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ACTi 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. Product Sales for 2012 Screwdriver Saws Units SP Units January 52,000 98 42,000 February 53,000 98 42,000 March 55,000 98 40,000 April 60,000 100 40,000 May 64,000 100 41,000 June 64,000 102 42,000 July 64,000 102 40,000 August 63,000 102 39,000 September 61,000 100 40,000 October 60,000 100 37,000 November 65,000 100 38,000 December 59,000 100 39,000 SP 118 120 122 125 125 130 130 130 125 125 125 125 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 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 Screwdrivers Units Unit cost 5 lbs 8.00 3 lbs 5.00 1 unit 3.00 Direct materials Metal Plastic Handles Direct labor Variable manufacturing OH Total 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. Inventories Screwdrivers, finished Saws, finished Metal Plastic Handles Beginning 20,000 8,000 320,000 29,000 6,000 Ending 25,000 10,000 36,000 32,000 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. 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 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 case 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 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. (Source and citation are available upon request to faculty only). MBAi 6691 Student: Date Scored Case Grading Rubric Criteria for Case Meets Expectations Analysis addresses all aspects of case in sufficient depth. Partially Meets Expectations Analysis addresses most aspects of case in sufficient depth. Fails to Meet Comments/Score Expectations Analysis does not address most aspects of case and/or fails to do so in sufficient depth. Content Solution (worth 40% of the case grade) Described solution demonstrates an understanding and correct use of problem solving skills Described solution demonstrates a sufficient level of problem solving abilities but fails to address correctly as aspects of the case. Described solution does not demonstrate an acceptable level of problem solving abilities and the ability to use case information correctly. Presentation Style (worth 20% of the case grade) No significant Errors in The presentation errors in presentation was limited, presentation style, compliance demonstrated a style, with case minimal effort to consistent requirements, meet case with case and normal requirements requirements business and present your and consistent standards solution in an with business acceptable standards business style. Content Analysis (worth 40% of the case grade) Late Submission 10% per day regardless of the reason for the late submission. Total Points Harvey’s Budget Case Financial/Managerial Accounting for International Executive Case 1. Sales Budget Sales Budget for The Year Ending December 31,2013 Units Selling price Revenues per Month Total Revenues Screwdriver 60,000 $100 $6,000,000 $72,000,000 Saws 40,000 $125 $5,000,000 $60,000,000 Total $132,000,000 A sales budget is the usual starting point for the operating budget, because the sales budget helps businesses predict the amount they will earn when they sell their products and services. Mr. Lipscomb believes the annual sales should be budgeted at 64,000 per month for screwdrivers and 42,000 per month for saws, and the budgeted selling price per unit should be equal to the highest selling price (102 per unit for screwdrivers and 130 per unit for saws) that could be achieved in 2012. I do not agree with this budget recommendation. I use the average sales and average unit price for determining the future operations, for the company did not have the enough confident and information for predicting the accurate growth rate of sales for the next year. Besides, the sales units and sales price for both Screwdriver and Saws are vary each month. The reason for the Sales and selling prices fluctuating is the market demand is different for each month. There are more construction works or tools needed for summer than the demand in winter. If the sales 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 1 Harvey’s Budget Case annual forecast, the budget will overestimate the amount and related price. The sales budget cannot describe the future amount the company will earn accurately. Therefore, using the average units of sales (60,000 units of screwdrivers and 40,000 units of saws) and unit price (100 per unit for screwdrivers and 125 per unit for saws) for every month is the best estimation for the sales budget. 