Signature Assignment Creating and Using a Master Budget Downloads: ?The following downloads include the Case Assignment and Excel workbooks in which to complet

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Juliette’s Pastries: Creating and Using a Master Budget

BACKGROUND

Juliette’s Pastries is a medium-sized regional bakery that

specializes in providing orders to grocery and convenience

stores. Because of the popularity of its brand, it has also

opened a small café for walk-in business.

In order to maintain its high-quality standard, Juliette

produces only three products: breakfast muffins, fresh bread,

and chocolate chip cookies. Although business has been good

in the past few years, a lucky contact with a large chain has

recently allowed it to expand its brand out of the local region.

Growth has been high since the new contract went into

effect.

Andy Griff, the chief executive officer (CEO) and

founder, has arranged a meeting with a venture capital

firm next week. Hopefully the meeting will result in the

sale of some of Juliette’s stock and an opportunity to

establish a significant line of credit with the venture capital

firm. These extra funds, if Andy can secure them, should

provide sufficient money to meet Juliette’s growth targets for

the next few years. The venture capital firm’s assessment

team has asked Andy to provide a quarterly master budget for

the year that just began, complete with pro forma financial

statements, at the meeting. They have expressed special

interest in Juliette’s earnings per share (EPS), cash flow from

operations, and profit margins, indicating that good numbers

in these areas will be essential for final approval.

In typical managerial style, Andy immediately assigned

the task of creating the budget to Nicole Quarterman, who

has just been hired as Juliette’s controller. Since this project

is her first assignment, Nicole started by making appointments

with each of the divisional managers to gather information

for the budget and to learn more about the company.

PART I: CREATING THE BUDGET MEETINGS WITH DIVISIONAL MANAGERS

MEETING WITH THE SALES DEPARTMENT

Walking down the hallway towards the office of Jeff Barza,

the sales manager, Nicole read the results for last quarter

which ended on December 31, 2015. Juliette’s Pastries sold

45,000 one-dozen packages of muffins for $5.50 each, 65,000

one-dozen packages of cookies for $4.75 each, and 85,000

one-dozen loaves of bread for $5.25 each. When Nicole got

to Jeff’s office, he motioned her in to have a seat.

“Is it time for our meeting already?” he asked. “Where

does the day go?”

“Who knows? It seems like one minute I’m having my

morning muffin and the next I’m saying good-bye to

everyone,” Nicole said with a sigh. “There’s never time to

get everything done. And now I get to do the budget.” Jeff

started to laugh. “Thanks,” she muttered. “I knew I could

count on your support.”

“I’m sorry. I just laugh at the amount of time you are going

to put into something that isn’t really used anyway, except for

setting bonuses, of course.”

“Not really used? I don’t know how it’s been around here

in the past, but this year, at least, the budget will prove to be

a valuable tool.” Nicole waved away Jeff’s retort. “Anyway,

one way or another I must create one and, as you know, the

process always starts with projected sales. Do you have a copy

of last quarter’s results?”

“Yes, right here somewhere,” Jeff said, shuffling papers

around on his desk. “Got it!” he exclaimed, waving it gently

as he pulled it from under a stack of other papers. “Now,

what do you want to know exactly?”

“Well, Andy thinks that since we have established a

strong following both locally and in our new markets, we

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can raise our prices slightly next year without a sharp drop in

sales. He was thinking $6.00 for muffins, $5.25 for cookies, and

$5.50 for bread. What do you think?”

“I agree,” Jeff said eagerly. “I’ve been pushing that for years.

Of course, I think that sales will drop some in the first quarter of

next year. They always drop off a bit after the holidays anyway,

but with the increase in sales price . . . I’d say a 20 percent drop

from the fourth quarter results we have here.” He looked up

questioningly and raised an eyebrow.

Nicole frowned. “That sounds kind of high. Based on

what I saw in the dairy industry, I was thinking the drop

would only be about 10 percent.”

Jeff looked a little uncomfortable and shuffled around in his

chair. “Well, it’s a little different for a Boulangerie. Our price is

a little more elastic than dairy products. Besides, 20 percent is a

more conservative estimate, and, in the past, we wanted no

surprises.” He looked at her and challenged, “Are you going to

change that?”

“Yeah, but we’ll be using this master budget to create a

cash flow budget and pro forma financial statements to show

our new investor. We need to look good, not bad.”

Nicole frowned. She didn’t want to start making changes and

enemies in her first few months.

“I guess so. But look—my bonus is tied to how well I meet

my estimates. If we estimate low results and then go up . . .”

Seeing the look on her face, he quickly changed direction.

“Besides, Nicole, we are raising the prices. A 10 percent drop is

normal after Christmas, but couple that with the increased

prices, and 20 percent is reasonable.”

Nicole frowned, and then sighed. She didn’t quite accept his

reasoning, but it would be better to have him on her side until

she understood the company politics a bit better. “Okay, Jeff. I’ll

take your word for it. We’ll use 20 percent. After all, you’re the

expert.”

“You’ve got that right!” Jeff said, trying to hide his relief.

He was obviously really counting on that bonus. He looked at a

couple of sales reports and market projections on the desk in

front of him. “After that, I think sales will grow steadily at about

5 percent a quarter with these new prices. Fourth-quarter sales

will be high because of the holidays— let’s say 20 percent,

instead of 5 percent, from the third to the fourth quarter. The

first quarter of the following year will continue the 5 percent

growth as though the holiday jump didn’t occur. And I’m not

messing with those estimates. That’s really my best guess, given

what I’ve seen in the past.” He looked up. “Does that give you

all you need?” “Just a few more questions. Have you made any

changes to the credit policy? The information I have from last

year says that we make about 10 percent of our sales through

our café and that we don’t sell to those customers on credit.”

Jeff smiled. “Yep, but we do sell on credit to the business

customers. If we didn’t, they’d go somewhere else. So, we give

our business customers a lot of leeway in paying us. It makes it a

little hard on us, but it keeps them loyal. Anyway, we collect 30

percent of the credit sales within the current quarter, 45 percent

in the following quarter, and 25 percent in the quarter after that.

The good news is that we don’t have any bad debt. Our

customers are mostly large chains with strong sales and even

better reputations. Since they are large companies, they take

their time paying small companies like us, but we get the money

from all of them in the end.”

“Then I have only two more questions. What were total sales

during the third and fourth quarters of last year, and are we still

collecting any of that money?”

Jeff pulled up a file. “Total sales were $802,000 and

$1,002,500, respectively, and we are still collecting quite a bit of

that money based on our collection breakdown.”

“I think that does it, then. If I’ve forgotten something, I’ll

come back and bug you later. It’s more fun to interrupt you

several times anyway. And you owe me one now.”

MEETING WITH THE PRODUCTION DEPARTMENT

Nicole sighed as she headed to her meeting with Phil Mainster,

Juliette’s head chef. She wasn’t sure about that large drop Jeff

wanted her to use, but as the new member of the staff she

wasn’t sure what she should do. Of course, she didn’t have

much time to think about it now anyway. She had met Phil

before, so she knew that it was going to be an interesting

meeting.

As she had suspected, she found Phil in the Boulangerie

instead of his office. “Phil,” she called as she hurried towards

him, “did you forget our meeting?”

“Me, forget?” Phil asked in a surprised voice. “I never

forget anything!” Nicole had to chuckle at the large streak of

flour across his face. “You said you wanted to see our

production facility, and I’m ready to show it to you.”

Nicole shook her head. “No, Phil. I didn’t say I wanted to

see the production facility; I said I wanted to talk to you about

the budget for next year.”

“Oh, of course you did.” Phil’s round face had turned a

deeper shade of pink. “Then why don’t we go to my office

and talk?”

Nicole sighed. “That’s a great idea, Phil.”

