Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information: 1. Klandon's sales manager reported that the company sold 15,000 bags of rocks in March. He has developed the following sales forecast. The expected sales price is $25 per bag. April May June 18,000 bags 22,000 bags 20,000 bags 24.000 bags 16.000 bags July August 2. Sales personnel receive a 4% commission on every beg of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include the depreciation increase resulting from the budgeted equipment purchase in June (see part 7). Monthly Fixed Selling and Administrative Costs $10.000 Variable Cost/Unit 25,000 $1.00 Depreciation Salaries of sales personnel Advertising Management salaries Miscellaneous 1,000 10.000 500 Bad debts Total costs $46.500 $1.00 3. After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages, the company established a policy requiring the ending Finished Goods Inventory to equal 20% of the following month's budgeted sales in units. On March 31, 4.000 bags were on hand. 4. Eight pounds of direct materials are required to fill each bag of finished rocks. The company wants to have direct materials on hand at the end of each month equal to 10% of the following month's production needs. On March 31, 13.000 pounds of materials were on hand. 5. The direct materials used in production cost $1.25 per pound. Sixty percent of the month's purchases are paid for in the month of purchase: the remaining 40%, in the following month. No discount is available 6. The standard labor allowed for one bag of rocks is 30 minutes. The current direct labor rate is $12 per hour. 7. On June 1, the company plans to spend $60,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value. While full-depreciated, the old equipment will be retained in service. 8. The budgeted monthly variable and fixed overhead amounts are as follows. Variable overhead is based on the number of units produced. The fixed overhead budget is based on an annual production of 420.000 bags. Variable Cost/Unit Monthly Fixed Overhead $8,000 2.500 13,000 $0.08 0.27 Depreciation Indirect materials Indirect labor Utilities Property taxes Maintenance Total costs 18.000 0.15 4,000 7,000 0.25 $52,500 $0.75 9. All sales are made on account. Historically, the company has collected 70% of its sales in the month of sale and 25% in the month following the sale. The remaining 5% of sales is uncollectible (and is included in the previous selling and administrative bed debt expense information). 10. Klandon must maintain a minimum cash balance of $40,000. An open line of credit at a local bank allows the company to borrow up to $175.000 per quarter in $1,000 increments. 11. All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid any time a principal payment is made. The interest rate is 12% per year. 12 A quarterly dividend of $53.000 will be declared and paid in April. 13. Income taxes payable for the first quarter will be paid on April 15. Klandon's tax rate is 30%. 14. The March 31 balance sheet is as follows: March 31 Cash Accounts receivable Raw materials inventory Finished goods inventory Plant & equipment Accumulated depreciation $40.000 93.750 21,600 73.000 200.000 (50,000) $378.350 Total assets $12,000 24.000 Accounts payable Income taxes payable Common stock Retained earnings Total liabilities and equities 52.000 290.350 $378,350 After preparing the budget for the second quarter, Kim Klandon was not satisfied with the projected results and began to investigate the following alternative. d. Klandon would like to reduce the age of accounts receivable to better manage the cash cycle. Instead of charging a fee for accounts that are paid in the second month after sale, she wants to offer a 2% cash discount. Since the company cannot afford to have total revenue decrease, Klandon plans to increase the sales price to $25.50 per bag. Customers who pay with cash at the time of purchase won't see any increase in their costs, but customers who purchase on account and pay later will. Klandon anticipates the following collection pattern if such a change is made: Cash sales 40 % Credit: Month of sale 30 % Month after sale 25 96 Uncollectible 5 % 100 % (d1). Your answer is partially correct Prepare all components of