Exercises
E22-21 Budgeting benefits
Learning Objective 1
This year Op. Inc. $1,880,000
David Rodriguez owns a chain of travel goods stores, Rodriguez Travel Goods. Last year, his sales staff
sold 25,000 suitcases at an average sales price of $150. Variable expenses were 60% of sales revenue,
and the total fixed expense was $120,000. This year, the chain sold more expensive product lines. Sales
were 20,000 suitcases at an average price of $250. The variable expense percentage and the total fixed
expenses were the same both years. Rodriguez evaluates the chain manager by comparing this year’s
operating income with last year’s operating income.
Prepare a performance report for this year, similar to Exhibit 22-2, which compares this year’s results
with last year’s results. How would you improve Rodriguez’s performance evaluation system to better
analyze this year’s results?
SOLUTION
RODRIGUEZ TRAVEL GOODS
Income Statement Performance Report
E22-22 Describing master budget components
Learning Objective 2
Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about
the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of
the master budget to me and tell me their purpose?” Answer Sarah’s question.
SOLUTION
A master budget is the set of budgeted financial statements and supporting schedules for the entire
The master budget models the company’s planned activities, and managers pay special attention to
ensure that the results of the budgeted income statement, the budgeted balance sheet, and the budgeted
statement of cash flows support key strategies. Creating a budget facilitates coordination and
E22-23 Preparing an operating budget—sales budget
Learning Objective 3
Jul. total sales $23,400
Sinclair Company manufactures T-shirts printed with tourist destination logos. The following table
shows sales prices and projected sales volume for the summer months:
Prepare a sales budget for Sinclair Company for the three months.
SOLUTION
SINCLAIR COMPANY
Sales Budget
For the Three Months Ended August 31
E22-24 Preparing an operating budget—sales and production budgets
Learning Objective 3
May pkg. produced 5,995
Gorman Company manufactures drinking glasses. One unit is a package of eight glasses, which sells for
$35. Gorman projects sales for April will be 5,500 packages, with sales increasing by 450 packages per
month for May, June, and July. On April 1, Gorman has 125 packages on hand but desires to maintain
an ending inventory of 10% of the next month’s sales. Prepare a sales budget and a production budget
for Gorman for April, May, and June.
SOLUTION
GORMAN COMPANY
Sales Budget
For the Three Months Ended June 30
E22-25 Preparing an operating budget—direct materials, direct labor, and manufacturing
overhead budgets
Learning Objective 3
2nd Qtr. OH $587.50
Trevor, Inc. manufactures model airplane kits and projects production at 500, 570, 300, and 450 kits for
the next four quarters. Direct materials are $10 per kit. Indirect materials are considered insignificant
and are not included in the budgeting process. Beginning Raw Materials Inventory is $200, and the
company desires to end each quarter with 30% of the materials needed for the next quarter’s production.
Trevor desires a balance of $200 in Raw Materials Inventory at the end of the fourth quarter. Each kit
requires 0.75 hours of direct labor at an average cost of $25 per hour. Manufacturing overhead is
allocated using direct labor hours as the allocation base. Variable overhead is $0.75 per kit, and fixed
overhead is $160 per quarter. Prepare Trevor’s direct materials budget, direct labor budget, and
manufacturing overhead budget for the year. Round the direct labor hours needed for production,
budgeted overhead costs, and predetermined overhead allocation rate to two decimal places. Round
other amounts to the nearest whole number.
SOLUTION
TREVOR, INC.
Direct Materials Budget
For the Year Ended December 31
E22-25, cont.
TREVOR, INC.
Direct Labor Budget
For the Year Ended December 31
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Budgeted kits to be produced
500
570
300
450
1,820
Direct labor hours per kit
× 0.75
× 0.75
× 0.75
× 0.75
× 0.75
Direct labor hours needed for production
Direct labor cost per hour
Budgeted direct labor cost
Fourth
Budgeted kits to be produced
Variable overhead cost per kit
× $0.75
× $0.75
× $0.75
× $0.75
Budgeted variable overhead
Budgeted fixed overhead
640.00
Direct labor hours (from DL budget)
Predetermined overhead allocation rate
$2,005.00 / 1,365.00 DLHr
Note: Exercise E22-25 must be completed before attempting Exercise E22-26.
E22-26 Preparing an operating budget—cost of goods sold budget
Learning Objective 3
3rd Qtr. COGS $20,895
Refer to the budgets prepared in Exercise E22-25. Determine the cost per kit to manufacture the model
airplane kits. Trevor projects sales of 400, 100, 700, and 500 kits for the next four quarters. Prepare a
cost of goods sold budget for the year. Trevor has no kits in beginning inventory. Round amounts to two
decimal places.
