Chapter 24, Problem 1CP

Comprehensive Problem for Chapters 22-24
The Trolley Toy Company manufactures toy building block sets for children Trolley is planning for 2019 by developing a master budget by quarters. Trolley's balance sheet for December 31,2018, follows:

TROLLEY TOY COMPANY Balance Sheet December 31, 2018
Assets
Current Assets:
Cash $	58,000
Accounts Receivable	22,000
Raw Materials Inventory	1,200
Finished Goods Inventory	5,400
Total Current Assets		$ 86,600
Property, Plant, and Equipment:
Equipment	142,000
Less: Accumulated Depreciation	(47,000)	95,000
Total Assets		$ 181,600
Liabilities
Current Liabilities:
Accounts Payable		$ 8,000
Stockholders' Equity
Common Stock, no par $ 120,000
Retained Earnings	53,600
Total Stockholders' Equity		173,600
Total Liabilities and Stockholders' Equity		$ 181,600

Other budget data for Trolley Toy Company:

1. Budgeted sales are 1,400 sets for the first quarter and expected to increase by 150 sets per quarter. Cash sales are expected to be
30% of total sales, with the remaining 70% of sales on account. Sets are budgeted to sell for $90 per set.

2. Finished Goods Inventory on December 31,2018, consists of 200 sets at $27 each.
3. Desired ending Finished Goods Inventory is 40% of the next quarter's sales; first quarter sales for 2020 are expected to be 2,000 sets. FIFO inventory costing method is used.
4. Raw Materials Inventory on December 31,2018, consists of 600 pounds. Direct materials requirement is 3 pounds per set. The cost is $2 per pound.
5. Desired ending Raw Materials Inventory is 10% of the next quarter's direct materials needed for production; desired ending inventory for December 31, 2019, is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.
6. Each set requires 0.30 hours of direct labor; direct labor costs average $12 per hour.
7. Variable manufacturing overhead is $3.60 per set.
8. Fixed manufacturing overhead includes $7,000 per quarter in depreciation and $2,585 per quarter for other costs, such as utilities, insurance, and property taxes.
9. Fixed selling and administrative expenses include $11,000 per quarter for salaries; $1,500 per quarter for rent; $1,350 per quarter for insurance; and $1,500 per quarter for depreciation.
10. Variable selling and administrative expenses include supplies at 2% of sales.
11. Capital expenditures include $45,000 for new manufacturing equipment, to be purchased and paid for in the first quarter.
12. Cash receipts for sales on account are 40% in the quarter of the sale and 60% in the quarter following the sale; Accounts
Receivable balance on December 31,2018, is expected to be received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.

Direct materials purchases are paid 90% in the quarter purchased and 10% in the following quarter; Accounts Payable balance on

December 31,2018, is expected to be paid in the first quarter of 2019.

Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

Income tax expense is projected at $3,500 per quarter and is paid in the quarter incurred.

Trolley desires to maintain a minimum cash balance of $55,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 10% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements

1. Prepare Trolley's operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours.