Revised Summer 2016 Exam Review

BUDGETING AND PROFIT PLANNING

Key Topics to Know

• Major benefits of budgeting and how and why budgets are used.
• Sequence in which the budgets are prepared.
• Prepare a Sales Budget and Schedule of Expected Cash Collections.
• Prepare a Production Budget.
• Prepare a Direct Materials Budget and a Schedule of Expected Cash
Disbursements.
• Prepare a Cash Budget.
• Direct labor, variable and fixed overhead, selling and administrative expense
budgets
• Budgeted financial statements

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Problems
Problem #1

The T Company has budgeted sales for the year as follows:

January February March April May

Unit sales 10,000 12,000 14,000 16,000 11,000

The ending inventory of finished goods for each month should equal 25% of the next
month’s budgeted sales in units. The finished goods inventory at the start of the year is
2,500 units. Four pounds of raw material are required for each unit produced. Raw
materials on hand at the start of the year total 4,200 pounds. The raw materials
inventory at the end of each month should equal 10% of the next month’s production
needs in material.

Raw materials are purchased for $4.00 per pound and are paid for 50% in the quarter of
purchase and 50% in the following quarter.

Required: a) Prepare a production budget for the first quarter of the year,
including a quarter total column.
b) Prepare a raw material purchases budget for the first quarter
including a quarter total column.
c) Prepare a cash disbursements budget for the first quarter
including a quarter total column.

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Problem #2

S Company needs a cash budget for October. The cash balance at the beginning of
October is $9,000. The actual sales for August and September and expected sales for
October are:
August September October
Cash sales $6,500 $5,250 $7,400
Sales on account 20,000 30,000 40,000
Total sales 26,500 35,250 47,400

Sales on account are collected over a three-month period as follows:

10% in the month of sale,
70% in the month following sale
18% in the second month following sale
2% remaining are uncollectible.

Additional information includes:

• Purchases of inventory will total $25,000 for October; 20% will be
paid for in October. Accounts payable from September's inventory
purchases is $16,000, all of which will be paid in October.
• Selling and administrative expenses are budgeted at $13,000 for
October; of which $4,000 is for depreciation.
• Equipment costing $18,000 will be purchased for cash during October,
and cash dividends of $3,000 will be paid during the month.
• The company must maintain a minimum cash balance of $5,000. An
open line of credit is available from the company's bank as needed.

Required: a) Prepare a schedule of expected cash collections for October.

b) Prepare a schedule of expected cash payments for inventory
purchases.
c) Prepare a cash budget for October including any borrowings
required.

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Problem #3

The P Company is preparing a Selling and Administrative expense budget for the year.
Expenses are paid in cash in the month incurred. The following budget data are
available:

Monthly Fixed Cost Variable Cost per Unit

Sales commissions $.80
Shipping 1.30
Advertising $40,000 .20
Executive salaries 25,000
Office depreciation 20,000
Other 7,000

Required: a) If budgeted sales were 18,000 units in January, determine the total
budgeted variable selling and administrative expenses.
b) If budgeted sales were 16,000 units in February, determine the total
budgeted fixed selling and administrative expenses.
c) If budgeted sales were 20,000 units in March, determine the
budgeted cash disbursements for selling and administrative
expenses.

Problem #4

H Company will open a new store on January 1. Based on experience from its other
retail outlets, Home Company is making the following sales projections:

Cash Sales Credit Sales

January $60,000 $40,000
February 30,000 50,000
March 40,000 60,000
April 18,000 80,000

H Company estimates that 70% of the credit sales will be collected in the month
following the month of sale, with the balance collected in the second month following
the month of sale.

Required: a) Determine the balance in accounts receivable on January 31.

b) Determine the balance in accounts receivable on March 31.
c) Determine the cash collected in April.

