CHAPTER 22

BUDGETARY PLANNING

CHAPTER LEARNING OBJECTIVES

1. State the essentials of effective budgeting and components of the master budget. The primary benefits of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives. The essentials of effective budgeting are (a) sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of management.

The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manufacturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet.

2. Prepare budgets for sales, production, and direct materials. The sales budget is derived from sales forecasts. The production budget starts with budgeted sales units, adds desired ending finished goods inventory, and subtracts beginning finished goods inventory to arrive at the required number of units to be produced. The direct materials budget starts with the direct materials units (e.g., pounds) required for budgeted production, adds desired ending direct materials units, and subtracts beginning direct materials units to arrive at required direct materials units to be purchased. This amount is multiplied by the direct materials cost (e.g., cost per pound) to arrive at the total cost of direct materials purchases.

3. Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement. The direct labor budget starts with the units to be produced as determined in the production budget. This amount is multiplied by the direct labor hours per unit and the direct labor cost per hour to arrive at the total direct labor cost. The manufacturing overhead budget lists all of the individual types of overhead costs, distinguishing between fixed and variable costs. The selling and administrative expense budget lists all of the individual types of selling and administrative expense items, distinguishing between fixed and variable costs. The budgeted income statement is prepared from the various operating budgets. Cost of goods sold is determined by calculating the budgeted cost to produce one unit, then multiplying this amount by the number of units sold.

4. Prepare a cash budget and a budgeted balance sheet. The cash budget has three sections (receipts, disbursements, and financing) and the beginning and ending cash balances. Receipts and payments sections are determined after preparing separate schedules for collections from customers and payments to suppliers. The budgeted balance sheet is developed from the budgeted balance sheet from the preceding year and the various budgets for the current year.

5. Apply budgeting principles to nonmanufacturing companies. Budgeting may be used by merchandisers for development of a merchandise purchases budget. In service companies, budgeting is a critical factor in coordinating staff needs with anticipated services. In not-for-profit organizations, the starting point in budgeting is usually expenditures, not receipts.

TRUE-FALSE STATEMENTS

1. Budgets are statements of management's plans stated in financial terms.

2. A benefit of budgeting is that it provides definite objectives for evaluating performance.

3. A budget can be a means of communicating a company's objectives to external parties.

4. A budget can be used as a basis for evaluating performance.

5. A well-developed budget can operate and enforce itself.

6. The budget itself and the administration of the budget are the responsibility of the accounting department.

7. Effective budgeting requires clearly defined lines of authority and responsibility.

8. The flow of input data for budgeting should be from the highest levels of responsibility to the lowest.

9. Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered.

10. A budget can facilitate the coordination of activities among the segments of a large company.

11. The longer the budget period, the more reliable the estimates of future outcomes.

12. The budget committee has the responsibility for coordinating the preparation of the budget.

13. The budget is developed within the framework of a sales forecast.

14. Budgeting and long-range planning are two terms that describe the same process.

15. Long-range plans are used more as a review of progress toward long-term goals rather than an evaluation of specific results to be achieved.

16. The master budget reflects management's long-term plans encompassing five years or more.

17. The master budget consists of operating and financial budgets.

18. Financial budgets must be completed before the operating budgets can be prepared.

19. The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known.

20. The number of direct labor hours needed for production is obtained from the production budget.

21. A manufacturing overhead budget is not needed if the company calculates a

predetermined overhead rate to apply overhead.

22. The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs.

23. A production budget should be prepared before the sales budget.

24. The direct materials budget contains both quantity and cost data.

25. The budgeted income statement projects the expected profitability of operations for the next year.

26. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

27. The budgeted balance sheet can be prepared entirely from the budgets for the current year.

28. The starting point when budgeting for a not-for-profit organization is generally to budget expenditures first.

29. A merchandiser has a merchandise purchases budget rather than a production budget.

30. A critical factor in budgeting for a service firm is to determine the amount of products to purchase.

31. Preparation and administration of the budget are entirely responsibilities of the accounting department.

32. Financial planning models and statistical and mathematical techniques may be used in forecasting sales.

33. The direct materials budget is derived from the direct materials units required for production plus desired ending direct materials units less beginning direct materials units.

34. The manufacturing overhead budget shows the expected manufacturing overhead costs.

35. In order to develop a budgeted balance sheet, the previous year's balance sheet is needed.

36. In service enterprises, the critical factor in budgeting is coordinating materials and equipment with anticipated services.

MULTIPLE CHOICE QUESTIONS

37. Why are budgets useful in the planning process?

a. They provide management with information about the company's past performance.

b. They help communicate goals and provide a basis for evaluation.

c. They guarantee the company will be profitable if it meets its objectives.

d. They enable the budget committee to evaluate the performance of employees.

38. A budget

a. is a substitute for management.

b. is an aid to management.

c. can operate or enforce itself.

d. is the responsibility of the accounting department.

39. Accounting generally has the responsibility for

a. setting company goals.

b. expressing the budget in financial terms.

c. enforcing the budget.

d. administration of the budget.

40. Which one of the following is not a benefit of budgeting?

a. It facilitates the coordination of activities.

b. It provides definite objectives for evaluating performance.

c. It provides assurance that the company will achieve its objectives.

d. It requires all levels of management to plan ahead on a recurring basis.

41. Budgeting is usually most closely associated with which management function?

a. Planning

b. Directing

c. Motivating

d. Controlling

42. Which of the following items does not follow from the adoption of a budget?

a. Promotes efficiency

b. Deterrent to waste

c. Basis for performance evaluation

d. Guarantee of accomplishing the profit objective

43. Which is true of budgets?

a. They are voted on and approved by stockholders.

b. They are used in the planning, but not in the control process.

c. There is a standard form and structure for budgets.

d. They are used in performance evaluation.

44. A common starting point in the budgeting process is

a. expected future net income.

b. past performance.

c. motivating the sales force.

d. a clean slate, with no expectations.

45. The effectiveness of budgeting is enhanced by all of the following except

a. acceptance at all levels of management.

b. research and analysis in setting realistic goals.

c. stockholders' approval.

d. sound organizational structure.

46. The effectiveness of a budget is enhanced by

a. a history of successful operations.

b. independent verification of budget goals.

c. an organizational structure with clearly defined lines of authority and responsibility.

d. excess plant capacity.

47. It is important that budgets be accepted by

a. division managers only.

b. department heads only.

c. supervisors only.

d. division managers, department heads, and supervisors.

48. Which of the following statements about budget acceptance in an organization is true?

a. The most widely accepted budget by the organization is the one prepared by top management.

b. The most widely accepted budget by the organization is the one prepared by the department heads.

c. Budgets are hardly ever accepted by anyone except top management.

d. Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process.

49. Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation. Which of the following statements is applicable?

a. Department managers should be held accountable for all variances from budgets for their departments.

b. Department managers should only be held accountable for controllable variances for their departments.

c. Department managers should be credited for favorable variances even if they are beyond their control.

d. Department managers' performances should not be evaluated based on actual results to budgeted results.

50. An unrealistic budget is more likely to result when it

a. has been developed in a top down fashion.

b. has been developed in a bottom up fashion.

c. has been developed by all levels of management.

d. is developed with performance appraisal usages in mind.

51. A budget is more likely to be effective if

a. it is used to assess blame when things do not occur according to plans.

b. it is not used to evaluate a manager's performance.

c. employees and managers at the lower levels do not get involved in the budgeting process.

d. it has top management support.

52. In many companies, responsibility for coordinating the preparation of the budget is assigned to

a. the company's independent certified public accountants.

b. the company's internal auditors.

c. the company's board of directors.

d. a budget committee.

53. A budget period should be

a. monthly.

b. for a year or more.

c. long-term.

d. long enough to provide obtainable goals under normal business conditions.

54. If a company has adopted continuous budgeting, the budget will show plans for

a. every day.

b. a full year ahead.

c. the current year and the next year.

d. at least five years.

55. The most common budget period is

a. one month.

b. three months.

c. six months.

d. one year.

56. Budget development for the coming year usually starts

a. a year in advance.

b. the first month of the year to be budgeted.

c. several months before the end of the current year.

d. the last month of the previous year.

57. The budget committee would not normally include the

a. research director.

b. treasurer.

c. sales manager.

d. external auditor.

58. All of the following can be a budget period except

a. a month.

b. a quarter.

c. a year.

d. each of these options can be a budget period.

59. Long-range planning

a. generally presents more detailed information than an annual budget.

b. generally encompasses a longer period of time than an annual budget.

c. is usually more accurate than an annual budget.

d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.

60. Long-range planning usually encompasses a period of at least

a. six months.

b. 1 year.

c. 5 years.

d. 10 years.

61. Which of the following is not a proper match-up?

a. Long range planning ↔ Strategies

b. Budgeting ↔ Short-term goals

c. Long-range planning ↔ 5 years

d. Budgeting ↔ Long-term goals

62. Which is the last step in developing the master budget?

a. Preparing the budgeted balance sheet

b. Preparing the cost of goods manufactured budget

c. Preparing the budgeted income statement

d. Preparing the cash budget

63. If there were 60,000 pounds of direct materials on hand on January 1, 120,000 pounds are desired for inventory at January 31, and 410,000 pounds are required for January production, how many pounds of direct materials should be purchased in January?

a. 350,000 pounds

b. 530,000 pounds

c. 290,000 pounds

d. 470,000 pounds

64. In preparing a direct labor budget, the number of direct labor hours required is calculated using the

a. sales forecast.

b. production budget.

c. direct materials budget.

d. sales budget.

65. The direct materials and direct labor budgets provide information for preparing the

a. sales budget.

b. production budget.

c. manufacturing overhead budget.

d. cash budget.

66. A sales forecast

a. shows a forecast for the firm only.

b. shows a forecast for the industry only.

c. shows forecasts for the industry and for the firm.

d. plays a minor role in the development of the master budget.

67. Which of the following is not an operating budget?

a. Direct labor budget

b. Sales budget

c. Production budget

d. Cash budget

68. Which of the following is not a financial budget?

a. Capital expenditure budget

b. Cash budget

c. Manufacturing overhead budget

d. Budgeted balance sheet

69. Which of the following can be done to improve the reliability of the sales forecast?

a. Employ financial planning models

b. Lengthen the planning horizon to more than a year

c. Rely solely on outside consultants

d. Use the sales forecasts from the previous year

70. The financial budgets include the

a. cash budget and the selling and administrative expense budget.

b. cash budget and the budgeted balance sheet.

c. budgeted balance sheet and the budgeted income statement.

d. cash budget and the production budget.

71. The culmination of preparing operating budgets is the preparation of the

a. budgeted balance sheet.

b. production budget.

c. cash budget.

d. budgeted income statement.

72. The following information is taken from the production budget for the first quarter:

Beginning finished goods units 1,200

Expected sales units 426,000

Capacity in units of production facility 472,000

How many units of finished goods should be produced during the quarter if the company desires 3,200 finished goods units available to start the next quarter?

a. 428,000

b. 424,000

c. 474,000

d. 429,200

73. An overly optimistic sales budget may result in

a. increases in selling prices late in the year.

b. insufficient inventories.

c. increased sales during the year.

d. excessive inventories.

74. In the production budget, total required production units is equal to the expected sales units plus

a. beginning finished goods units.

b. desired ending finished goods units.

c. desired ending finished goods units plus beginning finished goods units.

d. desired ending finished goods units minus beginning finished goods units.

75. The direct materials budget details:

1. the quantity of direct materials to be purchased.

2. the cost of direct materials to be purchased.

a. 1

b. 2

c. both 1 and 2

d. neither 1 nor 2

76. The production budget shows expected unit sales of 32,000. Beginning finished goods units are 3,600. Required production units are 33,600. What is the desired number of units in ending finished goods?

a. 2,000

b. 3,600

c. 6,400

d. 5,200

77. The production budget shows expected sales units are 100,000. The required production units are 104,000. What are the beginning and desired ending finished goods units, respectively?

