Module 6 Critical Thinking: Assignment Choice #1: Cost of Production Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter: a. As of December 31, (the end of the prior quarter), the company’s general ledger showed the following account balances: Cash $48,000 (debit) Accounts receivable $224,000 (debit) Inventory $60,000 (debit) Buildings and equipment, net $370,000 (debit) Accounts payable $93,000 (credit) Capital stock $500,000 (credit) Retained earnings $109,000 (credit) b. Actual sales for December and budgeted sales for the next four months are as follows: December $280,000, January $400,000, February $600,000, March $300,000 and April $200,000. c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales. d. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month; advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 per quarter. f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. g. One-half of the month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month. h. During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500. i. During January, the company will declare and pay $45,000 in cash dividends. chris Callout Choose 1 of 2 assignments to complete. Due in 48 hours chris Highlight j. Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local 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. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: Using the data above, complete the following statements and schedules for the first quarter. Submit your responses in an Excel spreadsheet: 1. Schedule of expected cash collections 2. Merchandise purchases budget Merchandise Purchases Budget January February March Quarter Budgeted Cost of Goods Sold $240,000* $360,000 Add desired ending inventory $90,000** Total needs $330,000 Less beginning inventory $60,000 Required purchases $270,000 *$400,000 sales x 60% ...

1. Module 6
Critical Thinking:
Assignment Choice #1: Cost of Production
Hillyard Company, an office supplies specialty store, prepares
its master budget on a quarterly basis.
The following data have been assembled to assist in preparing
the master budget for the first quarter:
a. As of December 31, (the end of the prior quarter), the
company’s general ledger showed the
following account balances:
Cash $48,000 (debit)
Accounts receivable $224,000 (debit)
Inventory $60,000 (debit)
Buildings and equipment, net $370,000 (debit)
Accounts payable $93,000 (credit)
Capital stock $500,000 (credit)
Retained earnings $109,000 (credit)
b. Actual sales for December and budgeted sales for the next
four months are as follows: December
$280,000, January $400,000, February $600,000, March
$300,000 and April $200,000.
c. Sales are 20% for cash and 80% on credit. All payments on
credit sales are collected in the month
following sale. The accounts receivable at December 31 are a
result of December credit sales.

2. d. The company’s gross margin is 40% of sales. (In other
words, cost of goods sold is 60% of sales.)
e. Monthly expenses are budgeted as follows: salaries and
wages, $27,000 per month; advertising,
$70,000 per month; shipping, 5% of sales; other expenses, 3%
of sales. Depreciation, including
depreciation on new assets acquired during the quarter, will be
$42,000 per quarter.
f. Each month’s ending inventory should equal 25% of the
following month’s cost of goods sold.
g. One-half of the month’s inventory purchases is paid for in the
month of purchase; the other half is
paid in the following month.
h. During February, the company will purchase a new copy
machine for $1,700 cash. During March,
other equipment will be purchased for cash at a cost of $84,500.
i. During January, the company will declare and pay $45,000 in
cash dividends.
chris
Callout
Choose 1 of 2 assignments to complete. Due in 48 hours
chris
Highlight
j. Management wants to maintain a minimum cash balance of
$30,000. The company has an
agreement with a local bank that allows the company to borrow

3. 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. The company would,
as far as it is able, repay the loan
plus accumulated interest at the end of the quarter.
Required:
Using the data above, complete the following statements and
schedules for the first quarter. Submit
your responses in an Excel spreadsheet:
1. Schedule of expected cash collections
2. Merchandise purchases budget
Merchandise Purchases Budget
January February March Quarter
Budgeted Cost of

4. Goods Sold
$240,000* $360,000
Add desired ending
inventory
$90,000**
Total needs $330,000
Less beginning
inventory
$60,000
Required purchases $270,000
*$400,000 sales x 60%
cost ratio = $240,000
** $360,000 x 25% =
$90,000
3. Schedule of expected cash disbursements-merchandise
purchases
Schedule of Expected Cash Disbursements-Merchandise
Purchases
January February March Quarter
December purchases $93,000 $93,000

5. January purchases $135,000 $135,000 $270,000
February purchases
Schedule of Expected Cash Collections
January February March Quarter
Cash sales $80,000
Credit sales $224,000
Total
Collections
$304,000
March purchases
Total disbursements $228,000
4. Schedule of expected cash disbursements-selling and
administrative expenses
Schedule of Expected Cash Disbursements-Selling and
Administrative
Expenses
January February March Quarter
Salaries and wages $27,000

6. Advertising $70,000
Shipping $20,000
Other expenses $12,000
Total disbursements $129,000
5. Cash budget:
Cash Budget
January February March Quarter
Cash balance, beginning $48,000
Add cash collections $304,000
Total cash available $352,000
Less cash disbursements
For inventory $228,000
For selling and admin
expenses
$129,000
For purchase of equipment ------
For cash dividends $45,000
Total cash disbursements $402,000

7. Excess (deficiency) of cash ($50,000)
Financing needed
Cash balance, ending
Provide your answers in a clearly organized Excel spreadsheet.
Provide your answers in a clearly
organized Excel spreadsheet. Check spelling and formatting for
readability.
Document your sources.
Assignment Choice #2: Calculating Flexible Budget Variances
chris
Highlight
Stellar Packaging Products is experiencing an increase in
demand for the month of August as a result of
Estrella Coffee’s comeback in its retail outlets. The following
fact pattern forms the basis for the static
budget:
Stellar Packaging Products
Variable Costs
Total
Fixed Costs

8. Total
Raw materials $ 100,000
Direct manufacturing labor $ 125,000
Indirect manufacturing labor $ 105,000
Factory Insurance & Utilities $ 63,000
Depreciation – Pressroom $ 38,500
Repairs and maintenance – factory $ 28,000
Selling, marketing & distribution
expenses $ 40,000 $ 80,000
General and administrative expenses $ 120,000
Variable Cost and Volume Data Plastic
Raw materials = 0.10 lbs x $2.00/lb. $ 0.20
Direct Labor = 0.025 hr x $10/hr. $ 0.25
Volume in units 500,000
Sales per unit are $3.00.
Required:
1. In good form, prepare the static budget operating income in
contribution format.
2. Suppose actual sales demand increases to 700,000 units for
August; assume the units are within the

9. relevant range. Prepare the flexible budget for August in
contribution format.
3. Compute and reconcile the sales volume variance for August.
Indicate whether the variance is
favorable or unfavorable.
4. In a one page composition, provide an explanation for the
change in the sales volume variance for
August, and identify the elements which give rise to the
difference between the flexible and static
budgets. Also explain the reason for completing a flexible
budget for the period.
Your paper should meet the following requirements:
-3 pages in total length