Evaluating a Company's Budget Procedures & Master Budget with Supporting Schedules


CASE 8-28 Evaluating a Company's Budget Procedures [L01]

Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company's factory; Jim is manager of the equipment maintenance department.

The men had just attended the monthly performance evaluation meeting for plant department heads. These meetings had been held on the third Tuesday of each month since Robert Ferguson, Jr., the president's son, had become plant manager a year earlier.

As they were walking, Tom Emory spoke: "Boy. I hate those meetings! I never know whether my department's accounting reports will show good or had performance. I'm beginning to expect the worst. If the accountants say I saved the company a dollar, I’m called 'Sir.' but if I spend even a little too much—boy, do I get in trouble. I don't know if 1 can hold on until I retire.”



Tom had just been given the worst evaluation he had ever received in his long career with Ferguson & Son. He was the most respected of the experienced machinists in the company. He had been with Ferguson & Son for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. The president (Robert Ferguson, St) had often stated that the company's success was due to the high-quality work of machinists like Tom. As supervisor, Tom stressed the importance of craftsmanship and told his workers that he wanted no sloppy work coming from his department.

When Robert Ferguson. Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage thesupervisors to reduce inefficiencies and to seek cost reduc­tion opportunities. The company controller was instructed to have his staff -tighten" the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant manager's desire to reduce COSIS. The young plant manager often stressed the importance of continued progress toward attaining the budget; he also made it known that he kept a file of these performance reports for future reference when he succeeded his father.

Tom Emory's conversation with Jim Morris continued as follows:

Emory: Ireally don't understand. We've worked so hard to meet the budget, and the minute we do so they tighten it on us. We can't work any faster and still maintain quality. I think my menare ready to quit trying. Besides, those reports don't tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that setup and machine adjustment time is killing us. And quite frankly, Jim, you were no help. When our hydraulic press broke down last month, your people were nowhere to be found. We had to take it apart ourselves and got stuck with all that idle Time.

Morris: I’m sorry about that, Tom, but you know my department has had trouble making budget, too. Wewererunning well behind at the time of that problem, and if we'd spent a day on that old machine, we would never have made it up. Instead we made the scheduled inspections of the forklift trucks because we knew wecould do those in less than the budgeted time.

Emory:Well, Jim, at least you have some options. I'm locked into what the scheduling department assigns to me and you know they're being harassed by sales for those special orders. Incidentally, why didn't your report show all the supplies you guys wasted last month when you were working in Bill’s department?

Morris:Wire not out of the woods on that deal yet. We charged the maximum we could to other work and haven't even reported some of it yet.

Emory: Well, I'm glad you have a way of avoiding the pressure. The accountants’ seern to know everything that's happening in my department, sometimes even beforeI do. I thought that entire budget and accounting stuff was supposed to help, but it just gets me into trouble. les all a big min. I'm trying to put our quality work: they're trying to save pennies.



Required:

I. Identify the problems that exist in Ferguson & Son Manufacturing Company's budgetary con­trol system and explain how the problems are likely to reduce the effectiveness of the system.

2. Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness.



































CASE 8-29 Master Budget with Supporting Schedules [L02, L04, L08, L09, L010]

You have just been hired as a management trainee by Cravat Sales Company, a nationwide dis­tributor of a designer's silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April I. You are anxious to make a favorable impression on the president and have assembled the information below.

The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows:





January (actual) …………….


20,000


June ………………………


60,000

February (actual) ……………


24,000


July ………………………


40,000

March (actual) ………………


28,000


August ……………………


36,000

April ………………………..


35,000


September ………………..


32,000

May …………………………


45,000









The large buildup in sales before and during June is due to Father's Day. Ending inventories are supposed to equal 90% of the next month's sales in units. The ties cost the company $5 each.

Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 25% of a month's sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the sec­ond month following sale. Bad debts have been negligible.

The company's monthly selling and administrative expenses are given below:



Variable:




Sales commissions ………………………….


$1 per tie

Fix:




Wages and salaries ………………………….


$22,000

Utilities …………………………………….


$14,000

Insurance …………………………………..


$1,200

Depreciation ……………………………….


$1,500

Miscellaneous ……………………………..


$3,000

















All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $25,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company's balance sheet at March 31 is given below:

Assets




Cash ………………………………………………………………


$14,000

Accounts receivable ($48,000 February sales;




$168,000 March sales) ………………………………………..


216,000

Inventory (31,500 units) ……………………………………….


157,500

Prepaid insurance ……………………………………………….


14,400

Fixed assets, net of depreciation ……………………………….


172,700

Total assets ……………………………………………………..


$574,600

Liabilities and Stockholders' Equity

Accounts payable ……………………………………………….


$85,750

Dividends payable ………………………………………………


12,000

Capital stock …………………………………………………….


300,000

Retained earnings ……………………………………………….


176,850

Total liabilities and stockholders' equity ……………………….


$574,600


The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $10,000 in cash









Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

1. a. A sales budget by month and in total.

A schedule of expected cash collections from sales, by month and in total.
A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total.

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.
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