MEET THECOMPANY Deluxe Spa Products Incorporated, a privately owned business, was founded five years ago by Jack Abbott. On February 1,2000 the company, which had been a lifelong dream of Jack Abbott, opened its doors. This company is fast becoming a leader in the industry. Annual sales have increased each year since the company began operations. Jack Abbott has worked hard to ensure that the company's reputation for both product quality and customer service is maintained. Jack Abbott, in consultation with his lawyer, John Silva, has been planning a small public offering of shares early next year in order to expand the business Deluxe Spa Products Incorporated manufactures 14gauge stainless steel spa beds which are sold to large hotels, spas, and fitness centers. Each spa bed sells for $1.838This price represents a l0% price increase from that of the prior year Like most manufacturing operations, the company uses a perpetual inventory system. Deluxe Spa Products Incorporated uses a process costing system and uses FIFO method to value inventory The terms of sale that the company offers to credit customers is net 30 days. Customers who have never dealt with the firm must pay cash for their first order. All orders are shipped FOB factory The present production process results in stainless steel scrap on a per-bed basis. The scrap, from fully completed beds occurs in the Forming Department. All scrap is sold to Josh Lyman, a scrap dealer, at $9.00 per square foot. Lyman collects the scrap each Friday and pays cash at the time of pickup The information listed on the trial balance is the unadjusted balance at January 31 All plant workers are paid by the working hour. The plant operates from 8 a.m. to 4:30 p.m. Lunch hours are not paid. No overtime is paid to the laborers until they have accumulated more than 15 minutes on a daily basis You have been hired as a temporary replacement for Victor Kiriakaus, who, as a result of an accident, will not be back at work for several months The following is a transcript of an information meeting which took place between the controller, Abe Carver, and yourself What type of costing system is in use at your company? ou: CarverWe use a process costing system and the FIFO method of inventory valuation. According to the budget, the price of stainless steel is $27.50 per sq. foot. Is that price sl in effect? ou: Carver No. There was a price increase of 50 cents per square foot on August last year What about the price of the logos? We are lucky there. No increase in that price for now ou: arver What about the plant labour rates? Any changes there? ou: Carver No changes for the moment. Negotiations have already taken place and the labourers will receive a 3% increase which will come into effect on February 1 At school we learned that budgets are based on practical (normal) or ideal (theoretical) capacity. What do you do here? Do you have a copy of the overhead budget for this ycar? ou: Carver: We are using practical capacity at 17,200 hours to set our overhead rates. If we were to use the plant at full capacity we would be able to work 17,550 hours. As you can see we are working pretty close to capacity at this time. Here is a copy of the overhead budget break down Practical S45,592 15,181 52,650 63,500 18,712 63,000 48,000 32,996 44,852 62.780 21,672 21,374 37,734 Ideal S46,520 15,490 52,650 63,500 18,712 63,000 48,000 32,996 44,852 64,058 22,113 21,374 37,734 Depreciationfactory equipment 45% of receiver's salary Maintenance mechanic's salary Supervisory salaries Insurance-factory premises Depreciation-building Purchasing agent's salary Security Business and property taxes Miscellaneous discretionary operating expenses Utilities-variable Committed operating expenses Utilities-fixed Carver The amount of stainless steel that has been requisitioned from the store room so far this year amounts to 109,907 square feet. The company has already produced 3,216 beds this ear How much have the plant employees been paid this year? ou Carver: According to the time cards the plant employces have worked 16,916 hours so far this year Even though business has been good, there has been no need for any overtime this year. If the guys have to work overtime we have to pay them time and a