Master Budget Case: ToyWorks Ltd. (A) ToyWorks Ltd. is a company that manufactures and sells a single product, which they call a Toodle. 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. Their fiscal year end is December 31. During the summer of 2007, Chris Leigh, the ToyWorks controller, spent considerable time with Pat Frazer, the Manager of Marketing, putting together a sales forecast for the next budget year (January to December, 2008). Unfortunately, their collaboration worked so well they eloped to Las Vegas, were married by an Elvis impersonator, and settled down somewhere in the desert. Prior to their departure they e-mailed letters of resignation and a cryptic sales forecast to the President of ToyWorks. Their sales forecast consisted of these few lines: ? For the year ended December 31, 2007: 475,000 units at $10.00 each* ? For the year ended December 31, 2008: 500,000 units at $10.00 each ? For the year ended December 31, 2009: 500,000 units at $10.00 each *Expected sales for the year ended December 31, 2007 are based on actual sales to date and budgeted sales for the duration of the year. ToyWorks?s President felt certain that the marriage wouldn?t last, and expected Chris would be back any day. But the end of the year is quickly approaching, and there is still no word from the desert. The President, desperately needing the budget completed, has approached you, a management accounting student, for help in preparing the budget for the coming fiscal year. Your conversations with the president and your investigations of the company?s records have revealed the following information: 1. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of sales for each month. Sales pick up over the summer with July, August and September each contributing 2% to the total. Valentines Day in February boosts sales to 5%, and Easter in April accounts for 10%. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December. This pattern of sales is not expected to change in the next two years. 2. From previous experience, management has determined that an ending inventory equal to 25% of the next month?s sales is required to fit the buyer?s demands. 3. Because sales are seasonal, ToyWorks must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $20,000 per month, payable at the beginning of the month. 4. There is only one type of raw material used in the production of toodles. Space-age acrylic (SAA) is a very compact material that is purchased in powder form. Each toodle requires 5 kilograms of SAA, at a cost of $0.45 per kilogram. The supplier of SAA tends to be somewhat erratic so ToyWorks finds it necessary to maintain an inventory balance equal to 40% of the following month?s production needs as a precaution against stock-outs. ToyWorks pays for 20% of a month?s purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount. 5. Beginning accounts payable will consist of $208,406.50 arising from the following estimated direct material purchases for November and December of 2007: SAA purchases in November 2007: $223,875.00 SAA purchases in December 2007 $162,563.50 6. ToyWorks?s manufacturing process is highly automated, so their direct labour cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $9.00 per hour. This rate already includes the employer?s portion of employee benefits. All payroll costs are paid in the period in which they are incurred. Each unit spends a total of 18 minutes in production. 7. Due to the similarity of the equipment in each of the production stages and the company?s concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.30, consisting of: Utilities--$0.60; Indirect Materials--$0.20; Plant maintenance--$0.30; environmental fee--$0.14; and Other--$0.06. 8. The fixed manufacturing overhead costs for the entire year are as follows: Training and development $ 43,200 Property and business taxes 39,000 Supervisor?s salary 149,400 Amortization on equipment 178,800 Insurance 96,000 Other 117,600 $ 624,000 ? The property and business taxes are paid on June 30 of each year. The expected payment for next year is $39,600. ? The annual insurance premium is paid at the beginning of September each year. There should be no change in the premium from last year. ? All other ?cash-related? fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred. ? ToyWorks uses the straight line method of amortization. 