You have been contracted as a consultant by Kakao Ltd. Kakao produces and sells high quality boxes of chocolates. Kakao is managed by its two owners and its fiscal year end is December 31st. It is January 4, 2022, and Kakao just completed its fifth year-end (December 31, 2021). The owners of Kakao are considering using a detailed Master Budget for the 2022 fiscal year to plan and control operations. You have been contracted to complete the following: I. Prepare a Master Budget for Kakao for each quarter of 2022 and for the 2022 fiscal year in total using the information in the Data section. The Master Budget will detail each quarters activity and the activity for the 2022 fiscal year in total. The following component budgets must be included: i. Beginning Balance Sheet (Data Item 13) ii. Sales Budget iii. Schedule of Cash Collections iv. Production Budget v. Direct Materials Budget vi. Schedule of Cash Disbursements for Raw Materials vii. Direct Labor Budget viii. Manufacturing Overhead Budget i. Include cash disbursements for total overhead expenses ix. Selling and Administrative Expense Budget i. Include cash disbursements for selling and administrative expenses x. Cash Budget Prepare the following for the 2022 fiscal year in total (these should not be quarterly): xi. Cost of Goods Manufactured Budget xii. Cost of Goods Sold Budget xiii. Budgeted Income Statement (using absorption costing) xiv. Budgeted Balance Sheet The Cash Budget and Budgeted Income Statement are completed at the same time as when you build a formula to account for tax expenses and a set of formulas to account for cash outflow in the Cash Budget The Budgeted Balance Sheet is completed last II. The owners of Kakao would like to improve cash flow. They have not taken a dividend since the companys inception, and they would like to start paying themselves dividends in 2022 without using any short-term financing. To accomplish this goal, they are considering the following changes: i. An increase in the sales price from $25.00 per unit to $26.50 per unit in 2022 (assume the change occurs January 1, 2022). ii. Tightening of credit terms to ensure more prompt collection of accounts receivable. Accounts receivable would now be collected as 80% in the quarter of sale and 20% in the following quarter. iii. The impact of the changes in (i) and (ii) is an anticipated drop in sales volume of 5% compared to the original estimates for every quarter for 2022 and 2023 If Kakaos owners want to leave $50,000 of cash in Kakao at the end of the 2022 fiscal year, what is the total amount of dividends that they can pay out of the company at December 31, 2022? III. The owners of Kakao have asked you to prepare a Report discussing the following: i. The overall importance/usefulness of budgeting ii. Difficulties faced relating to preparing the budget iii. Observations and recommendations you would make based on the Cash Budget prepared in Requirement I iv. The impacts of the changes made to the Budget in Requirement II v. Additional recommendations would you make to the company to improve its current situation a. You do not necessarily need to constrain your answer to include only those areas dealing with budgets

Data Kakao will base the 2022 Master Budget on the following information: 1. Expected sales, in units, for the four quarters of 2022 and the first two quarters of 2023 are as follows: 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 26,000 41,000 34,000 50,000 30,000 44,000 2. The selling price for 2022 has been set at $25.00 per unit. 3. All sales are on account. 75% of sales on account are collected in the quarter of sale and 25% of sales on account are collected in the following quarter. Assume that all the balance in Accounts Receivable at December 31, 2021 will be collected in the first quarter of 2022. Assume no bad debts are incurred. 4. Kakao has a policy of keeping ending finished goods inventory equal to 10% of next quarter's forecasted sales. Kakao has a policy of maintaining direct material ending inventory equal to 10% of direct materials needed for the next quarter's production requirements. All raw materials are purchased on account. 50% of the quarter's purchases are paid for in the quarter of purchase and the remaining in the following quarter. There is no beginning or ending work-in-process inventory. 5. Each unit requires the following direct inputs: a. 300 grams of direct material which is available at a price of $0.015/gram b. 0.5 hours of direct labor at a rate of $22.00 per hour 6. Direct labourers are paid at the end of each month. 