Mama Moca Soft Drink Company's Financial Position - Example

Mama Moca Soft Drink Company

Mama Moca is a renowned beverage company that manufactures non-alcoholic soft drinks. The main drinks sold by the company are Sports and Energy drinks. These products are packed in bottles of different capacity to meet the preferences and tastes of different consumers. The Company sells most of its products in the global market given its large production capacity. It also has a good management that understands the importance of budget planning in an attempt to forecast its results. Budgeting involves the quantification of the various plans in an organization in order to achieve the set objectives for a given period (Kaplan & Anthony 79). Budgets can be applied in a number of areas. These include but not limited to controlling of costs in the organization, evaluating the performance and in the decision-making process. Through budgetary planning, Mama Moca Company is in a position of detailing its plans on how to acquire and use its financial resources in the current period and in the future. The Company has various departments that must cooperate in the preparation of various budgets. Budgets will be prepared by each of the departments to determine their objectives and that of the entire Company (Van Vaerenbergh & Steven 180)

The process of preparing a budget helps reflect all the company’s activities. This can be achieved through inter-departmental cooperation. The process of budgeting must involve consultation and discussion at all the levels of management. Communication is important since it facilitate the coordination of various business activities. Communication within the company can be either horizontal or vertical. Horizontal communication involves communication amongst employees in the same level. On the other hand, vertical communication involves communication across different levels of management for instance the junior staff in the company and the senior executives. Budgets are usually prepared to communicate the expectations of each department and that of the entire company.

Assumed Financial Information

To manufacture its drinks the Mama Moca Company requires two types of material, these are materials X and material Y. The sales department of Mama Moca provides the following information for the manufacture of Energy Juice and Sports juice for the accounting year ending 30 June 2016.

Products of Mama Moca Soft Drinks Company

Energy Juice Sports Juice

Company’s demand for the two products 450,000 400,000

Selling price (expected) per unit $32 $44

Closing stock (30 June 2016) 40,000units 120,000

Opening stock (30thJune 2015) 90,000 units 20,000 units

The cost of stock per unit $20 $28

There are two processes in the manufacturing the two Products of Mama Maco Company. The capacity for each product is shown below.

Machining Processing

15 min 24 min

12 min 18 min

The content of the two raw materials areX Y

Material: A 1.5 kg 0.5 kg

Material: B 2.0 kg 4.0 kg

Each product requires direct labor hours estimated at 6 hrs 9 hrs

The company values finished goods using First-in-First out (FIFO) method.

Raw materials Material X Material Y

Closing stock requirements in kilos at 30th June 2016 60,000 100,000

Opening stock at 30th June 2015 kilos 110,000 600,000

Budgeted cost of raw materials per kilo $1.50 $1.00

Actual cost per kilo of opening stocks are based on the budgeted cost of the coming year

Direct labor

The Company estimates that wage rate for direct labor is to be valued at $1.60 per hr

Factory overhead

The Company estimates that its factory overhead will be at different absorption rates based on machining hours. This is as given below.

.

Machining deport Processing deport

$ $

Salary to the supervisors 10,000 9,150

Costs for Power 2,400 2,000

Running costs 2,100 2,000

Cost of consumables 3,400 500

General administration expenses 19,600 5,000

39,500 18,650

The company depreciates its equipment on a straight-line basis. The assumed depreciation rate is 5% on the value of the plant and equipment. Mama Moca Company plans to install a machine costing $20,000 by 1 October 2015 in its machining department. The machining department has an already installed machine valued at $ 100,000.

Mama Maco Soft Drinks expected figures for the balance sheet for the year ended 30 June 2016 are a provided below.

Mama Maco Soft Drinks Company balance Sheet for the year ending 30 June 2016

Fixed assets $ $

Buildings (NBV) 45,000

Property Plant and equipment (NBV) 112,000

157,000

Current Assets

Cash 7,600

Stock 23,600

Accounts receivable 19,500

Bank balance 4,300

Total current assets 55,000

Liabilities

Creditors 6,600

Taxation 24,600 31,200 23,700

180,700

Equity

Outstanding ordinary shares (150,000 of Shs.1 each) 150,000

Retained profits 30,700

180,700

Expenses (Sales and Distribution)

Commission and salaries $1,430,000

Traveling distribution $350,000

Office salaries $1,010,000

General expenses (administration) $250,000

3,040,000

The company has no opening or closing work in progress. The effects of inflation are to be ignored.

