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Artisans Shirtcraft manufactures and sells hand painted shirts of original design. The company was founded in 2005 by three sisters: Cathy, Linda, and Valerie Montgomery. Shirtcraft started out as a means of financing a hobby: profits from shirt sales were used to pay the cost of supplies. However, word of the sisters' appealing products spread quickty, eventually creating strong and widespread demand for Shirtcraft shirts. By 2009, the year of Shirtcraft's incorporation, the company no longer relied on selling at the occasional crafts fair. it now earned almost all of its revenues through sales to upscale boutiques and department stores. Shirteraft had grown into a legitimate business, but the hobby mentality remained. The company retained a simple approach that had served it well: Buy quality materials when available at a bargain price and turn them into shirts. At this time, the siste had a ready market for whatever they could produce. 2010, the sisters loosely organized Shirtcraft into three functional areas, each based aroun talent at which one of them excelled. Cathy would hunt high and low for the best prices, Linda would ee the painting of the original designs, and Valerie would sell the shirts and deal with the gen- yances of business administration. No separate departmental financial records were kept and for Shirtcraft shirts cont eral anno inued to grow. To finance additional production, the company Dem had become increasingly dependent upon debt. By 2013, bankers had become an integral part o at Shirtcraft. The sisters were devoting themselves primarily to executive most day-to-day operations to hired managers administration, leaving By the end of 2015, more than 75 employees were on the payroll. However, some ofS hirtcraft's estment in craft would be foolish. In light of the scrutiny under which their industry pres tors began to get cold feet. Given the sluggish economy, some felt that continued inv credi company such as Shirt ently operated, the bankers wondered about the prudence of increased and continued commitment to a ompany that was virtually devoid of financial controls. The bankers were particularly concerme craft's continuing reliance on the bargain purchase strategy. They thought the company uld chased lost sales due to underpurchasing. If Shirtcraft wanted the banks to commit Shirt inevitably vacillate between periods of incurring excessive inventory holding co materials and periods of sts for overpur to a rapidly growing credit line, the sisters would have to demonstrate their willin long term tablish organizational structures and controls such as those found in larger companies Plan In April 2016, a plan was established. Three functional areas were organized: purchasing, produ tion, and sales and administration. Purchasing and production would be cost centers, each monitored by comparisons of actual costs to budgeted costs. Compensation for key personnel of the c uld be tied to the results of this comparison. The sisters would officially be employees of the sales d administrative department, which would hold final responsibility for all executive and corporate ions. Key employees of sales and administration would be judged and compensated based on an overall firm profitability For the 12 months beginning in September 2016, the sisters expected to sell 192.000 shirts at verage price of $23 per shirt. Expenses for the sales and administrative department are estimate 750,000 for the year. Interest expenses for the period are estimated at $550,000. Incentive pay at various departments is expected to amount to $75,000 per functional area. Under the plan, a ie es are charged to the individual department that incurs them, except for interest expenses, and incentive pay. These are treated as corporate profit and loss items. Taxes are expected to ens taxes, be 40 percent of corporate pretax income er considerable negotiations between the sisters and the purchasing manager,I Aft t was agreed oduc ar such that direct materials costs should tion de average about $7 per shirt if purchases are made based on pr partment demand. Although this approach results in higher direct materials costs than ab purchase strategy, the demand-based purchase strategy is cheaper when opportunity costs in s inventory h and other overhead for the purchasing olding costs and contribution margin forgone due to lost sales are conside red. Salaries departmen t are expected to amount to $150,000 for the year cussions with the production manager led to estimates that production will use Dis fixed o head costing $240,000. Pro of 1/2 hour of direct labor, at a cost of $6 per hour, is needed for each shirt duction's variable overhead consists wholly of direct labor. An average Previously, financial records were kept only on a corporate level. Under the new plan, cost records, both budgeted and actual, will be kept for each department. Of Shirtcraft's sales, 40 per cent are expected to occur during September, October, November, and December. Sales are divide equally between months within each group of months. All costs that do not vary with shirt produc tion are divided equally throughout the year. All monthly purchasing and production are based o that month's orders and are assumed to be completely sold during that month. Only negligible inver tory is held Required a. Considering only costs, prepare budgeted annual and monthly financial statements for pu chasing and production. (Assume that production is not responsible for any costs already assigned to purchasing.) Prepare an annual budgeted income statement for Artisans Shir craft for the period September 2016 through August 2017. Annual costs for income state ment purposes consist of the following Cost of goods sold Administrative expenses Interest axe nd overhead for purchasing and production are treated as product c assigned i individual units. Therefore, these costs should be included in Shirtcraft's annual inte statement under cost of goods sold arl b. In gener , consider the changes in Shirtcraft due to growth. How is the compa differeit frci an organizational standpoint? What role do budgeting and cost centers n atte t the challenges presented by this growth? to mee