Exercises for Master Budget
Exercises 1
Weber Company produces floor mats used in gyms and dojos. The sales
budget for four months of the year is as follows:
April
May
June
July
Unit Sales
Dollar Sales
12,000
50,000
30,000
28,000
$ 288,000
1,200,000
720,000
672,000
Company policy requires that ending inventories for each month be 15
percent of next month’s sales. At the beginning of April, the beginning
inventory of mats met that policy.
Required:
Prepare a production budget for the second quarter of the year. Show the
number of units that should be produced each month as well as for the
quarter in total.
Solution:
Sales
Desired ending inventory
Total Needs
Less: Beginning inventory
Units to be produced
Second Quarter
April
May
June
12000
50000
30000
7500
4500
4200
19500
54500
34200
1800
7500
4500
17700
47000
29700
Total
92000
4200
96200
1800
94400
Desired ending inventory/ April = 0.15 * 50000 = 7500
Desired ending inventory/ May = 0.15 * 30000 = 4500
Desired ending inventory/ June = 0.15 * 28000 = 4200
Beginning inventory / April = 0.15 * 12000 = 1800
Exercises 2
Sleepeze Company produces a variety of pillows for catalog sales. Two
popular types are the standard pillow and the neck roll. The standard
pillow sells for $4, and the neck roll sells for $3. Projected sales of the
two types of pillows for the coming four quarters are as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Standard Pillow
5,000
6,500
10,000
5,500
Neck Roll
4,000
4,500
8,000
5,000
The president of the company believes that the projected sales are
realistic and can be achieved by the company. In the factory, the
production supervisor has received the projected sales figures and
gathered information needed to compile production budgets. He
found that 300 standard pillows and 170 neck rolls were in
inventory on January 1. Company policy dictates that ending
inventory should equal 20 percent of the next quarter’s sales for
standard pillows and 10 percent of next quarter’s sales for neck
rolls.
Required:
1. Prepare a sales budget for each quarter and for the year in total.
Show sales by product and in total for each time period.
2. Prepare a separate production budget for each product for each
of the first three quarters of the year.
Solution:
1.
Details
units
Price
Sales
Details
units
Price
Sales
Sales Budget for Standard Pillow
Quarters
1
2
3
4
5000
6500
10000
5500
$4
$4
$4
$4
20000
26000
40000
22000
Sales Budget for Neck Roll
Quarters
1
2
3
4
4000
4500
8000
5000
$3
$3
$3
$3
12000
13500
24000
15000
Year
27000
$4
108000
Year
21500
$3
64500
2.
Production Budget for Standard Pillow
Quarters
Details
1
2
3
Sales
5000
6500
10000
Desired ending inventory
1300
2000
1100
Total Needs
6300
8500
11100
Less: Beginning inventory
300
1300
2000
Units to be produced
6000
7200
9100
Total
21500
1100
22600
300
22300
Desired ending inventory/ 1 = 0.20 * 6500 = 1300
Desired ending inventory/ 2 = 0.20 * 10000 = 2000
Desired ending inventory/ 3 = 0.20 * 5500 = 1100
Production Budget for Neck Roll
Quarters
Details
1
2
3
Sales
4000
4500
8000
Desired ending inventory
450
800
500
Total Needs
4450
5300
8500
Less: Beginning inventory
170
450
800
Units to be produced
4280
4850
7700
Total
16500
500
17000
170
16830
Desired ending inventory/ 1 = 0.10 * 4500 = 450
Desired ending inventory/ 2 = 0.10 * 8000 = 800
Desired ending inventory/ 3 = 0.10 * 5000 = 500
Exercises 3
Ivans Company produces stuffed toy animals; one of these is Randy the
Reindeer. Each reindeer takes 0.10 yard of fabric and three ounces of
polyfiberfill. Fabric costs $3.50 per yard, and polyfiberfill is $0.05 per
ounce. Ivans has budgeted production of stuffed reindeer for the next four
months as follows:
Units
October
40,000
November
80,000
December
50,000
January
60,000
Inventory policy requires that sufficient fabric be in ending monthly
inventory to satisfy 15 percent of the following month’s production needs
and sufficient polyfiberfill be in inventory to satisfy 30 percent of the
following month’s production needs. Inventory of fabric and polyfiberfill
at the beginning of October equals exactly the amount needed to satisfy
the inventory policy. Each reindeer produced requires (on average) 0.2
direct labor hour. The average cost of direct labor is $10.50 per hour.
