Deck 8: Budgeting for Planning and Control

Question 1

Cost of Goods Sold Budget
Refer to Cornerstone Exercise 8.6.
Required:
1. Calculate the total budgeted cost of units produced for Play-Disc for the coming year. Show the cost of direct materials, direct labor, and overhead.
2. Prepare a cost of goods sold budget for Play-Disc for the year.
3. What if the beginning inventory of finished goods was $75,200 (for 16,000 units)? How would that affect the cost of goods sold budget? (Assume Play-Disc uses the FIFO method.)

Answer 1

1. The below table shows budgeted cost of units produced:
Direct materials:
i.e.
which is equal to 475,950.
Direct labor:
i.e.
which is equal to 159,600.
Fixed Overhead:
i.e.
which is equal to 513,000.
Variable Overhead:
i.e.
which is equal to 205,200.
2. The below table shows the cost of goods sold budget:
3. The below table shows the cost of goods sold budget with beginning inventory of finished goods $4,750.
The cost of goods sold will reduces with the reduction in the beginning finished goods.

Question 2

What are the steps involved in building an activity-based budget? How do these steps differentiate the ABB from the master budget?

Answer 2

Activity based budget:
The activity-based budget begins with determining the activities required to form an output and then search for the supporting activities. Where in master budget deals directly from output to resources.

Question 3

Activity-Based Budget
Refer to Exercise 8.29. Suppose Gene determines that next year's Sales Division activities include the following:
Research-researching current and future conditions in the industry
Shipping-arranging for shipping of mattresses and handling calls from purchasing agents at retail stores to trace shipments and correct errors
Jobbers-coordinating the efforts of the independent jobbers who sell the mattresses
Basic ads-placing print and television ads for the Sleepeze and Plushette lines
Ultima ads-choosing and working with the advertising agency on the Ultima account
Office management-operating the Sales Division office
The percentage of time spent by each employee of the Sales Division on each of the above activities is given in the following table:

Additional information is as follows:
a. Depreciation on the office equipment belongs to the office management activity.
b. Of the $21,000 for office supplies and other expenses, $5,000 can be assigned to telephone costs which can be split evenly between the shipping and jobbers' activities. An additional $2,400 per year is attributable to Internet connections and fees, and the bulk of these costs (80 percent) are assignable to research. The remainder is a cost of office management. All other office supplies and costs are assigned to the office management activity.
Required:
1. Prepare an activity-based budget for next year by activity. Use the expected level of sales activity.
2. On the basis of the budget prepared in Requirement 1, advise Gene regarding actions that might be taken to reduce expenses.

Answer 3

1.Prepare an activity based budget:
Research
Salary =
i.e.
which is equal to 30,000
Internet connection = 80% of internet charges applicable to research activity. So,
this is equal to 1,920.
Shipping
Salary =
i.e.
which is equal to 24,500.
Telephone = 50% of the telephone charges assigned to shipping. So,
this is equal to 2,500.
Shipping charges of Sleepeze, plushette and ultima has been considered in expected sales scenario.
Jobbers
Salary =
i.e.
which is equal to 18,750.
Telephone = 50% of the telephone charges assigned to shipping. So,
this is equal to 2,500.
Commission = commission charges has been considered in expected sales scenario.
Basic ads
Salary =
i.e.
which is equal to 16,000.
Advertising = advertising charges of Sleepeze and plushette has been considered in expected sales scenario.
Ultima ads
Salary =
i.e.
which is equal to 20,750.
Advertising = advertising charges of Ultima has been considered in expected sales scenario.
Manage office:
Salary =
i.e.
which is equal to 20,000.
Depreciation = depreciation charges has been considered in expected sales scenario.
Internet connection = 20% of internet charges applicable to research activity. So,
this is equal to 480.
Other office supplies = the remaining 13,600 are assigned to other office supplies.
2.List the suggestions to reduce the expenses:
The shipping and advertising expenses contribute more to the total expense. In order to reduce the shipping expenses, it would be advisable to compare the prices offered by several shipping companies or calling for bid for the lowest price from several companies would be helpful to reduce the expense.
The advertising expense for ultima is huge and need to be reduced. If not in the first year at least for the future years

Question 4

What is an accounts receivable aging schedule? Why is it important?

Question 5

Production Budget
Palmgren Company produces consumer products. The sales budget for four months of the year is presented below.

Company policy requires that ending inventories for each month be 25 percent of next month's sales. At the beginning of July, the beginning inventory of consumer products met that policy
Required:
Prepare a production budget for the third quarter of the year. Show the number of units that should be produced each month as well as for the quarter in total.

