CHAPTER 10

BUDGETARY PLANNING

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES

Bloom’s: AN = Analysis AP = Application C = Comprehension

E = Evaluation K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: MA = Management Accounting

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES (CONT’D)

Bloom’s: AN = Analysis AP = Application C = Comprehension

E = Evaluation K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: MA = Management Accounting

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, BLOOM’S TAXONOMY, LEVEL OF DIFFICULTY, AACSB CODES, AND CPA CODES (CONT’D)

Bloom’s: AN = Analysis AP = Application C = Comprehension

E = Evaluation K = Knowledge

LOD: E = Easy M = Medium H = Hard

AACSB: AN = Analytic

CPA: MA = Management Accounting

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False C = Completion BE = Brief Exercise

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

MP = Multi-Part

CHAPTER LEARNING OBJECTIVES

1. State the essentials of effective budgeting and the 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, (c) 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 labour, (e) manufacturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditures 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 production units. 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 labour, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement.

The direct labour starts with the units to be produced as determined in the production budget. This amount is multiplied by the direct labour hours per unit and the direct labour cost per hour to arrive at the total direct labour cost. The manufacturing overhead budget lists all of the individual types of overhead cost, 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 the cash budget and the budgeted balance sheet.

The cash budget, which shows expected cash flows, contains three sections (cash receipts, cash disbursements, and financing) and the beginning and ending cash balances. The budgeted balance sheet, which is a projection of the company’s financial position at the end of the budget period, lists assets and liabilities and shareholders’ equity. It is developed from the budgeted balance sheet for the preceding year and the budgets for the current year.

5. Explain the applicability of budgeting in non-manufacturing companies.

Merchandisers may use budgeting for development of a master budget. In service enterprises, 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 promote efficiency and serve as a deterrent to waste.

2. Budgets, by their very nature, create a negative effect on human behaviour within companies because they imply that management is trying to be in control.

3. The last step in the budgeting process is developing a sales forecast.

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

5. The direct materials budget contains only quantity data so the purchasing department knows how much materials should be purchased.

6. Companies can use either a predetermined overhead rate or a manufacturing overhead budget.

7. The manufacturing overhead budget generally has separate sections for variable and fixed costs.

8. Companies that do not prepare cash budgets have significant cash deficiencies.

9. In preparing the budgeted balance sheet, management should not be concerned if it does not balance since it does not reflect actual results.

10. A merchandiser has a merchandise purchases budget, and a manufacturer has a materials purchases budget.

11. A service company has no purchases budget.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

12. A budget

a) can be a means of communicating a company's objectives to external parties.

b) facilitates coordination of activities within the business but is a poor tool for evaluating performance.

c) is more beneficial if accepted by lower level management.

d) represents management’s performance in financial terms.

13. Which of the following is true?

a) The budget and the administration of the budget are the responsibility of management.

b) Each manager coordinates their respective budget activities.

c) Lower level managers are responsible for preparing the entire budget.

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

14. Long-range plans

a) are different than budgeting in terms of the emphasis and the time period involved.

b) are used primarily as an evaluation of specific results to be achieved.

c) reflect management's plans encompassing one year.

d) have the same amount of detail as the budget.

15. Which of the following is false in terms of budgets?

a) The master budget consists of a plan of action for a specified time period.

b) Operating budgets must be completed before the financial budgets can be prepared.

c) The production budget must be completed before the materials purchases budget because the number of units to be produced must be known to determine how much material to buy.

d) The cash budget displays expected cash flows in two sections: cash receipts and cash disbursements.

16. Which one of the following is correct concerning a budget period?

a) A budget is prepared to summarize the organization’s activity for the month, quarter, or year just completed.

b) A budget can be prepared for any period of time.

c) A budget must be prepared for a one year period.

d) A budget can be prepared for any period of time, but once that period has been adopted it cannot be changed.

17. The master budget contains which two classes of budgets?

a) the master budget and subsidiary budgets

b) the primary and secondary budgets

c) the historical and current budgets

d) the operating budgets and financial budgets

18. The “bottom-up” approach to budgeting is also referred to as which of the following?

a) zero-based budgeting

b) grassroots budgeting

c) participative budgeting

d) cooperative budgeting

19. What is a disadvantage of the “bottom-up” approach to budgeting?

a) Lower level management is not apt to know as much about their specific area as upper management who has a better view of the overall picture.

b) When lower management is part of the budgeting process they are less likely to “buy into it”.

c) It is time consuming and costly.

d) It is more apt to be widely seen as unrealistic than is the case with a “top-down” approach.

20. Which of the following is not a benefit of budgeting?

a) It promotes efficiency.

b) It deters waste.

c) It is a basis for performance evaluation.

d) It assures the company that management will perform at a particular operational level.

21. Which budget is normally prepared first?

a) the production budget

b) the sales budget

c) the budgeted income statement

d) the cash budget

22. What is “budgetary slack”?

a) It is the tolerance that is built into budgets to recognize that actual results will not match budgeted projections exactly.

b) It is the process where managers intentionally underestimate budgeted revenues or overestimate budgeted expenses in order to make it easier to achieve budgetary goals.

c) It is the amount that actual results vary from budgeted projections as reported at the end of the budget period.

d) It is the process whereby upper management underestimates budgeted revenues or overestimates budgeted expenses in order to motivate lower management.

23. Which one of the following is necessary if a company expects its budget to be effective?

a) The company must be operating at less than capacity.

b) The budget period must cover more than one year.

c) The company’s organizational structure must be sound.

d) The company must have sufficient cash for operations.

24. Which of the following individuals should accept the company’s budgets in order for the budgets to be most effective?

a) division managers and customers

b) department heads and division managers

c) supervisors and clerks

d) department heads and creditors

25. Which of the following approvals will make the most effective environment for budget acceptance?

a) The budget is prepared by top management.

b) The budget preparation contains input from all levels of management.

c) The budget is prepared by the department heads.

d) Acceptance has nothing to do with who prepares budgets.

26. Which of the following statements is correct?

a) Long-range planning is just another term for budgeting.

b) Budgeting and long-range planning differ with respect to emphasis, detail and time period.

c) The only difference between budgeting and long-range planning is the time frame.

d) Budgeting is the first step in long-range planning.

27. Which one of the following would most likely cause an unrealistic budget?

a) All levels of management contributed to its development.

b) The budget has been developed in a participative approach.

c) The budget was developed after considerable planning.

d) The budget has been developed in a top-down fashion.

28. Under what situation might a budget be most effective?

a) as a tool to assess blame when costs are too high

b) when used to evaluate a manager's performance

c) budgets are equally effective in all situations

d) when it is created by top management

29. In many companies, who is assigned the responsibility for coordinating the preparation of the budget?

a) a budget committee

b) the sales managers since the sales budget is the backbone of the master budget

c) the company's board of directors since they approve major corporate changes

d) the company's independent certified general accountants

30. Which one of the factors below is not a major influence on the length of budget periods?

a) the nature of the organization

b) the type of budget

c) prevailing business conditions

d) the profitability of the company

31. Which one of the following is a benefit of using participative budgeting?

a) It is updated daily to reflect current activity.

b) It assures the company is operating at the activity level of the master budget.

c) It allows companies to compare the current with the previous year.

d) Lower level managers are more likely to perceive budgets as fair.

32. What is a continuous budget?

a) It is a budget that is constantly being revised as new information is gained.

b) It is a budget that covers every aspect of the production process from the purchase of raw materials to the collection of revenue from sales.

c) It is a budget where the time period just completed is dropped and an equal future time period is added.

d) It is a term used to describe a budget that is prepared by a budget committee that meets on a continuous basis.

33. Crown, Inc. administered its budget. What did the company do?

a) It prepared the budget one year in advance.

b) Management used the budget as an aid in achieving projected goals.

c) The company allowed each level of management to participate in creating the budget.

d) Management estimated its sales for the budget period.

34. Which one of the following includes people who normally make up the budget committee?

a) sales manager, company president, company treasurer

b) company treasurer, creditors, controller

c) sales manager, controller, investors

d) external auditors, controller, treasurer

35. Which problem might be a result of an unrealistic budget?

a) profitable operations

b) reduced employee morale

c) favourable operating activity

d) minimal differences between actual and budgeted amounts

36. How does long-range planning compare to a master budget?

a) It focuses on meeting operating income objectives instead of strategies to achieve those goals.

b) It is less detailed than an annual budget.

c) It is prepared by the president, unlike a master budget that is prepared by a budget committee.

d) It generally encompasses a shorter period of time than a master budget.

37. What three differences exist between long-range planning and budgeting?

a) amount of detail, content, and emphasis

b) time periods involved, amount of detail, and content

c) content, emphasis, and amount of detail

d) emphasis, time periods involved, and amount of detail

38. Which of the following is a proper match-up?

a) long-range planning  1 year

b) budgeting review of progress

c) budgeting  anticipated trends in economic environment

d) long-range planning strategies

39. Which one of the following best describes a master budget?

a) It is an interrelated long-term plan and operating budgets.

b) It includes financial budgets and a long-term plan.

c) It includes interrelated financial budgets and operating budgets.

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

40. What is the starting point in preparing a master budget?

a) the production budget

b) the sales budget

c) the direct labour budget

d) the purchases budget

41. Which one of the following sets of budgets are financial budgets?

a) budgeted balance sheet and production budget

b) budgeted income statement and sales budget

c) capital expenditure budget and cash budget

d) cash budget and sales budget

42. What is true of budgets?

a) They are voted on and approved by shareholders.

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

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

d) They are used in performance evaluation.

43. What 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

44. 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 earn their paycheque.

45. Which one of the following represents the correct order in which the budget documents listed for a manufacturing company would be prepared?

a) production budget, marketing budget, direct materials budget, indirect labour budget

b) sales budget, cash budget, direct materials budget, direct labour budget

c) selling and administrative expense budget, budgeted income statement, cash budget, budgeted balance sheet

d) sales budget, cash budget, marketing budget, direct materials budget

46. Budgetary slack means

a) management delays the completion of its annual budget to await important information.

b) the budgetary process is not given a high priority in the company.

c) the budget contains within it intentional under or over estimated items.

d) the budget must be approved by too many senior levels of management before it is finalized.

47. One difference between a company’s long-range planning efforts and its annual budget preparation is

a) long-range planning documents usually contain more detail than annual budgets.

b) annual budgets usually contain more detail than the long-range planning process.

c) long-range planning documents focus on the company’s internal environment more than annual budgets.

d) annual budgets focus on the external environment more than the long-range planning process.

48. Which of the following is not a characteristic of bottom-up budgeting?

a) It encourages organization-wide input into the process.

b) It takes advantage of employees’ intimate knowledge of operations when formulating plans.

c) It is not as time consuming as top-down budgeting.

d) It increases employees’ commitment to achieving budget goals.

49. One statement about budgeting that is generally true is

a) manufacturing companies spend more time on budgets than do service companies.

b) service company budgets tend to change only if there is a major increase or decrease in sales levels from year to year.

c) the budget process is an element of a company’s activities and should be used throughout the year to evaluate performance.

d) the budget process is useful to assure shareholders that their interests will be looked after.

