Chapter 9

Profit Planning

True/False

1. The usual starting point in budgeting is to make a forecast of cash receipts and cash
F disbursements.
Medium

2. Budgets are used for planning rather than for control of operations.
F
Medium

3. A continuous or perpetual budget is one which covers a 12-month period but which is
T constantly adding a new month on the end as the current month is completed.
Easy

4. Control involves developing objectives and preparing the various budgets to achieve those
F objectives.
Easy

5. One of the distinct advantages of a budget is that it can help to uncover potential bottlenecks
T before they occur.
Easy

6. A self-imposed budget can be a very effective control device in an organization.

T
Easy

7. Sales forecasts are drawn up after the cash budget has been completed since only then are the
F funds available for marketing known.
Medium

8. A production budget is to a manufacturing firm as a merchandise purchases budget is to a

T merchandising firm.
Medium

9. The direct materials to be purchased for a period can be obtained by subtracting the desired
F ending inventory of direct materials from the total direct materials needed for the period.
Medium

10. In companies that have "no lay-off" policies, the total direct labor cost for a budget period is
F computed by multiplying the total direct labor hours needed to make the budgeted output of
Hard completed units by the direct labor wage rate.

Managerial Accounting, 9/e 321

11. In the merchandise purchases budget, the required purchases (in units) for a period can be
F determined by subtracting the beginning merchandise inventory (in units) from the budgeted
Medium sales (in units).

12. The beginning cash balance is not included on the cash budget since the cash budget deals
F exclusively with cash flows rather than with balance sheet amounts.
Hard

13. When using the self-imposed budget approach, it is generally best for top management to
F accept all budget estimates without question in order to minimize adverse behavioral responses
Easy from employees.

14. (Appendix) The economic order quantity is that point where the total costs of ordering
T inventory just equal the total costs of carrying inventory.
Medium

15. (Appendix) As the lead time increases, the safety stock should also increase.
T
Medium

Multiple Choice

16. The budget or schedule that provides necessary input data for the direct labor budget is the:
B a. raw materials purchases budget.
Easy b. production budget.
CMA adapted c. schedule of cash collections.
d. cash budget.

17. The cash budget must be prepared before you can complete the:
B a. production budget.
Easy b. budgeted balance sheet.
CMA adapted c. raw materials purchases budget.
d. schedule of cash disbursements.

18. Which of the following is not a benefit of budgeting?

C a. It uncovers potential bottlenecks before they occur.
Easy b. It coordinates the activities of the entire organization by integrating the plans and
objectives of the various parts.
c. It ensures that accounting records comply with generally accepted accounting principles.
d. It provides benchmarks for evaluating subsequent performance.

322 Managerial Accounting, 9/e

19. The materials purchase budget:
B a. is the beginning point in the budget process.
Easy b. must provide for desired ending inventory as well as for production.
c. is accompanied by a schedule of cash collections.
d. is completed after the cash budget.

20. The master budget process usually begins with the:

C a. production budget.
Easy b. operating budget.
CMA adapted c. sales budget.
d. cash budget.

21. There are various budgets within the master budget. One of these budgets is the production
C budget. Which of the following BEST describes the production budget?
Easy a. It details the required direct labor hours.
CMA adapted b. It details the required raw materials purchases.
c. It is calculated based on the sales budget and the desired ending inventory.
d. It summarizes the costs of producing units for the budget period.

22. (Appendix) The economic order quantity (EOQ) in an inventory management system is:
C a. the order quantity that yields the lowest unit purchase cost.
Medium b. the order quantity that yields the lowest inventory handling cost.
c. the order quantity that yields the lowest total cost of ordering and carrying
inventory.
d. the order quantity with the largest purchase discount.

23. (Appendix) The Stewart Company uses the Economic Order Quantity (EOQ) model in its
D inventory management. A decrease in which of the following variables would increase the
Medium company's EOQ?
CMA adapted a. Annual sales.
b. Cost per order.
c. Safety stock level.
d. Inventory carrying costs.

24. (Appendix) The level of safety stock depends on all of the following except:
D a. the level of uncertainty of the sales forecast.
Medium b. the level of customer dissatisfaction when goods are unavailable.
c. the level of uncertainty in the lead time for shipments from suppliers.
d. the ordering cost per order.

25. A method of budgeting in which the cost of each program must be justified every year is
B called:
Easy a. operational budgeting.
CMA adapted b. zero-based budgeting.
c. continuous budgeting.
d. responsibility accounting.

26. Fairmont Inc. uses an accounting system that charges costs to the manager who has been
A delegated the authority to make decisions concerning the costs. For example, if the sales
Easy manager accepts a rush order that will result in higher than normal manufacturing costs, these
CMA adapted additional costs are charged to the sales manager because the authority to accept or decline the
rush order was given to the sales manager. This type of accounting system is known as:
a. responsibility accounting.
b. contribution accounting.
c. absorption accounting.

Managerial Accounting, 9/e 323

 d. operational budgeting.

27. Parlee Company's sales are 30% in cash and 70% on credit. Sixty percent of the credit sales are
D collected in the month of sale, 25% in the month following sale, and 12% in the second month
Medium following sale. The remainder are uncollectible. The following are budgeted sales data:

January February March April

Total sales $60,000 $70,000 $50,000 $30,000

Total cash receipts in April would be budgeted to be:

a. $38,900.
b. $47,900.
c. $27,230.
d. $36,230.

