Quiz 14: Cost Planning

Production budget ABC Company's budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month's budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Required: Calculate the number of units to be produced in June and July.

Purchases budget In addition to the information presented in Mini-Exercise 14.1, each unit that ABC Company produces uses 3 pounds of raw material. ABC requires 25% of the next month's budgeted production as raw material inventory each month. Required: Calculate the number of pounds of raw material to be purchased in June. Reference Mini-Exercise 14.1: Production budget ABC Company's budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month's budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Required: Calculate the number of units to be produced in June and July.

Operating expense budget In addition to the information presented in Mini-Exercise 14.1, the following cost behavior patterns are budgeted for ABC Company's operating expenses each month: Fixed costs: salaries, $2,000; rent, $5,000; depreciation, $2,400; advertising, $3,200 Mixed costs: utilities, $3,000 + $0.50 per unit Variable costs per unit sold: sales commissions, $2.00; marketing promotions, $1.00; supplies, $0.75; bad debt expense, $0.25 Required: Prepare ABC Company's operating expense budget for June, July, and August. Reference Mini-Exercise 14.1: Production budget ABC Company's budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month's budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Required: Calculate the number of units to be produced in June and July.

Cash receipts analysis In addition to the information presented in Mini-Exercise 14.1, the selling price for each unit is $18. Based on past experience, ABC expects that 30% of a month's sales will be collected in the month of sale, 60% in the following month, and 8% in the second month following the sale. Required: Prepare an analysis of cash receipts from sales for ABC Company for August. Reference Mini-Exercise 14.1: Production budget ABC Company's budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month's budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Required: Calculate the number of units to be produced in June and July.

Cash budget In addition to the information presented in Mini-Exercise 14.4, ABC Company has a cash balance of $25,000 on August 1 and requires a minimum ending cash balance of $20,000. Cash disbursements budgeted for August include inventory purchases, $40,000; other manufacturing expenses, $98,000; operating expenses, $76,200; bond retirements, $50,000; and dividend payments, $15,000. Required: Prepare a cash budget for ABC Company for August. Reference Mini-Exercise 14.4: Cash receipts analysis In addition to the information presented in Mini-Exercise 14.1, the selling price for each unit is $18. Based on past experience, ABC expects that 30% of a month's sales will be collected in the month of sale, 60% in the following month, and 8% in the second month following the sale. Required: Prepare an analysis of cash receipts from sales for ABC Company for August. Reference Mini-Exercise 14.1: Production budget ABC Company's budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month's budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Required: Calculate the number of units to be produced in June and July.

Standard product cost In addition to the information presented in Mini-Exercises 14.1 and 14.2, ABC Company currently pays a standard rate of $1 per pound for raw materials. Each unit should be produced in 15 minutes of direct labor time at a standard direct labor rate of $12 per hour. Manufacturing overhead is applied at the standard rate of $16 per direct labor hour. Required: Calculate the standard cost per unit for ABC Company. Reference Mini-Exercise 14.1: Production budget ABC Company's budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month's budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Required: Calculate the number of units to be produced in June and July. Reference Mini-Exercise 14.2: Purchases budget In addition to the information presented in Mini-Exercise 14.1, each unit that ABC Company produces uses 3 pounds of raw material. ABC requires 25% of the next month's budgeted production as raw material inventory each month. Required: Calculate the number of pounds of raw material to be purchased in June.

Production and purchases budgets Olympia Productions, Inc., makes award medallions that are attached to ribbons. Each medallion requires 18 inches of ribbon. The sales forecast for February is 2,000 medallions. Estimated beginning inventories and desired ending inventories for February are as follows: Required: a. Calculate the number of medallions to be produced in February. b. Calculate the number of yards of ribbon to be purchased in February.

Production and purchases budgets Gillman Co. is forecasting sales of 62,000 units of product for August. To make one unit of finished product, 5 pounds of raw materials are required. Actual beginning and desired ending inventories of raw materials and finished goods are as follows: Required: a. Calculate the number of units of product to be produced during August. b. Calculate the number of pounds of raw materials to be purchased during August.

Purchases budget Each gallon of Old Guard, a popular aftershave lotion, requires 2 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2016 is as follows: Management's policy is to have on hand at the end of every quarter enough ocean scent inventory to meet 25% of the next quarter's production needs. At the beginning of Quarter I, 5,000 ounces of ocean scent were on hand. Required: a. Calculate the number of ounces of ocean scent to be purchased in each of the first two quarters of 2016. b. Explain why management plans for an ending inventory instead of planning to purchase each quarter the amount of raw materials needed for that quarter's production.

Production and purchases budgets Osage, Inc., has actual sales for May and June and forecast sales for July, August, September, and October as follows: Required: a. The firm's policy is to have finished goods inventory on hand at the end of the month that is equal to 70% of the next month's sales. It is currently estimated that there will be 4,000 units on hand at the end of June. Calculate the number of units to be produced in each of the months of July, August, and September. b. Each unit of finished product requires 6.5 pounds of raw materials. The firm's policy is to have raw material inventory on hand at the end of each month that is equal to 60% of the next month's estimated usage. It is currently estimated that 26,000 pounds of raw materials will be on hand at the end of June. Calculate the number of pounds of raw materials to be purchased in each of the months of July and August.

Cash receipts budget Fox Trail Center's sales are all made on account. The firm's collection experience has been that 30% of a month's sales are collected in the month the sale is made, 50% are collected in the month following the sale, and 18% are collected in the second month following the sale. The sales forecast for the months of May through August is as follows: Required: Calculate the cash collections that would be included in the cash budgets for July and August.

Cash receipts budget Scottsdale Co. has actual sales for July and August and forecast sales for September, October, November, and December as follows: Based on past experience, it is estimated that 30% of a month's sales are collected in the month of sale, 55% are collected in the month following the sale, and 10% are collected in the second month following the sale. Required: Calculate the estimated cash receipts for September, October, and November.

Developing direct labor cost standards Brass Creations Co. makes decorative candle pedestals. An industrial engineer consultant developed ideal time standards for one unit of the Cambridge model pedestal. The standards follow, along with the cost accountant's determination of current labor pay rates: Required: a. Using the preceding data, calculate the direct labor cost for a Cambridge model pedestal. b. Would it be appropriate to use the cost calculated in part a as a standard cost for evaluating direct labor performance and valuing inventory? Explain your answer.

Developing raw material cost standards Lakeway Manufacturing Co. manufactures and sells household cleaning products. The company's research department has developed a new cleaner for which a standard cost must be determined. The new cleaner is made by mixing 11 quarts of triphate solution and 4 pounds of sobase granules and boiling the mixture for several minutes. After the solution has cooled, 2 ounces of methage are added. This "recipe" produces 10 quarts of the cleaner, which is then packaged in 1-quart plastic dispenser bottles. Raw material costs are as follows: Required: a. Using the preceding data, calculate the raw material cost for one bottle of the new cleaner. b. Assume that the preceding costs are the current best estimates of the costs at which required quantities of the raw material can be purchased. Would you recommend that any other factors be considered in establishing the raw material cost standard for the new cleaner? c. Explain the process that would be used to develop the direct labor cost standard for the new product.

Standard absorption cost per unit DMA, Inc., processes corn into corn starch and corn syrup. The company's productivity and cost standards follow: From every bushel of corn processed, 12 pounds of starch and 3 pounds of syrup should be produced. Standard direct labor and variable overhead total $0.42 per bushel of corn processed. Standard fixed overhead (the predetermined fixed overhead application rate) is $0.35 per bushel processed. Required: a. Calculate the standard absorption cost per pound for the starch and syrup produced from the processing of 15,000 bushels of corn if the average cost per bushel is $2.83. b. Comment about the usefulness of this standard cost for management planning and control purposes.

Standard absorption cost per unit A cost analyst for Stamper Manufacturing Co. has assembled the following data about the Model 24 stamp pad: The piece of sheet metal from which eight pad cases can be made costs $0.14. This amount is based on the number of sheets in a 3,000-pound bundle of sheet metal, which is the usual purchase quantity. The foam pad that is put in the case costs $0.02, based on the number of pads that can be cut from a large roll of foam. Production standards, based on engineering analysis recognizing attainable performance, provide for the manufacture of 1,800 pads by two workers in an eight-hour shift. The standard direct labor pay rate is $11 per hour. Manufacturing overhead is applied to units produced using a predetermined overhead application rate of $16 per direct labor hour, of which $7 per hour is fixed manufacturing overhead. Required: a. Calculate the standard absorption cost of a package of 12 stamp pads. b. Stamper Manufacturing Co.'s management is considering a special promotion that would result in increased sales of 2,000 packages of 12 pads per package. Calculate the cost per package that is relevant for this analysis.

