Master Budgets and Performance Planning: Questions

Chapter 20 - Master Budgets and Performance Planning
Chapter 20
Master Budgets and Performance
Planning
QUESTIONS
1. A budget helps managers control and monitor a business by 1) communicating
plans to employees, 2) coordinating the activities of different parts of the
organization, and 3) providing a basis for deciding whether actual performance is
acceptable (through benchmarking). Budgeting also helps 4) promote analysis, 5)
focus on the future, and 6) motivate employees.
2. Two common benchmarks used by managers to evaluate performance are: past
performance and budgeted performance. Budgeted performance is generally more
useful because it is based on more current business conditions and information that
are presumably reflected in the numbers.
3. Continuous budgeting provides managers a full set of updated budgets each time a
budget period goes by. In a changing environment, continuous budgeting should
provide superior information for effective planning.
4. Three common short-term horizons for planning and budgeting purposes are:
monthly, quarterly, and annually. A semiannual planning horizon is also popular.
5. Budgeting can be a strong positive motivating force if employees are involved or
consulted in the process. This participation promotes their commitment to reaching
the specified goals—such a process is called participatory budgeting. Alternatively,
if employees are not consulted, budgets may produce negative attitudes and
dysfunctional behavior in an organization.
6. Budgeting helps management coordinate and plan business activities by providing
specific guidance for the individual activities of various departments and
employees.
7. The sales budget reflects the expected sales to be made over a period of time, stated
in dollars and/or units. The sales budget is the most important of all the component
budgets of the master budget because it is used to set purchasing/production levels
and the related selling and administrative activities and expenditures.
8. A selling expense budget is a plan of the expenses to be incurred to produce the
planned amount of sales. The capital expenditures budget lists dollar amounts of
plant assets to be disposed of and additional plant assets to be purchased during
the budget period.
20-1
9. Budgeting promotes good decision making by requiring managers to conduct

research (or analysis) and by focusing their attention on the future.
10. A cash budget shows the planned cash receipts and cash disbursements for each
budget period, including any loans to be received or repaid. Since the operating
budgets and the capital expenditures budget reflect transactions and events that
produce cash inflows and cash outflows, the cash budget can be completed only
after these companion budgets are completed.
11A. A production budget shows the number of units to be produced each budget period.
Based on the number of units to be produced (taken from the production budget),
the manufacturing budget shows the budgeted costs for direct materials, direct
labor, and factory overhead.
12. A manager of an Apple store would have responsibility for and decision control over
budgeting for his/her store. A manager at the corporate offices may participate in,
but would not likely be involved in the budgeting for individual stores, but would
have responsibility and decision control over administrative budgets.
13. With the exception of the decision to operate, the manager of a Research In Motion
distribution center is not likely to engage in a substantial amount of long-term
budgeting. Once the distribution center is up and operating, the vast majority of
decisions will focus on day-to-day operations. Most of the decisions concerning
freight carriers, pricing, and product mix are often made at the corporate level.
However, corporate level decision-making should incorporate information and
expectations provided by the operating managers of distribution centers.
14.
Budget Participant Description
Sales manager.....................Information on estimated sales (units and dollars).
Production manager...........Number of units to produce based on estimated sales.
Manufacturing manager......Amount of direct materials, direct labor, and
manufacturing overhead to produce the estimated level
of production.
Sales manager.....................Cost of selling the estimated sales level.
General & admini-
strative managers................Cost to support operations; most often are fixed costs.
Capital expenditures Prepare plans to have available plant assets necessary
committee............................to carry on business activities.
Cash managers....................Working with the above budgets, this team will prepare
cash flow analysis.
Accounting and finance
staff......................................Financial budgets prepared from above information.
20-2
QUICK STUDIES
Quick Study 20-1 (10 minutes)
Three useful guidelines to help motivate employees with budgeting are

1. Employees affected by a budget should be consulted when it is prepared.
2. Goals reflected in a budget should be attainable.
3. Evaluations of performance should be made carefully with opportunities
to explain any failures and discrepancies.
1. The bottom-up approach to budgeting is considered more successful

because without active employee involvement in preparing budget
figures, there is a risk these employees will feel that the numbers fail to
reflect their special problems and needs. It also has the benefit of
directly involving those employees who regularly confront and deal with
day-to-day situations.
2. Examples of bottom-up budgeting include

 involving the sales department in preparing sales estimates.
 involving the production department in preparing its own expense
budget.
Correct answer is 3.
20-3
Rockgate Company
Computation of Budgeted Cost of Purchases (in dollars)
For Month Ended July 31
Budgeted ending inventory.........................................................................
$ 50,000
Budgeted cost of goods to be sold [$400,000 x (1 – 30%)]......................
280,000
Required available merchandise................................................................
330,000
Less budgeted beginning inventory...........................................................
40,000
Budgeted cost of purchases.......................................................................
$290,000
Computation of budgeted Accounts Receivable balance as of July 31

Credit Percent still Amount
Sales month Total Sales Sales* Uncollected* Uncollected
June.....................$420,000 $168,000 20% $ 33,600
July...................... 398,000 159,200 90% 143,280
Total..................... $176,880
* Credit sales are 40% of total sales—of these credit sales, 10% are collected in the sale month,
70% are collected in the month after sale, and 20% are collected in the second month after sale.
Sosa Company
Cash Budget
For Month Ended March 31
Beginning cash balance.......................................................... $ 82,000
Cash receipts from sales......................................................... 300,000
Total cash available................................................................. $382,000
Cash disbursements
Payments for merchandise.................................................... 120,000
Salaries....................................................................................
80,000
Other expenses....................................................................... 55,000
Repayment of bank loan......................................................... 30,000
Total cash disbursements...................................................... 285,000
Ending cash balance............................................................... $ 97,000
20-4
1. Activity-based budgeting requires managers to focus on the activities of

their departments, forecast the individual activity levels, identify the
resources required to carry out the activities, and estimate the costs of
those resources.
2. Traditional budgeting consists of listing the amount of resources

required for each department (such as salaries and utilities). Activity-
based budgeting allows managers to better justify changes in budgeted
amounts based on changes in activity levels.
Quick Study 20-8A (15 minutes)

Goldenlock Company
Production Budget
For Month Ended November 30
Next month’s budgeted sales...............................................................400,000
Ratio of inventory to future sales.........................................................x 20%
Budgeted ending inventory.................................................................. 80,000
Add budgeted sales for the month......................................................350,000
Required units of available production...............................................430,000
Less beginning inventory..................................................................... 95,000
Units to be produced.............................................................................335,000
Goldenlock Company
Factory Overhead Budget
Units to be produced............................................................................. 335,000
Variable factory overhead rate per unit...............................................

x $1.75
Budgeted variable overhead.................................................................

$ 586,250
Budgeted fixed overhead......................................................................5,000,000
Budgeted total overhead.......................................................................

$5,586,250
20-5
Turks
Sales Budget
For Month Ended June 30
Prior month’s unit sales........................................................................ 900
Plus 5% growth in unit sales................................................................ 45
Projected June sales (units)................................................................. 945
Selling price per unit............................................................................. x $400
Projected sales for June....................................................................... $378,000
Turks
Selling Expense Budget
Budgeted sales...................................................................................... $378,000
Sales commission percent................................................................... x 10%
Sales commissions............................................................................... 37,800
Sales manager’s monthly salary.......................................................... 4,000
Projected selling expense for June..................................................... $ 41,800
20-6
Turks
Budgeted Cash Receipts
Budgeted sales...................................................................................... $378,000
Less ending accounts receivable (80%).............................................. 302,400
Cash sales (20%)................................................................................... 75,600
Collections of last month’s receivables*............................................. 288,000
Total cash receipts................................................................................ $363,600

*$360,000 x 80% = $288,000. Last month’s sales of $360,000 from QS 20-10.
Sales....................................................................................................... BIS
Administrative salaries paid................................................................. BIS
Accumulated depreciation.................................................................... BBS
Depreciation expense............................................................................ BIS
Interest paid on bank loan ................................................................... BIS
Cash dividends paid.............................................................................. NA
Bank loan owed..................................................................................... BBS
Cost of goods sold................................................................................ BIS
CANDY SHOPPE
Cash Receipts Budget
For Month Ended September 30
Cash receipts from September cash sales (25% x $120,000)............$ 30,000
Collection of prior month’s receivables (75% x $110,000)................ 82,500
20-7
ZEN DEN
Budgeted Cash Receipts
Cash receipts from November cash sales (15% x $30,000)............... $ 4,500
Collection of October’s sales (60% x $36,000).................................... 21,600
Collection of September’s sales (20% x $25,000)............................... 5,000
T-MART
Cash Disbursements for Merchandise (Budgeted)
For Month Ended September 30
Cash disbursements for September purchases (25% x $120,000)....$ 30,000
Cash disbursements for August purchases (75% x $100,000)...........$ 75,000
Total cash disbursements....................................................................$105,000
JAM CO.
Cash Disbursements for Merchandise (Budgeted)
For January, February, and March
January February March
Purchases..................................................... $11,600 $11,800 $15,400
Cash disbursements for
Current month’s purchases (40%) .......... $ 4,640 $ 4,720 $ 6,160
Prior month’s purchases (60%)................ 8,000 6,960 7,080
Total cash disbursements for purchases..... $12,640 $11,680 $13,240
20-8
SPLINTER CORP.
Purchases Budget
For Month Ended April 30
Budgeted ending inventory (130% x 1,000)......................................... 1,300
Budgeted sales for April....................................................................... 6,000
Required units of available inventory.................................................. 7,300
Less beginning inventory..................................................................... (1,000)
Units to be purchased........................................................................... 6,300
LI COMPANY
Merchandise Purchases Budget
For April, May, and June
April May June
Next month’s budgeted sales (units).......... 720,000 780,000 620,000
Ratio of inventory to future sales............... x 30% x 30% x 30%
Budgeted ending inventory (units)............. 216,000 234,000 186,000
Add budgeted sales (units)......................... 640,000 720,000 780,000
Required units of available merch. ............ 856,000 954,000 966,000

Deduct beginning inventory (units)............ (192,000) (216,000) (234,000)
Units to be purchased.................................. 664,000 738,000 732,000
20-9
Quick Study 20-20 A (10 minutes)
KYOTO, INC.
Production Budget
For Month Ended May 31
Next month’s budgeted sales (units)................................................... 300
Ratio of inventory to future sales......................................................... x 60%
Budgeted ending inventory (units)...................................................... 180
Add budgeted sales for the month (units).......................................... 280
Required units of available production............................................... 460
Deduct beginning inventory (units)..................................................... (168)
Units to be produced............................................................................. 292
ZYTON CORP.
Direct Materials Budget
For Month Ended January 31
Budget production (units)..................................................................... 292
Materials requirements per unit........................................................... x 5 lbs.
Materials needed for production (lbs.)................................................ 1,460
Add budgeted ending inventory (264* units x 5 lbs. per unit x 30%).... 396
Total materials requirements (lbs.)...................................................... 1,856
Deduct beginning inventory (lbs.)........................................................ (438)
Materials to be purchased (lbs.)........................................................... 1,418
Materials price per pound..................................................................... $ 6
Total cost of direct materials purchases............................................. $8,508

*February’s budgeted production.
20-10
Quick Study 20-22 A (5 minutes)
TEK CO.
Direct Labor Budget
Budget production (units)..................................................................... 620
Labor requirements per unit (hours)................................................... x 2
Total labor hours needed...................................................................... 1,240
Labor rate (per hour)............................................................................. $ 16
Labor dollars.......................................................................................... $19,840
SHAY INC.
Sales Budget
Budgeted Budgeted Budgeted
Unit Sales Unit Price Total Sales
January.......................................................... 1,200 $25 $ 30,000
February........................................................ 1,000 25 25,000
March............................................................. 1,600 25 40,000
Totals for the quarter................................... 3,800 $25 $95,000
20-11
SHAY INC.
Sales.............................................................. $30,000 $25,000 $40,000
Less ending accts. receivable (60%).......... 18,000 15,000 24,000
Cash receipts from
Cash sales (40% of sales) ........................... 12,000 10,000 16,000
Collections of prior month’s receivables...... 10,000 18,000 15,000
Total cash receipts ...................................... $22,000 $28,000 $31,000
SHAY INC.
Selling Expense Budget
Budgeted sales............................................. $30,000 $25,000 $40,000
Sales commission percent.......................... x 10% x 10% x 10%
Sales commissions ..................................... 3,000 2,500 4,000
Sales manager monthly salary.................... 5,000 5,000 5,000
Total selling expenses ................................ $ 8,000 $ 7,500 $ 9,000
20-12
MINK COMPANY
Cash Budget
For Month Ended February 28
Beginning cash balance........................................................................ $ 30,000
Cash receipts......................................................................................... 75,000
Total cash available............................................................................... 105,000
Cash disbursements............................................................................. (96,250)
Preliminary cash balance...................................................................... $ 8,750
Additional loan from bank.................................................................... 1,250
Ending cash balance............................................................................. $ 10,000
Based on the cash budget above, the company must borrow $1,250 during
February to maintain a $10,000 cash balance.
1.
Sales (current year)................................................................. €23,200
Sales growth (€23,200 x 3%)................................................... 696
Budgeted sales (next year)..................................................... €23,896
2.
Note: Assume sales of €24,000 for this question.
Budgeted selling expenses (€24,000 x 20%)......................... €4,800
Budgeted general and admin. expenses (€24,000 x 4%)..... 960
20-13
EXERCISES
Exercise 20-1 (30 minutes)
1. Merchandise Purchases Budget
Note: Shaded numbers represent known information provided in the

exercise.
Formworks Company
Merchandise Purchases Budget
For July, August, and September
July August September
Next month’s budgeted sales.............. 210,000 180,000 75,000 (10)
Ratio of inventory to next month sales. x 20% (9) x 20% (9) x 20% (9)
Budgeted ending inventory.................. 42,000 (6) 36,000 (3) 15,000
Add budgeted sales for month............ 120,000 210,000 180,000
Required units available inventory..... 162,000 (7) 246,000 (4) 195,000 (1)
Less beginning inventory..................... 24,000 (8) 42,000 (5) 36,000 (2)
Budgeted merchandise purchases..... 138,000 204,000 159,000
Notes (1) through (10) provide supporting calculations and explanations (see next page).
20-14
Exercise 20-1 (Continued)

Notes: (1) September required units
Ending inventory 15,000
Add budgeted sales 180,000
Total required in September 195,000
(2) September Beginning Inventory

Total required (1 above) 195,000
Less budgeted purchases (159,000)
September beginning inventory 36,000
(3) September Beginning Inventory = August Ending Inventory
(4) August required units

Total required in September 246,000
(5) August beginning inventory

August beginning inventory 42,000
(6) August Beginning Inventory = July Ending Inventory
(7) July required units

Total required in July 162,000
(8) July Beginning Inventory

July beginning inventory 24,000
(9) Percent of Sales to be held as Ending Inventory

Ending inventory for August = 36,000 = 20%
September Sales 180,000
This percentage is constant for the three months.
(10) October expected sales

September Ending Inventory = 15,000 = 75,000
Required % 20%
2. Monthly ending inventory is 20% of next month’s sales (see note #9).
3. October budgeted sales = 75,000 (see note #10 above).
20-15
KASIK COMPANY
Cash Budget
Beginning cash balance..............................
$ 30,000 $ 30,000 $ 69,294
Cash receipts................................................ 500,000 300,000 400,000
Total cash available...................................... 530,000 330,000 469,294
Cash disbursements.................................... 450,000 250,000 500,000
Interest expense
January ($60,000 x 1%)............................. 600
February ($10,600 x 1%)............................________ 106 ________
Preliminary cash balance............................ 79,400 79,894 (30,706)
Additional loan from bank........................... 60,706
Repayment of loan to bank.......................... (49,400) (10,600) ________
Ending cash balance....................................
$ 30,000 $ 69,294 $ 30,000
Ending loan balance.....................................

$ 10,600 $ 0 $ 60,706
20-16
SANCHEZ COMPANY
Cash Budget
Beginning cash balance.................................$ 50,000
Cash receipts from sales (note 1)................... 1,364,000
Total cash available........................................ $1,414,000
Cash disbursements
Payments for merchandise (note 2).............. 532,000
Salaries.......................................................... 211,000
Other expenses............................................. 150,000
Accrued taxes............................................... 80,000
Interest on bank loan.................................... 6,600
Total cash disbursements.............................. 979,600
Ending cash balance...................................... $ 434,400
Note: Depreciation expense is excluded since it is a non-cash expense.
Supporting calculations
(1) Cash receipts in July from sales

From May sales ($1,720,000 x 20%)............... $ 344,000
From June sales ($1,200,000 x 50%).............. 600,000
From July sales ($1,400,000 x 30%)............... 420,000
Total................................................................... $1,364,000
(2) Cash disbursements in July for merchandise

For June purchases ($430,000 x 40%)........... $ 172,000
For July purchases ($600,000 x 60%)............ 360,000
Total................................................................... $ 532,000
20-17

SANCHEZ COMPANY
Budgeted Income Statement
Sales...................................................................... $1,400,000
Cost of goods sold (note 1)................................... 616,000
Gross profit........................................................... 784,000
Operating expenses
Salaries expense (note 2)....................................$201,000
Depreciation expense........................................ 12,000
Other cash expenses.........................................150,000
Bank loan interest expense.............................. 6,600
Total expenses..................................................... 369,600
Income before taxes............................................. 414,400
Income tax expense (note 3)................................. 124,320
Net income............................................................ $ 290,080
(1) Cost of goods sold
Sales.................................................................. $1,400,000
Cost percent...................................................... 44%
Cost of goods sold........................................... $ 616,000
(2) Salaries expense

Cash paid.......................................................... $ 211,000
Less beginning payable................................... (50,000)
Plus ending payable......................................... 40,000
Salaries expense.............................................. $ 201,000
(3) Income tax expense

Pre-tax income.................................................. $ 414,400
Tax rate.............................................................. 30%
Income tax expense......................................... $ 124,320
20-18
Exercise 20-4 (Continued)

SANCHEZ COMPANY
Budgeted Balance Sheet
As of July 31
ASSETS
Cash (from Exercise 20-3)........................................ $ 434,400
Accounts receivable (note 1)................................ 1,220,000
Inventory (note 2)................................................... 64,000
Total current assets............................................. 1,718,400
Equipment.............................................................
$1,600,000
Less accumulated depreciation (note 3)..............292,000 1,308,000
Total assets........................................................... $3,026,400
LIABILITIES AND EQUITY
Liabilities
Accounts payable (note 4)..................................$ 240,000
Salaries payable................................................. 40,000
Income taxes payable........................................124,320
Total current liabilities.......................................404,320
Bank loan payable..............................................660,000 1,064,320
Stockholders’ equity
Common stock...................................................600,000
Retained earnings (note 5).................................. 1,362,080 1,962,080
Total liabilities and equity................................... $3,026,400
(1) Accounts receivable
June sales (20% x $1,200,000)....................................$ 240,000
July sales (70% x $1,400,000)................................... 980,000
Total..............................................................................
$1,220,000
(2) Inventory
Beginning.....................................................................
$ 80,000
Purchases....................................................................
600,000
Cost of goods sold......................................................
(616,000)
Ending..........................................................................
$ 64,000
(3) Accumulated depreciation

Beginning.....................................................................
$ 280,000
Expense........................................................................
12,000
Ending..........................................................................
$ 292,000
(4) Accounts payable

Purchases....................................................................
$ 600,000
Percent unpaid.............................................................
40%
Payable.........................................................................
$ 240,000
(5) Retained earnings

