c.
82,000 units
d.
42,000 units
64. Gerald Company manufactures books. Manufacturing a book takes 10 units of A1 and 1 unit of A2.
Scheduled production of books for the next two months is 1,000 and 1,200 units, respectively.
Beginning inventory is 4,000 units of A1 and 30 units of A2. The ending inventory of A1 is planned to
decrease 500 units in each of the next two months, and the A2 inventory is expected to increase 5 units
in each of the next two months.
Based on this information, the number of units of A1 that needs to be purchased by Gerald during the
first month is
a.
9,500 units.
b.
10,000 units.
c.
1,000 units.
d.
10,500 units.
65. Jordan Manufacturing Company expects to incur the following per unit costs for 1,000 units of
production:
Direct materials
3 lb. @ £5 = £15
Direct labour
1 hr @ £6 = £6
Variable overhead
75% of direct labour costs
Fixed overhead
50% of direct labour costs
What is the total amount of overhead included in the overhead budget?
a.
£4,500
b.
£3,000
c.
£11,250
d.
£7,500
66. Michael Ltd. has the following sales forecasts for the first three months of 2011:
Month
Sales
January
£36,000
February
24,000
March
40,000
Sixty-five per cent of sales are collected in the month of the sale and the remainder are collected in the
following month.
Accounts receivable balance (January 1, 2011)
£16,000
Cash balance (January 1, 2011)
12,000
Minimum cash balance is £20,000. Cash can be borrowed in £1,000 increments from the local bank
(assume no interest charges). How much cash would be collected in March from sales?
a.
£32,000
b.
£58,400
c.
£48,000
d.
£34,400
67. Kara Ltd. has the following sales forecasts for the selected three-month period in 2011:
Month
Sales
July
£24,000
August
14,000
September
16,000
Seventy per cent of sales are collected in the month of the sale, and the remainder are collected in the
following month.
Accounts receivable balance (July 1, 2011)
£20,000
Cash balance (July 1, 2011)
10,000
Minimum cash balance is £10,000. Cash can be borrowed in £1,000 increments from the local bank
(assume no interest charges).
How much cash would be collected in September from sales?
a.
£15,400
b.
£17,000
c.
£16,000
d.
£20,000
68. Schrandt Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly
master budget. Data for the July master budget are given below:
The June 30th balance sheet follows:
Cash
£ 25,000
Accounts payable
£ 45,000
Accounts receivable
110,000
Capital stock
300,000
Inventory
54,000
Retained earnings
94,000
Building and equipment (net)
250,000
Actual sales for June and budgeted sales for July, August, and September are given below:
June
£137,500
July
360,000
August
400,000
September
320,000
Sales are 20 per cent for cash and 80 per cent on credit. All credit sales are collected in the month
following the sale. There are no bad debts.
The gross margin percentage is 40 per cent of sales. The desired ending inventory is equal to 25 per
cent of the following month’s sales. One fourth of the purchases are paid for in the month of purchase
and the others are purchased on account and paid in full the following month.
The monthly cash operating expenses are £43,000, and the monthly depreciation expenses are £7,000.
What is the balance of the cash account at the end of July?
a.
£8,500
b.
£15,500
c.
£63,500
d.
£114,000
SHORT ANSWER
1. Explain how budgets provide a basis for performance evaluation.
2. Describe the incremental approach to budgeting. In what settings is the incremental approach typically
used? What is the primary advantage of this approach? What is the primary disadvantage of this
approach?
3. Describe zero-based budgeting.
4. Describe an activity-based budget.
PROBLEM
1. In what ways does a department orientation hinder traditional budgeting?
2. Rydingsward, Inc., has done a cost analysis for its production of reflectors.
The following activities and cost drivers have been developed:
Activity
Cost Formula
Maintenance
£5,000 + £8 per machine hour
Machining
£25,000 + £4 per machine hour
Inspection
£90,000 + £1,000 per batch
Setups
£5,000 per batch
Purchasing
£100,000 + £100 per purchase order
Required:
Prepare an activity-based budget for the following:
•
60,000 units:
10,000 machine hours; 30 batches;
20,000 purchase orders
•
100,000 units:
18,000 machine hours; 40 batches;
30,000 purchase orders
3. Discuss the features of an ideal budgetary process.
4. Compare and contrast the incremental budgetary approach to the zero-base budgeting approach to
budgeting.
