Master Budget

CHAPTER 13 THE MASTER BUDGET MULTIPLE CHOICE 1.

A budget aids in a. b. c. d.

communication. motivation. coordination. all of the above.

ANSWER: 2.

Planning Controlling Organizing Staffing

ANSWER:

b

EASY

The preparation of an organization’s budget a. b. c. d.

forces management to look ahead and try to see the future of the organization. requires that the entire management team work together to make and carry out the yearly plan. makes performance review possible at all levels of management. all of the above.

ANSWER: 4.

EASY

Measuring the firm’s performance against established objectives is part of which of the following functions? a. b. c. d.

3.

d

d

EASY

Which of the following is a basic element of effective budgetary control? a. b. c. d.

cost behavior patterns cost-volume-profit analysis standard costing all of the above

ANSWER:

a

EASY

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13–2

5.

Chapter 13

When actual performance varies from the budgeted performance, managers will be more likely to revise future budgets if the variances were a. b. c. d.

controllable rather than uncontrollable. uncontrollable rather than controllable. favorable rather than unfavorable. small.

ANSWER: 6.

b

EASY

A budget is a. b. c. d.

a planning tool. a control tool. a means of communicating goals to the firm’s divisions. all of the above.

ANSWER:

d

EASY

Ineffective budgets and/or control systems are characterized by the use of a. b. c. d.

budgets as a planning tool only and disregarding them for control purposes. budgets for motivation. budgets for coordination. the budget for communication.

ANSWER: 9.

MEDIUM

annual budget. industry price and cost structure. talents possessed by its managers. board of directors.

ANSWER:

8.

b

External factors that cause the achievement of company goals are the a. b. c. d.

7.

The Master Budget

a

EASY

Strategic planning is a. b. c. d.

planning activities for promoting products for the future. planning for appropriate assignments of resources. setting standards for the use of important but hard-to-find materials. stating and establishing long-term plans.

ANSWER:

d

EASY

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10.

The Master Budget

Key variables that are identified in strategic planning are a. b. c. d.

normally controllable if they are internal. seldom if ever controllable. normally controllable if they occur in a domestic market. normally uncontrollable if they are internal.

ANSWER: 11.

c

EASY

Which of the following statements is true? a. b. c. d.

All organizations have the same set of budgets. All organizations are required to budget. Budgets are a quantitative expression of an organization’s goals and objectives. Budgets should never be used to evaluate performance.

ANSWER:

c

EASY

Which of the following is not an “operating” budget? a. b. c. d.

sales budget production budget purchases budget capital budget

ANSWER: 14.

EASY

middle top middle and top operational

ANSWER:

13.

a

Tactical planning usually involves which level of management? a. b. c. d.

12.

13–3

d

EASY

The master budget is a static budget because it a. b. c. d.

is geared to only one level of production and sales. never changes from one year to the next. covers a preset period of time. always contains the same operating and financial budgets.

ANSWER:

a

EASY

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15.

Chapter 13

The master budget is a a. b. c. d.

static budget. flexible budget. qualitative expression of a prior goal. qualitative expression of a future goal.

ANSWER: 16.

d

EASY

Which of the following is usually perceived as being the master budget’s greatest advantage to management? a. b. c. d.

performance analysis increased communication increased coordination required planning

ANSWER:

d

EASY

Chronologically, the first part of the master budget to be prepared would be the a. b. c. d.

sales budget. production budget. cash budget. pro forma financial statements.

ANSWER: 19.

EASY

an operating budget. a capital budget. pro forma financial statements. all of the above.

ANSWER:

18.

a

The master budget usually includes a. b. c. d.

17.

The Master Budget

a

EASY

An example of a recurring short-term plan is a. b. c. d.

a probable product line change. expansion of plant and facilities. a unit sales forecast. a change in marketing strategies.

ANSWER:

c

EASY

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20.

The Master Budget

If the chief accountant of a firm has to prepare an operating budget for the coming year, the first budget to be prepared is the a. b. c. d.

sales budget. cash budget. purchases budget. capital budget.

ANSWER: 21.

EASY

capital budget. cash budget. purchases budget. pro forma balance sheet.

ANSWER:

a

EASY

Budgeted production for a period is equal to a. b. c. d.

the beginning inventory + sales – the ending inventory. the ending inventory + sales – the beginning inventory. the ending inventory + the beginning inventory – sales. sales – the beginning inventory + purchases.

ANSWER: 23.

a

It is least likely that a production budget revision would cause a revision in the a. b. c. d.

22.

13–5

b

EASY

Chronologically, in what order are the sales, purchases, and production budgets prepared? a. b. c. d.

sales, purchases, production sales, production, purchases production, sales, purchases purchases, sales, production

ANSWER:

b

EASY

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24.

Chapter 13

The material purchases budget tells a manager all of the following except the a. b. c. d.

quantity of material to be purchased each period. quantity of material to be consumed each period. cost of material to be purchased each period. cash payment for material each period.

ANSWER: 25.

EASY

sales material usage revenues general and administrative

ANSWER:

b

EASY

The amount of raw material purchased in a period may be different than the amount of material used that period because a. b. c. d.

the number of units sold may be different from the number of units produced. finished goods inventory may fluctuate during the period. the raw material inventory may increase/decrease during the period. companies often pay for material in the period after it is purchased.

ANSWER: 27.

d

Of the following budgets, which one is least likely to be determined by the dictates of top management? a. b. c. d.

26.

The Master Budget

c

MEDIUM

A purchases budget is a. b. c. d.

not affected by the firm’s policy of granting credit to customers. the same thing as a production budget. needed only if a firm does not pay for its merchandise in the same period as it is purchased. affected by a firm’s inventory policy only if the firm purchases on credit.

ANSWER:

a

EASY

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28.

The Master Budget

13–7

Which of the following equations can be used to budget purchases? (BI = beginning inventory, EI = ending inventory desired, CGS = budgeted cost of goods sold, P = budgeted purchases) a. b. c. d.

P = CGS + BI – EI P = CGS + BI P = CGS + EI + BI P = CGS + EI – BI

ANSWER: 29.

material purchases budget. production budget. pro forma income statement. cash budget.

ANSWER:

a

EASY

A company that maintains a raw material inventory, which is based on the following month’s production needs, will purchase less material than it uses in a month where a. b. c. d.

sales exceed production. production exceeds sales. planned production exceeds the next month’s planned production. planned production is less than the next month’s planned production.

ANSWER: 31.

EASY

Both the budgeted quantity of material to be purchased and the budgeted quantity of material to be consumed can be found in the a. b. c. d.

30.

d

c

MEDIUM

If a company has a policy of maintaining an inventory of finished goods at a specified percentage of the next month’s budgeted sales, budgeted production for January will exceed budgeted sales for January when budgeted a. b. c. d.

February sales exceed budgeted January sales. January sales exceed budgeted December sales. January sales exceed budgeted February sales. December sales exceed budgeted January sales.

ANSWER:

a

MEDIUM

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32.

Chapter 13

Depreciation on the production equipment would appear in which of the following budgets? a. b. c. d.

cash budget production budget selling and administrative expense budget manufacturing overhead budget

ANSWER: 33.

EASY

production sales cash purchases

ANSWER:

b

EASY

The budgeted amount of selling and administrative expense for a period can be found in the a. b. c. d.

sales budget. cash budget. pro forma income statement. pro forma balance sheet.

ANSWER: 35.

d

The selling, general, and administrative expense budget is based on the _______________ budget. a. b. c. d.

34.

The Master Budget

c

EASY

Which of the following represents a proper sequencing in which the budgets below are prepared? a. b. c. d.

Direct Material Purchases, Cash, Sales Production, Sales, Income Statement Sales, Balance Sheet, Direct Labor Sales, Production, Manufacturing Overhead

ANSWER:

d

EASY

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36.

The Master Budget

The detailed plan for the acquisition and replacement of major portions of property, plant, and equipment is known as the a. b. c. d.

capital budget. purchases budget. commitments budget. treasury budget.

ANSWER: 37.

EASY

labor budget. pro forma income statement. selling, general, and administrative expense budget. cash budget.

ANSWER:

d

EASY

The cash budget ignores all a. b. c. d.

dividend payments. sales of capital assets. noncash accounting accruals. sales of common stock.

ANSWER: 39.

a

The budgeted payment for labor cost each period would be found in the a. b. c. d.

38.

