Given the information below, perform the following required tasks for Carolina Coffee, Inc.:

  • Prepare a monthly master budget for Carolina Coffee, Inc. for the year ended December 31, 2021, including the following schedules: Sales Budget & Schedule of Cash Receipts, Production Budget, Direct Materials Budget & Schedule of Cash Disbursements, Direct Labor Budget, Manufacturing Overhead Budget, Ending Finished Goods Inventory Budget, Selling and Administrative Expense Budget, and Cash Budget.
  • Prepare a budgeted income statement and a budgeted statement of retained earnings for the year ended December 31, 2021, using absorption costing.
  • Prepare a budgeted balance sheet as of December 31, 2021.
  • Prepare a budgeted income statement for the year ended December 31, 2021, using variable costing.

Master Budget:   Carolina Coffee, Inc.

A manufacturing company Carolina Coffee, Inc. sells a single product, which they call a Flashy.  For planning and control purposes they utilize a monthly master budget, which is usually developed at least six months in advance of the budget year. Their fiscal year end is December 31.

During the spring of 2020, Bill, the Carolina Coffee, Inc., controller, spent considerable time with Agustus, the Managers of Marketing, putting together a sales forecast for the next budget year (January to December 2021).  Unfortunately, they submitted their resignation and a sales forecast to the President Council of Carolina Coffee, Inc. Connor.

Their sales forecast consisted of these few lines:

  • For the year ended December 31, 2020: 500,000 units at $10.00 each*
  • For the year ended December 31, 2021: 520,000 units at $10.20 each
  • For the year ended December 31, 2022: 520,000 units at $10.40 each

*Consider expected sales for the year ended December 31, 2020 are based on actual sales to date and budgeted sales for the duration of the year.

The President, desperately needing the budget completed, has approached you, a graduate management accounting student, for help in preparing the budget for the coming fiscal year.  Your conversations with the president and your investigations of the company’s records have revealed the following information:

  1. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of sales for each month.  Sales pick up over the summer with July, August, and September each contributing 2% to the total.  Valentine’s Day in February boosts sales to 5%, and Easter in April accounts for 10%.  As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December.  This pattern of sales is not expected to change in the next two years.
  2.  From previous experience, management has determined that an ending inventory equal to 25% of the next month’s sales is required to fit the buyer’s demands.
  3. Because sales are seasonal, Carolina Coffee, Inc. must rent an additional storage facility from September to December to house the additional inventory on hand.  The only related cost is a flat $20,000 per month, payable at the beginning of the month.
  4. There is only one type of raw material used in the production of Flashy. Special-processed acrylic (SPA) is a very compact material that is purchased in powder form.  Each Flashy requires 5 kilograms of SPA, at a cost of $0.46 per kilogram. The supplier of SPA tends to be somewhat erratic so Carolina Coffee, Inc.  finds it necessary to maintain an inventory balance equal to 40% of the following month’s production needs as a precaution against stock-outs.  Carolina Coffee, Inc. pays for 20% of a month’s purchases in the month of purchase, 45% in the following month and the remaining 35% two months after the month of purchase. There is no early payment discount.
  5. Beginning accounts payable will consist of $213,403 arising from the following estimated direct material purchases for November and December of 2020:
    SPA purchases in November 2020:        $228,896
    SPA purchases in December 2020         $166,612
  6. Carolina Coffee, Inc. manufacturing process is highly automated, so their direct labor cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $9.00 per hour.  This rate already includes the employer’s portion of employee benefits.  All payroll costs are paid in the period in which they are incurred. Each unit requires a total of 18 minutes of labor in production.
  7. Due to the similarity of the equipment in each of the production stages and the company’s concentration on a single product, manufacturing overhead is allocated based on volume (i.e. the units produced). The unit variable overhead manufacturing rate is $1.30, consisting of:  Utilities–$0.60; Indirect Materials–$0.20; Plant maintenance–$0.30; environmental fee–$0.14; and Other–$0.06.
  8. The fixed manufacturing overhead costs for the entire year are as follows:

Training and development                  $   43,200
Property and business taxes                     39,000
Supervisor’s salary                                    149,400
Amortization on equipment                    178,800
Insurance                                                       96,000
Other                                                             117,600
                                                                     $ 624,000 

  • The property and business taxes are pre-paid on June 30 of each year. The expected payment for next year is $39,600.
  • The annual insurance premium is paid at the beginning of September each year. There should be no change in the premium from last year.
  • All other “cash-related” fixed manufacturing overhead costs are incurred evenly over the year and paid as incurred.
  • Carolina Coffee, Inc. uses the straight-line method of amortization.
  1. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous year’s experience has provided the following information:
    Lowest level of sales:     375,000 units     Total Operating Expenses: $778,710
    Highest level of sales:    750,000 units     Total Operating Expenses: $1,022,460These costs are paid in the month in which they occur.  Bad debt expense is not included in the above selling and administrative expenses.
  2. Sales are on a cash and credit basis, with 55% collected during the month of the sale, 35% the following month, and 9.5% the month thereafter. ½ of 1% of sales are considered uncollectible (bad debt expense).
  3. Sales in November and December 2020 are expected to be $700,000 and $1,500,000 respectively. Based on the above collection pattern this will result in Accounts Receivable of $734,000 as of December 31, 2020 which will be collected in January and February, 2021.
  4. During the fiscal year ended December 31, 2021, Carolina Coffee, Inc. will be required to make monthly income tax installment payments of $5,000.  Outstanding income taxes from the year ended December 31, 2020 must be paid in April 2021. Income tax expense is estimated to be 25% of net income.  Income taxes for the year ended December 31, 2021, in excess of installment payments, will be paid in April, 2022.
  5. Carolina Coffee, Inc. is planning to acquire additional manufacturing equipment for $204,300 cash. 40% of this amount is to be paid in November 2021, the rest, in December 2021.  The manufacturing overhead costs shown above already include the amortization on this equipment.
  6. An arrangement has been made with the local bank that if Carolina Coffee, Inc. maintains a minimum balance of $25,000 in their bank account, they will be given a line of credit at a preferred rate of 6% per annum.  All borrowing is considered to happen on the first day of the month, repayments are on the last day of the month.  All borrowings and repayments from the bank should be in multiples of $1,000 and interest must be paid at the end of each month.  Interest is calculated on the balance at the beginning of the month, which includes any amounts borrowed that month.
  7. Carolina Coffee, Inc. has a policy of paying dividends at the end of each quarter. The president tells you that the board of directors is planning on continuing their policy of declaring dividends of $50,000 per quarter.
  8. Assume that the unit cost per unit was $7.30 for absorption costing and $6.10 for variable costing for year 2020.
  1. A listing of the estimated balances in the company’s ledger accounts as of December 31, 2020 is given below:


Cash                                                                      $     83,365

Accounts receivable                                                734,000

Inventory-raw materials                                              9,568

Inventory-finished goods                                             9,490

Prepaid Insurance                                                        64,000

Prepaid property and business taxes                        19,200

Capital assets (net)                                                     724,000

Total assets                                                              $1,643,623


Liabilities and Shareholders’ Equity

Accounts payable                                                    $   213,403

Income taxes payable                                                    21,500

Capital stock                                                                1,000,000

Retained Earnings                                                          408,720

Total liabilities and shareholders’ equity               $1,643,623

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