BACKGROUND Lockitt, Inc., a small manufacturing company, produces a specialized sealant lock for hazardous chemical containers. It was founded by an innovative entrepreneur, Brett Lockden. Prior to starting Lockitt, Inc., Lockden had a long career in the petroleum industry. He had firsthand knowledge and experience working with hazardous chemicals and understood the need for safe handling, storage, and transportation of these materials. After retiring from his position with one of the largest petroleum processing companies in the country, Lockden spent a few years experimenting to create a spill- and leak-proof lock that is safe, efficient, and cost effective and fits commercial chemical containers. In 2015, his efforts paid off when he was granted a patent for his invention, Duralock. Duralock is a specialized, single-use sealant lock for commercial chemical containers that prevents liquid chemicals from spilling and fumes from escaping. After receiving the patent, Lockden started his company, Lockitt, Inc. Ted Contador, a trusted former colleague, joined Lockden as his business partner. Being a former chemical industry insider, Lockden had enough connections to spread word-of-mouth about his product. Additionally, his patented product met an unfilled demand that existed across many chemical industries, including petroleum processing, chemical manufacturing, and metal production and fabrication. Therefore, from its inception, Lockitt, Inc., was on a steady growth trajectory. As do most small, privately held manufacturing companies, Lockitt, Inc., focused on its core operations and outsourced some of its other value-chain functions like human resources, IT, and sales and marketing. Lockden managed the manufacturing aspects of the business as well as the continuous improvement efforts. Contador handled the financial aspects and customer service. They jointly handled strategic planning and governance. PLANNING FOR 2020 Today is November 1, 2019. A month ago, soon after he started working on the 2020 operating budgets, Contador had a medical emergency and has since been on long-term disability leave. He is expected to return to work in February 2020. Before Contador fell ill, he had prepared the sales forecast for the first six months of 2020. During the past summer, Contador attended an Excel for Business workshop. IMA EDUCATIONAL CASE JOURNAL VOL. 14, NO. 1, ART. 3, MARCH 2021 1 2021 IMA Duralock: Budgeting for Decision-Making Harshini P. Siriwardane, CMA, PhD* Farmer School of Business Miami University, Ohio Karen De Meyst, PhD Farmer School of Business Miami University, Ohio ISSN 1940-204X Based on what he learned, Contador intended to create a dynamic operating budget, which can be used for sensitivity analysis and decision-making purposes. He had just started the Excel template for the operating budget when he fell ill. CURRENT SITUATION You have been working as a business co-op student at Lockitt, Inc. since September, and you have done projects for both Lockden and Contador. Today, Lockden called you to his office and asked about your understanding of operating budgets and Excel. Based on your answers, he was convinced that you are competent to create an operating budget for the first quarter of 2020. Lockden gave you the Excel template that Contador created and the following information: Expected sales in units for December 2019 and the first six months of 2020 are as follows: December January February March April May June 15,200 15,800 16,500 16,600 17,800 17,700 17,800 The company expects to sell each Duralock for US$88.1 Duralock requires two types of direct materialsLD-paste and Chem-glue. Two pounds of LDpaste and 350 ml of Chem-glue are required to produce one Duralock. At the end of each month, ending inventory of Duralock must be equal to 10% of the following months budgeted sales, or 1,600 (whichever is greater). Lockden is strict on this safety-stock policy; if any of his regular customers has an unexpected need for Duralock, Lockden wants to fulfill that need. The inventory policy for raw materials is to maintain the monthly ending inventory at 5% of the production needs for the next month. Chem-glue tends to dry up over time. Therefore, the monthly ending inventory of Chem-glue should not exceed 300 liters. Lockitt, Inc. expects all inventories at the end of December to be within these guidelines. The cost of LD-paste and Chem-glue are $10.25 per pound and $50 per liter, respectively. The production process requires two types of direct laborLB075 and LH075. LB075 represents machinists who operate the molding machines. Molding is done in batches; each batch contains 50 Duralocks. One hour of LB075 labor is required to process one batch of Duralock. LH075 represents manual finishing labor. Each Duralock requires one-tenth of an hour of LH075 labor. Hourly wage rates for LB075 and LH075 are $30 and $15 per hour, respectively. Both groups of employees are paid on an hourly basis. Variable manufacturing overhead is caused by batch-level and unit-level activities. The predetermined variable overhead rate at the batch level is $1,000 per batch; at the unit level, it is $50 per direct labor hour (based on total labor hours). Fixed factory overhead is $40,000 per month. Contador had been applying fixed factory overhead based on the budgeted production volume, and Lockden instructed you to do the same. IMA EDUCATIONAL CASE JOURNAL VOL. 14, NO. 1, ART. 3, MARCH 2021 2 2021 IMA 1 All monetary values are in U.S. dollars. The budgeted fixed selling and administrative expenses for the year are $600,000; this amount is to be uniformly divided across 12 months. Variable selling expenses for 2020 are expected to be 3% of the revenue. Lockitt, Inc. uses the first-in-first-out (FIFO) cost-flow assumption. EXPECTATION Lockden explained that the companys product differentiation strategy had worked well in the past, and further growth can be expected if the macroeconomic conditions stay stable. But he is concerned about a predicted slowdown in the U.S. economy and potential turmoil in the oil markets. These uncertainties were not factored in the sales forecast that Contador prepared but could negatively impact the companys sales volume. There are also reports of a viral epidemic in other parts of the world. Some health experts say it might spread in this country soon. Given these uncertainties, Lockden is interested in actively pursuing cost-reduction strategies to protect the companys profit margin. He expressed the need to critically evaluate the current manufacturing process against possible alternatives. Specifically, he raised concerns about the efficiency of the current production schedule, labor utilization, inventory policy, and supply chain. While he has many ideas, he needs assistance in evaluating their financial viability. Lockden believes that a dynamic budget will be an effective tool to make informed decisions. It may especially be helpful in the upcoming year, as it can be used to evaluate the financial impact of various cost-reduction options. Given the uncertainties the company is facing, Lockden also wants to use it to carry out sensitivity analyses. Further, Lockden expressed his intention to hire you as a full-time financial analyst after graduation. He ended the meeting with this remark: You may have considered the operating budget merely as a planning tool. However, in addition to planning, I intend to use it heavily for decision-making and risk analysis, especially given the uncertainties we have regarding 2020. You are the owner of this tool, and after you create the tool, please be prepared to answer any what-if questions that I throw at you. begin with creating excel sheets for data, STD cost, sales budget, production budget, DM purchases, DL budget, MOH budget, S&A budget.