28. Budgeted sales in Allen Company over the next four months are given below:
Difficult
September October November December
Budgeted sales $100,000 $160,000 $180,000 $120,000

Twenty-five percent of the company's sales are for cash and 75% are on account. Collections
for sales on account follow a stable pattern as follows: 50% of a month's sales are collected in
the month of sale, 30% are collected in the month following sale, and 15% are collected in the
second month following sale. The remainder are uncollectible. Given these data, cash
collections for December should be:
a. $153,000.
b. $138,000.
c. $120,000.
d. $103,500.

29. The PDQ Company makes collections on credit sales according to the following schedule:
D
Medium 25% in month of sale
70% in month following sale
4% in second month following sale
1% uncollectible

The following sales have been budgeted:

Month Sales
April ... $100,000
May ..... 120,000
June .... 110,000

Cash collections in June would be:

a. $113,400.
b. $110,000.
c. $111,000.
d. $115,500.

30. Orion Corporation is preparing a cash budget for the six months beginning January 1. Shown
D below are the company's expected collection pattern and the budgeted sales for the period.
Medium
Expected collection pattern:
65% collected in the month of sale
20% collected in the month after sale

324 Managerial Accounting, 9/e

 10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible

Budgeted sales:
January ....... $160,000
February ...... 185,000
March ......... 190,000
April ......... 170,000
May ........... 200,000
June .......... 180,000

The estimated total cash collections during April from sales and accounts receivables would
be:
a. $155,900.
b. $167,000.
c. $171,666.
d. $173,400.

Managerial Accounting, 9/e 325

31. Pardee Company plans to sell 12,000 units during the month of August. If the company has
A 2,500 units on hand at the start of the month, and plans to have 2,000 units on hand at the end
Easy of the month, how many units must be produced during the month?
a. 11,500.
b. 12,500.
c. 12,000.
d. 14,000.

32. Modesto Company produces and sells Product AlphaB. To guard against stockouts, the
C company requires that 20% of the next month's sales be on hand at the end of each month.
Medium Budgeted sales of Product AlphaB over the next four months are:

June July August September

Budgeted sales in units 30,000 40,000 60,000 50,000

Budgeted production for August would be:

a. 62,000 units.
b. 70,000 units.
c. 58,000 units.
d. 50,000 units.

33. Friden Company has budgeted sales and production over the next quarter as follows:
B
Hard April May June
Sales in units ......... 100,000 120,000 ?
Production in units .... 104,000 128,000 156,000

The company has 20,000 units of product on hand at April 1. A minimum of 20% of the next
month's sales needs in units must be on hand at the end of each month. July sales are expected
to be 140,000 units. Budgeted sales for June would be (in units):
a. 188,000.
b. 160,000.
c. 128,000.
d. 184,000.

34. Walsh Company expects sales of Product W to be 60,000 units in April, 75,000 units in May
B and 70,000 units in June. The company desires that the inventory on hand at the end of each
Medium month be equal to 40% of the next month's expected unit sales. Due to excessive production
during March, on March 31 there were 25,000 units of Product W in the ending inventory.
Given this information, Walsh Company's production of Product W for the month of April
should be:
a. 60,000 units.
b. 65,000 units.
c. 75,000 units.
d. 66,000 units.

35. Superior Industries' sales budget shows quarterly sales for the next year as follows:
C
Medium Quarter Sales (units)
CMA adapted First ..... 10,000
Second .... 8,000
Third ..... 12,000
Fourth .... 14,000

Company policy is to have a finished goods inventory at the end of each quarter equal to 20%

326 Managerial Accounting, 9/e

 of the next quarter's sales. Budgeted production for the second quarter should be:
a. 7,200 units.
b. 8,000 units.
c. 8,800 units.
d. 8,400 units.

36. The Tobler Company has budgeted production for next year as follows:
A
Medium Quarter ............... First Second Third Fourth
Production in units ... 10,000 12,000 16,000 14,000

Four pounds of raw materials are required for each unit produced. Raw materials on hand at
the start of the year totals 4,000 lbs. The raw materials inventory at the end of each quarter
should equal 10% of the next quarter's production needs. Budgeted purchases of raw materials
in the third quarter would be:
a. 63,200 lbs.
b. 62,400 lbs.
c. 56,800 lbs.
d. 50,400 lbs.

37. Marple Company's budgeted production in units and budgeted raw materials purchases over
D the next three months are given below:
Hard
January February March
Budgeted production (in units) .. 60,000 ? 100,000
Budgeted raw materials
purchases (in pounds) ........ 129,000 165,000 188,000

Two pounds of raw materials are required to produce one unit of product. The company wants
raw materials on hand at the end of each month equal to 30% of the following month's
production needs. The company is expected to have 36,000 pounds of raw materials on hand
on January 1. Budgeted production for February should be:
a. 105,000 units.
b. 82,500 units.
c. 150,000 units.
d. 75,000 units.

