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CHAPTER 6:

OPERATIONAL AND FINANCIAL BUDGETING

Multiple Choice a

1. The starting point in preparing a comprehensive budget is a. the sales forecast. b. the cash budget. c. the budgeted income statement. d. the flexible expense budget.

d

2. Budgets are related to which of the following management functions? a. Planning. b. Control. c. Performance evaluation. d. All of the above.

d

3. Which of the following should be used to forecast sales? a. Regression analysis. b. The scatter diagram. c. The judgment of the most experienced managers. d. Whatever method produces the most accurate forecast.

a

4. A critical factor for using indicator methods to forecast sales is a. the availability of a forecasted value for the indicator. b. an upward trend in the value of the indicator. c. governmental collection of data for computing and reporting the value of the indicator. d. the availability of an indicator that covers the entire country.

d

5. Which of the following equations beginning inventory, EI = ending of goods sold) a. Budgeted purchases = CGS + BI b. Budgeted purchases = CGS + BI c. Budgeted purchases = CGS + EI d. Budgeted purchases = CGS + EI

can be used to budget purchases? (BI = inventory desired, CGS = budgeted cost - EI + BI - BI

b

6. A flexible budget is a. one that can be changed whenever a manager so desires. b. adjusted to reflect expected costs at the actual level of activity. c. one that uses the formula total cost = cost per unit x units produced. d. the same as a continuous budget.

b

7. The use of flexible (as opposed to static) budget allowances is LEAST important for which of the following? a. Costs of the production department. b. Costs of the general accounting department. c. Costs of the product shipping department.

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d. Costs of the material receiving department.

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d

8. Budgets set at very high levels of performance (i.e., very low costs) a. assist in planning the operations of the company. b. stimulate people to perform better than they ordinarily would. c. are helpful in evaluating the performance of managers. d. can lead to low levels of performance.

c

9. Inventory policy is most critical in the budgeting of a. sales. b. cost of goods sold. c. purchases. d. expenses.

a 10. Budgeting expenditures by purpose is called a. program budgeting. b. zero-based budgeting. c. line budgeting. d. flexible budgeting. c 11. Which of the following is a difference between a static budget and a flexible budget? a. A flexible budget includes only variable costs, a static budget includes only fixed costs. b. A flexible budget includes all costs, a static budget includes only fixed costs. c. A flexible budget gives different allowances for different levels of activity; a static budget does not. d. None of the above. a 12. A static budget is most appropriate for a department a. with only fixed costs. b. with only variable costs. c. with mostly mixed costs. d. with any of the above characteristics. d 13. Which of the following is NOT an advantage of budgeting? a. It requires managers to state their objectives. b. It facilitates control by permitting comparisons of budgeted and actual results. c. It facilitates performance evaluation by permitting comparisons of budgeted and actual results. d. It provides a check-up device that allows managers to keep close tabs on their subordinates. b 14. An a. b. c. d.

imposed budget is the same as a static budget. can lead to poor performance. is best for planning purposes. eliminates the need for a sales forecast.

b 15. Prohibiting managers from overspending budget allowances a. improves company performance. b. can harm company performance. c. eliminates the need for comparisons of budgeted and actual amounts. d. usually reduces the need to prepare a cash budget.

