Review Problem

Myron Corporation manufactures and sells a seasonal product that has peak sales in the third month.
The following information concerns operations for 2015.
a) The company’s single product sells for Rs. 80 per unit. Budgeted sales in units for the next five
months are as follows (all sales are on credit):

Jan Feb Mar Apr May

Budgeted unit 40,000 60,00 100,000 50,00 70,000
sales 0 0

b) Sales are collected in the following pattern: 70% in the month the sales are made, and the
remaining 30% in the following month. On January 1, 2015, the company’s balance sheet showed
Rs. 65,000 in accounts receivable, all of which will be collected in the first month of the year. Bad
debts are negligible and can be ignored.
c) The company desires an ending finished goods inventory at the end of each month equal to 30% of
the budgeted unit sales for the next month. On December 31, 2014, the company had 12,000 units
on hand.
d) Five pounds of raw materials are required to complete one unit of product. The company re quires
ending raw materials inventory at the end of each month equal to 10% of the following month’s
production needs. On December 31, 2014, the company had 23,000 pounds of raw materials on
hand.
e) The raw material costs Rs. 10 per pound. Raw material purchases are paid for in the following
pattern: 60% paid in the month the purchases are made, and the remaining 40% paid in the
following month. On January 1, 2015, the company’s balance sheet showed Rs. 81,500 in accounts
payable for raw material purchases, all of which will be paid for in the first month of the year.

Required:
Prepare the following budgets and schedules for the 1 st quarter of the year, showing both monthly and
total figures:
a) A sales budget and a schedule of expected cash collections.
b) A production budget.
c) A direct materials budget and a schedule of expected cash payments for purchases of materials.

Q.9-1 Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales
occur in May of each year, as shown in the company’s sales budget for the second quarter given
below:

April May June Total

Budgeted sales (all on account) $300,000 $500,000 $200,000 $1,000,000

From past experience, the company has learned that 20% of a month’s sales are collected in the
month of sale, another 70% are collected in the month following sale, and the remaining 10%
are collected in the second month following sale. Bad debts are negligible and can be ignored.
February sales totaled $230,000, and March sales totaled $260,000.
Required:
a) Prepare a schedule of expected cash collections from sales, by month and in total, for the
second quarter.
b) Assume that the company will prepare a budgeted balance sheet as of June 30. Compute
the accounts receivable as of that date.

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Q.9-2 Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang for the
next four months as follows:
Mont Sales in units
h
April 50,000
May 75,000
June 90,000
July 80,000
The company is now in the process of preparing a production budget for the second quarter.
Past experience has shown that end-of-month inventory levels must equal 10% of the following
month’s sales.
The inventory at the end of March was 5,000 units.
Required:
Prepare a production budget for the second quarter; in your budget, show the number of units
to be produced each month and for the quarter in total.

Q.9-3 Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume
made by a small company in western Siberia. The cost of the musk oil is 150 roubles per
kilogram. (Siberia is located in Russia, whose currency is the rouble.) Budgeted production of
Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3:
Year 2 Year 3
First Secon Third Fourth First
d
Budgeted Production, in bottles 60,000 90,000 150,000 100,000 70,000
Musk oil has become as popular as a perfume ingredient that it has become necessary to carry
large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at
the end of a quarter must be equal to 20% of the following quarter’s production needs. Some
36,000 grams of musk oil will be on hand to start the first quarter of Year 2.
Required:
Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. At the bottom
of your budget, show the amount of purchases in roubles for each quarter and for the year in
total.

Q.9-5 The direct labor budget of Yuvwell Corporation for the upcoming fiscal year contains the
following details concerning budgeted direct labor-hours:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Budgeted direct labor- 8,000 8,200 8,500 7,800
hours
The company’s variable manufacturing overhead rate is $3.25 per direct labor-hour and the
company’s fixed manufacturing overhead is $48,000 per quarter. The only noncash item
included in fixed manufacturing overhead is depreciation, which is $16,000 per quarter.
Required:
a) Construct the company’s manufacturing overhead budget for the upcoming fiscal year.
b) Compute the company’s manufacturing overhead rate (including both variable and fixed
manufacturing overhead) for the upcoming fiscal year. Round off to the nearest whole cent.

Q.9-6 The budgeted unit sales of Weller Company for the upcoming fiscal year are provided below:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Budgeted unit 15,000 16,000 14,000 13,000

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 sales
The company’s variable selling and administrative expense per unit is $2.50. Fixed selling and
administrative expenses include advertising expenses of $8,000 per quarter, executive salaries
of $35,000 per quarter, and depreciation of $20,000 per quarter. In addition, the company will
make insurance payments of $5,000 in the first quarter and $5,000 in the third quarter. Finally,
property taxes of $8,000 will be paid in the second quarter.
Required:
Prepare the company’s selling and administrative expense budget for the upcoming fiscal year.

