Master Budgets

Preparing an operating budget—direct materials, direct labor, and manufacturing overhead budgets 

Grady, Inc. manufactures model airplane kits and projects production at 650, 500, 450, and 600 kits for the next four quarters. Direct materials are 4 ounces of plastic per kit and the plastic costs \(1 per ounce. Indirect materials are considered insignificant and are not included in the budgeting process. Beginning Raw Materials Inventory is 850 ounces, and the company desires to end each quarter with 10% of the materials needed for the next quarter’s production. Grady desires a balance of 200 ounces in Raw Materials Inventory at the end of the fourth quarter. Each kit requires 0.10 hours of direct labor at an average cost of \)10 per hour. Manufacturing overhead is allocated using direct labor hours as the allocation base. Variable overhead is \(0.20 per kit, and fixed overhead is \)165 per quarter. Prepare Grady’s direct materials budget, direct labor budget, and manufacturing overhead budget for the year. Round the direct labor hours needed for production, budgeted overhead costs, and predetermined overhead allocation rate to two decimal places. Round other amounts to the nearest whole number.

Preparing an operating budget—cost of goods sold budget 

Refer to the budgets prepared in Exercise E22-24. Determine the cost per kit to manufacture the model airplane kits. Grady projects sales of 100, 150, 100, and 200 kits for the next four quarters. Prepare a cost of goods sold budget for the year. Grady has no kits in beginning inventory. Round amounts to two decimal places.

Preparing a financial budget—schedule of cash receipts, sensitivity analysis

Marcel Company projects the following sales for the first three months of the year: \(11,200 in January; \)12,300 in February; and $11,100 in March. The company expects 60% of the sales to be cash and the remainder on account. Sales on account are collected 50% in the month of the sale and 50% in the following month. The Accounts Receivable account has a zero balance on January 1. Round to the nearest dollar.

 Requirements 

1. Prepare a schedule of cash receipts for Marcel for January, February, and March. What is the balance in Accounts Receivable on March 31? 

2. Prepare a revised schedule of cash receipts if receipts from sales on account are 60% in the month of the sale, 30% in the month following the sale, and 10% in the second month following the sale. What is the balance in Accounts Receivable on March 31?

Preparing a financial budget—schedule of cash payments 

Marcel Company has the following projected costs for manufacturing and selling and administrative expenses:

                                                                      January           February         March Direct materials purchases                      \( 3,100               \) 3,500         $ 4,800 Direct labor costs                                      3,300                  3,500            3,600 Depreciation on plant                        550                     550               550 Utilities for plant                                                     650                      650                650 Property taxes on plant                            200                      200                200 Depreciation on office                              550                      550                 550 Utilities for office                                       250                      250                 250 Property taxes on office                           170                       170                170 Office salaries                                           3,500                  3,500             3,500  

All costs are paid in month incurred except: direct materials, which are paid in the month following the purchase; utilities, which are paid in the month after incurred; and property taxes, which are prepaid for the year on January 2. The Accounts Payable and Utilities Payable accounts have a zero balance on January 1. Prepare a schedule of cash payments for Marcel for January, February, and March. Determine the balances in Prepaid Property Taxes, Accounts Payable, and Utilities Payable as of March 31.

 Preparing the financial budget—cash budget 

Use the original schedule of cash receipts completed in Exercise E22-26, Requirement 1, and the schedule of cash payments completed in Exercise E22-27 to complete a cash budget for Marcel Company for January, February, and March. 

Additional information: Marcel’s beginning cash balance is \(5,000, and Marcel desires to maintain a minimum ending cash balance of \)5,000. Marcel borrows cash as needed at the beginning of each month in increments of \(1,000 and repays the amounts borrowed in increments of \)1,000 at the beginning of months when excess cash is available. The interest rate on amounts borrowed is 8% per year. Interest is paid at the beginning of the month on the outstanding balance from the previous month.

