MANAGEMENT ADVISORY SERVICES 13 Financial And Operating Budgeting M$%TI&%E C'OICE ($ESTIONS 1.

A common starting point in the budgeting process is a. expected future net income. b. past performance. c. to motivate the sales force. d. a clean slate, with no expectations. A budget period should be a. monthly. b. for a year or more. c. long-term. d. long enough to provide an obtainable goal under normal business conditions. f a company has adopted continuous budgeting, the budget will show plans for a. every day. b. a full year ahead. c. the current year and the next year. d. at least five years. "udget development for the coming year usually starts a. a year in advance. b. the first month of the year to be budgeted. c. several months before the end of the current year. d. the last month of the previous year. $he budget committee normally include the a. research director. b. treasurer. c. sales manager. d. external auditor. would not 11 . &.

jjaurojrtcbic Oct !er "#13

'ong-range planning usually encompasses a period of at least a. six months. b. 1 year. c. # years. d. 1( years. *hich is the last step in developing the master budget+ a. ,reparing the budgeted balance sheet b. ,reparing the cost of goods manufactured budget c. ,reparing the budgeted income statement d. ,reparing the cash budget A master budget consists of a. an interrelated long-term plan and operating budgets. b. financial budgets and a long-term plan. c. interrelated financial budgets and operating budgets. d. all the accounting journals and ledgers used by a company. $he starting point in preparing a master budget is the preparation of the a. production budget. b. sales budget. c. purchasing budget. d. personnel budget. *hat is the proper preparation se.uencing of the following budgets+ 1. "udgeted "alance /heet 2. /ales "udget 3. /elling and Administrative "udget !. "udgeted ncome /tatement a. b. c. d. 1, 2, 2, 2, 2, 3, 3, !, 3, 1, !, 1, ! ! 1 3

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$he budget committee in a company is often headed by the a. president. b. controller. c. treasurer. d. budget director.

&ROB%EMS 1 0elta 1anufacturing has budgeted the following unit sales2 2(12 April 1ay 4une 4uly 3nits 2#,((( !(,((( %(,((( !#,(((

5f the units budgeted, !(6 are sold by the 7oastal 0ivision at an average price of 81# per unit and the remainder are sold by the 7entral 0ivision at an average price of 812 per unit. In)tructi n)

,repare separate sales budgets for each division and for the company in total for the second .uarter of 2(13. " "utler 1anufacturing manufactures two products, 91: ;egular and 92: 0eluxe. $he budgeted units to be produced are as follows2 3nits of ,roduct 2(13 4uly August /eptember 5ctober ;egular 1(,((( %,((( -,((( ),((( 0eluxe 1#,((( 1(,((( 1!,((( 12,((( $otal 2#,((( 1%,((( 23,((( 2(,(((

t ta<es 2 pounds of direct materials to produce the ;egular product and # pounds of direct materials to produce the 0eluxe product. t is the company=s policy to maintain an inventory of direct materials on hand at the end of each month e.ual to 3(6 of the next month=s production needs for the ;egular product and 2(6 of the next month=s production needs for the 0eluxe product. 0irect materials inventory on hand at 4une 3( were %,((( pounds for the ;egular product and 1#,((( pounds for the 0eluxe product. $he cost per pound of materials is 8# ;egular and 8) 0eluxe. In)tructi n) ,repare separate direct materials budgets for each product for the third .uarter of 2(13. 3 >arver ndustries has budgeted the following unit sales2 2(13 4anuary ?ebruary 1arch April 1ay 3nits 1(,((( ),((( -,((( 11,((( 1#,(((

$he finished goods units on hand on 0ecember 31, 2(12, was 2,((( units. @ach unit re.uires 3 pounds of raw materials that are estimated to cost an average of 8! per pound. t is the company=s policy to maintain a finished goods inventory at the end of each month e.ual to 2(6 of next month=s anticipated sales. $hey also have a policy of maintaining a raw materials inventory at the end of each month e.ual to 3(6 of the pounds needed for the following month=s production. $here were ),%!( pounds of raw materials on hand at 0ecember 31, 2(12. In)tructi n) ?or the first .uarter of 2(13, prepare 91: a production budget and 92: a direct materials budget. * "enet 7ompany has budgeted the following unit sales2 2(13 Auarter 1 2 3 ! 3nits 1(#,((( %(,((( &#,((( 12(,((( Auarter 1 2(13 3nits -(,(((

$he finished goods inventory on hand on 0ecember 31, 2(12 was 21,((( units. t is the company=s policy to maintain a finished goods inventory at the end of each .uarter e.ual to 2(6 of the next .uarter=s anticipated sales. In)tructi n) ,repare a production budget for 2(13. + $he following facts are <nown2

$he total pounds needed for production are 2 times the units to be produced. $he desired ending direct materials inventory is 2(6 of the total pounds needed for production. $he beginning direct materials inventory is e.ual in number to 1(6 of the units to be produced. 7ost per pound is 8#. $otal cost of the direct materials purchases is 81,(3#,(((.

In)tructi n) ,repare a direct materials budget for the period.

, ,ulham 7ompany is preparing its direct labor budget for 2(13 from the following production budget based on a calendar year2 Auarter 1 2 3 ! 3nits %(,((( 3(,((( !#,((( &#,(((

@ach unit re.uires 2 hours of direct labor. $he union contract provides for a 1(6 increase in wage rate to 811 per hour on 5ctober 1. In)tructi n) ,repare a direct labor budget for 2(13. /hep 7ompany combines its operating expenses for budget purposes in a selling and administrative expense budget. ?or the first .uarter of 2(13, the following data are developed2 1. 2. /ales2 2(,((( unitsB unit selling price2 Cariable costs per dollar of sales2 /ales commissions 0elivery expense Advertising ?ixed costs per .uarter2 /ales salaries 5ffice salaries 0epreciation nsurance 3tilities 83( %6 26 !6 82!,((( 1-,((( %,((( 2,((( 1,(((

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In)tructi n) ,repare a selling and administrative expense budget for the first .uarter of 2(13. . $he Dortheast ;egional 0ivision of 3nion 7orp. has been re.uested to prepare a .uarterly budgeted income statement for 2(13. $he regional manager expects that sales in the first .uarter of 2(13 will increase by 1(6 over the same .uarter of the preceding year and will then increase by #6 for each succeeding .uarter in 2(13. $he corporate head office has re.uested that the regional manager maintain an inventory in dollars e.ual to 2#6 of the next .uarter=s sales. Auarterly purchases average ##6 of .uarterly sales. "udgeted ending inventory on 0ecember 31, 2(12 is 81&%,(((. Auarterly salaries are 82(,((( plus #6 of sales. All salaries are classified as sales salaries. 5ther .uarterly expenses are estimated to be as follows2 ;ent expense 0epreciation on office e.uipment 3tilities expense 1iscellaneous expenses 82!,((( 812,((( 83,%(( 26 of sales

$he income statement for the first .uarter of 2(12 was as follows2 ncome /tatement ?or the Auarter @nded 1arch 31, 2(12 /ales................................................................................................ 7ost of goods sold.............................................................................. >ross profit....................................................................................... 5perating expenses /ales salaries.............................................................................. ;ent expense.............................................................................. 0epreciation............................................................................... 3tilities...................................................................................... 1iscellaneous.............................................................................. $otal operating expenses....................................................... Det income........................................................................................

