Chapter 22, Problem 8BPSB

To determine

Concept Introduction:

Master Budget-

Master budget is a sum of all lower level budgets which are produced at different functional areas of the company. It helps in providing good coordination among all level managers. It also helps the manager in evaluating the actual performance and comparing it with the standards set by them.

Requirement 1-

To prepare:

Monthly sales budget

Answer to Problem 8BPSB

Solution:

A sales budget is a budget which is used to estimate the expected units of sales in dollars and also helps to determine the estimated earnings during a period.

ISLE Corporation
Monthly sales budget (in units and sales value)
	January	February	March	Quarter
Sales in units	6,000	8,000	10,000	24,000
Selling price per unit	$45	$45	$45	$45
Dollar sales value($)	270,000	360,000	450,000	1,080,000

Explanation of Solution

Dollar sales value for each month is calculated as follows-

$\begin{array}{l}Dollarsalesvalue=Salesinunits\times Sellingpriceperunit\hfill \\ DollarsalesvalueforJanuary=6,000\times \$45\hfill \\ \begin{array}{l}DollarsalesvalueforJanuary=\$270,000\\ \begin{array}{l}DollarsalesvalueforFebruary=8,000\times \$45\hfill \\ \begin{array}{l}DollarsalesvalueforFebruary=\$360,000\\ DollarsalesvalueforMarch=10,000\times \$45\\ DollarsalesvalueforMarch=\$450,000\\ DollarsalesvalueforQuarter=24,000\times \$45\\ DollarsalesvalueforQuarter=\$1,080,000\end{array}\hfill \end{array}\end{array}\hfill \end{array}$

Conclusion

Thus, the monthly sales budget has been prepared both in units and sales value.

To determine

Requirement 2-

To prepare:

Merchandise purchases budget

Answer to Problem 8BPSB

Solution:

Budgeted purchases: Budgeted purchases are the estimates of purchases of a particular month based on the sales requirement and ending inventory requirement and the budgeted beginning inventory.

ISLE Corporation
Monthly merchandise purchases budgets
	January	February	March	Quarter
Budgeted Sales for the month	6,000	8,000	10,000
Ending inventory in units	2,000	2,500	2,250
Total Needs	8,000	10,500	12,250
Less: Beginning inventory	(5,000)	(2,000)	(2,500)
Merchandise purchases in units required	3,000	8,500	9,750
Cost per unit	$30	$30	$30
Dollar value of purchases ($)	90,000	255,000	292,500	637,500

Explanation of Solution

First, ending inventory in units is required to be calculated-

Calculation of ending inventory in units is as under-

$\begin{array}{l}Ending\text{ inven}toryrequirement=\text{ 25}\%ofNextMonthsExpectedsalesunits\\ Ending\text{ inven}toryrequirementforJanuary=25\%XExpectedsalesunitsforFebruary\\ Ending\text{ inven}toryrequirementforJanuary=25\%X8,000units\\ Ending\text{ inven}toryrequirementforJanuary=2,000units\\ \\ Ending\text{ inven}toryrequirementforFebruary=25\%XExpectedsalesunitsforMarch\\ Ending\text{ inven}toryrequirementforFebruary=25\%X10,000units\\ Ending\text{ inven}toryrequirementforFebruary=2,500units\\ \\ Ending\text{ inven}toryrequirementforMarch=25\%XExpectedsalesunitsforApril\\ Ending\text{ inven}toryrequirementforMarch=25\%X\text{ 9,000}units\\ Ending\text{ inven}toryrequirementforMarch\text{ = 2,250 }units\end{array}$

Now, Merchandise purchases required is to be calculated-

$\begin{array}{l}Requiredmerchandisepurchases\hfill \\ =EndingInventory+Expectedsalesofthemonth–BeginningInventory\hfill \end{array}$

Given, Expected sales of the month-

• January – 6,000 units

• February – 8,000 units

• March – 10,000 units

Ending inventory –

• January – 2,000 units

• February – 2,500 units

• March – 2,250 units

Beginning inventory-

- Ending inventory of the previous month shall be beginning inventory of current month.

