MANAGERIAL BUDGETING: ARROWDALE 1

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1 MANAGERIAL BUDGETING: ARROWDALE 1 Arrowdale Manufacturing: Master Budget Proposal Anitra N. Reaves MGT/MBA 6150: Budgeting & Resource Allocations Walden University

2 MANAGERIAL BUDGETING: ARROWDALE 2 ARROWDALE MANUFACTURING To: The Board of Directors From: Arrowdale Business Group Managers Date: March 20, 2015 Subject: Budget Projections and Forecasts - Expansion of Workforce Purpose The purpose of this report is for the Business Management team of Arrowdale Manufacturing to inform the Board of Directors of our sales and operations forecast and financial projections for We intend to present this information to establish a business case for the expansion of the company s workforce to cover a second shift at Arrowdale. As we consider our core customers, our number one selling product and our growth outlook for the future, we anticipate that in order to meet the demands of our core consumer base and remain competitive in our market, we will need to add to our sales, manufacturing and production operations. The following discussion will focus on the budget centers that will be vital to the successful execution of this profit plan, budget and resource allocation to establish revenue and profitability for Business Objective: We are recommending that Arrowdale Manufacturing acquire additional labor to account for sales and operations for maintaining a second shift at the company. We understand that controlling for the needs of the organization by proper budgetary planning is a vital business competency for balancing Arrowdale s financial, customer, operations and talent management activities. These four areas are critical to effective management of shareholder interests, stakeholder accountability, customer relationship management, operational excellence and workforce execution. This balanced scorecard approach will provide that we can identify, target, measure and adapt from all of the leading and lagging feedback that funnels back into Arrowdale s organizational system so that we can sustain and or improve organizational performance. Managing Arrowdales; financial, technical, human and raw material resources by implementing a strategic allocation of enterprise resources; we can more effectively plan for performance, control risk and evaluate the effectiveness of our profit planning strategies. The balanced scorecard approach is essentially a strategy map that enables Arrowdale Manufacturing to show the business commitments and relationships between them in a quantifiable and precise manner to achieve financial objectives, (Kaplan, Norton & Rugelsjoen, 2010, p.116.) What follows is an analysis of our forecast and projections for each budget center and the business outlook that Arrowdale can expect; should the Board of Directors approve this measure.

3 MANAGERIAL BUDGETING: ARROWDALE 3 Master Budget In preparation for the upcoming year; business managers who have budgetary accountability for Sales, Production, Direct Materials and Direct Labor at Arrowdale Manufacturing have prepared breakout calculations and corresponding analyses which reflect the overall fiscal year forecast as reflected in our budgeted income statement, balance sheet and budgeted balance sheet; expressing a complete accounting of Arrowdale s Master Budget. This Master budget contains all forecasts and projections for the financial and operating budget for fiscal year Sales The Arrowdale Sales budget contains all the units of projected sales of the Arrowdale Stainless Steel Thermos, the cost of the thermos by unit price, an accounting of anticipated cash receivables the company derives from credit sales (Shim, Seigel & Shim, 2012); that we can confidently project for the next year. We determined that our projected sales number and unit price will be set at 600,000 units, priced at $22.50 per unit. Our total revenue from sales is forecast to be $13,500,000. We expect that our cash collections will be a graduated percentage (+) of each quarter s sales with an expected uncollectable amount of 1%. In any month cash collections may vary from credit sales and a remaining 1% may not be collectible, (Shim, Seigel & Shim, 2012, p.100). Production The Arrowdale manufacturing company wants to make as many units as possible while maintaining a high standard in our product. Looking at our sales forecast in our sales budget, the production budget can be established. " The production budget calculates the number of units of products that must be manufactured, and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usually as safety stock to cover for unexpected increased in demand). The production budget is typically prepared for a "push" manufacturing system, as is used in a material requirements planning environment" (accountingtools.com)

