Budgeting, Production, Cash, and Master Budget: Discussion Questions

CHAPTER 9
BUDGETING, PRODUCTION, CASH, AND MASTER

BUDGET
DISCUSSION QUESTIONS
1. Budgets are the quantitative expressions of adjusted forecast then becomes the sales
plans. Budgets are used to translate the budget.
goals and strategies of an organization into
operational terms. 7. Yes. All budgets are founded on the sales
budget. Before a production budget can be
2. Control is the process of setting standards, created, it must have the planned sales. The
receiving feedback on actual performance, manufacturing budgets, in turn, depend on
and taking corrective action whenever actual the production budget. The same is true for
performance deviates materially from the financial budgets since sales are a
planned performance. Budgets are critical input for budgets in that category.
standards, and they are compared with
actual costs and revenues to provide 8. Goal congruence is important because it
feedback. means that the employees of an
organization are working toward the goals of
3. The planning and control functions of that organization.
budgeting can benefit all organizations,
regardless of size. All organizations need to 9. Frequent feedback is important so that
determine what their goals are and how best corrective action can be taken, increasing
to obtain those goals. This is the planning the likelihood of achieving budgetary goals.
function of budgeting. In addition,
10. Both monetary and nonmonetary incentives
organizations can compare what actually are used to encourage employees of an
happens with what was planned to see if the organization to achieve the organization’s
plans are unfolding as anticipated. This is
goals. Monetary incentives appeal to the
the control function of budgeting. economic needs of an individual, and
4. Budgeting forces managers to plan, nonmonetary incentives appeal to their
provides resource information for decision psychological needs. Since individuals are
making, sets benchmarks for control and motivated by both economic and
evaluation, and improves the functions of psychological factors, both types of
communication and coordination. incentives ought to be present in a good
budgetary system.
5. A master budget is the collection of all
individual area and activity budgets. 11. Participative budgeting is a system of
Operating budgeting that gives subordinate managers
budgets are concerned with the income- a say in how the budgets are established.
generating activities of a firm. Financial Participative budgeting fosters creativity and
budgets are concerned with the inflows and communicates a sense of responsibility to
outflows of cash and with planned capital subordinate managers. It also creates a
expenditures. higher likelihood of goal congruence since
managers have more of a tendency to make
6. The sales forecast is a critical input for the budget’s goals their own personal goals.
building the sales budget. However, it is not
necessarily equivalent to the sales budget. 12. Agree. Individuals who are not challenged
Upon receiving the sales forecast, tend to lose interest and maintain a lower
management may decide that the firm can level of performance. A challenging, but
do better than the forecast indicates. achievable, budget tends to extract a higher
Consequently, actions may be taken to level of performance.
increase the sales potential for the coming
year (e.g., increasing advertising). This 13. Top management should provide guidelines
and statistical input (e.g., industrial
Copyright © 2018 by Nelson Education Ltd. 9-1

forecasts) and review the budgets to 15. To meet budget, it is possible to take actions
minimize the possibility of budgetary slack that reduce costs in the short run but
and ensure that the budget is compatible increase them in the long run. For example,
with the strategic objectives of the firm. Top lower-priced, lower-quality materials can be
management should also provide the substituted for the usual quality of materials.
incentive and reward system associated with
the budgetary system.
14. By underestimating revenues and
overestimating costs, the budget is more
easily achieved.
9-2 Copyright © 2018 by Nelson Education Ltd.

CORNERSTONE EXERCISES
Cornerstone Exercise 9–1
Memorsave Inc.
Sales Budget
For the Coming Quarter
Quarter
July August September Total
Units 56,000 59,000 61,000 176,000
× Price × $52 × $52 × $52 × $52
Sales $2,912,000 $3,068,000 $3,172,000 $9,152,000
Memorsave Inc.
Production Budget
For the Coming Quarter
Sales in units 56,000 59,000 61,000 176,000
Desired ending inventory 17,700 18,300 16,500* 16,500
Total needs 73,700 77,300 77,500 192,500
Less: Beginning inventory 7,400 17,700 18,300 7,400
Units to be produced 66,300 59,600 59,200 185,100
*October sales of 55,000 × 0.30 = 16,500

1. ADAMIS’ SALES BUDGET FOR THE PERIOD OCTOBER TO DECEMBER
October:
Shoes $ 725 * 875 = $ 634,375
Belts $ 350 * 640 = 224,000
Total for October = $ 858,375
November:
Shoes $ 725 * 1,060 = $ 768,500
Belts $ 350 * 868 = 303,800
Total for November = $ 1,072,300
December:
Shoes $ 725 * 1,835 = $ 1,330,375
Belts $ 350 * 1,246 = 436,100
Total for December = $ 1,766,475
Total for the Quarter = $ 3,697,150

Cornerstone Exercise 9–3 (Continued)
2. ADAMIS’ MERCHANDISE PURCHASING BUDGET FOR THE PERIOD
OCTOBER TO DECEMBER
Shoes Belts
October:
Sales 875 640
Desired ending inventory 265 217
Total needs 1,140 857
Less: beginning inventory 400 100
Merchandise to be ordered 740 757
Cost per unit $ 320 $ 130
Cost of merchandise purchases $ 236,800 $ 98,410
November:
Sales 1,060 868
Total needs 1,519 1,180
Merchandise to be ordered 1,254 963
December:
Sales 1,835 1,246
Total needs 1,889 1,271
Merchandise to be ordered 1,430 959
Total units to be ordered: 3,424 2,679

Total cost of merchandise
purchases $1,095,680 $348,270
Total cost of merchandise purchases for the quarter: $1,095,680 + $348,270 =

$1,443,950.

1. Ending inventory for December

(and beginning inventory for January)= 0.15 × 2 litres of chemicals × 43,800 units
= 13,140 litres
Ending inventory for January = 0.15 × 2 litres of chemicals × 41,000 units
= 12,300 litres
Ending inventory for February = 0.15 × 2 litres of chemicals × 50,250 units
= 15,075 litres
2. Direct materials purchases budget—Chemicals:
January February
Production in units 43,800 41,000
× Litres per unit × 2 × 2
Litres for production 87,600 82,000
Desired ending inventory 12,300 15,075
Needed 99,900 97,075
Less: Beginning inventory* 13,140 12,300
Purchases 86,760 84,775
× Price per litre × $0.50 × $0.50
Dollar purchases $43,380 $42,388
*Beginning inventory for January equals ending inventory for December.
3. Ending inventory for December = 0.15 × 1 plastic crate × 43,800 units

(and beginning inventory for January) = 6,570
Ending inventory for January = 0.15 × 1 plastic crate × 41,000 units
= 6,150
Ending inventory for February = 0.15 × 1 plastic crate × 50,250 units
= 7,538

4. Direct materials purchases budget—Plastic Crates:

January February
Production in units 43,800 41,000
× Plastic crates per unit × 1 × 1
Plastic crates for production 43,800 41,000
Desired ending inventory 6,150 7,538
Needed 49,950 48,538
Less: Beginning inventory* 6,570 6,150
Purchases 43,380 42,388
× Price per plastic crate × $1.60 × $1.60
Dollar purchases $69,408 $67,821
*Beginning inventory for January equals ending inventory for December.

Direct Labour Budget: January February March Total
× Direct labour hrs. per unit × 0.3 × 0.3 × 0.3 × 0.3
Total direct labour hrs. 13,140 12,300 15,075 40,515
× Wage rate × $18 × $18 × $18 × $18
Direct labour cost $236,520 $221,400 $271,350 $729,270

Overhead: July August September Total
Total direct labour hrs. 15,200 16,350 17,100 48,650
× Variable overhead rate × $0.60 × $0.60 × $0.60 × $0.60
Total variable overhead $ 9,120 $ 9,810 $10,260 $29,190
Add: Fixed overhead 2,820 2,820 2,820 8,460
Total overhead $11,940 $12,630 $13,080 $37,650

1. Direct materials $14.00
Direct labour (1.9 hr × $16) 30.40
Variable overhead (1.9 hr × $1.20) 2.28
Fixed overhead (1.9 hr × $1.60) 3.04
Unit product cost $49.72
2. Cost of ending inventory = $49.72 × 675 = $33,561
Okeke Company
Cost of Goods Sold Budget
For the Coming Year
Direct materials ($14 × 20,000) ....................................................... $280,000
Direct labour (1.9 × $16 × 20,000) ................................................... 608,000
Variable overhead (1.9 × $1.20 × 20,000) ....................................... 45,600
Fixed overhead (1.9 × $1.60 × 20,000)............................................ 60,800
Total manufacturing cost ............................................................... 994,400
Less: Ending inventory ($49.72* × 675) ......................................... 33,561
Cost of goods sold .......................................................................... $960,839
*From Cornerstone Exercise 9-7
Fael Company
Selling and Administrative Expenses Budget
For the Coming Year
Variable selling expenses (0.03 × $19,730,000) ....... $ 591,900
Fixed expenses:
Salaries .................................................................. $ 960,000
Utilities ................................................................... 365,000
Office space .......................................................... 230,000
Advertising ............................................................ 1,200,000
Total fixed expenses............................................. 2,755,000
Total selling and administrative expenses .............. $3,346,900

Azizi Company
Budgeted Income Statement
For the Coming Year
Sales ($10.80 × 160,000) ................................................................. $1,728,000
Cost of goods sold ($6.30 × 160,000) ............................................ 1,008,000
Gross margin ................................................................................... 720,000
Less: Variable selling and administrative
expenses ($1.10 × 160,000) ....................................................... 176,000
Fixed selling and administrative expenses ................................... 423,000
Operating income ............................................................................ 121,000
Less: Income taxes (0.35 × $135,000) ............................................ 42,350
Net income ....................................................................................... $ 78,650

August September
June:
($100,800 × 0.25) $25,200 $ 0
July:
($77,000 × 0.50) 38,500
($77,000 × 0.25) 19,250
August:
($86,800 × 0.20) 17,360
($86,800 × 0.50) 43,400
September:
($91,000 × 0.20) 0 18,200
Total $81,060 $80,850

1. Payments for purchases from:
April ($374,400 × 0.80) $299,520
May ($411,200 × 0.20) 82,240
Total cash needed for May $381,760
2. Payments for purchases from:

May ($411,200 × 0.80) $328,960
June ($416,000 × 0.20) 83,200
Total cash needed for June $412,160

1.
Royal Company
Sales Budget
For the Quarter Ending June 30
April May June Quarter
Units 10,000 30,000 25,000 65,000
Unit selling price $10.50 $10.50 $10.50 $10.50
Budgeted sales $105,000 $315,000 $262,500 $682,500
2.
Royal Company
Production Budget

Sales in units 10,000 30,000 25,000 65,000
Desired ending inventory 4,500 3,750 2,550 2,550
Total needs 14,500 33,750 27,550 67,550
Less: beg. inventory 5,000 4,500 3,750 5,000
3.
Royal Company
Direct Materials Purchases Budget

Direct materials per unit (kg) 2 2 2 2
Production needs 19,000 58,500 47,600 125,100
Total needs 30,700 68,020 54,430 131,930
Less: beginning inventory 13,000 11,700 9,520 13,000
Dir. materials to be purchased 17,700 56,320 44,910 118,930
Cost per kilogram of
direct materials $ 0.25 $ 0.25 $ 0.25 $ 0.25
Total purchase cost $4,425 $14,080 $11,227.50 $ 29,732.50

4.
Royal Company
Direct Labour Budget

Direct labour time per
unit in hours 0.10 0.10 0.10 0.10
Labour hours paid 950 2,925 2,380 6,255
Hourly wage rate $ 12 $ 12 $ 12 $ 12
Total direct labour costs $ 11,400 $ 35,100 $ 28,560 $ 75,060
5.
Royal Company
Overhead Budget

Budgeted labour hours 950 2,925 2,380 6,255
Variable overhead rate $ 12 $ 12 $ 12 $ 12
Budgeted variable overhead 11,400 35,100 28,560 $ 75,060
Budgeted fixed overhead 35,500 35,500 35,500 106,500
Total overhead $ 46,900 $ 70,600 $ 64,060 $181,560
6.
Royal Company
Ending Finished Goods Inventory Budget
Unit cost computations:

Direct materials 2 kg * $ 0.25/kg = $ 0.50
Direct labour 0.1 hours * $12/hour = 1.20
Variable overhead 0.1 hours * $12/hour = 1.20
Fixed overhead $106,500/62,550 units = 1.70 (rounded)
= $ 4.60
Ending inventory in units 2,550

Unit production cost $ 4.60
Total ending inventory $11,730

7.
Royal Company
Direct materials used * $ 31,275

Direct labour used 75,060
Overhead 181,560
Budgeted manufacturing costs 287,895
Beginning finished goods** 23,000
Goods available for sale 310,908
Less: Ending finished goods 11,730
Budgeted cost of goods sold $299,165
* ($0.25 x 2 kg/unit x 62,550)

** $4.60 x 5,000
8.
Royal Company
Selling and Administrative Expense Budget

Planned sales in units 10,000 30,000 25,000 65,000
Variable selling and admin
per unit $ 0.50 $ 0.50 $ 0.50 $ 0.50
Total variable expenses $ 5,000 $ 15,000 $ 12,500 $ 32,500
Total fixed selling and admin 70,000 70,000 70,000 210,000
Total selling and admin $ 75,000 $ 85,000 $ 82,500 $ 242,500
9.
Royal Company
Quarter
Sales $ 682,500
Less: cost of goods sold 299,165
Gross margin 383,335
Less: selling and admin 242,500
Operating income 140,835
Less: interest expense 374
Net income $ 140,461

10.
Royal Company
Schedule of Expected Cash Collection on Sales

Accounts receivable for March $ 30,000 $ 30,000
April sales – 70% current month 73,500 73,500
April sales – 30% next month $ 31,500 31,500
May sales – 70% current month 220,500 220,500
May sales – 30% next month $ 94,500 94,500
June sales – 70% current month 183,750 183,750
Total cash collections $ 103,500 $ 252,000 $ 278,250 $ 633,750
11.
Royal Company
Schedule of Expected Cash Disbursements

Accounts payable for March $ 12,000 $12,000
April purchases – 50%
current month 2,213 2,213
April purchases – 50% next month $2,212 2,212
May purchases – 50% current month 7,040 7,040
May purchases – 50% next month $ 7,040 7,040
June purchases – 50%
current month 5,614 5,614
Total cash disbursements $ 14,213 $ 9,252 $ 12,654 $ 36,119

12.
Royal Company
Cash Budget

Beginning cash balance 40,000 30,000 43,961 40,000
Collections on account 103,500 252,000 278,250 633,750
Total cash available 143,500 282,000 322,211 673,750
Less disbursements:
Direct materials (14,213) (9,252) (12,654) (36,119)
Direct labour (11,400) (35,100) (28,560) (75,060)
Overhead (36,900) (60,600) (54,060) (151,560)
Selling and admin (65,000) (75,000) (72,500) (212,500)
Equipment (43,700) (12,250) (55,950)
Dividend (15,000) (15,000)
Total disbursements (127,513) (223,652) (195,024) (546,189)
Excess of cash 15,987 58,348 127,187 127,561
Financing
Borrowings 14,013 14,013
Repayments (14,013) (14,013)
Interest (374)* (374)
Total Financing 14,013 (14,387) (374)
Ending cash balance $30,000 $43,961 $127,187 $127,187
Interest payment is 2/12 x 0.16 x $14,013 since borrowing occurs at the beginning
of the month and payment is at the end of the following month.

13.
Royal Company
Budgeted Balance Sheet
Current assets:
Cash $127,187
Accounts receivable 78,750
Raw materials inventory 1,708*
Finished goods inventory 11,730
Total current assets 219,375
Property, plant, and equipment:

Land 50,000
Equipment 230,950
Accumulated depreciation (60,000)
Total property, plant, and equipment 220,950
Total assets $440,325
Current liabilities:
Accounts payable $ 5,614
Shareholders’ equity:
Common shares 200,000
Retained earnings 234,711**
Total liabilities and shareholders’ equity $440,325
* rounded
** Opening retained earnings + net income – dividends ($109,250 + $140,461 –
$15,000)

1. Cash receipts in October from:
Cash sales ($157,000 × 0.85) $133,450
Payments on September credit sales* 7,623
Payments on October credit sales** 16,485
Total cash expected $157,558
*$181,500 × 0.15 × 0.28 = $7,623
**$157,000 × 0.15 × 0.70 = $16,485
2. Payments for food purchases from:

September ($130,000 × 0.75) $ 97,500
October ($116,000 × 0.25) 29,000
Total cash needed for June $126,500
3. Beginning balance $ 2,147

Cash receipts 157,558
Cash available 159,705
Less:
Payments for food purchases 126,500
Owners’ draw 6,000
Workers’ wages* 7,300
Utilities 5,590
Rent 4,100
Insurance 1,200
Total disbursements 150,690
Ending balance $ 9,015
*September wage payments = ($7,300 × 0.1);

October wage payments = ($7,300 × 0.9)

EXERCISES
Exercise 9–15
a. 10
b. 8
c. 9
d. 2
e. 5
f. 3, 6, 7
g. 4
h. 1, 3
i. 1
Exercise 9–16
1. Imperial Doors
Sales Budget
For the Year 2017
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
Frosted23:
Units 950 1,800 2,400 3,100 8,250
× Price × $250 × $250 × $250 × $250 × $250
Sales $237,500 $ 450,000 $600,000 $775,000 $ 2,062,500
,
Frosted26:
Units 1,200 2,300 3,250 3,500 10,250
× Price × $375 × $375 × $375 × $375 × $375
Sales $450,000 $ 862,500 $1,218,750 $ 1,312,500 $ 3,843,750
Total sales $687,500 $1,312,500 $1,818,750 $2,087,500 $5,906,250
2. Imperial Doors will use the sales budget in planning as the basis for the
production budget and the succeeding budgets of the master budget. During
the year, the company can compare actual sales against the budget to see if
expectations are being achieved.

