ACCT6111 Fall 2013 Assignment 2

Case 1: Budgeting

Muscat Sandals Company (MSC) makes a very popular cloth sandal in one style, but in Regular and Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth covered wooden soles. MSC is preparing its budget for January 2013, and has estimated sales based on past experience.

Other information for the month of January follows:

Input Prices

Direct materials

Cloth $3.50 per yard

Wood $5.00 per board foot

Direct manufacturing labor $10 per direct manufacturing labor-hour

Input Quantities per Unit of Output (per pair of sandals)

Regular Deluxe

Direct materials

Cloth 1.3 yards 1.5 yards

Wood 0 2 board feet

Direct manufacturing labor-hours (DMLH) 5 Hours 7 Hours

Setup-hours per batch 2 Hours 3 Hours

Inventory Information, Direct Materials

Cloth Wood

Beginning inventory 610 yards 800 b.f.

Target ending inventory 386 yards 295 b.f.

Cost of beginning inventory $2,146 $4,040

MSC accounts for direct materials using a FIFO cost flow assumption.

Sales and Inventory Information, Finished Goods

Regular Deluxe

Expected sales in units (pairs of sandals) 2,000 3,000

Selling price $80 $130

Target ending inventory in units 400 600

Beginning inventory in units 250 650

Beginning inventory in dollars $15,500 $61,750

MSC uses a FIFO cost flow assumption for finished goods inventory.

All the sandals are made in batches of 50 pairs of sandals. MSC incurs manufacturing overhead costs, marketing and general administration, and shipping costs. Besides materials and labor, manufacturing costs include setup, processing, and inspection costs. MSC ships 40 pairs of sandals per shipment. MSC uses activity-based costing and has classified all overhead costs for the month of January as shown in the following chart:

Cost type Denominator Activity Rate

Manufacturing:

Setup Setup-hours $12 per setup-hour

Processing Direct manufacturing labor-hours $1.20 per DMLH

Inspection Number of pairs of sandals $0.90 per pair

Nonmanufacturing:

Marketing and general administration Sales revenue 8%

Shipping Number of shipments $10 per shipment

Required:

1. Prepare each of the following for January:

a. Revenues budget

b. Production budget in units

c. Direct material usage budget and direct material purchases budget in both units and dollars; round to dollars

d. Direct manufacturing labor cost budget

e. Manufacturing overhead cost budgets for processing and setup activities

f. Budgeted unit cost of ending finished goods inventory and ending inventories budget

g. Cost of goods sold budget

h. Marketing and general administration costs budget

2. MSC’s balance sheet for December 31 follows. Use it and the following information to prepare a cash budget for MSC for January. Round to dollars.

• All sales are on account; 60% are collected in the month of the sale, 38% are collected the following month, and 2% are never collected and written off as bad debts.

• All purchases of materials are on account. MSC pays for 80% of purchases in the month of purchase and 20% in the following month.

• All other costs are paid in the month incurred, including the declaration and payment of a $10,000 cash dividend in January.

• MSC is making monthly interest payments of 0.5% (6% per year) on a $100,000 long term loan.

• MSC plans to pay the $7,200 of taxes owed as of December 31 in the month of January. Income tax expense for January is zero.

• 30% of processing and setup costs, and 10% of marketing and general administration costs are depreciation.

Balance Sheet as of December 31

Prepare a budgeted income statement for January and a budgeted balance sheet for MSC as of January 31.