Master Budget Case

Wacky Widgets Inc

Wacky Widgets Inc. is a toy company that manufactures and sells a single product, the kadoodle. For planning and control purposes they utilize a quarterly master budget, which is usually developed at least six months in advance of the budget year. Their fiscal year end is December 31.

Early in 2021, Katrina Kyle, the Wacky Widgets controller, spent some time putting together a sales forecast for the next budget year (January to December, 2022). In April, however, Katrina decided to follow her dream and sail around the world. She left Wacky Widgets with minimal notice.

Susan Alexander, the president of Wacky Widgets, 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 Susan and your investigations of the companys records have revealed the following information:

1. Katrinas sales forecast consisted of these few lines:

For the year ended Dec. 31, 2021: 125,000 units at $19.00 each

For the year ended Dec. 31, 2022: 140,000 units at $19.50 each

For the year ended Dec. 31, 2023: 145,000 units at $20.00 each

1. Because the product is a toy, sales are very seasonal, with 65% of sales taking place in the last quarter of their fiscal year (Oct-Dec) as their customers, primarily retail stores, ramp up for the holiday season. 5% of sales take place in their first quarter, 10% in the second quarter, and 20% in their third quarter.

1. Because sales are seasonal, Wacky Widgets must rent an additional storage facility from August to November to house the additional finished toys on hand. The only related cost is a flat $1,500 per month, payable at the beginning of the month.

1. Sales are on a cash and credit basis, with 85% collected during the quarter of the sale, and 15% the following quarter.

1. From previous experience, management has determined that an ending finished goods inventory equal to 10% of the next quarters sales is required to meet customer demand. Opening finished goods inventory consists of 700 kadoodles.

1. The primary raw material used is a newly designed plastic. Each kadoodle requires 250 g (.25 kg) of plastic (including a wastage allowance), which the company purchases for $30.00 per kg. Wacky Widgets finds it necessary to maintain an inventory balance equal to 15% of the following quarters production needs of plastic as a precaution against stock-outs. Wacky Widgets pays for 80% of a quarters purchases in the quarter of purchase and 20% in the following quarter.

1. Much of the manufacturing process is done by hand. Employees are paid an average of $27 per hour, including the employers portion of employee benefits. All payroll costs are paid in the period in which they are incurred.

Each kadoodle spends a total of 15 minutes in production.

1. Due to the companys concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The variable overhead manufacturing rate is $1.25 per unit.

1. The fixed manufacturing overhead costs for the entire year are as follows:

Supervisors salary 98,400

Depreciation on equipment 80,000

Insurance 28,000

Other 15,000

$ 221,400

• The annual insurance premium is paid at the beginning of October each year.

• All other cash-related fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.

• Wacky Widgets uses the straight line method of depreciation.

1. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. The previous years experience has provided the following information:

Unit Sales Selling and Admin Cost

Q1 6,250 16,500

Q2 12,500 29,000

Q3 25,000 54,000

Q4 81,250 166,500

These costs are paid in the quarter in which they occur.

1. During the fiscal year ended Dec. 31, 2022, Wacky Widgets will be required to make quarterly income tax installment payments of $12,000. Outstanding income taxes from the year ended Dec. 31, 2021 must be paid in April, 2022. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2022, in excess of installment payments, will be paid in April, 2023.

1. Wacky Widgets is planning to acquire additional manufacturing equipment for $148,300 cash. 60% of this amount is to be paid in March, 2022, the rest, in April, 2022. The manufacturing overhead costs shown above already include the depreciation on this equipment.

1. Wacky Widgets Inc. 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 $10,000 per quarter.

1. Wacky Widgets has negotiated with the bank for a line of credit at a rate of 9% per annum (i.e. 2.25% per quarter). Amounts can be borrowed or repaid in increments of $1,000. Amounts are assumed to be borrowed at the beginning of the quarter when needed and repaid at the end of the quarter when cash is available. A minimum cash balance of $20,000 must be maintained.

1. A listing of the estimated balances in the companys ledger accounts as of December 31, 2021.

Cash	$20,345
Accounts receivable	231,563
Inventory-raw materials	8,663
Inventory-finished goods	11,900
Prepaid insurance	14,000
Capital assets (net)	1,050,000
	$1,336,471
Accounts payable	$ 95,859
Income tax payable	26,200
Capital stock	800,000
Retained earnings	414,411
	$1,336,471

Required:

Prepare a quarterly master budget for Wacky Widgets for the year ended December 31, 2022, including the following schedules:

1. Sales Budget & Schedule of Cash Receipts
2. Production Budget
3. Direct Materials Budget & Schedule of Cash Disbursements
4. Direct Labour Budget
5. Manufacturing Overhead Budget
6. Selling and Administrative Expense Budget
7. Cash Budget