13–9

c

EASY

Which of the following items would not be found in the financing section of the cash budget? a. b. c. d.

cash payments for debt retirement cash payments for interest dividend payments payment of accounts payable

ANSWER:

d

EASY

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40.

Chapter 13

The primary reason that managers impose a minimum cash balance in the cash budget is a. b. c. d.

because management needs discretionary cash for unforeseen business opportunities. managers lack discipline to control their spending. that it protects the organization from the uncertainty of the budgeting process. that it makes the financial statements look more appealing to creditors.

ANSWER: 41.

EASY

pro forma financial statements. cash budget. capital budget production budget.

ANSWER:

a

EASY

The pro forma income statement is not a component of the a. b. c. d.

master budget. financial budgets. operating budgets. capital budget.

ANSWER: 43.

c

Chronologically, the last part of the master budget to be prepared would be the a. b. c. d.

42.

The Master Budget

c

EASY

A pro forma financial statement is a. b. c. d.

a financial statement for past periods. a projected or budgeted financial statement. presented for the form but contains no dollar amounts. a statement of planned production.

ANSWER:

b

EASY

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44.

The Master Budget

A master budget contains which of the following? a. b. c. d.

Sales yes no no yes

ANSWER: 45.

a

Pro forma statements yes yes no yes

EASY

production budget. sales budget. purchases budget. pro forma income statement.

ANSWER:

d

EASY

A budget that includes a 12-month planning period at all times is called a ____________ budget. a. b. c. d.

pro forma flexible master continuous

ANSWER: 47.

Production yes no no no

The budgeted cost of products to be sold in a future period would be found in the a. b. c. d.

46.

13–11

d

EASY

The method of budgeting that adds one month’s budget to the end of the plan when the current month’s budget is dropped from the plan is called ____________ budgeting. a. b. c. d.

long-term operations incremental continuous

ANSWER:

d

EASY

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48.

Chapter 13

Slack in operating budgets a. b. c. d.

results from unintentional managerial acts. makes an organization more efficient and effective. requires managers to work harder to achieve the budget. is greater when managers are allowed to participate in the budgeting process.

ANSWER: 49.

d

EASY

Budget slack is a condition in which a. b. c. d.

demand is low at various times of the year. excess machine capacity exists in some areas of the plant. there is an intentional overestimate of expenses or an underestimate of revenues. managers grant favored employees extra time off.

ANSWER: 50.

The Master Budget

c

EASY

E Co. has the following expected pattern of collections on credit sales: 70 percent collected in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the second month after the month of sale. The remaining 1 percent is never collected. At the end of May, E Co. has the following accounts receivable balances: From April sales From May sales

$21,000 48,000

E’s expected sales for June are $150,000. What were total sales for April? a. b. c. d.

$150,000 $72,414 $70,000 $140,000

ANSWER:

d

MEDIUM

Chapter 13

51.

The Master Budget

Ball Company has a policy of maintaining an inventory of finished goods equal to 30 percent of the following month’s sales. For the forthcoming month of March, Ball has budgeted the beginning inventory at 30,000 units and the ending inventory at 33,000 units. This suggests that a. b. c. d.

February sales are budgeted at 10,000 units less than March sales. March sales are budgeted at 10,000 units less than April sales. February sales are budgeted at 3,000 units less than March sales. March sales are budgeted at 3,000 units less than April sales.

ANSWER: 52.

13–13

b

MEDIUM

Budgeted sales for the first six months of 2001 for Henry Corp. are listed below: UNITS:

JANUARY 6,000

FEBRUARY 7,000

MARCH 8,000

APRIL 7,000

MAY 5,000

JUNE 4,000

Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the next month’s budgeted sales. If Henry Corp. plans to produce 6,000 units in June, what are budgeted sales for July? a. b. c. d.

3,600 units 1,000 units 9,000 units 8,000 units

ANSWER: 53.

c

DIFFICULT

McGill Co. manufactures card tables. The company has a policy of maintaining a finished goods inventory equal to 40 percent of the next month’s planned sales. Each card table requires 3 hours of labor. The budgeted labor rate for the coming year is $13 per hour. Planned sales for the months of April, May, and June are respectively 4,000; 5,000; and 3,000 units. The budgeted direct labor cost for June for McGill Co. is $136,500. What are budgeted sales for July for McGill Co.? a. b. c. d.

