Budgeting projects

PROJECT FACTS Manny Fold owns a factory that specializes in" rel="nofollow">in makin" rel="nofollow">ing titanium valves for high performance engin" rel="nofollow">ines on a just in" rel="nofollow">in time basis. Thus, Manny produces what he sells in" rel="nofollow">in a particular month. There are no in" rel="nofollow">inventories of fin" rel="nofollow">inished goods or work in" rel="nofollow">in process. However, Manny does require that an in" rel="nofollow">inventory of direct raw materials equal to 20% of next month’s production requirement be available at the end of each month. To build his busin" rel="nofollow">iness and gain" rel="nofollow">in new customers Manny has extended generous credit terms to his customers. While Manny is confident about the fundamentals of his busin" rel="nofollow">iness, he is concerned about the possible in" rel="nofollow">income and cash flow implications. The variable costs of producin" rel="nofollow">ing a valve are budgeted at $7.20 per valve for direct materials (3/4 pound of titanium alloy costin" rel="nofollow">ing $9.60 per pound), $2.80 per valve for direct labor, and $5.50 per valve for variable manufacturin" rel="nofollow">ing overhead. Fixed manufacturin" rel="nofollow">ing overhead is budgeted at $74,700 per month durin" rel="nofollow">ing the 2nd quarter. The detailed components of variable and fixed overhead are as listed below. For variable overhead, electric power is budgeted at $2.30 per unit, in" rel="nofollow">indirect labor is budgeted at $2.50 per unit, and supplies are budgeted at $.70 per unit. For fixed overhead depreciation is budgeted at $10,000 per month, Supervision and other factory salaries are budgeted at $40,000 per month, property tax and in" rel="nofollow">insurance combin" rel="nofollow">ined are budgeted at $8,000 per month (which have been paid in" rel="nofollow">in advance through June 15 – see below), main" rel="nofollow">intenance is budgeted at $7,000 per month, licensin" rel="nofollow">ing fees and permits to use proprietary technology are budgeted at $3,400 per month, and other miscellaneous fixed overhead expenses are budgeted at $6,300 per month. Manny’s customers drive a hard bargain" rel="nofollow">in because they can easily switch suppliers. They all do pay eventually, but many of them take their time about doin" rel="nofollow">ing so and Manny is reluctant to get tough with them for fear they will take their busin" rel="nofollow">iness elsewhere. He tells you that all his sales are on credit (no cash sales). He typically collects only 10% of sales in" rel="nofollow">in the month of the sale, 30% of sales in" rel="nofollow">in the month after the sale and 60% of sales two months later (for example 10% of June sales would be collected in" rel="nofollow">in June, 30% in" rel="nofollow">in July and 60% in" rel="nofollow">in August). On the other hand, he must pay for 70% of his materials purchases in" rel="nofollow">in the same month of the purchase and 30% in" rel="nofollow">in the month after. Cash costs of labor and overhead other than depreciation, property taxes and in" rel="nofollow">insurance are paid in" rel="nofollow">in the same month they are in" rel="nofollow">incurred. Property taxes and in" rel="nofollow">insurance are paid in" rel="nofollow">in advance through June 15. The amount due for the next 6 months (startin" rel="nofollow">ing June 16) must be paid in" rel="nofollow">in early June. All of the sellin" rel="nofollow">ing and admin" rel="nofollow">inistrative expenses are fixed. Monthly fixed sellin" rel="nofollow">ing and admin" rel="nofollow">inistrative costs, other than in" rel="nofollow">interest, amount to $43,600, of which $6,000 is depreciation. These operatin" rel="nofollow">ing costs, exceptin" rel="nofollow">ing depreciation, are paid in" rel="nofollow">in cash in" rel="nofollow">in the month in" rel="nofollow">incurred. Manny has large tax loss carry forwards from a previous unsuccessful busin" rel="nofollow">iness venture. Therefore, he does not expect to pay any in" rel="nofollow">income taxes this year. (In other words you may ignore in" rel="nofollow">income taxes). Manny plans to buy new equipment costin" rel="nofollow">ing $80,000 durin" rel="nofollow">ing the month of June. This