Question

Chapter 8 Problem Session Homework

Questions:

1. Discuss some of the major benefits to be derived from budgeting.

2. What is meant by the term responsibility accounting?

3. Why is the sales forecast the starting point in budgeting?

Problems:

1.

Milo Company manufactures beach umbrellas. The company is preparing detailed budgets for the third quarter and has assembled the following information to assist in the budget preparation:

1. The Marketing Department has estimated sales as follows for the remainder of the year (in units):

July	30,000	October	20,000
August	70,000	November	10,000
September	50,000	December	10,000

The selling price of the beach umbrellas is $12 per unit.

2. All sales are on account. Based on past experience, sales are collected in the following pattern:

30%	in the month of sale
65%	in the month following sale
5%	uncollectible

Sales for June totaled $300,000.

3. The company maintains finished goods inventories equal to 15% of the following month’s sales. This requirement will be met at the end of June.
4. Each beach umbrella requires 4 feet of Gilden, a material that is sometimes hard to acquire. Therefore, the company requires that the ending inventory of Gilden be equal to 50% of the following month’s production needs. The inventory of Gilden on hand at the beginning and end of the quarter will be:

June 30	72,000	feet
September 30	?	feet

5. Gilden costs $0.80 per foot. One-half of a month’s purchases of Gilden is paid for in the month of purchase; the remainder is paid for in the following month. The accounts payable on July 1 for purchases of Gilden during June will be $76,000.

Required:

1. Calculate the estimated sales, by month and in total, for the third quarter.

2. Calculate the expected cash collections, by month and in total, for the third quarter.

3. Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

4. Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

5. Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

6. Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

2.

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—$10 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)	20,000	June (budget)	50,000
February (actual)	26,000	July (budget)	30,000
March (actual)	40,000	August (budget)	28,000
April (budget)	65,000	September (budget)	25,000
May (budget)	100,000

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 $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. 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	$	200,000
Rent	$	18,000
Salaries	$	106,000
Utilities	$	7,000
Insurance	$	3,000
Depreciation	$	14,000

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 for cash. The company declares dividends of $15,000 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	$	74,000
Accounts receivable ($26,000 February sales; $320,000 March sales)		346,000
Inventory		104,000
Prepaid insurance		21,000
Property and equipment (net)		950,000
Total assets	$	1,495,000
Liabilities and Stockholders’ Equity
Accounts payable	$	100,000
Dividends payable		15,000
Common stock		800,000
Retained earnings		580,000
Total liabilities and stockholders’ equity	$	1,495,000

The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash.

Required:

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

1. a. A sales budget, by month and in total.

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

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

    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 $50,000.

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

Problem-1:

Requirement-1: Calculate the estimated sales, by month and in total, for the third quarter.

Milo Company Sales Budget
Particulars	July	August	September	Quarter
Budgeted Unit Sales	30,000	70,000	50,000	150,000
Selling Price per unit	$12	$12	$12	$12
Budgeted Sales	$360,000	$840,000	$600,000	$1,800,000

Requirement-2: Calculate the expected cash collections, by month and in total, for the third quarter.

Milo Company Schedule of Expected Cash Collection for 3rd Quarter
Particulars	July	August	September	Quarter
Accounts receivables, June 30	$195,000			$195,000
July Sales	$108,000	$234,000		$342,000
August Sales		$252,000	$546,000	$798,000
September Sales			$180,000	$180,000
Total Cash Collection	$303,000	$486,000	$726,000	$1,515,000

Requirement-3: Calculate the estimated quantity of beach umbrellas that need to be produced in July, August, September, and October.

Milo Company Production Budget
Particulars	July	August	September	October
Budgeted Unit Sales	30,000	70,000	50,000	20,000
Add: Required Ending Inventory (15% of following month sale)	10,500	7,500	3,000	1,500
Total Needs	40,500	77,500	53,000	21,500
Less: Opening Inventory	4,500	10,500	7,500	3,000
Required Production in Units	36,000	67,000	45,500	18,500

Requirement-4: Calculate the quantity of Gilden (in feet) that needs to be purchased by month and in total, for the third quarter.

Milo Company Direct Materials Budget
Particulars	July	August	September	Quarter
Required Production in Units	36,000	67,000	45,500	148,500
Units of Raw Material needed per unit	4	4	4	4
Units of Raw Material needed to meet production	144,000	268,000	182,000	594,000
Add: Required Ending Inventory (50% of following month Production needs)	134,000	91,000	37,000	37,000
Total units of Raw Material needed	278,000	359,000	219,000	631,000
Less: Opening Inventory of Gilden	72,000	134,000	91,000	72,000
Units of Raw Materials to be Purchased	206,000	225,000	128,000	559,000

Requirement-5: Calculate the cost of the raw material (Gilden) purchases by month and in total, for the third quarter.

Milo Company Cost of Direct Materials Purchase Budget
Particulars	July	August	September	Quarter
Units of Raw Materials to be purchased	206,000	225,000	128,000	559,000
Unit Cost of Raw Material	$0.80	$0.80	$0.80	$0.80
Cost of Raw Material to be purchased	$164,800	$180,000	$102,400	$447,200

Requirement-6: Calculate the expected cash disbursements for raw material (Gilden) purchases, by month and in total, for the third quarter.

Milo Company Schedule of Expected Cash Disbursement
Particulars	July	August	September	Quarter
Accounts Payable, July 1	$76,000			$76,000
July Purchases	$82,400	$82,400		$164,800
August Purchases		$90,000	$90,000	$180,000
September Purchases			$51,200	$51,200
Total Cash Disbursement	$158,400	$172,400	$141,200	$472,000

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