38. The Waverly Company has budgeted sales for next year as follows:
A
Medium Quarter .......... First Second Third Fourth
Sales in units ... 12,000 14,000 18,000 16,000

The ending inventory of finished goods for each quarter should equal 25% of the next quarter's
budgeted sales in units. The finished goods inventory at the start of the year is 3,000 units.
Scheduled production for the third quarter should be:
a. 17,500.
b. 18,500.
c. 22,000.
d. 13,500.

39. The Willsey Merchandise Company has budgeted $40,000 in sales for the month of December.
A The company's cost of goods sold is 30% of sales. If the company has budgeted to purchase
Hard $18,000 in merchandise during December, then the budgeted change in inventory levels over
the month of December is:
a. $6,000 increase.
b. $10,000 decrease.

Managerial Accounting, 9/e 327

 c. $22,000 decrease.
d. $15,000 increase.

40. ABC Company has a cash balance of $9,000 on April 1. The company must maintain a
B minimum cash balance of $6,000. During April expected cash receipts are $45,000. Expected
Easy cash disbursements during the month total $52,000. During April the company will need to
borrow:
a. $2,000.
b. $4,000.
c. $6,000.
d. $8,000.

328 Managerial Accounting, 9/e

41. Avril Company makes collections on sales according to the following schedule:
D
Easy 30% in the month of sale
60% in the month following sale
8% in the second month following sale

The following sales are expected:

Expected Sales
January ....... $100,000
February ...... 120,000
March ......... 110,000

Cash collections in March should be budgeted to be:

a. $110,000.
b. $110,800.
c. $105,000.
d. $113,000.

42. The Stacy Company makes and sells a single product, Product R. Budgeted sales for April are
B $300,000. Gross Margin is budgeted at 30% of sales dollars. If the net income for April is
Hard budgeted at $40,000, the budgeted selling and administrative expenses are:
a. $133,333.
b. $50,000.
c. $102,000.
d. $78,000.

43. (Appendix) Canesco Enterprises uses 84,000 units of Part 256 in its production over a 300-day
A work year. The usual lead time for delivery of the part from the supplier is six days;
Hard occasionally, the lead time has been as high as eight days. The company wants to implement a
CMA adapted safety stock policy (it presently carries no safety stocks). The safety stock size, the likely
effect on stockout costs of implementing the safety stock, and the likely effect on carrying
costs of implementing the safety stock, respectively, would be:
a. 560 units, decrease, increase.
b. 560 units, increase, decrease.
c. 1,680 units, decrease, increase.
d. 1,680 units, increase, no change.

44. (Appendix) Karpov Enterprises, a wholesaler of electronic instruments, uses the economic
B order quantity model in its inventory management. Data concerning one product appear below:
Medium
Total units purchased annually .............. 810
Costs to place one order .................... $10
Selling price per unit ...................... $40
Annual cost to carry one unit in stock ...... $ 2

The economic order quantity (EOQ) for this product would be:
a. 18 units.
b. 90 units.
c. 81 units.
d. 180 units.

45. (Appendix) The Aron Company requires 40,000 units of Product Q for the year. The units will
D be used evenly throughout the year. It costs $60 to place an order. It costs $10 to carry a unit in
Medium inventory for the year. What is the economic order quantity (EOQ) rounded to the nearest

Managerial Accounting, 9/e 329

CPA adapted whole unit?
a. 400.
b. 490.
c. 600.
d. 693.

46. (Appendix) The following data relate to a part used by the Henry Company:
A
Medium Units required per year .......... 30,000
CPA adapted Cost of placing an order ......... $ 400
Unit carrying cost per year ...... $ 600

Assuming that the units will be used evenly throughout the year, what is the economic order
quantity (EOQ)?
a. 200.
b. 300.
c. 400.
d. 500.

47. (Appendix) Politan Company manufactures 4,000 bookcases a year. Set-up costs are $20 for a
D production run. Using the economic order quantity (EOQ) approach, the optimal production lot
Hard size would be 200 units when the cost of carrying one bookcase in inventory for one year is:
CPA adapted a. $0.50.
b. $1.00.
c. $2.00.
d. $4.00.

48. (Appendix) Moss Converters Inc. uses 100,000 kilograms of raw material annually in its
A production processes. The raw material costs $12 per kilogram. The cost to process a purchase
Hard order is $45, which includes variable costs of $35 and allocated fixed costs of $10. Out-of-
CMA adapted pocket storage costs are $4.20 per kilogram per year. Moss's economic order quantity (EOQ)
is:
a. 1,291 units.
b. 1,464 units.
c. 1,708 units.
d. 1,936 units.

49. (Appendix) Jasper Inc. produces automobile headlight assemblies for sports-utility vehicles.
C Data concerning a particular metal fastener that is used in a one of the company's products
Medium appear below.
Economic order quantity ..... 600 units
Average weekly usage ........ 150 units
Maximum weekly usage ........ 175 units
Lead time ................... 2 weeks

The safety stock would be:

a. 350 units.
b. 175 units.
c. 50 units.
d. 75 units.

Reference: 9-1
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)

330 Managerial Accounting, 9/e

 Sales ........................ $42,000 $40,000 $45,000
Cost of sales ................ 21,000 20,000 22,500
Gross margin ................. 21,000 20,000 22,500
Operating expenses ........... 20,000 20,000 20,000
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 "operating expenses" are paid in the month of the sale.

50. The amount of cash collected during the month of June should be:
C a. $32,000.
Easy b. $40,000.
CMA adapted c. $40,400.
Refer To: 9-1 d. $41,000.

51. The cash disbursements during the month of June for goods purchased for resale and for
B operating expenses should be:
Easy a. $40,000.
CMA adapted b. $41,000.
Refer To: 9-1 c. $42,500.
d. $43,500.

Reference: 9-2
Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash
and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of
goods sold is 60% of sales. Expected sales for the first four months appear below.

Expected
Sales
January ....... $10,000
February ...... 24,000
March ......... 16,000
April ......... 25,000

The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the
next month's merchandise sales (stated at cost). All purchases of merchandise inventory must be paid in the
month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five
percent of the credit sales should be collected in the month following the month of sale, with the balance collected
in the following month. Variable operating expenses should be 10% of sales and fixed expenses (all depreciation)
should be $3,000 per month. Cash payments for the variable operating expenses are made during the month the
expenses are incurred.

52. In a budgeted income statement for the month of February, net income would be:
D a. $9,000.
Medium b. $1,800.
Refer To: 9-2 c. $0.
d. $4,200.

53. In a budgeted balance sheet, the Merchandise Inventory on February 28 would be:
A a. $4,800.
Medium b. $7,500.
Refer To: 9-2 c. $9,600.
d. $3,200.

Managerial Accounting, 9/e 331

54. The Accounts Receivable balance that would appear in the March 31 budgeted balance sheet
C would be:
Medium a. $15,000.
Refer To: 9-2 b. $16,000.
c. $8,800.
d. $12,400.

55. In a budget of cash receipts for March, the total cash receipts would be:
A a. $17,800.
Medium b. $8,200.
Refer To: 9-2 c. $20,200.
d. $16,000.

56. In a budget of cash disbursements for March, the total cash disbursements would be:
B a. $11,200.
Hard b. $13,900.
Refer To: 9-2 c. $22,300.
d. $16,900.

Reference: 9-3
Information on the actual sales and inventory purchases of the Law Company for the first quarter follow:

Inventory
Sales Purchases
January ...... $120,000 $60,000
February ..... $100,000 $78,000
March ........ $130,000 $90,000

Collections from Law Company's customers are normally 60% in the month of sale, 30% in the month following
sale, and 8% in the second month following sale. The balance is uncollectible. Law Company takes full advantage
of the 3% discount allowed on purchases paid for by the end of the following month.
The company expects sales in April of $150,000 and inventory purchases of $100,000. Operating expenses for
the month of April are expected to be $38,000, of which $15,000 is salaries and $8,000 is depreciation. The
remaining operating expenses are variable with respect to the amount of sales in dollars. Those operating expenses
requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on March 1 was
$43,000, and on April 1 was $35,000.

57. The expected cash collections from customers during April would be:
B a. $150,000.
Medium b. $137,000.
Refer To: 9-3 c. $139,000.
d. $117,600.

58. The expected cash disbursements during April for inventory purchases would be:
D a. $100,000.
Easy b. $97,000.
Refer To: 9-3 c. $90,000.
d. $87,300.

59. The expected cash disbursements during April for operating expenses would be:
B a. $38,000.
Easy b. $30,000.
Refer To: 9-3 c. $23,000.
d. $15,000.

332 Managerial Accounting, 9/e

60. The expected cash balance on April 30 would be:
A a. $54,700.
Hard b. $62,700.
Refer To: 9-3 c. $19,700.
d. $28,700.

Reference: 9-4
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.

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

C a. $126,000.
Medium b. $148,000.
Refer To: 9-4 c. $166,000.
d. $190,000.

62. The budgeted cash receipts for October are:

B a. $188,000.
Medium b. $248,000.
Refer To: 9-4 c. $226,000.
d. $278,000.

Managerial Accounting, 9/e 333

Reference: 9-5
The LaGrange Company had the following budgeted sales for the first half of the current year:

Cash Sales Credit Sales

January ............ $70,000 $340,000
February ........... 50,000 190,000
March .............. 40,000 135,000
April .............. 35,000 120,000
May ................ 45,000 160,000
June ............... 40,000 140,000

The company is in the process of preparing a cash budget and must determine the expected cash collections by
month. To this end, the following information has been assembled:

Collections on sales: 60% in month of sale

30% in month following sale
10% in second month following sale

The accounts receivable balance on January 1 of the current year was $70,000, of which $50,000 represents
uncollected December sales and $20,000 represents uncollected November sales.

63. The total cash collected by LaGrange Company during January would be:
D a. $410,000.
Hard b. $254,000.
Refer To: 9-5 c. $344,000.
d. $331,500.

64. What is the budgeted accounts receivable balance on June 1 of the current year?
C a. $56,000.
Hard b. $64,000.
Refer To: 9-5 c. $76,000.
d. $132,000.

334 Managerial Accounting, 9/e

Reference: 9-6
Pardise Company plans the following beginning and ending inventory levels (in units) for July:

July 1 July 30
Raw material 40,000 50,000
Work in process 10,000 10,000
Finished goods 80,000 50,000

Two units of raw material are needed to produce each unit of finished product.