Preparing the financial budget—cash budget Hoppy Company requires a minimum cash balance of $3,500. When the company expects a cash deficiency, it borrows the exact amount required on the first of the month. Expected excess cash is used to repay any amounts owed. Interest owed from the previous month’s principal balance is paid on the first of the month at 14% per year. The company has already completed the budgeting process for the first quarter for cash receipts and cash payments for all expenses except interest. Hoppy does not have any outstanding debt on January 1. Complete the cash budget for the first quarter for Hoppy Company. Round interest expense to the nearest whole dollar.

Preparing the financial budget—budgeted balance sheet 

Barker, Inc. has the following balance sheet at December 31, 2018:

Barker projects the following transactions for 2019: 

Sales on account, \(20,000 

Cash receipts from customers from sales on account, \)17,600 

Purchase of raw materials on account, \(7,000 

Payments on account, \)3,500 

Total cost of completed products, \(16,600, which includes the following:

 Raw materials used, \)7,100 

Direct labor costs incurred and paid, \(3,900

 Manufacturing overhead costs incurred and paid, \)4,800 

Depreciation on manufacturing equipment, \(800

 Cost of goods sold, \)14,800 

Selling and administrative costs incurred and paid, \(500 

Purchase of equipment, paid in 2019, \)2,000 

Prepare a budgeted balance sheet for Barker, Inc. for December 31, 2019. (Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine the ending balance of each account.)

Preparing an operating budget—inventory, purchases, and cost of goods sold budget 

Slate, Inc. sells tire rims. Its sales budget for the nine months ended September 30, 2018, follows: 

                                                                 Quarter Ended             Nine-Month Total     

                                         March 31             June 30          September 30               Cash sales, 20%         \( 28,000           \) 38,000          \( 33,000    \) 99,000

Credit sales, 80%       112,000             152,000               132,000          396,000 Total sales                  \( 140,000            \) 190,000            \( 165,000       \) 495,000 

In the past, cost of goods sold has been 40% of total sales. The director of marketing and the financial vice president agree that each quarter’s ending inventory should not be below \(5,000 plus 10% of cost of goods sold for the following quarter. The marketing director expects sales of \)240,000 during the fourth quarter. The January 1 inventory was $38,000. Prepare an inventory, purchases, and cost of goods sold budget for each of the first three quarters of the year. Compute cost of goods sold for the entire nine-month period.

Preparing an operating budget—selling and administrative expense budget 

Consider the sales budget presented in Exercise E22-31. Slate’s selling and administrative expenses include the following: 

                        Rent,    \(2,000 per month                                                                        

                        Salaries, \)4,000 per month

                Commissions, 5% of sales 

                  Depreciation, $1,000 per month

 Miscellaneous expenses, 2% of sales 

Prepare a selling and administrative expense budget for each of the three quarters of 2018 and totals for the nine-month period.

Preparing a financial budget—schedule of cash receipts and schedule of cash payments 

Agua Cool is a distributor of bottled water. For each of the items, compute the amount of cash receipts or payments Agua Cool will budget for September. The solution to one item may depend on the answer to an earlier item. 

a. Management expects to sell equipment that cost \(14,000 at a gain of \)7,000. Accumulated depreciation on this equipment is \(5,000. 

b. Management expects to sell 7,100 cases of water in August and 9,000 cases in September. Each case sells for \)14. Cash sales average 20% of total sales, and credit sales make up the rest. Three-fourths of credit sales are collected in the month of the sale, with the balance collected the following month. 

c. The company pays rent and property taxes of $4,500 each month. Commissions and other selling expenses average 30% of sales. Agua Cool pays one-half of commissions and other selling expenses in the month incurred, with the balance paid the following month.

Preparing a financial budget—cash budget, sensitivity analysis 

Leichter Auto Parts, a family-owned auto parts store, began January with \(10,500 cash. Management forecasts that collections from credit customers will be \)11,000 in January and \(15,200 in February. The store is scheduled to receive \)8,500 cash on a business note receivable in January. Projected cash payments include inventory purchases (\(15,600 in January and \)14,800 in February) and selling and administrative expenses (\(2,900 each month). 

