Lecture 11

Budgeting
Group 9 Lew Kar Cheng Chow Wan Xuan Natelie Lim Xiu Wei Aaron Ho Kiu Hieng

Definition of Budgeting
A comprehensive financial plan that specifies how resources will be acquired and used during a specified period of time.

Management Process
Planning Controlling Decision Making

The Sales Budget

Forecasts of customer needs from marketing personnel Analysis of economic and market conditions Estimated Unit Sales Sales Budget Estimated Unit Price

Computation Process

Sales Budget
Budgeted Unit Sales

Production Budget
Units to be produced

DM Budget DL Budget
Material Purchases Direct Labor Cost

MOH Budget
MOH

S&A Budget

Cash Receipts Budget

Cash Receipts

S&A expense

Cash Budget

Budgeted Income Statement

Budgeted Balance Sheet

* Do not include non-cash outflow(ex: depreciation)

Question 1

Question 1
Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company's products. The company is now planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements

Question 1
a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units of Supermix plus 20% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 10,000 units.

EI = 3000 units + 20% of next monthss sales

Question 1
b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month's production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 54,000 cc of solvent H300.

EI = (next months production needs for raw materials)

Question 1
c. The company maintains no work in process inventories. A sales budget for Supermix for the last six months of the year follows.
Month
July August September October November December

Budgeted Sales in Units

35,000 40,000 50,000 30,000 20,000 10,000

1-1. Prepare a production budget for Supermix for the months July, August, September, and October.
COGS = COGM + Beginning Finished Goods Inventory Ending Finished Goods Inventory
Goods Sold (Unit) = Goods to be manufactured (Unit) + Beginning Finished Goods Inventory Ending Finished Goods Inventory

Goods to be manufactured (Unit) = Goods Sold (Unit) - Beginning Finished Goods Inventory + Ending Finished Goods Inventory

Question 1-1
Jul Budgeted Sales(Unit) Desired EI(Units) Total Units needed Less: BI(Units) Units to produce 35,000 11,000 46,000 10,000 36,000 Aug 40,000 13,000 53,000 11,000 42,000 Sept 50,000 9,000 59,000 13,000 46,000 Oct 30,000 7,000 37,000 9,000 28,000 Nov 20,000 5,000 25,000 7,000 18,000 EI = 3000 + 20% of next monthss sales

The Ending Inventory on June 30 = 10,000 units Budgeted Sales in December = 10,000 units

Question 1-2
Examine the production budget that you prepared in (1) above. Why will the company produce more units than it sells in July and August, and fewer units than it sells in September and October?

WHY???

In Jul and Aug, Units to produce > Budgeted Sales

In Sept and October, Units to produce < Budgeted Sales

Question 1-2

EI > BI

UTP > BS(Unit) UTP < BS(Unit)

EI < BI

1-3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.
Beginning Ending Materials Materials + Purchases - Materials = Used in Inventory Inventory Production

Materials Ending Purchases = Required in + Materials Production Inventory

Beginning Materials Inventory

Question 1-3
Jul Units to produce cc per unit Material needs(cc) Desired EI(cc) Total Material needs(cc) Less: BI(cc) Material purchases(cc) 36,000 3 108,000 63,000 171,000 54,000 117,000 Aug 42,000 3 126,000 69,000 195,000 63,000 132,000 Sept 46,000 3 138,000 42,000 180,000 69,000 111,000 Oct 28,000 3 84,000

EI = (next months production needs for raw materials)

For the quarter year, the quantity of solvent H300 to be purchased = 117,000 + 132,000 + 111,000 = 360,000 cc

Question 2

Qn 2

Cash Budget
Divided into four sections
Cash receipts which lists all cash inflows except financing Cash payments except repayments of principal and interest Cash excess/deficiency that determines whether there is a need to borrow or repay Financing section which details borrowings and repayments projected to take place

a) Compute budgeted cash receipts for the quarter

Budgeted cash receipts for quarter = receipts from previous quarter + receipts from current quarter

250,000 + (0.70 x 700,000) = $740,000

Previous quarter, found in accounts receivable

Only 70 percent is collected

b) Compute payments of current payables budgeted for the quarter

Beginning balance + Amount financed by current payables Ending balance of current payables

90,000

Current Payables

+
-

To be financed 442,000 with current payables Ending (90,000 + 15,000) balance is $15,000 more $ 427,000 than beginning balance

c) Compute cash prepayments budgeted for the quarter

$ 18,000. Since ending balance equals to beginning balance which is $18,000.

d) Prepare cash budget for the quarter

How cash budget looks like:

Beginning cash balance Cash receipts Total cash receipts Cash payments: Payments of current payables Tax liability payment

$10,000 740,000 $750,000

$427,000 50,000

Prepayments
Total cash payments Balance before financing Borrowing Debt service payment Ending cash balance

18,000
$495,000 $255,000 0 260,000 ($5,000)

e) Estimate short term borrowing requirements for the quarter

$ 15,000 as the ending cash balance is ($5,000) and to meet the minimum cash balance of $10,000 : $5,000 + $10,000 = $15,000

f) Discuss problems Peter might encounter in obtaining short term financing

Looking at Peter Corporations debt ratio which is 0.9 is close to 1 indicates that banks may not be so willing to offer short term finance as the company is nearing to the point where debts are more than assets. Thus the interest given to Peter could be high (cost of borrowing high) which is not favorable for the company.

Static vs. Flexible Budgets

Static Budgets prepared for a fixed activity level.

Flexible Budgets prepared for multiple activity levels

Static Budgeting
Original Budget Units of Activity Variable costs Indirect labor Indirect material Power Fixed Costs Depreciation Insurance $ 10,000 40,000 30,000 5,000 $ Actual Results 8,000 34,000 25,500 3,800 Variances 2000 $6,000 F 4,500 F 1,200 F

12,000 2,000 89,000

12,000 2,000 77,300

0 0 $11,700 F

Total overhead costs $

Static Budgeting
Original Budget Units of Activity 10,000

Qn: Since cost variances are favorable, has the company done a Actual Results good job in Variances controlling costs?

8,000

2000

Variable costs Indirect labor $ 40,000 $ Indirect material 30,000 costs Favorable variance: actual Power 5,000 less than budgeted costs. Fixed Costs Depreciation Insurance

34,000 25,500 3,800

$6,000 F 4,500 F 1,200 F

12,000 2,000 89,000

12,000 2,000 77,300

0 0 $11,700 F

Total overhead costs $

1)Note that variable costs will vary with the volume of production. 2)Since the actual volume of production is lower than the budgeted volume of production, then we can conclude that the actual variable costs is lower than the budgeted variable costs.

3)Therefore, it is difficult to ascertain that the favorable variance cost is due to lower activity of production or due to good cost control.
4)Hence, we have to flex the budget to the actual level of activity.

Limitation of Static Budgets

Performance evaluation is difficult when actual activity differs from activity originally budgeted. Comparing apples with oranges.

Flexible Budgeting
May be prepared for any activity level in the relevant range. Show expenses that should have occurred at the actual level of activity. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation.

Fixed costs
Constant at total unit basis Amount does not vary with changes in activity

Variable costs
Constant at per unit basis Amount vary with changes in activity

Flexible budgeting
Cost rate=Total Flexible budget Variable original cost=variable Formula Fixed Actual budget variable cost/ Flexible variable x flexible budget original budget unit of Budget rate Per Hour Costs Results Variances units of activity activity 8,000 8,000 0
Fixed costs are expressed a total $ 34,000 $as 2,000 U amount that doesU 25,500 1,500 not change within 3,800 200 F the relevant range of $ 63,300activity. $ 3,300 U