50. At January 1, 2022, Barry, Inc. has beginning inventory of 5,000 widgets. Barry estimates it will sell 40,000 units during the first quarter of 2022 with a 5% increase in sales each quarter. Barry’s policy is to maintain an ending inventory equal to 10% of the next quarter’s sales. Each widget costs $2 and is sold for $3. How much is budgeted sales revenue for the third quarter of 2022?

a) $44,100

b) $120,000

c) $132,300

d) $119,070

51. Waco’s Widgets plans to sell 22,000 widgets during May, 19,000 units in June, and 20,000 during July. Waco’s policy is to keep 10% of the next month’s sales as ending inventory. How many units should Waco produce during June?

a) 18,900

b) 21,000

c) 19,100

d) 19,000

52. Lewis Hats is planning to sell 650 straw hats in April. Each hat requires ½ kilogram of straw and ¼ hour of direct labour. Straw costs $0.20 per kilogram and employees of the company are paid $22 per hour. Lewis has 80 kilograms of straw and 40 hats in beginning inventory and wants to have 50 kilograms of straw and 60 hats in ending inventory. How many units should Lewis Hats produce in April?

a) 650

b) 670

c) 610

d) 710

53. Orr Corporation’s manufacturing costs for August when production was 750 units appears below:

Direct material $7 per unit

Direct labour $6,000

Variable overhead 3,000

Factory Depreciation 2,000

Factory supervisory salaries 7,000

Other fixed factory costs 1,500

How much is the budgeted manufacturing cost for a month when 500 units are produced?

a) $13,000

b) $16,500

c) $20,000

d) $9,000

54. Hargrow, Inc. makes and sells a single product, buckets. It takes 30 ounces of plastic to make one bucket. Budgeted production of buckets for the next three months is as follows: August 90,000 units, September 75,000 units, October 65,000 units. The company wants to maintain monthly ending inventories of plastic equal to 10% of the following month's production needs. On August 31, 195,000 ounces of plastic were on hand. The cost of plastic is $0.03 per ounce. How much is the ending inventory of plastic to be reported on the company’s balance sheet at September 30?

a) $195,000

b) $5,850

c) $6,750

d) $7,500

55. How many units should Jake produce during the first quarter of 2022?

a) 15,125

b) 15,000

c) 12,500

d) 11,000

56. How much is budgeted sales revenue for the third quarter of 2022?

a) $18,150

b) $4,537,500

c) $907,500

d) $3,750,000

57. Items from Sap Company’s budget for March, in which 2,100 units were produced and sold, appear below:

Direct materials $12,000

Indirect materials—variable 2,000

Supervisor salaries 10,000

Depreciation on factory equipment 8,000

Direct labour 7,000

Property taxes on factory 3,000

Total $42,000

At 2,200 units, how much are budgeted variable manufacturing costs?

a) $22,000

b) $43,000

c) $21,000

d) $19,905

58. Jelly Box, Inc. budgeted the following manufacturing costs for 25,000 calculators:

Fixed manufacturing costs $12,000 per month

Variable manufacturing costs $16.00 per unit

Jelly Box produced 20,000 calculators during March. How much are budgeted total manufacturing costs in March?

a) $320,000

b) $412,000

c) $400,000

d) $332,000

59. DaDum Company’s desired inventory levels are 12,000 kilograms of raw material on June 1 and 10,500 on June 30. The number of kilograms required for production for June totalled 240,000 kilograms. How many kilograms of raw material should DaDum purchase in June?

a) 238,500 kilograms

b) 241,500 kilograms

c) 250,500 kilograms

d) 228,000 kilograms

60. How does a sales forecast differ from a sales budget?

a) A sales forecast includes the company, while a sales budget includes the industry.

b) A sales forecast includes the company and the industry, while a sales budget includes only the industry.

c) A sales forecast includes the company and the industry, while a sales budget includes only the company.

d) They are both the same.

61. Which one of the following is an operating budget?

a) cash budget

b) sales budget

c) budgeted balance sheet

d) capital expenditure budget

62. Which one of the following helps improve the reliability of the sales forecast?

a) reduction of differences between actual and estimated amounts

b) creation of management awareness

c) consideration of industry trends

d) extension of the budget period

63. What might a very conservative sales budget cause?

a) a decrease in selling prices

b) a shortage of inventories

c) increased sales during the year

d) overproduction of goods

64. Which of the following is correct?

a) beginning raw material inventory + raw material required for production – desired ending raw material inventory = required raw material to be purchased.

b) beginning raw material inventory + desired ending raw material inventory – raw material required for production = required raw material to be purchased.

c) raw material required for production + beginning raw material inventory – desired ending raw material inventory = required raw material to be purchased.

d) raw material required for production + desired ending raw material inventory – beginning raw material inventory = required raw material to be purchased.

65. What information is found on the direct materials budget?

I. The number of units of direct materials that should be purchased.

II. The cost of direct materials to be purchased.

a) I only

b) II only

c) Both I and II

d) Neither I nor II

66. Surprise Company’s sales budget showed expected sales of 13,400 widgets. Beginning finished goods contained 1,200 widgets. The company determined that 14,100 units should be produced. How many widgets will the company have on hand at the end of the year?

a) 500

b) 1,200

c) 1,900

d) 700

67. The production budget shows expected unit sales are 1,800. The required production units are 1,700. Which of the following represents the inventory balances?

Beginning Units Ending Units

a) 200 100

b) 100 200

c) 200 200

d) 0 100

68. The production budget shows that expected unit sales are 86,000 for May and 87,000 for June. The company’s desired inventory levels at the end of the month are equal to 10% of next month’s sales. How many units should the company produce during May?

a) 86,100

b) 94,600

c) 85,900

d) 94,700

69. Nextel Company showed the following on its direct materials budget for June:

Units to be produced 25,000

Total kilograms needed for production 10,000

Total kilograms of materials to be purchased 9,000

The materials cost $2 per kilogram. How much is the cost of direct materials per unit?

a) $0.80

b) $0.72

c) $1.52

d) $5.00

70. Drive, Inc’s estimated production for the month is 300,000 units. Each unit requires 2 kilograms of material. The beginning direct materials are 1% of the current months expected needs. Ending inventory desired is 7,500 kilograms. How much are estimated direct materials purchases in kilograms?

a) 601,500 kilograms

b) 607,500 kilograms

c) 301,500 kilograms

d) 598,500 kilograms

71. The direct materials budget shows:

Desired ending direct materials 2,000 kilograms

Materials purchased 51,400 kilograms

Beginning inventory on hand 1,200 kilograms

How much are the total direct materials needed for production?

a) 50,600 kilograms

b) 52,600 kilograms

c) 52,200 kilograms

d) 51,400 kilograms

72. Which of the following is needed to prepare a sales budget?

a) the sales forecast

b) number of units of finished goods in inventory

c) the production capacity of the organization

d) estimated cost of goods sold

73. Spirit, Inc. budgeted sales are 433,000 units for January and 420,000 units for February. The company’s policy requires maintaining units on hand at the end of each month equal to 8% of next month's budgeted unit sales. How many units should the company produce in January?

a) 442,700 units

b) 423,300 units

c) 466,600 units

d) 431,960 units

74. Jason Company determined that the budgeted cost of producing a product is $1.20 per unit. On June 1, there were 11,000 units on hand. The sales department budgeted sales of 320,000 units in June. The company’s desired inventory level is 8,000 units June 30. How much is the budgeted cost of goods manufactured for June?

a) $380,400

b) $317,000

c) $323,000

d) $387,600

75. Of the following items, which one is found as the bottom amount on an individual budget?

a) total variable costs

b) required production units

c) cost of production

d) financing needed

76. Why is the sales budget the single most important source in preparing budgets?

a) All the other budgets depend on it.

b) It enables the company to determine the unit cost of products.

c) It is the best determination of profitability of a company.

d) It is the only budget that requires estimates.

77. In what order are the following budgets prepared?

IS. budgeted income statement

P. production budget

SA. selling and administrative budget

MP. materials purchases budget

a) SA, P, MP, IS

b) P, MP, IS, SA

c) P, MP, SA, IS

d) MP, P, SA, IS

78. At January 1, 2022, Ceatric, Inc. has beginning inventory of 10,000 boogie boards. Ceatric estimates it will sell 7,000 units during the first quarter of 2022 with a 7% increase in sales each quarter. Ceatric’s policy is to maintain an ending inventory equal to 14% of the next quarter’s sales. Each surfboard costs $95 and is sold for $130. How much is budgeted sales revenue for the third quarter of 2022?

a) $80,143

b) $910,000

c) $1,041,859

d) $280,500.50

79. Sargent.Com plans to sell 2,000 purple lawn chairs during May, 1,900 in June, and 2,000 during July. The company keeps 15% of the next month’s sales as ending inventory. How many units should Sargent.Com produce during June?

a) 1,915

b) 2,200

c) 1,885

d) not enough information to determine

80. Sudler Production is planning to sell 600 boxes of ceramic tile, with production estimated at 580 boxes during May. Each box of tile requires 44 kilograms of clay mix and a quarter hour of direct labour. Clay mix costs $0.50 per kilogram and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labour costs. Sudler has 2,600 kilograms of clay mix in beginning inventory and wants to have 3,000 kilograms in ending inventory. What is the total amount to be budgeted in kilograms for direct materials to be purchased for the month?

a) 25,520

b) 25,120

c) 25,920

d) 26,800

81. Green Plants plans to sell 160 potted plants during April and 120 units in May. Green Plants keeps 15% of the next month’s sales as ending inventory. How many units should Green Plants produce during April?

a) 154

b) 166

c) 160

d) 178

82. Which of the following is correct regarding the manufacturing overhead budget?

a) The manufacturing overhead budget should include all costs of marketing and advertising.

b) The budget should show only indirect materials and indirect labour.

c) Manufacturing overhead costs should be broken down by cost behaviour.

d) Total budgeted manufacturing overhead should be calculated using a predetermined overhead rate.

83. Tripod Exports, Inc. budgets on an annual basis for its fiscal year. The following beginning and ending inventory levels are planned for the fiscal year of July 1, 2021 to June 30, 2022:

June 30, 2022 June 30, 2021

Raw Materials 3,000 kilos 2,000 kilos

Three kilos of raw materials are needed to produce each unit of finished product. If Tripod Exports plans to produce 280,000 units during the 2021–2022 fiscal year, how many kilos of materials will the company need to purchase for its production during the year?

a) 841,000

b) 843,000

c) 840,000

d) 839,000

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

Beginning inventory in units 300

Sales budgeted for the quarter 114,000

Capacity in units of production facility 118,000

How many finished goods units should be produced during the quarter if the company’s desired inventory level is 800 units at the start of the next quarter?

a) 114,500

b) 113,500

c) 118,500

d) 114,800

85. Skate Rink Company revised its sales budget to show a 15% increase in sales. As a result of this change, which other budgets would change?

a) all of its other budgets

b) only its selling and administrative expenses budget

c) its marketing budget only

d) only its production budget

86. Why might the number of units in the sales budget and the production budget differ?

a) The finished goods inventory levels changed.

b) The direct material inventory levels changed.

c) Excess overhead costs were incurred.

d) Customers returned merchandise.

87. The sales budget for the Johnson Company indicates the following units to be sold:

January 20,000

February 30,000

March 24,000

April 28,000

The company requires that ending inventory be equivalent to 30% of the following month’s sales. There were no units on hand at the end of December. What is the budgeted balance in the company’s ending inventory account at March 31 expected to be?

a) 7,200

b) 8,400

c) 6,000

d) 0

88. The sales budget for the Johnson Company indicates the following units to be sold:

January 20,000

February 30,000

March 24,000

April 28,000

The company requires that ending inventory be equivalent to 30% of the following month’s sales. There were no units on hand at the end of December. What is the production that needs to take place during March?

a) 24,000 units

b) 102,000 units

c) 25,200 units

d) 32,400 units

89. Bixley Company budgets variable manufacturing overhead at 50% of its direct labour costs. The company estimates that 20,000 direct labour hours will be used at an average rate of $11.50 per hour. Bixley’s fixed manufacturing overhead costs are budgeted at $90,000 for the year. The company’s budgeted manufacturing overhead for the year is

a) $320,000.

b) $230,000.

c) $205,000.

d) $115,000.