Question 6

Trumbull Co. plans to produce 100,000 toy cars during September. Planned production for October is 125,000 cars. Sales are forecasted at 90,000 toy cars for September and120,000 toy cars for October. Each toy car requires four wheels. Trumbull's policy is to maintain 10% of the next month's production in inventory at the end of a month. How many wheels should Trumbull purchase during September? a. 195,000
B) 112,500
C) 102,500
D) 410,000

Question 7

Marketing Expense Budget
Timothy Donaghy has developed a unique formula for growing hair. His proprietary lotion, used regularly for 45 days, will grow hair in bald spots (with varying degrees of success). Timothy calls his lotion Hair-Again and is selling it via the telephone and Internet. His major form of marketing is through 15-minute infomercials and Internet advertising. Timothy sells each 16- ounce bottle of Hair-Again for $15 and pays a commission of 3 percent of sales to telephone operators who field the 1-800 phone calls from potential customers. Fixed marketing expenses for each quarter of the coming year include:

In addition, early next year Timothy intends to film and show infomercials on television. He expects the cost to be $10,000 in quarters 1 and 2, and that the cost will rise to $25,000 in each of quarters 3 and 4. Timothy expects the following unit sales of Hair-Again:

Required:
1. Construct a marketing expense budget for Hair-Again for the coming year. Show total amounts by quarter and in total for the year.
2. What if the cost of internet ads rises to $15,000 in Quarters 2 through 4? How would that affect variable marketing expense? Fixed marketing expense? Total marketing expense?

Question 8

Sales and Production Budgets
Berring Company produces two products: the deluxe and the standard. The deluxe sells for $40, and the standard sells for $10. Projected sales of the two models for the coming four quarters are given below.

The president of the company believes that the projected sales are realistic and can be achieved by the company. In the factory, the production supervisor has received the projected sales figures and gathered information needed to compile production budgets. He found that 1,300 deluxes and 1,170 standards were in inventory on January 1. Company policy dictates that ending inventory should equal 20 percent of the next quarter's sales for deluxes and 10 percent of next quarter's sales for standards.
Required:
1. Prepare a sales budget for each quarter and for the year in total. Show sales by product and in total for each time period.
2. What factors might Berring Company have considered in preparing the sales budget?
3. Prepare a separate production budget for each product for each of the first three quarters of the year.

Question 9

Which of the following describes the order in which the four types of budgets must be prepared? a. Production, sales, direct materials purchases, cash received on acccount
B) Sales, production, direct materials purchases, cash budget
C) Cash receipts, direct labor, production, sales
D) Sales, direct materials purchases, production, cash disbursements

Question 10

Suppose that the vice president of sales is a particularly pessimistic individual. If you were in charge of developing the master budget, how, if at all, would you be influenced by this knowledge?

Question 11

Direct Materials Purchases Budget: Direct Labor Budget
Crescent Company produces stuffed toy animals; one of these is "Arabeau the Cow." Each Arabeau takes 0.20 yard of fabric (white with irregular black splotches) and eight ounces of polyfiberfill. Fabric costs $3.50 per yard and polyfiberfill is $0.05 per ounce. Crescent has budgeted production of Arabeaus for the next four months as follows:

Inventory policy requires that sufficient fabric be in ending monthly inventory to satisfy 20 percent of the following month's production needs and sufficient polyfiberfill be in inventory to satisfy 40 percent of the following month's production needs. Inventory of fabric and polyfiberfill at the beginning of October equals exactly the amount needed to satisfy the inventory policy.
Each Arabeau produced requires (on average) 0.10 direct labor hour. The average cost of direct labor is $15 per hour.
Required:
1. Prepare a direct materials purchases budget of fabric for the last quarter of the year showing purchases in units and in dollars for each month and for the quarter in total.
2. Prepare a direct materials purchases budget of polyfiberfill for the last quarter of the year showing purchases in units and in dollars for each month and for the quarter in total.
3. Prepare a direct labor budget for the last quarter of the year showing the hours needed and the direct labor cost for each month and for the quarter in total.

Question 12

A company's controller is adjusting next year's budget to reflect the impact of an expected 3% inflation rate. Listed below are selected items from next year's budget before the adjustment.

After adjusting for the 3% inflation rate, what is the company's total budget for the selected items before taxes for next year?

A) $858,150
B) $860,412
C) $810,971
D) $858,971

Question 13

Sales Budget
FlashKick Company manufactures and sells soccer balls for teams of children in elementary and high school. FlashKick's best-selling lines are the practice ball line (durable soccer balls for training and practice) and the match ball line (high-performance soccer balls used in games). In the first four months of next year, FlashKick expects to sell the following:

Required:
1. Construct a sales budget for FlashKick for the first three months of the coming year. Show total sales for each product line by month and in total for the first quarter.
2. What if FlashKick added a third line-tournament quality soccer balls that were expected to take 40 percent of the units sold of the match balls and would have a selling price of $45 each in January and February, and $48 each in March? Prepare a sales budget for Flash- Kick for the first three months of the coming year. Show total sales for each product line by month and in total for the first quarter.

Question 14

Administrative Expense Budget
Green Earth Landscaping Company provides monthly and weekly landscaping and maintenance services to residential customers in the tri-city area. Green Earth has no variable administrative expense. Fixed administrative expenses for June, July, and August include:

Required:
1. Construct an administrative expense budget for Green Earth Landscaping Company for the three summer months. Show total amounts by month and in total for the three-month period.
2. What if Green Earth Landscaping Company's insurance rates increased at the beginning of July to $2,600 per month? How would that affect monthly administrative expense?

