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BUDGETARY PLANNING
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOMS TAXONOMY
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Brief Exercises
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Multi-Part Question
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10-2
Budgetary Planning
10-3
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Study Objective 1
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Study Objective 4
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MC = Multiple Choice
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10-4
Prepare the cash budget and the budgeted balance sheet. The cash budget, which
shows expected cash flows, contains three sections (cash receipts, cash disbursements,
and financing) and the beginning and ending cash balances. The budgeted balance sheet,
which is a projection of the companys financial position at the end of the budget period,
lists assets and liabilities and shareholders equity. It is developed from the budgeted
balance sheet for the preceding year and the budgets for the current year.
4.
Budgetary Planning
10-5
TRUE-FALSE STATEMENTS
1.
2.
3.
4.
A budget facilitates coordination of activities within the business but is a poor tool for
evaluating performance.
5.
6.
The budget itself and the administration of the budget are the responsibility of
management.
7.
8.
The flow of input data for budgeting should be from the lowest levels of responsibility to
the highest level.
9.
Budgets, by their very nature, create a negative effect on human behaviour within
companies because they imply that management is trying to control.
10.
11.
The shorter the budget period, the more reliable the estimates of future outcomes.
12.
Upper level managers are responsible for preparing the entire budget.
13.
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Budgeting and long-range planning differ in the emphasis and the time period involved.
15.
10-6
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The master budget consists of a plan of action for a specified time period.
18.
Operating budgets must be completed before the financial budgets can be prepared.
19.
The production budget must be completed before the materials purchases budget
because the number of units to be produced must be known to determine how much
material to buy.
20.
The number of direct labour hours needed for production is obtained from the direct labour
budget.
21.
22.
The manufacturing overhead budget generally has separate sections for variable and
fixed costs.
23.
24.
The direct materials budget contains only quantity data so the purchasing department
knows how much materials should be purchased.
25.
The budgeted income statement indicates the expected amount of cash expected to be
acquired from operations.
26.
Companies that do not prepare cash budgets have significant cash deficiencies.
27.
In preparing the budgeted balance sheet, management should not be concerned if it does
not balance since it does not reflect actual results.
28.
29.
Budgetary Planning
30.
10-7
10-8
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Budgetary Planning
10-9
At January 1, 2012, Barry, Inc. has beginning inventory of 5,000 widgets. Barry estimates
it will sell 40,000 units during the first quarter of 2012 with a 5% increase in sales each
quarter. Barrys policy is to maintain an ending inventory equal to 10% of the next
quarters sales. Each widget costs $2 and is sold for $3. How much is budgeted sales
revenue for the third quarter of 2012?
a. $44,100
b. $120,000
c. $132,300
d. $119,070
32.
Wacos Widgets plans to sell 22,000 widgets during May, 19,000 units in June, and 20,000
during July. Wacos policy is to keep10% of the next months sales as ending inventory.
How many units should Waco produce during June?
a. 18,900
b. 21,000
c. 19,100
d. 19,000
33.
Gottberg Mugs is planning to sell 2,000 mugs and produce 2,200 mugs during April. Each
mug requires 2 kilograms of resin and one-half hour of direct labour. Resin costs $1 per
kilogram and employees of the company are paid $12.50 per hour. Manufacturing
overhead is applied at a rate of 120% of direct labour costs. Gottberg has 2,000 kilograms
of resin in beginning inventory and wants to have 2,400 kilograms in ending inventory.
How much is the total amount of budgeted direct labour for April?
a. $12,500
b. $13,750
c. $25,000
d. $27,500
34.
During December, the capital budget indicates a $280,000 purchase of equipment. The
ending November cash balance is budgeted to be $40,000. Cash receipts are $840,000,
and cash disbursements are $610,000 during December. The company wants to maintain
a minimum cash balance of $20,000. What is the minimum cash loan that must be
planned to be borrowed from the Bank during December?
a. $30,000
b. $10,000
c. $50,000
d. $0
35.
Lewis Hats is planning to sell 650 straw hats. Each hat requires kilogram of straw and
hour of direct labour. Straw costs $0.20 per kilogram and employees of the company are
paid $22 per hour. Lewis has 80 kilograms of straw and 40 hats in beginning inventory and
wants to have 50 kilograms of straw and 60 hats in ending inventory. How many units
should Lewis Hats produce in April?
a. 650
10-10
b.
c.
d.
670
610
710
36.
Looker Hats is planning to sell 1,000 felt hats, and 800 will be produced during June. Each
hat requires .75 metres of felt and 1/2 hour of direct labour. Felt costs $5.00 per metre and
employees of the company are paid $15 per hour. How much is the total amount of
budgeted direct labour for June?
a. $9,750
b. $45,000
c. $6,000
d. $7,500
37.
Weaver, Inc. has budgeted direct materials purchases of $150,000 in March and $240,000
in April. Past experience indicates that the company pays for 70% of its purchases in the
month of purchase and the remaining 30% in the next month. Other costs are all paid
during the month incurred. During April, the following items were budgeted:
Wages expense
Purchase of office equipment
Selling and administrative expenses
Depreciation expense
Accounts Receivable write-offs
$75,000
36,000
24,000
18,000
10,000
Budgeted sales
Budgeted purchases
March
$300,000
$144,000
April
$290,000
$120,000
May
$320,000
$128,000
June
$280,000
$132,000
July
$210,000
$90,000
Customer amounts on account are collected 70% in the month of sale and 30% in the
following month.
Cost of goods sold is 60% of sales.
Livanos purchases and pays for merchandise 40% in the month of acquisition and 60% in
the following month.
Operating expenses are: Salaries, $50,000; Depreciation, $12,000; Rent, $15,000; and
Utilities, $14,000;
Accounts payable is used only for inventory acquisitions.
Budgetary Planning
10-11
38.
How much cash will Livanos receive during May from customers?
a. $308,000
b. $311,000
c. $224,000
d. $299,000
39.
40.
How much is Livanos budgeted balance for Accounts Payable at May 30, 2012?
a. $124,800
b. $72,000
c. $51,200
d. $76,800
41.
Orr Corporations manufacturing costs for August when production was 750 units appears
below:
Direct material
$7 per unit
Direct labour
$6,000
Variable overhead
3,000
Factory Depreciation
2,000
Factory supervisory salaries
7,000
Other fixed factory costs
1,500
How much is the budgeted manufacturing cost for a month when 500 units are produced?
a. $13,000
b. $16,500
c. $20,000
d. $9,000
42.
Lewis Production is planning to sell 220 boxes of bricks and produce 200 boxes of bricks
during May. Each box of bricks requires 20 kilograms of brick mix and a half hour of direct
labour. Brick mix costs $5 per 100 kilograms and employees of the company are paid
$12.00 per hour. Manufacturing overhead is applied at a rate of 120% of direct labour
costs. Lewis Production has 600 kilograms of brick mix in beginning inventory and wants
to have 800 kilograms of brick mix in ending inventory. What is the total amount to be
budgeted for manufacturing overhead for the month?
a. $1,440
b. $2,640
c. $2,400
d. $1,200
10-12
43.
Hargrow, Inc. makes and sells a single product, buckets. It takes 30 ounces of plastic to
make one bucket. Budgeted production of buckets for the next three months is as follows:
August 90,000 units, September 75,000 units, October 65,000 buckets. The company
wants to maintain monthly ending inventories of plastic equal to 10% of the following
month's production needs. On August 31st, 195,000 ounces of plastic were on hand. The
cost of plastic is $0.03 per ounce. How much is the ending inventory of plastic to be
reported on the companys balance sheet at September 30?
a. $195,000
b. $5,850
c. $6,750
d. $7,500
44. Razmataz Company makes and sells umbrellas. The company is in the process of
preparing its Selling and Administrative Expense Budget for the last half of the year. The
following budget data are available:
Item
Sales commissions
Shipping
Advertising
Depreciation on office equipment
Other operating expenses
Expenses are paid in the month incurred. If the company has budgeted to sell 2,000
umbrellas in October, how much is the total budgeted variable selling expenses for
October?
a. $41,000
b. $4,600
c. $4,900
d. $1,800
45.
Leak Company sells only on credit. It reported the following information for 2012:
Budgeted sales
September
$900,000
October
$800,000
November
$850,000
December
$960,000
Customer amounts on account are collected 45% in the month of sale and 55% in the
following month. How much is the November 30, 2009 budgeted Accounts Receivable?
a. $467,500
b. $382,500
c. $827,500
d. $528,000
Use the following information for questions 46 and 47.
At January 1, 2012, Jake, Inc. has beginning inventory of 4,000 surfboards. Jake estimates it will
sell 15,000 units during the first quarter of 2012 with a 10% increase in sales each quarter. Jakes
policy is to maintain an ending inventory equal to 25% of the next quarters sales. Each surfboard
costs $200 and is sold for $250.
Budgetary Planning
10-13
46.
How many units should Jake produce during the first quarter of 2012?
a. 15,125
b. 15,000
c. 12,500
d. 11,000
47.
How much is budgeted sales revenue for the third quarter of 2012?
a. $18,150
b. $4,537,500
c. $907,500
d. $3,750,000
48.
Items from Sap Companys budget for March in which 2,100 units were produced and sold
appear below:
Direct materials
Indirect materials - variable
Supervisor salaries
Depreciation on factory equipment
Direct labour
Property taxes on factory
Total
$12,000
2,000
10,000
8,000
7,000
3,000
$42,000
$ 29,000
150,000
82,000
76,000
The accounts payable account is used only for direct materials. How much will
Nunnallikash report as accounts payable on the balance sheet at the end of May?
a. $21,000
b. $103,000
c. $8,000
d. $15,000
50.
Harrah Company provided the following information for the month of October:
10-14
$ 35,000
460,000
485,000
Harrahs policy is to keep a minimum end of the month cash balance of $30,000. How
much will Harrahs need to borrow during August?
a. $20,000
b. $25,000
c. $10,000
d. $0
51.
Each production worker can produce 5 wooden chairs per hour. During the month of June,
Chairs, Inc. has forecasted sales of 100,000 chairs. The beginning inventory was 1,000
chairs, and desired ending inventory is 2,500 chairs. How many hours of direct labour
must be budgeted to meet production needs?
a. 20,300
b. 20,000
c. 21,200
d. 19,700
52.
Jelly Box, Inc. budgeted the following manufacturing costs for 25,000 calculators:
Fixed manufacturing costs
Variable manufacturing costs
Jelly Box produced 20,000 calculators during March. How much is budgeted total
manufacturing costs in March?
a. $320,000
b. $412,000
c. $400,000
d. $332,000
53.
54.
55.
Budgetary Planning
a.
b.
c.
d.
10-15
Zero-based budgeting
Grassroots budgeting
Participative budgeting
Cooperative budgeting
56.
57.
58.
59.
60.
Which one of the following is necessary if a company expects its budget to be effective?
a. The company must be operating at less than capacity.
b. The budget period must cover more than one year.
c. The companys organizational structure must be sound.
d. The company must have sufficient cash for operations.
61.
Which of the following individuals should accept the companys budgets in order for the
budgets to be most effective?
10-16
a.
b.
c.
d.
62.
Which of the following approvals will make the most effective environment for budget
acceptance?
a. The budget is prepared by top management.
b. The budget preparation contains input from all levels of management.
c. The budget is prepared by the department heads.
d. Acceptance has nothing to do with who prepares budgets.
63.
64.
Which one of the following would most likely cause an unrealistic budget to result?
a. All levels of management contributed to its development.
b. The budget has been developed in a participative approach.
c. The budget was developed after considerable planning.
d. The budget has been developed in a top down fashion.
65.
66.
In many companies, who is assigned the responsibility for coordinating the preparation of
the budget?
a. A budget committee
b. The sales managers since the sales budget is the backbone of the master budget
c. The company's board of directors since they approve major corporate changes
d. The company's independent certified general accountants
67.
Which one of the factors below is not a major influence on the length of budget periods?
a. The nature of the organization
b. The type of budget
c. Prevailing business conditions
d. The profitability of the company
Budgetary Planning
10-17
68.
69.
70.
Crown, Inc. administered its budget. What did the company do?
a. It prepared the budget one year in advance.
b. Management used the budget as an aid in achieving projected goals.
c. The company allowed each level of management to participate in creating the
budget.
d. Management estimated its sales for the budget period.
71.
Which one of the following includes people who normally make up the budget committee?
a. Sales manager, company president, company treasurer
b. Company treasurer, creditors, controller
c. Sales manager, controller, investors
d. External auditors, controller, treasurer
72.
73.
74.
10-18
d.
75.
76.
DaDum Company desired 12,000 kilograms of raw material on hand on June 1 and
10,500 on June 30. The number of kilograms required for production for June totalled
240,000 kilograms. How many kilograms of raw material should DaDum purchase in
June?
a. 238,500 kilograms
b. 241,500 kilograms
c. 250,500 kilograms
d. 228,000 kilograms
77.
Which budget provides the information needed to prepare the direct labour budget?
a. Income budget
b. Production budget
c. Materials budget
d. Sales budget
78
In preparing one of its budgets, Hartz, Inc. used information from both the direct materials
and direct labour budgets. Which budget was Hartz preparing?
a. Sales budget
b. Production budget
c. Manufacturing overhead budget
d. Cash budget
79.
80.
Budgetary Planning
10-19
81.
82.
Which one of the following helps improve the reliability of the sales forecast?
a. Reduction of differences between actual and estimated amounts
b. Creation of management awareness
c. Consideration of industry trends
d. Extension of the budget period
83.
84.
Which one of the following is the last step in preparing the operating budget?
a. Budgeted income statement
b. Production budget
c. Cash budget
d. Budgeted balance sheet
85.
86.
87.
10-20
d.
Neither I nor II
88.
Surprise Companys sales budget showed expected sales of 13,400 widgets. Beginning
finished goods contained 1,200 widgets. The company determined that 14,100 units
should be produced. How many widgets will the company have on hand at the end of the
year?
a. 500
b. 1,200
c. 1,900
d. 700
89.
The production budget shows expected unit sales are 1,800. The required production
units are 1,700. Which of the following represents possible inventory balances?
Beginning Units Ending Units
a.
200
100
b.
100
200
c.
200
200
d.
0
100
90.
The production budget shows that expected unit sales are 86,000 for May and 87,000 for
June. The company desires to have units on hand at the end of the month equal to 10% of
next months sales. How many units should the company produce during May?
a. 86,100
b. 94,600
c. 85,900
d. 94,700
91.
Nextel Company showed the following on its direct materials budget for June:
Units to be produced
Total kilograms needed for production
Total kilograms of materials to be purchased
25,000
10,000
9,000
The materials cost $2 per kilogram. How much is the cost of direct materials per unit?
a. $0.80
b. $0.72
c. $1.52
d. $5.00
92.
Drive, Inc. determined its estimated production for the month is 300,000 units. Each unit
requires 2 kilograms of material. The beginning direct materials are 1% of the current
months expected needs. Ending inventory desired is 7,500 kilograms. How much are
estimated direct materials purchases in kilograms?
a. 601,500 kilograms
b. 607,500 kilograms
c. 301,500 kilograms
d. 598,500 kilograms
Budgetary Planning
93.
10-21
2,000 kilograms
51,400 kilograms
1,200 kilograms
How much are the total direct materials needed for production?
a. 50,600 kilograms
b. 52,600 kilograms
c. 52,200 kilograms
d. 51,400 kilograms
94.
Which one of the following expenses would most likely appear on a Selling and
Administrative Expense Budget?
a. Indirect materials
b. Machine depreciation
c. Sales commissions
d. Indirect labour
95.
Which of the following would most likely appear as a fixed expense on the Selling and
Administrative Expense Budget?
a. Delivery expense
b. Factory supervisor salary
c. Indirect labour
d. Depreciation
96.
97.
98.
10-22
99.
Spirit, Inc. budgeted sales are 433,000 units for January and 420,000 units for February.
The companys policy requires maintaining units on hand at the end of each month equal
to 8% of next month's budgeted unit sales. How many units should the company produce
in January?
a. 442,700 units
b. 423,300 units
c. 466,600 units
d. 431,960 units
100.
Jason Company determined that the budgeted cost of producing a product is $1.20 per
unit. On June 1, there were 11,000 units on hand. The sales department budgeted sales
of 320,000 units in June. The company desires to have 8,000 units on hand on June 30.
How much is the budgeted cost of goods manufactured for June?
a. $380,400
b. $317,000
c. $323,000
d. $387,600
101.
Of the following items, which one is found as the bottom amount on an individual budget?
a. Total variable costs
b. Required production units
c. Cost of production
d. Financing needed
102.
103.
Which one of the following is a source of information used to prepare the budgeted
income statement?
a. Cash budget
b. Budgeted balance sheet
c. Capital expenditures budget
d. Selling and administrative expense budget
104.
105.
Why is the sales budget the single most important source in preparing budgets?
a. All the other budgets depend on it.
b. It enables the company to determine the unit cost of products.
Budgetary Planning
c.
d.
10-23
106.
107.
Which one of the following budgets would be used by all of the following entities:
manufacturing firms, merchandise firms, service firms and not-for-profit organizations?
a. Production budget
b. Merchandise purchase budget
c. Cash budget
d. Direct material budget
108.
109.
Sundy Company provided the following information for the month of August:
Beginning cash balance
Cash receipts
Cash disbursements
$ 7,000
549,000
523,000
Sundy borrowed $15,000 and repaid $16,000 during the month. How much will Sundys
report on its budgeted balance sheet at August 31 for cash?
a. $32,000
b. $33,000
c. $26,000
d. $25,000
110.
10-24
111.
112.
$124,000
120,000
135,000
140,000
142,000
The company's past experience indicates that 50% of the accounts receivable are
collected in the month of sale, 30% in the month following the sale, and 18% in the second
month following the sale. Two percent are uncollectible. How much does the company
anticipate as cash receipts for March?
a. $132,300
b. $125,820
c. $135,060
d. $122,300
113.
