"You are a manager for Peyton Approved, a pet supplies manufacturer. This responsibility requires you to create budgets, make pricing decisions, and analyze the results of operations to determine if changes need to be made to make the company more efficient.

You will be preparing a budget for the quarter July through September 2014.You are provided the following information. The budgeted balance sheet on June 30, 2014, is:"

Peyton Approved

Budgeted Balance Sheet

30-Jun-15

ASSETS

Cash $42,000

Accounts receivable 259,900

Raw materials inventory 35,650

Finished goods inventory 241,080

Total current assets 578,630

Equipment $720,000

Less accumulated depreciation 240,000 480,000

Total assets $1,058,630

LIABILITIES AND EQUITY

Accounts payable $63,400

Short-term notes payable 24,000

Taxes payable 10,000

Total current liabilities 97,400

Long-term note payable 300,000

Total liabilities 397,400

Common stock $600,000

Retained earnings 61,230

Total stockholders' equity 661,230

Total liabilities and equity $1,058,630

All assumptions are new and apply to the July through September budget period.

1. Sales were 20,000 units in June 2015. Forecasted sales in units are as follows: July, 18,000; August, 22,000; September, 20,000; October, 24,000. The product's selling price is $18.00 per unit and its total product cost is $14.35 per unit.

2. The June 30 finished goods inventory is 16,800 units.

3. Going forward, company policy calls for a given month's ending finished goods inventory to equal 70% of the next month's expected unit sales.

4. The June 30 raw materials inventory is 4,600 units. The budgeted September 30 raw materials inventory is 1,980 units. Raw materials cost $7.75 per unit. Each finished unit requires 0.50 units of raw materials. Company policy calls for a given month's ending raw materials inventory to equal 20% of the next month's materials requirements.

5. Each finished unit requires 0.50 hours of direct labor at a rate of $16 per hour.

6. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $1.35 per unit produced. Depreciation of $20,000 per month is treated as fixed factory overhead.

7. Monthly general and administrative expenses include $12,000 administrative salaries and 0.9% monthly interest on the long-term note payable.

8. Sales representatives' commissions are 12% of sales and are paid in the month of the sales. The sales manager's monthly salary is $3,750 per month.

Specifically, the following critical elements must be addressed when creating an Operating Budget by completing the budget templates found on the "Budgets" tab below.

Step 1: Make Sales Budget

Complete Part A - Sales Budget on the Budgets tab below by using the information found in the budgeted balance sheet above.

Consider assumption 1 when completing this critical element: Sales were 20,000 units in June 2015. Forecasted sales in units are as follows: July, 18,000; August, 22,000; September, 20,000; October, 24,000. The product's selling price is $18.00 per unit and its total product cost is $14.35 per unit.

Step 2: Make Production Budget

Complete Part C - Production Budget on the Budgets tab below by using the information found in the budgeted balance sheet above.

Consider assumption 1 while completing this critical element: Sales were 20,000 units in June 2015. Forecasted sales in units are as follows: July, 18,000; August, 22,000; September, 20,000; October, 24,000. The product's selling price is $18.00 per unit and its total product cost is $14.35 per unit.

Consider assumption 2 while completing this critical element: The June 30 finished goods inventory is 16,800 units.

Consider assumption 3 while completing this critical element: Going forward, company policy calls for a given month's ending finished goods inventory to equal 70% of the next month's expected unit sales.

Step 3: Make Manufacturing Budget

Complete Part E - Manufacturing Budget on the Budgets tab below by using the information found in the budgeted balance sheet above. The manufacturing budget consists of three parts: the Raw Materials Budget, the Direct Labor Budget, and the Factory Overhead Budget.

Raw Material Budget

Consider assumption 4 while completing this critical element: The June 30 raw materials inventory is 4,600 units. The budgeted September 30 raw materials inventory is 1,980 units. Raw materials cost $7.75 per unit. Each finished unit requires 0.50 units of raw materials. Company policy calls for a given month's ending raw materials inventory to equal 20% of the next month's materials requirements.

Consider units to be produced found in the production budget while completing this critical element.