From the financial data and information of Mama Moca provided above, several budgets and estimates can be prepared for the accounting year ending 30 December2016.

a) Sales Budget

The Sales budget is made up of a detailed outline of the expected sales for a defined period. It simply predicts or forecasts what a company is likely to sell to its customers for the planned period. A sales budget must be expressed in terms of units and currency (Alnoor & Srikant112).Sales budget is important to the whole process of budgeting. Therefore, it must be prepared accordingly with great accuracy. It is highly important since it is a key requirement in the development of a master budget. For example, to prepare the production estimate the company must depend on the market demand and the available stocks. When the forecasted sales are not accurate, the production estimate for that period will not be reliable. A number of factors have to be considered while preparing the sales budget. These factors include the actual sales of the previous period, the order levels that were obtained in advance and the information resulting from the research.

Mama Moca Sale’s budget has been prepared below from the assumed financial data.

Quantity Revenue Units $

Energy Juice 450,000 14,400,000

Sports Juice 400,000 17.600,000

Total 32,000,000

The projected sales for the financial year ending 30th June 2016 is $32,000,000

b) Production Budget (units)

Production Budget summarizes the requirements of production for the planned period. Its preparation depends largely on the sales budget obtained. It is crucial to budget for the inventory to ensure that proper levels of stock are maintained. This will ensure that the stocks levels are not underutilized consequently reducing the costs of holding stocks. It also ensures that there are no material shortages during the production process. This budget is expressed in terms of units of each type of product. There are various issues to consider when preparing the production budget (Gabillon and Mohammad 56). These factors include the availability of production capacity, forecasted sales and the level of finished goods. The process of the preparing the production budget will be overseen by the budget committee of Mama Moca. This committee will also determine the current production capacity and deliberate on the possible ways of expanding it. In addition, it considers how production capacity is linked to the available stock levels. The production budget below gives detailed information about the company production capacity.

Energy Juice (Units) Sports Juice (Units)

Required ending stock 40,000 120,000

Add: Sales during the year 450,000 400,000

Total requirement 490,000 520,000

Less: Estimated opening Stock (90,000) (20,000)

Production requirement (units) 400,000 500,000

The above budget shows the budgeted production unit of each product for Mama Moca Company. These are the units required for the production process in the financial year ending 30 June 2016

Plant Utilization Budget

The plant utilization budget for Mama Moca can also be prepared. There are two processes for manufacturing the two juices. The two processes are the machine hours and the processing of the products. The calculation is as follows

Plant utilization budget

Machinery Processing

Energy Juice 1000 hrs 800 hrs

Sports Juice 2,000hrs 1,500hrs

Total Plant utilization 3,000 hrs 2,300hrs

4000 x 15/60 = 1000 4000 x 12/60 = 800

5000 x 24/60 = 2000 500 x 18/60 = 1,500

Inventory budget

The inventory budget helps the company estimate or calculates the required opening and closing inventory. It guides the company in establishing the value of each stock as shown below for this company.

Inventory Budget

Opening stock

Energy Juice 90,000 x 20 1,800,000

Sports Juice 20,000 x 28 560,000

Closing inventory

Energy Juice Sports Juice

Closing stock units 40,000 120,000

Unit cost $ 19.6 28.15

Stock units 784,000 3,378,000

The estimated value of the closing stock used for manufacturing the Energy drink is $784,000 while that of Sports drink has been estimated at $3,378,000.

c) Direct materials usage budget

Direct material budget provides an estimate of the quantities and costs of all the raw materials and the requirements for the output demand for the production budget (Van Vaerenbergh & Steven 188) It is recommended that an adequate amount of raw material should be availed to meet the demand for the production process. Direct materials budget is expressed in terms of units. The Company’s direct material usage budget is computed below.