7. Total budgeted variable overhead costs for the 2022 year (at a level of sales estimated in Item 1 above) are as follows: Indirect materials Indirect labor Employee benefits Inspections Utilities Total $23,420 $33,456 $74,234 $18,456 $41,345 $190,911 Variable overhead is applied to components using a predetermined overhead rate based on annual direct labor hours. All variable overhead items are paid for in the quarter incurred. 8. The annual budget for fixed manufacturing overhead items follows: Variable overhead is applied to components using a predetermined overhead rate based on annual direct labor hours. All variable overhead items are paid for in the quarter incurred. 8. The annual budget for fixed manufacturing overhead items follows: Supervisory salaries Property taxes Insurance Maintenance Utilities Depreciation Total $100.000 $15,000 $10,000 $24.500 $34,500 $22,000 $206,000 4 All fixed overhead items are paid evenly each quarter except for property taxes which are paid for in the third quarter of the year. Fixed overhead is applied to production using a predetermined overhead rate based on the estimated annual number of units produced. 9. Variable selling and administration expenses include commissions and other administrative expenses. Commissions are budgeted at 5% of sales dollars for the quarter. 80% of these commissions are paid in the quarter they are incurred and 20% are paid in the following quarter. Other variable administration costs are $2.00 per unit sold. These costs are paid for in the quarter they are incurred. 10. Annual fixed selling and administration expenses are as follows: Sales salaries Administration salaries Travel Insurance Utilities Depreciation Other Total $120,000 $150,000 $10,000 $4,500 $1,800 $4,000 $2,500 $292,800 Fixed selling and administration expenses are paid evenly over the four quarters of the year. 10. Annual fixed selling and administration expenses are as follows: Sales salaries Administration salaries Travel Insurance Utilities Depreciation $120,000 $150,000 $10,000 $4,500 $1,800 $4,000 $2,500 Other Total $292,800 Fixed selling and administration expenses are paid evenly over the four quarters of the year. 11. Kakao makes quarterly income tax installments based on the projected taxable income for the year. The company is subject to a 30% tax rate. For the Master Budget, Kakao assumes tax expenses incurring for the year 2022 are paid in cash evenly over the 4 quarters of the year 2022. 12. Kakao plans the following financing and investing activities for the coming year: a. The company is planning to buy a piece of land, costing $70,000, in the last quarter of 2022. This piece of land will be held for future plant expansion. The company will pay cash for the land and will finance any resulting cash shortfall by drawing on its operating line of credit b. The company has an operating line established with its bank. This allows the company to borrow in multiples of $5,000 to cover any cash shortfalls. All borrowing is assumed to occur at the beginning of the quarter in which the funds are required, and repayment is assumed to be made at the end of the quarter in which funds are available for repayn Simple interest at the rate of 10% annum is paid on a quarterly basis on all outstanding short-term loans. All repayments are in multiples of $1,000. C. The company currently has $240,000 in an outstanding long-term loan with an annual interest rate of 12% and makes quarterly interest only payments at the end of each quarter. The loan is due in 2034. 13. The company's simplified balance sheet as of December 31, 2021 is as follows: Cash $26,000 Accounts Payable (1) $1.000 Accounts Receivable $1,500 Commissions Payable $500 Raw Material Inventory $0 Long-term Debt $240,000 Finished Goods Inventory $0 Capital Stock $1,554,780 Buildings and Equipment $2,000,000 Retained Earnings $100,000 Accumulated Depreciation ($131,220) Total Assets $1,896.280 Total Liabilities and Shareholders' Equity $1,896,280 These balance sheet figures must be taken as given. Negative balances are in the parentheses. 5 Data Kakao will base the 2022 Master Budget on the following information: 1. Expected sales, in units, for the four quarters of 2022 and the first two quarters of 2023 are as follows: 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 26,000 41,000 34,000 50,000 30,000 44,000 2. The selling price for 2022 has been set at $25.00 per unit. 3. All sales are on account. 75% of sales on account are collected in the quarter of sale and 25% of sales on account are collected in the following quarter. Assume that all the balance in Accounts Receivable at December 31, 2021 will be collected in the first quarter of 2022. Assume no bad debts are incurred. 