Order 1194055: Managerial Accounting

MBAi 6691

Financial/Managerial Accounting for International Executive

Case

In this case a full set of budgets will be prepared and presented in appropriate format. Reports will be prepared to explain how budget numbers were determined. The following are general requirements for this budget case. Specific requirements are listed after the relevant case data.

· Read the case and analyze the information.

· Prepare an operating budget in standard “income statement” format.

· Prepare a narrative report (or notes to the income statement) addressing why/how quantitative items were selected. The following items must be explained:

1. Sales Forecast

2. Purchases budget (raw materials, labor, all resources)

3. Operating Expenses

· Prepare a cash budget using any acceptable format. The following items must be explained or shown on the budget:

1. The process by which cash inflows were projected.

2. The process by which cash outflows were projected.

3. The process by which financing, if applicable, was determined.

4. How interest and other financing charges were calculated.

· Prepare a capital budget using any acceptable format.

You will be graded on your understanding of the underlying concepts related to determining budget amounts (for example, how purchases are determined) as well as your ability to prepare and explain standard business reports. The rubric attached as the last page of this document will be used to grade the case.

Harvey’s Budget1

Harvey Manufacturing manufactures and sells two industrial products: a self-balancing screw driver and a self-balancing saw. Both products are manufactured in a single plant.

Harvey’s general manager, Mr. Lipscomb, and president, Mr. Owens, want a budget prepared for the fiscal year 2013. They have asked various employees to gather information that they believe will be necessary for preparation of a budget. The information is presented below.

Neither Mr. Lipscomb nor Mr. Owens is skilled in budget preparation. Both executives have used budgets and have participated to some degree in budget preparation in prior years, but neither has prepared a full budget.

Sales and selling price per unit

Historical sales for 2012 the two products are shown below.

UnitsSPUnitsSP

January52,000 98 42,000 118

February53,000 98 42,000 120

March55,000 98 40,000 122

April60,000 100 40,000 125

May 64,000 100 41,000 125

June64,000 102 42,000 130

July64,000 102 40,000 130

August63,000 102 39,000 130

September61,000 100 40,000 125

October60,000 100 37,000 125

November65,000 100 38,000 125

December59,000 100 39,000 125

ScrewdriverSaws

Product Sales for 2012

Harvey’s sales typically peak in the summer months, beginning with May. Harvey’s general manager, Mr. Lipscomb, recommends that the budget be prepared with the units sold in the high sales months of May, June, and July be used as the bases for determining the annual forecast. Mr. Lipscomb’s recommendation is that annual sales be budgeted at 64,000 per month for screwdrivers and 42,000 per month for saws.

Mr. Lipscomb also believes that the budgeted selling price per unit should be equal to the highest selling price that could be achieved in 2012. He would like to budget 102 per unit for screwdrivers and 130 per unit for saws. Mr. Lipscomb states that his management team experimented with pricing in the prior year, beginning with the first month of the year.

You review the unit sales and unit selling price information for 2012 and recommend a budget based on 60,000 units of screwdrivers at 100 each and 40,000 units of saws at 125 each. Mr. Lipscomb challenges your conclusion. Likewise Mr. Owens, the company president, would like to hear an explanation of the budget numbers and how or why you calculated those numbers.

Production Requirements

Each unit produced requires the following materials, labor, and overhead, all of which is variable.

Standard costs per unit

Direct materials

Units

Unit cost

Cost

Units

Unit cost

Cost

Metal

5

lbs

8.00

40.00

4

lbs

8.00

32.00

Plastic

3

lbs

5.00

15.00

3

lbs

5.00

15.00

Handles

1

unit

3.00

3.00

58.00

47.00

Direct labor

2

hrs

12.00

24.00

3

hrs

16.00

48.00

Variable manufacturing OH

2

hrs

1.50

3.00

3

hrs

1.50

4.50

Total

85.00

99.50

Screwdrivers

Saws

Inventories

Inventories are listed below. The beginning inventories are the actual amounts on hand at the beginning of the year. The ending inventories shown are the amounts that the operations manager has determined to be necessary to ensure smooth production processes.

Inventories

Beginning

Ending

Screwdrivers, finished

20,000

25,000

Saws, finished

8,000

10,000

Metal

320,000

36,000

Plastic

29,000

32,000

Handles

6,000

7,000

Other information

Fixed manufacturing overhead

Fixed manufacturing overhead is 214,000, including 156,000 of non-cash expenditures.