Units of Units of X req. Material X Units of Y req. Material Y

Product per unit (total units) per unit (total units)

Product Product

Energy Juice 400,000 1.50 600,000 2 800,000

Sports Juice 500,000 0.50 250,000 4 2,000,000

Total units 850,000 2,800,000

d) Direct materials Purchases Budget

Direct material purchase budget is prepared to ensure that the materials fall within the planned stock levels of materials once the usage and material stock are considered (Branke &Jawad 118). The total purchase budget shall be equal to the summation of the total of the each of the material. In the case below, the total material budget is equivalent to the cost of material X and material Y.

Material X Units Material Y Units

Required ending inventory 60,000 100,000

Add: Current usage 850,000 2,800,000

Total material requirement 910,000 2,900,000

Less: Opening Stock (110,000) (60,000)

Materials to be purchased (Units) 800,000 2,300,000

Cost per unit $1.50 $1.00

Material purchase budget ($) 1,200,000 2,300,000

Total Materials purchases Budget $. 3,500,000

The material purchase budget for Energy drink is estimated at $1,200,000 while that of Sports drink is $2,300,000. The total materials purchases budget of the company has been estimated at $ 3,500,000.

e) Direct labor budget

This budget is important since it provides the forecast for the number of labor hours. This assists the company to know whether there is an adequate amount of labor time to meet the needs of the production. It depends on the production estimate budget. The direct labor budget will provide information on whether the company needs an additional labor force (Garrison & Peter 237). The company’s direct labor cost budget has been prepared as below from the assumed data above.

Product Units Hrs req. per unit Total No. of hours

Energy Juice 400,000 6 2,400,000

Sports Juice 500,000 9 4,500,000

Total No. of hrs 6,900,000

Standard wage per hr $ 1.60

Direct labor cost budget $ 11,040,000

The cost of labor is simply obtained by multiplying the direct labor hours by the wage rate. The production of the two drinks will cost the company an estimated amount $ 11,040,000 in labor cost.

f) Factory Overhead Budget

The factory overhead budget provides the forecast of fixed, variable and semi variable overheads incurred in the production process in the defined period. Moreover, it provides a summary of all costs excluding the direct costs (Branke & Jawad 126)

Energy drinks Sports drinks

Budgeted overheads (Excluding depreciation) 39,500 18,650

Add: depreciation

Existing plant 5,000 4,350

New Plant (apportioned per period) 500

Total budgeted overheads 45,000 23,000

Absorption base (machine hrs) 3,000 2,300

Overhead absorption rate $15/machine hours $10/machine hours

100,000 x 5% =5000 87000 x 5%=4,350

45000 /3000=15 23,000/2,300=10

The above calculations estimate the overhead absorption rate for the two juices for the two process of production.

Cost of goods sold budget

This budget is prepared to give an indication of the company’s expected costs and the amount of goods to be sold in the period. These figure are used to prepare the budgeted profit and loss account

Cost of goods sold budget

Energy Juice $ Sports Juice $

Opening Stock 1,800,000 560,000

Add: Production 7,840,000 14,075,000

Less: Closing stock 784,000 3,378,000

Value of goods sold 8,856,000 1,125,700

For the energy drink, the value for the goods sold amounts to $ 8,856,000 while that of the Sports drink is estimated at $ 1,125,700 for the current accounting period.

Workings

Opening stock

Energy Juice 90,000 x 20 1,800,000

Sports Juice 20,000 x 28 560,000

Closing inventory

Energy Juice Sports Juice

Closing stock units 40,000 120,000

Unit cost 19.6 28.15

Stock units 784,000 3,378,000

g) Selling and Administration Costs Budget

This budget can be split into two that is, the selling and distribution budget and the administration budget. Selling and Distribution Budget provides the forecast of the cost incurred in the selling and distribution process. This budget is concerned with the sales budget in the sense that it is based on the volume of projected sales budget for the given period. The budget includes expenses such as salaries and commission of the sales personnel and advertising cost. The administration Budget forecasts the costs incurred in the administration of the company. Each department or cost centre should prepare its budget (Garrison & Peter 321).The administration costs range from accounting costs, clerical costs and general administration costs. This budget is usually incremental in that the figures for the previous period are relevant in the subsequent period. The selling and administration budget for Mama Maco Soft Drinks Company is shown below.

