Deck 9: Profit Planning

Question 1

Discuss some reasons for budgeting.

Answer 1

Reasons for budgeting are given below:
1. It helps to forecast the business activities.
2. It helps the business to control the deviation level.
3. It helps for profit optimization and cost minimization.
4. It helps management to frame a health policy.
5. It helps to minimize the uncertainty condition.

Question 2

A budget too easily achieved will lead to diminished performance. Do you agree? Explain.

Answer 2

No, the budget is prepared based on the past experiences. The budget represents what all together has to be achieved in future. The deviation of budget is arises due to performance or efforts. The budget is only an estimated figure (result), it need to achieve. The performance is the main course of action, if deviate the result the budgeted result will be deviated. The budget does not create diminishing performance.

Question 3

Preparing a Direct Labor Budget
Patrick Inc. makes industrial solvents. Planned production in units for the first three months of the coming year is:

Each drum of industrial solvent takes 0.3 direct labor hours. The average wage is $18 per hour.
Required:
Prepare a direct labor budget for the months of January, February, and March, as well as the total for the first quarter.

Answer 3

The following table exhibits the direct labor budget for the first quarter of the coming year:
Budgeted Direct Labor Expenses for the first quarter of the coming year

Question 4

Sales Budget
Alger Inc. manufactures six models of leaf blowers and weed eaters. Alger's budgeting team is finalizing the sales budget for the coming year. Sales in units and dollars for last year follow:
In looking over the previous year's sales figures, Alger's sales budgeting team recalled the following:

a. Model LB-1 is a newer version of the leaf blower with a gasoline engine. The LB-1 is mounted on wheels instead of being carried. This model is designed for the commercial market and did better than expected in its first year. As a result, the number of units of Model LB-1 to be sold was forecast at 250% of the previous year's units.
b. Models WE-8 and WE-9 were introduced on July 1 of last year. They are lighter versions of the traditional weed eater and are designed for smaller households or condo units. Alger estimates that demand for both models will continue at the previous year's rate.
c. A competitor has announced plans to introduce an improved version of model WE-6, Alger's traditional weed eater. Alger believes that the model WE-6 price must be cut 30% to maintain unit sales at the previous year's level.
d. It was assumed that unit sales of all other models would increase by 5%, prices remaining constant.
Required:
Prepare a sales budget by product and in total for Alger Inc. for the coming year.

Question 5

Budgetary Performance, Rewards, Ethical Behavior
Linda Ellis, division manager, is evaluated and rewarded on the basis of budgetary performance. Linda, her assistants, and the plant managers are all eligible to receive a bonus if actual divisional profits are between budgeted profits and 120% of budgeted profits. The bonuses are based on a fixed percentage of actual profits. Profits above 120% of budgeted profits earn a bonus at the 120% level (in other words, there is an upper limit on possible bonus payments). If the actual profits are less than budgeted profits, no bonuses are awarded. Consider the following actions taken by Linda:
a. Linda tends to overestimate expenses and underestimate revenues. This approach facilitates the ability of the division to attain budgeted profits. Linda believes that the action is justified because it increases the likelihood of receiving bonuses and helps to keep the morale of the managers high.
b. Suppose that toward the end of the fiscal year, Linda saw that the division would not achieve budgeted profits. Accordingly, she instructed the sales department to defer the closing of a number of sales agreements to the following fiscal year. She also decided to write off some inventory that was nearly worthless. Deferring revenues to next year and writing off the inventory in a no-bonus year increased the chances of a bonus for next year.
c. Assume that toward the end of the year, Linda saw that actual profits would likely exceed the 120% limit and that she took actions similar to those described in Item b.
Required:
1. Comment on the ethics of Linda's behavior. Are her actions right or wrong? What role does the company play in encouraging her actions?
2. Suppose that you are the marketing manager for the division, and you receive instructions to defer the closing of sales until the next fiscal year. What would you do?
3. Suppose that you are a plant manager, and you know that your budget has been padded by the division manager. Further, suppose that the padding is common knowledge among the plant managers, who support it because it increases the ability to achieve the budget and receive a bonus. What would you do?
4. Suppose that you are the division controller, and you receive instructions from the division manager to accelerate the recognition of some expenses that legitimately belong to a future period. What would you do?

Question 6

Question 7

Which of the following is needed to prepare a budgeted income statement?
a. The production budget
b. Budgeted selling and administrative expenses
c. The budgeted balance sheet
d. The capital expenditures budget
e. Last year's income statement

Question 8

Preparing an Overhead Budget
Patrick Inc. makes industrial solvents. Budgeted direct labor hours for the first three months of the coming year are:

The variable overhead rate is $0.70 per direct labor hour. Fixed overhead is budgeted at $2,750 per month.
Required:
Prepare an overhead budget for the months of January, February, and March, as well as the total for the first quarter. ( Note : Round all dollar amounts to the nearest dollar

Question 9

Production Budget and Direct Materials Purchases Budget
Jani Subramanian, owner of Jani's Flowers and Gifts, produces gift baskets for various special occasions. Each gift basket includes fruit or assorted small gifts (e.g., a coffee mug, deck of cards, novelty cocoa mixes, scented soap) in a basket that is wrapped in colorful cellophane. Jani has estimated the following unit sales of the standard gift basket for the rest of the year and for January of next year.

Jani likes to have 5% of the next month's sales needs on hand at the end of each month. This requirement was met on August 31.
Two materials are needed for each fruit basket:

The materials inventory policy is to have 5% of the next month's fruit needs on hand and 30% of the next month's production needs of small gifts. (The relatively low inventory amount for fruit is designed to prevent spoilage.) Materials inventory on August 31 met this company policy.
Required:
1. Prepare a production budget for September, October, November, and December for gift baskets. ( Note : Round all answers to the nearest whole unit.)
2. Prepare a direct materials purchases budget for the two types of materials used in the production of gift baskets for the months of September, October, and November. ( Note : Round answers to the nearest whole unit.)
3. CONCEPTUAL CONNECTION Why do you think there is such a big difference in budgeted units from November to December? Why did Jani budget fewer units in January than in December?

Question 10

What is a master budget? An operating budget? A financial budget?

Question 11

What is the role of top management in participative budgeting?

Question 12

Cornerstone Exercise 9-26 Preparing an Ending Finished Goods Inventory Budget
Andrews Company manufactures a line of office chairs. Each chair takes $14 of direct materials and uses 1.9 direct labor hours at $16 per direct labor hour. The variable overhead rate is $1.20 per direct labor hour and the fixed overhead rate is $1.60 per direct labor hour. Andrews expects to have 675 chairs in ending inventory. There is no beginning inventory of office chairs.
Required:
1. Calculate the unit product cost. ( Note : Round to the nearest cent.)
2. Calculate the cost of budgeted ending inventory. ( Note : Round to the nearest dollar.)

Question 13

Schedule of Cash Collections on Accounts Receivable and Cash Budget
Bennett Inc. found that about 15% of its sales during the month were for cash. Bennett has the following accounts receivable payment experience:

Bennett's anticipated sales for the next few months are as follows:

( Note : Round all amounts to the nearest dollar.)
Required:
1. Calculate credit sales for May, June, July, and August.
2. Prepare a schedule of cash receipts for July and August.

Question 14

A moving, 12-month budget that is updated monthly is
a. not used by manufacturing firms.
b. a waste of time and effort.
c. a master budget.
d. a continuous budget.
e. always used by firms that prepare a master budget.

Question 15

Select the one budget below that is not an operating budget.

A) Cost of goods sold budget
B) Cash budget
C) Production budget
D) Overhead budget
E) All of these are operating budgets.

Question 16

Preparing a Cost of Goods Sold Budget
Andrews Company manufactures a line of office chairs. Each chair takes $14 of direct materials and uses 1.9 direct labor hours at $16 per direct labor hour. The variable overhead rate is $1.20 per direct labor hour and the fixed overhead rate is $1.60 per direct labor hour. Andrews expects to produce 20,000 chairs next year and expects to have 675 chairs in ending inventory. There is no beginning inventory of office chairs.

Question 17

Schedule of Cash Collections on Accounts Receivable and Cash Budget
Roybal Inc. sells all of its product on account. Roybal has the following accounts receivable payment experience:

To encourage payment in the month of sale, Roybal gives a 2% cash discount. Roybal's anticipated sales for the next few months are as follows:

Required:
1. Prepare a schedule of cash receipts for July.
2. Prepare a schedule of cash receipts for August.

Question 18

Explain the role of a sales forecast in budgeting. What is the difference between a sales forecast and a sales budget?

Question 19

Explain why a manager has an incentive to build slack into the budget.

Question 20

Preparing a Selling and Administrative Expenses Budget
Fazel Company makes and sells paper products. In the coming year, Fazel expects total sales of $19,730,000. There is a 3% commission on sales. In addition, fixed expenses of the sales and administrative offices include the following:

Required:
Prepare a selling and administrative expenses budget for Fazel Company for the coming year

Question 21

Cash Payments Schedule
Fein Company provided the following information relating to cash payments:
a. Fein purchased direct materials on account in the following amounts:

b. Fein pays 20% of accounts payable in the month of purchase and the remaining 80% in the following month.
c. In July, direct labor cost was $32,300. August direct labor cost was $35,400. The company finds that typically 90% of direct labor cost is paid in cash during the month, with the remainder paid in the following month.
d. August overhead amounted to $71,200, including $6,350 of depreciation.
e. Fein had taken out a four-month loan of $15,000 on May 1. Interest, due with payment of principal, accrued at the rate of 9% per year. The loan and all interest were repaid on August 31. ( Note : Use whole months to compute interest payment.)
Required:
Prepare a schedule of cash payments for Fein Company for the month of August.

