CLASS CASE 2- Browning Manufacturing Company

MBA210D AT 1-A/ MANAGERIAL ACCOUNTING FOR PLANNING AND CONTROL

Submitted to:

Mr. Felix Cena,CPA, Ph.D

Submitted by:

Abigail Francisco
Brief Background of the Case

The management of Browning Manufacturing Company annually

prepared a completed budget and provided information on all aspects of the
coming year’s operations. To ensure that the operations of all departments
were in balance with one another, each department must accomplish a detailed
computation for careful integration.
The budget statements ultimately derived from the adjusted estimated
transactions would then serve the company as a reliable guide and measure of
the coming year’s operations. Provided are the Projected Balance Sheets,
Income Statements & Statement of Cost of Goods Sold for 2009, and expected
transactions for 2010 in order to prepare the 2010 budget.

Statement of the Problem

A. What will management do to meet its note repayment goal?
B. What will management do to increase sales and reduce
inventories?
C. What will the management do to have a good company trade credit
standing?

Areas of Consideration
1. Note Payable Repayment Goal of the Management
The management will not meet its note repayment goal because cash
and marketable securities will only be worth $449,640 at the end of 2010.
After paying the minimum note payable to the bank of $350,000, the
remaining balance will be $99,650, which is less than the $150,000 goal
amount.
2. Inventory Turnover Goal of the Management
The management inventory goal will not be achieved. Inventory
turnover in 2010 is lower than in 2009. A low turnover indicates poor sales,
implying an excess of inventory.
3. Company’ Trade Credit Standing
Browning Manufacturing may demonstrate that they are unable to
pay their credits on time. This could imply that the company has a poor
relationship with its creditors or suppliers, which could have a significant
impact on the company process if things get out of hand, or that the

2
 company is poorly managed in the sense of delaying production, thus
delaying sales.

Alternative Courses of Action and Analysis

1. Examining the Note Payable Repayment Goal

As a solution, the company could reduce its payable accounts,
particularly its note payable account, as well as some of its expenses. In
addition, work harder on the collection, converting at least 3% to 5% of
Accounts Receivable to cash. As a result, its year-end cash balance will be
slightly higher than its target of $150,000.
2. Managing Inventory Turnover Goal
The company should think about improving its relationships with its
suppliers and customers. A better and stronger relationship with suppliers
will result in materials being delivered on time. On the other hand, when
you strengthen your customer relationships, demand becomes more
predictable, resulting in a decrease in product inventory.
3. Managing Trade Credit Standing
To have a strong creditor relationship that will not destroy the
company's goodwill, production, and sales in the future, the company must
maintain a good credit standing.

Recommendations & Conclusion

We believe that after learning about Browning Manufacturing Company's

financial situation, the company should begin responsibly managing its account
receivables in order to convert them to cash. They were able to meet their note
payable repayment goal by doing so.

Furthermore, in order to improve the company's turnover, they must have

a better sales record because higher sales mean that inventory will be reduced,
allowing them to meet their inventory goal. To accomplish this, the company
must do its part to reach out to both clients and suppliers. The company must
establish a very good relationship with the two. By having its clients and
customers increase their demand, the company can reduce stale production and
stagnant inventory by going through a productive cyclic process.

Browning Manufacturing Company

3
 Projected 2010 Statement of Cost of Goods Sold

Finished Goods Inventory 257,040.00

(January 01,2010)

Work In Process Inventory 172,200.00

(January 01,2010)

Materials used And Factory Expenses 811,000.00

Direct Manufacturing Labor 492,000.00

Indirect Manufacturing Labor 198,000.00

Power, heat and light 135,600.00
Depreciation Plant 140,400.00
Social Security Taxes 49,200.00
Taxes and Insurance 52,800.00
Supplies 61,200.00 637,200.00
2,112,400.00
Less: Work In Process (210,448.00)
Inventory (December 31, 2010)

Cost of Goods Manufactured 1,901,952.00

2,158,992.00

Less: Finished Goods Inventory (December 31, 2010) 352,368.00

Cost of Goods Sold 1,806,624.00

Browning Manufacturing Company

4
 Projected 2010 Income Statement

Sales 2,562,000.00
Less: Sales Returns and Allowances 19,200.00
Sales Discounts Allowed 49,200.00 (68,400.00)
Net Sales: 2,943,600.00
Less: Cost of Goods Sold
(Per Schedule) (1,806,624.00)
Gross Margin: 686,976.00
Less: Selling and
Administrative Expense (522,000.00)
Operating Income 164,976.00
Less: Interest Expense (38,400.00)

