Assume the 2009 December 31, inventory is estimated to be 38,400 pairs of socks. Prepare a schedule of planned sales and production for the first two quarters of 2010.

Exercise B DePaul Company projects sales of 25,000 units during May at $6 per unit. Production costs are $1.80 per unit. Variable selling and administrative expenses are $0.60 per unit; fixed selling and administrative expenses are $60,000. Compute the budgeted income before income taxes.

Exercise C Skaters Plus Company plans to sell 90,000 skateboards next quarter at a price of $36 per unit. Production costs are $14.40 per unit. Selling and administrative expenses are: variable, $7.20 per unit; and fixed, $604,800 per quarter. What are the budgeted earnings for next quarter? (Do not consider federal income taxes.)

Exercise D Duke Corporation considers materials and labor to be completely variable costs. Expected production for the year is 50,000 units. At that level of production, direct materials cost is budgeted at $198,000, and direct labor cost is budgeted at $450,000. Prepare a flexible budget for materials and labor for possible production levels of 52,500, 60,000, and 67,500 units of product.

Exercise E Assume that in the previous exercise the actual production was 60,000 units, materials cost was $247,000, and labor cost was $510,000. What are the budget variances?

Exercise F Fixed production costs for Alexia Company are budgeted at $576,000, assuming 40,000 units of production. Actual sales for the period were 35,000 units, while actual production was 40,000 units. Actual fixed costs used in computing cost of goods sold amounted to $504,000. What is the budget variance?

Exercise G The shoe department of Noardstone’s Department Store has prepared a sales budget for April calling for a sales volume of $75,000. The department expects to begin in April with a $50,000 inventory and to end the month with an $42,500 inventory. Its cost of goods sold averages 70% of sales.

Prepare a purchases budget for the department showing the amount of goods to be purchased during April.

Problems

Problem A Joyce Corporation prepares monthly operating and financial budgets. The operating budgets for June and July are based on the following data:

All sales are at $30 per unit. Direct materials, direct labor, and variable manufacturing overhead are estimated at $3, $6, and $3 per unit, respectively. Total fixed manufacturing overhead is budgeted at $1,080,000 per month. Selling and administrative expenses are budgeted at $1,200,000 plus 10% of sales, while federal income taxes are budgeted at 40% of income before federal income taxes. The inventory at June 1 consists of 200,000 units with a cost of $17.10 each.

1. Prepare monthly budget estimates of cost of goods sold assuming that FIFO inventory procedure is used.
2. Prepare planned operating budgets for June and July.

Problem B The computation of operating income for Frisco Company for 2008 follows:

An operating budget is prepared for 2009 with sales forecasted at a 25% increase in volume. Direct materials, direct labor, and all costs labeled as variable are completely variable. Fixed costs are expected to continue except for a $24,000 increase in fixed administrative costs. Actual operating data for 2009 are:

1. Prepare a budget report comparing the 2009 planned operating budget with actual 2009 data.
2. Prepare a budget report that would be useful in appraising the performance of the various persons charged with responsibility to provide satisfactory income. (Hint: Prepare budget data on a flexible basis and use the percentage by which sales were actually experienced.)
3. Comment on the differences revealed by the two reports.

Problem C Use the following data to prepare a planned operating budget for Hi-Lo Company for the year ending 2009 December 31:

Assume no beginning or ending inventory. Federal income taxes are budgeted at 40% of income before federal income taxes.

The actual operating data for the year ending 2009 December 31, follow:

1. Prepare a planned operating budget for the year ended 2009 December 31, for part (1).
2. Using a flexible operating budget, analyze the efficiency of operations and comment on the company’s sales policy for part (2).

Problem D Kim Company wants you to prepare a flexible budget for selling and administrative expenses. The general manager and the sales manager have met with all the department heads, who provided the following information regarding selling and administrative expenses:

The company presently employs 30 full-time salespersons with a base of $3,600 each per month plus commissions and 10 full-time salespersons with a salary of $6,000 each per month plus commissions. In addition, the company employs nine regional sales managers with a salary of $21,600 per month, none of whom is entitled to any commissions.

If sales volume exceeds $80 million per year, the company must hire four more salespersons, each at a salary of $3,600 per month plus commissions.

Sales commissions are either 10% or 5% of the selling price, depending on the product sold. Typically, a 10% commission applies on 60% of sales, and a 5% commission applies on the remaining 40% of sales.

Salespersons’ travel allowances average $1,500 per month per salesperson (excluding managers).

