MasterBudgetCase Study As part of the continued advancement of… Master?udget??ase Study?s part of the continued advancement of technology, a drone camera market has?merged in recent years. The drone camera market has been growing as more?hotography enthusiasts have begun adopted this high-tech approach to capturing still?mages and video using remotely controlled devices. Eager to capture a share of this?rowing market,?amDrone?ntered the market in early 2018.?amDrone?anufacturescamera drones,?elling?rimarily to?etailers.?amDrone?s pleased with its financial performance over its first few years of?perations, optimistic to achieve continued financial success. For planning and control?urposes the company utilizes a monthly master budget, which is usually developed at?east three months in advance of the budget year. The company has a fiscal year endingDecember 31.?t is now Sept 15, 2019. You have been asked to prepare the Master Budget for the year?nding?ecember?1,?020.?ased on your discussions with the various departments throughout the company, you?ave collected?he?ollowing?elevant?nformation?orpreparing?he?udget:?ales?.?he?arketing?epartment is?orecasting?he?ollowing?nnual sales:?For?he?ear?nded?ecember?1,?019:?,000 units?t?1,000?ach*?For?he?ear?nded?ecember?1,?020:?0,000?nits?t?1,000?ach?For?he?ear?nded?ecember?1,?021:?5,000?nits?t?1,000?ach*Expected sales for the year ended December 31,?019?ere based on actual sales?o?ate?nd?udgeted?ales?or?he?uration?f?he year.?.?eak months for sales generally correspond with summer weather and gift-giving?olidays. History shows that January is the slowest month, with only 1% of annual?ales, followed closely behind by Feb-April with 2% of annual sales for each month.?ales spike during summer months with May, June, July, and August contributing?2%, 15%, 12%, and 10% of annual sales respectively. With the back-to-school focus?n September, there is a significant dip in camera drone sales to 3% of annual sales.?s Christmas shopping picks up momentum, winter sales increase to 8% in October,?3% in November, and then peak at 20% in December. This pattern of sales is not?xpected tochange?n?he next?wo?ears.?anufacturing?osts?nd?nventory?.?ach camera?rones?pends??otal?f?.5?ours?n production.4.?ue to the highly technical nature of?amDrone’s?anufacturing process,?amDrone’s?irect?abour?ate has averaged $30.00 per hour for 2019. This rate?lready includes the employer’s portion of employee benefits. A new collective?greement is being negotiated, with a 3% pay increase anticipated effective January?,?020.?.?ach?amDrone?equires 1.25kg of direct materials. During 2019, the average cost of?irect materials was $57/kg. The supplier of the direct materials tends to be?omewhat erratic, so?amDrone?inds it necessary to maintain a direct materials?nventory balance equal to 40% of the following month’s production needs as a?recautionagainst?tock-outs.?.?ue to the similarity of the equipment in each of the production stages and the?ompany’s concentration on a single product, manufacturing overhead is allocated?ased on volume (i.e.?he units produced). The variable manufacturing overhead?ate?or?019?s$160/unit,?onsisting?f:Plant??quipment?aintenance$?0Utilities??0Indirect?aterials???0Other?20?$ 160?.?he?ixed?anufacturing?verhead costs?or 2019?re?s?ollows:Supervisor’s?alary181,800Amortization?f?lant &?quipment$?32,000Insurance84,000Training??evelopment54,750Property?nd?usiness?axes48,000Other?30,000$?30,550Amortization is calculated using the straight-line method, with no amortization?alculated?n?he?ear?apital?ssets?re acquired.?.?side from amortization, all other manufacturing costs are expected to increase by?%?n?020?ue?o?nflation.?.?rom previous experience, management has determined that an ending finished?oods inventory equal to 25% of the next month’s sales is required to efficiently?eet?ustomer?emands.Collections?attern?0.?ales are on a cash and credit basis, with 49% collected during the month of the sale,?3% the following month, and 17% the month thereafter. There are no early?ayment discounts for customers. Bad debt expense (amounts considered?ncollectible)?ccount?or?