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Prepare a Report a) Discuss the initial budget process, the variances, and potential reasons for the variances. b) Determine changes you think the company should make based on the variance analysis. What will the changes accomplish? c) What are the ethical considerations of the changes you have selected? Why are you recommending these particular changes? d) Decide whether you continue buying a particular component of one of your products or making the product in-house. Develop a recommendation on the “make” or “buy” decision for the given component. What factors did you consider? e) What are the ethical considerations of your decision? What implications could this decision have? f) Describe how your decision was reached. How will this impact the efficiencies of your operation? g) What suggestions would you make for nonfinancial performance measures that the company should adopt? What are the pros and cons of each? h) What are the ethical considerations of your suggestions? Explain the significance of each. Peyton Approved Budget 1. Operating Budget (a) Sales Budget Peyton Approved Sales Budget For the Quarter Ending September 30, 2015 July August September Quarter Projected unit sales 18,000 22,000 20,000 60,000 Sales price $18 $18 $18 $18 Projected revenue $324,000 $396,000 $360,000 $1,080,000 Previous month collections 216,000 194,400 237,600 648,000 Current month collections 129,600 158,400 144,000 432,000 Total revenue collected $345,600 $352,800 $381,600 $1,080,000 (b) Annotation of sales budget line items  Projected unit sales – to calculate the total number of units to be sold in a month so as to ascertain how many units of manufactured units need to be held in inventory to meet the demand  Sales price – in order to ascertain the amount of revenue that will be generated from the monthly sales throughout the quarter as the per unit price is not expected to fluctuate in the short term  Previous month collections – the company sells its merchandize in both cash and credit so revenue is collected over a period of two months. This item was included in order to ascertain the actual revenue collected in a month  Current month collections – the company collects only 40% of revenue in the month of sale, so this item is crucial in calculating gross revenue for the month (c) Production Budgets Peyton Approved Production Budget For the Quarter Ending September 30, 2015 Units of Production July August September Quarter Projected unit sales 18,000 22,000 20,000 60,000 Add: Ending inventory 15,400 14,000 16,800 46,200 Units available for sale 33,400 36,000 36,800 106,200 Less: Beginning inventory 16,800 12,600 15,400 44,800 Budgeted production 16,600 23,400 21,400 61,400 Direct Materials Purchases Budget Units Units needed for production 8,300 11,700 10,700 30,700 Add: Ending inventory 2,340 2,140 1,980 6,460 Units available for production 10,640 13,840 12,680 37,160 Less: Beginning inventory 4,600 2,340 2,140 9,080 Units to purchase 6,040 11,500 10,540 28,080 Budgeted cost of direct materials $46,810 $89,125 $81,685 $217,620 Direct Materials Used Budget Beginning inventory $35,650 $18,135 $16,585 $70,370 Purchases 46,810 89,125 81,685 217,620 Less: Ending inventory Units 18,135 16,585 15,345 50,065 Direct materials used $64,325 $90,675 $82,925 $237,925 Direct Labor Budget Budgeted production Total labor hours needed 8,300 11,700 10,700 30,700 Budgeted direct labor cost $132,800 $187,200 $171,200 $491,200 Manufacturing Overhead Budgeted production Variable overhead cost $11,205 $15,795 $14,445 $41,445 Fixed overhead cost $20,000 $20,000 $20,000 $60,000 Total overhead cost $31,205 $35,795 $34,445 $101,445 (d) Annotation of production budget line items  Projected unit sales – to determine the amount of merchandize that will need to be manufactured each month to meet demand  Ending inventory (finished goods) – to ascertain the quantity of gross merchandize needed to meet current month demand  Beginning inventory – to calculate the amount of new merchandize needed to meet demand  Units needed for production – to compute the quantity of direct materials needed to manufacture the required units per month  Ending inventory (raw material) – to determine the total amount of raw materials available for production  Beginning inventory – to determine the amount of raw material to be purchased per month to meet production goals  Total labor hours needed – to enable calculation of the money needed to pay labor to meet demand  Manufacturing Overhead - to calculate the cost of manufacturing overhead needed per month  Variable overhead cost – to ascertain the cost of variable overhead so as to determine the cost of total overhead per month  Fixed overhead cost - to ascertain the cost of fixed overhead so as to determine the cost of total overhead per month (e) Manufacturing budget Peyton Approved Production Budget For the Quarter Ending September 30, 2015 Direct Materials July August September Quarter Budgeted production units 8,300 11,700 10,700 30,700 Materials required per unit $7.75 $7.75 $7.75 $7.75 Material units needed for production $64,325 $90,675 $82,925 $237,925 (Add) Budgeted ending inventory 18,135 16,585 15,345 50,065 Total material units required $82,460 $107,260 $98,270 $287,990 (Less) Beginning