half. The number ofhours worked in each of the departments so far this year are as follows: Pattern Forming Welding 5,639 hours 3,759 hours 7,518 hours Also referred to as Amortization THE PRODUCT Product Specifications: Direct Material Quantity of stainless steel per bed Size of one sheet of stainless steel = Budgeted cost of stainless steel Budgeted cost of corporate logo 34'h sq. feet of 14 gauge steel $27.50 per square foot $1730cach Direct Labour The work day for each plant employee is 7h hours, 5 days per week Hourly rates are as follows: Pattern Mechanics are paid $24 per hour Forming Operators are paid $26.25 per hour Welders are paid S28.90 per hour. Manufacturing Overhead This production of spa beds is a labour-intensive operation thus overhead is applied based on direct labour hours. THE PROCESS The spa beds go through three processes form start to finish. The factory takes up 75% of the entire building space, and is organized into three processing areas and one shipping area Processing Areas Process One-Pattern In this area Pattern Mechanics collect the stainless steel from the storeroom and draw the pattern of the spa bed. Process Two-Forming In this area Form Operators cut the pattern that has been drawn in process one. Process Three-Welding In this area Welders weld, buff, and polish the pieces of stainless steel which form the spa bed. The corporate logo is affixed to the finished bed in this department. 4 ORGANIZATION CHART President and Chief Executive Officer Jack Abbott Plant Supervisor Brooke Logan Controller Abe Carver Plant WorkersMaintenance Purchasing Agent Receiver Shipper Cleaning Staff Sales Personnel Mark Haines Accountant Victor Kiriaukas Receptionist Gina Roma Brandon Walker Thome Forrester Michael Baldwin John Black Tony Demera Roman Brady Stephanie Forrester Sally Spectra Darla Epstein MEET THEEMPLOYEES Factory Plant Supervisor Brooke Logan has been working for the company since it began. The plant workers, janitor, receiver shipper, and the purchasing agent report to her Process One-Pattern Mechanics In this department the pattern is drawn on a sheet of stainless steel. There are three individuals e mploy e d in this department-Thomas Forrester, Michael Baldwin, and John Black. Each of thenm works five daysa week, 7 1/2 hours per day. To draw the pattern for 1 spa bed on a sheet of stainless steel s an average of 1 3/4 hours. Process Two-Forming Operators In this department the spa bed is cut from the pre-drawn pattern. Two individuals work in this department Tony Demera and Roman Brady. It takes one hour to cut each pre-drawn pattern. Each of theoperators works 7 1/2 hours per day, 5 days per weck. Process Three-Welders In this department the individual picces are welded, buffed, and polishcd. It is in this department that the logos are affixed to the front of the finished bed. There are four welders employed in this department -Stephanie Forrester, Sally Spectra, Darla Epstein, and Deacon Sharpe. It takes two hours to weld, buff. and polish the bed. An additional 1 /2 haris needed to attach the logo. Each of the welders work 7 hours per day, 5 days per week Shipping/Receiving Area In this area there is one employee-Whipple Jones. Jones is employed as a shipperreceiver. His hourly rate is $18. He collects the spa beds from the third process and prepares them for shipping. Forty-five percent of his time is allocated to receiving of raw materials and the other fifty-five percent is charged to shipping Sales Personnel Presently there are two individuals employed in sales. Both David Faber and Mark Haines have beern employed by the company for several years. Each is paid a base salary plus a bonus equal to one- quarter percent of the company's yearly total sales. The bonus is paid fifteen days after the year-end. Maintenance Personnel Brandon Walker, a salaried employee, is in charge of maintenance and repairs to the factory equipment. He works 7 1/2 hours per day Cleaning Staff Josiah Bartlett, is employed as a janitor. He is a salaried employee who cleans both the office and the factory. He works five hours per day and reports directly to the plant supervisor Purchasing Agent Marleana Evans, the purchasing agent, has been with the company for two years now. She is in