You have been hired as the new controller for the 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 create a report for the company, describing the strengths and weaknesses of the company as well as providing suggestions for the future.

Here are a few guidelines.

• Work-in-process inventories will be ignored.
• Financial and IRS will be the same.
• Some projections for 2019 will be given.
• Standards used for the 2019 budget will be reasonably obtainable standards.
• No hourly worker will work overtime.
• All price changes will occur on January 1and will remain in effect for the entire year.
• The actual 2018 information is available while preparing the 2019 budget.
• All debt transactions will occur either on January 1or December 31.
• There are no bad debts.

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. Because it is not possible to have a partial machine or person, certain figures will have to be rounded up.

Company Information

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 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.

Department Structure

Paulson Paint, Inc. has two separate departments, one for each of the paint types. Because 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.

2018 Information

Interior Paint DepartmentExterior Paint DepartmentNumber of machines available2720

Annual capacity per machine18,000 gallons18,000 gallonsAnnual production capacity432,000 gallons378,000 gallonsMachine hours available per machine2,000 hours2,000 hoursStandard machine hour per gallon.15 hour/gallon.15 hour/gallonStandard labor hour per machine hour1.25 labor hour/machine hour1.25 labor hour/machine hourActual sales volume440,000 gallons295,700 gallonsNumber of hourly employees3122Supervisors (1 per each 8 hourly employee)43Raw Material Prices: Cans$.50 each$.50 eachRaw Material Prices: Pigment$2.85 per pound$3.90 per poundRaw Material Usage: Cans1 per gallon1 per gallonRaw Material Usage: Pigment2 pounds per gallon2 pounds per gallonDirect labor rate$10.25 per hour$10.25 per hour

2019 Projected Sales Information

The Sales Department feels very good about the prospects for 2019. The reputation of the new product, Marvelous Paint, has increased significantly due to effective advertising in the past few years. The Sales Department is ready to launch a major advertising campaign, which is expected to continue the trend of the last3 years for the Marvelous brand, even with a small price increase per gallon.

Magnificent Paint has been produced since the company began production. The sales level of this product has been rather stagnant for the last 5 years, and that trend is expected to continue in the future.

The following information for the two products has been gathered.

Magnificent Paint

Marvelous Paint

Anticipated Sales Price - 2019

$14.50 per gallon

$18.75 per gallon

Actual Sales Price - 2014

424,000 gallons

NoneActual Sales Price - 2015

425,000 gallons

NoneActual Sales Price - 2016

413,000 gallons

226,560 gallons

Actual Sales Price - 2017

453,000 gallons

259,000 gallons

Actual Sales Price - 2018

440,000295,700 gallons

1. Magnificent Paint

• Sales growth in units will continue to be stagnant.
• The more recent years are more representative of continuing unit sales than years in the past.
• Exponential smoothing will be an appropriate unit sales projection to use.

1. Marvelous Paint

• Unit sales growth will continue on its current increasing trend.
• An exponential growth function, with the year being the independent variable and the sales volume being the dependent variable, will be an appropriate sales projection method.

2019 Direct Material and Inventory Budget Information

The production department worked in conjunction with both the sales and purchasing departments in developing the desired projected inventory levels for December 31, 2019. Information regarding beginning and desired ending inventories for 2019 are as follows.

Beginning Inventory

Ending Inventory

Cans59,140

62,170Pigment for Magnificent Paint

64,300 pounds

72,000 pounds

Pigment for Marvelous Paint

50,400 pounds

55,700 pounds

Finished Goods Inventory: Magnificent Paint

33,500 pounds

36,000 gallons

Finished Goods Inventory: Marvelous Paint

25,890 gallons

29,000 gallons

The following direct material price increases are expected to occur on January 1, 2019, and remain effective for the entire year.

Item

Price Increase Expected

Cans$0.03 price increase

Pigments: Magnificent Paint

$0.15 price increase over 2018 prices

Pigments: Marvelous Paint

$0.20 price increase over 2018 prices

Inventories are accounted for using the FIFO method.

