Magna Company Case

Contents
Introduction ................................................................................................................................ 2

MASTER BUDGET................................................................................................................ 3

BUDGETED INCOME STATEMENT ............................................................................... 9

CASH BUDGET.................................................................................................................... 12

TASK 4 ................................................................................................................................... 12

BUDGETED PERFORMANCE INDICATORS .............................................................. 14

RELATIONSHIP BETWEEN OVERHEADS & QUANTITY ..................................... 15

Conclusion ............................................................................................................................... 17

References ................................................................................................................................ 17

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 Magna Company Case

Abstract: In this case, we have solved some of the given tasks with the
position as an Accountant Assistant included: Prepare Master Budget for
Magna’s Manager; Consider possible factors that lead to the variance between
the actual and the proposed budget; Calculate some ratios to assess the
Magna’s performance in the future, Analyzing the relationship between total
overheads and quantity (units).

Introduction

We work as an Accounts Assistant Team in the management accounts department of Magna

Company, producing a single electronic component in the United Stated (US) – a
manufacturing company. We conducted the master budget to send to the manager to help him
make the right decisions in the course of the company's business like facilitating
communication and coordination between all managers, allocating resources, controlling
profit and operations. Beside that, the master budget is also a measure to judge the
performance of its various responsibility centers. The proposed master budget is a one-year
budget planning document for the firm encompassing all other budgets. It coincides with
the fiscal year of the firm and has been broken down into quarters.
The budgets that roll up into the master budget include:
− Sales budget
− Production budget
− Direct materials budget
− Direct labour budget
− Overhead budget
− Selling, general, administrative expenses budget
In addition, we also prepared a Budgeted Income Statement and Cash Budget. These are not
cases for the master budget, which look very much like a standard set of financial statements.
They are compiled from the above budget and useful for estimating the financial results,
financial position, and cash flows of a business as of various dates in the future. (Steven
Bragg, 2018)

Last but not least, we calculated and evaluated some budgeted performance indicators relate
to cost and profits centres. We applied knowledge of learned financial analysis to understand
what those ratios are showing. From the above calculations, we analyzed the relationship
between cost and quantity to help managers control production efficiency.

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 Magna Company Case

MASTER BUDGET

MAGNA COMPANY
Quarterly Sales Budget
Four quarters of 2017

Quarter I Quarter II Quarter III Quarter IV

Budgeted unit sales 75,000 90,000 85,000 100,000
Budgeted unit price ($) 280 280 280 280
Budgeted total sales ($) 21,000,000 25,200,000 23,800,000 28,000,000

Sales budget: to estimate unit sales and unit price, analyze economic and market
conditions, forecast the customer needs from marketing personnel.

The objective of sales budget is to plan and control expenditure of resources (money,
material, facilities and people) necessary to achieve the desired sales objective. It aims at
leveraging and maximizing profits.

MAGNA COMPANY
Quarterly Production Budget in units
Four quarters of 2017

Quarter I Quarter II Quarter III Quarter IV

Budgeted unit sales 75,000 90,000 85,000 100,000
Ending finnished good percentage 50% 50% 50%
Add: Budgeted ending finnished good 45,000 42,500 50,000 38,000
Total requirements 120,000 132,500 135,000 138,000
Deduct: Beginning finnished good 40,000 45,000 42,500 50,000
Budgeted production (units) 80,000 87,500 92,500 88,000

Production budget in units: contains details of the number of units that are intended to
be produced by a business in a particular period. This budget is made after the preparation of
the sales budget. It helps a company plan its manufacturing schedule and ensure that it
produces an adequate quantity of goods.

To answer three questions: How many units does it intend to sell during the budget
period?, What is the number of units of inventory that it holds at the beginning of the budget
period?, How many units does it want to have in stock at the end of the period?

