BUDGETARY PLANNING

Handout 8-1 (LO 1)

Which of the following statements is (are) false?
1.

________

An important part of the organizing process is the creation of a budget.

2.

________

Directing/leading, involves all actions managers must take to implement the plan
including motivating employees to achieve results.

3.

________

The control function is the forward-looking part of the planning and control cycle.

4.

________

The starting point of the planning process is managements strategic plan or vision of
what they want the organization to achieve over the long term.

5.

________

A short-term objective is a specific goal that managers want to achieve in more than a
year to reach their long-term goals.

6.

________

Planning is the forward-looking phase of the planning and control process that involves
setting long-term objectives and defining short-term tactics that will help to achieve them.

7.

________

Budgets should not be used to motivate and reward employees.

8.

________

Budgets play an important communication role within organizations. They provide a

mechanism for managers to share expectations and priorities for the future.

9.

________

Budgets also provide useful benchmarks for evaluating and rewarding employee
performance.

10
.

________

One of the major advantages of budgeting is that it forces managers to look to the future.

Handout 8-2
Which of the following statements is (are) false?

1
.

______
_

2
.

______
_

3
.

______
_

4
.

______
_

5
.

______
_

Operating budgets focus on the financial resources needed to support operations including
cash receipts and disbursements, capital expenditures and financing.
A participative approach is less likely to motivate people to work toward an organizations
goal than a top-down approach.
Participative budgeting allows employees throughout the organization to have input into
the budget-setting process.
One downside to participative budgeting is that managers may try to build a little extra
cushion, or budget slack, into their budget.
Budget can also create a use-it-or-lose-it mentality that encourages managers to spend
their entire budgets to avoid a reduction in the next budget period.

8-1
.

Handout 8-3
Rearrange the following budgets to be consistent with the sequence of the budgeting process.
Production Budget
Budgeted Balance Sheet
Selling and Administrative Budget
Sales Budget
Budgeted Income Statement
Raw Materials Purchases budget

Handout 8-4
1. Complete the sales budget of Strong, Inc. for this coming year.

Budgeted unit sales

Budgeted sales price
Budgeted sales revenue

Quarter 1
1,000
$100

Quarter 2
2,000
$100

Quarter 3
3,000
$100

Quarter 4
4,000
$100

Year
10,000
$100

Quarter 4
4,000

Year
10,000

2. Complete the production budget of Strong, Inc. for this coming year.

Budgeted unit sales

Budgeted ending inventory
(10% of current period
budgeted sales)
Budgeted beginning
inventory
Budgeted production

Quarter 1
1,000

Quarter 2
2,000

Quarter 3
3,000

300

3. Complete the raw materials purchases budget of Strong, Inc. for this coming year.

Budgeted production
Materials requirement
1 ounce per unit
Total materials needed for
production
Planned ending raw
materials inventory
(5% of current quarters
production needs)
Planned beginning raw
materials inventory
Total purchases of raw
materials
Average cost of raw
materials per ounce
($10)
Total cost of purchases of
raw materials

Quarter 1
800

Quarter 2
2,100

Quarter 3
3,100

50

4. Complete the direct labor budget of Strong, Inc. for this coming year.
8-2
.

Quarter 4
4,100

Year
10,100

Budgeted production
Direct labor requirement
(0.1 hour per unit)
Total direct labor hours
needed for production
Direct labor cost per hour
($10 per hour)

Quarter 1
800

Quarter 2
2,100

Quarter 3
3,100

Quarter 4
4,100

Year
10,100

Total direct labor cost

5. Complete the budgeted manufacturing overhead cost budget of Strong, Inc. for this coming year.

Budgeted production
Variable overhead rate
($2 per unit)
Total variable
manufacturing overhead
Fixed manufacturing
overhead
Total budgeted
manufacturing overhead
cost