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b 16. Which of the following will occur if X Co.'s actual sales in May are lower than its budgeted sales for that month? a. X won't have enough cash to cover bills requiring payment in May. b. X's actual inventory at the end of May will be higher than budgeted. c. X's actual purchases in June will be higher than budgeted. d. All of the above. c 17. JIT manufacturers are more likely than conventional manufacturers to a. use static budget allowances for manufacturing costs. b. prepare production budgets without a sales forecast. c. budget unit production equal to budgeted unit sales. d. experience budget variances. a 18. If cash receipts from customers are greater than sales, which of the following is most likely to be true? a. The balance of accounts receivable will decrease. b. The company's outstanding debt will decrease. c. The company's cash balance will increase. d. The company will show a profit. c 19. A cash budget is NOT prepared until a company has a. obtained a commitment from its bank that cash will be available as needed. b. prepared the pro forma balance sheet. c. prepared its purchases budget. d. determined that enough cash is available to meet dividend payments. a 20. Which of the following is LEAST likely to be affected if unit sales for this month are lower than budgeted? a. Production for this month. b. Production for next month. c. Cash receipts for next month. d. Inventory at the end of this month. b 21. "Incremental budgeting" refers to a. line-by-line approval of expenditures. b. setting budget allowances based on prior year expenditures. c. requiring top management approval of increases in budgets. d. using incremental revenues and costs in budgeting. b 22. The principal DISADVANTAGE of line budgeting is a. it can only be used by not-for-profit entities. b. it limits the flexibility of managers to accomplish the entity's objectives. c. it works only in conjunction with zero-based budgeting. d. none of the above. a 23. The cash receipts budget a. requires a sales forecast. b. requires a purchases or production budget. c. is prepared after the cash disbursements budget. d. has none of the above characteristics.

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c 24. The type of company most likely to run short of cash during the year is one with a. little seasonality. b. high contribution margin percentage. c. high seasonality and rapid sales growth. d. relatively low fixed costs. d 25. If a. b. c. d.

a company is earning a profit, its cash balance is increasing. its monthly cash disbursements will be stable. its inventory is increasing. it might have to borrow money.

a 26. One difference between budgeting in for-profit and not-for-profit entities is that not-for-profit entities usually a. budget expenses before revenues. b. don't need a cash budget. c. are less likely to use incremental budgeting. d. use computer software-packages to facilitate the budgeting process. d 27. To prepare its cash disbursements budget, a company uses information from a. its balance sheet at the end of the prior period. b. its purchases budget. c. its capital budget. d. all of the above sources. b 28. Just-in-time manufacturers are more likely than conventional manufacturers to a. prepare production budgets without a sales forecast. b. budget materials purchases equal to the current month's needs for production. c. budget unit production for the month at greater than budgeted unit sales for the month. d. experience cash shortages. c 29. Quorum Company desires an ending inventory of $120,000. It expects sales of $240,000 and has a beginning inventory of $80,000. Cost of sales is 60% of sales. Budgeted purchases are a. $120,000. b. $144,000. c. $184,000. d. $264,000. d 30. Garamond Company budgeted purchases of $200,000. Cost of sales was $240,000 and the desired ending inventory was $84,000. The beginning inventory was a. $40,000. b. $64,000. c. $84,000. d. $124,000.

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a 31. Wildwood Company budgeted purchases of 20,000 units. The budgeted beginning inventory was 4,800 units and the budgeted ending inventory was 6,000 units. Budgeted sales were a. 18,800 units. b. 21,200 units. c. 24,800 units. d. 26,000 units. c 32. Menomonie Company budgeted sales of 18,000 units. The budgeted beginning inventory was 3,000 units and the budgeted ending inventory was 5,000 units. Budgeted production is a. 23,000 units. b. 21,000 units. c. 20,000 units. d. 16,000 units. d 33. Baker Company budgets supplies as $20,000 + ($1.20 x direct labor hours). Baker has budgeted 18,000 direct labor hours, $130,000 direct labor cost. The flexible budget allowance for supplies is a. $18,000. b. $20,000. c. $150,000. d. some other number. b 34. Equinox Company budgeted sales of 44,000 units for January, 60,000 for February. The budgeted beginning inventory for January 1 was 14,000 units. Equinox desires an ending inventory equal to one-half of the following month's sales needs. Budgeted production for January is a. 74,000 units. b. 60,000 units. c. 52,000 units. d. 28,000 units. c 35. Sams Company manufactures a single product. It keeps its inventory of finished goods at 75% the coming month's budgeted sales, inventory of raw materials at 50% of the coming month's budgeted production needs. Each unit of product requires two pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in June would be a. 1,525 pounds. b. 2,550 pounds. c. 2,800 pounds. d. 3,050 pounds. a 36. Hayward Company desires an ending inventory of $70,000. It expects sales of $400,000 and has a beginning inventory of $65,000. Cost of sales is 65% of sales. Budgeted purchases are a. $265,000. b. $395,000. c. $405,000. d. $535,000.

