Exam 10: Static and Flexible Budgets

At the end of 20x1, SWP Corporation prepared its master budget for 20x2. Selected amounts from that budget, along with actual results for 20x2, are presented below: Budgeted Actual Sales $180,000 $210,000 Research and development cost 25,000 20,000 Interest revenue 7,600 7,000 Cost of goods sold 60,000 65,000 Marketing costs 45,000 45,000 The research and development cost variance could be explained by:

The budgeted income statement: I. Accumulates information from the supporting budgets II. Is based only on last year's income statement III. Is prepared a few weeks before the actual income statement is prepared for the period

Which of the following must managers develop prior to preparing a budgeted income statement?

(Appendix 10A)Conner Company is a medium-sized toy distributor. Experience has shown that 30% of sales are collected within the month of sale, 60% is collected the month after the sale, and 10% is collected two months after the sale. Inventory on hand at the end of a month is to be 70% of the next month's budgeted sales. Cost of goods sold is 50% of the selling price. Payment for purchases is made in the month after purchase. All other costs are paid in the month incurred. Budgeted amounts are as follows: March April May June July August Sales $10,000 $20,000 $30,000 $30,000 $50,000 $40,000 Costs: Wages 1,500 2,000 2,500 1,500 Rent 500 500 500 500 Other 400 500 600 500 Cash receipts for the month of May are expected to be:

In 20x2, OSW Corporation budgeted its sales volume at 10,000 units. Actual volume was 9,800 units. If OSW uses the static budget to calculate variances and assuming that inventory levels are insignificant, which of the following statements is true?

Ray Company's projected sales budget for the next four months is as follows: Units January 70,000 February 90,000 March 55,000 April 65,000 Beginning inventory for the year is 27,000 units. Ending inventory for each month should be 30% of the next month's sales. How many units need to be available for sale in February?

The Prairie Children's Clinic is located in a small rural town in Saskatchewan. It draws from a wide area, though, because it is the only children's clinic in this part of the Province. The clinic is usually busier during the summer than during any other time because parents bring children in for annual physical examinations and for follow-up on other problems while children are out of school. A new director was recently hired, and among the new ideas he introduced were responsibility accounting and monthly cost reports supplied to department heads. Previously, cost data had rarely been presented. Here is part of the report received by the Information Systems department: To: Department Heads From: Prairie Children's Clinic Business Manager Beginning this month, you will receive monthly reports comparing the costs of operating your department with budgeted costs. The reports will highlight the differences (variations)so you can identify problem areas in your department. The budget variances will help you identify what costs are out of line. Of course you will want to pay attention to the largest variances as they are likely the most important. The first report is attached. Please look it over and get back to me by next Thursday with information regarding your variances. Prairie Children's Clinic PERFORMANCE REPORT-INFORMATION SYSTEMS July 20x6 (Over)(Over) Under Under Budget Actual Budget Percent Number of visits 1,200 1,500 (300)(25)% Costs: Staff salaries $ 4,500 $6,250 $(1,750)(39) Supplies 550 750 (200)(71) Supervisor's salary 2,150 2,750 (600)(28) Allocated administrative costs 1,000 1,200 (200)(20) Equipment amortization 600 650 (50)(8) Total Costs $8,800 $11,600 $(2,800)(32)% Comments: Costs are significantly above budget for the month. Particular attention needs to be paid to staff and supervisors' salaries, and supplies. The annual budget for 20x6 was constructed by the new administrator, based on an average of the prior three years' costs. During this three-year period, all costs had increased each year, with more rapid increases between the second and third year. Once he developed the average, he deducted 2% to encourage department heads to better control costs. Monthly budgets were calculated as one-twelfth of the annual budget. The budgeted patient visits were the average number of visits per month for the last year. a)Describe static and flexible budgets and identify what type of budget this is. b)Actual prices for supplies were expected to be about 10% above the levels in the budget above. Because of increasing volumes, a part-time staff person was hired during the period. In addition, the department head received a salary increase. Prepare a flexible budget for performance evaluation of the head of the Information Systems department, and calculate the budget variances for the period. Assume that any variable costs vary with the number of visits. c)Explain why the flexible budget is a better benchmark for the Information Systems department at Prairie Children's Clinic than the static budget developed by the clinic director.