90. Gottberg Mugs is planning to sell 2,000 mugs and produce 2,200 mugs during April. Each mug requires 2 kilograms of resin and one-half hour of direct labour. Resin costs $1 per kilogram and employees of the company are paid $12.50 per hour. Manufacturing overhead is applied at a rate of 120% of direct labour costs. Gottberg has 2,000 kilograms of resin in beginning inventory and wants to have 2,400 kilograms in ending inventory. How much is the total amount of budgeted direct labour for April?

a) $12,500

b) $13,750

c) $25,000

d) $27,500

91. Looker Hats is planning to sell 1,000 felt hats, and 800 will be produced during June. Each hat requires .75 metres of felt and 1/2 hour of direct labour. Felt costs $5.00 per metre and employees of the company are paid $15 per hour. How much is the total amount of budgeted direct labour for June?

a) $9,750

b) $45,000

c) $6,000

d) $7,500

92. Lewis Production is planning to sell 220 boxes of bricks and produce 200 boxes of bricks during May. Each box of bricks requires 20 kilograms of brick mix and a half hour of direct labour. Brick mix costs $5 per 100 kilograms and employees of the company are paid $12.00 per hour. Manufacturing overhead is applied at a rate of 120% of direct labour costs. Lewis Production has 600 kilograms of brick mix in beginning inventory and wants to have 800 kilograms of brick mix in ending inventory. What is the total amount to be budgeted for manufacturing overhead for the month?

a) $1,440

b) $2,640

c) $2,400

d) $1,200

93. Razmataz Company makes and sells umbrellas. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available:

Variable Cost

Item Per Unit Sold Monthly Fixed Cost

Sales commissions $0.60 $3,000

Shipping $1.20

Advertising $0.30

Depreciation on office equipment $4,000

Office expenses $0.35 $34,000

Expenses are paid in the month incurred. If the company has budgeted to sell 2,000 umbrellas in October, how much is the total budgeted variable selling expenses for October?

a) $41,000

b) $4,600

c) $4,900

d) $3,600

94. Each production worker can produce 5 wooden chairs per hour. During the month of June, Chairs, Inc. has forecasted sales of 100,000 chairs. The beginning inventory was 1,000 chairs, and desired ending inventory is 2,500 chairs. How many hours of direct labour must be budgeted to meet production needs?

a) 20,300

b) 20,000

c) 21,200

d) 19,700

95. Which budget provides the information needed to prepare the direct labour budget?

a) income budget

b) production budget

c) materials budget

d) sales budget

96. Which one of the following expenses would most likely appear on a Selling and Administrative Expense Budget?

a) indirect materials

b) machine depreciation

c) sales commissions

d) indirect labour

97. Which of the following would most likely appear as a fixed expense on the Selling and Administrative Expense Budget?

a) delivery expense

b) factory supervisor salary

c) indirect labour

d) depreciation

98. Which of the following statements about a budgeted income statement is true?

a) It is prepared before the operating budgets are prepared.

b) It reflects the cash to be received and paid as a result of operations.

c) It is prepared after the cash budget is prepared.

d) It is prepared using the individual operating budgets.

99. Which one of the following is a source of information used to prepare the budgeted income statement?

a) cash budget

b) budgeted balance sheet

c) capital expenditures budget

d) selling and administrative expense budget

100. Which one of the following is the end-product of the operating budgets?

a) the budgeted balance sheet

b) the budgeted income statement

c) the capital expenditure budget

d) the cash budget

101. Which one of the following is calculated on a direct labour budget?

a) number of employees needed

b) cost per finished goods unit for labour

c) cost per employee for each unit produced

d) total required direct labour hours

102. What sources of information does a manufacturing company use to determine cost of goods sold?

a) only the sales budget

b) only the cost of purchases budget

c) the materials budget, the labour budget, and the overhead budget

d) the sales and the cost of purchases budget

103. Secret Prizes, Inc. is planning to sell 200 buckets and produce 190 buckets during March. Each bucket requires 500 grams of plastic and one-half hour of direct labour. Plastic costs $10 per 500 grams and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labour costs. Secret Prizes has 300 kilograms of plastic in beginning inventory and wants to have 200 kilograms in ending inventory. How much is the total amount of budgeted direct labour for March?

a) $1,500

b) $3,000

c) $1,425

d) $2,850

104. Sudler Production is planning to sell 700 boxes of ceramic tile, with production estimated at 800 boxes during May. Each box of tile requires 23 kilograms of clay mix and a half hour of direct labour. Clay mix costs $0.75 per kilogram and employees of the company are paid $20.00 per hour. Manufacturing overhead is applied at a rate of 125% of direct labour costs. Sudler has 3,000 kilograms of clay mix in beginning inventory and wants to have 4,000 kilograms in ending inventory. What is the total amount to be budgeted for manufacturing overhead for the month?

a) $10,000

b) $21,800

c) $27,250

d) $1,250

105. Sudler Production is planning to sell 600 boxes of ceramic tile, with production estimated at 580 boxes during May. Each box of tile requires 44 kilograms of clay mix and a quarter hour of direct labour. Clay mix costs $0.50 per kilogram and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate of 110% of direct labour costs. Sudler has 2,600 kilograms of clay mix in beginning inventory and wants to have 3,000 kilograms in ending inventory. What is the total amount to be budgeted for direct labour for the month?

a) $2,175

b) $8,700

c) $2,250

d) $34,800

106. Swingers Company makes and sells widgets. The company is in the process of preparing its Selling and Administrative Expense Budget for the month. The following budget data are available:

Variable Cost

Item Per Unit Sold Monthly Fixed Cost

Sales commissions $1 $5,000

Shipping $3

Advertising $4

Executive salaries $60,000

Depreciation on office equipment $2,000

Other $2 $3,000

Expenses are paid in the month incurred. If the company has budgeted to sell 40,000 widgets in October, how much is the total budgeted selling and administrative expenses for October?

a) $470,000

b) $70,000

c) $465,000

d) $400,000

107. Jaunty Company is preparing its budgeted income statement for the upcoming year. The proper time to prepare this budget is

a) at the start of the budgetary process so that everyone knows the expected income for the year.

b) once the sales budget has been done and approved.

c) prior to the completion of the capital budget for the year.

d) generally towards the end of the budgetary process when most other budgets have been approved.

108. During December, the capital budget indicates a $280,000 purchase of equipment for cash. The ending November cash balance is budgeted to be $40,000. Cash receipts are $840,000, and cash disbursements are $610,000 during December. The company wants to maintain a minimum cash balance of $20,000. What is the minimum cash loan that must be planned to be borrowed from the bank during December?

a) $30,000

b) $10,000

c) $50,000

d) $0

109. Weaver, Inc. has budgeted direct materials purchases of $150,000 in March and $240,000 in April. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. Other costs are all paid during the month incurred. During April, the following items were budgeted:

Wages expense $75,000

Purchase of office equipment 36,000

Selling and administrative expenses 24,000

Depreciation expense 18,000

Accounts Receivable write-offs 10,000

How much is budgeted cash disbursements for April?

a) $324,000

b) $213,000

c) $348,000

d) $366,000

• Customer amounts on account are collected 70% in the month of sale and 30% in the following month.
• Cost of goods sold is 60% of sales.
• Livanos purchases and pays for merchandise 40% in the month of acquisition and 60% in the following month.
• Operating expenses are: Salaries, $50,000; Depreciation, $12,000; Rent, $15,000; and Utilities, $14,000.
• Accounts payable is used only for inventory acquisitions.

110. How much cash will Livanos receive during May from customers?

a) $308,000

b) $311,000

c) $224,000

d) $299,000

111. How much is Livanos’ May 31, 2022 budgeted Accounts Receivable?

a) $320,000

b) $96,000

c) $224,000

d) $311,000

112. How much is Livanos’ budgeted balance for Accounts Payable at May 31, 2022?

a) $124,800

b) $72,000

c) $51,200

d) $76,800

113. Leak Company sells only on credit. It reported the following information for 2022:

September October November December

Budgeted sales $900,000 $800,000 $850,000 $960,000

Customer amounts on account are collected 45% in the month of sale and 55% in the following month. How much is the November 30, 2022 budgeted Accounts Receivable?

a) $467,500

b) $382,500

c) $827,500

d) $528,000

114. Nunnallikash Manufacturing Company has provided the following information for the month of May:

Accounts Payable balance at April 30 $ 29,000

Purchases on account during May 150,000

Cash payments for materials purchased in April 22,000

Cash payments for materials purchased in May 136,000

The accounts payable account is used only for direct materials. How much will Nunnallikash report as accounts payable on the balance sheet at the end of May?

a) $21,000

b) $103,000

c) $8,000

d) $15,000

115. Harrah Company provided the following information for the month of October:

Beginning cash balance $ 35,000

Cash receipts 460,000

Cash disbursements 485,000

Harrah’s policy is to keep a minimum end-of-the-month cash balance of $30,000. How much will Harrah’s need to borrow during August?

a) $20,000

b) $25,000

c) $10,000

d) $0

116. In preparing one of its budgets, Hartz, Inc. used information from both the direct materials and direct labour budgets. Which budget was Hartz preparing?

a) sales budget

b) production budget

c) manufacturing overhead budget

d) cash budget

117. Which one of the following is a financial budget?

a) capital expenditure budget

b) production budget

c) manufacturing overhead budget

d) sales budget

118. Which one of the following includes only financial budgets?

a) cash budget and the operating budget

b) sales budget and the budgeted balance sheet

c) budgeted balance sheet and the cash budget

d) cash budget and the sales budget

119. Which one of the following is the last step in preparing the operating budget?

a) budgeted income statement

b) production budget

c) cash budget

d) budgeted balance sheet

120. Which one of the following is the format of the cash budget?

a) beginning cash balance plus total receipts equals ending cash balance.

b) beginning cash balance plus total receipts less total disbursements equals ending cash balance.

c) total cash receipts minus total cash disbursements equals total available cash.

d) total cash receipts minus total cash disbursements plus beginning cash balance less ending cash balance equals total cash available.

121. Sundy Company provided the following information for the month of August:

Beginning cash balance $ 7,000

Cash receipts 549,000

Cash disbursements 523,000

Sundy borrowed $15,000 and repaid $16,000 during the month. How much will Sundy’s report on its budgeted balance sheet at August 31 for cash?

a) $32,000

b) $33,000

c) $26,000

d) $25,000

122. What information is reflected on the cash budget?

a) all revenues and all expenses for a period

b) the expected cash receipts and cash disbursements from all sources

c) all the amounts that appear on a budgeted income statement

d) all the revenues and cash inflows and all expenses and cash outflows for a period

123. Which one of the following sections appears on a cash budget?

a) Expenses

b) Financing

c) Revenues

d) Sales

124. The following credit sales are budgeted by Polex Electronics:

January $124,000

February 120,000

March 135,000

April 140,000

May 142,000

The company's past experience indicates that 50% of the accounts receivable are collected in the month of sale, 30% in the month following the sale, and 18% in the second month following the sale. Two percent are uncollectible. How much does the company anticipate as cash receipts for March?

a) $132,300

b) $125,820

c) $135,060

d) $122,300

125. A company's past experience indicates that 70% of its credit sales are collected in the month of sale and 28% in the next month. The remainder is never collected. The company’s budgeted credit sales totalled:

January $100,000

February 90,000

March 110,000

How much are expected cash receipts for February?

a) $102,200

b) $88,200

c) $93,800

d) $91,000

126. Which one of the following items would never appear on a cash budget?

a) delivery expense

b) depreciation expense

c) cost of material purchases

d) cash received from customers

127. What is the purpose of the financing section of a cash budget?

a) to indicate amounts that should be borrowed when the ending cash balance is less than the prior year

b) to indicate amounts that should be borrowed when the ending cash balance is less than the amount management desires

c) to indicate amounts that should be borrowed when expenses exceed revenues

d) to comply with GAAP budgeting requirements

128. Which statement about the cash budget is correct?

a) It can show managers when additional financing will be necessary.

b) It can show managers when the company will experience a net loss.

c) It can indicate when sales are insufficient.

d) It is also called the statement of cash flows.

129. Scobee Company’s cash budget showed total available cash less cash disbursements. What does this amount equal?

a) ending cash balance

b) total cash receipts

c) the excess (deficiency) of available cash over cash disbursements

d) the amount of financing required

130. Which statement below describes the budgeted balance sheet?

a) It is a projection of financial position of the company at the end of the budget period.

b) It is developed from the budgeted balance sheet for the preceding year.

c) It is the last operational budget prepared.

d) It shows the costs incurred by the company for the current year.

131. Which of the following are the sections of the cash budget?

a) cash receipts, cash disbursements, financing

b) cash receipts, cash disbursements, expenses

c) capital expenditures, cash receipts, cash disbursements

d) cash revenues, cash expenses, cash receipts, cash disbursements

132. Farley Company reported the following information for 2022:

September October November December January

Budgeted sales $240,000 $310,000 $290,000 $360,000 $200,000

Budgeted purchases $90,000 $120,000 $128,000 $144,000 $88,000

• All sales are on credit.
• Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
• Cost of goods sold is 35% of sales.
• Farley purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
• Accounts payable is used only for inventory acquisitions.

How much cash will Farley receive during November?

a) $145,000

b) $325,000

c) $300,000

d) $290,000

133. Farley Company reported the following information for 2022:

September October November December January

Budgeted sales $240,000 $310,000 $290,000 $360,000 $200,000

Budgeted purchases $90,000 $120,000 $128,000 $144,000 $88,000

• Cost of goods sold is 35% of sales.
• Farley purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
• Accounts payable is used only for inventory acquisitions.