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c 37. Bryce Company budgeted sales of 50,000 units for January, 60,000 for February. Bryce Company desires an ending inventory equal to one-half of the following month's sales needs. Inventory on January 1 was as desired. Budgeted production for January is a. 22,000 units. b. 52,000 units. c. 55,000 units. d. 74,000 units. c 38. Chetek Company budgeted purchases of 19,000 units. The budgeted beginning inventory was 12,400 units and the budgeted ending inventory was 13,000 units. Budgeted sales were a. 32,000 units. b. 31,400 units. c. 18,400 units. d. 19,600 units. d 39. Barron Company manufactures a single product. Barron keeps inventory of raw materials at 50% of the coming month's budgeted production needs. Each unit of product requires three pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in July would be a. 1,450 pounds. b. 2,400 pounds. c. 3,900 pounds. d. some other number. c 40. Acker Company has prepared the following flexible budget for production costs: total production costs = $260,000 + $5X, where X is the number of machine hours. Acker produced 20,000 units, using 34,000 machine hours at a total cost of $425,000. The flexible budget allowance for production costs is a. $260,000. b. $425,000. c. $430,000. d. $525,000. c 41. Scooter Inc. has projected sales to be $130,000 in June, $135,000 in July and $150,000 in August. Scooter collects 30% of a month's sales in the month of sale, 50% in the month following the sale, and 16% in the second month following the sale. Cash collections in August would be a. $ 45,000. b. $127,300. c. $133,300. d. $138,500. d 42. Rundall Co. makes payments for purchases 30% during the month of purchase and the remainder the following month. April purchases are projected to be $160,000; May purchases will be $240,000. Cash payments in May will be a. $ 72,000. b. $108,000. c. $168,000. d. $184,000.

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c 43. Randall Co. makes payments for purchases 30% during the month of purchase and the remainder the following month. April purchases are projected to be $80,000; May purchases will be $120,000. The accounts payable balance on May 31 will be a. $36,000. b. $54,000. c. $84,000. d. $92,000. c 44. Alfuth Co. makes payments for purchases 10% during the month of purchase, 60% in the following month, and the remainder in the second month following the purchase. Purchases are projected to be $260,000 in January, $280,000 in February, and $320,000 in March. March payments will be a. $ 32,000. b. $168,000. c. $278,000. d. some other number. d 45. Reid Co. makes payments for purchases 10% during the month of purchase, 60% in the following month, and the remainder in the second month following the purchase. Purchases are projected to be $130,000 in January, $140,000 in February, and $160,000 in March. The March 31 accounts payable balance will be a. $48,000. b. $96,000. c. $144,000. d. $186,000. c 46. Andover Inc. has projected sales to be: February, $10,000; March, $9,000; April, $8,000; May, $10,000; and June, $11,000. Andover has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale and 55% collected the second month. Total cash receipts in May would be a. $3,000. b. $8,150. c. $8,705. d. some other number. d 47. Conde Inc. has projected sales to be: February, $20,000; March, $18,000; April, $16,000; May, $20,000; and June, $22,000. Conde has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale and 60% collected the second month. Accounts receivable for May 31 would be a. $ 6,160. b. $13,300. c. $14,000. d. $20,720. d 48. Holmgren estimates its supplies purchases to be $21,000 in August and $28,000 in September. Holmgren pays 70% of its accounts in the month of purchase with the remainder paid the following month. September payments would be a. $14,700.

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b. $19,600. c. $23,100. d. $55,900. c 49. Danner Inc. has projected sales to be $100,000 in June, $90,000 in July, and $70,000 in August. Danner collects 50% of a month's sales in the month of sale, 30% in the month following the sale, and 16% in the second month following the sale. Cash collections in August would be a. $35,000. b. $62,000. c. $78,000. d. $86,000. a 50. Clearwater Inc. has projected sales to be $160,000 in April, $200,000 in May, and $240,000 in June. Clearwater collects 40% of a month's sales in the month of sale, 40% in the month following the sale, and 20% in the second month following the sale. The accounts receivable balance on June 30 would be a. $184,000. b. $144,000. c. $ 40,000. d. some other number.

True-False F

1. A just-in-time manufacturer does NOT need a sales budget.

T

2. A flexible budget allowance is NOT especially useful for budgeting discretionary costs.

F

3. The purchases budget is prepared before the sales budget because the company cannot estimate what it will sell until it has some idea of what will be on hand.

F

4. The longer the time period covered by a budget, the more useful the budget will be for controlling operations.

F

5. A purchases budget is normally prepared after the company has forecast how much cash it will have available to pay for purchases.

F

6. Imposed budgets are exceptionally ambitious goals not likely to be achieved without making fundamental changes in the way a job is done.

F

7. A JIT manufacturer that maintains no inventory doesn't need a cash disbursements budget.

F

8. The budget for a retailer is likely to be more complex than that for a manufacturer because a retailer has a wider variety of customers.

F

9. The increasing public demand for accountability from governmental and other not-for-profit organizations has resulted in an increased use of incremental budgeting.

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T 10. Line-by-line budget authorization is common in governmental units.

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Problems 1. Ballan Inc. estimates its units sales for the coming months to be as follows: March April May June July August

 

280,000 260,000 250,000 230,000 240,000 225,000

Ballan maintains inventory at budgeted sales needs for the next month. March 1 inventory will be 248,000 units. a. Prepare a monthly purchasing schedule for March through July.

SOLUTION: a. March purchases:

292,000 units

[280,000 + 260,000 – 248,000]

April purchases:

250,000 units

[260,000 + 250,000 – 260,000]

May purchases:

230,000 units

[250,000 + 230,000 – 250,000]

June purchases:

240,000 units

[230,000 + 240,000 – 230,000]

July purchases:

225,000 units

[240,000 + 225,000 – 240,000]

2. Superior Company manufactures a single product. It keeps its inventory of finished goods at twice the coming month's budgeted sales and inventory of raw materials at 150% of the coming month's budgeted production. Each unit of product requires five pounds of materials, which cost $3 per pound. The sales budget is, in units: May, 10,000; June, 12,400; July, 12,600; August, 13,200. a. Compute budgeted production for June. b. Compute budgeted production for July. c. Compute budgeted material purchases for June in pounds and dollars.

SOLUTION: a. June production: 12,800 units

[12,400 + (2 x 12,600) - (2 x 12,400)]

b. July production: 13,800 units

[12,600 + (2 x 13,200) - (2 x 12,600)]

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c. June materials purchases:

71,500 pounds; $214,500

Used in production (5 lbs. x 12,800) Ending inventory (5 lbs. x 13,800 x 150%)   Total Less beginning inventory (5 lbs. x 12,800 x 150%)   Purchases Times cost per pound   Equals dollar purchases  

64,000 lbs. 103,500 ------167,500 96,000 ------71,500 $3 ------$214,500 ========

3. Ironwood sells a single product for $10. The purchase cost is $4 per unit and Ironwood pays a 20% sales commission. Fixed costs are $45,000 per month including $12,000 depreciation, and the company maintains inventory equal to budgeted sales needs for the following month. The following budgeted data are available. Inventory on hand, February 1 Budgeted sales - February - March - April

28,000 24,000 26,000 25,000

units units units units

a. Compute total budgeted income for February and March. b. Find budgeted inventory at March 31 in units and dollars. c. Find budgeted purchases for March in units and dollars.

