Chapter 9 – Profit Planning
a.
production budget, sales budget, direct labor budget
b.
production budget, cost of goods sold budget, direct labor budget
c.
sales budget, cash budget, production budget
d.
sales budget, production budget, direct materials purchases budget
e.
production budget, cash budget, direct materials purchases budget
112. Suppose that a company has the following accounts receivable collection pattern:
Paid in the month of sale
Paid in the month following sale
All sales are on credit. If credit sales for January and February are $200,000 and $100,000 respectively, the cash
collection for February is
a.
$210,000
b.
$100,000
c.
$130,000
d.
$140,000
e.
$170,000
Cash from January sales (0.7 × $200,000)
Cash from February sales (0.3 × $100,000)
Cash received in February
113. Which of the following statements is true?
a.
The production budget is the first budget to be prepared in the master budget.
b.
The cash budget is prepared before the direct materials purchases budget.
c.
The budgeted balance sheet is prepared after the cash budget.
d.
Service firms need not prepare a master budget.
e.
The cost of goods sold budget is prepared before the direct labor and overhead budgets.
c
Figure 9-9.
Yummy Jams Company produces a line of jams. Yummy’s estimated production of jars of jam for the fourth quarter of the
year is as follows:
October
November
December
Each jar requires half a pound of berries. Yummy prefers to buy the freshest berries, so its policy is to have just 3% of the
following month’s production needs in ending inventory. On October 1, the company had 1,125 pounds of berries in
inventory. Yummy’s pays $0.60 per pound of berries. It buys all berries on account and typically pays 40% of a month’s
purchases in that month, and the remaining 60% the following month.
114. Refer to Figure 9-9. How many pounds of berries will be purchased during the month of November?
a.
23,375
b.
48,475
c.
39,925
Chapter 9 – Profit Planning
d.
41,950
e.
49,945
Production
× 0.50 lbs
Berries needed for production
Desired ending inventory
Berries needed
Less: beginning inventory
Berries purchases in pounds
115. Refer to Figure 9-9. What is the dollar cost of purchases for October?
a.
$19,925
b.
$22,707
c.
$18,450
d.
$23,300
e.
$33,320
Production
× 0.50 lbs
Berries needed for production
Desired ending inventory
Berries needed
Less: beginning inventory
Berries purchases in pounds
× 0.60 per pound
Total direct materials cost
116. Refer to Figure 9-9. How much cash is paid in November for berry purchases (rounded to the nearest dollar)?
a.
$25,258
b.
$21,088
c.
$28,900
d.
$19,963
e.
$32,212
Cash paid in November for purchases:
October purchases
$22,707 × 0.60 = 13,624.20
November purchases
$29,085 × 0.40 = 11,634.00
Total
$25,258.20
117. Bank loan officers would find which of the following budgets to be one of the most important in determining
whether or not to give a company a loan?
a.
Sales budget
b.
Production budget
c.
Budgeted income statement
d.
Budgeted balance sheet
Chapter 9 – Profit Planning
e.
Cash budget
e
118. A company anticipates selling $200,000 of goods, of which $15,000 will probably be uncollectible. Which of the
following statements is true?
a.
$15,000 does not appear on the cash budget.
b.
$215,000 is added to the cash budget.
c.
$15,000 is subtracted from the cash budget.
d.
$185,000 appears as a disbursement on the cash budget.
e.
None of these.
a
119. A company’s planned borrowings and repayments appear on the
a.
production budget.
b.
selling and administrative expenses budget.
c.
interest income budget.
d.
cash budget.
e.
operating budget.
120. The planned ending cash balance for the year appears on which of the following statements?
a.
Budgeted income statement
b.
Budgeted balance sheet
c.
Production budget
d.
Budgeted cash receipts
e.
Budgeted cash disbursements
121. Gilbert Company purchased $40,000 of goods in July and expects to purchase $60,000 of goods in August. Gilbert
typically pays for 25% of purchases in the month of purchase and 75% in the following month. What are Gilbert
Company’s total expected cash disbursements for purchases in the month of August?
a.
$65,000
b.
$40,000
c.
$45,000
d.
$60,000
e.
$100,000
Expected cash disbursements = ($40,000 × 0.75) + ($60,000 × 0.25) = $45,000
122. Which of the following appears on the budgeted balance sheet?
a.
Estimated sales
b.
Estimated cost of goods sold
c.
Estimated ending accounts receivable
d.
Estimated fixed selling expense
e.
