Budgetary Planning
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Ex. 187
Clay Co.’s projected sales are as follows:
August $400,000
September $450,000
October $550,000
Clay estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and
18% in the second month following the sale. Two percent of all sales are estimated to be bad
debts.
Instructions
How much are Clay Co.’s budgeted cash receipts for October?
Ex. 188
The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended
December 31, 2013. The following information is available:
1. The cash budget shows an expected cash balance of $75,000 at December 31, 2013.
2. The 2013 sales budget shows total annual sales of $800,000. All sales are made on account
and accounts receivable at December 31, 2013 are expected to be 10% of annual sales.
3. The merchandise purchases budget shows budgeted cost of goods sold for 2013 of $600,000
and ending merchandise inventory of $95,000. 20% of the ending inventory is expected to
have not yet been paid at December 31, 2013.
4. The December 31, 2012 balance sheet includes the following balances: Equipment $294,000,
Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings
$48,000.
5. The budgeted income statement for 2013 includes the following: depreciation on equipment
$15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not
be paid until 2013.
6. In 2013, management does not expect to purchase additional equipment or to declare any
dividends. It does expect to pay all operating expenses, other than depreciation, in cash.
Instructions
Prepare an unclassified budgeted balance sheet at December 31, 2013.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
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Solution 188 (20–25 min.)
Ex. 189
The management of Ocean Industries estimates that credit sales for August, September,
October, and November will be $540,000, $750,000, $840,000, and $480,000, respectively.
Experience has shown that collections are made as follows:
In month of sale 25%
In first month after sale 60%
In second month after sale 10%
Instructions
Determine the collections from customers in October and November. Show all computations.
Budgetary Planning
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Ex. 190
The beginning cash balance is $20,000. Sales are forecasted at $700,000 of which 80% will be
on credit. 70% of credit sales are expected to be collected in the year of sale. Cash expenditures
for the year are forecasted at $500,000. Accounts receivable from previous accounting periods
totaling $12,000 will be collected in the current year. The company is required to make a $20,000
loan payment and an annual interest payment on the last day of the year. The loan balance as of
the beginning of the year is $120,000, and the annual interest rate is 10%.
Instructions
How much will be reported as ‘cash’ on the budgeted balance sheet?
Ex. 191
Rudd Company has budgeted sales revenue as follows for the next 4 months:
February $300,000
March 240,000
April 210,000
May 330,000
Past experience indicates that 80% of sales each month are on credit and that collection of credit
sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in
the second month following the sale. The other 2% is uncollectible.
Instructions
Prepare a schedule which shows expected cash receipts from sales for the month of May.
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Ex. 192
Hagen Company’s budgeted sales and direct materials purchases are as follows.
Budgeted Sales Budgeted D.M. Purchases
January $300,000 $60,000
February 330,000 70,000
March 350,000 80,000
Hagen’s sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale,
50% in the month following sale, and 36% in the second month following sale; 4% are
uncollectible. Hagen’s purchases are 50% cash and 50% on account. Purchases on account are
paid 40% in the month of purchase, and 60% in the month following purchase.
Instructions
(a) Prepare a schedule of expected collections from customers for March.
(b) Prepare a schedule of expected payments for direct materials for March.
Budgetary Planning
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Solution 192 (Cont.)
Ex. 193
Minor Landscaping Company is preparing its budget for the first quarter of 2013. The next step in
the budgeting process is to prepare a cash receipts schedule and a cash payments schedule. To
that end the following information has been collected.
Clients usually pay 60% of their fee in the month that service is provided, 30% the month after,
and 10% the second month after receiving service.
Actual service revenue for 2012 and expected service revenues for 2013 are: November 2012,
$120,000; December 2012, $110,000; January 2013, $140,000; February 2013, $160,000; March
2013, $170,000.
Purchases on landscaping supplies (direct materials) are paid 40% in the month of purchase and
60% the following month. Actual purchases for 2012 and expected purchases for 2013 are:
December 2012, $21,000; January 2013, $20,000; February 2013, $22,000; March 2013,
$27,000.
Instructions
(a) Prepare the following schedules for each month in the first quarter of 2013 and for the quarter
in total:
(1) Expected collections from clients.
(2) Expected payments for landscaping supplies.
(b) Determine the following balances at March 31, 2013:
(1) Accounts receivable.
(2) Accounts payable.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
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Solution 193 (12 min.)
Ex. 194
In May 2013, the budget committee of Crater, Inc. assembles the following data in preparation of
budgeted merchandise purchases for the month of June.
1. Expected sales: June $750,000, July $900,000.
2. Cost of goods sold is expected to be 80% of sales.
3. Desired ending merchandise inventory is 40% of the following (next) month’s cost of goods
sold.
