Functional Budget Solution - Compress

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12 Financial And Operating Budgeting May 2013
MULTIPLE CHOICE QUESTIONS
1. A common starting point in the 7. Long-range planning usually

budgeting process is encompasses a period of at least
a. expected future net income. a. six months.
b. past performance. b. 1 year.
c. to motivate the sales force. c. 5 years.
d. a clean slate, with no expectations. d. 10 years.
2. A budget period should be 8. Which is the last step in developing the

a. monthly. master budget?
b. for a year or more. a. Preparing the budgeted balance
c. long-term. sheet
d. long enough to provide an b. Preparing the cost of goods
obtainable goal under normal manufactured budget
business conditions. c. Preparing the budgeted income
statement
3. If a company has adopted continuous d. Preparing the cash budget
budgeting, the budget will show plans
for 9. A master budget consists of
a. every day. a. an interrelated long-term plan and
b. a full year ahead. operating budgets.
c. the current year and the next year. b. financial budgets and a long-term
d. at least five years. plan.
c. interrelated financial budgets and
4. Budget development for the coming operating budgets.
year usually starts d. all the accounting journals and
a. a year in advance. ledgers used by a company.
b. the first month of the year to be
budgeted. 10 The starting point in preparing a master
c. several months before the end of budget is the preparation of the
the current year. a. production budget.
d. the last month of the previous year. b. sales budget.
c. purchasing budget.
5. The budget committee would not d. personnel budget.
normally include the
a. research director. 11 . What is the proper preparation
b. treasurer. sequencing of the following budgets?
c. sales manager. 1. Budgeted Balance
d. external auditor.
Sheet
6. The budget committee in a company is 2. Sales Budget
often headed by the 3. Selling and
a. president. Administrative Budget
b. controller. 4. Budgeted Income
c. treasurer. Statement
d. budget director. a. 1, 2, 3, 4
b. 2, 3, 1, 4
c. 2, 3, 4, 1
d. 2, 4, 1, 3
PROBLEMS
1
Delta Manufacturing has budgeted the following unit sales:
2012 Units
April 25,000
May 40,000
June 60,000
July 45,000
Of the units budgeted, 40% are sold by the Coastal Division at an average price of $15 per unit and the
remainder are sold by the Central Division at an average price of $12 per unit.
Instructions
Prepare separate sales budgets for each division and for the company in total for the second quarter of
2013.
Solution 1
DELTA MANUFACTURING
Sales Budget
For the Quarter Ended June 30, 2013
Coastal Division April May June Total

Expected unit sales 10,000 16,000 24,000 50,000
Unit selling price $15 $15 $15 $15
Total sales $150,000 $240,000 $360,000 $750,000
Central Division
Unit selling price $12 $12 $12 $12
Total sales $180,000 $288,000 $432,000 $900,000
Total Company
Total sales $330,000 $528,000 $792,000 $1,650,000
2
Butler Manufacturing manufactures two products, (1) Regular and (2) Deluxe. The budgeted units to be
produced are as follows:
Units of Product
2013 Regular Deluxe Total
July 10,000 15,000 25,000
August 6,000 10,000 16,000
September 9,000 14,000 23,000
October 8,000 12,000 20,000
It takes 2 pounds of direct materials to produce the Regular product and 5 pounds of direct materials to
produce the Deluxe product. It is the company's policy to maintain an inventory of direct materials on hand
at the end of each month equal to 30% of the next month's production needs for the Regular product
and 20% of the next month's production needs for the Deluxe product. Direct materials inventory on
hand at June 30 were 6,000 pounds for the Regular product and 15,000 pounds for the Deluxe product.
The cost per pound of materials is $5 Regular and $8 Deluxe.
Instructions
Prepare separate direct materials budgets for each product for the third quarter of 2013.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector
Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Budget Preparation
Solution 2
BUTLER MANUFACTURING
Direct Materials Budget—Regular
For the Quarter Ended September 30, 2013
July August September Total
Units to be produced 10,000 6,000 9,000
Direct materials per unit × 2 × 2 × 2
Total pounds needed for production 20,000 12,000 18,000
Add: Desired ending direct materials (pounds) 3,600 5,400 4,800*
Total materials required 23,600 17,400 22,800
Less: Beginning direct materials (pounds) 6,000 3,600 5,400
Direct materials purchases 17,600 13,800 17,400
Cost per pound × $5 × $5 × $5
Total cost of direct materials purchases $88,000 $69,000 $87,000 $244,000
*30% × (8,000 × 2)
BUTLER MANUFACTURING
Direct Materials Budget—Deluxe
For the Quarter Ended September 30, 2013
July August September Total
Add: Desired ending direct materials (pounds) 10,000 14,000 12,000*
Total cost of direct materials purchases $560,000 $432,000 $544,000 $1,536,000
*20% × (12,000 × 5)
3
Garver Industries has budgeted the following unit sales:
2013 Units
January 10,000
February 8,000
March 9,000
April 11,000
May 15,000
The finished goods units on hand on December 31, 2012, was 2,000 units. Each unit requires 3 pounds
of raw materials that are estimated to cost an average of $4 per pound. It is the company's policy to
maintain a finished goods inventory at the end of each month equal to 20% of next month's anticipated
sales. They also have a policy of maintaining a raw materials inventory at the end of each month equal
to 30% of the pounds needed for the following month's production. There were 8,640 pounds of raw
materials on hand at December 31, 2012.
Instructions
For the first quarter of 2013, prepare (1) a production budget and (2) a direct materials budget.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Industry/Sector
Solution 3
(1) GARVER INDUSTRIES
Production Budget
For the Quarter Ended March 31, 2013
January February March Total
Expected unit sales 10,000 8,000 9,000
Desired ending finished goods units 1,600 1,800 2,200*
Total required units 11,600 9,800 11,200
Less: Beginning finished goods units 2,000 1,600 1,800
Required production units 9,600 8,200 9,400 27,200
*April units: 11,000 × 20%.
(2) GARVER INDUSTRIES

Direct Materials Budget
January February March Total
Desired ending direct materials (pounds) 7,380 8,460 10,620**
Total cost of direct materials purchases $110,160 $102,720 $121,440 $334,320
**April units: 11,800 × 3 = 35,400 × 30%.
4
Benet Company has budgeted the following unit sales:
2013 2013
Quarter Units Quarter Units
1 105,000 1 90,000
2 60,000
3 75,000
4 120,000
The finished goods inventory on hand on December 31, 2012 was 21,000 units. It is the company's
policy to maintain a finished goods inventory at the end of each quarter equal to 20% of the next
quarter's anticipated sales.
Instructions
Prepare a production budget for 2013.
Solution 4
BENET COMPANY
Production Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Total
Desired ending finished goods units 12,000 15,000 24,000 18,000*
Total required units 117,000 75,000 99,000 138,000
Less: Beginning finished goods units 21,000 12,000 15,000 24,000
Required production units 96,000 63,000 84,000 114,000 357,000
*2013 Q1: 90,000 units × 20% = 18,000.
5
The following facts are known:
• The total pounds needed for production are 2 times the units to be produced.
• The desired ending direct materials inventory is 20% of the total pounds needed for production.
• The beginning direct materials inventory is equal in number to 10% of the units to be produced.
• Cost per pound is $5.
• Total cost of the direct materials purchases is $1,035,000.
Instructions
Prepare a direct materials budget for the period.
Solution 5
Let X = total units to be produced.
Then total pounds needed equals 2X.
Desired ending inventory is .20 × 2X.
The beginning inventory is .10X.
The direct materials budget is:
Units to be produced X 90,000*
Direct materials per unit 2 × 2
Total pounds needed for production 2X 180,000
Add: Desired ending direct materials .2(2X) .4X 36,000
Total materials required 2.4X 216,000
Less: Beginning direct materials .10X 9,000
Direct materials purchases 2.3X
2`1207,000
Cost per pound $5 × 5
Total cost of direct materials purchases $1,035,000
*2X + .2(2X) – .1X = 207,000
2X + .4X – .1X = 207,000
2.3X = 207,000
X = 90,000
6
Pulham Company is preparing its direct labor budget for 2013 from the following production budget
based on a calendar year:
Quarter Units
1 60,000
2 30,000
3 45,000
4 75,000
Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate
to $11 per hour on October 1.
Instructions
Prepare a direct labor budget for 2013.
Solution 6
PULHAM COMPANY
Direct Labor Budget
For the Year Ended December 31, 2013
Quarter
1 2 3 4 Total
Units to be produced 60,000 30,000 45,000 75,000
Direct labor time (hours) per unit × 2 × 2 × 2 × 2
Total required direct labor hours 120,000 60,000 90,000 150,000
Direct labor cost per hour × $10* × $10 × $10 × $11
Total direct labor cost $1,200,000 $600,000 $900,000 $1,650,000 $4,350,000
*$11 ÷ 110% = $10.
7
Shep Company combines its operating expenses for budget purposes in a selling and administrative
expense budget. For the first quarter of 2013, the following data are developed:
1. Sales: 20,000 units; unit selling price: $30
2. Variable costs per dollar of sales:
Sales commissions 6%
Delivery expense 2%
Advertising 4%
3. Fixed costs per quarter:
Sales salaries $24,000
Office salaries 19,000
Depreciation 6,000
Insurance 2,000
Utilities 1,000
Instructions
Prepare a selling and administrative expense budget for the first quarter of 2013.
Solution 7
SHEP COMPANY
Selling and Administrative Expense Budget
Variable expenses
Sales commissions ($600,000 × 6%) $ 36,000
Delivery expense ($600,000 × 2%) 12,000
Advertising ($600,000 × 4%) 24,000
Total variable 72,000
Fixed expenses
Sales salaries $ 24,000
Office salaries 19,000
Depreciation 6,000
Insurance 2,000
Utilities 1,000
Total fixed 52,000
Total selling and administrative expenses $124,000
8
The Northeast Regional Division of Union Corp. has been requested to prepare a quarterly budgeted
income statement for 2013. The regional manager expects that sales in the first quarter of 2013 will
increase by 10% over the same quarter of the preceding year and will then increase by 5% for each
succeeding quarter in 2013.
The corporate head office has requested that the regional manager maintain an inventory in dollars
equal to 25% of the next quarter's sales. Quarterly purchases average 55% of quarterly sales.
Budgeted ending inventory on December 31, 2012 is $176,000. Quarterly salaries are $20,000 plus 5%
of sales. All salaries are classified as sales salaries. Other quarterly expenses are estimated to be as
follows:
Rent expense $24,000
Depreciation on office equipment $12,000
Utilities expense $3,600
Miscellaneous expenses 2% of sales
The income statement for the first quarter of 2012 was as follows:
Income Statement
Sales................................................................................................ $720,000
Cost of goods sold.............................................................................. 396,000
Gross profit....................................................................................... 324,000
Operating expenses
Sales salaries.............................................................................. $52,000
Rent expense.............................................................................. 24,000
Depreciation............................................................................... 12,000
Utilities...................................................................................... 3,600
Miscellaneous.............................................................................. 12,800
Total operating expenses....................................................... 104,400
Net income........................................................................................ $219,600
Instructions
Prepare a budgeted quarterly income statement in tabular form for the first quarter of 2013. (Show
computations.)
Solution 8
UNION CORP.
Northeast Regional Division
Budgeted Income Statement
Sales (1) ....................................................................................................... $792,000
Cost of goods sold (2)...................................................................................... 403,700
Gross profit..................................................................................................... 388,300
Operating expenses
Sales salaries (3)...................................................................................... 59,600
Rent expense........................................................................................... 24,000
Depreciation............................................................................................. 12,000
Utilities.................................................................................................... 3,600
Miscellaneous (4)...................................................................................... 15,840
Total operating expenses..................................................................... 115,040
Net income..................................................................................................... $273,260
(1) Sales Qtr. 1 $720,000 × 110% = $792,000

(2) Cost of goods sold
Beginning inventory $176,000
Purchases ($792,000 × 55% = $435,600) 435,600
Cost of goods available 611,600
Ending inventory ($792,000 × 105% = $831,600 × 25% = $207,900) 207,900
Cost of goods sold $403,700
(3) Sales salaries: $20,000 + ($792,000 × .05) = $59,600.
(4) Miscellaneous expenses: $792,000 × .02 = $15,840.
9
Burr, Inc. provided the following information:
July August
Projected sales $220,000 $260,000
Projected merchandise purchases $150,000 $180,000
• Burr estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the
sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be
bad debts.
• Burr pays 30% of merchandise purchases in the month purchased and 70% in the following month.
• General operating expenses are budgeted to be $20,000 per month of which depreciation is $2,000
of this amount. Burr pays operating expenses in the month incurred.
• Burr makes loan payments of $3,000 per month of which $400 is interest and the remainder is
principal.
Instructions
Calculate Burr's budgeted cash disbursements for August.
Solution 9
Cash paid for merchandise purchases:
August purchases: $180,000 × 30% $ 54,000
July purchases: $150,000 × 70% 105,000
Cash paid for operating expenses ($20,000 – $2,000) 18,000
Cash paid for loan ($3,000 – $400) 2,600
Cash paid for interest 400
Budgeted cash disbursements for August $180,000
10
Casa Development, Inc. has budgeted sales revenues as follows:
Budgeted Sales Revenues
January $55,000
February 75,000
March 90,000
April 80,000
May 60,000
June 35,000
Past experience has indicated that 80% of sales each month are on credit and that collection of credit
sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the
second month following the sale. The other 5% is uncollectible.
Instructions
Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and
June.
10
CASA DEVELOPMENT, INC.
Expected Cash Receipts from Sales
For the Quarter Ended June 30
April May June

February sales
Credit sales: ($75,000 × .80 × .05) $ 3,000
March sales
Credit sales:
($90,000 × .80 × .30) 21,600
($90,000 × .80 × .05) $ 3,600
April sales
Credit sales:
($80,000 × .80 × .60) 38,400
($80,000 × .80 × .30) 19,200
($80,000 × .80 × .05) $ 3,200
Cash sales: ($80,000 × .20) 16,000
May sales
Credit sales:
($60,000 × .80 × .60) 28,800
($60,000 × .80 × .30) 14,400
Cash sales: ($60,000 × .20) 12,000
June sales
Credit sales: ($35,000 × .80 × .60) 16,800
Cash sales: ($35,000 × .20) 7,000
Total cash receipts $79,000 $63,600 $41,400
11
Cruises, Inc. has budgeted sales revenues as follows:
June July August
Credit sales $135,000 $125,000 $ 90,000
Cash sales 90,000 255,000 195,000
Total sales $225,000 $380,000 $285,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the
remaining 40% will be collected in the following month. Purchases of inventory are all on credit and
50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory
purchases are:
June $300,000
July 240,000
August 105,000
Other cash disbursements budgeted: (a) selling and administrative expenses of $48,000 each month,
(b) dividends of $103,000 will be paid in July, and (c) purchase of equipment in August for $30,000
cash.
The company wishes to maintain a minimum cash balance of $50,000 at the end of each month. The
company borrows money from the bank at 6% interest if necessary to maintain the minimum cash
balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning
cash balance on July 1 was $50,000. Assume that borrowed money in this case is for one month.
Instructions
Prepare a cash budget for the months of July and August. Prepare separate schedules for expected
collections from customers and expected payments for purchases of inventory.
Solution 11
CRUISES, INC.
Cash Budget
For the Two Months of July and August
July August
Beginning cash balance $ 50,000 $ 50,000
Add: Receipts
Collections from customers 129,000 104,000
Cash sales 255,000 195,000
Total receipts 384,000 299,000
Total available cash 434,000 349,000
Less: Disbursements
Purchases 270,000 172,500
Selling and administrative expenses 48,000 48,000
Dividends 103,000
Equipment purchase 30,000
Total disbursements 421,000 250,500
Excess (deficiency) of available cash over disbursements 13,000 98,500
Financing
Borrowings 37,000
Repayments (37,185)*
Ending cash balance $ 50,000 $ 60,315
*37,000 × 6% × 1/12 = $185 + $37,000 = $37,185.
Schedule of Expected Collections from Customers

