ACT 6691
Managerial Accounting
Case Information for Project and Presentation
In this case a full set of budgets will be prepared and presented in appropriate format. Reports will be prepared
to state your assumptions and explain how budget numbers were determined. The following are general
requirements for this budget case. Specific requirements are listed after the relevant case data.
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Read the case, state your assumptions, and analyze the information.
Prepare an operating budget in standard “income statement” format.
Prepare a narrative report, including your statements of assumptions (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 the demonstration of 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 included in this Module will be used to grade the Project.)
Harvey’s Budget1
Harvey Manufacturing manufactures and sells two industrial products: a self-balancing screw driver and a selfbalancing saw. Both products are manufactured in a single plant.
Harvey’s general manager, Mr. Lipscomb, and president, Mr. Owens, want a budget prepared for each quarter
of the fiscal year 2018. 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 in units and selling price (SP) in dollars per unit
Historical sales for 2017 for each of the two products are shown below. (There is a typo in the budget, 2012.
Please replace with 2017.)
January
February
March
April
May
June
July
August
September
October
November
December
Product Sales for 2012
Screwdriver
Saws
Units
SP
Units
SP
20,100
98
13,500
118
20,000
98
13,000
120
19,900
98
13,500
122
19,000
100
12,000
125
21,500
100
13,000
125
22,000
102
14,000
130
22,000
102
15,000
130
20,000
102
14,500
130
19,500
100
13,500
125
19,000
100
13,000
125
19,000
100
12,500
125
18,000
100
12,500
125
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 22,000 units per month for screwdrivers and 15,000 units 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 2017. 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 2017 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. The company
applies variable overhead on the basis of direct labor hours.
Standard costs per unit
Direct materials
Metal
Plastic
Handles
Direct labor
Variable manufacturing OH
Total
Screwdrivers
Units
Unit cost
5
lbs
8.00
3
lbs
5.00
1
unit
3.00
2
2
hrs
hrs
12.00
1.50
Cost
40.00
15.00
3.00
58.00
Units
4
3
24.00
3.00
85.00
3
3
lbs
lbs
Saws
Unit cost
8.00
5.00
Cost
32.00
15.00
47.00
hrs
hrs
16.00
1.50
48.00
4.50
99.50
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 in the following quarter.
Inventories
Screwdrivers, finished
Saws, finished
Metal
Plastic
Handles
First Quarter
Beginning Ending
20,000
25,000
8,000
10,000
32,000
36,000
29,000
32,000
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:
FOR THE FIRST QUARTER OF 2018:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Prepare a sales budget in good form.
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.
Prepare a production budget in units.
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.
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.
Prepare a manufacturing cost budget. Optional: Prepare a budgeted income statement.
Prepare a contribution margin income statement.
Prepare a narrative report explaining how the expenses on the income statement were determined.
Prepare a cash budget. Be sure that you show all cash inflows and outflows.
Prepare a narrative report explaining your cash budget process.
If necessary, prepare a capital expenditure budget. Explain your entries. Use only the facts in this case
to prepare the budget.
Summary:
Your finished Project will consist of six or seven budgets (a sales budget, a production budget in units, a
purchases budget, a budgeted income statement, a contribution margin income statement, a cash budget, and,
if necessary, a capital expenditure budget.)
You will also have your statement of assumptions along with four or five narrative reports (a sales budget
report, a purchases budget report, an income statement report, a cash budget report, and an explanation of
your capital budget, if necessary).
Narrative reports are reports that are in the form or a white paper that clearly explains the numeric entries on
your budgets. The length of the narrative reports will depend on the particular report. In general, you should
be able to prepare the sales budget report on one or two pages, the purchases budget report on one or two
pages, the income statement report on one page, and the cash budget report on one page. In this case, the
capital budget report would be less than one page. You should not worry if one of your reports is more or less
than the recommendation given here—just be sure you cover all of the important points and satisfactorily
explain the numeric entries in your budget. Also, be sure you explain the process of “how” your numbers were
determined. In this regard, it is not necessary or desirable to explain the exact calculations. Consider your
audience and prepare a report that would be suitable for executives making plans and decisions for the
upcoming year.
1
Harvey’s budget is adapted from a published case.
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