Ch.6 Mastering The Master Budget Exam Prep

CHAPTER 6

Mastering the Master Budget

CHAPTER LEARNING OBJECTIVES

1. Examine the compelling reasons for budgeting.

2. Explain how the master budget fits into the strategic planning process.

3. Develop an operating budget for a manufacturer that results in a budgeted income statement.

4. Develop a financial budget for a manufacturer that results in a budgeted balance sheet.

5. Summarize budgeting considerations for retailers and service providers.

Current count is:

Knowledge: 27

Comprehension: 9

Application: 67

Analysis: 34

Evaluation: 4

Synthesis: 0

Total: 141

Number and percentage of questions:

Easy: 22 questions, 16 percent (target of 25%)

Medium: 108 questions, 76 percent (target of 65%)

Hard: 11 questions, 8 percent (target of 10%)

Question types:

Multiple Choice: 110

Short Answer: 6

Brief Exercises: 12

Exercises: 10

Problems: 3

Multiple-Choice Questions

1. Jaco Ltd is involved in an incremental extension of their existing budget model. Which type of budget method should be used?
2. Imposed budget
3. Participative budget
4. Rolling budget
5. Zero-based budget

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: In a rolling budget, the budget period keeps on updating for future time periods, and as a result, it always represents forecasted values.

1. Jamie Lopez is the CEO of an exciting new solar-powered car manufacturer, SolCar Inc. Jamie shared a long-term vision and mission with the management team and now is expecting to see a detailed coordinated plan across all business units in the organization. Which of the following will provide Jamie with the needed information?
2. Master Budget
3. Pro forma (Budgeted) Balance Sheet
4. Pro forma (Budgeted) Income Statement
5. Tangible short-term objectives (Stretch goals) for the upcoming year

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The Master Budget spans all of a company’s operating, investing, and financing activities. As a result, three budgeted, or pro forma, financial statements (Income statement, Statement of Cash Flow, and Balance Sheet) are the intended outputs of a Master Budget process. Tangible short-term objectives (Stretch Goals) for the upcoming year do not provide a detailed coordinated plan.

1. Georgia has graduated now and has decided to repay all her debts so she can live debt-free. She owes some small-amount loans and some large-amount loans. Georgia chose to adopt the “Snowball Method” to reduce her debt. Which of the following statements is correct in the context of Georgia’s strategy?
2. Georgia paid largest loan first.
3. Georgia paid smallest loan first.
4. Georgia paid the interest on all the loans first.
5. Georgia paid the minimum payments on each loan.

Ans: B, LO 1, Bloom: C, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The snowball method is a debt repayment strategy where the payer focuses on paying the smallest debts first and the larger ones later.

1. Kevin is preparing the budgeted income statement for Nutshell Corp. for the upcoming month February and used the following information: Expected sales, $60,000; Expected cost of Goods Sold (COGS),50% of sales; and administrative expenses, $12,000. If Kevin has ignored all information from the previous month, which type of budget is Kevin using?

Imposed Budget

Participative budget

Rolling Budget

Zero-based Budget

Ans: D, LO 1, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Zero-based budgeting is prepared from the base value of zero each period which means all new estimates adopted in zero-based budgeting ignore previous information.

1. Two friends, Wei and Tee, are working as managers in two different organizations. Wei’s job is to see that the budget that has been created and approved by top executives of the company is enacted. Tee’s job is to see that the budget that has been created by all the managers of the organization and approved by higher authority is enacted. Which of the following statements is correct regarding Wei and Tee?
2. Wei uses a participative budget, while Tee uses a rolling budget.
3. Wei uses a participative budget, while Tee uses an imposed budget.
4. Wei uses a rolling budget, while Tee uses an imposed budget.
5. Wei uses an imposed budget, while Tee uses a participative budget.

Ans: D, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: An imposed budget is a top-down budget that is created and approved at the top level of an organization and followed by managers throughout the organization. A participative budget is the result of the combined efforts of managers at all levels in the organization. All mangers sit together and create a budget that is then approved at a higher level with iterative adjustments.

1. In the budgeting process, budgetary slack refers to the
2. practice of overestimating budgeted expenses and revenues.
3. practice of overestimating budgeted expenses and underestimating budgeted revenues.
4. practice of underestimating budgeted expenses and overestimating budgeted revenues.
5. practice of underestimating budgeted expenses and revenues.

Ans: B, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgetary slack is the intentional act of managers to overstate budgeted expenses and/or understate budgeted revenues to easily achieve targets.

1. The maintenance department of an organization has been budgeted $500,000 for the current year's maintenance work. At the end of the fiscal year, the general ledger (or books) shows that they have only spent $450,000 on maintenance. To avoid being granted $450,000 the next year, the manager has decided to wastefully spend $50,000. This is an example of
2. budgetary slack.
3. imposed budget.
4. use-it-or-lose-it mentality.
5. zero-based budget.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: In the absence of proper controls, budgeting can lead to ethical issues like budgetary slack and use-it-or-lose-it attitude. With the use-it-or-lose-it attitude, managers spend all the allocated funds in the budget period to avoid being granted less funds in subsequent budgeting periods.

1. Mike, a grocery store owner, estimates that his profits in the next month will be $3,000. Based on his expectations, he prepares a budget and assigns $650 to savings, $500 to retirement benefits plan, $1,000 to personal expenses, and decides to spend $850 for the expansion of his grocery store. Which type of budget did Mike use? 
   1. Imposed Budget 
   2. Participative budget 
   3. Rolling Budget 
   4. Zero-based Budget 

Ans: D, LO 1, Bloom: C, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: In zero-based budgeting, inflows of funds are equal to outflows of funds. 

1. Mallards Manufacturing’s budget for the next year is due by October 31. Prem Patel, the head of the purchasing department, received an Excel file with the previous year’s and current year’s departmental costs. Prem has been asked to use the information to create a budget for the next year. A meeting with department supervisors has been scheduled to discuss the data before the workbook is completed. Mallards Manufacturing’s budget is a ___ budget.
2. imposed
3. participative
4. rolling
5. zero-based

Ans: B, LO 1, Bloom: C, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgets that are created by managers who are knowledgeable about the factors impacting their operation are called participative budgets.

1. All of the following are advantages of budgeting except
2. Budgeting improves communication within the organization.
3. Budgeting improves coordination among departments.
4. Budgeting instills a use-it-or-lose-it mindset among the managers.
5. Budgeting provides the basis for evaluating employee performance.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeting is an adequate way to improve and monitor revenue generation activities in any organization. But, in the absence of proper controls, budgeting can lead to ethical issues such as budgetary slack and an organizational use-it-or-lose-it attitude.

1. Lara, a manager in the treasury department, has prepared a budget that updates the current month’s budgeted ending balance to the actual end-of-month information. Lara has created a(n)
2. imposed budget.
3. participative budget.
4. rolling budget.
5. zero-based budget.

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: In a rolling budget, the actual information is updated at the end of every month so that the budget begins with the real values at the start of each month.

1. Sara has realized her dream and is now working full-time as a nature photographer. Sara works 35 hours per week and has a monthly cash inflow from wages of $3,500 (net after taxes). Sara is working on a zero-based budget for January and expects to have a cash outflow of $1,800 per month for rent, $100 per week for groceries (assume 4 weeks in the month), and $850 for other miscellaneous expenses. Sara is saving the remaining amount for a new digital camera, and it is really important to keep saving for that, no matter what. Unfortunately, Sara just found out that monthly rent is going to increase by $300 starting in January. Which of the following is the best course of action for Sara to take revise their personal monthly budget?
2. Increase savings for the digital camera by $100 per month
3. Increase the number of hours worked by 12 hours per month
4. Lower grocery expenses by $25 per week
5. Lower monthly miscellaneous expenses by $250

Ans: B, LO 1, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Increasing the number of hours worked by 12 hours per month will allow for an increase in expected cash inflow of $300 ($25 per hour × 12 hours) which will be enough to pay for the additional rent cash outflow. Decreasing monthly miscellaneous expense by $250 would not be sufficient to cover the rent increase, nor would lowering grocery expenses by $25 per week for 4 weeks which would only reduce outflow by $100 for the month. Finally, increasing savings by $100 is going to increase cash outflow even more rather than get the budget balance back to zero. Sara’s best option is to work additional 12 hours per month to pay for extra rent. See additional explanation below:

1. Patrick prepared a production budget for a 6-month period for Hshell Corporation (or Inc.) At the end of the current month, Patrick revises the budgeted beginning inventory of the next month with an actual ending inventory of the current month. Which type of budget Patrick using?
   • • • 1. Imposed Budget
         2. Participative budget
         3. Rolling Budget
         4. Zero-based Budget

Ans: C, LO 1, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A rolling budget is initially prepared for a fixed period and updated frequently, for example by using the ending balance of current month to update the beginning balance of the next month.

1. Tran has worked for West End Manufacturing for the last three years as production manager for the company’s skateboard assembly line. He was recently promoted to plant manager. He received the next year’s budget from finance. In reviewing the budget, he noticed that there is not any money budgeted for a new piece of equipment he wants to buy to speed up the skateboard assembly line. When he asks about adding money to the budget for the new piece of equipment, he is told that budget cannot be changed. Which of the following is true?
   1. Because Tran cannot change the budget, West Manufacturing is using an imposed budget.
   2. By identifying new equipment for the production line, West End Manufacturing is using a participative budget.
   3. Tran will need to balance revenues with expenses before he can change the budget.
   4. Tran will need to update the previous period’s balances before he can change the budget.

Ans: A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: When a budget is developed by management at a higher level without input from the management levels that perform the work, the budget is considered to be an imposed budget.

1. Juwan is updating the budget for Pittman’s Cycle Shop. His manager has told him that a new piece of equipment has been purchased with a monthly loan payment of $123.50 for the next six months. Juwan completes the new budget by reviewing the budgeted amounts in different categories so that both budgeted revenue and budgeted expenses balance. Which of the following can be said about Pittman’s Cycle Shop?
   1. Juwan must update the actual ending balances from the previous period before he can complete the budget.
   2. Pittman’s Cycle Shop is using a rolling budget.
   3. Pittman’s Cycle Shop is using a zero-based budget.
   4. Since Juwan is adding the monthly loan payment to the budget, the budget is considered a participative budget.

Ans: C, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that revenues minus expenses equal zero.

1. Cade is promoted to plant manager at Mallards Manufacturing. It is his first time having to create a budget. He reviews the budget for the previous year and compares it to the actuals for the same time period. He then creates a budget for the next year using his knowledge of what he needs. When he submits the budget to finance, he is told that he should update the last closed period with actuals and then create a budget for the next two years. Which of the following is true?
   1. Because Cade was told by finance that he had to change his budget, he is working with an imposed budget.
   2. Cade is working with a rolling budget at Mallards Manufacturing.
   3. The new budget that Cade will create will be less realistic than the original budget.
   4. The new budget will have slack built into because the actuals are being used for the last current period.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A rolling budget is the most realistic of the budget types because it updates the most recent period with actual balances before the new budget is developed.

1. Mayco Manufacturing has multiple manufacturing plants throughout the southeastern United States. Once a year, the plant managers meet in the corporate headquarters where they are given their budgets for the next year. After the budgets are reviewed, the plant managers use the budgets to plan the next year at their respective plants. Which of the following can be said about Mayco Manufacturing?
   1. By allowing the plant managers to review the budgets, Mayco is using a participative budget.
   2. By not allowing the plant managers to have input to their budgets, it can be said that the plant managers are working with imposed budgets.
   3. Once back at the plant, the plant manager will ensure that the inflow of cash and the outflow of cash balance.
   4. When the plant manager gets back to his plant, they will add anything they think is missing before applying the budget to their plant’s budget for the next year.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: When a budget is developed by management at higher levels without input from the management levels that perform the work, the budget is called an imposed budget.

1. Rashad was excited to be going to work for a What’s What retail store. On his first day at the store, he attended a meeting with the store manager and all the other employees. The purpose of the meeting was for the manager to present the budget for the next year. Several of the employees suggested changes to some of the categories that would incur additional expenditures but would improve worker productivity. After a discussion, the store manager agreed to adopt the changes. Which of the following can be said about this What’s What store’s budgeting process?
   1. Because some of the categories were changed, the manager will have to review the budget in order to balance the revenues and the expenditures.
   2. By accepting suggestions that will affect the budget from the employees, the store manager is developing a participative budget.
   3. The budget for the store is a rolling budget because the store manager is updating using employee suggestions.
   4. This What’s What retail store is using an imposed budget because the store manager presented the budget.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A budget developed using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget.

1. Juwan is updating the budget for Pittman’s Cycle Shop. His manager has told him that a new piece of equipment has been purchased with a monthly loan payment of $123.50 for the next six months. Juwan adds the new payment to the budget and returns the budget to his boss, Laura. Laura tells him that he cannot just add the new expense, but that instead he must review the budgeted amounts in different categories so that both budgeted revenue and budgeted expenses balance. Which of the following is true?
   1. Laura is explaining how a zero-based budget is developed.
   2. Pittman’s Cycle Shop is using a participative budget.
   3. The addition of a new payment has caused Juwan to use an imposed budget.
   4. The budget for Pittman’s Cycle Shop will be more realistic because of the changes Juwan will make.

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that revenues minus expenses equal zero.

1. At the end of the year, each of the department heads is provided with a report that shows their actual expenditures compared to the budgeted amounts the departments heads submitted during the budgeting process. Tu was excited to see he was 15% under budget which meant he would get a bonus. Several of the other department heads asked how he always seems to earn the bonus. One explanation for his success could be
   1. he adds an extra 15% above what he thinks he will spend in his budget numbers.
   2. he submits a budget number less than he thinks he will spend.
   3. he uses the use-it-or-lose-it philosophy when creating his budget.
   4. management cut his budget after he submitted it.

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Increasing the budget amount above what is genuinely thought to be needed in order to make it easier to meet goals is called adding slack.

1. While preforming an internal audit at a production plant, the auditor notices there are a significant number of end-of-the-year purchases that the auditor cannot explain. The auditor reviewed the previous year and found a similar situation. The auditor begins to think the plant is using a _____ budgeting method.
   1. budgetary slack
   2. cost plus
   3. flexible
   4. use-it-or-lose-it

Ans: D, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: In the use-it-or-lose-it budgeting method, managers spend all their allocated funds in the budget period to avoid being granted less funds in subsequent budgeting periods.

1. Mallards Manufacturing’s budget for the next year is due by October 31 of the current one. Emma, the head of the production department, received an Excel file with the previous year and current year costs for her department. Emma has been asked to use the information to create the budget for the department for next year. Emma met with the department supervisors to get their input on the budget. After she met with the supervisors, she added an additional 10% to each of the categories before submitting the budget to finance. This budgeting method could be described as a(n)
2. imposed budget using use-it-or-lose-it method.
3. imposed budget with slack.
4. participative budget using use-it-or-lose-it method.
5. participative budget with slack.

Ans: D, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Developing a budget using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget, and increasing the budget amount above what is genuinely thought to be needed in order to make it easier to meet goals is called adding slack.

1. John, the production supervisor at Walrus Ball Caps, is reviewing his monthly actual expenses versus budget expenses for his production line. He needs to provide finance with his budget for next year. He notices he is significantly under budget in the supplies category. To ensure his budget does not get reduced for the next year, he has the purchasing agent order enough supplies to bring the category to close to the budget. This budgeting method could be described as a(n)
   1. imposed budget using the use-it-or-lose-it method.
   2. imposed budget with slack.
   3. participative budget using the use-it-or-lose-it method.
   4. participative budget with slack.

Ans: C, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Developing a budget using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget, and believing that if he does not spend all of his budget, then he will lose it, is called ”use it or lose it” thinking.

1. Juwan is updating the budget for Pittman’s Cycle Shop. His manager has told him that a new piece of equipment has been purchased with a monthly loan payment of $123.50 for the next six months. Juwan adds the new payment to the budget and returns the budget to his boss, Laura. Laura tells him that he cannot just add the new expense, but that instead he needs to review/adjust budgeted amounts in each category so that the inflow minus the outflow equal zero. Juwan updates the budget and sends it to Laura. Laura adds an additional 15% to each category before submitting the budget to finance. This an example of a(n)
   1. imposed budget using the use-it-or-lose-it method.
   2. participative budget using slack.
   3. rolling budget using the use-it-or-lose-it method.
   4. zero-based budget using slack.

Ans: D, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that the revenues minus the expenses will equal zero, and increasing the budget amount above what is genuinely thought to be needed in order to make it easier to meet goals is called adding slack.

1. Casey’s Boardshorts Store’s manager, Rashad, had an unexpected cleaning expense when a water pipe burst in the ceiling. At the end of each month, any unexpected expenses are added to the budget, and other categories are updated with the actual expenditures before the new budget is created. Casey’s Boardshorts Store’s budget is a(n) ___ budget.
2. imposed
3. participative
4. rolling
5. zero-based

Ans: C, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A rolling budget is the most realistic of the budget types because it updates the previous period’s actual balances before the new budget is developed.

1. Trayvon, a supervisor at Mayco Manufacturing, was discussing issues in his production area with the plant manager. Trayvon suggested that changes to the flow of materials would increase productivity but would cost about $50,000. As the plant manager was in the process of updating his budget for the next year, he added $50,000 for the changes to the proposed budget. This is an example of a(n) ______ budget.
   1. imposed
   2. participative
   3. rolling
   4. zero-based

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A budget developed using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget.

