Individual Case Study 2: Master Budget And Cash Budget

Individual Case Study 2 Master Budget Cash Budget And Budgeted Income

Develop a comprehensive master budget, cash budget, and budgeted income statement for All About The Beard Inc. (AATB) from October 2020 to October 2021. The budget should incorporate sales forecasts, production plans, raw materials purchasing, manufacturing overhead, selling and administrative expenses, financial activities, and cash flow management to meet company objectives. Ensure the budget maintains a minimum ending cash balance of $35,000 monthly, accounts for seasonal sales fluctuations, credit collection and payment policies, contributions to dividends, and planned asset acquisitions. Use the provided data and constraints to prepare detailed schedules and financial statements that support effective planning and decision-making for the company.

Paper For Above instruction

Introduction:

The purpose of this paper is to develop a comprehensive master budget, cash budget, and budgeted income statement for All About The Beard Inc. (AATB) for the twelve-month period from October 2020 through October 2021. The goal is to assist management in financial planning, ensuring liquidity, operational efficiency, and strategic investment decisions, such as land acquisition. Given the company's growth, seasonal sales, and credit policies, a detailed and integrated budgeting process is essential to meet the company’s financial objectives and provide transparent financial reporting to shareholders.

Sales Budget and Revenue Projections

The sales budget is the foundation for all subsequent budgets. Based on the forecast, AATB expects to sell 3,000 units in Q1 with an increase of 500 units each subsequent quarter, reaching 4,500 units in Q4. At a unit price of $20, the quarterly revenues are projected as follows:

- Q1: 3,000 units x $20 = $60,000

- Q2: 3,500 units x $20 = $70,000

- Q3: 4,000 units x $20 = $80,000

- Q4: 4,500 units x $20 = $90,000

These sales figures form the basis for the production, cash flow, and receivables budgets.

Production Budget

The production schedule ensures enough units are produced to meet sales demand plus desired ending inventory. The company maintains an ending inventory equal to 20% of the following quarter’s sales volume:

- Q1 ending inventory: 20% of Q2 sales units (3,500 units) = 700 units

- Q2 ending inventory: 20% of Q3 sales units (4,000 units) = 800 units

- Q3 ending inventory: 20% of Q4 sales units (4,500 units) = 900 units

- Q4 ending inventory: 20% of Q1 sales units (3,000 units) = 600 units

Required production for each quarter:

- Q1: (Sales of 3,000) + (Ending inventory of 700) – Beginning inventory (assumed zero at start) = 3,700 units

- Q2: 3,500 + 800 – 700 = 3,600 units

- Q3: 4,000 + 900 – 800 = 4,100 units

- Q4: 4,500 + 600 – 900 = 4,200 units

The production plan guides raw materials procurement and labor scheduling.

Direct Materials Budget

Each unit requires 2 pounds of raw material at $4 per pound. Raw material inventory is planned to be 10% of the next quarter’s production requirements in pounds:

- Q1 production: 3,700 units x 2 lbs = 7,400 lbs

- Q2 production: 3,600 units x 2 lbs = 7,200 lbs

- Q3 production: 4,100 units x 2 lbs = 8,200 lbs

- Q4 production: 4,200 units x 2 lbs = 8,400 lbs

Desired ending inventory:

- Q1: 10% of Q2 requirement (7,200 lbs) = 720 lbs

- Q2: 10% of Q3 (8,200 lbs) = 820 lbs

- Q3: 10% of Q4 (8,400 lbs) = 840 lbs

- Q4: 10% of Q1 of next year (7,400 lbs) = 740 lbs

Purchases are paid 50% in the purchase quarter and 50% in the following quarter. Calculated purchase quantities incorporate beginning inventory and desired ending inventory.

Direct Labor Budget

Each unit requires 2 hours of labor at $10 per hour, which totals $20 per unit:

- Q1: 3,700 units x 2 hours = 7,400 hours; cost: 7,400 x $10 = $74,000

- Q2: 3,600 units x 2 hours = 7,200 hours; cost: $72,000

- Q3: 4,100 units x 2 hours = 8,200 hours; cost: $82,000

- Q4: 4,200 units x 2 hours = 8,400 hours; cost: $84,000

Manufacturing Overhead Budget

Overhead includes variable and fixed components:

- Variable overhead based on direct labor hours:

- Indirect materials: $0.2 per hour

- Indirect labor: $0.5 per hour

- Fixed overhead includes wages, utilities, insurance, and depreciation:

- Monthly fixed costs: Wages ($2,000), Utilities ($1,500), Insurance ($2,000), Depreciation ($2,000)

Total overhead is computed quarterly and allocated based on direct labor hours.

Operating Expenses (S&A)

Selling and administrative expenses include:

- Variable expenses:

- Sales commissions ($1 per unit)

- Freight ($1 per unit)

- Fixed expenses:

- Wages and salaries

- Utilities

- Insurance

- Depreciation

- Miscellaneous expenses

Total operating expenses are calculated per quarter based on sales volume and fixed costs, ensuring all are paid timely.

Cash Budget and Financial Activities

The cash budget tracks monthly cash inflows and outflows. Collection policies specify:

- 50% of sales are collected in the quarter of sale

- Remaining 50% collected in the subsequent quarter

- Further 20% and 30% collected in subsequent quarters per credit policy

Payments include purchases, wages, overhead, dividends, land purchase, loan repayments, and taxes according to schedule.

Given starting cash of $14,000, the model ensures a minimum ending cash balance of $35,000 each month by arranging borrowings, mainly in increments of $1,000 at an annual simple interest rate of 12%.

Financial Statements

The budgeted income statement summarizes revenues, cost of goods sold (COGS), gross profit, operating expenses, EBITDA, interest expenses on borrowings, taxes, and net income for each quarter.

The COGS is based on production volume and unit costs:

- DM: 2 lbs per unit @ $4/lb

- DL: $10 per hour for 2 hours per unit

- MOH: Computed based on variable and fixed costs

The projected net income informs profitability and operational effectiveness.

Conclusion and Strategic Recommendations

This detailed master budgeting process integrates sales forecasts, production planning, resource procurement, expense management, and cash flow control. It provides management with a robust framework to monitor actual performance against projections. The planned asset acquisition and dividend policies are incorporated into the overall financial planning. Maintaining a minimum cash balance, optimizing credit collection and payment cycles, and controlling overhead and operating expenses are crucial for sustaining growth and ensuring liquidity. The final budget serves as a critical tool for strategic decision-making and stakeholder confidence.

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