Beginning.....................................................................
$1,072,000
Net income...................................................................
290,080
20-19
Ending..........................................................................
$1,362,080
20-20
Preliminary calculations (sales, cost of sales, beginning and ending inventory)

August September October November
Sales............................................................ $150,000 $ 350,000 $200,000 $300,000
Cost to sales percent................................. x 60% X 60% X 60% X 60%
Cost of goods sold..................................... 90,000 210,000 120,000 180,000
Beginning inventory percent..................... x 40% x 40% x 40% x 40%
Beginning inventory................................... $ 36,000 $ 84,000 $ 48,000 $ 72,000
Ending inventory (from next month)......... $ 84,000 $ 48,000 $ 72,000
Merchandise purchases budgets (* denotes from preliminary calculations

above)
August September October
Budgeted ending inventory (*)........................ $ 84,000 $ 48,000 $ 72,000
Add budgeted cost of goods sold (*)............. 90,000 210,000 120,000
Cost of available merchandise.......................174,000 258,000 192,000
Less beginning inventory (*)...........................(36,000) (84,000) (48,000)
Budgeted purchases.......................................
$138,000 $174,000 $144,000
Cash payments for purchases (on accounts) in October

Dollars Percent Paid
For purchases from August...........................
$138,000 15% $ 20,700
For purchases from September.....................174,000 35 60,900
For purchases from October..........................144,000 50 72,000
Total cash payments for purchases.............. $153,600
1. Budgeted merchandise purchases

June July August
Ending accounts payable................ $ 170,000 $ 200,000 $ 160,000
Cash paid on accounts payable...... 1,450,000 1,350,000 1,400,000
Total payable during month............ 1,620,000 1,550,000 1,560,000
Less beginning payable................... (120,000) (170,000) (200,000)
Purchases during month................. $1,500,000 $1,380,000 $1,360,000
2. Budgeted cost of goods sold

June July August
Beginning inventory......................... $ 250,000 $ 400,000 $ 300,000
Plus purchases................................. 1,500,000 1,380,000 1,360,000
Less ending inventory..................... (400,000) (300,000) (330,000)
20-21
Cost of goods sold........................... $1,350,000 $1,480,000 $1,330,000
20-22

1.
Preliminary calculations (sales, cost of sales, beginning inventory)
July August September October November
Budgeted sales...............................
$300,000 $240,000 $270,000 $240,000 $210,000
Cost to sales percent.....................x 70% x 70% x 70% x 70% x 70%
Budgeted cost of goods sold........210,000 168,000 189,000 168,000 147,000
Budgeted inventory percent.......... x 25% x 25% x 25% x 25% x 25%
Budgeted beginning inventory......... $ 52,500 $ 42,000 $ 47,250 $ 42,000 $ 36,750
Budgeted merchandise purchases

July August September October
Budgeted ending inventory..................
$ 42,000 $ 47,250 $ 42,000 $ 36,750
Budgeted cost of goods sold............... 210,000 168,000 189,000 168,000
Cost of available merchandise............ 252,000 215,250 231,000 204,750
Less beginning inventory.....................(52,500) (42,000) (47,250) (42,000)
Budgeted purchases.............................
$199,500 $173,250 $183,750 $162,750
2.
Budgeted payments on accounts payable in September
Purchases Percent Paid Dollars Paid
For purchases from September........... $183,750 20% $ 36,750
For purchases from August................. 173,250 50 86,625
For purchases from July....................... 199,500 30 59,850
Total payments...................................... $183,225
Budgeted payments on accounts payable in October

Purchases Percent Paid Dollars Paid
For purchases from October................ $162,750 20% $ 32,550
For purchases from September........... 183,750 50 91,875
For purchases from August................. 173,250 30 51,975
Total payments...................................... $176,400
3.
Budgeted balance of accounts payable at the end of September
Purchases Percent Unpaid Dollars Unpaid
From purchases in September.............$183,750 80% $147,000
From purchases in August................... 173,250 30 51,975
Total accounts payable balance.......... $198,975
Budgeted balance of accounts payable at the end of October

Purchases Percent Unpaid Dollars Unpaid
From purchases in October.................$162,750 80% $130,200
From purchases in September............. 183,750 30 55,125
Total accounts payable balance.......... $185,325
20-23
Exercise 20-8A (15 minutes)
NASCAR COMPANY
Production Budget
Second and Third Quarters
Second Third
Quarter Quarter
Budgeted ending inventories
Second quarter (20% x 262,500)............................................. 52,500
Third quarter (20% x 237,500)................................................. 47,500
Add budgeted sales.................................................................225,000 262,500

Required units of available production.................................277,500 310,000
Less actual or budgeted beginning inventories...................(37,500) (52,500)
Units to be produced...............................................................240,000 257,500
NASCAR COMPANY
Second Quarter
Units to be produced (from Exercise 20-8A).......................... 240,000

Materials requirement per unit............................................... x 60%
Materials needed for production (units)................................ 144,000
Add budgeted ending inventory (units)*............................... 77,250
Total materials requirements (units)...................................... 221,250
Deduct beginning inventory (units)**..................................... (72,000)
Materials to be purchased (units) .......................................... 149,250
x $175
Material price per unit..............................................................
$26,118,750
Total cost of direct materials purchases...............................
* (257,500 x 60%) x 50% **144,000 x 50%
20-24
NASCAR COMPANY
Direct Labor Budget
Second Quarter
Units to be produced (from Exercise 20-8A).......................... 240,000

Labor requirements per unit (hours)...................................... x 4
Total labor hours needed........................................................ 960,000
Labor rate (per hour)............................................................... x $9

Labor dollars............................................................................ $8,640,000
JAKE COMPANY
Budgeted Cash Disbursements
For August and September
August Sept.
Payments for merchandise*....................................................
$14,400 $19,200
Selling expenses (15% of sales).............................................4,800 5,400
Administrative expenses (10% of sales)................................3,200 3,600
Rent expense............................................................................ 2,400 2,400
Total cash disbursements.......................................................
$24,800 $30,600
* *Equals prior month’s purchases. Note that depreciation expense is excluded since it is
a non-cash expense.
20-25
EMILY, INC.
April May June
Sales..............................................................$525,000 $535,000 $560,000
Cash receipts from
Total cash receipts ......................................$510,000 $529,000 $545,000
KAIZEN CORP.
Cash Budget
July August Sept.
Beginning cash balance.............................. $ 8,400 $ 8,000 $ 8,000
Cash receipts................................................ 24,000 32,000 40,000
Total cash available ..................................... 32,400 40,000 48,000
Interest on bank loan
August ($3,600 x 1%)................................. 36
September ($1,636 x 1%).........................._______ _______ 16
Preliminary cash balance ........................... $ 4,400 $ 9,964 $15,984
Repayment of loan to bank.........................._______ 1,964 1,636
Ending cash balance.................................... $ 8,000 $ 8,000 $14,348
Loan balance, end of month........................ $ 3,600 $ 1,636 $ 0
20-26
FABRICE CORP.
Cash Budget
For October, November, and December
Oct. Nov. Dec.
Beginning cash balance*............................. $ 6,000 $ 6,000 $ 6,000
Cash receipts................................................ 22,000 16,000 20,000
October ($2,000 x 1%)............................... 20
November ($4,020 x 1%)........................... 40
December ($3,060 x 1%)............................_______ _______ 31
Preliminary cash balance ........................... $ 3,980 $ 6,960 $ 9,969
Repayment of loan to bank.........................._______ 960 3,060
Ending cash balance.................................... $ 6,000 $ 6,000 $ 6,909
Loan balance, end of month........................ $ 4,020 $ 3,060 $ 0
*October’s beginning cash balance includes an outstanding loan balance of $2,000.
20-27
CAMBRIDGE, INC.
Cash Budget
April May June
Beginning cash balance*............................. $12,000 $12,000 $ 15,588
Cash receipts**............................................. 31,200 36,800 30,400
Cash disbursements
Payments for merchandise.......................... 20,200 16,800 17,200
Sales commissions (10% of sales)............. 3,200 4,000 2,400
Shipping (3% of sales)................................. 960 1,200 720
Office salaries............................................... 3,000 3,000 3,000
Rent................................................................ 5,000 5,000 5,000
April ($2,000 x 1%)..................................... 20
May ($3,180 x 1%)...................................... ______ 32 _______
Preliminary cash balance ........................... $10,820 $18,768 $17,668

Repayment of loan to bank.........................._______ 3,180 _______
Ending cash balance.................................... $12,000 $15,588 $17,668
Loan balance, end of month........................ $ 3,180 $ 0 $ 0
*April’s beginning cash balance includes an outstanding loan payable of $2,000.

**Per cash receipts budget on next page
20-28
Exercise 20-15 (continued)
CAMBRIDGE, INC.
April May June
Sales.............................................................. $32,000 $40,000 $24,000
Cash receipts from
(1)
KOOL-RAY
July August Sept.
Sales.............................................................. $64,000 $80,000 $48,000
Cash receipts from
20-29
Exercise 20-16 (continued)
(2)
KOOL-RAY
Cash Budget
July August Sept.
Beginning cash balance*............................. $12,000 $12,000 $ 25,565
Cash receipts (from part 1).......................... 57,800 67,200 73,600
Cash disbursements
Payments for merchandise.......................... 40,400 33,600 34,400
Sales commissions (10% of sales)............. 6,400 8,000 4,800
Office salaries............................................... 4,000 4,000 4,000
Rent................................................................ 6,500 6,500 6,500
July ($2,000 x 1%)...................................... 20
August ($1,520 x 1%)................................._______ 15 _______
Preliminary cash balance ........................... $12,480 $27,085 $49,465
Additional loan from bank...........................

Repayment of loan to bank.......................... 480 1,520 ______
Ending cash balance.................................... $12,000 $25,565 $49,465
Loan balance, end of month........................ $ 1,520 $ 0 $ 0
*July’s beginning cash balance includes a loan payable of $2,000.
20-30
ZHAO COMPANY
As of March 31
ASSETS
Cash................................................................................ $ 48,000
Accounts receivable ($120,000 x 70%)............................. 84,000
Merchandise inventory (600 units x $35) ........................ 21,000
Total current assets....................................................... 153,000
Equipment....................................................................... $84,000
Less accumulated depreciation (note 1) ...................... 31,000 53,000
Total assets.................................................................... $206,000
Liabilities
Accounts payable ....................................................... $89,000
Income taxes payable.................................................. 26,000
Bank loan payable....................................................... 10,000 125,000
Stockholders’ equity
Common stock............................................................. 25,000
Retained earnings (note 2) ........................................... 56,000 81,000
Total liabilities and equity............................................. $206,000
(1) Accumulated depreciation

Beginning.....................................................................
$30,000
Depreciation expense................................................. 1,000
Ending..........................................................................
$31,000
(2) Retained earnings

Beginning.....................................................................
$ 8,000
Net income...................................................................
48,000
Ending..........................................................................
$56,000
20-31
ZULU, INC.
For Quarter Ended March 31
Sales (note 1)..................................................................... $3,750,000
Cost of goods sold (note 2).............................................. 2,100,000
Gross profit...................................................................... 1,650,000
Operating expenses
Commissions expense (10% of sales)............................$375,000
Rent expense ($20,000 x 3).............................................. 60,000
Advertising expense (15% of sales)................................ 562,500
Office salaries expense ($75,000 x 3)............................. 225,000
Depreciation expense ($50,000 x 3)................................ 150,000
Interest expense ($250,000 x 15% x 3/12)......................... 9,375
Total operating expenses............................................. 1,381,875
Income before income taxes.......................................... 268,125
Income tax expense (note 3)............................................ 107,250
Net income....................................................................... $ 160,875
(1) Sales
Unit sales (40,000 + 60,000 + 50,000).............. 150,000
Unit price........................................................... $25
Sales dollars..................................................... $3,750,000
(2) Cost of goods sold

Unit sales (40,000 + 60,000 + 50,000).............. 150,000
Unit cost............................................................ $14
Sales dollars..................................................... $2,100,000
(3) Income tax expense

Pre-tax income.................................................. $ 268,125
Tax rate.............................................................. 40%
Income tax expense......................................... $ 107,250
20-32
ZINK COMPANY
Direct Labor Budget
July August Sept.
Budgeted production (units)....................... 620 680 540

Labor requirements per unit (hours).......... x 2 x 2 x 2
Total labor hours needed............................. 1,240 1,360 1,080
Labor rate per hour...................................... $ 16 $ 16 $ 16.75
Labor dollars................................................. $19,840 $21,760 $18,090
RAD CO.
Production Budget
April May June
Next month’s budgeted sales (units).......... 580 530 600
Ratio of inventory to future sales............... x 20% x 20% x 20%
Budgeted ending inventory (units) ............ 116 106 120
Add budgeted sales for the month............. 500 580 530
Required units of available production...... 616 686 650
Deduct beginning inventory (units)............ (174) (116) (106)
Units to be produced.................................... 442 570 544
20-33
RAD CO.
April May June
Budgeted production (units)*...................... 442 570 544
Materials requirements per unit.................. x 5 x 5 x 5
Materials needed for production (lbs.)....... 2,210 2,850 2,720
Add budgeted ending inventory**............... 855 816 810
Total materials requirements (lbs.)............. 3,065 3,666 3,530
Deduct beginning inventory (lbs.).............. (663) (855) (816)
Materials to be purchased (lbs.).................. 2,402 2,811 2,714
* From Exercise 20-20A

** 30% of next month’s materials needed for production. July’s materials needed for
production (2,700 pounds) is given.
(1) i (2) f (3) g (4) e (5) d (6) a (7) c ( 8) b (9) h
Potential negative outcomes from participatory budgeting include the

potential for employees to (1) understate sales budgets and//or overstate
expense budgets, (2) commit unethical or fraudulent acts in order to meet
budgeted results, and (3) always spend budgeted amounts, even if on
unnecessary items.
20-34
KIRK CO. CPA

Activity-Based Budget
For Year Ending December 31, 2011
Hours Price/hour Cost
Data-entry...................................................... 1,100 $ 8 $ 8,800
Auditing......................................................... 2,400 40 96,000
Tax.................................................................. 2,150 50 107,500
Consulting..................................................... 375 50 18,750
Total............................................................... 6,025 $231,050
20-35
PROBLEM SET A
Problem 20-1A (60 minutes)
Part 1
PINSETTER’S SUPPLY
Merchandise Purchases Budgets
For March, April, and May
March April May
FOOTWEAR
Budgeted sales for next month............................20,000 30,000 33,000
Ratio of ending inventory to future sales........... 40% 40% 40%
Budgeted ending inventory.................................. 8,000 12,000 13,200
Add budgeted sales..............................................10,000 20,000 30,000
Required units of available merchandise...........18,000 32,000 43,200
Less actual (or budgeted) beginning inventory........(15,500) (8,000) (12,000)
Budgeted purchases............................................. 2,500 24,000 31,200
SPORTS EQUIPMENT
Budgeted ending inventory..................................34,000 36,000 32,000
Required units of available merchandise........... 100,000 121,000 122,000
Budgeted purchases.............................................30,000 87,000 86,000
APPAREL
Budgeted purchases............................................. 8,000 30,000 25,200
20-36
Problem 20-1A (Continued)
Part 2. Analysis Component
The factor that causes the first month’s purchases to be so much smaller is
the excess inventory that accumulated just prior to the budgeting period.
For example, 15,500 units of footwear are in March’s beginning inventory;
however, March sales are budgeted at only 10,000 units. Accordingly,
budgeted purchases are smaller because it is management’s goal to
reduce the inventory to only 40% of the next month’s sales.
This overstocking factor could exist for a number of reasons, including:
 Management may have simply lost sight of inventory levels, thereby
allowing them to reach inappropriately high levels.
 There may have been some potentially disruptive factor (such as a
strike, bad weather, or political uncertainty) that would have temporarily
interrupted the smooth delivery of products from the supplier. Thus,
management would have found it prudent to accumulate an excess as a
temporary safety stock against an interrupted supply.
 The company’s suppliers may have only recently become more
dependable than they were in the past.
 A supplier may have recently located a new distribution facility nearby,
with the result that the merchandise can be delivered more promptly.
 Competition among suppliers may have caused them to become more
customer oriented, with the result that they will deliver products in
smaller lots more quickly.
20-37
APACHE ARTS COMPANY

Cash Budget
For September, October, and November
September October November
Beginning balance..........................................$ 3,000 $ 53,000 $ 44,000
Cash receipts
Collection on accounts receivable*............ 136,000 210,000 290,200
Receipts from bank loan.............................. 80,000 _______ _______
Total cash available........................................ 219,000 263,000 334,200
Cash disbursements
Payments on accounts payable**............... 80,000 188,000 186,000
Payroll............................................................ 16,000 17,000 18,000
Rent................................................................ 6,000 6,000 6,000
Other expenses............................................. 64,000 8,000 7,000
Repayment on bank loan............................. 80,000
Interest on bank loan*.................................. _______ _______ 2,400
Total cash disbursements............................ 166,000 219,000 299,400
Ending cash balance......................................$ 53,000 $ 44,000 $ 34,800
* Interest at 12% on $80,000 for 3 months is $2,400.
Supporting schedules
Collections of credit sales* August September October November
Aug. sales ($180,000)—[25%: 45%: 20%: 9%]................. $ 45,000 $ 81,000 $ 36,000 $ 16,200
Sept. sales ($220,000)—[25%: 45%: 20%]........................ - 55,000 99,000 44,000
Oct. sales ($300,000)—[25%: 45%]................................... - - 75,000 135,000
Nov. sales ($380,000)—[25%]........................................... - - - 95,000
Total....................................................................................
$ 45,000 $136,000 $210,000 $290,200
Payments on credit purchases** August September October November

Aug. purchases ($100,000)—(0%: 80%: 20%).........................................
$ 0 $ 80,000 $ 20,000 $ -
Sept. purchases ($210,000)—(0%: 80%: 20%)........................................ - 0 168,000 42,000
Oct. purchases ($180,000)—(0%: 80%)................................................... - - 0 144,000
Nov. purchases ($220,000)—(0%)............................................................ - - - 0
Total...........................................................................................................
$ 0 $ 80,000 $188,000 $186,000
20-38

Part 1
Cash collections of credit sales (accounts receivable)
From sales in Total % Collected June July
April..............................................
$ 1,000,000 48% $480,000
May............................................... 500,000 30 150,000
............................................... 48 $240,000
June..............................................1,500,000 20 300,000
.............................................. 30 450,000
July............................................... 750,000 20 _______ 150,000
Total collected............................. $930,000 $840,000
Part 2
Budgeted ending inventories (in units)
April May June July
Next month’s budgeted sales...................... 4,000 12,000 6,000 7,600
Ratio of inventory to future sales............... 25% 25% 25% 25%
Budgeted “base” ending inventory............ 1,000 3,000 1,500 1,900
Plus safety stock.......................................... 100 100 100 100
Budgeted ending inventory......................... 1,100 3,100 1,600 2,000
Part 3
ABACUS COMPANY
For May, June, and July
May June July
Budgeted ending inventory (from part 2)............. 3,100 1,600 2,000
Add budgeted sales.......................................... 4,000 12,000 6,000
Required units of available merchandise........ 7,100 13,600 8,000
Deduct beginning inventory............................. (1,100) (3,100) (1,600)
Budgeted purchases (units)............................. 6,000 10,500 6,400
Budgeted cost per unit..................................... $100 $100 $100
Budgeted cost of merchandise purchases........$600,000 $1,050,000 $640,000
20-39

Part 4
Cash payments on product purchases (for June and July)
From purchases in Total % Paid June July
May................................................
$ 600,000 40% $240,000
June...............................................1,050,000 60 630,000
................................................. 40 $420,000
July................................................ 640,000 60 ________ 384,000
Total paid...................................... $870,000 $804,000
Part 5
ABACUS COMPANY
Cash Budget
June and July
June July
Beginning cash balance................................................$ 60,000 $ 60,000
Cash receipts from customers..................................... 930,000 840,000
Total available cash....................................................... 990,000 900,000
Cash disbursements
Payments on purchases............................................. 870,000 804,000
Selling and administrative expenses......................... 100,000 100,000
Interest expense*......................................................... 240 542
Total disbursements.................................................... 970,240 904,542
Preliminary cash balance.............................................. 19,760 (4,542)
Additional loan from bank............................................. 40,240 64,542
Repayment of loan to bank........................................... _______ _______
Ending cash balance.....................................................$ 60,000 $ 60,000
Ending loan balance**...................................................$ 72,240 $136,782
* Interest expense ** Loan balance

June = $32,000 x 9%/12 = $240 June = $32,000 + $40,240 = $72,240
July = $72,240 x 9%/12 = $542 July = $72,240 + $64,542 = $136,782
20-40
Part 6
Information about the need for cash in the near future would be helpful to
the management of Abacus Company because they would be able to enter
into negotiations with potential lenders well ahead of any immediate need
to obtain the cash. They would not only be able to avoid the risk of being
unable to pay their bills, they would also be able to enter into the debt
agreement on the most favorable terms available to them.
In addition, a good cash budget is likely to be helpful to management in

negotiating the terms of the loan. In this situation, the company can tell the
bank that it will need another loan in the following month. Hopefully, the
company will be able to develop additional cash budgets that will show
enough cash being accumulated to allow the loans to be paid back. If
management is armed with this kind of information, it should be able to
negotiate more favorable terms with the bank.
20-41

Part 1
LILLIPUT COMPANY
For Months of January, February, and March
Sales*........................................................$1,265,000 $1,391,500 $1,530,650
Cost of goods sold*................................. 660,000 726,000 798,600
Gross profit.............................................. 605,000 665,500 732,050
Expenses
Sales commissions (10%).................... 126,500 139,150 153,065
Advertising ($200,000 x 1.25)............... 250,000 250,000 250,000
Store rent............................................... 24,000 24,000 24,000
Administrative salaries......................... 40,000 40,000 40,000
Depreciation........................................... 50,000 50,000 50,000
Other expenses..................................... 12,000 12,000 12,000
Total expenses......................................... 502,500 515,150 529,065
Net income...............................................$ 102,500 $ 150,350 $ 202,985
* Volume for the next three months increases by 10% per month
Sales Cost of Goods
Units (@ $115) Sold (@ $60)
December ($1,300,000/$130)...................... 10,000
January........................................................
11,000 $1,265,000 $660,000
February......................................................
12,100 1,391,500 726,000
March...........................................................
13,310 1,530,650 798,600
Part 2: Analysis Component

The plan for increasing sales volume by reducing the price and increasing
advertising would cause the company to generate less net income in each of
the first three months of the next quarter than was earned in December. This
result is not encouraging. However, the rate of increase in earnings over the
three months is substantial. If the growth rate for sales can be maintained
without increasing commissions or other expenses, a large payoff would be
earned by making the changes and riding out the short-run period of relatively
lower profits. This is a common problem for management when introducing a
new strategy, product, or service to the market.
20-42

Part 1
SIMID SPORTS CO.
Sales Budgets
January, February, and March 2012
Units Unit Price Total Dollars
January 2012........................................................3,500 $55 $192,500
February 2012.......................................................4,500 55 247,500
March 2012............................................................5,500 55 302,500
Total for the first quarter..................................... 13,500 $742,500
Part 2
SIMID SPORTS CO.
January February March Total
Next month’s budgeted sales................ 4,500 5,500 5,000
Ratio of inventory to future sales......... x 20% x 20% x 20%
Budgeted ending inventory................... 900 1,100 1,000
Add budgeted sales............................... 3,500 4,500 5,500
Required available merchandise.......... 4,400 5,600 6,500
Deduct beginning inventory.................. (2,500) (900) (1,100)
Units to be purchased............................ 1,900 4,700 5,400 12,000
Budgeted cost per unit.......................... $ 30 $ 30 $ 30 $ 30
Budgeted merchandise purchases....... $ 57,000 $141,000 $162,000 $360,000
Part 3
SIMID SPORTS CO.
Selling Expense Budgets
Budgeted sales.....................................$192,500 $247,500 $302,500
Sales commission percent.................. x 20% x 20% x 20%
Sales commissions expense............... 38,500 49,500 60,500 $148,500
Sales salaries........................................ 2,500 2,500 2,500 7,500
Total selling expenses......................... $ 41,000 $ 52,000 $ 63,000 $156,000
20-43

Part 4
SIMID SPORTS CO.
General and Administrative Expense Budgets
Salaries.......................................................
$ 6,000 $ 6,000 $ 6,000 $18,000
Maintenance...............................................
1,000 1,000 1,000 3,000
Depreciation*..............................................
3,000 3,500 3,650 10,150
Total expenses...........................................
$10,000 $10,500 $10,650 $31,150
* Depreciation expense calculations

Annual
Deprec.
Expense January February March Total
Equipment owned
on 12/31/2011..................... $33,750 $2,812* $2,812 $2,812 $8,436
Purchased in January......... 2,250 188** 188 188 564
Purchased in February........ 6,000 500 500 1,000
Purchased in March............. 1,800 ______ ______ 150 150
Total...................................... $43,800 $3,000 $3,500 $3,650 $10,150
* rounded down to nearest dollar ** rounded up to nearest dollar
Part 5
SIMID SPORTS CO.

Capital Expenditures Budgets
Equipment purchases......................$18,000 $48,000 $14,400
Land purchase..................................______ ______ 75,000
Total...................................................$18,000 $48,000 $89,400
20-44

Part 6
SIMID SPORTS CO.
Cash Budgets
Beginning cash balance...................................... $ 18,000 $ 15,050 $105,150
Cash receipts from customers (note A)................110,625 348,500 244,750
Total cash available.............................................128,625 363,550 349,900
Cash disbursements
Payments for merchandise (note B).................... 40,000 151,400 73,800
Sales commissions............................................ 38,500 49,500 60,500
Sales salaries..................................................... 2,500 2,500 2,500
General & administrative salaries.................... 6,000 6,000 6,000
Maintenance expense........................................ 1,000 1,000 1,000
Interest ($7,500 x 1%).............................................. 75
Taxes payable..................................................... 45,000
Purchases of equipment................................... 18,000 48,000 14,400
Purchase of land................................................ ________ ________ 75,000
Total cash disbursements...................................106,075 258,400 278,200
Preliminary cash balance.................................... 22,550 105,150 71,700
Repayment of loan to bank................................. (7,500) _______ ________
Ending cash balance............................................
$ 15,050 $105,150 $ 71,700
Loan balance, end of month................................ $ 0 $ 0 $ 0
Supporting calculations January February March Total

Note A: Cash receipts from customers
Total sales........................................................$192,500 $247,500 $302,500 $742,500
Cash sales (25%)............................................. 48,125 61,875 75,625 185,625
Credit sales (75%)............................................ 144,375 185,625 226,875 556,875
Cash collections
Receivables at 12/31/2011............................... $62,500 $200,000 $262,500
Month after sale (60%)..................................... 86,625 $111,375 198,000
Second month (40%)......................................._______ _______ 57,750 57,750
Total from credit customers........................... 62,500 286,625 169,125 518,250
Cash sales........................................................ 48,125 61,875 75,625 185,625
Total cash received..........................................$110,625 $348,500 $244,750 $703,875
Note B: Cash payments for merchandise
Credit purchases.............................................$ 57,000 $141,000 $162,000 $360,000
Payables at 12/31/2011 $ 40,000 $140,000 $180,000

Month after purchase (20%)............................ 11,400 $ 28,200 39,600
Second month (80%)......................................._______ _______ 45,600 45,600
Total paid on purchases..................................$ 40,000 $151,400 $ 73,800 $265,200
20-45

Part 7
SIMID SPORTS CO.
For Three Months Ended March 31, 2012
Sales........................................................................... $742,500
Cost of goods sold (13,500 units @ $30)................ 405,000
Gross profit................................................................ 337,500
Operating expenses
Sales commissions................................................ $148,500
Sales salaries.......................................................... 7,500
General administrative salaries............................. 18,000
Maintenance expense............................................. 3,000
Depreciation expense............................................. 10,150
Interest expense...................................................... 75 187,225
Income before taxes................................................. 150,275
Income taxes (40%)................................................... 60,110
Net income................................................................. $ 90,165
Part 8
SIMID SPORTS CO.
March 31, 2012
ASSETS
Cash................................................... $ 71,700 Cash budget
Accounts receivable........................ 301,125 Note C
Inventory........................................... 30,000 Note D
Total current assets......................... 402,825
Land................................................... 75,000 Capital budget
Equipment......................................... $350,400 Note E
Less accumulated depreciation...... 43,900 306,500 Note F
Total assets....................................... $784,325

Accounts payable............................. $ 274,800 Note G
Bank loan payable............................ 0 Cash budget
Taxes payable (due 4/15/2012)........ 60,110 Income stmt.
Total liabilities.................................. 334,910
Common stock................................. $236,250 Unchanged
Retained earnings............................ 213,165 Note H
Total stockholders’ equity............... 449,415
Total liabilities and equity............... $784,325
20-46

Supporting Footnotes
Note C
Beginning receivables.......................................................$ 262,500
Credit sales........................................................................ 556,875
Less collections................................................................. (518,250)
Ending receivables............................................................$ 301,125
Note D
Beginning inventory..........................................................$ 75,000
Purchases.......................................................................... 360,000
Less cost of goods sold.................................................... (405,000)
Ending inventory*..............................................................$ 30,000
*Also equals 1,000 units @ $30 = $30,000
Note E
Beginning equipment........................................................$ 270,000
Purchased in January........................................................ 18,000
Purchased in February...................................................... 48,000
Purchased in March........................................................... 14,400
Total....................................................................................$ 350,400
Note F
Beginning accumulated depreciation..............................$ 33,750
Depreciation expense........................................................ 10,150
Total....................................................................................$ 43,900
Note G
Beginning payables...........................................................$ 180,000
Purchases.......................................................................... 360,000
Payments............................................................................ (265,200)
Ending payables................................................................$ 274,800
Note H
Beginning retained earnings.............................................$ 123,000
Net income......................................................................... 90,165
Total....................................................................................$ 213,165
20-47
Problem 20-6AA (30 minutes)
Part 1
DIAMOND SLOPE COMPANY

Production Budget (in units)
Third Quarter
Budgeted ending inventory (skis)......................................................... 4,000
Add budgeted sales................................................................................ 120,000
Required units of available production................................................ 124,000
Deduct beginning inventory (skis)........................................................ (7,000)
Units to be manufactured....................................................................... 117,000
Part 2
DIAMOND SLOPE COMPANY

Direct Materials Budget (in lbs, except where noted)
Third Quarter
Materials (carbon fiber) needed for production (117,000 x 2)......... 234,000
Add budgeted ending inventory (carbon fiber)................................ 5,000
Total materials (carbon fiber) requirements..................................... 239,000
Deduct beginning inventory (carbon fiber)...................................... (10,000)
Units of materials (carbon fiber) to be purchased........................... 229,000
Materials cost per pound.................................................................... $12

Total cost of materials purchases (229,000 x $12)...........................$2,748,000
20-48
PROBLEM SET B
Problem 20-1B (60 minutes)
Part 1
H2O SPORTS CORPORATION
April May June
WATER SKIS
TOW ROPES
100,000
Add budgeted sales.............................................. 90,000 110,000
LIFE JACKETS
Budgeted sales for next month............................ 260,000 310,000 260,000
300,000
Add budgeted sales.............................................. 260,000 310,000
Less actual (or budgeted) beginning inventory........ (250,000) (26,000) (31,000)
20-49
Problem 20-1B (Continued)
Part 2. Analysis Component
The factor that causes the first month’s purchases to be so much smaller is
the excess inventory that accumulated just prior to the budgeting period.
For example, 40,000 units of water skis are in April’s beginning inventory;
however, April sales are budgeted at only 70,000 units. Accordingly,
budgeted purchases are smaller because it is management’s goal to
reduce the inventory to only 10% of the next month’s sales.
This overstocking factor could exist for a number of reasons, including:
 Management may have simply lost sight of inventory levels, thereby
allowing them to reach inappropriately high levels.
 There may have been some potentially disruptive factor (such as a
strike, bad weather, or political uncertainty) that would have temporarily
interrupted the smooth delivery of products from the supplier. Thus,
management would have found it prudent to accumulate an excess as a
temporary safety stock against an interrupted supply.
 The company’s suppliers may have only recently become more
dependable than they were in the past.
 A supplier may have recently located a new distribution facility nearby,
with the result that the merchandise can be delivered more promptly.
 Competition among suppliers may have caused them to become more
customer oriented, with the result that they will deliver products in
smaller lots more quickly.
This means H2O Sports can now get by with a much smaller safety stock.
20-50

SIRO STEREO
Cash Budgets
April May June
Beginning balance..........................................$ 12,000 $137,500 $ 157,750
Cash receipts
Collection on accounts receivable*............ 116,000 293,750 446,550
Receipts from bank loan.............................. 125,000 _______ _______
Total cash available........................................ 253,000 431,250 604,300
Cash disbursements
Payments on accounts payable**............... 72,000 218,000 210,000
Payroll............................................................ 22,500 30,000 37,500
Rent................................................................ 12,000 12,000 12,000
Other expenses............................................. 9,000 13,500 16,500
Repayment on bank loan............................. 125,000
Interest on bank loan*.................................. ________ ________ 3,125
Total cash disbursements............................ 115,500 273,500 404,125
Ending cash balance......................................$137,500 $157,750 $200,175
* Interest at 10% on $125,000 for 90 days is $3,125.
Collections of credit sales* March April May June
March sales ($135,000)—[10%: 60%: 25%: 3%]............... $ 13,500 $ 81,000 $ 33,750 $ 4,050
April sales ($350,000)—[10%: 60%: 25%]........................ - 35,000 210,000 87,500
May sales ($500,000)—[10%: 60%]................................... - - 50,000 300,000
June sales ($550,000)—[10%]........................................... - - - 55,000
Total....................................................................................
$ 13,500 $116,000 $293,750 $446,550
Payments on credit purchases** March April May June

March purchases ($90,000)—(0%: 80%: 20%)........................................ $ 0 $ 72,000 $ 18,000 $ -
April purchases ($250,000)—(0%: 80%: 20%)......................................... - 0 200,000 50,000
May purchases ($200,000)—(0%: 80%)................................................... - - 0 160,000
June purchases ($190,000)—(0%)........................................................... - - - 0
Total...........................................................................................................
$ 0 $ 72,000 $218,000 $210,000
20-51

Part 1
Cash collections of credit sales (accounts receivable)
From sales in Total % Collected March April
January......................................$360,000 25% $ 90,000
February.................................... 540,000 30 162,000
.................................... 25 $135,000
March......................................... 300,000 40 120,000
.......................................... 30 90,000
April........................................... 540,000 40 _______ 216,000
Total collected........................... $372,000 $441,000
Part 2
Budgeted ending inventories (in units)
January February March April
Next month’s budgeted sales...................... 27,000 15,000 27,000 33,000
Ratio of inventory to future sales............... 30% 30% 30% 30%
Budgeted “base” ending inventory............8,100 4,500 8,100 9,900
Plus safety stock.......................................... 300 300 300 300
Budgeted ending inventory.........................8,400 4,800 8,400 10,200
Part 3
LAROCCA COMPANY
For February, March, and April
February March April
Budgeted ending inventory (from part 2)............. 4,800 8,400 10,200
Add budgeted sales.......................................... 27,000 15,000 27,000
Required units of available merchandise........ 31,800 23,400 37,200
Deduct beginning inventory............................. (8,400) (4,800) (8,400)
Budgeted purchases (units)............................. 23,400 18,600 28,800
Budgeted cost per unit..................................... $12 $12 $12
Budgeted cost of merchandise purchases........$280,800 $223,200 $345,600
20-52

Part 4
Cash payments on product purchases (for March and April)
From purchases in Total % Paid March April
February.......................................$280,800 70% $196,560
March............................................ 223,200 30 66,960
............................................ 70 $156,240
April.............................................. 345,600 30 _______ 103,680
Total paid..................................... $263,520 $259,920
Part 5
LAROCCA COMPANY
Cash Budget
March and April
March April
Beginning cash balance.......................................... $ 45,000 $ 45,000
Cash receipts from customers............................... 372,000 441,000
Total available cash................................................. 417,000 486,000
Cash disbursements
Payments on purchases....................................... 263,520 259,920
Selling and administrative expenses................... 120,000 120,000
Interest expense*................................................... 120 236
Total disbursements............................................. 383,640 380,156
Preliminary cash balance........................................ $ 33,360 $105,844
Additional loan......................................................... 11,640
Repayment of loan................................................... _______ (23,640)
Ending cash balance............................................... $ 45,000 $ 82,204
Ending loan balance................................................ $ 23,640 $ 0

*Interest expense: March = $12,000 x 12% /12 = $120; April = $23,640 x 12%/12 = $236
Part 6
Analysis Component: Information about the supply of cash in the near future
would be helpful to the management of the LaRocca Company. A good cash
budget would be likely to be helpful to management in negotiating the terms
of the loan. If the bank knows, for example, that the full borrowed amount is
likely to be repaid in the following month, the interest rate could be
substantially lower.
20-53

Part 1
COMPUTA-CATIONS
For Months of July, August, and September
July August September
Sales*......................................................... $990,000 $1,089,000 $1,197,900
Cost of goods sold*.................................. 440,000 484,000 532,400
Gross profit............................................... 550,000 605,000 665,500
Expenses
Sales commissions (10%)...................... 99,000 108,900 119,790
Advertising ($100,000 x 1.20)................ 120,000 120,000 120,000
Store rent................................................. 10,000 10,000 10,000
Administrative salaries.......................... 20,000 20,000 20,000
Depreciation............................................ 12,000 12,000 12,000
Other........................................................ 24,000 24,000 24,000
Total expenses.......................................... 285,000 294,900 305,790
Net income................................................. $265,000 $ 310,100 $ 359,710
* Volume for the next three months increases by 10% per month
Sales Cost of Goods
Units (@ $45) Sold (@ $20)
June ($1,000,000/$50).................................
20,000
July..............................................................
22,000 $ 990,000 $440,000
August.........................................................
24,200 1,089,000 484,000
September...................................................
26,620 1,197,900 532,400
Part 2: Analysis Component

advertising would cause the company to generate less net income in each of the
first two months (July and August) of the next quarter than was earned in June.
The results for the first two months are not encouraging. However, the
September net income is greater than that for June. Also, the rate of increase in
earnings over the three months is substantial. If the growth rate for sales can be
maintained without increasing commissions or other expenses, a large payoff
would be earned by making the changes and riding out the short-run period of
relatively lower profits. This is a common problem for management when
introducing a new strategy, product, or service to the market.
20-54

Part 1
OASIS CORPORATION
Sales Budgets
Units Unit Price Total Dollars
January 2012.......................................................30,000 $24 $ 720,000
February 2012......................................................24,000 24 576,000
March 2012..........................................................40,000 24 960,000
Total for the first quarter....................................94,000 $2,256,000
Part 2
OASIS CORPORATION
Next month’s budgeted sales................ 24,000 40,000 50,000
Ratio of inventory to future sales......... x 40% x 40% x 40%
Budgeted ending inventory................... 9,600 16,000 20,000
Add budgeted sales............................... 30,000 24,000 40,000
Required available merchandise.......... 39,600 40,000 60,000
Deduct beginning inventory.................. (18,000) (9,600) (16,000)
Units to be purchased............................ 21,600 30,400 44,000 96,000
Budgeted cost per unit.......................... $ 10 $ 10 $ 10 $ 10
Budgeted merchandise purchases....... $216,000 $304,000 $440,000 $960,000
000
Part 3
OASIS CORPORATION
Selling Expense Budgets
Budgeted sales.....................................$720,000 $576,000 $960,000
Sales commission percent.................. x 10% x 10% x 10%
Sales commissions expense............... 72,000 57,600 96,000 $225,600
Sales salaries........................................ 24,000 24,000 24,000 72,000
Total selling expenses......................... $ 96,000 $ 81,600 $120,000 $297,600
20-55

Part 4
OASIS CORPORATION
General and Administrative Expense Budgets
Salaries.......................................................
$28,000 $28,000 $28,000 $ 84,000
Maintenance...............................................
6,000 6,000 6,000 18,000
Depreciation*..............................................
12,000 13,000 13,800 38,800
Total expenses...........................................
$46,000 $47,000 $47,800 $140,800
* Depreciation expense calculations

Annual
Deprec.
Expense January February March Total
Equipment owned
on 12/31/2011..................... $120,000 $10,000 $10,000 $10,000 $30,000
Purchased in January......... 24,000 2,000 2,000 2,000 6,000
Purchased in February........ 12,000 1,000 1,000 2,000
Purchased in March............. 9,600 ______ ______ 800 800
Total...................................... $165,600 $12,000 $13,000 $13,800 $38,800
Part 5
OASIS CORPORATION
Capital Expenditures Budgets
Equipment purchases............ $240,000 $120,000 $ 96,000
Land purchase........................ ________ ________ 232,000
Total......................................... $240,000 $120,000 $328,000
20-56

Part 6
OASIS CORPORATION
Cash Budgets
Beginning cash balance...................................... $160,000 $160,000 $ 281,578
Cash receipts from customers (note A)................568,000 652,800 755,520
Total cash available.............................................728,000 812,800 1,037,098
Cash disbursements
Payments for merchandise (note B)....................240,000 232,800 286,400
Sales commissions............................................ 72,000 57,600 96,000
Sales salaries..................................................... 24,000 24,000 24,000
General & administrative salaries.................... 28,000 28,000 28,000
Maintenance expense........................................ 6,000 6,000 6,000
Interest ($20,000 x 1%)............................................ 200
Interest ($62,200 x 1%)............................................ 622
Taxes payable..................................................... 200,000
Purchases of equipment...................................240,000 120,000 96,000
Purchase of land................................................ _______ _______ 232,000
Total cash disbursements...................................610,200 469,022 968,400
Preliminary cash balance.................................... $117,800 $343,778 $ 68,698
Repayment of loan to bank................................. (62,200)
Additional loan from bank................................... 42,200 ________ 91,302
Ending cash balance............................................ $160,000 $281,578 $160,000
Loan balance, end of month................................ $ 62,200 $ 0 $ 91,302
Supporting calculations January February March Total

Note A: Cash receipts from customers
Total sales........................................................$720,000 $576,000 $960,000 $2,256,000
Cash sales (40%).............................................$288,000 $230,400 $384,000 $ 902,400
Credit sales (60%)............................................$432,000 $345,600 $576,000 $1,353,600
Cash collections
Receivables at 12/31/2011: (70%)...................$280,000 $ 280,000
(30%).................... $120,000 120,000
Month after sale (70%)..................................... 302,400 $241,920 544,320
Second month (30%)......................................._______ _______ 129,600 129,600
Total from credit customers...........................$280,000 422,400 371,520 1,073,920
Cash sales........................................................ 288,000 230,400 384,000 902,400
Total cash received..........................................$568,000 $652,800 $755,520 $1,976,320
Note B: Cash payments for merchandise
Credit purchases.............................................$216,000 $304,000 $440,000 $ 960,000
Payables at 12/31/2011: (80%).......................$240,000 $ 240,000
(20%)........................ $ 60,000 60,000
Month after purchase (80%)............................ 172,800 $243,200 416,000
Second month (20%)......................................._______ _______ 43,200 43,200
Total paid on purchases..................................$240,000 $232,800 $286,400 $ 759,200
20-57

Part 7
OASIS CORPORATION
For Three Months Ended March 31, 2012
Sales................................................................................ $2,256,000
Cost of goods sold (94,000 units @ $10)..................... 940,000
Gross profit..................................................................... 1,316,000
Operating expenses
Sales commissions..................................................... $225,600
Sales salaries............................................................... 72,000
General administrative salaries.................................. 84,000
Maintenance expense.................................................. 18,000
Depreciation expense.................................................. 38,800
Interest expense........................................................... 822 439,222
Income before taxes...................................................... 876,778
Income taxes (30%)........................................................ 263,033
Net income...................................................................... $ 613,745
Part 8
OASIS CORPORATION
March 31, 2012
ASSETS
Cash................................................... $ 160,000 Cash budget
Accounts receivable........................ 679,680 Note C
Inventory........................................... 200,000 Note D
Total current assets......................... 1,039,680
Equipment......................................... $1,656,000 Note E
Less accumulated depreciation...... 158,800 1,497,200 Note F
Land................................................... 232,000 Capital budget
Total assets....................................... $2,768,880

Accounts payable............................. $ 500,800 Note G
Bank loan payable............................ 91,302 Cash budget
Taxes payable (due 4/15/2012)........ 263,033 Income stmt.
Total liabilities.................................. 855,135
Common stock................................. $1,500,000 Unchanged
Retained earnings............................ 413,745 Note H
Total stockholders’ equity............... 1,913,745
Total liabilities and equity............... $2,768,880
20-58

Supporting Footnotes
Note C
Beginning receivables....................................................... $ 400,000
Credit sales........................................................................ 1,353,600
Less collections................................................................. (1,073,920)
Ending receivables............................................................ $ 679,680
Note D
Beginning inventory.......................................................... $ 180,000
Purchases.......................................................................... 960,000
Less cost of goods sold.................................................... (940,000)
Ending inventory*.............................................................. $ 200,000
*Also equals 20,000 units @ $10 = $200,000
Note E
Beginning equipment........................................................ $1,200,000
Purchased in January........................................................ 240,000
Purchased in February...................................................... 120,000
Purchased in March........................................................... 96,000
Total.................................................................................... $1,656,000
Note F
Beginning accumulated depreciation.............................. $ 120,000
Depreciation expense........................................................ 38,800
Total.................................................................................... $ 158,800
Note G
Beginning payables........................................................... $ 300,000
Purchases.......................................................................... 960,000
Payments............................................................................ (759,200)
Ending payables................................................................ $ 500,800
Note H
Beginning retained earnings............................................. $ (200,000)
Net income......................................................................... 613,745
Total.................................................................................... $ 413,745
20-59
Problem 20-6BA (30 minutes)
Part 1
RBI COMPANY
Production Budget (in units)
Second Quarter
Budgeted ending inventory (bats)......................................................... 3,000
Add budgeted sales................................................................................ 100,000
Required units of available production................................................ 103,000
Deduct beginning inventory (bats)........................................................ (10,000)
Units to be manufactured....................................................................... 93,000
Part 2
RBI COMPANY
Direct Materials Budget (in lbs, except where noted)
Second Quarter
Materials (aluminum) needed for production (93,000 x 4)............... 372,000
Add budgeted ending inventory (aluminum).................................... 2,000
Total materials (aluminum) requirements......................................... 374,000
Deduct beginning inventory (aluminum).......................................... (28,000)
Units of materials (aluminum) to be purchased............................... 346,000
Materials cost per pound.................................................................... $3

Total cost of materials purchases (346,000 x $3).............................$1,038,000
20-60
Serial Problem — SP 20
Serial Problem, Business Solutions (50 minutes)

Part 1
BUSINESS SOLUTIONS
Budgeted Income Statements
For Months of April, May, and June
April May June
Sales*......................................................... $69,600 $75,550 $81,500
Cost of goods sold**................................ 54,000 57,750 61,500
Gross profit............................................... 15,600 17,800 20,000
Expenses
Sales commissions (10%)...................... 6,960 7,555 8,150
Advertising ($3,000 x 1.10).................... 3,300 3,300 3,300
Other fixed expenses............................. 6,000 6,000 6,000
Total expenses.......................................... 16,260 16,855 17,450
Net income................................................. $ (660) $ 945 $ 2,550
*Results from per month volume increases for the next 3 months
Desks Units Sales (@ $1,150) Variable Cost of Sales (@ $750)
April.....................................................................
48 $55,200 $36,000
May......................................................................
52 59,800 39,000
June..............................................................
56 64,400 42,000
Chairs Units Sales (@ $450) Variable Cost of Sales (@ $250)

April.....................................................................
32 $14,400 $8,000
May......................................................................
35 15,750 8,750
June..............................................................
38 17,100 9,500
Total Desk & Chairs Sales Variable Cost of Sales

April.....................................................................
$69,600 = $55,200 + $14,400 $44,000 = $36,000 + $8,000
May......................................................................
$75,550 = $59,800 + $15,750 $47,750 = $39,000 + $8,750
June..............................................................
$81,500 = $64,400 + $17,100 $51,500 = $42,000 + $9,500
**Total Cost of Sales Variable Fixed Total Cost of Sales

April.....................................................................
$44,000 $10,000 $54,000
May......................................................................
47,750 10,000 57,750
June 51,500 10,000 61,500
20-61
Serial Problem, Business Solutions (continued)

