See Final Project 2 Guidelines and Rubic, Final Submission
The following case study is adapted from: Samuels, J. A., & Sawers, K. M. (2017). “SRS Educational Supply Company: An instructional budget project.” Issues in Accounting Education: November 2017, Vol. 32, No. 4, pp. 51-59. Summative Case Study: SRS Educational Supply Company Part 1 – Job Order Costing / Process Costing SRS Educational Supply Company provides educational materials and supplies to educational institutions. The company provides educational supply needs that includes workbooks, classroom visual aids, instructor support materials, art supplies, lab supplies, and administrative office supplies. Since SRS Educational Supply Company consistently produces the same service to its customers, the company uses job order costing. The company’s processing units are assigned costs. For example, the company will determine all of the costs associated with the sales/marketing in a certain period and divide the costs by the number of customers that the company currently has. The cost per customer then becomes a part of the inputs and its used to determine the cost of sales/marketing and the cost of each customer. Service industries often do not match directly the normal costing systems, but the same concepts can still be used to determine the costs per customer. The SRS Educational Press is wholly owned by the Company. It performs the bulk of its work for the print materials that are sold to the customers. The press also publishes and maintains a stock of books for general sale. The press uses normal costing to cost each job. Its job-costing system has two direct-cost categories (direct materials and direct manufacturing labor) and one indirect-cost pool (manufacturing overhead, allocated on the basis of direct manufacturing labor costs). The following data (in thousands) pertain to 2017: Direct materials and supplies purchased on credit: $800 Direct materials used: $710 Indirect materials issued to various production departments: $100 Direct manufacturing labor: $1,300 Indirect manufacturing labor incurred by various production departments: $900 Depreciation on building and manufacturing equipment: $400 Miscellaneous manufacturing overhead incurred by various production departments: $550 o (Ordinarily, this would be detailed as repairs, photocopying, utilities, etc.) Manufacturing overhead allocated at 160% of direct manufacturing labor costs: ? Cost of goods manufactured: $4,120 Revenues: $8,000 Cost of goods sold (before adjustment for under- or overallocated manufacturing overhead): $4,020 Inventories, December 31, 2016 (not 2017): o Materials control: $100 o Work-in-process control: $60 o Finished goods control: $500 Submission Requirements for Final Project I: As the accountant, the company has asked you to perform the following tasks: 1. Prepare an overview diagram of the job-costing system at the SRS Educational Press. 2. Prepare journal entries to summarize the 2017 transactions. As your final entry, dispose of the year-end under- or overallocated manufacturing overhead as a write-off to cost of goods sold. Number your entries. Explanations for each entry may be omitted. 3. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing Overhead Control, and Manufacturing Overhead Allocated. 4. How did the SRS Educational Press perform in 2017? Should the company continue to have in-house press production? You will submit your answers/explanations for Final Project I in a memo-style format to the company’s leadership team. Use Microsoft Word and Excel. Part 2 – Departmental and Master Budgets SRS Educational Supply Company provides educational materials and supplies to educational institutions. The SRS business model is to be a one-stop provider of educational supply needs. For example, some of their product lines include educational workbooks, classroom visual aids, instructor support materials, art supplies, lab supplies, and administrative office supplies. While SRS serves all levels of educational institutions, the majority of their customers are K-12 schools. Sales can vary quite a bit from month-to-month as K-12 educational institutions have seasonal ordering patterns. Thus, budgeting is vital for planning and cash flow purposes. SRS has a June 30, fiscal year end. The company’s balance sheet at June 30 is given below: Assets Liabilities & Stockholders’ Equity Cash $ 40,000 Accounts payable $ 130,000 Accounts receivable 340,000 Inventory 50,000 Capital stock 420,000 Prepaid insurance 18,000 Retained earnings 758,000 Building & equip. (net) 860,000 Total liabilities & Total assets $ 1,308,000 stockholders’ equity $ 1,308,000 The company’s income statement for the year ending June 30 is given below: Sales $ 5,523,000 Cost of goods sold 