Chapter 6
Budgeting
AP-15A LO 4 6
Pratt’s Pizza Inc. is a small chain of take-out pizza restaurants. The average selling price of a Pratt’s pizza is $15.
Pratt’s estimated sales for the first five months of the 2020 fiscal year are as follows.
Month
January
February
March
April
May
number of
Pizzas
15,000
18,000
21,000
27,000
25,000
required
a)
Prepare the sales budget for the first quarter.
Pratt's Pizza inc.
Sales Budget
For the Quarter ending March 31, 2020
January
b)
February
March
Quarter
The average cost of a pizza is $6. Opening food inventory for the year is estimated to be $9,000. When
compiling the annual budget, the operations manager insists that 10% of next month’s requirements should be
on hand to begin each month.
Prepare the purchases budget for the first quarter.
Pratt’s Pizza inc.
Purchases Budget
For the Quarter ending March 31, 2020
January
February
March
c)
Quarter
Pratt’s sales history indicates that 10% of sales will be for cash and 90% of sales will be on credit card. Using
the information from the sales budget, determine the forecasted cash and credit sales.
Pratt’s Pizza inc.
Forecasted Cash and Credit Card Sales
For the Quarter ending March 31, 2020
January
February
March
160
Quarter
Budgeting
Chapter 6
Pratt’s has reviewed past collection history and has determined that credit card sales will be collected as
follows: 90% is collected in the month of sale and 10% is collected the following month. The total credit card
sales for the month of December 31, 2019, were $250,000.
Prepare the cash collection per month section of the cash receipts budget worksheet for the first quarter.
Pratt’s Pizza inc.
Cash Collection per Month
For the Quarter ending March 31, 2020
January
February
March
d)
Quarter
Pratt’s will pay for 70% of its purchases of food inventory in the month of purchase and the remaining 30% in
the following month. The total inventory purchases for the month of December 31, 2019, were $95,000.
Prepare the budgeted schedule of cash payments for the first quarter.
Pratt’s Pizza inc.
Schedule of Cash Payments
For the Quarter ending March 31, 2020
January
February
March
e)
Quarter
Prepare a cash budget for the first quarter.
Assume the following:
1.
Pratt’s started the year with $20,000 in its bank account and must maintain a minimum cash balance of $10,000
at the end of each month.
2.
Pratt’s has access to an open line of credit with the bank to borrow money if needed. To keep things simple,
ignore interest calculations on the bank borrowings. Also, loan borrowings are taken in multiples of $1,000.
3.
Pratt’s maintains that it will repay debts as soon as possible with any excess cash that becomes available.
4.
Pratt’s has budgeted the following for 2020:
•
Payment for operating expenses = $80,000 each month.
•
Depreciation expense is $5,400 a month.
•
Pratt’s will need to purchase new ovens. The total cost of the ovens is $180,000. Pratt’s will pay $100,000 in
January and $80,000 in February.
•
Cash dividends of $10,000 will be paid to shareholders in February and March.
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Chapter 6
Budgeting
Pratt’s Pizza inc.
Cash Budget
For the Quarter ending March 31, 2020
January
February
March
Quarter
AP-16A LO 6
Hudson’s Breakfast Café is a small café near a park. Management has asked that a cash budget be prepared for the
upcoming year. The following is the company’s budgeted information for the 2020 fiscal year.
Sales (all on credit)
Food Inventory Purchases
Wages Expense
Rent Expense
Depreciation Expense
Q1
$32,000
14,400
12,800
2,600
3,200
Q2
$25,700
11,565
10,280
2,600
2,570
Q3
$34,500
15,525
13,800
2,600
3,450
Q4
$41,800
14,630
12,540
2,600
4,180
Year
$134,000
56,120
49,420
16,080
13,400
Additional information is as follows:
•
•
•
•
•
•
•
•
•
162
Hudson requires the ending cash balance for each period to be at a minimum of $5,000. The ending cash balance
at Q4-2019 was $5,350.
All sales are on credit. The collection pattern for sales is 80% in the quarter of sale, 20% in the following quarter.
There were no outstanding accounts receivable as at Q4-2019.
Food inventory is paid for in full in the quarter following the purchase.
The total purchases in Q4-2019 were $9,200.
All other expenses will be paid in full in the quarter they are budgeted for.
Equipment costing a total of $15,000 is to be purchased in the year; $8,000 will be paid in Q2 and $7,000 in Q3.
Dividend payments of $3,000 are to be paid in Q3 and $3,500 in Q4.
Hudson has an open line of credit that is used for any borrowings the company may need. Any borrowings are
done in multiples of $1,000.
Budgeting
Chapter 6
required
a)
Complete a schedule of cash receipts for the 2020 fiscal year.
