PROBLEM 9–27 Completing a Master Budget

PROBLEM 9–27 Completing a Master Budget [LO9–2, LO9–4, LO9–7, LO9–8, LO9–9, LO9–10]

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

2. Complete the following:

Merchandise Purchases Budget

April                May     JuneQuarter

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 × 75% cost ratio = $45,000.

†$54,000 × 80% = $43,200

3. Complete the following cash budget:

Schedule of Expected Cash Disbursements—Merchandise Purchases

April                May     June     Quarter

March purchases . . . . . . . . . . . . . .    $21,750                                   $21,750

April purchases . . . . . . . . . . . . . . . . .26,100   $26,100                      52,200

                                    May purchases . . . . . . . .

June purchases . . . . . . . . . . . . .                                                                    

Total disbursements . . . . . . . . . . . . . $47,850

Cash Budget

April    May     June     Quarter

Beginning cash balance . . . . . . . . . . . . . . .       $8,000

Add cash collections . . . . . . . . . . . . . . . . . .      56,000

Total cash available . . . . . . . . . . . . . . . . . . .     64,000

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 10–21 Critique a Report; Prepare a Performance Report [LO 10–1, LO 10–4, LO 10–6]

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                         Planning

Results                                    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.