Required:
1. Prepare a direct materials purchases budget of fabric for the last quarter
of the year showing purchases in units and in dollars for each month and
for the quarter in total.
2. Prepare a direct materials purchases budget of polyfiberfill for the last
quarter of the year showing purchases in units and in dollars for each
month and for the quarter in total.
3. Prepare a direct labor budget for the last quarter of the year showing
the hours needed and the direct labor cost for each month and for the
quarter in total.
Solution:
1.
direct materials purchases budget of fabric
Last Quarter
Details
October November December
Units to be produced
40000
80000
50000
Direct materials per
0.10
0.10
0.10
unit (Yard)
Production needs
4000
8000
5000
Desired ending
1200
750
900
inventory
Total needs
5200
8750
5900
Less: Beginning
600
1200
750
inventory
Direct materials to be
4600
7550
5150
purchased
Cost per Yard
3.5
3.5
3.5
Total purchase cost
16100
26425
18025
Total
170000
0.10
17000
900
17900
600
17300
3.5
60550
2.
direct materials purchases budget of polyfiberfill
Last Quarter
Details
October November December
Units to be produced
40000
80000
50000
Direct materials per
3
3
3
unit (ounce)
Production needs
120000
240000
150000
Desired ending
72000
45000
54000
inventory
Total needs
192000
285000
204000
Less: Beginning
36000
72000
45000
inventory
Direct materials to be
156000
213000
159000
purchased
Cost per Yard
0.05
0.05
0.05
Total purchase cost
7800
10650
7950
Details
Units to be produced
Direct labor time per
unit (hrs.)
Total hours needed
Wage per hour
Total Direct Labor
Cost
Direct Labor Budget
Last Quarter
October November December
40000
80000
50000
Total
170000
3
510000
54000
564000
36000
528000
0.05
26400
Total
170000
0.2
0.2
0.2
0.2
8000
10.5
16000
10.5
10000
10.5
34000
10.5
84000
168000
105000
357000
Exercises 4
Central Drug Store carries a variety of health and beauty aids, including
elastic ankle braces. The sales budget for ankle braces for the first six
months of the year is as follows:
January
February
March
April
May
June
Unit Sales
150
140
145
160
200
260
Dollar Sales
$1,200
1,120
1,160
1,280
1,600
2,080
The owner of Central Drug believes that ending inventories should be
sufficient to cover 20 percent of the next month’s projected sales. On
January 1, there were 84 ankle braces in inventory.
Required: Prepare a merchandise purchases budget in units of ankle
braces for as many months as you can.
Sales
Desired Ending Inventory
Total Needs
Less: Beginning Inventory
Units to be Purchase
Jan.
150
28
178
30
148
Feb.
140
29
169
28
141
March
145
32
177
29
146
April
160
40
200
32
168
May
200
52
252
40
212
Exercises 5
Crash Dobson, former all-state high school football player, owns a retail
store that sells new and used sporting equipment. Crash has requested a
cash budget for October. After examining the records of the company,
you find the following:
a. Cash balance on October 1 is $1,980.
b. Actual sales for August and September are as follows:
Cash sales
Credit sales
Total sales
August
$15,000
80,000
$95,000
September
$ 20,000
90,000
$110,000
c. Credit sales are collected over a three-month period: 50 percent in the
month of sale, 30 percent in the second month, and 15 percent in the third
month. The remaining sales are uncollectible.
d. Inventory purchases average 70 percent of a month’s total sales. Of
those purchases, 40 percent are paid for in the month of purchase. The
remaining 60 percent are paid for in the following month.
e. Salaries and wages total $2,000 per month.
f. Rent is $2,700 per month.
g. Taxes to be paid in October are $5,000.
h. Crash usually withdraws $4,000 each month as his salary.
i. Advertising is $500 per month.
j. Other operating expenses total $800 per month.
