Budgeting example:
A company plans the following sales in individual quarters of the year 2011:
I
Sales
in 800
units
Unit
sales 80$
price
Sales in $
64 000 $
II
700
III
900
IV
800
80$
80$
80$
56 000 $
72 000 $
64 000$
Total
3200
256 000 $
1) Prepare the schedule of expected cash collections, knowing that in quarter I all the accounts
receivable form 31 December of 2010 will be collected , 70% of each quarter’s sales will be
collected in the quarter of sale, 28% in the quarter following and the remaining 2% are
uncollectible.
2) Prepare the production budget (in units) knowing that the desired ending inventory should
equal 10% of the next quarter’s sales and the ending inventory on 31 December 2010 was 80
units and that the number of unites planned to be manufactured in the 1st quarter of 2012 is
100.
3) Prepare the Direct material budget knowing that each unit requires 3 pounds of material,
each pound will cost 2$, the desired ending inventory is 10% of the next quarter’s quantity
needed for production, the inventory on the 31 of December was 237 units of material, the
number of pounds needed for production in the 1st quarter of 2012 is planned to be 2500.
4) Prepare the schedule of expected cash disbursements knowing that all the accounts payable
from the 31 of December 2010, equal 2200 $, should be paid in the first quarter and that 50%
of each quarter’s purchase are paid in the quarter of purchase and the remainder in the
following quarter.
5) Prepare the direct labour budget knowing that each unit requires 5 direct labour hours and
one direct labour hour costs 5$. The workers will be paid in the same quarter in which they
will do job.
6) Prepare the overhead budget, knowing that it consists of a fixed amount 6000$ per quarter
plus 2$ per hour of direct labours.
7) Prepare the schedule for cash disbursements for overhead, knowing that all cash cost will
be paid in the same quarter they are incurred and the depreciation is equal to 3250 $ each
quarter.
8) Prepare the selling and administrative expense budget, knowing that per unit sold we have
to pay 4 $ of sales agents commissions, in the 1. Quarter we have to pay 1100 $ for
advertising and 2800 $ for insurance and each quarter we have to pay 8500 $ office salaries
and 350 rent and in the 3rd quarter we have to pay taxes 1200$.
9) Prepare the cash budget, knowing that:
- all administrative and selling expenses are paid in the same month they are incurred
- the company wants to maintain a minimum of 5000$ at the end of each quarter
- any borrowing and repayment must be made in multiples of 500$ at the interest rate of 10%
per year. Interest is computed and paid as the principal is repaid. Borrowing takes place at the
beginning of each quarter and repayment at the end of each quarter
- the income tax for 2010, equal to 4000$, will be paid in the 1. quarter
10) Prepare the budgeted income statement, knowing that income taxes rate is 20%., and the
balance sheet for 31st December 2011.
Balance sheet of 31st of December 2010:
Cash 10 000
Accounts receivable 9 500
Materials Inventory 474
Finished Goods Inventory 3 280
Land 50 000
Building and Equipment 100 000
Accumulated Depreciation (60 000)
Accounts payable 2 200
Income tax payable 4000
Common Stock 70 000
Retained Earnings 37 054
Balance sheet of 31st of December 2011:
Cash 22 053
Accounts receivable 17 920
Materials Inventory 500
Finished Goods Inventory ?
Land 50 000
Building and Equipment 100 000+30000
Accumulated Depreciation (60 000+4*3250)
Accounts payable 2 649
Income tax payable 8312
Common Stock 70 000
Retained Earnings 37 054+33 248