Susquehanna Corp. is a manufacturer of earrings. You have been hired as a new management trainee of the company. In the past, the company has done very little in 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 year. You have gathered the beginning balance sheet and the necessary assumptions for you to create the budget. The company has an agreement with a bank that allows the company to borrow in increments of $10,000 at the beginning of each quarter. The interest is 2% per quarter and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accumulated interest for the quarter on the loan and as much of the loan as possible (in increments of $10,000), while still retaining at least $40,000 in cash. Insurance for the whole year will be paid in January. Prepare the master budget for the year 2017. 0 Earrings Corp. Earrings Corp. Balance Sheet Budgeting Assumptions December 31, 2016 2017 2018 Assets Sales Budget Assumptions Same for all quarters Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 Current assets: Budgeted sales in pairs of earrings 105,000 50,000 60,000 100,000 135,000 65,000 Cash $ 48,000 Selling price per pair $ 23.50 Accounts receivable 224,000 Percentage of sales collected in the quarter of sale 60% Raw materials inventory (240,000 grams of silver) 120,000 Percentage of sales collected in the quarter after sale 40% Finished goods inventory (48,000 pairs of earrings) 480,000 Total current assets $ 872,000 Production Budget Assumptions Plant and equipment: Percentage of next quarter's sales needed in ending finished goods inventory 40% Land 50,000 Buildings and equipment 650,000 Direct Materials Budget Assumptions Accumulated depreciation (330,000) Grams of silver per pair of earring 10 Total Plant and equipment, net 370,000 Cost per gram of silver $ 0.50 Total assets $ 1,242,000 Percentage of next quarter's production needs in ending inventory 20% Percentage of purchases paid in the quarter of purchase 55% Liabilities and Stockholders' Equity Percentage of purchases paid in the quarter after purchase 45% Current liabilities: Accounts payable $ 93,000 Direct Labor Budget Assumptions Stockholders' equity: Direct labor-hours required per pair 0.20 Common stock $ 700,000 Direct labor cost per hour $ 12.00 Retained earnings 449,000 Total stockholders' equity 1,149,000 Manufacturing Overhead Budget Assumptions Total liabilities and stockholders' equity $ 1,242,000 Variable manufacturing overhead per direct labor-hour $ 1.50 Fixed manufacturing overhead excluding depreciation per quarter $ 145,950 Depreciation on factory assets per quarter $ 25,000 $ 30,000 $ 32,000 $ 33,000 Selling and Administrative Expense Budget Assumptions Variable selling and administrative expense per pair $ 2.80 Fixed selling and administrative expense: Advertising expense per quarter $ 270,000 Executive salaries per quarter $ 105,000 Insurance expense per quarter $ 48,000 (the whole year's insurance will be paid in January) Rent expense per quarter $ 240,000 Depreciation on non-factory assets per quarter $ 14,000 $ 16,000 $ 17,000 $ 18,000 Cash Budget Assumptions Minimum cash balance $ 40,000 Equipment purchases $ 20,000 $ 40,000 $ 15,000 $ 10,000 Dividends per quarter $ 15,000 Interest rate per quarter 2% Loans can be made and repaid in increments of $10,000 Earrings Corp. Master Budget For the Year Ended December 31, 2017 Sales Budget Quarter 1 2 3 4 Year Budgeted unit sales (in pairs) ? ? ? ? ? Selling price per unit ? ? ? ? ? Total sales ? ? ? ? ? Schedule of Expected Cash Collections Beginning accounts receivable ? ? First quarter