William E. Mccarthy, Michigan State University

Ventura Vehicles

Case Description

Julie Smith David, Arizona State University

and

William E. McCarthy, Michigan State University

Ventura Vehicles

Company Overview

Ventura Vehicles is a start-up company which began operations in February, 1992. The company’s founder, Carol Wellington, developed a business plan to guide her in running a manufacturing operation that will meet the vehicle needs of young professionals. After market research, she determined there is unmet needs for high quality bicycles, tricycles, and mini-trucks (i.e. very expensive, motorized toys for adults). The firm has hired skilled employees, designed plans for the merchandise, and begun manufacturing and selling products.

Manufacturing operations are being performed in a small, rented factory space located within one mile of the single office rented for the administrative staff. To date, employees have only worked part time in order to start the business slowly. However, within the year Carol plans on having the business running 40 hours a week.

Carol has also hired a systems consultant who has designed a data base that will store the data regarding Ventura Vehicle’s transactions. As part of the system design, the consultant developed Entity-Relationship (E-R) diagrams for each of the business cycles, and a consolidated E-R diagram for the organization. The follow narrative supplements the E-R diagrams found in Figures 1 through Figure 8.

Operations Detail

Inventory Acquisition (Figure 1)

Buyers place orders for necessary raw materials. The goal of the organization is to maintain low inventory levels yet meet customer demands. As such, the buyers have placed initial purchase orders to purchase minimum quantities of raw materials. During this initial process, they identified quality vendors and negotiated prices. Therefore, the system is designed to only allow purchases from an approved vendor list.

When the goods are received, they are counted and entered into the system as received (which increases the quantity on hand for each raw material received). This transaction is regarded as a “purchase,” and initiates a cash disbursement to the vendor. Vendors are paid based on the quantity of good received, and the price of each item from the purchase order. Currently, Ventura Vehicles had not been able to negotiate any purchase discount terms, but hopes to as the volume of business increases.

Fixed Asset Acquisition (Figure 2)

Fixed asset acquisitions must be initiated and approved by Ventura Vehicle supervisors. When a fixed asset is required, it is identified and a fixed asset acquisition (one per fixed asset) is placed with an approved vendor. This acquisition is updated when the good is received. At that time, a cash disbursement is authorized and a check is sent to the vendor.

Depreciation is calculated monthly for each fixed asset. The depreciation method, salvage value, and expected life are recorded for each fixed asset. Each depreciation transaction is identified by the time that the transaction is entered into the system, and includes the dates for the period of the depreciation.

Services Acquisition (Figure 3)

Ventura Vehicles requires numerous services such as factory rent, office rent, advertising, utilities, etc. These services are approved by a supervisor and initiate cash disbursements to the vendor that provided the services. (Note: all approved vendors are stored in one table, regardless of the types of products or services they provide.)

Conversion Cycle (Figure 4)

Ventura Vehicles produces finished goods following detailed instructions: a Bill of Materials lists the raw materials necessary to produce one unit of a finished good, and an Operations List highlights the steps needed to assemble each product. These instructions are stored in the system as Raw Material Issue Types and Job Operation Types. Standard quantities are stored for each. In addition, standard raw materials costs are stored in the raw material table, and standard job operation rates are stored in the Job Operation Type table.

When the production supervisor schedules production for finished goods, a Work In Progress Job is crated. This job tracks the actual material used in the production (R/M Issues) and the actual labor used on the job (Job Operation). These tables record both quantities and costs of the material and labor used for the jobs.

When a job is completed, the WIP Job is updated with an actual completion date and actual quantity produced. At that time, the quantity on hand for the finished good will be updated. If the WIP Job does not have a completion date, the job is still in process and any raw materials issued and job operations performed are counted as Work in Process Inventory.

Revenue Cycle (Figure 5)

Customers place orders with Ventura Vehicles by calling or writing their salesperson. If they are new customers, the credit manager verifies that Ventura Vehicles will extend credit to them. The customer may place an order for multiple finished goods. When the order has been placed, its value is calculated and added to the customer’s current outstanding balance to verify that their credit limit has not been reached. If they are below their credit limit, the order is forwarded to shipping (if not, the salesperson calls the customer to get payment before the order is sent to shipping).

The order is sent to the customer as soon as goods are available (if they are not available, production is notified so they can be produced as quickly as possible). Goods are shipped through a freight carrier based upon the size of the order, and customers are charged for the freight. As such, the total amount of each sale is the extended value for goods shipped plus freight. Because these vehicles are sent to distributors, the state does not require sales tax on the orders.

Customers are required to pay for their purchases within 30 days. At present, Ventura Vehicles has not offered customer discount terms, but they may in the future. Cash receipts are processed by a cashier, and are deposited into the company’s main bank account daily.

Payroll Cycle (Figure 6)

Employees are paid based upon the number of hours worked, so each employee submits a weekly time card. Factory worker’s time cards are compared to their Job Operation records and any discrepancy between the total hours is corrected before their time cards are included in the payroll process. Mangers that will normally receive salaries have agreed to receive partial payroll checks during the initial months since they are not working full time.

Hourly payroll is calculated by multiplying hours worked by wage rate. The result is the amount of the check distributed to each employee. (The employees are working as independent contractors so Ventura Vehicles is not responsible for any taxes or withholding.)

Payroll checks are drawn form an imprest account, i.e. a bank account that is only used for the payroll transactions. Therefore, the total amount for the weekly payroll is transferred from the main account to the imprest account. Employee checks are written from the imprest account. The balance on the imprest account will, by design, always be zero dollars when all of the outstanding checks have cleared the bank.

Transferring funds between accounts is accomplished by writing a check from one account (a cash disbursement), and depositing it (as a cash receipt) into the other account. (Note: this transaction is only modeled on the company-wide E-R diagram in Figure 8).

Finance Cycle (Figure 7)

Investors may lend money to Ventura Vehicles. Each loan is recorded as a separate Long-Term Debt instance and is recorded by a cashier. The funds are deposited into one of the cash accounts. Each debt item is negotiated with a current interest rate and a final due date.

Monthly checks are distributed to the investors (who are entered into the vendor file) and are used to pay for interest and to reduce the principle amount of the loan. (Note: although many cash disbursements will not have an interest/principle component, these attributes are stored in the cash disbursement table.