PROJECT FACTS

Manny Fold owns a factory that specializes in making titanium valves for high performance engines on a just in time basis. Thus, Manny produces what he sells in a particular month. There are no inventories of finished goods or work in process. However, Manny does require that an inventory of direct raw materials equal to 20% of next month's production requirement be available at the end of each month. To build his business and gain new customers Manny has extended generous credit terms to his customers. While Manny is confident about the fundamentals of his business, he is concerned about the possible income and cash flow implications.

The variable costs of producing a valve are budgeted at $7.20 per valve for direct materials (3/4 pound of titanium alloy costing $9.60 per pound), $2.80 per valve for direct labor, and $5.50 per valve for variable manufacturing overhead.  Fixed manufacturing overhead is budgeted at $74,700 per month during the 2nd quarter. The detailed components of variable and fixed overhead are as listed below.

For variable overhead, electric power is budgeted at $2.30 per unit, indirect labor is budgeted at $2.50 per unit, and supplies are budgeted at $.70 per unit.  For fixed overhead depreciation is budgeted at

$10,000 per month, Supervision and other factory salaries are budgeted at $40,000 per month, property tax and insurance combined are budgeted at $8,000 per month (which have been paid in advance through June 15 - see below), maintenance is budgeted at $7,000 per month, licensing fees and permits to use proprietary technology are budgeted at $3,400 per month, and other miscellaneous fixed overhead expenses are budgeted at $6,300 per month.

Manny's customers drive a hard bargain because they can easily switch suppliers. They all do pay eventually, but many of them take their time about doing so and Manny is reluctant to get tough with them for fear they will take their business elsewhere. He tells you that all his sales are on credit (no cash sales). He typically collects only 10% of sales in the month of the sale, 30% of sales in the month after the sale and 60% of sales two months later (for example 10% of June sales would be collected in June, 30% in July and 60% in August). On the other hand, he must pay for 70% of his materials purchases in the same month of the purchase and 30% in the month after. Cash costs of labor and overhead other than depreciation, property taxes and insurance are paid in the same month they are incurred. Property taxes and insurance are paid in advance through June 15. The amount due for the next 6 months (starting June 16) must be paid in early June.

All of the selling and administrative expenses are fixed. Monthly fixed selling and administrative costs, other than interest, amount to $43,600, of which $6,000 is depreciation. These operating costs, excepting depreciation, are paid in cash in the month incurred. Manny has large tax loss carry forwards from a previous unsuccessful business venture. Therefore, he does not expect to pay any income taxes this year. (In other words you may ignore income taxes).

Manny plans to buy new equipment costing $80,000 during the month of June.  This equipment will be ready for use starting in July.

The budgeted selling price of valves for April, May, and June is $23 per valve. Because of market competition there is not much flexibility to adjust the price and the price is expected to be stable during the 2nd quarter. Manny budgeted sales in units for April at 17,000 units. For May he expects to sell only 18,500 units. He has projected sales of 20,000 units for June and 18,000 units for July.

Manny requires a minimum cash balance of $10,000 at the end of each month. If the budgeted month end cash balance will fall below this level Manny plans to borrow enough cash at the beginning of that same month to keep his ending balance up to the minimum level. Manny's bank charges him interest at the rate of ½ % per month on the balance outstanding during that month. Manny's bank charges him interest at the rate of ½ % per month on the balance outstanding during that month.  Manny pays the interest at the beginning of the following month and plans to repay as much as he can at the beginning of that month without letting his budgeted cash balance go below $10,000 at month end.  (On the budgeted income statement round interest expense to the nearest dollar)

The company's managerial accountant has resigned unexpectedly before the 2nd quarter budget could be completed. You have been contracted to complete the master budget for June and for the 2nd quarter (including some missing numbers from May).  Balances as of March 31 for all relevant accounts have already been calculated by this accountant together with some of the amounts for April and May.  You may assume that these balances and amounts shown in the tables below are correct.

REQUIREMENTS:

1) Construct Manny's budgeted income statement for June and the total for the 2nd quarter. April and May have already been provided. Complete the template provided below. Show any necessary calculations.

2) Using the same forecast as in requirement 1 construct Manny's budget for raw materials purchases in June and the total for the 2nd quarter (You will also have to complete the budget for May) Complete the template provided which already has information for April and May.

3) Using the same forecast as you used in requirement 1 construct Manny's cash budgets for June and the total for the 2nd quarter (You will also have to provide the missing number for May payments for purchases). Complete the templates provided below which already have information for April and May. Show any necessary calculations.

4) Using the same forecast as you used in requirement 1 construct Manny's budgeted balance sheet at the end of June. Complete the template provided which already has the March 31 balances.

5) During March Manny actually produced and sold 16,500 valves. Actual sales revenues were $381,950. Actual costs and the original March budget based on 16,000 valves were as detailed in the table below. Complete the table by constructing a flexible budget based on 16,500 valves and determining the variances for the performance report. Use the template provided below for your answer.

6) Write a brief report explaining some possible reasons why Manny's profits were different from the amount projected in the master budget for March.