Beginning Units Ending Units

a. 10,000 6,000

b. 6,000 10,000

c. 4,000 10,000

d. 10,000 4,000

78. The production budget shows expected sales units of 48,000. The total required units are 54,000. What are required production units?

a. 6,000

b. 9,000

c. 12,000

d. Cannot be determined from the data provided.

79. The direct materials budget shows the following:

Units to be produced 3,000

Direct materials pounds required for production 9,000

Direct materials pounds to be purchased 9,900

What are the direct materials per unit?

a. .33 pounds

b. 3.0 pounds

c. 3.3 pounds

d. Cannot be determined from the data provided.

80. The direct materials budget shows the following:

Desired ending direct materials 18,000 pounds

Direct materials required for production 99,000 pounds

Beginning direct materials 13,200 pounds

The total quantity of direct materials to be purchased is

a. 103,800 pounds.

b. 94,200 pounds.

c. 112,200 pounds.

d. 117,000 pounds.

81. If the required direct materials purchases are 24,000 pounds, the direct materials required for production is three times the direct materials purchases, and the beginning direct materials inventory is three and a half times the direct materials purchases, what is the desired ending direct materials inventory in pounds?

a. 60,000

b. 12,000

c. 36,000

d. 24,000

82. Dart, Inc. 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:

Unit Variable Cost Monthly Fixed Cost

Sales commissions $0.60 $ 6,000

Shipping 1.20

Advertising 0.30

Executive salaries 40,000

Depreciation on office equipment 8,000

Other 0.35 28,000

Expenses are paid in the month incurred. If the company has budgeted sales of 8,000 umbrellas in October, what is the total budgeted variable selling and administrative expenses for October?

a. $16,800

b. $18,400

c. $101,600

d. $19,600

83. Which of the following expenses would not appear on a selling and administrative expense budget?

a. Sales commissions

b. Depreciation

c. Property taxes

d. Indirect labor

84. Which of the following would not appear as a fixed expense on a selling and administrative expense budget?

a. Freight-out

b. Office salaries

c. Property taxes

d. Depreciation

85. A master budget consists of

a. an interrelated long-term plan and operating budgets.

b. financial budgets and a long-term plan.

c. interrelated financial budgets and operating budgets.

d. all the accounting journals and ledgers used by a company.

86. The starting point for preparing the master budget is the preparation of the

a. production budget.

b. sales budget.

c. purchasing budget.

d. personnel budget.

87. Which one of the following is not needed to prepare a production budget?

a. Budgeted unit sales

b. Budgeted raw materials

c. Beginning finished goods units

d. Ending finished goods units

88. A company budgeted unit sales of 204,000 units for January, 2022 and 240,000 units for February, 2022. The company’s policy is to have finished goods inventory of units on hand at the end of each month that is equal to 30% of next month's budgeted unit sales. If there were 61,200 units of finished goods inventory on hand on December 31, 2021, how many units should be produced in January, 2022 in order for the company to meet its goals?

a. 214,800 units

b. 204,000 units

c. 193,200 units

d. 276,000 units

89. At January 1, 2022, Deer Corp. has beginning inventory of 2,000 surfboards. Deer estimates it will sell 10,000 units during the first quarter of 2022 with a 12% increase in sales in each for the following quarters. Deer’s policy is to maintain an ending finished goods inventory equal to 25% of the next quarter’s sales. Each surfboard costs $100 and is sold for $150. What is budgeted sales revenue for the third quarter of 2022?

a. $450,000

b. $1,950,000

c. $1,881,600

d. $12,544

90. Doe Manufacturing plans to sell 6,000 lawn chairs during May, 5,700 in June, and 6,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Doe produce during June?

a. 5,745

b. 6,600

c. 5,655

d. Not enough information to determine. 

91. Strand Company is planning to produce 380 composting bins and sell 400 composting bins during March. Each composting bin requires 500 grams of plastic and one-half hour of direct labor. 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 labor costs. Strand has 300 kilos of plastic in beginning direct materials inventory and wants to have 200 kilos in ending direct materials inventory. What is total amount budgeted for direct labor in March?

a. $3,000

b. $6,000

c. $2,850

d. $5,7000

92. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes, during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory.

What is the total amount to be budgeted for manufacturing overhead for the month?

a. $2,871

b. $2,970

c. $11,484

d. $11,880

93. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes, during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory.

What is the total amount to be budgeted for direct labor for the month?

a. $2,610

b. $10,440

c. $2,700

d. $41,760

94. Teller Co. is planning to sell 900 boxes of ceramic tile, with production estimated at 870 boxes, during May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.40 per pound and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Teller has 3,900 pounds of clay mix in beginning inventory and wants to have 4,500 pounds in ending inventory.

What is the budgeted amount of direct materials to be purchased (in pounds) for the month?

a. 38,280

b. 37,680

c. 38,880

d. 40,200

95. Lorie Nursery plans to sell 320 potted plants during April and 240 units in May. Lorie Nursery keeps 15% of the next month’s sales as ending inventory. How many units should Lorie Nursery produce during April?

a. 308

b. 332

c. 320

d. 356

96. Comma Co. 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 Unit Variable Cost Monthly Fixed Cost

Sales commissions $1 $10,000

Shipping $3

Advertising $4

Executive salaries $120,000

Depreciation on office equipment $4,000

Other $2 $6,000

Expenses are paid in the month incurred. If the company has budgeted sales of 80,000 widgets in October, what are the total budgeted selling and administrative expenses for October?

a. $940,000

b. $140,000

c. $930,000

d. $800,000

97. Comma Manufacturing budgets on an annual basis for its fiscal year. The following beginning and ending direct material inventory levels are planned for the fiscal year of July 1, 2021 to June 30, 2022:

June 30, 2022 June 30, 2021

Direct Materials 3,000 kilos 2,000 kilos

Three kilos of direct materials are needed to produce each unit finished goods unit. If Comma Manufacturing plans to produce 560,000 units during the 2021-2022 fiscal year, how many kilos of materials will the company need to purchase for its production during the period?

a. 1,681,000

b. 1,686,000

c. 1,680,000

d. 1,678,000

98. The following information is taken from the production budget for the first quarter:

Beginning finished goods units 1,200

Expected sales units for the quarter 456,000

Production capacity in units 472,000

How many finished goods units should be produced during the quarter if the company desires 3,200 finished goods units available at the beginning of the next quarter?

a. 458,000

b. 454,000

c. 474,000

d. 459,200

99. Off-Line Co. has 9,000 units in beginning finished goods. The sales budget shows expected sales of 36,000 units. If the production budget shows that 42,000 units required for production, what is the desired ending finished goods inventory in units?

a. 3,000.

b. 9,000.

c. 15,000.

d. 27,000.

