Nordic Company, a merchandising company, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparation of the master budget for the second quarter. a. As of March 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances: Cash . . . . . . . . . . . . . . . . . . $ 9,000 Accounts receivable . . . . . . 48,000 Inventory. . . . . . . . . . . . . . . . 12,600 Buildings and equipment (net) . . 214,100 Accounts payable . . . . . . . . . . . . . .. . . . . . .. . . . . . . . $ 18,300 Capital stock . . . . . . . . . . . . . .. . . . . . .. . . . . . ...... . . . . 190,000 Retained earnings . . . . . . . . . . . . . . . . . .. . . . . . .... . . . 75,400 $283,700 $283,700 b. Actual sales for March and budgeted sales for April–July are as follows: March (actual) . . . $60,000 April . . . . . . . . . . . $70,000 May . . . . . . . . . . . . $85,000 June . . . . . . . . . . . . $90,000
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Nordic Company, a merchandising company, prepares its
a. As of March 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances:
Cash . . . . . . . . . . . . . . . . . . $ 9,000
Accounts receivable . . . . . . 48,000
Inventory. . . . . . . . . . . . . . . . 12,600
Buildings and equipment (net) . . 214,100
Accounts payable . . . . . . . . . . . . . .. . . . . . .. . . . . . . . $ 18,300
Capital stock . . . . . . . . . . . . . .. . . . . . .. . . . . . ...... . . . . 190,000
$283,700 $283,700
b. Actual sales for March and budgeted sales for April–July are as follows:
March (actual) . . . $60,000
April . . . . . . . . . . . $70,000
May . . . . . . . . . . . . $85,000
June . . . . . . . . . . . . $90,000
July . . . . . . . . . . . . . $50,000
c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following the sale. The accounts receivable at March 31 are a result of March credit sales.
d. The company’s gross margin percentage is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
e. Monthly selling and administrative expenses are budgeted as follows: salaries and wages, $7,500 per month; shipping, 6% of sales; advertising, $6,000 per month; other expenses, 4% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will
be $6,000 for the quarter.
f. Each month’s ending inventory should equal 30% of the following month’s cost of goods sold.
g. Half of a month’s inventory purchases are paid for in the month of purchase and half in the
following month.
h. Equipment purchases during the quarter will be as follows: April, $11,500; and May, $3,000.
i. Dividends totaling $3,500 will be declared and paid in June.
j. Management wants to maintain a minimum cash balance of $8,000. The company has an
agreement with a local bank that allows the company to borrow in increments of $1,000 at
the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded.
The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.
- Schedule of expected cash collections:
|
|
APRIL |
MAY |
JUN |
TOTAL |
|
CASH SALES |
$14000 |
$17000 |
$18000 |
$49000 |
|
CREIDT SALES |
$48000 |
$56000 |
$68000 |
$172000 |
|
TOTAL COLLECTIONS |
$62000 |
$73000 |
$86000 |
$221000 |
- a. Merchandise purchases budget:
|
|
APRIL |
MAY |
JUN |
TOTAL |
|
Budgeted cost of goods sold |
$42000 |
$51000 |
$54000 |
$147000 |
|
Add desired ending inventory |
$15300 ( $51000*30%) |
$16200 |
$9000 ( $50000*60%*30%) |
$9000 |
|
Total needs |
$57300 |
$67200 |
$63000 |
$158000 |
|
Less beginning inventory |
$12600 |
$15300 |
$16200 |
$12600 |
|
Required purchases |
$44700 |
$51900 |
$46800 |
$143400 |
*$70,000 sales × 60% = $42,000.
†$51,000 × 30% = $15,300.
- Schedule of expected cash disbursements for merchandise purchases:
|
|
APRIL |
MAY |
JUN |
TOTAL |
|
For March purchases |
$18300 |
|
|
$18300 |
|
For April purchases |
$22350 |
$22350 |
|
$44700 |
|
For May purchases |
|
$25950 |
$25950 |
$51900 |
|
For June purchases |
|
|
$23400 |
$23400 |
|
Total cash disbursements for |
$40650 |
$48300 |
$49350 |
$138300 |
- Schedule of expected cash disbursements for selling and administrative expenses:
|
|
APRIL |
MAY |
JUN |
TOTAL |
|
Salaries and wages |
$7500 |
$7500 |
$7500 |
$22500 |
|
Shipping |
$4200 |
$5100 |
$5400 |
$14700 |
|
Advertising |
$6000 |
$6000 |
$6000 |
$18000 |
|
Other expenses |
$2800 |
$3400 |
$3600 |
$9800 |
|
Total cash disbursements for |
$20500 |
$22000 |
$22500 |
$65000 |
Reqired :
Cash budget :
|
|
APRIL |
MAY |
JUN |
TOTAL |
|
Cash balance, beginning |
$9000 |
|
|
|
|
Add cash collections |
62000 |
|
|
|
|
Total cash available |
$71000 |
|
|
|
|
Less cash disbursements: |
|
|
|
|
|
For inventory purchases |
$40650 |
|
|
|
|
For selling and administrative expenses |
20500 |
|
|
|
|
For equipment purchases |
11500 |
|
|
|
|
For dividends |
- |
|
|
|
|
Total cash disbursements |
$72650 |
|
|
|
|
Excess (deficiency) of cash Financing Etc. |
(1,650) |
|
|
|
2. Prepare an absorption costing income statement for the quarter ending June 30
3. Prepare a balance sheet as of June 30.
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