Crash tells you that he expects cash sales of $10,000 and credit sales of
$65,000 for October. He likes to have $2,000 on hand at the end of the
month and is concerned about the potential October ending balance.
Required: Prepare a cash budget for October. Include supporting
schedules for cash collections and cash payments.
Solution:
Sales Collections
Details
August
September
Cash Sales
15000
20000
Credit Sales:
%50
40000
45000
%30
24000
%15
Total
Purchases of September = 110000 * %70 = $ 77000
October
10000
32500
27000
12000
81500
Purchases of October = 75000 * %70 = $ 52500
Payments
%40
%60
Total
September
30800
October
21000
46200
67200
Details
Beginning cash balance
Sales Collections
Total Cash Available
Less disbursements:
Purchases
Salaries and wages
Rent
Taxes
Crash`s Salary
Advertising
Other operating expenses
Total disbursements
Minimum cash balance
Total cash needs
Excess (deficiency) of cash
available over needs
October
$1980
81500
$83480
67200
2000
2700
5000
4000
500
800
$82200
2000
$84200
(720)
Exercises 6
Historically, Pine Hill Wood Products has had no significant bad debt
experience with its customers. There are no cash sales; all sales are made
on credit. Payments for credit sales have been received as follows:
40 percent of credit sales in the month of the sale.
30 percent of credit sales in the first subsequent month.
25 percent of credit sales in the second subsequent month.
5 percent of credit sales in the third subsequent month.
The sales forecast is as follows.
January
$95,000
February
65,000
March
70,000
April
80,000
May
85,000
Required: What is the forecasted cash inflow for Pine Hill Wood
Products for May?
Exercises 7
Kevin Campbell’s is a men’s clothing store in Mesa, Arizona. Kevin
Campbell’s has its own house charge accounts and has found from past
experience that 20 percent of its sales are for cash. The remaining 80
percent are on credit. An aging schedule for accounts receivable reveals
the following pattern:
15 percent of credit sales are paid in the month of sale.
65 percent of credit sales are paid in the first month following the sale.
18 percent of credit sales are paid in the second month following the sale.
2 percent of credit sales are never collected.
Credit sales that have not been paid until the second month following the
sale are considered overdue and are subject to a 2 percent late charge.
Kevin Campbell’s has developed the following sales forecast:
May
$66,000
June
85,000
July
55,000
August
75,000
September
80,000
Required:
Prepare a schedule of cash receipts for August and September.
Exercises 8
Rokat Corporation is a manufacturer of tables sold to schools, restaurants,
hotels, and other institutions. The table tops are manufactured by Rokat,
but the table legs are purchased from an outside supplier. The assembly
department takes a manufactured table top and attaches the four
purchased table legs. It takes 18 minutes of labor to assemble a table. The
company follows a policy of producing enough tables to ensure that 40
percent of next month’s sales are in the finished goods inventory. Rokat
also purchases sufficient materials to ensure that materials inventory is 60
percent of the following month’s scheduled production. Rokat’s sales
budget in units for the next quarter is as follows:
July
2,300
August
2,500
September
2,100
Rokat’s ending inventories in units for June 30 are as follows:
Finished goods
1,900
Materials (legs)
4,000
Required:
1. Calculate the number of tables to be produced during August.
2. Disregarding your response to Requirement 1, assume the required
production units for August and September are 1,600 and 1,800,
respectively, and the July 31 materials inventory is 4,200 table legs.
Compute the number of table legs to be purchased in August.
3. Assume that Rokat Corporation will produce 1,800 units in September.
How many employees will be required for the assembly department in
September? (Fractional employees are acceptable since employees can be
hired on a part-time basis. Assume a 40-hour week and a 4-week month.)
Exercises 9
Electra Manufacturing, Inc., produces control valves used in the
production of oil field equipment. The control valves are sold to various
gas and oil engineering companies throughout the United States.