3,500 units 4,250 units 4,000 units 3,750 units

ANSWER:

b

DIFFICULT

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54.

Chapter 13

The Master Budget

Budgeted sales for K Inc. for the first quarter of 2001 are shown below: UNITS:

JANUARY 35,000

FEBRUARY 25,000

MARCH 32,000

The company has a policy that requires the ending inventory in each period to be 10 percent of the following period’s sales. Assuming that the company follows this policy, what quantity of production should be scheduled for February? a. b. c. d.

24,300 units 24,700 units 25,000 units 25,700 units

ANSWER: 55.

d

MEDIUM

Budgeted sales for the first six months of 2001 for Henry Corp. are listed below: UNITS:

JANUARY 6,000

FEBRUARY 7,000

MARCH 8,000

APRIL 7,000

MAY 5,000

JUNE 4,000

Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the next month’s budgeted sales. How many units has Henry Corp. budgeted to produce in the first quarter of 2001? a. b. c. d.

21,400 units 20,600 units 19,000 units 23,000 units

ANSWER:

a

DIFFICULT

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56.

The Master Budget

13–15

Production of Product X has been budgeted at 200,000 units for May. One unit of X requires 2 lbs. of raw material. The projected beginning and ending materials inventory for May are: Beginning inventory: 2,000 lbs. Ending inventory: 10,000 lbs. How many lbs. of material should be purchased during May? a. b. c. d.

192,000 208,000 408,000 416,000

ANSWER: 57.

c

MEDIUM

X Co. manufactures toy airplanes. Information on X Co.’s labor costs follow: Sales commissions Administration Indirect factory labor Direct factory labor

$5 per plane $10,000 per month $3 per plane $5 per plane

The following information applies to the upcoming month of July for X Co.: Budgeted production Budget sales

1,200 units 1,000 units

What amount of budgeted labor cost would appear in the July selling, general, and administrative expense budget? a. b. c. d.

$10,000 $16,000 $15,000 $23,000

ANSWER:

c

MEDIUM

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58.

Chapter 13

McGill Co. manufactures card tables. The company has a policy of maintaining a finished goods inventory equal to 40 percent of the next month’s planned sales. Each card table requires 3 hours of labor. The budgeted labor rate for the coming year is $13 per hour. Planned sales for the months of April, May, and June are respectively 4,000; 5,000; and 3,000 units. What is McGill Co.’s budgeted direct labor cost for May? a. b. c. d.

$54,600 $163,800 $226,200 $179,400

ANSWER: 59.

The Master Budget

b

DIFFICULT

X Co. manufactures toy airplanes. Information on X Co.’s labor costs follow: Sales commissions Administration Indirect factory labor Direct factory labor

$5 per plane $10,000 per month $3 per plane $5 per plane

The following information applies to the upcoming month of July for X Co.: Budgeted production Budget sales

1,200 units 1,000 units

What is X Co.’s budgeted factory labor cost for July? a. b. c. d.

$8,000 $15,600 $25,600 $9,600

ANSWER:

d

MEDIUM

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60.

The Master Budget

13–17

E Co. has the following expected pattern of collections on credit sales: 70 percent collected in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the second month after the month of sale. The remaining 1 percent is never collected. At the end of May, E Co. has the following accounts receivable balances: From April sales From May sales

$21,000 48,000

E’s expected sales for June are $150,000. How much cash will E Co. expect to collect in June? a. b. c. d.

$127,400 $129,000 $148,600 $152,520

ANSWER: 61.

c

DIFFICULT

For the month of October, P Corp. predicts total cash collections to be $1 million. Also for October, P Corp. estimates that its beginning cash balance will be $50,000 and that it will borrow cash in the amount of $70,000. If P Corp. estimates an ending cash balance of $30,000 for October, what must its projected cash disbursements be? a. b. c. d.

$1,090,000 $1,120,000 $1,070,000 $1,020,000

ANSWER:

a

MEDIUM

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62.

Chapter 13

The Master Budget

Volkers Hospital has provided you with the following budget information for April: Cash collections April 1 cash balance Cash disbursements

$876,000 23,000 978,600

Volkers has a policy of maintaining a minimum cash balance of $20,000 and borrows only in $1,000 increments. How much will Volkers borrow in April? a. b. c. d.

