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Master Budget Case Explore Scientific Inc. Explore Scientific Inc. is a company that manufactures and sells a single product, which they call LX200. 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 Their sales forecast consisted of these few lines: For the year ended December 31, 2019: 450,000 units at $11.00 each For the year ended December 31, 2020: 60000 at $11.00 each For the year ended December 31, 2021: 600,000 units at $12.00 each Expected sales for the year ended December 31, 2019 are based on actual sales to date and budgeted sales for the duration of the year. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of total sales for each month Sales pick up over the summer with July, August and September each contributing 2% of the total. Valentines Day in February boosts sales to 5%, and Easter in April accounts for 10% of total sales. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December. This pattern of sales is not expected to change in the next three years. 1. From previous experience, management has determined that an ending inventory equal to 25% of the next month's sales is required to fit the buyer's dem ands Because sales are seasonal, Explore Scientific must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $25,000 per month, payable at the beginning of the month. 3. 4. There is only one type of raw material used in the production of LX200s. Plactics is a very compact material that is purchased in powder form. Each LX200 requires 5 kilograms of PLATIC, at a cost of $0.70 per kilogram. This represents a recent increase of $0.05 per kilogram-which the distributor explained was a result of anticipated oil shortages in the coming year. PLATIC is an oil-based product. The price change was effective July 1, 2019 when Explore Scientific signed a three-year fixed price contract with the supplier. 5. The supplier of PLATIC tends to be somewhat erratic so Explore Scientific finds it necessary to maintain an inventory balance equal to 40% of the following month's production needs as a precaution against stock-outs. Explore Scientific pays for 20% of a month's purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount. 6. Beginning accounts payable will consist of $364,309 arising from the following estimated direct material purchases for November and December of 2019: PLATIC purchases in November 2019: PLATIC purchases in December 2019 $396,825 $281,775 7. Explore Scientific's manufacturing process is highly automated, so their direct labour cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $12.00 per hour. This rate already includes the employer's portion of employee benefits. All payroll costs are paid in the period in which they are incurred. 8. Due to the similarity of the equipment in each of the production stages and the company's concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.30, consisting of: Utilities--$0.60; Indirect Materials--$0.20; Plant maintenance-0.30; environmental fee-- $0.14; and Other--$0.06 9. The fixed manufacturing overhead costs for the entire year are as follows Training and development Business taxes Supervisor's salary Amortization on equipment Insurance Other $ 43,200 39,000 149,400 178,800 96,000 117,600 $ 624000 Although the annual business taxes are paid on June 30 of each year, they are expensed on a monthly basis. The expected payment for next year is $39,600 . The annual insurance premium is paid at the beginning of September each year. There should be no change in the premium from last year All other "cash-related" fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred .Explore Scientific uses the straight-line method of amortization 10. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous year's experience has provided the following information Lowest level of sales: Highest level of sales: 375,000 units 750,000 units Total Operating Expenses: $778,710 Total Operating Expenses: $1,022,460 These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense 11. Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. uncollectible (bad debt expense) of 1% of sales are considered 12. Sales in November and December 2019 are expected to be $990,000 and $1,980,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $975,150 at December 31, 2019 which will be collected in January and February, 2020 13. During the fiscal year ended December 31, 2020, Explore Scientific will be required to make monthly income tax installment payments of $1,000. Outstanding income taxes from the year ended December 31, 2019 must be paid in April 2020. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2020 in excess of installment payments, will be paid in April, 2021 14. Explore Scientific is planning to acquire additional manufacturing equipment for $204,300 cash, 40% of this amount is to be paid in November 2020, the rest, in December 2020, The manufacturing overhead costs shown above already include the amortization on this equipment. 15. An arrangement has been made with the local bank that if Explore Scientific maintains a minimum balance of $20,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum. All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month. All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month. Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month 16. Explore Scientific 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 $50,000 per quarter 17. A listing of the estimated balances in the company's ledger accounts as of December 31, 2019 is given below: Assets Cash Accounts receivable Inventory-raw materials Inventory-finished good:s Prepaid Insurance Prepaid property and business taxes Capital assets (net) Total assets $83,365 975,150 15,600 10,950 64,000 19,200 724,000 3 Liabilities and Shareholders' Equity Accounts payable Income taxes payable Capital stock Retained Earnings Total liabilities and shareholders' equity $ 364,309 21,500 1,200,000 306,456 Master Budget Case Explore Scientific Inc. Explore Scientific Inc. is a company that manufactures and sells a single product, which they call LX200. 