Skip to main content
Business LibreTexts

7.7: Summary

  • Page ID
    10429
  • Section Summaries

     

    7.1 Describe How and Why Managers Use Budgets

    • A good budgeting system assists management in reaching their goals through the planning and control of cash inflows through revenue and financing and outflows through payment and expenses.
    • There are various budgeting strategies including bottom-up, top-down, and zero-based budgeting.
    • A static budget is prepared at one level of activity, while a flexible budget allows the variable expenses to be adjusted for various levels of activity.
    • A master budget includes the subcategories of operating budgets and financial budgets.
    • A master budget is developed at the estimated level of activity.

    7.2 Prepare Operating Budgets

    • The sales budget is the first budget developed, and the estimated sales in turn guide the production budget.
    • The production budget shows the quantity of goods produced for each time period and leads to computing when and how much direct material needs to be ordered, when and how much labor needs to be scheduled, and when and how much manufacturing overhead needs to be planned.
    • The sales and administrative budget plans for the nonmanufacturing expenses.
    • All operating budgets combine to develop the budgeted income statement.

    7.3 Prepare Financial Budgets

    • The financial budgets include the capital asset budget and the cash budget. The cash collections schedule and cash payments schedule are computed and combined with the other budgets to develop the cash budget.
    • Information from the other budgets and the budgeted income statement are used to develop the budgeted balance sheet.

    7.4 Prepare Flexible Budgets

    • A master budget and related budgets are prepared as static budgets for the estimated level of activity.
    • A flexible budget adjusts the budgets for various levels of activity and allows for the actual results to be evaluated at the actual volume of activity.

    7.5 Explain How Budgets Are Used to Evaluate Goals

    • Management’s evaluations of the actual results versus the estimated budgetary results help plan for the future.
    • Favorable variances occur when sales are higher or expenses are lower than budgeted.
    • Unfavorable variances occur when sales are lower or expenses are higher than budgeted.

     

    Key Terms

     

    budget
    quantitative plan estimating when and how much cash or other resources will be received and how the cash or other resources will be used
    budgeted balance sheet
    estimated assets, liabilities, and equities that the company would have at the end of the year if their performance were to meet its expectations
    budgeted income statement
    statement similar to a traditional income statement except it contains budgeted data
    capital asset budget
    budget showing the organization’s plans to invest in long-term assets
    cash budget
    combined budget of all cash inflows and outflows of the organization
    cash collections schedule
    schedule showing when cash will be received from customers
    cash payments schedule
    schedule showing when cash will be used to pay for direct material purchases
    direct labor budget
    budget based on the production budget used to ensure the proper amount of staff is available for production and that there is money available to pay for the labor
    direct materials budget
    budget combining the production budget with the direct material per unit to ensure the proper quantity of direct materials is available when needed for production
    financial budget
    category of budgeting that details estimates for cash inflows and outflows through planned operations and changes capital investments of assets, liabilities, and equities
    flexible budget
    budget based on different levels of activity
    manufacturing overhead budget
    budget including the remainder of the production costs not covered by the direct materials and direct labor budgets
    master budget
    overall budget that includes the operating and financial budgets
    operating budget
    category of budgeting that helps managers plan and manage production, order materials, schedule direct labor, and monitor overhead expenses
    production budget
    budget showing the number of units that need to be produced for each period based on sales estimates and required inventory levels
    rolling budget
    budget that is continuously updated by adding an additional budget period at the end of the current budget period
    sales budget
    budget showing the expected sales in units and the sales price for the budget period
    selling and administrative expense budget
    budget showing the variable and fixed expenses estimated to be incurred in all areas other than production
    static budget
    budget prepared for a single level of activity for a given period
    zero-based budgeting
    budget that begins with zero dollars and then includes in the budget only revenue and expenses that can be supported or justified

     

    Multiple Choice

     

    1

    LO 7.1Which of the following is not a part of budgeting?

    1. planning
    2. finding bottlenecks
    3. providing performance evaluations
    4. preventing net operating losses
    2

    LO 7.1Which of the following is an operating budget?

    1. cash budget
    2. production budget
    3. tax budget
    4. capital budget
    3

    LO 7.1Which of the following is a finance budget?

    1. cash budget
    2. production budget
    3. direct materials purchasing budget
    4. tax budget
    4

    LO 7.1Which approach is most likely to result in employee buy-in to the budget?

    1. top-down approach
    2. bottom-up approach
    3. total participation approach
    4. basing the budget on the prior year
    5

    LO 7.1Which approach requires management to justify all its expenditures?

    1. bottom-up approach
    2. zero-based budgeting
    3. master budgeting
    4. capital allocation budgeting
    6

    LO 7.1Which of the following is true in a bottom-up budgeting approach?

    1. Every expense needs to be justified.
    2. Supervisors tell departments their budget amount and the departments are free to work within those amounts.
    3. Departments budget their needs however they see fit.
    4. Departments determine their needs and relate them to the overall goals.
    7

    LO 7.1The most common budget is prepared for a ________.

    1. week
    2. month
    3. quarter
    4. year
    8

    LO 7.2Which of the operating budgets is prepared first?