Projected sales in units for the coming four months are
as follows:
January
20,000
February
25,000
March
30,000
April
30,000
The following data pertain to production policies and manufacturing
specifications followed by Electra:
a. Finished goods inventory on January 1 is 13,000 units. The desired
ending inventory for each month is 70 percent of the next month’s sales.
b. The data on materials used are as follows:
Direct Material
Per-Unit Usage
Unit Cost
Part 714
5
$4
Part 502
3
3
Inventory policy dictates that sufficient materials be on hand at the
beginning of the month to produce 50 percent of that month’s estimated
sales. This is exactly the amount of material on hand on January 1.
c. The direct labor used per unit of output is two hours. The average
direct labor cost per hour is $15.
d. Overhead each month is estimated using a flexible budget formula.
(Activity is measured in direct labor hours.)
Supplies
Power
Maintenance
Supervision
Depreciation
Taxes
Other
Fixed Cost
Component
$—
—
28,000
14,000
100,000
7,000
56,000
Variable Cost
Component
$1.00
0.20
1.10
—
—
—
1.60
e. Monthly selling and administrative expenses are also estimated using a
flexible budgeting formula. (Activity is measured in units sold.)
Fixed Costs
Variable Costs
Salaries
$30,000
—
Commissions
—
$0.75
Depreciation
5,000
—
Shipping
—
2.60
Other
10,000
0.40
f. The unit selling price of the control valve is $90.
g. In February, the company plans to purchase land for future expansion.
The land costs $90,000.
h. All sales and purchases are for cash. Cash balance on January 1 equals
$162,900. If the firm develops a cash shortage by the end of the month,
sufficient cash is borrowed to cover the shortage. Any cash borrowed is
repaid one month later, as is the interest due. The interest rate is 12
percent per annum.
Required:
Prepare a monthly operating budget for the first quarter with the
following schedules:
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expense budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget
9. Budgeted income statement (ignore income taxes)
10. Cash budget
Exercises 10
Bernard Creighton is the controller for Creighton Hardware Store. In
putting together the cash budget for the fourth quarter of the year, he has
assembled the following data:
a. Sales
July
(actual) $100,000
August
(actual) 120,000
September
(estimated) 90,000
October
(estimated) 100,000
November
(estimated) 135,000
December
(estimated) 150,000
b. Each month, 20 percent of sales are for cash, and 80 percent are on
credit. The collection pattern for credit sales is 20 percent in the month of
sale, 50 percent in the following month, and 30 percent in the second
month following the sale.
c. Each month, the ending inventory exactly equals 40 percent of the cost
of next month’s sales. The markup on goods is 33.33 percent of cost.
d. Inventory purchases are paid for in the month following purchase.
e. Recurring monthly expenses are as follows:
Salaries and wages
$10,000
Depreciation on plant and equipment
4,000
Utilities
1,000
Other
1,700
f. Property taxes of $15,000 are due and payable on September 15.
g. Advertising fees of $6,000 must be paid on October 20.
h. A lease on a new storage facility is scheduled to begin on November 2.
Monthly payments are $5,000.
i. The company has a policy to maintain a minimum cash balance of
$10,000. If necessary, it will borrow to meet its short-term needs. All
borrowing is done at the beginning of the month. All payments on
principal and interest are made at the end of the month. The annual
interest rate is 9 percent. The company must borrow in multiples of
$1,000.
j. A partially completed balance sheet as of August 31 follows. (Accounts
payable is for inventory purchases only.)
Liabilities&
Assets
Owners’ Equity
Cash
?$
Accounts receivable
?
Inventory
?
Plant and equipment
431,750
Accounts payable
?$
Common stock
220,000
Retained earnings
268,750
Totals
$?
$?
Required:
1. Complete the balance sheet given in part (j).
2. Bernard wants to see how the company is doing prior to starting the
month of December. Prepare a cash budget for the months of September,
October, and November and for the three-month period in total (the
period begins on September 1). Provide a supporting schedule of cash
collections.
3. Prepare a pro forma balance sheet as of November 30.
Exercises 11
Bullen & Company makes and sells high-quality glare filters for
microcomputer monitors. John Crave, controller, is responsible for
preparing Bullen’s master budget and has assembled the following data
for 2010.
2010
January
Estimated unit sales
20,000
Sales price per unit
$80
Direct labor hours per unit
4.0
Direct labor hourly rate
$15
Direct materials cost per unit
$10
February
24,000
$80
4.0
$15
$10
March
16,000
$75
3.5
$16
$10
April
18,000
$75
3.5
$16
$10
The direct labor rate includes wages and all employee-related benefits.
