FNEC 2600Budget Case: Fall 2015
While attending West State University, Sydney Bradyrecognized there was business opportunity to silk-screen shirts for student organization and started a business called “Silk-Screen Design” at the beginning of last year (2014). Sydney obtained a 12-month $40,000 loan in January of 2014 to help get her business started. The interest rate on the note was6%, and the terms require payment of both the principal and interest to be remitted on January 5th of 2015.
The bank that loaned Sydney the $40,000 required her to put together detailed budgets as part of the loan application process. Sydney found this to be very helpful in getting her business started and has decided to go through the budgeting process again for 2015.Using the December 31, 2014 balance sheet along with the other information that follows, you are going to complete the 2015 budgeting process for Sydney.
December 31, 2014
Accounts Receivable 41,580
T-shirt (Materials) Inventory 24,000
Total Assets $252,906
Liabilities & Owner's Equity
Accounts Payable $52,800
Wages Payable 900
Notes Payable 40,000
Interest Payable 2,400
Income Taxes Payable 36,186
Total Liabilities $132,286
Capital or Retained Earnings 1,20,620
Total Liabilities & Owner's Equity $252,906
Sydney rents all of her equipment and furnishings but has decided to purchase the equipment and furnishings from the lessor at the end of lease term on April 1, 2015.The bank has agreed to loan Sydney an amount equal to the total cost of the furniture and equipment ($29,720). The 12-month, 5% loan will be dated April 1, 2015. Interest and principal will become due on March 31, 2016. A detail listing of the items that Sydney currently rents and will purchase follows. Sydney will depreciate all items on a straight-line basis with no salvage value:
Equipment& Furniture Monthly Rent Cost Life
Press that applies ink $250 $12,000 5 years
Light-exposure table (dries the ink) 20 2,000 10 years
Display furniture for retail area 40 4,000 10 years
Computer hardware &software for shirt design and production 150 5,200 4 years
Dryer conveyer belt 35 3,520 10 years
Computer hardware & software for administrative and sales activities 75 3,000 5 years
Blank T-shirts is the only direct material used in the production process. The cost per shirt was $8 in 2014 but will jump to$9.00 in 2015. Credit terms will carry over from 2014; 40% due in the quarter of purchase with the remaining 60% to be paid in the following quarter. Sydney will maintain an ending inventory of blank shirts equal to 20% of the next quarter’s sales volume. Shirts to be silk-screened are considered direct materials inventory. Sydney uses FIFO to account for the direct materials inventory and will carry no beginning or ending inventory for the finished products.
Sydney estimates the number of shirts to be sold in the next five quarters, beginning January 2015, to be:
First Quarter, year 2015 15,000
Second Quarter, year 2015 10,000
Third Quarter, year 2015 18,000
Fourth Quarter, year 2015 7,000
First Quarter, year 2016 16,000
The selling price of each shirt will be $15. 10 percent of sales are projected to be cash sales with the remaining sales on account. Some accounts had to be written off last year, so one percent of credit sales are going to be budgeted as bad debt in each quarter of 2015. Assume no write-offs will occur until 2016. Of the collectible credit sales, Sydney expects65% in the quarter of the saleand the remaining collectible balance to be received in the following quarter.
The estimated cost of ink used in the silk-screen process will be $37,500 in 2015 and will be applied quarterly based on the number of shirts produced. This cost is treated as an indirect material cost.
Knowing that the silk-screen process is labor intensive, Sydney plans to hire six students to help with the process. Based on Sydney’s sales projections, 5,500 hours of labor will be incurred during 2015 at an hourly rate of $12. Sydney expects that 92% of each quarter’s labor cost will be paid in the quarter incurred. The remaining cost will be paid in the following quarter.
Sydney needed one person to handle some administrative duties along with working in sales. Andy Lane, Director of Student Development at West State, was hired for this position. Andy knows the officers of all student organizations on campus and is also very active in the community. Because of his contacts, Sydney is willing to pay Andy $1,000 per month plus a 5% sales commission on all sales.