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

a) $48,000

b) $72,000

c) $102,000

d) $51,200

134. Farley Company reported the following information for 2022:

September October November December January

Budgeted sales $240,000 $310,000 $290,000 $360,000 $200,000

• All sales are on credit.
• Customer amounts on account are collected 50% in the month of sale and 50% in the following month.

How much is the November 30, 2022 budgeted Accounts Receivable?

a) $300,000

b) $180,000

c) $155,000

d) $145,000

135. Farley Company reported the following information for 2022:

September October November December January

Budgeted purchases $90,000 $120,000 $128,000 $144,000 $88,000

• Operating expenses are: Salaries, $50,000; Depreciation, $20,000; Rent, $10,000; Utilities, $14,000.
• Operating expenses are paid during the month incurred.
• Accounts payable is used only for inventory acquisitions.

How much is the budgeted amount of cash to be paid for operating expenses in November?

a) $202,000

b) $74,000

c) $94,000

d) $222,000

136. During September, the capital expenditure budget indicates a $140,000 purchase of equipment for cash. The ending September cash balance from operations is budgeted to be $20,000. The company wants to maintain a minimum cash balance of $10,000. What is the minimum cash loan that must be planned to be borrowed from the bank during September?

a) $110,000

b) $120,000

c) $130,000

d) $150,000

137. Lowe Ridge has budgeted its activity for December according to the following information:

1. Sales at $500,000, all for cash.

2. Budgeted depreciation for December is $12,500.

3. The cash balance at December 1 was $57,000.

4. Selling and administrative expenses are budgeted at $35,000 for December and are paid for in cash.

5. The planned merchandise inventory on December 31 and December 1 is $25,000.

6. The invoice cost for merchandise purchases represents 60% of the sales price. All purchases are paid in cash.

How much are the budgeted cash disbursements for December?

a) $347,500

b) $335,000

c) $322,500

d) $509,500

138. Which one of the following is one of the main purposes of preparing a cash receipts and disbursements budget?

a) to find investment opportunities for anticipated surpluses

b) to reconcile cash on hand

c) to determine production needed

d) to determine how many units need to be sold

139. Streak Merchandising Company expects to purchase $60,000 of materials in July and $70,000 of materials in August. Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth is paid for in the month following the month of purchase. In addition, a 2% discount is received for payments made in the month of purchase. How much will cash disbursements for materials purchases be in August?

a) $44,100

b) $54,100

c) $66,450

d) $60,000

140. Jaunty Company is preparing its budgeted balance sheet for the upcoming year. The proper time to prepare this budget is

a) at the start of the budgetary process so that comparisons with last year’s balance sheet can be made.

b) once the capital budget has been done and approved.

c) prior to the completion of the cash budget for the year.

d) generally towards the end of the budgetary process when most other budgets have been approved.

141. Which one of the following budgets would be used by all of the following entities: manufacturing firms, merchandise firms, service firms and not-for-profit organizations?

a) production budget

b) merchandise purchase budget

c) cash budget

d) direct material budget

142. Which one of the following is a critical factor in budgeting for a service company?

a) coordinating professional staff needs with anticipated services

b) determining how to allocate the disproportionate costs

c) budgeting expenditures before anticipated receipts

d) determining client needs

143. Which one of the following budgets would be prepared for a retail company but not for a manufacturer?

a) labour budget

b) cash budget

c) merchandise purchases budget

d) production budget

144. Which one of the following is used by a merchandiser?

a) production budgets

b) manufacturing budgets

c) material purchases budgets

d) merchandise purchases budget

145. Which one of the following is the correct formula for determining budgeted merchandise purchases?

a) budgeted sales + desired ending inventory – beginning inventory

b) budgeted production – sales + beginning inventory – desired ending inventory

c) budgeted sales – cost of goods sold + desired ending inventory – beginning inventory

d) budgeted sales – cost of goods sold + beginning inventory – desired ending inventory

146. Which one of the following lists the entities that use budgets?

a) merchandisers and service companies

b) manufacturing, merchandisers, and service companies

c) service, retail, and wholesale companies

d) manufacturers only

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

a) Labour costs will be disproportionately low.

b) Operating income will be higher because of the additional salaries.

c) Staff turnover may increase.

d) Revenue may be lost.

148. Which one of the following statements is true concerning the master budget for a not-for-profit company?

a) It will include only a budgeted balance sheet.

b) It will include a sales budget for sales revenue.

c) The starting point is expenditures rather than receipts.

d) It is based on revenues and expenses and omits cash flows.

149. Which statement is true concerning budgeting in not-for-profit organizations?

a) It is not necessary since the goal is not profit-oriented.

b) It usually starts with budgeting receipts, following by expenditures.

c) It is based on cash flows rather than revenues and expenses.

d) The budget must be approved by the shareholders.

150. What is the starting point for the development of the master budget by merchandisers?

a) cash budget

b) sales budget

c) selling and administrative expenses budget

d) expenditures budget

151. Company A is a manufacturer and Company B is a merchandiser. What is the difference in the budgets the two entities will prepare?

a) Company A will prepare a production budget, and Company B will prepare a merchandise purchases budget.

b) Company A will prepare a sales forecast, and Company B will prepare a sales budget.

c) Company B will prepare a production budget, and Company A will prepare a merchandise purchases budget.

d) Both companies prepare the same types of budgets.

152. On what basis do not-for-profit entities budget?

a) the cash flow basis

b) an accrual basis

c) the non-profit basis

d) a revenue and expense basis

153. Which one of the following is a budget that would never be prepared by a merchandising company?

a) production budget

b) cost of goods sold budget

c) purchases budget

d) budgeted income statement

154. When looking at the main difference between the budget preparation process of a manufacturing company and that of a service company,

a) manufacturing budgets focus more on the long-range planning components of the process than do service companies.

b) service company budgets focus more on the sales budget than do manufacturing companies.

c) the budget process is more important to a manufacturing company because of the higher level of capital investment involved.

d) the budget process contains the same level of complexity in both types of companies.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

BRIEF EXERCISES

Brief Exercise 155

Key Co. manufactures beanies. The budgeted units to be produced and sold are below:

It takes 5 metres of yarn to produce a beanie. The company's policy to maintain yarn inventory at the end of each month equal to 25% of the next month's production needs and to maintain a finished goods inventory at the end of each month equal to 30% of next month's anticipated production needs. The cost of yarn is $0.75 a metre. At August 1, 4,250 metres of yarn were on hand. Prepare a materials purchases budget for August.

Solution 155

Units to be produced 6,500

Metres needed per unit 5

Metres needed for production 32,500

Add: Desired materials ending inventory (metres) (25% x 7,000 x 5) 8,750

Less: Beginning inventory on hand (metres) (25% x 6,500 x 5) (8,125)

Metres needed to purchase 33,125

Cost per metre $0.75

Budgeted cost of purchases (33,125 metres x $0.75) $24,843.75

Brief Exercise 156

The budget components for McLeod Company for the quarter ended June 30 appear below. McLeod sells garbage cans for $12 each. Budgeted sales of garbage cans for the next four months are:

April 20,000 units

May 50,000 units

June 30,000 units

July 25,000 units

McLeod’s desired ending inventory of garbage cans is equal to 20 percent of the following month’s budgeted sales in units. On March 31, McLeod had 4,000 completed units on hand. The number of garbage cans to be produced in April and May are 26,000 and 46,000, respectively. Seven kilograms of plastic are required for each garbage can. At the end of each month, McLeod’s desired inventory level is 10 percent of the following month’s production material needs. At March 31, McLeod had 18,200 kilograms of plastic on hand. The material used in production costs $0.60 per kilogram. Each garbage can produced requires 0.10 hours of direct labour. How many garbage cans should McLeod produce during the month of June?

Solution 156

Units needed for June sales 30,000

+ Desired ending inventory (20% x 25,000) 5,000

Total units needed 35,000

Less beginning inventory on hand (20% x 30,000) (6,000)

Units to be produced during June 29,000

Brief Exercise 157

The budget components for McLeod Company for the quarter ended June 30 appear below. McLeod sells garbage cans for $12 each. Budgeted sales and production of garbage cans for the next four months are:

McLeod’s desired ending inventory of garbage cans is equal to 20 percent of the following month’s budgeted sales in units. On March 31, McLeod had 4,000 completed units on hand. The number of garbage cans to be produced in April and May are 26,000 and 46,000, respectively. Seven kilograms of plastic are required for each garbage can. At the end of each month, McLeod’s desired inventory level is 10 percent of the following month’s production material needs. At March 31, McLeod had 18,200 kilograms of plastic on hand. The material used in production costs $0.60 per kilogram. Each garbage can produced requires 0.10 hours of direct labour. Determine how much the materials purchases budget will be for the month ending April 30.

Solution 157

Production of garbage cans expected during April (given) 26,000

Kilograms of plastic per garbage can 7

Total kilograms of plastic needed for sales production 182,000

Add: ending plastic inventory desired (10% x 46,000 x 7) 32,200

Total kilograms of plastic needed 214,200

Less beginning inventory of plastic on hand (given) (18,200)

Kilograms of plastic to be purchased 196,000

Cost per kilogram of plastic $0.60

Cost of direct materials purchases $117,600

Brief Exercise 158

The budget components for McLeod Company for the quarter ended June 30 appear below. McLeod sells garbage cans for $12 each. Budgeted production for the next four months is:

McLeod’s desired ending inventory of garbage cans is equal to 20 percent of the following month’s budgeted sales in units. On March 31, McLeod had 4,000 completed units on hand. The number of garbage cans to be produced in April and May are 26,000 and 46,000, respectively. Seven kilograms of plastic are required for each garbage can. At the end of each month, McLeod’s desired inventory level is 10 percent of the following month’s production material needs. At March 31, McLeod had 18,200 kilograms of plastic on hand. The material used in production costs $0.60 per kilogram. Each garbage can produced requires 0.10 hours of direct labour. How much is the cost of the plastic inventory at the end of May?

Solution 158

Cost of ending inventory = [10% x 29,000] x 7 x $0.60 per kilogram = $12,180

Brief Exercise 159

Seas, Inc. makes and sells buckets. Each bucket uses 3/4 kilogram of plastic. Budgeted production of buckets in units for the next five months is as follows:

The company wants to maintain monthly ending inventories of plastic equal to 25% of the following month's budgeted production needs. The cost of plastic is $2.12 per kilogram. Prepare a direct materials purchases budget for the month of May.

Solution 159

Buckets to be produced during May 20,000

Kilograms of plastic needed for each bucket 3/4

Total kilograms of plastic needed for production 15,000

Add: ending inventory, kilograms of plastic desired (25% x 24,000 x 3/4) 4,500

Less: beginning inventory, kilograms of plastic (25% x 20,000 x 3/4) (3,750)

Kilograms of plastic needed to purchase 15,750

Cost per kilogram $2.12

Estimated cost of purchases for May $33,390

Brief Exercise 160

Sheller, Inc. makes and sells a single product, widgets. Three kilograms of wackel are needed to make one widget. Budgeted production of widgets for the next few months follows:

September 14,500 units

October 15,500 units

The company wants to maintain monthly ending inventories of wackel equal to 20% of the following month's production needs. On August 31, 8,700 kilograms of wackel were on hand. The cost of wackel is $1.25 per kilogram. How much is the cost of wackel to be purchased in September?

Solution 160

Expected sales in units during September 14,500

Kilograms of wackel needed per widget 3

Kilograms of wackel need for September sales units 43,500

Add: ending inventory desired (20% × 15,500 units × 3 kilograms) 9,300

Less: beginning inventory on hand (8,700)

Kilograms of wackel needed to purchase 44,100

Cost per kilogram $1.25

Estimated cost of purchases for September $55,125

Brief Exercise 161

Springer, Inc. produces rulers from plastic resin. On March 1, there are 5,000 completed rulers and 5,200 kilograms of resin on hand. Flyer has estimated production and sales of rulers in units for the next 4 months as:

Each ruler requires 0.25 kilograms of resin. The cost of resin is $4.40 per kilogram. Flyer wants to have 20% of the next month’s material requirements on hand at the end of each month. Prepare a direct materials purchases budget for May.

