Budgeting for Planning and Control

Budgeting for Planning and Control KEY TERMS TEST From the list that follows, select the term that best completes each statement and write it in the space provided. administrative expense budget budget budget committee budget director capital expenditures budget cash budget continuous (or rolling) budget control direct labor budget direct materials purchases budget ending finished goods inventory budget financial budgets marketing expense budget master budget operating budgets overhead budget production budget research and development expense budget sales budget 1. ______________________________ are financial plans associated with the incomeproducing activities of the organization. 2. The collection of all area and activity budgets representing a firm’s comprehensive plan of action is the _________________________. 3. The _________________________ describes expected sales in units and dollars for the coming period. 4. The _________________________________ shows the total direct labor hours needed and the associated cost for the number of units in the production budget. 5. The budget that shows how many units must be produced to meet sales needs and satisfy ending inventory requirements is the ______________________________. 6. A plan of action expressed in financial terms is a(n) ____________. 7. The financial plan outlining the acquisition of long-term assets is the _____________ ________________________________. 8. The _________________________ is responsible for coordinating and directing the overall budgeting process. 9. The _________________________ outlines all sources and uses of cash. 10. The ___________________________________________ outlines planned expenditures for selling and distribution activities. 11. The ___________________________________________ is a financial plan that consists of estimated expenditures for the overall organization and operation of the company. 12. Planned ending inventory of finished goods in units and dollars is found in the ____________ ____________________________________________________. 13. The ____________________________ reveals the planned expenditures for all indirect manufacturing items. Chapter 8 14. ______________ is the process of setting standards, receiving feedback on actual performance, and taking corrective action. 15. The _____________________________ is responsible for setting budgetary policies and goals. 16. The ______________________________________________________ outlines the expected usage of materials production and purchases of the direct materials required. 17. The ____________________________ are the part of the master budget that includes the budgeted balance sheet, statement of cash flows, and the capital budget. 18. A ________________________ is a moving 12-month budget. When a month expires in the budget, an additional month in the future is added so that the company always has a 12month plan on hand. 19. The _________________________________ outlines the estimated expenditures of research and development activities for the coming year. MULTIPLE-CHOICE QUIZ Complete each of the following statements by circling the letter of the best answer. 1. Operating budgets are: a. a forecast of expected operating expenses. b. a forecast of operating expenses. c. a forecast of units of production. d. concerned with the income-generating activities of a firm. e. concerned with the inflows and outflows of cash. 2. Which of the following is not an advantage of budgeting? a. It forces managers to plan. b. It provides resource information that can be used to improve decision making. c. It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent evaluation of performance. d. It provides organizational independence. e. It improves communication and coordination. Budgeting for Planning and Control 3. Morgan Company produces and sells laptop computers. It had 2,000 computers in finished goods inventory at the end of the last year. The company expects to sell 20,000 computers and would like to complete operations in this year with at least 2,500 completed computers in inventory. There is no ending work-in-process inventory in either year. The laptop computers sell for $2,000 each. How many laptop computers would be produced for the next year? a. 20,000 b. 20,500 c. 22,000 d. 22,500 e. 24,500 4. Reid Company is budgeting production of 100,000 units of product R for the month of September this year. Production of one unit of product R requires three units of material B. For material B, the actual inventory units at September 1 were 22,000 units and budgeted inventory units at September 30 are 24,000. How many units of material B is Reid planning to purchase during September? a. 328,000 b. 302,000 c. 298,000 d. 272,000 e. 250,000 5. Which of the following factors is not a responsibility of the budget committee? a. Reviews the budget. b. Provides policy guidelines. c. Provides budgeting goals. d. Resolves differences that may arise as the budget is prepared. e. Prepares actual financial statements. 6. XYZ has forecast sales for the next three months as follows: January, 10,000 units; February, 15,000 units; and March, 20,000 units. Inventory as of January 1 is expected to be 2,000 units. Ending inventories should equal 25% of the coming month’s sales needs. How many units should be produced in February? a. 13,750 units b. 15,000 units c. 16,250 units d. 18,000 units e. none of the above 7. Acme Company has observed its accounts receivable collection pattern to be as follows: 40% in the month of the sale, 45% in the month following the sale, and 13% in the second month following the sale. Sales for the last three months of the year were as follows: October, $300,000; November, $450,000; and December, $625,000. Sales for January are budgeted to be $375,000. What are the budgeted cash collections for January? a. $375,000 b. $489,750 c. $495,750 d. $625,000 e. none of the above Chapter 8 8. Scooter Corp. has forecast sales as follows: July, 30,000 units; August, 35,000 units; and September, 40,000 units. Finished goods inventory as of July 1 is forecast to be 10,000 units. Finished goods inventory of 20% of the following month’s sales needs is desired. Each finished unit requires 5 pounds of raw material. The raw materials inventory level on July 1 was 202,500 pounds and the expected raw materials inventory level on July 31 will be 270,000 pounds. How many pounds of raw material should be purchased in July? a. 27,000 pounds b. 40,500 pounds c. 135,000 pounds d. 202,500 pounds e. none of the above 9. Which of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for the calendar year 2003? a. The annual depreciation for 2003. b. A purchase order issued in December 2003 for items to be delivered in February 2004. c. Dividends declared in November 2003, to be paid in January 2004 to shareholders of record as of December 2003. d. The amount of uncollectible customer accounts for 2003. e. Funds borrowed from a bank on a note payable taken out in June 2002 with an agreement to pay the principal and all of the interest owed in December 2003. 10. Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the direct labor budget would be the: a. sales forecast. b. raw materials purchases budget. c. schedule of cash receipts and disbursements. d. schedule of manufacturing overhead. e. production budget. 11. In a not-for-profit service firm, the sales budget is replaced by: a. the production budget. b. the finished goods budget. c. a budget that identifies the various services and the associated funds assigned to them. d. a budget that identifies the various expenses. e. none of the above. 12. Which of the following budgets would not be present for both for-profit and not-for-profit service organizations? a. sales budget b. budgeted income statement c. budgeted balance sheet d. finished goods budget e. cash budget Budgeting for Planning and Control 13. In a for-profit service firm, the sales budget is also the: a. merchandise purchase budget. b. production budget. c. direct materials budget. d. overhead budget. e. none of the above. Chapter 8 PRACTICE TEST EXERCISE 1 ABC Company has prepared a unit sales budget for the upcoming months as follows: Month January ................. February................ March .................... April....................... May ....................... Units 5,000 7,500 10,000 15,000 20,000 Month June ....................... July ........................ August ................... September ............. October .................. Units 30,000 35,000 25,000 10,000 6,000 ABC has a policy to maintain inventory levels equal to 30% of the coming month’s sales requirements. Inventory on January 1 is projected to be 1,200 units. Required: Prepare a production budget for ABC Company for the next six months. Budgeting for Planning and Control EXERCISE 2 Resear Company sells modems. Resear desires to hold a finished goods inventory equal to 100% of the next month’s sales requirement of modems. The beginning finished goods inventory is 1,200 units. Forecasted unit sales for April and the next three months are as follows: April 800 May 850 June 925 July 1,000 The production of one finished unit requires 5 pounds of raw material. The company desires to have a one-month supply of raw materials as the ending inventory for each month. The beginning inventory of raw materials is 6,190 pounds. Required: Prepare a direct materials purchases budget (in pounds) for April. Chapter 8 EXERCISE 3 Acorn Corp. has requested a cash budget for July and August. The following information has been gathered: a. Cash balance as of July 1: $35,000. b. Actual and forecasted sales are as follows: May Cash sales .................. Credit sales ................. Total............................ $25,000 60,000 $85,000 June $ 30,000 80,000 $110,000 July August $ 40,000 100,000 $140,000 $ 50,000 110,000 $160,000 c. Credit sales are collected 40% in the month of the sale, 35% in the month following the sale, and 25% in the second month following the sale. d. Inventory purchases average 55% of sales. Of these purchases, 65% are paid for in the month of the purchase, with the remainder paid in the following month. e. Operating expenses are paid in the month incurred. Expenses include $2,500 in rent, $6,000 in salaries, and $750 in utilities and miscellaneous expenses. Required: 1. Prepare a schedule of cash collections on account for July and August. 2. What would the accounts receivable balance be on August 31? Budgeting for Planning and Control EXERCISE 3 (Continued) 3. Prepare a schedule of cash disbursements for July and August. 4. Prepare a cash budget for July and August. Chapter 8 “CAN YOU?” CHECKLIST  Can you explain the role of budgeting in planning and control?  Can you describe the advantages of budgets for an organization?  Can you define and distinguish among the various budgets found in the operating budget?  Can you explain why all budgets depend on the sales budget?  Can you prepare a sales forecast and the resulting production budget?  Can you prepare a cash budget?  Can you describe how budgeting differs for a merchandising firm and a service firm? ANSWERS KEY TERMS TEST 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Operating budgets master budget sales budget direct labor budget production budget budget capital expenditures budget budget director cash budget marketing expense budget administrative expense budget ending finished goods inventory budget overhead budget Control budget committee direct materials purchases budget financial budgets continuous (or rolling) budget research and development expense budget MULTIPLE-CHOICE QUIZ 1. d 2. d 3. b 4. b 5. e 6. c Sales + El – BI = 15,000 + (25% × 20,000) – (25% × 15,000) = 15,000 + 5,000 – 3,750 = 16,250 units 7. b (40% × January) + (45% × December) + (13% × November) = (.40 × $375,000) + (.45 × $625,000) + (.13 × $450,000) = $489,750 8. d 9. e 10. e Sales ............................................................. Desired finished goods ending inventory ....... Less: Finished goods beginning inventory .. Units to be produced ..................................... Materials per unit (lbs.) .................................. Production needs (lbs.) ................................. Desired raw materials ending inventory ........ Less: Raw materials beginning inventory .... Raw materials to be purchased ..................... 11. 12. c d July 30,000) 7,000) (10,000) 27,000) × 5) 135,000) 270,000) (202,500) 202,500) 13. b August 35,000) 8,000) (7,000) 36,000) × 5) 180,000) Budgeting for Planning and Control PRACTICE TEST EXERCISE 1 Sales .......................................... Ending inventory......................... Total needs................................. Less: Beginning inventory ......... Units to be produced .................. EXERCISE 2 ABC Company Production Budget January 5,000 2,250 7,250 1,200 6,050 February 7,500 3,000 10,500 2,250 8,250 March 10,000 4,500 14,500 3,000 11,500 April 15,000 6,000 21,000 4,500 16,500 May 20,000 9,000 29,000 6,000 23,000 June 30,000 10,500 40,500 9,000 31,500 April 800 May 850 June 925 July 1,000 850 1,650 1,200 450 925 1,775 850 925 1,000 1,925 925 1,000 May 4,625 June 5,000 Resear Company Production Budget for April Sales ................................................................................... Desired finished goods ending inventory, 100% of next month’s sales .......................................................... Total needs.......................................................................... Less: Finished goods beginning inventory ......................... Units to be produced ........................................................... Resear Company Raw Materials Budget for April Production needs, 5 lbs. per finished goods unit ................. Desired raw materials ending inventory .............................. Total needs.......................................................................... Less: Raw materials beginning inventory ........................... Raw materials to be purchased ........................................... April 2,250 4,625 6,875 6,190 685 Chapter 8 EXERCISE 3 1. Acorn Corp. Cash Collections on Account Cash sales ................................................................... 50,000 Credit sales .................................................................. 110,000 Collected in the month of the sale, 40% ................. 44,000 .................................................................... d Collected one month after the sale, 35% ................ 35,000 .................................................................... e Collected two months after the sale, 25% ............... 20,000 ..................................................................... f Total cash collected ..................................................... 259,000 a b c $100,000 × 0.40 $80,000 × 0.35 $60,000 × 0.25 d e f May $25,000 June July August $30,000 $ 40,000 $ 60,000 80,000 100,000 40,000 a 28,000 b 15,000 c $ 123,000 $ $110,000 × 0.40 $100,000 × 0.35 $80,000 × 0.25 2. Accounts receivable balance on August 31: [$100,000 × (100% – 40% – 35%)] + [$110,000 × (100% – 40%)] = $91,000 3. Acorn Corp. Cash Disbursement Schedule Purchases costs at 55% of sales ......................................................... 88,000 ............................................................................................ e Cash disbursement for purchases: Payment in the month of purchase, 65% ........................................ 57,200 ............................................................................................ f Payment one month after purchase, 35% ....................................... 26,950 ............................................................................................ g Operating expenses ............................................................................. 9,250.............................................................................................. h Total cash disbursements .................................................................... a b c d ($40,000 + $100,000) × 0.55 $77,000 × 0.65 $60,500 × 0.35 $2,500 + $6,000 + $750 4. e f g h June July August $60,500 $ 77,000 a $ 50,050 b 21,175 c 9,250 d $ 80,475 $ 93,400 ($50,000 + $110,000) × 0.55 $88,000 × 0.65 $77,000 × 0.35 $2,500 + $6,000 + $750 Acorn Corp. Cash Budget For the Months of July and August, 200X Beginning cash balance ............................................................................................... Cash collections: Cash sales .............................................................................................................. Credit sales: Current month .................................................................................................... One month after sales ........................................................................................ Two months after sales ...................................................................................... Total cash available ..................................................................................................... Less cash disbursements: July August $ 35,000 $ 77,525 40,000 50,000 40,000 28,000 15,000 $158,000 44,000 35,000 20,000 $226,525 Budgeting for Planning and Control Inventory purchases: Payment in the month of purchase .................................................................... Payment one month after purchase ................................................................... Operating expenses: Rent ................................................................................................................... Salaries.............................................................................................................. Utilities and miscellaneous ................................................................................ Total cash disbursements ............................................................................................ Ending cash balance.................................................................................................... $ 50,050 21,175 $ 57,200 26,950 2,500 6,000 750 $ 80,475 2,500 6,000 750 $ 93,400 $ 77,525 $133,125