9. 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 year?s experience has provided the following information: Lowest level of sales: 375,000 units Total Operating Expenses: $778,710 Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460 These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense. 10. 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). 11. Sales in November and December 2007 are expected to be $700,000 and $1,500,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $734,000 at December 31, 2007 which will be collected in January and February, 2008. 12. During the fiscal year ended December 31, 2008, ToyWorks will be required to make monthly income tax installment payments of $5,000. Outstanding income taxes from the year ended December 31, 2007 must be paid in April 2008. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2008, in excess of installment payments, will be paid in April, 2009. 13. ToyWorks is planning to acquire additional manufacturing equipment for $204,300 cash. 40% of this amount is to be paid in November 2008, the rest, in December 2008. The manufacturing overhead costs shown above already include the amortization on this equipment. 14. An arrangement has been made with the local bank that if ToyWorks maintains a minimum balance of $20,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum. All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month. All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month. Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month. 15. ToyWorks Ltd. has a policy of paying dividends at the end of each quarter. The president tells you that the board of directors is planning on continuing their policy of declaring dividends of $50,000 per quarter. ? 16. A listing of the estimated balances in the company?s ledger accounts as of December 31, 2007 is given below: Assets Cash $ 83,365 Accounts receivable 734,000 Inventory-raw materials 9,000 Inventory-finished goods 9,125 Prepaid Insurance 64,000 Prepaid property and business taxes 19,200 Capital assets (net) 724,000 Total assets $1,642,690 Liabilities and Shareholders? Equity Accounts payable $ 208,407 Income taxes payable 21,500 Capital stock 1,000,000 Retained Earnings 412,783 Total liabilities and shareholders? equity $1,642,690 ________________________________________ Required: 1. Prepare a monthly master budget for ToyWorks for the year ended December 31, 2008, 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 Ending Finished Goods Inventory Budget Selling and Administrative Expense Budget Cash Budget 2. Prepare a budgeted income statement and a budgeted statement of retained earnings for the year ended December 31, 2008, using absorption costing. 3. Prepare a budgeted balance sheet at December 31, 2008. 4. (Optional) Prepare a budgeted income statement for the year ended December 31, 2008, using variable costing. Assume the per unit variable cost for 2007 was $6.0520. This is what is provided on your website link "http://www.coursehero.com/file/6888060/BugdetCase-ToyWorksLtd/" but the balances for the fin stats are incorrrect. which means other numbers are incorrect as well. HURRY

ToyWorks Ltd. Sales Budget For the year ended December 31, 2008 Jan Percent of Annual Sales Expected sales in units Selling price per unit Total Budgeted Sales Feb 0.01 5,000 10 50,000 Mar 0.05 25,000 10 250,000 Apr 0.01 5,000 10 50,000 May 0.10 50,000 10 500,000 Jun 0.01 5,000 10 50,000 Jul 0.01 5,000 10 50,000 Aug 0.02 10,000 10 100,000 Sep 0.02 10,000 10 100,000 Oct 0.02 10,000 10 100,000 Nov 0.15 75,000 10 750,000 Dec 0.20 100,000 10 1,000,000 Year 0.40 200,000 10 2,000,000 1.00 500,000 10 5,000,000 1,100,000 350,000 71,250 1,521,250 Year 2,750,000 1,575,000 399,000 4,724,000 ToyWorks Ltd. Schedule of Expected Cash Collections For the year ended December 31, 2008 Jan Current month sales 55% Prior month's sales 35% Two months prior sales 9.5% Total cash collections Feb 27,500 525,000 66,500 619,000 Mar 137,500 17,500 142,500 297,500 Apr 27,500 87,500 4,750 119,750 May 275,000 17,500 23,750 316,250 Jun 27,500 175,000 4,750 207,250 Jul 27,500 17,500 47,500 92,500 Aug 55,000 17,500 4,750 77,250 Sep 55,000 35,000 4,750 94,750 Oct 55,000 35,000 9,500 99,500 Nov 412,500 35,000 9,500 457,000 Dec 550,000 262,500 9,500 822,000 ToyWorks Ltd. Schedule of Expected Cash Collections For the year ended December 31, 2008 Jan AR from November AR from December Jan Feb Mar Apr May June July August Sept Oct Nov Dec Feb 66,500 525,000 27,500 619,000 Mar 142,500 17,500 137,500 297,500 Apr 4,750 87,500 27,500 119,750 May 23,750 17,500 275,000 316,250 Jun 4,750 175,000 27,500 207,250 Jul 47,500 17,500 27,500 92,500 Aug 4,750 17,500 55,000 77,250 Sep 4,750 35,000 55,000 94,750 Oct 9,500 35,000 55,000 99,500 Nov 9,500 35,000 412,500 457,000 Dec 9,500 262,500 550,000 822,000 Year 71,250 350,000 1,100,000 1,521,250 66,500 667,500 49,750 248,750 49,750 497,500 49,750 49,750 99,500 99,500 99,500 746,250 900,000 1,100,000 4,724,000 ToyWorks Ltd. Production Budget For the year ended December 31, 2008 Jan Budgeted sales in units Add desired ending inventory of finished goods Total needs Less beginning inventory of finished goods Required production Feb 5,000 6,250 11,250 1,250 10,000 Mar 25,000 1,250 26,250 6,250 20,000 Apr 5,000 12,500 17,500 1,250 16,250 May 50,000 1,250 51,250 12,500 38,750 Jun 5,000 1,250 6,250 1,250 5,000 Jul 5,000 2,500 7,500 1,250 6,250 Aug 10,000 2,500 12,500 2,500 10,000 Sep 10,000 2,500 12,500 2,500 10,000 Oct 10,000 18,750 28,750 2,500 26,250 Nov 75,000 25,000 100,000 18,750 81,250 Dec 200,000 1,250 201,250 50,000 151,250 100,000 50,000 150,000 25,000 125,000 Year 500,000 1,250 501,250 1,250 500,000 ToyWorks Ltd. Manufacturing Overhead Budget For the year ended December 31, 2008 Jan Production in Units Variable overhead rate per unit Variable manufacturing overhead Fixed manufacturing overhead: Training and development Property and business taxes Supervisor Salaries Amortization on equipment Insurance Other Total fixed manufacturing OH Total manufacturing OH Less prepaid property tax Less prepaid insurance Less amortization Cash disbursements for manufacturing OH 10,000 1.3 13,000 Feb 20,000 1.3 26,000 Mar 16,250 1.3 21,125 Apr 38,750 1.3 50,375 May 5,000 1.3 6,500 Jun 6,250 1.3 8,125 Jul 10,000 1.3 13,000 Aug 10,000 1.3 13,000 Sep 26,250 1.3 34,125 Oct 81,250 1.3 105,625 Nov 125,000 1.3 162,500 Dec 151,250 1.3 196,625 Year 500,000 1.3 650,000 3,600 3,200 12,450 14,900 8,000 9,800 51,950 64,950 3,200 8,000 14,900 38,850 3,600 3,200 12,450 14,900 8,000 9,800 51,950 77,950 3,200 8,000 14,900 51,850 3,600 3,200 12,450 14,900 8,000 9,800 51,950 73,075 3,200 8,000 14,900 46,975 3,600 3,200 12,450 14,900 8,000 9,800 51,950 102,325 3,200 8,000 14,900 76,225 3,600 3,200 12,450 14,900 8,000 9,800 51,950 58,450 3,200 8,000 14,900 32,350 3,600 3,200 12,450 14,900 8,000 9,800 51,950 60,075 3,200 8,000 14,900 33,975 3,600 3,200 12,450 14,900 8,000 9,800 51,950 64,950 3,200 8,000 14,900 38,850 3,600 3,200 12,450 14,900 8,000 9,800 51,950 64,950 3,200 8,000 14,900 38,850 3,600 3,200 12,450 14,900 8,000 9,800 51,950 86,075 3,200 8,000 14,900 59,975 3,600 3,200 12,450 14,900 8,000 9,800 51,950 157,575 3,200 8,000 14,900 131,475 3,600 3,200 12,450 14,900 8,000 9,800 51,950 214,450 3,200 8,000 14,900 188,350 3,600 3,200 12,450 14,900 8,000 9,800 51,950 248,575 3,200 8,000 14,900 222,475 43,200 38,400 149,400 178,800 96,000 117,600 623,400 1,273,400 38,400 96,000 178,800 960,200 ToyWorks Ltd. Direct Materials Budget - SAA (kilograms) For the year ended December 31, 2008 Units to be produced Raw Materials needed per unit Production needs Add desired ending inventory Total needs Less beginning inventory Raw materials to be purchased Jan 10,000 5 50,000 40,000 90,000 20,000 70,000 Feb 