Q1) Master Budget with Supporting Schedules
Knockoffs Unlimited, a nationwide distributor of low-cost imitation designer necklaces, has an exclusive franchise on the distribution of the necklaces, and sales have grown so rapidly over the past few years that it has become necessary to add new members to the management team. To date, the company’s budgeting practices have been inferior, and, at times, the company has experienced a cash shortage. 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 favourable impression on the president and have assembled the information below.
The necklaces are sold to retailers for $10 each. Recent and forecasted sales in units are as follows:
January
(actual)
22,000 June 54,000
February
(actual)
30,000 July 34,000
March (actual) 43,000 August 32,000
April 69,000 September 29,000
May 103,000
The large buildup in sales before and during May is due to Mother’s Day. Ending
inventories should be equal to 40% of the next month’s sales in units.
The necklaces cost the company $4 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 20% of a month’s sales are collected by month-end. 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.
The company’s monthly selling and administrative expenses are given below:
Variable:
Sales commissions 4 % of sales
Fixed:
Advertising $ 212,000
Rent 20,000
Wages and salaries 110,800
Utilities 8,600
Insurance 3,800
Depreciation 18,000
All selling and administrative expenses are paid during the month, in cash, with the exception of depreciation and insurance. Insurance is paid on an annual basis, in November of each year. The company plans to purchase $17,600 in new equipment during May and $44,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,800 each quarter, payable in the first month of the following quarter. The company’s balance sheet at March 31 is given below:
Assets
Cash $ 78,000
Accounts receivable ($30,000 February sales;
$344,000 March sales)
374,000
Inventory 110,400
Prepaid insurance 26,600
Fixed assets, net of depreciation 970,000
Total assets $ 1,559,000
Liabilities and Shareholders’ Equity
Accounts payable $ 106,800
Dividends payable 15,800
Common shares 840,000
Retained earnings 596,400
Total liabilities and shareholders’ equity $ 1,559,000
The company wants a minimum ending cash balance each month of $50,000. All borrowing is done at the
beginning of the month, with any repayments made at the end of the month. The interest rate on these loans is 1%
per month and must be paid at the end of each month based on the outstanding loan balance for that month.
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 budgeted income statement for the three-month period ending June 30. Use the variable costing approach.
Q2) FLEXIBLE BUDGET
(Indicate each variance as “F” for favourable or “U” for unfavourable).
Q3) Material and Labour Variances
The direct materials and direct labour standards for one bottle of Clean-All spray cleaner are given below:
Standard
Quantity
or Hours
Standard Price
or Rate
Standard
Cost
Direct materials 5.0 millilitres $ 0.30
per
millilitre
$1.50
Direct labour 0.4 hours $12.00 per hour $4.80
During the most recent month, the following activity was recorded:
a. 28,000 millilitres of material was purchased at a cost of $0.25 per millilitre.
b. All of the material was used to produce 3,000 bottles of Clean-All.
c. 675 hours of direct labour time was recorded at a total labour cost of $8,100.
Required:
1. Compute the direct materials price and quantity variances for the month.
2. Compute the direct labour rate and efficiency variances for the month.
(Indicate each variance as “F” for favourable or “U” for unfavourable).