Selling and distribution cost budget

Sales commission and salaries $1,430,000

Traveling distribution $350,000

Office salaries $1,010,000

General administration expenses $250,000

3,040,000

Mama Moca Soft Drinks Company

Budgeted Profit and Loss Accoiunt

For the Year Ending 30 June 2016

Energy Juice ($) Sports Juice ($) Total ($)

Sales 14,400,000 17,600,000 32,000,000

Cost of goods sold 8,856,000 11,257,000 20,113,000

Gross profit 5,544,000 6,343,000 11,887,000

Less: Selling and administration costs (3,040,000)

Net profit 8,847,000

From the profit and loss account, the company has a favorable profit of $ 8,847,000 that is favorable to the company if it is Achievable. The Company should always strive to achieve the projected budgets and avoid greater deviations from norms

h) Master Budget

The combination of the Income Statement budgets, Cash Budget and Statement of Financial Position make up a master budget since they are fixed. Fixed budget usually focus on a single level of activity. Usually the company must compare the budgeted costs at the original level of activity with the actual results.

• Income Statement

Mama Maco Soft Drinks Company Income Statement (Figures from Coca-Cola Company.Figures are in $)

2015

2014

2013

Sales

44,294,000  

45,998,000  

46,854,000  

Cost of sales

17,482,000  

17,889,000  

18,421,000  

Gross Profit

26,812,000  

28,109,000  

28,433,000  

Expenses

Development and research costs

-  

-  

-  

General administration costs

18,084,000  

18,401,000  

18,205,000  

Other non-recurring costs

-  

-  

-  

Others

-  

-  

-  

-  

-  

-  

Operating profit

8,728,000  

9,708,000  

10,228,000  

Other incomes

Income from activities

1,244,000  

(669,000)

1,110,000  

Profit before tax

10,461,000  

9,808,000  

11,940,000  

Finance cost

856,000  

483,000  

463,000  

Income

9,605,000  

9,325,000  

11,477,000  

Taxation

2,239,000  

2,201,000  

2,851,000  

Interest to associate

(15,000)

(26,000)

(42,000)

Net profit

7,840,000  

7,867,000  

9,186,000  

Total profit

7,351,000  

7,098,000  

8,584,000  

Preference stock

-  

-  

-  

Income applicable to shareholders

7,351,000  

7,098,000  

8,584,000  

From the income statement above (figures from Coca Cola Company), there has been an increase in profit from year 2014 to year 2015. Going by this performance, Mama Maco Soft drinks Company can predict that its profit for year ending June 2016 is going to increase. Also the expenses slightly drops in year 2015, and by 2016, the expenses could drop further therefore creating chances of increasing net profit.

II) Balance Sheet (Figures obtained from Coca-Cola Company) Mama Moca Balance Sheet (Figures obtained from Coca Cola Company. Figures are in $)

2015

2014

2013

Short term assets

Cash and bank

7,309,000  

8,958,000  

10,414,000  

Investment(Short term)

12,591,000  

12,717,000  

9,854,000  

Accounts Receivable)

3,941,000  

4,466,000  

4,873,000  

Stock

2,902,000  

3,100,000  

3,277,000  

Additional short term assets

6,652,000  

3,745,000  

2,886,000  

Total short term assets

33,395,000  

32,986,000  

31,304,000  

Investment(Long term)

15,788,000  

13,625,000  

11,512,000  

Plant and Equipment

12,571,000  

14,633,000  

14,967,000  

Goodwill

11,289,000  

12,100,000  

12,312,000  

Other intangible assets

12,843,000  

14,272,000  

15,299,000  

Additional assets

4,207,000  

4,407,000  

4,661,000  

-  

-  

-  

Cummulative assets

90,093,000  

92,023,000  

90,055,000  

Short term liabilities

Creditors

9,991,000  

9,634,000  

9,886,000  

Debt(short term)

15,806,000  

22,682,000  

17,925,000  

Additional short term liabilities

1,133,000  

58,000  

-  

Total short term liabilities

26,930,000  

32,374,000  

27,811,000  

Debt(Long term Liability)