100. Lion Industries required production for June is 132,000 units. To make one unit of finished product, three pounds of direct material Z are required. Actual beginning and desired ending inventories of direct material Z are 300,000 and 330,000 pounds, respectively. How many pounds of direct material Z must be purchased?

a. 378,000.

b. 396,000.

c. 408,000.

d. 426,000.

101. Haft Construction Company determines that 54,000 pounds of direct materials are needed for production in July. There are 3,200 pounds of direct materials on hand at July 1 and the desired ending inventory is 2,800 pounds. If the cost per unit of direct materials is $3, what is the budgeted total cost of direct materials purchases for the month?

a. $158,400.

b. $160,800.

c. $163,200.

d. $165,600.

102. Pell Manufacturing is preparing its direct labor budget for May. Projections for the month are that 33,400 units are to be produced and that the direct labor time required is three hours per unit. If the labor cost per hour is $12, what is the total budgeted direct labor cost for May?

a. $1,159,200.

b. $1,180,800.

c. $1,202,400.

d. $1,296,000.

103. Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales . Each unit sells for $25. Forty percent of the sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following the sale.

Production in units for the third quarter should be budgeted at

a. 220,500.

b. 207,000.

c. 274,500.

d. 216,000.

104. Dolce Co. estimates its sales at 180,000 units in the first quarter and that sales will increase by 18,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales. Each unit sells for $25. Forty percent of the sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following the sale.

Cash collections for the third quarter are budgeted at

a. $3,051,000.

b. $4,428,000.

c. $5,319,000.

d. $6,156,000.

105. Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales . Each unit sells for $35. Forty percent of sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following sale.

Production in units for the third quarter should be budgeted at

a. 245,000.

b. 230,000.

c. 305,000.

d. 240,000.

106. Bear, Inc. estimates its sales at 200,000 units in the first quarter and that sales will increase by 20,000 units for each subsequent quarter during the year. The company has, and desires, an ending finished goods inventory equal to 25% of the next quarter’s sales . Each unit sells for $35. Forty percent of sales are for cash. Seventy percent of credit customers pay within the quarter. The remainder is collected in the quarter following sale.

Cash collections for the third quarter are budgeted at

a. $4,746,000.

b. $6,888,000.

c. $8,274,000.

d. $9,576,000.

107. A company determined that the expected unit production cost is $30. On June 1, there were 80,000 units on hand. The sales department budgeted sales of 300,000 units in June and the company desires to have 120,000 units on hand on June 30. The budgeted cost of goods produced for June is

a. $7,800,000.

b. $11,400,000.

c. $9,000,000.

d. $10,200,000.

108. Which of the following is not shown on one of the operating budgets?

a. Selling and administrative expenses

b. Accounts receivable

c. Cost of goods sold

d. Sales

109. Which of the following statements about a budgeted income statement is not true?

a. The budgeted income statement is prepared after the financial budgets are prepared.

b. The budgeted income statement is prepared on the accrual basis of accounting.

c. The budgeted income statement can be prepared in a multiple-step format.

d. The budgeted income statement is prepared using the individual operating budgets.

110. A company has budgeted direct materials purchases of $300,000 in July and $480,000 in August. 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. All selling and administrative expenses are paid in cash as incurred. During August, the following items were budgeted:

Wages Expense $150,000

Purchase of office equipment 72,000

Selling and Administrative Expenses 48,000

Depreciation Expense 36,000

Budgeted cash disbursements for August are

a. $648,000.

b. $426,000.

c. $696,000.

d. $732,000.

111. Astor Manufacturing has the following budgeted sales: January $120,000, February $180,000, and March $150,000. Forty percent of sales are for cash and sixty percent are on credit. For the credit sales, 50% are collected in the month of sale and 50% the next month. Total expected cash receipts for March are

a. $168,000.

b. $159,000.

c. $157,500.

d. $150,000.

112. Garnett Co. expects to purchase $180,000 of materials in July and $210,000 of materials in August. Three-fourths 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. What are budgeted cash disbursements for materials purchases in August?

a. $135,000

b. $157,500

c. $202,500

d. $210,000

113. The single most important output from preparing financial budgets is the

a. sales forecast.

b. determination of the unit cost of the product.

c. cash budget.

d. budgeted income statement.

114. Which of the following is not a separate section on the cash budget?

a. Cash receipts

b. Cash disbursements

c. Capital expenditures

d. Financing

115. The financing section of a cash budget is needed if there is a cash deficiency or if the ending cash balance is less than

a. the prior years.

b. management's minimum required balance.

c. the amount needed to avoid a service charge at the bank.

d. the industry average.

116. Beginning cash balance plus total receipts

a. equals ending cash balance.

b. must equal total disbursements.

c. equals total available cash.

d. is the excess of available cash over disbursements.

117. The projected financial position at the end of the budget period is found on the

a. budgeted income statement.

b. cash budget.

c. budgeted balance sheet.

d. sales budget.

118. What is the proper preparation sequencing of the following budgets?

1. Budgeted Balance Sheet

2. Sales Budget

3. Selling and Administrative Budget

4. Budgeted Income Statement

a. 1, 2, 3, 4

b. 2, 3, 1, 4

c. 2, 3, 4, 1

d. 2, 4, 1, 3

119. Kam Department Store reported the following information for 2022:

October November December

Budgeted sales $1,240,000 $1,160,000 $1,440,000

• • All sales are on credit.
  • Accounts receivable are collected 50% in the month of sale and 50% in the following month.