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 Master Budgets

Direct Material Usage Budget in units Quarter I Quarter II Quarter III Quarter IV
Budgeted production 80,000 87,500 92,500 88,000
Budgeted input per unit 12 12 12 12
Plastic
Budgeted usage 960,000 1,050,000 1,110,000 1,056,000
Budgeted input per unit 8 8 8 8
Linning material
Budgeted usage 640,000 700,000 740,000 704,000
Total direct material usage 1,600,000 1,750,000 1,850,000 1,760,000

MAGNA COMPANY
Quarterly Direct Material Purchases Budget
Four quarters of 2017
Quarter I Quarter II Quarter III Quarter IV
Plastic Linning Plastic Linning Plastic Linning Plastic Linning
Budgeted DM usage 960,000 640,000 1,050,000 700,000 1,110,000 740,000 1,056,000 704,000
Add: Target ending inventory 105,000 70,000 111,000 74,000 105,600 70,400 77,000 46,200
Total requirements 1,065,000 710,000 1,161,000 774,000 1,215,600 810,400 1,133,000 750,200
Deduct: Beginning inventory 80,000 50,000 105,000 70,000 111,000 74,000 105,600 70,400
Total DM purchases 985,000 660,000 1,056,000 704,000 1,104,600 736,400 1,027,400 679,800
Purchase price ($) 16.5 6 16.5 6 16.5 6 16.5 6
Total purchases ($) 16,252,500 3,960,000 17,424,000 4,224,000 18,225,900 4,418,400 16,952,100 4,078,800
Total Direct material purchases
20,212,500 21,648,000 22,644,300 21,030,900
(Plastic & Linning) ($)
 Master Budgets

Direct materials budget: to calculate the materials that must be purchased, by time
period, in order to fulfill the requirements of the production budget. It is typically presented
in either a monthly or quarterly format in the annual budget. In a business that sells products,
this budget may contain a majority of all costs incurred by the company, and so should be
compiled with considerable care.

The basic calculation used by the direct materials budget is (Jan, 2011):
Raw materials required for production
+ Planned ending inventory balance
= Total raw materials required
- Beginning raw materials inventory
= Raw materials to be purchased

MAGNA COMPANY
Quarterly Direct Labour Budget
Four quarters of 2017

Quarter I Quarter II Quarter III Quarter IV

Budgeted production 80,000 87,500 92,500 88,000
Budgeted DL hrs used per unit 1.5 1.5 1.5 1.5
Budgeted usage 120,000 131,250 138,750 132,000
Rate ($) 22 22 22 22
Budgeted Direct Labour 2,640,000 2,887,500 3,052,500 2,904,000

Direct labour budget: to calculate the number of labor hours that will be needed to
produce the units itemized in the production budget. A more complex direct labor budget will
calculate not only the total number of hours needed, but will also break down this information
by labor category. The direct labor budget is useful for anticipating the number of employees
who will be needed to staff the manufacturing area throughout the budget period.

The direct labour budget is presented in either a monthly or quarterly format. The
basic calculation used by the budget is to import the number of units of production from the
production budget and to multiply this by the standard number of labor hours for each unit.
 Magna Company Case

MAGNA COMPANY
Quarterly Manufacturing Overhead Budget
Four quarters of 2017

Variable Total
Amount Fixed Quarter I Quarter II Quarter III Quarter IV
per Unit Cost
Variable costs
Factory supplies 1.5 180,000 196,875 208,125 198,000
Utilities 0.7 84,000 91,875 97,125 92,400
Shop maintenance 0.5 60,000 65,625 69,375 66,000
Other 1.8 216,000 236,250 249,750 237,600
Total variable costs 4.5 540,000 590,625 624,375 594,000

Fixed costs

Shop maintenance 8,000 8,000 8,000 8,000 8,000

Supervision 8,000 8,000 8,000 8,000 8,000
Depreciation 120,000 120,000 120,000 120,000 120,000
Taxes 1,200 1,200 1,200 1,200 1,200
Others 30,000 30,000 30,000 30,000 30,000
Total fixed costs 167,200 167,200 167,200 167,200 167,200
TOTAL 707,200 757,825 791,575 761,200
Overhead budget: contains all manufacturing costs other than the costs of direct
materials and direct labor. The information in the manufacturing overhead budget becomes
part of the cost of goods sold line item in the master budget.

