MASTER BUDGET CASE STUDY RICE PRODUCTS PTY LIMITED Rice Products Pty. Ltd. is a local firm that produces two moulded plastic products: kickboards and pool buoys. The products are manufactured in a two step process and each process is treated as a separate cost centre. In the first process, the mixing department, a special resin is combined with a hardener. Moulding occurs in the second process where the output from the mixing department is poured into special shaped moulds. Due to the nature of the chemical compounds contained in the resin and hardener, the manufacturing process occurs very rapidly. Production is therefore scheduled so that no work-in-process inventory is held at the end of each day. The following information has been extracted from the accounting records of Rice Products or obtained through discussions with the senior management team: 1. Balance Sheet (Statement of Financial Position) as at 30 June 2020: Cash Accounts Receivable Raw Materials Inventory Finished Goods Inventory Plant and Equipment (Net) TOTAL ASSETS $ 9,000 Trade Creditors $ 8,520 85,210 8,408 Shareholders' Equity Retained Earnings 150,000 80,548 11,450 125,000 $ 239,068 TOTAL LIABILITY & EQUITY $239,068 2. The following schedule details the recent actual monthly unit sales achieved for each product to 30 June 2020. Additionally, the sales manager has projected sales volume forecasts for each product to November 2020: PRODUCT APR Kickboard 1,900 MAY 2,000 JUN JUL AUG SEP OCT NOV 2,700 2,400 2,600 2,300 2,900 3,000 Pool Buoy 1,300 1,400 1,300 1,100 1,300 1,000 900 1,000 3. Kickboards sell for $28 each and pool buoys for $24 each. Due to the tight cost control practices Rice Products has been able to maintain selling prices for the last 6 months and, in the absence of policy changes, do not foresee any change in the selling prices in the next 6 month period. 4. All sales are on credit: 15% are collected in the month of sale, 45% in the month following sale and the remaining 40% is collected in the second month following sale. 5. Details of the standard costs to manufacture one unit of each product are provided below: FACTORS OF PRODUCTION KICKBOARDS POOL BUOYS Materials: Resin Hardener Labour: Mixing Department Moulding Department Factory Overhead: Mixing Department Moulding Department 2 litres @$0.45/litre 5 litres @$0.70/litre 3 litres @$0.45/litre 2 litres @$0.70/litre 18 minutes @$20/hour 12 minutes @$30/hour 12 minutes @$20/hour 12 minutes @$30/hour $7.00/direct labour hour $11.00/direct labour hour $7.00/direct labour hour $11.00/direct labour hour 6. Depreciation on factory equipment is computed to be $1.00 per labour hour for each department and is included in the factory overhead rates shown above. 7. Materials are purchased on credit. Rice pays 60% of accounts in the month of purchase and the remaining 40% in the following month. Labour costs and all overhead costs (except depreciation) are paid as they are incurred. Monthly differences between applied and actual overhead costs are expected to be negligible. 8. Rice has an inventory policy in place where purchases of raw materials are scheduled to be 60% of the next month's anticipated production needs. Additionally, production is scheduled so that the number of finished units on hand at the end of each month is sufficient to support 30% of the following month's forecast sales. 9. The number of inventory items held as at 30 June 2020 was as follows: LITRE/UNIT 5040 litres 8772 litres 720 units 330 units MATERIAL/PRODUCT Resin Hardener Kickboards Pool Buoys 10. Fixed selling and administration expenses are $25,000 per month (including $1,000 of depreciation on office equipment). Sales commissions are paid at 7% of total sales dollars. Selling and administration expenses are paid in the month incurred. 11. Rice's management has a policy of maintaining a cash balance of $9,000 at the end of each month. This amount represents a buffer that is maintained as a margin of safety against unforeseen events which might cause significant departures from budget estimates. If this requirement cannot be met, 4 Rice has a standby credit arrangement in place with its bank to borrow the exact amount needed to achieve the desired cash balance. If Rice has a cash balance greater than $9,000 at the end of any month and an outstanding loan balance then the cash in excess of $9,000 is repaid to the bank. 12. The interest rate applicable to the bank loan is 12% per annum to be paid on a monthly basis on the outstanding principal at the end of the previous month. 