Q1
John Smith, a college student, plans to sell CD players over the internet & by mail order during the semester to help pay his expenses. He buys the players for $29 & sells them for $50. If payment by cheque accompanies the mail order (estimated to be 40% of sales), he gives 10% discount. If customers include a credit card number for either internet or mail order (estimated 30% of sales), they receive 5% discount. The remaining collections are estimated as follows:
| One month following | 15% |
| Two months following | 8% |
| Three months following | 5% |
| Uncollectable | 2% |
Sales forecast are as follows:
| September | 150 units |
| October | 250 units |
| November | 350 units |
| December | 450 units |
| January | Business terminated |
John plans to pay his supplier 60% in the month of purchase, and 40% in the following month. A 5% discount is granted on payments made in the month of purchase. However, John will not be able to take any discounts on the September purchases because of cash flow constraints. All September purchases will be paid for in October.
John has 50 players on hand (purchased in August and to be paid in September), and plans to maintain enough end-of-month inventory to meet 60% of the next month’s sales. John also wished to maintain a closing cash balance of $1,500 in the bank once the business commences in September. The current interest rate on short term loans is 3.5% pa.
Required:
Prepare schedules for monthly budgeted cash receipts & cash disbursements & the cash budget. During which month will John need to organise a short term loan & for how much?
Q2
Warsaw Ltd operates at capacity and makes glass-topped dining tables and wooden chairs, which are then typically sold as sets of four chairs with one table. However, some customers purchase replacement or extra chairs, and others buy some chairs or a table only, so the sales mix is not exactly 4:1. Warsaw Ltd is planning its annual budget for the financial year 2020. Information for 2020 is as follows:
| Input prices | ||||
| Direct materials | ||||
| Wood | $5.30 per board metre | |||
| Glass | $11.5 per sheet | |||
| Direct manufacturing labour | $14 per direct manufacturing labour-hour | |||
| Input quantities per unit of output | ||||
| Direct materials | Chairs | Tables | ||
| Wood | 1.2 board metres | 1.7 board metres | ||
| Glass | — _ | 2 sheets | ||
| Direct manufacturing labour | 3 hours | 6 hours | ||
| Machine-hours (MH) | 2 MH | 5 MH | ||
| Inventory information, direct materials | Wood | Glass | |
| Beginning inventory | 27 200 board metres | 8 700 sheets | |
| Target ending inventory | 29 360 board metres | 9 500 sheets | |
| Sales and inventory information, finished goods |
Chairs |
Tables | |
| Expected sales in units | 172 000 | 45 000 | |
| Selling price | $70 | $900 | |
| Target ending inventory in units | 8 400 | 2 050 | |
| Beginning inventory in units | 7 500 | 2 150 | |
Chairs are manufactured in batches of 500 and tables are manufactured in batches of 50. It takes three hours to set up for a batch of chairs and two hours to set up for a batch of tables. Warsaw Ltd uses activity-based costing and has classified all overhead costs as shown in the table below:
| Cost type | Budgeted variable | Budgeted fixed | Cost driver/allocation base |
| Manufacturing: | |||
| Materials handling | $342 840 | $600 000 | Number of board metres used |
| Set-up | 97 000 | 300 740 | Set-up hours |
| Processing | 789 250 | 5 900 000 | Machine-hours |
| Non-manufacturing: | |||
| Marketing | 2 011 200 | 4 500 000 | Sales revenue |
| Distribution | 54 000 | 380 000 | Number of deliveries |
Delivery trucks transport units sold in delivery sizes of 500 chairs or 500 tables.
Required
For the year 2018:
- Prepare the revenues budget.
- Use the revenues budget to: a. find the budgeted allocation rate for marketing costs b.find the budgeted number of deliveries and allocation rate for distribution costs.
- Prepare the production budget in units.
- Use the production budget to: a. find the budgeted number of set-ups, set-up hours and the allocation rate for set-up costs. b. find the budgeted total machine-hours and the allocation rate for processing costs.
- Prepare the direct materials usage budget and the direct materials purchases budget.
- Use the direct materials usage budget to find the budgeted allocation rate for materials-handling costs.
- Prepare the direct manufacturing labour cost budget.
- Prepare the manufacturing overhead cost budget for materials handling, set-up and processing.
- Prepare the budgeted unit cost of finished good and ending inventories budget.
- Prepare the cost of goods sold budget.
- Prepare the non-manufacturing overhead costs budget for marketing and distribution.
- Prepare a budgeted income statement (ignore income taxes).
- Compare the budgeted unit cost of a chair to its budgeted selling price. Why might Warsaw Ltd continue to sell the chairs for only $70?
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