Chapter 8 - BUSI 1002 PDF

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BUSI 1002...

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87 8 - Budgeting

Multiple Choice Questions 1.

The first step in formulating next year's master budget for a manufacturing company is to project next year's a. cash budget to decide if the company needs to take out a bank loan. b. materials and labour budget to decide on next year's direct material costs and direct labour costs. c. production budget to decide on next year's production schedule. d. sales budget to decide next year's sales volume.

2.

The cash budget must be prepared before you can complete which of the following? a. Production budget b. Budgeted balance sheet c. Raw materials purchases budget d. Schedule of cash disbursements

3.

An entity projected the following sales: Month January February March April

Budgeted Sales $400,000 360,000 440,000 480,000

The entity’s gross profit rate is 40%. Inventory at the end of December totalled $72,000. Desired inventory levels are 30% of the next month’s sales. What is the desired inventory at the end of March? a. $ 52,800 b. $ 57,600 c. $ 86,400 d. $144,000

88 4.

The following information relates to Jamie Inc. for June 20x3: Opening cash balance, June 1, 20x3 Depreciation expense for June Dividends paid in June Cash collections in June Equipment purchased for cash in June Cash operating expenses in June Merchandise paid for in June

$32,000 6,700 11,500 71,000 13,600 29,800 42,300

What is Jamie’s cash balance on June 30, 20x3? a) $800 b) $5,800 c) $10,600 d) $17,300

5.

ABC Company has a cash balance of $9,000 on April 1. The company must maintain a minimum cash balance of $6,000. During April expected cash receipts are $45,000. Expected cash disbursements during the month total $52,000. What amount will the company need to borrow during April? a) $2,000 b) $4,000 c) $6,000 d) $8,000

6.

The cash budget must be prepared before you can complete which of the following? a) Production budget. b) Budgeted balance sheet c) Raw materials purchases budget d) Schedule of cash disbursements

89 Problems Problem 1 The following information is available about Ashton Company: 1.

The cash balance on December 1 is $40,000

2.

Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $65,000 $70,000 $83,000 Credit sales 400,000 525,000 600,000 Sales on account are collected over a three-month period at the following rate: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible.

3.

Purchases of inventory will total $280,000 for December. 30% of a month’s inventory purchases are paid in the month of purchase and 70% are paid in the month following purchase. The accounts payable at Nov 30 total $161,000.

4.

Selling and administrative expenses are budgeted at $430,000 for December. Of this amount, $50,000 is for depreciation.

5.

A new web server for the Marketing Department costing $76,000 will be purchased for cash during December, and dividends totaling $9,000 will be paid during the month.

6.

The company must maintain a minimum cash balance of $20,000. An open line of credit is available from the company’s bank.

Required – Prepare a cash budget for December.

Problem 2 David Beadle Company makes patio chairs that require direct labour time of 30 minutes per unit. The company wants its finished goods inventory to equal 10% of the following month's unit sales. The budgeted labour rate is $9 per hour. Planned sales for October, November, and December, respectively, are 8,000; 11,000; and 14,000 chairs. Budgeted direct labour cost for December is $63,900. What is the company's planned direct labour cost for November? (4 marks)

90 Problem 3 The Dennison Company has planned the following sales for the next three months: Budgeted Sales

January $40,000

February $50,000

March $70,000

Sales are made 20% for cash and 80% on account. From experience, the company has learned that a month's sales on account are collected according to the following pattern: Month of sale First month following sale Second month following sale Uncollectible

60% 30% 8% 2%

The company requires a minimum cash balance of $5,000 to start a month. The beginning cash balance in March is budgeted to be $6,000. Required – a)

Calculate the budgeted cash receipts for March.

b)

The following additional information has been provided for March: Inventory purchases (all paid in March) Operating Expenses (all paid in March) Depreciation expense for March Dividends paid in March

$28,000 40,000 5,000 4,000

Prepare a cash budget for the month of March, using this information and the budgeted cash receipts you calculated in part a) above. The company can borrow in any dollar amount and will not pay interest until April.

