PGPM Term II Managerial Accounting

Victoria Project
In this team assignment, you will develop an Excel spreadsheet which will generate a
budgeted income statement and a budgeted balance sheet for Victoria Corporation under a variety
of conditions.
While this is a team project, I require that each member of the class actively participate in
developing all parts of the worksheet. Unless you do so, your understanding of the integrative
nature of the budgeting task may remain seriously deficient. This deficiency is likely to prove
costly in exams as well as on the job.
Your spreadsheet should satisfy all of the following requirements:
A.

Sensitivity Analysis: Your spreadsheet should allow the user to make sensitivity analyses
on the values of the following items at a minimum:
1.
2.
3.
4.
5.
6.

Sales volume
Production volume
Selling price
Price of direct materials
Percentage of receivable collection (currently 85%)
Wage Rate of Direct Labor

B.

No Debit-Credit Imbalances: Your spreadsheet should be fully articulated, meaning that

total assets should equal total equities, and net income should properly reconcile with
retained earnings no matter what values are used in these six factors.

C.

The Base Case: Your spreadsheet should match in amounts with those in Exhibits 8 and 9
in the assignment (budgeted income statement and balance sheet), when the values of the
above six factors are set equal to those given.

D.

Assumptions and Condition: In developing the budget model, assume that:

1.

A period is one quarter; hence you will be developing a budget for the coming
quarter, which is from 1/1/20xx to 3/31/20xx.

2.

The company uses FIFO.

3.

The income tax rate is 39%. Tax refund rate (if income is negative) is 35%.

4.

If the ending balance of finished goods goes below 1,500 units, the production
volume should be adjusted automatically; overriding the users input, so as to
maintain this minimum inventory balance at the end.

5.

If the ending cash balance is expected to go below $18,000, a loan should be

arranged at the beginning of the period by issuing a six-month note.
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E.

a.

The amount of the note issued should be a multiple of $2,000 and should
be the smallest such amount that can bring the ending balance at least equal
to the $18,000 minimum balance.

b.

A 0.45% monthly interest (compounded quarterly and payable upon

maturity) should be accrued, increasing the balance of notes payable.
If borrowings exceed $5,000, then a monthly interest rate of 0.45% is
applicable for the first $5,000 and 0.50% will be applicable to the
difference between the amount borrowed and $5,000.1

6.

Unless otherwise stated, all purchases and expenses, normally credited to accounts
payable, are paid before the end of the period. The beginning balance of accounts
payable ($96,540) remains unpaid at the end of the period, because it represents
disputed items.

7.

Treat all opening balances as fixed, so sensitivity analysis applies only to the
current quarter and not to the preceding quarters.

Notes:
1.

Please write a contact phone number for your team on your diskette label. Also,
list the members of the group on the label.

2.

Please do not use any macros in your worksheet.

3.

Design and organize your worksheet so it is easy to follow and to work with. If
there are no errors in your worksheet, good organization may earn you a bonus
point.

These interest computations are not applicable to existing notes payable.

