Master Budget Case

Wood Decor Inc.

Wood Decor Inc. is a company that manufactures and sells decorative wooden bowls. The company president, Joyce Eng, has expressed a desire to improve the companys planning for cash needs. She has approached you, a management accounting student, for help in preparing the budget for the upcoming third quarter. She would like to see the sources and uses of cash by month, for the next quarter ending Sept. 30, 2020. The president would also like to see a summary of your findings, highlighting any needs for financing and recommending specific changes to avoid the interest cost.

Your investigations of the companys records have revealed the following information:

1. Sales forecast:

First Quarter ended March 31 4,700 units

Second Quarter ended June 30 4,000 units

Third Quarter ended September 30 5,000 units

Fourth Quarter ended December 31 4,000 units

2. History has shown the sales pattern is consistent in each quarter, where sales in the first month of the quarter are 25% of the total for the quarter, 35% in the second month, and 40% in the third month of the quarter.

3. Sales are on a cash and credit basis, with 70% collected during the month of the sale, and 28% the following month. The remainder of receivables are uncollectible. The selling price is $80 per unit throughout the year.

4. From previous experience, management has determined that an ending finished goods inventory equal to 20% of the next months sales is required to meet customer demand. Opening finished goods inventory consists of 250 bowls.

5. The primary raw material used is mahogany that is rough cut, shaped on a lathe, then sanded. The bowls are then finished with varnish. Each bowl requires 2 linear feet of mahogany, which sells for $19 per linear foot. Wood Decor finds it necessary to maintain an inventory balance equal to 10% of the following months production needs of wood as a precaution against stock-outs. Opening raw materials inventory consists of 270 linear feet of wood. Wood Decor pays for 75% of a months purchases in the month of purchase and 25% in the following month. The cost of sandpaper and varnish is considered indirect materials and are paid for as needed with no inventory on hand, and the lathes are considered long lived assets.

6. Beginning accounts payable will consist of $14,364 arising from the estimated direct material purchases for June.

7. The production process is extremely labor intensive. Employees are paid an average of $24 per hour, including the employers portion of employee benefits. All payroll costs are paid in the period in which they are incurred.

Each bowl spends a total of 45 minutes in production.

8. Due to the companys concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The variable manufacturing overhead rate is $4.50 per unit, consisting primarily of indirect materials.

9. The fixed manufacturing overhead costs for the quarter are as follows:

Property and business taxes 1,800

Insurance 1,200

Supervisors salary 9,000

Depreciation on equipment 3,000

$15,000

The annual property and business taxes are paid on July 1 of each year.

The quarterly insurance payment is made August 1 of each year.

Wood Decor uses the straight-line method of depreciation.

10. Selling and administrative expenses are known to be a mixed cost. These costs are paid as they are incurred. The company uses least squares regression to predict mixed costs. Cost data for the third quarter of 2019, when sales were 4,000 units for the quarter, is as follows:

July $ 6,650

August $ 9,050

September $10,250

11. During the fiscal year ended December 31, 2020, Wood Decor will be required to make quarterly income tax installment payments of $9,000 on the first day of each quarter.

12. Wood Decor is planning to acquire additional manufacturing equipment for $35,000 cash. 60% of this amount is to be paid in July, 2020, the rest in September, 2020. The manufacturing overhead costs shown

above already include the depreciation on this equipment.

13. The company policy has been to pay dividends of $3,000 on the last day of each quarter.

14. Wood Decor has negotiated an operating loan with the bank at an annual interest rate of 6%. Amounts must be borrowed and repaid in increments of $1,000. Interest is paid for the full month in the month it is borrowed, and in the month when it is repaid. The company must maintain a minimum cash balance of $3,000.

15. A listing of the relevant balances in the companys ledger accounts as of June 30, 2019 follows:

Cash $22,750 Accounts receivable 35,840 Inventory-raw materials (270 linear feet) 5,130 Inventory-finished goods (250 bowls) 15,883 Accounts payable 14,364 Retained earnings 451,240

1. Prepare a monthly master budget for Wood Decor for the quarter ended September 30, 2020, including the following schedules:

a)Using Absorption Costing

b)Selling and Administrative Expense Budget

c)Cash Budget

d) Then prepare a statement of retained earnings.