June 15. 2022

PART I

SRS Educational Press Performance in 2017

            The SRS Educational Supply Company had an excellent performance in 2017. The company had made $8,000 in revenues, while its’ adjusted cost of goods sold (COGS) is $3,890. That makes a profit margin of $4,110 or 51.37% for 2017. According to the company’s performance in 2017, the company should continue to have in-house press productions. The company has earned $8,000 or $4,110 in profit margin, and this information proves that the in-house press productions do not affect the revenues that much. Additionally, having the in-house press production gives the company more control over its’ products.

The company uses the job-costing system, which uses direct materials and direct manufacturing, and one indirect cost pool for manufacturing overhead. This manufacturing overhead is allocated to direct manufacturing labor costs. SRS was able to budget for its’ manufacturing overhead costs accurately. The company was realistic in forecasting and setting its’ overhead cost at 160%. The company accountants should check the market, demand, and production in the following periods. That way, the company can lower overhead costs to prevent overallocated overhead costs. Alternatively, SRS can dispose of overapplied overhead costs by reporting them to its’ balance sheet as unearned revenue. This overapplied overhead can be closed by crediting the COGS account at the end of the period. If the manufacturing overhead is underapplied, the COGS account is debited, while the manufacturing overhead is credited.

Similar Products That Would Benefit from Job Order Costing

            Job-order costing accounts for different amounts of resources used in a job (Datar & Rajan, 2022) and is often used by companies that produce unique, customized, or specialized products to track the accumulated costs. Companies in the service industries can also use the job costing method. For example, the legal service industry can use this costing method to bill their clients accurately. Each client has specific needs that accumulate costs differently from each other. Using job order costing in this industry would help the companies take note of employees’ hourly rates, including the lawyers, the overhead in maintaining offices, and others. Another industry that can benefit from job order costing is web development and web developers. Each client they have has different needs and wants for their website. For example, one website may take more extended hours and more effort than another, and job order costing helps bill clients more accurately. In addition, many more industries use and benefit from job order costing. Both industries in the examples ensure the companies stay profitable while ensuring that their customers stay content with their services and bills.  

In terms of products, violins are one that I am familiar with that would benefit from job order costing. For example, Kennedy Violins produces different types of violins. In each type of violin, different qualities of wood, wooden pieces, and strings are used. The overhead would be wood glue, facility costs, and indirect labor. A job costing system helps Kennedy Violins accurately cost its products and ensure none of them are over or under- or over-costed.

PART II

Sales Budget

            SRS uses a sales budget to estimate the amount of material and services to sell. The sales budget helps one look at the possible sales from a month, quarter, and year view. According to the assumptions and computations, the first quarter may yield $1,985,000, with August earning the highest at $910,000 in concurrence for the school opening. That said, the monthly sales budget helps the business make monthly decisions. These assumptions and numbers are based on the previous sales and last year’s numbers.

The sales budget also helps predict the cash collection schedule for SRS’s accounts receivable. The cash collections are also based on assumptions on when it will be collected and how much it will be collected. For example, in July, the accounts receivable account was expected at $600,000, but as the assumptions suggest, only 30% will be collected in the month of sale and 70% in the following month. The amount collected in July is only $180,000, and the next month, $420,000, for a total of $600,000. The cash collections schedule shows how much is received from the previous and current months. The same event happens in the following months.

At the end of the quarter, the accounts receivables account has a remaining balance of $332,500 to be still collected. The expected sales amount for this quarter was $1,985,000, but $1,992,500 was collected. There is a difference of $7,500 between these two numbers because the company had received June, the previous month’s, account receivables of $340,000.

Purchasing Budget

            “A purchases budget contains the amount of inventory a company must purchase during each budget period. The amount stated in the budget is the amount needed to ensure that there is sufficient inventory on hand to meet customer orders for products” (Bragg, 2022). In addition, it helps SRS understand how many units they must buy every month and how to budget for it. The purchase budget includes the beginning inventories from the previous month’s ending balance. It also includes a schedule of expected cash disbursements for purchases for each month except for October and shows the quarterly result.

