ACC 202 Module 5 Operating and Cash Budget Assignment example

Budgeting for the Holiday Peak: Fourth Quarter Sales, Production and Cash Budgets for a Composite Candle Maker

[Student Name]

Southern New Hampshire University

ACC 202: Managerial Accounting

Module Five Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Budgeting for the Holiday Peak: Fourth Quarter Sales, Production and Cash Budgets for a Composite Candle Maker

Budget Assumptions

Cedarline Candle Co., the composite candle maker in this course project, earns a large share of its year in the fourth quarter. The budget below covers October through December 2025 and rests on the following assumptions, drawn from the cost formula in Milestone One and last year's sales records (Franklin et al., 2019). Candles sell for 24 dollars. Forecast sales are 2,600 candles in October, 3,400 in November, 3,900 in December and 1,700 in January; September sales were 2,100. Half of sales come through the website and are paid immediately; the other half are wholesale, collected in full the following month. The company keeps finished candles equal to 20 percent of the next month's sales and held 520 candles at September 30. Production costs other than commission, 12.00 dollars per candle, are paid in the month of production; commission of 1.20 dollars per candle is paid in the month of sale. Cash fixed costs are 15,480 dollars a month, which is the 16,130 dollars of fixed costs less 650 dollars of depreciation. The owner plans to buy a second melting station for 9,500 dollars in December. Cash at October 1 is expected to be 8,000 dollars, and the owner wants to keep at least 10,000 dollars on hand.

Sales Budget

Budgeted revenue is 62,400 dollars in October, 81,600 dollars in November and 93,600 dollars in December, a quarterly total of 237,600 dollars on 9,900 candles. The sales budget is the foundation of every other budget, so its accuracy matters most; the forecast is based on last year's fourth quarter adjusted upward 12 percent for two new retail accounts.

Production Budget

Table 1 calculates the candles to produce each month as budgeted sales plus desired ending inventory minus beginning inventory.

Table 1

Production Budget, Fourth Quarter 2025

Note. Composite figures. The quarter column uses the quarter's ending and beginning inventories, not the sum of the months.

Cash Budget

Table 2 follows cash through the quarter.

Table 2

Cash Budget, Fourth Quarter 2025

Note. Composite figures. November and December fixed costs include a $1,400 monthly step for temporary curing space and a seasonal coordinator.

When the Holiday Peak Breaks the Cost Formula

Milestone One limited the cost formula to monthly volumes from 1,500 up to 2,500 candles, and November and December production of about 3,500 candles falls well outside it. Within the range, fixed costs were fixed; beyond it, they step up. To cure 3,500 candles a month, Cedarline must rent temporary rack space and hire a seasonal coordinator, adding 1,400 dollars a month in November and December. A cost formula is a map of a particular territory, and the holiday peak is outside its borders. The cash budget therefore includes the step, and the budgeted income for those months uses fixed costs of 17,530 dollars rather than 16,130. Even so, the quarter is strongly profitable: contribution margin of 10.80 dollars on 9,900 candles, 106,920 dollars, less fixed costs of 51,190 dollars leaves budgeted operating income of about 55,730 dollars.

Budgeted Operating Income and Why It Differs From Cash

Measured on a contribution basis, budgeted operating income is about 11,950 dollars in October, 19,190 dollars in November and 24,590 dollars in December. In each month, income is sales times the 10.80 dollar contribution margin less fixed costs, including the 1,400 dollar step in November and December. These figures are not the same as the change in cash, and the differences are instructive. October's income of 11,950 dollars raised cash by only 4,680 dollars, because half of October's sales will not be collected until November, and because the business produced 160 more candles than it sold to build inventory for the peak. Depreciation of 650 dollars a month reduces income but uses no cash. December's cash increase is reduced by the 9,500 dollar melting station, which is not an expense at all but an asset that will be depreciated over its life. The owner who watches only the income figures would think October was a comfortable month; the cash budget shows it is the tightest month of the quarter. Both views are necessary, which is why a master budget includes a budgeted income statement and a cash budget rather than one or the other.

What the Budget Tells the Owner

Three findings stand out. First, cash starts the quarter below the owner's 10,000 dollar minimum, and it will dip further during the first weeks of October, because production spending for the season begins before October's wholesale collections arrive. The monthly totals hide this intra-month low point. Cedarline should arrange a small line of credit, about 10,000 dollars, before October, to be repaid from November collections (Datar & Rajan, 2021).

Second, the quarter generates enough cash to buy the second melting station in December without borrowing, and still ends with 36,740 dollars, more than three times the minimum. Because January sales fall to 1,700 candles and the seasonal costs end, this cash will need to carry the business through a slower first quarter.

Third, the budget depends heavily on the sales forecast. If November and December sales came in 15 percent below forecast, production and commissions would fall too, but fixed costs and the temporary costs would not, and ending cash would be several thousand dollars lower. The owner should compare actual sales with the budget weekly in November and cut the seasonal coordinator's hours if orders lag, since that is the only part of the step cost she can reverse quickly. Research on budgeting practice has noted that fixed annual budgets built on a single forecast are fragile in exactly this way, one reason some firms supplement them with rolling forecasts updated as the season unfolds (Hansen et al., 2003).

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 2: Managerial accounting. OpenStax. https://openstax.org/details/books/principles-managerial-accounting

Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15(1), 95-116. https://doi.org/10.2308/jmar.2003.15.1.95