ACCT6111_Fall 2013_Assignment 2_Case 1_Budgeting_Muscat Sandals Company (MSC)



ACCT6111 Fall 2013 Assignment 2

Case 1: Budgeting

Muscat Sandals Company (MSC) makes a very popular
cloth sandal in one style, but in Regular and Deluxe. The Regular sandals have
cloth soles and the Deluxe sandals have cloth covered wooden soles. MSC is
preparing its budget for January 2013, and has estimated sales based on past

Other information for the month of January follows:

Input Prices

Direct materials

Cloth $3.50
per yard

Wood $5.00
per board foot

Direct manufacturing labor $10 per direct manufacturing labor-hour

Input Quantities per Unit of Output (per pair of

Regular Deluxe

Direct materials

Cloth 1.3
yards 1.5 yards

Wood 0 2 board feet

Direct manufacturing labor-hours (DMLH) 5 Hours 7 Hours

Setup-hours per batch 2
Hours 3 Hours

Inventory Information, Direct Materials

Cloth Wood

Beginning inventory 610
yards 800 b.f.

Target ending inventory 386 yards 295 b.f.

Cost of beginning inventory $2,146 $4,040

MSC accounts for direct materials using a FIFO cost
flow assumption.

Sales and Inventory Information, Finished Goods

Regular Deluxe

Expected sales in units (pairs of sandals) 2,000 3,000

Selling price $80

Target ending inventory in units 400

Beginning inventory in units 250

Beginning inventory in dollars
$15,500 $61,750

MSC uses a FIFO cost flow assumption for finished
goods inventory.

All the sandals are made in batches of 50 pairs of
sandals. MSC incurs manufacturing overhead costs, marketing and general
administration, and shipping costs. Besides materials and labor, manufacturing
costs include setup, processing, and inspection costs. MSC ships 40 pairs of
sandals per shipment. MSC uses activity-based costing and has classified all
overhead costs for the month of January as shown in the following chart:

Cost type Denominator


Setup Setup-hours $12
per setup-hour

manufacturing labor-hours $1.20
per DMLH

of pairs of sandals $0.90
per pair


Marketing and general administration Sales revenue 8%

Shipping Number
of shipments $10
per shipment


1. Prepare
each of the following for January:

a. Revenues

b. Production
budget in units

c. Direct
material usage budget and direct material purchases budget in both units and
dollars; round to dollars

d. Direct
manufacturing labor cost budget

Manufacturing overhead cost budgets for processing and setup 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. MSC’s balance
sheet for December 31 follows. Use it and the following information to prepare
a cash budget for MSC for January. Round to dollars.

All sales are on account; 60% are collected in the month of the sale,
38% are collected the following month, and 2% are never collected and written
off as bad debts.

All purchases of materials are on account. MSC pays for 80% of purchases
in the month of purchase and 20% in the following month.

All other costs are paid in the month incurred, including the declaration
and payment of a $10,000 cash dividend in January.

MSC is making monthly interest payments of 0.5% (6% per year) on a
$100,000 long term loan.

MSC plans to pay the $7,200 of taxes owed as of December 31 in the month
of January. Income tax expense for January is zero.

30% of processing and setup costs, and 10% of marketing and general
administration costs are depreciation.

Balance Sheet as of December 31




Accounts receivable


Less: Allowance for bad debts




Direct materials


Finished goods


Fixed assets


Less: Accumulated depreciation



Total assets


Liabilities and Equity

Accounts payable

$ 10,400

Taxes payable


Interest payable


Long-term debt


Common stock


Retained earnings


Total liabilities and equity


Prepare a
budgeted income statement for January and a budgeted balance sheet for MSC as
of January 31.


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