Labor saving machinery will be fully operational by March. Also, as of
March 1, the company’s union contract calls for an increase in direct
labor wages that is included in the direct labor rate. Bullen expects to
have 10,000 glare filters in inventory at December 31, 2009, and has a
policy of carrying 50 percent of the following month’s projected sales in
inventory.
Required:
Prepare the following monthly budgets for Bullen & Company for the
first quarter of 2010. Be sure to show supporting calculations.
a. Production budget in units
b. Direct labor budget in hours
c. Direct materials cost budget
d. Sales budget
Exercises 12
Friendly Freddie’s is an independently owned major appliance and
electronics discount chain with seven stores in a Midwest metropolitan
area. Rapid expansion has created the need for careful planning of cash
requirements to ensure that the chain is able to replenish stock adequately
and meet payment schedules to creditors. Fred Ferguson, founder of the
chain, has established a banking relationship that provides a $200,000
line of credit to Friendly Freddie’s. The bank requires that a minimum
balance of $8,200 be kept in the chain’s checking account at the end of
each month. When the balance goes below $8,200, the bank
automatically extends the line of credit in multiples of $1,000 so that the
checking account balance is at least $8,200 at month-end. Friendly
Freddie’s attempts to borrow as little as possible and repays the loans
quickly in multiples of $1,000 plus 2 percent monthly interest on the
entire loan balance. Interest payments and any principal payments are
paid at the end of the month following the loan. The chain currently has
no outstanding loans. The following cash receipts and disbursements data
apply to the fourth quarter of the
current calendar year:
Estimated beginning cash balance
$ 8,800
Estimated cash sales:
October
November
December
Sales on account:
July (actual)
August (actual)
September (actual)
October (estimated)
November (estimated)
December (estimated)
$ 14,000
29,000
44,000
$130,000
104,000
128,000
135,000
142,000
188,000
Projected cash collection of sales on account is estimated to be 70 percent
in the month following the sale, 20 percent in the second month following
the sale, and 6 percent in the third month following the sale. The 4
percent beyond the third month following the sale is determined to be
uncollectible. In addition, the chain is scheduled to receive $13,000 cash
on a note receivable in October. All inventory purchases are made on
account as the chain has excellent credit with all vendors because of a
strong payment history. The following information regarding
inventory purchases is available:
Inventory Purchases
September (actual)
$120,000
October (estimated)
112,000
November (estimated)
128,000
December (estimated)
95,000
Cash disbursements for inventory are made in the month following
purchase using
an average cash discount of 3 percent for timely payment. Monthly cash
disbursements for operating expenses during October, November, and
December are estimated to be $38,000, $41,000, and $46,000,
respectively.
Required:
Prepare Friendly Freddie’s cash budget for the months of October,
November, and December showing all receipts, disbursements, and credit
line activity, where applicable.
Exercises 13
Choose the correct Answer:
1. Schultz Company expects to manufacture and sell 30,000 baskets in
20x4 for $6 each. There are 3,000 baskets in beginning finished
goods inventory with target ending inventory of 4,000 baskets. The
company keeps no work-in-process inventory. What amount of sales
revenue will be reported on the 20x4 budgeted income statement?
a. $174,000
b. $180,000
c. $186,000
d. $204,000
Answer: b
30,000 x $6 = $180,000
2. DeArmond Corporation has budgeted sales of 18,000 units, target
ending finished goods inventory of 3,000 units, and beginning
finished goods inventory of 900 units. How many units should be
produced next year?
a. 21,900 units
b. 20,100 units
c. 15,900 units
d. 18,000 units
Answer: b
18,000 + 3,000 - 900 = 20,100 units
3. For next year, Galliart, Inc., has budgeted sales of 60,000 units, target
ending finished goods inventory of 3,000 units, and beginning
finished goods inventory of 1,800 units. All other inventories are
zero. How many units should be produced next year?
a. 58,800 units
b. 60,000 units
c. 61,200 units
d. 64,800 units
Answer: c
60,000 + 3,000 - 1,800 = 61,200 units
4. Wilgers Company has budgeted sales volume of 30,000 units and
budgeted production of 27,000 units. 5,000 units are in beginning
finished goods inventory. How many units are targeted for ending
finished goods inventory?