Exercise 9–17
Imperial Doors
Production Budget for Frosted23
For the Year 2017
Sales in units 950 1,800 2,400 3,100 8,250
Desired ending inventory 360 480 620 202 202
Total needs 1,310 2,280 3,020 3,302 8,452
Less: Beginning inventory 220 360 480 620 220
Units produced 1,090 1,920 2,540 2,682 8,232
Imperial Doors
Production Budget for Frosted26
For the Year 2017
Sales in units 1,200 2,300 3,250 3,500 10,250
Total needs 1,430 2,625 3,600 3,648 10,398
Units produced 1,260 2,395 3,275 3,298 10,228

Exercise 9–18
1. Peanut-Fresh Inc.
Production Budget
For the First Quarter of the Year
January February March Total
Sales in units 48,000 46,000 55,000 149,000
Total needs 57,200 57,000 66,600 160,600
Units produced 42,700 47,800 55,600 146,100
2. Peanut-Fresh Inc.
For January and February
Jars:
January February Total
Production 42,700 47,800 90,500
× 1 jar × 1 × 1 × 1
Jars for production 42,700 47,800 90,500
Desired ending inventory 4,780 5,560 5,560
Total needs 47,480 53,360 96,060
Less: Beginning inventory 4,270 4,780 4,270
Jars purchased 43,210 48,580 91,790
Peanuts:
January February Total
Production 42,700 47,800 90,500
× 340 grams × 340 × 340 × 340
Grams for production 14,518,000 16,252,000 30,770,000
Desired ending inventory 1,625,200 1,890,400 1,890,400
Total needs 16,143,200 18,142,400 32,660,400
Less: Beginning inventory 1,451,800 1,625,200 1,451,800
Grams purchased 14,691,400 16,517,200 31,208,600

Exercise 9–19
De Silva Inc.
Production Budget
For the First Quarter of the Year
Sales in units 180,000 220,000 200,000 600,000
Total needs 235,000 270,000 260,000 660,000
Exercise 9–20
Tsiklauri Company
For March, April, and May
March April May Total
Direct materials per unit
(grams) × 425 × 425 × 425 × 425
Production needs 1,487,500 1,870,000 2,082,500 5,440,000
Desired ending inventory
(grams) 374,000 416,500 535,500 535,500
Total needs 1,861,500 2,286,500 2,618,000 5,975,500
Direct materials to be
purchased (grams) 1,564,000 1,912,500 2,201,500 5,678,000
Bundles of 10 grams 156,400 191,250 220,150 567,800
Cost per 10 grams × $0.34 × $0.34 × $0.34 × $0.34
Total purchase cost $ 53,176 $65,025 $74,851 $ 193,052

Exercise 9–21
Typefast Inc.
For October, November and, December
October November December Total
bundle (hours) × 0.30 × 0.30 × 0.30 × 0.30
Total hours needed 10,500 12,600 15,300 38,400
Cost per hour × $18 × $18 × $18 × $18
Total direct labour cost $189,000 $226,800 $275,400 $691,200
Exercise 9–22
Abbasov Inc.
Sales Budget
For the Coming Year
Model Units Price Total Sales
LB-1 36,750 $32.00 $1,176,000
LB-2 18,900 20.00 378,000
WE-6 25,200 10.50 264,600
WE-7 17,010 10.00 170,100
WE-8* 13,800 18.00 248,400
WE-9* 8,000 22.00 176,000
Total $2,413,100
*Recall that WE-8 and WE-9 sales from last year were only from the last two
quarters. Current year sales are estimated to be two times those amounts.

Exercise 9–23
1. Raylene’s Flowers and Gifts

Production Budget for Gift Baskets
For September, October, November, and December
September October November December
Sales 250 200 230 380
Desired ending inventory 20 23 38 10
Total needed 270 223 268 390
Less: Beginning inventory 25 20 23 38
Total production 245 203 245 352
2. Raylene’s Flowers and Gifts

For September, October, and November
Fruit: September October November
Production 245 203 245
× Amount/basket × 1 × 1 × 1
needed for production 245 203 245
Desired ending inventory 10 12 18
needed 255 215 263
Less: Beginning inventory 12 10 12
Total purchases 243 205 251
Small gifts:
production 245 203 245
× Amount/basket × 6 × 6 × 6
needed for production 1,470 1,218 1,470
Desired ending inventory 365 441 634
1,835 1,659 2,104
Less: Beginning inventory 441 365 441
Total purchases 1,394 1,294 1,663
3. December includes the Christmas holiday season and is a time when many
gifts are given. Raylene has factored this into her budgeting. January, on the
other hand, is a month with fewer holidays or gift-giving occasions. As a
result, Raylene has forecast fewer gift baskets.

Exercise 9–24
1. Credit sales in January = $340,000 × 0.55= $187,000

Credit sales in February = $318,000 × 0.55 = $174,900
Credit sales in March = $325,000 × 0.55 = $178,750
Credit sales in April = $332,000 × 0.55 = $182,600
2. Bayco Wholesale Inc.

Schedule of Cash Receipts
For March and April
March April
Cash sales $146,250 $149,400
Payments on account:
From January credit sales:
(0.03 × $187,000) 5,610 —
From February credit sales:
(0.76 × $174,900) 132,924
(0.03 × $174,900) 5,247
From March credit sales:
(0.20 × $178,750) 35,750
(0.76 × $178,750) 135,850
From April credit sales:
(0.20 × $182,600) — 36,520
Cash receipts $320,534 $327,017

Exercise 9–25
1. Janzen Inc.
For July
From May credit sales:
(0.23 × $248,000) .............................................................. $ 57,040
From June credit sales:
(0.55 × $260,000) .............................................................. 143,000
From July credit sales:
(0.20 × $240,000) .............................................................. 48,000
Less: July cash discount
(0.02 × $48,000) ................................................................ (960)
Cash receipts ........................................................................ $247,080
2. Janzen Inc.
For August
From June credit sales:
(0.23 × $260,000) .............................................................. $ 59,800
From July credit sales:
(0.55 × $240,000) .............................................................. 132,000
From August credit sales:
(0.20 × $300,000) .............................................................. 60,000
Less: August cash discount (0.02 × $60,000) .................... (1,200)
Cash receipts ........................................................................ $250,600
Exercise 9–26
Fein Company
Schedule of Cash Payments
For August
Payments on accounts payable:
From July purchases (0.80 × $77,000) ........................................... $ 61,600
From August purchases (0.20 × $73,000) ...................................... 14,600
Direct labour payments:
From July (0.10 × $32,300) ........................................................ 3,230
From August (0.90 × $35,400) ................................................... 31,860
Overhead ($71,200 – $6,350) .......................................................... 64,850
Loan repayment [$15,000 + ($15,000 × 0.09 × 4/12)] ..................... 15,450
Cash payments .......................................................................... $191,590

Exercise 9–27
1. Cash Budget
For June
Beginning cash balance ....................................... $ 736
Collections:
Cash sales ........................................................ 18,600
Credit sales:
Current month ($54,000 × 40%) ................. 21,600
May credit sales ($35,000 × 30%) .............. 10,500
April credit sales* ....................................... 5,896
Total cash available .............................................. $57,332
Less disbursements:
Inventory purchases:
Current month ($72,600 × 64% × 20%)...... 9,293
Prior month ($53,000 × 64% × 80%) .......... 27,136
Salaries and wages ......................................... 11,750
Rent .................................................................. 4,100
Taxes ................................................................ 6,780
Total cash needs ........................................ 59,059
Excess of cash available over needs .................. $ (1,727)
*$28,900 × 20% = $5,780
$5,780 × 0.02 = $116
$5,780 + $116 = $5,896
2. Yes, the business does show a negative cash balance for the month of June. A
negative budgeted cash balance is unacceptable. The easiest way to deal with
it would be for the owner to consider taking less cash salary.

PROBLEMS
Problem 9–28
Noonan and Associates

Schedule of Anticipated Cash Receipts
For August and September
August September
Cash fees .................................................................... $ 48,500 $ 60,000
Received from sales in:
June (0.75)(0.26)($200,000)(1.03) ............. 40,170 —
July (0.75)(0.60)($190,000) ...................... 85,500 —
(0.75)(0.26)($190,000)(1.03) ............. 38,162
August (0.75)(0.10)($194,000) ...................... 14,550
(0.75)(0.60)($194,000) ...................... 87,300
September (0.75)(0.10)($240,000) ...................... 18,000
Total............................................................................. $188,720 $203,462
Problem 9–29
1. Hopewell Manufacturing
For the Quarter Ended March 31
a. Schedule 1: Sales Budget
Units 80,000 90,000 95,000 265,000
Selling price × $298 × $298 × $298 × $298
Sales $23,840,000 $26,820,000 $28,310,000 $78,970,000
b. Schedule 2: Production Budget

Sales (Schedule 1) in units 80,000 90,000 95,000 265,000
Total needs 147,500 161,250 167,000 337,000

Problem 9–29 (Continued)
9-26
c. Schedule 3: Direct Materials Purchases Budget

Plastic Components Plastic Components Plastic Components Plastic Components
Units to be produced
(Schedule 2) 109,500 109,500 93,750 93,750 95,750 95,750 299,000 299,000
Direct materials
kg per unit × 12 × 4 × 12 × 4 × 12 × 4 × 12 × 4
Production needs 1,314,000 488,000 1,125,000 375,000 1,149,000 383,000 3,588,000 1,196,000
Desired ending
inventory 450,000 150,000 459,600 153,200 446,400 148,800 446,400 148,800
Total needs 1,764,000 588,000 1,584,600 528,200 1,595,400 531,800 4,034,400 1,344,800
Less: Beginning
inventory 525,600 175,200 450,000 150,000 459,600 153,200 525,600 175,200
Direct materials to
be purchased 1,238,400 412,800 1,134,600 378,200 1,135,800 378,600 3,508,800 1,169,600
Cost per unit × $16 × $9 × $16 × $9 × $16 × $9 × $16 × $9
Total cost $19,814,400$13,715,200 $18,153,600 $3,403,800 $18,172,800 $3,407,400 $56,140,800 $10,526,400
Copyright © 2018 by Nelson Education Ltd.

