GROUP COMPUTER PROJECT

ACCT 6060 Bazaz

Shiraz, Inc. is a small producer and distributor of a product called Alpha. Shiraz Company has become interested in the preparation of operating and financial budgets. The budgets are vitally needed for operational planning and cost control purposes. You have been asked to assist Sara, the accountant of the company, in the preparation of budgets for the first three months of year 20X2.

Sales Forecasting:

Sara knows that the first step for the preparation of budgets is to forecast sales. Sara has been able to identify two possible variables that drive/influence the sales of the company. They are: the level of distribution of Alpha (number of dealers) and the amount of money spent on advertising (advertising expenditures). Sara wants to use the Regression method for the development of a regression equation/model for forecasting the sales of the company. She has accumulated 12 months of recent data, 20X1, on sales units, advertising expenditures, and the number of dealers as shown in Table I.

TABLE I

Sales

Advertising

Number of

Units

Expenditures

Dealers

249,000

19080

310

256,000

19440

337

264,000

19800

375

304,000

27000

312

320,000

30600

318

272,000

21600

303

296,000

28800

315

216,000

19800

225

232,000

19440

247

240,000

19620

270

268,000

23400

306

280,000

25200

309

Shiraz expects the following for the first five months of year 20X2:

January

February

March

April

May

Advertising Expenditures

$28,000

$25,000

$27,000

$26,500

$25,800

No. Of Dealers

285

300

318

310

265

Budgeting:

Management of Shiraz Company is interested in a number of budgets. The preferred formats for budgets are displayed in Exhibit I. As shown in Exhibit I, Sara's Excel file has two sections. Section One contains the required data for the preparation of budgets. Section Two contains the budgets. Since management of Shiraz wants to simulate the budgets for various possible conditions, the content of budgets will be stated all in formulas. The only area where data should be entered manually is in the data section, under the January column only! (Hint: this will require the use of excel functions including: "IF", "AND", "SUM", "ROUNDUP", "ROUNDDOWN", "ROUND" etc.). Sara has prepared the following data for the preparation of budgets:

1. Sales

• Selling price per unit of Alpha is expected to be $12 in January through February. Five percent increase in selling price is expected in March. Aril and May are expected to have the same selling price as in March.
• Seventy-five (75) percent of each month's sales are collected in the month of sale. The remaining is collected in the following month.

2. Manufacturing Expenses

Production of each Alpha requires:

• Direct materials: 5 pounds of direct material @ $0.80 per pound (expected to increase by 10 cents each month)
• Direct Labor: hour of direct labor @ $10 per hour
• Variable manufacturing overhead (each unit): $0.50 per unit
• Fixed manufacturing overhead: Total of $25,000 per month of which $3,000 is depreciation expense

3. Operating (Selling & Administrative) Expenses

• Sales Commission: $0.80 per unit
• Shipping and Handling: $0.60 per unit
• Fixed Operating Expenses: Total $12,000 per month of which $1,500 is depreciation expense.

4. Payment of Expenses

• Other than purchase of materials, all expenses are expected to be paid in the month incurred. Sixty (60) percent of purchases are paid in the month of purchase and the remaining is paid in the following month

5. Capital Expenditures

• Shiraz is in the process of expansion of its operations by adding new equipment. The expansion requires $500,000 cash outflow in the month of January and another $300,000 in the month of February.

6. Loan Repayments & Interest Expense

• The Company can borrow from its bank as needed to bolster the Cash account. Borrowings and repayments of principle must be in multiples of $1,000, unless you are paying off the entire balance. All borrowings and repayments take place at the end of a month. The annual interest rate is 12%. Interest is compounded every month and added to the principle. Compute interest on whole month (1/12, 2/12, and so on).

7. Inventory Policy

• It is the company's policy to maintain an inventory of Alpha at the end of each month equal to 20% of next month's anticipated sales.
• Company also maintains an inventory of raw materials equal to 25% of next month's production needs.

8. Other Information

• Sales on December of previous year were $4,350,000.
• Direct material purchases for December of the previous year were $1,800,000.
• The balance of cash on December 31 of the previous year was $21,000.
• The Company desires to maintain a minimum balance of $20,000 cash on hand at all times.
• Applicable income tax rate is 30%.

Requirements:

Write a one to two page single-spaced memo to the management of Shiraz Company and include/attach your findings (use 1" margin along with Arial Font with font size of 10 for your report). Specifically:

1. Using the data provided by Sara in Table I calculate all possible regression equations that could be used for forecasting sales of Shiraz Company. The following step will help you to access "regression" in your excel file:
2. To use regression, follow the following steps:
3. Click of "file" on Excel
4. Click on "Option"
5. Click on "add-ins
6. Click on "Go" under Manage: Excel Add-ins
7. Select "analysis toolpack" , OK
8. Click on "Data" in the tool bar
9. Click on "data Analysis
10. Select regression
11. Now, you are ready to enter your data and run the regression.