Q.9-7 Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management
has prepared the following summary of its budgeted cash flows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Total cash receipt 180,000 330,000 210,000 230,000
Total cash 260,000 230,000 220,000 240,000
disbursements
The company’s beginning cash balance for the upcoming fiscal year will be $20,000. The
company requires a minimum cash balance of $10,000 and may borrow any amount needed
from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at
the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any
quarter. Interest payments are due on any principal at the time it is repaid. For simplicity,
assume that interest is not compounded.
Required:
Prepare the company’s cash budget for the upcoming fiscal year.

Q.9-8 Gig Harbor Boating is the wholesale distributor of a small recreational catamaran sailboat. Man -
agement has prepared the following summary data to use in its annual budgeting process:
Budgeted unit sales........................................... 460
Selling price per unit.......................................... $1,950
Cost per unit...................................................... $1,575
Variable selling and administrative expenses (per unit) $75
Fixed selling and administrative expenses (per year) $105,000
Interest expense for the year............................ $14,000
Required:
Prepare the company’s budgeted income statement.

Q.9-9 The management of Mecca Copy, a photocopying center located on University Avenue, has
compiled the following data to use in preparing its budgeted balance sheet for next year:
Ending Balances
Cash............................................... ?
Accounts receivable...................... $8,100
Supplies inventory......................... $3,200
Equipment.................................... $34,000
Accumulated depreciation............ $16,000
Accounts payable.......................... $1,800
Common stock.............................. $5,000
Retained earnings......................... ?
The beginning balance of retained earnings was $28,000, net income is budgeted to be $11,500,
and dividends are budgeted to be $4,800.
Required:

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 Prepare the company’s budgeted balance sheet.

Q.9-21 The president of the retailer Prime Products has just approached the company’s bank with a
request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring
inventories. Because the company has had some difficulty in paying off its loans in the past, the
loan officer has asked for a cash budget to help determine whether the loan should be made.
The following data are available for the months April through June, during which the loan will be
used:
a. On April 1, the start of the loan period, the cash balance will be $24,000. Accounts
receivable on April 1 will total $140,000, of which $120,000 will be collected during April
and $16,000 will be collected during May. The remainder will be uncollectible.
b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60%
in the month following sale, and 8% in the second month following sale. The other 2%
represents bad debts that are never collected. Budgeted sales and expenses for the three-
month period follow:
April May June
Sales (all on account) $300,000 $400,000 $250,000
Merchandise purchases $210,000 $160,000 $130,000
Payroll ............ $20,000 $20,000 $18,000
Lease payments.... $22,000 $22,000 $22,000
Advertising............ $60,000 $60,000 $50,000
Equipment purchases — — $65,000
Depreciation......... $15,000 $15,000 $15,000
c. Merchandise purchases are paid in full during the month following purchase. Accounts
payable for merchandise purchases during March, which will be paid during April, total
$140,000.
d. In preparing the cash budget, assume that the $30,000 loan will be made in April and
repaid in June. Interest on the loan will total $1,200.
Required:
1. Prepare a schedule of expected cash collections for April, May, and June, and for the three
months in total.
2. Prepare a cash budget, by month and in total, for the three-month period.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the
loan be repaid as planned? Explain.

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Q. You have been asked to prepare a December cash budget for Ashton Company, a distributor of
exercise equipment. The following information is available about the company's operations:

a. The cash balance on December 1 is Rs.40,000.

b. Actual sales for October and November and expected sales for December are as follows:
October November December
Cash sales Rs.65,000 Rs.70,000 Rs.83,000
Sales on account Rs.400,000 Rs.525,000 Rs.600,000
Sales on account are collected over a three-month period as follows: 20% collected in the
month of sale, 60% collected in the month following sale, and 18% collected in the second
month following sale. The remaining 2% is uncollectible.
c. Purchases of inventory will total Rs.280,000 for December. Thirty percent of a month's
inventory purchases are paid during the month of purchase. The accounts payable remaining
from November's inventory purchases total Rs.161,000, all of which will be paid in December.

d. Selling and administrative expenses are budgeted at Rs.430,000 for December. Of this
amount, Rs.50,000 is for depreciation.

e. A new Web server for the Marketing Department costing Rs.76,000 will be purchased for
cash during December, and dividends totaling Rs.9,000 will be paid during the month.

f. The company maintains a minimum cash balance of Rs.20,000. An open line of credit is
available from the company's bank to bolster the cash position as needed.
Required:
a) Prepare a schedule of expected cash collections for December.
b) Prepare a schedule of expected cash disbursement for merchandise purchase for
December.
c) Prepare a cash budget for December. Indicate in the financing section any borrowing
that will be needed during the month.

