You have just been hired as a new management trainee by Earrings Unlimited, a di

Question

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earring 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 earrings, but all are sold for the same price- $13 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)... 20,800 June (budget)... 50,800
February (actual)... 26,800 July (budget)... 30,800
March (actual)... 40,800 August (budget ... 28,800
April (budget)... 65,800 September (budget) 25,800
May (budget)... 100,800

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 earrings sold in the following month.

Suppliers are paid $7 for a pair of earrings. One-half of a month’s purchases are 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..................6% of sales

Fixed:
Advertising.....................$199,200
Rent................................17,200
Salaries........................105,200
Utilities.........................6,200
Insurance......................2,200
depreciation.................13,200

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

The company plans to purchase $15,400 in new equipment during May and $39,200 in new equipment during June; both purchases will be for cash. The company declares dividends of $11,000 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.............................................................................$ 130,400
Accounts Receivable($34,840 February sales; $424,320
March Sales)................................. 459,1600
Inventory...................................................................... 184,240
Prepaid insurance......................................................... 21,800
Property and equipment(net)....................................... 861,200
Total Assets................................................................. $1,656,800

Liabilities and Stockholders’ Equity
Accounts Payable.........................................................$ 177,800
Dividends Payable......................................................... 11,000
Capital stock................................................................. 880,000
Retained Earnings......................................................... 588,000
Total liabilities and stockholders’ equity $1,656,800

The company maintains a minimum cash balance of $55,000. 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 $55,000 in cash.

Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

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.

Explanation / Answer

Earrings Unlimited 1 a Sales budget April May June Total Sales (units) 65,000 1,00,000 50,000 2,15,000 Sales (dollars) $6,50,000 $10,00,000 $5,00,000 $21,50,000 b Cash collections from sales April May June Total February sales $26,000 $26,000 March sales $2,80,000 $40,000 $3,20,000 April sales $1,30,000 $4,55,000 $65,000 $6,50,000 May sales $2,00,000 $7,00,000 $9,00,000 June sales $1,00,000 $1,00,000 Total collections $4,36,000 $6,95,000 $8,65,000 $19,96,000 c Merchandise purchase budget April May June Total In units Desired ending inventory 40,000 20,000 12,000 72,000 Add: Sales during the month 65,000 1,00,000 50,000 2,15,000 Less: Opening inventory (26,000) (40,000) (20,000) (86,000) Purchases 79,000 80,000 42,000 2,01,000 Purchases (in dollars) @ $4 per unit $3,16,000 $3,20,000 $1,68,000 $8,04,000 d Cash disbursement for purchases April May June Total March purchases $1,00,000 $1,00,000 April purchases $1,58,000 $1,58,000 $3,16,000 May purchases $1,60,000 $1,60,000 $3,20,000 June purchases $84,000 $84,000 Total disbursements $2,58,000 $3,18,000 $2,44,000 $8,20,000 2 Cash budget April May June Total Beginning cash balance $74,000 $50,000 $50,000 $74,000 Receipts from customers $4,36,000 $6,95,000 $8,65,000 $19,96,000 Total cash $5,10,000 $7,45,000 $9,15,000 $20,70,000 Cash disbursements: To vendors for purchases $2,58,000 $3,18,000 $2,44,000 $8,20,000 Sales commissions $26,000 $40,000 $20,000 $86,000 Advertising $2,00,000 $2,00,000 $2,00,000 $6,00,000 Rent $18,000 $18,000 $18,000 $54,000 Salaries $1,06,000 $1,06,000 $1,06,000 $3,18,000 Utilities $7,000 $7,000 $7,000 $21,000 Purchase of new equipment $- $16,000 $40,000 $56,000 Payment of dividends $15,000 $- $- $15,000 Interest on borrowings $- $- $5,300 $5,300 Total disbursements $6,30,000 $7,05,000 $6,40,300 $19,75,300 Excess (Deficiency) of Cash Available $(1,20,000) $40,000 $2,74,700 $94,700 Financing: Cash Borrowed $1,70,000 $10,000 $- $1,80,000 Loan Repayments $- $- $1,80,000 $1,80,000 Loan Balance $1,70,000 $1,80,000 $- $- Cash Balance at End of Month $50,000 $50,000 $94,700 $94,700 Budgeted Income Statement for the period ended June 30 3 Sales $21,50,000 Less: Variable expenses Beginning inventory $1,04,000 Add: Purchases $8,04,000 Less: Ending inventory $(48,000) Cost of goods sold $8,60,000 Sales commission $86,000 Contribution margin $12,04,000 Less: Operating expenses Advertising $6,00,000 Rent $54,000 Salaries $3,18,000 Utilities $21,000 Insurance $9,000 Depreciation $42,000 Interest expense $5,300 Total operating expenses $10,49,300 Net income $1,54,700 4 Budgeted Balance Sheet as at June 30 Assets Cash $94,700 Accounts receivable (May sales $100,000 ; June sales $500,000) $5,00,000 Inventory $48,000 Prepaid insurance $12,000 Property, plant and equipment (net) $9,64,000 Total assets $16,18,700 Liabilities and stockholder's equity Accounts payable $84,000 Dividends payable $15,000 Capital stock $8,00,000 Retained earnings $7,19,700 Total liabilities and stockholder's equity $16,18,700

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