Harvey Case Narrative Report Cash Budget And Capital Budget Assignment In this case a full set of budgets will be prepared and presented in appropriate for

Harvey Case Narrative Report Cash Budget And Capital Budget Assignment In this case a full set of budgets will be prepared and presented in appropriate format.Reports will be prepared to explain how budget numbers were determined. The following are general requirements for this budget case.Specific requirements are listed after the relevant case data.

Read the case and analyze the information.
Prepare an operating budget in standard “income statement” format.
Prepare a narrative report (or notes to the income statement) addressing why/how quantitative items were selected.The following items must be explained:
Sales Forecast
Purchases budget (raw materials, labor, all resources)
Operating Expenses
Prepare a cash budget using any acceptable format.The following items must be explained or shown on the budget:
The process by which cash inflows were projected.
The process by which cash outflows were projected.
The process by which financing, if applicable, was determined.
How interest and other financing charges were calculated.
Prepare a capital budget using any acceptable format. Case
In this case a full set of budgets will be prepared and presented in appropriate format. Reports will be
prepared to explain how budget numbers were determined. The following are general requirements
for this budget case. Specific requirements are listed after the relevant case data.
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•
•
•
•
Read the case and analyze the information.
Prepare an operating budget in standard “income statement” format.
Prepare a narrative report (or notes to the income statement) addressing why/how quantitative
items were selected. The following items must be explained:
1. Sales Forecast
2. Purchases budget (raw materials, labor, all resources)
3. Operating Expenses
Prepare a cash budget using any acceptable format. The following items must be explained or
shown on the budget:
1. The process by which cash inflows were projected.
2. The process by which cash outflows were projected.
3. The process by which financing, if applicable, was determined.
4. How interest and other financing charges were calculated.
Prepare a capital budget using any acceptable format.
You will be graded on your understanding of the underlying concepts related to determining budget
amounts (for example, how purchases are determined) as well as your ability to prepare and explain
standard business reports. The rubric attached as the last page of this document will be used to grade
the case.
Harvey’s Budget1
Harvey Manufacturing manufactures and sells two industrial products: a self-balancing screw driver and
a self-balancing saw. Both products are manufactured in a single plant.
Harvey’s general manager, Mr. Lipscomb, and president, Mr. Owens, want a budget prepared for the
fiscal year 2013. They have asked various employees to gather information that they believe will be
necessary for preparation of a budget. The information is presented below.
Neither Mr. Lipscomb nor Mr. Owens is skilled in budget preparation. Both executives have used
budgets and have participated to some degree in budget preparation in prior years, but neither has
prepared a full budget.
Sales and selling price per unit
Historical sales for 2012 the two products are shown below.
Product Sales for 2012
Screwdriver
Saws
Units
SP
Units
January
52,000
98
42,000
February
53,000
98
42,000
March
55,000
98
40,000
April
60,000
100
40,000
May
64,000
100
41,000
June
64,000
102
42,000
July
64,000
102
40,000
August
63,000
102
39,000
September
61,000
100
40,000
October
60,000
100
37,000
November
65,000
100
38,000
December
59,000
100
39,000
SP
118
120
122
125
125
130
130
130
125
125
125
125
Harvey’s sales typically peak in the summer months, beginning with May. Harvey’s general manager,
Mr. Lipscomb, recommends that the budget be prepared with the units sold in the high sales months of
May, June, and July be used as the bases for determining the annual forecast. Mr. Lipscomb’s
recommendation is that annual sales be budgeted at 64,000 per month for screwdrivers and 42,000 per
month for saws.
Mr. Lipscomb also believes that the budgeted selling price per unit should be equal to the highest selling
price that could be achieved in 2012. He would like to budget 102 per unit for screwdrivers and 130 per
unit for saws. Mr. Lipscomb states that his management team experimented with pricing in the prior
year, beginning with the first month of the year.
You review the unit sales and unit selling price information for 2012 and recommend a budget based on
60,000 units of screwdrivers at 100 each and 40,000 units of saws at 125 each. Mr. Lipscomb challenges
your conclusion. Likewise Mr. Owens, the company president, would like to hear an explanation of the
