TO THE STUDENT
Fantastic, Inc. is a case study which allows you to incorporate numerous financial and managerial accounting concepts into a single business setting. You will take the position of the company controller who will prepare the budget for the year ended December 31, 2006, using the actual data from 2001 through 2005 and information given to you by various departments. You will prepare a report for the president of the company describing the strengths and weakness of the corporation as well as to provide suggestions for the future. In short, you will be responsible for the planning and control procedures for the company from an accounting standpoint.
In order to focus on important accounting concepts, certain simplifications are necessary to make this case manageable. The student should keep the following simplifications in mind while working on this case:
Work in process inventories will be ignored.
Financial and IRS tax will be the same.
Some projections for 2006 will be given.
Standards used for the 2006 budget will be the reasonably obtainable standards. No hourly worker will work overtime.
All price changes will occur on January 1st and will remain in effect for the entire year. The actual 2005 information is available while preparing the 2006 budget. All debt transactions will occur either on January 1st or December 31st. There are no bad debts.
The student should also keep in mind that the budgeting process is not an exact science; therefore, approximate figures provide adequate information for the decision maker. Figures should be rounded to the whole dollar throughout the budgeting process and the control applications. Since it is not possible to have a partial machine or person, certain figures will always have to be rounded up.
GENERAL COMPANY INFORMATION
Fantastic, Inc. is a paint manufacturing company that produces two qualities of paint, Super and Stupendous. The company was established eight years ago and began with only one type of paint. Sales of the original product have been rather stable in the past 5 years. In 2003, a second, higher quality paint was introduced, and sales of this product have increased each year due to reasonably effective sales efforts. The president is currently concerned about the potential inefficient use of capacity and the effect that this has on profits.
All raw materials are currently purchased from outside suppliers and no difficulty is foreseen in obtaining the necessary inventories for production in the future. All inventories are currently considered to be at the lowest safe levels possible given the delivery, production, and sales cycles.
Given the current production capacity, the company will have room for expansion for the next few years without building new facilities or expanding the current building. The company will also have the option of starting a second production shift to support future sales if necessary; therefore, increased production will be obtainable through purchasing additional equipment or increasing production hours. At this time, however, the president is not considering a second shift due the additional $1.00 per hour shift differential that would be necessary to pay the hourly second shift workers.
The company had a cash flow problem in 2005 but has always managed to make all payments on a timely basis. The president wishes to increase the amount of cash on hand in the future so that the company will have a greater margin of safety. To date, the company has not had difficulty obtaining financing for expansion and does not foresee any future difficulties in obtaining necessary funding for legitimate purposes.
The company has paid a consistently good dividend to the stockholders. The president would like to continue this policy in the future.
Fantastic, Inc. has two separate production departments - one for each of the paint types. Since...