Chapter 5 Complete Test Bank Planning And Forecasting Davis

Chapter 5

Planning and Forecasting

CHAPTER LEARNING OBJECTIVES

1. Describe the budget development process and explain how it fits into management’s planning process. (Unit 5.1)

Budgets can be completed in either a top-down, imposed process or a bottom-up, participative process. Either way, the process is iterative, as information is passed throughout the organization and updated for changes in planned activity. Budgets can be prepared using the prior year’s budget as a starting point, or they can be prepared using zero-based budgeting, in which each item must be justified anew each year. A budget may be prepared to cover a monthly, quarterly, or annual time frame.

Executive management sets out a strategy to guide a company’s actions. The budgeting process translates that strategy into action by allocating financial resources across the organization, to ensure that the necessary steps can be taken. The budget also communicates decisions about resource allocation throughout the organization, allowing managers to plan for the future in order to mitigate potential operational risks, such as cash shortages.

1. Calculate the standard cost of a product. (Unit 5.2)

To calculate the standard cost of a product, multiply the standard price of each input (direct materials, direct labor, and manufacturing overhead) by the standard quantity of the input and sum. The standard cost is the expected cost to manufacture one unit of output.

Price standards are the expected cost of obtaining each input used in producing a product.

• The direct materials price standard includes the cost of getting the materials to the factory (purchase price, freight, and discounts)
• The direct labor price standard includes wages, fringe benefits, and payroll taxes.
• The manufacturing overhead price standard is the predetermined overhead rate.

Quantity standards are the expected amount of inputs required to produce one good unit of output.

• The direct materials quantity standard is the quantity of direct materials needed to produce one unit of good output, including allowances for waste and spoilage.
• The direct labor quantity standard is the amount of direct labor time required to produce one good unit of output.
• The manufacturing overhead quantity standard is based on usage of the overhead application base.

1. Prepare the operating budget and describe the relationships among its components. (Unit 5.3)

The operating budget begins with the creation of the sales budget. Once budgeted sales have been forecast, a selling and administrative expense budget to support that level of sales is calculated. The sales budget also provides input for the production budget, which details when and how much of a product must be produced. Once budgeted production is known, the direct materials purchases, direct labor, and manufacturing overhead budgets can be prepared to support the acquisition of the required inputs.

• The sales budget is a forecast of expected sales, expressed in both units and dollars. This budget is the key to the entire master budgeting process, since most other master budget components depend on the level of sales.
• The selling and administrative expense budget details all the expenditures for selling and administrative expenses.
• The production budget determines the level of production required to meet budgeted sales and maintain desired levels of ending Finished Goods Inventory.
• The direct materials purchases budget shows the quantity of direct materials that will be needed to meet the production requirements shown in the production budget and maintain the desired ending inventory of direct materials. This budget also shows the quantity of direct materials that must be purchased.
• The direct labor budget shows how many direct labor hours must be incurred to meet the budgeted level of production.
• The manufacturing overhead budget details the fixed and variable overhead costs to be incurred.

1. Prepare the cash budget and describe the relationships among its components. (Unit 5.4)

The cash budget is comprised of the following sections:

• The cash available to spend section of the cash budget shows how much cash is available to spend in each period. It includes the beginning Cash balance and Cash collections from sales shown in the cash receipts budget.
• The cash disbursements section of the cash budget lists all budgeted cash disbursements. In addition to various planned operational disbursements, such as equipment purchases and debt service payments, the cash disbursements section includes information from the cash payments for materials, direct labor, manufacturing overhead, and selling and administrative expense budgets.
• The cash excess (cash needed) section of the cash budget subtracts the budgeted cash disbursements from the budgeted cash available to spend to determine the cash excess or shortage. It includes any minimum Cash balance required.
• The short-term financing section of the cash budget details the short-term financing activities needed to maintain an adequate Cash balance. It is completed only if additional short-term borrowings or repayments of existing short-term borrowings or interest are required.
• The ending Cash balance is determined by the following formula:

Cash available to spend – Cash disbursements = Cash excess or cash needed

Cash excess or cash needed + Short-term financing = Ending cash balance

• The ending Cash balance should always be at least as much as the minimum Cash balance required.
• The ending Cash balance for one period is the beginning Cash balance for the next period.

1. Prepare pro-forma financial statements and describe their relationship to the master budget components. (Unit 5.5)

Pro-forma income statements and balance sheets are prepared using the information developed in the budget process. These statements reflect the results of operations and the financial position of the organization as if all actions planned in the budget had occurred. Many of the master budget components provide direct input to the pro-forma financial statements, as follows:

TRUE-FALSE STATEMENTS

1. Budgeting is ineffective unless it is tied to strategy and used to manage an organization’s overall performance.
2. A budget is an operating plan that may be expressed in either financial or non-financial terms.

LO: 1, Bloom: K, Unit: 5-1, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Strategy

1. Budgets assist managers in the areas of planning, controlling, evaluating, and decision-making.
2. Top-down budgeting is also referred to as participative budgeting.
3. In a bottom-up budget approach, at each higher level of management, the budget is reviewed and may be altered to satisfy the competing needs of various units within the organization.
4. Bottom-up budgeting is also referred to as a participative budgeting.
5. A bottom-up approach to budgeting is circular while a top-down approach is linear.
6. Deviations from the budget can occur because of good decisions, bad decisions, or events.
7. Both the top-down and bottom-up approaches to budgeting are linear, with budget information flowing in a single direction.
8. Budgetary slack is more common in a top-down approach to budgeting than in a bottom-up approach.
9. The most popular way to begin the budgeting process is the incremental approach.
10. Zero-based budgeting is not as time consuming as incremental budgeting.
11. A rolling budget always includes 12 months of data and as one month ends, it is removed from the budget and the entire budget rolls forward one month.
12. Performance-standard setting is not an exact science, but there are some hard and fast criterion for proving one standard right and the other one wrong.
13. Practical standards represent a level of performance that can be attained with reasonable effort.
14. Ideal standards represent a level of performance that can be attained with reasonable effort.
15. Since the purchasing agent is responsible for ordering raw materials, he or she would be the one to negotiate a volume discount.
16. If practical standards are used, the standard quantity for direct materials should not include allowances for waste and spoilage in the normal course of manufacturing.
17. The terms standard price and standard cost can be used interchangeably.
18. Standard direct labor prices are also referred to as direct labor rates.
19. The direct labor quantity standard is the number of products that can be produced in one hour.
20. The predetermined overhead rate is calculated as: Budgeted Total Manufacturing Overhead divided by Budgeted Activity Level of Application Base.
21. The master budget is a collection of smaller budgets that lead to pro-forma financial statements.
22. The first component of the master budget is the cash budget.
23. Since the cash budget drives all other components of the master budget, it is imperative that it be as realistic as possible.
24. To prepare the sales budget, multiply the forecasted sales units by the budgeted sales price per unit.
25. The formula for the production budget is Budgeted Sales + Budgeted Beginning Inventory – Budgeted Ending Inventory = Budgeted Production.
26. The key inputs for the direct materials purchases budget are the production budget and the direct materials standards for each project.
27. The final component of the operating budget is the ending inventory and cost of goods sold budget.
28. The first section of the cash budget reconciles the cash available to the borrowing required to meet the minimum cash balance.

LO: 4, Bloom: K, Unit: 5-4, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Reporting, AICPA PC: None, IMA: Strategy

