CHAPTER BUDGETARY PLANNING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item SO BT Item SO BT 1 1 1 2 K C C C C K K K 10 11 12 13 14 15 16 2 2 2 C C C C K K C K Item SO BT Item SO BT 5 6 K C C K C C K K 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 5 5 5 5 5 5 5 5 5 5 6 155 156 5 Item SO BT 33 34 sg 35 sg 36 3 K K K C K C AP AP AP K AP K C AP C AP AP AP AP AP AP AP AP AP AP C K 129 130 131 132 133 134 135 136 st 137 sg 138 st 139 sg 140 st 141 sg 142 st 143 sg 144 st 145 sg 146 sg 147 sg 148 6 6 6 6 1 2 3 5 6 C C C C C C C C K K K K K AP K AP K AP K K AP AP 157 158 5 AP AP True-False Statements 17 18 19 20 21 22 23 24 3 3 3 3 K C C C C K C C 25 26 27 28 29 30 sg 31 sg 32 sg sg Multiple Choice Questions 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 1 1 1 2 2 2 2 2 2 2 2 K K K C C C K C C C C C C C C K K K K K K K C 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 2 3 3 3 3 3 3 3 3 3 3 C AP K AP C C K C C C K C AN C K K AP AP AP AP AP AP AP 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 3 3 3 3 3 3 3 3 4 5 C C K C C AP AP AP AP AP AP AP AP AP AP AP AP C K K C K C Brief Exercises 149 150 sg st 3 AP AP 151 152 3 AP AP 153 154 5 AP AP This question also appears in the Study Guide This question also appears in a self-test at the student companion website 9-2 Test Bank for ISV Managerial Accounting, Fourth Edition SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 159 160 161 162 163 3 3 AP AP AP AP AP 164 165 166 167 168 3 3 AP AP AP C AP 169 170 171 172 173 4 5 AP AP AP AP AP 174 175 176 177 178 5 5 AP AP C AP AP K K K 179 180 AP C Completion Statements 181 182 183 1 K K K 184 185 186 2 K K K 187 188 189 3 K K K 190 191 192 SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item TF TF TF TF TF TF 31 37 38 10 11 12 TF TF TF TF TF TF 13 14 15 32 43 44 TF TF TF TF MC MC 45 46 47 48 49 50 16 17 18 19 20 21 22 23 24 33 TF TF TF TF TF TF TF TF TF TF 34 35 62 63 64 65 66 67 68 69 TF TF MC MC MC MC MC MC MC MC 70 71 72 73 74 75 76 77 78 79 25 TF 100 MC 101 26 27 102 103 104 TF TF MC MC MC 107 108 109 110 111 MC MC MC MC MC 114 115 116 117 118 Type Item Type Item Study Objective TF 39 MC 42 MC 40 MC 137 MC 41 MC 138 Study Objective MC 51 MC 57 MC 52 MC 58 MC 53 MC 59 MC 54 MC 60 MC 55 MC 61 MC 56 MC 139 Study Objective MC 80 MC 90 MC 81 MC 91 MC 82 MC 92 MC 83 MC 93 MC 84 MC 94 MC 85 MC 95 MC 86 MC 96 MC 87 MC 97 MC 88 MC 98 MC 89 MC 99 Study Objective MC 102 MC 143 Study Objective MC 121 MC 145 MC 122 MC 146 MC 123 MC 153 MC 124 MC 154 MC 125 MC 155 Type Item Type Item Type MC MC MC 181 182 C C MC MC MC MC MC MC 140 183 184 185 186 187 MC C C C C C MC MC MC MC MC MC MC MC MC MC 141 142 149 150 151 152 159 160 161 162 MC MC BE BE BE BE Ex Ex Ex Ex 163 164 165 166 167 168 169 188 189 190 Ex Ex Ex Ex Ex Ex Ex C C C MC 170 Ex 171 Ex MC MC BE BE BE 158 172 173 174 175 BE Ex Ex Ex Ex 178 179 191 Ex Ex C Budgetary Planning 105 106 MC MC 112 113 MC MC 119 120 28 29 30 TF TF TF 36 127 128 TF MC MC 129 130 131 Note: TF = True-False MC = Multiple Choice MC 126 MC 156 MC 144 MC 157 Study Objective MC 132 MC 135 MC 133 MC 136 MC 134 MC 147 BE BE 176 177 Ex Ex MC MC MC 148 180 192 MC Ex C BE = Brief Exercise Ex = Exercise 9-3 C = Completion The chapter also contains one set of ten Matching questions and four Short-Answer Essay questions CHAPTER STUDY OBJECTIVES Identify the benefits of budgeting The primary advantages of budgeting are that it (a) requires management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater management awareness, and (f) motivates personnel to meet planned objectives State the essentials of effective budgeting The essentials of effective budgeting are (a) sound organizational structure, (b) research and analysis, and (c) acceptance by all levels of management Identify the budgets that comprise the master budget The master budget consists of the following budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manufacturing overhead, (f) selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash budget, and (j) budgeted balance sheet Describe the sources for preparing the budgeted income statement The budgeted income statement is prepared from (a) the sales budget, (b) the budgets for direct materials, direct labor, and manufacturing overhead, and (c) the selling and administrative expense budget Explain the principal sections of a cash budget The cash budget has three sections (receipts, disbursements, and financing) and the beginning and ending cash balances Indicate the applicability of budgeting in nonmanufacturing companies Budgeting may be used by merchandisers for development of a master budget In service enterprises budgeting is a critical factor in coordinating staff needs with anticipated services In not-forprofit organizations, the starting point in budgeting is usually expenditures, not receipts 9-4 Test Bank for ISV Managerial Accounting, Fourth Edition TRUE-FALSE STATEMENTS Budgets are statements of management's plans stated in financial terms A benefit of budgeting is that it provides definite objectives for evaluating performance A budget can be a means of communicating a company's objectives to external parties A budget can be used as a basis for