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Budgeting Project




Fanciful, Inc. is a case study which allows you to incorporate numerous financial and managerial accounting concepts into a single business setting. You will take the position of the company controller who will prepare the budget for the year ended December 31, 2013, using the actual data from 2008 through 2012, and information given to you by various departments. You will prepare a report for the president of the company, describing the strengths and weakness of the corporation, as well as provide suggestions for the future. In short, you will be responsible for the planning and control procedures for the company from an accounting standpoint.;In order to focus on important accounting concepts, certain simplifications are necessary to make this case manageable. The student should keep the following simplifications in mind while working on this case;? Work in process inventories will be ignored.;? Financial and IRS tax will be the same.;? Some projections for 2013 will be given.;? Standards used for the 2013 budget will be the reasonably obtainable standards.;? No hourly worker will work overtime.;? All price changes will occur on January 1st and will remain in effect for the entire year.;? The actual 2012 information is available while preparing the 2013 budget.;? All debt transactions will occur either on January 1st or December 31st.;? There are no bad debts.;The student should also keep in mind that 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 always have to be rounded up.;GENERAL COMPANY INFORMATION;Fanciful, Inc. is a paint manufacturing company that produces two qualities of paint, Super and Stupendous. The company was established eight years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 5 years. In 2010, a second, higher-quality paint was introduced, and sales of this product have increased each year due to reasonably effective sales efforts. The president is currently concerned about the potential inefficient use of capacity and the effect that this has on profits.;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 possible 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 not considering a second shift due to the additional $1.00-per-hour shift differential that would be necessary to pay the hourly second-shift workers.;The company had a cash flow problem in 2012, 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.;The company has paid a consistently good dividend to the stockholders. The president would like to continue this policy in the future.;DEPARTMENT STRUCTURE;Fanciful, Inc. has two separate production departments - one for each of the paint types. Since the end products are not distinguishable, the company uses process costing, employing a FIFO inventory.;Absorption costing is used for all outside reports. All non-direct 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. The need for separate departments is not necessary at this time.;2012 INFORMATION;SUPER STUPENDOUS;DEPARTMENT DEPARTMENT;Number of machines available 26 20;Annual capacity per machine 15,000 gallons 15,000 gallons;Annual production capacity 390,000 gallons 300,000 gallons;Machine hours available per machine 1,800 hours 1,800 hours;Standard machine hour per gallon.12 hour/gallon.12 hour/gallon;Standard labor hour per machine hour 1.25 labor hr/ 1.25 labor hr/;Actual sales volume 420,000 gallons 268,200 gallons;Number of hourly employees 29 21;Supervisors (one per each eight hourly;employees) 4 3;Raw material prices;Cans 40? each 40? each;Pigment $2.75 per pound $3.75 per pound;Raw material usage;Cans one per gallon one per gallon;Pigment two pounds per gallon two pounds per gallon;Direct labor rate $8.25 per hour $8.25 per hour;2013 PROJECTED SALES INFORMATION;The Sales Department feels very good about the prospects for 2013. The reputation of the new product, Stupendous 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 last three years for the Stupendous brand, even with a small price increase per gallon.;Super 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 regarding the two products has been gathered;Super Stupendous;Paint Paint;Anticipated 2013 Sales Price $10.30 per gallon $15.45 per gallon;Actual 2008 Sales 411,000 gallons None;Actual 2009 Sales 412,000 gallons None;Actual 2010 Sales 405,000 gallons 186,250 gallons;Actual 2011 Sales 430,000 gallons 223,500 gallons;Actual 2012 Sales 420,000 gallons 268,200 gallons;You have made the following conclusions about the two different products;Super 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 further past.;? Exponential Smoothing will be an appropriate unit sales projection method to use.;Stupendous 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.;2013 DIRECT MATERIAL AND INVENTORY BUDGET INFORMATION;The Production Department worked in conjunction with both the sales and purchasing departments in developing desired projected inventory levels for December 31, 2013. Information regarding beginning and desired ending inventories for 2013 are as follows;Beginning inventory Ending inventory;Cans 56,550 cans 61,700 cans;Pigment for Super Paint 63,300 pounds 70,000 pounds;Pigment for Stupendous Paint 49,700 pounds 53,750 pounds;Finished Goods Inventory;Super Paint 31,700 gallons 35,000 gallons;Stupendous Paint 24,850 gallons 27,000 gallons;The following direct material price increases are expected to occur on January 1, 2013, and remain effective for the entire year;Price increase expected;Cans 2? each;Pigments;Super Paint $0.14 increase over 2012 prices;Stupendous Paint $0.19 increase over 2012 prices;Inventories are accounted for using the FIFO method.;Hint: Remember that each gallon of paint requires two pounds of pigment.;2013 DIRECT LABOR BUDGET INFORMATION;During 2012, 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 total hours/2,000 per employee = 5.075, which needs to be rounded to 6 employees).;The standard direct labor rate will increase $0.25 per hour over the 2012 rate.;Additional information regarding employee benefits is included in the section on manufacturing overhead.;2013 OVERHEAD BUDGET INFORMATION;The following information is available regarding the actual overhead costs incurred for 2012;Variable costs Fixed costs;Indirect materials 20? per gallon;Indirect labor annual rate $50,000 per supervisor;Hourly employee fringe benefits 20% of wages;Hourly health benefits $1,500 per employee;Supervisor fringe benefits 20% supervisor?s salaries;Supervisor health benefits $1,500 per employee;Utilities 40? per machine hour;Maintenance 20? per machine hour *$10,000 annually;Insurance *$50,000 annually;Property taxes *$10,000 annually;Supplies *$5,000 annually;Depreciation (items held during 2012) **$250,000 annually;*These items are allocated to departments based upon production levels in gallons.;**The 2012 allocation was $141,300 to the Super Department, and $108,700 to the Stupendous;Department.;It is expected that the following changes will occur during 2013;Variable costs Fixed costs;Indirect materials No change;Indirect labor annual rate 2.5% increase;Hourly fringe benefits No change;Hourly health benefits Increase $200/employee;Supervisor fringe benefits No change;Supervisor fringe benefits Increase $200/supervisor;Utilities No change;Maintenance Increase 5?/MHr* Increase $500 annually;Insurance Increase $500 annually;Property taxes Increase 8.0%;Supplies Increase $200 annually;Depreciation (items held during 2012) No change;Depreciation (machinery purchased in 2013) Five-year life**;*Mhr stands for Machine hours.;** There will be no salvage value for the equipment purchased in 2013.;2013 SALES DEPARTMENT INFORMATION;The Sales Department consists of 10 representatives who report directly to the president. Each individual is on a base salary plus a commission, and the sales reps also submit meal and entertainment expenses for reimbursement. (In 2012, 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 2012;Variable Fixed;Commissions 35? per gallon sold;Salaries $15,000 per sales representative;Fringe benefits 20% of commissions 20% of salaries;Health benefits $1,500 per sales representative;Advertising $10 per 100 gallons sold;Meals & entertainment $50 per week per representative;Depreciation $7,500;It is felt that the company will not need any additional sales representatives for 2013. It is expected that the following;changes will occur in 2013;Variable Fixed;Commissions No change;Salaries No change;Fringe benefits No change No change;Health benefits Increase $200 per representative;Advertising $12 per 100 gallons sold;Meals & entertainment $60 per week per representative;Depreciation No change;2013 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 2012 actual costs;Variable Fixed;Salaries $250,000 annual;Fringe benefits 20% of salaries;Health benefits $1,500 per employee


Paper#74876 | Written in 18-Jul-2015

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