Question

Case 8-33 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 a master budget for the upcoming second quarter. 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):

January (actual)	22,200	June (budget)	52,200
February (actual)	28,200	July (budget)	32,200
March (actual)	42,200	August (budget)	30,200
April (budget)	67,200	September (budget)	27,200
May (budget)	102,200

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 $5.10 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. 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	$	310,000
Rent	$	29,000
Salaries	$	128,000
Utilities	$	12,500
Insurance	$	4,100
Depreciation	$	25,000

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

The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	85,000
Accounts receivable ($42,300 February sales; $506,400 March sales)		548,700
Inventory		137,088
Prepaid insurance		26,500
Property and equipment (net)		1,060,000
Total assets	$	1,857,288
Liabilities and Stockholders’ Equity
Accounts payable	$	111,000
Dividends payable		23,250
Common stock		1,020,000
Retained earnings		703,038
Total liabilities and stockholders’ equity	$	1,857,288

The company maintains a minimum cash balance of $61,000. 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 $61,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1.

    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. Determine any borrowing that would be needed to maintain the minimum cash balance of $61,000.

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.

Answer 1

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Collection Budget	February	March	April	May	June	April- Jun Qtr.
Sales Budget	423,000.00	633,000.00	1,008,000.00	1,533,000.00	783,000.00	3,324,000.00	See C
20% collected in same month			201,600.00	306,600.00	156,600.00	664,800.00	D= C*20%
70% collected in next month			443,100.00	705,600.00	1,073,100.00	2,221,800.00	E= 70% of C of previous month
10% collected in second month			42,300.00	63,300.00	100,800.00	206,400.00	F= 10% of C of previous to previous month
Expected cash collections			687,000.00	1,075,500.00	1,330,500.00	3,093,000.00	G=D+E+F

Purchase Budget	April	May	June	April- Jun Qtr.	July
Sales (units)	67,200.00	102,200.00	52,200.00	221,600.00	30,800.00	See A
Add: Desired Ending Inventory	40,880.00	20,880.00	12,320.00			H= 40% of A of next month
Total bracelet needed	108,080.00	123,080.00	64,520.00			I= A+H
Less: Expected Beginning Inventory	26,880.00	40,880.00	20,880.00			J= 40% of A
Bracelet Purchase Budget	81,200.00	82,200.00	43,640.00	207,040.00		K=I-J

Payment Budget	April	May	June	April- Jun Qtr.
Bracelet Purchase Budget	81,200.00	82,200.00	43,640.00	207,040.00	See K
Purchase price	5.10	5.10	5.10		L
Purchase cost	414,120.00	419,220.00	222,564.00	1,055,904.00	M=K*L
50% paid in same month	207,060.00	209,610.00	111,282.00	527,952.00	N= M*50%
50% paid in next month	111,000.00	207,060.00	209,610.00	527,670.00	O= 50% of M of previous month
Cash disbursements for merchandise purchases	318,060.00	416,670.00	320,892.00	1,055,622.00	P=N+O
Sales Commission Budget	April	May	June	April- Jun Qtr.
Sales Budget	1,008,000.00	1,533,000.00	783,000.00	3,324,000.00	See C
Sales Commission @ 4%	40,320.00	61,320.00	31,320.00	132,960.00	Q= C*4%
Cash budget	April	May	June	April- Jun Qtr.
Expected cash collections	687,000.00	1,075,500.00	1,330,500.00	3,093,000.00	See P
Total Cash Receipts	687,000.00	1,075,500.00	1,330,500.00
Estimated cash payments for
Merchandise purchases	318,060.00	416,670.00	320,892.00	1,055,622.00
Sales Commission	40,320.00	61,320.00	31,320.00	132,960.00
Advertising	310,000.00	310,000.00	310,000.00	930,000.00
Rent	29,000.00	29,000.00	29,000.00	87,000.00
Wages and Salaries	128,000.00	128,000.00	128,000.00	384,000.00
Utilities	12,500.00	12,500.00	12,500.00	37,500.00
New equipment		21,500.00	51,000.00	72,500.00
Dividends	23,250.00			23,250.00
Total cash payments	861,130.00	978,990.00	882,712.00	2,722,832.00
Cash increase or (decrease)	(174,130.00)	96,510.00	447,788.00
Cash Balance at the beginning of month	85,000.00	61,870.00	158,380.00
Cash Balance before borrowings/(repayment)	(89,130.00)	158,380.00	606,168.00
Borrowings/(repayment)	151,000.00		(151,000.00)
Interest payment			(4,530.00)	This is $ 151,000*3%.
Cash Balance at the end of month	61,870.00	158,380.00	450,638.00

Depreciation is a non cash expense so not considered.

Insurance is paid on an annual basis, in November of each year so not considered.