A company's past experience indicates that 70% of its credit sales are collected in the
month of sale and 28% in the next month. The remainder is never collected. The
companys budgeted credit sales totalled:
January
February
March
$100,000
90,000
110,000
Which one of the following items would never appear on a cash budget?
a. Delivery expense
b. Depreciation expense
c. Cost of material purchases
d. Cash received from customers
115.
Budgetary Planning
b.
c.
d.
10-25
To indicate amounts that should be borrowed when the ending cash balance is
less than the amount management desires
To indicate amounts that should be borrowed when expenses exceed revenues
To comply with GAAP budgeting requirements
116.
117.
Scobee Companys cash budget showed total available cash less cash disbursements.
What does this amount equal?
a. Ending cash balance
b. Total cash receipts
c. The excess (deficiency) of available cash over cash disbursements
d. The amount of financing required
118.
119.
120.
121.
122.
Which one of the following is a critical factor in budgeting for a service company?
a. Coordinating professional staff needs with anticipated services
10-26
b.
c.
d.
123.
Which one of the following budgets would be prepared for a retail company but not for a
manufacturer?
a. Labour budget
b. Cash budget
c. Merchandise purchases budget
d. Production budget
124.
125.
Which one of the following is the correct formula for determining budgeted merchandise
purchases?
a. Budgeted sales + desired ending inventory beginning inventory
b. Budgeted production sales + beginning inventory desired ending inventory
c. Budgeted sales cost of goods sold + desired ending inventory beginning
inventory
d. Budgeted sales cost of goods sold + beginning inventory desired ending
inventory
126.
Which one of the following lists the entities which use budgets?
a. Merchandisers and service companies
b. Manufacturing, merchandisers, and service companies
c. Service, retail, and wholesale companies
d. Manufacturers only
127.
Which one of the following is a problem resulting from a service company being
overstaffed?
a. Labour costs will be disproportionately low.
b. Profits will be higher because of the additional salaries.
c. Staff turnover may increase.
d. Revenue may be lost.
128.
Which one of the following statements is true concerning the master budget for a not-forprofit company?
a. It will include only a budgeted balance sheet.
b. It will include a sales budget for sales revenue.
c. The starting point is expenditures rather than receipts.
d. It is based on revenues and expenses and omits cash flows.
Budgetary Planning
10-27
129.
130.
What is the starting point for the development of the master budget by merchandisers?
a. Cash budget
b. Sales budget
c. Selling and administrative expenses budget
d. Expenditures budget
131.
132.
133.
January
September
October
November December
Budgeted sales
$240,000
$310,000
$290,000
$360,000
$200,000
Budgeted purchases
$90,000
$120,000
$128,000
$144,000
$88,000
All sales are on credit.
Customer amounts on account are collected 50% in the month of sale and 50% in the
following month.
Cost of goods sold is 35% of sales.
Farley purchases and pays for merchandise 60% in the month of acquisition and 40%
in the following month.
Accounts payable is used only for inventory acquisitions.
How much cash will Farley receive during November?
a. $145,000
b. $325,000
c. $300,000
d. $290,000
10-28
134.
135.
Which one of the following is a budget that would never be prepared by a merchandising
company?
a. Production budget
b. Cost of goods sold budget
c. Purchases budget
d. Budgeted income statement
136
January
September
October
November December
Budgeted sales
$240,000
$310,000
$290,000
$360,000
$200,000
All sales are on credit.
Customer amounts on account are collected 50% in the month of sale and 50% in the
following month.
How much is the November 30, 2012 budgeted Accounts Receivable?
a. $300,000
b. $180,000
c. $155,000
d. $145,000
137.
Budgetary Planning
10-29
How much is the budgeted amount of cash to be paid for operating expenses in
November?
a. $202,000
b. $74,000
c. $94,000
d. $222,000
138.
At January 1, 2012, Ceatric, Inc. has beginning inventory of 10,000 boogie boards. Ceatric
estimates it will sell 7,000 units during the first quarter of 2012 with a 7% increase in sales
each quarter. Ceatrics policy is to maintain an ending inventory equal to 14% of the next
quarters sales. Each surfboard costs $95 and is sold for $130. How much is budgeted
sales revenue for the third quarter of 2012?
a. $80,143
b. $910,000
c. $1,041,859
d. $280,500.50
139.
Sargent.Com plans to sell 2,000 purple lawn chairs during May, 1,900 in June, and 2,000
during July. The company keeps 15% of the next months sales as ending inventory. How
many units should Sargent.Com produce during June?
a. 1,915
b. 2,200
c. 1,885
d. Not enough information to determine.
140.
141.
Secret Prizes, Inc. is planning to sell 200 buckets and produce 190 buckets during March.
Each bucket requires 500 grams of plastic and one-half hour of direct labour. Plastic costs
$10 per 500 grams and employees of the company are paid $15.00 per hour.
Manufacturing overhead is applied at a rate of 110% of direct labour costs. Secret Prizes
has 300 kilos of plastic in beginning inventory and wants to have 200 kilos in ending
inventory. How much is the total amount of budgeted direct labour for March?
a. $1,500
b. $3,000
c. $1,425
d. $2,850
142.
10-30
c.
d.
143.
144.
145.
146.
Sudler Production is planning to sell 700 boxes of ceramic tile, with production estimated
at 800 boxes during May. Each box of tile requires 23 kilograms of clay mix and a half
hour of direct labour. Clay mix costs $0.75 per kilogram and employees of the company
are paid $20.00 per hour. Manufacturing overhead is applied at a rate of 125% of direct
labour costs. Sudler has 3,000 kilograms of clay mix in beginning inventory and wants to
have 4,000 kilograms in ending inventory. What is the total amount to be budgeted for
manufacturing overhead for the month?
a. $10,000
b. $21,800
c. $27,250
d. $1,250
147.
Sudler Production is planning to sell 600 boxes of ceramic tile, with production estimated
at 580 boxes during May. Each box of tile requires 44 kilograms of clay mix and a quarter
hour of direct labour. Clay mix costs $0.50 per kilogram and employees of the company
are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct
labour costs. Sudler has 2,600 kilograms of clay mix in beginning inventory and wants to
have 3,000 kilograms in ending inventory. What is the total amount to be budgeted for
direct labour for the month?
a. $2,175
b. $8,700
Budgetary Planning
c.
d.
10-31
$2,250
$34,800
148.
Sudler Production is planning to sell 600 boxes of ceramic tile, with production estimated
at 580 boxes during May. Each box of tile requires 44 kilograms of clay mix and a quarter
hour of direct labour. Clay mix costs $0.50 per kilogram and employees of the company
are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct
labour costs. Sudler has 2,600 kilograms of clay mix in beginning inventory and wants to
have 3,000 kilograms in ending inventory. What is the total amount to be budgeted in
kilograms for direct materials to be purchased for the month?
a. 25,520
b. 25,120
c. 25,920
d. 26,800
149.
Green Plants plans to sell 160 potted plants during April and 120 units in May. Green
Plants keeps 15% of the next months sales as ending inventory. How many units should
Green Plants produce during April?
a. 154
b. 166
c. 160
d. 178
150.
Swingers Company makes and sells widgets. The company is in the process of preparing
its Selling and Administrative Expense Budget for the month. The following budget data
are available:
Item
Sales commissions
Shipping
Advertising
Executive salaries
Depreciation on office equipment
Other
Expenses are paid in the month incurred. If the company has budgeted to sell 40,000
widgets in October, how much is the total budgeted selling and administrative expenses
for October?
a. $470,000
b. $70,000
c. $465,000
d. $400,000
151.
Lowe Ridge has budgeted its activity for December according to the following information:
1. Sales at $500,000, all for cash.
2. Budgeted depreciation for December is $12,500.
3. The cash balance at December 1 was $57,000.
10-32
4. Selling and administrative expenses are budgeted at $35,000 for December and are
paid for in cash.
5. The planned merchandise inventory on December 31 and December 1 is $25,000.
6. The invoice cost for merchandise purchases represents 60% of the sales price. All
purchases are paid in cash.
How much are the budgeted cash disbursements for December?
a. $347,500
b. $335,000
c. $322,500
d. $509,500
152.
Which one of the following is one of the main purposes of preparing a cash receipts and
disbursements budget?
a. To find investment opportunities for anticipated surpluses
b. To reconcile cash on hand
c. To determine production needed
d. To determine how many units need to be sold
153.
Which one of the following represents the correct order in which the budget documents
listed for a manufacturing company would be prepared?
a. Production budget, marketing budget, direct materials budget, indirect labour
budget
b. Sales budget, cash budget, direct materials budget, direct labour budget
c. Selling and administrative expense budget, budgeted income statement, cash
budget, budgeted balance sheet
d. Sales budget, cash budget, marketing budget, direct materials budget
154.
155.
Budgetary Planning
156.
