Budgeting Project


Fanciful, Inc. is a case study which allows you to incorporate numerous financial and managerial accounting concepts into a single business setting. You will take the position of the company controller who will prepare the budget for the year ended December 31, 2013, using the actual data from 2008 through 2012, and information given to you by various departments. You will prepare a report for the president of the company, describing the strengths and weakness of the corporation, as well as provide suggestions for the future. In short, you will be responsible for the planning and control procedures for the company from an accounting standpoint.


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In order to focus on important accounting concepts, certain simplifications are necessary to make this case manageable. The student should keep the following simplifications in mind while working on this case:


·         Work in process inventories will be ignored.

·         Financial and IRS tax will be the same.

·         Some projections for 2013 will be given.

·         Standards used for the 2013 budget will be the reasonably obtainable standards.

·         No hourly worker will work overtime.

·         All price changes will occur on January 1st and will remain in effect for the entire year.

·         The actual 2012 information is available while preparing the 2013 budget.

·         All debt transactions will occur either on January 1st or December 31st.

·         There are no bad debts.


The student should also keep in mind that the budgeting process is not an exact science; therefore, approximate figures provide adequate information for the decision maker. Figures should be rounded to the whole dollar throughout the budgeting process and the control applications. Since it is not possible to have a partial machine or person, certain figures will always have to be rounded up.




Fanciful, Inc. is a paint manufacturing company that produces two qualities of paint, Super and Stupendous. The company was established eight years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 5 years. In 2010, a second, higher-quality paint was introduced, and sales of this product have increased each year due to reasonably effective sales efforts. The president is currently concerned about the potential inefficient use of capacity and the effect that this has on profits.


All raw materials are currently purchased from outside suppliers and no difficulty is foreseen in obtaining the necessary inventories for production in the future. All inventories are currently considered to be at the lowest safe levels possible given the delivery, production, and sales cycles.             


Given the current production capacity, the company will have room for expansion for the next few years without building new facilities or expanding the current building. The company will also have the option of starting a second production shift to support future sales if necessary; therefore, increased production will be obtainable through purchasing additional equipment or increasing production hours. At this time, however, the president is not considering a second shift due to the additional $1.00-per-hour shift differential that would be necessary to pay the hourly second-shift workers.


The company had a cash flow problem in 2012, but has always managed to make all payments on a timely basis. The president wishes to increase the amount of cash on hand in the future so that the company will have a greater margin of safety. To date, the company has not had difficulty obtaining financing for expansion and does not foresee any future difficulties in obtaining necessary funding for legitimate purposes.


The company has paid a consistently good dividend to the stockholders. The president would like to continue this policy in the future.




Fanciful, Inc. has two separate production departments – one for each of the paint types. Since the end products are not distinguishable, the company uses process costing, employing a FIFO inventory.


Absorption costing is used for all outside reports. All non-direct fixed costs are allocated using various allocation bases as indicated throughout the project. The Company does not use a full ABC costing system; however, it does employ some of the ABC concepts in the budgeting process.


The Administrative Department handles all of the purchasing, accounting, and secretarial duties in a highly efficient manner. The need for separate departments is not necessary at this time.



SUPER                                   STUPENDOUS



Number of machines available                        26                                           20

Annual capacity per machine                           15,000 gallons                      15,000 gallons

Annual production capacity                             390,000 gallons                   300,000 gallons

Machine hours available per machine            1,800 hours                           1,800 hours

Standard machine hour per gallon                   .12 hour/gallon                     .12 hour/gallon

Standard labor hour per machine hour           1.25 labor hr/mach.hr         1.25 labor hr/mach.hr

Actual sales volume                                            420,000 gallons                   268,200 gallons

Number of hourly employees                           29                                           21

Supervisors (one per each eight hourly

   employees)                                                        4                                              3

Raw material prices

   Cans                                                                    40¢ each                                               40¢ each

   Pigment                                                              $2.75 per pound                  $3.75 per pound

Raw material usage                                           

   Cans                                                                    one per gallon                       one per gallon

   Pigment                                                              two pounds per gallon        two pounds per gallon

Direct labor rate                                                   $8.25 per hour                      $8.25 per hour




The Sales Department feels very good about the prospects for 2013. The reputation of the new product, Stupendous Paint, has increased significantly due to effective advertising in the past few years. The Sales Department is ready to launch a major advertising campaign, which is expected to continue the trend of the last three years  for the Stupendous brand, even with a small price increase per gallon.