65. If Pardise Company plans to sell 480,000 units during July, the number of units it would have
D to manufacture during July would be:
Easy a. 440,000 units.
CMA adapted b. 480,000 units.
Refer To: 9-6 c. 510,000 units.
d. 450,000 units.

66. If 500,000 finished units were to be manufactured during July, the units of raw material needed
C to be purchased would be:
Easy a. 1,000,000 units.
CMA adapted b. 1,020,000 units.
Refer To: 9-6 c. 1,010,000 units.
d. 990,000 units.

Reference: 9-7
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.

67. The total units to be produced in October is:

B a. 4,530.
Medium b. 5,070.
Refer To: 9-7 c. 5,670.
d. 5,890.

Managerial Accounting, 9/e 335

68. The desired ending inventory for December is:
C a. 960.
Easy b. 870.
Refer To: 9-7 c. 780.
d. 690.

Reference: 9-8
Roberts Enterprises has budgeted sales in units for the next five months as follows:
June ............ 4,500 units
July ............ 7,100 units
August .......... 5,300 units
September ....... 6,700 units
October ......... 3,700 units

Past experience has shown that the ending inventory for each month must be equal to 10% of the next month's
sales in units. The inventory on May 31 contained 410 units. The company needs to prepare a production budget
for the second quarter of the year.

69. The opening inventory in units for September is:

D a. 370 units.
Medium b. 6,700 units.
Refer To: 9-8 c. 530 units.
d. 670 units.

70. The total number of units to be produced in July is:

C a. 7,630 units.
Medium b. 7,100 units.
Refer To: 9-8 c. 6,920 units.
d. 7,280 units.

71. The desired ending inventory for August is:

B a. 530 units.
Easy b. 670 units.
Refer To: 9-8 c. 710 units.
d. 370 units.

Reference: 9-9
Noel Enterprises has budgeted sales in units for the next five months as follows:
January ..... 6,800 units
February .... 5,400 units
March ....... 7,200 units
April ....... 4,600 units
May ......... 3,800 units

Past experience has shown that the ending inventory for each month must be equal to 10% of the next month's
sales in units. The inventory on December 31 contained 400 units. The company needs to prepare a production
budget for the second quarter of the year.

72. The opening inventory in units for April is:

B a. 380 units.
Medium b. 460 units.
Refer To: 9-9 c. 4,600 units.
d. 720 units.

336 Managerial Accounting, 9/e

73. The total number of units to be produced in February is:
A a. 5,580 units.
Medium b. 5,400 units.
Refer To: 9-9 c. 6,120 units.
d. 5,220 units.

74. The desired ending inventory for March is:

B a. 720 units.
Medium b. 460 units.
Refer To: 9-9 c. 540 units.
d. 380 units.

Reference: 9-10
Wellfleet Company manufactures children’s' recreational equipment. The Purchasing Department is finalizing
plans for next year and has gathered the following information regarding two of the components used in both
tricycles and bicycles:

Part A19 Part B12 Tricycles Bicycles

Beginning inventory ... 3,500 1,200 800 2,150
Ending inventory ...... 2,000 1,800 1,000 900
Unit cost ............. $1.20 $4.50 $54.50 $89.60
Projected unit sales .. 96,000 130,000
Component usage:
Tricycles ....... 2 per unit 1 per unit
Bicycles ........ 2 per unit 4 per unit

75. The budgeted dollar value of Wellfleet Company's purchases of Part A19 for next year is:
B a. $383,580.
Hard b. $538,080.
CMA adapted c. $540,600.
Refer To: 9- d. $480,000.
10

76. (Appendix) If the economic order quantity (EOQ) for Part B12 is 70,000 units, the number of
D times that Wellfleet Company should purchase this part next year is:
Hard a. four times.
CMA adapted b. seven times.
Refer To: 9- c. eight times.
10 d. nine times.

Managerial Accounting, 9/e 337

Reference: 9-11
The LFM Company makes and sells a single product, Product T. Each unit of Product T requires 1.3 hours of
labor at a labor rate of $9.10 per hour. LFM Company needs to prepare a Direct Labor Budget for the second
quarter of next year.

77. The budgeted direct labor cost per unit of Product T would be:
B a. $9.10.
Easy b. $11.83.
Refer To: 9- c. $7.00.
11 d. $10.40.

78. The company has budgeted to produce 25,000 units of Product T in June. The finished goods
C inventories on June 1 and June 30 were budgeted at 500 and 700 units, respectively. Budgeted
Medium direct labor costs incurred in June would be:
Refer To: 9- a. $293,384.
11 b. $304,031.
c. $295,750.
d. $227,500.

Reference: 9-12
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
Per Unit Sold Monthly Fixed 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.

79. If the company has budgeted to sell 25,000 units of Product SW in July, then the total budgeted
C selling and administrative expenses for July will be:
Medium a. $56,250.
Refer To: 9- b. $78,000.
12 c. $134,250.
d. $123,250.

338 Managerial Accounting, 9/e

80. If the company has budgeted to sell 20,000 units of Product SW in October then the total
A budgeted variable selling and administrative expenses for October will be:
Medium a. $45,000.
Refer To: 9- b. $40,000.
12 c. $56,250.
d. $78,000.

81. If the budgeted cash disbursements for selling and administrative expenses for November total
B $123,250, then how many units of Product SW does the company plan to sell in November
Hard (rounded to the nearest whole unit)?
Refer To: 9- a. 33,444 units.
12 b. 25,000 units.
c. 22,952 units.
d. 20,111 units.

82. If the company has budgeted to sell 24,000 units of Product SW in September, then the total
D budgeted fixed selling and administrative expenses for September would be:
Medium a. $54,000.
Refer To: 9- b. $48,000.
12 c. $67,000.
d. $78,000.

Reference: 9-13
The Culver Company is preparing its Manufacturing Overhead Budget for the third quarter of the year. Budgeted
variable factory overhead is $3.00 per unit produced; budgeted fixed factory overhead is $75,000 per month, with
$16,000 of this amount being factory depreciation.

83. If the budgeted production for July is 6,000 units, then the total budgeted factory overhead for
D July is:
Easy a. $77,000.
Refer To: 9- b. $82,000.
13 c. $85,000.
d. $93,000.

84. If the budgeted production for August is 5,000 units, then the total budgeted factory overhead
B per unit is:
Easy a. $15.
Refer To: 9- b. $18.
13 c. $20.
d. $22.

Managerial Accounting, 9/e 339

85. If the budgeted cash disbursements for factory overhead for September are $80,000, then the
D budgeted production for September must be:
Medium a. 7,400 units.
Refer To: 9- b. 6,200 units.
13 c. 6,500 units.
d. 7,000 units.

Reference: 9-14
The Bandeiras Company, a merchandising firm, has budgeted its activity for December according to the following
information:

I. Sales at $550,000, all for cash.

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

86. The budgeted cash receipts for December are:

D a. $412,500.
Easy b. $137,500.
Refer To: 9- c. $585,000.
14 d. $550,000.

87. The budgeted cash disbursements for December are:

B a. $382,500.
Hard b. $442,500.
Refer To: 9- c. $472,500.
14 d. $477,500.

88. The budgeted net income for December is:

C a. $107,500.
Hard b. $137,500.
Refer To: 9- c. $42,500.
14 d. $77,500.

340 Managerial Accounting, 9/e

Reference: 9-15
A cash budget by quarters for the Carney Company is given below (note that some data are missing). Missing
data amounts have been keyed with either question marks or lower case letters (a, b, c, etc.); these lower case
letters will be referred to in the questions that follow. (It may be necessary to calculate a value for items where a
question mark appears.) The company requires a minimum cash balance of at least $10,000 to start a quarter. All
data are in thousands.

Carney Corporation
Cash Budget

Quarters o
1 2 3 4
Cash balance, beginning .................... $16 $ e $13 $10
Add collections from customers ............. a 70 67 80
Total cash available .................... ? ? 80 90
Less disbursements:
Purchase of inventory ................... 31 c 40 35
Operating expenses ...................... 35 22 ? 15
Equipment purchases ..................... 10 14 19 0
Dividends ............................... 0 6 0 5
Total disbursements ................. 66 ? f 55
Excess (deficiency) of cash available
over disbursements ...................... 7 17 (2) 35
Financing:
Borrowings .............................. b -- 12 --
Repayments (including interest) ......... -- d -- (21)
Total financing ...................... ? ? 12 (21)
Cash balance, ending ....................... 10 ? $10 $14

89. The collections from customers during the first quarter (item
C a) are:
Medium a. $50.
Refer To: 9- b. $60.
15 c. $57.
d. $73.

90. The borrowing required during the first quarter to meet the minimum cash balance (item b) is:
D a. $0.
Easy b. $7.
Refer To: 9- c. $10.
15 d. $3.

91. The cash disbursed for purchases during the second quarter (item c) is:
D a. $13.
Hard b. $55.
Refer To: 9- c. $9.
15 d. $21.

92. The repayment (including interest) of financing during the second quarter (item d) is:
A a. $4.
Medium b. $0.
Refer To: 9- c. $17.
15 d. $7.

93. The cash balance at the beginning of the second quarter (item e) is:

Managerial Accounting, 9/e 341

A a. $10.
Easy b. $14.
Refer To: 9- c. $0.
15 d. $7.

94. The total disbursements during the third quarter (item f) is:
C a. $84.
Easy b. $78.
Refer To: 9- c. $82.
15 d. $59.

Reference: 9-16
(Appendix) Ryerson Computer Furniture Inc. (RCF) manufactures a line of office chairs. The annual demand for
the chairs is 5,000 units. The annual cost to carry one chair in inventory is $10 and the cost to set up a production
run is $1,000. There are no chairs on hand in inventory, and RCF management has scheduled four production runs
of chairs for the coming year, the first of which is to be run immediately. A total of 1,250 chairs will be produced
in each of the production runs. RCF has 250 business days per year and sales occur uniformly throughout the year.

95. If RCF does not maintain a safety stock, the estimated total inventory carrying costs for the
C chairs for the coming year based on their current production schedule is:
Medium a. $4,000.
CMA adapted b. $5,000.
Refer To: 9- c. $6,250.
16 d. $12,500.