Question 15

Sales Forecast and Budget
Audio-2-Go, Inc., manufactures MP3 players. Models A-1, A-2, and A-3 are small and light. They are attached to armbands and use flash memory. Models A-4 and A-5 are somewhat larger and use a built-in hard drive; they can be put into fanny packs for use while working out. It is now early 2013, and Audio-2-Go's budgeting team is finalizing the sales budget for 2013. Sales in units and dollars for 2012 were as follows:

In looking over the 2012 sales figures, Audio-2-Go's sales budgeting team recalled the following:
a. Model A-1 costs were rising faster than the price could rise. Preparatory to phasing out this model, Audio-2-Go, Inc., planned to slash advertising for this model and raise its price by 30 percent. The number of units of Model A-1 to be sold was forecast to be 50 percent of 2012 units.
b. Model A-5 was introduced on November 1, 2012. It contains a built-in 20 GB hard drive and can be synchronized with several popular music software programs. Audio-2-Go brought out this model to match competitors' audio players, but the price is so much higher than other Audio-2-Go products, that sales have been disappointing. The company plans to discontinue this model on June 30, 2013, and thinks that 2013 monthly sales will remain at the 2012 level if the sales price remains at the 2012 level.
c. Audio-2-Go plans to introduce Model A-6 on July 1, 2013. It will be a high-end player that will be lighter and more versatile than Model A-5 (which it will replace). The target price for this model is $180; unit sales are estimated to equal 2,500 per month.
d. A competitor has announced plans to introduce an improved version of Model A-3. Audio-2-Go believes that theModelA-3 price must be cut 20 percent to maintain unit sales at the 2012 level. e. It was assumed that unit sales of all other models would increase by 10 percent, prices remaining constant.
Required:
Prepare a sales forecast by product and in total for Audio-2-Go, Inc., for 2013.

Question 16

A company's sales for the coming months are as follows:

About 20% of sales are cash sales, and the remainder are credit sales. The company finds that typically 10% of a month's credit sales are paid in the month of sale, 70% are paid the next month, and 15% are paid in the second month after sale. Expected cash receipts in July are budgeted at what amount?

A) $114,520
B) $143,150
C) $145,720
D) $156,000

Question 17

Define budget. How are budgets used in planning?

Question 18

Suppose that the controller of your company's largest factory is a particularly optimistic individual. If you were in charge of developing the master budget, how, if at all, would you be influenced by this knowledge?

Question 19

Purchases Budget
Tiger Drug Store carries a variety of health and beauty aids, including 500-count bottles of vitamins. The sales budget for vitamins for the first six months of the year is presented below.

The owner of Tiger Drug believes that ending inventories should be sufficient to cover 10 percent of the next month's projected sales. On January 1, 23 bottles of vitamins were in inventory.
Required:
1. Prepare a merchandise purchases budget in bottles of vitamins for as many months as you can.
2. If vitamins are priced at cost plus 80 percent, what is the dollar cost of purchases for each month of your purchases budget?

Question 20

The budget that adjusts unit sales for beginning and ending inventories of finished goods is the: a. production budget
B) purchases budget
C) ending inventory of finished goods budget
D) cost of goods sold budget

Question 21

Production Budget
Refer to Cornerstone Exercise 8.1, through Requirement 1. FlashKick requires ending inventory of product to equal 20 percent of the next month's unit sales. Beginning inventory in January was 3,100 practice soccer balls and 400 match soccer balls.
Required:
1. Construct a production budget for each of the two product lines for FlashKick Company for the first three months of the coming year.
2. What if FlashKick wanted a production budget for the two product lines for the month of April? What additional information would you need to prepare this budget?

Question 22

Budgeted Income Statement
Coral Seas Jewelry Company makes and sells costume jewelry. For the coming year, Coral Seas expects sales of $15.9 million and cost of goods sold of $8.75 million. Advertising is a key part of Coral Seas' business strategy, and total marketing expense for the year is budgeted at $2.8 million. Total administrative expenses are expected to be $675,000. Coral Seas has no interest expense. Income taxes are paid at the rate of 40 percent of operating income.
Required:
1. Construct a budgeted income statement for Coral Seas Jewelry Company for the coming year.
2. What if Coral Seas had interest payments of $500,000 during the year? What effect would that have on operating income? On income before taxes? On net income?

Question 23

Schedule of Cash Receipts
Rosita Flores owns Rosita's Mexican Restaurant in Tempe, Arizona. Rosita's is an affordable restaurant near campus and several hotels. Rosita accepts cash and checks. Checks are deposited immediately. The bank charges $0.50 per check; the amount per check averages $75. "Bad" checks that Rosita cannot collect make up 3 percent of check revenue.
During a typical month, Rosita's has sales of $45,000. About 80 percent are cash sales. Estimated sales for the next three months are as follows:

Required:
Prepare a schedule of cash receipts for May and June. (Round all amounts to the nearest dollar.)

Question 24

Operating Budget, Comprehensive Analysis
Ponderosa, Inc., produces wiring harness assemblies used in the production of semi-trailer trucks. The wiring harness assemblies are sold to various truck manufacturers around the world. Projected sales in units for the coming five months are given below.