    1. production budget
    2. sales budget
    3. cash received budget
    4. cash payments budget
    9

    LO 7.2The direct materials budget is prepared using which budget’s information?

    1. cash payments budget
    2. cash receipts budget
    3. production budget
    4. raw materials budget
    10

    LO 7.2Which of the following is not an operating budget?

    1. sales budget
    2. production budget
    3. direct labor budget
    4. cash budget
    11

    LO 7.2Which of the following statements is not correct?

    1. The sales budget is computed by multiplying estimated sales by the sales price.
    2. The production budget begins with the sales estimated for each period.
    3. The direct materials budget begins with the sales estimated for each period.
    4. The sales budget is typically the first budget prepared.
    12

    LO 7.2The units required in production each period are computed by which of the following methods?

    1. adding budgeted sales to the desired ending inventory and subtracting beginning inventory
    2. adding beginning inventory, budgeted sales, and desired ending inventory
    3. adding beginning inventory to budgeted sales and subtracting desired ending inventory
    4. adding budgeted sales to the beginning inventory and subtracting the desired ending inventory.
    13

    LO 7.3The cash budget is part of which category of budgets?

    1. sales budget
    2. cash payments budget
    3. finance budget
    4. operating budget
    14

    LO 7.3Which is not a section of the cash budget?

    1. cash receipts
    2. cash disbursements
    3. allowance for uncollectible accounts
    4. financing needs
    15

    LO 7.3Which budget is the starting point in preparing financial budgets?

    1. the budgeted income statement
    2. the budgeted balance sheet
    3. the capital expense budget
    4. the cash receipts budget
    16

    LO 7.3Which of the following includes only financial budgets?

    1. capital asset budget, budgeted income statement, sales budget
    2. production budget, capital asset budget, budgeted balance sheet
    3. cash budget, budgeted balance sheet, capital asset budget
    4. budgeted income statement, direct material purchases budget, cash budget
    17

    LO 7.4Which budget evaluates the results of operations at the actual level of activity?

    1. capital budget
    2. cash budget
    3. flexible budget
    4. static budget
    18

    LO 7.4What is the main difference between static and flexible budgets?

    1. The fixed manufacturing overhead is adjusted for units sold in the flexible budget.
    2. The variable manufacturing overhead is adjusted in the static budget.
    3. There is no difference between the budgets.
    4. The variable costs are adjusted in a flexible budget.

     

    Questions

     

    1

    LO 7.1What is a budget and what are the different types of budgets?

    2

    LO 7.1What is the difference between budgeting and long-range planning?

    3

    LO 7.1What are the advantages and disadvantages of the bottom-up budgeting approach?

    4

    LO 7.1Why might a rolling budget require more management participation than an annual budget?

    5

    LO 7.2What information is necessary for the operating budgets?

    6

    LO 7.2What operating budget exists for manufacturing but not for a retail company?

    7

    LO 7.3What is the process for developing a budgeted balance sheet?

    8

    LO 7.3Which of the financial budgets is the most important? Why?

    9

    LO 7.4A company has prepared the operating budget and the cash budget. It is now preparing the budgeted balance sheet. Identify the document that contains each of these balances.

    1. cash
    2. accounts receivable
    3. finished goods inventory
    4. accounts payable
    5. equipment purchases
    10

    LO 7.4Fill in the blanks: A flexible budget summarizes _______ and _______ for various volume levels by adjusting the _______ costs for the various levels of activities. The _______ costs remain the same for all levels of activities.

    11

    LO 7.4What information is included in the capital asset budget?

    12

    LO 7.5Why does budget planning typically begin with the sales forecast?

    13

    LO 7.5What steps should be considered if a budget is to be set and later have its results evaluated?

     

    Exercise Set A

     

    EA1

    LO 7.2Blue Book printing is budgeting sales of 25,000 units and already has 5,000 in beginning inventory. How many units must be produced to also meet the 7,000 units required in ending inventory?

    EA2

    LO 7.2How many units are in beginning inventory if 32,000 units are budgeted for sales, 35,000 units are produced, and the desired ending inventory is 9,000 units?

    EA3

    LO 7.2Navigator sells GPS trackers for $50 each. It expects sales of 5,000 units in quarter 1 and a 5% increase each subsequent quarter for the next 8 quarters. Prepare a sales budget by quarter for the first year.

    EA4

    LO 7.2One Device makes universal remote controls and expects to sell 500 units in January, 800 in February, 450 in March, 550 in April, and 600 in May. The required ending inventory is 20% of the next month’s sales. Prepare a production budget for the first four months of the year.

    EA5

    LO 7.2Sunrise Poles manufactures hiking poles and is planning on producing 4,000 units in March and 3,700 in April. Each pole requires a half pound of material, which costs $1.20 per pound. The company’s policy is to have enough material on hand to equal 10% of the next month’s production needs and to maintain a finished goods inventory equal to 25% of the next month’s production needs. What is the budgeted cost of purchases for March?

    EA6

    LO 7.2Given the following information from Rowdy Enterprises’ direct materials budget, how much direct materials needs to be purchased?

