Comprehensive Assignment - Managerial Accounting

Task:

As a Junior Management Accountant for Endless Mountain Company. The company's CFO has asked you to prepare the 2017 master budget. To fulfill this request, you need to prepare certain budget schedules and financial statements. The whole report should be with 3,500 - 4,000 word.

Context:

Endless Mountain Company manufactures a single product that is popular with outdoor recreation enthusiasts. The company sells its product to retailers throughout Northern England. It is in the process of creating a master budget for 2017 and reports a balance sheet at December 31, 2016 as follows: Endless Mountain Company
Balance Sheet
December 31, 2016
Assets
Current assets:
Cash		46,200
Accounts receivable (net)	260,000
Raw materials inventory (4,500 yards)	11,250
Finished goods inventory (1,500 units)	32,250
Total current assets		349,700
Plant and equipment:
Buildings and equipment	900,000
Accumulated depreciation	(292,000	)
Plant and equipment, net	608,000
Total assets		957,700
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		158,000
Stockholders' equity:
Common stock		419,800
Retained earnings	379,900
Total stockholders' equity	799,700
Total liabilities and stockholders' equity		957,700

The company's chief financial officer (CFO), in consultation with various managers across the organization has developed the following set of assumptions to help create the 2017 budget:

1. The budgeted unit sales are 12,000 units, 37,000 units, 15,000 units, and 25,000 units for quarters 1-4, respectively. The budgeted selling price for the year is 32 per unit. The budgeted unit sales for the first quarter of 2018 is 13,000 units.

2. 75% of all credit sales are collected in the quarter of the sale and 25% are collected in the subsequent quarter.

3. Each quarter's ending finished goods inventory should equal 15% of the next quarter's unit sales.

4. Each unit of finished goods requires 3.5 pounds of raw material that costs 3.00 per pound. Each quarter's ending raw materials inventory should equal 10% of the next quarter's production needs. The estimated ending raw materials inventory on December 31, 2017 is 5,000 pounds.

5. 70% of each quarter's purchases are paid for in the quarter of purchase. The remaining 30% of each quarter's purchases are paid in the following quarter.

6. Workers are paid 18 an hour and each unit of finished goods requires 0.25 direct labor-hours to complete.

7. The budgeted variable manufacturing overhead per direct labor-hour is 3.00. The quarterly fixed manufacturing overhead is 150,000 including 20,000 of depreciation on equipment. The number of direct labor-hours is used as the allocation base for the budgeted plantwide overhead rate. All overhead costs (excluding depreciation) are paid in the quarter incurred.

8. The budgeted variable selling and administrative expense is 1.25 per unit sold. The fixed selling and administrative expenses per quarter are 117,000 including depreciation expense (8,000). All selling and administrative expenses (excluding depreciation) are paid in the quarter incurred.

9. The company plans to maintain a minimum cash balance at the end of each quarter of 30,000. Assume that any borrowings take place on the first day of the quarter and repay principal and interest on any borrowings on the last day of the fourth quarter. The bank imposes a simple interest rate of 3% per quarter.

10. Dividends of 15,000 will be declared and paid in each quarter.

Part A:

The company's CFO has asked you to prepare the 2017 budgeted Income Statement and Balance Sheet as of December 31, 2017 (the intermediate steps for which include preparing a full master budget).

Part B:

However, when you reached the end of 2017 the actual sales figures turned out to be different:

Quarter I - 10,000 units

Quarter II - 35,000 units

Quarter III - 12,000 units

Quarter IV - 30,000 units

And the actual Income Statement showed the following values: Income statement	2017
Sales	2,784,000
CoGS	2,241,213
Gross Margin	542,787
S&A expenses	576,750
Operating Income	-33,963
Interest expense	16,632
Income	-50,595

Compare the budgeted Income Statement with the actual one. Prepare the Flexible Budget for 2017 and find out why you have such Income variance. Recommend a way to improve the financial situation.