Chapter 22

At the beginning of the 2010 school year, Britney Logan decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget: Cash balance, September 1 (from a summer job) . . . . . . . . . . . . . . . . . . . . . . . $7,000 Purchase season football tickets in September . . . . . . . . . . . . . . . . . . . . . . . . . 100 Additional entertainment for each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Pay fall semester tuition on September 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800 Pay rent at the beginning of each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Pay for food each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Pay apartment deposit on September 2 (to be returned Dec. 15) . . . . . . . . . . . . 500 Part-time job earnings each month (net of taxes) . . . . . . . . . . . . . . . . . . . . . . . . 900 a. Prepare a cash budget for September, October, November, and December. b. Are the four monthly budgets that are presented prepared as static budgets or flexible budgets? c. What are the budget implications for Britney Logan?

The production supervisor of the Machining Department for Nell Company agreed to the following monthly static budget for the upcoming year: Nell Company Machining Department Monthly Production Budget Wages . . . . . . . . . . . . . . . . . . . . . . \(540,000 Utilities . . . . . . . . . . . . . . . . . . . . . . 36,000 Depreciation . . . . . . . . . . . . . . . . . . 60,000 ________ Total . . . . . . . . . . . . . . . . . . . . . . \)636,000 ________ ________ The actual amount spent and the actual units produced in the first three months of 2010 in the Machining Department were as follows: Amount Spent Units Produced January \(600,000 110,000 February 570,000 100,000 March 545,000 90,000 The Machining Department supervisor has been very pleased with this performance, since actual expenditures have been less than the monthly budget. However, the plant manager believes that the budget should not remain fixed for every month but should “flex” or adjust to the volume of work that is produced in the Machining Department. Additional budget information for the Machining Department is as follows: Wages per hour \)18.00 Utility cost per direct labor hour $1.20 Direct labor hours per unit 0.25 Planned unit production 120,000 a. Prepare a flexible budget for the actual units produced for January, February, and March in the Machining Department. Assume depreciation is a fixed cost. b. Compare the flexible budget with the actual expenditures for the first three months. What does this comparison suggest?

Steelcase Inc. is one of the largest manufacturers of office furniture in the United States. In Grand Rapids, Michigan, it produces filing cabinets in two departments: Fabrication and Trim Assembly. Assume the following information for the Fabrication Department: Steel per filing cabinet . . . . . . . . . . . . . . 45 pounds Direct labor per filing cabinet . . . . . . . . . 20 minutes Supervisor salaries . . . . . . . . . . . . . . . . . \(140,000 per month Depreciation . . . . . . . . . . . . . . . . . . . . . . \)22,000 per month Direct labor rate . . . . . . . . . . . . . . . . . . . \(21 per hour Steel cost . . . . . . . . . . . . . . . . . . . . . . . . \)1.45 per pound Prepare a flexible budget for \(12,000,15,000\), and 18,000 filing cabinets for the month of October 2010, similar to Exhibit 5, assuming that inventories are not significant.

Accu-Weight, Inc. produces a small and large version of its popular electronic scale. The anticipated unit sales for the scales by sales region are as follows: $$ \begin{array}{lcc} & \text { Small Scale } & \text { Large Scale } \\ \hline \text { North Region unit sales } & 25,000 & 34,000 \\ \text { South Region unit sales } & \underline{27,000} & \underline{32,500} \\\ \text { Total } & 52,000 & 66,500 \end{array} $$ The finished goods inventory estimated for May 1, 2011, for the small and large scale models is 1,500 and 2,300 units, respectively. The desired finished goods inventory for May 31, 2011, for the small and large scale models is 1,100 and 2,500 units, respectively. Prepare a production budget for the small and large scales for the month ended May 31, 2011.

