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ACCT556 Budgeting Project TO THE STUDENT Fanciful, Inc. is a case study which allows you to incorporate numerous financial and managerial accounting concepts into a single business setting. You will take the position of the company controller who will prepare the budget for the year ended December 31, 2013, using the actual data from 2008 through 2012, and information given to you by various departments. You will prepare a report for the president of the company, describing the strengths and weakness of the corporation, as well as provide suggestions for the future. In short, you will be responsible for the planning and control procedures for the company from an accounting standpoint. In order to focus on important accounting concepts, certain simplifications are necessary to make this case manageable. The student should keep the following simplifications in mind while working on this case: Work in process inventories will be ignored. Financial and IRS tax will be the same. Some projections for 2013 will be given. Standards used for the 2013 budget will be the reasonably obtainable standards. No hourly worker will work overtime. All price changes will occur on January 1st and will remain in effect for the entire year. The actual 2012 information is available while preparing the 2013 budget. All debt transactions will occur either on January 1st or December 31st. There are no bad debts. The student should also keep in mind that the budgeting process is not an exact science; therefore, approximate figures provide adequate information for the decision maker. Figures should be rounded to the whole dollar throughout the budgeting process and the control applications. Since it is not possible to have a partial machine or person, certain figures will always have to be rounded up. GENERAL COMPANY INFORMATION Fanciful, Inc. is a paint manufacturing company that produces two qualities of paint, Super and Stupendous. The company was established eight years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 5 years. In 2010, a second, higher-quality paint was introduced, and sales of this product have increased each year due to reasonably effective sales efforts. The president is currently concerned about the potential inefficient use of capacity and the effect that this has on profits. All raw materials are currently purchased from outside suppliers and no difficulty is foreseen in obtaining the necessary inventories for production in the future. All inventories are currently considered to be at the lowest safe levels possible given the delivery, production, and sales cycles. Given the current production capacity, the company will have room for expansion for the next few years without building new facilities or expanding the current building. The company will also have the option of starting a second production shift to support future sales if necessary; therefore, increased production will be obtainable through purchasing additional equipment or increasing production hours. At this time, however, the president is not considering a second shift due to the additional $1.00-per-hour shift differential that would be necessary to pay the hourly second-shift workers. The company had a cash flow problem in 2012, but has always managed to make all payments on a timely basis. The president wishes to increase the amount of cash on hand in the future so that the company will have a greater margin of safety. To date, the company has not had difficulty obtaining financing for expansion and does not foresee any future difficulties in obtaining necessary funding for legitimate purposes. 1 The company has paid a consistently good dividend to the stockholders. The president would like to continue this policy in the future. DEPARTMENT STRUCTURE Fanciful, Inc. has two separate production departments - one for each of the paint types. Since the end products are not distinguishable, the company uses process costing, employing a FIFO inventory. Absorption costing is used for all outside reports. All non-direct fixed costs are allocated using various allocation bases as indicated throughout the project. The Company does not use a full ABC costing system; however, it does employ some of the ABC concepts in the budgeting process. The Administrative Department handles all of the purchasing, accounting, and secretarial duties in a highly efficient manner. The need for separate departments is not necessary at this time. 2012 INFORMATION Number of machines available Annual capacity per machine Annual production capacity Machine hours available per machine Standard machine hour per gallon Standard labor hour per machine hour Actual sales volume Number of hourly employees Supervisors (one per each eight hourly employees) Raw material prices Cans Pigment Raw material usage Cans Pigment Direct labor rate SUPER DEPARTMENT STUPENDOUS DEPARTMENT 26 15,000 gallons 390,000 gallons 1,800 hours .12 hour/gallon 1.25 labor hr/mach.hr 420,000 gallons 29 20 15,000 gallons 300,000 gallons 1,800 hours .12 hour/gallon 1.25 labor hr/mach.hr 268,200 gallons 21 4 3 40 each $2.75 per pound 40 each $3.75 per pound one per gallon two pounds per gallon $8.25 per hour one per gallon two pounds per gallon $8.25 per hour 2013 PROJECTED SALES INFORMATION The Sales Department feels very good about the prospects for 2013. The reputation of the new product, Stupendous Paint, has increased significantly due to effective advertising in the past few years. The Sales Department is ready to launch a major advertising campaign, which is expected to continue the trend of the last three years for the Stupendous brand, even with a small price increase per gallon. Super Paint has been produced