Leichter Auto Part's bank requires a \)10,000 minimum balance in the store’s checking account. At the end of any month when the account balance falls below \(10,000, the bank automatically extends credit to the store in multiples of \)1,000. Leichter Auto Parts borrows as little as possible and pays back loans in quarterly installments of \(2,000, plus 4% APR interest on the entire unpaid principal. The first payment occurs three months after the loan. 

Requirements 

1. Prepare Leichter Auto Part's cash budget for January and February.

2. How much cash will Leichter Auto Parts borrow in February if collections from customers that month total \)14,200 instead of $15,200?

Preparing a financial budget—cash budget 

You recently began a job as an accounting intern at Reilly Golf Park. Your first task was to help prepare the cash budget for April and May. Unfortunately, the computer with the budget file crashed, and you did not have a backup or even a paper copy. You ran a program to salvage bits of data from the budget file. After entering the following data in the budget, you may have just enough information to reconstruct the budget.

Reilly Golf Park eliminates any cash deficiency by borrowing the exact amount needed from First Street Bank, where the current interest rate is 6% per year. Reilly Golf Park first pays interest on its outstanding debt at the end of each month. The company then repays all borrowed amounts at the end of the month with any excess cash above the minimum required but after paying monthly interest expenses. Reilly does not have any outstanding debt on April 1. 

Complete the cash budget. Round interest expense to the nearest whole dollar.

Preparing a financial budget—budgeted balance sheet 

Use the following June actual ending balances and July 31, 2018, budgeted amounts for Omas to prepare a budgeted balance sheet for July 31, 2018. 

a. June 30 Merchandise Inventory balance, \(17,770 

b. July purchase of Merchandise Inventory, \)4,400, paid in cash 

c. July payments of Accounts Payable, \(8,400 

d. June 30 Accounts Payable balance, \)10,700 

e. June 30 Furniture and Fixtures balance, \(34,100; Accumulated Depreciation balance, \)29,880 

f. June 30 total stockholders’ equity balance, \(28,020 

g. July Depreciation Expense, \)500 

h. Cost of Goods Sold, 60% of sales 

i. Other July expenses, including income tax, \(2,000, paid in cash 

j. June 30 Cash balance, \)11,600 

k. July budgeted sales, all on account, \(12,600 

l. June 30 Accounts Receivable balance, \)5,130 

m. July cash receipts from collections on account, $14,700 

(Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine the ending balance of each account.)

Using sensitivity analysis Rucker Company prepared the following budgeted income statement for 2019:

Requirements 

1. Prepare a budgeted income statement with columns for 700 units, 1,300 units, and 1,700 units sold. 

2. How might managers use this type of budgeted income statement? 

3. How might spreadsheet software such as Excel assist in this type of analysis?

Question: Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget 

Puckett Company has provided the following budget information for the first quarter of 2018: 

Total sales                                                        \( 216,000 

Budgeted purchases of direct materials             40,600 

Budgeted direct labor cost                                   36,800                                                                                   Budgeted manufacturing overhead costs: 

Variable manufacturing overhead                          1,025 

Depreciation                                                            1,000 

Insurance and property taxes                                6,650

 Budgeted selling and administrative expenses: 

Salaries expense                                                    14,000 

Rent expense                                                            2,500 

Insurance expense                                                   2,000 

Depreciation expense                                                 350  

Supplies expense                                                     4,320

Additional data related to the first quarter of 2018 for Puckett Company: 

a. Capital expenditures include \)41,000 for new manufacturing equipment to be purchased and paid in the first quarter. 

b. Cash receipts are 75% of sales in the quarter of the sale and 25% in the quarter following the sale. 

c. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter. 

d. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. 

e. Income tax expense for the first quarter is projected at \(49,000 and is paid in the quarter incurred. 

f. Puckett Company expects to have adequate cash funds and does not anticipate borrowing in the first quarter. 

g. The December 31, 2017, balance in Cash is \)25,000, in Accounts Receivable is \(21,600, and in Accounts Payable is \)16,500. 

Requirements

 1. Prepare Puckett Company’s schedule of cash receipts from customers and schedule of cash payments for the first quarter of 2018. 