Harmony Audio Company manufactures two models of speakers, DL and XL. Based on the following production and sales data for September 2009, prepare (a) a sales budget and (b) a production budget. DL XL Estimated inventory (units), September 1 . . . . . . 240 60 Desired inventory (units), September 30 . . . . . . . 275 52 Expected sales volume (units): East Region . . . . . . . . . . . . . . . . . . . . . . . . . . 3,700 3,250 West Region . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250 3,700 Unit sales price . . . . . . . . . . . . . . . . . . . . . . . . . . \(125 \)195

Roberts and Chou, CPAs, offer three types of services to clients: auditing, tax, and small business accounting. Based on experience and projected growth, the following billable hours have been estimated for the year ending December 31, 2010: Billable Hours Audit Department: Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,400 Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800 Tax Department: Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,800 Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,100 Small Business Accounting Department: Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 630 The average billing rate for staff is \(130 per hour, and the average billing rate for partners is \)250 per hour. Prepare a professional fees earned budget for Roberts and Chou, CPAs, for the year ending December 31, 2010, using the following column headings and showing the estimated professional fees by type of service rendered: Billable Hours Hourly Rate Total Revenue

Coca-Cola Enterprises is the largest bottler of Coca-Cola in North America. The company purchases Coke \({ }^{\otimes}\) and Sprite \({ }^{-}\)concentrate from The Coca-Cola Company, dilutes and mixes the concentrate with carbonated water, and then fills the blended beverage into cans or plastic two-liter bottles. Assume that the estimated production for Coke and Sprite two-liter bottles at the Dallas, Texas, bottling plant are as follows for the month of March: \(\begin{array}{ll}\text { Coke } & 214,000 \text { two-liter bottles } \\\ \text { Sprite } & 163,000 \text { two-liter bottles }\end{array}\) In addition, assume that the concentrate costs \(\$ 80\) per pound for both Coke and Sprite and is used at a rate of \(0.2\) pound per 100 liters of carbonated water in blending Coke and \(0.15\) pound per 100 liters of carbonated water in blending Sprite. Assume that twoliter bottles cost \(\$ 0.08\) per bottle and carbonated water costs \(\$ 0.06\) per liter. Prepare a direct materials purchases budget for March 2010, assuming no changes between beginning and ending inventories for all three materials.

Anticipated sales for Sure Grip Tire Company were 42,000 passenger car tires and 15,000 truck tires. There were no anticipated beginning or ending finished goods inventories for either product. Rubber and steel belts are used in producing passenger car and truck tires according to the following table: \begin{tabular}{lrl} & Passenger Car & Truck \\ \hline Rubber & \(30 \mathrm{lbs}\). per unit & \(70 \mathrm{lbs}\). per unit \\ Steel belts & \(4 \mathrm{lbs}\). per unit & \(10 \mathrm{lbs}\). per unit \end{tabular} The purchase prices of rubber and steel are \(\$ 3.20\) and \(\$ 4.20\) per pound, respectively. The desired ending inventories of rubber and steel belts are 40,000 and 10,000 pounds, respectively. The estimated beginning inventories for rubber and steel belts are 46,000 and 8,000 pounds, respectively. Prepare a direct materials purchases budget for Sure Grip Tire Company for the year ended December 31, \(2010 .\)

Sleep-EZ Suites, Inc., operates a downtown hotel property that has 250 rooms. On average, \(72 \%\) of Sleep-EZ Suites' rooms are occupied on weekdays, and \(48 \%\) are occupied during the weekend. The manager has asked you to develop a direct labor budget for the housekeeping and restaurant staff for weekdays and weekends. You have determined that the housekeeping staff requires 40 minutes to clean each occupied room. The housekeeping staff is paid \(\$ 10\) per hour. The restaurant has five full-time staff (eighthour day) on duty, regardless of occupancy. However, for every 60 occupied rooms, an additional person is brought in to work in the restaurant for the eight-hour day. The restaurant staff is paid \(\$ 8\) per hour. Determine the estimated housekeeping, restaurant, and total direct labor cost for an average weekday and weekend day. Format the budget in two columns, labeled as weekday and weekend day.

