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Chapter 8
Master Budgeting
Solutions to Questions
8-1 A budget is a detailed quantitative plan
for the acquisition and use of financial and other
1. Budgets communicate management’s
plans throughout the organization.
2. Budgets force managers to think about
and plan for the future. In the absence of the
6. Budgets define goals and objectives that
which a manager is held responsible for those
items of revenues and costs—and only those
items—that the manager can control to a
of all of management’s plans and goals for the
future, and outlines the way in which these
plans are to be accomplished. The master
cash budget.
8-5 The level of sales impacts virtually every
other aspect of the firm’s activities. It
8-7 Creating a “budgeting assumptions” tab
8-8 A self-imposed budget is one in which
persons with responsibility over cost control
estimates prepared by front-line managers are
often more accurate and reliable than estimates
8-9 The direct labor budget and other
The Foundational 15
1. The budgeted sales for July are computed as follows:
Unit sales (a) .............................
10,000
Selling price per unit (b) .............
$70
Total sales (a) × (b) ...................
$700,000
2. The expected cash collections for July are computed as follows:
July
June sales:
$588,000 × 60% ...................
$352,800
July sales:
$700,000 × 40% ...................
280,000
Total cash collections ................
$632,800
3. The accounts receivable balance at the end of July is:
July sales (a) .............................
$700,000
Percent uncollected (b) ...............
60%
Accounts receivable (a) × (b) ......
$420,000
4. The required production for July is computed as follows:
July
Budgeted sales in units ..................
10,000
Add desired ending inventory* .......
2,400
Total needs ...................................
12,400
Less beginning inventory** ............
2,000
Required production ......................
10,400
*August sales of 12,000 units × 20% = 2,400 units.
**July sales of 10,000 units × 20% = 2,000 units.
The Foundational 15 (continued)
5. The raw material purchases for July are computed as follows:
July
Required production in units of finished goods .................
10,400
Units of raw materials needed per unit of finished goods ..
5
Units of raw materials needed to meet production ............
52,000
Add desired units of ending raw materials inventory* .......
6,100
Total units of raw materials needed .................................
58,100
Less units of beginning raw materials inventory** ............
5,200
Units of raw materials to be purchased ............................
52,900
6. The cost of raw material purchases for July is computed as follows:
Units of raw materials to be purchased (a).........
52,900
Unit cost of raw materials (b) ............................
$2.00
Cost of raw materials to be purchased (a) × (b) .
$105,800
7. The estimated cash disbursements for materials purchases in July is
computed as follows:
July
June purchases:
$88,880 × 70% ......................
$62,216
July purchases:
$105,800 × 30% ....................
31,740
Total cash disbursements ...........
$93,956
8. The accounts payable balance at the end of July is:
July purchases (a) ......................
$105,800
Percent unpaid (b) .....................
70%
Accounts payable (a) × (b) .........
$74,060
The Foundational 15 (continued)
9. The estimated raw materials inventory balance at the end of July is
computed as follows:
Ending raw materials inventory (pounds) (a) ......
6,100
Cost per pound (b) ...........................................
$2.00
Raw material inventory balance (a) × (b) ..........
$12,200
10. The estimated direct labor cost for July is computed as follows:
July
Required production in units ..............
10,400
Direct labor hours per unit .................
× 2.0
Total direct labor-hours needed (a).....
20,800
Direct labor cost per hour (b) .............
$15
Total direct labor cost (a) × (b) ..........
$312,000
11. The estimated unit product cost is computed as follows:
Quantity
Cost
Total
Direct materials .......................
5 pounds
$2 per pound
$10.00
Direct labor .............................
2 hours
$15 per hour
30.00
Manufacturing overhead ..........
2 hours
$10 per hour
20.00
Unit product cost .....................
$60.00
12. The estimated finished goods inventory balance at the end of July is
computed as follows:
Ending finished goods inventory in units (a) .......
2,400
Unit product cost (b) ........................................
$60.00
Ending finished goods inventory (a) × (b) ..........
$144,000
The Foundational 15 (continued)
13. The estimated cost of goods sold for July is computed as follows:
Unit sales (a) ...................................................
10,000
Unit product cost (b) ........................................
$60.00
Estimated cost of goods sold (a) × (b) ..............
$600,000
The estimated gross margin for July is computed as follows:
Total sales (a) ..................................................
$700,000
Cost of goods sold (b) ......................................
600,000
Estimated gross margin (a) – (b) .......................
$100,000
14. The estimated selling and administrative expense for July is computed
as follows:
July
Budgeted unit sales ...................................
10,000
Variable selling and administrative ..............
expense per unit .....................................
× $1.80
Total variable expense ...............................
$18,000
Fixed selling and administrative expenses ...
60,000
Total selling and administrative expenses ...
$78,000
15. The estimated net operating income for July is computed as follows:
Gross margin (a) ..............................................
$100,000
Selling and administrative expenses (b) .............
78,000
Net operating income (a) – (b) ..........................
$ 22,000
