Course: Managerial Accounting

Project on Master Budget

Imagine, you are planning to start a new small, home-based business. You are going to make and sell a single food item.

What is the food item that your business will sell?

Assumptions:

You are starting your business next month, so currently you have no beginning inventory of finished goods or raw materials. Also, there is no beginning balance for accounts payable or accounts receivable.

Since the business is very small and home-based, there is no direct labor cost for your business. Labor wage (if any) is assumed to be fixed and part of MOH.

All the manufacturing costs you incur for your business falls under any one of the two categories: direct material (DM) or MOH. (Remember indirect material part of MOH)

To calculate the DM cost for your product, find out a simple recipe for the product you are planning to sell. You MUST NOT visit any physical store to collect any data. All information must be collected from the internet. If you cant find any information you need on the internet, make reasonable guesses.

For each of your direct material fill out the following table. Make more copies of the table if necessary. You need to have a separate table for each direct material.

Direct Material 1:

Direct material item name
Quantity required for each unit of product
Desired ending inventory as a percentage of following months production requirement
Price per unit of direct material

Direct Material 2:

Direct Material Name
Quantity Required for Each Unit of Product
Desired Ending Inventory as a Percentage of Following Months Production Requirement
Price Per Unit of Direct Material

Direct Material 3:

Direct Material Name
Quantity Required for Each Unit of Product
Desired Ending Inventory as a Percentage of Following Months Production Requirement
Price Per Unit of Direct Material

Based on the recipe and information you have collected from the internet, calculate the total direct material cost for making one unit of your product.

Now, we will calculate MOH costs for your business. Remember,

Total MOH = Variable MOH + Fixed MOH.

Assume, indirect materials are the only thing included in your variable MOH. Identify some indirect materials for your product, and assume a rate of variable MOH cost for each unit of product.

You do not have to make any budget for indirect material. The variable MOH rate you have assumed in the previous table will be used for preparing the MOH budget.

Since depreciation is part of fixed MOH, we will now calculate depreciation expenses.

To calculate depreciation expense, first, identify the equipment you will need to make your product. Next, find the cost(s) of the equipment from the internet. Then, make estimation(s) about useful life. Finally, calculate the depreciation expense per month using a straight-line depreciation method. Show your calculations in the following table.

Add more rows in the table if necessary.

Equipment Name	Cost	Useful Life	Depreciation Expense

Write down the total depreciation expense included in fixed MOH based on your calculations in the last table.

All the equipment you have identified above will be purchased in the first month of your business, i.e. in October 2020.

Identify all other monthly fixed MOH expenses for your business. Remember, it is a small, home-based business so you do not have to make many complicated assumptions. You have already calculated depreciation expense in the above table. List all fixed expenses, including depreciation expense calculated above, in the following table.

Add more rows in the table as necessary.

Fixed MOH Expense Item Name	Fixed Expense Per Month

Write down the total fixed MOH expense, including depreciation expense, based on the list you have prepared in the last table.

Remember,

Total selling and administrative (SnA) expense = Variable SnA + Fixed SnA

Your variable SnA expense consists of only two items - delivery expense per unit and packaging cost per unit. Write your estimations about delivery expense per unit and packaging cost per unit in the following table. Also, add the two numbers to calculate total variable SnA expense for each unit of product.

Your fixed advertising expense consists of only one item - facebook advertising expense. Write your estimation about your monthly facebook advertising expense. This is your total fixed SnA expense per month.

Calculate your total variable expenses for each unit of product by adding the direct material cost per unit, variable MOH rate per unit, and variable SnA expense per unit of product.

Calculate your selling price per unit by charging a 200% mark-up on per unit variable expense.

Now, we will make some estimations about the number of units of product your business expects to sell over the next 12 months. Fill out the following table about sales estimates.

Month	Estimated Units of Product Sold
October
November
December
January
February
March
April
May
June
July
August
September

Assume all sales will be 75% on cash and 25% on credit . you will collect your credit in the month following the month of sale.

Since you are going to sell a food item, no ending inventory of finished goods will be maintained. Each unit will be manufactured after an order is received.

All purchases for all direct materials are made 60% in cash and 40% on credit to be paid equally over two months next to month of sales.

You want to draw a dividend of BDT 20,000 every month as the sole owner of your business. [This your dividend, you will not use this money for operating your business.]

At the end of each month you want to have at least BDT 3 0,000 cash available for operating your business.

You will start the business with a cash investment of BDT 500,000.

You can borrow up to BDT 200,000 from your best friend to invest in your business.

You will repay the borrowed amount, if you have cash available in excess of your minimum cash requirement.

Requirements:

Based on the assumptions you have formed above, prepare a Master Budget consisting of the following components in the Google Sheet attached to this assignment.

1. Sales Budget [No schedule of cash collection will be needed as all sales are on cash.] 2. Direct Material Budget(s) [Make a separate budget for each direct material. No schedule of cash disbursements for direct material will be necessary as all purchases will be made in cash.]

3. MOH Budget.

4. SnA Expense Budget

5. Cash Budget

Note:

You will not need any production budget since units sold = units produced every month. Thus, the sales estimates you have formed above will also be used as the number of units produced in the Master Budget.

Your budget must be prepared as demonstrated in class. First input your assumptions in the Google Sheet, and then prepare a fully linked Master Budget making use of cell referencing and automated formulas for calculations.