Ch08 The Master Budget.docx

Chapter 8—The Master Budget TRUE/FALSE 1. Strategic planning is focused on short-term goals of less than five years. ANS: F 2. Strategic planning is focused on long-range goals of five to ten years. ANS: T 3. The budget is an important source of feedback for an organization. ANS: T 4. Most tactical plans are single use plans. ANS: T 5. An annual budget is an example of a strategic plan. ANS: F 6. An annual budget is an example of a single use tactical plan. ANS: T 7. Top management should be directly involved in strategic planning for an organization. ANS: T 8. Operational management should be directly involved with the strategic planning of an organization. ANS: F 9. The financial budget is prepared before the operating budget. ANS: F 10. The financial budget is prepared after the operating budget. ANS: T 11. The operating budget is expressed both in units and dollars. ANS: T 12. The first stage in the budgeting process is the preparation of a sales budget. ANS: T 13. The first stage in the budgeting process is the preparation of a cash collections budget. ANS: F 14. In a manufacturing organization, the cash budget is prepared immediately after the sales budget. ANS: F 15. In a manufacturing organization, the production budget is prepared immediately after the sales budget. ANS: T 16. The amount of raw materials that must be purchased can be computed by the following formula: Beginning inventory + Materials required - Ending inventory. ANS: F 17. The amount of raw materials that must be purchased can be computed by the following formula: Ending inventory + Materials required - Beginning inventory. ANS: T 18. In estimating factory overhead, it is necessary to separate costs into their fixed and variable components. ANS: T 19. In estimating factory overhead, it is necessary to subtract depreciation from total overhead costs. ANS: T 20. In estimating factory overhead, it is necessary to add depreciation to total overhead costs. ANS: F 21. The effect of capital expenditures on the master budget is reflected through periodic depreciation charges in the cash outflow portion. ANS: F 22. The effect of capital expenditures on the master budget is reflected through cash payments made for acquisition of capital assets. ANS: T 23. The cash budget is constructed after all other budgets have been completed. ANS: T 24. Balances for Accounts Receivable and Sales Discounts are projected before the cash collections schedule is prepared. ANS: F 25. Balances for Accounts Receivable and Sales Discounts are projected after the cash collections schedule is prepared. ANS: F 26. The final step in constructing the master budget is the preparation of pro-forma financial statements for the period. ANS: T 27. A continuous budget is prepared by adding a new budget month as each month expires. ANS: T 28. Budgetary slack is an effective motivator for employees, because it reduces employee frustration when goals cannot be achieved. ANS: F 29. Budgetary slack is frequently found in imposed budgets. ANS: F 30. A participatory budget is developed by both top management and operating personnel. ANS: T 31. A budget manual should include pro-forma financial statements for the upcoming period. ANS: F OBJ: 8-7 32. A budget manual should include a statement of the budgetary purpose and its desired results.. ANS: T OBJ: 8-7 33. A calendar of scheduled budgetary activities helps to coordinate the budgeting process. ANS: T OBJ: 8-7 34. Top management can reduce slack by using a bonus system to link performance to the budget. ANS: T COMPLETION 1. Long-range planning carried out by top management is referred to as ______________________________. ANS: strategic planning 2. Short-term planning designed to address a specific set of circumstances is referred to as _____________________________. ANS: tactical planning 3. The final document resulting from the budgeting process is referred to as the ______________________. ANS: master budget 4. A budget that is expressed in terms of both units and dollars is referred to a an ________________________. ANS: operating budget 5. A budget that indicates the funds to be generated or consumed during the period is referred to as a __________________________. ANS: financial budget 6. The starting point for any master budget is the _________________________. ANS: sales budget 7. The ending point in the budgetary process is the _____________________________. ANS: pro-forma financial statements 8. In a manufacturing organization, the budget that is prepared after the sales budget is the _________________________. ANS: production budget. 9. In a manufacturing organization, the budgets that are prepared after the production are the _____________________, _____________________,and __________________ budgets. ANS: direct materials, direct labor, overhead 10. The budget that focuses on an organization’s long-term needs is referred to as a __________________________. ANS: capital budget 11. A budget that is prepared by adding a new budget month as each month expires is referred to as a _________________________________________. ANS: continuous budget. 