Hint!

Remember that each gallon of paint requires 2 lb of pigment.

2019 Direct Labor Budget Information

During 2019, a new contract was signed with the union. As part of that agreement, no worker can work in more than one department, and no single worker can work over 2,000 hours during the year. This means that for every 2,000 hours of labor that is required for production in each department, one hourly employee is needed. For example, if a department needs 10,150 labor hours during the year, six employees will be needed (10,150 / 2,000 per employee = 5.075, which needs to be rounded to six employees).

The standard direct labor rate will increase $0.25 per hour over the 2018 rate.

Additional information regarding employee benefits is included in the section on manufacturing overhead.

2019 Overhead Budget Information

The following information is available regarding the actual overhead costs incurred for 2018.

Variable CostsFixed CostsIndirect materials$.25 per gallonIndirect labor annual rate$55,000 per supervisorHourly employee fringe benefits25% of wagesHourly health benefits$2,000 per employeeSupervisor's fringe benefits25% supervisor's salariesSupervisor's health benefits$2,000 per employeeUtilities$.45 per machine hourMaintenance$.25 per machine hour$12,000 annuallyInsurance$50,000 annuallyProperty taxes$12,000 annuallySupplies$6,000 annuallyDepreciated (Items held during 2018)$275,000 annually

Note

Allocations of maintenance, insurance, property taxes, and supplies are allocated to departments based upon production levels in gallons. The 2018 Depreciation allocation to Magnificent Dept. is $150,000 and Marvelous Dept. is $125,000.

It is expected that the following changes will occur during 2019.

Variable CostsFixed CostsIndirect materialsNo changeIndirect labor annual rate3.0% increaseHourly fringe benefitsNo changeHourly health benefitsIncrease $250/employeeSupervisor fringe benefitsNo changeSupervisor health benefitsIncrease $250/employeeUtilitiesNo changeMaintenanceIncrease $.05 per MHRIncrease $500 annuallyInsuranceIncrease $500 annuallyProperty taxesIncrease 8%SuppliersIncrease $300 annuallyDepreciation (Items held during 2018)

No changeDepreciation (Machinery purchased in 2019)5-year life

Note

There will be no salvage value for the equipment purchased in 2019. MHR is Machine Hours.

2019 Sales Department Information

The Sales Department consists of 10 representatives who report directly to the president. Each individual is on a salary plus commission, and the sales reps also submit meal and entertainment expenses for reimbursement. (In 2018, the meal and entertainment expenses were limited to $50 per week per sales representative based upon a 52-week year.)

The following information is available regarding the actual selling costs incurred for 2018.

VariableFixedCommissions$.40 per gallon soldSalaries$20,000 per sales representativeFringe Benefits25% of commissions25% of salaries

Health Benefits$1,800 per sales representativeAdvertising$10 per 100 gallons soldMeals and Entertainment$50 per week per representativeDepreciation$8,000

It is felt that the company will not need any additional sales representatives for 2019. It is expected that the following changes will occur in 2019.

VariableFixedCommissionsNo change

SalariesNo change

Fringe BenefitsNo change

No change

Health BenefitsIncrease $250 per representative

Advertising$12 per 100 gallons soldMeals and Entertainment$60 per week per representativeDepreciationNo change

2019 Administrative Budget Information

The Administrative Department consists of the president and an office staff of eight who handle the secretarial, purchasing, and accounting duties (total of nine people).

The following information is available regarding the 2018 actual costs.

VariableFixedSalaries$300,000 annualFringe Benefits20% of salariesHealth Benefits$2,000 per employeeProfessional Fees$25,000 annuallyOffice Supplies$.04 per gallon soldTelephone$.02 per gallon soldDepreciation$8,000 annually

It is felt that the level of the office and administrative staff will be adequate for the coming year. It is expected that the following changes will occur in 2019.

