### Preparing a budget and analyzing the results of operations

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PART 1: Preparing a budget and analyzing the results of operations in relation to the budget will help you understand how to use financial information to evaluate the effectiveness of an organization's operations. The process will also help you determine the reasons operations do not always go as planned and make decisions on changes that might need to be made to make the organization, or just your own department, more efficient.

In Part I of the final project, you will use course-provided information to prepare an operating budget and compare actual operational results to the budgets, discussing potential reasons for any variances and areas to explore further. This variance analysis will allow you to make suggestions in Part II of the final project about potential changes to make your organization more efficient.

You will have three deliverables for Part I of the assessment: a student worksheet, a budget variance worksheet, and a budget variance report. First, you will prepare a beginning operating budget for your company, using the student worksheet provided. Your budget will include different products with different costing methods, labor, overhead, and sales projections based on a desired profit margin. You will then compare your budget to actual results to determine and analyze variances. You will calculate and record the variances on the budget variance worksheet provided. Finally you will provide a brief written analysis of the variances and discuss additional information needed to determine their cause.

This assessment addresses the following course outcomes:

a. Communicate budget planning to internal stakeholders for strategic planning
b. Apply costing methods to production for supporting budget planning and decision making

Prompt:

You are a manager for Peyton Approved, a pet supplies manufacturer. This responsibility requires you to create budgets, make pricing decisions, and analyze the results of operations to determine if changes need to be made to make the company more efficient.

You will be preparing a budget for the quarter July through September 2015. You are provided the following information. The budgeted balance sheet at June 30, 2015, is:

1. Sales were 20,000 units in June 2015. Forecasted sales in units are as follows: July, 18,000; August, 22,000; September, 20,000; October, 24,000. The product's selling price is \$18.00 per unit and its total product cost is \$14.35 per unit.

2. The June 30 finished goods inventory is 16,800 units.

3. Going forward, company policy calls for a given month's ending finished goods inventory to equal 70% of the next month's expected unit sales.

4. The June 30 raw materials inventory is 4,600 units. The budgeted September 30 raw materials inventory is 1,980 units. Raw materials cost \$7.75 per unit. Each finished unit requires 0.50 units of raw materials. Company policy calls for a given month's ending raw materials inventory to equal 20% of the next month's materials requirements.

5. Each finished unit requires 0.50 hours of direct labor at a rate of \$16 per hour.

6. Overhead is allocated based on direct labor hours. The predetermined variable overhead rate is \$1.35
per unit produced. Depreciation of \$20,000 per month is treated as fixed factory overhead.

7. Monthly general and administrative expenses include \$12,000 administrative salaries and 0.9% monthly interest on the long-term note payable.

8. Sales representatives' commissions are 12% of sales and are paid in the month of the sales. The sales manager's monthly salary is \$3,750 per month.

Specifically, the following critical elements must be addressed:

1. Operating Budget

Create an operating budget using the final project Part I student worksheet.

a) Prepare a sales budget. Ensure accuracy of data.
b) Prepare a production budget. Ensure the accuracy of your data.
c) Prepare a manufacturing budget. Ensure the accuracy of your data.
d) Prepare a selling expense budget. Ensure the accuracy of your data.
e) Prepare a general and administrative expense budget using appropriate costing methods.

2. Budget Variance Analysis

The actual quantity of material used was 31,000 with an actual cost of \$7.75 per unit. The actual labor hours were 33,000 with an actual rate per hour of \$15.

a) Develop a variance analysis including a budget variance performance report and appropriate variances for materials, labor, and overhead. Use the budget variance student worksheet provided.
b) In your budget variance report, discuss each variance. What does the variance tell you?
c) In addition, your budget variance report should cover: What needs to be investigated to determine the reason for the variance? Why?

PART 2:

Now write a report discussing the following:

Introduction:

In your opening paragraph, very briefly introduce the purpose of your paper. Recall that you will be discussing the operating budget and variance analysis as explained in your rubric instructions. Three or four sentences are sufficient.

Section 1: Using content from your Peyton Approved student worksheet, budget variance worksheet, discuss the budget variances and what each tells you.

Section 2: Using content from your Peyton Approved student worksheet, budget variance worksheet, discuss what needs to be investigated to determine the reasons for the variance(s) and why.

Conclusion:  The conclusion reminds the reader what your paper is about and allows you to make a final point without introducing new information. Three or four sentences are sufficient.

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