Chapter 13

Planning and Budgeting

Part B: Computational Questions

76. The Sledge Hammer Company manufactures a line of high quality tools. The company sold
1,000,000 hammers at a price of $4 per unit in 2008. The company estimates that this volume
represents a 20% share of the current hammers market. The market is expected to increase by 5%.
Marketing specialists have determined that, as a result of a new advertising campaign and
packaging, the company will increase its share of this larger market to 24%. Due to changes in
prices, the new price for the hammer will be $4.30 per unit. This new price is expected to be in
line with the competition and have no effect on the volume estimates. What are the estimated
sales revenues in 2009?
A) $5,040,000.
B) $5,160,000.
C) $5,418,000.
D) $5,689,000.
E) Some other answer _______________.

Answer: C Difficulty: Complex Learning Objective: 3

Response:
1,000,000/.2 = 5,000,000; 5,000,000 x 1.05 = 5,250,000 new market size
5,250,000 x .24 = 1,260,000 sales (units); 1,260,000 x $4.30 = $5,418,000
AACSB: Analytic

77. TRS is a large securities dealer. Last year, the company made 120,000 trades with an average
commission of $120. Because of the general economic climate, TRS expects trade volume to
decline by 20%. Fortunately, the average commission per trade is likely to increase by 10%
because trades are expected to be large in the coming year. What are the estimated commission's
revenues for TRS in the coming year?
A) $11,520,000
B) $12,672,000
C) $15,552,000
D) $15,840,000
E) some other answer _______________.

Answer: B Difficulty: Complex Learning Objective: 3

Response: [(120,000 x .80) x ($120 x 1.10) = $12,672,000

AACSB: Analytic

85. Kaufman Industries has just completed its sales forecasts and its marketing department estimates
that the company will sell 36,000 units during the upcoming year. In the past, management has
maintained inventories of finished goods at approximately three months' sales. However, the

322 Lanen, Anderson Maher Fundamentals of Cost Accounting, 2e

 estimated inventory at the start of the year of the budget period is only 6,000 units. Sales occur
evenly throughout the year. What is the estimated production level (units) for the first month of
the upcoming budget year?
A) 12,000
B) 9,000
C) 6,000
D) 3,000
E) some other answer _______________.

Answer: C Difficulty: Moderate Learning Objective: 4

Response: 36,000/12 = 3,000 sales per month; 3,000 + (3 x 3,000) - 6,000 = 6,000
AACSB: Analytic

Use the following to answer questions 86-87:

The Sun Company manufactures a special line of graphic tubing items. The company estimates it will sell
75,000 units of this item in 2008. The beginning finished goods inventory contains 20,000 units. The
target for each year's ending inventory is 10,000 units.

Each unit requires five feet of plastic tubing. The tubing inventory currently includes 70,000 feet of the
required tubing. Materials on hand are targeted to equal three month's production. Any shortage in
materials will be made up by the immediate purchase of materials. Sales take place evenly throughout the
year.

86. What is the production budget (in units) for 2008?

A) 60,000
B) 65,000
C) 75,000
D) 85,000
E) Some other answer _______________.

Answer: B Difficulty: Simple Learning Objective: 4

Response: 75,000 + 10,000 - 20,000 = 65,000

AACSB: Analytic

87. What are the materials requirements (in feet) for 2008?
A) 313,750
B) 336,250
C) 363,750
D) 386,250
E) Some other answer _______________.

Answer: B Difficulty: Moderate Learning Objective: 4

Response: 65,000 x 5 = 325,000 + (325,000/12 x 3) -70,000 = 336,250

AACSB: Analytic

Test Bank, Chapter 13 323

Use the following to answer questions 90-92:

The Task Company is to begin operations in May. They have budgeted May sales of $34,000, June sales
of $40,000, July sales of $42,000, and August sales of $38,000. 10% of each month's sales will represent
cash sales; 75% of the balance will be collected in the month following the sale, 17% the second month,
6% the third month and the balance is bad debts.

