ACC 310F Lecture Notes - Lecture 10: Accounts Payable, Retained Earnings, Fixed Cost
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You are a Consultant for the professional service firm, BUSI2083 LLP. Your firm specializes in providing a wide variety ofinternal business solutions for different clients. One of thepartners in your practice is impressed with the work you havecompleted to date and would like to give you additionalresponsibility. She has asked you to take the lead on thisengagement with the hope that a successful outcome may lead to yourpromotion to Senior Consultant. You take the background files fromthe partner and get started.
Perfect Stitch Replicaâs Limited, a nationwide distributor oflow-cost imitation clothing, has an exclusive agreement for thedistribution of the clothing. Sales have grown so rapidly over thelast few years that it has become necessary to add new members tothe management team. To date, the company's budgeting practiceshave been minimal, and at times, the company has experienced a cashshortage. You have been given responsibility for all planning andbudgeting. Your first assignment is to prepare a master budget forthe next three months, starting April 1. You are anxious to make afavourable impression and have assembled the information below.
Additional Information
The clothing is sold to retailers for an average price of $10each. Recent and forecasted sales in units are as follows:
Recent and forecast sales: | |
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'ssales in units.
The average cost of the clothing is $4 each. Purchases are paidfor 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, thatonly 20% of a month's sales are collected by month-end. Anadditional 70% is collected in the following month, and theremaining 10% is collected in the second month following sale. Baddebts have been negligible.
The company's monthly operating expenses are given below:
Variable: | |
Sales commissions (percentage of sales) | 4% |
Fixed: | |
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, withthe exception of depreciation and insurance. Insurance is paid onan annual basis, in November of each year. The company plans topurchase $16,000 in new equipment during May and $40,000 in newequipment during June; both purchases will be paid in cash. Thecompany declares dividends of $15,000 each quarter, payable in thefirst month of the following quarter. The company's balance sheetat March 31 is given below:
Balance Sheet at March 31: | |
Assets | |
Cash | $ 74,000 |
Accounts receivable* | 346,000 |
Inventory** | 104,000 |
Prepaid insurance | 21,000 |
Fixed assets, net of depreciation | 950,000 |
Total assets | $1,495,000 |
Liabilities and Shareholders' Equity | |
Accounts payable | $ 100,000 |
Dividends payable | 15,000 |
Common shares | 800,000 |
Retained earnings | 580,000 |
Total liabilities and shareholders' equity | $ 1,495,000 |
Notes to Balance Sheet: | |
*February sales | $ 26,000 |
March sales | 320,000 |
$ 346,000 | |
**Number of units: | |
Dollar amount of inventory | 104,000 |
Divide by cost per unit | $ 4 |
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; anyrepayments are made at the end of the month. The company has anagreement with a bank that allows it to borrow in increments of$1,000 at the beginning of each month. The interest rate on theseloans is 1% per month, and for simplicity, assume that interest isnot compounded. At the end of the quarter, the company would paythe bank all of the accumulated interest on the loan and as much ofthe loan as possible (in increments of $1,000), while stillretaining at least $50,000 in cash.
Prepare the following budgets for the first three months of2016:
A sales budget by month and in total
A schedule of expected cash collections from sales, by month andin total.
A merchandise purchases budget in units and in dollars. Show thebudget by month and in total.
A schedule of expected cash disbursements for merchandisepurchases, by month and in total.
A cash budget. Show the budget by month and in total.
A budgeted Income Statement for the three-month period endingJune 30. Use the variable costing approach.
Provide a budgeted Balance Sheet as at June 30th.
A decentralized organization is one in which:
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A local chain department store grants each of its store managersthe authority to make buying decisions for their stores. Grantingmanagers this kind of authority is found in which type oforganization?
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A local chain electronics store does not allow its store ordistrict managers to make important decisions about their stores.The main role of store managers is to supervise employees and makesure day-to-day transactions run smoothly while district managerssupervise store managers and report profitability data back totop-level management. Not allowing store or district managersdecision-making authority is most likely to be found in which typeof organization?
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When a few individuals at the top of an organization retaindecision-making authority, the organization is referred to asa(n):
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Which of the following statements regarding the structure oforganizations is false?
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Which of the following is an advantage of decentralization?
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Which of the following is not an advantage ofdecentralization?
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Which of the following is often not a disadvantage ofdecentralization?
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Which of the following is a disadvantage ofdecentralization?
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"Responsibility accounting" is the concept that says:
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A budget for a single unit of a product or service is called asa:
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Which of the following statements is true regarding the budgetedcost for direct materials?
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Variance analysis compares:
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Which of the following statements is false regarding taskanalysis?
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Task analysis:
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A(n) ____ is attainable only when near-perfect conditionsexist.
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In most companies, machines break down occasionally andemployees are often less than perfect. Which type of standardacknowledges these characteristics when determining the standardcost of a product?
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Hathaway Inc. produces and sells golf umbrellas to localresorts. Hathaway anticipates April to be a busy month with thesale of 2,000 umbrellas. The company has prepared the followingstatic budget for April:
Sales revenue (2,000 units) | $60,000 |
Variable costs: | |
Direct materials | 6,000 |
Direct labor | 8,000 |
Overhead | 2,500 |
Fixed costs | 6,000 |
Net operating income | $37,500 |
During April, Hathaway actually produced and sold 2,300 umbrellas.What should be Hathaway's net operating income in April based on aflexible budget?
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Hoppe Inc. manufactures widgets. Management has determined thateach widget has a standard materials cost of $3.50 when 2.5 ouncesof raw material at a cost of $1.40 per ounce are used. The staticbudget for the month of December showed an estimated production of4,000 widgets in December. During December, 4,300 widgets wereactually produced. The actual cost for each widget was $3.60 when2.25 ounces of raw material at a cost of $1.60 per ounce werepurchased and used. What should be the total direct materials costaccording to Hoppe's flexible budget for December?
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Violetta Inc. manufactures plastic storage boxes. Management hasdetermined that each medium-sized box has a standard materials costof $1.20 when 4 pounds of raw material at a cost of $.30 per poundare used. The static budget for the month of March showed anestimated production of 15,000 boxes in March. During March, 17,000boxes were actually produced. The actual cost for each box was$1.56 when 3.9 pounds of raw material at a cost of $.40 per poundwere purchased and used. What should be the total direct materialscost according to Violetta's flexible budget for March?
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