Hudson’s Breakfast Café
Schedule of Cash receipts
For the Year ending december 31, 2020
Q1
Q2
Q3
b)
Q4
Year
Q4
Year
Prepare a cash budget for the 2020 fiscal year.
Hudson’s Breakfast Café
Cash Budget
For the Year ending december 31, 2020
Q1
Q2
Q3
AP-17A LO 6
Fish River Seafood Restaurant provides you with the following information.
Sales
Cost of Sales
Capital Expenditures (new equipment)
Administrative Costs (excluding depreciation)
May
$51,000
12,750
4,000
25,000
June
$45,000
11,250
21,000
July
$55,000
13,750
1,200
19,000
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Chapter 6
Budgeting
Expectations:
•
Cash sales represent 10% of total sales; the balance is credit card sales.
•
Of the credit card sales, 90% are collected in the month of sale and the remaining 10% will be collected in
the following month.
•
The credit card sales in April amounted to $45,000.
•
Inventory purchases are expected to be 25% of sales and are to be paid for in the month in which they are
purchased.
•
Wages are expected to be 30% of sales and are to be paid in the month in which they are incurred.
•
Administration costs are to be paid in the month in which they are incurred.
•
Advertising costs of $1,000 are expected to be paid in June and in July.
•
Fish River must have at least a $10,000 cash balance at the end of each month. Borrowing is in multiples of
$1,000.
•
Excess cash over the required minimum cash balance must be used towards paying off any outstanding
loan. Ignore interest on the loan.
•
The balance of the loan as of May 1 is $0.
•
The balance of cash as of May 1 is $15,000.
Prepare a cash budget for each month in the quarter and the quarter as a whole.
Fish river Seafood restaurant
Cash Budget
For the Quarter ending July 31, 2020
May
June
164
July
Quarter
Chapter 7
Flexible Budgeting and Variance Analysis
case study
cs-1 LO 2 3
You have just been hired as general manager of Sunflower Suites, a small boutique hotel situated outside the downtown
core of a major city. Sunflower Suites has 18 guest rooms and a small 40-seat café that serves breakfast only, called the
Breakfast Bar. The hotel has not been performing very well over the past few years and Shannon, the owner, has asked
you to determine why results were not as planned in the prior year and what your plan is to return to profitability.
breakfast bar analysis
The Breakfast Bar is open to hotel guests and the public seven days a week. The restaurant manager budgeted sales
of $262,800 to 21,900 guests. The chef is responsible for maintaining a 28% food cost. Server labour was budgeted
at $43,800 and kitchen labour at $54,750. The café requires two servers every day for six hours and two cooks every
day for five hours. The only other costs incurred are utilities budgeted at $6,000 and the supervisor’s salary of $40,000.
Actual results for 2021 were as follows.
Guests Served
Revenue
Food Cost
Server Wages Expense
Kitchen Wages Expense
Utilities Expense
Supervisor Salary Expense
Department Operating Profit (Loss)
17,520
$192,720
57,816
39,420
70,080
6,200
42,000
($22,796)
required
a)
Prepare a flexible budget analysis for the Breakfast Bar for the year.
breakfast bar
Flexible budget analysis
For the year ended december 31, 2021
actual
results
202
Flexible
budget
Variance
Flexible
budget
sales Volume
Variance
static
budget
Price/
Variable
cost per
guest
Flexible Budgeting and Variance Analysis
Chapter 7
b)
Explain the flexible budgeting tool to Shannon and point out a few items you are concerned about.
c)
Calculate the price and quantity variances for revenue and cost variances for kitchen labour and explain the
results to Shannon.
Hotel analysis
The Sunflower Suites Hotel accepts guests 365 days per year. The manager budgeted to sell 5,913 rooms for total
revenue of $709,560. Housekeeping costs were budgeted at $8 per room. The only other budgeted costs were utilities
at $30,000, rent at $60,000 and fixed front desk salaries of $70,000.
Actual results for 2021 were as follows.
Rooms Sold
Revenue
Housekeeping Wages Expense
Utilities Expense
Rent Expense
Front Desk Salaries Expense
Department Operating Profit
6,242
$761,463
51,180
32,000
60,000
72,000
$546,283
203
Chapter 7
Flexible Budgeting and Variance Analysis
required
d)
Prepare a flexible budget analysis for the rooms department for the year.
sunflower suites rooms department
Flexible budget analysis
For the year ended december 31, 2021
actual
results
Flexible
budget
Variance
Flexible
budget
sales Volume
Variance
static
budget
Price/
Variable
cost per
guest
e)
Briefly describe the results and point out a few items you are concerned about.
f)
Calculate the price and quantity variances for revenue and cost variances for housekeeping labour and explain
the results to Shannon.
204
Flexible Budgeting and Variance Analysis
g)
Chapter 7
Explain to Shannon where you will focus your time first and why.
205