You have been hired as the new controller for the Paulson Paint, Inc. You will have the opportunity to utilize your financial and managerial accounting experience. You will be responsible for preparing the budget for the year ending December 31, 2019,
You have been hired as the new controller for the Paulson Paint, Inc. You will have the opportunity to utilize your financial and managerial accounting experience. You will be responsible for preparing the budget for the year ending December 31, 2019, using the actual data from 2014 through 2018. You will also prepare a report for the company, describing the strengths and weaknesses of the company as well as providing suggestions for the future.
Here are a few guidelines.
Work-in-process inventories will be ignored.
Financial and IRS will be the same.
Some projections for 2019 will be given.
Standards used for the 2019 budget will be reasonably obtainable standards.
No hourly worker will work overtime.
All price changes will occur on January 1 and will remain in effect for the entire year.
The actual 2018 information is available while preparing the 2019 budget.
All debt transactions will occur either on January 1 or December 31.
There are no bad debts.
Please note the following: 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. Because it is not possible to have a partial machine or person, certain figures will have to be rounded up.
Company Information
Paulson Paint, Inc. produces two qualities of paint: Magnificent (Interior Paint Department) and Marvelous (Exterior Paint Department). The company was established 12 years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 7 years. In 2016, a second type of paint was introduced, and sales of this product have increased each year due to effective sales campaigns and efforts. The president is currently concerned about the inefficient use of capacity and the effect this has on profitability.
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 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 considering a second shift due to the additional $1.50 per hour shift differential that would be necessary to pay hourly second-shift workers.
The company experienced cash flow issues in 2018 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.
Department Structure
Paulson Paint, Inc. has two separate departments, one for each of the paint types. Because the end products are not distinguishable, the company uses process costing, employing a FIFO inventory system.
Absorption costing is used for all outside reports. All nondirect 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. There is no need for separate departments at this time.
2018 Information
Interior Paint Department Exterior Paint Department
Number of machines available 27
20
nnual capacity per machine 18,000 gallons 18,000 gallons
Annual production capacity 432,000 gallons 378,000 gallons
Machine hours available per machine 2,000 hours 2,000 hours
Standard machine hour per gallon .15 hour/gallon .15 hour/gallon
Standard labor hour per machine hour 1.25 labor hour/machine hour 1.25 labor hour/machine hour
Actual sales volume 440,000 gallons 295,700 gallons
Number of hourly employees 31 22
Supervisors (1 per each 8 hourly employee) 4 3
Raw Material Prices: Cans $.50 each $.50 each
Raw Material Prices: Pigment $2.85 per pound $3.90 per pound
Raw Material Usage: Cans 1 per gallon 1 per gallon
Raw Material Usage: Pigment 2 pounds per gallon 2 pounds per gallon
Direct labor rate $10.25 per hour $10.25 per hour
2019 Projected Sales Information
The Sales Department feels very good about the prospects for 2019. The reputation of the new product, Marvelous 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 3 years for the Marvelous brand, even with a small price increase per gallon.
Magnificent 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 for the two products has been gathered.
Magnificent Paint
Marvelous Paint
Anticipated Sales Price – 2019
$14.50 per gallon
$18.75 per gallon
Actual Sales Price – 2014
424,000 gallons
None
Actual Sales Price – 2015
425,000 gallons
None
Actual Sales Price – 2016
413,000 gallons
226,560 gallons
Actual Sales Price – 2017
453,000 gallons
259,000 gallons
Actual Sales Price – 2018
440,000 295,700 gallons
Magnificent 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 past.
Exponential smoothing will be an appropriate unit sales projection to use.
Marvelous 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.
2019 Direct Material and Inventory Budget Information
The production department worked in conjunction with both the sales and purchasing departments in developing the desired projected inventory levels for December 31, 2019. Information regarding beginning and desired ending inventories for 2019 are as follows.
Beginning Inventory
Ending Inventory
Cans
59,140
62,170
Pigment for Magnificent Paint
64,300 pounds
72,000 pounds
Pigment for Marvelous Paint
50,400 pounds
55,700 pounds
Finished Goods Inventory: Magnificent Paint
33,500 pounds
36,000 gallons
Finished Goods Inventory: Marvelous Paint
25,890 gallons
29,000 gallons
The following direct material price increases are expected to occur on January 1, 2019, and remain effective for the entire year.
Item
Price Increase Expected
Cans
$0.03 price increase
Pigments: Magnificent Paint
$0.15 price increase over 2018 prices
Pigments: Marvelous Paint
$0.20 price increase over 2018 prices
Hint!
Remember that each gallon of paint requires 2 lb of pigment.
2019 Direct Labor Budget Information
During 2019, 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 / 2,000 per employee = 5.075, which needs to be rounded to six employees).
The standard direct labor rate will increase $0.25 per hour over the 2018 rate.
Additional information regarding employee benefits is included in the section on manufacturing overhead.
2019 Overhead Budget Information
The following information is available regarding the actual overhead costs incurred for 2018.
Variable Costs
Fixed Costs
Indirect materials
$.25 per gallon
Indirect labor annual rate
$55,000 per supervisor
Hourly employee fringe benefits
25% of wages
Hourly health benefits
$2,000 per employee
Supervisor’s fringe benefits
25% supervisor’s salaries
Supervisor’s health benefits
$2,000 per employee
Utilities
$.45 per machine hour
Maintenance
$.25 per machine hour
$12,000 annually
Insurance
$50,000 annually
Property taxes
$12,000 annually
Supplies
$6,000 annually
Depreciated (Items held during 2018)
$275,000 annually
Note
Allocations of maintenance, insurance, property taxes, and supplies are allocated to departments based upon production levels in gallons. The 2018 Depreciation allocation to Magnificent Dept. is $150,000 and Marvelous Dept. is $125,000.