2,541,000 Gross margin Selling and administrative expenses Shipping $ 249,000 $ 2,982,000 Other 511,000 Salaries and wages 1,104,000 Advertising 685,000 Insurance 27,000 Depreciation 228,000 Total operating expenses 2,804,000 Net operating income $ 178,000 Interest expense 25,000 Net income $ 153,000 The following forecasts have been provided by the organization: Sales forecasts range July $550,000 - $650,000 August $900,000 - $980,000 September $450,000 - $550,000 October $360,000 - $420,000 November $350,000 - $480,000 December $350,000 - $480,000 Purchasing cost range (July – December) Cost of goods sold 42% - 50% Operating expense range (July – December) Shipping 4% - 5% of sales Other expenses 8% - 9.5% of sales Salaries and wages $85,000 to $95,000 per month Advertising $45,000 - $58,000 per month Insurance $2,000 - $3,000 per month Depreciation $25,000 per month General Instructions for Master Budget Assignment The company has four main departments: Sales, Purchasing, Operations and Finance. Based on the information provided about each department, you will create a master budget for the three- month period beginning July 1 and ending September 30. You are responsible for creating a budget for each department that will become the master budget. The master budget must include the following detailed budgets: A sales budget by month and in total A schedule of expected cash collections from sales, by month and in total A merchandise purchase budget in dollars. Show the budget by month and in total A schedule of expected cash disbursements for merchandise purchases, by month and in total A selling and administrative budget, by month and in total A schedule of expected cash disbursements for selling and administration, by month and in total A cash budget. Show the budget by month and in total A budgeted income statement for the three-month period ending September 30 A budgeted balance sheet as of September 30 For grading purposes, you will be graded on the accuracy of the budgeted numbers. In addition, you will be graded on the accurate completion of the Budgeted Balance Sheet. Additional Financial Information for the Sales Department SRS has a large number of customers that are K-12 educational institutions. As a result, SRS receives large orders for educational supplies in July and August as schools get ready for the start of the academic year. This is also when educational budgets are still plentiful. Sales begin to decline in September and October and then monthly sales stabilize for the rest of the year (November – June) to a range between $350,000 and $480,000. Actual sales for June and your forecasted sales for the next four months are as follows: June (actual) $455,000 July Likely Range: $550,000 - $650,000 (most likely outcome is $600,000) August Likely Range: $900,000 - $980,000 (most likely outcome is $910,000) September Likely Range: $450,000 - $550,000 (most likely outcome is $475,000) October Likely Range: $360,000 - $420,000 (most likely outcome is $385,000) As the accountant, your specific responsibility is to prepare a sales budget and a schedule of expected cash collections from sales by month and in total (July – September). Additional Financial Information for the Purchasing Department Most of SRS’ clients expect a one to three-day turn-around time for orders. It typically takes a week for the company to get merchandise. As a result, the organization states that it has approximately a week’s worth of inventory on hand at all times. For budgeting purposes, the organization should plan to purchase enough merchandise during any one month to meet the sales projections for that month and to end the month with 20% of the next month’s cost of merchandise sold. The company’s cost of merchandise sold ranges from 42% – 50% of sales with the most likely outcome for next quarter (July – September) of 45% of sales. As the accountant, your responsibility is to prepare a merchandise purchase budget (in dollars) and a schedule of expected cash disbursements for merchandise purchases by month and in total (July – September). Additional Financial Information for the Operations Department The Operations and Logistics Department of SRS Educational Supply Company secures advertising that supports the sales efforts, coordinate shipping and delivery of merchandise to clients and provide general administrative support to the other departments. The organization has estimated the company’s monthly operating expenses for the next quarter (July – September) as follows: Variable: Shipping 4.0% to 5.0% of sales with 5% of sales the most likely outcome Other expenses 8.0% to 9.5% of sales with 8% of sales the most likely outcome Fixed: Salaries and wages $85,000 to $95,000 with $85,000 the most likely outcome