Case 9-29 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, L
ID: 2467089 • Letter: C
Question
Case 9-29 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, LO9-10] You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designer’s silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. 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 favorable impression on the president and have assembled the information below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $9 each. Recent and forecasted sales in units are as follows: January (actual) 28,000 June 61,000 February (actual) 25,000 July 42,000 March (actual) 28,000 August 36,000 April 33,000 September 38,000 May 45,000 The large buildup in sales before and during June is due to Father’s Day. Ending inventories are supposed to equal 90% of the next month’s sales in units. The ties cost the company $5 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 25% of a month’s sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% 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 $ 1 per tie Fixed: Wages and salaries $ 31,800 Utilities $ 18,200 Insurance $ 1,000 Depreciation $ 1,500 Miscellaneous $ 3,200 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $24,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below: Assets Cash $ 13,000 Accounts receivable ($56,250 February sales; $189,000 March sales) 245,250 Inventory (29,700 units) 148,500 Prepaid insurance 12,000 Fixed assets, net of depreciation 153,900 Total assets $ 572,650 Liabilities and Stockholders’ Equity Accounts payable $ 81,250 Dividends payable 12,000 Capital stock 300,000 Retained earnings 179,400 Total liabilities and stockholders’ equity $ 572,650 The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $100,000. 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 $10,000 in cash. Required: 1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: 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. (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 contribution approach. 4. A budgeted balance sheet as of June 30.
Explanation / Answer
Solution:
1)
a. A sales budget by month and in total (refer note 1)
Cravat Sales Company
Sales budget by month and in total for period ending June 30
Particulars
April
May
June
Total
Budgeted Sales Unit
33,000
45,000
61,000
139,000
Budgeted Selling Price Per Unit
$9
$9
$9
$9
Budgeted Sales in dollars
$297,000
$405,000
$549,000
$1,251,000
b. A schedule of expected cash collections from sales, by month and in total
Cravat Sales Company
A sales budget by month and in total for period ending June 30
Particulars
April
May
June
Total
Credit Sales
$297,000
$405,000
$549,000
$1,251,000
Collection Schedule from Credit Sales
25% are collected in sale month
$74,250
$101,250
$137,250
$312,750
50% are collected in the following month of sale
$126,000
$148,500
$202,500
$477,000
25% are collected in second month following sale
$56,250
$63,000
$74,250
$193,500
Total Budgeted Cash Collection
$256,500
$312,750
$414,000
$983,250
Working Note 1 –
February
March
April
May
June
Budgeted Sales Unit
25,000
28,000
33,000
45,000
61,000
Budgeted Sales @ $9 per unit
$225,000
$252,000
$297,000
$405,000
$549,000
Collection Schedule
25% are collected in sale month
$56,250
$63,000
$74,250
$101,250
$137,250
50% are collected in the following month of sale
$112,500
$126,000
$148,500
$202,500
25% are collected in second month following sale
$56,250
$63,000
$74,250
Total Budgeted Cash Collection
$306,250
$455,500
$586,500
$762,750
$1,024,000
c. A merchandise purchases budget in units and in dollars.
Cravat Sales Company
A merchandise purchases budget in units and in dollars for period ending June 30
Particulars
April
May
June
Total
Budgeted Sales Unit
33000
45000
61000
139000
Add: Ending Inventory (90% of next month sale)
40500
54900
37800
133200
Less: Beginning Inventory (ending inventory of last month)
(29700)
(40500)
(54900)
(54900)
Budgeted Merchandise Purchase Units
43800
59400
43900
147100
Budgeted Merchandise Purchase in dollars @ $5
$219,000
$297,000
$219,500
$735,500
Working Note 2:
February
March
April
May
June
July
Budgeted Sales Unit
25000
28000
33000
45000
61000
42000
Add: Ending Inventory (90% of next month sale)
25200
29700
40500
54900
37800
0
Less: Beginning Inventory (ending inventory of last month)
(25200)
(29700)
(40500)
(54900)
(37800)
Budgeted Merchandise Purchase Units
50200
32500
43800
59400
43900
4200
Budgeted Merchandise Purchase in dollars @ $5
$251,000
$162,500
$219,000
$297,000
$219,500
$21,000
d. A schedule of expected cash disbursements for merchandise purchases
Cravat Sales Company
A schedule of expected cash disbursements for merchandise purchases for period ending June 30
Particulars
April
May
June
Total
Budgeted Merchandise Purchase in dollars
$219,000
$297,000
$219,500
Cash Disbursements Schedule
50% are paid in the month of purchase
$109,500
$148,500
$109,750
$367,750
Remaining 50% in the following month of purchases
$81,250
$109,500
$148,500
$339,250
Total Cash Disbursements
$409,750
$555,000
$477,750
$1,442,500
Working Note 3
Particulars
March
April
May
June
Budgeted Merchandise Purchase in dollars
$162,500
$219,000
$297,000
$219,500
Cash Disbursements Schedule
50% are paid in the month of purchase
$81,250
$109,500
$148,500
$109,750
Remaining 50% in the following month of purchases
$81,250
$109,500
$148,500
Total Cash Disbursements
$243,750
$409,750
$555,000
$477,750
For Part 2 and 3 --- please ask separate question
Cravat Sales Company
Sales budget by month and in total for period ending June 30
Particulars
April
May
June
Total
Budgeted Sales Unit
33,000
45,000
61,000
139,000
Budgeted Selling Price Per Unit
$9
$9
$9
$9
Budgeted Sales in dollars
$297,000
$405,000
$549,000
$1,251,000
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