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Chapter 22: 5RQ (page 1228)
Explain the difference between strategic and operational budgets
The strategic budget is for three to ten years, whereas the span of the operational budget is less than or equal to one year.
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Budgeting types Consider the following budgets and budget types.
Cash Cost of Goods Sold
Flexible Master
Operational Sales
Static Strategic
Which budget or budget type should be used to meet the following needs?
a. Upper management is planning for the next five years.
b. A store manager wants to plan for different levels of sales.
c. The accountant wants to determine if the company will have sufficient funds to pay expenses.
d. The CEO wants to make companywide plans for the next year.
Explain the difference between static and flexible budgets.
How is the predetermined overhead allocation rate determined?
Preparing a financial budget鈥攕chedule of cash receipts and schedule of cash payments
Agua Cool is a distributor of bottled water. For each of the items, compute the amount of cash receipts or payments Agua Cool will budget for September. The solution to one item may depend on the answer to an earlier item.
a. Management expects to sell equipment that cost \(14,000 at a gain of \)7,000. Accumulated depreciation on this equipment is \(5,000.
b. Management expects to sell 7,100 cases of water in August and 9,000 cases in September. Each case sells for \)14. Cash sales average 20% of total sales, and credit sales make up the rest. Three-fourths of credit sales are collected in the month of the sale, with the balance collected the following month.
c. The company pays rent and property taxes of $4,500 each month. Commissions and other selling expenses average 30% of sales. Agua Cool pays one-half of commissions and other selling expenses in the month incurred, with the balance paid the following month.
Using sensitivity analysis in budgeting
Refer to the Berry鈥檚 schedule of cash receipts from customers that you prepared in Short Exercise S22-9. Now assume that Berry鈥檚 sales are collected as follows:
60% in the month of the sale
20% in the month after the sale
18% two months after the sale
2% never collected
Prepare a revised schedule of cash receipts for January and February.
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