Chapter 22
Master Budgets and Planning
QUESTIONS
1. A budget helps managers control and monitor a business by 1) communicating
plans to employees, 2) coordinating the activities of different parts of the
2. Two common benchmarks used by managers to evaluate performance are: past
3. Continuous budgeting provides managers a full set of updated budgets each time a
4. Three common short-term horizons for planning and budgeting purposes are:
monthly, quarterly, and annually. A semiannual planning horizon is also popular.
5. Budgeting can be a strong positive motivating force if employees are involved or
consulted in the process. This participation promotes their commitment to reaching
6. Budgeting helps management coordinate and plan business activities by providing
7. The sales budget reflects the expected sales to be made over a period of time, stated
8. A selling expense budget is a plan of the expenses to be incurred to produce the
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9. Budgeting promotes good decision making by requiring managers to conduct
research (or analysis) and by focusing their attention on the future.
10. A cash budget shows the planned cash receipts and cash disbursements for each
budget period, including any loans to be received or repaid. Since the operating
11. A production budget shows the number of units to be produced each budget period.
12. A manager of an Apple store would have responsibility for and decision control over
13. With the exception of the decision to operate, the manager of an Arctic Cat
distribution center is not likely to engage in a substantial amount of long-term
14.
Budget Participant
Description
Sales manager ………………..
Information on estimated sales (units and dollars).
Production manager ………..
Number of units to produce based on estimated sales.
Manufacturing manager …..
Amount of direct materials, direct labor, and
manufacturing overhead to produce the estimated level
of production.
Sales manager ………………..
Cost of selling the estimated sales level.
General & admini-
strative managers …………...
Cost to support operations; most often are fixed costs.
Capital expenditures
committee ……………………...
Prepare plans to have available plant assets necessary
to carry on business activities.
Cash managers ……………....
Working with the above budgets, this team will prepare
cash flow analysis.
Accounting and finance
staff ……………………………....
Financial budgets prepared from above information.
QUICK STUDIES
Quick Study 22-1 (5 minutes)
Quick Study 22-2 (10 minutes)
Three useful guidelines to help motivate employees with budgeting are
Quick Study 22-3 (15 minutes)
Montel Company
Computation of Budgeted Cost of Purchases
For Month Ended July 31
Budgeted ending inventory ……………………………………………………….
$ 40,000
Budgeted cost of goods to be sold [$600,000 x (1 – 40%)] …………………
360,000
Required available merchandise …………………………………………….…………
400,000
Less budgeted beginning inventory ……………………………………….…………
50,000
Budgeted cost of purchases ………………………………………………….……
$350,000
Quick Study 22-4 (10 minutes)
1. The bottom-up approach to budgeting is considered more successful
because without active employee involvement in preparing budget
2. Examples of bottom-up budgeting include
• Involving the sales department in preparing sales estimates.
• Involving the production department in preparing its own expense
budget.
Quick Study 22-5 (15 minutes)
Computation of budgeted Accounts Receivable balance as of July 31
Sales month
Total Sales
Credit
Sales*
Percent Still
Uncollected*
Amount
Uncollected
June ……………..….
$420,000
$168,000
10%
$ 16,800
July ………………….
398,000
159,200
80%
127,360
Total …………….….
$144,160
* Credit sales are 40% of total sales—of these credit sales, 20% are collected in the sale month,
70% are collected in the month after sale, and 10% are collected in the second month after sale.
Quick Study 22-6 (15 minutes)
Gado Merchandising Company
Cash Budget
For Month Ended March 31
Beginning cash balance ………………………………………………….
$ 72,000
Cash receipts from sales ………………………………………….…….
300,000
Total cash available ………………………………………………….……
$372,000
Cash disbursements
Payments for purchases ………………………………………….…….
140,000
Salaries …………………………………………………………………..…….
80,000
Other expenses …………………………..…………………………..
45,000
Repayment of bank loan ………………………………………….…….
20,000
Total cash disbursements ……………………………………….…….
285,000
Ending cash balance ………………………………………………..…….