12. A budget that is developed with little input from operating personnel is referred to as a(n) _____________________________________. ANS: imposed budget 13. A budget that is developed by both top management and operating personnel is referred to as a(n) _____________________________________. ANS: participatory budget 14. If revenues are intentionally underestimated during the budgeting process, _____________________ has been created. ANS: budgetary slack MULTIPLE CHOICE 1. A budget aids in a. communication. b. motivation. c. coordination. d. all of the above. ANS: D 2. Measuring the firm's performance against established objectives is part of which of the following functions? a. Planning b. Controlling c. Organizing d. Staffing ANS: B 3. The preparation of an organization's budget a. forces management to look ahead and try to see the future of the organization. b. requires that the entire management team work together to make and carry out the yearly plan. c. makes performance review possible at all levels of management. d. all of the above. ANS: D 4. Which of the following is a basic element of effective budgetary control? a. cost behavior patterns b. cost-volume-profit analysis c. standard costing d. all of the above ANS: A 5. When actual performance varies from the budgeted performance, managers will be more likely to revise future budgets if the variances were a. controllable rather than uncontrollable. b. uncontrollable rather than controllable. c. favorable rather than unfavorable. d. small. ANS: B 6. External factors that cause the achievement of company goals are the a. annual budget. b. industry price and cost structure. c. talents possessed by its managers. d. board of directors. ANS: B 7. A budget is a. a planning tool. b. a control tool. c. a means of communicating goals to the firm's divisions. d. all of the above. ANS: D 8. Ineffective budgets and/or control systems are characterized by the use of a. budgets as a planning tool only and disregarding them for control purposes. b. budgets for motivation. c. budgets for coordination. d. the budget for communication. ANS: A 9. Strategic planning is a. planning activities for promoting products for the future. b. planning for appropriate assignments of resources. c. setting standards for the use of important but hard-to-find materials. d. stating and establishing long-term plans. ANS: D 10. Key variables that are identified in strategic planning are a. normally controllable if they are internal. b. seldom if ever controllable. c. normally controllable if they occur in a domestic market. d. normally uncontrollable if they are internal. ANS: A 11. Tactical planning usually involves which level of management? a. middle b. top c. middle and top d. operational ANS: C 12. Which of the following statements is true? a. All organizations have the same set of budgets. b. All organizations are required to budget. c. Budgets are a quantitative expression of an organization's goals and objectives. d. Budgets should never be used to evaluate performance. ANS: C 13. Which of the following is not an "operating" budget? a. sales budget b. production budget c. purchases budget d. capital budget ANS: D 14. The master budget is a static budget because it a. is geared to only one level of production and sales. b. never changes from one year to the next. c. covers a preset period of time. d. always contains the same operating and financial budgets. ANS: A 15. The master budget is a a. static budget. b. flexible budget. c. qualitative expression of a prior goal. d. qualitative expression of a future goal. ANS: A 16. The master budget usually includes a. an operating budget. b. a capital budget. c. pro forma financial statements. d. all of the above. ANS: D 17. Which of the following is usually perceived as being the master budget's greatest advantage to management? a. performance analysis b. increased communication c. increased coordination d. required planning ANS: D 18. Chronologically, the first part of the master budget to be prepared would be the a. sales budget. b. production budget. c. cash budget. d. pro forma financial statements. ANS: A 19. An example of a recurring short-term plan is a. a probable product line change. b. expansion of plant and facilities. c. a unit sales forecast. d. a change in marketing strategies. ANS: C 20. 