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Choose 1 of 2
assignments to
complete. Due in
48 hours
Module 6
Critical Thinking:
Assignment Choice #1: Cost of Production
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, (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)
b. 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 and 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. (In other words, cost of goods sold is 60% 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 per quarter.
f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.
g. 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.
h. 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.
i. During January, the company will declare and pay $45,000 in cash dividends.
j.
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:
Schedule of Expected Cash Collections
January
Cash sales
$80,000
Credit sales
$224,000
Total
Collections
$304,000
February
March
Quarter
Using the data above, complete the following statements and schedules for the first quarter. Submit
your responses in an Excel spreadsheet:
1. Schedule of expected cash collections
2. Merchandise purchases budget
Merchandise Purchases Budget
January
February
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
March
Quarter
*$400,000 sales x 60%
cost ratio = $240,000
** $360,000 x 25% =
$90,000
3.
Schedule of expected cash disbursements-merchandise purchases
Schedule of Expected Cash Disbursements-Merchandise Purchases
January
December purchases
$93,000
January purchases
$135,000
February purchases
February
March
Quarter
$93,000
$135,000
$270,000
March purchases
Total disbursements
4.
$228,000
Schedule of expected cash disbursements-selling and administrative expenses
Schedule of Expected Cash Disbursements-Selling and Administrative
Expenses
January
5.
Salaries and wages
$27,000
Advertising
$70,000
Shipping
$20,000
Other expenses
$12,000
Total disbursements
$129,000
February
March
Quarter
March
Quarter
Cash budget:
Cash Budget
January
Cash balance, beginning
$48,000
Add cash collections
$304,000
Total cash available
$352,000
February
Less cash disbursements
For inventory
For selling and admin
expenses
$228,000
$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
Provide your answers in a clearly organized Excel spreadsheet. Provide your answers in a clearly
organized Excel spreadsheet. Check spelling and formatting for readability.
Document your sources.
Assignment Choice #2: Calculating Flexible Budget Variances
Stellar Packaging Products is experiencing an increase in demand for the month of August as a result of
Estrella Coffee’s comeback in its retail outlets. The following fact pattern forms the basis for the static
budget:
Stellar Packaging Products
Raw materials
Direct manufacturing labor
Indirect manufacturing labor
Factory Insurance & Utilities
Depreciation – Pressroom
Repairs and maintenance – factory
Selling, marketing & distribution
expenses
General and administrative expenses
Variable Cost and Volume Data
Raw materials = 0.10 lbs x $2.00/lb.
Direct Labor = 0.025 hr x $10/hr.
Volume in units
Variable Costs
Total
$
100,000
$
125,000
$
Plastic
$
$
40,000
Fixed Costs
Total
$
$
$
$
105,000
63,000
38,500
28,000
$
$
80,000
120,000
0.20
0.25
500,000
Sales per unit are $3.00.
Required:
1. In good form, prepare the static budget operating income in contribution format.
2. Suppose actual sales demand increases to 700,000 units for August; assume the units are within the
relevant range. Prepare the flexible budget for August in contribution format.
3. Compute and reconcile the sales volume variance for August. Indicate whether the variance is
favorable or unfavorable.
4. In a one page composition, provide an explanation for the change in the sales volume variance for
August, and identify the elements which give rise to the difference between the flexible and static
budgets. Also explain the reason for completing a flexible budget for the period.
Your paper should meet the following requirements:



2-3 pages in total length
Formatted according to the
Document your sources
APA Requirements.