DRILLS

COMPREHENSIVE BUDGETING

EXERCISES
1. Purchase Budget – Merchandising Business

Gerdie Company has the following information:

Month Budgeted Sales

March $50,000
April 53,000
May 51,000
June 54,500
July 52,500

In addition, the gross profit rate is 40% and the desired inventory level is 30% of next
month's cost of sales.

Required:
Prepare a purchases budget for April through June.

2. Production & Raw Materials Purchase Budget

Lubriderm Corporation has the following budgeted sales for the next six-month period:
June 90,000 August 210,000 October 180,000
July 120,000 September 150,000 November 120,000

There were 30,000 units of finished goods in inventory at the beginning of June. Plans
are to have an inventory of finished products that equal 20% of the unit sales for the next
month.
Five pounds of materials are required for each unit produced. Each pound of material
costs $8. Inventory levels for materials are equal to 30% of the needs for the next month.
Materials inventory on June 1 was 15,000 pounds.

Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total
purchases in both pounds and dollars for each month.
3. Production and related schedules

The Jansen Company manufactures and sells two products: Plastic Boxes and Trays.
Estimated needs for a unit of each are:

Boxes Trays
Material A 2 pounds 1 pound
Material B 4 pounds 4 pounds
Direct Labor 2 hours 2 hours

Overhead is applied on the basis of $2 per direct labor hour. The estimated sales by
product for 2000 are:

Boxes Trays
Sales 42,000 24,000

The beginning inventories are expected to be as follows:

Material A 4,000 pounds

Material B 6,000 pounds
Boxes 1,000 units
Trays 500 units

The desired inventories are one month’s production requirements, assuming constant
sales throughout the year.

Prepare the following:

A. Production Schedule
B. Purchase budget in units
C. Direct Labor budget in hours
D. Overhead to be charged to production
4. Cash Receipts & Cash Disbursements

The following are forecasts of sales and

purchases for a company.
Sales Purchases
April $80,000 $30,000

May 90,000 40,000

June 85,000 30,000

All sales are on credit. Records show that 70 percent of the customers pay the month of
the sale, 20 percent pay the month after the sale, and the remaining 10 percent pay the
second month after the sale. Purchases are all paid the following month at a 2 percent
discount. Cash disbursements for operating expenses in June were $5,000.

REQUIRED:
Prepare a schedule of cash receipts and disbursements for June.

5. Increase in Cash

Jackson Fabrics has prepared a forecast for May 2000. Some of the projected information
follows:

Income after tax $260,000

Accrued Income Tax Expense 62,000
Increase in Accounts Receivable for month 41,000
Decrease in Accounts Payable for month 18,300
Depreciation Expense 71,200
Estimated Bad Debts Expense 13,100
Dividends declared 20,000

Using the above information, what is the company’s projected increase in cash for May
2000?
6. Cash Budget & Financing Gap
Bagel Factory Inc. prepared cash estimates for the next four months. The following
estimates were developed for certain items:
Item March April May June
Cash sales $10,000 $6,000 $8,000 $11,000
Credit sales 5,000 2,000 6,000 9,000
Payroll 2,000 1,500 2,500 3,000
Purchases 3,000 2,600 2,800 4,000
Other expenses 2,500 2,400 2,600 2,800

In February, credit sales totaled $9,000, and purchases totaled $5,000. January credit
sales were $12,000. Accounts receivable collections amount to 30% in the month after
the sale and 60% in the second month after the sale; 10% of the receivables are never
collected. Payroll and other expenses are paid in the month incurred. Seventy-five percent
of the purchases are paid in the month incurred, and the remainder are paid in the
following month. A $15,000 tax payment is due on June 15. The cash balance was $5,000
on March 1. The company wants a minimum cash balance of $5,000 per month.

Required:
(1) Prepare a cash budget for the four-month period, March through June.
(2) List the amount of funds available for investing or required for borrowing in each
month.

7. Cash budget

The January 31, 1999, balance sheet of Sara's Plaques follows:

Assets
Cash $12,000
Accounts Receivable (Net of Allowance for Uncollectibles of $1,440) 34,560
Inventory 52,400
Plant Assets (Net of Accumulated Depreciation of $60,000) 36,000
Total Assets $134,960

Liabilities and Stockholders' Equity

Accounts Payable $70,200
Common Stock 90,000
Retained Earnings (Deficit) (25,240) 64,960
Total Liabilities & Stockholders’ Equity $134,960

Additional information about the company includes the following:

 Expected sales for February and March are $120,000 and $130,000, respectively.
 The collection pattern from the month of sale forward is 50%, 48%, and 2%
uncollectible.
 Cost of goods sold is 75% of sales.
 Purchases each month are 55% of the current month’s sales and 45% of the next
month’s projected sales. All purchases are paid for in full in the month following
purchase.
 Other cash expenses each month are $21,500. The only noncash expense each
month is $4,000 of depreciation.

