Sweetums Cookies, Inc.: A Master Budget Case

Introduction

You knew they were good, but you never thought Grandma's old cookie recipe would bring you this far! It all started about three years ago when you began using your Grandma's cookie recipe to bake 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're making a little extra money.

There is a small problem with all of this success. The volume of business has grown so much that you can no longer keep up with demand. Your desire to grow this hobby into a full-fledged business has led you to explore expanding. You have been investigating new facilities, equipment, and the requirements of hiring a few employees. However, you're missing one important element; money to fund this expansion!

On the advice of a friend, you meet with a local banker. She says 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, but what she really needs to see is your budget for the next year.

When you return home after the meeting, you pull out your college accounting textbook and settle in to produce a plan for next year. 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 your costs into several categories. You realize that some costs are for raw materials while others are related to manufacturing overhead or operating expenses. You also realize that some costs appear to be fixed while other costs are variable.

You now have the information you need to create budget that will allow you to show the banker your plans for the coming year. This budget will also help you to understand your sales and the collection on 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 that if you can estimate how many dozens of cookies you can sell, then you can calculate how many ingredients to buy and how much overhead and operating expenses will be. You will need to get yours sales estimate as accurate as possible.

Assignment

Use the information in Exhibits 1 - 3 to prepare master budget for the first quarter of the year (January - March). Exhibit 1 presents information regarding sales price, production costs, and operating costs. Exhibit 2 contains information regarding your sales projections, expected collection patterns, purchasing and payment patterns for the first four months of the year. Exhibit 3 presents information regarding your plans for capital contributions, equipment purchases, loans, minimum cash balance. It also contains your Grandma's cookie recipe.

Required

Complete the Connect assignment Master Budget Project by preparing the following components of Sweetums Inc.'s master budget:

1.)Sales budget

2.)Cash collections budget

3.)Direct materials purchases budgets (5)

4.)Cash disbursements for materials budget

5.)Manufacturing overhead budget

6.)Operating expenses budget

7.)Cash budget

EXHIBIT 1

Sales Price, Production Costs, and Operating Expenses

Sales Price

A dozen cookies sell for $12.05.

Direct Materials Costs

Material

Per Unit Cost

Flour

$.15

Sugar

$.15

Eggs

$.10

Shortening

$.50

Chocolate Chips

$ 1.25

Any other ingredients are indirect materials and are considered part of manufacturing overhead

Direct Labor Costs

Information regarding direct labor costs is not maintained because you are your only employee. In this case, labor costs are considered part of manufacturing overhead.

Manufacturing Overhead Costs

Variable costs per dozen

Fixed costs per month

Utilities

$ .50

N/a

Other indirect materials and labor

$ .75

N/a

Maintenance

N/a

$ 250

Depreciation

N/a

$ 500

Totals

$ 1.25

$ 750

Operating Expenses

Variable costs per dozen

Fixed costs per month

Shipping Costs

$ 1.50

N/a

Salaries

N/a

$ 2,000

Depreciation

N/a

$ 200

Other

N/a

$ 1,450

Totals

$ 1.50

$ 3,650

EXHIBIT 2

Sales Projections, Collections, Purchases, and Payments

Monthly Sales Projections (in dozens of cookies):

January1,000

February1,200

March1,300

April1,100

You have stopped production of cookies at year end to facilitate the expansion of the business. Therefore, you expect to have no uncollected accounts receivable, unpaid accounts payable, or raw materials inventories at January 1, the beginning of your budget period.

Collections of Sales1.

Sixty percent (60%) of all sales are collected in the month the sale occurs. Forty percent (40%) of all sales are collected in the month following the sale.

Production

The company produces cookies daily. No work-in-process or finished goods inventories are maintained.

Raw Materials Inventory, Purchases, and Payments

The company plans to maintain an ending inventory of raw materials at the end of each month equal to 10% of the raw materials production needs for the next month.

Twenty-five percent (25%) of materials purchases are paid for in the month of the purchase. Seventy-five percent (75%) of materials purchases are paid for in the month following the purchase.

EXHIBIT 3

Financing Activities and Cookie Ingredients

Financing Activities

January beginning cash balance$10,000

Loan acquired in January$25,000

Equipment purchase in January$20,000

Minimum desired cash balance at the end of each month$10,000

If 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 credit with the bank and will borrow additional funds in multiples of $1,000. Interest (12% annual rate) is paid monthly on total outstanding borrowing at the end of the prior month.

Sweetums Cookie Ingredient List (makes 1 dozen cookies)

2 cups flour

1 cups sugar

1 cup shortening

2 cups chocolate chips

2 eggs

1 teaspoons vanilla

1 teaspoon baking soda

1 teaspoon salt

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