BUDGETING CASE STUDY

WOODY'S REPRODUCTION

Woody's Reproduction makes reproductions antique tables and chairs and sells them through three sales outlets.

The product line consists of two styles of chairs, two styles of tables, and three styles of cabinets. Although

customers often ask Jack Molinari, the owner/manager of Woody's Reproductions, to make other products, he

does not intend to expand the product line.

The planning group at Woody's Reproductions prepares a master budget for each fiscal year, which corresponds

to the calendar year. It is December 2020, and the planners are completing the master budget for 2021.

Unit prices are $200, $900, and $1,800, respectively, for the chairs, tables, and cabinets. Customers pay (1) by

cash and receive a 5% discount, (2) by credit card (the credit card company takes 3% of the revenue as its fee and

remits the balance in the month following the month of sale), or (3) on account (only exporters buy on account).

The distribution of cash, credit card, and exporter sales is 25%, 35%, and 40%, respectively. Of the credit sales to

exporters, Woody's Reproductions collects 30% in the month following the sale, 50% in the second month

following the sale, and 17% in the third month following the sale, with 3% going uncollected. Woody's

Reproductions recognizes the expense of cash discounts, credit card fees, and bed debts in the month of the sale.

Woody's employs 40 people who work in the following areas: 15 in administration, sales, and shipping; 2 in

manufacturing supervision (director and a scheduler); 9 in manufacturing fabrication and assembly (carpenters);

and 14 in manufacturing, finishing, and other areas (helpers, cleaners and maintenance crew).

The carpenter hours required to make the parts for and assemble a chair, table, or cabinet are 0.4, 2.5, and 6,

respectively. Production personnel have organized the work so that each carpenter hour worked requires 1.5

helper hours. Therefore, production planners maintain a ration on average of 1.5 helpers for every carpenter. The

company pays carpenters and helpers $24 and $14 per hour, respectively (including all benefits).

Woody's Reproductions guarantees all employees their pay regardless of the hours of work available. When the

employees are not doing, their regular jobs, they undertake maintenance, training, community service, and

customer relations activities. Woody's pays each employee weekly for that week's work. If an employee works

172 hours or less during the month, Woody's still pays the employee for 172 hours at his or her normal hourly

rate. The company pays 150% of the normal hourly rate for every hour over 172 that the employee works during

the month. Planners add new carpenters if the projected total monthly overtime is more than 5% of the total

regular carpenter hours available. Woody's has a policy of no employee layoffs. Any required hiring is done on

the first day of each month.

For a factory, Woody's Reproductions rents a converted warehouse that costs $600,000 per year. The company

pays rent quarterly beginning January 1 of each year. Woody's pays other capacity-related manufacturing costs,

which include manufacturing supervision salaries and amount to $480,000, in equal monthly amounts.

The capital investment policy is to purchase, each January and July, $5,000 of machinery and equipment per

carpenter employed during that month. Woody's recognizes depreciation at the rate of 10% of the year-end

balance of the machinery and equipment account. Statistical studies of cost behavior have determined that

supplies, flexible support, and maintenance costs vary with the number of carpenter hours worked and are $5,

$20, and $15, per hour, respectively.

The units of wood required for chairs, tables, and cabinets are 1, 8, and 15 respectively. Each unit of wood costs

$30. The inventory policy is to make products in the month they will be sold. Two suppliers deliver raw materials

and supplies as required. The company pays for all materials, supplies, flexible support, and maintenance items on

receipt.

Annual administration salaries, capacity-related selling costs, and planned advertising expenditures are $300,000,

$360,000,and $600,000, respectively. Woody's Reproductions makes these expenditures in equal monthly

amounts. Packaging and shipping costs for chairs, tables, and cabinets are $15, $65, and $135, respectively.