Chapter 7
Master Budgeting
Solutions to Questions
7-1 A budget is a detailed quantitative plan
for the acquisition and use of financial and other
7-2
1. Budgets communicate management’s
2. Budgets force managers to think about
and plan for the future. In the absence of the
3. The budgeting process provides a means
4. The budgeting process can uncover
5. Budgets coordinate the activities of the
entire organization by integrating the plans of its
6. Budgets define goals and objectives that
7-3 Responsibility accounting is a system in
which a manager is held responsible for those
items of revenues and costs—and only those
7-4 A master budget represents a summary
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
income statement, budgeted balance sheet, and
cash budget.
7-5 The level of sales impacts virtually every
other aspect of the firm’s activities. It
cash budget and budgeted income statement
although related, concepts. Planning involves
achieve those goals. Control, by contrast,
involves the means by which management
7-7 Creating a “budgeting assumptions” tab
the projected financial statements.
7-8 A self-imposed budget is one in which
views and judgments are valued. (2) Budget
estimates prepared by front-line managers are
often more accurate and reliable than estimates
prepared by top managers who have less
7-9 The direct labor budget and other
budgets can be used to forecast workforce
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
Exercise 7-1 (20 minutes)
1.
April
May
June
Total
February sales:
$230,000 × 10% …….
$ 23,000
$ 23,000
March sales: $260,000
× 70%, 10% ………….
182,000
$ 26,000
208,000
April sales: $300,000 ×
20%, 70%, 10% …….
60,000
210,000
$ 30,000
300,000
May sales: $500,000 ×
20%, 70% …………….
100,000
350,000
450,000
June sales: $200,000 ×
20% …………………….
40,000
40,000
Total cash collections ….
$265,000
$336,000
$420,000
$1,021,000
Notice that even though sales peak in May, cash collections peak in
June. This occurs because the bulk of the company’s customers pay in
the month following sale. The lag in collections that this creates is even
more pronounced in some companies. Indeed, it is not unusual for a
company to have the least cash available in the months when sales are
greatest.
2. Accounts receivable at June 30:
From May sales: $500,000 × 10% ……………………
$ 50,000
From June sales: $200,000 × (70% + 10%) ………
160,000
Total accounts receivable at June 30 …………………
$210,000
Exercise 7-2 (10 minutes)
April
May
June
Quarter
Budgeted unit sales ……………..
50,000
75,000
90,000
215,000
Add desired units of ending
finished goods inventory* ……
7,500
9,000
8,000
8,000
Total needs ………………………..
57,500
84,000
98,000
223,000
Less units of beginning finished
goods inventory ………………..
5,000
7,500
9,000
5,000
Required production in units …..
52,500
76,500
89,000
218,000
*10% of the following month’s sales in units.
Exercise 7-3 (15 minutes)
Quarter—Year 2
First
Second
Third
Fourth
Year
Required production in units of finished
goods ………………………………………………
60,000
90,000
150,000
100,000
400,000
Units of raw materials needed per unit of
finished goods …………………………………..
× 3
× 3
× 3
× 3
× 3
Units of raw materials needed to meet
production ………………………………………..
180,000
270,000
450,000
300,000
1,200,000
Add desired units of ending raw materials
inventory ………………………………………….
54,000
90,000
60,000
42,000
42,000
Total units of raw materials needed ………….
234,000
360,000
510,000
342,000
1,242,000
Less units of beginning raw materials
inventory ………………………………………….
36,000
54,000
90,000
60,000
36,000
Units of raw materials to be purchased ……..
198,000
306,000
420,000
282,000
1,206,000
Unit cost of raw materials ……………………….
× $1.50
× $1.50
× $1.50
× $1.50
× $1.50
Cost of raw materials to purchased …………..
$297,000
$459,000
$630,000
$423,000
$1,809,000
Exercise 7-4 (20 minutes)
1. Assuming that the direct labor workforce is adjusted each quarter, the direct labor budget is:
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
Required production in units ……………………….
