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:

August (actual)1500

September (actual)1600

October 1700

November 1800

December 1850

January 1450

February 1200

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. Bad debts have been negligible, so they can be ignored for the purposes of the budget.

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 pajama requires 1.5 of a yard of fabric, which the company purchases for $22.00 per yard. Note there 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 component of 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'sother monthly operating expenses are given below:

Variable:

License

$0.75 per pair of pajamas sold **

Fixed :

Wages and salaries 5000

Utilities. 1200

Insurance 600

Miscellaneous 1200

Depreciation (S&A) 800

**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 characters. All operating expenses are paid during the month in cash, with the exception of the depreciation, as it is not a cash expense. 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	35000
Accounts receivable	106500
Inventory - Raw Materials	17325
Inventory - Finished Goods	41178
PP&E	$45,000
Accumulated depreciation	(12,000)
TOTAL ASSETS	233003
Liabilities and Equity
Bank loan	0
Accounts payable, purchases	27720
Dividends payable	35000
Capital stock, no par	22000
Retained earnings	148283

TOTAL LIABILITIES AND EQUITY. 233003

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.

REQUIRED:

Prepare the following for the company for the quarter ending December 31st, 20X2:

Sales Budget and Schedule of Expected Cash Collections

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

NOTES