    Beginning materials inventory $75,800, Ending materials inventory 79,200, Materials needed for production 500,000.
    EA7

    LO 7.2Each unit requires direct labor of 2.2 hours. The labor rate is $11.50 per hour and next year’s direct labor budget totals $834,900. How many units are included in the production budget for next year?

    EA8

    LO 7.2How many units are estimated to be sold if Skyline, Inc., has a planned production of 900,000 units, a desired beginning inventory of 160,000 units, and a desired ending inventory of 100,000 units?

    EA9

    LO 7.3Cash collections for Wax On Candles found that 60% of sales were collected in the month of the sale, 30% was collected the month after the sale, and 10% was collected the second month after the sale. Given the sales shown, how much cash will be collected in January and February?

    November $25,000, December 35,000, January 20,000, February 25,000.
    EA10

    LO 7.3Nonna’s Re-Appliance Store collects 55% of its accounts receivable in the month of sale and 40% in the month after the sale. Given the following sales, how much cash will be collected in February?

    December 2017 $20,000, January 2018 60,000, February 2018 70,000.
    EA11

    LO 7.3Dream Big Pillow Co. pays 65% of its purchases in the month of purchase, 30% the month after the purchase, and 5% in the second month following the purchase. It made the following purchases at the end of 2017 and the beginning of 2018:

    November 2017 $60,000, December 2017 50,000, January 2018 35,000, February 2018 40,000, March 2018 45,000.
    EA12

    LO 7.3Desiccate purchases direct materials each month. Its payment history shows that 70% is paid in the month of purchase with the remaining balance paid the month after purchase. Prepare a cash payment schedule for March if in January through March, it purchased $35,000, $37,000, and $39,000, respectively.

    EA13

    LO 7.3What is the amount of budgeted cash payments if purchases are budgeted for $420,000 and the beginning and ending balances of accounts payable are $95,000 and $92,000, respectively?

    EA14

    LO 7.3Halifax Shoes has 30% of its sales in cash and the remainder on credit. Of the credit sales, 65% is collected in the month of sale, 25% is collected the month after the sale, and 5% is collected the second month after the sale. How much cash will be collected in August if sales are estimated as $75,000 in June, $65,000 in July, and $90,000 in August?

    EA15

    LO 7.4Cold X, Inc. uses this information when preparing their flexible budget: direct materials of $2 per unit, direct labor of $3 per unit, and manufacturing overhead of $1 per unit. Fixed costs are $35,000. What would be the budgeted amounts for 20,000 and 25,000 units?

    EA16

    LO 7.4Using the provided budgeted information for production of 10,000 and 15,000 units, prepare a flexible budget for 17,000 units.

    Production, 10,000 units, 15,000 units; Expense A, $15,000, 22,500; Expense B, 21,000, 21,000; Expense C, 43,000, 43,000.
    EA17

    LO 7.5The production cost for a waterproof phone case is $7 per unit and fixed costs are $23,000 per month. How much is the favorable or unfavorable variance if 5,500 units were produced for a total of $61,000?

     

    Exercise Set B

     

    EB1

    LO 7.2Lovely Wedding printing is budgeting sales of 32,000 units and already has 4,000 in beginning inventory. How many units must be produced to also meet the 6,000 units required in ending inventory?

    EB2

    LO 7.2How many units are in beginning inventory if 32,000 units are budgeted for sales, 35,000 units are produced, and the desired ending inventory is 9,000 units?

    EB3

    LO 7.2Barnstormer sells airplane accessories for $20 each. It expects sales of 120,000 units in quarter 1 and a 7% increase each subsequent quarter for the next 8 quarters. Prepare a sales budget by quarter for the first year.

    EB4

    LO 7.2Rehydrator makes a nutrition additive and expects to sell 3,000 units in January, 2,000 in February, 2,500 in March, 2,700 in April, and 2,900 in May. The required ending inventory is 20% of the next month’s sales, and the beginning inventory on January 1 was 600 units. Prepare a production budget for the first four months of the year.

    EB5

    LO 7.2Cloud Shoes manufactures recovery sandals and is planning on producing 12,000 units in March and 11,500 in April. Each sandal requires 1.2 yards if material, which costs $3.00 per yard. The company’s policy is to have enough material on hand to equal 15% of next month’s production needs and to maintain a finished goods inventory equal to 20% of the next month’s production needs. What is the budgeted cost of purchases for March?

    EB6

    LO 7.2Given the following information from Power Enterprises’ direct materials budget, how much direct materials needs to be purchased?

    Beginning materials inventory $101,200, Ending materials inventory 105,300, Materials needed for production 890,250.
    EB7

    LO 7.2Each unit requires direct labor of 4.1 hours. The labor rate is $13.75 per hour and next year’s production is estimated at 75,000 units. What is the amount to be included in next year’s direct labor budget?

    EB8

    LO 7.2How many units are estimated to be sold if Kino, Inc., has planned production of 750,000 units, a desired beginning inventory of 30,000 units, and a desired ending inventory of 45,000 units?

    EB9

    LO 7.3Cash collections for Renew Lights found that 65% of sales were collected in the month of sale, 25% was collected the month after the sale, and 10% was collected the second month after the sale. Given the sales shown, how much cash will be collected in March and April?

