Master budgeting

1. Klein Co. has estimated sales in units for the third quarter of 1990 as follows: July, 4,000;
August, 9,000; and September, 7,500. Normally, Klein has a policy for ending inventory to be
5% of estimated sales for the following month. On July 1, however, Klein had overestimated
sales for June and had an ending inventory of 450 units. Prepare a production budget for Klein
Co. for the third quarter (by month and in total) of 1990 if October sales are expected to be
6,800 units.
June July August September October Third
quarter
Estimated
- 4,000 9,000 7,500 6,800 20,500
Sales
Beginning
- 450 450 375 340 450
Inventory
Ending 9,000*5% 7,500*5% 6,800 * 5% -
450 340
Inventory = 450 = 375 = 340
Estimated
- 4,000 8,925 7,465 - 20,390
Production

2. The sales budget for Cary Corp. shows the following sales projections (in units) for the
calendar year of 1991:
Jan. – March 420,000
Apr. – June 380,000
July – Sept. 500,000
Oct – Dec. 370,000
Total 1,670,000
Sales for the first quarter of 1992 are expected to be 450,000 units. The December 31, 1990,
inventory is budgeted to be 147,000 units. The quantity of finished goods inventory at the end
of each production period is scheduled to equal 35% of the next quarter’s budgeted sales in
units. Develop a production budget per quarter for 1991.
 1st quarter of 2nd quarter 3rd quarter of 4th quarter of Total
1991 of 1991 1991 1991
Estimated
420,000 380,000 500,000 370,000 1,670,000
Sales
Beginning
147,000 133,000 175,000 129,500 147,000
Inventory
Ending 380,000*35% 500,000*35% 370,000*35% 450,000*35%
157,500
Inventory = 133,000 = 175,000 = 129,500 = 157,500
Estimated
406,000 422,000 454,500 398,000 1,680,500
Production

3. Alpine Inc. has projected sales of 21,480 pairs of ski boots in September. It takes 2–1/2
linear feet of leather to make one pair of boots. The beginning inventories of leather and boots
are 2,500 yards and 1,154 pair, respectively. Because of high sales projections for the winter
months, Alpine wants to have 9,000 yards of leather and 3,800 pairs of boots at the end of
September. The leather comes in standard widths (to convert linear feet to yards, divide by 3).
If Alpine has no beginning or ending work in process, how many yards of leather must it
purchase in September?

Estimated Sales: 21,480 pairs of ski boots; 1 pair of boots needs 2.5 feet of leather
Estimated Sales in feet: 21,480 * 2.5 = 53,700 feet
Beginning Inventory: 2,500 yards + 1,154 pairs = 7,500 + 2,885 = 10,385 feet
Ending Inventory: 9,000 yards + 3,800 pairs = 27,000 + 9,500 = 36,500 feet
Projected production: 53,700 – 10,385 + 36,500 = 79,815 feet, which is equal to 26,605 yards.

4. Cork Company has budgeted 75,000 units of sales of its only product for May 1991. Each
unit of product requires three pounds of Material X ($6.50 per pound) and four pounds of
Material Y ($1.25 per pound). Actual beginning inventories and projected ending inventories
are as follows:
May l May 31
Finished goods (in units) 15,000 12,500
Material X (in pounds) 8,000 9,600
Material Y (in pounds) 12,300 12,500
a. How many pounds of Material X does Cork plan to purchase in May? What will be the cost
of those purchases?
Beginning FG + CGM – Ending FG = CGS
15,000 + CGM – 12,500 = 75,000
CGM = 72,500
72,500 units need 217,500 pounds of Material X and 290,000 pounds of Material Y.
Material X purchased in during the month: 217,500 – 8000 + 9,600 = 219,100
Material Y purchased in during the month: 290,000 – 12,300 + 12,500 = 290,200
Total cost: 219,100 * $6.5 + 290,200 * $1.25 = 1,424,150 + 362,750 = 1,786,900

b. How many pounds of Material Y does Cork plan to purchase in May? What will be the cost
of those purchases?
290,200 pounds of Material Y, which cost $362,750.

