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Chapter 9 - Profit Planning

1. A strategic plan identifies strategies for future activities and operations, generally covering at least five years.
a. True
b. False

ANSWER: True

2. Budgets are financial plans for the future.


a. True
b. False

ANSWER: True

3. The master budget is composed of operating budgets and financial budgets.


a. True
b. False

ANSWER: True

4. Control is achieved by comparing actual results with budgeted results on a periodic basis.
a. True
b. False

ANSWER: True

5. Planning is looking ahead to see what actions should be taken to realize particular goals.
a. True
b. False

ANSWER: True

6. Budgets identify objectives and the actions needed to achieve them because they are foresighted financial plans.
a. True
b. False

ANSWER: True

7. A firm should develop a strategic plan before preparing a budget.


a. True
b. False

ANSWER: True

8. A firm acquires information that can be used to improve decision making from a budgetary system.
a. True
b. False

ANSWER: True

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Chapter 9 - Profit Planning

9. Comparing actual results with budgeted results on a periodic basis provides control in a budgetary system.
a. True
b. False

ANSWER: True

10. A large difference between actual and planned results is feedback that the system is providing adequate control.
a. True
b. False

ANSWER: False

11. Communication and coordination are served by budgets.


a. True
b. False

ANSWER: True

12. The master budget is typically a comprehensive financial plan for the organization for the past fiscal year.
a. True
b. False

ANSWER: False

13. A continuous budget is a moving 12-month budget.


a. True
b. False

ANSWER: True

14. The department manager reviews the budget, provides policy guidelines and budgetary goals, and resolves
differences that arise as the budget is prepared, approves the final budget, and monitors the actual performance of
the organization as the year unfolds.
a. True
b. False

ANSWER: False

15. The budget director is the person responsible for directing and coordinating the organization's overall budgeting
process.
a. True
b. False

ANSWER: True

16. The first budget to be prepared is the sales budget.


a. True
b. False

ANSWER: True

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Chapter 9 - Profit Planning

17. The production budget is prepared in units and in dollars.


a. True
b. False

ANSWER: False
RATIONALE: The production budget is prepared in units only, not dollars.

18. The direct materials purchases budget is based on the sales budget.
a. True
b. False

ANSWER: False
RATIONALE: The direct materials purchases budget is based on the production budget.

19. There are as many direct materials purchases budgets as there are products.
a. True
b. False

ANSWER: False

20. The direct labor budget includes: units to be produced, direct labor time needed per unit, and total direct labor cost
for the period.
a. True
b. False

ANSWER: True

21. The selling and administrative expenses budget is part of the operating budgets.
a. True
b. False

ANSWER: True

22. The sales budget is used directly in the development of the production budget.
a. True
b. False

ANSWER: True

23. In preparing the direct labor budget, the average wage rate is used to calculate total direct labor cost.
a. True
b. False

ANSWER: True

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Chapter 9 - Profit Planning

24. The cash budget includes the beginning balance of cash, cash receipts, cash disbursements, and the ending balance
of cash.
a. True
b. False

ANSWER: True

25. If the initial cash budget indicates a cash deficiency, the company must go out of business.
a. True
b. False

ANSWER: False

26. Cash receipts must be at least as much as sales.


a. True
b. False

ANSWER: False

27. Cash budgets are often prepared monthly or even weekly.


a. True
b. False

ANSWER: True

28. The output of the cost of goods sold budget is entered into the pro forma balance sheet.
a. True
b. False

ANSWER: False
RATIONALE: The output of the cost of goods sold budget is entered into the pro forma income statement.

29. Individual behavior that is in basic conflict with the goals of the organization is called goal congruence.
a. True
b. False

ANSWER: False
RATIONALE: Individual behavior that is in basic conflict with the goals of the organization is called dysfunctional behavior.

30. Pseudoparticipation is one of the potential problems with participative budgeting.


a. True
b. False

ANSWER: True

31. Budgets should be based on ideal standards to encourage everyone to reach for the highest level of performance.
a. True
b. False

ANSWER: False
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Chapter 9 - Profit Planning

32. Ideally, managers are held accountable for controllable costs.


a. True
b. False

ANSWER: True

33. Myopic behavior is one of the advantages of participative budgeting.


a. True
b. False

ANSWER: False

34. Monetary incentives include salary increases, bonuses, and promotions.


a. True
b. False

ANSWER: True

35. __________________ is looking ahead to see what actions should be taken to realize particular goals.
ANSWER: Planning

36. The ________________ plots a direction for an organization’s future activities and operations; it generally covers
at least five years.
ANSWER: strategic plan

37. Budgets improve _________________.


ANSWER: decision making

38. The _________________ is the comprehensive financial plan for the organization as a whole.
ANSWER: master budget

39. A __________________ is a moving 12-month budget.


ANSWER: continuous budget

40. The controller of the company usually serves as the __________________.


ANSWER: budget director

41. The cash budget and budgeted balance sheet are part of the ________________.
ANSWER: financial budget

42. The _______________ tells how many units must be produced to meet sales needs and to satisfy ending
inventory requirements.
ANSWER: production budget

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Chapter 9 - Profit Planning

43. The __________________ shows the expected cost of all production costs other than direct materials and direct
labor.
ANSWER: overhead budget

44. Salaries expense, advertising expense and depreciation expense would be included in the
______________________ budget.
ANSWER: selling and administrative expenses

45. The basic structure of a ______________ includes cash receipts, cash disbursements, any excess or deficiency of
cash, and financing.
ANSWER: cash budget

46. _________________ consists of beginning cash balance and the expected cash receipts.
ANSWER: Cash available

47. The alignment of managerial and organizational goals is often referred to as _______________.
ANSWER: goal congruence

48. ____________________ is individual behavior that is in basic conflict with the goals of the organization.
ANSWER: Dysfunctional behavior

49. ______________ are the means an organization uses to influence a manager to exert effort to achieve an
organization’s goals.
ANSWER: Incentives

50. Examples of ________________ include job enrichment, increased responsibility and autonomy, and recognition
programs.
ANSWER: nonmonetary incentives

51. _____________________ allows subordinate managers considerable say in how the budgets are established.
ANSWER: Participative budgeting

52. ___________________ exists when a manager deliberately underestimates revenues or overestimates cost in an
effort to make the future period appear less attractive in the budget than they think it will be in reality.
ANSWER: Budgetary slack

53. When top management assumes total control of the budgeting process and only seeks superficial participation from
lower-level managers this is known as ________________.
ANSWER: pseudoparticipation

54. _________________ are used to ensure that budgeted costs can be realistically compared with costs for actual
levels of activity.
ANSWER: Flexible budgets

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Chapter 9 - Profit Planning

55. Which of the following is an advantage of budgeting?


a. Forces managers to plan.
b. Provides information useful for control.
c. Provides information for improved decision making.
d. Improves communication.
e. All of these.

ANSWER: e

56. Which of the following is a use of budgets for control?


a. Plans can be made for the future.
b. If conditions change between the formation of the budget and the current time, budgets can be quickly
adapted.
c. Budgets set a standard against which results can be compared.
d. Communication is improved.
e. All of these.

ANSWER: c

57. Which of the following budgets can be used for control?


a. Production budget
b. Cash budget
c. Budgeted income statement
d. Selling and administrative expense budget
e. All of these

ANSWER: e

58. In a (n) ____, as one month expires, an additional month in the future is added to the budget so that the company
always has a 12-month plan on hand.
a. continuous budget
b. financial budget
c. operational budget
d. yearly budget
e. master budget

ANSWER: a

59. The ____ is the person responsible for directing and coordinating the organization's overall budget process.
a. budget master
b. controller
c. chief financial planner
d. budget director
e. chief accountant

ANSWER: d

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Chapter 9 - Profit Planning

60. Looking backward to determine what actually happened and comparing it with the previously planned outcomes is
a. control.
b. communicating.
c. decision making.
d. strategic planning.
e. budgeting.

ANSWER: a

61. Budgets are


a. key components of planning.
b. financial plans for the future.
c. an identifier of objectives and the actions needed to achieve them.
d. used for communication and coordination.
e. all of these.

ANSWER: e

62. The master budget is


a. the selective financial plan for the organization as a whole.
b. typically for a 1-year period corresponding to the fiscal year of the company.
c. broken down into daily and weekly budgets.
d. used for misinformation and coordination.
e. all of these.

ANSWER: b

63. Which of the following is not true?


a. The sales forecast is done before the sales budget.
b. The master budget is the comprehensive plan for the organization as a whole.
c. The production budget is prepared in units and dollars.
d. One approach to forecasting sales is the bottom-up approach.
e. In creating the sales forecast, outside factors such as the state of the economy, should be considered.

ANSWER: c

64. The first step in creating the master budget is the creation of the
a. production budget.
b. direct labor budget.
c. cash budget.
d. sales budget.
e. budgeted income statement.

ANSWER: d

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Chapter 9 - Profit Planning

65. The budget that describes how many units must be produced in order to meet sales needs and ending inventory
objectives is the
a. production budget.
b. direct materials purchases budget.
c. cash budget.
d. budgeted income statement.
e. none of these.

ANSWER: a

66. Direct materials needed for production is calculated by


a. multiplying units to be produced by direct materials per unit.
b. subtracting units to be produced from direct materials per unit.
c. dividing units to be produced by direct materials per unit.
d. adding units to be produced to direct materials per unit.
e. subtracting direct materials per unit from units to be produced.

ANSWER: a

67. In preparing the overhead budget, many companies use


a. activity-based costing.
b. multiple drivers for a simple budget.
c. participative costing.
d. a unit-based driver such as direct labor hours.
e. none of these.

ANSWER: d

68. Which of the following statements is true?


a. The overhead budget is typically composed of variable overhead and fixed overhead.
b. The direct labor budget uses an average wage rate for direct labor.
c. The production budget is not converted into dollars.
d. The sales budget includes both units and dollars.
e. All of these.

ANSWER: e

69. The ending finished goods inventory budget supplies information needed for the
a. sales budget.
b. cash budget.
c. budgeted income statement.
d. cost of goods sold budget.
e. all of these.

ANSWER: d

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Chapter 9 - Profit Planning

70. Which of the following budgets are needed to calculate a budgeted unit cost?
a. Direct materials purchases budget
b. Direct labor budget
c. Overhead budget
d. Direct materials purchases budget and overhead budget
e. Direct materials purchases budget, direct labor budget, and overhead budget

ANSWER: e

71. The selling and administrative expenses budget includes


a. cost of goods sold.
b. overhead.
c. fixed production expense.
d. variable cost of selling.
e. all of these.

ANSWER: d

72. Budgeted operating income includes


a. budgeted interest expense.
b. budgeted income taxes.
c. budgeted cost of goods sold.
d. budgeted net income.
e. none of these.

