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True/False Questions

F 1. The usual starting point in budgeting is to make a forecast of net income.


F 2. A budget committee helps provide consistency in the budgeting process because it
prepares all of the budgets for the various segments of the organization.
T 3. A continuous or perpetual budget is one which covers a 12-month period but which is
constantly adding a new month on the end as the current month is completed.
F 4. Control involves developing objectives and preparing the various budgets to achieve
those objectives.
F 5. A self-imposed budget is one prepared by top management and passed downward
through an organization.
F 6. When using the self-imposed budget approach, it is generally best for top management
to accept all budget estimates without question in order to minimize adverse
behavioral responses from employees.
T 7. Cash collections in a schedule of cash collections typically consist of collections on
sales made to customers in prior periods plus collections on sales made in the current
budget period.
T 8. In a production budget, if the number of units in finished goods inventory at the end of
the period is less than the number of units in finished goods inventory at the beginning
of the period, then the expected number of units sold is greater than the number of
units to be produced during the period.
T 9. In a merchandising company, the required merchandise purchases for a period are
determined by subtracting the units in beginning inventory from the sum of the units
to be sold during the period and the desired ending inventory.
F 10. The direct materials to be purchased for a period can be obtained by subtracting the
desired ending inventory of direct materials from the total direct materials needed for
the period.
F 11. The direct labor budget begins with sales in units from the sales budget.
F 12. The selling and administrative expense budget lists all costs of production other than
direct materials and direct labor.
T 13. In the manufacturing overhead budget, the non-cash charges (such as depreciation) are
deducted from the total budgeted manufacturing overhead to determine the expected
cash disbursements for manufacturing overhead.
T 14. The selling and administrative expense budget lists the budgeted expenses for areas
other than manufacturing.
F 15. The disbursements section of a cash budget consists of all cash payments for the
period except cash payments for dividends.
D 16. Which of the following budgets are prepared before the sales budget?

Budgeted Income Statement Direct Labor Budget


A) Yes Yes
B) Yes No
C) No Yes
D) No No
C 17. The usual starting point for a master budget is:
A) the direct materials purchase budget.
B) the budgeted income statement.
C) the sales forecast or sales budget.
D) the production budget.
A 18. Which of the following budgets are prepared before the cash budget?

Selling and Administrative Expense Budget Production Budget


A) Yes Yes
B) Yes No
C) No Yes
D) No No
D 19. Which of the following benefits could an organization reasonably expect from an
effective budget program?
A) Better control of the organization's costs.
B) Better coordination of an organization's activities.
C) Better communication of the organization's objectives.
D) All of the above.
B 20. An organization's budget program should not be used:
A) to motivate employees.
B) to assign blame to managers that do not meet budgetary goals.
C) to help evaluate managers.
D) to allocate resources to the various parts of an organization.
C 21. A basic idea underlying __________________ is that a manager should be held
responsible only for those items that the manager can actually control to a significant
extent.
A) participative budgeting
B) planning and control
C) responsibility accounting
D) the master budget
B 22. When preparing a merchandise purchases budget, the required purchases in units
equals:
A) budgeted unit sales + beginning merchandise inventory + desired merchandise
ending inventory.
B) budgeted unit sales - beginning merchandise inventory + desired merchandise
ending inventory.
C) budgeted unit sales - beginning merchandise inventory - desired merchandise
ending inventory.
D) budgeted unit sales + beginning merchandise inventory - desired merchandise
ending inventory.
A 23. When preparing a direct materials budget, the required purchases of raw materials in
units equals:
A) raw materials needed to meet the production schedule + desired ending
inventory of raw materials - beginning inventory of raw materials.
B) raw materials needed to meet the production schedule - desired ending inventory
of raw materials - beginning inventory of raw materials.
C) raw materials needed to meet the production schedule - desired ending inventory
of raw materials + beginning inventory of raw materials.
D) raw materials needed to meet the production schedule + desired ending
inventory of raw materials + beginning inventory of raw materials.
B 24. Which of the following statements is NOT correct concerning the Manufacturing
Overhead Budget?
A) The Manufacturing Overhead Budget provides a schedule of all costs of
production other than direct materials and labor costs.
B) The Manufacturing Overhead Budget shows only the variable portion of
manufacturing overhead.
C) The Manufacturing Overhead Budget shows the expected cash disbursements
for manufacturing overhead.
D) The Manufacturing Overhead Budget is prepared after the Sales Budget.
A 25. Which of the following statements is NOT correct concerning the Cash Budget?
A) It is not necessary to prepare any other budgets before preparing the Cash
Budget.
B) The Cash Budget should be prepared before the Budgeted Income Statement.
C) The Cash Budget should be prepared before the Budgeted Balance Sheet.
D) The Cash Budget builds on earlier budgets and schedules as well as additional
data.

NOTE: All Amounts in color RED are final answers.


28. All of Gaylord Company's sales are on account. Thirty-five percent of the credit sales
are collected in the month of sale, 45% in the month following sale, and the rest are
collected in the second month following sale. Bad debts are negligible and should be
ignored. The following are budgeted sales data for the company:

January February March April


Total sales............... $50,000 $60,000 $40,000 $30,000

What is the amount of cash that should be collected in March?


March sales ($40,000 35%).............. $14,000
February sales ($60,000 45%)......... 27,000
January sales ($50,000 20%*)......... 10,000
Total..................................................... $51,000
*100% 35% 45% = 20%
30. Betz Company's sales budget shows the following projections for next year:

Sales in units
First Quarter....................... 60,000
Second Quarter................... 80,000
Third Quarter..................... 45,000
Fourth Quarter.................... 55,000
Inventory at the beginning of the year was 18,000 units. The finished goods inventory
at the end of each quarter is to equal 30% of the next quarter's budgeted unit sales.
How many units should be produced during the first quarter?
Units produced = Ending inventory + Units sold + Beginning inventory
= (30% 80,000) + 60,000 18,000
= 24,000 + 60,000 18,000 = 66,000
32. MJ Department Store expects to generate the following sales figures for the next three
months:

July August September


Expected sales........ $480,000 $560,000 $600,000

MJ's gross profit rate is 45% of sales dollars. At the end of each month, MJ wants a
merchandise inventory balance equal to 30% of the following month's expected sales,
stated at cost. What dollar amount of merchandise inventory should MJ plan to
purchase in August?

Inventory cost is 55% of sales dollars (1 45% gross profit rate)


Inventory purchased = Ending inventory + Sales Beginning inventory
= [($600,000 30%) 55%] + ($560,000 55%) [($560,000 30%) 55%]
= ($180,000 55%) + $308,000 ($168,000 55%)
= $99,000 + $308,000 $92,400 = $314,600

34. The following are budgeted data:

Month 1 Month 2 Month 3


Sales in units...................... 15,000 20,000 18,000
Production in units............. 16,000 22,000 15,000

One pound of material is required for each finished unit. The inventory of materials at
the end of each month should equal 20% of the following month's production needs.
At the beginning of Month 1, 3,200 lbs. of materials were on hand. Purchases of raw
materials for Month 2 would be budgeted to be:

Materials purchased = Ending inventory + Materials used Beginning inventory


= (20% 15,000) + 22,000 (20% 22,000)
= 3,000 + 22,000 4,400 = 20,600
37. Depasquale Corporation is working on its direct labor budget for the next two months.
Each unit of output requires 0.41 direct labor-hours. The direct labor rate is $8.10 per
direct labor-hour. The production budget calls for producing 5,000 units in May and
5,400 units in June. If the direct labor work force is fully adjusted to the total direct
labor-hours needed each month, what would be the total combined direct labor cost for
the two months?

