George Gordon, Chief Executive Officer of Forrest's Company Limited, the principal supplier of the finest wooden dining tables with glass tops in Utopia. George has just concluded a meeting with the budget committee in September 2014 where the preparation of the company's master budget for 2015 was discussed extensively. Arising out of the meeting, it was decided that a new industrial sander and polisher equipment would be purchased on 1st January 2015. It is expected to take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.
In response to the issue about financing the acquisition of new equipment, George stated that the sander and polisher equipment will cost $1,000,000 with an additional cost of $200,000 for ancillary equipment. The total acquisition will be financed with a one-year loan from MNS Bank and Trust Company on 1st January 2015. The agreement of the loan is interest rate will be 2 percent per quarter on a compound basis with one payment of principal and interest payments to be made on 31st December 2015. The result of the effective annual rate of interest should be expressed to two decimal places only.
Forrest's Company Limited is a manufacturer of wooden tables with glass tops, large and small. The firm's two products are designated as L (large table; 60 x 24 inches) and S (small table; 36 x 18 inches). The primary raw materials are lumber and glass sheets 60x30 inches. Large table requires thirteen square feet of lumber while S small wooden table requires nine square feet of lumber. Allowing for normal breakage and scrap glass, the company can get either 2 Small table tops or one Large table top out of a glass sheet. Other raw materials, such as cardboard backing, are insignificant in cost and are treated as indirect materials.
George Gordon, Chief Finance Officer of Forrest's Company Limited is in charge of preparing the master budget for 2015. He has gathered the following information:
1. Sales, principal budget factor, in the fourth quarter 2014 are expected to be 10,000 Large tables and 15,000 Small tables. Based on improved economic outlook, the sales manager predicts that for the next two years 2015 and 2016, sales for Small tables will grow by 1,100 per cent each quarter over the previous quarter while Large tables will grow by 1,000 each quarter over the previous quarter.
2. Forrest Company Limited sales history indicates that 60 percent of all sales are on credit, with the remainder of the sales in cash. The company's collection experience shows that 60 percent of the credit sales are collected during the quarter in which the sale is made and the remainder is collected in the following quarter.
3. Currently, the Large table sells for $750 each, and the Small table sells for $450 each. It is expected that prices will hold firm throughout 2015.
4. The production manager attempts to end each quarter with enough finished-goods inventory in each product line to cover 20 percent of the following quarter's sales. Moreover, an attempt is made to end each quarter with 25 percent of the glass sheets needed for the following quarter's production. Assume an ending inventory of 4,840 glass sheets for the fourth quarter of 2014. Lumber is purchased locally, the company buys them on a just-in-time basis; inventory is negligible.
5. All direct-material purchases are made on account, and 80 percent of each quarter's purchases are paid in cash during the same quarter as the purchase. The remainder is paid in the next quarter.
6. Indirect materials are purchased with cash as needed. Work-in-process is insignificant.
7. Projected manufacturing costs for 2015 are as follows:
Large table Small table
Direct material
Lumber:
Large: 13sq. ft. @ $20 per sq. foot $260
Small: 9sq.ft. @ $20 per sq. foot $180
Glass sheets:
Large: 1sheet @ $50 per sheet 50
Small: ½ sheet @ $50 per sheet 25
Direct labour:
Large: 5 hours @ $30 per hour 150
Small: 3 hours @ $30 per hour 90
Manufacture overhead
0.5 direct-labour hour x $20 per hour 10____ __ 10___
Total product cost per unit $470 $305___
8. The following production overheads are budgeted for 2015.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Indirect material 102,000 112,000 122,000 132,000
Indirect labour 408,000 448,000 488,000 528,000
Other overhead 310,000 360,000 410,000 460,000
Depreciation 250,000 250,000 250,000 250,000
Total overhead costs $1,070,000 $1,170,000 $1,270,000 $1,370,000
9. The following relates to past selling and administrative expenses. (Use regression analysis to derive a cost function and use this cost function to estimate selling and administrative cost for each quarter of year 2015).
Year Quarter Large and Small tables (sales units) Selling and Administration($)
2014 2 18,700 1,800,000
3 20,800 1,900,000
4 22,900 2,100,000
2015 1 27,100 2,300,000
2 29,200 2,400,000
3 31,300 2,650,000
4 33,400 2,750,000
10. Marie anticipates for each quarter dividend of $350,000 will be declared and paid in cash.
11. Income tax to be paid six months from the end of the financial period; tax rate is 25%.
12. Forrest's Company Limited projected balance sheet as of December 31, 2014, follows:
$
Plant, Property and Equipment (net book value) 10,000,000
Cash 731,828
Accounts receivable 3,420,000
Inventory:
Raw material 242,000
Finished goods 2,016,100
Total assets 16,409,928
===========
Common stock @ $1 9,000,000
Retained earnings 6,149,633
Accounts payable 1,260,295
Total liabilities and shareholders' equity 16,409,928
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Required:
Prepare Forrest Company Limited master budget for each quarter of 2015 and in total for the year by completing the following schedules and statements:
(a) Sales budget (prepare 4th quarter of 2014 as well).
(8 marks)
(b) Schedule of cash collected from customers.
(10 marks)
(c) Production budget (prepare 4th quarter of 2014 as well).
(19 marks)
(d) Direct-material budget (prepare 4th quarter of 2014 as well).
(19marks)
(e) Schedule of cash disbursement to suppliers for direct material.
(8 marks)
(f) Direct labour budget.
(3 marks)
(g) Production overhead budget.
(4 marks)
(h) Selling and administrative budget. (Round off variable cost to 2 decimal places and fixed cost to the nearest whole number). Show regression computation.
(5 marks)
(i) Cash budget
(16 marks)
(j) Budgeted Cost of Goods Manufactured and Sold for the year 2015. (Show budget for the entire year only).
(9 marks)
(k) Budgeted Income Statement for 2015. (Show budget for the entire year only).
(5 marks)
(l) Budgeted Statement of Retained Earnings for 2015. (Show budget for the entire year only).
(4 marks)
(m) Budgeted Balance Sheet as of 31st December 31, 2015.
(10 marks)
(Total = 120 marks)
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