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 earrings 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 a master budget for the upcoming second quarter. 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-$16 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) February (actual) March (actual) April (budget) May (budget) 22,48 June (budget) 28,48 July (budget) 42,480 August (budget) 67,480 September (budget) 52,488 32,486 38,486 27,48e 182,480 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 $5.20 for a pair of earrings. 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. 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 Rent Salaries Utilities Insurance Depreciation $ 328,eee $ 3,eee $ 13e,808 $ 13,808 $ 4,280 $ 26,808

Explanation / Answer

Written by Irfanullah Jan

Quarter 1 2 3 4 Year Beginning Cash Balance $5,200 $5,000 $5,000 $11,740 $5,200 Add: Budgeted Cash Receipts: 37,150 54,190 53,730 62,300 207,370 Total Cash Available for Use $42,350 $59,190 $58,730 $74,040 $212,570 Less: Cash Disbursements Direct Material 14,960 16,550 16,810 19,410 67,730 Direct Labor 8,830 9,610 9,750 11,900 40,090 Factory Overhead 10,020 10,400 11,000 11,780 43,200 Selling and Admin. Expenses 7,640 8,360 8,500 9,610 34,110 Equipment Purchases 6,000 14,000 20,000 Total Disbursements $41,450 $50,920 $46,060 $66,700 $205,130 Cash Surplus/(Deficit) $900 $8,270 $12,670 $7,340 $7,440 Financing: Borrowing 4,100 4,000 Repayments ?3,188 ?912 ?4,000 Interest ?82 ?18 ?100 Net Cash from Financing $4,100 ?$3,270 ?$930 ?100 Budgeted Ending Cash Balance $5,000 $5,000 $11,740 $7,340 $7,340

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