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CASE Cash budget, income statement and performance report using a flexible budget


CASE Cash budget, income statement and performance report using a flexible budget. Harry Kohl owns a factory that specializes in making steel widgets on a just in time basis. Harry buys his steel only after he receives a firm order. Thus, Harry only buys materials for and produces what he sells in a particular month. To build his business and gain new customers Harry has extended generous credit terms to his customers. While Hairy is confident about the fundamentals of his business, he is concerned about the possible cash flow implications. Harry informs you that he currently expects to collect 20% of sales in the month of the sale, 40% of sales in the month after the sale and 40% of sales two months later (for example 20% of February sales are collected in February, 40% in March and 40% in April). He pays for 80% of his materials purchases in the month of the purchase and 20% one month later. Costs of labor and overhead other than depreciation are paid in the same month they are incurred. His monthly fixed selling and administrative costs, other than interest, amount to $320,000, of which $30,000 is depreciation. These costs also, excepting depreciation, are paid in the month incurred. There are no variable selling or administrative costs. Harry has large tax loss carry forwards from a previous unsuccessful business venture. Therefore he does not expect to pay any income taxes this year. (In other words you may ignore income taxes). Sales revenues in February were $4,050,000 and in March were $4,150,000 (these numbers do not agree with the excel sheet). Purchases in March were $1,350,000. The budgeted selling price of widgets for April, May, and June is $25 per widget. Harry provides the following information regarding his sales in units for the next 3 months: April 180,000 units, May 200,000 units and June 210,000 units. The variable costs of producing a widget are budgeted at: $8 for materials, $5 for labor, and $7 for variable overhead. Fixed overhead is budgeted at $380,000 per month. The detailed components of fixed and variable overhead are as listed below. For variable overhead, supplies are budgeted at $1 per unit, electric power is budgeted at $4 per unit, and indirect labor is budgeted at $2 per unit. For fixed overhead depreciation is budgeted at $70,000 per month, Supervision and other salaries is budgeted at $180,000 per month, insurance is budgeted at $12,000 per month, maintenance is budgeted at $23,000 per month, licensing fees and permits to use proprietary technology are budgeted at $64,000 per month, and other miscellaneous fixed expenses are budgeted at $31,000 per month. Assume Harry's opening cash balance on April 1 is $25,000. Harry requires a minimum cash balance of $5,000 at the end of each month. If the budgeted cash balance will fall below this level Harry plans to borrow enough cash at the beginning of the month to keep his ending balance up to the minimum level. Harry's bank charges him interest at the rate of 1% per month (12% per year) on the balance outstanding during that month. Harry pays the interest at the beginning of the following month and plans to repay as much as he can without letting his cash balance go below $5,000. Assume no borrowings were outstanding as of April 1. Required 1) Construct Harry's cash budget for the 3 months April, May, and June and the total for the 2nd quarter. Fixed overhead expenses requiring the use of cash may be grouped together as a single line item called "fixed overhead”. Variable overhead items may be grouped together as a single line item called "variable overhead”. Show any necessary calculations. (7 points) 2) Construct Harry's contribution margin format budgeted income statement for the 3 months April, May, and June and the total for the 2nd quarter. Fixed overhead expenses may be grouped together as fixed overhead. Variable overhead expenses may be grouped together as variable overhead. Remember to include interest on any borrowings. Show any necessary calculations. (6 points) 3) Explain why Harry is facing a cash flow problem in May even though his business is profitable. (2 points) 4) During April Harry actually produced and sold 175,000 widgets. Actual sales revenues were $4,342,000. Actual costs were as detailed in the table below. Complete the table by constructing a flexible budget and performance report including variances for April based on 175,000 widgets. Your performance report should be similar to the performance report shown in exhibit 10.7 of page 559 except your report includes detailed cost production cost line items. Use the template provided below for your answer. (8 points) 5) Write a brief report explaining the most important reasons why Harry's profits were different from the amount projected in the master budget. (2 points) Sales revenue in February Sales Revenue in March 4,050,000 4,150,000 Purchases in March CASH BUDGET April May June Total Units sold Collected from February Collected From March Collected From April Collected From May Collected From June Total Collected PAYMENTS March purchases April purchases May purchases June purchases Labor costs Variable Overhead Fixed Overhead Selling and administrative Total Payments Collections - Payments Beginning Cash balance Borrowing/repayment Interest Ending Cash balance May June BUDGETED INCOME STATEMENT April Sales Revenues Variable costs Materials Labor Overhead Total Contribution Margin Fixed production Cost Fixed Selling and Admin Interest Expense Net Income Actual Costs and Template for Requirement #4 Use this page to answer this requirement. Cost Item Performance Report for April Actual results Flexible Flexible Sales Volume Budget Budget for Variance Variance 175,000 units $4.342.000 Static Master Budget for 180,000 units Sales Revenues Direct Materials $1,515,625 $881,436 Direct Labor Supplies Electric Power $166.288 $701,354 Indirect Labor $339.272 $175,549 Salaries and Supervision Maintenance $37,336 $12,000 $68,000 $70,000 $33.173 Insurance Permits and license fees Factory depreciation Other Overhead expenses Total Production Expenses Total Selling & Administrative Expenses Total Expenses Operating Income $329,453

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