ANSWER: c

73. Depreciation expense on sales equipment appears in a separate line on which of the following budgets?
a. Cash budget
b. Selling and administrative expenses budget
c. Direct labor budget
d. Production budget
e. Overhead budget

ANSWER: b

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Chapter 9 - Profit Planning

74. Rodriquez Company budgeted the following sales in units:

January 30,000
February 20,000
March 40,000

Rodriquez's policy is to have 20% of the following month's sales in inventory. On January 1, inventory equaled
7,500 units. February production in units is
a. 20,000.
b. 28,000.
c. 40,000.
d. 26,500.
e. 24,000.

ANSWER: e
RATIONALE: January February
Sales 30,000 20,000
+ Desired EI 4,000 8,000
Units needed 34,000 28,000
− Beginning inventory 7,500 4,000
Production 26,500 24,000

75. A company has had stable sales and production for several years. Next year, sales are expected to increase by at
least 50%. Assuming that the company maintains its policy for desired ending inventories of finished product and
direct materials purchases, what will be the likely effect on the desired ending inventory of finished product?
a. It will increase
b. It will decrease
c. It will stay the same
d. It will be twice the size of the desired ending inventory of raw materials
e. None of these

ANSWER: a

76. A company expects the following sales for the coming year:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter


Units 40,000 30,000 60,000 80,000
Average selling price $5 $5 $5 $6
Budgeted sales revenue for the year is
a. $1,050,000
b. $1,260,000
c. $1,155,000
d. $1,130,000
e. it is impossible to tell from this information

ANSWER: d
RATIONALE: Budgeted sales = [(40,000 + 30,000 + 60,000) × $5] + (80,000 × $6) = $1,130,000
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Chapter 9 - Profit Planning

77. A company provided the following information on sales for the coming year:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter


Units 40,000 40,000 30,000 80,000
Average selling price $5 $5 $5 $6
Assuming that the beginning inventory is 3,000 units, and that the company policy is to have 25% of the next
quarter's sales in ending inventory, which quarter will have the lowest production?
a. Quarter 4
b. Quarter 3
c. Quarter 2
d. Quarter 1
e. All quarters have the same production

ANSWER: c
RATIONALE: Production budget:
Qtr 1 Qtr 2 Qtr 3 Qtr 4
Sales 40,000 40,000 30,000 80,000
+ Desired ending inventory 10,000 7,500 20,000
Units needed 50,000 47,500 50,000
− Beginning inventory − 3,000 − 10,000 − 7,500
Production 47,000 37,500 42,500

Since Quarter 4 must have production that is at least 60,000 (80,000 + some level of desired ending
inventory − 20,000), Quarter 2 is the lowest.

78. Belant Company budgeted 200,000 units of production for June, 210,000 units for July and 300,000 units for August.
Each unit requires 0.25 direct labor hours. How many direct labor hours are budgeted for August?
a. 50,000
b. 5,000
c. 75,000
d. 52,500
e. 300,000

ANSWER: c
RATIONALE: Direct labor hours = 0.25 × 300,000 = 75,000

79. In budgeting direct labor hours for the coming year, it is important to
a. multiply production in units by the direct labor hours per unit.
b. divide production in units by the direct labor hours per unit.
c. subtract production in units from the direct labor hours per unit.
d. subtract direct labor hours per unit from production in units.
e. multiply production in units by the labor wage rate.

ANSWER: a

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Chapter 9 - Profit Planning

80. Galvern Company provided the following data for July:

Direct materials $50,000


Direct labor $25,000
Overhead $90,000
Beginning finished goods $15,000
Ending finished goods $34,000
Production in units 10,000
What is the cost of goods sold?
a. $165,000
b. $146,000
c. $214,000
d. $184,000
e. $75,000

ANSWER: b
RATIONALE: Cost of goods manufactured = $50,000 + $25,000 + $90,000 = $165,000
Cost of goods sold = $165,000 + $15,000 − $34,000 = $146,000

81. A production budget is most important for which of the following?


a. retail stores
b. manufacturing firms
c. not-for-profit agencies
d. local government agencies
e. all of these

ANSWER: b

82. A company requires 200 pounds of plastic to meet the production needs of a product. It currently has 20 pounds of
plastic inventory. The desired ending inventory of plastic is 60 pounds. How many pounds of plastic should be
budgeted for purchasing during the coming period?
a. 200 pounds
b. 240 pounds
c. 260 pounds
d. 280 pounds
e. 160 pounds

ANSWER: b
RATIONALE: Pounds of plastic to purchase = 200 + 60 − 20 = 240

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Chapter 9 - Profit Planning

83. A company plans on selling 400 units. The selling price per unit is $5. There are 40 units in beginning inventory, and
the company would like to have 75 units in ending inventory. How many units should be produced for the coming
period?
a. 435
b. 400
c. 365
d. 2,000
e. 2,035

ANSWER: a
RATIONALE: Units to produce = 400 + 75 − 40 = 435

84. A company has provided a sales budget for the next four months. It bases its production budget on the sales budget,
and has a policy that each month's ending inventory of finished product must be equal to 25% of the following
month's sales needs. The direct materials purchases budget is based on the production budget. The company's
policy for each month's ending inventory of raw materials is that they must be equal to 10% of the following
month's production needs for raw materials. Given this information, the company can prepare direct materials
purchases budgets for how many months?
a. One
b. Two
c. Three
d. Four
e. Five

ANSWER: b
RATIONALE: Four months of sales budgets allows the calculation of three months of production budgets. The fourth
month is impossible without the fifth month of sales to figure the desired ending inventory for month four.
Similarly, three months of production budgets allows calculation for two months worth of direct materials
purchases budgets. The third month is impossible without the fourth month of production to figure the
desired ending inventory for month three.

85. Which of the following is the most common starting point in the information gathering process for budgeting?
a. The personnel forecast
b. The sales forecast
c. The production forecast
d. The projected income statement

ANSWER: b

86. Which of the following is an operating budget?


a. Budgeted statement of cash flows
b. Capital expenditures budget
c. Budgeted income statement
d. Cash budget

ANSWER: c

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Chapter 9 - Profit Planning

87. What is the formula used to compute the units to be produced?


a. Units produced = Units sold
b. Units produced = Units sold + Units in beginning inventory + Units in ending inventory
c. Units produced = Units sold + Units in beginning inventory − Units in ending inventory
d. Units Produced = Units sold − Units in beginning inventory + Units in ending inventory

ANSWER: d

88. Candace Company produces and sells pillows. It expects to sell 10,000 pillows in the next year and had 1,000
pillows in finished goods inventory at the end of the prior year. Candace would like to complete operations next
year with at least 1,250 completed pillows in inventory. There is no ending work-in-process inventory. The pillows
sell for $5 each. How many pillows would be produced in the next year?
a. 10,000 pillows
b. 11,000 pillows
c. 11,250 pillows
d. 10,250 pillows

ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
10,000 + 1,250 − 1,000 = 10,250 pillows

89. Bright Lamp Company manufactures lamps. The estimated number of lamp sales for the last three months of the
current year are as follows:

Month Sales
October 10,000
November 14,000
December 13,000
Finished goods inventory at the end of September was 3,000 units. Ending finished goods inventory is budgeted to
equal 25% of the next month's sales. Bright Lamp expects to sell the lamps for $25 each. In January of the next
year, sales are projected at 16,000 lamps. How many lamps should be produced in November?
a. 11,000 lamps
b. 10,500 lamps
c. 14,000 lamps
d. 13,750 lamps

ANSWER: d
RATIONALE: SUPPORTING CALCULATIONS:
(13,000 × 0.25) + 14,000 − (14,000 × 0.25) = 13,750 lamps

90. In going from the sales budget to the production budget, adjustments to the sales budget need to be made for
a. finished goods inventories.
b. cash receipts.
c. factory overhead costs.
d. selling expenses.

ANSWER: a

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Chapter 9 - Profit Planning

91. Watson Corporation manufactures boxes. The estimated numbers of boxes sold for the first three months of the
current year are as follows:

Month Sales
January 3,000
February 4,200
March 3,900
Finished goods inventory at the end of December was 600 units. Ending finished goods inventory is equal to 20% of
the next month's sales. Watson Corporation expects to sell the boxes for $5 each. April sales are projected at 4,500
boxes. How many boxes should be produced in February?
a. 4,140 boxes
b. 4,200 boxes
c. 4,260 boxes
d. 3,900 boxes

ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS:
4,200 + (0.20 × 3,900) − (0.20 × 4,200) = 4,140 boxes

Figure 9-1.
Saphire Company budgeted the following production in units for the second quarter of the year:

April 45,000
May 38,000
June 42,000

Each unit requires four pounds of raw material. Saphire's policy is to have 30% of the following month's production
needs for materials in inventory. This policy was met in March.
92. Refer to Figure 9-1. Raw materials purchases budgeted for May in pounds equal:
a. 156,800
b. 202,400
c. 45,600
d. 171,600
e. 225,600

ANSWER: a
RATIONALE: April May June
Production 45,000 38,000 42,000
× materials per unit × 4 ×4 ×4
Raw materials for production 180,000 152,000 168,000
Desired ending inventory 45,600 50,400
Raw materials needed 225,600 202,400
Less: beginning inventory (54,000) (45,600)
Purchases 171,600 156,800

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Chapter 9 - Profit Planning

93. Refer to Figure 9-1. Desired ending inventory for April in pounds equals:
a. 45,600
b. 11,400
c. 10.500
d. 38,300
e. 54,000

ANSWER: a
RATIONALE: April May June
Production 45,000 38,000 42,000
× materials per unit ×4 ×4 ×4
Raw materials for production 180,000 152,000 168,000
Desired ending inventory 45,600 50,400
Raw materials needed 225,600 202,400
Less: beginning inventory (54,000) (45,600)
Purchases 171,600 156,800

Figure 9-2.
Kenner Company produces two products: SR200 and TX500. Budgeted sales for four months are as follows:

SR200 TX500
May 8,000 20,000
June 13,000 32,000
July 11,000 39,000
August 18,000 46,000
Kenner's ending inventory policy is that SR200 should have 15% of next month's sales in ending inventory and
TX500 should have 40% of next month's sales in ending inventory. On May 1, there were 1,200 units of SR200 and
9,000 units of TX500.

