Cost and Management Acc-II: Individual Assignment (20%)

Question

Question
Kankee Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and at times the company has experienced a cash shortage. 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 eager to make a favorable impression on the president and have assembled the information below.
The necklaces are sold to retailers for $10 each. Recent and forecast sales in
units are as follows:
January (actual) . . . . . . . . 20,000 June . . . . . . . . . . . . . . 50,000
February (actual) . . . . . . . 26,000 July . . . . . . . . . . . . . . 30,000
March (actual) . . . . . . . . . 40,000 August. . . . . . . . . . . . 28,000
April. . . . . . . . . . . . . . . . . 65,000 September . . . . . . . . . 25,000
May . . . . . . . . . . . . . . . . . 100,000
The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units. The necklaces cost the company $4 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 20% of a month’s sales are collected by month-end. 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’s monthly selling and administrative expenses are given below:
Variable:
Sales commissions . . . . . . . . . . . . . . . . . . . . . . . 4% of sales
Fixed:
Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Wages and salaries . . . . . . . . . . . . . . . . . . . . . . . 106,000
Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash.
The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $ 74,000
Accounts receivable ($26,000 February sales;
$320,000 March sales) . . . . . . . . . . . . . . . . . . . . . 346,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,000
Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Fixed assets, net of depreciation . . . . . . . . . . . . . . . 950,000
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . $1,495,000
Liabilities and Shareholders’ Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . ... 15,000
Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . .. 800,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 580,000
Total liabilities and shareholders’ equity . . . . . . . . . $1,495,000
The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month.
Required:
Prepare a master budget for the three-month period ending June 30. Include
the following detailed budgets:

A sales budget by month and in total.
A schedule of expected cash collections from sales, by month and in total.
A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
A schedule of expected cash disbursements for merchandise purchases, by month and in total.
A cash budgets. Show the budget by month and in total.
A budgeted income statement for the three-month period ending June 30. Use the variable costing approach.
A budgeted balance sheet as of June 30.

Answer 1

1. Sales Budget:
April: 65,000 units x $10 = $650,000
May: 100,000 units x $10 = $1,000,000
June: 50,000 units x $10 = $500,000
Total Sales Budget = $2,150,000

2. Schedule of Expected Cash Collections:
April Sales:
20% collected in April: $130,000
70% collected in May: $455,000
10% collected in June: $65,000

May Sales:
20% collected in May: $200,000
70% collected in June: $700,000
10% collected in July: $100,000

June Sales:
20% collected in June: $100,000
70% collected in July: $350,000
10% collected in August: $50,000

Total Expected Cash Collections = $2,050,000

3. Merchandise Purchases Budget:
Ending Inventory for April = 40% x 100,000 = 40,000 units
April Purchases = 65,000 units - 60,000 units + 40,000 units = 45,000 units
April Purchases in dollars = 45,000 units x $4 = $180,000

May Purchases = 100,000 units - 40,000 units + 50,000 units = 110,000 units
May Purchases in dollars = 110,000 units x $4 = $440,000

June Purchases = 50,000 units - 40,000 units + 30,000 units = 40,000 units
June Purchases in dollars = 40,000 units x $4 = $160,000

Total Merchandise Purchases Budget = $780,000

4. Schedule of Expected Cash Disbursements for Merchandise Purchases:
April Purchases: $180,000 x 50% = $90,000
May Purchases: $440,000 x 50% = $220,000
June Purchases: $160,000 x 50% = $80,000

Total Expected Cash Disbursements for Merchandise Purchases = $390,000

5. Cash Budget:
Beginning Cash Balance: $74,000
Total Cash Collections: $2,050,000
Total Cash Disbursements: $390,000
Equipment Purchases in May and June: $16,000 + $40,000 = $56,000
Dividends Payment: $15,000

Ending Cash Balance = $74,000 + $2,050,000 - $390,000 - $56,000 - $15,000 = $1,673,000

6. Budgeted Income Statement:
Sales Revenue: $2,150,000
Cost of Goods Sold: $780,000
Gross Profit: $1,370,000
Selling and Administrative Expenses:
Sales Commissions: 4% x $2,150,000 = $86,000
Advertising: $200,000
Rent: $18,000
Wages and Salaries: $106,000
Utilities: $7,000
Insurance: $250 (1/12 of $3,000)
Depreciation: $14,000
Total Expenses: $431,250

Net Income: $938,750

7. Budgeted Balance Sheet as of June 30:
Assets:
Cash: $1,673,000
Accounts Receivable: $nil (assuming all collected)
Inventory: $104,000
Prepaid Insurance: $nil
Fixed Assets: $950,000
Total Assets: $2,727,000

Liabilities and Shareholders' Equity:
Accounts Payable: $nil
Dividends Payable: $nil
Common Shares: $800,000
Retained Earnings: $927,000
Total Liabilities and Shareholders' Equity: $2,727,000