1)
Describe the components of a master budget in the order in which they are usually prepared.
Also explain the parts of each component.
Answer:
Student responses will vary but should include the following points: The three major components ofthe master budget are:
1)
Operating budget
2)
Capital
expenditures budget
3)
Financial budget
The operating budget sets the expected revenues and expenses, and thus
the operating income for the period, and consists of the following:
1)
Sales or
revenue budget
2)
Purchases, cost
of goods sold, and inventory budget
3)
Operating
expenses budget
4)
Budgeted income statement
The capital
expenditures budget presents the company’s plan for purchases of
property, plant, equipment, and other
long-term assets.
The financial budget projects cash inflows and outflows and the end of period budgeted balance sheet and consists of the following:
1)
Cash budget
consisting of the statement of budgeted cash receipts and budgeted cash disbursements
2)
Budgeted
balance sheet
3)
Budgeted
statement of cash flows
2)
Define the term budget and identify
four benefits of budgeting. Should employees participate in the budgeting
process or should management prepare the budgets alone? Explain.
Answer:
Student responses will vary
but should include the following points:
A budget is a quantitative expression of a plan of action that helps managers
coordinate and implement the plan.
1)
Budgeting compels
planning. Budgeting helps managers set realistic goals by requiring
them to plan specific actions
to meet their goals. Budgeting also helps managers prepare for a range of
conditions and plan for contingencies.
2)
Budgeting
promotes coordination and communication. The master budget coordinates the activities
of the organization. It forces managers
to consider relationships among operations across
the entire
value chain.
3)
Budgeting aids
performance evaluation. To evaluate a department or activity, its actual
results may be compared either to its budget or its past performance. In
general, the budget is a better benchmark since it considers current changes
stemming from past conditions.
4)
Budgeting
motivates employees. Budgets affect behavior. The budgeting process prompts
managers
to look further into the future than they would look otherwise. This
helps them to foresee and avoid problems.
Budgets also motivate
employees to achieve the business’s goals, especially when employees have participated in the budgeting process. If employees
are excluded from this process,
and unrealistic
goals are set,
employee morale can be deflated, especially if the employees’ performance is judged against these unfair standards.
3)
Reed Books had
fourth quarter sales of $200,000 in 2009 and projects that sales in 2010 will
increase by 3% the first quarter and 2% the second quarter,
will decrease 5% the third quarter, and increase 6% the fourth quarter. The cost of goods
sold is estimated at 62% of sales and the percentage will remain constant
throughout 2010. Total operating expenses are budgeted at 15% of sales during
the first two quarters of 2010 and 20% during the last two quarters of 2010.
Prepare a
budgeted income statement for the fourth quarter of 2010. Answer:
Reed Books Budgeted Income Statement
For Three Months Ended December 31, 2010
|
Sales
|
$211,591
|
|
Cost of goods sold
|
131,186
|
|
Gross profit
|
$ 80,405
|
|
Operating
expenses
|
42,318
|
|
Net income
|
$ 38,087
|
Sales:
$200,000
x 1.03 x 1.02 x .95 x 1.06 = $211,591
Cost
of goods sold:
$211,591
x 62% = $131,186
Operating expenses:
$211,591
x 20% = $42,318
4)
The following
budget information is given for Farrington Company for the last quarter of
2009: Expected sales for October are $88,000.
Monthly
sales are expected to increase 5% in November and 5% in December.
Monthly expenses: Monthly salary = $6,000
Sales commissions = 15% of sales
Rent expense = $4,000 Depreciation expense =
$1,600
Miscellaneous expense = 5% of sales
Advertising expense = 6% of sales
Prepare an operating expense budget for the last quarter
of 2009.
|
Answer:
|
Farrington Company
|
|
|
|
Operating Expense Budget
For Three
Months Ended December 31, 2009
|
|
|
Salary expense
|
October November
$ 6,000 $ 6,000
|
December
$ 6,000
|
|
Sales commissions
|
13,200 13,860
|
14,553
|
|
Rent expense
|
4,000 4,000
|
4,000
|
|
Depreciation expense
|
1,600 1,600
|
1,600
|
|
Miscellaneous expense
|
4,400 4,620
|
4,851
|
|
Advertising expense
|
5,280 5,544
|
5,821
|
|
Totals
|
$34,480 $35,624
|
$36,825
|
|
Sales commissions October:
|
$88,000 X 15%
= $13,200
|
|
|
November:
December:
|
$13,200 X 1.05 = $13,860
$13,860 X 1.05 = $14,553
|
|
Miscellaneous expenses
October: $88,000
X 5% = $4,400
November: $4,400
X 1.05 = $4,620
December: $4,620
X 1.05 = $4,851
Advertising expense
October: $88,000
X 6% = $5,280
November: $5,280
X 1.05 = $5,544
December: $5,544
X 1.05 = $5,821
5)
The sales
budget of Hickory Company for the third quarter of 2009 is as follows:
July August September
Sales $96,000 $72,000 $108,000
Sales
are 20% cash, 80% credit.
Cost
of goods sold is 70% of total sales.
Desired ending
inventory for each month is equal
to 25% of cost of goods sold for the following
month.
