BUDGETARY PLANNING

TRUE-FALSE STATEMENTS
1.

Budgets represent managements plans in financial terms.

2.

Budgets promote efficiency and serve as a deterrent to waste.

3.

A budget can be a means of communicating a company's objectives to external parties.

4.

A budget facilitates coordination of activities within the business but is a poor tool for
evaluating performance.

5.

A budget is more beneficial if accepted by lower level management.

6.

The budget itself and the administration of the budget are the responsibility of
management.

7.

The most common budget period is one year.

8.

The flow of input data for budgeting should be from the lowest levels of responsibility to
the highest level.

9.

Budgets, by their very nature, create a negative effect on human behavior within
companies because they imply that management is trying to control.

10.

A budget committee coordinates the budget activities of a company.

11.

The shorter the budget period, the more reliable the estimates of future outcomes.

12.

Upper level managers are responsible for preparing the entire budget.

13.

The last step in the budgeting process is developing a sales forecast.

14.

Budgeting and long-range planning differ in the emphasis and the time period involved.

15.

Long-range plans are used primarily as an evaluation of specific results to be achieved.

16.

Long-range plans reflect management's long-term plans encompassing five years or

more.

17.

The master budget consists of a plan of action for a specified time period.

18.

Operating budgets must be completed before the financial budgets can be prepared.

19.

The production budget must be completed before the materials purchases budget
because the number of units to be produced must be known to determine how much
material to buy.

20.

The number of direct labor hours needed for production is obtained from the direct labor
budget.

9-2

21.

Companies can use either a predetermined overhead rate or a manufacturing overhead

budget.
The manufacturing overhead budget generally has separate sections for variable and
fixed costs.

22.
23.

A sales budget should be prepared before the production budget.

24.

The direct materials budget contains only quantity data so the purchasing department
knows how much materials should be purchased.

25.

The budgeted income statement indicates the expected amount of cash expected to be
acquired from operations.

26.

Companies that do not prepare cash budgets have significant cash deficiencies.

27.

In preparing the budgeted balance sheet, management should not be concerned if it does
not balance since it does not reflect actual results.

28.

The first budget prepared should be the sales budget.

29.

A merchandiser has a merchandise purchases budget, and a manufacturer has a

materials purchases budget.

30.

A service company has no purchases budget.

Answers to True-False Statements

Item
1.
2.
3.
4.
5.

Ans.
T
T
F
F
T

Item
6.
7.
8.
9.
10.

Ans.
T
T
T
F
T

Item
11.
12.
13.
14.
15.

Ans.
T
F
F
T
F

Item
16.
17.
18.
19.
20.

Ans.
T
T
T
T
T

Item
21.
22.
23.
24.
25.

Ans.
F
T
T
F
F

Item
26.
27.
28.
29.
30.

Ans.
F
F
T
T
T

MULTIPLE CHOICE QUESTIONS

31.

At January 1, 2004, Barry, Inc. has beginning inventory of 4,000 widgets. Barry estimates it
will sell 35,000 units during the first quarter of 2004 with a 10% increase in sales each
quarter. Barrys policy is to maintain an ending inventory equal to 25% of the next quarters
sales. Each widget costs $1 and is sold for $1.50. How much is budgeted sales revenue for
the third quarter of 2004?
a. $57,525
b. $63,000
c. $63,525
d. $42,350

32.

Wacos Widgets plans to sell 22,000 widgets during May, 19,000 units in June, and 20,000
during July. Waco keeps 10% of the next months sales as ending inventory. How many
units should Waco produce during June?

Budgetary Planning

a.
b.
c.
d.
33.

9-3

18,900
21,000
19,100
19,000

Gottberg Mugs is planning to sell 2,000 mugs and produce 2,200 mugs during April. Each
mug requires 2 pounds of resin and one-half hour of direct labor. Resin costs $1 per pound
and employees of the company are paid $12.50 per hour. Manufacturing overhead is
applied at a rate of 120% of direct labor costs. Gottberg has 2,000 pounds of resin in
beginning inventory and wants to have 2,400 pounds in ending inventory. How much is the
total amount of budgeted direct labor for April?
a. $12,500
b. $13,750
c. $25,000
d. $27,500

34.