Units of Activity

Variable costs Indirect labor $ Indirect material Power Total variable costs $ Fixed Costs Depreciation Insurance Total fixed costs Total overhead costs

4.00 3.00 0.50 7.50

$ 32,000 24,000 4,000 $ 60,000 $12,000 $ 12,000 2,000 2,000 $ 14,000 $ 74,000

$ 12,000 2,000 $ 14,000 $ 77,300

0 0 0 $ 3,300 U

Flexible budgeting
Cost Total Formula Fixed Per Hour Costs Units of Activity Flexible Budget 8,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,000 $ 14,000 $ 77,300 Variances 0 $ 2,000 U 1,500 U 200 F $ 3,300 U 0 0 0 $ 3,300 U

Variable costs Now, indirect material Indirect labor $ labor 4.00 and indirect $ 32,000 have unfavorable variances because actual Indirect material 3.00 24,000 costs are more than the flexible budget Power 0.50 4,000 costs. Total variable costs $ 7.50 $ 60,000 Fixed Costs Depreciation $12,000 $ 12,000 Insurance 2,000 2,000 Total fixed costs $ 14,000 Total overhead costs $ 74,000

Question 3

Tutorial Qn 3
A few years ago, Eastern Digital Corporation implemented a systematic budgeting process for profit planning and control purposes. While the majority of departmental managers are happy with the new process, the factory manager has expressed his unhappiness with the information being generated by the system. A typical departmental cost report for a recent period follows:

Machine hours Variable costs: Supplies Scrap Indirect materials Fixed costs: Wages and salaries Equipment depreciation Total Cost

Planning Budget 40,000

Assembly Department Cost Report for the month ended 31 March, 2012 Actual Results 35,000

Variance

$ $ $

32,000 $ 20,000 $ 56,000 $

29,700 $ 19,500 $ 51,800 $

2,300 F 500 F 4,200 F

$ 80,000 $ $ 60,000 $ $ 248,000 $

79,200 $ 60,000 240,200 $

800 F -7,800 F

After receiving a copy of this cost report, the supervisor of the Assembly Department said, These reports are great. Its really good to see how well things are going in my department. I cant understand why those people up there complain so much about the reports. For the last several years, the companys sales and marketing department has failed to meet the sales targets stated in the companys monthly budgets.

(a) The companys CEO is uneasy about the cost reports and would like you to evaluate their usefulness to the company. The reports as prepared are of little use to the company. This is because the company is using a static budget to compare budgeted performance at one level of activity to actual performance at another level of activity. Although the reports do a good job of showing whether or not the budgeted level of activity was attained, they do not tell whether costs were controlled for the activity level that was actually worked during the period.

(b)What changes, if any, should be made in the reports to give better insight into how well departmental supervisors are controlling costs?
The company should use a flexible budget approach to evaluate control over costs. Under the flexible budget approach, the actual costs incurred in working 35,000 machine hours should be compared to budgeted costs at that activity level.

(c) Prepare a new performance report, incorporating any changes you suggested in question (b) above.
Variable rate= original budget variable cost/ Cost Formula Total original budget unit of per hour fixed costs activity
Flexible Budget 35,000 Assembly Department Cost Report for the month ended 31 March, 2012 Actual Variance Results 35,000 0

Machine hours Variable costs: Supplies Scrap Indirect materials Total variable costs

$0.80 $0.50 $1.40 $2.70

$ $ $ $

28,000 17,500 49,000 94,500

$ $ $ $

29,700 19,500 51,800 101,000

$ $ $ $

1,700 2,000 2,800 6,500

U U U U

Fixed costs: Wages and salaries Equipment depreciation Total fixed costs Total overhead costs

$ 79,200 $ 79,200 $ $ 60,000 $ 60,000 $ $ 139,200 $ $233,700 $240,200

79,200 60,000 139,200

0 0 0 $6,500 U

Variable rate= original budget variable cost/ original budget unit of activity

Variable rate for supplies= $32,000/40,000 = $0.8

Variable rate for scrap= $20,000/40,000=$0.5

Variable rate for indirect materials= $56,000/40,000= $1.4

Cost Formula Total per hour fixed costs Machine hours Variable costs: Supplies Scrap Indirect materials Total variable costs Fixed costs: Wages and salaries Equipment depreciation Total fixed costs Total overhead costs

$0.80 $0.50 $1.40 $2.70

Flexible budget variable cost=variable rate x flexible budget $ 28,000 $ $ of17,500 units activity$
$ $ 49,000 $ 94,500 $

Flexible Budget 35,000

Assembly Department Cost Report for the month ended 31 March, 2012 Actual Variance Results 35,000 0

29,700 19,500 51,800 101,000

$ $ $ $

1,700 2,000 2,800 6,500

U U U U

$ 79,200 $ 79,200 $ $ 60,000 $ 60,000 $ $ 139,200 $ $233,700 $240,200

79,200 60,000 139,200

0 0 0 $6,500 U

Tutors Comments: Note that for wages and salaries, the Budgeted Cost is $80,000, so there is a 800 Favourable variance. Final answer is $5,700 U

Flexible budget variable cost=variable rate x flexible budget units of activity

Flexible budget:
Variable costs: Supplies ($0.8 x 35,000=$28,000)

Scrap ($0.5 x 35,000=$17,500)

Indirect materials ($1.4 x 35,000=$$49,000)

Cost Formula Total per hour fixed costs Machine hours Variable costs: Supplies Scrap Indirect materials Total variable costs Fixed costs: Wages and salaries Equipment depreciation Total fixed costs Total overhead costs

Flexible Budget 35,000

Assembly Department Cost Report for the month ended 31 March, 2012 Actual Variance Results 35,000 0

$0.80 $0.50 $1.40 $2.70

Fixed costs are $ 28,000 $ expressed as a total29,700 amount that does $ 17,500 $ not change within the 19,500 $ 49,000 $ range of activity. 51,800 relevant $ 94,500 $ 101,000
$ 79,200 $ 79,200 $ $ 60,000 $ 60,000 $ $ 139,200 $ $233,700 $240,200 79,200 60,000 139,200

$ $ $ $

1,700 2,000 2,800 6,500

U U U U

0 0 0 $6,500 U

(d) How well were costs controlled in the Assembly Department in March?

Supplies, scrap and indirect materials have unfavorable variances as actual costs are more than the flexible budget costs.
The unfavorable cost variance indicates that there is poor cost control in the Assembly Department in March.

Question 4
(Financial Accounting)

Question 1
An accountant forgot to record four adjustments during 2010.
Which one of the following omissions of adjustments will

overstate assets?

Question 1
(A) Unearned revenue is not reduced for the portion that has been earned. (B) Interest on fixed deposits has not yet been recorded. (C) Office supplies are not reduced for the portion that has been used. (D) Income taxes owed but not yet paid are ignored.

Question 1
(A) Unearned revenue is not reduced for the portion that has been earned. Debit. Unearned Revenue
Liabilities

Credit. Sales Revenue

Revenues

- Overstates Liabilities - Understates Revenue Understates Net Income Understates Stockholders Equity

Question 1
(B) Interest on fixed deposits has not yet been recorded.
Assets

Debit. Cash/Interest Receivables

Credit. Interest Received

Revenues

- Understates Assets - Understates Revenue Understates Net Income Understates Stockholders Equity

Question 1
(C) Office supplies are not reduced for the portion that has been used.
Expenses

Debit. Office Supplies Expense

Credit. Office Supplies

Assets

- Overstates Assets - Understates Expenses Overstates Net Income Overstates Stockholders Equity

Question 1
(D) Income taxes owed but not yet paid are ignored.
Expenses

Debit. Income Tax Expense

Credit. Income Tax Payable

Liabilities

- Understates Liabilities - Understates Expenses Overstates Net Income Overstates Stockholders Equity

Question 1
An accountant forgot to record four adjustments during 2010. Which one of the following omissions of adjustments will overstate assets?