90. What is the amount of cash to be collected in the month of August?

A) $40,106
B) $40,340
C) $38,036
D) $44,140
E) Some other answer _______________.

Answer: A Difficulty: Complex Learning Objective: 5

Response:
($38,000 x .10) + ($42,000 x .90 x .75) + ($40,000 x .90 x .17) + ($34,000 x .90 x .06) = $40,106
AACSB: Analytic

91. Assume the Task Company charges 1 1/2% on any balance that is not collected in the month
following the month of sale. This charge will also change the collection percentages to 15% cash
sales, 80% of the balance collected in the month following the sale, 16% the second month, 3%
the third month. This stricter credit policy will reduce the estimated sales budgets by 7% each
month. What is the amount of cash to be collected in July?
A) $39,199
B) $35,312
C) $38,193
D) $35,520
E) Some other answer _______________.

Answer: D Difficulty: Complex Learning Objective: 5

Response:
$42,000 x .93 = $39,060; $40,000 x .93 = $37,200; $34,000 x .93 = $31,620
($39,060 x 15) + ($37,200 x .85 x .80) + ($31,620 x .85 x .16 x 1.015) = $35,520
AACSB: Analytic

93. Pardee Company makes 30% of its sales for cash and 70% on account. 60% of the account sales
are collected in the month of sale, 25% in the month following sale, and 12% in the second month
following sale. The remainder is uncollectible. The following information has been gathered for
the current year:

324 Lanen, Anderson Maher Fundamentals of Cost Accounting, 2e

 Month 1 2 3 4
Total sales $60,000 $70,000 $50,000 $30,000

Total cash receipts in Month 4 will be

A) $38,000.
B) $47,900.
C) $27,230.
D) $36,230.
E) Some other answer _________________.

Answer: D Difficulty: Moderate Learning Objective: 5

Response:
($30,000 x .30) + ($30,000 x .70 x .60) + ($50,000 x .70 x. .25) + ($70,000 x .70 x .12) = $36,230
AACSB: Analytic

94. Pardee Company makes 30% of its sales for cash and 70% on account. 60% of the account sales
are collected in the month of sale, 25% in the month following sale, and 12% in the second month
following sale. The remainder is uncollectible. The following information has been gathered for
Pardee's first year of operations:

Month 1 2 3 4
Total sales $60,000 $70,000 $50,000 $30,000

Total cash receipts in Month 3 will be

A) $52,200.
B) $53,290.
C) $50,000.
D) $51,510.
E) Some other answer _________________.

Answer: B Difficulty: Moderate Learning Objective: 5

Response:
($50,000 x .30) + ($50,000 x .70 x .60) + ($70,000 x .70 x .25) + ($60,000 x .70 x .12) = $53,290
AACSB: Analytic

96. The Richburn Manufacturing Company increased its ending inventory by $17,000 in 2008. The
company also granted its customers more liberal credit terms which increased the accounts
receivable by $37,500. Sales were $975,000 in 2008 and the accounts payable decreased by
$27,500. The gross profit on sales is 45%. Selling and administrative expenses were $145,000;
this included depreciation expense of $4,000. What were the cash disbursements for 2008?
A) $721,750.
B) $706,500.

Test Bank, Chapter 13 325

 C) $689,500.
D) $599,750.
E) Some other answer ________________.

Answer: A Difficulty: Complex Learning Objective: 5

Response:
$975,000 (1 - .45) = $536,250
$536,250 + $17,000 + $27,500 + ($145,000 - $4,000) = $721,750
AACSB: Analytic

97. The Jack Company is preparing its cash budget for the month of June. The following information
is available concerning its inventories:

Inventories at beginning of June $ 67,500

Estimated purchases for June 330,000
Estimated cost of goods sold for June 337,500
Estimated payments in June for purchases in May 56,250
Estimated payments in June for purchases prior to May 15,000
Estimated payments in June for purchases in June 80%

What are the estimated cash disbursements for inventories in June?

A) $264,000.
B) $320,250.
C) $335,250.
D) $341,250.
E) Some other answer _______________.

Answer: C Difficulty: Moderate Learning Objective: 5

Response: $330,000 (.80) + $56,250 + $15,000 = $335,250

AACSB: Analytic

98. The Smart Company is preparing its cash budget for the month of June. The following
information is available concerning its accounts receivable:

Estimated credit sales for June $300,000

Actual credit sales for May 225,000
Est. collections in June for credit sales in June 25%
Est. collections in June for credit sales in May 65%
Est. collections in June for credit sales prior to May $ 18,000
Est. write-offs in June for uncollectible credit sales 12,000
Est. provision for bad debts in June for credit sales in June 10,000

What are the estimated cash receipts from accounts receivable collections in June?
A) $221,250.
B) $227,250.
C) $229,250.

326 Lanen, Anderson Maher Fundamentals of Cost Accounting, 2e

 D) $239,250.
E) Some other answer ________________.

Answer: D Difficulty: Moderate Learning Objective: 5

Response:
[$300,000 (.25)] + [$225,000 (.65)] + $18,000 = $239,250
AACSB: Analytic

99. The Sport Company is preparing a cash budget for the month of July. The following information
on accounts receivable collections is available from Sport's past collection experience:

Percent of current month's sales collected this month 15%

Percent of prior month's sales collected this month 72%
Percent of sales two months prior to current month collected this month 6%
Percent of sales three months prior to current month collected this month 3%

The remaining 4% are not collected and are written off as bad debts.

Credit sales to date are as follows:

July-estimated $150,000
June $135,000
May $120,000
April $145,000

What are the estimated collections in July?

A) $125,250.
B) $131,250.
C) $133,250.
D) $137,250.
E) Some other answer .

Answer: B Difficulty: Moderate Learning Objective: 5

Response: ($150,000 x .15) + ($135,000 x .72) + ($120,000 x .06) + ($145,000 x .03) = $131,250
AACSB: Analytic

116. A company is formulating its plans for the coming year, including the preparation of its cash
budget. Historically, the company's sales are 30% cash. The remaining sales are on credit with the
following collection pattern:

Test Bank, Chapter 13 327

 Collections on Account Percentage
In the month of sale 40%
In the month following the sale 58%
Uncollectible 2%

Sales for the first 5 months of the coming year are forecast as follows:

January $3,500,000
February 3,800,000
March 3,600,000
April 4,000,000
May 4,200,000

For the month of April, the total cash receipts from sales and collections on account would be
(CIA adapted)
A) $3,729,968
B) $3,781,600
C) $4,025,200
D) $4,408,000
E) some other answer _______________.

Answer: B Difficulty: Moderate Learning Objective: 5

Response: (.30 x $4,000,000) + (.40 x .70 x $4,000,000) + (.58 x .70 x $3,600,000) = $3,781,600
AACSB: Analytic

Essay Questions

120. Eppes Plating Company plans to sell 120,000 units of a certain product line in 2008 at a price of
$6. There are 10,000 units of the product in the inventory at January 1, 2008 and the inventory is
to be increased 20% during the year.

Two types of materials are used to make the product. Four units of Material A each costing 30
cents are required for each unit of product, and two units of Material B each costing 40 cents are
required for each unit of product. On January 1, 2008, there are 10,000 units of Material A in
inventory and 5,000 units of Material B. Plans for 2008 indicate that 12,000 units of Material A
and 6,000 units of Material B are to be in the inventory on December 31.

Each unit of product can be produced in 15 minutes of direct labor time. Direct labor is paid at
the rate of $8.00 an hour. The variable manufacturing overhead varies at the rate of $.50 per
direct labor hour and the fixed manufacturing overhead for the year is estimated at $140,000.

Required:
(A) Prepare a production budget for 2008.
(B) Prepare a materials purchases budget for 2008.