$80,000 $79,600 $99,000 $100,000

ANSWER:

d

MEDIUM

Use the following information for questions 63–65.

Beginning cash balance Cash collections Cash disbursements Cash excess (shortage) Borrowing (repayments) Ending cash 63.

CASH BUDGET CASE B $ 300 400 ? ? 100 200

In CASE A, what are the budgeted cash collections? a. b. c. d.

$700 $500 $300 $400

ANSWER: 64.

CASE A $ 100 ? 500 ? 300 200

c

MEDIUM

In CASE B, what are the budgeted cash disbursements? a. b. c. d.

$600 $700 $500 $400

ANSWER:

a

MEDIUM

CASE C $ 700 ? 600 400 ? 100

Chapter 13

65.

The Master Budget

13–19

In CASE C, what are the budgeted cash collections? a. b. c. d.

$200 $300 $400 $500

ANSWER:

b

MEDIUM

Use the following information for questions 66–69.

Beginning cash Cash collections Cash disbursements Cash excess (shortage) Borrowing (repayments) Ending Cash 66.

What is the correct value of item A in the cash budget? a. b. c. d.

$200 $300 $400 $900

ANSWER: 67.

QTR 1 $300 900 B 200 ? 200

CASH BUDGET QTR 2 QTR 3 QTR 4 $200 $ ? $? 700 C ? ? 600 ? (400) ? ? 600 (300) 0 ? 200 ?

b

EASY

What is the correct value of item B in the cash budget? a. b. c. d.

$1,000 $1,200 $800 $700

ANSWER:

a

MEDIUM

YEAR $ A 3,300 3,500 ? ? D

13–20

68.

Chapter 13

What is the correct value of item C in the cash budget? a. b. c. d.

$1,400 $1,200 $900 $700

ANSWER: 69.

a

MEDIUM

Managers may be more willing to accept a budget if a. b. c. d.

it is continuous. it is imposed. it is very hard to attain. they can participate in its development.

ANSWER:

d

EASY

(Appendix) A budget manual should include which of the following? a. b. c. d.

a list of specific budgetary activities to be performed original, revised, and approved budgets a calendar of scheduled budgetary activities all of the above

ANSWER: 72.

MEDIUM

$200 $300 $400 $1,000

ANSWER:

71.

c

What is the correct value of item D in the cash budget? a. b. c. d.

70.

The Master Budget

d

EASY

Which of the following is not true about an imposed budget? a. b. c. d.

It reduces the budgeting process time frame. It uses the knowledge of top management as it relates to resource availability. It enhances coordination. It increases the feeling of teamwork.

ANSWER:

d

EASY

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73.

The Master Budget

A disadvantage of participatory budgets is that a. b. c. d.

there is a high degree of acceptance of the goals and objectives by operating management. they are usually more realistic. they lead to better morale and higher motivation. they usually require more time to prepare.

ANSWER: 74.

13–21

d

EASY

The master budget a. b. c. d.

reflects the determination of an organization’s cost of capital. serves as a managerial tool for the organization. includes only an organization’s pro forma financial statements. utilizes only information from the financial accounting system.

ANSWER:

b

EASY

SHORT ANSWER/PROBLEMS 1.

Explain why managers might want to build slack into a budget. ANSWER: Building slack into the budget allows managers to achieve the budgeted level of performance with less effort. Thus, they have a higher probability of achieving the budget and any bonus or compensation that may be tied to that performance standard. MEDIUM

2.

What role does the budgeting activity play in managerial compensation and performance evaluation? ANSWER: Once set, the budget is not only a plan for the organization, but it becomes a standard against which actual performance may be compared. Recognizing the budget as a performance standard, organizations may base employee compensation (to some extent) on how well actual performance compares to the budgeted performance. Such a compensatory arrangement frequently involves a bonus plan that permits bonuses to go up as performance relative to the budget goes up. MEDIUM

13–22

3.

Chapter 13

The Master Budget

Why will there frequently be a difference between the budgeted cost of material in the material purchases budget and the budgeted cash disbursement for material in the cash budget? ANSWER: Because firms do not necessarily pay for material in the same period in which they are purchased, the amounts in these two budgets will frequently differ. The material purchases budget is based on the cost of material purchased in a period while the cash budget only reflects expected actual payments for material in the period. MEDIUM

4.

