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Profit Planning
Study the flow of budget data in Exhibit 7-2. This exhibit provides a
good overview of the chapter and the budgeting process. Notice particu
larly how all the budgets depend in some way on the sales budget and
that nearly all budgets eventually impact the cash budget. As suggested
by this exhibit, the cash budget is a key budget that serves to tie together
much of the budget process. Schedule 8 in the text contains an example
of a cash budget.
Schedules I and 2, containing the sales and production budgets, are
also very important and your homework assignments are very likely to
concentrate on these two budgets.
79
CHAPTER HIGHLIGHTS
A. Profit planning is
in most V'i','u"L"'~
over a
time
1. The master
is a summary the com
that sets specific
for
produc
tion,
activities. The master budget
statement and
balance sheet.
1.
discussed in
(Schedule 1 in the
is the
It details the
for the budget
a Schedule
"1'.'01H\;iil'
e.
the entire
objectives
a.
d.
format:
occur.
xxx
coordinates the activities of
by
the plans and
inventory ..
Total needs...............................
Less beginning
Required production ............... .
b.
Schedule 2 in the text carefully.
Note that the "Year" column is not simply the sum of
the
for the
in Schedule 2. The desired
ending inventory
the year is the desired ending in
ventory for the 4th Quarter. And the
inven
for the year is the
for the 1st
Quarter.
Students often overlook this impor
tant detaiL
C. Budget prel)aratIon is a
the coc'peI'atl're
"VI",",''''/\,
XXX
3. In a
company such as a cloth
ing store, the sales budget followed by a merchan
,....,,,rlo,,IN'" budget instead of a production
details the amount of
that must
purchased from
to meet customer demand
and to maintain adequate stocks
inventory.
task
80
Chapter 7
a. The format for the merchandise purchases
budget is (in units or dollars):
Budgeted unit sales ................. .
Total needs .
a.
is:
a.
Raw materials required for production ..
Add desired ending inventory .. .. .......... .
Total raw materials needs ... .... .. ............ .
Less beginning inventory .................... ..
Raw materials to be purchased .......... ... .
xxx
XXX
XXX
XXX
XXX
$XXX
XXX
XXX
XXX
81
Chapter 7
True or False
Enter a T or an F in the blank to indicate whether the
statement is true or false.
I. A forecast of sales is the usual starting
point in budgeting.
Multiple Choices
Choose the best answer or response by placing the
identifying letter in the space provided.
82
Chapter 7
Exercises
Exercise 7-1.
Billings Company produces and sells a single product. Expected sales for the next four months
are given below:
April
10,000
May
12,000
June
15,000
July
9,000
The company needs a production budget for the second quarter. Experience indicates that end-of-month invento
ries should equal 10% of the following month's sales in units. At the end of March, 1,000 units were on hand.
Complete the following production budget for the quarter:
April
May
Quarter
June
Exercise 7-2.
Dodero Company's production budget for the next four months is given below:
July
15,000
August
18,000
September
20,000
October
16,000
Each unit of product uses five ounces of raw materials. At the end of June, 11,250 ounces of material were on
hand. The company wants to maintain an inventory of materials equal to 15% of the following month's production
needs.
Complete the following materials purchases budget for the third quarter:
July
83
August
September
Quarter
Chapter 7
Exercise 7-3.
Whitefish Company budgets its cash two months at a time. Budgeted cash disbursements for
March and April, respectively, are: for inventory purchases, $90,000 and $82,000; for selling and administrative
expenses (includes $5,000 depreciation each month), $75,000 and $70,000; for equipment purchases, $15,000 and
$6,000; and for dividend payments, $5,000 and $0. Budgeted cash collections from customers are $150,000 and
$185,000 for March and April, respectively. The company will begin March with a $10,000 cash balance on hand.
The minimum cash balance at the end of each month should be $5,000. If needed, the company can borrow money
at 1% per month. All borrowings are at the beginning of a month, and all repayments are at the end of a month.
Interest is paid only when principal is being repaid.
Complete the following cash budget for March and April:
March
April
Two
Months
$_--
$._--
$_--
$,= =
$._ = ==
$= = = =
84
Chapter 7
True or False
1. T
2. F
3. F
S. F
6. F
8. F
4. T
7. F
7,500
Total cash receipts .... .... .............................. .
$60.500
Exercise 7-I.
40,000
12,000
52,000
8,000
~
32,000
-----.a
96,000
33,000
129,000
24,000
10S,000
$ IS,OOO
90,000
10S,000
12S,000
$( 20,000)
Exercises
$42,000
16,000
$58.0Jill
April
May
10,000 12,000
1,500
1,200
11,200 13,500
1,000
1,200
~ 12,300
85
June
15,000
900
IS ,900
1,500
14.400
Quarter
37.000
----2QQ
37,900
1,000
36,900
Chapter 7
Exercise 7-2.
Required production (units) ................ .......
Raw material needs per unit (ounces) ........
Production needs (ounces) .... ..... ... .... ... ......
Add desired ending inventolY (oWlces)* ...
Total needs (ounces) ........ :... .. .... ................
Less beginning inventory (ounces) ... .........
Raw materials to be purchased (ounces) ....
July
15,000
August
18,000
September
20,000
Quarter
53,000
--..10.
--..10.
--..10.
--..10.
75,000
13,500
88,500
. 11.250
~
90,000
15,000
105,000
13,500
21,5:QQ
100,000
12,000
112,000
15,000
21,OQQ
265,000
12,000
277,000
11 ,250
265,1iQ
*September desired ending inventory: 16,000 units for October x 5 ounces per unit = 80,000 ounces;
80,000 ounces x 15% = 12,000 ounces
Exercise 7-3.
Cash balance, beginning .......... .......... .........
Add collections from customers ... ... ........... .
Total cash available .. .... ........ .......... ............ .
Less disbursements:
* $25,000 x
March
$ 10,000
150,000
160,000
April
$ 5,000
185,000
190,000
Two
Months
$ 10,000
335,000
345,000
90,000
82,000
172,000
70,000
15,000
5,000
180,000
65,000
6,000
0
153,000
135,000
21,000
5,000
333,000
(20,000)
37,000
12,000
(25,000)
(500)
(25,500)
.LU,5QQ
25,000
(25,000)
(500)
(500)
$ 11 ~OO
25,000
25,000
$----.5. DDD
1% x 2 = $500
86