Chapter 22: Master Budgeting Dr.

Mohamed ElDeeb

Multiple-Choice questions:
1. Sioux Company is estimating the following sales for the first six months of next year:
January ...... $250,000
February..... $220,000
March ........ $240,000
April .......... $300,000
May ........... $360,000

Sales at Sioux are normally collected as 60% in the month of sale, 35% in the month
following the sale, and the remaining 5% being uncollectible. Based on this information,
how much cash should Sioux expect to collect during the month of April?
A) $250,800
B) $264,000
C) $290,700
D) $306,000

Ans: B
Solution:
April sales ($300,000 × 60%) ............. $180,000
March sales ($240,000 × 35%) ........... 84,000
Total .................................................. $264,000

2. All of Guylord Company's sales are on account. Thirty-five percent of the credit sales are
collected in the month of sale, 45% in the month following sale, and the rest are collected
in the second month following sale. Bad debts are negligible and should be ignored. The
following are budgeted sales data for the company:
January February March April
Total sales .............. $50,000 $60,000 $40,000 $30,000

What is the amount of cash that should be collected in March?

A) $39,000
B) $37,000
C) $27,500
D) $51,000
Ans: D
Solution:
March sales ($40,000 × 35%) ............. $14,000
February sales ($60,000 × 45%) ......... 27,000
January sales ($50,000 × 20%*) ......... 10,000
Total .................................................. $51,000
*100% − 35% − 45% = 20%

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Chapter 22: Master Budgeting Dr.Mohamed ElDeeb

3. Betz Company's sales budget shows the following projections for next year:
Sales in units
First Quarter...................... 60,000
Second Quarter ................. 80,000
Third Quarter .................... 45,000
Fourth Quarter .................. 55,000

Inventory at the beginning of the year was 18,000 units. The finished goods inventory at the end
of each quarter is to equal 30% of the next quarter's budgeted unit sales. How many units should
be produced during the first quarter?
A) 24,000
B) 48,000
C) 66,000
D) 72,000
Ans: C
Solution:
Units produced = Ending inventory + Units sold + Beginning inventory
= (30% × 80,000) + 60,000 − 18,000
= 24,000 + 60,000 − 18,000 = 66,000

4. The following information relates to Minorca Manufacturing Corporation for next quarter:
January February March
Expected sales (in units) ........................... 440,000 390,000 400,000
Desired ending finished goods inventory
(in units) ............................................... 28,000 30,000 35,000

How many units should Minorca plan on producing for the month of February?
A) 360,000 units
B) 388,000 units
C) 392,000 units
D) 420,000 units
Ans: C
Solution:
Ending inventory + Units sold − Beginning inventory
= 30,000 + 390,000 - 28,000 = 392,000

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Chapter 22: Master Budgeting Dr.Mohamed ElDeeb

5. The following are budgeted data:

Month 1 Month 2 Month 3
Sales in units ..................... 15,000 20,000 18,000
Production in units ............ 16,000 22,000 15,000

One pound of material is required for each finished unit. The inventory of materials at the
end of each month should equal 20% of the following month's production needs. At the
beginning of Month 1, 3,200 lbs. of materials were on hand. Purchases of raw materials
for Month 2 would be budgeted to be:
A) 17,600 pounds
B) 23,400 pounds
C) 20,600 pounds
D) 25,000 pounds
Ans:
Solution:
Materials purchased = Ending inventory + Materials used − Beginning inventory
= (20% × 15,000) + 22,000 − (20% × 22,000)
= 3,000 + 22,000 − 4,400 = 20,600

6. Garry Manufacturing Corporation's most recent production budget indicates the following
required production:
October November December
Required production (units) ........... 210,000 175,000 110,000

Each unit of finished product requires 5 pounds of raw materials. The company maintains raw
materials inventory equal to 25% of the next month's expected production needs. How many
pounds of raw material should Garry plan on purchasing for the month of November?
A) 1,006,250
B) 793,750
C) 1,012,500
D) 893,500
Ans: B
Solution:
Materials to be purchased = Ending inventory + Materials to be used − Beginning
inventory
= (25% × 110,000 × 5) + (175,000 × 5) − (25% × 175,000 × 5)
= 137,500 + 875,000 − 218,750 = 793,750