96. The number of production runs per year that would minimize the sum of the inventory carrying
D costs and set-up costs for the coming year is:
Medium a. 1 production run.
CMA adapted b. 2 production runs.
Refer To: 9- c. 4 production runs.
16 d. 5 production runs.

342 Managerial Accounting, 9/e

97. A safety stock of a five-day supply of computer chairs would increase RCF's planned average
C inventory by:
Medium a. 20 units.
CMA adapted b. 5 units.
Refer To: 9- c. 100 units.
16 d. 50 units.

Reference: 9-17
(Appendix) Cantor Creations, which has 250 business days per year, manufactures desks for desktop
workstations. The annual demand for the desks is estimated to be 5,000 units. The annual cost of carrying one unit
in inventory is $10, and the cost to set up a production run is $1,000. Cantor has scheduled four equal production
runs for the coming year, the first to begin immediately. Currently, there are no desks on hand. Assume that sales
occur uniformly throughout the year and that production is instantaneous.

98. If Cantor Creations does not maintain a safety stock, the estimated total carrying costs for the
B desks for the coming year is:
Hard a. $5,000.
CMA adapted b. $6,250.
Refer To: 9- c. $4,000.
17 d. $10,250.

99. If Cantor Creations were to schedule only two equal production runs of the desks for the
A coming year, the sum of carrying costs and set-up costs would increase (decrease) by:
Hard a. $4,250.
CMA adapted b. $(2,000).
Refer To: 9- c. $6,250.
17 d. $(250).

100. A safety stock of a five-day supply of desks would increase the number of units in Cantor
B Creations' planned average inventory by:
Hard a. 50 units.
CMA adapted b. 100 units.
Refer To: 9- c. 250 units.
17 d. 500 units.

Reference: 9-18
(Appendix) The Huron Corporation purchases 60,000 headbands per year. The average purchase lead time is 20
working days. Maximum lead time is 27 working days. The corporation works 240 days per year.

101. Horun Corporation should carry a safety stock of:

C a. 5,000 units.
Medium b. 6,750 units.
CMA adapted c. 1,750 units.
Refer To: 9- d. 5,250 units.
18

102. Huron Corporation should reorder headbands when the quantity in inventory reaches:
B a. 5,000 units.
Medium b. 6,750 units.
CMA adapted c. 1,750 units.
Refer To: 9- d. 5,250 units.
18

Managerial Accounting, 9/e 343

Essay

103. Clay Company has projected sales and production in units for the second quarter of the coming
Medium 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.

344 Managerial Accounting, 9/e

 Answer:

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.

April May June

Sales units........................ 50,000 40,000 60,000
Sales price........................ X $14 x $14 x $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

Managerial Accounting, 9/e 345

104. Tilson Company has projected sales and production in units for the second quarter of the
Medium coming year as follows:

April May June

Sales ............ 55,000 45,000 65,000
Production ....... 65,000 55,000 55,000

Cash-related production costs are budgeted at $7 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 $110,000 per month. The accounts
payable balance on March 31 totals $193,000, which will be paid in April.
All units are sold on account for $16 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
$520,000 ($100,000 from February's sales and the remainder from March).

Required:

a. Prepare a schedule for each month showing budgeted cash disbursements for the Tilson
Company.
b. Prepare a schedule for each month showing budgeted cash receipts for Tilson Company.

Answer:

April May June

Production units................... 65,000 55,000 55,000
Cash required per unit............. $7 $7 $7
Production costs................... $455,000 $385,000 $385,000

Cash disbursements:
April May June
Production this month (40%)........ $182,000 $154,000 $154,000
Production prior month (60%)....... 193,000 273,000 231,000
Selling and administrative......... 110,000 110,000 110,000
Total disbursements................ $485,000 $537,000 $495,000

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

April May June

Sales units....................... 55,000 45,000 65,000
Sales price....................... X $16 x $16 __ x $16
Total sales....................... $880,000 $720,000 $1,040,000

April May June

Cash receipts:
February sales.................. $100,000
March sales..................... 315,000 $105,000
April sales..................... 528,000 264,000 $ 88,000
May sales....................... 432,000 216,000
June sales...................... 624,000
Total receipts.................... $943,000 $801,000 $928,000

105. At March 31 Streuling Enterprises, a merchandising firm, had an inventory of 38,000 units,
Medium and it had accounts receivable totaling $85,000. Sales, in units, have been budgeted as follows

346 Managerial Accounting, 9/e

 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.

Answer:
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

106. TabComp Inc. is a retail distributor for MZB-33 computer hardware and related software.
Hard TabComp prepares annual sales forecasts of which the first six months of the coming year are
presented below.

Hardware Hardware Total

Units Dollars Software Sales

January ....... 130 $390,000 $160,000 $550,000

February ...... 120 360,000 140,000 500,000
March ......... 110 330,000 150,000 480,000
April ......... 90 270,000 130,000 400,000
May ........... 100 300,000 125,000 425,000
June .......... 125 375,000 225,000 600,000

Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank
credit card, and the remaining 45% are on open account (TabComp's own charge accounts).
The cash and bank credit card sale payments are received in the month of the sale. Bank credit

Managerial Accounting, 9/e 347

 card sales are subject to a four percent discount which is deducted immediately. The cash
receipts for sales on open account are 70% in the month following the sale, 28% in the second
month following the sale, and the remaining are uncollectible.
TabComp's month-end inventory requirements for computer hardware units are 30% of the
next month's sales. The units must be ordered two months in advance due to long lead times
quoted by the manufacturer.