d. Schedule 4: Direct Labour Budget

Units to be produced
(Schedule 2) 109,500 93,750 95,750 299,000
Direct labour time
per unit (hours) × 2 × 2 × 2 × 2
Total hours needed 219,000 187,500 191,500 598,000
Cost per hour × $18.50 × $18.50 × $18.50 × $18.50
Total cost $4,051,500 $3,468,750 $3,542,750 $11,063,000
e. Schedule 5: Overhead Budget

Budgeted direct labour
hours (Schedule 4) 219,000 187,500 191,500 598,000
Variable overhead rate × $2.80 × $2.80 × $2.80 × $2.80
Budgeted variable overhead $613,200 $525,000 $536,200 $1,674,400
Budgeted fixed overhead 408,000 408,000 408,000 1,224,000
Total overhead $1,021,200 $933,000 $944,200 $2,898,400
f. Schedule 6: Selling and Administrative Expenses Budget

Planned sales (Schedule 1) 80,000 90,000 95,000 265,000
Variable selling and
administrative expenses
per unit × $2.55 × $2.55 × $2.55 × $2.55
Total variable expense $204,000 $229,500 $242,250 $675,750
Fixed selling and
administrative expenses:
Salaries 70,000 70,000 70,000 210,000
Depreciation 45,000 45,000 45,000 135,000
Other 10,000 10,000 10,000 30,000
Total fixed expenses 125,000 125,000 125,000 375,000
Total selling and
administrative expenses $329,000 $354,500 $367,250 $1,050,750

g. Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation:
Direct materials:
Plastic (12 × $16) = $192
Comp. (4 × $9) = 36 $228.00
Direct labour (2 × $18.50) 37.00
Overhead:
Variable (2 × $2.80) 5.60
Fixed (2 × $1,224,000/598,000) 4.09
Total unit cost $274.69
Finished goods inventory = Units × Unit cost
= 72,000 × $274.69
= $19,777,680
h. Schedule 8: Cost of Goods Sold Budget

Direct materials used (Schedule 3)
Plastic (3,588,000a × $16) ...................................... $57,408,000
Components (1,196,000b × $9) .............................. 10,764,000 $68,172,000
Direct labour used (Schedule 4) ................................ 11,063,000
Overhead (Schedule 5) ............................................... 2,898,400
Budgeted manufacturing costs ............................ 82,133,400
Add: Beginning finished goods (38,000 × $274.69)c 10,438,220
Goods available for sale ....................................... 92,571,620
Less: Ending finished goods (Schedule 7) ............... 19,777,680
Budgeted cost of goods sold ............................... $72,793,940
i. Schedule 9: Budgeted Income Statement

Sales (Schedule 1) ..................................................................... $ 78,970,000
Less: Cost of goods sold (Schedule 8) .................................... 72,793,940
Gross margin ........................................................................ 6,176,060
Less: Selling and administrative expenses (Schedule 6) ....... 1,050,750
Income before taxes ............................................................. $ 5,125,310
a
299,000 units × 12 kg per unit
b
299,000 units × 4 components per unit
c
See Schedules 2 and 7

j. Schedule 10: Cash Budget

Beginning balance $ 4,600,000 $ 150,000 $ 563,218 $ 4,600,000
Cash receipts 23,840,000 26,820,000 28,310,000 78,970,000
Cash available 28,440,000 26,970,000 28,873,218 31,150,000
Less:
Disbursements:
Purchases (Sch. 3) 23,529,600 21,557,400 21,580,200 66,667,200
Direct labour (Sch. 4) 4,051,500 3,468,750 3,542,750 11,063,000
Overhead* (Sch. 5) 791,200 703,000 714,200 2,208,400
Selling & admin.*
(Sch 6) 284,000 309,500 322,250 915,750
Total 28,656,300 26,038,650 26,159,400 80,854,350
Tentative
ending balance (216,300) 931,350 2,713,818
Borrowed/(repaid) 366,300 (366,300) 0
Interest paid 0 (1,832)** 0
Ending balance $ 150,000 $ 563,218 $ 2,713,818
*excludes depreciation
**(0.06 × 1/12 × $366,300) =1,832
2. Answers will vary.

Problem 9–30
Victor Company
For the Month Ended December 31
1. Schedule 1: Sales Budget
December
Units 240,000
Selling price × $12
Sales $2,880,000
Schedule 2: Production Budget

December
Sales (Schedule 1) in units 240,000
Desired ending inventory 60,000
Total Needs 300,000
Less: Beginning inventory 40,000
Units to be produced in December 260,000
Cost of purchasing = 260,000 units x $8 = $2,080,000
2.
Victor Company
Sales (Schedule 1) $2,880,000
Cost of goods sold 1,920,000*
Gross margin 960,000
Selling and administrative expenses 225,000
Miscellaneous expenses 61,500
Net income $ 673,500
*240,000 x $8 = $1,920,000

3.
Victor Company
Budgeted Statement of Cash Flows
Cash inflows for December
October sales: $2,700,000 x 0.05 $ 135,000
November sales: $2,220,000 x 0.30 666,000
December sales: $2,880,000 x 0.60 1,728,000
Total cash inflows for December: $2,529,000
Cash outflows for December:

November purchases: $1,568,000 x 0.30 $ 470,400
December purchases: $2,080,000 x 0.70 1,456,000
Selling and admin. 180,000
Miscellaneous 61,500
Total cash outflows for December: 2,167,900
Net cash flow $361,100
Opening cash balance, December 1 $ 60,000

Plus: net cash flow 361,100
Ending cash balance, December 31 $421,100
4. The sales budget is the basis for all of the other operating budgets and most
of the financial budgets; therefore it is very important the sales budget be as
accurate as possible. If the sales forecast is estimated too low, that is, if the
estimate is below demand, the company may not purchase enough inventory.
This can lead to lost sales and additional expenditures as the company pays
suppliers a premium for rush delivery.
On the other hand, if the sales forecast is estimated too high, the company
may purchase too much inventory in which case they have to pay to store the
inventory until it is sold. Additionally, the cash used to purchase the inventory
is then not available to be used for other, more profitable, investments and the
company faces risks such as inventory damage or obsolescence.

Problem 9–31
1. To determine accounts payable as at June 30, a schedule of purchases will be

constructed. This schedule will also be used to build the cash budget.
Let X = Cost of sales, and Sales = 1.00

If X + 0.25X = 1.00, then X = 0.8
For example, for August, Cost of sales = $100,000 x 0.8 = $80,000
June July August September

Cost of sales $ 96,000 $ 72,000 $ 80,000 $108,000
Desired end. inventory* 36,000 40,000 54,000 44,000
Total requirements 132,000 112,000 134,000 152,000
Less: Beg. inventory 48,000 36,000 40,000 54,000
Purchases $ 84,000 $ 76,000 $ 94,000 $ 98,000
*0.50  next month’s cost of sales
Since purchases are paid for in the following month, accounts payable at the
end of June is $84,000. Inventory for June 30 is $36,000.
Accounts receivable for June 30 is computed as follows:
From June: 0.7 × $120,000 × 0.8* = $67,200
From May: 0.7 × $100,000 × 0.3* = 21,000
Total $88,200
*By June 30, 20% of June credit sales and 70% of May credit sales have been
collected, leaving 80% and 30%, respectively, to be collected.
Given accounts payable, the total liabilities plus shareholders’ equity must
equal $562,750 ($84,000 + $210,000 + $268,750). Cash is the difference between
total assets and all other assets except cash ($562,750 – $425,000 – $36,000 –
$88,200). This difference is $13,550.
Assets L & SE
Cash ....................................................................... $ 13,550
Accounts receivable ............................................. 88,200
Inventory ................................................................ 36,000
Plant and equipment............................................. 425,000
Accounts payable ................................................. $ 84,000
Common shares .................................................... 210,000
Retained earnings ................................................. 268,750
Total .................................................................. $562,750 $562,750

2. Attar Retailers
Cash Budget
For the Quarter Ending September 30, 2017
Beginning cash balance $ 13,550 $ 10,450 $ 10,405 $ 13,550
Cash collections* 102,600 100,700 113,300 316,600
Total cash available 116,150 111,150 123,705 330,150
Cash disbursements:
Purchases** 84,000 76,000 94,000 254,000
Salaries and wages 10,000 10,000 10,000 30,000
Utilities 1,000 1,000 1,000 3,000
Other 1,700 1,700 1,700 5,100
Property taxes 15,000 15,000
Advertising fees 6,000 6,000
Lease 5,000 5,000
Total disbursements 111,700 94,700 111,700 318,100
Minimum cash balance 10,000 10,000 10,000 10,000
Total cash needs 121,700 104,700 121,700 328,100
Excess (deficiency) (5,550) 6,450 2,005 2,050
Financing:
Borrowings 6,000 6,000
Repayments (6,000) (6,000)
Interest*** (45) (45)
Total financing 6,000 (6,045) (45)
Ending cash balance $ 10,450 $ 10,405 $ 12,005 $ 12,005
*Cash collections:
Cash sales $ 27,000 $ 30,000 $ 40,500 $ 97,500
Credit sales:
Current month 12,600 14,000 18,900 45,500
Prior month 42,000 31,500 35,000 108,500
From two months ago 21,000 25,200 18,900 65,100
Total collections $102,600 $100,700 $113,300 $316,600
**Taken from the purchase schedule developed in Requirement 1
***$6,000 × 0.09/12
Note: Depreciation is not a cash expense and so does not appear in the budget.

3. Attar Retailers
Pro Forma Balance Sheet
September 30, 2017
Assets L & SE
Cash ....................................................................... $ 12,005
Accounts receivablea ............................................ 96,600
Inventoryb .............................................................. 44,000
Plant and equipmentc ........................................... 413,000
Accounts payableb ................................................ $ 98,000
Common shares .................................................... 210,000
Retained earningsd ............................................... 257,605
Total .................................................................. $565,605 $565,605
a
(0.7 × $135,000 × 0.8) + (0.7 × $100,000 × 0.3)
b
From purchases schedule prepared in Requirement 1
c
[$425,000 – 3($4,000)]
d
If total assets equal $565,605, then liabilities plus shareholders’ equity must
also equal that amount. Subtracting accounts payable and common shares from
total liabilities and shareholders’ equity gives retained earnings of $257,605.
4. Cash budgets are important in loan decisions to help determine the

company’s capability to repay the loan. A statement of cash flows would also
be helpful to see how cash has been generated and used in the past. Another
key report is the balance sheet so that the loan officer can assess the current
level of indebtedness and the assets that would be available to claim should
the company default. Reliability of historical financial reports can be increased
through an audit by an independent CPA. The CPA might also be asked to
examine the assumptions and reasonableness of a cash budget.

Problem 9–32
Answers will vary.
When Churchill said “planning is essential,” he was no doubt referring to the

extensive planning process required during the Second World War. That plan was
comprehensive and took into account the manpower needed, probable German
response, and even the weather. However, as the war continued, Churchill had to
respond to changes in the assumptions underlying British war plans. Churchill
had to change the plan in response to changes in important factors. It is in that
sense that “plans are of little importance.” He had no problem deviating from the
original plan if it seemed warranted.
In business, planning is crucial. The master budgeting process is the planning

process. During that process, all resources and opportunities of the firm are
considered. The budget committee gathers information from all areas of the firm
as well as from outsiders. Then, the best plan is developed. The plan will be used
for continual planning during the coming year as well as control. If the underlying
factors change (e.g., the economy, demand for the company’s products,
responses of competitors), then the budget must be adapted to fit those changes.
However, if the underlying factors do not change, then the plan can be used as a
benchmark, and performance can be compared to it.

Problem 9–33
Munishi Company
Cash Budget
For the Month of October
Beginning cash balance ................................................................. $ 35,000
Collections:
Cash sales (0.45 × $990,000) ..................................................... 445,500
Credit sales:
October:
Before discounta.............................................................. 190,575
Less: discountb ............................................................... (953)
Septemberc............................................................................ 180,400
Augustd .................................................................................. 72,738
Sale of old equipment ..................................................................... 12,500
Total cash available ................................................................... 935,760
Less disbursements:
Raw materials:
Octobere ................................................................................ 204,480
Septemberf ............................................................................ 158,400
Direct labour ............................................................................... 110,000
Operating expenses................................................................... 328,000
Dividends .................................................................................... 115,000
Equipment .................................................................................. 124,000
Total disbursements ............................................................ 1,039,880
Minimum cash balance ................................................................... 10,000
Total cash needs ........................................................................ 1,049,880
Excess of cash required (borrowed) ............................................. (114,120)
Ending cash balance ................................................................. $ 10,000

a
(0.55 × $990,000) × 0.35
b
(0.55 × $990,000) × 0.35 x .5 × 0.01
c
(0.55 × $820,000) × 0.4
d
(0.55 × $575,000) × 0.23
e
October payment = ($1,278,000)(0.32)(0.50) = $204,480
f
September payment = ($990,000)(0.32)(0.50) = $158,400

Problem 9–34
1. Schedule 1: Sales Budget (in thousands)

Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Units 65 70 75 90 300
Unit price × $400 × $400 × $400 × $400 × $400
Total sales $26,000 $28,000 $30,000 $36,000 $120,000
2. Schedule 2: Production Budget

Sales (Schedule 1) 65,000 70,000 75,000 90,000 300,000
Desired ending
inventory 13,000 15,000 20,000 10,000 10,000
Total needs 78,000 85,000 95,000 100,000 310,000
Less: Beginning
inventory 0 13,000 15,000 20,000 0
Production 78,000 72,000 80,000 80,000 310,000
3. Schedule 3: Direct Materials Purchases Budget (in thousands)

Production 78 72 80 80 310
Materials/unit × 3 × 3 × 3 × 3 × 3
Production needs 234.0 216.0 240.0 240.0 930.0
Desired ending
inventory 63.0 67.5 81.0 65.7 65.7
Total needs 297.0 283.5 321.0 305.7 995.7
Less: Beginning
inventory 65.7 63.0 67.5 81.0 65.7
Purchases 231.3 220.5 253.5 224.7 930.0
Cost per unit × $80 × $80 × $80 × $80 × $80
Purchase cost $18,504 $17,640 $20,280 $17,976 $74,400
4. Schedule 4: Direct Labour Budget (in thousands)

Production 78 72 80 80 310
Hours per unit × 5 × 5 × 5 × 5 × 5
Hours needed 390 360 400 400 1,550
Cost per hour × $10 × $10 × $10 × $10 × $10
Total cost $3,900 $3,600 $4,000 $4,000 $15,500

5. Schedule 5: Overhead Budget (in thousands)

Budgeted hours 390 360 400 400 1,550
Variable rate × $6 × $6 × $6 × $6 × $6
Budgeted VOH $2,340 $2,160 $2,400 $2,400 $ 9,300
Budgeted FOH 1,000 1,000 1,000 1,000 4,000
Total OH $3,340 $3,160 $3,400 $3,400 $ 13,300
6. Schedule 6: Selling and Administrative Expenses Budget (in thousands)

Planned sales 65 70 75 90 300
Variable rate × $10 × $10 × $10 × $10 × $10
Variable expenses $ 650 $ 700 $ 750 $ 900 $3,000
Fixed expenses 250 250 250 250 1,000
Total expenses $ 900 $ 950 $1,000 $1,150 $4,000
7. Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation:
Direct materials (3 units @ $80) .......................................... $240.00
Direct labour (5 hours @ $10) .............................................. 50.00
Overhead:
Variable (5 hours @ $6) .................................................. 30.00
Fixed ($4,000,000/310,000).............................................. 12.90
Total unit cost ....................................................................... $332.90
Finished goods = 10,000 × $332.90 = $3,329,000
8. Schedule 8: Cost of Goods Sold Budget

Direct materials used (Schedule 3) .......................................... $ 74,400,000
Direct labour used (Schedule 4) ............................................... 15,500,000
Overhead (Schedule 5) .............................................................. 13,300,000
Budgeted manufacturing costs ........................................... 103,200,000
Add: Beginning finished goods inventory (Schedule 2) ........ 0
Goods available for sale ...................................................... 103,200,000
Less: Ending finished goods inventory (Schedule 7) ............. 3,329,000
Budgeted cost of goods sold .............................................. $ 99,871,000

9. Cash Budget (in thousands)

Beginning cash bal. $ 250 $ 1,110 $ 3,128 $ 5,568 $ 250
Collections:
Credit sales:
Current quarter 22,100 23,800 25,500 30,600 102,000
Prior quarter 3,300 3,900 4,200 4,500 15,900
Cash available 25,650 28,810 32,828 40,668 118,150
Less disbursements:
Direct materials:
Current quarter 9,252 8,820 10,140 8,988 37,200
Prior quarter 7,248 9,252 8,820 10,140 35,460
Direct labour 3,900 3,600 4,000 4,000 15,500
Overhead 2,990 2,810 3,050 3,050 11,900
Selling and admin. 850 900 950 1,100 3,800
Dividends 300 300 300 300 1,200
Equipment 2,000 2,000
Total cash needs 24,540 25,682 27,260 29,578 107,060
Ending cash bal. $ 1,110 $ 3,128 $ 5,568 $11,090 $ 11,090
10. Pro Forma Income Statement

For the Year Ending December 31, 2017
Sales (Schedule 1) ..................................................................... $120,000,000
Less: Cost of goods sold (Schedule 8) .................................... 99,871,000
Gross margin ........................................................................ 20,129,000
Less: Selling and administrative expenses (Schedule 6) ....... 4,000,000
Income before taxes ............................................................. $ 16,129,000

11. Pro Forma Balance Sheet

December 31, 2017
Assets
Cash ............................................................................................ $11,090,000
Accounts receivable .................................................................. 5,400,000
Direct materials inventory ......................................................... 5,256,000
Finished goods inventory ......................................................... 3,329,000
Plant and equipment.................................................................. 33,900,000a
Total assets ........................................................................... $58,975,000
Liabilities and Shareholders’ Equity

Accounts payable ...................................................................... $ 8,988,000
Common shares ......................................................................... 27,000,000
Retained earnings ...................................................................... 22,987,000b
Total liabilities and shareholders’ equity ........................... $58,975,000
a
Beginning plant and equipment $33,500,000
Add: New equipment 2,000,000
Less: Depreciation expense (1,600,000)
Ending plant and equipment $33,900,000
b
Beginning retained earnings $ 8,058,000
Plus: Net income* 16,129,000
Less: Dividends paid (1,200,000)
Ending retained earnings $22,987,000
*Ignore taxes.