20,000 5 100,000 32,500 132,500 40,000 92,500 Mar 16,250 5 81,250 77,500 158,750 32,500 126,250 Apr 38,750 5 193,750 10,000 203,750 77,500 126,250 May 5,000 5 25,000 12,500 37,500 10,000 27,500 Jun 6,250 5 31,250 20,000 51,250 12,500 38,750 Jul 10,000 5 50,000 20,000 70,000 20,000 50,000 Aug 10,000 5 50,000 52,500 102,500 20,000 82,500 Sep 26,250 5 131,250 162,500 293,750 52,500 241,250 Oct 81,250 5 406,250 250,000 656,250 162,500 493,750 Nov 125,000 5 62,500 302,500 927,500 250,000 677,500 Dec 151,250 5 756,250 20,000 776,250 302,500 473,750 Year 500,000 5 2,500,000 1,000,000 3,500,000 20,000 3,480,000 Cost of SAA per kilogram Total cost of purchases of SAA 0 31,500 0 41,625 0 56,813 0 56,813 0 12,375 0 17,438 0 22,500 0 37,125 0 108,563 0 222,188 0 304,875 0 213,188 0 1,566,000 ToyWorks Ltd. Schedule of Expected Cash Disbursement for Purchases of Raw Material SAA For the year ended December 31, 2008 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Current month's purchases 20% 6,300 8,325 11,363 11,363 2,475 3,488 4,500 7,425 21,713 44,438 60,975 42,637 225,001 Prior month's purchases 45% 73,153 14,175 18,731 25,566 25,566 5,569 7,847 10,125 16,706 48,853 99,984 137,194 483,468 Two month's prior purchases 35% 78,356 56,897 11,025 14,569 19,884 19,884 4,331 6,103 7,875 12,994 37,997 77,766 347,681 Total cash disbursements for purchases of raw material 157,809 79,397 41,119 51,497 47,925 28,941 16,678 23,653 46,294 106,285 198,956 257,597 1,056,151 ToyWorks Ltd. Schedule of Expected Cash Disbursement for Purchases of Raw Material SAA For the year ended December 31, 2008 Jan A/P from November A/P from December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb 78,356 73,153 6,300 157,809 208,406 Mar 56,897 14,175 8,325 79,397 Apr 11,025 18,731 11,363 41,119 May 14,569 25,566 11,363 51,497 Jun 19,884 25,566 2,475 47,925 Jul 19,884 5,569 3,488 28,941 Aug 4,331 7,847 4,500 16,678 Sep 6,103 10,125 7,425 23,653 Oct 7,875 16,706 21,713 46,294 Nov 12,994 48,853 44,438 106,284 Dec 37,997 99,984 60,975 198,956 Year 77,766 137,194 42,637 257,597 78,356 130,050 31,500 41,625 56,813 56,813 12,375 17,438 22,500 37,125 108,563 222,188 198,169 42,637 1,056,150 ToyWorks Ltd. Direct Labour Budget For the year ended December 31, 2008 Jan Units to be Produced Direct Labour time per unit (hours) Total hours of direct labour time needed Direct Labour cost per hour Total direct labour cost Feb 10,000 0 3,000 9 27,000 Mar 20,000 0 6,000 9 54,000 Apr 16,250 0 4,875 9 43,875 38,750 0 11,625 9 104,625 May Jun 5,000 0 1,500 9 13,500 Jul 6,250 0 1,875 9 16,875 10,000 0 3,000 9 27,000 Aug Sep Oct Nov Dec Year 10,000 26,250 81,250 125,000 151,250 500,000 0 0 0 0 0 0 3,000 7,875 24,375 37,500 45,375 150,000 9 9 9 9 9 9 27,000 70,875 219,375 337,500 408,375 1,350,000 ToyWorks Ltd. Selling and Administrative Expense Budget For the year ended December 31, 2008 Jan Budgeted sales in units Variable selling and administrative expense per unit Variable expenses Fixed selling and administrative expenses Bad Debts Warehouse rental Total budgeted selling and administrative expenses Less: non-cash items Bad debt expense Variable rate per unit: High Low Change Variable rate per unit Fixed expenses per year 5,000 0.65 3,250 44,580 250 48,080 Feb 25,000 0.65 16,250 44,580 1,250 62,080 Mar 5,000 0.65 3,250 44,580 250 48,080 50,000 0.65 32,500 44,580 2,500 79,580 5,000 0.65 3,250 44,580 250 48,080 5,000 0.65 3,250 44,580 250 48,080 10,000 0.65 6,500 44,580 500 51,580 10,000 0.65 6,500 44,580 500 10,000 0.65 6,500 44,580 500 75,000 0.65 48,750 44,580 3,750 100,000 0.65 65,000 44,580 5,000 200,000 0.65 130,000 44,580 10,000 Year 500,000 0.65 325,000 534,960 25,000 51,580 71,580 117,080 134,580 204,580 964,960 250 47,830 1,250 60,830 250 47,830 2,500 77,080 250 47,830 250 47,830 500 51,080 500 51,080 500 71,080 3,750 113,330 5,000 129,580 10,000 194,580 25,000 939,960 Total Costs Units 1,022,460 750,000 778,710 375,000 243,750 375,000 0.65 534,960 Apr May Jun Jul Aug Sep Oct Nov Dec ToyWorks Ltd. Ending Finished Goods Inventory Budget (Absorption Costing) For the year ended December 31, 2008 Item Production cost per unit: Direct materials: Direct Labour Manufacturing O/H Unit product cost Quantity Cost/unit 5 Kilo 0.3 hours 0.3 hours $0.45/kilo 9.00/hr 5.462/hr Budgeted finished goods inventory: Ending finished goods inventory in units Unit product costs (see above) Ending finished goods inventory in dollars Budgeted cost of goods sold: Beginning finished goods inventory Plus cost of goods manufactured Less: ending inventory Budgeted cost of goods sold in dollars: Total 2.25 2.7 1.639 6.59 1250 6.59 8236 1,250 500,000 1,250 500,000 6.59 6.59 6.59 6.59 8,238 3,295,000 8,238 3,295,000 ToyWorks Ltd. Cash Budget For the year ended December 31, 2008 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Cash balance, beginning 83,365 425,876 472,299 357,250 337,573 398,218 268,498 207,140 156,307 Add receipts: Collections from customers 619,000 297,500 119,750 316,250 207,250 92,500 77,250 94,750 99,500 Total cash available before financing 702,365 723,376 592,049 673,500 544,823 490,718 345,748 301,890 255,807 Less disbursements: Direct materials 157,809 79,397 41,119 51,497 47,925 28,941 16,678 23,653 46,294 Direct labour 27,000 54,000 43,875 104,625 13,500 16,875 27,000 27,000 70,875 Manufacturing overhead 38,850 51,850 46,975 76,225 32,350 33,975 38,850 38,850 59,975 Selling and administrative expenses 47,830 60,830 47,830 77,080 47,830 47,830 51,080 51,080 71,080 Tax remittance 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 Tax payable 21,500 Prepaid insurance 96,000 Prepaid property and business tax 39,600 Capital asset purchases Dividend payment 50,000 50,000 50,000 Total disbursements 276,489 251,077 234,799 335,927 146,605 222,221 138,608 145,583 399,224 Excess (deficiency) of cash available over disbursements 425,876 472,299 357,250 337,573 398,218 268,498 207,140 156,307 (143,418) Financing: Borrowing (at the beginning of the month) Repayment (at the end of the month) Interest expense (paid monthly) Total financing Cash balance, ending Running total _x000D_March 29th, 2012 164,000 425,876 0 472,299 0 357,250 337,573 398,218 268,498 0 0 0 207,140 156,307 164,000 20,583 20,583 Nov 20,118 20,012 Year 2,767,237 457,000 477,583 822,000 842,118 1,521,250 1,541,262 4,724,000 7,491,237 106,284 219,375 131,475 113,330 5,000 575,464 (97,881) 198,956 337,500 188,350 129,580 5,000 81,720 941,106 (98,988) 257,597 408,375 222,475 194,580 5,000 122,580 50,000 1,260,607 280,655 1,056,150 1,350,000 960,200 939,960 60,000 21,500 96,000 39,600 204,300 200,000 4,927,710 2,563,528 118,000 119,000 257,375 3,280 (260,655) 20,000 401,000 257,375 3,280 140,345 2,703,872 118,000 20,118 Dec 119,000 20,012 0 _x000D_Derin Ireyomi_x000D_103091992_x000D_Peter Roth_x000D_ _x000D_Budget Case Toy Works Ltd_x000D_Managerial Accounting_x000D__x000D_ ToyWorks Ltd. Budgeted Income Statement For the year ended December 31, 2008 $ 5,000,000 3,295,000 1,705,000 Sales Cost of goods sold Gross Margin Less: Selling & administrative expenses Net operating income Less: Interest expense Net income before taxes Income taxes Net Income 534,960 1,170,040 6,240 1,163,800 290,950 872,850 ToyWorks Ltd. Budgeted Statement of Retained Earnings For the year ended December 31, 2008 Retained earnings beginning of year Plus: Net Income Sub-total Less: Dividends declared Retained earnings end of year 412,783 872,850 1,285,633 200,000 1,085,633 ToyWorks Ltd. Budgeted Balance Sheet December 31, 2008 Assets Cash Accounts Receivable Inventory: Raw Materials Inventory: Finished goods Prepaid Insurance Prepaid Property and Business Tax Capital assets (net) Total Assets 20,000 734,000 20,000 9,373 96,000 39,600 749,500 1,668,473 Liabilities and Shareholders' Equity Liabilities Bank Loan Payable 146,585 Accounts payable 208,406 Income taxes payable 16,164 Total Liabilities 371,155 Shareholders' Equity Capital stock 1,000,000 Retained earnings 1,085,633 Total Shareholders' equity 2,085,633 Total Liabilities & Shareholders' Equity 2,456,788 I DON'T UNDERSTAND WHY I CAN'T GET IT TO BALANCE OUT