CMA (IMA) Practice Test 6

Brightwater Ceramics — second-quarter budget

Brightwater Ceramics makes glazed porcelain floor tile, sold in cartons to flooring retailers. Demand peaks in late spring as the home-renovation season begins, and CFO Alicia Moreno is worried that June will strain the company's cash at the same moment it pays for a new glazing kiln.

Controller Jonah Pierce is preparing the June schedules of the master budget. Brightwater keeps finished-goods inventory at the end of each month equal to 20% of the next month's unit sales, and raw clay-and-glaze mix at the end of each month equal to 25% of the next month's production needs. Both policies have been met at every month-end this year. Each carton needs 3 pounds of mix, which costs $2.00 per pound.

Retailers buy on credit. Brightwater collects 35% of each month's sales in the month of sale and 62% in the following month; the remaining 3% is never collected. Half of each month's mix purchases are paid in the month of purchase and half in the following month. Direct labor is $6.00 per carton produced and is paid in the month incurred. Other cash operating costs are $150,000 a month; monthly depreciation of $25,000 is in addition to that amount.

The new kiln costs $300,000 and will be paid in cash in June. Brightwater must hold at least $50,000 of cash at every month-end and borrows from its bank on the first day of a month, in multiples of $10,000, when it needs to. Moreno has also asked Pierce to recommend budgeting methods for next year.