It is expected that the following changes will occur during 2019.
Variable Costs
Fixed Costs
Indirect materials
No change
Indirect labor annual rate
3.0% increase
Hourly fringe benefits
No change
Hourly health benefits
Increase $250/employee
Supervisor fringe benefits
No change
Supervisor health benefits
Increase $250/employee
Utilities
No change
Maintenance
Increase $.05 per MHR
Increase $500 annually
Insurance
Increase $500 annually
Property taxes
Increase 8%
Suppliers
Increase $300 annually
Depreciation (Items held during 2018)
No change
Depreciation (Machinery purchased in 2019)
5-year life
Note
There will be no salvage value for the equipment purchased in 2019. MHR is Machine Hours.
2019 Sales Department Information
The Sales Department consists of 10 representatives who report directly to the president. Each individual is on a salary plus commission, and the sales reps also submit meal and entertainment expenses for reimbursement. (In 2018, 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 2018.
Variable
Fixed
Commissions
$.40 per gallon sold
Salaries
$20,000 per sales representative
Fringe Benefits
25% of commissions
25% of salaries
Health Benefits
$1,800 per sales representative
Advertising
$10 per 100 gallons sold
Meals and Entertainment
$50 per week per representative
Depreciation
$8,000
It is felt that the company will not need any additional sales representatives for 2019. It is expected that the following changes will occur in 2019.
Variable
Fixed
Commissions
No change
Salaries
No change
Fringe Benefits
No change
No change
Health Benefits
Increase $250 per representative
Advertising
$12 per 100 gallons sold
Meals and Entertainment
$60 per week per representative
Depreciation
No change
2019 Administrative Budget Information
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 2018 actual costs.
Variable
Fixed
Salaries
$300,000 annual
Fringe Benefits
20% of salaries
Health Benefits
$2,000 per employee
Professional Fees
$25,000 annually
Office Supplies
$.04 per gallon sold
Telephone
$.02 per gallon sold
Depreciation
$8,000 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 2019.
Variable
Fixed
Salaries
Increase 3% annually
Fringe Benefits
No change
Health Benefits
Increase $250 per employee
Professional Fees
Increase of $2,000
Office Supplies
Increase .01 per gallon sold
Telephone
Increase .01 per gallon sole
Depreciation
No change
2019 Income Tax Information
The current federal tax rate is 20%. All taxes for the year will be paid by the end of the year, which means there will be no accrued taxes on December 31, 2019.
2019 Accounts Receivable information
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.
2019 Accounts Payable Information
The 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.
2019 Wage and Salary Information
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, 2019, the accrued wages will include wages representing one full payroll period.
2019 Property Plant and Equipment Information
Property, Plant, and Equipment consist of the following on December 31, 2018.
Property and Plant
$800,000
Equipment $1,155,000
Total $1,955,000
Each additional machine that is needed to support the production level expected during 2019 will cost $35,000 and be depreciated over 5 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.
2019 Long-Term Debt Information
A long-term debt repayment (principle only) will be made on December 31, 2019 for $275,000. The interest rate charged on the debt balance throughout 2019 will be 8% and will be paid on December 31, 2019.
If an additional machine is purchased, $5,000 will be paid in cash and the remaining $30,000 will be financed at the 8% rate. The same proportion of cash/additional debt will be applied to all additional equipment purchased during 2019. Again, any purchases will be made on January 1, 2019.
Dividend Policy
Paulson Paint, Inc. policy is to pay dividends on the last day of each quarter. The total anticipated dividends for 2019 are $2.75 per share.
Other Information
Unless otherwise noted, information will remain unchanged from 2018 to 2019.
Paulson Paint, Inc.
Balance Sheet
December 31, 2018
Assets
Cash
$190,000
Accounts Receivable
$857,000
Inventory-Raw Materials
$412,000
Inventory-Finished Goods
$564,850
Plant and Equipment
$1,955,000
Less Accumulated Depreciation
($630,000)
Total Assets
$3,348,850
Liabilities
Accounts Payable
$395,620
Accrued Wages
$82,500
Accrued Other
$71,220
Long-Term Debt
$1,230,000
Total Liabilities
$1,779,340
Stockholders’ Equity
Common Stock, $5 per value
$450,000
Additional Paid-In Capital
$684,430
Retained Earnings
$435,080
Total Stockholders’ Equity
$1,569,510
Total Liabilities and Stockholders’ Equity
$3,348,850
Course Project Requirements
Prepare the following budgets for the fiscal year ending December 31, 2019 using the provided worksheet.
Course Project Requirements
Prepare the following budgets for the fiscal year ending December 31, 2019 using the provided worksheet.
Important!
It is required to use the provided worksheets using Excel formulas.
Milestone 1
Milestone 1 is due in Week 5 and worth 75 points.
A sales projection in units using the methods suggested (10 points)
Sales budget (10 points)
Production budget (10 points)
Direct materials budget (10 points)
Direct labor budget (10 points)
Manufacturing overhead budget (10 points)
Projected Cost of Goods Manufactured (Absorption Costing) (15 points)
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