Purchases budget Brooklyn Furniture, a retail store, has an average gross profit ratio of 46%. The sales forecast for the next four months follows: Management's inventory policy is to have ending inventory equal to 300% of the cost of sales for the subsequent month, although it is estimated that the cost of inventory at June 30 will be $410,000. Required: Calculate the purchases budget, in dollars, for the months of July and August.

Purchases budget-analytical Precious Stones, Ltd., is a retail jeweler. Most of the firm's business is in jewelry and watches. The firm's average gross profit ratio for jewelry and watches is 60% and 37.5%, respectively. The sales forecast for the next two months for each product category is as follows: The company's policy, which is expected to be achieved at the end of April, is to have ending inventory equal to 200% of the next month's cost of goods sold. Required: a. Calculate the cost of goods sold for jewelry and watches for May and June. b. Calculate a purchases budget, in dollars, for each product for the month of May.

Cash budget-part 1 PrimeTime Sportswear is a custom imprinter that began operations six months ago. Sales have exceeded management's most optimistic projections. Sales are made on account and collected as follows: 50% in the month after the sale is made and 45% in the second month after sale. Merchandise purchases and operating expenses are paid as follows: PrimeTime Sportswear's income statement budget for each of the next four months, newly revised to reflect the success of the firm, follows: Cash on hand August 31 is estimated to be $40,000. Collections of August 31 accounts receivable were estimated to be $20,000 in September and $15,000 in October. Payments of August 31 accounts payable and accrued expenses in September were estimated to be $24,000. Required: a. Prepare a cash budget for September. b. What is your advice to management of PrimeTime Sportswear?

Cash budget-part 2 Refer to the PrimeTime Sportswear data presented in Problem 14.19. Required: a. Prepare a cash budget for October and November. What are the prospects for this company if its sales growth continues at a similar rate? b. Assume now that PrimeTime Sportswear is a mature firm, and that the September-November data represent a seasonal peak in business. Prepare a cash budget for December, January, and February, assuming that the income statements for January and February are the same as December's. Explain how the cash budget would be used to support a request to a bank for a seasonal loan. Reference Problem 14.19: Cash budget-part 1 PrimeTime Sportswear is a custom imprinter that began operations six months ago. Sales have exceeded management's most optimistic projections. Sales are made on account and collected as follows: 50% in the month after the sale is made and 45% in the second month after sale. Merchandise purchases and operating expenses are paid as follows: PrimeTime Sportswear's income statement budget for each of the next four months, newly revised to reflect the success of the firm, follows: Cash on hand August 31 is estimated to be $40,000. Collections of August 31 accounts receivable were estimated to be $20,000 in September and $15,000 in October. Payments of August 31 accounts payable and accrued expenses in September were estimated to be $24,000. Required: a. Prepare a cash budget for September. b. What is your advice to management of PrimeTime Sportswear?

Cash budget The monthly cash budgets for the second quarter of 2016 follow ($000 omitted) for Morrison Mfg. Co. A minimum cash balance of $30,000 is required to start each month, and a $100,000 line of credit has been arranged with a local bank at a 8% interest rate. Required: Calculate the missing amounts. (Hint: The total cash available includes collections from customers for all three months, plus the beginning cash balance from April 1, 2016.)