budget numbers and how or why you calculated those numbers.
Production Requirements
Each unit produced requires the following materials, labor, and overhead, all of which is variable.
Standard costs per unit
Screwdrivers
Units
Unit cost
5
lbs
8.00
3
lbs
5.00
1
unit
3.00
Direct materials
Metal
Plastic
Handles
Direct labor
Variable manufacturing OH
Total
2
2
hrs
hrs
12.00
1.50
Cost
40.00
15.00
3.00
58.00
Units
4
3
24.00
3.00
85.00
3
3
lbs
lbs
Saws
Unit cost
8.00
5.00
Cost
32.00
15.00
47.00
hrs
hrs
16.00
1.50
48.00
4.50
99.50
Inventories
Inventories are listed below. The beginning inventories are the actual amounts on hand at the
beginning of the year. The ending inventories shown are the amounts that the operations manager has
determined to be necessary to ensure smooth production processes.
Inventories
Screwdrivers, finished
Saws, finished
Metal
Plastic
Handles
Beginning
20,000
8,000
320,000
29,000
6,000
Ending
25,000
10,000
36,000
32,000
7,000
Other information
Fixed manufacturing overhead
Fixed manufacturing overhead is 214,000, including 156,000 of non-cash expenditures.
Fixed manufacturing overhead is allocated on total units produced.
Beginning cash is 1,800,000.
Sales are on credit. Sales are collected 50 percent in the current period and the remainder in
the next period. There are no bad debts.
Sales for the last quarter were 8,400,000.
Purchases for direct materials and labor costs are paid for in the quarter acquired.
Manufacturing overhead expenses are paid in the quarter incurred.
Selling and administrative expenses are all fixed and are paid in the quarter incurred.
Estimated selling and administrative expenses for the next period are 340,000 per quarter,
including 90,000 of depreciation.
REQUIREMENTS:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Prepare a sales budget in good form.
Prepare a narrative report explaining how your sales budget was determined. Use the table
above in your analysis. (Hint: Many companies would develop their budgets using average sales
and average unit costs.)
Whatever budget determination method you use should be explained. In your explanation, you
should include a discussion of why you believe sales and selling prices fluctuated last year.
Prepare a production budget in units.
Prepare a purchases budget. Remember that you will need to purchase enough materials to
have the required ending inventories shown. You will also need to purchase enough to
manufacture and sell the products on your sales forecast. Do not forget that you have
beginning inventories.
Prepare a narrative report explaining how you prepared the purchases budget. Be as detailed
as necessary to be sure that the president and general manager will understand the calculations
and costs.
Prepare a budgeted income statement.
Prepare a contribution margin income statement.
Prepare a narrative report explaining how the expenses on the income statement were
determined.
Prepare a cash budget. Be sure that you show all cash inflows and outflows.
Prepare a narrative report explaining your cash budget process.
If necessary, prepare a capital expenditure budget. Explain your entries. Use only the facts in
this case to prepare the budget.
Summary:
Your finished case will consist of six or seven budgets (a sales budget, a production budget in units, a
purchases budget, a budgeted income statement, a contribution margin income statement, a cash
budget, and, if necessary, a capital expenditure budget.)
You will also have four or five narrative reports (a sales budget report, a purchases budget report, an
income statement report, a cash budget report, and an explanation of your capital budget, if necessary).
Narrative reports are reports that are in the form or a white paper that clearly explains the numeric
entries on your budgets. The length of the narrative reports will depend on the particular report. In
general, you should be able to prepare the sales budget report on one or two pages, the purchases
budget report on one or two pages, the income statement report on one page, and the cash budget
report on one page. In this case, the capital budget report would be less than one page. You should not
worry if one of your reports is more or less than the recommendation given here—just be sure you
cover all of the important points and satisfactorily explain the numeric entries in your budget. Also, be
sure you explain the process of “how” your numbers were determined. In this regard, it is not necessary
or desirable to explain the exact calculations. Consider your audience and prepare a report that would
be suitable for executives making plans and decisions for the upcoming year.
1
Harvey’s budget is adapted from a published case. (Source and citation are available upon request to faculty
only).

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