Fixed manufacturing overhead is allocated on total units produced.

Beginning cash is 1,800,000.

Sales are on credit. Sales are collected 50 percent in the current period and the remainder in the next period. There are no bad debts.

Sales for the last quarter were 8,400,000.

Purchases for direct materials and labor costs are paid for in the quarter acquired.

Manufacturing overhead expenses are paid in the quarter incurred.

Selling and administrative expenses are all fixed and are paid in the quarter incurred.

Estimated selling and administrative expenses for the next period are 340,000 per quarter, including 90,000 of depreciation.

REQUIREMENTS:

1. Prepare a sales budget in good form.

Solution:

	Screwdriver	Saws
	Qty	SP	Value	Qty	SP	Value
January	60000	100	$60,00,000	40000	125	$50,00,000
February	60000	100	$60,00,000	40000	125	$50,00,000
March	60000	100	$60,00,000	40000	125	$50,00,000
April	60000	100	$60,00,000	40000	125	$50,00,000
May	60000	100	$60,00,000	40000	125	$50,00,000
June	60000	100	$60,00,000	40000	125	$50,00,000
July	60000	100	$60,00,000	40000	125	$50,00,000
August	60000	100	$60,00,000	40000	125	$50,00,000
September	60000	100	$60,00,000	40000	125	$50,00,000
October	60000	100	$60,00,000	40000	125	$50,00,000
November	60000	100	$60,00,000	40000	125	$50,00,000
December	60000	100	$60,00,000	40000	125	$50,00,000
	720000		$7,20,00,000	480000		$6,00,00,000

2. Prepare a narrative report explaining how your sales budget was determined. Use the table above in your analysis. (Hint: Many companies would develop their budgets using average sales and average unit costs.)

Whatever budget determination method you use should be explained. In your explanation, you should include a discussion of why you believe sales and selling prices fluctuated last year.

Solution:

Sales Report

A sales budget is a prediction based on past sales performance and expected market conditions. It is a self-assessment tool for a company

Here, I have considered sales on the basis of previous year average actuals of screwdrivers and saw.

The main reason is considering average sales to give a correct estimation of next year to the Company. If we will take highest sales and price, then we will not able to give correct estimation because it is showing fluctuations in the previous year sales. If you go through the previous year trend, the beginning month sale in the previous year is lower.

An average method is considering low and high quantity estimation and gives correct estimation of sale budget.

Sale forecasting processes is important because:

· It gives in-dept knowledge of customers

· It shows when and how much to buy

· The ability to plan for production and capacity

· Future cash flow statement

2. Prepare a production budget in units.

	Screwdriver	Saws
	Sales	Opening	Closing	Production	Sales	Opening	Closing	Production
January	60000	20000	25000	55000	40000	8000	10000	38000
February	60000	25000	25000	60000	40000	10000	10000	40000
March	60000	25000	25000	60000	40000	10000	10000	40000
April	60000	25000	25000	60000	40000	10000	10000	40000
May	60000	25000	25000	60000	40000	10000	10000	40000
June	60000	25000	25000	60000	40000	10000	10000	40000
July	60000	25000	25000	60000	40000	10000	10000	40000
August	60000	25000	25000	60000	40000	10000	10000	40000
September	60000	25000	25000	60000	40000	10000	10000	40000
October	60000	25000	25000	60000	40000	10000	10000	40000
November	60000	25000	25000	60000	40000	10000	10000	40000
December	60000	25000	25000	60000	40000	10000	10000	40000

3. Prepare a purchases budget. Remember that you will need to purchase enough

materials to have the required ending inventories shown. You will also need to purchase enough to manufacture and sell the products on your sales forecast. Do not forget that you have beginning inventories.

