INTRODUCTION You (and your group) are the owners of your own cookie company. It all started about three years ago when you began using your Grandma's cookie recipe to bake, what most people consider, the "best tasting cookies they have ever put in their mouth." At first, you started baking cookies as a little side business. You bake them right in your home and sell them to friends and local stores. Response has been great! People love the cookies, and you are making a little extra money. Your fast sales growth has negatives in addition to positives. The volume of business has grown so much that you ean no longer keep up with demand. Your desire to grow this hobby into a fullfledged business has led you to explore expanding. You have been investigating new facilities and equipment, and checking into the requirements of hiring a few employees. However, there is one problem; you don't have the money to expand! On the advice of a friend, you meet with a local banker. You share your dreams and ideas, and your need to borrow some money. The banker is encouraging and helpful. However, she states that the bank cannot lend you any money without a business plan that describes your financial results, marketing strategy, and projections for the future. You show the banker your income statement and balance sheet as of the most recent year-end, and the banker is impressed! "Looks very promising," she states. "But what I really need to see is what you plan to do with the money that I will lend you and what your business will look like next year." When you return home after the mecting, you pull out your college accounting textbook. You realize that this is a master budget problem just like you did in your managerial accounting class. After reviewing your class notes and reading the textbook, you settle in to produce a plan for next year. PART 1: Product Costs You immediately realize that you must gain an understanding of your cost structure and of the relationship between your revenues, costs, and profits. You pull out Grandma's recipe to see what ingredients it takes to make a dozen cookies. Next, you go to your invoice files to determine the cost of each of the ingredients. You brainstorm to develop a list of the new costs that you must incur when you expand your operations. After analyzing all of this data you are able to break out your costs into several categories. You realize that some costs are for raw materials while others are related to manufacturing overhead or (non-manufacturing) operating expenses. You also realize that some costs appear to be fixed while other costs are variable. Now you have sufficient information to determine how much money you can make when you sell these cookies. Requirements for Part I: 1. Name your company. As a group, think of your favorite cookie. Search the Intemet and find a recipe for this type of cookie. This recipe will be your "Grandma's recipe" that you make and sell in your business. Print out this recipe. You must consult your recipe to determine the amount of ingredients required for one dozen cookies. You also must consult Exhibit 1 for "Adapted from "Tasty Cookies, Inc: A Mater Budget Case" by Thomas C. Wooten and Jane Dillard-Eggers information regarding the costs of ingrodients, manufacturing overhead, and operating expenses. If your cookies have ingredients that are not included in Exhibit I, these ingredients are considered part of overhead. 2. Calculate the following: (a) Total variable costs per dozen cookies. (b) Sales price per doren cookies using "markup on variable costs," (c) Contribution margin per dozen cookies. (d) Breakeven point for the quarter (three months) in dollars and in units. PART 2: Master Budget You now have the information you neod to create a budget that will allow you to show the banker your plans for the coming year. This budget also will help you to understand your sales and the collection of those sales. You will be able to determine how much money you need to purchase the ingredients for your cookies and to pay your overhead and operating expenses. You realize, "It all begins with sales. If I can estimate how many dorens of cookies I can sell, then I can calculate how many ingredients to buy and how much my overhead and operating expenses will be. Well, I had better get that sales number as accurate as possible." Once you have completed each of your operating budgets you must put it all together to see if you will have profits and see if you have enough money to do what you want to do. You know that you have some of your own money to contribute to the business and you also know that you need to make some equipment purchases. Now it is time for you to develop your pro forma (projected) income statement, balance sheet, and cash budget. Requirements for Part 2: Exhibit 2 presents information regarding your sales projections, expected collection partems. purchasing and payment patterns for the first four months of the year. Exhibit 3 contains