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 Their sales forecast consisted of these few lines: For the year ended December 31, 2019: 450,000 units at $11.00 each For the year ended December 31, 2020: 60000 at $11.00 each For the year ended December 31, 2021: 600,000 units at $12.00 each Expected sales for the year ended December 31, 2019 are based on actual sales to date and budgeted sales for the duration of the year. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of total sales for each month Sales pick up over the summer with July, August and September each contributing 2% of the total. Valentines Day in February boosts sales to 5%, and Easter in April accounts for 10% of total sales. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December. This pattern of sales is not expected to change in the next three years. 1. From previous experience, management has determined that an ending inventory equal to 25% of the next month's sales is required to fit the buyer's dem ands Because sales are seasonal, Explore Scientific must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $25,000 per month, payable at the beginning of the month. 3. 4. There is only one type of raw material used in the production of LX200s. Plactics is a very compact material that is purchased in powder form. Each LX200 requires 5 kilograms of PLATIC, at a cost of $0.70 per kilogram. This represents a recent increase of $0.05 per kilogram-which the distributor explained was a result of anticipated oil shortages in the coming year. PLATIC is an oil-based product. The price change was effective July 1, 2019 when Explore Scientific signed a three-year fixed price contract with the supplier. 5. The supplier of PLATIC tends to be somewhat erratic so Explore Scientific finds it necessary to maintain an inventory balance equal to 40% of the following month's production needs as a precaution against stock-outs. Explore Scientific pays for 20% of a month's purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount. 6. Beginning accounts payable will consist of $364,309 arising from the following estimated direct material purchases for November and December of 2019: PLATIC purchases in November 2019: PLATIC purchases in December 2019 $396,825 $281,775 7. Explore Scientific's manufacturing process is highly automated, so their direct labour cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $12.00 per hour. This rate already includes the employer's portion of employee benefits. All payroll costs are paid in the period in which they are incurred. 8. Due to the similarity of the equipment in each of the production stages and the company's concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.30, consisting of: Utilities--$0.60; Indirect Materials--$0.20; Plant maintenance-0.30; environmental fee-- $0.14; and Other--$0.06 9. The fixed manufacturing overhead costs for the entire year are as follows Training and development Business taxes Supervisor's salary Amortization on equipment Insurance Other $ 43,200 39,000 149,400 178,800 96,000 117,600 $ 624000 Although the annual business taxes are paid on June 30 of each year, they are expensed on a monthly basis. The expected payment for next year is $39,600 . The annual insurance premium is paid at the beginning of September each year. There should be no change in the premium from last year All other "cash-related" fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred .Explore Scientific uses the straight-line method of amortization 10. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous year's experience has provided the following information Lowest level of sales: Highest level of sales: 375,000 units 750,000 units Total Operating Expenses: $778,710 Total Operating Expenses: $1,022,460 These costs are paid in the month in which they occur. Not included in the above expenses is bad debt expense 11. Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. uncollectible (bad debt expense) of 1% of sales are considered 12. Sales in November and December 2019 are expected to be $990,000 and $1,980,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $975,150 at December 31, 2019 which will be collected in January and February, 2020 13. During the fiscal year ended December 31, 2020, Explore Scientific will be required to make monthly income tax installment payments of $1,000. Outstanding income taxes from the year ended December 31, 2019 must be paid in April 2020. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2020 in excess of installment payments, will be paid in April, 2021 14. Explore Scientific is planning to acquire additional manufacturing equipment for $204,300 cash, 40% of this amount is to be paid in November 2020, the rest, in December 2020, The manufacturing overhead costs shown above already include the amortization on this equipment. 15. An arrangement has been made with the local bank that if Explore Scientific maintains a minimum balance of $20,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum. All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month. All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month. Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month 16. Explore Scientific 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 $50,000 per quarter 17. A listing of the estimated balances in the company's ledger accounts as of December 31, 2019 is given below: Assets Cash Accounts receivable Inventory-raw materials Inventory-finished good:s Prepaid Insurance Prepaid property and business taxes Capital assets (net) Total assets $83,365 975,150 15,600 10,950 64,000 19,200 724,000 3 Liabilities and Shareholders' Equity Accounts payable Income taxes payable Capital stock Retained Earnings Total liabilities and shareholders' equity $ 364,309 21,500 1,200,000 306,456