Essay Questions

114.Weller Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow: Sales are budgeted at $330,000 for November, $300,000 for December, and $320,000 for January. Collections are expected to be 85% in the month of sale, 14% in the month following the sale, and 1% uncollectible. The cost of goods sold is 60% of sales. The company purchases 80% of its merchandise in the month prior to the month of sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase. Other monthly expenses to be paid in cash are $21,200. Monthly depreciation is $21,000. Ignore taxes.Statement of Financial Position

October 31

Assets:

Cash$22,000

Accounts receivable (net of allowance for uncollectible accounts)83,000

Inventory158,400

Property, plant and equipment (net of $594,000 accumulated depreciation)1,004,000

Total assets$1,267,400

Liabilities and Stockholders Equity:

Accounts payable$196,000

Common stock620,000

Retained earnings451,400

Total liabilities and stockholders equity$1,267,400

Required:a. Prepare a Schedule of Expected Cash Collections for November and December.b. Prepare a Merchandise Purchases Budget for November and December.c. Prepare Cash Budgets for November and December.d. Prepare Budgeted Income Statements for November and December.e. Prepare a Budgeted Balance Sheet for the end of December.

Ans:a.NovemberDecember

Sales$330,000$300,000

Schedule of Expected Cash Collections

Accounts receivable$83,000

November sales280,500$46,200

December sales255,000

Total cash collections$363,500$301,200

b.NovemberDecember

Cost of goods sold$198,000$180,000

Merchandise Purchases Budget

November sales$39,600

December sales144,000$36,000

January sales153,600

Total purchases$183,600$189,600

Disbursements for merchandise$196,000$183,600

c.NovemberDecember

Cash receipts$363,500$301,200

Cash disbursements:

Disbursements for merchandise196,000183,600

Other monthly expenses21,20021,200

Total cash disbursements217,200204,800

Excess (deficiency) of cash available over disbursements$146,300$96,400

d.NovemberDecember

Sales$330,000$300,000

Bad debt expense3,3003,000

Cost of goods sold198,000180,000

Gross margin128,700117,000

Other monthly expenses21,20021,200

Depreciation21,00021,000

Net operating income$86,500$74,800

e.Statement of Financial Position

December 31

Assets:

Cash$264,700

Accounts receivable (net of allowance for uncollectible accounts)42,000

Inventory153,600

Property, plant and equipment (net of $636,000 accumulated depreciation)962,000

Total assets$1,422,300

Liabilities and Stockholders Equity:

Accounts payable$189,600

Common stock620,000

Retained earnings612,700

Total liabilities and stockholders equity$1,422,300

115.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:April60,000

May75,000

June90,000

July81,000

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.

Ans:

a.AprilMayJuneJuly

Budgeted sales, in units60,00075,00090,00081,000

Desired ending inventory (40%)30,00036,00032,400

Total needs90,000111,000122,400

Less beginning inventory38,00030,00036,000

Required purchases52,00081,00086,400

b.AprilMayJune

Budgeted sales, at $2 per unit$120,000$150,000$180,000

March 31 accounts receivable$85,000

April sales40,000$80,000

May sales50,000$100,000

June sales60,000

Total cash collections$125,000$130,000$160,000

116.Capes Corporation is a wholesaler of industrial goods. Data regarding the store's operations follow: Sales are budgeted at $390,000 for November, $360,000 for December, and $340,000 for January. Collections are expected to be 85% in the month of sale, 10% in the month following the sale, and 5% uncollectible. The cost of goods sold is 80% of sales. The company purchases 40% of its merchandise in the month prior to the month of sale and 60% in the month of sale. Payment for merchandise is made in the month following the purchase. The November beginning balance in the accounts receivable account is $77,000. The November beginning balance in the accounts payable account is $320,000.Required:a. Prepare a Schedule of Expected Cash Collections for November and December.b. Prepare a Merchandise Purchases Budget for November and December.

Ans:

a.NovemberDecember

Sales$390,000$360,000

Schedule of Expected Cash Collections

Accounts receivable$77,000

November sales331,500$39,000

December sales306,000

Total cash collections$408,500$345,000

b.NovemberDecember

Cost of goods sold$312,000$288,000

Merchandise Purchases Budget

November sales$187,200

December sales115,200$172,800

January sales108,800

Total purchases$302,400$281,600

Disbursements for merchandise$320,000$302,400

117.Clay Company has projected sales and production in units for the second quarter of the coming year as follows:AprilMayJune

Sales50,00040,00060,000

Production60,00050,00050,000

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.