Super Paint has been produced since the company began production. The sales level of this product has been rather stagnant for the last 5 years, and that trend is expected to continue in the future.



The following information regarding the two products has been gathered:


Super                                      Stupendous

Paint                                       Paint


Anticipated 2013 Sales Price                             $10.30 per gallon                 $15.45 per gallon


Actual 2008 Sales                                               411,000 gallons                   None
Actual 2009 Sales                                               412,000 gallons                   None
Actual 2010 Sales                                               405,000 gallons                   186,250 gallons
Actual 2011 Sales                                               430,000 gallons                   223,500 gallons
Actual 2012 Sales                                               420,000 gallons                   268,200 gallons


You have made the following conclusions about the two different products:

Super Paint

·         Sales growth in units will continue to be stagnant.

·         The more recent years are more representative of continuing unit sales than years in the further past.

·         Exponential Smoothing will be an appropriate unit sales projection method to use.


Stupendous Paint

·         Unit sales growth will continue on its current increasing trend.

·         An exponential growth function, with the year being the independent variable and the sales volume being the dependent variable, will be an appropriate sales projection method.




The Production Department worked in conjunction with both the sales and purchasing departments in developing desired projected inventory levels for December 31, 2013. Information regarding beginning and desired ending inventories for 2013 are as follows:


Beginning inventory            Ending inventory

Cans                                                                       56,550 cans                          61,700 cans

Pigment for Super Paint                                     63,300 pounds                     70,000 pounds

Pigment for Stupendous Paint                          49,700 pounds                     53,750 pounds

Finished Goods Inventory

   Super Paint                                                        31,700 gallons                      35,000 gallons

   Stupendous Paint                                             24,850 gallons                      27,000 gallons


The following direct material price increases are expected to occur on January 1, 2013, and remain effective for the entire year:


Price increase expected

Cans                                                                       2¢ each


   Super Paint                                                        $0.14 increase over 2012 prices

   Stupendous Paint                                             $0.19 increase over 2012 prices


Inventories are accounted for using the FIFO method.

Hint: Remember that each gallon of paint requires two pounds of pigment.






During 2012, a new contract was signed with the union. As part of that agreement, no worker can work in more than one department, and no single worker can work over 2,000 hours during the year. This means that for every 2,000 hours of labor that is required for production in each department, one hourly employee is needed. For example, if a department needs 10,150 labor hours during the year, six employees will be needed (10,150 total hours/2,000 per employee = 5.075, which needs to be rounded to 6 employees).


The standard direct labor rate will increase $0.25 per hour over the 2012 rate.


Additional information regarding employee benefits is included in the section on manufacturing overhead.




The following information is available regarding the actual overhead costs incurred for 2012:


Variable costs                       Fixed costs

Indirect materials                                                20¢ per gallon

Indirect labor annual rate                                                                                  $50,000 per supervisor

Hourly employee fringe benefits                      20% of wages                      

Hourly health benefits                                                                                        $1,500 per employee

Supervisor fringe benefits                                                                                  20% supervisor’s salaries

Supervisor health benefits                                                                                 $1,500 per employee

Utilities                                                                   40¢ per machine hour

Maintenance                                                        20¢ per machine hour        *$10,000 annually

Insurance                                                                                                              *$50,000 annually

Property taxes                                                                                                      *$10,000 annually

Supplies                                                                                                                 *$5,000 annually

Depreciation (items held during 2012)                                                            **$250,000 annually


*These items are allocated to departments based upon production levels in gallons.