1. Pro-forma financial statements are prepared based on assumed rather than actual results.

Answers to True-False Statements

MULTIPLE-CHOICE QUESTIONS

1. Preparing a budget allows managers to
   1. plan for the future.
   2. reduce the need for unprepared responses to unexpected situations.
   3. assess whether a division’s strategic direction is in line with corporate strategy.
2. Preparing a budget does not allow managers to
   1. eliminate any variances that would have been created without a budget.
   2. help divisions within the organization to communicate with one another.
   3. assess whether a division’s strategic direction is in line with corporate strategy.
3. Budgets assist managers which of the following aspects of management?
   1. Planning
   2. Controlling
   3. Evaluating
4. Budgets assist managers in all the following aspects of management except
   1. planning.
   2. controlling.
   3. leading.
   4. evaluating.
5. Which of the following is not a characteristic of a top-down budget environment?
   1. Executive management creates the budget.
   2. This approach is referred to as participative budgeting.
   3. The budget is pushed down through the organization.
6. A top-down budget approach is also referred to as
   1. participative budgeting.
   2. imposed budgeting.
   3. responsibility budgeting.
7. Which of the following is not a characteristic of a bottom-up budget environment?
   1. Executive management creates the budget.
   2. At each higher level of management, the budget is reviewed and may be altered.
   3. The budget approach may also be referred to as participative budgeting.
8. A bottom-up budget approach is also referred to as
   1. participative budgeting.
   2. imposed budgeting.
   3. responsibility budgeting.
   4. reverse budgeting.
9. Which of the following budget approaches will produce a more accurate budget?
   1. Participative budgeting.
   2. Imposed budgeting.
   3. Responsibility budgeting.
10. Which of the following is a disadvantage of participative budgeting?
    1. It is considering to be rolling throughout each budget period.
    2. Managers may pad the budget.
    3. It is a method of tactical planning.
    4. It requires each amount to be justified each budget period.
11. An imposed budget
    1. tends to elicit more commitment to the budget from employees since they have had some input into its creation.
    2. begins at the lowest levels of management and filters up through the organization.
    3. is the least efficient method of budget preparation.
    4. involves the fewest number of people in the budgeting process.
12. Which of the following is not a characteristic of a participative budget?
    1. It will produce a more accurate budget than an imposed budget.
    2. It tends to elicit more commitment to the budget than a top-down budget.
    3. It is the most efficient method of budget preparation.
    4. It is a time-consuming process as many people must provide input.
13. Under both participative budgeting and imposed budgeting, the process is
    1. linear.
    2. iterative.
    3. curvilinear.
14. Deviations from the budget may occur because of
    1. bad decisions.
    2. events beyond the company’s control.
    3. good decisions.
15. Undesirable behavior is especially common in a bottom-up budget environment because managers
    1. may be required to explain unfavorable outcomes for amounts for factors they are able to control that caused the outcomes.
    2. have the ability to include budgetary slack to increase his or her chances of receiving a favorable performance evaluation.
    3. tend to employ tactical planning.
    4. do not control excess spending, and often exceed budgeted expenses.
16. Budgetary slack is also referred to as
    1. budgetary padding.
    2. bottom-up slack.
    3. top-down slack.
    4. tactical planning.
17. A manager estimates that revenues for the coming period will be $85,000 but includes only $80,000 in her budget. This is an example of
    1. pro-forma variance.
    2. revenue slack.
    3. budgetary padding.
    4. unfavorable planning.
18. Which of the following is not a consequence of budgetary slack?
    1. Resources may not be allocated in the optimal way.
    2. Those who implement the budget may engage in undesirable behavior because they had input into setting the budget.
    3. Managers may receive bonuses they would not have earned if the budget had been prepared realistically.
    4. The pro-forma budgets may not be representative of actual expectations.
19. Which of the following is not a behavioral issue related to a top-down budgeting environment?
    1. Employees may feel that an imposed budget is unfair.
    2. Employees will have no motivation to attempt to meet the budget.
    3. Employees may engage in budgetary padding.
    4. The organization’s resources may be wasted.
20. Which of the following is the most popular way to begin the budgeting process?
    1. The incremental approach
    2. Zero-based approach
    3. Rolling approach
    4. Padding approach.
21. Which of the following budget approaches begins each year at $0 and each individual budget item must be justified?
    1. Dollar value-based budgeting
    2. Governmental-based budgeting
    3. Justification-based budgeting
    4. Zero-based budgeting
22. Which of the following is not a characteristic of zero-based budgeting?
    1. This method of budgeting is often used in governmental entities.
    2. This method of budgeting is much more time-consuming than incremental budgeting.
    3. This method of budgeting encourages budgetary slack.
23. Which of the following is not a characteristic of a rolling budget?
    1. This method of budgeting always includes 12 months of data.
    2. As one month ends, it is removed from the budget and the entire budget rolls forward one month.
    3. At the beginning of the budget period, management breaks down only the first quarter into months.
    4. It requires a top-down approach.
24. Sara Speed requested $120,000 in her budget to cover salary expenses. However, Sara realistically expects to spend $110,000 on salaries. This is an example of
    1. top-down budgeting.
    2. operating income padding.
    3. rolling budgeting.
    4. budgetary slack.
25. An ideal standard signifies
    1. perfection.
    2. realistic projections.
    3. attainable goals.
    4. padding.
26. In a manufacturing setting, practical standards do not allow for
    1. machine breakdowns.
    2. employee fatigue.
    3. vacations.
    4. excess employee idleness.
27. Which of the following is not a criticism of ideal standards?
    1. After a period of performing below standard, employees will likely lose motivation.
    2. Morale will suffer because employees cannot attain the standard.
    3. In an effort to meet an ideal efficiency standard, employees may take shortcuts.
    4. They encourage employees to achieve high levels of performance.
28. Which of the following is not a criticism of ideal standards?
    1. Product quality may decline if standards are not met.
    2. Employee morale will suffer if standards are not met.
    3. Employees may take shortcuts in order to meet the standards.
    4. Employees will perform with zero defects.
29. Which of the following is an advantage of ideal standards?
    1. Employees will be motivated.
    2. Employees will take pride in their work.
    3. Employee morale will be high.
    4. Workers operate at 100% efficiency.
30. A company may set standards for the maximum cost that should be incurred to produce a unit of product. Such cost standards are useful
    1. in the directing process.
    2. in evaluating how well manufacturing operations are managed.
    3. in achieving zero defects.
    4. In implementing a rolling budget.
31. Direct materials standards specify both
    1. quantity and efficiency.
    2. quantity and price.
    3. efficiency and price.
    4. quality and usage.
32. In the manufacturing of swimsuits, in addition to the price of fabric, the standard materials price does not include
    1. cost of shipping.
    2. volume discounts.
    3. taxes.
    4. units of material used.
33. In the manufacturing of swimsuits, in addition to the price of fabric, the standard materials price includes all of the following items except
    1. the cost of shipping.
    2. the cost of advertising.
    3. a volume discount.
    4. sales taxes.
34. The position responsible for negotiating a volume discount is the
    1. purchasing agent.
    2. production manager.
    3. accounts payable supervisor.
    4. corporate controller.
35. The standard cost of direct material is the
    1. standard price of direct material input × standard quantity of direct material inputs.
    2. standard price of direct material input × actual quantity of direct material inputs.
    3. actual price of direct material input × standard quantity of direct material inputs.
    4. actual price of direct material input × actual quantity of direct material inputs.
36. The difference in standard price and standard cost of direct material is that
    1. standard price is the amount to produce one unit of product; standard cost is the amount paid to obtain one unit of material from a vendor.
    2. standard price is the amount paid to obtain one unit of material from a vendor; standard cost is the amount to produce one unit of product.
    3. standard price is the amount added to work in process as material is put into production; standard cost is the amount to produce one unit of product.
    4. standard price is the amount to produce one unit of product; standard cost is the amount added to work in process as material is put into production.
37. The standard price of direct labor includes all of the following except
    1. payroll taxes.
    2. health insurance.
    3. retirement contributions.
    4. employee-paid union dues.
38. The standard price of direct labor does not include which of the following items?
    1. FICA taxes
    2. health insurance
    3. retirement contributions
    4. vacation pay.
39. The amounts to be included in the standard price of direct labor are generally determined by
    1. each employee’s supervisor.
    2. the plant manager.
    3. the payroll department.
    4. the CFO.
40. The amounts to be included in the standard price of direct labor are generally provided by
    1. each employee’s supervisor.
    2. the human resources department.
    3. the plant manager.
    4. the controller.
41. Because people talk about wage rates rather than wage prices, we refer to standard direct labor prices as direct labor rates, expressed as
    1. per direct labor hour.
    2. per unit.
    3. a percentage.
    4. per direct labor dollar.
42. The time needed to produce one unit of product is referred to as
    1. the direct labor efficiency standard.
    2. the direct labor time standard.
    3. the direct labor quantity standard.
    4. the direct labor standard.
43. In setting the direct labor quantity standard, allowances are made for
    1. wage rate changes.
    2. employee terminations.
    3. cost of time inefficiencies.
    4. excess use of materials.
44. In setting the direct labor quantity standard, allowances are made for
    1. rest time.
    2. overtime pay.
    3. payroll taxes.
    4. fringe benefits.
45. In setting the direct labor quantity standard, allowances are made for such items as rest time and machine down-time, based on estimates made by
    1. the controller.
    2. the engineering department.
    3. the human resources department.
    4. production workers.
46. In setting the direct labor quantity standard, estimated time can be derived from
    1. published labor rates in benchmark studies.
    2. time-and-motion studies.
    3. union contracts.
    4. payroll records.
47. The calculation for the standard direct labor cost is
    1. standard wage rate per direct labor hour × actual quantity of direct labor hours.
    2. standard wage rate per direct labor hour × standard quantity of direct labor hours.
    3. actual wage rate per direct labor hour × standard quantity of direct labor hours.
    4. actual wage rate per direct labor hour × actual quantity of direct labor hours.
48. The predetermined overhead rate is calculated by
    1. dividing the budgeted activity level of application base by the budgeted total manufacturing overhead.
    2. multiplying the budgeted activity level of application base by the budgeted total manufacturing overhead.
    3. dividing the budgeted total manufacturing overhead by the budgeted activity level.
    4. multiplying the budgeted total manufacturing overhead by the budgeted activity level.
49. ABC Corporation allocates overhead based on direct labor cost. Assume ABC expects to incur a total of $1,025,000 in overhead costs and $820,000 in direct labor costs. Actual overhead costs incurred totaled $1,050,000 and actual direct labor costs totaled $800,100. ABC’s predetermined overhead rate is closest to
    1. 125% of direct labor cost.
    2. 128% of direct labor cost.
    3. 98% of direct labor costs.
    4. 100% of direct labor costs.
50. Overhead is typically divided into which of the following components?
    1. Direct and indirect
    2. Fixed and variable
    3. Product and period
    4. Controllable and non-controllable.
51. Jody Jewelry manufactures jewelry. In October Jody is planning to make 500 rings, 400 bracelets, and 210 pendants. Each ring requires 3 ounces of gold and 2 semi-precious stones. Each bracelet requires 4 ounces of gold and 4 semi-precious stones. Each pendant requires 3.5 ounces of gold and 1 semi-precious stone. The company can purchase the 10k gold it uses in its manufacturing for $215 an ounce, and can purchase a lot of 100 semi-precious stones for $3,080. What is the standard cost for direct materials per pendant?
52. $245.80
53. $783.30
54. $752.50
55. $3,295.00
56. Jody Jewelry manufactures jewelry. In October Jody is planning to make 500 rings, 400 bracelets, and 210 pendants. Each ring requires 3 ounces of gold and 2 semi-precious stones. Each bracelet requires 4 ounces of gold and 4 semi-precious stones. Each pendant requires 3.5 ounces of gold and 1 semi-precious stone. The company can purchase the 10k gold it uses in its manufacturing for $215 an ounce, and can purchase a lot of 100 semi-precious stones for $3,080. What is the standard cost for direct materials per bracelet?
57. $338.20
58. $983.20
59. $890.80
60. $245.80
61. Jody Jewelry manufactures jewelry. It applies overhead based on direct labor hours. In October Jody is planning to make 500 rings, 400 bracelets, and 210 pendants. The company expects the total manufacturing overhead for the year would be $3,450,000 and that total direct labor hours for the year would be 75,000. Actual overhead incurred for October was $295,920. Each ring requires 6.25 hours of labor to manufacture; each bracelet requires 5.5 hours of labor to manufacture, and each pendant requires 4 hours of labor to manufacture. What is the standard overhead cost per ring?
62. $46.00
63. $287.50
64. $300.00
65. $48.00
66. Jody Jewelry manufactures jewelry. It applies overhead based on direct labor hours. In October Jody is planning to make 500 rings, 400 bracelets, and 210 pendants. The company expects the total manufacturing overhead for the year would be $3,450,000 and that total direct labor hours for the year would be 75,000. Actual overhead incurred for October was $295,920. Each ring requires 6.25 hours of labor to manufacture; each bracelet requires 5.5 hours of labor to manufacture, and each pendant requires 4 hours of labor to manufacture. What is the standard overhead cost per bracelet?
67. $46.00
68. $253.00
69. $264.00
70. $48.00
71. Kandy Harts manufactures custom T-shirts. Each T-shirt can be imprinted front and back with photos, company logos or other information. Each T-shirt requires 2 ounces of ink, 15 minutes of direct labor (processing, folding, packaging), and a plastic bag for packaging. The following information is available regarding costs:

Kandy applied overhead at a rate of $9.40 per direct labor hour, and fringe benefits for workers are an additional 20% of wages. What is the standard price and standard quantity for direct labor?

1. $16.00; 0.25 hour
2. $19.20; 0.25 hour
3. $4.80; 1 hour
4. $4.80; 0.25 hour
5. Kandy Harts manufactures custom T-shirts. Each T-shirt can be imprinted front and back with photos, company logos or other information. Each T-shirt requires 2 ounces of ink, 15 minutes of direct labor (processing, folding, packaging), and a plastic bag for packaging. The following information is available regarding costs:

Kandy applied overhead at a rate of $9.40 per direct labor hour, and fringe benefits for workers are an additional 20% of wages. What is the standard price and standard quantity for manufacturing overhead?

1. $11.28; 0.25 hour
2. $9.40; 0.25 hour
3. $2.35; 1 hour
4. $2.82; 0.25 hour
5. Kandy Harts manufactures custom T-shirts. Each T-shirt can be imprinted front and back with photos, company logos or other information. Each T-shirt requires 2 ounces of ink, 15 minutes of direct labor (processing, folding, packaging), and a plastic bag for packaging. The following information is available regarding costs:

Kandy applied overhead at a rate of $9.40 per direct labor hour, and fringe benefits for workers are an additional 20% of wages. What is the standard price of producing one short-sleeve T-shirt?

1. $10.65
2. $11.73
3. $10.73
4. $12.23

$3.50 + $1.00 + $0.08 + $4.80 + $2.35 = $11.73

1. Kandy Harts manufactures custom T-shirts. Each T-shirt can be imprinted front and back with photos, company logos or other information. Each T-shirt requires 2 ounces of ink, 15 minutes of direct labor (processing, folding, packaging), and a plastic bag for packaging. The following information is available regarding costs:

Kandy applied overhead at a rate of $9.40 per direct labor hour, and fringe benefits for workers are an additional 20% of wages. What is the standard price of producing one long-sleeve T-shirt?

1. $11.15
2. $12.23
3. $11.23
4. $11.73

$4.00 + $1.00 + $0.08 + $4.80 + $2.35 = $12.23

1. Tanger Products plans to produce 10,000 units in January. Each unit requires 3 pounds of plastic, which costs $2 per pound. What standard material cost would the company use to plan for production?
   1. $2
   2. $6
   3. $3,333
   4. $5,000
2. A collection of smaller budgets that leads to pro-forma financial statements is referred to as the
   1. master budget.
   2. summary budget.
   3. overall budget.
   4. pro-forma budget.
3. Which of the following is not a component of the master budget?
   1. Indirect cost budget
   2. Direct material purchases budget
   3. Ending inventory and cost of goods sold budget
   4. Production budget
4. Which of the following is not a component of the master budget?
   1. Manufacturing overhead budget
   2. Gross profit budget
   3. Ending inventory and cost of goods sold budget
   4. Production budget
5. Which of the following is not a component of the master budget?
   1. Selling and administrative expenses budget
   2. Ending inventory and cost of goods sold budget
   3. Capital expenditures budget
   4. Sales budget
6. Which of the following is not a component of the master budget?
   1. Budgeted income statement
   2. Direct material purchases budget
   3. Ending inventory and cost of goods sold budget
   4. Budgeted statement of cash flows.
7. The first component of the master budget is the
   1. cash budget.
   2. overhead budget.
   3. pro-forma budget.
   4. sales budget.
8. Development of the operating budget begins with the
   1. cash budget.
   2. sales budget.
   3. overhead budget.
   4. pro-forma budget.
9. Which of the following is not a consequence of a sales budget developed by an overly optimistic marketing department?
   1. Too much inventory may be produced.
   2. Too much material will be ordered.
   3. The company will fail to achieve its budgeted income.
   4. More cash will be on hand than anticipated.
10. In order to prepare the sales budget, one needs the number of units
    1. expected to be produced and the prices expected to be charged.
    2. expected to be sold and the cost of producing each unit.
    3. expected to be sold and the prices expected to be charged.
    4. sold in the previous period and the price charged for the units.
11. Which of the following use information from the selling and administrative expense budget?
    1. Manufacturing overhead budget and cash budget
    2. Budgeted income statement and cash budget
    3. Cash budget and budgeted balance sheet
    4. Production budget and budgeted income statement.
12. Which of the following budgets uses information from the selling and administrative expense budget?
    1. Pro-forma budget
    2. Budgeted income statement
    3. Direct materials purchases budget.
13. Which of the following is not a step in preparing the production budget?
    1. Add beginning inventory units to required units to determine the budgeted production.
    2. Enter budgeted sales units from the sales budget.
    3. Calculate budgeted ending inventory units for the period.
    4. Add budgeted ending to budget sales units.
14. Which of the following is not a use of the materials purchases budget?
    1. It helps managers minimize the resources invested in inventory.
    2. It helps managers plan the quantity and timing of purchases of material.
    3. It helps ensure the adequate level of inventory.
    4. It helps determine the number of units of product to produce.

104. Which of the following is not a step in preparing the direct materials purchases budget?

1. Enter the budgeted sales from the sales budget.
2. Calculate the direct materials production needs by multiplying the number of units to be produced by the direct material standard quantity for one unit.
3. Calculate the total direct materials required for the period by adding the ending inventory to the direct materials production needs.
4. Calculate the required purchases by subtracting the beginning direct materials balance from the total direct materials required for the period.
5. One amount that the direct labor budget calculates is the number of
   1. direct labor hours required to meet the units in the sales budget.
   2. direct and indirect labor hours required to meet the units in the sales budget.
   3. direct labor hours required to meet the budgeted level of production.
   4. direct and indirect labor hours required to meet the budgeted level of production.
6. Which of the following is not a step in preparing the manufacturing overhead budget?
   1. Enter the total estimated overhead from the previous period.
   2. Calculate the variable overhead cost per period using the variable rate and the budgeted activity base.
   3. Subtract the non-cash overhead items from the total overhead cost to determine cash payments for overhead.
   4. Calculate the total overhead cost for the period by adding the fixed and variable overhead costs.
7. Total budgeted manufacturing overhead flows to the
   1. ending inventory and cost of goods sold budget.
   2. production budget.
   3. cash budget.
   4. the cost of goods sold budget.
8. Information from the manufacturing overhead budget flows to the
   1. direct materials purchases budget.
   2. cash budget.
   3. production budget.
   4. sales budget.
9. The final component of the operating budget is the
   1. cash budget.
   2. budgeted balance sheet.
   3. sales budget.
   4. ending inventory and cost of goods sold budget.
10. Mounce, Inc. produces and sells free-standing quilt frames. In budgeting for production needs, the company requires that 10% of the next month’s sales be on hand at the end of each month. Budgeted sales of quilt frames over the next four months are:

Budgeted production for October is

• 1. 26,650.
  2. 34,400.
  3. 35,100.
  4. 37,600.

1. Mounds Company has provided you with the following sales data.

The company requires that 5% of the next month’s sales be on hand at the end of each month. Budgeted production for October is

• 1. 30,000.
  2. 31,000.
  3. 31,500.
  4. 35,000.