    January $90,000, February 120,000, March 75,000, April 85,000.
    EB10

    LO 7.3My Aunt’s Closet Store collects 60% of its accounts receivable in the month of sale and 35% in the month after the sale. Given the following sales, how much cash will be collected in March?

    February 2018 $20,000, March 2018 60,000, April 2018 70,000.
    EB11

    LO 7.3Gear Up Co. pays 65% of its purchases in the month of purchase, 30% in the month after the purchase, and 5% in the second month following the purchase. What are the cash payments if it made the following purchases in 2018?

    February 2018 $90,000, March 2018 92,000, April 2018 101,000, May 2018 98,000, June 2018 99,500.
    EB12

    LO 7.3Drainee purchases direct materials each month. Its payment history shows that 65% is paid in the month of purchase with the remaining balance paid the month after purchase. Prepare a cash payment schedule for January using this data: in December through February, it purchased $22,000, $25,000, and $23,000 respectively.

    EB13

    LO 7.3What is the amount of budgeted cash payments if purchases are budgeted for $190,500 and the beginning and ending balances of accounts payable are $21,000 and $25,000, respectively?

    EB14

    LO 7.3Earthie’s Shoes has 55% of its sales in cash and the remainder on credit. Of the credit sales, 70% is collected in the month of sale, 15% is collected the month after the sale, and 10% is collected the second month after the sale. How much cash will be collected in June if sales are estimated as $75,000 in April, $65,000 in May, and $90,000 in June?

    EB15

    LO 7.4Judge’s Gavel uses this information when preparing their flexible budget: direct materials of $3 per unit, direct labor of $2.50 per unit, and manufacturing overhead of $1.25 per unit. Fixed costs are $49,000. What would be the budgeted amounts for 33,000 and 35,000 units?

    EB16

    LO 7.4Using the following budgeted information for production of 5,000 and 12,000 units, prepare a flexible budget for 9,000 units.

    Production, 5,000 units, 12,000 units; Expense A, $17,500, 42,000; Expense B, 19,000, 19,000; Expense C, 21,000, 21,000.
    EB17

    LO 7.5The production cost for UV protective sunglasses is $5.50 per unit and fixed costs are $19,400 per month. How much is the favorable or unfavorable variance if 14,000 units were produced for a total of $97,000?

     

    Problem Set A

     

    PA1

    LO 7.2Lens Junction sells lenses for $45 each and is estimating sales of 15,000 units in January and 18,000 in February. Each lens consists of 2 pounds of silicon costing $2.50 per pound, 3 oz of solution costing $3 per ounce, and 30 minutes of direct labor at a labor rate of $18 per hour. Desired inventory levels are:

    Beginning inventory for January 31, February 28, and March 31 respectively: Finished goods 4,500, 5,900, 5,000; Direct materials: silicon, 8,500, 9,100, 9,200; Direct materials: solution, 11,200, 12,000, 13,000.

    Prepare a sales budget, production budget, direct materials budget for silicon and solution, and a direct labor budget.

    PA2

    LO 7.2The data shown were obtained from the financial records of Italian Exports, Inc., for March:

    Estimated Sales, $560,000, Sales 567,923, Purchases 294,823, Ending Inventory of next month’s sales 10%, Administrative salaries 50,320, Marketing expense of estimated sales 5%, Sales commissions of estimated sales 2%, Rent expense 7,500, Depreciation expense 1,100, Utilities 2,500, Taxes on income (before taxes) 15%.

    Sales are expected to increase each month by 10%. Prepare a budgeted income statement.

    PA3

    LO 7.2Echo Amplifiers prepared the following sales budget for the first quarter of 2018:

    January, February, and March (respectively): Units, 1,000, 1,200, 1,500; Sales price $10, 10, 10; Budgeted sales, $10,000, 12,000, 15,000.

    It also has this additional information related to its expenses:

    Direct material per unit $1.50, Direct labor per unit 2, Variable manufacturing overhead per hour 0.50, Fixed manufacturing overhead per month 3,000, Sales commissions per unit 15, Sales salaries per month 5,000, Delivery expense per unit 0.50, Factory utilities per month 5,000, Administrative salaries per month 20,000, Marketing expenses per month 8,000, Insurance expense per month 11,000, Depreciation expense per month 9,000.

    Prepare a sales and administrative expense budget for each month in the quarter ending March 31, 2018.

    PA4

    LO 7.2Prepare a budgeted income statement using the information shown.

    Sales (units) 15,000, Sales price per unit $40, Uncollectible expense 1 percent of sales, Direct material per unit $2, Direct labor per unit (hours) .5, Direct labor rate per hour $20, Manufacturing overhead $15,000, Variable sales and administrative expenses per unit $2, Fixed sales and administrative expenses $20,000, Taxes (on income before taxes) 15 percent.
    PA5

    LO 7.2Spree Party Lights overhead expenses are:

    Indirect material, pounds per unit 0.25, Indirect material cost per pound $2, Indirect labor hours 1, Indirect labor rate per hour $15, Variable maintenance per unit $.75, Variable utilities per unit $.20, Supervisor salaries $10,000, Maintenance salaries $9,000, Insurance $3,000, Depreciation $1,500.