2. Production Budget Production Budget(in Units) for the Year Ending December 31,2013 Product Screwdrivers Saws Budgeted Unit Sales 720,000 480,000 Target Ending Finished Goods Inventory 25,000 10,000 Total Required Units 745,000 490,000 Beginning Finished Goods Inventory 20,000 8,000 Units of Finished Goods to be Produced 725,000 410,000 3. Purchases Budget Schedule A:Direct Material Usage Budget in Quantity and Dollars for the Year Ending December 31,2013 Material Metal Plastic Handles Physical units Budget Direct Materials required for Screwdrivers(725,000 units) 3,625,000 lbs 2,175,000 lbs Direct materials required for Saws(410,000 units) 1,640,000 lbs 1,230,000 lbs Total quantity of direct materials to be used 5,265,000 lbs 3,405,000 lbs 725,000 lbs 725,000 lbs Cost Budget Available from beginning direct material inventory Metal: 320,000 lbs $2,560,000 Plastic: 29,000 lbs $145,000 Handles: 6,000 lbs $18,000 To be Purchased this period Metal: (5,265,000-320,000) lbs $39,560,000 2 Total Harvey’s Budget Case Plastic: (3,405,000-29,000) lbs $16,880,000 Handles: (725,000-6,000) lbs $2,157,000 Direct Materials to be used this period $42,120,000 $17,025,000 $2,175,000 $61,320,000 The number of units to be produced is the key to computing the usage of direct materials in quantities and in dollars. Because the Purchases of Direct materials equals to direct materials used in production plus Target ending inventory of direct materials minus beginning inventory of direct materials, we need to figure out the Direct Materials to be used this period. According to the sales budget we made before, we know there are 725,000 units of Screwdrivers and 410,000 units of Saws to be produced in 2013. For the production of each unit, the company needs the direct materials as below: Then we can calculate the quantity of each type of direct materials to be used. For the production of 2013, the company needs 5,265,000 lbs of metals, 3,405,000 lbs of plastic and 725,000 lbs of handles. Because there are beginning direct materials inventory exist, subtract the inventory from the total quantity of direct materials to be used to get the amount of materials to be used during 2013. Of course, we also can calculate the dollar values of these materials for a later use. Schedule B: Direct Material Purchases Budget for the Year Ending December 31,2013 Material Metal Plastic Handles Physical Units Budget To be used in production Target ending inventory 5,265,000 lbs 3,405,000 lbs 725,000 lbs 36,000 lbs 32,000 lbs 7,000 lbs 3 Total Harvey’s Budget Case Total requirements Beginning inventory Purchases to be made 5,301,000 lbs 3,437,000 lbs 732,000 lbs 320,000 lbs 29,000 lbs 6,000 lbs 4,981,000 lbs 3,408,000 lbs 726,000 lbs Cost Budget Metal: 4,981,000 lbs $39,848,000 Plastic: 3,408,000 lbs $17,040,000 Handles: 726,000 lbs Purchases $2,178,000 $39,848,000 $17,040,000 $2,178,000 $59,066,000 After we get the budget for how many materials will be used in production, we know there are 5,265,000 lbs of metal, 3,405,000 lbs of plastic and 725,000 lbs of handles to be used. Add the target ending inventory to find out the total requirement for direct materials. The total materials requirements for metal are 5,301,000 lbs, for plastic are 3,437,000 lbs and for handles are 732,000 lbs. At last, deduct the beginning materials inventory to get how many direct materials the company need purchase. The company needs purchase 4,981,000 lbs of metal, 3,408,000 lbs of plastic and 726,000 lbs of handles to meet the production need for 2013. We already know each unit of metal, plastic and handle costs $8, $5 and $3.According to this budget, we can figure out how much many the company need to pay for purchasing these direct materials. The total budget for direct materials purchasing is $59,066,000. 4. Budgeted Income Statement. Harvey Manufacturing Budgeted Income Statement For the Year Ending December 31,2013 Revenues $132,000,000 Cost of goods sold $102,010,000 Gross margin $29,990,000 Operating Cost Selling and administrative $1,360,000 Net Income $1,360,000 $28,630,000 4 Harvey’s Budget Case For the budgeted income statement, we already know the budgeted revenue is $132,000,000, and the $1,360,000 of Selling and administrative expenses is given, what we need to figure out is the Cost of Goods Sold. So I prepared the Cost of Goods Sold Budget for 2013 as below: Cost of Goods Sold Budget for the Year Ending December 31,2013 Schedule Beginning Finished goods inventory, January 1,2013 Direct materials used Direct manufacturing labor Total Given $2,496,000 A $61,320,000 Given $37,080,000 Manufacturing overhead Variable Given $4,020,000 Fixed Given $214,000 $4,234,000 Cost of goods manufactured $102,634,000 Cost of goods available for sale $105,130,000 Deduct Ending Finished Goods Inventory, December 31,2013 Given Cost of Goods Sold $3,120,000 $102,010,000 The Cost of Goods Sold equals to the Beginning Finished goods inventory plus direct materials used and direct manufacturing labor and manufacturing overhead, then deduct the Ending Finished Goods Inventory. The $2,496,000 of Beginning Finished goods inventory, $37,080,000 of direct manufacturing labor, $4,234,000 of manufacturing overhead, and $3,120,000 of Ending Finished Goods Inventory are already given. Besides; we can get that $61,320,000 of direct materials will be used during production from the Budget Schedule A. Use the formula I mentioned; we can calculate the amount of Cost of Goods Sold is $102,010,000. Subtract the cost of goods sold and operation cost, we can get $28,630,000 of budgeted net income. 