Browning

Manufacturing
Company:
2010 Budget
 • Browning Manufacturing Company annually prepares for a
CASE BRIEF budget of expected financial operations for the upcoming
calendar year - includes projected balance sheet as of the
BACKGROUND end of the year and a projected income statement.
• The final preparation of statements are integration of
estimates and revisions of each department that have
overall effect on business operations to conclude with a
coordinated and profitable plan of operations for the coming
year.
• During the preparation of 2010 budget in November of 2009,
projected 2009 statements were compiled for use as
comparison with the budgeted figures. The company is able
to provide the summary of expected operations for the
budget year of 2010 (Available in Slide 4).
CASE BRIEF
BACKGROUND: • Have a year-end cash balance of approx.
$150,000.00 after paying off note payables to the
COMPANY'S bank - minimum $350,000.00 and maximum
GOALS $400,000.00

• Improvement on inventory turnover ratio

• Maintain its satisfactory trade credit relationship

with suppliers.
 2010 EXPECTED
OPERATIONS:
Transaction Transaction
1.) Sales: All on credit, $2,562,000; sales returns and allowances, $19,200; sales 5.) Cost of finished goods sold to customers: $1,806,624.
discounts taken by customers (for prompt payment), $49,200. (The sales 6.) Financial transactions:
figure is net of expected bad debts.) a. $264,000 borrowed on notes payable to bank.
2.) Purchases of goods and services: b. Cash payment to bank of $38,400 for interest on loans.
a. New assets: Cash receipts from customers on accounts receivable: $2,604,000.
i. Purchased for cash: manufacturing plant and equipment, $144,000; 7.)
prepaid manufacturing taxes and insurance, $78,000.
8.) Cash payments of liabilities:
ii. Purchased on accounts payable: materials, $825,000; supplies, $66,000.
a. Payment of accounts payable, $788,400.
b. Services used to convert materials into work in process, all purchased for b. Payment of 2009 income tax, $9,000.
cash: direct manufacturing labor, $492,000; indirect manufacturing labor,
9.) Estimated federal income tax on 2010 income: $58,000, of which $5,800 is
$198,000; social security taxes on labor, $49,200; power, heat,
estimated to be unpaid as of December 31, 2010.
and light, $135,600.
10.) Dividends declared for year and paid in cash:$36,000.
c. Selling and administrative services, purchased for cash: $522,000.
3.) Conversion of assets into work in process: This appears as an increase in the
cost of work in process and a decrease in the appropriate asset accounts.
Depreciation of manufacturing building andequipment, $140,400; expiration
of prepaid taxes and insurance, $52,800; supplies used in
manufacturing, $61,200; materials put into process, $811,000.
4.) Transfer of work in process to finished goods: This appears as an increase in
finished goods and a decrease in work in process. Total cost accumulated
on goods that have been completed and transferred to finished goods,
$1,901,952.
1.) Projected Statements for 2010
1.) Projected Statements for 2010
Browning Manufacturing Company, Projected 2010 Statement of Cost of Goods Sold

Finished goods inventory, 1/1/10 $ 257,040

Work in process inventory, 1/1/10 $ 172,200
Materials used 811,000
Plus: Factory expenses
Direct manufacturing labor 492,000
Factory overhead:
Indirect manufacturing labor $ 198,000
Power, heat, and light 135,600
Depreciation of plant 140,400
Social Security taxes 49,200
Taxes and insurance, factory 52,800
Supplies 61,200 637,200
2,112,400
Less: Work in process inventory, 12/31/10 210,448
Cost of goods manufactured (i.e., completed) 1,901,952
2,158,992
Less: Finished goods inventory, 12/31/10 352,368
Cost of goods sold $1,806,624
1.) Projected Statements for 2010
Browning Manufacturing Company
Projected Income Statement December 31, 2010