evaluating performance A well-developed budget can operate and enforce itself The budget itself and the administration of the budget are the responsibility of the accounting department Effective budgeting requires clearly defined lines of authority and responsibility The flow of input data for budgeting should be from the highest levels of responsibility to the lowest Budgets can have a positive or negative effect on human behavior depending on the manner in which the budget is developed and administered 10 A budget can facilitate the coordination of activities among the segments of a large company 11 The longer the budget period, the more reliable the estimates of future outcomes 12 The budget committee has the responsibility for coordinating the preparation of the budget 13 The budget is developed within the framework of a sales forecast 14 Budgeting and long-range planning are two terms that describe the same process 15 Long-range plans are used more as a review of progress toward long-term goals rather than an evaluation of specific results to be achieved 16 The master budget reflects management's long-term plans encompassing five years or more 17 The master budget consists of operating and financial budgets 18 Financial budgets must be completed before the operating budgets can be prepared 19 The direct materials budget must be completed before the production budget because the quantity of materials available for production must be known 20 The number of direct labor hours needed for production is obtained from the production budget 21 A manufacturing overhead budget is not needed if the company develops a predetermined overhead rate to apply overhead Budgetary Planning 9-5 22 The manufacturing overhead budget generally has separate sections for variable, mixed, and fixed costs 23 A production budget should be prepared before the sales budget 24 The direct materials budget contains both quantity and cost data 25 The budgeted income statement indicates the expected profitability of operations for the next year 26 If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month 27 The budgeted balance sheet is prepared entirely from the budgets for the current year 28 The starting point when budgeting for a not-for-profit organization is generally to budget expenditures first 29 A merchandiser has a merchandise purchases budget rather than a production budget 30 A critical factor in budgeting for a service firm is to determine the amount of products to purchase Additional True-False Questions 31 The budget itself and the administration of the budget are entirely accounting responsibilities 32 Financial planning models and statistical and mathematical techniques may be used in forecasting sales 33 The direct materials budget is derived from the direct materials units required for production plus desired ending direct materials units less beginning direct materials units 34 The manufacturing overhead budget shows the expected manufacturing overhead costs 35 In order to develop a budgeted balance sheet, the previous year's balance sheet is needed 36 In service enterprises, the critical factor in budgeting is coordinating materials and equipment with anticipated services Answers to True-False Statements Item Ans T T F T F F Item 10 11 12 Ans T F T T F T Item 13 14 15 16 17 18 Ans T F T F T F Item 19 20 21 22 23 24 Ans F T F F F T Item 25 26 27 28 29 30 Ans T F F T T F Item 31 32 33 34 35 36 Ans F T T T T F 9-6 Test Bank for ISV Managerial Accounting, Fourth Edition MULTIPLE CHOICE QUESTIONS 37 Why are budgets useful in the planning process? a They provide management with information about the company's past performance b They help communicate goals and provide a basis for evaluation c They guarantee the company will be profitable if it meets its objectives d They enable the budget committee to earn their paycheck 38 A budget a is a substitute for management b is an aid to management c can operate or enforce itself d is the responsibility of the accounting department 39 Accounting generally has the responsibility for a setting company goals b expressing the budget in financial terms c enforcing the budget d administration of the budget 40 Which one of the following is not a benefit of budgeting? a It facilitates the coordination of activities b It provides definite objectives for evaluating performance c It provides assurance that the company will achieve its objectives d It requires all levels of management to plan ahead on a recurring basis 41 Budgeting is usually most closely associated with which management function? a Planning b Directing c Motivating d Controlling 42 Which of the following items does not follow from the adoption of a budget? a Promote efficiency b Deterrent to waste c Basis for performance evaluation d Guarantee of accomplishing the profit objective 43 Which is true of budgets? a They are voted on and approved by stockholders b They are used in the planning, but not in the control, process c There is a standard form and structure for budgets d They are used in performance evaluation 44 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 Budgetary Planning 9-7 45 If budgets are to be