Solution:

Raw Material Required
	Screwdriver
	Qty	Metal	Plastic	Handles
		5	3	1
January	55000	275000	165000	55000
February	60000	300000	180000	60000
March	60000	300000	180000	60000
April	60000	300000	180000	60000
May	60000	300000	180000	60000
June	60000	300000	180000	60000
July	60000	300000	180000	60000
August	60000	300000	180000	60000
September	60000	300000	180000	60000
October	60000	300000	180000	60000
November	60000	300000	180000	60000
December	60000	300000	180000	60000
	Saws
	Qty	Metal	Plastic
		5	3
January	38000	190000	114000
February	40000	200000	120000
March	40000	200000	120000
April	40000	200000	120000
May	40000	200000	120000
June	40000	200000	120000
July	40000	200000	120000
August	40000	200000	120000
September	40000	200000	120000
October	40000	200000	120000
November	40000	200000	120000
December	40000	200000	120000

Month-wise Raw Material wise details
	Metal	Plastic	Handles
January	465000	279000	55000
February	500000	300000	60000
March	500000	300000	60000
April	500000	300000	60000
May	500000	300000	60000
June	500000	300000	60000
July	500000	300000	60000
August	500000	300000	60000
September	500000	300000	60000
October	500000	300000	60000
November	500000	300000	60000
December	500000	300000	60000

Purchase Budget Raw Material wise

	Metal
	Production	Opening	Closing	Purchase	Rate	Value
January	465000	320000	36000	749000	8.00	5992000
February	500000	36000	36000	500000	8.00	4000000
March	500000	36000	36000	500000	8.00	4000000
April	500000	36000	36000	500000	8.00	4000000
May	500000	36000	36000	500000	8.00	4000000
June	500000	36000	36000	500000	8.00	4000000
July	500000	36000	36000	500000	8.00	4000000
August	500000	36000	36000	500000	8.00	4000000
September	500000	36000	36000	500000	8.00	4000000
October	500000	36000	36000	500000	8.00	4000000
November	500000	36000	36000	500000	8.00	4000000
December	500000	36000	36000	500000	8.00	4000000

	Plastic
	Production	Opening	Closing	Purchase	Rate	Value
January	279000	29000	32000	276000	5.00	1380000
February	300000	32000	32000	300000	5.00	1500000
March	300000	32000	32000	300000	5.00	1500000
April	300000	32000	32000	300000	5.00	1500000
May	300000	32000	32000	300000	5.00	1500000
June	300000	32000	32000	300000	5.00	1500000
July	300000	32000	32000	300000	5.00	1500000
August	300000	32000	32000	300000	5.00	1500000
September	300000	32000	32000	300000	5.00	1500000
October	300000	32000	32000	300000	5.00	1500000
November	300000	32000	32000	300000	5.00	1500000
December	300000	32000	32000	300000	5.00	1500000

	Handles
	Production	Opening	Closing	Purchase	Rate	Value
January	55000	6000	7000	54000	3.00	162000
February	60000	7000	7000	60000	3.00	180000
March	60000	7000	7000	60000	3.00	180000
April	60000	7000	7000	60000	3.00	180000
May	60000	7000	7000	60000	3.00	180000
June	60000	7000	7000	60000	3.00	180000
July	60000	7000	7000	60000	3.00	180000
August	60000	7000	7000	60000	3.00	180000
September	60000	7000	7000	60000	3.00	180000
October	60000	7000	7000	60000	3.00	180000
November	60000	7000	7000	60000	3.00	180000
December	60000	7000	7000	60000	3.00	180000

5. Prepare a narrative report explaining how you prepared the purchases budget. Be as detailed as necessary to be sure that the president and general manager will understand the calculations and costs.

Solution:

Purchase Budget

The purchase budget calculates the materials that must be purchased in order to fulfill the requirements of the production budget. In a business that sells products, this budget may contain a majority of all costs incurred by the company, so that this budget to be complied with care. Purchase budget is very important for inventory controls. It allows the business to avoid holding excess inventory or materials. It is also helpful the business to react quickly to avoid losing customers because of longer production time or the slower filling of orders.

For the computation of purchase budget, first we have to consider production quantity of finished goods. Production quantity to be arrived by sales minus closing plus opening finished goods inventory.

Now we have to break finished goods production to bill of material of each product. In purchase budget the bill of material for each product has been considered on the basis of details provided in the data.

Raw material rates have been considered the prevailing rates for each item mentioned in the work sheet.

No increase/decrease in finished goods and WIP has been considered for computation of raw material consumption.

