Lolly Pops Inc. makes really big lollypops in two sizes, large & giant. The company sells lollipops to convenience stores, fairs, schools for fund raising and in bulk on the internet. Summer is approaching & the company is preparing its budget for the month of December. The lollypops are handmade, mostly out of sugar and attached to wooden sticks. Expected sales are based on past experience.
Other information for the month of December follows:
Input prices:
| Direct materials | |
| Sugar | $0.50 per kg |
| Sticks | $0.30 each |
| Direct manufacturing labour | $8 per direct manufacturing labour hour |
Input quantities per unit of output:
| Large | Giant | |
| Direct material | ||
| Sugar | 0.25 kg | 0.5 kg |
| Sticks | 1 | 1 |
| Direct manufacturing labour hours (DMLH) | 0.2 hours | 0.25 hours |
| Set up hours per batch | 0.08 hours | 0.09 hours |
Inventory Information, direct materials:
| Sugar | Sticks | |
| Beginning inventory | 125 kgs | 350 |
| Target ending inventory | 240 kg | 480 |
| Cost of beginning inventory | $64 | $105 |
Note: Lolly Pops Inc. accounts for direct materials using FIFO cost flow assumption.
Sales and inventory information, finished goods:
| Large | Giant | |
| Expected sales in units | 3000 | 1800 |
| Selling price | $3 | $4 |
| Target ending inventory in units | 300 | 180 |
| Beginning inventory in units | 200 | 150 |
| Beginning inventory in dollars | $500 | $474 |
Note: Lolly Pops Inc. uses a FIFO cost flow assumption for finished goods inventory.
All the lollipops are made in batches of 10. The company incurs manufacturing overhead costs, and marketing and general administration costs, but customers pay for shipping. Other than manufacturing labour costs, monthly processing costs are very small. The company uses activity-based costing and has classified all overhead cost for the month of December as shown in the following table:
| Cost type | Activity Base | Rate |
| Manufacturing: | ||
| Set-up | Set up hours | $20 per set up hour |
| Processing | DMLH’s | $1.70 per DMLH |
| Non- manufacturing | ||
| Marketing & Administration | Sales Revenue | 10% |
Other information:
Eighty percent of sales are on account, of which half are collected in the month of trade, 49% are collected in the following month and 1% are never collected & written off as bad debt.
All purchases of materials are on account. The company pays for 70% of purchases in the month of purchase and 30% in the following month.
All other costs are paid in the month incurred.
The company is making monthly interest payments at 12% p. a. on a $20,000 long term loan.
The company plans to pay the $500 of taxes as of 30 November in the month of December. Income tax expenses for December are zero
Forty percent of processing costs and 30% of marketing & general administration costs , are depreciation.
Lolly Pop Inc.
Balance Sheet
As at 30 November
| Assets | ||
| Cash | $587 | |
| A/c Receivable | 4 800 | |
| Less: Allowance for bad debt | (96) | 4 704 |
| Inventories | ||
| DM | 169 | |
| Finished Goods | 974 | |
| Fixed Assets | 190 000 | |
| Less: Accumulated Depreciation | (55 759) | 134 241 |
| Total Assets | 140 675 |
| Liabilities & Equity | ||
| Accounts payable | $696 | |
| Taxes payable | 500 | |
| Interest payable | 200 | |
| Long term debt | 20 000 | |
| Ordinary Shares | 10 000 | |
| Retained Earnings | 109 279 | |
| Total liabilities & equity | 140 675 |
Required:
Prepare each of the following for December:
- Revenue budget
- Production budget
- Direct material usage budget and direct material purchase budget
- Direct manufacturing labour cost budget
- Manufacturing overheard cost budget for setup & processing activities
- Budgeted unit cost of ending finished goods inventory and ending inventory budget.
- Cost of goods sold budget
- Marketing & general administration budget.
- Cash budget for December
- Budgeted income & expenditure statement for December
- Budgeted balance sheet as at 31 December
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