Budgets – Assignment – Model Answer

Exercise One:
Haylock Inc. bases its manufacturing overhead budget on budgeted direct labor-
hours. The direct labor budget indicates that 5,600 direct labor-hours will be required
in August. The variable overhead rate is $5.40 per direct labor-hour. The company's
budgeted fixed manufacturing overhead is $69,440 per month, which includes
depreciation of $15,680. All other fixed manufacturing overhead costs represent
current cash flows. The August cash disbursements for manufacturing overhead on
the manufacturing overhead budget should be:
A) $99,680
B) $84,000
C) $53,760
D) $30,240
Answer: B
Variable manufacturing overhead + Fixed manufacturing overhead
= (5,600 × $5.40) + ($69,440 − $15,680)
= $30,240 + $53,760 = $84,000

Exercise Two:
At March 31 Streuling Enterprises, a merchandising firm, had an inventory of 38,000
units, and it had accounts receivable totaling $85,000. Sales, in units, have been
budgeted as follows for the next four months:
April.................. 60,000
May................... 75,000
June................... 90,000
July ................... 81,000
Streuling's board of directors has established a policy to commence in April that the
inventory at the end of each month should contain 40% of the units required for the
following month's budgeted sales.
The selling price is $2 per unit. One-third of sales are paid for by customers in the
month of the sale, the balance is collected in the following month.
Required:

a. Prepare a merchandise purchases budget showing how many units should

be purchased for each of the months April, May, and June.
b. Prepare a schedule of expected cash collections for each of the months
April, May, and June.
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Answer:
a. April May June July
Budgeted sales, in units ....... 60,000 75,000 90,000 81,000
Desired ending inventory (40%) 30,000 36,000 32,400
Total needs .......................... 90,000 111,000 122,400
Less beginning inventory .... 38,000 30,000 36,000
Required purchases ............. 52,000 81,000 86,400

b. April May June

Budgeted sales, at $2 per unit $120,000 $150,000 $180,000
March 31 accounts receivable $ 85,000
April sales ............................ 40,000 $ 80,000
May sales ............................. 50,000 $100,000
June sales ............................. 60,000
Total cash collections .......... $125,000 $130,000 $160,000

Exercise Three:
Clay Company has projected sales and production in units for the second quarter of
the coming year as follows:
April May June
Sales................... 50,000 40,000 60,000
Production ......... 60,000 50,000 50,000
Cash-related production costs are budgeted at $5 per unit produced. Of these
production costs, 40% are paid in the month in which they are incurred and the
balance in the following month. Selling and administrative expenses will amount to
$100,000 per month. The accounts payable balance on March 31 totals $190,000,
which will be paid in April.
All units are sold on account for $14 each. Cash collections from sales are budgeted
at 60% in the month of sale, 30% in the month following the month of sale, and the
remaining 10% in the second month following the month of sale. Accounts
receivable on April 1 totaled $500,000 ($90,000 from February's sales and the
remainder from March).
Required:
a. Prepare a schedule for each month showing budgeted cash disbursements
for the Clay Company.
b. Prepare a schedule for each month showing budgeted cash receipts for
Clay Company.

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Answer:

a. April May June

Production units ................... 60,000 50,000 50,000
Cash required per unit ......... × $5 × $5 × $5
Production costs .................. $300,000 $250,000 $250,000

Cash disbursements:
April May June
Production this month (40%) $120,000 $100,000 $100,000
Production prior month (60%) 190,000 180,000 150,000
Selling and administrative ... 100,000 100,000 100,000
Total disbursements ............. $410,000 $380,000 $350,000

Payments relating to the prior month (March) in April represent the balance
of accounts payable at March 31.

b. April May June

Sales units ............................ 50,000 40,000 60,000
Sales price............................ × $14 × $14 × $14
Total sales ............................ $700,000 $560,000 $840,000

April May June

Cash receipts:
February sales ...................... $ 90,000
March sales .......................... 307,500 $102,500
April sales ............................ 420,000 210,000 $ 70,000
May sales ............................. 336,000 168,000
June sales ............................. 504,000
Total receipts ....................... $817,500 $648,500 $742,000

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Exercise Four:
Negam Inc. is working on its cash budget for March. The budgeted beginning cash
balance is $33,000. Budgeted cash receipts total $182,000 and budgeted cash
disbursements total $191,000. The desired ending cash balance is $40,000.

1-The excess (deficiency) of cash available over disbursements for March will
be:
A) $215,000
B) $42,000
C) $24,000
D) ($9,000)
Answer: C
Excess cash available over disbursements = Beginning cash balance +
Budgeted cash receipts − Budgeted cash disbursements = $33,000 + $182,000
− $191,000 = $24,000

2.To attain its desired ending cash balance for March, the company needs to
borrow:

A) $40,000
B) $0
C) $16,000
D) $64,000
Answer: C

Excess cash available over disbursements = Beginning cash balance +

Budgeted cash receipts − Budgeted cash disbursements = $33,000 + $182,000
− $191,000 = $24,000

Borrowing = Desired ending cash balance − Excess cash available over

disbursements = $40,000 − $24,000 = $16,000

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Exercise Five:
Star Inc. bases its manufacturing overhead budget on budgeted direct labor-hours.
The variable overhead rate is $8.60 per direct labor-hour. The company's budgeted
fixed manufacturing overhead is $107,970 per month, which includes depreciation
of $9,760. All other fixed manufacturing overhead costs represent current cash
flows. The July direct labor budget indicates that 6,100 direct labor-hours will be
required in that month.

Required:

a. Determine the cash disbursement for manufacturing overhead for July.

b. Determine the predetermined overhead rate for July.

Answer:

a. July
Budgeted direct labor-hours............................... 6,100
Variable overhead rate ....................................... $8.60
Variable manufacturing overhead ...................... $ 52,460
Fixed manufacturing overhead .......................... 107,970
Total manufacturing overhead ........................... 160,430
Less depreciation ............................................... 9,760
Cash disbursement for manufacturing overhead $150,670

b. $160,4
Total manufacturing overhead (a) ..................... 30
Budgeted direct labor-hours (b) ......................... 6,100
Predetermined overhead rate for the month
(a)/(b) .............................................................. $26.30

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Exercise Six:

Lubriderm Corporation has the following budgeted sales for the next six-month
period:

Month Unit Sales

June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
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.

Answer:

a. July August September

Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000

Total inventory requirements 162,000 240,000 186,000

Less: Beginning inventory 24,000 42,000 30,000

Budgeted production 138,000 198,000 156,000

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 b. July August September
Production in units 138,000 198,000 156,000

Targeted ending inventory in lbs. *297,000 234,000 **252,000

Production needs in lbs. ***690,000 990,000 780,000

Total requirements in lbs. 987,000 1,224,000 1,032,000

Less: Beginning inventory in lbs. ****207,000 297,000 234,000

Purchases needed in lbs. 780,000 927,000 798,000

Cost ($8 per lb.) × $8 × $8 × $8

Total material purchases $6,240,000 $7,416,000 $6,384,000

* 0.3 times next month's needs

** (180,000 + 24,000 - 36,000) times 5 lbs. × 0.3
*** 5 lbs. times units to be produced, across row
**** (690,000 × .3) = 207,000 lbs., etc. row across

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