Tasty Cookies, Inc:: A Master Budget Project You knew they were good, but you never thought Grandma's old cookie recipe would bring you this farl 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." After finishing college, 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 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 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 meeting, you pull out your old college accounting textbook. You realize that this is a master budget problem just like you did in college. After reviewing your class notes and reading the textbook, you settle in to produce a plan for next year. PART 1 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 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 1: 1. Think of your favorite cookie. Search the internet 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 information regarding the costs of ingredients, manufacturing overhead, and operating expenses. If your cookies have ingredients that are not included in Exhibit 1 , these ingredients are considered part of overhead. 2. Calculate the following: (a) Total variable costs per dozen cookies. (b) Sales price per dozen 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. 3. Short answer questions: (a) Exhibit 1 presents your expenses in the categories of raw materials, manufacturing overhead, and operating expenses. What factors make each of the categories different? (b) Exhibit 1 indicates which costs are fixed and which costs are variable. For each expense listed, indicate why it would be categorized as fixed or variable. Note: Make sure you turn in a copy of your recipe with your calculations and answers to the short answer questions. PART 2 You now have the information you need 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 dozens 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." You reach in your desk and pull out a disk that the banker gave you. On that disk is an example format of a budget that the banker has seen many businesses use over the years. You pull up the spreadsheet and begin working. Requirements for Part 2: Exhibit 2 presents information regarding your sales projections, expected collection patterns, and purchasing and payment patterns for the first four months of the year. 1. Use the spreadsheet template provided by your instructor to prepare the following operating budgets: (a) Sales budget/Cash collections Budget (b) Direct materials purchases budget/Cash disbursements budget (c) Manufacturing overhead budget (d) Operating expenses budget Note: When preparing the budgets, you should make maximum use of cell referencing and formulas in the Excel spreadsheets. You should not have to enter the same data more than one time (for example, you thould enter monthly sales projections on the sales budget and then use cell referencing from the sales budget to incorporate this information in all of the other budgets). You should use formulas in Excel to perform all of your mathematical calculations. Part of your grade for this assignment will be based on your ability to use these Excel tools. Do not complete the income statements, cash budget, and balance sheet worksheets. These budgets comprise Part 3 of the project which will be completed later. 2. Short anwer questions: (a) Discuss the importance of beginning the master budget process with an accurate sales budget. (b) What are some important factors that a manager should consider when developing a sales budget? State why each is important. (c) Distinguish between operating expenses and disbursements for operating expenses. PART 3 You have now completed each of your operating budgets. It looks pretty goodI "But what does this tell me?" you ask yourselt. This is good information, but i still do not know what my profits are projected to be or if I will need any addibional cash borrowing during the period:" Now 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 proforma (projected) income statement, balance sheet, and cash budget. Hequirements for Part 3 : Ehibit 3 contains information regarding your plans for capital contributions, equipment purchases, loans, minimum cash balances, and estimated tax rate. 1. Use the information from Exhibit 3 and information from your operating budgets completed in Part 2 to prepare the following for the first three months of the year. (a) Proforma variable income statement (b) Proforma absorption income statement (c) Cash budeet (d) Proforma balance sheet 2 Short anwwer questions: (a) What is the main difference between the variable and absorption income statementa? (b) What are the major benefits of budeeting? EXHIBIT 1 Sales Price, Cests of Ingredients, Manufacturing Overhead, and Operating Expenses Direct Labor Costs: Information regarding direct labor conts is not maintained because your facility is highly automated. Direct labor is incloded as part of nanufacturing overbead. You have stopped production of cookies at year end to facilitate the expansion of the business. Therefore, you expect to hive no uncollected mccounts receivables, unpoid sccounts payable. Or naw material inventorits as Janakry 1 , the beginning of your bodget period. Production: The company produces the cookies daily. No work-in-process of finished goods isventories ase maintaised. Raw materiala: The company plans to maintain as ending inventory of raw materials at the end of each monch. The company desires to maintain a percetage of raw materials productioe needs for the next month. See Evaibit ifor information regarding raw material conts, manufacturing overhead, usd operating expens. EXHIBIT 3 Other Transactions Initial investment: Capital contribution in Jamaary $50,000 Borrowing: Bank loan in January $50000 Minimum desired cash balance at the end of moeth 510,000 As cach over $10,000 is wailable at the end of the month, you will make ropayments of outstanding loam in multiples of $1000. If mdditional bormowisg is necessary to maintain the $10,900 end-of-month balance, you have a line of credit with the bank, and will borrow additional funds is multiples of $1,000. Intereat ( 12% antual rate) is paid monthly os sotal outstanding berrowings at the end of the prior month. Fixed acuet acyuialiboe: Budgeted fixed autet acquisitioes in lanuary $90,000 Income taxes: lesome tax nite thcome taves are paid at the end of each garter on net income for that quarter