1. Alios recently changed jobs to become the Southeast sales manager for Waycom Electronics. He previously worked for Marcom. His first month with company, he received a budget that reflected his sales goals for the next year. This surprised him because he had always developed his sales revenue goals for the next year. When he questioned the VP of Sales at Waycom, he was told that that was not part of his responsibility at Waycom. Which of the following is true?
   1. Marcom was using a participative budget, and Waycom is using an imposed budget.
   2. Marcom was using an imposed budget, and Waycom is using a zero-based budget.
   3. Waycom is using a rolling budget, and Marcom was using a participative budget.
   4. Waycom is using a rolling budget, and Marcom was using an imposed budget.

Ans: A, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A budget developed using input from the employees that are most knowledgeable about activities that affect an area is called a participative budget, and when a budget is developed by management at higher levels without input from the management levels that perform the work, the budget is called an imposed budget.

1. Carolyn was recently hired at Thermo Chocolate Company in the role as internal auditor. To acquaint herself with company’s budgeting process, she reviews the last three years Actual versus Budget reports. She notices that one of the managers seem to always spend what he budgeted even when there are significant changes to revenues. Other managers seem to have more significant differences as she what have expected given the changes in revenue. The auditor begins to think the manager is
   1. using a flexible budget that makes it easier to make his budget.
   2. using a use-it-or-lose-it budgetary method to ensure his budget is not cut in the next year.
   3. using budgetary slack to make his budgets.
   4. using cost plus to make his budget.

Ans: B, LO 1, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: In the use-it-or-lose-it method, managers spend all their allocated funds in the budget period to avoid being granted less funds in subsequent budgeting periods.

1. Macda is responsible for determining how to bring a new product to market. He has considered manufacturing it in the southeast but decides to have it produced in the northeast because a critical raw material is manufactured near that plant and would be easier to source from there. This planning would be considered during the ________ step of strategic planning.
   1. goals and objectives
   2. measures and targets
   3. mission and vision
   4. strategies and initiatives

Ans: D, LO 2, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: As short-term objectives are created and long-term goals are established, techniques and methods are chosen to meet short-term objectives and long-term goals. These techniques are created during the strategies and initiatives step of the strategic planning process.

1. Arrange the following steps in the correct order with reference to the strategic planning process:
2. Goals and objectives
3. Measures and targets
4. Results
5. Strategies and initiatives
6. Mission and vision
7. 5, 1, 4, 2, and 3
8. 1, 4, 2, 3, and 5
9. 5, 1, 2, 4, and 3
10. 1, 2, 3, 4, and 5

Ans: A, LO 2, Bloom: C, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The steps to the strategic planning process are: 1. Mission and vision; 2. Goals and objectives; 3. Strategies and initiatives; 4. Measures and targets; and 5. Results.

1. Which of the following statements is correct in the context of centralization?
2. Centralization creates accountability and responsibility among the employees.
3. Centralization improves managers’ performances.
4. Decisions are made at all levels of an organization.
5. Decisions are made at the highest level of an organization.

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Centralization is the concentration of power and decision-making authority within the hands of top-level executives of an organization. Whereas, decentralization refers to the freedom of decision-making among the managers at different organizational levels. Decentralization promotes autonomy in the organization.

1. TWV is successful marketing company. In an interview, the company’s CEO agreed that shifting the authority for some types of decision making to lower levels in the organization plays a main role in the company’s overall success. What kind of organizational structure is TVW using?
2. Centralized structure
3. Decentralized structure
4. Flat structure
5. Tall structure

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledgec, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A decentralized structure refers to a structure that the freedom of decision-making to be distributed among the managers at different organizational levels. This promotes the autonomy in the organization.

1. Walrus Ball Caps had a great year in sales, resulting in greater profits than were planned. The company has decided to use some of these profits to replace aging equipment. Jun was told to come up with a proposal that would spend $150,000 on replacement equipment. Which of the following is true?
   1. Because Jun was responsible for investing the $150,000 on long-term assets, he would be responsible for an investment center.
   2. Because profits increased, costs must have been controlled. Jun must therefore have responsibility for a cost center.
   3. The $150,000 that Jun was responsible for spending was the result of increased sales. This would mean he has responsibility for a revenue center.
   4. The $150,000 that Jun was responsible for spending was the result of increased profits. This would mean he has responsibility for a profit center.

Ans: A, LO 2, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: The investment of subsequent returns of a company’s resources in long-term assets is done by an investment center.

1. Organizational structure and budgets are linked together. What type of budget is most commonly used in decentralized organizations?

Imposed Budget

Participative budget

Rolling Budget

Zero-based Budget

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Decentralization is an organizational structure in which decision-making power is delegated to managers of respective departments. Participative budgets are prepared with the help of different managers of those respective departments and suggestions are taken by employees related to those particular budgets.

35. Santiago, one of the accountants for a company, was reviewing the direct materials purchases budget for the production line and noticed a 15% increase in the budget compared to the prior period budget. What could have caused the increase in the direct materials purchases budget, and who should he talk to about the cause?

1. The increase in the direct materials purchases budget could have been caused by an increase in production direct labor costs, and he should talk to the production manager who prepared the budget.
2. The increase in the direct materials purchases budget could have been caused by an increase in manufacturing overhead costs, and he should talk to the plant manager who provided the budget.
3. The increase in the direct materials purchases budget could have been caused by a decrease in the quantity of the direct materials needed, and he should talk to the production manager who prepared the budget.
4. The increase in the direct materials purchasing budget could have been caused by an increase in the purchasing price, and he should talk to the purchasing manager who provided the budget.

Ans: D, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting, Solution: The purchasing manager is responsible for providing the direct materials purchases budget. An increase in the quantity of direct materials needed and/or an increase in purchasing prices could cause an increase in the direct materials purchases budget.

1. Eatsy manufacturing creates a master budget that includes budgets for each of the responsibility centers of the company using input from the person responsible for each center. Decision-making responsibility is given to each of the managers of their responsibility centers. Manuel is a production supervisor responsible for managing the packaging line that produces organic food bars. Each month, he gets a report that shows the expenditures for his line and is responsible for explaining any major discrepancies. What type of organizational structure does Eatsy use, and what kind of responsibility center does Manual manage?
   1. Easty has a centralized organizational structure and Manuel manages an investment center.
   2. Easty has a centralized organizational structure and Manuel manages a revenue center.
   3. Easty has a decentralized organizational structure and Manuel manages a profit center.
   4. Easty has a decentralized organizational structure and Manuel manages a cost center.

Ans: D, LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: By allowing the managers of the responsibility centers to make decisions, the structure should be considered decentralized. Because Manuel is only responsible for the expenditures (costs), he manages a cost center.

1. Bylue Inc. has set a long-term plan to increase production by 100% over the next five years. Jose uses this information to set up a purchase plan for new equipment for the next year that will allow an increase in production of up to 20% in the next year on the way to the 100% increase by year five. Which of the following is true?
   1. The 100% increase in production would have been reflected in the next year’s master budget affecting the manufacturing costs.
   2. The purchase of new equipment would have been identified in the mission and vision step of the strategic planning process.
   3. The purchase plan for new equipment would have been identified during the strategies and initiatives step of the strategic planning process.
   4. The purchase plan was a short-term objective that was created during the goals and objectives step to support the long-term goal of 100% increase in production.

Ans: D, LO 2, Bloom: C, Difficulty: Easy, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting, Solution: To meet long-term goals, short-term objectives, to be accomplished in the coming year, are created to support the ultimate attainment of the long-term goals.

1. Henry manages the working capital, debts, stocks, plant, and machinery of the organization. Which responsibility center is managed by Henry?
   • • • 1. Cost Center
         2. Investment Center
         3. Profit Center
         4. Revenue Center

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A business unit that is managed according to its area of control is called the responsibility center. The investment center manager is responsible for profit or loss and decisions related to the company’s investments. He also manages the company’s assets.

1. Mallards Manufacturing’s senior executives meet once a year to discuss where the company is going and what changes need to be made to get there. This may include adding new product lines or discontinuing existing lines. It might also include plans for new plants and sales offices. What are the expected results of this meeting?
   1. A mission statement and vision statement(s) were created.
   2. A set of goals and objectives were created that will be used to create the budget.
   3. A set of strategies and initiatives were written that will be used to create the company’s budget.
   4. Measures and targets were developed to be used in employee reviews.

Ans: A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: As companies change directions or business environments change over time, these companies periodically review where they are going and update their mission statement to reflect the company’s new direction(s). They may also update the description of what they hope to look like in the future, and this description is often called a vision statement.

1. In 2015, Hanson Services set a vision of entering a new area of business that would increase revenue by 25% over the next five years. The end of the year, reports for 2020 show that Hanson was successful in entering the new area of business and that they had increased revenue by 30% as a result. Given that the vision has been accomplished, what would Hanson Services need to do before they can create a master budget for the next year?
   1. Hanson Services would simply update the new sales budget for the next year.
   2. Hanson Services would need to decide where it wants to go next and update its mission and vision statements to reflect their new purpose and destination.
   3. Hanson Services would not need to make any changes.
   4. Hanson Services would update the measures and targets to reflect the 30% increase in revenue.

Ans: B, LO 2, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: As the vision reflected a goal to be accomplished in the future and drives the mission until it is realized, once the vision has been accomplished, both the mission and vision would need to be updated to reflect new purposes and objectives.

1. The new year has begun, and Casey has received the first month’s actual expenditures. In reviewing the data provided, she realizes the key performance indicators (KPIs) set by the master budget for labor overtime has been exceeded. She asks for a detailed report of transactions that were used to calculate the KPIs. The data she was provided came from the
2. actual labor hours reported by the employees.
3. master budget numbers developed for the current year.
4. objectives set by the company during the strategic planning process.
5. techniques that were chosen to support the strategies adopted by the company.

Ans: A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: KPIs are created using the actual transactions that are recorded by the company for the given period. Employees would report their daily work hours. Any hours worked above the weekly normal hours would be identified as overtime and used to calculate the KPIs for overtime labor.

1. Aibir is preparing for his annual review with the VP. He has spent the last week reviewing the monthly reports focusing on sales made by his sales representatives. Overall, he thinks he is in a good position as he has made 103% of his key performance indicators (KPIs) for sales, and his expenses are within 1.5% of the budget. During the meeting, the VP comments that Aibir’s sales numbers are good and he is happy with the expense management. What kind of responsibility center is Aibir’s department?
2. The department is a cost center because Aibir is only responsible for expenses.
3. The department is a profit center because Aibir is responsible for generating sales revenues and maintaining expenses.
4. The department is a revenue center because Aibir is only concerned with sales.
5. The department is an investment center because Aibir is reviewing the monthly reports.

Ans: B, LO 2, Bloom: K, Difficulty: Easy, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: When a department is evaluated based on their sales (revenue) and expenses, the department is classified as a profit center.

1. Gabriel has worked for Cartoon Express Manufacturing for the last three years as warehouse manager for the company’s distribution center. He received next year’s budget from finance, and in reviewing the budget, he noticed that there was not any money for a new piece of equipment that he wants to buy to improve stocking shelves in the warehouse. Gabriel makes a change to include the equipment purchase in his budget and sends it back to finance. The budget was returned to him without the new equipment and with a note from finance that told him additions to the budget are made by headquarters, and he cannot change the budget. Which of the following is true?
   1. Cartoon Express Manufacturing is a centralized decision-making organization that uses a rolling budget.
   2. Cartoon Express Manufacturing is a centralized decision-making organization that uses an imposed budget.
   3. Cartoon Express Manufacturing is a decentralized decision-making organization that uses an imposed budget.
   4. Cartoon Express Manufacturing is a decentralized decision-making organization that uses a rolling budget.

Ans: B, LO1 & LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting, Solution: A budget created and approved by top executives and then forced down on the organization is an imposed budget. Because the budget is created by headquarters, the organization of the company should be considered centralized.

1. Johnson Retail has seven stores located throughout the state of Vermont. Once a year, store managers meet in the corporate headquarters where they are given their budgets that were created by finance for the next year. Over the course of that week, finance presents the budgets for each store allowing store managers to ask questions about their budget and to make changes to their budgets. Which of the following is true?
2. Johnson Retail is a centralized decision-making organization that uses a rolling budget.
3. Johnson Retail is a centralized decision-making organization that uses a participative budget.
4. Johnson Retail is a decentralized decision-making organization that uses a rolling budget.
5. Johnson Retail is a decentralized decision-making organization that uses a participative budget.

Ans: D, LO 1 & LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: The development of the budget by finance would indicate a centralized decision-making company, but because the plan managers can make changes, it indicates a decentralized decision-making organization. Since the plant managers, who know the most about their parts in the plant’s activities, are allowed to provide input to the budget, the budget should be considered a participate budget.

1. Victoria, a supervisor at Wholesale Foods, was in meeting with her manager discussing issues in the production area. Victoria suggested that changes to the flow of materials would increase productivity but would cost about $105,000 in new equipment. As the plant manager was in the process of updating his budget for the next year, he changed the budget to add $105,000 for the purchase of new equipment. What kind of organizational structure and budget type is described above?
   1. Victoria works for a company that has a centralized organizational structure and uses a rolling budget type.
   2. Victoria works for a company that has a centralized organizational structure and uses an imposed budget type.
   3. Victoria works for a company that has a decentralized organizational structure and uses a zero-based budget type.
   4. Victoria works for a company that has a decentralized organizational structure and uses a participative budget type.

Ans: D, LO 1 & LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting, Solution: Decentralization is an organizational structure in which decision-making power is delegated to managers of respective departments. Participative budgets are prepared with the help of different managers of those respective departments, and suggestions are taken by employees related to those particular budgets.

1. Binita had recently gone to work for Augustine Services as a division manager. She was told she would receive the next year’s budget in few weeks. After receiving the budget, she suggested some additional changes to expenses for supplies. Finance told her she could make the changes but would need to balance revenues with expenses. Augustine Services has a(n) ______ budget in a _______ organization structure?
   1. imposed, decentralized
   2. participative, centralized
   3. rolling, centralized
   4. zero-based, decentralized

Ans: D, LO 1 & LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: To create a zero-based budget, the revenues and expenses must be reviewed to ensure that the revenues minus the expenses will equal zero. Decentralization is an organizational structure in which decision-making power is delegated to managers of respective departments.

1. Jessica has just launched an online store where she will be selling high-end pet apparel. She wants to start this business off on the right foot and is creating a Cost of Goods Sold Budget for the month of September of this year. She has gathered as much information as possible and is ready to get to work. She made her first purchase last month in the amount of $165 but did not have any sales. She will be purchasing 500 units from a supplier with a price of $2.48 per unit. She believes she will end the month with Merchandise Inventory in the amount of $120. How much will Jessica’s Cost of Goods Sold Budget be for September?
2. $165
3. $1,120
4. $1,285
5. $1,525

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The formula needed to calculate the Budgeted Cost of Goods Sold is Beginning Merchandise Inventory + Purchases − Ending Merchandise Inventory. Although Jessica is launching her business this month, it must be noted that she would have beginning inventory that had been purchased during the previous month. Start with Beginning Merchandise Inventory of $165, add her Purchases of $1,240 ($2.48 per unit × 500), and subtract her Ending Merchandise Inventory of $120 to arrive at a Budgeted Cost of Goods Sold of $1,285.

1. Jenson is in the furniture business. He observed increasing demand for office chairs, and strongly anticipates even better results in the next quarter. Jenson decides to reconsider his production plans, and he comes up with the following production budget for the second quarter:

Jenson determines that every unit needs 2 hours of direct labor (DL) time. He pays $20 per hour to his daily wage workers. Considering the given information, which of the following is correct?

1. For the second quarter, total DL hours and total DL cost will be 1,200 and $24,000 respectively.
2. For the second quarter, total DL hours and total DL cost will be 3,920 and $78,400 respectively.
3. For the second quarter, total DL hours and total DL cost will be 1,320 and $26,400 respectively.
4. For the second quarter, total DL hours and total DL cost will be 3,960 and $77,600 respectively.

Ans: B, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted DL Hours Needed = Budgeted Units to be Produced × Quantity of DL Hours per Unit = [(600 × 2) + (660 × 2) + (700 × 2)] = (1,200 + 1,320 + 1,400) = 3,920.

Budgeted DL Cost = Budgeted DL Hours Needed × Budgeted DL Cost per Hour = 3,920 × $20 = $78,400.

1. Chaitanya, the purchasing manager of direct materials at AirFun, was reviewing the budgeted balance sheet for the upcoming year. She noticed that the accounts payable account for direct materials had increased significantly. She needs to understand what caused the increase. She should find the cause of the increase _____ and could get an explanation from _______.
   1. on the budgeted balance sheet under Direct Material Inventory balance, the CFO about the reason for the increase
   2. on the budgeted cash flow statement under the Operating Activities section, the plant manager about the reason for the increase
   3. on the budgeted income statement under Sales, the VP of Sales about the reason for the increase
   4. on the Direct Materials Purchases budget, the plant manager about the reason for the increase

Ans: D, LO 3, Bloom: C, Difficulty: Medium, AACSB: Knowledge, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: Once the production budget has been set, it is used to determine the direct materials purchases. An increase in raw materials purchases on credit and/or an increase in the materials costs would increase the accounts payable account for direct materials.

1. XYZ Company produces and sells chairs. Quarterly budgeted sales are as follows:

Quarter 1 4,500

Quarter 2 5,000

Quarter 3 3,000

Quarter 4 4,800

The ending inventory of finished goods (FG) for a given quarter includes 5% of the next quarter’s budgeted sales. Calculate the budgeted units to be produced for Quarter 3.