Ans:a.AprilMayJune

Production units60,00050,00050,000

Cash required per unit $5 $5 $5

Production costs$300,000$250,000$250,000

Cash disbursements:

AprilMayJune

Production this month (40%)$120,000$100,000$100,000

Production prior month (60%)190,000180,000150,000

Selling and administrative100,000100,000100,000

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.AprilMayJune

Sales units50,00040,00060,000

Sales price $14 $14 $14

Total sales$700,000$560,000$840,000

AprilMayJune

Cash receipts:

February sales$90,000

March sales307,500$102,500

April sales420,000210,000$70,000

May sales336,000168,000

June sales504,000

Total receipts$817,500$648,500$742,000

118.The Doley Company has planned the following sales for the next three months:JanFebMar

Budgeted sales$40,000$50,000$70,000

Sales are made 20% for cash and 80% on account. From experience, the company has learned that a months sales on account are collected according to the following pattern:

Month of sale60%

First month following sale30%

Second month following sale8%

Uncollectible2%

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. Compute the budgeted cash receipts for March.b. The following additional information has been provided for March:

Inventory purchases (all paid in March)$28,000

Selling and administrative expenses (all paid in March)$40,000

Depreciation expense for March$5,000

Dividends paid in March$4,000

Prepare a cash budget in good form for the month of March, using this information and the budgeted cash receipts you computed for part (1) above. The company can borrow in any dollar amount and will not pay interest until April.

Ans:

a.Cash sales, March: $70,000 20%$14,000

Collections on account:

Jan. sales: $40,000 80% 8%2,560

Feb. sales: $50,000 80% 30%12,000

Mar. sales: $70,000 80% 60%33,600

Total cash receipts$62,160

b.Cash balance, beginning$6,000

Add cash receipts from sales62,160

Total cash available68,160

Less disbursements:

Inventory purchases28,000

Selling and administrative expenses40,000

Dividends4,000

Total disbursements72,000

Cash excess (deficiency)(3,840)

Financingborrowing8,840

Cash balance, ending$5,000

119.A sales budget is given below for one of the products manufactured by the Key Co.:January21,000 units

February36,000 units

March61,000 units

April41,000 units

May31,000 units

June25,000 units

The inventory of finished goods at the end of each month should equal 20% of the next month's sales. However, on December 31 the finished goods inventory totaled only 4,000 units.Each unit of product requires three specialized electrical switches. Since the production of these specialized switches by Key's suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month's production needs. This requirement had been met on January 1 of the current year.Required:Prepare a budget showing the quantity of switches to be purchased each month for January, February, and March and in total for the quarter.Ans:JanuaryFebruaryMarchApril

Budgeted sales (units)21,00036,00061,00041,000

Add: Desired ending inventory7,20012,2008,2006,200

Total needs28,20048,20069,20047,200

Deduct: Beginning inventory4,0007,20012,2008,200

Units to be produced24,20041,00057,00039,000

JanuaryFebruaryMarchQuarter

Units to be produced24,20041,00057,000122,200

Switches per unit3333

Production needs72,600123,000171,000366,600

Add: Desired ending inventory36,90051,30035,10035,100

Total needs109,500174,300206,100401,700

Deduct: Beginning inventory21,78036,90051,30021,780

Required purchases87,720137,400154,800379,920

Beginning inventory, January 1: 72,600 0.3 = 21,780Ending inventory, March 31: (39,000 3) 0.3 = 35,100120.One quarter gram of a rare seasoning is required for each bottle of Dipping Oil, a very popular product sold through gourmet shops that is produced by The Lucas Company. The cost of the seasoning is $16 per gram. Budgeted production of Dipping Oil is given below for the second quarter, and the first month of the third quarter.AprilMayJuneJuly

Required production bottles5,0008,00015,00010,000

The seasoning is so difficult to get that the company must have on hand at the end of each month 20% of the next month's production needs. A total of 250 grams will be on hand at the beginning of April.Required:Prepare a direct materials budget for the seasoning, by month and in total for the second quarter. Be sure to include both the quantity to be purchased and its cost for each month.

Ans:Lucas Company Direct Materials Budget for the Second Quarter

AprilMayJuneTotal

Required production (bottles)5,0008,00015,00028,000

Seasoning required per bottle (grams)0.250.250.250.25

Production needs (grams)1,2502,0003,7507,000

Add desired ending inventory of seasoning400750500500

Total needs1,6502,7504,2507,500

Less beginning inventory of seasoning250400750250

Seasoning to be purchased (grams)1,4002,3503,5007,250

Cost of seasoning per gram $16 $16 $16 $16

Cost of seasoning to be purchased$22,400$37,600$56,00$116,000

121.Whitmer Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.05 direct labor-hours. The direct labor rate is $11.80 per direct labor-hour. The production budget calls for producing 7,100 units in February and 6,800 units in March.Required:Construct the direct labor budget for the next two months, assuming that the direct labor work force is fully adjusted to the total direct labor-hours needed each month.

Ans:FebruaryMarch

Required production in units7,1006,800

Direct labor-hours per unit0.050.05

Total direct labor-hours needed355340

Direct labor cost per hour$11.80$11.80

Total direct labor cost$4,189$4,012

AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting,Measurement LO:5 Level:Easy

122.Sthilaire Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.34 direct labor-hours. The direct labor rate is $11.10 per direct labor-hour. The production budget calls for producing 8,000 units in April and 8,300 units in May. The company guarantees its direct labor workers a 40-hour paid work week. With the number of workers currently employed, that means that the company is committed to paying its direct labor work force for at least 2,840 hours in total each month even if there is not enough work to keep them busy.Required: Construct the direct labor budget for the next two months.Ans:AprilMay

Required production in units8,0008,300

Direct labor-hours per unit0.340.34

Total direct labor-hours needed2,7202,822

Total direct labor-hours paid2,8402,840

Direct labor cost per hour$11.10$11.10

Total direct labor cost$31,524$31,524

123.Brockney 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.

Ans:

a.July

Budgeted direct labor-hours6,100

Variable overhead rate$8.60

Variable manufacturing overhead$52,460

Fixed manufacturing overhead107,970

Total manufacturing overhead160,430

Less depreciation9,760

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

AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting,Measurement LO:6 Level:Easy

124.The manufacturing overhead budget of Reigle Corporation is based on budgeted direct labor-hours. The February direct labor budget indicates that 5,800 direct labor-hours will be required in that month. The variable overhead rate is $4.60 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $82,360 per month, which includes depreciation of $16,820. All other fixed manufacturing overhead costs represent current cash flows.Required:a. Determine the cash disbursement for manufacturing overhead for February. Show your work!b. Determine the predetermined overhead rate for February. Show your work!

Ans:

a.February

Budgeted direct labor-hours5,800

Variable overhead rate$4.60

Variable manufacturing overhead$26,680

Fixed manufacturing overhead82,360

Total manufacturing overhead109,040

Less depreciation16,820

Cash disbursement for manufacturing overhead$92,220

b.Total manufacturing overhead (a)$109,040

Budgeted direct labor-hours (b)5,800

Predetermined overhead rate for the month (a)/(b)$18.80

125.Wala Inc. bases its selling and administrative expense budget on the number of units sold. The variable selling and administrative expense is $8.20 per unit. The budgeted fixed selling and administrative expense is $132,800 per month, which includes depreciation of $14,400. The remainder of the fixed selling and administrative expense represents current cash flows. The sales budget shows 8,000 units are planned to be sold in July.Required:Prepare the selling and administrative expense budget for July.

Ans:July

Budgeted unit sales8,000

Variable selling and administrative expense per unit$8.20

Budgeted variable expense$65,600

Budgeted fixed selling and administrative expense132,800

Total budgeted selling and administrative expense198,400

Less depreciation14,400

Cash disbursements for selling and administrative expenses$184,000

AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting,Measurement LO:7 Level:Easy

126.The selling and administrative expense budget of Garney Corporation is based on the number of units sold, which are budgeted to be 1,800 units in October. The variable selling and administrative expense is $2.00 per unit. The budgeted fixed selling and administrative expense is $22,680 per month, which includes depreciation of $7,020. The remainder of the fixed selling and administrative expense represents current cash flows.Required: Prepare the selling and administrative expense budget for October.Ans:October

Budgeted unit sales1,800

Variable selling and administrative expense per unit$2.00

Budgeted variable expense$3,600

Budgeted fixed selling and administrative expense22,680

Total budgeted selling and administrative expense26,280

Less depreciation7,020

Cash disbursements for selling and administrative expenses$19,260

127.Romeiro Corporation is preparing its cash budget for September. The budgeted beginning cash balance is $46,000. Budgeted cash receipts total $160,000 and budgeted cash disbursements total $152,000. The desired ending cash balance is $70,000. The company can borrow up to $120,000 at any time from a local bank, with interest not due until the following month.Required:Prepare the company's cash budget for September in good form.