1. Julie Finn is preparing the materials purchases budget for the first quarter. The production manager has provided the following production budget information: January – 60,000 units, February – 55,000 units, March – 50,000 units. Each unit requires 5 gallons of direct materials, and Julie wants to maintain an ending inventory equal to 15% of the next month’s production needs. How many gallons will Julie budget to purchase in February?
   1. 271,250
   2. 275,000
   3. 282,500
   4. 312,500
2. Which of the following is not a step in preparing the cost of goods sold budget?
   1. Add the budgeted direct materials, budgeted direct labor, and budgeted manufacturing overhead used in production to the beginning work in process balance.
   2. Subtract the budgeted ending work in process balance to determine the budgeted cost of goods manufactured.
   3. Add the beginning finished goods balance.
   4. Enter the standard cost of each product.
3. The master budget process begins with the
   1. cash budget.
   2. operating budget.
   3. production budget.
   4. sales budget.
4. Staci Pearce is preparing a direct labor budget. Her sales budget shows total sales units of 15,000 and sales dollars of $45,000. The direct materials purchases budget shows materials to be purchased of 25,000 units and budgeted purchases cost of $18,750. The production budget indicates a total of 25,000 units to be produced. Standard direct labor hours per unit is .50 and the standard average wage rate is $10. What is budgeted direct labor cost?
   1. $125,000
   2. $143,750
   3. $188,750
   4. $250,000
5. James Worman is preparing a direct labor budget. His sales budget shows total sales units of 15,000 and sales dollars of $18,750. The direct materials purchases budget shows materials to be purchased of 15,000 units and budgeted purchases cost of $3,750. The production budget indicates a total of 12,000 units to be produced. Standard direct labor hours per unit are 0.30 and the standard average wage rate is $15. What is budgeted direct labor cost?
   1. $67,500
   2. $54,000
   3. $180,000
   4. $225,000
6. Martin, Inc. is preparing a direct labor budget for the next quarter. Which of the following items will Martin not need to complete the budget?
   1. Actual sales
   2. Standard hourly labor rate
   3. Standard direct labor hours per unit
   4. Budgeted production
7. Myers Company is preparing the raw materials ending inventory budget. Which of the following items will Myers not need to complete the budget?
   1. Beginning raw materials inventory balance
   2. Actual production
   3. Direct materials used in the production of new units started during the period
   4. Ending raw materials inventory balance
8. Phillip Co. manufactures decorative pillows designed for use on outdoor patios. Phillip requires that 30 percent of next month’s sales be on hand at the end of each month. The following information is available regarding budgeted sales of pillows:

What is budgeted production for April?

1. 30,000
2. 34,200
3. 43,200
4. 21,000
5. Phillip Co. manufactures decorative pillows designed for use on outdoor patios. Phillip requires that 30 percent of next month’s sales be on hand at the end of each month. The following information is available regarding budgeted sales of pillows:

What is budgeted production for May?

1. 44,000
2. 48,800
3. 62,000
4. 30,800
5. Barry Co. manufactures leather briefcases and carryalls. Barry’s production manager has provided the following production budget. Each briefcase or carryall requires 1.2 yards of leather fabric and Barry maintains an ending inventory of leather fabric equal to 25% of the next month’s production needs.

How many yards of leather fabric will Barry budget to purchase in May?

1. 94,200
2. 75,000
3. 62,500
4. 76,800
5. Barry Co. manufactures leather briefcases and carryalls. Barry’s production manager has provided the following production budget. Each briefcase or carryall requires 1.2 yards of leather fabric and Barry maintains an ending inventory of leather fabric equal to 25% of the next month’s production needs.

If each yard of leather fabric costs $8.60, how much should Barry budget for purchases of fabric in April?

1. $784,320
2. $629,520
3. $619,200
4. $524,600
5. Barry Co. manufactures leather briefcases and carryalls. Barry’s production manager has provided the following production budget. Each briefcase or carryall requires 1.2 yards of leather fabric and Barry maintains an ending inventory of leather fabric equal to 25% of the next month’s production needs.

If each yard of leather fabric costs $6.40, how much should Barry budget for purchases of fabric in February?

1. $468,480
2. $372,480
3. $310,400
4. $384,000
5. Percy’s Pickled Snacks produces several types of pickled vegetables. The company budgets for each quarter in the last month of the previous quarter. In early March, Percy is preparing the budget for pickled beets. Budgeted sales are 12,000 jars for April, 16,000 jars for May, and 19,000 jars for June. Each jar requires 1.2 pounds of beets. The pickling process takes 60 minutes for 20 jars. Because pressurized cooking is used, the processing is monitored by an employee at all times. Each jar of pickled beets sells for $15.00. Percy requires ending Finished Goods inventory equal to 25% of the following month’s sales. Other information is as follows:

What is Percy’s production budget for April?

1. 12,000
2. 13,000
3. 16,000
4. 11,000
5. Percy’s Pickled Snacks produces several types of pickled vegetables. The company budgets for each quarter in the last month of the previous quarter. In early March, Percy is preparing the budget for pickled beets. Budgeted sales are 12,000 jars for April, 16,000 jars for May, and 19,000 jars for June. Each jar requires 1.2 pounds of beets. The pickling process takes 60 minutes for 20 jars. Because pressurized cooking is used, the processing is monitored by an employee at all times. Each jar of pickled beets sells for $15.00. Percy requires ending Finished Goods inventory equal to 25% of the following month’s sales. Other information is as follows:

What is Percy’s direct labor budget for May?

1. $12,450
2. $10,050
3. $7,200
4. $9,600
5. Percy’s Pickled Snacks produces several types of pickled vegetables. The company budgets for each quarter in the last month of the previous quarter. In early March, Percy is preparing the budget for pickled beets. Budgeted sales are 12,000 jars for April, 16,000 jars for May, and 19,000 jars for June. Each jar requires 1.2 pounds of beets. The pickling process takes 60 minutes for 20 jars. Because pressurized cooking is used, the processing is monitored by an employee at all times. Each jar of pickled beets sells for $15.00. Percy requires ending Finished Goods inventory equal to 25% of the following month’s sales. Other information is as follows:

What is Percy’s overhead budget for April?

1. $27,000
2. $29,250
3. $36,000
4. $20,250
5. Percy’s Pickled Snacks produces several types of pickled vegetables. The company budgets for each quarter in the last month of the previous quarter. In early March, Percy is preparing the budget for pickled beets. Budgeted sales are 12,000 jars for April, 16,000 jars for May, and 19,000 jars for June. Each jar requires 1.2 pounds of beets. The pickling process takes 60 minutes for 20 jars. Because pressurized cooking is used, the processing is monitored by an employee at all times. Each jar of pickled beets sells for $15.00. Percy requires ending Finished Goods inventory equal to 25% of the following month’s sales. Other information is as follows:

What is Percy’s cost of goods sold budget for April?

1. $150,150
2. $138,600
3. $120,900
4. $111,600

OH: $45 × 600 = $27,000; DM: 12,000 × 1.2 × $6 = $86,400; $18,000 + $7,200 + $27,000 + $86,400 = $138,600

1. Which of the following items would most likely differ on the cash budget and the budgeted income statement?
   1. Insurance expense
   2. Advertising expense
   3. Bad debt expense
   4. Supplies expense
2. Which of the following items would most likely differ on the cash budget and the budgeted income statement?
   1. Rent expense
   2. Research and development expense
   3. Sales commissions expense
   4. Depreciation expense
3. Which of the following is not a component of the cash budget?
   1. Cash available to spend
   2. Short-term financing
   3. Reconciliation of beginning and ending cash
   4. Cash disbursements
4. Which of the following is one of the major reasons that small businesses fail?
   1. Inadequate cash flow
   2. Inadequate net income
   3. Inadequate earnings per share
   4. Inadequate assets
5. The basic managerial functions that help managers ensure that enough cash is available to run the business is the function of
   1. planning.
   2. controlling.
   3. evaluation.
   4. decision making.
6. The plan that helps manage cash flow is the
   1. statement of cash flows.
   2. budgeted Income statement.
   3. cash budget.
   4. schedule of cash activities.
7. Many new businesses fail not because they are unprofitable, but because
   1. they do not have the expertise to maintain the business.
   2. they run out of cash.
   3. they do not have adequate inventory.
   4. there is a declining demand of the products.
8. Trail Industries is preparing its cash budget for the third quarter of the current year. Sales for the third quarter are budgeted at $870,000 ($290,000 per month). Sales are 80% cash, with the remaining 20% on credit which is collected in the month following the month of sale. On June 30, the cash balance is $48,000, and the Accounts Receivable (all related to June sales) balance is $51,000. Operating expenses for the quarter are budgeted at $464,000, which includes $18,000 of depreciation. Cash expenses are paid in the month incurred. Cash purchases for merchandise inventory are budgeted at $392,000 for the quarter. What is the projected cash balance at the end of the third quarter?
9. $113,000
10. $73,000
11. $4,000
12. $131,000
13. Quail Industries is preparing its cash budget for the third quarter of the current year. Sales for the third quarter are budgeted at $696,000 ($232,000 per month). Sales are 80% cash, with the remaining 20% on credit which is collected in the month following the month of sale. On June 30, the cash balance is $38,400, and the Accounts Receivable (all related to June sales) balance is $40,800. Operating expenses for the quarter are budgeted at $371,200, which includes $14,400 of depreciation. Cash expenses are paid in the month incurred. Cash purchases for merchandise inventory are budgeted at $313,600 for the quarter. To prepare for the busy fourth quarter, Quail’s desired cash balance on September 30 is $120,000. How much financing will the company need at the end of the third quarter?
14. $29,600
15. $61,600
16. $116,800
17. $15,200

$120,000 ̶ $58,400 =$61,600

1. Avery Manufacturing has the following sales budgets for the fourth quarter.

The accounting manager has analyzed cash collections and determined that credit sales are collected 70% in the month of sale, 20% in the month following the sale, and 10% uncollectible. How much cash is Avery expected to collect in November?

1. $865,600
2. $912,180
3. $787,830
4. $693,600
5. Avery Manufacturing has the following sales budgets for the fourth quarter.

The accounting manager has analyzed cash collections and determined that credit sales are collected 70% in the month of sale, 20% in the month following the sale, and 10% in the second month following sale. How much cash is Avery expected to collect in December?

