Case #$1$a $-$ Budgeting

Best Bike Seats Ltd$.($BBS$),$ manufactures and sells a single product, a bike seat with customizable

adjustments, called the Comfyrider. The CFO, is ready to have you, the Controller, begin preparing a

master budget for $2024$ based on the following information:

a$.$ The sales volume for $2024$ is expected to be $39,000$ units in the first quarter, with $6,000$ unit

increments in each quarter after that.

b$.$ The selling price is $$77$ per unit. Seventy percent of the sales are on a cash basis, the remainder

on credit. $60\%$ are collected in the quarter sold, and $40\%$ are collected in the following quarter.

The full accounts receivable balance from $2023$ will be collected in Q$1$ of $2024.$

c$.$ BBS believes it can meet its future sales requirements by maintaining an ending inventory that is

equal to $20\%$ of the next quarter$$s budgeted sale volume to ensure a continuous supply. The

ending inventory for Q$4$ of $2023$ is $8,000$ units. The budgeted unit sales for Q$1$ of $2025$ is $55,000$

units.

d$.$ Each bike seat requires $2$ kg of direct materials at $$10$ per kg and $1\mathrm{.}5$ hours of direct labour at

$$22$ per hour. All direct materials are purchased on credit. $35\%$ of the purchases are paid during

the quarter purchased and the remainder is paid in the following quarter. The full accounts

payable balance from $2023$ will be paid in Q$1$ of $2024.$ The direct materials ending inventory for

$2023$ in units is $8,240.$

e$.$ Wages and salaries are paid on the $15$th and the last day of each month for the work performed

to the date of payment.

f$.$ Because of its close proximity to its suppliers, BBS maintains an ending inventory of raw

materials equal to $10\%$ of the next quarter$$s production requirements.

g$.$ BBS expects variable costs to fluctuate with the production volume based on the following rates

per direct labour hour: indirect materials $$1$; indirect labour $$1\mathrm{.}40$; utilities $$0\mathrm{.}40$; and

maintenance $$0\mathrm{.}20.$

h$.$ Fixed overhead costs are usually $$220,000$ for each quarter. Of this total, one half is

depreciation. Overhead is applied to production based on direct labour hours. All overhead,

variable and fixed, is paid in cash in the month in which they are incurred.

i$.$ Fixed selling and administration expenses are $$1,200,000$ per year, including $$40,000$ of

depreciation. They are incurred uniformly throughout the year. Budgeted selling and

administration expenses are; $$3$ per unit sold in commission and $$1$ per unit sold for freight out.

All selling and administration expenses are paid during the quarter in which they are incurred.

j$.$ The shareholders of BBS will be paid $$150,000$ in dividends each quarter.

k$.$ BBS plans to purchase new production equipment in early January $2024,$ at a cost of $$3,500,000.$

It will have a useful life of $10$ years. It plans to make a down payment of $$1,300,000$ and have a

$7\%,5$ year bank loan for the balance. The annual principal and interest payments will be due on

January $1$ each year. As this is new equipment the depreciation has not been included in the

fixed overhead noted in part h$.$

l$.$ For short$-$term cash needs BBS has negotiated a line of credit with the bank of up to $$300,000.$

BBS will borrow at the beginning of the quarter at an annual rate of $10\%$ in multiples of

$$100,000$ and repay in full at the end of a quarter in which cash becomes available.

m$.$ An estimated income tax liability of $35\%$ of the before tax net income is to be paid in cash on

December $31,2024.$

$2$

n$.$ The balance sheet on December $31,2023$ was as follows:

Assets

Cash $$500,000$

Accounts receivable $1,400,000$

Direct materials inventory $82,400$

Finished goods inventory $437,447$

Plant and Equipment $15,000,000$

Total assets $$17,419,847$

Liabilities and shareholders$$ equity

Accounts payable $($note $1)$ $$900,000$

Common shares $13,000,000$

Retained earnings $3,519,847$

Total liabilities and shareholders$$ equity $$17,419,847$

Note $1$: Accounts payable is for purchases of direct materials only

Required:

Prepare a master budget for each quarter of $2024$ and for the year in total, including the following:

a$.$ Sales budget

b$.$ Production budget

c$.$ Direct materials purchases budget

d$.$ Direct labour budget

e$.$ Overhead budget

f$.$ Selling and administrative budget

g$.$ Ending finished goods inventory budget

h$.$ Cost of goods sold budget

i$.$ Cash budget

j$.$ Budgeted income statement $($absorption costing$)$

k$.$ Budgeted income statement $($just prepare to the contribution margin line$)$

l$.$ Budgeted balance sheet