Advertising expenses average $150,000 per month plus 3% of sales.

Selling supplies expense is estimated at 1% of sales.

Administrative salaries are $300,000 per month.

Other administrative expenses include the following:

Rent—$48,000 per month

Office supplies—2% of sales

Other administrative expenses (telephone, etc.)—$12,000 per month

Prepare a flexible budget for selling and administrative expenses for sales volume of $36 million, $48 million, and $60 million per year.

Problem E Galaxy Lighting Company manufactures and sells lighting fixtures. Estimated sales for the next three months are:

Sales for August were $400,000. All sales are on account. Galaxy Lighting Company estimates that 60% of the accounts receivable are collected in the month of sale with the remaining 40% collected the following month. The units sell for $30 each. The cash balance for September 1 is $100,000.

Generally, 60% of purchases are due and payable in the month of purchase with the remainder due the following month. Purchase cost per unit for materials is $18. The company maintains an end-of-the-month inventory of 1,000 units plus 10% of next month’s unit sales.

Prepare a cash receipts schedule for September and October and a purchases budget for August, September, and October.

Problem F Refer to the previous problem. In addition to the information given, selling and administrative expenses paid in cash are $120,000 per month.

Prepare a monthly cash budget for September and October for Galaxy Lighting Company.

Alternate problems

Alternate problem A Cougars Company prepares monthly operating and financial budgets. Estimates of sales in units are made for each month. Production is scheduled at a level high enough to take care of current needs and to carry into each month one-half of the next month’s unit sales. Direct materials, direct labor, and variable manufacturing overhead are estimated at $12, $6, and $4 per unit, respectively. Total fixed manufacturing overhead is budgeted at $480,000 per month. Sales for April, May, June, and July 2009 are estimated at 100,000, 120,000, 160,000, and 120,000 units. The inventory at 2009 April 1, consists of 50,000 units with a cost of $28.80 per unit.

9. Prepare a schedule showing the budgeted production in units for April, May, and June 2009.
10. Prepare a schedule showing the budgeted cost of goods sold for the same three months assuming that the FIFO method is used for inventories.

Alternate problem B Following is a summary of operating data of Bugs Company for the year 2008:

Sales volume for 2009 is budgeted at 90% of 2008 sales volume. Prices are not expected to change. The 2009 budget amounts for the various other costs and expenses differ from those reported in 2008 only for the expected volume change in the variable items. Actual operating data for 2009 follow:

1. Prepare a budget report comparing the planned operating budget for 2009 with the actual results for that year.
2. Prepare a budget report that would be useful in pinpointing responsibility for the poor showing in 2009. (Hint: Prepare a flexible operating budget.)

Alternate problem C Use the following data for Andrea Company in preparing its 2009 planned operating budget:

Assume no beginning inventory. Federal income taxes are budgeted at 40% of income before income taxes.

The actual results for Andrea Company for the year ended 2009 December 31, follow. (Note: The actual sales price was $80 per unit. Actual unit production was equal to actual unit sales.)

1. Prepare a planned operating budget for the year ended 2009 December 31, for (1).
2. Using a flexible operating budget, analyze the efficiency of operations. Comment on the results of 2009 and on the company’s sales policy in (2).

Alternate problem D Rocklin Company gathered the following budget information for the quarter ending 2009 September 30:

A cash balance of $36,000 is planned for July 1. Accounts receivable are expected to be $60,000 on July 1. All but one-half of 1% of the July 1 Accounts Receivable balance will be collected in the quarter ending September 30. The company’s sales collection pattern is 95% in the quarter of sale and 5% in the quarter after sale. Accounts payable will be $30,000 on July 1 and will be paid during the coming quarter. The company’s purchases payment pattern is 75% in the quarter of purchase and 25% in the quarter after purchase. Expenses are paid in the quarter in which they are incurred.

Prepare a cash budget for the quarter ending 2009 September 30.

Beyond the numbers—Critical thinking

Business decision case A Golden State Company has applied at a local bank for a short-term loan of $150,000 starting on 2009 October 1. The bank’s loan officer has requested a cash budget from the company for the quarter ending 2009 December 31. The following information is needed to prepare the cash budget:

A cash balance of $24,000 is planned for October 1. Accounts receivable are expected to be $48,000 on October 1. All of these accounts will be collected in the quarter ending December 31. In general, sales are collected as follows: 90% in the quarter of sale, and 10% in the quarter after sale. Accounts payable will be $480,000 on October 1 and will be paid during the quarter ending December 31. All purchases are paid in the quarter after purchase.