8,000
6,500
7,000
7,500
29,000
Direct labor time per unit (hours) …………………
× 0.35
× 0.35
× 0.35
× 0.35
× 0.35
Total direct labor-hours needed……………………
2,800
2,275
2,450
2,625
10,150
Direct labor cost per hour …………………………..
× $12.00
× $12.00
× $12.00
× $12.00
× $12.00
Total direct labor cost ………………………………..
$ 33,600
$ 27,300
$ 29,400
$ 31,500
$121,800
2. Assuming that the direct labor workforce is not adjusted each quarter and that overtime wages are
paid, the direct labor budget is:
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
Required production in units ………………………
8,000
6,500
7,000
7,500
Direct labor time per unit (hours) ………………..
× 0.35
× 0.35
× 0.35
× 0.35
Total direct labor-hours needed ………………….
2,800
2,275
2,450
2,625
Regular hours paid …………………………..………
2,600
2,600
2,600
2,600
Overtime hours paid …………………………………
200
0
0
25
Wages for regular hours (@ $12.00 per hour) ..
$31,200
$31,200
$31,200
$31,200
$124,800
Overtime wages (@ 1.5 × $12.00 per hour) ….
3,600
0
0
450
4,050
Total direct labor cost ……………………………….
$34,800
$31,200
$31,200
$31,650
$128,850
Exercise 7-5 (15 minutes)
1.
Yuvwell Corporation
Manufacturing Overhead Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
Budgeted direct labor-hours …………………………..
8,000
8,200
8,500
7,800
32,500
Variable manufacturing overhead rate ……………..
× $3.25
× $3.25
× $3.25
× $3.25
× $3.25
Variable manufacturing overhead ……………………
$26,000
$26,650
$27,625
$25,350
$105,625
Fixed manufacturing overhead ……………………….
48,000
48,000
48,000
48,000
192,000
Total manufacturing overhead ……………………….
74,000
74,650
75,625
73,350
297,625
Less depreciation ………………………………………..
16,000
16,000
16,000
16,000
64,000
Cash disbursements for manufacturing overhead .
$58,000
$58,650
$59,625
$57,350
$233,625
2.
Total budgeted manufacturing overhead for the year (a) …
$297,625
Budgeted direct labor-hours for the year (b) …………………
32,500
Predetermined overhead rate for the year (a) ÷ (b) ……….
$9.16
Exercise 7-6 (15 minutes)
Weller Company
Selling and Administrative Expense Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
Budgeted unit sales …………………………..………..
15,000
16,000
14,000
13,000
58,000
Variable selling and administrative expense per
unit ……………………………………………………….
× $2.50
× $2.50
× $2.50
× $2.50
× $2.50
Variable selling and administrative expense ………
$ 37,500
$ 40,000
$ 35,000
$ 32,500
$145,000
Fixed selling and administrative expenses:
Advertising………………………………………………
8,000
8,000
8,000
8,000
32,000
Executive salaries ……………………………………..
35,000
35,000
35,000
35,000
140,000
Insurance ……………………………………………….
5,000
5,000
10,000
Property taxes ………………………………………….
8,000
8,000
Depreciation ……………………………………………
20,000
20,000
20,000
20,000
80,000
Total fixed selling and administrative expenses ….
68,000
71,000
68,000
63,000
270,000
Total selling and administrative expenses …………
105,500
111,000
103,000
95,500
415,000
Less depreciation ………………………………………..
20,000
20,000
20,000
20,000
80,000
Cash disbursements for selling and
administrative expenses ……………………………..
$ 85,500
$ 91,000
$ 83,000
$ 75,500
$335,000
Exercise 7-7 (15 minutes)
Garden Depot
Cash Budget
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
Beginning cash balance .
$ 20,000
$ 10,000
$ 35,800
$ 25,800
$ 20,000
Total cash receipts ……..