8&2(,((( 3-%,((( 32!,((( 8#2,((( 2!,((( 12,((( 3,%(( 12,)(( 1(!,!(( 821-,%((

In)tructi n) ,repare a budgeted .uarterly income statement in tabular form for the first .uarter of 2(13. 9/how computations.:

/ "urr, nc. provided the following information2 ,rojected sales ,rojected merchandise purchases 4uly 822(,((( 81#(,((( August 82%(,((( 81)(,(((

"urr estimates that it will collect !(6 of its sales in the month of sale, 3#6 in the month after the sale, and 226 in the second month following the sale. $hree percent of all sales are estimated to be bad debts. "urr pays 3(6 of merchandise purchases in the month purchased and &(6 in the following month. >eneral operating expenses are budgeted to be 82(,((( per month of which depreciation is 82,((( of this amount. "urr pays operating expenses in the month incurred. "urr ma<es loan payments of 83,((( per month of which 8!(( is interest and the remainder is principal.

In)tructi n) 7alculate "urr=s budgeted cash disbursements for August. 1# 7asa 0evelopment, nc. has budgeted sales revenues as follows2 4anuary ?ebruary 1arch April 1ay 4une "udgeted /ales ;evenues 8##,((( &#,((( -(,((( )(,((( %(,((( 3#,(((

,ast experience has indicated that )(6 of sales each month are on credit and that collection of credit sales occurs as follows2 %(6 in the month of sale, 3(6 in the month following the sale, and #6 in the second month following the sale. $he other #6 is uncollectible. In)tructi n) ,repare a schedule which shows expected cash receipts from sales for the months of April, 1ay, and 4une. 11 7ruises, nc. has budgeted sales revenues as follows2 7redit sales 7ash sales $otal sales 4une 813#,((( -(,((( 822#,((( 4uly 812#,((( 2##,((( 83)(,((( August 8 -(,((( 1-#,((( 82)#,(((

,ast experience indicates that %(6 of the credit sales will be collected in the month of sale and the remaining !(6 will be collected in the following month. ,urchases of inventory are all on credit and #(6 is paid in the month of purchase and #(6 in the month following purchase. "udgeted inventory purchases are2 4une 4uly August 83((,((( 2!(,((( 1(#,(((

5ther cash disbursements budgeted2 9a: selling and administrative expenses of 8!),((( each month, 9b: dividends of 81(3,((( will be paid in 4uly, and 9c: purchase of e.uipment in August for 83(,((( cash. $he company wishes to maintain a minimum cash balance of 8#(,((( at the end of each month. $he company borrows money from the ban< at %6 interest if necessary to maintain the minimum cash balance. "orrowed money is repaid in months when there is an excess cash balance. $he beginning cash balance on 4uly 1 was 8#(,(((. Assume that borrowed money in this case is for one month. In)tructi n) ,repare a cash budget for the months of 4uly and August. ,repare separate schedules for expected collections from customers and expected payments for purchases of inventory. 1" $he /unstate "an< has as<ed 0ell ,rinting 7o. for a budgeted balance sheet for the year ended 0ecember 31, 2(13. $he following information is available2 1. $he cash budget shows an expected cash balance of 8&#,((( at 0ecember 31, 2(13.

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$he 2(13 sales budget shows total annual sales of 8)((,(((. All sales are made on account and accounts receivable at 0ecember 31, 2(13 are expected to be 1(6 of annual sales. $he merchandise purchases budget shows budgeted cost of goods sold for 2(13 of 8%((,((( and ending merchandise inventory of 8-#,(((. 2(6 of the ending inventory is expected to have not yet been paid at 0ecember 31, 2(13. $he 0ecember 31, 2(12 balance sheet includes the following balances2 @.uipment 82-!,(((, Accumulated 0epreciation 8122,(((, 7ommon /toc< 82&(,(((, and ;etained @arnings 8!),(((. $he budgeted income statement for 2(13 includes the following2 depreciation on e.uipment 81#,(((, federal income taxes 821,(((, and net income 8!-,(((. $he income taxes will not be paid until 2(13. n 2(13, management does not expect to purchase additional e.uipment or to declare any dividends. t does expect to pay all operating expenses, other than depreciation, in cash.

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In)tructi n) ,repare an unclassified budgeted balance sheet at 0ecember 31, 2(13.