The following data pertain to production policies and manufacturing specifications followed by Ponderosa:
a. Finished goods inventory on January 1 is 900 units. The desired ending inventory for each month is 20 percent of the next month's sales.
b. The data on materials used are as follows:

Inventory policy dictates that sufficient materials be on hand at the beginning of the month to satisfy 30 percent of the next month's production needs. This is exactly the amount of material on hand on January 1.
c. The direct labor used per unit of output is one and one-half hours. The average direct labor cost per hour is $20.
d. Overhead each month is estimated using a flexible budget formula. (Activity is measured in direct labor hours.)

e. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. (Activity is measured in units sold.)

f. The unit selling price of the wiring harness assembly is $110.
g. In February, the company plans to purchase land for future expansion. The land costs $68,000.
h. All sales and purchases are for cash. The cash balance on January 1 equals $62,900. The firm wants to have an ending cash balance of at least $25,000. If a cash shortage develops, sufficient cash is borrowed to cover the shortage and provide the desired ending balance. Any cash borrowed must be borrowed in $1,000 increments and is repaid the following month, as is the interest due. The interest rate is 12 percent per annum.
Required:
Prepare a monthly operating budget for the first quarter with the following schedules:
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expense budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget
9. Budgeted income statement (ignore income taxes)
10. Cash budget

Question 25

Define control. How are budgets used to control?

Question 26

What impact does the learning curve have on budgeting? What specific budgets might be affected? (Hint: Refer to Chapter 3 for material on the learning curve.)

Question 27

Schedule of Cash Receipts
Refer to Exercise 8.20. Rosita thinks that it may be time to refuse to accept checks and to start accepting credit cards. She is negotiating with VISA/MasterCard and American Express, and she would start the new policy on April 1. Rosita estimates that with the drop in sales from the "no checks" policy and the increase in sales from the acceptance of credit cards, the net increase in sales will be 30 percent. The credit cards do involve added costs as follows:
VISA/MasterCard: Rosita will accumulate these credit card receipts throughout the month and submit them in one bundle for payment on the last day of the month. The money will be credited to her account by the fifth day of the following month. A fee of 3.5 percent is charged by the credit card company.
American Express: Rosita will accumulate these receipts throughout the month and send them to American Express for payment on the last day of the month. American Express will credit her account by the sixth day of the following month. A fee of 5.5 percent is charged by American Express.
Rosita estimates the following breakdown of revenues among the various payment methods.

Required:
Prepare a schedule of cash receipts for May and June that incorporates the changes in policy. (Round all amounts to the nearest dollar.)

Question 28

Cash Budget, Pro Forma Balance Sheet Bernard Creighton is the controller for Creighton Hardware Store. In putting together the cash budget for the fourth quarter of the year, he has assembled the following data.

A) Sales

B) Each month, 20 percent of sales are for cash, and 80 percent are on credit. The collection pattern for credit sales is 20 percent in the month of sale, 50 percent in the following month, and 30 percent in the second month following the sale.
C) Each month, the ending inventory exactly equals 40 percent of the cost of next month's sales. The markup on goods is 33.33 percent of cost.
D) Inventory purchases are paid for in the month following purchase.
E) Recurring monthly expenses are as follows:

F) Property taxes of $15,000 are due and payable on September 15.
G) Advertising fees of $6,000 must be paid on October 20.
H) A lease on a new storage facility is scheduled to begin on November 2. Monthly payments are $5,000.
I) The company has a policy to maintain a minimum cash balance of $10,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of the month. The annual interest rate is 9 percent. The company must borrow in multiples of $1,000.
J) A partially completed balance sheet as of August 31 is given below. (Accounts payable is for inventory purchases only.)

Required:
1) Complete the balance sheet given in part (j).
2) Bernard wants to see how the company is doing prior to starting the month of December. Prepare a cash budget for the months of September, October, and November and for the three-month period in total (the period begins on September 1). Provide a supporting schedule of cash collections.
3) Prepare a pro forma balance sheet as of November 30.

Question 29

Direct Materials Purchases Budget
Refer to Cornerstone Exercise 8.2 for the production budgets for practice balls and match balls. Every practice ball requires 0.7 square yard of polyvinyl chloride panels, one bladder with valve (to fill with air), and 3 ounces of glue. FlashKick's policy is that 20 percent of the following month's production needs for raw materials be ending inventory. Beginning inventory in January for all raw materials met this requirement.
Required:
1. Construct a direct materials purchases budget for each type of raw materials for the practice ball line for January and February of the coming year.
2. What if FlashKick decreased the ending inventory percentage to 15 percent of the next month's production needs? What impact would that have on the direct materials purchases budgets prepared in Requirement 1?

Question 30

Cash Receipts Budget and Accounts Receivable Aging Schedule
Shalimar Company manufactures and sells industrial products. For 2013, Shalimar has budgeted the follow sales:

In Shalimar's experience, 10 percent of sales are paid in cash. Of the sales on account, 65 percent are collected in the quarter of sale, 25 percent are collected in the quarter following the sale, and 7 percent are collected in the second quarter after the sale. The remaining 3 percent are never collected. Total sales for the third quarter of the current year (2012) are $4,900,000 and for the fourth quarter of the current year are $6,850,000.
Required:
1. Calculate cash sales and credit sales expected in the last two quarters of 2012, and in each quarter of 2013.
2. Construct a cash receipts budget for Shalimar Company for each quarter of the next year, showing the cash sales and the cash collections from credit sales.
3. What if the recession led Shalimar's top management to assume that in the next year 10 percent of credit sales would never be collected? The expected payment percentages in the quarter of sale and the quarter after sale are assumed to be the same. How would that affect cash received in each quarter? Construct a revised cash budget using the new assumption.

