Question

Individual Case Study 2 Master Budget, Cash Budget and Budgeted Income Statement

After two years study at UCW, you finally graduate and start a job as Junior accountant at All About The Beard Inc.(AATB). Your manager is responsible for the national distribution of men grooming sets. Because of the new fashion style among current generation, the company has grown rapidly, and the prompt growth forces the management team to improve their efficiency and manage their production effectively.

You have just been given responsibility for all planning and budgeting of the entire men grooming set division. Today is your first day, you have just given an assignment to prepare master budget for the manager, who needs to present the budget and discuss the financial objectives with the shareholders tomorrow. During your job interview, you clearly stated that you gained managerial accounting knowledge and hand on experience during your MBA study.

Your first assignment is to prepare a master budget for the next fiscal year, starting October 1, 2020. The office manager brought a pile of files on your desk including the past sale records, product information, manufacture schedule and supplier pricing list. Now, you realized that you should have pay more attention during the lecture rather than checking your social media page. Now, you don’t know where to start. Fortunately, you remember that you still kept a copy spreadsheet of the master budget template in your computer from the accounting course during your MBA study.

Note: The company desires a minimum ending cash balance each quarter on $35,000. The beard grooming products are sold to retailers for $20 each and the sales have been stagnant due to the Covid-19. However, the marketing department has been positive toward the end of the year due to season change and upcoming holiday. The marketing department has just sent you their forecasted quarter sales and marketing budget.

Quarter

2020 Q4

2021 Q1

2021 Q2

2021 Q3

2021 Q4

2022 Q1

Sales in Unit

30,000

35,000

40,000

65000

68000

70,000

Marketing Expenses

$35,000

$20,000

$20,000

$45,000

$45,000

$45,000

The increased sales volume before and during June and January is due to Father’s Day and holidays with AATB being a favorite. Ending finished goods inventories are supposed to be equal to 20% of the next quarter’s sales in units. AATB currently does its own assembly production in house. Each unit consists of 3 shaves and the cost of each is $1.50. Each unit needs 0.10 labour hour from assemble to finish package. The hourly pay rate to the assembling workers is $15 per hour. The production manager also required desired direct material ending inventory to 30% of the next quarter production.

Purchases are paid for in the following manner: 50% in the quarter of the purchase and the remaining 50% paid in the quarter following the purchase. All sales to the distributors are made on credit terms with no discount (for now), and payable within 15 days. The AATB has determined that only 50% of sales are collected by the end of the quarter in which the sale occurred. An additional 30% is collected in the quarter following the sale, and the remaining 20% is collected in the second quarter following the sale. Bad debts have been negligible, supporting the credit terms as favorable.

Below is a display of the AATB division monthly manufacture overhead and selling and administrative expenses:

Manufacture Overhead

Variable:

Indirect labour $0.5 per labour hour

Indirect Materials $0.2 per labour hour

Fixed:

Wages and Salaries $2,000 per month

Utilities $1,500 per month

Insurance $2,000 per month

Depreciation $2,000 per month

Selling and Administrative

Variable:

Sales Commissions $1 per unit

Fixed (Monthly) :

Wages and Salaries $22,000

Utilities $6,000

Insurance $1,200

Depreciation $1,500

Miscellaneous $3,000

Labour, Manufacture Overhead, and Selling and Administrative expenses are all paid during the month, in cash, with the exception of depreciation (of course). AATB will make a purchase of a parcel of land during the first quarter of 2021 for $22,500 cash. AATB contributes to the corporate dividend at a rate of $12,000 each quarter, payable in the first month of the following quarter. AATB’s balance sheet at the end of the third quarter is shown below:

Assets

Cash $14,000

Accounts receivable ($48,000 sales in Q2 and $152,000 in Q3 this year ) $200,000

Liabilities

Accounts payable $85,700

An agreement with Bank of the West allows AATB to borrow in increments of $1,000 at the beginning of each month, up to a total loan amount of $550,000. The interest rate on these loans is 12% annually (pretty high considering market rates) but the interest is not compounded, meaning this is simple interest only.

Required:

Prepare a master budget for twelve months from Oct, 2020 to Oct, 2021. Include the following budget schedules and financial statements:

1) Master Budget

2) Cash Budget. Show the cash budget by month and in total.

3) Budgeted Income statement

Answer 1

anwser

Budgeted Sales
S.No.	Quarter	2020 Q4	2021 Q1	2021 Q2	2021 Q3	2021 Q4
1	Sales in Unit	30000	35000	40000	65000	68000
2	Sell Price	20	20	20	20	20
3(1*2=3)	Total Sales	600000	700000	800000	1300000	1360000
	Estimated Production Budget
1	Quarter	2020 Q4	2021 Q1	2021 Q2	2021 Q3	2021 Q4	2022 Q1
2	Sales in Unit	30000	35000	40000	65000	68000	70000
3(20%*next Quarter Sale)	Desired Ending Inventory	7000	8000	13000	13600	14000
	Total required for the month	37000	43000	53000	78600	82000
	Less: Beginning FG inventory	30600	7000	8000	13000	13600	0
	Estimated Production Budget	30600	37000	43000	53000	78600
	Raw Material Budget
	Quarter	2020 Q4	2021 Q1	2021 Q2	2021 Q3	2021 Q4	2022 Q1
	Estimated Production Budget	30600	37000	43000	53000	78600	70000
	Desired ending raw material Inventory	11100	12900	15900	23580	21000
		41700	49900	58900	76580	99600
	Raw Material Needed Per unit	3	3	3	3
	Estimated Raw Material Inv.	125100	149700	176700	229740