TX500 requires 6 units of component A. (SR200 does not use component A.) There were 30,000 units of
component A in inventory on May 1. Kenner wants to have 20% of the following month's production needs in
inventory for Component A.
94. Refer to Figure 9-2. How many units of TX500 are budgeted for production in June?
a. 47,600
b. 34,800
c. 32,000
d. 45,000
e. 12,800

ANSWER: b
RATIONALE: May June
Sales 20,000 32,000
Desired ending inventory 12,800 15,600
Units needed 32,800 47,600
Less: beginning inventory (9,000) (12,800)
Production 23,800 34,800

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Chapter 9 - Profit Planning

95. Refer to Figure 9-2. What is the budgeted production of SR200 for May in units?
a. 8,750
b. 9,950
c. 8,000
d. 1,200
e. 10,500

ANSWER: a
RATIONALE: May June
Sales 8,000 13,000
Desired ending inventory 1,950 1,650
Units needed 9,950 14,650
Less: beginning inventory (1,200) (1,950)
Production 8,750 12,700

96. Refer to Figure 9-2. What is the budgeted amount of component A to be purchased in May?
a. 41,760
b. 142,800
c. 154,560
d. 164,600
e. 66,600

ANSWER: c
RATIONALE: May June
Production 23,800 34,800
× units of component A × 6 × 6
Component A needed for production 142,800 208,800
Desired ending inventory 41,760
Units needed 184,560
Less: beginning inventory (30,000)
Production 154,560

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Chapter 9 - Profit Planning

97. Refer to Figure 9-2. What is the desired ending inventory of component A for May?
a. 86,000
b. 180,000
c. 58,500
d. 41,760
e. 30,000

ANSWER: d
RATIONALE: May June
Production 23,800 34,800
× units of component A × 6 × 6
Component A needed for production 142,800 208,800
Desired ending inventory* 41,760
Units needed 184,560
Less: beginning inventory (30,000)
Production 154,560

*208,800 × 20% = 41,760

Figure 9-3.
Zion Company manufactures sneakers. Production of their new sneaker for the coming three months is budgeted
as follows:

August 26,000
September 48,000
October 31,000

Each sneaker requires 1.5 hours of direct labor time. Direct labor wages average $13 per hour. Monthly overhead
averages $8 per direct labor hour plus fixed overhead of $4,300.
98. Refer to Figure 9-3. What is the direct labor cost budgeted for September?
a. $820,000
b. $750,000
c. $140,000
d. $936,000
e. $625,000

ANSWER: d
RATIONALE: September direct labor cost = 48,000 × 1.50 × $13 = $936,000

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Chapter 9 - Profit Planning

99. Refer to Figure 9-3. What is the total overhead budgeted for the month of September?
a. $680,000
b. $580,300
c. $142,100
d. $460,000
e. $362,100

ANSWER: b
RATIONALE: Budgeted overhead = ($8 × 48,000 × 1.50) + $4,300 = $580,300

Figure 9-4.
Bickford Company plans to sell 135,000 units in November and 180,000 units in December. Bickford's policy is that
10% of the following month's sales must be in ending inventory. On November 1, there were 14,000 units in
inventory.

It takes 30 minutes of direct labor time to make one unit. Direct labor wages average $17 per hour. Variable
overhead is applied at the rate of $5 per direct labor hour. Fixed overhead is budgeted at $56,500 per month.
100. Refer to Figure 9-4. What is the direct labor cost budgeted for November?
a. $1,181,500
b. $950,600
c. $707,600
d. $2,152,000
e. $622,800

ANSWER: a
RATIONALE: November production = 135,000 + (0.10 × 180,000) − 14,000 = 139,000 units

Direct labor hours = 0.50 hours per unit × 139,000 = 69,500 hours

Direct labor cost = $17 × 69,500 = $1,181,500

101. Refer to Figure 9-4. What is the budgeted production in units for November?
a. 100,000
b. 140,000
c. 121,000
d. 125,600
e. 139,000

ANSWER: e
RATIONALE: November production = 135,000 + (0.10 × 180,000) − 14,000 = 139,000 units

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102. Refer to Figure 9-4. What is the budgeted overhead for November?
a. $444,500
b. $280,700
c. $404,000
d. $348,420
e. $192,920

ANSWER: c
RATIONALE: November production = 135,000 + (0.10 × 180,000) − 14,000 = 139,000 units

Direct labor hours = 0.50 hours per unit × 139,000 = 69,500 hours

Budgeted overhead for November = ($5 × 69,500) + 56,500 = $404,000

Figure 9-5.
Sully Company provided the following information for last month.

Production in units 3,000


Direct materials cost $7,000
Direct labor cost $10,000
Overhead cost $9,600
Sales commission per unit sold $4
Price per unit sold $29
Fixed selling and administrative expense $7,000
There were no beginning and ending inventories.
103. Refer to Figure 9-5. What is Sully's cost of goods sold per unit?
a. $12.60
b. $8.87
c. $10.00
d. $12.50
e. $16.60

ANSWER: b
RATIONALE: Direct materials cost $7,000
Direct labor cost $10,000
Overhead cost $9,600
Total manufacturing costs $26,600
Units produced 3,000
Cost of goods sold per unit $8.87

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104. Refer to Figure 9-5. What is gross margin for Sully Company last month?
a. $54,000
b. $64,600
c. $32,400
d. $47,400
e. $60,400

ANSWER: e
RATIONALE: Sales ($29 × 3,000) $87,000
Cost of goods sold ($7,000 + 10,000 + 9,600) 26,600
Gross margin $60,400

105. Refer to Figure 9-5. What is operating income for Sully Company for last month?
a. $24,000
b. $34,600
c. $49,400
d. $27,400
e. $41,400

ANSWER: e
RATIONALE: Sales ($29 × 3,000) $87,000
Cost of goods sold ($7,000 + 10,000 + 9,600) 26,600
Gross margin $60,400
Less: commission ($4 × 3,000) (12,000)
Less: fixed selling and admin. expense (7,000)
Operating income $41,400

Figure 9-10.
Connor Company produces speaker systems for cars. Estimated sales (in units) in January are 40,000; in February
37,000; and in March 34,000. Each unit is priced at $60. Connor wants to have 35% of the following month's sales
in ending inventory. That requirement was met on January 1.

Each speaker system requires 3 boxes and 15 yards of wire. Boxes cost $4 each and wire is $0.60 per yard.
Connor wants to have 20% of the following month's production needs in ending raw materials inventory. On
January 1, Connor had 24,000 boxes and 100,000 yards of wire in inventory.
106. Refer to Figure 9-10. What is Connor's expected sales revenue for February?
a. $2,020,000
b. $1,900,000
c. $60
d. $1,125,000
e. $2,220,000

ANSWER: e
RATIONALE: February revenue = 37,000 × $60 = $2,220,000

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107. Refer to Figure 9-10. How many units does Connor expect to produce in February?
a. 25,700
b. 30,500
c. 23,750
d. 35,950
e. 25,000

ANSWER: d
RATIONALE: January February
Sales 40,000 37,000
Desired ending inventory (35%) 12,950 11,900
Units needed 52,950 48,900
Less: beginning inventory (14,000) (12,950)
Production 38,950 35,950

108. Refer to Figure 9-10. How many boxes does Connor expect to purchase in January?
a. 159,650
b. 114,420
c. 214,550
d. 148,500
e. 138,420

ANSWER: b
RATIONALE: January February
Production 38,950 35,950
× raw materials per unit × 3 × 3
Raw materials for production 116,850 107,850
Desired ending inventory 21,570
Units needed 138,420
Less: beginning inventory (24,000)
Purchases in units 114,420

Figure 9-11.
Pallen Company estimated sales of 11,000 units at $40 each, unit cost of goods sold of $22, marketing expense of
$65,000 and a 10% commission on each unit sold. Administrative expense is budgeted at $50,000.
109. Refer to Figure 9-11. What is total selling expense?
a. $65,000
b. $44,000
c. $84,000
d. $109,000
e. $39,000

ANSWER: d
RATIONALE: Total selling expense = $109,000

109,000 = $65,000 + ($40 × 0.10 × 11,000)

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110. Refer to Figure 9-11. What is Pallen's budgeted operating income?


a. $281,000
b. $39,000
c. $198,000
d. $83,000
e. $440,000

ANSWER: b
RATIONALE: Budgeted operating income = $39,000
39,000 = ($40 × 11,000) − ($22 × 11,000) − $109,000* − $50,000

*109,000 = $65,000 + ($40 × 0.10 × 11,000) = Budgeted Marketing Expenses

111. Budgets are prepared in which of the following orders?


a. production budget, sales budget, direct labor budget
b. production budget, cost of goods sold budget, direct labor budget
c. sales budget, cash budget, production budget
d. sales budget, production budget, direct materials purchases budget
e. production budget, cash budget, direct materials purchases budget

ANSWER: d

112. Suppose that a company has the following accounts receivable collection pattern:

Paid in the month of sale 30%


Paid in the month following sale 70%

All sales are on credit. If credit sales for January and February are $200,000 and $100,000 respectively, the cash
collection for February is
a. $210,000
b. $100,000
c. $130,000
d. $140,000
e. $170,000

ANSWER: e
RATIONALE: Cash from January sales (0.7 × $200,000) $140,000
Cash from February sales (0.3 × $100,000) 30,000
Cash received in February $170,000

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Chapter 9 - Profit Planning

113. Which of the following statements is true?


a. The production budget is the first budget to be prepared in the master budget.
b. The cash budget is prepared before the direct materials purchases budget.
c. The budgeted balance sheet is prepared after the cash budget.
d. Service firms need not prepare a master budget.
e. The cost of goods sold budget is prepared before the direct labor and overhead budgets.

ANSWER: c

Figure 9-9.
Yummy Jams Company produces a line of jams. Yummy's estimated production of jars of jam for the fourth
quarter of the year is as follows:

October 75,000
November 98,000
December 63,000

Each jar requires half a pound of berries. Yummy prefers to buy the freshest berries, so its policy is to have just 3%
of the following month's production needs in ending inventory. On October 1, the company had 1,125 pounds of
berries in inventory. Yummy's pays $0.60 per pound of berries. It buys all berries on account and typically pays
40% of a month's purchases in that month, and the remaining 60% the following month.
114. Refer to Figure 9-9. How many pounds of berries will be purchased during the month of November?
a. 23,375
b. 48,475
c. 39,925
d. 41,950
e. 49,945

ANSWER: b
RATIONALE: October November December
Production 75,000 98,000 63,000
× 0.50 lbs × 0.50 × 0.50 × 0.50
Berries needed for production 37,500 49,000 31,500
Desired ending inventory 1,470 945
Berries needed 38,970 49,945
Less: beginning inventory (1,125) (1,470)
Berries purchases in pounds 37,845 48,475

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115. Refer to Figure 9-9. What is the dollar cost of purchases for October?
a. $19,925
b. $22,707
c. $18,450
d. $23,300
e. $33,320

ANSWER: b
RATIONALE: October
Production 75,000
× 0.50 lbs × 0.50
Berries needed for production 37,500
Desired ending inventory 1,470
Berries needed 38,970
Less: beginning inventory (1,125)
Berries purchases in pounds 37,845
× 0.60 per pound × 0.60
Total direct materials cost 22,707

116. Refer to Figure 9-9. How much cash is paid in November for berry purchases (rounded to the nearest dollar)?
a. $25,258
b. $21,088
c. $28,900
d. $19,963
e. $32,212

ANSWER: a
RATIONALE: Cash paid in November for purchases:
October purchases $22,707 × 0.60 = 13,624.20
November purchases $29,085 × 0.40 = 11,634.00
Total $25,258.20

117. Bank loan officers would find which of the following budgets to be one of the most important in determining
whether or not to give a company a loan?
a. Sales budget
b. Production budget
c. Budgeted income statement
d. Budgeted balance sheet
e. Cash budget

ANSWER: e

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118. A company anticipates selling $200,000 of goods, of which $15,000 will probably be uncollectible. Which of the
following statements is true?
a. $15,000 does not appear on the cash budget.
b. $215,000 is added to the cash budget.
c. $15,000 is subtracted from the cash budget.
d. $185,000 appears as a disbursement on the cash budget.
e. None of these.

