PROJECT FACTS Manny Fold owns a factory that specializes in making titanium valv
ID: 2474695 • Letter: P
Question
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 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. (10 points)
2) Using the same forecast as in requirement 1 construct Manny’s budget for raw materials purchases 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 information for April and May. (4 points)
3) Using the same forecast as you used in requirement 1 construct Manny’s cash budgets for June and the total for the 2nd quarter (You will also have to provide the missing number for May payments for purchases). Complete the templates provided below which already have information for April and May. Show any necessary calculations. (5 points)
4) Using the same forecast as you used 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. (5 points)
5) During March Manny actually produced and sold 16,500 valves. Actual sales revenues were $381,950. Actual costs and the original March budget based on 16,000 valves were as detailed in the table below. Complete the table by constructing a flexible budget based on 16,500 valves and determining the variances for the performance report. Use the template provided below for your answer. (10 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 March (2 points).
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)
($74,700)
FIXED OPERATING EXPENSES
($43,600)
($43,600)
OPERATING INCOME
$ 9,200
INTEREST EXPENSE
$0
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
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
$56,700
Payments for Property Taxes and Insurance
$0
$0
Payments for other operating expenses
$37,600
$37,600
Capital Expenditures
$0
$0
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
$0
Repayments
$0
Interest Payments
$0
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
0
Bank Loans Payable
0
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
$8,000
Permits and license fees
$3,400
$3,400
Factory depreciation
$10,000
$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)
($74,700)
FIXED OPERATING EXPENSES
($43,600)
($43,600)
OPERATING INCOME
$ 9,200
INTEREST EXPENSE
$0
NET INCOME
$9,200
Explanation / Answer
April May June 2nd Quarter No.of units 19000 Sales Rev 391000 414000 437000 1242000 Direct Materials Used -122400 -129600 -136800 -388800 Direct Labor -47600 -50400 -53200 -151200 Variable OH -93500 -99000 -104500 -297000 Contribution Margin 127500 135000 142500 405000 Fixed OH -74700 -74700 -74700 -224100 Fixed operating expenses -43600 -43600 -43600 -130800 Operating Income 9200 16700 24200 50100 Interest Expense 0 520 520 Net Income 9200 16700 23680 49580 budgeted purchases of titanium alloy April May june 2nd quarter July Valves to produced 17000 18000 19000 54000 18000 X punds per unit 0.75 0.75 0.75 titanium to be used 12750 13500 14250 40500 desired ending inventory (20%) 2700 2850 3600 3600 lbs of titanium needed 15450 16350 17850 44100 less: beginning inventory 2550 2700 2850 2550 lbs to be purchased 12900 13650 15000 41550 cost per lbs 9.6 9.6 9.6 9.6 cost of purchases 123840 131040 144000 398880 computation of cash collections P April May june 2nd quarter sales made 2 months ago 60% June= April*60% 213900 220800 234600 669300 sales made 1 month ago 30% June=May*.3 110400 117300 124200 351900 sales made this month 10% June 39100 41400 43700 124200 total cash collections 363400 379500 402500 1145400 Computation of cash payments April may june 2nd quarter payments for purchases of materials Same month 70% of P 91728 100800 Next month 30% P 37152 39312 payments for purchases of materials 121680 128880 140112 390672 payments for direct labor 47600 50400 53200 151200 payments of variable OH 93500 99000 104500 297000 payments of fixed OH 56700 56700 56700 170100 8000*6 payments of property taxes & insurance 0 0 48000 48000 payments for other op expenses 37600 37600 37600 112800 capital expenditures 0 0 80000 80000 total cash payments 357080 372580 520112 1249772 combinded cash budget april may june 2nd quarter beginning balance 10324 16644 23564 10324 cash collections 363400 379500 402500 1145400 total cash available 373724 396144 426064 1195932 less: cash payments 357080 372580 520112 1249772 ending cash balance before financing 16644 23564 -94048 -94048 borrowings 0 104048 104048 repayments 0 interest payments 0 end cash nalance 16644 23564 10000 10000 budgeted balance sheet for june 30 42460 42460 42551 42551 Assets: Cash 10324 10000 accts receivable 545100 641700 (437000*90%)+(414000*60%) inventory 24480 34560 2850*9.6 prepaid insurance 20000 44000 48000-4000(16 June to 30 June) total current assets 599904 730260 equipment & furniture 880000 960000 accumulated depreciation -540000 -588000 net equipment & furn 340000 372000 Total Assets 939904 1102260 Liabilites & equity Current Liabilities accts pay 34992 43200 interest pay 0 520 bank loans pay 0 104048 total liabilities 34992 147768 owners equity 904912 954492 total liab & equity 939904 1102260 Dear student there are various sub parts I have answered first 4. performance report for march cost item actual results A flex budget varianceA-F Variance flex budget for 16,500 F sales volume variance F-M static master budget for 16,000 units M sales rev 381950 2450 F 379500 11500 F 368000 direcr materials used 118720 -80 F 118800 3600 U 115200 direct labor 45600 -600 F 46200 1400 U 44800 electric power 38454 504 U 37950 1150 U 36800 indirect labor 49360 8110 U 41250 1250 U 40000 supplies 16686 5136 U 11550 350 U 11200 supervision & other salaries 37858 -2142 F 40000 0 40000 maintenance 8925 1925 U 7000 0 7000 insurance & prop tax 8000 0 8000 0 8000 permits & license fees 3400 0 3400 0 3400 factory depreciation 10000 0 10000 0 10000 other OH expenses 8650 2350 U 6300 0 6300 total production expenses 345,653 $15,203 U 330,450 7750 U 322,700 total selling & admin expsnes 39,867 ($3,733) F 43,600 0 43,600 total expenses 385,520 $11,470 U 374,050 7750 U 366,300 operating income ($3,570) ($9,020) F $5,450 3,750 u 1,700
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