sales ? ? ? Second quarter sales ? ? ? Third quarter sales ? ? ? Fourth quarter sales ? ? Total cash collections ? ? ? ? ? Production Budget Quarter 1 2 3 4 Year Budgeted unit sales ? ? ? ? ? Add: Desired units of ending finished goods inventory ? ? ? ? ? Total needs ? ? ? ? ? Less: Units of beginning finshed goods inventory ? ? ? ? ? Required production in units ? ? ? ? ? Direct Materials Budget Quarter 1 2 3 4 Year Required production in pairs ? ? ? ? ? Units of raw materials needed per pair ? ? ? ? ? Units of raw materials needed to meet production ? ? ? ? ? Add desired units of ending raw materials inventory ? ? ? 214,000 ? Total units of raw materials needed ? ? ? ? ? Less units of beginning raw materials inventory ? ? ? ? ? Units of raw materias to be purchased ? ? ? ? ? Cost of raw materials per pound ? ? ? ? ? Cost of raw materials to be purchased ? ? ? ? ? Schedule of Expected Cash Disbursements for Purchases of Materials Beginning accounts payable ? ? First quarter purchases ? ? ? Second quarter purchases ? ? ? Third quarter purchases ? ? ? Forth quarter purchases ? ? Total cash disbursements for materials ? ? ? ? ? Direct Labor Budget Quarter 1 2 3 4 Year Required production in pairs ? ? ? ? ? Direct labor-hours per pair ? ? ? ? ? Total direct labor-hours needed ? ? ? ? ? Direct labor cost per hour ? ? ? ? ? Total direct labor cost ? ? ? ? ? Manufacturing Overhead Budget Quarter 1 2 3 4 Year Budgeted direct labor-hours ? ? ? ? ? Variable manufacturing overhead rate ? ? ? ? ? Variable manufacturing overhead ? ? ? ? ? Fixed manufacturing overhead ? ? ? ? ? Total manufacturing overhead ? ? ? ? ? Less depreciation on factory assets ? ? ? ? ? Cash disbursements for manufacturing overhead ? ? ? ? ? Total manufacturing overhead ? Budgeted direct labor-hours ? Predetermined overhead rate for the year 2017 ? Ending Finished Goods Inventory Budget (absorption costing basis) Item Quantity Cost Total Production cost per case: Direct materials ? grams ? per gram ? Direct labor ? hours ? per hour ? Manufacturing overhead ? hours ? per hour ? Unit product cost ? Budgeted finished goods inventory: Ending finished goods inventory in cases ? Unit product cost ? Ending finished goods inventory in dollars ? Selling and Administrative Expense Budget Quarter 1 2 3 4 Year Budgeted unit sales ? ? ? ? ? Variable selling and administrative expense per pair ? ? ? ? ? Total variable selling and administrative expense ? ? ? ? ? Fixed selling and administrative expense per quarter: Advertising ? ? ? ? ? Executive salaries ? ? ? ? ? Insurance ? ? ? ? ? Rent ? ? ? ? ? Depreciation on non-factory assets ? ? ? ? ? Total fixed selling and administrative expense ? ? ? ? ? Total selling and administrative expense ? ? ? ? ? Adjustment for prepaid insurance #VALUE! #VALUE! #VALUE! #VALUE! #VALUE! Less depreciation on non-factory assets ? ? ? ? ? Cash disbursements for selling and administrative expense ? ? ? ? ? Cash Budget Quarter 1 2 3 4 Year Beginning cash balance ? ? ? ? ? Add cash receipts: Collections from customers ? ? ? ? ? Total cash available ? ? ? ? ? Less cash disbursements: Direct materials ? ? ? ? ? Direct labor ? ? ? ? ? Manufacturing overhead ? ? ? ? ? Selling and administrative ? ? ? ? ? Equipment purchases ? ? ? ? ? Dividends ? ? ? ? ? Total cash disbursements ? ? ? ? ? Excess (deficiency) of cash available over disbursements ? ? ? ? ? Financing: Borrowings (at the beginnings of quarters) $ 50,000.00 $ - ? Repayments (at end of the year) $ - ? ? Interest $ (1,000.00) ? ? Total financing $ 49,000.00 ? ? ? ? Ending cash balance ? ? ? ? ?