During December, the capital budget indicates a $280,000 purchase of equipment. The
ending November cash balance is budgeted to be $40,000. Cash receipts are $840,000,
and cash disbursements are $610,000 during December. The company wants to maintain
a minimum cash balance of $20,000. What is the minimum cash loan that must be planned
to be borrowed from the Bank during December?
a. $30,000
b. $10,000
c. $50,000
d. $0

35.

Lewis Hats is planning to sell 600 straw hats. Each hat requires pound of straw and
hour of direct labor. Straw costs $0.20 per pound and employees of the company are paid
$22 per hour. Lewis has 80 pounds of straw and 40 hats in beginning inventory and wants
to have 50 pounds of straw and 60 hats in ending inventory. How many units should Lewis
Hats produce in April?
a. 600
b. 620
c. 580
d. 630

36.

Looker Hats is planning to sell 600 felt hats, and 700 will be produced during June. Each
hat requires yard of felt and hour of direct labor. Felt costs $3.00 per yard and
employees of the company are paid $20 per hour. How much is the total amount of
budgeted direct labor for June?
a. $3,000
b. $48,000
c. $3,500
d. $2,400

37.

Weaver, Inc. has budgeted direct materials purchases of $150,000 in March and $240,000
in April. Past experience indicates that the company pays for 70% of its purchases in the
month of purchase and the remaining 30% in the next month. Other costs are all paid
during the month incurred. During April, the following items were budgeted:
Wages expense
Purchase of office equipment
Selling and administrative expenses

$75,000
36,000
24,000

9-4

Depreciation expense

18,000

How much is budgeted cash disbursements for April?

a. $324,000
b. $213,000
c. $348,000
d. $366,000
Use the following information for questions 38, 39, and 40.
Livanos, Inc.reports all its sales on credit, and pays operating costs in the month incurred. Amounts
for 2005 are:

Budgeted sales
Budgeted purchases

March
$300,000
$144,000

April
$290,000
$120,000

May
$320,000
$128,000

June
July
$280,000 $210,000
$132,000 $90,000

Customer amounts on account are collected 70% in the month of sale and 30% in the
following month.
Cost of goods sold is 60% of sales.
Livanos purchases and pays for merchandise 40% in the month of acquisition and 60% in
the following month.
Operating expenses are: Salaries, $50,000; Depreciation, $12,000; Rent, $15,000; and
Utilities, $14,000;
Accounts payable is used only for inventory acquisitions.

38.

How much cash will Livanos receive during May from customers?
a. $308,000
b. $311,000
c. $224,000
d. $299,000

39.

How much is Livanos May 30, 2005 budgeted Accounts Receivable?

a. $320,000
b. $96,000
c. $224,000
d. $311,000

40. How much is Livanos budgeted balance for Accounts Payable at May 30, 2005?
a. $124,800
b. $72,000
c. $51,200
d. $76,800
41.

Orr Corporations manufacturing costs for August when production was 800 units appears
below:
Direct material
$10 per unit
Direct labor
$4,800
Variable overhead
4,000
Factory depreciation
3,000
Factory supervisory salaries
2,000
Other fixed factory costs
1,000
How much is the budgeted manufacturing cost for a month when 900 units are produced?

Budgetary Planning

a.
b.
c.
d.

9-5

$23,800
$18,900
$24,900
$25,650

42.

Lewis Production is planning to sell 220 boxes of bricks and produce 200 boxes of bricks
during May. Each box of bricks requires 20 pounds of brick mix and a half hour of direct
labor. Brick mix costs $5 per 100 pounds and employees of the company are paid $12.00
per hour. Manufacturing overhead is applied at a rate of 120% of direct labor costs. Lewis
Production has 600 pounds of brick mix in beginning inventory and wants to have 800
pounds of brick mix in ending inventory. What is the total amount to be budgeted for
manufacturing overhead for the month?
a. $1,440
b. $2,880
c. $2,400
d. $1,200

43.

Hargrow, Inc. makes and sells a single product, buckets. It takes 30 ounces of plastic to
make one bucket. Budgeted production of buckets for the next three months is as follows:
August 90,000 units, September 75,000 units, October 65,000 buckets. The company
wants to maintain monthly ending inventories of plastic equal to 10% of the following
month's production needs. On August 31st, 195,000 ounces of plastic were on hand. The
cost of plastic is $0.03 per ounce. How much is the ending inventory of plastic to be
reported on the companys balance sheet at September 30?
a. $195,000
b. $5,850
c. $6,750
d. $7,500

44.

