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CASE 3 ======== BANNER MANUFACTURING INC. You are well aware of the importance of budgeting in managing a business enterprise successfully....

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CASE 3 ======== BANNER MANUFACTURING INC. You are well aware of the importance of budgeting in managing a business enterprise successfully. Consequently, you have decided to prepare an operating budget for the Banner Company for the year 2011. You have already gathered valuable information about the Company's various cost behaviors by the application of regression as summarized models. You know the behavior of various costs as well as the below: Cost Equations Based on Regression Analyses: Advertising: Y = 0.10 gross sales Salary & Commission: Y= 40,000 + 0.10 gross sales Bad debt Expense: Y= .03 gross sales Sales Discount: Y= .005 gross sales Overhead Cost: Y= 70,000 + 5 Unit X + 6 Unit y or or Y= 70,000 + 2.5 DLH X + 2.4 DLH y or or Y= 70,000 + .625 DL$ X + .60 DL$ y Purchasing Expense Y= 400 + .025 DM$ OTHER ASSUMPTIONS ------------- 1- Same unit selling price and cost behavior as before 2- Same level of demand for products but different sales mix (based on 240,000 and 120,000 units respectively for X and Y). REQUIREMENT ------------- 1- Compute unit contribution margin for product X and Y first to determine which one is more profitable to sell. 2- Prepare a master budget by completing the schedules presented in appendix F. (Data Section).
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CASE 3 APPENDIX F BANNER MANUFACTURING INC. MASTER BUDGET FOR THE COMING YEAR SALES BUDGET (SCH. 1) REF. PRODUCT X PRODUCT Y: TOTAL ----- ---------- ----------------- -------------- UNITS SCH. 2 240,000 120,000 XXXXXXXXXX PRICE INPUT XXXXXXXXXX ---------- ----------------- -------------- AMOUNT ---------- ----------------- -------------- PRODUCTION BUDGET (SCH. 2) REF. PRODUCT X PRODUCT Y ----- ------------ ------------- BUDGETED SALES COMPT. ADD: DESIRED ENDING INVENTORY *INPUT LESS: BEGINNING INVENTORY INPUT 500 2,000 ------------ ------------- BUDGETED PRODUCTION COMP. ------------ ------------- * THE PRODUCTION CYCLE IS ONE DAY AND TOTAL WORKING DAYS DURING YEAR IS 240 DAYS. DIRECT MATERIAL USAGE BUDGET (SCH. 3) REF. UNITS MATERIAL A MATERIAL B PRODUCTION USAGE USAGE ----- ----------- ----------- ------------ PRODUCTION X: -------- UNITS PRODUCTION SCH.2 XXXXXXXXXX XXXXXXXXXX MATERIAL USAGE RATE (LBS.) INPUT XXXXXXXXXX XXXXXXXXXX .--------- .--------- TOTAL UNITS MATERIAL USAGE (LBSCOMPT. PRODUCT Y: -------- UNITS PRODUCTION SCH. 2 XXXXXXXXXX XXXXXXXXXX MATERIAL USAGE RATE (LBS.) INPUT XXXXXXXXXX TOTAL UNITS MATERIAL USAGE (LBSCOMPT. XXXXXXXXXX ----------------- ------------ TOTAL MATERIAL USAGE (LBS.) COMPT. ----------------- ------------- MATERIAL PURCHASE BUDGET (SCH. 4) REF. MATERIAL A MATERIAL B TOTAL ------ ----------------- ---------- --------------- UNIT MATERIAL USAGE (LBS.) SCH. 3 XXXXXXXXXX ADD: DESIRED ENDING INVENTORY *SCH. 3 XXXXXXXXXX LESS: BEGINNING MATERIAL INVENTBAL. SHEET (325,500) (297,900) XXXXXXXXXX ----------------- ----------- XXXXXXXXXX UNITS TO BE PURCHASED (LBS.) COMPT. XXXXXXXXXX UNIT COST INPUT XXXXXXXXXX ----------------- ----------- --------------- TOTAL COST OF PURCHASES ($) COMPT. ----------------- ----------- --------------- * APPROXIMATELY ONE WEEK LEAD TIME (OR 1.923% OF THE NEXT YEAR MATERIAL USAGE) ASSUMING NO CHANGES IN THE LEVEL OF PRODUCTION. DIRECT LABOR BUDGET (SCH. 5) REF CUTTING DEPT. ASSEMBLY DEPT. TOTAL ------ ------------- -------------- --------------- PRODUCT X XXXXXXXXXX -------- XXXXXXXXXX UNITS PRODUCTION SCH.2 XXXXXXXXXX LABOR HOUR PER UNIT INPUT