Klandon's master budget for the second quarter. (Enter negative amounts using either a negative sign preceding the number eg -45. Do not leave any answer field blank. Enter o for amounts.) Sales Budget April May June Budgeted units sold 18000 22000 20000 Budgeted sales price V $ 25.5 25.5 $ 25.5 Budgeted sales revenue > C $ 459000 $ 561000 $ 510000 Quarter 60000 $ 25.5 $ 1530000 Selling and Administrative Expense Budget April May Depreciation S 10000 $ 10000 Sales personnel compensation 25000 25000 Advertising 1000 1000 Management salaries 10000 10000 Miscellaneous 500 500 Sales commissions 18360 22440 Bad debts 22950 28050 Total budgeted expenses 87810 $ 96990 Less V: Non-cash expenses Depreciation -10000 i -10000 Bad debts -22950 -28050 Total cash costs $ $ 54860 $ 58940 June Quarter $ 11000 $ 31000 25000 75000 1000 3000 10000 30000 500 1500 20400 61200 25500 76500 $ 93400 $ 278200 $ $ -11000 i $ -31000 -25500 i -76500 1 $ 56900 $ 170700 Cash Receipts Budget April May June March A/R $ s $ April sales 1 Cash Credit May sales Cash O IO NA ORA I II 00 INI I DO NORM 000 0 Credit June sales Cash Credit Totals Total Cash Receipts Accounts Receivable Sales Discounts Bad Debts $ $ $ $ I DA NI DO 1 10 10 101 LII II III $ $ $ Cash Budget April May Beginning cash balance $ 40000 40208 Collections from sales 411378 502962 Total cash avallable to spend 451378 543170 Less : Disbursements Materials purchases 125610 204860 Direct labor 110400 129600 i Manufacturing overhead 58300 60700 Selling & administrative expenses 54860 i 58940 i Income taxes 24000 Equipment purchase 0 0 Dividends 53000 i 0 Total cash disbursements 426170 454100 Cash excess (deficiency) 25208 89070 June Quarter $ 73920 40000 493170 1407510 567090 1447510 211840 542310 i 124800 364800 1 60100 179100 i 56900 i 170700 i 24000 60000 i 60000 i 53000 i 513640 1393910 113450 Minimum cash balance 40000 40000 1 Cash excess (needed) - 14792 49070 Financing Borrowings 15000 0 Repayments 0 15000 i Interest 150 Total financing 15000 14850 Ending cash balance 40208 $ 73920 40000 i 40000 i 0 0 0 15000 0 15000 i 0 150 0 29850 $ $ 113450 $ 113450 Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information: 1. Klandon's sales manager reported that the company sold 15,000 bags of rocks in March. He has developed the following sales forecast. The expected sales price is $25 per bag. April May June 18,000 bags 22,000 bags 20,000 bags 24.000 bags 16.000 bags July August 2. Sales personnel receive a 4% commission on every beg of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include the depreciation increase resulting from the budgeted equipment purchase in June (see part 7). Monthly Fixed Selling and Administrative Costs $10.000 Variable Cost/Unit 25,000 $1.00 Depreciation Salaries of sales personnel Advertising Management salaries Miscellaneous 1,000 10.000 500 Bad debts Total costs $46.500 $1.00 3. After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages, the company established a policy requiring the ending Finished Goods Inventory to equal 20% of the following month's budgeted sales in units. On March 31, 4.000 bags were on hand. 4. Eight pounds of direct materials are required to fill each bag of finished rocks. The company wants to have direct materials on hand at the end of each month equal to 10% of the following month's production needs. On March 31, 13.000 pounds of materials were on hand. 5. The direct materials used in production cost $1.25 per pound. Sixty percent of the month's purchases are paid for in the month of purchase: the remaining 40%, in the following month. No discount is available 6. The standard labor allowed for one bag of rocks is 30 minutes. The current direct labor rate is $12 per hour. 7. On June 1, the company plans to spend $60,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value. While full-depreciated, the old equipment will be retained in service. 