10-33
Tripod Exports, Inc. budgets on an annual basis for its fiscal year. The following beginning
and ending inventory levels are planned for the fiscal year of July 1, 2012 to June 30,
2013:
Raw Materials
Three kilos of raw materials are needed to produce each unit of finished product. If Tripod
Exports plans to produce 280,000 units during the 2012-2013 fiscal year, how many kilos
of materials will the company need to purchase for its production during the year?
a. 841,000
b. 843,000
c. 840,000
d. 839,000
157.
The following information is taken from the production budget for the first quarter:
Beginning inventory in units
Sales budgeted for the quarter
Capacity in units of production facility
300
114,000
118,000
How many finished goods units should be produced during the quarter if the company
desires 800 units available to start the next quarter?
a. 114,500
b. 113,500
c. 118,500
d. 114,800
158.
Skate Rink Company revised its sales budget to show a 15% increase in sales. As a result
of this change, which other budgets would change?
a. All of its other budgets
b. Only its selling and administrative expenses budget
c. Its marketing budget only
d. Only its production budget
159.
Why might the number of units in the sales budget and the production budget differ?
a. The finished goods inventory levels changed.
b. The direct material inventory levels changed.
c. Excess overhead costs were incurred.
d. Customers returned merchandise.
160.
10-34
161.
One difference between a companys long-range planning efforts and its annual budget
preparation is
a. long-range planning documents usually contain more detail than annual budgets.
b. annual budgets usually contain more detail than the long-range planning process.
c. long-range planning documents focus on the companys internal environment
more than annual budgets.
d. annual budgets focus on the external environment more than the long-range
planning process.
162.
163.
The sales budget for the Johnson Company indicates the following units to be sold:
January
20,000
February
30,000
March
24,000
April
28,000
The company requires that ending inventory be equivalent to 30% of the following months
sales. There were no units on hand at the end of December. What is the budgeted
balance in the companys ending inventory account at March 31st expected to be
a. 7,200.
b. 8,400.
c. 6,000.
d. 0.
164.
Using the information in Question 163 above, what is the production that needs to be put
in place to the end of March?
a. 24,000 units
b. 102,000 units
c. 25,200 units
d. 32,400 units
165.
Jaunty Company is preparing its budgeted income statement for the upcoming year. The
proper time to prepare this budget is
a. at the start of the budgetary process so that everyone knows the expected
income for the year.
b. once the sales budget has been done and approved.
c. prior to the completion of the capital budget for the year.
d. generally towards the end of the budgetary process when most other budgets
have been approved.
Budgetary Planning
10-35
166.
Jaunty Company is preparing its budgeted balance sheet for the upcoming year. The
proper time to prepare this budget is
a. at the start of the budgetary process so that comparisons with last years balance
sheet can be made
b. once the capital budget has been done and approved
c. prior to the completion of the cash budget for the year
d. generally towards the end of the budgetary process when most other budgets
have been approved
167.
When looking at the main difference between the budget preparation process of a
manufacturing company and that of a service company
a. manufacturing budgets focus more on the long-range planning components of the
process than do service companies.
b. service company budgets focus more on the sales budget than do manufacturing
companies.
c. the budget process is more important to a manufacturing company because of
the higher level of capital investment involved.
d. the budget process contains the same level of complexity in both types of
companies.
168.
169.
Bixley Company budgets variable manufacturing overhead at 50% of its direct labour
costs. The company estimates that 20,000 direct labour hours will be used at an average
rate of $11.50 per hour. Bixleys fixed manufacturing overhead costs are budgeted at
$90,000 for the year. The companys budgeted manufacturing overhead for the year is
a. $320,000.
b. $230,000.
c. $205,000.
d. $115,000.
10-36
Ans.
c
c
b
a
b
c
c
b
b
d
c
a
b
d
a
a
b
a
a
a
Item
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
Ans.
a
d
b
d
c
c
d
b
b
c
b
b
b
d
b
a
d
d
c
b
Item
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
Ans.
a
b
b
d
d
a
b
d
c
b
a
c
c
d
b
d
c
c
a
a
Item
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
Ans.
a
a
a
c
d
c
b
a
d
a
b
d
d
b
a
b
c
c
a
b
Item
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
Ans.
b
b
d
b
b
a
c
c
a
a
d
a
c
d
a
b
c
c
c
b
Item
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
Ans.
a
a
c
a
a
d
b
c
a
c
c
d
a
c
b
a
a
c
a
a
Item
151.
152.
153.
154.
155.
156.
157.
158.
159.
160.
161.
162.
163.
164.
165.
166.
167.
168.
169.
Ans.
b
a
c
c
c
a
a
a
a
c
b
c
b
c
d
d
d
c
c
Budgetary Planning
10-37
BRIEF EXERCISES
Brief Exercise 170
Salem Company reported the following information for 2012:
Budgeted sales
Budgeted purchases
September
$75,000
$50,000
October
$80,000
$65,000
November
$90,000
$125,000
December
$150,000
$100,000
January
$70,000
$40,000
Budgeted sales
Budgeted purchases
September
$75,000
$50,000
October
$80,000
$65,000
November
$90,000
$125,000
December
$150,000
$100,000
January
$70,000
$40,000
Budgeted sales
Budgeted purchases
September
$75,000
$50,000
October
$80,000
$65,000
November
$90,000
$125,000
December
$150,000
$100,000
January
$70,000
$40,000
10-38
How much is the budgeted balance for Accounts Payable at November 30, 2012?
Solution Brief Exercise 172
From November purchases: $125,000 x 20% = $25,000
Brief Exercise 173
Salem Company reported the following information for 2012:
Budgeted sales
Budgeted purchases
September
$75,000
$50,000
October
$80,000
$65,000
November
$90,000
$125,000
December
$150,000
$100,000
January
$70,000
$40,000
Operating expenses are: Salaries, $55,000; Depreciation, $7,000; Rent, $15,000; Utilities,
$12,000; Supplies are 2% of current months sales and are used during the month acquired.
Operating expenses are paid during the month incurred.
Accounts payable is used only for inventory acquisitions.
How much is the budgeted amount of cash to be paid for operating expenses in November?
Solution Brief Exercise 173
Operating expenses = salaries + rent + utilities + supplies
$55,000 + $15,000 + $12,000 + (2%)($90,000) = $83,800
August
September
Expected Production
6,500
7,000
Expected Sales
6,200
7,100
It takes 5 metres of yarn to produce a beanie. The company's policy to maintain yarn at the end
of each month equal to 25% of the next month's production needs and to maintain a finished
goods inventory at the end of each month equal to 30% of next month's anticipated production
needs. The cost of yarn is $0.75 a metre. At August 1, 4,250 metres of yarn were on hand.
Prepare a materials purchases budget for August.
Solution Brief Exercise 174
Units to be produced
Metres needed per unit
Metres needed for production
Add: Desired materials ending inventory (metres) (25%*7,000*5)
Less: Beginning inventory on hand (metres) (25%*6,500*5)
Metres needed to purchase
6,500
5
32,500
8,750
(8,125)
33,125
Budgetary Planning
10-39
$0.75
$24,843.75
Budgeted purchases
May
$50,000
June
$60,000
July
$45,000
August
$55,000
Cost of goods sold is 50% of sales. Accounts payable is used only for inventory acquisitions.
M&H purchases and pays for merchandise 50% in the month of acquisition and 50% in the
following month.
Selling and administrative expenses are budgeted at $30,000 for May and are expected to
increase 2% per month. They are paid during the month of acquisition. In addition, budgeted
Depreciation is $5,000 per month.
M&H pays $700 per month for its 5% note payable and interest.
New equipment costing $12,000 will be purchased in June and an additional equipment
purchase for $3,000 will be made in July. Depreciation on the new equipment will start in the
month of purchase.
Income taxes are $5,000 for July and are paid in the month incurred.
How much are the budgeted cash disbursements for July?
Solution Brief Exercise 175
Cash disbursements:
Cash paid for July purchases (50%*$45,000)
Cash paid for June purchases (50%*$60,000)
Cash paid for July selling and admin ($30,000*1.02*1.02)
Cash paid for note payment and interest
Cash paid for equipment purchased in July
Cash paid for income taxes
Total cash disbursements
$22,500
30,000
31,212
700
3,000
5,000
$92,412
10-40
$100,000
90,000
95,000
110,000
130,000
$45,000
38,000
$83,000
20,000 units
50,000 units
30,000 units
25,000 units
McLeod desires to have garbage cans on hand at the end of each month equal to 20 percent of
the following months budgeted sales in units. On March 31, McLeod had 4,000 completed units
on hand. The number of garbage cans to be produced in April and May are 26,000 and 46,000,
respectively. Seven kilograms of plastic are required for each garbage can. At the end of each
month, McLeod desires to have 10 percent of the following months production material needs on
hand. At March 31, McLeod had 18,200 kilograms of plastic on hand. The material used in
production costs $0.60 per kilogram. Each garbage can produced requires 0.10 hours of direct
labour. How many garbage cans should McLeod produce during the month of June?