Explain why different types of organizations will have different sets of budgets. ANSWER: We may think of the set of budgets as the plan for producing outputs and acquiring inputs. As different organizations have different inputs and outputs, we would naturally expect them to have different budgets. For example, a retailing firm would find no need for a production budget because it does not manufacture anything. On the other hand, the need for a production budget in a manufacturing organization is obvious. Likewise, governmental organizations will have budgets that are different than private organizations. MEDIUM

5.

Why have many managers in recent years moved toward emphasizing employee participation in the budgeting process rather than simply imposing the budget on the employees? ANSWER: Many managers believe that the quality of the budget is enhanced through employee participation. This is attributable in part to the fact that many employees possess technical information that management does not have. Through the budgeting process this technical information is imparted to management. Further, participation in the budgeting process may lead employees to be more attentive to the budget and feel like a more important part of the organizational team. Employees feel more committed to meeting a budget they helped prepare. Preparing a budget gives the preparer management training, which makes him or her better prepared for advancement in the company. MEDIUM

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6.

The Master Budget

13–23

The I. M. Broke Co. has the following collection pattern for its accounts receivable: 40 percent in the month of sale 50 percent in the month following the sale 8 percent in the second month following the sale 2 percent uncollectible The company has recent credit sales as follows: April: May: June:

$200,000 420,000 350,000

How much should the company expect to collect on its receivables in June? ANSWER: JUNE COLLECTIONS From April sales: $200,000 × .08 From May sales: 420,000 × .50 From June sales: 350,000 × .40 Total MEDIUM

$ 16,000 210,000 140,000 $366,000

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Chapter 13

The Master Budget

Use the following information for questions 7 and 8. 7.

Barnes Company manufactures three products (A, B, and C) from three raw materials (X, Y, and Z). The following table indicates the number of pounds of each material that is required to manufacture each type of product: Product A B C

Material X 2 2 3

Material Y 3 1 2

Material Z 2 2 2

The company has a policy of maintaining an inventory of finished goods on all three products equal to 25 percent of the next month’s budgeted sales. Listed below is the sales budget for the first quarter of 2001: Month Jan. Feb. Mar.

Product A 10,000 9,000 11,000

Product B 11,000 12,000 10,000

Product C 12,000 8,000 10,000

Assuming that the company meets its required inventory policy, prepare a production budget for the first 2 months of 2001 for each of the three products. ANSWER: Required ending inventory Projected sales Total production needs Less the beginning inventory Budgeted production

Product A January February 2,250 2,750 10,000 9,000 12,250 11,750 (2,500) (2,250 ) 9,750 9,500

Required ending inventory Projected sales Total production needs Less the beginning inventory Budgeted production

Product B January February 3,000 2,500 11,000 12,000 14,000 14,500 (2,750) (3,000 ) 11,250 11,500

Required ending inventory Projected sales Total production needs Less the beginning inventory Budgeted production

Product C January February 2,000 2,500 12,000 8,000 14,000 10,500 (3,000) (2,000 ) 11,000 8,500

MEDIUM

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8.

The Master Budget

13–25

Unit costs of materials X, Y, and Z are respectively $4, $3, and $5. The Barnes Company has a policy of maintaining its raw material inventories at 50 percent of the next month’s production needs. Assuming that this policy is satisfied, prepare a material purchases budget for all three materials in both pounds and dollars for January. ANSWER:

Prod. × lbs. Tot.

Product A Jan. Feb. 9,750 9,500 ×2 ×2 19,500 19,000

Material X Purchases Product B Jan. Feb. 11,250 11,500 ×2 ×2 22,500 23,000

Required EI (19,000 + 23,000 + 25,500) × .50 = Needed: (19,500 + 22,500 + 33,000) = Total raw material X needed: Less: BI (75,000 × .50) Material X to be purchased in January (pounds): Multiply by cost of Material X per lb.: Budgeted Cost of Material X for January:

Prod. × lbs. Tot.

