C09_DOIT A P18 Ch09
User Manual: A P18
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Chapter 9 > DO IT! Budget Terminology Use this list of terms to complete the sentences that follow. Long-range planning Sales forecast Master budget Participative budgeting Operating budgets Financial budgets 1. A ________________ shows potential sales for the industry and a company’s expected share of such sales. 2. __________________ are used as the basis for the preparation of the budgeted income statement. 3. The _______________ is a set of interrelated budgets that constitutes a plan of action for a specified time period. Action Plan ✔ Understand the budgeting process, including the importance of the sales forecast. ✔ Understand the difference between an operating budget and a financial budget. ✔ Differentiate budgeting from long-range planning. ✔ Realize that the master budget is a set of interrelated budgets. > 4. ___________________ identifies long-term goals, selects strategies to achieve these goals, and develops policies and plans to implement the strategies. 5. Lower-level managers are more likely to perceive results as fair and achievable under a ________________ approach. 6. ___________________ focus primarily on the cash resources needed to fund expected operations and planned capital expenditures. Solution 1. Sales forecast. 4. Long-range planning. 2. Operating budgets. 5. Participative budgeting. 3. Master budget. 6. Financial budgets. Related exercise material: BE9-1, E9-1, and DO IT! 9-1. DO IT! Production Budget Becker Company estimates that 2014 unit sales will be 12,000 in quarter 1, 16,000 in quarter 2, and 20,000 in quarter 3, at a unit selling price of $30. Management desires to have ending finished goods inventory equal to 15% of the next quarter’s expected unit sales. Prepare a production budget by quarter for the first six months of 2014. Solution Action Plan ✔ Begin with budgeted sales in units. ✔ Add desired ending finished goods inventory. ✔ Subtract beginning finished goods inventory. Becker Company Production Budget For the Six Months Ending June 30, 2014 Quarter 1 2 Expected unit sales Add: Desired ending finished goods 12,000 2,400 16,000 3,000 Total required units Less: Beginning finished goods inventory 14,400 1,800 19,000 2,400 Required production units 12,600 16,600 Related exercise material: BE9-3, E9-4, E9-6, and DO IT! Six Months 29,200 9-2. D-1 D-2 > DO IT! DO IT! Master Budget Soriano Company is preparing its master budget for 2014. Relevant data pertaining to its sales, production, and direct materials budgets are as follows. Sales. Sales for the year are expected to total 1,200,000 units. Quarterly sales, as a percentage of total sales, are 20%, 25%, 30%, and 25%, respectively. The sales price is expected to be $50 per unit for the first three quarters and $55 per unit beginning in the fourth quarter. Sales in the first quarter of 2015 are expected to be 10% higher than the budgeted sales for the first quarter of 2014. Action Plan ✔ Know the form and ✔ ✔ ✔ ✔ ✔ content of the sales budget. Prepare the sales budget first, as the basis for the other budgets. Determine the units that must be produced to meet anticipated sales. Know how to compute the beginning and ending finished goods units. Determine the materials required to meet production needs. Know how to 1 compute the 2 beginning and ending direct 3 materials units. 4 Production. Management desires to maintain the ending finished goods inventories at 25% of the next quarter’s budgeted sales volume. Direct materials. Each unit requires 3 pounds of raw materials at a cost of $5 per pound. Management desires to maintain raw materials inventories at 5% of the next quarter’s production requirements. Assume the production requirements for the first quarter of 2015 are 810,000 pounds. Prepare the sales, production, and direct materials budgets by quarters for 2014. Solution Soriano Company Sales Budget.xls Home Insert Page Layout Formulas Data Review View fx P18 B A C D E F 4 300,000 3 $55 $16,500,000 Year 1,200,000 __ $61,500,000 Soriano Company Sales Budget For the Year Ending December 31, 2014 5 Quarter 2 3 360,000 300,000 3 $50 3 $50 $15,000,000 $18,000,000 1 240,000 3 $50 $12,000,000 6 Expected unit sales 7 Unit selling price 8 Total sales Soriano Company Production Budget.xls Home Insert Page Layout P18 Formulas Data Review View fx A B C 1 Soriano Company 2 Producon Budget For the Year Ending December 31, 2014 3 4 5 6 Expected unit sales 7 Add: Desired ending finished goods units a 8 Total required units 9 Less: Beginning finished goods units 10 Required producon units 1 240,000 75,000 315,000 60,000 255,000 c D Quarter 2 3 300,000 360,000 90,000 75,000 390,000 435,000 75,000 90,000 315,000 345,000 E 4 300,000 66,000 366,000 75,000 291,000 F Year b 11 12 a25% of next quarter's unit sales 13 bEsmated first-quarter 2015 sales units: 240,000 1 (240,000 3 10%) 5 264,000: 264,000 3 25% 14 c25% of esmated first-quarter 2014 sales units (240,000 3 25%) 1,206,000 DO IT! D-3 Soriano Company Direct Materials Budget.xls Home Insert Page Layout Formulas Data Review View fx P18 A B C D E 1 Soriano Company 2 Direct Materials Budget For the Year Ending December 31, 2014 3 4 8 9 10 11 12 13 14 G H Quarter 5 6 7 F Units to be produced Direct materials per unit Total pounds needed for producon Add: Desired ending direct materials (pounds) Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials purchases 1 255,000 33 2 315,000 33 3 345,000 33 4 291,000 33 765,000 945,000 1,035,000 873,000 47,250 812,250 51,750 996,750 43,650 1,078,650 40,500 913,500 47,250 949,500 3 $5 51,750 1,026,900 3 $5 43,650 869,850 3 $5 $4,747,500 $5,134,500 $4,349,250 38,250 774,000 3 $5 $3,870,000 b Year a $18,101,250 15 16 aEsmated first-quarter 2015 producon requirements: 810,000 3 5% 5 40,500 17 b5% of esmated first-quarter pounds needed for producon 18 Related exercise material: BE9-2, BE9-3, BE9-4, E9-2, E9-3, E9-4, E9-5, E9-6, and > DO IT! 9-3. DO IT! Budgeted Income Statement Soriano Company is preparing its budgeted income statement for 2014. Relevant data pertaining to its sales, production, and direct materials budgets can be found in the DO IT! exercise on page 2. In addition, Soriano budgets 0.5 hours of direct labor per unit, labor costs at $15 per hour, and manufacturing overhead at $25 per direct labor hour. Its budgeted selling and administrative expenses for 2014 are $12,000,000. Action Plan (a) Calculate the budgeted total unit cost. (b) Prepare the budgeted income statement for 2014. ✔ Recall that total unit cost consists of direct materials, direct labor, and manufacturing overhead. ✔ Recall that direct materials costs are included in the direct materials budget. ✔ Know the form and content of the income statement. Solution (a) Cost Element Quantity Unit Cost Total Direct materials Direct labor Manufacturing overhead 3.0 pounds 0.5 hours 0.5 hours $ 5 $15 $25 $ 15.00 7.50 12.50 Total unit cost $35.00 D-4 DO IT! Action Plan (cont’d) ✔ Use the total unit sales (b) information from the sales budget to compute annual sales and cost of goods sold. Soriano Company Budgeted Income Statement For the Year Ending December 31, 2014 Sales (1,200,000 units from sales budget, page 2) Cost of goods sold (1,200,000 3 $35.00/unit) $61,500,000 42,000,000 Gross profit Selling and administrative expenses 19,500,000 12,000,000 Net income $ 7,500,000 Related exercise material: BE9-8, E9-11, E9-13, and > DO IT! 9-4. DO IT! Cash Budget Martian Company management wants to maintain a minimum monthly cash balance of $15,000. At the beginning of March, the cash balance is $16,500, expected cash receipts for March are $210,000, and cash disbursements are expected to be $220,000. How much cash, if any, must be borrowed to maintain the desired minimum monthly balance? Solution Action Plan Martian Company Cash Budget For the Month Ending March 31, 2014 ✔ Write down the basic form of the cash budget, starting with the beginning cash balance, adding cash receipts for the period, deducting cash disbursements, and identifying the needed financing to achieve the desired minimum ending cash balance. ✔ Insert the data given into the outlined form of the cash budget. Beginning cash balance Add: Cash receipts for March Total available cash Less: Cash disbursements for March 226,500 220,000 Excess of available cash over cash disbursements Financing 6,500 8,500 Ending cash balance $ 15,000 To maintain the desired minimum cash balance of $15,000, Martian Company must borrow $8,500 of cash. Related exercise material: BE9-9, E9-13, E9-14, E9-15, E9-16, and > $ 16,500 210,000 Comprehensive DO IT! 9-5. DO IT! 1 Barrett Company has completed all operating budgets other than the income statement for 2014. Selected data from these budgets follow. Sales: $300,000 Purchases of raw materials: $145,000 Ending inventory of raw materials: $15,000 Direct labor: $40,000 Manufacturing overhead: $73,000, including $3,000 of depreciation expense Selling and administrative expenses: $36,000 including depreciation expense of $1,000 Interest expense: $1,000 DO IT! D-5 Principal payment on note: $2,000 Dividends declared: $2,000 Income tax rate: 30% Other information: Assume that the number of units produced equals the number sold. Year-end accounts receivable: 4% of 2014 sales. Year-end accounts payable: 50% of ending inventory of raw materials. Interest, direct labor, manufacturing overhead, and selling and administrative expenses other than depreciation are paid as incurred. Dividends declared and income taxes for 2014 will not be paid until 2015. Barrett Company Balance Sheet December 31, 2013 Assets Cash Raw materials inventory Equipment Less: Accumulated depreciation $20,000 10,000 $40,000 4,000 36,000 Total assets $66,000 Liabilities and Stockholders’ Equity Accounts payable Notes payable $ 5,000 22,000 Total liabilities Common stock Retained earnings 25,000 14,000 $27,000 39,000 Total liabilities and stockholders’ equity $66,000 Instructions (a) Calculate budgeted cost of goods sold. (b) Prepare a budgeted income statement for the year ending December 31, 2014. (c) Prepare a budgeted balance sheet as of December 31, 2014. Action Plan Solution to Comprehensive DO IT! 1 ✔ Recall that beginning raw materials inventory plus purchases less ending raw materials inventory equals direct materials used. ✔ Prepare the budgeted income statement before the budgeted balance sheet. ✔ Use the standard form of a cash budget to determine cash on the budgeted balance sheet. ✔ Add budgeted depreciation expense to accumulated depreciation at the beginning of the year to determine accumulated depreciation on the budgeted balance sheet. (a) Beginning raw materials 1 Purchases 2 Ending raw materials 5 Cost of direct materials used ($10,000 1 $145,000 2 $15,000 5 $140,000) Direct materials used 1 Direct labor 1 Manufacturing overhead 5 Cost of goods sold ($140,000 1 $40,000 1 $73,000 5 $253,000) (b) Barrett Company Budgeted Income Statement For the Year Ending December 31, 2014 Sales Cost of goods sold Gross profit Selling and administrative expenses Interest expense $300,000 253,000 47,000 $36,000 1,000 37,000 Income before income tax expense Income tax expense (30%) Net income 10,000 3,000 $ 7,000 D-6 DO IT! Action Plan (cont’d) (c) ✔ Add budgeted net Barrett Company income to retained earnings from the beginning of the year and subtract dividends declared to determine retained earnings on the budgeted balance sheet. ✔ Verify that total assets equal total liabilities and stockholders’ equity on the budgeted balance sheet. Budgeted Balance Sheet December 31, 2014 Assets Cash(1) Accounts receivable (4% 3 $300,000) Raw materials inventory Equipment Less: Accumulated depreciation $17,500 12,000 15,000 $40,000 8,000 Total assets 32,000 $76,500 Liabilities and Stockholders’ Equity Accounts payable (50% 3 $15,000) Income taxes payable Dividends payable Note payable $ 7,500 3,000 2,000 20,000 Total liabilities Common stock Retained earnings(2) 25,000 19,000 $32,500 Total liabilities and stockholders’ equity $76,500 (1) Beginning cash balance Add: Collections from customers (96% 3 $300,000 sales) $ 20,000 288,000 Total available cash Less: Disbursements Direct materials ($5,000 1 $145,000 2 $7,500) Direct labor Manufacturing overhead Selling and administrative expenses Total disbursements Excess of available cash over cash disbursements Financing Less: Repayment of principal and interest Ending cash balance (2) 44,000 308,000 $142,500 40,000 70,000 35,000 287,500 20,500 3,000 $ 17,500 Beginning retained earnings 1 Net income 2 Dividends declared 5 Ending retained earnings ($14,000 1 $7,000 2 $2,000 5 $19,000) DO IT! > Comprehensive Action Plan D-7 DO IT! 2 Asheville Company is preparing its master budget for 2014. Relevant data pertaining to its sales and production budgets are as follows. Sales. Sales for the year are expected to total 2,100,000 units. Quarterly sales, as a ✔ Know the form and con- percentage of total sales, are 15%, 25%, 35%, and 25%, respectively. The sales price tent of the sales budget. is expected to be $70 per unit for the first three quarters and $75 per unit beginning ✔ Prepare the sales in the fourth quarter. Sales in the first quarter of 2015 are expected to be 10% higher budget first as the basis for the other budgets. than the budgeted sales volume for the first quarter