charge of purchasing for all factory requirem 6 Deluxe Spa Products Incorporated Income Statement For the year ended January 31,2017 Sales Cost of Goods Sold Gross Profit Scrap Sales Profit before Operating Expenses S5,026,700 3,533,740 $1,492,960 37.800 1,530,760 Operating Expenses Selling Expenses Sales Salaries Expense $ 82,878 114,000 22,600 31,500 440,000 47,320 23,475 69,675 22,620 146,322 110,549 67,200 42,500 epreciation Expense-Office Depreciation Expense-Building Administrative Salaries Expense Advertising Expense Insurance Expense Interest Expense Bad Debts Expense Operating Expenses Utilities Expense Business and Property Taxes Office Supplies Expense Total Expenses Profit Before Income Taxes Income Tax Expensc Net Income Farnings Per Share 1,220,639 S 310,121 114.745 S 195,376 $19.54 Deluxe Spa Products Incorporated Balance Sheet As at January 31,2017 ASSETS Current Assets: Cash Marketable Securities Accounts Receivable Allowance for Bad Debts Raw Materials Inventory* Work in Process Inventory Finished Goods Inventory Prepaid Insurance Prepaid Advertising Office Supplies $107,174 51,000 $121,928 15,725 106,203 109,813 35,537 129,140 27,712 10,593 10 S587,705 Total Current Assets Capital Assets: Building Less: Accumulated Depreciation Factory Machinery Less: Accumulated Depreciation Office Equipment Less: Accumulated Depreciation Total Capital Assets $1,260,000 157,500 $450,000 156,577 $225,000 14,600 $1,102,500 293,423 110.400 506,323 $2.094028 Total Assets LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Notes Payable (due February 2004) Accounts Payable Wages Payable Unearned Revenue Current Portion of Long Term Debt Income Taxes Payable Total Current Liabilities S100,000 43,388 25,850 37,676 56,468 34,498 $297,880 Long Term Liabilities: 666,819 $ 964,699 Mortgage Payable Total Liabilities SHAREHOLDER'S EQUITY Capital Stock (10,000 common shares, no par value) Retained Earnings Total Shareholder's Equity Total Liabilities and Shareholder's Equity $100,000 1,029,329 1129329 $2.094.028 ncludes I lologos and 109 sheets of stainless steel January 31 The following is a summary of the manufacturing operations during the last week of January: Pattern Dept. Forming Dept. Welding Dept Units Units Units Beginning WIP Units Transferred In Units Completed during 10 (30%) 150 80%) 5 (20%) 60 65 last week of January, 2017 Ending WIP 60 54 16(50%) 65 I ()( I 0% ) 5 (60%) Supplcmentary Information , a. Any under/over-applied overhead is closed out to the Cost of Goods Sold account. b. The building space is used 75 percent for the factory and 25 percent for office and selling c. Depreciation on the office equipment, which has a salvage value of$15,000, is calculated using the double declining balance method, at a rate of 10 percent per year. The company uses the straight line method of depreciation for the building. The factory machinery is depreciated using the declining balance method at 3 percent. d. Management estimated that 0.45 percent of all sales will be uncollectible. A e. new two year insurance policy was purchased on December 1, 2016. f. Prepaid advertising at the end of January amounted to $7,819 g. Office supplies on hand at the end of the month totaled $1,253 nRaw materials purchased during the period Fcbruary 1, 2016 to January 24, 2017 amounted to $3,315,298 i. Raw materials inventory at the end of January 2005 included 86 corporate logos. The level of inventory was lower than the normal 15 percent requirement that the company would usually hold at the end of this quarter It is estimated that the uities for the month of January will amount to $7,458 j. This company is taxed at the rate of 38 percent. REQUIREMENTS 1. Prepare the following statements for the year ending January 31, 2018 a. Cost of. Goods Manufactured Statement b. Income Statement c. Statemcnt of Rctaincd Earnings d. Balance Sheet 2. The annual budget meeting has been called and you are required to attend. There has been lots of talk back and forth. Many numbers have been banteredaround. At the last sales meeting the salespersons reported on what they could sell in fiscal 2018. The following sales forecast was agreed upon by the management team: First quarter Second quarter Third quarter Fourth quarter 700 units 900 