QUESTION 1

You have just been hired as a new management trainee by Sun Color Berhad, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price at RM 10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months are as follows:

  RM   RM

Actual January 20,000 Budget June 50,000

Actual February 26,000 Budget July 30,000

Actual March 40,000 Budget August 28,000

Budget April 65,000 Budget September 25,000

Budget May 100,000

The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid RM 4 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase and the other half is paid for 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 in the month of sales. 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.

Monthly operating expenses for the company are given below:

Variable:

Sales commissions 4% of sales

Fixed:

Advertising RM 200,000

Rent 18,000

Salaries 106,000

Utilities 7,000

Insurance 3,000

Depreciation 14,000

Insurance is paid on an annual basis in November of each year. The company plans to purchase RM 16,000 in new equipment during May and RM 40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of RM 15,000 each quarter, payable in the first month of the following quarter.

A listing of the company's ledger accounts as of March 31 is given below:

Assets

Cash RM 74,000

Accounts receivable (RM 26,000 February sales; 346,000

RM 320,000 March sales)

Inventory 104,000

Prepaid insurance 21,000

Property and equipment (net) 950,000

Total Assets       1,495,000

Liabilities and Stockholders' Equity

Accounts payable RM 100,000

Dividends payable 15,000

Capital Stocks 800,000

Retained Earnings 580,000

Total Liabilities and Stockholders' Equity          1,495,000

The company maintains a minimum cash balance of RM 50,000. All borrowing is done at the beginning of a month, any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of RM 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. 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 RM 1,000), while still retaining at least RM 50,000 in cash.

REQUIRED:

Prepare master budget for the three-month period ending June 30. Include the following detailed budgets (by month and in total):

a. Sales budget

b. A schedule of expected cash collections from sales

c. A merchandise purchases budget in unit and RM

d. A schedule of expected cash disbursements for merchandise purchases

(25 Marks)

Cash Budget. Determine any borrowing that would be needed to maintain the minimum cash balance of RM 50,000.

(25 Marks)

A budgeted Income statement for the three-month period ending June 30 using Marginal approach.

(15 Marks)

A budgeted Balance Sheet as of June 30.

(10 Marks)

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