The following case study is adapted from:
Samuels, J. A., & Sawers, K. M. (2017). “SRS Educational Supply Company: An instructional budget
project.” Issues in Accounting Education: November 2017, Vol. 32, No. 4, pp. 51-59.
Summative Case Study: SRS Educational Supply Company
Part 1 – Job Order Costing / Process Costing
SRS Educational Supply Company provides educational materials and supplies to educational
institutions. The company provides educational supply needs that includes workbooks, classroom
visual aids, instructor support materials, art supplies, lab supplies, and administrative office
supplies. Since SRS Educational Supply Company consistently produces the same service to its
customers, the company uses job order costing. The company’s processing units are assigned
costs. For example, the company will determine all of the costs associated with the
sales/marketing in a certain period and divide the costs by the number of customers that the
company currently has. The cost per customer then becomes a part of the inputs and its used to
determine the cost of sales/marketing and the cost of each customer. Service industries often do
not match directly the normal costing systems, but the same concepts can still be used to
determine the costs per customer.
The SRS Educational Press is wholly owned by the Company. It performs the bulk of its work
for the print materials that are sold to the customers. The press also publishes and maintains a
stock of books for general sale. The press uses normal costing to cost each job. Its job-costing
system has two direct-cost categories (direct materials and direct manufacturing labor) and one
indirect-cost pool (manufacturing overhead, allocated on the basis of direct manufacturing labor
costs).
The following data (in thousands) pertain to 2017:
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Direct materials and supplies purchased on credit: $800
Direct materials used: $710
Indirect materials issued to various production departments: $100
Direct manufacturing labor: $1,300
Indirect manufacturing labor incurred by various production departments: $900
Depreciation on building and manufacturing equipment: $400
Miscellaneous manufacturing overhead incurred by various production departments:
$550
o (Ordinarily, this would be detailed as repairs, photocopying, utilities, etc.)
Manufacturing overhead allocated at 160% of direct manufacturing labor costs: ?
Cost of goods manufactured: $4,120
Revenues: $8,000
Cost of goods sold (before adjustment for under- or overallocated manufacturing
overhead): $4,020
Inventories, December 31, 2016 (not 2017):
o Materials control: $100
o Work-in-process control: $60
o Finished goods control: $500
Submission Requirements for Final Project I:
As the accountant, the company has asked you to perform the following tasks:
1. Prepare an overview diagram of the job-costing system at the SRS Educational Press.
2. Prepare journal entries to summarize the 2017 transactions. As your final entry, dispose
of the year-end under- or overallocated manufacturing overhead as a write-off to cost of
goods sold. Number your entries. Explanations for each entry may be omitted.
3. Show posted T-accounts for all inventories, Cost of Goods Sold, Manufacturing
Overhead Control, and Manufacturing Overhead Allocated.
4. How did the SRS Educational Press perform in 2017? Should the company continue to
have in-house press production?
You will submit your answers/explanations for Final Project I in a memo-style format to the
company’s leadership team. Use Microsoft Word and Excel.
Part 2 – Departmental and Master Budgets
SRS Educational Supply Company provides educational materials and supplies to educational
institutions. The SRS business model is to be a one-stop provider of educational supply needs.
For example, some of their product lines include educational workbooks, classroom visual aids,
instructor support materials, art supplies, lab supplies, and administrative office supplies. While
SRS serves all levels of educational institutions, the majority of their customers are K-12
schools. Sales can vary quite a bit from month-to-month as K-12 educational institutions have
seasonal ordering patterns. Thus, budgeting is vital for planning and cash flow purposes. SRS
has a June 30, fiscal year end.
The company’s balance sheet at June 30 is given below:
Assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Building & equip. (net)
Total assets
$
40,000
340,000
50,000
18,000
860,000
$ 1,308,000
Liabilities & Stockholders’ Equity
Accounts payable
$ 130,000
Capital stock
Retained earnings
Total liabilities &
stockholders’ equity
The company’s income statement for the year ending June 30 is given below:
Sales
Cost of goods sold
$
5,523,000
2,541,000
420,000
758,000
$ 1,308,000
Gross margin
Selling and administrative expenses
Shipping
Other
Salaries and wages
Advertising
Insurance
Depreciation
Total operating expenses
Net operating income
Interest expense
Net income
$ 2,982,000
$
249,000
511,000
1,104,000
685,000
27,000
228,000
2,804,000
178,000
25,000
$ 153,000
$
The following forecasts have been provided by the organization:
Sales forecasts range
July
August
September
October
November
December
$550,000 - $650,000
$900,000 - $980,000
$450,000 - $550,000
$360,000 - $420,000
$350,000 - $480,000
$350,000 - $480,000
Purchasing cost range (July – December)
Cost of goods sold
42% - 50%
Operating expense range (July – December)
Shipping
Other expenses
Salaries and wages
Advertising
Insurance
Depreciation
4% - 5% of sales
8% - 9.5% of sales
$85,000 to $95,000 per month
$45,000 - $58,000 per month
$2,000 - $3,000 per month
$25,000 per month
General Instructions for Master Budget Assignment
The company has four main departments: Sales, Purchasing, Operations and Finance. Based on
the information provided about each department, you will create a master budget for the threemonth period beginning July 1 and ending September 30. You are responsible for creating a
budget for each department that will become the master budget. The master budget must include
the following detailed budgets:
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A sales budget by month and in total
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A schedule of expected cash collections from sales, by month and in total
A merchandise purchase budget in dollars. Show the budget by month and in total
A schedule of expected cash disbursements for merchandise purchases, by month and in
total
A selling and administrative budget, by month and in total
A schedule of expected cash disbursements for selling and administration, by month and
in total
A cash budget. Show the budget by month and in total
A budgeted income statement for the three-month period ending September 30
A budgeted balance sheet as of September 30
For grading purposes, you will be graded on the accuracy of the budgeted numbers. In addition,
you will be graded on the accurate completion of the Budgeted Balance Sheet.
Additional Financial Information for the Sales Department
SRS has a large number of customers that are K-12 educational institutions. As a result, SRS
receives large orders for educational supplies in July and August as schools get ready for the start
of the academic year. This is also when educational budgets are still plentiful. Sales begin to
decline in September and October and then monthly sales stabilize for the rest of the year
(November – June) to a range between $350,000 and $480,000.
Actual sales for June and your forecasted sales for the next four months are as follows:
June (actual) $455,000
July
Likely Range: $550,000 - $650,000 (most likely outcome is $600,000)
August
Likely Range: $900,000 - $980,000 (most likely outcome is $910,000)
September
Likely Range: $450,000 - $550,000 (most likely outcome is $475,000)
October
Likely Range: $360,000 - $420,000 (most likely outcome is $385,000)
As the accountant, your specific responsibility is to prepare a sales budget and a schedule of
expected cash collections from sales by month and in total (July – September).
Additional Financial Information for the Purchasing Department
Most of SRS’ clients expect a one to three-day turn-around time for orders. It typically takes a
week for the company to get merchandise. As a result, the organization states that it has
approximately a week’s worth of inventory on hand at all times. For budgeting purposes, the
organization should plan to purchase enough merchandise during any one month to meet the
sales projections for that month and to end the month with 20% of the next month’s cost of
merchandise sold. The company’s cost of merchandise sold ranges from 42% – 50% of sales
with the most likely outcome for next quarter (July – September) of 45% of sales.
As the accountant, your responsibility is to prepare a merchandise purchase budget (in dollars)
and a schedule of expected cash disbursements for merchandise purchases by month and in total
(July – September).
Additional Financial Information for the Operations Department
The Operations and Logistics Department of SRS Educational Supply Company secures
advertising that supports the sales efforts, coordinate shipping and delivery of merchandise to
clients and provide general administrative support to the other departments.
The organization has estimated the company’s monthly operating expenses for the next quarter
(July – September) as follows:
Variable:
Shipping
Other expenses
4.0% to 5.0% of sales with 5% of sales the most likely outcome
8.0% to 9.5% of sales with 8% of sales the most likely outcome
Fixed:
Salaries and wages
Advertising
Insurance
Depreciation
$85,000 to $95,000 with $85,000 the most likely outcome
$45,000 to $58,000 with $50,000 the most likely outcome
$2,000 to $3,000 with $3,000 the most likely outcome
$25,000
As the accountant, you will prepare a selling and administrative budget and a schedule of
expected cash disbursements by month and in total (July – September).
Additional Financial Information for the Finance Department
The Accounting and Finance Department of SRS Educational Supply Company manages the
accounts receivable and collections, accounts payable, general ledger, and handles the cash
management, borrowing and investing activities of the company.
Historic collection data (cash collections of sales):
● All sales are on credit, with no discounts, and due in 15 days.
● The company has found, however, that only 30% of a month’s sales are collected by
month-end and the remaining 70% is collected in the following month.
Historic payment data:
● Purchases of inventory are paid for as follows: 50% in the month of purchase and the
remaining 50% in the following month.
● Other operating expenses are paid in cash during the month they are incurred.
Other planned outlays of cash:
● During July, purchases of automated equipment totaling $200,000 for cash.
● New computers for the office will be purchased during August for $90,000 cash.
● The company plans on declaring and paying dividends of $50,000 during July.
Cash management policies:
● Desired minimum ending cash balance each month: $35,000
● The company has a line of credit with a bank.
● The company can borrow in increments of $1,000 at the beginning of each month.
● The interest rate on these loans is 1% per month and we assume a simple interest
calculation (not compounded).
● At the end of each month, the company pays the bank as much of the loan as possible
(increments of $1,000), while still retaining at least $35,000 in cash.
● For simplicity, the company pays the bank the interest related to the borrowing for one
month at the beginning of the next month. For example, the interest on any borrowing in
June is paid in July.
As the accountant, you will prepare a cash budget by month and in total (July – September) and a
Budgeted Income Statement for the quarter ending September 30.
* Depreciation on newly acquired assets will be made as an adjustment at the end of the fiscal
year.
Submission Requirements for Final Project II:
At this point, you should have a budget for each of the four departments. You will take the four
departmental budgets and prepare the master budget. You will submit the four budgets and the
master budget in one Excel file.
Then, using the budget project you just completed, you will create a PowerPoint presentation that
will serve as an executive brief to the organization’s leadership team. The presentation should
include an overview of the budgets and the process for creating the budgets, and it should answer
the questions listed below:
1. What were your goals for the master budget you created for July, August, and
September?
2. What process did you use to create each of the four budgets? Did the budgeting process
differ between different departments? Explain.