4 MANAGERIAL BUDGETING: ARROWDALE 4 As our sales forecast shows, we anticipate 600,000 units to sale. Our production budget team decided that our desired ending inventory will be 40,000 units. Our beginning inventory will be 35,000 units. Using these figures we can calculate the units that are to be produced; which is shown in the illustration below. Arrowdale Manufacturing Company Production Budget For year Ended December 2015 Sales & Inventory: Beginning & Ending Needs Quantity Planned Sales 600,000 Units Desired Ending Inventory 40,000 Units Total Needs 640,000 Units Less Beginning Inventory 35,000 Units Total Units to be Produced 605,000 Units With our planned Schedule 1 sales, our budget will allow for us to produce 605,000 units. By hiring a second shift this should be well within our means to produce in a timely manner. Direct Materials Budget Direct materials budgets show material quantities required to meet production demands, material quantities that will need to be purchased, and their associated costs; including expected cash payments for materials (Shim, and Siegel, 2012). Direct materials budgets are categorical components of manufacturing costs, and include all primary components of the product. For example, the Arrowdale thermos would contain direct materials such as stainless steel, rubber gaskets, and plastic caps and handles. Factory overhead, and direct labor budgets make up the remainder of manufacturing costs. In establishing unit production needs, consideration must be given to raw material needs, accounting for waste and spoilage. We start with quantities and costs of required materials. We then establish values for inventory to be held, accounting for time lags between ordering and receiving materials needed for production. Purchasing needs, and costs can then be established, with consideration for financing, material cost fluctuation, bulk and cash discounts, delivery requirements, and backorders. Purchasing needs, usually

5 MANAGERIAL BUDGETING: ARROWDALE 5 referred to as a merchandise purchase budget, can be calculated by subtracting a desired ending inventory from cost of goods sold, and then subtracting the beginning inventory. Finally, we must develop a purchase policy that addresses both internal and external needs. Diving deeper into the materials purchase budget, it is helpful to classify cost centers within the budget. We can assign components that fall into a static monthly expense in a category separate from those that include monthly, or seasonal fluctuation, giving us a better handle on predictable expenses. Smaller items that can be purchased in bulk from a single vendor, allow us to take advantage of economies of scale in our purchasing behaviors. We must remember that the focus of budgeting is to provide direction, a tool to help focus our decision making process on defined objectives (Biryuk and Korol, 2013). Direct materials budgets in combination with production, and labor budgets provide a snapshot into potential necessity of adding production to meet growing demands for product. By providing a breakdown of material needs, and how these needs relate to individual units, and unit hours, it is possible to evaluate the need for additional output. Direct Labor Budget We computed the direct labor requirements by using the expected production volume for each quarter from the production budget multiplied by the number of direct labor hours required to produce a single unit which is.50 to get the total hours per unit. Then, we took the number of direct labor hours to meet production requirements and multiply by the direct labor cost per hour of $12, to obtain the budgeted total direct labor costs $3,630,000. Since the direct labor is determined by the amount of units to be produced from production $605,000, we can clearly see a need to add more labor force. Due to the increase in inventory and units to be produced, it is my recommendations that we open the second shift to meet these demands. Because the direct labor hours per unit is.50 times the number of units to be produced per quarter, the total hours per quarter ranges from 80,000 to 85,000 which is a high demand for more labor and would be too many hours to keep for just one shift. For example, we would have to ccalculate hours in a full-time Schedule by determining the standard hours in a full-time work week schedule. Then for each reporting quarter, we would multiply the number of weeks in the quarter (e.g. the Quarterly reporting period is from 9/16 through 12/15.). We would calculate a 40 Hours in full-time work week X 13 weeks per quarter = 520 Total Quarterly Hours (usny.nysed.gov).