Victoria Corporation
First, we summarize the profit plan developed for Victoria Corporation. Second, we tie
the profit plan into the other budgets, such as the cash budget and the capital budget. Finally, we
present the budgeted balance sheet. The master budget ties together the financial activities of the
firm for the budget period. Hence, it can be useful for both planning and coordination. For
example, planning for cash needs requires knowing cash flows to and from operating activities
and knowing cash needs for the capital budget.
Exhibit 1 summarizes the information about projected sales and production volumes,
revenues, and costs. Exhibit 2 presents the master budget profit plan.
Materials Purchases Budget
The Purchasing Department is responsible for purchasing materials in Victoria
Corporation. Exhibit 3 presents the materials purchases budget. The production budget is the
basis for the materials purchases budget. For simplicity in presentation, it is assumed that
payments to suppliers equal purchases each period.
Capital Budget
The capital budget, Exhibit 4, shows Victoria Corporations plan for acquisition of
depreciable, long-term assets during the next period. Management plans to purchase major items
of equipment. Part of the cost will be financed by the issuance of notes payable in a later period
to equipment suppliers. The note issuance is deducted from the cost of the acquisitions to
determine current cash outlays for equipment. An accepted alternative treatment would have
viewed the note issuance as a cash inflow, with the entire cost of the equipment included in cash
outflows.
Cash Outlays Budget
A schedule of the planned cash outlays for the budget period is presented in Exhibit 5.
The first six items are taken from the cash outlay lines of earlier exhibits. Each period, the
Victoria Corporation pays the income taxes accrued in the previous period. Income taxes payable
at the start of the budget period are shown to be $6,200 on the beginning balance sheet (first
column of Exhibit 9). Dividends of $5,000 are expected to be declared and paid in the budget
period.
Receivables and Collections Budget
Most of each periods sales are collected in the period of sale, but there is some lag in
collections. The budget for cash collections from customers appears in Exhibit 6. Collections for
sales of a given period normally occur as follows: 85 percent in the period of sale and 15 percent
in the next period. It would be possible to introduce sales discounts and estimates of
uncollectable accounts into the illustration, but they are omitted for simplicity. The estimated
accounts receivable at the start of the budget period of $71,400 are shown on the beginning
balance sheet (first column of Exhibit 9). The amount represents 15 percent of the previous
periods sales of $476,000 ($71,400 = .15 x $476,000). In the budget period, 85 percent of sales
is expected to be collected, leaving $63,000 in Accounts Receivable at the end of the budget
period ($63,000 = 15 percent of budget period sales of $420,000).

Cash Budget
Cash flow is so important for any organization that no budget is more important for
financial planning than the cash budget, illustrated in Exhibit 7. This budget is significant because
it helps management plan to avoid unnecessary idle cash balances or unneeded, expensive
borrowing. Almost all firms prepare a cash budget.
The budgeted amounts for cash outflows and collections from customers are taken from
Exhibits 5 and 6, respectively. The other income is made up of interest and miscellaneous
revenues. It is estimated to be $2,000 for the period.
Budgeted (Pro Forma) Income and Retained Earnings Statement
All of the previous budget information is pulled together in the budgeted income and
retained earnings statement and the budgeted balance sheet. The former is illustrated in Exhibit 8.
At this stage in the budgeting process, managements attention switches from decision making,
planning, and control to external reporting to shareholders. In other words, management
becomes particularly interested in how the results of its decisions will be reflected in the income
statement and balance sheet. Accordingly, the budgeted income statement and balance sheet are
often prepared in accordance with generally accepted accounting principles. That is why we call
the statement in Exhibit 8 an income statement rather than a profit plan, and we present it using
full absorption costing as required for external reporting.
Compilation of all of the data for the period indicates a budgeted income of $6,039. If top
management finds this budgeted result satisfactory, and adequate cash can be made available to
carry out the operations as indicated by Exhibit 7, the master budget will be approved. If the
budgeted results are not considered satisfactory, additional thought and additional meetings will
be devoted to considering ways in which the budgeted results may be improved through cost
reductions or altered sales plans.
Budgeted Balance Sheet
The final exhibit of this series, Exhibit 9, shows the budgeted balance sheets at the start
and end of the period. (The budget is prepared before the beginning of the budget period; hence,
the beginning balance sheet is unknown when the budget is prepared. For example, a budget
prepared for the coming calendar year starting January 1 would usually be prepared the preceding
September through November.)

Here, as in the budgeted income statement, management will have to decide if the
budgeted overall results will be acceptable. Will cash balances be satisfactory? Is the receivables
turnover up to plan? Will the final capital structure and debt-equity ration conform to
managements desires? If the budgeted balance sheet and income statement are satisfactory, they
will become the initial benchmarks against which actual performance in the ensuring period is
checked.
Summary of the Master Budget
The master budget summarizes managements plans for the period covered. Preparing the
master budget is usually a complex, dynamic process requiring the participation of all managerial
groups, from local plant and sales managers to the top executives of the firm and the board of
directors. Once the budget is prepared and adopted, it becomes the major planning and control
instrument.
Master budgets are almost always static budgets; that is, they consider the likely results of
operations at the one level of operations specified in the budget. If preparing the master budget
requires a lot of hand calculation, it can be cumbersome and costly to prepare multiple master
budgets. As the process is computerized, it becomes less costly to develop multiple master
budgets that take into account the various uncertainties facing the firm, such as market conditions,
material prices, labor difficulties, and government regulations.

