Management Accounting

Sally's Sweet Treats produces a variety of food products to supply the domestic market. The company owner, Sally Swiss, has seen a market opportunity for adding fudge to her product range. She anticipates starting the fudge range with just one variety - Truffle Chocolate, to be produced using chocolate from a local chocolatier. Sally's company needs some temporary finance to start up this additional branch of her business. When Sally contacted the bank and asked for an additional overdraft facility for the next few months, the bank manager explained that they would not consider it without firstly analysing a projected budget for the next three months, to ensure that Sally's expansion plans are viable. As a first step, Sally approaches you to assist her in preparing operating budgets for the next three months - October, November and December, and provides you with the information below concerning the proposed venture.

The fudge will be produced in bulk by Sally's Sweet Treats for another company to package and market. The current price of the locally produced chocolate is $4.30 per kg. A high-quality truffle extract, costing $50 per kg is also used to make the fudge. The 1 kg fudge recipe requires 0.90 kg of chocolate and 0.10 kg of truffle extract. Sally is confident that the company can sell 1,000 kgs of fudge in the first month of operations with sales increasing by 15% in November. Sally expects December sales to increase by an additional 20% due to the Christmas period while January and February will fall back to November levels. Sally expects to sell the fudge to selected restaurants for $26 per kilogram. These prices are expected to remain constant for the next three months.

Sally's Sweet Treats generally keeps enough raw materials on hand to cope with three weeks of next month's production needs (to protect against supply problems). It is also company policy to keep finished goods inventory equal to one week of next month's sales, so that customers can continue being supplied even if there are production breakdowns or other problems. [Note: Assume that one week equals 14 of one month].

One kg of fudge is expected to require 18 minutes (30% of an hour) of labour to manufacture, while variable overheads (electricity, maintenance, etc.) usually run at $0.45 per kg in Sally's company. Sales commissions of 10% of sales revenues are paid to company sales representatives as an incentive. The company pays tax at an average rate of 30% of profits. Sally's office staff have estimated the fixed manufacturing overheads expected to be associated with the fudge venture, and these total $3,100 per month for October and November, increasing to $5,500 in December. Similarly, fixed selling and administration costs are expected to run at $1,000 per month except in December when Sally intends to employ a temporary sales assistant for the Christmas markets. This will increase the cost by $1,000 in December. Sally will be able to source the ingredients for a test run in the next few weeks and will consequently have some initial stocks of chocolate and truffle extract amounting 120 and 100 kgs respectively on hand to commence operations on 1 October. Further, the test runs of the fudge will leave 50kg of fudge on hand ready to meet sales from that date. Sally pays her factory workers an average of $25 per hour.

Budget Preparation

Refer to the Sally's Sweet Treats case study material above to provide the following information.

Use Excel to calculate a master budget for Sally's Sweet Treats for October, November and December. Include the following budgets:

1. Sales budget

2. Production budget

3. Direct materials purchases budget

4. Direct labour budget

5. Overhead budget

6. Selling and administrative expenses budget

7. Ending finished goods inventory budget

8. Budgeted cost of goods manufactured

9. Budgeted income statement