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. sales budget. b. cash budget. c. purchases budget. d. capital budget. ANS: A 21. It is least likely that a production budget revision would cause a revision in the a. capital budget. b. cash budget. c. purchases budget. d. pro forma balance sheet. ANS: A 22. Budgeted production for a period is equal to a. the beginning inventory + sales - the ending inventory. b. the ending inventory + sales - the beginning inventory. c. the ending inventory + the beginning inventory - sales. d. sales - the beginning inventory + purchases. ANS: B 23. Chronologically, in what order are the sales, purchases, and production budgets prepared? a. sales, purchases, production b. sales, production, purchases c. production, sales, purchases d. purchases, sales, production ANS: B 24. The material purchases budget tells a manager all of the following except the a. quantity of material to be purchased each period. b. quantity of material to be consumed each period. c. cost of material to be purchased each period. d. cash payment for material each period. ANS: D 25. Of the following budgets, which one is least likely to be determined by the dictates of top management? a. sales b. material usage c. revenues d. general and administrative ANS: B 26. The amount of raw material purchased in a period may be different than the amount of material used that period because a. the number of units sold may be different from the number of units produced. b. finished goods inventory may fluctuate during the period. c. the raw material inventory may increase/decrease during the period. d. companies often pay for material in the period after it is purchased. ANS: C 27. A purchases budget is a. not affected by the firm's policy of granting credit to customers. b. the same thing as a production budget. c. needed only if a firm does not pay for its merchandise in the same period as it is purchased. d. affected by a firm's inventory policy only if the firm purchases on credit. ANS: A 28. 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. P = CGS + BI - EI b. P = CGS + BI c. P = CGS + EI + BI d. P = CGS + EI - BI ANS: D 29. Both the budgeted quantity of material to be purchased and the budgeted quantity of material to be consumed can be found in the a. material purchases budget. b. production budget. c. pro forma income statement. d. cash budget. ANS: A 30. 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. sales exceed production. b. production exceeds sales. c. planned production exceeds the next month's planned production. d. planned production is less than the next month's planned production. ANS: C 31. 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. February sales exceed budgeted January sales. b. January sales exceed budgeted December sales. c. January sales exceed budgeted February sales. d. December sales exceed budgeted January sales. ANS: A 32. Depreciation on the production equipment would appear in which of the following budgets? a. cash budget b. production budget c. selling and administrative expense budget d. manufacturing overhead budget ANS: D 33. The selling, general, and administrative expense budget is based on the _______________ budget. a. production b. sales c. cash d. purchases ANS: B 34. The budgeted amount of selling and administrative expense for a period can be found in the a. sales budget. b. cash budget. c. pro forma income statement. d. pro forma balance sheet. ANS: C 35. Which of the following represents a proper sequencing in which the budgets below are prepared? a. Direct Material Purchases, Cash, Sales b. Production, Sales, Income Statement c. Sales, Balance Sheet, Direct Labor d. Sales, Production, Manufacturing Overhead ANS: D 36. The detailed plan for the acquisition and replacement of major portions of property, plant, and equipment is known as the a. capital budget. b. purchases budget. c. commitments budget. d. treasury budget. ANS: A 37. The budgeted payment for labor cost each period would be found in the a. labor budget. b. pro forma income statement. c. selling, general, and administrative expense budget. d. cash budget. ANS: D 38. The cash budget ignores all a. dividend payments. b. sales of capital assets. c. noncash accounting accruals. d. sales of common stock. ANS: C 39. Which of the following items would not be found in the financing section of the cash budget? a. cash payments for debt retirement b. cash payments for interest c. dividend payments d. payment of accounts payable ANS: D 40. The primary reason that managers impose a minimum cash balance in the cash budget is a. because management needs discretionary cash for unforeseen business opportunities. b. managers lack discipline to control their spending. c. that it protects the organization from the uncertainty of the budgeting process. d. that it makes the financial statements look more appealing to creditors. ANS: C 41. Chronologically, the last part of the master budget to be prepared would be the a. pro forma financial statements. b. cash budget. c. capital budget d. production budget. ANS: A 42. The pro forma income statement is not a component of the a. master budget. b. financial budgets. c. operating budgets. d. capital budget. ANS: C 43. A pro forma financial statement is a. a financial statement for past periods. b. a projected or budgeted financial statement. c. presented for the form but contains no dollar amounts. d. a statement of planned production. ANS: B 44. A master budget contains which of the following? Sales Production Pro forma statements a. yes yes yes b. no no yes c. no no no d. yes no yes ANS: A 45. The budgeted cost of products to be sold in a future period would be found in the a. production budget. b. sales budget. c. purchases budget. d. pro forma income statement. ANS: D 46. A budget that includes a 12-month planning period at all times is called a ____________ budget. a. pro forma b. flexible c. master d. continuous ANS: D 47. 