Question 31

Cash Budget
Janet Wooster owns a retail store that sells new and used sporting equipment. Janet has requested a cash budget for October. After examining the records of the company, you find the following:
a. Cash balance on October 1 is $1,118.
b. Actual sales for August and September are as follows:

c. Credit sales are collected over a three-month period: 40 percent in the month of sale, 36 percent in the next month, and 22 percent in the second month after the sale. The remaining sales are uncollectible.
d. Inventory purchases average 70 percent of a month's total sales. Of those purchases, 45 percent are paid for in the month of purchase. The remaining 55 percent are paid for in the following month.
e. Salaries and wages total $3,850 per month.
f. Rent is $3,150 per month.
g. Taxes to be paid in October are $1,635.
h. Janet usually withdraws $3,500 each month as her salary.
i. Advertising is $1,500 per month.
j. Other operating expenses total $3,800 per month.
k. Internet and telephone fees are $320 per month.
Janet tells you that she expects cash sales of $5,000 and credit sales of $63,000 for October. She likes to have $3,000 on hand at the end of the month and is concerned about the potential October ending balance.
Required:
1. Prepare a cash budget for October. Include supporting schedules for cash collections and cash payments. (Round all amounts to the nearest dollar.)
2. Did the business meet Janet's desired ending cash balance for October? Assuming that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for meeting the desired cash balance?

Question 32

Production, Direct Labor, Direct Materials, Sales Budgets, Budgeted Contribution Margin
Greiner Company makes and sells high-quality glare filters for microcomputer monitors. John Craven, controller, is responsible for preparing Greiner's master budget and has assembled the following data for 2013. The direct labor rate includes wages, all employee-related benefits, and the employer's share of FICA. Labor saving machinery will be fully operational by March. Also, as of March 1, the company's union contract calls for an increase in direct labor wages that is included in the direct labor rate. Greiner expects to have 5,600 glare filters in inventory at December 31, 2012, and has a policy of carrying 35 percent of the following month's projected sales in inventory.

Required:
1. Prepare the following monthly budgets for Greiner Company for the first quarter of 2013. Be sure to show supporting calculations.
a. Production budget in units
b. Direct labor budget in hours
c. Direct materials cost budget
d. Sales budget
2. Calculate the total budgeted contribution margin for Greiner Company by month and in total for the first quarter of 2013. Be sure to show supporting calculations. ( CMA adapted )

Question 33

Discuss some of the reasons for budgeting.

Question 34

While many small firms do not put together a complete master budget, nearly every firm creates a cash budget. Why do you think that is so?

Question 35

Budgeted Cash Collections, Budgeted Cash Payments
Historically, Ragman Company has had no significant bad debt experience with its customers. Cash sales have accounted for 20 percent of total sales, and payments for credit sales have been received as follows:
40 percent of credit sales in the month of the sale
35 percent of credit sales in the first subsequent month
20 percent of credit sales in the second subsequent month
5 percent of credit sales in the third subsequent month
The forecast for both cash and credit sales is as follows.

Required:
1. What is the forecasted cash inflow for Ragman Company for May?
2. Due to deteriorating economic conditions, Ragman Company has now decided that its cash forecast should include a bad debt adjustment of 2 percent of credit sales, beginning with sales for the month of April. Because of this policy change, what will happen to the total expected cash inflow related to sales made in April? ( CMA adapted )

Question 36

Cash Budget
Friendly Freddie's is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie's. The bank requires that a minimum balance of $8,200 be kept in the chain's checking account at the end of each month. When the balance goes below $8,200, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,200 at month-end.
Friendly Freddie's attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans.
The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year.

Projected cash collection of sales on account is estimated to be 70 percent in the month following the sale, 20 percent in the second month following the sale, and 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 cash on a note receivable in October.
All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available.

Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $38,000, $41,000, and $46,000, respectively.
Required:
Prepare Friendly Freddie's cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable. ( CMA adapted )

Question 37

Direct Labor Budget for Service
The School of Accounting (SOA) at State University is planning its annual fundraising campaign for accounting alumni. This year, the SOA is planning a call-a-thon and will ask Beta Alpha Psi members to volunteer to make phone calls to a list of 5,000 alumni. The Dean's office has agreed to let Beta Alpha Psi use their offices from 6 p.m. to 9 p.m. each weekday so that they will have access to phones. Each volunteer will be provided with a phone and a script with an introduction and suggested responses to various questions that had been asked in the past.
Carol Johnson, Beta Alpha Psi faculty advisor, estimates the following:
1. Of the 5,000 phone numbers, roughly 10 percent will be wrong numbers (because alumni change addresses and phone numbers without updating State University). In that case, the student is instructed to apologize to the answering party, hang up, and move on to the next phone number. Each of these calls takes about three minutes.
2. Another 15 percent will be correct numbers, but no one is home and the answering machine picks up. In that case, the student is instructed to simply hang up and move on to the next phone number. Each of these calls takes about two minutes.
3. Each time an alumnus answers the phone, the student is instructed to introduce him or herself and read the scripted introduction. The student is encouraged to engage the alumnus in conversation and reminiscences about State U and bring the alum up to date on the wonderful things that are happening in the SOA. Some calls are longer, some shorter, but the average call length is 10 minutes.
Required:
1. Prepare a direct labor budget, in hours, for the fundraising call-a-thon. If 15 students volunteer, how many evenings will the phone-a-thon take? (Round to two significant digits.)
2. What if the phone-a-thon can be moved to the State University Foundation phone bank? That facility has an automated calling system that will automatically dial the phone numbers and route all answered calls directly to students. As a result, no time is spent dialing and listening to answering machines. The time savings due to having the numbers automatically dialed and routed mean that the average length of a wrong number call drops to one minute and the average length of an alumni call drops to eight minutes. Prepare a direct labor budget, in hours, for the fundraising call-a-thon at the State University Foundation. If 15 students volunteer, how many evenings will the phone-a-thon take? (Round to two significant digits.)

