Financial/Managerial Accounting for International Executive

Case
In this casea full set of budgets will be prepared and presented in appropriate
format. Reports will be prepared to explain how budget numbers were determined.
The following are general requirements for this budget case. Specific requirements
are listed after the relevant case data.

Read the case and analyze the information.

Prepare an operating budget in standard income statement format.
Prepare a narrative report (or notes to the income statement) addressing
why/how quantitative items were selected. The following items must be
explained:
1 Sales Forecast
2 Purchases budget (raw materials, labor, all resources)
3 Operating Expenses
Prepare a cash budget using any acceptable format. The following items
must be explained or shown on the budget:
1 The process by which cash inflows were projected.
2 The process by which cash outflows were projected.
3 The process by which financing, if applicable, was determined.
4 How interest and other financing charges were calculated.
Prepare a capital budget using any acceptable format.

You will be graded on your understanding of the underlying concepts related to

determining budget amounts (for example, how purchases are determined) as well
as your ability to prepare and explain standard business reports. The rubric
attached as the last page of this document will be used to grade the case.

Harveys Budget1
Harvey Manufacturing manufactures and sells two industrial products: a selfbalancing screw driver and a self-balancing saw. Both products are manufactured in
a single plant.
Harveys general manager, Mr. Lipscomb, and president, Mr. Owens, want a budget
prepared for the fiscal year 2013. They have asked various employees to gather
information that they believe will be necessary for preparation of a budget. The
information is presented below.
Neither Mr. Lipscomb nor Mr. Owens is skilled in budget preparation. Both
executives have used budgets and have participated to some degree in budget
preparation in prior years, but neither has prepared a full budget.
Sales and selling price per unit
Historical sales for 2012 the two products are shown below.

Harveys sales typically peak in the summer months, beginning with May. Harveys
general manager, Mr. Lipscomb, recommends that the budget be prepared with the
units sold in the high sales months of May, June, and July be used as the bases for
determining the annual forecast. Mr. Lipscombs recommendation is that annual
sales be budgeted at 64,000 per month for screwdrivers and 42,000 per month for
saws.
Mr. Lipscomb also believes that the budgeted selling price per unit should be equal
to the highest selling price that could be achieved in 2012. He would like to budget
102 per unit for screwdrivers and 130 per unit for saws. Mr. Lipscomb states that
his management team experimented with pricing in the prior year, beginning with
the first month of the year.

You review the unit sales and unit selling price information for 2012 and recommend
a budget based on 60,000 units of screwdrivers at 100 each and 40,000 units of
saws at 125 each. Mr. Lipscomb challenges your conclusion. Likewise Mr. Owens,
the company president, would like to hear an explanation of the budget numbers
and how or why you calculated those numbers.
Production Requirements
Each unit produced requires the following materials, labor, and overhead, all of
which is variable.

Inventories
Inventories are listed below. The beginning inventories are the actual amounts on
hand at the beginning of the year. The ending inventories shown are the amounts
that the operations manager has determined to be necessary to ensure smooth
production processes.

Other information
Fixed manufacturing overhead
Fixed manufacturing overhead is 214,000, including 156,000 of noncash expenditures.
Fixed manufacturing overhead is allocated on total units produced.

Beginning cash is 1,800,000.

Sales are on credit. Sales are collected 50 percent in the current period and
the remainder in the next period. There are no bad debts.
Sales for the last quarter were 8,400,000.
Purchases for direct materials and labor costs are paid for in the quarter
acquired.
Manufacturing overhead expenses are paid in the quarter incurred.
Selling and administrative expenses are all fixed and are paid in the quarter
incurred.
Estimated selling and administrative expenses for the next period are
340,000 per quarter, including 90,000 of depreciation.

REQUIREMENTS:
1.
2.

3.
4.

5.
6.
7.
8.
9.
10.
11.

Prepare a sales budget in good form.

Prepare a narrative report explaining how your sales budget was
determined. Use the table above in your analysis. (Hint: Many companies
would develop their budgets using average sales and average unit costs.)
Whatever budget determination method you use should be explained. In
your explanation, you should include a discussion of why you believe sales
and selling prices fluctuated last year.
Prepare a production budget in units.
Prepare a purchases budget. Remember that you will need to purchase
enough materials to have the required ending inventories shown. You will
also need to purchase enough to manufacture and sell the products on your
sales forecast. Do not forget that you have beginning inventories.
Prepare a narrative report explaining how you prepared the purchases
budget. Be as detailed as necessary to be sure that the president and
general manager will understand the calculations and costs.
Prepare a budgeted income statement.
Prepare a contribution margin income statement.
Prepare a narrative report explaining how the expenses on the income
statement were determined.
Prepare a cash budget. Be sure that you show all cash inflows and outflows.
Prepare a narrative report explaining your cash budget process.
If necessary, prepare a capital expenditure budget. Explain your entries.
Use only the facts in this case to prepare the budget.

Summary:
Your finished case will consist of six or seven budgets (a sales budget, a production
budget in units, a purchases budget, a budgeted income statement, a contribution

margin income statement, a cash budget, and, if necessary, a capital expenditure

budget.)
You will also have four or five narrative reports (a sales budget report, a purchases
budget report, an income statement report, a cash budget report, and an
explanation of your capital budget, if necessary).
Narrative reports are reports that are in the form or a white paper that clearly
explains the numeric entries on your budgets. The length of the narrative reports
will depend on the particular report. In general, you should be able to prepare the
sales budget report on one or two pages, the purchases budget report on one or two
pages, the income statement report on one page, and the cash budget report on
one page. In this case, the capital budget report would be less than one page. You
should not worry if one of your reports is more or less than the recommendation
given herejust be sure you cover all of the important points and satisfactorily
explain the numeric entries in your budget. Also, be sure you explain the process of
how your numbers were determined. In this regard, it is not necessary or
desirable to explain the exact calculations. Consider your audience and prepare a
report that would be suitable for executives making plans and decisions for the
upcoming year.
1

Harveys budget is adapted from a published case. (Source and citation are available upon
request to faculty only).