Chapter 5 Materials Fall 2023
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CHAPTER 5 PROFIT PLANNING I.
What is a budget?
How resources will be used to implement “the plan”
A.
What are the advantages of budgeting?
1.
2
.
3
.
4
.
5
.
B
.
How does an organization prepare a budget?
1.
Imposed (top-down) vs. participative budgets (bottom-up)
—
2.
Behavioral issues—
CFO magazine reports 53% of managers believed the budgeting process encouraged mgrs in some form of ___________________.
Budgetary Slack -
o
May cause resources not to be allocated correctly
o
Common in ______________
In __
__________
budgets, employees may feel process is unfair.
3. Incremental budgeting vs. zero-based budgeting—
Incremental –
Zero based budgeting –
4.
Time frame –
Typical approach is to prepare a budget once/yr
–
Rolling budget
–
1
** Always remember with budgeting to be flexible in order to take advantage of opportunities or to discontinue unprofitable areas and that budgets can change, they don’t have to be set in stone II. What is a standard? A.
Ideal vs. Practical Standards
Ideal –
Practical standards - B.
Product standards CLASS PREP 1: STANDARDS 1. What are the two material standards? Be able to describe each. a. b 2. What is the difference between the standard price and the standard cost?
3. What are the two direct labor standards? Be able to describe each. a. b. 4. What is the manufacturing overhead standard? a. 2
Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing OH Budget Cash Budget Selling & Admin Budget Budgeted (Pro-forma) Financial Statements Master Budget Components (Manufacturing Company) 3
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July August
September
October
Sales
$40,000
$70,000
$50,000
$45,000
COGS
24,000
42,000
30,000
27,000
Gross Margin
16,000
28,000
20,000
18,000
Operating Expenses
Selling*
7,200
11,700
8,500
7,300
Administrative**
5,600
7,200
6,100
5,900
Total Expenses
12,800
18,900
14,600
13,200
Net Income
$3,200
$9,100
$5,400
$4,800
Notes:
a. Sales are 20% for cash and 80% on credit
Prepare a schedule of expected cash collections from sales for July-September. Collections on Sales:
July
August
September
Quarter
Cash Sales
Credit
May
June
July
August
September
Total cash collections: Calculate the Accounts Receivable Balance as of September 30:
c. All selling expenses are for cash.
1.
Janus Products, Inc. is a merchandising company that sells school supplies. The company is planning its cash needs
for the third quarter. Janus typically has to borrow cash in the third quarter to support sales of back-to-school inventory.
The following is a budgeted income statement for July-October:
b. Credit sales are collected over a three month period:10% in the month of the sale, 70% in the month following the
sale, 20% in the second month following the sale. May sales totaled $30,000 and June sales totaled $36,000.
SCHEDULE OF EXPECTED CASH COLLECTIONS
d. All administrative expenses are for cash except for $2,000 of depreciation each month.
Janus Products
4
Prepare an inventory purchases budget for the third quarter. July
August
September
Quarter
Budgeted C
OGS
+ Desired EI
Total needs
- Beginning inventory
Required purchases
Prepare a schedule of expected cash disbursements for inventory.
July
August
September
Quarter
Beginning AP
July purchases
August purchases
September purchases
Total cash disbursements
Calculate the Accounts Payable Balance as of September 30:
2. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following
month. The merchandise inventory at June 30 is $18,000.
INVENTORY PURCHASES BUDGET
SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR INVENTORY
Inventory purchases are paid for 50% in the month of the purchase and 50% in the month following the purchase. The accounts payable balance at June 30 is $11,700.
5
3.
Prepare a cash budget for the third quarter.
-Land costing $4,500 will be purchased in July.
-Dividends of $1,000 will be declared and paid in September.
July
August
September
Quarter
Beginning cash
Cash collections
Total cash available
Less disbursements
Inventory
Selling expenses
Administrative expenses
Land
Dividends
Total disbursements
Excess (deficiency)
Financing
Borrowings
Repayments
Interest
Total financing
Ending cash balance
Accrued interest will be paid only when the principal is repaid. Principal will only be repaid when excess cash is available. The company has a line of credit with the bank and can borrow money as needed. Borrowings must be made at the beginning of the month and repayments are made at the end of the month. Borrowings must be made in increments of $1,000. The annual interest rate is 12%. Interest is compounded annually. CASH BUDGET
-The cash balance on June 30 is $8,000. The company must maintain a cash balance of $8,000 at all times.
6
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Total for
January
February
March
Quarter
April
May
Sales in units
220,000
205,000
195,000
620,000
180,000
195,000
Sales in dollars
440,000
$ 410,000
$ 390,000
$ 1,240,000
$ 360,000
$ 390,000
$ Cash Sales
Credit Sales
Total for
January
February
March
Quarter
Cash sales
December
January
February
March
Calculate the Accounts Receivable balance as of March 31st: January
February
March
April
Sales in units
+ Desired ending inventory
Total inventory needs
- Beginning inventory
Required production
1. Texas Manufacturing Company created the following sales budget for the first five months of 20
20
:
2.
The company is able to produce very quickly and therefore only requires that 7% of the next month's
sales be on hand at the end of the month. Ending inventory for December 31
is 15,400 units (7% of
January sales). Prepare the following production budget.
SALES BUDGET
PRODUCTION BUDGET
Sales are 40% for cash and 60% for credit. Credit sales are collected 30% in the month of the sale, 60% in the month following the sale, and 5% in the second month following the sale. The remainder of credit sales is uncollectible. Complete the following schedule of expected cash collections. December sales totaled $450,000. There were no sales in November.
SCHEDULE OF EXPECTED CASH COLLECTIONS
Texas Manufacturing Company
7
January
February
March
Quarter
April
Required production (units)
x Ounces per unit
4
4
4
4
4
Required production (ozs.) + EI (10% next month)
Total needs (ozs.)
- BI
= Required purchases (ozs.)
x Price per oz.
0.20
$ 0.20
$ 0.20
$ 0.20
$ Total cost of material
January
February
March
Quarter
Beginning AP
January purchases
February purchases
March purchases
Calculate the Accounts Payable Balance as of March 31st:
3.
Texas Manufacturing requires that direct materials on hand at the end of each month be equal to 10% of
the following month's production needs. Beginning inventory of direct materials was 87,580 ounces. Each
unit required 4 ounces of material. Prepare the following direct materials purchases budget.
DIRECT MATERIALS BUDGET
4.
The company pays for purchases of direct materials 40% in the month of the purchase and 60% in the
following month. The beginning accounts payable balance from direct materials purchased in December
was $80,000. Prepare the following cash disbursements budget.
SCHEDULE OF EXPECTED CASH DISBURSEMENTS FOR DIRECT MATERIALS
8
CHAPTER 5 PROBLEMS
1.
Schedule of expected cash collections
Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak
sales occur in May of each year. These peak sales are shown in the company’s sales
budget for the second quarter given below:
April
May
June
Total
Budgeted Sales
$300,000
$500,000
$200,000
$1,000,000
From past experience, the company has learned that 15% of the company’s sales are for
cash. Credit sales are collected as follows: 20% are collected in the month of sale,
another 70% are collected in the month following the sale, and the remaining 10% are
collected in the second month following the sale. Bad debts are negligible and can be
ignored. February sales totaled $230,000, and March sales totaled $260,000.
A.
Prepare a schedule of expected cash collections from sales, by month and in total,
for the second quarter.
B.
Assume that the company will prepare a budgeted balance sheet as of June 30.
Compute the accounts receivable as of that date.
2.
Production Budget
Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang or
the next four months as follows:
Sales in Units
April
50,000
May
75,000
June
90,000
July
80,000
The company is now in the process of preparing a production budget for the second
quarter. Past experience has shown that end
‐
of
‐
month inventory levels must equal 10%
of the following month’s sales. The inventory at the end of March was 5,000 units.
A.
Prepare a production budget for the second quarter. In your budget, show the
number of units to be produced each month and for the quarter in total.
9
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CHAPTER 5 PROBLEMS
3.
Direct Materials Budget
Three ounces of perfume oil are required for each bottle of “Debits,” a very popular
cologne produced by Thompson Manufacturing for the American Accounting
Association. The
price
of the oil is $1.50 per ounce. Budgeted production of “Debits”
is given below by quarters for Year 1 and for the first quarter of Year 2.
Year 1
Year 2
Quarter
1
st
2
nd
3
rd
4
th
1st
Budgeted Production in Bottles
60,000
90,000
150,000
100,000
70,000
The perfume oil used in the production has become such a popular ingredient that it has
become necessary to carry large inventories as a precaution against stock
‐
outs. For this
reason, the inventory of the perfume oil at the end of a quarter must be equal to 20% of
the following quarter’s production needs. There will be 36,000 ounces of perfume oil on
hand at the beginning of year 1.
A.
Prepare a direct materials budget for the perfume oil, by quarter and in total, for
year 1. At the bottom of your budget, show the amount of purchases in dollars for
each quarter and for the year in total.
10
Ch. 5 Planning and Budgeting Practice Quiz 1.
Principal components of a master budget include which of the following?
A.
Production budget
B.
Sales budget
D.
All of the above
C.
Material purchases budget
E.
None of the above
2.
The first budget customarily prepared as part of an entity's master budget is the:
A.
production budget
B.
cash budget
D.
direct materials purchases
C.
sales budget
E.
selling and administrative expense budget
3.
Which of the following budgets provides the starting point for the preparation of the direct labor cost budget?
A.
Direct materials purchases budget
B.
Cash budget
C.
Production budget
D.
Sales budget
E.
None of the above
4.
Production and sales estimates for June are as follows:
Estimated inventory (units), June 1 .........................................
8,000 Desired inventory (units), June 30 ..........................................
9,000 Expected sales volume (units): Area X ...............................................................................
3,000 Area Y ...............................................................................
4,000 Area Z ................................................................................
5,500 Unit sales price ........................................................................
$20 The number of units expected to be manufactured in June is: A.
10,000
B.
11,500
D.
13,500
C.
12,500
E.
21,500
5.
Tessie's Auto Repair and Beauty Salon is estimating the following sales figures for the next four months:
Cash Sales
Credit Sales
Total Sales
March
$1,500
$18,000
$19,500
April
$2,200
$26,400
$28,600
May
$1,800
$21,600
$23,400
June
$2,000
$24,000
$26,000
Tessie has the following collection pattern on credit sales: 10% in month of sale; 30% in month after sale; 50% in second month after sale; 10% uncollectible. What are Tessie's budgeted cash receipts for June? A.
$21,080
B.
$23,920
D.
$25,880
C.
$25,870
E.
$24,080
11
Use the following information for questions 6 through 9. After her last child, Dorothy Dible decided to start exercising to get back in shape. Dorothy hated the ache in her muscles while exercising and developed a brilliant idea to overcome the problem. The solution was Burlapwear: exercisewear made exclusively out of burlap. Dorothy's reasoning behind Burlapwear is simple. The burlap makes your skin itch and sweat so bad that you forget all about your aching muscles. Dorothy is now the president of Dible’s Burlapwear, Incorporated. 6.
Dorothy's budgeted sales figures (in units) for burlap leotards for next quarter are shown below:
July
August
September
Expected Sales 2,400 3,000 3,500 Dorothy likes to have 40% of the next month's sales needs in ending finished goods inventory. How many units should Dorothy plan to produce in August? A.
4,400
C.
2,800
E.
3,200
B.
3,440
D.
2,560
7.
Dorothy's budgeted production figures (in units) for burlap sweatshirts for next quarter are shown below:
July
August
September
Expected Production 3,600 4,100 5,000 Dorothy uses 1.2 yards of burlap per sweatshirt and pays $0.75 per yard of burlap. Dorothy likes to have half of the next month's burlap needs in ending inventory. What is the expected cost of burlap to be purchased for sweatshirts in August? A.
$5,460
B.
$4,550
D.
$3,285
C.
$4,095
E.
none of the above
8.
Dorothy's total budgeted purchases of burlap for next quarter are shown below:
September
Required purchases July
August
$15,300
$16,500 Dorothy pays for 75% of her purchases in the month of purchase and 25% in the month following purchase. What are Dorothy's expected cash disbursements related to burlap purchases for the month of August? A.