equipment will be ready for use startin" rel="nofollow">ing in" rel="nofollow">in July. The budgeted sellin" rel="nofollow">ing price of valves for April, May, and June is $23 per valve. Because of market competition there is not much flexibility to adjust the price and the price is expected to be stable durin" rel="nofollow">ing the 2nd quarter. Manny budgeted sales in" rel="nofollow">in units for April at 17,000 units. For May he expects to sell only 18,500 units. He has projected sales of 20,000 units for June and 18,000 units for July. Manny requires a min" rel="nofollow">inimum 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 begin" rel="nofollow">innin" rel="nofollow">ing of that same month to keep his endin" rel="nofollow">ing balance up to the min" rel="nofollow">inimum level. Manny’s bank charges him in" rel="nofollow">interest at the rate of ½ % per month on the balance outstandin" rel="nofollow">ing durin" rel="nofollow">ing that month. Manny’s bank charges him in" rel="nofollow">interest at the rate of ½ % per month on the balance outstandin" rel="nofollow">ing durin" rel="nofollow">ing that month. Manny pays the in" rel="nofollow">interest at the begin" rel="nofollow">innin" rel="nofollow">ing of the followin" rel="nofollow">ing month and plans to repay as much as he can at the begin" rel="nofollow">innin" rel="nofollow">ing of that month without lettin" rel="nofollow">ing his budgeted cash balance go below $10,000 at month end. (On the budgeted in" rel="nofollow">income statement round in" rel="nofollow">interest expense to the nearest dollar) The company’s managerial accountant has resigned unexpectedly before the 2nd quarter budget could be completed. You have been contracted to complete the master budget for June and for the 2nd quarter (in" rel="nofollow">includin" rel="nofollow">ing some missin" rel="nofollow">ing numbers from May). Balances as of March 31 for all relevant accounts have already been calculated by this accountant together with some of the amounts for April and May. You may assume that these balances and amounts shown in" rel="nofollow">in the tables below are correct. REQUIREMENTS: (To Equal 24 project poin" rel="nofollow">ints) 1) Construct Manny’s budgeted in" rel="nofollow">income statement for June and the total for the 2nd quarter. April and May have already been provided. Complete the template provided below. Show any necessary calculations. (7 poin" rel="nofollow">ints) 2) Usin" rel="nofollow">ing the same forecast as in" rel="nofollow">in requirement 1 construct Manny’s budget for raw materials purchases in" rel="nofollow">in June and the total for the 2nd quarter (You will also have to complete the budget for May) Complete the template provided which already has in" rel="nofollow">information for April and May. (2 poin" rel="nofollow">ints) 3) Usin" rel="nofollow">ing the same forecast as you used in" rel="nofollow">in requirement 1 construct Manny’s cash budgets for June and the total for the 2nd quarter (You will also have to provide the missin" rel="nofollow">ing number for May payments for purchases). Complete the templates provided below which already have in" rel="nofollow">information for April and May. Show any necessary calculations. (3 poin" rel="nofollow">ints) 4) Usin" rel="nofollow">ing the same forecast as you used in" rel="nofollow">in requirement 1 construct Manny’s budgeted balance sheet at the end of June. Complete the template provided which already has the March 31 balances. (3 poin" rel="nofollow">ints) 5) Durin" rel="nofollow">ing March Manny actually produced and sold 16,500 valves. Actual sales revenues were $381,950. Actual costs and the origin" rel="nofollow">inal March budget based on 16,000 valves were as detailed in" rel="nofollow">in the table below. Complete the table by constructin" rel="nofollow">ing a flexible budget based on 16,500 valves and determin" rel="nofollow">inin" rel="nofollow">ing the variances for the performance report. Use the template provided below for your answer. (7 poin" rel="nofollow">ints) 6) Write a brief report explain" rel="nofollow">inin" rel="nofollow">ing some possible reasons why Manny’s profits were different from the amount projected in" rel="nofollow">in the master budget for March (2 poin" rel="nofollow">ints).