Master Budget Formulas Module 6 Management Accounting

MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
PARTS 3 and 4: Master Budget Formulas
SALES BUDGET
Forecasted units sold x selling price = total sales
PRODUCTION BUDGET
Budgeted sales + desired ending inventory – beginning inventory = required
production
DIRECT MATERIALS BUDGET

(Units to produce x raw materials per unit) + desired ending inventory –
beginning inventory = raw materials to purchase
DIRECT LABOUR BUDGET

Units to produce x direct labour time per unit x direct labour cost per hour =
total direct labour cost
MANUFACTURING OVERHEAD BUDGET

(Direct labour hours x variable overhead rate) + FMOH – depreciation= cash
disbursements for overhead
ENDING FINISHED GOOD INVENTORY BUDGET

(Direct materials cost per unit + direct labour cost per unit + manufacturing
overhead per unit) x ending finished goods inventory in units = ending
finished goods inventory
SELLING AND ADMINISTRATIVE EXPENSE BUDGET

(Unit sales x variable selling and administrative expense per unit) + fixed
selling and administrative expenses = total selling and administrative
expenses
-1- MA1_mod6_handout1.doc
PART 3 Slides 17 – 20: Question 4 March 2005
Alarums Ltd. produces alarm clock radios with CD players built into them. They had the
following results for January 20XX:
January
Units:
Beginning inventory 0
Production 1,000
Sales 900
Ending inventory (all units are finished at the end of the period
— there is no work in process) 100
Costs:
Variable manufacturing costs per unit:
Direct materials $ 10.00
Direct labour 5.00
Variable manufacturing overhead 3.00
Variable marketing costs per unit 2.00
Fixed manufacturing overhead 8,000
Fixed marketing and administrative costs 12,000
Sales price per unit $ 45.00
Required
a. Prepare in good form a variable-costing format income statement for Alarums for the month of
January.
b. Prepare in good form an absorption-costing format income statement for Alarums for the month of
January.
c. Prepare a schedule reconciling the net incomes for January under the variable and absorption costing
methods.
PART 3 Slides 17 – 20: Question 4 March 2005 Solution
a. ALARUMS LTD.
Variable Costing Income Statement
for the month ended January 31, 20XX
Sales $ 40,500 1
Less:
Variable cost of goods sold 16,200 2
Variable marketing costs 1,800 3
Contribution margin 22,500
Less:
Fixed manufacturing costs 8,000
Fixed marketing and administrative costs 12,000
Net income $ 2,500
b. ALARUMS LTD.
Absorption Costing Income Statement
for the month ended January 31, 20XX
Sales $ 40,500 1
Cost of goods sold 23,400 4
Gross margin 17,100
Marketing and administrative costs 13,800 5
Net income $ 3,300
c. Reconciliation of net incomes:
Net income under absorption costing $ 3,300

Less: Costs inventoried under absorption costing [100 × ($8,000/1,000)] (800)
Net income under variable costing $ 2,500
1 900 × $45 = $40,500

2 900 × $18 = $16,200
3 900 × $2 = $1,800
4 900 × $18 + (8,000/1,000) × 900 = $23,400
5 $12,000 + (900 × $2) = $13,800
PART 3 Slides 17 – 20: Question 2 June 2003
Boat Refit Inc. produces and sells custom parts for powerboats. The company uses a costing
system based on actual costs. Selected accounting and production information for fiscal 2002
is as follows:
Net income (under absorption costing) $ 400,000

Sales $ 3,400,000
Fixed factory overhead $ 600,000
Fixed selling and administrative costs (all these costs are fixed) $ 400,000
Net income (under variable costing) $ 310,000
Units produced 2,000
Units sold ?
Boat Refit had no work in process inventory at either the beginning or the end of fiscal 2002.
The company also did not have any finished goods inventory at the beginning of the fiscal year.
Required
a. Calculate the units sold in fiscal 2002.
b. Calculate the total contribution margin under variable costing.
c. Calculate the gross margin under absorption costing.
d. Calculate the cost per unit sold under variable costing.
e. Calculate the cost per unit sold under absorption costing.
PART 3 Slides 17 – 20: Question 2 June 2003 Solution
a. Number of units sold:

Net income under absorption costing $ 400,000
Net income under variable costing 310,000
Absorption costing exceeds variable costing $ 90,000
Since absorption costing net income exceeds variable costing net income, this means that sales must
have been less than production.
Fixed factory overhead/Units produced = Cost per unit

$600,000/2,000 = $300
Therefore, the number of units transferred to inventory = $90,000/$300 = 300 units.
Sales for May = 2,000 – 300 = 1,700 units
b. Contribution margin under variable costing:

Sales $3,400,000
Variable costs ?
Contribution margin ?
Fixed overhead (600,000)
Fixed selling and admin. Expenses (400,000)
Net income 310,000
3,400,000 – 600,000 - 400,000 – 310,000 = variable costs of $2,090,000
3,400,000 – 2,090,000 = 1,310,000 contribution margin
c. Gross margin under absorption costing:
Sales 3,400,000
Cost of goods sold ?
Gross margin ?
Fixed selling and administrative expenses (400,000)
Net income 400,000
3,400,000 – 400,000 – 400,000 = cost of goods sold of $2,600,000
3,400,000 – 2,600,000 = $800,000 Gross margin
d. Cost per unit sold under variable costing:
Contribution margin $ 1,310,000
Add back variable manufacturing costs 2,090,000
Sales $ 3,400,000
Cost per unit ($2,090,000/1,700) $ 1,229.41
e. Cost per unit sold under absorption costing:

Fixed costs of production/Production level = Fixed cost per unit
$600,000/2,000 units = $300
Cost per unit = $1,229.41 + $300 = $1,529.41

OR Cost of goods sold calculated in part c of $2,600,000 / 1700 units = $1,529,41
PART 7 Slides 80-82 Exercise 9-1, page 410
1. July August September Total

$
May sales: $430,000 × 10% 43,000 $ 43,000
June sales: $540,000 × 70%, 10% 378,000 $ 54,000 432,000
July sales: $600,000 × 20%, 70%, 10% 120,000 420,000 $ 60,000 600,000
August sales: $900,000 × 20%, 70% 180,000 630,000 810,000
September sales: $500,000 × 20% 100,000 100,000
Total cash collections $541,000 $654,000 $790,000 $1,985,000
2. Accounts receivable at September 30:
From August sales: $900,000 × 10% .......................................................................... $ 90,000

From September sales:
$500,000 × (70% + 10%) ......................................................................................... 400,000
Total accounts receivable .............................................................................................$490,000
PART 7 Slides 80-82 Exercise 9-2, page 410
July August September Quarter

Budgeted sales in units 30,000 45,000 60,000 135,000
Add desired ending inventory* 4,500 6,000 5,000 5,000
Total needs 34,500 51,000 65,000 140,000
Less beginning inventory 3,000 4,500 6,000 3,000
Required production 31,500 46,500 59,000 137,000
*10% of the following month’s sales
PART 8 Slides 83– 86: Question 5 March 2004
OMB Ltd.’s September balance sheet contains the following information:
Cash $ 30,000 (dr)

Accounts receivable 100,800 (dr)
Allowance for doubtful accounts 2,240 (cr)
Merchandise inventory 21,000 (dr)
Management has designated $30,000 as the firm’s minimum monthly cash balance. Other information
about the firm and its operations is as follows:
1. Sales revenues of $280,000, $336,000, and $250,000 are expected for October, November,
and December, respectively. All goods are sold on account.
2. The collection pattern for accounts receivable is 55% in the month of sale, 44% in the month
following the month of sale, and 1% uncollectible, which is set up as an allowance.
3. Cost of goods sold is 60% of sales revenues.
4. Management’s target ending balance of merchandise inventory is 10% of the current month’s
sales.
5. All accounts payable for inventory are paid in the month of purchase.
6. Other monthly expenses are $37,800, which includes $2,800 of amortization but does not
include bad debt expense.
7. Borrowings and investments can only be made in $5,000 increments at the end of a month. Interest is
charged at the rate of 10% per year; interest will be earned at the rate of 8% per year.
Required
a. Prepare a cost of purchases schedule for October and November.
b. Prepare the cash budgets for October and November including the effects of
financing (borrowing or investing)
PART 8 Slides 83– 86: Question 5 March 2004 Solution
a.
BEFORE you attempt to answer this part of the question, review the “formula” for the purchase
budget.
October November
Cost of goods sold (60% x sales) 168,000 201,600
Plus desired ending inventory 10% x 168,000 10% x 201,600 16,800 20,160
Total needs 184,800 221,760
Less beginning inventory 21,000 16,800
Cost of Purchases 163,800 204,960
b. October Cash Budget

Beginning cash balance $ 30,000
October collections:
September sales collected: A/R - AFDA 98,560
October sales collected: 280,000 x 55% 154,000 252,560
Total cash inflows 282,560
Disbursements
Merchandise purchases 163,800
Other monthly expenses 37,800 – 2,800 35,000
Total disbursements (198,800)
Excess of cash inflows over outflows 83,760
Investment 50,000
Ending cash balance $ 33,760
November Cash Budget

Beginning cash balance $ 33,760
November collections:
October sales collected: 280,000 x 44% 123,200
November sales collected: 336,000 x 55% 184,800 308,000
Total cash inflows 341,760
Disbursements
Merchandise purchases 204,960
Other monthly expenses 37,800 – 2,800 35,000
Total disbursements (239,960)
Excess of cash inflows over outflows 101,800
Interest on investments: 1/12 x 8% x 50,000 333
102,133
Investment 70,000
Ending cash balance $ 32,133
PART 9 Slides 87 – 88: Question 4 June 1991
The Mosquito Nest Co. Inc. presents you with the following selected information:
Part of the trial balance at April 1, 1990 showed:
Debits Credits
Cash $ 6,000
Accounts receivable 19,500
Allowance for bad debts $ 2,400
Merchandise inventory 12,000
Accounts payable, merchandise 9,000
The company’s purchases are payable within ten days. Assume that one-third of the purchases
of any month are due and paid for in the following month.
The unit invoice cost of the merchandise purchased is $10. At the end of each month, the
company’s policy is to have an inventory equal to 50% of the following month’s unit sales.
Sales terms include a 1% discount if payment is made by the end of the calendar month in which
the sale took place. Past experience indicates that 60% of the billings will be collected during the
month of the sale, 30% in the following calendar month, 6% in the next following calendar
month, and 4% will be uncollectible.
Sales data:
Selling price per unit $ 15
February actual sales revenue 15,000
March actual sales revenue 45,000
April estimated sales revenue 36,000
May estimated sales revenue 27,000
Total sales expected in the fiscal year 450,000
The company’s fiscal year begins February 1.
Exclusive of bad debts, the total budgeted selling and general administrative expenses for the
fiscal year are estimated at $70,500, of which $21,000 is fixed expense (inclusive of a $9,000
annual depreciation charge). These fixed expenses are incurred uniformly throughout the year.
The balance of the selling and general administrative expenses varies with sales. Expenses are
paid as incurred.
REQUIRED:
Prepare a cash budget for the month of April.
PART 9 Slides 87 – 88: Question 4 June 1991 Solution
Cash balance, beginning 6,000
Receipts
From February: 6% x 15,000 900
From March: 30% x 45,000 13,500
From April: 60% x 36,000 x .99 21,384
41,784
Disbursements
Purchases: March 9,000
1
April 14,000 ( 23,000)
Selling and administration

Variable [ (70,500 – 21,000) / 450,000 ] x 36,000 ( 3,960)
Fixed (21,000 – 9,000) / 12 ( 1,000)
Cash balance, April 30 13,824
Calculation
1
April May
Sales $ $36,000 $27,000
Cost of sales
(2/3 of sales) 24,000 18,000
Desired end invent.
(50% of following month) 9,000
Total needs 33,000
Beginning inventory
(Given) (12,000)
Purchases 21,000
Cash disbursement for April purchase
(2/3 paid in April 21,000 x 2/3) $14,000
PART 10 Slides 89 – 90: Question 3 December 1992
Stromwitz Co. Ltd., and sells Widgets. Budgeted unit sales for the first six months of 1992 are as follows:
Month Sales
January 3,500
February 4,000
March 6,000
April 8,000
May 12,000
June 12,000
Each Widget requires three pounds of direct materials which cost $5.00 per pound.
Stromwitz’s inventory policy is to have available at the end of each month finished units equal to 25%
of the following month’s sales. For direct materials, their policy is to have on hand at the end of each
month enough material for 30% of the following month’s production.
A total of 50% of purchases are paid for in the month of purchase and 50% in the following month.
REQUIRED:
Compute the April cash disbursements for payment of accounts payable regarding direct materials
purchases.
Solution
March April May
Sales 6,000 8,000 12,000
FG desired ending inv. 2,0002 3,0003 3,0003
FG, beginning (1,500)1 (2,000) (3,000)
Produced 6,500 9,000 12,000
Calculations
1
25%(6,000) = 1,500
2
25%(8,000) = 2,000
3
25%(12,000) = 3,000
March April
Units to produce 6,500 9,000 Payment
RM per unit 3 3
RM needs 19,500 27,000 March: $108,750 x ½ = $ 54,375
DM, ending 8,1002 10,8003 April: $148,500 x ½ = 74,250
DM, beginning (5,850)1 (8,100)2 $128,625
Total needs 21,750 29,700
Unit cost $5 $5
Total cost $108,750 $148,500
Calculations
1
30%(6,500 x 3) = 5,850
2
30%(9,000 x 3) = 8,100
3
30%(12,000 x 3) = 10,800
PART 11 Slides 91-94 Multiple Choice Questions - Module 6
Q1. Parts (a), (b), (c), and (d) refer to the following information: March 2003 exam
The following information is from Skiros Company’s records for the year ended December 31, 2002:
Sales $1,400,000
Cost of goods manufactured:
Variable $ 630,000
Fixed $ 315,000
Operating expenses:
Variable $ 98,000
Fixed $ 140,000
Units manufactured 70,000 units
Units sold 60,000 units
Finished goods inventory, January 1, 2002 0 units
There were no work in process inventories at the beginning or end of the year.
a. What would be the cost of the ending finished goods inventory cost under variable costing?
1) $ 90,000 10,000 (DM + DL + VOH)

2) $104,000 = 10,000 (630,000/70,000)
3) $105,000 = 10,000 (9)
4) $135,000 = 90,000
answer: 1)
b. What would be the cost of the ending finished goods inventory cost under absorption costing?
1) $ 90,000 10,000 (DM + DL + VOH + FOH)

2) $104,000 = 10,000 (9 + 315,000/70,000)
3) $105,000 = 10,000 (9 + 4.50)
4) $135,000 = 135,000
answer: 4)
c. What would be the operating profit for the year under absorption costing?
1) $217,000 Sales 1,400,000

2) $307,000 COGS 60,000(13.50) 810,000
3) $352,000 Gross profit 590,000
4) $374,000 Fixed selling ( 140,000)
Variable selling ( 98.000)
answer: 3) Operating profit 352,000
d. What would be the operating profit for the year under variable costing?
1) $135,000 Sales 1,400,000

2) $217,000 Variable COGS (60,000 x 9) ( 540,000)
3) $307,000 Variable selling ( 98,000)
4) $352,000 Contribution margin 762,000
FOH + FSE (315,000 + 140,000) ( 455,000)
answer: 3) Operating profit 307,000
PART 11 Slides 91-94 Multiple Choice Questions – (continued)

Q2. The following data were collected by Balto Co. for the month of May:
Master budget data:

Sales 9,000 units @ $30
Variable costs $23 per unit
Total fixed costs $18,800
Actual results:
Sales 9,600 units @ $29
Variable costs $24 per unit
Total fixed costs $18,200
What was the May variance from the master budget operating income?
1) $14,400 F Plan Actual

2) $14,400 U Sales: 9,000 x 30; 9,600 x 29 270,000 278,400
3) $29,800 U VC: 9,000 x 23; 9,600 x 24 (207,000) ( 230,400)
4) $44,200 F Fixed costs ( 18,800) ( 18,200)
Operating profit 44,200 28,800
June 2003 exam answer: 2)
You have 14,400 less income than planned. Thus it is unfavourable.
Q3. A company has the following incomplete production budget data for the first quarter:
January February March

Expected unit sales 1,000 3,000 4,000
In the previous December, ending inventory was 100 units, which was the minimum required, at 10%
of projected sales units in the coming month.
What is the expected production in February?
1) 3,000 units Find a formula!

