Financial and Managerial Accounting

Business

Quiz 23 :

Operational Budgeting

Quiz 23 :

Operational Budgeting

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Short Budgeting Problem Harlow Corporation manufactures and sells a single product. In preparing the budget for the first quarter, the company's cost accountant has assembled the following information: img The company uses the first-in, first-out method of pricing its inventory of finished goods. Instructions Compute the following budgeted quantities or dollar amounts: a. Planned production of finished goods (in units). b. Cost of finished goods manufactured. c. Finished goods inventory, March 31. (Remember to use the first-in, first-out method in pricing the inventory.) d. Cost of goods sold.
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a. To determine the planned production of finished goods in units:
img b. To determine the cost of finished goods manufactured:
img c. To determine the cost of finished goods inventory at March 31:
img d. To determine the cost of goods sold:
img

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Briefly explain at least three ways in which a business may expect to benefit from preparing a formal budget.
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A business may expect to benefit from preparing a formal budget in several ways, including:
a. The process of preparing the budget forces management to consider all aspects of the company's activities and also many aspects of the external business environment. Thus, budgeting should make managers more aware of the company's resources, problems, and environment.
b. A budget is a forecast of the outcome of future events. Thus, it may give advance warning of impending problems, such as cash shortages.
c. The preparation of a budget provides an opportunity to coordinate the efforts of the various departments in the business so that all are working efficiently toward common goals.
d. The budgeted levels of performance provide a yardstick for evaluating the actual performance of company personnel.

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Why is the preparation of a sales forecast one of the earliest steps in preparing a master budget?
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Budgeting:
Budgeting is a process of estimating the revenue and expenses of the near future in advance to plan and to be used in the decision-making process. The budget is generally prepared on the past analysis and trends. The budgeted data act as a benchmark for the actual values derived.
For an expense budget to be profitable, the actual values should be less than the budgeted so estimated. A company strives to earn maximum profit by reducing costs. In such a way budgets are helpful in the decision-making process. These budgets are prepared by the management. They are tentative only and provides the company a rough idea about the costs and revenues.
Master Budget:
The master budget is a common word used for all types of budgets related to sales, production, and expenses etc. The budgets so prepared act as a working note as the values computed under these budgets are used in the computation of cash budget and the financial statements. It is prepared to have a look on the responsibility centers and to evaluate their performance as well.
Items that forms part of master budget are as follows:
• Sales budget
• Production budget
• Direct material budget
• Direct labor budget
• Manufacturing overhead budget
• Selling and administrative budget
• Cash budget
• Budgeted income statement
• Budgeted balance sheet
Preparation of sales budget is the most important and foremost budget in the preparation of master budget. It determines the level of production which is been required to prepare the next budgets in the list. Also, it helps in determining the need for cash in the production process which is directly related to the production forecasted in sales budget. It also helps in the financial planning. The projected values are determined from past trends and the growth of the company in recent financial years.