1. Prepare a cash budget for the quarter ending 2009 December 31. Assume that the $150,000 loan will be made on October 1 and will be repaid with interest at 10% on December 31.
2. Will the company be able to repay the loan on December 31? If the company desires a minimum cash balance of $18,000, will the company be able to repay the loan as planned?

Ethics case B The state of California, USA faced large budget deficits. Meanwhile, officials in a particular community college district were looking for ways to spend the money that had been budgeted for the district. The community college was entering the last three months of the fiscal year with excess funds because the area had experienced a mild winter resulting in lower than usual utilities and maintenance costs.

At a budget meeting, one official commented, “You know what will happen if we do not spend all of our budget. The state will claim we do not need as much money next year. What happens if we have a hard winter next year? We will need every cent we can get!”

The community college’s accounting manager commented, “We are legally entitled to spend all of the money this year that has been budgeted to us. I am concerned about the memorandum that we received requesting that we cut expenditures wherever possible to help reduce the state’s deficit.”

The first official responded, “That deficit is the state’s problem, not ours. We would not have a deficit in the first place if the state administrators were able to estimate taxes and do a better job of budgeting. Let us deal with our problems and let them deal with theirs!”

Write a response from the point of view of the taxpayers of the state of California. Should the community college spend all of the money that had been budgeted for it?

Broader perspective C Refer to the Broader perspective, “Planning in a changing environment”. Describe and evaluate Verizon Communications, Inc.’s new approach to planning. How would you advise company management to communicate the company’s values and plans to employees?

Group project D In groups of three, develop a budget for an organization that publishes financial statements, such as The Coca-Cola Company or Maytag Corporation. Your budget should include three different types of projected income statements for the coming month, quarter, or year. These three income statements should be for optimistic, pessimistic, and expected scenarios. Collect or develop as much information as possible to prepare the budget. For example, to prepare a budgeted income statement for a publicly traded company such as Coca-Cola, look at previous annual reports and collect whatever additional information you can from news reports. Be sure to state the assumptions used in preparing the budget in a memorandum you write as a team. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Do not forget to include the three different projected income statements.

Group project E The chief executive officer (CEO) of Rigid Plastics Corporation remarked to a colleague, “I do not understand why other companies waste so much time in the budgeting process. I set our company goals, and everyone strives to meet them. What is wrong with that approach?” In groups of two or three students, write a memorandum to your instructor stating whether you agree with this comment or not and explain why. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Group project F Multigoal Corporation has established a bonus plan for its employees. An employee receives a bonus if his or her department meets or is below the cost levels specified in the annual budget plan. If the department’s costs exceed the budget, its employees earn no bonus. In groups of two or three students, write a memorandum to your instructor stating the problems that might arise with this bonus plan. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Using the Internet—A view of the real world

Visit the website for a high technology company that provides recent annual reports. Examples include Intel Corporation, IBM, and Dell. Develop a budgeted income statement (operating budget) for the coming year and include three categories for optimistic, pessimistic, and expected scenarios. Collect or develop as much information as possible to prepare the budget. For example, look at previous annual reports and collect whatever additional information you can from news reports. Be sure to state the assumptions used in preparing the budget in a memorandum. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Do not forget to include the three different projected income statements.

Visit the website for a retail company that provides recent annual reports. Develop a budgeted income statement (operating budget) for the coming year and include three categories for optimistic, pessimistic, and expected scenarios. Collect or develop as much information as possible to prepare the budget. For example, look at previous annual reports and collect whatever additional information you can from news reports. Be sure to state the assumptions used in preparing the budget in a memorandum. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Do not forget to include the three different projected income statements.

Comprehensive problems

Wimerick Corporation prepares annual budgets by quarters. The company’s post-closing trial balance as of 2010 December 31, is as follows:

All of the capital stock of the company was recently acquired by Juan Jackson. After the purchase, Jackson loaned substantial sums of money to the corporation, which still owes him $480,000 on a 5% note. There are no accrued federal income taxes payable, but future earnings will be subject to income taxation.

Jackson is anxious to withdraw $120,000 from the corporation (as a payment on the note payable to him) but will not do so if it reduces the corporation’s cash balance below $120,000. Thus, he is quite interested in the budgets for the quarter ending 2011 March 31.