What are budgeted cash receipts for November?

a. $580,000

b. $1,300,000

c. $1,200,000

d. $1,160,000

120. The following information was taken from Southgate Industry’s cash budget for the month of July:

Beginning cash balance $480,000

Cash receipts 304,000

Cash disbursements 544,000

If the company’s policy is to maintain a minimum end of the month cash balance of $400,000, the amount the company would have to borrow in July is

a. $160,000.

b. $80,000.

c. $240,000.

d. $96,000.

121. The cash budget reflects

a. all revenues and all expenses for a period.

b. expected cash receipts and cash disbursements from all sources.

c. all the items that appear on a budgeted income statement.

d. all the items that appear on a budgeted balance sheet.

122. The following credit sales are budgeted by Terra Co.:

January $204,000

February 300,000

March 420,000

April 360,000

The company's past experience indicates that 70% of accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The budgeted cash receipts for the month of April are

a. $370,320.

b. $336,000.

c. $360,000.

d. $352,800.

123. Hyde Corp.'s 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

124. Which one of the following is not a section of a cash budget?

a. Cash receipts

b. Financing

c. Investing

d. Cash disbursements

125. A company's past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales for the first quarter are:

January $360,000

February 216,000

March 540,000

Budgeted cash receipts for the month of March are

a. $406,800.

b. $307,800.

c. $324,000.

d. $388,800.

126. Which one of the following items would not be included on a cash budget?

a. Office salaries expense

b. Interest expense

c. Depreciation expense

d. Travel expense

127. Correy Inc. reported the following information for 2022:

October November December

Budgeted sales $460,000 $440,000 $540,000

Budgeted purchases $240,000 $256,000 $288,000

• 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.
• Purchases are paid for 60% in the month of acquisition and 40% in the following month.
• Accounts payable is used only for inventory acquisitions.

What are Correy’s budgeted cash receipts during November?

a. $220,000

b. $490,000

c. $450,000

d. $440,000

128. Correy Company reported the following information for 2022:

October November December

Budgeted sales $460,000 $440,000 $540,000

Budgeted purchases $240,000 $256,000 $288,000

• 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.
• Purchases are paid for 60% in the month of acquisition and 40% in the following month.
• Accounts payable is used only for inventory acquisitions.

What is the budgeted balance for Accounts Payable at October 31, 2022?

a. $96,000

b. $144,000

c. $204,000

d. $102,400

129. Petal Co. reported the following information for 2022:

October November December

Budgeted sales $930,000 $870,000 $1,080,000

• All sales are on credit.
• Accounts receivable are collected 50% in the month of sale and 50% in the following month.

What is the November 30, 2022 budgeted balance of Accounts Receivable?

a. $900,000

b. $540,000

c. $465,000

d. $435,000

130. Bean Manufacturing reported the following information for 2022:

October November December

Budgeted purchases $240,000 $256,000 $288,000

• Operating expenses are: Salaries, $100,000; Depreciation, $40,000; Rent, $20,000; Utilities, $28,000
• Operating expenses are paid during the month incurred.
• Accounts payable is used only for inventory acquisitions.

What are budgeted cash disbursements for operating expenses in November?

a. $404,000

b. $148,000

c. $188,000

d. $444,000

131. For September, the capital expenditure budget indicates a $420,000 purchase of equipment. The ending September cash balance from operations is budgeted to be $60,000. The company wants to maintain a minimum cash balance of $30,000. What is the minimum amount of cash that the company should plan to borrow in September?

a. $330,000

b. $360,000

c. $450,000

d. $390,000

132. Young Co. has budgeted its activity for December according to the following information:

1. Sales are budged at $600,000 and are all cash sales.

2. Budgeted depreciation for December is $15,000.

4. The budgeted cash balance at December 1 is $15,000.

5. Selling and administrative expenses are budgeted at $60,000 for December and are paid for in cash.

6. Budgeted merchandise inventories on December 31 and December 1 are $18,000.

7. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are paid in cash.

What are the budgeted cash disbursements for December?

a. $345,000

b. $510,000

c. $525,000

d. $492,000

133. Dex Industries expects to purchase $120,000 of materials in March and $140,000 of materials in April. Three-fourths 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 2% discount is received for payments made in the month of purchase. What are Dex’s budgeted cash disbursements for materials purchases in April?

a. $88,200

b. $108,200

c. $132,900

d. $120,000

134. On January 1, Witt Company has a beginning cash balance of $126,000. During the year, the company expects cash disbursements of $1,020,000 and cash receipts of $870,000. If Witt requires an ending cash balance of $120,000, Witt Company must borrow

a. $96,000.

b. $120,000.

c. $144,000.

d. $276,000.

135. Mapleview, Inc. has the following budgeted sales: July $200,000, August $300,000, and September $250,000. Forty percent of sales are for cash and sixty percent are on account. For the credit sales, 50% are collected in the month of sale and 50% in the following month. Total expected cash receipts for September are

a. $280,000.

b. $265,000.

c. $262,500.

d. $250,000.

136. Burr, Inc.'s direct materials budget shows total cost of direct materials purchases for April $400,000, May $480,000 and June $560,000. Cash payments are 60% in the month of purchase and 40% in the following month. Budgeted cash disbursement for materials purchases for June are

a. $528,000.

b. $512,000.

c. $480,000.

d. $416,000.

137. Which one of the following budgets would be prepared for a manufacturer but not for a merchandiser?

a. Direct labor budget

b. Cash budget

c. Sales budget

d. Budgeted income statement

138. The equation for determining budgeted merchandise purchases is budgeted

a. production + desired ending inventory – beginning inventory.

b. sales + beginning inventory – desired ending inventory.

c. cost of goods sold + desired ending inventory – beginning inventory.

d. cost of goods sold + beginning inventory – desired ending inventory.

139. Which of the following is a problem resulting from a service company being overstaffed?

a. Labor 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.

140. The master budget for a service enterprise

a. will have the same types of budgets as a merchandiser.

b. may include a sales budget for sales revenue.

c. will not include a budgeted income statement.

d. includes a service revenue budget based on expected client billings.