%?fsales.?1.?ased on the collection pattern described above, accounts payable as at end of?usiness day on December 31,?019?s projected to be $1,098,899 arising from the?ollowing?stimates:Sales?November?019)$1,170,000Sales?December?019)$1,800,000?ayments?attern?2.?amDrone?ays for 20% of a month’s purchases of direct materials in the month of?urchase, 50% in the following month and the remaining 30% two months after the?onth of?urchase.?here are?oearly?ayment?iscounts?ffered?y?uppliers.?3.?ased on the payment pattern described above, accounts payable as at end of?usiness day on December 31,?019?s projected to be $78,641 arising from the?ollowing?stimates:Direct?aterial?urchases?November?019)$95,888Direct?aterial?urchases?December?019)$62,344?4.?ll?ayroll?osts?re?aid?n?he?eriod?n which?hey?re incurred.?5.?he property and business taxes, paid at the beginning of July each year, apply to?he following 12-month period. Any increases for inflation on property and business?axes?o?ot?ake?ffect?ntil thebeginning of?uly each year.?6.?nnual insurance premiums, paid at the beginning of April each year, apply to the?ollowing 12-month period. Any increases for inflation on insurance premiums do?ot?ake?ffect?ntil?hebeginning?f?pril?ach?ear.?7.?ixed manufacturing overhead costs are incurred evenly over the year and “cash-?elated” amounts?re?aid?s incurred.?8.?elling?nd?dministrative?xpenses?re?aid?n?he month?n?hichthey?ccur.?ther?9.?nticipating a significant increase in customer demand and market share over the?ext?ew?ears,?amDrone?s?lanning??ignificantexpansion?nvolving?cquiringadditional manufacturing equipment for $3,000,000 cash. Half of this amount is to?e paid to the equipment supplier in July 2020, with the remainder to be paid in?ctober?020.?0.?elling and administrative expenses are known to be a mixed cost; however, there is??ot?f?ncertainty?bout?he?ortion that is?ixed.Based on prior year?xperience:?owest level?f?onthly?ales:80 units…?otal?perating?xpenses:?87,270*?ighest level?f?onthly?ales:1,600?nits…?otal?perating?xpenses:?360,780*??xcluding?ad?ebts?nd?mounts?escribed?elow?hese?xpenses?re?xpected?o?ncrease?y?%?n?020?ue?oinflation.?1.?o secure and grow its market share,?amDrone?s planning to operate “pop-up”?iosks in various local retail centers during peak sales months (May-Aug, Nov-Dec)?ommencing Nov2019.?amDrone?s budgeting $10,900 per month (including all?elated fees and taxes), payable at the beginning of each month, to set-up and?perate these kiosks. The cost to set-up and operate “pop-up” kiosks will be in?ddition to the normal selling and administrative expenses described above and is?ot?xpected?o?ncrease?uring2020.?2.?ncome tax expense is estimated to be 25% of net income.CamDrone?akes?onthly income tax installment payments of $25,000 and pays all outstanding?ncome taxes (in excess ofinstallment payments) in March of the following year. As?uch, any outstanding income tax balance for the year ended December 31,?019?t?ill?e?aid?n?arch?020.?3.?n arrangement has been made with the local bank that if?amDronemaintains a?inimum balance of $50,000 in their bank account, they will be given a line of credit?t a preferred rate of 3% per annum (0.25% per month).?ll borrowing is considered?o happen on the first day of the month, repayments are on the last day of the?onth.?llborrowings?nd repayments?rom the?ank?hould be?n?ultiples?f$10,000 and interest must be paid at the end of each month.?nterest is calculated?n the balance at the beginning of the month, which includes any amounts?orrowed?hat?onth.?4.?amDrone?as a policy of paying dividends at the end of each quarter.?he?resident tells you that the Board of Directors is planning on declaring dividends as?ollows:March?020$50,000June?020$100,000September?020$250,000December?020$250,000Dividends?re?aid?n?he?onth?hey are?eclared.?5.?he company is forecasting the following balances as at the end of business day on?ecember 31,?019:?Assets?ash$?100,000Accounts?eceivable1,098,899Inventory:?irect?aterials3,591Inventory:?inished?oods11,640Prepaid?roperty?nd?usiness?axes24,000Prepaid?nsurance21,000Capital?ssets?net)571,800?otal?ssets$1,830,930?iabilities?nd Shareholders’Equity?ccounts?ayable$?8,641?ncome?axes?ayable19,700?apital?tock500,000?etained Earnings1,232,589?Total?iabilities?nd?hareholders’ Equity$1,830,930Required:?repare a monthly master budget for?amDrone?or the year ending December 31,?020,?how?our answers for the?ollowing schedules?nly.?.?ales Budget?.?chedule of Expected Cash Collections3.?roduction Budget4.?irect Materials Budget?.?chedule of Expected Cash DisbursementsAccountingBusinessManagerial AccountingBUSINESS ACCT10
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