Preparing a master budget (accounting)

You need to develop your company’s master budget for 5 years (2020-2024), taking into account all relevant aspects learned during this semester about management accounting:

• Cost-center, Type & Bearer and Allocation Policies · MOH & SGA
• Material flow · Inventory Turnover
• Direct & Indirect Costs
• Job Order Costing vs Process Costing
• Variable vs Fixed Costs & Cost Volume Profit Analysis
• Cash Flow Management, Cash Budgeting
• Long term profitability, sustainability · Business model viability

To begin with your project should display at least 2 years of past activities (Financial Statements containing at least a detailed P&L and a Balance Sheet).
You just closed books March, 31st of 2020.

In light of recent results, the Board is asking form you the forecast for the next five business years.

So, for the master budget exercise you will have 2 scenarios:

1. Sales growth of 50% more than the 2020 over 2019. In example your sales incrsed 2019 8% over 2018, then your sales target is at least 8% + 50% (over 8%) = 12% growth from 2019.

Or

2. Operating Profit Margin of 3 percentage points improvement over last year. In example your profit margin was 8%. the first year of budget needs to be 11% over sales.

Task: Prepare an excel sheet with the forecasts of each and every one of the lines of the income statement.

The assumptions are:

If we choose scenario 1
• Sales grow 50% over last year and this growth continues for the 5 years.
• Contribution margin will be reduced in 1% compared to the last year of past activity and maintained stable for the rest of the years.
• Travelling expenses for projects will increase in the same proportion as sales.
• Indirect Labor will increase in the same proportion as sales.
• Depreciation based on 10 years.
• Utilities will increase in the same proportion as sales.
• All other costs will increase at a 10% year over year.
• Accounts receivables in days remain constant, as last year of activity.
• Accounts payable in days remain constant, as last year of activity.
• Inventories in days remain constant, as last year of activity.
• Interest expense is 4%.
• Investments will be 5% of net sales every year.
• Make a forecast for all balance sheet accounts.
If we choose scenario 2
• Net sales are reducing 3% compared to the last year of activity and the reduction continues for the 5 years.
• Contribution margin will be increased in 3% compared to the last year of past activity and maintained stable for the rest of the years.
• Travelling expenses for projects will increase in the same proportion as sales.
• Indirect Labor will increase in the same proportion as sales.
• Depreciation based on 10 years.
• Utilities will increase in the same proportion as sales.
• All other costs will decrease at a 1% year over year.
• Accounts receivables in days remain constant, as last year of activity.
• Accounts payable in days remain constant, as last year of activity.
• Inventories in days remain constant, as last year of activity.
• Interest expense is 4%.
• Investments will be 1% of net sales every year.
• Make a forecast for all balance sheet accounts.

choice: (You can make up a company or choose a real one)

• Textile, Clothing and Apparel B2C