of 2014. ✔ Determine the units that Production. Management desires to maintain ending finished goods inventories at must be produced to 20% of the next quarter’s budgeted sales volume. meet anticipated sales. ✔ Know how to compute Instructions the beginning and Prepare the sales budget and production budget by quarters for 2014. ending finished goods Solution to Comprehensive DO IT! 2 units. Asheville Company Sales Budget For the Year Ending December 31, 2014 Quarter 1 Expected unit sales Unit selling price Total sales 2 3 4 Year 315,000 3 $70 525,000 3 $70 735,000 3 $70 525,000 3 $75 2,100,000 — $22,050,000 $36,750,000 $51,450,000 $39,375,000 $149,625,000 Asheville Company Production Budget For the Year Ending December 31, 2014 Quarter 1 2 3 4 Expected unit sales Add: Desired ending finished goods units 315,000 105,000 525,000 147,000 735,000 105,000 525,000 69,300a Total required units Less: Beginning finished goods units 420,000 63,000b 672,000 105,000 840,000 147,000 594,300 105,000 Required production units 357,000 567,000 693,000 489,300 a Estimated first-quarter 2015 sales volume 315,000 1 (315,000 3 10%) 5 346,500; 346,500 3 20% 20% of estimated first-quarter 2014 sales units (315,000 3 20%) b Year 2,106,300 D-8 DO IT! > DO IT! REVIEW Identify budget terminology. (LO 2, 3), K DO IT! 9-1 Use this list of terms to complete the sentences that follow. Long-range plans Sales forecast Master budget Participative budgeting Operating budgets Financial budgets 1. _____________ establish goals for the company’s sales and production personnel. 2. The _____________ is a set of interrelated budgets that constitutes a plan of action for a specified time period. 3. _____________ reduces the risk of having unrealistic budgets. 4. _____________ include the cash budget and the budgeted balance sheet. 5. The budget is formed within the framework of a _____________. 6. _____________ contain considerably less detail than budgets. Production budget. DO IT! 9-2 Zeller Company estimates that 2014 unit sales will be 20,000 in quarter 1, (LO 3), AP 24,000 in quarter 2, and 29,000 in quarter 3, at a unit selling price of $20. Management desires to have ending finished goods inventory equal to 10% of the next quarter’s expected unit sales. Prepare a production budget by quarter for the first six months of 2014. Prepare sales, production, and direct materials budgets. DO IT! 9-3 Ash Creek Company is preparing its master budget for 2014. Relevant data pertaining to its sales, production, and direct materials budgets are as follows. (LO 3), AP Sales. Sales for the year are expected to total 1,000,000 units. Quarterly sales are 20%, 20%, 30%, and 30%, respectively. The sales price is expected to be $40 per unit for the first three quarters and $45 per unit beginning in the fourth quarter. Sales in the first quarter of 2015 are expected to be 20% higher than the budgeted sales for the first quarter of 2014. Production. Management desires to maintain the ending finished goods inventories at 25% of the next quarter’s budgeted sales volume. Direct materials. Each unit requires 2 pounds of raw materials at a cost of $12 per pound. Management desires to maintain raw materials inventories at 10% of the next quarter’s production requirements. Assume the production requirements for first quarter of 2015 are 450,000 pounds. Prepare the sales, production, and direct materials budgets by quarters for 2014. Calculate budgeted total unit cost and prepare budgeted income statement. (LO 4), AP DO IT! 9-4 Ash Creek Company is preparing its budgeted income statement for 2014. Relevant data pertaining to its sales, production, and direct materials budgets can be found in DO IT! 9-3. In addition, Ash Creek budgets 0.3 hours of direct labor per unit, labor costs at $15 per hour, and manufacturing overhead at $20 per direct labor hour. Its budgeted selling and administrative expenses for 2014 are $6,000,000. (a) Calculate the budgeted total unit cost. (b) Prepare the budgeted income statement for 2014. Determine amount of financing needed. (LO 5), AP DO IT! 9-5 Batista Company management wants to maintain a minimum monthly cash balance of $20,000. At the beginning of April, the cash balance is $25,000, expected cash receipts for April are $245,000, and cash disbursements are expected to be $255,000. How much cash, if any, must be borrowed to maintain the desired minimum monthly balance?
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