C09_DOIT A P18 Ch09

User Manual: A P18

Open the PDF directly: View PDF PDF.
Page Count: 8

Budget
Terminology
>
DO IT!
Use this list of terms to complete the sentences that follow.
Long-range planning Participative budgeting
Sales forecast Operating budgets
Master budget 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 specifi ed time period.
4. ___________________ identifi es 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
Action Plan
✔ Understand the bud-
geting process, including
the importance of the
sales forecast.
✔ Understand the
difference between an
operating budget and
a fi nancial budget.
✔ Differentiate budgeting
from long-range
planning.
✔ Realize that the master
budget is a set of inter-
related budgets.
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 9-1.
DO IT!
Production Budget
>
DO IT!
Becker Company estimates that 2014 unit sales will be 12,000 in quarter 1, 16,000 in quar-
ter 2, and 20,000 in quarter 3, at a unit selling price of $30. Management desires to have
ending fi nished goods inventory equal to 15% of the next quarter’s expected unit sales.
Prepare a production budget by quarter for the fi rst six months of 2014.
Solution
Becker Company
Production Budget
For the Six Months Ending June 30, 2014
Quarter
Six
1 2 Months
Expected unit sales 12,000 16,000
Add: Desired ending fi nished goods 2,400 3,000
Total required units 14,400 19,000
Less: Beginning fi nished goods inventory 1,800 2,400
Required production units 12,600 16,600 29,200
Related exercise material: BE9-3, E9-4, E9-6, and 9-2.
DO IT!
Action Plan
✔ Begin with budgeted
sales in units.
✔ Add desired ending
fi nished goods
inventory.
✔ Subtract beginning
fi nished goods
inventory.
Chapter 9
D-1
D-2 DO IT!
Master Budget
>
DO IT!
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 fi rst three quarters and $55 per unit beginning
in the fourth quarter. Sales in the fi rst quarter of 2015 are expected to be 10% higher
than the budgeted sales for the fi rst quarter of 2014.
Production. Management desires to maintain the ending fi nished 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 fi rst
quarter of 2015 are 810,000 pounds.
Prepare the sales, production, and direct materials budgets by quarters for 2014.
Solution
Formulas Data Review View
Page LayoutInsert
1
2
3
4
5
6
7
8
A
P18 fx
CEFBD
Expected unit sales
Unit selling price
Total sales
240,000
3 $50
$12,000,000
1
300,000
3 $50
$15,000,000
360,000
3 $50
$18,000,000
300,000
3 $55
$16,500,000
1,200,000
__
$61,500,000
Home
Soriano Company
Sales Budget
For the Year Ending December 31, 2014
Quarter
2 3 4 Year
Soriano Company Sales Budget.xls
Action Plan
✔ Know the form and
content of the sales
budget.
✔ Prepare the sales
budget fi rst, 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 fi nished goods
units.
✔ Determine the
materials re-
quired to meet
production
needs.
✔ Know how to
compute the
beginning and
ending direct
materials units.
Formulas Data Review View
Page LayoutInsert
1
2
3
4
5
6
7
8
9
10
11
12
13
14
A
P18 fx
BDFEC
240,000
75,000
315,000
60,000
255,000
300,000
90,000
390,000
75,000
315,000
360,000
75,000
435,000
90,000
345,000
300,000
66,000
366,000
75,000
291,000 1,206,000
Home
Soriano Company
Producon Budget
For the Year Ending December 31, 2014
Quarter
123 4 Year
Expected unit sales
Add: Desired ending finished goods unitsa
Total required units
Less: Beginning finished goods units
Required producon units
a25% of next quarter's unit sales
bEsmated first-quarter 2015 sales units: 240,000 1 (240,000 3 10%) 5 264,000: 264,000 3 25%
c25% of esmated first-quarter 2014 sales units (240,000 3 25%)
c
b
Soriano Company Production Budget.xls
DO IT! D-3
Formulas Data Review View
Page LayoutInsert
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
A
P18 fx
BD FGHEC
255,000
3 3
765,000
47,250
812,250
38,250
774,000
3 $5
$3,870,000
315,000
3 3
945,000
51,750
996,750
47,250
949,500
3 $5
$4,747,500
345,000
3 3
1,035,000
43,650
1,078,650
51,750
1,026,900
3 $5
$5,134,500
291,000
3 3
873,000
40,500
913,500
43,650
869,850
3 $5
$4,349,250 $18,101,250
Home
Soriano Company
Direct Materials Budget
For the Year Ending December 31, 2014
Quarter
1234 Year
a
b
Units to be produced
Direct materials per unit
Total pounds needed for
producon
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
aEsmated first-quarter 2015 producon requirements: 810,000 3 5% 5 40,500
b5% of esmated first-quarter pounds needed for producon
Soriano Company Direct Materials Budget.xls
Related exercise material: BE9-2, BE9-3, BE9-4, E9-2, E9-3, E9-4, E9-5, E9-6, and 9-3.
DO IT!
Budgeted Income
Statement
>
DO IT!
Soriano Company is preparing its budgeted income statement for 2014. Relevant data per-
taining to its sales, production, and direct materials budgets can be found in the 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.
(a) Calculate the budgeted total unit cost. (b) Prepare the budgeted income statement for
2014.
Solution
DO IT!
(a)
Cost Element Quantity Unit Cost Total
Direct materials 3.0 pounds $ 5 $ 15.00
Direct labor 0.5 hours $15 7.50
Manufacturing overhead 0.5 hours $25 12.50
Total unit cost $35.00
Action Plan
✔ 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.
D-4 DO IT!
Action Plan (cont’d)
✔ Use the total unit sales
information from the
sales budget to compute
annual sales and cost
of goods sold.
(b)
Soriano Company
Budgeted Income Statement
For the Year Ending December 31, 2014
Sales (1,200,000 units from sales budget, page 2) $61,500,000
Cost of goods sold (1,200,000 3 $35.00/unit) 42,000,000
Gross profi t 19,500,000
Selling and administrative expenses 12,000,000
Net income $ 7,500,000
DO IT!
Related exercise material: BE9-8, E9-11, E9-13, and 9-4.
Cash Budget
Action Plan
✔ 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
fi nancing to achieve
the desired minimum
ending cash balance.
✔ Insert the data given
into the outlined form
of the cash budget.
>
DO IT!
Martian Company
Cash Budget
For the Month Ending March 31, 2014
Beginning cash balance $ 16,500
Add: Cash receipts for March 210,000
Total available cash 226,500
Less: Cash disbursements for March 220,000
Excess of available cash over cash disbursements 6,500
Financing 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.
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
Related exercise material: BE9-9, E9-13, E9-14, E9-15, E9-16, and 9-5.
DO IT!
>
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
Comprehensive
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 $20,000
Raw materials inventory 10,000
Equipment $40,000
Less: Accumulated depreciation 4,000 36,000
Total assets $66,000
Liabilities and Stockholders’ Equity
Accounts payable $ 5,000
Notes payable 22,000
Total liabilities $27,000
Common stock 25,000
Retained earnings 14,000 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.
Solution to Comprehensive 1
DO IT!
(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 $300,000
Cost of goods sold 253,000
Gross profi t 47,000
Selling and administrative expenses $36,000
Interest expense 1,000 37,000
Income before income tax expense 10,000
Income tax expense (30%) 3,000
Net income $ 7,000
Action Plan
✔ 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 depreci-
ation expense to accu-
mulated depreciation
at the beginning of
the year to determine
accumulated deprecia-
tion on the budgeted
balance sheet.
D-6 DO IT!
Action Plan (cont’d)
✔ Add budgeted net
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.
(c)
Barrett Company
Budgeted Balance Sheet
December 31, 2014
Assets
Cash(1) $17,500
Accounts receivable (4% 3 $300,000) 12,000
Raw materials inventory 15,000
Equipment $40,000
Less: Accumulated depreciation 8,000 32,000
Total assets $76,500
(2)
Beginning retained earnings 1 Net income 2 Dividends declared 5 Ending retained
earnings ($14,000 1 $7,000 2 $2,000 5 $19,000)
Liabilities and Stockholders’ Equity
Accounts payable (50% 3 $15,000) $ 7,500
Income taxes payable 3,000
Dividends payable 2,000
Note payable 20,000
Total liabilities $32,500
Common stock 25,000
Retained earnings(2) 19,000 44,000
Total liabilities and stockholders’ equity $76,500
(1)Beginning cash balance $ 20,000
Add: Collections from customers
(96% 3 $300,000 sales) 288,000
Total available cash 308,000
Less: Disbursements
Direct materials ($5,000 1 $145,000 2 $7,500) $142,500
Direct labor 40,000
Manufacturing overhead 70,000
Selling and administrative expenses 35,000
Total disbursements 287,500
Excess of available cash over cash disbursements 20,500
Financing
Less: Repayment of principal and interest 3,000
Ending cash balance $ 17,500
DO IT! 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
percentage of total sales, are 15%, 25%, 35%, and 25%, respectively. The sales price
is expected to be $70 per unit for the fi rst three quarters and $75 per unit beginning
in the fourth quarter. Sales in the fi rst quarter of 2015 are expected to be 10% higher
than the budgeted sales volume for the fi rst quarter of 2014.
Production. Management desires to maintain ending fi nished goods inventories at
20% of the next quarter’s budgeted sales volume.
Instructions
Prepare the sales budget and production budget by quarters for 2014.
Solution to Comprehensive 2
Comprehensive
Asheville Company
Sales Budget
For the Year Ending December 31, 2014
Quarter
1 2 3 4 Year
Expected unit sales 315,000 525,000 735,000 525,000 2,100,000
Unit selling price 3 $70 3 $70 3 $70 3 $75 —
Total sales $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 Year
Expected unit sales 315,000 525,000 735,000 525,000
Add: Desired ending fi nished goods units 105,000 147,000 105,000 69,300a
Total required units 420,000 672,000 840,000 594,300
Less: Beginning fi nished goods units 63,000b 105,000 147,000 105,000
Required production units 357,000 567,000 693,000 489,300 2,106,300
aEstimated fi rst-quarter 2015 sales volume 315,000 1 (315,000 3 10%) 5 346,500; 346,500 3 20%
b20% of estimated fi rst-quarter 2014 sales units (315,000 3 20%)
DO IT!
Action Plan
✔ Know the form and con-
tent of the sales budget.
✔ Prepare the sales
budget fi rst 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 fi nished goods
units.
D-8 DO IT!
>
DO IT! REVIEW
Use this list of terms to complete the sentences that follow.
Long-range plans Participative budgeting
Sales forecast Operating budgets
Master budget 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
specifi ed 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.
DO IT! 9-1
Zeller Company estimates that 2014 unit sales will be 20,000 in quarter 1,
24,000 in quarter 2, and 29,000 in quarter 3, at a unit selling price of $20. Management
desires to have ending fi nished goods inventory equal to 10% of the next quarter’s ex-
pected unit sales. Prepare a production budget by quarter for the fi rst six months of 2014.
Ash Creek 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 1,000,000 units. Quarterly sales are 20%,
20%, 30%, and 30%, respectively. The sales price is expected to be $40 per unit for the
fi rst three quarters and $45 per unit beginning in the fourth quarter. Sales in the fi rst
quarter of 2015 are expected to be 20% higher than the budgeted sales for the fi rst quar-
ter of 2014.
Production. Management desires to maintain the ending fi nished 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 fi rst quarter of 2015
are 450,000 pounds.
Prepare the sales, production, and direct materials budgets by quarters for 2014.
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 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.
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?
Identify budget
terminology.
(LO 2, 3), K
Production budget.
(LO 3), AP
Prepare sales, production,
and direct materials budgets.
(LO 3), AP
Calculate budgeted total unit
cost and prepare budgeted
income statement.
(LO 4), AP
Determine amount of fi nancing
needed.
(LO 5), AP
DO IT! 9-2
DO IT! 9-3
DO IT! 9-4
DO IT! 9-5
DO IT!

Navigation menu