Chapter 07 – Exercises – Part II (Model Answers)

Exercise Seven:
Haylock Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The direct labor
budget indicates that 5,600 direct labor-hours will be required in August. The variable overhead rate is
$5.40 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $69,440 per month,
which includes depreciation of $15,680. All other fixed manufacturing overhead costs represent current
cash flows. The August cash disbursements for manufacturing overhead on the manufacturing overhead
budget should be:

A) $99,680

B) $84,000

C) $53,760

D) $30,240

Answer: B

Solution:

Variable manufacturing overhead + Fixed manufacturing overhead

= (5,600 × $5.40) + ($69,440 − $15,680)
= $30,240 + $53,760 = $84,000

Exercise Eight:
At March 31 Streuling Enterprises, a merchandising firm, had an inventory of 38,000 units, and it had
accounts receivable totaling $85,000. Sales, in units, have been budgeted as follows for the next four
months:

April ...................... 60,000

May ....................... 75,000
June ....................... 90,000
July ........................ 81,000
Streuling's board of directors has established a policy to commence in April that the inventory at the end
of each month should contain 40% of the units required for the following month's budgeted sales.

The selling price is $2 per unit. One-third of sales are paid for by customers in the month of the sale, the
balance is collected in the following month.

Required:

a. Prepare a merchandise purchases budget showing how many units should be purchased for
each of the months April, May, and June.
b. Prepare a schedule of expected cash collections for each of the months April, May, and June.

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

b. April May June

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

Exercise Nine:
Clay Company has projected sales and production in units for the second quarter of the coming year as
follows:

April May June

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

Cash-related production costs are budgeted at $5 per unit produced. Of these production costs, 40% are
paid in the month in which they are incurred and the balance in the following month. Selling and
administrative expenses will amount to $100,000 per month. The accounts payable balance on March 31
totals $190,000, which will be paid in April.

All units are sold on account for $14 each. Cash collections from sales are budgeted at 60% in the month
of sale, 30% in the month following the month of sale, and the remaining 10% in the second month
following the month of sale. Accounts receivable on April 1 totaled $500,000 $(90,000 from February's
sales and the remainder from March).
Required:
a. Prepare a schedule for each month showing budgeted cash disbursements for the Clay
Company.
b. Prepare a schedule for each month showing budgeted cash receipts for Clay Company.

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Answer:

a. April May June

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

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

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

b. April May June

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

April May June

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

Exercise Ten:
Negam Inc. is working on its cash budget for March. The budgeted beginning cash balance is $33,000.
Budgeted cash receipts total $182,000 and budgeted cash disbursements total $191,000. The desired
ending cash balance is $40,000.

1-The excess (deficiency) of cash available over disbursements for March will be:
A) $215,000
B) $42,000
C) $24,000
D) ($9,000)

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

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2.To attain its desired ending cash balance for March, the company needs to borrow:

A) $40,000
B) $0
C) $16,000
D) $64,000

Answer: C

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

Borrowing = Desired ending cash balance − Excess cash available over disbursements = $40,000
− $24,000 = $16,000

Exercise Eleven:
The following are budgeted data:
Month 1 Month 2 Month 3
Sales in units ..................... 15,000 20,000 18,000
Production in units ............ 16,000 22,000 15,000

One pound of material is required for each finished unit. The inventory of materials at the end of
each month should equal 20% of the following month's production needs. At the beginning of
Month 1, 3,200 lbs. of materials were on hand. Purchases of raw materials for Month 2 would be
budgeted to be:
A) 17,600 pounds
B) 23,400 pounds
C) 20,600 pounds
D) 25,000 pounds

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

Required:

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

b. Determine the predetermined overhead rate for July.

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Answer:

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

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

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

Exercise Thirteen:

Edwards Company has projected sales and production in units for the second quarter of the year
as follows:

Required:

a. Cash production costs are budgeted at $6 per unit produced. Of these production costs, 40%
are paid in the month in which they are incurred and the balance in the following month. Selling
and administrative expenses (all paid in cash) amount to $60,000 per month. The accounts
payable balance on March 31 totals $96,000, all of which will be paid in April. Prepare a
schedule for each month showing budgeted cash disbursements for Edwards Company.

b. Assume that all units will be sold on account for $15 each. Cash collections from sales are
budgeted at 60% in the month of sale, 30% in the month following the month of sale and the
remaining 10% in the second month following the month of sale. Accounts receivable on March
31 totaled $255,000 $(45,000 from February's sales and the remainder from March). Prepare a
schedule for each month showing budgeted cash receipts for Edwards Company.

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Solution:

Exercise Fourteen:

Lubriderm Corporation has the following budgeted sales for the next six-month period:

Month Unit Sales

June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to
have an inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs $8.
Inventory levels for materials are equal to 30% of the needs for the next month. Materials
inventory on June 1 was 15,000 pounds.

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Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total
purchases in both pounds and dollars for each month.

Solution:
a. July August September
Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000

Total inventory requirements 162,000 240,000 186,000

Less: Beginning inventory 24,000 42,000 30,000

Budgeted production 138,000 198,000 156,000

b. July August September

Production in units 138,000 198,000 156,000

Targeted ending inventory in lbs.*297,000 234,000 **252,000

Production needs in lbs.*** 690,000 990,000 780,000

Total requirements in lbs. 987,000 1,224,000 1,032,000

Less: Beginning inventory in lbs. ****207,000 297,000 234,000

Purchases needed in lbs. 780,000 927,000 798,000

Cost ($8 per lb.) × $8 × $8 × $8

Total material purchases $6,240,000 $7,416,000 $6,384,000

* 0.3 times next month's needs

** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3
*** 5 lbs. times units to be produced, across row
**** (690,000 × .3) = 207,000 lbs., etc. row across

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