The assumptions dictate that the cost of goods is based on 45% of the percentage of sales and that the desired ending inventory as a percentage of next month’s cost of sales should be 20%. Following this assumption, the cost of the merchandise in July, which had sales of $600,000, should be $270,000. The same thing goes in August, September, and October. The desired ending inventory in dollars of next month’s cost of sales for July is based on August’s cost of goods sold multiplied by this percentage. In a concrete example, August’s sales amount is $910,000 multiplied by the merchandise cost as % of sales. It results in a budgeted cost of merchandise sold of $409,500. This amount will be multiplied by 20% of the desired ending inventory. The result is $81,900, or the desired ending inventory. This pattern continues until September, the month when the quarter ends.

To calculate the required purchases, there are several steps. First, add the budgeted cost of merchandise sold and the desired ending inventory together. The resulting number is the Total Inventory Needs. Next, subtract the Beginning Inventory from this number. The result should be the amount of Required Purchases.

Two assumptions are used in the schedule of expected cash disbursements for purchases. The first is that the percent of inventory purchases paid in the month of purchase is 50%, and the second is that the percent of inventory purchases paid in the month after purchase is also 50%. This information means the company’s accounts payables should be paid off after a month. In July, the company pays the June Purchases of $130,000 and 50% of July’s Purchases, which is 50% of $301,900 or $150,950. Finally, it resulted in a $280,950 paid in July. However, there is a difference of $20,950 from the required purchase of $301,900 and $280,950. The same pattern, including the variance, happens every month.

Ultimately, it leaves the Accounts Payable account at $905,075 compared to the budgeted cost of merchandise for the quarter, $893,250. There is a difference of $102,825, and the company paid more than budgeted.

Admin Budget

            “Administrative budgets are financial plans that include all expected selling, general and administrative expenses for a period” (Kenton, 2021). The admin budget also focuses on a schedule of cash disbursements related to selling and administrative expenses. In addition, there are two primary selling and administrative budget categories: variable and fixed expenses.

The variable expenses SRS business lists are shipping and other expenses. However, there is more than that. For example, variable expenses can include direct labor costs, sales commissions, utility costs, credit card fees, and more. The assumptions mention that the shipping expenses amount is 5% of sales, and the other expenses account for 8% as a percent of sales. The total variable expenses vary each month. For July, the total variable expenses amount was $78,000. In August, $118,300, and in September, $61,750. Totaled together, it results in $258,050.

The fixed expenses SRS business lists are salaries and wages, advertising, insurance, and depreciation costs. The assumptions mention $85,00 for salaries and wages, $50,000 for advertising, $3,000 for prepaid insurance, and $25,000 for depreciation. Since these are fixed expenses, the value does not change and remains the same for each month. The total fixed expenses for each month is $163,000. The total fixed expense for the quarter is $489,000.

To get the total selling and admin expenses, one must add the variable expenses for that month and the fixed expenses for one month together. The result should be subtracted from the Depreciation and Prepaid Ins sum, which is fixed for each month, and is the total cash disbursement for that month.

Cash Budget

            “The cash budget is an estimate of cash receipts and their payment during a future period of time. It deals with other budgets such as materials, labor, overheads, and research and development. The cash budget is an indicator of the probable cash inflows and outflows” (Tamplin, 2021). The assumptions tab states that there is a balance of $40,000 in the cash account. From this, add the cash collections from the sales budget, which becomes the total cash available. The next step is subtracting the cash disbursement from the available cash. The cash disbursements include inventory from the Purchasing Budget, operating expenses from Selling and Admin Budget, Equipment, Cash Dividends, and interest. The result should be an excess or deficiency of cash. For July, there is a deficiency of cash at $183,950. However, there is a borrowing of $219,000 this month. It results in a cash balance of $35,050. The following months pay off the borrowed $219,000.