6. Prepare a budgeted income statement.

Budgeted Income Statement

	January	February	March	April	May	June
Sales	11000000	11000000	11000000	11000000	11000000	11000000
Less:
Raw Material	7534000	5680000	5680000	5680000	5680000	5680000
Direct Labor	3360000	3360000	3360000	3360000	3360000	3360000
Variable mfg ohs	360000	360000	360000	360000	360000	360000
Fixed mfg ohs	58000	58000	58000	58000	58000	58000
Non cash expenditures	156000	156000	156000	156000	156000	156000
Selling & admin exp.	28333	28333	28333	28333	28333	28333
Net Income	-496333	1357667	1357667	1357667	1357667	1357667

	July	August	September	October	November	December
Sales	11000000	11000000	11000000	11000000	11000000	11000000
Less:
Raw Material	5680000	5680000	5680000	5680000	5680000	5680000
Direct Labor	3360000	3360000	3360000	3360000	3360000	3360000
Variable mfg ohs	360000	360000	360000	360000	360000	360000
Fixed mfg ohs	58000	58000	58000	58000	58000	58000
Non cash expenditures	156000	156000	156000	156000	156000	156000
Selling & admin exp.	28333	28333	28333	28333	28333	28333
Net Income	1357667	1357667	1357667	1357667	1357667	1357667

7. Prepare a contribution margin income statement.

	January	February	March	April	May	June
Sales	11000000	11000000	11000000	11000000	11000000	11000000
Less:
Raw Material	7534000	5680000	5680000	5680000	5680000	5680000
Direct Labor	3360000	3360000	3360000	3360000	3360000	3360000
Variable mfg ohs	360000	360000	360000	360000	360000	360000
Contribution Margin	-254000	1600000	1600000	1600000	1600000	1600000

	July	August	September	October	November	December
Sales	11000000	11000000	11000000	11000000	11000000	11000000
Less:
Raw Material	5680000	5680000	5680000	5680000	5680000	5680000
Direct Labor	3360000	3360000	3360000	3360000	3360000	3360000
Variable mfg ohs	360000	360000	360000	360000	360000	360000
Contribution Margin	1600000	1600000	1600000	1600000	1600000	1600000

8. Prepare a narrative report explaining how the expenses on the income statement were determined.

Report on Income Statement

Income statement is a statement which shows difference between revenue and cost. Sale figure is arrived from the basis of previous year average actuals of screwdrivers and saw.

For the computation of raw material cost, first we have arrived production quantity. After production quantity, it will multiply with prevailing rates which is mentioned in the working sheet.

The expenses are considered in the income statement is based on the previous year expenses. These expenses can be divided into variable and fixed overheads. Variable overheads are directly related to sales and fixed overheads are fixed. For computation of contribution margin is revenues minus from variable overheads.

Income statement is very important for analyzing the performance of the business.

9. Prepare a cash budget. Be sure that you show all cash inflows and outflows.

	January	February	March	April	May	June
Opening balance	1800000	-2640333	-1126666	387001	1900668	3414335
Collection from receivables	6900000	11000000	11000000	11000000	11000000	11000000
Cash Inflow	8700000	8359667	9873334	11387001	12900668	14414335
Cash outflow
Payment to accounts payable	7534000	5680000	5680000	5680000	5680000	5680000
Payment to labor	3360000	3360000	3360000	3360000	3360000	3360000
Manufacturing ohs	418000	418000	418000	418000	418000	418000
Selling & Admin ohs	28333	28333	28333	28333	28333	28333
Net Surplus/(Deficit)	-2640333	-1126666	387001	1900668	3414335	4928002

	July	August	September	October	November	December
Opening balance	4928002	6441669	7955336	9469003	10982670	12496337
Collection from receivables	11000000	11000000	11000000	11000000	11000000	11000000
Cash Inflow	15928002	17441669	18955336	20469003	21982670	23496337
Cash outflow
Payment to accounts payable	5680000	5680000	5680000	5680000	5680000	5680000
Payment to labor	3360000	3360000	3360000	3360000	3360000	3360000
Manufacturing ohs	418000	418000	418000	418000	418000	418000
Selling & Admin ohs	28333	28333	28333	28333	28333	28333
Net Surplus/(Deficit)	6441669	7955336	9469003	10982670	12496337	14010004

10. Prepare a narrative report explaining your cash budget process.

Solution:

Cash budget is shows inflow and outflow of cash. It is very important current assets. Insufficiency of cash at any stage prevents a firm from discharging its liabilities or forces it to sell its other assets immediately. The main objectives of cash budget are:

· Minimizing the cash balance

· Meeting the Cash Outflows as and when arise.

11. If necessary, prepare a capital expenditure budget. Explain your entries. Use only the facts in this case to prepare the budget.

Solution:

I have not considered any capacity increase; therefore capital expenditure is not required.