$ 87,000
Quick Study 22-7 (10 minutes)
1. Activity-based budgeting requires managers to focus on the activities of
2. Traditional budgeting consists of listing the amount of resources
Quick Study 22-8 (15 minutes)
Forrest Company
Production Budget
For Month Ended November 30
Next month’s budgeted sales ……………………………………………………...
350,000
Ratio of inventory to future sales ………………………………………………...
x 10%
Budgeted ending inventory ……………………………………………………….
35,000
Add budgeted sales for the month ……………………………………………...
400,000
Required units of available production ………………………………………..
435,000
Less beginning inventory …………………………………………………………...
40,000
Units to be produced …………………………………………………………………..
395,000
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Quick Study 22-9 (15 minutes)
Forrest Company
Factory Overhead Budget
For Month Ended November 30
Units to be produced (from QS 22-8) …………………………………………...
395,000
Variable factory overhead rate per unit ………………………………………..
x $1.50
Budgeted variable overhead ……………………………………………………….
$ 592,500
Budgeted fixed overhead …………………………………………………………....
4,600,000
Budgeted total overhead ……………………………………………………………..
$5,192,500
Quick Study 22-10 (10 minutes)
Grace
Sales Budget
For Month Ended June 30
Prior month’s unit sales ……………………………………………………………...
1,000
Plus 4% growth in unit sales ……………………………………………………....
40
Projected June sales (units) ……………………………………………………….
1,040
Selling price per unit …………………………………………………………………..
x $250
Projected sales for June ……………………………………………………………..
$260,000
Quick Study 22-11 (10 minutes)
Grace
Selling Expense Budget
For Month Ended June 30
Budgeted sales (from QS 22-10) ………………………………………………....
$260,000
Sales commission percent ………………………………………………………....
x 8%
Sales commissions …………………………………………………………………....
20,800
Sales manager’s monthly salary ………………………………………………....
6,000
Projected selling expense for June ……………………………………………..
$ 26,800
Quick Study 22-12 (10 minutes)
Grace
Budgeted Cash Receipts
For Month Ended June 30
Budgeted sales (from QS 22-10) ………………………………………………....
$260,000
Less ending accounts receivable ($260,000 x 0.40) ……………………...
104,000
Cash sales ($260,000 x 0.60)) ……………………………………………………...
156,000
Collections of last month’s receivables* ……………………………………...
100,000
Total cash receipts ……………………………………………………………………..
$256,000
*$250,000 x 40% = $100,000. Last month’s sales of $250,000 from QS 22-10.
Quick Study 22-13 (15 minutes)
Sales …………………………..…………………………………………………………….. BIS
Office salaries paid ……………………………………………………………………. BIS
Quick Study 22-14 (10 minutes)
CANDLE SHOPPE
Cash Receipts Budget
For Month Ended September 30
Cash receipts from September cash sales (40% x $170,000) ………...
$ 68,000
Collection of prior month’s receivables (60% x $150,000) …………....
90,000
Total cash receipts ……………………………………………………………………..
$158,000
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Quick Study 22-15 (10 minutes)
WELLS COMPANY
Budgeted Cash Receipts
For Month Ended November 30
Cash receipts from November cash sales (20% x $80,000) …………...
$ 16,000
Collection of October’s sales (70% x $66,000) ……………………………...
46,200
Collection of September’s sales (10% x $55,000) ………………………....
5,500
Total cash receipts ……………………………………………………………………..
$ 67,700
Quick Study 22-16 (10 minutes)
GORDANDS
Cash Disbursements for Merchandise (Budgeted)
For Month Ended September 30
Cash disbursements for September purchases (25% x $720,000) ....
$180,000
Cash disbursements for August purchases (75% x $600,000) ………..
450,000
Total cash disbursements …………………………………………………………..
$630,000
Quick Study 22-17 (10 minutes)
MEYER CO.
