ACCT 241: Principles of Managerial Accounting
Fall 2013 Semester Project: Earrings Unlimited Budget
Students will prepare a Comprehensive Master Budget and Budgeted Financial Statements for Earrings Unlimited for the three-month period ending June 30. This includes: Sales Budget, Cash Receipts Budget, Merchandise Purchases Budget, Cash Disbursements Budget, Cash Budget, Budgeted Income Statement using the Contribution Format, and a Budgeted Balance Sheet. Students will also perform CVP analysis to determine the break-even point and complete a sensitivity analysis to a sales price change and a change in the price of purchases.
I. (70 points) Complete the Earrings Unlimited Case on an individual basis using the Excel template found on Blackboard under Course Documents, Project. Enter your answer on the Worksheet labeled “Part I Answer.” Use formulas in the cells for calculations (i.e., do not type in a total that you have determined with your calculator.)
II. (10 points) Use CVP Analysis to determine the break-even point in units and sales dollars for Earrings Unlimited for the Quarter Ended June 30. You must show all calculations. Enter your response on the Project Excel file in theWorksheet labeled “Part II Answer.”
III. (20 points) Determine Sales Revenue & Net Income for the 3-month period ending June 30, and the ending Cash Balance as of June 30 assuming the unit Sales Price is expected to increase (effective April 1) to $12, and the unit Purchase Price is expected to increase (effective April 1) to $5. Reconcile the changes.
To solve this, use the Worksheets provided in the Project Excel file (i.e., the worksheets titled “If SP = $12,” “If Purch Pr = $5,” “If SP=$12; and Purch Pr = $5” ). In each Worksheet, start with the Base Case data (what you entered as “Part I Answer”) and then change the budget and/or financial statement data affected by the change to the Sales Price and/or the change to the Purchases Price. For example, changing the unit sale price will cause changes to the sales budget, cash receipts budget, and summary cash budget… this will lead to a new Net Income and a new June 30 ending Cash Balance. With changes to Sales and/or Purchases Prices, items such as interest expense and inventory values will also change. Complete the chart found on the Project Excel filein theWorksheet labeled “Part III Answer.”
Hint: If you have used formulas for all calculations in the Excel spreadsheet, this question will be simple.
Another Hint: In the Base Case (Part I) and in the scenarios in Part III, be careful to follow the rules that Earrings Unlimited has established with its bank with respect to taking out and repaying loans as this will impact other items.
Note: When completing the Excel Worksheets, make sure that the data in your schedules foots and cross-foots in an accurate and meaningful way. The Excel Worksheets other than for the Base Case (Part I Answer) will not properly indicate if Column totals are “Correct” or “Incorrect.”. You need to confirm your own results in Part III of this project by checking your own work.
An SI session will be scheduled to help you with Excel questions. Your SI Leader will notify you of the details.
Due Date and Submission Requirements:
The completed project is due on Tuesday, November 19, 2013and is to be submitted in print and electronically.
The print copy of your project (Worksheet titled Part I Answer, Worksheet titled Part II Answer, Worksheet titled Part III Answer is due in class on November 19.
The Excel file (including all the Worksheets) is to be submitted electronically prior to the start of class on the due date. You are to submit your file electronically in Blackboard.
Late projects will not be accepted.
You may collaborate with other students in the class on the project solutions. However, each student must prepare and submit his/her own project solutions separately. Remember that you are bound by the American University’s Integrity Code. Additional information about the Code (i.e. acceptable forms of collaboration, definitions of plagiarism, etc.) can be found in a number of places including the University’s Academic Regulations, Student Handbook, and website at <http://www.american.edu/academics/integrity>.
Lastly, if you collaborated with another student, you must send an email to your Professor indicating the name(s) of the other student(s) with whom you worked.
ACCT 241: Principles of Managerial Accounting
Fall 2013 Semester Project: Earrings Unlimited Case
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below.
The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):
The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $4 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
A listing of the company's ledger accounts as of March 31 is given below:
The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.
Required Part I:
Use the Excel template found on Blackboard under Course Documents, Project to prepare a master budget for the three-month period ending June 30. Enter your response in the Worksheet labeled “Part I Answer.” In this problem, income taxes will be ignored. Also, variable product costs will comprise Cost of Goods Sold (COGS) on the Income Statement and Inventory on the Balance Sheet.
Include the following detailed budgets:
a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution format approach.
4. A budgeted balance sheet as of June 30.
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