1. 3,090
2. 4,525
3. 4,560
4. 4,900

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Units to be Produced = Budgeted Sales Volume + Target Ending FG Inventory − Beginning FG Inventory = 3,000 + (4,800 × 5%) − (3,000 × 5%) = 3,090 units

1. AP Corp is a well-known name for producing the best quality hammers in the town. Dmitri, a manager in the firm, wants to know the maximum production capacity possible within the budgeted amount. It requires 12 minutes of direct labor (DL) time to manufacture 1 hammer, and the hourly wage rate of direct labor is $11. Help Dmitri calculate the number of hammers that can be produced if the management approves a budget of $19,800 for direct labor. 
2. 3,630 units
3. 3,960 units
4. 9,000 units
5. 9,900 units

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The number of hammers produced = $19,800/((12/60) × $11) = 9,000

1. Dave, the owner of Dave’s Doughnuts, has prepared an operating budget that shows the following data for the quarter ended March 31:

The sales price of each doughnut is $4.75, and the cost to produce each doughnut is $3.10. The company’s tax rate is 30%. Based on this information, what amount would Dave’s budgeted income statement show for net income? Round all calculations to two decimal places.

1. $1,670.37
2. $2,386.25
3. $2,886.25
4. $7,136.25

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting , Solution: A total of 4,325 doughnuts are projected to be sold during the quarter ending March 31. The net income would be determined by preparing a budgeted income statement as follows:

1. Peter, a part-time intern in an enterprise, estimates that budgeted units of production for the next month need to be 5,000 units to achieve the targeted sales. The production of one unit requires 0.30 direct labor (DL) hours, and the hourly rate of labor is $10. Based on the given data, the total budgeted DL hours required and total budgeted DL cost are
2. 1,000 and $15,000 respectively.
3. 1,500 and $15,000 respectively.
4. 1,500 and $22,500 respectively.
5. 5,000 and $10,000 respectively.

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted DL Hours Needed = Budgeted Units to be Produced × Quantity of DL Hours per Unit = 5,000 × 0.30 = 1,500; Budgeted DL Cost = Budgeted DL Hours Needed × Budgeted DL Cost per Hour = 1,500 × $10 = $15,000.

1. XYZ Company produces and sells chairs. Monthly budgeted sales are as follows:

June 450

July 500

August 300

September 480

October 430

The ending inventory of finished goods is 5% of the next month’s budgeted sales. 10% of sales are budgeted as cash sales and the remaining sales are budgeted as credit sales. According to the company records, 40% of credit sales are collected in the same month, 35% are collected in the next month, 22% are collected two months after the sale, and remaining are uncollectible. If company is selling 1 chair for $150, then calculate total cash received in September.

1. $55,762
2. $57,690
3. $61,260
4. $62,145

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cash Receipts = Budgeted Cash Sales + Budgeted Collections on Credit Sales = (480 × $150 × 10%) + (500 × $150 × 90% × 22%) + (300 × $150 × 90% × 35%) + (480 × $150 × 90% × 40%) = $7,200 + $14,850 + $14,175 + $25,920 = $62,145.

1. Aclass Technology is currently selling 20,000 tablets per year. The company is expecting to increase their tablet sales by 20% in the next year with a new marketing strategy. At a price-per-tablet of $350, how much in budgeted sales revenue should the company expect?
2. $1.4 million
3. $5.6 million
4. $7 million
5. $8.4 million

Ans: D, LO 3, Bloom: AP, Difficulty: Easy, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Sales Revenue = Budgeted Sales Volume × Budgeted Selling Price = 20,000 (1 + 20%) × $350 = $8,400,000 or $8.4 million.

1. Joycups is currently manufacturing ice-cream cones. The company requires 7 minutes of direct labor (DL) time to manufacture 1 cone, and the direct labor rate is $12 per hour. What is the total budgeted DL cost to produce 5,000 cones? (Do not round values during intermediate calculations.)
2. $4,200
3. $5,000
4. $7,000
5. $8,571

Ans: C, LO 3, Bloom: AP, Difficulty: Easy, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted DL Cost = Budgeted DL Hours Required × Budgeted DL Cost per Hour = (5,000 × 7/60) × $12 = $7,000.

1. If Mia charged $450 for the services provided to Olivia and Olivia used her credit card to pay her bill, how Mia would record this transaction?
2. Debit the Cash account for the amount of sale — Amount of merchant fees; Debit the Merchant Fees Expense account for the amount of fees; and Credit the Sales account for the total amount of the sale
3. Debit the Cash account for the amount of the sale; Credit the Merchant Fees Expense account for the amount of the fees; and Credit the Sales account for the amount of the sale — the amount of the merchant fees
4. Debit the Sales account for the amount of the sale; Credit the Cash account for the amount of the sale — the amount of the merchant fees; and Credit the Merchant Fees Expense account for the amount of the fees
5. No entry

Ans: A, LO 3, Bloom: C, Difficulty: Easy, AACSB: Knowledge, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: When a seller or service provider receives a credit card payment, they need to consider a reduction in the cash value of the transaction as a result of any credit card processing fees. In Mia’s register, the entry would look like:

1. Rose Bags Company plans to sell 8,000 bags in April and expects a growth rate in sales of 5% per month. The monthly target ending finished goods (FG) inventory (in bags) is 20% of the next month's planned sales. There are 2,000 bags in inventory on March 31. The number of budgeted units (in bags) to be produced in April is
2. 6,000 bags.
3. 7,680 bags.
4. 8,320 bags.
5. 9,680 bags.

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Units to be Produced = Budgeted Sales Volume + Target Ending FG Inventory Units − Beginning FG Inventory Units. Budgeted Sales Volume is 8,000 bags + Target Ending FG Inventory Units (8,000 bags x (1 + 5%) x 20%) − Beginning FG Inventory Units 2,000 bags = 7,680 bags.

1. Fedrick, of Zenith Bakery, estimates the sale of 180 cookies and the production of 200 cookies for January. Each cookie requires 10 grams of flour and costs $0.2 per gram. Budgeted ending flour requirement is estimated to be 500 grams and beginning flour inventory is 200 grams. How much flour needs to be purchased, and how much will it cost?
   1. 1,700 grams, $340
   2. 2,700 grams, $540
   3. 2,300 grams, $460
   4. 2,000 grams, $400

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The Budgeted Quantity of Direct Material (flour) = (Budgeted Units to be Produced × Budgeted Quantity of Material required) + Budgeted Ending Direct Material Inventory Quantity − Budgeted Beginning Direct Material Inventory Quantity

Budgeted Quantity of Direct Material = (200 × 10) + 500 − 200 = 2,300

Budgeted Cost of Direct Material = Budgeted Quantity of Direct Material × Price per Unit of Direct Material

Budgeted Cost of Direct Material = 2,300 × $0.2 = $460

1. Starfish Candy Manufacturing Inc. makes and distributes uniquely flavored candy to major retailers across the US (seaweed-turmeric taffy, anyone?). Premium candy costs $2 per piece and regular candy costs $1 per piece. The marketing and sales department projects credit and cash sales volume for the month of March as follows:

What is the total budgeted gross sales for March?

1. $450
2. $500
3. $575
4. $800

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Debit cards, credit cards, and credit sales are all included in the sales forecast (Sales Budget). The total budget for Premium is $500 and Regular is $300 for a total of $800. See additional explanation below:

1. Home Furniture Inc. expects to produce 5,000 finished goods (FG) units (in tables) in October and 5,500 FG units (in tables) in November. Each table needs 2 meters of direct material (DM) in wood that costs $5 (per meter of wood). Target ending DM inventory is 10% of the next month's total production needs in DM (meters of wood). There is DM of 600 meters of wood in inventory on September 30. Total budgeted cost of DM purchases of wood during October will be
2. $9,500.
3. $10,500.
4. $52,000.
5. $52,500.

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Quantity of DM to be Purchased = (Budgeted Units to be Produced × Budgeted Quantity of DM needed per Unit) + Target Ending DM Inventory Quantity − Beginning DM Inventory Quantity; Budgeted Quantity of DM to be Purchased = (5,000 x 2) + (5,500 x 2 x 10%) − 600 = 10,500 (meters of wood); Budgeted Cost of DM to be Purchased = Budgeted Quantity of DM to be Purchased × Budgeted Cost of DM (per meter of wood); Budgeted Cost of DM to be Purchased = 10,500 (meters of wood) x $5 (per meter of wood) = $52,500.

1. From Pickwell’s sales budget, the budgeted sales volume for the month of January and February is 25,000 units and 35,000 units respectively. Sam, the production head of the Pickwell, decided that the ending inventory quantity should be 10% of the next month’s sale. Based on the given information, how many units are expected to be produced in January?
   • • • 1. 22,500 units
         2. 24,000 units
         3. 26,000 units
         4. 28,500 units

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Expected Number of Units to be Produced = Budgeted Sales Volume + Budgeted Ending Inventory − Budgeted Beginning Inventory

Budgeted Sales Volume = 25,000 units

Budgeted Ending Inventory = 10% of the next month sale i.e. 3,500 units (10% of 35,000)

Budgeted Beginning Inventory = 10% of current month sale i.e. 2,500 units (10% of 25,000), because the ending inventory for the previous month will be the beginning inventory for the current month. And, the ending inventory for December is 10% of the sales for January, and the ending inventory for December will be the beginning inventory for January.

Budgeted Number of Units to be Produced = 25,000 + 3,500 − 2,500 = 26,000

1. Mia is working on her department’s budgeted annual income statement. In the process, she needs to determine the budgeted amount for selling, general, and administrative (SG&A) expenses in order to complete her budget.

On the basis of the given data, what are total budgeted selling, general, and administrative (SG&A) expenses of the department?

1. $16,400
2. $33,400
3. $35,400
4. $41,400

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Total Budgeted SG&A Costs = (Budgeted Sales Volume × Budgeted Variable SG&A Cost per Unit) + Budgeted Fixed SG&A Costs = (12,000 × $0.20) + ($6,000 + $8,000 + $25,000) = $2,400 + $39,000 = $41,400.

1. Darius is a factory supervisor, and he is currently preparing the production budget for the next quarter. The following production budget was in place for the current quarter of the year:

Darius anticipates that in the first, second, and third month of the next quarter, production will increase by 5%, 7%, and 8%, respectively, compared to the previous month’s production. If every unit needs 2.5 hours of direct labor (DL) time and the hourly wage rate is $15 per hour, than what will the total number of budgeted production units, the total number of direct labor hours, and the total direct labor cost for the next quarter be (Round your calculations to the nearest whole number amounts)?

1. Total budgeted production units: 1,960; Total DL hours: 4,900; Total DL cost: $73,500
2. Total budgeted production units: 2,092; Total DL hours: 5,230; Total DL cost: $78,450
3. Total budgeted production units: 2,370; Total DL hours: 5,925; Total DL cost: $88,875
4. Total budgeted production units: 6,638; Total DL hours: 16,595; Total DL cost: $248,925

Ans: C, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Units to be Produced = Budgeted Production for April + Budgeted Production for May + Budgeted Production for June = 735 + 786 + 849 = 2,370.

Budgeted DL Hours Needed = Budgeted Units to be Produced × Quantity of DL Hours per Unit = 2,370 Units × 2.5 Hours = 5,925 Hours.

Budgeted DL Cost = Budgeted DL Hours Needed × Budgeted DL Cost per Hour = 5,925 × $15 = $88,875.

See additional explanation below:

1. Sue works in a company that manufactures shirts for school uniforms. For the past two years, she has been handling the production department’s budgets for the company. The company has a policy to stock 10% of next month’s sales in finished goods (FG) inventory and 20% of direct material inventory from the next month’s direct materials (DM) requirement. The following production budget was in place for the current quarter of the year.

Assume that the quantity of direct material required is 2 meters of cloth for one shirt and the direct material cost per meter is $1.50. Help Sue calculate the total budgeted cost of ending DM inventory for the month of November.

1. 1,257
2. 1,350
3. 6,285
4. 6,750

Ans: B, LO 3, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Targeted Ending DM Inventory for November = DM Required for December × 20%; 4,500 × 20% = 900

Total Budgeted Cost of Ending DM Inventory for November = Targeted Ending DM Inventory for November × Cost per Meter; 900 × $1.5 = $1,350

See additional explanation below:

1. Jack is preparing the production budget for Candy Cane Corporation (CCC). Jack determines that the production department generally holds 20% of the following month’s budgeted sales in ending inventory each month. From the sales and marketing department, Jack learned that budgeted unit sales for the next 3 months are: January; 1,000 units, February; 1,500 units, and March; 2,500 units. How many units should Jack have the production department produce in February?
2. 1,100 units
3. 1,700 units
4. 2,000 units
5. 3,300 units

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: For February, start with a sales volume of 1,500. Then, add 500 for the target ending inventory. Next, subtract the beginning inventory of 300 for February from the budgeted units to be produced.

See additional explanation below:

1. Sheer, an accountant at a Trader Joe's store, is working on the cost of goods sold (COGS) budget. He extracts some data from the purchase budget to complete the COGS budget. Based on the purchasing budget, the budgeted beginning and the ending finished goods inventories are 170 and 200 units respectively, and the budgeted purchases are 540 units at $4.30 per unit. What will the expected COGS be for the month of August? 
2. $2,193 
3. $2,451 
4. $2,800 
5. $2,913 

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted COGS = Beginning Inventory + Purchases − Ending Inventory = (170 × $4.30) + (540 × $4.30) − (200 × $4.30) = $731 + $2,322 − $860 = $2,193.

1. AXN Corporation is a well-known name in the production of high-quality metal boxes. The VP of store operations has asked the sales manager to provide him the sales forecasts for the third quarter of the year. The sales manager, Kevin, has provided him the following information:  

What will the budgeted gross sales be for the third quarter of the year?  

1. $16,000 
2. $18,288 
3. $53,000  
4. $53,668 

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Gross Sales = Budgeted Sales Units × Budgeted Selling Price = (640 × $25) + (720 × $25.40) + (760 × $25.50) = $16,000 + $18,288 + $19,380 = $53,668.

1. July, the current operating month of XBL Corporation has reported less production, and it is determined that this month will end with more raw material inventory than budgeted. Based on the records, July’s ending raw materials inventory will be 560 kilograms. The head of finance for the company has asked Joshua, the head of the purchasing department, to submit the department’s direct materials purchases budget for August 2021. From the production budget, Joshua saw that budgeted production for August is determined to be 750 units, and that it would require 6 kilograms of raw material to produce one unit. The Company has a policy of maintaining a safety stock of 450 kilograms of raw material, and one kilogram of raw material costs the company $8. What will the budgeted cost of direct material (DM) to be purchased be for August 2021? 
2. $4,390 
3. $6,000 
4. $35,120 
5. $36,000 

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Quantity of DM to be Purchased = (Budgeted Units to be Produced × Budgeted Quantity of DM Needed per Unit) + Targeted Ending DM Inventory − Beginning DM Inventory = (750 × 6) + 450 − 560 = 4,500 + 450 −560 = 4,390Kg 

Budgeted Cost of DM to be Purchased = Budgeted Quantity of DM to be Purchased × Budgeted Cost of DM = 4,390 × $8 = $35,120 

1. The head of finance for Squish Corporation wants to know the expected manufacturing variable overhead cost for the third quarter of this year. In the second quarter, the company reported the manufacturing of 7,000 units and a total variable manufacturing overhead of $56,000. In addition to this, the production department has provided him the details below:

On the basis of the data above, what will the total variable manufacturing overhead cost of the third quarter of the year be?

1. $3,600 
2. $11,000 
3. $11,280 
4. $56,000 

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Variable Manufacturing Overhead rate per Unit = Total Manufacturing Overhead Cost/Number of Units Produced = $56,000/7,000 = $8 per Unit 

Budgeted Variable Manufacturing Overhead Cost = Budgeted Number of Units to be Produced × Variable Manufacturing Overhead cost per Unit 

July:  Budgeted Variable Manufacturing Overhead Cost = 450 × $8 = $3,600 

August: Budgeted Variable Manufacturing Overhead Cost = 470 × $8 = $3,760 

September: Budgeted Variable Manufacturing Overhead Cost = 490 × $8 = $3,920 

Total Variable Manufacturing Overhead Cost = $11,280. 

1. NBN Corporation has planned to produce 7,000 units each of NPS 1 (length 12 meters) and NPS 3 (length 12 meters) steel pipes in the month of August. It is estimated that it will takes 3 hours to produce each type of pipe. The following table provides the additional information on this:

If the expected rate for direct labor is $15 per hour, then the total expected direct labor cost for August will be

1. $84,000. 
2. $105,000. 
3. $315,000. 
4. $630,000. 

Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Direct Labor Cost = (Budgeted Production Units × Quantity of Direct Labor Hours per Unit) × Budgeted Direct Labor Cost per Hour = (14,000 × 3) × $15 = $630,000.

1. Mallards Manufacturing produces waterproof tarps for camping, and the company has been in business since 1955. The following budget information has been provided for the 2024 production year:

What is the budgeted quantity of direct materials to be purchased?

• 1. 65,998
  2. 122,247
  3. 178,500
  4. 209,749

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The units to be produced must be calculated first (Sales Volume + Targeted Ending Finished Goods Quantity − Beginning Finished Goods Quantity) = 105,000 + 45,000 − 25,000 = 125,000. The quantity to be produced is used to calculate the quantity of direct material to be purchased ((Quantity to be Produced × Direct Material per Unit) + Targeted Ending Direct Material Quantity − Beginning Direct Material Quantity) = (125,000 × 1.25) + 56,250 − 34,000 = 178,500.