5. Zippo Company is in the process of developing its first quarter budget by month and is
having difficulty in determining its expected cash collections. Upon investigation, the
following actual and expected sales information was revealed:
November December January February March
$63,000 $58,000 $62,000 $73,000 $68,000
Tracing collections from prior-year monthly sales and discussions with the credit manager
helped develop the following profile of collection behavior patterns:
– Of a given month’s sales, 60% are typically collected in the month of sale. Since the
company terms are 1% EOM, net 30, all collections within the month of sale are net of the 1%
discount.
– 30% of a given month’s sales are collected in the month following the sale.
– The remaining 10% are collected in the second month following the month of the sale. Bad
debts are negligible and should be ignored.

a. Schedule Zippo’s collections by month for January, February, and March.

Sales January February March Total Discounts After quarter
63,000 6,300 - - 6,300 - -
58,000 17,400 5,800 - 23,200 - -
62,000 37,200 18,600 6,200 62,000 372 -
73,000 - 43,800 21,900 65,700 438 7,300
68,000 - - 40,800 40,800 408 27,200
b. Calculate the Accounts Receivable at March 31.
A/R balance 31/12
January collection from November sales 6,300
January collections from December sales 17,400
February collections from December sales 5,800
Balance: 29,500

A/R balance 31/3

Balance 31/12 29,500
Sales in Jan, Feb, Mar 203,000
Collections in Jan (- discounts) (60,528)
Collections in Feb (-discounts) (67,762)
Collection is Mar (- discounts) (68,492)
Balance: 35,718
Account receivable is equal to the amount collectible after the end of the quarter + discounts.
7,300 + 27,200 = 34,500 + 1,218 = 35,718

6. The Accounts Receivable balance at October 1, 1991, for Klaus & Klaus, CPAs, was
$606,900. Of that balance, $450,000 represents remaining Accounts Receivable from
September billings. The normal collection pattern for the firm is 20% of billings in the month
of service, 55% in the month after service, and 22% in the second month following service.
The remaining billings are uncollectible. October billings are expected to be $700,000.

Sales Aug Sep Oct Total Uncollectible After

quarter
Aug: x 0.2x 0.55x 0.22x 0.97x 0.03x -
Sep :y - 0.2y 0.55y 0.57y 0.03y 0.4y
140,00 140,00 21,000
700,000 - - 539,000
0 0
450,000 = 0.8y; y = 562,500
x + y – 0.75x – 0.2y = 606,900
0.25x + 450,000 = 606,900
0.25x = 156,900; x = 627,600

a. What were August billings for Klaus & Klaus?

$627,600
b. What amount of September billings are expected to be uncollectible?
562,500 * 0.03 = $16,875
c. What are projected cash collections in October 1991 for the firm?
0.22*627,600 + 0.55*562,500 + 140,000 = 138,072 + 309,375 + 140,000 = $587,447

7. The accountant for Grayland Inc. is concerned about the amount of cash that will be
collected in October 1991, because the company is planning a major capital expenditure in
November. She has reviewed the collection experience for the past several months and
prepared the following credit sales analysis:
Cash collected from current month’s sales 18%
Cash collected from prior month’s sales 65%
Cash collected from sales 2 months ago 14%
Uncollectible 3%
The company has estimated sales for August, September, and October of $400,000, $300,000,
and $360,000, respectively. Prepare a schedule showing cash collections during October
1991.

