e.
It fosters a sense of managerial responsibility.
86. Which of the following is an advantage of participative budgeting?
a.
It fosters pseudoparticipation.
b.
It encourages budgetary slack.
c.
It tends to discourage goal congruence.
d.
It fosters a sense of responsibility.
e.
There are no advantages of participative budgeting.
87. Which of the following is an example of myopic behavior?
a.
Promotion of deserving employees.
b.
Reducing expenditures on preventive maintenance.
c.
Increased spending on research and development.
d.
Productivity training for new employees.
e.
Buying cheaper materials of the same quality to decrease the amount spent on raw
materials.
PROBLEM
1. Varney Company makes rolling suitcases. Its sales budget for four months is:
Month
Unit Sales
March
$15,000
April
$20,000
May
$40,000
June
$60,000
Varney’s policy is that ending inventory of finished suitcases should equal 30% of the next month’s
sales. Beginning inventory (March 1) is 5,300 suitcases.
Each suitcase required 1.5 yards of ballistic nylon. The ending inventory policy for nylon is that 20%
of the following month’s production needs must be on hand. On March 1, Varney had 10,450 yards of
nylon in inventory.
A.
What is the desired ending inventory of suitcases for April?
B.
What is the budgeted production of suitcases for April?
C.
What is the desired ending inventory of nylon for March?
D.
What are the budgeted yards of nylon to be purchased in March?
E.
Assuming each suitcase required two yards of ballistic nylon, what is the desired
ending inventory of nylon for March?
2. Borland Company makes backpacks. Its production budget for two months is:
Month
Budgeted production in units
June
35,000
July
50,000
Borland uses two types of labor to make the backpacks: cutting labor and sewing labor. Each backpack
requires 6 minutes, on average, of cutting labor. Each backpack requires 24 minutes of sewing labor.
Borland has fixed overhead of $4,400 per month and variable overhead of $3 per direct labor hour.
A.
How many hours of cutting labor are budgeted for July?
B.
How many hours of sewing labor are budgeted for July?
C.
What is the total amount of budgeted direct labor hours for July?
D.
What is the budgeted total overhead for the month of July?
A.
Budgeted cutting labor = (6/60)50,000 = 5,000 hours
A.
12,000 (see table below)
B.
26,000 (see table below)
Sales
+ Desired EI
Units needed
Production
7,800 yards (26,000 1.5 20%)
D.
20,900 yards (see table below)
Production
Nylon needed for production
+ Desired ending inventory
Nylon needed
Purchases of nylon in yards
10,400 yards (26,000 2 20%)
3. Abrams Bottling Company sells fruit-flavored colas. Estimated sales in cartons for May, June, and
July are 1,000, 3,000 and 5,000 respectively. The price is forecast at $5 per carton. Abrams requires
that finished goods ending inventory be 20% of the next month’s sales. Inventory was 500 units on
May 1. Each carton requires 12 oz of fruit syrup and 130 oz of carbonated water. Materials ending
inventory is 10% of the next month’s production needs. May 1 inventory met that requirement.
A.
Budgeted revenue for May is $__________________.
B.
Budgeted revenue for July is $__________________.
C.
Production in May is __________________ cartons.
D.
Production in June is __________________ cartons.
E.
Purchases of syrup in May is __________________ ounces.
F.
Purchases of carbonated water in May is __________________ ounces.
A.
Budgeted revenue for May = $5,000
[5,000 = 1,000 $5]
B.
Budgeted revenue for July = $25,000
[25,000 = 5,000 $5]
C.
Production in May = 1,100 cartons.
[1,100 = 1,000 + 600 − 500]
D.
Production in June = 3,400 cartons.
[3,400 = 3,000 + 1,000 − 600]
E.
Purchases of syrup in May = 15,960 ounces.
[15,960 = (1,100 12) + (3,400 12)(.1) − (1,100 12)(.1)]
F.
Purchases of carbonated water in May = 172,900 ounces.
[172,900 = (1,100 130) + (3,400 130)(.1) − (1,100 130)(.1)]
4. Karam Inc. has compiled the following data in order to put together their first quarter operating budget
for 20XX:
January
February
March
April
Sales (units)
35,000
31,000
38,000
29,000
B.
Budgeted sewing labor = (24/60)50,000 = 20,000 hours
C.
Budgeted direct labor hours = 5,000 + 20,000 = 25,000
D.
Budgeted total overhead = $4,400 + $3(25,000) = $79,400
Additional information:
Karam sells each unit for $95.
Company policy is to have 30% of next month’s sales (in units) in ending finished goods inventory.
This policy was met in December.
Company policy is to have 40% of next month’s production needs in ending raw materials inventory.
The production needs for April is 95,500. This policy was met in December.
It takes three pounds of material to produce each unit and the cost is $2.75/pound.
Required:
A. Prepare a sales budget for the January, February and March and for the first quarter in total.
B. Prepare a production budget for January, February and March and for the first quarter in total.
C. Prepare a direct materials purchases budget for January, February and March and for the first
quarter in total.
