ACCT Project Fall 2013

SECOND (GROUP) PROJECT REQUIRED: This project is worth 20 points. It is an opportunity to put together some of the things you have learned in different parts of this course. Read the case and answer the requirements below.

For this project you may work together in groups of up to 3 people. Group members may come from any of professor Milbrath’s or Professor Li’ sections of Acct. 2332. The names, usernames and Peoplesoft numbers of the group members must be written clearly below.

If there is only one member in the group you should leave the rows for the second and third member below blank. If there are two members you should leave just the third row blank.

To receive credit you must write full answers, using the templates provided for each requirement We must ask you to handwrite your answers and show any calculations you feel are needed.

Hand your project in to the accounting lab 133MH during lab hours on or before Thursday November 21 at 7 PM.

1) GROUP MEMBERS:

NAME Blackboard Username Peoplesoft Number

YOUR RECEIPT NUMBER _______________(lab assistants will give you this)

PROJECT FACTS Manny Fold owns a factory that specializes in making titanium valves for high performance engines on a just in time basis. Thus, Manny produces what he sells in a particular month. There are no inventories of finished goods or work in process. However, Manny does require that an inventory of direct raw materials equal to 16% of next month’s production requirement be available at the end of each month. To build his business and gain new customers Manny has extended generous credit terms to his customers. While Manny is confident about the fundamentals of his business, he is concerned about the possible income and cash flow implications.

The variable costs of producing a valve are budgeted at $6.60 per valve (3/4 pound of titanium alloy costing $8.80 per pound for materials), $2.50 per valve for direct labor, and $5.90 per valve for variable manufacturing overhead. Fixed manufacturing overhead is budgeted at $78,600 per month during the 4th quarter. The detailed components of variable and fixed overhead are as listed below.

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For variable overhead, electric power is budgeted at $2.10 per unit, indirect labor is budgeted at $3.20 per unit, and supplies are budgeted at $.60 per unit. For fixed overhead depreciation is budgeted at $12,000 per month, Supervision and other factory salaries are budgeted at $35,000 per month, property tax and insurance combined are budgeted at $9,000 per month, maintenance is budgeted at $7,000 per month, licensing fees and permits to use proprietary technology are budgeted at $7,600 per month, and other miscellaneous fixed overhead expenses are budgeted at $8,000 per month.\ Manny’s customers drive a hard bargain because they can easily switch suppliers. They all do pay eventually, but many of them take their time about doing so and Manny is reluctant to get tough with them for fear they will take their business elsewhere. He tells you that all his sales are on credit (no cash sales). He typically collects only 10% of sales in the month of the sale, 40% of sales in the month after the sale and 50% of sales two months later (for example 10% of July sales are collected in July, 40% in August and 50% in September). On the other hand he must pay for 75% of his materials purchases in the month of the purchase and 25% in the month after. Cash costs of labor and overhead other than depreciation, property taxes and insurance are paid in the same month they are incurred. Property taxes and insurance are paid up through December 15. The amount due for the next 6 months (starting December 16) must be paid in early December. Monthly fixed selling and administrative costs, other than interest, amount to $39,600, of which $8,000 is depreciation. These operating costs, excepting depreciation, are paid in cash in the month incurred. There are no variable selling or administrative costs. Manny has large tax loss carry forwards from a previous unsuccessful business venture. Therefore he does not expect to pay any income taxes this year. (In other words you may ignore income taxes).

The budgeted selling price of valves for October, November, and December is $22 per valve. Because of market competition there is not much flexibility to adjust the price and the price is expected to be stable during the 4th quarter of 2013. Manny budgeted sales in units for October at 18,000 units. For November he expects to sell 20,000 units but he is uncertain about sales for December and January. His high forecast for these two months is 22,000 units for December and 19,000 for January. His low forecast is 19,000 units for December and 16,000 units for January.

Manny requires a minimum cash balance of $10,000 at the end of each month. If the budgeted month end cash balance will fall below this level Manny plans to borrow enough cash at the beginning of that same month to keep his ending balance up to the minimum level. Manny’s bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny pays the interest at the beginning of the following month and plans to repay as much as he can at the beginning of that month without letting his budgeted cash balance go below $10,000 at month end. (On the budget round interest to the nearest dollar)

The company’s managerial accountant has resigned unexpectedly before the 4th quarter budget could be completed. You have been contracted to complete the master budget for December and the for the 4th quarter (including some missing numbers from November)

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REQUIREMENTS:

1) Construct Manny’s budgeted cost of goods sold and operating income statement for December and the total for the 4th quarter. October and November have already been provided. Complete the template provided below. Show any necessary calculations. You may use either the high forecast or the low forecast for this budget. Choose either the high or the low.(4 points)

2) Using the same forecast as in requirement 1 construct Manny’s budget for raw materials purchases in December and the total for the 4th quarter (You will also have to complete the budget for November) Complete the template provided which already has information for October and November. (3 points)