Exhibit 1
VICTORIA CORPORATION
Summary of Sales, Production, and Cost Budgets

Sales Budget
70,000 units at $6

$ 420,000

Production Budget
Units to be Produced
Budgeted Sales, in Units (see sales budget)
Desired Ending Inventory (assumed)
Total Units Needed
Beginning Inventory (assumed)
Units to Be Produced

70,000 Units
8,000
78,000 Units
8,000
70,000 Units

Production Cost Budget

Direct Materials (1 pound per unit at $1.00 per pound)
Direct labor (1/8 hour per unit at $20 per hour)
Manufacturing Overhead:
Indirect Labor ($.10 per unit)
Supplies ($.04 per unit)
Power ($1,000 per period plus $.03 per unit)
Maintenance ($13,840 per period)
Rent ($6,000 per period)
Insurance ($1,000 per period)
Depreciation ($10,360 per period)
Total Production Costs

$ 70,000
175,000
$ 7,000
2,800
3,100
13,840
6,000
1,000
10,360

44,100
$289,100

(continued)

Marketing Cost Budget

Variable Costs
Commissions (2 percent of sales; see sales budget)
Shipping Costs ($.02 per unit shipped; see sales budget)
Total Variable Marketing Costs
Fixed Costs
Salaries ($25,000 period)
Advertising ($30,000 per period)
Sales Office ($8,400 per period)
Travel ($2,000 per period)
Total Fixed Marketing Costs
Total Marketing Cost Budget

$ 8,400
1,400
$

9,800

$25,000
30,000
8,400
2,000
65,400
$ 75,200

Administrative Cost Budget

Presidents Salary
Salaries of Other Staff Personnel
Supplies
Heat and Light
Rent
Donations and Contributions
General Corporate Taxes
Depreciation-Staff Office Equipment
Total Administrative Cost Budget

$ 10,000
17,000
2,000
1,400
4,000
1,000
8,000
1,400
$ 44,800

Exhibit 2
VICTORIA CORPORATION
Master Budget Profit Plan

Variable Costing Basis

Sales (70,000 units at $6)
Less:
Variable Manufacturing Cost of Goods Sold (70,000 units at $3.67)
Variable Marketing Costs (70,000 units at $.14)
Contribution Margin
Less:
Fixed Manufacturing Costs
Fixed Marketing and Administrative Costs
Operating Profits (variable costing)

$420,000
(256,900)
( 9,800)
$153,300
( 32,200)
(110,200)
$ 10,900

Full Absorption Costing Basis

Sales (70,000 units at $6)
Less:
Cost of Goods Sold (70,000 units at $4.13)
Gross Margin
Less:
Marketing and Administrative Costs
Operating Profits (full absorption costing)

$420,000
(289,100)
$130,900
(120,000)
$ 10,900

Exhibit 3
VICTORIA CORPORATION
Materials Purchases Budget
Quantities to Be Purchased (in pounds)
Units to Be Used (see Exhibit 12.10)
Purchases Required at a Budgeted Cost of $1 per Pound
There are no materials inventories.

70,000 Units
$ 70,000

Exhibit 4
VICTORIA CORPORATION
Capital Budget

Acquisition of New Factory Machinery

Miscellaneous Capital Additions
Total Capital Budget
Borrowings for New Machinery--Long-Term Notes Payable
Current Cash Outlay

Period 1
$ 12,000
2,000
$ 14,000
( 6,000)
$ 8,000

Exhibit 5
VICTORIA CORPORATION
Cash Outflows Budget

Materials (Exhibit 3)
Labor (Exhibit 1)
Manufacturing Overhead (Exhibit 1)a
Marketing Costs (Exhibit 1)
Administrative Costs (Exhibit 1)a
Capital Expenditures (Exhibit 4)
Payments on Short-Term Notesc
Interestc
Income Taxesd
Dividendsc
Total Cash Outflows

Period 1
$ 70,000
175,000
33,740
75,200
43,400
8,000
13,000
3,000
6,200
5,000
$432,540

__________
a

Manufacturing Overhead Costs Depreciation = $44,100 - $10,360 = $33,740.