    Prepare a manufacturing overhead budget if the number of units to produce for January, February, and March are 2,500, 3,000, and 2,700, respectively.

    PA6

    LO 7.3Relevant data from the Poster Company’s operating budgets are:

    Quarter 1 and Quarter 2 respectively: Sales $208,470, 211,539; Direct material purchases 115,295, 120,832; Direct labor 75,205, 73,299; Manufacturing overhead 25,300, 25,300; Selling and admin expenses 32,000, 32,500; Depreciation included in selling and admin 1,500, 1,000; Collections from customers 215,392, 240,155; Cash payments for purchases 114,295, 119,253.

    Additional data: Capital assets were sold in January for $10,000 and $4,500 in May. Dividends of $4,500 were paid in February. The beginning cash balance was $60,359 and a required minimum cash balance is $59,000. Use this information to prepare a cash budget for the first two quarters of the year

    PA7

    LO 7.3Fill in the missing information from the following schedules:

    Sales Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Expected sales (units) 7,500, 8,250, 8,750, 9.000, ?; Sales price per unit $45, 50, 50, 55; Total sales revenue $337,500, 412,500, 437,500, ?, ?Production Budget For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Q 1Year 2 (respectively): Expected Sales 7,500, 8,250, 8,750, 9,000, 8,000; plus Desired ending inventory 1,650, 1,750, 1,800, ?, 900; Total required units 9,150, 10,000, 10,550, 10,600, 8,900; minus Beginning Inventory 1,500, 1,650, 1,750, 1,800, 1,600; Equals required production 7,650, 8,350, 8800, ?, 7,300; Total ?Direct Materials Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Units to be produced 7,650, 8,350, 8,800, 8,800, 33,600; Times Direct material per unit 2, 2, 2, 2, 2; Total pounds needed for production 15,300, 16,700, 17,600, 17,600, 67,200; Add: desired ending inventory 4,175, 4,400, 4,400, 3,650, 3,650; Total material required 19,475, 21,100, 22,000, 21,250, 70,850; Less: beginning inventory 0, 4,175, 4,400, 4,400, –; Pounds of direct material purchase requirements 19,475, 16,925, 17,600, 16,850, 70,850; Cost per pound $1.50, 1.50, 1.50, 1.50, 1.50; Total cost of direct material purchase $29,213, 25,388, 26,400, 25,275, 106,275; Total ? $106,275.Direct Labor Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Units to be produced 7,650, 8,350, 8,800, 8,800, 33,600; Direct labor hours per unit 0.75, 0.75, 0.75, 0.75, 0.75; Total required direct labor hours 5,738, 6,263, 6,600, 6,600, 25,200; Labor cost per hour $25, 25, 25, 25, 25; Total direct labor cost $143,438, 156,563, 165,000, 165,000, 630,000.
    PA8

    LO 7.3Direct labor hours are estimated as 2,000 in Quarter 1; 2,100 in Quarter 2; 1,900 in Quarter 3; and 2,300 in Quarter 4. Prepare a manufacturing overhead budget using the information provided.

    Indirect material per hour $1.00; Indirect labor per hour 1.25; Maintenance per hour 0.25; Utilities per hour 0.50; Supervisory salaries 17,000; Maintenance 5,000; Property taxes and insurance 6,000; Depreciation 3,500.
    PA9

    LO 7.3Fitbands’ estimated sales are:

    October $131,982, November 195,723, December 249,283, January 124,298, February 124,284, March 124,373.

    What are the balances in accounts receivable for January, February, and March if 65% of sales is collected in the month of sale, 25% is collected the month after the sale, and 10% is second month after the sale?

    PA10

    LO 7.3Sports Socks has a policy of always paying within the discount period and each of its suppliers provides a discount of 2% if paid within 10 days of purchase. Because of the purchase policy, 85% of its payments are made in the month of purchase and 15% are made the following month. The direct materials budget provides for purchases of $129,582 in November, $294,872 in December, $239,582 in January, and $234,837 in February. What is the balance in accounts payable for January 31, and February 28?

    PA11

    LO 7.4Prepare a flexible budgeted income for 120,000 units using the following information from a static budget for 100,000 units:

    Sales price $90, Direct material per unit 30, Direct labor per unit 15, Variable manufacturing overhead per unit 13, Fixed manufacturing overhead 75,000, Variable sales and admin expenses per unit 3, Fixed sales and admin expenses 25,000, Taxes 30 percent of income before taxes.
    PA12

    LO 7.4Before the year began, the following static budget was developed for the estimated sales of 100,000. Sales are sluggish and management needs to revise its budget. Use this information to prepare a flexible budget for 80,000 and 90,000 units of sales.

    Sales $3,500,000 less cost of goods sold: Direct material 900,000, Direct labor 1,000,000, Variable manufacturing overhead 80,000 equals 2,230,000 cost of goods sold Equals Gross profit 1,270,000 Less Variable sales and admin expenses 100,000 and Fixed sales and admin expenses 950,000 equals Income before taxes 220,000 Less Taxes 66,000 equals Net Income $154,000.
    PA13

    LO 7.4Caribbean Hammocks currently sells 75,000 units at $50 per unit. Its expenses are:

    Direct material per unit $9, Direct labor per unit 10, Variable manufacturing overhead per unit 7, Variable sales and admin expenses per unit 2, Fixed manufacturing overhead 75,000, Fixed sales and admin expenses 850,000, Taxes 30 percent of income before taxes.

    Management believes it can increase sales by 5,000 units for every $5 decrease in sales price. It also believes the additional sales will allow a decrease in direct material of $1 for each additional 5,000 units. Prepare a flexible budgeted income statement for 75,000-, 80,000-, and 85,000-unit sales.

    PA14

    LO 7.4Total Pop’s data show the following information:

    January, February, March, April, May (respectively): Estimated sales (in units) 15,000, 14,500, 16,000, 15,500, 15,800; Sales price per unit $45, 45, 45, 45, 45; Direct labor per unit 3, 3, 2.25, 2, 2; Labor rate per hour $18, 18, 21, 21, 21.

    New machinery will be added in April. This machine will reduce the labor required per unit and increase the labor rate for those employees qualified to operate the machinery. Finished goods inventory is required to be 20% of the next month’s requirements. Direct material requires 2 pounds per unit at a cost of $3 per pound. The ending inventory required for direct materials is 15% of the next month’s needs. In January, the beginning inventory is 3,000 units of finished goods and 4,470 pounds of material. Prepare a production budget, direct materials budget, and direct labor budget for the first quarter of the year.

    PA15

    LO 7.4Identify the document that contains the information listed in these lines from the budgeted balance sheet shown.

    1. Cash
    2. Accounts receivable
    3. Raw materials inventory
    4. Computers
    5. Accounts payable
    Assets: Cash $2,500,000A; Accounts receivable 5,381,239 B; Raw materials inventory 3,149,183 C; Finished goods inventory 6,239,138 Equals Total current assets $17,269,560; Property, plant, and equipment: Computers $150,000 D, Machinery 9,745,231, less Accumulated Depreciation (5,385,733) equals Net Property, plant, and equipment 4,509,498 Equals Total assets $21,779,058; Liabilities: Accounts Payable $3,242,938 E; Notes payable 8,289,722 Equals Total liabilities $11,532,660; Stockholders’ equity: Common stock $5,000,000, Retained earnings 5,246,398 Equals Total stockholders’ equity $10,246,398; Total liabilities and stockholders’ equity $21,779,058.
    PA16

    LO 7.5Titanium Blades refines titanium for use in all brands of razor blades. It prepared a static budget for the sales of 5,000 units. These variances were observed:

    Actual Results and Variances, respectively: Sales $150,000, $25,000 Favorable; Variable expenses 77,800, 12,800 Unfavorable; Fixed expenses 70,300, 300 Unfavorable; Net income (loss) 1,900, 11,900 Unfavorable.

    Determine the static budget and use the information to prepare a flexible budget and analysis for the 6,000 units actually sold.

     

    Problem Set B

     

    PB1

    LO 7.2Lens & Shades sells sunglasses for $37 each and is estimating sales of 21,000 units in January and 19,000 in February. Each lens consists of 2.00 mm of plastic costing $2.50 per mm, 1.7 oz of dye costing $2.80 per ounce, and 0.50 hours direct labor at a labor rate of $18 per unit. Desired inventory levels are:

    Beginning inventory for January, February, and March respectively: Finished goods 3,500, 3,800, 4,500; Direct materials: plastic, 4,100, 4,500, 4,600; Direct materials: dye, 10,100, 11,300, 12,200.

    Prepare a sales budget, production budget, direct materials budget for silicon and solution, and a direct labor budget.

    PB2

    LO 7.2The following data were obtained from the financial records of Sonicbrush, Inc., for March:

    Estimated Sales, $333,000, Sales 329,831, Purchases 179,431, Ending Inventory (of next month’s sales) 15 percent, Administrative salaries 70,200, Marketing expense of estimated sales 3 percent, Sales commissions of estimated sales 4 percent, Rent expense per month 8,400, Depreciation expense per month 1,200, Utilities per month 2,800, Taxes on income (before taxes) 15 percent.

    Sales are expected to increase each month by 15%. Prepare a budgeted income statement.

    PB3

    LO 7.2TIB makes custom guitars and prepared the following sales budget for the second quarter

    April, May, and June (respectively): Units, 80, 86, 84; Sales price $1,200, 1,200, 1,200; Budgeted sales, $96,000, 103,200, 100,800.

    It also has this additional information related to its expenses:

    Direct material per unit $55, Direct labor per hour 20, Variable manufacturing overhead per hour 3.50, Fixed manufacturing overhead per month 3,000, Sales commissions per unit 20, Sales salaries per month 5,000, Delivery expense per unit 0.50, Utilities per month 4,000, Administrative salaries per month 20,000, Marketing expenses per month 8,000, Insurance expense per month 11,000, Depreciation expense per month 9,000.

    Prepare a sales and administrative expense budget for each month in the quarter ended June 30, 2018.

    PB4

    LO 7.2Prepare a budgeted income statement using the information shown.

