CHAPTER 5

QUESTIONS: BUDGETING

QUESTION 1
Maju Sdn Bhd plans to sell 400,000 units of finished product in July 2006. Management (1) anticipates
a growth rate in sales of 5% per month thereafter and (2) desires a monthly ending finished-goods
inventory (in units) of 80% of the following month’s estimated sales. There are 300,000 completed units
in the June 30, 2006 inventory. Each unit of finished product requires four pounds of direct material at a
cost of $1.50 per pound. There are 1,600,000 pounds of direct material in inventory on June 30, 2006.
Required:
i. Prepare a production budget for the quarter ended September 30, 2006. Note: For both
part “1” and part “2” of this problem, prepare your budget on a quarterly (not monthly)
basis.
Projected Units
to be Sold
July 400,000
August (400,000 x 1.05) 420,000
September (420,000 x 1.05) 441,000
Quarterly total 1,261,000

Total quarterly sales 1,261,000

Add: Desired 9/30 inventory (463,050* x 80%) 370,440
Total units needed 1,631,440
Less: 6/30 inventory 300,000
Total quarterly production requirement 1,331,440

* October sales: 441,000 x 1.05 = 463,050

ii. Independent of your answer to part “a,” assume that Maju Sdn Bhd plans to produce
1,200,000 units of finished product for the quarter ended September 30. If the firm
desires to stock direct materials at the end of this period equal to 25% of current
production needs, compute the cost of direct materials purchases for this quarter.

Direct material required for production (1,200,000 x 4 pounds) 4,800,000

Add: Desired 9/30 inventory (4,800,000 x 25%) 1,200,000
Direct materials needed 6,000,000
Less: 6/30 inventory 1,600,000
Pounds to be purchased during the quarter 4,400,000
Direct material cost per pound x $1.50
Total quarterly cost of purchases $6,600,000
QUESTION 2
Tara Company has the following historical collection pattern for its credit sales:
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible

1
 Budgeted credit sales for the last six months of 2006 follow:

July $30,000
August 35,000
September 40,000
October 45,000
November 50,000
December 42,500

Required:

i. Calculate the estimated total cash collections during October.

Month of Sale October Collections
July $30,000 x 4% = $ 1,200
August 35,000 x 10% = 3,500
September 40,000 x 15% = 6,000
October 45,000 x 70% = 31,500
Total $42,200

ii. Calculate the estimated total cash collections during the year’s fourth quarter
Credit Amount Collected
Month of Sale Sales October November December
July $ 30,000 $ 1,200
Total collections in the
August fourth quarter
35,000 3,500 $ 1,400 $ 132,700
September 40,000 6,000 4,000 $ 1,600
October 45,000 31,500 6,750 4,500
November 50,000 35,000 7,500
December 42,500 29,750
Total $242,500 $ 42,200 $ 47,150 $ 43,350
QUESTION 3
Hamidah Care Corp., a distributor of herb-based sun screens, is ready to begin its third quarter, in
which peak sales occur. The company has requested a $40,000, 90 day loan from its bank to help
meet cash requirements during the quarter. Since the company has experienced difficulty in
paying off its loans in the past, the loan officer at the bank has asked the company to prepare a
cash budget for the quarter. In response to this request, the following data have been assembled:

a. On July 1, the beginning of the third quarter, the company will have a cash balance of
$44,500.
b. Actual sales for the last two months and budgeted sales for the third quarter follow:

May (actual) $250,000

June (actual) 300,000
July (budgeted) 400,000
August (budgeted) 600,000
September (budgeted) 320,000

2
 Past experience shows that 25% of a month’s sales are collected in the month of sale,
70% in the month following sale, and 3% in the second month following sale. The
remainder is uncollectible.
c. Budgeted merchandise purchases and budgeted expenses for the third quarter are
given below:
d.
July August September
Merchandise purchases -------------- $240,000 $350,000 $175,000
Salaries and wages ------------------- 45,000 50,000 40,000
Advertising ----------------------------- 130,000 145,000 80,000
Rent payments ------------------------ 9,000 9,000 9,000
Depreciation --------------------------- 10,000 10,000 10,000

Merchandise purchases are paid in full during the month following purchase.
Accounts payable for merchandise purchases on June 30, which will be paid during
July, total $180,000.
e. Equipment costing $10,000 will be purchased for cash during July.
f. In preparing the cash budget, assume that the $40,000 loan will be made in July and
repaid in September. Interest on the loan will total $1,200.

Required:
i. Prepare a schedule of expected cash collections for July, August, and September
and for the quarter in total.
Schedule of expected cash collections:
Month
From accounts receivable: July August September Quarter
May sales
$250,000 x 3% $7,500 $7,500
June sales
$300,000 x 70%, 3% 210,000 $9,000 219,000
From budgeted sales:
July
$400,000 x 25%
70%, 3% 100,000 280,000 $ 12,000 392,000
August
$600,000 x 25%, 70% 150,000 420,000 570,000
September _____
$320,000 x 25% _______ _______ 80,000 80,000
Total cash collections $317,500 $439,000 $512,000 $1,268,500

ii. Prepare a cash budget, by month and in total, for the third quarter.
Cash budget
Month

3
 July August September Quarter
Cash balance, beginning $ 44,500 $ 28,000 $ 23,000 $ 44,500
Add receipts:
Collections from customers 317,500 439,000 512,000 1,268,500
Total cash available 362,000 467,000 535,000 1,313,000
Less cash disbursements:
Merchandise purchases 180,000 240,000 350,000 770,000
Salaries and wages 45,000 50,000 40,000 135,000
Advertising 130,000 145,000 80,000 355,000
Rent payments 9,000 9,000 9,000 27,000
Equipment purchases 10,000 _______ ______ 10,000
Total cash disbursements 374,000 444,000 479,000 1,297,000
Excess (deficiency) of receipts
Over disbursements (12,000) 23,000 56,000 16,000
Financing:
Borrowings 40,000 - - 40,000
Repayments - - (40,000) (40,000)
Interest - - (1,200) (1,200)
Total financing 40,000 - (41,200) (1,200)
Cash balance, ending $ 28,000 $ 23,000 $ 14,800 $ 14,800
QUESTION 4
Saleh Inc., supplies bicycles to retail outlets for the whole of Malaysia throughout the year.
However, in anticipation of increased demand from June to September, outlets stock up their
bicycles from May through August. Outlets are billed when the bicycles are ordered. From past
experience, Saleh’s accountant projects 20% of sales will be collected in the month invoiced,
50% are received in the following month, and 30% of invoices are received two months after the
month of invoice. The average selling price per bicycles is $450.
To meet demand, Saleh increases production from April through July, since the bicycles are
produced a month prior to the projected sale. Direct materials are purchased in the month of
production, and paid for during the following month (terms are payment in full within 30 days of
the invoice date). During this period there is no production for inventory, and no materials are
purchased for inventory (i.e. the company adopts JIT).
Direct manufacturing labor and manufacturing overhead are paid monthly. Variable
manufacturing overhead is incurred at the rate of $7 per direct manufacturing labor-hour. Variable
marketing costs are driven by the number of sales visits. However, there are no sales visits from
April to July. Saleh Inc. also incurs fixed manufacturing overhead costs of $5,500 per month and
fixed non-manufacturing overhead costs of $2,500 per month.

Projected Sales

May 80 units
June 120 units
July 200 units
August 100 units
September 60 units
October 40 units

Direct Materials and Direct Manufacturing Labor Utilization and Cost

Units Per Board Price Per Unit Unit

4
Wood 5 $30 Board feet
Fiberglass 6 5 Yard
Direct manufacturing labor 5 25 Hour

The beginning cash balance for July 1, 2003 is $10,000. On September 1, 2003, Saleh borrowed
$30,000 from Maybank which attracts a 6% interest per annum, payable monthly. The loan is
due to be repaid on October 1, 2003.
Required:

i. Prepare a cash budget for the months of July-September, 2003. Show supporting
schedules for the calculation of receivables and payables.
Projected Sales

May June July August September October

Sales, Units 80 120 200 100 60 40
Sales, Dollars $36,000 $54,000 $90,000 $45,000 $27,000

Collections of Receivables
May June July August September October
From Sales in:
May $10,800
June 27,000 16,200
July 18,000 45,000 27,000
August 9,000 22,000
September 5,400
Total $55,800 $70,200 $54,900

Calculation of Payables
May June July August September October
Materials and Labor Use, Units
Budgeted production 200 100 60 40
Direct materials
Wood (board feet) 1,000 500 300 200
Fiberglass (yards) 1,200 600 360 240
Direct labor (hours) 1,000 500 300 200
Disbursement of Payments
Direct materials
Wood $30,000 $15,000 $9,000
Fiberglass 6,000 3,000 1,800
Direct labor 12,500 7,500 5,000
Interest payment 150 150 150

Variable OHD Calculation

Variable OHD rate $7 $7 $7
OHD driver 500 300 200
Variable OHD expense $3,500 $2,100 $1,400

Cash Budget for the months of July, August, September 2003

July August September

Beginning cash balance $10,000 $ 5,650 $40,100

5
 Add receipts:
Collection of receivables 55,800 70,200 54,900
Total receipts 55,800 70,200 54,900
Total cash available $65,800 $75,850 $95,000

Deduct disbursements:
Material: Wood 30,000 15,000 9,000
Fibreglass 6,000 3,000 1,800
Direct labor 12,500 7,500 5,000
Variable costs 3,500 2,100 1,400
Fixed costs: Manufacturing 5,500 5,500 5,500
Non- 2,500 2,500 2,500
Manufacturing
Interest payments 150
Total disbursements 60,000 35,600 25,350
Ending cash balance $5,800 $40,400 $69,950

ii. Will Saleh be in a position to pay off the $30,000 loan on October 1,2003? If not,
what actions would you recommend to Saleh’s management team?
Yes. Saleh will be in a position to pay off the $30,000 1-year note on October 1, 2003.

iii. Suppose Saleh is interested in maintaining a minimum cash balance of $10,000. Will
the company be able to maintain such a balance during all three months analyzed? If
not, suggest a suitable cash management strategy.
No. Saleh does not maintain a $10,000 minimum cash balance in July. It could
encourage its customers to pay earlier by offering a discount.

QUESTION 5
Farah Limited is preparing its annual budgets for the year to 31 December 2005. It manufactures
and sells one product, which has a selling price of RM150. The marketing director believes that
the price can be increased to RM160 with effect from I July 2005 and that at this price the sales
volume for each quarter of 2005 will be as follows:

Sales Volume
Quarter 1 40,000
Quarter 2 50,000
Quarter 3 30,000
Quarter 4 45,000

Sales for each quarter of 2006 are expected to be 40,000 units.

Each unit of the finished product which is manufactured requires four units of component R and
three units of component T, together with a body shell S. These items are purchased from an
outside supplier. Currently prices are:

Component R RM8 each

Component T RM5 each
Shell S RM30 each

2005; no change is expected in the price of the shell.

6
Stocks on 31 December 2004 are expected as follows:

Finished units 9,000 units

Component R 3,000 units
Component T 5,500 units
Shell S 500 units

Closing stocks at the end of each quarter are to be as follows:

Finished units 10% of next quarter’s sales

Component R 20% of next quarter’s production requirements
Component T 15% of next quarter’s production requirements
Shell S 10% of next quarter’s production requirements

Required:

i. Prepare the following budgets of Farah Limited for the year ending 31 December
2005, showing values for each quarter and the year in total:
(a) sales budget (in RM and Units)
Sales budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Sales units 40,000 50,000 30,000 45,000 165,000
Unit price (RM) 150 150 160 160
Revenue (RM’000) 6,000 7,500 4,800 7,200 25,500

(b) production budgets (in units)

Production budget (units):
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Budgeted sales 40,000 50,000 30,000 45,000 165,000
Add: Target ending
inventory 5,000 3,000 4,500 4,000 4,000
Total requirements 45,000 53,000 34,500 49,000 169,000
Less: Target
beginning inventory 9,000 5,000 3,000 4,500 9,000
Budgeted production 36,000 48,000 31,500 44,500 160,000

(c) material usage budget (in unit)

Material usage budget (units)
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Budgeted production 36,000 48,000 31,500 44,500
Component R (4 per 144,000 192,000 126,000 178,000 640,000
unit)
Component T (3 per 108,000 144,000 94,500 133,500 480,000
unit)
Shell s (1 per unit) 36,000 48,000 31,500 44,500 160,000

(d) material purchases budget for Component R and T only (in RM and unit)
Production cost budget

7
 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
(RM) (RM) (RM) (RM) (RM)
Materials
Component R 1,152,000 1,689,600 1,108,800 1,566,400 5,516,800
Component T 540,000 792,000 519,750 734,250 2,586,000
Shell S 1,080,000 1,440,000 945,000 1,335,000 4,800,000
2,772,000 3,921,600 2,573,550 3,635,650 12,902,800
Labour 1,080,000 1,440,000 960,000 1,388,400 4,853,400
Variable
Overhead* 360,000 480,000 315,000 445,000 1,600,000
Fixed Overhead 54,000 72,000 47,250 66,750 240,000
4,266,000 5,913,600 3,880,800 5,535,800 19,596,200
*Absorbed rate= RM240,000/160,000 units = RM1.50
“Budgeting is a waste of time. I’ve been running this business for 40 years. I don’t need to plan.”
Discuss.

QUESTION 6 (NO SOLUTIONS)

i. “Production managers and marketing managers are like oil and water. They just don’t
mix.” How can a budget assist in reducing battles between these two areas?

ii. Hussin Sdn. Bhd., headquartered in Selayang, has a manufacturing plant in Klang. Plant
managers desire to participate in the company’s budget efforts, which, for the past 10
years, have been handled solely by top executives in Selayang. Klang managers feel that
by becoming involved, they can make great strides in terms of improving
operating performance of their aging facility.

iii. Briefly discuss the situation, focusing on the benefits and problems (advantages and
disadvantages) of letting Klang managers participate in the company’s budgetary efforts.

iv. Discuss the importance of budgeting in an organization

v. What is participative budgeting? Explain the advantages and disadvantages of

participative budgeting (give two of each).

vi. What do you understand by the term “budgetary slack”.

Explain the negative consequences of budgetary slack.
Briefly explain three factors that will encourage managers to introduce “slack” into their
budgets.

QUESTION 7
DAKOTA FAN, INC. manufactures an inexpensive household fan that it sells to retailers for
RM20 per unit. All sales are on account, with 40 percent of sales collected in the month of sale
and 60 percent collected in the following month. The data that follow were extracted from the
company’s accounting records.

 Dakota Fan maintains cash balance of RM15,000. Total payments in January 2007 are
budgeted at RM195,000.

8
 A schedule of cash collections for January and February of 2007 revealed the following
receipts for the period:

Cash Receipts (2007)

January February
From December 31 2006, RM108,000
accounts receivable
From January 2007 sales 76,000 RM114,000
From February 2007 sales 78,400

 March 2007 sales are expected to total 10,000 units.

 Finished-goods inventories are maintained at 20 percent of the following month’s sales.

 The December 31, 2006, balance sheet revealed the following selected figures: cash,
RM22,500; accounts receivable, RM108,000; and finished goods, RM22,350.

Required:

i. Determine the number of units that Dakota Fan sold in December 2006.
Since the company expects to sell 10,000 units, sales revenue will total
$200,000 (10,000 units x $20).

ii. Compute the sales revenue for March 2007.

Dakota Fan collected 40% of February’s sales during February, or $78,400.
Thus, February’s sales total $196,000 ($78,400 ÷ .4). Combining January
sales ($76,000 + $114,000), February sales ($196,000), and March sales
($200,000), the company will report revenue of $586,000.

iii. Compute the total sales revenue to be reported on Dakota Fan’s budgeted income
statement for the first quarter of 2007.
Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x
60%).

iv. Determine the accounts receivable balance to the reported on the March 31, 2007,
budgeted balance sheet.

v. Calculate the number of units in the December 31, 2006, finished-goods inventory.
Finished-goods inventories are maintained at 20% of the following month’s
sales. January sales total $190,000 ($76,000 + $114,000), or 9,500 units
($190,000 ÷ $20). Thus, the December 31 inventory is 1,900 units (9,500 x
20%).

vi. Calculate the number of units of finished goods to be manufactured in January 2007.
February sales will total 9,800 units ($196,000 ÷ $20), giving rise to a January
31 inventory of 1,960 units (9,800 x 20%). Letting X denote production,
then:

12/31/x0 inventory + X – January ‘x1 sales = 1/31/x1 inventory

9
 1,900 + X - 9,500 = 1,960
X – 7,600 = 1,960
X = 9,560

vii. Calculate the financing required in January, if any, to maintain the firm’s minimum cash
balance.
Financing required is $3,500 ($15,000 minimum balance less ending cash
balance of $11,500):

Cash balance, January $ 22,500

1…………………………
Add: January receipts ($108,000 + $76,000).. 184,000
Subtotal…………………………………… $206,500
……
Less: January 195,000
payments…………………………
Cash balance before $ 11,500
financing………………….