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Problem #5

F Company regarding the following data for the store's operations:

• Sales are budgeted at $350,000 for November, $320,000 for December, and
$300,000 for January.
• Collections are expected to be 80% in the month of sale, 16% in the month
following the sale, and 4% uncollectible.
• The cost of goods sold is 70% of sales.
• The Company desires an ending merchandise inventory equal to 60% of the cost
of goods sold in the following month. Payment for merchandise is made in the
month following the purchase.
• The November beginning balance in the accounts receivable account is $78,000.
• The November beginning balance in the accounts payable account is $254,000.

Required: a) Prepare a Schedule of Expected Cash Collections for November

and December.
b) Prepare a Merchandise Purchases Budget for November and
December.

Problem #6

M Company provided the following data for next quarter:

April May June

Sales $110,000 $130,000 $180,000
Merchandise purchases 85,000 92,000 105,000
Selling expenses 50,000 50,000 50,000

All sales are on credit. 40% are collected in the month of sale, 58% in the month
following the sale, and the remaining 2% are uncollectible. Merchandise purchases are
paid in full the month following the month of purchase. The selling expenses above
include $8,000 of depreciation on store fixtures. All other selling and administrative
expenses are paid as incurred. M Company wants to maintain a cash balance of
$15,000. Borrowings can be made as needed in increments of $1,000. All borrowings
are made at month end.

Required: Prepare McCracken's cash budget for May. McCracken expects to

have $24,000 of cash on hand at the beginning of May.

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Problem #7

H Company manufactures and sells plastic boomerangs. Expected boomerang sales (in
units) for the upcoming months are as follows:

Jul Aug Sep Oct Nov Dec

Budgeted
Sales 12,000 15,000 10,000 8,000 7,000 11,000

H Company likes to maintain a finished goods inventory equal to 10% of the next
month's estimated sales. Seven ounces of plastic resin are needed to produce every
boomerang. H Company likes to have enough plastic resin on hand at the end of the
month to cover 25% of the next month's production requirements. They expect to
pay$2.00 per pound for the resin.

Required: What is the cost of the resin Mate plans on purchasing during the
month of October?

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Multiple Choice Questions

1. The starting point for preparing the master budget is the
a) Inventory policy
b) Sales budget
c) Production budget
d) Budgeted balance sheet

2. The budget that shows how many units will be produced each period is the
a) Direct materials budget
b) Direct labor budget
c) Sales budget
d) Production budget

3. If a manufacturing company is planning to increase the amount of inventory on

hand,
a) production should exceed sales.
b) sales should exceed production.
c) production should equal sales.
d) production should equal inventory.

4. The direct or raw materials purchases budget should begin with

a) actual materials purchases from the previous year.
b) budgeted sales.
c) budgeted production.
d) budgeted cost of raw materials.

5. When preparing the direct labor budget, the starting point should be:
a) actual direct labor hours from the previous year.
b) budgeted sales.
c) budgeted production.
d) budgeted cost of direct labor.

6. Which of the following is not part of the cash budget?

a) Budgeted cash collections
b) Budgeted cash payments
c) Depreciation expense
d) Cash borrowed or repaid

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7. The G Company makes and sells a single product called a Clop. Each Clop
requires 1.1 direct labor-hours at $8.20 per direct labor-hour. The direct labor
workforce is fully adjusted each month to the required workload. The company
is preparing a Direct Labor Budget for the first quarter of the year. If the
company has budgeted to produce 20,000 Clops in January, then the budgeted
direct labor cost for January is:
a) $164,000
b) $180,400
c) $172,200
d) $195,600

8. The W Company makes collections on sales according to the following

schedule:

25% in month of sale

65% in month following sale
5% in second month following sale
5% uncollectible

The following sales have been budgeted:

Sales
April $120,000
May $100,000
June $110,000

Budgeted cash collections in June would be:

a) $27,500
b) $98,500
c) $71,000
d) $15,500

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9. J Company expects to generate the following sales for the next three months:

July August September

Expected sales $460,000 $580,000 $620,000

J Company 's cost of gods sold is 60% of sales dollars. At the end of each
month, J Company wants a merchandise inventory balance equal to 20% of
the following month's expected cost of goods sold. What dollar amount of
merchandise inventory should J Company plan to purchase in August?
a) $257,400
b) $314,600
c) $352,800
d) $327,800

10. F Company manufactures and sells stainless steel coffee mugs. Expected mug
sales at Fab (in units) for the next three months are as follows:

October November December

Budgeted unit sales 28,000 25,000 31,000

F Company likes to maintain a finished goods inventory equal to 30% of the

next month's estimated sales. How many mugs should F Company plan on
producing during the month of November?
a) 23,200
b) 26,800
c) 25,900
d) 34,300

11.
Budgeted: Sales (units) Production (units)
April 15,000 18,000
May 20,000 19,000
June 18,000 16,000

Two pounds of material are required for each finished unit. The inventory of
materials at the end of each month should equal 20% of the following month's
production needs. Purchases of raw materials for May should be:
a) 39,200
b) 52,000
c) 36,800
d) 38,000

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12. V Company’s sales budget shows 6,600 units are planned to be sold in April.
The variable selling and administrative expense is $9.70 per unit. The
budgeted fixed selling and administrative expense is $127,380 per month,
which includes depreciation of $8,580 per month. The remainder of the fixed
selling and administrative expense represents current cash flows. The cash
disbursements for selling and administrative expenses on the April selling and
administrative expense budget should be:
a) $191,400
b) $118,800
c) $64,020
d) $182,820

13. K Company has the following budgeted sales data:

January February March April

Cash Sales $70,000 $90,000 $80,000 $70,000
Credit Sales $400,000 $350,000 $300,000 $320,000

The regular pattern of collection of credit sales is 40% in the month of sale,
50% in the month following sale, and the remainder in the second month
following the month of sale. There are no bad debts. The budgeted accounts
receivable balance on February 28 would be:
a) $250,000
b) $210,000
c) $175,000
d) $215,000

14. Each unit of Product WZ requires 3.5 hours of direct labor at the rate of $16.00
per direct labor-hour. The company would like you to prepare a Direct Labor
Budget for June. It plans to sell 31,000 units of Product WZ in June. The
finished goods inventories on June 1 and June 30 are budgeted to be 100 and
600 units, respectively. Budgeted direct labor costs for June would be:
a) $1,764,000
b) $504,000
c) $1,708,000
d) $1,736,000

15. P Company bases the overhead budget on direct labor-hours. The direct labor
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budget indicates that 8,900 direct labor-hours will be required in May. The
budgeted variable overhead rate is $5.50 per direct labor-hour and budgeted
fixed manufacturing overhead is $133,500 per month, including depreciation of
$30,260. The company recomputes its predetermined overhead rate every
month. The predetermined overhead rate and total overhead for May are:
a) $5.50 and $48,950
b) $17.10 and $133,500
c) $20,50 and $182,450
d) $15.00 and $152,190

16. B Company is estimating the following raw material purchases for the final four
months of the year.

September $800,000
October $920,000
November $840,000
December $760,000

At B Company, 30% of raw materials purchases are normally paid for in the
month of purchase. The remaining 70% is paid for in the month following the
purchase. In B Company 's budgeted balance sheet at December 31, at what
amount will accounts payable for raw materials be shown?
a) $760,000
b) %532,000
c) $228,000
d) $588,000

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Solutions to Problems
Problem #1

January February March Quarter April

Units Sold 10,000 12,000 14,000 36,000 16,000
Ending Inventory 3,000 3,500 4,000 4,000 2,750*
Units Needed 13,000 15,500 18,000 40,000 18,750
Beginning Inventory 2,500 3,000 3,500 2,500 4,000
Units to be Produced 10,500 12,500 14,500 37,500 14,750