4. Kakao has a policy of keeping ending finished goods inventory equal to 10% of next quarter's forecasted sales. Kakao has a policy of maintaining direct material ending inventory equal to 10% of direct materials needed for the next quarter's production requirements. All raw materials are purchased on account. 50% of the quarter's purchases are paid for in the quarter of purchase and the remaining in the following quarter. There is no beginning or ending work-in-process inventory. 5. Each unit requires the following direct inputs: a. 300 grams of direct material which is available at a price of $0.015/gram b. 0.5 hours of direct labor at a rate of $22.00 per hour 6. Direct labourers are paid at the end of each month. 7. Total budgeted variable overhead costs for the 2022 year (at a level of sales estimated in Item 1 above) are as follows: Indirect materials Indirect labor Employee benefits Inspections Utilities Total $23,420 $33,456 $74,234 $18,456 $41,345 $190,911 Variable overhead is applied to components using a predetermined overhead rate based on annual direct labor hours. All variable overhead items are paid for in the quarter incurred. 8. The annual budget for fixed manufacturing overhead items follows: Variable overhead is applied to components using a predetermined overhead rate based on annual direct labor hours. All variable overhead items are paid for in the quarter incurred. 8. The annual budget for fixed manufacturing overhead items follows: Supervisory salaries Property taxes Insurance Maintenance Utilities Depreciation Total $100.000 $15,000 $10,000 $24.500 $34,500 $22,000 $206,000 4 All fixed overhead items are paid evenly each quarter except for property taxes which are paid for in the third quarter of the year. Fixed overhead is applied to production using a predetermined overhead rate based on the estimated annual number of units produced. 9. Variable selling and administration expenses include commissions and other administrative expenses. Commissions are budgeted at 5% of sales dollars for the quarter. 80% of these commissions are paid in the quarter they are incurred and 20% are paid in the following quarter. Other variable administration costs are $2.00 per unit sold. These costs are paid for in the quarter they are incurred. 10. Annual fixed selling and administration expenses are as follows: Sales salaries Administration salaries Travel Insurance Utilities Depreciation Other Total $120,000 $150,000 $10,000 $4,500 $1,800 $4,000 $2,500 $292,800 Fixed selling and administration expenses are paid evenly over the four quarters of the year. 10. Annual fixed selling and administration expenses are as follows: Sales salaries Administration salaries Travel Insurance Utilities Depreciation $120,000 $150,000 $10,000 $4,500 $1,800 $4,000 $2,500 Other Total $292,800 Fixed selling and administration expenses are paid evenly over the four quarters of the year. 11. Kakao makes quarterly income tax installments based on the projected taxable income for the year. The company is subject to a 30% tax rate. For the Master Budget, Kakao assumes tax expenses incurring for the year 2022 are paid in cash evenly over the 4 quarters of the year 2022. 12. Kakao plans the following financing and investing activities for the coming year: a. The company is planning to buy a piece of land, costing $70,000, in the last quarter of 2022. This piece of land will be held for future plant expansion. The company will pay cash for the land and will finance any resulting cash shortfall by drawing on its operating line of credit b. The company has an operating line established with its bank. This allows the company to borrow in multiples of $5,000 to cover any cash shortfalls. All borrowing is assumed to occur at the beginning of the quarter in which the funds are required, and repayment is assumed to be made at the end of the quarter in which funds are available for repayn Simple interest at the rate of 10% annum is paid on a quarterly basis on all outstanding short-term loans. All repayments are in multiples of $1,000. C. The company currently has $240,000 in an outstanding long-term loan with an annual interest rate of 12% and makes quarterly interest only payments at the end of each quarter. The loan is due in 2034. 13. The company's simplified balance sheet as of December 31, 2021 is as follows: Cash $26,000 Accounts Payable (1) $1.000 Accounts Receivable $1,500 Commissions Payable $500 Raw Material Inventory $0 Long-term Debt $240,000 Finished Goods Inventory $0 Capital Stock $1,554,780 Buildings and Equipment $2,000,000 Retained Earnings $100,000 Accumulated Depreciation ($131,220) Total Assets $1,896.280 Total Liabilities and Shareholders' Equity $1,896,280 These balance sheet figures must be taken as given. Negative balances are in the parentheses. 5