Revised Spring 2018 Chapter 9 Review Questions

Multiple Choice

1. A master budget consists of

a) Individual budgets made for short-term goals
b) Emphasis is put on cash resources for capital planning
c) Interrelated budgets for an action plan for a specific time period
d) Focuses on review of progress towards long-term goals

2. L Company produces hand tools. For March, budgeted sales are 12,000 units,
beginning finished goods inventory will be 1,200 units, and ending finished goods
inventory will be 1,400 units. March production will be?
a) 10,900
b) 11,800
c) 12,200
d) 14,600

J Company produces hand tools. Budgeted sales will be: March 12,000 units, April
14,000, May 16,000 and June 19,000. Ending finished goods inventory policy is 10%
of the following month's sales. March 1 inventory is projected to be 1,500 units.

3. How many units will be produced in March?

a) 11,900
b) 12,200
c) 13,000
d) 14,800

4. A Company produces leather handbags. The production budget for the next four
months is: July 6,000 units, August 8,000, September 7,500, October 8,000. Each
handbag requires 0.5 square meters of leather. A Company‘s leather inventory policy
is 30% of next month's production needs. On July 1 leather inventory was expected
to be 2,000 square meters. Leather is expected to cost $6.00 per square meter in
July. What is the expected cost of leather purchases in July?
a) $13,100
b) $13,200
c) $16,200
d) $16,300

5. Y Company produces chairs. The production budget for the next four months is: July
6,000 units, August 7,000, September 7,500. Each chair requires 2.2 hours of skilled
labor (paid $15 per hour). How much will be paid to skilled labor during the Quarter 3
(July-September)?
a) $292,500
b) $676,500
c) $677,500
d) $742,500
Revised Spring 2018 Chapter 9 Review Questions
6. B Company has forecast production for the next three months as follows: July 5,000
units, August 6,600 units, September 7,500 units. Monthly manufacturing overhead is
budgeted to be $17,000 plus $5 per unit produced. What is budgeted manufacturing
overhead for July?
a) $24,500
b) $41,500
c) $42,000
d) $47,000

7. S Company has forecast sales to be $120,000 in February, $145,000 in March,

$170,000 in April, and $180,000 in May. All sales are on made on credit and sales
are collected 60% in the month of sale, and 40% the month following. What are
budgeted cash receipts in March?
a) $131,000
b) $135,000
c) $94,500
d) $91,700

8. F Company has forecast purchases on account to be $210,000 in March, $270,000 in

April, $320,000 in May, and $390,000 in June. Seventy percent of purchases are paid
for in the month of purchase, the remaining thirty percent are paid in the following
month. What are budgeted cash payments for April?
a) $252,000
b) $285,000
c) $159,000
d) $126,000

9. E Company has forecast sales to be $225,000 in February, $235,000 in March,

$250,000 in April, and $240,000 in May. All sales are made on credit and sales are
collected 60% in the month of sale, and 40% the month following. What is the
budgeted Accounts Receivable balance on May 31?
a) $69,000
b) $96,000
c) $98,000
d) $106,000

10. N Company is preparing a cash budget for June. The company has $12,000 cash at
the beginning of June and anticipates $30,000 in cash receipts and $34,500 in cash
disbursements during June. Northern Company has an agreement with its bank to
maintain a cash balance of at least $10,000. To maintain the $10,000 required
balance, during June the company must:
a) Borrow $4,500
b) Borrow $2,500
c) Borrow $10,000
d) Borrow $7,500
Revised Spring 2018 Chapter 9 Review Questions

Practice Problems

Practice Problem #1

Peak sales for J & J Products, a wholesale distributor of leaf rakes, occur in August. Sales the
company’s planning budget for the third quarter are shown below:

July August September Total

Budgeted Sales on account $600,000 $900,000 $500,000 $2,000,000

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. May sales totaled $430,000 and June sales totaled $540,000.

Required: a) Prepare a schedule of expected cash collections from sales, by month

and in total, for the third quarter.
b) Compute the accounts receivable as September 30.