Razmataz Company makes and sells umbrellas. The company is in the process of
preparing its Selling and Administrative Expense Budget for the last half of the year. The
following budget data are available:
Item
Sales commissions
Shipping
Advertising
Depreciation on office equipment
Other operating expenses

Variable Cost Per Unit Sold

$0.60
$1.20
$0.30
$0.35

Monthly Fixed Cost

$3,000
$4,000
$34,000

Expenses are paid in the month incurred. If the company has budgeted to sell 2,000
umbrellas in October, how much is the total budgeted variable selling and administrative
expenses for October?
a. $41,000
b. $4,600
c. $45,900
d. $4,900
45.

Leak Company sells only on credit. It reported the following information for 2006:
Budgeted sales

September
$900,000

October
$800,000

November
$850,000

December
$960,000

9-6

46.

Customer amounts on account are collected 45% in the month of sale and 55% in the
following month. How much is the November 30, 2006 budgeted Accounts Receivable?
a. $467,500
b. $382,500
c. $827,500
d. $528,000
At January 1, 2006, Jake, Inc. has beginning inventory of 3,000 surfboards. Jake estimates
it will sell 14,000 units during the first quarter of 2006 with a 10% increase in sales each
quarter. Jakes policy is to maintain an ending inventory equal to 20% of the next quarters
sales. Each surfboard costs $140 and is sold for $200. How many units should Jake
produce during the first quarter of 2006?
a. 14,080
b. 14,000
c. 16,800
d. 14,200

47.

At January 1, 2006, Jake, Inc. has beginning inventory of 3,000 surfboards. Jake estimates
it will sell 14,000 units during the first quarter of 2006 with a 10% increase in sales each
quarter. Jakes policy is to maintain an ending inventory equal to 20% of the next quarters
sales. Each surfboard costs $140 and is sold for $200. How much is budgeted sales
revenue for the third quarter of 2006?
a. $16,940
b. $3,388,000
c. $3,360,000
d. $3,080,000

48.

Items from Sap Companys budget for March in which 2,100 units were produced and sold
appear below:
Direct materials
Indirect materials - variable
Supervisor salaries
Depreciation on factory equipment
Direct labor
Property taxes on factory
Total

$12,000
2,000
10,000
8,000
7,000
3,000
$42,000

At 2,200 units, how much are budgeted variable manufacturing costs?

a. $22,000
b. $43,000
c. $21,000
d. $19,905
49.

Nunnally Manufacturing Company has furnished the following information which occurred
during May:
Accounts Payable balance at April 30
Purchases on account during May
Cash payments for materials purchased in April
Cash payments for materials purchased in May

$ 29,000
150,000
82,000
76,000

The accounts payable account is used only for direct materials. How much will Nunnally
report as accounts payable on the balance sheet at the end of May?
a. $21,000
b. $103,000
c. $8,000

Budgetary Planning

d.
50.

9-7

$15,000
Harrah Company provided the following information for the month of October:
Beginning cash balance
Cash receipts
Cash disbursements

$ 35,000
460,000
485,000

Harrahs policy is to keep a minimum end of the month cash balance of $30,000. How
much will Harrahs need to borrow during August?
a. $20,000
b. $25,000
c. $10,000
d. $0
51.

Each production worker can produce 4 wooden chairs per hour. During the month of June,
Chairs, Inc. has forecasted sales of 100,000 chairs. The beginning inventory was 1,000
chairs, and desired ending inventory is 2,500 chairs. How many hours of direct labor must
be budgeted to meet production needs?
a. 25,375
b. 25,000
c. 26,500
d. 24,625

52.

Jelly Box, Inc. budgeted the following manufacturing costs for 25,000 calculators:
Fixed manufacturing costs
Variable manufacturing costs

$12,000 per month

$16.00 per unit

Jelly Box produced 20,000 calculators during March. How much is budgeted total
manufacturing costs in March?
a. $320,000
b. $412,000
c. $400,000
d. $332,000
53.

Which one of the following is correct concerning a budget?

a. It can focus as a substitute for management.
b. It is a written statement of managements plans for a specified future time period.
c. It is required for all business operations.
d. It is used only by manufacturing companies.

54.

For which one of the following budgeting aspects does the budget committee generally
have the responsibility?
a. Enforcing the budget
b. Expressing the budget in financial terms
c. Setting company goals
d. Serves as a review board where managers can defend budget goals and requests

55.

Which one of the following is not a benefit of budgeting?

a. It facilitates the coordination of activities.
b. It provides definite objectives for evaluating performance.
c. It provides assurance that the company will achieve its objectives.
d. It requires all levels of management to plan ahead on a recurring basis.

9-8

56.

With which management function is budgeting most closely related?

a. Motivating
b. Controlling
c. Planning
d. Directing

57.

Which of the following is not a benefit of budgeting?

a. It promotes efficiency.
b. It deters waste.
c. It is a basis for performance evaluation.
d. It assures the company that management will perform at a particular operational level.

58.

Where do most companies start in the budgeting process?

a. They estimate expected profits.
b. They look at past performance.
c. They look at competitors future plans.
d. They estimate how many units the production department is able to produce.

59.

Which one of the following is one of the factors that must be present if budgets are to be
effective?
a. All upper level managers should verify the validity of the amounts in the budgets.
b. Research and analysis should occur in order to set realistic goals.
c. The company must have the stockholders' approval of the budget.
d. The budget committee must prepare the budget.

60.

Which one of the following is necessary if a company expects its budget to be effective?
a. The company must be operating at less than capacity.
b. The budget period must cover more than one year.
c. The companys organizational structure must be sound.
d. The company must have sufficient cash for operations.

61.

Which of the following individuals should accept the companys budgets in order for the
budgets to be most effective?
a. Division managers and customers
b. Department heads and division managers
c. Supervisors and clerks
d. Department heads and creditors

62.

Which of the following approvals will make the most effective environment for budget
acceptance?
a. The budget is prepared by top management.
b. The budget preparation contains input from all levels of management.
c. The budget is prepared by the department heads.
d. Acceptance has nothing to do with who prepares budgets.

63.

The performance report of the Canadian Division of Sidmund, Inc. showed a difference
between the budget and the actual results for the year. Management determines this
difference was controllable by the manager in charge. Should the division manager be
held responsible?
a. No, since budget differences fluctuate over time.
b. Yes, because managers are responsible for controllable costs for their departments.

Budgetary Planning

9-9

c. Only if the difference is favorable.

d. Yes, managers are responsible for all costs in their division.
64.

Which one of the following would most likely cause an unrealistic budget to result?
a. All levels of management contributed to its development.
b. The budget has been developed in a participative approach.
c. The budget was developed after considerable planning.
d. The budget has been developed in a top down fashion.

65.

Under what situation might a budget be most effective?

a. As a tool to assess blame when costs are too high
b. When used to evaluate a manager's performance
c. Budgets are equally effective in all situations.
d. When it is created by top management

66.

In many companies, who is assigned the responsibility for coordinating the preparation of
the budget?
a. A budget committee
b. The sales managers since the sales budget is the backbone of the master budget
c. The company's board of directors since they approve major corporate changes
d. The company's independent certified public accountants

67.

Which one of the factors below is not a major influence of the length of budget periods?
a. The nature of the organization
b. The type of budget
c. Prevailing business conditions
d. The profitability of the company

68.

Which one of the following is an advantage of using participative budgeting?

a. It is updated daily to reflect current activity.
b. It assures the company is operating at the activity level of the master budget.
c. It allows companies to compare the current with the previous year.
d. Lower level managers are more likely to perceive budgets as fair.

69.

Which time period is the most common for budget periods?

a. One month
b. Five years
c. One year
d. There is no common time period since companies use any period desired.

70.

Crown, Inc. administered its budget. What did the company do?
a. It prepared the budget one year in advance.
b. Management used the budget as an aid in achieving projected goals.
c. The company allowed each level of management to participate in creating the budget.
d. Management estimated its sales for the budget period.

71.

Which one of the following includes people who normally make up the budget committee?
a. Sales manager, company president, company treasurer
b. Company treasurer, creditors, controller
c. Sales manager, controller, investors
d. External auditors, controller, treasurer

9-10

72.

Which problem might be a result of an unrealistic budget?

a. Profitable operations
b. Reduced employee morale
c. Favorable operating activity
d. Minimal differences between actual and budgeted amounts

73.

How does long-range planning compare to a master budget?

a. It focuses on meeting profit objectives instead of strategies to achieve those goals.
b. It is less detailed than an annual budget.
c. It is prepared by the president, unlike a master budget which is prepared by a budget
committee.
d. It generally encompasses a shorter period of time than a master budget.

74.

What three differences exist between long-range planning and budgeting?

a. Amount of detail, content, and emphasis
b. Time periods involved, amount of detail, and content
c. Content, emphasis, and amount of detail
d. Emphasis, time periods involved, and amount of detail

75.

Which of the following is a proper match-up?

a. Long-range planning 1 year
b. Budgeting Review of progress
c. Budgeting Anticipated trends in economic environment
d. Long range planning Strategies

76.

DaDumCompany desired 12,000 pounds of raw material on hand on June 1 and 10,500
on June 30. The number of pounds required for production for June totaled 240,000
pounds. How many pounds of raw material should DaDum purchase in June?
a. 238,500 pounds
b. 241,500 pounds
c. 250,500 pounds
d. 228,000 pounds

77.

Which budget provides the information needed to prepare the direct labor budget?
a. Income budget
b. Production budget
c. Materials budget
d. Sales budget

78

In preparing one of its budgets, Hartz, Inc. used information from both the direct materials
and direct labor budgets. Which budget was Hartz preparing?
a. Sales budget
b. Production budget
c. Manufacturing overhead budget
d. Cash budget

Budgetary Planning

9-11

79.

How does a sales forecast differ from a sales budget?

a. A sales forecast includes the company, while a sales budget includes the industry.
b. A sales forecast includes the company and the industry, while a sales budget includes
only the industry.
c. A sales forecast includes the company and the industry, while a sales budget includes
only the company.
d. They are both the same.

80.

Which one of the following is an operating budget?

a. Cash budget
b. Sales budget
c. Budgeted balance sheet
d. Capital expenditure budget

81.

Which one of the following is a financial budget?

a. Capital expenditure budget
b. Production budget
c. Manufacturing overhead budget
d. Sales budget

82.

Which one of the following helps improve the reliability of the sales forecast?
a. Reduction of differences between actual and estimated amounts
b. Creation of management awareness
c. Consideration of industry trends
d. Extension of the budget period

83.

Which one of the following sets includes only financial budgets?

a. Cash budget and the operating budget
b. Sales budget and the budgeted balance sheet
c. Budgeted balance sheet and the cash budget
d. Cash budget and the sales budget

84.

Which one of the following is the last step in preparing the operating budget?
a. Budgeted income statement
b. Production budget
c. Cash budget
d. Budgeted balance sheet

85.

What might a very conservative sales budget cause?

a. An decrease in selling prices
b. A shortage of inventories
c. Increased sales during the year
d. Overproduction of goods

86.

Savy, Inc. was preparing its production budget. How should the company determine the
number of units to be produced?
a. The budgeted sales units plus beginning finished goods units
b. The budgeted sales units plus desired ending finished goods units
c. The budgeted sales units plus desired ending finished goods units plus beginning
finished goods units
d. The budgeted sales units plus desired ending finished goods units minus beginning
finished goods units

9-12

87.

What information is found on the direct materials budget?

I. How many units of direct materials should be purchased?
II. How much is the cost of direct materials to be purchased?
a. I only
b. II only
c. Both I and II
d. Neither I nor II

88.

Surprise Companys sales budget showed expected sales of 13,400 widgets. Beginning
finished goods contained 1,200 widgets. The company determined that 14,100 units
should be produced. How many widgets will the company have on hand at the end of the
year?
a. 500
b. 1,200
c. 1,900
d. 700

89.

The production budget shows expected unit sales are 1,800. The required production
units are 1,700. Which of the following represents possible inventory balances?
a.
b.
c.
d.

Beginning Units
200
100
200
0

Ending Units
100
200
200
100

90.

The production budget shows that expected unit sales are 86,000 for May and 87,000 for
June. The company desires to have units on hand at the end of the month equal to 10% of
next months sales. How many units should the company produce during May?
a. 86,100
b. 94,600
c. 85,900
d. 94,700

91.

