Exercise 8-1:

Schedule of Expected Cash Collections

Given:
Peak sales for Midwest Products, a wholesale distributor of leaf rakes, occur in August. The
company's sales budget for the third quarter showing these peak sales is given below:

Budgeted Sales (All on Account)

Actual Sales (All on Account)
Total Sales

May

June

$430,000
$430,000

$540,000
$540,000

July
$600,000
$600,000

August September
$900,000
$500,000
$900,000

$500,000

From past experience, the company has learned that 20% of a month's sales are collected in the
month of sale, another 70% are collected in the month following the sale, and the remaining 10% are
collected in the second month following the sale. Bad debts are negligible and can be ignored.
Required:
1.

Prepare a schedule of expected cash collections from sales, by month and in total, for the third
quarter.
May
June
July
August
September
20% collected in month of sale
$86,000 $108,000
$120,000
$180,000
$100,000
70% collected in month after sale
301,000
378,000
420,000
630,000
10% collected in 2nd month after
43,000
54,000
60,000
Total
$86,000 $409,000
$541,000
$654,000
$790,000

2. Assume that the company will prepare a budgeted balance sheet as of September 30. Compute
the A/R as of that date.
Accounts Receivable -- September 30:

%
Uncollected

From August Sales:

From September Sales:
Total A/R

$900,000
$500,000

Check:
Total Sales:
Less Total Collections:
Accounts Receivable -- September 30:

10%
80%

A/R
$90,000
400,000
$490,000

$2,970,000
2,480,000
$490,000

Total
$2,000,000
$2,970,000

ning 10% are

or the third
Total
$400,000
1,428,000
157,000
$1,985,000

Exercise 8-2:

Production Budget

Given:
Crystal telecom has budgeted the sales of its innovative mobile phone over the next four months as
follows:
Unit
Sales
July
30,000
August
45,000
September
60,000
October
50,000
The company is now in the process of preparing a production budget for the third quarter. Past
experience has shown that end-of-month inventories of finished goods must equal 10% of the next
month's sales. The inventory at the end of June was 3,000.
Required:
Prepare a production budget for the third quarter showing the number of units to be produced each
month and for the quarter in total.

Budgeted Sales
Desired EI**
Total Units Desired
Less BI
Production

July
30,000
4,500
34,500
3,000
31,500

August
45,000
6,000
51,000
4,500
46,500

September
60,000
5,000
65,000
6,000
59,000

** EI is anticipated to be 10% of the next month's sales

Quarter
135,000
5,000
140,000
3,000
137,000
137,000

October
50,000

Exercise 8-3:

Direct Materials Budget

Given:
Micro Products, Inc. has developed a very powerful electronic calculator. Each calculator requires 3 small
"chips" that cost $2 each and are purchased from an overseas supplier. Micro Products has prepared a
production budget for the calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below:

Budgeted Production (Calculators)

1st Quarter Y2 2nd Quarter Y2 3rd Quarter Y2 4th Quarter Y2

60,000
90,000
150,000
100,000

The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a
precaution against stockout. For this reason, the inventory of chips at the end of a quarter must be equal to
following quarter's production needs. Some 36,000 chips will be on hand to start the first quarter of Year 2.
Required:
Prepare a direct materials budget for chips, by quarter and in total, for Year 2. At the bottom of your budget,
show the dollar amount of purchases for each quarter and for the year in total.
1st Quarter Y2 2nd Quarter Y2 3rd Quarter Y2 4th Quarter Y2
Budgeted Production (Calculators)
60,000
90,000
150,000
100,000
# of chips needed per calculator
3
3
3
3
Total chips needed for production
180,000
270,000
450,000
300,000
Desired EI **
54,000
90,000
60,000
48,000
Total direct materials needed
234,000
360,000
510,000
348,000
Less: BI of chips
36,000
54,000
90,000
60,000
Required purchases of chips (units)
198,000
306,000
420,000
288,000
Cost per chip
$2
$2
$2
$2
Required purchases of chips (dollars)
$396,000
$612,000
$840,000
$576,000
** EI is anticipated to be 20% of the next quarter's production needs.

wn below:
1st Quarter Y3
80,000

arge inventories as a
equal to 20% of the
f Year 2.

r budget,

Year 2
400,000
3
1,200,000
48,000
1,248,000
36,000
1,212,000
$2
$2,424,000

Exercise 8-4:

Direct Labor Budget

Given:
The Production Department of the Riverside Plant of Junnen Corporation has submitted the following
forecast of units to be produced at the plant for each quarter of the upcoming fiscal year. The plant
produces high-end outdoor barbecue grills.

