Question

Case 8-33 (Algo) Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

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—$15 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)	22,200	June (budget)	52,200
February (actual)	28,200	July (budget)	32,200
March (actual)	42,200	August (budget)	30,200
April (budget)	67,200	September (budget)	27,200
May (budget)	102,200

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 $5.10 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	310,000
Rent	$	29,000
Salaries	$	128,000
Utilities	$	12,500
Insurance	$	4,100
Depreciation	$	25,000

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

The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 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	$	85,000
Accounts receivable ($42,300 February sales; $506,400 March sales)		548,700
Inventory		137,088
Prepaid insurance		26,500
Property and equipment (net)		1,060,000
Total assets	$	1,857,288
Liabilities and Stockholders’ Equity
Accounts payable	$	111,000
Dividends payable		23,250
Common stock		1,020,000
Retained earnings		703,038
Total liabilities and stockholders’ equity	$	1,857,288

The company maintains a minimum cash balance of $61,000. 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 $61,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

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

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

    c. A merchandise purchases 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 month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $61,000.

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

4. A budgeted balance sheet as of June 30.

Earrings Unlimited Cash Budget For the Three Months Ending June 30 April $ 85,000 May June Quarter Beginning cash balance Add collections from customers Total cash available 85,000 0 0 Less cash disbursements: Merchandise purchases Advertising Rent Salaries Commissions Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance 0 0 0 0 85,000 0 0 $ 85,000 $ $ 0 $

Answer 1

Required Budgets are as prepared below:

1a
Earings unlimited
Sales Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Budgeted Unit sales	67,200	102,200	52,200	221,600
Sale Price	15	15	15	15
Budgeted sales	1,008,000	1,533,000	783,000	3,324,000
1b.
Earings unlimited
Schedule of expected Cash collections
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Accounts Receivable
February sales (28,200*15*10%)	42,300			42,300
March sales (42,200*15*70%)	443,100			443,100
March sales (42,200*15*10%)		63,300		63,300
April Credit Sales	201,600	705,600	100,800	1,008,000
May Credit Sales		306,600	1,073,100	1,379,700
June Credit sales			156,600	156,600
Total collections	687,000	1,075,500	1,330,500	3,093,000
Account receivable for June Sale			626,400
Account receivable for May Sale			153,300
1c.
Earings unlimited
Merchandise Purchase Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Budgeted Unit Sales	67,200	102,200	52,200	221,600
Add: Desired Ending merchandise inventory (40% of next month sales)	40,880	20,880	12,880	12,880
Total needs	108,080	123,080	65,080	234,480
Less: beginning merchandise inventory	26,880	40,880	20,880	26,880
Required purchase	81,200	82,200	44,200	207,600
Unit Cost	5.1	5.1	5.1	5.1
Required dollar purchases	$414,120	$419,220	$225,420	$1,058,760
1d.
Earings unlimited
Schedule of expected Cash payments
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Accounts Payable (a)	$111,000			$111,000
April Purchases (b)	$207,060	$207,060		$414,120
May Purchases (c )		$209,610	$209,610	$419,220
June Purchases (d)			$112,710	$112,710
Total payments (a+b+c+d)	$318,060	$416,670	$322,320	$1,057,050
Earings unlimited
Commission
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Budgeted Unit sales	67,200	102,200	52,200	221,600
Sale Price	15	15	15	15
Budgeted sales	1,008,000	1,533,000	783,000	3,324,000
Sales commisssions (4% of sales)	40,320	61,320	31,320	132,960
2
Earings unlimited
Cash Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Cash balance	85,000	61,870	158,380	85,000
Add: Collection from customers	$687,000	$1,075,500	$1,330,500	$3,093,000
cash available for use	$772,000	$1,137,370	$1,488,880	$3,178,000
Less: cash Disbursements
Merchandise purchase	$318,060	$416,670	$322,320	1,057,050
Advertising	310,000	310,000	310,000	930,000
Rent	29,000	29,000	29,000	87,000
Salaries	128,000	128,000	128,000	384,000
Commissions	40,320	61,320	31,320	132,960
Utilities	12,500	12,500	12,500	37,500
Equipment purchase		21,500	51,000	72,500
Dividend paid	23,250			23250
Total disbusrement	861,130	978,990	884,140	2,724,260
Cash surplus/Deficit	-89,130	158,380	604,740	453,740
Financing
Borrowing	151,000			151,000
Repayment			-151,000	-151,000
Interest			-3020	-3,020
Net cash from Financing	151,000	0	-154,020	-3,020
Budgeted ending cash balance	61,870	158,380	450,720	450,720
Earings Unlimited
Budgeted Income Statement
For the three month ended June 30
Particulars	Amount ($)	Amount ($)
Sales		3,324,000
Less: Cost of goods sold (221,600*5.1)		1,130,160
Variable expenses:
Commissions	132,960
Interest expense	3,020
Insurance (4,100*3)	12,300
		148,280
Contribution Margin		2,045,560
Fixed Expenses:
Advertising	930,000
Rent	87,000
Salaries	384,000
Depreciation (25,000*3)	75,000
Utilities	37,500	1,513,500
Net operating Income		532,060
Dividend Paid		23,250
Net Income		508,810
Earings Unlimited
Budgeted balance Sheet
Jun-30
Assets
Cash	450,720
Accounts Receivable	779,700
Inventory (12,880*5.1)	65,688
Property and equipment Net (1060000+21,500+51,000-75,000)	1,057,500
Prepaid insurance (26,500-12,300)	14,200
Total assets	2,367,808
Liabilities and Stockholders' Equity
Accounts Payable purchases	112,710
Dividend payable	23,250
Common Stock	1,020,000
Retained earnings (703,038+514,850)	1,211,848
Total liabilities and stockholders' equity	2,367,808