•
Loan and interest payments for March are expected to be $25,000.
What is the cash balance at the end of March expected to be?
a.
$ 8,500
b.
$ (3,500)
c.
$ 3,500
d.
$26,500
70. Avery Inc. would like to prepare a summary cash budget for June. The following information is
available:
•
The cash balance at June 1 was estimated to be $6,000.
•
June sales, all on account, were estimated to be $75,000. Sales are collected over a
two-month period with 60 percent collected in the month of sale and the remainder in the
subsequent month. May sales on account were $70,000.
•
Inventory purchases are expected to be $50,000 in June. The company pays for one-half of
inventory purchases in the month of purchase and the remainder in the subsequent month.
May purchases were $60,000.
•
Cash disbursements for selling and administrative expenses are expected to be $9,000 in
June.
•
Depreciation expense for June is expected to be $3,000.
What is the cash balance at the end of June expected to be?
a.
$15,000
b.
$12,000
c.
$26,000
d.
$29,000
71. Which of the following statements is false regarding a company’s budgeted financial statements?
a.
They are used for internal planning purposes.
b.
They are often called pro forma financial statements.
c.
Lending institutions should not use them as a basis for granting a loan.
d.
An error in the preparation of one budget often affects one or more other budgets.
72. Which of the following would not appear on a budgeted income statement?
a.
Net income
b.
Depreciation expense
c.
Cost of goods sold
d.
Cash received from bank loan.
73. For a manufacturing company, which of the following budgets does not have to be prepared before a
budgeted income statement is prepared?
a.
Budgeted cost of goods manufactured
b.
Budgeted cost of goods sold
c.
Budgeted balance sheet
d.
Sales budget
74. Which of the following budgets would be prepared by both manufacturing companies and
merchandising companies?
a.
Production budgets
b.
Direct material purchases budget
c.
Sales budget
d.
Manufacturing overhead budget
75. Which of the following budgets would be prepared by manufacturing companies but not
merchandising companies?
a.
Sales budget
b.
Cash receipts budget
c.
Production budget
d.
Selling and administrative expenses budget
76. Which of the following budgets is often more of a focus for a service company than a manufacturing
company?
a.
Manufacturing overhead budget
b.
Direct materials budget
c.
Labor budget
d.
Cash receipts budget
77. A budget that is established at the beginning of the period and not adjusted for different levels of
actual sales activity is called a:
a.
nonfinancial budget.
b.
flexible budget.
c.
static budget.
d.
zero-based budget.
78. A budget that budgets costs for the actual number of units produced is called a:
a.
master budget.
b.
summary cash budget.
c.
static budget.
d.
flexible budget.
79. Which type(s) of activities are static budgets less useful for?
a.
Operating activities
b.
Control activities
c.
Planning activities
d.
Both control and planning activities
80. Which type(s) of activities are flexible budgets most useful for?
a.
Operating activities
b.
Control activities
c.
Planning activities
d.
Both control and planning activities
81. Ashland Inc. is a manufacturer of small appliances. For which of the following activities would
Ashland be more likely to use a static budget than a flexible budget?
a.
For planning the amount of direct materials that will need to be purchased in the upcoming
year.
b.
For the evaluation of whether or not actual direct labor costs were reasonably close to
budgeted direct labor costs.
c.
For the comparing the actual manufacturing overhead costs with the budgeted
manufacturing overhead costs during the year.
d.
For the evaluation of whether or not employees made the most efficient use of their time.
82. Pellini Products Inc. is a manufacturer of paper products. For which of the following activities would
Pellini be more likely to use a flexible budget than a static budget?
a.
For planning the quantity of direct materials that will be need to be purchased in the
upcoming year.
b.
For planning the estimated cash receipts in the upcoming year.
c.
For estimating the number of direct labor hours employees will need to work in the
upcoming year.
d.
For the evaluation of whether or not employees made the most efficient use of their time
during the year.
83. Prior to the start of 2013, Bellamy Inc. estimated budgeted sales at 60,000 units. During 2013, 68,000
units were produced out of which 65,000 units were sold. How many units should Bellamy’s 2013
flexible sales budget be based upon?
a.
65,000 units
b.
71,000 units
c.
60,000 units
d.