Required:
a. What are budgeted cash collections for February 2000?
b. What will be the inventory balance at February 29, 2000?
c. What will be the projected balance in Retained Earnings at February 29, 2000?
d. If the company wishes to maintain a minimum cash balance of $8,000, how much will
be available for investment or need to be borrowed at the end of February 2000?

8. Budgeted Cost of Goods Manufactured And Sold Statement

WKRP, Inc., with $50,000,000 of par stock outstanding, plans to budget earnings of 10%,
before income tax, on this stock. The Marketing Department budgets sales at
$40,000,000. The budget director approves the sales budget and expenses as follows:

Marketing 20% of sales

Administrative 10% of sales

Labor is expected to be 50% of the total manufacturing cost; materials issued for the
budgeted production will cost $12,500,000; therefore, any savings in manufacturing cost
will have to be in factory overhead. Inventories are to be as follows:

Beginning of Year End of Year

Finished goods $8,000,000 $10,000,000
Work in process 1,000,000 3,000,000
Materials 5,000,000 4,000,000

Required:
Prepare the budgeted cost of goods manufactured and sold statement, showing the
budgeted purchases of materials and the adjustments for inventories of materials, work in
process, and finished goods.

9. Budgeted Income Statement

The management of Podunk Pottery Co. would like to earn 20% on its invested capital of
$4,000,000. The company estimates sales of 100,000 pots during the coming year ending
December 31. Sales commissions are paid at the rate of 10% of the sales price. Other
expenses are as follows:

Variable manufacturing expenses 30% of sales

Fixed manufacturing expenses $ 100,000
Fixed general and administrative expenses $ 25,000

Required:
(1) Compute the dollar amount of target net income.
(2) Prepare a budgeted income statement for the coming year.

10. Pro forma income statement

Bennett Novelty Wholesale Store has prepared the following budget information for May
2001:
 Sales of $300,000. All sales are on account and a provision for bad debts is made
monthly at 3 percent of sales.
 Inventory was $70,000 on April 30 and an increase of $10,000 is planned for May.
 All inventory is marked to sell at cost plus 50 percent.
 Estimated cash disbursements for selling and administrative expenses for the
month are $40,000.
 Depreciation for May is projected at $5,000.

Prepare a pro forma income statement for Bennett Novelty Wholesale Store for May
2001.
11. Kaizen-Based Income Statement
Allscott Company is developing its budgets for 20x5 and, for the first time, will use the
kaizen approach. The initial 20x5 income statement, based on static data from 20x4, is as
follows:

Sales (140,000 units) $420,000

Less: Cost of goods sold 280,000
Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000
Net income $28,000

Selling prices for 20x5 are expected to increase by 8%, and sales volume in units will
decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline
by 10% per unit. Other than depreciation, all other operating costs are expected to decline
by 5%.

Required:
Prepare a kaizen-based budgeted income statement for 20x5.

12. Projected Income Statement and Balance Sheet

Russell Company has the following projected account balances for June 30, 20x3:

Accounts payable $40,000 Sales $800,000

Accounts receivable 100,000 Capital stock 400,000
Depreciation, factory 24,000 Retained earnings ?
Inventories (5/31 & 6/30) 180,000 Cash 56,000
Direct materials used 200,000 Equipment, net 240,000
Office salaries 80,000 Buildings, net 400,000
Insurance, factory 4,000 Utilities, factory 16,000
Plant wages 140,000 Selling expenses 60,000
Bonds payable 160,000 Maintenance, factory 28,000

Required:
a. Prepare a budgeted income statement for June 20x3.
b. Prepare a budgeted balance sheet as of June 30, 20x3.
13. Budget income statement and purchases budget (6-9)

Olson Sporting Goods has the following sales forecast for the first four months of 20X9.

January $70,000
February 70,000
March 90,000
April 80,000

Olson’s cost of sales is 60% of sales. Fixed costs are $12,000 per month. Olson maintains
inventory at 150% of the coming month’s budgeted sales requirements and has $55,000
inventory at January 1.

Required:
1. Prepare a budgeted income statement for the first three months of 20X9, in total, not
by month.
2. Prepare a purchase budget for the first three months of 20X9 b month.

