case 8-29 master budget with supporting schedules - 76266

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CASE 8–29 Master Budget with Supporting Schedules [LO2, LO4, LO8, LO9, LO10] You have just been hired as a management trainee by Cravat Sales Company, a nationwide distributor of a designer’s silk ties. The company has an exclusive franchise on the distribution of the ties, and sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. You have been given responsibility for all planning and budgeting. Your first assignment is to prepare a master budget for the next three months, starting April 1. You are anxious to make a favorable impression on the president and have assembled the information below. The company desires a minimum ending cash balance each month of $10,000. The ties are sold to retailers for $8 each. Recent and forecasted sales in units are as follows: January (actual) . . . . . . . . . . . . . . . 20,000 February (actual) . . . . . . . . . . . . . . 24,000 March (actual) . . . . . . . . . . . . . . . . 28,000 April . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 May . . . . . . . . . . . . . . . . . . . . . . . . 45,000 June . . . . . . . . . . . . . . . . . 60,000 July . . . . . . . . . . . . . . . . . . 40,000 August . . . . . . . . . . . . . . . 36,000 September . . . . . . . . . . . . 32,000 382 Chapter 8 The large buildup in sales before and during June is due to Father’s Day. Ending inventories are supposed to equal 90% of the next month’s sales in units. The ties cost the company $5 each. Purchases are paid for as follows: 50% in the month of purchase and the remaining 50% in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 25% of a month’s sales are collected by month-end. An additional 50% is collected in the following month, and the remaining 25% is collected in the second month following sale. Bad debts have been negligible. The company’s monthly selling and administrative expenses are given below: Variable: Sales commissions . . . . . . $1 per tie Fixed: Wages and salaries . . . . . . $22,000 Utilities . . . . . . . . . . . . . . . $14,000 Insurance . . . . . . . . . . . . . $1,200 Depreciation . . . . . . . . . . . $1,500 Miscellaneous . . . . . . . . . . $3,000 All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance expired. Land will be purchased during May for $25,000 cash. The company declares dividends of $12,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below: Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,000 Accounts receivable ($48,000 February sales; $168,000 March sales) . . . . . . . . . . . . . . . . . . . . . . 216,000 Inventory (31,500 units) . . . . . . . . . . . . . . . . . . . . . . . 157,500 Prepaid insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,400 Fixed assets, net of depreciation . . . . . . . . . . . . . . . . 172,700 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $574,600 Liabilities and Stockholders’ Equity Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,750 Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,850 Total liabilities and stockholders’ equity . . . . . . . . . . . $574,600 The company has an agreement with a bank that allows it to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $40,000. 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 $10,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: 1. a. A sales budget by month and in total. b. A schedule of expected cash collections from sales, by month and in total. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. 2. A cash budget. Show the budget by month and in total. 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. 383 The Inevitability of Forecasting Errors While companies derive numerous benefits from planning for the future, they must be able to respond when actual results deviate from the plan. For example, just two months after telling Wall Street analysts that it would break even for the first quarter of 2005, General Motors (GM) acknowledged that its actual sales were far less than its original forecast and the company would lose $850 million in the quarter. For the year, GM acknowledged that projected earnings would be 80% lower than previously indicated. The company’s stock price dropped by $4.71. When a company’s plans deviate from its actual results, managers need to understand the reasons for the deviations. How much is caused by the fact that actual sales differ from budgeted sales? How much is caused by the actions of managers? In the case of GM, the actual level of sales is far less than the budget, so some actual costs are likely to be less than originally budgeted. These lower costs do not signal managerial effectiveness. This chapter explains how to analyze the sources of discrepancies between budgeted and actual results. ? Source: Alex Taylor III, “GM Hits the Skids,” Fortune, April 4, 2005, pp. 71–74. 9 C h a p t e r After studying Chapter 9, you should be able to: LO1 Prepare a flexible budget. LO2 Prepare a report showing activity variances. LO3 Prepare a report showing revenue and spending variances. LO4 Prepare a performance report that combines activity variances and revenue and spending variances. LO5 Prepare a flexible budget with more than one cost driver. LO6 Understand common errors made in preparing performance reports based on budgets and actual results. LEARNING

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