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Chapter 22: Master Budgeting Dr.Mohamed ElDeeb

Question Eight:
Clay Company has projected sales and production in units for the second quarter of the coming
year as follows:
April May June
Sales ...................... 50,000 40,000 60,000
Production.............. 60,000 50,000 50,000

Cash-related production costs are budgeted at $5 per unit produced. Of these production costs,
40% are paid in the month in which they are incurred and the balance in the following month.
Selling and administrative expenses will amount to $100,000 per month. The accounts payable
balance on March 31 totals $190,000, which will be paid in April.
All units are sold on account for $14 each. Cash collections from sales are budgeted at 60% in
the month of sale, 30% in the month following the month of sale, and the remaining 10% in the
second month following the month of sale. Accounts receivable on March 31 totaled $500,000,
will be collected in full in April.
Required:
a. Prepare a schedule for each month showing budgeted cash disbursements for the Clay
Company.
b. Prepare a schedule for each month showing budgeted cash receipts for Clay
Company.

Ans:
a. April May June
Production units .......................... 60,000 50,000 50,000
Cash required per unit ................. × $5 × $5 × $5
Production costs.......................... $300,000 $250,000 $250,000

Cash disbursements:
April May June
Production this month (40%) ...... $120,000 $100,000 $100,000
Production prior month (60%) .... 190,000 180,000 150,000
Selling and administrative ........... 100,000 100,000 100,000
Total disbursements .................... $410,000 $380,000 $350,000

Payments relating to the prior month (March) in April represent the balance of accounts
payable at March 31.

b. April May June

Sales units ................................. 50,000 40,000 60,000
Sales price ................................. × $14 × $14 × $14
Total sales ................................. $700,000 $560,000 $840,000

April May June

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Chapter 22: Master Budgeting Dr.Mohamed ElDeeb

Cash receipts:

March sales ............................... 500,000

April sales ................................. 420,000 210,000
$ 70,000
May sales .................................. 336,000
168,000
June sales .................................. 504,000
Total receipts ............................. $920,000 $546,000 $742,000

Question Nine:
Negam Inc. is working on its cash budget for March. The budgeted beginning cash balance is
$33,000. Budgeted cash receipts total $182,000 and budgeted cash disbursements total $191,000.
The desired ending cash balance is $40,000.
1-The excess (deficiency) of cash available over disbursements for March will be:
A) $215,000
B) $42,000
C) $24,000
D) ($9,000)
Ans: C
Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts − Budgeted cash disbursements = $33,000 + $182,000 − $191,000 = $24,000

2.To attain its desired ending cash balance for March, the company needs to borrow:
A) $40,000
B) $0
C) $16,000
D) $64,000
Ans: C
Excess cash available over disbursements = Beginning cash balance + Budgeted cash
receipts − Budgeted cash disbursements = $33,000 + $182,000 − $191,000 = $24,000
Borrowing = Desired ending cash balance − Excess cash available over disbursements =
$40,000 − $24,000 = $16,000

Question Ten:
Edwards Company has projected sales and production in units for the second quarter of the year
as follows:

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Chapter 22: Master Budgeting Dr.Mohamed ElDeeb

Required:

a. Cash production costs are budgeted at $6 per unit produced. Of these production costs, 40%
are paid in the month in which they are incurred and the balance in the following month. Selling
and administrative expenses (all paid in cash) amount to $60,000 per month. The accounts
payable balance on March 31 totals $96,000, all of which will be paid in April. Prepare a
schedule for each month showing budgeted cash disbursements for Edwards Company.

b. Assume that all units will be sold on account for $15 each. Cash collections from sales are
budgeted at 60% in the month of sale, 30% in the month following the month of sale and the
remaining 10% in the second month following the month of sale. Accounts receivable on March
31 totaled $255,000 will be collected in April on full. Prepare a schedule for each month
showing budgeted cash receipts for Edwards Company.

Solution:

April May June

Acc/Rec March 31 255,000
60% same month 270,000 180,000 255,000
30% 1 month 135,000 90,000
10% 2 months 15,000
Total cash collection 525,000 315,000 360,000