Selling and administrative expense budget

1. 4. Prepare a budgeted income statement for the year ended December 31, 2021, using variable costing.

Master Budget: Harvard Square, Inc.

• For the year ended December 31, 2021: 520,000 units at $10.20 each

• For the year ended December 31, 2022: 520,000 units at $10.40 each

1. Peak months for sales correspond with gift-giving holidays. History shows that January, March, May and June are the slowest months with only 1% of sales for each month. Sales pick up over the summer with July, August, and September each contributing 2% to the total. Valentine’s Day in February boosts sales to 5%, and Easter in April accounts for 10%. As Christmas shopping picks up momentum, winter sales start at 15% in October, move to 20% in November and then peak at 40% in December. This pattern of sales is not expected to change in the next two years.

2. From previous experience, management has determined that an ending inventory equal to 25%

SPA purchases in November 2020: $228,896 SPA purchases in December 2020 $166,612

6. Harvard Square, Inc. manufacturing process is highly automated, so their direct labor cost is low. Employees are paid on a per unit basis. Their total pay each month is, therefore, dependent on production volumes and averages $9.00 per hour. This rate already includes the employer’s portion of employee benefits. All payroll costs are paid in the period in which they are

8. The fixed manufacturing overhead costs for the entire year are as follows:

• The property and business taxes are pre-paid on June 30 of each year. The expected payment for next year is $39,600.

9. Selling and administrative expenses are known to be a mixed cost; however, there is a lot of uncertainty about the portion that is fixed. Previous year’s experience has provided the following information:

Lowest level of sales: 375,000 units Total Operating Expenses: $778,710 Highest level of sales: 750,000 units Total Operating Expenses: $1,022,460

12. During the fiscal year ended December 31, 2021, Harvard Square, Inc. will be required to make monthly income tax installment payments of $5,000. Outstanding income taxes from the year ended December 31, 2020 must be paid in April 2021. Income tax expense is estimated to be 25% of net income. Income taxes for the year ended December 31, 2021, in excess of installment payments, will be paid in April, 2022.

13. Harvard Square, Inc. is planning to acquire additional manufacturing equipment for $204,300 cash. 40% of this amount is to be paid in November 2021, the rest, in December 2021. The manufacturing overhead costs shown above already include the amortization on this equipment.

17. A listing of the estimated balances in the company’s ledger accounts as of December 31, 2020 is given below:

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