Sydney also had to find a person skilled in computer graphics to generate the designs to be printed on the shirts. Shecontracted a graphics designer at a rate of $600 per month plus $0.20 for each shirt printed. The entire cost of the graphic designer is treated as indirect labor.
The lease for a commercial building near the university and the downtown area requires monthly rent of $1,000. 80% of the building will be used in the silk-screen process and 20% will be used for sales and administration.
Maintenance and utility costs are both considered mixed costs. Sydney is confident that the maintenance and utility costs from 2014 can be used to generate the budgeted costs for 2015. The variable costs budgeted for maintenance and utilities are based on production volume, but the fixed cost for these two items is to be treated like rent; 80% incurred due to the silk-screen process and 20% incurred for sales and administrative activities. Data for maintenance and utility costs incurred in 2014 follow:
Shirts Produced & Sold Maintenance Cost Utility Cost
January 9,500 $2,230 $1,230
February 3,000 1,920 990
March 2,500 1,915 988
April 3,000 1,925 1,003
May 2,500 1,910 980
June 1,500 1,860 945
July 3,000 1,900 1,000
August 10,000 2,200 1,200
September 9,000 2,160 1,170
October 5,000 2,010 1,060
November 1,000 1,840 930
December 2,000 1,882 962
After talking with the insurance agent and the property valuation administrator in her municipality, Sydney estimates the property tax and insurance on theproduction related equipment that is to be acquired will cost $3,000 annually, beginning on the purchase date. Property tax and insurance on the other acquired assets will total $240 annually, beginning on the purchase date.
Advertising costs for an ad in the student newspaper will be $20 per week. Sydney will also run an ad in the local newspaper that will cost her $70 per week.
The estimated income tax rate will be 30% in 2015. Sydney pays her income taxes in the first quarter of the year following the year the income tax expense was incurred.
Instructions:For instructions 1-8 and instruction #10, set up a column for each quarter of the year and also a total column for the year. Round all amounts to the nearest dollar on instructions 1-11.
1) Prepare a sales budget for 2015.
2) Prepare a 2015schedule of expected cash collections from customers.
3) Prepare a shirt purchases (i.e. direct materials) budget for 2015.
4) Prepare a 2015schedule of expected payments for shirt purchases.
5) Prepare a direct labor budget for 2015.
6) Using the high-low method along with the monthly data provided from 2014, compute:
a) the variable maintenance cost per unit and the monthly fixed maintenance cost
b) the variable utility cost per unit and the monthly fixed utility cost.
(NOTE: The variable maintenance cost per unitand the variable utility cost per unit that is determined here will be applied to the 2015 quarterly data provided when developing the 2015 budgets that follow. The fixed cost per month that you determine will be used for the 2015 budgets as well.)
7) Prepare a selling and administrative expenses budget for 2015.To maximize partial credit, list each cost individually.
8) Prepare an overhead expenses budget for 2015. To maximize partial credit, list each cost individually.
9) Using the information found in the case along with the previous budgets, prepare a
budgeted income statement for the year ended December 31, 2015. Do not break this budget down by quarter.
(HINT: Include all three product costs in COGS)
10) Using the information found in the case along with the previous budgets, prepare a
quarterly cash budget, including a total column, for the year ended December 31, 2015.
(NOTE: Assume all labor, selling & admin., and overhead costs requiring payment are paid
in the quarter incurred)
11) Using the information found in the case along with the previous budgets, prepare a
budgeted balance sheet as of December 31, 2015. Do not break this budget down by quarter.
12) Based on the budgeted information, determine the number units and sales dollars needed to
generate a $55,000 profit.
(HINTS: Do not include any income taxes in your calculations and round per unit costs and
contribution margin per unit to three decimal places.)
Your score on this budget case will carry a weight of 15% in determining your overall course grade. A hard copy of your solution for the instructions above must be submitted at the beginning of class on Friday, November 20th. Any submissions after that time are subject to late point reductions. If you are planning on leaving campus before the 20th, submit a hard copy earlier.