SOLUTION
Direct materials cost per kit
$ 10.00
Direct labor cost per kit (0.75 DLHr per kit × $25 per DLHr)
Manufacturing overhead cost per kit (0.75 DLHr per kit × $1.47 per DLHr*)
Total projected manufacturing cost per kit
Kits produced and sold
Cost per kit
Total budgeted cost of goods sold
$ 2,985
E22-27 Preparing a financial budget—schedule of cash receipts, sensitivity analysis
Learning Objectives 4, 5
1. Feb. total cash receipts $11,960
Armand Company projects the following sales for the first three months of the year: $10,600 in January;
$12,300 in February; and $12,900 in March. The company expects 60% of the sales to be cash and the
remainder on account. Sales on account are collected 50% in the month of the sale and 50% in the
following month. The Accounts Receivable account has a zero balance on January 1. Round to the
nearest dollar.
Requirements
1. Prepare a schedule of cash receipts for Armand for January, February, and March. What is the
balance in Accounts Receivable on March 31?
2. Prepare a revised schedule of cash receipts if receipts from sales on account are 60% in the month of
the sale, 30% in the month following the sale, and 10% in the second month following the sale.
What is the balance in Accounts Receivable on March 31?
SOLUTION
Requirement 1
Schedule of Cash Receipts from Customers
Total sales
Cash Receipts from Customers:
Accounts Receivable balance, January 1
Total cash receipts from customers
Accounts Receivable balance, March 31:
March – Credit sales, 50% collected in April
$ 2,580
E22-27, cont.
Requirement 2
Revised Schedule of Cash Receipts from Customers
January
February
March
Total
Total sales
$ 10,600
$ 12,300
$ 12,900
$ 35,800
January
February
March
Total
Cash Receipts from Customers:
Accounts Receivable balance, January 1
$ 0
$ 1,272
Total cash receipts from customers
$ 11,604
$ 12,736
$ 33,244
Accounts Receivable balance, March 31:
E22-28 Preparing a financial budget—schedule of cash payments
Learning Objective 4
Mar. total cash pmts. $11,600
Armand Company has the following projected costs for manufacturing and selling and administrative
expenses:
All costs are paid in month incurred except: direct materials, which are paid in the month following the
purchase; utilities, which are paid in the month after incurred; and property taxes, which are prepaid for
the year on January 2. The Accounts Payable and Utilities Payable accounts have a zero balance on
January 1. Prepare a schedule of cash payments for Armand for January, February, and March.
Determine the balances in Prepaid Property Taxes, Accounts Payable, and Utilities Payable as of March
31.
SOLUTION
Schedule of Cash Payments
January
February
March
Total
Cash Payments
Direct Materials:
Accounts Payable balance, January 1
January—Direct materials purchases paid in Feb.
February—Direct materials purchases paid in Mar.
Total payments for direct materials
3,900
4,100
Direct Labor:
January—Direct labor paid in January
3,300
February—Direct labor paid in February
3,900
Total payments for direct labor
3,900
3,500
10,700
Manufacturing Overhead:
January—Utilities for plant paid in February
650
February—Utilities for plant paid in March
650
Year—Property taxes on plant prepaid on
Jan. 2, $150/month × 12 months
1,800
Total payments for manufacturing overhead
1,800
650
650
3,100
Selling and Administrative Expenses:
January—Utilities for office paid in February
350
February—Utilities for office paid in March
350
Year—Property taxes on office prepaid on
Jan. 2 ($180/month × 12 months)
2,160
January—Office salaries paid in January
3,000
February—Office salaries paid in February
3,000
March—Office salaries paid in March
3,000
Total payments for S&A expenses
5,160
3,350
3,350
11,860
Total cash payments
March 31 liability balances:
Prepaid Property Taxes – $2,970
Accounts Payable – $4,600
Utilities Payable – $1,000
Note: Exercises E22-27 and E22-28 must be completed before attempting Exercise E22-29.
E22-29 Preparing the financial budget—cash budget
Learning Objective 4
Feb. ending cash bal. $3,367
Use the original schedule of cash receipts completed in Exercise E22-27, Requirement 1, and the
schedule of cash payments completed in Exercise E22-28 to complete a cash budget for Armand
Company.
Additional information: Armand’s beginning cash balance is $3,000, and Armand desires to maintain a
minimum ending cash balance of $3,000. Armand borrows cash as needed at the beginning of each
month in increments of $1,000 and repays the amounts borrowed in increments of $1,000 at the
beginning of months when excess cash is available. The interest rate on amounts borrowed is 8% per
year. Interest is paid at the beginning of the month on the outstanding balance from the previous month.
SOLUTION
ARMAND COMPANY
Cash Budget
For the Three Months Ended March 31
January
February
March
Total
Beginning cash balance
$ 3,000
$ 3,220
$ 3,367
$ 3,000
Cash receipts (from E22-27, Req. 1)
8,480
11,960
12,780
33,220
Cash available
11,480
15,180
16,147
36,220
Cash payments (from E22-28):
Purchases of direct materials
Direct labor
3,300
10,700
Manufacturing overhead
1,800
650
Selling and administrative expenses
5,160
11,860
Interest expense
Total cash payments
10,260
11,813
11,613
33,686
Ending cash balance before financing
1,220
Minimum cash balance desired
Projected cash excess (deficiency)
(1,780)
367
Financing:
Borrowing
2,000
0
0
Principal repayments
Total effects of financing
2,000
Ending cash balance
$ 3,367
$ 3,534
$ 3,534
E22-30 Preparing the financial budget—cash budget
Learning Objective 4
Mar. interest expense $212
Harley Company requires a minimum cash balance of $5,000. When the company expects a cash
deficiency, it borrows the exact amount required on the first of the month. Expected excess cash is used
to repay any amounts owed. Interest owed from the previous month’s principal balance is paid on the
first of the month at 12% per year. The company has already completed the budgeting process for the
first quarter for cash receipts and cash payments for all expenses except interest. Harley does not have
any outstanding debt on January 1. Complete the cash budget for the first quarter for Harley Company.