Cash budget-comprehensive Following are the budgeted income statements for the second quarter of 2016 for SeaTech, Inc.: The company expects about 30% of sales to be cash transactions. Of sales on account, 60% are expected to be collected in the first month after the sale is made, and 40% are expected to be collected in the second month after sale. Depreciation, insurance, and property taxes represent $12,000 of the estimated monthly cost of goods sold and $8,000 of the estimated monthly operating expenses. The annual insurance premium is paid in January, and the annual property taxes are paid in August. Of the remainder of the cost of goods sold and operating expenses, 80% are expected to be paid in the month in which they are incurred, and the balance is expected to be paid in the following month. Current assets as of April 1, 2016, consist of cash of $14,000 and accounts receivable of $149,800 ($105,000 from March credit sales and $44,800 from February credit sales). Current liabilities as of April 1 consist of $18,000 of accounts payable for product costs incurred in March; $4,600 of accrued liabilities for operating expenses incurred in March; and a $40,000, 12%, 120-day note payable that is due on April 17, 2016. An estimated income tax payment of $40,000 will be made in May. The regular quarterly dividend of $16,000 is expected to be declared in May and paid in June. Capital expenditures amounting to $17,200 will be made in April. Required: a. Complete the monthly cash budgets for the second quarter of 2016 using the following format. Note that the ending cash balance for June is provided as a check figure. b. Assume that management of SeaTech, Inc., desires to maintain a minimum cash balance of $10,000 at the beginning of each month and has arranged a $50,000 line of credit with a local bank at an interest rate of 10% to ensure the availability of funds. Borrowing transactions are to occur only at the end of months in which the budgeted cash balance would otherwise fall short of the $10,000 minimum balance. Repayments of principal and interest are to occur at the end of the earliest month in which sufficient funds are expected to be available for repayment. Explain how this minimum cash balance requirement would affect the monthly cash budgets prepared in part a.

Sales, production, purchases, and cash budgets Soprano Co. is in the process of preparing the second quarter budget for 2016, and the following data have been assembled: • The company sells a single product at a selling price of $40 per unit. The estimated sales volume for the next six months is as follows: • All sales are on account. The company's collection experience has been that 40% of a month's sales are collected in the month of sale, 55% are collected in the month following the sale, and 5% are uncollectible. It is expected that the net realizable value of accounts receivable (i.e., accounts receivable less allowance for uncollectible accounts) will be $132,000 on March 31, 2016. • Management's policy is to maintain ending finished goods inventory each month at a level equal to 50% of the next month's budgeted sales. The finished goods inventory on March 31, 2016, is expected to be 3,500 units. • To make one unit of finished product, 3 pounds of materials are required. Management's policy is to have enough materials on hand at the end of each month to equal 40% of the next month's estimated usage. The raw materials inventory is expected to be 10,200 pounds on March 31, 2016. • The cost per pound of raw material is $6, and 80% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable balance for raw material purchases is expected to be $26,280 on March 31, 2016. Required: a. Prepare a sales budget in units and dollars, by month and in total, for the second quarter (April, May, and June) of 2016. b. Prepare a schedule of cash collections from sales, by month and in total, for the second quarter of 2016. c. Prepare a production budget in units, by month and in total, for the second quarter of 2016. d. Prepare a materials purchases budget in pounds, by month and in total, for the second quarter of 2016. e. Prepare a schedule of cash payments for materials, by month and in total, for the second quarter of 2016.

Sales, production, purchases, and cash budgets Freese, Inc., is in the process of preparing the fourth quarter budget for 2016, and the following data have been assembled: • The company sells a single product at a price of $60 per unit. The estimated sales volume for the next six months is as follows: • All sales are on account. The company's collection experience has been that 32% of a month's sales are collected in the month of sale, 64% are collected in the month following the sale, and 4% are uncollectible. It is expected that the net realizable value of accounts receivable (i.e., accounts receivable less allowance for uncollectible accounts) will be $499,200 on September 30, 2016. • Management's policy is to maintain ending finished goods inventory each month at a level equal to 40% of the next month's budgeted sales. The finished goods inventory on September 30, 2016, is expected to be 4,800 units. • To make one unit of finished product, 5 pounds of materials are required. Management's policy is to have enough materials on hand at the end of each month to equal 30% of the next month's estimated usage. The raw materials inventory is expected to be 19,200 pounds on September 30, 2016. • The cost per pound of raw material is $4, and 70% of all purchases are paid for in the month of purchase; the remainder is paid in the following month. The accounts payable for raw material purchases is expected to be $75,960 on September 30, 2016. Required: a. Prepare a sales budget in units and dollars, by month and in total, for the fourth quarter (October, November, and December) of 2016. b. Prepare a schedule of cash collections from sales, by month and in total, for the fourth quarter of 2016. c. Prepare a production budget in units, by month and in total, for the fourth quarter of 2016. d. Prepare a materials purchases budget in pounds, by month and in total, for the fourth quarter of 2016. e. Prepare a schedule of cash payments for materials, by month and in total, for the fourth quarter of 2016.

Standard-setting process Canada Printing Group, Inc. (CPGI), has recently begun the process of acquiring small to medium-size local and regional printing firms across the country to facilitate its corporate strategy of becoming the low-cost provider of graphic arts and printing services in Canada. To emphasize the importance of cost control, CPGI uses a standard cost system in all its printing plants. Most of the smaller firms that CPGI has acquired have never used a standard cost system before. Therefore, when CPGI acquires a new printing plant, its first task is to evaluate the operation and set standards for the printing presses. One such recent acquisition was Pierre's Lithographing of Montreal. Pierre has a 5-year-old, 40-inch, four-color press that is in very good condition. Specifications provided by the manufacturer of the press indicate that under ideal conditions, the press should be able to produce 10,000 impressions per hour. CPGI has many similar presses throughout its organization, and in most locations the standard has been set at 9,000 impressions per hour. Many of Pierre's jobs have been for smaller run quantities, which means that the presses are stopped many times during the day as the press operator sets up the press for each new job. Additionally, the jobs that Pierre attracts are very complex and require high-quality results. Pierre suggests that even if everything ran perfectly throughout a day, the most he could expect the press to run would be 8,000 impressions per hour. As usual with new acquisitions, CPGI has prepared a time study of the press for the past six months to determine how productive each of the operators has been. The results of the time study are as follows: Required: a. CPGI is considering five possibilities for setting the press standard for impressions per hour: 10,000, 9,000, 8,000, 7,400, or 6,500. Discuss the appropriateness, including a list of pros and cons, of setting the press standard at each level identified. b. What qualitative factors should CPGI consider when setting a standard for the same model press at other sites across Canada? c. Which level would you choose for the press standard at Pierre's Lithographing of Montreal? Explain your answer.

Budget of the United States government: Internet assignment The Office of Management and Budget (OMB) provides access to the budget of the United States government through the U.S. Government Printing Office's Federal Digital System (FDsys) at gpo.gov/fdsys. As the "Featured Collections" description states, "The Budget of the United States Government is a collection of documents that contains the budget message of the President, information about the President's budget proposals for a given fiscal year, and other budgetary publications that have been issued throughout the fiscal year. Other related and supporting budget publications are included, which may vary from year to year." One particularly useful supporting publication that appeared from 1996 through 2002 was "A Citizen's Guide to the Federal Budget," which provided information about the budget and the budget process for the general public. This guide was designed to give the reader a walking tour of the budget of the United States. Access the guide for fiscal year 2002, and complete the following requirements: Required: a. Why was the guide designed, and what information is presented at this site? b. What is the federal budget? c. What percentage of the gross domestic product does spending for federal programs represent? What percentage does state and local government spending represent? d. What was the amount of total receipts? Where did they come from? e. What was the amount of total outlays? Where did they go? f. Explain the process used by the government to create a budget. g. How is the federal budget monitored? h. What is meant by a budget surplus? A budget deficit? i. Why is a budget deficit important? A budget surplus? j. How does the government's budget process compare to the operating budgeting process described in the chapter? What are the similarities and differences?

Budgeting software review, collaborative project: Internet assignment Form a group of three or four students to research, evaluate, and report on software solutions available to support the budgeting needs of an organization. Choose three planning/budgeting products from the following list of company websites, and review the information about the software solutions available on each company's website. The list provided is meant to serve only as a starting point for this case; it is not a comprehensive listing of all budgeting software tools on the market. In fact, you are encouraged to search for other products and include them in your analysis. Your information gathering should focus on things such as company history, product features and functionality, for what size organization the product is designed, product scalability, technology requirements, budgeting process employed by the system, customer references and/or testimonials, product demos, training, and/or other services available for implementation. After you have compiled information about each product, write a summary report that provides a comparative assessment of the three products.