Part 2
advertising would cause the company to generate a loss in the first month
of the next quarter. This result is not encouraging. However, the company
would expect profits in each of the next two months of the quarter, and the
rate of increase in earnings over the three months is substantial. If the
growth rate for sales can be maintained without increasing commissions or
other expenses, a large payoff would be earned by making the changes and
riding out the short-run period of relatively lower profits. This is a common
problem for management when introducing a new strategy, product, or
service to the market.
Reporting in Action — BTN 20-1
1. Research In Motion’s statement of cash flows would report cash paid for
acquisitions of property, plant, and equipment among the activities
disclosed in its cash flows from investing activities section.
2. a. Cash paid for acquisitions of property, plant, and equipment and
reported on the statement of cash flows for the year ended February
27, 2010 is $1,009,416 (thousands).
b. Given the assumption—that Research In Motion’s annual cash

payments for acquisitions of property, plant, and equipment equal
60% of the prior year’s net income—we would budget cash payments
for the fiscal year ended 2011 of $1,474,286 (thousands), computed
as $2,457,144,000 x 60%.
3. Answers will depend on Research In Motion’s results obtained.
20-62
Comparative Analysis — BTN 20-2
1. Computation of inventory reduction under new distribution system
Amount of ending inventory required at the 40% rule

[$200,000 x (1- 0.20) x 0.40]..................................................... $64,000
Amount of ending inventory required at the 10% rule

[$200,000 x (1- 0.20) x 0.10]..................................................... 16,000
Difference (inventory reduction)................................................. $48,000
This result implies that Apple can reduce its inventory level for the
Canadian market by $48,000 given improvements in its distribution
system.
2. An analysis such as in part 1 along with an explanation can make clear

to management the cost of funds necessary to support ending
inventory levels. Unless this type of information and analysis are
prepared, it is unlikely management will dedicate valuable time and
energy to investigate and implement a JIT inventory system.
To further illustrate, assuming a 15% interest cost of resources tied up

in inventory, a company can save money by reducing its inventory
level. In particular, by reducing its ending inventory by $48,000, Apple
would save $7,200 per year ($48,000 difference x 15% interest cost) for
just this one model and market. This means the operating costs of a
JIT inventory system can be as high as $7,200 per year and be justified
in terms of its costs being less than its benefits. Moreover, if such a
shift in inventory can benefit multiple future periods and multiple
product models, the savings are even greater. The type of analysis
here can show management the benefits of a JIT inventory system, or
any system, that reduces its inventory level. Extending this analysis to
all markets and product models, the benefits can be seen to be
substantial.
20-63
Ethics Challenge — BTN 20-3
Report on “Use It or Lose It” Budgeting

Instructor note: There is no widely accepted solution to this problem. The key is for the student to
think about the problem and work to at least modify the negative behavioral consequences of this
practice.
Any plan offered as a solution must better align upper management’s

expectations with department managers’ behavior. For example, upper
management might only cut by one-half the amount not spent according to
budget. Another potential suggestion is to allow department managers the
option of justifying why the amount was not spent and explain why current
budget levels must be maintained.
Upper management must also keep in mind that efficient and effective
allocation of resources is necessary to provide high-quality services to
customers and the public. All spending behavior must be monitored.
Without monitoring in the budgeting system, even more money will be
wasted or used inefficiently.
20-64
Communicating in Practice — BTN 20-4
MEMORANDUM
TO: ____________________
FROM: ____________________
DATE: ____________________
SUBJECT: ____________________
The content of this memorandum will vary among students. The student
must emphasize the need to know the compensation structure of the sales
staff to understand any potential bias in the information provided to the
budget process.
The memorandum should explain why a concern with bias in the

information does exist. Specifically, if a bonus is paid when sales go over
budget, then the sales staff is likely to under report achievable sales to
increase the likelihood of earning the bonus. However, setting the budget
below what is actually expected to occur invalidates the budget activity.
Useful budgeting depends on accurate and unbiased sales estimates.
Taking It to the Net — BTN 20-5
1. The “e-budgets” Website lists a number of benefits such as accuracy,

timeliness, ease of sharing information, ease of updating, real-time
comparison of actual performance vs. estimates, and so on.
In the case of large, multi-divisional companies, coordination across
and within divisions is extremely important, so that plans across the
organization are consistent. It appears that e-budgeting allows
managers to share information on a real-time basis. Therefore, any
changes made to the estimates can be seen right away by others within
the organization.
Moreover, e-budgets are spreadsheet based which allows for
manipulation of data and sensitivity (or what-if) analysis.
2. As a senior manager, my biggest concern would be security, particularly
when the system is easily accessible and usable. It would be important
to determine who in the organization will have access to the information,
and who will have the authority to change information. Also, it would be
important to review the security protocols of outsiders (pirates)
accessing e-budgets’ databases.
20-65
Teamwork in Action — BTN 20-6
There is no specific solution to this assignment. The instructor should

watch for proper development and identification of all reasonable costs.
Specifically, one should review the (1) items included in the budget, (2)
assumptions used in preparing the budget, and (3) proper format. For
example, one can look for how the team projected the costs of books and
supplies for courses yet to be attended. Taking the average cost of books
per course is one reasonable approach.
Entrepreneurial Decision — BTN 20-7
1. Budgeting allows an organization to plan its activities better by

allocating financial resources to the different activities. Consequently, it
can provide the owners with information that they can use for financing
purposes as well.
2. Direct materials budgets and direct labor budgets are particularly

important in businesses, like that of Smathers and Branson, that rely
heavily on the highest quality materials and use a lot of skilled labor in
their production process. Failure to plan for increases in materials
and/or labor costs could drastically hurt the company’s profits.
20-66
Hitting the Road — BTN 20-8
Instructor note: This problem is designed to (1) show that external factors are important
in determining price and volume and (2) develop awareness of external factors when
preparing a sales budget.
1. & 2.
The types of external factors identified by the student for consideration in
part (1), or selected as an explanatory factor for part (2), might include the
following:
 Location, such as near a convenient or busy traffic area.
 Competitors’ responses to price and quality.
 Climatic conditions.
 Shifting demographics.
 Changes to industrial base.
 Labor supply.
Global Decision — BTN 20-9
1. The administrative and general expense budget is likely to be an

important budget in the master budgeting process at NOKIA. In 2009,
administrative expenses comprised about 2.8% (€1,145 / €40,984) of
sales revenue. The amount of administrative expenses requires that
due attention is given to the administrative expense budget component
of the master budget each year.
2. General office expenses

Top management salaries
Depreciation expense
3. The initial responsibility usually rests with a vice president or an

equivalent-level manager. NOKIA is organized by divisions. Therefore,
managers in each division may have initial responsibility for the
administrative expense budget.
20-67

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Chapter 20 - Master Budgets and Performance Planning

9. Budgeting promotes good decision making by requiring managers to conduct

Quick Study 20-1 (10 minutes)

Three useful guidelines to help motivate employees with budgeting are

Quick Study 20-2 (10 minutes)

1. The bottom-up approach to budgeting is considered more successful

2. Examples of bottom-up budgeting include

Quick Study 20-3 (5 minutes)

Quick Study 20-4 (15 minutes)

Quick Study 20-5 (15 minutes)

Computation of budgeted Accounts Receivable balance as of July 31

Quick Study 20-6 (15 minutes)

Quick Study 20-7 (10 minutes)

1. Activity-based budgeting requires managers to focus on the activities of

2. Traditional budgeting consists of listing the amount of resources

Quick Study 20-8A (15 minutes)

Quick Study 20-9A (15 minutes)

Variable factory overhead rate per unit...............................................

Budgeted variable overhead.................................................................

Budgeted fixed overhead......................................................................5,000,000

Budgeted total overhead.......................................................................

Quick Study 20-10 (10 minutes)

Plus 5% growth in unit sales................................................................ 45

Projected June sales (units)................................................................. 945

Selling price per unit............................................................................. x $400

Projected sales for June....................................................................... $378,000

Quick Study 20-11 (10 minutes)

Sales commission percent................................................................... x 10%

Sales commissions............................................................................... 37,800

Sales manager’s monthly salary.......................................................... 4,000

Projected selling expense for June..................................................... $ 41,800

Quick Study 20-12 (10 minutes)

Less ending accounts receivable (80%).............................................. 302,400

Cash sales (20%)................................................................................... 75,600

Collections of last month’s receivables*............................................. 288,000

Total cash receipts................................................................................ $363,600

Quick Study 20-13 (15 minutes)

Quick Study 20-14 (10 minutes)

Collection of prior month’s receivables (75% x $110,000)................ 82,500

Total cash receipts................................................................................ $112,500

Quick Study 20-15 (10 minutes)

Collection of October’s sales (60% x $36,000).................................... 21,600

Collection of September’s sales (20% x $25,000)............................... 5,000

Total cash receipts................................................................................ $31,100

Quick Study 20-16 (10 minutes)

Cash disbursements for August purchases (75% x $100,000)...........$ 75,000

Total cash disbursements....................................................................$105,000

Quick Study 20-17 (10 minutes)

Quick Study 20-18 (5 minutes)

Quick Study 20-19 (15 minutes)

Ratio of inventory to future sales............... x 30% x 30% x 30%

Budgeted ending inventory (units)............. 216,000 234,000 186,000

Add budgeted sales (units)......................... 640,000 720,000 780,000

Required units of available merch. ............ 856,000 954,000 966,000

Quick Study 20-20 A (10 minutes)

Ratio of inventory to future sales......................................................... x 60%

Budgeted ending inventory (units)...................................................... 180

Add budgeted sales for the month (units).......................................... 280

Required units of available production............................................... 460

Deduct beginning inventory (units)..................................................... (168)

Units to be produced............................................................................. 292

Quick Study 20-21A (10 minutes)

Materials requirements per unit........................................................... x 5 lbs.