| Susquehanna Corp. is a manufacturer of earrings. You have been hired as a new management trainee of the company. In the past, the company has done very little in 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 year. You have gathered the beginning balance sheet and the necessary assumptions for you to create the budget. The company has an agreement with a bank that allows the company to borrow in increments of $10,000 at the beginning of each quarter. The interest is 2% per quarter and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accumulated interest for the quarter on the loan and as much of the loan as possible (in increments of $10,000), while still retaining at least $40,000 in cash. Insurance for the whole year will be paid in January. Prepare the master budget for the year 2017. | |||||||||||||
| 0 | |||||||||||||
| Earrings Corp. | Earrings Corp. | ||||||||||||
| Balance Sheet | Budgeting Assumptions | ||||||||||||
| December 31, 2016 | |||||||||||||
| 2017 | 2018 | ||||||||||||
| Assets | Sales Budget Assumptions | Same for all quarters | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Quarter 1 | Quarter 2 | |||||
| Current assets: | Budgeted sales in pairs of earrings | 105,000 | 50,000 | 60,000 | 100,000 | 135,000 | 65,000 | ||||||
| Cash | $ 48,000 | Selling price per pair | $ 23.50 | ||||||||||
| Accounts receivable | 224,000 | Percentage of sales collected in the quarter of sale | 60% | ||||||||||
| Raw materials inventory (240,000 grams of silver) | 120,000 | Percentage of sales collected in the quarter after sale | 40% | ||||||||||
| Finished goods inventory (48,000 pairs of earrings) | 480,000 | ||||||||||||
| Total current assets | $ 872,000 | Production Budget Assumptions | |||||||||||
| Plant and equipment: | Percentage of next quarter's sales needed in ending finished goods inventory | 40% | |||||||||||
| Land | 50,000 | ||||||||||||
| Buildings and equipment | 650,000 | Direct Materials Budget Assumptions | |||||||||||
| Accumulated depreciation | (330,000) | Grams of silver per pair of earring | 10 | ||||||||||
| Total Plant and equipment, net | 370,000 | Cost per gram of silver | $ 0.50 | ||||||||||
| Total assets | $ 1,242,000 | Percentage of next quarter's production needs in ending inventory | 20% | ||||||||||
| Percentage of purchases paid in the quarter of purchase | 55% | ||||||||||||
| Liabilities and Stockholders' Equity | Percentage of purchases paid in the quarter after purchase | 45% | |||||||||||
| Current liabilities: | |||||||||||||
| Accounts payable | $ 93,000 | Direct Labor Budget Assumptions | |||||||||||
| Stockholders' equity: | Direct labor-hours required per pair | 0.20 | |||||||||||
| Common stock | $ 700,000 | Direct labor cost per hour | $ 12.00 | ||||||||||
| Retained earnings | 449,000 | ||||||||||||
| Total stockholders' equity | 1,149,000 | Manufacturing Overhead Budget Assumptions | |||||||||||
| Total liabilities and stockholders' equity | $ 1,242,000 | Variable manufacturing overhead per direct labor-hour | $ 1.50 | ||||||||||
| Fixed manufacturing overhead excluding depreciation per quarter | $ 145,950 | ||||||||||||
| Depreciation on factory assets per quarter | $ 25,000 | $ 30,000 | $ 32,000 | $ 33,000 | |||||||||
| Selling and Administrative Expense Budget Assumptions | |||||||||||||
| Variable selling and administrative expense per pair | $ 2.80 | ||||||||||||
| Fixed selling and administrative expense: | |||||||||||||
| Advertising expense per quarter | $ 270,000 | ||||||||||||
| Executive salaries per quarter | $ 105,000 | ||||||||||||
| Insurance expense per quarter | $ 48,000 | (the whole year's insurance will be paid in January) | |||||||||||
| Rent expense per quarter | $ 240,000 | ||||||||||||