a. 5,000 units
b. 8,000 units
c. 3,000 units
d. 2,000 units
Answer: d
5,000 + 27,000 - 30,000 = 2,000
Exercises 14
Marguerite, Inc., expects to manufacture and sell 20,000 pool cues for
$12.00 each. Direct materials costs are $2.00, direct manufacturing labor
is $4.00, and manufacturing overhead is $0.80 per pool cue. The
following inventory levels apply to 20x4:
Direct materials
Finished goods inventory
Beginning inventory
24,000 units
2,000 units
Ending inventory
24,000 units
2,500 units
1. On the 20x4 budgeted income statement, what amount will be reported
for sales?
a. $246,000
b. $240,000
c. $312,000
d. $318,000
Answer: b
20,000 x $12 = $240,000
2. How many pool cues need to be produced in 20x4?
a. 22,500 cues
b. 22,000 cues
c. 20,500 cues
d. 19,500 cues
Answer: c
20,000 + 2,500 - 2,000 = 20,500 cues
3. On the 20x4 budgeted income statement, what amount will be reported
for cost of goods sold?
a. $139,400
b. $136,000
c. $132,600
d. $153,000
Answer: b
20,000 x ($4.00 + $2.00 + $0.80) = $136,000
4. What are the 20x4 budgeted costs for direct materials, direct
manufacturing labor, and manufacturing overhead, respectively?
a. $0; $96,000; $19,200
b. $39,000; $78,000; $15,600
c. $80,000; $40,000; $16,000
d. $41,000; $82,000; $16,400
Answer: d 20,500 x $2.00 = $41,000; 20,500 x $4.00 = $82,000;
20,500 x $0.80 = $16,400
Exercises 15
Daniel, Inc. expects to manufacture and sell 6,000 ceramic vases for $20
each. Direct materials costs are $2, direct manufacturing labor is $10, and
manufacturing overhead is $3 per vase. The following inventory levels
apply to 20x4:
Direct materials
Finished goods inventory
Beginning inventory
1,000 units
400 units
Ending inventory
1,000 units
500 units
1. On the 20x4 budgeted income statement, what amount will be reported
for sales?
a. $122,000
b. $118,000
c. $140,000
d. $120,000
Answer: d
6,000 x $20 = $120,000
2. How many ceramic vases need to be produced in 20x4?
a. 5,900 vases
b. 6,100 vases
c. 7,000 vases
d. 6,000 vases
Answer: b
6,000 + 500 - 400 = 6,100 vases
3. On the 20x4 budgeted income statement, what amount will be reported
for cost of goods sold?
a. $91,500
b. $105,000
c. $90,000
d. $88,500
Answer: c
6,000 x ($2 + $10 + $3) = $90,000
4. What are the 20x4 budgeted costs for direct materials, direct
manufacturing labor, and manufacturing overhead, respectively?
a. $12,200; $61,000; $18,300
b. $12,000; $60,000; $18,000
c. $2,000; $10,000; $3,000
d. $2,000; $0; $18,000
Answer: a
6,100 x $2 = $12,200; 6,100 x $10 = $61,000; 6,100 x $3 =
$18,300
Exercises 16
The following information pertains to the January operating budget for
Casey Corporation, a retailer:
Budgeted sales are $200,000 for January
Collections of sales are 50% in the month of sale and 50% the next
month
Cost of goods sold averages 70% of sales
Merchandise purchases total $150,000 in January
Marketing costs are $3,000 each month
Distribution costs are $5,000 each month
Administrative costs are $10,000 each month
1. For January, budgeted gross margin is
a. $100,000.
b. $140,000.
c. $60,000.
d. $50,000.
Answer: c
$200,000 - $140,000 = $60,000
2. For January, the amount budgeted for the nonmanufacturing costs
budget is
a. $78,000.
b. $10,000.
c. $168,000.
d. $18,000.
Answer: d
$3,000 + $5,000 + $10,000 = $18,000
3. For January, budgeted net income is
a. $42,000.
b. $60,000.
c. $50,000.
d. $52,000.