ANSWER: a

119. A company's planned borrowings and repayments appear on the


a. production budget.
b. selling and administrative expenses budget.
c. interest income budget.
d. cash budget.
e. operating budget.

ANSWER: d

120. The planned ending cash balance for the year appears on which of the following statements?
a. Budgeted income statement
b. Budgeted balance sheet
c. Production budget
d. Budgeted cash receipts
e. Budgeted cash disbursements

ANSWER: b

121. Gilbert Company purchased $40,000 of goods in July and expects to purchase $60,000 of goods in August. Gilbert
typically pays for 25% of purchases in the month of purchase and 75% in the following month. What are Gilbert
Company's total expected cash disbursements for purchases in the month of August?
a. $65,000
b. $40,000
c. $45,000
d. $60,000
e. $100,000

ANSWER: c
RATIONALE: Expected cash disbursements = ($40,000 × 0.75) + ($60,000 × 0.25) = $45,000

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122. Which of the following appears on the budgeted balance sheet?


a. Estimated sales
b. Estimated cost of goods sold
c. Estimated ending accounts receivable
d. Estimated fixed selling expense
e. Estimated fixed factory overhead

ANSWER: c

123. Cash budgeting is important to which of the following?


a. retail stores
b. manufacturing firms
c. not-for-profit agencies
d. local government agencies
e. all of these

ANSWER: e

124. Ressen Company finds that typically 30% of a month's sales are for cash. Payments on accounts receivable are
60% in the month of sale and 38% in the month following sale. Budgeted sales for June are $100,000, for July
$140,000, and for August $120,000. What are the total cash receipts budgeted for July?
a. $127,400
b. $85,400
c. $122,000
d. $262,000
e. $140,000

ANSWER: a
RATIONALE: July
Cash sales ($140,000 × 0.30) $ 42,000
Payments on account for sales in:
June ($100,000 × 0.7 × 0.38) 26,600
July ($140,000 × 0.70 × 0.60) 58,800
Total cash receipts $127,400

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125. Schrandt Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly master budget.
Data for the July master budget are given below:

The June 30th balance sheet follows:

Cash $ 25,000 Accounts payable $ 45,000


Accounts receivable 110,000 Capital stock 300,000
Inventory 54,000 Retained earnings 94,000
Building and equipment (net) 250,000
Actual sales for June and budgeted sales for July, August, and September are given below:

June $137,500
July 360,000
August 400,000
September 320,000
Sales are 20% for cash and 80% on credit. All credit sales are collected in the month following the sale. There are
no bad debts.

The gross margin percentage is 40% of sales. The desired ending inventory is equal to 25% of the following
month's sales. One fourth of the purchases are paid for in the month of purchase and the others are purchased on
account and paid in full the following month.

The monthly cash operating expenses are $43,000, and the monthly depreciation expenses are $7,000.

What is the balance of the accounts receivable at the end of July?


a. $110,000
b. $288,000
c. $360,000
d. $398,000

ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
80% × 360,000 = $288,000

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126. June Corporation has the following sales forecasts for the first three months of the current year:

Month Sales
January $36,000
February 24,000
March 40,000
75% of sales are collected in the month of the sale and the remainder is collected in the following month.

Accounts receivable balance (January 1) $22,800


Cash balance (January 1) 22,000
Minimum cash balance needed 20,000
What is the cash balance at the end of January, assuming that cash is received only from customers and that
$48,000 is paid out during January?
a. $19,400
b. $23,800
c. $20,600
d. $21,000

ANSWER: b
RATIONALE: SUPPORTING CALCULATIONS:
$22,000 + $22,800 + (0.75 × $36,000) − $48,000 = $23,800

Figure 9-6.
Toscano Company makes all its sales on account. Accounts receivable payment experience is as follows:

Percent paid in the month of sale 25%


Percent paid in the month after the sale 64%
Percent paid in the second month after the sale 5%
Toscano provided information on sales as follows:

May $140,000
June $115,000
July $126,000
August (expected) $132,000
127. Refer to Figure 9-6. How much of May's sales are expected to be uncollectible?
a. $8,400
b. $5,000
c. $2,500
d. $7,200
e. $0

ANSWER: a
RATIONALE: May uncollectible sales = $140,000 × 0.06 = $8,400

6% is obtained by the following: 1.00 − (0.25 + 0.64 + 0.05) = 0.06

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Chapter 9 - Profit Planning

128. Refer to Figure 9-6. How much of June credit sales are expected to be collected in the month of July?
a. $30,000
b. $60,000
c. $36,000
d. $73,600
e. $80,000

ANSWER: d
RATIONALE: June credit sales collected in July = $115,000 × 0.64 = $73,600

129. Refer to Figure 9-6. What is budgeted cash to be collected on account for the month of August?
a. $45,000
b. $132,000
c. $119,390
d. $150,000
e. $154,600

ANSWER: c
RATIONALE: From June ($115,000 × 0.05) $5,750
From July ($126,000 × 0.64) 80,640
From August ($132,000 × 0.25) 33,000
Total cash expected $119,390

Figure 9-7.
Lambert Company purchased $140,000 of goods in September and expects to purchase $130,000 of goods in
October. Lambert typically pays for 20% of purchases in the month of purchase and 80% in the following month.

Every month, Lambert must make the following payments:

Rent $ 5,000
Wages 14,000
Utilities 3,000
Telephone 400
Loan on equipment 1,200

In mid-October, Lambert expects to buy a new computer for $4,500 using the company credit card. Typically, the
credit card bill is paid in full in the following month. September credit card purchases totaled $6,000.
130. Refer to Figure 9-7. What is Lambert's expected cash disbursement in October for purchases of goods?
a. $140,000
b. $130,000
c. $112,000
d. $138,000
e. $26,000

ANSWER: d
RATIONALE: Cash payments for goods in October = ($140,000 × 0.80) + ($130,000 × 0.20) = $138,000

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131. Refer to Figure 9-7. What are the total cash disbursements expected by Lambert during the month of October?
a. $167,600
b. $172,100
c. $161,600
d. $55,600
e. $60,100

ANSWER: a
RATIONALE: Rent $ 5,000
Wages 14,000
Utilities 3,000
Telephone 400
Loan on equipment 1,200
Payments for goods ($140,000 × 0.80) + ($130,000 × 0.20) 138,000
Payment for September credit card purchases 6,000
Total cash disbursements in October $167,600

Figure 9-8.
Cohlmia Company makes all its sales on account. Cohlmia's accounts receivable payment experience is as follows:

Percent paid in the month of sale 20%


Percent paid in the month after the sale 75%
Percent paid in the second month after the sale 2%
Cohlmia provided information on sales as follows:

September $100,000
October $120,000
November $200,000
December (expected) $250,000
132. Refer to Figure 9-8. What are the expected cash receipts in the month of November?
a. $200,000
b. $40,000
c. $190,000
d. $132,000
e. $114,000

ANSWER: d
RATIONALE: November cash receipts = ($200,000 × 0.20) + ($120,000 × 0.75) + ($100,000 × 0.02) = $132,000

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133. Refer to Figure 9-8. What are the expected cash receipts in December?
a. $202,400
b. $210,400
c. $50,000
d. $250,000
e. $179,000

ANSWER: a
RATIONALE: December cash receipts = ($250,000 × 0.20) + ($200,000 × 0.75) + ($120,000 × 0.02) = $202,400

134. The following forecasted sales pertain to Micah Company:

Month Sales
April $200,000
May 250,000
June 150,000
July 100,000
Collection pattern:
60% in month of sale
40% in month following the sale

Accounts receivable as of March 31 $35,000


Finished goods inventory as of March 31 4,000 units
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20% of the next
month's sales. How many units are expected to be produced in April?
a. 21,000 units
b. 19,000 units
c. 25,000 units
d. 20,000 units

ANSWER: a
RATIONALE: SUPPORTING CALCULATIONS: ($200,000 / $10) + [($250,000 / $10) × 0.20] − 4,000 = 21,000
units

135. The alignment of managerial and organizational goals is referred to as goal


a. congruence.
b. participation.
c. pseudoparticipation.
d. feedback.
e. incentives.

ANSWER: a

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136. Traditional organization theory uses which of the following to motivate workers?
a. Bonuses
b. Self-esteem
c. Nature of the work itself
d. Increased responsibility
e. Job satisfaction

ANSWER: a

137. ____ occurs when a manager deliberately underestimates revenues or overestimates costs.
a. Budgetary slack
b. Pseudoparticipation
c. Goal congruence
d. Setting standards too high
e. None of these

ANSWER: a

138. Which of the following is true of the master budget?


a. Monthly budgets are derived by dividing the master budget by 12.
b. Fixed costs cannot change from one month to another.
c. Variable costs cannot change from one month to another.
d. The master budget can reflect seasonal effects.
e. None of these.

ANSWER: d

139. Which of the following is not an advantage of participative budgeting?


a. It fosters a sense of creativity in managers.
b. It encourages the introduction of budgetary slack.
c. It encourages greater goal congruence.
d. It encourages a higher level of performance.
e. It fosters a sense of managerial responsibility.

ANSWER: b

140. Which of the following is an advantage of participative budgeting?


a. It fosters pseudoparticipation.
b. It encourages budgetary slack.
c. It tends to discourage goal congruence.
d. It fosters a sense of responsibility.
e. There are no advantages of participative budgeting.

ANSWER: d

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141. Which of the following is an example of myopic behavior?


a. Promotion of deserving employees.
b. Reducing expenditures on preventive maintenance.
c. Increased spending on research and development.
d. Productivity training for new employees.
e. Buying cheaper materials of the same quality to decrease the amount spent on raw materials.

ANSWER: b

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142. Varney Company makes rolling suitcases. Its sales budget for four months is:

Month Unit Sales


March 15,000
April 20,000
May 40,000
June 60,000
Varney's policy is that ending inventory of finished suitcases should equal 30% of the next month's sales. Beginning
inventory (March 1) is 5,300 suitcases.

Each suitcase required 1.5 yards of ballistic nylon. The ending inventory policy for nylon is that 20% of the
following month's production needs must be on hand. On March 1, Varney had 10,450 yards of nylon in inventory.

A. What is the desired ending inventory of suitcases for April?


B. What is the budgeted production of suitcases for April?
C. What is the desired ending inventory of nylon for March?
D. What are the budgeted yards of nylon to be purchased in March?
Assuming each suitcase required two yards of ballistic nylon, what is the desired ending
E.
inventory of nylon for March?
ANSWER:

A. 12,000 (see table below)


B. 26,000 (see table below)

March April May


Sales 15,000 20,000 40,000
+ Desired EI 6,000 12,000 18,000
Units needed 21,000 32,000 58,000
− Beginning inventory − 5,300 − 6,000 − 12,000
Production 15,700 26,000 46,000

C. 7,800 yards (26,000 × 1.5 × 20%)

D. 20,900 yards (see table below)

March April
Production 15,700 26,000
× 1.5 yds nylon × 1.5 × 1.5
Nylon needed for production 23,550 39,000
+ Desired ending inventory + 7,800
Nylon needed 31,350
− Beginning inventory − 10,450
Purchases of nylon in yards 20,900

E. 10,400 yards (26,000 × 2 × 20%)

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143. Borland Company makes backpacks. Its production budget for two months is:

Month Budgeted production in units


June 35,000
July 50,000
Borland uses two types of labor to make the backpacks: cutting labor and sewing labor. Each backpack requires 6
minutes, on average, of cutting labor. Each backpack requires 24 minutes of sewing labor.

Borland has fixed overhead of $4,400 per month and variable overhead of $3 per direct labor hour.

A. How many hours of cutting labor are budgeted for July?


B. How many hours of sewing labor are budgeted for July?
C. What is the total amount of budgeted direct labor hours for July?
D. What is the budgeted total overhead for the month of July?
ANSWER:

A. Budgeted cutting labor = (6 / 60) × 50,000 = 5,000 hours
B. Budgeted sewing labor = (24 / 60) × 50,000 = 20,000 hours
C. Budgeted direct labor hours = 5,000 + 20,000 = 25,000
D. Budgeted total overhead = $4,400 + ($3 × 25,000) = $79,400

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144. Abrams Bottling Company sells fruit-flavored colas. Estimated sales in cartons for May, June, and July are 1,000,
3,000 and 5,000 respectively. The price is forecast at $5 per carton. Abrams requires that finished goods ending
inventory be 20% of the next month's sales. Inventory was 500 units on May 1. Each carton requires 12 oz of fruit
syrup and 130 oz of carbonated water. Materials ending inventory is 10% of the next month's production needs.
May 1 inventory met that requirement.

A. Budgeted revenue for May is $__________________.


B. Budgeted revenue for July is $__________________.
C. Production in May is __________________ cartons.
D. Production in June is __________________ cartons.
E. Purchases of syrup in May is __________________ ounces.
F. Purchases of carbonated water in May is __________________ ounces.
ANSWER:

A. Budgeted revenue for May = $5,000


[5,000 = 1,000 × $5]

B. Budgeted revenue for July = $25,000


[25,000 = 5,000 × $5]

C. Production in May = 1,100 cartons.


[1,100 = 1,000 + 600 − 500]

D. Production in June = 3,400 cartons.


[3,400 = 3,000 + 1,000 − 600]

E. Purchases of syrup in May = 15,960 ounces.


[15,960 = (1,100 × 12) + (3,400 × 12 × 0.10) − (1,100 × 12 × 0.10)]

F. Purchases of carbonated water in May = 172,900 ounces.


[172,900 = (1,100 × 130) + (3,400 × 130 × 0.10) − (1,100 × 130 × 0.10)]

145. Karam Inc. has compiled the following data in order to put together their first quarter operating budget for 20XX:

January February March April


Sales (units) 35,000 31,000 38,000 29,000
Additional information:
Karam sells each unit for $95.
Company policy is to have 30% of next month’s sales (in units) in ending finished goods inventory. This policy was
met in December.
Company policy is to have 40% of next month’s production needs in ending raw materials inventory. The
production needs for April is 95,500. This policy was met in December.
It takes three pounds of material to produce each unit and the cost is $2.75/pound.

Required:
A. Prepare a sales budget for the January, February and March and for the first quarter in total.
B. Prepare a production budget for January, February and March and for the first quarter in total.

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C. Prepare a direct materials purchases budget for January, February and March and for the first quarter in total.
ANSWER:

A. Karam Inc.
Sales Budget
For the Quarter Ended March 31, 20XX
January February March Total
Sales in units 35,000 31,000 38,000 104,000
Unit selling price ×        $95 ×        $95 ×        $95 ×        $95
Budgeted sales $3,325,000 $2,945,000 $3,610,000 $9,880,000

B. Karam Inc.
Production Budget
For the Quarter Ended March, 31, 20XX
January February March Total
Sales in units (given) 35,000 31,000 38,000 104,000
Desired ending inventory
  (31,000 × 0.30; 38,000 ×  
  0.30; 29,000 × 0.30) 9,300 11,400 8,700 8,700
Total needs 44,300 42,400 46,700 112,700

Less: Beginning inventory


  (35,000 × 0.30; 31,000 ×  
  0.30; 36,000 × 0.30) (10,500) (9,300) (11,400) (10,500)
Units to be produced 33,800 33,100 35,300 102,200

C. Karam Inc.
Production Budget
For the Quarter Ended March, 31, 20XX
January February March Total
Units to be produced 33,800 33,100 35,300 102,200
Direct materials per unit ×       3 ×      3 × 3 ×        3
Production needs 101,400 99,300 105,900 306,600
Desired ending inventory
  (99,300 × 0.40; 105,900 × 0.40;
  95,500 (given) × 0.40) 39,720 42,360 38,200 38,200
Total needs 141,120 141,660 144,100 344,800
Less: Beginning inventory
  (35,000 × 0.30; 31,000 × 0.30;
  36,000 × 0.30) (40,560) (39,720) (42,360) (40,560)
Direct materials to be purchased 100,560 101,940 101,740 304,240
Cost per pound × $2.75 ×   $2.75 ×   $2.75 ×   $2.75
Total purchase cost $276,540 $280,335 $279,785 $836,660

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146. Boyle Company has put together the following data in order to complete their operating budget for the second
quarter in 20XX:

April May June July


Sales (units) 73,200 68,900 65,400 67,300
Additional information:
Company policy requires 60% of next month’s sales (in units) be in ending inventory. This policy was met in
March.
It takes 2.5 hours of direct labor to produce one unit.
The average wage cost is $14.
Variable overhead rate is $6 per direct labor hour and fixed overhead is $15,000 per month.

Required:
A. Prepare a production budget for April, May, June and the quarter in total.
B. Prepare a direct labor budget for April, May, June and the quarter in total.
C. Prepare an overhead budget for April, May, June and the quarter in total.
ANSWER:

Boyle Company
A. Production Budget
For the Quarter Ended June 30, 20XX
April May June Total
Sales in units 73,200 68,900 65,400 207,500
Desired ending inventory
  (68,900 × 0.60; 65,400 × 0.60;
  67,300 × 0.60) 41,340 39,240 40,380 40,380
Total needs 114,540 108,140 105,780 247,880
Less: beginning inventory
  (73,200 × 0.60; 68,900 × 0.60;
  65,400 × 0.60) (43,920) (41,340) (39,240) (43,920)
Units to be produced 70,620 66,800 66,540 203,960

B Boyle Company
Direct Labor Budget
For the Quarter Ended June 30, 20XX
April May June Total
Units to be produced 70,620 66,800 66,540 203,960
Direct labor hours per unit ×         2.5 × 2.5 ×         2.5 ×         2.5
Total hours needed 176,550 167,000 166,350 509,900
Average wage rate per hour ×        $14 ×        $14 ×        $14 × $14
Total direct labor cost $2,471,700 $2,338,000 $2,328,900 $7,138,600

C Boyle Company
Overhead Budget
For the Quarter Ended June 30, 20XX
April May June Total
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Budgeted direct labor hours 176,550 167,000 166,350 509,900


Variable overhead rate ×          $6 ×          $6 ×          $6 ×          $6
Budgeted variable overhead $1,059,300 $1,002,000 $998,100 $3,059,400
Budgeted fixed overhead 15,000 15,000 15,000 45,000
Total overhead $1,074,300 $1,017,000 $1,013,100 $3,104,400

147. Jones Corporation has the following budgeted sales for the selected four-month period:

Month Unit Sales


July 20,000
August 35,000
September 25,000
October 30,000

Sales price per unit is $180


Plans are to have an inventory of finished product equal to 20% of the unit sales for the
next month. There was 4,000 units in beginning inventory on July 1st.
Three pounds of materials are required for each unit produced. Each pound of material
costs $20. Inventory levels for materials equal 30% of the needs for the next month.
Desired ending inventory for September is 25,200 pounds of material. Beginning inventory
for July was 20,700 pounds of material.
Each unit requires 0.6 hours of direct labor and the average wage rate is $16 per hour.
Variable overhead rate is $3.50 per direct labor hour. There is also fixed overhead of
$22,000 per month.
The company pays a 3% commission on sales.
Company has fixed selling and administrative expenses as follows:
Rent $6,000/month
Utilities $1,200/month
Advertising $400/month
Office Salaries $35,000/month
Required:
A. Prepare a sales budget for July, August, and September and in total for the quarter.
B. Prepare production budgets for July, August, and September and in total for the quarter.
Prepare a direct materials purchases budget in pounds and dollars for July, August, and
C.
September and in total for the quarter.
Prepare a direct labor budget in hours and total cost for July, August and September and
D.
in total for the quarter.
E. Prepare an overhead budget for July, August and September and in total for the quarter.
Prepare a selling and administrative expenses budget for July, August and September and
F.
in total for the quarter.
Prepare an ending finished goods inventory budget for the quarter (Hint: You have
G. already calculated the desired ending finished goods inventory quantity. Assume a stable
per unit rate and round the per unit fixed factory overhead rate to two decimal places.)
H. Prepare a cost of goods sold budget for the quarter
Prepare a budged income statement for the quarter-the company falls into the 35% tax
I.
bracket for income taxes.

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ANSWER:

Sales Budget
July August September Total
Units to be sold 20,000 35,000 25,000 80,000
Sales price × $180 × $180 × $180 × $180
Total sales dollars $3,600,000 $6,300,000 $4,500,000 $14,400,000

Production Budget
July August September Total
Sales $20,000 $35,000 $25,000 $80,000
Add: Desired ending inventory $7,000 $5,000 $6,000 $6,000
Total needs $27,000 $40,000 $31,000 $86,000
Less: Beginning inventory ($4,000) ($7,000) ($5,000) ($4,000)
Units to be produced $23,000 $33,000 $26,000 $82,000

Direct Materials Budget


July August September Total
Units to be produced 23,000 33,000 26,000 82,000
× lbs per unit ×3 ×3 ×3 ×3
Pounds needed 69,000 99,000 78,000 246,000
Desired ending inventory 29,700 23,400 25,200 25,200
Total needs 98,700 122,400 103,200 271,200
Less beginning inventory (20,700) (29,700) (23,400) (20,700)
Purchases needed 78,000 92,700 79,800 250,500
× $20.00/lb × $20 × $20 × $20 × $20
Total purchase cost $1,560,000 $1,854,000 $1,596,000 $5,010,000

Direct Labor Budget


July August September Total
Units to be produced 23,000 33,000 26,000 82,000
× 0.60 of direct labor hours per unit × 0.60 × 0.60 × 0.60 × 0.60
Direct labor hours needed 13,800 19,800 15,600 49,200
× $16.00 per hour × $16.00 × $16.00 × $16.00 × $16.00
Total direct labor cost $220,800 $316,800 $249,600 $787,200

Overhead Budget
July August September Total
Labor hours 13,800 19,800 15,600 49,200
× variable rate per hour × $3.50 × $3.50 × $3.50 × $3.50
Total variable OH $48,300 $69,300 $54,600 $172,200
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Fixed overhead $22,000 $22,000 $22,000 $66,000


Total overhead $70,300 $91,300 $76,600 $238,200

Selling and Administrative Budget


July August September Total
Variable selling expense $108,000 $189,000 $135,000 $432,000
Fixed expenses:
Rent 6,000 6,000 6,000 18,000
Utilities 1,200 1,200 1,200 3,600
Advertising 400 400 400 1,200
Office salaries 35,000 35,000 35,000 105,000
Total $150,600 $231,600 $177,600 $559,800

Ending Finished Goods Inventory Budget


Desired ending inventory
  (6,000 × $72.50) $435,000

Direct materials ($20 × 3) $60.00
Direct labor (0.60 × $16) 9.60
Overhead:
Variable overhead (0.60 × $3.50) 2.10
Fixed overhead [0.60 × ($66,000 / 49,200)] 0.80
Unit cost $72.50

Cost of Goods Sold Budget


Direct materials (82,000 × $60) $4,920,000
Direct labor (82,000 × 0.60 × $16.00) 787,200
Overhead [(82,000 × 0.60 × $3.50) + $66,000] 238,200
Add: Beginning inventory (4,000 × $72.50) 290,000
Goods available for sale 6,235,400
Less: Ending inventory (435,000)
Cost of goods sold $5,800,400

Budgeted Income Statement


Sales ($180 × 80,000) $14,400,000
Cost of goods sold 5,800,400
Gross margin $8,599,600
Less: Variable selling and administrative 432,000
Fixed selling and administrative expenses 127,800
Operating income $8,039,800
Less: Income taxes (Operating income × 35%) 2,813,930
Net income $5,225,870
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Chapter 9 - Profit Planning

148. Rapid-Lube provides oil changes and lubes. The estimated number of oil changes for April and May are 3,600 and
4,000. Each oil change takes 12 minutes of direct labor. The wage rate is $10 per hour. Overhead is $3,700 per
month and $2 per oil change.

A. Budgeted direct labor for April is $__________________.


B. Budgeted direct labor for May is $__________________.
C. Budgeted overhead for April is $__________________.
D. Budgeted overhead for May is $__________________.
ANSWER:

A. Budgeted direct labor for April = $7,200


$7,200 = [3,600 × (12 / 60) × $10]

B. Budgeted direct labor for May = $8,000


$8,000 = [4,000 × (12 / 60) × $10]

C. Budgeted overhead for April = $10,900


$10,900 = $3,700 + ($2 × 3,600)

D. Budgeted overhead for May = $11,700


$11,700 = $3,700 + ( $2 × 4,000)

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149. Terrill Company makes and sells two types of shaving cream: foamy, and gel. Last year, Foamy sold for $2.30 per
can, and Gel sold for $3.15 per can. Sales volume was as follows:

Quarter 1 Quarter 2 Quarter 3 Quarter 4


Foamy $76,000 $80,000 $82,000 $70,000
Gel $50,000 $80,000 $90,000 $60,000
Terrill expects sales for Foamy to increase by 5% over the same quarter last year. The Gel price will increase to
$3.50, but aggressive advertising is expected to raise volume by 5% in quarters 1 and 4 and by 10% in quarters 2
and 3.

Prepare a sales budget for the coming year.


ANSWER:

Quarter 1 Quarter 2 Quarter 3 Quarter 4


Foamy $183,540 $193,200 $198,030 $169,050
Gel 183,750 308,000 346,500 220,500

Supporting calculations:
Quarter 1 Quarter 2
Foamy $2.30 × (76,000 × 1.05) $2.30 × (80,000 × 1.05)
Gel $3.50 × (50,000 × 1.05) $3.50 × (80,000 × 1.10)

Quarter 3 Quarter 4
Foamy $2.30 × (82,000 × 1.05) $2.30 × (70,000 × 1.05)
Gel $3.50 × (90,000 × 1.10) $3.50 × (60,000 × 1.05)

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Chapter 9 - Profit Planning

150. Allison Company makes luggage. One popular model is the Traveler (a 21" wheeled carry-on). Budgeted sales for
this model are:

Month Unit Sales


March 25,000
April 34,000
May 50,000
June 70,000
Desired ending inventory is 20% of the next month's sales. Inventory on March 1 is 3,100 units. Prepare a
production budget for as many months as possible.
ANSWER:

March April May


Sales 25,000 34,000 50,000
+ Desired ending inventory 6,800 10,000 14,000
Units needed 31,800 44,000 64,000
Less: beginning inventory (3,100) (6,800) (10,000)
Production 28,700 37,200 54,000

NOTE: A production budget for June is impossible because estimated July sales (on which June's
desired ending inventory are based) are unknown.

151. CutMaster Salons anticipates giving 100 permanents in May, 130 in June, and 120 in July. CutMaster needs one
permanent wave kit for each perm, along with two boxes of wave tissues. Its inventory policy is to have 10% of the
following month's materials needs on hand. On May 1, there were 15 wave kits and four boxes of wave tissues on
hand. (Round any fractions of a unit to the nearest whole unit.)

A. The wave kits to be purchased in May equal __________________.


B. The wave kits to be purchased in June equal __________________.
C. The boxes of tissues to be purchased in May equal __________________.
D. The boxes of tissues to be purchased in June equal __________________.
ANSWER:

A. May wave kit purchases = 98


98 = 100 + 13 − 15

B. June wave kit purchases = 129


129 = 130 + 12 − 13

C. May purchases of tissue boxes = 222


222 = (100 × 2 boxes) + (130 × 2 boxes × 0.10) − 4

D. June purchases of tissue boxes = 258


258 = (130 × 2 boxes) + (120 × 2 boxes × 0.10) − (130 × 2 boxes × 0.10)

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152. Foster Company makes power tools. The sales budget for drills for the first four months of the year is:

Month Unit Sales


January 20,000
February 15,000
March 22,000
April 25,000
Foster has taken a just-in-time approach to production and wants only 5% of the next month's sales needs in ending
inventory. January 1 inventory of drills was zero. Each drill takes 15 minutes of direct labor at $18 per hour. The
factory overhead formula is $27,000 + $1.20 per direct labor hour.

A. Budgeted production for January is __________________.


B. Budgeted production for February is __________________.
C. Budgeted production for the entire first quarter of the year is __________________.
D. Budgeted direct labor cost for January is $__________________.
E. Budgeted direct labor cost for February is $__________________.
F. Budgeted variable overhead for March is $__________________.
G. Budgeted total overhead for March is $__________________.
ANSWER:

A. Budgeted production for January = 20,750


[20,750 = 20,000 + 750 − 0]

B. Budgeted production for February = 15,350


[15,350 = 15,000 + 1,100 − 750]

C. Budgeted production for the entire first quarter of the year = 58,250
[58,250 = 20,750 + 15,350 + 22,150*] *(22,000 + 1,250 − 1,100)

D. Budgeted direct labor cost for January = $93,375


[93,375 = 20,750 × 0.25* × $18] *(15 / 60)

E. Budgeted direct labor cost for February = $69,075


[69,075 = 15,350 × .25 × $18]

F. Budgeted variable overhead for March = $6,645


[6,645 = 22,150 × 0.25 × $1.20]

G. March budgeted total overhead = $33,645


[33,645 = $27,000 + 6,645]

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153. Uma Company production has variable overhead costs of $8 per direct labor hour and fixed overhead costs of
$56,000 per month. Budgeted production for the next three months is as follows:

Month Production
October 6,000
November 5,500
December 8,000
Each unit requires three hours of direct labor.

A. Uma's total variable overhead for October is $__________________.


B. Uma's total overhead for October is $__________________.
C. Uma's total variable overhead for November is $__________________.
D. Uma's total fixed overhead for December is $__________________.
Uma's total budgeted overhead for the last three months of the year equals
E.
$__________________.
ANSWER:

Variable Fixed Total


Month overhead overhead overhead
October $144,000 $56,000 $200,000
November $132,000 $56,000 $188,000
December $192,000 $56,000 $248,000

A. October total variable overhead = 3 × 6,000 × $8 = $144,000


B. October total overhead = $144,000 + $56,000 = $200,000
C. November total variable overhead = 3 × 5,500 × $8 = $132,000
D. December total fixed overhead = $56,000
E. Total budgeted overhead for the last three months of the year = $636,000
$636,000 = $200,000 + $188,000 + $248,000
OR
[(6,000 + 5,500 + 8,000) × 3 hours × $8.00 × variable overhead rate per direct labor hour]
+ ($56,000 × 3 months) = $636,000

Above numbers calculated as follows:

$188,000 = $132,000 + $56,000 November Total Budgeted Overhead


$248,000 = 3 × 8,000 × $8 + 56,000 December Total Budgeted Overhead

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Chapter 9 - Profit Planning

154. Kanban Company estimated sales of 40,000 units at $6 each. Budgeted cost of goods sold per unit includes $1.20 of
direct materials, six minutes of direct labor time at $15 per hour, and unit overhead cost of $1.30. Kanban pays a
sales commission of 10% of sales revenue. Fixed selling and administrative expenses are budgeted at $25,000.
Prepare a statement of operating income.

A. Budgeted variable marketing expense is $__________________.


B. Budgeted operating income is $__________________.
Recalculate budgeted operating income assuming fixed selling and administrative
C.
expenses double and the selling price per unit increases 10%.
ANSWER:

Sales ($6 × 40,000) $240,000


Cost of goods sold {$1.20 + [(6 / 60) × $15.00] + $1.30} × 40,000 160,000
Gross profit $ 80,000
Less: Sales commission ($240,000 × 0.10) (24,000)
Less: Fixed selling and administrative expense (25,000)
Operating income $ 31,000

A. Budgeted variable marketing expense is $24,000.


B. Budgeted operating income is $31,000.
C. Budgeted operating income is $27,600. (see table below)

Sales ($6.60 × 40,000) $264,000


Cost of goods sold {$1.20 + [(6 / 60) × $15.00] + $1.30} × 40,000 160,000
Gross profit $104,000
Less: Sales commission ($264,000 × 0.10) (26,400)
Less: Fixed selling and administrative expense (50,000)
Operating income $ 27,600

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Chapter 9 - Profit Planning

155. You have decided to throw a party next weekend for 19 friends. The friends are going to bring health food, so all
you have to have available are the drinks. You estimate that, on average, each person will drink four bottles of soft
drinks. Three of your friends will drink only natural soda without unneeded color − so Sulo Ginger Ale should work
well for them. For the others and yourself, you decide to buy Sulo Cola. Before going online, you check the
refrigerator − you already have six bottles of Sulo Ginger Ale and 14 of Sulo Cola. Since this is the end of the
semester − you decide that you don't really want any of the soft drinks on hand after the party. Now, you are
ordering on the Internet.

A. How many bottles of Sulo Ginger Ale do you plan to buy?


B. How many bottles of Sulo Cola do you plan to buy?
ANSWER:

Ginger Ale Cola


To drink at the party:
3 friends × 4 bottles 12
17 friends × 4 bottles 68
+ Desired ending inventory 0 0
Bottles needed 12 68
− Beginning inventory −6 − 14
Bottles to purchase 6 54

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Chapter 9 - Profit Planning

156. Quillin Company had the following budgeted information for October:

1. October 1 cash balance $3,500


2. Expected sales 2,500 units at $25 each (half in cash, remainder on credit due in November)
3. Inventory purchases 3,000 units at $14 each (all in cash)
4. Rent $1,450
5. Payroll $1,000
6. Utilities and other costs $4,500
Accounts receivable balance Oct. 1, $35,000 (includes $700 bad debts allowance;
7.
use this amount for both parts A and D).

A. What is the budgeted collection on accounts receivable for October?


B. What are the total cash disbursements for October?
C. What is the ending cash balance for October?
Assuming sales are collected 75% in the month of sale and 25% the following month,
D.
what is the ending cash balance for October?
ANSWER:

A. $34,300 (see table below)


B. $48,950 (see table below)
C. $20,100 (see table below)

Beginning cash balance $ 3,500


Sales in cash (2,500 × $25 × 0.50) 31,250
Collections on account ($35,000 − $700) 34,300
Cash available $69,050
Payments for purchases (3,000 × $14) $42,000
Rent 1,450
Payroll 1,000
Utilities, etc. 4,500
Total cash disbursements 48,950
Ending cash balance $20,100

D. $35,725 (see table below)

Beginning cash balance $ 3,500


Sales in cash (2,500 × $25 × 0.75) 46,875
Collections on account ($35,000 − $700) 34,300
Cash available $84,675
Payments for purchases (3,000 × $14) $42,000
Rent 1,450
Payroll 1,000
Utilities, etc. 4,500
Total cash disbursements 48,950
Ending cash balance $35,725

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Chapter 9 - Profit Planning

157. Fredder Company usually sells about 20% of its merchandise during a month for cash with the remaining sales on
account. The company's accounts receivable payment history is as follows: 30% in the month of sale, 50% in the
month following, and 15% in the second month following sale. Total budgeted sales for the second quarter are as
follows:

April $100,000
May 120,000
June 80,000
Assume all questions relate to the month of June.

A. What are the expected cash sales?


B. What are the expected receipts from accounts receivable for sales made in April?
C. What are the expected receipts from accounts receivable for sales made in May?
D. What are the total expected cash receipts?
From the above accounts receivable history information, receipts from accounts
E.
receivable do not equal 100%. Why not? Does this amount appear on the cash budget?
ANSWER:

A. June cash sales = $80,000 × 0.2 = $16,000

Receipts on accounts receivable for sales made in April = 0.80 × $100,000 × 0.15 =
B.
$12,000

Receipts on accounts receivable for sales made in May = 0.80 × $120,000 × 0.50 =
C.
$48,000

Total cash expected in June = $16,000 + $12,000 + $48,000 + (0.80 × $80,000 × 0.30) =
D.
$95,200

30% + 50% + 15% = 95%


E. The remaining 5% is uncollectible. It does not appear on the cash budget because there is
no cash involved.

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158. Rivers Company purchases merchandise on account. In general, Rivers pays 50% in the month of purchase and
50% in the following month. All payments in the month of purchase qualify for a 2% cash discount. First quarter
budgeted purchases are:

January $90,000
February 80,000
March 96,000

A. What are the total cash disbursements expected in February?


B. What are the total cash disbursements expected in March?
Now suppose that there is no cash discount for purchases made in the month of
C.
purchase. Now what are the total cash disbursements expected in February? In March?
ANSWER:

A. $84,200 (see table below)


B. $87,040 (see table below)

February March
January purchases (0.50 × $90,000) $45,000
February purchases:
(0.50 × $80,000 × 0.98) 39,200
(0.50 × $80,000) $40,000
March purchases (0.50 × $96,000 × 0.98) 47,040
Total cash disbursements $84,200 $87,040

C. February cash disbursements = $85,000


March cash disbursements = $88,000

February March
January purchases (0.50 × $90,000) $45,000
February purchases:
(0.50 × $80,000) 40,000
(0.50 × $80,000) $40,000
March purchases (0.50 × $96,000) _______ 48,000
Total cash disbursements $85,000 $88,000

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159. Wexler Company expects sales of $40,000 in July, $50,000 in August, and $30,000 in September. Wexler's
experience is that 40% of sales are cash, and the remainder is on account. Accounts receivable are paid: 70% in
the month of sale, and 25% in the following month.

A. What are the expected cash receipts on accounts receivable in August for July sales?
B. What are the expected cash receipts on accounts receivable in August for August sales?
C. What are the total expected cash receipts on accounts receivable in August?
D. What are the total expected cash receipts in August?
E. How much of July sales are deemed to be uncollectible?
ANSWER:

A. Expected cash receipts on accounts receivable in August for July sales = $6,000
[(0.60 × $40,000 × 0.25) = $6,000]

B. Expected cash receipts on accounts receivable in August for August sales = $21,000
[$21,000 = (0.60 × $50,000 × 0.70)]

C. Total expected cash receipts on accounts receivable in August = $27,000


[$27,000 = (0.60 × $40,000 × 0.25) + (0.60 × $50,000 × 0.70)]

D. Total expected cash receipts in August = $47,000


[$47,000 = (0.60 × $40,000 × 0.25) + (0.60 × $50,000 × 0.70) + (0.4 × $50,000)]

E. July sales of $40,000 × 0.60 = $24,000 on account


$24,000 × 0.05 = $1,200 uncollectible

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Chapter 9 - Profit Planning

160. Shorter Company developed the following data for the month of June.

1. June 1 cash balance $2,300


2. Cash sales in June $67,000
Credit sales for June are $20,000; for May $10,000; and for April $16,000. 60% of credit
3. sales are collected in the month of sale, 20% in the following month, and 10% in the second
month following the sale.
Purchases for May were $34,000 and for June are $40,000. Half of purchases are paid in the
4.
month of purchase and the remainder in the following month.
5. June salaries are $28,400, utilities are $1,090, and depreciation on the building is $1,000.

Anticipated cash receipts from accounts receivable in June equal


A.
$__________________.
B. Anticipated total cash available in June is $__________________.
C. June cash payments for purchases are $__________________.
D. Anticipated cash balance on June 30 is $__________________.
ANSWER:

A. Anticipated cash receipts from accounts receivable in June = $15,600


[15,600 = ($20,000 × 0.60) + ($10,000 × 0.20) + ($16,000 × 0.10)]

B. Anticipated total cash available in June = $84,900


[84,900 = $67,000 + $15,600 + $2,300]

C. June cash payments for purchases = $37,000


[37,000 = ($40,000 × 0.50) + ($34,000 × 0.50)]

D. Anticipated cash balance on June 30 = $18,410


[18,410 = $84,900 − $37,000 − 28,400 − 1,090]

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Chapter 9 - Profit Planning

161. Calino Company developed the following data for the month of August.

1. August 1 cash balance $12,300.


2. Cash sales in August $80,000.
Credit sales for August are $30,000; for July $40,000; and for June $40,000. 70% of credit
3. sales are collected in the month of sale, 15% in the following month, and 10% in the second
month following the sale.
Purchases for July were $50,000 and for August are $40,000. One-fourth of purchases are
4.
paid in the month of purchase and the remaining three-quarters in the following month.
August salaries are $31,400, utilities are $3,220, and depreciation on the building and
5.
equipment is $10,000.

Anticipated cash receipts from accounts receivable in August are


A.
$__________________.
B. Anticipated total cash available from all sources in August is $__________________.
August cash payments for purchases made in July and August are
C.
$__________________.
D. Anticipated cash balance on August 31 is $__________________.
ANSWER:

A. August cash receipts from accounts receivable = $31,000


B. August anticipated total cash available from all sources = $123,300
C. August cash payments for purchases = $47,500
D. Anticipated cash balance on August 31 = $41,180

Accounts Receivable Payments to be received in August from sales in:

June ($40,000 × 0.10) $ 4,000


July ($40,000 × 0.15) 6,000
August ($30,000 × 0.70) 21,000
Total $31,000

Cash Budget for August:

Beginning balance $ 12,300


Cash sales 80,000
Payments from Accounts Receivable 31,000 111,000
Cash available $123,300
Payments on July purchases ($50,000 × 0.75) 37,500
Payments on August purchases ($40,000 × 0.25) 10,000
Salaries 31,400
Utilities 3,220
Total disbursements 82,120
Cash balance, August 31 $ 41,180

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Chapter 9 - Profit Planning

162. It is May 28 and you have just gotten a summer job that will pay you (net of taxes) $800 per month. You start June
1 and will work until school starts − halfway through August. Your scholarship pays for tuition, room and board.
But you must buy books, pay for transportation to and from school, and pay for clothing, any extra meals,
entertainment, and so on. You have gathered the following data:

One round trip airline ticket is $260, and you'd like to come home for Thanksgiving (your
1. parents will drive you there in August, and you will try to catch a ride home with another
student in December).
2. Books are estimated to cost about $500 per semester for your anticipated major
3. Supplies should be another $150
4. Clothing might run $100 − you already have almost everything you think you'll need.
There are 16 weeks in the semester, and you think you'll need $50 per week for allowance to
5.
cover extra meals and entertainment
Before school even starts, you need to cover any summer expenses, including going out with
6. friends. $30 a week sounds about right, since all your friends will be working and saving for
college as well. There are 11 weeks of summer.
Right now, you have $200 in your checking account.

Prepare a cash budget for the summer and the first semester of college. (Do the entire
A.
time period; do not break it down by week or by month.)
Comment on the estimated ending balance. What actions can you take, if any, to increase
B.
it?
ANSWER:

A. Beginning balance checking account $ 200


Salary from summer job (2.5 × $800) 2,000
Cash available $2,200
Less disbursements:
Airline ticket 260
Books 500
Supplies 150
Clothing 100
Weekly allowance at school (16 × $50) 800
Weekly allowance during the summer (11 × $30) 330
Total disbursements $2,140
Estimated ending balance $ 60

A $60 ending balance for a six month time period seems too close for comfort. Responses
will vary. However, it would be relatively easy to suggest cutting out the trip home at
B. Thanksgiving − or attempt to find a ride home with another student instead. Similarly, the
estimated allowances can be cut. The real problem is that these are estimates. So perhaps
another source of cash, such as a student loan, should be located in advance.

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Chapter 9 - Profit Planning

163. Miller Corporation has the following sales budget for the first four months of the current year:

Month Sales
January $400,000
February $320,000
March $440,000
April $360,000
Historically, the following trend has been established regarding cash collection of sales:

65% in month of sale


25% in month following sale
8% in second month following sale
2% uncollectible

The company allows a 2% cash discount for payments made by customers during the month of the sale. November
and December sales were $400,000 and $240,000, respectively. All sales are on account.