180,000
330,000
210,000
230,000
950,000
Total cash available ……
200,000
340,000
245,800
255,800
970,000
Less total cash
disbursements …………
260,000
230,000
220,000
240,000
950,000
Excess (deficiency) of
cash available over
disbursements …………
(60,000)
110,000
25,800
15,800
20,000
Financing:
Borrowings (at
beginnings of
quarters)* ……………
70,000
70,000
Repayments (at ends
of quarters) ………….
(70,000)
(70,000)
Interest§ ………………..
(4,200)
(4,200)
Total financing …………..
70,000
(74,200)
(4,200)
Ending cash balance …..
$ 10,000
$ 35,800
$ 25,800
$ 15,800
$ 15,800
* Since the deficiency of cash available over disbursements is $60,000,
the company must borrow $70,000 to maintain the desired ending cash
balance of $10,000.
§ $70,000 × 3% × 2 = $4,200.
Exercise 7-8 (10 minutes)
Gig Harbor Boating
Budgeted Income Statement
Sales (460 units × $1,950 per unit) ………………….
$897,000
Cost of goods sold (460 units × $1,575 per unit) …
724,500
Gross margin ……………………………………………….
172,500
Selling and administrative expenses* ………………..
139,500
Net operating income …………………………………….
33,000
Interest expense …………………………………………..
14,000
Net income ………………………………………………….
$ 19,000
*(460 units × $75 per unit) + $105,000 = $139,500.
Exercise 7-9 (15 minutes)
Mecca Copy
Budgeted Balance Sheet
Assets
Current assets:
Cash* …………………………………………
$12,200
Accounts receivable ……………………….
8,100
Supplies inventory …………………………
3,200
Total current assets …………………………
$23,500
Plant and equipment:
Equipment …………………………………..
34,000
Accumulated depreciation ……………….
(16,000)
Plant and equipment, net ………………….
18,000
Total assets …………………………..……….
$41,500
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ………………………….
$ 1,800
Stockholders’ equity:
Common stock ……………………………..
$ 5,000
Retained earnings# ……………………….
34,700
Total stockholders’ equity ………………….
39,700
Total liabilities and stockholders’ equity ..
$41,500
*Plug figure.
#
Retained earnings, beginning balance ..
$28,000
Add net income …………………………….
11,500
39,500
Deduct dividends …………………………..
4,800
Retained earnings, ending balance ……
$34,700
Exercise 7-10 (45 minutes)
1. Production budget:
July
August
Septem-
ber
October
Budgeted unit sales ……………
35,000
40,000
50,000
30,000
Add desired units of ending
finished goods inventory …..
11,000
13,000
9,000
7,000
Total needs ………………………
46,000
53,000
59,000
37,000
Less units of beginning
finished goods inventory ….
10,000
11,000
13,000
9,000
Required production in units ..
36,000
42,000
46,000
28,000
2. During July and August the company is building inventories in
anticipation of peak sales in September. Therefore, production exceeds
Exercise 7-10 (continued)
3. Direct materials budget:
July
August
Septem-
ber
Third
Quarter
Required production in units of finished goods …….
36,000
42,000
46,000
124,000
Units of raw materials needed per unit of finished
goods ………………………………………………………
× 3 cc
× 3 cc
× 3 cc
× 3 cc
Units of raw materials needed to meet production ..
108,000
126,000
138,000
372,000
Add desired units of ending raw materials
inventory …………………………………………………..
63,000
69,000
42,000
*
42,000
Total units of raw materials needed …………………..
171,000
195,000
180,000
414,000
Less units of beginning raw materials inventory …..
54,000
63,000
69,000
54,000
Units of raw materials to be purchased ………………
117,000
132,000
111,000
360,000
* 28,000 units (October production) × 3 cc per unit = 84,000 cc;
84,000 cc × 1/2 = 42,000 cc.