Total direct labor-hours = 0.41 (5,000 + 5,400) = 4,264


Direct labor cost = 4,264 $8.10 = $34,538.40
38. Pooler Corporation is working on its direct labor budget for the next two months. Each
unit of output requires 0.15 direct labor-hours. The direct labor rate is $7.00 per direct
labor-hour. The production budget calls for producing 6,500 units in April and 6,200
units in May. The company guarantees its direct labor workers a 40-hour paid work
week. With the number of workers currently employed, that means that the company is
committed to paying its direct labor work force for at least 1,000 hours in total each
month even if there is not enough work to keep them busy. What would be the total
combined direct labor cost for the two months?

Direct labor-hours needed for production in April = 0.15 6,500 = 975


Direct labor-hours needed for production in May = 0.15 6,200 = 930
Even though both months production needs would require less than 1,000 hours, the
company has committed to paying a minimum of 1,000 hours per month.
Total direct labor-hours = 1,000 + 1,000 = 2,000
Direct labor cost = 2,000 $7 = $14,000

42. The manufacturing overhead budget at Foshay Corporation is based on budgeted


direct labor-hours. The direct labor budget indicates that 5,800 direct labor-hours will
be required in May. The variable overhead rate is $9.10 per direct labor-hour. The
company's budgeted fixed manufacturing overhead is $104,400 per month, which
includes depreciation of $8,120. All other fixed manufacturing overhead costs
represent current cash flows. The company recomputes its predetermined overhead
rate every month. The predetermined overhead rate for May should be:

$9.10 + ($104,400 5,800) = $9.10 + $18 = $27.10

43. The manufacturing overhead budget at Franklyn Corporation is based on budgeted


direct labor-hours. The direct labor budget indicates that 4,400 direct labor-hours will
be required in January. The variable overhead rate is $1.30 per direct labor-hour. The
company's budgeted fixed manufacturing overhead is $60,280 per month, which
includes depreciation of $17,160. All other fixed manufacturing overhead costs
represent current cash flows. The January cash disbursements for manufacturing
overhead on the manufacturing overhead budget should be:

(4,400 $1.30) + ($60,280 $17,160) = $5,720 + $43,120 = $48,840

44. Schuepfer Inc. bases its selling and administrative expense budget on budgeted unit
sales. The sales budget shows 1,300 units are planned to be sold in March. The
variable selling and administrative expense is $4.20 per unit. The budgeted fixed
selling and administrative expense is $19,240 per month, which includes depreciation
of $3,380 per month. The remainder of the fixed selling and administrative expense
represents current cash flows. The cash disbursements for selling and administrative
expenses on the March selling and administrative expense budget should be:
Solution:

(1,300 $4.20) + ($19,240 $3,380) = $5,460 + $15,860 = $21,320

46. Sedita Inc. is working on its cash budget for July. The budgeted beginning cash
balance is $46,000. Budgeted cash receipts total $175,000 and budgeted cash
disbursements total $174,000. The desired ending cash balance is $50,000. The excess
(deficiency) of cash available over disbursements for July will be:

Excess cash available = Beginning cash balance + Cash receipts Cash disbursements
= $46,000 + $175,000 $174,000 = $47,000
48. Francis Manufacturing Company is currently preparing its cash budget for next month
and has gathered the following information:

Expected cash receipts............................... $39,400


Expected disbursements:
Direct materials....................................... $12,000
Direct labor............................................. $9,000
Manufacturing overhead......................... $11,500
Selling and administrative expenses....... $22,000

The beginning cash balance will be $6,000 and the company requires a minimum cash
balance at the end of the month of $5,000. How much will Francis Manufacturing
need to borrow to meet its cash needs for the month?

Solution:
Actual ending cash balance = Beginning cash balance + Cash receipts Cash
disbursements = $6,000 + $39,400 ($12,000 + $9,000 + $11,500 + $22,000)
= $45,400 $54,500 = ($9,100)
Amount borrowed = Desired ending cash balance Actual ending cash balance
= $5,000 ($9,100) = $14,100

Use the following to answer questions 49-50:


KAB Inc., a small retail store, had the following results for May. The budgets for June and
July are also given.

May June July


(actual) (budget) (budget)
Sales............................................................ $42,000 $40,000 $45,000
Less cost of goods sold............................... 21,000 20,000 22,500
Gross margin............................................... 21,000 20,000 22,500
Less selling and administrative expenses.... 20,000 20,000 20,000
Net operating income.................................. $ 1,000 $ 0 $ 2,500
Sales are collected 80% in the month of the sale and the balance in the month following the
sale. (There are no bad debts.) The goods that are sold are purchased in the month prior to
sale. Suppliers of the goods are paid in the month following the sale. The "selling and
administrative expenses" are paid in the month of the sale.

49. The amount of cash collected during the month of June should be:

Solution:

June sales ($40,000 80%)................. $32,000


May sales ($42,000 20%)................. 8,400
Total..................................................... $40,400

50. The cash disbursements during the month of June for goods purchased for resale and
for selling and administrative expenses should be:

May purchases of goods.................................. $21,000


June selling and administrative expenses........ 20,000
Total................................................................. $41,000

Use the following to answer questions 51-59:

Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's
operations follow:

Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000
for January.
Collections are expected to be 65% in the month of sale, 33% in the month following
the sale, and 2% uncollectible.
The cost of goods sold is 80% of sales.
The company purchases 70% of its merchandise in the month prior to the month of
sale and 30% in the month of sale. Payment for merchandise is made in the month
following the purchase.
Other monthly expenses to be paid in cash are $21,100.
Monthly depreciation is $21,000.
Ignore taxes.

Statement of Financial Position


October 31
Assets:
Cash............................................................................................... $ 25,000
Accounts receivable
(net of allowance for uncollectible accounts)............................ 77,000
Inventory........................................................................................ 162,400
Property, plant and equipment
(net of $624,000 accumulated depreciation).............................. 1,026,000
Total assets..................................................................................... $1,290,400

Liabilities and Stockholders Equity:


Accounts payable........................................................................... $ 239,000
Common stock............................................................................... 740,000
Retained earnings........................................................................... 311,400
Total liabilities and stockholders equity....................................... $1,290,400

51. Expected cash collections in December are:

December sales ($310,000 65%)..... $201,500


November sales ($290,000 33%)..... 95,700
Total..................................................... $297,200

52. The cost of December merchandise purchases would be:

Cost of
Sales Goods Sold
November............................................ $290,000 $232,000
December............................................ $310,000 $248,000
January................................................ $210,000 $168,000
Merchandise purchases = Ending inventory + Cost of goods sold Beginning
inventory = ($168,000 70%) + $248,000 ($248,000 70%)
= $117,600 + $248,000 $173,600 = $192,000

53. December cash disbursements for merchandise purchases would be:

Cost of
Sales Goods Sold
November............................................ $290,000 $232,000
December............................................ $310,000 $248,000
January................................................ $210,000 $168,000
December cash disbursements = 70% of December Cost of Goods Sold + 30% of
November Cost of Good Sold = (70% $248,000) + (30% $232,000)
= $173,600 + $69,600 = $243,200

54. The excess (deficiency) of cash available over disbursements for December would be:

Cash collections Cash disbursements Other monthly expenses


= $297,200 $243,200 $21,100 = $32,900
55. The net income for December would be:

Sales.................................................... $310,000
Less uncollectible ($310,000 2%).... 6,200
Net sales.............................................. 303,800
Cost of goods sold ($310,000 80%). 248,000
Other expenses.................................... 21,100
Depreciation expenses......................... 21,000
Net income.......................................... $ 13,700

56. The cash balance at the end of December would be:

November December
October Accounts Receivable Balance ..... $ 77,000
Collection of November Sales...................
$290,000 65%...................................... 188,500
$290,000 33%...................................... $ 95,700
Collection of December Sales....................
$310,000 65%...................................... 201,500
October Accounts Payable Balance........... (239,000)
Payment for November Purchases.............
($290,000 80%) 30%........................ (69,600)
($310,000 80%) 70%........................ (173,600)
Other cash monthly expenses..................... (21,100) (21,100)
Net cash inflow(outflow) per month.......... $ 5,400 $ 32,900

Beginning cash balance, October 31.......................... $25,000


Add November net cash inflow.................................. 5,400
Add December net cash inflow.................................. 32,900
Ending cash balance, December 31............................ $63,300

57. The accounts receivable balance, net of uncollectible accounts, at the end of December
would be:

From December sales ($310,000 33%): $102,300

58. Accounts payable at the end of December would be:


Cost of
Sales Goods Sold
November............................................ $290,000 $232,000
December............................................ $310,000 $248,000
January................................................ $210,000 $168,000
Merchandise purchases = Ending inventory + Cost of goods sold Beginning
inventory = ($168,000 70%) + $248,000 ($248,000 70%)
= $117,600 + $248,000 $173,600 = $192,000
59. Retained earnings at the end of December would be:

Net income in November:


Sales.................................................... $290,000
Less uncollectible ($290,000 2%).... 5,800
Net sales.............................................. 284,200
Cost of goods sold ($290,000 80%). 232,000
Other expenses.................................... 21,100
Depreciation expenses......................... 21,000
Net income.......................................... $ 10,100
Retained earnings in December = Retained earnings in October + Net income in
November + Net income in December = $311,400 + $10,100 + $13,700 = $335,200

Use the following to answer questions 68-69:

The LaPann Company has obtained the following sales forecast data:

July August September October


Cash sales............... $80,000 $70,000 $50,000 $60,000
Credit sales............. $240,000 $220,000 $180,000 $200,000

The regular pattern of collection of credit sales is 20% in the month of sale, 70% in the month
following the month of sale, and the remainder in the second month following the month of
sale. There are no bad debts.

68. The budgeted accounts receivable balance on September 30 is:

Solution:

September sales ($180,000 80%*)... $144,000


August sales ($220,000 10%**)...... 22,000
Total..................................................... $166,000
*100% 20%
**100% 20% 70%

69. The budgeted cash receipts for October are:

October cash sales............................................ $ 60,000


October credit sales ($200,000 20%)............ 40,000
September credit sales ($180,000 70%)....... 126,000
August credit sales ($220,000 10%)............. 22,000
Total................................................................. $248,000
Use the following to answer questions 70-71:

Sarafiny Corporation is in the process of preparing its annual budget. The following
beginning and ending inventory levels are planned for the year.

Beginning Inventory Ending Inventory


Finished goods (units)........ 20,000 30,000
Raw material (grams)......... 50,000 40,000

Each unit of finished goods requires 7 grams of raw material.

70. If the company plans to sell 270,000 units during the year, the number of units it
would have to manufacture during the year would be:

Units produced = Ending inventory + Units sold Beginning inventory


= 30,000 + 270,000 20,000 = 280,000

71. How much of the raw material should the company purchase during the year?

Materials purchased = Ending inventory + Materials to be used Beginning inventory


= 40,000 + (280,000 7) 50,000
= 40,000 + 1,960,000 50,000 = 1,950,000

Use the following to answer questions 72-73:

LBC Corporation makes and sells a product called Product WZ. Each unit of Product WZ
requires 3.5 hours of direct labor at the rate of $14.50 per direct labor-hour. Management
would like you to prepare a Direct Labor Budget for June.

72. The budgeted direct labor cost per unit of Product WZ would be:

Budgeted direct labor cost per unit = Direct labor-hours per unit Direct labor rate
= 3.5 $14.50 = $50.75

73. The company plans to sell 39,000 units of Product WZ in June. The finished goods
inventories on June 1 and June 30 are budgeted to be 200 and 100 units, respectively.
Budgeted direct labor costs for June would be:

Units produced = Ending inventory + Units sold Beginning inventory


= 100 + 39,000 200 = 38,900
Budgeted direct labor cost per unit = Direct labor-hours per unit Direct labor rate
= 3.5 $14.50 = $50.75
Budgeted direct labor cost = Units produced Budgeted direct labor cost per unit
= 38,900 $50.75 = $1,974,175
Use the following to answer questions 74-75:

Barley Enterprises has budgeted unit sales for the next four months as follows:

October................... 4,800 units


November............... 5,800 units
December............... 6,400 units
January................... 5,200 units

The ending inventory for each month should be equal to 15% of the next month's sales in
units. The inventory on September 30 was below this level and contained only 600 units.

74. The total units to be produced in October are:

Units produced = Ending inventory + Units sold Beginning inventory


= (15% 5,800) + 4,800 600 = 870 + 4,800 600 = 5,070

75. The desired ending inventory for December is:

Desired ending inventory for December = 15% of Januarys sales in units


= 15% 5,200 = 780

Additional Problems with Solutions for Self-Review


Use the following to answer questions 76-77:

Harden, Inc., has budgeted sales in units for the next five months as follows:

June........................ 7,000 units


July......................... 5,300 units
August.................... 7,100 units
September.............. 6,800 units
October................... 4,900 units

Past experience has shown that the ending inventory for each month should be equal to 15%
of the next month's sales in units. The inventory on May 31 contained 1,050 units. The
company needs to prepare a production budget for the next five months.

76. The beginning inventory for September should be:


A) 1,020 units
B) 1,050 units
C) 1,065 units
D) 735 units
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy

Solution:

The beginning inventory for September is equal to the ending inventory for August.
Desired ending inventory for August = 15% Septembers sales in units
= 15% 6,800 = 1,020

77. The total number of units produced in July should be:


A) 5,300 units
B) 6,365 units
C) 5,570 units
D) 5,030 units

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 3 Level: Easy

Solution:

Units produced = Ending inventory + Units sold Beginning inventory


= (7,100 15%) + 5,300 (5,300 15%)
= 1,065 + 5,300 795 = 5,570

Use the following to answer questions 78-79:

Caspion Corporation makes and sells a product called a Miniwarp. One Miniwarp requires 2.5
kilograms of the raw material Jurislon. Budgeted production of Miniwarps for the next five
months is as follows:

August.................... 22,600 units


September.............. 21,300 units
October................... 22,700 units
November............... 23,900 units
December............... 23,600 units

The company wants to maintain monthly ending inventories of Jurislon equal to 20% of the
following month's production needs. On July 31, this requirement was not met since only
10,800 kilograms of Jurislon were on hand. The cost of Jurislon is $18.00 per kilogram. The
company wants to prepare a Direct Materials Purchase Budget for the next five months.
78. The desired ending inventory of Jurislon for the month of September is:
A) $81,720
B) $76,680
C) $191,700
D) $204,300

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Medium

Solution:

Desired ending inventory = 20% Direct materials needed for October Cost per
kilogram of Jurislon = 20% (22,700 2.5) $18 = 11,350 $18 = $204,300

79. The total cost of Jurislon to be purchased in August is:


A) $1,839,600
B) $1,014,300
C) $1,208,700
D) $1,017,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 4 Level: Medium

Solution:

Materials purchased = Ending inventory + Materials used Beginning inventory


= (20% 21,300 2.5) + (22,600 2.5) 10,800
= 10,650 + 56,500 10,800 = 56,350
Total cost of purchase = 56,350 $18 = $1,014,300
Use the following to answer questions 80-83:

The International Company makes and sells only one product, Product SW. The company is in
the process of preparing its Selling and Administrative Expense Budget for the last half of the
year. The following budget data are available:

Variable Cost Monthly Fixed


Per Unit Sold Cost
Sales commissions............................... $0.70
Shipping............................................... $1.10
Advertising........................................... $0.20 $14,000
Executive salaries................................. $34,000
Depreciation on office equipment........ $11,000
Other.................................................... $0.25 $19,000

All expenses other than depreciation are paid in cash in the month they are incurred.

80. If the company has budgeted to sell 25,000 units of Product SW in July, then the total
budgeted selling and administrative expenses for July will be:
A) $56,250
B) $78,000
C) $134,250
D) $123,250

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Medium
Solution:

Variable cost per unit = ($0.70 + $1.10 + $0.20 + $0.25) = $2.25


Fixed cost = $14,000 + $34,000 + $11,000 + $19,000 = $78,000
Total budgeted selling and administrative expenses = Variable cost + Fixed cost
= ($2.25 25,000) + $78,000 = $56,250 + $78,000 = $134,250
81. If the company has budgeted to sell 20,000 units of Product SW in October then the
total budgeted variable selling and administrative expenses for October will be:
A) $45,000
B) $40,000
C) $56,250
D) $78,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Medium

Solution:

Variable cost per unit = ($0.70 + $1.10 + $0.20 + $0.25) = $2.25


Total budgeted variable selling and administrative expenses = Variable cost per unit
Units sold = $2.25 20,000 = $45,000

82. If the budgeted cash disbursements for selling and administrative expenses for
November total $123,250, then how many units of Product SW does the company plan
to sell in November (rounded to the nearest whole unit)?
A) 33,444 units
B) 25,000 units
C) 22,952 units
D) 20,111 units

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Hard

Solution:

Variable cost per unit = ($0.70 + $1.10 + $0.20 + $0.25) = $2.25


Cash disbursements = Variable cost + (Fixed cost Depreciation)
$123,250 = ($2.25 Units sold) + ($78,000 $11,000)
$123,250 = ($2.25 Units sold) - $67,000
Units sold = ($123,250 $67,000) $2.25
Units sold = $56,250 $2.25
Units sold = 25,000 units
83. If the company has budgeted to sell 24,000 units of Product SW in September, then the
total budgeted fixed selling and administrative expenses for September would be:
A) $54,000
B) $48,000
C) $67,000
D) $78,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 7 Level: Medium

Solution:
Monthly
Fixed Cost
Advertising........................................... $14,000
Executive salaries................................. 34,000
Depreciation on office equipment........ 11,000
Other.................................................... 19,000
Total..................................................... $78,000

Use the following to answer questions 84-86:

Davis Corporation is preparing its Manufacturing Overhead Budget for the fourth quarter of
the year. The budgeted variable factory overhead rate is $1.70 per direct labor-hour; the
budgeted fixed factory overhead is $116,000 per month, of which $30,000 is factory
depreciation.

84. If the budgeted direct labor time for October is 8,000 hours, then the total budgeted
factory overhead for October is:
A) $129,600
B) $43,600
C) $99,600
D) $86,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Total budgeted factory overhead = Variable manufacturing overhead + Fixed


manufacturing overhead = (8,000 $1.70) + $116,000 = $13,600 + $116,000
= $129,600
85. If the budgeted direct labor time for November is 7,000 hours, then the total budgeted
cash disbursements for November must be:
A) $41,900
B) $127,900
C) $86,000
D) $97,900

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Medium

Solution:

Cash disbursements = Variable manufacturing overhead + Fixed manufacturing


overhead Depreciation = (7,000 $1.70) + $116,000 $30,000
= $11,900 + $116,000 $30,000 = $97,900

86. If the budgeted direct labor time for December is 4,000 hours, then the predetermined
factory overhead per direct labor-hour for December would be:
A) $9.20
B) $30.70
C) $23.20
D) $1.70

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Medium

Solution:

Predetermined factory overhead rate = Variable overhead rate per direct labor hour +
Fixed factory overhead rate per hour = $1.70 + ($116,000 4,000)
= $1.70 + $29 = $30.70

Use the following to answer questions 87-88:

Cartier Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The
variable overhead rate is $5.80 per direct labor-hour. The company's budgeted fixed
manufacturing overhead is $39,930 per month, which includes depreciation of $12,870. All
other fixed manufacturing overhead costs represent current cash flows. The direct labor
budget indicates that 3,300 direct labor-hours will be required in April.
87. The April cash disbursements for manufacturing overhead on the manufacturing
overhead budget should be:
A) $59,070
B) $46,200
C) $27,060
D) $19,140

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Cash disbursements for April = (Variable overhead rate Number of direct-labor


hours) + (Fixed manufacturing overhead less depreciation)
= ($5.80 3,300) + ($39,930 $12,870) = $19,140 + $27,060 = $46,200

88. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for April should be:
A) $14.00
B) $5.80
C) $17.90
D) $12.10

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Predetermined factory overhead rate = Variable overhead rate per direct labor hour +
Fixed factory overhead rate per hour = $5.80 + ($39,930 3,300)
= $5.80 + $12.10 = $17.90

Use the following to answer questions 89-90:

Avril Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The
variable overhead rate is $4.60 per direct labor-hour. The company's budgeted fixed
manufacturing overhead is $54,080 per month, which includes depreciation of $3,840. All
other fixed manufacturing overhead costs represent current cash flows. The direct labor
budget indicates that 3,200 direct labor-hours will be required in October.
89. The October cash disbursements for manufacturing overhead on the manufacturing
overhead budget should be:
A) $68,800
B) $64,960
C) $14,720
D) $50,240

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Cash disbursements for October = (Variable overhead rate Number of direct-labor


hours) + (Fixed manufacturing overhead less depreciation)
= ($4.60 3,200) + ($54,080 $3,840) = $14,720 + $50,240 = $64,960

90. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for October should be:
A) $4.60
B) $21.50
C) $20.30
D) $16.90

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Predetermined factory overhead rate = Variable overhead rate per direct labor hour +
Fixed factory overhead rate per hour
= $4.60 + ($54,080 3,200) = $4.60 + $16.90 = $21.50

Use the following to answer questions 91-92:

The manufacturing overhead budget at Cardera Corporation is based on budgeted direct labor-
hours. The direct labor budget indicates that 2,300 direct labor-hours will be required in
January. The variable overhead rate is $1.00 per direct labor-hour. The company's budgeted
fixed manufacturing overhead is $28,060 per month, which includes depreciation of $4,600.
All other fixed manufacturing overhead costs represent current cash flows.
91. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for January should be:
A) $1.00
B) $12.20
C) $11.20
D) $13.20

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Predetermined factory overhead rate = Variable overhead rate per direct labor hour +
Fixed factory overhead rate per hour
= $1 + ($28,060 2,300) = $1 + $12.20 = $13.20

92. The January cash disbursements for manufacturing overhead on the manufacturing
overhead budget should be:
A) $30,360
B) $2,300
C) $23,460
D) $25,760

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Cash disbursements for January = (Variable overhead rate Number of direct-labor


hours) + (Fixed manufacturing overhead less depreciation)
= (2,300 $1) + ($28,060 $4,600) = $2,300 + $23,460 = $25,760

Use the following to answer questions 93-94:

The manufacturing overhead budget at Polich Corporation is based on budgeted direct labor-
hours. The direct labor budget indicates that 1,600 direct labor-hours will be required in
February. The variable overhead rate is $3.40 per direct labor-hour. The company's budgeted
fixed manufacturing overhead is $28,320 per month, which includes depreciation of $3,680.
All other fixed manufacturing overhead costs represent current cash flows.
93. The company recomputes its predetermined overhead rate every month. The
predetermined overhead rate for February should be:
A) $3.40
B) $21.10
C) $17.70
D) $18.80

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Predetermined factory overhead rate = Variable overhead rate per direct labor hour +
Fixed factory overhead rate per hour = $3.40 + ($28,320 1,600)
= $3.40 + $17.70 = $21.10

94. The February cash disbursements for manufacturing overhead on the manufacturing
overhead budget should be:
A) $24,640
B) $33,760
C) $30,080
D) $5,440

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 6 Level: Easy

Solution:

Cash disbursements for February = (Variable overhead rate Number of direct-labor


hours) + (Fixed manufacturing overhead less depreciation)
= (1,600 $3.40) + ($28,320 $3,680) = $5,440 + $24,640 = $30,080
Use the following to answer questions 95-97:

Porter Corporation makes and sells a single product called a Yute. The company is in the
process of preparing its Selling and Administrative Expense Budget for the last quarter of the
year. The following budget data are available:

Variable Cost Monthly Fixed


Per Yute Sold Cost
Sales commissions.................................. $5.90
Shipping.................................................. $5.30
Advertising.............................................. $8.90 $32,000
Executive salaries.................................... $178,000
Depreciation on office equipment........... $7,000
Other....................................................... $0.60 $20,000

All of these expenses (except depreciation) are paid in cash in the month they are incurred.

95. If the company has budgeted to sell 14,000 Yutes in November, then the total budgeted
selling and administrative expenses for November would be:
A) $526,800
B) $289,800
C) $237,000
D) $519,800

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 7 Level: Medium

Solution:

Total budgeted selling and administrative expenses = Variable cost + Fixed cost =
[14,000 ($5.90 + $5.30 + $8.90 + $ 0.60)] + ($32,000 + $178,000 + $7,000 +
$20,000) = (14,000 $20.70) + $237,000 = $526,800
96. If the company has budgeted to sell 12,000 Yutes in December, then the budgeted total
cash disbursements for selling and administrative expenses for December would be:
A) $237,000
B) $485,400
C) $248,400
D) $478,400

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 7 Level: Medium

Solution:

Variable cost per unit = $5.90 + $5.30 + $8.90 + $0.60 = $20.70


Fixed cost total = $32,000 + $178,000 + $7,000 + $20,000 = $237,000
Cash disbursements for December = (Variable selling and administrative cost
Number of direct-labor hours) + (Fixed manufacturing overhead less depreciation)
= (12,000 $20.70) + ($237,000 $7,000) = $248,400 + $230,000 = $478,400

97. If the budgeted cash disbursements for selling and administrative expenses for October
total $518,520, then how many Yutes does the company plan to sell in October?
A) 13,300 units
B) 14,100 units
C) 13,800 units
D) 13,600 units

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 7 Level: Hard

Solution:

($20.70 Units sold) + $237,000 = $518,520


($20.70 Units) = $518,520 $237,000
Units = $281,520 $20.70 = 13,600
Use the following to answer questions 98-100:

The Bandeiras Company, a merchandising firm, has budgeted its activity for December
according to the following information:

Sales at $550,000, all for cash.


Merchandise inventory on November 30 was $300,000.
Budgeted depreciation for December is $35,000.
The cash balance at December 1 was $25,000.
Selling and administrative expenses are budgeted at $60,000 for December and are
paid in cash.
The planned merchandise inventory on December 31 is $270,000.
The invoice cost for merchandise purchases represents 75% of the sales price. All
purchases are paid for in cash.

98. The budgeted cash receipts for December are:


A) $412,500
B) $137,500
C) $585,000
D) $550,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Since all sales are on a cash basis, the cash receipts for December will be equal to the
sales in December of $550,000.
99. The budgeted cash disbursements for December are:
A) $382,500
B) $442,500
C) $472,500
D) $477,500

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Hard

Solution:

Purchases = Ending inventory + Cost of goods sold Beginning inventory


= $270,000 + ($550,000 75%) $300,000 = $382,500
Cash disbursements = Purchases + Selling and administrative expenses
= $382,500 + $60,000 = $442,500

100. The budgeted net income for December is:


A) $107,500
B) $137,500
C) $42,500
D) $77,500

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 9 Level: Hard

Solution:

Sales............................................................................ $550,000
Cost of goods sold ($550,000 75%)........................ 412,500
Gross margin.............................................................. 137,500
Depreciation expense.................................................. 35,000
Selling and administrative expense............................ 60,000
Net income.................................................................. $ 42,500

Use the following to answer questions 101-102:

Rogers Corporation is preparing its cash budget for July. The budgeted beginning cash
balance is $25,000. Budgeted cash receipts total $141,000 and budgeted cash disbursements
total $139,000. The desired ending cash balance is $30,000.
101. The excess (deficiency) of cash available over disbursements for July is:
A) $23,000
B) $2,000
C) $166,000
D) $27,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts - Budgeted cash disbursements
= $25,000 + $141,000 - $139,000 = $27,000

102. To attain its desired ending cash balance for July, the company should borrow:
A) $30,000
B) $0
C) $3,000
D) $57,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts - Budgeted cash disbursements = $25,000 + $141,000 $139,000 = $27,000
Borrowing = Desired ending cash balance Excess cash available over disbursements
= $30,000 $27,000 = $3,000

Use the following to answer questions 103-104:

Bries Corporation is preparing its cash budget for January. The budgeted beginning cash
balance is $18,000. Budgeted cash receipts total $183,000 and budgeted cash disbursements
total $188,000. The desired ending cash balance is $30,000.
103. The excess (deficiency) of cash available over disbursements for January is:
A) $23,000
B) $13,000
C) ($5,000)
D) $201,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts Budgeted cash disbursements = $18,000 + $183,000 $188,000 = $13,000

104. To attain its desired ending cash balance for January, the company should borrow:
A) $17,000
B) $0
C) $30,000
D) $43,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts Budgeted cash disbursements = $18,000 + $183,000 $188,000 = $13,000
Borrowing = Desired ending cash balance Excess cash available over disbursements
= $30,000 $13,000 = $17,000

Use the following to answer questions 105-106:

Muecke Inc. is working on its cash budget for April. The budgeted beginning cash balance is
$40,000. Budgeted cash receipts total $150,000 and budgeted cash disbursements total
$158,000. The desired ending cash balance is $50,000.
105. The excess (deficiency) of cash available over disbursements for April will be:
A) $32,000
B) $190,000
C) $48,000
D) ($8,000)

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts Budgeted cash disbursements = $40,000 + $150,000 $158,000 = $32,000

106. To attain its desired ending cash balance for April, the company needs to borrow:
A) $18,000
B) $0
C) $50,000
D) $82,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts - Budgeted cash disbursements = $40,000 + $150,000 - $158,000 = $32,000
Borrowing = Desired ending cash balance Excess cash available over disbursements
= $50,000 $32,000 = $18,000

Use the following to answer questions 107-108:

Varughese Inc. is working on its cash budget for March. The budgeted beginning cash balance
is $33,000. Budgeted cash receipts total $182,000 and budgeted cash disbursements total
$191,000. The desired ending cash balance is $40,000.
107. The excess (deficiency) of cash available over disbursements for March will be:
A) $215,000
B) $42,000
C) $24,000
D) ($9,000)

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts Budgeted cash disbursements = $33,000 + $182,000 $191,000 = $24,000

108. To attain its desired ending cash balance for March, the company needs to borrow:
A) $40,000
B) $0
C) $16,000
D) $64,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 8 Level: Easy

Solution:

Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts Budgeted cash disbursements = $33,000 + $182,000 $191,000 = $24,000
Borrowing = Desired ending cash balance Excess cash available over disbursements
= $40,000 $24,000 = $16,000
Use the following to answer questions 109-113:

Carver Lumber sells lumber and general building supplies to building contractors in a
medium-sized town in Montana. Data regarding the store's operations follow:

Sales are budgeted at $350,000 for November, $320,000 for December, and $300,000
for January.
Collections are expected to be 90% in the month of sale, 8% in the month following
the sale, and 2% uncollectible.
The cost of goods sold is 75% of sales.
The company purchases 60% of its merchandise in the month prior to the month of
sale and 40% in the month of sale. Payment for merchandise is made in the month
following the purchase.
Other monthly expenses to be paid in cash are $24,700.
Monthly depreciation is $16,000.
Ignore taxes.

Statement of Financial Position


October 31
Assets:
Cash.................................................................................................. $ 19,000
Accounts receivable (net of allowance for uncollectible accounts). 77,000
Inventory........................................................................................... 157,500
Property, plant and equipment (net of $502,000 accumulated
depreciation).................................................................................. 1,002,000
Total assets........................................................................................ $1,255,500

Liabilities and Stockholders Equity:


Accounts payable.............................................................................. $ 272,000
Common stock.................................................................................. 780,000
Retained earnings.............................................................................. 203,500
Total liabilities and stockholders equity.......................................... $1,255,500
109. The net income for December would be:
A) $32,900
B) $42,300
C) $39,300
D) $55,300

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 9 Level: Hard

Solution:

Net sales [$320,000 (100% 2%)]......................... $313,600


Cost of goods sold ($320,000 75%)........................ 240,000
Gross margin.............................................................. 73,600
Depreciation expense.................................................. 16,000
Selling and administrative expense............................ 24,700
Net income.................................................................. $ 32,900

110. The cash balance at the end of December would be:


A) $19,000
B) $156,600
C) $61,300
D) $137,600

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 10 Level: Hard

Solution:

November December
October Accounts Receivable
Balance ...................................................................
$ 77,000
Collection of November Sales....................................
$350,000 90%......................................................
315,000
$350,000 8%........................................................ $ 28,000
Collection of December Sales....................................
$320,000 90%...................................................... 288,000
October Accounts Payable Balance............................
(272,000)
Payment for November Purchases..............................
($350,000 75%) 40%........................................ (105,000)
($320,000 75%) 60%........................................ (144,000)
Other cash monthly expenses.....................................
(24,700) (24,700)
Net cash inflow(outflow) per month..........................
$ 95,300 $ 42,300
Beginning cash balance, October 31.......................... $ 19,000
Add November net cash inflow.................................. 95,300
Add December net cash inflow.................................. 42,300
Ending cash balance, December 31............................ $156,600

111. The accounts receivable balance, net of uncollectible accounts, at the end of December
would be:
A) $53,600
B) $83,400
C) $25,600
D) $32,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 10 Level: Hard

Solution:

112. Accounts payable at the end of December would be:


A) $231,000
B) $96,000
C) $135,000
D) $240,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 10 Level: Hard

Solution:
Cost of
Sales Goods Sold
November............................................ $350,000 $262,500
December............................................ $320,000 $240,000
January................................................ $300,000 $225,000
Purchases in December = ($225,000 60%) + ($240,000 40%)
= $135,000 + $96,000 = $231,000
113. Retained earnings at the end of December would be:
A) $289,600
B) $276,200
C) $236,400
D) $203,500

Ans: B AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting LO: 10 Level: Hard

Solution:

Net income calculation for November:


Net sales ($350,000 98%)....................................... $343,000
Less cost of goods sold ($350,000 75%)................ 262,500
Gross margin.............................................................. 80,500
Less depreciation expense.......................................... 16,000
Less selling and administrative expense..................... 24,700
Net income.................................................................. $ 39,800

Net income calculation for December:


Net sales [$320,000 (100% 2%)]......................... $313,600
Less cost of goods sold ($320,000 75%)................ 240,000
Gross margin.............................................................. 73,600
Less depreciation expense.......................................... 16,000
Less selling and administrative expense..................... 24,700
Net income.................................................................. $ 32,900

Retained earnings in December = Retained earnings in October + Net income in


November + Net income in December = $203,500 + $39,800 + $32,900 = $276,200
Essay Questions

114. Weller Industrial Gas Corporation supplies acetylene and other compressed gases to
industry. Data regarding the store's operations follow:

Sales are budgeted at $330,000 for November, $300,000 for December, and
$320,000 for January.
Collections are expected to be 85% in the month of sale, 14% in the month
following the sale, and 1% uncollectible.
The cost of goods sold is 60% of sales.
The company purchases 80% of its merchandise in the month prior to the month of
sale and 20% in the month of sale. Payment for merchandise is made in the month
following the purchase.
Other monthly expenses to be paid in cash are $21,200.
Monthly depreciation is $21,000.
Ignore taxes.

Statement of Financial Position


October 31
Assets:
Cash.................................................................................................. $ 22,000
Accounts receivable (net of allowance for uncollectible accounts). 83,000
Inventory........................................................................................... 158,400
Property, plant and equipment (net of $594,000 accumulated
depreciation).................................................................................. 1,004,000
Total assets $1,267,400

Liabilities and Stockholders Equity:


Accounts payable.............................................................................. $ 196,000
Common stock.................................................................................. 620,000
Retained earnings.............................................................................. 451,400
Total liabilities and stockholders equity.......................................... $1,267,400

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.


b. Prepare a Merchandise Purchases Budget for November and December.
c. Prepare Cash Budgets for November and December.
d. Prepare Budgeted Income Statements for November and December.
e. Prepare a Budgeted Balance Sheet for the end of December.
Ans:

a. November December
Sales........................................................... $330,000 $300,000

Schedule of Expected Cash Collections


Accounts receivable................................... $ 83,000
November sales.......................................... 280,500 $ 46,200
December sales.......................................... 255,000
Total cash collections................................. $363,500 $301,200

b. November December
Cost of goods sold...................................... $198,000 $180,000

Merchandise Purchases Budget


November sales.......................................... $ 39,600
December sales.......................................... 144,000 $ 36,000
January sales.............................................. 153,600
Total purchases........................................... $183,600 $189,600

Disbursements for merchandise................. $196,000 $183,600

c. November December
Cash receipts.............................................. $363,500 $301,200
Cash disbursements:
Disbursements for merchandise.............. 196,000 183,600
Other monthly expenses.......................... 21,200 21,200
Total cash disbursements........................ 217,200 204,800
Excess (deficiency) of cash available over
disbursements......................................... $146,300 $ 96,400

d. November December
Sales........................................................... $330,000 $300,000
Bad debt expense....................................... 3,300 3,000
Cost of goods sold...................................... 198,000 180,000
Gross margin.............................................. 128,700 117,000
Other monthly expenses............................. 21,200 21,200
Depreciation............................................... 21,000 21,000
Net operating income................................. $ 86,500 $ 74,800
e. Statement of Financial Position
December 31
Assets:
Cash............................................................................ $ 264,700
Accounts receivable (net of allowance for
uncollectible accounts)............................................ 42,000
Inventory..................................................................... 153,600
Property, plant and equipment (net of $636,000
accumulated depreciation)...................................... 962,000
Total assets.................................................................. $1,422,300

Liabilities and Stockholders Equity:


Accounts payable........................................................ $ 189,600
Common stock............................................................ 620,000
Retained earnings........................................................ 612,700
Total liabilities and stockholders equity.................... $1,422,300

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 2,3,8,9,10 Level: Hard

115. At March 31 Streuling Enterprises, a merchandising firm, had an inventory of 38,000


units, and it had accounts receivable totaling $85,000. Sales, in units, have been
budgeted as follows for the next four months:

April....................... 60,000
May........................ 75,000
June........................ 90,000
July......................... 81,000

Streuling's board of directors has established a policy to commence in April that the
inventory at the end of each month should contain 40% of the units required for the
following month's budgeted sales.
The selling price is $2 per unit. One-third of sales are paid for by customers in the
month of the sale, the balance is collected in the following month.

Required:

a. Prepare a merchandise purchases budget showing how many units should be


purchased for each of the months April, May, and June.
b. Prepare a schedule of expected cash collections for each of the months April, May,
and June.
Ans:

a. April May June July


Budgeted sales, in units............... 60,000 75,000 90,000 81,000
Desired ending inventory (40%). 30,000 36,000 32,400
Total needs................................... 90,000 111,000 122,400
Less beginning inventory............ 38,000 30,000 36,000
Required purchases..................... 52,000 81,000 86,400

b. April May June


Budgeted sales, at $2 per unit...... $120,000 $150,000 $180,000
March 31 accounts receivable..... $ 85,000
April sales.................................... 40,000 $ 80,000
May sales..................................... 50,000 $100,000
June sales..................................... 60,000
Total cash collections.................. $125,000 $130,000 $160,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 2,3 Level: Medium
116. Capes Corporation is a wholesaler of industrial goods. Data regarding the store's
operations follow:

Sales are budgeted at $390,000 for November, $360,000 for December, and
$340,000 for January.
Collections are expected to be 85% in the month of sale, 10% in the month
following the sale, and 5% uncollectible.
The cost of goods sold is 80% of sales.
The company purchases 40% of its merchandise in the month prior to the month of
sale and 60% in the month of sale. Payment for merchandise is made in the month
following the purchase.
The November beginning balance in the accounts receivable account is $77,000.
The November beginning balance in the accounts payable account is $320,000.

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.


b. Prepare a Merchandise Purchases Budget for November and December.

Ans:

a. November December
Sales........................................................ $390,000 $360,000

Schedule of Expected Cash Collections


Accounts receivable................................ $ 77,000
November sales....................................... 331,500 $ 39,000
December sales........................................ 306,000
Total cash collections.............................. $408,500 $345,000

b. November December
Cost of goods sold................................... $312,000 $288,000

Merchandise Purchases Budget


November sales....................................... $187,200
December sales........................................ 115,200 $172,800
January sales............................................ 108,800
Total purchases........................................ $302,400 $281,600

Disbursements for merchandise.............. $320,000 $302,400

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 2,3 Level: Medium
117. Clay Company has projected sales and production in units for the second quarter of
the coming year as follows:

April May June


Sales....................... 50,000 40,000 60,000
Production.............. 60,000 50,000 50,000

Cash-related production costs are budgeted at $5 per unit produced. Of these


production costs, 40% are paid in the month in which they are incurred and the
balance in the following month. Selling and administrative expenses will amount to
$100,000 per month. The accounts payable balance on March 31 totals $190,000,
which will be paid in April.

All units are sold on account for $14 each. Cash collections from sales are budgeted at
60% in the month of sale, 30% in the month following the month of sale, and the
remaining 10% in the second month following the month of sale. Accounts receivable
on April 1 totaled $500,000 $(90,000 from February's sales and the remainder from
March).

Required:

a. Prepare a schedule for each month showing budgeted cash disbursements for the
Clay Company.
b. Prepare a schedule for each month showing budgeted cash receipts for Clay
Company.
Ans:

a. April May June


Production units........................... 60,000 50,000 50,000
Cash required per unit................. $5 $5 $5
Production costs........................... $300,000 $250,000 $250,000

Cash disbursements:
April May June
Production this month (40%)....... $120,000 $100,000 $100,000
Production prior month (60%)..... 190,000 180,000 150,000
Selling and administrative........... 100,000 100,000 100,000
Total disbursements..................... $410,000 $380,000 $350,000

Payments relating to the prior month (March) in April represent the balance of
accounts payable at March 31.

b. April May June


Sales units................................... 50,000 40,000 60,000
Sales price................................... $14 $14 $14
Total sales.................................... $700,000 $560,000 $840,000

April May June


Cash receipts:
February sales............................. $ 90,000
March sales................................. 307,500 $102,500
April sales................................... 420,000 210,000 $ 70,000
May sales..................................... 336,000 168,000
June sales..................................... 504,000
Total receipts............................... $817,500 $648,500 $742,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 2,4 Level: Hard
118. The Doley Company has planned the following sales for the next three months:

Jan Feb Mar


Budgeted sales....... $40,000 $50,000 $70,000

Sales are made 20% for cash and 80% on account. From experience, the company has
learned that a months sales on account are collected according to the following
pattern:

Month of sale................................. 60%


First month following sale............. 30%
Second month following sale......... 8%
Uncollectible.................................. 2%

The company requires a minimum cash balance of $5,000 to start a month. The
beginning cash balance in March is budgeted to be $6,000.

Required:

a. Compute the budgeted cash receipts for March.


b. The following additional information has been provided for March:

Inventory purchases (all paid in March).............................. $28,000


Selling and administrative expenses (all paid in March)..... $40,000
Depreciation expense for March......................................... $5,000
Dividends paid in March..................................................... $4,000

Prepare a cash budget in good form for the month of March, using this information
and the budgeted cash receipts you computed for part (1) above. The company can
borrow in any dollar amount and will not pay interest until April.
Ans:

a. Cash sales, March: $70,000 20%......... $14,000


Collections on account:
Jan. sales: $40,000 80% 8%.............. 2,560
Feb. sales: $50,000 80% 30%........... 12,000
Mar. sales: $70,000 80% 60%.......... 33,600
Total cash receipts................................... $62,160

b. Cash balance, beginning.......................... $ 6,000


Add cash receipts from sales................... 62,160
Total cash available................................. 68,160

Less disbursements:
Inventory purchases................................. 28,000
Selling and administrative expenses....... 40,000
Dividends................................................ 4,000
Total disbursements................................. 72,000
Cash excess (deficiency)......................... (3,840)
Financingborrowing.............................. 8,840
Cash balance, ending............................... $ 5,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 2,8 Level: Medium
119. A sales budget is given below for one of the products manufactured by the Key Co.:

January................... 21,000 units


February................. 36,000 units
March..................... 61,000 units
April....................... 41,000 units
May........................ 31,000 units
June........................ 25,000 units

The inventory of finished goods at the end of each month should equal 20% of the
next month's sales. However, on December 31 the finished goods inventory totaled
only 4,000 units.
Each unit of product requires three specialized electrical switches. Since the
production of these specialized switches by Key's suppliers is sometimes irregular, the
company has a policy of maintaining an ending inventory at the end of each month
equal to 30% of the next month's production needs. This requirement had been met on
January 1 of the current year.

Required:
Prepare a budget showing the quantity of switches to be purchased each month for
January, February, and March and in total for the quarter.

Ans:
January February March April
Budgeted sales (units).................... 21,000 36,000 61,000 41,000
Add: Desired ending inventory...... 7,200 12,200 8,200 6,200
Total needs..................................... 28,200 48,200 69,200 47,200
Deduct: Beginning inventory......... 4,000 7,200 12,200 8,200
Units to be produced...................... 24,200 41,000 57,000 39,000

January February March Quarter


Units to be produced 24,200 41,000 57,000 122,200
Switches per unit 3 3 3 3
Production needs 72,600 123,000 171,000 366,600
Add: Desired ending inventory 36,900 51,300 35,100 35,100
Total needs 109,500 174,300 206,100 401,700
Deduct: Beginning inventory 21,780 36,900 51,300 21,780
Required purchases 87,720 137,400 154,800 379,920

Beginning inventory, January 1: 72,600 0.3 = 21,780


Ending inventory, March 31: (39,000 3) 0.3 = 35,100

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 4 Level: Hard
120. One quarter gram of a rare seasoning is required for each bottle of Dipping Oil, a very
popular product sold through gourmet shops that is produced by The Lucas Company.
The cost of the seasoning is $16 per gram. Budgeted production of Dipping Oil is
given below for the second quarter, and the first month of the third quarter.

April May June July


Required production bottles........... 5,000 8,000 15,000 10,000

The seasoning is so difficult to get that the company must have on hand at the end of
each month 20% of the next month's production needs. A total of 250 grams will be on
hand at the beginning of April.

Required:

Prepare a direct materials budget for the seasoning, by month and in total for the
second quarter. Be sure to include both the quantity to be purchased and its cost for
each month.