Question 22

Which of the following is not part of the operating budget?
a. The direct labor budget
b. The cost of goods sold budget
c. The production budget
d. The capital budget
e. The selling and administrative expenses budget

Question 23

The cash budget serves which of the following purposes?
a. Documents the need for liberal inventory policies.
b. Reveals the amount of depreciation expense.
c. Reveals the amount lost due to uncollectible accounts.
d. Provides information about the ability to repay loans.
e. None of the above.

Question 24

Preparing a Budgeted Income Statement
Oliver Company provided the following information for the coming year:

Required:
Prepare a budgeted income statement for Oliver Company for the coming year. ( Note : Round all income statement amounts to the nearest dollar.)

Question 25

Cash Budget
The owner of a building supply company has requested a cash budget for June. After examining the records of the company, you find the following:
a. Cash balance on June 1 is $736.
b. Actual sales for April and May are as follows:

c. Credit sales are collected over a three-month period: 40% in the month of sale, 30% in the second month, and 20% in the third month. The sales collected in the third month are subject to a 2% late fee, which is paid by those customers in addition to what they owe. The remaining sales are uncollectible.
d. Inventory purchases average 64% of a month's total sales. Of those purchases, 20% are paid for in the month of purchase. The remaining 80% are paid for in the following month.
e. Salaries and wages total $11,750 per month, including a $4,500 salary paid to the owner.
f. Rent is $4,100 per month.
g. Taxes to be paid in June are $6,780.
The owner also tells you that he expects cash sales of $18,600 and credit sales of $54,000 for June. No minimum cash balance is required. The owner of the company doesn't have access to short-term loans.
Required:
1. Prepare a cash budget for June. Include supporting schedules for cash collections and cash payments. (Round all amounts to the nearest dollar.)
2. CONCEPTUAL CONNECTION Did the business show a negative cash balance for June? Suppose that the owner has no hope of establishing a line of credit for the business, what
recommendations would you give the owner for dealing with a negative cash balance?

Question 26

All budgets depend on the sales budget. Is this true? Explain.

Question 27

Explain how a manager can milk the firm to improve budgetary performance.

Question 28

Preparing a Schedule of Cash Collections on Accounts Receivable
Kailua and Company is a legal services firm. All sales of legal services are billed to the client (there are no cash sales). Kailua expects that, on average, 20% will be paid in the month of billing, 50% will be paid in the month following billing, and 25% will be paid in the second month following billing. For the next five months, the following sales billings are expected:

Required:
Prepare a schedule showing the cash expected in payments on accounts receivable in August and in September.

Question 29

Cash Budget
Aragon and Associates has found from past experience that 25% of its services are for cash. The remaining 75% are on credit. An aging schedule for accounts receivable reveals the following pattern:
a. Ten percent of fees on credit are paid in the month that service is rendered.
b. Sixty percent of fees on credit are paid in the month following service.
c. Twenty-six percent of fees on credit are paid in the second month following service.
d. Four percent of fees on credit are never collected.
Fees (on credit) that have not been paid until the second month following performance of the legal service are considered overdue and are subject to a 3% late charge.
Aragon has developed the following forecast of fees:

( Note : Round all amounts to the nearest dollar.)
Required:
Prepare a schedule of cash receipts for August and September.

Question 30

Before a direct materials purchases budget can be prepared, you should first
a. prepare a sales budget.
b. prepare a production budget.
c. decide on the desired ending inventory of materials.
d. obtain the expected price of each type of material.
e. do all of these.

Question 31

Assume that a company has the following accounts receivable collection pattern:

All sales are on credit. If credit sales for January and February are $100,000 and $200,000, respectively, the cash collections for February are

A) $140,000.
B) $300,000.
C) $120,000.
D) $160,000.
E) $80,000.

Question 32

Preparing an Accounts Payable Schedule
Wight Inc. purchases raw materials on account for use in production. The direct materials purchases budget shows the following expected purchases on account:

Wight typically pays 20% on account in the month of billing and 80% the next month.
Required:
1. How much cash is required for payments on account in May?
2. How much cash is expected for payments on account in June?

Question 33

Operating Budget, Comprehensive Analysis
Allison Manufacturing produces a subassembly used in the production of jet aircraft engines. The assembly is sold to engine manufacturers and aircraft maintenance facilities. Projected sales in units for the coming five months follow:

The following data pertain to production policies and manufacturing specifications followed by Allison Manufacturing:
a. Finished goods inventory on January 1 is 32,000 units, each costing $166.06. The desired ending inventory for each month is 80% of the next month's sales.
b. The data on materials used are as follows:

Inventory policy dictates that sufficient materials be on hand at the end of the month to produce 50% of the next month's production needs. This is exactly the amount of material on hand on December 31 of the prior year.
c. The direct labor used per unit of output is three hours. The average direct labor cost per hour is $14.25.
d. Overhead each month is estimated using a flexible budget formula. (Note: Activity is measured in direct labor hours.)

e. Monthly selling and administrative expenses are also estimated using a flexible budgeting formula. ( Note : Activity is measured in units sold.)

