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Accounting Project: Pretzel Company

It is a few months before your store is opening. You expect to open the doors of your pretzel company as of January 1. You are starting fresh with no raw materials, no accounts receivable, and no accounts payable. You were able to secure several contracts with local businesses (i.e., sales associates that are paid on commission); based off these contracts, you were able to make projects for the first four months of the year.

Because your pretzels are made fresh daily, there is no work-in-process or finished goods inventory.
You plan to maintain a raw direct material inventory of 10% of the next month production.
Payment for raw direct materials is 25% in the month of purchase and 75% in the following months.
Your monthly sales projections are based off your last name, and sales are sold per dozen.

Quarterly sales projections:
Name January February March April
A-F 3750 3750 3750 3750
G-L 2750 3250 4000 5000
M-S 2000 3500 4500 5000
T-Z 1750 3750 3500 6000
Collections on Sales
Cash sales collected in the current month: 40%
Credit sales are collected in the following month: 60%

Financial Budget Information
Your initial investment in your business is $50,000, and you are looking to secure a bank loan for $50,000 with additional line of credit. However, you must always have a minimum cash end-of-month balance of $10,000.
If there is any cash over $10,000 available at the end of the month, you must repay your outstanding balance in $1,000 increments.
If the end-of-month cash balance falls below $10,000, you must make additional borrowing from the line of credit.
These borrowings are also in increments of $1,000.
Your bank loan and line of credit has an annual interest rate of 12% which is paid monthly on the total outstanding borrowings at the end of the prior month.
Additional Information
* Fixed asset acquisition in January is $90,000.
* Your income taxes are paid each quarter on net income at a rate of 25%.

1 Discuss the importance of beginning the master budget process with an accurate sales budget.
2 What are some important factors that a manager should consider when developing a sales budget? State why?
3 Distinguish between operating expenses and disbursements for operating expenses.
4 What is the main difference between the variable and absorption income statements?
5 What are the major benefits of budgeting?


Solution Summary

The schedules needed to shown (click in cells to see computations). A few sentences respond to the theory questions asked.