SOLUTION: a. Budgeted income:  

$110,000

S ales [(24,000 + 26,000) x $10] Cost of sales (50,000 x $4)

$500,000 200,000 ------$300,000 100,000 ------$200,000 90,000 ------$110,000 ========

  Gross profit Commissions at 20%   Contribution margin Fixed costs (2 x 45,000)   Income   b. Budgeted inventory:

25,000 units;

$100,000

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($4 x 25,000)

c. Budgeted purchases: 25,000 units; $100,000 Cost of sales Ending inventory Total required Less beginning inventory Purchases

26,000 units 25,000 -----51,000 26,000 -----25,000 units x $4 ======

$104,000 100,000 -------$204,000 104,000 -------$100,000 ========

4. Westrum estimates production overhead costs equal to $300,000 + $2X, where X is the number of machine hours used. Westrum budgeted 40,000 machine hours for 20X4. Westrum produced 23,000 units in 20X4, each requiring 3 machine hours. Actual production costs were $420,000. a. Calculate the flexible budget allowance for production overhead costs for 20X4. b. Find the amount and direction of the budget variance for 20X4 for production overhead. (favorable unfavorable) Circle one answer.

SOLUTION: a. Flexible budget allowance, b. Budget variance:

$438,000

$18,000 favorable

[$300,000 + (23,000 x 3 x $2)] ($438,000 - $420,000)

5. Acme Inc. estimates its dollar sales for the coming months to be as follows. June $340,000 July 360,000 August 300,000 September 260,000 October 240,000 November 200,000 Acme has an average gross margin of 40% of sales and maintains inventory at 75% of budgeted sales needs for the next month. Acme began June with $150,000 in inventory. a. Prepare a monthly purchasing schedule (in $) for as many months as is possible.

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SOLUTION: a. Sales x 40% Cost of Sales + Ending Inv - Beg Inv Purchases

June $340,000 x .40 -------$136,000 108,000 (150,000) -------$ 94,000 ========

July $360,000 x .40 -------$144,000 90,000 (108,000) -------$126,000 ========

August $300,000 x .40 -------$120,000 78,000 (90,000) -------$108,000 ========

September $260,000 x .40 -------$104,000 72,000 (78,000) -------$ 98,000 ========

October $240,000 x .40 -------$ 96,000 60,000 (72,000) -------$ 84,000 ========

6. Bay City estimates production overhead costs equal to $200,000 + $4X + $7Y, where X is the number of direct labor hours used and Y is the number of machine hours used. Bay City budgeted 20,000 direct labor hours and 50,000 machine hours for 20X2. Bay City produced 30,000 units in 20X2, each requiring 1 direct labor hour and 2.5 machine hours. Actual production costs were $890,000. a. Calculate the flexible budget allowance for production overhead costs for 20X2. b. Find the amount and direction of the budget variance for 20X2 for production overhead. (favorable unfavorable) Circle one answer.

SOLUTION: a. Flexible budget allowance, (30,000 x 2.5 x 7)] b. Budget variance:

$845,000

$45,000 unfavorable

[$200,000 + (30,000 x 1 x $4) +

($845,000 - $890,000)

7. Webster Company has the following sales budget. January February March April

$200,000 $240,000 $300,000 $360,000

Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in the following month. Webster keeps inventory equal to double the coming month's budgeted sales requirements. It pays for purchases 80% in the month of purchase and 20% in the month after purchase. Inventory at the beginning of January is $190,000. Webster has monthly fixed costs of $30,000 including $6,000 depreciation. Fixed costs requiring cash are paid as incurred. a. Compute budgeted cash receipts in March. b. Compute budgeted accounts receivable at the end of March.

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c. Compute budgeted inventory at the end of February. d. Compute budgeted purchases in February. e. March purchases are $290,000. Compute budgeted cash payments in March to suppliers of goods. f. Compute budgeted accounts payable for goods at the end of February. g. Cash at the end of February is $45,000. Cash disbursements are not required for anything other than payments to suppliers and fixed costs. Compute the budgeted cash balance at the end of March.

