FAM 5400 Module 4 Midterm Project: Statements, Controls and a Budget for a Growing Manufacturer Example

Growing Without Running Dry: A Midterm Analysis and 2026 Budget Plan for Millville Scientific Glass

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Master of Science in Management, Thomas Edison State University

FAM-5400: Finance and Accounting for Managers

Mentor Name

Month Day, Year

Growing Without Running Dry: A Midterm Analysis and 2026 Budget Plan for Millville Scientific Glass

Introduction

Millville Scientific Glass grew sales 13 percent in 2025, earned $2.2 million and still ended the year with less cash and a new bank line. It also learned, through a reconciliation a new controller ran, that a supervisor had been pocketing scrap glass sales. Both problems point to the same need: a planning and control system that connects the financial statements to the decisions of individual managers. This paper reviews what the statements and reporting judgments show, considers what the fraud reveals about control, and proposes a budget and responsibility accounting structure for 2026.

What the Statements Show

The 2025 statements, analyzed in the first assignment, describe a profitable company whose working capital is absorbing its cash. Collections slowed to 66 days and stock grew to roughly 113 days of cost, tying up $2.7 million between them. Capital spending of $2.15 million exceeded operating cash flow of $1.26 million. Keown et al. (2020) describe this as the classic pattern of a firm whose growth outpaces its internal financing: the profit is real, but it is tied up in customers' unpaid invoices and in glass on shelves.

The reporting judgments from the second assignment sharpen the picture. Recognizing revenue on the custom distillation system over time added about $352,000 to 2025 revenue that will not be collected until 2026, and writing down $260,000 of discontinued stock reduced reported profit. Both choices make the statements more faithful, and both remind management that a portion of 2025's reported assets will not turn into cash at full value.

What the Fraud Reveals

The scrap fraud was small, about $25,000 over nearly three years, but it exposed a control environment built on trust rather than design. Internal control, Libby et al. (2020) explain, starts with knowing which assets are at risk, and nobody had treated scrap glass as an asset worth controlling. The same pattern could exist elsewhere. Custom shop materials, returned goods and overtime claims are all processes where one person may control both the activity and the record. A budget system helps here too, because a variance report that compares expected and actual results by manager is itself a form of monitoring.

The response should be proportionate to a small manufacturer. Segregating every duty is impossible with a lean office staff, so the plan relies on compensating controls: scrap is weighed and logged by the shift supervisor, sold only to an approved dealer who pays the company by check or transfer, and reconciled monthly by the controller against the production records. The owners will review the reconciliation each quarter. These steps cost little, and they turn scrap from an untracked byproduct into an asset with a paper trail.

A Budget Built Around Cash

Most budgets begin with sales and end with profit. For Millville in 2026, the binding constraint is cash, so the budget should begin with a cash target: ending 2026 with at least $1.5 million in cash and the bank line fully repaid. Working backward, the company must generate enough operating cash to cover planned capital spending of $1.6 million, $900,000 of term debt repayment, $1.8 million of line repayment and dividends.

The master budget would proceed in the usual sequence (Keown et al., 2020): a sales budget by product line and customer group; a production budget that sets output to meet sales and the inventory target; materials, labor and overhead budgets; a selling and administrative budget; and finally the cash budget and budgeted statements. Three assumptions carry the plan:

At 6 percent growth, sales of about $40.7 million would produce net income near $2.4 million at 2025 margins. Reducing receivables to 55 days and inventory to 90 days would release roughly $2 million of cash relative to 2025 levels, enough, with operating profit and depreciation, to meet the target. The plan deliberately slows growth for one year so the company can rebuild its cash position; Hansen et al. (2003) observe that budgets are most useful when they are used to make trade-offs explicit rather than to project the past forward.

The cash budget should be monthly, not annual, because Millville's cash needs follow its customers' purchasing cycles. Laboratories and universities order heavily before the academic year and at fiscal year-end, so receivables peak in late summer and again in the spring. A monthly cash budget shows whether the bank line will be needed during those peaks even if the year as a whole ends with surplus cash, and it gives the controller a month-by-month standard against which to track collections.

Responsibility Accounting

A budget only changes behavior if each figure belongs to someone. Responsibility accounting assigns each result to the manager who controls it.

Two choices deserve comment. Receivables are assigned to the sales manager, because the terms granted and the follow-up on overdue accounts are sales decisions; in 2025 no one owned them. And scrap rate is assigned to the plant manager, with scrap revenue reported separately by accounting, so the person who generates scrap does not also record its sale.

The custom shop raises a transfer pricing question. It uses glass blanks from the main plant, and the price at which those blanks are charged to the shop determines how much profit each center reports. Charging them at standard cost keeps the plant manager accountable for efficiency while letting the custom shop lead be judged on the contracts he negotiates; charging at market price would reward the plant for selling internally whatever its efficiency. The plan uses standard cost plus a small margin, set annually and reviewed by the general manager.

Measuring Performance

Monthly performance reports should compare actual results with a flexible budget, the budget adjusted to actual volume, so a manager is not blamed for costs that rose only because the plant produced more. A static budget would show the plant manager over budget whenever sales exceed plan, which tells nothing about efficiency. Each report would show the variance, its cause and the manager's response.

Behavioral research cautions that budgets can also encourage the wrong behavior. Managers who are judged solely on meeting a budget may pad their estimates or cut necessary spending at year end. Hansen et al. (2003) review alternatives, including rolling forecasts and relative targets, that reduce these incentives. For Millville, a practical safeguard is to evaluate managers on a few measures beyond the budget, such as on-time delivery and customer complaints, so that hitting a cost target by delaying maintenance is visible.

Conclusion

The first four modules describe a single system. The statements show the company's condition, the reporting concepts make the statements trustworthy, internal control protects the assets the statements describe and the budget connects all three to the daily decisions of identifiable managers. For Millville, the 2026 plan trades a year of slower growth for a restored cash position, assigns each driver of that cash to a manager who can control it and uses flexible budget reports to monitor results, closing the kind of gap the scrap fraud slipped through.

The plan also prepares the company for the next stage of the course. Once working capital is under control, the same budgeting discipline will support decisions about borrowing, valuing the business and choosing among capital projects, which the later modules address.

References

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

Keown, A. J., Martin, J. D., & Petty, J. W. (2020). Foundations of finance (10th ed.). Pearson.

Libby, R., Libby, P. A., & Hodge, F. (2020). Financial accounting (10th ed.). McGraw-Hill Education.