Ans: (C) Office supplies are not reduced for the portion that has been used.

Question 2
In October, an inexperienced book-keeper capitalized the

cost of replacing the car battery

of a 5-year old companys car to an

asset account.
This entry

Question 2
(A) overstates the total book value of plant assets on the Octobers balance sheet, but has no effect on the amount of net income reported during October. overstates the total book value of plant assets on the Octobers balance sheet and understates amount of net income reported during October. overstates the total book value of plant assets reported on the Octobers balance sheet and the amount of net income reported during October. has no effect on the book value of plant assets on the Octobers balance sheet or the amount of net income reported during October.

(B) (C) (D)

Question 2
How does this affect

Total book value of plant assets

and

Net Income?

Question 2
Cost of replacing the car battery

Expenses

- Overstates Assets (Book value of plant assets) - Understates Expenses Overstates Net Income

Question 2
In October, an inexperienced book-keeper capitalized the cost of replacing the car battery of a 5-year old companys car to an asset account. This entry

Ans: (C) overstates the total book value of plant assets reported on the Octobers balance sheet and the amount of net income reported during October.

Question 3
Unison Company reported net credit sales of $2,800,000 and cost of goods sold of $1,800,000 for 2010. Its beginning balance of accounts receivable was $320,000. During 2010, the accounts receivable balance decreased by $60,000. What is Unisons accounts receivable turnover rate for 2010 (rounded to two decimal places)?

Question 3
Net Credit Sales = $2,800,000 COGS = $1,800,000 Beginning Accounts Receivable = $320,000 Ending Accounts Receivable = $320,000 - $60,000 = $260,000

Question 3
Accounts Receivable Turnover Rate =

Question 3
Average Accounts Receivable
=
+ $,+$,

= $290,000

Question 3
Accounts Receivable Turnover Rate

$,, = $,
= 9.66

Question 3
Unison Company reported net credit sales of $2,800,000 and cost of goods sold of $1,800,000 for 2010. Its beginning balance of accounts receivable was $320,000. During 2010, the accounts receivable balance decreased by $60,000. What is Unisons accounts receivable turnover rate for 2010 (rounded to two decimal places)?

Ans: (B) 9.66

Question 4
Art & Co. sold goods to Party House on 28 December 2009, with shipping terms of

FOB destination point.

Party House received the goods on 3 January 2010. Which of the following is true?

Question 4
Recall:

Question 4
28 December 2009

Art & Co.

Party House

3 January 2010

Question 4
(A) Art & Co. should record the sales revenue on 28 December 2009.

28 December 2009

Art & Co.

Party House

3 January 2010

Question 4
(B) Party House should pay the transportation costs.

28 December 2009

Art & Co.

Party House

3 January 2010

Question 4
(C) Party House should include the goods in its inventory at 31 December 2009.

28 December 2009

Art & Co.

Party House

3 January 2010

Question 4
(D) Party House should record a liability for the purchase on 3 January 2010.
28 December 2009

Art & Co.

Party House

3 January 2010

Question 4 (4)
Art & Co. sold goods to Party House on 28 December 2009, with shipping terms of FOB destination point. Party House received the goods on 3 January 2010. Which of the following is true?

Ans: (D) Party House should record a liability for the purchase on 3 January 2010.

Question 5
For the most recent year, DC Banks current ratio was significantly lower than that for the industry. What is the best possible explanation for this situation?

Question 5
= Lower: - Current Assets - Current Liabilities

Question 5
(A) The other companies in the industry were profitable. Net Income? DC Banks liquidity has improved.

(B)

Question 5
(C) DC Bank has less equity than the rest of the industry.

(D) DC Banks liquidity is worse than the rest of the industry.

Question 5
For the most recent year, DC Banks current ratio was significantly lower than that for the industry. What is the best possible explanation for this situation?

