ACTi 6691
Financial/Managerial Accounting for InternationalExecutive
Case
In this case a full set of budgets will beprepared and presented in appropriate format. Reports will be prepared to explain how budget numbers weredetermined. The following are general requirements for thisbudget case. Specific requirements arelisted after the relevant case data.
· Read the case and analyze theinformation.
· Prepare an operating budget instandard “income statement” format.
· Prepare a narrative report (ornotes to the income statement) addressing why/how quantitative items wereselected. The following items must beexplained:
1. Sales Forecast
2. Purchases budget (rawmaterials, labor, all resources)
3. Operating Expenses
· Prepare a cash budget using anyacceptable format. The following itemsmust be explained or shown on the budget:
1. The process by which cashinflows were projected.
2. The process by which cashoutflows were projected.
3. The process by which financing,if applicable, was determined.
4. How interest and otherfinancing charges were calculated.
· Prepare a capital budget usingany acceptable format.
You will be graded on your understanding ofthe underlying concepts related to determining budget amounts (for example, howpurchases are determined) as well as your ability to prepare and explain standardbusiness reports. The rubric attached asthe last page of this document will be used to grade the case.
Harvey’s Budget1
Harvey Manufacturing manufactures and sellstwo industrial products: aself-balancing screw driver and a self-balancing saw. Both products are manufactured in a singleplant.
Harvey’s general manager, Mr. Lipscomb, andpresident, Mr. Owens, want a budget prepared for the fiscal year 2013. They have asked various employees to gatherinformation that they believe will be necessary for preparation of abudget. The information is presentedbelow.
Neither Mr. Lipscomb nor Mr. Owens isskilled in budget preparation. Bothexecutives have used budgets and have participated to some degree in budgetpreparation in prior years, but neither has prepared a full budget.
Sales and selling price per unit
Historical sales for 2012 the two products areshown below.
Harvey’s sales typically peak in the summermonths, beginning with May. Harvey’sgeneral manager, Mr. Lipscomb, recommends that the budget be prepared with theunits sold in the high sales months of May, June, and July be used as the basesfor determining the annual forecast. Mr.Lipscomb’s recommendation is that annual sales be budgeted at 64,000 per monthfor screwdrivers and 42,000 per month for saws.
Mr. Lipscomb also believes that thebudgeted selling price per unit should be equal to the highest selling pricethat could be achieved in 2012. He wouldlike to budget 102 per unit for screwdrivers and 130 per unit for saws. Mr. Lipscomb states that his management teamexperimented with pricing in the prior year, beginning with the first month ofthe year.
You review the unit sales and unit sellingprice information for 2012 and recommend a budget based on 60,000 units ofscrewdrivers at 100 each and 40,000 units of saws at 125 each. Mr. Lipscomb challenges your conclusion. Likewise Mr. Owens, the company president, wouldlike to hear an explanation of the budget numbers and how or why you calculatedthose numbers.
Production Requirements
Each unit produced requires the followingmaterials, labor, and overhead, all of which is variable.
Inventories
Inventories are listed below. The beginning inventories are the actualamounts on hand at the beginning of the year. The ending inventories shown are the amounts that the operations managerhas determined to be necessary to ensure smooth production processes.
Other information
Fixedmanufacturing overhead
Fixedmanufacturing overhead is 214,000, including 156,000 of non-cash expenditures.
Fixedmanufacturing overhead is allocated on total units produced.
Beginning cashis 1,800,000.
Sales are oncredit. Sales are collected 50 percentin the current period and the remainder in the next period. There are no bad debts.
Sales for thelast quarter were 8,400,000.
Purchases fordirect materials and labor costs are paid for in the quarter acquired.
Manufacturingoverhead expenses are paid in the quarter incurred.
Selling andadministrative expenses are all fixed and are paid in the quarter incurred.
Estimatedselling and administrative expenses for the next period are 340,000 perquarter, including 90,000 of depreciation.
REQUIREMENTS:
1. Prepare a sales budget in good form.
2. Prepare a narrative report explaining how yoursales budget was determined. Use thetable above in your analysis. (Hint: Many companies woulddevelop their budgets using average sales and average unit costs.)
Whatever budgetdetermination method you use should be explained. In your explanation, you should include adiscussion of why you believe sales and selling prices fluctuated last year.
3. Prepare a production budget in units.
4. Prepare a purchases budget. Remember that you will need to purchase enough materials to have therequired ending inventories shown. Youwill also need to purchase enough to manufacture and sell the products on yoursales forecast. Do not forget that youhave beginning inventories.
5. Prepare a narrative report explaining how youprepared the purchases budget. Be asdetailed as necessary to be sure that the president and general manager willunderstand the calculations and costs.
6. Prepare a budgeted income statement.
7. Prepare acontribution margin income statement.
8. Prepare a narrative report explaining how theexpenses on the income statement were determined.
9. Prepare a cashbudget. Be sure that you show all cashinflows and outflows.
10. Prepare a narrative report explaining your cashbudget process.
11. If necessary,prepare a capital expenditure budget. Explain your entries. Use only the facts in this case to preparethe budget.
Summary:
Your finished case will consist of six or seven budgets (asales budget, a production budget in units, a purchases budget, a budgetedincome statement, a contribution margin income statement, a cash budget, and,if necessary, a capital expenditure budget.)
You will also have four or five narrativereports (a sales budget report, a purchases budget report, an income statementreport, a cash budget report, and an explanation of your capital budget, ifnecessary).
Narrative reports are reports that are inthe form or a white paper that clearly explains the numeric entries on yourbudgets. The length of the narrativereports will depend on the particular report. In general, you should be able to prepare the sales budget report on oneor two pages, the purchases budget report on one or two pages, the income statementreport on one page, and the cash budget report on one page. In this case, the capital budget report wouldbe less than one page. You should notworry if one of your reports is more or less than the recommendation givenhere—just be sure you cover all of the important points and satisfactorilyexplain the numeric entries in your budget. Also, be sure you explain the process of “how” your numbers weredetermined. In this regard, it is notnecessary or desirable to explain the exact calculations. Consider your audience and prepare a reportthat would be suitable for executives making plans and decisions for theupcoming year.
1Harvey’s budget is adapted from a published case. (Source and citation are available uponrequest to faculty only).
MBAi6691
Date Scored
Student:
Case Grading Rubric
Criteriafor Case
MeetsExpectations
PartiallyMeets Expectations
Failsto Meet Expectations
Comments/Score
ContentAnalysis (worth 40% of the case grade)
Analysisaddresses all aspects of case in sufficient depth.
Analysisaddresses most aspects of case in sufficient depth.
Analysisdoes not address most aspects of case and/or fails to do so in sufficientdepth.
ContentSolution (worth 40% of the case grade)
Describedsolution demonstrates an understanding and correct use of problem solvingskills
Describedsolution demonstrates a sufficient level of problem solving abilities butfails to address correctly as aspects of the case.
Describedsolution does not demonstrate an acceptable level of problem solvingabilities and the ability to use case information correctly.
PresentationStyle (worth 20% of the case grade)
Nosignificant errors in presentation style, consistent with case requirementsand consistent with business standards
Errorsin presentation style, compliance with case requirements, and normal businessstandards
Thepresentation was limited, demonstrated a minimal effort to meet caserequirements and present your solution in an acceptable business style.
LateSubmission – 10% per day regardless of the reason for the late submission.
Total Points
