WATER WORLD INSTRUCTIONAL CASE :

INTEGRATING FINANCIAL AND MANAGERIAL

ACCOUNTING WITH STRATEGIC PLANNING

Lucille M. Montondon, Texas State University-San Marcos

Janet B. Butler, Texas State University-San Marcos

CASE DESCRIPTION

The primary subject matter of this case concerns integration of strategic planning with

financial and managerial accounting. Secondary issues include financial accounting journal

entries, relevant costs in decision making, budgeting, production schedules, and the accounting

cycle. The case has a difficulty level of two, appropriate for sophomore level and five,

appropriate for first year graduate level. The case is modular in nature, and is designed to be

taught in 1-5 class hours. The number of hours of outside Preparation will depend on the

portions of the case selected for use in the classroom, but should not exceed 10 hours.

CASE SYNOPSIS

Much has been published about integration of accounting content and breaking down of

silos created within colleges of business. Introductory accounting courses generally are still

divided between managerial and financial accounting or, if there is only one course, the

highlights of each are presented separately. Further, business strategy is often considered only

as part of a class, and the use of accounting information to support strategic decision

making is often overlooked.

The purpose of this case is to provide related financial and managerial accounting

projects which culminate in a strategic plan. The projects are simplified but provide a

discernable thread from raw materials and direct labor to plans to expand the firm. These

projects are suitable for a blended financial and managerial introductory course for

undergraduates or for MBA students and have been used effectively in an online teaching

environment. The modular nature of the projects means that instructors can easily customize

case materials.

The Case Description and Case Synopsis should be removed before assigning this case to

a student or a student group. This material could prejudice the minds of students.

This case is designed to help you understand and apply financial and managerial

accounting concepts, and to see how the accounting system provides information that can help in

financial reporting as well as managerial decision making. To accomplish this, you will be

using information from Water World, Inc., a fictitious company operating a water park facility in

Texas.

There are five projects in this case. The first three projects focus on managerial

accounting concepts, while the fourth is oriented toward financial accounting. You will use both

financial and managerial information to complete project five. To complete project one, production schedule and a cash budget are required. In project two, you will identify and focus on

relevant costs for decision making and will use these costs to formulate recommendations related

to production of plush toy animals. To complete projects 3 and 4, record basic entries and, in

project 4 complete the accounting cycle. In project 5, you will use the accounting information

you have generated to make recommendations for increased profits.

OVERVIEW

Water World, Inc. owns and operates a 75 acre water park in Sanderling, Texas.

Sanderling is located in northwest Texas, a part of the state known for its hot and dry

summertime weather. Because of the heat, the park's cooling waterslides and rides are very

popular among residents of the region.

The company's mission goes beyond entertainment, however. In addition to entertaining

park customers with water rides and swimming pools, the company educates customers about

aquatic mammals through shows and exhibits. The most popular of the educational shows

focuses on sea otters. In the show, otters show off a variety of tricks while a narrator describes

the otters' habitats and characteristics. The otter exhibits and shows have proven to be so

popular that the company has adopted the sea otter as the company mascot, and Water World

sells otter toys in the water park's gift shop and to local retailers. To control costs, Water

World's manufactures the most popular otter toy, a plush otter, through its wholly-owned

subsidiary named Otter Land.

Project 1: Scheduling

Part I:

Required: Provide a monthly production schedule for the fiscal year beginning January 1, x1

based on the following information.

Otter Land manufactures and sells sea otter plush animals locally year round, but most

are sold during the summer months when the Water World park opens for water shows and rides.

Otter Land follows a policy of stabilizing employment for the core manufacturing work force

throughout the year. Management believes that without this policy, the skilled workers who give

the sea otter toys their special personality would quit. Therefore, the minimum production is

50,000 toys per month. By adding temporary workers, production can be increased to as much

as 150,000 toys per month; however, holding inventory longer than absolutely necessary is

against company policy. It is an inefficient use of resources. (Hint: note the minimum and

maximum production capacity.)

The inventory on both December 31, 20x0 and December 31, 20x1 must be 60,000

finished toys. Each monthly ending inventory must equal or exceed the next month's sales

projections. The sales forecasts for the next fiscal year are based on company history, tourism

trends, population, age of the population, and disposable income.

Sales projections by month, in terms of numbers of toys, are as follows:

January, 20x1 60,000 July 200,000

February 60,000 August 150,000

March 120.000 September 100,000

April 80,000 October 50,000

May 100,000 November 60,000

June 200,000 December 100,000

Part 2:

Required: monthly cash budget for the year, with a detailed listing of receipts and

disbursements. For this calculation, assume that all sales are in cash. Use the following

information plus the production schedule developed in part 1.

Ending balance of cash and cash equivalents on 12-31-x0: $1,900,000.

Plush toy selling price: $15 each

Costs for the coming year are estimated as follows:

Materials: Materials are purchased and paid for in the month needed for production.

2 oz of fill per toy, estimated price $.25/oz

2 oz of fabric covering, estimated price $.75/oz

Direct labor:

Cutters, .05 hour per toy, wage rate $10.00 per hour

Finishers, .5 hour per toy, wage rate $15.00 per hour

Variable manufacturing overhead: $.20 per toy

Fixed manufacturing overhead: Fixed costs of $900,000 cash are incurred evenly

throughout the year.

Selling and Administrative costs: Selling and administrative expenses of $300,000 per

year are incurred evenly throughout the year and are fixed. All selling and administrative

are paid for in cash, and are paid in the month incurred.

Project 2: Relevant Costs

Required: Consider each of the following situations separately. Use the information from the

cash budget you prepared in Part 2 of Project 1 to answer the following:

1. Make or Buy: An overseas manufacturer has approached Otter Land with an offer to make

100,000 sea otter toys for $9.25 each. The toys would be delivered in June and July, and Otter

Land management believes that that the company will be able to cut back on temporary workers

during those months if the offer is accepted. If management accepts the offer, fixed

manufacturing overhead costs will drop by $10,000. Additional shipping and insurance costs for

the purchased toys are estimated to be $100,000.

a. Based on the labor, material, variable manufacturing overhead, and fixed

manufacturing overhead costs from the cash budget you prepared in Part 2 of Project 1,

should management accept the overseas manufacturer's offer? Why or why not?

b. What other qualitative factors should Water World management consider before

accepting the offer?

2. Sell or process further: Otter Land's management believes that there is a market for special

"named" sea otter toys. The new named toys use the basic sea otter toy produced, but artisans

then paint individual names on the starfish held by the sea otter. Additional labor and material

costs for the addition of the handcrafted name will be $4.00 per sea otter toy. Management

anticipates selling 50,000 of the sea otter toys for $21.00 each.

a. Should Otter Land process the basic sea otter toy further to make named sea otter toys?

By how much will Water World's operating income increase/decrease if the company

decides to make the themed sea otter toys?

3. Special Order: A major toy retailer would like to place a one time only special order in

January 20x1 for 50,000 sea otter toys. If Otter Land management accepts the special order,

fixed costs will not change.

a. What is the minimum amount per toy that Otter Land will be willing to accept for the

one time only special order?

1. Will your answer change if the toy retailer becomes a regular customer which orders 50,000

sea otters per year? How?

b. The retailer and Otter Land agree on a price of $11.00 for the one time only order. By

how much will Otter Land's operating income increase/decrease?

c. What other factors should Otter Land and Water World management consider before

accepting the offer?

Question: What is the answer for project 2?