units 1,100 units 00 units 3,500 units Total You gather the following information Raw Materials Inventory You are to assume that the beginning inventory of stainless steel is 3,708 square feet and that the required ending inventory of stainless steel will be 5,400 square feet. Beginning inventory of corporate logos is 132 units. The required ending inventory of corporate logos should be 150 units. Logos will increase in price to S19.00 each and stainless steel will increase to $29.00 a square foot. You discover that it is normal corporate policy to maintain quarter-end inventory levels of stainless steel and corporate logos at 15 percent of the following quarter's production Work-In-Process Work-in-process inventories will be immaterial and can be ignored Finished Goods The desired ending inventory should be 20 percent of the next quarter's sales. The fourth quarter (January 31, 2018) ending inventory should be 150 beds. You are to assume that the opening inventory (February 1, 2017) is 132 beds at a total cost of $184,140 Other Budget Information Direct labour employees presently earn on average $26.00 an hour and in the last round of labour negotiations, production staff won a 3% wage increase. This increase will come into effect as of February 1, 2017 Present variable selling and administrative expenses are $75 per unit. These will increase by 5 per- cent in the coming year. Total fixed selling expenses are estimated to be $150,000. Total fixed administrative expenses, which include administrative salaries, are expected to be $582,000. These expenses are incurred evenly throughout the year The present one-quarter percent commission on sales is being maintained as an incentive to sales personnel Pricing Policy The selling price of the spa beds will be set at $2,021.00 because of the increased cost of materials and labour Next year promises to be the best year ever, and Abbott is concerned about whether he can meet the demand, given the present set up of the company. He needs to know if his present staff and operating hours will have to be modified in order for the company to produce enough product to meet the demand and still have some beds in inventory After speaking with department heads and management, you construct the following budgeted factory overhead costs for the company 20,000 DLH 18,000 DLH 60,000 68,000 21,(530 42,150 36,000 9,800 18,900 16,718 55,123 98,100 23,172 50,400 $499,993 Depreciation Plant Supervisor's Salary Insurance Business and Property Taxes Security Telephone Janitorial,Services Receiver's Salary Utilities Factory Operating Expenses-Variable Factory Operating Expenses-Fixed Purchasing Agent $60,000 68,000 21,630 42,150 36,000 10,500 1,900 16,718 58,060 109,000 23,172 50,400 $514,530 Required You are to investigate the concerns which Jack Abbott has raised and prepare a report that discusses these concerns. An operating budget as well as a pro forma income statement should be included in your report DELUXE SPAPRODUCTSINCORPORATED Adjusted Trial Balance January 31, 2018 Cash Accounts Reccivable Allowance for Bad Debts Marketable Securities Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Prepaid Insurance Prepaid Advertising Office Supplies Building Accumulated Depreciation - Building Factory Machinery Accumulated Depreciation - Factory Machinery Office Equipment Accumulated Depreciation - Office Equipment Notes Payable Accounts Payable Unearned Revenue Dividends Payable Wages Payable Income Taxes Payable Accrued Expenses Mortgage Payable Capital Stock Retained Earnings $137,593 163,083 $ 29,256 355,839 60,394 36,091 132,896 43,736 2,553 1,260,000 189,000 165,380 136,680 450,000 240,465 49,853 18,380 10,000 0 177,835 37,785 666,819 00,000 1,019,329 6,072,752 es Scrap Sales Sales Returns and Allowances Cost of Goods Sold Manufacturing Overhead Administrative Salaries Expense Interest Expense Utilities Expense Office Supplies Expen Advertising Expense Sales Salaries Expense Selling Expenses Operating Expenses Depreciation Expense - Office Equipment Depreciation Expense Building Bad Debts Expense Business and Property Taxes Income Tax Expense 4,402,802 0 461,260 60,397 117,941 55,927 14,555 150,135 86,568 155,160 22,080 7,875 27,294 70,560 177.835 $8.708.210 $8.708.210 