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. long-term b. operations c. incremental d. continuous ANS: D 48. Slack in operating budgets a. results from unintentional managerial acts. b. makes an organization more efficient and effective. c. requires managers to work harder to achieve the budget. d. is greater when managers are allowed to participate in the budgeting process. ANS: D 49. Budget slack is a condition in which a. demand is low at various times of the year. b. excess machine capacity exists in some areas of the plant. c. there is an intentional overestimate of expenses or an underestimate of revenues. d. managers grant favored employees extra time off. ANS: C 50. Ebony Company 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, Ebony Company has the following accounts receivable balances: From April sales $21,000 From May sales 48,000 Ebony's expected sales for June are $150,000. What were total sales for April? a. $150,000 b. $72,414 c. $70,000 d. $140,000 ANS: D Balance in A/R from April sales: $21,000/0.15 = $140,000 15% represents the amount of April receivables uncollected at the end of May. 51. 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. February sales are budgeted at 10,000 units less than March sales. b. March sales are budgeted at 10,000 units less than April sales. c. February sales are budgeted at 3,000 units less than March sales. d. March sales are budgeted at 3,000 units less than April sales. ANS: B Increase in inventory = 3,000 units 3,000/0.30 = 10,000 increase for April over March. 52. Budgeted sales for the first six months for Porter Corp. are listed below: JANUARY FEBRUARY MARCH APRIL MAY JUNE UNITS: 6,000 7,000 8,000 7,000 5,000 4,000 Porter Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the next month's budgeted sales. If Porter Corp. plans to produce 6,000 units in June, what are budgeted sales for July? a. 3,600 units b. 1,000 units c. 9,000 units d. 8,000 units ANS: C Beginning Inventory for June 1,600 units (4,000 * 40%) Produced in June 6,000 units Deduct: June sales (4,000) units Ending inventory for June 3,600 units 3,600/0.40 = 9,000 units DIF: Difficult 53. Weaver 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 Weaver Co. is $136,500. What are budgeted sales for July for Weaver Co.? a. 3,500 units b. 4,250 units c. 4,000 units d. 3,750 units ANS: B Card tables to be produced in June: $136,500 / $13 = 10,500 hours 10,500 hrs/3 hrs/table = 3,500 card tables Beginning Inventory for July 1,200 units (3,000 * 40%) Produced in June 3,500 units Deduct: June sales (3,000) units Ending inventory for June 1,700 units 1,700/0.40 = 4,250 units DIF: Difficult 54. Budgeted sales for Knox Inc. for the first quarter the year are shown below: JANUARY FEBRUARY MARCH UNITS: 35,000 25,000 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. 24,300 units b. 24,700 units c. 25,000 units d. 25,700 units ANS: D Ending Inventory, February 3,200 units February Sales 25,000 units Requirements for Month 28,200 units Less Beginning Inventory, February (2,500) units Production scheduled for February 25,700 units 55. Budgeted sales for the first six months the year for Gibson Corporation are listed below: JANUARY FEBRUARY MARCH APRIL MAY JUNE UNITS: 6,000 7,000 8,000 7,000 5,000 4,000 Gibson Corporation 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 Gibson Corporation budgeted to produce in the first quarter of the year? a. 21,400 units b. 20,600 units c. 19,000 units d. 23,000 units ANS: A Desired ending inventory March 31 2,800 units Sales: 1st quarter 21,000 units Inventory needs 23,800 units Beginning inventory, January 1 (2,400) units Production 21,400 units DIF: Difficult 56. 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. 