Master Budget with Supporting Schedules
You have been hired as a new management trainees 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 experience a shortage of cash.
Sine you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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-$10.00 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six month follow (in pairs of earrings):
January (actual) 20,000 Febuary (actual) 26,000
March (actual) 40,000 April (budget) 65,000
May (budget) 100,000 June (budget) 50,000
July (budget) 30,000 August (budget) 28,000
September (budget) 25,000
The concentration of sales before and during May is due to Mother’s Day. 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 $4.00 for a pair of earrings. One-half of a month’s purchases in paid for in the month of the purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20 percent of a month’s sales are collected in the month of sale. An additional 70 percent is collected in the following month, and the remaining 10 percent in the second month following sale. Bad debts have been negligible.
Monthly operation expenses for the company are given below:
Variable:
Sales Commission 4% of sales
Fixed:
Advertising 200,000
Rent 18,000
Salaries 106,000
Utilities 7,000
Insurance 3,000
Depreciation 14,000
Insurance is paid on an annual basis, in November of each year. The company plans to purchase 16,000 in new equipment during May and $40,000 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.
A listing of the company’s ledger accounts as of March 3 is given below:
Assets
Cash 74,000
Accounts receivalbe ($26,000 febuary sales;$320,00 March sale 346,000
Inventory 104,000
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
capital 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, and repayments are made at the end of a month. The annual interest rate is 12 percent. Interest is computed and paid at the end of each quarter on all loans outstanding during the quarter.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets;
1. a. A sales budget, by month and in total
b. A schedule of expected cash collections from sales, by month and in total
c. A merchandise purchaser budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by the month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000
3. A budgeted income statement for the three months period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.