You have been hired as the new controller for Paulson Paint, Inc. You will have the opportunity to utilize your financial and managerial accounting experience. You will be responsible for preparing the budget for the year ending December 31, 2019, using the actual data from 2014 through 2018. You will also prepare a report for the company, describing the strengths and weaknesses of the company as well as providing suggestions for the future.

Please note the following: The budgeting process is not an exact science; therefore, approximate figures provide adequate information for the decision maker. Figures should be rounded to the whole dollar throughout the budgeting process and the control applications. Since it is not possible to have a partial machine or person, certain figures will have to be rounded up.

Paulson Paint, Inc. produces two qualities of paint: Magnificent (Interior Paint Department) and Marvelous (Exterior Paint Department). The company was established 12 years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 7 years. In 2016, a second type of paint was introduced, and sales of this product have increased each year due to effective sales campaigns and efforts. The president is currently concerned about the inefficient use of capacity and the effect this has on profitability.

All raw materials are currently purchased from outside suppliers and no difficulty is foreseen in obtaining the necessary inventories for production in the future. All inventories are currently considered to be at the lowest safe levels given the delivery, production, and sales cycles.

Given the current production capacity, the company will have room for expansion for the next few years without building new facilities or expanding the current building. The company will also have the option of starting a second production shift to support future sales if necessary; therefore, increased production will be obtainable through purchasing additional equipment or increasing production hours. At this time, however, the president is relunctantly considering a second shift due to the additional $1.50 per hour shift differential that would be necessary to pay hourly second-shift workers.

The company experienced cash flow issues in 2018 but has always managed to make all payments on a timely basis. The president wishes to increase the amount of cash on hand in the future so that the company will have a greater margin of safety. To date, the company has not had difficulty obtaining financing for expansion and does not foresee any future difficulties in obtaining necessary funding for legitimate purposes.

Paulson Paint, Inc. has two separate departments, one for each of the paint types. As the end products are not distinguishable, the company uses process costing, employing a FIFO inventory system.

Absorption costing is used for all outside reports. All nondirect fixed costs are allocated using various allocation bases as indicated throughout the project. The company does not use a full ABC costing system; however, it does employ some of the ABC concepts in the budgeting process.

The Administrative Department handles all of the purchasing, accounting, and secretarial duties in a highly efficient manner. There is no need for separate departments at this time.