Income Before Federal Income Tax 126,576.00

Less: Estimated Income Tax Expense (58,000.00)

Net Income 68,576.00

Browning Manufacturing Company

5
 Projected 2010 Balance Sheet

Assets

Current Assets
Cash and marketable securities 443,640.00
Accounts receivable (net of 201,360.00
allowance for DA)

Materials 124,520.00
Work in process 210,448.00
Finished goods 352,368.00
Supplies 22,080.00 709,416.00

Prepaid taxes and insurance 91,920.00

Total current assets
1,446,336.00
Other assets:
Manufacturing plant at cost 2,822,400.00
Less: Accumulated depreciation 1,047,600.00
1,774,800.00
Total Assets 3,221,136.00

Liabilities and Shareholder’s Equity

Current Liabilities

Accounts Payable 288,360.00

Notes Payable 552,840.00
Income taxes payable 5,800.00
Total current liabilities 847,000.00
Shareholder’s equity:
Capital Stock 1,512,000.00
Retained earnings 862,136.00 2,347,136.00

6
 Total Liabilities and Shareholder’s Equity 3,221,136.00

Accounts 2009 2010 % Income - December

Sales 2,295,600.00 2,562,000.00 12% Increase

Sales returns and 17,640.00 19,200.00 9% Increase

allowances

Sales discounts 43,920.00 49,200.00 12% Increase

allowed

Cost of goods sold 1,568,280.00 1,806,624.00 15% Increase

(per schedule)

Selling and 437,160.00 522,000.00 19% Increase

administrative
expense

Interest Expense 34,080.00 38,400.00 13% Increase

Estimated income tax 89,520.00 58,000.00 -35% Decrease

expense

Cash and marketable 118,440.00 443,640.00 275% Increase

securities

Accounts receivable 311,760.00 201,360.00 -35% Decrease

(net)

Materials 110,520.00 124,520.00 13% Increase

Work in process 172,200.00 210,448.00 22% Increase

Finished goods 257,040.00 352,368.00 37% Increase

Supplies 17,280.00 22,080.00 28% Increase

Prepaid taxes and 66,720.00 91,920.00 38% Increase

insurance

Manufacturing plant 2,678,400.00 2,822,400.00 5% Increase

7
at cost

Accounts payable 185,760.00 288,360.00 55% Increase

Notes payable 288,840.00 552,840.00 91% Increase

Income taxes payable 9.00 5.80 -36% Decrease

8
2. Describe the principal differences between the 2010 estimates and the 2009
figures as shown in exhibits 1,2 and 3. In what respects is 2010 performance
expected to be better than 2009 performance, and in what respects is it expected
to be worse?

- The comparison shows that in 2010, it is projected that there will be a

significant increase by 275% in the company’s cash and marketable securities. It
can also be noted that accounts receivables for 2010 is expected to go down by
35% and it means the company will have more and faster collections of
receivables and increase in sales can be expected.

3. Does the budget indicate that management will achieve its note payable
repayment goal? If not, what do you suggest they do to achieve their minimum
objective?

- The company will fail to achieve its notes payable repayment goal of a
year-end cash balance of $150,000.00 after paying off at least $350,000.00 of the
notes payable and a year-end cash balance will decrease to $93,640.00 and will
have a short of $150,000.00. In order to achieve the company’s objective, the
company should be able to increase its sales and lessen the expenses as well as
the payables.

4. Does the budget indicate that management’s inventory turnover goal will be
achieved? If not, what do you suggest they do to improve the company’s
inventory turnover?

- The management inventory goal will not be achieved due to the turnover
for 2010 being lower than 2009. In order to achieve the company’s inventory
turnover goal, the company should utilize its resources efficiently, analyze the
market and demand of the customer, manage a long-term relationship with its
suppliers so that it will reduce the availability problems, delays and quality issues
when ordering the products. With that, there will be a possibility to minimize the

9
inventory cost and be able to fulfill the customer’s needs without affecting the
company’s budget.

5. What does the budget indicate might happen to the company’s trade credit
standing?

- Their credit standing as a company will worsen because the

company’s expenses will be higher in 2010. They may have a faster collections of
receivables but however, payables and expenses increases also resulting in the
inability of the company to become stable. This shows that the company is not
able to pay on time and will have a hard time borrowing if there will be
continuous past dues and the operations will soon be affected.

10