information regarding your plans for capital contributions, equipment purchases, loans, minimum cash balances, and estimated tax rate. 1. Use the spreadsheet template (posted on Canvas) to prepare the following operating budgets: (a) Sales budget Cach collections Budget (b) Direct materials purchases budget/Cash disbursements budget (c) Manufacturing overhead budget (d) Operating expenses budget 2. Use the information from Exhibit 3 and information from your operating budgets to prepare the following for the first three months of the year: (a) Pro forma variable income statement (Contribution format income statement) (b) Pro forma absorption income statement (Traditional income statement) (c) Cash budget (d) Pro forma balance sheet Exhibit 1 Sales price, costs of Ingredients, Manufactuing Overhead, and Operating Expenses Sales Price: Mark-up on total variable costs 130% * round the sales price to the nearest cent. Cost of Raw Materials: Direct Labor Costs: Information regarding direct labor costs is not maintained because your facility is highly automated. Labor is included as part of manufacturing overhead. Manufacturing Overhead: Exhibit 2 Sales Projections, Collections, Purchases and Payments Monthly sales projections (in dozens of cookies): *Enter the appropriate number in this column. Round each number to the nearest whole number. You have stopped production of cookies at year end to facilitate the expansion of the business. Therefore, you expect to have no uncollected accounts receivables, unpaid accounts payable, or raw material inventories at January 1 , the beginning of your budget period. Production: The company produces the cookies daily. No work-in-process or finished goods inventories are maintained. Raw Materials: The company plans to maintain an ending inventory of raw materials at the end of each month. The company desires to maintain 10% of raw materials production needs for next month. As cash over $10,000 is available at the end of the month, you will make repayments of outstanding loans in multiples of $1,000. If additional borrowing is necessary to maintain the $10,000 end-of-month balance, you have a line of eredit with the bank, and will borrow additional funds in multiples of $1,000. Interest ( 9% annual rate) is paid monthly on total outstanding borrowings at the end of the prior month. Reference: Wooten, T. and Dillard-Eggers, J. (2004). Tasty Cookies, Ine.: A Master Budget Case. Journal of College Teaching \& Learning, 1(9), 85-100. INTRODUCTION You (and your group) are the owners of your own cookie company. It all started about three years ago when you began using your Grandma's cookie recipe to bake, what most people consider, the "best tasting cookies they have ever put in their mouth." At first, you started baking cookies as a little side business. You bake them right in your home and sell them to friends and local stores. Response has been great! People love the cookies, and you are making a little extra money. Your fast sales growth has negatives in addition to positives. The volume of business has grown so much that you ean no longer keep up with demand. Your desire to grow this hobby into a fullfledged business has led you to explore expanding. You have been investigating new facilities and equipment, and checking into the requirements of hiring a few employees. However, there is one problem; you don't have the money to expand! On the advice of a friend, you meet with a local banker. You share your dreams and ideas, and your need to borrow some money. The banker is encouraging and helpful. However, she states that the bank cannot lend you any money without a business plan that describes your financial results, marketing strategy, and projections for the future. You show the banker your income statement and balance sheet as of the most recent year-end, and the banker is impressed! "Looks very promising," she states. "But what I really need to see is what you plan to do with the money that I will lend you and what your business will look like next year." When you return home after the mecting, you pull out your college accounting textbook. You realize that this is a master budget problem just like you did in your managerial accounting class. After reviewing your class notes and reading the textbook, you settle in to produce a plan for next year. PART 1: Product Costs You immediately realize that you must gain an understanding of your cost structure and of the relationship between your revenues, costs, and profits. You pull out Grandma's recipe to see what ingredients it takes to make a dozen cookies. Next, you go to your invoice files to determine the cost of each of the ingredients. You brainstorm to develop a list of the new costs that you must incur when you expand your operations. After analyzing all of this data you are able to break out your costs into several categories. You realize that some costs are for raw materials while others are related to manufacturing overhead