141. Budgeting in not-for-profit organizations

a. is not important because they are not profit-oriented.

b. usually starts with budgeting expenditures rather than receipts.

c. is necessary only if some product is produced and sold.

d. consists only of budgeted contributions.

142. For a merchandiser, the starting point in the development of the master budget is the

a. cash budget.

b. sales budget.

c. selling and administrative expenses budget.

d. budgeted income statement.

143. Instead of a production budget, a merchandiser will prepare a

a. pseudo-production budget.

b. merchandise purchases budget.

c. master time sheet.

d. sales forecast.

144. Orange Co. is a manufacturer and Pineapple Company is a merchandiser. What is the difference in the budgets the two entities will prepare?

a. Orange Co. will prepare a production budget while Pineapple Company will prepare a merchandise purchases budget.

b. Orange Co. will prepare a sales forecast while Pineapple Company will prepare a sales budget.

c. Pineapple Company will prepare a production budget while Orange Co. will prepare a merchandise purchases budget.

d. Both companies will prepare the same types of budgets.

145. An appropriate activity index for a college or university for budgeting faculty positions would be the

a. faculty hours worked.

b. number of administrators.

c. credit hours taught by a department.

d. number of days in the school term.

146. A critical factor in budgeting for a service firm is to

a. hire professional staff to perform the budgeting work.

b. coordinate professional staff needs with anticipated services.

c. classify all personnel as either variable or fixed.

d. budget expenditures before anticipated receipts.

147. The primary benefits of budgeting include all of the following except it

a. requires only top management to plan ahead and formalize their future goals.

b. provides definite objectives for evaluating performance.

c. creates an early warning system for potential problems.

d. motivates personnel throughout the organization.

148. The _____________ has primary responsibility for expressing management's budgeting goals in financial terms.

a. accounting department

b. top management

c. lower level of management

d. budget committee

149. Coordinating the preparation of the budget is the responsibility of the

a. treasurer.

b. president.

c. chief accountant.

d. budget committee.

150. For better management acceptance, the flow of input data for budgeting should begin with the

a. accounting department.

b. top management.

c. lower levels of management.

d. budget committee.

151. In the direct materials budget, the quantity of direct materials to be purchased is computed by adding direct materials required for production to

a. desired ending direct materials.

b. beginning direct materials.

c. desired ending direct materials less beginning direct materials.

d. beginning direct materials less desired ending direct materials.

152. Grey Company has 24,000 units in beginning finished goods. If sales are expected to be 120,000 units for the year and Grey desires an ending finished goods of 30,000 units, how many units must the company produce?

a. 114,000

b. 120,000

c. 126,000

d. 150,000

153. The important end-product of the operating budgets is the

a. budgeted income statement.

b. cash budget.

c. production budget.

d. budgeted balance sheet.

154. On January 1, Kale Company has a beginning cash balance of $42,000. During the year, the company expects cash disbursements of $340,000 and cash receipts of $290,000. If Kale requires an ending cash balance of $40,000, the company must borrow

a. $32,000.

b. $40,000.

c. $48,000.

d. $92,000.

155. The budget that is often considered to be the most important financial budget is the

a. cash budget.

b. capital expenditure budget.

c. budgeted income statement.

d. budgeted balance sheet.

156. Lark Corp.'s direct materials budget shows direct materials purchases for January $250,000, February $300,000 and March $350,000. Cash payments are 60% in the month of purchase and 40% in the following month. The budgeted cash disbursements for direct materials purchases in March are

a. $330,000.

b. $320,000.

c. $300,000.

d. $260,000.

157. A purchases budget is used instead of a production budget by

a. merchandising companies.

b. service enterprises.

c. not-for-profit organizations.

d. manufacturing companies.

158. Which of the following statements is incorrect?

a. A continuous twelve-month budget results from dropping the budgeted amounts for the month that has just ended and adding the budgeted amounts for the subsequent month.

b. The production budget is derived from the direct materials and direct labor budgets.

c. The cash budget shows anticipated cash receipts and disbursements.

d. In the budget process for not-for-profit organizations, the emphasis is on cash flows rather than on revenue and expenses.

BRIEF EXERCISES

BE 159

Wynn, Inc. manufactures afghans. The budgeted units to be produced and sold are as follows:

Expected Production Expected Sales

August 3,500 2,900

September 2,800 3,900

It takes 18 yards of yarn to produce an afghan. The company's policy is to maintain yarn at the end of each month equal to 5% of next month's production needs and to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated production needs. The cost of yarn is $0.20 a yard. At August 1, 3,150 yards of yarn were on hand.

Instructions

Compute the budgeted cost of direct materials purchases for August.

Ex. 169

Delta Manufacturing has budgeted the following unit sales:

2022 Units

April 25,000

May 40,000

June 60,000

July 45,000

Of the units budgeted, 40% are sold by the Coastal Division at an average price of $15 per unit and the remainder are sold by the Central Division at an average price of $12 per unit.

Instructions

Prepare separate sales budgets for each division and for the company in total for the second quarter of 2022.

Ex. 170

Pitt Corp. makes and sells deck coating which are sold by the gallon. Two pounds of sand are needed to make one gallon of deck coating. Budgeted production of deck coating for the next two months follows:

September 25,000 gallons

October 31,000 gallons

The company wants to maintain monthly ending inventories of sand equal to 20% of the following month's production needs. On August 31, 10,000 pounds of sand were on hand.

Instructions

How much sand should be purchased in September?

Ex. 171

Butler Manufacturing manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be produced are as follows:

Units of Product

2022 Regular Deluxe Total

July 10,000 15,000 25,000

August 6,000 10,000 16,000

September 9,000 14,000 23,000

October 8,000 12,000 20,000

It takes 2 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials at the end of each month equal to 30% of the next month's production needs for the Regular product and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on hand at June 30 were 6,000 pounds for the Regular product and 15,000 pounds for the Deluxe product. The cost per pound of materials is $5 for the Regular product and $8 for the Deluxe.

Instructions

Prepare separate direct materials budgets for each product for the third quarter of 2022.