Sales $ 2,562,000
Less: Sales Return and Allowances $ 19,200
Sales Discount 49,200
Net Sales 2,493,600
Less: Cost of Goods Sold 1,806,624
Gross Margin 686,976
Less: Selling and Administrative Expense 522,000
Operating Income 164,976
Less: Interest Expense 38,400
Income before federal and state income tax 126,576
Less: Estimated income tax expense 58,000

Net Income $ 68,576

2.) Financial Estimates 2010 vs 2009
2.) Financial Estimates 2010 vs 2009

Cash = Increased = Better but still not enough to achieve the management’s goal
• Cash increased but we consider it still not enough if we will refer to the case wherein the management's
goal is to have at least 150k left as their ending balance if they want to pay-off their Notes Payable. (To be
discussed more in Question #3.)
2.) Financial Estimates 2010 vs 2009

Accounts Receivable = Decreased but 2009 is still better

• Significant decrease is too optimistic
• Company should consider preparing an aging schedule
2.) Financial Estimates 2010 vs 2009

Inventory and Accounts Receivable = Increased but 2009 is still better

• There is an increase in Work in Process inventory and Finished Goods inventory. Therefore, there's more products that are almost
done or can already be sold and be converted to sales. However, we can still consider its inventory better in 2009 as compared to
the 2010 estimates because of the increase in unused materials and supplies.
• Also, the materials and supplies are all expected to be purchased on credit. Thus, resulting to an increase in Accounts Payable as
well. If we look at the Liabilities section, we can see that their ending Accounts Payable account did increase more than half or
55% from previous years' value.
2.) Financial Estimates 2010 vs 2009

Total Liabilities = Increased = 2009 is better

• Total liabilities show a 75% increase, which is concerning not only because it means increasing
unpaid debts but more importantly because it is not proportionally aligned with the growth rate of the
Equities side, which is only at 4% (Note: 4% is for the RE only since Capital remain unchanged).
• If left unchecked and the Liabilities outgrow the Equities side, then the company's capacity to pay-off
its liabilities decreases as well. Generally, you want your company to be financed more by equity and
not by liabilities.
2.) Financial Estimates 2010 vs 2009

