SOLUTIONS TO EXERCISES AND PROBLEMS - BUDGETING

Exercise 10-10
Quarter (000 omitted)
1 2 3 4 Year
Cash balance, beginning.........................................
$ 6 * $ 5 $  5 $  5 $  6
Add collections from customers...............................
 65  70    96 *   92  323 *
Total cash available................................................
 71 *  75  101   97  329
Less disbursements:
Purchase of inventory..........................................
35 * 45 * 48 35 * 163
Selling and administrative
expenses.........................................................
28 30 * 30 * 25 113 *
Equipment purchases..........................................
8 * 8 * 10 * 10 36 *
Dividends............................................................
   2 *    2 *      2 *     2 *     8
Total disbursements...............................................
 73  85 *    90   72  320
Excess (deficiency) of cash available
over disbursements.............................................
  (2)* (10)   11 *   25     9
Financing:
Borrowings.........................................................
7 15 * 0 0 22
Repayments (including interest)...........................
   0    0    (6)   (17)*   (23)
Total financing.......................................................
   7  15    (6)   (17)     (1)
Cash balance, ending..............................................
$ 5 $ 5 $  5 $  8 $  8
*Given.
Exercise 10-11
1. Gaeber Industries
Production Budget

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year

Budgeted unit sales....................................
8,000 7,000 6,000 7,000 28,000
Add desired ending 1,400 1,200 1,400 1,700 1,700
inventory................................................
Total units needed......................................
9,400 8,200 7,400 8,700 29,700
Less beginning inventory.............................
1,600 1,400 1,200 1,400 1,600
Required production...................................
7,800 6,800 6,200 7,300 28,100

2. Gaeber Industries
Direct Materials Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Required production....................................................
7,800 6,800 6,200 7,300 28,100
Raw materials per unit.................................................
×2 ×2 ×2 ×2 ×2
Production needs........................................................
15,600 13,600 12,400 14,600 56,200
Add desired ending inventory.......................................
2,720 2,480 2,920 3,140 3,140
Total needs.................................................................
18,320 16,080 15,320 17,740 59,340
Less beginning inventory.............................................
3,120 2,720 2,480 2,920 3,120
Raw materials to be purchased....................................
15,200 13,360 12,840 14,820 56,220
Cost of raw materials to be purchased
at $4.00 per pound..................................................
$60,800 $53,440 $51,360 $59,280 $224,880

Schedule of Expected Cash Disbursements for Materials

Accounts payable, beginning balance...........................

$14,820 $ 14,820
1st Quarter purchases.................................................
45,600 $15,200 60,800
2nd Quarter purchases................................................ 40,080 $13,360 53,440
3rd Quarter purchases................................................. 38,520 $12,840 51,360
4th Quarter purchases.................................................
      44,460 44,460
Total cash disbursements for materials.........................
$60,420 $55,280 $51,880 $57,300 $224,880
Exercise 10-12
1. Jessi Corporation
Sales Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Budgeted unit sales......................... 11,000 12,000 14,000 13,000 50,000
Selling price per unit........................
× $18.00 × $18.00 × $18.00 × $18.00 × $18.00
Total sales.......................................
$198,000 $216,000 $252,000 $234,000 $900,000

Schedule of Expected Cash Collections

Accounts receivable,
beginning balance.........................
$ 70,200 $ 70,200
1 Quarter sales..............................
st
128,700 $ 59,400 188,100
2 Quarter sales..............................
nd
140,400 $ 64,800 205,200
3 Quarter sales..............................
rd
163,800 $ 75,600 239,400
4 Quarter sales..............................
th
       152,100  152,100
Total cash collections.......................
$198,900 $199,800 $228,600 $227,700 $855,000

2. Jessi Corporation
Production Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Budgeted unit sales.........................
11,000 12,000 14,000 13,000 50,000
Add desired ending inventory...........   1,800   2,100   1,950   1,850   1,850
Total units needed...........................
12,800 14,100 15,950 14,850 51,850
Less beginning inventory..................
  1,650   1,800   2,100   1,950   1,650
Required production.........................
11,150 12,300 13,850 12,900 50,200
Problem 10-15
1. Production budget:
Septem-
July August ber October
Budgeted sales (units)........... 35,000 40,000 50,000 30,000
Add desired ending inventory. 11,000 13,000   9,000   7,000
Total needs........................... 46,000 53,000 59,000 37,000
Less beginning inventory........ 10,000 11,000 13,000   9,000
Required production.............. 36,000 42,000 46,000 28,000

2. During July and August the company is building inventories in

anticipation of peak sales in September. Therefore, production exceeds
sales during these months. In September and October inventories are
being reduced in anticipation of a decrease in sales during the last
months of the year. Therefore, production is less than sales during
these months to cut back on inventory levels.