Levi Strauss \& Co. manufactures slacks and jeans under a variety of brand names, such as Dockers \({ }^{8}\) and 501 Jeans \(^{\circledR}\). Slacks and jeans are assembled by a variety of different sewing operations. Assume that the sales budget for Dockers and 501 Jeans shows estimated sales of 24,700 and 53,600 pairs, respectively, for January 2010. The finished goods inventory is assumed as follows: \begin{tabular}{lcc} & Dockers & \(\mathbf{5 0 1}\) Jeans \\ \hline January 1 estimated inventory & 1,110 & 1,490 \\ January 31 desired inventory & 410 & 1,890 \end{tabular} Assume the following direct labor data per 10 pairs of Dockers and 501 Jeans for four different sewing operations: \begin{tabular}{lll} & \multicolumn{2}{c}{ Direct Labor per \(\mathbf{1 0}\) Pairs } \\ \cline { 2 - 3 } & Dockers & \(\mathbf{5 0 1}\) Jeans \\ \hline Inseam & 18 minutes & 12 minutes \\ Outerseam & 22 & 15 \\ Pockets & 7 & 9 \\ Zipper & \(\underline{10}\) & \(\frac{6}{42}\) minutes \end{tabular} a. Prepare a production budget for January. Prepare the budget in two columns: Dockers \(^{2}\) and 501 Jeans \(^{\otimes}\). b. Prepare the January direct labor cost budget for the four sewing operations, assuming a \(\$ 12.50\) wage per hour for the inseam and outerseam sewing operations and a \(\$ 16\) wage per hour for the pocket and zipper sewing operations. Prepare the direct labor cost budget in four columns: inseam, outerseam, pockets, and zipper.

Venus Candy Company budgeted the following costs for anticipated production for September 2010: \(\begin{array}{lrlr}\text { Advertising expenses } & \$ 275,000 & \text { Production supervisor wages } & \$ 132,000 \\ \text { Manufacturing supplies } & 15,000 & \text { Production control salaries } & 35,000 \\ \text { Power and light } & 44,000 & \text { Executive officer salaries } & 280,000 \\\ \text { Sales commissions } & 300,000 & \text { Materials management salaries } & 38,000 \\ \text { Factory insurance } & 26,000 & \text { Factory depreciation } & 21,000\end{array}\) Prepare a factory overhead cost budget, separating variable and fixed costs. Assume that factory insurance and depreciation are the only factory fixed costs.

The controller of Swiss Ceramics Inc. wishes to prepare a cost of goods sold budget for June. The controller assembled the following information for constructing the cost of goods sold budget: \begin{tabular}{lrrrr} Direct materials: & Enamel & Paint & Porcelain & Total \\ \hline Total direct materials purchases budgeted for June & \(\$ 33,840\) & \(\$ 5,340\) & \(\$ 118,980\) & \(\$ 158,160\) \\ Estimated inventory, June 1, 2010 & 1,150 & 2,800 & 4,330 & 8,280 \\ Desired inventory, June 30, 2010 & 2,400 & 2,050 & 6,000 & 10,450 \end{tabular} Use the preceding information to prepare a cost of goods sold budget for June 2010 .

Pet Joy Wholesale Inc., a pet wholesale supplier, was organized on May 1,2010 . Projected sales for each of the first three months of operations are as follows: \(\begin{array}{lr}\text { May } & \$ 360,000 \\ \text { June } & 450,000 \\\ \text { July } & 600,000\end{array}\) The company expects to sell \(10 \%\) of its merchandise for cash. Of sales on account, \(50 \%\) are expected to be collected in the month of the sale, \(35 \%\) in the month following the sale, and the remainder in the second month following the sale. Prepare a schedule indicating cash collections from sales for May, June, and July.