66,500 units
84. Prior to the start of 2013, Proctor Inc. estimated budgeted sales at 225,000 units. At the start of 2013,
there were 8,000 units in beginning finished goods. During 2013, 215,000 units were produced and
220,000 units were sold. How many units should Proctor’s 2013 flexible sales budget be based upon?
a.
225,000 units
b.
220,000 units
c.
207,000 units
d.
212,000 units
85. Vestal Products Inc. had the following information available for 2013:
Budgeted sales for 2013
90,000 units
Units in beginning inventory (1/1/2013)
4,000 units
Units produced during 2013
100,000 units
Units in ending inventory (12/31/2013)
6,000 units
How many units should Vestal’s 2013 flexible sales budget be based upon?
a.
96,000 units
b.
102,000 units
c.
98,000 units
d.
90,000 units
86. Baker Inc., a local manufacturer of cooking tools, had the following information available for 2013:
Budgeted sales for 2013
250,000 units
Units in beginning inventory (1/1/2013)
5,000 units
Units produced during 2013
265,000 units
Units in ending inventory (12/31/2013)
2,000 units
How many units should Baker’s 2013 flexible sales budget be based upon?
a.
268,000 units
b.
265,000 units
c.
245,000 units
d.
262,000 units
87. McCourt Inc. manufacturers a unique product. The company’s controller has prepared the following
static budget for the month of February:
Estimated production
300 units
Direct labor per unit
1 hour
Direct labor required for estimated production
300 hours
Average direct labor rate per hour
$ 10
Estimated direct labor cost
$3,000
Actual production during February was 275 units and actual direct labor cost was $2,900.
If McCourt prepares a flexible budget for February, the projected direct labor cost would be:
a.
$2,750
b.
$2,900
c.
$3,000
d.
$3,165
88. Camden Products Inc. manufacturers travel accessories. The company’s controller has prepared the
following static budget of one of the product lines for the month of November:
Estimated production
1,000 units
Direct labor per unit
12 minutes
Direct labor required for estimated production
200 hours
Average direct labor rate per hour
$ 9
Estimated direct labor cost
$1,800
Actual production during November was 1,300 units and actual direct labor cost was $2,520.
If Camden prepares a flexible budget for November, the projected direct labor cost would be:
a.
$1,800
b.
$2,520
c.
$2,340
d.
$1,938
89. Colorado Springs Ltd. produces and sells bottled water. The company’s controller has the following
information available from the static budget of one of the product lines for the month of April:
Estimated production
20,000 units
Direct material per unit
2 ounces
Direct material cost per unit
$.15 per ounce
Actual production during April was 18,000 units and actual direct materials cost was $6,300.
If the company prepares a flexible budget for April, the projected direct materials cost would be:
a.
$7,000
b.
$6,300
c.
$5,400
d.
$6,000
90. Global Products produces and sells limited edition decorative plates. The company’s controller has the
following information available from the static budget of one of the product lines for the month of
April:
Estimated production
2,000 units
Direct material per unit
10 ounces
Direct material cost per unit
$.25 per ounce
Actual production during April was 1,900 units and actual direct materials cost was $4,940.
If the company prepares a flexible budget for April, the projected direct materials cost would be:
a.
$5,200
b.
$4,940
c.
$5,000
d.
$4,750
SHORT ANSWER
1. Managers use budgets for three types of activities. Describe and give a brief example of each of these
three activities.
2. There are many advantages of budgeting. List four of these advantages.
3. Other than prior years’ sales, list two other factors that are often used in the development of a sales
forecast.
4. On a production budget, what is the basic formula for computing the required production for a certain
period of time?
5. For a manufacturing company, which two budgets should be prepared before the direct materials
purchases budget is prepared?
6. If a company has prepared a sales budget, is it still necessary for them to prepare a cash receipts
budget? Why or why not?
7. Describe the process of preparing a summary cash budget.
8. Following is a list of items that appear in the budgeted financial statements of a company.
1.Cash
2. Sales
3. Interest on line of credit
4. Selling and administrative expenses
5. Accounts receivable
Identify the budgets from where each of the above is derived from.