Cash Disbursements for Merchandise (Budgeted)
For January, February, and March
January
February
March
Purchases …………………………………………..…
$15,800
$18,600
$20,200
Cash disbursements for
Current month’s purchases (40%) ………
$ 6,320
$ 7,440
$ 8,080
Prior month’s purchases (60%) ……………
22,000*
9,480
11,160
Total cash disbursements for purchases ..…
$28,320
$16,920
$19,240
* Accounts payable balance at December 31
Quick Study 22-18 (5 minutes)
RAIDER-X CORP.
Purchases Budget (in units)
For Month Ended April 30
Budgeted ending inventory (130% x 3,000) …………………………………..
3,900
Budgeted sales for April (units) …………………………………………………..
18,000
Required units of available inventory …………………………………………..
Less beginning inventory (units) ………………………………………………...
21,900
(3,000)
Units to be purchased ………………………………………………………………...
18,900
Quick Study 22-19 (15 minutes)
LEXI COMPANY
Merchandise Purchases Budget
For April, May, and June
April
May
June
Next month’s budgeted sales (units) ………
1,220,000
980,000
1,020,000
Ratio of inventory to future sales ……………
x 30%
x 30%
x 30%
Budgeted ending inventory (units) …………
366,000
294,000
306,000
Add budgeted sales (units) ………………….…
1,040,000
1,220,000
980,000
Required units of available merch. ……..…
1,406,000
1,514,000
1,286,000
Deduct beginning inventory (units) ……..…
(280,000)
(366,000)
(294,000)
Units to be purchased …………………………..
1,126,000
1,148,000
992,000
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Quick Study 22-20 (10 minutes)
CHAMP, INC.
Production Budget
For Month Ended May 31
Next month’s budgeted sales (units) …………………………………………...
200
Ratio of inventory to future sales ………………………………………………...
x 60%
Budgeted ending inventory (units) ……………………………………………...
120
Add budgeted sales for the month (units) …………………………………...
180
Required units of available production ………………………………………..
300
Deduct beginning inventory (units) ……………………………………………..
(50)
Units to be produced …………………………………………………………………..
250
Quick Study 22-21 (10 minutes)
ZORTEK CORP.
Direct Materials Budget
For Month Ended January 31
Budget production (units) …………………………………………………………...
400
Materials requirements per unit …………………………………………………..
x 5 lbs.
Materials needed for production (lbs.) ………………………………………...
2,000
Add budgeted ending inventory (200* units x 5 lbs. per unit x 40%) ....
400
Total materials requirements (lbs.) ……………………………………………...
2,400
Deduct beginning inventory (lbs.) ………………………………………………..
(130)
Materials to be purchased (lbs.) …………………………..……………………...
2,270
Materials price per pound …………………………………………………………...
$ 2
Total cost of direct materials purchases ……………………………………...
$4,540
*February’s budgeted production.
Quick Study 22-22 (5 minutes)
TORA CO.
Direct Labor Budget
For Month Ended July 31
Budget production (units) …………………………………………………………...
1,020
Labor requirements per unit (hours) …………………………………………...
x 2
Total labor hours needed …………………………………………………………....
2,040
Labor rate (per hour) …………………………………………………………………..
$ 20
Labor dollars ……………………………………………………………………………...
$40,800
Quick Study 22-23 (10 minutes)
SCORA INC.
Sales Budget
For January, February, and March
Budgeted
Unit Sales
Budgeted
Unit Price
Budgeted
Total Sales
January …………………………………………………
1,200
$50
$ 60,000
February ……………………………………………..…
2,000
50
100,000
March ……………………………………………………
1,600
50
80,000
Totals for the quarter …………………………..
4,800
$50
$240,000
Fundamental Accounting Principles, 21st Edition
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Quick Study 22-24 (10 minutes)
SCORA INC.
Cash Receipts Budget
For January, February, and March
January
February
March
Sales (from QS 22-23) …………………………..
$60,000
$100,000
$80,000
Less ending accts. receivable (60%) ………
36,000
60,000
48,000
Cash receipts from
Cash sales (40% of sales) …………………..…
24,000
40,000
32,000
Collections of prior month’s receivables ……
15,000
36,000
60,000
Total cash receipts …………………………….…
$39,000
$76,000
$92,000
Quick Study 22-25 (10 minutes)
SCORA INC.