f. The unit selling price of the subassembly is $205.
g. All sales and purchases are for cash. The cash balance on January 1 equals $400,000. The firm requires a minimum ending balance of $50,000. If the firm develops a cash shortage by the end of the month, sufficient cash is borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is the interest due (cash borrowed at the end of the quarter is repaid at the end of the following quarter). The interest rate is 12% per annum. No money is owed at the beginning of January.
Required:
1. Prepare a monthly operating budget for the first quarter with the following schedules. ( Note : Assume that there is no change in work-in-process inventories.)
a. Sales budget
b. Production budget
c. Direct materials purchases budget
d. Direct labor budget
e. Overhead budget
f. Selling and administrative expenses budget
g. Ending finished goods inventory budget
h. Cost of goods sold budget
i. Budgeted income statement
j. Cash budget
2. CONCEPTUAL CONNECTION Form a group with two or three other students. Locate a manufacturing plant in your community that has headquarters elsewhere. Interview the controller for the plant regarding the master budgeting process. Ask when the process starts each year, what schedules and budgets are prepared at the plant level, how the controller forecasts the amounts, and how those schedules and budgets fit in with the overall corporate budget. Is the budgetary process participative? Also, find out how budgets are used for performance analysis. Write a summary of the interview.

Question 34

Why is goal congruence important?

Question 35

The percentage of accounts receivable that are uncollectible can be ignored for cash budgeting because
a. no cash is received from an account that defaults.
b. it is included in cash sales.
c. it appears on the budgeted income statement.
d. for most companies, it is not a material amount.
e. none of the above is correct.

Question 36

Preparing a Cash Budget
La Famiglia Pizzeria provided the following information for the month of October:
a. Sales are budgeted to be $157,000. About 85% of sales are cash; the remainder are on account.
b. La Famiglia expects that, on average, 70% of credit sales will be paid in the month of sale, and 28% will be paid in the following month.
c. Food and supplies purchases, all on account, are expected to be $116,000. La Famiglia pays 25% in the month of purchase and 75% in the month following purchase.
d. Most of the work is done by the owners, who typically withdraw $6,000 a month from the business as their salary. ( Note : The $6,000 is a payment in total to the two owners, not per person.) Various part-time workers cost $7,300 per month. They are paid for their work weekly, so on average 90% of their wages are paid in the month incurred and the remaining 10% in the next month.
e. Utilities average $5,950 per month. Rent on the building is $4,100 per month.
f. Insurance is paid quarterly; the next payment of $1,200 is due in October.
g. September sales were $181,500 and purchases of food and supplies in September equaled $130,000.
h. The cash balance on October 1 is $2,147.
Required:
1. Calculate the cash receipts expected in October. ( Hint : Remember to include both cash sales and payments from credit sales.)
2. Calculate the cash needed in October to pay for food purchases.
3. Prepare a cash budget for the month of October.

Question 37

Understanding Relationships, Cash Budget, Pro Forma Balance Sheet
Ryan Richards, controller for Grange Retailers, has assembled the following data to assist in the preparation of a cash budget for the third quarter of the year:
a. Sales:

b. Each month, 30% of sales are for cash and 70% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale.
c. Each month, the ending inventory exactly equals 50% of the cost of next month's sales. The markup on goods is 25% of cost.
d. Inventory purchases are paid for in the month following the purchase.
e. Recurring monthly expenses are as follows:

f. Property taxes of $15,000 are due and payable on July 15.
g. Advertising fees of $6,000 must be paid on August 20.
h. A lease on a new storage facility is scheduled to begin on September 2. Monthly payments are $5,000.
i. The company has a policy to maintain a minimum cash balance of $10,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of a month. The annual interest rate is 9%. The company must borrow in multiples of $1,000.
j. A partially completed balance sheet as of June 30 follows. (Note: Accounts payable is for inventory purchases only.)

Required:
1. Complete the balance sheet given in Item j.
2. Prepare a cash budget for each month in the third quarter and for the quarter in total (the third quarter begins on July 1). Prepare a supporting schedule of cash collections.
3. Prepare a pro forma balance sheet as of September 30.
4. CONCEPTUAL CONNECTION Form a group with two or three other students. Discuss why a bank might require a cash budget for businesses that are seeking short-term loans. Determine what other financial reports might be useful for a loan decision. Also, discuss how the reliability of cash budgets and other financial information can be determined.

Question 38

The first step in preparing the sales budget is to
a. prepare a sales forecast.
b. review the production budget carefully.
c. assess the desired ending inventory of finished goods.
d. talk with past customers.
e. increase sales beyond the forecast level.

Question 39

An ideal budgetary system is one that
a. encourages dysfunctional behavior.
b. encourages goal-congruent behavior.
c. encourages myopic behavior.
d. encourages subversion of an organization's goals.
e. does none of these.