The total of all costs in this overhead budget are converted into a per-unit overhead
allocation, which is used to derive the cost of ending finished goods inventory, and which in
turn is listed on the budgeted balance sheet.

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 Magna Company Case

MAGNA COMPANY
Quarterly Selling, General & Administrative Expense Budget
Four quarters of 2017

Variable Total
Amount Fixed Quarter I Quarter II Quarter III Quarter IV
per Unit Cost
Sales 280 21,000,000 25,200,000 23,800,000 28,000,000
Variable costs
Commissions 3.00 225,000 270,000 255,000 300,000
Shipping 0.75 56,250 67,500 63,750 75,000
Other 1.25 93,750 112,500 106,250 125,000
Total variable
5.00 375,000 450,000 425,000 500,000
costs
Contribution
275 20,625,000 24,750,000 23,375,000 27,500,000
margin
Fixed costs
Salaries 48,000 48,000 48,000 48,000 48,000
Depreciation 40,000 40,000 40,000 40,000 40,000
Other 25,000 25,000 25,000 25,000 25,000
Total fixed costs 113,000 113,000 113,000 113,000 113,000
Income from
178,000 20,512,000 24,637,000 23,262,000 27,387,000
operations
Selling, general, administrative expense budget: is comprised of the budgets of all
non-manufacturing departments, such as the sales, marketing, accounting, engineering, and
facilities departments. The selling and administrative expense budget is typically presented in
either a monthly or quarterly format.

We used traditional methods for allocating overhead to products. Manufacturing

overheads are allocated to products using a predetermined rate based on the number of direct
labour hours with fomular (Langfield-Smith, 2015)

Quarter I Quarter II Quarter III Quarter IV

Fixed cost 167,200 167,200 167,200 167,200
Direct labour hours 120,000 131,250 138,750 132,000
Fixed cost allocated per unit 1.39 1.27 1.21 1.27

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 Magna Company Case

MAGNA COMPANY
Quarterly Product cost per Unit
Four quarters of 2017

Quarter I Quarter II Quarter III Quarter IV

Direct material 246 246 246 246
Direct labour 33 33 33 33
Variable cost 4.5 4.5 4.5 4.5
Fixed cost 1.39 1.27 1.21 1.27
Product cost per unit 284.89 284.77 284.71 284.77

MAGNA COMPANY
Quarterly Production Budget in dollars
Four quarters of 2017

Quarter I Quarter II Quarter III Quarter IV

Budgeted unit sales 21,367,000 25,629,651 24,199,929 28,476,667
Add: Budgeted ending
12,820,200 12,102,891 14,235,252 10,821,133
finnished good
Total requirements 34,187,200 37,732,542 38,435,181 39,297,800
Deduct: Beginning
11,395,733 12,814,826 12,099,964 14,238,333
finnished good
Budgeted production 22,791,467 24,917,717 26,335,217 25,059,467
Rate ($) 284.89 284.77 284.71 284.77

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 Magna Company Case

BUDGETED INCOME STATEMENT

MAGNA COMPANY
Quarterly Budgeted Income Statement
Four quarters of 2017

Price: $190/unit Quarter I Quarter II Quarter III Quarter IV

Sales 14,250,000 17,100,000 16,150,000 19,000,000
Cost of goods sold 21,367,000 25,629,651 24,199,929 28,476,667
Gross Profit (7,117,000) (8,529,651) (8,049,929) (9,476,667)
Operating expenses
Salaries 48,000 48,000 48,000 48,000
Commissions 225,000 270,000 255,000 300,000
Depreciation 40,000 40,000 40,000 40,000
Shipping 56,250 67,500 63,750 75,000
Other 118,750 137,500 131,250 150,000
Total Operating expenses 488,000 563,000 538,000 613,000

Net Income before taxes (7,605,000) (9,092,651) (8,587,929) (10,089,667)