MEET THECOMPANY Deluxe Spa Products Incorporated, a privately owned business, was founded five years ago by Jack Abbott. On February 1,2000 the company, which had been a lifelong dream of Jack Abbott, opened its doors. This company is fast becoming a leader in the industry. Annual sales have increased each year since the company began operations. Jack Abbott has worked hard to ensure that the company's reputation for both product quality and customer service is maintained. Jack Abbott, in consultation with his lawyer, John Silva, has been planning a small public offering of shares early next year in order to expand the business Deluxe Spa Products Incorporated manufactures 14gauge stainless steel spa beds which are sold to large hotels, spas, and fitness centers. Each spa bed sells for $1.838This price represents a l0% price increase from that of the prior year Like most manufacturing operations, the company uses a perpetual inventory system. Deluxe Spa Products Incorporated uses a process costing system and uses FIFO method to value inventory The terms of sale that the company offers to credit customers is net 30 days. Customers who have never dealt with the firm must pay cash for their first order. All orders are shipped FOB factory The present production process results in stainless steel scrap on a per-bed basis. The scrap, from fully completed beds occurs in the Forming Department. All scrap is sold to Josh Lyman, a scrap dealer, at $9.00 per square foot. Lyman collects the scrap each Friday and pays cash at the time of pickup The information listed on the trial balance is the unadjusted balance at January 31 All plant workers are paid by the working hour. The plant operates from 8 a.m. to 4:30 p.m. Lunch hours are not paid. No overtime is paid to the laborers until they have accumulated more than 15 minutes on a daily basis You have been hired as a temporary replacement for Victor Kiriakaus, who, as a result of an accident, will not be back at work for several months The following is a transcript of an information meeting which took place between the controller, Abe Carver, and yourself What type of costing system is in use at your company? ou: CarverWe use a process costing system and the FIFO method of inventory valuation. According to the budget, the price of stainless steel is $27.50 per sq. foot. Is that price sl in effect? ou: Carver No. There was a price increase of 50 cents per square foot on August last year What about the price of the logos? We are lucky there. No increase in that price for now ou: arver What about the plant labour rates? Any changes there? ou: Carver No changes for the moment. Negotiations have already taken place and the labourers will receive a 3% increase which will come into effect on February 1 At school we learned that budgets are based on practical (normal) or ideal (theoretical) capacity. What do you do here? Do you have a copy of the overhead budget for this ycar? ou: Carver: We are using practical capacity at 17,200 hours to set our overhead rates. If we were to use the plant at full capacity we would be able to work 17,550 hours. As you can see we are working pretty close to capacity at this time. Here is a copy of the overhead budget break down Practical S45,592 15,181 52,650 63,500 18,712 63,000 48,000 32,996 44,852 62.780 21,672 21,374 37,734 Ideal S46,520 15,490 52,650 63,500 18,712 63,000 48,000 32,996 44,852 64,058 22,113 21,374 37,734 Depreciationfactory equipment 45% of receiver's salary Maintenance mechanic's salary Supervisory salaries Insurance-factory premises Depreciation-building Purchasing agent's salary Security Business and property taxes Miscellaneous discretionary operating expenses Utilities-variable Committed operating expenses Utilities-fixed Carver The amount of stainless steel that has been requisitioned from the store room so far this year amounts to 109,907 square feet. The company has already produced 3,216 beds this ear How much have the plant employees been paid this year? ou Carver: According to the time cards the plant employces have worked 16,916 hours so far this year Even though business has been good, there has been no need for any overtime this year. If the guys have to work overtime we have to pay them time and a