8. The budgeted monthly variable and fixed overhead amounts are as follows. Variable overhead is based on the number of units produced. The fixed overhead budget is based on an annual production of 420.000 bags. Variable Cost/Unit Monthly Fixed Overhead $8,000 2.500 13,000 $0.08 0.27 Depreciation Indirect materials Indirect labor Utilities Property taxes Maintenance Total costs 18.000 0.15 4,000 7,000 0.25 $52,500 $0.75 9. All sales are made on account. Historically, the company has collected 70% of its sales in the month of sale and 25% in the month following the sale. The remaining 5% of sales is uncollectible (and is included in the previous selling and administrative bed debt expense information). 10. Klandon must maintain a minimum cash balance of $40,000. An open line of credit at a local bank allows the company to borrow up to $175.000 per quarter in $1,000 increments. 11. All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid any time a principal payment is made. The interest rate is 12% per year. 12 A quarterly dividend of $53.000 will be declared and paid in April. 13. Income taxes payable for the first quarter will be paid on April 15. Klandon's tax rate is 30%. 14. The March 31 balance sheet is as follows: March 31 Cash Accounts receivable Raw materials inventory Finished goods inventory Plant & equipment Accumulated depreciation $40.000 93.750 21,600 73.000 200.000 (50,000) $378.350 Total assets $12,000 24.000 Accounts payable Income taxes payable Common stock Retained earnings Total liabilities and equities 52.000 290.350 $378,350 After preparing the budget for the second quarter, Kim Klandon was not satisfied with the projected results and began to investigate the following alternative. d. Klandon would like to reduce the age of accounts receivable to better manage the cash cycle. Instead of charging a fee for accounts that are paid in the second month after sale, she wants to offer a 2% cash discount. Since the company cannot afford to have total revenue decrease, Klandon plans to increase the sales price to $25.50 per bag. Customers who pay with cash at the time of purchase won't see any increase in their costs, but customers who purchase on account and pay later will. Klandon anticipates the following collection pattern if such a change is made: Cash sales 40 % Credit: Month of sale 30 % Month after sale 25 96 Uncollectible 5 % 100 % (d1). Your answer is partially correct Prepare all components of Klandon's master budget for the second quarter. (Enter negative amounts using either a negative sign preceding the number eg -45. Do not leave any answer field blank. Enter o for amounts.) Sales Budget April May June Budgeted units sold 18000 22000 20000 Budgeted sales price V $ 25.5 25.5 $ 25.5 Budgeted sales revenue > C $ 459000 $ 561000 $ 510000 Quarter 60000 $ 25.5 $ 1530000 Selling and Administrative Expense Budget April May Depreciation S 10000 $ 10000 Sales personnel compensation 25000 25000 Advertising 1000 1000 Management salaries 10000 10000 Miscellaneous 500 500 Sales commissions 18360 22440 Bad debts 22950 28050 Total budgeted expenses 87810 $ 96990 Less V: Non-cash expenses Depreciation -10000 i -10000 Bad debts -22950 -28050 Total cash costs $ $ 54860 $ 58940 June Quarter $ 11000 $ 31000 25000 75000 1000 3000 10000 30000 500 1500 20400 61200 25500 76500 $ 93400 $ 278200 $ $ -11000 i $ -31000 -25500 i -76500 1 $ 56900 $ 170700 Cash Receipts Budget April May June March A/R $ s $ April sales 1 Cash Credit May sales Cash O IO NA ORA I II 00 INI I DO NORM 000 0 Credit June sales Cash Credit Totals Total Cash Receipts Accounts Receivable Sales Discounts Bad Debts $ $ $ $ I DA NI DO 1 10 10 101 LII II III $ $ $ Cash Budget April May Beginning cash balance $ 40000 40208 Collections from sales 411378 502962 Total cash avallable to spend 451378 543170 Less : Disbursements Materials purchases 125610 204860 Direct labor 110400 129600 i Manufacturing overhead 58300 60700 Selling & administrative expenses 54860 i 58940 i Income taxes 24000 Equipment purchase 0 0 Dividends 53000 i 0 Total cash disbursements 426170 454100 Cash excess (deficiency) 25208 89070 June Quarter $ 73920 40000 493170 1407510 567090 1447510 211840 542310 i 124800 364800 1 60100 179100 i 56900 i 170700 i 24000 60000 i 60000 i 53000 i 513640 1393910 113450 Minimum cash balance 40000 40000 1 Cash excess (needed) - 14792 49070 Financing Borrowings 15000 0 Repayments 0 15000 i Interest 150 Total financing 15000 14850 Ending cash balance 40208 $ 73920 40000 i 40000 i 0 0 0 15000 0 15000 i 0 150 0 29850 $ $ 113450 $ 113450