13. Rice uses the FIFO (first in first out) method to value ending inventory. PART A (65 Marks) You have been appointed to the position of senior management accountant at Rice Products. It is your responsibility to prepare a master budget for the next quarter (July, August and September 2020). The master budget documents are to consist of the following reports (the budgets should show the figures for each month and a total for the quarter where appropriate and round calculations to the nearest dollar): Sales Revenue Budget Production Budget (Units) Direct Material Purchase Budget (Unites and $) Direct Labour Budget (Hours and $) Factory Overhead Budget Selling, Admin and Finance Budget Cash Budget Income Statement (Statement of Financial Performance) Balance Sheet (Statement of Financial Position) Schedule 1: Revenues Budget Kickboards Pool Buoys Total Sales Revenue Budget July August September 67,200 72,800 64,400 Q1 Total 204,400 26,400 31,200 24,000 93,600 104,000 88,400 81,600 286,000 Schedule 2: Production Budget (in units) Kickboards July August September Q1 Total Budgeted unit sales (Schedule 1) 2,400 2,600 2,300 7,300 Add target ending finished goods inventory 780 690 870 870 Total required units 3,180 3,290 3,170 8,170 Deduct beginning finished goods inventory 720 780 690 720 Units of finished goods to be produced 2,460 2,510 2,480 7,450 Pool Buoys Budgeted unit sales (Schedule 1) 1,100 1,300 1,000 3,400 Add target ending finished goods inventory 390 300 270 270 Total required units 1,490 1,600 1,270 3,670 Deduct beginning finished goods inventory 330 390 300 330 Units of finished goods to be produced 1,160 1,210 970 3,340 Add: resin ending inventory Schedule 3 Direct Materials Purchases Budget July August September Q1 Total Resin Resin needed for production 8,400 8,650 7,870 24,920 5,190 4,722 5,190 5,190 13,590 13,372 13,060 30,110 5,040 5,190 4,722 5,040 8,550 8,182 8,338 25,070 0.45 0.45 0.45 0.45 Total resin required Less: resin beginning inventory Total resin to purchase Cost per Litre Total cost of resin to produce Hardener Hardener needed for production Add: hardener ending inventory Total hardener required Less: hardener beginning inventory Total hardener to purchase Cost per Litre Total cost of hardener to produce Total DM Purchases Budget $ 3,847.50 $ 3,681.90 $ 3,752.10 $ 11,281.50 14,620 14,970 14,340 43,930 8,982 8,604 9,906 9,906 23,602 23,574 24,246 53,836 8,772 8,982 8,604 8,772 14,830 0.70 14,592 0.70 15,642 45,064 0.70 0.70 $ 10,381.00 $ 10,214.40 $10,949.40 $ 31,544.80 $14,228.50 $ 13,896.30 $14,701.50 $ 42,826.30 Schedule 4: Direct manufacturing labour costs budget July August September Q1 Total Mixing Department Kickboard Required hours per unit 0.30 Production units 2,460 0.30 2,510 0.30 2,480 0.30 7,450 Total hours needed 738 753 744 2,235 Cost per hour $ 20.00 $ 20.00 $ 20.00 20.00 Mixing labour costs - Kickboard 14,760 $ 15,060 $ 14,880 $ 44,700 Pool Buoys Required hours per unit Production units 0.20 0.20 0.20 0.20 1,160 1,210 970 3,340 Total hours needed 232 242 194 668 Cost per unit $ 20.00 $ 20.00 $ 20.00 $ 20.00 Mixing labour costs - Pool Buoys es $ 4,640 $ 4,840 $ 3,880 $ 13,360 Total labour costs for mixing department $ 19,400 $ 19,900 $ 18,760 $ 58,060 Moulding department Kickboards Required hours per unit 0.20 0.20 0.20 0.20 Production units 2,460 2,510 2,480 7,450 Total hours needed 492 Cost per hour $ 30.00 $ 502 30.00 $ 30.00 496 1,490 30.00 Moulding labour costs - Kickboard $ 14,760 $ 15,060 $ 14,880 $ 44,700 Pool Buoys Required hours per unit 0.20 0.20 0.20 0.20 Production units 1,160 1,210 970 3,340 Total hours needed 232 242 194 668 Cost per unit $ 30.00 $ 30.00 $ 30.00 $ 30.00 Moulding labour costs - Pool Buoys $ 6,960 $ 7,260 $ 5,820 $ 20,040 Total labour costs for moulding department $ 21,720 $ 22,320 $ 20,700 $ 64,740 Total labour costs $ 41,120 $ 42,220 $ 39,460 $ 122,800 Schedule 5: Factory Overhead Budget July August September Q1 Total Mixing Department Budgeted direct labour hours 970 995 938 2,903 Variable manufacturing overhead rate 7 7 7 7 Total variable manufacturing overhead 6,790 6,965 6,566 20,321 Moulding Department Budgeted direct labour hours 724 744 690 2,158 Variable manufacturing overhead rate 11 11 11 11 Total variable manufacturing overhead 7,964 8,184 7,590 23,738 Total factory overhead budget 14,754 15,149 14,156 44,059 Schedule 6: Selling, Admin & Finance Budget July August September Q1 Total Sales Revenue 93,600 104,000 88,400 286,000 Sales commission rate on total sales 7% 7% 7% 7% Total sales commission 6,552 7,280 6,188 20,020 Fixed selling & adminstrative expense 25,000 25,000 25,000 25,000 Total selling & admin expense 31,552 32,280 31,188 95,020 should be 95,102