BUS 122A Term Project

TylerLtd.

TylerLtd. is a company that manufactures and sells a single product, calleda Gadget. For planning and control purposes they utilize a monthly master budget, which is usually developed at least six months in advance of the budget year. Theirfiscal year end is December 31.

Senior management and department leaders have met and gathered data on the plans for the future of the company.

The company has recently had to fire its Controller. The CEO, needing the budget completed, has approachedyou, a management accounting student, for help in preparing the budget for the coming fiscal year. Your conversations with the CEO and your investigations of the companys records have revealed the following information:

1.Their sales forecast:

Forthe year ended December 31, 2019: 190,000 units at $25.00 each*

Forthe year ended December 31, 2020: 200,000 units at $25.00 each

For the year ended December 31, 2021: 210,000 units at $25.00 each

*Expected sales forthe year ended December 31, 2019are based on actual sales to date and budgeted sales for the duration of the year.

2.Sales are seasonal with the peak months being the summermonthsandChristmas season. The following table shows expected distribution of sales for each month based on percentage of the total budgeted sales.

Months Percentage of sales

Jan, Feb, Mar 4% each

Apr, Aug, Sept 5% each

May, Jun, Jul& Oct 8% each

Nov 16%

Dec 25%

3.Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. of 1% of sales are considered uncollectible (bad debt expense).

4.From previous experience, management has determined that an ending inventory equal to 30% of the next months sales is required to meetthe buyers demands. 5.Because sales are seasonal, Tylermust rent an additional storage facility for Octoberand Novemberto house the additional finished goods inventory on hand. The only related cost is a flat $15,000 per month, payable at the beginning of the month.

6.There are three typesof rawmaterial used in the production of Gadgets.

Material #1(Won) is a material purchased in powder form. Each Gadgetrequires 0.75kilograms of Won, at a cost of $10.00per kilogram. The supplier of Wontends to be somewhat erratic so Tylerfinds it necessary to maintain an inventory balance equal to 50% of the following months production needs as a precaution against stock-outs.

Material #2(Too) is purchasedfrom an outside supplier. Itis attached during the assembly process. For a small premium, Tylerhas made a JIT agreement with the supplier which includes on-time and quality assurances. Each Gadgetuses three(3) units of Too, which cost $0.50each.The supplier of Too is paid in the month the product is supplied.

The final component for the toy is a length of rope which is used to pull the Gadget. The rope is supplied by a student entrepreneur, who must be paid in cash. On the first day of every month she delivers exactly the right amount to manufacture the budgeted number of units for that month. It costs $1.60 per meter and Tyleruses one-quartermeter for each Gadget.

7.Accountspayable consists of WONpurchases only. Tylerpays for 30% of a months purchases in the month of purchase, 35% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount.

8.The manufacturing process for Gadgets is divided into three separate activities; forming, assembly and finishing.

a.The forming process is where WON is formed into several shapes that snap together to make the Gadget.

b.During the assembly stage, the shapes are fused together. The forming and assembly stages of the manufacturing process are highly automated, so the only employees are three supervisors, who are trained to operate the equipment and make repairs as required. The supervisors work shifts, allowing the plant to operate for longer hours during the busier months. They are also responsible for managing the employees who work in the finishing department

c.The finishing stage is where the wheel and the pull rope are attached and the Gadget is prepared for shipping. This is the only part of the manufacturing process that employs direct labour. Most of the staff work on a part-time basis, so their hours can be set based on production requirements. This also eliminates the need for overtime. These employees are paid based on the number of units produced. They receive an average of $18.00 per hour including employee benefits.Each Gadget spends 12 minutes in the finishing department

9.Because of the large difference in the manufacturing stages, Tyleruses two separate variable manufacturing overhead rates. The forming and assembly departments use similar equipment and with the companys concentration on asingle product, the manufacturing overhead is allocated based on volume (i.e. the units produced). The combined unit variable overhead manufacturing rate for forming and assembly is $3.25, consisting of: Utilities--$1.50; Indirect Materials--$0.50; Plant maintenance--$0.75; environmental fee--$0.35; and Other--$0.15.