1. Cash
Summary cash budget
2. Sales
Sales budget
3. Interest on line of credit
Summary cash budget
4. Selling and administrative expenses
Selling and administrative budget
5. Accounts receivable
Cash receipts budget
9. What is the difference between a static budget and a flexible budget?
10. Which type of budget, static or flexible, should be used by managers for control activities? Explain
your answer.
PROBLEM
1. ABC Manufacturing sells widgets for $6.00 each. The marketing department has prepared the
following second quarter sales forecast (in units) for 2013:
April
15,000
May
23,000
June
20,000
Total
58,000
Required: Prepare a sales budget for each month and the total for the quarter. Include all column and
row headings.
Estimated sales (units)
Sales price per unit
Total budgeted sales
2. Franklin Corp. sells glass vases to various florists throughout the country. Each vase sells for $.50. The
following sales forecast (in units) has been prepared for the first six months of 2013:
January
3,000
February
6,000
March
5,000
April
3,000
May
5,000
June
2,000
Historically, the cash collection of sales has been as follows: 60 percent in the month of sale, 35
percent in the month following sale, and 4 percent in the second month following sale. The remaining
1 percent is uncollectible.
Required: Prepare a cash receipts budget for the second quarter of 2013 (April through June).
3. Blooming Blossoms Ltd. sells flower seeds to retailers throughout the country. Each pack of seeds
sells for $.25. The company’s accountant has prepared the following sales forecast (in packs) for the
second quarter of the current year:
April
35,000 packs
May
40,000 packs
June
30,000 packs
Historically, the cash collection of sales has been as follows: 25 percent in the month of sale, 60
percent in the month following sale, and 15 percent in the second month following sale.
Required: Compute projected cash receipts for the month of June.
April sales collected in June:
35,000 $.25 15%
May sales collected in June:
June sales collected in June:
30,000 $.25 25%
Feb. sales collected in:
April: 6,000 $.50 4%
Mar. sales collected in:
April: 5,000 $.50 35%
May: 5,000 $.5 4%
April sales collected in:
April: 3,000 $.5 60%
May: 3,000 $.5 35%
June: 3,000 $.5 4%
May sales collected in:
May: 5,000 $.5 60%
June: 5,000 $.5 35%
June sales collected in:
June: 2,000 $.5 60%
Total cash receipts
4. Dante Enterprises sells hot sauce to restaurants throughout the south. Dante sells each jar of hot sauce
for $.90. The company’s accountant has prepared the following sales forecast (in units) for the fourth
quarter of the current year:
October
8,000 units
November
15,000 units
December
18,000 units
Historically, the cash collection of sales has been as follows: 40 percent in the month of sale, 50
percent in the month following sale, and 10 percent in the second month following sale.
Required: Compute projected cash receipts for the month of December.
5. Talley Inc. had the following purchases budgeted for the last quarter of the current year:
October
$230,000
November
300,000
December
375,000
Talley pays for one-fourth of a month’s purchases in the month of purchase and the remainder in the
following month. What are expected cash disbursements for the month of December?
November purchases paid for in December:
Total cash receipts in June
6. O’Malley Inc. manufacturers a unique product. Prior to the start of July, the company’s controller
estimated July’s production to be 4,000 units. Each unit requires one hour of direct labor at a cost of
$10 per direct labor hour.
At the end of July, it was determined that actual production was 4,680 units and actual direct labor cost
was $49,140.
Required:
A.
Prepare a static budget for July.
B.
Prepare a flexible budget for July.
C.
Which type of budget should be compared to the actual direct labor cost for control
purposes? Explain.
A.
Estimated production
Direct labor hours needed
Projected direct labor cost
B.
Estimated production (based on actual production)
Direct labor hours needed
Projected direct labor cost
$300,000 75%
December purchases paid for in December:
$375,000 25%
Total cash disbursements in December
7. Leigh Manufacturing produces widgets. Prior to the start of September, the company’s controller
estimated September’s production to be 900 units. Each unit requires two hours of direct labor at a cost
of $12 per direct labor hour.
At the end of September, it was determined that actual production was 860 units and actual direct labor
cost was $19,500.
Required:
A.
Prepare a static budget for September.
B.
Prepare a flexible budget for September.
C.
Which type of budget should be compared to the actual direct labor cost for control
purposes? Explain.
