CHAPTER 9

BUDGETARY PLANNING

CHAPTER LEARNING OBJECTIVES

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

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

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

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

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

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

TRUE-FALSE STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

predetermined overhead rate to apply overhead.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MULTIPLE CHOICE QUESTIONS

37. Why are budgets useful in the planning process?

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

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

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

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

38. A budget

a. is a substitute for management.

b. is an aid to management.

c. can operate or enforce itself.

d. is the responsibility of the accounting department.

39. Accounting generally has the responsibility for

a. setting company goals.

b. expressing the budget in financial terms.

c. enforcing the budget.

d. administration of the budget.

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

a. It facilitates the coordination of activities.

b. It provides definite objectives for evaluating performance.

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

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

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

a. Planning

b. Directing

c. Motivating

d. Controlling

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

a. Promotes efficiency

b. Deterrent to waste

c. Basis for performance evaluation

d. Guarantee of accomplishing the profit objective

43. Which is true of budgets?

a. They are voted on and approved by stockholders.

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

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

d. They are used in performance evaluation.

44. A common starting point in the budgeting process is

a. expected future net income.

b. past performance.

c. motivating the sales force.

d. a clean slate, with no expectations.

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

a. acceptance at all levels of management.

b. research and analysis in setting realistic goals.

c. stockholders' approval.

d. sound organizational structure.

46. The effectiveness of a budget is enhanced by

a. a history of successful operations.

b. independent verification of budget goals.

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

d. excess plant capacity.

47. It is important that budgets be accepted by

a. division managers only.

b. department heads only.

c. supervisors only.

d. division managers, department heads, and supervisors.

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

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

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

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

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

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

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

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

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

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

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

a. has been developed in a top down fashion.

b. has been developed in a bottom up fashion.

c. has been developed by all levels of management.

d. is developed with performance appraisal usages in mind.

51. A budget is more likely to be effective if

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

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

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

d. it has top management support.

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

a. the company's independent certified public accountants.

b. the company's internal auditors.

c. the company's board of directors.

d. a budget committee.

53. A budget period should be

a. monthly.

b. for a year or more.

c. long-term.

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

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

a. every day.

b. a full year ahead.

c. the current year and the next year.

d. at least five years.

55. The most common budget period is

a. one month.

b. three months.

c. six months.

d. one year.

56. Budget development for the coming year usually starts

a. a year in advance.

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

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

d. the last month of the previous year.

57. The budget committee would not normally include the

a. research director.

b. treasurer.

c. sales manager.

d. external auditor.

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

a. a month.

b. a quarter.

c. a year.

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

59. Long-range planning

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

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

c. is usually more accurate than an annual budget.

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

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

a. six months.

b. 1 year.

c. 5 years.

d. 10 years.

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

a. Long range planning ↔ Strategies

b. Budgeting ↔ Short-term goals

c. Long-range planning ↔ 5 years

d. Budgeting ↔ Long-term goals

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

a. Preparing the budgeted balance sheet

b. Preparing the cost of goods manufactured budget

c. Preparing the budgeted income statement

d. Preparing the cash budget

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

a. 350,000 pounds

b. 530,000 pounds

c. 290,000 pounds

d. 470,000 pounds

Ex. 169

Delta Manufacturing has budgeted the following unit sales:

2022 Units

April 25,000

May 40,000

June 60,000

July 45,000

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

Instructions

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

Ex. 170

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

September 25,000 gallons

October 31,000 gallons

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

Instructions

How much sand should be purchased in September?

Ex. 171

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

Units of Product

2022 Regular Deluxe Total

July 10,000 15,000 25,000

August 6,000 10,000 16,000

September 9,000 14,000 23,000

October 8,000 12,000 20,000

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

Instructions

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

Ex. 172

Garver Industries has budgeted the following unit sales:

2022 Units

January 10,000

February 8,000

March 9,000

April 11,000

May 15,000

The finished goods units on hand on December 31, 2021 was 2,000 units. Each unit of finished goods requires 3 pounds of direct materials that are estimated to cost an average of $4 per pound. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated sales. The company also has a policy of maintaining a direct materials inventory at the end of each month equal to 30% of the pounds needed for the following month's production. There were 8,640 pounds of direct materials on hand at December 31, 2021.

Instructions

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

Ex. 173

Benet Company has budgeted the following unit sales:

2022 2023

Quarter Units Quarter Units

1 105,000 1 90,000

2 60,000

3 75,000

4 120,000

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

Instructions

Prepare a production budget for 2022.

Ex. 174

The following facts are known:

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

Instructions

Prepare a direct materials budget for the period.