Solution 161

SPRINGER, INC.

Direct Materials Purchases Budget

Month of May

Estimated production for May in units 30,000

Kilograms needed per unit .25

Total kilograms needed for production 7,500

Add ending inventory desired (20% × 32,000 ×.25 kgs) +1,600

Less beginning inventory (20% × 30,000 ×.25 kgs) (1,500)

Kilograms need for production in May 7,600

Cost per kilogram $4.40

Total cost of purchases of materials $33,440

Brief Exercise 162

The Doorjam Company makes the latest in technologically advanced door jams. Its product is in such demand that it needs to protect itself against stock outs of its product. To do so, it calculates that 20% of the next month’s sales be on hand at the end of each month. Budgeted unit sales for the next four months are:

April May June July

Monthly budgeted sales 40,000 50,000 60,000 70,000

Instructions

Calculate the budgeted production for June.

Solution 162

Needs: Sales for June 60,000

Ending inventory 70,000 x 20% 14,000

Less opening inventory 60,000 x 20% (12,000)

Production required in June 62,000

Brief Exercise 163

Salem Company reported the following information for 2022:

• All sales are on credit.
• Credit sales are collected 75% in the month of sale and 25% in the following month.

How much cash will Salem receive during November?

Solution 163

From November sales: $90,000 x 75% = $67,500

From October sales: $80,000 x 25% = $20,000

Total = $67,500 + $20,000 = $87,500

Brief Exercise 164

Salem Company reported the following information for 2022:

 All sales are on credit.

• Credit sales are collected 75% in the month of sale and 25% in the following month.

How much is the November 30, 2022 budgeted Accounts Receivable?

Solution 164

From November sales: $90,000 x 25% = $22,500

Brief Exercise 165

Salem Company reported the following information for 2022:

 Cost of goods sold is 60% of sales.

• Salem purchases and pays for merchandise 80% in the month of acquisition and 20% in the following month.
• Accounts payable is used only for inventory acquisitions.

How much is the budgeted balance for Accounts Payable at November 30, 2022?

Solution 165

From November purchases: $125,000 x 20% = $25,000

Brief Exercise 166

Salem Company reported the following information for 2022:

 Operating expenses are: Salaries, $55,000; Depreciation, $7,000; Rent, $15,000; Utilities, $12,000; Supplies are 2% of current month’s sales and are used during the month acquired.

 Operating expenses are paid during the month incurred.

 Accounts payable is used only for inventory acquisitions.

How much is the budgeted amount of cash to be paid for operating expenses in November?

Solution 166

Operating expenses = salaries + rent + utilities + supplies

$55,000 + $15,000 + $12,000 + (2%)($90,000) = $83,800

Brief Exercise 167

M&H Ltd. budgeted the following information for 2022:

• Cost of goods sold is 50% of sales. Accounts payable is used only for inventory acquisitions.
• M&H purchases and pays for merchandise 50% in the month of acquisition and 50% in the following month.
• Selling and administrative expenses are budgeted at $30,000 for May and are expected to increase 2% per month. They are paid during the month of acquisition. In addition, budgeted Depreciation is $5,000 per month.
• M&H pays $700 per month for its 5% note payable and interest.
• New equipment costing $12,000 will be purchased in June and an additional equipment purchase for $3,000 will be made in July. Depreciation on the new equipment will start in the month of purchase.
• Income taxes are $5,000 for July and are paid in the month incurred.

How much are the budgeted cash disbursements for July?

Solution 167

Cash disbursements:

Cash paid for July purchases (50% x $45,000) $22,500

Cash paid for June purchases (50% x $60,000) 30,000

Cash paid for July selling and admin ($30,000 x 1.02 x 1.02) 31,212

Cash paid for note payment and interest 700

Cash paid for equipment purchased in July 3,000

Cash paid for income taxes 5,000

Total cash disbursements $92,412

Brief Exercise 168

M&H Ltd.’s sales are all on account to customers. The company’s collection pattern is: 40% collected in the month of sale; 50% collected in the month following sale; and the remaining 10% is uncollectible. The accounts receivable balance on March 31 was $70,000, all of which was collectible. The cash balance at the beginning of April was $124,000. Forecasted sales information follows:

Forecasted sales for January $100,000

Forecasted sales for February 90,000

Forecasted sales for March 95,000

Forecasted sales for April 110,000

Forecasted sales for May 130,000

Determine the amount of cash to be collected during the month of March.

Solution 168

Cash collected from February sales: $90,000 x 50% = $45,000

Cash collected from March sales: $95,000 x 40% = 38,000

Cash to be collected during March $83,000

Brief Exercise 169

Cheney Company has budgeted direct materials purchases of $400,000 in March and $600,000 in April. Past experience indicates that the company pays for 65% of its purchases in the month of purchase and the remaining 35% in the next month. Other costs are all paid during the month incurred. During April, the following items were budgeted:

How much is budgeted cash disbursements for April?

Solution 169

Payment of March purchases ($400,000 x 35%) $140,000

Payment of April purchases ($600,000 x 65%) 390,000

Wages expense 120,000

Purchase of office equipment 200,000

Selling and administrative expenses 126,000

Total budgeted cash disbursements $976,000

Brief Exercise 170

Robinson Inc. provided the following information:

• Robinson pays for 40% of merchandise purchases in the month of purchase and 60% in the following month.
• General operating expenses are budgeted to be $31,000 per month, which includes $3,000 of depreciation. Robinson pays operating expenses in the month incurred.
• Robinson makes loan payments of $4,000 per month, which includes $450 in interest and the remainder is principal.

Calculate budgeted cash disbursements for May.

Solution 170

Budgeted cash disbursements for purchases:

Cash paid for May purchases ($78,000 x 40%) $31,200

Cash paid for April purchases ($92,000 x 60%) 55,200

Budgeted cash paid for purchases 86,400

Budgeted cash payments for operating expenses ($31,000 – $3,000) 28,000

Budgeted cash payments for loan ($4,000 – $450) 3,550

Budgeted cash payments for interest 450

Total budgeted cash disbursements for May $118,400

Brief Exercise 171

Trescot, Inc. provided the following information:

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

Calculate Trescot’s budgeted cash disbursements for August.

Solution 171

Cash paid for merchandise purchases:

August purchases: $70,000 x 30% $21,000

July purchases: $65,000 x 70% 45,500

Cash paid for operating expenses ($20,000 − $2,000) 18,000

Cash paid for loan ($3,000 − $400) 2,600

Cash paid for interest 400

Budgeted cash disbursements for August $87,500

Brief Exercise 172

Tomim Co.’s projected sales are as follows:

Tomim 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. How much are Tomim Co.’s budgeted cash receipts for October?

Solution 172

Collections from October sales: $220,000 × 30% $ 66,000

Collections from Sept. sales: $180,000 × 50% 90,000

Collections from August sales: $160,000 × 18% 28,800

Total budgeted cash receipts for October $184,800

Brief Exercise 173

The beginning cash balance is $10,000. Sales are forecasted at $400,000 of which 80% will be on credit. 70% percent of credit sales are expected to be collected in the year of sale. Cash expenditures for the year are forecasted at $250,000. Accounts Receivable from previous accounting periods totalling $6,000 will be collected in the current year. The company is required to make a $10,000 loan payment and an annual interest payment on the last day of every year. The loan balance as of the beginning of the year is $60,000, and the annual interest rate is 10%. How much will be reported as ‘cash’ on the budgeted balance sheet?

Solution 173

Cash collections:

Accounts receivable collected $ 6,000

Cash sales: 20% × $400,000 80,000

Credit sales: (80% × $400,000) × 70% 224,000

Cash expenditures (250,000)

Loan payment (10,000)

Interest payment (10% × $60,000) (6,000)

Net increase in cash 44,000

Add beginning cash balance 10,000

Ending cash balance $ 54,000

Brief Exercise 174

The Springfield Company makes collections on its sales in the following manner:

In the month of sale 40% of sales

In the first month following sale 50% of sales

In the second month following sale 7% of sales

For the upcoming year, sales are budgeted to be as follows:

January $150,000

February 170,000

March 190,000

Instructions

Calculate the budgeted cash collection for Springfield for the month of March.

Solution 174

($190,000 x 40%) + ($170,000 x 50%) + ($150,000 x 7%) = $171,500

EXERCISES

Exercise 175

Brainstorm with a friend on the meaning of budgeting and control. How are budgets used in planning? How are budgets used to control organizational behaviours and outcomes? What are some of the reasons for budgeting?

Solution 175 (6–8 min.)

Answers will vary by student.

Budgets are plans expressed numerically. Budgets are used to translate the plans, goals, and strategies of a company into operational terms.

Control, by contrast, is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned outcomes. Budgets are the standards, and they are compared with actual costs and revenues to provide feedback to managers who can then take measure to remedy the situation.

Budgeting forces management to plan ahead. It also provides information on resource usage information for decision making (and future planning), sets benchmarks for control and evaluation, and improves the function of communication and coordination.

Exercise 176

What features would the ideal budgetary process have?

Solution 176 (6–8 min.)

Budget preparers do try to create budgets that evaluate performance that are based on costs that are actually controllable by managers. Measures other than budgets should be used to measure managerial performance, including reduced attrition rate of employees, employee satisfaction (from surveys), customer satisfaction (from surveys), diminished throughput time, reduced employee absenteeism, and the like. Budgeting should be participative, so that more than just one level of employee has a say; this increases communication throughout all the levels of a company, and shares responsibility for meeting budgets amongst the masses. Budgets should provide routine, timely feedback and incentives for achieving organization-wide goals.

Exercise 177

Fling Company has budgeted the following unit sales for 4 months in 2022:

April 15,000

May 17,000

June 22,000

July 25,000

Of the units budgeted, 35% are sold in the Western Region at an average price of $80 per unit, and the remainder are sold by the Eastern Region at an average price of $85 per unit.

Instructions

a) Prepare a sales budget with columns for each region and for the company in total for the month of June.

b) Sales representatives are compensated as follows:

Monthly base salary: $750

0 to 6,000 units: 3% of selling price

6,001 to 15,000 units: 6% of selling price

15,001 to 25,000 units: 12% of selling price

Over 25,001 units: 15% of selling price

All sales compensation is paid in cash in the month earned.

Based on this information, calculate the amount Fling expects to pay in sales compensation for the month of April.

Solution 177 (10–11 min.)

a)

FLING COMPANY

Sales Budget

For the Month Ending June 30, 2022

Western Region Eastern Region Total

Expected sales in units 22,000 x.35 22,000 x.65 22,000

Selling price per unit $80 $85

Estimated sales for quarter $616,000 $1,215,500 $1,831,500

b)

Western Region Eastern Region

Sales split 35%–65% 15,000 x 35%=5,250 units 15,000 x 65% = 9,750 units

respectively

Base compensation $750 $750

0 to 6,000 units @ 3% of 5,250 units x 3% x 6,000 units x 3% x

sales price $80 = $12,600 $85 = $15,300

6,001 to 15,000 units 0 3,750 units x 6% x

$85= $19,125

Regional Total $13,350 $35,175

Exercise 178

Smackaroos Enterprises manufactures two models of brooms, Model X2 and Model T3. The budgeted units to be produced are as follows:

It takes 1.7 kilograms of direct materials to produce Model X2 and twice as many kilograms of direct materials to produce Model T3. It is the company's policy to maintain an inventory of direct materials on hand at the end of each month equal to 25% of the next month's production needs. The cost per kilogram of materials is $4.50 for T3 while the cost per kilogram of materials for X2 is ½ the cost of the materials for T3.

Instructions

Prepare direct materials budgets for each product for the month of September.

Solution 178 (10–12 min.)

SMACKAROOS ENTERPRISES

Direct Materials Budget

For the Month Ending September 30, 2022

Model X2 Model T3

Units to be produced 7,350 9,000

Direct materials per unit 1.7 kg. 3.4 kg.

