Master Budget Case: ToyWorks Ltd. (B) 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 June 30. During the summer of 2020, 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 (July 2020 to June 2021). 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 June 30, 2020: 500,000 units at $10.00 each*

For the year ended June 30, 2021: 525,000 units at $15.00 each

For the year ended June 30, 2022: 525,000 units at $15.00 each

*Expected sales for the year ended June 30, 2020 are based on actual sales to date and budgeted sales for the duration of the year.

ToyWorkss President felt certain that the marriage wouldnt last, and expected Chris would be back any day. But time is passing quickly, 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 companys 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 2% of sales for each month. Sales pick up over the summer with July, August and September each contributing 4% to the total. Valentines Day in February boosts sales to 8%, and Easter in April accounts for 12%. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 25% 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 30% of the next months sales is required to fit the buyers 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 $5,000 per month, payable at the beginning of the month. McGraw-Hill Ryerson Master Budget Case (vB.0) 2

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 11 kilograms of SAA, at a cost of $0.26 per kilogram. The supplier of SAA tends to be somewhat erratic so ToyWorks finds it necessary to maintain an inventory balance equal to 50% of the following months production needs as a precaution against stock-outs. ToyWorks pays 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.

5. Beginning accounts payable will consist of $59,610 arising from the following estimated direct material purchases for May and June of 2020: SAA purchases in May, 2020: $54,197 SAA purchases in June, 2020 $58,058

6. ToyWorkss 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 $15.00 per hour. This rate already includes the employers portion of employee benefits. All payroll costs are paid in the period in which they are incurred. Each unit spends a total of 15 minutes in production.

7. Due to the similarity of the equipment in each of the production stages and the companys concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.60, consisting of: Utilities--$0.60; Indirect Materials--$0.20; Plant maintenance--$0.50; environmental fee--$0.14; and Other--$0.16.

8. The fixed manufacturing overhead costs budgeted for the entire year are as follows: Training and development $ 43,700 Property and business taxes 40,000 Supervisors salary 149,400 Amortization on equipment 178,800 Insurance 24,000 Other 76,100 $ 512,000 The property and business taxes are paid in advance on December 31 of each year. The expected payment for next year is $40,600. The annual insurance premium is paid at the beginning of March 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. McGraw-Hill Ryerson Master Budget Case (vB.0) 3 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 years experience has provided the following information: Lowest level of sales: 400,000 units Total Operating Expenses: $635,800 Highest level of sales: 800,000 units Total Operating Expenses: $915,800 It is estimated that selling and administrative expenses for the budget year will be about 10% greater than the previous average. These costs are paid in the month in which they occur, with the exception of the only non-cash item: a monthly amortization of office equipment in the amount of $900. Not included in the above expenses is bad debt expense or warehouse rental.

10. Sales are on a cash and credit basis, with 75% collected during the month of the sale, 15% the following month, and 9.5% the month thereafter. 0.5% of sales are considered uncollectible (bad debt expense).

11. Sales in May and June 2020 are expected to be $180,000 and $190,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $63,650 at June 30, 2020 which will be collected in July and August, 2020.

12. During the fiscal year ended June 30, 2021 ToyWorks will be required to make monthly income tax installment payments of $4,000. Outstanding income taxes from the year ended June 30, 2020 must be paid in October 2020. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended June 30, 2021, in excess of installment payments, will be paid in October 2021.

13. Prior to the busy season, ToyWorks is planning to upgrade its manufacturing equipment for which they will need to pay cash. The bid that was accepted totaled $225,000 of which 40% is to be paid in August 2020 and 50% in September 2020. The 10% holdback will be paid in January 2021, assuming everything goes as planned. 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 $25,000 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. McGraw-Hill Ryerson Master Budget Case (vB.0) 4

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 $25,000 per quarter.

16. A listing of the estimated balances in the companys ledger accounts as of June 30, 2020 is given below: Cash $ 22,763 Accounts receivable 63,650 Inventory-raw materials 30,030 Inventory-finished goods 49,455 Prepaid insurance 16,000 Prepaid tax 19,200 Capital assets (net) 724,000 $ 925,098 Accounts payable $ 59,610 Income tax payable 21,500 Capital stock 500,000 Retained earnings 343,988 $ 925,098

Required: 1. Prepare a monthly master budget for ToyWorks for the year ended June 30, 2021, 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 June 30, 2021 using absorption costing. 3. Prepare a budgeted balance sheet at June 30, 2021.