effective, all of the following must be present except a acceptance at all levels of management b research and analysis in setting realistic goals c stockholders' approval of the budget d sound organizational structure 46 If budgets are to be effective, there must be a a history of successful operations b independent verification of budget goals c an organizational structure with clearly defined lines of authority and responsibility d excess plant capacity 47 It is important that budgets be accepted by a division managers b department heads c supervisors d all of these 48 Which of the following statements about budget acceptance in an organization is true? a The most widely accepted budget by the organization is the one prepared by top management b The most widely accepted budget by the organization is the one prepared by the department heads c Budgets are hardly ever accepted by anyone except top management d Budgets have a greater chance of acceptance if all levels of management have provided input into the budgeting process 49 Top management notices a variation from budget and an investigation of the difference reveals that the department manager could not be expected to have controlled the variation Which of the following statements is applicable? a Department managers should be held accountable for all variances from budgets for their departments b Department managers should only be held accountable for controllable variances for their departments c Department managers should be credited for favorable variances even if they are beyond their control d Department managers' performances should not be evaluated based on actual results to budgeted results 50 An unrealistic budget is more likely to result when it a has been developed in a top down fashion b has been developed in a bottom up fashion c has been developed by all levels of management d is developed with performance appraisal usages in mind 51 A budget is most likely to be effective if a it is used to assess blame when things not occur according to plans b it is not used to evaluate a manager's performance c employees and managers at the lower levels not get involved in the budgeting process d it has top management support 9-8 Test Bank for ISV Managerial Accounting, Fourth Edition 52 In many companies, responsibility for coordinating the preparation of the budget is assigned to a the company's independent certified public accountants b the company's internal auditors c the company's board of directors d a budget committee 53 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 54 If 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 55 The most common budget period is a one month b three months c six months d one year 56 Budget 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 57 The budget committee would not normally include the a research director b treasurer c sales manager d external auditor 58 The budget committee in a company is often headed by the a president b controller c treasurer d budget director 59 Long-range planning a generally presents more detailed information than an annual budget b generally encompasses a longer period of time than an annual budget c is usually more accurate than an annual budget d is prepared on a quarterly basis if the budget is prepared on a quarterly basis Budgetary Planning 9-9 60 Long-range planning usually encompasses a period of at least a six months b year c years d 10 years 61 Which of the following is not a proper match-up? a Long range planning  Strategies b Budgeting  Short-term goals c Long-range planning  years d Budgeting  Long-term goals 62 Which is the last step in developing the master budget? a Preparing the budgeted balance sheet b Preparing the cost of goods manufactured budget c Preparing the budgeted income statement d Preparing the cash budget 63 If there were 70,000 pounds of raw materials on hand on January 1, 140,000 pounds are desired for inventory at January 31, and 420,000 pounds are required for January production, how many pounds of raw materials should be purchased in January? a 350,000 pounds b 560,000 pounds c 280,000 pounds d 490,000 pounds 64 The total direct labor hours required in preparing a direct labor budget are calculated using the a sales forecast b production budget c direct materials budget d sales budget 65 The direct materials and direct labor budgets provide information for preparing the a sales budget b production budget c manufacturing overhead budget d cash budget 66 A sales forecast a shows a forecast for the firm only b shows a forecast for the industry only c shows forecasts for the industry and for the firm d plays a minor role in the development of the master budget 67 Which of the following is not an operating budget? a Direct labor budget b Sales budget c Production budget d Cash budget - 10 Test Bank for ISV Managerial Accounting, Fourth Edition 68 Which of the following is not a financial budget? a Capital expenditure budget b Cash budget c Manufacturing overhead budget d Budgeted balance sheet 69 Which of the following is done to improve the reliability of the sales forecast? a Employ financial planning models b Lengthen the planning horizon