Answer: a
$200,000 - $140,000 - $3,000 - $5,000 - $10,000 = $42,000
Exercises 17
Furniture, Inc., estimates the following number of mattress sales for the
first four months of 20x4:
Month
January
February
March
April
Sales
5,000
7,000
6,500
8,000
Finished goods inventory at the end of December is 1,500 units. Target
ending finished goods inventory is 30% of next month's sales.
1. How many mattresses need to be produced in January 20x4?
a. 4,400 mattresses
b. 5,600 mattresses
c. 6,500 mattresses
d. 7,100 mattresses
Answer: b
5,000 + (7,000 x 0.30) - $1,500 = 5,600 mattresses
2. How many mattresses need to be produced in the first quarter (January,
February, March) of 20x4?
a. 18,500 mattresses
b. 19,400 mattresses
c. 20,900 mattresses
d. 22,400 mattresses
Answer: b
5,000 + 7,000 + 6,500 + (8,000 x 0.30) - 1,500 = 19,400 mattresses
Exercises 18
Wallace Company provides the following data for next year:
Month
Budgeted Sales
January
$120,000
February
108,000
March
132,000
April
144,000
The gross profit rate is 40% of sales. Inventory at the end of December is
$21,600 and target ending inventory levels are 30% of next month's sales,
stated at cost.
1. Purchases budgeted for January total
a. $130,800.
b. $72,000.
c. $69,840.
d. $74,160.
Answer: c
($120,000 x 0.6) + ($108,000 x 0.6 x 0.3) - $21,600 = $69,840
2. Purchases budgeted for February total
a. $69,120.
b. $60,480.
c. $115,200.
d. $64,800.
Answer: a
($108,000 x 0.6) + ($132,000 x 0.6 x 0.3) - ($108,000 x 0.6 x 0.3) =
$69,120
Exercises 19
Ossmann Enterprises reports year-end information from 20x4 as follows:
Sales (80,000 units)
Cost of goods sold
$480,000
320,000
Gross margin
Operating expenses
160,000
130,000
Operating income
$ 30,000
Ossmann is developing the 20x5 budget. In 20x5 the company would like
to increase selling prices by 8%, and as a result expects a decrease in
sales volume of 10%. All other operating expenses are expected to
remain constant. Assume that COGS is a variable cost and that operating
expenses are a fixed cost.
1. What is budgeted sales for 20x5?
a. $518,400
b. $533,333
c. $466,560
d. $432,000
Answer: c
$480,000 x 1.08 x 0.90 = $466,560
2. What is budgeted cost of goods sold for 20x5?
a. $311,040
b. $288,000
c. $345,600
d. $320,000
Answer: b
$320,000 x 0.90 = $288,000
3. Should Ossmann increase the selling price in 20x5?
a. Yes, because operating income is increased for 20x5.
b. Yes, because sales revenue is increased for 20x5.
c. No, because sales volume decreases for 20x5.
d. No, because gross margin decreases for 20x5.
Answer: a
$466,560 - $288,000 - 130,000 = $48,560 Yes, because it would
result in an increase in operating income compared to 20x4.
Exercises 20
The following information pertains to Basrah Company:
Month
January
February
March
Sales
$30,000
$40,000
$50,000
Purchases
$16,000
$20,000
$28,000
 Cash is collected from customers in the following manner:
Month of sale
30%
Month following the sale70%
 40% of purchases are paid for in cash in the month of purchase,
and the balance is paid the following month.
 Labor costs are 20% of sales. Other operating costs are $15,000
per month (including $4,000 of depreciation). Both of these are
paid in the month incurred.
 The cash balance on March 1 is $4,000. A minimum cash
balance of $3,000 is required at the end of the month. Money can
be borrowed in multiples of $1,000.
