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.