2) 3,100 units
3) 3,400 units Unit sales + desired ending inv. – beg inventory = production
4) 3,600 units
3,000 + (10% of 4,000) - (10% of 3,000) = 3,100
March 2006 exam Production = 3,100 units
answer: 2)
PART 11 Slides 91-94 Multiple Choice Questions – (continued)
Q4. Which of the following statements regarding the use of variable costing versus absorption costing is
true?
1) Absorption costing treats all costs of production as product costs, regardless of whether the
costs are variable or fixed.
2) Absorption costing treats only variable costs of production as product costs.
3) Absorption costing treats only fixed costs of production as product costs.
4) Absorption costing harmonizes fully with the contribution approach and cost-volume-profit
concepts.
March 2007 exam answer: 1)
Q5. How does the accounting treatment of selling and administration costs differ between absorption and
variable costing if more units are produced than are sold?
1) The variable portion is added to the cost of ending inventory based on a pro rata portion of
units produced to those sold.
2) The fixed portion is added to the costs of ending inventory based on a pro rata portion of
units produced to those sold.
3) There is no difference in the treatment.
4) Both fixed and variable portions are added to the cost of ending inventory based on a pro rata
portion of units produced to those sold. Fixed selling and administration
costs are treated as period costs
March 2007 exam answer: 3) under both methods.
Q6. Use the following information to answer parts (a) and (b) December 2006 exam
For the year ended December 31, 2005, Ventor Corporation has the following records of its costs:
Direct materials used $ 600,000
Direct labour 200,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Selling and administrative costs (variable) 80,000
Selling and administrative costs (fixed) 40,000
a. If Ventor uses variable costing, what would the inventoriable costs for the year ended
December 31, 2005 be?
For variable costing, only variable manufacturing costs
1) $ 800,000 are inventoriable:
2) $ 900,000
Total inventoriable costs = Direct material + Direct
3) $ 980,000
labour + Variable manufacturing overhead
4) $ 1,060,000
= $600,000 + 200,000 + 100,000 = $900,000
December 2007 exam answer: 2)
b. If Ventor were to use absorption costing instead, what would the inventoriable costs be?
For absorption costing, all costs of production are
1) $ 800,000 capitalized into inventory:
2) $ 900,000
3) $ 1,060,000 Total inventoriable costs = Variable manufacturing cost
4) $ 1,180,000 + Fixed manufacturing overhead
= $900,000 + $160,000 = $1,060,000
December 2007 exam answer: 3)

Master Budget Formulas Module 6 Management Accounting

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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6

PARTS 3 and 4: Master Budget Formulas

DIRECT MATERIALS BUDGET

DIRECT LABOUR BUDGET

MANUFACTURING OVERHEAD BUDGET

ENDING FINISHED GOOD INVENTORY BUDGET

SELLING AND ADMINISTRATIVE EXPENSE BUDGET

PART 3 Slides 17 – 20: Question 4 March 2005

Sales price per unit $ 45.00

PART 3 Slides 17 – 20: Question 4 March 2005 Solution

c. Reconciliation of net incomes:

Net income under absorption costing $ 3,300

1 900 × $45 = $40,500

PART 3 Slides 17 – 20: Question 2 June 2003

Net income (under absorption costing) $ 400,000

b. Calculate the total contribution margin under variable costing.

c. Calculate the gross margin under absorption costing.

d. Calculate the cost per unit sold under variable costing.

e. Calculate the cost per unit sold under absorption costing.

PART 3 Slides 17 – 20: Question 2 June 2003 Solution

a. Number of units sold:

Fixed factory overhead/Units produced = Cost per unit

Therefore, the number of units transferred to inventory = $90,000/$300 = 300 units.

Sales for May = 2,000 – 300 = 1,700 units

b. Contribution margin under variable costing:

Cost per unit ($2,090,000/1,700) $ 1,229.41

e. Cost per unit sold under absorption costing:

Cost per unit = $1,229.41 + $300 = $1,529.41

PART 7 Slides 80-82 Exercise 9-1, page 410

1. July August September Total

2. Accounts receivable at September 30:

From August sales: $900,000 × 10% .......................................................................... $ 90,000

PART 7 Slides 80-82 Exercise 9-2, page 410

July August September Quarter

*10% of the following month’s sales

PART 8 Slides 83– 86: Question 5 March 2004

OMB Ltd.’s September balance sheet contains the following information:

Cash $ 30,000 (dr)

3. Cost of goods sold is 60% of sales revenues.

a. Prepare a cost of purchases schedule for October and November.

PART 8 Slides 83– 86: Question 5 March 2004 Solution

b. October Cash Budget

November Cash Budget

PART 9 Slides 87 – 88: Question 4 June 1991

The company’s fiscal year begins February 1.

Prepare a cash budget for the month of April.

PART 9 Slides 87 – 88: Question 4 June 1991 Solution

Cash balance, beginning 6,000

Selling and administration

PART 10 Slides 89 – 90: Question 3 December 1992

PART 11 Slides 91-94 Multiple Choice Questions - Module 6

1) $ 90,000 10,000 (DM + DL + VOH)

1) $ 90,000 10,000 (DM + DL + VOH + FOH)

1) $217,000 Sales 1,400,000

1) $135,000 Sales 1,400,000

PART 11 Slides 91-94 Multiple Choice Questions – (continued)

Master budget data:

1) $14,400 F Plan Actual

January February March

What is the expected production in February?

1) 3,000 units Find a formula!

PART 11 Slides 91-94 Multiple Choice Questions – (continued)

March 2007 exam answer: 1)