Units to be produced

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

5,000
4,400
4,500
4,900

Each unit requires 0.40 direct labor hours and direct labor workers are paid $11 per hour.
Required:
1. Construct the company's direct labor budget for the upcoming fiscal year, assuming that
the direct labor workforce is adjusted each quarter to match the number of hours required
to produce the forecasted number of units produced.

Units to be produced
Direct labor hours required per grill
Total DLHs required for production
DL Cost per hour
Total Budgeted DL Costs

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

5,000
4,400
4,500
4,900
0.4
0.4
0.4
0.4
2,000
1,760
1,800
1,960
$11
$11
$11
$11
$22,000
$19,360
$19,800
$21,560

Year
18,800
0.4
7,520
$11
$82,720

2. Construct the company's direct labor budget for the upcoming fiscal year, assuming that
the direct labor workforce is not adjusted each quarter. Instead assume that the company's
direct labor workforce consists of permanent employees who are guaranteed to be paid for
at least 1,800 hours of work each quarter. If the number of required direct labor hours is less
than this number, the workers are paid for 1,800 hours anyway. Any hours worked in excess
of 1,800 hours in a quarter are paid at the rate of 1.5 times the normal hourly rate for DL.

Units to be produced
Direct labor hours required per grill
Total DLHs required for production
Minimum guaranteed hours (@ $11)
Wage rate for guaranteed hours
Wages for guaranteed time
Overtime hours
Wages rate for overtime hours (1.5X)
Wages for overtime
Total Budgeted DL Costs

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

5,000
4,400
4,500
4,900
0.40
0.40
0.40
0.40
2,000
1,760
1,800
1,960
1,800
1,800
1,800
1,800
$11
$11
$11
$11
$19,800
$19,800
$19,800
$19,800
200
0
0
160
$16.50
$16.50
$16.50
$16.50
$3,300
$0
$0
$2,640
$23,100
$19,800
$19,800
$22,440

Year
18,800
0.40
7,520
7,200
$11
$79,200
360
$16.50
$5,940
$85,140

Exercise 8-5:

Manufacturing Overhead Budget

Given:
The direct labor budget of Krispin Corporation for the upcoming fiscal year contains the following
details concerning budgeted direct labor hours.

Budgeted DL Hours

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

5,000
4,800
5,200
5,400

The company's VMOH rate is $1.75 per DLH and the company's FMOH is $35,000 per quarter.
The only noncash item included in the FMOH is depreciation, which is $15,000 per quarter.
Required:
1. Construct the company's MOH budget for the upcoming fiscal year.

Budgeted DL Hours
VMOH rate per DLH
Budgeted VMOH Expense
Budgeted FMOH Expense
Budgeted TMOH Expense

1st Quarter
5,000
$1.75
$8,750
35,000
$43,750

2nd Quarter
4,800
$1.75
$8,400
35,000
$43,400

2. Compute the company's TMOH rate for the upcoming fiscal year.

3rd Quarter
5,200
$1.75
$9,100
35,000
$44,100

4th Quarter
5,400
$1.75
$9,450
35,000
$44,450
$8.6127

Year
20,400
$1.75
$35,700
140,000
$175,700

Exercise 8-6:

Selling and Administrative Expense Budget

Given:
The budgeted unit sales of Haerve Company for the upcoming fiscal year are provided below:

Budgeted unit sales

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

12,000
14,000
11,000
10,000

The company's variable selling and administrative expense per unit is $2.75. Fixed selling and Administrative
expenses include advertising expenses of $12,000 per quarter, executive salaries of $40,000 per quarter,
and depreciation of $16,000 per quarter. In addition, the company will make insurance payments of $6,000
in the 2nd Quarter and $6,000 in the 4th Quarter. Finally, property taxes of $6,000 will be paid in the 3rd
Quarter.
Required:
Prepare the company's selling and administrative expense budget for the upcoming fiscal year.

