You are a manager for johnson Approved, a pet supplies manufacturer. This responsibility requires you to create budgets, make pricing decisions, and analyze the results of operations to determine if changes need to be made to make the company more efficient.

You will be preparing a budget for the quarter July through September 2014. You are provided the following information. The budgeted balance sheet at June 30, 2014, is:

1. Sales were 20,000 units in June 2014. Forecasted sales in units are as follows: July, 19,000; August, 21,000; September, 20,000; October, 24,000. The product's selling price is $17.50 per unit and its total product cost is $14.35 per unit.

The June 30 finished goods inventory is 14,700 units.

Going forward, company policy calls for a given month's ending finished goods inventory to equal 70% of the next month's expected unit sales.

The June 30 raw materials inventory is 4,375 units. The budgeted September 30 raw materials inventory is 1,980 units. Raw materials cost $8 per unit. Each finished unit requires 0.50 units of raw materials. Company policy calls for a given month's ending raw materials inventory to equal 20% of the next month's materials requirements.

Each finished unit requires 0.50 hours of direct labor at a rate of $16 per hour.

Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is $1.35 per direct labor hour. Depreciation of $20,000 per month is treated as fixed factory overhead.

Monthly general and administrative expenses include $12,000 administrative salaries and 0.9% monthly interest on the long-term note payable.

Sales representatives' commissions are 10% of sales and are paid in the month of the sales. The sales manager's monthly salary is $3,750 per month.

The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none are collected in the month of the sale).

All raw materials purchases are on credit, and no payables arise from any other transactions. One month's raw materials purchases are fully paid in the next month.

Dividends of $20,000 are to be declared and paid in August.

Income taxes payable at June 30 will be paid in July. Income tax expense will be assessed at 35% in the quarter and paid in October.

Equipment purchases of $100,000 are budgeted for the last day of September.

The minimum ending cash balance for all months is $40,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.

Specifically, the following critical elements must be addressed:

Operating Budget

Create an operating budget

a) Prepare a sales budget. Ensure accuracy of data.

b) Annotate your sales budget line items. Why have you made the choices you have made? What information informed your decision for each item?

c) Prepare a production budget. Ensure the accuracy of your data.

d) Annotate your production budget line items. Why have you made the choices you have made? What information informed your decision for each item?

e) Prepare a manufacturing budget. Ensure the accuracy of your data.

f) Annotate your manufacturing budget line items. Why have you made the choices you have made? What information informed your decision for each item?

g) Prepare a selling expense budget. Ensure the accuracy of your data.

h) Annotate your selling expense budget line items. Why have you made the choices you have made? What information informed your decision for each item?

i) Prepare a general and administrative expense budget using appropriate costing methods.

j) Annotate your line items. Why have you made the choices you have made? What information informed your decision for each item?

2. Budget Variance Analysis

The actual quantity of material used was 31,000 with an actual cost of $7.75 per unit. The actual labor hours were 33,000 with an actual rate per hour of $15.

a) Develop a variance analysis including a budget variance performance report and appropriate variances for materials, labor, and overhead.

b) Annotate each variance. What does the variance tell you?

c) What needs to be investigated to determine the reason for the variance? Why?