ACCT6111_Fall 2013_Assignment 2_Case 1_Budgeting_Muscat Sandals Company (MSC)

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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

Assets

 

 

Cash

 

$   6,290

Accounts receivable

$216,000

 

Less: Allowance for bad debts

10,800

205,200

Inventories

 

 

Direct materials

 

6,186

Finished goods

 

77,250

Fixed assets

$580,000

 

Less: Accumulated depreciation

90,890

489,110

Total assets

 

$784,036

Liabilities and Equity

 

 

Accounts payable

 

$ 10,400

Taxes payable

 

7,200

Interest payable

 

500

Long-term debt

 

100,000

Common stock

 

200,000

Retained earnings

 

465,936

Total liabilities and equity

 

$784,036

 

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

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