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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.
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