PROJECT FACTS Manny Fold owns a factory that specializes in making titanium valv

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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 20% 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 $7.20 per valve for direct materials (3/4 pound of titanium alloy costing $9.60 per pound), $2.80 per valve for direct labor, and $5.50 per valve for variable manufacturing overhead. Fixed manufacturing overhead is budgeted at $74,700 per month during 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, 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 insurance combined are budgeted at $8,000 per month (which have been paid in advance through June 15 – see below), maintenance is budgeted at $7,000 per month, licensing 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 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, 30% of sales in the month after the sale and 60% of sales two months later (for example 10% of June sales would be collected in June, 30% in July and 60% in August). On the other hand he must pay for 70% of his materials purchases in the same month of the purchase and 30% 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 in advance through June 15. The amount due for the next 6 months (starting June 16) must be paid in early June.

All of the selling and administrative expenses are fixed. Monthly fixed selling and administrative costs, other than interest, amount to $43,600, of which $6,000 is depreciation. These operating costs, excepting depreciation, are paid in cash in the month incurred. 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).

Manny plans to buy new equipment costing $80,000 during the month of June. This equipment will be ready for use starting in July.

The budgeted selling 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 during the 2nd quarter of 2014. Manny budgeted sales in units for April at 17,000 units. For May he expects to sell only 18,000 units. He has projected sales of 19,000 units for June and 18,000 units for July.

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’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 budgeted income statement round 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 (including some missing 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 the tables below are correct.

REQUIREMENTS: (To Equal 36 project points)

1)Construct Manny’s budgeted for June and the total for the 2ndquarter.AprilandMayhavealreadybeen provided. the providedbelow. Show any calculations. points)

2)Using the forecast as in 1constructbudgetforrawpurchases inJune and total for 2nd quarter(YouwillalsotothebudgetforMay)thetemplateprovided which already has forApril and May. (4 points)

3)Usingthe forecastasyouusedin1Manny’scashbudgetsfor June and the for the 2nd quarter(Youwillalsohavetoprovide for May for purchases).thetemplatesprovidedbelowwhich already have for April

4)Using the forecast as you used in1Manny’sbudgetedbalancesheetattheendofJune.Complete theprovidedwhichalreadyhastheMarch31balances.(5 points)

5)DuringMarchMannyactuallyproducedandsold 16,500 valves. Actual sales revenues were$381,950.Actualcostsandthe March budget based on 16,000 valveswereasinthebelow. table by a budget based on 16,500 valves and the variances for the report.Usetheprovided

6)abriefreportexplaining possiblereasonswhyManny’sprofitsweredifferentfromthe amount projected in the budgetforMarch(2points).

REQUIREMENT 1

Budgeted Income Statement

April

May

June

2nd Quarter

SALES REVENUES

$391,000

$414,000

DIRECT MATERIALS USED

($122,400)

($129,600)

DIRECT LABOR

($47,600)

($50,400)

VARIABLE OVERHEAD

($93,500)

($99,000)

CONTRIBUTION MARGIN

$127,500

FIXED OVERHEAD

($74,700)

FIXED OPERATING EXPENSES

($43,600)

OPERATING INCOME

$ 9,200

INTEREST EXPENSE

NET INCOME

$9,200

REQUIREMENT #2 BUDGETED PURCHASES OF TITANIUM ALLOY (direct material)

April

May

June

2nd Quarter

Valves to be produced

17,000

18,000

X Pounds per unit

0.75

Titanium to be used

12,750

13,500

Desired ending inventory (20%)

2,700

Pounds of Titanium Needed

15,450

Less Beginning Inventory

2,550

2,700

Pounds to be purchased

12,900

Cost per pound

$9.60

Cost of Purchases

$123,840

REQUIREMENT #3

COMPUTATION OF CASH COLLECTIONS (Use this to calculate March & Feb sales)

April

May

June

2nd Quarter

Sales Made 2 Months Ago

$213,900

$220,800

Sales Made 1 Month Ago

$110,400

$117,300

Sales Made this Month

$39,100

$41,400

Total Cash Collections

$363,400

$379,500

COMPUTATION OF CASH PAYMENTS

April

May

June

2nd Quarter

Payments for purchases of materials

$121,680 (used to calculate March purchases)

Payments for direct Labor

$47,600

$50,400

Payments for Variable Overhead

$93,500

$99,000

Payments for Fixed Overhead

$56,700

Payments for Property Taxes and Insurance

Payments for other operating expenses

$37,600

Capital Expenditures

Total Cash Payments

$357,080

April

May

June

2nd Quarter

Beginning Balance of Cash

$10,324

$16,644

Cash Collections

$363,400

$379,500

Total cash available

$373,724

$396,144

Less: Cash Payments

$357,080

Ending Cash Balance Before Financing:

$16,644

Borrowings

Repayments

Interest Payments

End Cash Balance

$16,644

REQUIREMENT #4: BUDGETED BALANCE SHEET FOR JUNE 30

March 31

June 30

ASSETS:

Current Assets

Cash

$10,324

Accounts Receivable

$545,100

Inventory (raw materials)

$24,480

Prepaid Insurance and Property Taxes

$20,000

Total Current Assets

$599,904

Equipment and Furniture

$880,000

Accumulated Depreciation

($540,000)

Equipment & Furniture (net)

$340,000

Total Assets

$939,904

LIABILITIES AND EQUITY

Liabilities (all current)

Accounts Payable

$34,992

Interest Payable

Bank Loans Payable

Total Liabilities

$34,992

Owner’s Equity

(Net income increases this)

$904,912

Total Liabilities and Equity

$939,904

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

Performance Report for March

Cost Item

Actual results

Flexible Budget Variance

Flexible Budget for 16,500 units

Sales Volume Variance

Static Master Budget for 16,000 units

Sales Revenues

$381,950

$368,000

Direct Materials used

$118,720

$115,200

Direct Labor

$45,600

$44,800

Electric Power

$38,454

$36,800

Indirect Labor

$49,360

$40,000

Supplies

$16,686

$11,200

Supervision and other salaries

$37,858

$40,000

Maintenance

$8,925

$7,000

Insurance and property tax

$8,000

Permits and license fees

$3,400

Factory depreciation

$10,000

Other Overhead expenses

$8,650

$6,300

Total Production Expenses

$322,700

Total Selling & Administrative Expenses

$39,867

$43,600

Total Expenses

$366,300

Operating Income

$ 1,700

REQUIREMENT 6 (SPACE FOR REPORT)

April

May

June

2nd Quarter

SALES REVENUES

$391,000

$414,000

DIRECT MATERIALS USED

($122,400)

($129,600)

DIRECT LABOR

($47,600)

($50,400)

VARIABLE OVERHEAD

($93,500)

($99,000)

CONTRIBUTION MARGIN

$127,500

FIXED OVERHEAD

($74,700)

FIXED OPERATING EXPENSES

($43,600)

OPERATING INCOME

$ 9,200

INTEREST EXPENSE

NET INCOME

$9,200

Explanation / Answer

REQUIREMENT 1

Budgeted Income Statement

April

May

June

2nd Quarter

SALES REVENUES

$391,000

$414,000

437,000

$1,242,000

DIRECT MATERIALS USED

($122,400)

($129,600)

(136,800)

$(388,800)

DIRECT LABOR

($47,600)

($50,400)

(53,200)

($151,200)

VARIABLE OVERHEAD

($93,500)

($99,000)

(104,500)

($297,000)

CONTRIBUTION MARGIN

$127,500

135,000

142,500

$405,000

FIXED OVERHEAD

($74,700)

(74,700)

(224,100)

FIXED OPERATING EXPENSES

($43,600)

(43,600)

(130,800)

OPERATING INCOME

$ 9,200

$16,700

$24,200

50,100

INTEREST EXPENSE

$(490)

(490)

NET INCOME

$9,200

$16,700

$23,710

49,610

Sales = 19,000 *23

Direct materials 19,000 *7.20

Direct labor 19,000* 2.80

Variable overhead 19,000* 5.5

REQUIREMENT #2 BUDGETED PURCHASES OF TITANIUM ALLOY (direct material)

April

May

June

2nd Quarter

Valves to be produced

17,000

18,000

19,000

54,000

X Pounds per unit

0.75

.75

Titanium to be used

12,750

13,500

14,250

40,500

Desired ending inventory (20%)

2,700

2,850

2,700

Pounds of Titanium Needed

15,450

16,350

16,950

43,200

Less Beginning Inventory

2,550

2,700

2,850

2,550

Pounds to be purchased

12,900

13,650

14,100

40,650

Cost per pound

$9.60

Cost of Purchases

$123,840

$131,040

$135,360

$390,240

Ending inventory = 18,000 july units* .75 = 13,500 @20% = $2,700

REQUIREMENT #3

COMPUTATION OF CASH COLLECTIONS (Use this to calculate March & Feb sales)

April

May

June

2nd Quarter

Sales Made 2 Months Ago

$213,900

$220,800

$234,600

$669,300

Sales Made 1 Month Ago

$110,400

$117,300

$124,200

$351,900

Sales Made this Month

$39,100

$41,400

$43,700

$124,200

Total Cash Collections

$363,400

$379,500

$402,500

$1,145,400

April 391,000 @60% - 234,600

May 414,000 @30% = 124,200 May 414,000 @60% = 248,400

June 437,000 @ 10% = 43,700 June 437,000 @90% = 393,300

Total cash collection = 402,500 Account receivable = 641,700 for June

Accounts payable for June

135,360 @30% = $40,608

Raw materials 2700 @$9.60 = $25,920

Prepaid insurance 15 June to Dec 15 = 8,000 *6 = $48,000

Out of this 4,000 will be charged in June hence balance in prepaid insurance = $44,000

Interest payable 98,000 @.5% = $490 to be paid in July

Depreciation = (10,000 + 6,000)*3 = $48,000

Accumulated depreciation = 540,000 +48,000 = $588,000

Total cost of Equipment = 880,000 + 80,000 = $960,000

COMPUTATION OF CASH PAYMENTS

April

May

June

2nd Quarter

Payments for purchases of materials

$121,680 (used to calculate March purchases)

