Master Budgets

 Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, directing, controlling, coordinating and communicating, and benchmarking. 

1. Managers are required to think about future business activities. 

2. Managers use feedback to identify corrective action. 

3. Managers use results to evaluate employees’ performance. 

4. Managers work with managers in other divisions.

Match the budget types to the definitions. 

Budget Types Definitions 

5. Financial a. Includes sales, production, and cost of goods sold budgets 

6. Flexible b. Long-term budgets 

7. Operating c. Includes only one level of sales volume 

8. Operational d. Includes various levels of sales volumes 

9. Static e. Short-term budgets 

10. Strategic f. Includes the budgeted financial statements

11. Kendall Company projects 2019 first quarter sales to be $10,000 and increase by 5% per quarter. Determine the projected sales for 2019 by quarter and in total. Round answers to the nearest dollar. 

12. Friedman Company manufactures and sells bicycles. A popular model is the XC. The company expects to sell 1,500 XCs in 2018 and 1,800 XCs in 2019. At the beginning of 2018, Friedman has 350 XCs in Finished Goods Inventory and desires to have 10% of the next year’s sales available at the end of the year. How many XCs will Friedman need to produce in 2018?

Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2018 and 280 tents in 2019. At the beginning of 2018, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?

Connor Company began operations on January 1 and has projected the following selling and administrative expenses:

Rent Expense                                 $ 1,000 per month, paid as incurred 

Utilities Expense                            500 per month, paid in month after incurred 

Depreciation Expense                  300 per month 

Insurance Expense                       100 per month, 6 months prepaid on January 1 

Determine the cash payments for selling and administrative expenses for the first three months of operations.

Crowley Company projects the following sales:                                                           

                                                                        January        February          March 

Cash sales (25%)                                           \( 5,000           \) 5,500           \( 6,000 

Sales on account (75%)                                 15,000              16,500           18,000 

Total sales                                                     \) 20,000           \( 22,000        \) 24,000 

Crowley collects sales on account in the month after the sale. The Accounts Receivable balance on January 1 is \(13,500, which represents December’s sales on account. Crowley projects the following cash receipts from customers: 

                                                                         January           February        March 

Cash receipts from cash sales                     \) 5,000               \( 5,500        \) 6,000 

Cash receipts from sales on account           13,500                15,000          16,500 

Total cash receipts from customers           \( 18,500             \) 20,500        $ 22,500 

Recalculate cash receipts from customers if total sales remain the same but cash sales are only 20% of the total.

Question: List the four budgeting objectives.

Budgeting benefits List the three key benefits companies get from preparing a budget.

Question: One benefit of budgeting is coordination and communication. Explain what this means.

Budgeting types Consider the following budgets and budget types. 

                                Cash                           Cost of Goods Sold                                            

                                Flexible                      Master 

                                Operational               Sales 

                                Static                         Strategic

Which budget or budget type should be used to meet the following needs? 

a. Upper management is planning for the next five years. 

b. A store manager wants to plan for different levels of sales. 

c. The accountant wants to determine if the company will have sufficient funds to pay expenses. 

d. The CEO wants to make companywide plans for the next year.

How is benchmarking beneficial? 

What is budgetary slack? Why might managers try to build slack into their budgets?

Question: Meeks Company has the following sales for the first quarter of 2019:         

                                                                       January         February           March                      Cash sales                                                     \( 5,000               \) 5,500          \( 5,250 Sales on account                                            15,000                 14,000        14,500 Total sales                                                       \) 20,000            \( 19,500       \) 19,750 Sales on account are collected the month after the sale. The Accounts Receivable balance on January 1 is $12,500, the amount of December’s sales on account. Calculate the cash receipts from customers for the first three months of 2019.

Explain the difference between strategic and operational budgets

Explain the difference between static and flexible budgets.

What is a master budget? 

In a manufacturing company, what are the three types of budgets included in the master budget? Describe each type.

Why is the sales budget considered the cornerstone of the master budget?

What is the formula used to determine the number of units to be produced?

What is the formula used to determine the amount of direct materials to be purchased? 

What are the two types of manufacturing overhead? How do they affect the manufacturing overhead budget calculations?

How is the predetermined overhead allocation rate determined? 

What is the capital expenditures budget?

What are the three sections of the cash budget?

What are the budgeted financial statements? How do they differ from regular financial statements?

How does the master budget for a merchandising company differ from a manufacturing company?

What is the formula used to determine the amount of merchandise inventory to be purchased?

What budgets are included in the financial budget for a merchandising company?

What is sensitivity analysis? Why is it important for managers?

Preparing an operating budget—sales budget Brown Company manufactures luggage sets. Brown sells its luggage sets to department stores. Brown expects to sell 1,700 luggage sets for \(180 each in January and 2,050 luggage sets for \)180 each in February. All sales are cash only. Prepare the sales budget for January and February.

Preparing an operating budget—production budget Bailey Company expects to sell 1,500 units of finished product in January and 1,750 units in February. The company has 180 units on hand on January 1 and desires to have an ending inventory equal to 80% of the next month’s sales. March sales are expected to be 1,820 units. Prepare Bailey’s production budget for January and February.

Preparing an operating budget—direct materials budget 

Bell expects to produce 1,800 units in January and 2,155 units in February. The company budgets 3 pounds per unit of direct materials at a cost of $10 per pound. Indirect materials are insignificant and not considered for budgeting purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 4,950 pounds. Bell desires the ending balance in Raw Materials Inventory to be 20% of the next month’s direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell’s direct materials budget for January and February.

Preparing an operating budget—direct labor budget Baker Company expects to produce 2,050 units in January and 1,994 units in February. Baker budgets five direct labor hours per unit. Direct labor costs average $9 per hour. Prepare Baker’s direct labor budget for January and February.

Preparing an operating budget—manufacturing overhead budget Bennett Company expects to produce 2,030 units in January that will require 8,120 hours of direct labor and 2,210 units in February that will require 8,840 hours of direct labor. Bennett budgets \(10 per unit for variable manufacturing overhead; \)2,100 per month for depre000ciation; and $78,460 per month for other fixed manufacturing overhead costs. Prepare Bennett’s manufacturing overhead budget for January and February, including the predetermined overhead allocation rate using direct labor hours as the allocation base.

Preparing an operating budget—cost of goods sold budget Butler Company expects to sell 1,650 units in January and 1,550 units in February. The company expects to incur the following product costs: 

Direct materials cost per unit                                  \( 85                                                           

Direct labor cost per unit                                             60                                                   

Manufacturing overhead cost per unit                      55

The beginning balance in Finished Goods Inventory is 250 units at \)200 each for a total of $50,000. Butler uses FIFO inventory costing method. Prepare the cost of goods sold budget for Butler for January and February.

Preparing a financial budget—schedule of cash receipts 

Berry expects total sales of \(359,000 in January and \)405,000 in February. Assume that Berry’s sales are collected as follows: 

80% in the month of the sale 

10% in the month after the sale 

6% two months after the sales 

4% never collected 

November sales totaled \(350,000, and December sales were \)325,000. Prepare a schedule of cash receipts from customers for January and February. Round answers to the nearest dollar.

Preparing a financial budget—schedule of cash payments 

Barnes Company budgeted direct materials purchases of \(191,990 in January and \)138,610 in February. Assume Barnes pays for direct materials purchases 60% in the month of purchase and 40% in the month after purchase. The Accounts Payable balance on January 1 is $75,000. Prepare a schedule of cash payments for purchases for January and February. Round to the nearest dollar.

Preparing a financial budget—cash budget 

Booth has \(12,500 in cash on hand on January 1 and has collected the following budget data: 

                                                                                January                    February 

Sales                                                                     \) 529,000                \( 568,000 

Cash receipts from customers                              443,000                  502,200 

Cash payments for direct materials purchases   180,624                  160,284 

Direct labor costs                                                    135,010                  113,348 

Manufacturing overhead costs (includes  

depreciation of \)900 per month)                          55,058                    53,922 

Assume direct labor costs and manufacturing overhead costs are paid in the month incurred. Additionally, assume Booth has cash payments for selling and administrative expenses including salaries of \(40,000 per month plus commissions that are 1% of sales, all paid in the month of sale. The company requires a minimum cash balance of \)20,000. Prepare a cash budget for January and February. Round to the nearest dollar. Will Booth need to borrow cash by the end of February?