6 MANAGERIAL BUDGETING: ARROWDALE 6 According to the information from the website Covered nonexempt employees must receive overtime pay for hours worked over 40 per workweek (any fixed and regularly recurring period of 168 hours seven consecutive 24-hour periods) at a rate not less than one and one-half times the regular rate of pay. By keeping the one shift, there could a be possibilities of paying too much overtime, employees workload could become too much of a challenge to meet the added demands, workers could become burned out for extensive hours, and employees morale to work may decrease. Therefore, by adding the second shift, we would meet still meet the demand for our current products, along with producing new goods and services while continuing to sell and increase customer satisfaction. After further review of the other budgets and our budgeted income statement (net income after taxes of $980,000), opening another shift and hiring new employees would allow us room to continue to meet these demands while opening another shift to reach our goals and still make profits. Budgeted Income Statement A Budgeted Income Statement provides a summary of the variety of revenues and expenses that influence net income in the period defined by the budget (Shim and Siegel, 2012). The information available from this statement provides a basis for more detailed forecasting, and offers a global snapshot of corporate financial health. Areas of concentration for improved return on investment can begin to be identified in this statement, channeling focus appropriately as we drill deeper into each section highlighted. The Budgeted Income Statement calculations for Arrowdale show us that on $13,500,000 of sales, we spend almost $11,000,000 on materials and production. After considering related expenses such as necessary administrative expenditures, and taxes, we realize a net profit just shy of $1,000,000. Labor costs of $3,600,000 on $1,000,000 net profit becomes the baseline scenario we are considering.

7 MANAGERIAL BUDGETING: ARROWDALE 7 Balance Sheet - CY Budgeted Balance Sheet NY Evaluating the amount of inventory reflecting the finished production of thermos bottles which is our desired finished goods inventory; we can calculate the sales value of the inventory we have on hand for the current year and take our projected beginning amount for the next year and assign a sales value to that. This information will be useful in the populating the company balance sheet for the current year and the budgeted balance sheet for the next year. The current and future sales value of good & products on hand accounts for current and future profitability after all expense obligations are accounted for in our variable and fixed costs and; contingent that expenditures do not exceed revenue as this ensures that Arrowdale is maintaining a balanced budget (Shim, Siegel & Shim, 2012). Our Balance sheet for the current year regarding our ending goods inventory is 25,000 thermos units (x) by the unit cost of $22.50 = $562,500 in sales. Our Budgeted Balance sheet next year is based on a finished goods inventory of 20,000 thermos units (x) by the unit cost of $22.50 = $450,000 in sum sales quantity & value. Figure: 2 Budgeted Income Statement The Arrowdale Manufacturing Company Budgeted Income Statement For the Year Ended December 31, 2015 Sales (600,000 $22.50) $ 13,500,000 Less: Cost of Goods Sold Beginning finished goods inventory $ 25,000 Add: Cost of goods manufactured (605,000 $18) 10,890,000 Cost of goods available for sale 10,915,000 Less: Ending finished goods inventory $ 10,895,000 20,000 Gross margin $ 2,605,000 Less: Selling and Administrative expense 1,200,000 Operating income $ 1,405,000 Less: Interest expense 5,000 Net income before taxes $ 1,400,000 Less: Income taxes 420,000 Net income after taxes 980,000

8 MANAGERIAL BUDGETING: ARROWDALE 8 References Biryuk, O. G., & Korol, V. V. (2013). Technology of budgeting as a tool of managing sugar beet production. The Problems of Economy, 4, Retrieved from Kaplan, R. S., Norton, D. P., & Rugelsjoen, B. (2010). Managing alliances with the balanced scorecard. Harvard Business Review, 88(1), doi: web.b.ebscohost.com.skyline.ucdenver.edu/ehost/pdfviewer/pdfviewer?sid=7a eec6-4a8c-93ed- 88c19d06cc7d%40sessionmgr113&vid=6&hid=101 Production budget. (n.d.). In Accounting Tools.com. Retrieved March 19, 2015, from Accounting Tools website: Sample ARRA jobs worksheet [For quarterly reporting for all AARA grants]. (n.d.). In NYSED.gov.doi: et.html Shim, J. K., & Siegel, J. G. (2012). Budgeting basics and beyond (4 th ed.). Hoboken, NJ: John Wiley & Sons. Wage and hour division (WHD) [Compliance assistance: Wages and the fair labor standards act]. (n.d.). In United States Department of Labor. Retrieved March 19, 2015, from US Department of Labor website: