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More Budgeting Problems

1) Corner Brook Furniture Co. makes bookstands and expects sales and collections for the fi rst three
months of 2011 o be as follows:
January

February

March

Total

Sales quantity (units)

6,400

5,200

7,400

19,000

Revenue

$128,000

$104,000

$148,000

$380,000

Collections $116,200 $ 81,300 $101,500 $299,000The December 31, 2010, balance sheet revealed the
following selected account balances: Cash, $18,320; Direct Material Inventory, $8,230; Finished Goods
Inventory, $23,200; and Accounts Payable, $5,800. The Direct Material Inventory balance represents
1,580 pounds of scrap iron and 1,200 bookstand bases. The Finished Goods Inventory consists of 1,220
bookstands.
Each bookstand requires 2 pounds of scrap iron, which costs $3 per pound. Bookstand bases are
purchased from a local lumber mill at a cost of $2.50 per unit. Company management decided that,
beginning in 2011, the ending balance of Direct Material Inventory should be 25 percent of the following
months production requirements and that the ending balance of Finished Goods Inventory should be 20
percent of the next months sales. Sales for April and May are expected to be 8,000 bookstands per
month.
The company normally pays for 75 percent of a months purchases of direct material in the month of
purchase (on which it takes a 1 percent cash discount). The remaining 25 percent is paid in full in the
month following the month of purchase.
Direct labor is budgeted at $0.70 per bookstand produced and is paid in the month of production. Total
cash manufacturing overhead is budgeted at $14,000 per month plus $1.30 per bookstand. Total cash
selling and administrative costs equal $13,600 per month plus 10 percent of sales revenue. These costs
are all paid in the month of incurrence. In addition, the company plans to pay executive bonuses of
$35,000 in January 2011 and make an estimated quarterly tax payment of $5,000 in March 2011.
Management requires a minimum cash balance of $10,000 at the end of each month. If the company
borrows funds, it will do so only in $1,000 multiples at the beginning of a month at a 12 percent annual
interest rate. Loans are to be repaid at the end of a month in multiples of $1,000. Interest is paid only
when a repayment is made. Investments are made in $1,000 multiples at the end of a month, and the
return on investment is 8 percent per year.
a. Prepare a production budget by month and in total for the first quarter of 2011.
b. Prepare a direct material purchases budget by month and in total for the first quarter of 2011.
c. Prepare a schedule of cash payments for purchases by month and in total for the first quarter of 2011.
d. Prepare a combined payments schedule for manufacturing overhead and selling and administrative
cash costs for each month and in total for the first quarter of 2011.
e. Prepare a cash budget for each month and in total for the first quarter of 2011.

2) Stabler Co.s projected March 31, 2011, balance sheet follows.


Assets
Cash

24,000

Accounts Receivable (net of


Allowance for Uncollectibles
of $2,880)
Merchandise Inventory
Plant Assets (net of Accumulated
Depreciation of $120,000)

104,800

TOTAL ASSETS

269,920

Liabilities and Stockholders Equity


Accounts Payable

140,400

69,120

72,000

Common Stock

50,000

Retained Earnings

79,520

TOTAL LIABILITIES + SHE

269,920

Additional information about the company is as follows:


Expected sales for April and May are $240,000 and $260,000, respectively. All sales are made on
account.
The monthly collection pattern from the month of sale forward is 50 percent, 48 percent, and 2
percent uncollectible. Accounts Receivable and the Allowance for Uncollectibles reflect only accounts
for March.
Cost of goods sold is 65 percent of sales.
Purchases each month are 60 percent of the current months sales and 30 percent of the next months
projected sales. All purchases are paid for in full in the month following purchase.
Dividends of $20,000 will be declared and paid in April 2011.
Selling and administrative expenses each month are $43,000, of which $8,000 is depreciation.
Investments and borrowings must be made in $1,000 amounts.
a. What were March 2011 sales?
b. What will be budgeted cash collections for April 2011?
c. What will be the Merchandise Inventory balance at April 30, 2011?
d. What will be the projected balance in the Retained Earnings account at April 30, 2011?
e. If the company wishes to maintain a minimum cash balance of $16,000, how much will be available
for investment, or be borrowed at the end of April 2011?

3) Blackman Corp., a rapidly expanding crossbow distributor, is in the process of formulating plans for
2011. Cara Jordan, director of marketing, has completed her 2011 forecast and is confident that sales
estimates will be met or exceeded. The following forecasted sales figures show the growth expected and
will provide the planning basis for other corporate departments.
SALES
January

$3,600,000

February

4,000,000

March

3,600,000

April

4,400,000

May

5,000,000

June

5,600,000

July

6,000,000

August

6,000,000

September

6,400,000

October

6,400,000

November

6,000,000

December

6,800,000

George Moore, assistant controller, has been given the responsibility for formulating the cash flow
projection, a critical element during a period of rapid expansion. The following information will be used
in preparing the cash analysis:
Blackman has experienced an excellent record in accounts receivable collections and expects this
trend to continue. The company collects 60 percent of its billings in the month after the sale and 40
percent in the second month after the sale. Uncollectible accounts are insignificant and should not be
considered in the analysis.
The purchase of crossbows is Blackmans largest expenditure; the cost of these items equals 50
percent of sales. The company receives 60 percent of the crossbows one month prior to sale and 40
percent during the month of sale.
Prior experience shows that 80 percent of accounts payable is paid by Blackman one month after
receipt of the purchased crossbows, and the remaining 20 percent is paid the second month after
receipt.
Hourly wages, including fringe benefits, are a function of sales volume and are equal to 20 percent of
the current months sales. These wages are paid in the month incurred.
Administrative expenses are projected to be $5,280,000 for 2011. All of these expenses are incurred
uniformly throughout the year except the property taxes. Property taxes are paid in four equal
installments in the last month of each quarter. The composition of the expenses is:

Salaries
Promotion
Property taxes
Insurance
Utilities
Depreciation
Total

$ 960,000
1,320,000
480,000
720,000
600,000
1,200,000
$5,280,000

Income tax payments are made by Blackman in the first month of each quarter based on income for
the prior quarter. Blackmans income tax rate is 40 percent. Blackmans net income for the first quarter
of 2011 is projected to be $1,224,000.
Blackman has a corporate policy of maintaining an end-of-month cash balance of $200,000. Cash is
invested or borrowed monthly, as necessary, to maintain this balance.
Blackman uses a calendar year reporting period.
a. Prepare a budgeted schedule of cash receipts and disbursements for Blackman Corp., by month, for
the second quarter of 2011. Ignore interest expense and/or interest income associated with the
borrowing/investing activities.
b. Discuss why cash budgeting is particularly important for a rapidly expanding company such as
Blackman Corp.
c. Do monthly cash budgets ignore the pattern of cash flows within the month? Explain.
4) Retail outlets purchase snowboards from Slopes, Inc., throughout the year. However, in anticipation
of late summer and early fall purchases, outlets ramp up inventories from May through August. Outlets
are billed when boards are ordered. Invoices are payable within 60 days. From past experience, Slopes
accountant projects 20% of invoices will be paid in the month invoiced, 50% will be paid in the following
month, and 30% of invoices will be paid two months after the month of invoice. The average selling
price per snowboard is $450.
To meet demand, Slopes increases production from April through July, because the snowboards are
produced a month prior to their projected sale. Direct materials are purchased in the month of
production and are paid for during the following month (terms are payment in full within 30 days of the
invoice date). During this period there is no production for inventory, and no materials are purchased
for inventory.
Direct manufacturing labor and manufacturing overhead are paid monthly. Variable manufacturing
overhead is incurred at the rate of $7 per direct manufacturing labor-hour. Variable marketing costs are
driven by the number of sales visits. However, there are no sales visits during the months studied.
Slopes, Inc., also incurs fixed manufacturing overhead costs of $5,500 per month and fixed
nonmanufacturing overhead costs of $2,500 per month.
Projected Sales
May 80 units
June 120 units

July 200 units


August 100 units
September 60 units
October 40 units
Direct Materials and Direct Manufacturing Labor Utilization and Cost
Units per Board

Price per Unit

Unit

Wood

30

board feet

Fiberglass

yard

Direct manufacturing labor

25

hour

The beginning cash balance for July 1, 2012, is $10,000. On October 1, 2011, Slopes had a cash crunch
and borrowed $30,000 on a 6% one-year note with interest payable monthly. The note is due October 1,
2012. Using the information provided, you will need to determine whether Slopes will be in a position to
pay off this short-term debt on October 1, 2012.
1. Prepare a cash budget for the months of July through September 2012. Show supporting schedules
for Required the calculation of receivables and payables.
2. Will Slopes be in a position to pay off the $30,000 one-year note that is due on October 1, 2012? If
not, what actions would you recommend to Slopes management?
3. Suppose Slopes is interested in maintaining a minimum cash balance of $10,000. Will the company be
able to maintain such a balance during all three months analyzed? If not, suggest a suitable cash
management strategy.
5) On December 1, 2011, the Itami Wholesale Co. is attempting to project cash receipts and
disbursements through January 31, 2012. On this latter date, a note will be payable in the amount of
$100,000. This amount was borrowed in September to carry the company through the seasonal peak in
November and December.
Selected general ledger balances on December 1 are as follows:
Cash

$ 88,000

Inventory

65,200

Accounts payable

136,000

Sales terms call for a 3% discount if payment is made within the first 10 days of the month after sale,
with the balance due by the end of the month after sale. Experience has shown that 50% of the billings
will be collected within the discount period, 30% by the end of the month after purchase, and 14% in the
following month. The remaining 6% will be uncollectible. There are no cash sales.
The average selling price of the companys products is $100 per unit. Actual and projected sales are as
follows:

October actual

$ 280,000

November actual

320,000

December estimated

330,000

January estimated

250,000

February estimated

240,000

Total estimated for year ending June 30, 2012

$2,400,000

All purchases are payable within 15 days. Approximately 60% of the purchases in a month are paid that
month, and the rest the following month. The average unit purchase cost is $80. Target ending
inventories are 500 units plus 10% of the next months unit sales.
Total budgeted marketing, distribution, and customer-service costs for the year are $600,000. Of this
amount, $120,000 are considered fixed (and include depreciation of $30,000). The remainder varies
with sales. Both fixed and variable marketing, distribution, and customer-service costs are paid as
incurred.
Prepare a cash budget for December 2011 and January 2012.