192,000 b. 208,000 c. 408,000 d. 416,000 ANS: C Ending inventory--May 10,000 lbs. Production needs: 200,000 units * 2 lbs/unit 400,000 lbs. Inventory needed 410,000 lbs. Beginning inventory--May (2,000) lbs. Total purchase requirements 408,000 lbs. Xanadu Company manufactures toy airplanes. Information on Xanadu Company's labor costs follow: Sales commissions $5 per plane Administration $10,000 per month Indirect factory labor $3 per plane Direct factory labor $5 per plane The following information applies to the upcoming month of July for Xanadu Company: Budgeted production 1,200 units Budget sales 1,000 units 57. Refer to Xanadu Company. What amount of budgeted labor cost would appear in the July selling, general, and administrative expense budget? a. $10,000 b. $16,000 c. $15,000 d. $23,000 ANS: C Sales Commissions (1,000 units * $5/plane $ 5,000 Administration $10,000 Labor in SG&A $15,000 58. Refer to Xanadu Company. What is Xanadu’s budgeted factory labor cost for July? a. $8,000 b. $15,600 c. $25,600 d. $9,600 ANS: D Direct labor per unit $5.00/unit Indirect labor per unit 3.00/unit 8.00/unit Units produced 1,200 units Total budgeted labor cost $9,600 59. Harrison Company 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 Harrison Company’s budgeted direct labor cost for May? a. $54,600 b. $163,800 c. $226,200 d. $179,400 ANS: D Ending Inventory, May 1,200 units Sales: May 5,000 units Requirements for May 6,200 units Less: Beginning Inventory, May 1,600 units Units to be produced 4,600 units 3 hrs/unit * $13/hr $179,400 DIF: Difficult 60. Edwards Company 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, Edwards Company has the following accounts receivable balances: From April sales $21,000 From May sales 48,000 Edwards expected sales for June are $150,000. How much cash will Edwards Company expect to collect in June? a. $127,400 b. $129,000 c. $148,600 d. $152,520 ANS: C June sales ($150,000 * 70%) $105,000 May sales (160,000 * 15%) 24,000 April sales (140,000 * 14%) 19,600 Total cash collections--June $148,600 DIF: Difficult 61. 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. $1,090,000 b. $1,120,000 c. $1,070,000 d. $1,020,000 ANS: A Beginning Cash Balance $ 50,000 Cash Collections 1,000,000 Borrowings 70,000 Cash Available 1,120,000 Less: Ending Cash Balance 30,000 Projected Cash Disbursements $1,090,000 62. Esterwood Hospital has provided you with the following budget information for April: Cash collections $876,000 April 1 cash balance 23,000 Cash disbursements 978,600 Esterwood has a policy of maintaining a minimum cash balance of $20,000 and borrows only in $1,000 increments. How much will Esterwood borrow in April? a. $80,000 b. $79,600 c. $99,000 d. $100,000 ANS: D April 1 balance $ 23,000 Add: Cash Collections 876,000 $899,000 Deduct: Cash Disbursements 978,600 Cash Deficit $(79,600) Minimum Cash Balance 20,000 Amount to Borrow $ 99,600 rounded up to $100,000 Triple P Companies CASH BUDGET Company A Company B Company C Beginning cash balance $100 $300 $700 Cash collections    ?  400    ? Cash disbursements  500    ?  600 Cash excess (shortage)    ?    ?  400 Borrowing (repayments)  300  100    ? Ending cash  200  200  100 63. Refer to Triple P Companies. For Company A, what are the budgeted cash collections? a. $700 b. $500 c. $300 d. $400 ANS: C Ending Cash $ 200 Deduct Borrowings (300) Cash Shortage $(100) Add Disbursements 500 Deduct Beginning cash (100) Budgeted cash collections $ 300 64. Refer to Triple P Companies. For Company B, what are the budgeted cash disbursements? a. $600 b. $700 c. $500 d. $400 ANS: A Ending Cash $ 200 Deduct Borrowings (100) Cash Balance $ 100 Deduct collections (400) Deduct Beginning cash (300) Budgeted cash disbursements $(600) 65. Refer to Triple P Companies. For Company C, what are the budgeted cash collections? a. $200 b. $300 c. $400 d. $500 ANS: B Ending Cash $ 100 Add Repayments 300 Cash Balance $ 400 Add disbursements 600 Deduct Beginning cash (700) Budgeted cash collections $ 300 66. Managers may be more willing to accept a budget if a. it is continuous. b. it is imposed. c. it is very hard to attain. d. they can participate in its development. ANS: D 67. A budget manual should include which of the following? a. a list of specific budgetary activities to be performed b. original, revised, and approved budgets c. a calendar of scheduled budgetary activities d. all of the above ANS: D OBJ: 8-7 68. Which of the following is not true about an imposed budget? a. It reduces the budgeting process time frame. b. It uses the knowledge of top management as it relates to resource availability. c. It enhances coordination. d. It increases the feeling of teamwork. ANS: D 69. A disadvantage of participatory budgets is that a. there is a high degree of acceptance of the goals and objectives by operating management. b. they are usually more realistic. c. they lead to better morale and higher motivation. d. they usually require more time to prepare. ANS: D 70. The master budget a. reflects the determination of an organization's cost of capital. b. serves as a managerial tool for the organization. c. includes only an organization's pro forma financial statements. d. utilizes only information from the financial accounting system. ANS: B 71. Which of the following items should NOT be included in a company’s budget manual? a. sample budgetary forms b. a statement of desired results of the budget c. a listing of budgetary activities to be performed d. financial statements for the upcoming fiscal year ANS: D OBJ: 8-7 Krebs Company Krebs Company is preparing its Manufacturing Overhead budget for the second quarter of the year. Budgeted variable factory overhead is $3.00 per unit produced; budgeted fixed factory overhead is $75,000 per month, with $16,000 of this amount being factory depreciation. 