Rice Products Pty. Ltd. is a local firm that produces two moulded plastic products: kickboards and pool buoys. The products are manufactured in a two step process and each process is treated as a separate cost centre. In the first process, the mixing department, a special resin is combined with a hardener. Moulding occurs in the second process where the output from the mixing department is poured into special shaped moulds. Due to the nature of the chemical compounds contained in the resin and hardener, the manufacturing process occurs very rapidly. Production is therefore scheduled so that no work-in-process inventory is held at the end of each day.

The following information has been extracted from the accounting records of Rice Products or obtained through discussions with the senior management team:

1. Balance Sheet (Statement of Financial Position) as at 30 June 2020:

Cash $ 9,000 Trade Creditors $ 8,520

Accounts Receivable 85,210 Shareholders Equity 150,000

Raw Materials Inventory 8,408 Retained Earnings 80,548

Finished Goods Inventory 11,450

(Kickboard $8,496; Pool buoy $2,954)

Plant and Equipment (Net) 125,000

TOTAL ASSETS $ 239,068 TOTAL LIABILITY & EQUITY $ 239,068

2. The following schedule details the recent actual monthly unit sales achieved for each product to 30 June 2020. Additionally, the sales manager has projected sales volume forecasts for each product to November 2020:

PRODUCT	APR	MAY	JUN	JUL	AUG	SEP	OCT	NOV
Kickboard	1,900	2,000	2,700	2,400	2,600	2,300	2,900	3,000
Pool Buoy	1,300	1,400	1,300	1,100	1,300	1,000	900	1,000

3. Kickboards sell for $28 each and pool buoys for $24 each. Due to the tight cost control practices Rice Products has been able to maintain selling prices for the last 6 months and, in the absence of policy changes, do not foresee any change in the selling prices in the next 6 month period.

4. All sales are on credit: 15% are collected in the month of sale, 45% in the month following sale and the remaining 40% is collected in the second month following sale.

5. Details of the standard costs to manufacture one unit of each product are provided below:

FACTORS OF PRODUCTION	KICKBOARDS	POOL BUOYS
Materials:
Resin	2 litres @$0.45/litre	3 litres @$0.45/litre
Hardener	5 litres @$0.70/litre	2 litres @$0.70/litre
Labour:
Mixing Department	18 minutes @$20/hour	12 minutes @$20/hour
Moulding Department	12 minutes @$30/hour	12 minutes @$30/hour
Factory Overhead:
Mixing Department	$7.00/direct labour hour	$7.00/direct labour hour
Moulding Department	$11.00/direct labour hour	$11.00/direct labour hour

6. Depreciation on factory equipment is computed to be $1.00 per labour hour for each department and is included in the factory overhead rates shown above.

7. Materials are purchased on credit. Rice pays 60% of accounts in the month of purchase and the remaining 40% in the following month. Labour costs and all overhead costs (except depreciation) are paid as they are incurred. Monthly differences between applied and actual overhead costs are expected to be negligible.

Rice has an inventory policy in place where purchases of raw materials are scheduled to be 60% of the next months anticipated production needs. Additionally, production is scheduled so that the number of finished units on hand at the end of each month is sufficient to support 30% of the following months forecast sales.

9. The number of inventory items held as at 30 June 2020 was as follows:

MATERIAL/PRODUCT	LITRE/UNIT
Resin	5040 litres
Hardener	8772 litres
Kickboards	720 units
Pool Buoys	330 units

10. Fixed selling and administration expenses are $25,000 per month (including $1,000 of depreciation on office equipment). Sales commissions are paid at 7% of total sales dollars. Selling and administration expenses are paid in the month incurred.

11. Rices management has a policy of maintaining a cash balance of $9,000 at the end of each month. This amount represents a buffer that is maintained as a margin of safety against unforeseen events which might cause significant departures from budget estimates. If this requirement cannot be met,

Rice has a standby credit arrangement in place with its bank to borrow the exact amount needed to achieve the desired cash balance. If Rice has a cash balance greater than $9,000 at the end of any month and an outstanding loan balance then the cash in excess of $9,000 is repaid to the bank.

12. The interest rate applicable to the bank loan is 12% per annum to be paid on a monthly basis on the outstanding principal at the end of the previous month.