5. Budgeted sales for the third quarter of the year for Brown Company are as follows:
Budgeted Sales
July
£300,000
August
375,000
Maintenance
Machining
Inspection
Setups
Purchasing
Total costs
September
450,000
The company normally collects 30 per cent in the month of sale and 65 per cent in the month
following the sale. Five per cent of all sales are uncollectible and are written off in the following
month.
The balance in accounts receivable at July 1 was £245,000, which represents 70 per cent of June sales.
Required:
Prepare a schedule of cash collections on accounts receivable for the third quarter.
6. The following budget estimates have been prepared by Clifton Company:
Cash Receipts
Cash Payments
May
£120,000
£150,000
June
110,300
150,000
The company likes to maintain a minimum cash balance of £40,000.
Any excess cash is invested in a money market account earning 9 per cent compounded monthly.
Interest is reinvested in the money market account. Any cash deficiencies are covered by a withdrawal
from the money market account. If additional cash is needed, the company has a line of credit at 12 per
cent interest with the local bank. Interest is paid monthly.
Assume a cash balance on May 1 of £40,000, a money market account balance of £0, and a credit line
loan balance of £0.
Required:
Prepare a cash budget for May and June.
Beginning cash balance
Add: Cash receipts
__120,000
Cash available
Less: Cash disbursements
Cash collections:
30% of sales for current month
£ 90,000
65% of sales for previous month
Total cash collections
7. The Good As Old Company manufactures antique-looking, oak rocking chairs. Budgeted sales for the
first five months of the year are as follows:
Budgeted Sales (Units)
January
200
February
240
March
180
April
160
May
240
Each rocking chair requires 10 square feet of oak, at a cost of £20 per square foot.
The company wants to maintain an inventory of chairs equal to 25 per cent of the following month’s
sales. At the beginning of the year, 40 chairs are on hand.
Assume the company maintains an inventory of oak equal to 10 per cent of the next month’s needs. At
the beginning of the year, 240 square feet of oak are on hand. Inventory of oak at March 31 is
estimated to be 180 square feet.
Required:
a.
Prepare a production budget, in units, for each of the first four months of the year.
b.
Prepare a purchases budget, in dollars, for each of the first three months of the year.
Budgeted sales in units
Total needs
Less: Beginning inventory
Units to be produced
b.
Units to be produced
Multiplied by:
Sq. ft. of material
needed for production
Desired ending inventory
(10% of next month’s needs)
Add: Cash from loans
Ending cash balance
8. Budgeted sales for the second quarter of the year for Reuben Company are as follows:
Budgeted Sales
April
£400,000
May
200,000
June
600,000
The company normally collects 60 per cent in the month of sale and 30 per cent in the month
following the sale. Ten per cent of all sales are uncollectible and are written off in the following
month.
The balance in accounts receivable at April 1 was £200,000, which represents 40 per cent of March
sales.
Required:
Prepare a schedule of cash collections on accounts receivable for the second quarter.
Cash collections:
60% of sales for current month
30% of sales for previous month
Total cash collections
*March sales = £200,000/.4 = £500,000
£500,000 .3 = £150,000
9. The following budget estimates have been prepared by Flowers Company:
Cash Receipts
Cash Payments
January
£220,000
£220,000
February
380,000
400,000
March
320,000
319,800
The company likes to maintain a minimum cash balance of £50,000.
Any excess cash is invested in a money market account earning 8 per cent compounded monthly.
Interest is reinvested in the money market account. Any cash deficiencies are covered by a withdrawal
from the money market account. If additional cash is needed, the company has a line of credit at 12 per
cent interest with the local bank.
Less: Beginning inventory
Sq. ft. to be purchased
Multiplied by:
Cost of raw material purchases
Assume a cash balance on January 1 of £50,000, a money market account balance of £0, and a credit
line loan balance of £0.
