Managerial Accounting Project
You are the owner of your own company. Fast growth and the need to expand have made it necessary for you to seek financing from a local bank. However, you need to show the banker your plans for the coming year. Using your own, unique data, you will prepare a comprehensive budget and proforma financial statements to show the banker your projected earnings and financial position. Good luck getting that bank loan!
You knew they were good, but you never thought your idea would bring you this far! It all started about three years ago when you were at Bryant taking a managerial accounting class. After finishing college, you started as a little side business. You used your home to manufacture and sell them to friends and local stores. Response has been great! People love them, and you are making a little extra money.
Your fast sales growth has negatives in addition to positives. The volume of business has grown so much that you can no longer keep up with demand. Your desire to grow this hobby into a full-fledged business has led you to explore expanding. You have been investigating new facilities and equipment, and checking into the requirements of hiring a few employees. However, there is one problem; you don't have the money to expand!
On the advice of a friend, you meet with a local banker. You share your dreams and ideas, and your need to borrow some money. The banker is encouraging and helpful. However, she states that the bank cannot lend you any money without a business plan that describes your financial results, marketing strategy, and projections for the future. You show the banker your income statement and balance sheet as of the most recent year-end, and the banker is impressed! “Looks very promising,” she states. “But what I really need to see is what you plan to do with the money that I will lend you and what your business will look like next year.”
When you return home after the meeting, you pull out your old college accounting textbook. You realize that this is a master budget problem just like you did in college. After reviewing your class notes and reading the textbook, you settle in to produce a plan for next year.
ASSIGNMENT PART 1:
You immediately realize that you must gain an understanding of your cost structure and of the relationship between your revenues, costs, and profits. You Google to see where you can buy your components economically. You brainstorm to develop a list of the new costs that you must incur when you expand your operations. After analyzing all of this data you are able to break out your costs into several categories. You realize that some costs are for raw materials while others are related to manufacturing overhead or operating expenses. You also realize that some costs appear to be fixed while other costs are variable. Now you have sufficient information to determine how much money you can make when you sell your product.
Requirements for Part 1:
1. Think of a product you would like to make. Search the Internet and find how you make (maybe You Tube “How things are Made”). Prepare a bill of material and routing for the product. Look up on the internet a cost of your components.
2. Calculate the following: (a) Total variable costs per unit. (b) Sales price per unit. (c) Contribution margin per unit. (d) Breakeven point for the quarter (three months) in dollars and in units.
3. Short answer questions: (a) Categories of raw materials, manufacturing overhead, and operating expenses. What factors make each of the categories different? (b) Create a list of all costs in your business. For each expense listed, indicate why it would be categorized as fixed or variable.
Note: Make sure you turn in a copy of searches with your calculations and answers to the short answer questions. Responses to the short answer questions must be typed (no hand written responses).
ASSIGNMENT PART 2
You now have the information you need to create a budget that will allow you to show the banker your plans for the coming year. This budget also will help you to understand your sales and the collection on those sales. You will be able to determine how much money you need to purchase the components for your product and to pay your overhead and operating expenses. You realize, “It all begins with sales. If I can estimate how many units I can sell, then I can calculate how many components to buy and how much my overhead and operating expenses will be. Well, I had better get that sales number as accurate as possible.”
You reach in your desk and pull out a disk that the banker gave you. On that disk is an example format of a budget that the banker has seen many businesses use over the years. You pull up the spreadsheet and begin working.
Requirements for Part 2:
Now you must brainstorm to determine your sales projections, expected collection patterns, purchasing and payment patterns for the first year. Prepare by quarter so you will have 5 columns (four quarters and a total)
1. Use the spreadsheet template provided by the text to prepare the following operating budgets: (a) Sales budget (b) Cash collections/receipts budget (c) Direct materials purchases budget (d) Cash disbursements/payments budget (e) Manufacturing overhead budget (f) Operating expenses budget
Note: When preparing the budgets, you should make maximum use of cell referencing and formulas in the Excel spreadsheets. You should not have to enter the same data more than one time (for example, you should enter monthly sales projections on the sales budget and then use cell referencing from the sales budget to incorporate this information in all of the other budgets). You should use formulas in Excel to perform all of your mathematical calculations. Do not complete the income statements, cash budget, and Balance sheet worksheets. These budgets comprise Part 3 of the project that will be completed later.
2. Short answer questions: (a) Discuss the importance of beginning the master budget process with an accurate sales budget. (b) What are some important factors that a manager should consider when developing a sales budget? State why each is important. (c) Distinguish between operating expenses and disbursements for operating expenses.
ASSIGNMENT PART 3:
You have now completed each of your operating budgets. It looks pretty good! “But what does this tell me?” you ask yourself. “This is good information, but I still do not know what my profits are projected to be or if I will need any additional cash borrowing during the period.” Now you must put it all together to see if you will have profits and see if you have enough money to do what you want to do. You know that you have some of your own money to contribute to the business and you also know that you need to make some equipment purchases. Now it is time for you to develop your proforma (projected) income statement, balance sheet, and cash budget.
Requirements for Part 3:
In the development of your plans determine the capital contributions, equipment purchases, loans, minimum cash balances, and estimated tax rate.
1. Use this information and information from your operating budgets completed in Part 2 to prepare the following for the year. Use the same format as part 2. (a) Proforma variable income statement (b) Proforma absorption income statement (c) Cash budget
2. Short answer questions: (a) What is the main difference between the variable and absorption income statements? (b) What are the major benefits of budgeting? (c) What is sensitivity analysis? How does the use of spreadsheets aid in the application of sensitivity analysis?