Question 1

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?

Accepted Answer

The answer of Production Budget 
Refer to Cornerstone Exercise 8.1,...

Question 2

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?

Accepted Answer

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Coral Seas Jewelry Company...

Question 3

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.)

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Rosita Flores owns...

Question 4

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

Accepted Answer

The answer of Operating Budget, Comprehensive Analysis 
Ponderosa, Inc., produces...

Question 5

Define control. How are budgets used to control?

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Question 6

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.)

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Question 7

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.)

Accepted Answer

The answer of Schedule of Cash Receipts 
Refer to Exercise...

Question 8

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.

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Question 9

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?

Accepted Answer

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Refer to Cornerstone...

Question 10

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.

Accepted Answer

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Question 11

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?

Accepted Answer

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Janet Wooster owns a retail...

Question 12

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 )

Accepted Answer

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Question 13

Discuss some of the reasons for budgeting.

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Question 14

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?

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Question 15

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 )

Accepted Answer

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Historically,...

Question 16

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 )

Accepted Answer

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Friendly Freddie's is an independently...

Question 17

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.)

Accepted Answer

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The School...

Question 18

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?

Accepted Answer

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Khloe Company imports gift items...

Question 19

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.

Accepted Answer

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Del Spencer is...

Question 20

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?

Accepted Answer

The answer of Flexible Budget 
The controller for Muir Company's...

Quiz 8: Budgeting for Planning and Control

Define control. How are budgets used to control?

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.)

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.

Discuss some of the reasons for budgeting.

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?