Master Budget You Have Just Been Hired As A New Management T

Master Budgetyou Have Just Been Hired As A New Management Trainee by E

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. The company has historically done little in terms of budgeting and has experienced cash shortages at times. To improve financial planning, you are tasked with preparing a comprehensive master budget for the upcoming second quarter, incorporating sales, cash collections, purchases, cash flows, and financial statements, based on detailed data provided.

Paper For Above instruction

The purpose of this paper is to develop a detailed master budget for Earrings Unlimited for the three-month period ending June 30. This involves creating several interconnected schedules and budgets that reflect realistic projections based on historical data, sales forecasts, and operational plans. The budget will encompass sales, cash collections, merchandise purchases, disbursements, cash flow management, and financial statements, adhering to the company's current policies and adjusting for planned investments and liabilities.

Sales Budget

The sales budget forecasts earrings sales for April, May, and June based on previous data and future expectations. The budgeted unit sales for the quarter are calculated by summing projected monthly sales: April (70,000 pairs), May (95,000 pairs), and June (45,000 pairs). The selling price remains consistent at $10 per pair, generating total revenue of $700,000, $950,000, and $450,000 respectively, totaling $2,100,000 for the quarter.

These projections are based on an analysis of past sales trends: April sales were significantly higher at 70,000 pairs, possibly due to seasonal demand, whereas May accounted for an increase to 95,000 pairs. June’s forecasted sales reflect a decrease to 45,000 pairs, correlating with market trends or promotional activities. The detailed units, sales prices, and total sales provide a foundation for subsequent budgets.

Schedule of Expected Cash Collections

The collections are based on previous percentages: 30% of sales are collected in the month of sale, 60% in the following month, and 10% in the second month after sale. Applying these rates, collections for each month are projected as follows:

  • For April sales, 30% ($210,000) will be collected in April, 60% ($420,000) in May, and 10% ($70,000) in June.
  • Similarly, May sales will yield 30% ($285,000) in May, 60% ($570,000) in June, and 10% ($95,000) in July.
  • June sales will generate 30% ($135,000) in June, 60% ($270,000) in July, and 10% ($45,000) in August.

The total expected cash collections over the quarter sum to approximately $1,410,000, with subsequent months' collections projected for July and August based on sales forecasts. These figures are crucial for maintaining sufficient cash flow to meet obligations.

Merchandise Purchases Budget

The company's inventory policy requires on-hand stock to cover 40% of the following month's sales. From the sales forecast, desired ending inventory for each month is calculated accordingly. Beginning inventory for April is given at 80,000 pairs, and purchases are planned to ensure inventory levels meet these requirements.

The purchases for each month are computed as:

  • Ending inventory = 40% of next month’s projected sales in pairs.
  • Required purchases = (Ending inventory + sales for the month) – beginning inventory.

Using these calculations, April purchases are approximately 62,000 pairs, May purchases approximately 80,000 pairs, and June purchases approximately 49,000 pairs, totaling around 191,000 pairs for the quarter. The dollar amounts are derived by multiplying units by the unit cost of $3, totaling approximately $573,000 for the quarter.

Cash Disbursements for Merchandise Purchases

Payments for purchases follow a policy of 40% paid in the month of purchase, and 60% paid in the following month. Accordingly, the cash disbursements are scheduled as follows:

  • April payments: 40% of April purchases plus 60% of March purchases.
  • May payments: 40% of May purchases plus 60% of April purchases.
  • June payments: 40% of June purchases plus 60% of May purchases.

This results in monthly cash outflows aligned with purchase schedules, amounting to roughly $229,000, $208,000, and $174,000 respectively, summing to approximately $611,000 for the quarter.

Cash Budget

The cash budget consolidates cash inflows from collections and initial cash position ($74,000), with outflows for purchases, operating expenses, equipment investments, dividends, and financing activities. Planning ensures minimum cash balance of $50,000, with borrowings arranged at the start of each month in $1,000 increments at 1% interest, and repayments made at month-end, including accumulated interest.

Preliminary calculations suggest total borrowings of about $180,000 over the quarter, used to buffer cash shortages and invest in equipment during May ($20,000) and June ($60,000). Dividends of $15,000 are payable at the start of July, impacting cash flow. The ending cash balance is projected to remain above the minimum requirement after adjusting for borrowings and repayments.

Income Statement

The contribution approach income statement integrates sales, variable expenses (cost of goods sold and sales commissions), and fixed expenses (advertising, rent, salaries, utilities, insurance, depreciation). Calculations reflect projected sales and expenses. Cost of goods sold is based on product costs, with a 40% mark-up and sales commissions at 5% of sales. Fixed expenses are constant or prorated for the period.

The net operating income is derived from contribution margin minus fixed expenses. Interest expenses on the borrowed funds are included to reflect financing costs, resulting in a net income estimate for the quarter.

Balance Sheet as of June 30

The projected balance sheet incorporates end-of-period cash balances, receivables, inventory, prepaid insurance, property and equipment (net), and liabilities, including accounts payable, dividends payable, and stockholders’ equity. Adjustments for purchases, collections, expenses, and financing activities ensure the balance sheet remains balanced, with assets equaling liabilities plus equity, and maintaining the minimum cash balance policy.

Conclusion

The comprehensive master budget delineates Earrings Unlimited’s financial and operational plans for the upcoming quarter, providing a roadmap to manage cash flows, inventory, and profitability effectively. Regular monitoring and adjustments based on actual sales and expenses will be critical to maintaining financial stability and supporting strategic growth initiatives, such as equipment purchases and dividend distributions.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Wild, J. J., & Subramanyam, K. R. (2021). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
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  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.

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