Master Budget You Have Just Been Hired As A New Manag 792906

Master Budgetyou Have Just Been Hired As A New Management Trainee By

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 a master budget for the upcoming second quarter. 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—$13 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) 20,600; February (actual) 26,600; March (actual) 40,600; April (budget) 65,600; May (budget) 100,600; June (budget) 50,600; July (budget) 30,600; August (budget) 28,600; September (budget) 25,600. 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 $4.30 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 in the following month. All sales are on credit.

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 as follows:

• Variable: Sales commissions 4% of sales
• Fixed: Advertising $230,000; Rent $21,000; Salaries $112,000; Utilities $8,500; Insurance $3,300; Depreciation $17,000

Insurance is paid annually in November. The company plans to purchase $17,500 in new equipment during May and $43,000 in June, both for cash.

The company declares dividends of $17,250 each quarter, payable in the month following the quarter. The balance sheet as of March 31 shows total assets of $1,649,152, with specifics including cash, accounts receivable, inventory, prepaid insurance, and property & equipment, alongside liabilities and equity.

The company maintains a minimum cash balance of $53,000. All borrowing is done at the beginning of each month in $1,000 increments at 1% per month, with repayment at month's end, including interest. At the end of the quarter, the company will pay all accumulated interest and as much of the loan as possible while maintaining the minimum cash reserve.

Your task is to:

1. Prepare a master budget for the three-month period ending June 30, including:
   • Sales budget by month and in total
   • Schedule of expected cash collections by month and in total
   • Merchandise purchases budget in units and dollars by month and in total
   • Schedule of expected cash disbursements for merchandise purchases by month and in total
2. Develop a cash budget by month and in total, determining any borrowing needs to uphold the minimum cash balance of $53,000.
3. Construct a budgeted income statement for the period ending June 30 using the contribution approach.
4. Create a budgeted balance sheet as of June 30.

Paper For Above instruction

The process of preparing a master budget involves a systematic approach to projecting a company's financial performance and position over a specific period—here, the second quarter. This comprehensive exercise enables managers to plan, coordinate, and control financial activities, ensuring that the organization maintains liquidity, profitability, and operational efficiency. This paper presents a detailed master budget for Earrings Unlimited for the three months ending June 30, including sales forecasts, cash collections, inventory purchases, disbursements, cash flow, income, and balance sheet projections.

Sales Budget

The sales budget forms the foundation of the master budgeting process, projecting expected sales revenue. For Earrings Unlimited, budgeted sales for April through June are 65,600, 100,600, and 50,600 pairs respectively, with actuals from January to March providing historical context. Each pair sells at $13, establishing total sales revenue for each month:

• April: 65,600 pairs × $13 = $854,800
• May: 100,600 pairs × $13 = $1,308,600
• June: 50,600 pairs × $13 = $657,800

Expected Cash Collections

The company's receivables policy involves collecting 20% of sales in the month of sale, 70% in the following month, and 10% in the second month after sale. Calculating these collections involves applying these percentages accordingly:

• April collections: 20% of April sales + 70% of March sales + 10% of February sales
• May collections: 20% of May sales + 70% of April sales + 10% of March sales
• June collections: 20% of June sales + 70% of May sales + 10% of April sales

For example, April collections are:

20% of $854,800 + 70% of $40,600×13 + 10% of $26,600×13 = $170,960 + $370,982 + $34,658 = $576,600 approximately.

Merchandise Purchases Budget

To meet sales demands and maintain ending inventory equal to 40% of the following month’s projected sales, the company calculates the needed inventory. Purchases are made in units, matching the required ending inventory and beginning inventory, considering the sales forecast.

• Purchases for each month are based on projected sales and desired ending inventory less beginning inventory, multiplied by the number of units needed per sale (1 pair per sale).

Total purchase dollars are computed by multiplying units by cost per pair ($4.30). For example, May purchases in units are calculated as:

Required inventory at end of May for June sales (50,600 pairs × 40%) = 20,240 pairs + sales in May (100,600) - beginning inventory (April’s ending inventory) = units to purchase.

Cash Disbursements for Purchases

As half of purchases are paid in the month of purchase, and half in the following month, cash disbursements are scheduled accordingly. This involves summing payments for each month based on the previous month’s purchases and current month’s purchases.

Cash Budget

The cash budget projects cash inflows and outflows, ensuring the company can maintain its minimum balance of $53,000. It incorporates beginning cash balances, collections, disbursements, operating expenses, equipment expenditures, dividends, and borrowing activities.

Borrowings occur at the start of months when the projected ending cash balance falls below the minimum, with repayments at the end of months including interest at 1%. Multiple calculations ensure proper tracking of loans and interest accrued.

Budgeted Income Statement

Using the contribution approach, the income statement deducts variable expenses—such as sales commissions—from sales revenue to determine contribution margin. Fixed expenses are then subtracted to compute net income for the period.

Budgeted Balance Sheet

The projected balance sheet as of June 30 consolidates estimated assets, liabilities, and equity based on the budgeted figures. It ensures assets like cash, accounts receivable, inventory, and property are aligned with projected operations, and liabilities including accounts payable and borrowing are appropriately reflected.

Conclusion

Developing a master budget like this enables Earrings Unlimited to proactively manage its cash flow, inventory levels, and financial commitments. It provides a detailed forecast that supports strategic decision-making, minimizes cash shortages, and ensures the company remains financially sound throughout the quarter.

References

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