5,000
35,000
(6,000)
29,000
Production
Budgetary Planning
April
May
June
July
20,000 units
50,000 units
30,000 units
25,000 units
10-41
26,000 units
46,000 units
29,000 units
20,000 units
McLeod desires to have garbage cans on hand at the end of each month equal to 20 percent of
the following months budgeted sales in units. On March 31, McLeod had 4,000 completed units
on hand. The number of garbage cans to be produced in April and May are 26,000 and 46,000,
respectively. Seven kilograms of plastic are required for each garbage can. At the end of each
month, McLeod desires to have 10 percent of the following months production material needs on
hand. At March 31, McLeod had 18,200 kilograms of plastic on hand. The material used in
production costs $0.60 per kilogram. Each garbage can produced requires 0.10 hours of direct
labour. Determine how much the materials purchases budget will be for the month ending April
30.
Solution Brief Exercise 178
Production of garbage cans expected during April (given)
Kilograms of plastic per garbage can
26,000
7
182,000
32,200
214,200
(18,200)
196,000
$0.60
$117,600
26,000 units
10-42
May
June
July
46,000 units
29,000 units
20,000 units
McLeod desires to have garbage cans on hand at the end of each month equal to 20 percent of
the following months budgeted sales in units. On March 31, McLeod had 4,000 completed units
on hand. The number of garbage cans to be produced in April and May are 26,000 and 46,000,
respectively. Seven kilograms of plastic are required for each garbage can. At the end of each
month, McLeod desires to have 10 percent of the following months production material needs on
hand. At March 31, McLeod had 18,200 kilograms of plastic on hand. The material used in
production costs $0.60 per kilogram. Each garbage can produced requires 0.10 hours of direct
labour. How much is the cost of the plastic inventory at the end of May?
Solution Brief Exercise 179
$120,000
200,000
126,000
18,000
$140,000
390,000
120,000
200,000
126,000
$976,000
Budgetary Planning
Budgeted production
March
22,000
April
21,000
May
20,000
June
24,000
10-43
July
18,000
The company wants to maintain monthly ending inventories of plastic equal to 25% of the
following month's budgeted production needs. The cost of plastic is $2.12 per kilogram. Prepare a
direct materials purchases budget for the month of May.
Solution Brief Exercise 181
Buckets to be produced during May
Kilograms of plastic needed for each bucket
Total kilograms of plastic needed for production
Add ending inventory, kilograms of plastic desired (25%*24,000*3/4)
Less beginning inventory, kilograms of plastic (25%*20,000*3/4)
Kilograms of plastic needed to purchase
Cost per kilogram
Estimated cost of purchases for May
20,000
3/4
15,000
4,500
(3,750)
15,750
$2.12
$33,390
March
$82,000
April
$92,000
May
$78,000
June
$66,000
July
$73,000
Robinson pays 40% of merchandise purchases in the month purchased and 60% in the
following month.
General operating expenses are budgeted to be $31,000 per month of which depreciation
is $3,000 of this amount. Robinson pays operating expenses in the month incurred.
Robinson make loan payments of $4,000 per month of which $450 is interest and the
remainder is principal.
$31,200
55,200
86,400
28,000
3,550
450
$118,400
Projected sales
June
$120,000
July
$110,000
August
$130,000
September
$100,000
10-44
$76,000
$65,000
$70,000
$58,000
Trescot pays 30% of merchandise purchases in the month purchased and 70% in the
following month.
General operating expenses are budgeted to be $20,000 per month of which depreciation
is $2,000 of this amount. Trescot pays operating expenses in the month incurred.
Trescot makes loan payments of $3,000 per month of which $400 is interest and the
remainder is principal.
$21,000
45,500
18,000
2,600
400
$87,500
$160,000
$180,000
$220,000
$200,000
Tomim estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and
18% in the second month following the sale. Two percent of all sales are estimated to be bad
debts. How much are Tomim Co.s budgeted cash receipts for October?
Solution Brief Exercise 184
Collections from October sales: $220,000 30% =
Collections from Sept. sales: $180,000 50% =
Collections from August sales: $160,000 18% =
Total budgeted cash receipts for October
$ 66,000
90,000
28,800
$184,800
14,500 units
15,500 units
The company wants to maintain monthly ending inventories of wackel equal to 20% of the
following month's production needs. On August 31, 8,700 kilograms of wackel were on hand. The
cost of wackel is $1.25 per kilogram. How much is the cost of wackel to be purchased in
September?
Budgetary Planning
10-45
14,500
x3
43,500
9,300
(8,700)
44,100
$1.25
$55,125
Cash expenditures
Loan payment
6,000
80,000
224,000
(250,000)
(10,000)
(6,000)
44,000
10,000
10-46
$ 54,000
Ending cash balance
Estimated production
Estimated sales
April
May
June
22,000
30,000
32,000
21,000
33,000
24,000
Each ruler requires 0.25 kilograms of resin. The cost of resin is $4.40 per kilogram. Flyer wants to
have 20% of the next months material requirements on hand at the end of each month. Prepare
a direct materials purchases budget for May.
Solution Brief Exercise 187
Springer, Inc.
Direct Materials Purchases Budget
Month of May
Estimated production for May in units
Kilograms needed per unit
Total kilograms needed for production
Add ending inventory desired (20% 32,000 .25 kgs)
Less beginning inventory (20% 30,000 .25 kgs)
Kilograms need for production in May
Cost per kilogram
Total cost of purchases of materials
30,000
.25
7,500
+1,600
(1,500)
7,600
$4.40
$33,440
April
40,000
May
June
50,000
July
60,000
Instructions
Calculate the budgeted production for June.
Solution Brief Exercise 188
Needs:
Sales for June
Ending inventory 70,000 x 20% =
Less opening inventory 60,000 x 20% =
Production required in June
60,000
14,000
(12,000)
62,000
70,000
Budgetary Planning
40% of sales
50% of sales
7% of sales
$150,000
170,000
190,000
Instructions
Calculate the budgeted cash collections for Springfield for the month of March.
Solution Brief Exercise 189
($190,000 x 40%) + ($170,000 x 50%) + ($150,000 x 7%) = $171,500
10-47
10-48
EXERCISES
Exercise 190
Soster makes and sells candles. Each candle uses 0.6 kilogram of wax. Budgeted production of
candles in units for the next five months is as follows:
Budgeted production
March
20,000
April
17,000
May
18,000
June
15,000
July
16,000
The company wants to maintain monthly ending inventories of wax equal to 25% of the following
month's budgeted production needs. There were 1,300 kilograms of wax on hand on March 31
and 900 kilograms at March 1. The cost of wax is $0.75 per kilogram. Soster pays 45% of
merchandise purchases in the month purchased and 55% in the following month.
Instructions
a. Prepare a direct materials purchases budget for the April.
b. Determine how much cash will be paid for purchases during April.
Solution Exercise 190 (12-14 mins.)
a.
Soster Inc.
Direct Materials Purchases Budget
Month of April
Candles to be produced during April
Kilograms of wax per candle
Kilograms of wax needed for production
Add desired kilograms of wax in ending inventory (April 30) (18,000 0.6 25%)
Total kilograms of wax needed
Less kilograms of wax on hand in beginning inventory (April 1)
Kilograms of wax to be purchased
Cost per kilogram of wax
Cost of material purchases during April
b. March:
$9,300* x 55%
April:
$8,700 x 45%
Cash paid for purchases during April
*Candles to be produced during March
Kilograms of wax per candle
Kilograms of wax needed for production
Add: ending inventory (March 31)
Total kilograms of wax needed
Less: beginning inventory (March 1)
Total kilograms of wax to be purchased
Cost per kilogram of wax
Cost of material purchases during March
17,000
0.6
10,200
2,700
12,900
(1,300)
11,600
$0.75
$8,700
$5,115
3,915
$9,030
20,000
0.60
12,000
1,300
13,300
(900)
12,400
$0.75
$9,300
Exercise 191
Evans Recycle plans to produce 1,500 recycle bins during April. Each bin requires 1.7 kilograms
of plastic and 0.1 hours of direct labour. Plastic costs $2.15 per kilogram. Evans pays its
Budgetary Planning
10-49
employees $12.50 per hour. Manufacturing overhead is applied at a rate of 150% of direct labour
costs. Finished plastic lids are purchased separately from another supplier. Evans has 400
kilograms of plastic in beginning inventory and wants to have 550 kilograms in ending inventory.
Instructions
a. How many kilograms of plastic direct materials should Evans plan to buy during April?
b. How much should Evans budget for direct labour for April?
c. How much manufacturing overhead will be charged to each recycle bin in April?
d. What is the cost per unit of the bins produced in April?
Solution Exercise 191 (10-12 mins.)
a Units to be produced
.
Kilograms per bin
Total kilograms needed for production
Add desired ending inventory
Subtract beginning inventory on hand
Purchases of plastic needed in
kilograms
b
.
1,500
1.7
2,550
550
(400)
2,700
Units to be produced
1,500
0.1
150
$12.50
$1,875
c.
$1,875
150%
2,812.50
1,500
$ 1.875
d
.
