Required

You have been contracted as a consultant by Kakao Ltd. Kakao produces and sells high quality boxes of

chocolates. Kakao is managed by its two owners and its fiscal year end is December 31st. It is January 4,

2022, and Kakao just completed its fifth year-end (December 31, 2021). The owners of Kakao are

considering using a detailed Master Budget for the 2022 fiscal year to plan and control operations. You

have been contracted to complete the following:

I. Prepare a Master Budget for Kakao for each quarter of 2022 and for the 2022 fiscal year in total

using the information in the Data section. The Master Budget will detail each quarters activity

and the activity for the 2022 fiscal year in total. The following component budgets must be

included:

i. Beginning Balance Sheet (Data Item 13)

ii. Sales Budget

iii. Schedule of Cash Collections

iv. Production Budget

v. Direct Materials Budget

vi. Schedule of Cash Disbursements for Raw Materials

vii. Direct Labor Budget

viii. Manufacturing Overhead Budget

i. Include cash disbursements for total overhead expenses

ix. Selling and Administrative Expense Budget

i. Include cash disbursements for selling and administrative expenses

x. Cash Budget

Prepare the following for the 2022 fiscal year in total (these should not be quarterly):

xi. Cost of Goods Manufactured Budget

xii. Cost of Goods Sold Budget

xiii. Budgeted Income Statement (using absorption costing)

xiv. Budgeted Balance Sheet

The Cash Budget and Budgeted Income Statement are completed at the same time as when

you build a formula to account for tax expenses and a set of formulas to account for cash

outflow in the Cash Budget

The Budgeted Balance Sheet is completed last

II. The owners of Kakao would like to improve cash flow. They have not taken a dividend since the

companys inception, and they would like to start paying themselves dividends in 2022 without

using any short-term financing. To accomplish this goal, they are considering the following

changes:

i. An increase in the sales price from $25.00 per unit to $26.50 per unit in 2022 (assume

the change occurs January 1, 2022).

ii. Tightening of credit terms to ensure more prompt collection of accounts receivable.

Accounts receivable would now be collected as 80% in the quarter of sale and 20% in the

following quarter.

iii. The impact of the changes in (i) and (ii) is an anticipated drop in sales volume of 5%

compared to the original estimates for every quarter for 2022 and 2023

If Kakaos owners want to leave $50,000 of cash in Kakao at the end of the 2022 fiscal year, what

is the total amount of dividends that they can pay out of the company at December 31, 2022?

III. The owners of Kakao have asked you to prepare a Report discussing the following:

i. The overall importance/usefulness of budgeting

ii. Difficulties faced relating to preparing the budget

iii. Observations and recommendations you would make based on the Cash Budget

prepared in Requirement I

iv. The impacts of the changes made to the Budget in Requirement II

v. Additional recommendations would you make to the company to improve its current

situation

a. You do not necessarily need to constrain your answer to include only those areas

dealing with budgets

Data

Kakao will base the 2022 Master Budget on the following information:

1. Expected sales, in units, for the four quarters of 2022 and the first two quarters of 2023 are as

follows:

2022 Q1 26,000

2022 Q2 41,000

2022 Q3 34,000

2022 Q4 50,000

2023 Q1 30,000

2023 Q2 44,000

2. The selling price for 2022 has been set at $25.00 per unit.

3. All sales are on account. 75% of sales on account are collected in the quarter of sale and 25% of

sales on account are collected in the following quarter. Assume that all the balance in Accounts

Receivable at December 31, 2021 will be collected in the first quarter of 2022. Assume no bad

debts are incurred.

4. Kakao has a policy of keeping ending finished goods inventory equal to 10% of next quarters

forecasted sales. Kakao has a policy of maintaining direct material ending inventory equal to 10%

of direct materials needed for the next quarters production requirements. All raw materials are

purchased on account. 50% of the quarters purchases are paid for in the quarter of purchase and

the remaining in the following quarter. There is no beginning or ending work-in-process inventory.

5. Each unit requires the following direct inputs:

a. 300 grams of direct material which is available at a price of $0.015/gram

b. 0.5 hours of direct labor at a rate of $22.00 per hour

6. Direct labourers are paid at the end of each month.

7. Total budgeted variable overhead costs for the 2022 year (at a level of sales estimated in Item

1 above) are as follows:

Indirect materials $23,420

Indirect labor $33,456

Employee benefits $74,234

Inspections $18,456

Utilities $41,345

Total $190,911

Variable overhead is applied to components using a predetermined overhead rate based on

annual direct labor hours. All variable overhead items are paid for in the quarter incurred.

8. The annual budget for fixed manufacturing overhead items follows:

Supervisory salaries $100.000

Property taxes $15,000

Insurance $10,000

Maintenance $24,500

Utilities $34,500

Depreciation $22,000

Total $206,000

All fixed overhead items are paid evenly each quarter except for property taxes which are paid for

in the third quarter of the year. Fixed overhead is applied to production using a predetermined

overhead rate based on the estimated annual number of units produced.

9. Variable selling and administration expenses include commissions and other administrative

expenses. Commissions are budgeted at 5% of sales dollars for the quarter. 80% of these

commissions are paid in the quarter they are incurred and 20% are paid in the following quarter.

Other variable administration costs are $2.00 per unit sold. These costs are paid for in the quarter

they are incurred.

10. Annual fixed selling and administration expenses are as follows:

Sales salaries $120,000

Administration salaries $150,000

Travel $10,000

Insurance $4,500

Utilities $1,800

Depreciation $4,000

Other $2,500

Total $292,800

Fixed selling and administration expenses are paid evenly over the four quarters of the year.

11. Kakao makes quarterly income tax installments based on the projected taxable income for the

year. The company is subject to a 30% tax rate. For the Master Budget, Kakao assumes tax

expenses incurring for the year 2022 are paid in cash evenly over the 4 quarters of the year 2022.

12. Kakao plans the following financing and investing activities for the coming year:

a. The company is planning to buy a piece of land, costing $70,000, in the last quarter of

2022. This piece of land will be held for future plant expansion. The company will pay

cash for the land and will finance any resulting cash shortfall by drawing on its operating

line of credit.

b. The company has an operating line established with its bank. This allows the company to

borrow in multiples of $5,000 to cover any cash shortfalls. All borrowing is assumed to

occur at the beginning of the quarter in which the funds are required, and repayment is

assumed to be made at the end of the quarter in which funds are available for

repayment. Simple interest at the rate of 10% per annum is paid on a quarterly basis on

all outstanding short-term loans. All repayments are in multiples of $1,000.

c. The company currently has $240,000 in an outstanding long-term loan with an annual

interest rate of 12% and makes quarterly interest only payments at the end of each

quarter. The loan is due in 2034.

13. The companys simplified balance sheet as of December 31, 2021 is as follows:

Cash $26,000 Accounts Payable (1) $1,000 Accounts Receivable $1,500 Commissions Payable $500 Raw Material Inventory $0 Long-term Debt $240,000 Finished Goods Inventory $0 Capital Stock $1,554,780 Buildings and Equipment $2,000,000 Retained Earnings $100,000 Accumulated Depreciation ($131,220) Total Assets $1,896,280 Total Liabilities and Shareholders' Equity $1,896,280 These balance sheet figures must be taken as given. Negative balances are in the parentheses