Problem 9–35
1. Chistosa Company
Direct Materials Purchases Budget for Fabric
For the Fourth Quarter
Units to be produced .................... 20,000 40,000 25,000 85,000
DM per unit (m).............................. × 0.20 × 0.20 × 0.20 × 0.20
Production needs .................... 4,000 8,000 5,000 17,000
Desired ending inventory (m) ...... 1,200 750 900 900
Total needs............................... 5,200 8,750 5,900 17,900
Less: Beg. inventory..................... 600 1,200 750 600
DM to be purchased (m) .......... 4,600 7,550 5,150 17,300
Cost per metre............................... × $3.50 × $3.50 × $3.50 × $3.50
Total purchase cost ................. $16,100 $26,425 $18,025 $60,550
2. Chistosa Company
Direct Materials Purchases Budget for Polyfiberfill
Units to be produced ................. 20,000 40,000 25,000 85,000
DM per unit (g)............................ × 6 × 6 × 6 × 6
Production needs ................. 120,000 240,000 150,000 510,000
Desired ending inventory (g) .... 72,000 45,000 54,000 54,000
Total needs............................ 192,000 285,000 204,000 564,000
Less: Beg. inventory.................. 36,000 72,000 45,000 36,000
DM to be purchased (g) ........ 156,000 213,000 159,000 528,000
Cost per gram............................. × $0.05 × $0.05 × $0.05 × $0.05
Total purchase cost .............. $ 7,800 $ 10,650 $ 7,950 $26,400
3. Chistosa Company
Units to be produced .............. 20,000 40,000 25,000 85,000
unit (hours)......................... × 0.10 × 0.10 × 0.10 × 0.10
Total hours needed ................. 2,000 4,000 2,500 8,500
Wages per hour ....................... × $15.50 × $15.50 × $15.50 × $15.50
Total direct labour cost ..... $ 31,000 $62,000 $38,750 $131,750

Problem 9–36
1. Schedule of Cash Receipts

August September
Cash sales:
($75,000 × 75%) ................................................ $56,250
($80,000 × 75%) ................................................ $60,000
Cheques* ............................................................... 18,231 19,446
Total .................................................................. $74,481 $79,446
*Cheque collections for: August September
(0.25 × $75,000) ................................................ $18,750
(0.25 × $80,000) ................................................ $20,000
Less: Bad cheques
(0.02 × $18,750) ................................................ (375)
(0.02 × $20,000) ................................................ (400)
Less: Service charge
[($18,750/$65) × $0.50] ..................................... (144)
[($20,000/$65) × $0.50] ..................................... (154)
$18,231 $19,446
2. Revised sales estimates:
a. August
Cash sales ($75,000 × 1.20 x 0.05) ............ $ 4,500
Credit card sales ($75,000 x 1.20 x 0.95)… 85,500
Revised total sales for August ....................... $90,000
September
Cash sales ($80,000 × 1.20 x 0.05) ............ $ 4,800
Credit card sales ($80,000 x 1.20 x 0.95)… 91,200
Revised total sales for September ................. $96,000
b. Estimated number of credit card transactions

August September
Sales:
($75,000 × 1.20 × 0.95) ..................................... $85,500
($80,000 × 1.20 × 0.95) ..................................... $91,200
Divide by the average credit card transaction.... $50 $50
Number of transactions ........................................ 1,710 1,824

3. Cash receipts for August and September
Cash sales: August September

August: $90,000 x 0.05 = 4,500
September: $96,000 x 0.05 = 4,800
Credit card receipts net of discount:

From July: $68,400* x 0.98 x 0.06 = 4,022
From August:
$85,500 x 0.98 x 0.94 = 78,763
$85,500 x 0.98 x 0.06 = 5,027
From September: $91,200 x 0.98 x 0.94 = 84,013
Less:
Gateway and statement fee -19 -19
Transaction fees:
1,710 x $0.25 -428
1,824 x $0.25 -456
Total: $86,838 $93,365
* July credit sales: $60,000 x 1.20 x 0.95 = $68,400

Problem 9–37
Sales Budget
Back Country Outfitters Inc.

Sales Budget
For the Year Ending June 30, 2018

Q1 Q2 Q3 Q4 Year
Units 1,320 1,760 880 440 4,400
Unit selling
price × $500 × $500 × $500 × $500 × $500
Budgeted
sales $660,000 $880,000 $440,000 $220,000 $2,200,000

Production Budget

Production Budget
Q1 Q2 Q3 Q4 Year
Sales in units 1,320 1,760 880 440 4,400
Total needs 1,848 2,024 1,012 876 4,836
Less: Beginning
inventory 375 528 264 132 375
Units to be produced 1,473 1,496 748 744 4,461
Sales for Q1 of 2019 = 1.1 x 1,320 = 1,452

1,452 x 30% = 436 Q4 desired ending inventory


Boards
Q1 Q2 Q3 Q4 Year
Direct materials per
unit x1 x1 x1 x1 x1
Production needs 1,473 1,496 748 744 4,461
Desired ending
inventory 374 187 176 399* 399
Total needs 1,847 1,683 924 1,143 4,860
Less: Beginning
inventory 325 374 187 176 325
purchased 1,522 1,309 737 967 4,535
Cost per unit $142 $142 $142 $142 $142
Total purchase cost—
boards $216,124 $185,878 $104,654 $137,314 $643,970
Note: Quarter 1, 2019 units to be produced: 1,452 + (1,760 * 1.1 *.30) - 436 = 1,597
units
* (1,597 x 0.25)
Fittings
Q1 Q2 Q3 Q4 Year
Direct materials per unit x1 x1 x1 x1 x1
Production needs 1,473 1,496 748 744 4,461
Total needs 1,847 1,683 924 1,143 4,860
purchased 1,522 1,309 737 967 4,535
Cost per unit $50 $50 $50 $50 $50
Total purchase cost—
fittings $76,100 $65,450 $36,850 $48,350 $226,750


Q1 Q2 Q3 Q4 Year
Units to be produced 1,473.00 1,496.00 748.00 744.00 4,461.00
unit in hours 0.50 0.50 0.50 0.50 0.50
Total hours needed
736.50 748 374 352 2,210.50
Average wage per hour $36 $36 $36 $36 $36
Total direct labour cost $26,514 $26,928 $13,464 $12,672 $79,578
Overhead Budget

Overhead Budget
Q1 Q2 Q3 Q4 Year
Budgeted direct labour
hours 736.50 748 374 352 2,210.50
Variable overhead rate
per labour hour $20 $20 $20 $20 $20
Budgeted variable
overhead $14,730 $14,960 $7,480 $7,040 $44,210
Fixed overhead rate
per labour hour $30 $30 $30 $30 $30
Fixed overhead $22,095 $22,440 $11,220 $10,560 $66,315
Total overhead $36,825 $37,400 $18,700 $17,600 $110,525
Finished Goods Inventory Budget
Unit cost computation

Direct materials per unit
Boards $142
Fittings 50
Direct labour (0.5 × $36.00) 18
Overhead:
Variable (0.5 × $20.00) 10
Fixed (0.5 × $30.00) 15
Total unit cost $235


Finished Goods Inventory Budget
As at June 30, 2018
Beginning Ending
Snowboards 375 436
Unit cost $235 $235
Total ending inventory $88,125 $102,460

Direct materials used $ 856,512*

Direct labour used 79,578
Overhead 110,525
Budgeted manufacturing costs 1,046,615
Beginning finished goods inventory 88,125
Goods available for sale 1,134,740
Less: Ending finished goods inventory 102,460
Budgeted cost of goods sold $1,032,280
* (4,461 x ($142 + $50))


Q1 Q2 Q3 Q4 Year
Planned sales in units 1,320 1,760 880 440 4,400
Variable selling and
administrative
commissions @ 5% of
sales $33,000 $44,000 $22,000 $11,000 $110,000
Bad debt expense @
2% of credit sales 11,880 15,840 7,920 3,960 39,600
Total variable expenses 44,880 59,840 29,920 14,960 149,600
Fixed selling and
administrative
expenses:
Salaries 46,375 46,375 46,375 46,375 185,500
Facilities rental 7,500 7,500 7,500 7,500 30,000
Advertising and
promotion 6,250 6,250 6,250 6,250 25,000
Depreciation 4,500 4,500 4,500 4,500 18,000
Professional fees 3,750 3,750 3,750 3,750 15,000
Office expenses 3,750 3,750 3,750 3,750 15,000
Total fixed expenses 72,125 72,125 72,125 72,125 288,500
Total selling and
administrative
expenses $117,005 $131,965 $102,045 $87,085 $438,100


Year
Sales $ 2,200,000
Less: Cost of goods sold 1,032,280
Gross margin 1,167,720
Less: Selling & admin.
expenses 438,100
Less: Interest expense 18,000
Net Income before taxes 711,620
Less: Income taxes 284,648
Net Income $ 426,972

Cash Collection Schedule

Cash Collection Schedule
Cash sales expected, Quarter 1 $ 66,000

Q1 Q2 Q3 Q4 Year
Cash Sales $ 66,000 $ 88,000 $ 44,000 $ 22,000 $ 220,000
Received on account from:
Quarter 3, 2014 28,800 28,800
Quarter 4, 2014 108,000 14,400 122,400
Quarter 1, 2015 178,200 356,400 47,520 582,120
Quarter 2, 2015 237,600 475,200 63,360 776,160
Quarter 3, 2015 118,800 237,600 356,400
Quarter 4, 2015 59,400 59,400
Total Cash Collections $381,000 $696,400 $685,520 $382,360 $2,145,280