Price: $200/unit Quarter I Quarter II Quarter III Quarter IV

Sales 15,000,000 18,000,000 17,000,000 20,000,000
Cost of goods sold 21,367,000 25,629,651 24,199,929 28,476,667
Gross Profit (6,367,000) (7,629,651) (7,199,929) (8,476,667)
Operating expenses
Salaries 48,000 48,000 48,000 48,000
Commissions 225,000 270,000 255,000 300,000
Depreciation 40,000 40,000 40,000 40,000
Shipping 56,250 67,500 63,750 75,000
Other 118,750 137,500 131,250 150,000
Total Operating expenses 488,000 563,000 538,000 613,000
Net Income before taxes (6,855,000) (8,192,651) (7,737,929) (9,089,667)

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 Magna Company Case

Price: $230/unit Quarter I Quarter II Quarter III Quarter IV

Sales 7,250,000 20,700,000 19,550,000 23,000,000
Cost of goods sold 21,367,000 25,629,651 24,199,929 28,476,667
Gross Profit (4,117,000) (4,929,651) (4,649,929) (5,476,667)
Operating expenses
Salaries 48,000 48,000 48,000 48,000
Commissions 225,000 270,000 255,000 300,000
Depreciation 40,000 40,000 40,000 40,000
Shipping 56,250 67,500 63,750 75,000
Other 118,750 137,500 131,250 150,000
Total Operating expenses 488,000 563,000 538,000 613,000
Net Income before taxes (4,605,000) (5,492,651) (5,187,929) (6,089,667)

Price: $250/unit Quarter I Quarter II Quarter III Quarter IV

Sales 18,750,000 22,500,000 21,250,000 25,000,000
Cost of goods sold 21,367,000 25,629,651 24,199,929 28,476,667
Gross Profit (2,617,000) (3,129,651) (2,949,929) (3,476,667)
Operating expenses
Salaries 48,000 48,000 48,000 48,000
Commissions 225,000 270,000 255,000 300,000
Depreciation 40,000 40,000 40,000 40,000
Shipping 56,250 67,500 63,750 75,000
Other 118,750 137,500 131,250 150,000
Total Operating expenses 488,000 563,000 538,000 613,000
Net Income before taxes (3,105,000) (3,692,651) (3,487,929) (4,089,667)

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 Magna Company Case

Price: $280/unit Quarter I Quarter II Quarter III Quarter IV

Sales 21,000,000 25,200,000 23,800,000 28,000,000
Cost of goods sold 21,367,000 25,629,651 24,199,929 28,476,667
Gross Profit (367,000) (429,651) (399,929) (476,667)
Operating expenses
Salaries 48,000 48,000 48,000 48,000
Commissions 225,000 270,000 255,000 300,000
Depreciation 40,000 40,000 40,000 40,000
Shipping 56,250 67,500 63,750 75,000
Other 118,750 137,500 131,250 150,000
Total Operating expenses 488,000 563,000 538,000 613,000
Net Income before taxes (855,000) (992,651) (937,929) (1,089,667)
A flexible budget adjusts to changes in actual revenue levels. Actual revenues or other
activity measures are entered into the flexible budget once an accounting period has been
completed, and it generates a budget that is specific to the inputs. The budget is then
compared to actual expenses for control purposes.

Advantages of Flexible Budgeting:

− Usage in variable cost environment. The flexible budget is especially useful in

businesses where costs are closely aligned with the level of business activity,
such as a retail environment where overhead can be segregated and treated as
a fixed cost, while the cost of merchandise is directly linked to revenues.
− Performance measurement. Since the flexible budget restructures itself based
on activity levels, it is a good tool for evaluating the performance of managers
- the budget should closely align to expectations at any number of activity
levels.
− Budgeting efficiency. Flexible budgeting can be used to more easily update a
budget for which revenue or other activity figures have not yet been finalized.
Under this approach, managers give their approval for all fixed expenses, as
well as variable expenses as a proportion of revenues or other activity
measures. Then the budgeting staff completes the remainder of the budget,
which flows through the formulas in the flexible budget and automatically
alters expenditure levels. (Bragg. 2017)

