The project is to be completed as follows:
1) The project must be completed using Excel or similar electronic spreadsheet software. Your cell formulas must be turned in with the project itself. That is, you may print out the project but you must also turn an excel file with your spreadsheets on it. (i.e. do not just type the project in Word). The goal is to prepare the budget and then reference certain totals and line items to the flexible budget and the performance report.
2) Good form and readability is important. You are the accounting manager of the Company so your work should be professional and complete as well as accurate.
3) Remember that several Generally Accepted Accounting Principles, (GAAP), may apply to this project. Assume this company is an S Company, so you can ignore income taxes, use simple interest, and assume that there are 4 weeks in a month.
4) Timeliness is crucial. The excel files and complete written project is due no later than midnight on Sunday, November 30th.
5) Points for each component of the project are indicated.
FOOD SERVICE COMPANY, INC.
Food Service Company, Inc. sells packaged meals to the airlines for first class customers. Even though the company has been in business for several years, because of continued problems experienced by the airlines, the company has lost several major customers in recent years and finds it very difficult to plan operations and cash requirements on an annual basis. As a result, the company has asked you to prepare a budget for the remaining quarter of 2012 in the hopes of better controlling sales and costs.
You are the accounting manager. The charge to you is to:
I. Prepare a master budget.
II. Prepare a flexible budget.
III. Prepare a performance report.
Using the information and instructions provided, complete your assignment.
I. Prepare the master budget.
The master budget consists of:
1) a sales budget for the quarter.
2) a purchases budget for the quarter.
3) a selling and administrative budget for the quarter.
4) a cash budget for the quarter.
5) a proforma income statement for the quarter ending Dec. 31, 2012.
6) a proforma balance sheet as of December 31, 2012.
The following is the information you will need:
Sales Forecast:
October - 10,000 meals
November - 16,000 meals
December - 20,000 meals
January - 18,000 meals
The airlines will be charged $6.00 for each meal; they are required to pay 30% of the cost in the month of delivery, 55% the following month and the remaining 15% in the next month; no bad debts are expected. (September sales were 9,000 meals).
Purchases and inventory levels:
The company buys the meals wholesale from a local restaurant and pays an average of $3.00 for each meal. Because the meals can be frozen and, in order to keep up with unexpected demand, especially during the Thanksgiving and Christmas holidays, the company keeps a minimum inventory of 10% of the next month's expected sales.
The company must pay 60% of the cost of the meals in the month they are purchased and 40% in the following month.
Selling and Administrative expenses:
Two salesmen work for the company and sell to the major airlines. They have a base salary of $2,000 each per month and also earn a combined commission of 5% of sales. The salaries are paid in the month the sales are made and the commission is paid the following month.
In addition, a trucking company delivers the meals from either the restaurant or company freezer to the airline. The charge is $.10 per meal and is paid in the month of delivery.
Other costs of the company are estimated to be:
Telephone & Web site $ 350 mo. *
Rent 1,000 mo.
Office salaries 2,500 mo.
Insurance 9,000 per year
Utilities 200 mo. *
Supplies 100 mo. *
Advertising (paid the lst day of the qtr.) $150 per quarter
* indicates they are paid in the month following usage. All other expenses are paid in the month incurred unless otherwise noted.
The company has office equipment costing $25,000 which is expected to last 5 years and office furniture costing $40,000 which is expected to last 10 years. There is no salvage value.
The company had to borrow $30,000 in January of 2012; the terms of the loan was 8% per year, with interest paid monthly and the principal due December 31, 2014. The minimum cash on hand that the company feels it must keep is $5,000. Should the cash budget indicate an ending cash balance below $5,000, the company has access to a line of credit. Any principal borrowed is due on the last day of the quarter; however the interest must be paid in the following month.
II. Prepare a flexible budget.
In anticipation of changing sales in 2013, the management team has decided to also prepare a flexible budget for the quarter. Meal sales ranges are from 30,000 to 50,000 in increments of 5,000's. In preparing this budget, do not consider beginning and ending inventory amounts, but assume that purchases are exactly the amount that will be sold.
III. Prepare a performance report.
Actual results for the last quarter of 2012 are as follows:
Meals sold: 55,000
During December, the salesmen made a special deal with the airlines which dropped the quarterly sales price from $6.00 per meal to an average of $5.75 each.
Unfortunately, the restaurant had a price increase which brought the average cost Food Service Company, Inc. had to pay for the meal from $3.00 to $3.25 each. Plus, because of the Christmas rush, the delivery company also increased its price to an average cost of $.12 per meal.
The company decided to pay Christmas bonuses of $350 to each salesman and a total of $1,500 to the salaried employees. Other actual costs for the quarter were as follows:
Telephone $ 1,500
Rent 3,000
Office salaries 8,000 (excluding bonuses)
Utilities 1,000
Supplies 200
Advertising 600
The company paid the bank any interest due as of December 31.
Your report should compare actual quarterly activity to both the flexible budget and the master budget. As part of your report, comment on how effective you felt your efforts were in preparing the quarterly budget and point out any items you feel management should address or look into as a result of the performance report.
Format should be as follows:
Item Actual Flexible Budget Variance Master Budget Variance
IV. Report to management with recommendations.
How do you feel about the future of the company?
What changes would you recommend to management and why? Be as specific as possible.