5. Contribution Margin Income Statement 5 Harvey’s Budget Case Harvey Manufacturing Budgeted Contribution Margin Income Statement For the Year Ending December 31,2013 Revenues $132,000,000 Variable production Expenses Direct materials $61,320,000 Direct labors $37,080,000 Variable manufacturing overhead $4,020,000 $102,420,000 Variable Selling and Administrative Expenses $0 Contribution Margin $29,580,000 Fixed Expenses $950,000 Net Income $28,630,000 6. Cash Budget Harvey Manufacturing Cash Budget For the Year Ending December 31,2013 Quarters 1 Cash balance, Beginning 2 3 4 Year as a Whole $1,800,000 $(2,688,750) $5,122,500 $12,933,750 $1,800,000 $4,200,000 $16,500,000 $16,500,000 $16,500,000 From current period $16,500,000 $16,500,000 $16,500,000 $16,500,000 $119700000 Total Cash available for needs $22,500,000 $30,311,250 $38,122,500 $45,933,750 $121500000 $14,649,250 $14,649,250 $14,649,250 $14,649,250 $58,597,000 Payroll $9,270,000 $9,270,000 $9,270,000 $9,270,000 $37,080,000 Manufacturing overhead $1,019,500 $1,019,500 $1,019,500 $1,019,500 $4,078,000 Nonmanufacturing Cost $250,000 $250,000 $250,000 $250,000 $1,000,000 Cash excess(deficiency) $(2,688,750) $5,122,500 $12,933,750 $20,745,000 $20,745,000 Cash balance End $(2,688,750) $5,122,500 $12,933,750 $20,745,000 $20,745,000 Collections From Customers From last period Deduct Disbursement Direct materials The cash budget is the schedule of expected cash receipts and disbursements. It 6 Harvey’s Budget Case predicts the effects on the cash position at the given level of operations. I prepared the cash budget by quarters to show the impact of cash flow. First we need to know how much money the company will get each quarter. According to the Sales budget and the information that sales are collected 50 percent in the current period and the remainder in the next period and there are no bad debts, we calculate out the cash inflow for each quarter. The amount of first quarter is a little bit different, because the sales for last quarter were $8,400,000. We only can collect $4,200,000 from last year during the first quarter. According to the Purchases Budget, the company need spend $39,560,000 to purchase metals, $16,880,000 to buy plastic and $2,157,000 to get handles. Therefor we can conclude that the company needs $14,649,250 for purchasing materials. Through viewing the production Budget, we can get there are 725,000 units of Screwdrivers and 410,000 units of Saws will be produced. The average labor cost is $24 for Screwdriver and $48 for Saw. The each unit cost of manufacturing OH is $3 for Screwdriver and $4.5 for Saw. The total fixed manufacturing overhead is $214,000, including $156,000 of non-cash expenditures. So we exclude this non-cash expenditure from the cash budget. Then we can get that company need pay salary for the labor $9,270,000 each quarter and pay $1,019,500 for the manufacturing overhead expenditure. The Selling and administrative expenses are all fixed and are paid in the quarter incurred. Estimated selling and administrative expenses for the next period are 7 Harvey’s Budget Case $340,000 per quarter, including $90,000 of depreciation. Just deduct the depreciation expense from nonmanufacturing cost, we can calculate out the company need pay $250,000 each quarter for nonmanufacturing cost. At last, subtract all of the cash disbursements from the cash available to get the cash balance for each quarter. 7. Capital Expenditure Budget Harvey Manufacturing Capital Expenditure Budget Quarter 1 Total Financing Borrowing(at beginning) $2,688,750 $2,688,750 Budgeting for capital expenditures involves setting aside or saving money for a purchase or electing to add debt to your balance sheet for the purchase of the capital asset. According to the cash budget, the company does not have enough cash for supporting its first quarter operations. So the company need borrow the money to prepare for its deficit. During the first quarter, there will be $2,688,750 of cash deficiency. The company need budget to borrow $2,688,750 at the beginning of the 2013 to mitigate this cash shortage. Of course, this will increases the debt and cause a problem for future borrowing ability. 8
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