• January – 5,000 units (given)

• February - 2,000 units

• March – 2,500 units

Total requirement for the month of January, February and March-

$\begin{array}{l}Requiredmerchandisepurchases\hfill \\ \begin{array}{l}=EndingInventory+Expectedsalesofthemonth–BeginningInventory\\ RequiredmerchandisepurchasesforJanuary=2,000units+6,000units–5,000units\\ RequiredmerchandisepurchasesforJanuary=3,000units\\ \\ RequiredmerchandisepurchasesforFebruary=2,500units+8,000units–2,000units\\ RequiredmerchandisepurchasesforFebruary=8,500units\\ \\ \begin{array}{l}RequiredmerchandisepurchasesforMarch=2,250units+10,000units–2,500units\hfill \\ RequiredmerchandisepurchasesforMarch=9,750units\hfill \end{array}\end{array}\hfill \end{array}$

Dollar Value of purchases is calculated as follows-

$\begin{array}{l}\begin{array}{l}Dollarvalueofpurchase\text{ =}Requiredmerchandisepurchase\times Costperunit\hfill \\ DollarvalueofpurchaseforJanuary=3,000units\times \$30\hfill \end{array}\\ DollarvalueofpurchaseforJanuary=\$90,000\\ \\ \begin{array}{l}DollarvalueofpurchaseforFebruary=8,500units\times \$30\hfill \\ \begin{array}{l}DollarvalueofpurchaseforFebruary=\$255,000\\ \\ \begin{array}{l}DollarvalueofpurchaseforMarch=9,750units\times \$30\hfill \\ DollarvalueofpurchaseforMarch=\$292,500\hfill \\ \hfill \end{array}\end{array}\hfill \end{array}\end{array}$

Conclusion

Thus, the merchandise purchase budget has been prepared for the months of January, February and March.

To determine

Requirement 3-

To prepare:

Monthly selling expense Budget

Answer to Problem 8BPSB

Solution:

ISLE Corporation
Monthly Selling Expense budgets
	January ($)	February ($)	March ($)
Sales commissions	54,000	72,000	90,000
Sales salaries	7,500	7,500	7,500
Selling expenses	61,500	79,500	97,500

Explanation of Solution

First we need to calculate Sales commissions.

Calculation of sales commission is as under-

$\begin{array}{l}SalesCommission=20\%\times Sales\hfill \\ SalesCommissionforJanuary=20\%\times \$270,000\hfill \\ \begin{array}{l}SalesCommissionforJanuary=\$54,000\\ \\ SalesCommissionforFebruary=20\%\times \$360,000\\ SalesCommissionforFebruary=\$72,000\\ \\ \begin{array}{l}SalesCommissionforMarch=20\%\times \$450,000\hfill \\ SalesCommissionforMarch=\$90,000\hfill \end{array}\end{array}\hfill \end{array}$

Sales salary for each month-

$\begin{array}{l}Salessalaryforeachmonth=\frac{\$90,000}{12months}\hfill \\ Salessalaryforeachmonth=\$7,500\hfill \end{array}$

Selling expense for each month is calculated as under-

$\begin{array}{l}SellingExpense=SalesCommission+Salessalary\hfill \\ SellingExpenseforJanuary=\$54,000+\$7,500\hfill \\ \begin{array}{l}SellingExpenseforJanuary=\$61,500\\ \\ \begin{array}{l}SellingExpenseforFebruary=\$72,000+\$7,500\hfill \\ \begin{array}{l}SellingExpenseforFebruary=\$79,500\\ \\ SellingExpenseforMarch=\$90,000+\$7,500\\ SellingExpenseforMarch=\$97,500\end{array}\hfill \end{array}\end{array}\hfill \end{array}$

Conclusion

Thus, the selling expense budget is prepared for the month of January, February and March.

To determine

Requirement 4-

To prepare:

Monthly general and administrative expense Budget

Answer to Problem 8BPSB

Solution:

ISLE Corporation
Monthly general and administrative budgets
	January	February	March
General and administrative salaries	12,000	12,000	12,000
Maintenance expense	3,000	3,000	3,000
Total general and administrative expenses	15,000	15,000	15,000

Explanation of Solution

Given: Maintenance Expense = $3,000 per month

General and administrative salaries for each month-

$\begin{array}{l}Generalandadministrativesalariesforeachmonth=\frac{Totalsalaryforyear}{12months}\hfill \\ Generalandadministrativesalariesforeachmonth=\frac{\$144,000}{12months}\hfill \\ Generalandadministrativesalariesforeachmonth=\$12,000\hfill \end{array}$