5. Boyle Company has put together the following data in order to complete their operating budget for the
second quarter in 20XX:
April
May
June
July
Sales (units)
73,200
68,900
65,400
67,300
Additional information:
Company policy requires 60% of next month’s sales (in units) be in ending inventory. This policy
was met in March.
It takes 2.5 hours of direct labor to produce one unit.
The average wage cost is $14.
Variable overhead rate is $6 per direct labor hour and fixed overhead is $15,000 per month.
Required:
A. Prepare a production budget for April, May, June and the quarter in total.
B. Prepare a direct labor budget for April, May, June and the quarter in total.
C. Prepare an overhead budget for April, May, June and the quarter in total.
Sales in units
Production needs
Desired ending inventory
Less: Beginning inventory
Direct materials to be purchased
Total purchase cost
6. Jones Corporation has the following budgeted sales for the selected four-month period:
Month
Unit Sales
July
20,000
August
35,000
September
25,000
October
30,000
Sales price per unit is $180
Plans are to have an inventory of finished product equal to 20% of the unit sales for the
next month. There was 4,000 units in beginning inventory on July 1st.
Three pounds of materials are required for each unit produced. Each pound of material
costs $20. Inventory levels for materials equal 30% of the needs for the next month.
Desired ending inventory for September is 25,200 pounds of material. Beginning
inventory for July was 20,700 pounds of material.
Each unit requires 0.6 hours of direct labor and the average wage rate is $16 per hour.
Variable overhead rate is $3.50 per direct labor hour. There is also fixed overhead of
$22,000 per month.
The company pays a 3% commission on sales.
Company has fixed selling and administrative expenses as follows:
Rent $6,000/month
Utilities $1,200/month
Advertising $400/month
Office Salaries $35,000/month
Required:
A.
Prepare a sales budget for July, August, and September and in total for the quarter.
B.
Prepare production budgets for July, August, and September and in total for the
quarter.
C.
Prepare a direct materials purchases budget in pounds and dollars for July, August, and
September and in total for the quarter.
D.
Prepare a direct labor budget in hours and total cost for July, August and September
and in total for the quarter.
E.
Prepare an overhead budget for July, August and September and in total for the quarter.
F.
Prepare a selling and administrative expenses budget for July, August and September
and in total for the quarter.
G.
Prepare an ending finished goods inventory budget for the quarter (Hint: You have
already calculated the desired ending finished goods inventory amount. Assume a
stable per unit rate and round the per unit fixed factory overhead rate to two decimal
places.)
H.
Prepare a cost of goods sold budget for the quarter
I.
Prepare a budged income statement for the quarter-the company falls into the 35% tax
bracket for income taxes.
7. Rapid-Lube provides oil changes and lubes. The estimated number of oil changes for April and May
are 3,600 and 4,000. Each oil change takes 12 minutes of direct labor. The wage rate is $10 per hour.
Overhead is $3,700 per month and $2 per oil change.
A.
Budgeted direct labor for April is $__________________.
B.
Budgeted direct labor for May is $__________________.
C.
Budgeted overhead for April is $__________________.
D.
Budgeted overhead for May is $__________________.
8. Terrill Company makes and sells two types of shaving cream: foamy, and gel. Last year, Foamy sold
for $2.30 per can, and Gel sold for $3.15 per can. Sales volume was as follows:
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Foamy
$76,000
$80,000
$82,000
$70,000
Gel
$50,000
$80,000
$90,000
$60,000
Terrill expects sales for Foamy to increase by 5% over the same quarter last year. The Gel price will
increase to $3.50, but aggressive advertising is expected to raise volume by 5% in quarters 1 and 4 and
by 10% in quarters 2 and 3.
Prepare a sales budget for the coming year.
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Foamy
Gel
183,750
308,000
346,500
220,500
A.
Budgeted direct labor for April = $7,200
[$7,200 = (3,600 .2 $10)]
B.
Budgeted direct labor for May = $8,000
[$8,000 = (4,000 .2 $10)]
C.
Budgeted overhead for April = $10,900
[$10,900 = $3,700 + ($2 3,600)]
D.
Budgeted overhead for May = $11,700
[$11,700 = $3,700 + ( $2 4,000)]
9. Allison Company makes luggage. One popular model is the Traveler (a 21″ wheeled carry-on).
Budgeted sales for this model are:
Month
Unit Sales
March
$25,000
April
$34,000
May
$50,000
June
$70,000
Desired ending inventory is 20% of the next month’s sales. Inventory on March 1 is 3,100 units.
Prepare a production budget for as many months as possible.
Sales
+ Desired ending inventory
10,000
Units needed
Less: beginning inventory
Production
28,700
37,200
10. CutMaster Salons anticipates giving 100 permanents in May, 130 in June, and 120 in July. CutMaster
needs one permanent wave kit for each perm, along with two boxes of wave tissues. Its inventory
policy is to have 10% of the following month’s materials needs on hand. On May 1, there were 15
wave kits and four boxes of wave tissues on hand. (Round any fractions of a unit to the nearest whole
unit.)
A.
The wave kits to be purchased in May equal __________________.
B.
The wave kits to be purchased in June equal __________________.
C.
The boxes of tissues to be purchased in May equal __________________.
D.