Ex. 172

Garver Industries has budgeted the following unit sales:

2022 Units

January 10,000

February 8,000

March 9,000

April 11,000

May 15,000

The finished goods units on hand on December 31, 2021 was 2,000 units. Each unit of finished goods requires 3 pounds of direct materials that are estimated to cost an average of $4 per pound. 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. The company also has a policy of maintaining a direct materials inventory at the end of each month equal to 30% of the pounds needed for the following month's production. There were 8,640 pounds of direct materials on hand at December 31, 2021.

Instructions

For the first quarter of 2022, prepare (1) a production budget and (2) a direct materials budget.

Ex. 173

Benet Company has budgeted the following unit sales:

2022 2023

Quarter Units Quarter Units

1 105,000 1 90,000

2 60,000

3 75,000

4 120,000

The finished goods inventory on hand on December 31, 2021 was 21,000 units. It is the company's policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next quarter's anticipated sales.

Instructions

Prepare a production budget for 2022.

Ex. 174

The following facts are known:

• The total pounds needed for production are 2 times the units to be produced.
• The desired ending direct materials inventory in pounds is 20% of the total pounds needed for production.
• The beginning direct materials inventory in pounds is equal in number to 10% of the units to be produced.
• Cost per pound is $5.
• The total cost of the direct materials purchases is $1,035,000.

Instructions

Prepare a direct materials budget for the period.

Ex. 175

Tall Oak, Inc. produces pellets for cornhole bags from plastic resin which they sell by the pound. Tall Oak has estimated production and sales of pellets in pounds for the next 2 months as:

May June

Estimated production 42,000 48,000

Estimated sales 50,000 36,000

Each pound of pellets requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Tall Oak wants to have 20% of the next month's direct materials requirements on hand at the end of each month.

Instructions

Prepare a direct materials purchases budget for the month of May.

Ex. 176

Pulham Company is preparing its direct labor budget for 2022 from the following production budget based on a calendar year:

Quarter Units

1 60,000

2 30,000

3 45,000

4 75,000

Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate to $22 per hour on October 1.

Instructions

Prepare a direct labor budget for 2022.

Ex. 177

For each item given, 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.

Budget Code:

DM Direct Materials Budget

DL Direct Labor Budget

P Production Budget

S Sales Budget

C Cash Budget

BBS Budgeted Balance Sheet

BIS Budgeted Income Statement

SA Selling and Administrative Expense Budget

MOH Manufacturing Overhead Budget

1. Ending cash balance

2. Total selling and administrative expenses

3. Total sales (in dollars)

4. Interest expense

5. Ending raw materials inventory in dollars)

6. Ending finished goods inventory in dollars

Ex. 178

Leaf Industries is preparing its master budget for 2022. Relevant data pertaining to its sales budget are as follows:

Sales for the year are expected to total 8,000,000 units. Quarterly sales are 25%, 30%, 15%, and 30%, respectively. The sales price is expected to be $2.00 per unit for the first quarter and then be increased to $2.20 per unit in the second quarter.

Instructions

Prepare a sales budget for 2022 for Leaf Industries.

Ex. 179

Shep Company combines its operating expenses for budget purposes in a selling and administrative expense budget. For the first quarter of 2022, the following data are developed:

1. Sales: 20,000 units; unit selling price: $30

2. Variable costs per sales dollar:

Sales commissions 6%

Delivery expense 2%

Advertising 4%

3. Fixed costs per quarter:

Sales salaries $24,000

Office salaries 19,000

Depreciation 6,000

Insurance 2,000

Utilities 1,000

Instructions

Prepare a selling and administrative expense budget for the first quarter of 2022.

Ex. 180

Thread Company is preparing its manufacturing overhead budget for 2022. Relevant data consist of the following.

Quarterly units production: Q1 -10,000, Q2-12,000, Q3-14,000, Q4-16,000.

Direct labor: Labor required is 1 hour per unit.

Variable overhead costs per direct labor hour: Indirect materials $0.80; indirect labor $1.20; and maintenance $0.50.

Fixed overhead costs per quarter: Supervisory salaries $42,000; depreciation $16,000; and maintenance $12,000.

Instructions

Prepare the manufacturing overhead budget for the year, showing quarterly data.

Ex. 181

Walt Bach Company has accumulated the following budget data for the year 2022.

1. Sales: 40,000 units, unit selling price $50.

2. Cost of one unit of finished goods: Direct materials 2 pounds at $5 per pound, direct labor 1.5 hours at $12 per hour, and manufacturing overhead $6 per direct labor hour.

3. Inventories (raw materials only): Beginning, 10,000 pounds; desired ending, 15,000 pounds.

4. Raw materials cost: $5 per pound.

5. Selling and administrative expenses: $200,000.

6. Income taxes: 20% of income before income taxes.

Ex. 181 (Cont.)

Instructions

(a) Prepare a schedule showing the computation of budgeted cost of goods sold for 2022.

(b) Prepare a budgeted income statement for 2022.

Ex. 182

The Northeast Regional Division of Union Corp. has been requested to prepare a quarterly budgeted income statement for 2022. The regional manager expects that sales in the first quarter of 2022 will increase by 10% over the same quarter of the preceding year and will then increase by 5% for each succeeding quarter in 2022.

The corporate head office has requested that the regional manager maintain an inventory in dollars equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales. Budgeted ending inventory on December 31, 2021 is $176,000. Quarterly salaries are $20,000 plus 5% of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as follows:

Rent expense $24,000

Depreciation on office equipment $12,000

Utilities expense $3,600

Miscellaneous expenses 2% of sales

Ex. 182 (Cont.)

The income statement for the first quarter of 2021 was as follows:

Income Statement

For the Quarter Ended March 31, 2021

Sales $720,000

Cost of goods sold 396,000

Gross profit 324,000

Operating expenses

Sales salaries $52,000

Rent expense 24,000

Depreciation 12,000

Utilities 3,600

Miscellaneous 12,800

Total operating expenses 104,400

Net income $219,600

Instructions

Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2022. (Show computations.)