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1. December cash sales.....................................................................  83,000
Collections on account:
October sales: $400,000 × 18%................................................. 72,000
November sales: $525,000 × 60%............................................. 315,000
December sales: $600,000 × 20%..............................................  120,000
Total cash collections................................................................. 590,000

2. Payments to suppliers:
November purchases (accounts payable).................................. 161,000
December purchases: $280,000 × 30%.....................................    84,000
Total cash payments.................................................................. 245,000

ASHTON COMPANY
Cash Budget
For the Month of December

Cash balance, beginning...................................................................   40,000

Add cash receipts: Collections from customers................................   590,000
Total cash available before current financing................................... 630,000
Less disbursements:
Payments to suppliers for inventory............................................. 245,000
Selling and administrative expenses*........................................... 380,000
New web server............................................................................ 76,000
Dividends paid..............................................................................     9,000
Total disbursements.........................................................................   710,000
Excess (deficiency) of cash available over
disbursements..............................................................................   (80,000)
Financing:
Borrowings................................................................................... 100,000
Repayments.................................................................................. —  
Interest.........................................................................................      —      
Total financing..................................................................................   100,000
Cash balance, ending........................................................................   20,000

*$430,000 – $50,000 = $380,000.

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Q.1 The following information relates to the Atticus Manufacturing Company:
Average sales price Rs.56
Sales by territory (units):
Territor 1 2 3 4 5
y
January 67,500 80,00 35,00 101,000 91,500
0 0
February 64,000 89,50 41,00 97,500 87,500
0 0
March 70,500 86,00 29,50 112,000 110,500
0 0
Desired finished goods inventories (units):
January 1 204,650
January 31 201,500
February 28 195,900
March 31 206,100

One unit of direct materials is required to produce one finished unit.

Direct material cost per unit: Rs.44
Desired ending direct materials inv 55% of next month’s production
Production April: 216,710 units

Required: Prepare sales budget in units and rupees, production budget, direct materials
purchase budget and direct materials usage budget

Q.2 Rhodes Corporation expects its sales for the current year to be Rs.795,000. In previous years the
percentage of gross profit to sales has been 45 percent. Operating expenses are expected to be
Rs.260,000, of which 40 percent are administrative and 60 percent selling.

Required: Assume a tax rate is 30 percent, prepare a budgeted income statement.

Q.3 Griffin Manufacturing Company has four sales territories. Each salesperson is expected to sell
the following number of units this quarter:
Territor 1 2 3 4
y
January 750 790 910 820
February 640 670 870 785
Required: Assuming an March 810 805 895 805 average sales price of Rs.33,
prepare a first quarter sales forecast in units and rupees.

Q.4 In the first quarter of 2015 Griffin Manufacturing Company projects its sales in units to be as
follows:
January 3,270
February 2,965
March 3,315

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 In addition, it desires to have the following units of finished goods inventory on hand:
January 1 2,975
January 31 2,705
February 28 2,650
March 31 3,000

Required: Prepare a production budget.

Q.5 Union Company intends to produce the following units during the third quarter of 2015:
July 3,685
August 4,450
September 4,175
Two units of direct materials are required for each unit of finished product. Ending direct
material inventory is expected to be 70 percent of the following month’s production
requirements denominated in units of direct materials.
Required: Prepare direct materials purchase and usage budgets assuming a purchase price of
Rs.6.25. Production for October is expected to be 4,000 units.

Q.6 Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales
occur in May of each year. These peak sales are shown in the company’s sales budget for the
second quarter given below (all sales are on account):
April May June Total
Budgeted sales Rs.300, 000 Rs.500, 000 Rs.200, 000 Rs.1, 000,000

From past experience, the company has learned that 20% of a month’s sales are collected in the
month of sale, another 70% are collected in the month following sale, and the remaining 10%
are collected in the second month following sale. Bad debts are negligible and can be ignored.
February sales totaled Rs.230,000, and March sales totaled Rs.260,000.

Required: Prepare a schedule of expected cash collections from sales, by month and in total, for
the second quarter.

Q.7 ABC Limited sales are shown in the company’s sales budget for the third quarter of 2015 given
below:
July August September Total
Budgeted cash sales Rs. 300,000 Rs. 300,000 Rs. 400,000 Rs. 1,000,000
Budgeted cash sales Rs. 600,000 Rs. 650,000 Rs. 750,000 Rs. 2,000,000

From past experience, the company has learned that 30% of a month’s sales are collected in the
month of sale, another 50% are collected in the month following sale, and the remaining 15%
are collected in the second month following sale. Bad debts are 5%. May credit sales totaled
Rs.530,000, and March credit sales totaled Rs.560,000.

Required: Prepare a schedule of expected cash collections from sales, by month and in total, for
the second quarter.

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