Question

Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below.

The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows:

January (actual)	23,000	June	56,000
February (actual)	32,000	July	36,000
March (actual)	45,000	August	34,000
April	71,000	September	31,000
May	105,000

The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units.

The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% 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 by month-end. 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.

The company’s monthly selling and administrative expenses are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	218,000
Rent		21,000
Wages and salaries		113,200
Utilities		9,400
Insurance		4,200
Depreciation		20,000

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,400 in new equipment during May and $46,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $16,200 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:

Assets
Cash	$	80,000
Accounts receivable ($32,000 February sales;      $360,000 March sales)		392,000
Inventory		113,600
Prepaid insurance		29,400
Fixed assets, net of depreciation		980,000
Total assets	$	1,595,000
Liabilities and Shareholders’ Equity
Accounts payable	$	110,800
Dividends payable		16,200
Common shares		860,000
Retained earnings		608,000
Total liabilities and shareholders’ equity	$	1,595,000

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month.

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 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. (Round your intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and interest should be indicated by a minus sign.)

       

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

       

4.	A budgeted balance sheet as of June 30.

      

Answer 1

Required Budgets are as prepared below:

Knockoff Unlimited
Sales Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Budgeted Unit sales	71,000	105,000	56,000	232,000	36,000
Sale Price	10	10	10	10	10
Budgeted sales	710,000	1,050,000	560,000	2,320,000	360,000
Knockoff Unlimited
Schedule of expected Cash collections
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Accounts Receivable
February sales (32,000*10*10%)	32,000			32,000
March sales (45,000*10*70%)	315,000			315,000
March sales (45,000*10*10%)		45,000		45,000
April Credit Sales	142,000	497,000	71,000	710,000
May Credit Sales		210,000	735,000	945,000
June Credit sales			112,000	112,000
Total collections	489,000	752,000	918,000	2,159,000
Account receivable for June Sale			448,000
Account receivable for May Sale			105,000
Knockoff Unlimited
Merchandise Purchase Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Budgeted Unit Sales	71,000	105,000	56,000	232,000	36,000
Add: Desired Ending merchandise inventory	42,000	22,400	14,400	14,400
Total needs	113,000	127,400	70,400	246,400
Less: beginning merchandise inventory	28,400	42,000	22,400	28,400
Required purchase	84,600	85,400	48,000	218,000
Unit Cost	4.0	4.0	4.0	4.0
Required dollar purchases	$338,400	$341,600	$192,000	$872,000
Knockoff Unlimited
Schedule of expected Cash payments
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Accounts Payable (a)	$110,800			$110,800
April Purchases (b)	$169,200	$169,200		$338,400
May Purchases (c )		$170,800	$170,800	$341,600
June Purchases (d)			$96,000	$96,000
Total payments (a+b+c+d)	$280,000	$340,000	$266,800	$886,800
Knockoff Unlimited
Commission
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Budgeted Unit sales	71,000	105,000	56,000	232,000
Sale Price	10	10	10	10
Budgeted sales	710,000	1,050,000	560,000	2,320,000
Sales commisssions (4% of sales)	28,400	42,000	22,400	92,800
2
Knockoff Unlimited
Cash Budget
For the quarter ended June 30
	Month
Particulars	April	May	June	Total
Beginning Cash balance	80,000	50,800	50,800	80,000
Add: Collection from customers	$489,000	$752,000	$918,000	$2,159,000
cash available for use	$569,000	$802,800	$968,800	$2,239,000
Less: cash Disbursements
Merchandise purchase	$280,000	$340,000	$266,800	886,800
Advertising	218,000	218,000	218,000	654,000
Rent	21,000	21,000	21,000	63,000
Salaries	113,200	113,200	113,200	339,600
Sales commission	28,400	42,000	22,400	92,800
Utilities	9,400	9,400	9,400	28,200
Equipment purchase		18,400	46,000	64,400
Dividend paid	16,200			16200
Total disbusrement	686,200	762,000	696,800	2,145,000
Cash surplus/Deficit	-117,200	40,800	272,000	94,000
Financing
Borrowing	168,000	10,000		178,000
Repayment			178,000	-178,000
Interest			3,460	-3,460	3360
Net cash from Financing	168,000	10,000	-181,460	-3,460	100
Budgeted ending cash balance	50,800	50,800	90,540	90,540