to more than a year c Rely solely on outside consultants d Use the sales forecasts from the previous year 70 The financial budgets include the a cash budget and the selling and administrative expense budget b cash budget and the budgeted balance sheet c budgeted balance sheet and the budgeted income statement d cash budget and the production budget 71 The culmination of preparing operating budgets is the a budgeted balance sheet b production budget c cash budget d budgeted income statement 72 The following information is taken from the production budget for the first quarter: Beginning inventory in units Sales budgeted for the quarter Capacity in units of production facility 900 342,000 354,000 How many finished goods units should be produced during the quarter if the company desires 2,400 units available to start the next quarter? a 343,500 b 340,500 c 355,500 d 344,400 73 An overly optimistic sales budget may result in a increases in selling prices late in the year b insufficient inventories c increased sales during the year d excessive inventories 74 In a production budget, total required units are the budgeted sales units plus a beginning finished goods units b desired ending finished goods units c desired ending finished goods units plus beginning finished goods units d desired ending finished goods units minus beginning finished goods units - 36 Test Bank for ISV Managerial Accounting, Fourth Edition Ex 167 For each item given, identify the budget in which it will appear If an item will appear on more than one budget, then indicate as many budgets as are relevant Budget Code: DM DL P S C BBS BIS SA MOH Direct Materials Budget Direct Labor Budget Production Budget Sales Budget Cash Budget Budgeted Balance Sheet Budgeted Income Statement Selling and Administrative Expense Budget Manufacturing Overhead Budget Ending cash balance Total selling and administrative expenses Total sales (in dollars) Interest expense Ending raw materials inventory (in dollars) Ending finished goods inventory (in dollars) Solution 167 BBS, C SA, BIS S, BIS C, BIS BBS, DM BBS, BIS (10–13 min.) Ending cash balance Total selling and administrative expenses Total sales (in dollars) Interest expense Ending raw materials inventory (in dollars) Ending finished goods inventory (in dollars) Ex 168 Hease Company is preparing its master budget for 2008 Relevant data pertaining to its sales budget are as follows: Sales for the year are expected to total 6,000,000 units Quarterly sales are 25%, 30%, 15%, and 30%, respectively The sales price is expected to be $2.00 per unit for the first quarter and then be increased to $2.30 per unit in the second quarter Instructions Prepare a sales budget for 2008 for Hease Company Budgetary Planning Solution 168 - 37 (9–14 min.) HEASE COMPANY Sales Budget For the Year Ended December 31, 2008 Quarter Unit sales Unit selling price Total sales 1,500,000 × $2.00 $3,000,000 1,800,000 × $2.30 $4,140,000 900,000 × $2.30 $2,070,000 1,800,000 × $2.30 $4,140,000 Year 6,000,000 Var $13,350,000 Ex 169 Neeley Company combines its operating expenses for budget purposes in a selling and administrative expense budget For the first quarter of 2008, the following data are developed: Sales: 20,000 units; unit selling price: Variable costs per dollar of sales: Sales commissions Delivery expense Advertising Fixed costs per quarter: Sales salaries Office salaries Depreciation Insurance Property taxes $35 6% 2% 4% $24,000 17,000 6,000 2,000 1,000 Instructions Prepare a selling and administrative expense budget for the first quarter of 2008 Solution 169 (12–17 min.) NEELEY COMPANY Selling and Administrative Expense Budget For the Quarter Ended March 31, 2008 Variable expenses Sales commissions ($700,000 × 6%) Delivery expense ($700,000 × 2%) Advertising ($700,000 × 4%) Total variable Fixed expenses Sales salaries Office salaries Depreciation Insurance Property taxes Total fixed Total selling and administrative expenses $ 42,000 14,000 28,000 84,000 $ 24,000 17,000 6,000 2,000 1,000 50,000 $134,000 Test Bank for ISV Managerial Accounting, Fourth Edition - 38 Ex 170 The Northeast Regional Division of Hight Wholesale Corporation has been requested to prepare a quarterly budgeted income statement for 2009 The regional manager expects that sales in the first quarter of 2009 will increase by 10% over the same quarter of the preceding year and will then increase by 5% for each succeeding quarter in 2009 The corporate head office has requested that the regional manager maintain an inventory in dollars equal to 25% of the next quarter's sales Quarterly purchases average 55% of quarterly sales Budgeted ending inventory on December 31, 2008 is $132,000 Quarterly salaries are $15,000 plus 5% of sales All salaries are classified as sales salaries Other quarterly expenses are estimated to be as follows: Rent expense Depreciation on office equipment Utilities expense Miscellaneous expenses $18,000 $9,000 $2,700 2% of sales The income statement for the first quarter of 2008 was as follows: Income Statement For the Quarter Ended March 31, 2008 Sales Cost of goods sold Gross profit Operating expenses Sales salaries Rent expense Depreciation