QUESTION 8
Kotak Corporation manufactures two types of cardboard boxes used in shipping canned food,
fruit, and vegetables. The canned food box (type C) and the perishable food box (type P) have the
following material and labor requirements.
Type of Box
C P
Direct material required per 100 boxes:
Corrugating medium (RM0.15 per pound) 20 pounds 30 pounds
Paperboard (RM0.30 per pound) 30 pounds 70 pounds
Direct labor required per 100 boxes (RM18.00 per hour) 0.25 hour 0.50 hour

The following manufacturing-overhead costs are anticipated for the next year. The predetermined
overhead rate is based on a production volume of 495,000 units for each type of box.
Manufacturing overhead is applied on the basis of direct-labor hours.
RM
Indirect material 15,750
Indirect labor 75,000
Utilities 37,500
Property taxes 27,000
Insurance 24,000
Depreciation 43,500
Total 222,750

The following selling and administrative expenses are anticipated for the next year.
RM
Salaries and fringe benefits of sales personnel 112,500
Advertising 22,500
Management salaries and fringe benefits 135,000
Clerical wages and fringe benefits 39,000
Miscellaneous administrative expenses 6,000

10
 Total 315,000

Sales Volume Sales Price

Box type C 500,000 boxes RM135 per hundred boxes
Box type P 500,000 boxes RM195 per hundred boxes

The following inventory information is available for the next year.

Expected Inventory Desired Ending Inventory
January 1 December 31
Finished goods:
Box type C 10,000 boxes 5,000 boxes
Box type P 20,000 boxes 15,000 boxes
Raw material:
Corrugating medium 5,000 pounds 10,000 pounds
Paperboard 15,000 pounds 5,000 pounds

Required:
a- Prepare the following budget for Kotak Corporation.
(i) Sales budget
Sales budget:

Box C Box P Total

Sales (in units) 500,000 500,000
Sales price per unit            
$1.35 $1.95
Sales revenue $675,00 $975,000 $1,650,000
0

(ii) Production budget

Production budget (in units):

 Box C   Box P
Sales 500,000   500,000   
    
Add: Desired ending inventory....................................       
5,000     15,000    
Total units needed...................................................... 505,000   515,000   
    
Deduct: Beginning Inventory.......................................    
10,000    20,000    
 
Production requirements............................................. 495,000   495,000   
    

(iii) Direct-material budget

11
Raw-material budget:

CORRUGATING MEDIUM
Box C Box P Total
Production requirements (number of boxes)...... 495,000 495,000
Raw material required per box (pounds)...........               
     .2     .3
Raw material required for
production (pounds)......................................  99,000 148,500 247,500
Add: Desired ending
raw-material inventory..................................     
10,000
Total raw-material needs.................................. 257,500
Deduct: Beginning raw-material inventory.........     
5,000
Raw material to be purchased.......................... 252,500
Price (per pound).............................................      
$.15
Cost of purchases (corrugating medium)........... $ 37,875
Total cost of raw-material purchases
($145,500 + $37,875)................................... $183,37
5
PAPERBOARD
Box C Box P Total
Production requirement (number of boxes)........ 495,000 495,000
Raw material required per box (pounds)...........  
                
   .3   .7
Raw material required for
production (pounds)...................................... 148,500 346,500 495,000
Add: Desired ending
raw-material inventory..................................     
5,000
Total raw-material needs.................................. 500,000
Deduct: Beginning raw-material inventory.........   15,000
Raw material to be purchased.......................... 485,000
Price (per pound).............................................      
$.30
Cost of purchases (paperboard)....................... $145,50
0

(iv) Direct-labor budget

12
 (v) Manufacturing-overhead budget

b- "Budgets are primarily a tool used to limit expenditures." Do you agree? Explain.

13