XXXXXXXXXX ------------ ------------- XXXXXXXXXX TOTAL LABOR HOURS COMPT. WAGE RATE INPUT ------------ ------------- LABOR COST COMPT. XXXXXXXXXX ============ ============= PRODUCT Y XXXXXXXXXX -------- XXXXXXXXXX UNITS PRODUCTION SCH.2 XXXXXXXXXX LABOR HOUR PER UNIT INPUT XXXXXXXXXX ------------ ------------- XXXXXXXXXX TOTAL LABOR HOURS COMPT. WAGE RATE INPUT ------------ ------------- LABOR COST COMPT. ============ ============= PRODUCT X AND Y XXXXXXXXXX -------- XXXXXXXXXX TOTAL LABOR HOURS COMPT. --------------- WAGE RATE INPUT ------------ ------------- --------------- TOTAL LABOR COST BUDGET COMPT. ============ ============= =============== FACTORY OVERHEAD BUDGET (SCH. 6) PRODUCT X PRODUCT Y DIRECT O/H RATE O/H DIRECT O/H RATE O/H DEPARTMENT VARIABLE OVERHEAD COST REF. LABOR COST PER DL COST COST LABOR COST PER DL COST COST VARIABLE O/H -------- ------ ----- ------------ -------------- ------ -------------- -------------- ------- -------- DIRECT LABOR COST (BASIS) SCH. 5 XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX SERVICE DEPT. : SUPPLIES REGRESS XXXXXXXXXX 0.025 $ XXXXXXXXXX 0.025 $ POWER REGRESS XXXXXXXXXX 0.280 $ XXXXXXXXXX 0.255 $ -------- REPAIR DEPT. : SUPPLIES REGRESS XXXXXXXXXX 0.070 $ XXXXXXXXXX 0.070 $ CUTTING DEPT. : SUPPLIES REGRESS XXXXXXXXXX 0.150 $ XXXXXXXXXX 0.150 $ ASSEMBLY DEPT. : SUPPLIES REGRESS XXXXXXXXXX 0.100 $ XXXXXXXXXX 0.100 $ ----------------- ---------- --------------- ---------- -------- TOTAL VARIABLE O/H REGRESS XXXXXXXXXX 0.625 $ XXXXXXXXXX 0.600 $ ----------------- ---------- --------------- ---------- -------- FIXED OVERHEAD COSREF. SERVICE REPAIR CUTTING ASSEMBLY TOTAL DEPT. DEPT. DEPT. DEPT. -------- --- ------ --------- --------- --------- --------- --------- SALARIES INPUT 48,000 60,000 66,000 66,000 240,000 DEPRECIATION * INPUT 48,000 48,000 154,000 240,000 490,000 --------- --------- --------- --------- --------- TOTAL COMPT. 96,000 108,000 220,000 306,000 730,000 --------- --------- --------- --------- --------- * THE $50,000 EQUIPMENT INSTALLATION COST FOR THE CUTTING DEPARTMENT IN JUNE HAD BEEN CAPITALIZED AND WOULD BE DEPRECIATED OVER 5 YEARS. ** ALLOCATE FIXED OVERHEAD EQUALLY TO PRODUCT X AND Y BASED ON THE BUDEGETED PRODUCTION. STANDARD UNIT COST (SCH. 8) PRODUCTION X PRODUCTION Y ------------ ----------------- ------------- -------------- --------------- -------- REF. POUND X RATE .= TOTAL POUND X RATE .= TOTAL DIRECT MATERIAL COST: ----- --------- --------- --------- --------- --------- ----------- MATERIAL A INPUT = MATERIAL B INPUT = ------------- -------- MATERIAL COST COMPT. XXXXXXXXX XXXXXXXXX XXXXXXXXX XXXXXXXXX ------------- -------- DIRECT LABOR COST: DL HRS X RATE .= TOTAL DL HRS X RATE TOTAL CUTTING DEPT. INPUT = ASSEMBLY DEPT. INPUT = ------------- -------- LABOR COST COMPT. XXXXXXXXX XXXXXXXXX XXXXXXXXX XXXXXXXXX ------------- -------- VARIABLE FACTORY OVERHEAD: DL HRS X RATE .= TOTAL DL HRS X RATE TOTAL PER UNIT = ------------- -------- VARIABLE O/H COMPT. XXXXXXXXX XXXXXXXXX XXXXXXXXX XXXXXXXXX ------------- -------- FIXED FACTORY OVERHEAD: ONE UNIT RATE .= TOTAL ONE UNIT X RATE TOTAL PER UNIT X = ------------- -------- FIXED O/H COMPT. XXXXXXXXX XXXXXXXXX XXXXXXXXX XXXXXXXXX ------------- -------- STANDARD UNIT COST COMPT. ============= ======== BUDGETED INCOME STATEMENT (SCH. 9) CONTRIBUTION MARGIN PRODUCTION X PRODUCTION X TOTAL GROSS SALES SCH.1 XXXXXXXXX XXXXXXXXX LESS: VARIABLE COST: REGRESS XXXXXXXXX XXXXXXXXX ----------------- -------------- ----------- CONTRIBUTION MARGIN COMPT. LESS: FIXED COSTS: .---------- .---------- .---------- INCOME BEFORE TAX COMPT. .========== .========= .==========
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