MasterBudgetCase Study

As part of the continued advancement of technology, a drone camera market hasemerged in recent years. The drone camera market has been growing as morephotography enthusiasts have begun adopted this high-tech approach to capturing stillimages and video using remotely controlled devices. Eager to capture a share of thisgrowing market,CamDroneentered the market in early 2018.CamDronemanufacturescamera drones,sellingprimarily toretailers.

CamDroneis pleased with its financial performance over its first few years ofoperations, optimistic to achieve continued financial success. For planning and controlpurposes the company utilizes a monthly master budget, which is usually developed atleast three months in advance of the budget year. The company has a fiscal year endingDecember 31.

It is now Sept 15, 2019. You have been asked to prepare the Master Budget for the yearendingDecember31,2020.

Based on your discussions with the various departments throughout the company, youhave collectedthefollowingrelevantinformationforpreparingthebudget:

Sales

1.Themarketingdepartment isforecastingthefollowingannual sales:

FortheyearendedDecember31,2019:9,000 unitsat$1,000each*

FortheyearendedDecember31,2020:10,000unitsat$1,000each

FortheyearendedDecember31,2021:15,000unitsat$1,000each

*Expected sales for the year ended December 31,2019were based on actual salestodateandbudgetedsalesforthedurationofthe year.

2.Peak months for sales generally correspond with summer weather and gift-givingholidays. History shows that January is the slowest month, with only 1% of annualsales, followed closely behind by Feb-April with 2% of annual sales for each month.Sales spike during summer months with May, June, July, and August contributing12%, 15%, 12%, and 10% of annual sales respectively. With the back-to-school focusin September, there is a significant dip in camera drone sales to 3% of annual sales.As Christmas shopping picks up momentum, winter sales increase to 8% in October,13% in November, and then peak at 20% in December. This pattern of sales is notexpected tochangeinthe nexttwoyears.

ManufacturingCostsandInventory

3.Each cameradronesspendsatotalof3.5hoursin production.

4.Due to the highly technical nature ofCamDrone'smanufacturing process,CamDrone'sdirectlabourrate has averaged $30.00 per hour for 2019. This ratealready includes the employer's portion of employee benefits. A new collectiveagreement is being negotiated, with a 3% pay increase anticipated effective January1,2020.

5.EachCamDronerequires 1.25kg of direct materials. During 2019, the average cost ofdirect materials was $57/kg. The supplier of the direct materials tends to besomewhat erratic, soCamDronefinds it necessary to maintain a direct materialsinventory balance equal to 40% of the following month's production needs as aprecautionagainststock-outs.

6.Due to the similarity of the equipment in each of the production stages and thecompany's concentration on a single product, manufacturing overhead is allocatedbased on volume (i.e.the units produced). The variable manufacturing overheadratefor2019is$160/unit,consistingof:

Plant&EquipmentMaintenance

$70

Utilities

40

IndirectMaterials

30

Other

20

$ 160

7.Thefixedmanufacturingoverhead costsfor 2019areasfollows:

Supervisor'ssalary

181,800

AmortizationofPlant &Equipment

$132,000

Insurance

84,000

Training&Development

54,750

PropertyandBusinessTaxes

48,000

Other

30,000

$530,550

Amortization is calculated using the straight-line method, with no amortizationcalculatedintheyearcapitalassetsare acquired.

8.Aside from amortization, all other manufacturing costs are expected to increase by3%in2020duetoinflation.

9.From previous experience, management has determined that an ending finishedgoods inventory equal to 25% of the next month's sales is required to efficientlymeetcustomerdemands.

CollectionsPattern

10.Sales are on a cash and credit basis, with 49% collected during the month of the sale,33% the following month, and 17% the month thereafter. There are no earlypayment discounts for customers. Bad debt expense (amounts considereduncollectible)accountfor1%ofsales.

11.Based on the collection pattern described above, accounts payable as at end ofbusiness day on December 31,2019is projected to be $1,098,899 arising from thefollowingestimates:

Sales(November2019)

$1,170,000

Sales(December2019)

$1,800,000

PaymentsPattern

12.CamDronepays for 20% of a month's purchases of direct materials in the month ofpurchase, 50% in the following month and the remaining 30% two months after themonth ofpurchase.There arenoearlypaymentdiscountsofferedbysuppliers.