Estimated fixed factory overhead
Chapter 9 – Profit Planning
c
123. Cash budgeting is important to which of the following?
a.
retail stores
b.
manufacturing firms
c.
not-for-profit agencies
d.
local government agencies
e.
all of these
e
124. Ressen Company finds that typically 30% of a month’s sales are for cash. Payments on accounts receivable are 60%
in the month of sale and 38% in the month following sale. Budgeted sales for June are $100,000, for July $140,000, and
for August $120,000. What are the total cash receipts budgeted for July?
a.
$127,400
b.
$85,400
c.
$122,000
d.
$262,000
e.
$140,000
Cash sales ($140,000 × 0.30)
Payments on account for sales in:
June ($100,000 × 0.7 × 0.38)
July ($140,000 × 0.70 × 0.60)
Total cash receipts
125. 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
Accounts payable
Accounts receivable
Capital stock
Inventory
Retained earnings
Building and equipment (net)
Actual sales for June and budgeted sales for July, August, and September are given below:
June
July
August
September
Sales are 20% for cash and 80% on credit. All credit sales are collected in the month following the sale. There are no bad
debts.
The gross margin percentage is 40% of sales. The desired ending inventory is equal to 25% 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.
Chapter 9 – Profit Planning
What is the balance of the accounts receivable at the end of July?
a.
$110,000
b.
$288,000
c.
$360,000
d.
$398,000
126. June Corporation has the following sales forecasts for the first three months of the current year:
Month
January
February
March
75% of sales are collected in the month of the sale and the remainder is collected in the following month.
Accounts receivable balance (January 1)
Cash balance (January 1)
Minimum cash balance needed
What is the cash balance at the end of January, assuming that cash is received only from customers and that $48,000 is
paid out during January?
a.
$19,400
b.
$23,800
c.
$20,600
d.
$21,000
Figure 9-6.
Toscano Company makes all its sales on account. Accounts receivable payment experience is as follows:
Percent paid in the month of sale
Percent paid in the month after the sale
Percent paid in the second month after the sale
Toscano provided information on sales as follows:
May
June
July
August (expected)
127. Refer to Figure 9-6. How much of May’s sales are expected to be uncollectible?
a.
$8,400
b.
$5,000
c.
$2,500
d.
$7,200
e.
$0
Chapter 9 – Profit Planning
128. Refer to Figure 9-6. How much of June credit sales are expected to be collected in the month of July?
a.
$30,000
b.
$60,000
c.
$36,000
d.
$73,600
e.
$80,000
June credit sales collected in July = $115,000 × 0.64 = $73,600
129. Refer to Figure 9-6. What is budgeted cash to be collected on account for the month of August?
a.
$45,000
b.
$132,000
c.
$119,390
d.
$150,000
e.
$154,600
From June ($115,000 × 0.05)
From July ($126,000 × 0.64)
From August ($132,000 × 0.25)
Total cash expected
Figure 9-7.
Lambert Company purchased $140,000 of goods in September and expects to purchase $130,000 of goods in October.
Lambert typically pays for 20% of purchases in the month of purchase and 80% in the following month.
Every month, Lambert must make the following payments:
Rent
Wages
Utilities
Telephone
Loan on equipment
In mid-October, Lambert expects to buy a new computer for $4,500 using the company credit card. Typically, the credit
card bill is paid in full in the following month. September credit card purchases totaled $6,000.
130. Refer to Figure 9-7. What is Lambert’s expected cash disbursement in October for purchases of goods?
a.
$140,000
b.
$130,000
c.
$112,000
d.
$138,000
e.
$26,000
Cash payments for goods in October = ($140,000 × 0.80) + ($130,000 × 0.20) = $138,000
Chapter 9 – Profit Planning
131. Refer to Figure 9-7. What are the total cash disbursements expected by Lambert during the month of October?
a.
$167,600
b.
$172,100
c.
$161,600
d.
$55,600
e.
$60,100
Rent
Wages
Utilities
Telephone
Loan on equipment
Payments for goods ($140,000 × 0.80) + ($130,000 × 0.20)
Payment for September credit card purchases
Total cash disbursements in October
Figure 9-8.
Cohlmia Company makes all its sales on account. Cohlmia’s accounts receivable payment experience is as follows:
Percent paid in the month of sale
Percent paid in the month after the sale
Percent paid in the second month after the sale
Cohlmia provided information on sales as follows:
September
October
November
December (expected)
132. Refer to Figure 9-8. What are the expected cash receipts in the month of November?
a.
$200,000
b.
$40,000
c.
$190,000
d.
$132,000
e.