72. Refer to Krebs Company. If the budgeted production for April is 6,000 units, then the total budgeted factory overhead for April is: a. $77,000 b. $82,000 c. $85,000 d. $93,000 ANS: D (6,000 units * $3.00/unit) + $75,000 = $93,000 Variable Fixed 73. Refer to Krebs Company. If the budgeted production for May is 5,000 units, then the total budgeted factory overhead per unit: a. $15 b. $18 c. $20 d. $22 ANS: B $3.00/unit + ($75,000/5,000 units) = $18/unit Variable Fixed 74. Refer to Krebs Company. If the budgeted cash disbursements for factory overhead for June are $80,000, then the budgeted production for June must be: a. 7,400 units b. 6,200 units c. 6,500 units d. 7,000 units ANS: D $80,000 + $16,000 = $96,000 Budgeted Factory Overhead $96,000 - $75,000 = $21,000 Budgeted Variable Overhead/$3.00 per unit = 7,000 units Evita Company Evita Company, a reseller of women’s fashions, has budgeted its activity for March. The budget information is presented below: I. Sales are $550,000. All sales are cash. II. Merchandise inventory on February 28 is $300,000 III. Budgeted depreciation for March is $35,000. IV. Cash in bank on March 1 is $25,000. V. Selling and administrative expenses are budgeted at $60,000 for March and are paid in cash. VI. The planned merchandise inventory on March 31 is $270,000. VII. The invoice cost for merchandise purchases represents 75% of sales price. All purchases are paid for in cash. 75. Refer to Evita Company. The budgeted cash receipts for March are: a. $412,500 c. $585,000 b. $137,500 d. $550,000 ANS: D Cash sales = $550,000 76. Refer to Evita Company. The budgeted cash disbursements for March are: a. $382,500 c. $472,500 b. $442,500 d. $477,500 ANS: B Cost of Goods Sold = ($550,000 * .75) = $412,500 Purchases = $(270,000 + 412,500 - 300,000) = $382,500 S&A Expenses = $60,000 Cash disbursements = $382,500 + $60,000 = $442,500. DIF: Difficult 77. Refer to Evita Company. The budgeted net income for December is: a. $107,500 c. $ 42,500 b. $137,500 d. $ 77,500 ANS: C Net Income = Sales - Cost of Goods Sold - S&A Expenses - Depreciation = $(550,000 - 412,500 - 60,000 - 35,000) = $42,500 DIF: Difficult Gleason Company Gleason Company prepared a cash budget by quarters for the upcoming year. Missing data amounts are indicated with question marks or lower case letters; these lower case letters will be referred to in the questions that follow. Gleason requires a minimum balance of $10,000 to start a quarter. All data are in thousands. Gleason Corporation Cash Budget QTR 1 QTR 2 QTR 3 QTR 4 Cash balance, beginning $16 $ e $13 $10 Add collections from customers a 70 67 80 Total cash available ? ? 80 90 Less disbursements: Purchase of inventory 31 c 40 35 Operating expenses 35 22 ? 15 Equipment purchases 10 14 19 0 Dividends 0 6 0 5 Total disbursements 66 ? f 55 Excess (deficiency) of cash available over disbursements 7 17 (2) 35 Financing: Borrowings: b -- 12 -- Repayments (including interest) -- d -- (21) Total financing ? ? 12 (21) Cash balance, ending $10 $? $10 $14 ==== ==== ==== ==== 78. Refer to Gleason Company. The collections from customers during the first quarter (item a) are: a. $50 c. $57 b. $60 d. $73 ANS: C Total cash available = Excess of cash available over disbursements + Total disbursements = $(7 + 66) = $73 Total cash collections from customers = Total cash available - Beginning cash balance = $(73 - 16) = $57 79. Refer to Gleason Company. The borrowing required during the first quarter to meet the minimum cash balance (item b) is: a. $0 c. $10 b. $7 d. $ 3 ANS: D Borrowings required = Ending cash balance - Excess of cash over disbursements = $(10 - 7) = $3 80. Refer to Gleason Company. The cash disbursed for purchases during the second quarter (item c) is: a. $13 c. $ 9 b. $55 d. $21 ANS: D Total cash available = $80 Excess of cash available over disbursements = $17 Therefore, disbursements = $63 $(x + 22 + 14 + 6) = $63 x = $21 81. Refer to Gleason Company. The repayment (including interest) of financing during the second quarter (item d) is: a. $ 4 c. $17 b. $ 0 d. $ 7 ANS: A Ending balance of cash = $13 (same as beginning balance of 3rd quarter) Excess of cash available over disbursements = $17 Repayments = $4 82. Refer to Gleason Company. The cash balance at the beginning of the second quarter (item e) is: a. $10 c. $ 0 b. $14 d. $ 7 ANS: A Beginning cash balance for second quarter is the same as ending balance for first quarter: $10. 