Ex. 183

In September 2022, the budget committee of Jason Company assembles the following data:

1. Expected Sales

October $1,800,000

November 1,700,000

December 1,600,000

2. Cost of goods sold is expected to be 60% of sales.

3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold.

4. The beginning inventory at October 1 will be the desired amount.

Instructions

Prepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule.

Ex. 184

Burr, Inc. provided the following information:

July August

Projected sales $220,000 $260,000

Projected merchandise purchases $150,000 $180,000

• Burr estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be bad debts.

Ex. 184 (Cont.)

• Burr pays for 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, including depreciation of $2,000. Burr pays operating expenses in the month incurred.
• Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is principal.

Instructions

Calculate Burr's budgeted cash disbursements for August.

Ex. 185

Casa Development, Inc. has budgeted sales revenues as follows:

Budgeted Sales Revenues

January $55,000

February 75,000

March 90,000

April 80,000

May 60,000

June 35,000

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, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible.

Instructions

Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June.

Ex. 186

Cruises, Inc. has budgeted sales revenues as follows:

June July August

Credit sales $135,000 $125,000 $ 90,000

Cash sales 90,000 255,000 195,000

Total sales $225,000 $380,000 $285,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on account with 50% is paid in the month of purchase and 50% paid in the month following purchase. Budgeted inventory purchases are as follows:

June $300,000

July 240,000

August 105,000

Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash.

Ex. 186 (Cont.)

The company’s policy is to maintain a minimum cash balance of $50,000 at the end of each month. The company borrows money from the bank at 6% interest if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month.

Instructions

Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory.

Ex. 187

Clay Co.’s projected sales are as follows:

August $400,000

September $450,000

October $550,000

Clay 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.

Instructions

What are Clay Co.'s budgeted cash receipts for October?

Ex. 188

The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended December 31, 2022. The following information is available:

1. The cash budget shows an expected cash balance of $75,000 at December 31, 2022.

2. The 2022 sales budget shows total annual sales of $800,000. All sales are made on account and accounts receivable at December 31, 2022 are expected to be 10% of annual sales.

3. The merchandise purchases budget shows budgeted cost of goods sold for 2022 of $600,000 and ending merchandise inventory of $95,000. 20% of the ending inventory is expected to have not yet been paid at December 31, 2022.

4. The December 31, 2021 balance sheet includes the following balances: Equipment $294,000, Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings $48,000.

5. The budgeted income statement for 2022 includes the following: depreciation on equipment $15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not be paid until 2022.

6. In 2022, 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.

Ex. 188 (Cont.)

Instructions

Prepare an unclassified budgeted balance sheet at December 31, 2022.

Ex. 189

The management of Ocean Industries estimates that credit sales for August, September, October, and November will be $540,000, $750,000, $840,000, and $480,000, respectively. Experience has shown that collections are made as follows:

In month of sale 25%

In first month after sale 60%

In second month after sale 10%

Instructions

Determine the collections from customers in October and November. Show all computations.

Ex. 190

The beginning cash balance is $20,000. Sales are forecasted at $700,000 of which 80% will be on account. The remainder are cash sales. Seventy percent of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $500,000. Accounts receivable from previous accounting periods totaling $12,000 will be collected in the current year. The company is required to make a $20,000 loan payment and an annual interest payment on the last day of the year. The loan balance as of the beginning of the year is $120,000, and the annual interest rate is 10%.

Instructions

What will be reported as 'cash' on the budgeted balance sheet?

Ex. 191

Rudd Company has budgeted sales revenue as follows for the next 4 months:

February $300,000

March 240,000

April 210,000

May 330,000

Past experience indicates that 80% of sales each month are on credit. The remainder are cash sales. 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.

Ex. 191 (Cont.)

Instructions

Prepare a schedule which shows expected cash receipts from sales for the month of May.

Ex. 192

Hagen Company's budgeted sales and direct materials (DM) purchases are as follows.

Budgeted Sales Budgeted DM Purchases

January $300,000 $60,000

February 330,000 70,000

March 350,000 80,000

Hagen's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. Hagen's purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of the purchase and 60% in the month following the purchase.

Instructions

(a) Prepare a schedule of budgeted cash receipts from customers for March.

(b) Prepare a schedule of budgeted cash disbursements for direct materials for March.

Ex. 193

Minor Landscaping Company is preparing its budget for the first quarter of 2022. The next step in the budgeting process is to prepare cash receipts and cash payments schedules. To that end the following information has been collected.

Clients usually pay 60% of their fee in the month that service is provided, 30% the month after, and 10% the second month after receiving service.

Actual service revenue for 2021 and expected service revenues for 2022 are: November 2021, $120,000; December 2021, $110,000; January 2022, $140,000; February 2022, $160,000; March 2022, $170,000.

Purchases of landscaping supplies are paid 40% in the month of purchase and 60% the following month. Actual purchases for 2021 and expected purchases for 2022 are: December 2021, $21,000; January 2022, $20,000; February 2022, $22,000; March 2022, $27,000.

Instructions

(a) Prepare the following schedules for each month in the first quarter of 2022 and for the quarter in total:

(1) Expected collections from clients.

(2) Expected payments for landscaping supplies.

Ex. 193 (Cont.)

(b) Determine the following balances at March 31, 2022:

(1) Accounts receivable.

(2) Accounts payable.

Ex. 194

In May 2022, the budget committee of Crater, Inc. assembles the following data in preparation of budgeted merchandise purchases for the month of June.

1. Expected sales: June $750,000, July $900,000.

2. Cost of goods sold is expected to be 80% of sales.

3. Desired ending merchandise inventory is 40% of the following month's cost of goods sold.

4. The beginning inventory at June 1 will be the desired amount.

Instructions

(a) Compute the budgeted merchandise purchases for June.

(b) Prepare the budgeted income statement for June through gross profit.

Ex. 195

In September 2022, the management of Rye Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November.

1. Expected Sales

October $1,500,000

November 2,100,000

December 2,700,000

2. Cost of goods sold is expected to be 70% of sales.

3. Desired ending merchandise inventory is 20% of the next month's cost of goods sold.

4. The beginning inventory at October 1 will be the desired amount.

Instructions

Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month.