Artisans Shirtcraft manufactures and sells hand painted shirts of original design. The company was founded in 2005 by three sisters: Cathy, Linda, and Valerie Montgomery. Shirtcraft started out as a means of financing a hobby: profits from shirt sales were used to pay the cost of supplies. However, word of the sisters' appealing products spread quickty, eventually creating strong and widespread demand for Shirtcraft shirts. By 2009, the year of Shirtcraft's incorporation, the company no longer relied on selling at the occasional crafts fair. it now earned almost all of its revenues through sales to upscale boutiques and department stores. Shirteraft had grown into a legitimate business, but the hobby mentality remained. The company retained a simple approach that had served it well: Buy quality materials when available at a bargain price and turn them into shirts. At this time, the siste had a ready market for whatever they could produce. 2010, the sisters loosely organized Shirtcraft into three functional areas, each based aroun talent at which one of them excelled. Cathy would hunt high and low for the best prices, Linda would ee the painting of the original designs, and Valerie would sell the shirts and deal with the gen- yances of business administration. No separate departmental financial records were kept and for Shirtcraft shirts cont eral anno inued to grow. To finance additional production, the company Dem had become increasingly dependent upon debt. By 2013, bankers had become an integral part o at Shirtcraft. The sisters were devoting themselves primarily to executive most day-to-day operations to hired managers administration, leaving By the end of 2015, more than 75 employees were on the payroll. However, some ofS hirtcraft's estment in craft would be foolish. In light of the scrutiny under which their industry pres tors began to get cold feet. Given the sluggish economy, some felt that continued inv credi company such as Shirt ently operated, the bankers wondered about the prudence of increased and continued commitment to a ompany that was virtually devoid of financial controls. The bankers were particularly concerme craft's continuing reliance on the bargain purchase strategy. They thought the company uld chased lost sales due to underpurchasing. If Shirtcraft wanted the banks to commit Shirt inevitably vacillate between periods of incurring excessive inventory holding co materials and periods of sts for overpur to a rapidly growing credit line, the sisters would have to demonstrate their willin long term tablish organizational structures and controls such as those found in larger companies Plan In April 2016, a plan was established. Three functional areas were organized: purchasing, produ tion, and sales and administration. Purchasing and production would be cost centers, each monitored by comparisons of actual costs to budgeted costs. Compensation for key personnel of the c uld be tied to the results of this comparison. The sisters would officially be employees of the sales d administrative department, which would hold final responsibility for all executive and corporate ions. Key employees of sales and administration would be judged and compensated based on an overall firm profitability For the 12 months beginning in September 2016, the sisters expected to sell 192.000 shirts at verage price of $23 per shirt. Expenses for the sales and administrative department are estimate 750,000 for the year. Interest expenses for the period are estimated at $550,000. Incentive pay at various departments is expected to amount to $75,000 per functional area. Under the plan, a ie es are charged to the individual department that incurs them, except for interest expenses, and incentive pay. These are treated as corporate profit and loss items. Taxes are expected to ens taxes, be 40 percent of corporate pretax income er considerable negotiations between the sisters and the purchasing manager,I Aft t was agreed oduc ar such that direct materials costs should tion de average about $7 per shirt if purchases are made based on pr partment demand. Although this approach results in higher direct materials costs than ab purchase strategy, the demand-based purchase strategy is cheaper when opportunity costs in s inventory h and other overhead for the purchasing olding costs and contribution margin forgone due to lost sales are conside red. Salaries departmen t are expected to amount to $150,000 for the year cussions with the production manager led to estimates that production will use Dis fixed o head costing $240,000. Pro of 1/2 hour of direct labor, at a cost of $6 per hour, is needed for each shirt duction's variable overhead consists wholly of direct labor. An average Previously, financial records were kept only on a corporate level. Under the new plan, cost records, both budgeted and actual, will be kept for each department. Of Shirtcraft's sales, 40 per cent are expected to occur during September, October, November, and December. Sales are divide equally between months within each group of months. All costs that do not vary with shirt produc tion are divided equally throughout the year. All monthly purchasing and production are based o that month's orders and are assumed to be completely sold during that month. Only negligible inver tory is held Required a. Considering only costs, prepare budgeted annual and monthly financial statements for pu chasing and production. (Assume that production is not responsible for any costs already assigned to purchasing.) Prepare an annual budgeted income statement for Artisans Shir craft for the period September 2016 through August 2017. Annual costs for income state ment purposes consist of the following Cost of goods sold Administrative expenses Interest axe nd overhead for purchasing and production are treated as product c assigned i individual units. Therefore, these costs should be included in Shirtcraft's annual inte statement under cost of goods sold arl b. In gener , consider the changes in Shirtcraft due to growth. How is the compa differeit frci an organizational standpoint? What role do budgeting and cost centers n atte t the challenges presented by this growth? to mee

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