83. Refer to Gleason Company. The total disbursements during the third quarter (item f) is: a. $84 c. $82 b. $78 d. $59 ANS: C Deficiency of cash disbursements over cash available = $(2) Cash available =$80 Cash disbursements =$82 SHORT ANSWER 1. Explain why managers might want to build slack into a budget. ANS: 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. 2. What role does the budgeting activity play in managerial compensation and performance evaluation? ANS: 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. 3. 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? ANS: 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. 4. Explain why different types of organizations will have different sets of budgets. ANS: 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. 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? ANS: 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. 6. What are some of the benefits of a well-prepared budget? ANS: 1. The budget help managers align activities and resource allocations with organizational goals. 2. The budget can help promote employee participation, cooperation, and departmental coordination. 3. The budget enhances conduct of the managerial functions of planning, controlling, problem solving, and performance evaluation. 4. The budget can sharpen management’s responsiveness to changes in both external and internal factors. 5. The budget is a model of future performance of a business in time to consider alternative measures. PROBLEM 1. Cline Company 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: $200,000 May: 420,000 June: 350,000 How much should the company expect to collect on its receivables in June? ANS: JUNE COLLECTIONS From April sales: $200,000 ? .08 $ 16,000 From May sales:  420,000 ? .50 210,000 From June sales:  350,000 ? .40  140,000 Total $366,000 Oakwood Music, Inc. Oakwood Music, Inc. sells Baldwin pianos. The following information regarding operating costs has been extracted from budgets of Oakwood Music for December of this year and the first few months of next year: Dec. Jan. Feb. Mar. Payroll $12,000   $13,000   $22,000   $16,000   Insurance 4,000 4,000 4,000 4,000 Rent 6,000 6,000 6,000 6,000 Depreciation 2,000 2,000 2,000 2,000 Taxes 1,200 1,400 2,300 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: Dec. Jan. Feb. Mar. Apr. Budgeted sales in units: 40 45 60 50 40 2. Refer to Oakwood Music, Inc. 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. ANS: CASH BUDGET Oakwood Music, Inc. Jan.   Feb.   Mar.   Beginning cash $ 50,000  $ 67,600  $ 84,300  Cash collections: Dec. sales 36,000  Jan. sales 27,000  40,500  Feb. sales 36,000  54,000  Mar. sales                       30,000  Cash available 113,000  144,100  168,300  Less cash disb.  (45,400)  (59,800)  (56,000) Ending cash $ 67,600  $ 84,300  $112,300  3. Refer to Oakwood Music, Inc. 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 Oakwood Music, Inc. for the first three months of next year. First, prepare a purchases budget for December through March for the pianos. ANS: Dec. Jan. Feb. Mar. Required ending inventory 18  24  20  16  Projected sales      40       45       60       50  Total pianos needed 58  69  80  66  Less the beginning inventory     (16)     (18)     (24)     (20) Pianos to be purchased 42  51  56  46  x the cost of the piano x  $500  x  $500  x  $500  x  $500  Budgeted purchases $21,000  $25,500  $28,000  $23,000  Budgeted cash disbursements Jan.   Feb.   Mar.   Payroll $13,000  $22,000  $16,000  Insurance 4,000  4,000  4,000  Rent 6,000  6,000  6,000  Taxes 1,400  2,300  2,000  Merchandise purchases  21,000   25,500   28,000  Total $45,400  $59,800  $56,000  Wentworth Company Wentworth 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 Material X Material Y Material Z A 2 3 2 B 2 1 2 C 3 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 Product A Product B Product C Jan. 10,000 11,000 12,000 Feb.  9,000 12,000  8,000 Mar. 11,000 10,000 10,000 4. Refer to Wentworth Company. 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. ANS: Product A January February Required ending inventory  2,250 2,750 Projected sales 10,000  9,000  Total production needs 12,250 11,750  Less the beginning inventory  (2,500) (2,250) Budgeted production  9,750 9,500 Product B January February Required ending inventory  3,000 2,500 Projected sales 11,000 12,000  Total production needs 14,000 14,500  Less the beginning inventory  (2,750) (3,000) Budgeted production 11,250 11,500  Product C January February Required ending inventory  2,000 2,500 Projected sales 12,000  8,000  Total production needs 14,000 10,500  Less the beginning inventory  (3,000) (2,000) Budgeted production 11,000 8,500 5. Refer to Wentworth Company. Unit costs of materials X, Y, and Z are respectively $4, $3, and $5. The Wentworth 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. ANS: Material X Purchases