Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Preparing the Master Budget MANAGERIAL Tom Wills is the majority shareholder and chief executive officer of Hampton Freeze, ACCOUNTING Inc., a company he started in

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
Preparing the Master Budget MANAGERIAL Tom Wills is the majority shareholder and chief executive officer of Hampton Freeze, ACCOUNTING Inc., a company he started in 2006. The company makes premium popsicles using only IN ACTION natural ingredients and featuring exotic flavours, such as tangy tangerine and minty mango. The company's business is highly seasonal, with most of the sales occurring in The issue spring and summer. In 2007, the company's second year of operations, a major cash crunch in the first and Hampton second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2007 turned out to be a very successful year in both overall cash flow and net income. Partly as a result of that harrowing experience, Tom decided to hire a professional financial manager toward the end of 2007. Tom interviewed several promising candidates for the job and settled on Larry Giano, who had considerable experience in the packaged Foods Freeze, Inc. Buy industry. In the job interview. Tom questioned Larry about the steps he would take to pre- vent a recurrence of the 2007 cash crunch: Tom: As I mentioned earlier, we are going to wind up 2007 with a very nice profit. What you may not know is that we had some very big financial problems this year. Larry. Let me guess. You ran out of cash sometime in the first or second quarter. Tom: How did you know? Larry. Most of your sales are in the second and third quarters, right? Tom: Sure, everyone wants to buy popsicles in the spring and summer, but nobody wants them when the weather turns cold. Larry: So, you don't have many sales in the first quarter? Tom: Right Larry. And in the second quarter, which is the spring, you are producing like crazy to orders? Tom: Sure. the grocery stores, pay you the day you make your deliveries? ar vou are 1dly. A orders? Tom: Sure. Larry: Do your customers, the grocery stores, pay you the day you make your une Tom: Are you kidding? Of course not. Larry. So, in the first quarter, you don't have many sales. In the second quarter, you are producing like crazy, which eats up cash, but you aren't paid by your customers until long after you have paid your employees and suppliers. No wonder you had a cash problem. I see this pattern all the time in food processing because of the seasonality of the business. Tom: So, what can we do about it? Larry. The first step is to predict the magnitude of the problem before it occurs. If we can predict early in the year what the cash shortfall is going to be, we can go to the bank and arrange for credit before we really need it. Bankers tend to be leery of panicky people who show up begging for emergency loans. They are much more likely to make the loan if you look like you know what you are doing, you have done your homework, and you are in control of the situation. Tom: How can we predict the cash shortfall? Larry: You can put together a cash budget. While you're at it, you might as well do a master budget. You'll find it is well worth the effort. Tom: I don't like budgets. They are too confining. My wife budgets everything at home, and I can't spend what I want. Larry: Can I ask a personal question? Tom: What? Larry: Where did you get the money to start this business? Tom: Mainly from our family's savings. I get your point. We wouldn't have had the money to start the business if my wife hadn't been forcing us to save every month. Larry: Exactly. I suggest you use the same discipline in your business. It is even more important here because you can't expect your employees to spend your money as carefully as you would. Tom: I'm sold. Welcome aboard. han master budget for With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2008. In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget: 1. A sales budget, including a schedule of expected cash collections. 2. A production budget (a merchandise purchases budget would be used in a merchan- dising company). 3. A direct materials budget, including a schedule of expected cash disbursements for raw materials (this would not be needed for a merchandising company). 4. A direct labour budget (this would not be needed for a merchandising company). 5. A manufacturing overhead budget. 6. An ending finished goods inventory budget. 7. A selling and administrative expense budget. 8. A cash budget. S TODAY Better than Budgets? Borealis is a company headquartered in Copenhagen, Denmark, that produces polymers for the plastics industry. Thomas Boesen, the company's financial controller, felt that the traditional budgeting process had outlived its usefulness-markets were changing so fast that the budget was out of date within weeks of its publication. Moreover, since bud- gets were used to control and evaluate the performance of managers, they were subject to considerable gaming behavior that reduced their accuracy and usefulness. So over a five-year period the company phased out its traditional budgets and replaced them with rolling forecasts and several other management tools. Instead of holding managers to a budget, targets based on competitors' performance were set for variable costs, fixed costs, and operating margins. Managers were given the freedom to spend money as needed to meet these competitive benchmarks. Since the rolling forecasts of financial results were not used to control spending or to evaluate managers' performance, managers had little incentive to "game the system, and hence the forecasts were more accurate than those obtained through the traditional budgeting process. Source: Professor Bjorn Jorgensen, Borealis, Harvard Business School Case 9-102-048, Rev: May 9. 