Collections on
credit sales are as follows: 50% in the
month of sale
30% in the month following sale
15% in the second
month following sale 5% uncollectible
July
1 inventory is $16,000.
Expected
sales for October are $84,000.
Payments for
inventory are 70% in the month following purchase and 30% two months following
purchase.
Prepare the purchases budget for July, August, and
September, 2009.
Answer:
Hickory Company Purchases Budget
For Three Months Ended
September 30, 2009
|
|
July
|
August
|
September
|
|
Cost of goods sold
|
$ 67,200
|
$ 50,400
|
$ 75,600
|
|
Plus desired ending inventory
|
12,600
|
18,900
|
14,700
|
|
Less beginning inventory
|
(16,000)
|
(12,600)
|
(18,900)
|
|
Purchases
|
$ 63,800
|
$ 56,700
|
$ 71,400
|
6)
The sales
budget of Mulls Company for the fourth quarter of 2009 is as follows:
|
Sales are 20% cash, 80% credit.
Cost
of goods sold is 70% of total sales.
Desired ending
inventory for each month is equal
to 25% of cost of goods sold for the following
month.
Collections on
credit sales are as follows: 50% in
the month of sale
30% in the month following sale
15% in the second
month following sale 5% uncollectible
October
1 inventory is $16,000.
Expected
sales for January 2010, are $84,000.
Payments for inventory are 70%
in the month following purchase
and 30% two months following purchase.
Compute the cash collections for December, 2009.
|
Answer:
October sales
|
($96,000 X
.80 X .15)
|
$11,520
|
|
November
sales
|
($72,000 X .80 X .30)
|
17,280
|
|
December
sales
|
($108,000 X .20)
|
21,600
|
|
|
($108,000 X .80 X .50)
|
43,200
|
|
December cash collections
|
|
$93,600
|
7)
Dozier Company
has a problem managing cash. From the following data determine cash
disbursements for May and June.
|
|
April
|
May
|
June
|
|
Sales
|
$16,000
|
$20,000
|
$23,000
|
Other data are as follows:
Purchases of inventory are 60% of sales.
Payments for purchases of inventory are made one month after purchase.
Selling
expenses are 15% of sales and are paid in the same month as the associated
sales. Administrative expenses (excluding rent and depreciation) are 20% of
sales and are paid in the same month as the associated sales.
Rent expense is
$1,200 per month and is paid each month.
Equipment depreciation is 5% of sales.
Answer:
|
|
April
|
May
|
June
|
|
Purchases (60% of sales)
|
$9,600
|
$12,000
|
$13,800
|
|
Cash disbursements
|
|
|
|
|
Purchases
|
|
$ 9,600
|
$12,000
|
|
Selling
expenses
|
|
3,000
|
3,450
|
|
Administrative expense
|
|
4,000
|
4,600
|
|
Rent expense
|
|
1,200
|
1,200
|
|
Total cash
disbursements
|
|
$17,800
|
$21,250
|
8)
Soccer Forever
gathered the following information as of May 31, 2009:
|
May 31 inventory balance
|
$11,000
|
|
May payments for inventory
|
8,300
|
|
May payments of accounts payable and
accrued liabilities
|
9,800
|
|
May 31 accounts payable balance
|
5,400
|
|
April 30 equipment balance
|
37,500
|
|
April 30 accumulated depreciation-equipment balance
|
20,900
|
|
Cash purchase of equipment in May
May operating expenses, excluding
depreciation (75% paid in May, 25% accrued on May 31)
|
2,700
4,200
|
|
May depreciation expense
|
600
|
|
April
30 stockholders’ equity
|
42,385
|
|
April 30 cash balance
|
27,040
|
|
May budgeted sales
|
17,300
|
|
May cash
receipts
|
12,110
|
|
Cost of goods sold
|
65% of sales
|
|
May 31 accounts receivable balance
|
30% of May sales
|
|
Prepare the budgeted balance sheet
on May 31, 2009.
|
|
Answer:
Soccer Forever Budgeted Balance Sheet May 31, 2009
|
Assets
|
|
|
|
Current
assets:
|
|
|
|
Cash*
|
$ 15,200
|
|
|
Accounts receivable ($17,300 X .30)
|
5,190
|
|
|
Inventory
|
11,000
|
|
|
Total current assets
|
|
$31,390
|
|
Plant assets:
|
|
|
|
Equipment
|
$ 40,200
|
|
|
Less:
accumulated depreciation
|
(21,500)
|
18,700
|
|
Total assets
|
|
$50,090
|
|
Liabilities
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$ 5,400
|
|
|
Accrued liabilities ($4,200 X .25)
|
1,050
|
|
|
Total current liabilities
|
|
$ 6,450
|
|
Stockholders' equity**
|
|
43,640
|
|
Total liabilities and stockholders' equity
|
|
$50,090
|
*[$27,040 – $8,300
– $9,800 – $2,700 – (.75 X $4,200) + $12,110] =
$15,200
**net income for May = $17,300 –
(.65 X $17,300) –
$4,200 – $600
= $1,255
$42,385 + $1,255 = $43,640
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