Tutorial 5 (Budgeting)
1. Explain how both small and large organizations can benefit from budgeting.
2. Discuss some of the reasons for budgeting.
3. Explain the role of a sales forecast in budgeting. What is the difference between a sales forecast
and a sales budget?
7. What is participative budgeting? Discuss some of its advantages.
13. Freshaire, Inc., produces two types of air fresheners: Mint Freshener and Lemon Freshener.
Both produces are sold in 32-ounce bottles. Mint sell for $3.00 per bottle, and Lemon sells for $
3.50 per bottle. Projected sales (in bottles) for the coming four quarters are as follows:
First quarter, 2008
Second quarter, 2008
Third quarter, 2008
Fourth quarter. 2008
First quarter, 2009
Mint
80,000
110,000
124,000
140,000
90,000
Lemon
100,000
100,000
120,000
140,000
110,000
The vice president of sales believes that the projected sales are realistic and can be achieved by the
company.
Required
a) Prepare a sales budget for each quarter of 2008 and for the year in total. Show sales by
product and in total for each time period.
b) How will Freshaire, Inc., use this sales budget?
14. Refer to question 13. Freshaire, Inc., next prepared a production budget for each product.
Beginning inventory of Mint Freshener on January 1 was 4,000 bottles. The company’s policy is to
have 10 percent of the next quarter’s sales of Mint Freshener in ending inventory. Beginning
inventory of Lemon Freshener on January 1 was 6,400 bottles. The company’s policy is to have 20
percent of the next quarter’s sales of Lemon Freshener in ending inventory.
Required
Prepare a production budget for each product by quarter and in total for the year.
17. Marvel Company provided the following information relating to cash payments.
a) Marvel purchased direct materials on account in the following amounts.
June
July
August
20,000
25,000
30,000
Marvel pays 25 percent of accounts payable in the month of purchase, and the remaining 75
percent in the following month.
b) In July, direct labour cost $40,000. August direct labour cost was $50,000. The company
find that typically 90 percent of direct labour cost is paid in cash during the month, with the
remainder paid in the following month.
c) August overhead amounted to $70,000, including $5,500 of depreciation.
d) Marvel took out a loan of $10,000 on May 1. Interest, due with payment of principal,
accrued at the rate of 12 percent per year. The loan and all interest was repaid on August 31.
Required
Prepare a schedule of cash payments for Marvel Company for the month of August.
21. Briggs Manufacturing produces a subassembly used in the production of jet aircraft engines.
The assembly is sold to engine manufacturers and to aircraft maintenance facilities. Projected sales
for the coming four months follow:
January
February
March
April
40,000
50,000
60,000
60,000
The following data pertain to production policies and manufacturing specifications followed by
Briggs Manufacturing:
a) Finished goods inventory on January 1 is 32,000 units, each costing $148.71. The desired
ending inventory for each month is 80 percent of the next month’s sales.
b) The data on materials used are as follows:
Direct Material
Metal
Components
Per-Unit Usage
10 lbs.
6
Cost per Pound
$8
2
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 labour used per unit of output is four hours. The average direct labour cost per
hour is $9.25.
d) Overhead each month is estimated using a flexible budget formula. (Activity is measured in
direct labour hours.)
Supplies
Power
Maintenance
Fixed-Cost Component
–
–
$30,000
Variable-Cost Component
$1.00
0.50
0.40
Supervision
Depreciation
Taxes
Other
Fixed-Cost Component
16,000
200,000
12,000
80,000
Variable-Cost Component
–
–
–
1.50
e) Monthly selling and administrative expenses are also estimated using a flexible budgeting
formula. (Activity is measured in units sold.)
Salaries
Commissions
Depreciation
Shipping
Other
Fixed Costs
$50,000
–
40,000
–
20,000
Variable Costs
–
$2.00
–
1.00
0.60
f) The unit selling price of the subassembly is $215.
g) All sales and purchases are for cash shortage by the end of the month, sufficient cash is
borrowed to cover the shortage. Any cash borrowed is repaid at the end of the quarter, as is
the interest due. (Cash borrowed at the end of the quarter is repaid at the end of the
following quarter.) The interest rate is 12 percent per annum. No money is owed at the
beginning of January.
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 labour budget
5. Overhead budget
6. Selling and administrative expenses budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget
9. Budgeted income statement (ignore income taxes)
10. Cash budget
Solution
(1) The planning and control functions of budgeting can benefit all organizations regard- less
of size. All organizations need to determine what their goals are and how best to attain
those goals. This is the planning function of budgeting. In addition, organizations can
compare what actually happens with what was planned to see if the plans are un- folding
as anticipated. This is the control function of budgeting.
(2) Budgeting forces managers to plan, pro- vides resource information for decision making,
sets benchmarks for control and evaluation, and improves the functions of communication and
coordination.
(3) The sales forecast is a critical input for building the sales budget. However, it is not
necessarily equivalent to the sales budget. Upon receiving the sales forecast,
management may decide that the firm can do better than the forecast indicates.
Consequently, actions may be taken to increase the sales potential for the coming year
(e.g., increasing advertising). This adjusted fore- cast then becomes the sales budget.
(4) Participative budgeting is a system of budgeting that allows subordinate managers a say in
how the budgets are established. Participative budgeting fosters creativity and
communicates a sense of responsibility to subordinate managers. It also creates a higher
likelihood of goal congruence since managers have more of a tendency to make the budget’s
goals their own personal goals.
(5)
1.
Freshaire, Inc.
Sales Budget
For the Year 2008
Mint:
1st Qtr.
80,000
 $3.00
$240,000
2nd Qtr.
110,000
 $3.00
$330,000
3rd Qtr.
124,000
 $3.00
$372,000
4th Qtr.
140,000
 $3.00
$420,000
Total
454,000
 $3.00
$ 1,362,000
Units
 Price
Sales
100,000
 $3.50
$350,000
100,000
 $3.50
$350,000
120,000
 $3.50
$420,000
140,000
 $3.50
$490,000
460,000
 $3.50
$ 1,610,000
Total sales
$590,000
$680,000
$792,000
$910,000
$ 2,972,000
Units
 Price
Sales
Lemon:
2. Freshaire, Inc., will use the sales budget in planning as the basis for the production budget and the succeeding budgets of the master budget. At the end
of the year, the company can compare actual sales against the budget to see
if expectations were achieved.
(6)
Freshaire, Inc.
Production Budget for Mint Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced
1st Qtr.
80,000
11,000
91,000
4,000
87,000
2nd Qtr.
110,000
12,400
122,400
11,000
111,400
3rd Qtr.
124,000
14,000
138,000
12,400
125,600
4th Qtr.
140,000
9,000
149,000
14,000
135,000
Total
454,000
9,000
463,000
4,000
459,000
4th Qtr.
140,000
22,000
162,000
28,000
134,000
Total
460,000
22,000
482,000
6,400
475,600
Freshaire, Inc.
Production Budget for Lemon Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced
.
1st Qtr.
100,000
20,000
120,000
6,400
113,600
2nd Qtr.
100,000
24,000
124,000
20,000
104,000
3rd Qtr.
120,000
28,000
148,000
24,000
124,000
(7)
MarvelI agree with comment Company
Schedule of Cash Payments for August
Payments on accounts payable:
From July purchases
(0.75 x $25,000)
From August purchases
(0.25 x $30,000)
Direct labor payments:
From July (0.10 x $40,000)
From August (0.90 x $50,000)
Overhead ($70,000 - $5,500)
Loan repayment [$10,000 + ($10,000 x 0.12 x 4/12)]
Cash payments
$ 18,750
7,500
4,000
45,000
64,500
10,400
$150,150
.
(8)
Briggs Manufacturing
For the Quarter Ended March 31, 20XX
1. Schedule 1: Sales Budget
Units
Selling price
Sales
January
40,000
 $215
$8,600,000
February
50,000