Total General and administrative expenses for each month is calculated as under-

$\begin{array}{l}\begin{array}{l}TotalGeneralandadministrativeexpenses=Generalandadministrativesalaries+MaintenanceExpense\hfill \\ TotalGeneralandadministrativeexpensesforJanuary=\$12,000+\$3,000\hfill \end{array}\\ TotalGeneralandadministrativeexpensesforJanuary=\$15,000\\ \\ \begin{array}{l}TotalGeneralandadministrativeexpensesforFebruary=\$12,000+\$3,000\hfill \\ \begin{array}{l}TotalGeneralandadministrativeexpensesforFebruary=\$15,000\\ \\ \begin{array}{l}TotalGeneralandadministrativeexpensesforMarch=\$12,000+\$3,000\hfill \\ TotalGeneralandadministrativeexpensesforMarch=\$15,000\hfill \end{array}\end{array}\hfill \end{array}\end{array}$

Conclusion

Thus, the general and administrative expenses budget is prepared for the month of January, February and March.

To determine

Requirement 5-

To prepare:

Monthly capital expenditures Budget

Answer to Problem 8BPSB

Solution:

ISLE Corporation
Capital Expenditures budget
	January	February	March	Quarter
Purchase of Equipment	72,000	96,000	28,800	196,800
Purchase of Land	0	0	150,000	150,000
Total Capital expenditure	72,000	96,000	178,800	346,800

Explanation of Solution

Given-

• Purchase of Equipment in January = $72,000

• Purchase of Equipment in February = $96,000

• Purchase of Equipment in March = $28,800

• Purchase of Land in March = $150,000

$\begin{array}{l}TotalcapitalexpenditureinMarch=PurchaseofEquipment+PurchaseofLand\hfill \\ TotalcapitalexpenditureinMarch=\$28,800+\$150,000\hfill \\ TotalcapitalexpenditureinMarch=\$178,800\hfill \end{array}$

Conclusion

Thus, Capital expenditure budget is prepared.

To determine

Requirement 6-

To prepare:

Monthly Cash Budget

Answer to Problem 8BPSB

Solution:

ISLE Corporation
Monthly cash budgets
	January	February	March
Beginning cash balance	36,000	198,000	123,000
Cash receipts:
Cash sales	67,500	90,000	112,500
Collection from -
Beginning accounts receivable	315,000	210,000
Credit sales of January		121,500	81,000
Credit sales of February			162,000
Total cash receipts	382,500	421,500	355,500
Total cash available	418,500	619,500	478,500
Less: Cash disbursements-
Merchandise purchases
Beginning accounts payable	72,000	288,000
January accounts payable		18,000	72,000
February accounts payable			51,000
Selling expenses	61,500	79,500	97,500
General and administrative expenses	15,000	15,000	15,000
Capital Expenditure	72,000	96,000	178,800
Taxes			90,000
Total cash disbursements	220,500	496,500	504,300
Surplus/ ( deficiency) of cash	198,000	123,000	(25,800)
Borrowing / ( Repayment)			61,800
Ending cash balance	198,000	123,000	36,000

Explanation of Solution

Cash sales is calculated as under-

$\begin{array}{l}\begin{array}{l}Cashsales=25\%\times Totalsalesofthemonth\hfill \\ CashsalesforJanuary=25\%\times \$270,000\hfill \\ \begin{array}{l}CashsalesforJanuary=\$67,500\\ \end{array}\hfill \\ CashsalesforFebruary=25\%\times \$360,000\hfill \\ \begin{array}{l}CashsalesforFebruary=\$90,000\\ \end{array}\hfill \\ CashsalesforMarch=25\%\times \$450,000\hfill \end{array}\\ CashsalesforMarch=\$112,500\end{array}$

Beginning accounts receivable-

Given-

• January-$315,000

• February-$210,000

Credit Sales-

For the month of February-

$\begin{array}{l}CreditsalereceiptinthemonthofFebruary=60\%\times JanuaryCreditsales\hfill \\ CreditsalereceiptinthemonthofFebruary=60\%\times \left[TotalJanuarysales\times 75\%\right]\hfill \\ CreditsalereceiptinthemonthofFebruary=60\%\times \left[\$270,000\times 75\%\right]\hfill \\ CreditsalereceiptinthemonthofFebruary=60\%\times \$202,500\hfill \\ CreditsalereceiptinthemonthofFebruary=\$121,500\hfill \end{array}$