2. Prepare Puckett Company’s cash budget for the first quarter of 2018.

Question: Preparing an operating budget—sales budget; inventory, purchases and COGS budget; and S&A expense budget Burton Office Supply’s March 31, 2018, balance sheet follows:

The budget committee of Burton Office Supply has assembled the following data: a. Sales in April are expected to be \(200,000. Burton forecasts that monthly sales will increase 2% over April sales in May. June’s sales will increase by 4% over April sales. July sales will increase 20% over April sales. b. Burton maintains inventory of \)15,000 plus 25% of the cost of goods sold budgeted for the following month. Cost of goods sold equal 50% of sales revenue. c. Monthly salaries amount to \(7,000. Sales commissions equal 5% of sales for that month. d. Other monthly expenses are as follows: • Rent: \)2,000 • Depreciation: \(200 • Insurance: \)100 • Income tax: $2,200 

Requirements 

1. Prepare Burton’s sales budget for April and May 2018. Round all calculations to the nearest dollar. 

2. Prepare Burton’s inventory, purchases, and cost of goods sold budget for April and May. 

3. Prepare Burton’s selling and administrative expense budget for April and May.

Question: Completing a comprehensive budgeting problem—manufacturing company 

The Gerard Tire Company manufactures racing tires for bicycles. Gerard sells tires for \(90 each. Gerard is planning for the next year by developing a master budget by quarters. Gerard’s balance sheet for December 31, 2018, follows:

Other data for Gerard Tire Company:

 a. Budgeted sales are 1,500 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. 

b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)33 each. 

c. Desired ending Finished Goods Inventory is 30% of the next quarter’s sales; first quarter sales for 2020 are expected to be 2,300 tires. FIFO inventory costing method is used. 

d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds of rubber compound used to manufature the tires. 

e. Direct materials requirements are 2 pounds of a rubber compound per tire. The cost of the compound is \(8.50 per pound.

f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes. 

g. Each tire requires 0.4 hours of direct labor; direct labor costs average \)12 per hour. 

h. Variable manufacturing overhead is \(4 per tire. 

i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(16,770 per quarter for other costs, such as utilities, insurance, and property taxes. 

j. Fixed selling and administrative expenses include \)12,500 per quarter for salaries; \(3,000 per quarter for rent; \)450 per quarter for insurance; and \(2,000 per quarter for depreciation. 

k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)15,000 for new manufacturing equipment, to be purchased and paid in the first quarter. 

m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes. 

n. Direct materials purchases are paid 60% in the quarter purchased and 40% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. 

p. Income tax expense is projected at \(1,500 per quarter and is paid in the quarter incurred. 

q. Gerard desires to maintain a minimum cash balance of \)55,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter. 

Requirements 

1. Prepare Gerard’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar. 

2. Prepare Gerard’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

Question: Preparing an operating budget—sales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets 

The Langley Batting Company manufactures wood baseball bats. Langley’s two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Langley sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(40; the adult bat sells for \)65. Langley’s highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Langley’s balance sheet for December 31, 2018, follows:

Other data for Langley Batting Company for the first quarter of 2019: 

a. Budgeted sales are 1,200 youth bats and 2,600 adult bats. 

b. Finished Goods Inventory on December 31, 2018, consists of 300 youth bats at \(14 each and 950 adult bats at \)18 each. 

c. Desired ending Finished Goods Inventory is 350 youth bats and 300 adult bats; FIFO inventory costing method is used. 

d. Direct materials requirements are 48 ounces of wood per youth bat and 56 ounces of wood per adult bat. The cost of wood is \(0.25 per ounce.

e. Raw Materials Inventory of December 31, 2018, consists of 24,000 ounces of wood at \)0.25 per ounce. 

f. Desired ending Raw Materials Inventory is 24,000 ounces (indirect materials are insignificant and not considered for budgeting purposes). 

g. Each bat requires 0.7 hours of direct labor; direct labor costs average \(18 per hour. h. Variable manufacturing overhead is \)0.30 per bat. 

i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)20,140 per quarter for other costs, such as insurance and property taxes. 

j. Fixed selling and administrative expenses include \(9,000 per quarter for salaries; \)2,500 per quarter for rent; \(1,000 per quarter for insurance; and \)200 per quarter for depreciation. 

k. Variable selling and administrative expenses include supplies at 2% of sales.

 Requirements 

1. Prepare Langley’s sales budget for the first quarter of 2019. 

2. Prepare Langley’s production budget for the first quarter of 2019.

 3. Prepare Langley’s direct materials budget, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours. 

4. Prepare Langley’s cost of goods sold budget for the first quarter of 2019. 

5. Prepare Langley’s selling and administrative expense budget for the first quarter of 2019.

Question: Preparing a financial budget—schedule of cash receipts, schedule cash payments, cash budget 

Baxter Company’s budget committee provides the following information: December 31, 2017, account balances: 

1. Prepare the schedule of cash receipts from customers for January and February 2018. Assume cash receipts are 80% in the month of the sale and 20% in the month following the sale. 

2. Prepare the schedule of cash payments for purchases for January and February 2018. Assume purchases are paid 60% in the month of purchase and 40% in the month following the purchase. 

3. Prepare the schedule of cash payments for selling and administrative expenses for January and February 2018. Assume 40% of the accrual for Salaries and Commissions Payable is for commissions and 60% is for salaries. The December 31 balance will be paid in January. Salaries and commissions are paid 30% in the month incurred and 70% in the following month. Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.

 4. Prepare the cash budget for January and February 2018. Assume no financing took place.

Preparing a financial budget—budgeted income statement and balance sheet Ball Company has the following post-closing trial balance on December 31, 2018:

The company’s accounting department has gathered the following budgeting information for the first quarter of 2019: 

Budgeted total sales, all on account $ 121,800 Budgeted purchases of merchandise inventory, all on account 60,400 Budgeted cost of goods sold 60,900 Budgeted selling and administrative expenses: 

Commissions expense 6,090 Salaries expense 7,000 Rent expense 4,100 Depreciation expense 600 Insurance expense 400 Budgeted cash receipts from customers 125,840 Budgeted cash payments for merchandise inventory 67,775 Budgeted cash payments for salaries and commissions 14,822 Budgeted income tax expense 5,400 Additional information: Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount. 

Requirements 

1. Prepare a budgeted income statement for the quarter ended March 31, 2019. 
2. 2. Prepare a budgeted balance sheet as of March 31, 2019.

Completing a comprehensive budgeting problem—merchandising company Alliance Printing Supply of Baltimore has applied for a loan. Its bank has requested a budgeted income statement for April 2018 and a balance sheet at April 30, 2018. The March 31, 2018, balance sheet follows:

As Alliance Printing Supply’s controller, you have assembled the following additional information: 

a. April dividends of \(7,000 were declared and paid. 

b. April capital expenditures of \)16,300 budgeted for cash purchase of equipment. 

c. April depreciation expense, \(1,000. 

d. Cost of goods sold, 40% of sales. 

e. Desired ending inventory for April is \)22,400. 

f. April selling and administrative expenses include salaries of \(37,000, 30% of which will be paid in cash and the remainder paid next month. 

g. Additional April selling and administrative expenses also include miscellaneous expenses of 10% of sales, all paid in April. 

h. April budgeted sales, \)89,000, 80% collected in April and 20% in May. 

i. April cash payments of March 31 liabilities incurred for March purchases of inventory, \(8,600. 

j. April purchases of inventory, \)8,600 for cash and $37,400 on account. Half the credit purchases will be paid in April and half in May.

Requirements 

1. Prepare the sales budget for April. 

2. Prepare the inventory, purchases, and cost of goods sold budget for April. 

3. Prepare the selling and administrative expense budget for April. 

4. Prepare the schedule of cash receipts from customers for April. 

5. Prepare the schedule of cash payments for selling and administrative expenses for April. 

6. Prepare the cash budget for April. Assume the company does not use short-term financing to maintain a minimum cash balance. 

7. Prepare the budgeted income statement for April. 

8. Prepare the budgeted balance sheet at April 30, 2018.

Using sensitivity analysis Caputo Company prepared the following budgeted income statement for the first quarter of 2018:

Caputo Company is considering two options. Option 1 is to increase advertising by \(1,100 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%. 

Requirements 

1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)10,000. Round all calculations to the nearest dollar. 

2. Which option should Caputo choose? Explain your reasoning.

Preparing an operating budget—sales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets The Irwin Batting Company manufactures wood baseball bats. Irwin’s two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Irwin sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(35; the adult bat sells for \)50. Irwin’s highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Irwin’s balance sheet for December 31, 2018, follows:

Other data for Irwin Batting Company for the first quarter of 2019: 

a. Budgeted sales are 1,400 youth bats and 3,300 adult bats. 

b. Finished Goods Inventory on December 31, 2018, consists of 700 youth bats at \(15 each and 550 adult bats at \)10 each. 

c. Desired ending Finished Goods Inventory is 220 youth bats and 300 adult bats; FIFO inventory costing method is used. 

d. Direct materials requirements are 40 ounces of wood for youth bats and 70 ounces of wood for adult bats. The cost of wood is \(0.10 per ounce. 

e. Raw Materials Inventory on December 31, 2018, consists of 90,000 ounces of wood at \)0.10 per ounce. 

f. Desired ending Raw Materials Inventory is 90,000 ounces (indirect materials are insignificant and not considered for budgeting purposes). 

g. Each bat requires 0.4 hours of direct labor; direct labor costs average \(26 per hour. 

h. Variable manufacturing overhead is \)0.30 per bat. 

i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)14,977 per quarter for other costs, such as insurance and property taxes.

j. Fixed selling and administrative expenses include \(13,000 per quarter for salaries; \)3,500 per quarter for rent; \(1,400 per quarter for insurance; and \)450 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 1% of sales. 

Requirements 

1. Prepare Irwin’s sales budget for the first quarter of 2019. 

2. Prepare Irwin’s production budget for the first quarter of 2019. 

3. Prepare Irwin’s direct materials, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours. 

4. Prepare Irwin’s cost of goods sold budget for the first quarter of 2019. 

5. Prepare Irwin’s selling and administrative expense budget for the first quarter of 2019.

Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget 

Haney Company has provided the following budget information for the first quarter of 2018: 

Total sales \(214,000 Budgeted purchases of direct materials 40,300 Budgeted direct labor cost 37,200 Budgeted manufacturing overhead costs: 

Variable manufacturing overhead 1,150 Depreciation 1,200 Insurance and property taxes 6,600 Budgeted selling and administrative expenses: Salaries expense 13,000 Rent expense 2,500 Insurance expense 1,100 Depreciation expense 350 Supplies expense 4,280 Additional data related to the first quarter of 2018 for Haney Company:

 a. Capital expenditures include \)38,000 for new manufacturing equipment, to be purchased and paid in the first quarter. 

b. Cash receipts are 65% of sales in the quarter of the sale and 35% in the quarter following the sale. 

c. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter. 

d. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. 

e. Income tax expense for the first quarter is projected at \(44,000 and is paid in the quarter incurred. 

f. Haney Company expects to have adequate cash funds and does not anticipate borrowing in the first quarter. 

g. The December 31, 2017, balance in Cash is \)45,000, in Accounts Receivable is \(23,200, and in Accounts Payable is \)9,000.

Requirements 

1. Prepare Haney Company’s schedule of cash receipts from customers and schedule of cash payments for the first quarter of 2018. 

2. Prepare Haney Company’s cash budget for the first quarter of 2018.

Preparing a financial budget—budgeted income statement and balance sheet 

Ballentine Company has the following post-closing trial balance on December 31, 2018:

The company’s accounting department has gathered the following budgeting information for the first quarter of 2019: 

Budgeted total sales, all on account $ 305,500 Budgeted direct materials to be purchased and used 40,000 Budgeted direct labor cost 12,500 Budgeted manufacturing overhead costs: Variable manufacturing overhead 2,600 Depreciation 800 Insurance and property taxes 1,100 Budgeted cost of goods sold 71,300 Budgeted selling and administrative expenses: Salaries expense7,000 Rent expense 3,500 Insurance expense 2,000 Depreciation expense 350 Supplies expense 3,055 Budgeted cash receipts from customers 263,500 Budgeted income tax expense 44,000 Budgeted purchase and payment for capital expenditures

(additional equipment) 34,000

Additional information: 

a. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter. 

b. Direct labor, ma following budgeted income statement manufacturing overhead, selling and administrative costs, and income tax expense are paid in the quarter incurred. 

c. Accounts payable at December 31, 2018 are paid in the first quarter of 2019. Requirements 

1. Prepare Ballentine Company’s budgeted income statement for the first quarter of 2019. 

2. Prepare Ballentine Company’s budgeted balance sheet as of March 31, 2019.

Completing a comprehensive budgeting problem—manufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for \(70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin’s balance sheet for December31, 2018, follows:

Other data for Gavin Tire Company: a. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)36 each.

c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is \(4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average \)20 per hour. h. Variable manufacturing overhead is \(3 per tire. i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include \)8,000 per quarter for salaries; \(4,800 per quarter for rent; \)1,950 per quarter for insurance; and \(2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)25,000 for new manufacturing equipment, to be purchased and paid in the first quarter. m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes. n. Direct materials purchases are paid 50% in the quarter purchased and 50% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. p. Income tax expense is projected at \(3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of \)20,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Requirements 

1. Prepare Gavin’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.

2. Prepare Gavin’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

Preparing an operating budget—sales budget; inventory, purchases and COGS budget; and S&A expense budget Ballard Office Supply’s March 31, 2018, balance sheet follows:

The budget committee of Ballard Office Supply has assembled the following data. 

a. Sales in April are expected to be \(160,000. Ballard forecasts that monthly sales will increase 2% over April sales in May. June’s sales will increase by 4% over April sales. July sales will increase 20% over April sales. 

b. Ballard maintains inventory of \)7,000 plus 25% of the cost of goods sold budgeted for the following month. Cost of goods sold equal 50% of sales revenue. 

c. Monthly salaries amount to \(3,000. Sales commissions equal 5% of sales for that month. 

d. Other monthly expenses are as follows: • Rent: \)3,400 • Depreciation: \(800 • Insurance: \)300 • Income tax: $1,500

Requirements 

1. Prepare Ballard’s sales budget for April and May 2018. Round all calculations to the nearest dollar. 

2. Prepare Ballard’s inventory, purchases, and cost of goods sold budget for April and May. 

3. Prepare Ballard’s selling and administrative expense budget for April and May.

Preparing a financial budget—schedule of cash receipts, schedule of cash payments, cash budget 

Beasley Company’s budget committee provides the following information: 

December 31, 2017, account balances: 

Cash \( 32,000 Accounts Receivable 19,000 Merchandise Inventory 16,000 Accounts Payable 15,000 Salaries and Commissions Payable 2,900 Budgeted amounts for 2018: 

January February Sales, all on account \) 84,000 $ 84,400 Purchases, all on account 41,000 41,600 Commissions Expense 4,200 4,220 Salaries Expense 5,000 5,000 Rent Expense 2,200 2,200 Depreciation Expense 500 500 Insurance Expense 200 200 Income Tax Expense 1,900 1,900 

Requirements 

1. Prepare the schedule of cash receipts from customers for January and February 2018. Assume cash receipts are 80% in the month of the sale and 20% in the month following the sale. 

2. Prepare the schedule of cash payments for purchases for January and February 2018. Assume purchases are paid 70% in the month of purchase and 30% in the month following the purchase. 

3. Prepare the schedule of cash payments for selling and administrative expense for January and February 2018. Assume 25% of the accrual for Salaries and Commissions Payable is for commissions and 75% is for salaries. The December 31 balance will be paid in January. Salaries and commissions are paid 70% in the month incurred and 30% in the following month. Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount. 