28,407,000  

19,063,000  

19,154,000  

Additional long term liabilities

4,301,000  

4,389,000  

3,498,000  

Charges for long term liabilities

4,691,000  

5,636,000  

6,152,000  

Interest(Minority shareholders)

210,000  

241,000  

267,000  

Negative Goodwill

-  

-  

-  

Cumulative liabilities

64,539,000  

61,703,000  

56,882,000  

Equity

Options and warrants

-  

-  

-  

Preference stock(redeemed)

-  

-  

-  

Stock(Preference)

-  

-  

-  

Ordinary common stock

1,760,000  

1,760,000  

1,760,000  

Earnings retained

65,018,000  

63,408,000  

61,660,000  

Stock(Treasury)

(45,066,000)

(42,225,000)

(39,091,000)

Capital

14,016,000  

13,154,000  

12,276,000  

Additional common stock

(10,174,000)

(5,777,000)

(3,432,000)

Shareholders stock

25,554,000  

30,320,000  

33,173,000  

Total intangible assets

1,422,000  

3,948,000  

5,562,000  

Using the figures obtained from Coca Cola Company, we can estimate the performance of Mama Maco Company for the year 2016. Total of intangible assets has decreased from year 2013 to 2015.According to this performance, the year 2016 is likely to record a lower figure than 2015 Therefore 2016 will have less of intangible assets. Total Liabilities increased from year 2013 to year 2015.It is likely that for 2016 there will be more of liabilities going by the trend. The reflection on the performance of Coca Cola Company shows that Mama Maco Company will have more of liabilities in 2016

III) Cash Budget

The cash budget is prepared to indicate the cash inflows and outflows prepared on a continuous basis. The preparation of this budget takes less time, money and is less strenuous. The budget is always relevant and up to date since it is prepared on a continuous basis (Gabillon and Alessandro 334). Cash budgets takes into account the various changes in the economy and other factors of the company. Cash budget can therefore be said to be more realistic. In addition, the budget is readily available all the time showing the financial performances for various periods. the Quarterly Cash Budget For Mama Maco Company is shown below.

Mama Maco Cash Budget (Quarterly)

1 2 3

$(000) $ (000) $(000)

Beginning Cash 15,000 21,000 19,000

Expected cash receipts

Cash sales 11,000 12,000 9,000

Recevaibles 19,500 20,500 23,000

Total cash 45,500 53,500 51,000

Expected cash payment

Raw materials 1,200 900 700

Payroll 500 230 270

Purchase of equipment 20,000 20,000 20,000

Commission 630 400 400

Travelling expenses 1,300 1,200 1,000

General expenses 800 7,000 1,000

Total cash expenses 23,930 23,430 23,370

Ending cash balance 21,570 30,070 27,630

The ending cash balance will be carried in the next period. In the above cash budget, the beginning cash is obtained from the balance sheet. The following cash are an estimate. For the expenses, their estimate that is provided in the financial information has been apportioned for the three quarters to give the expected figure for each quarter.

Work cited

Kaplan, Robert S., and Anthony A. Atkinson. Advanced management accounting. PHI Learning, 2015.

Bhimani, Alnoor, Srikant M. Datar, and George Foster. Management and cost accounting. Harlow: Financial Times/Prentice Hall, 2002.

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Garrison, Ray H., Eric W. Noreen, and Peter C. Brewer. Managerial accounting. New York: McGraw-Hill/Irwin, 2003.

Gabillon, Victor, Mohammad Ghavamzadeh, and Alessandro Lazaric. "Best arm identification: A unified approach to fixed budget and fixed confidence." Advances in Neural Information Processing Systems. 2012.

Dekel, Ofer, Shai Shalev-Shwartz, and Yoram Singer. "The Forgetron: A kernel-based perceptron on a fixed budget." Advances in neural information processing systems. 2005.

Van Vaerenbergh, Steven, et al. "Fixed-budget kernel recursive least-squares." Acoustics Speech and Signal Processing (ICASSP), 2010 IEEE International Conference on. IEEE, 2010.

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Garrison, Ray H., Eric W. Noreen, and Peter. "The treadmill effect in a fixed budget system." Journal of health economics 25.1 2006: 146-169.