since the company began production. The sales level of this product has been rather stagnant for the last 5 years, and that trend is expected to continue in the future. The following information regarding the two products has been gathered: Super Paint Stupendous Paint 2 Anticipated 2013 Sales Price $10.30 per gallon $15.45 per gallon Actual 2008 Sales Actual 2009 Sales Actual 2010 Sales Actual 2011 Sales Actual 2012 Sales 411,000 gallons 412,000 gallons 405,000 gallons 430,000 gallons 420,000 gallons None None 186,250 gallons 223,500 gallons 268,200 gallons You have made the following conclusions about the two different products: Super Paint Sales growth in units will continue to be stagnant. The more recent years are more representative of continuing unit sales than years in the further past. Exponential Smoothing will be an appropriate unit sales projection method to use. Stupendous Paint Unit sales growth will continue on its current increasing trend. An exponential growth function, with the year being the independent variable and the sales volume being the dependent variable, will be an appropriate sales projection method. 2013 DIRECT MATERIAL AND INVENTORY BUDGET INFORMATION The Production Department worked in conjunction with both the sales and purchasing departments in developing desired projected inventory levels for December 31, 2013. Information regarding beginning and desired ending inventories for 2013 are as follows: Cans Pigment for Super Paint Pigment for Stupendous Paint Finished Goods Inventory Super Paint Stupendous Paint Beginning inventory 56,550 cans 63,300 pounds 49,700 pounds Ending inventory 61,700 cans 70,000 pounds 53,750 pounds 31,700 gallons 24,850 gallons 35,000 gallons 27,000 gallons The following direct material price increases are expected to occur on January 1, 2013, and remain effective for the entire year: Cans Pigments Super Paint Stupendous Paint Price increase expected 2 each $0.14 increase over 2012 prices $0.19 increase over 2012 prices Inventories are accounted for using the FIFO method. Hint: Remember that each gallon of paint requires two pounds of pigment. 2013 DIRECT LABOR BUDGET INFORMATION During 2012, a new contract was signed with the union. As part of that agreement, no worker can work in more than one 3 department, and no single worker can work over 2,000 hours during the year. This means that for every 2,000 hours of labor that is required for production in each department, one hourly employee is needed. For example, if a department needs 10,150 labor hours during the year, six employees will be needed (10,150 total hours/2,000 per employee = 5.075, which needs to be rounded to 6 employees). The standard direct labor rate will increase $0.25 per hour over the 2012 rate. Additional information regarding employee benefits is included in the section on manufacturing overhead. 2013 OVERHEAD BUDGET INFORMATION The following information is available regarding the actual overhead costs incurred for 2012: Indirect materials Indirect labor annual rate Hourly employee fringe benefits Hourly health benefits Supervisor fringe benefits Supervisor health benefits Utilities Maintenance Insurance Property taxes Supplies Depreciation (items held during 2012) Variable costs 20 per gallon Fixed costs $50,000 per supervisor 20% of wages $1,500 per employee 20% supervisor's salaries $1,500 per employee 40 per machine hour 20 per machine hour *$10,000 annually *$50,000 annually *$10,000 annually *$5,000 annually **$250,000 annually *These items are allocated to departments based upon production levels in gallons. **The 2012 allocation was $141,300 to the Super Department, and $108,700 to the Stupendous Department. It is expected that the following changes will occur during 2013: Variable costs Indirect materials No change Indirect labor annual rate Hourly fringe benefits No change Hourly health benefits Supervisor fringe benefits Supervisor fringe benefits Utilities No change Maintenance Increase 5/MHr* Insurance Property taxes Supplies Depreciation (items held during 2012) Depreciation (machinery purchased in 2013) *Mhr stands for Machine hours. ** There will be no salvage value for the equipment purchased in 2013. 2013 SALES DEPARTMENT INFORMATION 4 Fixed costs 2.5% increase Increase $200/employee No change Increase $200/supervisor Increase $500 annually Increase $500 annually Increase 8.0% Increase $200 annually No change Five-year life** The Sales Department consists of 10 representatives who report directly to the president. Each individual is on a base salary plus a commission, and the sales reps also submit meal and entertainment expenses for reimbursement. (In 2012, the meal and entertainment expenses were limited to $50 per week per sales representative based upon a 52-week year.) The following information is available regarding the actual selling costs incurred for 2012: Commissions Salaries Fringe benefits Health benefits Advertising Meals & entertainment Depreciation Variable 35 per gallon sold 20% of commissions Fixed $15,000 per sales representative 20% of salaries $1,500 per sales representative $10 per 100 gallons sold $50 per week per representative $7,500 It is felt that the company will not need any additional sales representatives for 2013. It is expected that the following changes will occur in 2013: Variable Fixed Commissions No change Salaries No change Fringe benefits No change No change Health benefits Increase $200 per representative Advertising $12 per 100 gallons sold Meals & entertainment $60 per week per representative Depreciation No change 2013 ADMINISTRATIVE BUDGET INFORMATION The Administrative Department consists of the president and an office staff of eight who handle the secretarial, purchasing, and