SOLUTION: a. March receipts:

$264,000

[($240,000 x 60%) + ($300,000 x 40%)]

b. Receivables at end of March:

$180,000

c. Inventory at end of February: d. February purchases: $252,000 - ($240,000 x 2 x 70%)] e. March payments:

$282,400

f. AP at end of February: g. Cash at end of March:

$420,000

[$300,000 x (100% - 40%)] ($300,000 x 70% x 2)

[($240,000 x 70%) + ($300,000 x 2 x 70%)

[(252,000 x 20%) + ($290,000 x 80%)]

$50,400 $2,600

($252,000 x 20%) ($25,000 + $264,000 - $282,400 - $24,000)

8. Weasel Company has the following sales projections for 20X3: January February March April May June

$200,000 210,000 225,000 230,000 245,000 240,000

Weasel collects 40% of its sales in the month of sale, 45% in the month following the sale and 13% in the second month following the sale. Records show that sales were $225,000 in November and $208,000 in December 20X2. a. Prepare a schedule of cash receipts for the first three months of 20X3. b. What would be the accounts receivable (net of bad debts) balance on March 31, 20X3?

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SOLUTION: a. January collections: (13% x 225,000) (45% x 208,000) (40% x 200,000)  

= = =

$29,250 93,600 80,000 ------ $202,850  ========

February collections: (13% x 208,000) = $27,040 (45% x 200,000) = 90,000 (40% x 210,000) = 84,000   ------ $201,040  ======== March collections:

b.

$157,800

(13% x 200,000) = $26,000 (45% x 210,000) = 94,500 (40% x 225,000) = 90,000   ------ $210,500  ======== $ 27,300 = February sales 210,000 x 13% $130,500 = March sales 225,000 x (45% + 13%) -------$157,800 ========

9. Bismarck has the following sales budget: March April May June

$300,000 $312,000 $320,000 $348,000

Cost of sales is 55% of sales. Bismarck keeps an inventory equal to onefourth the coming month's budgeted sales requirements. It pays for purchases 40% in the month of purchase and 60% in the month after purchase. Accounts Payable is $94,800 on March 1.

a. Prepare a monthly purchasing schedule for March through May. b. Prepare a monthly cash payment schedule for March through May. c. Compute the accounts payable balance as of May 31.

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SOLUTION: a. Sales x 55% Cost of Sales + Ending Inv - Beg Inv Purchases

March $300,000 x .55 -------$165,000 42,900 (41,250) -------$166,650 ========

April $312,000 x .55 -------$171,600 44,000 (42,900) -------$172,700 ========

May $320,000 x .55 -------$176,000 51,975 (44,000) -------$183,975 ========

b. March payments:

(40% x 166,650) = Mar 1 Acct Pay =

$ 66,660 94,800   ------ $161,460  ========

April payments:

(40% x 172,700) = (60% x 166,650) =

$ 69,080 99,990   ------ $169,070  ========

May payments:

(40% x 183,975) = (60% x 172,700) =

$ 73,590 103,620   ------ $177,210  ========

c. Accounts Payable, May 31: $110,385

[60% x $183,975]

10. Hicks Company has the following sales projections for 20X4: January $160,000 February 168,000

March April

175,000 180,000

May June

195,000 190,000

Hicks collects 30% of its sales in the month of sale, 45% in the month following the sale, and 24% in the second month following the sale. Records show that sales were $160,000 in November and $168,000 in December 20X3. a. Prepare a schedule of cash receipts for the first three months of 20X4. b. What would be the accounts receivable balance (net of bad debts) on March 31, 20X4?

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SOLUTION: a. January collections: (24% x 160,000) = (45% x 168,000) = (30% x 160,000) =

$38,400 75,600 48,000  ------$162,000 ========

February collections: (24% x 168,000) = $40,320 (45% x 160,000) = 72,000 (30% x 168,000) = 50,400  ------$162,720 ======== March collections:

b.

$161,070

(24% x 160,000) = $38,400 (45% x 168,000) = 75,600 (30% x 175,000) = 52,500  ------$166,500 ======== $40,320 = February sales (168,000 x 24%)  120,750 = March sales [175,000 x (45% + 24%)]  ------$161,070 ========

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