half. The number ofhours worked in each of the departments so far this year are as follows: Pattern Forming Welding 5,639 hours 3,759 hours 7,518 hours Also referred to as Amortization THE PRODUCT Product Specifications: Direct Material Quantity of stainless steel per bed Size of one sheet of stainless steel = Budgeted cost of stainless steel Budgeted cost of corporate logo 34'h sq. feet of 14 gauge steel $27.50 per square foot $1730cach Direct Labour The work day for each plant employee is 7h hours, 5 days per week Hourly rates are as follows: Pattern Mechanics are paid $24 per hour Forming Operators are paid $26.25 per hour Welders are paid S28.90 per hour. Manufacturing Overhead This production of spa beds is a labour-intensive operation thus overhead is applied based on direct labour hours. THE PROCESS The spa beds go through three processes form start to finish. The factory takes up 75% of the entire building space, and is organized into three processing areas and one shipping area Processing Areas Process One-Pattern In this area Pattern Mechanics collect the stainless steel from the storeroom and draw the pattern of the spa bed. Process Two-Forming In this area Form Operators cut the pattern that has been drawn in process one. Process Three-Welding In this area Welders weld, buff, and polish the pieces of stainless steel which form the spa bed. The corporate logo is affixed to the finished bed in this department. 4 ORGANIZATION CHART President and Chief Executive Officer Jack Abbott Plant Supervisor Brooke Logan Controller Abe Carver Plant WorkersMaintenance Purchasing Agent Receiver Shipper Cleaning Staff Sales Personnel Mark Haines Accountant Victor Kiriaukas Receptionist Gina Roma Brandon Walker Thome Forrester Michael Baldwin John Black Tony Demera Roman Brady Stephanie Forrester Sally Spectra Darla Epstein MEET THEEMPLOYEES Factory Plant Supervisor Brooke Logan has been working for the company since it began. The plant workers, janitor, receiver shipper, and the purchasing agent report to her Process One-Pattern Mechanics In this department the pattern is drawn on a sheet of stainless steel. There are three individuals e mploy e d in this department-Thomas Forrester, Michael Baldwin, and John Black. Each of thenm works five daysa week, 7 1/2 hours per day. To draw the pattern for 1 spa bed on a sheet of stainless steel s an average of 1 3/4 hours. Process Two-Forming Operators In this department the spa bed is cut from the pre-drawn pattern. Two individuals work in this department Tony Demera and Roman Brady. It takes one hour to cut each pre-drawn pattern. Each of theoperators works 7 1/2 hours per day, 5 days per weck. Process Three-Welders In this department the individual picces are welded, buffed, and polishcd. It is in this department that the logos are affixed to the front of the finished bed. There are four welders employed in this department -Stephanie Forrester, Sally Spectra, Darla Epstein, and Deacon Sharpe. It takes two hours to weld, buff. and polish the bed. An additional 1 /2 haris needed to attach the logo. Each of the welders work 7 hours per day, 5 days per week Shipping/Receiving Area In this area there is one employee-Whipple Jones. Jones is employed as a shipperreceiver. His hourly rate is $18. He collects the spa beds from the third process and prepares them for shipping. Forty-five percent of his time is allocated to receiving of raw materials and the other fifty-five percent is charged to shipping Sales Personnel Presently there are two individuals employed in sales. Both David Faber and Mark Haines have beern employed by the company for several years. Each is paid a base salary plus a bonus equal to one- quarter percent of the company's yearly total sales. The bonus is paid fifteen days after the year-end. Maintenance Personnel Brandon Walker, a salaried employee, is in charge of maintenance and repairs to the factory equipment. He works 7 1/2 hours per day Cleaning Staff Josiah Bartlett, is employed as a janitor. He is a salaried employee who cleans both the office and the factory. He works five hours per day and reports directly to the plant supervisor Purchasing Agent Marleana Evans, the purchasing agent, has been with the company for two years now. She is in