328 Lanen, Anderson Maher Fundamentals of Cost Accounting, 2e

 (C) Prepare a labor cost budget for 2008.
(D) Prepare a budget for manufacturing overhead for 2008.

Answer:
a.
Sales 120,000
Plus desired ending inventory 12,000
132,000
Less estimated beginning inventory ( 10,000 )
Production requirements 122,000

b.
A B
Production requirements 122,000 122,000
Materials in one finished goods unit 4 2
Materials to meet production 488,000 244,000
Add desired ending inventory 12,000 6,000
500,000 250,000
Less estimated beginning inventory ( 10,000 ) (5,000 )
Materials to be purchased 490,000 245,000
Cost per material unit $ .30 $ .40
Material purchases $147,000 $98,000

c.
Production requirements 122,000
Hours per unit .25
Hours required for production 30,500
Rate per hour $ 8
Labor costs $244,000

d.
Variable overhead ($.50 x 30,000) $15,250
Fixed overhead 140,000
Total overhead $155,250

AACSB: Analytic

121. Greatday, Inc. makes a product that has peak sales in September of each year. The company has
prepared a sales budget for the third quarter of 2008, as shown below:

Budgeted sales
July $200,000
August 400,000
September 600,000

The company is in the process of preparing a cash budget for the third quarter and must determine
the expected cash collections by month. To this end, the following information has been
assembled:

Test Bank, Chapter 13 329

 Collections on sales
In month of sale 60%
In month following sale 25%
In second month following sale 10%

The company gives a 3% cash discount to customers paying in the month of their sale. The
company charges 2% interest to customers who pay in the second month following their sales.
The accounts receivable balance to start the quarter is $150,000: $35,000 from May's sales and
$115,000 from June's sales.

Required: Prepare a cash receipts budget for the third quarter of 2008.

Answer:

July August September

Collected in month of sale:
$200,000 x .60 x .97 $116,400
$400,000 x .60 x .97 $232,800
$600,000 x .60 x .97 $349,200

Collected in month following

month of sale
$115,000/.40 x .25 71,875
$200,000 x .25 50,000
$400,000 x .25 100,000

Collected in second month

following month of sale:
$35,000/.15 x .10 x 1.02 23,800
$115,000/.40 x .10 x 1.02 29,325
$200,000 x .10 x 1.02 20,400

Total $212,075 $312,125 $469,600

AACSB: Analytic

123. A) The production manager of Miller Enterprises plans to have an inventory on hand at the end
of each month that will equal 150% of the next month's sales. This requirement was met at the
end of February. A sales budget for the four months ending June 30th is as follows:

Months Units
March 30,000
April 50,000
May 80,000
June 40,000

330 Lanen, Anderson Maher Fundamentals of Cost Accounting, 2e

 Required: Prepare a production budget for April and May.

April May
Sales 50,000 80,000
Plus desired ending inventory 120,000 60,000
170,000 140,000
Less estimated beginning inventory 75,000 120,000
Production 95,000 20,000

B) Past experience has demonstrated that 55% of the net sales billed in a month are collected
during the month, 35% are collected in the following month and 9% are collected in the second
following month. Customers are allowed a 3% discount if payment is made within 5 days after
the billing date. 65% of the customers that pay in the month of the sale, pay within 5 days and
take the discount. A sales budget for the four months ending June 30th is as follows:

Months Units Selling Price

March 30,000 $5.20
April 50,000 5.20
May 80,000 5.60
June 40,000 5.60

Required: Prepare a cash receipts budget for June.

Answer:

June
(.55)(40,000 x $5.60)(.65)(.97) $ 77,677.60
(.55)(40,000 x $5.60)(.35) 43,120.00
(.35)(80,000 x $5.60) 156,800.00
(.09)(50,000 x $5.20) 23,400.00
Total $300,997.60

AACSB: Analytic

Test Bank, Chapter 13 331