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:

Complete the following:

3. Complete the following cash budget:

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

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:

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.