Administrative Costs - Depreciation = $44,800 - $1,400 = $43,400.

Assumed for illustration.

Income taxes on earnings of previous period are paid in current period. The amount is assumed in this case.

Exhibit 6
VICTORIA CORPORATION
Receivables and Collections Budget
Accounts Receivable, Start of Period:
From the Period Immediately Preceding the Budget Period (15 percent
of $476,000)
Budget Period Sales
Total Receivables

$ 71,400
420,000
$491,400

Less Collections:
Current Period (85 percent of $420,000)
Previous Period (15 percent of $476,000)
Total Collections
Accounts Receivable, End of Period

(357,000)
( 71,400)
(428,400)
$ 63,000

Exhibit 7
VICTORIA CORPORATION
Cash Budget
Budget
Period
Cash Receipts:
Collections from Customers (Exhibit 6)
Other Incomea
Total Receipts
Cash Outflows (Exhibit 5)

$428,400
2,000
$430,400
(432,540)

Increase (Decrease) in Cash during Period

Cash Balance at Start of Perioda
Cash Balance at End of Period

2,140)
79,800
$ 77,660

__________
a

Assumed for illustration.

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Exhibit 8
VICTORIA CORPORATION
Budgeted (pro forma) Income and Retained Earnings Statement
Sales (70,000 units at $6)
Less Cost of Goods Sold (70,000 units at $4.13)
Gross Margin
Less Marketing Expenses
Less Administrative Expenses
Operating Income (Exhibit 2)
Other Income (Exhibit 7)
Less Interest Expense (Exhibit 5)

$420,000
( 289,100)
$130,900
( 75,200)
( 44,800)
$ 10,900a
2,000
$ 12,900
( 3,000)

Pretax Income
Less Income Taxesb

$
(

9,900
3,861)

Net Income
Less Dividends (Exhibit 5)

$
(

6,039
5,000)

Increase in Retained Earnings

Retained Earnings at Start of Period (Exhibit 9)

Retained Earnings at End of Period (Exhibit 9)

$ 57,539

1,039
56,500

__________
a

This is the amount called operating profits on the master budget profit plan, Exhibit 2.

Income taxes average approximately 39 percent of pretax income. The amount $3,861 is shown as the end-ofperiod income taxes payable in Exhibit 9.

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Exhibit 9
VICTORIA CORPORATION
Budgeted Balance Sheet
Start of
Budget
Period

End of
Budget
Period

Current Assets
Cash (Exhibit 7)
Accounts Receivable (Exhibit 6)
Finished Goods Inventory
Total Current Assets

$ 79,800
71,400
33,040a
$184,240

$ 77,660
63,000
33,040a
$173,700

Plant Assets
Equipment (Exhibit 4)
Less Accumulated Depreciation
Total Assets

460,000
(162,000)b
$482,240

474,000
(173,760)b
$473,940

Current Liabilities
Accounts Payable
Short-Term Notes and Other Payables
Income Taxes Payable (Exhibits 5 and 8)
Total Current Liabilities

$ 96,540b
41,000b
6,200
$143,740

$ 96,540b
28,000b
3,861
$128,401

Long-Term Liabilities
Long-Term Equipment Notes (Exhibit 4)
Total Liabilities

82,000b
$225,740

88,000b
$216,401

$200,000b
56,500b
$256,500
$482,240

$200,000b
57,539b
$257,539
$473,940

Assets

Equities

Shareholders Equity
Capital Stock ($20 par value)
Retained Earnings (Exhibit 8)
Total Shareholders Equity
Total Equities
__________

8,000 units in inventory according to Exhibit 1 at $4.13 per unit. $4.13 is the full absorption
manufacturing cost per unit.
a

Assumed for purposes of illustration

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