Master Budget

Master Budget

 

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

 

The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

 

       
January (actual) 30,000 June (budget) 45,000
February (actual) 20,000 July (budget) 40,000
March (actual) 50,000 August (budget) 30,000
April (budget) 70,000 September (budget) 20,000
May (budget) 95,000    
 

 

Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

 

Suppliers are paid $3 for a pair of earrings. 40% of a month’s purchases is paid for in the month of purchase; the other 60% is paid for in the following month. All sales are on credit. Only 30% of a month’s sales are collected in the month of sale. An additional 60% is collected in the following month, and the remaining 10% is collected in the second month following sale.

 

 

Monthly operating expenses for the company are given below:

 

 
Variable:      
Sales commissions     5% of sales
Fixed:      
Advertising $ 190,000  
Rent $ 20,000  
Salaries $ 100,000  
Utilities $ 8,000  
Insurance $ 3,000  
Depreciation $ 14,000  
 

 

Insurance is paid on an annual basis, in November of each year.

At the end of June, the company received $4,000 deposit for July sales. Sales in advance is a liability.

 

The company plans to purchase $20,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

 

The company’s balance sheet as of March 31 is given below:

 

     
Assets
Cash $ 74,000
Accounts receivable ($20,000 February sales; $350,000 March sales)   370,000
Inventory   80,000
Prepaid insurance   21,000
Property and equipment (net)   950,000
Total assets $ 1,495,000
Liabilities and Stockholders’ Equity
Accounts payable $ 100,000
Dividends payable   15,000
Common stock   800,000
Retained earnings   580,000
Total liabilities and stockholders’ equity $ 1,495,000
 

 

The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

 

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.

 

 

 

 

 

 

 

 

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: Use the formats/tables below. Any other format is unacceptable. Below each table, show how you arrived at the numbers in your tables. Lack of detailed calculations will reduce your marks even if the answers are correct.

 

 

 

1. a. A sales budget, by month and in total.

 

Sales Budget
  April May June Quarter
Budgeted unit sales        
Selling price per unit        
Total sales        

 

 

 

 

 

b. A schedule of expected cash collections, by month and in total.

 

 

Earrings Unlimited
Schedule of Expected Cash Collections
  April May June Quarter
February sales        
March sales        
April sales        
May sales        
June sales        
Total cash collections        

 

 

 

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

 

Earrings Unlimited
Merchandise Purchases Budget
  April May June Quarter
Budgeted unit sales        
Add: Desired ending merchandise inventory        
Total needs        
Less: Beginning merchandise inventory        
Required purchases        
Unit cost        
Required dollar purchases        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

 

Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
  April May June Quarter
Accounts payable        
April purchases        
May purchases        
June purchases        
Total cash payments        

 

 

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.

 

Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
  April May June Quarter Quarter
Beginning cash balance       $74,000
Add collections from customers       1,996,000
Total cash available       2,070,000
Less cash disbursements:        
Merchandise purchases       820,000
Advertising       600,000
Rent       54,000
Salaries       318,000
Commissions       86,000
Utilities       21,000
Equipment purchases       56,000
Dividends paid       15,000
Total cash disbursements       1,970,000
Excess (deficiency) of cash available over disbursements       100,000
Financing:        
Borrowings       180,000
Repayments       (180,000)
Interest       (5,300)
Total financing       (5,300)
Ending cash balance       $94,700

 

 

· Required 1D

 

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

 

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Sales    
Variable expenses:    
Cost of goods sold    
Commissions    
     
     
Contribution margin    
Fixed expenses:    
Advertising    
Rent    
Salaries    
Utilities    
Insurance    
Depreciation    
     
     
Net operating income    
Interest expense    
Net income    

 

 

 

 

 

 

 

 

 

 

 

 

 

4. A budgeted balance sheet as of June 30.

 

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Cash  
Accounts receivable  
Inventory  
Prepaid insurance  
Property and equipment, net  
   
   
Total assets  
Liabilities and Stockholders’ Equity
Accounts payable  
Dividends payable  
Common stock  
Retained earnings  
   
   
Total liabilities and stockholders’ equity  

 

 

Required 3

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