1. Forecasted sales of Great Inc. for Quarter 1 (January / February / March) are 2,580 units, 2,780 units, 2,900 units respectively. Budgeted sales for the month of April are 3,000 units. The company has a target policy to hold ending inventory equal to 20% of the forecasted sales for next month. You are required to calculate the total units produced during Quarter 1 of the year.
   1. 8,344 units
   2. 8,433 units
   3. 8,434 units
   4. 8,443 units

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Units to be Produced = Budgeted Sales Volume + Target End. Inv. − Beg. Inv. = (2,580 + 2,780 + 2,900) + (556 + 580 + 600) − (516 + 556 + 580) = 8,344. See additional explanation below:

1. ASF Corporation is manufacturing three types of products, namely L, M, and N, and is currently in process of reviewing the quarterly budgets for its products. Quarterly budgets for the company show that there are two different cash costs of manufacturing overhead (MOH) reported by the production head and the cost accountant for product M. Based on this information, the head of production has decided to reconsider all the available information and resubmit his budget. He has taken the following information to determine the budgeted cash cost of manufacturing overhead:

Based on your calculation, the budgeted cash cost of MOH for product M reported by the production head should be 

1. $26,800.
2. $27,000.
3. $29,700.
4. $281,400.

Ans: B, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Variable Manufacturing Overhead Cost = Budgeted Number of Units to be Produced × Variable Manufacturing Overhead Cost per Unit  

Budgeted Variable Manufacturing Overhead Cost = 6,700 × $4 = $26,800 

Budgeted Fixed Manufacturing Overhead Cost = Depreciation Allocated to Product M + Rent Allocated to Product M  

= $2,700 + $200 = $2,900 

Total Budgeted Manufacturing Overhead Cost = Variable Manufacturing Overhead Cost + Fixed Manufacturing Overhead Cost 

Total Budgeted Manufacturing Overhead Cost = $26,800 + $2,900 = $29,700 

Total Budgeted Cash Cost of Manufacturing Overhead = Total Budgeted Manufacturing Overhead Cost − Depreciation Allocated to Product M 

= $29,700 − $2,700 = $27,000. 

1. Ley Corporation, a producer of paper bags, hires Zoey as a finance intern. As an intern, Zoey is tasked with collecting and comparing actual financial data with budgets. In the process, Zoey found that company neglected to plan for manufacturing overhead costs. Zoey’s manager provided the following information, and asked her to prepare the manufacturing overhead budget:

If the company has a policy of maintaining zero work-in-progress, then what manufacturing overhead cost will Zoey calculate based on the information she was given?

• 1. $114 million  
  2. $190 million  
  3. $228 million  
  4. $418 million  

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cost of Manufacturing Overhead = Budgeted Cost of Goods Manufactured − Budgeted Cost of Direct Material − Budgeted Cost of Direct Labor = ($760 × 45%) – ($760 × 20%) − ($760 × 10%) = $342 million − $152 million − $76 million = $114 million

1. Ashley, a student in a cost accounting course, gets an assignment to submit by end of the day. He is stuck in the calculation of the budgeted cost of manufacturing overhead and anxiously asks for your help. Ashley provided you with the following information and is looking forward to getting a timely response from you.

You assist Ashley with the calculation and conclude that the total budgeted manufacturing overhead costs equal

1. $15,000. 
2. $289,000. 
3. $291,000. 
4. $295,000.

Ans: A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cost of Manufacturing Overhead = Depreciation on Factory Equipment + Supervisor’s Salary + Factory Rent = $4,000 + $5,000 + $6,000 = $15,000 

1. Joseph is calculating the budgeted cost of goods sold for Landes Inc., a manufacturer of leather bags, to verify their sales revenue. From the company’s policy, it is known that the company maintains zero work-in-process (WIP) inventory. Departmental managers provided him their budgeted reports, but Joseph realized that there is much to interpret. To save his time Joseph decided to pull the following figures from all available reports:

Joseph’s analysis shows that the company's budgeted cost of goods sold is (Do not round intermediate calculations, and round the final answer to the nearest dollar.)

1. $51,000.
2. $51,570.
3. $73,000.
4. $73,229.

 Ans: D, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cost of Goods Manufactured = Budgeted Cost of Direct Material Used + Budgeted Cost of Direct Labor Incurred + Budgeted Cost of Manufacturing Overhead Incurred; 

Budgeted Cost of Goods Sold = Budgeted Beginning Finished Goods Inventory + Budgeted Cost of Goods Manufactured - Budgeted Ending Finished Goods Inventory;

Budgeted Cost of Goods Manufactured = $40,250 + $8,760 + $2,560 = $51,570 

Budgeted Unit Cost = (Budgeted Cost of Goods Manufactured)/(Budgeted Number of Units Produced) = $51,570/500 = $103.14 

Budgeted Cost of Goods Sold = (260 × $103.14) + $51,570 − (50 × $103.14) = $26,816.4 + $51,570 − $5,157 = $73,229.4 

1. Sarah, the sales head for MGF Corporation is reviewing the half-yearly performance of her team. She notices that while the company is doing well in terms of profits and market share, there is a visible gap between the actual and budgeted results. In an attempt to further encourage her team, Sarah decides to review the selling, general, and administrative (SG&A) budget for July 2024. The values for July are as follows:

Expected Sales: 4,670 units @ $27 per unit; Expected Production: 5,500 units; Monthly Depreciation on Office Equipment: $1,200; Monthly Property Taxes and Insurance on office: $800; Sales commission: $2.30 per unit sold; Advertising expenses: $400 per month; Webhosting: $200 per month.

Based on the data given, what will the July budgeted SG&A costs be? 

1. $602.30 
2. $629.30 
3. $13,341 
4. $290,607 

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted SG&A Expenses = (Budgeted Sales Volume × Budgeted Variable SG&A Expenses per Unit) + Budgeted Fixed SG&A Expenses = (4,670 × $2.30) + $1,200 + $800 + $400 + $200 = $13,341.  

1. Sarah owns a small jewelry booth at a local flea market, and she is in the process of creating a Cost of Goods Sold budget for the month of July of this year. She has collected information from her past records and notes that her Merchandise Inventory Balance for the end of June is $220. She will be purchasing 1,000 units from a supplier at a price of $0.42 per unit. She believes her Ending Merchandise Inventory will be $98. What is Sarah’s Cost of Goods Sold budget for July?
   1. $102
   2. $542
   3. $640
   4. $4,322

Ans: B, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The formula needed to calculate the Budgeted Cost of Goods Sold is Beginning Merchandise Inventory plus Purchases minus Ending Merchandise Inventory. In this question, first note that the Ending Balance of Merchandise Inventory for June becomes the Beginning Balance of Merchandise Inventory for July. In Sarah’s case she starts with her Beginning Merchandise Inventory of $220, then adds her Purchases of $420 ($0.42 per unit x 1,000), and finally subtracts her Ending Inventory of $98 to arrive at a Budgeted Cost of Goods Sold of $542.

1. Roger is a producer of small cat toys, and he is in the process of creating a Production Budget for March of this year. He budgeted for 150 units of sales in February and expects to see a 10% increase in sales every month. Roger has created a policy where he will produce and retain 5% of next month’s sales in his Finished Goods (FG) Inventory. How many Budgeted Units will Roger plan to produce for March? (Round all calculations to nearest whole unit).
2. 148
3. 157
4. 166
5. 174

Ans: C, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To calculate the correct number of budgeted units, employ the following formula: Budgeted Sales Volume plus Target Ending FG Inventory minus Beginning FG Inventory. To calculate Budgeted Sales, take the Budgeted Sales from February (the previous month) and multiply by 1.10 to account for the 10% increase Roger anticipates, so this would be 165 units. To calculate the target Ending FG Inventory, multiply next month’s Budgeted Sales by the 5% retention that Roger would like to maintain. Next month’s Sales will take 165 units (budgeted sales in March) × 1.10 (to account for the increase), so that comes out to 182 units (rounding to the nearest whole unit). Now, multiply this value by the 5% retention to arrive at 9 additional units needed. The final item to calculate is the Beginning FG Inventory. The Ending Balance for February becomes the Beginning Balance for March. To calculate this, take the 165 units budgeted for March and multiply by 5% to get 8 units (rounded to the nearest whole unit). Now, calculate − 165 units plus 9 units minus 8 units, and that equals 166 Budgeted Units that need to be to be produced.

1. John is working on his company’s financial statements for the month of June, and he would like to account for any potential accounts receivable that he is not likely to collect. John’s company typically allows his clients up to 60 days to make payments, so he opts to use an accrual-based method to account for those uncollectible accounts. During June, the company sold $60,000, 75% of which was on credit. In John’s experience, 15% of sales made on credit become uncollectible. What amount would John record in his monthly journal entry to account for uncollectible credit sales, and which accounts would he use?
2. Debit Accounts Receivable- Customer X $6,750, Credit Bad Debt Expense $6,750
3. Debit Allowance for Doubtful Accounts $45,000, Credit Bad Debt Expense $45,000
4. Debit Bad Debt Expense $45,000, Credit Accounts Receivable-Customer X $45,000
5. Debit Bad Debt Expense $6,750, Credit Allowance for Doubtful Accounts $6,750

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The first step to solving this question is to determine what Sales should be subjected the uncollectible percentage estimate. John’s Sales for June are $60,000, and 75% of those sales are on credit. That results in a total of $45,000 of Credit Sales. John anticipates that 15% of this value will become uncollectible, so that would be an overall total of $6,750. Since John allows 60 days to make a payment, there could be a delay in learning what accounts will become uncollectible, so he will use an Allowance for Doubtful Accounts for credit. Choice D is the only answer to have both the correct total of uncollectible accounts and the proper debit and credit accounts.

1. Fescue, Inc. is in a lawncare business that specializes in residential services. A large majority of their customers have set up accounts to pay their bills for services the month after the service has been rendered while other customers pay as soon as the work is completed. Artemis estimates that Fescue, Inc. will collect 40% of their payments in the month that the services are provided, 45% of their payments in the month after the services have been provided, and the remaining 15% of their payments two months after the services have been provided. Fescue’s sales were as follows: August, $10,000; September, $13,000; October, $9,500; and November, $7,300. What will the total amount of cash collected in October be?
2. $9,500
3. $9,650
4. $11,150
5. $32,500

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: This question requires you to not only calculate the sales collected in the given month but also to factor in how the collection percentages for work from previous months will contribute to the total. The correct answer is $11,150. To get the correct total for October, add $1,500 ($10,000 × 15% from 2 months prior) + $5,850 ($13,000 × 45% from the previous month) + $3,800 ($9,500 × 40% collected in the month that services are provided).

1. Daisy Company is a customer service organization that is in the process of working on various components of their Cash Budget. Elizabeth, the accountant, is working on completing a Cash Disbursements Schedule and has decided to calculate Daisy’s cash payment on Accounts Payable first. They pay their bills in the following manner - 60% of purchases are paid in month of the purchase, 30% of purchases are paid in the month following the purchase, and the remaining 10% of purchases are paid in the second month following the purchase. They made the following purchases: March, $25,600; April, $16,200; May, $22,300; June, $27,900; and July, $19,850. What will the total amount paid out by Accounts Payable for June be?
   1. $23,430
   2. $25,050
   3. $27,900
   4. $66,400

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: This question requires you to not only calculate the payments made by Accounts Payable in the given month but also to factor in how their payment percentages from purchases in previous months contribute to the total. The correct answer is $25,050. To get the correct total for June, add $16,740 ($27,900 × 60% of purchases paid in the month of the purchase) + $6,690 ($22,300 × 30% of purchases paid for purchases from the previous month) + $1,620 ($16,200 × 10% of purchases paid for purchases two months prior).

1. Sara, working as a manager in the company, is asked to submit the cash budget for the third quarter of the year. Sara’s analysis shows that the third quarter will report an opening cash balance of $7,000, expected cash receipts of $22,000, and expected cash disbursements of $24,500. If the company is required to keep a minimum quarterly cash balance of $8,000, then in order to meet this requirement, the company must borrow 
2. $3,500.
3. $4,500. 
4. $9,500. 
5. $12,500. 

Ans: A, LO 4, Bloom: AP, Difficulty: Easy, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Required Borrowings = Minimum Quarterly Cash Balance Required − (Beginning Cash Balance + Cash Receipts − Cash Disbursements) = $8,000 − ($7,000 + $22,000 − $24,500) = $3,500.

1. The following table represents the credit sales of Seneca Foods for the first five months of this year:

According to their records, the company is expecting to receive payments for credit sales as follows: 60% in the month of sale, 20% in the first month after the sale, 15% in the second month after the sale, and the remainder becomes uncollectible. How much cash should Seneca expect to receive in May as a result of credit sales?

1. $7,650
2. $11,000
3. $12,300
4. $49,950

Ans: D, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cash Receipts in June = [(March’s credit sales of $45,000 × 15% collected in May) + (April’s credit sales of $51,000 × 20% collected in May) + (May’s credit sales of $55,000 × 60% collected in May)] = [$6,750 + $10,200 + $33,000] = $49,950.

See additional explanation below:

1. The following table represents the credit sales of Seneca Foods for the first five months of the current year:

According to their records, the company is expecting to receive payments for credit sales as follows: 60% in the month of sale, 20% in the first month after the sale, 15% in the second month after the sale, and the remainder becomes uncollectible. Calculate the amount of uncollectible accounts for Seneca as a result of these credit sales.

1. $7,650
2. $11,000
3. $12,300
4. $18,650

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Uncollectible = Budgeted Credit Sales − Budgeted Credit Collections = ($40,000 + $55,000 + $45,000 + $51,000 + $55,000) − ($147,600 + $49,200 + $36,900) = $246,000 − $233,700 = $12,300.

See additional explanation below:

1. Mike is concerned about the cash receipts schedule of his business since all of the business’s customers deal in credit instead of cash. Based on historical data, he is expecting to receive collections on accounts receivable (A/R) as follows: 55% in the month of sale, 40% in the next month after the sale, and 5% becomes uncollectible. Mike has decided to write off the business’s uncollectible A/R at the end of second month after the sale. The following table provides the month-by-month summary of sales for Mike’s business:

How much uncollectible A/R will Mike write off at the end of May?

• 1. $500
  2. $750
  3. $1,500
  4. $2,000

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting . Solution: The amount of uncollectible A/R that would be written off at the end of May = 5% of March credit sales = $750. See additional explanation below:

1. The following table shows the cash schedule of XYZ Co for the first quarter of 2021:

XYZ has an opening cash balance of $23,000 for the month of January. The budgeted ending cash balance at the end of the quarter will be

• 1. $188,000.
  2. $226,000.
  3. $394,000.
  4. $499,000.

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted ending cash balance at the end of the quarter = $188,000. See additional explanation below:

1. Dymund Group reports the sale of 16,000 units for $22 per unit in the current quarter. 70% of these sales are credit sales. Management forecasts a 6% growth in sales each quarter, and according to their records, the company is expecting to receive full payment for credit sales in the next quarter. If the selling price and the credit sale ratio remain the same, then cash receipts for the next quarter are expected to be 
2.  $111,936.
3.  $246,400.  
4.  $358,336.  
5.  $373,120.  

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cash Receipts = Budgeted Cash Sales + Budgeted Collections on Credit Sales; Budgeted Sales in the Next Quarter = (16,000 × (1 + 6%) × $22) = $373,120; Budgeted Cash Sales in the Next Quarter = $373,120 × 30% = $111,936; Budgeted Credit Collection (of previous quarter) = 16,000 × $22 × 70% = $246,400; Budgeted Cash Receipts = $111,936 + $246,400 = $358,336.

1. The Green Retail store is planning to open new credit department that only makes credit sales. Its budgeted credit sales for the first year by quarter are as follow: Quarter 1, $10,000; Quarter 2, $11,000; Quarter 3, $12,100; and Quarter 4, $13,310. From the company’s market study, the credit department will collect its customers’ Accounts Receivable balances according to the following pattern: 70% in the quarter of sale, 28% in the following quarter after the sale, and the balance is uncollectible and will be directly written off of the Accounts Receivable balance during the 2^nd following quarter after the sale. What are the budgeted collections on credit sales for quarter 3 of first year?
2. $8,470
3. $10,500
4. $11,550
5. $11,858

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cash Receipts = Budgeted Cash Sales + Budgeted Collections on Credit Sales = $0 + (28% of Q2 Credit Sales + 70% of Q3 Credit Sales) = (28% x $11,000) + (70% x $12,100) = $3,080 + $8,470 = $11,550.

1. Sea Salt Manufacturing Company’s policy is to maintain a safe minimum end of the month cash balance of $54,000. Its May cash budget information is as follows: Beginning cash balance, $60,000; cash receipts, $31,000; and cash disbursements, $42,000. The budgeted financing amount the company would have to borrow from the bank in May is
2. $0.
3. $5,000.
4. $17,000.
5. $54,000.

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Required Borrowings = Minimum Cash Balance Required − (Beginning Cash Balance + Cash Receipts − Cash Disbursements)

Bank’s Borrowing in May = $54,000 − $60,000 − $31,000 + $42,000 = $5,000.

1. The CFO of M Corp estimates the number of units sold for May and June to be 5,000 units and 6,000 units respectively. These units will be sold at a price of $40 per unit. The CFO estimates that 40% of sales will be credit sales and 60% of the credit sales amount will be received in a month after the sales are made with balance paid off in the following month. How much cash is expected to be collected in June?
2. $144,000
3. $192,000
4. $200,000
5. $264,000

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Expected Cash Receipts = Expected Cash Sales + Expected Accounts Receivable

Expected Cash Receipt = Cash Sales for the Month of June + Accounts Receivable for June = (6,000 × $40 × 60%) + (5,000 × $40 × 40% × 60%) = $144,000 + $48,000 = $192,000.