Selling Expense Budget
For January, February, and March
January
February
March
Budgeted sales (from QS 22-23) ………….…
$60,000
$100,000
$80,000
Sales commission percent ………………….…
x 10%
x 10%
x 10%
Sales commissions ………………………………
6,000
10,000
8,000
Sales manager monthly salary …………….…
6,000
6,000
6,000
Total selling expenses ……………………….…
$12,000
$ 16,000
$14,000
Quick Study 22-26 (5 minutes)
MESSERS COMPANY
Cash Budget
For Month Ended February 28
Beginning cash balance ……………………………………………………………...
$ 20,000
Cash receipts ……………………………………………………………………………..
75,000
Total cash available ……………………………………………………….…………...
95,000
Cash disbursements…………………………………………………………………...
(100,250)
Preliminary cash balance ……………………………………………………….…...
$ (5,250)
Additional loan from bank …………………………………………………………..
10,250
Ending cash balance …………………………………………………………………..
$ 5,000
Based on the cash budget above, the company must borrow $10,250 during
February to maintain a $5,000 cash balance.
Quick Study 22-27 (10 minutes)
1.
Sales (current year) ………………………………………………………..
(in € millions)
€25,400
Sales growth (€25,400 x 3%) ……………………………………………
762
Budgeted sales (next year) ……………………………………………..
€26,162
2.
Note: Assume sales of €26,000 for this question.
Budgeted selling expenses (€26,000 x 20%) …………………….
€5,200
Budgeted general and admin. expenses (€26,000 x 4%) …..
1,040
EXERCISES
Exercise 22-1 (25 minutes)
KAYAK COMPANY
Cash Budget
For January, February, and March
January
February
March
Beginning cash balance …………………………
$ 30,000
$ 30 ,000
$ 69,294
Cash receipts ……………………………………..…
525,000
400,000
450,000
Total cash available …………………………….…
555,000
430,000
519,294
Cash disbursements………………………………
475,000
350,000
525,000
Interest expense
January ($60,000 x 1%) …………………….…
600
February ($10,600 x 1%) …………………….…
________
106
________
Preliminary cash balance …………………….…
79,400
79,894
(5,706)
Additional loan from bank …………………..…
35,706
Repayment of loan to bank ………………….…
(49,400)
(10,600)
________
Ending cash balance …………………………..
$ 30,000
$ 69,294
$ 30,000
Ending loan balance*…………………………..
$ 10,600
$ 0
$ 35,706
*Loan balance is $60,000 at the beginning of January. January’s ending loan balance is
computed as $60,000 – 49,400.
Exercise 22-2 (30 minutes)
1. Merchandise Purchases Budget
Note: Shaded numbers represent known information provided in the exercise.
Walker Company
Merchandise Purchases Budget
For July, August, and September
July
August
September
Next month’s budgeted sales …………..
315,000
270,000
200,000
(10)
Ratio of inventory to next month sales .
x 15%
(9)
x 15%
(9)
x 15%
(9)
Budgeted ending inventory ……………..
47,250
(6)
40,500
(3)
30,000
Add budgeted sales for month …………
180,000
315,000
270,000
Required units available inventory …..
227,250
(7)
355,500
(4)
300,000
(1)
Less beginning inventory ………………..
27,000
(8)
47,250
(5)
40,500
(2)
Budgeted merchandise purchases …..
200,250
308,250
259,500
The following notes (1) through (10) provide supporting calculations and explanations.
Notes: (1) September required units
Ending inventory
30,000
Add budgeted sales
270,000
Total required in September
300,000
(2) September beginning Inventory
Total required (1 above)
300,000
Less budgeted purchases
(259,500)
September beginning inventory
40,500
(3) September Beginning Inventory = August Ending Inventory
(4) August required units
Ending inventory
40,500
Add budgeted sales
315,000
Total required in August
355,500