Assignment- Answer key

CASE STUDY

You are a new manager of Fashion Alley Est., a distributor of bracelets to various retail outlets. You have to prepare Sales, excepted cash collection and purchase budgets for the upcoming second quarter so that management will see the benefits that can be gain from your budget. Below is detailed information.

The company sells different styles of bracelets, but the selling price each style is same $10/piece. Actual sales of earrings for the last three months and budgeted sales for the next six months follow

Jan-2017 (actual) -20,000                June -2017 (budget) - 50,000
Feb-2017 (actual) -26,000                July -2017 (budget) - 30,000
March-2017 (actual) - 40,000            August -2017 (budget) - 28,000
April-2017 (budget) - 65,000            September-2017 (budget) - 25,000
May-2017 (budget) - 100,000

The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month.

Suppliers are paid $4 for a pair of bracelets. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for 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 in the month of sale. 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.

Prepare a below budgets for the three-month period ending June 30.

Question -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.

Question 2- In the year 2016, Season International Company had sales of 8,500 units and production of 11,000 units. Other information includes-

Direct manufacturing labor               SAR 18,750
Fixed administrative expenses          10,000
Fixed manufacturing overhead          20,000
Direct materials                               15,000
Variable selling expenses                  10,000
Variable manufacturing overhead       10,000

There was no beginning inventory.

A. Assume the company uses absorption costing-

i- Compute the ending finished goods inventory.
ii- Compute the cost of goods sold

B. Assume the company uses Variable costing-

i- Compute the ending finished goods inventory.
ii- Compute the cost of goods sold

C. If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?