Budgeted units
Variable S & A rate per unit
Budgeted Variable S & A Expense
Budgeted Fixed S & A Expenses:
Advertising
Executive salaries
Depreciation
Insurance Expense1
Property Tax Expense1
Total Fixed S & A Expense
Total Budgeted S&A Expense
1

1st Quarter
12,000
$2.75
$33,000

2nd Quarter
14,000
$2.75
$38,500

3rd Quarter
11,000
$2.75
$30,250

4th Quarter
10,000
$2.75
$27,500

$12,000
40,000
16,000

$12,000
40,000
16,000
6,000

$12,000
40,000
16,000

$12,000
40,000
16,000
6,000

$68,000
$101,000

$74,000
$112,500

Are these expense items or cash payments?

6,000
$74,000
$104,250

$74,000
$101,500

and Administrative
0 per quarter,
ments of $6,000
aid in the 3rd

Year
47,000
$2.75
$129,250
$48,000
160,000
64,000
12,000
6,000
$290,000
$419,250

Problem 8-24:
Given:
The president of Univax, Inc., has just approached the company's bank seeking short-term financing
for the coming year, Year 2. Univax is a distributor of commercial vacuum cleaners. The bank has
stated that the loan request must be accompanied by a detailed cash budget that shows the quarters
in which financing will be needed, as well as the amounts that will be needed and the quarters in
which repayments can be made.
To provide this information for the bank, the president has directed that the following data be gathered
from which a cash budget can be prepared:
a. Budgeted sales and merchandise purchases for Year 2, as well as actual sales and purchases for
the last quarter of Year 1, are as follows:
Merchandise
Year 1:
Sales
Purchases
Fourth quarter actual
$300,000
$180,000
Year 2:
First quarter, estimated
$400,000
$260,000
Second quarter, estimated
$500,000
$310,000
Third quarter, estimated
$600,000
$370,000
Fourth quarter estimated
$480,000
$240,000
b. The company typically collects 33% of a quarter's sales before the quarter ends and another 65%
in the following quarter. The remainder is uncollectible. This pattern of collections is now being
experienced in the actual data for the Year 1 fourth quarter.
c. Some 20% of a quarter's merchandise purchases are paid for within the quarter. The remainder is
paid in the follow quarter.
d. Selling & Administrative Expenses for Year 2 are budgeted at $90,000 per quarter plus 12% of sales.
Of the fixed amount, $20,000 each quarter is depreciation.
e. The company will pay $10,000 in cash dividends each quarter.
f. Land purchases will be made as follows during the year: $80,000 in the second quarter and $48,500
in the third quarter.
g. The Cash account contained $20,000 at the end of Year 1. The company must maintain a minimum
cash balance of at least $18,000.
h. The company has an agreement with a local bank that allows the company to borrow in increments
of $10,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest
rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded.
The company would, as far as it is able, replay the loan plus accumulated interest at the end of the year.
i.

At present, the company has no loans outstanding.

Required:
1. Prepare the following, by quarter and in total, for Year 2:

a. A schedule of expected cash collections on sales.

$300,000

Sales

4th Q Year 1
Collections in month of sales (33%)
Collections in month following sales (65%)

$400,000

$500,000

1st Q Year 2

2nd Q Year 2

$132,000
$195,000
$327,000

$165,000
$260,000
$425,000

$600,000
3rd Q Year 2

$480,000
4th Q Year 2

$198,000
$325,000
$523,000

$158,400
$390,000
$548,400

$370,000

$240,000

b. A schedule of expected cash disbursements for merchandise purchases.

Purchases

$180,000
4th Q Year 1

Payments for purchases -- month of purchase (20%)

Payments for purchases -- following quarter (80%)

$260,000

$310,000

1st Q Year 2

2nd Q Year 2

$52,000
$144,000
$196,000

$62,000
$208,000
$270,000

3rd Q Year 2

$74,000
$248,000
$322,000

4th Q Year 2

$48,000
$296,000
$344,000

2. Compute the expected cash disbursements for selling and administrative expenses, by quarter and in
total, for Year 2.
$300,000
$400,000
$500,000
$600,000
$480,000
Sales
4th Q Year 1
Payments for var. operating expenses (12% of sales)
Fixed operating expenses less non-cash depreciation
Cash disbursements for operating expenses

1st Q Year 2

2nd Q Year 2

$48,000
$70,000
$118,000

$60,000
$70,000
$130,000

3rd Q Year 2

$72,000
$70,000
$142,000

4th Q Year 2

$57,600
$70,000
$127,600

3. Prepare a cash budget by quarter and in total for Year 2.

Cash Budget:
Cash balance, beginning
Add cash collections
Total cash available
Less disbursements:
Merchandise purchases
Selling & Administrative
Land
Dividends (Declared & Paid)
Total disbursements
Net Cash Inflow before Financing

Available for repayment

Financing:
Borrowings
Repayments
$10,000
Interest
1%
Total Financing
Cash balance, ending
Desired minimum cash balance
Excess Over Desired Minimum

1st Q Year 2

2nd Q Year 2

$20,000
327,000
$347,000

$23,000
425,000
$448,000

3rd Q Year 2

$18,000
523,000
$541,000

4th Q Year 2

$18,500
548,400
$566,900

$196,000
$118,000

$322,000
$142,000
$48,500
$10,000
$522,500
$18,500
$500

$344,000
$127,600

$10,000
$324,000
$23,000
$5,000

$270,000
$130,000
$80,000
$10,000
$490,000
($42,000)
$0

$0
0
0
$0
$23,000

$60,000
0
0
$60,000
$18,000

$0
0
0
$0
$18,500

$0
($60,000)
(5,400)
($65,400)
$19,900

$18,000
$5,000

$18,000
$0

$18,000
$500

$18,000
$1,900

$10,000
$481,600
$85,300
$67,300

Total
$653,400
$1,170,000
$1,823,400

Total
$236,000
$896,000
$1,132,000

uarter and in

Total
$237,600
$280,000
$517,600

Y2

$20,000
1,823,400
$1,843,400
$1,132,000
$517,600
$128,500
$40,000
$1,818,100
$25,300
$7,300
$60,000
($60,000)
($5,400)
($5,400)
$19,900
$18,000
$1,900

Exercise 8-27:

Completing a Master Budget

Given:
Nordic Company, a merchandising company, prepares its master budget on a quarterly basis. The
following data have been assembled to assist in preparation of the master budget for the second
quarter.
a. As of March 31 (the end of the prior quarter), the company's balance sheet showed the following
account balances:
Cash
Accounts Receivable
Inventory
Building and equipment
Accounts Payable
Capital Stock
Retained Earnings
Total
b.

$9,000
48,000
12,600
214,100

$283,700

$18,300
190,000
75,400
$283,700

Actual sales for March and budgeted sales for April-July are as follows:
Actual
Budgeted Budgeted Budgeted
March
April
May
June
$60,000 $70,000
$85,000
$90,000

Budgeted
July
$50,000

$245,000

c.

Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month
following the sale. The A/R at March 31 are a result of March credit sales.

d.

The company's gross margin % is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

e.

Monthly expenses are budgeted as follows:

Salaries and wages
Shipping
Advertising
Other expenses
Depreciation, including depreciation on new
assets acquired during the quarter, will be

$7,500
6%
$6,000
4%

per month
of sales
per month
of sales

$6,000 for the quarter

f.

Each month's EI should equal

g.

Half of a month's inventory purchases are paid for in the month of purchase and half in the following
month.

h.

Equipment purchases during the quarter will be as follows:

April
May

i.

30% of the following month's COGS

$11,500
$3,000

Dividends declared and paid in June

$3,500

j.

Management wants to maintain a minimum cash balance of $8,000.

$8,000

The company has an agreement with a local bank that allows the company to borrow in increments
of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate
on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded.
The company would, as far as it is able, repay the loan plus accumulated interest at the end of the
quarter.
Required:
Using the data above, complete the following statements and schedules for the second quarter:
1.

2.