Sales Aug Sep Oct Total Uncollectible After

quarter
388,00 12,000
400,000 72,000 260,000 56,000 -
0
195,00 249,00 9,000
300,000 - 54,000 42,000
0 0
360,000 - - 64,800 64,800 10,800 284,400
Total cash collections in October: 56,000 + 195,000 + 64,800 = $315,800

8. Rex Company is developing a forecast of June 1991 cash receipts from sales. Total sales
for June 1991 are expected to be $450,000. Of each month’s sales, 80% is expected to be on
credit. The Accounts Receivable balance at May 31, 1991, is $290,000. Of that amount,
$245,000 represents the balance of May credit sales. There are no receivables from months
prior to April 1991. Rex has an established collection pattern for credit sales of 30% in the
month of sale, 50% in the month following the sale, and 20% in the second month following
the sale. Rex has no uncollectible accounts.
Sales in April: x; Sales in May: y; Sales in June: 450,000
x + y – 0.2x (collected in cash) – 0.2y – 0.3*0.8x (collected in April) – 0.5*0.8x (collected in
May) – 0.3*0.8y = 290,000
0.16x = 45,000; x = 281,250
0.56y = 245,000; y = 437,500
a. What were total sales for April 1991?
$281,250

b. What were credit sales for May 1991?

437,500*0.8 = 350,000
c. What are projected cash collections for June 1991?
281,250*0.8*0.2 + 350,000*0.5 + 450,000*0.2 + 450,000*0.8*0.3 = 45,000 + 175,000 +
90,000 + 108,000 = $418,000
d. What will be the balance of Accounts Receivable at June 30, 1991?
Sales altogether: 1,168,750
Cash collected in April (123,970)
(281,750*0.2 + 281,750*0.8*0.3)
Cash collection is May (305,200)
(281,750*0.8*0.5 + 437,500*0.2 + 350,000*0.3)
Cash collection in June (418,000)
A/R balance 30/06 $321,580

9. The following four independent situations are related to cash budgeting:

a. Sussex Company has budgeted operations for February 1991. No change in inventory level
during the month is planned. Selected data from estimated amounts are as follows:
Net loss $100,000
Increase in Accounts Payable 40,000
Depreciation expense 35,000
Decrease in Accounts Receivable 60,000
Purchase of office equipment on 45-day note payable 15,000
Provision for estimated warranty liability 10,000
What is the projected change in the cash balance for February?
(100,000) + 40,000 + 35,000 + 60,000 + 15,000 – 10,000 = $40,000
b. Mapes Corp. has estimated January 1991 activity and has provided the following
information from those estimates:
Sales $1,400,000
Gross profit (based on sales) 30%
Increase in Accounts Receivables $ 40,000
Increase in inventory during month $ 20,000
There is no projected change in Accounts Payable for the month. Variable selling, general, &
administrative expenses (SG&A) include a charge for uncollectible accounts of 1% of sales.
Total SG&A is $142,000 per month plus 15% of sales. Depreciation expense of $80,000 per
month is included in fixed SG&A.
What are the estimated cash disbursements for January 1991?
420,000 + (40,000) + (20,000) + (14,000) + (48,000) + (210,000) = $88,000
Cash coll. – A/R increase – Inv. increase – Uncoll. – SG&A (without depr.) – 15% of sales

c. Farmer Corp. projects the following transactions for 1991, its first year of operations:
Proceeds from issuing common stock $1,000,000
Sales on account 2,200,000
Collections on Accounts Receivable 1,800,000
Cost of Goods Sold 1,400,000
Disbursements for purchases of inventory and expenses 1,200,000
Disbursements for income taxes 250,000
Disbursements for purchases of fixed assets 800,000
Depreciation on fixed assets 150,000
Proceeds from borrowings 700,000
Payments on borrowings 80,000
What is the company’s projected cash balance at December 31, 1991?
Net income: 550,000 (Sales – CGS – Taxes)
550,000 – 1,200,000 (inventory) + 700,000 (borrowing) – 80,000 (borrowing paid back) =
120,000
120,000 – 800,000 (purchase of fixed assets) + 1,000,000 (stock issue) = 320,000
320,000 – 400,000 (A/R increase) = ($80,000)
d. Brown Manufacturing uses the following flexible budget formula to estimate its annual
maintenance costs in the Finishing Department:
Total Cost = $7,200 + $.60 per Machine Hour
Brown is projecting the use of 20,000 machine hours during January 1991. Included in the
maintenance cost is $2,700 of annual depreciation expense.
What is Brown’s total estimated maintenance cost for January? Its cash maintenance cost?
Total cost per month = $600 + $0.6 per Machine Hour
$600 + 0.6*20,000 + $225 (depreciation per month) = $12,825
$7,200 + 0.6*20,000*12 + $2,700 = 9,900 + 144,000 = $153,900