| Depreciation on non-factory assets per quarter | $ 14,000 | $ 16,000 | $ 17,000 | $ 18,000 | |||||||||
| Cash Budget Assumptions | |||||||||||||
| Minimum cash balance | $ 40,000 | ||||||||||||
| Equipment purchases | $ 20,000 | $ 40,000 | $ 15,000 | $ 10,000 | |||||||||
| Dividends per quarter | $ 15,000 | ||||||||||||
| Interest rate per quarter | 2% | ||||||||||||
| Loans can be made and repaid in increments of $10,000 | |||||||||||||
| Earrings Corp. | |||||||||||||
| Master Budget | |||||||||||||
| For the Year Ended December 31, 2017 | |||||||||||||
| Sales Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Budgeted unit sales (in pairs) | ? | ? | ? | ? | ? | ||||||||
| Selling price per unit | ? | ? | ? | ? | ? | ||||||||
| Total sales | ? | ? | ? | ? | ? | ||||||||
| Schedule of Expected Cash Collections | |||||||||||||
| Beginning accounts receivable | ? | ? | |||||||||||
| First quarter sales | ? | ? | ? | ||||||||||
| Second quarter sales | ? | ? | ? | ||||||||||
| Third quarter sales | ? | ? | ? | ||||||||||
| Fourth quarter sales | ? | ? | |||||||||||
| Total cash collections | ? | ? | ? | ? | ? | ||||||||
| Production Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Budgeted unit sales | ? | ? | ? | ? | ? | ||||||||
| Add: Desired units of ending finished goods inventory | ? | ? | ? | ? | ? | ||||||||
| Total needs | ? | ? | ? | ? | ? | ||||||||
| Less: Units of beginning finshed goods inventory | ? | ? | ? | ? | ? | ||||||||
| Required production in units | ? | ? | ? | ? | ? | ||||||||
| Direct Materials Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Required production in pairs | ? | ? | ? | ? | ? | ||||||||
| Units of raw materials needed per pair | ? | ? | ? | ? | ? | ||||||||
| Units of raw materials needed to meet production | ? | ? | ? | ? | ? | ||||||||
| Add desired units of ending raw materials inventory | ? | ? | ? | 214,000 | ? | ||||||||
| Total units of raw materials needed | ? | ? | ? | ? | ? | ||||||||
| Less units of beginning raw materials inventory | ? | ? | ? | ? | ? | ||||||||
| Units of raw materias to be purchased | ? | ? | ? | ? | ? | ||||||||
| Cost of raw materials per pound | ? | ? | ? | ? | ? | ||||||||
| Cost of raw materials to be purchased | ? | ? | ? | ? | ? | ||||||||
| Schedule of Expected Cash Disbursements for Purchases of Materials | |||||||||||||
| Beginning accounts payable | ? | ? | |||||||||||
| First quarter purchases | ? | ? | ? | ||||||||||
| Second quarter purchases | ? | ? | ? | ||||||||||
| Third quarter purchases | ? | ? | ? | ||||||||||
| Forth quarter purchases | ? | ? | |||||||||||
| Total cash disbursements for materials | ? | ? | ? | ? | ? | ||||||||
| Direct Labor Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Required production in pairs | ? | ? | ? | ? | ? | ||||||||
| Direct labor-hours per pair | ? | ? | ? | ? | ? | ||||||||
| Total direct labor-hours needed | ? | ? | ? | ? | ? | ||||||||
| Direct labor cost per hour | ? | ? | ? | ? | ? | ||||||||
| Total direct labor cost | ? | ? | ? | ? | ? | ||||||||
| Manufacturing Overhead Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Budgeted direct labor-hours | ? | ? | ? | ? | ? | ||||||||
| Variable manufacturing overhead rate | ? | ? | ? | ? | ? | ||||||||
| Variable manufacturing overhead | ? | ? | ? | ? | ? | ||||||||
| Fixed manufacturing overhead | ? | ? | ? | ? | ? | ||||||||
| Total manufacturing overhead | ? | ? | ? | ? | ? | ||||||||
| Less depreciation on factory assets | ? | ? | ? | ? | ? | ||||||||
| Cash disbursements for manufacturing overhead | ? | ? | ? | ? | ? | ||||||||
| Total manufacturing overhead | ? | ||||||||||||
| Budgeted direct labor-hours | ? | ||||||||||||
| Predetermined overhead rate for the year 2017 | ? | ||||||||||||
