Case 8-31 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, L

Question

Case 8-31 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

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 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—$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

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 $4.5 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, 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.

     The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter.

     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.

A schedule of expected cash disbursements for merchandise purchases, by month and in total.

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 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.

Explanation / Answer

a) Sales Budget April May June Quarter Budgeted unit sales 66,000 101,000 51,000 218,000 Selling price per unit 15 15 15 15 total sales 990000 1515000 765000 3270000 b) Schedule of Expected Cash collections April may june qtr Feb sales 40,500 40,500 march sales(41000*15*70%;10%) 430500 61500 492000 April sales (990,000*20%;70%;10%) 198000 693000 99000 990000 May sales (1515000*20%;70%) 303000 1060500 1363500 june sales (765000*20%) 153000 153000 total cash collectiosn 669,000 1057500 1312500 3,039,000 c) Merchandise purchase budget April may june qtr budgeted unit sales 66,000 101,000 51,000 218,000 Add:ending inventory 40400 20400 12400 12,400 total needs 106,400 121,400 63,400 230,400 less:opening inventory -26400 -40,400 -20,400 -26,400 required purchases 80,000 81,000 43,000 204,000 unit cost 4.5 4.5 4.5 4.5 required dollar purchases 360000 364500 193500 918000 d) Budgeted Cash Disbursement for Merchandise purchase April may june qtr Accounts payabale 105,500 105,500 April purchase 180000 180,000 360000 May purchases 182250 182,250 364500 June purchases 96750 96750 total cash payments 285,500 362250 279000 926,750

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