    Sales (units) 84,000, Sales price per unit $22, Uncollectible expense 1 percent of sales, Direct material per unit $1.50, Direct labor per unit (hours) 0.8, Direct labor rate per hour $19, Manufacturing overhead $14,000, Variable sales and administrative expenses per unit $2.10, Fixed sales and administrative expenses $23,000, Taxes (on income before taxes) 15 percent.
    PB5

    LO 7.2Sunshine Gardens overhead expenses are:

    Indirect material, pounds per unit 0.50, Indirect material cost per pound $1, Indirect labor hours 1, Indirect labor rate per hour $16.50, Variable maintenance per unit $0.75, Variable utilities per unit $0.20, Supervisor salaries $10,000, Maintenance salaries $9,000, Insurance $3,000, Depreciation $1,500.

    Given production of 10,200; 11,300; 12,900; and 13,200 for each quarter of the next year, prepare a manufacturing overhead budget for each quarter.

    PB6

    LO 7.3Relevant data from the operating budget of The Framers are:

    Quarter 1 and Quarter 2 respectively: Sales $33,948, 76,482; Direct material purchases 25,312, 26,423; Direct labor 29,948, 24,328; Manufacturing overhead 9,322, 10,299; Selling and admin expenses 19,283, 19,238; Depreciation included in selling and admin 950, 800; Collections 34,324, 76,938; Cash payments 29,349, 20,937; Cash received: other 8,000, 500; Dividend 0, 500.

    Other data:

    • Capital assets were sold in quarter 1 and $8,000 was collected in quarter 1 and $500 collected in quarter 2.
    • Dividends of $500 will be paid in May
    • The beginning cash balance was $50,000 and a required minimum cash balance is $10,000.
    • Prepare a cash budget for the first two quarters of the year.
    PB7

    LO 7.3Fill in the missing information from the following schedules:

    Sales Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Expected sales (units) 21,000, 26,250, 8,750, 9.000, 65,000; Sales price per unit $?, ?, ?, ?; Total sales revenue $315,000, ?, ?, ?, 975,000.Production Budget For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Q 1Year 2 (respectively): Expected Sales 21,000, 26,250, 8,750, 9,000, 8,000; plus Desired ending inventory 5,250, ?, ?, 1,600, –; Total required units 26,250, 28,000, 10,550, 10,600, 8,000; minus Beginning Inventory 5,250, 5,250, 1,750, 1,800, 1,600; Equals required production ?, ?, ?, ?, 6,400; Total 61,350.Direct Materials Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Units to be produced ?, ?, ?, ?, 61,350; Times Direct material per unit 2, 2, 2, 2, 2; Total pounds needed for production 42,000, 45,500, 17,600, 17,600, 122,700; Add: desired ending inventory11,375, ?, ?, 3,200, 3,200; Total material required 53,375, 49,900, 22,000, 20,800, 125,900; Less: beginning inventory 0, 11,375, 4,400, 4,400, –; Pounds of direct material purchase requirements 53,375, 38,525, 17,600, 16,400, 125,900; Cost per pound $1.50, 1.50, 1.50, 1.50, 1.50; Total cost of direct material purchase $80,063, 57,788, 26,400, 24,600, 188,850; Total $188,850, 188,850.Direct Labor Budget, For the Year Ending December 31, 2018, Quarter 1, Quarter 2, Quarter 3, Quarter 4, Total (respectively): Units to be produced ?, ?, ?, ?, ?; Direct labor hours per unit 1, 1, 1, 1, 1; Total required direct labor hours 15,750, 17,063, 6,600, 6,600, 46,013; Labor cost per hour $25, ?, ?, ?, ?; Total direct labor cost $393,750, 426,563, 165,000, 165,000, 1,150,313.
    PB8

    LO 7.3Mesa Aquatics, Inc. estimated direct labor hours as 1,900 in quarter 1, 2,000 in quarter 2, 2,200 in quarter 3, and 1,800 in quarter 4. a sales and administration budget using the information provided.

    Indirect material per hour $1.00; Indirect labor per hour 1.25; Maintenance per hour 0.25; Utilities per hour 0.50; Supervisory salaries 17,000; Maintenance 5,000; Property taxes and insurance 6,000; Depreciation 3,500.
    PB9

    LO 7.3Amusement tickets estimated sales are:

    January $231,837, February 231,937, March 381,274, April 212,947, May 282,172, June 281,836.

    What are the balances in accounts receivable for April, May, and June if 60% of sales are collected in the month of sale, 30% are collected the month after the sale, and 10% are collected the second month after the sale?

    PB10

    LO 7.3All Temps has a policy of always paying within the discount period, and each of its suppliers provides a discount of 2% if paid within 10 days of purchase. Because of the purchase policy, 80% of its payments are made in the month of purchase and 20% are made the following month. The direct materials budget provides for purchases of $23,812 in February, $23,127 in March, $21,836 in April, and $28,173 in May. What is the balance in accounts payable for April 30, and May 31?

