Option #1: Cost of Production Hilliard Company, an office supplies specialty sto
ID: 2539150 • Letter: O
Question
Option #1: Cost of Production
Hilliard 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:
As of December 31, the end of the prior quarter, the company's general ledger showed the following account balances:
Cash $48,000 (debit)
Accounts receivable $224,000 (debit)
Inventory $60,000 (debit)
Buildings and equipment, net $370,000 (debit)
Accounts payable $93,000 (credit)
Capital stock $500,000 (credit)
Retained earnings $109,000 (credit)
Actual sales for December and budgeted sales for the next four months are as follows:
December $280,000
January $400,000
February $600,000
March $300,000
April $200,000
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.
The company's gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)
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 per quarter.
Each month's ending inventory should equal 25% of the following month's cost of goods sold.
One half of the month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month.
During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500.
During January, the company will declare and pay $45,000 in cash dividends.
Management wants to maintain a minimum cash balance of $30,000. 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. 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 tasks for Option #1:
Using the data above, finish populating the following statements and schedules for the first quarter. Submit your responses in an Excel spreadsheet:
Schedule of expected cash collections
Schedule of Expected Cash Collections
January
February
March
Quarter
Cash sales
$80,000
Credit sales
$224,000
Total collections
$304,000
Merchandise purchases budget
Merchandise Purchases Budget
January
February
March
Quarter
Budgeted cost of goods sold
$240,000*
$360,000
Add desired ending inventory
$90,000**
Total needs
$330,000
Less beginning inventory
$60,000
Required purchases
$270,000
*$400,000 sales x 60% cost ratio = $240,000
** $360,000 x 25% = $90,000
Schedule of expected cash disbursements-merchandise purchases
Schedule of Expected Cash Disbursements-Merchandise Purchases
January
February
March
Quarter
December purchases
$93,000
$93,000
January purchases
$135,000
$135,000
$270,000
February purchases
March purchases
Total disbursements
$228,000
Schedule of expected cash disbursements-selling and administrative expenses
Schedule of Expected Cash Disbursements-Selling and Administrative Expenses
January
February
March
Quarter
Salaries and wages
$27,000
Advertising
$70,000
Shipping
$20,000
Other expenses
$12,000
Total disbursements
$129,000
Cash budget:
Cash Budget
January
February
March
Quarter
Cash balance, beginning
$48,000
Add cash collections
$304,000
Total cash available
$352,000
Less cash disbursements
For inventory
$228,000
For selling and admin
expenses
$129,000
For purchase of equipment
------
For cash dividends
$45,000
Total cash disbursements
$402,000
Excess (deficiency) of cash
($50,000)
Financing needed
Cash balance, ending
Schedule of Expected Cash Collections
January
February
March
Quarter
Cash sales
$80,000
Credit sales
$224,000
Total collections
$304,000
Explanation / Answer
1)
Schedule of Expected Cash Collections (Amounts in $)
Particulars
January
February
March
Quarter
1) Cash sales (20% of total sales)
80,000
120,000
60,000
260,000
2)Credit sales (credit sales of last month)
224,000
320,000
480,000
1,024,000
Total collections (1+2)
304,000
440,000
540,000
1,284,000
2)
Merchandise Purchases Budget (Amounts in $)
Particulars
January
February
March
Quarter
Budgeted cost of goods sold (60% of sales)
240,000*
360,000
180,000
780,000
Add: Desired ending inventory (25% of next month COGS)
90,000**
45,000
30,000***
30,000
Total needs
330,000
405,000
210,000
810,000
Less: Beginning inventory
(60,000)
(90,000)
(45,000)
(60,000)
Required purchases
270,000
315,000
165,000
750,000
*$400,000 sales x 60% cost ratio = $240,000
** $360,000 x 25% = $90,000
****April Sales*60% = April COGS
($200,000*60% = $120,000)
March ending Inventory = $120,000*25% = $30,000
3)
Schedule of Expected Cash Disbursements-Merchandise Purchases (Amt in $)
Particulars
January
February
March
Quarter
December purchases (50% of purchases)
93,000
93,000
January purchases (50% in current and 50% in next month)
135,000
135,000
270,000
February purchases
157,500
157,500
315,000
March purchases (50% of $165,000)
82,500
82,500
Total disbursements
228,000
292,500
240,000
760,500
4)
Schedule of Expected Cash Disbursements-Selling and Administrative Expenses (Amount in $)
Particulars
January
February
March
Quarter
Salaries and wages (Fixed)
27,000
27,000
27,000
81,000
Advertising (Fixed)
70,000
70,000
70,000
210,000
Shipping (5% of sales)
20,000
30,000
15,000
65,000
Other expenses (3% of sales)
12,000
18,000
9,000
39,000
Total disbursements
129,000
145,000
121,000
395,000
5)
Cash Budget
Particulars
January
February
March
Quarter
Cash balance, beginning
48,000
30,000
30,800
48,000
Add: cash collections
304,000
440,000
540,000
1,284,000
Total cash available (A)
352,000
470,000
570,800
1,332,000
Less: cash disbursements
For inventory
228,000
292,500
240,000
760,500
For selling and admin
expenses
129,000
145,000
121,000
395,000
For purchase of equipment
-
1,700
84,500
86,200
For cash dividends
45,000
-
-
45,000
Total cash disbursements (B)
402,000
439,200
445,500
1,286,700
Excess (deficiency) of cash (A-B)
(50,000)
30,800
125,300
45,300
Financing needed
80,000
-
-
80,000
Cash balance, ending
30,000
30,800
125,300
125,300
Schedule of Expected Cash Collections (Amounts in $)
Particulars
January
February
March
Quarter
1) Cash sales (20% of total sales)
80,000
120,000
60,000
260,000
2)Credit sales (credit sales of last month)
224,000
320,000
480,000
1,024,000
Total collections (1+2)
304,000
440,000
540,000
1,284,000
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