FinMan Chapter 20 SM

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Solutions Manual, Chapter 20 1091

Chapter 20 Master Budgets and Performance Planning

QUESTIONS 1. A budget helps managers control and monitor a business by 1) communicating

plans to employees, 2) coordinating the activities of different parts of the organization, and 3) providing a basis for deciding whether actual performance is acceptable (through benchmarking). Budgeting also helps 4) promote analysis, 5) focus on the future, and 6) motivate employees.

2. Two common benchmarks used by managers to evaluate performance are: past performance and budgeted performance. Budgeted performance is generally more useful because it is based on more current business conditions and information that are presumably reflected in the numbers.

3. Continuous budgeting provides managers a full set of updated budgets each time a budget period goes by. In a changing environment, continuous budgeting should provide superior information for effective planning.

4. Three common short-term horizons for planning and budgeting purposes are: monthly, quarterly, and annually. A semiannual planning horizon is also popular.

5. Budgeting can be a strong positive motivating force if employees are involved or consulted in the process. This participation promotes their commitment to reaching the specified goals—such a process is called participatory budgeting. Alternatively, if employees are not consulted, budgets may produce negative attitudes and dysfunctional behavior in an organization.

6. Budgeting helps management coordinate and plan business activities by providing specific guidance for the individual activities of various departments and employees.

7. The sales budget reflects the expected sales to be made over a period of time, stated in dollars and/or units. The sales budget is the most important of all the component budgets of the master budget because it is used to set purchasing/production levels and the related selling and administrative activities and expenditures.

8. A selling expense budget is a plan of the expenses to be incurred to produce the planned amount of sales. The capital expenditures budget lists dollar amounts of plant assets to be disposed of and additional plant assets to be purchased during the budget period.


Financial & Managerial Accounting, 5th Edition 1092

9. Budgeting promotes good decision making by requiring managers to conduct research (or analysis) and by focusing their attention on the future.

10. A cash budget shows the planned cash receipts and cash disbursements for each budget period, including any loans to be received or repaid. Since the operating budgets and the capital expenditures budget reflect transactions and events that produce cash inflows and cash outflows, the cash budget can be completed only after these companion budgets are completed.

11. A production budget shows the number of units to be produced each budget period. Based on the number of units to be produced (taken from the production budget), the manufacturing budget shows the budgeted costs for direct materials, direct labor, and factory overhead.

12. A manager of an Apple store would have responsibility for and decision control over budgeting for his/her store. A manager at the corporate offices may participate in, but would not likely be involved in the budgeting for individual stores, but would have responsibility and decision control over administrative budgets.

13. With the exception of the decision to operate, the manager of an Arctic Cat distribution center is not likely to engage in a substantial amount of long-term budgeting. Once the distribution center is up and operating, the vast majority of decisions will focus on day-to-day operations. Most of the decisions concerning freight carriers, pricing, and product mix are often made at the corporate level. However, corporate level decision-making should incorporate information and expectations provided by the operating managers of distribution centers.

14.

Budget Participant Description

Sales manager .................... Information on estimated sales (units and dollars).

Production manager ........... Number of units to produce based on estimated sales.

Manufacturing manager ..... Amount of direct materials, direct labor, and manufacturing overhead to produce the estimated level of production.

Sales manager .................... Cost of selling the estimated sales level.

General & admini-strative managers ...............

Cost to support operations; most often are fixed costs.

Capital expenditures committee ...........................

Prepare plans to have available plant assets necessary to carry on business activities.

Cash managers ................... Working with the above budgets, this team will prepare cash flow analysis.

Accounting and finance staff .....................................

Financial budgets prepared from above information.



QUICK STUDIES

Quick Study 20-1 (5 minutes) Correct answer is 4. Quick Study 20-2 (10 minutes) Three useful guidelines to help motivate employees with budgeting are

1. Employees affected by a budget should be consulted when it is prepared.

2. Goals reflected in a budget should be attainable.

3. Evaluations of performance should be made carefully with opportunities to explain any failures and discrepancies.

Quick Study 20-3 (15 minutes)

Montel Company Computation of Budgeted Cost of Purchases

For Month Ended July 31

Budgeted ending inventory ........................................................................ $ 40,000

Budgeted cost of goods to be sold [$600,000 x (1 – 40%)] ..................... 360,000

Required available merchandise ................................................................ 400,000

Less budgeted beginning inventory .......................................................... 50,000

Budgeted cost of purchases ...................................................................... $350,000



Quick Study 20-4 (10 minutes) 1. The bottom-up approach to budgeting is considered more successful

because without active employee involvement in preparing budget figures, there is a risk these employees will feel that the numbers fail to reflect their special problems and needs. It also has the benefit of directly involving those employees who regularly confront and deal with day-to-day situations.

2. Examples of bottom-up budgeting include

Involving the sales department in preparing sales estimates.

Involving the production department in preparing its own expense budget.

Quick Study 20-5 (15 minutes) Computation of budgeted Accounts Receivable balance as of July 31

Sales month

Total Sales

Credit Sales*

Percent Still Uncollected*

Amount Uncollected

June ..................... $420,000 $168,000 10% $ 16,800 July ...................... 398,000 159,200 80% 127,360 Total .................... $144,160

* Credit sales are 40% of total sales—of these credit sales, 20% are collected in the sale month, 70% are collected in the month after sale, and 10% are collected in the second month after sale.


Gado Merchandising Company Cash Budget

For Month Ended March 31

Beginning cash balance .......................................................... $ 72,000

Cash receipts from sales ........................................................ 300,000

Total cash available ................................................................. $372,000

Cash disbursements

Payments for purchases ........................................................ 140,000

Salaries .................................................................................... 80,000

Other expenses ....................................................................... 45,000

Repayment of bank loan ........................................................ 20,000

Total cash disbursements ..................................................... 285,000

Ending cash balance ............................................................... $ 87,000




1. Activity-based budgeting requires managers to focus on the activities of

their departments, forecast the individual activity levels, identify the

resources required to carry out the activities, and estimate the costs of

those resources.

2. Traditional budgeting consists of listing the amount of resources

required for each department (such as salaries and utilities). Activity-

based budgeting allows managers to better justify changes in budgeted

amounts based on changes in activity levels.


Forrest Company Production Budget

For Month Ended November 30

Next month’s budgeted sales ............................................................... 350,000

Ratio of inventory to future sales ......................................................... x 10%

Budgeted ending inventory .................................................................. 35,000

Add budgeted sales for the month ...................................................... 400,000

Required units of available production ............................................... 435,000

Less beginning inventory ..................................................................... 40,000

Units to be produced ............................................................................. 395,000




Forrest Company Factory Overhead Budget


Units to be produced (from QS 20-8) ................................................... 395,000

Variable factory overhead rate per unit ............................................... x $1.50

Budgeted variable overhead ................................................................. $ 592,500

Budgeted fixed overhead ...................................................................... 4,600,000

Budgeted total overhead ....................................................................... $5,192,500


Grace Sales Budget

For Month Ended June 30

Prior month’s unit sales ........................................................................ 1,000

Plus 4% growth in unit sales ................................................................ 40

Projected June sales (units) ................................................................. 1,040

Selling price per unit ............................................................................. x $250

Projected sales for June ....................................................................... $260,000


Grace Selling Expense Budget

For Month Ended June 30

Budgeted sales (from QS 20-10) .......................................................... $260,000

Sales commission percent ................................................................... x 8%

Sales commissions ............................................................................... 20,800

Sales manager’s monthly salary .......................................................... 6,000

Projected selling expense for June ..................................................... $ 26,800




Grace Budgeted Cash Receipts For Month Ended June 30

Budgeted sales (from QS 20-10) .......................................................... $260,000

Less ending accounts receivable ($260,000 x 0.40) ........................... 104,000

Cash sales ($260,000 x 0.60)) ............................................................... 156,000

Collections of last month’s receivables* ............................................. 100,000

Total cash receipts ................................................................................ $256,000

*$250,000 x 40% = $100,000. Last month’s sales of $250,000 from QS 20-10.

Quick Study 20-13 (15 minutes) Sales ....................................................................................................... BIS

Office salaries paid ............................................................................... BIS

Accumulated depreciation ................................................................... BBS

Amortization expense ........................................................................... BIS

Interest paid on note payable .............................................................. BIS

Cash dividends paid ............................................................................. NA

Bank loan owed ..................................................................................... BBS Cost of goods sold ................................................................................ BIS Quick Study 20-14 (10 minutes)

CANDLE SHOPPE Cash Receipts Budget

For Month Ended September 30

Cash receipts from September cash sales (40% x $170,000) ............ $ 68,000

Collection of prior month’s receivables (60% x $150,000) ................ 90,000

Total cash receipts ................................................................................ $158,000




WELLS COMPANY Budgeted Cash Receipts


Cash receipts from November cash sales (20% x $80,000) ............... $ 16,000

Collection of October’s sales (70% x $66,000) .................................... 46,200

Collection of September’s sales (10% x $55,000) ............................... 5,500

Total cash receipts ................................................................................ $ 67,700


GORDANDS Cash Disbursements for Merchandise (Budgeted)

For Month Ended September 30

Cash disbursements for September purchases (25% x $720,000) .... $180,000

Cash disbursements for August purchases (75% x $600,000) ........... 450,000

Total cash disbursements .................................................................... $630,000


MEYER CO. Cash Disbursements for Merchandise (Budgeted)

For January, February, and March

January February March

Purchases ..................................................... $15,800 $18,600 $20,200

Cash disbursements for

Current month’s purchases (40%) ......... $ 6,320 $ 7,440 $ 8,080

Prior month’s purchases (60%) ............... 22,000* 9,480 11,160

Total cash disbursements for purchases ..... $28,320 $16,920 $19,240

* Accounts payable balance at December 31




RAIDER-X CORP. Purchases Budget (in units) For Month Ended April 30

Budgeted ending inventory (130% x 3,000) ......................................... 3,900

Budgeted sales for April (units) ........................................................... 18,000

Required units of available inventory ..................................................

Less beginning inventory (units) .........................................................

21,900

(3,000)

Units to be purchased ........................................................................... 18,900


LEXI COMPANY Merchandise Purchases Budget

For April, May, and June

April May June

Next month’s budgeted sales (units) ......... 1,220,000 980,000 1,020,000

Ratio of inventory to future sales ............... x 30% x 30% x 30%

Budgeted ending inventory (units) ............ 366,000 294,000 306,000

Add budgeted sales (units) ......................... 1,040,000 1,220,000 980,000

Required units of available merch. ........... 1,406,000 1,514,000 1,286,000

Deduct beginning inventory (units) ........... (280,000) (366,000) (294,000)

Units to be purchased ................................. 1,126,000 1,148,000 992,000




CHAMP, INC. Production Budget

For Month Ended May 31

Next month’s budgeted sales (units) ................................................... 200

Ratio of inventory to future sales ......................................................... x 60%

Budgeted ending inventory (units) ...................................................... 120

Add budgeted sales for the month (units) .......................................... 180

Required units of available production ............................................... 300

Deduct beginning inventory (units) ..................................................... (50)

Units to be produced ............................................................................. 250


ZORTEK CORP. Direct Materials Budget

For Month Ended January 31

Budget production (units) ..................................................................... 400

Materials requirements per unit ........................................................... x 5 lbs.

Materials needed for production (lbs.) ................................................ 2,000

Add budgeted ending inventory (200* units x 5 lbs. per unit x 40%) .... 400

Total materials requirements (lbs.) ...................................................... 2,400

Deduct beginning inventory (lbs.) ........................................................ (130)

Materials to be purchased (lbs.) ........................................................... 2,270

Materials price per pound ..................................................................... $ 2

Total cost of direct materials purchases ............................................. $4,540

*February’s budgeted production.