1. In your memo, discuss these various equations and state which of the equations you would recommend to be used and why. Provide a complete and detailed justification for your choice. Also, discuss the meaning of the regression coefficients of the equation that you choose and explain whether these coefficients are reliable by referring each to its t-value. Attach your Excel work for this section to your memo. In your regression equation, carry two decimal points for coefficient of X variables and none for the intercept. (Hint: Your selection should be based on highest R2 and t-values or P-values.)

1. Using the chosen equation in Item 1, forecast sales of Shiraz Company for January to May and state the results in a Table similar to the following in the memo. You may not be able to fill the cells for all 5 months. However, you should be able to have complete information for the first quarter (January, February, and March).

Month

January

February

March

April

May

Sales Units

1. Using the format in Exhibit I, summarize the requisite data for the preparation of budgets in the January column of Section One of your Excel file. Then, write the necessary formulas for all other cells to calculate the budgets. Format nicely the content of budgets (allow two decimal points for "per unit" items and "round" to whole numbers for total items). Attach a print copy of (a) the budgets containing numbers, and (b) the budgets displaying the formulas in the cells (don't worry about displaying the whole formula in order to save paper!)

5. There are rumors that the price of direct materials and direct labor for Alpha to be increased by 15% and 5%, respectively effective January 1, 20X2. Management of Shiraz wants to know the impact of this increase on its financial position. Recalculate the budgets by incorporating the expected increases in the price of direct materials and direct labor. Compute and discuss the percentages of change in the profit and cash balance of the company due to the increase in the price.

Hint: To save time in typing, you could copy the necessary data from this Word file to your Excel file.

Exhibit I

SECTION ONE: DATA FOR BUDGETS

Sales Data:

January January

February

March March

April

May

Sales Units

Selling price per unit

Percentage of sales collected in the month of sales

Percentage of sales collected in the following month

Variable Expenses:

Pounds of material needed per unit of Alpha

Price of material per pound

Direct labor hours needed per unit of Alpha

Direct labor rate per hour

Variable manufacturing overhead per unit of Alpha

Variable operating expenses per unit of Alpha

Fixed Expenses:

Fixed manufacturing overhead

Depreciation portion of fixed overhead

Fixed operating expenses

Depreciation portion of fixed operating expenses

Inventory Policy:

Desired ending inventory of Alpha (% of next month sales)

Desired ending inventory of DM (% of next month's production needs)

Other Information:

Capital Expenditures

Loan Repayments & Interest Expense

Income tax rate

Minimum cash retained at the end of month

December 20X1 Sales dollars

Cash balance as of January 1, 20X2

SECTION TWO: BUDGETS

Sales Budget

January January

February

March March

April

May May

Sales in Units

Unit Selling Price

Sales in Dollars

Production Budget

January January

February

March March

April

May

Sales Units

Add: Desired Ending Inventory

Total Required Units

Less: Beginning Inventory

Required Production Units

Direct Materials Budget (Purchases Budget)

January January

February

March March

April

May

Units to be Produced

Direct Material Qty Required Per Unit of Alpha (pounds)

Total Direct Materials Needed for Production (pounds)

Add: Desired Ending Inventory Direct Materials

Total Direct Materials Needed

Less: Beginning Inventory of Direct Materials

Direct Material Purchases (pounds)

Cost Per Pound

Total Cost of DM Purchases

Cost of Production Budget (Usage Budget)

January January

February

March March

April

May

Units to be Produced

Direct Material Costs

Direct Labor Cost

Variable Manufacturing Cost

Fixed Manufacturing Cost

Total Production Costs

Cost of Production Per Unit

Operating Expense Budget

January January

February

March March

April

May

Variable

Fixed

Total Operating Expenses

Budgeted Income Statement

January January

February

March March

April

May

Sales ($)

Cost of Goods Sold

Gross Profit

Operating Expenses

Income from Operations

Interest Expense

Income Taxes

Net Income

Cash Budget

January January

February

March March

April

May

Beginning Cash Balance

Add: Receipts

Current Month Sales

Prior Period Month Sales

Total Receipts

Total Cash Available

Less: Disbursements

Direct Materials Purchases

Direct Labor

Fixed Manufacturing Overhead

Variable Manufacturing Overhead

Fixed Operating Expenses

Variable Operating Expenses

Income Taxes

Capital Expenditures

Loan Repayment & Interest Expense

Total Disbursements

Excess (deficiency) of available cash over disbursements

Financing/Borrowing

Ending Cash Balance

Notes Payable