1. What amount should Windshell Corp borrow to maintain an ending cash balance of $4,000, if the beginning cash balance is $5,000, expected cash receipts are $1,000, and expected cash payments are $3,500?
2. $1,000
3. $1,500
4. $3,500
5. $4,000

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Borrowed Amount = Minimum Ending Cash Balance − (Beginning Cash Balance + Expected Cash Receipts − Expected Cash Payments);

Borrowed Amount = $4,000 − ($5,000 + $1,000 − $3,500) = $1,500

1. Mallards Manufacturing produces tarps for camping, and the company has been in business since 1955. The company’s budgeted beginning cash balance for the year 2024 is $7,143,234 with budgeted cash collections from sales for 2024 of $34,567,423 and budgeted cash disbursements of $38,895,156. What is the budgeted ending cash balance?
   1. -$4,327,733
   2. $2,815,501
   3. $34,567,423
   4. $41,710,657

Ans: B, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Ending Cash Balance = Budgeted Beginning Cash Balance + Budgeted Cash Sales + Budgeted Cash Collections from Sales − Budgeted Cash Disbursements $7,143,234 +$ 0 + $34,567,423 − $38,895,156 = $2,815,501

1. The Green Retail store is planning to open a new department that only makes credit sales. Its budgeted credit sales for the first year by quarter are as follow: Quarter 1, $10,000; Quarter 2, $11,000; Quarter 3, $12,100; and Quarter 4, $13,310. From the company’s market study, the credit department will collect its customers’ Accounts Receivable (A/R) balances according to the following pattern: 70% in the quarter of sale, 28% in the following quarter after the sale, and the balance is uncollectible and will be directly written off of Accounts Receivable balance during the 2nd following quarter after the sale. What is the ending Accounts Receivable balance that will be presented in the year-end budgeted balance sheet for the first year?
2. $ 4,235
3. $ 4,655
4. $ 41,755
5. $ 46,410

Ans: A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Ending Accounts Receivable Balance = Beginning A/R Balance + Budgeted Total Credit Sales − Budgeted Total Cash Receipts – Direct Write-Offs of Uncollectible A/R

Ending Accounts Receivable Balance = $0 (first year) + ($10,000 + $11,000 + $12,100 + $13,310) – [(98% × $10,000) + (98% × $11,000) + (98% × $12,100) + (70% × $13,310)] – [(2% × $10,000) + (2% × $11,000) = $0 + $46,410 – $41,755 − $420 = $4,235.

1. Brianna is trying to figure out the budgeted amount of cash receipts for the next month of operations. From June’s records, she determines that in the next month, 60% of total sales will result in accounts receivable. Considering the records, she is expecting to receive the collections on accounts receivable (A/R) as follows: 55% in the month of sale, 40% in the next month after the sale, and 5% become uncollectible. In her budget, Brianna shows the budgeted sales of $80,000 and $84,000 for June and July respectively. What will the total amount of budgeted cash receipts be in July?
2. $27,720
3. $46,920
4. $80,520
5. $84,000

Ans: C, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cash Sales + Budgeted Collections on Credit Sales = [(July’s Cash Sales of $33,600) + (July’s Credit Sales of $50,400 × 55%) + (June’s Credit Sales of $48,000 × 40%)] = [$33,600 + $27,720 + $19,200] = $80,520.

1. Mike is concerned about the cash receipts schedule of his business since all of the business’s customers deal in credit instead of cash. Based on historical data, he is expecting to receive collections on accounts receivable (A/R) as follows: 55% in the month of sale, 40% in the next month after the sale, and 5% becomes uncollectible. Mike has decided to write off the business’s uncollectible A/R at the end of second month after the sale. The following table provides the month-by-month summary of sales for Mike’s business:

Considering the above data, which of the following statements is correct?

1. In the month of April, uncollectible sales of $750 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on April 30 is $750.
2. In the month of February, uncollectible sales of $500 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on February 28 is $6,750.
3. In the month of January, uncollectible sales of $4,500 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on January 31 is $0.
4. In the month of March, uncollectible sales of $500 are taken as a direct write-off to A/R, and the budgeted ending balance of A/R on March 31 is $7,250.

Ans: A, LO 4, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Since Mike has decided to write off the business’s uncollectible A/R at the end of second month after the sale, written-off of uncollectible A/R will start after March.

The amount of uncollectible sales written off at the end of March = 5% of January credit sales = $500;

The amount of uncollectible sales written off at the end of April = 5% of February credit sales = $750;

The amount of uncollectible sales written off at the end of May = 5% of March credit sales = $750.

See additional explanation below:

1. Natalia is excited for her new start-up and visits the bank to open a business checking account. Her relationship manager at the bank, Max, informs her about overall process and about the bank’s requirement to maintain a minimum cash balance of $10,000 in her account at all times. Max also tells her about the easy access to lines of credit from the first day of the month, if the need for them arises. The annual interest on lines of credit is 10%, and it must be paid every month if there is an outstanding balance, but there is no need to make the principal payments each month. The following table provides additional information on this:

If Natalia borrowed funds in increments of $100, then which of the following is correct for the month of August in the given scenario? (Round your calculations to the nearest whole number, if required.)

1. Natalia can wait for next month’s deposits; there is no need to borrow on a line of credit.
2. Natalia will borrow $3,000 to maintain the minimum cash balance, and her books will show the budgeted ending cash balance of $10,000.
3. Natalia will borrow $3,100 to maintain the minimum cash balance, and her books will show the budgeted ending cash balance of $10,074.
4. Natalia’s books will show at least the sufficient amount of funds, and there will be no need to borrow.

Ans: C, LO 4, Bloom: AN, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: After making cash payments of $90,000, Natalia’s bank account will have a deficit of $3,000 against the minimum requirement. Hence, to maintain the minimum cash balance of $10,000, Natalia will need to borrow on a line of credit. See additional explanation below:

1. Patricia handles the sales and marketing department for the organization and is currently busy in the marketing of new product. Based on her analysis, the company will achieve their target sales of 250 units in the first month of product’s launch and 275 units in the following month. The cost of the product to the company is $230 per unit, and the company has decided to sell this product at maximum retail price (MRP) of $300. The company is expecting a sales return of 7% and factored in a prompt payment discount of 1.5% from its suppliers. What will the net sales be in the first month assuming Patricia’s assumptions are correct? (Do not round values during your intermediate calculations.)
   1. $53,475
   2. $68,704
   3. $69,750
   4. $75,000

Ans: C, LO 5, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Revenue = Budgeted Sales Volume × Budgeted Sales Price = 250 × $300 = $75,000; Sales Returns = $75,000 × 7% = $5,250; Budgeted Net Sales = Budgeted Revenue − Sales Returns = $75,000 − $5,250 = $69,750.

1. Keith, a manager of a store in Florida, is involved in the preparation of the sales budget for August 2024. He estimates that in August the sales volume will be around 5,000 units @ $20 per unit. Keith expects an average of 6% sales return, and to boost sales, he decides to offer a flat discount of 22% of the original selling price to all customers. Based on the given information, budgeted net sales for August 2024 will be
   • • • 1. $72,000.
         2. $73,320.
         3. $79,320.
         4. $94,000.

Ans: A, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Net Sales = Gross Sales − Sales Returns − Sales Discounts; 

Gross Sales = Number of Units Sold × Sales Price per Unit 

= 5,000 × $20 = $100,000 

Sales Returns = Gross Sales × Sales Return Percentage = $100,000 × 6% = $6,000 

Sales Discounts = Gross Sales × Sales Discount Percentage 

= $100,000 × 22% = $22,000 

Budgeted Net Sales = $100,000 − $6,000 − $22,000 = $72,000 

1. G mart deals in retail sales of consumer goods. The head of G mart finance estimates the sales volume of a particular product to be 4,000 units at a price of $20 per unit. 17% sales return is estimated for this product and a 1% discount is provided to all customers. How much in budgeted net sales of that particular product is G mart expecting?
   • • • 1. $65,600
         2. $65,736
         3. $66,400
         4. $67,200

Ans: A, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Net Sales for Retailers = (Budgeted Sales Volume × Budgeted Sale Price) − Sales Returns – Discounts;

Budgeted Net Sales = (4,000 × $20) − (4,000 × $20 × 17%) − (4,000 × $20 × 1%)

Budgeted Net Sales = ($80,000 − $13,600 − $800) = $65,600

1. Olivia, the purchasing head of a small retail store dealing in cases to fit all types of specs, is preparing the budget for August 2024. July records show an ending inventory balance of 670 units, and Joe, the sales head of the store, gives her a sales estimate of 8,000 units for August. Olivia changes the minimum inventory requirement and makes a policy to maintain an ending inventory of 470 units from August onwards.  If the budgeted purchase price per unit is $5.60 and the store successfully adds a purchase discount of 15% for payment within the discounted period, then the budgeted amount of net purchase for August 2024 will be 
   • • • 1. $37,128. 
         2. $36,780.
         3. $37,654. 
         4. $39,528. 

Ans: A, LO 5, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Net Purchases = Total Budgeted Purchases − Purchase Discounts; 

Total Budgeted Purchases = (Budgeted Sales Volume + Target Ending Inventory − Target Beginning Inventory) × Purchase Price = (8,000 + 470 − 670) × $5.60 = $43,680 

Purchase Discounts = Total Budgeted Purchase × Percentage of Purchase Discount 

= $43,680 × 15% = $6,552 

Budgeted Net Purchases = $43,680 − $6,552 = $37,128.

1. Teal’s Supplies sells camping equipment to people walking the Appalachian Trail. One of the fastest selling items is a tarp that can be used to lay on the ground or strung between trees for cover. The budgeted sales of that tarp are 25,000 units at a selling price of $35 with 5% returns and a 1.5% discount. What are the budgeted net sales for the tarp?
   1. $818,125
   2. $831,250
   3. $861,875
   4. $875,000

Ans: A, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted sales revenue is calculated by multiplying the budgeted sales units by the budgeted selling price. (25,000 × $35) = $875,000. Budgeted net sales are calculated by subtracting the sales returns and sales discounts from the budgeted sales revenue. Sales Returns ($875,000 × 5%) = $43,750, and Sales Discounts ($875,000 × 1.5%) = $13,125. Budgeted Net Sales = $875,000 − $43,750 − $13,125 = $818,125.

1. JumpStart is a retail store in downtown Glen Ellyn that sells athletic footwear and apparel. The budgeted shoe sales for August are 200 pairs of shoes at an average selling price of $75, and the athletic wear sales are 300 items at an average selling price of $40 per item. JumpStart is a popular store and sells quality products, but sometimes customers are not happy with their purchases. In recent months, JumpStart customers have returned an average of 5% of shoe purchases and 3% of athletic wear purchases. JumpStart has given customers an average of a 2% discount off of the original selling price for all products. What will JumpStart’s total budgeted net sales be for August?
2. $11,160
3. $13,950
4. $25,110
5. $25,350

Ans: D, LO 5, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Athletic shoes budgeted net sales are $13,950, and athletic wear budgeted net sales are $11,400 for a total budgeted net sales of $25,350. See additional explanation below:

1. Irina is a managing partner at a firm and is handling the sales and marketing group. She is currently busy in a new product launch. Sales for the new product are expected to be 250 units in July and 280 units in August. Inventory purchases are made at the beginning of the month, and the firm has a policy to stock 10% of the next month’s sales in FG inventory. The cost of the product to the company is $200 per unit, and after a careful analysis, Irina has decided to sell the product at a profit margin of 40%. Irina is expecting a sales return of 7% and factored in a prompt payment discount of 1.5% from its suppliers by paying within the discounted period of 15 days. Determine the budgeted cash payments for the merchandise purchases made in July. (Round your calculations to nearest whole number.)
2. $54,766
3. $50,600
4. $54,766
5. $55,600

Ans: A, LO 5, Bloom: AP, Difficulty: Hard, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted Cost of Merchandise to be Purchased = (Budgeted Quantity of Merchandise to be Purchased × Budgeted Cost of Merchandise) — Purchase Discount = (278 × $200) — $834 = $54,766. See additional explanation below:

1. George owns a small IT parts supply store, and he is in the process of creating a sales budget for next month. George predicts the following budgeted numbers: Sales Volume of 500 with a Budgeted Selling Price of $18 per unit. On average, George’s store has experienced an average 5% rate of sales returns and discounts of 1.2% of the original selling price. What will the Budgeted Net Sales be for George next month?
   1. $7,470
   2. $8,442
   3. $8,550
   4. $8,892

Ans: B, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To calculate Budgeted Net Sales, you must first calculate the Budgeted Gross Revenue, Sales Returns, and Sales Discounts. Budgeted Gross Revenue is calculated for 500 units by multiplying by $18 per unit for a total of $9,000. From that value, subtract Sales Returns of $450 ($9,000 × 0.050) and Sales Discounts of $108 ($9,000 × 0.012). So, the Budgeted Net Sales for the month will be $8,442 ($9,000 − $450 − $108).

1. Marvin owns a clothing boutique, and he is in the process of creating a purchases budget for August, which is next month. Marvin has gathered the following budgetary data: Budgeted Sales Volume, 800 units; Target Ending Merchandise Inventory, 250 units; and Beginning Units in Merchandise Inventory, 75 units. The purchase price per unit is $14, and Marvin takes advantage of a $50 purchase discount. What are Marvin’s Budgeted Net Purchases for August?
   1. $13,600
   2. $13,650
   3. $14,600
   4. $14,650

Ans: A, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To calculate Budgeted Net Purchases, first calculate the Total Quantity of Units to Purchase, which is comprised of units available for Sale minus Beginning Units in Merchandise Inventory. Total Units Available for Sale equals the Budgeted Sales Volume of 800 plus the Target Ending Merchandise Inventory of 250 units for a Total of 1,050. From this value, subtract Beginning Units in Merchandise Inventory of 75 units, and the result is 975 units, and that is the number of units that will need to be purchased. Next, multiply the Units to Purchase by the Purchase Price of $14 per unit, and the Total Budgeted Purchases value will equal $13,650. Finally, you must subtract the $50 Purchase Discount to arrive at the final Net Purchases value of $13,600.

1. Veronica owns and operates a landscaping business, and she is creating a sales budget for July, which is next month. Veronica has had a good year and an even better summer thus far. She forecasts the following budgeted numbers: Sales volume of 350 (yards landscaped) with a budgeted selling price of $75 per yard that she services. Typically, Veronica is able to leave all of her customers satisfied, but she is going to budget an expected return/refund rate of 4% of sales and discounts of 1% of the original selling price for customers who remit payment promptly. What will the Budgeted Net Sales be for Veronica for July?
2. $24,937.50
3. $25,200.00
4. $25,987.50
5. $26,250.00

Ans: A, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To calculate Budgeted Net Sales, first calculate a Budgeted Gross Revenue, a Sales Returns amount, and a Sales Discounts value. Budgeted Gross Revenue equals 350 units times $75.00 per yard or $26,250.00. Next, calculate and subtract Sales Returns of $1,050.00 ($26,250.00 × 0.04) and Sales Discounts of $262.50 ($26,250.00 × 0.01). The Budgeted Net Sales value is $24,937.50 ($26,250.00 − $1,050.00 − $262.50).

1. During the month of April, Caroline sold $6,000 worth of products to one of her customers. Once the items arrived, her customer realized that some merchandise had been damaged, and the customer promptly returned $1,800 worth of products. Caroline has offered her terms of 3/10, net 30, with an agreement that Caroline will assume responsibility for shipping charges. Caroline has incurred the overall shipping cost of $150 that she paid up front. If the customer pays within the discount period, what is the overall amount that Caroline will be able to collect from her customer during April?
2. $4,020
3. $4,074
4. $4,224
5. $5,820

Ans: B, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: To arrive at the correct total, you must use the following formula: (Sales − Returns) × (1 − Discount Rate). The shipping costs will not be added to the total as that will be paid by Caroline. $4,074 is the only choice that appropriately applies the formula: ($6,000 − $1,800) × 0.97.

1. Tanzeena is an accountant for Teal Vista Sales and has been asked to calculate budgeted sales returns and sales discounts for the next month. The sales budget for next month is 675,000 units at an average sales price of $105. Sales returns are budgeted at the 0.75% of sales, and sales discounts are budgeted at 3% of sales. What is the dollar amount of the sales discounts, and how many units are expected to be returned (round up to whole units)?
   1. $2,126,250; 5,063 units
   2. $2,126,250; 506,250 units
   3. $21,262,500; 5,063 units
   4. $21,262,250; 20,250 units

Ans: A, LO 5, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC: Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgeted sales dollars must be calculated first, 675,000 × $105 = $70,875,000. Sales Discounts equal Budgeted Sales dollars × Sales Discount = $70,875,000 × 0.03 = $2,126.250. Sales Returns Units equal Sales Units × Sales Return Percentage = 675,000 × 0.0075 = 5,062.5 rounded up to 5,063 units.

Short Answers

1. Briefly describe what a budget is, and name the four main types of budgets. Why are budgets a powerful tool for management to use in planning?

Ans: N/A, LO 1, Bloom: K, Difficulty: Medium, AACSB: Knowledge Communication, AICPA: FC, Measurement, Analysis, and Interpretation. AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A budget is a plan created with the intention of planning for and monitoring the use of resources. The four main types of budgets include rolling budgets, zero-based budgets, imposed budgets, and participative budgets. Each of these four budget types has its own pros and cons, and their effectiveness should be evaluated by management prior to implementation. Budgets are a powerful tool for management as managers will find themselves empowered with knowledge pertaining to the actual use and allocation of company resources. By measuring the actual use of resources against what was initially planned to be used, management can implement meaningful changes to make the company more successful.

