CHAPTER 8 Budgeting for Planning and Control

COLLABORATIVE LEARNING EXERCISE OBJECTIVES 2, 3

8-41 Elsamen Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding Elsamens sales for the first six months of the coming year are as follows:

Estimated Monthly Sales Type of Monthly Sale

January $475,000 Cash sales 15%

February 410,000 Credit sales 85%

March 500,000 April 525,000

May 620,000

June 660,000

Collection Pattern for Credit Sales Month of sale 30%

First month following sale 50 Second month following sale 15

Elsamens cost of goods sold averages 40 percent of the sales value. Elsamens objective is to maintain a target inventory equal to 30 percent of the next months sales. Purchases of merchandise for resale are paid for in the month following the sale. The variable operating expenses (other than cost of goods sold) for Elsamen are 10 percent of sales and are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paid quarterly in January, April, July, and October. Property taxes are paid twice a year in April and October. Annual Fixed Operating Costs Advertising $ 319,200 Salaries 971,000 Depreciation 220,000 Insurance 115,000 Property taxes 138,000 Required: Form groups of two or three. Within each group, calculate the following:

1. The amount of cash collected in March for Elsamen Company from the sales made during March.

2. Elsamen Companys total cash receipts for the month of April.

3. The purchases of merchandise that Elsamen Company will need to make during February.

4. The amount of cost of goods sold that will appear on Elsamen Companys pro forma income statement for the month of February.

5. The total cash disbursements that Elsamen Company will make for the operating expenses (expenses other than the cost of goods sold) during the month of April. (CMA adapted)