80.
Refer to the information above. Assume Baskin actually achieves the 60,000 unit sales
level, and that net income actually earned at this level was $70,000. A performance report
would indicate that net income was:
Essay Questions
81.
Explain what is meant by “profit rich, yet cash poor”.
82.
Discuss the benefits that a company may derive from a formal budgeting process.
83.
Establishing budgeted amounts
(a) The text discusses two basic philosophies as to the levels at which budgeted amounts
should be set. Identify and describe briefly each of these two philosophies.
(b) Which of the two management philosophies would be more likely to elicit the following
comment?
“At our company, budgeted revenue is set so high and budgeted costs so low that no
department can ever meet the budget. This way, department managers can never relax;
they are motivated to keep working harder no matter how well they are already doing.”
84.
Steps in the budgeting process
Listed below are eight operating budgets. In the space provided, list which of these
budgets is typically prepared first, second, third, etc.
(a) ____Operating expense budget
(b) ____Budgeted income statement
(c) ____Ending finished goods forecast
(d) ____Production schedule (in units)
(e) ____Manufacturing cost estimates
(f) ____Cost of goods sold budget
(g) ____Sales forecast
(h) ____Manufacturing cost budget
85.
Elements of the master budget
Describe briefly the purpose of a master budget and discuss its elements.
86.
Budgeted material purchases and payments to suppliers
On January 1 of the current period, Gotham Corporation has direct materials on hand of
$82,000. Of this amount, Gotham owes suppliers $51,000 on account. The company has
prepared the following budget estimates for January:
(a) Purchases of direct materials budgeted in January amount to: $_______________
(b) Cash payments to suppliers budgeted in January amount to: $_______________
Computations
23–45
87.
Production and purchases budgets
Brian Furniture, Inc. manufactures a variety of desks, chairs, tables, and shelf units which
are sold to public school systems throughout the Midwest. The controller of the company’s
School Desk Division is currently preparing a budget for the second quarter of 2015. The
following sales forecast has been developed by the division’s sales manager:
April 6,500 desk and chair sets
May 7,500 desk and chair sets
June 9,000 desk and chair sets
July 8,700 desk and chair sets
August 8,800 desk and chair sets
The inventory of finished desk and chair sets at the end of each month must be equal to
30% of the budgeted sales for the next month. On April 1, there will be 1,950 units of desk
and chair sets on hand.
Work-in-process inventories are negligible and can be safely ignored.
Each desk and chair set requires 10 board feet of pine planks. Pine planks cost $0.75 per
board foot, and the division ends each month with enough pine to cover 20% of the next
month’s production requirements. This requirement will be met on April 1 of 2015.
Required. Prepare a production budget and a materials purchases budget for April, May,
and June and in total for the three-month period.
88.
Budgeted debt service costs
On April 1, Fisher Corporation borrowed $400,000 from its bank by signing a 9%, 5-year
note payable. The note calls for 60 monthly payments of $6,150, which includes both
interest and principal components.
(a) Interest expense budgeted for April amounts to: $_______________
(b) The carrying value of the note to be reported in the company’s budgeted balance sheet
as of April 30 is: $_______________
(c) Interest expense budgeted for May amounts to (round to nearest whole dollar):
$_______________
(d) The carrying value of the note to be reported in the company’s budgeted balance sheet
as of May 31 is (round to nearest whole dollar): $_______________
23–49
89.
Cash receipts budget
The director of budgeting for Bond Products is beginning the process of preparing a cash
budget for each month of the coming year. The sales forecast for the month of January is
as follows:
In the past, the accounts receivable originating from credit sales have been collected in the
following pattern:
Credit sales in the last two months of the current year, some of which remain uncollected
at year-end, were as follows:
Compute the amount of cash expected to be collected from customers in January of the
coming year.
90.
Preparation of cash budget
Use the following information to prepare a cash budget for Knightsbridge Corporation for
the month of June 2015.
In May, 30-day credit sales were $175,000; 80% of this amount is estimated to be
collectible in June.
June sales are estimated to be $425,000; cash sales are usually 25% of total sales. Only
10% of credit sales are collected in the month in which the sale is made.
Total fixed expenses are $60,000 per month, including $26,000 depreciation. Variable
expenses are 55% of sales. All expenses requiring payment are paid in cash when incurred.
A $40,000 note payable must be paid on June 30.
As of May 31, the cash balance is $94,000.
23–52
91.
Harding Company expected sales to be 50,000 units in February, 45,000 in March, and
55,000 units in April. Each unit sells for $18.00 each. The following costs pertain to each
unit:
Harding is considering an advertising campaign which will cost $15,000 per month from
January to March and is expected to increase sales by 8% a month. At the same time
Harding will reduce sales prices to $17.00 per unit while keeping costs steady.
Required:
(A.) What will operating income be in each of the three months before the advertising
campaign?
(B.) If Harding goes ahead with the advertising campaign, how much would operating
income increase or decrease each month? Would you advise them to go ahead with the
campaign?
92.
Aron Company makes computer screens, Model 1 and Model 2. Aron anticipates selling the
screens as follows:
The inventory on 1/1/15 is 2500 units of Model 1 and 3000 units of Model 2. Aron wants to
have on hand 45% of the anticipated sales of the following month for each model. Prepare
a production budget for the first 3 quarters of 2015 for both models.
93.
Flexible budget-variances
The cost accountant for Bradley, Inc., prepared the following monthly performance report
relating to the Finishing Department:
(a) Compute the amounts that should be included for each of the following in a flexible
budget prepared for a 6,500-unit level of production:
(1) Direct materials: $_______________
(2) Direct labor: $_______________
(3) Fixed manufacturing overhead: $_______________
(b) Assume that a revised performance report is prepared for the 6,500-unit level of
production using a flexible budget approach. Compute the cost variances for each of the
following. Indicate whether each variance is favorable (F) or unfavorable (U).
94.
Flexible budgeting
What is meant by the term flexible budget? What role do flexible budgets play in evaluating
performance?