            In August, the company had an excess of $46,435, paid $11,000 for its’ loan, and $2,190 in interest. While in September, SRS’s strongest month, the company had an excess of $328,105 and paid off its’ debt with $208,000 and interest of $2,080, leaving the company with a cash balance of $120,105. After this quarter, the company has no outstanding balance but must pay $4,270 in the next quarter.

Budget Income Statament

            The budgeted income statement is in Pro-forma. Pro-forma “is a method of calculating financial results using certain projections or presumptions. Pro forma financials are not computed using standard generally accepted accounting principles (GAAP) and usually leave out one-time expenses that are not part of normal company operations, such as restructuring costs following a merger” (Tuovila, 2022). The budgeted income statement uses the assumptions based on last year’s performance. That said, the total budgeted sales amount is $1,985,000, while the budget costs of goods sold amount is $893,250 for a total of $1,091,750 in Gross Margin. The total selling and administrative budget expenses are $747,050 and $4,270 in interest to the Gross Margin. In addition, it leaves the company with a total net income of $340,340.

Master Budget Income

            The Master Budget Income is a Pro-forma statement that lists the company’s future or expected assets, liabilities, and equity. The company can check its’ actual balances against the Pro-forma statement as a guideline. The Pro-forma statement categorizes the assets and liabilities as current and non-current, the same as a regular balance sheet. However, the SRS company does not have many non-current assets and liabilities, so it only lists the building and equipment as a singular item and uses the net balance.

The current assets in the Pro-forma are valued at $496,255, while the buildings and equipment are valued at $1,075,000 for a total of $1,571,255. The accounts payable is at $102,825, and there is no outstanding balance for the notes. The final part: stockholder’s equity is valued at $420,000 for capital stock and $1,048,430 for retained earnings. These numbers result in $1,571,255, which balances with the Asset’s amount.

Variances

The company has experienced several variances in its budgets. From the Sales Budget, the projected sales is at $1,985,000, while the schedule of cash collections show a value of $1,992,500. There is a difference of $7,500, and the company seems to earn more than budgeted. From the Purchasing budget, the budgeted cost of merchandise sold for the quarter is $893,250, while the schedule of expected cash disbursements for purchases shows an amount of $905,075. The payment of June purchases caused a variance of $11,825.

Two variances that may cause concern or prompt further analysis might be higher or lower sales than anticipated and having more or less inventory than budgeted. The higher or lower sales than anticipated may be caused by schools not having enough or having more than enough budget. Not having enough budget may cause the school not to order its’ usual volume. Having more than the budget may cause the school to order more than SRS has prepared its inventory. The company needs to keep updating the budget to keep up with the demand as time progresses.

References

Bragg, S. (2022, May 24). AccountingTools. AccountingTools. https://www.accountingtools.com/articles/what-is-a-purchases-budget.html#:~:text=What%20is%20the%20Purchases%20Budget,meet%20customer%20orders%20for%20products.

Datar, S., & Rajan, M. (2022). Job-Costing and Process-Costing Systems. Pearson.com. https://etext-ise.pearson.com/courses/6926628/products/FETLM2ODV8T/pages/a43ac1e8480f8c21305590d99d23c908c26c8dea9?locale=&isTpi=Y&key=15998157133288724182022

Kenton, W. (2021, June). Administrative Budget Definition. Investopedia. https://www.investopedia.com/terms/a/administrative-budget.asp#:~:text=Administrative%20budgets%20are%20financial%20plans,payroll%20for%20non%2Dmanufacturing%20departments.

Tamplin, T. (2019, September 17). What Is a Cash Budget? | Definition, Explanation, Functions and Merits. Finance Strategists; Finance Strategists. https://learn.financestrategists.com/explanation/budgeting/cash-budget/#:~:text=The%20cash%20budget%20is%20an,probable%20cash%20inflows%20and%20outflows.

Tuovila, A. (2022, February 03). What Does “Pro Forma” Mean? Investopedia. https://www.investopedia.com/terms/p/proforma.asp

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