7.E: Budgeting (Exercises)

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Multiple Choice

Which of the following is not a part of budgeting?
1. planning
2. finding bottlenecks
3. providing performance evaluations
4. preventing net operating losses

Answer:: d

Which of the following is an operating budget?
1. cash budget
2. production budget
3. tax budget
4. capital budget
Which of the following is a finance budget?
1. cash budget
2. production budget
3. direct materials purchasing budget
4. tax budget

Answer:: a

Which 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
Which approach requires management to justify all its expenditures?
1. bottom-up approach
2. zero-based budgeting
3. master budgeting
4. capital allocation budgeting

Answer:: b

Which 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.
The most common budget is prepared for a ________.
1. week
2. month
3. quarter
4. year

Answer:: d

Which of the operating budgets is prepared first?
1. production budget
2. sales budget
3. cash received budget
4. cash payments budget
The 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

Answer:: c

Which of the following is not an operating budget?
1. sales budget
2. production budget
3. direct labor budget
4. cash budget
Which 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.

Answer:: c

The 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.
The cash budget is part of which category of budgets?
1. sales budget
2. cash payments budget
3. finance budget
4. operating budget

Answer:: c

Which is not a section of the cash budget?
1. cash receipts
2. cash disbursements
3. allowance for uncollectible accounts
4. financing needs
Which 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

Answer:: a

Which 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
Which budget evaluates the results of operations at the actual level of activity?
1. capital budget
2. cash budget
3. flexible budget
4. static budget

Answer:: c

What 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

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

Answer:: A budget is a written financial plan for a set period, which is typically a year. There are several different types of budgets including the master budget, operating budget, financial budget, flexible budget, and operating budget.

What is the difference between budgeting and long-range planning?
What are the advantages and disadvantages of the bottom-up budgeting approach?

Answer:: This approach begins at the lowest levels of management. These managers know the details involved with their departments. This allows for more accurate budget estimates when management understands how their department contributes to the company’s goals. Disadvantages include that this type of budgeting takes time, which leads to more labor costs, and when management doesn’t fully understand how it contributes to the company goals, the budget may support the department and not the company.

Why might a rolling budget require more management participation than an annual budget?
What information is necessary for the operating budgets?

Answer:: Operating budgets plan the primary operations of the business and need accurate information in order to provide accurate planning. Assumptions such as sales in units, sales price, desired ending inventory in units, manufacturing costs per unit, which include direct material needed per unit, desired direct materials ending inventory, amount of direct labor hours and rate, and the overhead required for production and managing the company.

What operating budget exists for manufacturing but not for a retail company?
What is the process for developing a budgeted balance sheet?

Answer:: The budgeted income statement includes the estimated revenue and expenses for the company. Using historical data on cash collections helps plan when the cash will be received and is used to develop the cash collections schedule. The company applies its payment policies on its purchases and other items requiring cash expenditures. This creates the cash payments schedule. Information from the cash collections schedule, cash payments schedule, and the capital expense budget are combined to develop the cash budget. The information from the cash budget and the ending balance sheet from the preceding year are used to develop the budgeted balance sheet.

Which of the financial budgets is the most important? Why?
A 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

Answer:

cash budget
cash receipts budget
production budget
cash payments schedule
capital assets budge

Fill 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.
What information is included in the capital asset budget?

Answer:: This budget is the plan for the purchase and disposal of plant assets and lists the estimated dollar amounts for each

Why does budget planning typically begin with the sales forecast?
What steps should be considered if a budget is to be set and later have its results evaluated?

Answer:: Before the time period begins, the organization’s goals should be defined so the budget can be set to achieve the goals. During the time period, the results should be properly measured and reported so necessary changes can be made during the year. Then, the results of the operations can be evaluated and compared to the original budget and organization’s goals.

Exercise Set A

Blue 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?
How 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?
Navigator 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.
One 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.
Sunrise 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?
Given 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.

Each 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?
How 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?
Cash 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.

Nonna’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.

Dream 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.

Desiccate 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.
What 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?
Halifax 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?
Cold 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?
Using 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.

The 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

Lovely 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?
How 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?
Barnstormer 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.
Rehydrator 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.
Cloud 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?
Given 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.

Each 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?
How 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?
Cash 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.

My 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.

Gear 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.

Drainee 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.
What 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?
Earthie’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?
Judge’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?
Using 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.

The 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

Lens 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.

The 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.

Echo 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.

Prepare 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.

Spree 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.

Relevant 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.

Fill 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.

Direct 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.

Fitbands’ 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?

Sports 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?
Prepare 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.

Before 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.

Caribbean 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.

Total 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.

Identify 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.

Titanium 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

Lens & 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.

The 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.

TIB 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.

Prepare 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.

Sunshine 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.

Relevant 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.

Fill 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.

Mesa 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.

Amusement 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?

All 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?
Prepare 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.

Before 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).

Artic 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.

Fruit 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.

Identify 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.

Replenish 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

Why is a clear understanding of management’s goals and objectives necessary for effective budgets?
It is proper budgeting procedure to begin with estimated revenues, but why might some nonprofit entities begin planning their expenditures instead of their revenues?
How would a human resources department use information in the operating budgets?
How would maintenance departments use information in the budget?
How might service industries predict revenue?
The 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?
When would a static budget be effective in evaluating a manager’s performance?
If management is being evaluated on their ability to manage a budget, what can they do to increase cash flow?
If management is being evaluated on their ability to manage a budget, what can they do to decrease cash outflow?

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