Practice Problem #2

Micro Corporation has budgeted sales of its microchips for next four month as follows:

Units Sold
April 20,000
May 25,000
June 35,000
July 40,000

The company is preparing a production budget for the third quarter. Ending inventory level
must equal 20% of the next month’s sales.

Required: a) Calculate the ending inventory as of March 31.

b) Prepare a production budget for the third quarter by month and in total.
Revised Spring 2018 Chapter 9 Review Questions

Practice Problem #3

Z Company sells a single product. Each unit takes two pounds of material and costs $3.00 per
pound. Company A has prepared a production budget by quarters for Year 2 and for the first
quarter of Year 3, as follows:

Year 2 Year 3
First Second Third Fourth First
Budgeted production 30,000 60,000 90,000 100,000 50,000

The ending inventory at the end of a quarter must be equal to 25% of the following quarter’s
production needs. 26,000 pounds of material are on hand to start the first quarter of Year 2.
Purchases are paid for 40% in the quarter of purchase and 60% in the following quarter.

Required: a) Prepare direct materials budget for the chips by quarter and in for Year
2 in total including the dollar amount of purchases.
b) Prepare cash disbursements budget for the chips by quarter and in for
Year 2 in total including the dollar amount of purchases.

Practice Problem #4

The production department of the H Company has submitted the following forecast of units to be
produced by quarter for the upcoming fiscal year.

First Second Third Fourth

Units to be produced 8,000 7,500 7,000 9,500

Each unit requires 0.4 direct labor-hours. Direct labor rate is $10.00 per hour.

Required: Prepare the direct labor budget for the upcoming fiscal year.

Practice Problem #5

The budgeted direct labor-hours for the T Company are as followed:

First Second Third Fourth

Budgeted direct labor hours 15,000 16,500 16,000 15,500

T Company’s variable manufacturing overhead rate is $1.50 per direct labor-hour and the
company’s fixed manufacturing overhead is $60,000 per quarter. The only non-cash item
included in the fixed mfg. overhead is depreciation, which is $18,000.

Required: a) Prepare a manufacturing overhead budget for the year.

And calculate amounts used for cash disbursements
b) Compute the total manufacturing overhead rates for the year.
Revised Spring 2018 Chapter 9 Review Questions

Practice Problem #6

G Company had cash of $13,000 on hand on January 1. During the year, the company
expected the following cash collections from customers by quarter:

First Second Third Fourth

Cash collections 110,000 177,500 183,700 136,000

Direct materials purchases in tons were budgeted as follows:

First Second Third Fourth

Direct materials
purchases 65,000 75,000 55,000 50,000

The production budget showed the following unit production by quarter with an average labor
rate of $40.00:

First Second Third Fourth

Units to be produced 1,500 2,000 1,700 1,500

G Company planned to pay dividends of $10,000 per quarter during the year. During July, new
equipment costing $60,000 will be purchased. An additional $16,000 was planned to installation
costs during the fourth quarter.

The company was required to maintain a minimum cash balance of $15,000. A line of credit
was available for short-term borrowings in increments of $1,000. All borrowings will be made at
the beginning of a quarter and repaid at the end of a quarter. Interest on the short-term
borrowings will be paid at 0.5% per quarter on the amount repaid in any quarter when a loan
repayment is made. All other interest expense will be accrued each quarter.

Required: Prepare a cash budget by quarter and for the year in total.

Solutions

1. C
2. C
3. A
4. B
5. B
6. C
7. B
8. A
9. B
10. B
Revised Spring 2018 Chapter 9 Review Questions

Practice Problem #1

a) Schedule of Cash Collections:

July August September Total
May sales ($430,000 X 10%) $43,000 $43,000
June sales ($540,000 X 70%, 378,000 54,000 432,000
10%)
July sales ($600,000 X 20%, 120,000 420,000 60,000 600,000
70%, 10%)
August sales ($900,000 X 180,000 630,000 810,000
20%, 70%)
September sales ($500,000 X 100,000 100,000
20%)
Total cash collections $541,000 $654,000 $790,000 $1,985,000

b) Account receivable at September 30:

From August sales: $900,000 X 10% $90,000

From September sales: $500,000 X (70% + 10%) 400,000
Total account receivable $490,000

