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Managerial accounting

You are a Consultant
for the professional service firm, BUSI 2083 LLP. Your firm specializes in
providing a wide variety of internal business solutions for different clients.
One of the partners in your practice is impressed with the work you have completed
to date and would like to give you additional responsibility. She has asked you
to take the lead on this engagement with the hope that a successful outcome may
lead to your promotion to Senior Consultant. You take the background files from
the partner and get started.

Perfect Stitch
Replica’s Limited, a nationwide distributor of low-cost imitation clothing, has
an exclusive agreement for the distribution of the clothing. Sales have grown
so rapidly over the last few years that it has become necessary to add new
members to the management team. To date, the company’s budgeting practices have
been minimal, and at times, the company has experienced a cash shortage. You
have been given responsibility for all planning and budgeting. Your first
assignment is to prepare a master budget for the next three months, starting
April 1. You are anxious to make a favourable impression and have assembled the
information below.

Additional Information

The clothing is sold
to retailers for an average price of $10 each. Recent and forecasted sales in
units are as follows:

Recent and forecast
January (actual) 20,000
February (actual) 26,000
March (actual) 40,000
April 65,000
May 100,000
June 50,000
July 30,000
August 28,000
September 25,000

Ending inventories
should be equal to 40% of the next month’s sales in units.

The average cost of
the clothing is $4 each. Purchases are paid for as follows: 50% in the month of
purchase and the remaining 50% in the following month. All sales are on credit,
with no discount, and payable within 15 days. The company has found, however,
that only 20% of a month’s sales are collected by month-end. An additional 70%
is collected in the following month, and the remaining 10% is collected in the
second month following sale. Bad debts have been negligible.

The company’s monthly
operating expenses are given below:

Sales commissions
(percentage of sales)
Advertising $200,000
Rent $18,000
Wages and salaries $106,000
Utilities $7,000
Insurance $3,000
Depreciation $14,000

All operating expenses
are paid during the month, in cash, with the exception of depreciation and
insurance. Insurance is paid on an annual basis, in November of each year. The
company plans to purchase $16,000 in new equipment during May and $40,000 in
new equipment during June; both purchases will be paid in cash. The company
declares dividends of $15,000 each quarter, payable in the first month of the
following quarter. The company’s balance sheet at March 31 is given below:

Sheet at March 31:
Cash $
Inventory** 104,000
Prepaid insurance 21,000
Fixed assets, net
of depreciation
Total assets $1,495,000
and Shareholders’ Equity
Accounts payable $
Dividends payable 15,000
Common shares 800,000
Retained earnings 580,000
Total liabilities
and shareholders’ equity
Notes to Balance
*February sales $
March sales 320,000
**Number of units:
Dollar amount of
Divide by cost per
Number of units 26,000

The company wants a
minimum ending cash balance each month of $50,000. All borrowing is done at the
beginning of the month; any repayments are made at the end of the month. The
company has an agreement with a bank that allows it 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, assume that interest is not compounded. At the
end of the quarter, the company would pay the bank all of the accumulated
interest on the loan and as much of the loan as possible (in increments of
$1,000), while still retaining at least $50,000 in cash.

Prepare the following
budgets for the first three months of 2016:

  1. A sales budget by month and in total
  2. A schedule of expected cash collections from sales, by month and
    in total.
  3. A merchandise purchases budget in units and in dollars. Show the
    budget by month and in total.
  4. A schedule of expected cash disbursements for merchandise
    purchases, by month and in total.
  5. A cash budget. Show the budget by month and in total.
  6. A budgeted Income Statement for the three-month period ending
    June 30. Use the variable costing approach.
  7. Provide a budgeted Balance Sheet as at June 30th


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