1. Briefly describe the concept of Budgetary Slack. Why is this practice so detrimental to the overall success of the budgetary process and to a company’s ability to meet their goals?

Ans: N/A, LO 1, Bloom: K, Difficulty: Medium, AACSB: Knowledge Communication, AICPA: FC, Measurement, Analysis, and Interpretation. AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Budgetary Slack, which is sometimes referred to as “padding the budget,” occurs when the person that creates the budget chooses to intentionally overstate their expenses or understate their revenues in their budgeted totals. This intentionally deceptive act can create false expectations so that when a manager arrives at their budgeted goals and their expenses are less than budgeted or their revenues are higher, it paints a false picture of success. When a budget has been created including padding of this nature, it can also make it far more difficult for managers to appropriately plan and budget in the future. This lack of accuracy can cumulatively make it almost impossible to fully achieve realistic goals that should have been set forth.

1. Why are feedback and follow-up important to the overall budgeting process? What are some potential consequences of not performing either?

Ans: N/A, LO 2, Bloom: K, Difficulty: Medium, AACSB: Knowledge, Communication, AICPA: FC, Measurement, Analysis, and Interpretation. AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: If someone chooses to skip out on the budget-versus-actual comparison by using feedback and follow-up, then that defeats the entire purpose of the budgeting process. A crucial component to the success of the overall budgeting process involves management taking the time to follow-up with the results of a budget-versus-actual comparison and then providing feedback to those who have been tasked with overseeing the budgetary inputs. A potential consequence of not performing follow-up and feedback would include not being able to successfully and accurately measure a manager’s and their respective department’s performance against predefined benchmarks. This may in turn impact the creation of the budget for the following year. Another consequence could be that management may feel as though their efforts have gone unnoticed or unappreciated, and that could lead to a detrimental decrease in overall morale.

1. Which budget is prepared directly after the sales are forecasted? Are there any organizations that can skip this type of budget, and if so, then why?

Ans: N/A, LO 3, Bloom: K, Difficulty: Medium, AACSB: Knowledge Communication, AICPA: FC, Measurement, Analysis, and Interpretation. AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: A budget prepared directly after the sales are forecasted is a Production Budget. This budget uses the sales forecast data to determine the quantity of items that will need to be produced during a given period of time. The budgeted units to be produced can be calculated by adding budgeted sales volume to target finished goods inventory and subtracting the beginning finished goods inventory. This type of budget will assist management in making important decisions pertaining to direct materials, direct labor, and manufacturing overhead. Both merchandisers and service organizations can skip this budget as they do not create or manufacture their own goods.

1. Briefly describe the purpose and importance of a Cash Budget. How might a cash budget differ for companies with cash-based accounting compared to those who use accrual-based accounting?

Ans: N/A, LO 4, Bloom: K, Difficulty: Medium, AACSB: Knowledge Communication, AICPA: FC, Measurement, Analysis, and Interpretation AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: The Cash Budget is one of the last budgets prepared, and it is comprised of decisions that have come before it which is why it is completed at the end of the budgeting process. Cash is a very important asset, and it is often considered the most accurate representation of the viability of an organization. Organizations often consider this their most precious resource, and they will want to ensure that they are properly monitoring and budgeting all activity that directly impacts the cash in their accounts. Accrual-based accounting means that revenues are recorded when the work occurs and that expenses are recorded when they are incurred without regard to cash inflow or outflow. This means that the cash budget and activity will not fully reconcile with the net income of an accrual-based business as some of their income may not be collected until later, if at all. Cash-based businesses will record their revenue as they are paid and their expenses as money is spent. Therefore, their cash account and budget are more likely to align with their net income than an accrual-based business.

1. Although retailers have only one category of inventory for which they must budget and are not generating their own products, why could you compare their budgeting to that of a manufacturer? Please discuss both the similarities and the differences.

Ans: N/A, LO 5, Bloom: K, Difficulty: Medium, AACSB: Knowledge Communication, AICPA: FC, Measurement, Analysis, and Interpretation AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Retailers will typically have one category of inventory called Merchandise Inventory, and it is similar to Finished Goods Inventory, an account that would be used by a manufacturer. Drawing this parallel affords one the opportunity to more readily compare budgets for retailers and manufacturers. Retailers must additionally account for sales returns and discounts offered to customers along with possible purchase returns and applied discounts. Manufacturers have an added category of Direct Materials Inventory to track that will also factor into their work-in-process and finished goods inventory.

Brief Exercises

1. Amanda has recently decided to pursue her dream of opening a small online store where she will sell her handmade jewelry. Amanda would eventually like to open a brick-and-mortar location, but she will need to save at least $2,000 in order to afford a place of her own. Her goal can be achieved over time by implementing a zero-based budget. Her monthly business expenses include the following: Supplies to make Jewelry, $100; Phone, $30; Domain for Website, $40; Internet Access, $80; and Shipping and Packaging Materials, $150; She projects that she will sell 100 pieces of Jewelry per month with an overall revenue of $1,000. Assuming these numbers remain consistent, use a zero-based budget to determine how many months will it take Amanda to achieve her savings goal of at least $2,000 so she can open her brick-and-mortar location?

Ans: N/A, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: It will take Amanda 4 months to achieve her savings goal.

By combining all necessary expenses for her online shop, it is clear that Amanda is spending $400 of her sales income on business-related expenses. This leaves her with $600 per month to place into her savings account. It will take her approximately 4 months ($2,000/$600 a month = 3 1/3 months) in order to save enough to open a brick-and-mortar location.

1. Sarah has recently graduated from college and is trying to determine how much she can afford to pay towards rent. She would prefer to move into an apartment of her own rather than moving back in with her parents, so a budget is crucial to achieving this goal. She has secured a job at a small advertising firm where she will take home $2,700 after taxes. She has the opportunity to work at a local café on the weekends for 10 hours per month where she will earn $12 per hour after taxes. Her monthly expenses include the following: Phone, $80; Internet, $60; Car Payment, $300; Car Insurance, $32; Groceries and Household Supplies, $420; Eating Out and Entertainment, $150; and Student Loans, $725. Using zero-based budgeting, how much rent could Sarah afford only with just the income from her full-time job without working the weekend part-time hours at the café?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

If Sarah only works at her full-time job, she will be able to afford $933 a month for rent.

By adding up all of Sarah’s monthly expenses, she currently spends $1,767 which would leave $933 to spend on rent per month. She could always explore adding the part-time hours if she wanted to increase her budget.

1. Theresa has recently graduated from college and is trying to determine how much she can afford to save each month for retirement. She would prefer to set up a retirement account with a local broker, so a budget is crucial to achieving this goal. She has secured a job at a small firm where she will take home $2,550 after taxes. She has the opportunity to work at a local bookstore on the weekends for 8 hours per month where she will earn $13 per hour after taxes. Her monthly expenses include the following: Rent (including utilities), $800; Phone, $90; Internet, $67; Car Payment, $318; Car Insurance, $28; Groceries and Household Supplies, $478; Personal Loan, $127; and Student Loans, $630. Using zero-based budgeting, how much could Theresa afford to save for retirement if she decides to work at both the full-time job as well as working 8 hours part-time on the weekends at the café?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: If Theresa works at her full-time job as well as 8 part-time hours on the weekends, she will be able to afford $116 a month for retirement.

By adding up all of Theresa’s monthly expenses, she currently spends $2,538 which would leave $116 to save for retirement per month as she has added an extra $104 to her inflow.

1. After completing their sales forecast, Fido Treats LLC has decided that they would like to create a production budget. Their goal is to ensure that they will be able to produce enough dog treats to cover the sales they have projected for the entire first quarter. Fido has projected the following sales: January, 1,109 units; February, 1,242 units; and March, 1,391 units for an overall total of 3,742 units for the entire quarter. The company has a policy of keeping 15% of the next month’s projected sales on hand in their Finished Goods (FG) Inventory. Using the format below, calculate the number of budgeted units that need to be produced for each month and for the entire quarter.

Ans: N/A, LO 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

This exercise requires you to calculate both the target Ending FG Inventory and the Beginning FG Inventory by utilizing the 15% retention percentage given in the problem. Target FG Inventory is calculated as follows: January, 1,242 (units from February) × 0.15; February, 1,391 (units from March) × 0.15; and March will have no information as there is no projection for what the budgeted sales volume for April will be. Beginning FG Inventory is calculated as follows: January, 1,109 (units from January) × 0.15; February, 1,242 (units from February) × 0.15; and March, and 1,391 (units from March) × 0.15. After these calculations have been completed, work vertically through the budget, and that should result in the following numbers of budgeted units to be produced: January, 1,128.95; February, 1,264.35; and March, 1,182.35; and this gives a final total for the quarter of 3,575.65 budgeted units to be produced.

1. Bellflower, Inc. is a small company that sells coffee mugs that feature local artists from their region. Jeff, the chief financial officer (CFO), is in the process of compiling a Budgeted Income Statement for 2024 so that they can apply for a loan at their local bank. Jeff has budgeted for sales of 10,000 mugs at a sales price of $12.50 per mug. They originally paid $3.75 per mug when they acquired them. They have selling, general & admin (SG&A) expenses of $39,750 and have an existing loan of $5,000 with an annual percentage rate (APR) of 2%. Their tax rate is a flat 21%. What is the amount of operating income that Jeff will report on the budgeted income statement for 2024?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Bellflower will report Operating Income of $47,750.

Using a partial income statement or the formula of Sales − Cost of Goods Sold − Selling, General & Administrative Expenses, the Operating Income is $47,750.

1. Fido Treats LLC is an Internet-based business that specializes in the production and sale of specialty dog treats. They were established 2 years ago, and they have experienced consistent growth in sales every month since then. In an effort to be more prepared for the coming year, they are creating a sales forecast. In December of the previous year, they were able to sell 990 units, and based on their records, they anticipate an additional 12% growth every month. They have set their selling price for each unit at $9.50. Using the format below, calculate the budgeted gross revenue for each month and the quarter. (Remember to round up the sales volume.)

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

See additional explanation below:

Fido Treats will have a Budgeted Gross Revenue for January in the amount of $10,535.50, $11,799.00 for February, $13,214.50 for March, and a total of $35,549.00 for the Quarter. In order to calculate the correct budgeted sales volume for each month, take the previous month’s budget and multiply it by 1.12 to account for the monthly 12% projected increase. January will use the total from the previous month December. After calculating the correct number of units needed, multiply that value by the selling price to arrive at the Budgeted Gross Revenue.

1. Forager Plants, LLC is a retail business that specializes in acquiring and reselling houseplants. They are working on compiling budgets for the next year, and they would like to create a Cost of Goods Sold budget for January of the coming year. The company has a policy of keeping 10% of the next month’s projected sales on hand in their Inventory. They have provided the following information pertaining to their inventory counts as of December:

Forager Plants predicts that they will need to purchase $7,000 worth of products to meet the demand for January. The company has projected that they will sell a total of $7,600 in January and $8,000 in February. Using this information, prepare a Cost of Goods Sold budget for Forager Plants, LLC.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

To begin with, this problem first requires the calculation of the January beginning inventory. This can be accomplished by taking each inventory item from December and multiplying the on-hand quantity by the per-unit cost for each type of plant. The sum of these items will become the Beginning Inventory balance for January. Purchases are given in the problem. Next, calculate the Ending Inventory total by taking the projected sales for February and multiplying it by the company’s retention policy of 10%. The overall formula to calculate Cost of Goods Sold is Beginning Inventory ($379) + Purchases ($7,000) − Ending Inventory ($800), and this results in a Cost of Goods Sold in the amount of $6,579.

1. Bellflower, Inc. is a small company that sells coffee mugs that feature local artists from their region. Jeff, the chief financial officer (CFO), is in the process of compiling a Budgeted Income Statement for 2024 so that they can apply for a loan at their local bank. Jeff has budgeted for sales of 10,000 mugs at a sales price of $12.50 per mug. They originally paid $3.75 per mug when they acquired them. They have selling, general & admin (SG&A) expenses of $39,750 and have an existing loan of $5,000 with an annual percentage rate (APR) of 2%. Their tax rate is a flat 21%. What is the amount of income tax expense that Jeff will report on the budgeted income statement for 2024?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation. Solution: Bellflower will report income tax expense of $10,006.50.

Using a partial income statement or the formula of Sales − Cost of Goods Sold − Selling, General & Administrative Expenses, the Operating Income is $47,750. You will then need to subtract Interest Expenses that are calculated by taking the loan amount of $5,000 and multiplying it against their APR of 2% for a total interest expense of $100. After subtracting Interest Expense from the Operating Income, you will arrive at an Income before Income Taxes of $47,650. The last step to calculating Income Tax Expense is to multiply the Income before Income Taxes of $47,650 by their Tax Rate of 21% for an Income Tax Expense of $10,006.50.

1. Wallflower, LLC is a small company that sells decorative picture frames from local artisans. John, the chief financial officer (CFO), is in the process of compiling a Budgeted Income Statement for 2024 so that they can apply for a loan at their local bank. John has budgeted for sales of 6,200 mugs at a sales price of $15.50 per mug. They originally paid $2.48 per mug when they acquired them. They have selling, general & admin (SG&A) expenses of $46,800 and have an existing loan of $7,200 with an annual percentage rate (APR) of 3.2%. Their tax rate is a flat 21%. What is the amount of net income that John will report on the budgeted income statement for 2024? All calculations should be rounded to the nearest whole number.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Wallflower will report Net Income of $26,618.

Using a partial income statement or the formula of Sales − Cost of Goods Sold − Selling, General & Administrative Expenses, the Operating Income is $33,924. Then, subtract Interest Expenses that are calculated by taking the loan amount of $7,200 and multiplying it against their APR of 3.2% for a Total Interest Expense of $230. After subtracting Interest Expense from the Operating Income, the Income before Income Taxes is $33,694. Next, multiply the Income before Income Taxes of $33,694 by their tax rate of 21% for an Income Tax Expense of $7,076. The last step to calculating Net Income will be to subtract the Income Tax Expense of $7,076 from the Income before Income Taxes of $33,694 for a Total Net Income of $26,618.

1. Butterfly, LLC is a landscaping business and specializes in providing services to suburban homes. A large majority of their customers have set up accounts to where they will pay their bill for services in the month following when the service is rendered while other customers will pay as the work is completed. Butterfly estimates that it will collect 30% of its sales in the month it occurs, 62% of its sale in the following month, and the remaining 8% in the second month following the sale. Their sales have been as follows: June, $4,000; July, $7,600; August, $9,000; and September, $8,200. What will the total cash collected during July be?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Butterfly will collect $4,760 during July.

In order to calculate the total for July’s cash collections, account for 62% of the sales in June and 30% of the sales for July, the current month.

1. Monarch, LLC is a landscaping business that specializes in providing services to homes in a small, rural community. A majority of their customers have set up accounts where they will pay their bill for services in the month following the month when the service is rendered while other customers will pay in the same month as the work is completed. Monarch estimates that it will collect 63% of its sales in the month it occurs, 34% of its sale in the following month, and the remaining 3% in the second month following the sale. Their sales have been as follows: July, $3,400; August, $8,760; September, $8,900; and October, $7,240. What will the total cash collected during September be? All calculations should be rounded to the nearest whole number.

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution: Monarch will collect $8,687 during September.

In order to calculate the total for September’s cash collections, account for 3% of the sales in July, 34% of the sales in August, and 63% of the sales for September, the current month.

1. Hayley sells graphic t-shirts on her website, and she would like to be more proactive in her planning. She has decided to create a Sales Budget for the month of September. She was able to sell 100 units in August, and she has seen a 5% increase in sales volume every month. She intends to keep her selling price at $14 per unit. She offers a sales discount to anyone who buys at least five shirts which is normally 1.3% of her gross revenue. She is anticipating a sales return percentage of 7%. Calculate her budgeted net sales for September.

Ans: N/A, LO 5, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

The first step in this calculation is to determine the sales volume for September. This is accomplished by taking August sales of 100 units and multiplying by 1.05 to account for the 5.00% increase that Hayley anticipates. Hayley expects to sell 105 units in September which is then multiplied by $14 per unit to arrive at a Budgeted Gross Revenue of $1,470. From that value, subtract Projected Sales Returns of $102.90 ($1,470 × 0.07) and projected Sales Discounts of $19.11 ($1,470 × 0.013) to arrive at a Budgeted Net Sales value of $1,347.99 for the month of September.

Exercise

1. JJ is working his way through college. He has 2 part-time jobs that allow him to cover his expenses. He has the following accounts in his budget:

All of expenses are fixed except for Groceries and Savings.

JJ has learned that next year he will get a raise at the library which will increase his after tax pay to $26,500. He would like to use the additional income to rent a better apartment and has found one that will cost him $14,760 for the year. He has also decided to use zero-based budgeting for his future financial planning.

Using the information above, answer the following:

1. What is a zero-based budget?
2. What would JJ’s budget look like for the current year?
3. Using the planned changes information for next year, what would his budget look like for next year? Explain the changes you made.

All calculations should be rounded to the nearest whole number.

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. A zero-based budget starts each period without input from previous periods. Every account must be justified to be included. Inflows (cash in) and outflows (expenses) must serve a purpose to be included in the budget. The outflows are subtracted from the inflows and should equal 0 in a zero-based budget.

