UNIVERSITY / INSTITUTE: University of Saskatchewan
CLASS / COURSE: Accounting
Introduction to Management Accounting
Question #1 – 40 marks
Shortly before the end of 2012, the management of Lam Corporation prepared the following budgeted balance sheet as of December 31, 2012.
Budgeted Balance Sheet
As of December 31, 2012
Total current assets
Loan from bank
Taxes payable (due March 15, 2008)
Total shareholders’ equity
In anticipation of preparing a master budget for January, February, and March 2013, management has gathered the following information:
a. Lam’s single product is purchased for $10 per unit and resold for $15 per unit. The expected inventory level on December 31 (18,750 units) is smaller than management’s desired level for 2013 of 80% of the next month’s expected sales (in units). Budgeted sales are:
January 75,000 units February 67,500 March 90,000 April 90,000
b. Cash sales are 50% of total sales and credit sales are 50% of total sales. Of the credit sales, 80% are collected in the first month after the sale and 20% in the second month after the sale. Eighty percent of the December 31, 2012, balance of accounts receivable will be collected during January and 20% will be collected during February.
c. Merchandise purchased by the company is paid for as follows: 70% in the month after purchase, and 30% in the second month after purchase. Seventy percent of the Accounts Payable balance on December 31, 2012, will be paid during January, and 30% will be paid during February.
d. Sales commissions of 10% of sales are paid each month. Additional sales salaries are $90,000 per year.
e. General and administrative salaries are $810,000 per year. Repair expenses equal $3,750 per month and are paid in cash.
f. The equipment shown in the December 31, 2012, balance sheet was purchased in January 2012. It is being amortized over 10 years under the straight-line method with no salvage value. The following new purchases of equipment are planned in the coming quarter:
January 2008 $ 82,800 February 43,200 March 108,000
This equipment also will be amortized with the straight-line method over ten years, with no salvage value. A full month’s amortization is taken for the month in which the equipment is purchased.
g. The company plans to acquire some land at the end of March at a cost of $750,000. The purchase price will be paid with cash on the last day of the month.
h. Lam has a working arrangement with the bank to obtain additional loans as needed. The interest rate is 12% per year, and the interest is paid at the end of each month based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. Lam has agreed to maintain a minimum ending cash balance of $36,000 in every month.
i. The income tax rate applicable to the company is 40%. However, income taxes on the first quarter’s income will not be paid until April 15.
Prepare a master budget for the first quarter of 2013. It should include the following component budgets:
1. Monthly sales budgets (showing both budgeted unit sales and dollar sales)
2. Monthly merchandise purchases budgets
3. Monthly selling expense budgets
4. Monthly general and administrative expense budgets
5. Monthly capital expenditures budgets
6. Monthly cash budgets
7. Budgeted income statement for the first quarter
8. Budgeted balance sheet as of March 31, 2008
Provide as many supplemental schedules as you need. Round all amounts to the nearest dollar.
Question #2 – 20 marks
Pearl Products Limited of Sarnia, Ontario, manufactures and distributes toys throughout central Canada. Three cubic centimetres (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company expects to pay $0.25 per cc of H300 to its suppliers. The company is now planning its raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units Supermix plus 20% of next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,000 units.
b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s raw materials requirements. The raw materials inventory on June 30 is budgeted to be 54,000 cc of solvent H300.
c. The company maintains no goods in process inventories.
Estimated sales for July to December are as follows:
Month Budgeted Sales (units) July 35,000 August 40,000 September 50,000 October 30,000 November 20,000 December 10,000
1. Prepare a production budget for Supermix for July to October.
2. Prepare a budget showing the quantity of solvent H300 to be purchased in July, August, and September, and for the quarter in total.
3. Examine the production budget you prepared above. Why will the company produce more units than it sells in July and August, and fewer units than it sells in September and October?
Question #3 – 20 marks
Refer to Question #2. Consider the following additional information: (1) each unit of Supermix requires 12 minutes of direct labour compensated at a rate of $15 per hour, (2) factory overhead is applied on the basis of direct labour dollars, (3) variable overhead is budgeted at 120% of direct labour dollars, and (4) fixed overhead is budgeted to be $40,000 per month. Assume the finished goods inventories at the end of June 30 cost $8.25 per unit, and that raw materials inventories at the end of June 30 were valued at $14,000.
1. Prepare monthly direct labour and factory overhead budgets for the third quarter; also show the total for the quarter. [Note: Factory Overhead is the same as Manufacturing Overhead.]
2. Prepare the cost of goods manufactured and cost of goods sold budgets for the third quarter (in total). [Note: The chapter on Budgeting does not contain an example of the COGM Budget or the COGS Budget. Essentially, they would look like the schedule of COGM and COGS presented in Chapter 2.]
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