10. Randall Ltd. has prepared a forecast for May 1991. Some of the projected information
follows:
Income after taxes $250,000
Accrued income tax expense 72,000
Increase in gross Accounts Receivable for month 41,000
Decrease in Accounts Payable for month 18,300
Depreciation expense 71,200
Estimated bad debts expense 13,100
Dividends declared 20,000

Using the preceding information, what is Randall’s projected increase in cash for May 1991?
250,000 + 72,000 – 41,000 – 18,300 + 71,200 - 13,100 – 20,000 = $300,800
Income + Accrued tax – A/R increase – A/P decrease + Depr. – Bad debt – dividend

11. In trying to decide whether it was feasible for the company to declare a cash dividend for
April 1991, Sally Ann Roberts (the president of Monique, Inc.) requested information on
projected cash disbursements for that month. She received the following information from her
new accountant:
Sales for April $6,000,000
Gross profit on sales 30%
Wages expense for April 1,350,000
Other cash expenses for April 921,000
Decrease in A/P during April 130,000
Decrease in inventory during April 95,000
Not understanding how the preceding information could help her compute cash disbursements
she called the accountant and asked him to show her how to compute cash disbursements
from the figures he had provided. If all significant data are given, what are projected cash
disbursements for April?
1,350,000 + 921,000 + 130,000 – 95,000 = $2,306,000

12. The accountant for Mickey & Minnie, a fast-food chain, prepared the following cash
budget for the second quarter of 1991. When the owner was reviewing the budget, he was
eating a sandwich. Unfortunately, some of the dressing from the sandwich spilled onto the
page and smeared the figures. Complete the missing numbers on the cash budget, assuming
that the accountant has projected a minimum cash balance at the start of each month of
$2,500. All borrowings, repayments, and investments are made in even $500 amounts.

April May June Total

Beginning cash balance 2,500 2,900 2,600 2,800
Cash receipts 8,200 10,100 18,400 36,400
Total cash available 10,700 13,000 21,000 39,200
Cash disbursement
Payments on account 1,300 3,900 5,700 10,900
Wages expense 5,000 5,900 6,100 17,000
Overhead cost 4,000 4,600 4,400 13,000
Total disbursement 10,300 14,400 16,200 40,900
Cash excess 400 (1,400) 4,800 (1,700)
Minimum cash balance (2,500) (2,500) (2,500) (2,500)
Cash available (2,100) (3,900) 2,300 (4,200)
Financing
Borrowings
2,500 4,000 (2,000) 4000
(repayments)
Acquire (sell)
- - 0 500
investments
Receive (pay) interest - - 0 (50)
Ending cash balance 2,900 2,600 2,800 2,750

13. Molly Corporation has estimated the following items for July 1991:
Sales 2,000,000
Cost of goods sold percentage 65%
Increase in Accounts Receivable during July 80,000
Decrease in inventory during July 10,000
There will be no expected change in the Accounts Payable balance during July. Variable
selling, general, and administrative costs normally amount to 20% of sales dollars; fixed
SG&A charges each month are $150,000. The fixed SG&A costs include $15,000 of
depreciation each month.

a. What are total estimated SG&A costs for July?

2,000,000*0.2 + 150,000 = 400,000 + 150,000 = $550,000

b. What is estimated gross profit for July?

2,000,000 – CGS (2,000,000 * 0.65) = 2,000,000 * 0.35 = $700,000

c. How many dollars of cash collections are expected in July?

700,000 – 80,000 + 10,000 = $630,000
Profit – A/R increase + Inventory decrease

d. What are expected cash disbursements for July?

SG&A – depreciation = 550,000 – 15,000 = $535,000