Question 38

Cash Budget
Khloe Company imports gift items from overseas and sells them to gift shops and department stores throughout the United States. Khloe Company provided the following information:
a. The October 31 balance in the cash account is $53,817.
b. All sales are on account. Sales in September were $950,000 and in October were $1,240,000.
c. November sales are expected to be $2,145,000.
d. In Khloe's experience, 70 percent of sales are collected in the month of sale and 28 percent are collected in the month following sale. The remaining credit sales are uncollectible.
e. Khloe purchases all merchandise on account. Purchases in September were $750,000 and in October were $980,000. November purchases are expected to be $2,000,000 as Khloe prepares for the Christmas buying season. Fifteen percent of purchases are paid in the month of purchase, while the remainder is paid in the month following the purchase month.
f. Khloe Company has nine employees who are paid a total of $48,000 per month. Due to timing issues, about 90 percent of total wages are paid in the month earned and the remaining 10 percent are paid in the following month.
g. Rent for office and warehouse space is $12,300 paid monthly in cash.
h. Utilities average $6,100 per month and are paid in cash.
i. In November, Khloe expects to pay employment taxes of $6,625.
j. Since Khloe imports product from overseas, customs duty and shipping to the central location of 30 percent of current monthly purchase cost must be paid in the month of purchase.
k. Other cash expenses for November are expected to be $41,500.
Required:
1. Prepare a cash budget for Khloe Company for the month of November.
2. What if Khloe faced a customs duty and shipping percentage of 35 percent? How would that affect the November cash budget?

Question 39

Schedule of Cash Receipts
Del Spencer is the owner and founder of Del Spencer's Men's Clothing Store. Del Spencer's has its own house charge accounts and has found from past experience that 10 percent of its sales are for cash. The remaining 90 percent are on credit. An aging schedule for accounts receivable reveals the following pattern:
15 percent of credit sales are paid in the month of sale.
65 percent of credit sales are paid in the first month following the sale.
14 percent of credit sales are paid in the second month following the sale.
6 percent of credit sales are never collected.
Credit sales that have not been paid until the second month following the sale are considered overdue and are subject to a 3 percent late charge.
Del Spencer's has developed the following sales forecast:

Required:
Prepare a schedule of cash receipts for August and September.

Question 40

Flexible Budget
The controller for Muir Company's Salem plant is analyzing overhead in order to determine appropriate drivers for use in flexible budgeting. She decided to concentrate on the past 12 months since that time period was one in which there was little important change in technology, product lines, and so on. Data on overhead costs, number of machine hours, number of setups, and number of purchase orders are in the following table.

Required:
1. Calculate an overhead rate based on machine hours using the total overhead cost and total machine hours. (Round the overhead rate to the nearest cent and predicted overhead to the nearest dollar.) Use this rate to predict overhead for each of the 12 months.
2. Run a regression equation using only machine hours as the independent variable. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the intercept and x-coefficient to the nearest cent and predicted overhead to the nearest dollar.) Is this flexible budget better than the budget in Requirement 1? Why or why not?

Question 41

What is the master budget? An operating budget? A financial budget?

Question 42

Discuss the shortcomings of the traditional master budget. In what situations would the master budget perform well?

Question 43

Cash Disbursements Schedule
Refer to Exercise 8.24. Del Spencer's purchases clothing evenly throughout the month. All purchases are on account. On the first of every month, Jana Spencer, Del's wife, pays for all of the previous month's purchases. Terms are 2/10, n/30 (i.e., a 2 percent discount can be taken if the bill is paid within 10 days; otherwise, the entire amount is due within 30 days).
The forecast purchases for the months of May through September are as follows:

Required:
1. Prepare a cash disbursements schedule for the months of August and September. (Round all cash amounts to the nearest dollar.)
2. Now, suppose that Del wants to see what difference it would make to have someone pay for any purchases that have been made three times per month, on the 1st, the 11th, and the 21st. Prepare a cash disbursements schedule for the months of July and August assuming this new payment schedule. (Round all cash amounts to the nearest dollar.)
3. Suppose that Jana (who works full-time as a school teacher and is the mother of two small children) does not have time to make payments on two extra days per month and that a temporary employee is hired on the 11th and 21st at $20 per hour, for four hours each of those two days. Is this a good decision? Explain.

