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Posted on May 18, 2024

NOTE: PLEASE IGNORE GST FOR THE PURPOSE OF THIS QUESTION You are the accountant for A & J Enterprises, a gourmet fudge manufacturer. The owners

NOTE: PLEASE IGNORE GST FOR THE PURPOSE OF THIS QUESTION

You are the accountant for A & J Enterprises, a gourmet fudge manufacturer. The owners of the business, Amelia and Julia, are an absolute whiz in the kitchen, however they are clueless when it comes to developing financial plans. To help them you have offered your assistance to develop the operating budgets and budgeted financial statements for the next financial year.

Discussions with Amelia and Julia revealed the following business goals:

Annual sales increase by 5% from the prior financial year (2021/2022).
At least 60% of the total sales units must be achieved by the end of December. This milestone considers the additional fudge sales over the Christmas period. It was agreed that this milestone was realistic as the sales are traditionally much higher in December.
To achieve the above milestone, the variable marketing costs at 31 December must also be at least 60% of the total variable marketing costs.
Production staff will have a KPI equal to 2kg of fudge produced per hour.
The annual budgets must be broken down into months for the financial year as per accounting principles and practices and distributed for review and approval by the business owners no later than one month prior to the beginning of the financial year or within the agreed timeframe.

Additional business milestones, and operational procedures were also discussed and are outlined below:

Sales

A monthly sales forecast in units is to be prepared for fourteen months for the period July 2022 to August 2023 and based on the seasonal trends indicated in the most recently available historical data (2021/2022 financial year). Note: July and August 2023 will be 5% higher than July and August 2022 as per the above business objectives.
Amelia and Julia advise that the selling price per unit is adjusted over the course of the year based on seasonal demand. An analysis of historical sales data is required to determine the relevant selling price per period (i.e. month)
All sales are on credit.
Accounts receivable history indicates the following: 75% of customers pay in the same month of the sale and 25% of customers pay the following month after the sale.

Production and raw material cost

Amelia and Julia require that the ending inventory of finished goods (in units) for each month to be 20% of the expected sales for the next month.
Each unit produced requires 200g of raw material. The cost of raw materials is $1.50 per 100g.

Purchases

The closing inventory of production material is required to be 25% of the next month production material requirements.
All purchases are on credit
Accounts payable for purchases are paid as follows:

60% is paid in the month of purchase,
the remaining 40% is paid the following month.

Direct labour (cash)

Analysis of the payroll revealed that the average hourly rate for fudge factory staff is $35 per hour. This rate takes into account superannuation and other entitlements as per the industry award for factory staff.

Factory overheads (cash)

In previous years the variable factory overheads were budgeted at $1.50 per unit produced, however, to allow for an increase in overhead costs it was agreed this rate per unit should be increased by 10%.

The fixed factory overheads per annum are as follows:

Factory Depreciation $3,000
Factory Rent $7,200

Operating Expenses

Monthly variable expenses, paid in cash, are estimated at:

Marketing expenses - 3.50% of sales
Administration expenses - 2.50% of sales
Financial expenses - 1.50% of sales

Monthly fixed expenses, also paid in cash are budgeted as follows:

Marketing expenses - $150 per month
Administration expenses - $120 per month

Additional information

A & J Enterprises are paid interest on a term deposit twice per year at the end of November and May. Each interest receipt is $1,500. The interest is deposited into the main operating account.
Amelia and Julia each draw $2,500 from the business every month.
A Trial Balance as at 30 June of the prior year is provided in Appendix A
Monthly actuals for the previous financial year relevant to your analysis can be obtained from the following folder in the online storage system: A&J_Enterprises_FinancialData (Note: the online storage system for the purpose of this task is within Connect). You are to use the data within this folder to complete relevant tasks and for analysis.

Required

Use above business milestones, KPIs and operational procedures to prepare the budgets outlined below as a means of clarifying and reporting the business objectives to the business owners for the next financial year. Calculations must be rounded to the nearest dollar as per industry standards.

A & J ENTERPRISES

Sales budget

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Sales units

Sales $

Production budget

July

August

September

October

November

December

January

February

March

April

May

June

Expected sales (units)

+ Closing inventory (units)

Available for sale

- Opening inventory (units)

Required production (units)

Raw Material cost budget

July

August

September

October

November

December

January

February

March

April

May

June

Budgeted production (units)

Material required (@ 200g/unit)

Total cost of Raw Material ($)

Purchases budget

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Material required (@ 200g/unit)

+ Closing inventory (grams)

Material available

- Opening inventory (grams)

Required purchases (grams)

Required purchases ($)

Direct labour budget

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Production units

Direct Labour hours required

Direct labour cost ($)

Factory overhead budget

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Production units

Varaible Overheads

Fixed Overheads:

- Rent

- Depreciation

Total factory overheads

Cost of production budget

July

August

September

October

November

December

January

February

March

April

May

June

Direct materials (purchases)

Direct labour cost

Factory overhead cost

Total cost of production

Cost of Goods Sold Budget

July

August

September

October

November

December

January

February

March

April

May

June

Opening inventory (finished goods)

