Assignment # $1$ Master Budget

Course: ACCT $27$ Introduction to Managerial Accounting

You have just hired as a management trainee by Alpha Fashions, a nationwide distributor of a designers silk

ties. The company has an exclusive franchise on the distribution of the ties, and sales have been 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 $(3)$ months, starting April $1.$ You are anxious to make a favourable 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 $40,000$

June $65,000$

July $40,000$

August $36,000$

September $32,000$

The large buildup in sales before and during June is due to Fathers Day. Ending inventories are supposed to

equal $90\%$ of the next months sales in units. The ties cost the company $$5$ each.

Purchases are paid for as follows: $50\%$ in the month of purchase and 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 months sales are collected by month$-$end. An additional $50\%$ are collected in the following month,

and the remaining $25\%$ are collected in the second month following sale. Bad debts have been negligible.

The companys monthly selling and administrative expenses are given below:

Variable:

Sales Commission $$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 the month of May for $$25,000$ cash. The company

declares dividends of $$12,000$ each quarter, payable in the first month of the following quarter. The companys

balance sheet at March $31$ is given below:

Assets:

Cash $$14,000$

Account 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 Shareholders Equity

Accounts Payable $$85,750$

Dividend Payable $$12,000$

Common Shares $$300,000$

Retained Earnings $$176,850$

Total liabilities and shareholders 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 $$140,000.$ 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 increment of

$$1,000),$ while retaining at least $$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. $(10$ marks$)$

b$.$ A schedule of expected cash collection from sales, by month and in total. $(10$ marks$)$

c$.$ A merchandise purchases budget in units and in dollars. Show the budget by month and in

total. $(10$ marks$)$

d$.$ A schedule of expected cash disbursements for merchandise purchases, by month and in

total. $(10$ marks$)$

$2-$ A cash budget. Show the budget by month and in total $(20$ marks$)$

$3-$ A budgeted income statement for the three$-$month period ending June $30.$ Use the contribution

approach. $(20$ marks$)$

$4-$ A budgeted balance sheet as of June $30.(20$ marks