Topic 9 Master Budget

1. Comprehensive problem
a. Complete the sales budget of Strong, Inc. for this coming year

Budgeted unit sales

Budgeted sales price
Budgeted sales revenue

Quarter 1
1,000
$100

Quarter 2
2,000
$100

Quarter 3
3,000
$100

Quarter 4
4,000
$100

Year
10,000
$100

b. Complete the production budget (in units) of Strong, Inc. for this coming year.
Budgeted unit sales
Budgeted ending inventory
(10% of current period
budgeted sales)
Budgeted beginning
inventory
Budgeted production

Quarter 1
1,000

Quarter 2
2,000

Quarter 3
3,000

Quarter 4
4,000

Year
10,000

300

c. Complete the budget for purchase of direct materials (in units). Assume each unit of product
requires two units of direct materials, which cost $2 per unit. The company has a policy of maintaining
an ending inventory at the end of each month equal to 10% if the next quarters production needs.
Budgeted production
DM needed for production
Budgeted ending DM
inventory
Budgeted beginning DM
inventory
DM to be purchased

Quarter 1
800

Quarter 2
2,100

Quarter 3
3,100

Quarter 4
4,100

Year
10,100

1,020
160

d. Complete the direct labor budget (in hours). Assume each unit of product requires 0.5 hour of
direct labor and the hourly rate is $10. The company has a no-layoff policy; for each quarter, the
company will pay a minimum of 500 hours per quarter.
Budgeted production
DL hour per unit
DL hours required
Guaranteed labor hours
DL hours to be paid

Quarter 1
800

Quarter 2
2,100

Quarter 3
3,100

Quarter 4
4,100

Year
10,100

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e. Complete the manufacturing overhead budget (in $). The budgeted variable manufacturing
overhead rate is $2.00 per direct labor hour; the budgeted fixed manufacturing overhead is $5,000 per
quarter.
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Year
DL hours to be paid
500
1,050
1,550
2,050
5,150
Variable MOH rate
Variable MOH costs
Fixed MOH cost
Total MOH cost
f. Compute the schedule of cash collections for Strong, Inc.
40% of the total sales are paid by cash in the same quarter of sales and 60% of total sales are credit sales.
Strong, Inc. expects to collect 50% of the credit sales in the same quarter and the remaining 50% of credit
sales in the next quarter. The beginning balance of accounts receivable is $50,000 (i.e., the remaining credit
sales from the last quarter of the previous year to be collected).
Budgeted sales revenue
Cash sales of the current
quarter (40% of the
total sales)
Credit Sales Collected
in the current
quarter (50%)
Credit Sales Collected
in the next quarter
(50%) or accounts
receivable from the
previous quarter to
be collected

Quarter 1
$100,000

Quarter 2
$200,000

Quarter 3
$300,000

Quarter 4
$400,000

Year
$1,000,000

50,000

Budgeted cash collections

g. Compute the schedule of cash disbursement for Strong, Inc. For selling and administrative (S&A)
expense, the budgeted variable S&A expense is $6.00 per unit sold and the budgeted fixed S&A
expense is $20,000 per quarter.
Quarter 1

Quarter 2

Quarter 3

Quarter 4

Year

Direct material cost

Direct labor cost
MOH cost
Selling and administrative
cost
Budgeted cash
disbursement

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Topic 9 Continued
2.

3.

A. Compute total cash received in November and total cash received in December (show two separate
figures.)
B. Compute the cash balance as at 31 December

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4. Flawless Lawns Manufacturing produces lawn edgers. The company has a policy that the ending
inventory in any month must be 10% of the following month's expected sales. On March 31, Flawless
Lawns Manufacturing had 140 lawn edgers in inventory. Flawless Lawns Manufacturing expects to sell
the following number of lawn edgers in each of the next four months:

Prepare a production budget for the second quarter, with a column for each month and for the quarter.

5. Fredder Company usually sells about 20% of its merchandise during a month for cash with the remaining
sales on account. The companys 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
A. What are the expected cash sales for June?
B. What are the expected receipts in June from accounts receivable for sales made in April?
C. What are the expected receipts from in June accounts receivable for sales made in May?
D. What are the total expected cash receipts for June?
E. From the above accounts receivable history information, receipts from accounts receivable do not equal
100%. Why not? Does this amount appear on the cash budget?

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6. 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?
C. Now suppose that there is no cash discount for purchases made in the month of
purchase. Now what are the total cash disbursements expected in February? In March?
D.

7. BusyBody Company expects its November sales to be 20% higher than its October sales of $180,000.
Purchases were $110,000 in October and are expected to be $160,000 in November. All sales are on
credit and are collected as follows: 35% in the month of the sale and 60% in the following month.
Purchases are paid 40% in the month of purchase and 60% in the following month. The cash balance on
November 1 is $13,500. The cash balance on November 30 will be $_______________

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8. The Storm Meadows Resort is preparing a cash budget for July 2013. Management has collected the
following information:
a.
b.

The cash balance on June 30, 2013 is $215,000.

Actual services provided in May and June and projected services for July are:

Cash services
Credit services

May
$ 96,000
675,000

June
$ 80,000
835,000

July
$ 120,000
752,000

40% of credit services are collected in the month of service, and 60% are collected in the
month following service.
c. During July, $100,000 of cleaning supplies will be purchased. Accounts are usually paid for over
two months: 80% in the month of purchase, 20% in the month following purchase. Accounts
payable (the remaining balance owed) on June 30th is $34,000.
d. Salaries and wages paid in July will be $650,000.
e. Depreciation on equipment used for the resort for July will be $104,000.
f. Other cash expenses for July will be $155,000.
g. The resort must repay a short-term loan during July. The payment is $80,000, including interest.
Prepare a cash budget for July 2013.

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Solutions

Sales & Production Budget, Cash Collections Schedule

a. Complete the sales budget of Strong, Inc. for this coming year
Quarter 1
Quarter 2
Quarter 3
Budgeted unit sales
1,000
2,000
3,000
Budgeted sales price
$100
$100
$100
Budgeted sales revenue
$100,000
$200,000
$300,000

Quarter 4
4,000
$100
$400,000

Year
10,000
$100
$1,000,00
0

Quarter 4
4,000

Year
10,000

b. Complete the production budget of Strong, Inc. for this coming year.
Budgeted unit sales
Budgeted ending inventory
(10% of current period
budgeted sales)
Budgeted beginning
inventory
Budgeted production

Quarter 1
1,000

Quarter 2
2,000

Quarter 3
3,000

100

200

300

400

400

300

100

200

300

300

800

2,100

3,100

4,100

10,100

c. Complete the budget for purchase of direct materials. Assume each unit of product requires two
units of direct materials, which cost $2 per unit. The company has a policy of maintaining an ending
inventory at the end of each month equal to 10% if the next months production needs.
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Year
Budgeted production
800
2,100
3,100
4,100
10,100
DM needed for production
1,600
4,200
6,200
8,200
20,200
Budgeted ending DM
420
620
820
1,020
1,020
inventory
(given)
(given)
Budgeted beginning DM
160
420
620
820
160
inventory
(given)
(given)
DM to be purchased
1,860
4,400
6,400
8,400
21,060
d. Complete the direct labor budget. Assume each unit of product requires 0.5 hour of direct labor
and the hourly rate is $10. The company has a no-layoff policy; for each quarter, the company will
pay a minimum of 500 hours per quarter.
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Year
Budgeted production
800
2,100
3,100
4,100
10,100
DL hour per unit
0.5
0.5
0.5
0.5
0.5
DL hours required
400
1,050
1,550
2,050
5,050
Guaranteed labor hours
500
500
500
500
DL hours to be paid
500
1,050
1,550
2,050
5,150
e. Complete the manufacturing overhead budget. The budgeted variable manufacturing overhead
rate is $2 per direct labor hour; the budgeted fixed manufacturing overhead is $5,000 per quarter.
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Year
DL hours to be paid
500
1,050
1,550
2,050
5,150
Variable MOH rate
$2
$2
$2
$2
$2
Variable MOH costs
$1,000
$2,100
$3,100
$4,100
$10,300
Fixed MOH cost
$5,000
$5,000
$5,000
$5,000
$20,000
Total MOH cost
$6,000
$7,100
$8,100
$9,100
$30,300
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f. Compute the schedule of cash collections for Strong, Inc.

40% of the total sales are paid by cash in the same quarter of sales and 60% of total sales are credit sales.
Strong, Inc. expects to collect 50% of the credit sales in the same quarter and the remaining 50% of credit
sales in the next quarter. The beginning balance of accounts receivable is $50,000 (i.e., the remaining credit
sales from the last quarter of the previous year to be collected).
Budgeted sales revenue
Cash sales of the current
quarter (40% of the
total sales)
Credit sales (60% of total
sales)
Collected in the
current quarter
(50%)
Collected in the next
quarter (50%) or
accounts receivable
from the previous
quarter to be
collected
Budgeted cash collections

Quarter 1
$100,000
40,000

Quarter 2
$200,000
80,000

Quarter 3
$300,000
120,000

Quarter 4
$400,000
160,000

Year
$1,000,000
400,000

30,000

60,000

90,000

120,000

300,000

50,000

30,000

60,000

90,000

230,000

$120,000

$170,000

$270,000

$370,000

$930,000

g. Compute the schedule of cash disbursement for Strong, Inc. For selling and administrative (S&A)
expense, the budgeted variable S&A expense is $6.00 per unit sold and the budgeted fixed S&A
expense is $20,000 per quarter.
Direct material cost
Direct labor cost
MOH cost
Selling and administrative
cost