**The 2012 allocation was $141,300 to the Super Department, and $108,700 to the Stupendous   



It is expected that the following changes will occur during 2013:


                                                                             Variable costs                          Fixed costs

Indirect materials                                                No change

Indirect labor annual rate                                                                                  2.5% increase

Hourly fringe benefits                                         No change                            

Hourly health benefits                                                                                        Increase $200/employee

Supervisor fringe benefits                                                                                  No change

Supervisor fringe benefits                                                                                  Increase $200/supervisor

Utilities                                                                   No change

Maintenance                                                        Increase 5¢/MHr*               Increase $500 annually

Insurance                                                                                                              Increase $500 annually

Property taxes                                                                                                      Increase 8.0%

Supplies                                                                                                                 Increase $200 annually

Depreciation (items held during 2012)                                                            No change

Depreciation (machinery purchased in 2013)                                                                Five-year life**


            *Mhr stands for Machine hours.

            ** There will be no salvage value for the equipment purchased in 2013.




The Sales Department consists of 10 representatives who report directly to the president. Each individual is on a base salary plus a commission, and the sales reps also submit meal and entertainment expenses for reimbursement. (In 2012, the meal and entertainment expenses were limited to $50 per week per sales representative based upon a 52-week year.)


The following information is available regarding the actual selling costs incurred for 2012:


                                                                            Variable                     Fixed

Commissions                                                        35¢ per gallon sold

Salaries                                                                                                                  $15,000 per sales representative

Fringe benefits                                                      20% of commissions          20% of salaries

Health benefits                                                                                                    $1,500 per sales representative

Advertising                                                            $10 per 100 gallons sold

Meals & entertainment                                                                                      $50 per week per representative

Depreciation                                                                                                         $7,500


It is felt that the company will not need any additional sales representatives for 2013. It is expected that the following

changes will occur in 2013:

                                                                           Variable                                      Fixed

Commissions                                                        No change

Salaries                                                                                                                  No change

Fringe benefits                                                      No change                             No change            

Health benefits                                                                                                    Increase $200 per representative

Advertising                                                            $12 per 100 gallons sold

Meals & entertainment                                                                                      $60 per week per representative

Depreciation                                                                                                         No change




The Administrative Department consists of the president and an office staff of eight who handle the secretarial, purchasing, and accounting duties (total of nine people). The following information is available regarding the 2012 actual costs:



                                                                                Variable                                 Fixed

Salaries                                                                                                                  $250,000 annual

Fringe benefits                                                                                                      20% of salaries

Health benefits                                                                                                    $1,500 per employee

Professional fees                                                                                                  $20,000 annually

Office supplies                                                     3¢ per gallon sold

Telephone                                                             1.5¢ per gallon sold

Depreciation                                                                                                         $6,000 annually



It is felt that the level of the office and administrative staff will be adequate for the coming year. It is expected that the

following changes will occur in 2013:





                                                                                Variable                                 Fixed

Salaries                                                                                                                  Increase 3% annually

Fringe benefits                                                                                                      No change

Health benefits                                                                                                    Increase $200 per employee

Professional fees                                                                                                  Increase of $1,500

Office supplies                                                     Increase 1¢ per gallon sold

Telephone                                                            Increase ¼¢ per gallon sold

Depreciation                                                                                                         No change





The current federal and state income tax rates total 40%. All taxes for the year will be paid by the end of the year,   

which means that there will be no accrued taxes on December 31, 2013.





It is expected that sales will occur evenly throughout the year and that there will be no cash sales. Seventy-five percent of monthly sales  will be collected in the month following the sale, and the remaining 25% will be collected by the end of the second

month. No bad debts are anticipated.




This account represents the purchases for raw materials only. It is expected that purchases will be made evenly throughout   

the year, and that all purchases will be paid for during the month following the purchase.