$ 3.655
1.250
1.875
$6.78
Exercise 192
Markus Corporation's sales of gizmos are 10% for cash and 90% on credit. Past collection history
indicates that credit sales are collected as follows:
25% in the month of sale
70% in the month following sale
5% in the second month following sale
In January, sales were $39,000 and February sales were $43,000. Projected sales for March are
4,000 gizmos at $9 each. Projected sales for April are 4,700 gizmos at $11 each. The cash
balance at March 1 was $7,350.
10-50
Markus expects to purchase $22,000 of materials in February and $19,000 of materials in March.
Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth
are paid for in the month following the month of purchase. In addition, a 3% discount is allowed
for payments made in the month of purchase. All other fixed expenses are $6,570 per month and
are paid in the month of purchase.
Instructions
a. Prepare a cash budget for March.
b. Why is the cash budget important?
Solution Exercise 192 (9-12 mins.)
a.
Markus Corporation
Cash Budget
Month of March
Cash collections:
From March credit sales [(4,000 $9) 90% 25%]
From cash sales [(4,000 $9) 10%]
Cash collections from February sales ($43,000 90% 70%)
Cash collections from January sales ($39,000 90% 5%)
Total budgeted cash receipts during March
Cash payments:
From Februarys purchases ($22,000 25%)
From Marchs purchases ($19,000 75%) .97
Other fixed expenses
Total budgeted cash payments during March
Net cash receipts over payments
Beginning cash balance
Ending cash balance
$ 8,100
3,600
27,090
1,755
$40,545.00
$ 5,500.00
13,822.50
6,570.00
25,892.50
14,652.50
7,350.00
$22,002.50
b. Cash budgets are critical for owners of businesses like Markuss because managers need to
actively manage cash flows. Often a companys operating cash flow may need to be
supplemented with debt, such as a line of credit, for some months where the payments may
exceed receipts.
Exercise 193
Fling Company has budgeted the following unit sales for 4 months in 2012:
April
May
June
July
15,000
17,000
22,000
25,000
Of the units budgeted, 35% are sold in the Western Region at an average price of $80 per unit,
and the remainder are sold by the Eastern Region at an average price of $85 per unit.
Instructions
a. Prepare a sales budget with columns for each region and for the company in total for the
month of June.
Budgetary Planning
b.
10-51
$750
3% of selling price
6% of selling price
12% of selling price
15% of selling price
Fling Company
Sales Budget
For the Month Ending June 30, 2012
Western Region
Eastern Region
22,000 x .35
22,000 x .65
$80
$85
$616,000
$1,215,500
Total
22,000
$1,831,500
b.
Sales split 35%-65%
respectively
Base compensation
0 to 6,000 units @ 3% of
sales price
6,001 to 15,000 units
Western Region
15,000 x
35%=5,250 units
$750
5,250 units x 3% x
$80 = $12,600
0
Regional Total
13,350
Eastern Region
15,000 x 65% =
9,750 units
$750
6,000 units x 3% x
$85 = $15,300
3,750 units x 6% x
$85= $19,125
$35,175
Exercise 194
Smackaroos Enterprises manufactures two models of brooms, Model X2 and Model T3. The
budgeted units to be produced are as follows:
July
August
September
October
Model X2
8,750
5,125
7,350
9,125
Model T3
9,250
7,125
9,000
14,375
Total
18,000
12,250
16,350
23,500
It takes 1.7 kilograms of direct materials to produce Model X2 and twice as many kilograms of
direct materials to produce Model T3. It is the company's policy to maintain an inventory of direct
materials on hand at the end of each month equal to 25% of the next month's production needs.
The cost per kilogram of materials is $4.50 for T3 while the cost per kilogram of materials for X2
is the cost of the materials for T3.
Instructions
10-52
Prepare direct materials budgets for each product for the month of September.
Solution Exercise 194 (1012 min.)
Smackaroos Enterprises
Direct Materials Budget
For the Month Ending September 30, 2012
Model X2
Units to be produced
7,350
Direct materials per unit
1.7 kg.
Total kilograms needed for production
12,495
Add: Desired ending direct materials (kilograms)*
3,878.12
5
Total materials required
16,373.125
Less: Beginning direct materials (kilograms)**
(3,123.75)
Direct materials purchases
13,249.375
Cost per kilogram
$4.50
Total cost of direct materials purchases
$59,622.19
Model T3
9,000
3.4 kg.
30,600
12,218.
75
42,818.75
(7,650)
35,168.75
$2.2
5
$79,129.69
14,000
12,000
11,000
16,000
13,000
Each unit requires 2 metres of fabric which is estimated to cost $3.50 per metre. It is the
company's policy to maintain a finished goods inventory at the end of each month equal to 20%
of next month's anticipated sales. Clingy Company also have a policy of maintaining a raw
materials inventory at the end of each month equal to 10% of the metres needed for the following
month's production. There were 1,200 metres of fabric on hand at March 1.
Instructions
Prepare a production budget and a direct materials budget for March.
Solution Exercise 195 (1012 min.)
Clingy Company
Production Budget
For the Month Ending March 31
Expected unit sales
Desired ending finished goods units (20% x 16,000)
11,000
3,200
Budgetary Planning
10-53
14,200
2,200
12,000
Clingy Company
Direct Materials Budget
For the Month Ending March 31
Units to be produced
Direct materials per unit
Total metres needed for production
Desired ending direct materials in metres*
Total materials required
Less: Beginning direct materials in metres
Direct materials purchases
Cost per kilogram
Total cost of direct materials purchases
12,000
2
24,000
1,540
25,540
1,200
24,340
$3.50
$85,190
Units
60,000
50,000
40,000
80,000
The finished goods inventory on hand on December 31, 2012 was 6,000 units. 90% of the next
quarters sales will come from production during that quarter, and the remainder of next quarters
sales will come from this quarters ending inventory.
Instructions
Prepare a production budget for the second quarter of 2013.
Solution Exercise 196 (710 min.)
Coliseum Company
Production Budget
For the Quarter Ended June 30, 2013
Expected unit sales
Desired ending finished goods units (10%* x 40,000)
Total required units
Less: Beginning finished goods units (10%** x 50,000)
Required production units
50,000
4,000
54,000
5,000
49,000
* 90% of the third quarters sales is 90% x 40,000 = 36,000 units. Therefore 10% of the 3rd
quarters sales come from the 2nd quarters ending inventory, which needs to be 10% x 40,000
units, or 4,000 units in ending inventory.
10-54
** 90% of the second quarters sales is 90% x 50,000 = 45,000 units. Therefore 10% of the 2nd
quarters sales come from the 1st quarters ending inventory, which needs to be 10% x 50,000
units or 5,000 units in ending inventory for the first quarter. This then carries forward as beginning
inventory for the second quarter.
Exercise 197
The following facts are provided by Breanna Enterprises for March:
The total kilograms needed for production are 2.5 times the units to be produced.
The desired ending direct materials inventory is 10% of the total kilograms needed for
production in the following month.
Cost per kilogram is $12.
Total units to be produced is 280,000 in February, 325,000 in March and 300,000 in April.
Instructions
Determine the direct materials purchases for March.
Solution Exercise 197 (810 min.)
Units to be produced
Direct materials per unit
Total kilograms needed for production
Add: Desired ending direct materials (10% x 300,000 x 2.5)
Total materials required
Less: Beginning direct materials (10% x 325,000 x 2.5)
Direct materials purchases
Cost per kilogram
Total cost of direct materials purchases
325,000
2.5
812,500
75,000
887,500
81,250
806,250
$12
$9,675,000
Exercise 198
Harocase Company currently pays it employees $14 per hour. The company is preparing its
direct labour budget for 2012 from the following production budget based on a calendar year:
Quarter
1
2
3
4
Units
60,000
70,000
50,000
80,000
Each unit requires 75 minutes of direct labour. The union contract provides for a 8% increase in
wage rate on July 1.
Instructions
Prepare a direct labour budget for the third quarter of 2012.
Solution Exercise 198 (79 min.)
Harocase Company
Direct Labour Budget
For the Quarter Ending September 30, 2012
Units to be produced
50,000
Budgetary Planning
10-55
1.25
62,500
$15.12
$945,000
Exercise 199
Nolo Enterprises is preparing its master budget for 2012. Relevant data pertaining to its sales
budget are as follows:
Instructions
Prepare a sales budget for the third quarter of 2012 for Nolo Company.
Solution Exercise 199 (810 min.)
Nolo Enterprises
Sales Budget
For the Quarter Ending September 30, 2012
Unit sales (31% x 800,000)
Unit selling price (1.1 x 1.1 x $2)
Total sales
248,000
$2.42
$600,160
Exercise 200
Trickle Bakery combines its operating expenses for budget purposes in a selling and
administrative expense budget. For the first quarter of 2012, the following data are developed:
1.
2.
3.
4.
