Master Budget Case1:

Altec Manufacturing Inc.

Altec Manufacturing Inc. is a company that manufactures and sells a single product, which they call an Altec. 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 2021, Dave Koppelaar, the Altec controller, spent considerable time with Mary T.Barra, the Manager of Marketing, putting together a sales forecast for the next budget year (January to December, 2022). 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 Altec.

Their sales forecast consisted of these few lines:

• For the year ended December 31, 2021*: 70,000 units at $150.00 each
• For the year ended December 31, 2022: 80,000 units at $150.00 each
• For the year ended December 31, 2023: 90,000 units at $150.00 each

*Expected sales for the year ended December 31, 2021 are based on actual sales to date and budgeted sales for the duration of the year.

Altecs President felt certain that the marriage wouldnt last, and expected David 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 companys records have revealed the following information:

1) Sales are seasonal, and sometimes correspond with general holidays. History shows that January, February and March are the slowest months with only 4% of total sales in each month. Spring break causes April sales to jump to 10% of the annual total before dropping back to 6% in each of May and June. The summer months of July and August each contribute 9% of sales. Fall sales start slowly at only 3% of total sales, but as Christmas shopping picks up momentum, sales climb to 11% in October, move to 15% in November and peak at 19% 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 38% of the next months sales is required to fit the buyers demands.

3) Because sales are seasonal, Altec must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $28,000 per month, payable at the beginning of the month.

4) The only raw material used in the production of toodles is space-age acrylic (SAA), a compact material that is purchased in powder form. Each product requires 55 kilograms of SAA, at a cost of $0.85 per kilogram. The supplier of SAA tends to be somewhat erratic so Altec finds it necessary to maintain an inventory balance equal to 38% of the following months production needs as a precaution against stock-outs. Altec pays for 55% of a months purchases in the month of purchase, 25% in the following month and the remaining 20% two months after the month of purchase. The ending balance of raw materials at December 31, 2021 is 33,000 kilograms.

5) Altec expects that any payments made in the month of purchase will be subject to 2%, net/30 terms. The purchase discounts are reported as one metric on their administration departments balanced scorecard. To provide the information for the balanced scorecard, purchase discounts are included in the selling and administration budget, and are considered a non-cash item.

6) Beginning accounts payable will consist of $227,800 arising from the following estimated direct material purchases for November and December of 2021:

SAA purchases in November 2021: $450,000

SAA purchases in December 2021: $306,000

7) Altecs manufacturing process is highly automated. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $20.00 per hour before benefits. The employers portion of employee benefits adds 20% to the hourly rate. All payroll costs are paid in the period in which they are incurred.

Each unit spends a total of 75 minutes in production.

8) 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 variable overhead manufacturing rate is $25.95 per unit, consisting of: Utilities--$12.00; Indirect Materials--$5.00; Plant maintenance--$4.50; environmental fee--$1.95; and Other--$2.50.

9) The expected fixed manufacturing overhead costs below cover the twelve months ended December 31, 2021 and are based on actual costs to date and budgeted costs for the duration of the year.

Training and development $ 47,520

Property and business taxes 36,000

Supervisors salary 89,400

Amortization on equipment 227,760

Insurance 92,460

Other 109,600

$ 602,740

1. a) The property and business taxes, levied by the municipality covering the calendar year, are paid in one lump sum on June 30 of each year. The expected payment for next year (2022) is $39,000.
2. b) The annual insurance premium is paid at the beginning of April each year, covering the subsequent 12 months, from April 1 of the current year to March 31 of the next year. The premium is expected to go up to $93,300 on April 1, 2022.
3. c) All other cash-related fixed manufacturing overhead costs are incurred evenly over the year, paid as incurred, and are not expected to change in 2022.
4. d) Altec uses the straight line method of amortization.

10) In 20x1, the average total cost to manufacture one unit was $93.90 under absorption costing.

11) Selling and administrative expenses (S&A) are known to be a mixed cost; however, there is a lot of uncertainty about what portion is fixed and what is variable. Previous experience has provided the following information:

Lowest level of sales: 42,500 units Total S&A Expenses: $1,273,123

Highest level of sales: 87,500 units Total S&A Expenses: $2,493,073

These costs are paid in the month in which they occur. Not included in the above expenses are bad debt expense and the purchases discount.

12) Sales are on a cash and credit basis, with 21% collected during the month of the sale, 42% the following month, and 35% the month thereafter. 2% of sales are uncollectible (bad debt expense).

13) Sales in November and December 2021 are expected to be $1,100,000 and $1,600,000 respectively. Based on the above collection pattern this will result in accounts receivable of $1,617,000 at December 31, 2021 which will be collected in January and February, 2022.

14) During the fiscal year ending December 31, 2022, Altec will be required to make monthly income tax installment payments of $10,000. Outstanding income taxes from the year ended December 31, 2021 must be paid in March 2022. Income tax expense is estimated to be 25% of income before tax. Income taxes for the year ended December 31, 20x2, in excess of installment payments, will be paid in March, 2023.

15) Altec is planning to acquire additional manufacturing equipment for $304,750 cash. 40% of this amount is to be paid in April 2022, the rest, in May 2022. The manufacturing overhead costs shown above already include the amortization on this equipment.

16) Altec. 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 $32,000 per quarter.

17) An arrangement has been made with the local bank that if Altec maintains a minimum balance of $15,000 in their bank account, they will be given a line of credit at a preferred rate of 5% per annum. All borrowings from and repayments to the bank must be in multiples of $1,000 and interest must be paid at the end of each month.

All borrowing is considered to occur on the first day of the month, repayments on the last day of the month. Therefore, the amount subject to interest each month is the balance owing at the beginning of the month plus any amounts borrowed at the beginning of the month. Note that any amounts repaid that month do not reduce the amount subject to interest that month because they are assumed repaid on the last day of the month.

18) A listing of the estimated balances in the companys ledger accounts as of December 31, 2021 is given below (this is the ending balance sheet for 2021):

Cash	$ 15,680
Accounts receivable	1,617,000
Inventory-raw materials	28,050
Inventory-finished goods	28,170
Prepaid insurance	23,115
Capital assets (net)	1,328,000
$ 3,040,015
Bank loan payable	$ 102,000
Accounts payable	227,800
Income tax payable	11,200
Capital stock	1,200,000
Retained earnings	1,610,500
$ 3,04,015