Question 40

Planning and Control
a. Dr. Jones, a dentist, wants to increase the size and profitability of his business by building a reputation for quality and timely service.
b. To achieve this, he plans on adding a dental laboratory to his building so that crowns, bridges, and dentures can be made in-house.
c. To add the laboratory, he needs additional money, which he decides must be obtained by increasing revenues. After some careful calculation, Dr. Jones concludes that annual revenues must be increased by 10%.
d. Dr. Jones finds that his fees for fillings and crowns are below the average in his community and decides that the 10% increase can be achieved by increasing these fees.
e. He then identifies the quantity of fillings and crowns expected for the coming year, the new per-unit fee, and the total fees expected.
f. As the year unfolds (on a month-by-month basis), Dr. Jones compares the actual revenues received with the budgeted revenues. For the first three months, actual revenues were less than planned.
g. Upon investigating, he discovered that he had some reduction in the number of patients because he had also changed his available hours of operation.
h. He returned to his old schedule and found out that the number of patients was restored to the original expected levels.
i. However, to make up the shortfall, he also increased the price of some of his other services.
Required:
Match each statement with the following planning and control elements ( Note : A letter may be matched to more than one item):
1. Corrective action
2. Budgets
3. Feedback
4. Investigation
5. Short-term plan
6. Comparison of actual with planned
7. Monitoring of actual activity
8. Strategic plan
9. Short-term objectives
10. Long-term objectives

Question 41

Participative Budgeting, Not-for-Profit Setting
Dwight D. Eisenhower was the 34th president of the United States and the Supreme Commander of the Allied Forces during World War II. Much of his army career was spent in planning. He once said that ''planning is everything; the plan is nothing.''
Required:
CONCEPTUAL CONNECTION What do you think he meant by this? Consider his comment with respect to the master budget. Do you agree or disagree? Be sure to include the impact of the master budget on planning and control.

Question 42

Define the term budget. How are budgets used in planning?

Question 43

Why is it important for a manager to receive frequent feedback on his or her performance?

Question 44

Some key budgetary features that tend to promote positive managerial behavior are
a. frequent feedback on performance.
b. participative budgeting.
c. realistic standards.
d. well-designed monetary and non-monetary incentives.
e. all of these.

Question 45

Sales Budget
Assume that Stillwater Designs produces two automotive subwoofers: S12L7 and S12L5. The S12L7 sells for $475, and the S12L5 sells for $300. Projected sales (number of speakers)
for the coming five quarters are as follows:

The vice president of sales believes that the projected sales are realistic and can be achieved by the company
Refer to the information regarding Stillwater Designs above.
Required:
1. Prepare a sales budget for each quarter of 20X1 and for the year in total. Show sales by product and in total for each time period.
2. CONCEPTUAL CONNECTION How will Stillwater Designs use this sales budget?

Question 46

Cash Budget
The controller of Feinberg Company is gathering data to prepare the cash budget for July. He plans to develop the budget from the following information:
a. Of all sales, 40% are cash sales.
b. Of credit sales, 45% are collected within the month of sale. Half of the credit sales collected within the month receive a 2% cash discount (for accounts paid within 10 days). Thirty percent of credit sales are collected in the following month; remaining credit sales are collected the month thereafter. There are virtually no bad debts.
c. Sales for the second two quarters of the year follow. (Note: The first three months are actual sales, and the last three months are estimated sales.)

d. The company sells all that it produces each month. The cost of raw materials equals 26% requirements. Of raw materials purchases, 50% are paid for in the month of purchase. The remaining 50% is paid for in of each sales dollar. The company requires a monthly ending inventory of raw materials equal to the coming month's production the following month.
e. Wages total $105,000 each month and are paid in the month incurred.
f. Budgeted monthly operating expenses total $376,000, of which $45,000 is depreciation and $6,000 is expiration of prepaid insurance (the annual premium of $72,000 is paid on January 1).
g. Dividends of $130,000, declared on June 30, will be paid on July 15.
h. Old equipment will be sold for $25,200 on July 4.
i. On July 13, new equipment will be purchased for $173,000.
j. The company maintains a minimum cash balance of $20,000.
k. The cash balance on July 1 is $27,000.
Required:
Prepare a cash budget for July. Give a supporting schedule that details the cash collections from sales.

Question 47

A budget
a. is a long-term plan.
b. covers at least 2 years.
c. is only a control tool.
d. is a short-term financial plan.
e. is necessary only for large firms.

Question 48

Which of the following is needed to prepare the production budget?
a. Direct materials needed for production
b. Direct labor needed for production
c. Expected unit sales
d. Units of materials in ending inventory
e. None of these.

Question 49

Which of the following is not an advantage of participative budgeting?

A) It encourages budgetary slack.
B) It tends to lead to a higher level of performance.
C) It fosters a sense of responsibility.
D) It encourages greater goal congruence.
E) It fosters a sense of creativity in managers.

