Question

Case Study 2 Master Budgeting and Pro-Forma Financial Statements

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 handkerchief sets (HCS) 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 HCS 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 HCS’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 HCS being a favorite. Ending inventories are supposed to be equal to 90% of the next month’s sales in units. The cost of each HCS 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 HCS 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 HCS division monthly selling and administrative expenses:

Variable:
Sales Commissions	$ 1 per HCS
Fixed:
Wages and Salaries	$22,000
Utilities	$14,000

Insurance	$1,2000
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. HCS will make a purchase of a parcel of land during the month of May for $25,000 cash. HCS contributes to the corporate dividend at a rate of $12,000 each quarter, payable in the first month of the following quarter. HCS’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	$574600

An agreement with Bank of the West allows HCS 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 1% per month (pretty high but convenient nonetheless) but the interest is not compounded, meaning this is simple interest only. At quarter end, HCS 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:

6) Prepare a budgeted Income Statement for the three months ending June 30, 2019. Use the contribution approach.

Answer 1