1. $1,154,790
2. $1,178,080
3. $898,990
4. $1,205,600
5. Alexa Industries has the following amounts budgeted for selling and administrative expenses for February:

What amount will Alexa report on its February cash budget for selling and administrative expenses?

1. $154,400
2. $148,000
3. $169,200
4. $156,000
5. Morgan Manufacturing is preparing its cash budget for the second quarter. The inventory manager has provided the following amounts budgeted for materials purchases:

The controller reports that Morgan pays for 20% of its purchases in the month of purchase, 60% in the month following purchase, and 20% in the second month after purchase. What are Morgan’s budgeted cash payments for purchases in June?

1. $39,552
2. $49,024
3. $89,912
4. $9,472
5. Sophia, Inc. is preparing its cash budget for the fourth quarter. The inventory manager advises that materials purchases will be $40,000 in October and will increase by 25% for each month thereafter due to the holiday season. Sophia’s purchases in September were $32,000. Sophia pays for purchases 50% in the month after sale and 50% in the 2nd month after the sale. What are Sophia’s budgeted cash payments for purchases in November?
6. $45,000
7. $36,000
8. $61,000
9. $40,000
10. If a company gets the sales forecast wrong, which of the following budgets will also be incorrect?
    1. Direct labor budget
    2. Production budget
    3. Budgeted income statement
11. Which of the following is not a suggested source for forecasting sales?
    1. Customer-provided requirements
    2. Historical sales data
    3. Random statistical data
    4. Industry projections
12. Which of the following is a suggested source for forecasting sales for a new business?
    1. Industry projections
    2. Factory capacity
    3. Projected production.
    4. Time and motion studies.
13. To determine the cash payments for direct materials during a period, companies prepare a
    1. cash payment for materials budget.
    2. cash flow from operating activities.
    3. cash disbursements schedule.
14. Which of the following does not appear in the Other Cash Disbursements section of the Cash Budget?
    1. Dividend payments
    2. Income tax payments
    3. Depreciation on factory equipment
    4. Purchase of new equipment
15. A company is preparing its cash budget for the first quarter of the year. It has $1,000 in cash at the beginning of the period. Cash sales for the quarter are budgeted at $30,000. Selling and administrative expenses are budgeted at $8,000, which includes $2,000 depreciation. Cash expenses are paid in the month incurred. Cash payment for inventory purchases are budgeted at $25,000. The desired cash balance on March 31 is $5,000. How much financing will the company need during the quarter?
    1. $0
    2. $2,000
    3. $5,000
    4. $7,000
16. A company is preparing its cash budget for the first quarter of the year. It has $8,000 in cash at the beginning of the period. Cash sales for the quarter are budgeted at $180,000. Selling and administrative expenses are budgeted at $58,000, which includes $12,000 depreciation. Cash expenses are paid in the month incurred. Cash payment for inventory purchases are budgeted at $135,000. The desired cash balance on March 31 is $10,000. How much financing will the company need during the quarter?
    1. $0
    2. $3,000
    3. $5,000
    4. $7,000

Finance the difference of $10,000 ̶ $7,000 = $3,000

1. Johnson Equipment expects the following sales in January, February, and March:

The controller has determined that the company collects credit sales as follows: 60% in the month of sale, 35% in the first month after sale, and 5% in the second month after sale. How much cash will be collected from customers in March?

• 1. $291,500
  2. $376,500
  3. $410,000

1. London Manufacturing Company expects the following sales in January, February, and March:

The controller has determined that the company collects credit sales as follows: 60% in the month of sale, 30% in the first month after sale, 5% in the second month after sale, and 5% is expected to be uncollectible. How much cash will be collected from customers in March?

• 1. $291,500
  2. $376,500
  3. $373,500
  4. $410,000

1. Pepper Farm’s intern was preparing the cash budget for June. During the month, Pepper’s cash sales were $30,000 and Pepper collects 60% of credit sales during the month of sale. What was the dollar amount of Pepper’s credit sales?

1. $456,000
2. $556,000
3. $200,160
4. $476,000

Credit sales = $456,000

1. $350,000
2. $243,000
3. $240,818
4. $73,508

Purchases – Ending inventory + Beginning inventory = (Monthly sales × 55%);

$133,050 – $12,000 + $12,600 = (Monthly sales × 55%);

$133,650 ÷ 55% = Monthly sales = $243,000

1. Starfish Industries’ sales budget for the first quarter of the upcoming year shows budgeted sales of $325,000, $350,000, and $310,000 in January, February, and March, respectively. All sales are made on credit. The cash receipts budget for March shows total cash receipts equal to $296,780. Starfish grants a discount to customers who pay within 10 days of the invoice. Starfish collects 60% of sales within the discount period, 20% in the month of sale but outside the discount period, 15% in the month following sale and the remainder is uncollectible. What is the discount offered by Starfish, and what are the cash collections in March associated with March sales?
2. 2%; $244,280
3. 1.5%; $245,210
4. 2%; $182,280
5. 1.5%; $183,210

$296,780 = ($310,000 × 60% x discount %) + ($310,000 × 20%) + ($350,000 × 15%);

$182,280 = ($310,000 × 60% × discount %); Discount = 2%;

March collections = ($310,000 × 60% × 98%) + ($310,000 × 20%) = $244,280

1. $193,958
2. $221,625
3. $155,000
4. $314,795

$148,390 = (March sales × 60% × 98%) + (March sales × 20%) + ($175,000 × 15%);

$122,140 = (.588 March sales) + .2 March sales;

$155,000 = March sales

1. Wright’s sales budget for the third quarter of the upcoming year shows budgeted sales of $465,000, $525,000, and $487,500 in July, August, and September, respectively. All sales are made on credit. The cash receipts budget for September shows total cash receipts equal to $459,975. Wright grants a discount to customers who pay within 10 days of the invoice. Wright collects 60% of sales within the discount period, 20% in the month of sale but outside the discount period, 15% in the month following sale and the remainder is uncollectible. What is the discount offered by Wright, and what are the cash collections in September associated with September sales?
2. 2%; $477,750
3. 2%; $384,150
4. 3%; $283,725
5. 3%; $381,225

$459,975 = ($487,500 × 60% × discount %) + ($487,500 × 20%) + ($525,000 × 15%);

$283,725 = ($487,500 × 60% × discount %); Discount = 3%;

September collections = ($487,500 × 60% × 97%) + ($487,500 x 20%) = $381,225

1. Pro-forma financial statements are
   1. based on assumed rather than actual results.
   2. used only in analyzing what has occurred in the past.
   3. based on historical data.
   4. not a component of the master budget.
2. Starfish Industries’ sales budget for the first quarter of the upcoming year shows budgeted sales of $325,000, $350,000, and $310,000 in January, February, and March, respectively. All sales are made on credit. The cash receipts budget for March shows total cash receipts equal to $306,840. Starfish grants a discount to customers who pay within 10 days of the invoice. Starfish collects 60% of sales within the discount period, 20% in the month of sale but outside the discount period, 20% in the month following sale. What is the discount offered by Starfish, and what is the Accounts Receivable balance that will be reported in the March 31 pro-forma balance sheet?
3. 6%; $73,160
4. 6%; $62,000
5. 4%; $70,000
6. 4%; $73,160

$306,840 = ($310,000 × 60% × discount %) + ($310,000 × 20%) + ($350,000 × 20%)

$178,840 = ($310,000 × 60% × discount %); Discount = 6%

March 31 Accounts Receivable = $310,000 × 20% = $62,000

1. To prepare a pro-forma income statement, information is pulled from
   1. the general ledger.
   2. the trial balance.
   3. components of the master budget.
2. Gross profit on a pro-forma income statement is calculated as
   1. budgeted sales revenue minus contribution margin.
   2. budgeted sales revenue minus budgeted cost of goods sold.
   3. budgeted sales revenue minus product cost and period cost.
3. On a pro-forma balance sheet, the cash balance comes directly from
   1. the cash receipts budget.
   2. the general ledger.
   3. the cash budget.
   4. the bank statement.
4. On a pro-forma balance sheet, the accounts receivable balance comes directly from
   1. the cash receipts budget.
   2. the general ledger.
   3. the cash budget.
   4. the sales journal.
5. Alexa Industries has the following amounts budgeted for selling and administrative expenses for February:

What amount will Alexa report on its February pro-forma income statement for selling and administrative expenses?

1. $154,400
2. $169,200
3. $148,000
4. $156,000
5. Rowen Company pays 80% of its expenses in the month incurred. Rowen’s controller has developed the following budgeted amounts budgeted for selling and administrative expenses for July:

What amount will Rowen report on its July pro-forma income statement for selling and administrative expenses?

1. $47,920
2. $59,900
3. $43,900
4. $35,120

Answers to Multiple-Choice Questions

MATCHING

1. Match the following terms to the appropriate statement by placing the letter to the left of each statement.

1. d – Ideal standard
2. h – Pro-forma financial statements
3. a – Budgetary slack
4. j – Top-down budget
5. e – Operating budget
6. b – Cash receipts budget
7. i – Rolling budget
8. f – Participative budget
9. c – Ending inventory and cost of goods sold budget
10. g – Practical standard

BRIEF EXERCISES

1. Indicate whether the following items are characteristics of imposed budgeting or participative budgeting.

1. Indicate whether the following items are characteristics of imposed budgeting or participative budgeting.

1. Pro-forma financial statements are prepared using the information developed in the budget process. These statements reflect the results of operations and the financial position of the organization as if all actions planned in the budget had occurred. Many of the master budget components provide direct input to the pro-forma financial statements.