Ans:Cash balance, beginning$46,000

Add cash receipts160,000

Total cash available206,000

Less cash disbursements152,000

Excess (deficiency) of cash available over disbursements54,000

Borrowings16,000

Cash balance, ending$70,000

AACSB:Analytic AICPABB:CriticalThinking AICPAFN:Reporting,Measurement LO:8 Level:Easy

128.Zolezzi Inc. is preparing its cash budget for March. The budgeted beginning cash balance is $42,000. Budgeted cash receipts total $178,000 and budgeted cash disbursements total $175,000. The desired ending cash balance is $50,000. The company can borrow up to $160,000 at any time from a local bank, with interest not due until the following month.Required: Prepare the company's cash budget for March in good form. Make sure to indicate what borrowing, if any, would be needed to attain the desired ending cash balance.Ans:

Cash balance, beginning$42,000

Add cash receipts178,000

Total cash available220,000

Less cash disbursements175,000

Excess (deficiency) of cash available over disbursements45,000

Borrowings5,000

Cash balance, ending$50,000

16.Which of the following budgets are prepared before the sales budget?Budgeted Income StatementDirect Labor Budget

A)YesYes

B)YesNo

C)NoYes

D)NoNo

Ans:D 17.The usual starting point for a master budget is:A)the direct materials purchase budget.B)the budgeted income statement.C)the sales forecast or sales budget.D)the production budget.Ans:C 18.Which of the following budgets are prepared before the cash budget?Selling and Administrative Expense BudgetProduction Budget

A)YesYes

B)YesNo

C)NoYes

D)NoNo

Ans:A 19.Which of the following benefits could an organization reasonably expect from an effective budget program?A)Better control of the organization's costs.B)Better coordination of an organization's activities.C)Better communication of the organization's objectives.D)All of the above.Ans:D 20.An organization's budget program should not be used:A)to motivate employees.B)to assign blame to managers that do not meet budgetary goals.C)to help evaluate managers.D)to allocate resources to the various parts of an organization.Ans:B AACSB:ReflectiveThinking AICPABB:ResourceManagement,CriticalThinking AICPAFN:Reporting LO:1 Level:Easy

21.A basic idea underlying __________________ is that a manager should be held responsible only for those items that the manager can actually control to a significant extent.A)participative budgetingB)planning and controlC)responsibility accountingD)the master budgetAns:C AACSB:ReflectiveThinking AICPABB:ResourceManagement,CriticalThinking AICPAFN:Reporting LO:1 Level:Easy

22.When preparing a merchandise purchases budget, the required purchases in units equals:A)budgeted unit sales + beginning merchandise inventory + desired merchandise ending inventory.B)budgeted unit sales - beginning merchandise inventory + desired merchandise ending inventory.C)budgeted unit sales - beginning merchandise inventory - desired merchandise ending inventory.D)budgeted unit sales + beginning merchandise inventory - desired merchandise ending inventory.Ans:B AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:3 Level:Easy

23.When preparing a direct materials budget, the required purchases of raw materials in units equals:A)raw materials needed to meet the production schedule + desired ending inventory of raw materials - beginning inventory of raw materials.B)raw materials needed to meet the production schedule - desired ending inventory of raw materials - beginning inventory of raw materials.C)raw materials needed to meet the production schedule - desired ending inventory of raw materials + beginning inventory of raw materials.D)raw materials needed to meet the production schedule + desired ending inventory of raw materials + beginning inventory of raw materials.Ans:A AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:4 Level:Easy

24.Which of the following statements is NOT correct concerning the Manufacturing Overhead Budget?A)The Manufacturing Overhead Budget provides a schedule of all costs of production other than direct materials and labor costs.B)The Manufacturing Overhead Budget shows only the variable portion of manufacturing overhead.C)The Manufacturing Overhead Budget shows the expected cash disbursements for manufacturing overhead.D)The Manufacturing Overhead Budget is prepared after the Sales Budget.Ans:B AACSB:ReflectiveThinking AICPABB:CriticalThinking AICPAFN:Reporting LO:6 Level:Easy

25.Which of the following statements is NOT correct concerning the Cash Budget?A)It is not necessary to prepare any other budgets before preparing the Cash Budget.B)The Cash Budget should be prepared before the Budgeted Income Statement.C)The Cash Budget should be prepared before the Budgeted Balance Sheet.D)The Cash Budget builds on earlier budgets and schedules as well as additional data.