ACCT 2121: Ch 6.

Problem
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Problem 1 Kinder Company shows the following estimates for unit sales for next year: The
company expects to sell its goods for $50 per unit.
Required:
a.) Prepare a sales budget for the year ended December 31.
Additional information

The company expects to collect 70% of sales in the quarter of the sale, and 25% in the
quarter following the sale. 5% of sales are expected to be uncollectible. The company’s
beginning accounts receivable was $125,000, all of which was expected to be collected in
the first quarter.
Required:
b.) Prepare a schedule of expected cash collections for the year ended December 31.

Solution:
Sales Budget for the year ended December 31

Q1 Q2 Q3 Q4 Year
Sales in Units 11,000 12,000 14,000 13,000 50,000
Sales price $50 $50 $50 $50 $50
Sales revenue $550,000 $600,000 $700,000 $650,000 $2,500,000

Schedule of Expected Cash Collections for the Year Ended December 31

Q1 Q2 Q3 Q4 Year
Beginning A/R $125,000 125,000
Q1 Sales 385,000 137,500 522,500
Q2 Sales 420,000 150,000 570,000
Q3 Sales 490,000 175,000 665,000
Q4 Sales 455,000 455,000
Total Cash Collection 510,000 557,000 640,000 630,000 $2,337,500

Problem 2
Murphy Company shows the following estimates for unit sales for the first quarter of its
upcoming fiscal year:
The company requires finished goods inventory on hand equal to 20% of the next month’s
expected sales.
The company expects to begin January with 600 units in inventory. The expected unit sales
for April are 5,000.
Required:
Prepare a production budget for the quarter.

Solution:
Production Budget for the Quarter Ended March 31

Jan Feb Mar Quarter

Expected sales (units) 3,000 3,500 4,500 11,000
Add: Desired Ending Inventory 700 900 1,000 1,000
Total production needs 3,700 4,400 5,500 12,000
Deduct: Beginning Inventory (600) (700) (900) (600)
Required Production 3,100 3,700 4,600 11,400

Problem 3
Fung Company manufactures faux-leather bags. Each bag takes 0.5 yards of material. The
material costs $5 per yard. The company had 1,500 yards of material on hand at the
beginning of January and required enough ending monthly materials to be on hand to meet
10% of the following month’s production requirements.
The company’s production budget follows:

The company expects to produce 40,000 units in April.

Required:
Prepare a materials purchases budget for the quarter. Provide both the number of yards, and
dollar value of inventory to be purchased.

Solution:
Materials Purchases Budget for the Quarter Ended March 31

Jan Feb Mar Quarter

Required production (units) 30,000 35,000 38,000 103,000
 Required material (/unit) 0.5 0.5 0.5 0.5
Required material (yards) 15,000 17,500 19,000 51,500
Add: Desired ending materials 1,750 1,900 2,000 2,000
Total material needs 16,750 19,400 21,000 53,500
Deduct: Beginning materials (1,500) (1,750) (1,900) (1,500)
Required materials to be purchased (yards) 15,250 17,650 19,100 52,000
Cost per yard $5 $5 $5 $5
Total materials cost $76,250 $98,250 $95,500 $260,000

Problem 4
Meeho Company’s production requirements are as follows:

Each unit requires two direct labour hours to produce and workers are paid $15.00 per hour.
Required
a.) Assuming a completely flexible labour force, prepare the company’s direct labour budget
for the quarter.
b.) Refer to the original data. Assume the company has permanent employees who are
guaranteed to be paid for at least 11,500 hours of work per month. If production requires less
than 11,500 hours, they will be paid for 11,500 hours anyway. Any amount of work above
11,500 hours will be paid at 1.5 times their normal hourly rate.

Solution:
Direct Labor Budget for the Quarter Ended March 31

Jan Feb Mar Quarter

Required Production 5,000 6,000 7,000 18,000
Time per unit 2 hrs 2 hrs 2 hrs 2 hrs
DL hours needed 10,000 12,000 14,000 36,000
Cost per hour $15 $15 $15 $15
Total DL cost $150,00 $180,000 $210,000 $540,000
Direct Labor Budget for the Quarter Ended March 31

Jan Feb Mar Quarter

DL Hours needed 10,000 12,000 14,000 36,000
Regular hours paid 11,500 11,500 11,500 34,500
Regular cost/hour $15 $15 $15 $15
Regular DL cost $172,500 172,500 172,500 172,500
Overtime hours paid 0 500 2,500 3,000
Overtime cost/hour $22.50 $22.50 $22.50 $22.50
Overtime cost 0 11,250 56,250 67,500
Total DL cost $172,500 183,750 228,750 585,000

Problem 5
Singular Inc. budgets direct labour hours for the first quarter as follows:

The company’s variable overhead rate is $10 per direct labour hour. The company’s fixed
overhead is $100,000 per month – this number includes monthly depreciation of $25,000.
Required
Prepare the company’s manufacturing overhead budget for the quarter.
Manufacturing Overhead Budget for the Quarter Ended March 31

Jan Feb Mar Quarter

DL Hours 75,000 80,000 95,000 250,000
V MOH/Hour $10/hour $10/hour $10/hour $10/hour
V MOH 750,000 800,000 950,000 2,500,000
F MOH 100,000 100,000 100,000 300,000
Total MOH 850,000 900,000 1,050,000 2,800,000
Deduct Depreciation (25,000) (25,000) (25,000) (75,000)
Cash paid for MOH 825,000 875,000 1,025,000 2,725,000

Problem 6
The budgeted unit sales for Purple Corporation for the upcoming quarter are as follows:

The company’s variable expenses include:

Shipping expenses: $2.00 per unit
Sales commissions: $5.00 per unit
Other expenses: $6.00 per unit
The company’s fixed expenses are:
Advertising: $75,000 per month
Executive salaries: $90,000 per month
Depreciation: $20,000 per month
Also, executive bonus payments of $25,000 will be made in the July and September, and a
major building repair of $35,000 will be paid in August.
Required:
Prepare the company’s selling and administrative budget for the upcoming quarter. Disclose
both total selling and administrative expenses and cash disbursements for selling and
administrative expenses.
Selling & Administrative Expenses Budget for the Quarter ended Aug. 30th

July Aug Sept Quarter

Shipping 60,000 50,000 44,000 154,000
Sales Commission 150,000 125,000 110,000 385,000
Other Expenses 180,000 150,000 132,000 462,000
Total Variable SG&A Expenses 390,000 325,000 286,000 1,001,000
Advertising 75,000 75,000 75,000 225,000
Executive salaries 90,000 90,000 90,000 270,000
Depreciation 20,000 20,000 20,000 60,000
Executive Bonuses 25,000 25,000 50,000
Building repair 35,000
Total Fixed SG&A Expenses 210,000 220,000 210,000 640,000
Total SG&A Expenses 600,000 545,000 496,000 1,641,000
Deduct: Depreciation 20,000 20,000 20,000 60,000
Cash paid for SG&A expenses 580,000 525,000 476,000 1,581,000

Problem 7
Cookie Crunchers had the following estimated cash flows for the first quarter:

The company begins the year with $20,000 in cash and requires a minimum cash balance of
$10,000. The company may borrow any amount from a local bank at an annual interest rate
of 6%, The borrowing must occur at the beginning of any month and all repayments must be
made at the end of any month. Interest must be repaid at the time of loan repayment.
Required:
Prepare the company’s cash budget for the upcoming year
Cash Budget for the Quarter Ended Mar 31

Jan Feb Mar Quarter

Cash balance, beginning $20,000 $10,000 $39,800 $20,000
Cash receipts 50,000 140,000 90,000 280,000
Subtotal 70,000 150,000 129,800 300,000
Cash disbursements (80,000) (90,000) (100,000) (270,000)
Minimum cash desired (10,000) (10,000) (10,000) (10,000)
Cash available (short) (20,000) 50,000 19,800 20,000
Financing
Borrowing 20,000 20,000
Repayments (principal) (20,000) (20,000)
Repayments (interest) (200) (200)
Cash balance, ending $10,000 $39,800 $29,800 $29,800

Problem 8
Lubriderm Corporation has the following budgeted unit sales for the next six-month period:

Month Unit Sales

June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to
have an inventory of finished products that equal 20% of the unit sales for the next month.

Five pounds of materials are required for each unit produced. Each pound of material costs
$8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials
inventory on June 1 was 15,000 pounds.

Required:

a. Prepare production budgets in units for July, August, and September.

b. Prepare a purchases budget in pounds for July, August, and September, and give total
purchases in both pounds and dollars for each month.
Solution:

a. July August September

Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000

Total inventory requirements 162,000 240,000 186,000

Less: Beginning inventory 24,000 42,000 30,000

Budgeted production 138,000 198,000 156,000

b. July August September

Production in units 138,000 198,000 156,000

Targeted ending inventory in lbs.*297,000 234,000 **252,000

Production needs in lbs.*** 690,000 990,000 780,000

Total requirements in lbs. 987,000 1,224,000 1,032,000

Less: Beginning inventory in lbs.****207,000 297,000 234,000

Purchases needed in lbs. 780,000 927,000 798,000

Cost ($8 per lb.) × $8 × $8 × $8

Total material purchases $6,240,000 $7,416,000 $6,384,000

* 0.3 times next month's needs

** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3
*** 5 lbs. times units to be produced, across row
**** (690,000 × .3) = 207,000 lbs., etc. row across