Case Study 2 Master Budgeting and Pro-Forma Financial Statements

You have just been assigned to a new manager who believes you have exceptional budgeting skills. Since you began your job last summer, you have been showing management your latest spreadsheets and how you use your new-found knowledge of Managerial Accounting to make sound business decisions. Your new manager is responsible for the nationwide distribution of designer handkerchief sets (HCS) and, through multiple franchise agreements, sales have grown very rapidly, and the timing is right for you to join her team and to show your skills. You have just been given responsibility for all planning and budgeting of the entire HCS division. Your first assignment is to prepare a master budget for the next three months, starting April 1, 2019. You accept this responsibility with enthusiasm and you are anxious to impress your new manager and the president of the company, who has a very high regard for you. To commence your new role, you have assembled the following pertinent information:

Note: The company desires a minimum ending cash balance each month on $10,000. The HCS’s are sold to retailers for $8 each and they are flying off the shelves. Recent forecasted sales in units are provided below:

The increased sales volume before and during June is due to Father’s Day with HCS being a favorite. Ending inventories are supposed to be equal to 90% of the next month’s sales in units. The cost of each HCS is $5.00.

Purchases are paid for in the following manner: 50% in the month of the purchase and the remaining 50% paid in the month following the purchase. All sales to the distributors are made on credit terms with no discount (for now), and payable within 15 days. The HCS division has determined that only 25% of a month’s sales are collected by the end of the month in which the sale occurred. An additional 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Bad debts have been negligible, supporting the credit terms as favorable.

Below is a display of the HCS division monthly selling and administrative expenses:

Selling and administrative expenses are all paid during the month, in cash, with the exception of depreciation (of course) and insurance is pre-paid for the duration of the policy. HCS will make a purchase of a parcel of land during the month of May for $25,000 cash. HCS contributes to the corporate dividend at a rate of $12,000 each quarter, payable in the first month of the following quarter. HCS’s balance sheet at the end of the first quarter is shown below:

An agreement with Bank of the West allows HCS to borrow in increments of $1,000 at the beginning of each month, up to a total loan amount of $150,000. The interest rate on these loans is 1% per month (pretty high but convenient nonetheless) but the interest is not compounded, meaning this is simple interest only. At quarter end, HCS would pay Bank of the West all of the accumulated interest on the loan and as much of the balance of the loan as possible (in $1,000 increments) while retaining the minimum $10,000 cash balance.

Required:

Prepare a master budget for the three- months ending June 30, 2019. Include the following budget schedules and financial statements:

5) Cash Budget. Show the cash budget by month and in total.

Answers to previous questions to help with answering question # 5

Part 2 –Schedule of expected cash collections from sales, by month and total.

Part 3 – Merchandise purchases budget in units and in dollars. Show the budget by month and total

Part 4 - Schedule of expected cash disbursements for merchandise purchases, by month and total

How are debt and stock investments reported in financial statements

Pam Inc. produces joint products O, P, and Q from a joint process. Information concerning a batch produced in May at a joint cost of $90,000 was as follows

Required:

            (1) Allocate the joint costs to the joint products using the physical measures method.

            (2) Allocate the joint costs to the joint products using the net realizable method.

Choose an area of the Accounting Profession (i.e. Public Accounting, Taxation, Managerial Accounting, Payroll, Controller (General Ledger/payables), Government Accountant, Bookkeeper, or any other area of Accounting) and write a two page paper to me describing the following:

-Description of the area

-any certifications available or required

-typical duties and responsibilities

-career prospects

-educational requirements

-why you chose the area

The paper will be graded on content, spelling, grammar, and originality

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

Financial data for Joel de Paris, Inc., for last year follow:

The company paid dividends of $266,940 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

3. What was the company’s residual income last year?

Nexto Inc. uses the weighted average method of process costing. The company has the following information for the period:

Beginning Work in Process: 2000 units 100% complete for materials, 75% complete for conversion costs

Units started during the period: 10,000

Ending work in process: 4,000 units 75% complete for materials, 50% complete for conversion costs

Costs for the period:

Beginning work in process: Materials: $1,100 Conversion Costs: $2,000

Costs added during the period: Materials: $14,300 Conversion Costs: $13,000

A) What are the total units to account for?  

B) How many units were completed during the month?  

C) What are the equivalent units for materials?  

D) What are the equivalent units for conversion?  

E) What is the cost per equivalent unit for materials? $

F) What is the cost per equivalent unit for conversion? $

G) What is the cost assigned to units completed and transferred out? $

H) What is the cost assigned to units in ending work in process? $

I) What are the total costs to account for? $

Use the following information to answer the next six questions:

All balances are as of 12/31/2019 unless specified otherwise.

5. Determine the Working Capital as of December 31, 2019.

1. 137,000
2. 5.9305
3. 187,500
4. 149,500
5. cannot be determined since the balance of Common Stock is not given

6. Determine Retained Earnings and Cash as of 12/31/2019.

7. Determine Total Liabilities as of 12/31/2019.

1. $48,500
2. $76,500
3. $153,000
4. $168,500
5. $181,000

8. Determine Income from Operations for 2019.

1. $200,500
2. $243,500
3. $117,000
4. $151,750
5. $165,750

9. Determine the Total Assets as of 12/31/2019.

1. $719,000
2. $769,000
3. $679,000
4. $669,000
5. $696,500

10. Determine the Profit Margin for the year ended December 31, 2019.              

1. 26%
2. 37%
3. 54%
4. 382%
5. $243,500

Denton Company manufactures and sells a single product. Cost data for the product are given:

The product sells for $48 per unit. Production and sales data for July and August, the first two months of operations, follow:

The company’s Accounting Department has prepared the following absorption costing income statements for July and August:

Required:

1. Determine the unit product cost under:

a. Absorption costing.

b. Variable costing.

2. Prepare contribution format variable costing income statements for July and August.

3. Reconcile the variable costing and absorption costing net operating incomes.

Alamar Petroleum Company offers its employees the option of contributing retirement funds up to 5% of their wages or salaries, with the contribution being matched by Alamar. The company also pays 85% of medical and life insurance premiums. Deductions relating to these plans and other payroll information for the first biweekly payroll period of February are listed as follows:
   

   
Required:
Prepare the appropriate journal entries to record salaries and wages expense and payroll tax expense for the biweekly pay period. Assume that no employee’s cumulative wages exceed the relevant wage bases for Social Security, and that all employees’ cumulative wages do exceed the relevant unemployment wage bases. Salaries are not yet paid. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  

Explain the tax implications of compensation in the form of salary and wages from the perspectives of the employee and employer.

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

* $3 per unit variable; $250,000 fixed each year.

The company’s $29 unit product cost is computed as follows:

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operations are:

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

record the transactions or events that should be recorded in the general journal

On August 2, Paid $2200 cash for August salon rent. On August 4, Incurred $400 of advertising costs due in 20 days On August 5, Purchased salon equipment for $120 On August 7, Paid for supplies (shampoos, creams, and gels) $350 On August 8, received $300 for selling gels On August 12, paid $200 water bill On August 12, paid $150 for electricity bill On August 14, incurred $1100 for the business’s bank loan due in 14 days On August 16, purchased a new chair set up for $450 On August 17, paid the amount due for the influencer $400 for advertising On August 19, paid $90 for my internet bill On August 21, received for $200 selling of shampoos On August 23, paid $110 for insurance On August 24, cleaner $110 On August 27, paid $1100 for the business’s bank loan On August 28, gas bills $35 On August 30, extra salary cost to a new trainee $400 On August 30, purchased a new tv screen $600 On August 30, paid $6000 in salaries for the month of August. On August 30, received $14000 from haircuts services during the month of August. And $500 of selling gels, creams, and shampoos

Zimmerman Inc. manufactures a single product, CXW. Zimmerman uses budgets
and standards in its planning and control functions. Zimmerman makes use of its
standards in order to derive their budgeted cost per unit. For example, Exhibit A
provides information on the budgeted variable costs per unit. When determining
direct material costs for the planning budget income statement, the $12 budgeted
material cost per unit of CXW would be used in the calculation.

Exhibit A

Budgeted
(Standard)
Variable Costs Per
Unit of CXW
Raw material: 3 pounds at $4 per pound $12
Direct labor: 0.75 direct labor hours at $20 per hour 15
Variable overhead: 0.75 direct labor hours at $12 per hour 9
Total variable budgeted (standard) cost per CXW $36
__________________________________________________________________
The standards for fixed manufacturing overhead costs are: 0.75 direct labor hours
at $8 per hour. The standard fixed manufacturing overhead cost per hour is
calculated based on a denominator level of activity of 30,000 direct labor hours.
The planning budget income statement is based on the expectation of selling
40,000 units of CXW. The budgeted sales price is $65 per unit, and total budgeted
fixed selling and administrative costs are $500,000. There are no variable selling
and administrative costs in this firm.
The company actually produced and sold 36,000 units this year. The company
never has a beginning or ending raw materials inventory, because it uses all raw
materials purchased. Also, the company never has a beginning or ending finished
goods inventory. Everything produced in the year is sold in that same year.

3

The actual income statement for the year is provided in Exhibit B.
Exhibit B
_______________________________________________________________

Zimmerman Inc.
Actual Income Statement

Sales:
36,000 units produced and sold at $68 $2,448,000
Less Variable Costs:
Direct materials (100,000 pounds at $4.25 per pound) 425,000
Direct labor (32,000 direct labor hours at $18/hr.) 576,000
Variable manufacturing overhead 400,000
Contribution margin 1,047,000
Less Fixed Costs:
Fixed manufacturing overhead costs 280,000
Fixed selling and administrative costs 485,000
Net operating income $ 282,000
Required:
2) Prepare a detailed income statement variance analysis using the contribution
approach income statement (i.e., variable costing basis) for the year (i.e.,
compare the actual income statement with the flexible budget income
statement and compare the flexible budget income statement with the
planning budget income statement). Show all the revenue, spending, and
activity variances appearing in the income statement analysis. A template
for answering this question is given below. All variances should be marked
with either an “F” for favorable or “U” for unfavorable. (35 points)

Acquisition Cost of Long-Lived Assets

The following items represent expenditures (or receipts) related to the construction of a new home office for Lowrey Company.

Required

From the given data, calculate the proper balances for the Land, Building, and Land Improvements accounts of Lowrey Company.