Sales:
Unit selling price:
Variable costs per dollar of sales:
Sales commissions
Delivery expense
Advertising
Fixed costs per quarter:
Sales salaries
Office salaries
Depreciation
Insurance
Utilities
34,000 units
$8
7%
1%
5%
$15,000
14,000
3,000
1,000
3,000
Instructions
Prepare a selling and administrative expense budget for the first quarter of 2012.
Solution Exercise 200 (810 min.)
10-56
Trickle Bakery
Selling and Administrative Expense Budget
For the Quarter Ended March 31, 2012
Variable expenses
Sales commissions (34,000 $8 7%)
Delivery expense (34,000 $8 1%)
Advertising (34,000 $8 5%)
Total variable
Fixed expenses
Sales salaries
Office salaries
Depreciation
Insurance
Utilities
Total fixed
Total selling and administrative expenses
$19,040
2,720
13,600
35,360
$15,000
14,000
3,000
1,000
3,000
36,000
$71,360
Exercise 201
Clark and Associates provides accounting services. It is preparing its quarterly budgeted income
statement for 2013. Ms. Clark anticipates that billable hours in the first quarter of 2013 will
increase by 5% over the same quarter of the preceding year, and by 6% in the second quarter.
There were 700 billable hours in the first quarter of 2012, and 600 in the second quarter. Ms.
Clark billed clients $200 per hour in 2012, and due to strong competition is unable to raise that
rate for the foreseeable future.
Salary expenses for both accountants and support staff are $20,000 plus 70% of revenue per
quarter. Income tax is 30%. Other quarterly expenses are estimated to be as follows:
Rent expense
Depreciation
Utilities expense
Miscellaneous expenses
$4,500
700
2,100
5% of revenue
Instructions
Prepare a budgeted quarterly income statement for the first quarter of 2013. (Show
computations.)
Solution Exercise 201 (1215 min.)
Clark and Associates
Budgeted Income Statement
For the Quarter Ending March 31, 2013
Revenue (700 hours X 1.05 X $200/hour)........................................................ $147,000
Operating expenses
Salary expense ($20,000 + [$147,000 X 0.70]).........$122,900
Rent expense..................................................................4,500
Depreciation.......................................................................700
Utilities expense..............................................................2,100
Miscellaneous expenses ($147,000 X 0.05)....................7,350
Total Expenses..................................................................................................137,550
Income before income tax...........................................................................................9,450
Budgetary Planning
10-57
2.
3.
4.
Expected Sales
October
$400,000
November
420,000
December
450,000
Cost of goods sold is expected to be 45% of sales.
Purchases for October are $180,900.
Desired ending merchandise inventory is 10% of the next month's cost of goods sold.
Instructions
Prepare the budgeted income statement for October through gross profit on sales, including a
cost of goods sold schedule.
Solution Exercise 202 (912 min.)
Fidelity Company
Budgeted Income Statement
For the Month Ending October 31, 2012
Sales
Cost of goods sold
Inventory, October 1 (10% x $400,000 x 45%)
Purchases
Cost of goods available for sale
Less: Inventory, October 31 (10% x $420,000 x 45%)
Cost of goods sold
Gross profit
$400,000
$ 18,000
180,900
198,900
18,900
180,000*
$220,000
$ 90,000
100,000
80,000
70,000
110,000
60,000
Past experience has indicated that 80% of sales each month are on credit and that collection of
credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and
3% in the second month following the sale. The other 2% is uncollectible.
10-58
Instructions
a. Prepare a schedule which shows expected cash receipts from sales for the month of May.
b. Do the remaining 2% of accounts that are uncollectible represent a cash disbursement for
the month? Explain.
Solution Exercise 203 (79 min.)
a.
Carlson Company
Expected Cash Receipts from Sales
For the Month Ended May 31
March sales
Credit sales: ($80,000 .80 .03)
April sales
Credit sales: ($70,000 .80 .35)
May sales
Credit sales: ($110,000 .80 .60)
Cash sales: ($110,000 .20)
Total cash receipts
$ 1,920
19,600
52,800
22,000
$96,320
b. No, the remaining 2% do not represent a cash disbursement for the month. In fact, those
accounts are never collected, so there is no cash paid out by the company for their noncollection.
Exercise 204
Sushi House has budgeted sales revenues as follows:
Credit sales
Cash sales
Total sales
June
$85,000
14,000
$99,000
July
$ 80,000
25,000
$105,000
August
$ 72,000
32,000
$104,000
Past experience indicates that 70% of the credit sales will be collected in the month of sale and
the remaining 30% will be collected in the following month. Purchases of inventory are all on
credit and 60% is paid in the month of purchase and 40% in the month following purchase.
Budgeted inventory purchases are:
June
July
August
$45,000
43,000
40,000
Other cash disbursements budgeted: selling and administrative expenses of $14,000 each
month, dividends of $30,000 will be paid in July, and purchase of a computer in August for $3,000
cash. The company wishes to maintain a minimum cash balance of $20,000 at the end of each
month. The company borrows money from the bank at 9% interest if necessary to maintain the
minimum cash balance and must be paid each month whether there is a loan repayment or not.
Borrowed money is repaid in months when there is an excess cash balance. The beginning cash
balance on July 1 was $25,000. All amounts borrowed during a month are borrowed on the first
day. The loan balance as of July 1 is $26,000.
Budgetary Planning
10-59
Instructions
Prepare a cash budget for the month of July. Prepare separate schedules for expected collections
from customers and expected payments for purchases of inventory.
Solution Exercise 204 (1216 min.)
Sushi House, Inc.
Cash Budget
For the Month Ending July 31
Beginning cash balance
Add: Receipts
Collections from customers:
July sales [$25,000 + ($80,000 x 70%)]
$81,000
June sales [$85,000 x 30%]
25,500
Total receipts
Total available cash
Less: Disbursements
Purchases during July (60% x $43,000)
$25,800
Purchases during June (40% x $45,000)
18,000
Selling and administrative expenses
14,000
Dividends
30,000
Total disbursements
Excess of available cash over disbursements
Financing
Repayments interest (.09/12 x $26,000)
Repayments principal ($23,700 excess - $195 interest)
Ending cash balance
$25,000
106,500
131,500
87,800
43,700
(195)
(23,505)
$20,000
Exercise 205
Royal Bank of America has asked Maquire and Ferlow Ltd. for a budgeted balance sheet for the
year ended December 31, 2013. The following information is available:
1.
2.
3.
4.
5.
6.
The cash budget shows an expected cash balance of $26,000 at December 31, 2013.
The 2012 sales budget shows total annual sales of $500,000. All sales are made on account
and accounts receivable at December 31, 2013 are expected to be 8% of annual sales.
The merchandise purchases budget shows budgeted cost of goods sold for 2013 of
$210,000 and ending merchandise inventory of $21,000. 20% of the ending inventory is
expected to have not yet been paid at December 31, 2013.
The December 31, 2012 balance sheet includes the following balances: Equipment
$127,000, Accumulated Depreciation $52,000, Common Stock $68,000, and Retained
Earnings $21,000.
The budgeted income statement for 2013 includes the following: depreciation on equipment
$6,000, federal income taxes $21,000, and net income $41,800. The income taxes will not
be paid until 2013.
In 2013, management does not expect to purchase additional equipment or to declare any
dividends. It does expect to pay all operating expenses, other than depreciation, in cash.
Instructions
10-60
$ 26,000
40,000
21,000
69,000
$156,000
$ 4,200
21,000
68,000
62,800
$156,000
Exercise 206
The sales manager of EKP Inc. has estimated sales for January, February, March, and April will
be $70,000, $75,000, $83,000 and $90,000 respectively. Further, the manager expects that 10%
of the sales will be for cash, and the collection of the credit sales will be made as follows:
Month of sale
Month following the sale
Second month following the sale
60%
20%
15%
$ 9,450
13,500
8,300
44,820
$76,070
$ 9,685
76,070
85,755
83,450
2,305
Budgetary Planning
Financing
Borrowing
Ending cash balance
10-61
4,695
$7,000
Exercise 207
Mrs. Claus Things specializes in sales of Christmas decorations. Therefore, the companys sales
are seasonal. Budgeted figures for 2012 are presented below.
Budgeted Sales
1
$80,000
Quarter
2
3
$60,000
$120,000
4
$460,000
From past experience, Mrs. Claus Things has determined that 60% of its credit sales are
collected in the quarter of sale and 40% are collected in the quarter following the sale. Fourth
quarter sales for 2011 totalled $420,000.
Instructions
Determine Mrs. Claus Things cash collections for the third quarter of 2012.
Solution Exercise 207 (47 min.)
Second quarter ($60,000 .40)
Third quarter ($120,000 .60)
Total cash collections
$24,000
72,000
$96,000
Exercise 208
OJ Small Company needs a cash budget for the month of April, 2012. The companys controller
has provided you with the following information and assumptions:
1.
2.
All sales are on account. Credit sales are collected over a three-month period50 percent in
the month of sale, 35 percent in the month following sale, and 15 percent in the second
month following sale. Actual sales for February and March were $100,000 and $90,000,
respectively. Aprils sales are budgeted at $110,000.