* May sold = 11,000 X 25% = 2,750 ending inventory

January February March Quarter April

Units to be Produced 10,500 12,500 14,500 37,500 14,750
Pounds per unit 4 4 4 4 4
Raw Materials Used 42,000 50,000 58,000 150,000 59,000
Ending Inventory 5,000 5,800 5,900 5,900
Raw Materials Needed 47,000 55,800 63,900 155,900
Beginning Inventory 4,200 5,000 5,800 4,200
Materials to be
Purchased 42,800 50,800 58,100 151,700
Cost per pound $4.00 $4.00 $4.00 $4.00
Total cost of purchases $171,200 $203,200 $232,400 $606,800

Cash Disbursements:
December inventory
4,200 pounds x $4.00 x
50% $8,400 $8,400
January $85,600 $85,600 $171,200
February $101,600 $101,600 $203,200
March $116,200 $116,200
Total disbursements $94,000 $187,200 $217,800 $499,000

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Problem #2

Schedule of expected cash receipts:

October cash sales $7,400
October collections on account:
August sales: $20,000 X 18% 3,600
September sales: $30,000 X 70% 21,000
October sales: $40,000 X 10% 4,000
Total cash receipts $36,000

Schedule of payments to suppliers:

September purchases (accounts payable) $16,000
October purchases: $25,000 X 20% 5,000
Total cash payments $21,000

Cash Budget:
Cash balance, October 1 $ 9,000
Add: Cash receipts 36,000
Cash available before financing 45,000
Less: Cash disbursements:
Payments to suppliers $21,000
Selling and administrative expenses 9,000
Equipment purchases 18,000
Dividends paid 3,000
Total disbursements 51,000
Excess (deficiency) of available over disbursements (6,000)
Borrowing 11,000
Cash balance, October 31 $ 5,000

Problem #3

a) 18,000 X ($.80 + $1.30 + $.20) = $41,400

b) $40,000 + 25,000 + 20,000 + 7,000 = $92,000
c)
Variable cost (20,000 X $2.30) $46,000
Fixed cost excluding 72,000
depreciation
Budgeted cash disbursements $118,000

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Problem #4

a) January credit sales $40,000 X 100% $40,000

b) February credit sales $50,000 X 30% $15,000

March credit sales $60,000 X 100% 60,000
March accounts receivable $75,000

c) February credit sales $50,000 X 30% $15,000

March credit sales $60,000 X 70% 42,000
April cash sales $18,000 X 100% 18,000
April cash collections $75,000

Problem #5

Collections
Sales November December
Accounts receivable $78,000
November sales $350,000
X 80% 280,000
X 16% $56,000
December sales $320,000
X 80% 256,000
Total collections $358,000 $312,000

November December
Cost of goods sold $350,000 x 70% $245,000
$320,000 x 70% $224,000
Ending inventory $224,000 x 60% 134,400
$300,000 x 70% x 60% 126,000
- Beginning inventory $245,000 x 60% 147,000
$224,000 x 60% 134,400
Purchases $232,400 $215,600

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Problem #6

Cash Budget
Beginning cash balance $24,000
Add cash collections $130,000 x 40% + 115,800
$110,000 x 58%
Total cash available 139,800
Less disbursements:
Merchandise purchases 85,000
Selling and administrative $50,000 – 8,000 42,000
Excess of cash available over disbursements 12,800
Financing:
Borrowings 3,000
Ending cash balance $15,800

Problem #7

Production Budget
October November December
Sales 8,000 7,000 11,000
Ending inventory 700 1,100
8,700 8,100
- Beginning inventory 800 700
Required production 7,900 7,400

Direct Materials Budget

October November December
Required production 7,900 7,400
Raw materials per unit 7 7
Raw materials needed 55,300 51,800
Ending inventory 12,950
68,250
- Beginning inventory 13,825
Required purchases
in ounces 54,425
/ Ounces per pound 16
Pounds of resin to be 3,401.56
purchased
Cost per pound $2.00
Purchase cost $6,803

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Solutions to Multiple Choice Questions

1. B
2. D
3. A
4. C
5. C
6. C
7. B
8. B
9. C
10. B
11. C
12. D
13. A
14. A
15. C
16. B

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