charge of purchasing for all factory requirem 6 Deluxe Spa Products Incorporated Income Statement For the year ended January 31,2017 Sales Cost of Goods Sold Gross Profit Scrap Sales Profit before Operating Expenses S5,026,700 3,533,740 $1,492,960 37.800 1,530,760 Operating Expenses Selling Expenses Sales Salaries Expense $ 82,878 114,000 22,600 31,500 440,000 47,320 23,475 69,675 22,620 146,322 110,549 67,200 42,500 epreciation Expense-Office Depreciation Expense-Building Administrative Salaries Expense Advertising Expense Insurance Expense Interest Expense Bad Debts Expense Operating Expenses Utilities Expense Business and Property Taxes Office Supplies Expense Total Expenses Profit Before Income Taxes Income Tax Expensc Net Income Farnings Per Share 1,220,639 S 310,121 114.745 S 195,376 $19.54 Deluxe Spa Products Incorporated Balance Sheet As at January 31,2017 ASSETS Current Assets: Cash Marketable Securities Accounts Receivable Allowance for Bad Debts Raw Materials Inventory* Work in Process Inventory Finished Goods Inventory Prepaid Insurance Prepaid Advertising Office Supplies $107,174 51,000 $121,928 15,725 106,203 109,813 35,537 129,140 27,712 10,593 10 S587,705 Total Current Assets Capital Assets: Building Less: Accumulated Depreciation Factory Machinery Less: Accumulated Depreciation Office Equipment Less: Accumulated Depreciation Total Capital Assets $1,260,000 157,500 $450,000 156,577 $225,000 14,600 $1,102,500 293,423 110.400 506,323 $2.094028 Total Assets LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Notes Payable (due February 2004) Accounts Payable Wages Payable Unearned Revenue Current Portion of Long Term Debt Income Taxes Payable Total Current Liabilities S100,000 43,388 25,850 37,676 56,468 34,498 $297,880 Long Term Liabilities: 666,819 $ 964,699 Mortgage Payable Total Liabilities SHAREHOLDER'S EQUITY Capital Stock (10,000 common shares, no par value) Retained Earnings Total Shareholder's Equity Total Liabilities and Shareholder's Equity $100,000 1,029,329 1129329 $2.094.028 ncludes I lologos and 109 sheets of stainless steel January 31 The following is a summary of the manufacturing operations during the last week of January: Pattern Dept. Forming Dept. Welding Dept Units Units Units Beginning WIP Units Transferred In Units Completed during 10 (30%) 150 80%) 5 (20%) 60 65 last week of January, 2017 Ending WIP 60 54 16(50%) 65 I ()( I 0% ) 5 (60%) Supplcmentary Information , a. Any under/over-applied overhead is closed out to the Cost of Goods Sold account. b. The building space is used 75 percent for the factory and 25 percent for office and selling c. Depreciation on the office equipment, which has a salvage value of$15,000, is calculated using the double declining balance method, at a rate of 10 percent per year. The company uses the straight line method of depreciation for the building. The factory machinery is depreciated using the declining balance method at 3 percent. d. Management estimated that 0.45 percent of all sales will be uncollectible. A e. new two year insurance policy was purchased on December 1, 2016. f. Prepaid advertising at the end of January amounted to $7,819 g. Office supplies on hand at the end of the month totaled $1,253 nRaw materials purchased during the period Fcbruary 1, 2016 to January 24, 2017 amounted to $3,315,298 i. Raw materials inventory at the end of January 2005 included 86 corporate logos. The level of inventory was lower than the normal 15 percent requirement that the company would usually hold at the end of this quarter It is estimated that the uities for the month of January will amount to $7,458 j. This company is taxed at the rate of 38 percent. REQUIREMENTS 1. Prepare the following statements for the year ending January 31, 2018 a. Cost of. Goods Manufactured Statement b. Income Statement c. Statemcnt of Rctaincd Earnings d. Balance Sheet 2. The annual budget meeting has been called and you are required to attend. There has been lots of talk back and forth. Many numbers have been banteredaround. At the last sales meeting the salespersons reported on what they could sell in fiscal 2018. The following sales forecast was agreed upon by the management team: First quarter Second quarter Third quarter Fourth quarter 700 units 900 