Required: Prepare a schedule of budgeted cash collections from sales for January, February, and March.
ANSWER:

January February March


November $400,000 × 8% $ 32,000
December $240,000 × 25%; 8% 60,000 $ 19,200
$400,000 × (65% ×
January
98%); 25%; 8% 254,800 100,000 $ 32,000
$320,000 × (65% ×
February
98%); 25% 203,840 80,000
$440,000 × (65% ×
March
98%) 280,280
Total cash collections $346,800 $323,040 $392,280

164.
Allan Corporation has a sales budget for March of $440,000. About 10% are cash sales
and the remainder is sold on account.
The company expects that 60% of credit sales will be collected in the month of the sale,
25% in the next month and 10% in the following month.
Materials purchased on account are expected to be $250,000. Allan pays 35% in the month
of the purchase, 50% in the month following the purchase and the remaining 15% in the
second month after the purchase.
Salaries and wages of the workers are approximately $45,000 per month. The employees
are paid weekly so on average 95% of their wages are paid in the month to which they
relate and the remaining 5% is paid in the following month.
Utilities average $4,300 per month.
Rent on the building is $9,000 per month.
Insurance is $3,000 per month and advertising costs are $1,000 per month.
February sales were $320,000 and purchases of materials in February were $170,000;
January sales were $200,000 and purchases of materials in January were $130,000.
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Chapter 9 - Profit Planning

The cash balance on March 1st is $5,400.

Required:
A. Prepare a schedule of cash receipts
B. Prepare a schedule of cash payments (Accounts payable payments)
C. Prepare a cash budget

ANSWER: A.

Cash receipts for March


January collection (200,000 × 90% ×
10%) $18,000
February collection (320,000 × 90% ×
25%) 72,000
March cash sales (440,000 × 10%) 44,000
March accounts receivable
sales (440,000 × 90% × 60%) $237,600
Total cash collection $371,600

B.

Cash disbursements for March


January payment (130,000 ×15%) $19,500
February payment (180,000 × 50%) 85,000
March payment (250,000 × 35%) 87,500
Total cash disbursements $192,000

C.
Beginning cash balance $5,400
Cash collections 371,600
Cash available 377,000
Less disbursements:
Payments for:
Raw materials 192,000
Salaries 45,000
Utilities 4,300
Rent 9,000
Insurance 3,000
Advertising 1,000
Total disbursements $254,300
Ending cash balance $122,700

165. Trish Morrow owns and operates Yummy Bakery which sells a wide variety of cupcakes. She has compiled the
following data and information in order to put together a cash budget for September and October.

Budgeted sales for September are 65,000 cupcakes and 98,000 in October. Each cupcake sells for $3.50.
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Chapter 9 - Profit Planning

On average 60% are cash sales and 40% are sold on account.
The company expects to collect 75% of credit sales in the month of the sale and 20% in the month after the
sale.
All necessary raw materials are purchased on account. Purchases are paid 85% in the month of the
purchase and 15% in the following month. Purchases for September are estimated to be $200,000 and
$290,000 in October.
Monthly expenses include:

Wages $10,000
Rent $4,000
Utilities $3,500
Insurance $2,500
Advertising $2,290

Cash balance on September 1st was $6,000.


The company has a policy to maintain a minimum cash balance of $5,000. If necessary the company will
borrow to meet its short-term needs. All borrowing is done at the beginning of the month and all payments on
principal and interest are made at the end of the next month. The annual interest rate is 7%. The company
must borrow in multiples of $1,000.

August sales were 43,000 cupcakes and raw materials purchased equal $230,000.

Prepare a cash budget for September and October.


ANSWER:
September collections:
Total sales* $227,500
Cash sales** $136,500
Accounts receivable collections-September*** 68,250
Accounts receivable collections-August**** 12,040
Total cash collections $216,790

* 65,000 × $3.50
** $227,500 × 60%
*** $227,500 × 40% × 75%
**** 43,000 × $3.5 × 40% × 20%

October collections
Total sales* $343,000
Cash sales** $205,800
Accounts receivable collections-October*** 102,900
Accounts receivable collections-September**** 18,200
Total cash collections $326,900

* 98,000 × $3.50
** $343,000 × 60%
*** $343,000 × 40% × 75%
**** $227,500 × 40% × 20%

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Chapter 9 - Profit Planning

Yummy Baker
Cash Budget
September October
Beginning cash balance $ 6,000 $ 5,000
Cash collections 216,790 326,900
Total cash available $222,790 $331,900

Cash disbursements:
Purchases (230,000 × 15%) + (200,000 ×
85%); (200,000 × 15%) + (290,000 × 85%) $204,500 $276,500
Wages 10,000 10,000
Rent 4,000 4,000
Utilities 3,500 3,500
Insurance 2,500 2,500
Advertising 2,290 2,290
Total disbursements $226,790 $298,790
Minimum cash balance 5,000 5,000
Total cash needs $231,790 $303,790
Excess (deficiency) $ (9,000) $ 28,110
Financing:
Borrowings $ 9,000
Repayments $ (9,000)
Interest (105)
Total financing $ 9,000 ($9,105)
Ending cash balance $ 5,000 $ 24,005

166. Dickson Company has the following projected account balances for September 30 of the current year:

Accounts payable $20,000 Sales $400,000


Accounts receivable 50,000 Capital stock 200,000
Depreciation, factory 12,000 Retained earnings (beginning) 64,000
Inventories (8/31) 90,000 Maintenance, factory 14,000
Inventories (9/30) 90,000 Cash 28,000
Materials used 100,000 Equipment, net 120,000
Office salaries 40,000 Buildings, net 200,000
Insurance, factory 2,000 Utilities, factory 8,000
Factory wages 70,000 Selling expenses 30,000
Bonds payable 80,000
Required:
A. Prepare a budgeted income statement for the month ended September 30.
B. Prepare a budgeted balance sheet as of September 30.
ANSWER:

Dickson Company
A. Budgeted Income Statement
For the Month Ended September 30
Sales $400,000
Cost of goods sold:
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Chapter 9 - Profit Planning

Beginning inventory $ 90,000


Materials used 100,000
Factory wages 70,000
Depreciation 12,000
Insurance 2,000
Maintenance 14,000
Utilities 8,000
Ending inventory (90,000) 206,000
Gross margin $194,000

Operating expenses:
Selling expenses $ 30,000
Office salaries 40,000 70,000
Net income $124,000

Dickson Company
B. Budgeted Balance Sheet
September 30
Assets Liab. and Owners' Equity
Cash $ 28,000 Accounts payable $ 20,000
Accounts receivable 50,000 Bonds payable 80,000
Inventories 90,000 Capital stock 200,000
Equipment, net 120,000 Retained earnings 188,000
Buildings, net 200,000
Total $488,000 Total $488,000

167. What are the advantages of budgeting?


ANSWER: There are several advantages of budgeting:
1. It forces managers to plan.
2. It provides information that can be used to improve decision making.
3. It provides a standard for performance evaluation.
4. It improves communication and coordination.

168. Which budget is the first one that must be completed in the master budgeting process and why?
ANSWER: The sales budget is the first budget to be developed in the master budgeting process. The sales budget
forms the basis for the rest of the budgets. A company must know estimated sales of each product in
order to determine how much must be produced. The production budget, in turn, is used to develop the
direct materials purchases, direct labor, and overhead budgets. These three budgets provide useful
information in determining cost of goods sold. Clearly, the budgeted income statement requires the
budgeted revenue from the sales budget. Without this budget, the others cannot be developed.

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Chapter 9 - Profit Planning

You decide
169. You are the senior accountant at Cannon Manufacturing and have been asked by the budget director to prepare the
production budget for the upcoming quarter. The budget director stated that they chose you to prepare this budget
because it is an important part of the overall operating budget and financial budget. Explain what the production
budget calculates and how the production budget would affect other operating budgets and the financial budget.
ANSWER: The production budget tells how many units must be produced to meet sales needs and to satisfy ending
inventory requirements. The total units to be produced each month or quarter is then used in
determining the direct materials to be purchased and the number of direct labor hours needed during the
period to produce the units. After determining how many direct labor hours would be necessary to
produce the given amount of units, the overhead budget can be prepared. The direct materials
purchases budget, the direct labor budget and the overhead budget also calculate the total amount of
cash needed to pay for the raw materials, direct labor employees, and overhead costs, which have a
direct affect on the preparation of the cash budget.

170. Does a not-for-profit agency need to budget? Why or why not?


ANSWER: All entities need to use the formal budgeting process. While the nonprofit agency is not trying to make a
profit, it does need to determine sources and uses of revenues. For example, local United Ways develop
budgets each year. First, they listen to proposals from the agencies that want funding. Worthy proposals
are chosen and a budget to obtain revenues and then distribute those revenues is developed. The budget
forms the foundation for the fall fundraising efforts.

171. Briefly describe the attributes of an ideal budgetary system. What features of budgeting have been identified that
encourage positive behavior?
ANSWER: An ideal budgetary system is one that achieves complete goal congruence and at the same time creates
a drive in managers to achieve the organization's goals in an ethical manner. Features that encourage
the positive behavior that would move the firm closer to an ideal budgetary system include:
Frequent feedback on performance
Monetary and nonmonetary incentives
Participative budgeting
Realistic standards
Controllability of costs
Multiple measures of performance

172. Describe some problems with participative budgeting.


ANSWER: Some potential problems are:
Standards may be set too high. This can discourage managers/employees from even trying to meet
1. the standards. Alternatively, standards can be set too low. This will not encourage workers to stretch
to meet achievable (yet higher) standards.

Managers may pad the budget. Managers know that the budget sets the standards against which
2. their work will be measured. Not surprisingly, managers may prefer an easier standard, with
budgetary slack built in.

Pseudoparticipation may be more the rule than participation. Here, top management sets the budget
3. and does not seek or use input from lower-level managers. The so-called participation is simply the
opportunity for lower-level managers to formally acknowledge the budget.

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Chapter 9 - Profit Planning

Identify each item as a component of the production budget or the direct materials purchases budget.
a. production budget
b. direct materials purchases budget
173. beginning inventory of materials
ANSWER: b
174. sales in units
ANSWER: a
175. units of raw materials needed for each unit of product
ANSWER: b
176. ending inventory of product
ANSWER: a

Identify each item as either part of the operating budget or the financial budget.
a. Operating Budget
b. Financial Budget
177. production budget
ANSWER: a
178. sales budget
ANSWER: a
179. cash budget
ANSWER: b
180. ending finished goods inventory budget
ANSWER: a
181. budgeted balance sheet
ANSWER: b
182. budgeted capital expenditures
ANSWER: b

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Chapter 9 - Profit Planning

Identify each item as an advantage or disadvantage of budgeting.


a. advantage
b. disadvantage
183. Pseudoparticipation
ANSWER: b
184. forces managers to plan
ANSWER: a
185. improves communication and coordination
ANSWER: a
186. leads to budgetary slack
ANSWER: b
187. provides standard for performance evaluation
ANSWER: a

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