The boxes of tissues to be purchased in June equal __________________.
A.
May wave kit purchases = 98
[98 = 100 + 13 − 15]
B.
June wave kit purchases = 129
11. Foster Company makes power tools. The sales budget for drills for the first four months of the year is:
Month
Unit Sales
January
$20,000
February
$15,000
March
$22,000
April
$25,000
Foster has taken a just-in-time approach to production and wants only 5% of the next month‘s sales
needs in ending inventory. January 1 inventory of drills was zero. Each drill takes 15 minutes of direct
labor at $18 per hour. The factory overhead formula is $27,000 + $1.20 per direct labor hour.
A.
Budgeted production for January is __________________.
B.
Budgeted production for February is __________________.
C.
Budgeted production for the entire first quarter of the year is __________________.
D.
Budgeted direct labor cost for January is $__________________.
E.
Budgeted direct labor cost for February is $__________________.
F.
Budgeted variable overhead for March is $__________________.
G.
Budgeted total overhead for March is $__________________.
A.
Budgeted production for January = 20,750
[20,750 = 20,000 + 750 − 0]
B.
Budgeted production for February = 15,350
[15,350 = 15,000 + 1,100 − 750]
C.
Budgeted production for the entire first quarter of the year = 58,250
*(22,000 + 1,250 − 1,100)
D.
Budgeted direct labor cost for January = $93,375
[93,375 = 20,750 .25* $18]
Budgeted direct labor cost for February = $69,075
[69,075 = 15,350 .25 $18]
[6,645 = 22,150 .25 $1.20]
[129 = 130 + 12 − 13]
C.
May purchases of tissue boxes = 222
[222 = 100(2 boxes) + 130(2 boxes)(0.10) − 4]
D.
June purchases of tissue boxes = 258
[258 = 130(2 boxes) + 120(2 boxes)(0.10) − 130(2 boxes)(.10)]
12. Uma Company production has variable overhead costs of $8 per direct labor hour and fixed overhead
costs of $56,000 per month. Budgeted production for the next three months is as follows:
Month
Production
October
$6,000
November
$5,500
December
$8,000
Each unit requires three hours of direct labor.
A.
Uma’s total variable overhead for October is $__________________.
B.
Uma’s total overhead for October is $__________________.
C.
Uma’s total variable overhead for November is $__________________.
D.
Uma’s total fixed overhead for December is $__________________.
E.
Uma’s total budgeted overhead for the last three months of the year equals
$__________________.
Month
October
November
December
A.
October total variable overhead = (3)(6,000)($8) = $144,000
B.
October total overhead = $144,000 + $56,000 = $200,000
C.
November total variable overhead = (3)(5,500)($8) = $132,000
D.
December total fixed overhead = $56,000
Total budgeted overhead for the last three months of the year = $636,000
$636,000 = $200,000 + $188,000 + $248,000
$188,000 = $132,000 + $56,000
November Total Budgeted Overhead
$248,000 = ((3)(8,000)($8)+56,000)
December Total Budgeted Overhead
13. Kanban Company estimated sales of 40,000 units at $6 each. Budgeted cost of goods sold per unit
includes $1.20 of direct materials, six minutes of direct labor time at $15 per hour, and unit overhead
cost of $1.30. Kanban pays a sales commission of 10% of sales revenue. Fixed selling and
administrative expenses are budgeted at $25,000. Prepare a statement of operating income.
G.
March budgeted total overhead = $33,645
[33,645 = $27,000 + 6,645]
A.
Budgeted variable marketing expense is $.
B.
Budgeted operating income is $__________________.
C.
Recalculate budgeted operating income assuming fixed selling and administrative
expenses double and the selling price per unit increases 10%.
14. You have decided to throw a party next weekend for 19 friends. The friends are going to bring health
food, so all you have to have available are the drinks. You estimate that, on average, each person will
drink four bottles of soft drinks. Three of your friends will drink only natural soda without unneeded
color − so Sulo Ginger Ale should work well for them. For the others and yourself, you decide to buy
Sulo Cola. Before going online, you check the refrigerator − you already have six bottles of Sulo
Ginger Ale and 14 of Sulo Cola. Since this is the end of the semester − you decide that you don’t really
want any of the soft drinks on hand after the party. Now, you are ordering on the Internet.
A.
How many bottles of Sulo Ginger Ale do you plan to buy?
B.
How many bottles of Sulo Cola do you plan to buy?
To drink at the party:
3 friends 4 bottles
17 friends 4 bottles
+ Desired ending inventory
Bottles needed
Bottles to purchase
Sales ($6 40,000)
Cost of goods sold ($1.20 + $1.50 + $1.30)(40,000)
Gross profit
Less: Sales commission ($240,000 0.10)
Less: Fixed selling and administrative expense
Operating income
Budgeted variable marketing expense is $24,000.
B.
Budgeted operating income is $31,000.
C.
Budgeted operating income is $27,600. (see table below)
Sales ($6.60 40,000)
Cost of goods sold ($1.20 + $1.50 + $1.30)(40,000)
Gross profit
Less: Sales commission ($264,000 0.10)
Less: Fixed selling and administrative expense
Operating income