I.

Flying Fish Kite Company, a small Woy Woy, Australia, firm that sells kites on the Web,
wants a master budget for the 3 months beginning January 1, 20X2. It desires an ending
minimum cash balance of $15,000 each month. Sales are forecasted at an average wholesale
selling price of $14 per kite. Merchandise costs average $5 per kite. All sales are on credit,
payable within 30 days, but experience has shown that 40% of current sales are collected in the
current month, 10% in the next month, and 50% in the month thereafter. Bad debts are
negligible. In January, Flying Fish Kite is beginning just-in-time (JIT) deliveries from
suppliers, which means that purchases will equal expected sales. On January 1, purchases will
cease until inventory decreases to $22,000, after which time purchases will equal sales.
Purchases during any given month are paid in full during the following month. Monthly
operating expenses are as follows:
Monthly operating expenses are as follows:
Wages and salaries………………………………………………………………….. $80,000
Insurance expired………… ……………………………………………………… 450
Depreciation ……………… …………………………………………………….. 900
Miscellaneous ………… ………………………………………………………… 4,000
Rent ………………………………………….$500/month + 5% of quarterly sales over $50,000
Cash dividends of $2,400 are to be paid quarterly, beginning January 15, and are declared on the
fifteenth of the previous month. All operating expenses are paid as incurred, except insurance,
depreciation, and rent. Rent of $500 is paid at the beginning of each month, and the additional
5% of sales is settled quarterly on the tenth of the month following the end of the quarter. The
next rent settlement date is January 10. The company plans to buy some new fixtures for $4,000
cash in March. Money can be borrowed and repaid in multiples of $2,000. Management wants to
minimize borrowing and repay rapidly. Simple interest of 9% per annum is computed monthly
but paid when the principal is repaid. Assume that borrowing occurs at the beginning, and
repayments at the end, of the months in question. Compute interest to the nearest dollar.

Assets as of December 31, 20X1 Liabilities and Owners’ Equities as of

December 31, 20X1
Cash $30,00 Account Payable
Account Receivable 180,600 (merchandise) $151,500
Inventory 153,000 Dividend Payable 2,400
Unexpired Insurance 5,400 Rent Payable 27,950
Fixed assets, net 62,000 Owners’ equity 249,150
$431,000 $ 431,000
*November 30 inventory balance = $59,000
Recent and forecasted sales:
October $280,000 December $161,000
February $413,000 April $280,000
November 168,000 January 378,000
March 273,000

1. Prepare a master budget including a budgeted income statement, balance sheet, cash budget,
and supporting schedules for the months January–March 20X2.
2. Explain why there is a need for a bank loan and what operating sources provide the cash for
the repayment of the bank loan.

II. Daniel Merrill is the manager of an airport gift shop, Merrill News and Gifts. From the
following data, Mr. Merrill wants a cash budget showing expected cash receipts and
disbursements for the month of April, and the cash balance expected as of April 30, 20X7.
● Planned cash balance, March 31, 20X7: $100,000
● Customer receivables as of March 31: $530,000 total, $80,000 from February sales, $450,000
from March sales
● Accounts payable, March 31: $460,000
● Merchandise purchases for April: $450,000, 40% paid in month of purchase, 60% paid in next
month
● Payrolls due in April: $90,000
● Other expenses for April, payable in April: $45,000
● Accrued taxes for April, payable in June: $7,500
● Bank note due April 10: $90,000 plus $7,200 interest
● Depreciation for April: $2,100
● Two-year insurance policy due April 14 for renewal: $1,500, to be paid in cash
● Sales for April: $1,000,000, half collected in month of sale, 40% in next month, 10% in third
month
Required: Prepare the cash budget for the month ending April 30, 20X7.
 II. British Beverages bottles two soft drinks under licence to Cadbury Schweppes at its
Manchester plant. Bottling at this plant is a highly repetitive, automated process. Empty
bottles are removed from their carton, placed on a conveyor, and cleaned, rinsed, dried,
filled, capped and heated (to reduce condensation). The only stock held is either direct
materials or else finished goods. There is no work in progress. The two soft drinks bottled by
British Beverages are lemonade and diet lemonade. The syrup for both soft drinks is
purchased from Cadbury Schweppes. Syrup for the regular brand contains a higher sugar
content than the syrup for the diet brand. British Beverages uses a lot size of 1000 cases as
the unit of analysis in its budgeting. (Each case contains 24 bottles.) Direct materials are
expressed in terms of lots, where one lot of direct materials is the input necessary to yield
one lot (1000 cases) of beverage. In 2015, the following purchase prices are forecast for
direct materials:

Lemonade Diet lemonade

Syrup £1200 per lot £1100 per lot

Containers

(bottles, caps, etc.) £1000 per lot £1000 per lot

Packaging £800 per lot £800 per lo

The two soft drinks are bottled using the same equipment. The equipment is cleaned daily, but it
is only rinsed when a switch is made during the day between diet lemonade and lemonade. Diet
lemonade is always bottled first each day to reduce the risk of sugar contamination. The only difference
in the bottling process for the two soft drinks is the syrup.

Summary data used in developing budgets for 2015 are as follows:

a Sales:

z Lemonade, 1080 lots at £9000 selling price per lot.

z Diet lemonade, 540 lots at £8500 selling price per lot.

b Opening (1 January 2015) stock of direct materials:

z Syrup for lemonade, 80 lots at £1100 purchase price per lot.

z Syrup for diet lemonade, 70 lots at £1000 purchase price per lot.

z Containers, 200 lots at £950 purchase price per lot.

z Packaging, 400 lots at £900 purchase price per lot.

c Opening (1 January 2015) stock of finished goods:

z Lemonade, 100 lots at £5300 per lot.

 z Diet lemonade, 50 lots at £5200 per lot.

d Target closing (31 December 2015) stock of direct materials:

z Syrup for lemonade, 30 lots.

z Syrup for diet lemonade, 20 lots.

z Containers, 100 lots.

z Packaging, 200 lots

e Target closing (31 December 2015) stock of finished goods:

z Lemonade, 20 lots.

z Diet lemonade, 10 lots.

f Each lot requires 20 direct manufacturing labour-hours at the 2015 budgeted rate of £25 per hour.

Indirect manufacturing labour costs are included in the manufacturing overhead forecast.

g Variable manufacturing overhead is forecast to be £600 per hour of bottling time; bottling time is the
time the filling equipment is in operation. It takes two hours to bottle one lot of lemonade and two
hours to bottle one lot of diet lemonade. Fixed manufacturing overhead is forecast to be £1 200 000 for
2015.

h Hours of budgeted bottling time is the sole allocation base for all fixed manufacturing overhead.

i Administration costs are forecast to be 10% of the cost of goods manufactured for 2015.

Marketing costs are forecast to be 12% of sales for 2015. Distribution costs are forecast to be 8% of sales
for 2015. Required Assume British Beverages uses the first-in, first-out (FIFO) method for costing all
stock.

On the basis of the preceding data, prepare the following budgets for 2015:

1 Revenue budget (in £)

2 Production budget (in units)

3 Direct materials usage budget (in units and £)

4 Direct materials purchases budget (in units and £)

5 Direct manufacturing labour budget

6 Manufacturing overhead costs budget

7 Closing finished goods stock budget

8 Cost of goods sold budget

9 Marketing costs budget

10 Distribution costs budget

11 Administration costs budget

12 Budgeted profit and loss account.