Sales for the coming quarter ending 2011 March 31, are forecasted at $1,200,000; for the following quarter they are forecasted at $1,500,000. All sales are priced to yield a gross margin of 40%. Inventory is to be maintained on hand at the end of any quarter in an amount equal to 20% of the goods to be sold in the next quarter. All sales are on account, and 95% of the 2010 December 31, receivables plus 70% of the current quarter’s sales will be collected during the quarter ending 2011 March 31.

Selling expenses are budgeted at $48,000 plus 6% of sales; $24,000 will be incurred on account, $66,000 accrued, $27,000 from expiration of prepaid rent and prepaid insurance, and $3,000 from allocated depreciation.

Purchasing expenses are budgeted at $34,800 plus 5% of purchases for the quarter; $9,000 will be incurred on account, $48,000 accrued, $13,800 from expired prepaid expenses, and $1,200 from allocated depreciation.

Administrative expenses are budgeted at $42,000 plus 2% of sales; $3,000 will be incurred on account, $36,000 accrued, $13,200 from expired prepayments, and $1,800 from allocated depreciation. Uncollectible accounts are estimated at 1% of sales.

Interest accrues at 5% annually on the notes payable and is credited to Accrued Liabilities Payable.

All of the beginning balances in Accounts Payable and Accrued Liabilities Payable, plus 80% of the current credits to Accounts Payable, and all but $30,000 of the current accrued liabilities will be paid during the quarter. An $18,000 insurance premium is to be paid prior to March 31, and a full year’s rent of $144,000 is due on January 2.

Federal income taxes are budgeted at 40% of the income before federal income taxes. The taxes should be accrued, and no payments are due in the first quarter.

1. Prepare a planned operating budget for the quarter ending 2011 March 31, including supporting schedules for planned purchases and operating expenses.
2. Prepare a financial budget for 2011 March 31. Supporting schedules should be included that (1) analyze accounts credited for purchases and operating expenses, (2) show planned accounts receivable collections and balance, and (3) show planned cash flows and cash balance.
3. Will Jackson be able to collect the $120,000 on his note?

Davis Corporation is a rapidly expanding company. The company’s post-closing balance as of 2010 December 31, is as follows:

Sales in the last quarter of 2010 amounted to $2,400,000 and are projected at $3,000,000 and $4,800,000 for the first two quarters of 2011. This expansion has created a need for cash. Management is especially concerned about the probable cash balance of 2011 March 31, since a payment of $360,000 for some new equipment must be made on delivery on April 2. The current cash balance of $240,000 is considered to be the minimum workable balance.

Purchases, all on account, are to be scheduled so that the inventory at the end of any quarter is equal to one-third of the goods expected to be sold in the coming quarter. Cost of goods sold averages 60% of sales.

Selling expenses are budgeted at $120,000 plus 8% of sales; $24,000 is expected to be incurred on account, $288,000 accrued, $33,600 from expired prepayments, and $14,400 from allocated depreciation.

Purchasing expenses are budgeted at $84,000 plus 5% of purchases; $12,000 will be incurred on account, $156,000 accrued, $13,200 from expired prepayments, and $10,800 from allocated depreciation.

Administrative expenses are budgeted at $150,000 plus 3% of sales; $24,000 will be incurred on account, $132,000 accrued, $13,200 from expired prepayments, and $10,800 from allocated depreciation.

Federal income taxes are budgeted at 40% of income before federal income taxes and are recorded as accrued liabilities. Payments on these taxes are included in the payments on accrued liabilities discussed in item 6.

All 2010 December 31, accounts payable plus 80% of current credits to this account will be paid in the first quarter. All of the 2010 December 31, accrued liabilities payable (except for $72,000) will be paid in the first quarter. Of the current quarter’s accrued liabilities, all but $288,000 will be paid during the first quarter.

Cash outlays for various expenses normally prepaid will amount to $96,000 during the quarter.

All sales are made on account; 80% of the sales are collected in the quarter in which made, and all of the remaining sales are collected in the following quarter, except for 2% which is never collected. The Allowance for Uncollectible Accounts account shows the estimated amount of accounts receivable at 2010 December 31, arising from 2010 sales that will not be collected.

1. Prepare an operating budget for the quarter ending 2011 March 31. Supporting schedules for planned purchases and operating expenses should be included.
2. Prepare a financial budget for 2011 March 31. Include supporting schedules that (1) analyze accounts credited for purchases and expenses, (2) show planned cash flows and cash balance, and (3) show planned collections of accounts receivable and the accounts receivable balance.
3. Will sufficient cash be on hand April 2 to pay for the new equipment?