Question

Case 9-31 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, LO9-10]

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—$18 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)	22,800	June (budget)	52,800
February (actual)	28,800	July (budget)	32,800
March (actual)	42,800	August (budget)	30,800
April (budget)	67,800	September (budget)	27,800
May (budget)	102,800

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 $5.4 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.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4%	of sales
Fixed:
Advertising	$	340,000
Rent	$	32,000
Salaries	$	134,000
Utilities	$	14,000
Insurance	$	4,400
Depreciation	$	28,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 each quarter, payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:

Assets
Cash	$	88,000
Accounts receivable ($51,840 February sales;$616,320 March sales)		668,160
Inventory		146,448
Prepaid insurance		28,000
Property and equipment (net)		1,090,000
Total assets	$	2,020,608
Liabilities and Stockholders’ Equity
Accounts payable	$	114,000
Dividends payable		25,500
Common stock		1,080,000
Retained earnings		801,108
Total liabilities and stockholders’ equity	$	2,020,608

The company maintains a minimum cash balance of $64,000. 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 $64,000 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.

	Sales	Budget
	April	May	June	Quarter
Budget Unit Sales
Selling Price peer unit
Total Sales

b. A schedule of expected cash collections from sales, by month and in total.

Earrings Unlimited
Schedule of Expected Cash Collections
	April	May	June	Quarter
February Sales
March Sales
April Sales
May Sales
June Sales
Total Cash Collections

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)

Earrings Unlimited
Merchandise Purchases Budget
	April	May	June	Quarter
Budgeted Unit Sales
??
Total Needs
??
Required Purchases
Unit Cost
Required Dollar Purchases

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

Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
Accounts Payable
April Purchases
May Purchases
June Purchases
Total Cash Payments

Answer 1

Sales Budget:	Apr	May	June	Qtr
Sales(units)	67800	102800	52800	223400
Selling price	18	18	18	18
Total Sales	1220400	1850400	950400	4021200
Schedule of expected Collections:			Apr	May	June	Qtr
Feburary Sales	518400	10%	51840			51840
March sales	770400	70/10%	539280	77040		616320
April sales	1220400	20/70/10%	244080	854280	122040	1220400
May sales	1850400	20/70%		370080	1295280	1665360
June Sales	950400	20%			190080	190080
Total Cash Collections			835200	1301400	1607400	3744000
Merchandise Purchase Budget	Apr	May	June	Qtr
Budgeted unit sales	67800	102800	52800	223400
Add:desired ending inventory(40%)	41120	21120	13120	13120
Total Needs	108920	123920	65920	236520
Less:Opening Inventory	27120	41120	21120	27120
Required purchases	81800	82800	44800	209400
Unit cost	5.4	5.4	5.4	5.4
Cost of purchases	441720	447120	241920	1130760
June ending inventory = July slaes * 40%
=32800*40%=13120
Budgeted Cash Disbursements for purchases
	Apr	May	June	Qtr
Accounts Payable	114000			114000
April Purchases(50%/50%)	220860	220860		441720
May purchases(50%/50%)		223560	223560	447120
June Purchases(50%)			120960	120960
Total cash Payaments	334860	444420	344520	1123800