Question 44

Flexible Budget, Multiple Regression
Refer to Problem 8.40 for data.
Required:
1. Run a multiple regression equation using machine hours, number of setups, and number of purchase orders as independent variables. Prepare a flexible budget for overhead for the 12 months using the results of this regression equation. (Round the regression coefficients to the nearest cent and predicted overhead to the nearest dollar.) Which flexible budget is better- the one based on simple regression (with machine hours as the only independent variable) or the one based on multiple regression? Why?
2. Now, suppose that the controller remembers that the factory throws two big parties each year, one for the 4th of July and the other for Christmas. Rerun the multiple regression with machine hours, number of setups, and number of purchase orders, and add a dummy variable called "Party." (This variable takes the value one for months with a factory-sponsored party, and zero otherwise.) Prepare a flexible budget for the 12 months using the results of this regression. Discuss the implications of using this new regression for decision making.

Question 45

Overhead Budget
Johnston Company cleans and applies powder coat paint to metal items on a job-order basis. Johnston has budgeted the following amounts for various overhead categories in the coming year.

In the coming year, Johnston expects to powder coat 120,000 units. Each unit takes 1.3 direct labor hours. Johnston has found that supplies and gas (used to run the drying ovens-all units pass through the drying ovens after powder coat paint is applied) tend to vary with the number of units produced. All other overhead categories are considered to be fixed. (Round all overhead rates to the nearest cent.)
Required:
1. Calculate the number of direct labor hours Johnston must budget for the coming year. Calculate the variable overhead rate. Calculate the total fixed overhead for the coming year.
2. Prepare an overhead budget for Johnston for the coming year. Show the total variable overhead, total fixed overhead, and total overhead. Calculate the fixed overhead rate and the total overhead rate (rounded to the nearest cent).
3. What if Johnston had expected to make 118,000 units next year? Assume that the variable overhead per unit does not change and the total fixed overhead amounts do not change. Calculate the new budgeted direct labor hours and prepare a new overhead budget. Calculate the fixed overhead rate and the total overhead rate (rounded to the nearest cent).

Question 46

Flexible Budget for Varying Levels of Activity
Nashler Company has the following budgeted variable costs per unit produced:

Budgeted fixed overhead costs per month include supervision of $98,000, depreciation of $76,000, and other overhead of $245,000.
Required:
1. Prepare a flexible budget for all costs of production for the following levels of production: 160,000 units, 170,000 units, and 175,000 units.
2. What is the per-unit total product cost for each of the production levels from Requirement 1? (Round each unit cost to the nearest cent.)
3. What if Nashler Company's cost of maintenance rose to $0.22 per unit? How would that affect the unit product costs calculated in Requirement 2?

Question 47

Production, Purchases, and Direct Labor Budgets
Ingles Corporation is a manufacturer of tables sold to schools, restaurants, hotels, and other institutions. The table tops are manufactured by Ingles, but the table legs are purchased from an outside supplier. The Assembly Department takes a manufactured table top and attaches the four purchased table legs. It takes 16 minutes of labor to assemble a table. The company follows a policy of producing enough tables to ensure that 40 percent of next month's sales are in the finished goods inventory. Ingles also purchases sufficient materials to ensure that materials inventory is 60 percent of the following month's scheduled production. Ingles's sales budget in units for the next quarter is as follows:

Ingles's ending inventories in units for July 31 are as follows:

Required:
1. Calculate the number of tables to be produced during August.
2. Disregarding your response to Requirement 1, assume the required production units for August and September are 2,100 and 1,900, respectively, and the July 31 materials inventory is 4,000 units. Compute the number of table legs to be purchased in August.
3. Assume that Ingles Corporation will produce 2,340 units in September. How many employees will be required for the Assembly Department in September? (Fractional employees are acceptable since employees can be hired on a part-time basis. Assume a 40-hour week and a 4-week month.) (CMA adapted)

Question 48

Participative versus Imposed Budgeting
An effective budget converts the goals and objectives of an organization into data. The budget serves as a blueprint for management's plans. The budget is also the basis for control. Management performance can be evaluated by comparing actual results with the budget.
Thus, creating the budget is essential for the successful operation of an organization. Finding the resources to implement the budget-that is, moving from a starting point to the ultimate goal-requires the extensive use of human resources. How managers perceive their roles in the process of budgeting is important to the successful use of the budget as an effective tool for planning, communicating, and controlling.
Required:
1. Discuss the behavioral implications of planning and control when a company's management employs: (a) an imposed budgetary approach, and (b) a participative budgetary approach.
2. Communications plays an important role in the budgetary process whether a participative or an imposed budgetary approach is used.
a. Discuss the differences between communication flows in these two budgetary approaches.
b. Discuss the behavioral implications associated with the communication process for each of the budgetary approaches. ( CMA adapted )

Question 49

Explain the role of a sales forecast in budgeting. What is the difference between a sales forecast and a sales budget?

Question 50

Define static budget. Give an example that shows how reliance on a static budget could mislead management.

Question 51

Flexible Budget
In an attempt to improve budgeting, the controller for Meliore, Inc., has developed a flexible budget for overhead costs. Meliore, Inc., makes two types of products, the standard model and the deluxe model. Meliore expects to produce 300,000 units of the standard model and 120,000 units of the deluxe model during the coming year. The standard model requires 0.05 direct labor hour per unit, and the deluxe model requires 0.08. The controller has developed the following cost formulas for each of the four overhead items:

Required:
1. Prepare an overhead budget for the expected activity level for the coming year.
2. Prepare an overhead budget that reflects production that is 10 percent higher than expected (for both products) and a budget for production that is 20 percent lower than expected.