Cash Payments on Accounts Payable Schedule

Cash Payments on Accounts Payable Schedule
Q1 Q2 Q3 Q4 Year
Boards $216,124 $185,878 $104,654 $137,314 $643,970
Fittings 76,100 65,450 36,850 48,350 226,750
Total $292,224 $251,328 $141,504 $185,664 $870,720
Timing Q1 Q2 Q3 Q4 Year
Quarter
4, 2014 $85,000 $85,000
Quarter
1, 2015* 233,779 $58,445 292,224
Quarter
2, 2015* 201,062 $50,266 251,328
Quarter
3, 2015* 113,203 $28,301 141,504
Quarter
4, 2015* 148,531 148,531
$318,779 $259,507 $163,469 $176,832 $918,587
* rounded


Cash Budget

Cash Budget
For the Year Ended June 30, 2018
Q1 Q2 Q3 Q4 Year
Beginning cash balance 48,000 151,757 184,197 380,959 48,000
Cash sales and
collections on account 381,000 696,400 685,520 382,360 2,145,280
Total cash available 429,000 848,157 869,717 763,319 2,193,280
Less Disbursements:
Direct materials 318,779 259,507 163,469 176,832 918,587
Direct labour 26,514 26,928 13,464 12,672 79,578
Overhead 36,825 37,400 18,700 17,600 110,525
Selling & admin. 117,005 131,965 102,045 87,085 438,100
Equipment 100,000 125,000 225,000
Income taxes 284,648 284,648
Less: Bad debt
expense (11,880) (15,840) (7,920) (3,960) (39,600)
Less: Depreciation (10,000) (10,000) (10,000) (10,000) (40,000)
Total Disbursements 577,243 554,960 279,758 564,877 1,976,838
Excess (Deficiency) of
Cash (148,243) 293,197 589,959 198,442 216,442
Financing:
Borrowings 300,000 300,000
Repayments (100,000) (200,000) (300,000)
Interest (9,000) (9,000) (18,000)
Total Financing 300,000 (109,000) (209,000) (18,000)
Ending cash balance 151,757 184,197 380,959 198,442 198,442
In Quarter 2, the interest payment is 6/12 x 0.06 x $300,000 since borrowing occurs
at the beginning of the quarter and payment is at the end of the following quarter.
In Quarter 3, the interest payment is 9/12 x 0.06 x $200,000 since borrowing occurs
at the beginning of the quarter and payment is at the end of the following quarter.

Budgeted Balance Sheet

Balance Sheet
As at June 30, 2018
Current assets:
Cash $ 198,442
Accounts receivable, net 166,320
Raw materials inventory 76,608
Finished goods inventory 102,460
Total current assets 543,830
Property, plant, and equipment:
Land 66,075
Building and equipment 373,000
Accumulated depreciation (108,700)
Total PP&E 330,375
Total assets $ 874,205
Current liabilities:
Accounts payable 37,133
Owner's equity:
Retained earnings* 837,072
Total liability & owner's equity $ 874,205
* Opening retained earnings + Net income ($410,100 + $426,972)
Problem 9–38
Answers will vary.

PROFESSIONAL EXAMINATION PROBLEMS*
Professional Examination Problem 9–39 BUDGETING—DELOS

MANUFACTURING COMPANY
a. Cee Dee
Needs: Sales in units 12,000 9,000
Ending inventory 300 200
Less beginning inventory (400) (150)
Production budget 11,900 9,050
b. DM1 DM2 DM3

Needs: Production
(11,900 × 10) + (9,050 × 8) 191,400
9,050 × 4 36,200
(11,900 × 2) + (9,050 × 1) 32,850
Ending inventory 4,000 1,000 1,500
Less beginning inventory (3,000) (1,500) (1,000)
Purchase budget – units 192,400 35,700 33,350
Purchase price $2.00 $2.50 $0.50
Purchase budget $384,800 $89,250 $16,675
c. Cee Dee
Hours: 11,900 × 5 | 9,050 × 8 59,500 72,400
Hourly rate $14 $14
Direct labour budget $833,000 $1,013,600
d. Cee Dee
Manufacturing cost per unit
RM1: 10 × $2 | 8 × $2 $20.00 $16.00
RM2: 4 × $2.50 10.00
RM3: 2 × $0.50 | 1 × $0.50 1.00 0.50
Direct labour: 5 hrs × $14 | 8 hrs × $14 70.00 112.00
Manufacturing overhead
Rate: $263,800 / (59,500 + 72,400)
= $263,800 / 131,900 hours
= $2 per DLH
5 hrs × $2 | 8 hrs × $2 10.00 16.00
$101.00 $154.50
*
© CPA Ontario.

Professional Examination Problem 9–39 (Continued)
Cost of goods sold Cee Dee

Opening inventory:
400 × $101 | 150 × $154.50 $ 40,400 $ 23,175
Cost of goods manufactured
11,900 × $101 | 9,050 × $154.50 1,201,900 1,398,225
Ending inventory:
300 × $101 | 200 × $154.50 (30,300) (30,900)
$1,212,000 $1,390,500
e. Cee Dee Total

Sales $1,800,000 $1,800,000 $3,600,000
Cost of goods sold 1,212,000 1,390,500 2,602,500
Gross margin $ 588,000 $ 409,500 997,500
Selling and administrative expenses 605,000
Income taxes (40%) 157,000
Net income $235,500

Professional Examination Problem 9–40 BUDGETING—CALYDON
CORPORATION
Cash, November 30, 2018 $12,000
Cash collections:
Oct. sales: 70,000 × $5 × 10% $ 35,000
Nov. sales: 50,000 × $5 × 40% 100,000
Dec. sales: 50,000 × $5 × 50% × 0.98 122,500 257,500
Interest from investments 500

Sale of equipment 7,500
Cash disbursements:
Direct materials 60,000
Direct labour
Regular time: 75,000 bats / 7.5 × $15 150,000
Overtime: 15,000 bats / 7.5 × $15 × 1.5 45,000
Overhead:
Variable: 90,000 bats × $0.30 27,000
Fixed: ($280,000 – $40,000) / 12 20,000
Selling:
Variable: 50,000 × $0.20 10,000
Fixed: $60,000 / 12 5,000
Fixed administrative: $120,000 / 12 10,000
Prepaid expenses: $4,200 ending balance
– ($4,800 opening balance – 3,600 expired in 3,000
December)
Income taxes 50,000
Note payment: $144,000 / 24 6,000
Interest on note payable:
[$144,000 - (6,000 × 7)] × 1% 1,020
Dividend payment: 7,000 shares × $0.20 1,400 (388,420)
Cash balance before financing (110,920)
Liquidation of temporary investments 40,000
Borrowing 80,920
Cash balance, end $10,000
A loan of $80,920 will be required.

CASES
Case 9–41
1. Budgets help business owners and managers to plan ahead, and later,
exercise control by comparing what actually happened to what was expected
in the budget. Budgets formalize managers’ expectations regarding sales,
prices, and costs. Even small businesses and non-profit entities can benefit
from the planning and control provided by budgets. Budgets are aids in
planning, communicating, setting standards of performance, motivating
personnel toward goals, measuring results, and directing attention to problem
areas that need investigation. Rajvir should use the budget as explained
above.
2. Merits include:
a. Forces managers to think about and plan (defines goals and objectives)
b. Provides information that can be used to improve decision making (e.g.,
can help efficiently allocate resources)
c. Provides a standard for performance evaluation
d. Improves communication and coordination (uncovers potential
bottlenecks)
3. We can improve the process by recognizing the nature of the volatile industry
in the budget (e.g., better calibrate the budget for the seasonality of demand
with each passing year) and by providing a rolling budget such that 12
months of forecasts are always available. This is a new company, and the
more data available to identify trends and opportunities, the better.

Case 9–42
1. Dr. Roger Jones

Cash Budget
Cash collections and cash available* ...................................... $ 21,360
Less cash disbursements:
Salaries .................................................................................. 12,700
Benefits ................................................................................. 1,344
Building lease ....................................................................... 1,500
Dental supplies ..................................................................... 1,200
Janitorial ............................................................................... 300
Utilities .................................................................................. 400
Phone .................................................................................... 150
Office supplies ...................................................................... 100
Lab fees ................................................................................. 5,000
Loan payments ..................................................................... 570
Interest payments ................................................................. 500
Miscellaneous ....................................................................... 500
Total cash needs ........................................................................ 24,264
Deficiency of cash available over needs ................................. $ (2,904)
*Total revenues for a month:
Fillings ($50 × 90) $ 4,500
Crowns ($300 × 19) 5,700
Root canals ($170 × 8) 1,360
Bridges ($500 × 7) 3,500
Extractions ($45 × 30) 1,350
Cleaning ($25 × 108) 2,700
X-rays ($15 × 150) 2,250
$ 21,360
The budget clearly shows Dr. Jones that there is $2,904 more cash going out
than coming in.