TORA CO. Direct Labor Budget


Budget production (units) ..................................................................... 1,020

Labor requirements per unit (hours) ................................................... x 2

Total labor hours needed ...................................................................... 2,040

Labor rate (per hour) ............................................................................. $ 20

Labor dollars .......................................................................................... $40,800


SCORA INC. Sales Budget


Budgeted Unit Sales

Budgeted Unit Price

Budgeted Total Sales

January ......................................................... 1,200 $50 $ 60,000

February ........................................................ 2,000 50 100,000

March ............................................................ 1,600 50 80,000

Totals for the quarter ................................... 4,800 $50 $240,000




SCORA INC. Cash Receipts Budget



Sales (from QS 20-23) .................................. $60,000 $100,000 $80,000

Less ending accts. receivable (60%) ......... 36,000 60,000 48,000

Cash receipts from

Cash sales (40% of sales) .......................... 24,000 40,000 32,000

Collections of prior month’s receivables ...... 15,000 36,000 60,000

Total cash receipts ..................................... $39,000 $76,000 $92,000


SCORA INC. Selling Expense Budget



Budgeted sales (from QS 20-23) ................ $60,000 $100,000 $80,000

Sales commission percent ......................... x 10% x 10% x 10%

Sales commissions .................................... 6,000 10,000 8,000

Sales manager monthly salary ................... 6,000 6,000 6,000

Total selling expenses ............................... $12,000 $ 16,000 $14,000




MESSERS COMPANY Cash Budget

For Month Ended February 28

Beginning cash balance ........................................................................ $ 20,000

Cash receipts ......................................................................................... 75,000

Total cash available ............................................................................... 95,000

Cash disbursements.............................................................................. (100,250)

Preliminary cash balance ...................................................................... $ (5,250)

Additional loan from bank .................................................................... 10,250

Ending cash balance ............................................................................. $ 5,000

Based on the cash budget above, the company must borrow $10,250 during February to maintain a $5,000 cash balance. Quick Study 20-27 (10 minutes) 1.

Sales (current year) .................................................................

(in € millions)

€25,400

Sales growth (€25,400 x 3%) ................................................... 762

Budgeted sales (next year) ..................................................... €26,162

2.

Note: Assume sales of €26,000 for this question.

Budgeted selling expenses (€26,000 x 20%) .........................

€5,200

Budgeted general and admin. expenses (€26,000 x 4%) ..... 1,040



EXERCISES

Exercise 20-1 (25 minutes)

KAYAK COMPANY Cash Budget



Beginning cash balance .............................. $ 30,000 $ 30 ,000 $ 69,294

Cash receipts ............................................... 525,000 400,000 450,000

Total cash available ..................................... 555,000 430,000 519,294

Cash disbursements.................................... 475,000 350,000 525,000

Interest expense

January ($60,000 x 1%) ............................ 600

February ($10,600 x 1%) ............................ ________ 106 ________

Preliminary cash balance ............................ 79,400 79,894 (5,706)

Additional loan from bank .......................... 35,706

Repayment of loan to bank ......................... (49,400) (10,600) ________

Ending cash balance ................................... $ 30,000 $ 69,294 $ 30,000

Ending loan balance*................................... $ 10,600 $ 0 $ 35,706

*Loan balance is $60,000 at the beginning of January. January’s ending loan balance is computed as $60,000 – 49,400.



Exercise 20-2 (30 minutes) 1. Merchandise Purchases Budget Note: Shaded numbers represent known information provided in the exercise.

Walker Company Merchandise Purchases Budget For July, August, and September

July August September

Next month’s budgeted sales .............. 315,000 270,000 200,000 (10)

Ratio of inventory to next month sales . x 15% (9) x 15% (9) x 15% (9)

Budgeted ending inventory ................. 47,250 (6) 40,500 (3) 30,000

Add budgeted sales for month ............ 180,000 315,000 270,000

Required units available inventory ..... 227,250 (7) 355,500 (4) 300,000 (1)

Less beginning inventory .................... 27,000 (8) 47,250 (5) 40,500 (2)

Budgeted merchandise purchases ..... 200,250 308,250 259,500

The following notes (1) through (10) provide supporting calculations and explanations.

Notes: (1) September required units Ending inventory 30,000 Add budgeted sales 270,000 Total required in September 300,000

(2) September beginning Inventory

Total required (1 above) 300,000 Less budgeted purchases (259,500) September beginning inventory 40,500

(3) September Beginning Inventory = August Ending Inventory

(4) August required units

Ending inventory 40,500 Add budgeted sales 315,000 Total required in August 355,500



Exercise 20-2 (concluded)

Notes: concluded

(5) August beginning inventory Total required (4 above) 355,500 Less budgeted purchases (308,250) August beginning inventory 47,250

(6) August Beginning Inventory = July Ending Inventory

(7) July required units

Ending inventory 47,250 Add budgeted sales 180,000 Total required in July 227,250

(8) July Beginning Inventory

Total required (7 above) 227,250 Less budgeted purchases (200,250) July beginning inventory 27,000

(9) Percent of Sales to be held as Ending Inventory

Ending inventory for August September Sales

= 40,500 = 15% 270,000

This percentage is constant for the three months.

(10) October expected sales September Ending Inventory

Required % = 30,000 = 200,000 15%

2. Monthly ending inventory is 15% of next month’s sales (see note #9). 3. October budgeted sales = 200,000 (see note #10 above).




ACCO COMPANY Cash Budget


Beginning cash balance ................................................ $ 50,000

Cash receipts from sales (note 1) .................................. 1,364,000

Total cash available ....................................................... $1,414,000

Cash disbursements

Payments for merchandise (note 2) ............................. 730,000

Salaries ......................................................................... 275,000

Other expenses ............................................................ 200,000

Accrued taxes .............................................................. 80,000

Interest on bank loan .................................................. 6,600

Total cash disbursements ............................................ 1,291,600

Ending cash balance ..................................................... $ 122,400

Supporting calculations (1) Cash receipts in July from sales

From May sales ($1,720,000 x 20%) .............. $ 344,000 From June sales ($1,200,000 x 50%) ............. 600,000 From July sales ($1,400,000 x 30%) .............. 420,000 Total ................................................................. $1,364,000

(2) Cash disbursements in July for merchandise

For June purchases ($700,000 x 40%) .......... $ 280,000 For July purchases ($750,000 x 60%) ........... 450,000 Total ................................................................. $ 730,000




ACCO COMPANY Budgeted Income Statement


Sales (from Exercise 20-3) .................................................. $1,400,000

Cost of goods sold (note 1) ............................................. 770,000

Gross profit ..................................................................... 630,000

Operating expenses

Salaries expense (note 2) .............................................. $285,000

Depreciation expense (from Exercise 20-3) .................... 36,000

Other cash expenses (from Exercise 20-3) ..................... 200,000

Bank loan interest expense ......................................... 6,600

Total expenses ................................................................ 527,600

Income before taxes ....................................................... 102,400

Income tax expense (note 3) ............................................ 30,720

Net income ....................................................................... $ 71,680

Supporting calculations (1) Cost of goods sold

Sales ................................................................ $1,400,000 Cost percent .................................................... 55% Cost of goods sold ......................................... $ 770,000

(2) Salaries expense

Cash paid ......................................................... $ 275,000 Less beginning payable ................................. (50,000) Plus ending payable ....................................... 60,000 Salaries expense ............................................. $ 285,000

(3) Income tax expense

Pre-tax income ................................................ $ 102,400 Tax rate ............................................................ 30% Income tax expense ........................................ $ 30,720



Exercise 20-4 (Continued)

ACCO COMPANY

Budgeted Balance Sheet As of July 31

ASSETS

Cash (from Exercise 20-3) .................................................. $ 122,400

Accounts receivable (note 1) .......................................... 1,220,000

Inventory (given) .............................................................. 60,000

Total current assets ....................................................... 1,402,400

Equipment ...................................................................... $1,600,000

Less accumulated depreciation (note 2) ....................... 316,000 1,284,000

Total assets .................................................................... $2,686,400

LIABILITIES AND EQUITY

Liabilities

Accounts payable (note 3) ............................................ $ 300,000

Salaries payable .......................................................... 60,000

Income taxes payable ................................................. 30,720

Total current liabilities ................................................ 390,720

Bank loan payable ....................................................... 660,000 1,050,720

Stockholders’ equity

Common stock ............................................................. 600,000

Retained earnings (note 4) ........................................... 1,035,680 1,635,680

Total liabilities and equity ............................................. $2,686,400

Supporting calculations (1) Accounts receivable

June sales (20% x $1,200,000) ................................... $ 240,000 July sales (70% x $1,400,000)................................... 980,000 Total .............................................................................. $ 1,220,000

(2) Accumulated depreciation Beginning ..................................................................... $ 280,000 Expense ........................................................................ 36,000 Ending .......................................................................... $ 316,000

(3) Accounts payable Purchases .................................................................... $ 750,000 Percent unpaid............................................................. 40% Payable ......................................................................... $ 300,000

(4) Retained earnings Beginning ..................................................................... $ 964,000 Net income ................................................................... 71,680 Ending .......................................................................... $1,035,680



Exercise 20-5 (30 minutes) Preliminary calculations (sales, cost of sales, beginning and ending inventory)

August September October November

Sales ........................................................... $325,000 $ 320,000 $250,000 $310,000 Cost to sales percent ................................. x 60% x 60% x 60% x 60% Cost of goods sold ..................................... 195,000 192,000 150,000 186,000 Beginning inventory percent ..................... x 20% x 20% x 20% x 20% Beginning inventory ................................... $ 39,000 $ 38,400 $ 30,000 $ 37,200 Ending inventory (from next month) ......... $ 38,400 $ 30,000 $ 37,200

Merchandise purchases budgets (* denotes from preliminary calculations) August September October

Budgeted ending inventory (*) ........................ $ 38,400 $ 30,000 $ 37,200 Add budgeted cost of goods sold (*) ............. 195,000 192,000 150,000 Cost of available merchandise ....................... 233,400 222,000 187,200 Less beginning inventory (*) ........................... (39,000) (38,400) (30,000) Budgeted purchases ....................................... $194,400 $183,600 $157,200

Cash payments for purchases (on accounts) in October Dollars Percent Paid

For purchases from August ........................... $194,400 15% $ 29,160 For purchases from September ..................... 183,600 35 64,260 For purchases from October .......................... 157,200 50 78,600 Total cash payments for purchases .............. $172,020 Exercise 20-6 (25 minutes) 1. Budgeted merchandise purchases June July August

Ending accounts payable ......................... $ 200,000 $ 235,000 $ 195,000

Cash paid on accounts payable ............... 1,490,000 1,425,000 1,495,000

Total payable during month ...................... 1,690,000 1,660,000 1,690,000

Less beginning accounts payable ........... (150,000) (200,000) (235,000)

Purchases during month .......................... $1,540,000 $1,460,000 $1,455,000

2. Budgeted cost of goods sold June July August

Beginning inventory .................................. $ 250,000 $ 400,000 $ 300,000

Plus purchases .......................................... 1,540,000 1,460,000 1,455,000

Less ending inventory ............................... (400,000) (300,000) (330,000)

Cost of goods sold .................................... $1,390,000 $1,560,000 $1,425,000



Exercise 20-7 (40 minutes) 1. Preliminary calculations (sales, cost of sales, beginning inventory)

July August September October November

Budgeted sales ............................... $350,000 $290,000 $320,000 $275,000 $265,000 Cost to sales percent ..................... x 70% x 70% x 70% x 70% x 70% Budgeted cost of goods sold ........ 245,000 203,000 224,000 192,500 185,500 Budgeted inventory percent .......... x 20% x 20% x 20% x 20% x 20% Budgeted beginning inventory ......... $ 49,000 $ 40,600 $ 44,800 $ 38,500 $ 37,100

Budgeted merchandise purchases

July August September October

Budgeted ending inventory ................. $ 40,600 $ 44,800 $ 38,500 $ 37,100 Budgeted cost of goods sold .............. 245,000 203,000 224,000 192,500 Cost of available merchandise ............ 285,600 247,800 262,500 229,600 Less beginning inventory .................... (49,000) (40,600) (44,800) (38,500) Budgeted purchases ............................ $236,600 $207,200 $217,700 $191,100