Marketable securities are expected to be sold for $25,000 during the month of April.
The controller estimates that direct materials totalling $44,000 will be purchased during April.
Sixty percent of a months raw materials purchases are paid in the month of purchase with
the remaining 40 percent paid in the following month. Accounts payable for March purchases
total $9,000, which will be paid in April.
During April, direct labour costs are estimated to be $19,000.
Manufacturing overhead is estimated to be 40 percent of direct labour costs, Further, the
controller estimates that approximately 10 percent of the manufacturing overhead is
depreciation on the factory building and equipment.
Selling and administrative expenses are budgeted at $22,000 for April. Of this amount,
$7,000 is for depreciation.
During April, OJ Small Company plans to buy a new delivery van costing $25,000. The
company will pay cash for the van.
OJ Small Company owes $35,000 in income tax, which must be paid in April.
3.
4.
5.
6.
7.
8.
9.
10-62
10. OJ Small Company must maintain a minimum cash balance of $10,000. To bolster the cash
position as needed, an open line of credit is available from the bank.
Instructions
Prepare the following:
a.
b.
c.
A cash budget for the month of April. Indicate in the financing section any borrowing that will
be necessary during the month.
OJ Small Company
Cash Budget
For the month ending April 30, 2012
$ 11,000
$101,500
25,000
126,500
137,500
35,400
19,000
6,840
15,000
25,000
35,000
136,240
1,260
8,740
$ 10,000
Exercise 209
In September 2012, the management of Whitehorse Company assembles the following data in
preparation of budgeted merchandise purchases for the months of October, November, and
December.
1.
Expected Sales
October
November
December
$700,000
800,000
600,000
Budgetary Planning
2.
3.
4.
10-63
Instructions
Calculate the budgeted merchandise purchases for November.
Solution Exercise 209 (79 min.)
Whitehorse Company
Merchandise Purchases Budget
For the Month of November, 2012
Budgeted cost of goods sold (60% x $800,000)
$480,000
Desired ending merchandise inventory (12% x 60% x $600,000)
43,200
Total
523,200
Less: Beginning merchandise inventory (12% x 60% x $800,000)
57,600
Required merchandise purchase
$465,600
Exercise 210
Brainstorm with a friend on the meanings of budgeting and control. How are budgets used in
planning? How are budgets used to control organizational behaviours and outcomes? What are
some of the reasons for budgeting?
Solution 210
Answers will vary by student.
Budgets are plans expressed numerically. Budgets are used to translate the plans, goals and
strategies of a company into operational terms.
Control, by contrast, is the process of setting standards, receiving feedback on actual
performance and taking corrective action whenever actual performance deviates from planned
outcomes. Budgets are the standards, and they are compared with actual costs and revenues to
provide feedback to managers who can then take measure to remedy the situation.
Budgeting forces management to plan ahead. It also provides information on resource usage
information for decision making (and future planning), sets benchmarks for control and
evaluation, and improves the function of communication and coordination.
Exercise 211
If you could imagine the ideal budgetary process, what features would it have?
Solution 211
You are indeed imagining!
Budget preparers do try to create budgets that evaluate performance that are based on costs that
are actually controllable by managers. Measures other than budgets should be used to measure
managerial performance, including reduced attrition rate of employees, employee satisfaction
(from surveys) customer satisfaction (from surveys) diminished throughput time, reduced
employee absenteeism and the like. Budgeting should be participative, so that more than just one
level of employee has a say; this increases communication throughout all the levels of a
10-64
company, and shares responsibility for meeting budgets amongst the masses. Budgets should
provide routine, timely feedback and incentives for achieving organization-wide goals.
Exercise 212
Sales for January, February and March are expected to be $200,000, $180,000 and $220,000
respectively for Cito Gaston Inc. All sales are on account, with terms 2/15, net 30, and are
collected as follows: 50% in the month of the sale, and the remaining 50% in the month following
the sale. One-half of all sales discounts are taken on the average. Materials are purchased one
month before being needed in production. All purchases and expenses are paid for as incurred.
Activities for the quarter are expected to be:
January
$40,000
$70,000
$18,000
$36,000
$14,000
Nil
$8,000
Materials used
Salaries
Maintenance
Depreciation
Water and heat
Dividends paid to shareholders
Debt repayment on bonds
February
$36,000
$68,000
$18,000
$36,000
$14,000
$10,000
$8,000
March
$44,000
$72,000
$18,000
$36,000
$14,000
Nil
$8,000
Instructions
Prepare a cash budget, showing inflows and outflows, for February.
Solution 212
Cash receipts:
Sales
January ($200,000 x 0.50 x.99*)
February ($180,000 x 0.50 x .99*)
Total cash receipts
$ 99,000
$ 89,100
Cash disbursements:
Materials
Salaries
Maintenance
Water and heat
Dividends paid
Debt repayment on bonds
Net cash inflow
$44,000
$68,000
$18,000
$14,000
$10,000
$8,000
$162,000
$ 26,100
Exercise 213
The Doorjam Company makes the latest in technologically advanced door jams. Its product is in
such demand that it need to protect itself against stock outs of its product. To do so, it calculates
that 20% of the next months sales be on hand at the end of each month Budgeted unit sales for
the next four months are:
Monthly budgeted sales
April
40,000
May
50,000
Instructions
Calculate the budgeted production for June
June
60,000
July
70,000
Budgetary Planning
Solution 213
Needs:
60,000
14,000
(12,000)
62,000
Exercise 214
The Springfield Company makes collections on its sales in the following manner:
In the month of sale
In the first month following sale
In the second month following sale
40% of sales
50% of sales
7% of sales
$150,000
170,000
190,000
Instructions
Calculate the budgeted cash collections for Springfield for the month of March.
Solution 214
($190,000 x 40%) + ($170,000 x 50%) + ($150,000 x 7%) = $171,500
10-65
10-66
COMPLETION STATEMENTS
215.
216.
217.
218.
The budget should have the support of _________________ and should be an important
basis for _________________________ by comparing actual results to expected results.
219.
220.
221.
A major difference between the annual budget and long-range planning is the
____________________ over which the data pertain.
222.
223.
224.
225.
226.
The two major differences between the master budgets of merchandisers and
manufacturers are that the merchandiser will have a ______________________ budget
and will not have __________________ budgets.
Budgetary Planning
10-67
budget
222.
sales budget
216.
communicating
223.
217.
organizational structure
218.
224.
master budget
219.
continuous twelve-month
225.
220.
budget committee
221.
time period
226.
10-68
MATCHING
Matching 227
Match the items below by entering the appropriate code letter in the space provided.
A.
B.
C.
D.
E.
Budget
Financial budgets
Budget committee
Master budget
Sales forecast
F.
G.
H.
I.
J.
Production budget
Cash budget
Long-range planning
Direct materials budget
Sales budget
6.
2. J
7.
3. B
8.
4. E
9.
5. A
10.
Matching 228
A list of budgets and some assigned budget codes appear below:
Budget Code:
Budgetary Planning
DM
DL
P
S
C
BBS
BIS
SA
MOH
10-69
Instructions
For each item listed in 1 through 6 below, identify the budget in which it will appear. If an item will
appear on more than one budget, then indicate as many budgets as are relevant.
1.
2.
3.
4.
5.
6.
Interest expense
Ending raw materials inventory (in dollars)
Ending finished goods inventory (in dollars)
Ending cash balance
Total selling and administrative expenses
Total sales (in dollars)
C, BIS
2.
BBS, DM
3.
BBS, BIS
4.
BBS, C
5.
SA, BIS
6.
S, BIS
10-70
Budgetary Planning
b.
10-71
trimmed will not exceed the amount of the padding. The decision as to whether the addition
of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive
method of adding padding to one's own budget would be unethical.
As Ken Clarke's superior, Ms. Jackson has the obligation to correct his mistakes. Apparently,
in this particular company, budgets are trimmed in committee, with the expectation that all
budgets contain some expenses that could be removed without harm to the company. Ken
must continue to be honest. One way to do that would be for Ken to submit his trimmed
budget, and then note the costs that are most likely to exceed the budget, and by how much.
This would give Ms. Jackson the ability to intelligently defend his budget while in committee.
10-72
MULTI-PART QUESTION
Multi-Part Question 233
Overcast Umbrellas is budgeting its sales for its top-of-the-line umbrella, Number 142, as 50,000
units for the month of March. To make one of these umbrellas, two metres of Nylon fabric are
required. Actual beginning and ending inventories of the nylon fabric and Number 142 are as
follows:
Nylon fabric
Raw material
Work in progress inventory
Number 142
March 1
March 31
90,000 m
0m
130,000 m
0m
25,000 units
35,000 units
Instructions
Calculate the amount of material that Overcast should purchase in March.
Solution Multi-Part Question 233
Number 142 Sales
Ending inventory
Total needs
Less opening inventory
Direct Material A
Required for production 60,000 x 2 m
Ending inventory
Total needs
Less opening inventory
50,000
35,000
85,000
(25,000)
60,000
120,000
130,000
250,000
(90,000)
160,000