Direct Labor Budget

Consider assumption 5 while completing this critical element: Each finished unit requires 0.50 hours of direct labor at a rate of $16 per hour.

Consider units to be produced found in the production budget while completing this critical element.

Factory Overhead Budget

Consider assumption 6 while completing this critical element: Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $1.35 per unit produced. Depreciation of $20,000 per month is treated as fixed factory overhead.

Consider units to be produced found in the production budget while completing this critical element.

Step 4: Make Selling Budget

Complete Part G - Selling Expense Budget.

Consider assumption 8 while completing this critical element: 8. Sales representatives' commissions are 12% of sales and are paid in the month of the sales. The sales manager's monthly salary is $3,750 per month.

Step 5: General and Administrative Expense Budget

Complete Part I - General and Admin Expense Budget.

Consider assumption 7 while completing this critical element: 7. Monthly general and administrative expenses include $12,000 administrative salaries and 0.9% monthly interest on the long-term note payable.

Specifically, the following critical elements must be addressed when performing the Budget Variance Analysis using the Budget Variance Student Worksheet

The actual quantity of material used was 31,000 with an actual cost of $7.75 per unit. The actual labor hours were 33,000 with an actual rate per hour of $15.

Step 1: After making budgets, Develop a variance analysis including a Budget Variance performance report and appropriate variances for materials, labor, and overhead.

Start with the Labor and Materials Variance tab.

Standard costs/quantities come from the raw materials budget and the labor budget.

After completing the Labor and Materials Variance tab, transfer variances to the Budget Variance Report tab.

Sales Budget

Peyton Approved

Sales Budgets

July, August, and September 2015

Budgeted Units Budgeted Unit Price Budgeted Total Dollars

Jul-15

Aug-15

Sep-15

Total for the first quarter

Production Budget

Peyton Approved

Production Budget

July, August, and September 2015

July August Sept. Total

Next month's budgeted sales

Percentageof inventory to future sales

Budgeted ending inventory

Add budgeted sales

Required units to be produced

Deduct beginning inventory(Previous month ending inventory)

Units to be produced

Manufacturing Budget -contains raw materials budget, direct labor budget, and factory overhead budget

Peyton Approved

Raw Materials Budget

July, August, and September 2015

July August Sept. Total

Production budget (units)

Materials requirement per unit

Materials needed for production

Add budgeted ending inventory

Total materials requirements (units)

Deduct beginning inventory(previous month ending inventory)

Materials to be purchased

Material price per unit

Total cost of direct material purchases

Peyton Approved

Direct Labor Budget

July, August, and September 2015

July August Sept. Total

Budgeted production (units)

Labor requirements per unit (hours)

Total labor hours needed

Labor rate (per hour)

Labor dollars

Peyton Approved

Factory Overhead Budget

July, August, and September 2015

July August Sept. Total

Budgeted production (units)

Variable factory overhead rate

Budgeted variable overhead

Fixed overhead

Budgeted total overhead

Selling Expense Budget

Peyton Approved

Selling Expense Budget

July, August, and September 2015

July August Sept. Total

Budgeted sales

Sales commission percent

Sales commissions expense

Sales salaries

Total selling expenses

General and Administrative Expense Budget

Peyton Approved

General and Administrative Expense Budget

July, August, and September 2015

July August Sept. Total

Salaries

Interest on long-term note

Total expenses

Peyton Approved

Budget Variance Report

For the Year Ended ...

Actual Results Static Budget Variance Favorable/ Unfavorable

Direct materials variances

Cost/price variance

Efficiency variance

Total direct materials variance

Direct labor variances

Cost /price variance

Efficiency variance

Total direct labor variance

The actual quantity of material used was 31,000 with an actual cost of $7.75 per unit. The actual labor hours were 33,000 with an actual rate per hour of$15.

a)Develop a variance analysis including a budget variance performance report and appropriate variances for materials and labor. Use the budget variance student worksheet provided.

b)In your budget variance report, discuss each variance. What does the variance tell you?

c) What needs to be investigated to determine the reason for the variance? Why?