The accrued wage account will include all direct labor, indirect labor, sales commissions and salaries, and administrative salaries. All wages are earned evenly throughout the year, and employees are paid twice each month. On December 31, 2013, the accrued wages will include wages representing one full payroll period.




This account includes all other cash expenses not included in Account Payable and Accrued Wages. It is the company’s policy to pay all other expenses during the month following the purchase. These expenses will be incurred evenly throughout the year. The 20% fringe benefits will be paid on all wages, salaries, and commissions.





Property, plant, and equipment consist of the following on December 31, 2012:


Property and plant                                                              $750,000

Equipment                                                                          1,025,000

        Total Property, Plant, and Equipment                        $1,775,000


Each additional machine that is needed to support the production level expected during 2013 will cost $30,000 and be depreciated over five years using the straight-line method. Assume that any equipment purchases are made on the first day of January and are operational throughout the entire year.


No new equipment will be needed for the sales and administrative departments.




A long-term debt repayment (principle only) will be made on December 31, 2013 for $255,000. The interest rate charged on the debt balance throughout 2013 will be 7.5%, and will be paid on December 31, 2013.


If an additional machine is purchased, $5,000 will be paid in cash and the remaining $25,000 will be financed at the 7.5% rate. This same proportion of cash/additional debt will be applied to all additional equipment purchased during 2013. Again, any purchases will be made on January 1, 2013.




Fanciful, Inc.’s policy is to pay dividends on the last day of each quarter. The total anticipated dividends for 2013 are $2.50 per share.




Unless otherwise noted, information will remain unchanged from 2012 through 2013.




The Income Statement and Balance Sheet for Fanciful, Inc. for 2012 are as follows:



                                                                               FANCIFUL, INC      

                                                                      STATEMENT OF INCOME

                                                     FOR THE YEAR ENDED DECEMBER 31, 2012



Sales                                                                       $8,270,000

Cost of goods sold                                                 6,620,946

Gross Margin                                                          1,649,054


Selling expenses                                   $581,060

Office & administrative expenses      373,010    954,070

Operating income                                                                   694,984

Interest expense                                                          85,950

Income before tax                                                    609,034

Income tax                                                                243,614

                                Net income                                                             $365,420






                                                                          FANCIFUL, INC.

                                                                          BALANCE SHEET

                                                                          DECEMBER 31, 2012



                                  Cash                                                                  $150,000

  Accounts receivable                                          827,000

  Inventory-Raw materials                                 383,037

  Inventory-Finished goods                                551,835

  Plant and equipment                                    1,775,000

    Less Accumulated Depreciation                 (615,000)

Total Assets                                                   $3,071,872 



  Accounts payable                                          $383,016

  Accrued wages                                                    76,097

  Accrued other                                                       74,083

  Long-term debt                                              1,125,000 

              Total liabilities                                                    1,658,196




  Common stock, $5 par value   $400,000

  Additional paid-in                      495,000

  Retained earnings                       518,676

Total Stockholders’ equity                            1,413,676


                               Total liabilities and

                                   stockholders’ equity                                 $3,071,872        





Part A


1. Prepare the following budgets for the fiscal year ending December 31, 2013, using the provided spreadsheets. Note: It is required to use the provided worksheets using Excel formulas.


a. A sales projection in units using the methods suggested. (10 points)


b. Sales budget (10 points)


c. Production budget (10 points)


d. Direct materials budget (10 points)


e. Direct labor budget (10 points)


f. Manufacturing overhead budget (10 points)


g. Projected Cost of Goods Manufactured (absorption costing) (10 points)




Loss of 20 points for not using the provided Excel worksheets




Part B


h. Capital expenditures budget (10 points)


i. Selling expenses budget (10 points)


j. Administrative expenses budget (10 points)


k. Proforma income statement (absorption costing) (20 points)


l. Cash budget (25 points)


m. Proforma balance sheet (25 points)


2.  Comment on the strengths and weaknesses of this company. What concerns do you have? What recommendations do you have for the future? (10 points)




Loss of 25 points for not using provided Excel worksheets.


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