Total kilograms needed for production 12,495 30,600

Add: Desired ending direct materials (kilograms) 3,878.125 12,218.75

Total materials required 16,373.125 42,818.75

Less: Beginning direct materials (kilograms) (3,123.75) (7,650)

Direct materials purchases 13,249.375 35,168.75

Cost per kilogram $4.50 $2.25

Total cost of direct materials purchases $59,622.19 $79,129.69

25% x 9,125 units x 1.7 kilograms = 3,878.125 kilograms

25% x 14,375 units x 3.4 kilograms = 12,218.75 kilograms

25% x 7,350 units x 1.7 kilograms = 3,123.75 kilograms

25% x 9,000 units x 3.4 kilograms = 7,650 kilograms

Exercise 179

Clingy Company budgeted the following unit sales:

January 14,000

February 12,000

March 11,000

April 16,000

May 13,000

Each unit requires 2 metres of fabric that is estimated to cost $3.50 per metre. It is company policy to maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated sales. Clingy Company also has a policy of maintaining a raw materials inventory at the end of each month equal to 10% of the metres needed for the following month's production. There were 1,200 metres of fabric on hand at March 1.

Instructions

Prepare a production budget and a direct materials budget for March.

Solution 179 (10–12 min.)

CLINGY COMPANY

Production Budget

For the Month Ending March 31

Expected unit sales 11,000

Desired ending finished goods units (20% x 16,000) 3,200

Total required units 14,200

Less: Beginning finished goods units (20% x 11,000) 2,200

Required production units 12,000

CLINGY COMPANY

Direct Materials Budget

For the Month Ending March 31

Units to be produced 12,000

Multiply by Direct materials per unit 2

Total metres needed for production 24,000

Desired ending direct materials in metres 1,540

Total materials required 25,540

Less: Beginning direct materials in metres 1,200

Direct materials purchases 24,340

Cost per kilogram $3.50

Total cost of direct materials purchases $85,190

10% x [16,000 + (20% x 13,000) − (20% x 16,000)]

Exercise 180

Coliseum Company has budgeted the following unit sales:

The finished goods inventory on hand on December 31, 2021 was 6,000 units. 90% of the next quarter’s sales will come from production during that quarter, and the remainder of next quarter’s sales will come from this quarter’s ending inventory.

Instructions

Prepare a production budget for the second quarter of 2022.

Solution 180 (7–10 min.)

COLISEUM COMPANY

Production Budget

For the Quarter Ended June 30, 2022

Expected unit sales 50,000

Desired ending finished goods units (10% x 40,000) 4,000

Total required units 54,000

Less: Beginning finished goods units (10% x 50,000) 5,000

Required production units 49,000

90% of the third quarter’s sales is 90% x 40,000 = 36,000 units. Therefore, 10% of the 3^rd quarter’s sales come from the 2^nd quarter’s ending inventory, which needs to be 10% x 40,000 units, or 4,000 units in ending inventory.

90% of the second quarter’s sales is 90% x 50,000 = 45,000 units. Therefore, 10% of the 2^nd quarter’s sales come from the 1^st quarter’s ending inventory, which needs to be 10% x 50,000 units or 5,000 units in ending inventory for the first quarter. This then carries forward as beginning inventory for the second quarter.

Exercise 181

The following facts are provided by Breanna Enterprises for March:

• The total kilograms needed for production are 2.5 times the units to be produced.
• The desired ending direct materials inventory is 10% of the total kilograms needed for production in the following month.
• Cost per kilogram is $12.
• Total units to be produced is 280,000 in February, 325,000 in March and 300,000 in April.

Instructions

Determine the direct materials purchases for March.

Solution 181 (8–10 min.)

Units to be produced 325,000

Multiply by Direct materials per unit 2.5

Total kilograms needed for production 812,500

Add: Desired ending direct materials (10% x 300,000 x 2.5) 75,000

Total materials required 887,500

Less: Beginning direct materials (10% x 325,000 x 2.5) 81,250

Direct materials purchases 806,250

Cost per kilogram $12

Total cost of direct materials purchases $9,675,000

Exercise 182

Nolo Enterprises 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 800,000 units.
• Quarterly sales are 20%, 28%, 31%, and 21%, respectively per quarter.
• The sales price is expected to be $2.00 per unit for the first quarter and will then be increased by 10% each subsequent quarter.

Instructions

Prepare a sales budget for the third quarter of 2022 for Nolo Company.

Solution 182 (8–10 min.)

NOLO ENTERPRISES

Sales Budget

For the Quarter Ending September 30, 2022

Unit sales (31% x 800,000) 248,000

Unit selling price (1.1 x 1.1 x $2) $2.42

Total sales $600,160

Exercise 183

The Doorjam Company makes the latest in technologically advanced door jams. Its product is in such demand that it need to protect itself against stock outs. To do so, it determines that 20% of the next month’s sales be on hand at the end of each month. Budgeted unit sales for the next four months are:

April May June July

Monthly budgeted sales 40,000 50,000 60,000 70,000

Instructions

Calculate the budgeted production for June.

Solution 183 (3–5 min.)

Needs: Sales for June 60,000

Ending inventory 70,000 x 20% 14,000

Less opening inventory 60,000 x 20% (12,000)

Production required in June 62,000

Exercise 184

Evans Recycle plans to produce 1,500 recycle bins during April. Each bin requires 1.7 kilograms of plastic and 0.1 hours of direct labour. Plastic costs $2.15 per kilogram. Evans pays its employees $12.50 per hour. Manufacturing overhead is applied at a rate of 150% of direct labour costs. Finished plastic lids are purchased separately from another supplier. Evans has 400 kilograms of plastic in beginning inventory and wants to have 550 kilograms in ending inventory.

Instructions

a) How many kilograms of plastic direct materials should Evans plan to buy during April?

b) How much should Evans budget for direct labour for April?

c) How much manufacturing overhead will be charged to each recycle bin in April?

d) What is the cost per unit of the bins produced in April?

Solution 184 (10–12 min.)

a)

Units to be produced 1,500

Kilograms per bin 1.7

Total kilograms needed for production 2,550

Add: desired ending inventory 550

Subtract: beginning inventory on hand (400)

Purchases of plastic needed in kilograms 2,700

b)

Units to be produced 1,500

Labour required per unit 0.1

Hours required 150

Cost per hour $12.50

Total labour budgeted $1,875

c)

Direct labour costs (from part b) $1,875

Application rate 150%

Total overhead to allocate 2,812.50

Units to be produced 1,500

Overhead per unit $1.875

d)

Direct materials per unit (1.7 kgs. x $2.15 per kg) $ 3.655

Direct labour ($1,875/1,500 units) 1.250

Factory overhead ($2,812.50/1,500 units) 1.875

Total cost per unit $6.78

Exercise 185

Harocase Company currently pays it employees $14 per hour. The company is preparing its direct labour budget for 2022 from the following production budget based on a calendar year:

Quarter Units

1 60,000

2 70,000

3 50,000

4 80,000

Each unit requires 75 minutes of direct labour. The union contract provides for an 8% increase in wage rate on July 1.

Instructions

Prepare a direct labour budget for the third quarter of 2022.

Solution 185 (7–9 min.)

HAROCASE COMPANY

Direct Labour Budget

For the Quarter Ending September 30, 2022

Units to be produced 50,000

Direct labour hours per unit (75/60) 1.25

Total required direct labour hours 62,500

Direct labour cost per hour ($14 x 1.08) $15.12

Total direct labour cost $945,000

Exercise 186

Trickle Bakery 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: 34,000 units

2. Unit selling price: $8

3. Variable costs per dollar of sales:

Sales commissions 7%

Delivery expense 1%

Advertising 5%

4. Fixed costs per quarter:

Sales salaries $15,000

Office salaries 14,000

Depreciation 3,000

Insurance 1,000

Utilities 3,000

Instructions

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

Solution 186 (8–10 min.)

TRICKLE BAKERY

Selling and Administrative Expense Budget

For the Quarter Ended March 31, 2022

Variable expenses

Sales commissions (34,000 x $8 x 7%) $19,040

Delivery expense (34,000 x $8 x 1%) 2,720

Advertising (34,000 x $8 x 5%) 13,600

Total variable 35,360

Fixed expenses

Sales salaries $15,000

Office salaries 14,000

Depreciation 3,000

Insurance 1,000

Utilities 3,000

Total fixed 36,000

Total selling and administrative expenses $71,360

Exercise 187

In September 2022, the budget committee of Fidelity Company assembled the following data:

1. Expected Sales

October $400,000

November 420,000

December 450,000

2. Cost of goods sold is expected to be 45% of sales.

3. Purchases for October are $180,900.

4. Desired ending merchandise inventory is 10% of the next month's cost of goods sold.

Instructions

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

Solution 187 (9–12 min.)

FIDELITY COMPANY

Budgeted Income Statement

For the Month Ending October 31, 2022

Sales $400,000

Cost of goods sold

Inventory, October 1 (10% x $400,000 x 45%) $ 18,000

Purchases 180,900

Cost of goods available for sale 198,900

Less: Inventory, October 31 (10% x $420,000 x 45%) 18,900

Cost of goods sold 180,000

Gross profit $220,000

.45 x $400,000 = $180,000

Exercise 188

Fructose Company currently pays it employees $21 per hour. The company is preparing its direct labour budget for 2022 from the following production budget based on a calendar year:

Quarter Units

1 90,000

2 105,000

3 75,000

4 120,000

Each unit requires 30 minutes of direct labour. The union contract provides for a 2% increase in wage rate on Apr 1.

Instructions

Prepare a direct labour budget for the second quarter of 2022.

Solution 188 (7–9 min.)

FRUCTOSE COMPANY

Direct Labour Budget

For the Quarter Ending June 30, 2022

Units to be produced 105,000

Direct labour hours per unit (30/60) 0.50

Total required direct labour hours 52,500

Direct labour cost per hour ($21 x 1.02) $21.42

Total direct labour cost $1,124,550

Exercise 189

Candy Treats expects variable costs to fluctuate with the production volume based on the following rates per direct labour hour: indirect materials $1.50; indirect labour $2.10; utilities $0.60; and maintenance $0.30. To produce 5,000 units will require 15,000 direct labour hours. Fixed costs include supervisory salaries $12,000; depreciation $6,000, property taxes $3,000, insurance $1,000 and utilities $2,000.

Instructions

Prepare a manufacturing overhead budget for the first quarter of 2022.

Solution 189 (8–10 min.)

CANDY TREATS

Manufacturing Overhead Budget

For the Quarter Ended March 31, 2022

Variable costs

Indirect materials ($1.50/hr. X 15,000 hrs.) $22,500

Indirect labour ($2.10/hr. x 15,000 hrs.) 31,500

Utilities ($0.60/hr. x 15,000 hrs.) 9,000

Maintenance ($0.30/hr. x 15, 000 hrs.) 4,500

Total variable costs 67,500

Fixed costs

Supervisory salaries $12,000

Depreciation 6,000

Property taxes 3,000

Insurance 1,000

Utilities 2,000

Total fixed costs 24,000

Total manufacturing overhead $91,500

Exercise 190

Soster makes and sells candles. Each candle uses 0.6 kilogram of wax. Budgeted production of candles in units for the next five months is as follows:

The company wants to maintain monthly ending inventories of wax equal to 25% of the following month's budgeted production needs. There were 1,300 kilograms of wax on hand on March 31 and 900 kilograms at March 1. The cost of wax is $0.75 per kilogram. Soster pays 45% of merchandise purchases in the month purchased and 55% in the following month.

Instructions

a) Prepare a direct materials purchases budget for the April.

b) Determine how much cash will be paid for purchases during April.

Solution 190 (12–14 min.)

a)

SOSTER INC.

Direct Materials Purchases Budget

Month of April

Candles to be produced during April 17,000

Kilograms of wax per candle 0.6

Kilograms of wax needed for production 10,200

Add: desired kilograms of wax in ending inventory (April 30) (18,000 x 0.6 x 25%) 2,700

Total kilograms of wax needed 12,900

Less: kilograms of wax on hand in beginning inventory (April 1) (1,300)

Kilograms of wax to be purchased 11,600

Cost per kilogram of wax $0.75

Cost of material purchases during April $8,700

b)

Candles to be produced during March 20,000

Kilograms of wax per candle 0.60

Kilograms of wax needed for production 12,000

Add: ending inventory (March 31) 1,300

Total kilograms of wax needed 13,300

Less: beginning inventory (March 1) (900)

Total kilograms of wax to be purchased 12,400

Cost per kilogram of wax $0.75

Cost of material purchases during March $9,300

Cash paid for purchases during April:

March: $9,300 x 55% $5,115

April: $8,700 x 45% 3,915

Total $9,030

Exercise 191

Royal Bank of Canada has asked Maquire and Ferlow Ltd. 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 $26,000 at December 31, 2022.