Question 50

Production Budget
Assume that Stillwater Designs produces two automotive subwoofers: S12L7 and S12L5. The S12L7 sells for $475, and the S12L5 sells for $300. Projected sales (number of speakers)
for the coming five quarters are as follows:

The vice president of sales believes that the projected sales are realistic and can be achieved by the company.
Refer to the information regarding Stillwater Designs on the previous page. Stillwater Designs needs a production budget for each product (representing the amount that must be outsourced to manufacturers located in Asia). Beginning inventory of S12L7 for the first quarter of 20X1 was 340 boxes. The company's policy is to have 20% of the next quarter's sales of S12L7 in ending inventory. Beginning inventory of S12L5 was 170 boxes. The company's policy is to have 30% of the next quarter's sales of S12L5 in ending inventory.
Required:
Prepare a production budget for each quarter for 20X1 and for the year in total.

Question 51

Understanding Relationships, Master Budget, Comprehensive Review
Optima Company is a high-technology organization that produces a mass-storage system. The design of Optima's system is unique and represents a breakthrough in the industry. The units Optima produces combine positive features of both compact and hard disks. The company is completing its fifth year of operations and is preparing to build its master budget for the coming year (20X1). The budget will detail each quarter's activity and the activity for the year in total. The master budget will be based on the following information:
a. Fourth-quarter sales for 20X0 are 55,000 units.
b. Unit sales by quarter (for 20X1) are projected as follows:

The selling price is $400 per unit. All sales are credit sales. Optima collects 85% of all sales within the quarter in which they are realized; the other 15% is collected in the following quarter. There are no bad debts.
c. There is no beginning inventory of finished goods. Optima is planning the following ending finished goods inventories for each quarter:

d. Each mass-storage unit uses five hours of direct labor and three units of direct materials. Laborers are paid $10 per hour, and one unit of direct materials costs $80.
e. There are 65,700 units of direct materials in beginning inventory as of January 1, 20X1. At the end of each quarter, Optima plans to have 30% of the direct materials needed for next quarter's unit sales. Optima will end the year with the same amount of direct materials found in this year's beginning inventory.
f. Optima buys direct materials on account. Half of the purchases are paid for in the quarter of acquisition, and the remaining half are paid for in the following quarter. Wages and salaries are paid on the 15th and 30th of each month.
g. Fixed overhead totals $1 million each quarter. Of this total, $350,000 represents depreciation. All other fixed expenses are paid for in cash in the quarter incurred. The fixed overhead rate is computed by dividing the year's total fixed overhead by the year's budgeted production in units.
h. Variable overhead is budgeted at $6 per direct labor hour. All variable overhead expenses are paid for in the quarter incurred.
i. Fixed selling and administrative expenses total $250,000 per quarter, including $50,000 depreciation.
j. Variable selling and administrative expenses are budgeted at $10 per unit sold. All selling and administrative expenses are paid for in the quarter incurred.
k. The balance sheet as of December 31, 20X0, is as follows:

l. Optima will pay quarterly dividends of $300,000. At the end of the fourth quarter, $2 million of equipment will be purchased.
Required:
Prepare a master budget for Optima Company for each quarter of 20X1 and for the year in total. The following component budgets must be included:
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expenses budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget ( Note : Assume that there is no change in work-in-process inventories.)
9. Cash budget
10. Pro forma income statement (using absorption costing) ( Note : Ignore income taxes.)
11. Pro forma balance sheet ( Note : Ignore income taxes.)

Question 52

Define control. How are budgets used to control?

Question 53

Discuss the roles of monetary and nonmonetary incentives. Do you believe that nonmonetary incentives are needed? Why?

Question 54

Which of the following items is a possible example of myopic behavior?
a. Failure to promote deserving employees
b. Reducing expenditures on preventive maintenance
c. Cutting back on new product development
d. Buying cheaper, lower-quality materials so that the company does not exceed the materials purchases budget
e. All of these.

Question 55

Production Budget and Direct Materials Purchases Budgets
Peanut-Fresh Inc. produces all-natural organic peanut butter. The peanut butter is sold in 12-ounce jars. The sales budget for the first four months of the year is as follows:

Company policy requires that ending inventories for each month be 20% of next month's sales. At the beginning of January, the inventory of peanut butter is 14,500 jars.
Each jar of peanut butter needs two raw materials: 24 ounces of peanuts and one jar. Company policy requires that ending inventories of raw materials for each month be 10% of the next month's production needs. That policy was met on January 1.
Required:
1. Prepare a production budget for the first quarter of the year. Show the number of jars that should be produced each month as well as for the quarter in total.
2. Prepare separate direct materials purchases budgets for jars and for peanuts for the months of January and February.