$12,375
B.
$15,600
D.
$16,900
C.
$16,200
E.
none of the above
9.
Dorothy is budgeting for the following expenses in September:
Utilities $ 700 Rent
800
Depreciation
1,400
Allowance for defective units 300 Taxes
1,000
Additional information: •
Utilities are paid for in the month of expense.
•
Rent is paid in January.
•
Depreciation includes $200 which relates to the cash purchase of a new $7,200 piece of equipment in
September.
•
Taxes are estimated to total $12,000 for the year. A $2,800 quarterly payment has to be paid in
September.
What is the total dollar amount related to the above information that should be included as part of cash disbursements in the September cash budget? A.
$12,200
B.
$11,500
D.
$10,700
C.
$11,000
E.
none of the above
$18,100
12
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Use the following information for questions 1
2 and 1
3
. Kriz's, Inc. manufactures and sells water quilts for waterbeds. Kriz's actual and estimated sales for the first six months of this year are as follows: December - last year (actual) $1,000 January (actual) 1,000 February (actual) 2,000 March (estimated) 3,000 April (estimated) 4,000 May (estimated) 3,000 June (estimated) 2,000 Cash sales account for 10% of total sales. Credit sales are collected 40% in the month of sale, 30% in the month following sale, 25% in the second month following sale, and 5% is uncollectible. 1
2
.
What will Kriz's budgeted cash collections from sales be in March and April?
March
April
A.
$1,550
$2,300 B.
$2,350
$3,350 C.
$2,145
$3,100 D.
$2,200
$3,150 E.
none of the above
11.
W
hat
is Kriz’s expected net accounts receivable balance (after deducting the allowance for uncollectible
accounts) on the June 30 budgeted balance sheet?
A.
$2,850
B.
$2,250
C.
$3,195
D.
$1,890
E.
$1,665
ANSWERS 1. D
11.
Omit
12. C
13. E
2. C
3. C
4. D
5. E
6.
E
7.
C
8.
C
9.
D
10. Omit
13
13.
Omit 10 and 11.
14
Emersyn Industries
Emersyn Industries makes Elsa dolls. Emersyn likes to have 20% of the next month’s sales needs in
ending finished goods inventory. Each doll requires 1.5 yards of fabric that costs Emersyn $0.50 per
yard. Emersyn requires that ending inventory of direct materials (fabric) on hand at the end of each
month be equal to 40% of the following month’s production needs.
From past experience, the company has learned that 15% of the company’s sales are for cash. The
remaining sales are made on credit with 10% collected in the month of sale, 60% collected in the month
following the sale, and 30% in the second month following the sale. The following data was taken from
Emersyn’s master budget:
February
March
April
May
June
Expected Production Units
6,940
8,200
10,400
8,240
9,660
Expected Sales Units
6,800
7,500
11,000
8,000
9,200
Expected Sales $
$68,000
$75,000
$110,000
$80,000
$92,000
15
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16
1.
What will Emersyn’s budgeted cash collections from sales be in April and May?
April
May
a.
$81,440
$94,025
b.
$94,025
$81,440
c.
$64,940
$82,025
d.
92,900
$107,625
2.
How much cash does Emersyn expect to collect in June from sales made in May?
a.
$0
b.
$48,000
c.
$68,000
d.
$40,800
3.
How much does Emersyn expect to collect this quarter (April, May, and June) from cash sales
(collected immediately)?
a.
$37,950
b.
$42,300
c.
$63,750
d.
$265,935
4.
What is Emersyn’s expected accounts receivable balance on the June 30
th
balance sheet?
a.
$20,400
b.
$70,380
c.
$90,780
d.
$106,800
17
5.
How much cash does Emersyn expect to collect this quarter (April, May, and June) from all
sales?
a.
$37,950
b.
$63,750
c.
$149,725
d.
$265,935
6.
What is the expected cost of fabric to be purchased for dolls in April?
a.
$6,816
b.
$7,152
c.
$14,304
d.
$14,970
e.
$7,485
7.
How many yards of fabric should Emersyn plan on purchasing in March?
a.
6,810
b.
13,620
c.
14,310
d.
14,970
e.
7,485
18
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21
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