Question

You have just been assigned to a new manager who believes you have exceptional budgeting skills. Since you began your job last summer, you have been showing management your latest spreadsheets and how you use your new-found knowledge of Managerial Accounting to make sound business decisions. Your new manager is responsible for the nationwide distribution of designer shaving kit sets (SKS) and, through multiple franchise agreements, sales have grown very rapidly, and the timing is right for you to join her team and to show your skills. You have just been given responsibility for all planning and budgeting of the entire SKS division. Your first assignment is to prepare a master budget for the next three months, starting April 1, 2019. You accept this responsibility with enthusiasm, and you are anxious to impress your new manager and the president of the company, who has a very high regard for you. To commence your new role, you have assembled the following pertinent information:

Note: The company desires a minimum ending cash balance each month on $10,000.

The SKS’s are sold to retailers for $8 each and they are flying off the shelves. Recent forecasted sales in units are provided below:

January (actual) 20,000 June 60,000

February (actual) 24,000 July 40,000

March (actual) 28,000 August 36,000

April 35,000 September 32,000

May 45,000

The increased sales volume before and during June is due to Father’s Day with SKS being a favorite. Ending inventories are supposed to be equal to 90% of the next month’s sales in units. The cost of each SKS is $5.00.

Purchases are paid for in the following manner: 50% in the month of the purchase and the remaining 50% paid in the month following the purchase. All sales to the distributors are made on credit terms with no discount (for now), and payable within 15 days. The SKS division has determined that only 25% of a month’s sales are collected by the end of the month in which the sale occurred. An additional 50% is collected in the month following the sale, and the remaining 25% is collected in the second month following the sale. Bad debts have been negligible, supporting the credit terms as favorable. Below is a display of the SKS division monthly selling and administrative expenses:

Variable: Sales Commissions $ 1 per SKS

Fixed: Wages and Salaries $22,000

Utilities $14,000

Insurance $1,200

Depreciation $1,500

Miscellaneous $3,000

Selling and administrative expenses are all paid during the month, in cash, with the exception of depreciation (of course) and insurance is pre-paid for the duration of the policy. SKS will make a purchase of a parcel of land during the month of May for $22,500 cash. SKS contributes to the corporate dividend at a rate of $12,000 each quarter, payable in the first month of the following quarter.

SKS’s balance sheet at the end of the first quarter is shown below:

Assets Cash $14,000

Accounts receivable ($48,000 February sales: $168,000 March sales) 216,000

Inventory (31,500 units) 157,500

Prepaid insurance 14,400

Fixed assets, net of depreciation 172,700

Total Assets $574,600

Liabilities and Stockholders Equity Accounts payable $85,750

Dividends payable 12,000

Capital Stock 300,000

Retained earnings 176,850

Total Liabilities and Stockholders Equity $574,600

An agreement with Bank of the West allows SKS to borrow in increments of $1,000 at the beginning of each month, up to a total loan amount of $150,000. The interest rate on these loans is 10% annually (pretty high considering market rates) but the interest is not compounded, meaning this is simple interest only. At quarter end, SKS would pay Bank of the West all of the accumulated interest on the loan and as much of the balance of the loan as possible (in $1,000 increments) while retaining the minimum $10,000 cash balance. Required: Prepare a master budget for the three- months ending June 30, 2019. Include the following budget schedules and financial statements: 8) Your new manager has asked for your explanation about your experience in preparing this budget. She specifically wants to know your thoughts on the value of all this work and whether the benefits from the work are worth the effort. Prepare a memo, no longer than 2 pages, describing your experience from this exercise, and your thoughts on the value of having a Master Budget.

Answer 1

1.a.

Sales Budget
	April	May	June	Quarter
Budgeted Sales in Units	35,000	45,000	60,000	140,000
Unit Selling Price	$ 8	$ 8	$ 8	$ 8
Budgeted Dollar Sales	$ 280,000	$ 360,000	$ 480,000	$ 1,120,000

1.b.

Schedule of Expected Cash Collections
	April	May	June	Quarter
February Sales	$48,000			$48,000
March Sales	112,000	56,000		168,000
April Sales	70,000	140,000	70,000	280,000
May Sales	0	90,000	180,000	270,000
June Sales	0	0	120,000	120,000
Total Cash Collections	$ 230,000	$ 286,000	$ 370,000	$ 886,000

2.a.

Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted Sales in Units	35,000	45,000	60,000	140,000
Add: Desired Ending Inventory ( 90% of next month sales )	40,500	54,000	36,000	36,000
Total Needed	75,500	99,000	96,000	176,000
Less: Beginning Inventory	31,500	40,500	54,000	31,500
Budgeted Purchases in Units	44,000	58,500	42,000	144,500
Cost per Unit	$ 5	$ 5	$ 5	$ 5
Budgeted Cost of Purchases	$220,000	$292,500	$210,000	$722,500

2.b.

Schedule of Cash Payments for Merchandise Purchases
	April	May	June	Quarter
March Purchases	$ 85,750			$ 85,750
April Purchases	110,000	110,000		220,000
May Purchases	0	146,250	146,250	292,500
June Purchases	0	0	105,000	105,000
Total Cash Payments	195,750	256,250	251,250	703,250

3.

SKS Division Cash Budget For the three months ended June 30, 2019
	April	May	June	Quarter
Beginning Cash Balance	$14,000	$10,250	$ 10,500	$14,000
Add: Cash Receipts	230,000	286,000	370,000	886,000
Total Cash Available	244,000	296,250	380,500	900,000
Less: Cash Disbursements for
Merchandise Purchases	195,750	256,250	251,250	703,250
Sales Commissions	35,000	45,000	60,000	140,000
Wages and Salaries	22,000	22,000	22,000	66,000
Utilities	14,000	14,000	14,000	42,000
Miscellaneous	3,000	3,000	3,000	9,000
Purchase of Land	0	22,500	0	22,500
Dividends	12,000	0	0	12,000
Total Cash Disbursements	281,750	362,750	350,250	994,750
Cash Surplus ( Deficit )	(37,750)	(66,500)	30,250	(94,750)
Financing
Borrowing	48,000	77,000	0	125,000
Repayment	0	0	17,000	(17,000)
Interest	0	0	2,483	2,483
Total Financing	48,000	125,000	108,000
Ending Cash Balance	10,250	10,500	10,767	10,767

4.

SKS Division Budgeted Income Statement For the quarter ended June 30, 2019
Sales Revenue		$ 1,120,000
Cost of Goods Sold
Beginning Inventory	157,500
Cost of Merchandise Purchases	722,500
Ending Inventory	(180,000)	(700,000)
Gross Profit		420,000
Selling and Administrative Expenses
Sales Commision Expense	140,000
Wages and Salaries Expense	66,000
Utilities Expense	42,000
Insurance Expense	3,600
Depreciation Expense	4,500
Miscellaneous Expense	9,000
Total Selling and Administrative Expenses		265,100
Income from Operations		154,900
Interest Expense		(2,483 )
Net Income		152,417

5.

SKS Division Budgeted Balance Sheet June 30, 2019
Assets
Cash	$ 10,767
Accounts Receivable	450,000
Inventory	180,000
Prepaid Insurance	10,800
Fixed Assets, net of depreciation	190,700
Total Assets	$ 842,267
Liabilities and Stockholders' Equity
Accounts Payable	105,000
Dividends Payable	12,000
Loan Payable	108,000
Capital Stock	300,000
Retained Earnings	317,267
Total Liabilities and Stockholders' Equity	$ 842,267