Case 9-31 Master Budget with Supporting Schedules [LO9-2, LO9-4, LO9-8, LO9-9, LO9-10]

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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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 price$12 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)	20,400	June (budget)	50,400
February (actual)	26,400	July (budget)	30,400
March (actual)	40,400	August (budget)	28,400
April (budget)	65,400	September (budget)	25,400
May (budget)	100,400

The concentration of sales before and during May is due to Mothers 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 $4.2 for a pair of earrings. One-half of a months 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. The company has found, however, that only 20% of a months 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	$	220,000
Rent	$	20,000
Salaries	$	110,000
Utilities	$	8,000
Insurance	$	3,200
Depreciation	$	16,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $17,000 in new equipment during May and $42,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $16,500 each quarter, payable in the first month of the following quarter.

A listing of the companys ledger accounts as of March 31 is given below:

Assets
Cash	$	76,000
Accounts receivable ($31,680 February sales;$387,840 March sales)		419,520
Inventory		109,872
Prepaid insurance		22,000
Property and equipment (net)		970,000
Total assets	$	1,597,392
Liabilities and Stockholders Equity
Accounts payable	$	102,000
Dividends payable		16,500
Common stock		840,000
Retained earnings		638,892
Total liabilities and stockholders equity	$	1,597,392

The company maintains a minimum cash balance of $52,000. 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 $52,000 in cash.

Required:

1. Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:

a. A sales budget, by month and in total.

Sales Budget
	April	May	June	Quarter
Budgeted unit sales
Selling price per unit
Total sales

b. A schedule of expected cash collections from sales, by month and in total.

Earrings Unlimited
Schedule of Expected Cash Collections
	April	May	June	Quarter
February sales
March sales
April sales
May sales
June sales
Total cash collections

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.)

Earrings Unlimited
Merchandise Purchases Budget
	April	May	June	Quater
Budgeted unit sales
Total needs
Required purchases
Unit cost
Required dollar purchases

Blank space use:

Add: Beginning merchandise inventory

Add: Desired ending merchandise inventory

Less: Beginning merchandise inventory

Less: Desired ending merchandise inventory

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
Accounts payable
April purchases
May purchases
June purchases
Total cash payments

2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Earrings Unlimited
Cash Budget
For the Three Months Ending June 30
	April	May	June	Quarter
Beginning cash balance
Add collections from customers
Total cash available
Less cash disbursements:
Merchandise purchases
Advertising
Rent
Salaries
Commissions
Utilities
Equipment purchases
Dividends paid
Total cash disbursements
Excess (deficiency) of cash available over disbursements
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash balance

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

Earrings Unlimited
Budgeted Income Statement
For the Three Months Ended June 30
Variable expenses:
Contribution margin or loss?
Fixed expenses:
Net operating income or loss?
Net income or loss?

Choices for the blank boxes #3:

Administrative expenses

Advertising

Beginning merchandise inventory

Commissions

Cost of goods sold

Depreciation

Direct materials

Ending merchandise inventory

Indirect materials

Insurance

Interest expense

Manufacturing overhead

Miscellaneous

Purchases

Rent

Salaries

Sales

Selling expenses

Utilities

Wages

4. A budgeted balance sheet as of June 30.

Earrings Unlimited
Budgeted Balance Sheet
June 30
Assets
Total assets
Liabilities and Stockholders Equity
Total liabilities and stockholders equity

choices for the blank boxes for #4:

Accounts payable, purchases

Accounts receivable

Administrative expenses

Advertising

Cash

Commissions

Common stock

Cost of goods sold

Depreciation

Direct materials

Dividends payable

Indirect materials

Inventory

Loans payable, bank

Manufacturing overhead

Prepaid insurance

Property and equipment, net

Purchases

Retained earnings

Sales

Selling expenses