Question

Option #1: Cost of Production

Hilliard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter:

As of December 31, the end of the prior quarter, the company's general ledger showed the following account balances:

Cash $48,000 (debit)

Accounts receivable $224,000 (debit)

Inventory $60,000 (debit)

Buildings and equipment, net $370,000 (debit)

Accounts payable $93,000 (credit)

Capital stock $500,000 (credit)

Retained earnings $109,000 (credit)

Actual sales for December and budgeted sales for the next four months are as follows:

December $280,000

January $400,000

February $600,000

March $300,000

April $200,000

Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales.

The company's gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month; advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 per quarter.

Each month's ending inventory should equal 25% of the following month's cost of goods sold.

One half of the month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500.

During January, the company will declare and pay $45,000 in cash dividends.

Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local 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. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required tasks for Option #1:

Using the data above, finish populating the following statements and schedules for the first quarter. Submit your responses in an Excel spreadsheet:

Schedule of expected cash collections

Schedule of Expected Cash Collections
	January	February	March	Quarter
Cash sales	$80,000
Credit sales	$224,000
Total collections	$304,000

Merchandise purchases budget

Merchandise Purchases Budget
	January	February	March	Quarter
Budgeted cost of goods sold	$240,000*	$360,000
Add desired ending inventory	$90,000**
Total needs	$330,000
Less beginning inventory	$60,000
Required purchases	$270,000
*$400,000 sales x 60% cost ratio = $240,000 ** $360,000 x 25% = $90,000

Schedule of expected cash disbursements-merchandise purchases

Schedule of Expected Cash Disbursements-Merchandise Purchases
	January	February	March	Quarter
December purchases	$93,000			$93,000
January purchases	$135,000	$135,000		$270,000
February purchases
March purchases
Total disbursements	$228,000

Schedule of expected cash disbursements-selling and administrative expenses

Schedule of Expected Cash Disbursements-Selling and Administrative Expenses
	January	February	March	Quarter
Salaries and wages	$27,000
Advertising	$70,000
Shipping	$20,000
Other expenses	$12,000
Total disbursements	$129,000

Cash budget:

Cash Budget
	January	February	March	Quarter
Cash balance, beginning	$48,000
Add cash collections	$304,000
Total cash available	$352,000
Less cash disbursements
For inventory	$228,000
For selling and admin    expenses	$129,000
For purchase of equipment	------
For cash dividends	$45,000
Total cash disbursements	$402,000
Excess (deficiency) of cash	($50,000)
Financing needed
Cash balance, ending

Answer 1

1)

Schedule of Expected Cash Collections (Amounts in $)
Particulars	January	February	March	Quarter
1) Cash sales (20% of total sales)	80,000	120,000	60,000	260,000
2)Credit sales (credit sales of last month)	224,000	320,000	480,000	1,024,000
Total collections (1+2)	304,000	440,000	540,000	1,284,000

2)

Merchandise Purchases Budget (Amounts in $)
Particulars	January	February	March	Quarter
Budgeted cost of goods sold (60% of sales)	240,000*	360,000	180,000	780,000
Add: Desired ending inventory (25% of next month COGS)	90,000**	45,000	30,000***	30,000
Total needs	330,000	405,000	210,000	810,000
Less: Beginning inventory	(60,000)	(90,000)	(45,000)	(60,000)
Required purchases	270,000	315,000	165,000	750,000
*$400,000 sales x 60% cost ratio = $240,000 ** $360,000 x 25% = $90,000 ****April Sales*60% = April COGS ($200,000*60% = $120,000) March ending Inventory = $120,000*25% = $30,000

3)

Schedule of Expected Cash Disbursements-Merchandise Purchases (Amt in $)
Particulars	January	February	March	Quarter
December purchases (50% of purchases)	93,000			93,000
January purchases (50% in current and 50% in next month)	135,000	135,000		270,000
February purchases		157,500	157,500	315,000
March purchases (50% of $165,000)			82,500	82,500
Total disbursements	228,000	292,500	240,000	760,500

4)

Schedule of Expected Cash Disbursements-Selling and Administrative Expenses (Amount in $)
Particulars	January	February	March	Quarter
Salaries and wages (Fixed)	27,000	27,000	27,000	81,000
Advertising (Fixed)	70,000	70,000	70,000	210,000
Shipping (5% of sales)	20,000	30,000	15,000	65,000
Other expenses (3% of sales)	12,000	18,000	9,000	39,000
Total disbursements	129,000	145,000	121,000	395,000

5)

Cash Budget
Particulars	January	February	March	Quarter
Cash balance, beginning	48,000	30,000	30,800	48,000
Add: cash collections	304,000	440,000	540,000	1,284,000
Total cash available (A)	352,000	470,000	570,800	1,332,000
Less: cash disbursements
For inventory	228,000	292,500	240,000	760,500
For selling and admin    expenses	129,000	145,000	121,000	395,000
For purchase of equipment	-	1,700	84,500	86,200
For cash dividends	45,000	-	-	45,000
Total cash disbursements (B)	402,000	439,200	445,500	1,286,700
Excess (deficiency) of cash (A-B)	(50,000)	30,800	125,300	45,300
Financing needed	80,000	-	-	80,000
Cash balance, ending	30,000	30,800	125,300	125,300