PROBLEM 9-28 Completing a Master Budget [LO2, LO4, LO7, LO8, LO9, LO10] Hillyard Company, an of ce supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the rst quarter: a. As of December 31 (the end of the prior quarter), the company's general ledger showed the following account balances:

b. Actual sales for December and budgeted sales for the next four months are as follows:

c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales. d. The company's gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month: advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 for the quarter.

412 Chapter 9

2. a. Merchandise purchases budget:

b. Schedule of expected cash disbursements for merchandise purchases:

3. Schedule of expected cash disbursements for selling and administrative expenses:

f. Each month's ending inventory should equal 25% of the following month's cost of goods sold. g. One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month. h. During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500. i. During January, the company will declare and pay $45,000 in cash dividends. j. Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local 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. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the data above, complete the following statements and schedules for the rst quarter: 1. Schedule of expected cash collections:

January February March Quarter

Cash sales. . . . . . . . . . . . . . . . . . .$80,000 Credit sales. . . . . . . . . . . . . . . . . .224,000

Total cash collections . . . . . . . . . . .$304,000

January February March Quarter

Budgeted cost of goods sold. . . . .$240,000* $360,000 Add desired ending inventory. . . . .90,000

Total needs. . . . . . . . . . . . . . . . . . .330,000 Less beginning inventory. . . . . . . .60,000

Required purchases. . . . . . . . . . . .$270,000

*$400,000 sales 60% cost ratio $240,000. $360,000 25% $90,000.

January February March Quarter

December purchases. . . . . . . . . . .$93,000$ 93,000 January purchases. . . . . . . . . . . . .135,000 135,000270,000 February purchases . . . . . . . . . . . . March purchases. . . . . . . . . . . . . .

Total cash disbursementsfor purchases. . . . . . . . . . . . . . .$228,000

January February March Quarter

Salaries and wages. . . . . . . . . . . . . . . . . $27,000 Advertising . . . . . . . . . . . . . . . . . . . . . . . . 70,000 Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Other expenses. . . . . . . . . . . . . . . . . . . . 12,000

Total cash disbursements forselling and administrative expenses . . . $129,000

Pro t Planning 413

CASE 9-29 Evaluating a Company's Budget Procedures [LO1] Tom Emory and Jim Morris strolled back to their plant from the administrative offices of Ferguson & Son Manufacturing Company. Tom is manager of the machine shop in the company's factory; Jim is manager of the equipment maintenance department. The men had just attended the monthly performance evaluation meeting for plant department heads. These meetings had been held on the third Tuesday of each month since Robert Ferguson, Jr., the president's son, had become plant manager a year earlier. As they were walking, Tom Emory spoke: "Boy, I hate those meetings! I never know whether my department's accounting reports will show good or bad performance. I'm beginning to expect the worst. If the accountants say I saved the company a dollar, I'm called 'Sir,' but if I spend even a little too muchboy, do I get in trouble. I don't know if I can hold on until I retire." Tom had just been given the worst evaluation he had ever received in his long career with Ferguson & Son. He was the most respected of the experienced machinists in the company. He had been with Ferguson & Son for many years and was promoted to supervisor of the machine shop when the company expanded and moved to its present location. The president (Robert Ferguson, Sr.) had often stated that the company's success was due to the high-quality work of machinists like Tom. As supervisor, Tom stressed the importance of craftsmanship and told his workers that he wanted no sloppy work coming from his department. When Robert Ferguson, Jr., became the plant manager, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to seek cost reduction opportunities. The company controller was instructed to have his staff "tighten" the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the plant manager's desire to reduce costs. The young plant manager often stressed the importance of continued progress toward attaining the budget; he also made it known that he kept a file of these performance reports for future reference when he succeeded his father. Tom Emory's conversation with Jim Morris continued as follows: Emory: I really don't understand. We've worked so hard to meet the budget, and the minute we do so they tighten it on us. We can't work any faster and still maintain quality. I think my men are ready to quit trying. Besides, those reports don't tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that setup and machine adjustment time is killing us. And quite frankly, Jim, you were no help. When our hydraulic press broke down last month, your people were nowhere to be found. We had to take it apart ourselves and got stuck with all that idle time.

Cases

4. Cash budget:

5. Prepare an absorption costing income statement for the quarter ending March 31 as shown in Schedule 9 in the chapter. 6. Prepare a balance sheet as of March 31.

January February March Quarter

Cash balance, beginning. . . . . . . .$48,000 Add cash collections. . . . . . . . . . .304,000

Total cash available. . . . . . . . . . . .352,000

Less cash disbursements:Purchases of inventory. . . . . . .228,000Selling and administrativeexpenses. . . . . . . . . . . . . . . .129,000Purchases of equipment. . . . . .Cash dividends. . . . . . . . . . . . . .45,000

Total cash disbursements. . . . . . .402,000

Excess (de ciency) of cash. . . . . .(50,000)

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