Ex. 175

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

May June

Estimated production 42,000 48,000

Estimated sales 50,000 36,000

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

Instructions

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

Ex. 176

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

Quarter Units

1 60,000

2 30,000

3 45,000

4 75,000

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

Instructions

Prepare a direct labor budget for 2022.

Ex. 177

For each item given, identify the budget in which it will appear. If an item will appear on more than one budget, then indicate as many budgets as are relevant.

Budget Code:

DM Direct Materials Budget

DL Direct Labor Budget

P Production Budget

S Sales Budget

C Cash Budget

BBS Budgeted Balance Sheet

BIS Budgeted Income Statement

SA Selling and Administrative Expense Budget

MOH Manufacturing Overhead Budget

1. Ending cash balance

2. Total selling and administrative expenses

3. Total sales (in dollars)

4. Interest expense

5. Ending raw materials inventory in dollars)

6. Ending finished goods inventory in dollars

Ex. 178

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

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

Instructions

Prepare a sales budget for 2022 for Leaf Industries.

Ex. 179

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

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

2. Variable costs per sales dollar:

Sales commissions 6%

Delivery expense 2%

Advertising 4%

3. Fixed costs per quarter:

Sales salaries $24,000

Office salaries 19,000

Depreciation 6,000

Insurance 2,000

Utilities 1,000

Instructions

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

Ex. 180

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

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

Direct labor: Labor required is 1 hour per unit.

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

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

Instructions

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

Ex. 181

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

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

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

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

4. Raw materials cost: $5 per pound.

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

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

Ex. 181 (Cont.)

Instructions

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

(b) Prepare a budgeted income statement for 2022.

Ex. 182

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

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

Rent expense $24,000

Depreciation on office equipment $12,000

Utilities expense $3,600

Miscellaneous expenses 2% of sales

Ex. 182 (Cont.)

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

Income Statement

For the Quarter Ended March 31, 2021

Sales $720,000

Cost of goods sold 396,000

Gross profit 324,000

Operating expenses

Sales salaries $52,000

Rent expense 24,000

Depreciation 12,000

Utilities 3,600

Miscellaneous 12,800

Total operating expenses 104,400

Net income $219,600

Instructions

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

Ex. 183

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

1. Expected Sales

October $1,800,000

November 1,700,000

December 1,600,000

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

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

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

Instructions

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

Ex. 184

Burr, Inc. provided the following information:

July August

Projected sales $220,000 $260,000

Projected merchandise purchases $150,000 $180,000

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

Ex. 184 (Cont.)

• Burr pays for 30% of merchandise purchases in the month purchased and 70% in the following month.
• General operating expenses are budgeted to be $20,000 per month, including depreciation of $2,000. Burr pays operating expenses in the month incurred.
• Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is principal.

Instructions

Calculate Burr's budgeted cash disbursements for August.

Ex. 185

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

Budgeted Sales Revenues

January $55,000

February 75,000

March 90,000

April 80,000

May 60,000

June 35,000

Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible.

Instructions

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

Ex. 186

Cruises, Inc. has budgeted sales revenues as follows:

June July August

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

Cash sales 90,000 255,000 195,000

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

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

June $300,000

July 240,000

August 105,000

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

Ex. 186 (Cont.)

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

Instructions

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

Ex. 187

Clay Co.’s projected sales are as follows:

August $400,000

September $450,000

October $550,000

Clay estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts.

Instructions

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

Ex. 188

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

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

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

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

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

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

6. In 2022, management does not expect to purchase additional equipment or to declare any dividends. It does expect to pay all operating expenses, other than depreciation, in cash.

Ex. 188 (Cont.)

Instructions

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

Ex. 189

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

In month of sale 25%

In first month after sale 60%

In second month after sale 10%

Instructions

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

Ex. 190

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

Instructions

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

Ex. 191

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

February $300,000

March 240,000

April 210,000

May 330,000

Past experience indicates that 80% of sales each month are on credit. The remainder are cash sales. Collection of credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in the second month following the sale. The other 2% is uncollectible.

Ex. 191 (Cont.)

Instructions

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

Ex. 192

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

Budgeted Sales Budgeted DM Purchases

January $300,000 $60,000

February 330,000 70,000

March 350,000 80,000

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

Instructions

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

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

Ex. 193

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

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

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

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

Instructions

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

(1) Expected collections from clients.

(2) Expected payments for landscaping supplies.

Ex. 193 (Cont.)

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

(1) Accounts receivable.

(2) Accounts payable.

Ex. 194

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

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

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

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

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

Instructions

(a) Compute the budgeted merchandise purchases for June.

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

Ex. 195

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

1. Expected Sales

October $1,500,000

November 2,100,000

December 2,700,000

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

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

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

Instructions

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