Product A Product B Product C Jan. Feb. Jan. Feb. Jan. Feb. Prod.  9,750  9,500 11,250 11,500 11,000   8,500 ? lbs. x    2 x    2 x    2 x    2 x    3  x    3 Tot. 19,500 19,000 22,500 23,000 33,000  25,500 Required EI (19,000 + 23,000 + 25,500) ? .50 = 33,750  Needed: (19,500 + 22,500 + 33,000) =   75,000  Total raw material X needed: 108,750  Less: BI (75,000 ? .50)  (37,500) Material X to be purchased in January (pounds): 71,250  Multiply by cost of Material X per lb.: x     $4  Budgeted Cost of Material X for January: $285,000  Material Y Purchases Product A Product B Product C Jan. Feb. Jan. Feb. Jan. Feb. Prod. 9,750 9,500 11,250 11,500 11,000  8,500 ? lbs. x    3 x    3 x    1 x    1 x    2  x    2 Tot. 29,250 28,500 11,250 11,500 22,000  17,000 Required EI (28,500 + 11,500 + 17,000) ? .50 = 28,500  Needed: (29,250 + 11,250 + 22,000) =   62,500  Total raw material Y needed: 91,000  Less BI (62,500 ? .50)  (31,250) Material Y to be purchased in January (pounds): 59,750  Multiply by cost of Material Y per lb.: x     $3  Budgeted Cost of Material Y for January: $179,250  Material Z Purchases Product A Product B Product C Jan. Feb. Jan. Feb. Jan. Feb. Prod. 9,750 9,500 11,250 11,500 11,000  8,500 x lbs. x    2 x    2 x    2 x    2 x    2  x    2 Tot. 19,500 19,000 22,500 23,000 22,000  17,000 Required EI (19,000 + 23,000 + 17,000) ? .50 = 29,500  Needed: (19,500 + 22,500 + 22,000) =   64,000  Total raw material Z needed: 93,500  Less BI (64,000 ? .50)  (32,000) Material Z to be purchased in January (pounds): 61,500  Multiply by cost of Material Z per lb.: x      5  Budgeted Cost of Material Z for January: $307,500  The budgeted cost of all materials to be purchased in Jan. would be $285,000 + $179,250 + $307,500 = $771,750  DIF: Difficult 6. Shown below are the totals from period budgets of Miller Corporation for the current year: Revenue budget $100,000 Materials usage from production budget 15,000 Labor cost budget 20,000 Manufacturing overhead budget 20,000 General and administrative budget 30,000 Capital expenditure budget 20,000 Work in Progress Inventories: Beginning of Year 10,000 End of Year 5,000 Finished Goods Inventory: Beginning of Year 15,000 End of Year 10,000 Tax Rate 40% Required: Prepare a forecasted Income Statement for the current year: ANS: Revenue $100,000  Less: COGS COGM RM used (production budget) $ 15,000  DL (labor budget) 20,000  Mfg. OH (OH budget)   20,000  Current Mfg. costs $ 55,000  Plus: Beg. WIP   10,000  Total In-Process $ 65,000  Less: End WIP   (5,000) COGM $ 60,000  Plus: Beg. FG   15,000  Goods Avail. for Sale $ 75,000  Less: End FG  (10,000) COGS   65,000  Gross Margin $ 35,000  Less: G & A expense budget  (30,000) Income before income taxes $ 5,000  Less: taxes @ 40%   (2,000) Net Income $ 3,000  7. The following are forecasts of sales and purchases for China Grove Company: Sales Purchases April $80,000  $30,000  May 90,000 40,000 June 85,000 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 disbursements for June. ANS: Schedules of Cash Receipts and Disbursements for June Cash Receipts: From current month sale (June) (.7 ? 85,000) $59,500 From 1 month prior sale (May) (.2 ? 90,000) 18,000 From 2 month prior sale (April) (.1 ? 80,000)   8,000 Total cash receipts $85,500 Cash Disbursements: May purchases @ 98% (less discount) (.98 ? 40,000) $39,200 Operating expenses   5,000 Total cash disbursements $44,200 Net increase in cash for June $41,300 8. Allen Builders in the building construction business. In Year 2, 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 Year 1 was $4,500. Sales  Purchases Year 1-Actual November $80,000 $70,000 December 90,000 80,000 Year 2-Budgeted January 70,000 70,000 February 90,000 60,000 March 30,000 50,000 Required: a. Prepare a cash budget and determine the projected ending cash balances for the first three months of Year 2. b. Determine the months that the company would either borrow or invest cash. ANS: a. Year 1 Year 2 Nov. Dec. Jan. Feb. Mar. Sales $80,000 $90,000 $70,000 $90,000 $30,000  Purchases 70,000 80,000 70,000 60,000 50,000  Cash Receipts: Jan. Feb. Mar. Beginning cash balance $ 4,500 $ 2,600 $ 300  From current month sales $28,000 $36,000 $12,000  From prior month sales  54,000  42,000  54,000  Total cash receipts $82,000 $78,000 $66,000  Total cash available $86,500 $80,600 $66,300  Cash Disbursements: From Purchases: Current month @ 20% $14,000 $12,000 $10,000  From 1 mo. prior purchases @ 50% 40,000 35,000 30,000  From 2 mo. prior purchases @ 30%  21,000  24,000  21,000  Total payments on purchases $75,000 $71,000 $61,000  Labor expense 4,000 4,000 4,000  Sales salaries 2,000 2,000 2,000  Commissions @ 2% of sales 1,400 1,800 600  Other expenses exclude depr. ($500)   1,500   1,500   1,500  Total cash disbursements $83,900 $80,300 $69,100  Ending cash balance $ 2,600 $   300 $(2,800) b. Borrow-March; invest-January and February DIF: Difficult