Product A Jan. Feb. 9,750 9,500 ×3 ×3 29,250 28,500

Material Y Purchases Product B Jan. Feb. 11,250 11,500 ×1 ×1 11,250 11,500

Required EI (28,500 + 11,500 + 17,000) × .50 = Needed: (29,250 + 11,250 + 22,000) = Total raw material Y needed: Less BI (62,500 × .50) Material Y to be purchased in January (pounds): Multiply by cost of Material Y per lb.: Budgeted Cost of Material Y for January:

Product C Jan. Feb. 11,000 8,500 ×3 ×3 33,000 25,500 33,750 75,000 108,750 (37,500) 71,250 × $4 $285,000 Product C Jan. Feb. 11,000 8,500 ×2 ×2 22,000 17,000 28,500 62,500 91,000 (31,250) 59,750 × $3 $179,250

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Chapter 13

Prod. × lbs. Tot.

Product A Jan. Feb. 9,750 9,500 ×2 ×2 19,500 19,000

Material Z Purchases Product B Jan. Feb. 11,250 11,500 ×2 ×2 22,500 23,000

Required EI (19,000 + 23,000 + 17,000) × .50 = Needed: (19,500 + 22,500 + 22,000) = Total raw material Z needed: Less BI (64,000 × .50) Material Z to be purchased in January (pounds): Multiply by cost of Material Z per lb.: Budgeted Cost of Material Z for January: The budgeted cost of all materials to be purchased in Jan. would be $285,000 + $179,250 + $307,500 = DIFFICULT

The Master Budget

Product C Jan. Feb. 11,000 8,500 ×2 ×2 22,000 17,000 29,500 64,000 93,500 (32,000 ) 61,500 ×5 $307,500 $771,750

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Use the following information for questions 9 and 10. 9.

Farr Music Inc. sells Baldwin pianos. The following information regarding operating costs has been extracted from budgets of Farr Music for December of this year and the first few months of next year: Payroll Insurance Rent Depreciation Taxes

Dec. $12,000 4,000 6,000 2,000 1,200

Jan. $13,000 4,000 6,000 2,000 1,400

Feb. $22,000 4,000 6,000 2,000 2,300

Mar. $16,000 4,000 6,000 2,000 2,000

In addition to the above operating costs, enough pianos are purchased each month to maintain the inventory at 40 percent of the projected next month’s sales. The firm is expected to be in compliance with this policy on December 1. Budgeted sales are: Budgeted sales in units:

Dec. 40

Jan. 45

Feb. 60

Mar. 50

Apr. 40

The average cost of a piano is $500. Merchandise is paid for in the month following its purchase. All other expenses are paid in the month in which they are incurred. Prepare a budget of the cash disbursements for Farr Music Inc. for the first three months of next year. First, prepare a purchases budget for December through March for the pianos. ANSWER: Required ending inventory Projected sales Total pianos needed Less the beginning inventory Pianos to be purchased × the cost of the piano Budgeted purchases

Dec. 18 40 58 (16) 42 × $500 $21,000

Payroll Insurance Rent Taxes Merchandise purchases Total

Budgeted cash disbursements Jan. Feb. Mar. $13,000 $22,000 $16,000 4,000 4,000 4,000 6,000 6,000 6,000 1,400 2,300 2,000 21,000 25,500 28,000 $45,400 $59,800 $56,000

MEDIUM

Jan. 24 45 69 (18) 51 × $500 $25,500

Feb. 20 60 80 (24) 56 × $500 $28,000

Mar. 16 50 66 (20 ) 46 × $500 $23,000

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The Master Budget

The average cost of a piano is $500. Merchandise is paid for in the month following its purchase. All other expenses are paid in the month in which they are incurred. On average, a piano sells for $1,500. Of each sale, 40 percent of the sales price is collected in the month of sale. The balance is collected in the month following the sale. Prepare a cash budget for the first three months of next year. The beginning cash balance on January 1 is budgeted to be $50,000. ANSWER:

Beginning cash Cash collections: Dec. sales Jan. sales Feb. sales Mar. Sales Cash available Less cash disb. Ending cash MEDIUM

CASH BUDGET FARR MUSIC INC. Jan. Feb. $50,000 $ 67,600 36,000 27,000 _______ 113,000 (45,400) $ 67,600

40,500 36,000 _______ 144,100 (59,800) $ 84,300

Mar. $ 84,300

54,000 30,000 168,300 (56,000 ) $112,300

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Shown below are the totals from 2002 period budgets. Revenue budget Materials usage from production budget Labor cost budget Manufacturing overhead budget General and administrative budget Capital expenditure budget Work in Progress Inventories: Beginning of 2002 End of 2002 Finished Goods Inventory: Beginning of 2002 End of 2002 Tax Rate

