Question

K&B Enterprises manufactures a high-tech raincoat for children. The following information has been assembled for next year's first quarter (i.e., Jul - Sep) budget preparation: 1. The sales price of a coat is $150 and unit sales estimates for the last half of this year are: July August 6,000 .. 5,000 3,000 1,000 2,000 December.000 October 1 November 2. All sales are on account. Based on experience, sales are collected in the following pattern: 30% in the month of sale, 65% in the month following sale, and any remaining amount is uncollectible. The ending gross receivable balance on June 30h is expected to be $500,000. Com pany management desires finished goods inventory to equal 40% of the next month's Sales at the end of each month. 3. Each kite requires ten feet of Carbon Fiber material. To prevent shortages, the company policy is to keep 25% of the next month's production requirements on hand at the end of each month. 4. B will pay for 50% of its purchases in the monthof purchase and the remainder inthe following month. The accounts payable balance for the Carbon Fiber purchases is anticipated to be $100,000 on July1t The Carbon Fiber costs $12 per foot. In order to improve its cash flows from last year, 5.

a) Prepare a sales budget(in dollars) and cash collections budget for July through September of this year.

b) Prepare a production budget (in units) for July through September

c) Prepare a direct materials purchase budget(in units) and cash disbursements budget for Carbon Fiber for July through September.

Please give the details how to get the answers. Thanks!

Answer 1

A) (i) Sales Budget for the period July to September   

Particulars	July	August	September	October
Estimated sales units (assumed to be same as last year)	6000	5000	3000	1000
(*) Selling price per coat ($)	150	150	150	150
Estimated Sales ($)	900,000	750,000	450,000	150,000

(ii) Cash Collection Budget for the period July to September (in $)

Particulars	July	August	September
Collection from Debtors (Refer Working note 1 below)	734,285.71	810,000	622,500

Working Note 1:

Collection from Debtors for the month = (30% of Current month's sale) + (65% of Previous month's sale)

July - ($ 900,000 * 30%) + ($ 500,000/70 * 65) = $ 270,000 + $ 464,285.71 = $ 734,285.71

Note: The ending gross receivable balance as on 30th June is expected to be $ 500,000. It would comprise of 70% of sales of the same month. Out of the same, only 65% would be collected in the month of July as 5% of every month's sale is not collectible.

August - ($ 750,000 * 30%) + ($ 900,000 * 65%) = $225,000 + $ 585,000 = $ 810,000

September - ($ 450,000 * 30%) + ($750,000 *65%) = $ 135,000 + $ 487,500 = $ 622,500

B) Production Budget for July to September

Units Produced = Units sold + Closing stock - Opening stock

Particulars	July	August	September	October
Units sold	6,000	5,000	3,000	1,000
(+) Closing stock (40% of next month's sale)	2,000	1,200	400	800
(-) Opening stock (Closing stock of previous month or 40% of the sale month's sale)	2,400	2,000	1,200	400
Units Produced	5,600	4,200	2,200	1,400

C) (a) Direct Material Purchase Budget (in Units) for Juty to September

Material Purchased (in units) = Units Consumed + Closing stock - Opening stock

Particulars	July	August	September	October
Finished Goods Units to be produced (High tech raincoat)	5,600	4,200	2,200	1,400
(*) Material requirement per unit (carbon fiber) (in feet)	10	10	10	10
Material Consumed (in feet)	56,000	42,000	22,000	14,000
(+) Closing stock (25% of next month's requirement)	10,500	5,500	3,500	-
(-) Opening stock (= closing stock of previous month or 25% of current month's requirement)	14,000	10,500	5,500	-
Material Purchased (in feet)	52,500	37,000	20,000	-

C) (b) Cash Disbursement Budget for Carbon Fiber for July to September

Particulars	July	August	September
Material Purchased (in feet)	52,000	37,000	20,000
(*) Cost per foot of Fiber ($)	12	12	12
Purchases for the month	6,24,000	444,000	240,000
Payment of Account payable
i. 50% of purchases of the same month	312,000	222,000	120,000
ii. 50% of purchases of the previous month	100,000	312,000	222,000
Total Cash disbursement for the month (i + ii) ($)	412,000	534,000	342,000

Note: The Accounts payable balance of $ 100,000 for carbon fiber as on 1st July pertains to purchases made in the previous month i.e. June. The same will be paid in July as seen in the working above.