Question

You have just   been hired as a controller for Intermediate, Inc., a distributor of necklaces   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 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 necklaces, but all are sold for the same price—$16 each.   Actual sales of necklaces for the last three months and budgeted sales for   the next six months follow in units of necklaces:

 

January (actual)	23,400	June (budget)	53,400
February   (actual)	29,400	July   (budget)	33,400
March (actual)	43,400	August (budget)	31,400
April   (budget)	68,400	September   (budget)	28,400
May (budget)	103,400

 

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 necklaces sold in the following month.

 

Suppliers are   paid $5.7 for each necklace. 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, 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		4%	of sales
Fixed:
Advertising	$	370,000
Rent	$	35,000
Salaries	$	140,000
Utilities	$	15,500
Insurance	$	4,700
Depreciation	$	31,000

 

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

The   company plans to purchase $24,500 in new equipment during May and $57,000 in   new equipment during June; both purchases will be for cash. The company   declares dividends of $27,750 each quarter, payable in the first month of the   following quarter.

A listing of the company’s ledger accounts as of March 31   is given below:

 

Assets
Cash	$	91,000
Accounts receivable ($47,040 ) February  sales;                                                              $555,520 March sales)		602,560
Inventory		155,952
Prepaid insurance		29,500
Property   and equipment (net)		1,120,000
Total   assets	$	1,999,012
Liabilities   and Stockholders’ Equity
Accounts payable	$	117,000
Dividends   payable		27,750
Common stock		1,140,000
Retained   earnings		714,262
Total liabilities   and stockholders’ equity	$	1,999,012

 

The company   maintains a minimum cash balance of $67,000. 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 $67,000 in cash.   Required: a.       Calculate a   sales budget for the second quarter (monthly and in total). b.       Calculate a Purchases   budget (monthly and in total). c.       Calculate a   direct labor budget. (monthly and in total). d.       Create a cash   receipts budget (monthly and in total). e.       Create a cash   disbursements budget. (monthly and in total). f.        Create an overall   cash budget. (monthly and in total). g.       Create a   budgeted income statement. (One for the quarter) h.       Balance Sheet –   Bonus Points (at end of quarter)