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 Magna Company Case

CASH BUDGET

MAGNA COMPANY
Quarterly Budgeted Income Statement
Four quarters of 2017

Quarter I Quarter II Quarter III Quarter IV

Beginning cash balance 5,000,000 (4,200,500) (24,639,000) (45,933,800)
Receipts from customers 14,100,000 4,620,000 4,900,000 5,180,000
Total cash available 19,100,000 419,500 (19,739,000) (40,753,800)
Disbursements
Payments for DM 20,212,500 21,648,000 22,644,300 21,030,900
Payments for DL 2,640,000 2,887,500 3,052,500 2,904,000
Sales salaries 48,000 48,000 48,000 48,000
Commissions 225,000 270,000 255,000 300,000
Shipping 56,250 67,500 63,750 75,000
Other 118,750 137,500 131,250 150,000
Total disbursements 23,300,500 25,058,500 26,194,800 24,507,900
Preliminary balance (4,200,500) (24,639,000) (45,933,800) (65,261,700)

In the first quarter, all of account receivable balce in Jan 1st, 2017 ($1,200,000) is
collectible fully and 10% sales of this quarter is collected by cash. So, receipts from
customers in 1st quarter is $1,200,000 + 10%*$21,000,000 = $14,100,000.

In the second quarter, 10% sales of this quarter and 10% sales of the previous quarter
is collected by cash = 10%*$25,200,000 + 10%*$21,000,000 = $4,620,000

TASK 4: Actually, in 2017, the Magna Company sold 350,000 units (as budget)

Direct material usage is favourable because

➔ A favorable direct materials efficiency variance results when fewer materials are used
than planned.
➔ Purchasing of materials of higher quality than the standard.
➔ Using and improving automated manufacturing tools and processes.
Direct material price is adverse because
➔ The expenses associated with the order (freight, duties, handling expenses etc.) may
increase the price of materials available for use.

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 Magna Company Case

➔ Rise in price: The rise in the general price level may increase the input costs of the
vendor and as a result vendor may increase the price of the materials. The rise in price
is very common reason of an unfavorable variance.
➔ Transportation: Transportation is a part of total direct materials cost. Any change in
the transportation expenses can change the total and per unit cost of direct materials
available for use and can become the reason of favorable or unfavorable direct
materials price variance.
Direct labour efficiency is favourable because
➔ A simplified product design to reduce assembly time
➔ A reduction in the amount of scrap produced by the process
➔ Increasing the amount of automation
➔ Altering the workflow
If these can be done, then the standard number of hours required to produce an item is
decreased to more closely reflect the actual level of efficiency.
Direct labour rate is adverse because
➔ Increase in the national minimum wage rate
➔ Hiring of more skilled labor than anticipated in the standard (this should be reflected
in a favorable labor efficiency variance)
➔ Inefficient hiring by the HR department
➔ Effective negotiations by labor unions
Fixed overhead expenditure is adverse because
➔ This is caused by actual fixed overhead being more than budgeted.
➔ It could be caused by price increase, or a different pattern of overhead expenditure.
➔ increase in cost of services used
➔ excessive use of services
➔ change in type of services used
Fixed overhead capacity is favourable because
➔ labour force working overtime
➔ This is caused by actual labour hours being more than budgeted leading to an under
absorption of overhead.
Fixed overhead efficiency is favourable because
➔ labour force working more efficiently

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 Magna Company Case

➔ This is caused by the standard hours for actual production being more than actual
hours worked.

BUDGETED PERFORMANCE INDICATORS

❖ Cost centres

Quarter I Quarter II Quarter III Quarter IV

Production ($) 22,782,400 24,918,250 26,342,150 25,060,640
Productivity =
DL (hrs) 120,000 131,250 138,750 132,000
Productivity 189.85 189.85 189.85 189.85
The large productivity ratio shows that the productivity of company employees is very
good, creating a lot of products for the company in a short time. Show that the company is
producing effectively.