14. Cash budget and pro forma balance sheet (continuation of 6-9)

Olson pays for its purchase 40% in the month of purchase, 60% in the following month.
Olson collects 60% of its sales in the month of sale, 40% in the following month. All fix
costs require cash disbursements. Olson’s balance sheet at December 31, 20X8 appears
below:

Assets Equities
Cash $ 20,000 Accounts Payable $ 18,000
Receivables 30,000
Inventory 55,000 Stockholder’s Equity 87,000
Total $ 105,000 $105,000

Required:

1. Prepare a cash receipts budget for each of the first three months of 20X9 and for
the quarter as a whole.
2. Prepare a cash disbursement budget for each of the first three months of 20X9 for
the quarter as a whole.
 3. Prepare a cash budget for each of the first three months of 20X9 and for the
quarter as a whole.
4. Prepare a pro forma balance sheet as of March 31, 20X9.

15. Budget for a manufacturer (6-15)

Odell Company manufactures a small cabinet for cassette tapes. Its sales budget for the
first three months of 20X0 is as follows.

January $2,000 (50 units)

February $2,200 (55 units)
March $1,800 (45 units)

Variable manufacturing costs are $26 per unit, of which $12 is for materials. Odell’s
fixed manufacturing costs are $150 per month, including $40 of depreciation. Its only
variable selling cost is a 15% sales commission. Fixed selling and administrative costs
are $70 per month. Odell maintains no inventory of finished cabinets.

Required:

Prepare a budgeted income statement for Odell for January.

16. Production budget for a manufacturer (continuation of 6-15)

Because Odell carries no inventory of finished cabinets, its production, in units, is the
same as its sales. Odell’s $12-per –unit materials cost is for 4 pounds of materials at a
price of $3 per pound.

Required:

Prepare a budget for production costs for January showing as much details as the facts
permit.

17. Purchases budget for a manufacturer (continuation of 6-15 and 6-16)

Odell’s policy is to maintain an inventory of material at 20% of production in the

upcoming month. At December 31, 20X9, Odell had 34 pounds of material that cost
$102.
Required:

Prepare a materials purchases budget for Odell for January, in units and dollars.

18. Understanding budgets

Blaisdel Company
Balance Sheet at December 31, 20X0

Assets Equities
Cash $ 33,000 Accounts Payable $ 9,000
Receivables 31,000 Income Taxes Payable 8,000
Inventory 59,000 Common Stocks 180,000
Fixed Assets, net 102,000 Retained Earnings 28,000
Total $ 225,000 Total $ 225,000

Additional information:

A. All sales are on credit and are collected 20% in the month of sale and 80% in the
month after sale.
B. Budgeted sales for the first five months of 20X1 are $50,000, $60,000, $70,000,
$66,000, and $65,000, respectively.
C. Inventory in maintained at budgeted sales requirements for the following two months.
D. Purchases are all on credit and are paid 80% in the month of purchase and 20% in the
month after purchase.
E. Other variable cost are 20% of sales and are paid in the month incurred.
F. Fixed costs are $6,000 per month, including $1,000 of depreciation. Cash fixed costs
are paid in the month incurred.
G. Blaisdel’s income tax rate is 25%, with taxes being paid in the month after they are
accrued.
H. Cost of goods sold is expected to be 60% of sales.

Required:
1. What are budgeted cash receipts for January 20X1?
2. What is the budgeted inventory at January 31, 20X1?
3. What are budgeted purchases for January 20X1?
4. What is budgeted net income for January 20X1?
5. What is the budgeted cash balance at the end of January 20X1?
6. What are budgeted accounts receivable at February 28, 20X1?
7. What is the budgeted book value of fixed assets at March 31, 20X1?
8. What are budgeted accounts payable at March 31, 20X1?
9. If Blaisdel declared a cash dividend of $1,200 during January, payable in February,
what balance would be reported for retained earnings in a pro forma balance shet as of
January 31, 20X1?
10. What amount would show as the liability for income taxes as of March 31, 20X1?

19. Comprehensive

Webster Company has the following sales budget.

January $200,000 March $300,000

February $240,000 April $360,000

Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in the
following month. Webster keeps inventory equal to double the coming month's budgeted
sales requirements. It pays for purchases 80% in the month of purchase and 20% in the
month after purchase. Inventory at the beginning of January is $190,000. Webster has
monthly fixed costs of $30,000 including $6,000 depreciation. Fixed costs requiring cash
are paid as incurred.

Required:
a. Compute budgeted cash receipts in March.
b. Compute budgeted accounts receivable at the end of March.
c. Compute budgeted inventory at the end of February.
d. Compute budgeted purchases in February.
e. March purchases are $290,000. Compute budgeted cash payments in March to
suppliers of goods.
f. Compute budgeted accounts payable for goods at the end of February.
g. Cash at the end of February is $45,000. Cash disbursements are not required for
anything other than payments to suppliers and fixed costs. Compute the budgeted cash
balance at the end of March.