Ans: (D) DC Banks liquidity is worse than the rest of the industry.

Question 6
Logistics Transport purchased a truck on 1 January 2008 for $40,000. The truck had an estimated life of 5 years and an estimated residual value of $5,000. Logistics used the straight-line method to depreciate the asset. On 1 July 2010, the truck was sold for $7,000 cash. The journal entry to record the sale of the truck in 2010

Question 4 (6)
= $, $, =
= $, /

Question 6
Period 1 Jan 31 Dec, 2008 1 Jan 31 Dec, 2009 1 Jan 31 June, 2010 Total Depreciation $ 7,000 7,000 3,500 $17,500

Question 6
Cost - Accumulated Depreciation Book Value - Cash Received Loss on Disposal $ 40,000 17,500 22,500 7,000 $ 15,500

Question 6
Account Titles Cash Loss on Disposal Accumulated Depreciation: Truck Assets: Truck Debit Credit $ 7,000 15,500 17,500 $40,000

Question 6
Change in Total Assets: = $7,000 + $17,500 - $40,000 = ($15,500) Total Assets decreased Total Expenses increased by $15,500 Net Income decreased Total Stockholders Equity decreased

Question 6
Logistics Transport purchased a truck on 1 January 2008 for $40,000. The truck had an estimated life of 5 years and an estimated residual value of $5,000. Logistics used the straightline method to depreciate the asset. On 1 July 2010, the truck was sold for $7,000 cash. The journal entry to record the sale of the truck in 2010

Ans: (A) decreases stockholders equity.

Question 7
Energy Consultants had total assets of $750,000 and total shareholders equity of $250,000 at the beginning of the year. During the year, total assets increased by $550,000 and total liabilities increased by $200,000. The company also paid $200,000 in dividends. No other transactions occurred except revenues and expenses. How much is net income for the year?

Question 7
Accounting Equation: Assets = Liabilities + Shareholders Equity

A = L + OE
Capital + Net Income - Dividends

Question 7
Beginning: Assets = $750,000 Shareholders Equity = $250,000 Liabilities = $750,000 $250,000 = $500,000 Changes: Assets + $550,000 Liabilities + $200,000 Paid dividend $200,000

Question 7
Ending: Assets = $750,000 + $550,00 = $1,300,000 Liabilities = $500,000 + $200,000 = $700,000 Shareholders Equity = $1,300,000 - $700,000 = $600,000

Question 7
OE = Capital Stock + Net Income Dividends
Since Capital Stock is a constant, OE = Net Income Dividends paid OE = $600,000 - $250,000 = $350,000 Dividends paid= $200,000

Question 7
Net Income = OE + Dividends paid = $350,000 + $200,000 = $550,000

Question 7
Energy Consultants had total assets of $750,000 and total shareholders equity of $250,000 at the beginning of the year. During the year, total assets increased by $550,000 and total liabilities increased by $200,000. The company also paid $200,000 in dividends. No other transactions occurred except revenues and expenses. How much is net income for the year?

Ans: (D) $550,000

Question 8
Fong Manufacturing has current assets (mainly cash) of $100,000, total assets of $250,000, current liabilities of $20,000, and long-term liabilities of $50,000. Fong wants to buy new plant assets. How much of its existing cash can Fong use to acquire plant assets without allowing its current ratio to decline below 2.0 to 1?

Question 8
Current Assets = $100,000 Current Liabilities = $20,000 =

Question 8
When cash is used, current ratio decreases. Current Ratio 2 $, $, Cash can to be used $60,000

Question 8
Fong Manufacturing has current assets (mainly cash) of $100,000, total assets of $250,000, current liabilities of $20,000, and long-term liabilities of $50,000. Fong wants to buy new plant assets. How much of its existing cash can Fong use to acquire plant assets without allowing its current ratio to decline below 2.0 to 1?

