7-A1) Preparing a Master Budget
You are the new manager of the Betterbuy Electronics store in the Mall of America. Top management of Betterbuy Electronics is convinced that management training should include the active participation of store managers in the budgeting process. You have been asked to prepare a complete master budget for your store for June, July, and August. All accounting is done centrally so you have no expert help on the premises. In addition, tomorrow the branch manager and the assistant controller will be here to examine your work; at that time, they will assist you in formulating the final budget document. The idea is to have you prepare the initial budget on your own so that you gain more confidence about accounting matters. You want to make a favorable impression on your superiors, so you gather the following data as of May 31, 20X8:
Credit sales are 90% of total sales. Credit accounts are collected 80% in the month following the sale and 20% in the subsequent month. Assume that bad debts are negligible and can be ignored. The accounts receivable on May 31 are the result of the credit sales for April and May:
(.20 x .90 x $300,000) + (1.0 x .90 x $350,000) = $369,000.
The average gross profit on sales is 38%. The policy is to acquire enough inventory each month to equal the following month’s projected cost of goods sold. All purchases are paid for in the month following purchase. Salaries, wages, and commissions average 20% of sales; all other variable expenses are 4% of sales. Fixed expenses for rent, property taxes, and miscellaneous payroll and other items are $55,000 monthly. Assume that these variable and fixed expenses require cash disbursements each month. Depreciation is $2,500 monthly. In June, $55,000 is going to be disbursed for fixtures acquired and recorded in furniture and fixtures in May. The May 31 balance of accounts