inventory 35,650 18,135 16,585 70,370 Material units to be purchased $46,810 $89,125 $81,685 $217,620 Direct Labor Total labor hours needed 8,300 11,700 10,700 30,700 Rate per hour $16 $16 $16 $16 Total labor cost $132,800 $187,200 $171,200 $491,200 Manufacturing Overhead Variable overhead cost $11,205 $15,795 $14,445 $41,445 Fixed overhead cost $20,000 $20,000 $20,000 $60,000 Total overhead cost $31,205 $35,795 $34,445 $101,445 Total Manufacturing Costs $210,815 $312,120 $287,330 $810,265 P July August September October Projected unit sales 18,000 22,000 20,000 60,000 Budgeted cost $14.35 $14.35 $14.35 $14.35 Projected Units Cost $258,300 $315,700 $287,000 $861,000 (h) Annotation of selling expense budget  Projected unit sales – to determine the amount required to manufacture the units needed to satisfy monthly demand  Budgeted price – to calculate the total cost of manufacturing the goods needed to meet demand based on the predetermined direct material, direct labor and manufacturing overhead costs (i) General and administrative expense budget Peyton Approved General and Administrative Expense Budget For the Quarter Ending September 30, 2015 July August September Quarter Administrative salaries $12,000 $12,000 $12,000 $36,000 Sales commissions 2,160 2,640 2,400 7,200 Interest on long-term note 2,700 2,700 2,700 8100 Sales manager's salary 3,750 3,750 3,750 11250 Total general, selling and admin. expenses $20,610 $21,090 $20,850 $62,550 (j) Annotation of general and administrative expense budget line items  Administrative salaries - is a core component of Peyton Approved’s general and administrative expense, thus is important in computing quarterly administrative expenses  Sales commissions – is based on monthly sales and paid out per month, thus is a key component of selling expenses  Interest on long-term note – is described as an expense that falls under general and administrative expenses and is paid on a monthly basis  Sales manager's salary – this is a recurring general and administrative expense, thus crucial in ascertaining quarterly general and administrative expenses 2. Budget Variance Analysis (a) Variance analysis Peyton Approved Budget Variance Analysis For the Quarter Ending September 30, 2015 Actual Results Static Budget Static Budget Variances Units sold 60,000 60,000 0 Per unit cost $18 $18 0 Revenues $1,080,000 $1,080,000 0 Variable costs Direct materials 240,250 232,500 7,750U Direct labor 495,000 480,000 15,000U Variable overhead 40,500 40,500 0 Total variable costs 775,750 753,000 22,750U Contribution margin 304,250 327,000 (22,750)U Fixed costs 60,000 60,000 0 Operating income 244,250 267,000 (22,750)U (b) Annotation of variance analysis  Units sold – this is the key determinant of various costs in the budget, thus its inclusion in variance analysis  Per unit cost – to determine the actual amount of revenue generated and to compare it with the budgeted revenue  Direct materials – is key ingredient in manufacturing goods for sale, and varies depending on units sold, so it is essential in gauging if expenses are within the budget  Direct labor – is vital for every unit produced, thus is an essential metric in determining if the manufacturing department is efficient  Variable overhead – varies with direct labor and units manufactured, thus is key in determining contribution margin  Fixed costs – facilitates the manufacturing department, so is important in determining operating income (c) What needs to be investigated (i) The manufacturing technology the company uses because it could be causing wastage leading to the need for more materials or machines could be breaking down leading to loss of labor hours (ii) The quality of direct materials being procured because using more material than usual could be an indication of poor quality material (iii) The lower labor cost could be an indication that the company is hiring less skilled labor, and this maybe the course of the additional 3,000 direct labor hours incurred which resulted in a loss of $15,000 (iv)How the manufacturing department is managing materials because use of more material than budgeted could be an indication of waste resulting from poor management

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1. The initial budget process

The initial budget process involved calculating the amount of projected revenue based on forecasted monthly sales for the quarter ending September 2015. The sales budget estimate of projected revenue applied a per unit sale of $18 in line with Peyton Approved’s past sales. Additionally, the budget process involved ascertaining the amount of total revenue that the company would collect each month based on Peyton Approved’s credit policy. Since the company collected 40% of sales in cash in the month of sale and 60% in the following month, 40% of June sales and were included in the quarterly budget while 60% of September sales were excluded.

Another core element of the initial budget process involved calculating the cost of sales based on the company’s budgeted cost of $14.35 per unit. This would allow an estimation of the markup prior to deduction of other costs. The selling expense budget focused on the projected unit sales for the quarter as this was important in assessing variances....
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