13. Rice uses the FIFO (first in first out) method to value ending inventory.

PART A (65 Marks)

You have been appointed to the position of senior management accountant at Rice Products. It is your responsibility to prepare a master budget for the next quarter (July, August and September 2020). The master budget documents are to consist of the following reports (the budgets should show the figures for each month and a total for the quarter where appropriate and round calculations to the nearest dollar):

Sales Revenue Budget

Production Budget (Units)

Direct Material Purchase Budget (Unites and $)

Direct Labour Budget (Hours and $)

Factory Overhead Budget

Selling, Admin and Finance Budget

Cash Budget

Income Statement (Statement of Financial Performance)

Balance Sheet (Statement of Financial Position)

The budget documents are to be prepared using Excel spreadsheet and the template should consists of three sections: an index section to identify yourself and spreadsheet layout, a data section that contains relevant case study information which will be used to construct the budgets, and a budget reports section. Appendix 1 and Appendix 2 have been attached to provide a suggested format for the design of the data section and the budget reports section. It is important to note that the figures in the report section should be derived from FORMULA ONLY that relates to information in the data section. That is the budget documents should be constructed in such a manner that will enable sensitivity (WHAT IF) analyses to be performed.

Hint: Check that your budget reports match the key checking figures provided in Appendix 2 and the balance sheet balances.

INSTRUCTIONS FOR CONSTRUCTING THE MASTER BUDGET TEMPLATE:

Round completed units down to the nearest unit (if applicable) using the ROUNDDOWN function. Completed units are only completed if they are whole numbers. Likewise Units can only be sold in whole numbers. This truncates the number.

Other measures in the budgets (not the data input section) eg. Liquid, kilograms, to be displayed to the nearest whole number using the format function. This does not truncate the number. Do not use the round function for this.

Dollar amounts in the budgets (not the data input section) to be displayed to the nearest dollar using the format function. This does not truncate the number. Do not use the round function for this.

Monthly budgets columns and the total for the quarter column are required.

Only formulas are to be used in the budgets, you must keep your data section separate. Create links between the data section and the reports/budgets.

PART B (35 Marks)

The directors of Rice Products are concerned about the level of profitability of the company and the need to borrow from the bank. They have discussed the production processes with the production manager and have been assured that the manufacturing departments are operating efficiently and that the equipment used is technically superior to that of competitors in the market. The following policies which have an impact on the companys operating cycle have therefore been suggested as ways to improve the level of profitability and provide a positive cash flow to avoid the need to borrow. As the senior management accountant you have been asked to conduct a sensitivity analysis to determine the effect of each of the possible policy changes currently being considered by the directors.

The changes being considered are:

(a) Offer customers a cash discount of 2.5% if payment is made in the month of sale. It is anticipated that this would increase the percentage of customers paying in the month of sale to 40%, and those paying in the following two months would reduce by 15% and 10% respectively.

(b) Increase the unit price by $2 for kickboards and $1 for pool buoys. The market for swimming aids is very price sensitive and the marketing manager predicts that if this policy is adopted unit sales will decline by 10% for kickboards and 5% for pool buoys.

(c) Negotiate with suppliers to extend the existing credit arrangements so that 50% of purchases are paid in the month of purchase and the balance of trade creditors to be paid in the following month.

(d) Reduce the margin of safety held in the bank account to $4,500.

(e) Restructure the remuneration packages of staff in the sales division. It is proposed to increase the sales commission paid to sales persons by 3% which will reduce monthly fixed salaries commitment by $2,000 per month. It is expected that the additional incentive available to the sales staff will result in an increase in unit sales of 5% for each product line.

(f) Consideration is being given to undertaking a $1,500 per month marketing campaign to promote the superiority and excellent value of Rices products. It is expected that the marketing strategy will result in an increase in unit sales of 6% for each product line.

(g) Rearrange the factory floor layout and work practices to enable a reduction in the desired level of inventory to be held. Raw materials would be maintained at 50% of next months production requirements and finished goods at 20% of next months sales. The change in inventory levels to be held would require a multi-skilled workforce and necessitate a re-negotiation of the current Enterprise Agreement. It is anticipated the wage rates would increase by $0.80 per hour for each department.

You are required to conduct a separate WHAT IF analysis for each of the above proposals to assess the effect of EACH policy on the level of profitability and cash flows for Rice Products for the three month period ending 30 September 2020 (seven different outcomes).

Hint: Construct linking mechanisms in the report section to the data section.