ACCT Project Fall

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 16% 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 $6.60 per valve (3/4 pound of titanium
alloy costing $8.80 per pound for materials), $2.50 per valve for direct labor, and $5.90 per valve
for variable manufacturing overhead. Fixed manufacturing overhead is budgeted at $78,600 per
month during the 4th quarter. The detailed components of variable and fixed overhead are as
listed below.
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For variable overhead, electric power is budgeted at $2.10 per unit, indirect labor is budgeted at
$3.20 per unit, and supplies are budgeted at $.60 per unit. For fixed overhead depreciation is
budgeted at $12,000 per month, Supervision and other factory salaries are budgeted at $35,000
per month, property tax and insurance combined are budgeted at $9,000 per month, maintenance
is budgeted at $7,000 per month, licensing fees and permits to use proprietary technology are
budgeted at $7,600 per month, and other miscellaneous fixed overhead expenses are budgeted at
$8,000 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, 40% of
sales in the month after the sale and 50% of sales two months later (for example 10% of July
sales are collected in July, 40% in August and 50% in September). On the other hand he must
pay for 75% of his materials purchases in the month of the purchase and 25% 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 up through December
15. The amount due for the next 6 months (starting December 16) must be paid in early
December. Monthly fixed selling and administrative costs, other than interest, amount to
$39,600, of which $8,000 is depreciation. These operating costs, excepting depreciation, are paid
in cash in the month incurred. There are no variable selling or administrative costs. 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).
The budgeted selling price of valves for October, November, and December is $22 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 4th quarter of 2013. Manny budgeted sales in units for October at
18,000 units. For November he expects to sell 20,000 units but he is uncertain about sales for
December and January. His high forecast for these two months is 22,000 units for December and
19,000 for January. His low forecast is 19,000 units for December and 16,000 units for January.
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 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 budget round interest to the nearest dollar)
The company’s managerial accountant has resigned unexpectedly before the 4th quarter budget
could be completed. You have been contracted to complete the master budget for December and
the for the 4th quarter (including some missing numbers from November)
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REQUIREMENTS:
1) Construct Manny’s budgeted cost of goods sold and operating income statement
for December and the total for the 4th quarter. October and November have
already been provided. Complete the template provided below. Show any
necessary calculations. You may use either the high forecast or the low forecast
for this budget. Choose either the high or the low.(4 points)
2) Using the same forecast as in requirement 1 construct Manny’s budget for raw
materials purchases in December and the total for the 4th quarter (You will also
have to complete the budget for November) Complete the template provided
which already has information for October and November. (3 points)
3) Using the same forecast as you used in requirement 1 construct Manny’s cash
budgets for December and the total for the 4th quarter (You will also have to
provide the missing number for November payments for purchases). Complete the
templates provided below which already have information for October and
November. Show any necessary calculations. Note: there are no capital
expenditures or dividends budgeted for December. (4 points)
4) Using the same forecast as you used in requirement 1 construct Manny’s budgeted
balance sheet at the end of December. Complete the template provided which
already has the September 30 balances. (3 points)
5) During September Manny actually produced and sold 17,500 valves. Actual sales
revenues were $381,950. Actual costs and the original budget based on 18,000
units were as detailed in the table below. Complete the table by constructing a
flexible budget based on 17,500 valves and determining the variances for the
performance report. Your performance report should be similar to the
performance report shown in exhibit 10.13 of page 611 except your report
includes more detailed production cost line items. Use the template provided
below for your answer. (4 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 September (2 points).
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