Question 56

Direct Materials and Direct Labor Budgets
Willison Company produces stuffed toy animals; one of these is Betty Rabbit. Each rabbit takes 0.2 yards of fabric and six ounces of polyfiberfill. Fabric costs $3.50 per yard, and polyfiberfill is $0.05 per ounce. Willison has budgeted production of stuffed rabbits for the next four months as follows:
Inventory policy requires that sufficient fabric be in ending monthly inventory to satisfy 15% of the following month's production needs and sufficient polyfiberfill be in inventory to satisfy 30% of the following month's production needs. Inventory of fabric and polyfiberfill at the beginning of October equals exactly the amount needed to satisfy the inventory policy.
Each rabbit produced requires (on average) 0.10 direct labor per hour. The average cost of direct labor is $15.50 per hour.
Required:
1. Prepare a direct materials purchases budget of fabric for the last quarter of the year, showing purchases in units and in dollars for each month and for the quarter in total.
2. Prepare a direct materials purchases budget of polyfiberfill for the last quarter of the year, showing purchases in units and in dollars for each month and for the quarter in total.
3. Prepare a direct labor budget for the last quarter of the year, showing the hours needed and the direct labor cost for each month and for the quarter in total.

Question 57

Which of the following is part of the control process?
a. Monitoring of actual activity
b. Comparison of actual with planned activity
c. Investigating
d. Taking corrective action
e. All of these.

Question 58

A company requires 100 pounds of plastic to meet the production needs of a small toy. It currently has 10 pounds of plastic inventory. The desired ending inventory of plastic is 30 pounds. How many pounds of plastic should be budgeted for purchasing during the coming period?

A) 80 pounds
B) 110 pounds
C) 120 pounds
D) 130 pounds
E) None of these.

Question 59

Preparing a Sales Budget
Patrick Inc. sells industrial solvents in five-gallon drums. Patrick expects the following units to be sold in the first three months of the coming year:

The average price for a drum is $35.
Required:
Prepare a sales budget for the first three months of the coming year, showing units and sales revenue by month and in total for the quarter

Question 60

Production Budget
Aqua-pro Inc. produces submersible water pumps for ponds and cisterns. The unit sales for selected months of the year are as follows:

Company policy requires that ending inventories for each month be 25% of next month's sales. However, at the beginning of April, due to greater sales in March than anticipated, the beginning inventory of water pumps is only 21,000.
Required:
Prepare a production budget for the second quarter of the year. Show the number of units that should be produced each month as well as for the quarter in total.

Question 61

Cash Budgeting
Jordana Krull owns The Eatery in Miami, Florida. The Eatery is an affordable restaurant located near tourist attractions. Jordana accepts cash and checks. Checks are deposited immediately. The bank charges $0.50 per check; the amount per check averages $65. Bad checks that Jordana cannot collect make up 2% of check revenue.
During a typical month, The Eatery has sales of $75,000. About 75% are cash sales. Estimated sales for the next three months are as follows:

Jordana thinks that it may be time to refuse to accept checks and to start accepting credit cards. She is negotiating with a credit card processing service that will allow her to accept all major credit cards. She would start the new policy on July 1. Jordana estimates that with the drop in sales from the no-checks policy and the increase in sales from the acceptance of credit cards, the net increase in sales will be 20%. The credit card processing service will charge no setup fee, however the following fees and conditions apply:
• Monthly gateway and statement fee totaling $19, paid on the first day of the month.?
• Discount fee of 2% of the total sale. This is not paid separately, instead, the amount that Jordana receives from each credit sale is reduced by 2%. For example, on a credit card sale of $150, the processing company would take $3 and remit a net amount of $147 to Jordana's account.
• Transaction fee of $0.25 per transaction paid at the time of the transaction.
There will be a two-day delay between the date of the transaction and the date on which the net amount will be deposited into Jordana's account. On average, 94% of a month's net credit card sales will be deposited into her account that month. The remaining 6% will be deposited the next month.
If Jordana adds credit cards, she believes that cash sales will average just 5% of total sales, and that the average credit card transaction will be $50.
Required:
1. Prepare a schedule of cash receipts for August and September under the current policy of accepting checks.
2. Assuming that Jordana decides to accept credit cards,
a. Calculate revised total sales, cash sales, and credit card sales by month for August and September.
b. Calculate the total estimated credit card transactions for August and September.
3. Prepare a schedule of cash receipts for August and September that incorporates the changes in policy.

Question 62

Explain how both small and large organizations can benefit from budgeting.

Question 63

What is participative budgeting? Discuss some of its advantages.

Question 64

Preparing a Production Budget
Patrick Inc. makes industrial solvents. In the first four months of the coming year, Patrick expects the following unit sales:

Patrick's policy is to have 25% of next month's sales in ending inventory. On January 1, it is expected that there will be 6,700 drums of solvent on hand.
Required:
Prepare a production budget for the first quarter of the year. Show the number of drums that should be produced each month as well as for the quarter in total.

Question 65

Direct Materials Purchases Budget
Langer Company produces plastic items, including plastic housings for humidifiers. Each housing requires about 15 ounces of plastic costing $0.08 per ounce. Langer molds the plastic into the proper shape. Langer has budgeted production of the housings for the next four months as follows:

Inventory policy requires that sufficient plastic be in ending monthly inventory to satisfy 20% of the following month's production needs. The inventory of plastic at the beginning of July equals exactly the amount needed to satisfy the inventory policy.
Required:
Prepare a direct materials purchases budget for July, August, and September, showing purchases in units and in dollars for each month and in total.

