Chapter 8

Essay Questions

114. Weller Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:

Sales are budgeted at $330,000 for November, $300,000 for December, and $320,000 for January.

Collections are expected to be 85% in the month of sale, 14% in the month following the sale, and 1% uncollectible.

The cost of goods sold is 60% of sales. The company purchases 80% of its merchandise in the month prior to the month of

sale and 20% in the month of sale. Payment for merchandise is made in the month following the purchase.

Other monthly expenses to be paid in cash are $21,200. Monthly depreciation is $21,000. Ignore taxes.

Statement of Financial PositionOctober 31

Assets:Cash.................................................................................................. $ 22,000Accounts receivable (net of allowance for uncollectible accounts). 83,000Inventory........................................................................................... 158,400Property, plant and equipment (net of $594,000 accumulated

depreciation).................................................................................. 1,004,000 Total assets $1,267,400

Liabilities and Stockholders’ Equity:Accounts payable.............................................................................. $ 196,000Common stock.................................................................................. 620,000Retained earnings.............................................................................. 451,400 Total liabilities and stockholders’ equity.......................................... $1,267,400

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.b. Prepare a Merchandise Purchases Budget for November and December.c. Prepare Cash Budgets for November and December.d. Prepare Budgeted Income Statements for November and December.e. Prepare a Budgeted Balance Sheet for the end of December.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 9-5

Chapter 9 Profit Planning

Ans:

a. November DecemberSales........................................................... $330,000 $300,000

Schedule of Expected Cash CollectionsAccounts receivable................................... $ 83,000November sales.......................................... 280,500 $ 46,200December sales.......................................... 255,000 Total cash collections................................. $363,500 $301,200

b. November DecemberCost of goods sold...................................... $198,000 $180,000

Merchandise Purchases BudgetNovember sales.......................................... $ 39,600December sales.......................................... 144,000 $ 36,000January sales.............................................. 153,600 Total purchases.......................................... $183,600 $189,600

Disbursements for merchandise................. $196,000 $183,600

c. November DecemberCash receipts.............................................. $363,500 $301,200Cash disbursements:

Disbursements for merchandise.............. 196,000 183,600Other monthly expenses.......................... 21,200 21,200 Total cash disbursements........................ 217,200 204,800

Excess (deficiency) of cash available over disbursements......................................... $146,300 $ 96,400

d. November DecemberSales........................................................... $330,000 $300,000Bad debt expense....................................... 3,300 3,000Cost of goods sold...................................... 198,000 180,000 Gross margin.............................................. 128,700 117,000 Other monthly expenses............................. 21,200 21,200Depreciation............................................... 21,000 21,000 Net operating income................................. $ 86,500 $ 74,800

9-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

e. Statement of Financial PositionDecember 31

Assets:Cash............................................................................ $ 264,700Accounts receivable (net of allowance for

uncollectible accounts)............................................ 42,000Inventory..................................................................... 153,600Property, plant and equipment (net of $636,000

accumulated depreciation)...................................... 962,000 Total assets.................................................................. $1,422,300

Liabilities and Stockholders’ Equity:Accounts payable........................................................ $ 189,600Common stock............................................................ 620,000Retained earnings........................................................ 612,700 Total liabilities and stockholders’ equity.................... $1,422,300

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 2,3,8,9,10 Level: Hard

115. 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....................... 60,000May........................ 75,000June........................ 90,000July......................... 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.



Ans:

a. April May June JulyBudgeted sales, in units............... 60,000 75,000 90,000 81,000Desired ending inventory (40%). 30,000 36,000 32,400 Total needs.................................. 90,000 111,000 122,400Less beginning inventory............ 38,000 30,000 36,000 Required purchases..................... 52,000 81,000 86,400

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 2,3 Level: Medium


116. Capes Corporation is a wholesaler of industrial goods. Data regarding the store's operations follow:

Sales are budgeted at $390,000 for November, $360,000 for December, and $340,000 for January.

Collections are expected to be 85% in the month of sale, 10% in the month following the sale, and 5% uncollectible.

The cost of goods sold is 80% of sales. The company purchases 40% of its merchandise in the month prior to the month of

sale and 60% in the month of sale. Payment for merchandise is made in the month following the purchase.

The November beginning balance in the accounts receivable account is $77,000. The November beginning balance in the accounts payable account is $320,000.

Required:

a. Prepare a Schedule of Expected Cash Collections for November and December.b. Prepare a Merchandise Purchases Budget for November and December.

Ans:

a. November DecemberSales........................................................ $390,000 $360,000

Schedule of Expected Cash CollectionsAccounts receivable................................ $ 77,000November sales....................................... 331,500 $ 39,000December sales........................................ 306,000 Total cash collections.............................. $408,500 $345,000

b. November DecemberCost of goods sold................................... $312,000 $288,000

Merchandise Purchases BudgetNovember sales....................................... $187,200December sales........................................ 115,200 $172,800January sales............................................ 108,800 Total purchases........................................ $302,400 $281,600

Disbursements for merchandise.............. $320,000 $302,400




117. Clay Company has projected sales and production in units for the second quarter of the coming year as follows:

April May JuneSales....................... 50,000 40,000 60,000Production.............. 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.


Ans:

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

Cash disbursements:April May June

Production this month (40%)....... $120,000 $100,000 $100,000Production prior month (60%)..... 190,000 180,000 150,000Selling 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 JuneSales units................................... 50,000 40,000 60,000Sales price................................... × $14 × $14 × $14Total sales................................... $700,000 $560,000 $840,000

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 2,4 Level: Hard



118. The Doley Company has planned the following sales for the next three months:

Jan Feb MarBudgeted sales....... $40,000 $50,000 $70,000

Sales are made 20% for cash and 80% on account. From experience, the company has learned that a month’s sales on account are collected according to the following pattern:

Month of sale................................. 60%First month following sale............. 30%Second month following sale......... 8%Uncollectible.................................. 2%

The company requires a minimum cash balance of $5,000 to start a month. The beginning cash balance in March is budgeted to be $6,000.

Required:

a. Compute the budgeted cash receipts for March.b. The following additional information has been provided for March:

Inventory purchases (all paid in March).............................. $28,000Selling and administrative expenses (all paid in March)..... $40,000Depreciation expense for March......................................... $5,000Dividends paid in March..................................................... $4,000

Prepare a cash budget in good form for the month of March, using this information and the budgeted cash receipts you computed for part (1) above. The company can borrow in any dollar amount and will not pay interest until April.


Ans:

a. Cash sales, March: $70,000 × 20%......... $14,000Collections on account:Jan. sales: $40,000 × 80% × 8%.............. 2,560Feb. sales: $50,000 × 80% × 30%........... 12,000Mar. sales: $70,000 × 80% × 60%.......... 33,600 Total cash receipts................................... $62,160

b. Cash balance, beginning.......................... $ 6,000Add cash receipts from sales................... 62,160 Total cash available................................. 68,160

Less disbursements:Inventory purchases................................. 28,000Selling and administrative expenses....... 40,000Dividends................................................ 4,000 Total disbursements................................. 72,000 Cash excess (deficiency)......................... (3,840)Financing–borrowing.............................. 8,840 Cash balance, ending............................... $ 5,000




119. A sales budget is given below for one of the products manufactured by the Key Co.:

January................... 21,000 unitsFebruary................. 36,000 unitsMarch..................... 61,000 unitsApril....................... 41,000 unitsMay........................ 31,000 unitsJune........................ 25,000 units

The inventory of finished goods at the end of each month should equal 20% of the next month's sales. However, on December 31 the finished goods inventory totaled only 4,000 units.Each unit of product requires three specialized electrical switches. Since the production of these specialized switches by Key's suppliers is sometimes irregular, the company has a policy of maintaining an ending inventory at the end of each month equal to 30% of the next month's production needs. This requirement had been met on January 1 of the current year.

Required:Prepare a budget showing the quantity of switches to be purchased each month for January, February, and March and in total for the quarter.

Ans:January February March April

Budgeted sales (units).................... 21,000 36,000 61,000 41,000Add: Desired ending inventory...... 7,200 12,200 8,200 6,200 Total needs..................................... 28,200 48,200 69,200 47,200Deduct: Beginning inventory......... 4,000 7,200 12,200 8,200 Units to be produced...................... 24,200 41,000 57,000 39,000

January February March QuarterUnits to be produced 24,200 41,000 57,000 122,200Switches per unit ×3 ×3 ×3 ×3Production needs 72,600 123,000 171,000 366,600Add: Desired ending inventory 36,900 51,300 35,100 35,100 Total needs 109,500 174,300 206,100 401,700Deduct: Beginning inventory 21,780 36,900 51,300 21,780 Required purchases 87,720 137,400 154,800 379,920

Beginning inventory, January 1: 72,600 × 0.3 = 21,780Ending inventory, March 31: (39,000 × 3) × 0.3 = 35,100

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Hard


120. One quarter gram of a rare seasoning is required for each bottle of Dipping Oil, a very popular product sold through gourmet shops that is produced by The Lucas Company. The cost of the seasoning is $16 per gram. Budgeted production of Dipping Oil is given below for the second quarter, and the first month of the third quarter.

April May June JulyRequired production bottles........... 5,000 8,000 15,000 10,000

The seasoning is so difficult to get that the company must have on hand at the end of each month 20% of the next month's production needs. A total of 250 grams will be on hand at the beginning of April.

Required:

Prepare a direct materials budget for the seasoning, by month and in total for the second quarter. Be sure to include both the quantity to be purchased and its cost for each month.

Ans:Lucas Company

Direct Materials Budget for the Second Quarter

April May June TotalRequired production (bottles)............ 5,000 8,000 15,000 28,000Seasoning required per bottle

(grams)........................................... ×0.25 ×0.25 ×0.25 ×0.25Production needs (grams).................. 1,250 2,000 3,750 7,000Add desired ending inventory of

seasoning........................................ 400 750 500 500 Total needs......................................... 1,650 2,750 4,250 7,500Less beginning inventory of

seasoning........................................ 250 400 750 250 Seasoning to be purchased (grams).... 1,400 2,350 3,500 7,250Cost of seasoning per gram................ × $16 × $16 × $16 × $16Cost of seasoning to be purchased..... $22,400 $37,600 $56,00 $116,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 4 Level: Easy



121. Whitmer Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.05 direct labor-hours. The direct labor rate is $11.80 per direct labor-hour. The production budget calls for producing 7,100 units in February and 6,800 units in March.

Required:

Construct the direct labor budget for the next two months, assuming that the direct labor work force is fully adjusted to the total direct labor-hours needed each month.

Ans:February March

Required production in units.......... 7,100 6,800Direct labor-hours per unit............. 0.05 0.05Total direct labor-hours needed..... 355 340Direct labor cost per hour.............. $11.80 $11.80Total direct labor cost.................... $4,189 $4,012


122. Sthilaire Corporation is working on its direct labor budget for the next two months. Each unit of output requires 0.34 direct labor-hours. The direct labor rate is $11.10 per direct labor-hour. The production budget calls for producing 8,000 units in April and 8,300 units in May. The company guarantees its direct labor workers a 40-hour paid work week. With the number of workers currently employed, that means that the company is committed to paying its direct labor work force for at least 2,840 hours in total each month even if there is not enough work to keep them busy.

Required:

Construct the direct labor budget for the next two months.

Ans:April May

Required production in units.......... 8,000 8,300Direct labor-hours per unit............. 0.34 0.34Total direct labor-hours needed..... 2,720 2,822Total direct labor-hours paid.......... 2,840 2,840Direct labor cost per hour.............. $11.10 $11.10Total direct labor cost.................... $31,524 $31,524

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 5 Level: Medium


123. Brockney 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.

Ans:

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

b. Total manufacturing overhead (a)................................... $160,430Budgeted direct labor-hours (b)...................................... 6,100Predetermined overhead rate for the month (a)/(b)......... $26.30




124. The manufacturing overhead budget of Reigle Corporation is based on budgeted direct labor-hours. The February direct labor budget indicates that 5,800 direct labor-hours will be required in that month. The variable overhead rate is $4.60 per direct labor-hour. The company's budgeted fixed manufacturing overhead is $82,360 per month, which includes depreciation of $16,820. All other fixed manufacturing overhead costs represent current cash flows.

Required:

a. Determine the cash disbursement for manufacturing overhead for February. Show your work!

b. Determine the predetermined overhead rate for February. Show your work!

Ans:

a. FebruaryBudgeted direct labor-hours............................................ 5,800Variable overhead rate..................................................... $4.60Variable manufacturing overhead................................... $ 26,680Fixed manufacturing overhead........................................ 82,360 Total manufacturing overhead......................................... 109,040Less depreciation............................................................. 16,820 Cash disbursement for manufacturing overhead............. $ 92,220

b. Total manufacturing overhead (a)................................... $109,040Budgeted direct labor-hours (b)....................................... 5,800Predetermined overhead rate for the month (a)/(b)......... $18.80



125. Wala Inc. bases its selling and administrative expense budget on the number of units sold. The variable selling and administrative expense is $8.20 per unit. The budgeted fixed selling and administrative expense is $132,800 per month, which includes depreciation of $14,400. The remainder of the fixed selling and administrative expense represents current cash flows. The sales budget shows 8,000 units are planned to be sold in July.

Required:

Prepare the selling and administrative expense budget for July.

Ans:

JulyBudgeted unit sales.................................................................... 8,000Variable selling and administrative expense per unit................ $8.20Budgeted variable expense........................................................ $ 65,600Budgeted fixed selling and administrative expense.................. 132,800 Total budgeted selling and administrative expense................... 198,400Less depreciation....................................................................... 14,400 Cash disbursements for selling and administrative expenses.... $184,000




126. The selling and administrative expense budget of Garney Corporation is based on the number of units sold, which are budgeted to be 1,800 units in October. The variable selling and administrative expense is $2.00 per unit. The budgeted fixed selling and administrative expense is $22,680 per month, which includes depreciation of $7,020. The remainder of the fixed selling and administrative expense represents current cash flows.

Required:

Prepare the selling and administrative expense budget for October.

Ans:October

Budgeted unit sales..................................................................... 1,800Variable selling and administrative expense per unit................. $2.00Budgeted variable expense......................................................... $ 3,600Budgeted fixed selling and administrative expense.................... 22,680 Total budgeted selling and administrative expense.................... 26,280Less depreciation........................................................................ 7,020 Cash disbursements for selling and administrative expenses..... $19,260



127. Romeiro Corporation is preparing its cash budget for September. The budgeted beginning cash balance is $46,000. Budgeted cash receipts total $160,000 and budgeted cash disbursements total $152,000. The desired ending cash balance is $70,000. The company can borrow up to $120,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company's cash budget for September in good form.

Ans:

Cash balance, beginning........................................................... $ 46,000Add cash receipts...................................................................... 160,000 Total cash available................................................................... 206,000Less cash disbursements........................................................... 152,000 Excess (deficiency) of cash available over disbursements....... 54,000Borrowings................................................................................ 16,000 Cash balance, ending................................................................ $ 70,000




128. Zolezzi Inc. is preparing its cash budget for March. The budgeted beginning cash balance is $42,000. Budgeted cash receipts total $178,000 and budgeted cash disbursements total $175,000. The desired ending cash balance is $50,000. The company can borrow up to $160,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company's cash budget for March in good form. Make sure to indicate what borrowing, if any, would be needed to attain the desired ending cash balance.

Ans:

Cash balance, beginning......................................................... $ 42,000Add cash receipts.................................................................... 178,000 Total cash available................................................................ 220,000Less cash disbursements......................................................... 175,000 Excess (deficiency) of cash available over disbursements..... 45,000Borrowings............................................................................. 5,000 Cash balance, ending.............................................................. $ 50,000



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Chapter 8