| Ending Finished Goods Inventory Budget (absorption costing basis) | |||||||||||||
| Item | Quantity | Cost | Total | ||||||||||
| Production cost per case: | |||||||||||||
| Direct materials | ? | grams | ? | per gram | ? | ||||||||
| Direct labor | ? | hours | ? | per hour | ? | ||||||||
| Manufacturing overhead | ? | hours | ? | per hour | ? | ||||||||
| Unit product cost | ? | ||||||||||||
| Budgeted finished goods inventory: | |||||||||||||
| Ending finished goods inventory in cases | ? | ||||||||||||
| Unit product cost | ? | ||||||||||||
| Ending finished goods inventory in dollars | ? | ||||||||||||
| Selling and Administrative Expense Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Budgeted unit sales | ? | ? | ? | ? | ? | ||||||||
| Variable selling and administrative expense per pair | ? | ? | ? | ? | ? | ||||||||
| Total variable selling and administrative expense | ? | ? | ? | ? | ? | ||||||||
| Fixed selling and administrative expense per quarter: | |||||||||||||
| Advertising | ? | ? | ? | ? | ? | ||||||||
| Executive salaries | ? | ? | ? | ? | ? | ||||||||
| Insurance | ? | ? | ? | ? | ? | ||||||||
| Rent | ? | ? | ? | ? | ? | ||||||||
| Depreciation on non-factory assets | ? | ? | ? | ? | ? | ||||||||
| Total fixed selling and administrative expense | ? | ? | ? | ? | ? | ||||||||
| Total selling and administrative expense | ? | ? | ? | ? | ? | ||||||||
| Adjustment for prepaid insurance | #VALUE! | #VALUE! | #VALUE! | #VALUE! | #VALUE! | ||||||||
| Less depreciation on non-factory assets | ? | ? | ? | ? | ? | ||||||||
| Cash disbursements for selling and administrative expense | ? | ? | ? | ? | ? | ||||||||
| Cash Budget | Quarter | ||||||||||||
| 1 | 2 | 3 | 4 | Year | |||||||||
| Beginning cash balance | ? | ? | ? | ? | ? | ||||||||
| Add cash receipts: | |||||||||||||
| Collections from customers | ? | ? | ? | ? | ? | ||||||||
| Total cash available | ? | ? | ? | ? | ? | ||||||||
| Less cash disbursements: | |||||||||||||
| Direct materials | ? | ? | ? | ? | ? | ||||||||
| Direct labor | ? | ? | ? | ? | ? | ||||||||
| Manufacturing overhead | ? | ? | ? | ? | ? | ||||||||
| Selling and administrative | ? | ? | ? | ? | ? | ||||||||
| Equipment purchases | ? | ? | ? | ? | ? | ||||||||
| Dividends | ? | ? | ? | ? | ? | ||||||||
| Total cash disbursements | ? | ? | ? | ? | ? | ||||||||
| Excess (deficiency) of cash available over disbursements | ? | ? | ? | ? | ? | ||||||||
| Financing: | |||||||||||||
| Borrowings (at the beginnings of quarters) | $ 50,000.00 | $ - | ? | ||||||||||
| Repayments (at end of the year) | $ - | ? | ? | ||||||||||
| Interest | $ (1,000.00) | ? | ? | ||||||||||
| Total financing | $ 49,000.00 | ? | ? | ? | ? | ||||||||
| Ending cash balance | ? | ? | ? | ? | ? | ||||||||
Related questions
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 priceâ$18 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) | 23,800 | June (budget) | 53,800 |
| February (actual) | 29,800 | July (budget) | 33,800 |
| March (actual) | 43,800 | August (budget) | 31,800 |
| April (budget) | 68,800 | September (budget) | 28,800 |
| May (budget) | 103,800 | ||
The concentration of sales before and during May is due to Motherâs 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 $5.90 for a pair of earrings. One-half of a monthâs 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 monthâs 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 | $ | 390,000 | |
| Rent | $ | 37,000 | |
| Salaries | $ | 144,000 | |
| Utilities | $ | 16,500 | |
| Insurance | $ | 4,900 | |
| Depreciation | $ | 33,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $25,500 in new equipment during May and $59,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $29,250 each quarter, payable in the first month of the following quarter.
