Practice Problems 

1.
 
Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales
occur in May of each year, as shown in the company’s sales budget for the second quarter given
below:

  April May June Total

  Budgeted sales (all on account) $490,000     $690,000     $220,000     $1,400,000  

     From past experience, the company has learned that 25% of a month’s sales are collected in
the month of sale, another 60% are collected in the month following sale, and the remaining
15% are collected in the second month following sale. Bad debts are negligible and can be
ignored. February sales totaled $420,000, and March sales totaled $450,000.

Required:
1. Prepare a schedule of expected cash collections from sales, by month and in total, for the
second quarter.
   
    

2. Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the
accounts receivable as of that date.
   

   

 
 

 2.
 
Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang for the
next four months as follows:

  Sales in Units
  April   82,000 
  May   90,000 
  June   122,000 
  July   96,000 
 

The company is now in the process of preparing a production budget for the second quarter. Past
experience has shown that end-of-month inventory levels must equal 15% of the following
month’s sales. The inventory at the end of March was 12,300 units.

Required:
Prepare a production budget for the second quarter; in your budget, show the number of units to
be produced each month and for the quarter in total.
 

 3.
 
Two grams of musk oil are required for each bottle of Mink Caress, a very popular perfume
made by a small company in western Siberia. The cost of the musk oil is $1.60 per gram.
Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first
quarter of Year 3:

    
 

  Year 2   Year 3  
  First Second Third Fourth   First  
  Budgeted production, in bottles 76,000   106,000   166,000   116,000     86,000   

    
 

    Musk oil has become so popular as a perfume ingredient that it has become necessary to carry
large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at
the end of a quarter must be equal to 20% of the following quarter’s production needs. Some
30,400 grams of musk oil will be on hand to start the first quarter of Year 2.

  

Required:
Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. (Round "Unit
cost of raw materials" answers to 2 decimal places.)
 

 4.
 
The production manager of Rordan Corporation has submitted the following forecast of units to
be produced by quarter for the upcoming fiscal year:

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

  Units to be produced 10,600 8,500 7,000 11,100

Each unit requires 0.35 direct labor-hours, and direct laborers are paid $20 per hour.

Required:
1. Complete 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. (Round "Direct labor time per unit
(hours)" answers to 2 decimal places.)
   
     

2. Complete 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
3,000 hours of work each quarter. If the number of required direct labor-hours is less than
this number, the workers are paid for 3,000 hours anyway. Any hours worked in excess of
3,000 hours in a quarter are paid at the rate of 1.5 times the normal hourly rate for direct
labor. (Input all amounts as positive values.)
   

    

5.
 
The direct labor budget of Yuvwell Corporation for the upcoming fiscal year contains the
following details concerning budgeted direct labor-hours:

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

  Budgeted direct labor-hours 11,400 9,900 10,200 11,000

 
The company’s variable manufacturing overhead rate is $6.25 per direct labor-hour and the
company’s fixed manufacturing overhead is $82,000 per quarter. The only noncash item
included in fixed manufacturing overhead is depreciation, which is $20,500 per quarter.

Required:
1. Complete the company’s manufacturing overhead budget for the upcoming fiscal year.
   

    

 
 
 

2. Compute the company's manufacturing overhead rate (including both variable and fixed
manufacturing overhead) for the upcoming fiscal year.
 

 
    6.
 
The budgeted unit sales of Weller Company for the upcoming fiscal year are provided below:

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

  Budgeted unit sales 32,000 34,000 25,000 30,000

 
The company’s variable selling and administrative expense per unit is $3.10. Fixed selling and
administrative expenses include advertising expenses of $9,000 per quarter, executive salaries of
$50,000 per quarter, and depreciation of $31,000 per quarter. In addition, the company will
make insurance payments of $4,000 in the first quarter and $4,000 in the third quarter. Finally,
property taxes of $8,000 will be paid in the second quarter.

  
 

Required:
Prepare the company’s selling and administrative expense budget for the upcoming fiscal year.
(Round "Variable cost" answers to 2 decimal places.)

 
  7.
 
Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management
has prepared the following summary of its budgeted cash flows:

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

  Total cash receipts $190,000     $340,000     $220,000     $240,000    
  Total cash disbursements $267,000     $237,000     $227,000     $247,000    

The company’s beginning cash balance for the upcoming fiscal year will be $22,000. The
company requires a minimum cash balance of $10,000 and may borrow any amount needed
from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the
beginning of any quarter and may repay its loans, or any part of its loans, at the end of any
quarter. Interest payments are due on any principal at the time it is repaid. For simplicity,
assume that interest is not compounded.

Required:
Complete the company's cash budget for the upcoming fiscal year. (Cash deficiency,
repayments, and interest, should be indicated by a minus sign.)

Homework Questions
 1.

Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang for the
next four months as follows:

  Sales in Units
  April   64,000 
  May   80,000 
  June   104,000 
  July   87,000 

The company is now in the process of preparing a production budget for the second quarter. Past
experience has shown that end-of-month inventory levels must equal 15% of the following
month’s sales. The inventory at the end of March was 9,600 units.

 
Required:
Prepare a production budget for the second quarter; in your budget, show the number of units to
be produced each month and for the quarter in total.

2.
 
Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South
East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of
Supermix, one of the company’s products. The company is now planning raw materials needs
for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and
sales moving smoothly, the company has the following inventory requirements:

a. The finished goods inventory on hand at the end of each month must be equal to 2,000 units
of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is
budgeted to be 15,400 units.
b. The raw materials inventory on hand at the end of each month must be equal to one-half of
the following month’s production needs for raw materials. The raw materials inventory on
June 30 is budgeted to be 86,000 cc of solvent H300.
c. The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

Budgeted Sales
 
in Units
  July 67,000
  August 72,000
  September 82,000
  October 62,000
  November 52,000
  December 42,000

Required:
1. Prepare a production budget for Supermix for the months July, August, September, and
October.
   

     
 

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for
July, August, and September, and for the quarter in total.

 3.
 
The direct labor budget of Yuvwell Corporation for the upcoming fiscal year contains the
following details concerning budgeted direct labor-hours:

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

  Budgeted direct labor-hours 8,200 8,300 8,600 8,000

The company’s variable manufacturing overhead rate is $2.25 per direct labor-hour and the
company’s fixed manufacturing overhead is $50,000 per quarter. The only noncash item
included in fixed manufacturing overhead is depreciation, which is $12,500 per quarter.

Required:
1. Complete the company’s manufacturing overhead budget for the upcoming fiscal year.
   

      
 

2. Compute the company's manufacturing overhead rate (including both variable and fixed
manufacturing overhead) for the upcoming fiscal year.
   

     

 4.
 
The Production Department of Hruska Corporation has submitted the following forecast of units
to be produced by quarter for the upcoming fiscal year:

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

  Units to be produced 10,200 9,200 11,200 12,200

Each unit requires 0.25 direct labor-hours and direct laborers are paid $11.00 per hour.
     In addition, the variable manufacturing overhead rate is $1.60 per direct labor-hour. The
fixed manufacturing overhead is $82,000 per quarter. The only noncash element of
manufacturing overhead is depreciation, which is $22,000 per quarter.

Required:
1. Prepare 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. (Round "Direct labor time per unit
(hours)" and "Direct labor cost per hour" answers to 2 decimal places.)
   

     
 

2. Prepare the company’s manufacturing overhead budget.

   
 5.
 
Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly
basis. The following data have been assembled to assist in preparing the master budget for the
first quarter:

a. As of December 31 (the end of the prior quarter), the company’s general ledger showed the
following account balances:

 
          
  Cash $ 41,000        
  Accounts receivable  200,800        
  Inventory   57,900        
  Buildings and equipment
 351,000        
(net)
  Accounts payable    $ 85,425    
  Common stock      500,000    
  Retained earnings      65,275    

 
   
  $650,700     $650,700    

 
   

b. Actual sales for December and budgeted sales for the next four months are as follows:

   
  December(actual)  $251,000  
  January $386,000  
  February $583,000  
  March $297,000  
  April $194,000  

c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the
month following sale. The accounts receivable at December 31 are a result of December
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, $16,000 per month:
advertising, $56,000 per month; shipping, 5% of sales; other expenses, 3% of sales.
 Depreciation, including depreciation on new assets acquired during the quarter, will be
$42,260 for the quarter.
f. Each month’s ending inventory should equal 25% of the following month’s cost of goods
sold.
g. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half
is paid in the following month.
h. During February, the company will purchase a new copy machine for $1,100 cash. During
March, other equipment will be purchased for cash at a cost of $70,500.
i. During January, the company will declare and pay $45,000 in cash dividends.
j. Management wants to maintain a minimum cash balance of $30,000. 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. 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 first quarter:
1. Schedule of expected cash collections:
   

         

2-a. Merchandise purchases budget:

   

         
 

  *$386,000 sales × 60% cost ratio = $231,600.

  †$349,800 × 25% = $87,450.

  

2-b. Schedule of expected cash disbursements for merchandise purchases:

   

         

3. Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus
sign.)
   
         
 

4. Prepare an absorption costing income statement for the quarter ending March 31.
   

         

5. Prepare a balance sheet as of March 31.

 6.
 
Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in
which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to
help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in
paying off its loans in the past, the loan officer at the bank has asked the company to prepare a
cash budget for the quarter. In response to this request, the following data have been assembled:

  
 

On July 1, the beginning of the third quarter, the company will have a cash balance of
a.
$41,000.
b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales
are on account):

  

     
  May (actual) $160,000  
  June (actual) $200,000  
  July (budgeted) $320,000  
  August (budgeted) $540,000  
  September (budgeted) $280,000  

   

Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the
month following sale, and 3% in the second month following sale. The remainder is
uncollectible.

   

c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given
below:
 

  July August September

  Merchandise purchases $192,000   $324,000   $168,000 
  Salaries and wages $ 36,000   $ 40,000   $ 41,000 
  Advertising $110,000   $110,000   $ 81,000 
  Rent payments $ 5,000   $ 5,000   $ 5,000 
  Depreciation $ 5,000   $ 5,000   $ 5,000 

   

Merchandise purchases are paid in full during the month following purchase. Accounts
 
payable for merchandise purchases on June 30, which will be paid during July, total $120,000.
d.Equipment costing $10,000 will be purchased for cash during July.
e. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in
September. Interest on the loan will total $1,200.

   

Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for the
quarter in total.
   

     
 

2. Prepare a cash budget, by month and in total, for the third quarter. (Cash deficiency,
repayments and interest should be indicated by a minus sign.)
   
 7.
 
Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management
has prepared the following summary of its budgeted cash flows:

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

  Total cash receipts $300,000     $420,000     $350,000     $370,000    
  Total cash disbursements $358,000     $328,000     $318,000     $338,000    
 

The company’s beginning cash balance for the upcoming fiscal year will be $35,000. The
company requires a minimum cash balance of $10,000 and may borrow any amount needed
from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the
beginning of any quarter and may repay its loans, or any part of its loans, at the end of any
quarter. Interest payments are due on any principal at the time it is repaid. For simplicity,
assume that interest is not compounded.

Required:
Complete the company's cash budget for the upcoming fiscal year. (Cash deficiency,
repayments, and interest, should be indicated by a minus sign.)