As shown in part (1), production is greatest in September; however, as shown in the raw material
purchases budget, purchases of materials are greatest a month earlier—in August. The reason for the
large purchases of materials in August is that the materials must be on hand to support the heavy
production scheduled for September.
Exercise 7-11 (20 minutes)
Quarter (000 omitted)
1
2
3
4
Year
Beginning cash balance ………………………….
$ 6
*
$ 5
$ 5
$ 5
$ 6
Add collections from customers ……………….
65
70
96
*
92
323
*
Total cash available ……………………………….
71
*
75
101
97
329
Less cash disbursements:
Purchase of inventory ………………………….
35
*
45
*
48
35
*
163
Selling and administrative expenses ……….
28
30
*
30
*
25
113
*
Equipment purchases ………………………….
8
*
8
*
10
*
10
36
*
Dividends …………………………………………
2
*
2
*
2
*
2
*
8
Total cash disbursements ……………………….
73
85
*
90
72
320
Excess (deficiency) of cash available over
disbursements …………………………………..
(2)
*
(10)
11
*
25
9
Financing:
Borrowings ……………………………………….
7
15
*
0
0
22
Repayments (including interest) …………….
0
0
(6)
(17)
*
(23)
Total financing ……………………………………..
7
15
(6)
(17)
(1)
Ending cash balance ……………………………..
$ 5
$ 5
$ 5
$ 8
$ 8
* Given.
Exercise 7-12 (30 minutes)
1. Schedule of expected cash collections:
Month
July
August
Sept.
Quarter
From accounts receivable .
$136,000
$136,000
From July sales:
35% × 210,000 …………
73,500
73,500
65% × 210,000 …………
$136,500
136,500
From August sales:
35% × 230,000 …………
80,500
80,500
65% × 230,000 …………
$149,500
149,500
From September sales:
35% × 220,000 …………
77,000
77,000
Total cash collections …….
$209,500
$217,000
$226,500
$653,000
2. a. Merchandise purchases budget:
July
August
Sept.
Total
Budgeted cost of goods sold
(60% of sales)………………….
$126,000
$138,000
$132,000
$396,000
Add desired ending
merchandise inventory* ……..
41,400
39,600
43,200
43,200
Total needs ………………………..
167,400
177,600
175,200
439,200
Less beginning merchandise
inventory …………………………
62,000
41,400
39,600
62,000
Required purchases ……………..
$105,400
$136,200
$135,600
$377,200
July
August
Sept.
Total
From accounts payable ……….
$ 71,100
$ 71,100
For July purchases ……………..
42,160
$ 63,240
105,400
For August purchases …………
54,480
$ 81,720
136,200
For September purchases ……
54,240
54,240
Total cash disbursements …….
$113,260
$117,720
$135,960
$366,940
Exercise 7-12 (continued)
3.
Beech Corporation
Income Statement
For the Quarter Ended September 30
Sales ($210,000 + $230,000 + $220,000) ..
$660,000
Cost of goods sold (Part 2a) …………………
396,000
Gross margin ……………………………………..
264,000
Selling and administrative expenses
($60,000 × 3 months) ………………………
180,000
Net operating income…………………………..
84,000
Interest expense ………………………………..
0
Net income ……………………………………….
$ 84,000
4.
Beech Corporation
Balance Sheet
September 30
Assets
Cash ($90,000 + $653,000 – $366,940 – ($55,000 ×
3)) ……………………………………………………………
$211,060
Accounts receivable ($220,000 × 65%) …………………
143,000
Inventory (Part 2a) ……………………………………………
43,200
Plant and equipment, net ($210,000 – ($5,000 ×3)) …
195,000
Total assets …………………………..…………………………
$592,260
Accounts payable ($135,600 × 60%) …………………….
Common stock (Given) ………………………………………
Retained earnings ($99,900 + $84,000) …………………
Total liabilities and stockholders’ equity ………………….
$592,260