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Chapter 22: 6RQ (page 1228)
Explain the difference between static and flexible budgets.
A static budget is prepared once and does not affect or change the actual volume of output. On the other hand, the Flexible budget changes with the actual output volume.
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What is sensitivity analysis? Why is it important for managers?
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.
Completing a comprehensive budgeting problem鈥攎anufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for \(70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin鈥檚 balance sheet for December31, 2018, follows:
Other data for Gavin Tire Company: a. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)36 each.
c. Desired ending Finished Goods Inventory is 40% of the next quarter鈥檚 sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is \(4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter鈥檚 direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average \)20 per hour. h. Variable manufacturing overhead is \(3 per tire. i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include \)8,000 per quarter for salaries; \(4,800 per quarter for rent; \)1,950 per quarter for insurance; and \(2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)25,000 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 50% in the quarter purchased and 50% 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 \(3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of \)20,000 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 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Gavin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 basedon direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Gavin鈥檚 annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.
Question: Preparing an operating budget鈥攕ales budget; inventory, purchases and COGS budget; and S&A expense budget Burton Office Supply鈥檚 March 31, 2018, balance sheet follows:
The budget committee of Burton Office Supply has assembled the following data: a. Sales in April are expected to be \(200,000. Burton forecasts that monthly sales will increase 2% over April sales in May. June鈥檚 sales will increase by 4% over April sales. July sales will increase 20% over April sales. b. Burton maintains inventory of \)15,000 plus 25% of the cost of goods sold budgeted for the following month. Cost of goods sold equal 50% of sales revenue. c. Monthly salaries amount to \(7,000. Sales commissions equal 5% of sales for that month. d. Other monthly expenses are as follows: 鈥� Rent: \)2,000 鈥� Depreciation: \(200 鈥� Insurance: \)100 鈥� Income tax: $2,200
Requirements
1. Prepare Burton鈥檚 sales budget for April and May 2018. Round all calculations to the nearest dollar.
2. Prepare Burton鈥檚 inventory, purchases, and cost of goods sold budget for April and May.
3. Prepare Burton鈥檚 selling and administrative expense budget for April and May.
Preparing an operating budget鈥攕ales, production, direct materials, direct labor, overhead, COGS, and S&A expense budgets The Irwin Batting Company manufactures wood baseball bats. Irwin鈥檚 two primary products are a youth bat, designed for children and young teens, and an adult bat, designed for high school and college-aged players. Irwin sells the bats to sporting goods stores, and all sales are on account. The youth bat sells for \(35; the adult bat sells for \)50. Irwin鈥檚 highest sales volume is in the first three months of the year as retailers prepare for the spring baseball season. Irwin鈥檚 balance sheet for December 31, 2018, follows:
Other data for Irwin Batting Company for the first quarter of 2019:
a. Budgeted sales are 1,400 youth bats and 3,300 adult bats.
b. Finished Goods Inventory on December 31, 2018, consists of 700 youth bats at \(15 each and 550 adult bats at \)10 each.
c. Desired ending Finished Goods Inventory is 220 youth bats and 300 adult bats; FIFO inventory costing method is used.
d. Direct materials requirements are 40 ounces of wood for youth bats and 70 ounces of wood for adult bats. The cost of wood is \(0.10 per ounce.
e. Raw Materials Inventory on December 31, 2018, consists of 90,000 ounces of wood at \)0.10 per ounce.
f. Desired ending Raw Materials Inventory is 90,000 ounces (indirect materials are insignificant and not considered for budgeting purposes).
g. Each bat requires 0.4 hours of direct labor; direct labor costs average \(26 per hour.
h. Variable manufacturing overhead is \)0.30 per bat.
i. Fixed manufacturing overhead includes \(1,300 per quarter in depreciation and \)14,977 per quarter for other costs, such as insurance and property taxes.
j. Fixed selling and administrative expenses include \(13,000 per quarter for salaries; \)3,500 per quarter for rent; \(1,400 per quarter for insurance; and \)450 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 1% of sales.
Requirements
1. Prepare Irwin鈥檚 sales budget for the first quarter of 2019.
2. Prepare Irwin鈥檚 production budget for the first quarter of 2019.
3. Prepare Irwin鈥檚 direct materials, direct labor budget, and manufacturing overhead budget for the first quarter of 2019. Round the predetermined overhead allocation rate to two decimal places. The overhead allocation base is direct labor hours.
4. Prepare Irwin鈥檚 cost of goods sold budget for the first quarter of 2019.
5. Prepare Irwin鈥檚 selling and administrative expense budget for the first quarter of 2019.
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