For the month of March-

$\begin{array}{l}\begin{array}{l}Creditsalereceipt=\left\{40\%\times JanuaryCreditsales\right\}+\left\{60\%\times FebruaryCreditsales\right\}\hfill \\ Creditsalereceipt=\left\{40\%\times \left[TotalJanuarysales\times 75\%\right]\right\}+\left\{60\%\times \left[TotalFebruarysales\times 75\%\right]\right\}\hfill \\ Creditsalereceipt=\left\{40\%\times \left[\$270,000\times 75\%\right]\right\}+\left\{60\%\times \left[\$360,000\times 75\%\right]\right\}\hfill \\ Creditsalereceipt=\left\{40\%\times \$202,500\right\}+\left\{60\%\times \$270,000\right\}\hfill \\ Creditsalereceipt=\$81,000+\$162,000\hfill \end{array}\\ Creditsalereceipt=\$243,000\end{array}$

Beginning accounts payable-

Given-

• January-$72,000

• February-$288,000

Calculation of accounts payable is as under-

For the month of February-

$\begin{array}{l}\begin{array}{l}Accountspayable=20\%\times Januarypurchases\hfill \\ Accountspayable=20\%\times \$90,000\hfill \end{array}\\ Accountspayable=\$18,000\end{array}$

For the month of March-

$\begin{array}{l}Accountspayable=\left(80\%\times Januarypurchases\right)+\left(20\%\times Februarypurchases\right)\hfill \\ Accountspayable=\left(80\%\times \$90,000\right)+\left(20\%\times \$255,000\right)\hfill \\ Accountspayable=\$72,000+\$51,000\hfill \\ Accountspayable=\$123,000\hfill \end{array}$

To determine

Requirement 7-

To prepare:

Budgeted income statement

Answer to Problem 8BPSB

Solution:

ISLE Corporation
Income Statement
Particulars	Amount ($)	Amount ($)
Sales		1,080,000
Cost of merchandise sold		720,000
Gross Profit		360,000
Operating expenses:
Selling expenses	238,500
General and administrative expenses	45,000
Depreciation expense	21,425	304,925
Income before tax		55,075
Tax @ 40%		22,030
Net operating income		33,045

Explanation of Solution

Income before tax-

$\begin{array}{l}\begin{array}{l}Incomebeforetax=Sales-Costofgoodssold-SellingExpense\\ -Generalandadministrativeexpenses-Depreciationexpense\end{array}\hfill \\ Incomebeforetax=\$1,080,000-\$720,000-\$238,500-\$45,000-\$21,425\hfill \\ Incomebeforetax=\$55,075\hfill \end{array}$

Tax Expense-

$\begin{array}{l}TaxExpense=Incomebeforetax\times TaxRate\hfill \\ TaxExpense=\$55,075\times 40\%\hfill \\ TaxExpense=22,030\hfill \end{array}$

Net Operating income is calculated as under-

$\begin{array}{l}NetOperatingincome=Incomebeforetax-TaxExpense\hfill \\ NetOperatingincome=\$55,075-\$22,030\hfill \\ NetOperatingincome=33,045\hfill \end{array}$

Conclusion

Thus, Income statement is prepared for the quarter.

To determine

Requirement 8-

To prepare:

Budgeted Balance sheet.

Answer to Problem 8BPSB

Solution:

ISLE Corporation
Balance sheet as of March 31, 2018
	Amount ($)	Amount ($)
Assets
Cash	36,000
Accounts receivable	445,500
Inventory	67,500
Total current assets		549,000
Land		150,000
Equipment gross	736,800
Accumulated depreciation	88,925
Equipment net		647,875
Total assets		1,346,875
Stockholder's Equity and Liabilities
Accounts payable	496,500
Bank loan payable	76,800
Tax payable	22,030
Current liabilities		595,330
Common stock		472,500
Retained earnings		279,045
Total Stockholder's Equity and Liabilities		1,346,875

Explanation of Solution

$\begin{array}{l}\begin{array}{l}TotalAssets=TotalCurrentassets+Land+Equipment\hfill \\ TotalAssets=\$549,000+\$150,000+\$647,875\hfill \end{array}\\ TotalAssets=\$1,346,875\end{array}$

$\begin{array}{l}\begin{array}{l}TotalStockholder\text{'}sEquityandLiabilities=Currentliabilities+Commonstock+Retainedearnings\hfill \\ TotalStockholder\text{'}sEquityandLiabilities=\$595,330+\$472,500+\$279,045\hfill \end{array}\\ TotalStockholder\text{'}sEquityandLiabilities=\$1,346,875\end{array}$

Conclusion

Thus, Budgeted balance sheet is prepared with total of $1,346,875.