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Explain the relationship between the management functions of planning and controlling costs.
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Production Budgets Mercury Bag Company produces cases of grocery bags. The managers at Mercury are trying to develop budgets for the upcoming quarter. The following data have been gathered: img a. Using the above information, develop Mercury's sales forecast in dollars and production schedule in units. b. What is Mercury's budgeted variable manufacturing cost per case? c. Prepare Mercury's manufacturing cost budget. d. What is the projected ending value of the Inventory account?
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Beta Computers is experiencing financial difficulties attributed to declining sales of its mainframe computer systems. Several years ago. the company obtained a large loan from Midland State Bank. The covenants of the loan agreement strictly state that if Beta is unable to maintain a current ratio of 3:1. a quick ratio of 1:1. and a return on assets of 12.percent, the bank will exercise its right to liquidate the company's assets in settlement of the loan. To monitor Beta's performance, the bank demands quarterly financial statements that have been reviewed by an independent CPA. Nick Price. Beta's CEO, has just reviewed the company's master budget projections for the first two quarters of the current year. What he has learned is disturbing. If sales trends continue, it appears that Beta will be in violation of its loan covenants by the end of the second quarter. If these projections are correct, the bank might foreclose on the company's assets. As a consequence, Beta's 750 employees will join the ranks of the unemployed. In February of the current year, Rembrant International contacted Beta to inquire about purchasing a custom-configured mainframe computer system. Not only would the sale generate over a million dollars in revenue, it would put Beta back in compliance with its loan covenants. Unfortunately, Rembrant International is an extremely bad credit risk, and the likelihood of collecting on the sale is slim. Nonetheless, Nick Price approved the sale on February 1, which resulted in the recording of a $1.4 million receivable. On March 31, Edgar Gamm, CPA, arrived at Beta's headquarters. In Gamm's opinion, the $1.4 million receivable from Rembrant International should immediately be written off as uncollectible. Of course, if the account is written off. Beta will be in violation of its loan covenants and the bank will soon foreclose. Gamm told Price that it is his professional duty to prevent any material misstatement of the company's assets. Price reminded Gamm that if the account is written off, 750 employees will be out of work, and that Gamm's accounting firm probably could not collect its fee for this engagement. Price then showed Gamm Beta's master budget for the third and fourth quarters of the current year. The budget indicated a complete turnaround for the company. Gamm suspected, however, that most of the budget's estimates were overly optimistic. Instructions With a group of students answer the following questions: a. Should Gamm insist that the Rembrant International account be classified as uncollectible? Should the optimistic third and fourth quarter master budget projections influence his decision? What would you do if you were in his position? Defend your actions. b. If you were the president of Midland State Bank, what would you do if you discovered that the Rembrant International account constituted a large portion of Beta's reported liquid assets and sales activity for the quarter? How would you react if Edgar Gamm's accounting firm.had permitted Beta to classify the account as collectible?
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Medlin Accounting Shareware produces accounting programs that Internet users can download and try for free. Access the Medlin Web site at: WWW.medlin.com Click on the Medlin budgeting package. Instructions a. What features are provided with the budgeting software? b. Explain how the features can be used for (1) advance warning and assignment of responsibility for corrective action. (2) coordination of activities among all departments within the organization, or (3) the creation of standards for evaluating performance. Internet sites are time and date sensitive. It is the purpose of these exercises to have you explore the Internet. You may need to use the Yahoo! search engine http://www.yahoo.com (or another favorite search engine ) to find a company's current Web address.
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Body Builders Corporation is opening a chain of five health clubs in the Minneapolis area. Body Builders's marketing manager has suggested a marketing plan designed to generate new memberships. The plan would allow new members to delay payment for the first three months' membership and pay at the end of the first quarter. Thus, the cash flow from membership fees will not occur for three months. Discuss the implications of this marketing approach for the cash flows of Body Builders.
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Short Budgeting Problem Lakeland Corporation manufactures and sells a single product. In preparing the budget for the first quarter, the company's cost accountant has assembled the following information: img The company uses the first-in, first-out method of pricing its inventory of finished goods. Instructions Compute the following budgeted quantities or dollar amounts: a. Planned production of finished goods (in units). b. Cost of finished goods manufactured. c. Finished goods inventory, March 31. (Remember to use the first-in, first-out method in pricing the inventory.) d. Cost of goods sold.
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Criticize the following quotation: "At our company, budgeted revenue is set so high and budgeted expenses so low that no department can ever meet the budget. This way, department managers Can never relax: they are motivated to keep working harder no matter how well they are already doing."
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Renfrow International manufactures and sells a single product. In preparing its master budget for the current quarter, the company's controller has assembled the following information: img Renfrow International used the average cost method of pricing its inventory of finished goods. Instructions Compute the following budgeted quantities or dollar amounts: a. Planned production of finished goods (in units). b. Cost of finished goods manufactured. c. Ending finished goods inventory. (Remember that in using the average cost method you must first compute the average cost of units available for sale.) d. Cost of goods sold.
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Budgeting Labor Costs Deep Valley Foods manufactures a product that is first smoked and then packed for shipment to customers. During a normal month the product's direct labor cost per pound is budgeted using the following information: img The budget for March calls for the production of 400,000 pounds of product. However, March's direct labor costs for smoking are expected to be 6 percent above normal due to anticipated scheduling inefficiencies. Yet direct labor costs in the packing room are expected to be 2 percent below normal because of changes in equipment layout. Prepare a budget for direct labor costs in March using three column headings: Total, Smoking, and Packing.