1. How much cash will be collected from customers in March?
a. $47,000
b. $43,000
c. $50,000
d. None of the above
Answer: b ($40,000 x 70%) + ($50,000 x 30%) = $43,000
2. How much cash will be paid to suppliers in March?
a. $23,200
b. $28,000
c. $44,000
d. None of the above
Answer: a ($20,000 x 60%) + ($28,000 x 40%) = $23,200
3. How much cash will be disbursed in total in March?
a. $21,000
b. $25,000
c. $44,200
d. $48,200
Answer: c $23,200 + ($50,000 x 20%) + ($15,000 -$4,000) =
$44,200
4. What is the ending cash balance for March?
a. ($25,000)
b. $3,000
c. $3,200
d. $3,800
Answer: d $4,000 + $43,000 - $44,200 + $1,000 = $3,800
Exercises 21
Fiscal Company has the following sales budget for the last six months of
20x3:
July
$100,000
October
$ 90,000
August
80,000
November
100,000
September 110,000
December
94,000
Historically, the cash collection of sales has been as follows:
65% of sales collected in the month of sale,
25% of sales collected in the month following the sale,
8% of sales collected in the second month following the sale,
and 2% of sales are uncollectible.
1. Cash collections for September are
a. $71,500.
b. $86,700.
c. $99,500.
d. $102,000.
Answer: c
($110,000 x 0.65) + ($80,000 x 0.25) + ($100,000 x 0.08) = $99,500
2. What is the ending balance of accounts receivable for September,
assuming uncollectible balances are written off during the second
month following the sale?
a. $99,500
b. $48,500
c. $44,900
d. $46,500
Answer: d ($110,000 x 0.35) + ($80,000 x 0.10) = $46,500
3. Cash collections for October are
a. $58,500.
b. $92,400.
c. $99,500.
d. $88,200.
Answer: b
($90,000 x 0.65) + ($110,000 x 0.25) + ($80,000 x 0.08) = $92,400
Exercises 22
Bear Company has the following information:
Month
Budgeted Purchases
January
$26,800
February
29,000
March
30,520
April
29,480
May
27,680
Purchases are paid for in the following manner:
10% in the month of purchase
50% in the month after purchase
40% two months after purchase
1. What is the expected balance in Accounts Payable as of March 31?
a. $39,068
b. $18,312
c. $2,900
d. $30,520
Answer: a ($30,520 x 0.9) + ($29,000 x 0.4) = $39,068
2. What is the expected balance in Accounts Payable as of April 30?
a. $26,532
b. $38,740
c. $12,208
d. $17,688
Answer: b ($29,480 x 0.9) + ($30,520 x 0.4) = $38,740
3. What is the expected Accounts Payable balance as of May 31?
a. $11,792
b. $24,912
c. $36,704
d. $2,948
Answer: c ($27,680 x 0.9) + ($29,480 x 0.4) = $36,704
Exercises 23
The following information pertains to the January operating budget for
Casey Corporation.
 Budgeted sales for January $100,000 and February $200,000.
 Collections for sales are 60% in the month of sale and 40% the
next month.
 Gross margin is 30% of sales.
 Administrative costs are $10,000 each month.
 Beginning accounts receivable $20,000.




Beginning inventory $14,000.
Beginning accounts payable $60,000. (All from inventory
purchases.)
Purchases are paid in full the following month.
Desired ending inventory is 20% of next month’s cost of goods
sold (COGS).
1. For January, budgeted cash collections are
a. $20,000.
b. $60,000.
c. $80,000.
d. none of the above.
Answer: c $20,000 + ($100,000 x 60%) = $80,000
2. At the end of January, budgeted accounts receivable is
a. $20,000.
b. $40,000.
c. $60,000.
d. none of the above.
Answer: b $100,000 x 40% = $40,000
3. For January, budgeted cost of goods sold is
a. $20,000.
b. $30,000.
c. $40,000.
d. none of the above.
Answer: d
$100,000 x 70% = $70,000
4. For January, budgeted net income is
a. $20,000.
b. $30,000.
c. $40,000.
d. none of the above.
Answer: a
$100,000 - $70,000 - $10,000 = $20,000
5. For January, budgeted cash payments for purchases are
a. $14,000.
b. $70,000.
c. $60,000
d. none of the above.
Answer: c
Accounts payable, $60,000 as stated
6. At the end of January, budgeted ending inventory is
a. $20,000.
b. $28,000.
c. $40,000.
d. none of the above.
Answer: b
$200,000 x 70% x 20% = $28,000