Managerial Accounting focuses heavily on finding solutions to numerical problems. With that in mind, most units will include a number of problems. For each problem, you will need to provide more than a simple numerical response. Your solutions should thoroughly address the issue and present the findings in a meaningful format similar to those developed within the chapters and as part of the review exercises solutions. Part value may be assigned for incorrect responses.
Question 1: (30 marks)
For the second quarter of the following year Cloaks Company has projected sales and production in units as follows:
Cash-related production costs are budgeted at $7 per unit produced. Of these production costs, 35% are paid in the month in which they are incurred and the balance in the next month. $95,000 per month will account for Selling and administrative expenses. On January 31 the accounts payable balance totals $185,000, which will be paid in Feb.
All units are sold on account for $13 each. Cash collections from sales are budgeted at 55% in the month of sale, 25% in the month following the month of sale, and the remaining 20% in the second month following the month of sale. On January 1 accounts receivable totaled $500,000 ($90,000 from November’s sales and the remaining from January).
1) Prepare a schedule for each month showing budgeted cash disbursements for Cloaks Company.
2) Prepare a schedule for each month showing budgeted cash receipts for Cloaks Company.
Question 2: (36 marks)
A merchandising firm by the name of Star Wars Enterprises, had an inventory of 42,000 units on March 31, and it had accounts receivable totaling $83,500. Sales, in units, have been budgeted as follows for the next four months:
To be enforced in April, Star Wars board of directors has established a policy that states that the inventory at the end of each month should contain 35% of the units required for the following month’s budgeted sales. $2.5 is the selling price per unit. One-Quarter of sales are paid for by customers in the month of the sale; the balance is collected in the following month.
1) Prepare a merchandise purchases budget showing how many units should be purchased for
each of the months April, May, and June.
2) Prepare a schedule of expected cash collections for each of the months April, May, and June.
Question 3: (24 marks)
Fonsey Corporation, a merchandising company, has provided the following budget data:
Collections from customers are normally 65% in the month of sale, 22% in the month following the sale, and 11% in the second month following the sale. It is expected that the balance be uncollectible. Fonsey pays for purchases in the month following the purchase. Cash disbursements for expenses other than merchandise purchases are expected to be $13,300 for May. Fonsey’s cash balance on May 1 was $21,500.
1) Compute the expected cash collections during May.
2) Compute the expected cash balance on May 31.
Question 4: (10 marks)
Five years ago, Phil Coulson left his position at a large company to start Coulson Spy Solutions Co. (CSS), a software design and tracking company. CSS’s first product was a unique software package that seamlessly integrates networked PCs. Robust sales of this initial product permitted the company to begin development of other software products and to hire additional personnel. The staff at CSS quickly grew from three people working out of Phil’s basement to more than 70 individuals working in leased spaces at an industrial park. Continued growth led Coulson to hire seasoned marketing, distribution, and production managers and an experienced accountant.
Recently, Coulson decided that the company had become too large to run on an informal basis and that a formalized planning and control program centered around a budget was necessary. Coulson asked the accountant, Maria Hill, to work with him in developing the initial budget for CSS.
Coulson forecasted sales revenues based on his projections for both the market growth for the initial software and successful completion of new products. Hill used this data to construct the master budget for the company, which she then broke down into departmental budgets. Coulson and Hill met a number of times over a three-week period to hammer out the details of the budgets.
When Coulson and Hill were satisfied with their work, the various departmental budgets were distributed to the department managers with a cover letter explaining CSS’s new budgeting system. The letter requested everyone’s assistance in working together to achieve the budget objectives. Several of the department managers were displeased with how the budgeting process was undertaken. In discussing the situation among themselves, they felt that some of the budget projections were overly optimistic and not realistically attainable.
1) How does the budgeting process Coulson and Hill used at CSS differ from recommended practice?
2) What are the behavioural implications of the way Coulson and Hill went about preparing the master budget