Required:

For each of the following components of the financial statements, indicate which pro-forma financial statement will show the item (Income Statement or Balance Sheet) and the budget(s) within the master budget where the item originated. Number 1 provides an example.

1. As a service to the public, the accounting department at a major university provides speakers for budgeting seminars at functions such as club meetings, couples’ retreats, and at several local half-way houses and women’s shelters. Speakers, who hold doctorate degrees in accounting, are paid by the college of business an hourly rate of $75 plus fringe benefits estimated at 30% of their hourly rate. Since all speaking engagements are in the local area, speakers are paid 10% of their hourly rate for transportation costs. Speakers are paid for their speaking time plus their travel and preparation time. The standard time estimated for each speaking engagement is 1 hour and 30 minutes.

Required:

Calculate the standard cost for each engagement.

Speaking rate per engagement ($75 × 1.5) $112.50

Fringe benefits ($112.50 × .30) 33.75

Transportation ($112.50 × .10) 11.25

Standard rate for engagement $157.50

Or

Speaking rate $75.00

Fringe benefits 22.50

Transportation 7.50

Standard rate for engagement $105.00 x 1.5 hours = $157.50

1. Simple Styles is a dress manufacturer. The company purchases fabric with a list price of $200 per bolt and pays shipping charges of $3 per bolt. Each bolt contains 100 yards of fabric. Simply Styles receives a volume discount of 15% per bolt. Each dress uses a standard quantity of 2 yards of fabric.

Required:

Calculate the standard cost of material for one dress.

[$200 + $3 – ($200 × .15)] = $173 cost per bolt

$173 ÷ 100 yards = $1.73 per yard × 2 yards per dress = $3.46 standard cost per dress

1. Mountaineers, Inc. makes and sells high-quality backpacking tents. Sally Gimbrel, the controller, is responsible for preparing Mountaineers’ master budget. She has received the following sales forecast for 2020 from the sales manager.

Required:

Prepare Mountaineers’ sales budget for the first quarter. Omit the heading.

1. Milligan Manufacturing Company produces and sells garden tools. The company has developed the following production plan for its new electric trimmer.

Each unit requires three feet of metal tubing. The company wishes to have ending inventory of metal tubing equal to 110% of its next month’s production needs, plus an additional 100 feet. January’s beginning inventory meets this requirement. Milligan’s standard cost per foot is $2.80.

Required

Prepare the 1^st quarter direct materials purchases budget for metal tubing.

1. Cooper Company, a retailer of camping supplies has budgeted activity for January using the following data:

Required:

What is Cooper’s budgeted cash receipts for January?

1. Cooper Company, a retailer of camping supplies has budgeted activity for January using the following data:

Required:

What is Cooper’s budgeted cash disbursements for January?

1. Richardson Company has provided you with the following numbers pulled from various budgets related to January 2020 activity:

Required:

Prepare a pro-forma income statement for Richardson Company

EXERCISES

1. Danny’s Delights is a wholesale bakery. Danny makes a variety of baked goods which he sells to restaurants and grocery stores. His best-selling item is a peanut butter cookie. The recipe calls for 1 cup of peanut butter, 1 cup of sugar and 1 egg. Each recipe makes a batch of one dozen cookies. Danny’s standard direct materials cost for batch of cookies is $0.90 for peanut butter, $0.15 for sugar and $0.10 for an egg. In addition, the cookies are packaged by the dozen in cardboard containers costing $0.25 each. One batch of cookies requires 4 minutes preparation time, 8 minutes of cooking time, and 3 minutes of packaging time. The standard wage rate is $15 per hour. Overhead is applied at 50% of direct labor cost.

Required:

Calculate the standard cost for a batch (1 dozen) of peanut butter cookies.

Direct material ($0.90 + $0.15 + $0.10 + $0.25) $1.40

Direct labor ($15 × [(4 + 8 + 3) ÷ 60] 3.75

Manufacturing overhead ($3.75 × .50) 1.88

Standard cost for a dozen cookies $7.03

1. Candi’s Wholesale Foods specializes in providing hors d'oeuvres at a wholesale price to caterers. One of Candi’s best sellers is a fruit éclair. Her recipe calls for 1 pint of pastry cream, 8 ladyfinger cookies, and 2 cups of fruit (strawberries, raspberries, or blueberries). Each recipe makes 8 éclairs (one batch). The standard direct materials cost is $0.80 per pint of pastry cream, $0.90 for a box of 24 ladyfingers, and $0.25 for a cup of fruit. The éclairs are packed on plastic trays costing $0.30 each. Caterers pick up the éclairs immediately so there is no storage or delivery cost to Candi. It requires one person 4 minutes preparation time and 2 minutes of packaging time for one batch of éclairs. The standard wage rate is $15 per hour. Overhead is applied at 50% of direct labor cost.

Required:

Calculate the standard cost for a batch (8 éclairs).

Direct material [$0.80 + ($0.90 ÷ 3) + (($0.25 × 2) + $0.30)] $1.90

Direct labor ($15 × [(4 + 2) ÷ 60] 1.50

Manufacturing overhead ($1.50 × .50) 0.75

Standard cost per batch $4.15

1. Custom Design manufactures t-shirts for new parents and grandparents by turning a client’s newborn baby’s picture into a design on the shirt. The following information has been provided by various units within Custom Design’s departments. The company purchases cotton t-shirts in bundles of 100 at a price of $400 per bundle. Custom Design has to pay shipping charges of $10 per bundle. The process of transferring pictures onto the shirts costs $0.75 per shirt. Each shirt is boxed in a cardboard box that costs $0.15 each. It takes one worker 10 minutes to prepare a shirt and transfer the picture onto the shirt and another worker 5 minutes to check the shirt for flaws in the printing and package the shirt. Workers are paid $15 per hour. Custom Design applies overhead at a rate of 100% of direct labor cost.

Required:

Compute the standard cost of producing one t-shirt.

Material

Purchase price ($400 ÷ 100) $ 4.00

Shipping ($10 ÷ 100) 0.10

Packaging 0.15

Picture transfer 0.75

Labor: $15 × ¼ hour 3.75

Overhead: $3.75 × 100% 3.75

Total standard cost per shirt $12.50

1. Custom Design manufactures baby blankets by turning a client’s photograph of a new baby into a design printed on the blanket. This is a popular item, selling for $30, for new parents and grandparents. The following information has been provided by various units within Custom Design’s departments. The company purchases fleece blankets in bundles of 100 at a price of $500 per bundle. Custom Design has to pay shipping charges of $10 per bundle. The process of transferring a picture onto a blanket costs $1.50. Each blanket is boxed in a cardboard box that costs $0.25 each. It takes one worker 15 minutes to prepare a blanket and transfer the picture onto the blanket and another worker 5 minutes to check the blanket for flaws in the printing and package the blanket. Workers are paid $15 per hour. Custom Design applies overhead at a rate of 120% of direct labor cost.

Required

Compute the standard cost of producing one blanket.

Material

Purchase price ($500 ÷ 100) $ 5.00

Picture transfer 1.50

Shipping ($10 ÷ 100) 0.10

Packaging 0.25

Labor

$15 × [(15 + 5) ÷ 60] hours 5.00

Overhead

$5 × 120% 6.00

Total standard cost per shirt $17.85

1. Murphy Company produces and sells only one product, heavy-duty cargo carriers for trucks. The company is preparing its selling and administrative expense budget for the month. The following information has been provided to assist in the budgeting process.

All cash expenses are paid in the month they are incurred.

Required:

Murphy has budgeted to sell 5,000 units during July. Prepare the selling and administrative expense budget for July.

1. Berry Products Company manufactures and sells a single product. Each unit requires three feet of tubing. Berry’s budgeted production is as follows:

December 15,000 units

January 14,000 units

February 15,000 units

March 12,000 units

April 13,000 units

Berry budgets monthly ending inventories to be equal to 20% of the following month’s production needs. The January beginning inventory meets this requirement. The tubing costs $0.80 per foot.

Required:

Prepare the direct material purchases budget for tubing for the first quarter.

1. Grantham Manufacturing Company makes oak rocking chairs. Budgeted sales are 20,000 for July, 25,000 for August, 28,000 for September and 30,000 for October. Grantham maintains an ending inventory equal to 10% of the current month’s sales. Ending inventory at June 30^th was 3,000.

Required:

Prepare a production budget for the 3^rd quarter ending September 30.

1. Brand, Inc. makes portable generators. Budgeted sales are 20,000 for July, 25,000 for August, 28,000 for September, and 31,000 for October. Brand maintains an ending inventory equal to 10% of the following month’s sales. Ending inventory at June 30^th was 2,000.

Required

Prepare a production budget for the 3^rd quarter ending September 30.

1. Haygood, Inc. is a manufacturer of cast iron fire pits. Budgeted production is 20,000 units for January and 18,000 for February and 15,000 for March. The manufacturing process is highly automated but requires ¼ hour of direct labor time for each unit. The standard wage rate is $10.

Required:

Prepare a direct labor budget for the first quarter.

1. Outfitters, Inc. is a manufacturer of ultra-light sleeping bags. Budgeted production is 20,000 units for January and 18,000 for February and 15,000 for March. Each sleeping bag requires two hours of direct labor. The standard wage rate is $15.

Required:

Prepare a direct labor budget for the first quarter.

1. Greenland, Inc. is a manufacturing company specializing in eco-friendly products. The company has recently developed a new water filter. Because the product is new to the market, Greenland does not have a prior history of sales to help develop its budget for the coming quarter. Greenland has agreements from several retail outlets to promote and stock the filters. Based on customers’ request and Greenland’s sales staff, managers have estimated January sales to be 200 units and estimate that sales will double each month for the next six months. Units are priced at $120 each.

