ToyWorks Ltd. is a company that manufactures and sells a single product, called a Toodle. For planning and control purposes they utilize a monthly master budget. Their fiscal year end is December 31. It is October 2020, and unfortunately, Chris Leigh, the ToyWorks controller, recently resigned, without completing a budget for the upcoming fiscal year, 2021. This is the information that he left behind: Their sales forecast consisted of these few lines:

For the year ended December 31, 2020: 475,000 units at $10.00 each*

For the year ended December 31, 2021: 500,000 units at $10.00 each

For the year ended December 31, 2022: 500,000 units at $10.00 each

*Expected sales for the year ended December 31, 2020 are based on actual sales to date and budgeted sales for the duration of the year. The actual unit cost from the previous year was $7.30 per unit using absorption costing. The President, desperately needing the budget completed, has approached you, a management accounting student, for help in preparing the budget for the coming fiscal year. Your conversations with the president and your investigations of the companys records have revealed the following information:

1. 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 sales for each month. Sales pick up over the summer with July, August and September each contributing 2% to the total. Valentines Day in February boosts sales to 5%, and Easter in April accounts for 10%. 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 two years.

2. From previous experience, management has determined that an ending inventory equal to 25% of the next months sales is required to fit the buyers demands.

3. There is only one type of raw material used in the production of toodles. Space-age acrylic (SAA) is a very compact material that is purchased in powder form. Each toodle requires 5 kilograms of SAA, at a cost of $0.45 per kilogram.

4. ToyWorks finds it necessary to maintain an inventory balance equal to 40% of the following months production needs as a precaution against stock-outs. ToyWorks pays for 20% of a months 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.

5. Beginning accounts payable will consist of $208,406.50 arising from the following estimated direct material purchases for November and December of 2020: SAA purchases in November 2020: $223,875.00 SAA purchases in December 2020: $162,563.50

6. Unit sales amounted to: 70,000 units for November and 150,000 units for December.

7. ToyWorkss 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 $9.00 per hour. This rate already includes the employers portion of employee benefits. All payroll costs are paid in the period in which they are incurred. Each unit spends a total of 18 minutes in production.

8. Due to the similarity of the equipment in each of the production stages and the companys 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.

9. The fixed manufacturing overhead costs for the entire year are as follows: Training and development $ 43,200 Supervisors salary 149,400 Amortization on equipment 178,800 Other 117,600 $ 489,000

10. All fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.

11. ToyWorks uses the straight line method of amortization.

12. 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 years experience has provided the following information: Lowest level of sales: 375,000 units Total Operating Expenses: $778,710 Highest level of sales: 750,000 units 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. Hint: Use the high-low method to determine the variable and fixed portion of selling and administrative expenses.

13. Because sales are seasonal, ToyWorks must rent an additional storage facility from September to December to house the additional inventory on hand. The only related cost is a flat $20,000 per month, payable at the beginning of the month.

14. 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. of 1% of sales are considered uncollectible (bad debt expense).

15. Sales in November and December 2020 are expected to be $700,000 and $1,500,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $734,000 at December 31, 2020 which will be collected in January and February, 2021.

16. ToyWorks is planning to acquire additional manufacturing equipment for $204,300 cash. 40% of this amount is to be paid in November 2021, the rest, in December 2021. The manufacturing overhead costs shown above already include the amortization on this equipment.

17. An arrangement has been made with the local bank that if ToyWorks 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.

18. ToyWorks Ltd. 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.

19. A listing of the estimated balances in the companys ledger accounts as of December 31, 2020 is given below: Assets Cash $ 83,365 Accounts receivable 734,000 Inventory-raw materials 9,000 Inventory-finished goods 9,125 Capital assets (net) 724,000 Total assets $1,559,490 Liabilities and Shareholders Equity Accounts payable $ 208,407 Capital stock 1,000,000 Retained Earnings 351,084 Total liabilities and shareholders equity $1,559,490 Adapted from: McGraw-Hill Ryerson, Master Budget Case (vA.0)

Required: 1. Prepare a monthly master budget for ToyWorks for the year ended December 31, 2021, including the following schedules (Use the Excel template provided!): Sales Budget & Schedule of Cash Receipts Production Budget & Manufacturing Overhead Budget Direct Materials Budget & Schedule of Cash Disbursements Direct Labour Budget Selling and Administrative Expense Budget Ending Finished Goods Inventory Budget Cash Budget

2. Prepare budgeted financial statements at December 31, 2021, using absorption costing.

3. Assume that the actual results for 2021 ended up being the following: The marketing department was only able to achieve an actual sales volume of 450,000 units, although the amount produced was based on the 2021 budget. The human resources department concluded that the direct labour cost ended up being $12 per hour. A) Briefly but concisely comment on the impacts these changes had on net income for the year. B) Briefly but concisely explain what you as the accounting manager could do, to take advantage of the interdependence of the functional areas within the business, to develop strategies which will positively impact financial performance.