2. The 2022 sales budget shows total annual sales of $500,000. All sales are made on account and accounts receivable at December 31, 2022 are expected to be 8% of annual sales.

3. The merchandise purchases budget shows budgeted cost of goods sold for 2022 of $210,000 and ending merchandise inventory of $21,000. 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 $127,000, Accumulated Depreciation $52,000, Common Shares $68,000, and Retained Earnings $21,000.

5. The budgeted income statement for 2022 includes the following: depreciation on equipment $6,000, federal income taxes $21,000, and net income $41,800. The income taxes will not be paid until 2023.

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.

Instructions

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

Solution 191 (14–18 min.)

MAQUIRE AND FERLOW LTD.

Budgeted Balance Sheet

December 31, 2022

Assets

Cash $ 26,000

Accounts receivable (8% x $500,000) 40,000

Merchandise inventory 21,000

Equipment $127,000

Less: Accumulated depreciation ($52,000 + $6,000) 58,000 69,000

Total assets $156,000

Liabilities and Shareholders' Equity

Accounts payable (20% x $21,000) $ 4,200

Income taxes payable 21,000

Common stock 68,000

Retained earnings ($21,000 + $41,800) 62,800

Total liabilities and stockholders' equity $156,000

Exercise 192

Markus Corporation's sales of gizmos are 10% for cash and 90% on credit. Past collection history indicates that credit sales are collected as follows:

25% in the month of sale

70% in the month following sale

5% in the second month following sale

In January, sales were $39,000 and in February, sales were $43,000. Projected sales for March are 4,000 gizmos at $9 each. Projected sales for April are 4,700 gizmos at $11 each. The cash balance at March 1 was $7,350.

Markus expects to purchase $22,000 of materials in February and $19,000 of materials in March. Three-quarters of all purchases are paid for in the month of purchase, and the other one-fourth is paid for in the month following the month of purchase. In addition, a 3% discount is allowed for payments made in the month of purchase. All other fixed expenses are $6,570 per month and are paid in the month of purchase.

Instructions

a) Prepare a cash budget for March.

b) Why is the cash budget important?

Solution 192 (9–12 min.)

a)

MARKUS CORPORATION

Cash Budget

Month of March

Cash collections:

From March credit sales [(4,000 x $9) x 90% x 25%] $ 8,100

From cash sales [(4,000 x $9) x 10%] 3,600

Cash collections from February sales ($43,000 x 90% x 70%) 27,090

Cash collections from January sales ($39,000 x 90% x 5%) 1,755

Total budgeted cash receipts during March $40,545.00

Cash payments:

From February’s purchases ($22,000 x 25%) $ 5,500.00

From March’s purchases ($19,000 x 75%) x.97 13,822.50

Other fixed expenses 6,570.00

Total budgeted cash payments during March 25,892.50

Net cash receipts over payments 14,652.50

Beginning cash balance 7,350.00

Ending cash balance $22,002.50

b) Cash budgets are critical for owners of businesses like Markus’s because managers need to actively manage cash flows. Often a company’s operating cash flow may need to be supplemented with debt, such as a line of credit, for some months where the payments may exceed receipts.

Exercise 193

Carlson Company has budgeted sales revenue as follows for the next 6 months:

January $ 90,000

February 100,000

March 80,000

April 70,000

May 110,000

June 60,000

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, 35% in the month following the sale, and 3% in the second month following the sale. The other 2% is uncollectible.

Instructions

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

b) Do the remaining 2% of accounts that are uncollectible represent a cash disbursement for the month? Explain.

Solution 193 (7–9 min.)

a) CARLSON COMPANY

Expected Cash Receipts from Sales

For the Month Ended May 31

March sales

Credit sales: ($80,000 x.80 x.03) $ 1,920

April sales

Credit sales: ($70,000 x.80 x.35) 19,600

May sales

Credit sales: ($110,000 x.80 x.60) 52,800

Cash sales: ($110,000 x.20) 22,000

Total cash receipts $96,320

b) No, the remaining 2% does not represent a cash disbursement for the month. In fact, those accounts are never collected, so there is no cash paid out by the company for their non-collection.

Exercise 194

Sushi House has budgeted sales revenues as follows:

June July August

Credit sales $85,000 $80,000 $72,000

Cash sales 14,000 25,000 32,000

Total sales $99,000 $105,000 $104,000

Past experience indicates that 70% of the credit sales will be collected in the month of sale and the remaining 30% will be collected in the following month. Purchases of inventory are all on credit and 60% is paid in the month of purchase and 40% in the month following purchase. Budgeted inventory purchases are:

June $45,000

July 43,000

August 40,000

Other cash disbursements budgeted include selling and administrative expenses of $14,000 each month, dividends of $30,000 will be paid in July, and purchase of a computer in August for $3,000 cash. The company wishes to maintain a minimum cash balance of $20,000 at the end of each month. The company borrows money from the bank at 9% interest if it is necessary to maintain the minimum cash balance and interest must be paid each month whether there is a loan repayment or not. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $25,000. All amounts borrowed during a month are borrowed on the first day. The loan balance as of July 1 is $26,000.

Instructions

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

Solution 194 (12–16 min.)

SUSHI HOUSE, INC.

Cash Budget

For the Month Ending July 31

Beginning cash balance $25,000

Add: Receipts

Collections from customers:

July sales [$25,000 + ($80,000 x 70%)] $81,000

June sales [$85,000 x 30%] 25,500

Total receipts 106,500

Total available cash 131,500

Less: Disbursements:

Purchases during July (60% x $43,000) $25,800

Purchases during June (40% x $45,000) 18,000

Selling and administrative expenses 14,000

Dividends 30,000

Total disbursements 87,800

Excess of available cash over disbursements 43,700

Financing

Repayments—interest (.09/12 x $26,000) (195)

Repayments—principal ($23,700 excess – $195 interest) (23,505)

Ending cash balance $20,000

Exercise 195

The sales manager of EKP Inc. has estimated sales for January, February, March, and April to be $70,000, $75,000, $83,000, and $90,000 respectively. Further, the manager expects that 10% of the sales will be for cash, and the collection of the credit sales will be made as follows:

Month of sale 60%

Month following the sale 20%

Second month following the sale 15%

The remaining credit sales are uncollectable.

Instructions

a) Determine the cash collections for March.

b) If EKP Inc.’s cash balance is $9,685 on March 1, cash expenditures are projected to equal $83,450 for March, and management wants a minimum cash balance of $7,000, how much does EKP Inc. need to borrow in March?

Solution 195 (7–9 min.)

a) Collections from Customers

January sales ($70,000 x.90 x.15) $ 9,450

February sales ($75,000 x.90 x.20) 13,500

March cash sales ($83,000 x.10) 8,300

March credit sales ($83,000 x.90 x.60) 44,820

Total collections $76,070

b) Beginning cash balance $ 9,685

Add: cash receipts 76,070

Cash available 85,755

Less: cash disbursements 83,450

Excess (deficiency) of available cash over disbursements 2,305

Financing:

Borrowing 4,695

Ending cash balance $7,000

Exercise 196

Mrs. Claus’ Things specializes in sales of Christmas decorations. Therefore, the company’s sales are seasonal. Budgeted figures for 2022 are presented below.

Quarter

1 2 3 4

Budgeted Sales $80,000 $60,000 $120,000 $460,000

From past experience, Mrs. Claus’ Things has determined that 60% of its credit sales are collected in the quarter of sale and 40% are collected in the quarter following the sale. Fourth quarter sales for 2021 totalled $420,000.

Instructions

Determine Mrs. Claus’ Things’ cash collections for the third quarter of 2022.

Solution 196 (4–7 min.)

Second quarter ($60,000 ×.40) $24,000

Third quarter ($120,000 ×.60) 72,000

Total cash collections $96,000

Exercise 197

OJ Small Company needs a cash budget for the month of April, 2022. The company’s controller has provided you with the following information and assumptions:

1. The April 1, 2022 cash balance is expected to be $11,000.

2. All sales are on account. Credit sales are collected over a three-month period—50 percent in the month of sale, 35 percent in the month following sale, and 15 percent in the second month following sale. Actual sales for February and March were $100,000 and $90,000, respectively. April’s sales are budgeted at $110,000.

3. Marketable securities are expected to be sold for $25,000 during the month of April.

4. The controller estimates that direct materials totalling $44,000 will be purchased during April. Sixty percent of a month’s raw materials purchases are paid in the month of purchase with the remaining 40 percent paid in the following month. Accounts payable for March purchases total $9,000, which will be paid in April.

5. During April, direct labour costs are estimated to be $19,000.

6. Manufacturing overhead is estimated to be 40 percent of direct labour costs, Further, the controller estimates that approximately 10 percent of the manufacturing overhead is depreciation on the factory building and equipment.

7. Selling and administrative expenses are budgeted at $22,000 for April. Of this amount, $7,000 is for depreciation.

8. During April, OJ Small Company plans to buy a new delivery van costing $25,000. The company will pay cash for the van.

9. OJ Small Company owes $35,000 in income tax, which must be paid in April.

10. OJ Small Company must maintain a minimum cash balance of $10,000. To bolster the cash position as needed, an open line of credit is available from the bank.

Instructions

Prepare the following:

a) A schedule of cash collections for April.

b) A schedule of cash payments for raw materials for April.

c) A cash budget for the month of April. Indicate in the financing section any borrowing that will be necessary during the month.

Solution 197 (15–18 min.)

a) Cash Receipts b) Cash Payments for Merchandise

.50 × $110,000 = $55,000 .60 × $44,000 = $26,400

.35 × $90,000 = 31,500 Accounts payable 9,000

.15 × $100,000 = 15,000 Total $35,400

Total $101,500

c)

OJ SMALL COMPANY

Cash Budget

For the Month Ending April 30, 2022

Beginning cash balance $ 11,000

Add: Receipts

Collections from customers $101,500

Sales of securities 25,000

Total receipts 126,500

Total available cash 137,500

Less: Disbursements

Direct materials 35,400

Direct labour 19,000

Manufacturing overhead ($19,000 x.40) x.90 6,840

Selling and administrative expenses ($22,000 – $7,000) 15,000

Purchase of van 25,000

Income tax expense 35,000

Total disbursements 136,240

Excess (deficiency) of available cash over disbursements 1,260

Financing

Borrowings 8,740

Ending cash balance $ 10,000

Exercise 198

Sales for January, February and March are expected to be $200,000, $180,000 and $220,000 respectively for Cito Gaston Inc. All sales are on account, with terms 2/15, net 30, and are collected as follows: 50% in the month of the sale, and the remaining 50% in the month following the sale. One-half of all sales discounts are taken on the average. Materials are purchased one month before being needed in production. All purchases and expenses are paid for as incurred. Activities for the quarter are expected to be:

January February March

Materials used $40,000 $36,000 $44,000

Salaries $70,000 $68,000 $72,000

Maintenance 18,000 $18,000 $18,000

Depreciation $36,000 $36,000 $36,000

Water and heat $14,000 $14,000 $14,000

Dividends paid to shareholders Nil $10,000 Nil

Debt repayment on bonds $8,000 $8,000 $8,000

Instructions

Prepare a cash budget, showing inflows and outflows, for February.

Solution 198 (7–9 min.)

Cash receipts:

Sales

January ($200,000 x 0.50 x.99) $ 99,000 (Average discount is 1%,or 2% x ½)

February ($180,000 x 0.50 x.99) 89,100

Total cash receipts $188,100

Cash disbursements:

Materials $44,000

Salaries 68,000

Maintenance 18,000

Water and heat 14,000

Dividends paid 10,000

Debt repayment on bonds 8,000 162,000

Net cash inflow $ 26,100

Exercise 199

The Springfield Company makes collections on its sales in the following manner:

In the month of sale 40% of sales

In the first month following sale 50% of sales

In the second month following sale 7% of sales

For the upcoming year, sales are budgeted to be as follows:

January $150,000

February 170,000

March 190,000

Instructions

Calculate the budgeted cash collections for Springfield for the month of March.

Solution 199 (3–5 min.)

