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Chapter 20: Q7PSA (page 926)

Question: Aztec Company sells its product for \(180 per unit. Its actual and budgeted sales follow

All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of the sale, 50% in the month after the sale, 28% in the second month after the sale, and 2% proves to be uncollectible. The product’s purchase price is \)110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are \(1,320,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is \)100,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds \(100,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On May 31, the loan balance is \)25,000, and the company’s cash balance is \(100,000. (Round amounts to the nearest dollar.)

Required

1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.

2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.

3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.

4. Prepare a schedule showing the computation of cash payments for product purchases for June and July.

5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

Analysis Component

6. Refer to your answer to part 5. The cash budget indicates the company will need to borrow more than \)18,000 in June. Suggest some reasons that knowing this information in May would be helpful to management.

Short Answer

Expert verified

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Step by step solution

01

(1) Computation of cash collections

02

(2) Schedule for ending inventory

03

(3) Merchandise budget schedule

04

(4) Computation of cash payments

05

(5) Cash budget

06

(6) Reason

There are many tips that can be used in an organization to reduce the amount of debt by

  1. Increasing the amount of sales revenue
  2. Proper inventory management
  3. Restructuring the organizations capital

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Most popular questions from this chapter

For each of the following items 1 through 5, indicate yes if the item is an important budgeting guideline or no if it is not.

1. Employees should have the opportunity to explain differences from budgeted amounts.

2. Budgets should include budgetary slack.

3. Employees impacted by a budget should be consulted when it is prepared.

4. Goals in a budget should be set low so targets can be reached.

5. Budgetary goals should be attainable.

Ramos Co. provides the following sales forecast and production budget for the next four months:

The company plans for finished goods inventory of 120 units at the end of June. In addition, each finished unit requires 5 pounds of direct materials and the company wants to end each month with direct materials inventory equal to 30% of next month’s production needs. Beginning direct materials inventory for April was 663 pounds. Direct materials cost \(2 per pound. Each finished unit requires 0.50 hours of direct labor at the rate of \)16 per hour. The company budgets variable overhead at the rate of \(20 per direct labor hour and budgets fixed overhead of \)8,000 per month. Prepare a direct materials budget for April, May, and June.

Participatory budgeting can sometimes lead to negative consequences. From the following list of outcomes that can arise from participatory budgeting, identify those with potentially negative consequences.

  1. Budgetary slack will not be available to meet budgeted results.
  2. Employees might understate expense budgets.
  3. Employees might commit unethical or fraudulent acts to meet budgeted results.
  4. Employees set sales targets too high.
  5. Employees always spend budgeted amounts, even if on unnecessary items.
  6. Employees might understate sales budgets and overstate expense budgets.

Branson Belts makes handcrafted belts. The company budgets production of 4,500 belts during the second quarter. Each belt requires 4 direct labor hours, at a cost of $17 per hour. Prepare a direct labor budget for the second quarter.

Match the definitions 1 through 9 with the term or phrase a through i

a. Budget

b. Cash budget

c. Merchandise purchases budget

d. Safety stock

e. Budgeted income statement

f. General and administrative expense budget

g. Sales budget

h. Master budget

i. Budgeted balance sheet

1. A comprehensive business plan that includes specific plans for expected sales, the units of product to be produced, the merchandise or materials to be purchased, the expenses to be incurred, the long-term assets to be purchased, and the amounts of cash to be borrowed or loans to be repaid, as well as a budgeted income statement and balance sheet.

2. A quantity of inventory or materials over the minimum to reduce the risk of running short.

3. A plan showing the units of goods to be sold and the sales to be derived; the usual starting point in the budgeting process.

4. An accounting report that presents predicted amounts of the company’s revenues and expenses for the budgeting period.

5. An accounting report that presents predicted amounts of the company’s assets, liabilities, and equity balances at the end of the budget period.

6. A plan that shows the units or costs of merchandise to be purchased by a merchandising company during the budget period.

7. A formal statement of a company’s future plans, usually expressed in monetary terms.

8. A plan that shows predicted operating expenses not included in the selling expenses budget.

9. A plan that shows the expected cash inflows and cash outflows during the budget period, including receipts from any loans needed to maintain a minimum cash balance and repayments of such loans.
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