Practice Problem #2

a) Since the ending inventory for the month of March must be 20% of April’s sales of 20,000
units, ending inventory = 4,000 units.

b) Production Budget:
April May June Quarter
Budgeted sales in units 20,000 25,000 35,000 80,000
Add desired ending inventory* 5,000 7,000 8,000** 8,000
Total needs 25,000 32,000 43,000 88,000
Less beginning inventory 4,000 5,000 7,000 4,000
Required production 21,000 27,000 36,000 84,000

*10% of the following month's unit sales

**July sales = 40,000 X 20% = 8,000
Revised Spring 2018 Chapter 9 Review Questions
Practice Problem #3

Quarter - Year 2 Year 3

First Second Third Fourth First
Required production 30,000 60,000 90,000 100,000 50,000
Pounds of material per
unit 2 2 2 2 2
Total production needs 60,000 120,000 180,000 200,000 100,000

Production needs 60,000 120,000 180,000 200,000 560,000

Add desired ending
inventory 30,000 45,000 50,000 25,000 25,000
Total needs 90,000 165,000 230,000 225,000 585,000
Less beginning
inventory 26,000 30,000 45,000 50,000 26,000
Required purchases 64,000 135,000 185,000 175,000 559,000
Cost of purchase per
unit $3.00 $3.00 $3.00 $3.00 $3.00
Total costs of purchase $192,000 $405,000 $555,000 $525,000 $1,677,000

Cash Disbursements:
Fourth Quarter, Year 1
purchases
26,000 x $3.00 x 60% $46,800 $46,800
First Quarter purchases 76,800 $115,200 $192,000
Second Quarter purchases 162,000 $243,000 $405,000
Third Quarter purchases 222,000 $333,000 $555,000
Fourth Quarter purchases 210,000 $210,000
$123,600 $277,200 $465,000 $543,000 $1,408,800

Practice Problem #4

First Second Third Fourth Year

Required production 8,000 7,500 7,000 9,500 32,000
Direct labor-hour per unit 0.4 0.4 0.4 0.4 0.4
Total direct labor hours 3,200 3,000 2,800 3,800 12,800
Direct labor costs per dlh $10.00 $10.00 $10.00 $10.00 $10.00
Total direct labor cost* $32,000 $30,000 $28,000 $38,000 $128,000

*Assume that the direct labor workforce will be fully adjusted to the total direct labor-hours
needed each quarter
Revised Spring 2018 Chapter 9 Review Questions
Practice Problem #5

First Second Third Fourth Year

Budgeted direct labor-hours 15,000 16,500 16,000 15,500 63,000
Variable mfg. overhead rate $1.50 $1.50 $1.50 $1.50 $1.50
Variable mfg. overhead $22,500 $24,750 $24,000 $23,250 $94,500
Fixed mfg. overhead 60,000 60,000 60,000 60,000 240,000
Total mfg. overhead $82,500 $84,750 $84,000 $83,250 $334,500
Less deprecation 18,000 18,000 18,000 18,000 72,000
Cash disbursement for mfg.
overhead. $64,500 $66,750 $66,000 $65,250 $262,500

Total manufacturing overhead $334,500

Budgeted direct labor-hours 63,000
overhead rate for the year = $5.31

Practice Problem #6

First Second Third Fourth Year

Beginning cash balance $13,000 $15,000 $15,380 $15,080 $13,000
+ Cash collections 110,000 177,500 183,700 136,000 607,200
= Cash available $123,000 $192,500 $199,080 $151,080 $620,200
- Cash Disbursements:
Direct materials purchases 65,000 75,000 55,000 50,000 245,000
Direct labor 60,000 80,000 68,000 60,000 268,000
Plant assets 60,000 16,000 76,000
Dividends 10,000 10,000 10,000 10,000 40,000
Excess (deficiency) ($12,000) $27,500 $6,080 $15,080 ($8,800)
Financing:
+ Borrowings 27,000 9,000 36,000
- Repayments (12,000) (12,000)
- Interest paid (120) (120)
= Ending cash balance $15,000 $15,380 $15,080 $15,080 $15,080

- Interest paid $12,000 X 0.5% X 2 qtrs = $120