Master Budget Pedro’s Pizza makes frozen pizza dough.  The company just finished its first year of operation (12 months, Jan-Dec).  The following is its traditional income statement and Balance Sheet Sales  (15,000 units)                     $ 300,000 CGS                                               180,000 Gross Profit                                   $ 120,000 Sales Commissions                        $ 30,000 Salaries                                          30,000 Depreciation expense                         6,000 Net Income                                    $ 54,000   Cash                                   $5,000         AP                     $3,000 AR                                       5,000          Credit Line         7,000exam 1

1. QUESTION

2. Master Budget

Pedro’s Pizza makes frozen pizza dough.  The company just finished its first year of operation (12 months, Jan-Dec).  The following is its traditional income statement and Balance Sheet

Sales  (15,000 units)                     $ 300,000

CGS                                               180,000

Gross Profit                                   $ 120,000

Sales Commissions                        $ 30,000

Salaries                                          30,000

Depreciation expense                         6,000

Net Income                                    $ 54,000

Cash                                   $5,000         AP                     $3,000

AR                                       5,000          Credit Line         7,000

Inventory – Raw Mat          9,000

Inventory – Finished Goods   3,000         Common Stock   12,000

Equipment                          60,000         Retained Earn    54,000

Acc Depreciation                (  6,000)

Total Assets                   $76,000         Total L & Eq   $76,000

VCP wants to prepare a cash budget for the first 3 months of the next year.

Use the following estimates:

• The quantity sold is projected to increase 4% for the year. Price will increase 5%.  Sales are spread evenly throughout the year.   CGS should be calculated on a FIFO basis.
• 25% of sales is collected in the month of sale; the remainder is collected the next month.
• Inventory:
  • Last year’s Finished Goods and Cost of Goods Sold had a constant cost per unit.
  • All raw materials is purchased on credit ($1.50 per lb) and is the same price as last year. Each product requires 2.5 lbs).
  • Ending inventory for both should be 40% of next month’s activity (activity is constant).
  • Beginning and ending WIP is zero
• 20% of purchases are paid in the month of purchase, 80% in the following. All other expenses are paid with cash.
• Direct Labor is 0.2 hours per product at $30 per hour. Variable Overhead is $2.25 per product.  Fixed Overhead is zero.
• The credit line is used for cash shortfalls. Excess cash will pay down this line.  Interest is 1% per month of last month’s balance.
• Projections are to buy $6000 of new equipment at the end of January. Equipment is depreciated straight-line to zero salvage over 5 years.  All of this is used in administration.
• Sales commission rate will remain the same. Salaries will increase by 4%.
• VCP wants to maintain a minimum cash balance of at least $5,000. Excess to repay credit line.

1. Sales A/R Collections (10 points)

1. Finished Goods/Production (Patties) (10 points)

1. DM/RM (Beef) Inventory/Purchases (10 points)

1. Capital Purchases (10 points)

1. Cost of Goods Manufactured (10 points)

1. Cost of Goods Sold/Ending Finished Goods (FIFO) (10 points)

1. AP/Cash Payments (10 points)

1. Cash Budget/Interest/Credit line (10 points)

1. Credit Line/Borrowing/Repay (10 points)

1. Projected monthly Income statement for Jan, Feb, Mar (10 points)

ANSWER

 Pedro’s Pizza Cash Budget and Financial Projections for Jan, Feb, and Mar

Introduction

In this essay, we will outline the cash budget and financial projections for Pedro’s Pizza, a frozen pizza dough manufacturer, for the first three months of the next year. We will utilize estimates and historical data to forecast sales, collections, inventory, purchases, capital investments, cost of goods manufactured, accounts payable, cash flow, and the credit line. These projections will provide valuable insights into the company’s financial performance and assist in making informed business decisions.

Sales and Accounts Receivable Collections

We will begin by projecting sales and accounts receivable (A/R) collections for January, February, and March. Sales are projected to increase by 4% for the year, with a 5% price increase. Since sales are spread evenly throughout the year, we can calculate the monthly sales as follows:

– January Sales: Total projected sales for the year divided by 12 months.