units 1,100 units 00 units 3,500 units Total You gather the following information Raw Materials Inventory You are to assume that the beginning inventory of stainless steel is 3,708 square feet and that the required ending inventory of stainless steel will be 5,400 square feet. Beginning inventory of corporate logos is 132 units. The required ending inventory of corporate logos should be 150 units. Logos will increase in price to S19.00 each and stainless steel will increase to $29.00 a square foot. You discover that it is normal corporate policy to maintain quarter-end inventory levels of stainless steel and corporate logos at 15 percent of the following quarter's production Work-In-Process Work-in-process inventories will be immaterial and can be ignored Finished Goods The desired ending inventory should be 20 percent of the next quarter's sales. The fourth quarter (January 31, 2018) ending inventory should be 150 beds. You are to assume that the opening inventory (February 1, 2017) is 132 beds at a total cost of $184,140 Other Budget Information Direct labour employees presently earn on average $26.00 an hour and in the last round of labour negotiations, production staff won a 3% wage increase. This increase will come into effect as of February 1, 2017 Present variable selling and administrative expenses are $75 per unit. These will increase by 5 per- cent in the coming year. Total fixed selling expenses are estimated to be $150,000. Total fixed administrative expenses, which include administrative salaries, are expected to be $582,000. These expenses are incurred evenly throughout the year The present one-quarter percent commission on sales is being maintained as an incentive to sales personnel Pricing Policy The selling price of the spa beds will be set at $2,021.00 because of the increased cost of materials and labour Next year promises to be the best year ever, and Abbott is concerned about whether he can meet the demand, given the present set up of the company. He needs to know if his present staff and operating hours will have to be modified in order for the company to produce enough product to meet the demand and still have some beds in inventory After speaking with department heads and management, you construct the following budgeted factory overhead costs for the company 20,000 DLH 18,000 DLH 60,000 68,000 21,(530 42,150 36,000 9,800 18,900 16,718 55,123 98,100 23,172 50,400 $499,993 Depreciation Plant Supervisor's Salary Insurance Business and Property Taxes Security Telephone Janitorial,Services Receiver's Salary Utilities Factory Operating Expenses-Variable Factory Operating Expenses-Fixed Purchasing Agent $60,000 68,000 21,630 42,150 36,000 10,500 1,900 16,718 58,060 109,000 23,172 50,400 $514,530 Required You are to investigate the concerns which Jack Abbott has raised and prepare a report that discusses these concerns. An operating budget as well as a pro forma income statement should be included in your report DELUXE SPAPRODUCTSINCORPORATED Adjusted Trial Balance January 31, 2018 Cash Accounts Reccivable Allowance for Bad Debts Marketable Securities Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Prepaid Insurance Prepaid Advertising Office Supplies Building Accumulated Depreciation - Building Factory Machinery Accumulated Depreciation - Factory Machinery Office Equipment Accumulated Depreciation - Office Equipment Notes Payable Accounts Payable Unearned Revenue Dividends Payable Wages Payable Income Taxes Payable Accrued Expenses Mortgage Payable Capital Stock Retained Earnings $137,593 163,083 $ 29,256 355,839 60,394 36,091 132,896 43,736 2,553 1,260,000 189,000 165,380 136,680 450,000 240,465 49,853 18,380 10,000 0 177,835 37,785 666,819 00,000 1,019,329 6,072,752 es Scrap Sales Sales Returns and Allowances Cost of Goods Sold Manufacturing Overhead Administrative Salaries Expense Interest Expense Utilities Expense Office Supplies Expen Advertising Expense Sales Salaries Expense Selling Expenses Operating Expenses Depreciation Expense - Office Equipment Depreciation Expense Building Bad Debts Expense Business and Property Taxes Income Tax Expense 4,402,802 0 461,260 60,397 117,941 55,927 14,555 150,135 86,568 155,160 22,080 7,875 27,294 70,560 177.835 $8.708.210 $8.708.210