The companyâs balance sheet as of March 31 is given below:
| Assets | ||
| Cash | $ | 93,000 |
| Accounts receivable ($53,640 February sales; $630,720 March sales) | 684,360 | |
| Inventory | 162,368 | |
| Prepaid insurance | 30,500 | |
| Property and equipment (net) | 1,140,000 | |
| Total assets | $ | 2,110,228 |
| Liabilities and Stockholdersâ Equity | ||
| Accounts payable | $ | 119,000 |
| Dividends payable | 29,250 | |
| Common stock | 1,180,000 | |
| Retained earnings | 781,978 | |
| Total liabilities and stockholdersâ equity | $ | 2,110,228 |
The company maintains a minimum cash balance of $69,000. 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 $69,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $69,000.
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted balance sheet as of June 30.
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 priceâ$15 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) | 21,800 | June (budget) | 51,800 |
| February (actual) | 27,800 | July (budget) | 31,800 |
| March (actual) | 41,800 | August (budget) | 29,800 |
| April (budget) | 66,800 | September (budget) | 26,800 |
| May (budget) | 101,800 | ||
The concentration of sales before and during May is due to Motherâs 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 $4.90 for a pair of earrings. One-half of a monthâs 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 monthâs 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 | $ | 290,000 | |
| Rent | $ | 27,000 | |
| Salaries | $ | 124,000 | |
| Utilities | $ | 11,500 | |
| Insurance | $ | 3,900 | |
| Depreciation | $ | 23,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter.
Selected items from the companyâs March 31 balance sheet are as follows:
| Cash | $ | 83,000 |
| Accounts receivable ($41,700 February sales; $501,600 March sales) | 543,300 | |
| Inventory | 130,928 | |
| Accounts payable | 109,000 | |
| Dividends payable | 21,750 | |
The company maintains a minimum cash balance of $59,000. 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 $59,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:
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 $59,000.
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 priceâ$17 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) | 23,600 | June (budget) | 53,600 |
| February (actual) | 29,600 | July (budget) | 33,600 |
| March (actual) | 43,600 | August (budget) | 31,600 |
| April (budget) | 68,600 | September (budget) | 28,600 |
| May (budget) | 103,600 | ||
The concentration of sales before and during May is due to Motherâs 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 $5.80 for a pair of earrings. One-half of a monthâs 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 monthâs 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 | $ | 380,000 | |
| Rent | $ | 36,000 | |
| Salaries | $ | 142,000 | |
| Utilities | $ | 16,000 | |
| Insurance | $ | 4,800 | |
| Depreciation | $ | 32,000 | |
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $25,000 in new equipment during May and $58,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $28,500 each quarter, payable in the first month of the following quarter.
The companyâs balance sheet as of March 31 is given below:
| Assets | ||
| Cash | $ | 92,000 |
| Accounts receivable ($50,320 February sales; $592,960 March sales) | 643,280 | |
| Inventory | 159,152 | |
| Prepaid insurance | 30,000 | |
| Property and equipment (net) | 1,130,000 | |
| Total assets | $ | 2,054,432 |
| Liabilities and Stockholdersâ Equity | ||
| Accounts payable | $ | 118,000 |
| Dividends payable | 28,500 | |
| Common stock | 1,160,000 | |
| Retained earnings | 747,932 | |
| Total liabilities and stockholdersâ equity | $ | 2,054,432 |
The company maintains a minimum cash balance of $68,000. 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 $68,000 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 $68,000.
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.
Prepare a master budget for the three-month period ending June 30 that includes a sales budget, by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash collections, by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a merchandise purchases budget in units and in dollars. Show the budget by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash disbursements for merchandise purchases, by month and in total.
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Prepare a master budget for the three-month period ending June 30 that includes 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 $68,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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Prepare a master budget for the three-month period ending June 30 that includes a budgeted income statement for the three-month period ending June 30. Use the contribution approach.
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Prepare a master budget for the three-month period ending June 30 that includes a budgeted balance sheet as of June 30.
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