Cool-Ice makes popsicles in two flavors, chocolate, and strawberry. Cool-Ice sells these popsicles to various outlets including convenience stores, fairs and schools for fund-raisers and in bulk on the internet. Towards the year end Cool-Ice is preparing its budget for the month of December. These popsicles are hand-made with highest quality, mostly out of sugar and flavors and attached to wooden sticks. Expected sales are based on their historical selling trend.
Other information for the month of December follows.
Input prices
Direct materials
Sugar & flavors
$0.50 per kilogram (kg)
Sticks
$0.30 each
Direct manufacturing labour
$8 per direct manufacturing labour-hour
Input quantities per unit of output
Chocolate
Strawberry
Direct materials
Sugar & flavors
0.25 kg
0.5 kg
Sticks
1
1
Direct manufacturing labour-hours (DMLH)
0.2 hour
0.25 hour
Set-up hours per batch
0.08 hour
0.09 hour
Inventory information, direct materials
Sugar& flavors
Sticks
Beginning inventory
125 kg
350
Target ending inventory
240 kg
480
Cost of beginning inventory
$64
$105
Cool-Ice accounts for direct materials using a FIFO cost flow assumption.
Sales and inventory information, finished goods
Chocolate
Strawberry
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
Cool-Ice uses a FIFO cost flow assumption for finished goods inventory.
All the popsicles are made in batches of 10. Cool-Ice 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. Cool-Ice uses activity-based costing and has classified all overhead costs for the month of December as shown in the following chart:
Cost type
Denominator activity
Rate
Manufacturing:
Set-up
Set-up hours
$20 per set-up hr
Processing
Direct manufacturing labour-hours (DMLH)
$1.70 per DMLH
Non-manufacturing:
Marketing and general
Sales revenue
10%
administration
REQUIRED
PART A
1. Prepare each of the following budget for December:
a. revenues budget
b. production budget in units
c. direct materials usage budget and direct materials purchases budget
d. direct manufacturing labour cost budget
e. manufacturing overhead cost budgets for processing and set-up activities
f. budgeted unit cost of ending finished goods inventory and ending inventories budget
g. cost of goods sold budget
h. marketing and general administration costs budget.
2. Cool-Ice’s balance sheet for 30 November follows. Use it and the following information to prepare a cash budget for Cool-Ice for December.
· 80% of sales are on account, of which half are collected in the month of the sale, 49% are collected the following month and 1% are never collected and are written off as bad debts.
· All purchases of materials are on account. Cool-Ice 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.
· Cool-Ice is making monthly interest payments of 1% (12% per year) on a $20 000 long-term loan.
· Cool-Ice plans to pay the $500 of taxes owed as of 30 November in the month of December. Income tax expense for December is zero.
· 40% of processing and set-up costs, and 30% of marketing and general administration costs, are depreciation.
Cool-Ice
Balance sheet as of 30 November
Assets
Cash
$587
Accounts receivable
$4 800
Less: Allowance for bad debts
96
4 704
Inventories
Direct materials
169
Finished goods
974
Fixed assets
$190 000
Less: Accumulated depreciation
55 759
134 241
Total assets
$140 675
Liabilities and 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 and equity
$140 675
3. Prepare a budgeted income statement for December and a budgeted balance sheet for Cool-Ice as of 31 December.