$100,000 15,000 20,000 20,000 30,000 20,000 10,000 5,000 15,000 10,000 40%

Required: Prepare a forecasted Income Statement for 2002. ANSWER: Revenue Less: COGS COGM RM used (production budget) DL (labor budget) Mfg. OH (OH budget) Current Mfg. costs Plus: Beg. WIP Total In-Process Less: End WIP COGM Plus: Beg. FG Goods Avail. for Sale Less: End FG COGS Gross Margin Less: G & A expense budget Income before income taxes Less: taxes @ 40% Net Income MEDIUM

$100,000 $ 15,000 20,000 20,000 $ 55,000 10,000 $ 65,000 (5,000) $ 60,000 15,000 $ 75,000 (10,000 ) 65,000 $ 35,000 (30,000) $ 5,000 (2,000 ) $ 3,000

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The Master Budget

The following are forecasts of sales and purchases for a company. April May June

Sales $80,000 90,000 85,000

Purchases $30,000 40,000 30,000

All sales are on credit. Records show that 70 percent of the customers pay the month of the sale, 20 percent pay the month after the sale, and the remaining 10 percent pay the second month after the sale. Purchases are all paid the following month at a 2 percent discount. Cash disbursements for operating expenses in June were $5,000. Required: Prepare a schedule of cash receipts and disbursement for June. ANSWER: Schedules of Cash Receipts and Disbursements for June Cash Receipts: From current month sale (June) From 1 month prior sale (May) From 2 month prior sale (April) Total cash receipts Cash Disbursements: May purchases @ 98% (less discount) Operating expenses Total cash disbursements Net increase in cash for June MEDIUM

(.7 × 85,000) (.2 × 90,000) (.1 × 80,000)

$59,500 18,000 8,000 $85,500

(.98 × 40,000)

$39,200 5,000 $44,200 $41,300

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Flour International is in the building construction business. In 2002, it is expected that 40 percent of a month’s sales will be collected in cash, with the balance being collected the following month. Of the purchases, 50 percent are paid the following month, 30 percent are paid in two months, and the remaining 20 percent are paid during the month of purchase. The sales force receives $2,000 a month base pay plus a 2 percent commission. Labor expenses are expected to be $4,000 a month. Other operating expenses are expected to run about $2,000 a month, including $500 for depreciation. The ending cash balance for 2001 was $4,500. 2001—Actual November December 2002—Budgeted January February March

Sales

Purchases

$80,000 90,000

$70,000 80,000

70,000 90,000 30,000

70,000 60,000 50,000

Required: a. Prepare a cash budget and determine the projected ending cash balances for the first three months of 2002. b. Determine the months that the company would either borrow or invest cash.

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ANSWER: a. Sales Purchases

2001 Nov. $80,000 70,000

b.

Jan. $70,000 70,000

2002 Feb. $90,000 60,000

Mar. $30,000 50,000

Jan. $ 4,500 $28,000 54,000 $82,000 $86,500

Feb. $ 2,600 $36,000 42,000 $78,000 $80,600

Mar. $ 300 $12,000 54,000 $66,000 $66,300

$14,000 40,000 21,000 $75,000 4,000 2,000 1,400 1,500 $83,900 $ 2,600

$12,000 35,000 24,000 $71,000 4,000 2,000 1,800 1,500 $80,300 $ 300

$10,000 30,000 21,000 $61,000 4,000 2,000 600 1,500 $69,100 $ (2,800)

Dec. $90,000 80,000

Cash Receipts: Beginning cash balance From current month sales From prior month sales Total cash receipts Total cash available Cash Disbursements: From Purchases: Current month @ 20% From 1 mo. prior purchases @ 50% From 2 mo. prior purchases @ 30% Total payments on purchases Labor expense Sales salaries Commissions @ 2% of sales Other expenses exclude depr. ($500) Total cash disbursements Ending cash balance

Borrow—March; invest—January and February

DIFFICULT

The Master Budget