Inflows ($44,980) minus outflows ($44,980) = 0

1. JJ can budget his expenses in two ways:

Inflows ($46,480) minus outflows ($46,480) = 0

Inflows ($46,480) minus outflows ($46,480) = 0

The pay raise at the library will result in an additional $1,500 for the year. This would give him a budget of $14,700 for rent. He is short $60 from the rent on the new apartment, so he would have to reduce one of his other accounts. The rent is increased to $14,760 to reflect the cost of the new apartment. In solution one, Savings are reduced by $60 to bring budget to zero. In solution 2, Groceries are reduced by $60 to bring the budget to zero.

1. Christina has recently graduated from college and is trying to determine how much she can afford to pay towards car payment. She would love to buy a new car rather than lease or take public transportation, so a budget is crucial to achieving this goal. She has just been offered a job at a local accounting firm where she will take home $3,400 per month after taxes. She has the opportunity to work as a freelance bookkeeper in her spare time where she will earn an additional $20 per hour after taxes. She believes that she can work 2 extra hours per week for a total of 8 hours per month. Her monthly expenses include the following: Phone, $100; Internet, $45; Rent (her share, including utilities), $1,100; Metro/Bus Fare, $33; Groceries and Household Supplies, $460; Additional Items are: Eating Out and Entertainment, $180; and Student Loans, $925. Using zero-based budgeting, answer the following questions.
   1. How much of a car payment could Christina afford only with just the income from her full-time job?
   2. How much of a car payment could Christina afford working at both her full-time job and as a freelance bookkeeper?
   3. If Christina would like to buy a new car in cash for an amount of $20,000, then how many months would it take for her to save up for this goal with just the income from her full-time job?

Ans: N/A, LO 1, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

By using zero-based budgeting, Christina would be able to afford a car payment in the amount of $557. We take her income from the full-time job of $3,400 and subtract each of her monthly expenses. This leaves an amount of $557 that she could then save for her car payment each month. Once we subtract/allocate this to the car payment, we see that our budget now has a 0 balance as we desired.

By using zero-based budgeting, Christina would be able to afford to set aside $717 to save for her car payment. We take her income from the full-time job of $3,400 plus her part time income of $160 (2 hours per week for four weeks at a rate of $20/hour) and subtract each of her monthly expenses. This left an amount of $717 that she would then be able to save for her car payment each month. Once we subtract/allocate this to the car payment, we see that our budget now has a 0 balance as we desired.

For this question, we can use the information we calculated in a) in a different way. Christina will be able to place the money that we calculated for her car payment, $557 per month, and place into a savings account where she will save up to purchase her new vehicle. She would like to spend $20,000 total for the new vehicle so we divide that number by her monthly savings ($20,000/$557) and learn that it will take her at least 36 months to be able to purchase the vehicle outright. Christina may want to consider taking on extra freelance work to achieve this goal in less time.

1. Carlos is the production supervisor at West Coast Tarps. West Cost Tarps manufactures tarps that are popular with campers as they are waterproof and lightweight. Carlos has been given the following information:

Using the information provided above, create the following: (All calculations should be rounded to the nearest whole number.)

• 1. Production budget for the next 6 months.
  2. Direct material purchasing budget for the next 6 months.
  3. Direct labor budget for the next 6 months.
  4. What are the total direct costs for the month of September? Explain how that amount was calculated.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. Production budget for the next 6 months:

The production budget begins with the budgeted sales volume. Ending inventory is then added to the budgeted sales volume to determine the total quantity needed. FG ending inventory is calculated by multiplying the next month budgeted sales volume by 30%. To calculate the December units to produce, January’s budgeted sales volume is needed. The company expects sales to increase 20% each month, so January’s sales can be calculated by multiplying the December budgeted sales volume by 20%, 261,274 × 20% = 52,255. This would be added to the December number, 261,274 + 52,255, to yield 313,529. The January sales volume would be multiplied by targeted FG ending inventory 30%, 313,529 × 0.30, to get 94,059. The budgeted sales volume would be added to the targeted ending FG inventory to get the total quantity needed. The beginning inventory for each period would be determined next. The beginning FG inventory for June is given in the description (26,250). Each month after that, the beginning inventory would be equal to the previous month’s ending inventory, August = 37,800. Finally, the beginning inventory for each month would be subtracted from the total quantity needed to determine the budgeted units to produce, July = 142,800 − 26,250 = 116,550.

1. Direct materials purchases budget for the next 6 months.

Beginning with the number of units to produce from the production schedule, the units are multiplied by the quantity of DM per unit to determine the total production needs, July = 116,550 × 1.5 = 174,825. This calculation will be made for each month through January. Ending inventory of DM is calculated by multiplying the next month’s production needs by 30%, July = 133,560 × 30% = 60,102. The desired ending DM inventory would be added to the total production needs to determine the total DM inventory needs, July = 174,825 + 60,102 = 234,927. The beginning inventory for each month would be calculated next. The beginning inventory for July, 34,000, is given in the description. The beginning inventory for each month after July will be equal to the previous month’s ending inventory, August = July (60,102). Budgeted DM to be purchased would be calculated by subtracting the beginning inventory for each month from the Total DM inventory needs, July = 234,927 − 34,000 = 200,927. Finally, the budgeted DM to be purchased is multiplied by the DM cost ($45.75), to determine the total budgeted cost of DM purchases, July = 200,927 × $45.75 = $9,192,410.

1. Direct labor budget for the next 6 months:

The quantity of budgeted units to produce for each month is multiplied by the DL hours per unit resulting in the quantity of DL hours needed to produce, July = 116,550 × 4.2 = 489,510. Finally, the Total budgeted DL hours needed is multiplied by the DL cost ($17.25), to determine the Total budgeted DL costs, July = 489,510 × $17.25 = $8,444,048. These calculations would be made for each month.

1. The total direct costs for the month of September would be $23,270,310. This value is calculated by adding the total budgeted cost of DM purchases plus the total budgeted DL costs, $11,658,610 + $11,611,700 = $23,270,310.
2. Carolina Production sales embroidered baseball caps. The company procures the caps and then caps are embroidered in accordance with the customer’s instructions. The company has been growing significantly over the last year at a rate of 45%. Because Carolina Production has had recent problems with getting direct materials, a portion of the next period’s sales is completed in the current period. Chara works in the embroidery plant. She has been given the following Information:

Using the information provided above, create the following: (All calculations should be rounded to the nearest whole number.)

• 1. Manufacturing overhead budget for the year.
  2. Scheduled cost of goods sold for the year.
  3. What does the Budgeted Cost of Goods Available for Sale represent?
  4. What is the gross margin for the year? Explain how this amount was calculated.
  5. What would the SG&A expenses be if the operating income is as shown above? Explain how you calculated the amount.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. Manufacturing overhead (MOH) costs for the year.

The company has a manufacturing overhead that is variable based on the number of units produced. They also have fixed manufacturing overhead composed of depreciation on the production equipment and other fixed costs. The budgeted DM quantity needed is multiplied by the variable rate per unit, 1,110,451 × $7.50, and that yields the budgeted variable-MOH costs of $8,328,383. The fixed costs of depreciation on the plant assets, $27,000, and the other fixed-MOH costs, $33,000, are added to the total budgeted variable-MOH to yield the total budgeted MOH costs, $8,388,383. Finally, the noncash MOH cost (Depreciation) is subtracted from the total budgeted MOH costs, to determine the total budgeted cash cost of MOH = $8,388,383 − $27,000 = $8,361,383.

1. Scheduled cost of goods sold (COGS) for the year.

The calculation begins with beginning FG inventory amount, $2,148,800, to which the cost of DM used, $18,145,136, cost of DL needed, $80,452,156, and MOH costs, $8,388,383, are added to yield budgeted costs of goods available for sale, $109,134,475. The budgeted ending FG inventory, $13,860,756, is then subtracted from budgeted costs of goods available for sale, $109,134,475 to yield budgeted cost of goods sold of $95,273,719.

1. Budgeted Cost of Goods Available for Sale represents the sum of beginning FG inventory and everything that was manufactured during the period. Because Carolina Production completes a portion of the next month budgeted sales in the current period, the budgeted ending FG inventory need to be removed to accurately reflect the COGS for the period.

Using the revenue expected to be earned from the budgeted sales, the production costs of the FG units produced are then subtracted with the remainder as the gross margin. The gross margin represents the revenue that is available to cover all of the other expenses of the company.

1. The SG&A Expenses would be $8,080,235. Operating Income is calculated by subtracting the SG&A Expenses from the Gross Margin: Gross Margin minus SG&A Expenses = Operating Income. By rearranging the formula, Gross Margin ($14,203,691) minus Operating Income ($6,123,456) = SG&A Expenses ($8,080,235).

1. The following information was provided to Jacob:

Jacob works for a large store, Shamrock Camping, in the northeast. Shamrock Camping sells all types of camping equipment, specializing in equipment used on long hikes. To save time in creating a quarterly budget, Jacob has been given an average price and average cost so he does not have to calculate each product sold separately. Jacob has used this method in the past, and management has been satisfied with the results. The store manager has informed Jacob that average purchase price of merchandise has increased from last quarter’s price of $13.75 per unit to $14.25 per unit. According to the store manager, the new supplier has been selected and shall start supplying in January. Shamrock Camping keeps 15% of the next period’s sales in merchandise inventory at the end of the current period.

Using the information provided above, create the following:

• 1. Sales budget for the first quarter
  2. Purchases budget for the first quarter
  3. Cost of Goods Sold (COGS) budget for the first quarter
  4. What is the difference between COGS for a retailer versus a manufacturer?

Do not round your calculations.

Ans: N/A, LO 3, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. Sales budget for the first quarter.

The sales budget begins with the budgeted sales volume that was given in the data. The calculations will be the same for each month. For the month of January, the budgeted sales volume, 2,000, is multiplied by the average selling price, $45.75, and that yields $91,500 in Budgeted Gross Revenue. Shamrock has 3.5% of its revenue returned and offers a discount of 2.5% on large orders. The returns percentage, 3.5%, is multiplied by the gross revenue yielding $3,202.50 and the discount percentage, 2.5%, is multiplied by the gross revenue yielding $2,287.50. Both these quantities are then subtracted from the budgeted gross revenue resulting in the budgeted net sales, $86,010.00. The quarterly total is the sum of all three months in the quarter.

1. Purchases budget for the first quarter.

The purchase budget starts with the budgeted sale volume. The targeted ending units is calculated by multiplying the next period’s sales volume by 15%, Jan. = Feb. (3,000) × 15% = 450. The target ending inventory would be added to the budgeted sales volume to determine the total units needed. The beginning inventory for each month would be calculated next. The beginning inventory for January, 340, is given in the description. The beginning inventory for each month after Jan. will be equal to the previous month’s ending inventory, Feb. = Jan. (450). Quantity in units to purchase is calculated by subtracting the beginning inventory from the total units needed, Jan: 2,450 − 340 = 2,110. Then, the budgeted quantity in units to purchase is multiplied by the purchase price, $14.25 resulting in total budgeted cost of purchases, $30,067.50. The final step is to calculate the purchase discount by multiplying the total budgeted cost of purchases, $30,067.50 by the purchase discount, 1.50%, yielding net purchases of $29,616.49. All periods will perform these calculations. The Quarter total is the sum of the three periods.

1. COGS budget for the first quarter.

The COGS budget for the quarter begins with beginning inventory for the first period of the quarter, which is 340. The 340 is multiplied by the $13.75 to calculate the dollars associated with the beginning inventory, 340 × $13.75 = $4,675. The beginning inventory, $4,675, is added to the net purchases for the three periods, $29,616.49 + $43,161.47 + $50,811.23 = $123,589.18, resulting in a cost of goods available for sales of $128,264.18. The ending inventory for the quarter would be from the March period, 645, multiplied by the purchase price, $14.25 = $9,191.25. Finally, budgeted ending merchandise inventory is subtracted from the budgeted costs of goods available for sale to yield budgeted cost of goods sold for the quarter of $119,072.93.

1. Unlike manufacturers, a retailer purchases its products in finished form, so it does not have raw materials inventory, work-in-process inventory, and manufacturing cost of direct material, direct labor, and overhead. The only inventory that retailers hold is merchandise inventory. Retailer COGS consists of units (merchandise inventory) purchased and sold times purchasing price per unit. Whereas, manufacturer COGS consists of units manufactured and sold times cost of goods manufactured per unit.
2. Ollie, LLC is an online business that specializes in the production and sale of handmade dog sweaters. They were established one year ago and have seen consistent growth in sales month-to-month. In an effort to be more prepared for their second year, they are creating a sales forecast. In December of the previous year, they were able to sell 575 units and anticipate 5% growth every month in the coming year. They have set their selling price for each sweater at $34.99. Please answer the following questions. (All budgeted sales volume figures should be rounded to the nearest whole number.)
   1. What is their budgeted gross sales in units for the February?
   2. What is their budgeted gross revenue for the March?
   3. If they increased their sales by 8% month-to-month, as opposed to 5%, then what percentage increase would Ollie see in their Budgeted Gross Revenue for the quarter? (Round your answer to the nearest whole percent.)

Ans: N/A, LO 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. The budgeted gross sales for January will be 604 units. This is calculated by taking the budgeted sales from December of 575 units and adding in the 5% increase they anticipate. 575 x 1.05 = 604 units. The budgeted gross sales for February will be 634 units. This is calculated by taking the budgeted sales from January of 604 units and adding in the 5% increase they anticipate. 604 x 1.05 = 634 units.
2. The budgeted gross revenue for March will $23,303.34. In order to determine this number, you must first calculate the budgeted sales volume for March which involves taking the budgeted sales volume from February of 634 units and adding in the 5% increase. 634 x 1.05 = 666 units. Lastly, you will multiply the budgeted sales volume by the budgeted sales price of $34.99, 666 units x $34.99 = $23,303.34.
3. Before measuring change, you must determine how the extra increase of budgeted sales volume impacts the budgeted gross revenue. Each month’s budgeted sales volume is calculated by taking the previous month and multiplying by 1.08. Overall, Ollie has budgeted sales volume of 2,017 units. Once you multiply this against the budgeted sales price of $34.99, you will arrive at a budgeted gross revenue of $70,574.83.

You are now able to calculate the percentage increase in budgeted gross revenue. To do this, you use the following formula: (New Forecast – Original Forecast)/Original Forecast. ($70,574.83 − $66,620.96)/$66,620.96 = 0.05935 or 6% (rounded).

1. Knope, Inc. is an online retailer that sells personalized Christmas wreaths, and they have had a successful first year. Karen, the owner, surpassed her initial sales goal of 200 units last year, selling 270. She anticipates a 10% increase this coming year and is able to sell each Christmas wreath for $28 with a cost to her of $11 per wreath. Karen is debating adding Halloween wreaths this year that would cost her $12.50 each and that she could sell for $33 per wreath. She anticipates the demand for these to be a bit lower and is aiming to sell 75 wreaths. Her selling, general, and administrative (SG&A) expenses will be $2,472, and she has an existing $2,000 loan with a 1% Annual Percentage Rate (APR). Knope, Inc. has a flat tax rate of 21%. Please answer the following questions:
   1. If Knope, Inc. chooses to only continue selling Christmas wreaths, then what will their net income be for the upcoming year?
   2. If Knope, Inc. decides to also sell the Halloween wreaths, then what will their net income be for the upcoming year?
   3. What is the gross margin percentage for both a) and b), and what does this indicate about each choice for Karen and Knope, Inc.?

Ans: N/A, LO 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. If Knope chooses to only continue selling Christmas wreaths, then their net income will be $2,020.03. This is calculated as follows:

1. If Knope chooses to also sell Halloween wreaths, then their net income will be $3,234.65. This is calculated as follows:

1. The Gross Margin percentage is calculated by taking the Gross Margin and dividing it by net sales. This percentage demonstrates how well Knope, Inc. manages their costs and both a) and b) indicate that Knope, Inc. is able to keep over 60% of their sales with only around 40% going to cover the costs of products sold. Both scenarios present a pretty consistent model that would serve the business well.

The Gross Margin percentage for scenario a) is $5,049/$8,316 = 60.71%.

The Gross Margin percentage for scenario b) is $6,586.50/$10,791 = 61.04%.

1. Kicks Shoes is an online store that sells custom-made sneakers. The shoes are sold for $235.00, and the base shoe is purchased for $123.35 from a manufacturer in Vietnam. Because they experience shipping disruptions, they keep 60% of the next month’s projected sales forecast in their ending inventory of base shoes. They sold 1,234 units during the month of June, and they expect sales to increase by 10% for each month over the next seven months. They offer generous credit terms that allow the customer to pay 50% when they place their order with the remainder due the following month. Kicks Shoes has experienced a 15% uncollectable rate on their sales. Ending base shoe inventory for June was 814, and sales for June were $289,990.

Using the information provided above, create the following: (All calculations should be rounded to 0 decimals.)

1. Sales forecast for the next 6 months.
2. Schedule of cash receipts for the next 6 months.
3. Purchasing budget for base shoes for the next 6 months.
4. What is the amount of uncollected sales dollars from August’s total sales? Explain how this was calculated.

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

The company sold 1,234 pairs of shoes in the last month, June. Each month after June, sales are expected to increase by 10%. After the monthly quantities have been determined, those quantities are multiplied by the budgeted sales price to determine the budgeted gross revenue.

July = (1,234 × 1.1) = 1,357

August = (1,357 × 1.1) = 1,493

September = (1,493 × 1.1) = 1,642

October = (1,642 × 1.1) = 1,806

November = (1,806 × 1.1) = 1,987

December = (1,987 × 1.1) = 2,186

Kicks Shoes collects 50% of the sales revenue in the month the order is placed and another 35% in the following month. Over time, Kicks shoes has determined that roughly 15% of the sales revenue will not be collected. To calculate cash receipts by month, the sales revenue for the previous month is multiplied by 35% and the sales revenue for the current month is multiplied by 50%.