3) Using the same forecast as you used in requirement 1 construct Manny’s cash budgets for December and the total for the 4th quarter (You will also have to provide the missing number for November payments for purchases). Complete the templates provided below which already have information for October and November. Show any necessary calculations. Note: there are no capital expenditures or dividends budgeted for December. (4 points)

4) Using the same forecast as you used in requirement 1 construct Manny’s budgeted balance sheet at the end of December. Complete the template provided which already has the September 30 balances. (3 points)

5) During September Manny actually produced and sold 17,500 valves. Actual sales revenues were $381,950. Actual costs and the original budget based on 18,000 units were as detailed in the table below. Complete the table by constructing a flexible budget based on 17,500 valves and determining the variances for the performance report. Your performance report should be similar to the performance report shown in exhibit 10.13 of page 611 except your report includes more detailed production cost line items. Use the template provided below for your answer. (4 points)

6) Write a brief report explaining some possible reasons why Manny’s profits were different from the amount projected in the master budget for September (2 points).

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REQUIREMENT 1

Budgeted Income Statement

October November December 4th Quarter Raw Materials Used

$118,800 $132,000

Direct Labor

$ 45,000 $50,000

Variable Overhead

$106,200 $118,000

Fixed Overhead

$78,600 $78,600

Cost of Goods Sold

$348,600 $378,600

October November December 4th Quarter SALES REVENUES

$396,000 $440,000

LESS COST OF GOODS SOLD

$348,600 $378,600

GROSS PROFIT $ 47,400 $ 61,400

LESS OPERATING EXPENSES

$ 39,600 $ 39,600

OPERATING INCOME

$ 7,800 $21,800

COMPUTATION OF COST OF GOODS SOLD

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REQUIREMENT #2 BUDGETED PURCHASES OF TITANIUM ALLOY (direct material) October November December 4th Quarter Valves to be produced

18,000 20,000

X Pounds per unit

0.75 0.75

Titanium to be used

13,500 15,000

Desired ending inventory (16%)

2,400

Pounds of Titanium Needed

15,900

Less Beginning Inventory

2,160 2,400

Pounds to be purchased

13,740

Cost per pound $8.80 $8.80 Cost of Purchases

$120,912

REQUIREMENT #3

COMPUTATION OF CASH COLLECTIONS

October November December 4th Quarter Sales Made 2 Months Ago

$187,000 $190,975

Sales Made 1 Month Ago

$152,780 $158,400

Sales Made this Month

$39,600 $44,000

Total Cash Collections

$379,380 $393,375

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COMPUTATION OF CASH PAYMENTS FOR OPERATIONS

October November December 4th Quarter Payments for purchases of materials

$119,559

Payments for direct Labor

$45,000 $50,000

Payments for Variable Overhead

$106,200 $118,000

Payments for Fixed Overhead

$57,600 $57,600

Payments for Property Taxes and Insurance

$0 $0

Payments for other operating expenses

$31,600 $31,600

Total Cash Payments $359,959

October November December 4th Quarter

Beginning Balance of Cash

$10,641 $30,062

Cash Collections $379,380 $393,375 Total cash available

$390,021 $423,437

Less: Cash Payments

$359,959

Ending Cash Balance Before Financing:

$30,062

Borrowings

$0

Repayments

$0

Interest Payments

$0

End Cash Balance

$30,062

COMBINED CASH BUDGET

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REQUIREMENT #4 BUDGETED BALANCE SHEET

September 30 December 31 ASSETS: Current Assets

Cash $10,641

Accounts Receivable $530,755

Inventory (raw materials) $19,008

Prepaid Insurance and Property Taxes

$22,500

Total Current Assets $582,904

Equipment and Furniture

$950,000

Accumulated Depreciation

($540,000)

Equipment & Furniture (net) $410,000

Total Assets $992,904

LIABILITIES AND EQUITY Liabilities (all current) Accounts Payable $28,875

Interest Payable 0

Bank Loans Payable 0

Total Liabilities $28,875

Owner’s Equity (Net income increases this)

$964,029

Total Liabilities and Equity $992,904

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Actual Costs and Template for Requirement #5 Use this page to answer this requirement.

Performance Report for September Cost Item Actual results Flexible

Budget Variance

Flexible Budget for 17,500 units

Sales Volume Variance

Static Master Budget for 18,000 units

Sales Revenues $381,950

$396,000

Direct Materials used

$113,720 $118,800

Direct Labor $43,600 $ 45,000 Supplies $16,686 $ 10,800 Electric Power $36,454 $37,800 Indirect Labor $59,360 $57,600 Supervision and other salaries

$33,858 $35,000

Maintenance $8,925 $7,000 Insurance and property tax

$9,000 $9,000

Permits and license fees

$7,600 $7,600

Factory depreciation

$12,000 $12,000

Other Overhead expenses

$8,650 $8,000

Total Production Expenses

$349,853 $348,600

Total Selling & Administrative Expenses

$39,867 $39,600

Total Expenses $389,720 $388,200 Operating Income

($ 7,770) $7,800

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REQUIREMENT 6 (SPACE FOR REPORT)