2. Budgeted payments on accounts payable in September Purchases Percent Paid Dollars Paid

For purchases from September .......... $217,700 25% $ 54,425 For purchases from August ................. 207,200 60 124,320 For purchases from July ...................... 236,600 15 35,490 Total payments ..................................... $214,235

Budgeted payments on accounts payable in October Purchases Percent Paid Dollars Paid

For purchases from October ............... $191,100 25% $ 47,775 For purchases from September .......... 217,700 60 130,620 For purchases from August ................. 207,200 15 31,080 Total payments ..................................... $209,475

3. Budgeted balance of accounts payable at the end of September Purchases Percent Unpaid Dollars Unpaid

From purchases in September ............ $217,700 75% $163,275 From purchases in August .................. 207,200 15 31,080 Total ....................................................... $194,355

Budgeted balance of accounts payable at the end of October Purchases Percent Unpaid Dollars Unpaid

From purchases in October ................. $191,100 75% $143,325 From purchases in September ............ 217,700 15 32,655 Total ....................................................... $175,980




ELECTRO COMPANY Production Budget

Second and Third Quarters

Second Third Quarter Quarter

Budgeted ending inventories

Second quarter (20% x 525,000) ........................................... 105,000

Third quarter (20% x 475,000) ............................................... 95,000

Add budgeted sales ................................................................. 450,000 525,000

Required units of available production ................................. 555,000 620,000

Less actual or budgeted beginning inventories ................... (75,000) (105,000)

Units to be produced ............................................................... 480,000 515,000


ELECTRO COMPANY Direct Materials Budget

Second Quarter

Units to be produced (from Exercise 20-8) ................................. 480,000

Materials requirement per unit ............................................... x 0.80

Materials needed for production (units) ................................ 384,000

Add budgeted ending inventory (units)* ............................... 206,000

Total materials requirements (units) ...................................... 590,000

Deduct beginning inventory (units)** ....................................

Materials to be purchased (units) .........................................

Material price per unit..............................................................

Total cost of direct materials purchases ...............................

(192,000)

398,000

x $170

$67,660,000

* (515,000 x 0.80) x 50% **384,000 x 50%




ELECTRO COMPANY Direct Labor Budget

Second Quarter

Units to be produced (from Exercise 20-8) .................................

480,000

Labor requirements per unit (hours) ..................................... x 4

Total labor hours needed ........................................................ 1,920,000

Labor rate (per hour) ............................................................... x $12

Labor dollars ............................................................................ $23,040,000


HECTOR COMPANY Budgeted Cash Disbursements

For August and September

August Sept.

Payments for merchandise* ................................................... $14,400 $19,200

Selling expenses (10% of sales) ............................................. 7,200 6,600

Administrative expenses (8% of sales) ................................. 5,760 5,280

Rent expense ............................................................................ 7,400 7,400

Total cash disbursements ...................................................... $34,760 $38,480

**Equals prior month’s purchases. Note that depreciation expense is excluded since it is a non-cash expense.




JASPER COMPANY Cash Receipts Budget


April May June

Sales .............................................................. $525,000 $535,000 $560,000


Cash receipts from





KARIM CORP. Cash Budget

For July, August, and September

July August Sept.

Beginning cash balance .............................. $ 8,400 $ 8,000 $ 8,000

Cash receipts ............................................... 20,000 26,000 40,000

Total cash available .................................... 28,400 34,000 48,000


Interest on bank loan

August ($7,600 x 1%) ................................

September ($11,676 x 1%)* ......................

Preliminary cash balance ...........................

______

$ 400

76

______

$ 3,924

117

$25,883

Additional loan from bank .......................... 7,600 4,076

Repayment of loan to bank ......................... ______ _______ 11,676

Ending cash balance ................................... $ 8,000 $ 8,000 $14,207

Loan balance, end of month ....................... $ 7,600 $11,676 $ 0

* Rounded to nearest whole dollar.




FOYERT CORP. Cash Budget

For October, November, and December

Oct. Nov. Dec.

Beginning cash balance* ............................ $ 30,000 $ 30,000 $ 30,000

Cash receipts ............................................... 110,000 80,000 100,000




October ($10,000 x 1%) ............................

November ($20,100 x 1%) .........................

December ($15,300 x 1%) .........................


100

_______

$ 19,900

201

_______

$ 34,799

153

$ 49,847


Repayment of loan to bank ......................... _______ 4,799 15,301

Ending cash balance ................................... $ 30,000 $ 30,000 $ 34,546

Loan balance, end of month ....................... $ 20,100 $ 15,301 $ 0

*October’s beginning cash balance includes an outstanding loan balance of $10,000.




CASTOR, INC. Cash Budget


April May June

Beginning cash balance* ............................ $12,000 $12,000 $12,279

Cash receipts**............................................. 28,000 36,000 32,000


Cash disbursements

Payments for merchandise ......................... 20,200 16,800 17,200

Sales commissions (10% of sales) ............ 3,200 4,000 2,400

Shipping (2% of sales) ................................ 640 800 480

Office salaries ..............................................

Rent ...............................................................


April ($2,000 x 1%) ....................................

May ($6,060 x 1%) .....................................


5,000

3,000

20

______

$7,940

5,000

3,000

61

$18,339

5,000

3,000

_______

$16,199


Repayment of loan to bank ......................... _______ 6,060 _______

Ending cash balance ................................... $12,000 $12,279 $16,199

Loan balance, end of month ....................... $ 6,060 $ 0 $ 0

*April’s beginning cash balance includes an outstanding loan payable of $2,000. **Per cash receipts budget on next page



Exercise 20-15 (continued)

CASTOR, INC. Cash Receipts Budget


April May June

Sales .............................................................. $32,000 $40,000 $24,000


Cash receipts from




Exercise 20-16 (30 minutes) (1)

KELSEY Cash Receipts Budget


July August Sept.

Sales .............................................................. $64,000 $80,000 $48,000


Cash receipts from






Exercise 20-16 (continued) (2)

KELSEY Cash Budget


July August Sept.

Beginning cash balance* ............................ $15,000 $15,000 $25,504

Cash receipts (from part 1) ......................... 57,800 67,200 73,600


Cash disbursements

Payments for merchandise ......................... 40,400 33,600 34,400

Sales commissions (10% of sales) ............ 6,400 8,000 4,800

Office salaries ..............................................

Rent ...............................................................

Interest on bank loan**

July (5,000 x 1%) .......................................

August ($4,550 x 1%) ................................


4,000

6,500

50

_______

$15,450

4,000

6,500

46

$30,054

4,000

6,500

_______

$49,404

Additional loan from bank ..........................

Repayment of loan to bank ......................... 450 4,550 ______

Ending cash balance ................................... $15,000 $25,504 $49,404

Loan balance, end of month ....................... $ 4,550 $ 0 $ 0

*July’s beginning cash balance includes a loan payable of $5,000. ** Rounded to the nearest dollar. Answers vary slightly if rounded to the nearest cent.




ZETROV COMPANY

Budgeted Balance Sheet

As of March 31

ASSETS

Cash ................................................................................ $ 50,000

Accounts receivable ($140,000 x 70%) ............................. 98,000

Merchandise inventory (600 units x $35) ........................ 21,000

Total current assets ....................................................... 169,000

Equipment ...................................................................... $84,000

Less accumulated depreciation (note 1) ...................... 47,000 37,000

Total assets .................................................................... $206,000


Liabilities

Accounts payable ....................................................... $89,000

Income taxes payable ................................................. 26,000

Bank loan payable ....................................................... 10,000 125,000

Stockholders’ equity

Common stock ............................................................. 25,000

Retained earnings (note 2) .......................................... 56,000 81,000

Total liabilities and equity ............................................. $206,000

Supporting calculations

(1) Accumulated depreciation

Beginning ..................................................................... $46,000 Depreciation expense ................................................. 1,000 Ending .......................................................................... $47,000

(2) Retained earnings Beginning ..................................................................... $ 8,000 Net income ................................................................... 48,000 Ending .......................................................................... $56,000




FORTUNE, INC. Budgeted Income Statement For Quarter Ended March 31

Sales (note 1) ..................................................................... $3,750,000

Cost of goods sold (note 2) ............................................. 2,100,000

Gross profit ..................................................................... 1,650,000

Operating expenses

Commissions expense (8% of sales) ............................. $300,000

Rent expense ($14,000 x 3) ............................................. 42,000

Advertising expense (15% of sales) ............................... 562,500

Office salaries expense ($75,000 x 3) ............................ 225,000

Depreciation expense ($40,000 x 3) ............................... 120,000

Interest expense ($250,000 x 15% x 3/12) .........................

Total operating expenses ............................................

9,375

1,258,875

Income before income taxes ......................................... 391,125

Income tax expense (note 3) ............................................ 117,338

Net income ....................................................................... $ 273,787

Supporting calculations (1) Sales

Unit sales (45,000 + 55,000 + 50,000) ............. 150,000 Unit price ......................................................... $25 Sales dollars .................................................... $3,750,000

(2) Cost of goods sold

Unit sales (45,000 + 55,000 + 50,000) ............. 150,000 Unit cost........................................................... $14 Cost of goods sold dollars ............................. $2,100,000

(3) Income tax expense

Pre-tax income ................................................ $ 391,125 Tax rate ............................................................ 30% Income tax expense ........................................ $ 117,338*

* Rounded to the nearest dollar.




MANNER COMPANY Direct Labor Budget


July August Sept.

Budgeted production (units) ...................... 620 680 540

Labor requirements per unit (hours) ......... x 2 x 2 x 2

Total labor hours needed ............................ 1,240 1,360 1,080

Labor rate per hour ...................................... $ 20 $ 20 $ 21

Labor dollars ................................................ $24,800 $27,200 $22,680


HOSPITABLE CO. Production Budget


April May June

Next month’s budgeted sales (units) ......... 580 540 620

Ratio of inventory to future sales ............... x 25% x 25% x 25%

Budgeted ending inventory (units) ........... 145 135 155

Add budgeted sales for the month ............ 500 580 540

Required units of available production ..... 645 715 695

Deduct beginning inventory (units) ........... (190) (145) (135)

Units to be produced ................................... 455 570 560




HOSPITABLE CO. Direct Materials Budget For April, May, and June

April May June

Budgeted production (units)* ..................... 455 570 560

Materials requirements per unit ................. x 5 x 5 x 5

Materials needed for production (lbs.) ...... 2,275 2,850 2,800

Add budgeted ending inventory** .............. 855 840 810

Total materials requirements (lbs.) ............ 3,130 3,690 3,610

Deduct beginning inventory (lbs.) .............. (663) (855) (840)

Materials to be purchased (lbs.) ................. 2,467 2,835 2,770

* From Exercise 20-20

** 30% of next month’s materials needed for production. July’s materials needed for production (2,700 pounds = 540 units x 5) is given.

Exercise 20-22 (10 minutes) (1) h (2) d (3) g (4) e (5) i (6) b (7) a (8) f (9) c Exercise 20-23 (5 minutes) Potential negative outcomes from participatory budgeting include the

potential for employees to (1) understate sales budgets and//or overstate

expense budgets, (2) commit unethical or fraudulent acts in order to meet

budgeted results, and (3) always spend budgeted amounts, even if on

unnecessary items.




RENDER CO. CPA Activity-Based Budget

For Year Ending December 31, 2013

Budgeted Hours

Budgeted Price/hour

Budgeted Cost

Data-entry ..................................................... 2,200 $10 $ 22,000

Auditing ........................................................ 4,800 40 192,000

Tax ................................................................. 4,300 50 215,000

Consulting ....................................................

Total ..............................................................

750

12,050

50

37,500

$466,500


RIDA INC. Direct Materials Budget

Second Quarter

Units to be produced ...............................................................