VariableFixedSalariesIncrease 3% annually

Fringe BenefitsNo change

Health BenefitsIncrease $250 per employee

Professional FeesIncrease of $2,000

Office SuppliesIncrease .01 per gallon sold

TelephoneIncrease .01 per gallon sole

DepreciationNo change

2019 Income Tax Information

The current federal tax rate is 20%. All taxes for the year will be paid by the end of the year, which means there will be no accrued taxes on December 31, 2019.

2019 Accounts Receivable information

It is expected that sales will occur evenly throughout the year and that there will be no cash sales. Seventy-five percent of monthly sales will be collected in the month following the sale, and the remaining 25% will be collected by the end of the second month. No bad debts are anticipated.

2019 Accounts Payable Information

The account represents the purchases for raw materials only. It is expected that purchases will be made evenly throughout the year and that all purchases will be paid for during the month following the purchase.

2019 Wage and Salary Information

The accrued wage account will include all direct labor, indirect labor, sales commissions and salaries, and administrative salaries. All wages are earned evenly throughout the year, and employees are paid twice each month. On December 31, 2019, the accrued wages will include wages representing one full payroll period.

2019 Property Plant and Equipment Information

Property, Plant, and Equipment consist of the following on December 31, 2018.

Property and Plant

$800,000Equipment$1,155,000Total$1,955,000

Each additional machine that is needed to support the production level expected during 2019 will cost $35,000 and be depreciated over 5 years using the straight-line method. Assume that any equipment purchases are made on the first day of January and are operational throughout the entire year.

No new equipment will be needed for the sales and administrative departments.

2019 Long-Term Debt Information

A long-term debt repayment (principle only) will be made on December 31, 2019 for $275,000. The interest rate charged on the debt balance throughout 2019 will be 8% and will be paid on December 31, 2019.

If an additional machine is purchased, $5,000 will be paid in cash and the remaining $30,000 will be financed at the 8% rate. The same proportion of cash/additional debt will be applied to all additional equipment purchased during 2019. Again, any purchases will be made on January 1, 2019.

Dividend Policy

Paulson Paint, Inc. policy is to pay dividends on the last day of each quarter. The total anticipated dividends for 2019 are $2.75 per share.

Other Information

Unless otherwise noted, information will remain unchanged from 2018 to 2019.

2018 Income Statement and Balance Sheet

Paulson Paint, Inc.

Income Statement

Year Ended December 31, 2018

Sales$11,482,600Cost of Goods Sold$9,192,947Gross Margin$2,289,653Selling Expenses$603,339Administrative Expenses$387,056$990,395Operating Income$1,299,258Interest Expense$96,440Income Before Income Tax$1,202,818Income Tax$240,564Net Income$962,254

Paulson Paint, Inc.

Balance Sheet

December 31, 2018

AssetsCash$190,000Accounts Receivable$857,000Inventory-Raw Materials$412,000Inventory-Finished Goods$564,850Plant and Equipment$1,955,000Less Accumulated Depreciation($630,000)Total Assets$3,348,850LiabilitiesAccounts Payable$395,620Accrued Wages$82,500Accrued Other$71,220Long-Term Debt$1,230,000Total Liabilities$1,779,340Stockholders' EquityCommon Stock, $5 per value$450,000Additional Paid-In Capital$684,430Retained Earnings$435,080Total Stockholders' Equity$1,569,510Total Liabilities and Stockholders' Equity$3,348,850

Course Project Requirements

Prepare the following budgets for the fiscal year ending December 31, 2019 using the provided worksheet.

Important!

It is required to use the provided worksheets using Excel formulas.

Milestone 1

Milestone 1 is due in Week 5 and worth 75 points.

1. A sales projection in units using the methods suggested (10 points)
2. Sales budget (10 points)
3. Production budget (10 points)
4. Direct materials budget (10 points)
5. Direct labor budget (10 points)
6. Manufacturing overhead budget (10 points)
7. Projected Cost of Goods Manufactured (Absorption Costing) (15 points)