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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 companys 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 eager to make a favorable impression on the president and have assembled the information below.

The necklaces are sold to retailers for $10 each. Recent and forecast sales in units are as follows:

January (actual)	20,000		June	50,000
February (actual)	26,000		July	30,000
March (actual)	40,000		August	28,000
April	65,000		September	25,000
May	100,000

The large buildup in sales before and during May is due to Mothers Day. Ending inventories should be equal to 40% of the next months 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 months 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 companys monthly selling and administrative expenses are given below:

Variable:
Sales commissions	4% of sales
Fixed:
Advertising	$200,000
Rent	18,000
Wages and salaries	106,000
Utilities	7,000
Insurance	3,000
Depreciation	14,000

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 $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be paid in cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

The companys balance sheet at March 31 is given below:

Assets
Cash	$ 74,000
Accounts receivable ($26,000 February sales; $320,000 March sales)	346,000
Inventory	104,000
Prepaid insurance	21,000
Fixed assets, net of depreciation	950,000
Total assets	$1,495,000
Liabilities and Shareholders Equity
Accounts payable	$ 100,000
Dividends payable	15,000
Common shares	800,000
Retained earnings	580,000
Total liabilities and shareholders equity	$1,495,000

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 sales budget by month and in total.
2. A schedule of expected cash collections from sales, by month and in total.
3. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
4. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total.

3. A budgeted income statement for the three-month period ending June 30. Use the variable costing approach.

4. A budgeted balance sheet as of June 30.

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