❖ Profit centre

Quarter I Quarter II Quarter III Quarter IV

Net profit NI ($) (855,000) (992,651) (937,929) (1,089,667)
=
margin Sales ($) 21,000,000 25,200,000 23,800,000 28,000,000
Net profit margin (%) (4.07) (3.94) (3.94) (3.89)
Estimated profit margins in four quarters have negative values, indicating that the
company has not well controlled costs. Costs incurred but business production was not
effective. So the company needs to review the cost management or have a more suitable
business plan.

Quarter I Quarter II Quarter III Quarter IV

Gross profit Gross profit ($) (367,000) (429,651) (399,929) (476,667)
=
margin Sales ($) 21,000,000 25,200,000 23,800,000 28,000,000
Gross profit margin (%) (1.75) (1.70) (1.68) (1.70)
Gross profit margin for 4 quarters is negative. Although the company has good
productivity, this is because the cost of production is less than the selling price, making the
gross profit margin less than 0.The company needs to review how to calculate prices more
reasonably.

Quarter I Quarter II Quarter III Quarter IV

COGS ($) 21,367,000 25,629,651 24,199,929 28,476,667
Sales ($) 21,000,000 25,200,000 23,800,000 28,000,000
Production costs
101.75 101.70 101.68 101.70
of sales/sales (%)

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 Magna Company Case

Production costs of sales/sales greater than 1 quarterly estimation shows that COGS>
Sales and Managa are having problems in calculating cost and selling price of products.

Quarter I Quarter II Quarter III Quarter IV

Operating expenses ($) 488,000 563,000 538,000 613,000
Sales ($) 21,000,000 25,200,000 23,800,000 28,000,000
Non-production costs of
2.32 2.23 2.26 2.19
sales/sales (%)
Non-production costs of sales accounts for about 2% of sales, indicating that the
company does not have much cost, not the cost of goods sold. The majority of costs incurred
in the company are the cost of goods sold. The company has not paid much attention to
advertising and the costs associated with selling a lot.

RELATIONSHIP BETWEEN OVERHEADS & QUANTITY

From the “Manufacturing Overhead Budget”, we have the below chart show the
relationship between total overheads and quantity (units)

Relationship between Overheads & Quantity

900000

800000

700000

600000

500000

400000

300000

200000

100000

0
0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000

VC FC TC

From the graph showing the relationship between total overheads and quantity. Total
cost is the total fixed cost and variable cost. At the output level of 0, the total cost is always

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 Magna Company Case

equal to the fixed cost. Variable costs always vary by quantity. If output is low, variable costs
are low, output increases, variable costs increase.

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 Magna Company Case

Conclusion

According to Hyless, when company implements a master budget, there is a strong

tendency for senior management to force the organization to closely adhere to it by including
budget goals in employee compensation plans. Doing so has the following effects:

− Forcing the organization to follow the budget requires a group of financial

analysts who track down and report on variances from the plan. This adds
unnecessary overhead expense to the business.

− Managers tend to ignore new business opportunities, because all resources are
already allocated toward attaining the budget, and their personal incentives are
tied to the budget.

Thus, enforcing a master budget can skew the operational performance of a business.
Because of this problem, it may be better to employ the master budget as just a rough
guideline for management's near-term expectations for the business. (Hyles, 2016)

References

Bragg, Steven (2017), Flexible Budget Overview. Retrieved from

https://www.accountingtools.com/articles/2017/5/17/flexible-budget.html

Bragg, Steven (2018), Budgeted financial statements. Retrieved from

https://www.accountingtoos.com/articles/what-are-budgeted-financial-statements.html

Hyles-Anderson College (2016), Master Budget Problems and Solutions

Jan, Irfanullah (2011), Direct Material Purchases Budget. Retrieved from

https://xplaind.com/522711/direct-material-purchases.html

Langfield-Smith, Kim, et al. (2015), Management Accounting

Contributions of members in group:

Full name Student number Contributions Percent

Tôn Nữ Quỳnh Anh K164050741 33,33
Võ Đặng Việt Đan K164050743 33,33
Nguyễn Huỳnh Anh Thư K164050761 33,33

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