+ Cost of Production

Goods available for Sale

- Closing inventory (finished goods)

Cost of goods Sold

Other income budget

July

August

September

October

November

December

January

February

March

April

May

June

Interest on TD

Marketing budget

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Variable

Fixed

Total Marketing budget

Administration Budget

July

August

September

October

November

December

January

February

March

April

May

June

Variable

Fixed

Total Administration budget

Financial Expenses Budget

July

August

September

October

November

December

January

February

March

April

May

June

Variable

Fixed

Total Financial Expenses

A & J Enterprises

Budgeted Income Statement

July

August

September

October

November

December

January

February

March

April

May

June

Sales

Less: Cost of goods sold

GROSS PROFIT

Add:

Other income

Total income

Less operating expenses

Marketing expenses

Administration expenses

Financial expenses

TOTAL EXPENSES

Net profit

Accounts Receivable collections

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Sales

Collections from debtors

Same month

1 month

Total cash receipts

Accounts Payable payments

Rate

July

August

September

October

November

December

January

February

March

April

May

June

Purchases

Payments to creditors

Same month

1 month

Total cash payments

Clean Fleet Truck Washing

Cash budget

July

August

September

October

November

December

January

February

March

April

May

June

Beginning cash

Receipts

Collections from customers

Other receipts

Total receipts

Cash available

Payments

Payments to creditors

Payments to factory staff

Factory overheads (cash)

Marketing expenses (cash)

Admin (cash)

Financial (cash)

Drawings

Total payments

Closing cash balance

Clean Fleet Truck Washing

Budgeted balance sheet as at 30 June

Current assets

Common Bank

Accounts receivable

Inventory - raw materials

Inventory - finished goods

Term Deposit

Non-current assets

Delivery vehicle

Less: depreciation

Total Assets

Current liabilities

Accounts payable

Total Liabilities

Net Assets

Equity

Opening capital

Current period profits

Less: drawings

Net equity

A & J Enterprises
Performance Report for the month of July
	Master Budget	Capacity Variance	F/U	Flexible budget	Flexible variance	F/U	Actuals
Sales units
Sales $
Less:
Cost of goods sold*
Gross profit
Less: Operating expenses
Marketing expenses
Administration expenses
Financial expenses
Total Expenses
Net profit

* Budgeted Cost of Goods sold details
Direct Material per unit	$ 3.00
Direct Labour per unit	$ 3.50
Varaible FOH per unit	$ 1.65
	$ 8.15
Fixed FOH
Rent	$ 600.00
Depreciation	$ 250.00
	$ 850.00

Other Instructions

As per industry standard practice, you are required to support your calculations and figures with verifiable evidence and source documents. As such, you are required to collate the following documentation and include with the submission of the above budgets:

Detailed working paper for the trend analysis on historical data you performed and included in your budgets.
Detailed working paper showing how you calculated the direct labour hours per unit.

Note: your working papers must clearly indicate the assumptions you applied and include a reconciliation against parameters (i.e. business objectives etc) provided to verify relevance and accuracy.

As part of your sales forecast process, you have asked Amelia and Julia who their main competitors are. They have provided you with a list with their competitor websites (Appendix B). Review the feasibility of your sales forecasts by researching the selling price for fudge for each of the competitors provided by Amelia and Julia. Is the selling price outlined in the budget milestones realistic when compared to the market? Verify your response by providing evidence of your research, including the calculations you have performed to compare the unit price of fudge.

Task 2

As part of your presentation of the budgets to Julia and Amelia, please prepare answers to the following questions to help them with their understanding of the budgetary process.

Can you please explain the key purpose of budgets and forecasts and the relevance of milestones and key performance indicators?
Can you verify that the milestones and KPI's relating to sales, marketing and production been incorporated into the budgets? Please explain.
Now that we have budgets in place, what is the next step? How do we keep track of how we are performing?
We were recently told about "Flexible budgets" at a recent networking event. Can you explain what that is and if it is something we should be incorporating into our budget process?

................................................................................................................................................................

Task 3

As per your discussion with Amelia and Julia, you are to prepare a detailed performance report using flexible budgeting techniques for the month of July.

The income statement for July has been prepared is located in the following online storage folder: A&J_Enterprises_FinancialData (Note: the online storage system for the purpose of this task is within Connect).

Required

Using the approved template, prepare the monthly detailed performance report for the month of July. The report must indicate the capacity variance and the flexible budget variance in absolute terms, and if the variance is favourable ("F") or unfavourable ("U").

Prepare a written report for distribution to the business owners, Amelia and Julia. Your report should include reasonable explanations for variances. You will need to analyse the actuals to reveal any deviations from the budget. In your report, indicate if relevant business KPI's and milestones have been met. Your report should also include recommendations for adjustments

Appendix A

A & J Enterprises
Trial Balance 30 June 2022	Dr	Cr

Common Bank	33,500
Accounts receivable	4,641
Inventory - materials	1,585
Inventory - Finished goods	3,613
Term deposit	60,000
Delivery vehicle	30,000
Accumulated Dep'n - Delivery vehicle		12,000
Accounts payable		2,127
Owners' Equity		119,212
	133,339	133,339