Question

Mast Corporation seeks your assistance in developing cash and other budget information for May, June, and July. At April 30, the company had cash of $11,000, accounts receivable of $874,000, inventories of $618,800, and accounts payable of $266,110. The budget is to be based on the following assumptions.

Each month’s sales are billed on the last day of the month.

Customers are allowed a 2 percent discount if payment is made within 10 days after the billing date. Receivables are recorded in the accounts at their gross amounts (not net of discounts).

The billings are collected as follows: 70 percent within the discount period, 15 percent by the end of the month, and 12 percent by the end of the following month. Three percent is uncollectible.

Purchase data are as follows:

Of all purchases of merchandise and selling, general, and administrative expenses, 60 percent is paid in the month purchased and the remainder in the following month.

The number of units in each month’s ending inventory equals 120 percent of the next month’s units of sales.

The cost of each unit of inventory is $10.

Selling, general, and administrative expenses, of which $4,000 is depreciation, equal 15 percent of the current month’s sales.

Actual and projected sales follow:

	Dollars		Units
March	$	708,000	11,800
April		726,000	12,100
May		714,000	11,900
June		684,000	11,400
July		720,000	12,000
August		732,000	12,200

Required:

a. Compute the budgeted purchases in dollars for May.

b. Compute the budgeted purchases in dollars for June.

c. Compute the budgeted cash collections during May.

d. Compute the budgeted cash disbursements during June.

e. Compute the budgeted number of units of inventory to be purchased during July.

Answer 1

(a)	Budgeted merchandise purchase for May (in $) :
	Let purchase be X
	Ending inventory is 120% of next month's unit sales.
	Openning Inventory + Purchase - Sales = Closing Inventory
	1.20 * (11,900) + X - 11,900 = 1.20 ( 11,400)
	X = 11,300 units
	Purchases = 11,300 units * $10
	Purchases = $1,13,000
(b)	Budgeted merchandise purchase for June (in $) :
	Let purchase be X
	Ending inventory is 120% of next month's unit sales.
	Openning Inventory + Purchase - Sales = Closing Inventory
	1.20 * (11,400) + X - 11,400= 1.20 ( 12,000)
	X = 12,120 units
	Purchases = 12,120 units * $10
	Purchases = $1,21,200
(c)	Budgeted cash collections during the month of May :
	70% billings are collected within discount period (discount rate is 2% given) and further 15% billings are collecyed at the end of month, 12% of the billings collected in the next month and remaining 3% are uncollectible.
	From April = ($7,26,000 * 70% * .98) + ($7,26,000 * 15%)
	From April = $6,06,936
	From March = $7,08,000 * 12%
	From March = $84,960
	Total cash collection = $6,06,936 + $84,960
	Total cash collection = $6,91,896
(d)	Budgeted cash disbursement during the month of June (in $) :
	60% of purchases and other expenses to be paid in same month and remaining in following month i.e for june calculations, 60% shall paid for june and also remaining 40% of May shall be paid in June.
	Merchandis purchases = (60% * $1,21,200) + (40% * $1,13,000)
	Merchandis purchases = $1,17,920
	Expenses = (60% * $98,600) + (40% * $1,03,100)
	Expenses = $1,00,400
	Selling, general and administrative expenses = 15% of current years sale including $4,000 depreciation
	Selling, general and administrative expenses for June = (15%*$6,84,000) - $4,000 = $98,600
	Selling, general and administrative expenses for May = (15%*$7,14,000) - $4,000 = $1,03,100
	Cash Disbursement = $1,17,920 + $1,00,400
	Cash Disbursement = $2,18,320
(e)	Budgeted units of Inventory needed to be purchased in July :
	Let purchase be X
	Ending inventory is 120% of next month's unit sales.
	Openning Inventory + Purchase - Sales = Closing Inventory
	1.20 * (12,000) + X - 12,000 = 1.20 (12,200)
	X = 12,240 units
	No. Of units to be purchased in July = 12,240 units.