Question

Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favourable impression on the president and have assembled the information below.

     The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows:

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

The large buildup in sales before and during May is due to Mother’s Day. Ending inventories should be equal to 40% of the next month’s sales in units.

     The necklaces cost the company $4 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected by month-end. 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.

      The company’s monthly selling and administrative expenses are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	200,000
Rent		18,000
Wages and salaries		106,000
Utilities		7,000
Insurance		3,000
Depreciation		14,000

All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. 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 paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at 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
Fixed assets, net of depreciation		950,000
Total assets	$	1,495,000
Liabilities and Shareholders’ Equity
Accounts payable	$	100,000
Dividends payable		15,000
Common shares		800,000
Retained earnings		580,000
Total liabilities and shareholders’ equity	$	1,495,000

The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1% per month and must be paid at the end of each month based on the outstanding loan balance for that month.

Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1.
a. A sales budget by month and in total.

b. A schedule of expected cash collections from sales, 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. (Round your intermediate calculations and final answers to the nearest whole dollar. Also, round down your interest calculations to the next whole dollar amount. Cash deficiency, repayments and interest should be indicated by a minus sign. Do not leave any empty spaces; input a 0 wherever it is required.)

3. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach.

4. A budgeted balance sheet as of June 30.

Answer 1

Solution

(1a)

Knockoffs Unlimited
Sales Budget for the quarter ending on June 30
Particulars	April	May	June	Total
Forecasted Sales units	65000	100000	50000	215000
Per unit selling price	$             10.00	$                10.00	$             10.00
Total Sales	$ 6,50,000.00	$ 10,00,000.00	$ 5,00,000.00	$ 21,50,000.00

(1b) Before making the solution that must be clear that Collection for April will consist 10% of February sales (i.e. 26000 x $10 = $260000) and 70% of March sales (i.e. 40000 x $10 = $400000). Balance 10% of March will be recovered in May. Now let us draw the solution,

Knockoffs Unlimited
Schedule of expected cash collections for the quarter ending on June 30
Particulars	April	May	June	Total
Due of February	260000 x 10% = 26000			26000
Due of March	400000 x 70% = 280000	400000 x 10% = 40000		320000
Due of April	650000 x 20% = 130000	650000 x 70% = 455000	650000 x 10% = 65000	650000
Due of May		1000000 x 20% = 200000	1000000 x 70% = 700000	900000
Due of June			500000 x 20% = 100000	100000
Total	436000	695000	865000	1996000

Balance due shall be included in Accounts Receivable will be,
May = $(1000000 - 900000) = $100000
June = $(500000 - 100000) = $400000
Total = $500000

(1c)

Knockoffs Unlimited
Merchandise Purchases Budget for the quarter ending on June 30
Particulars	April	May	June	Total
Sales during the month	65000	100000	50000	215000
Add: Closing Inventory	(100000 x 40%) =	(50000 x 40%) =	(30000 x 40%) =	72000
	40000	20000	12000
Total Requirement	105000	120000	62000	287000
Less: Opening Inventory	(65000 x 40%) =	(100000 x 40%) =	(50000 x 40%) =	-76000
	-26000	-40000	-20000
Total Purchases	79000	80000	42000	211000
Purchase price per unit	$                     4.00	$                     4.00	$                   4.00
Total Purchase cost	$       3,16,000.00	$       3,20,000.00	$     1,68,000.00	$ 8,44,000.00

(1d) Before making the statement, we have to find out the material procured in March as 50% of it will be paid off in April. Therefore,
Material Procured in March = Sales during March + Closing Inventory (40% of April) - Opening Inventory (40% of March)
= 40000 + (40% x 65000) - (40000 x 40%)
= 40000 + 26000 - 16000
= 50000
Value of purchases = 50000 x $4 = $200000

Knockoffs Unlimited
Schedule of expected cash disbursements for merchandise purchases for the quarter ending on June 30
Particulars	April	May	June	Total
Due of March	200000 x 50% = 100000			100000
Due of April	316000 x 50% = 158000	316000 x 50% = 158000		316000
Due of May		320000 x 50% = 160000	320000 x 50% = 160000	320000
Due of June			168000 x 50% = 84000	84000
Total	258000	318000	244000	820000

Balance $84000 of June shall be included in Accounts payable.

(2)

Knockoffs Unlimited
Cash Budget for the quarter ending on June 30
Particulars	April	May	June	Total
Opening Balance	74,000.00	50,000.00	50,000.00	1,74,000.00
Receipts:
Cash Collections	4,36,000.00	6,95,000.00	8,65,000.00	19,96,000.00
Total	5,10,000.00	7,45,000.00	9,15,000.00	21,70,000.00
Payments:
Cash Payments	-2,58,000.00	-3,18,000.00	-2,44,000.00	-8,20,000.00
Sales Commission	-26,000.00	-40,000.00	-20,000.00	-86,000.00
Advertisement	-2,00,000.00	-2,00,000.00	-2,00,000.00	-6,00,000.00
Rent	-18,000.00	-18,000.00	-18,000.00	-54,000.00
Wages & Salaries	-1,06,000.00	-1,06,000.00	-1,06,000.00	-3,18,000.00
Utilities	-7,000.00	-7,000.00	-7,000.00	-21,000.00
Purchase of equipment		-16,000.00	-40,000.00	-56,000.00
Payment of Dividend	-15,000.00			-15,000.00
Balance	-6,30,000.00	-7,05,000.00	-6,35,000.00	-19,70,000.00
Cash Balance before borrowings	-1,20,000.00	40,000.00	2,80,000.00	2,00,000.00
Borrowings:
Borrowings made during the year	1,71,717.00	11,835.00	-	1,83,552.00
Interest	-1,717.00	-1,835.00	-1,836.00	-5,388.00
Repayments	-	-	-1,83,552.00	-1,83,552.00
Closing Balance	50,000.00	50,000.00	94,612.00	1,94,612.00

(3)

Knockoffs Unlimited
Budgeted Income Statement for the quarter ending on June 30
Particulars	Amount ($)	Amount ($)
Sales		21,50,000.00
Less: Variable Cost of Goods Sold
Opening Inventory	3,04,000.00
Purchases	8,44,000.00
Less: Closing Inventory	-2,88,000.00	-8,60,000.00
Less: Variable Selling and Administrative Expenses
Sales Commission		-86,000.00
Contribution		12,04,000.00
Less: Fixed Costs
Advertising	6,00,000.00
Rent	54,000.00
Wages and Salaries	3,18,000.00
Utilities	21,000.00
Insurance	9,000.00
Depreciation	42,000.00	-10,44,000.00
Earnings before Interest and Taxes		1,60,000.00
Less: Interest expenses		-5,388.00
Earnings After Taxes		1,54,612.00
Less: Dividend Payable		-15,000.00
Earnings transferred to Retained Earnings		1,39,612.00

(4)  

Knockoffs Unlimited
Balance Sheet for the quarter ending on June 30
Particulars	Amount ($)
Assets
Current Assets:
Cash	94,612.00
Accounts Receivable	5,00,000.00
Inventory	48,000.00
Prepaid Insurance	12,000.00
Total Current Assets	6,54,612.00
Non-Current Assets:
Fixed Assets	9,64,000.00
Total Non-Current Assets	9,64,000.00
Total Assets	16,18,612.00
Liabilities and Stockholders' Equity
Liabilities:
Accounts Payable	84,000.00
Dividends Payable	15,000.00
Total Liabilities	99,000.00
Stockholders' Equity:
Common Shares	8,00,000.00
Retained Earnings	7,19,612.00
Total Stockholders' Equity	15,19,612.00
Total Liabilities and Stockholders' Equity	16,18,612.00