240,000

Materials requirement per unit ............................................... x .60

Materials needed for production (units) ................................ 144,000

Add budgeted ending inventory (units)* ............................... 15,750

Total materials requirements (units) ...................................... 159,750

Deduct beginning inventory (units)** ....................................

Materials to be purchased (units) .........................................

Material price per unit..............................................................

Total cost of direct materials purchases ...............................

(72,000)

87,750

x $175

$15,356,250

*(52,500 x 0.60) x 50%

**144,000 x 50%



Exercise 20-26 (15 minutes) 1.

RIDA INC. Direct Labor Budget

Second Quarter

Units to be produced ...............................................................

240,000

Labor requirements per unit (hours) ..................................... x 4

Total labor hours needed ........................................................ 960,000


Labor dollars ............................................................................ $8,640,000

2.

RIDA INC. Factory Overhead Budget

Second Quarter

Total labor hours needed ........................................................

960,000

Variable overhead rate per DL hour ....................................... x $11

Budgeted variable overhead ................................................... $10,560,000

Budgeted fixed overhead ........................................................ 450,000

Budgeted total overhead ......................................................... $11,010,000




RAD CO. Direct Materials Budget For April, May, and June

April May June

Budget production (units) ........................... 442 570 544

Materials requirements per unit ................. x 5 x 5 x 5

Materials needed for production (lbs.) ...... 2,210 2,850 2,720

Add budgeted ending inventory* ............... 855 816 810

Total materials requirements (lbs.) ............ 3,065 3,666 3,530

Deduct beginning inventory (lbs.) .............. (663) (855) (816)

Materials to be purchased (lbs.) ................. 2,402 2,811 2,714

*30% of next month’s materials needed for production. July’s materials needed for production equals 2,700 pounds (540 units x 5).



Exercise 20-28 (15 minutes) 1.

RAD CO. Direct Labor Budget


April May June

Budget production (units) ........................... 442 570 544

Direct labor hours per unit .......................... x 0.50 x 0.50 x 0.50

Total labor hours needed ............................ 221 285 272

Labor rate (per hour) ................................... x $16 x $16 x $16

Labor cost ..................................................... $3,536 $4,560 $4,352

2.

RAD CO. Factory Overhead Budget For April, May, and June

April May June

Total labor hours needed ............................ 221 285 272

Variable factory overhead rate ................... x $20 x $20 x $20

Budgeted variable overhead ....................... $4,420 $5,700 $5,440

Budgeted fixed overhead ............................ 8,000 8,000 8,000

Total factory overhead ................................ $12,420 $13,700 $13,440



PROBLEM SET A

Problem 20-1A (60 minutes)

Part 1

KEGGLER’S SUPPLY Merchandise Purchases Budgets

For March, April, and May

March April May

FOOTWEAR

Budgeted sales for next month ........................... 25,000 32,000 35,000

Ratio of ending inventory to future sales ........... 30% 30% 30%

Budgeted ending inventory ................................. 7,500 9,600 10,500

Add budgeted sales .............................................. 15,000 25,000 32,000

Required units of available merchandise ........... 22,500 34,600 42,500

Less actual (or budgeted) beginning inventory ....... (20,000) (7,500) (9,600)

Budgeted purchases ............................................ 2,500 27,100 32,900

SPORTS EQUIPMENT








APPAREL










Problem 20-1A (Continued)

Part 2. Analysis Component

The factor that causes the first month’s purchases to be so much smaller is

the excess inventory that accumulated just prior to the budgeting period.

For example, 20,000 units of footwear are in March’s beginning inventory;

however, March sales are budgeted at only 15,000 units. Accordingly,

budgeted purchases are smaller because it is management’s goal to

reduce the inventory to only 30% of the next month’s sales.

This overstocking factor could exist for a number of reasons, including:

Management may have simply lost sight of inventory levels, thereby

allowing them to reach inappropriately high levels.

There may have been some potentially disruptive factor (such as a

strike, bad weather, or political uncertainty) that would have temporarily

interrupted the smooth delivery of products from the supplier. Thus,

management would have found it prudent to accumulate an excess as a

temporary safety stock against an interrupted supply.

The company’s suppliers may have only recently become more

dependable than they were in the past.

A supplier may have recently located a new distribution facility nearby,

with the result that the merchandise can be delivered more promptly.

Competition among suppliers may have caused them to become more

customer oriented, with the result that they will deliver products in

smaller lots more quickly.




ONEIDA COMPANY Cash Budget

For September, October, and November

September October November

Beginning balance .......................................... $ 5,000 $ 99,250 $ 69,500

Cash receipts

Collection on accounts receivable* ............ 159,250 249,250 338,100

Receipts from bank loan .............................. 100,000 _______ _______

Total cash available ........................................ 264,250 348,500 407,600

Cash disbursements

Payments on accounts payable** ............... 100,000 217,000 228,000

Payroll ............................................................ 20,000 22,000 24,000

Rent ................................................................ 10,000 10,000 10,000

Other expenses ............................................. 35,000 30,000 20,000

Repayment on bank loan ............................. 100,000

Interest on bank loan*** ............................... ________ ________ 3,000

Total cash disbursements ........................... 165,000 279,000 385,000

Ending cash balance ...................................... $ 99,250 $ 69,500 $ 22,600

*** Interest at 12% on $100,000 for 3 months is $3,000. Supporting schedules

Collections of credit sales* August September October November

Aug. sales ($215,000)—[25%: 45%: 20%: 9%] ................ $ 53,750 $ 96,750 $ 43,000 $ 19,350 Sept. sales ($250,000)—[25%: 45%: 20%] ....................... - 62,500 112,500 50,000 Oct. sales ($375,000)—[25%: 45%] .................................. - - 93,750 168,750 Nov. sales ($400,000)—[25%] .......................................... - - - 100,000 Total .................................................................................. $ 53,750 $159,250 $249,250 $338,100

Payments on credit purchases** August September October November

Aug. purchases ($125,000)—(0%: 80%: 20%) ........................................ $ 0 $100,000 $ 25,000 $ - Sept. purchases ($240,000)—(0%: 80%: 20%) ....................................... - 0 192,000 48,000 Oct. purchases ($225,000)—(0%: 80%) .................................................. - - 0 180,000 Nov. purchases ($200,000)—(0%) .......................................................... - - - 0 Total ......................................................................................................... $ 0 $100,000 $217,000 $228,000




Part 1

Cash collections of credit sales (accounts receivable)

From sales in Total % Collected June July

April .............................................. $ 720,000 28% $201,600 May ............................................... 360,000 50 180,000 ............................................... 28 $100,800 June .............................................. 1,080,000 20 216,000 .............................................. 50 540,000 July ............................................... 900,000 20 _______ 180,000 Total collected ............................. $597,600 $820,800

Part 2

Budgeted ending inventories (in units)

April May June July

Next month’s budgeted sales ..................... 2,000 6,000 5,000 3,800 Ratio of inventory to future sales ............... 20% 20% 20% 20% Budgeted “base” ending inventory ........... 400 1,200 1,000 760 Plus safety stock.......................................... 100 100 100 100 Budgeted ending inventory ........................ 500 1,300 1,100 860

Part 3

AZTEC COMPANY Merchandise Purchases Budgets

For May, June, and July

May June July

Budgeted ending inventory (from part 2) ............ 1,300 1,100 860

Add budgeted sales .......................................... 2,000 6,000 5,000

Required units of available merchandise ....... 3,300 7,100 5,860

Deduct beginning inventory ............................ (500) (1,300) (1,100)

Budgeted purchases (units) ............................ 2,800 5,800 4,760

Budgeted cost per unit ..................................... $110 $110 $110

Budgeted cost of merchandise purchases ........ $308,000 $638,000 $523,600




Part 4

Cash payments on product purchases (for June and July)

From purchases in Total % Paid June July

May ................................................ $308,000 40% $123,200 June ............................................... 638,000 60 382,800 .............................................. 40 $255,200 July ................................................ 523,600 60 ________ 314,160 Total paid ...................................... $506,000 $569,360

Part 5

AZTEC COMPANY Cash Budget June and July

June July

Beginning cash balance ................................................ $100,000 $100,000

Cash receipts from customers ..................................... 597,600 820,800

Total available cash ....................................................... 697,600 920,800

Cash disbursements Payments on purchases ............................................. 506,000 569,360

Selling and administrative expenses ......................... 110,000 110,000

Interest expense* ......................................................... 250 437

Total disbursements ................................................... 616,250 679,797

Preliminary cash balance .............................................. 81,350 241,003

Additional loan from bank ............................................ 18,650 0

Repayment of loan to bank ........................................... ________ 43,650

Ending cash balance ..................................................... $100,000 $197,353

Ending loan balance** ................................................... $ 43,650 $ 0

* Interest expense ** Loan balance June = $25,000 x 12%/12 = $250 June = $25,000 + $18,650 = $43,650 July = $43,650 x 12%/12 = $437 (rounded) July = $43,650 - $43,650 = $0



Problem 20-3A (Concluded) Part 6

Information about the need for cash in the near future would be helpful to

the management of Aztec Company because they would be able to enter

into negotiations with potential lenders well ahead of any immediate need

to obtain the cash. They would not only be able to avoid the risk of being

unable to pay their bills, they would also be able to enter into the debt

agreement on the most favorable terms available to them.

In addition, a good cash budget is likely to be helpful to management in

negotiating the terms of the loan. In this situation, the company can tell the

bank that it will need another loan in the following month. Hopefully, the

company will be able to develop additional cash budgets that will show

enough cash being accumulated to allow the loans to be paid back. If

management is armed with this kind of information, it should be able to

negotiate more favorable terms with the bank.




Part 1

MERLINE Budgeted Income Statement

For Months of January, February, and March, 2014


Sales* ....................................................... $2,062,500 $2,268,750 $2,495,625

Cost of goods sold* ................................ 1,237,500 1,361,250 1,497,375

Gross profit ............................................. 825,000 907,500 998,250

Expenses

Sales commissions (10%) .................... 206,250 226,875 249,563

Advertising ($250,000 x 1.15) .............. 287,500 287,500 287,500

Store rent ............................................... 30,000 30,000 30,000

Administrative salaries ........................ 45,000 45,000 45,000

Depreciation .......................................... 50,000 50,000 50,000

Other expenses ..................................... 10,000 10,000 10,000

Total expenses ........................................ 628,750 649,375 672,063

Net income ............................................... $ 196,250 $ 258,125 $ 326,187

* Volume for the next three months increases by 10% per month

Sales Cost of Goods Units (@ $125) Sold (@ $75)

December ($2,250,000/$150) ..................... 15,000 January ...................................................... 16,500 $2,062,500 $1,237,500 February ..................................................... 18,150 2,268,750 1,361,250 March .......................................................... 19,965 2,495,625 1,497,375

Part 2: Analysis Component

The plan for increasing sales volume by reducing the price and increasing advertising would cause the company to generate less net income in each of the three months of the next quarter than was earned in December. This result is not encouraging. However, the rate of increase in earnings over the three months is substantial. If the growth rate for sales can be maintained without increasing commissions or other expenses, a large payoff would be earned by making the changes and riding out the short-run period of relatively lower profits. This is a common problem for management when introducing a new strategy, product, or service to the market.




