Question
Karnataka Ltd operates at capacity and makes the glass-topped coffee table. At the end of 2019, Karnataka Ltd.s management accountant gathered the following data to
Karnataka Ltd operates at capacity and makes the glass-topped coffee table. At the end of 2019, Karnataka Ltd.’s management accountant gathered the following data to prepare budgets for the first six months of 2020:
- Units sales per quarter and the selling price per unit are estimated as follows:
Unit sales Price per unit
January 2,700 $400
February 2,600 $400
March 2,800 $550
April 2,600 $550
May 2,650 $500
June 2,600 $500
July 3,000 $500
August 3,000 $550
Sales on November 2019 were 2,500 units and on December 2,400 units at a selling price of $450.
20% of sales are cash sales and 80% are credit sales. From experience, Karantika Ltd collected 40% of credit sales within the month of sale, 30% in the following month and 25% in two months after the month of sale. 5% of credit sales is uncollectable. The bad debt is calculated at the end of six month.
- The beginning inventories (BI) on 1 January 2020 and the desired ending inventories (EI) at the end of each month are as follows:
BI (1/1/19) | EI (end of each month) |
---|---|
Tables:500 (at $210/unit) | 20% of following month estimated sales |
Wood: 1,400 b.m. | 25% b.m. needed for next month’s budgeted production (units) |
Glass 500 sheets | 20% sheets needed for next month’s budgeted production (units) |
- Materials and labor requirements
Direct materials:
Wood: 2 board meters (b.m.) per table
Glass: 1 sheet per table
Direct manufacturing labor: 4 hours per table
- Costs of direct materials and labor:
Wood: $16 per b.m.
Glass: $22 per sheet
Direct labour: $25 per labor-hour
- Direct materials are purchased in the month of production and are paid 60% in the month of purchase and 40% in the following month. Wages and salaries are paid monthly.
- Variable manufacturing overhead is $25 per direct manufacturing labor-hour. There is also $210,000 in fixed manufacturing overhead costs per month. Fixed costs include $40,000 depreciation of factory equipment. The fixed manufacturing overhead rate is based on the number of units produced budgeted every six months, at the beginning of each semester, calculated dividing the budgeted fixed overhead costs by the budgeted number of units produced for the semester. Variable and fixed costs are paid in the month incurred.
- Sales commissions are paid monthly at the rate of 10% of month’s sales revenue. There is $160,000 in fixed non-manufacturing costs (administrative expenses) budgeted per month including $20,000 depreciation costs of office equipment. Variable and fixed non-manufacturing costs are paid in the month incurred.
- Karantika Ltd has estimated the following payments in the first semester 2020:
January: Loan for $40,000 plus interest payable at 31 December 2019 for $2,000 were paid on 2 January 2020.
End of January: Dividends $100,000
Beginning of May: Purchase of land $200,000
Beginning of June: Purchase of equipment for $300,000. Estimated of useful life 5 year with zero residual value.
- Karantika Ltd maintain a 18% open line of credit for $400,000. Interests are paid at the end of each month. Karantika Ltd maintains a minimum cash balance of $20,000. The company borrows on the first day of the month and repays loans on the last day of the month, both in multiples of $1,000. The income tax is 30%.
- Karantika Ltd’s balance sheet at 31 December 2019 is as follows:
ASSETS | LIABILITIES | ||
---|---|---|---|
Cash | 32,000 | Accounts payable ** | 64,000 |
Accounts receivable * | 700,200 | Interest payable | 2,000 |
Inventory: Wood | 22,400 | Loan payable | 40,000 |
Inventory: Glass | 11,000 | SHAREHOLDER’S EQUITY | |
Inventory: Finished goods | 105,000 | Share capital | 801,600 |
Plant and equipment, net | 450,000 | Retained earnings | 413,000 |
Total assets | 1, 320,600 | Total Liabilities and Shareholder’s equity | 1,320,600 |
*At the beginning of the year there is no allowance of doubtful debt
** Account payable is from the direct material purchase.
Required:
Prepare a monthly master budget for Karantika Ltd.’s for the first semester 2020. The following component budgets must be included ( round the number with two decimals):
- Sales revenue budget
- Production budget (in units)
- Direct materials usage and purchases budget for each direct materials and total direct materials (in units and dollars)
- Direct manufacturing labor budget
- Manufacturing overhead budget
- Manufacturing overhead rate for the semester
- Ending finished goods inventory budget (unit cost and total cost) at June 2020.
- Selling and administrative expenses budget
- Cash budget
- Cost of goods sold at 30 June 2020
- Budgeted income statement for the first semester of 2020
- Budgeted balance sheet as of 30 June 2020 (including separately the two direct materials inventory)
Note. There is no beginning and ending balance of WIP in each month.
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