# Cost Accounting-Excel Master Budget Homework ACC318.

January 30, 2017

Question
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—\$10 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)
February (actual)
March (actual)
April (budget)
May (budget)

20,000
26,000
40,000
65,000
100,000

June (budget)
July (budget)
August (budget)
September (budget)

50,000
30,000
28,000
25,000

The concentration of sales before and during May is due to Mother’s 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 for a pair of earrings. One-half of a month’s 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 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
Fixed:
Rent
Salaries
Utilities
Insurance
Depreciation

4% of sales
\$
\$
\$
\$
\$
\$

200,000
18,000
106,000
7,000
3,000
14,000

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

The company plans to purchase \$16,000 in new equipment during May and \$40,000 in new equipment during June; both purchases
will be for cash. The company declares dividends of \$15,000 each quarter, payable in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:
Assets
\$

Cash
Accounts receivable (\$26,000 February sales;
Inventory
Prepaid insurance
Property and equipment (net)
Total assets

74,000

\$

346,000
104,000
21,000
950,000
1,495,000

\$320,000 March sales)

Liabilities and Stockholders’ Equity
Accounts payable
Dividends payable
Common stock
Retained earnings
Total liabilities and stockholders’ equity

\$

\$

100,000
15,000
800,000
580,000
1,495,000

The company maintains a minimum cash balance of \$50,000. 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 \$50,000 in cash.
Required:
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
A sales budget, by month and in total
A schedule of expected cash collections from sales, by month and in total
A merchandise purchases budget in units and in dollars. Show the budget by month and in total
A schedule of expected cash disbursements for merchandise purchases, by month and in total.
A cash budget. Show the budget by month and in total.
A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
A budgeted balance sheet as of June 30

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