Part 1

DIMSDALE SPORTS CO. Sales Budgets

January, February, and March 2014

Budgeted Units

Budgeted Unit Price

Budgeted Total Dollars

January 2014 ........................................................ 7,000 $55 $ 385,000

February 2014....................................................... 9,000 55 495,000

March 2014 ........................................................... 11,000 55 605,000

Total for the first quarter ..................................... 27,000 $1,485,000

Part 2

DIMSDALE SPORTS CO. Merchandise Purchases Budgets


January February March Total

Next month’s budgeted sales ............... 9,000 11,000 10,000

Ratio of inventory to future sales ......... x 20% x 20% x 20%

Budgeted ending inventory .................. 1,800 2,200 2,000

Add budgeted sales ............................... 7,000 9,000 11,000

Required available merchandise .......... 8,800 11,200 13,000

Deduct beginning inventory ................. (5,000) (1,800) (2,200)

Units to be purchased ........................... 3,800 9,400 10,800 24,000

Budgeted cost per unit .......................... $ 30 $ 30 $ 30 $ 30

Budgeted merchandise purchases ...... $114,000 $282,000 $324,000 $720,000

Part 3

DIMSDALE SPORTS CO. Selling Expense Budgets

January, February, and March 2014 January February March Total

Budgeted sales ..................................... $385,000 $495,000 $605,000

Sales commission percent .................. x 20% x 20% x 20%

Sales commissions expense ............... 77,000 99,000 121,000 $297,000

Sales salaries........................................ 5,000 5,000 5,000 15,000

Total selling expenses ......................... $ 82,000 $104,000 $126,000 $312,000




Part 4

DIMSDALE SPORTS CO. General and Administrative Expense Budgets



Salaries ....................................................... $12,000 $12,000 $12,000 $36,000

Maintenance ............................................... 2,000 2,000 2,000 6,000

Depreciation* .............................................. 6,000 7,000 7,300 20,300

Total expenses ........................................... $20,000 $21,000 $21,300 $62,300

* Depreciation expense calculations

Annual Amount January February March Total

Equipment owned on 12/31/2013 ....................

$67,500

$5,625

$5,625

$5,625

$16,875

Purchased in January ........ 4,500 375 375 375 1,125 Purchased in February ....... 12,000 1,000 1,000 2,000 Purchased in March ............ 3,600 ______ ______ 300 300 Totals ................................... $6,000 $7,000 $7,300 $20,300

Part 5

DIMSDALE SPORTS CO. Capital Expenditures Budgets



Equipment purchases ......................................... $36,000 $96,000 $ 28,800

Land purchase ..................................................... ______ ______ 150,000

Total ...................................................................... $36,000 $96,000 $178,800




Part 6 DIMSDALE SPORTS CO.

Cash Budgets



Beginning cash balance ...................................... $ 36,000 $ 30,100 $210,300

Cash receipts from customers (note A)................ 221,250 697,000 489,500

Total cash available ............................................. 257,250 727,100 699,800

Cash disbursements

Payments for merchandise (note B) ................... 80,000 302,800 147,600

Sales commissions ........................................... 77,000 99,000 121,000

Sales salaries ..................................................... 5,000 5,000 5,000

General & administrative salaries .................... 12,000 12,000 12,000

Maintenance expense ....................................... 2,000 2,000 2,000

Interest ($15,000 x 1%) ............................................ 150

Taxes payable .................................................... 90,000

Purchases of equipment ................................... 36,000 96,000 28,800

Purchase of land ................................................ ________ ________ 150,000

Total cash disbursements .................................. 212,150 516,800 556,400

Preliminary cash balance .................................... 45,100 210,300 143,400

Repayment of loan to bank ................................. (15,000) _______ ________

Ending cash balance ........................................... $ 30,100 $210,300 $143,400

Loan balance, end of month ............................... $ 0 $ 0 $ 0

Supporting calculations January February March Total Note A: Cash receipts from customers Total sales ......................................................... $385,000 $495,000 $605,000 $1,485,000 Cash sales (25%) .............................................. 96,250 123,750 151,250 371,250 Credit sales (75%) ............................................ 288,750 371,250 453,750 1,113,750 Cash collections Receivables at 12/31/2013 ............................... $125,000 $400,000 $525,000 Month after sale (60%) ..................................... 173,250 $222,750 396,000 Second month (40%) ........................................ _______ _______ 115,500 115,500 Total from credit customers ............................ 125,000 573,250 338,250 1,036,500 Cash sales......................................................... 96,250 123,750 151,250 371,250 Total cash received .......................................... $221,250 $697,000 $489,500 $1,407,750

Note B: Cash payments for merchandise Credit purchases .............................................. $114,000 $282,000 $324,000 $720,000 Accounts payables at 12/31/2013 $ 80,000 $280,000 $360,000 Month after purchase (20%) ............................ 22,800 $ 56,400 79,200 Second month (80%) ........................................ _______ _______ 91,200 91,200 Total paid on purchases .................................. $ 80,000 $302,800 $147,600 $530,400




Part 7

DIMSDALE SPORTS CO. Budgeted Income Statement

For Three Months Ended March 31, 2014

Sales ................................................................................ $1,485,000 Cost of goods sold (27,000 units @ $30) ..................... 810,000 Gross profit .................................................................... 675,000 Operating expenses

Sales commissions ..................................................... $297,000 Sales salaries ............................................................... 15,000 General administrative salaries ................................. 36,000 Maintenance expense ................................................. 6,000 Depreciation expense ................................................. 20,300 Interest expense .......................................................... 150 374,450

Income before taxes ...................................................... 300,550 Income taxes (40%) ....................................................... 120,220 Net income ...................................................................... $180,330

Part 8

DIMSDALE SPORTS CO. Budgeted Balance Sheet

March 31, 2014 ASSETS

Cash ............................................................ $ 143,400 Cash budget

Accounts receivable .................................. 602,250 Note C

Inventory ..................................................... 60,000 Note D

Total current assets ................................... 805,650

Land ............................................................ 150,000 Capital budget

Equipment .................................................. $700,800 Note E

Less accumulated depreciation ............... 87,800 613,000 Note F

Total assets ................................................ $1,568,650


Accounts payable ...................................... $ 549,600 Note G

Bank loan payable ..................................... 0 Cash budget

Taxes payable (due 4/15/2014) ................. 120,220 Income stmt.

Total liabilities ............................................ 669,820

Common stock ........................................... $472,500 Unchanged

Retained earnings ...................................... 426,330 Note H

Total stockholders’ equity ........................ 898,830

Total liabilities and equity ......................... $1,568,650



Problem 20-5A (Concluded)

Supporting Footnotes

Note C Beginning receivables ...................................................... $ 525,000 Credit sales ........................................................................ 1,113,750 Less collections ................................................................ (1,036,500) Ending receivables ............................................................ $ 602,250 Note D Beginning inventory .......................................................... $ 150,000 Purchases .......................................................................... 720,000 Less cost of goods sold ................................................... (810,000) Ending inventory* .............................................................. $ 60,000 *Also equals 2,000 units @ $30 = $60,000 Note E Beginning equipment ........................................................ $ 540,000 Purchased in January ....................................................... 36,000 Purchased in February...................................................... 96,000 Purchased in March .......................................................... 28,800 Total ................................................................................... $ 700,800 Note F Beginning accumulated depreciation .............................. $ 67,500 Depreciation expense ....................................................... 20,300 Total ................................................................................... $ 87,800 Note G Beginning accounts payable ............................................ $ 360,000 Purchases .......................................................................... 720,000 Payments ........................................................................... (530,400) Ending accounts payable ................................................. $ 549,600 Note H Beginning retained earnings ............................................ $ 246,000 Net income ......................................................................... 180,330 Total ................................................................................... $ 426,330



Problem 20-6A (40 minutes) Part 1

BLACK DIAMOND COMPANY Production Budget (in units)

Third Quarter

Budgeted ending inventory (skis) ......................................................... 3,500

Add budgeted sales ................................................................................ 150,000

Required units of available production ................................................ 153,500

Deduct beginning inventory (skis) ........................................................ (5,000)

Units to be manufactured ...................................................................... 148,500

Part 2

BLACK DIAMOND COMPANY Direct Materials Budget (in lbs, except where noted)

Third Quarter

Materials (carbon fiber) needed for production (148,500 x 2) ........ 297,000

Add budgeted ending inventory (carbon fiber) ............................... 4,000

Total materials (carbon fiber) requirements .................................... 301,000

Deduct beginning inventory (carbon fiber) ...................................... (6,000)

Units of materials (carbon fiber) to be purchased ........................... 295,000

Materials cost per pound ................................................................... $15

Total cost of materials purchases (295,000 x $15) .......................... $4,425,000



Problem 20-6A (concluded) Part 3

BLACK DIAMOND COMPANY Direct Labor Budget

Third Quarter

Units to be produced ............................................................... 148,500

Labor requirements per unit (hours) ..................................... x 0.50



Labor dollars ............................................................................ $1,485,000

Part 4

BLACK DIAMOND COMPANY Factory Overhead Budget

Third Quarter


74,250

Variable overhead rate per DL hour ....................................... x $8

Budgeted variable overhead ................................................... $ 594,000

Budgeted fixed overhead ........................................................ 1,782,000




Problem 20-7A (130 minutes) Part 1

ZIGBY MANUFACTURING Sales Budgets

April, May, and June 2013

Budgeted Units

Budgeted Unit Price


April 2013 .............................................................. 20,500 $23.85 $ 488,925

May 2013 ............................................................... 19,500 23.85 465,075

June 2013 .............................................................. 20,000 23.85 477,000

Total for the second quarter ............................... 60,000 $1,431,000

Part 2

ZIGBY MANUFACTURING Production Budget


April May June Total





Required units to be produced ............. 36,100 35,500 36,400


Units to be produced ............................. 19,700 19,900 20,400 60,000



Problem 20-7A (continued)

Part 3

ZIGBY MANUFACTURING Raw Materials Budget



Production budget (units) ..................... 19,700 19,900 20,400

Materials requirement per unit ............. x 0.50 x 0.50 x 0.50

Materials needed for production .......... 9,850 9,950 10,200

Add budgeted ending inventory ........... 4,975 5,100 4,000

Total materials requirements (units) .... 14,825 15,050 14,200


Materials to be purchased .................... 9,900 10,075 9,100 29,175

Material price per unit ........................... $ 20 $ 20 $ 20 $ 20

Total cost of direct material purchases ..... $198,000 $201,500 $182,000 $581,500

Part 4

ZIGBY MANUFACTURING Direct Labor Budget



Budgeted production (units) ................ 19,700 19,900 20,400

Labor requirements per unit (hours) .... x 0.50 x 0.50 x 0.50

Total labor hours needed ...................... 9,850 9,950 10,200 30,000

Labor rate (per hour) ............................. $ 15 $ 15 $ 15 $ 15

Labor dollars .......................................... $147,750 $149,250 $153,000 $450,000

Part 5

ZIGBY MANUFACTURING Factory Overhead Budget April, May, and June 2013


Labor hours needed ............................. 9,850 9,950 10,200

Variable factory overhead rate ............ x $2.70 x $2.70 x $2.70

Budgeted variable overhead ............... 26,595 26,865 27,540 $ 81,000

Fixed overhead ..................................... 20,000 20,000 20,000 60,000

Budgeted total overhead ..................... $46,595 $46,865 $47,540 $141,000



Problem 20-7A (continued)

Part 6

ZIGBY MANUFACTURING Selling Expense Budgets April, May, and June 2013


Budgeted sales ..................................... $488,925 $465,075 $477,000



Sales salaries........................................ 3,000 3,000 3,000 9,000

Total selling expenses ......................... $ 42,114 $ 40,206 $ 41,160 $123,480

Part 7

ZIGBY MANUFACTURING General and Administrative Expense Budgets



Salaries ....................................................... $12,000 $12,000 $12,000 $36,000

Interest on long-term note ........................ 4,500 4,500 4,500 13,500

Total expenses ........................................... $16,500 $16,500 $16,500 $49,500

*$500,000 x 0.90%




Part 8 ZIGBY MANUFACTURING

Cash Budgets


April May June




Cash disbursements

Payments for raw materials (note B) .................. 200,500 198,000 201,500

Payments for direct labor .................................

Payments for variable overhead ......................

Sales commissions ...........................................

147,750

26,595

39,114

149,250

26,865

37,206

153,000

27,540

38,160

Sales salaries ..................................................... 3,000 3,000 3,000


Dividends ........................................................... 10,000

Loan interest ($12,000 x 1%) .................................. 120

Long-term note interest ($500,000 x .0.9%) ............

