Prepare a master budget
You have just been hired as a new management trainee by XYZ Limited, 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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting programme. To achieve this you have worked with accounting and other areas within the business to gather the information below.
The company sells many styles of earrings, but all are sold for the same price - $10 per pair. Actual unit sales (in pairs) of earrings for the last three months and budgeted sales for the next six months are as follows (in pairs of earrings):
|
Month
|
Sales (pairs)
|
Month
|
Sales (pairs)
|
|
January (actual)
|
20,000
|
June (budget)
|
50,000
|
|
February (actual)
|
26,000
|
July (budget)
|
30,000
|
|
March (actual)
|
40,000
|
August (budget)
|
28,000
|
|
April (budget)
|
65,000
|
September (budget)
|
25,000
|
|
May (budget)
|
100,000
|
|
|
The increase in sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. The company uses variable costing in its budgeted income statement and balance sheet. Suppliers are paid $4 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. However the company has found that only 20% of a month's sales are collected in the month of sale; 70% is collected in the following month, and the remaining 10% is collected in the second month following the sale. There are no bad debts.
Monthly operating expenses for the company are given below:
|
Variable:
|
|
|
Sales commissions
|
4% of sales
|
|
Fixed:
|
|
|
Advertising
|
$200,000
|
|
Rent
|
$18,000
|
|
Salaries
|
$106,000
|
|
Utilities
|
$7,000
|
|
Insurance
|
$3,000
|
|
Depreciation
|
$14,000
|
Insurance is paid on an annual basis, in November each year. All other expenses are paid for in the month that they are incurred. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. There is no depreciation on the new equipment for the budget period, as it is not operational until July. The company declares dividends of $15,000 for each quarter, payable in the first month following the end of the quarter.
A listing of the company's ledger accounts as of 31 March is given below:
|
Assets
|
|
|
$
|
|
Bank
|
74,000
|
|
Accounts Receivable ($26,000 February sales; $320,000 March sales)
|
346,000
|
|
Inventory
|
104,000
|
|
Prepaid Insurance
|
21,000
|
|
Building and Equipment
|
2,750,000
|
|
Accumulated Depreciation
|
(1,800,000)
|
|
Total Assets
|
$1,495,000
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
$
|
|
Accounts Payable
|
100,000
|
|
Dividends Payable
|
15,000
|
|
Ordinary Shares
|
800,000
|
|
Retained Earnings
|
580,000
|
|
Total Liabilities and Shareholders' Equity
|
$1,495,000
|
The company maintains a minimum cash balance of $50,000. Any borrowing is done at the beginning of a month and any repayments are made at the end of a month.
The company has an agreement with their bank that allows the company to borrow in increments of $1,000 at the beginning of each month up to a maximum of $200,000. The interest rate on any borrowings is 1% per month (interest is not compounded). At the end of each quarter the company would pay all of the interest due for that quarter and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.
Required
1. Prepare a master budget for the three month period ending 30 June. Include the following detailed budgets:
a) A sales budget, by month and in total for the quarter.
b) A schedule of expected cash collections from sales, by month and in total for the quarter.
c) A purchases budget in units and in dollars. Show the budget by month and in total for the quarter.
d) A schedule of expected cash disbursements for purchases, by month and in total for the quarter.
e) A cash budget. Show the budget by month and in total for the quarter. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
f) A budgeted income statement for the three-month period ending 30 June. Use the contribution approach.
g) A budgeted balance sheet as at 30 June.
2. Having prepared the budgets for the next quarter, you are now interested in ways that the budgeting process and profitability could be improved. Briefly discuss some areas where XYZ Limited could incorporate improvements into the budgets produced in part 1 above.