4. Prepare the cash budget for January and February. Assume no financing took place.

Preparing a financial budget—budgeted income statement and balance sheet 

Buncomb Company has the following post-closing trial balance on December 31, 2018:

The company’s accounting department has gathered the following budgeting information for the first quarter of 2019: 

Budgeted total sales, all on account $ 121,700 Budgeted purchases of merchandise inventory,

all on account 61,200 Budgeted cost of goods sold 60,850 Budgeted selling and administrative expenses: Commissions expense 6,085 Salaries expense 3,000 Rent expense 4,100 Depreciation expense 900 Insurance expense 300 Budgeted cash receipts from customers 126,450 Budgeted cash payments for merchandise inventory 67,925 Budgeted cash payments for salaries and commissions 14,836 Budgeted income tax expense 4,700 Additional information:

Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount. 

Requirements 

1. Prepare a budgeted income statement for the quarter ended March 31, 2019. 
2. 2. Prepare a budgeted balance sheet as of March 31, 2019.

: Completing a comprehensive budgeting problem—merchandising company

Belton Printing Company of Baltimore has applied for a loan. Its bank has requested a budgeted income statement for the month of April 2018 and a balance sheet at April 30, 2018. The March 31, 2018, balance sheet follows:

As Belton Printing’s controller, you have assembled the following additional information: 

a. April dividends of \(7,000 were declared and paid. 

b. April capital expenditures of \)17,000 budgeted for cash purchase of equipment. 

c. April depreciation expense, \(800. 

d. Cost of goods sold, 55% of sales. 

e. Desired ending inventory for April is \)24,800. 

f. April selling and administrative expenses includes salaries of \(29,000, 20% of which will be paid in cash and the remainder paid next month. 

g. Additional April selling and administrative expenses also include miscellaneous expenses of 10% of sales, all paid in April. 

h. April budgeted sales, \)86,000, 80% collected in April and 20% in May. 

i. April cash payments of March 31 liabilities incurred for March purchases of inventory, \(8,300. 

j. April purchases of inventory, \)22,900 for cash and $37,200 on account. Half the credit purchases will be paid in April and half in May

Requirements 

1. Prepare the sales budget for April. 

2. Prepare the inventory, purchases, and cost of goods sold budget for April. 

3. Prepare the selling and administrative expense budget for April. 

4. Prepare the schedule of cash receipts from customers for April. 

5. Prepare the schedule of cash payments for selling and administrative expenses for April. 

6. Prepare the cash budget for April. Assume the company does not use short-term financing to maintain a minimum cash balance. 

7. Prepare the budgeted income statement for April. 

8. Prepare the budgeted balance sheet at April 30, 2018.

Using sensitivity analysis Holly Company prepared the following budgeted income statement for the first quarter of 2018:

Holly Company is considering two options. Option 1 is to increase advertising by \(700 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 45% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 30% per month rather than 20%. 

Requirements 

1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)8,000. Round all calculations to the nearest dollar. 

2. Which option should Holly choose? Explain your reasoning.

Preparing a financial budget 

This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month). 

Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan. 

Requirements 

1. Prepare Piedmont Computer Company’s cash budget for January and February 2020. 

2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?

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.

Southeast Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so employee turnover is high. 

Assistant Manager/Controller Terry Dunn asked the new bookkeeper to help prepare the hotel’s master budget. The master budget is prepared once a year and is submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel’s performance. These performance evaluations affect hotel managers’ bonuses, and they also affect company decisions on which hotels deserve extra funds for capital improvements. 

When the budget was almost complete, Dunn asked the bookkeeper to increase the amounts budgeted for labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly control capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at the hotel where she worked previously. 

Requirements Put yourself in Dunn’s position. In deciding how to deal with the situation, answer the following questions: 

1. What is the ethical issue? 

2. What are the options? 

3. What are the possible consequences? 

4. What should you do?

Patrick works for McGill’s Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this “on the side” for friends and family, he does not want to charge as much as McGill’s charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill’s has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount. 

Requirements 

1. Why would Patrick’s actions be considered fraudulent? 

2. What can a company do to protect against this kind of business risk?