Case 9–42 (Continued)
2. Dr. Jones must either increase revenues to make up the deficiency or cut
costs or a combination of the two. Three possible approaches are outlined as
follows:
a. Extend office hours so that a total of 40 hours are worked each week. This
could increase revenues by as much as $5,340. Based on a four-week
month, the current revenue earned per hour is $166.88 ($21,360/128). Thus,
the total revenue increase possible is $166.88 × 32 hours = $5,340. Dr.
Jones would need to inform his assistants and receptionist of the
increased time and indicate that each will receive approximately a 25
percent increase in salary for the additional time. (The office is currently
open 32 hours per week, so the hours are increasing by 25%.) The
hygienist is fully utilized, so we assume no increased hours or wages for
the hygienist. Benefits (primarily CPP and employment insurance benefits)
would also increase. Other expenses that will likely increase with an
increase in sales are dental supplies, utilities, and lab fees (representing
about 31 percent of sales). The remaining expenses appear to be fixed.
Thus, the increase in cash flow is computed as follows:
Incremental revenues $ 5,340
Salary increases (0.25 × $3,400) (850)
Benefits ( $12,700
$1,344
)($850) (90)
Variable expenses (0.31 × $5,340) (1,655)

Cash flow increase $ 2,745
Approach 1 carries with it some risk. Increasing office hours may not
increase business. If business does not increase as expected, the cash
flow problems could be aggravated rather than relieved. The likelihood of
increasing business would be increased if the additional hours are offered
in the early evening instead of Friday afternoon. Evening hours are a major
convenience for patients who must work during the day and are reluctant
to lose work hours.

Dr. Roger Jones

Revised Cash Budget
Cash collections and cash available ($21,360 + $5,340) ... $ 26,700
Less cash disbursements:
Salaries ($12,700 + $850) ................................................ 13,550
Benefits ($1,344 + $90).................................................... 1,434
Building lease .................................................................. 1,500
Dental supplies ($1,200 + $301*) .................................... 1,501
Janitorial .......................................................................... 300
Utilities ($400 + $100*) .................................................... 500
Phone ............................................................................... 150
Office supplies ................................................................ 100
Lab fees ($5,000 + $1,254*) ............................................. 6,254
Loan payments ................................................................ 570
Interest payments ........................................................... 500
Miscellaneous.................................................................. 500
Total cash needs .................................................................. 26,859
Deficiency of cash available over needs ............................ $ (159)
* Dental supplies, utilities, and lab fees are variable expenses. The
proportion of total variable expenses of each is:
Dental supplies $1,200 (18.2% = 1,200/6,600)

Utilities 400 (6.1% = 400/6,600)
Lab fees 5,000 (75.8% = 5,000/6,600)
Total $6,600
Additional expenses ($5,340 x 31% rounded) in each category (rounded to

the nearest dollar):
Dental supplies $ 301 (18.2% x 1,655)

Utilities 100 (6.1% x 1,655)
Lab fees 1,254 (75.8% x 1,655)

b. Cut one dental assistant, eliminate the salary to Mrs. Jones and the
activities she does, and cut Dr. Jones’s salary back by $1,000 per month.
The savings are as follows:
Assistant (salary and benefits) $1,051*
Salaries 2,000
Total $3,051
*($1,900/2) + [($950/$12,700) × $1,344] = $1,051 (rounded). (This provides a
reasonable approximation of the benefits assigned to an assistant.)
Although this achieves the savings, the solution may not be feasible. The
solution depends to a large extent on how well the Jones family can do
with a $2,000 per month cut in their income. In all likelihood, this would be
unacceptable to the Jones family. Also, cutting an assistant would require
the receptionist to become involved in assisting. This may not be possible
without laying off the receptionist and hiring a person that has both sets of
skills. Additionally, using the receptionist as an assistant would result in
phone calls going unanswered and/or incoming patients being ignored.
c. Increase the fees charged for the various dental services. Assuming a
variable cost ratio of 31 percent (from the first approach), the increase in
revenues needed to cover the $2,900 deficiency can be computed as
follows:
0.69R = $2,900
R = $2,900/0.69
R = $4,203
This increase would call for fees to increase an average of 19.7 percent.
Whether this increase is possible or not depends to some extent on how
Dr. Jones’s charges compare with other dentists in the area. If some
increase is possible, then the increase could be combined with elements of
the other two approaches, (e.g., a 10 percent increase in fees and working
an extra four hours per week, say, on Wednesday evening). Dr. Jones
would be more likely to accept such a combination rather than accepting
either of the other approaches in their pure form.
The behavioural principles discussed in the chapter do have a role in this
type of setting. Dr. Jones’s personal goals must be in line with the goals of
his professional organization, and he must have the motivation to achieve
those goals. There is, however, a significant difference. Dr. Jones owns
and manages the organization. To a large extent, his goals are the goals of
the organization.

d. Another possibility for savings would be for Dr. Jones to reduce or

eliminate his participation in information seminars which would result in a
direct cost savings of $2,400 per year. The monthly cash budget prepared
in part 1 above does not take into account this yearly expenditure.
Case 9–43
1. Linda’s behaviour is not ethical. In the budgeting process, she is deliberately

misrepresenting the capabilities of her division for personal gain. To ensure
that she achieves budget (either this year or next), she manipulates
accounting procedures. This manipulation is in opposition to generally
accepted accounting principles. Her decisions are based on her self-interest
rather than on the interests of the company. Deceptive and manipulative
behaviour for personal gain is clearly wrong.
2. There are few, if any, legitimate reasons for deferring the closing of sales.
Thus, if a marketing manager was asked to engage in this behaviour, the first
response must be to find out why the request is being made. If there is no
sound reason offered, then a simple refusal should suffice. If it takes on the
nature of an order and no sound reason exists, then the marketing manager
should consider appealing to a higher-level manager. Certainly, deferral of
closings so that it increases the likelihood of meeting budget for the coming
year is not a sound reason, and, in fact, is wrong.
3. It would be hard to go against a common practice that seems to have the
approval of the plant managers. The widespread knowledge of the practice
may even suggest that higher-level management is aware of it and essentially
condones the practice—or at least adjusts for it. If higher-level management is
aware of the practice and adjusts for it, then the ability to achieve bonus may
not be enhanced as much as believed. The plant manager could investigate
and find out the extent to which upper-level management is aware of padding.
At the same time, the manager could obtain some advice on what his
behaviour ought to be. If told that the practice is acceptable, then the manager
has to decide whether to continue working in an organization that accepts
deceptive behaviour (or go against the grain and simply report what he or she
feels is really achievable by the plant).

4. This is a clear violation of the ethical code for management accountants. A

management accountant is obligated to report information fairly and
objectively and to disclose all information that can be expected to influence a
user’s understanding of accounting reports. Moreover, management
accountants must perform their duties in accordance with relevant laws,
regulations, and technical standards. Accelerating the recognition of
expenses violates generally accepted accounting principles. Your first step
would be to explain to the division manager that this action is wrong. If the
division manager persists, you might ask him/her to put the request in writing.
This will often solve the problem, as the division manager would likely not
want his/her name attached to this order. If it does not, you should continue
up the chain of command and/or inform the audit committee of the board of
directors.

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CHAPTER 9

BUDGETING, PRODUCTION, CASH, AND MASTER

Copyright © 2018 by Nelson Education Ltd. 9-1

9-2 Copyright © 2018 by Nelson Education Ltd.

Cornerstone Exercise 9–1

Cornerstone Exercise 9–2

Cornerstone Exercise 9–3

Copyright © 2018 by Nelson Education Ltd. 9-3

Cost of merchandise purchases $ 236,800 $ 98,410

Cost of merchandise purchases $ 401,280 $ 125,190

Cost of merchandise purchases $ 457,600 $ 124,670

Total units to be ordered: 3,424 2,679

Total cost of merchandise purchases for the quarter: $1,095,680 + $348,270 =

9-4 Copyright © 2018 by Nelson Education Ltd.

1. Ending inventory for December

3. Ending inventory for December = 0.15 × 1 plastic crate × 43,800 units

Copyright © 2018 by Nelson Education Ltd. 9-5

4. Direct materials purchases budget—Plastic Crates:

Cornerstone Exercise 9–5

Cornerstone Exercise 9–6

9-6 Copyright © 2018 by Nelson Education Ltd.

2. Cost of ending inventory = $49.72 × 675 = $33,561

Cornerstone Exercise 9–8

*From Cornerstone Exercise 9-7

Cornerstone Exercise 9–9

Copyright © 2018 by Nelson Education Ltd. 9-7

Cornerstone Exercise 9–11

Cornerstone Exercise 9–12

2. Payments for purchases from:

9-8 Copyright © 2018 by Nelson Education Ltd.

April May June Quarter

April May June Quarter

Copyright © 2018 by Nelson Education Ltd. 9-9

April May June Quarter

April May June Quarter

Unit cost computations:

Ending inventory in units 2,550

9-10 Copyright © 2018 by Nelson Education Ltd.

Direct materials used * $ 31,275

* ($0.25 x 2 kg/unit x 62,550)

April May June Quarter

Copyright © 2018 by Nelson Education Ltd. 9-11

April May June Quarter

April May June Quarter

9-12 Copyright © 2018 by Nelson Education Ltd.

April May June Quarter

Excess of cash 15,987 58,348 127,187 127,561

Ending cash balance $30,000 $43,961 $127,187 $127,187

Copyright © 2018 by Nelson Education Ltd. 9-13

Property, plant, and equipment:

9-14 Copyright © 2018 by Nelson Education Ltd.

2. Payments for food purchases from:

3. Beginning balance $ 2,147

*September wage payments = ($7,300 × 0.1);

Copyright © 2018 by Nelson Education Ltd. 9-15