Management Accounting

Read carefully the following Case information before planning to write the Report

 

Sunshine Electric Company is a small, rapidly growing wholesaler of consumer electrical products. The firm’s main product lines are small kitchen appliances and power tools. The new marketing manager, Maria Brown, has recently completed a sales forecast. She believes that the company’s sales during the first quarter of next year will increase by 10 per cent each month over the previous month’s sales. Brown then expects sales to remain constant for several months. Sunshine’s projected balance sheet as at 31 December this year is as follows:

 

Cash $ 35 000
Accounts receivable 270 000
Marketable securities 15 000
Inventory 154 000
Buildings and equipment (net of acc. depr.)      626 000
Total assets $1 100 000
   
Accounts payable $176 400
Long-term loan interest payable 12 500
Property taxes payable 3 600
Long-term loan payable (10% p.a.) 300 000
Share capital 500 000
Retained earnings      107 500
Total liabilities and shareholders’ equity $1 100 000

Peter Jackman, the management accountant, is now preparing a monthly budget for the first quarter of next year. In the budgeting process, the following information has been accumulated:

  • Projected sales for December this year are $400 000. Credit sales typically are 75 per cent of total sales. Sunshine’s credit experience indicates that 10 per cent of the credit sales are collected during the month of sale, and the remainder are collected during the following month.
  • Sunshine’s cost of goods sold generally runs at 70 per cent of sales. Inventory is purchased on credit, and 40 per cent of each month’s purchases is paid during the month of purchase. The remainder is paid during the following month. In order to have adequate inventory on hand, the firm aims to have inventory at the end of each month equal to half of the next month’s projected cost of goods sold. Jackman has estimated that Sunshine’s other monthly expenses will be as follows:

Sales salaries                    $18 000

Advertising and promotion       19 000

Administrative salaries       21 000

Depreciation                       25 000

Interest on long-term loan    2 500

Property taxes                          900

 

In addition, sales commissions run at the rate of 1 per cent of sales.

 

  • Sunshine’s managing director, Beth Johnson, has indicated that the firm should, just after the new year begins, invest $125 000 in an automated inventory-handling system to control the movement of inventory in the firm’s warehouse. To the extent possible, these equipment purchases would be financed from the firm’s cash and marketable securities. Johnson believes that Sunshine needs to keep a minimum cash balance of $25 000. If necessary, the remainder of the equipment purchases would be financed using short-term credit from a local bank. The minimum period for such a loan is three months. Jackman believes short-term interest rates will be 5 per cent per year at the time of the equipment purchases. If a loan is necessary, Johnson has decided it should be paid off by the end of the first quarter if possible.
  • Sunshine’s board of directors has indicated an intention to declare and pay dividends amounting to $50 000 on the last day of each quarter.
  • The interest on any short-term borrowing would be paid when the loan is repaid. Interest on Sunshine’s long-term loan is paid semi-annually, on 31 January and 31 July, for the preceding six-month period.
  • Property taxes are paid half-yearly on 28 February and 31 August for the preceding six-month period.

 

 

Required:

 

Prepare Sunshine’s annual budget for the first quarter of next year commencing 1 January by completing the following schedules and statements:

 

  1. Sales budget

 

 

 

This year   Next year  
  December January February March 1st quarter
  Total sales          
  Cash sales          
  Credit sales          

 

 

  1. Cash receipts budget

 

                                                                                          Cash receipts budget  
  January February March 1st quarter
  Cash sales        
  Cash receipts from credit sales made during current month        
  Cash receipts from credit sales made during preceding month        
  Total cash receipts        

 

  1. Purchases budget

 

  This year   Next year  
  December January February March 1st quarter
  Budgeted cost of goods sold          
  Add Desired ending inventory          
  Total goods needed          
  Less Expected beginning inventory          
  Purchases          

 

  1. Cash payments budget

 

                                                 Cash payments budget  
  January February March 1st quarter
  Inventory purchases        
  Cash payments for purchases during the current month*        
  Cash payments for purchases during the preceding month        
 Total cash payments for inventory purchases        
  Other expenses        
  Sales salaries        
  Advertising and promotion        
  Administrative salaries        
  Interest on long-term loan        
  Property taxes        
  Sales commissions        
  Total cash payments for other        
  Total cash payments        

* 40% of the current month’s purchases (schedule 3).

  • 60% of the preceding month’s purchases (schedule 3).
  • Long-term loan interest is paid every six months, on 31 January and 31 July. Property taxes are also paid every six months, on 28 February and 31 August.

 

  1. Complete the first three lines of the summary cash budget. Then do the analysis of short-term financing needs in requirement 6, and then finish requirement 5.

 

                                                               Summary cash budget

 

 
  January February March 1st quarter
  Cash receipts (from schedule 2)        
  Less Cash payments (from schedule 4)        
  Change in cash balance during quarter due to operations        
  Sale of marketable securities (2 Jan.)        
  Proceeds from bank loan (2 Jan.)        
  Purchase of equipment        
  Repayment of bank loan (31 March)        
  Interest on bank loan        
  Payment of dividends        
  Change in cash balance for 1st quarter        
  Cash balance, 1 January        
  Cash balance, 31 March        

 

 

  1. Analysis of short-term financial needs:
    • Projected cash balance as at 31 December in current year
    • Less Minimum cash balance
    • Cash available for equipment purchases
    • Projected proceeds from sale of marketable securities
    • Cash available
    • Less Cost of investment in equipment
    • Required short-term borrowing

 

 

  1. Prepare Sunshine’s budgeted income statement for the first quarter. (Ignore income taxes.)

 

 

  1. Prepare Sunshine’s budgeted statement of retained earnings for the first quarter.

 

 

  1. Prepare Sunshine’s budgeted balance sheet as at 31 March. (Hint: On 31 March, long-term loan interest payable is $5 000 and property taxes payable are $900.)

 

 

 

 

Format and Submission of the Group Assignment Report

 

 

  1. Each group should consist of 3 to 4 members.

 

  1. The assignment report format, contents and structure should be decided by your group, but it must include all the budgets and schedules required in the Case. The report should be presented in a professional and quality manner.

 

  1. Apart from the budget schedules required, the report must also include an Introduction section and a Conclusion addressing the relevant qualitative issues of the budgeting process, such as objectives; advantages; disadvantages; approaches of budget preparation.

 

  1. Relevant headings/sub-headings/sections in the report should be designed appropriately to cover the relevant issues in the Case. Credit will be given for proper identification and organisation of the relevant issues discussed in the report.

 

  1. The report should contain a cover page, a table of contents, the report body and references.

 

  1. The number of references should be between 5 to 10 (maximum one page) for any materials (academic, business, professional) referenced and cited to support your arguments / concepts / examples addressed in the report. 10% of the assessment is allocated to proper research efforts on relevant topics.

 

  1. The cover page of the report must follow the format provided by IMC, and each member of the group must submit the Peer and Self-Assessment of Teamwork on individual basis.

 

  1. The report is to be submitted (by one member in your group) on Moodle link through Turnitin checking for plagiarism on or before 19 October 2020 by 2:00 pm.

 

  1. Report body length: 1,200-1,500 words (excluding the budgets and schedules) containing proper page numbers with the following settings:
    • Font style/size: Times New Roman “12”
    • Line spacing: 1.5 lines (except budgets and schedules with numbers)
    • Margins: Top (2.5 cm), Bottom (1.5 cm), Left (2.5 cm), Right (2.0 cm) Paper size: A4