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Chapter 22: Q11RQ (page 1228)
What is the formula used to determine the amount of direct materials to be purchased?
The purchasing department uses the amount estimated from the direct materials budget.
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Preparing an operating budget鈥攄irect materials budget
Bell expects to produce 1,800 units in January and 2,155 units in February. The company budgets 3 pounds per unit of direct materials at a cost of $10 per pound. Indirect materials are insignificant and not considered for budgeting purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 4,950 pounds. Bell desires the ending balance in Raw Materials Inventory to be 20% of the next month鈥檚 direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell鈥檚 direct materials budget for January and February.
Preparing an operating budget鈥攕ales budget; inventory, purchases and COGS budget; and S&A expense budget Ballard Office Supply鈥檚 March 31, 2018, balance sheet follows:
The budget committee of Ballard Office Supply has assembled the following data.
a. Sales in April are expected to be \(160,000. Ballard forecasts that monthly sales will increase 2% over April sales in May. June鈥檚 sales will increase by 4% over April sales. July sales will increase 20% over April sales.
b. Ballard maintains inventory of \)7,000 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 \(3,000. Sales commissions equal 5% of sales for that month.
d. Other monthly expenses are as follows: 鈥� Rent: \)3,400 鈥� Depreciation: \(800 鈥� Insurance: \)300 鈥� Income tax: $1,500
Requirements
1. Prepare Ballard鈥檚 sales budget for April and May 2018. Round all calculations to the nearest dollar.
2. Prepare Ballard鈥檚 inventory, purchases, and cost of goods sold budget for April and May.
3. Prepare Ballard鈥檚 selling and administrative expense budget for April and May.
Using sensitivity analysis Caputo Company prepared the following budgeted income statement for the first quarter of 2018:
Caputo Company is considering two options. Option 1 is to increase advertising by \(1,100 per month. Option 2 is to use better-quality materials in the manufacturing process. The better materials will increase the cost of goods sold to 55% but will provide a better product at the same sales price. The marketing manager projects either option will result in sales increases of 25% per month rather than 20%.
Requirements
1. Prepare budgeted income statements for both options, assuming both options begin in January and January sales remain \)10,000. Round all calculations to the nearest dollar.
2. Which option should Caputo choose? Explain your reasoning.
Preparing a financial budget鈥攃ash budget, sensitivity analysis
Leichter Auto Parts, a family-owned auto parts store, began January with \(10,500 cash. Management forecasts that collections from credit customers will be \)11,000 in January and \(15,200 in February. The store is scheduled to receive \)8,500 cash on a business note receivable in January. Projected cash payments include inventory purchases (\(15,600 in January and \)14,800 in February) and selling and administrative expenses (\(2,900 each month).
Leichter Auto Part'sbank requires a \)10,000 minimum balance in the store鈥檚 checking account. At the end of any month when the account balance falls below \(10,000, the bank automatically extends credit to the store in multiples of \)1,000. Leichter Auto Parts borrows as little as possible and pays back loans in quarterly installments of \(2,000, plus 4% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.
Requirements
1. Prepare Leichter Auto Part'scash budget for January and February.
2. How much cash will Leichter Auto Parts borrow in February if collections from customers that month total \)14,200 instead of $15,200?
How does the master budget for a merchandising company differ from a manufacturing company?
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