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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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Why is the sales budget considered the cornerstone of the master budget?
Question: Completing a comprehensive budgeting problem鈥攎anufacturing company
The Gerard Tire Company manufactures racing tires for bicycles. Gerard sells tires for \(90 each. Gerard is planning for the next year by developing a master budget by quarters. Gerard鈥檚 balance sheet for December 31, 2018, follows:
Other data for Gerard Tire Company:
a. Budgeted sales are 1,500 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account.
b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)33 each.
c. Desired ending Finished Goods Inventory is 30% of the next quarter鈥檚 sales; first quarter sales for 2020 are expected to be 2,300 tires. FIFO inventory costing method is used.
d. Raw Materials Inventory on December 31, 2018, consists of 600 pounds of rubber compound used to manufature the tires.
e. Direct materials requirements are 2 pounds of a rubber compound per tire. The cost of the compound is \(8.50 per pound.
f. Desired ending Raw Materials Inventory is 40% of the next quarter鈥檚 direct materials needed for production; desired ending inventory for December 31, 2019 is 600 pounds; indirect materials are insignificant and not considered for budgeting purposes.
g. Each tire requires 0.4 hours of direct labor; direct labor costs average \)12 per hour.
h. Variable manufacturing overhead is \(4 per tire.
i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(16,770 per quarter for other costs, such as utilities, insurance, and property taxes.
j. Fixed selling and administrative expenses include \)12,500 per quarter for salaries; \(3,000 per quarter for rent; \)450 per quarter for insurance; and \(2,000 per quarter for depreciation.
k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)15,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes.
n. Direct materials purchases are paid 60% in the quarter purchased and 40% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
p. Income tax expense is projected at \(1,500 per quarter and is paid in the quarter incurred.
q. Gerard desires to maintain a minimum cash balance of \)55,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Gerard鈥檚 operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Gerard鈥檚 annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.
Connor Company began operations on January 1 and has projected the following selling and administrative expenses:
Rent Expense $ 1,000 per month, paid as incurred
Utilities Expense 500 per month, paid in month after incurred
Depreciation Expense 300 per month
Insurance Expense 100 per month, 6 months prepaid on January 1
Determine the cash payments for selling and administrative expenses for the first three months of operations.
Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, directing, controlling, coordinating and communicating, and benchmarking.
1. Managers are required to think about future business activities.
2. Managers use feedback to identify corrective action.
3. Managers use results to evaluate employees鈥� performance.
4. Managers work with managers in other divisions.
Understanding the components of the master budgetThe following are some of the components included in the master budget of amerchandising company.
a. Budgeted balance sheet
b. Sales budget
c. Capital expenditures budget
d. Budgeted income statement
e. Cash budget
f. Inventory, purchases, and cost of goods sold budget
g. Selling and administrative expense budget
List the items of the master budget in order of preparation.
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