Quarter 1
$3,720
$5,000
$6,000
$26,000

Quarter 2
$8,800
$10,500
$7,100
$32,000

Quarter 3
$12,800
$15,500
$8,100
$38,000

Quarter 4
$16,800
$20,500
$9,100
$44,000

Year
$42,120
$51,500
$30,300
$140,000

$40,720

$58,400

$74,400

$90,400

$263,920

Budgeted cash
disbursement

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2. Flawless Lawns Manufacturing produces lawn edgers. The company has a policy that the ending
inventory in any month must be 10% of the following month's expected sales. On March 31, Flawless
Lawns Manufacturing had 140 lawn edgers in inventory. Flawless Lawns Manufacturing expects to sell
the following number of lawn edgers in each of the next four months:

Prepare a production budget for the second quarter, with a column for each month and for the quarter.

3. Fredder Company usually sells about 20% of its merchandise during a month for cash with the remaining
sales on account. The companys 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
A. What are the expected cash sales for June?
B. What are the expected receipts in June from accounts receivable for sales made in April?
C. What are the expected receipts from in June accounts receivable for sales made in May?
D. What are the total expected cash receipts for June?
E. From the above accounts receivable history information, receipts from accounts receivable do not equal
100%. Why not? Does this amount appear on the cash budget?

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

B. Receipts on accounts receivable for sales made in April = (0.8)($100,000)(0.15) = $12,000
C. Receipts on accounts receivable for sales made in May = (0.8)($120,000)(0.50) = $48,000
D. Total cash expected in June = $16,000 + $12,000 + $48,000 + (0.8)($80,000)(0.30) = $95,200
E. 30% + 50% + 15% = 95% The remaining 5% is uncollectible. It does not appear on the cash budget
because there is no cash involved.

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4. 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?
C. Now suppose that there is no cash discount for purchases made in the month of purchase.
Now what are the total cash disbursements expected in February? In March?
A. $84,200 (see table below)
B. $87,040 (see table below)
February
March
January purchases (0.5)($90,000)
$45,000
February purchases:
(0.5)($80,000)(0.98)
39,200
(0.5)($80,000)
$40,000
March purchases (0.5)($96,000)(0.98)
_____
47,040
Total cash disbursements
$84,200
$87,040
C. February cash disbursements = $85,000
March cash disbursements = $88,000
January purchases (0.5)($90,000)
February purchases:
(0.5)($80,000)
(0.5)($80,000)
March purchases (0.5)($96,000)
Total cash disbursements

February
$45,000

March

40,000
_____
$85,000

$40,000
48,000
$88,000

5. BusyBody Company expects its November sales to be 20% higher than its October sales of $180,000.
Purchases were $110,000 in October and are expected to be $160,000 in November. All sales are on
credit and are collected as follows: 35% in the month of the sale and 60% in the following month.
Purchases are paid 40% in the month of purchase and 60% in the following month. The cash balance on
November 1 is $13,500. The cash balance on November 30 will be $_______________

Oct. Sales $ 180,000 60%

Nov. Sales 180,000 1.2% = 216,000 35%
Total Cash Receipts
Oct. Purchases $110,000 60%
Nov. Purchases 160,000 40%
Total Cash Disbursements
Beginning Cash
Cash Receipts
Cash Disbursements
Ending Cash

= 108,000
= 75,600
183,600

= 66,000
= 64,000
$ 130,000
$ 13,500
+ 183,600
- 130,000
$ 67,100

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6.

a.
b.

The Storm Meadows Resort is preparing a cash budget for July 2013. Management has collected the
following information:

The cash balance on June 30, 2013 is $215,000.

Actual services provided in May and June and projected services for July are:

Cash services
Credit services

May
$ 96,000
675,000

June
$ 80,000
835,000

July
$ 120,000
752,000

40% of credit services are collected in the month of service, and 60% are collected in the
month following service.
c. During July, $100,000 of cleaning supplies will be purchased. Accounts are usually paid for over
two months: 80% in the month of purchase, 20% in the month following purchase. Accounts
payable (the remaining balance owed) on June 30th is $34,000.
d. Salaries and wages paid in July will be $650,000.
e. Depreciation on equipment used for the resort for July will be $104,000.
f. Other cash expenses for July will be $155,000.
g. The resort must repay a short-term loan during July. The payment is $80,000, including interest.
Prepare a cash budget for July 2013.

Cash receipts
Beginning cash balance, July 1
Cash services
Collections from credit services
($835,000 0.60) + ($752,000 0.40)
Total cash available
Cash expenditures
Purchase of supplies
[$34,000 + ($100,000 0.80)]
Salaries and wages
Other cash expenses
Repayment of loan
Total expenditures
Ending cash balance, July 31

$215,000
120,000
801,800
$1,136,800

$ 114,000
650,000
155,000
80,000
$999,000
$137,800

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