Exam 10: Static and Flexible Budgets

Rolling budgets: I. Are often prepared monthly or quarterly II. Reflect any changes going forward through a specified future period (usually annually or longer) III. Provide managers with more current budget targets than traditional budgets

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 number of finished units to be produced?

TNR Corporation is preparing its budgeted income statement for the month of August. Budgeted sales are $18,000. Cost of goods sold is twice the amount of operating costs, and operating costs plus cost of goods sold equals 40% of net income. Return on sales (net income / sales)is anticipated to be 50%. TNR does not have any nonoperating items on its income statement. TNR's budgeted operating income will be:

A budget that reflects a range of operations is called a:

(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 Forecasted ending inventory for the month of December is:

Planning Systems, Inc. has forecast the following unit sales and production for the next year, by quarter: 1^st 2^nd 3^rd 4^th Production 150 160 140 100 Sales 120 140 150 120 The firm has beginning inventories as follows: Finished goods 50 units Direct material A 100 Direct material B 100 A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. What is the ending finished goods inventory for quarter 2?

SRI Incorporated manufactures and sells shark repellent. Angelica and Vincent, members of the accounting staff, have collected the data below to assist in the development of operating and financial budgets for the next fiscal year: Expected unit sales 3,000 Price per unit $25 Variable product costs per unit: Materials $3.50 Labour 5.00 Variable overhead 2.50 Fixed product cost: Manufacturing overhead $12,200 allocated at $4.00 per unit Period costs (totals): Research & development $ 3,000 Marketing 7,000 Administration 10,000 SRI had no beginning work in process or raw materials inventories. Beginning finished goods inventory totalled 250 units at a cost of $15 per unit. SRI's managers want an ending finished goods inventory equal to 10% of unit sales, and an ending raw materials inventory of $1,200. a)Prepare a revenue budget for expected sales of 3,000 units. b)Prepare a production budget in units for the sales level of 3,000 units. c)Prepare a cost of goods sold budget for the sales level of 3,000 units. d)Prepare a budgeted income statement (pretax)based on an expected sales level of 3,000 units. e)Angela and Vincent are not sure whether sales will be 2,500, 3,000 or 3,500 next period. They have decided to prepare budgets for each level of sales, in addition to the current budget. Explain why the managers of a company might be interested in budgets prepared for different expected sales levels.

In zero-based budgeting, managers justify budget amounts as if no information about prior budgets exists.

Planning Systems, Inc. has forecast the following unit sales and production for the next year, by quarter: 1^st 2^nd 3^rd 4^th Production 150 160 140 100 Sales 120 140 150 120 The firm has beginning inventories as follows: Finished goods 50 units Direct material A 100 Direct material B 100 A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. How much material A must be purchased in quarter 2?

Budget assumptions are gathered from: I. Last year's budgets II. Department heads with information about next year's plans III. Future expectations

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: TFS' actual income for the next fiscal year will be:

(CMA)Table Top produces tables sold to discount stores. The table tops are manufactured in Canada by Table Top, but the table legs are manufactured in a plant in Nogales, Mexico. The assembly department attaches the four purchased table legs to the table top. It takes 20 minutes of labour to assemble a table. The company follows a policy of producing enough tables to insure that 40% of next month's sales are in the finished goods inventory. Table Top also purchases sufficient raw materials to insure that raw materials inventory is 60% of the following month's scheduled production. Table Top's sales budget in units for the next quarter is as follows: Table Top's ending inventories in units for June 30, 20x5 are: The number of tables to be produced during August, 20x5 is:

Planning Systems, Inc. has forecast the following unit sales and production for the next year, by quarter: 1^st 2^nd 3^rd 4^th Production 150 160 140 100 Sales 120 140 150 120 The firm has beginning inventories as follows: Finished goods 50 units Direct material A 100 Direct material B 100 A finished unit requires one unit of material A and two units of material B. There should be enough material on hand at the end of each quarter to meet 20% of the next quarter's production needs. There are no work-in-process inventories. How much material B must be purchased in quarter 1?

January February March April Sales $26,400 $23,100 $33,000 $25,000 Production in units 990 1,440 1,710 1,200 Sales are 30% cash and 70% on account, and 60% of credit sales are collected in the month of the sale. In the month after the sale, 30% of credit sales are collected. The remainder is collected two months after the sale. It takes 4 kilograms of direct material to produce a finished unit, and direct materials cost $5 per kilogram. All direct materials purchases are on account, and are paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Ending direct materials inventory for each month is 40% of the next month's production needs. January's beginning materials inventory is 1,080 kilograms. Suppose that both accounts receivable and accounts payable are zero at the beginning of January. (Appendix 10A)The net change in cash for the period January - March is:

A formalized financial plan for organizational operations is called a long-term strategy.

The ending inventories budget is typically expressed in terms of costs, while the production budget is typically expressed in units.

(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 disbursements in July for purchases are expected to be:

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 SWP's total budget variance for the data provided is:

Which of the following is a simple version of a flexible budget?

To overcome possible problems with budgets that are developed only by top level managers, an alternative is to use: