Chapter 9
The Use of Budgets in Planning and Decision Making
Concept Questions
1. (LO1—Concepts and purposes of budgets)
By their nature, budgets are future oriented and involve the use of estimates. In
2. (LO1—The budgeting process)
A personal budget would begin with estimated cash inflows from a job or other
3. (LO2—The sales budget)
The sales budget is the most important budget because it is used at the
4. (LO2—The sales forecast)
Major factors considered in a sales forecast include anticipated consumer
demand, the impact of competitors, and the economic outlook for the anticipated
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5. (LO3—The production budget)
6. (LO4—Preparation of material, labor, and overhead budgets)
This statement is false in that the expected level of production affects the
7. (LO5—The cash receipts budget)
Cash receipts budgets are used in a variety of decisions, including the timing of
8. (LO5—Focusing on cash flow)
Budgets focus on cash flow because the timing of cash flows is critical to the
9. (LO6—Pro forma financial statements)
Internally, budgeted income statements are used to help plan estimated tax
10. (LO7—Financial budgets for merchandising and service companies)
Financial budgets for merchandising companies differ from financial budgets for
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11. (LO8—Static versus flexible budgets)
Static budgets are based on estimated production and sales and are not adjusted
Brief Exercises
1. (LO1—Advantages of budgeting)
a. future
2. (LO2—Forecasting sales)
3. (LO4—Purchases budget)
Projected production (units) 500,000
× 2 units of raw materials (RM) per unit of
× 2
4. (LO5—Cash receipts budget)
Cash Receipts Budget
March 31
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5. (LO6, 7—Budgeting basics)
a. False
6. (LO8—Flexible budget)
Flexible
Budget
Actual
Difference
Estimated production (boxes) 26,400 26,400 —
Exercises
7. (LO2—Sales budget)
January February March Quarter
8. (LO2—Sales budget)
January February March Quarter
9. (LO2—Sales forecast)
Marcy’s company may consider many factors, including historical data, such as
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10. (LO2, 3—Sales Budget)
January February March Quarter
11. (LO3—Production budget)
Production Budget
August
Projected sales (units) 1,000
12. (LO4—Purchases budget)
90,000 pounds of flour should be purchased during the year.
Projected production (boxes) 200,000
13. (LO4—Purchases budget)
Projected sales of modems (modems) 420,000
Add: Desired ending inventory 42,000
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14. (LO4—Purchases Budget)
1st and 2nd Quarters
Required production in units 400,000
15. (LO4—Purchases budget for a merchandising company)
16. (LO4—Direct labor budget)
April May June 2nd Quarter
Required production (# of hammocks) 15,000 12,500 12,500 40,000
May
Projected sales (units) 100
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17. (LO4—Selling and administrative budget)
18. (LO5—Cash receipts budget)
Sales April May June
February ($156,250) $ 14,062.50 (9%)
19. (LO5—Cash receipts budget)
Cash Receipts Budget
Sales January February March March 31
balance
Variable selling and administrative expenses
Store supplies $ 450
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20. (LO5—Cash summary budget)
Note: Missing numbers are shown in bold font in the following solution.
Benson, Inc.
Quarterly Cash Budget ($000 omitted)
1 2 3 4
Beginning cash balance $ 10 $ 7$ 7 $ 7
Cash collections 76 93 126 80
21. (LO5—Cash disbursements budget)
Robyn’s Rocket Shop
Cash Disbursements Budget
for the Month of June
Labor expenses $10,000
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22. (LO6—Budgeted income statement)
23. (LO8—Flexible budget)
Flexible
Budget
Actual
Difference
Estimated production (bars) 53,000 53,000 —
Robyn’s Rocket Shop
Budgeted Income Statement
for the Quarter Ended Sept. 30
Sales $185,000
Cost of goods sold 56,800
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Problems
24. (LO1, 2—The sales budget and CVP analysis)
A. Calculation of average revenue per mechanic hour:
B. Monthly sales budget—10 percent increase in budgeted hours
Month
Budgeted
Hours
Rate per
Mechanic Hour
Budgeted
Revenues
January 1,291.4 $9.92 $ 12,811
February 1,162.7 9.92 11,534
Note: “Budgeted Hours” rounded to one decimal and “Budgeted Revenue”
rounded to the nearest dollar.
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C. Monthly sales budget—5 percent increase in hourly rate
Note: “Rate per Mechanic Hour” rounded to two decimals and “Budgeted
Revenues” rounded to the nearest dollar.
D. A 10 percent increase in sales volume will result in revenue of $249,111 for
25. (LO2, 3, and 4—Sales, production, and material purchases budgets)
A. October November December
Projected sales (units) 6,500 7,200 9,600
B. October November December
Projected sales (units) 6,500 7,200 9,600
Month
Budgeted
Hours
Rate per
Mechanic
Hour
Budgeted
Revenues
January 1,174 $10.42 $ 12,233
February 1,057 10.42 11,014
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C. October November December
Projected production (units) 7,220 7,440 9,120
26. (LO2, 5—Sales and Cash Collections Budgets)
A.
Mountain Mash
Sales Budget
March April May June July
B.
Mountain Mash
Cash Receipts Budget
Month Sales May June July
March $245,000 $ 12,250 5% — —
C. Total June sales: $315,000
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27. (LO3, 4—Production and purchases budget)
A. Alvarez Company—Production Budget
for the Period Ending, June 30, 2012
Jan. Feb. Mar. April May June
Projected sales
(units)
25,000
27,000
32,000
28,500
31,400 34,500
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B.
Alvarez Company—Material Purchases Budget
for the Period Ending June 30, 2012
Jan. Feb. Mar. April May June
Projected production
25,500
28,250
31,125
29,225
32,175
35,050
× Material/unit × 3 lb × 3 lb × 3 lb × 3 lb × 3 lb × 3 lb
Notes:
*July sales are projected to be 36,700 units, August to be 35,000 units.
lb. 76,500 × 30 percent = 22,950 lb.
28. (LO3, 4—Production and direct material purchases budget)
A. Anderson Company—Production Budget
for the Period Ended June 30, 2012
Jan. Feb. Mar. April May June
Projected sales
(units)
10,000
17,000
13,000
18,500
22,100
24,300
Add: Proj. ending
*Projected sales for the month of July are 26,200 units. Projected ending inventory is equal to 3,930
(26,200 × 0.15).