Nextel Company showed the following on its direct materials budget for June:
Units to be produced
Total pounds needed for production
Total pounds of materials to be purchased

50,000
4,000
5,000

The materials cost $2 per pound. How much is the cost of direct materials per unit?
a. $0.16
b. $25
c. $20
d. $0.20
92.

Drive, Inc. determined its estimated production for the month are 300,000 units. Each unit
requires 2 pounds of material. The beginning direct materials are 1% of the current
months expected needs. Ending inventory desired is 7,500 pounds. How much are
estimated direct materials purchases in pounds?
a. 601,500 pounds
b. 607,500 pounds
c. 301,500 pounds
d. 598,500 pounds

Budgetary Planning

93.

9-13

The direct materials budget shows:

Desired ending direct materials
Materials purchased
Beginning inventory on hand

2,000 pounds
51,400 pounds
1,200 pounds

How much is the total direct materials needed for production?

a. 50,600 pounds
b. 52,600 pounds
c. 52,200 pounds
d. 51,400 pounds
94.

Which one of the following expenses would most likely appear on a Selling and
Administrative Expense Budget?
a. Indirect materials
b. Machine depreciation
c. Sales commissions
d. Indirect labor

95.

Which of the following would most likely appear as a fixed expense on the Selling and
Administrative Expense Budget?
a. Delivery expense
b. Factory supervisor salary
c. Indirect labor
d. Depreciation

96.

Which one of the following best describes a master budget?

a. It is an interrelated long-term plan and operating budgets.
b. It includes financial budgets and a long-term plan.
c. It includes interrelated financial budgets and operating budgets.
d. It is all the accounting journals and ledgers used by a company.

97.

What is the starting point in preparing a master budget?

a. The production budget
b. The sales budget
c. The production budget
d. The purchases budget

98.

Which one of the following is needed to prepare a production budget?

a. Budgeted unit sales
b. Budgeted raw materials to be purchased
c. Beginning work in process units
d. Estimated cost of goods sold

99.

Spirit, Inc. budgeted sales are 433,000 units for January and 420,000 units for February.
The companys policy requires maintaining units on hand at the end of each month equal
to 8% of next month's budgeted unit sales. How many units should the company produce
in January?
a. 442,700 units
b. 423,300 units
c. 466,600 units
d. 431,960 units

9-14

100.

Jason Company determined that the budgeted cost of producing a product is $1.20 per
unit. On June 1, there were 11,000 units on hand. The sales department budgeted sales
of 320,000 units in June. The company desires to have 8,000 units on hand on June 30.
How much is the budgeted cost of goods manufactured for June?
a. $380,400
b. $317,000
c. $323,000
d. $387,600

Answers to Multiple Choice Questions

Item
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.

Ans.
c
c
b
a
b
c
c
b
b
d
c
a
b
d
a
a
b
a
a

Item
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.

Ans.
a
a
d
b
d
c
c
d
b
b
c
b
b
b
d
b
a
d
d

Item
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.

Ans.
c
b
a
b
b
d
d
a
b
d
c
b
a
c
c
d
b
d
c

Item
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.

Ans.
c
a
a
a
a
a
c
d
c
b
a
d
a

Budgetary Planning

9-15

Exercise 183
Clingy Company budgeted the following unit sales:
January
February
March
April
May

14,000
12,000
11,000
16,000
13,000

Each unit requires 2 yards of fabric which is estimated to cost $3.50 per yard. It is the company's
policy to maintain a finished goods inventory at the end of each month equal to 20% of next
month's anticipated sales. Clingy Company also have a policy of maintaining a raw materials
inventory at the end of each month equal to 10% of the yards needed for the following month's
production. There were 1,200 yards of fabric on hand at March 1.
Instructions
Prepare a production budget and a direct materials budget for March.
Solution Exercise 183 (1012 min.)
Clingy Company
Production Budget
For the Month Ending March 31
Expected unit sales
Desired ending finished goods units (20% x 16,000)
Total required units
Less: Beginning finished goods units (20% x 11,000)
Required production units

11,000
3,200
14,200
2,200
12,000

Clingy Company
Direct Materials Budget
For the Month Ending March 31
Units to be produced
Direct materials per unit
Total yards needed for production
Desired ending direct materials in yards*
Total materials required
Less: Beginning direct materials in yards
Direct materials purchases
Cost per pound
Total cost of direct materials purchases
* 10% x [16,000 + (20% x 13,000) (20% x 16,000)]

