BACC216 Management Accounting 2
Semester 2, 2017
Assignment – Part 1
Vermillion Chemical Company
Vermillion Chemical Company manufactures a red industrial dye. The Vermillion Chemical Company is in the process of preparing its 2018 master budget and you (a group of two trainee management accountants) are presented with the following information in mid-August 2017:
1. The December 31, 2017, projected balance sheet for the company is shown below:
| Vermillion Chemical Company | |||||
| Projected Balance Sheet | |||||
| As at 31 December 2017 | |||||
| ASSETS | LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
| Cash | 5,080 | Notes payable | 25,000 | ||
| Accounts receivable | 26,500 | Accounts payable | 2,148 | ||
| Raw materials inventory | 800 | Dividends payable | 10,000 | ||
| Finished goods inventory | 2,104 | Total liabilities | 37,148 | ||
| Prepaid insurance | 1,200 | Shareholders’ funds | |||
| Building | 300,000 | Paid in capital | 150,000 | ||
| Accumulated depreciation | -20,000 | 280,000 | Retained earnings | 128,536 | 278,536 |
| Total assets | 315,684 | Total liabilities and shareholders’ funds |
315,684 | ||
2. The Accounts Receivable balance as at 31/12/2017 represents the remaining balances of the November 2017 and December 2017 credit sales. Sales were $70,000 and $65,000, respectively, in those two months.
3. The estimated sales in litres of dye for January through May 2018 are shown below:
| January | 8,000 |
| February | 10,000 |
| March | 15,000 |
| April | 12,000 |
| May | 11,000 |
Each litre of dye sells for $12.
4. The collection pattern for accounts receivable is as follows: 70% in the month of sale; 20% in the first month of sale; 10% in the second month of sale. Vermillion Chemical expects no bad debts and no customers are given cash discounts.
5. Each litre of dye has the following standard quantities and costs for direct materials and direct labour:
1.2 litres of direct materials (some evaporation occurs during processing) @ $0.80 per litre; $0.96 per litre
0.5 hours of direct labour @ $6 per hour; $3.00
Variable overhead is applied to the product on a machine hour basis. It takes 5 hours of machine time to process one litre of dye. The variable overhead is $0.06 per machine hour; Variable overhead consists entirely of utility costs. Total annual fixed overhead is
$120,000; it is applied at $1.00 per gallon based on an expected annual capacity of 120,000 litres. Fixed overhead per year is composed on the following costs:
| Salaries | $78,000 |
| Utilities | 12,000 |
| Insurance-Factory | 2,400 |
| Depreciation – Factory Building | 27,600 |
Fixed overhead is incurred evenly throughout the year.
6. There is no beginning inventory of Work in Process. All work in process is completed in the period in which it is started. Raw Material Inventory at the beginning of year (2018) consists of 1,000 litres of direct materials at a standard cost of $0.80 per litre (check the balance sheet). There are 400 litres of dye in the Finished Goods Inventory at the beginning of the year (2018) carried at a standard cost of $5.26 per litre; Direct Materials, $0.96; Direct labour, $3.00; Variable Overhead, $0.30 and Fixed Overhead, $1.00 (check the balance sheet).
7. Accounts payable relates solely to raw materials. Accounts payable are paid 60% in the month of purchase and 40% in the month after purchase. No discounts are given for prompt payment.
8. The dividend will be paid in January 2018.
9. A new piece of office equipment costing $9,000 will be purchased on March 1, 2018. Payment will be made 80% in March 2018 and 20% in April 2018. The equipment will have no salvage value and has a useful life of 3 years.
10. The note payable has a 20% interest rate; interest is paid at the end of each month.
11. Vermillion Chemical Company’s management has set a minimum cash balance at $5,000. Investments and borrowings are made in even $100 amounts. Investments will earn 9% per year.
12. The ending inventory of Finished Goods Inventory should be 5% of the next month’s needs. This is not true at the beginning of 2018 due to a miscalculation in sales in December. The ending inventory of raw materials should be 5% of the next month’s
needs.
13. Selling and administrative costs per month are as follows: salaries, $18,000; office rent, $7,000; and utilities, $800. These costs are paid in cash when they are incurred.
You are required to prepare a master budget for each month of the first quarter of 2018 and the financial statements for each month of first quarter using an Excel spreadsheet before 11.55 pm on Sunday, 27 August 2017 and submitted to management (Suzanne) via Moodle. A skeleton Excel spreadsheet is available on Moodle for you to complete the Master Budget and the Financial Statements. Please ensure your Excel spreadsheet includes your name and your student number of both of your group members.
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