In conclusion, although it seems good that their assets increased in 2010 by 14%, their balance sheet is still better in
2009.
 2.) Financial Estimates 2010 vs 2009
Statement of Cost of Goods Sold
2010 2009 Variance % Variance
Finished goods inventory, 1/1/10 $. 257,040 $ 218,820 38,220 17%
Work in process inventory, 1/1/10 $ 172,200 $ 137,760 34,440 25%
Materials used 811,000 663,120 147,880 22%
Plus: Factory expenses
Direct manufacturing labor 492,000 419,040 72,960 17%
Factory overhead:
Indirect manufacturing labor $ 198,000 $ 170,640 27,360 16%
Power, heat, and light 135,600 116,760 18,840 16%
Depreciation of plant 140,400 126,600 13,800 11%
Social Security taxes 49,200 42,120 7,080 17%
Taxes and insurance, factory 52,800 46,320 6,480 14%
Supplies 61,200 637,200 56,880 559,320 4,320 8%
2,112,400 1,779,240 333,160 19%
Less: Work in process inventory,
210,448 172,200 38,248 22%
12/31/10
Cost of goods manufactured (i.e.,
1,901,952 1,607,040 294,912 18%
completed)
2,158,992 1,825,860 333,132 18%
Less: Finished goods inventory,
352,368 257,040 95,328 37%
12/31/10
Cost of goods sold $ 1,806,624 $ 1,568,820 237,804 15%
In terms of the Statement of Cost of Goods Sold, over all the company incurred higher costs in relation to the production of goods in 2010 with a 15% increase from 2009. The
company has also noted of building its inventory as also mentioned, in the previous slides. The beginning inventory of the company has noted an increase of 17% in 2010. Materials
used also increase in the same year from 2009 by 22%. Overall, the cost of goods manufactured has increased by 18% in 2010 and an increase in Ending Inventory of 37%.
2.) Financial Estimates 2010 vs 2009
Browning Manufacturing Company However, the company is better
Projected Income Statement 2010 vs 2009 off in terms of its income in 2009
in which it recorded a 35%
2010 2009 Variance % Variance decrease in 2010 or lowered by
Sales 2,562,000 2,295,600 266,400 12% 35,884. The main driver of this
Less: Sales returns and 19,200 17,640 1,560 9% decrease is the COGS in which it
allowances is higher in 2010 than 2009 by
Sales discounts allowed 49,200 68,400 43,920 61,560 5,280 12% 15%. The COGS % of Sales and
OPEX % of Sales are also higher in
Net Sales 2,493,600 2,234,040 259,560 12% 2010 with 71% and 20%,
Less: Cost of goods sold (per 1,806,624 1,568,820 237,804 15% respectively.
schedule)
Gross 686,976 665,220 21,756 3%
margin
Less: Selling and administrative 522,000 437,160 84,840 19%
expense Percentage Share
Operating Income 164,976 228,060 - 63,084 -28%
Gross Margin % 28% 30%
Less: Interest 38,400 34,080 4,320 13% Operating Income % 7% 10%
expense
Income before federal and state 126,576 193,980 - 67,404 -35% COGS % of Sales 71% 68%
income tax OPEX % of Sales 20% 19%
Less: Estimated income tax 58,000 89,520 - 31,520 -35%
expense
Net 68,576 104,460 - 35,884 -34%
income
3.) Will the company meet the Note Payable repayment
goal? Suggestions to meet minimum goal.
Year End Cash Balance Goal
Note Repayment (1:Minimum)
Note Repayment (2: Maximum)
Year End Cash Balance Goal Scenario (1)
Year End Cash Balance Goal Scenario (2)
Goals Met Scenario (1)?
Goals Met Scenario (2)?
With a cash of $443,640 stated in the
Amount Projected Balance Sheet statement in the
previous slides and running scenarios in
$150,000.00
this table, the answer to the question is
$350,000.00
no. The company will not meet its Note
$400,000.00
Payable repayment as well as its Year End
$93,640.00
Cash Balance goals.
$43,640.00
No
Recommendations:
No
• Minimize additional Notes payable
• Reassess and strategize collection of their
Accounts Receivable
• Engage in investments – a.) certificate of
deposits, and b.) marketable securities
(short-term interest-bearing promissory
note or treasury bills. )
4.) Will the company meet Inventory turnover ratio goal?
Suggestions to improve company's turnover ratio.
2009 2010 No. Browning Manufacturing will not
meet its goal to improve turnover
Cost of Goods Sold 1,568,280 1,806,624 ratio.
Inventory 557,040 709,416
Inventory Turnover 2.82 2.55 Recommendation:
• Lessen inventory (materials and
Ratio supplies) purchases to improve
both Inventory Turnover Ratio and
Accounts Payable since materials
and supplies also contributed to its
sudden increase in the projected
2010 statement
5.) What does the budget indicate to company's trade
credit standing?
In order to determine whether the company has a poor credit standing, we shall use the current ratio.
Current ratio is the ratio of current assets to current liabilities. It is an important indication of an entity’s
ability to meet its current obligations because if current assets do not exceed current liabilities by a
comfortable margin, the entity may be unable to pay its current bills. This is because most current assets
are expected to be converted into cash within a year or less, whereas most current liabilities are
obligations expected to use cash within a year or less. As a rough rule of thumb, a current ratio of at least
2 to 1 is believed to be desirable in a typical manufacturing company.
2009 2010
Current Asset 1,053,960 1,446,336
Current Liabilities 483,600 847,000
Current Ratio 2.18 1.71
Looking at the company's Balance Sheet both for 2010 and 2009, its assets are higher than its
liabilities. It even goes higher in 2010 by 14%. But, the company's current ratio in 2010 decrease with
1.71 compared with its ratio in 2009 at 2.18 which indicates that the company has a poor credit
standing with the 2010 budget.
Thank you!