Your Task

You were recently hired as an assistant controller at the Hairy Yak Yarn Company ("the Company"). Your employer manufactures and sells a single product: balls of yarn! With people learning to knit because of the COVID-19 pandemic, the Company has seen a significant increase in demand for their yarn.

The first task you have been assigned in your new role is to prepare the master budget for the quarter ended March 31^st, 2023.

You have assembled the following information.

Information on sales

The yarn balls sell for $25 each. Recent and budgeted sales (in units) are as follows:

November (actual) 10,000

December (actual) 11,000

January 12,000

February 11,000

March 11,000

April 9,000

May 10,000

All sales are on credit, with no discount. The company has found that only 25% of a month's sales are collected by month-end. An additional 70% is collected in the month following the sale, and the remaining 5% 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.

Information on inventory and production

Inventories of finished goods on hand at the end of each month are to be equal to 10% of the following months budgeted sales. As of December 31^st, 2022, the company had 1,200 balls of yarn in finished goods inventory. The company has no work-in-process (WIP) inventory.

Each ball of yarn requires 2 yards of fleece, which the company purchases for $5.00 per yard. It is company policy to keep enough fleece in raw materials to meet 50% of the next month's production needs. As of December 31^st, the Company had 11,900 yards of fleece 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 ball of yarn requires only 0.5 labour hours (30 minutes) to assemble by hand, as most of the work is done by machine. Employees making the yarn are paid $15.00 per hour, and do not work overtime. The Company has enough casual/on-call workers that they can call in if additional work is required.

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 ball of yarn in production, and the fixed component is $17,000 per month. The $17,000 of fixed manufacturing overhead includes depreciation of $2,000 per month on the machines used to manufacture the yarn. Direct labour hours is used as an allocation base for assigning manufacturing overhead to units produced.

Information on selling and administrative expenses and cash outlays

The Company's other monthly operating expenses are given below:

Variable:

Colour licensing

$0.50 per ball of yarn sold **

Fixed:

Wages and salaries	$10,000
Utilities	$2,500
Insurance	$800
Depreciation (S&A)	$1,200
Misc	$1,000

**The Company pays "yarn colour experts" a licensing fee per ball of yarn to use their cool, wacky colorways.

All operating expenses are paid during the month in cash, with the exception of the depreciation, as it is not a cash expense.

Balance Sheet as at December 31^st, 2022:

Assets
Cash	22,500
Accounts receivable	218,750
Inventory - Raw Materials	59,500
Inventory - Finished Goods	24,016
PP&E	254,000
Accumulated depreciation	(71,000)
Total assets	507,766
Liabilities and Equity
Financing	-
Accounts payable, purchases	57,500
Dividends payable	-
Capital stock, no par	150,000
Retained earnings (see below)	300,266
Total liabilities and equity	507,766

Additional information on cash requirements and financing

Management of the Company requires a minimum ending cash balance each month of $10,000. 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:

1 - Prepare the following for the company for the quarter ending March 31^st:

1. Sales Budget and Schedule of Expected Cash Collections
2. Production Budget
3. Direct Materials Budget and Schedule of Expected Cash Disbursements - only need this one done

Here are the answers for 1. and 2. to help with 3.

1.)

Hairy Yak Yarn Company Sales Budget For the Quarter Ending March 31st y. y. Sales in units 12,000 11,000 Selling price $ 25 _$ 25 Budgeted sales $ 300,000 _$ 275,000 Hairy Yak Yarn Company Schedule of Expected Cash Collections For the Quarter Ending March 31st November December Credit sales: $ 250.000 _$ 275,000 During the month Month following the sale Second month following the sale Expected Cash Collections m m 11,000 34,000 _$ 25 $ 25 _$ 275,000 $ 850,000 January February March _$ 300,000 $ 275,000 $ 275,000 $ 75,000 $ 68,750 $ 68,750 192,500 210,000 192,500 12$ 13,; 15% _$ 280,000 $ 292,500 $ 276,250 Hairy Yak Yarn Company Production Budget For the Quarter ending March 31st Budgeted sales units Add: Desired ending finished goods inventory Less: Beginning finished goods inventory Budgeted Production in units February 11,000 1,100 _1,1 0 11,000