4. The beginning inventory at June 1 will be the desired amount.
Instructions
(a) Compute the budgeted merchandise purchases for June.
(b) Prepare the budgeted income statement for June through gross profit.
Budgetary Planning
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Solution 194 (12 min.)
Ex. 195
In September 2013, the management of Rye Company assembles the following data in
preparation of budgeted merchandise purchases for the months of October and November.
1. Expected Sales
October $1,500,000
November 2,100,000
December 2,700,000
2. Cost of goods sold is expected to be 70% of sales.
3. Desired ending merchandise inventory is 20% of the next month’s cost of goods sold.
4. The beginning inventory at October 1 will be the desired amount.
Instructions
Compute the budgeted merchandise purchases for October and November. Use a columnar
format with separate columns for each month.
Test Bank for Accounting, Tools for Business Decision Making, Fifth Edition
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COMPLETION STATEMENTS
196. A _________________ is a formal written statement of management’s plans expressed in
financial terms.
197. A budget is a primary means of ________________ agreed upon objectives throughout
the business organization.
198. Effective budgeting is dependent on an _________________________ in which authority
and responsibility are clearly defined.
199. The budget should have the support of _________________ and should be an important
basis for _________________________ by comparing actual results to expected results.
200. Many companies use ____________________________ budgets by dropping the month
just ending and adding a future month.
201. A __________________ is responsible for coordinating the preparation of the budget in
many companies.
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202. A major difference between the annual budget and long-range planning is the
____________________ over which the data pertain.
203. The ____________________ is the starting point in preparing the master budget.
204. The formula for developing a production budget is ___________________ plus
______________________ minus _______________________.
205. The ________________ is a set of interrelated budgets that constitutes a plan of action
for a specified period of time.
206. Three major sections of a cash budget are (1) ___________________, (2)
____________________, and (3) ______________________.
207. The two major differences between the master budgets of a merchandiser and a
manufacturer are that the merchandiser will have a ______________________ budget
and will not have __________________ budgets.
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MATCHING
208. Match the items below by entering the appropriate code letter in the space provided.
A. Budget F. Production budget
B. Financial budgets G. Cash budget
C. Budget committee H. Long-range planning
D. Master budget I. Direct materials budget
E. Sales forecast J. Sales budget
____ 1. A selection of strategies to achieve long-term goals.
____ 2. An estimate of expected sales for the budget period.
____ 3. Budgets that indicate the cash resources needed for expected operations and planned
capital expenditures.
____ 4. The projection of potential sales for the industry and the company’s expected share of
such sales.
____ 5. Management’s plans expressed in financial terms for a specified future time period.
____ 6. A projection of anticipated cash flows.
____ 7. A group responsible for coordinating the preparation of the budget.
____ 8. A projection of production requirements to meet expected sales.
____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period.
____ 10. An estimate of the quantity and cost of direct materials to be purchased.
Budgetary Planning
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 209
(a) What is a budget?
(b) How does a budget contribute to good management?
S-A E 210
Budgeting can be an important management tool if implemented properly. Identify several
positive results when budgets are used properly. Since budgets affect people, identify several
negative aspects if budgets are not implemented properly.
S-A E 211
Budgeting and long-range planning are both important aids to management in achieving a
company’s goals and objectives. Briefly distinguish between budgeting and long-range planning
and indicate how they help managers perform their functions.
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S-A E 212
What is participative budgeting? What are its potential benefits? What are its potential
shortcomings?
S-A E 213 (Ethics)
Ashley Finn is a new production manager. After a great deal of effort, including considerable
market research, she completes her budget and submits it to her boss, Keith Payne. Without
even looking at it, he asks her what her “fudge factor” was, and which items contained the most
slack. Ashley, very surprised, responds that she doesn’t use any “fudge factor,” and that all her
figures are honest. Mr. Payne counters by asking her how she would respond if she had to cut
about 20% from her budget, as it is. He tells her that most budgets are trimmed in committee, and
she had better be ready. He returns the budget to her, and tells her to come back with something
reasonable.
Required:
1. Is it ethical to build slack into a budget? Explain.
2. Was it ethical for Mr. Payne to refuse to accept a budget without slack? Briefly explain.
Budgetary Planning
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S-A E 214 (Communication)
At Boulder Industries, budgets are the responsibility of everyone. Each department collaborates
in determining its expected needs, and sales personnel determine the likely sales volume. Bart
Gray, one of the production managers, believes in building plenty of slack into everything,
including his estimates of ending inventory of work in process.
Required:
You are the accounting manager. Write a memo to Mr. Gray. Explain why the ending inventory
figure should be extremely accurate, with as little slack as possible.