Question

Comprehensive Master (Operating) Budget

Bee Gee Distributors, a wholesale company, is considering whether to open a new distribution center near Bowling Green, Ohio. The center would open January 1, 2020. The economic outlook is reasonable, but extensive advance planning is required if such a commitment is to be made. As a part of the planning process, The Board of Directors requires a Master (i.e. Operating) Budgetfor the center’s first quarter of operations(i.e. January, February & March of 2020).  In order to prepare anybudget, management must make reasonable assumptions about expected sales, inventory levels and cash flows.  

Required:  Your help is needed to construct the entire first quarter Master Budget based upon the following two pages of management assumptions:

SALES BUDGET: “What is the Profit Plan?”

        ** It all starts with a sales forecast **

a.     January sales are estimated to be $400,000 of which $100,000 (25%) will be cash and $300,000 will be on credit.  Management expects the above sales pattern to continue with an overall grow rate of 10% per month.  Prepare a sales budget.

b.     The company expects to collect 100% of the accounts receivable in the month following the month of the sale.  Prepare a schedule of expected cash receipts.

c.     Use the information developed above in requirements a and bto determine the amount of accounts receivable on the March 31 pro forma balance sheet and the amount of sales on the first quarter pro forma income statement.

_____________________________________________________________________

PURCHASES BUDGET: “What are our total needs, less what do we have”?

d.     Cost of goods sold will be 60% of sales.  Company policy is to budget an ending inventory balance equal to 25% of the next month’s projected cost of goods sold.  Prepare an inventory purchases budget.

Note: For March analysis needs, Aprilcost of goods sold is expected to be $314,000.

Answer 1

a.

Sales Budget
Month	Budgeted Sales
January	400000
February	440000
March	484000
Total budgeted sales $	1324000

b.

Schedule of Expected Cash Collections
	January	February	March	Total
Cash sales	100000	110000	121000	331000
Credit sales for:
January		300000		300000
February			330000	330000
Total cash collection $	100000	410000	451000	961000

c. Amount of accounts receivable on March 31 proforma balance sheet = 75% of March sales = 75% x $484000 = $363,000

Amount of sales on the first quarter proforma income statement = $1,324,000

d.

Inventory Purchases Budget
	January	February	March	Total
Cost of goods sold	240000	264000	290400	794400
Add: Desired ending inventory	66000	72600	78500	78500
Total needs	306000	336600	368900	872900
Less: Beginning inventory	0	66000	72600	0
Budgeted inventory purchases $	306000	270600	296300	872900