Principles of Managerial Accounting Budget Project

Spring 2021

Bright World LLC (BW) distributes sunglasses to small retail stores in the Midwest part of the United States. BW does not manufacture the sunglasses, but instead buys the sunglasses from foreign sources and resells the sunglasses to small retail stores.

It is December of 2020 and you have been hired as BWs Budget Manager. BWs President, Gary Christens, has asked you to prepare a master budget for 2021. You have gathered the following information and are ready to begin preparing the budget.

Sales Information for BW:

Actual sales 2020 1st quarter 2nd quarter 3rd quarter 4th quarter	Pairs of Sunglasses sold 70,000 94,000 36,000 40,000
Forecasted sales 2021 1st quarter 2nd quarter 3rd quarter 4th quarter 1st quarter 2022	62,400 67,800 34,600 41,600 58,000

Shipping firms and U.S. Customs have previously delayed sunglass shipments arriving from the foreign manufacturers. BW management has addressed this concern by establishing a policy that the ending inventory for a quarter should be 50% of the next quarters sales.

All sunglasses are sold for $14 per pair. All sales are on credit with no discount, and are payable in 30 days. BW has found that only 20% of a quarters sales are collected in the quarter of sale, with an additional 60% collected in the quarter following the sale, and the remaining 20% is collected in the second quarter following the sale. Bad debts have been insignificant and are not budgeted.

BW buys sunglasses from foreign suppliers. BW pays $6 per pair of sunglasses. 40% of a quarters purchase is paid for in the quarter of purchase, the other 60% is paid for in the quarter following the quarter of purchase.

BW plans to purchase new computer equipment costing $30,000 during the second quarter of 2021 and a new packing machine for $40,000 during the 3rd quarter of 2021. Both of these equipment purchases will be for cash at the time of the purchase.

BW has a regular dividend pattern which is expected to continue during 2021. This pattern involves BWs board of directors declaring a $25,000 quarterly dividend on March 15th, June 15th, September 15th, and December 15th. The dividends are paid 30 days after the boards declaration.

Operating Expenses expected for 2021:

Operating Expenses expected for 2021 accrual based	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Variable Expenses: Sales Commission	5% of sales revenue	5% of sales revenue	5% of sales revenue	5% of sales revenue
Fixed Expenses: Advertising Rent Salaries Utilities Insurance Depreciation (includes the projected 2021 purchases)	$180,000 $20,000 $113,000 $9,000 $6,000 $14,000	$200,000 $20,000 $113,000 $9,000 $6,000 $14,000	$220,000 $20,000 $120,000 $9,000 $6,000 $15,000	$220,000 $20,000 $120,000 $9,000 $6,000 $16,000

Sales commissions are accrued in the quarter the sales are made, but are paid to the sales staff in the following quarter.

Insurance for a twelve month period is prepaid on October 1 of each year. All other expenses are paid in the quarter incurred.

The company requires a minimum cash balance of $50,000. All borrowings and repayments are done in even $1,000 increments. All borrowings are done on the first day of the quarter, and repayments are made on the last day of the quarter. Interest for all monies borrowed during a quarter is computed and accrued on the last day of the quarter and paid to the bank in the following quarter. Money borrowed is charged interest at a 7% annual rate.

[Borrowing and Interest Example - If BW computes that the company will need to borrow $20,000 for the first quarter, the loan would occur on January 1 and interest expense during the first quarter would be $350 and this interest would be paid to the bank in the second quarter. If in the second quarter, BW determines that it will be able to repay the $20,000 loan, the repayment would occur on the last day of the second quarter or June 30. Interest expense for the second quarter would $350 and this interest would be paid in the third quarter.]

Additional information gathered includes the Balance Sheet at year-end 2020 and the 2020 Income

Statement.

Bright World LLC Balance Sheet December 31, 2020

ASSETS: Cash Accounts Receivable Inventory Prepaid Insurance Property & Equipment Accumulated Depreciation	$74,000 548,800 187,200 18,000 975,000 (135,000)	Liabilities: Accounts Payable Dividends Payable Interest Payable Loans Payable Commissions Payable Total Liabilities Capital Stock Retained Earnings Total Stockholder Equity	184,320 25,000 0 0 28,000 237,320 800,000 630,680 1,430,680
Total Assets	$1,668,000	Total Liabilities and Stockholders Equity	$1,668,000

Bright World LLC

Income Statement Year Ended December 31, 2020

Sales Cost of Goods Sold: Beginning Inventory Purchases Goods Available for Sale Ending Inventory Cost of Goods Sold Gross Profit Operating Expenses: Advertising Expense Rent Expense Salaries Expense Utility Expense Insurance Expense Commission Expense Depreciation Expense Total Operating Expenses Income Before Interest Expense Interest Expense Net Income

2,870,000 210,000 1,207,200 1,417,200 187,200 1,230,000 1,640,000 700,000 72,000 411,000 28,000 24,000 144,000 52,000 1,431,000 209,000 6,700 202,300

1) Prepare the following budget schedules for 2021, by quarter with a total 2021 column.

1. a) A sales budget. See page 363.

2. b) A schedule of expected cash collections from sales. See page 363.

3. c) A merchandise purchases budget in units and in dollars. See the information on page 365 that

4. d) A schedule of expected cash disbursements for merchandise purchases.

5. e) A selling and administrative expense budget. See page 371 and the video on Canvas.

6. f) A cash budget including borrowings and loan repayments. See page 373 and the video on

   Canvas for the interest calculation.

2) Prepare the following budget schedules. The Income Statement and Balance Sheet must have the same format and detail that the 2020 financial statements include. (shown above)

1. a) A budgeted Income Statement for the year-end December 31, 2021.

2. b) A budgeted Balance Sheet for December 31, 2021.

3) Additional analysis information including (show computations):

1. a) Break-Even in units and Break-Even revenue dollars for budget year 2021.

2. b) Margin of Safety for 2021 in total dollar amount and percentage.

3. c) Contribution Margin Ratio for 2021.

4. d) Any additional analysis that you have calculated.

2021 quarter 1=62,400

2021 quarter 2=67,800

2021 quarter 3=34,600

2021 quarter 4=41,600