Question 66

Case 9-54 Budgeting in the Government Sector, Internet Research
Similar to companies, the U.S. government must prepare a budget each year. However, unlike private, for-profit companies, the budget and its details are available to the public. The entire budgetary process is established by law. The government makes available a considerable amount of information concerning the federal budget. Most of this information can be found on the Internet. Using Internet resources (e.g., consider accessing the Office of Management and Budget at www.whitehouse.gov/omb), answer the following questions:
Required:
1. When is the federal budget prepared?
2. Who is responsible for preparing the federal budget?
3. How is the final federal budget determined? Explain in detail how the government creates its budget.
4. What percentage of the gross domestic product (GDP) is represented by the federal budget?
5. What are the revenue sources for the federal budget? Indicate the percentage contribution of each of the major sources.
6. How does U.S. spending as a percentage of GDP compare with spending of other countries?
7. How are deficits financed?

Question 67

Which of the following is not an advantage of budgeting?
a. It forces managers to plan.
b. It provides information for decision making.
c. It guarantees an improvement in organizational efficiency.
d. It provides a standard for performance evaluation.
e. It improves communication and coordination.

Question 68

A company plans to sell 220 units. The selling price per unit is $24. There are 50 units in beginning inventory, and the company would like to have 20 units in ending inventory. How many units should be produced for the coming period?

A) 250
B) 200
C) 230
D) 220
E) None of these.

Question 69

Preparing a Direct Materials Purchases Budget
Patrick Inc. makes industrial solvents sold in five-gallon drums. Planned production in units for the first three months of the coming year is:

Each drum requires 5.5 gallons of chemicals and one plastic drum. Company policy requires that ending inventories of raw materials for each month be 15% of the next month's production needs. That policy was met for the ending inventory of December in the prior year. The cost of one gallon of chemicals is $2.00. The cost of one drum is $1.60. ( Note : Round all unit amounts to the nearest unit. Round all dollar amounts to the nearest dollar.)
Required:
1. Calculate the ending inventory of chemicals in gallons for December of the prior year, and for January and February. What is the beginning inventory of chemicals for January?
2. Prepare a direct materials purchases budgets for chemicals for the months of January and February.
3. Calculate the ending inventory of drums for December of the prior year, and for January and February.
4. Prepare a direct materials purchases budgets for drums for the months of January and February.

Question 70

Direct Labor Budget
Evans Company produces asphalt roofing materials. The production budget in bundles for Evans' most popular weight of asphalt shingle is shown for the following months:

Each bundle produced requires (on average) 0.40 direct labor hours. The average cost of direct labor is $20 per hour.
Required:
Prepare a direct labor budget for March, April, and May, showing the hours needed and the direct labor cost for each month and in total.

Question 71

Cash Budget
Dr. Roger Jones is a successful dentist but is experiencing recurring financial difficulties. For example, Jones owns his office building, which he leased to the professional corporation that housed his dental practice (he owns all shares in the corporation). After the corporation's failure to pay payroll taxes for the past six months, however, the Internal Revenue Service is threatening to impound the business and sell its assets. Also, the corporation has had difficulty paying its suppliers, owing one of them over $200,000 plus interest. In the past, Jones had borrowed money on the equity in either his personal residence or his office building, but he has grown weary of these recurring problems and has hired a local consultant for advice.
According to the consultant, the financial difficulties facing Jones have been caused by the absence of proper planning and control. Budgetary control is sorely needed. The following financial information is available for a typical month:

Benefits include Jones's share of social security and a health insurance premium for all employees. Although all revenues billed in a month are not collected, the cash flowing into the business is approximately equal to the month's billings because of collections from prior months. The office is open Monday through Thursday from 9:00 A.M. to 4:00 P.M. and on Friday from 9:00 A.M. to 12:30 P.M. A total of 32 hours are worked each week. Additional hours could be worked, but Jones is reluctant to do so because of other personal endeavors that he enjoys.
Jones has noted that the two dental assistants and receptionist are not fully utilized. He estimates that they are busy about 65 to 70% of the time. Jones's wife spends about 5 hours each week on a monthly newsletter that is sent to all patients. She also maintains a birthday list and sends cards to patients on their birthdays.
Jones recently attended an informational seminar designed to teach dentists how to increase their revenues. An idea from that seminar persuaded Jones to invest in promotion and public relations (the newsletter and the birthday list).
Required:
1. Prepare a monthly cash budget for Dr. Jones.
2. Using the cash budget prepared in Requirement 1 and the information given in the case, recommend actions to solve Dr. Jones's financial problems. Prepare a cash budget that reflects these recommendations and demonstrates to Jones that the problems can be corrected. Do you think that Jones will accept your recommendations? Do any of the behavioral principles discussed in the chapter have a role in this type of setting? Explain.