Purchase of equipment .....................................

4,500

_______

4,500

_______

4,500

130,000



Additional loan .....................................................

Repayment of loan to bank .................................

(12,000)

_______

16,752 _______

Ending cash balance ........................................... $ 83,346 $124,295 $ 40,000

Loan balance, end of month ............................... $ 0 $ 0 $ 16,752

Supporting calculations April May June Total Note A: Cash receipts from customers Total sales ......................................................... $488,925 $465,075 $477,000 $1,431,000 Cash sales (30%) .............................................. 146,677 139,522 143,100 429,299 Credit sales (70%) ............................................ 342,248 325,553 333,900 1,001,701 Cash collections Month after sale (100%) ................................... $342,248 $342,248 $325,553 $1,010,049 Cash sales......................................................... 146,677 139,522 143,100 429,299 Total cash received .......................................... $488,925 $481,770 $468,653 $1,439,348

Note B: Cash payments for raw materials Month after purchase (100%) .......................... $200,500 $198,000 $201,500 $ 600,000

NOTE: Cash sales are rounded down to the nearest whole dollar. All other amounts are rounded

up to the nearest whole dollar. Student answers will vary slightly if they round differently.




Part 9

ZIGBY MANUFACTURING Budgeted Income Statement

For Three Months Ended June 30, 2013

Sales ................................................................................ $1,431,000 Cost of goods sold (60,000 units @ $19.85) ................ 1,191,000 Gross profit .................................................................... 240,000 Operating expenses

Sales commissions ..................................................... $114,480 Sales salaries ............................................................... 9,000 General administrative salaries ................................. 36,000 Long-term note interest .............................................. 13,500 Interest expense .......................................................... 120 173,100

Income before taxes ...................................................... 66,900 Income taxes (35%) ....................................................... 23,415 Net income ...................................................................... $ 43,485

Part — Budgeted Retained Earnings & Budgeted Balance Sheet

ZIGBY MANUFACTURING Budgeted Balance Sheet

June 30, 2013 ASSETS

Cash ............................................................ $ 40,000 Cash budget


Raw materials inventory ........................... Finished goods inventory .........................

80,000 325,540

Note D Note E


Equipment .................................................. $730,000 Note F

Less accumulated depreciation ............... 210,000 520,000 Note G

Total assets ................................................ $1,299,440


Accounts payable ...................................... $ 182,000 Note H

Bank loan payable ..................................... 16,752 Cash budget

Taxes payable ............................................ 23,415 Income stmt.

Total current liabilities .............................. 222,167

Long-term note payable ............................ Common stock ...........................................

$335,000

500,000 Unchanged

Retained earnings ...................................... 242,273 Note I





Problem 20-7A (Concluded)


Note C Beginning receivables ...................................................... $ 342,248 Credit sales ........................................................................ 1,001,701 Less collections ................................................................ (1,010,049) Ending receivables ............................................................ $ 333,900 Note D Beginning raw materials inventory .................................. $ 98,500 Purchases of raw materials .............................................. 581,500 Less materials used in production** ................................ (600,000) Ending raw materials inventory* ...................................... $ 80,000 *Also equals 4,000 units @ $20 = $80,000 **30,000 units x $20 per unit

Note E Beginning finished goods inventory ................................ $ 325,540 Cost of goods completed during the period ................... 1,191,000 Less cost of goods sold during the period ..................... (1,191,000) Ending finished goods inventory*.................................... $ 325,540 *Also equals 16,400 units @ $19.85 = $325,540 Note F

Beginning equipment ........................................................ $ 600,000 Purchased in June ............................................................ 130,000 Total ................................................................................... $ 730,000 Note G Beginning accumulated depreciation .............................. $ 150,000 Depreciation expense ....................................................... 60,000 Total ................................................................................... $ 210,000 Note H Beginning accounts payable ............................................ $ 200,500 Purchases of raw materials .............................................. 581,500 Payments for raw materials .............................................. (600,000) Ending accounts payable ................................................. $ 182,000 Note I

ZIGBY MANUFACTURING Budgeted Statement of Retained Earnings

For Three Months Ended June 30, 2013

Retained earnings, Beginning ......................... $208,788 Add: Net income ......................................... 43,485 252,273 Less: Dividends ........................................... 10,000 Retained earnings, Ending .............................. $242,273



PROBLEM SET B

Problem 20-1B (60 minutes)

Part 1

H2O SPORTS CORPORATION Merchandise Purchases Budgets


April May June

WATER SKIS








TOW ROPES








LIFE JACKETS










Problem 20-1B (Concluded) Part 2. Analysis Component

The factor that causes the first month’s purchases to be so much smaller is

the excess inventory that accumulated just prior to the budgeting period.

For example, 40,000 units of water skis are in April’s beginning inventory;

however, April sales are budgeted at only 70,000 units. Accordingly,

budgeted purchases are smaller because it is management’s goal to

reduce the inventory to only 10% of the next month’s sales.

This overstocking factor could exist for a number of reasons, including:

Management may have simply lost sight of inventory levels, thereby

allowing them to reach inappropriately high levels.

There may have been some potentially disruptive factor (such as a

strike, bad weather, or political uncertainty) that would have temporarily

interrupted the smooth delivery of products from the supplier. Thus,

management would have found it prudent to accumulate an excess as a

temporary safety stock against an interrupted supply.

The company’s suppliers may have only recently become more

dependable than they were in the past.

A supplier may have recently located a new distribution facility nearby,

with the result that the merchandise can be delivered more promptly.

Competition among suppliers may have caused them to become more

customer oriented, with the result that they will deliver products in

smaller lots more quickly.

This means H2O Sports can now get by with a much smaller safety stock.




SONY STEREO Cash Budgets


April May June

Beginning balance .......................................... $ 3,000 $ 53,000 $ 44,000

Cash receipts

Collection on accounts receivable* ............ 136,000 210,000 290,200

Receipts from bank loan .............................. 80,000 _______ _______

Total cash available ........................................ 219,000 263,000 334,200

Cash disbursements

Payments on accounts payable** ............... 80,000 188,000 186,000

Payroll ............................................................ 16,000 17,000 18,000

Rent ................................................................ 6,000 6,000 6,000

Other expenses ............................................. 64,000 8,000 7,000

Repayment on bank loan ............................. 80,000

Interest on bank loan* .................................. ________ ________ 2,400

Total cash disbursements ........................... 166,000 219,000 299,400

Ending cash balance ...................................... $ 53,000 $ 44,000 $ 34,800

* Interest at 12% on $80,000 for 90 days is $2,400.

Supporting calculations

Collections of credit sales* March April May June

March sales ($180,000)—[25%: 45%: 20%: 9%] .............. $ 45,000 $ 81,000 $ 36,000 $ 16,200 April sales ($220,000)—[25%: 45%: 20%] ....................... - 55,000 99,000 44,000 May sales ($300,000)—[25%: 45%] .................................. - - 75,000 135,000 June sales ($380,000)—[25%] .......................................... - - - 95,000 Total .................................................................................. $ 45,000 $136,000 $210,000 $290,200

Payments on credit purchases** March April May June

March purchases ($100,000)—(0%: 80%: 20%) ..................................... $ 0 $ 80,000 $ 20,000 $ - April purchases ($210,000)—(0%: 80%: 20%) ........................................ - 0 168,000 42,000 May purchases ($180,000)—(0%: 80%) .................................................. - - 0 144,000 June purchases ($220,000)—(0%) .......................................................... - - - 0 Total ......................................................................................................... $ 0 $ 80,000 $188,000 $186,000




Part 1

Cash collections of credit sales (accounts receivable)

From sales in Total % Collected March April

January ..................................... $396,000 23% $ 91,080 February .................................... 495,000 35 173,250 ................................... 23 $113,850 March ........................................ 418,000 40 167,200 ......................................... 35 146,300 April ........................................... 412,500 40 _______ 165,000 Total collected .......................... $431,530 $425,150

Part 2

Budgeted ending inventories (in units) January February March April

Next month’s budgeted sales ..................... 22,500 19,000 18,750 21,000

Ratio of inventory to future sales ............... 20% 20% 20% 20%

Budgeted “base” ending inventory ........... 4,500 3,800 3,750 4,200

Plus safety stock.......................................... 100 100 100 100

Budgeted ending inventory ........................ 4,600 3,900 3,850 4,300 Part 3

CONNICK COMPANY Merchandise Purchases Budgets

For February, March, and April

February March April

Budgeted ending inventory (from part 2) ............ 3,900 3,850 4,300

Add budgeted sales .......................................... 22,500 19,000 18,750

Required units of available merchandise ....... 26,400 22,850 23,050

Deduct beginning inventory ............................ (4,600) (3,900) (3,850)

Budgeted purchases (units) ............................ 21,800 18,950 19,200

Budgeted cost per unit ..................................... $12 $12 $12

Budgeted cost of merchandise purchases ........ $261,600 $227,400 $230,400



Problem 20-3B (Continued)

Part 4

Cash payments on product purchases (for March and April)

From purchases in Total % Paid March April

February ....................................... $261,600 70% $183,120 March ........................................... 227,400 30 68,220 ............................................ 70 $159,180 April .............................................. 230,400 30 _______ 69,120 Total paid ..................................... $251,340 $228,300

Part 5

CONNICK COMPANY Cash Budget

March and April

March April

Beginning cash balance .......................................................... $ 50,000 $ 58,070

Cash receipts from customers ............................................... 431,530 425,150

Total available cash ................................................................. 481,530 483,220

Cash disbursements

Payments on purchases ....................................................... 251,340 228,300

Selling and administrative expenses ................................... 160,000 160,000

Interest expense* ................................................................... 120 0

Total disbursements ............................................................. 411,460 388,300

Preliminary cash balance ........................................................ $ 70,070 $ 94,920

Additional loan .........................................................................

Repayment of loan ................................................................... (12,000) ________

Ending cash balance ............................................................... $ 58,070 $ 94,920

Ending loan balance ................................................................ $ 0 $ 0

*Interest expense: March = $12,000 x 12% /12 = $120

Part 6

Analysis Component: Information about the supply of cash in the near future would be helpful to the management of Connick Company. A good cash budget would be likely to be helpful to management in negotiating the terms of the loan. If the bank knows, for example, that the full borrowed amount is likely to be repaid in the following month, the interest rate could be substantially lower.




Part 1

COMP-MEDIA Budgeted Income Statement

For Months of July, August, and September, 2013

July August September

Sales* ......................................................... $1,265,000 $1,391,500 $1,530,650

Cost of goods sold* .................................. 660,000 726,000 798,600

Gross profit ............................................... 605,000 665,500 732,050

Expenses

Sales commissions (10%) ...................... 126,500 139,150 153,065

Advertising ($200,000 x 1.25) ................ 250,000 250,000 250,000

Store rent ................................................. 24,000 24,000 24,000

Administrative salaries .......................... 40,000 40,000 40,000

Depreciation ............................................ 50,000 50,000 50,000

Other ........................................................ 12,000 12,000 12,000

Total expenses .......................................... 502,500 515,150 529,065

Net income ................................................. $ 102,500 $ 150,350 $ 202,985

* Volume for the next three months increases by 10% per month

Sales Cost of Goods Units (@ $115) Sold (@ $60)

June ($1,300,000/$130) .............................. 10,000 July ............................................................. 11,000 $1,265,000 $660,000 August ........................................................ 12,100 1,391,500 726,000 September .................................................. 13,310 1,530,650 798,600

Part 2: Analysis Component

The plan for increasing sales volume by reducing the price and increasing advertising would cause the company to generate less net income in each of the three months of the next quarter than was earned in June. The expected results for the first three months are not encouraging. However, the September net income is 83% of that for June, and the rate of increase in earnings over the three months is substantial. If the growth rate for sales can be maintained without increasing commissions or other expenses, a large payoff might be earned by making the changes and riding out the short-run period of relatively lower profits. This is a common problem for management when introducing a new strategy, product, or service to the market.




Part 1

ISLE CORPORATION Sales Budgets


Budgeted Units

Budgeted Unit Price


January 2014 ....................................................... 6,000 $45 $ 270,000

February 2014...................................................... 8,000 45 360,000

March 2014 .......................................................... 10,000 45 450,000

Total for the first quarter .................................... 24,000 $1,080,000

Part 2

ISLE CORPORATION Merchandise Purchases Budgets







Required available merchandise .......... 8,000 10,500 12,250


Units to be purchased ........................... 3,000 8,500 9,750 21,250

Budgeted cost per unit .......................... $ 30 $ 30 $ 30 $ 30

Budgeted merchandise purchases ...... $90,000 $255,000 $292,500 $637,500

Part 3

ISLE CORPORATION Selling Expense Budgets



Budgeted sales ..................................... $270,000 $360,000 $450,000



Sales salaries........................................ 7,500 7,500 7,500 22,500




Problem 20-5B (Continued) Part 4

ISLE CORPORATION General and Administrative Expense Budgets



Salaries ....................................................... $12,000 $12,000 $12,000 $36,000

Maintenance ............................................... 3,000 3,000 3,000 9,000

Depreciation* .............................................. 6,375 7,375 7,675 21,425

Total expenses ........................................... $21,375 $22,375 $22,675 $66,425

* Depreciation expense calculations

Annual Amount January February March Total

Equipment owned on 12/31/2013 ....................

$67,500

$5,625

$5,625

$5,625

$16,875

Purchased in January ........ 9,000 750 750 750 2,250 Purchased in February ....... 12,000 1,000 1,000 2,000 Purchased in March ............ 3,600 ______ ______ 300 300 Total ..................................... $6,375 $7,375 $7,675 $21,425

Part 5

ISLE CORPORATION Capital Expenditures Budgets



Equipment purchases ......................................... $72,000 $96,000 $ 28,800

Land purchase ..................................................... _______ _______ 150,000

Total ...................................................................... $72,000 $96,000 $178,800




Part 6

ISLE CORPORATION Cash Budgets



Beginning cash balance ...................................... $ 36,000 $182,850 $ 107,850



Cash disbursements Payments for merchandise (note B) ................... 72,000 306,000 123,000

Sales commissions ........................................... 54,000 72,000 90,000 Sales salaries ..................................................... 7,500 7,500 7,500 General & administrative salaries .................... 12,000 12,000 12,000 Maintenance expense ....................................... 3,000 3,000 3,000 Interest ($15,000 x 1%) ............................................ 150 Taxes payable .................................................... 90,000 Purchases of equipment ................................... 72,000 96,000 28,800 Purchase of land ................................................ ________ ________ 150,000


Preliminary cash balance .................................... $197,850 $107,850 $ (40,950)

Repayment of loan to bank ................................. (15,000)

Additional loan from bank .................................. ________ ________ 76,950

Ending cash balance ........................................... $182,850 $107,850 $ 36,000


Supporting calculations January February March Total Note A: Cash receipts from customers Total sales ......................................................... $270,000 $360,000 $450,000 $1,080,000 Cash sales (25%) .............................................. $ 67,500 $ 90,000 $112,500 $ 270,000 Credit sales (75%) ............................................ $202,500 $270,000 $337,500 $ 810,000 Cash collections Receivables at 12/31/2013 (60%; 40%) ........... $315,000 $210,000 $ 525,000 January credit sales (60%; 40%) .................... 121,500 $ 81,000 202,500 February credit sales (60%; 40%) ................... _______ _______ 162,000 162,000 Total from credit customers ............................ $315,000 331,500 243,000 889,500 Cash sales......................................................... 67,500 90,000 112,500 270,000 Total cash received .......................................... $382,500 $421,500 $355,500 $1,159,500

Note B: Cash payments for merchandise Credit purchases .............................................. $90,000 $255,000 $292,500 $637,500 Accounts payable at 12/31/2013 (20%; 80%) . $72,000 $288,000 $360,000 January purchases (20%; 80%) ...................... 18,000 $72,000 90,000 February purchases (20%) .............................. _______ _______ 51,000 51,000 Total paid on purchases .................................. $72,000 $306,000 $123,000 $501,000




Part 7

ISLE CORPORATION Budgeted Income Statement

For Three Months Ended March 31, 2014

Sales ................................................................................ $1,080,000 Cost of goods sold (24,000 units @ $30) ..................... 720,000 Gross profit .................................................................... 360,000 Operating expenses

Sales commissions ..................................................... $216,000 Sales salaries ............................................................... 22,500 General administrative salaries ................................. 36,000 Maintenance expense ................................................. 9,000 Depreciation expense ................................................. 21,425 Interest expense .......................................................... 150 305,075


Part 8

ISLE CORPORATION Budgeted Balance Sheet

March 31, 2014 ASSETS

Cash ............................................................ $ 36,000 Cash budget


Inventory ..................................................... 67,500 Note D


Equipment .................................................. $736,800 Note E

Less accumulated depreciation ............... 88,925 647,875 Note F

Land ............................................................ 150,000 Capital budget

Total assets ................................................ $1,346,875


Accounts payable ...................................... $ 496,500 Note G


Taxes payable (due 4/15/2014) ................. 21,970 Income stmt.

Total liabilities ............................................ 595,420

Common stock ........................................... $472,500 Unchanged

Retained earnings ...................................... 278,955 Note H





Problem 20-5B (Concluded)


Note C Beginning receivables ................................................................. $ 525,000 Credit sales ................................................................................... 810,000 Less collections ........................................................................... (889,500) Ending receivables ....................................................................... $ 445,500 Note D Beginning inventory ..................................................................... $ 150,000 Purchases ..................................................................................... 637,500 Less cost of goods sold .............................................................. (720,000) Ending inventory* ......................................................................... $ 67,500 *Also equals 2,250 units @ $30 = $67,500 Note E Beginning equipment ................................................................... $ 540,000 Purchased in January .................................................................. 72,000 Purchased in February................................................................. 96,000 Purchased in March ..................................................................... 28,800 Total .............................................................................................. $ 736,800 Note F Beginning accumulated depreciation ......................................... $ 67,500 Depreciation expense .................................................................. 21,425 Total .............................................................................................. $ 88,925 Note G Beginning accounts payable ....................................................... $ 360,000 Purchases ..................................................................................... 637,500 Payments ...................................................................................... (501,000) Ending accounts payable ............................................................ $ 496,500 Note H Beginning retained earnings ....................................................... $ 246,000 Net income .................................................................................... 32,955 Total .............................................................................................. $ 278,955



Problem 20-6B (30 minutes) Part 1

NSA COMPANY Production Budget (in units)

Second Quarter

Budgeted ending inventory (bats) ........................................................ 6,000

Add budgeted sales ................................................................................ 250,000

Required units of available production ................................................ 256,000

Deduct beginning inventory (bats) ....................................................... (8,000)

Units to be manufactured ...................................................................... 248,000

Part 2

NSA COMPANY Direct Materials Budget (in lbs, except where noted)

Second Quarter

Materials (aluminum) needed for production (248,000 x 3) ............ 744,000

Add budgeted ending inventory (aluminum) ................................... 12,000

Total materials (aluminum) requirements ........................................ 756,000

Deduct beginning inventory (aluminum) .......................................... (15,000)

Units of materials (aluminum) to be purchased .............................. 741,000

Materials cost per pound ................................................................... $4

Total cost of materials purchases (741,000 x $4) ............................ $2,964,000



Problem 20-6B (concluded) Part 3

NSA COMPANY Direct Labor Budget

Second Quarter

Units to be produced ............................................................... 248,000

Labor requirements per unit (hours) ..................................... x 0.50



Labor dollars ............................................................................ $2,232,000

Part 4

NSA COMPANY Factory Overhead Budget

Second Quarter


124,000

Variable overhead rate per direct labor hour ........................ x $12

Budgeted variable overhead ................................................... $1,488,000

Budgeted fixed overhead ........................................................ 1,776,000





Part 1

NABAR MANUFACTURING Sales Budgets

July, August, and September 2013

Budgeted Units

Budgeted Unit Price


July 2013 ............................................................... 21,000 $17.00 $ 357,000

August 2013 .......................................................... 19,000 17.00 323,000

September 2013 ................................................... 20,000 17.00 340,000

Total for the first quarter ..................................... 60,000 $1,020,000

Part 2

NABAR MANUFACTURING Production Budget


July August Sept. Total





Required units to be produced ............. 34,300 33,000 36,800


Units to be produced ............................. 17,500 19,700 22,800 60,000



Problem 20-7B (continued) Part 3

NABAR MANUFACTURING Raw Materials Budget



Production budget (units) ..................... 17,500 19,700 22,800

Materials requirement per unit ............. x 0.50 x 0.50 x 0.50

Materials needed for production .......... 8,750 9,850 11,400

Add budgeted ending inventory ........... 1,970 2,280 1,980

Total materials requirements (units) .... 10,720 12,130 13,380


Materials to be purchased .................... 6,345 10,160 11,100 27,605

Material price per unit ........................... $ 8 $ 8 $ 8 $ 8

Total cost of direct material purchases ..... $ 50,760 $ 81,280 $ 88,800 $220,840

Part 4

NABAR MANUFACTURING Direct Labor Budget



Budgeted production (units) ................ 17,500 19,700 22,800

Labor requirements per unit (hours) .... x 0.50 x 0.50 x 0.50

Total labor hours needed ...................... 8,750 9,850 11,400 30,000

Labor rate (per hour) ............................. $ 16 $ 16 $ 16 $ 16

Labor dollars .......................................... $140,000 $157,600 $182,400 $480,000

Part 5

NABAR MANUFACTURING Factory Overhead Budget

July, August, and September 2013 July August Sept. Total

Budgeted production (units) ............... 17,500 19,700 22,800

Variable factory overhead rate* .......... x $1.35 x $1.35 x $1.35

Budgeted variable overhead ............... 23,625 26,595 30,780 $ 81,000

Fixed overhead ..................................... 20,000 20,000 20,000 60,000

Budgeted total overhead ..................... $ 43,625 $ 46,595 $ 50,780 $141,000



Problem 20-7B (continued)

Part 6

NABAR MANUFACTURING Selling Expense Budgets

July, August, and September 2013 July August Sept. Total

Budgeted sales ..................................... $357,000 $323,000 $340,000



Sales salaries........................................ 3,500 3,500 3,500 10,500


Part 7

NABAR MANUFACTURING General and Administrative Expense Budgets



Salaries ....................................................... $ 9,000 $ 9,000 $ 9,000 $27,000

Interest on long-term note ........................ 2,700 2,700 2,700 8,100

Total expenses ........................................... $11,700 $11,700 $11,700 $35,100



Problem 20-7B (Continued) Part 8

NABAR MANUFACTURING Cash Budgets


July August Sept.




Cash disbursements

Payments for raw materials (note B) .................. 51,400 50,760 81,280

Payments for direct labor .................................

Payments for variable overhead ......................

Sales commissions ...........................................

140,000

23,625

35,700

157,600

26,595

32,300

182,400

30,780

34,000

Sales salaries ..................................................... 3,500 3,500 3,500


Income taxes ......................................................

Dividends ...........................................................

10,000

20,000

Loan interest ($24,000 x 1%) .................................. 240

Long-term note interest ($300,000 x .0.9%) ............

Purchase of equipment .....................................

2,700

_______

2,700

_______

2,700

100,000



Additional loan .....................................................

Repayment of loan to bank .................................