($190,000 x 40%) + ($170,000 x 50%) + ($150,000 x 7%) = $171,500

Exercise 200

Clark and Associates provides accounting services. It is preparing its quarterly budgeted income statement for 2022. Ms. Clark anticipates that billable hours in the first quarter of 2022 will increase by 5% over the same quarter of the preceding year, and by 6% in the second quarter. There were 700 billable hours in the first quarter of 2021, and 600 in the second quarter. Ms. Clark billed clients $200 per hour in 2021, and due to strong competition is unable to raise that rate for the foreseeable future.

Salary expenses for both accountants and support staff are $20,000 plus 70% of revenue per quarter. Income tax is 30%. Other quarterly expenses are estimated to be as follows:

Rent expense $4,500

Depreciation 700

Utilities expense 2,100

Miscellaneous expenses 5% of revenue

Instructions

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

Solution 200 (12–15 min.)

CLARK AND ASSOCIATES

Budgeted Income Statement

For the Quarter Ending March 31, 2022

Revenue (700 hours x 1.05 x $200/hour) $147,000

Operating expenses

Salary expense ($20,000 + [$147,000 x 0.70]) $122,900

Rent expense 4,500

Depreciation 700

Utilities expense 2,100

Miscellaneous expenses ($147,000 x 0.05) 7,350

Total Expenses 137,550

Income before income tax 9,450

Income tax expense (9,450 x 30%) 2,835

Net Income $ 6,615

Exercise 201

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

1. Expected Sales

October $700,000

November 800,000

December 600,000

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

3. Desired ending merchandise inventory is 12% of the next month's cost of goods sold.

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

Instructions

Calculate the budgeted merchandise purchases for November.

Solution 201 (7–9 min.)

WHITEHORSE COMPANY

Merchandise Purchases Budget

For the Month of November, 2022

Budgeted cost of goods sold (60% x $800,000) $480,000

Desired ending merchandise inventory (12% x 60% x $600,000) 43,200

Total 523,200

Less: Beginning merchandise inventory (12% x 60% x $800,000) 57,600

Required merchandise purchase $465,600

Exercise 202

In June 2022, the management of McBride Company assembles the following data in preparation of budgeted merchandise purchases for the months of July, August, and September.

1. Expected Sales

July $1,050,000

August 1,200,000

September 900,000

2. Cost of goods sold is expected to be 55% of sales.

3. Desired ending merchandise inventory is 8% of the next month's cost of goods sold.

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

Instructions

Calculate the budgeted merchandise purchases for August.

Solution 202 (7–9 min.)

MCBRIDE COMPANY

Merchandise Purchases Budget

For the Month of August 2022

Budgeted cost of goods sold (55% x $1,200,000) $660,000

Desired ending merchandise inventory (8% x 55% x $900,000) 39,600

Total 699,600

Less: Beginning merchandise inventory (8% x 55% x $1,200,000) 52,800

Required merchandise purchase $646,800

COMPLETION STATEMENTS

203. A ___ is a formal written summary or statement of management's plans expressed in financial terms.

204. A budget is a primary means of ___ agreed upon objectives throughout the business organization.

205. Effective budgeting is dependent on an ___ in which authority and responsibility are clearly defined.

206. The budget should have the support of ___ and should be an important basis for ___ by comparing actual results to expected results.

207. Many companies use ___ budgets by dropping the month just ending and adding a future month.

208. A ___, which is often headed by a budget director, is responsible for coordinating the preparation of the budget in many companies.

209. A major difference between the annual budget and long-range planning is the ___ over which the data pertain.

210. The ___ is a set of interrelated budgets that constitutes a plan of action for a specified period of time.

211. The ___ is the starting point in preparing the master budget.

212. The formula for developing a production budget is ___ plus ___ minus ___.

213. Operating expenses are combined into one budget called the ___ budget.

214 The revenues reported on the budgeted income statement for a manufacturing company are taken from the ___ budget.

215. Three major sections of a cash budget are (1) ___, (2) ___, and (3) ___.

216. The two major differences between the master budgets of merchandisers and manufacturers are that the merchandiser will use a ___ budget instead of a ___ budget and will not use the ___ budgets.

ANSWERS TO COMPLETION STATEMENTS

203. budget

204. communicating

205. organizational structure

206. top management, evaluating performance

207. continuous twelve-month

208. budget committee

209. time period

210. master budget

211. sales budget

212. budgeted sales units, desired ending finished goods units, beginning finished goods units

213. selling and administration expenses

214. sales

215. cash receipts, cash disbursements, financing

216. merchandise purchases, production, manufacturing

MATCHING

217. Match the items below by entering the appropriate code letter in the space provided.

A. Budget F. Production budget

B. Financial budgets G. Cash budget

C. Budget committee H. Long-range planning

D. Master budget I. Direct materials budget

E. Sales forecast J. Sales budget

____ 1. A selection of strategies to achieve long-term goals.

____ 2. An estimate of expected sales for the budget period.

____ 3. Budgets that indicate the cash resources needed for expected operations and planned capital expenditures.

____ 4. The projection of potential sales for the industry and the company's expected share of such sales.

____ 5. Management's plans expressed in financial terms for a specified future time period.

____ 6. A projection of anticipated cash flows.

____ 7. A group responsible for coordinating the preparation of the budget.

____ 8. A projection of production requirements to meet expected sales.

____ 9. A set of interrelated budgets that constitute a plan of action for a specified time period.

____ 10. An estimate of the quantity and cost of direct materials to be purchased.

218. A list of budgets and some assigned budget codes appear below:

Budget Code:

DM Direct Materials Budget

DL Direct Labour 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

Instructions

For each item listed in below, 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.

1. Interest expense

2. Ending raw materials inventory (in dollars)

3. Ending finished goods inventory (in dollars)

4. Ending cash balance

5. Total selling and administrative expenses

6. Total sales (in dollars)

ANSWERS TO MATCHING

217.

1. H

2. J

3. B

4. E

5. A

6. G

7. C

8. F

9. D

10. I

218.

1. Interest expense C, BIS

2. Ending raw materials inventory (in dollars) BBS, DM

3. Ending finished goods inventory (in dollars) BBS, BIS

4. Ending cash balance BBS, C

5. Total selling and administrative expenses SA, BIS

6. Total sales (in dollars) S, BIS

SHORT-ANSWER ESSAY QUESTIONS

SAE 219

Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly.

Solution 219

When budgets are used properly, positive results can include: managers are required to plan ahead, there are definite objectives for performance evaluation, there is an early warning system for potential problems, there is coordination of activities within the business, there is greater management awareness of the entity's overall operations, and there are positive behaviour patterns by motivating personnel to meet planned objectives. However, if budgets are not implemented properly, negative results can include discouragement of additional effort to meet goals, poor morale of managers, and lack of commitment to budget goals.

SAE 220

Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives. Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions.

Solution 220

Budgeting is preparing a detailed formal written summary of management's plans for a specified future time period (usually one year), in financial terms. Long-range planning involves the selection of strategies to achieve long-term (at least five years) goals and the development of policies and plans to implement the strategies. Budgeting and long-range planning differ in time periods involved, emphasis, and the amount of detail presented. Budgets help managers in planning and controlling operations for the coming year, while long-range planning assists managers in broad long-term goal-setting, policy development, and planning.

SAE 221

Ken Clarke is a new production manager. After a great deal of effort, including considerable market research, he completes his budget and submits it to his boss, Diane Jackson. Without even looking at it, she asks him what his "fudge factor" was, and which items contained the most slack. Ken, very surprised, responds that he doesn't use any "fudge factor," and that all his figures are honest. Ms. Jackson counters by asking him how he would respond if he had to cut about 20% from his budget, as it is. She tells him that most budgets are trimmed in committee, and he had better be ready. She returns the budget to him, and tells him to come back with something reasonable.

Instructions

a) Is it ethical to build slack into a budget? Explain.

b) Was it ethical for Ms. Jackson to refuse to accept a budget without slack? Briefly explain.

Solution 221

a) Either answer may be correct. Slack may be seen as an estimate of how much the actual results may vary from the predictions. As such, it is perfectly legitimate to add some slack, as in this case. On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget anticipating that the amount to be trimmed will not exceed the amount of the padding. The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed. Any secretive method of adding padding to one's own budget would be unethical.

b) As Ken Clarke's superior, Ms. Jackson has the obligation to correct his mistakes. Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company. Ken must continue to be honest. One way to do that would be for Ken to submit his trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much. This would give Ms. Jackson the ability to intelligently defend his budget while in committee.

SAE 222

At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Ed Tucker, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process.

Instructions

You are the accounting manager. Write a memo to Mr. Tucker. Explain why the ending inventory figure should be extremely accurate, with as little slack as possible.

Solution 222

TO: Ed Tucker

FROM: Mary Barnes

SUBJECT: Budgets

At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions. You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well.

Please reconsider adding slack to the ending inventory estimates. Those estimates are used by all other departments in calculating their budgets. In other words, they rely on your figures being accurate. If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce. If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage. We will also have spent money to produce more units than the next department can use.

I understand your desire to ensure that your budgets are reasonable. However, I am sure also that you see that we depend upon your inventory numbers. Please make sure that these numbers are as precise as possible.

(signed)

SAE 223

Discuss the staffing problems a firm could face when budgeting for a service enterprise in terms of over/under staffing.

Solution 223

If a firm is overstaffed, several problems may result: (1) Labour costs will be disproportionately

high. (2) Profits will be lower because of the additional salaries. (3) Staff turnover may increase

because there is not enough challenging work. In contrast, if an enterprise is understaffed, it

may lose revenue because it cannot meet the existing and potential needs of clients for services. Also, professional staff may look for other jobs because their workloads are too heavy.

MULTI-PART QUESTION

224. Overcast Umbrellas is budgeting its sales for its top-of-the-line umbrella, Number 142, as 50,000 units for the month of March. To make one of these umbrellas, two metres of nylon fabric are required. Actual beginning and ending inventories of the nylon fabric and Number 142 are as follows:

March 1 March 31

Nylon fabric

Raw material 90,000 m 130,000 m

Work in progress inventory 0 m 0 m

Number 142 25,000 units 35,000 units

Instructions

Calculate the amount of material that Overcast should purchase in March.

Solution 224 (10–15 min.)

Number 142 Sales 50,000

Ending inventory 35,000

Total needs 85,000

Less opening inventory (25,000)

60,000

Direct Material A

Required for production 60,000 x 2 m 120,000

Ending inventory 130,000

Total needs 250,000

Less opening inventory (90,000)

160,000

225. Pink House Ltd. sells plastic pink flamingos. The following operating expenses were provided for the month of April 2022:

Sales salaries $25,000

Advertising 3% of monthly sales

Sales commissions 2.5% of monthly sales

Delivery expenses $2,500

Rent expense $10,500

Amortization $580

Utilities $800

Insurance $1,200

Telephone $600

• The company budgets cost of goods sold to be 55% of total sales. Expected sales for April and May are $850,000 and $925,000, respectively.
• The company maintains a merchandise inventory of 20% of the following months cost of goods sold.
• The company’s income tax rate is 30%.

Instructions

a) Prepare a merchandise purchases budget for April 2022.

b) Prepare a budgeted income statement for April 2022, showing details for cost of goods sold.

Solution 225 (15–18 min.)

a) Merchandise Purchases Budget

PINK HOUSE LTD.

Merchandise Purchases Budget

Month Ending April 30, 2022

Budgeted cost of goods sold ($850,000 x 55%) $467,500

Plus: Desired ending merchandise inventory

($925,000 x 55% x 20%) 101,750

Total 569,250

Less: Beginning merchandise inventory

($467,500 x 20%) 93,500

Budgeted merchandise purchases for April $475,750

b) Budgeted Income Statement

PINK HOUSE LTD.

Budgeted Income Statement

Month Ending April 30, 2022

Sales $850,000

Cost of Goods Sold:

Beginning merchandise inventory $ 93,500

Purchases 475,750

Total goods available for sale 569,250

Less: Ending merchandise inventory 101,750

Cost of Goods Sold 467,500

Gross profit 382,500

Selling and administrative expenses (A) 87,930

Income from operations 294,570

Income tax expense 88,731

Net income $206,199

(A) $25,000 + ($850,000 x 3%) + ($850,000 x 2.5%) + $2500 + $10,500 + $580 + $800 + $1200 + $600 = $87,930

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