Required:
Prepare a cash budget for each of the first three months of the year.
10. Dusty Company manufactures oak porch swings. Budgeted sales for the first four months of the year
are as follows:
Budgeted Sales (Units)
January
320
February
280
March
340
April
240
Each porch swing requires 15 square feet of oak, at a cost of £20 per square foot.
The company wants to maintain an inventory of swings equal to 20 per cent of the following month’s
sales. At the beginning of the year, 40 swings are on hand.
Assume the company maintains an inventory of oak equal to 10 per cent of the next month’s needs. At
the beginning of the year, 500 square feet of oak are on hand. Inventory of oak at March 31 is
estimated to be 400 square feet.
Required:
a.
Prepare a production budget, in units, for each of the first three months of the year.
b.
Prepare a purchases budget, in monetary values, for direct materials for each of the first
three months of the year.
Budgeted sales, in units
Desired ending inventory
(20% of next month’s sales)
Less: Beginning inventory
Beginning cash balance
Add: Cash receipts
Cash available
Less: Cash disbursements
Cash surplus (deficiency)
Add: Cash from loans
Ending cash balance
11. Retro, Inc., produces a single product. The projected sales for the first month of the coming year and
the beginning and ending inventory data are as follows:
Sales
80,000 units
Unit price
£12
Beginning inventory
6,000 units
Desired ending inventory
9,000 units
Each unit requires three pounds of material costing £2 per pound. The beginning inventory of raw
materials is 2,500 pounds, and the company wants to have 4,500 pounds of material in inventory at the
end of the month. Each unit requires one hour of direct labour time, which is billed at £8 per hour.
Required:
a.
Prepare a production budget for the first month.
b.
Prepare a direct materials purchases budget for the first month.
Production budget:
Sales (in units)
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced
b.
Purchases budget:
Units to be produced
Production needs (pounds)
Total needs
Units to be produced
b.
Units to be produced
Multiplied by:
Sq. ft. of material
needed for production
Desired ending inventory
(10% of next month’s needs)
Total sq. ft. needed
Less: Beginning inventory
Sq. ft. to be purchased
Multiplied by:
Cost of raw material purchases
12. Define budgeting and control. How are budgets used in planning? How are budgets used to control?
What are some of the reasons for budgeting?
13. Smithson Ltd. has the following budgeted sales for the selected six-month period:
Month
Unit Sales
June
15,000
July
20,000
August
35,000
September
25,000
October
30,000
November
20,000
There were 7,500 units of finished goods in inventory at the beginning of June. Plans are to have an
inventory of finished product equal to 20 per cent of the unit sales for the next month.
Three pounds of materials are required for each unit produced. Each pound of material costs £20.
Inventory levels for materials equal 30 per cent of the needs for the next month. Materials inventory on
June 1 was 5,000 pounds.
Required:
a.
Prepare production budgets in units for July, August, and September.
b.
Prepare a purchases budget in pounds and dollars for July, August, and September.
Sales
20,000
35,000
Add: Desired ending inventory
_7,000
_5,000
Total needs
27,000
40,000
Less: Beginning inventory
_4,000
_7,000
Less: Beginning inventory (pounds)
Direct materials to be purchased (pounds)
Total purchase cost
14. Steve manufactures picture frames. Sales for July are expected to be 10,000 units of various sizes.
Historically, the average frame requires five foot of framing, one square foot of glass, and one square
feet of backing. Beginning inventory includes 7,000 feet of framing, 1,500 square feet of glass, and
2,500 square feet of backing. Current prices are £0.90 per foot of framing, £4.50 per square foot of
glass, and £1.50 per square foot of backing. Ending inventory should be 150 per cent of beginning
inventory. Purchases are paid for in the month acquired.
Required:
a.
Determine the quantity of framing, glass, and backing that is to be purchased during July.
b.
Determine the total amount of cash needed for July purchases.