Schedule of expected cash collections:

Actual
March
Total Sales
$60,000

April
$70,000

May
$85,000

June
$90,000

Total
$305,000

Collections from:
Cash Sales (20%)
Credit Sales (80%, 1-month delay)
Total Cash Collections

April
$14,000
48,000
$62,000

May
$17,000
56,000
$73,000

June
$18,000
68,000
$86,000

Quarter
$49,000
172,000
$221,000

Total Sales

March
$60,000

April
$70,000

May
$85,000

June
$90,000

July
$50,000

Budgeted COGS (60% of Sales)

Add desired EI (30% next COGS)
Total Needs
Less BI (30% of this month's COGS)
Purchases

March
$36,000
12,600
$48,600
10,800
$37,800

April
$42,000
15,300
$57,300
12,600
$44,700

May
$51,000
16,200
$67,200
15,300
$51,900

June
$54,000
9,000
$63,000
16,200
$46,800

Quarter
$147,000
9,000
$156,000
12,600
$143,400

June
$23,400
25,950
$49,350

Quarter
$71,700
66,600
$138,300

a. Merchandise purchases budget:

b. Schedule of expected cash disbursement for merchandise purchases:

50% paid in month of purchase

50% paid In month after purchase
Total
3.

March
$18,300

April
$22,350
18,300
$40,650

May
$25,950
22,350
$48,300

Schedule of expected cash disbursements for selling & administrative

Salaries and Wages

Shipping (6% of sales)
Advertising
Other Expenses (4% of sales)
Total Selling & Admin.

April
$7,500
$4,200
$6,000
$2,800
$20,500

May
$7,500
$5,100
$6,000
$3,400
$22,000

June
$7,500
$5,400
$6,000
$3,600
$22,500

Quarter
$22,500
$14,700
$18,000
$9,800
$65,000

4.

Cash Budget:
Cash balance, beginning
Add cash collections
Total cash available
Less disbursements:
Inventory purchases
Selling & Administrative
Equipment purchases
Dividends (Declared & Paid)
Total disbursements
Net Cash Inflow before Financing

Available for repayment

Financing:
Borrowings
Repayments
Interest
Total Financing
Cash balance, ending

$1,000
1%

Desired minimum cash balance

Excess Over Desired Minimum
5.

April
$9,000
62,000
$71,000

May
$8,350
73,000
$81,350

June
$8,050
86,000
$94,050

Quarter
$9,000
221,000
$230,000

$40,650
$20,500
$11,500

$48,300
$22,000
$3,000

$49,350
$22,500

$72,650
($1,650)
$0

$73,300
$8,050
$50

$3,500
$75,350
$18,700
$10,700

$138,300
$65,000
$14,500
$3,500
$221,300
$8,700
$700

$10,000
0
0
$10,000
$8,350

$0
0
0
$0
$8,050

$0
(10,000)
(300)
($10,300)
$8,400

$10,000
($10,000)
($300)
($300)
$8,400

$8,000
$350

$8,000
$50

$8,000
$400

$8,000
$400

Prepare an absorption costing I/S statement for the quarter ending June 30
Nordic Company
Absorption Costing Income Statement
For the Quarter Ended June 30th
Sales
Cost of Goods Sold:
Beginning Inventory
Add purchases
Goods available for sale
Ending Inventory
Gross Margin
Selling & Administrative Expenses
Net Operating Income
Less Interest Expense
Net Income

6.

Prepare a balance sheet as of June 30.

Nordic Company
Balance Sheet
6/30/20??
Assets:
Current Assets:

$245,000
$12,600
143,400
$156,000
9,000

147,000
$98,000
71,000
$27,000
(300)
$26,700

0.6
0.4

Cash
Accounts Receivable
Inventory
Long-Term Assets:
Net Building and Equipment
Total Assets
Equity:
Current Liabilities:
Accounts Payable
Stockholders' Equity
Capital Stock
Retained Earnings**
Total Equity

**Retained Earnings:
Beginning Balance
Plus: Net Income
Less: Dividends Declared
Ending Balance

$8,400
72,000
9,000

$89,400
222,600
$312,000

$23,400
$190,000
98,600

$75,400
26,700
(3,500)
$98,600

$288,600
$312,000

Total
$355,000