Participative budgeting: I. Occurs from the bottom up II. Motivates employees to buy into the budgeting process III. Provides managers with incentives to build in budgetary slack

The master budget includes two components: an operating budget and a time budget.

Uncontrollable external factors can create challenges in measuring the results for which managers should be held responsible. Which of the following is the best example of an uncontrollable external factor for a manager who oversees all of the operations for a business?

Matz Company expects to sell 24,000 units of finished goods over the next 6-month period. The company has 10,000 units on hand and its managers want to have 14,000 units on hand at the end of the period. To produce one unit of finished product, two units of direct materials are needed. Matz has 100,000 units of direct material on hand and has budgeted for an ending inventory of 110,000 units. What is the amount of direct material to be purchased (in units)?

Discuss the similarities and differences between annual budgets and rolling budgets.

Steve Company uses the following flexible budget formula for monthly repair cost: total cost = $700 + $0.40 per machine hour. The annual operating budget calls for 35,000 hours of planned machine time. Budgeted repair cost is:

(Appendix 10A)In a cash budget, operating cash receipts include:

The cost of goods sold budget

(CA)The Dilly Company marks up all merchandise at 25% of gross purchase price. All purchases are made on account with terms of 1/10, (1% discount if paid in 10 days)net/60 (full amount due within 60 days). Purchase discounts, which are recorded as miscellaneous income, are always taken. Normally, 60% of each month's purchases are paid for in the first month after purchase, whereas the other 40% are paid during the first 10 days of the first month after purchase. Inventories of merchandise at the end of each month are kept at 30% of the next month's forecasted cost of goods sold. Terms for sales on account are 2/10 (2% discount if paid within 10 days), net/30 (full amount due in 30 days). Cash sales are not subject to discount. Fifty percent of each month's sales on account are collected during the month of sale, 45% are collected in the succeeding month, and the remainder is usually uncollectible. Seventy percent of the collections in the month of sale are subject to discount, and 10% of the collections in the succeeding month are subject to discount (2%). Forecasted sales data and cost of sales for selected months are as follows: Sales on Account (Gross)Cash Sales Cost of Goods sold December $1,900,000 $400,000 $1,840,000 January 1,500,000 250,000 1,400,000 February 1,700,000 350,000 1,640,000 March 1,600,000 300,000 1,520,000 Assuming that all of the beginning inventory for December is sold, forecasted gross purchases for January are:

TFS Corporation, a retail company selling hotel furniture, has just completed its master budget for the next fiscal year. Ending inventory is budgeted at 20% of cost of goods available for sale. Selected data from that process appear in the table below: Which of the following amounts will be subtracted from gross profit on TFS' budgeted income statement?

When an organization's actual revenues are greater than its budgeted revenues, the difference is referred to as a favourable variance.

(Appendix 10A)Gold Company has the following balances at December 31, 20x0: Cash $6,000; accounts receivable $34,000 ($10,000 from November and $24,000 from December); merchandise inventory $40,000; and accounts payable $20,000 (for merchandise purchases only). Budgeted sales follow: January $ 50,000 February 90,000 March 60,000 April 100,000 Other data: *Sales are 40% cash, 50% collected during the following month, and 10% collected during the second month after sale. A 3% cash discount is given on cash sales *Cost of goods sold is 40% of sales *Ending inventory must be 140% of the next month's cost of sales *Purchases are paid 70% in month of purchase and 30% in the following month *The selling and administrative cost function is: $6,000 + $0.2 × sales. This includes $1,000 for amortization *All costs are paid in the month incurred *Minimum cash balance requirement is $6,000 What will be the ending cash balance for January?

Budgeted and actual income statement data for XRC Corp., which sells clerical clothing and supplies, appear below: Budgeted Actual Revenue $85,000 $80,750 Variable manufacturing costs 13,000 12,500 Fixed manufacturing costs 5,000 5,200 Variable selling expenses 22,000 19,000 Fixed selling expenses 3,000 3,100 Administrative expenses 7,000 7,000 Operating income $35,000 $33,950 The difference between the actual and budgeted amounts of revenue was created by differences between expected and actual unit sales. a)Prepare a flexible budget based on actual revenue. b)Calculate budget variances and indicate whether each variance is favourable or unfavourable. c)Comment briefly on XRC's overall performance. Examine the relationships among the variances and develop one question for the manager about the variances and their relationships.