Office Mate Supplies Inc. has "cash and carry" customers and credit customers. Office Mate estimates that \(25 \%\) of monthly sales are to cash customers, while the remaining sales are to credit customers. Of the credit customers, \(20 \%\) pay their accounts in the month of sale, while the remaining \(80 \%\) pay their accounts in the month following the month of sale. Projected sales for the first three months of 2010 are as follows: \(\begin{array}{lr}\text { August } & \$ 250,000 \\ \text { September } & 290,000 \\ \text { October } & 270,000 \\ & \\ \text { nce on July 31, 2010, was } \$ 200,000 .\end{array}\) The Accounts Receivable balance on July 31, 2010, was \(\$ 200,000\). Prepare a schedule of cash collections from sales for August, September, and October.

Excel Learning Systems Inc. was organized on May 31, 2010. Projected selling and administrative expenses for each of the first three months of operations are as follows: \(\begin{array}{lr}\text { June } & \$ 117,400 \\ \text { July } & 110,500 \\\ \text { August } & 100,400\end{array}\) Depreciation, insurance, and property taxes represent \(\$ 25,000\) of the estimated monthly expenses. The annual insurance premium was paid on May 31 , and property taxes for the year will be paid in December. Sixty percent of the remainder of the expenses are expected to be paid in the month in which they are incurred, with the balance to be paid in the following month. Prepare a schedule indicating cash payments for selling and administrative expenses for June, July, and August.

Rejuvenation Physical Therapy Inc. is planning its cash payments for operations for the third quarter (July-September), 2011. The Accrued Expenses Payable balance on July 1 is \(\$ 24,000\). The budgeted expenses for the next three months are as follows: \begin{tabular}{lrrr} & \multicolumn{1}{rr}{ July } & August & September \\ \hline Salaries & \(\$ 58,200\) & \(\$ 63,500\) & \(\$ 74,500\) \\ Utilities & 5,300 & 5,600 & 7,100 \\ Other operating expenses & 48,500 & 52,700 & 58,200 \\ Total & \(\$ 112,000\) & \(\$ 121,800\) & \(\$ 139,800\) \end{tabular} Other operating expenses include \(\$ 10,500\) of monthly depreciation expense and \(\$ 600\) of monthly insurance expense that was prepaid for the year on March 1 of the current year. Of the remaining expenses, \(70 \%\) are paid in the month in which they are incurred, with the remainder paid in the following month. The Accrued Expenses Payable balance on July 1 relates to the expenses incurred in June. Prepare a schedule of cash payments for operations for July, August, and September.

On January 1, 2010, the controller of Gardeneer Tools Inc. is planning capital expenditures for the years 2010-2013. The following interviews helped the controller collect the necessary information for the capital expenditures budget: Director of Facilities: A construction contract was signed in late 2009 for the construction of a new factory building at a contract cost of \(\$ 13,000,000\). The construction is scheduled to begin in 2010 and be completed in \(2011 .\) Vice President of Manufacturing: Once the new factory building is finished, we plan to purchase \(\$ 1.7\) million in equipment in late 2011. I expect that an additional \(\$ 200,000\) will be needed early in the following year (2012) to test and install the equipment before we can begin production. If sales continue to grow, I expect we'll need to invest another million in equipment in \(2013 .\) Vice President of Marketing: We have really been growing lately. I wouldn't be surprised if we need to expand the size of our new factory building in 2013 by at least \(40 \%\). Fortunately, we expect inflation to have minimal impact on construction costs over the next four years. Additionally, I would expect the cost of the expansion to be proportional to the size of the expansion. Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn't make sense to do this until after the new factory building is completed and producing product. During 2012, once the factory is up and running, we should equip the whole facility with wireless technology. I think it would cost us \(\$ 1,600,000\) today to install the technology. However, prices have been dropping by \(25 \%\) per year, so it should be less expensive at a later date. President: I am excited about our long-term prospects. My only short-term concem is financing the \(\$ 7,000,000\) of construction costs on the portion of the new factory building scheduled to be completed in \(2010 .\) Use the interview information above to prepare a capital expenditures budget for Gardeneer Tools Inc. for the years 2010-2013.