348 Managerial Accounting, 9/e

 Required:

a. Calculate the cash that TabComp can expect to collect during April. Show all of your
calculations.

b. Determine the number of computer hardware units that should be ordered in January.
show all of your calculations.

Answer:
a. The cash that TabComp can expect to collect during April is calculated below.

April cash receipts:

April cash sales ($400,000 x 0.25)............. $100,000
April credit card sales ($400,000 x 0.30 x 0.96) 115,200
Collections on open account:
March ($480,000 x 0.45 x 0.70)................. 151,200
February ($500,000 x 0.45 x 0.28).............. 63,000
January (uncollectible)........................ 0
Total collections............................ $429,400

b. The number of units that TabComp should order in January is calculated as follows.
March sales ..................................... 110 units
Add desired ending inventory (90 units x 0.30) .. 27 units
Total needs ..................................... 137 units
Less beginning inventory (110 units x 0.30) ..... 33 units
Required purchases .............................. 104 units

107. The Doley Company has planned the following sales for the next three months:
Medium
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 month's 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 provide for March:

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

Managerial Accounting, 9/e 349

 dollar amount and will not pay interest until April.

Answer:
a. Cash sales, March: $70,000 x 20% ............... $14,000
Collections on account:
Jan. sales: $40,000 x 80% x 8% .............. 2,560
Feb. sales: $50,000 x 80% x 30% ............. 12,000
Mar. sales: $70,000 x 80% x 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
Operating expenses ........................... 40,000
Dividends .................................... 4,000
Total disbursements ............................. 72,000
Cash excess (deficiency) ........................ (3,840)
Financing - borrowing ........................... 8,840
Cash balance, ending ............................ $ 5,000

108. Montero Corporation, a merchandising company, has provided the following budget data:
Medium Purchases Sales
CPA adapted January ........ $42,000 $72,000
February........ 48,000 66,000
March .......... 36,000 60,000
April .......... 54,000 78,000
May ............ 60,000 66,000

Collections from customers are normally 70% in the month of sale, 20% in the month
following the sale, and 9% in the second month following the sale. The balance is expected to
be uncollectible. Montero pays for purchases in the month following the purchase. Cash
disbursements for expenses other than merchandise purchases are expected to be $14,400 for
May. Montero's cash balance at May 1 was $22,000.

350 Managerial Accounting, 9/e

 Required:

a. Compute the expected cash collections during May.

b. Compute the expected cash balance at May 31.

Answer:
a. Expected
Sales Collections
March ............ $60,000 x 9% = $ 5,400
April ............ $78,000 x 20% = $15,600
May .............. $66,000 x 70% = $46,200
Total .......... $67,200
b.
Balance, May 1 ....................... $22,000

Expected collections ................. 67,200

Expected disbursements
April purchases to be paid in May .. $54,000
Cash disbursements for expenses .... 14,400
Total disbursements............... 68,400
(1,200)
Expected ending balance .............. $20,800

109. A sales budget is given below for one of the products manufactured by the Key Co.:
Hard
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.

Answer:

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

Managerial Accounting, 9/e 351

 January February March Quarter
Units to be produced........ 24,200 41,000 57,000 122,200
Switches per unit........... x 3 x 3 x 3 x 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 x 0.3 = 21,780.

Ending inventory, March 30: (39,000 x 3) x 0.3 = 35,100.

110. A sales budget is given below for one of the products manufactured by the OMI Co.:
Hard
January ...... 25,000 units
February ..... 40,000 units
March ........ 65,000 units
April ........ 45,000 units
May .......... 35,000 units
June ......... 30,000 units

The inventory of finished goods at the end of each month must 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 pounds of specialized material. Since the production of
this specialized material by OMI'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 material to be purchased each month for January,
February, and March and in total for the quarter.

Answer:

January February March April

Budgeted sales (units)... 25,000 40,000 65,000 45,000
Add: Desired
ending inventory 8,000 13,000 9,000 7,000
Total needs.............. 33,000 53,000 74,000 52,000
Deduct:
Beginning inventory 4,000 8,000 13,000 9,000
Units to be produced...... 29,000 45,000 61,000 43,000

January February March Quarter

Units to be produced..... 29,000 45,000 61,000 135,000
Switches per unit........ x 3 x 3 x 3 x 3
Production needs......... 87,000 135,000 183,000 405,000
Add: Desired
ending inventory. 40,500 54,900 38,700 38,700
Total needs.............. 127,500 189,900 221,700 443,700
Deduct:
Beginning inventory... 26,100 40,500 54,900 26,100

352 Managerial Accounting, 9/e

 Required purchases....... 101,400 149,400 166,800 417,600

Beginning inventory, January 1: 87,000 x 0.3 = 26,100.

Ending inventory, March 30: (43,000 x 3) x 0.3 = 38,700.

Managerial Accounting, 9/e 353