AC2620: Module 4 Budgeting And Cost Variance Analysis Exerci

AC2620: Module 4 Budgeting and Cost Variance Analysis Exercise

Ac2620 Module 4 Budgeting And Cost Variance Analysisexercise 43masteAc2620 Module 4 Budgeting And Cost Variance Analysisexercise 43masteAC2620: Module 4 Budgeting and Cost Variance Analysis Exercise 4.3 Master Budget 1 The results of operations for the Garret Bug Spray Manufacturing Company for the fourth quarter of 2014 were as follows (in thousands): Sales of bug spray $500,000 Less variable cost of goods sold $280,000 Contribution margin $220,000 Less fixed production costs $90,000 Less fixed selling and administrative expenses $50,000 $140,000 Income before taxes $80,000 Less taxes on income $32,000 Net income $48,000 Note: Garret uses the variable costing method. Therefore, only variable costs are included in the cost of goods sold. Fixed costs are charged to expense in the period incurred. The company’s balance sheet as of the end of the fourth quarter of 2014 was as follows (in thousands): Assets Cash $ 30,000 Accounts receivable 250,000 Total current assets 280,000 Fixtures and equipment $130,000 Less accumulated depreciation 80,000 50,000 Total assets $330,000 Liabilities and owners’equity: Accounts payable $ 44,800 Retained earnings 175,000 Common stock 110,200 AC2620: Module 4 Budgeting and Cost Variance Analysis Exercise 4.3 Master Budget 2 Assets Total liabilities and owners’equity $330,000 Additional information: ï‚· Sales and variable costs of sales are expected to increase by 7 percent in the next quarter. ï‚· All sales are on credit with 50 percent collected in the quarter of sale and 50 percent collected in the following quarter. ï‚· Variable cost of sales consists of 40 percent materials, 40 percent direct labor, and 20 percent variable overhead.

Materials are purchased on credit. Sixty percent are paid for in the quarter of purchase, and the remaining amount is paid for in the quarter after purchase. ï‚· There is no inventory. Also, direct labor and variable overhead costs are paid in the quarter the expenses are incurred. ï‚· Fixed production costs (other than $5,000 of depreciation expense) are expected to increase by 1.5 percent. Fixed production costs requiring payment are paid in the quarter they are incurred. ï‚· Fixed selling and administrative costs (other than $3,000 of depreciation expense) are expected to increase by 3 percent. Fixed selling and administrative costs requiring payment are paid in the quarter they are incurred. ï‚· The tax rate is expected to be 40 percent. All taxes are paid in the quarter they are incurred. ï‚· No purchases of fixtures or equipment are expected in the first quarter of 2015. Based on this information, perform the following tasks: ï‚· Prepare a budgeted income statement for the first quarter of 2015. ï‚· Prepare a budgeted statement of cash budget for the first quarter of the next year. ï‚· Prepare a budgeted balance sheet as of the end of the first quarter of the next year. Submission Requirements: ï‚· Answer the problem in detail with conclusion and results. ï‚· Submit your answer in a Microsoft Excel file, showing step-by-step calculations. Evaluation Criteria: The exercise rubric will be used to evaluate your responses.

Paper For Above instruction

The present financial planning exercise involves creating a comprehensive budget for Garret Bug Spray Manufacturing Company, focusing on the first quarter of 2015. This includes preparing a budgeted income statement, a cash flow statement, and a balance sheet based on historical data from 2014 and assumptions about changes in sales, costs, and expenses. The goal is to project financial performance, cash position, and financial health to assist management in decision-making and strategic planning.

Introduction

Budgeting is a crucial process for manufacturing companies like Garret Bug Spray, enabling managers to forecast revenues, costs, cash flows, and financial position. Effective budgeting helps in resource allocation, cost control, and strategic planning. Given the company's prior performance and the projected increases in sales and costs, developing future budgets provides valuable insights into expected profitability and liquidity.

Analysis of Historical Data

The company's operating results for Q4 2014 show sales of $500,000 with a gross contribution margin of $220,000 after variable costs, which amounted to $280,000. Fixed costs totaled $140,000, leading to an income before taxes of $80,000 and net income of $48,000 after taxes. The balance sheet indicates total assets of $330,000, with current assets primarily in cash and receivables, and fixed assets net of depreciation at $50,000. The company’s equity and liabilities are balanced at $330,000.

Forecast Assumptions and Changes

For the upcoming quarter, sales and variable costs are expected to increase by 7%. The assumption of no inventory requires that sales are fully realizable and costs are directly proportional to sales. The collection pattern remains at 50% in the current quarter and 50% in the subsequent quarter, influencing receivables and cash collections. Materials purchases on credit will follow a payment cycle of 60% in the purchase quarter and 40% in the following quarter.

Fixed costs, excluding depreciation, are anticipated to rise slightly: production costs by 1.5% and selling and administrative costs by 3%, reflecting inflation and cost pressures. Depreciation expenses are treated as non-cash and excluded from cash flow calculations but included in profit calculations.

Budgeted Income Statement for Q1 2015

To construct the income statement, first determine projected sales: $500,000 x 1.07 = $535,000. Variable COGS thus increases proportionally: $280,000 x 1.07 = $299,600. Material, labor, and variable overhead costs are derived based on their respective ratios, and fixed costs are inflated as specified. Calculations also factor in taxes at 40% to arrive at net income.

Budgeted Cash Budget for Q1 2015

The cash budget incorporates cash collections from sales, payments for materials, direct labor, variable overheads, fixed costs, and taxes. Arrears from previous periods influence cash inflows; payments for materials depend on prior purchases with payment terms of 60/40. Fixed costs are paid as incurred, adjusted for inflation. Tax payments are based on taxable income, considering depreciation and timing of expenses.

Budgeted Balance Sheet at the End of Q1 2015

The balance sheet forecast includes assets, liabilities, and equity post-budget. Cash balance calculation considers beginning cash, net cash flows, and any adjustments for receivables and payables. Accounts receivable increases with sales, and accounts payable depend on material purchases and payment schedules. Fixed assets are unchanged as no new purchases are planned; equity adjusts based on projected net income minus dividends. This comprehensive view indicates the company’s financial position after executing the budget.

Conclusion

Creating a detailed budget involves synthesizing historical data, projecting future operations, and applying assumptions about cost increases, collection patterns, and payment cycles. The resulting forecasts help in understanding expected profitability, liquidity, and financial stability. For Garret Bug Spray, the budgeting exercise emphasizes the importance of careful planning in managing growth and controlling costs while maintaining profitability and ensuring cash availability for operational needs.

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