Quarter 1
800

Quarter 2
2,100

Quarter 3
3,100

Quarter 4
4,100

Year
10,100

$5,000

$5,000

$5,000

$5,000

$20,000

6. Given the budgeted manufacturing cost per unit, compute the cost of goods sold budget of Strong,
Inc. for this coming year.
Budgeted raw materials cost per unit (1 ounce per unit $10 per ounce)
Budgeted direct labor cost per unit (0.10 hour per unit $10 per hour)
Budgeted variable manufacturing overhead cost per unit
Budgeted fixed manufacturing cost per unit
($20,000 per year 10,000 units)
Budgeted manufacturing cost per unit
Quarter 1

Quarter 2

Quarter 3

$10
$1
$2
$2
$15
Quarter 4

Year

Budgeted units sales

Budgeted manufacturing
cost per unit
Budgeted cost of goods
sold

7. Complete the selling and administrative budget of Strong, Inc. for this coming year.

Budgeted sales revenue

10% of sales revenue
Variable selling expenses
Fixed administrative
expenses
Total budgeted selling and
administrative expense

Quarter 1
$100,000

Quarter 2
$200,000

Quarter 3
$300,000

Quarter 4
$400,000

5%

5%

5%

5%

Year
$1,000,00
0
5%

$50,000

$50,000

$50,000

$50,000

$200,000

8. Complete the budgeted income statement of Strong, Inc. for this coming year.

Budgeted sales revenue

Quarter 1
$100,000

Quarter 2
$200,000
8-3
.

Quarter 3
$300,000

Quarter 4
$400,000

Year
$1,000,000

Budgeted cost of goods

sold
Budgeted gross margin
Budgeted selling and
administrative expenses
Budgeted operating
income

Handout 8-5
The sales revenues of Strong, Inc. for this coming year are as follows.

Budgeted sales revenue

Quarter 1
$100,000

Quarter 2
$200,000

Quarter 3
$300,000

Quarter 4
$400,000

Year
$1,000,000

40% of the total sales are paid by cash in the same quarter of sales and 60% of total sales are credit sales.
Strong, Inc. expects to collect 50% of the credit sales in the same quarter and the remaining 50% of credit
sales in the next quarter. The beginning balance of accounts receivable is $50,000 (i.e., the remaining
credit sales from the last quarter of the previous year to be collected).
Compute the schedule of cash collections for Strong, Inc.

Budgeted sales revenue

Cash sales of the current
quarter (40% of the
total sales)
Credit sales (60% of total
sales)
Collected in the
current quarter
(50%)
Collected in the next
quarter (50%) or
accounts receivable
from the previous
quarter to be
collected

Quarter 1
$100,000

Quarter 2
$200,000

Quarter 3
$300,000

Quarter 4
$400,000

Year
$1,000,000

50,000

Budgeted cash collections

Handout 8-6
The raw materials purchases of Strong, Inc. for this coming year are as follows.

Raw materials purchases

Quarter 1
$8,000

Quarter 2
$22,300

Quarter 3
$32,000

Quarter 4
$42,000

Year
$104,300

20% of the raw materials purchases will be paid in the same quarter of purchase and the remaining 80%
will be paid in the following quarter. The beginning balance of accounts payable is $8,000 (i.e., the
remaining unpaid purchase from the last quarter of the previous year).
Compute the schedule of cash payments for materials purchases of Strong, Inc.

8-4
.

Raw materials purchases

20% paid for in month of
purchase
80% paid for in the
following month or
accounts payable from
the previous quarter to
be paid
Cash paid for raw
materials

Quarter 1
$8,000

Quarter 2
$22,300

Quarter 3
$32,000

Quarter 4
$42,000

Year
$104,300

8,000

Handout 8-7
MGG, Inc. needs to maintain a $500 minimum cash balance at anytime. MGG, Inc. has enough credit
line from a bank to obtain bank loans. The interest rate of bank loans is 12% (i.e., 3% per quarter). We
assume that the bank loans are always borrowed or repaid at the end of the quarter and the loans must be
repaid as soon as the company has enough money to do so.
Complete the following cash budget of MGG, Inc.:
Quarter 1
Beginning cash balance

Quarter 2

Quarter 3

Quarter 4

Year

400

1,000

900

2,800

$1,000

Budgeted cash collections

Budgeted cash payments

800

Cash Balance before

financing

700

794
300

3,194
600

Cash borrowed (repaid)

(6)

Ending cash balance

$500

8-5
.