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Estimating Direct Materials Inventory On January 1, Salter Corporation determined that its direct materials inventory needs to contain 8,000 pounds of materials by March 31. To achieve this goal, Salter will have to use 3 pounds of direct materials for every pound that it purchases during the upcoming quarter. On the basis of the company's budgeted sales volume, management estimates that 4,000 pounds of direct materials need to be purchased by March 31. Determine the number of pounds in Salter's beginning direct materials inventory on January 1.
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Production Budget Expected quarterly unit sales for tents at Sandy's Camping Gear are 7,500, 8,800, 3,200, and 2,900 for the next two years. At the start of the current year, inventory of finished tents on hand is 750 tents. Sandy's has a desired ending inventory of 20 percent of next quarter's sales. Create the production budget in numbers of tents for quarters one through four for the current year.
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Frowren Domestic manufactures and sells a single product. In preparing its master budget for the current quarter, the company's controller has assembled the following information: img Frowren Domestic used the average cost method of pricing its inventory of finished goods. Instructions Compute the following budgeted quantities or dollar amounts: a. Planned production of finished goods (in units). b. Cost of finished goods manufactured. c. Ending finished goods inventory. (Remember that in using the average cost method you first must compute the average cost of units available for sale.) d. Cost of goods sold.
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Budgeting for Cash Barley, Inc., wants a projection of cash receipts and cash payments for the month of November. On November 28, a note will be payable in the amount of $102,250, including interest. The cash balance on November 1 is $37,200. Accounts payable to merchandise creditors at the end of October were $206,000. The company's experience indicates that 70 percent of sales will be collected during the month of sale, 25'percent in the month following the sale, and 3 percent in the second month following the sale; 2 percent will be uncollectible. The company sells various products at an average price of $10 per unit. Selected sales figures are as follows: img Because purchases are payable within 15 days; approximately 50 percent of the purchases in a.given month are paid in the following month. The average cost of units purchased is $6 per unit. Inventories at the end of each month are maintained at a level of 2,000 units plus 10 percent of the number of units that will be sold in the following month. The inventory on October 1 amounted to 9,000 units. Budgeted operating expenses for November are $225,000. Of this amount, $100,000 is consid ered fixed (including depreciation of $40,000). All operating expenses, other than depreciation, are paid in the month in which they are incurred.? The company expects to sell fully depreciated equipment in November for $9,000 cash. Instructions Prepare a cash budget for the month of November, supported by schedules of cash collections on accounts receivable and cash payments for purchases of merchandise.
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Budgeting Purchases and Cash Payments The following information is from the manufacturing budget and the budgeted financial statements of Fabor Fabrication: img Compute the budgeted amounts for: a. Purchases of direct materials during the year. b. Cash payments during the year to suppliers of materials.
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Barnum Distributors wants a projection of cash receipts and cash payments for the month of November. On November 28, a note will be payable in the amount of $98,500. including interest. The cash balance on November 1 is $29,600. Accounts payable to merchandise creditors at the end of October were $217,000. The company's experience indicates that 70 percent of sales will be collected during the month of sale, 20 percent in the month following the sale, and 7 percent in the second month following the sale; 3 percent will be uncollectible. The company sells various products at an average price of $11 per unit. Selected sales figures are as follows: img Because purchases are payable within 15 days. approximately 50 percent of the purchases in a given month are paid in the following month. The average cost of units purchased is $7 per unit. Inventories at the end of each month are maintained at a level of 2.000 units plus 10 percent of the number of units that will be sold in the following month The inventory on October 1 amounted to 8.000 units. Budgeted operating expenses for November are $220,000. Of this amount. $90,000 is considered fixed (including depreciation of $35.0001. All operating expenses, other than depreciation, are paid in. the month in which they are incurred. The company expects to sell fully depreciated equipment in November for $8:40 cash. Instructions Prepare a cash budget for the month of November, supported by schedules of cash collections on accounts receivable and cash payments for purchases of merchandise.
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img Cash Budgeting The importance of cash budgets for all types of businesses and individuals cannot be overempha sized. The following six steps to cash flow control are critical. 1. Create a monthlv cash flow budget. Determine the amount you need to achieve your business and personal financial goals, including enough to pay taxes and fund your retirement. 2. At the end of each month compare cash infows and outflows to make necessary adjustments to cash spending or :aving. 3. Accounting software can help automate-the process. 4. Set aside cash each month to pay your taxes on time. 5. Make quarterly cortributions to a retirement account. 6. Establish a line of credit with a bank, or investigate other short-term financing sources, well before you think you'll need the extra cash. Instructions a. Assume for item number 2 that a business's actual xash flows are not enough to achieve its business goals and some necessary adjustments must be made. Name at least four adjustment procedures that businesses can use to equalize cash flows. b. Write a short paragraph discussing how cash budgeting can be critical for your ongoing success.
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Renaldo's Boutiques, Inc., has 14 stores located in a midwestern part of the United States. Renaldo. the president of the company, has set budgets for each store that do not allow for lost, stolen, or misplaced merchandise (inventory shrinkage). Research shows the disappearance of store merchandise is attributed to a combination of internal and external causes: Customer theft-35 percent Employee theft-40 percent Administrative errors-18 percent Vendor dishonesty-7 percent This chapter discussed two types of budgeting philosophies. Which philosophy do you believe Renaldo is following? Use information in this problem to support your answer.
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