3. Direct materials budget:

Septem- Third
July August ber Quarter
Required production (units).... 36,000 42,000 46,000 124,000
Material H300 needed per unit × 3 cc × 3 cc × 3 cc × 3 cc
Production needs (cc)............ 108,000 126,000 138,000 372,000
Add desired ending inventory
(cc)....................................   63,000   69,000   42,000 *   42,000
Total material H300 needs..... 171,000 195,000 180,000 414,000
Less beginning inventory (cc).   54,000   63,000   69,000   54,000
Material H300 purchases (cc). 117,000 132,000 111,000 360,000
* 28,000 units (October production) × 3 cc per unit = 84,000 cc;
84,000 cc × 1/2 = 42,000 cc.

As shown in part (1), production is greatest in September; however, as

shown in the raw material purchases budget, purchases of materials are
greatest a month earlier—in August. The reason for the large purchases
of materials in August is that the materials must be on hand to support
the heavy production scheduled for September.

Problem 10-17
1. December cash sales................................... $ 83,000
 Collections on account:
October sales: $400,000 × 18%................ 72,000
November sales: $525,000 × 60%............ 315,000
December sales: $600,000 × 20%.............  120,000
Total cash collections................................ $590,000

2. Payments to suppliers:
November purchases (accounts payable). . . $161,000
December purchases: $280,000 × 30%.....    84,000
Total cash payments................................. $245,000

3. Ashton Company
Cash Budget
For the Month of December
Cash balance, beginning.................................. $ 40,000
Add cash receipts: Collections from customers. .  590,000
Total cash available before current financing..... 630,000
Less disbursements:
Payments to suppliers for inventory............... $245,000
Selling and administrative expenses*............. 380,000
New web server............................................ 76,000
Dividends paid..............................................     9,000
Total disbursements........................................  710,000
Excess (deficiency) of cash available over
disbursements..............................................  (80,000)
Financing:
Borrowings................................................... 100,000
Repayments................................................. 0
Interest........................................................            0
Total financing................................................  100,000
Cash balance, ending....................................... $ 20,000
*$430,000 – $50,000 = $380,000.
Problem 10-24
1. Collections on sales:
April May June Quarter
Cash sales....................... $120,000 $180,000 $100,000 $   400,000
Sales on account:
February: $200,000 ×
80% × 20%............... 32,000 32,000
March: $300,000 ×
80% × 70%, 20%...... 168,000 48,000 216,000
April: $600,000 × 80%
× 25%, 65%, 10%..... 120,000 312,000 48,000 480,000
May: $900,000 × 80%
× 25%, 65%.............. 180,000 468,000 648,000
June: $500,000 × 80%
× 25%.......................                             100,000     100,000
Total cash collections....... $440,000 $720,000 $716,000 $1,876,000

2. a. Merchandise purchases budget:

April May June July
Budgeted cost of goods sold..... $420,000 $630,000 $350,000 $280,000
Add desired ending
merchandise inventory*.........    94,500   52,500    42,000
Total needs............................. 514,500 682,500 392,000
Less beginning merchandise
inventory..............................    84,000    94,500    52,500
Required inventory purchases... $430,500 $588,000 $339,500
*15% of the next month’s budgeted cost of goods sold.

b. Schedule of expected cash disbursements for merchandise purchases:

April May June Quarter
Beginning accounts
payable............... $126,000 $   126,000
April purchases....... 215,250 $215,250 430,500
May purchases........ 294,000 $294,000 588,000
June purchases.......                              169,750     169,750
Total cash
disbursements...... $341,250 $509,250 $463,750 $1,314,250
3.
Garden Sales, Inc.
Cash Budget
For the Quarter Ended June 30
April May June Quarter
Beginning cash balance........ $ 52,000 $ 40,750 $ 83,500 $  52,000
Add collections from
customers.........................  440,000  720,000  716,000 1,876,000
Total cash available.............  492,000  760,750  799,500 1,928,000
Less cash disbursements:
Purchases for inventory..... 341,250 509,250 463,750 1,314,250
Selling expenses............... 79,000 120,000 62,000 261,000
Administrative expenses.... 25,000 32,000 21,000 78,000
Land purchases................. —     16,000 —      16,000
Dividends paid..................    49,000      —         —          49,000
Total cash disbursements. .  494,250  677,250  546,750 1,718,250
Excess (deficiency) of cash
available over
disbursements..................    (2,250)    83,500   252,750    209,750
Financing:
Borrowings....................... 43,000 0 0 43,000
Repayments...................... 0 0 (43,000) (43,000)
Interest
($43,000 × 1% × 3).......           0           0    (1,290)      (1,290)
Total financing.....................  43,000           0 (44,290)      (1,290)
Ending cash balance............ $ 40,750 $ 83,500 $ 208,460 $  208,460

4. Collecting accounts receivable sooner and reducing inventory levels

reduces the company’s borrowing from $180,000 to $43,000. It also
reduces the company’s interest expense from $4,900 to $1,290.