accounting duties (total of nine people). The following information is available regarding the 2012 actual costs: Variable Salaries Fringe benefits Health benefits Professional fees Office supplies Telephone Depreciation Fixed $250,000 annual 20% of salaries $1,500 per employee $20,000 annually 3 per gallon sold 1.5 per gallon sold $6,000 annually It is felt that the level of the office and administrative staff will be adequate for the coming year. It is expected that the following changes will occur in 2013: Variable Fixed Increase 3% annually No change Increase $200 per employee Salaries Fringe benefits Health benefits 5 Professional fees Office supplies Telephone Depreciation Increase of $1,500 Increase 1 per gallon sold Increase per gallon sold No change 2013 INCOME TAX INFORMATION The current federal and state income tax rates total 40%. All taxes for the year will be paid by the end of the year, which means that there will be no accrued taxes on December 31, 2013. 2013 ACCOUNTS RECEIVABLE INFORMATION It is expected that sales will occur evenly throughout the year and that there will be no cash sales. Seventy-five percent of monthly sales will be collected in the month following the sale, and the remaining 25% will be collected by the end of the second month. No bad debts are anticipated. 2013 ACCOUNTS PAYABLE INFORMATION This account represents the purchases for raw materials only. It is expected that purchases will be made evenly throughout the year, and that all purchases will be paid for during the month following the purchase. 2013 WAGE AND SALARY INFORMATION The accrued wage account will include all direct labor, indirect labor, sales commissions and salaries, and administrative salaries. All wages are earned evenly throughout the year, and employees are paid twice each month. On December 31, 2013, the accrued wages will include wages representing one full payroll period. 2013 ACCRUED OTHER INFORMATION This account includes all other cash expenses not included in Account Payable and Accrued Wages. It is the company's policy to pay all other expenses during the month following the purchase. These expenses will be incurred evenly throughout the year. The 20% fringe benefits will be paid on all wages, salaries, and commissions. 2013 PROPERTY, PLANT, AND EQUIPMENT INFORMATION Property, plant, and equipment consist of the following on December 31, 2012: Property and plant Equipment Total Property, Plant, and Equipment $750,000 1,025,000 $1,775,000 Each additional machine that is needed to support the production level expected during 2013 will cost $30,000 and be depreciated over five years using the straight-line method. Assume that any equipment purchases are made on the first day of January and are operational throughout the entire year. No new equipment will be needed for the sales and administrative departments. 6 2013 LONG-TERM DEBT INFORMATION A long-term debt repayment (principle only) will be made on December 31, 2013 for $255,000. The interest rate charged on the debt balance throughout 2013 will be 7.5%, and will be paid on December 31, 2013. If an additional machine is purchased, $5,000 will be paid in cash and the remaining $25,000 will be financed at the 7.5% rate. This same proportion of cash/additional debt will be applied to all additional equipment purchased during 2013. Again, any purchases will be made on January 1, 2013. DIVIDEND POLICY Fanciful, Inc.'s policy is to pay dividends on the last day of each quarter. The total anticipated dividends for 2013 are $2.50 per share. OTHER INFORMATION Unless otherwise noted, information will remain unchanged from 2012 through 2013. 2012 BALANCE SHEET AND INCOME STATEMENT The Income Statement and Balance Sheet for Fanciful, Inc. for 2012 are as follows: FANCIFUL, INC STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2012 Sales Cost of goods sold Gross Margin $8,270,000 6,620,946 1,649,054 Selling expenses Office & administrative expenses Operating income Interest expense Income before tax Income tax Net income $581,060 373,010 954,070 694,984 85,950 609,034 243,614 $365,420 FANCIFUL, INC. BALANCE SHEET DECEMBER 31, 2012 ASSETS Cash Accounts receivable Inventory-Raw materials $150,000 827,000 383,037 7 Inventory-Finished goods Plant and equipment Less Accumulated Depreciation Total Assets 551,835 1,775,000 (615,000) $3,071,872 LIABILITIES Accounts payable Accrued wages Accrued other Long-term debt Total liabilities $383,016 76,097 74,083 1,125,000 1,658,196 STOCKHOLDERS' EQUITY Common stock, $5 par value $400,000 Additional paid-in 495,000 Retained earnings 518,676 Total Stockholders' equity 1,413,676 Total liabilities and stockholders' equity $3,071,872 8 REQUIREMENTS: Part A 1. Prepare the following budgets for the fiscal year ending December 31, 2013, using the provided spreadsheets. Note: It is required to use the provided worksheets using Excel formulas. a. A sales projection in units using the methods suggested. (10 points) b. Sales budget (10 points) c. Production budget (10 points) d. Direct materials budget (10 points) e. Direct labor budget (10 points) f. Manufacturing overhead budget (10 points) g. Projected Cost of Goods Manufactured (absorption costing) (10 points) Loss of 20 points for not using the provided Excel worksheets Part B h. Capital expenditures budget (10 points) i. Selling expenses budget (10 points) j. Administrative expenses budget (10 points) k. Proforma income statement (absorption costing) (20 points) l. Cash budget (25 points) m. Proforma balance sheet (25 points) 2. Comment on the strengths and weaknesses of this company. What concerns do you have? What recommendations do you have for the future? (10 points) Loss of 25 points for not using provided Excel worksheets