128,880

134,064

$384,624

Payments for direct Labor

$47,600

$50,400

53,200

$151,200

Payments for Variable Overhead

$93,500

$99,000

104,500

$297,000

Payments for Fixed Overhead

$56,700

56,700

$170,100

Payments for Property Taxes and Insurance

48,000

$48,000

Payments for other operating expenses

$37,600

37,600

$112,800

Capital Expenditures

80,000

Total Cash Payments

$357,080

$372,580

$514,064

$1,243,724

April

May

June

2nd Quarter

Beginning Balance of Cash

$10,324

$16,644

$23,564

$10,324

Cash Collections

$363,400

$379,500

402,500

$1,145,400

Total cash available

$373,724

$396,144

426,064

$1,155,724

Less: Cash Payments

$357,080

372,580

514,064

$1,243,724

Ending Cash Balance Before Financing:

$16,644

$23,564

(88,000)

Borrowings

98,000

Repayments

Interest Payments

End Cash Balance

$16,644

$23,564

10,000

REQUIREMENT #4: BUDGETED BALANCE SHEET FOR JUNE 30

March 31

June 30

ASSETS:

Current Assets

Cash

$10,324

10,000

Accounts Receivable

$545,100

641,700

Inventory (raw materials)

$24,480

$25,920

Prepaid Insurance and Property Taxes

$20,000

$44,000

Total Current Assets

$599,904

721,620

Equipment and Furniture

$880,000

960,000

Accumulated Depreciation

($540,000)

588,000

Equipment & Furniture (net)

$340,000

372,000

Total Assets

$939,904

1,093,620

LIABILITIES AND EQUITY

Liabilities (all current)

Accounts Payable

$34,992

$40,608

Interest Payable

490

Bank Loans Payable

98,000

Total Liabilities

$34,992

139,098

Owner’s Equity

(Net income increases this)

$904,912

954,522

Total Liabilities and Equity

$939,904

$1,093,620

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

Performance Report for March

Cost Item

Actual results

Flexible Budget Variance

Flexible Budget for 16,500 units

Sales Volume Variance

Static Master Budget for 16,000 units

Sales Revenues

$381,950

$2,450(F)

$379,500

11,500 (F)

$368,000

Direct Materials used

$118,720

$80(F)

$118,800

3,600(U)

$115,200

Direct Labor

$45,600

600 (F)

$46,200

1,400(U)

$44,800

Electric Power

$38,454

504(U)

37,950

1,150(U)

$36,800

Indirect Labor

$49,360

8,110(U)

$41,250

1,250(U)

$40,000

Supplies

$16,686

5,136(U)

$11,550

350(U)

$11,200

Supervision and other salaries

$37,858

2,142(F)

$40,000

Maintenance

$8,925

1,925(U)

$7,000

Insurance and property tax

$8,000

Permits and license fees

$3,400

Factory depreciation

$10,000

Other Overhead expenses

$8,650

2,350(U)

$6,300

Total Production Expenses

?$345,653

15,203U)

$330,450

7,750(U)

$322,700

Total Selling & Administrative Expenses

$39,867

$3,733(F)

$43,600

Total Expenses

?$385,520

11,470(U)

$374,050

7,750(U)

$366,300

Operating Income

?(3,570)

$9,020(U)

$5,450

$3,750(F)

$ 1,700

REQUIREMENT 6 (SPACE FOR REPORT)

A Master budget is based on management’s estimate of the level of production and sales for the coming period .This we see is one possible reason of difference in sales volume. Master budget is based on a single level of activity which causes the difference in profit.

Secondly with the change in sales volume the variable costs also vary .Thus variable costs varies with change in activity level which is another cause of change in profit for March.

Also other budgets like production , raw materials , direct labor and overhead budgets depend directly or indirectly on sales budget.Thus change in level of activity in sale units will affect other budgets as well and hence change in profit.

Similarly selling and administrative expense budget which outlines expenditure for selling and distribution activities is

April

May

June

2nd Quarter

SALES REVENUES

$391,000

$414,000

437,000

$1,242,000

DIRECT MATERIALS USED

($122,400)

($129,600)

(136,800)

$(388,800)

DIRECT LABOR

($47,600)

($50,400)

(53,200)

($151,200)

VARIABLE OVERHEAD

($93,500)

($99,000)

(104,500)

($297,000)

CONTRIBUTION MARGIN

$127,500

135,000

142,500

$405,000

FIXED OVERHEAD

($74,700)

(74,700)

(224,100)

FIXED OPERATING EXPENSES

($43,600)

(43,600)

(130,800)

OPERATING INCOME

$ 9,200

$16,700

$24,200

50,100

INTEREST EXPENSE

$(490)

(490)

NET INCOME

$9,200

$16,700

$23,710

49,610

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PROJECT FACTS Manny Fold owns a factory that specializes in making titanium valv

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