Ans: (D) $60,000

Question 9
H & Co. has 5,000 3% cumulative preference shares of $5 each, outstanding and 25,000 ordinary shares of $2 each, outstanding. No dividends have been paid for the past two years. If H & Co. wishes to distribute $2 per share to the ordinary shareholders, what is the total amount of dividends to be declared in the current year?

Question 9
Outstanding shares:
Shares 3% Cumulative Preference Shares Ordinary Shares Units 5,000 25,000 Price per unit $5 $2 Total Price $25,000 $50,000 Dividends per year $750 -

Question 9
Dividends paid:
Shares 3% Cumulative Preference Shares Ordinary Shares 1st Year $750 2nd Year $750 3rd Year $750

$2 x 25,000 = $50,000

Total Dividends paid = 3 x $750 + $50,000 = $52,250

Question 9
H & Co. has 5,000 3% cumulative preference shares of $5 each, outstanding and 25,000 ordinary shares of $2 each, outstanding. No dividends have been paid for the past two years. If H & Co. wishes to distribute $2 per share to the ordinary shareholders, what is the total amount of dividends to be declared in the current year?

Ans: (B) $52,250

Question 10
Which of the following will not cause a change in the owners equity of a business? (A) (B) (C) (D) Withdrawal of cash by the owner. Profit from sale of properties. Settlement of a note payable. Losses from discontinued operations.

Question 10
(A) Withdrawal of cash by the owner.
Owners Equity

Debit. Capital Stock

Credit. Cash
Assets

- Owners Equity decreased - Assets decreased

Question 10
(B) Profit from sale of properties. Profit from sale of properties
Revenues

- Revenues increased Net Income increased Owners Equity increased

Question 10
(C) Settlement of a note payable.
Liabilities

Debit. Note Payable

Credit. Cash
Assets

- Liabilities decreased - Assets decreased

Question 10
(D) Losses from discontinued operations. Losses from discontinued operations
Expenses

- Expenses increased Net Income decreased Owners Equity decreased

Question 10
Which of the following will not cause a change in the owners equity of a business? Ans: (C) Settlement of a note payable.

Review Questions

1. You are responsible for preparing the following budgets:

A Cash Budget B Production Budget C S&A Expense Budget D Sales Budget E Cash Receipts Budget F Budgeted Balance Sheet In which order should you prepare these budgets? (a) D, B, A, C, E, F (b) A, C, B, E, D, F (c) D, B, C, E, A, F (d) D, C, B, A, F, E

2. With a 1st May inventory of 12,000 units, how many units must be produced to provide an ending inventory of 8,000 units if the expected March sales to be 36,000 units? (a) 56,000 (b) 32,000 (c) 48,000 (d) 20,000 Beginning Inventory = 12,000 Ending Inventory = 8,000 Budgeted unit of sales = 36,000 To be produced = Budgeted sales + Ending inventory Beginning inventory

3. Budgeted Sales:
Periods Budgeted Unit Sales Sept 12,000 Oct 13,000 Nov 15,000 Dec 10,000

The desired ending inventory is 10% of the budgeted unit sales of the following month. How many units will be produced in October? (a) 11,900 (b) 13,100 (c) 13,200 (d) 12,100 Beginning Inventory = 13,000 x 10% = 1,300 Ending Inventory = 15,000 x 10% = 1,500 To be produced = Budgeted sales + Ending inventory Beginning inventory

4. Amounts budgeted for 10,000 units of planned production:

Direct materials Direct labor Variable manufacturing overhead costs Fixed manufacturing overhead costs $ 80,000 $ 120,000 $ 100,000 $ 50,000

12,000 units were produced, which is a level below full capacity. The direct materials cost for the period were $96,850. How much was the actual cost of direct materials over or under budget? Direct materials per unit = $80,000/10,000 (a) $850 over budget = $8 (b) $850 under budget (c) $16,850 over budget Budgeted DM = $8 x 12,000 (d) $16,850 under budget = $96,000

Thank You