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 at 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 sales price per unit is $18.00 and the total product cost is $14.35 per unit.

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

3.     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 units of production. 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 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. The following critical elements must be addressed by completing the budget templates found on the “Budgets” tab.

Specifically, the following critical elements must be addressed when creating an Operating Budget by completing the budget templates found on the “Budgets” tab of your student workbook.

Step 1: Prepare a Sales Budget

·       Complete Part A – Sales Budget on the budget tab 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 sales price per unit is $18.00 and the total product cost is $14.35 per unit.

·       You can find an example of a sales budget in Exhibit 22-5 on page 1324.

Step 2: Prepare a Production Budget

·       Complete Part C – Production Budget on the budget 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 sales price per unit is $18.00 and the 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: Company policy calls for a given month’s ending finished goods inventory to equal 70% of the next month’s expected unit sales.

·       You can find an example of a production budget in Exhibit 22-6 on page 1325.

Step 3: Prepare a Manufacturing Budget (See text example Exhibits 22-7, 22-8, and 22-9 on pages 1326–1328)

Complete Part E – Manufacturing Budget on the budget tab 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 units of production. 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: Prepare a Selling Budget

·       Complete Part G – Selling Expense Budget.

·       Consider assumption 8 while completing this critical element: Sales 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: 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 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 hours of $15.

Step 1: Complete A. 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 raw materials budget and the labor budget.

·       Use Exhibits 23-11 on page 1416 and 23-12 on page 1419 as guides.

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

Congratulations! You have completed the workbook portion of your Final Project Part I. To complete the discussion portion of Final Project Part I, complete the Final Project Part I Student Discussion document.