Acct6111 Fall 2013 Assignment Case 1: Budgeting Muscat Sanda

Acct6111 Fall 2013 Assignment Case 1: Budgeting Muscat Sandals Company (MSC)

Muscat Sandals Company (MSC) produces cloth sandals in two styles: Regular and Deluxe, with different materials and labor requirements. MSC is preparing its January 2013 budget based on estimated sales, cost data, inventory levels, and activity-based overhead costs. The assignment entails preparing various budgets, including sales, production, materials, labor, overhead, inventory, cost of goods sold, and marketing expenses. Additionally, a cash budget, budgeted income statement, and balance sheet for January 2013 need to be developed, considering accounts receivable/payable, expenses, dividends, taxes, and loan interest. The data includes beginning inventories, estimated sales, cost details, activity rates for overhead, and other financial and operational parameters.

Paper For Above instruction

Muscat Sandals Company (MSC) operates in the footwear industry, specializing in cloth sandals with two distinct styles: Regular and Deluxe. For January 2013, MSC meticulously prepared various financial and operational budgets to project its performance, cash flows, and inventory status. The comprehensive budgeting process encompassed sales forecasts, production plans, material and labor requirements, overhead allocations, and financial statement projections, all crucial for effective planning and decision-making.

Sales Budget

The sales budget is the foundation of the budgeting process, projecting unit sales for each product. MSC estimated sales of 2,000 pairs of Regular sandals and 3,000 pairs of Deluxe sandals for January 2013. With selling prices of $80 and $130 respectively, total expected revenues from sales would be $160,000 (Regular) and $390,000 (Deluxe), summing to a total of $550,000. This projection informs subsequent budgets, such as production and inventory planning.

Production Budget

The production budget determines the number of units that need to be produced to meet sales demand and maintain desired ending inventory levels. The target ending inventory was set at 386 yards of cloth and 295 board feet of wood, corresponding to sufficient stock for future sales and manufacturing needs. Using the FIFO inventory method, beginning inventories were considered for calculating production needs. Given the expected sales, production units for each style were calculated to ensure inventory targets are achieved, aligning with the batch production process of 50 pairs per batch.

Direct Material Usage and Purchases Budget

The direct materials requisitioned per unit include 1.3 yards of cloth for Regular styles and 1.5 yards for Deluxe. The total material usage is derived from projected production, considering beginning inventories and desired ending inventories. For example, for Regular sandals, material needed is based on the forecasted units and per-unit requirements. To determine the material to be purchased, the ending inventory policy and FIFO method are applied. Calculations also convert material requirements into dollar amounts by multiplying the quantities by current per-yard costs ($3.50 for cloth, $5.00 per board foot for wood).

Direct Manufacturing Labor Budget

Labor requirements are based on direct labor hours per unit, with 5 hours for Regular and 7 hours for Deluxe sandals, at a rate of $10 per hour. Total labor costs are calculated by multiplying the projected production units by labor hours per unit and then by the labor rate, providing a detailed view of direct labor expenses.

Manufacturing Overhead Budget

Overhead costs, allocated through activity-based costing, include setup, processing, and inspection costs. Setup costs are based on setup-hours, with a rate of $12 per setup-hour, while processing costs are linked to direct labor hours at $1.20 per DMLH. Inspection costs are per pair of sandals at $0.90. Total overhead estimates for January are obtained by applying activity rates to expected activity levels, ensuring accurate absorption of overhead costs into product costs.

Ending Finished Goods Inventory and Cost Calculations

The cost of ending inventory is derived from the unit cost, which includes raw materials, labor, and allocated overhead. The ending inventory valuation considers FIFO inventory flow assumptions, with costs assigned based on earliest inventory layers. The unit cost is computed by dividing total costs by units produced, and ending inventory values are consequently determined.

Cost of Goods Sold Budget

The COGS budget combines beginning inventory, production costs, and ending inventory to determine gross profit. Calculation involves subtracting ending inventory costs from the sum of beginning inventory and production costs. This provides an estimate of the expenses directly related to sold units for January.

Marketing and General Administrative Costs Budget

Marketing and G&A expenses are budgeted as percentages of sales revenue, with additional costs such as shipping calculated based on shipment volumes (40 pairs per shipment). The specific percentages are 8% of sales revenue for marketing and G&A, and $10 per shipment for shipping costs, totaling budgeted expenses for January.

Cash Budget

The cash budget reconciles cash inflows and outflows, starting with receivables collections, which follow a 60%, 38%, and 2% pattern of sales from current and prior months. Accounts payable for materials are paid 80% in the current month and 20% in the subsequent month. Expenses such as labor, overhead, marketing, taxes ($7,200), interest payments (0.5% on $100,000), dividends, and other costs are included. The cash balance at the end of January provides insight into liquidity and financing needs.

Budgeted Financial Statements

Using projected revenues and expenses, the income statement for January summarizes gross profit, operating expenses, and net income. The balance sheet as of January 31 reflects projected assets, liabilities, and equity, adjusting beginning balances with January activity, particularly focusing on cash, receivables, inventories, and payables. Depreciation costs are non-cash expenses, influencing net income but not cash flows.

Conclusion

Effective budgeting in MSC’s case involves integrating detailed sales forecasts, cost estimates, and activity-based overhead allocations to prepare realistic financial and operational plans. The coordinated approach ensures that inventory levels, cash flows, and profitability are closely monitored, enabling MSC to make informed decisions and maintain financial stability amidst market fluctuations. Regular review and adjustment of these budgets are essential for responsive management and strategic growth.

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