$215
$10,750,000
March
60,000

$215
$12,900,000
Total
150,000

$215
$32,250,000
2. Schedule 2: Production Budget
January
February
March
Total
Sales (Schedule 1)
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced
40,000
40,000
80,000
32,000
48,000
50,000
48,000
98,000
40,000
58,000
60,000
48,000
108,000
48,000
60,000
150,000
48,000
198,000
32,000
166,000
3. Schedule 3: Direct Materials Purchases Budget
Metal
Units to be produced
(Schedule 2)
Direct materials
per unit (lbs.)
Production needs
Desired ending
inventory
Total needs
Less: Beginning
inventory
Direct materials to
be purchased
Cost per pound
Total cost
January
Components
February
Components
48,000
48,000
58,000
58,000

10
480,000

6
288,000

10
580,000

6
348,000
250,000
730,000
150,000
438,000
300,000
880,000
180,000
528,000
200,000
120,000
250,000
150,000
530,000

$8
$4,240,000
318,000
 $2
$636,000
630,000

$8
$5,040,000
378,000

$2
$756,000
March
Metal
Components
Units to be produced
(Schedule 2)
Direct materials
per unit (lbs.)
Production needs
Desired ending
inventory
Total needs
Less: Beginning
inventory
Direct materials to
be purchased
Cost per pound
Total cost
Metal
Metal
Total
Components
60,000
60,000
166,000
166,000

10
600,000

6
360,000

10
1,660,000

6
996,000
300,000
900,000
180,000
540,000
300,000
1,960,000
180,000
1,176,000
300,000
180,000
200,000
120,000
600,000

$8
$4,800,000
360,000

$2
$720,000
1,760,000

$8
$14,080,000
1,056,000

$2
$2,112,000
4. Schedule 4: Direct Labor Budget
January
Units to be produced
(Schedule 2)
Direct labor time
per unit (hours)
Total hours needed
Cost per hour
Total cost
February
48,000
March
58,000
60,000
Total
166,000

4
4
4
4
192,000
232,000
240,000
664,000
 $9.25
 $9.25
 $9.25
 $9.25
$1,776,000
$2,146,000
$2,220,000
$6,142,000
5. Schedule 5: Overhead Budget
January
Budgeted direct labor
hours (Schedule 4)
192,000
Variable overhead rate
 $3.40
Budgeted variable overhead $652,800
Budgeted fixed overhead
338,000
Total overhead
$990,800
February
March
Total
232,000
 $3.40
$ 788,800
338,000
$1,126,800
240,000
 $3.40
$ 816,000
338,000
$1,154,000
664,000
 $3.40
$2,257,600
1,014,000
$3,271,600
6. Schedule 6: Selling and Administrative Expenses Budget
Planned sales (Schedule 1)
Variable selling and
administrative
expenses
per unit
Total variable expense
Fixed selling and
administrative
expenses:
Salaries
Depreciation
Other
Total fixed expenses
Total selling and
administrative expenses
January
40,000
February
50,000
March
60,000
Total
150,000
 $3.60
$144,000
 $3.60
$180,000
 $3.60
$216,000
 $3.60
$540,000
$ 50,000
40,000
20,000
$110,000
$ 50,000
40,000
20,000
$110,000
$ 50,000
40,000
20,000
$110,000
$150,000
120,000
60,000
$330,000
$254,000
$290,000
$326,000
$870,000
7. Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials:
Metal (10 @ $8) = $80
Comp.
(6 @ $2)
= 12
Direct labor (4  $9.25)
Overhead:
Variable (4 @ $3.40)
Fixed (4  $1,014,000/664,000)
Total unit cost
Finished goods inventory
= Units  Unit cost
$ 92.00
37.00
13.60
6.11
$148.71
= 48,000  $148.71
= $7,138,080
8. Schedule 8: Cost of Goods Sold Budget
Direct materials used (Schedule 3)
Metal (1,660,000  $8)
$13,280,000
Components (996,000  $2)
1,992,000
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Add: Beginning finished goods (32,000  $148.71)
Goods available for sale
Less: Ending finished goods (Schedule 7)
Budgeted cost of goods sold
9.
$15,272,000
6,142,000
3,271,600
$24,685,600
4,758,720
$29,444,320
7,138,080
$22,306,240
Schedule 9: Budgeted Income Statement
Sales (Schedule 1)
Less: Cost of goods sold (Schedule 8)
Gross margin
Less: Selling and admin. expenses (Schedule 6)
Income before income taxes
$ 32,250,000
22,306,240
$ 9,943,760
870,000
$ 9,073,760
10. Schedule 10: Cash Budget
Beg. balance
Cash receipts
Cash available
Less:
Disbursements:
Purchases
Direct labor
Overhead
Selling & admin.
Total
Tentative
ending balance
Borrowed/(repaid)
Interest paid
January
$ 378,000
8,600,000
$8,978,000
February
$ 1,321,200
10,750,000
$12,017,200
March
$ 2,952,400
12,900,000
$15,852,400
$4,876,000
1,776,000
790,800
214,000
$7,656,800
$5,796.000
2,146,000
926,800
250,000
$9,118.800
$ 5,520,000
2,220,000
954,000
286,000
$ 8,980,000
$16,192,000
6,142,000
2,671,600
750,000
$25,755,600
$1,321,200
2,952,400
$ 6,872,400
$6,872,400
—
—
Total
378,000
32,250,000
$32,628,000
$
Ending balance
6,872,400
$1,321,200
$ 2,952,400
$ 6,872,400
$
*(0.12  2/12  $56,800) + (0.12  1/12  $6,800)
10