12,000
2
24,000
1,540
25,540
1,200
24,340
$3.50
$85,190

9-16

Exercise 189
The Jaguars Division of NFL has been requested to prepare a quarterly budgeted income
statement for 2006. The regional manager expects that sales in the first quarter of 2006 will
increase in volume by 10% over the same quarter of the preceding year and will then increase by
5% for each succeeding quarter in 2006.
The corporate head office has requested that the regional manager maintain an inventory in
dollars equal to 16% of the next quarter's sales. Quarterly purchases average 45% of quarterly
sales. Budgeted ending inventory on December 31, 2005 is $8,000. Quarterly salaries are $7,200
plus 10% of sales. All salaries are classified as sales salaries. Other quarterly expenses are
estimated to be as follows:
Rent expense
Depreciation on office equipment
Utilities expense
Miscellaneous expenses

$4,400
$2,000
$1,800
2% of sales

The income statement information for the first quarter of 2005 was as follows:
Sales ............................................................................................. $150,000
Cost of goods sold ........................................................................
66,000
Instructions
Prepare a budgeted quarterly income statement for the first quarter of 2006. (Show
computations.)
Solution Exercise 189 (1215 min.)
NFL - Jaguars Division
Budgeted Income Statement
For the Quarter Ending March 31, 2006
Sales (110% x $150,000).....................................................................................
Cost of goods sold*..............................................................................................
Gross profit .........................................................................................................
Operating expenses
Sales salaries ($7,200 + ($165,000 .1) .....................................................
Rent expense ..............................................................................................
Depreciation ................................................................................................
Utilities .........................................................................................................
Miscellaneous (2% x $165,000) ...................................................................
Total operating expenses .....................................................................
Net income .........................................................................................................
* Cost of goods sold:
Beginning inventory
Purchases ($165,000 45%)
Cost of goods available
Ending inventory ($165,000 105% = $173,250 16%)
Cost of goods sold

$165,000
54,530
110,470
23,700
4,400
2,000
1,800
3,300
35,200
$ 75,270
$ 8,000
74,250
82,250
27,720
$54,530

Budgetary Planning

9-17

Exercise 192
Sushi House has budgeted sales revenues as follows:
Credit sales
Cash sales
Total sales

June
$85,000
14,000
$99,000

July
$ 80,000
25,000
$105,000

August
$ 72,000
32,000
$104,000

Past experience indicates that 70% of the credit sales will be collected in the month of sale and
the remaining 30% will be collected in the following month. Purchases of inventory are all on
credit and 60% is paid in the month of purchase and 40% in the month following purchase.
Budgeted inventory purchases are:
June
$45,000
July
43,000
August
40,000
Other cash disbursements budgeted: selling and administrative expenses of $14,000 each
month, dividends of $30,000 will be paid in July, and purchase of a computer in August for $3,000
cash.
The company wishes to maintain a minimum cash balance of $20,000 at the end of each month.
The company borrows money from the bank at 9% interest if necessary to maintain the minimum
cash balance. Borrowed money is repaid in months when there is an excess cash balance. The
beginning cash balance on July 1 was $25,000. All amounts borrowed during a month are
borrowed on the first day. The loan balance as of July 1 is $26,000.
Instructions
Prepare a cash budget for the month of July. Prepare separate schedules for expected collections
from customers and expected payments for purchases of inventory.
Solution Exercise 192

(1216 min.)
Sushi House, Inc.
Cash Budget
For the Month Ending July 31

Beginning cash balance

Add: Receipts
Collections from customers:
July sales [$25,000 + ($80,000 x 70%)]
$81,000
June sales [$85,000 x 30%]
25,500
Total receipts
Total available cash
Less: Disbursements
Purchases during July (60% x $43,000)
$25,800
Purchases during June (40% x $45,000)
18,000
Selling and administrative expenses
14,000
Dividends
30,000
Total disbursements
Excess of available cash over disbursements
Financing
Repayments interest (.09/12 x $26,000)
Repayments principal ($23,700 excess - $195 interest)
Ending cash balance

$25,000

106,500
131,500

87,800
43,700
(195)
(23,505)
$20,000