Ans:
Lucas Company
Direct Materials Budget for the Second Quarter

April May June Total


Required production (bottles)............ 5,000 8,000 15,000 28,000
Seasoning required per bottle
(grams)........................................... 0.25 0.25 0.25 0.25
Production needs (grams).................. 1,250 2,000 3,750 7,000
Add desired ending inventory of
seasoning........................................ 400 750 500 500
Total needs......................................... 1,650 2,750 4,250 7,500
Less beginning inventory of
seasoning........................................ 250 400 750 250
Seasoning to be purchased (grams).... 1,400 2,350 3,500 7,250
Cost of seasoning per gram................ $16 $16 $16 $16
Cost of seasoning to be purchased..... $22,400 $37,600 $56,00 $116,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 4 Level: Easy
121. Whitmer Corporation is working on its direct labor budget for the next two months.
Each unit of output requires 0.05 direct labor-hours. The direct labor rate is $11.80 per
direct labor-hour. The production budget calls for producing 7,100 units in February
and 6,800 units in March.

Required:

Construct the direct labor budget for the next two months, assuming that the direct
labor work force is fully adjusted to the total direct labor-hours needed each month.

Ans:
February March
Required production in units.......... 7,100 6,800
Direct labor-hours per unit............. 0.05 0.05
Total direct labor-hours needed...... 355 340
Direct labor cost per hour.............. $11.80 $11.80
Total direct labor cost..................... $4,189 $4,012

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 5 Level: Easy

122. Sthilaire Corporation is working on its direct labor budget for the next two months.
Each unit of output requires 0.34 direct labor-hours. The direct labor rate is $11.10 per
direct labor-hour. The production budget calls for producing 8,000 units in April and
8,300 units in May. The company guarantees its direct labor workers a 40-hour paid
work week. With the number of workers currently employed, that means that the
company is committed to paying its direct labor work force for at least 2,840 hours in
total each month even if there is not enough work to keep them busy.

Required:

Construct the direct labor budget for the next two months.

Ans:
April May
Required production in units.......... 8,000 8,300
Direct labor-hours per unit............. 0.34 0.34
Total direct labor-hours needed...... 2,720 2,822
Total direct labor-hours paid.......... 2,840 2,840
Direct labor cost per hour.............. $11.10 $11.10
Total direct labor cost..................... $31,524 $31,524

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 5 Level: Medium
123. Brockney Inc. bases its manufacturing overhead budget on budgeted direct labor-
hours. The variable overhead rate is $8.60 per direct labor-hour. The company's
budgeted fixed manufacturing overhead is $107,970 per month, which includes
depreciation of $9,760. All other fixed manufacturing overhead costs represent current
cash flows. The July direct labor budget indicates that 6,100 direct labor-hours will be
required in that month.

Required:

a. Determine the cash disbursement for manufacturing overhead for July.


b. Determine the predetermined overhead rate for July.

Ans:

a. July
Budgeted direct labor-hours............................................ 6,100
Variable overhead rate..................................................... $8.60
Variable manufacturing overhead................................... $ 52,460
Fixed manufacturing overhead....................................... 107,970
Total manufacturing overhead........................................ 160,430
Less depreciation............................................................ 9,760
Cash disbursement for manufacturing overhead............. $150,670

b. Total manufacturing overhead (a)................................... $160,430


Budgeted direct labor-hours (b)...................................... 6,100
Predetermined overhead rate for the month (a)/(b)......... $26.30

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 6 Level: Easy
124. The manufacturing overhead budget of Reigle Corporation is based on budgeted direct
labor-hours. The February direct labor budget indicates that 5,800 direct labor-hours
will be required in that month. The variable overhead rate is $4.60 per direct labor-
hour. The company's budgeted fixed manufacturing overhead is $82,360 per month,
which includes depreciation of $16,820. All other fixed manufacturing overhead costs
represent current cash flows.

Required:

a. Determine the cash disbursement for manufacturing overhead for February. Show
your work!
b. Determine the predetermined overhead rate for February. Show your work!

Ans:

a. February
Budgeted direct labor-hours............................................ 5,800
Variable overhead rate..................................................... $4.60
Variable manufacturing overhead.................................... $ 26,680
Fixed manufacturing overhead........................................ 82,360
Total manufacturing overhead......................................... 109,040
Less depreciation............................................................. 16,820
Cash disbursement for manufacturing overhead............. $ 92,220

b. Total manufacturing overhead (a).................................... $109,040


Budgeted direct labor-hours (b)....................................... 5,800
Predetermined overhead rate for the month (a)/(b)......... $18.80

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 6 Level: Easy
125. Wala Inc. bases its selling and administrative expense budget on the number of units
sold. The variable selling and administrative expense is $8.20 per unit. The budgeted
fixed selling and administrative expense is $132,800 per month, which includes
depreciation of $14,400. The remainder of the fixed selling and administrative expense
represents current cash flows. The sales budget shows 8,000 units are planned to be
sold in July.

Required:

Prepare the selling and administrative expense budget for July.

Ans:

July
Budgeted unit sales.................................................................... 8,000
Variable selling and administrative expense per unit................ $8.20
Budgeted variable expense........................................................ $ 65,600
Budgeted fixed selling and administrative expense.................. 132,800
Total budgeted selling and administrative expense................... 198,400
Less depreciation....................................................................... 14,400
Cash disbursements for selling and administrative expenses.... $184,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 7 Level: Easy
126. The selling and administrative expense budget of Garney Corporation is based on the
number of units sold, which are budgeted to be 1,800 units in October. The variable
selling and administrative expense is $2.00 per unit. The budgeted fixed selling and
administrative expense is $22,680 per month, which includes depreciation of $7,020.
The remainder of the fixed selling and administrative expense represents current cash
flows.

Required:

Prepare the selling and administrative expense budget for October.

Ans:
October
Budgeted unit sales..................................................................... 1,800
Variable selling and administrative expense per unit................. $2.00
Budgeted variable expense......................................................... $ 3,600
Budgeted fixed selling and administrative expense.................... 22,680
Total budgeted selling and administrative expense.................... 26,280
Less depreciation........................................................................ 7,020
Cash disbursements for selling and administrative expenses..... $19,260

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 7 Level: Easy
127. Romeiro Corporation is preparing its cash budget for September. The budgeted
beginning cash balance is $46,000. Budgeted cash receipts total $160,000 and
budgeted cash disbursements total $152,000. The desired ending cash balance is
$70,000. The company can borrow up to $120,000 at any time from a local bank, with
interest not due until the following month.

Required:

Prepare the company's cash budget for September in good form.

Ans:

Cash balance, beginning........................................................... $ 46,000


Add cash receipts...................................................................... 160,000
Total cash available................................................................... 206,000
Less cash disbursements........................................................... 152,000
Excess (deficiency) of cash available over disbursements....... 54,000
Borrowings................................................................................ 16,000
Cash balance, ending................................................................ $ 70,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 8 Level: Easy
128. Zolezzi Inc. is preparing its cash budget for March. The budgeted beginning cash
balance is $42,000. Budgeted cash receipts total $178,000 and budgeted cash
disbursements total $175,000. The desired ending cash balance is $50,000. The
company can borrow up to $160,000 at any time from a local bank, with interest not
due until the following month.

Required:

Prepare the company's cash budget for March in good form. Make sure to indicate
what borrowing, if any, would be needed to attain the desired ending cash balance.

Ans:

Cash balance, beginning......................................................... $ 42,000


Add cash receipts.................................................................... 178,000
Total cash available................................................................ 220,000
Less cash disbursements......................................................... 175,000
Excess (deficiency) of cash available over disbursements..... 45,000
Borrowings............................................................................. 5,000
Cash balance, ending.............................................................. $ 50,000

AACSB: Analytic AICPA BB: Critical Thinking


AICPA FN: Reporting, Measurement LO: 8 Level: Easy