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

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


Prepare a master budget for the three-month period ending June 30.
Include the following detailed budgets:


o a. A sales budget, by month and in total.

o b. A schedule of expected cash collections from
sales, by month and in total.

o c. A merchandise purchases budget in units and in
dollars. Show the budget by month and in total.

o 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 approach.

4. A budgeted balance sheet as of June 30.

Course Project A

For Project A, you will need to review the Course Project Instructions in Document Sharing. An Excel template file can be also found in Doc Sharing. Use it to do your master budget and supporting schedules. This project will help you learn and understand what a master budget is and how it is prepared. When you have completed Project A, upload it into the Dropbox. There will be a discussion thread area in Weeks 4 and 5 that you can use to ask questions about the project.

Grading Rubric for Course Project (Part A)





& Formatting



Project worksheets will be done in Excel and will contain formulas to receive maximum credit.

& Cohesiveness



Calculations should be organized and correctly labeled.




Quality work will be free of any spelling, punctuation, or grammatical errors.




A quality project will have all required work completed and will be correct.




A quality project will meet or exceed all of the above requirements.

See Syllabus, Due Dates for Assignments & Exams, for due date information.