or (non-manufacturing) operating expenses. You also realize that some costs appear to be fixed while other costs are variable. Now you have sufficient information to determine how much money you can make when you sell these cookies. Requirements for Part I: 1. Name your company. As a group, think of your favorite cookie. Search the Intemet and find a recipe for this type of cookie. This recipe will be your "Grandma's recipe" that you make and sell in your business. Print out this recipe. You must consult your recipe to determine the amount of ingredients required for one dozen cookies. You also must consult Exhibit 1 for "Adapted from "Tasty Cookies, Inc: A Mater Budget Case" by Thomas C. Wooten and Jane Dillard-Eggers information regarding the costs of ingrodients, manufacturing overhead, and operating expenses. If your cookies have ingredients that are not included in Exhibit I, these ingredients are considered part of overhead. 2. Calculate the following: (a) Total variable costs per dozen cookies. (b) Sales price per doren cookies using "markup on variable costs," (c) Contribution margin per dozen cookies. (d) Breakeven point for the quarter (three months) in dollars and in units. PART 2: Master Budget You now have the information you neod to create a budget that will allow you to show the banker your plans for the coming year. This budget also will help you to understand your sales and the collection of those sales. You will be able to determine how much money you need to purchase the ingredients for your cookies and to pay your overhead and operating expenses. You realize, "It all begins with sales. If I can estimate how many dorens of cookies I can sell, then I can calculate how many ingredients to buy and how much my overhead and operating expenses will be. Well, I had better get that sales number as accurate as possible." Once you have completed each of your operating budgets you must put it all together to see if you will have profits and see if you have enough money to do what you want to do. You know that you have some of your own money to contribute to the business and you also know that you need to make some equipment purchases. Now it is time for you to develop your pro forma (projected) income statement, balance sheet, and cash budget. Requirements for Part 2: Exhibit 2 presents information regarding your sales projections, expected collection partems. purchasing and payment patterns for the first four months of the year. Exhibit 3 contains information regarding your plans for capital contributions, equipment purchases, loans, minimum cash balances, and estimated tax rate. 1. Use the spreadsheet template (posted on Canvas) to prepare the following operating budgets: (a) Sales budget Cach collections Budget (b) Direct materials purchases budget/Cash disbursements budget (c) Manufacturing overhead budget (d) Operating expenses budget 2. Use the information from Exhibit 3 and information from your operating budgets to prepare the following for the first three months of the year: (a) Pro forma variable income statement (Contribution format income statement) (b) Pro forma absorption income statement (Traditional income statement) (c) Cash budget (d) Pro forma balance sheet Exhibit 1 Sales price, costs of Ingredients, Manufactuing Overhead, and Operating Expenses Sales Price: Mark-up on total variable costs 130% * round the sales price to the nearest cent. Cost of Raw Materials: Direct Labor Costs: Information regarding direct labor costs is not maintained because your facility is highly automated. Labor is included as part of manufacturing overhead. Manufacturing Overhead: Exhibit 2 Sales Projections, Collections, Purchases and Payments Monthly sales projections (in dozens of cookies): *Enter the appropriate number in this column. Round each number to the nearest whole number. You have stopped production of cookies at year end to facilitate the expansion of the business. Therefore, you expect to have no uncollected accounts receivables, unpaid accounts payable, or raw material inventories at January 1 , the beginning of your budget period. Production: The company produces the cookies daily. No work-in-process or finished goods inventories are maintained. Raw Materials: The company plans to maintain an ending inventory of raw materials at the end of each month. The company desires to maintain 10% of raw materials production needs for next month. As cash over $10,000 is available at the end of the month, you will make repayments of outstanding loans in multiples of $1,000. If additional borrowing is necessary to maintain the $10,000 end-of-month balance, you have a line of eredit with the bank, and will borrow additional funds in multiples of $1,000. Interest ( 9% annual rate) is paid monthly on total outstanding borrowings at the end of the prior month. Reference: Wooten, T. and Dillard-Eggers, J. (2004). Tasty Cookies, Ine.: A Master Budget Case. Journal of College Teaching \& Learning, 1(9), 85-100