2002. MAKER Sales Manager You were recently hired as the sales manager for a company that designs and manufac tures hard-soled casual and dress shoes for sale to department stores. The vice-president of sales recently decided that the company will add athletic footwear to its catalogue, and asked you to prepare a sales budget for that product line for the coming year. How would you forecast sales for this product line? ng the Master Budget RIAL Tom Wills is the majority shareholder and chief executive officer of Hampton Freeze, TING Inc., a company he started in 2006. The company makes premium popsicles using only ION natural ingredients and featuring exotic flavours, such as tangy tangerine and minty mango. The company's business is highly seasonal, with most of the sales occurring in spring and summer. In 2007, the company's second year of operations, a major cash crunch in the first and second quarters almost forced the company into bankruptcy. In spite of this cash crunch, 2007 turned out to be a very successful year in both overall cash flow and net income. Partly as a result of that harrowing experience, Tom decided to hire a professional financial manager toward the end of 2007. Tom interviewed several promising candidates for the job and settled on Larry Giano, who had considerable experience in the packaged foods industry. In the job interview, Tom questioned Larry a went a recurrence of the 2007 cash crunch: t the steps he would take to pre- Tom: As I mentioned earlier, we are going to wind un 2007 with a very nice profit. What you may not know is that we had some very big financial problems this year. Larry: Let me guess. You ran out of cash sometime in the first or second quarter Tom: How did you know? Larry: Most of your sales are in the second and third quarters, right? Tom: Sure, everyone wants to buy popsicles in the spring and summer, but nobody wants them when the weather turns cold. Larry: So, you don't have many sales in the first quarter? Tom: Right Larry: And in the second quarter, which is the spring, you are producing like crazy onders? Tom: Sure. Larry: Do your customers, the grocery stores, pay you the day you make your dine ke your deliveries? Tom: Are you kidding? Of course not. Larry: So, in the first quarter, you don't have many sales. In the second quarter, you producing like crazy, which eats up cash, but you aren't paid by your customers untillons after you have paid your employees and suppliers. No wonder you had a cash problem see this patter all the time in food processing because of the seasonality of the business Tom: So, what can we do about it? Larry: The first step is to predict the magnitude of the problem before it occurs. If we can predict early in the year what the cash shortfall is going to be, we can go to the bank and arrange for credit before we really need it. Bankers tend to be leery of panicky people who show up begging for emergency loans. They are much more likely to make the loan if you look like you know what you are doing, you have done your homework. and you are in control of the situation. Tom: How can we predict the cash shortfall? Larry: You can put together a cash budget. While you're at it, you might as well do a master budget. You'll find it is well worth the effort. Tom: I don't like budgets. They are too confining. My wife budgets everything at home, and I can't spend what I want. Larry: Can I ask a personal question? Tom: What? Larry: Where did you get the money to start this business? Tom: Mainly from our family's savings. I get your point. We wouldn't have had the money to start the business if my wife hadn't been forcing us to save every month. Larry: Exactly. I suggest you use the same discipline in your business. It is even more important here because you can't expect your employees to spend your money as carefully as you would. Tom: I'm sold. Welcome aboard. With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2008. In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget: 1. A sales budget, including a schedule of expected cash collections. 2. A production budget (a merchandise purchases budget would be used in a merchan- dising company). 3. A direct materials budget, including a schedule of expected cash disbursements for raw materials (this would not be needed for a merchandising company). 4. A direct labour budget (this would not be needed for a merchandising company). 5. A manufacturing overhead budget 6. An ending finished goods inventory budget. 7. A selling and administrative expense budget. 8. A cash budget. With the full backing of Tom Wills, Larry Giano set out to create a master budget for the company for the year 2008. In his planning for the budgeting process, Larry drew up the following list of documents that would be a part of the master budget: 1. A sales budget, including a schedule of expected cash collections. 2. A production budget (a merchandise purchases budget would be used in a merchan- dising company). 3. A direct materials budget, including a schedule of expected cash disbursements for raw materials (this would not be needed for a merchandising company). 4. A direct labour budget (this would not be needed for a merchandising company). 5. A manufacturing overhead budget. 6. An ending finished goods inventory budget. 7. A selling and administrative expense budget. 8. A cash budget

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Hospitality Management Accounting

Authors: Michael M. Coltman, Martin G. Jagels, Martin Jagels

7th Edition

0471348848, 978-0471348849

More Books

Students also viewed these Accounting questions