Utilities Miscellaneous Total operating expenses Net income $480,000 264,000 216,000 $39,000 18,000 9,000 2,700 9,600 78,300 $137,700 Instructions Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2009 (Show computations.) Solution 170 (18–23 min.) HIGHT WHOLESALE CORPORATION Northeast Regional Division Budgeted Income Statement For the Quarter Ended March 31, 2009 Sales (1) Cost of goods sold (2) Gross profit Operating expenses Sales salaries (3) Rent expense Depreciation Utilities Miscellaneous (4) Total operating expenses Net income $528,000 283,800 244,200 41,400 18,000 9,000 2,700 10,560 81,660 $162,540 Budgetary Planning Solution 170 (1) (2) (3) (4) - 39 (cont.) Sales Qtr $480,000 × 110% = $528,000 Cost of goods sold Beginning inventory Purchases ($528,000 × 55% = $290,400) Cost of goods available Ending inventory ($528,000 × 105% = $554,400 × 25% = $138,600) Cost of goods sold Sales salaries: $15,000 + ($528,000 × 05) = $41,400 Miscellaneous expenses: $528,000 × 02 = $10,560 $132,000 290,400 422,400 138,600 $283,800 Ex 171 In September 2008, the budget committee of Stein Company assembles the following data: Expected Sales October $900,000 November 850,000 December 800,000 Cost of goods sold is expected to be 60% of sales Desired ending merchandise inventory is 20% of the next month's cost of goods sold The beginning inventory at October will be the desired amount Instructions Prepare the budgeted income statement for October through gross profit on sales, including a cost of goods sold schedule Solution 171 (16–21 min.) STEIN COMPANY Budgeted Income Statement For the Month Ended October 31, 2008 Sales Cost of goods sold Inventory, October Purchases Cost of goods available for sale Less: Inventory, October 31 Cost of goods sold Gross profit Supporting Computations: Budgeted cost of goods sold (1) Desired ending merchandise inventory (2) Total Less: Beginning merchandise inventory (3) Budgeted merchandise purchases October (1) $900,000 × 60% = $540,000 (2) ($850,000 × 60%) × 20% = $102,000 (3) $540,000 × 20% = $108,000 $900,000 $108,000 534,000 642,000 102,000 540,000 $360,000 $540,000 102,000 642,000 108,000 $534,000 Test Bank for ISV Managerial Accounting, Fourth Edition - 40 Ex 172 Rivera, Inc provided the following information: Projected sales Projected merchandise purchases July $110,000 $75,000 August $130,000 $90,000  Rivera estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale Three percent of all sales are estimated to be bad debts  Rivera pays 30% of merchandise purchases in the month purchased and 70% in the following month  General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000 of this amount Rivera pays operating expenses in the month incurred  Rivera makes loan payments of $3,000 per month of which $400 is interest and the remainder is principal Instructions Calculate Rivera's budgeted cash disbursements for August Solution 172 (8 min.) Cash paid for merchandise purchases: August purchases: $90,000 × 30% July purchases: $75,000 × 70% Cash paid for operating expenses ($20,000 – $2,000) Cash paid for loan ($3,000 – $400) Cash paid for interest Budgeted cash disbursements for August $ 27,000 52,500 18,000 2,600 400 $100,500 Ex 173 Scott Company has budgeted sales revenues as follows: January February March April May June Budgeted Sales Revenues $55,000 75,000 90,000 60,000 45,000 35,000 Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale The other 5% is uncollectible Instructions Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June Budgetary Planning Solution 173 - 41 (20–25 min.) SCOTT COMPANY Expected Cash Receipts from Sales For the Quarter Ended June 30 April February sales Credit sales: ($75,000 × 80 × 05) May June $ 3,000 March sales Credit sales: ($90,000 × 80 × 30) ($90,000 × 80 × 05) 21,600 $ 3,600 April sales Credit sales: ($60,000 × 80 × 60) ($60,000 × 80 × 30) ($60,000 × 80 × 05) Cash sales: ($60,000 × 20) 28,800 14,400 $ 2,400 12,000 May sales Credit sales: ($45,000 × 80 × 60) ($45,000 × 80 × 30) Cash sales: ($45,000 × 20) 21,600 10,800 9,000 June sales Credit sales: ($35,000 × 80 × 60) Cash sales: ($35,000 × 20) Total cash receipts $65,400 $48,600 16,800 7,000 $37,000 Ex 174 Farley Company has budgeted sales revenues as follows: June $135,000 90,000 $225,000 Credit sales Cash sales Total sales July $145,000 255,000 $400,000 August $ 90,000 195,000 $285,000 Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase Budgeted inventory purchases are: June July August $300,000 250,000 105,000 Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month, (b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000 cash - 42 Ex 174 Test Bank for ISV Managerial Accounting, Fourth Edition (cont.) The company wishes to maintain a minimum cash balance of $50,000 at the end of each month The company borrows money from the bank at 8% interest if necessary to maintain the minimum cash balance Borrowed money is repaid in months when there is an excess cash balance The beginning cash balance on July was $50,000 Assume that borrowed money in this case is for one month Instructions Prepare a cash budget for the months of July and August Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory Solution 174 (25–35 min.) FARLEY COMPANY Cash Budget For the Two Months of July and August Beginning cash balance Add: Receipts Collections from customers Cash sales Total receipts Total available cash Less: Disbursements Purchases Selling and administrative expenses Dividends Equipment purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance July $ 50,000 August $ 50,000 141,000 255,000 396,000 446,000 112,000 195,000 307,000 357,000 275,000 48,000 103,000 177,500 48,000 426,000 20,000 30,000 255,500 101,500 30,000 $ 50,000 (30,200)* $ 71,300 *30,000 × 8% × 1/12 = $200 + $30,000 = $30,200 Schedule of Expected Collections from Customers Credit sales June (135,000 × 40%) July ($145,000) August ($90,000) Total collections July $ 54,000 87,000 $141,000 August $ 58,000 54,000 $112,000 Schedule of Expected Payments for Purchases of Inventory Inventory purchases June ($300,000) July ($250,000) August ($105,000) Total payments July $150,000 125,000 $275,000 August $125,000 52,500 $177,500 Budgetary Planning - 43 Ex 175 Farris Co.’s projected sales are as follows: August September October $240,000 $270,000 $330,000 Farris estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale Two percent of all sales are estimated to be bad debts Instructions How much are Farris Co.'s budgeted cash receipts for October? Solution 175 (8 min.) Collections from October sales: $330,000 × 30% Collections from September sales: $270,000 × 50% Collections from August sales: $240,000 × 18% Total budgeted cash receipts for October $ 99,000 135,000 43,200 $277,200 Ex 176 The City National Bank has asked Mackey, Inc for a budgeted balance sheet for the year ended December 31, 2008 The following information is available: The cash budget shows an expected cash balance of $75,000 at December 31, 2008 The 2008 sales budget shows total annual sales of $900,000 All sales are made on account and accounts receivable at December 31, 2008 are expected to be 10% of annual sales The merchandise purchases budget shows budgeted cost of goods sold for 2008 of $600,000 and ending merchandise inventory of $105,000 20% of the ending inventory is expected to have not yet been paid at December 31, 2008 The December 31, 2007 balance sheet includes the following balances: Equipment $294,000, Accumulated Depreciation $120,000, Common Stock $270,000, and Retained Earnings $48,000 The budgeted income statement for 2008 includes the following: depreciation on equipment $15,000, federal income taxes $24,000, and net income $66,000 The income taxes will not be paid until 2009 In 2008, management does not expect to purchase additional equipment or to declare any dividends It does expect to pay all operating expenses, other than depreciation, in cash Instructions Prepare an unclassified budgeted balance sheet at December 31, 2008 Test Bank for ISV Managerial Accounting, Fourth Edition - 44 Solution 176 (20–25 min.) MACKEY, INC Budgeted Balance Sheet December 31, 2008 Assets Cash Accounts receivable Merchandise inventory Equipment $294,000 Less: Accumulated depreciation ($120,000 + $15,000) 135,000 Total assets Liabilities and Stockholders' Equity Accounts payable Income taxes payable Common stock Retained earnings Total liabilities and stockholders' equity $ 75,000 90,000 105,000 159,000 $429,000 $ 21,000 24,000 270,000 114,000 $429,000 Ex 177 The management of Horton Company estimates that credit sales for August, September, October, and November will be $270,000, $375,000, $420,000, and $240,000, respectively Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale 25% 60% 10% Instructions Determine the collections from customers in October and November Show all computations Solution 177 (13–18 min.) Collections from Customers August Sales ($270,000 × 10) September Sales ($375,000 × 60) ($375,000 × 10) October Sales ($420,000 × 25) ($420,000 × 60) November Sales ($240,000 × 25) Total collections October $ 27,000 November $ -0- 225,000 37,500 105,000 252,000 -0$357,000 60,000 $349,500 Budgetary Planning - 45 Ex 178 The beginning cash balance is $20,000 Sales are forecasted at $800,000 of which 80% will be on credit 70% of credit sales are expected to be collected in the year of sale Cash expenditures for the year are forecasted at $500,000 Accounts receivable from previous accounting periods totaling $12,000 will be collected in the current year The company is required to make a $20,000 loan payment and an annual interest payment on the last day of the year The loan balance as of the beginning of the year is $120,000, and the annual interest rate is 10% Instructions How much will be reported as 'cash' on the budgeted balance sheet? Solution 178 (12 min.) Cash collections: Accounts receivable collected Cash sales: 20% × $800,000 Credit sales: (80% × $800,000) × 70% Cash expenditures Loan payment Interest payment (10% × $120,000) Net increase in cash Add: beginning cash balance Ending cash balance $ 12,000 160,000 448,000 (500,000) (20,000) (12,000) 88,000 20,000 $108,000 Ex 179 Roswell Company has budgeted sales revenue as follows for the next months: February March April May $150,000 120,000 105,000 165,000 Past experience indicates