Master Budget Case: ToyWorks Ltd.

ToyWorks Ltd. is a company that manufactures and sells a single product, which they call a toodle. For planning and control purposes they utilize aquarterlymaster budget, which is usually developed at least six months in advance of the budget period. Their fiscal year end is December 31.

During the summer of 2018, Chris Leigh, the ToyWorks controller, spent considerable time with Pat Frazer, the Manager of Marketing, putting together a sales forecast for the first quarter of next year (January to March, 2019). 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, 2018: 475,000 units at $10.00 each*
• For the year ended December 31, 2019: 500,000 units at $10.00 each
• For the year ended December 31, 2020: 500,000 units at $10.00 each

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 first quarter. Your conversations with the President and your investigations of the company's records have revealed the following information:

1. Sales of toodles are seasonal. History shows that January, March, May, and June are the slowest months with only 5% of sales for each month. Sales pick up over the summer with July, August, and September each contributing 6% to the total. Valentine's Day in February boosts sales to 10%, and spring break in April accounts for 7%. As Christmas shopping picks up momentum, winter sales start at 10% in October, move to 15% in November, and then peak at 20% 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. 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.
4. Beginning accounts payable will consist of $167,084, arising from the following estimated direct material purchases for November and December of 2018:

\fTraining and development $ 43,200 Repairs and maintenance 39,000 Supervisors salaries 149,400 Amortization on equipment 178,800 Plant Insurance 96,000 Other 117,600 $ 624,000Lowest level of sales: 375,000 units Total Operating Expenses: $778,710 Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460Cash $ 64,165 Accounts receivable 490,438 Inventory-raw materials 28,125 Inventory-finished goods 45,625 Capital assets (net) 724,000 $ 1,352,353 Accounts payable $ 167,084 Income tax payable 21,500 Capital stock 1,000,000 Retained earnings 163,769 $ 1,352,353