Required:

Prepare a sales budget for the first quarter.

1. Williams Company makes and sells laundry duffel bags. Each duffel bag sells for $20 and has a unit variable cost of $12. The company has provided the following budgeting data for March:

If necessary, Williams will borrow cash from the local bank in multiples of $1,000.

Required:

• 1. How many units did Williams budget to sell during March?
  2. What is Williams’ budgeted cash balance at the end of the period before borrowing?
  3. How much should Williams budget for borrowing in January?
  4. $34,000 ÷ $20 = 1,700 units
  5. Beginning cash balance $ 4,000

Cash collections 34,000

Cash disbursements 36,000

Cash balance March 31 $ 2,000

• 1. Williams must borrow $2,000 to maintain a $4,000 minimum cash balance

1. Cooper Company, a retailer of camping supplies has budgeted activity for January using the following data:

Required:

Prepare a cash budget for January. Omit the heading.

PROBLEMS

188. Go-Spa Enterprises is a portable hot tub manufacturer. The company produces both 2-person and 4-person hot tubs. John Ireland, the company’s sales manager, prepared the following sales forecast for 2021. The forecasted sales prices include a 5 percent increase in the 2-person spa price and a 10 percent increase in the 4-person spa price, to cover anticipated increases in raw materials prices.

Required:

a. Prepare Go-Spa’s sales budget for 2021. Omit the heading.

b. On December 31, 2020, Go-Spa had 80 2-person spas in stock—fewer than the desired inventory level of 100, based on the following quarter’s sales. The company has budgeted for sales of 450 2-person spas in the first quarter of 2022. Prepare the 2021 production budget for 2-person spas. Omit the heading.

c. Each 2-person spa requires a pump motor, which Go-Spa purchases for $160. On December 31, 2020, Go Spa had 400 pump motors in inventory. Damage during the installation process results in a standard quantity of 1.2 motors per spa. Because of recent delivery problems, Go-Spa wants to maintain an ending inventory equal to 50 percent of the following quarter’s production needs. Since the supplier has assured Go-Spa that the delivery issues will be resolved by the end of December, Go-Spa wants only 300 motors in inventory on December 31, 2021. Prepare the purchases budget for motors for 2021.

a.

1^st Quarter 2^nd Quarter 3^rd Quarter 4^th Quarter Annual

2-person spas:

Budgeted unit sales 500 500 400 600 2,000

Budgeted sales price × $ 1,250 × $ 1,250 × $ 1,250 × $ 1,250 × $ 1,250

Budgeted revenue $625,000 $625,000 $500,000 $750,000 $2,500,000

4-person spas:

Budgeted units sales 200 100 100 200 600

Budgeted sales price × $ 2,600 × $ 2,600 × $ 2,600 × $ 2,600 × $ 2,600

Budgeted revenue $520,000 $260,000 $260,000 $520,000 $1,560,000

Total revenue $1,145,000 $885,000 $760,000 $1,270,000 $4,060,000

b.

1^st Quarter 2^nd Quarter 3^rd Quarter 4^th Quarter Annual

Budgeted unit sales 500 500 400 600 2,000

+ Budgeted ending inventory 100 80 120 90 90

= Total units required 600 580 520 690 2,090

− Beginning inventory 80 100 80 120 80

= Budgeted production 520 480 440 570 2,010

c.

1^st Quarter 2^nd Quarter 3^rd Quarter 4^th Quarter Annual

Budgeted production 520 480 440 570 2,010

× Standard pump motors per spa × 1.2 × 1.2 × 1.2 × 1.2 × 1.2

= Production needs 624 576 528 684 2,412

+ Budgeted ending inventory 288 264 342 300 300

= Total DM required (motors) 912 840 870 984 2,712

− Beginning inventory 400 288 264 342 400

= Budgeted purchases (motors) 512 552 606 642 2,312

× Standard price per motor × $160 × $160 × $160 × $160 × $160

= Budgeted purchases cost $81,920 $88,320 $96,960 $102,720 $369,920

189. Senegalese Specialties, a retailer of West African food products, has completed the following sales forecast for the coming year:

January $37,000 July $38,000

February 38,000 August 37,000

March 32,000 September 33,000

April 40,000 October 40,000

May 36,000 November 48,000

June 31,000 December 52,000

Senegalese Specialties maintains an ending inventory level of 60 percent of the following month’s cost of goods sold. The company’s cost of goods sold is 35 percent of sales.

Required:

a. Prepare Senegalese Specialties purchases budget for June and July. Omit the heading. Use the following format:

Budgeted sales dollars

× Cost of goods sold percentage

= Cost of goods sold

+ Ending inventory

= Total inventory required

− Beginning inventory

= Budgeted purchases

b. Assuming that Senegalese Specialties pays for 50 percent of its purchases in the month of purchase and the remaining 50 percent in the month following the purchase, prepare the company’s cash payments budget for July. Omit the heading.

a.

June   July     August

Budgeted sales $31,000 $38,000 $37,000

× COGS percentage × .35 × .35 × .35

= Cost of goods sold 10,850 13,300 12,950

+ Budgeted ending inventory 7,980 7,770

= Total inventory required 18,830 21,070

− Beginning inventory 6,510 7,980

= Budgeted purchases $12,320 $13,090

b. 50% of June purchases: $12,320 × .5 = $6,160

50% of July purchases: $13,090 × .5 = 6,545

$12,705

190. Garden Gnomes Company produces various types of lawn ornaments. The company’s sales budget for the first four months of the coming year is as follows. All sales are made on credit.

   March       April    May    June   

Budgeted sales $550,000 $650,000 $700,000 $620,000

Garden Gnomes is planning to change its credit policies in the coming year. For the first time in its history, the company is offering a 2 percent discount to customers who pay within 15 days of the invoice date. Based on industry trends, Garden Gnomes estimates that this change will result in 60 percent of credit sales being paid within the discount period; another 20 percent of sales, within the month of sale (but outside of the discount period); and another 15 percent of sales, during the month after the sale. An estimated 5 percent of sales will be uncollectible.

Required:

a. Prepare Garden Gnomes’ cash receipts budget for the second quarter of the coming year. Omit the heading.

b. How much cash will Garden Gnomes sacrifice in the second quarter by offering the new discount?

c. What do you think led Garden Gnomes to offer the new discount to customers?

Total Cash Bad Accounts

a.    April         May        June    Receipts   Debts Receivable

March sales

$550,000 × 15% $ 82,500 $82,500

April sales

$650,000 × 60% × 98% 382,200 382,200

$650,000 × 20% 130,000 130,000

$650,000 × 15% $ 97,500 97,500

$650,000 × 5% $32,500

May sales

$700,000 × 60% × 98% 411,600 411,600

$700,000 × 20% 140,000 140,000

$700,000 × 15% $105,000 105,000

$700,000 × 5% 35,000

June sales

$620,000 × 60% × 98% 364,560 364,560

$620,000 × 20% 124,000 124,000

$620,000 × 15%

$620,000 × 5%                                                                                   31,000      $93,000

Totals $594,700 $649,100 $593,560 $1,837,360 $98,500 $93,000

b. April: $650,000 × 60% × 2% = $ 7,800

May: $700,000 × 60% × 2% = 8,400

June: $620,000 × 60% × 2% = 7,440

$23,640

c. Garden Gnomes may have offered the discount to customers because competitors were doing the same thing, or it could be that the company needed to accelerate its cash flows to be able to pay its bills on time.

191. Sedona Gear Company, a rapidly growing distributor of camping equipment, is formulating its plans for the coming year. Cody Mosbay, the firm’s marketing director, has completed the following sales forecast.

Patti Bodkin, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. She has gathered the following information.

• All sales are made on credit.
• Sedona’s excellent record in accounts receivable collection is expected to continue, with 65 percent of billings collected in the month after sale and the remaining 35 percent collected in the second month after the sale.
• Cost of goods sold, Sedona’s largest expense, is estimated to equal 45 percent of sales dollars. Seventy percent of inventory is purchased one month prior to sale and 30 percent during the month of sale. For example, in April, 30 percent of April cost of goods sold is purchased and 70 percent of May cost of goods sold is purchased.
• All purchases are made on account. Historically, 70 percent of accounts payable have been paid during the month of purchase, and the remaining 30 percent in the month following purchase.

Required:

a. Prepare the cash receipts budget for the second quarter. Omit the heading.

b. Prepare the purchases budget for the second quarter. Omit the heading.

c. Prepare the cash payments budget for the second quarter. Omit the heading.

a. Total Cash Accounts

    April         May          June      Receipts   Receivable

February sales

$1,000,000 × 35% $350,000 $350,000

March sales

$900,000 × 65% 585,000 585,000

$900,000 × 35% $315,000 315,000

April sales

$1,200,000 × 65% 780,000 780,000

$1,200,000 × 35% $ 420,000 420,000

May sales

$1,500,000 × 65% 975,000 975,000

$1,500,000 × 35%                                                                                  $525,000

Totals $935,000 $1,095,000 $1,395,000 $3,425,000 $525,000

b. Total

    April         May          June      Purchases  

April COGS

$1,200,000 × 45% × 30% $162,000 $162,000

May COGS

$1,500,000 × 45% × 70% 472,500 472,500

$1,500,000 × 45% × 30% $202,500 202,500

June COGS

$1,900,000 × 45% × 70% 598,500 598,500

$1,900,000 × 45% × 30% $256,500 256,500

July COGS

$1,900,000 × 45% × 70%                                     598,500 598,500

Totals $634,500 $801,000 $855,000 $2,290,500

c. Total Cash Accounts

    April         May          June      Payments  Payable

March purchases

$499,500^a × 30% $149,850 $149,850

April purchases

$634,500 × 70% 444,150 444,150

$634,500 × 30% $190,350 190,350

May purchases

$801,000 × 70% 560,700 560,700

$801,000 × 30% $240,300 240,300

June purchases

$855,000 × 70% 598,500 598,500

$855,000 × 30%                                                                               $256,500

Totals $594,000 $751,050 $838,800 $2,183,850 $256,500

^a30% of March COGS + 70% of April COGS = ($900,000 × 45% × 30%) + ($1,200,000 × 45% × 70%)

1. What is budgetary slack and why is it an issue in budget preparation?

Budgetary slack, or budgetary padding, is a common problem in a bottom-up budget environment. Budgetary slack is created when managers budget a lower level of revenue or a higher level of costs than is really expected to occur. At the end of the year, the manager will “beat the budget” and look as if the manager did a great job managing her department.