Round interest expense to the nearest whole dollar.
SOLUTION
HARLEY COMPANY
Cash Budget
For the Three Months Ended March 31
January
February
March
Total
Beginning balance
$ 5,000
$ 5,000
$ 5,000
$ 5,000
Cash receipts
18,000
26,000
40,000
84,000
Cash available
23,000
31,000
45,000
89,000
Cash payments:
All expenses except interest
35,000
30,000
32,000
97,000
Interest expense
Total cash payments
35,000
30,170
32,212
97,382
Ending balance before financing
12,788
Minimum cash balance desired
Projected cash excess (deficiency)
Financing:
Borrowing
17,000
21,170
Principal repayments
Total effects of financing
17,000
13,382
Ending cash balance
$ 5,000
$ 5,000
$ 5,000
$ 5,000
E22-31 Preparing the financial budget—budgeted balance sheet
Learning Objective 4
FG inventory $500
Berkson, Inc. has the following balance sheet at December 31, 2016:
Berkson projects the following transactions for 2017:
Sales on account, $21,000
Cash receipts from customers from sales on account, $15,800
Purchase of raw materials on account, $2,000
Payments on account, $2,000
Total cost of completed products, $15,150, which includes the following:
Raw materials used, $2,000
Direct labor costs incurred and paid, $5,800
Manufacturing overhead costs incurred and paid, $6,500
Depreciation on manufacturing equipment, $850
Cost of goods sold, $16,300
Selling and administrative costs incurred and paid, $1,000
Purchase of equipment, paid in 2017, $1,900
Prepare a budgeted balance sheet for Berkson, Inc. for December 31, 2017.
Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine
the ending balance of each account.
SOLUTION
BERKSON, INC.
Budgeted Balance Sheet
December 31, 2017
E22-31, cont.
Cash
Accounts
Receivable
Raw
Materials
Inventory
Finished
Goods
Inventory
Equipment
Accumulated
Depreciation
Accounts
Payable
Common
Stock
Retained
Earnings
Dec. 31, 2016
$ 2,100
$ 900
$ 900
$ 1,650
$ 17,000
$ (3,500)
$ 1,400
$ 7,000
$ 10,650
Sales on account
21,000
21,000
from customers
15,800
2,000
Payments
on account
(2,000)
(2,000)
Raw materials
used
2,000
Direct labor
(5,800)
5,800
Mfg. overhead
(6,500)
6,500
850
COGS
S&A
(1,000)
(1,000)
Purchase of
equipment
(1,900)
Dec. 31, 2017
$ 700
$ 6,100
$ 900
$ 500
$ 18,900
$ (4,350)
$ 1,400
$ 7,000
$ 14,350
Cash receipts
E22-32 Using sensitivity analysis
Learning Objective 5
1. Op. Inc. at 1,600 units $112,000
Bolden Company prepared the following budgeted income statement for 2017:
Requirements
1. Prepare a budgeted income statement with columns for 1,300 units, 1,400 units, and 1,600 units sold.
2. How might managers use this type of budgeted income statement?
3. How might spreadsheet software such as Excel assist in this type of analysis?
SOLUTION
Requirement 1
BOLDEN COMPANY
Budgeted Income Statement
For the Year Ended December 31, 2017
Unit Sales
1,300
1,400
1,600
Sales Revenue ($700 × units sold)
Cost of Goods Sold (55% of sales)
Gross Profit
S&A Expenses (35% of sales)
Operating Income
Requirement 2
The budgeted income statement prepared in Requirement 1 is a flexible budget prepared for various
Requirement 3
Technology, such as Excel spreadsheet software, makes it more cost-effective for managers to conduct
E22A-33 Preparing an operating budget—inventory, purchases, and cost of goods sold budget
Learning Objective 6
Appendix 22A
Stewart, Inc. sells tire rims. Its sales budget for the nine months ended September 30, 2016, follows:
In the past, cost of goods sold has been 40% of total sales. The director of marketing and the financial
vice president agree that each quarter’s ending inventory should not be below $10,000 plus 10% of cost
of goods sold for the following quarter. The marketing director expects sales of $200,000 during the
fourth quarter. The January 1 inventory was $36,000. Prepare an inventory, purchases, and cost of goods
sold budget for each of the first three quarters of the year. Compute cost of goods sold for the entire
nine-month period.
SOLUTION
STEWART, INC.
Inventory, Purchases, and Cost of Goods Sold Budget
Nine Months Ended September 30, 2016