Task: Budgeting and Variances

Question one -

1.1. Critically discuss the following statement 'A budget is a forecast of what is expected to happen in a business during the next year'.

Hillyard Company an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter.

a. As of December 31, 2016 (the end of the prior quarter), the company's general ledger showed the following account balance:

b. Actual sales for December and budgeted sales for the next four months are as follows

December (actual) -        $280 000

January                          $400 000

February                         $600 000

March                             $300 000

April                               $200 000

c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales.

d. The company's gross margin is 40% of sales.

e. Monthly expenses are budgeted as follows: salaries and wages $27 000 per month, Advertising $70 000 per month, Shipping 5% of sales, other expenses 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42 000 for the quarter.

f. Each month's ending inventory should equal 25% of the following month's cost of goods sold.

g. One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

h. During February, the company will purchase a new copy machine for $11 700 cash. During March, other equipment will be purchased for cash at a cost of $84 500.

i. The company must maintain a minimum cash balance of $30 000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1 000. Interest is paid only at the time of payment of principal. The annual interest rate is 12%.

1.2. You are required to:

(a) Prepare a merchandise purchase budget and cash budget, by month and in total for the first quarter.

(b) Prepare a budgeted income statement for the quarter ending March 31, 2017 and a balance sheet as at 31 March, 2017.

Question Two: Accounts Receivable Management

The general manager of Plastics manufacturers Limited has recently been talking to the chief, buyer of Plastic Toys Ltd, which makes a wide range of toys for young children. Plastic Toys is considering changing its supplier of plastic granules and has offered to buy its entire requirement of 3,000 kilograms per month from you at the going market rate provided you will grant it three months' credit on its purchases. The following information is available:

1. Plastic granules sell for $12 per kilogram, variable costs are $8 per kilogram and fixed costs are $2 per kilogram.

2. Your own company is financially strong and has sales of $15 million per year. For the foreseeable future it will have surplus capacity and it is actively looking for new outlets.

3. Extract from Plastic Toy's statements:

2.1. Write short notes suggesting four sources of information you would use to assess the creditworthiness of potential customers who are unknown to you. Critically evaluate each source of information.

2.2. Describe three accounting controls you would use to monitor the level of your company's trade debtors.

2.3. Advise your general manager on the acceptability of Plastic Toys' proposal, giving your reasons and making any calculations you consider necessary. (Hint: Use sales figures instead of using cost of sales).

Question Three: Cash Management

3.1. Why do businesses hold cash?

3.2. What methods can a business use to minimize the cash transmissions period (from the customer to the bank)?