As they sat down, Nicole asked her first question. “Okay,

Phil, I need to know how much inventory we keep on hand.”

“Well, we can’t keep much in the way of finished goods

on hand. My cookies and bread would dry out if we kept them

too long. I’d say that we normally keep only about two days’

worth of inventory on hand to avoid shipping issues or

problems with the café.”

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“Okay and you make your estimates based on a 90-day

quarter?”

Phil nodded impatiently. “Please, Nicole, don’t ask

obvious questions.”

“I’m sorry. Let’s talk about your pantry. You take care of

purchasing too, don’t you?”

“Yessirree. We decided it would be easier for me to run

purchasing than to have a separate manager do it. After all, I do

everything else around here.”

“Well, we want it done right.”

Phil chuckled. “I’ll have to remember that one. Martha will

love it. Okay, let’s talk about raw materials. Some days we

must produce a lot to meet our orders, so I normally try to keep

15 percent of the next quarter’s raw materials on hand at all

times.”

“Is that what we’ve got on hand now for the coming

year?”

“Of course. Jeff and I had already talked about the

possibility of raising prices and his estimate of a 20 percent

drop in demand, so I’m ready to go.”

Nicole considered telling Phil that she was unsure the 20

percent drop would really materialize but changed her mind.

There would be time to get the extra ingredients ordered if sales

only dropped 10 percent, and she didn’t want anyone

to think she had caved in to peer pressure. “Good. Can you

give me some estimates of how long it takes to make each

package of cookies, bread, and muffins?”

“Are you kidding? We don’t really move each item from

start to finish. We do them in large batches, so I have no idea

how long each final package takes.” Seeing Nicole’s frown, he

quickly went on. “But I can tell you that one of my mixers can

mix either 12 dozen cookies, 8 dozen muffins, or

4 dozen loaves of bread in 15 minutes. The bakers then take

another half an hour to get the dough ready and bake it.”

“The batch sizes are the same for each product?”

“Yep. I try to keep things as standard as possible.

The packaging department is the slowest. They must double

wrap the cookies and muffins—once to keep them fresh and

once in the fancy packages marketing came up with—so it

takes 15 minutes to package either two one-dozen packages

of cookies or two one-dozen packages of muffins. The bread

is a little faster. In 15 minutes, we can package about eight

dozen loaves of bread.”

“Do you happen to know what we are paying each group of

employees?”

Phil grabbed a piece of paper. “We pay the mixers $7.50 an

hour, the bakers $8.00 an hour, and the packers $6.50 an hour.”

“Perfect. Then I just have one more question.”

“Let me guess. You want a breakdown of ingredients for

each item we bake.”

“You must be psychic, Phil.”

“No, I just remember being bugged about this by the last

controller.” He handed Nicole a piece of paper with a table on it.

“Here they all are. Just make sure you don’t let it out of the

building! I don’t want my secret recipes to get out.” “Don’t

worry. I’ll be careful.” Nicole glanced down at the price sheet.

“Wow. I wish I could buy my groceries at these prices.”

Phil chuckled. “So, do I. You must remember, though,

Exhibit 1

Summary of Ingredients

Ingredients

Cost / Lb.

Cookies Muffins Bread

Lbs./Dozen

Total / Dozen

Lbs./Dozen

Total / Dozen

Lbs./Dozen

Total / Dozen

Flour $0.15 0.50 $0.08 0.50 $0.08 3.00 $0.45

Margarine $0.25 0.75 $0.19 0.25 $0.06

Sugar $0.20 1.00 $0.20 0.50 $0.10 0.25 $0.05

Eggs (each) $0.05 2.00 $0.10 2.00 $0.10

Milk (per gallon) $1.25 0.10 $0.13 0.25 $0.31

Cocoa $1.50 0.25 $0.38

Peanut Butter Chips $0.75 1.00 $0.75

Mini Chocolate Chips $0.75 1.00 $0.75

Shortening $0.50 0.25 $0.13

Baking Packet* $0.10 1.00 $0.10 1.00 $0.10 1.00 $0.10

$1.79 $1.31 $1.04

* The Baking Packet consists of ingredients too small to be purchased by the pound, so the bakery buys them in prepared packets.

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Exhibit 2

List of Selling and Administrative Expenses

that we buy in bulk, lots and lots of bulk. That lets us get

some great deals from our local vendors.”

“I guess that makes sense. Thanks for taking time to see me.”

“Just make sure you don’t leave without taking a cookie

or two.” Phil held out a plate loaded with perfect, if two-day

old, cookies. “If we don’t eat them, they go into the trash!”

“My pleasure!”

MEETING WITH THE ACCOUNTING DEPARTMENT

Nicole hurried back to her own office. She had a staff meeting

in 15 minutes. She should be able to get most of the

information she still needed from Sarah, since she wrote the

checks. Even though Sarah only worked part-time, she’d been

with the Boulangerie from the beginning and seemed to know

just about everything about the accounting system. Anything

Sarah didn’t know, Bob, their new summer intern, would have

found out for her by now. He was very good at digging up

information once he was pointed in the right direction.

“We thought you were going to stand us up,” Sarah said

as Nicole hurried into the office.

“Actually, we hoped you were,” Bob quipped. “We don’t

want to get stuck doing the budget, so we hoped that you

would forget to come.”

“Don’t worry,” Nicole said with a sigh. “Andy wants me

to take care of it personally. He seems to think it would be

good for me to get to know the company or something. So,

have you gathered all the information that I asked for?”

“Of course,” Sarah said. “Where do you want us to start?”

“Let’s start with our accounts payable.”

“That’s me,” Bob said. “Most of our vendors require that

we pay for everything within 30 days of making our purchase.

That means that 85 percent of our purchases are paid for

within the quarter they are made. And, before you ask, we

ordered $210,984 worth of inventory during the last quarter

last year, so we still owe 15 percent of that, or $31,648.”

“Thanks, Bob, but I knew that last part. After all, it’s right

there in the balance sheet.”

“Oh, yeah,” Bob said turning pink. “I forgot about that.”

Sarah laughed. “So, you calculated it by hand?”

“Well, yeah. I wanted to be prepared for the meeting today.”

“All right, you two,” said Nicole, jumping in before

Sarah could pick on the young man anymore. “Let’s move

on to our overhead assumptions.”

“Sure,” Sarah said. “Last year we allocated variable

overhead at $1.50 for each direct labor hour. This year, I

think that we’re going to need to increase that to $2.00 to

cover increases in security fees, utility rates, and energy

prices. We also spend about $160,000 a quarter in fixed

overhead. Also, don’t forget that we usually use total direct

labor hours to calculate a predetermined overhead rate when

calculating the unit cost.”

“Unit cost?” asked Bob. “Oh, wait,” he said nodding, “I

remember. We must include direct materials, direct labor, and

manufacturing overhead to get the cost of producing each

unit. Direct materials are calculated from the recipe and

direct labor cost from the employee information that Phil

gave you. But we need to multiply the number of hours it takes

to make each product by the predetermined overhead rate so

that we can figure a per-unit applied overhead amount. Sorry

to interrupt.”

“No problem.” Nicole nodded approvingly at the young

intern while finishing up her notes. “Just one last question,

Sarah. How much of that overhead is from depreciation?”

“Eight percent of the fixed amount.”

“ Bob, tell me about our sales costs.”

“Well, we don’t really have that much in variable sales

costs. We give a one percent commission to our sales staff.”

“Is that based on profit or sales price?” Sarah asked.

“Total sales price. Sorry, I forgot to mention that. The

commission is paid both for business sales and sales in the

café. Also, here’s the table of fixed selling and administrative

expenses.”

S&A Expense Cost / quarter

Advertising $40,000

Cleaning supplies 1,000

Janitorial service 6,000

Office staff salaries 25,000

Office supplies 3,000

Rent – Office 9,000

Sales salaries 35,000

Top management salar 80,000

Utilities – Office 1,800

Total $200,800

Nicole took the paper. “Thanks. Okay, Sarah, tell me

about our debt.”

“Well, at the end of last year, we secured a $1,109,969

mortgage at 6 percent interest. Our payment each quarter is

$20,000. Since it’s a mortgage, the calculations are kind of

fun. Each payment requires us to pay a lot of interest and a

little bit of principal. To break up the $20,000 into the two

parts, we have to multiply the current mortgage value by 6

percent and divide by 4. . .”

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“Divide by 4?” asked Bob.

“Well, yeah, 6 percent is the annual rate. Since we make

quarterly payments, we divide the annual rate by 4.”

“Oh,” Bob said sheepishly. “I should have remembered

that.”

“Yes, you should have,” Nicole said with a smile. She was

very pleased with how well Bob was progressing during his

summer with the firm. Hiring an intern had been one of her first

changes, and it seemed to be working out well. If the company

continued to grow, maybe he could be hired full-time once he

graduated in a couple of years. “Go ahead, Sarah.”

“Right. So, our first payment will be made at the end of

the upcoming quarter. We’ll end up paying $16,650 as

interest and $3,350 in principal. This means that the value of

the mortgage in the second quarter will be $1,106,619. That’s

the original $1,109,969 minus the $3,350, Bob.”

“Thanks, Sarah. I appreciate the help,” Bob retorted,

rolling his eyes.

“I appreciate it, too,” Nicole said. “If I remember right, we

have to pay the $20,000 each quarter. Our contract prohibits

us from paying any additional principal for the first three

years.”

Sarah nodded. “Yep, kind of a bummer, but that was the

only way we could get that 6 percent interest rate.”

“Okay,” Nicole said. “The last thing is a recap of how we

handle income taxes. I think that has pretty much stayed the

same?”

“It sure has,” Bob responded, rifling through a tax folder.

“Our corporate tax rate is 30 percent, and a portion of our

estimated taxes must be paid each quarter to avoid late fees. Our

policy is to pay 110 percent of the taxes that we owed last year

over the course of the current year. Since we paid

$15,000 last year, we will need to pay $16,500 this year.”

“And we’ll pay that equally over the four quarters?”

“Right. At the end of the year, we calculate our actual

taxes owed as 30 percent of net income. Any difference

between the cash we paid for taxes over the year and actual

income tax expense on the income statement is put into income

taxes payable if we haven’t paid enough and into deferred tax

assets if we paid too much.”

“Right,” Nicole said. “I think that’s about it.”

“Don’t forget the balance sheet from last year,” Bob said,

handing her a sheet of paper.

“Thanks. I’m starting to lose track of everything. I must be

getting old.”

“Oh, I wouldn’t say that” Bob quipped, then added with a

grin, “at least, not as long as you’re my boss.”

MEETING WITH THE CEO

“So, how goes the battle, Nicole?” Andy asked as she came

into his office.

“Oh, it’s going. Actually, I think we’re just about there. I

just need to check some numbers with you, and I’ll be all set.

Then it’s just a matter of actually creating the budget. That’s

the fun part, you know.”

Andy laughed. “Right. That’s why you’re the accountant

and I’m not. So, what do you need?”

“First, I just want to confirm a couple of things from some

earlier meetings. You told me a couple of weeks ago that the

board of directors now wants us to have $40,000 worth of cash on

hand at all times and to pay $25,000 in dividends each quarter. Is

that still the plan?”

“Yes, it is. I think it’s a little restrictive myself, but sometimes we

Exhibit 3 – Balance Sheet, Dec. 31 1

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must do as we’re told. Because of the expansion, though, we

are going to have to issue another 50,000 shares of common

stock to the venture capital firm in the first week of the third