Budgetary slack may appear to be harmless, but there are real consequences to the organization. Resources may not be allocated in the optimal way. Managers may receive bonuses based on their beating a padded budget, so they receive additional compensation that they would not have earned had the budget been prepared realistically.

1. You have recently accepted a position as a manager with Athletic Academy. At a recent managers meeting, the controller asked for input on how to make the budgeting process more effective. Specifically, the controller indicated that the employees did not seem to be committed to the budget during the previous period. Unfortunately, none of the managers reached their targeted sales projections for the previous period.

Required:

Explain to the other managers what method the company apparently used in the previous period and why the method created the lack of commitment. Also discuss flaws if the alternative approach to budgeting is used.

The two methods are the top-down approach (imposed budget) and the bottom-up approach (participative budgeting). The top-down approach was apparently used in the previous period. It is the most efficient, because it involves the fewest number of people. In the top-down environment, employees may not be committed to the budget because executive management creates the budget and it is pushed down through the organization. However, upper management has the best understanding of the organization’s strategic direction and how to allocate resources to achieve the organization’s goals. The alternative approach is the bottom-up approach where the budgeting process begins at lower levels of manager and is reviewed as it moves up through management at each higher level. The primary behavioral issue with the bottom-up approach is that managers may pad the budget or include budgetary slack. Managers may budget lower revenues in order to meet goals or include a higher level of costs than they actually expect to incur. This may lead to managers receiving bonuses because they meet goals of a budget that is not realistic.

1. On October 31, 2020, Janie Mounce, manager of a department in the largest division of the XYZ Company, was contacted by the chairman of the budget committee. Janie needed to send her 2021 departmental budget to the committee. Instructions from the chair of the committee to all the department managers indicated that any revenue or expense items that deviated more than 5% from last year’s budget needed a written explanation to be turned in with the budget.

Required:

Describe XYZ’s budget process as a top-down or bottom-up approach. What are the advantages and disadvantages of this budget process?

This process is a bottom-up approach. The process begins with managers developing and submitting their budgets rather than having executives create the budget and push it down through the organization. This budget process is also referred to as participative budgeting. Advantages of the bottom-up approach are that it is more accurate and there is greater employee commitment to the budget. Disadvantages include the issues that it is more time consuming and there is a potential for budgetary slack.

1. Assume your friend is watching you prepare the master budget as part of your accounting homework. She notices that the sales budget affects both the budgeted income statement and the cash budget, but not by the same amount. Explain why the effect is not the same on the two budgets.

The effect is not the same because of a timing difference. A sale is recorded in the period when the performance obligation is satisfied, but the cash collected from the sale may be in a later period. The budgeted sales revenue from the sales budget goes directly to the budgeted income statement. The journal entry would be to debit accounts receivable and credit revenue. However, many sales transactions will result in credit sales where the collection does not occur until a month or more after the sale is made. At that time, cash would be debited and accounts receivable would be credited. The budgeted income statement uses the accrual basis of accounting where revenue is recorded when the performance obligation is satisfied (not when cash is received). On the other hand, the cash budget includes cash collections for the period from cash sales and credit sales. Some of the collections from credit sales will be from sales made in previous periods.

1. What are two tradeoffs between ideal standards and practical standards that a student might be willing to accept for a Principles of Accounting class?

Some possible answers may be:

1. A student might be willing to forgo an ideal standard of receiving an A in order to spend more time studying other courses.
2. A student might be willing to accept an easy professor in lieu of the ideal standard of the best professor.
3. A student might be willing to forgo homework points in order to attend a frat party.
4. Describe the components of the cash budget and discuss why the cash budget is important to managers.

The cash budget has five major components: cash available to spend, cash disbursements, cash excess or cash needed, short-term financing, and ending cash balance. The cash budget is important to managers for several reasons. Managing cash is a common problem for individuals and organizations. The cash budget helps managers manage cash flow. Inadequate cash flow is a major reason why small businesses fail. The cash budget helps managers in all four areas of managerial functions: planning, control, evaluation, and decision making.

1. The standard price of a product is comprised of several components including cost and quantity.

Required:

List the six components and explain what each includes.

Price standards are the expected cost of obtaining each input used in producing a product:

• The direct materials price standard includes the cost of getting the materials to the factory (purchase price, freight, storage, and net of discounts).
• The direct labor price standard includes wages, fringe benefits, and payroll taxes.
• The manufacturing overhead price standard is the predetermined overhead rate.

Quantity standards are the expected amount of inputs required to produce one good unit of output.

• The direct materials quantity standard is the quantity of direct materials needed to produce one unit of good output, including allowances for waste and spoilage.
• The direct labor quantity standard is the amount of direct labor time required to produce one good unit of output, including rest time and machine downtime.
• The manufacturing overhead quantity standard is based on usage of the overhead application base.

ESSAY

1. The two common approaches to budgeting are the top-down budget approach and the bottom-up approach. Both methods have advantages and disadvantages both from a practical standpoint and behavioral issues. List two advantages related to each method and two disadvantages that create problems with each approach.

Top-Down Approach

Advantages

1. It is the most efficient method of budget preparation.
2. Upper management has the best understanding of the organization’s strategic direction and how to allocate resources to achieve the organization’s goals.

Disadvantages

1. Since employees do not have input into its creation, they are not as committed to it as under a bottom-up approach.
2. Managers might argue that a budget is unreasonable or unfair if they are not involved in preparing it.

Bottom-Up Approach

Advantages

1. It is more accurate since those who know the most about the resources needed to operate are involved in its preparation.
2. The budget is reviewed at all stages of management.
3. It elicits more commitment since all levels of employees are involved in its creation.

Disadvantages

1. Allocation of resources may not be done in the optimal way if managers pad the budget.
2. If managers receive bonuses based on an incorrect budget, they would receive additional compensation they have not earned.
3. This approach is time consuming.
4. Most organizations have a plan for success. The plan may be formal or informal, but leaders should be able to identify what they want their organizations to achieve. One type of tactical planning is the budgeting process.

Required:

Describe the budget development process and explain how it fits into management’s planning process.

Budgets can be completed in either a top-down, imposed process, or a bottom-up, participative process. Either way, the process is iterative, as information is passed throughout the organization and updated for changes in planned activity. Budgets can be prepared using the prior year’s budget as a starting point, or they can be prepared using zero-based budgeting, in which each item must be justified anew each year. A budget may be prepared to cover a monthly, quarterly or annual time frame.

Executive management sets out a strategy to guide a company’s actions. The budgeting process translates that strategy into action by allocating financial resources across the organization, to ensure that the necessary steps can be taken. The budget also communicates decisions about resource allocation throughout the organization, allowing managers to plan for the future in order to mitigate potential operational risks, such as cash shortages.

1. Assume you have just been hired by a large manufacturing company and have been assigned to a team that has the responsibility of gathering the data for completing the company’s operating budget. Your first assignment is to make the initial contact with the department managers who will be providing data to ensure that everyone involved knows the importance of preparing a realistic budget. The first manager you approach does not appear to know what an operating budget is and apparently is not interested in assisting your team in preparing a meaningful budget. Prepare a written memo to the managers explaining what the operating budget is, its components, and its importance.

Date

To: Department Managers

From: Your name, budget team member

During the next few days someone from the budget team will be contacting you for information concerning the next period’s budget. The team will be collecting data from you and incorporating it into the operating budget.

The operating budget provides a plan for operations during the budget period. Development of the operating budget begins with the sales budget. From those sales estimates, budgeted production, direct materials, direct labor, manufacturing overhead, and selling and administrative costs are determined. The operating budget will become a vital component of the master budget.

We will be respectful of your schedule as we go through this process. Before we meet with each of you, written guidelines will be provided to you explaining the information we will need from your department. Preparing a realistic budget will assist managers in planning for the future, reducing the need for unprepared responses to unexpected situations, and help departments communicate within our company. It will also help managers in planning, controlling, evaluating, and decision making in their respective areas.

Thank you for your participation in this process. The budget team looks forward to working with you in this endeavor.

Required:

• 1. What is a master budget?
  2. What are the component parts of the master budget?
  3. How are the components related?

1. The master budget is a collection of smaller budgets that leads to pro-forma (budgeted) financial statements.
2. The first component of the master budget is the operating budget which consists of the sales budget, production budget, direct materials purchases budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. In addition, the master budget contains the ending inventory and cost of goods sold budget, the cash budget, budgeted income statement and budgeted balance sheet.
3. Each of the budgets impacts the company’s cash position, income statement, and balance sheet. The sales budget is the key to the entire master budgeting process, since most other master budget components depend on the level of sales. The pro-forma income statement and balance sheet are prepared from numbers contained in the various components of the other budgets.