(24,000)

_______

14,380 ________

Ending cash balance ........................................... $ 96,835 $141,180 $ 40,000


Supporting calculations July August Sept. Total Note A: Cash receipts from customers Total sales ......................................................... $357,000 $323,000 $340,000 $1,020,000 Cash sales (30%) .............................................. 107,100 96,900 102,000 306,000 Credit sales (70%) ............................................ 249,900 226,100 238,000 714,000 Cash collections Month after sale (100%) ................................... $249,900 $249,900 $226,100 $ 725,900 Cash sales......................................................... 107,100 96,900 102,000 306,000 Total cash received .......................................... $357,000 $346,800 $328,100 $1,031,900

Note B: Cash payments for raw materials Month after purchase (100%) .......................... $ 51,400 $ 50,760 $ 81,280 $ 183,440




Part 9

NABAR MANUFACTURING Budgeted Income Statement

For Three Months Ended September 30, 2013

Sales ................................................................................ $1,020,000 Cost of goods sold (60,000 units @ $14.35) ................ 861,000 Gross profit .................................................................... 159,000 Operating expenses

Sales commissions ..................................................... $102,000 Sales salaries ............................................................... 10,500 General administrative salaries ................................. 27,000 Long-term note interest .............................................. 8,100 Interest expense .......................................................... 240 147,840


Part — Budgeted Retained Earnings & Budgeted Balance Sheet

NABAR MANUFACTURING Budgeted Balance Sheet

September 30, 2013 ASSETS

Cash ............................................................ $ 40,000 Cash budget


Raw materials inventory ........................... Finished goods inventory .........................

15,840 241,080

Note D

Note E


Equipment .................................................. $820,000 Note F

Less accumulated depreciation ............... 300,000 520,000 Note G

Total assets ................................................ $1,054,920


Accounts payable ...................................... $ 88,800 Note H


Taxes payable ............................................ 3,906 Income stmt.

Total current liabilities .............................. 107,086

Long-term note payable ............................ Common stock ...........................................

$600,000

300,000

Unchanged

Retained earnings ...................................... 47,834 Note I





Problem 20-7B (Concluded)


Note C Beginning receivables ...................................................... $ 249,900 Credit sales ........................................................................ 714,000 Less collections ................................................................ (725,900) Ending receivables ............................................................ $ 238,000 Note D Beginning raw materials inventory .................................. $ 35,000 Purchases of raw materials .............................................. 220,840 Less materials used in production** ................................ (240,000) Ending inventory raw materials inventory* ..................... $ 15,840 *Also equals 1,980 units @ $8 = $15,840 **30,000 units x $8 per unit

Note E Beginning finished goods inventory ................................ $ 241,080 Cost of goods completed during the period ................... 861,000 Less cost of goods sold during the period ..................... (861,000) Ending inventory raw materials inventory* ..................... $ 241,080 *Also equals 16,800 units @ $14.35 = $241,080 Note F

Beginning equipment ........................................................ $ 720,000 Purchased in September .................................................. 100,000 Total ................................................................................... $ 820,000 Note G Beginning accumulated depreciation .............................. $ 240,000 Depreciation expense ....................................................... 60,000 Total ................................................................................... $ 300,000 Note H Beginning accounts payable ............................................ $ 51,400 Purchases of raw materials .............................................. 220,840 Payments for raw materials .............................................. (183,440) Ending accounts payable ................................................. $ 88,800 Note I

NABAR MANUFACTURING Budgeted Statement of Retained Earnings

For Three Months Ended September 30, 2013

Retained earnings, Beginning ......................... $60,580 Add: Net income ......................................... 7,254 67,834 Less: Dividends ........................................... 20,000 Retained earnings, Ending .............................. $47,834



Serial Problem — SP 20

Serial Problem, Success Systems (50 minutes)

Part 1

SUCCESS SYSTEMS Budgeted Income Statements

For Months of April, May, and June

April May June

Sales* ......................................................... $69,600 $75,550 $81,500

Cost of goods sold**................................. 54,000 57,750 61,500

Gross profit ............................................... 15,600 17,800 20,000

Expenses

Sales commissions (10%) ...................... 6,960 7,555 8,150

Advertising ($3,000 x 1.10) .................... 3,300 3,300 3,300

Other fixed expenses ............................. 6,000 6,000 6,000

Total expenses .......................................... 16,260 16,855 17,450

Net income ................................................. $ (660) $ 945 $ 2,550

*Results from per month volume increases for the next 3 months

Desks Units Sales (@ $1,150) Variable Cost of Sales (@ $750)

April ..................................................................... 48 $55,200 $36,000 May ...................................................................... 52 59,800 39,000 June .............................................................. 113 56 64,400 42,000

Chairs Units Sales (@ $450) Variable Cost of Sales (@ $250)

April ..................................................................... 32 $14,400 $8,000 May ...................................................................... 35 15,750 8,750 June .............................................................. 113 38 17,100 9,500

Total Desk & Chairs Sales Variable Cost of Sales

April ..................................................................... $69,600 = $55,200 + $14,400 $44,000 = $36,000 + $8,000 May ...................................................................... $75,550 = $59,800 + $15,750 $47,750 = $39,000 + $8,750 June .............................................................. 113 $81,500 = $64,400 + $17,100 $51,500 = $42,000 + $9,500

**Total Cost of Sales Variable Fixed Total Cost of Sales

April ..................................................................... $44,000 $10,000 $54,000

May ...................................................................... 47,750 10,000 57,750

June 51,500 10,000 61,500



Serial Problem, Success Systems (Concluded) Part 2

The plan for increasing sales volume by reducing the price and increasing

advertising would cause the company to generate a loss in the first month

of the next quarter. This result is not encouraging. However, the company

would expect profits in each of the next two months of the quarter, and the

rate of increase in earnings over the three months is substantial. However,

the amount of profits in each of the next two months is low relative to the

company’s current income. If the growth rate for sales can be maintained

without increasing commissions or other expenses, a large payoff might be

earned by making the changes and riding out the short-run period of

relatively lower profits. This is a common problem for management when

introducing a new strategy, product, or service to the market.

Reporting in Action — BTN 20-1

1. Polaris’s statement of cash flows would report cash paid for

acquisitions of property and equipment among the activities disclosed in its cash flows from investing activities section.

2. a. Cash paid for acquisitions of property and equipment and reported on the statement of cash flows for the year ended December 31, 2011 is $84,484 (thousands).

b. Given the assumption—that Polaris’s annual cash payments for acquisitions of property and equipment equal 40% of the prior year’s net income—we would budget cash payments for the year ended 2012 of $91,030 (thousands), computed as $227,575 (thousands) x 40%.

3. Answers will depend on Polaris’s results obtained.



Comparative Analysis — BTN 20-2

1. Computation of inventory reduction under new distribution system

Amount of ending inventory required at the 30% rule [$1,000,000 x (1- 0.20) x 0.30] .................................................. $240,000

Amount of ending inventory required at the 10% rule [$1,000,000 x (1- 0.20) x 0.10] .................................................. 80,000

Difference (inventory reduction) ................................................. $160,000

This result implies that Arctic Cat can reduce its inventory level for the

Canadian market by $160,000 if it improves its distribution system.

2. An analysis such as in part 1 along with an explanation can make clear

to management the cost of funds necessary to support ending

inventory levels. Unless this type of information and analysis are

prepared, it is unlikely management will dedicate valuable time and

energy to investigate and implement a JIT inventory system.

To further illustrate, assuming a 15% interest cost of resources tied up

in inventory, a company can save money by reducing its inventory

level. In particular, by reducing its ending inventory by $160,000, Arctic

Cat would save $24,000 per year ($160,000 difference x 15% interest

cost) for just this one model and market. This means the operating

costs of a JIT inventory system can be as high as $24,000 per year and

be justified in terms of its costs being less than its benefits. Moreover,

if such a shift in inventory can benefit multiple future periods and

multiple product models, the savings are even greater. The type of

analysis here can show management the benefits of a JIT inventory

system, or any system, that reduces its inventory level. Extending this

analysis to all markets and product models, the benefits can be seen to

be substantial.



Ethics Challenge — BTN 20-3

Report on “Use It or Lose It” Budgeting

Instructor note: There is no widely accepted solution to this problem. The key is for the student to think about the problem and work to at least modify the negative behavioral consequences of this practice.

Any plan offered as a solution must better align upper management’s

expectations with department managers’ behavior. For example, upper

management might only cut by one-half the amount not spent according to

budget. Another potential suggestion is to allow department managers the

option of justifying why the amount was not spent and explain why current

budget levels must be maintained.

Upper management must also keep in mind that efficient and effective

allocation of resources is necessary to provide high-quality services to

customers and the public. All spending behavior must be monitored.

Without monitoring in the budgeting system, even more money will be

wasted or used inefficiently.



Communicating in Practice — BTN 20-4

MEMORANDUM TO: ____________________ FROM: ____________________ DATE: ____________________ SUBJECT: ____________________

The content of this memorandum will vary among students. The student must emphasize the need to know the compensation structure of the sales staff to understand any potential bias in the information provided to the budget process.

The memorandum should explain why a concern with bias in the information does exist. Specifically, if a bonus is paid when sales go over budget, then the sales staff is likely to under report achievable sales to increase the likelihood of earning the bonus. However, setting the budget below what is actually expected to occur invalidates the budget activity. Useful budgeting depends on accurate and unbiased sales estimates.

Taking It to the Net — BTN 20-5 1. The “e-budgets” Website lists a number of benefits such as accuracy, timeliness, ease of

sharing information, ease of updating, real-time comparison of actual performance vs. estimates, and so on.

In the case of large, multi-divisional companies, coordination across and within divisions is extremely important, so that plans across the organization are consistent. It appears that e-budgeting allows managers to share information on a real-time basis. Therefore, any changes made to the estimates can be seen right away by others within the organization.

Moreover, e-budgets are spreadsheet based which allows for manipulation of data and sensitivity (or what-if) analysis.

2. As a senior manager, my biggest concern would be security, particularly

when the system is easily accessible and usable. It would be important to determine who in the organization will have access to the information, and who will have the authority to change information. Also, it would be important to review the security protocols of outsiders (pirates) accessing e-budgets’ databases.



Teamwork in Action — BTN 20-6 There is no specific solution to this assignment. The instructor should

watch for proper development and identification of all reasonable costs.

Specifically, one should review the (1) items included in the budget, (2)

assumptions used in preparing the budget, and (3) proper format. For

example, one can look for how the team projected the costs of books and

supplies for courses yet to be attended. Taking the average cost of books

per course is one reasonable approach.

Entrepreneurial Decision — BTN 20-7

1. Budgeting allows an organization to plan its activities better by

allocating financial resources to the different activities. Consequently, it

can provide the owners with information that they can use for financing

purposes as well.

2. Sales forecasts and purchases budgets are particularly important in

businesses like Freshii that sell perishable items (food) and that try to

adapt rapidly to changing customer tastes. Failure to identify changing

sales trends could result in Matthew purchasing too much of certain

food items and too little of others. Purchasing excessive food items

could result in losses due to spoilage. Purchasing too little of certain

food items could result in missed sales.



Hitting the Road — BTN 20-8 Instructor note: This problem is designed to (1) show that external factors are important in determining price and volume and (2) develop awareness of external factors when preparing a sales budget.

1. & 2.

The types of external factors identified by the student for consideration in part (1), or selected as an explanatory factor for part (2), might include the following:

Location, such as near a convenient or busy traffic area.

Competitors’ responses to price and quality.

Climatic conditions.

Shifting demographics.

Changes to industrial base.

Labor supply.

Global Decision — BTN 20-9 1. The infrastructure and administration expense budget is likely to be an

important budget in the master budgeting process at KTM. In 2011,

infrastructure and administration expenses comprised about 4.0%

(€20,870,000/€526,801,000) of sales revenue. The amount of

infrastructure and administration expenses requires that due attention is

given to the infrastructure and administration expense budget

component of the master budget each year.

2. General office expenses

Top management salaries

Depreciation expense

3. The initial responsibility usually rests with a vice president or an

equivalent-level manager. KTM is organized by divisions. Therefore,

managers in each division may have initial responsibility for the

infrastructure and administration expense budget.

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