13.Based on the payment pattern described above, accounts payable as at end ofbusiness day on December 31,2019is projected to be $78,641 arising from thefollowingestimates:

DirectMaterialPurchases(November2019)

$95,888

DirectMaterialPurchases(December2019)

$62,344

14.Allpayrollcostsarepaidintheperiodin whichtheyare incurred.

15.The property and business taxes, paid at the beginning of July each year, apply tothe following 12-month period. Any increases for inflation on property and businesstaxesdonottakeeffectuntil thebeginning ofJuly each year.

16.Annual insurance premiums, paid at the beginning of April each year, apply to thefollowing 12-month period. Any increases for inflation on insurance premiums donottakeeffectuntilthebeginningofAprileachyear.

17.Fixed manufacturing overhead costs are incurred evenly over the year and "cash-related" amountsarepaidas incurred.

18.Sellingandadministrativeexpensesarepaidinthe monthinwhichtheyoccur.

Other

19.Anticipating a significant increase in customer demand and market share over thenextfewyears,CamDroneisplanningasignificantexpansioninvolvingacquiring

additional manufacturing equipment for $3,000,000 cash. Half of this amount is tobe paid to the equipment supplier in July 2020, with the remainder to be paid inOctober2020.

20.Selling and administrative expenses are known to be a mixed cost; however, there isalotofuncertaintyabouttheportion that isfixed.Based on prior yearexperience:

Lowest levelofmonthlysales:80 units

...TotalOperatingExpenses:$87,270*

Highest levelofmonthlysales:1,600units

...TotalOperatingExpenses:$360,780*

*excludingbaddebtsandamountsdescribedbelow

Theseexpensesareexpectedtoincreaseby3%in2020duetoinflation.

21.To secure and grow its market share,CamDroneis planning to operate "pop-up"kiosks in various local retail centers during peak sales months (May-Aug, Nov-Dec)commencing Nov2019.CamDroneis budgeting $10,900 per month (including allrelated fees and taxes), payable at the beginning of each month, to set-up andoperate these kiosks. The cost to set-up and operate "pop-up" kiosks will be inaddition to the normal selling and administrative expenses described above and isnotexpectedtoincreaseduring2020.

22.Income tax expense is estimated to be 25% of net income.CamDronemakesmonthly income tax installment payments of $25,000 and pays all outstandingincome taxes (in excess ofinstallment payments) in March of the following year. Assuch, any outstanding income tax balance for the year ended December 31,2019itwillbepaidinMarch2020.

23.An arrangement has been made with the local bank that ifCamDronemaintains aminimum balance of $50,000 in their bank account, they will be given a line of creditat a preferred rate of 3% per annum (0.25% per month).All borrowing is consideredto happen on the first day of the month, repayments are on the last day of themonth.Allborrowingsand repaymentsfrom thebankshould beinmultiplesof

$10,000 and interest must be paid at the end of each month.Interest is calculatedon the balance at the beginning of the month, which includes any amountsborrowedthatmonth.

24.CamDronehas a policy of paying dividends at the end of each quarter.ThePresident tells you that the Board of Directors is planning on declaring dividends asfollows:

March2020

$50,000

June2020

$100,000

September2020

$250,000

December2020

$250,000

Dividendsarepaidinthemonththey aredeclared.

25.The company is forecasting the following balances as at the end of business day onDecember 31,2019:

Assets

Cash

$100,000

AccountsReceivable

1,098,899

Inventory:DirectMaterials

3,591

Inventory:FinishedGoods

11,640

PrepaidPropertyandBusinessTaxes

24,000

PrepaidInsurance

21,000

CapitalAssets(net)

571,800

TotalAssets

$1,830,930

Liabilitiesand Shareholders'Equity

AccountsPayable

$78,641

IncomeTaxesPayable

19,700

CapitalStock

500,000

Retained Earnings

1,232,589

TotalLiabilitiesandShareholders' Equity

$1,830,930

Required:Prepare a monthly master budget forCamDronefor the year ending December 31,2020,whowyour answers for thefollowing schedulesonly.

1.Sales Budget

2.Schedule of Expected Cash Collections

3.Production Budget

4.Direct Materials Budget

5.Schedule of Expected Cash Disbursements