that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 35% in the month following the sale, and 3% in the second month following the sale The other 2% is uncollectible Instructions Prepare a schedule which shows expected cash receipts from sales for the month of May - 46 Test Bank for ISV Managerial Accounting, Fourth Edition Solution 179 (7-9 min.) ROSWELL COMPANY Expected Cash Receipts from Sales For the Month Ended May 31 March sales Credit sales: ($120,000 × 80 × 03) $ 2,880 April sales Credit sales: ($105,000 × 80 × 35) 29,400 May sales Credit sales: ($165,000 × 80 × 60) Cash sales: ($165,000 × 20) Total cash receipts 79,200 33,000 $144,480 Ex 180 In September 2008, the management of Vinson Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November Expected Sales October November December $1,500,000 2,100,000 2,700,000 Cost of goods sold is expected to be 68% of sales Desired ending merchandise inventory is 25% of the next month's cost of goods sold The beginning inventory at October will be the desired amount Instructions Compute the budgeted merchandise purchases for October and November Use a columnar format with separate columns for each month Solution 180 (12–17 min.) VINSON COMPANY Merchandise Purchases Budget For the Months of October and November, 2008 Budgeted cost of goods sold Desired ending merchandise inventory Total Less: Beginning merchandise inventory Required merchandise purchase October $1,500,000 × 68% = $1,020,000 $1,428,000 × 25% = $357,000 $1,020,000 × 25% = $255,000 October $1,020,000 357,000 1,377,000 255,000 $1,122,000 November $1,428,000 459,000 1,887,000 357,000 $1,530,000 November $2,100,000 × 68% = $1,428,000 $2,700,000 × 68% × 25% = $459,000 Budgetary Planning - 47 COMPLETION STATEMENTS 181 A _ is a formal written statement of management's plans expressed in financial terms 182 A budget is a primary means of agreed upon objectives throughout the business organization 183 Effective budgeting is dependent on an _ in which authority and responsibility are clearly defined 184 The budget should have the support of _ and should be an important basis for _ by comparing actual results to expected results 185 Many companies use budgets by dropping the month just ending and adding a future month 186 A is responsible for coordinating the preparation of the budget in many companies 187 A major difference between the annual budget and long-range planning is the over which the data pertain 188 The is the starting point in preparing the master budget 189 The formula for developing a production budget is _ plus minus _ 190 The is a set of interrelated budgets that constitutes a plan of action for a specified period of time 191 Three major sections of a cash budget are (1) _, (2) , and (3) 192 The two major differences between the master budgets of a merchandiser and a manufacturer are that the merchandiser will have a budget and will not have budgets Answers to Completion Statements 181 182 183 184 budget communicating organizational structure top management, evaluating performance 185 continuous twelve-month 186 budget committee 187 time period 188 sales budget 189 budgeted sales units, desired ending finished goods units, beginning finished goods units 190 master budget 191 cash receipts, cash disbursements, financing 192 merchandise purchases, manufacturing Test Bank for ISV Managerial Accounting, Fourth Edition - 48 MATCHING 193 Match the items below by entering the appropriate code letter in the space provided A B C D E Budget Financial budgets Budget committee Master budget Sales forecast F G H I J Production budget Cash budget Long-range planning Direct materials budget Sales budget A selection of strategies to achieve long-term goals An estimate of expected sales for the budget period Budgets that indicate the cash resources needed for expected operations and planned capital expenditures The projection of potential sales for the industry and the company's expected share of such sales Management's plans expressed in financial terms for a specified future time period A projection of anticipated cash flows A group responsible for coordinating the preparation of the budget A projection of production requirements to meet expected sales A set of interrelated budgets that constitute a plan of action for a specified time period 10 An estimate of the quantity and cost of direct materials to be purchased Answers to Matching H J B E A 10 G C F D I Budgetary Planning - 49 SHORT-ANSWER ESSAY QUESTIONS S-A E 194 Budgeting can be an important management tool if implemented properly Identify several positive results when budgets are used properly Since budgets affect people, identify several negative aspects if budgets are not implemented properly Solution 194 When budgets are used properly, positive results can include: managers are required to plan ahead, there are definite objectives for performance evaluation, there is an early warning system for potential problems, there is coordination of activities within the business, there is greater management awareness of the entity's overall operations, and there are positive behavior patterns by motivating personnel to meet planned objectives However, if budgets