– February Sales: Total projected sales for the year divided by 12 months.

– March Sales: Total projected sales for the year divided by 12 months.

To determine A/R collections, we need to consider that 25% of sales are collected in the month of sale, and the remaining 75% is collected the following month. The A/R collections for each month can be calculated accordingly.

Finished Goods/Production

Next, we will focus on the finished goods and production. We need to determine the required ending balance of finished goods based on the projected sales for each month (Finished Goods Inventory: Formula, Calculation & Turnover, n.d.). The beginning inventory of finished goods and the cost per unit are known, allowing us to calculate the production units required to meet sales demand. The actual ending balance of finished goods can be derived by subtracting the units sold from the production units.

DM/RM (Beef) Inventory/Purchases

To manage raw material inventory, we will analyze the beef inventory and purchases. We know the beginning inventory, the raw material units needed for production, and the minimum required inventory. Based on this information, we can calculate the purchases in units and dollars for each month. The actual ending inventory balance can be determined by subtracting the units used in production from the purchased units.

Capital Purchases

In January, Pedro’s Pizza plans to invest $6,000 in new equipment. The equipment will be depreciated straight-line over five years with zero salvage value. We can calculate the monthly depreciation expense based on this information. Additionally, we need to track the accumulated depreciation for accurate financial reporting.

Cost of Goods Manufactured

The cost of goods manufactured involves the components of direct materials (DM), direct labor (DL), variable overhead (VOH), and fixed overhead (FOH). By multiplying the required DM units by their cost per unit, we can determine the DM cost used in production. Similarly, DL and VOH costs can be calculated per unit and multiplied by the production units to obtain the total costs. FOH is zero in this case, so it doesn’t contribute to the cost of goods manufactured.

Cost of Goods Sold/Ending Finished Goods (FIFO)

To calculate the cost of goods sold (COGS) and the ending finished goods (FG) balance, we need to consider the beginning FG units, the cost per unit for the beginning FG, the quantity produced, and the cost per unit of production (Fernando, 2023). Subtracting the units sold from the beginning FG units will give us the remaining units. The COGS is then calculated by multiplying the units sold by the cost per unit of production.

AP/Cash Payments

The accounts payable (AP) balance will depend on the beginning balance and the purchases made each month. The purchases in dollars can be calculated using the purchase units and their cost per unit. By subtracting the payments from the beginning AP balance, we can obtain the ending AP balance.

Cash Budget/Interest/Credit Line

The cash budget is an essential part of financial planning. We start with the cash beginning balance and consider the collections, AP payments, and other cash payments for each month. By adding or subtracting these cash flows, we can calculate the cash subtotal. If the cash subtotal is less than the minimum cash balance, the credit line is utilized to cover the shortfall. Any excess cash is used to repay the credit line. Interest on the credit line is calculated based on the previous month’s balance.

Projected Monthly Income Statement

Finally, we will present the projected monthly income statement for January, February, and March. The income statement will include sales, cost of goods sold, gross profit, and other expenses such as sales commissions and salaries (J. Chen, 2023). The net income can be calculated by subtracting the total expenses from the gross profit.

Conclusion

By preparing the cash budget and financial projections for Pedro’s Pizza, we gain valuable insights into the company’s expected performance for the first three months of the next year. These projections provide a foundation for decision-making and help identify areas of improvement or potential risks. With a clear understanding of sales, inventory, purchases, and cash flow, Pedro’s Pizza can optimize its operations and financial management, ensuring a successful and profitable future.

References

Chen, J. (2023). Income Statement: How to Read and Use It. Investopedia. https://www.investopedia.com/terms/i/incomestatement.asp 

Fernando, J. (2023). Cost of Goods Sold (COGS) Explained With Methods to Calculate It. Investopedia. https://www.investopedia.com/terms/c/cogs.asp 

Finished Goods Inventory: Formula, Calculation & Turnover. (n.d.). https://www.bluecart.com/blog/finished-goods-inventory