Sales month

Collected in July June = $289,990 × 0.35

July = $318,895 × 0.50

Collected in August July = $318,895 × 0.35

August = $350,855 × 0.50

Collected in September August = $350,855 × 0.35

September = $385,870 × 0.50

Collected in October September = $385,870 × 0.35

October = $424,410 × 0.50

Collected in November October = $424,410 × 0.35

November = $466,945 × 0.50

Collected in December November = $466,945 × 0.35

December = $513,710 × 0.50

1. Purchasing Budget for base shoes.

Kicks Shoes wants 60% of the next month’s budgeted sales to already be in inventory at the end of the month. To determine what needs to be ordered, Kicks Shoes starts with the budgeted sales units for the month and calculates 60% of the budgeted sales units for the next month. Added together, it gives the additional amount needed for that month.

1. Amount of sales dollars uncollected from the August total sales:

Kicks Shoes collects 50% of a sales order during the month the order is placed and another 35% the following month. Using historical data, Kicks Shoes has determined that 15% of their sales revenue is never collected due to bad debt. That means that overall, on any given order they expect to collect 85% of the sales revenue, or put another way, they expect to lose 15% of income from all orders.

For the month of August, Kicks Shoes has a budgeted gross revenue of $350,855. To determine the uncollectable amount, the budgeted gross revenue ($350,855) times the uncollectable rate (15%) equals $52,628. $350,855 × 15% = $52,628.

1. Rachel is a staff accountant at Bowl More, Inc. She has been assigned the task of preparing the company’s purchases budget and schedule of cash disbursements for the quarter ended June 30. During her review of the company’s purchasing and payment policies, she determines the following information:

• The company’s budgeted purchases of bowling balls for the next quarter are as follows:
  • April: 800 bowling balls
  • May: 950 bowling balls
  • June: 860 bowling balls
• The company purchases bowling balls from its vendor for $100 each.
• Freight charges of $6 per bowling ball are invoiced to Bowl More by the vendor. These are shown on the same invoice as the bowling balls and are charged to accounts payable.
• The company’s payment schedule for accounts payable is as follows:
  • • 10% of payables are paid during the month of purchase
    • 55% of payables are paid the month following purchase
    • 35% of payables are paid two months following purchase
• The accounts payable (A/P) balance as of March 31 is $16,200. Of this amount, 60% is for purchases made in February and 40% is for purchases made in March.

1. Determine the total cost of purchasing bowling balls for each month and the total for the quarter.
2. Prepare a schedule of cash disbursements for the quarter ended June 30.
3. Determine Bowl More’s accounts payable balance as of June 30.
4. Explain how Rachel’s work on these items will impact the company’s budgeted balance sheet for the quarter ended June 30.

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

• 1. Total value of purchases for the quarter ended June 30.

1. Schedule of cash disbursements for the quarter ended June 30.

1. Accounts Payable balance as of June 30.

1. Impact on budgeted balance sheet.

Answers will vary, but the following key points should be included in the student’s answer:

• Total cash disbursements will reduce the budgeted cash balance and, in turn, total assets.
• Accounts payable will increase during the quarter, and that will increase budgeted liabilities on the balance sheet.

1. Monarch, LLC is a graphic design business that specializes providing services to other small businesses. A large majority of their customers have set up accounts to where they will pay their bill for services in the month following when the service was rendered while other customers will pay as the work is completed. Monarch estimates that it will collect 25% of its sales in the month it occurs, 55% of its sales in the following month, 15% in the second month after the sale, and they will write off the remaining 5% as uncollectible at the end of the second month after the sale. Their credit sales have been as follows: April, $5,600; May, $9,200; June, $4,300; and July, $2,800. Please answer the following questions:
   1. What will the total cash collected during May be?
   2. What will the total cash collected during June be? How much of this total came from sales during previous month(s)?
   3. How much of their sales will they write off during the month of July?

Ans: N/A, LO 4, Bloom: AP, Difficulty: Medium, AACSB: Analytic, AICPA: FC, Measurement, Analysis, and Interpretation IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

• 1. The amount of cash collected during May will be $5,380 which is comprised of 25% of its current month’s credit sales and 55% of the previous month’s credit sales. This is calculated as follows: $2,300 ($9,200 x 0.25) + $3,080 ($5,600 x 0.55).
  2. The amount of cash collected during June will be $6,975 which is comprised of 25% of its current month’s credit sales, 55% of the previous month’s credit sales, and 15% of the sales from two months prior. This is calculated as follows: $1,075 ($4,300 x 0.25) + $5,060 ($9,200 x 0.55) + $840 ($5,600 x 0.15). The amount of cash collected from previous months, April and May, would total $5,900, calculated as $5,060 ($9,200 x 0.55) + $840 ($5,600 x 0.15).
  3. During the month of July, the company will write off $460. This is calculated by multiplying sales from two months prior by the company’s estimated uncollectible percentage of 5%. You would take May’s sales of $9,200 and multiply by 5% for a total of $460.

Problems

1. Anna has recently started Dapper Doggies, a dog grooming business in her hometown. She is debating whether she would like to have a brick-and-mortar location located in the heart of downtown or a mobile grooming truck that would allow her to travel all over the city. The brick-and-mortar store would allow her to have a consistent place to see clients. She would be able to charge $40 per dog and anticipates that she would see 100 dogs a month. Using a mobile truck would afford her the opportunity to see 150 dogs a month, but she would only be able to charge $33 per dog which also includes a convenience fee of $3 per dog. Below is a listing of monthly costs associated with each type of location she may choose:

Anna has decided to use zero-based budgeting to assist her in making a final selection.

1. Calculate the amount left for Anna to put into retained earnings if she decides to go with the brick-and-mortar location.
2. Calculate the amount left for Anna to put into retained earnings if she decides to go with the mobile truck.
3. Assume that Anna would really like to pursue the mobile truck as she enjoys the versatility. How many additional dogs would she need to groom each month to create the same outcome as the brick-and-mortar location? (Note: If needed, round up the final answer.)
4. Now, assume that Anna would prefer to pursue the brick-and-mortar location, but she would like to increase the amount remaining for each month to $1,200. What approach should she implement in order to achieve this amount?
5. Why is zero-based budgeting considered helpful when making decisions pertaining to allocating both new and existing funds?

Ans: N/A, LO 1, Bloom: AN, Difficulty: Medium, AACSB: Analytic, Communication AICPA: FC, Measurement, Analysis, and Interpretation. AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting Solution:

1. Zero-based budgeting for the brick-and-mortar location will leave $950 for Anna to put into retained earnings at the end of the month. This is calculated as follows:

1. Zero-based budgeting for the mobile truck would leave $784 for Anna to put into retained earnings at the end of the month. This is calculated as follows:

1. In order to achieve at least the same amount of money left over for Anna as the brick-and-mortar location would yield, Anna would need to see an additional 6 dogs. This is calculated as follows:

$950 From brick-and-mortar

− 784 From mobile unit

$166 Additional income needed

$166/$33 (amount charged per dog at mobile unit) = 6 dogs (round up)

1. The brick-and-mortar location would leave $950 for Anna which is not enough to meet her new goal. Anna could choose to increase her service charges by $2.50 ($1,200 − $950)/100 dogs to increase her remaining profits without having to increase the number of dogs that she would have to see per month. Alternatively, Anna could also choose to cut down her expenses by a total amount of $250. A balanced approach of both increasing revenue while also decreasing expenses would be ideal, but an increase in revenue would be the more easily achievable recommendation.
2. Zero-based budgeting is an incredibly helpful tool due the budgeter starting from zero and justifying each item being added in. This form of budgeting requires justification for both new and existing items listed in the budget. This form of budgeting requires allocation of every dollar that comes in and will place any overage in a category of its own, usually a goal of the person making the budget. The overall goal of Zero-based budget is for the amount remaining after reconciliation to be zero which means that all available funds will have been allocated where they are needed.
3. Carolyn has been promoted to the position of production manager for DC, Inc. DC produces button-down shirts that are very popular with teenagers. Carolyn would like to produce a budget for the manufacturing facility to help her better manage the plant.

The budgeted sales for the next month are 1,200,000 shirts to be sold for $75 each. The budgeted beginning inventory of finished product is 10,000 shirts at a cost of $55.00 per shirt with ending inventory of 15,000 shirts at a cost of $55.38 per shirt. The shirt is made up of 2 yards of fabric costing $8 per yard and 8 buttons costing $0.25 per button. Direct labor is $12 per hour, and it takes 3 hours to complete a shirt. Variable manufacturing overhead is budgeted at $1.25 per completed shirt. The budgeted beginning inventory for the fabric is 18,000 yards and the budgeted ending inventory is 22,000 yards. Beginning and ending inventories for the buttons have been budgeted at 2,500 and 2,000 respectively.

The following financial information is also available:

• • Fixed manufacturing overhead is $156,000 per month.
  • Manufacturing overhead expenses are paid in the month incurred.
  • Purchases of direct materials and labor costs are paid for in the month acquired.
  • Selling, General, and Administrative (SG&A) expenses are variable based on shirts sold at a rate of $0.75 per shirt.
  • There is also a fixed amount of SG&A expenses of $126,300 for each month, including $45,000 of depreciation.
  • All expenses are paid in the month incurred.

Answer the following questions:

1. Using the information provided, what is the variable manufacturing cost of one shirt?
2. How many shirts need to be produced during the month?
3. Why are the no. of shirts to be produced different than the budgeted sales shirts?
4. Considering the budgeted sales of 1,200,000 shirts, what would the budgeted operating income be for the month?
5. What is the purchasing budget for the direct materials for the month?

Ans: N/A, LO 3, Bloom: AN, Difficulty: Medium, AACSB: Analytic,Communication AICPA: FC, Measurement, Analysis, and Interpretation. AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting Solution:

1. The variable manufacturing cost of the shirt is made up of the direct material costs plus the direct labor costs plus the variable manufacturing overhead costs. It would be calculated as follows:

Direct Materials:

Fabric 2 yards × $8.00 per yard = $16.00

Buttons 8 × $0.25 = $2.00

Total Direct materials = $16.00 + $2.00 = $18.00

Direct Labor:

3 hours × $12.00 = $36.00

Variable Manufacturing Overhead:

1 shirt × $1.25 = $1.25

Total Variable Manufacturing Cost per Shirt

= $18.00 + $36.00 + $1.25 = $55.25

1. The number of shirts to produce during the month is calculated by beginning with the budgeted sales volume plus the ending inventory of finished product minus the beginning inventory of finished product. The calculation would be:

Budgeted Production: 1,200,000 + Ending Inventory of Finished Product: 15,000 − Beginning Inventory of Finished Product: 10,000 = 1,205,000

1. DC, Inc. plans to have a portion of the next month’s sales available at the end of the current month. To do this, the plant must produce more than their budgeted sales volume. Because each month ends with finished product, the next month will begin with that amount in finished product. The production quantity would be the Sales Budget Volume + Ending Inventory − Beginning Inventory resulting in what is to be produced. The quantity to produce will always exceed the sales volume.
2. Budgeted Operating Income is calculated by subtracting the Budgeted Cost of Goods Sold (COGS) and Budgeted SG&A Expenses from the Budgeted Sales. The following calculations will need to be made:

Budgeted Sales

Budgeted Sales 1,200,000 × Sales Price $75 = $90,000,000

Budgeted Cost of Goods Sold = Budgeted Beginning Finished Goods (FG) Inventory + Budgeted Cost of Goods Manufactured (COGM) − Budgeted Ending FG Inventory

Budgeted COGM is equal to Budgeted Cost of Direct Material (DM) used + Budgeted Direct Labor (DL) Cost + Budgeted Manufacturing Overhead (MOH) Cost

Budgeted Cost of Direct Materials used:

Fabric 2 Yards × Shirts to Produce 1,205,000 × Cost per yard $8.00 = $19,280,000

Buttons 8 × Shirts to Produce 1,205,000 × Cost per Button $0.25 = $2,410,000

Budgeted Direct Labor cost:

Hours per shirt 3 × Shirts to Produce 1,205,000 × Cost per Hour $12.00 = $43,380,000

Budgeted Manufacturing Overhead Cost:

Variable Manufacturing Overhead Cost = Shirts to produce 1,205,000 × Variable Manufacturing Overhead per Shirt $1.25 = $1,506,250

Fixed Manufacturing Overhead Cost $156,000

Budgeted Cost of Goods Manufactured = Direct Materials: $19,280,000 + $2,410,000 + Direct Labor: $43,380,000 + Variable Manufacturing Overhead: $1,506,250 + Fixed Manufacturing Overhead: $156,000 = $66,732,250

Budgeted Cost of Goods Sold (COGS) = (10,000 × $55.00) + $66,732,250 − (15,000 × $55.38) = $550,000 + $66,732,250 − $830,700 = $66,451,550

SG&A Expenses:

SG&A Expenses = (Budgeted Sales 1,200,000 × Variable Cost per Shirt $0.75) + Fixed SG&A Expenses $126,300 = $1,026,300

Budgeted Operating Income = Budgeted Sales $90,000,000 − Budgeted COGS $66,451,550 − SG&A Expenses $1,026,300 = $22,522,150

1. The purchasing budget would include the fabric for the shirt and the buttons. The following calculations would be made

Fabric amount = Production Quantity needed: 1,205,000 × 2 yards × Cost: $8.00 ($19,280,000) + Ending Inventory: 22,000 × Cost $8.00 ($176,000) – Beginning Inventory: 18,000 × Cost $8.00 ($144,000) = $19,312,000

Buttons amount = Production Quantity needed, 1,205,000 × 8 × Cost: $0.25 ($2,410,000) + Ending Inventory: 2,000 × Cost: $0.25 ($500) – Beginning Inventory: 2,500 × Cost: $0.25 ($625) = $2,409,875

Total Purchase Budget = Fabric ($19,312,000) + Buttons ($2,409,875) = $21,721,875

1. Sharon is a baker who owns a small bakery called Pie in the Sky that sells cherry pies. She has been debating adding new pies into her offerings, including blackberry and apple. Sharon is preparing a budgeted income statement for April so she can compare budgeted net income, when selling just cherry pies, to budgeted net income when selling other types of pies as well. She has decided that she will be able to sell the pies for the following prices: Cherry, $12; Blackberry, $10; and Apple, $13. Sharon will be able to produce 400 pies a month regardless of what kinds of pies she chooses to bake and sell. The pies have the following costs associated with them:

Sharon took out a $10,000 loan with an Annual Percentage Rate (APR) of 12% to begin her business, and she will have a flat tax rate of 21%. Her monthly fixed selling, general, and administrative (SG&A) expenses include the following:

1. If Sharon decides to only sell cherry pies, then what will her budgeted sales revenue be for April?
2. Assuming that Sharon proceeds with a), what would her gross margin and budgeted net income be for April?
3. If Sharon decides to sell 200 cherry pies and 100 each of both blackberry and apple, then what would her budgeted gross revenue be for April?
4. Assuming that Sharon proceeds with c), what would her budgeted gross margin and net income be for April?
5. Based upon what you have learned from choices b) and d), which approach would you encourage Sharon to utilize?

Ans: N/A, LO 3, Bloom: AP, Difficulty: Hard, AACSB: Analytic,Communication AICPA: FC, Measurement, Analysis, and Interpretation AICPA PC: Communication IMA: Strategy Planning, & Performance: Budgeting and Forecasting. Solution:

1. Sharon’s budgeted sales revenue would be $4,800 for April.

Budgeted Sales Revenue = Budgeted Sales Volume x Budgeted Selling Price

= 400 pies x $12.00

= $4,800

1. For April, Sharon’s gross margin would be $4,140 and her budgeted net income would be $466.10.

Gross Margin = Budgeted Sales – Cost of Goods Sold

To calculate Cost of Goods Sold, you would need to calculate the cost per pie:

Cherry Pie

Now, take the projected Sales Revenue and subtract the Cost of Goods Sold to arrive at Gross Margin:

Net Income = Gross Margin − SG&A Expenses − Interest Expense − Income Tax Expense

1. If Sharon decides to use the described sales mix of pies, then her budgeted gross revenue would be $4,700 for April.

Budgeted Gross Revenue = (Budgeted Sales Volume for Pie 1 x Budgeted Selling Price for Pie 1) + (Budgeted Sales Volume for Pie 2 x Budgeted Selling Price for Pie 2) + (Budgeted Sales Volume for Pie 3 x Budgeted Selling Price for Pie 3)

= (200 cherry pies x $12) + (100 blackberry pies x $10) + (100 apple pies x $13)

= $2,400 + $1,000+ $1,300

= $4,700

1. If Sharon proceeds with c), then she can expect a gross margin of $4,070 and Net Income $410.80 for April.

Gross Margin = Budgeted Sales − Cost of Goods Sold

To calculate Cost of Goods Sold, calculate the costs per pie:

COGS = (200 x $1.65) + (100 x $1.46) + (100 x $1.54)

= $630

Now, take the projected Sales Revenue and subtract the Cost of Goods Sold to arrive at Gross Margin:

Net Income = Gross Margin − SG&A Expenses − Interest Expense − Income Tax Expense

1. Based upon the numbers calculated in both b) and d), the best recommendation for Sharon would be to continue selling only cherry pies as it yields a higher gross margin and a higher net income. Should she choose to diversify her pie offerings in the future, she may want to determine whether she can increase the selling price on the proposed pie additions or to try and cut some of the cost associated with the new pies. This could involve calling suppliers and asking for additional discounts.