Parts A and B of this assignment are based on the scenario of Allenby Ltd provided below. Part A: Evaluating a Company's Budget Procedures and Behavioural Aspects of Budgeting Allenby Ltd is a distributor of earrings to various retail outlets located in shopping malls across the country. The company operates on a financial year basis and begins its annual budgeting process in late March when the Chief Executive Ofcer (CEO) establishes targets for total sales dollars and net operating income before taxes for the next nancial year. The sales target is given to Marketing Department, where the Marketing manager, Ms Dory Thompson formulates a sales budget in both units and dollars. Ms Thompson also estimates the cost of the marketing activities required to support target sales volume and prepares a tentative marketing expense budget. The Deputy CEO uses the sales and profit targets, and the tentative marketing expense budget to determine the dollar amounts that can be devoted to purchases and ofce expense. The Deputy CEO prepares the budget for ofce expenses, and then forward to the Purchases Department, the sales budget in units and total dollar amount that can be devoted to purchases. The purchases manager is Mr Mark Treble. The purchases manager develops a purchases plan that will acquire the required inventory units when needed within the cost constraints set by the Deputy CEO. The budgeting process usually comes to a halt at this point because the purchases manager does not consider the nancial resources allocated to his department to be adequate. When this standstill occurs, the Chief Finance Ofcer (CFO), the Deputy CEO, the marketing manager, and the purchases manager meet to determine the nal budgets for each of the areas. This normally results in a modest increase in the total amount available for inventory costs, while the marketing expense and ofce expense budgets are cut. The total sales and net operating income targets proposed by the CEO are seldom changed. Although the managers are hardly pleased with the compromise, these budgets are nal. The marketing and purchases managers then develop a new detail budget for their own departments. However, none of these departments has achieved their budgets in recent years. Sales often run below the target. When budgeted sales are not achieved, each department is expected to cut costs so that the CEO's prot A listing of the company's ledger accounts as of March 31 is given below. Assets Cash $70 000 Accounts receivable 436 800 ($33 600 February sales, $403 200 March sales) Inventory 148 500 Prepaid insurance 25 200 Property and equipment (net) 903 500 Total assets $1 584 [M1 Liabilities and Stockholders' Equity Accounts payable $125 000 Dividends payable 15 000 Common stock 850 000 Retained earnings 594 000 Total liabilities and stockholders' equity $1 584 000 The company maintains a minimum cash balance of $60 000. All 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 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 $60 000 in cash. Required: You are required to provide all the supporting schedules that are needed to compile the budgeted balance sheet for the three month period ending June 30 as follows: 1. A sales budget, by month and in total (6 marks) 2. A schedule of expected cash collections from sales, by month and in total (8 marks) 3. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (8 marks) 4. A schedule of expected cash disbursements for merchandise purchases, by month and in total (6 marks) 5. 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 $60 000. (12 marks) 6. A budgeted income statement for the threemonth period ending 30 June. Use the contribution approach. (8 marks) 7. A budgeted balance sheet as at June 30. (12 marks) Total Marks for Part B = 60 Part B: Comprehensive Master Budget Allenby's CEO decided to apply the new budget approach in preparing comprehensive budgets for the upcoming second quarter, The following information is assembled from accounting and other business areas. The company sells many styles of earrings, but all are sold for the same price, i.e. $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) 22 000 June (budget) 55 000 February (actual) 28 000 July (budget) 32 000 March (actual) 42 000 August (budget) 30 000 April (budget) 66 000 September (budget) 28 000 May (budget) 100 000 The concentration of sales before and during May is due to Mother's Day. Sufcient inventory should be on hand at the end of each month to supply 45% of the earrings sold in the following month. Suppliers are paid $5 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase, and 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 month's 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 5% of sales Fixed: Advertising $210 000 Rent 22 000 Salaries 110 000 Utilities 8 000 Insurance 5 000 Depreciation 15 000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20 000 in new equipment during May and $42 000 in new equipment during June, and both will be for cash. The company declares dividends of $15 000 each quarter, payable in the first month of the following quarter. target can still be met. Nonetheless, the prot target is hardly met since costs are not out enough. In fact, costs often run above the original budget in all departments. The CEO is concerned that the company had not been able to meet its sales and prot targets. He employed a consultant with considerable relevant industry experience. The consultant suggested a participatory budgeting approach where the marketing and production managers would be requested by the CEO to coordinate in order to estimates sales and purchases quantities. Ms Thompson decided that she would start out by looking at recent sales history, potential customers, and customers' spending patterns. Subsequently, she would intuitively forecast the best sales quantity and pass it to Mr Treble so he can estimate a purchases quantity. Since Ms Thompson and Mr Treble did not want to fall short of the sales estimates, they gave themselves 'a little breathing room' by lowering the initial sales estimates by between 5% and 10%. As a result, they had to adjust the projected purchases as the year progressed, which changes the estimated ending inventory. They also made similar adjustments to expenses by adding at least 10% to the initial estimates. Required: You are required to prepare a 500word report to the CEO discussing the follow aspects. 1. The company's original budget approach that contributed to the failure to achieve the CEO's sales and profit targets. (10 marks) 2. Whether the departments should be expected to cut their costs when sales volume falls below budget. (10 marks) 3. The new budget approach recommended by the consultant. (10 marks) 4. Ms Thompson and Mr Treble behaviour under the new budget approach, and the potential impact of their behaviour. (10 marks) Total Marks for Part A = 40