$114,000
November cash receipts = ($200,000 × 0.20) + ($120,000 × 0.75) + ($100,000 × 0.02) = $132,000
133. Refer to Figure 9-8. What are the expected cash receipts in December?
a.
$202,400
b.
$210,400
c.
$50,000
d.
$250,000
e.
$179,000
134. The following forecasted sales pertain to Micah Company:
Chapter 9 – Profit Planning
Month
April
May
June
July
Collection pattern:
60% in month of sale
40% in month following the sale
Accounts receivable as of March 31
Finished goods inventory as of March 31
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20% of the next
month’s sales. How many units are expected to be produced in April?
a.
21,000 units
b.
19,000 units
c.
25,000 units
d.
20,000 units
SUPPORTING CALCULATIONS: ($200,000 / $10) + [($250,000 / $10) × 0.20] − 4,000 = 21,000 units
135. The alignment of managerial and organizational goals is referred to as goal
a.
congruence.
b.
participation.
c.
pseudoparticipation.
d.
feedback.
e.
incentives.
a
136. Traditional organization theory uses which of the following to motivate workers?
a.
Bonuses
b.
Self-esteem
c.
Nature of the work itself
d.
Increased responsibility
e.
Job satisfaction
a
137. ____ occurs when a manager deliberately underestimates revenues or overestimates costs.
a.
Budgetary slack
b.
Pseudoparticipation
c.
Goal congruence
d.
Setting standards too high
e.
None of these
a
138. Which of the following is true of the master budget?
a.
Monthly budgets are derived by dividing the master budget by 12.
b.
Fixed costs cannot change from one month to another.
Chapter 9 – Profit Planning
c.
Variable costs cannot change from one month to another.
d.
The master budget can reflect seasonal effects.
e.
None of these.
139. Which of the following is not an advantage of participative budgeting?
a.
It fosters a sense of creativity in managers.
b.
It encourages the introduction of budgetary slack.
c.
It encourages greater goal congruence.
d.
It encourages a higher level of performance.
e.
It fosters a sense of managerial responsibility.
140. 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.
141. 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.
142. 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?
Chapter 9 – Profit Planning
A.
12,000 (see table below)
B.
26,000 (see table below)
Sales
+ Desired EI
Units needed
Production
C.
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%)
143. 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
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
144. 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.
Chapter 9 – Profit Planning
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 × 0.10) − (1,100 × 12 × 0.10)]
Purchases of carbonated water in May = 172,900 ounces.
[172,900 = (1,100 × 130) + (3,400 × 130 × 0.10) − (1,100 × 130 × 0.10)]
145. 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
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.
A.
Sales in units
35,000
31,000
38,000
Unit selling price
Budgeted sales
Chapter 9 – Profit Planning
Sales in units (given)
0.30; 29,000 × 0.30)
Total needs
Units to be produced
Units to be produced
Direct materials per unit
Production needs
Total needs
(40,560)
(39,720)
(42,360)
(40,560)
Direct materials to be purchased
Cost per pound
Total purchase cost
146. 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.
Chapter 9 – Profit Planning
147. Jones Corporation has the following budgeted sales for the selected four-month period:
Month
July
August
September
October
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
Sales in units
Total needs
65,400 × 0.60)
Units to be produced
B
Units to be produced
Direct labor hours per unit
Total hours needed
Average wage rate per hour
Total direct labor cost
C
Budgeted direct labor hours
Variable overhead rate
Budgeted variable overhead
Budgeted fixed overhead
Total overhead
Chapter 9 – Profit Planning
$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 quantity. 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.
Sales price
Total sales dollars
Add: Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced
Units to be produced
× lbs per unit
Pounds needed
Desired ending inventory
Total needs
Less beginning inventory
Purchases needed
× $20.00/lb
Total purchase cost
Chapter 9 – Profit Planning
Chapter 9 – Profit Planning
Sales ($180 × 80,000)
Cost of goods sold
5,800,400
Gross margin
Less: Variable selling and administrative
Fixed selling and administrative expenses
Operating income
Less: Income taxes (Operating income × 35%)
2,813,930
Net income
148. 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 $__________________.
A.
Budgeted direct labor for April = $7,200
$7,200 = [3,600 × (12 / 60) × $10]
B.
Budgeted direct labor for May = $8,000
$8,000 = [4,000 × (12 / 60) × $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)
149. 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 3
Foamy
$82,000
Gel
$90,000
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 3
Foamy
Gel
346,500
Supporting calculations:
Quarter 1
Quarter 2
Foamy
$2.30 × (76,000 × 1.05)
$2.30 × (80,000 × 1.05)