The best cost driver for the finishing department is considered to be direct labour hours. Here the predetermined variable manufacturing overhead is expected to be $2.05per hour.

10.Fixed manufacturing overhead costs are not separated between departments. The total costs for the entire yearare as follows:

Training and development $ 43,200

Property and business taxes 39,000

Supervisors salary 269,400

Amortization on equipment 178,800

Insurance 96,000

Other 117,600

Total $ 744,000

The property and business taxes are paid in one lump sum onJune 30 of each year.The expected payment for next year(2020)is $39,600.

Theannual insurance premium is paid at the beginning of September each year.There shouldbe no change in the premium for 2020, it should be the same as 2019.

All other cash-related fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.

Tyleruses the straight line method of amortization.

11.Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed.Previous years experience has provided the following information(rounded):

Lowest level of sales: 140,000 units Total Operating Expenses: $778,200

Highest level of sales: 220,000 units Total Operating Expenses: $1,023,000

The annual amount of amortization on office furniture and equipment is only $24,000and this amount isnotincluded in the fixed portion of the selling and administration expenses. Also not included in the above expenses is bad debt expense.

Payments for selling and administrative expensesoccur in the month in whichthey are incurred.

12.During the fiscal year ended December 31, 2020, Tylerwill be required to make monthly income tax instalment payments of $5,000. Outstanding income taxes from the year ended December 31, 2019must be paid in April 2020. Income tax expenseis estimated to be 25% of net income. Income taxes forthe year ended December 31, 2020, in excess of instalment payments, will be paid in April, 2021.

Notes:

Income tax instalments are required of corporations that owed tax to IRSin the prior year (just like how as a personal tax payer you pay tax with each paycheque, companies are required to remit an amount monthly if they paid tax in the prior year).

Instalments are calculated based on the amount owed from the prior year. When paid, companies usually put the amount into a balance sheet account called income tax receivable/payable

.Once the amount of income tax owed for the year is calculated (usually after year end) the company is able to calculate any remaining amount owed to or receivable from IRSas this should be the remaining balance in the income tax receivable/payable account.

13.Tyleris planning to acquire additional manufacturingequipment for $306,000 in February, 2020. They have a special agreementto pay the supplierin three equal instalments: in May, July and September. The manufacturing overhead costs shown above already include the amortization on this equipment.

14.An arrangement has been made with the local bank to have aline of credit at aninterest rate of 8% per annum. All borrowing is considered to happenon the first dayof the month, repayments are on the last dayof the month. Interest must be paid at the beginning of the followingmonth. Interest is calculated on the balance on the 2ndlast dayof the month, which includes any amounts borrowedbut not repaid that month.

15.Tyler Ltd. requires a minimum cash balance on hand at all times of $5,000.

16.TylerLtd. has a policy of paying dividends at the end of each calendar quarter. The CEOtells you that the board of directors is planning on continuing their policy of declaring dividends of $50,000 per quarter.

17.A listing of the estimated balances in the companysledger accounts as of December31, 2019is given below:

Assets

Cash$ 83,365

Accounts receivable 490,438

Inventory-raw materials(WON) 15,000

Inventory-finished goods 31,950

Prepaid Insurance 64,000

Prepaid property and business taxes19,200

Capital assets (net) 724,000

Total assets $1,427,953

Liabilities and Shareholders Equity

Accounts payable $ 112,481

Income taxes payable 22,500

Capital stock 1,000,000

Retained Earnings 292,971

Total liabilities and shareholders equity $1,427,953

Required:

Prepare a monthly master budget for Tyler for the year ended December 31, 2020, including the following schedules:

Sales Budget & Schedule of Cash Receipts

Production Budget

Direct Materials Budget & Schedule of Cash Disbursements

Direct Labour Budget

Manufacturing Overhead Budget

Selling and Administrative Expense Budget

Cash Budget