8. Hillman Products produces and sells limited edition decorative mugs. The company’s controller has the
following information available from the static budget of one of the product lines for the month of
April:
Estimated production
5,000 units
Direct material per unit
12 ounces
Direct material cost per unit
$.20 per ounce
Actual production during April was 5,400 units.
A.
Estimated production
Projected direct labor cost
B.
Estimated production (based on actual production)
Direct labor hours needed
Projected direct labor cost
Required: Prepare a flexible budget for the month of April.
9. Keep–it-Hot Inc. manufactures popular thermoses. On June 30, the company had 1,000 thermoses in
inventory. Each thermos sells for $8.00. The company’s policy is to maintain a thermos inventory
equal to 10% of next month’s sales. The company expects the following sales activity for the third
quarter of the year:
July
7,000 units
August
15,000 units
September
10,000 units
In addition, October’s sales are expected to be 9,000 units.
Required:
A.
Prepare a sales budget for the third quarter of the year.
B.
Prepare a production budget for the third quarter of the year.
Estimated sales (units)
Sales price per unit
Total budgeted sales
Estimated sales (units)
Add: Desired ending inventory
900
10. Sunshine Inc. manufactures kiddie pools. On March 31, the company had 750 pools in inventory. Each
pool sells for $25.00. The company’s policy is to maintain a pool inventory equal to 15% of next
month’s sales. The company expects the following sales activity for the second quarter of the year:
April
5,000 units
May
9,000 units
June
16,000 units
In addition, July’s sales are expected to be 20,000 units.
Required:
A.
Prepare a sales budget for the second quarter of the year.
B.
Prepare a production budget for the second quarter of the year.
11. Grainger Manufacturing Inc. produces outdoor grills. On March 31, the company had 120 grills in
inventory. The company’s policy is to maintain a grill inventory equal to 15% of next month’s sales.
The company expects the following sales activity for the second quarter of the year:
Total budgeted production needs
Less: Beginning inventory
Required production
April
800 units
May
2,000 units
June
2,600 units
Sales for July and August are expected to be 1,800 units and 1,400 units, respectively. Each completed
unit of finished product requires 3 pounds of a heat resistant plastic material which costs $4.00 per
pound. The company has determined that it needs 20 percent of next month’s raw material needs on
hand at the end of each month. The company had 600 pounds of plastic on hand at the end of March.
Required:
A.
Prepare a production budget for the second quarter of the year.
B.
Prepare a budget for the second quarter of the year showing the projected cost of the direct
materials (plastic) that will be needed.
12. Sallinger Products Inc. makes and sells grill covers. On March 31, the company had 400 covers in
inventory. The company’s policy is to maintain a cover inventory equal to 10% of next month’s
projected sales. The company expects the following sales activity for the second quarter of the year:
April
4,000 units
May
5,000 units
June
7,000 units
Sales for both July and August are expected to be 8,000 units each. Each completed unit of finished
product requires 6 yards of a plastic material which costs $.60 per yard. The company has determined
that it needs 15% of next month’s raw material needs on hand at the end of each month. The company
had 3,000 yards of plastic material on hand at the end of March.
Required:
A.
Prepare a production budget for the second quarter of the year.
B.
Prepare a budget for the second quarter of the year showing the projected cost of the direct
materials (plastic) that will be needed.
13. DSP Products Inc. makes and sells boat tarps. The purchasing manager has prepared the production
budget for the second quarter of 2013 as follows:
April
2,500 units
May
4,000 units
June
6,800 units
Production for both July and August are expected to be 7,000 units each. Each completed unit of
finished product requires 50 yards of a heavy-duty plastic material which costs $1.40 per yard. The
company has determined that it needs 15% of next month‘s raw material needs on hand at the end of
each month. The company had 18,750 yards of plastic material on hand at the end of March.
It is the company’s policy to pay for one-half of a month’s direct materials purchases in the month of
purchase and the remainder in the following month.
Required:
A.
Prepare a direct materials purchases budget for the second quarter of 2013.
B.
Assuming all cash disbursements in the month of June will be for direct materials, prepare
a cash disbursements budget for the month of June.
Required production
Material needed for production (yds)
Total budgeted projected needs (yds)
Estimated sales (units)
Total budgeted production needs
Required production (units)
Material needed for production (yds)