15. Sales for October, November, and December are expected to be £200,000, £180,000, and £220,000,
respectively, for Ripken Company. All sales are on account (terms 2/15, net 30 days) and are collected
50 per cent in the month of sale and 50 per cent in the following month. One-half of all sales discounts
are taken on the average. Materials are purchased one month before being needed, and all purchases
and expenses are paid for as incurred. Activities for the quarter are expected to be:
October
November
December
Materials used
£40,000
£36,000
£44,000
Salaries
70,000
68,000
72,000
Maintenance and repairs
18,000
18,000
18,000
Depreciation
36,000
36,000
36,000
Utilities and other
14,000
14,000
14,000
Dividends paid
-0-
10,000
-0-
Payment on bonds
8,000
8,000
8,000
Required:
Using the given information, prepare a cash budget for November.
16. Dodge Ltd. is in the process of preparing its budget for next year. Cost of goods sold has been
estimated at 60 per cent of sales. Merchandise purchases are to be made during the month preceding
the month of the sales. Dodge pays 60 per cent in the month of purchase, and 40 per cent in the month
following. Wages are estimated at 20 per cent of sales and are paid during the month of sale. Other
operating costs amounting to 10 per cent of sales are to be paid in the month following the sale. The
accounts payable balance on June 30 was £20,000.
Month
Sales
June
£170,000
July
200,000
August
120,000
September
150,000
October
160,000
November
100,000
Required:
Prepare a schedule of cash disbursements for July, August, and September.
Cash receipts:
Sales:
October (£200,000 0.50 0.99*)
November (£180,000 0.50 0.99*)
Total
Cash disbursements:
Materials
Salaries and wages
68,000
Maintenance and repairs
18,000
Utilities and other
14,000
Dividends
10,000
Payment on bonds
Net cash inflow (outflow)
17. The city of Coventry had the following sales of water for the selected months of 2011:
Month
Sales
January
£50,000
February
45,000
March
60,000
April
42,500
May
70,000
June
120,000
All sales are on credit. Historically, 50 per cent is collected in the month of sale, 35 per cent during the
first month following the sale, and 15 per cent in the second month following the sale.
Cost of water averages 75 per cent of sales. Water is purchased in the month of sale. All purchases are
paid during the month following the purchase.
Operating costs of £40,000 are paid each month.
The March 1 cash balance is expected to be the minimum balance of £5,000.
Money can be borrowed from a local bank in increments of £1,000. (Do not include interest charges in
your budget.)
Required:
Prepare a cash budget for March, April, and May.
Beginning cash balance
Plus: Cash collections:
Month following (0.35)
Sales
Cost of goods sold
Cash paid to suppliers:
June
July (£72,000)
August (£90,000)
September (£96,000)
Total cash paid to suppliers
Cash paid for wages
Cash paid for operating cost
18. The following data is obtained from the general records in the shipping department at Fast Parcel
Delivery Company for August:
•
Inspecting packages prior to placement on truck takes 1 minute per package.
•
Processing paperwork for each shipment (each truck loaded) takes 30 minutes.
•
Loading packages takes 1 minute of labour per package plus an additional 3 labour hours per
truck
•
Miscellaneous tasks take 2 hours per truck.
•
Temporary employees to perform all of the above tasks can be hired for any amount of hours
at a rate of £10 per hour during the summer (no benefits).
•
One supervisor is needed for every 1,000 hours of temporary employee labour (rounded up).
•
Supervisors are paid a flat rate of £3,600 per month.
•
Supervisors divide their time evenly among inspecting, processing, and loading activities, and
miscellaneous tasks.
•
One thousand dollars per month general department overhead is allocated to miscellaneous
tasks and £2,000 per month to loading, inspecting and processing activities.
August will have 24 working days. Fast Parcel expects to load 12 trucks per day during August. There
are on average 100 packages per truck.
Required:
Prepare a budget using the activity based approach for the costs of inspecting, processing, loading
miscellaneous activities within the shipping department for August.
Inspecting
(1/60 100 packages 12 trucks 24 days)
Processing
(1/2 12 trucks 24 days)
Loading
Miscellaneous
(2 12 trucks 24 days)
Total
Temporary help
Supervisory salary allocation
ESSAY
1. Discuss the role of budgeting in planning, control, and decision making.