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
           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

Cash   $587
A/c Receivable 4 800  
             Less: Allowance for bad debt (96) 4 704
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




Prepare each of the following for December:

  1. Revenue budget
  2. Production budget
  3. Direct material usage budget and direct material purchase budget
  4. Direct manufacturing labour cost budget
  5. Manufacturing overheard cost budget for setup & processing activities
  6. Budgeted unit cost of ending finished goods inventory and ending inventory budget.
  7. Cost of goods sold budget
  8. Marketing & general administration budget.
  9. Cash budget for December
  10. Budgeted income & expenditure statement for December
  11. Budgeted balance sheet as at 31 December

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