Hilda Ltd manufactures and sells two products: ThingOne and ThingTwo. With the recent downturn in the market, Hilda experienced a decline in financial performance. The management team is in the process of preparing the 2018 budget and put together the following budgeted information.
Annual sales are expected to be 5,000 units. Budgeted sales for the month of October and November 2018 are provided below (Table 1). All sales are on credit. Hilda Ltd expects to collect 40 percent of accounts receivable in the month of sale, 59% are collected the following month and 1% are never collected and are written off as bad debts. Hilda Ltd recorded sale revenue of $74,100 for ThingOne and $105,000 for ThingTwo during the month of September 2018.
Table 1: Expected Sales in Units and Dollars for October and November 2018
The annual production is expected to be 5,100 units. Table 2 identifies the material requirements per unit of output and material costs per kg. These costs are not expected to change during the budgeted period.
Table 2: Budgeted Direct Materials – Inputs and Costs as at October 1, 2018
|Cost per Kg||Direct Material Required (in Kgs) per Unit|
|Material X||$5.50||2.5 kg||5 kg|
|Material Y||$13.00||3 kg||4 kg|
|Material Z||$7.50||1.5 kg||3 kg|
Beginning inventories of the respective direct materials are shown in Table 3. It is Hilda’s policy to maintain an ending inventory equal to 20 percent of the current month’s production.
Table 3: Direct Materials Inventory – as at October 1, 2018
|ThingOne (kgs)||Cost||ThingTwo (kgs)||Cost|
All purchases of materials are on account. Hilda’s suppliers require that 70 percent of accounts payable be paid in the month of purchase. The remaining 30 percent is paid in the following month. September month total direct material purchases amounted to $31,800.
Hilda uses a FIFO cost flow assumption for both direct materials and finished goods inventory. Finished goods ending inventory policy is 25% of the current month’s sales. The following information is provided on the current ending inventory of finished goods as at 30 September 2018.
Table 4: Finished Goods Inventory as at October 1, 2018
|Finished Goods Inventory in units||45||32|
|Finished Goods Inventory in dollars (cost)||$8,460||$10,432|
Direct labour is divided into two processes: Assembly and Packaging. It is expected that direct labour hours for 2018 to be 15,000 hours. The following information is provided for all classes of direct labour for each of the tables.
Table 5: Direct Manufacturing Labour – Inputs and Costs for October 1, 2018
|Rate per Hour||Direct Labour Hours
Required per Unit
|Labour – Assembly||$30.00||2||2.5|
|Labour – Packaging||$22.00||0.3||0.5|
Hilda uses an activity-based costing system and classifies manufacturing overhead into three activity pools: setup (based on set-up time); processing (based on machine hour) and inspection (based on inspection time). Cost driver rates for these activities are $120 per setup hour, $8 per machine hour and $21 per inspection hour, respectively. Other information as follows:
Table 6: Cost Driver information
|Number of units per batch||15 units||12 units|
|Machine hour per unit||4 hours||6 hours|
|Set-up time per batch||1.5 hours||2 hours|
|Inspection time per batch||5 hours||6 hours|
Non-manufacturing fixed costs for September equal $52,000, of which 50 percent are office salaries and distribution, and the balance being depreciation for office equipment. All manufacturing equipment have been fully depreciated since September 2018. Office salaries and distribution cost are expected to increase 8 percent in October. Sales commission for October is estimated to be 2 percent of sales revenue. Labour, other manufacturing costs and non-manufacturing costs are paid in cash in the month incurred. Hilda currently has a $50,000 loan at an annual interest rate of 18%. The interest is paid at the end of each month. Seuss desires a $30,000 cash cushion before interest payment. Funds are assumed to be borrowed, in increments of $1,000. If Hilda has more than $80,000 cash at the end of October it will pay back the loan. Hilda Ltd has a cash balance of $35,900 at the end of September.
Prepare the following budgets for Hilda Ltd, for October 2018 both in dollars and units (where applicable):
- Sales Budget (separate column for each product)
- Production Budget (separate column for each product)
- Direct Materials Usage and Purchases Budget (clearly show the quantity and cost for EACH material)
- Direct Manufacturing Labour Budget (clearly show the labour hours and cost for EACH process)
- Manufacturing Overhead Budget
- Ending Inventories Budgets (for direct materials and finished goods) with workings for unit cost of finished goods
- Cost of Goods Sold Budget
- Non-manufacturing Cost Budget / Selling and Administrative Expense Budget
- Budgeted Income Statement
- Cash Budget (show workings for schedule of cash receipts and schedule of cash payments)
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