Lockitt Inc. 2020 Operating Budget
Data Sheet
Revenue	Budgeted	Percentage Change	New
Unit selling price	$88
December sales volume	15,200	4%
January sales volume	15,800	4%
February sales volume	16,500	1%
March sales volume	16,600	7%
April Sales volume	17,800	-1%
May sales volume	17,700	1%
June sales volume	17,800
Materials Quantity per Duralock	Input quantity per unit of output
LD-paste (lbs.)	2
Chem-glue (ml)	350
Materials Unit Price	Price per unit of input
LD-paste: Price per pound	10 and 25 cents
Chem-glue: Price per milliliter	5 cents
Inventory Policy	% of next period's requirement	Min	Max
Finished goods (%, units)	10%	1600 units
LD-paste (%)	5%	15200 pounds
Chem-glue (%, ml)	5%	266,000 ml
Labor Rate	Hourly rate
LB075	$30
LH075	$15
Labor Usage
LB075 (hours per batch)	1 hr
LH075 (Hours per unit)	1/10 hrs
Batch size
Duralocks per batch	50
Variable OH
Per batch	$1,000
Per direct labor hour	$40
Fixed Overhead
Per month	$ 40,000
Selling and Admin
Fixed, per month	600,000
Variable, percentage of revenue	3%

Standard Cost Sheet for the Product for Q1
Direct materials	Quantity of Input per Duralock	Price per Unit of Input	Cost per Unit of Duralock
LD-paste	$2	$10.25	20.50
Chem-glue	$350	$0.05	17.50
Direct Labor	HRS per Unit of Duralock	Labor Rate per Hour
LB075	0.02	$30	0.60
LH075	0.1	$15	1.50
Variable overhead cost	Cost per Batch	Units per Batch
Batch-related		$1,000
Variable overhead cost	Cost per Hour	Hours per Unit
Direct-labor related		$50
Fixed overhead	Cost per Quarter	Budgeted Production for the Quarter
Fixed overhead
Standard cost per unit

Sales Budget
	January	February	March	QTR
Sales (units)
Selling Price
Sales Revenue ($)

Production Budget (all in Units)
	January	February	March	QTR	April	May
Sales (Units)
Ending Inventory (with Constraint)
Beginning Inventory
Production
			Cross-footing check

Direct Materials Purchase Budget
	January	February	March	QTR
Direct Materials Budget (LD-paste)
Quantity required for production (lbs.)
Ending inventory (lbs.)
Beginning inventory (lbs.)
Purchases (lbs.)
Cost ($)
			Cross-footing check
Direct Materials Budget (Chem-glue)
Quantity required for production (ml)
Ending inventory (with constraint) (ml)
Beginning inventory (ml)
Purchases (ml)
Cost ($)
			Cross-footing check
Total Direct Materials Purchase Cost
			Cross-footing check

Direct Labor Budget
	January	February	March	QTR
Direct Labor LB075
Batches of production (original)
Batches of production (whole number)
LB075 labor hours needed
Direct labor cost-LB075
			Cross-footing check
Direct Labor LH075
Direct Labor hours needed
Direct labor cost LH075
			Cross footing check
Total labor cost

Manufacturing Overhead Budget
	January	February	March	QTR
Number of batches
Total direct labor hours (LB075 and LH075)
Variable Overhead
Batch-related variable overhead cost						Cross-footing check
Direct labor hour-related variable overhead cost						Cross-footing check
Total variable OH cost
Fixed Overhead
Fixed overhead cost
Total MOH
			Cross-footing check

Lockitt Inc.,
Budgeted Income Statement
Quarter ended March 31
		%
Revenue
Cost of Goods Sold
Gross Profit
Selling and Admin Expense
Income from operations before tax