Budgeting
Present responses in an Excel spreadsheet.
PROBLEM 1:
Completing a Master Budget
The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:
Current assets as of March 31:
Cash ............................................................... $8,000
Accounts receivable ........................... $20,000
Inventory ...................................................... $36,000
Buildings and equipment, net ......................... $120,000
Accounts payable .............................................. $21,750
Capital stock ................................................... $150,000
Retained earnings ............................................. $12,250
a. The gross margin is 25% of sales.
b. Actual and budgeted sales data:
March (actual) .................................................. $50,000
April .................................................................. $60,000
May .................................................................. $72,000
June ................................................................. $90,000
July ................................................................. $48,000
c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.
d. Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold.
e. One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.
f. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $900 per month (includes depreciation on new assets).
g. Equipment costing $1,500 will be purchased for cash in April.
h. Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month.
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.
Required:
Using the preceding data:
1. Complete the following schedule:
| Schedule of Expected Cash Collections |
|
April |
May |
June |
Quarter |
| Cash sales |
$36,000 |
|
|
|
| Credit sales |
20,000 |
|
|
|
| Total collections |
$56,000 |
|
|
|
Complete the following:
|
Merchandise Purchases Budget
April May June Quarter
|
|
|
Budgeted cost of goods sold ................ $45,000 $54,000
Add desired ending inventory 43,200
Total needs 88.200
Less beginning Inventory 36,000
Required purchases $52,200
For April sales: $60,000 sales x 75% cost ratio = $45,000. $54,000 x 80%= $43,200
|
| Schedule of Expected Cash Disbursements-Merchandise Purchases |
|
April |
May |
June |
Quarter |
| March purchases |
$21,750 |
$21,750 |
|
|
| April purchases |
26.1 |
$26,100 |
52,200 |
|
| May purchases |
|
|
|
|
| June purchases |
|
|
|
|
| Total disbursements |
$47,850 |
|
|
|
3. Complete the following cash budget:
| Cash Budget |
|
April |
May |
June |
Quarter |
| Beginning cash balance |
$8,000 |
|
|
|
| Add cash collections |
56 |
|
|
|
| Total cash available |
64 |
|
|
|
| Less cash disbursements: |
|
|
|
|
| For Inventory |
47,850 |
|
|
|
| For expenses |
13,300 |
|
|
|
| For equipment |
1,500 |
|
|
|
| Total cash disbursements |
62,650 |
|
|
|
| Excess (deficiency) of cash |
1,350 |
|
|
|
| Financing |
|
|
|
|
| Etc. |
|
|
|
|
4. Prepare an absorption costing income statement, similar to the one shown in Schedule 9 in the chapter, for the quarter ended June 30.
5. Prepare a balance sheet as of June 30.
PROBLEM 2:
TipTop Flight School offers flying lessons at a small municipal airport. The school's owner and manager has been attempting to evaluate performance and control costs using a variance report that compares the planning budget to actual results. A recent variance report appears below:
TipTop Flight School
Variance Report
For the Month Ended July 31
|
|
Actual
Results
|
Planning
Budget
|
Variances
|
|
Lessons .................................................
|
155
|
150
|
|
|
Revenue................................................
|
$33,900
|
$33,000
|
$900 F
|
|
Expenses:
|
|
|
|
|
Instructor wages.................................
|
9,870
|
9,750
|
120 U
|
|
Aircraft depreciation ................
|
5,890
|
5,700
|
190 U
|
|
Fuel.....................................................
|
2,750
|
2,250
|
500 U
|
|
Maintenance.......................................
|
2,450
|
2,330
|
120 U
|
|
Ground facility expenses....................
|
1,540
|
1,550
|
10 F
|
|
Administration.....................................
|
3,320
|
3,390
|
70 F
|
|
Total expense...............................
|
25,820
|
24,970
|
850 U
|
|
Net operating Income...................
|
$ 8,080
|
$ 8,030
|
$ 50 F
|
After several months of using such variance reports, the owner has become frustrated. For example, she is quite confident that instructor wages were very tightly controlled in July, but the report shows an unfavorable variance.The planning budget was developed using the following formulas, where q is the number of lessons sold:
|
|
Cost Formulas
|
|
Revenue...........................................................
|
|
$220q
|
|
Instructor wages....................................
|
|
$65q
|
|
Aircraft depreciation ...............................
|
|
$38q
|
|
Fuel..................................................................
|
|
$15q
|
|
Maintenance.....................................................
|
$ 530
|
+ $12q
|
|
Ground facility expenses..........................
|
$1,250 + $2q
|
|
Administration........................................
|
$3,240 + $1q
|
Required:
1. Should the owner feel frustrated with the variance reports? Explain.
2. Prepare a flexible budget performance report for the school for July.
3. Evaluate the school's performance for July.