Question
Tyler Ltd. Tyler Ltd. is a company that manufactures and sells a single product, call ed a Gadget . For planning and control purposes they
Tyler
Ltd.
Tyler
Ltd. is a company that manufactures and sells a single product, call
ed a Gadget
.
For planning and control purposes they utilize a monthly master budget, which is usually
developed at least six months in advance of the budget year. Their
fiscal year end is
December 31.
Senior management and department leaders have met and gathered data on the plans for
the future of the company.
The company has recently had to fire its Controller. The CEO, 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 CEO and your
investigations of the company's records have revealed the following information:
1.
Their sales forecast
:
For
the ye
ar ended December 31, 2019: 190,000 units at $25.00 each*
For
the year ended December 31, 2020: 200,000 units at $25.00 each
For the year ended December 31, 2021: 210,000 units at $25.00 each
*Expected sales for
the year ended December 31,
2019 are based o
n actual sales to
date and budgeted sales for the duration of the year.
2.
Sales are seasonal with the peak months being
the summer
months
and Christmas
season
. The following table shows expected distribution of sales for each month
based on percentage of the total budgeted sales.
Months
Percentage of sales
Jan, Feb, Mar
4
% each
Apr,
Aug,
Sept
5
% each
May,
Jun,
Jul
& Oct
8
% each
Nov
16
%
Dec
25
%
3.
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).
4.
From previous experience, management has determined that an ending inventory
equal to 30
% of the next month's sales is required to meet
the buyer's dema
nds.
5.
Because sales are seasonal, Tyler
must rent an additional storage facility
for October
and November
to house the additional finished goods inventory on hand. The only
related cost is a flat $
15,000 per month, payable at the beginning of the month.
BUS 122A
- Term Project
6.
There are three types of raw
material used in the production of Gadget
s.
Material #1
(Won
) is a material purchased in powder form. Each Gadget
requires
0.75 kilograms of
Won
, at a cost of $10.00 per kilogram. The supplier of Won
tends to be somewhat erratic so
Tyler
finds it necessary to maintain an inventory
balance equal to
50% of the following month's production needs as a precaution
against stock-
outs.
Material #2
(Too) is purchased
from an outside supplier. It
is attached during the
assembly pr
ocess. For a small premium, Tyler
has made a JIT agreem
ent with the
supplier which includes on-
time and quality assurances. Each Gadget
uses three
(3) units of Too, which cost $0.50 each.
The supplier of Too is paid in the month
the product is supplied.
The final component for the toy is a length of rope which is used to pull the
Gadget
. The rope is sup
plied by a student entrepreneur, who must be paid in
cash. On the first day of every month she delivers exactly the right amount to
manufacture the budgeted number of units for that month. It costs $1.60 per
meter and Tyler
uses one
-quarter
meter for each
Gadget
.
7.
Accounts
payable consists of
WON
purchases only
. Tyler
pays for 30% of a month's
purchases in the month of purchase,
35% in the following month and the remaining
35% two months after the month of purchase. There is no early payment discount.
8.
The manufacturing process for Gadgets is divided into three separate activities;
forming, assembly and finishing.
a.
The forming process is where WON is form
ed into several shapes that snap
together to make the Gadget.
b.
During the assembly stage, the shapes are fused together. The forming and
assembly stages of the manufacturing process are highly automated, so the only
employees are three supervisors, who a
re trained to operate the equipment and
make repairs as required. The supervisors work shifts, allowing the plant to
operate for longer hours during the busier months. They are also responsible for
managing the employees who work in the finishing departm
ent
c.
The finishing stage is where the wheel and the pull rope are attached and the
Gadget is prepared for shipping. This is the only part of the manufacturing
process that employs direct labour. Most of the staff work on a part
-time basis, so
their hours can be set based on production requirements. This also eliminates the
need for overtime. These employees are paid based on the number of units
produced. They receive an average of $18.00 per hour including employee
benefits.
Each Gadget spends 12 minute
s in the finishing department
BUS 122A
- Term Project
9.
Because of the large difference in the manufacturing stages, Tyler
uses two separate
variable manufacturing overhead rates. The forming and assembly departments use
similar equipment and with the company's concentration on a
single product,
the
manufacturing overhead is allocated based on volume (i.e. the units produced). The
combined unit variable
overhead manufacturing rate for forming and assembly is
$3.25, consisting of: Utilities
--$1.50
; Indirect Materials
--$0.
50; Plan
t maintenance--
$0.75; e
nvironmental fee
--$0.35; and Other
--$0.