Credit sales July August
June (135,000) $ 54,000
July ($125,000) 75,000 $ 50,000
August ($90,000) 54,000
Total collections $129,000 $104,000
Schedule of Expected Payments for Purchases of Inventory

Inventory purchases July August
June ($300,000) $150,000
July ($240,000) 120,000 $120,000
August ($105,000) 52,500
Total payments $270,000 $172,500
12
The Sunstate Bank has asked Dell Printing Co. for a budgeted balance sheet for the year ended
December 31, 2013. The following information is available:
1. The cash budget shows an expected cash balance of $75,000 at December 31, 2013.
2. The 2013 sales budget shows total annual sales of $800,000. All sales are made on account and
accounts receivable at December 31, 2013 are expected to be 10% of annual sales.
3. The merchandise purchases budget shows budgeted cost of goods sold for 2013 of $600,000 and
ending merchandise inventory of $95,000. 20% of the ending inventory is expected to have not yet
been paid at December 31, 2013.
4. The December 31, 2012 balance sheet includes the following balances: Equipment $294,000,
Accumulated Depreciation $122,000, Common Stock $270,000, and Retained Earnings $48,000.
5. The budgeted income statement for 2013 includes the following: depreciation on equipment
$15,000, federal income taxes $21,000, and net income $49,000. The income taxes will not be paid
until 2013.
6. In 2013, management does not expect to purchase additional equipment or to declare any
dividends. It does expect to pay all operating expenses, other than depreciation, in cash.
Instructions
Prepare an unclassified budgeted balance sheet at December 31, 2013.
Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector
Solution 12
DELL PRINTING CO.
Budgeted Balance Sheet
December 31, 2013
Assets
Cash................................................................................................ $ 75,000
Accounts receivable............................................................................ 80,000
Merchandise inventory........................................................................ 95,000
Equipment........................................................................................ $294,000
Less: Accumulated depreciation ($122,000 + $15,000)........................... 137,000 157,000
Total assets................................................................................ $407,000
Liabilities and Stockholders' Equity
Accounts payable............................................................................... $ 19,000
Income taxes payable......................................................................... 21,000
Common stock................................................................................... 270,000
Retained earnings.............................................................................. 97,000
Total liabilities and stockholders' equity.......................................... $407,000

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MANAGEMENT ADVISORY SERVICES jjaurojrtcbic

12 Financial And Operating Budgeting May 2013

MULTIPLE CHOICE QUESTIONS

1. A common starting point in the 7. Long-range planning usually

2. A budget period should be 8. Which is the last step in developing the

Coastal Division April May June Total

(2) GARVER INDUSTRIES

(1) Sales Qtr. 1 $720,000 × 110% = $792,000

April May June

*37,000 × 6% × 1/12 = $185 + $37,000 = $37,185.

Schedule of Expected Collections from Customers

Schedule of Expected Payments for Purchases of Inventory

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