Randy's Kayaks Inc. Budget Preparation And Financial Analysi
Randys Kayaks Inc Budget Preparation and Financial Analysis for 2012
Randys Kayaks Inc. manufactures and sells one-person fiberglass kayaks. The company’s balance sheet at the end of 2011 provides the starting point for preparing the 2012 master budget, which includes sales, production, purchases, expenses, cash flow, income statement, and balance sheet projections. The company’s management aims to maintain a minimum cash balance of $50,000 each quarter, borrowing in $10,000 increments at a 6% interest rate if needed, and making quarterly dividend payments of $4,000.
Additional data such as sales estimates for each quarter, cost details, expected equipment purchases, and planned income tax payments guide the comprehensive budgeting process. This process will enable management to forecast financial performance and liquidity, identify potential funding needs, and evaluate operational plans for the upcoming year.
The budget components to be prepared include:
1. Sales budget with expected cash collections for each quarter and the entire year
2. Production budget for each quarter and the year
3. Direct materials purchases budget with expected cash disbursements per quarter and annually
4. Direct labor budget per quarter and annually
5. Manufacturing overhead budget, including cash disbursements quarterly and yearly
6. Ending finished goods inventory budget for the year
7. Selling and administrative expense budget with cash disbursements quarterly and annually
8. Cash flow budget for each quarter and the entire year
9. Budgeted income statement for 2012
10. Budgeted balance sheet at year-end 2012
11. A management memo with comments and recommendations based on the budget
This comprehensive budget provides a detailed financial plan to guide Randy’s Kayaks through 2012, ensuring operational and financial goals are met efficiently.
Paper For Above instruction
Introduction
Budgeting is an essential process for any manufacturing firm, especially for a company like Randy’s Kayaks Inc., which relies on precise planning to meet operational objectives and maintain liquidity. The primary goal of this comprehensive exercise is to develop a detailed master budget for the year 2012, encompassing sales forecasts, production planning, cost estimation, cash management, and financial statement preparation. This exercise offers insight into revenue management, cost control, cash flow optimization, and strategic decision-making, which are paramount for sustaining growth and profitability.
Sales Budget and Cash Collections
Randy’s anticipated sales for the year were provided in units per quarter, with specific amounts for each period. Since the sales price per kayak is $400, the sales revenue for each quarter was calculated accordingly. The sales forecast was also used to determine cash collections, given the company's collection policy—40% in the quarter of sale and 60% in the following quarter. This cash collection schedule is crucial for preparing the cash budget and managing working capital effectively.
Quarterly sales and collections were projected as follows:
- Q1: 1,000 kayaks, revenue = $400,000; cash collection = 40% of Q1 sales ($160,000); 60% collected in Q2.
- Q2: 2,000 kayaks, revenue = $800,000; cash collection = 40% of Q2 sales ($320,000); 60% in Q3.
- Q3: 3,000 kayaks, revenue = $1,200,000; cash collection = 40% ($480,000); 60% in Q4.
- Q4: 4,000 kayaks, revenue = $1,600,000; cash collection = 40% ($640,000); remaining 60% collected in Q1 of next year (not budgeted here).
Annual total expected cash collections from sales were computed accordingly.
Production Budget
The production schedule ensures enough kayaks are produced to meet sales demand and desired ending inventories, considering beginning inventory and safety stock levels.
- The company desires to keep raw materials ending inventory at 40% of next quarter's production needs, and finished goods ending inventory at 10% of next quarter's sales.
- Production for each quarter was calculated based on sales forecasts, beginning inventories, and desired ending inventories, ensuring smooth production flow without stockouts.
- For example, Q1 production was determined by the formula:
Production = (Sales in Q1 + Desired ending inventory) - Beginning inventory.
Applying these principles quarterly resulted in an organized production schedule aligned with sales projections.
Direct Materials Purchases
Material requirements were based on a per-unit usage of 10 pounds at $3 per pound, for each kayak produced. The purchasing plan accounts for inventory policies, purchasing in quantities that support production and inventory needs.
- Raw materials purchases were determined by multiplying the total pounds needed for the quarter's production by 10 pounds, then adjusting for desired ending raw materials inventory.
- Cash disbursements for raw materials followed the company's policy: 70% paid in the purchase quarter, 30% in the following quarter.
- The cash disbursement schedule was derived accordingly, with totals for each quarter summarized for the year.
Direct Labor Budget
Labor costs were computed based on 10 hours per kayak at a rate of $20 per hour. The total labor hours and expenses per quarter were calculated based on production levels, thus aligning labor costs with operational plans.
- The direct labor budget reflected the total hours needed per period and the associated wages, ensuring an accurate reflection of labor expenses.
Manufacturing Overhead Budget
Manufacturing overhead encompassed variable and fixed costs. Variable costs were calculated based on direct labor hours at $5 per hour. Fixed manufacturing overhead included depreciation, apportioned evenly each quarter, and other fixed expenses totaling $103,125 per quarter.
- Cash disbursements for overhead costs were primarily due to variable expenses, with depreciation accounted for as a non-cash expense.
Ending Finished Goods Inventory Budget
Finished goods inventory was targeted at 10% of next quarter’s sales units, valued at standard cost (10 pounds x $3 = $30 per kayak), which equates to a valuation of $12,000 per unit.
- The ending inventory budget ensured sales fulfillment and buffer stock necessary for smooth operations across quarters.
Selling and Administrative Expenses
Expenses were categorized into fixed and variable costs. Fixed expenses included insurance ($45,000 quarterly), sales salaries ($30,000 quarterly), and depreciation ($6,000 quarterly). Variable selling expenses were $25 per kayak, increasing with production output.
- Cash disbursements followed the expense structure, with fixed costs paid each quarter and variable costs tied directly to sales volume.
Cash Budget
The cash budget integrated all cash inflows and outflows, including sales collections, material and labor payments, overhead, selling expenses, dividends, and equipment purchases.
- Borrowing was scheduled at quarter-start if cash was projected below $50,000, in $10,000 increments at a 6% interest rate.
- Payments for principal and interest were calculated based on borrowing or repayment schedules, considering the timing of cash shortages or surpluses.
- The budget maintained a minimum cash balance of $50,000, with borrowings and repayments managed to achieve this target.
Income Statement and Balance Sheet
The projected income statement captured sales revenue, cost of goods sold (including direct materials, labor, and overhead), gross profit, operating expenses, and income tax expense.
- Income taxes were calculated at a 30% rate based on pre-tax income, with payments scheduled as per the plan.
- The budgeted balance sheet summarized assets and liabilities at year-end, reflecting planned changes from operational activities, capital purchases, and profit retention.
Management Recommendations and Conclusion
The comprehensive budgeting process reveals the financial health and operational capability of Randy’s Kayaks Inc. It highlights the importance of cash flow management, cost control, and inventory planning. Management should monitor cash inflows and outflows closely, especially given the planned large equipment purchase in Q4, which could strain liquidity if not managed prudently. Effective scheduling of payments, borrowing, and repayments will be critical to avoid cash shortages.
Furthermore, leveraging budgeting insights can inform strategic decisions such as capacity expansion, product pricing, or operational efficiencies. Recommendations include maintaining strict cost control, exploring flexible financing options, and continuously reviewing sales forecasts to adapt the budget as needed. The iterative process of budget management will help Randy’s Kayaks optimize profitability and ensure sustainable growth throughout 2012.
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