Question
PURELY PAJAMAS LTD. THE ASSIGNMENT You were recently hired as an assistant controller at PURELY PYJAMAS LTD. Your employer manufactures and sells a single product,
PURELY PAJAMAS LTD.
THE ASSIGNMENT
You were recently hired as an assistant controller at PURELY PYJAMAS LTD. Your employer manufactures and sells a single product, Onesie Pajamas. The first task you have been assigned in your new role is to prepare the master budget for the quarter ended December 31st, 20X2.
You have assembled the following information.
SALES INFORMATION
The Pajamas sell for $45 each. Recent and budgeted sales (in units) are as follows:
October 1,700
November 1,800
December 1,850
January 1,450
February 1,200
- All sales are on credit, with no discount. The company has found that only 30% of a month's sales are collected by month-end.
- An additional 50% is collected in the month following the sale, and the remaining 20% is collected in the second month following the sale.
- This company does not experience any bad debts.
INVENTORY AND PRODUCTION
- Inventories of finished goods on hand at the end of each month are to be equal to 50% of the following months budgeted sales.
- As of September 30th, 20X2, the company had 1,000 Pajamas in finished goods inventory.
- The company has no work-in-process (WIP) inventory.
- Each pair of pajamas requires 1.5 of a yard of fabric, which the company purchases for $22.00 per yard.
- Notethere is only one raw material used to make the product. It is company policy to keep enough fabric in raw materials to meet 30% of the next month's production needs.
- As of September 30th, Purely Pajamas Ltd. had 787.5 yards of fabric in raw materials inventory.
- Purchases of raw materials are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month.
- Each pair of pajamas requires 0.50 labour hours to assemble by hand.
- Employees who make the Pajamas are paid $21.00 per hour, and never work overtime.
- Manufacturing overhead includes all the costs of production other than direct materials and direct labour.
- The variable manufacturing overhead is $1.00 per pair of pajamas in production, and the fixed component is $6,000 per month.
- The $6,000 of fixed manufacturing overhead includes depreciation of $2,000 per month on the sewing machines and graphic print machines used to manufacture the Pajamas.
- Direct labour hours are used as an allocation base for assigning manufacturing overhead to units produced.
SELLING AND ADMINISTRATION
Purely Pajamas Ltd.'s other monthly operating expenses are given below:
Variable:
License | $0.75 per pair of pajamas sold |
- All Pajamas are made to look like a unique character which attracts a licensing fee. The license amount is paid directly to the companies with the exclusive rights to the character's intellectual property rights.
Fixed:
Wages and salaries | $5,000 |
Utilities | $1,200 |
Insurance | $600 |
Depreciation (S&A) | $800 |
Miscellaneous | $1,200 |
- All operating expenses are paid during the month in cash, except for the depreciation, as it is not a cash expense.
CAPITAL EQUIPMENT & DIVIDENDS
- Due to the planned introduction of a new pajamas line for teens in 20X3, the company will be purchasing a new set of industrial sewing machines in October for $18,000 and a new packaging machine in November for $14,000.
- The equipment will not be used until 2021. The machines were purchased ahead of schedule, as Purely Pajamas Ltd. did not want to experience any delays in case a future shutdown.
- The company has a policy to declare a dividend of $35,000 on the last day of each quarter, which is to be paid in the first month of the next quarter.
PURELY PAJAMAS Ltd. Balance Sheet as at September 30th, 20X2:
Assets | ||
Cash | $ 35,000 | |
Accounts receivable | 106,500 | |
Inventory - Raw Materials | 17,325 | |
Inventory - Finished Goods | 48,047 | |
PP&E | $45,000 | |
Accumulated depreciation | (12,000) | |
33,000 | ||
TOTAL ASSETS | $ 239,872 | |
Liabilities and Equity | ||
Bank loan | - | |
Accounts payable, purchases | $ 27,720 | |
Dividends payable | 35,000 | |
Capital stock, no par | 22,000 | |
Retained earnings | 155,152 | |
TOTAL LIABILITIES AND EQUITY | $ 239,872 |
Additional information on cash requirements and financing
- Management of Purely Pajamas Ltd. requires a minimum ending cash balance each month of $15,000.
- The company can borrow money from its bank at 6% annual interest. All borrowing must be done at the beginning of a month, and repayments must be made at the end of a month. Borrowings and repayments of principal must be in round $1,000 amounts.
- Interest is computed and paid when any repayments occur. Round all interest payments to the nearest whole dollar. Compute interest using whole months, not days.
- The company wishes to use any excess cash to pay loans off as rapidly as possible.
- Sales Budget and Schedule of Expected Cash Collections
ASSIGNMENT REQUIREMENTS:
Prepare the following for the company for the quarter ending December 31st, 20X2:
- Production Budget
- Direct Materials Budget and Schedule of Expected Cash Disbursements
- Direct Labour Budget (inclusive of expected labour disbursements)
- Manufacturing Overhead Budget (inclusive of expected overhead disbursements)
- Ending Finished Goods Inventory Budget
- Selling and Administrative Budget
- Cash Budget
- Schedule of Cost of Goods Manufactured
- Budgeted Income Statement (with the cost of goods sold computation included in the income statement) You may ignore income taxes for the purposes of this budget
- Budgeted Retained Earnings Statement
- Budgeted Balance Sheet as at December 31st, 20X2
GENERAL GUIDANCE:
Preparing the schedules
- For items (a) through (h) show each of the 3 months and a total column for the whole quarter (ended December 31).
- It may be helpful to prepare (a) through (g) on one individual worksheet in Excel, to make building and referencing easier.
- For items (i) through (k), show only for the quarter ended December 31st, 20X2.
- All schedule and statements should be formatted professionally.
- Use Excel to do the work.
- Use cell references and formulas in your schedules You will be able to update certain numbers and have the changes instantly flow through the rest of the schedules.
- Don't just type it in.
Check figures | Amount | Schedule |
Total Sales for the Quarter | $240,750 | Sales Budget |
Total cash collections for the quarter | $272,775 | Expected cash collections |
Total required production for the quarter (units) | $5,075 | Production |
Raw materials to purchase for the quarter (total yards) | $7,421 | Direct materials |
Total Cash Disbursements for materials | $165,371 | Expected Cash disbursements for materials |
Ending Finished Good inventory | $34,834 | Ending Finished Goods inventory Budget |
Total Cash disbursements for selling and admin | $28,013 | Selling and Admin budget |
Ending cash balance | $14,869 | Cash budget |
Total cost of goods manufactured for the quarter | $243,838 | Schedule of COGM |
Total assets - December 31, 20x2 | $193,895 | Balance sheet |
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