GROUP PROJECT ON MASTER BUDGETING CASE
KIRA KRAFT INC CASE
Kira’s Krafts Inc. produces superior art craft kits. The company is preparing its master budget for the last quarter of 2014 and has presented you with the following information
Kira Krafts Inc.
September 30, 2014
Accounts Receivable 652,000
Raw Materials Inventory 125,000
Finished Goods Inventory 187,500
Prepaid Insurance 13,500
Depreciation (263,250) $876,750
Total Asssets $1,909,300
Liabilities and Stockholders’ Equity
Notes Payable $72,600
Accounts Payable 563,000
Total Liabilities $635,600
Common Stock 245,000
Paid-in Capital 500,000
Retained Earnings 528,700
Total Liabilities and
Stockholders’ Equity $1,909,300
1. Estimated sales in craft kits (IN UNITS) are:
MONTH # KITS
Each craft kit sells for $9.60 PER UNIT
2. The ending Finished Goods (FG) and Raw Material (RM) inventories should be 10% of the next month’s demand.
3. There is no beginning inventory of WIP – all WIP is completed in the period in which it is started. Both FG and RM inventories at 9/30/14 are 25,000 kits.
4. Each kit has the following standard quantities and costs for direct materials and labor:
Std. Cost/Per Kit
1.10 pounds of direct materials at $5.00 per pound $5.50
1/8 hour of direct labor at $10.00 per hour 1.25
VOH: 1 hour at $0.50 per hour 0.50
FOH: $0.25/kit 0.25
Total annual fixed overhead is $1,300,000; it is applied at $0.25/kit based on expected annual capacity of 4,200,000 kits. Fixed overhead is incurred evenly throughout the year and fixed overhead per year is composed of the following costs:
Depreciation – factory $215,000
Insurance – factory $54,000
5. The A/R balance at 9/30/14 represents the remaining balance of September credit sales. Sales were $3,260,000 for September.
6. The collection pattern for accounts receivable is as follows:
Month of Sale: 80%
Month AFTER Sale 20%
Kira’s Krafts Inc. expects no bad debts and no customers are given cash discounts.
7. Accounts payable relates solely to raw materials. A/P are paid;
Month of Purchase: 70%
Month after Purchase 30%
No discounts are given for prompt payment.
8. Selling and administrative costs are paid in cash as they are incurred. These costs per month are as follows:
Utilities = $850
Salaries = $2,800
Rent = $6,200
9. The note payable has a 3.5% interest rate and interest is paid at the end of the month. The note is due 10/31
10. Kira’s Krafts Inc. has a policy of maintaining a minimum cash balance of $50,000. Investments earn 2.0% per year.
11. A new piece of equipment costing $22,600 will be purchased on November 1st 2014. Payment will be divided equally in November and December. The equipment will no salvage value and will have a useful life of 5 years.
1. Prepare a master budget for each month of the last quarter of 2014 and pro format financial statements as of the end of the quarter. The master budget will include: sales budget, A/R Collections, Production Budget, Purchases Budget, Payment of AP, DL Budget, VOH Budget, FOH Budget, other payments, collections and cost adj, and cash budget leading to the master budget.
Net Income: $2,265,966
Total Assets: $4,070,273
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