Question

In: Accounting

Colosimo Company started business on January 1, 2017. The company estimated that sales for the first...

Colosimo Company started business on January 1, 2017. The company estimated that sales for the first six months would be as follows:

January - 10,000 units, $60,000

February - 8,000 units, $48,000

March - 15,000 units, $90,000

April - 17,000 units, $102,000

May - 22,000 units, $132,000

June - 30,000 units, $180,000

The company sells all items on account and expects collections of accounts receivable to be as follows: 65% in the month of the sale, and the remaining 35% in the month after the sale.

Required:

(a) Compute the expected cash collections during the months of January, February, March, April, May and June.

(b) The company has decided that finished goods inventory at the end of each month should ideally be equal to 45% of next month’s sales. What should budgeted production be for each month?

(c) It takes three pounds of raw material to make one unit of finished product. The company wants to keep an ending inventory of raw material equal to 40% of next month’s production needs. How many pounds of raw material should be purchased in each month?

(d) The raw material costs $2.75 per pound. The company pays for 75% of its purchases during the month of purchase and the remainder in the following month. How much cash will be disbursed during each month for the purchase of raw material?

(e) The projected cash balance on March 1 is $19,500. What is the estimated cash balance at the end of the month? (Prepare a formal cash budget for the month of March.)

Solutions

Expert Solution

(a) Expected cash collections:
Jan Feb Mar Apr May June
Jan sales
65% in Jan-60000*65% 39000
35% in Feb-60000*35% 21000
Feb sales
65% in Feb-48000*65% 31200
35% in Mar-48000*35% 16800
Mar sales
65% in Mar-90000*65% 58500
35% in Apr-90000*35% 31500
Apr Sales
65% in Apr-102000*65% 66300
35% in May-102000*35% 35700
May sales
65% in May-132000*65% 85800
35% in June-132000*35% 46200
June Sales
65% in June-180000*65% 117000
39000 52200 75300 97800 121500 163200
(b) Budgeted Production in units
Jan Feb Mar Apr May
Sales 10000 8000 15000 17000 22000
Add: Ending inventory-Finished goods (Note:1) 3600 6750 7650 9900 13500
13600 14750 22650 26900 35500
Less: Beginning inventory Finished goods (Note:2) 0 3600 6750 7650 9900
Units to be produced 13600 11150 15900 19250 25600
Note:1-Ending inventory of finished goods:
finished goods inventory at the end of each month should ideally be equal to 45% of next month’s sales
Jan Feb Mar Apr May
Next month sale 8000 15000 17000 22000 30000
Ending inventory-45% 3600 6750 7650 9900 13500
Note:2-Beginning inventory of finished goods:
For Jan,Beginning inventory is 0,Sinnce the operations started on Jan.
For others,Ending inventory of previous month should be the beginning inventory
Note:It is not possible to prepae a production budget for June since there is no information regarding budgeted sales for July.
© Raw material purchase budget
Jan Feb Mar Apr May
Units to be produced 13600 11150 15900 19250 25600
Raw material required per unit 3 3 3 3 3
Production need 40800 33450 47700 57750 76800
Add: Ending inventory-Raw material (Note:1) 16320 13380 19080 23100 30720
57120 46830 66780 80850 107520
Less: Beginning inventory- Raw material (Note:2) 0 16320 13380 19080 23100
Raw material to be purchased 57120 30510 53400 61770 84420
Note:1-Ending inventory of Raw material:
ending inventory of raw material equal to 40% of next month’s production needs
Jan Feb Mar Apr May
Next month production needs 40800 33450 47700 57750 76800
Ending inventory-40% 16320 13380 19080 23100 30720
Note:2-Beginning inventory of raw material:
For Jan,Beginning inventory is 0,Since the operations started on Jan.
For others,Ending inventory of previous month should be the beginning inventory
(d)
Jan Feb Mar Apr May
Credit Purchase:
Raw material to be purchased in pound 57120 30510 53400 61770 84420
Cost per pound ($) 2.75 2.75 2.75 2.75 2.75
Purchase in $ 157080 83902.5 146850 169867.5 232155
Cash disbursement:
75% during the month of purhase 117810 62926.88 110137.5 127400.6 174116.3
25% during next month 39270 20975.63 36712.5 42466.88
Total 117810 102196.9 131113.1 164113.1 216583.1
(e) Cash Budget
March
Beginning balance (A) 19500
Add: receipts
Collection from Sales [Refer Part (a)] 75300
Total cash receipts (B) 75300
Payment towards purchases [Refer part (d)] 131113.1
Toal cash payment © 131113.1
Closing balance (A)+(B)-© -36313.1

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