Question

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Part B: Comprehensive Master Budget Allenby's CEO decided to apply the new budget approach in preparing comprehensive budgets for the upcoming second quarter. The following information is assembled from accounting and other business areas. The company sells many styles of earrings, but all are sold for the same price, i.e. $12 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) 22 000 June (budget) 55 000 February (actual) 28 000 July (budget) 32 000 March (actual) 42 000 August (budget) 30 000 April (actual) 66 000 September (budget) 28 000 May (budget) 100 000 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 45% of the earrings sold in the following month. Suppliers are paid $5 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase, and 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% 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 5% of sales Fixed: Advertising $210 000 Rent 22 000 Salaries 110 000 Utilities 8 000 Insurance 5 000 Depreciation 15 000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20 000 in new equipment during May and $42 000 in new equipment during June, and both will be for cash. The company declares dividends of $15 000 each quarter, payable in the first month of the following quarter.

Answer 1

1 Sales Budget June Budgeted Unit sales Selling price per unit Total Sales April 66,000 $12 $792,000 May 100,000 $12 $1,200,000 Quarter 55,000 221,000 $12 $121 $660,000 $2,652,000 2 Schedule of Cash collected from Customers May April $33,600 $352,800 $158,400 February sale ($336,000*10%) March Sale ($504,000) 70% in April and 10% in May April Sales May Sales June Sales Total Cash Collections $50,400 $554,400 $240,000 June Quarter $33,600 $403, 2001 $79,200 $792,000 $840,000 $1,080,000 $132,000 $132,000 $1,051,200 $2,440,800 $544,800 $844,800 3 Purchase Budget July 32,000 Budgeted Unit Sales Add: Closing stock ( 45% of sale of following month) Total Needs Less Opening Stock Required Purchase (Units) Unit Cost Purchase value budget April 66,000 45,000 111,000 29,700 81,300 $5.00 $406,500 May 100,000 24,7501 124,750 45,000 79,750 $5.00 $398,750 June Quarter 55,000 221,000 14,400 14,4001 69,400 235,400 24,750 29,700 44,650 205,700 $5.00 $5.00 $223,250 $1,028,500 Opening stock for April- ($148,500/$5)- 29,700 units May 4 Schedule of Expected Cash Disbursement for Merchandise purchases April Accounts Payable $125,000 April Purchase $203,250 May Purchase June Purchase Total Cash Disbursements $328,250 $203,250 $199,375 June Quarter $125,000 $406,500 $199,375 $398,750 $111,625 $111,625 $311,000 $1,041,875 $402,625 5 May $60,950 June $73,125 Quarter $70,000 $844,800 $905,750 $1,051,200 $2,440,800 $1,124,325 $2,510,800 Cash Budget For the Three Months Ended June 30 April Opening Balance of Cash $70,000 Receipt of Cash Collection from Customers $544,800 Cash available for disbursement $614,800 Less : Cash disbursements Merchandise purchase $328,250 Advertising $210,000 Rent $22,000 Salaries $110,000 Sales Commission - 5% of Sales $39,600 Utilities $8,000 Equipment purchase Dividends paid $15,000 Cash paid for disbursements $732,850 Net Cash available -$118,050 Financing Borrowings (at the beginning of the month) $179,000 Repayments at the end of quarter) Interest (at 1% per month) Total financing $179,000 Closing cash balance $60,950 $402,625 $210,000 $22,000 $110,000 $60,000 $8,000 $20,000 $311,000 $1,041,875 $210,000 $630,000 $22,000 $66,000 $110,000 $330,000 $33,000 $132,600 $8,000 $24,000 $42,000 $62,000 $15,000 $736,000 $2,301,475 $388,325 $209,325 $832,625 $73,125 $179,000 -$179,000-$179,000 -$5,370 -$5,370 -$184,370 -$5,370 $203,955 $203,955 $0 $73,125 Interest on short term borrowing @1% Month Borrowing Interest April $179,000 $5,370 Interest for 3 month $5,370 6 $2,652,000 $1,237,600 $1,414,400 Budgeted Income Statement For the Three Months Ending June 30 Sales Variable expense Cost of Goods sold $1,105,000 Commission - 5% of Sales $132,600 Total variable expenses Contribution margin Less: Fixed Cost Advertising $630,000 Rent $66,000 Salaries $330,000 Utilities $24,000 Insurance $15,000 Depreciation $45,000 Interest on short term loan $5,370 Total expenses Net Income $1,115,370 $299,030 7 Budgeted Balance Sheet As of June 30 Assets Current Assets Cash Accounts receivable Inventory Prepaid Insurance Fixed Assets Property and Equipment Add: Purchases $203,955 $648,000 $72,000 $10,200 $934, 1551 $903,500 $62,000 $965,500 -$45,000 $920,500 $1,854,655 Less: Depreciation during the Quarter Total Assets Liabilities and Stockholders' Equity Current liabilities Accounts payable Dividends payable $111,625 $15,000 Stockholders' equity Common stock Retained earnings Total Liabilities and Stockholders' Equity $850,000 $878,030 $1,854,655 Budgeted Statement of Retained Earnings Retained earnings Add: Net profit Less: Dividend proposed Retained earnings $594,000 $299,0301 -$15,000 $878,0301 Accounts receivable closing balance Opening Balance Add : Sales Less: Collection Closing Balance $436,800 $2,652,000 -$2,440,800 $648,000 Accounts payable closing balance Opening Balance Add: Purchases Less : Payment Closing Balance $125,000 $1,028,500 -$1,041,875 $111,625