Aztec Company sells its product for $180 per unit. Its actual and budgeted sales follow. Units Dollars April (actual) . 4,000 $ 720,000 May (actual) 2,000 360,000 June (budgeted) . 6,000 1,080,000 July (budgeted) 5,000 900,000 August (budgeted) . 3,800 684,000 All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of the sale, 50% in the month after the sale, 28% in the second month after the sale, and 2% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,320,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $100,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $100,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On May 31, the loan balance is $25,000, and the company’s cash balance is $100,000. (Round amounts to the nearest dollar.) Required 1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July. 2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July. 3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month. 4. Prepare a schedule showing the computation of cash payments for product purchases for June and July. 5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Aztec Company sells its product for $180 per unit. Its actual and budgeted sales follow.
Units Dollars
April (actual) . 4,000 $ 720,000
May (actual) 2,000 360,000
June (budgeted) . 6,000 1,080,000
July (budgeted) 5,000 900,000
August (budgeted) . 3,800 684,000 All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of
the sale, 50% in the month after the sale, 28% in the second month after the sale, and 2% proves to be
uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid
in that month and the other 40% is paid in the next month. The company has a policy to maintain an
ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. The
April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative
expenses for the year are $1,320,000 and are paid evenly throughout the year in cash. The company’s
minimum cash balance at month-end is $100,000. This minimum is maintained, if necessary, by borrowing
cash from the bank. If the balance exceeds $100,000, the company repays as much of the loan
as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On
May 31, the loan balance is $25,000, and the company’s cash balance is $100,000. (Round amounts to
the nearest dollar.)
Required
1. Prepare a schedule that shows the computation of cash collections of its credit sales (
in each of the months of June and July.
2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April,
May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and
then show the dollar amount of purchases for each month.
4. Prepare a schedule showing the computation of cash payments for product purchases for June and July.
5. Prepare a
loan balance at the end of each month.
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