15.
The best cost driver for the finishing department is considered to be direct labour
hours. Here the predetermined variable manufacturing overhead is expected to be
$2.05 per hour.
10.
Fixed manufacturing overhead costs
are not separated between departments. The
total costs
for the entire year
ar
e as follows:
Training and development
$ 43,200
Property and business taxes
39,000
Supervisor's salary
269,400
Amortization on equipment
178,800
Insurance
96,000
Other
117,600
$ 744,000
The property and business taxes are
paid in one lump sum on
June 30 of each
year.
The expected payment for next year
( 2020
) is $
39,600.
The
annual insurance premium is paid at the beginning of September each year
.
There should be no change in the premium for 20
20, it should be the same as
2019.
All other "cash
-related" fixed manufacturing overhead costs are incurred evenly
over the year and paid as incurred.
Tyler
uses the straight line method of amortization.
11.
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 year
's experience has
provided the following information (rounded)
:
Lowest level of sales:
140,000 units
Tota
l Operating Expenses: $778,200
Highest level of sales:
220,000 units
Total Operating Expenses: $1,023,000
The annual
amount of amortization on office furniture and equipment is only
$24,000and this amount is
not
included in the fixed portion of the selling and
administration expenses. Also n
ot included in the above expenses is bad debt
expense.
Payments for selling and administrative expenses
occur in the month in which they
are incurred.
12.
During the fi
scal year ended December 31, 2020,
Tyler
will be req
uired to make
monthly income tax instalment payments of $5,
000. Outstanding income taxes from
the year ended December 31, 2019 must be paid in April 2020
. Income tax expense
BUS 122A
- Term Project
is estimated to be 25% of net income. Income taxes for
the year ended December 31,
2020, in excess of instalment paym
ents, will be paid in April, 2021.
Notes:
Income tax instalments are required of corporations that owed tax to
IRS
in the
prior year (just like how as a "personal" tax payer you pay tax with each
paycheque, companies a
re required to remit an amount monthly if they paid tax in
the prior year).
Instalments are calculated based on the amount owed from the prior year. When
paid, companies usually put the amount into a balance sheet account called
"income tax receivable/pay
able".
Once the amount of income tax owed for the year is calculated (usually after year
end) the company is able to calculate any remaining amount owed to or receivable
from IRS
as this should be the remaining balance in the "income tax
receivable/payable" account.
13.
Tyler
is planning to acquire additional manufacturing equipment for $306,000 in
February, 20
20. They have a special agreement
to pay the supplier
in three equal
instalments
: in May, July and September
. The manufacturing overhead costs shown
above already include the amortization on this equipment.
14.
An arrangement has been made with the local bank to have a
line of credit at a
n
interest
rate of
8% per annum. All borrowing is
considered to happen on the first day
of the month, repayments are on th
e last day
of the month. I
nterest must be paid at
the beginning of the following
month. Interest is calculated on the balance on the 2
nd
last day
of the month, which includes any amounts borrowed
but not repaid that
month.
15.
Tyler Ltd. requires a minimum cash balance on hand at all times of $5,000.
16.
Tyler
Ltd. has a policy of paying dividends at the end of each calendar quarter. The
CEO tells you that the board of directors is planning on continuing their policy of
declaring dividends of $50,000 per quarte
r.
17.
A listing of the estimated balances in the company's
ledger accounts as of
December
31, 2019 is given below:
Assets
Cash
$ 83,365
Accounts receivable
490,438
Inventory
-raw materials
(WON
)
15,000
Inventory
-finished goods
31,950
Prepaid Insurance
64,000
Prepaid property and business taxes
19,200
Capital assets (net)
724,000
Total assets
$1,427,953
Liabilities and Shareholders' Equity
Accounts payable
$ 112,481
Income taxes payable
22,500
BUS 122A
- Term Project
Capital stock
1,000,000
Retained Earnings
292,971
Total liabilities and shareholders' equity
$1,427,953
Required:
1.
Prepare a
monthly
master budget for Tyler
for
the year ended December 31, 2020,
including the following schedules:
Sales Budget & Schedule of Cash Receipts
Production Budget
Direct Materials Budget & Schedule of Cash Disbursements
Direct Labour Budget
Manufacturing Overhead Budget
Ending Finished Goods Inventory Budget
Selling and Administrative Expense Budget
Cash Budget
2.
Prepare a
monthly budgeted income statement
for the year ended December 31, 2020.
Include a total column that gives the total budgeted income statement for the year
ended December 31, 2020.
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