Problem 4 Projected sales (in units) for Jarvis Fabricators for January and February of 20x4 are: January February 2,000 2,300 Jarvis management has a policy of ending each month with finished goods equal to 30% of the next month's projected sales. How many units of production should Jarvis budget for January 20x4?

91 Problem 5 Budgeted sales for the third quarter (July to September) of the current year are as follows: July $250,000 August 320,000 September 290,000 The company collects 30% in the month of sale, 55% in the first month following sale and 13% in the second month following sale. 2% of all sales are uncollectible. 1. 2. 3.

What are the cash collections in September? What is the net accounts receivable balance at the end of August? What is the budgeted bad debt expense for the third quarter?

Problem 6 BH Wholesalers has a sales budget for December of $800,000. Cost of merchandise sold is expected to be 30% of sales. Sixty percent (60%) of all merchandise is paid for in the month of purchase and the remaining 40% is paid in the following month. The merchandise inventory balance on November 30 is $24,000 and the December 31 merchandise inventory balance is budgeted to be $30,000. What is the budgeted accounts payable balance at December 31?

92 8 - Budgeting SOLUTIONS

Multiple Choice Questions 1.

d

2.

b

3.

c

$480,000 x (1 - 0.4) x 0.3 = $86,400

4.

b

$32,000 – 11,500 + 71,000 – 13,600 – 29,800 – 42.,300 = $5,800

5.

b

9,000 + 45,000 – 52,000 – 6,000 = 4,000

6.

b

Problems Problem 1 Cash, beginning

$40,000

Cash collections Cash Sales

1

$83,000

Credit Sales: Oct: $400,000 x 18% Nov: $525,000 x 60% Dec: $600,000 x 20%

1 1 1

72,000 315,000 120,000

590,000

2 1

$161,000 84,000

-245,000

2 1 1

-380,000 -76,000 -9,000

1

-80,000 100,000

Cash Disbursements On Purchases: Nov A/P December purchases: $280,000 x 30% Selling and admin expenses ($430,000 – 50,000) Web Server Dividends Cash Balance before financing Borrowings Cash, end

$20,000

93

94 Problem 2 Needs: November sales Ending inventory: 14,000 x 10% Less beginning inventory Required production

1 1 1

11,000 1,400 (1,100) 11,300

Budgeted DL cost = 11,300 x ½ hour x $9/hour = $50,850 1 mark

Problem 3 a)

b)

Cash Sales: $70,000 x 20% Collections on credit sales: January: $40,000 x 80% x 8% February: $50,000 x 80% x 30% March: $70,000 x 80% x 60%

Cash balance, beginning Cash collections Cash disbursements Inventory purchases Operating expenses Dividends Cash balance before borrowing Borrowing Cash balance, end 1 mark for ignoring depreciation

Problem 4 Needs: Sales Ending inventory: 2,300 x 30% Less opening inventory: 2,000 x 30% Budgeted purchases

1 1.5 1.5

2,000 690 (600) 2,090

$14,000

1

2,560 12,000 33,600 $62,160

1 1 1

$ 6,000 62,160

0.5 0.5

(28,000) (40,000) (4,000) (3,840) 8,840 $5,000

0.5 0.5 1 1

95 Problem 5 1.

2.

3.

July Sales: $250,000 x 13% August Sales: $320,000 x 55% September Sales: $290,000 x 30% 3 marks

$ 32,500 176,000 87,000 $295,500

2 marks

$ 32,500 217,600 $250,100

July Sales: $250,000 x 13% August Sales: $320,000 x 68%

Total sales = $860,000 x 2% = $17,200

1 mark

Problem 6 Purchases: $800,000 x 0.3 Ending inventory Beginning inventory

1 1 1

$240,000 30,000 (24,000) 246,000

1

x 0.4 $98,400...