Understanding the components of the master budget The following are some of the components included in the master budget of a merchandising company.

a. Budgeted balance sheet

b. Sales budget

c. Capital expenditures budget

d. Budgeted income statement

e. Cash budget

f. Inventory, purchases, and cost of goods sold budget

g. Selling and administrative expense budget

List the items of the master budget in order of preparation.

Preparing an operating budget—sales budget 

Trailers sells its rock-climbing shoes worldwide. Trailers expects to sell 6,500 pairs of shoes for \(185 each in January and 4,000 pairs of shoes for \)220 each in February. All sales are cash only. Prepare the sales budget for January and February.

Question: Brooks Company expects to sell 8,500 units for \(175 each for a total of \)1,487,500 in January and 2,500 units for \(200 each for a total of \)500,000 in February. The company expects cost of goods sold to average 70% of sales revenue, and the company expects to sell 4,700 units in March for \(280 each. Brooks’s target ending inventory is \)20,000 plus 50% of the next month’s cost of goods sold. Prepare Brooks’s inventory, purchases, and cost of goods sold budget for January and February

Preparing a financial budget—schedule of cash receipts

 Victors expects total sales of \(702,000 for January and \)349,000 for February. Assume that Victor's sales are collected as follows:

50% in the month of the sale 

30% in the month after the sale 

16% two months after the sale

4% never collected 

November sales totaled \(388,000, and December sales were \)407,000. Prepare a schedule of cash receipts from customers for January and February. Round answers to the nearest dollar.

Preparing a financial budget—schedule of cash payments 

Jefferson Company has budgeted purchases of merchandise inventory of \(457,500 in January and \)533,250 in February. Assume Jefferson pays for inventory purchases 70% in the month of purchase and 30% in the month after purchase. The Accounts Payable balance on December 31 is $98,275. Prepare a schedule of cash payments for purchases for January and February.

Preparing a financial budget—cash budget 

Wilson Company has \(11,000 in cash on hand on January 1 and has collected the following budget data: 

                                                                           January                      February Sales                                                                \) 1,400,000                  \( 710,000 Cash receipts from customers                            851,420                    871,800 Cash payments for merchandise inventory        561,100                   532,310

Assume Wilson has cash payments for selling and administrative expenses including salaries of \)55,000 plus commissions of 2% of sales, all paid in the month of sale. The company requires a minimum cash balance of $8,500. Prepare a cash budget for January and February. Will Wilson need to borrow cash by the end of February?

Using sensitivity analysis in budgeting 

Refer to the Victors schedule of cash receipts from customers that you prepared in Short Exercise S22-15. Now assume that Victors’s sales are collected as follows: 

40% in the month of the sale

 20% in the month after the sale 

39% two months after the sale 

1% never collected 

Prepare a revised schedule of cash receipts for January and February

Using sensitivity analysis in budgeting 

Refer to the Berry’s schedule of cash receipts from customers that you prepared in Short Exercise S22-9. Now assume that Berry’s sales are collected as follows: 

60% in the month of the sale 

20% in the month after the sale 

18% two months after the sale 

2% never collected

Prepare a revised schedule of cash receipts for January and February.

Using sensitivity analysis in budgeting Riverbed Sporting Goods Store has the following sales budget:

Suppose June sales are expected to be \(81,000 rather than \)65,000. Revise Riverbed’s sales budget.

Describing master budget components 

Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?” Answer Sarah’s question.

Preparing an operating budget—sales budget 

Yarbrough Company manufactures T-shirts printed with tourist destination logos. The following table shows sales prices and projected sales volume for the summer months: 

                                                                                Projected Sales in Units                         T-Shirt Sizes                                                    Sales Price    June   July     August Youth                                                                       $ 7            575     500        525 Adult—regular                                                         17            625      900       825 Adult—oversized                                                     18            400      500       475 Prepare a sales budget for Yarbrough Company for the three months.

Preparing an operating budget—sales and production budgets

 Lugo Company manufactures drinking glasses. One unit is a package of eight glasses, which sells for $30. Lugo projects sales for April will be 2,000 packages, with sales increasing by 250 packages per month for May, June, and July. On April 1, Lugo has 325 packages on hand but desires to maintain an ending inventory of 20% of the next month’s sales. Prepare a sales budget and a production budget for Lugo for April, May, and June.