    PB11

    LO 7.4Prepare a flexible budgeted income statement for 47,000 units using the following information from a static budget for 45,000 units:

    Sales price $50, Direct material per unit 12, Direct labor per unit 5, Variable manufacturing overhead per unit 3, Fixed manufacturing overhead 25,000, Variable sales and admin expenses per unit 3, Fixed sales and admin expenses 9,000, Taxes 15 percent of income before taxes.
    PB12

    LO 7.4Before the year began, the following static budget was developed for the estimated sales of 50,000. Sales are higher than expected and management needs to revise its budget. Prepare a flexible budget for 100,000 and 110,000 units of sales.

    50,000 Units: Sales $1,250,000 less cost of goods sold: Direct material 450,000, Direct labor 500,000, Variable manufacturing overhead 125,000, Fixed manufacturing overhead 32,000 equals 1,107,000 cost of goods sold Equals Gross profit 143,000 Less Variable sales and admin expenses 50,000 and Fixed sales and admin expenses 105,000 equals Income before taxes (12,000) Less Taxes (1,800) equals Net Income $(10,200).
    PB13

    LO 7.4Artic Camping Gear’s currently sells 35,000 units at $73 per unit. Its expenses are as follows:

    Direct material per unit $4, Direct labor per unit 7, Variable manufacturing overhead per unit 3, Variable sales and admin expenses per unit 1.50, Fixed manufacturing overhead 21,000, Fixed sales and admin expenses 89,000, Taxes 15 percent of income before taxes.

    Management believes it can increase sales by 2,000 units for every $5 decrease in sales price. It also believes the additional sales will allow a decrease in direct material of $1 for each additional 2,000 units. Prepare a flexible budgeted income statement for 35,000-, 37,000-, and 39,000-unit sales.

    PB14

    LO 7.4Fruit Tea’s data show the following information:

    August, September, October, November, December (respectively): Estimated sales (in units) 25,000, 25,000, 27,000, 27,500, 28,000; Sales price per unit $31, 31, 31, 31, 31; Direct labor per unit 1.75, 1.75, 1.50, 1.50, 1.50; Labor rate per hour $21, 21, 24, 24, 24.

    New machinery will be added in October. This machine will reduce the labor required per unit and increase the labor rate for those employees qualified to operate the machinery. Finished goods inventory is required to be 20% of the next month’s requirements. Direct material requires 2.5 pounds per unit at a cost of $5 per pound. The ending inventory required for direct materials is 20% of the next month’s needs. In August, the beginning inventory is 3,750 units of finished goods and 13,125 pounds of materials. Prepare a production budget, direct materials budget, and direct labor budget for the first quarter of the year.

    PB15

    LO 7.4Identify the document that contains the information listed in these lines from the budgeted balance sheet shown.

    1. Accounts receivable
    2. Finished goods inventory
    3. Machinery
    4. Accumulated depreciation
    5. Notes payable
    6. Common stock
    Assets: Cash $2,500,000; Accounts receivable 5,381,239 A; Raw materials inventory 3,149,183 Finished goods inventory 6,239,138 B; Equals Total current assets $17,269,560; Property, plant, and equipment: Computers $150,000, Machinery 9,745,231 C, less Accumulated Depreciation (5,385,733) D, equals Net Property, plant, and equipment 4,509,498 Equals Total assets $21,779,058; Liabilities: Accounts Payable $3,242,938; Notes payable 8,289,722 E Equals Total liabilities $11,532,660; Stockholders’ equity: Common stock $5,000,000 F, Retained earnings 5,246,398; Equals total stockholders’ equity $10,246,398; Total liabilities and stockholders’ equity $21,779,058.
    PB16

    LO 7.5Replenish sells shampoo that removes chlorine from hair. It prepared a static budget for the sales of 10,000 units. These variances were observed:

    Actual Results and Variances, respectively: Sales $264,000, $66,000 Unfavorable; Variable expenses 70,500, 19,500 Favorable; Fixed expenses 70,270, 270 Unfavorable; Net income (loss) 123,230, 46,230 Unfavorable.

    Determine the static budget and use the information to prepare a flexible budget and analysis for the 8,000 units actually sold.

     

    Thought Provokers

     

    TP1

    LO 7.1Why is a clear understanding of management’s goals and objectives necessary for effective budgets?

    TP2

    LO 7.1It is proper budgeting procedure to begin with estimated revenues, but why might some nonprofit entities begin planning their expenditures instead of their revenues?

    TP3

    LO 7.2How would a human resources department use information in the operating budgets?

    TP4

    LO 7.2How would maintenance departments use information in the budget?

    TP5

    LO 7.2How might service industries predict revenue?

    TP6

    LO 7.4The management of Hess, Inc., is developing a flexible budget for the upcoming year. It was not pleased with the small amount of net income the budget showed at all sales levels and is contemplating using a less expensive material. This action reduces direct material cost by $1 per unit. What would be the effects on financial statements and a flexible budget if management takes this approach? Are there other factors that need to be considered?

    TP7

    LO 7.4When would a static budget be effective in evaluating a manager’s performance?

    TP8

    LO 7.5If management is being evaluated on their ability to manage a budget, what can they do to increase cash flow?

    TP9

    LO 7.5If management is being evaluated on their ability to manage a budget, what can they do to decrease cash outflow?