are not implemented properly, negative results can include discouragement of additional effort to meet goals, poor morale of managers, and lack of commitment to budget goals S-A E 195 Budgeting and long-range planning are both important aids to management in achieving a company's goals and objectives Briefly distinguish between budgeting and long-range planning and indicate how they help managers perform their functions Solution 195 Budgeting is preparing a detailed formal written summary of management's plans for a specified future time period (usually one year), in financial terms Long-range planning involves the selection of strategies to achieve long-term (at least five years) goals and the development of policies and plans to implement the strategies Budgeting and long-range planning differ in time periods involved, emphasis, and the amount of detail presented Budgets help managers in planning and controlling operations for the coming year, while long-range planning assists managers in broad long-term goal-setting, policy development, and planning S-A E 196 (Ethics) Ron Benson is a new production manager After a great deal of effort, including considerable market research, he completes his budget and submits it to his boss, Diane Moran Without even looking at it, she asks him what his "fudge factor" was, and which items contained the most slack Ron, very surprised, responds that he doesn't use any "fudge factor," and that all his figures are honest Ms Moran counters by asking him how he would respond if he had to cut about 20% from his budget, as it is She tells him that most budgets are trimmed in committee, and he had better be ready She returns the budget to him, and tells him to come back with something reasonable Required: Is it ethical to build slack into a budget? Explain Was it ethical for Ms Moran to refuse to accept a budget without slack? Briefly explain - 50 Test Bank for ISV Managerial Accounting, Fourth Edition Solution 196 Either answer may be correct Slack may be seen as an estimate of how much the actual results may vary from the predictions As such, it is perfectly legitimate to add some slack, as in this case On the other hand, it is certainly possible that a great deal of padding may be added to a budget, with the manager preparing the budget hoping that the amount to be trimmed will not exceed the amount of the padding The decision as to whether the addition of slack is unethical depends upon whether budgeting guidelines are followed Any secretive method of adding padding to one's own budget would be unethical As Ron Benson's superior, Ms Moran has the obligation to correct his mistakes Apparently, in this particular company, budgets are trimmed in committee, with the expectation that all budgets contain some expenses that could be removed without harm to the company Ron must continue to be honest One way to that would be for Ron to submit his trimmed budget, and then note the costs that are most likely to exceed the budget, and by how much This would give Ms Moran the ability to intelligently defend his budget while in committee S-A E 197 (Communication) At Lakeside Manufacturing, budgets are the responsibility of everyone Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume Al Talbott, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process Required: You are the accounting manager Write a memo to Mr Talbott Explain why the ending inventory figure should be extremely accurate, with as little slack as possible Solution 197 TO: Al Talbott FROM: Mary Barnes SUBJECT: Budgets At our last budget meeting, you mentioned that you put plenty of slack into all your budgets, so that you could better survive budget reductions You remember that I specifically asked about your ending inventory estimates, and you said that those had plenty of slack as well Please reconsider adding slack to the ending inventory estimates Those estimates are used by all other departments in calculating their budgets In other words, they rely on your figures being accurate If you estimate much too high for inventory, the other departments will experience stockouts, as they will have counted on your having more goods ready than you will be able to produce If, as is more likely, you understate the number of units you will have on hand, we will experience increased storage costs and related spoilage We will also have spent money to produce more units than the next department can use I understand your desire to ensure that your budgets are reasonable However, I am sure also that you see that we depend upon your inventory numbers Please make sure that these numbers are as precise as possible (signed) ...9-2 Test Bank for ISV Managerial Accounting, Fourth Edition SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 159 160... worked b number of administrators c credit hours taught by a department d number of days in the school term 9 - 22 Test Bank for ISV Managerial Accounting, Fourth Edition 136 A critical factor in... Item 25 26 27 28 29 30 Ans T F F T T F Item 31 32 33 34 35 36 Ans F T T T T F 9-6 Test Bank for ISV Managerial Accounting, Fourth Edition MULTIPLE CHOICE QUESTIONS 37 Why are budgets useful in