Question 52

Information for Budgeting, Ethics
Norton Company, a manufacturer of infant furniture and carriages, is in the initial stages of preparing the annual budget for the coming year. Scott Ford has recently joined Norton's accounting staff and is interested in learning as much as possible about the company's budgeting process. During a recent lunch with Marge Atkins, sales manager, and Pete Granger, production manager, Ford initiated the following conversation.
FORD : "Since I'm new around here and am going to be involved with the preparation of the annual budget, I'd be interested in learning how the two of you estimate sales and production numbers."
ATKINS : "We start out very methodically by looking at recent history, discussing what we know about current accounts, potential customers, and the general state of consumer spending. Then, we add that usual dose of intuition to come up with the best forecast we can."
GRANGER : "I usually take the sales projections as the basis for my projections. Of course, we have to make an estimate of what this year's closing inventories will be, which is sometimes difficult."
FORD : "Why does that present a problem? There must have been an estimate of closing inventories in the budget for the current year."
GRANGER : "Those numbers aren't always reliable since Marge makes some adjustments to the sales numbers before passing them on to me."
FORD : "What kind of adjustments?"
ATKINS : "Well, we don't want to fall short of the sales projections so we generally give ourselves a little breathing room by lowering the initial sales projection anywhere from 5 to 10 percent."
GRANGER : "So, you can see why this year's budget is not a very reliable starting point. We always have to adjust the projected production rates as the year progresses, and of course, this changes the ending inventory estimates. By the way, we make similar adjustments to expenses by adding at least 10 percent to the estimates; I think everyone around here does the same thing."
Required:
1. Marge Atkins and Pete Granger have described the use of budgetary slack.
a. Explain why Atkins and Granger behave in this manner, and describe the benefits they expect to realize from the use of budgetary slack.
b. Explain how the use of budgetary slack can adversely affect Atkins and Granger.
2. As a management accountant, Scott Ford believes that the behavior described by Marge Atkins and Pete Granger may be unethical and that he may have an obligation not to support this behavior. By citing the specific standards of competence, confidentiality, integrity, and/or credibility from the "Statement of Ethical Professional Practice" (in Chapter 1), explain why the use of budgetary slack may be unethical. (CMA adapted)

Question 53

Ending Finished Goods Inventory Budget
Play-Disc makes Frisbee-type plastic discs. Each 12-inch diameter plastic disc has the following
manufacturing costs:

For the coming year, Play-Disc expects to make 300,000 plastic discs, and to sell 285,000 of them. Budgeted beginning inventory in units is 16,000 with unit cost of $4.75. (There are no beginning or ending inventories of work in process.)
Required:
1. Prepare an ending finished goods inventory budget for Play-Disc for the coming year.
2. What if sales increased to 290,000 discs? How would that affect the ending finished goods inventory budget? Calculate the value of budgeted ending finished goods inventory.

Question 54

Flexible Budget for Varying Levels of Activity
Refer to Cornerstone Exercise 8.13. In March, Nashler Company produced 163,200 units and had the following actual costs:

Required:
1. Prepare a performance report for Nashler Company comparing actual costs with the flexible budget for actual units produced.
2. What if Nashler Company's actual direct materials cost were $1,175,040? How would that affect the variance for direct materials? The total cost variance?

Question 55

Flexible Budget
Refer to Exercise 8.27. At the end of the year, Meliore, Inc., actually produced 310,000 units of the standard model and 115,000 of the deluxe model. The actual overhead costs incurred were:

Required:
Prepare a performance report for the period.

Question 56

All budgets depend on the sales budget. Is this true? Explain.

Question 57

What are the two meanings of a flexible budget? How is the first type of flexible budget used? The second type?

Question 58

Sales Forecast and Flexible Budget
Olympus, Inc., manufactures three models of mattresses: the Sleepeze, the Plushette, and the Ultima. Forecast sales for next year are 15,000 for the Sleepeze, 12,000 for the Plushette, and 5,000 for the Ultima. Gene Dixon, vice president of sales, has provided the following information:
a. Salaries for his office (including himself at $65,000, a marketing research assistant at $40,000, and an administrative assistant at $25,000) are budgeted for $130,000 next year.
b. Depreciation on the offices and equipment is $20,000 per year.
c. Office supplies and other expenses total $21,000 per year.
d. Advertising has been steady at $20,000 per year. However, the Ultima is a new product and will require extensive advertising to educate consumers on the unique features of this high- end mattress. Gene believes the company should spend 15 percent of first-year Ultima sales for a print and television campaign.
e. Commissions on the Sleepeze and Plushette lines are 5 percent of sales. These commissions are paid to independent jobbers who sell the mattresses to retail stores.
f. Last year, shipping for the Sleepeze and Plushette lines averaged $50 per unit sold. Gene expects the Ultima line to ship for $75 per unit sold since this model features a larger mattress.
Required:
1. Suppose that Gene is considering three sales scenarios as follows:

Prepare a revenue budget for the Sales Division for the coming year for each scenario.
2. Prepare a flexible expense budget for the Sales Division for the three scenarios above.