MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
EXERCISES AND PROBLEMS
164. Spirit Company sells three products with the following seasonal sales pattern:
Products
Quarter A B C
1 40% 30% 10%
2 30% 20% 40%
3 20% 20% 40%
4 10% 30% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit as follows:
Product Units Selling Price
A 50,000 $ 4
B 125,000 10
C 62,500 6
Required:
Prepare a sales budget, in units and dollars, by quarters for the company for the coming year.
Answer: First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Product A:
Sales (units) 20,000 15,000 10,000 5,000 50,000
Price x $4 x $4 x $4 x $4 x $4
Sales ($) $80,000 $60,000 $40,000 $20,000 $200,000
Product B:
Sales (units) 37,500 25,000 25,000 37,500 125,000
Price x $10 x $10 x $10 x $10 x $10
Sales ($) $375,000 $250,000 $250,000 $375,000 $1,250,000
Product C:
Sales (units) 6,250 25,000 25,000 6,250 62,500
Price x $6 x $6 x $6 x $6 x $6
Sales ($) $37,500 $150,000 $150,000 $37,500 $375,000
Total dollars $492,500 $460,000 $440,000 $432,500 $1,825,000
165. Lubriderm Corporation has the following budgeted sales for the next six‑month period:
Month Unit Sales
June 90,000
July 120,000
August 210,000
September 150,000
October 180,000
November 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month.
Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds.
Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.
Answer:
a. July August September
Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000
Total inventory requirements 162,000 240,000 186,000
Less: Beginning inventory 24,000 42,000 30,000
Budgeted production 138,000 198,000 156,000
b. July August September
Production in units 138,000 198,000 156,000
Targeted ending inventory in lbs.* 297,000 234,000 **252,000
Production needs in lbs.*** 690,000 990,000 780,000
Total requirements in lbs. 987,000 1,224,000 1,032,000
Less: Beginning inventory in lbs. ****207,000 297,000 234,000
Purchases needed in lbs. 780,000 927,000 798,000
Cost ($8 per lb.) x $8 x $8 x $8
Total material purchases $6,240,000 $7,416,000 $6,384,000
* 0.3 times next month's needs
** (180,000 + 24,000 - 36,000) times 5 lbs. x 0.3
*** 5 lbs. times units to be produced
**** (690,000 x .3) = 207,000 lbs.
166. Gerdie Company has the following information:
Month Budgeted Sales
March $50,000
April 53,000
May 51,000
June 54,500
July 52,500
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales.
Required:
Prepare a purchases budget for April through June.
Answer: April May June Total
Desired ending inventory $ 9,180 $ 9,810 $ 9,450 $ 9,450
Plus COGS 31,800 30,600 32,700 95,100
Total needed 40,980 40,410 42,150 104,550
Less beginning inventory 9,540 9,180 9,810 9,540
Total purchases $31,440 $31,230 $32,340 $ 95,010
167. Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.30 per foot of framing, $6.00 per square foot of glass, and $2.25 per square foot of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired.
Required:
a. Determine the quantity of framing, glass, and backing that is to be purchased during August.
b. Determine the total costs of direct materials for August purchases.
Answer:
a. Framing Glass Backing
Desired ending inventory* 2,250 750 750
Production needs (10,000 units)** 40,000 10,000 20,000
Total needs 42,250 10,750 20,750
Less: Beginning inventory 1,500 500 500
Purchases planned 40,750 10,250 20,250
b. Cost of direct materials:
Framing (40,750 x $0.30) $12,225.00
Glass (10,250 x $6.00) 61,500.00
Backing (20,250 x $2.25) 45,562.50
Total $119,287.50
*1,500 x 1.5 = 2,250
500 x 1.5 = 750
**10,000 x 4 = 40,000
10,000 x 1 = 10,000
10,000 x 2 = 20,000
168. Michelle Enterprises reports the year-end information from 20x2 as follows:
Sales (100,000 units) $250,000
Less: Cost of goods sold 150,000
Gross profit 100,000
Operating expenses (includes $10,000 of Depreciation) 60,000
Net income $ 40,000
Michelle is developing the 20x3 budget. In 20x3 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable.
Required:
Prepare a budgeted income statement for 20x3.
Answer:
Michelle Enterprises
Budgeted Income Statement
For the Year 20x3
Sales (95,000 x $2.75) $261,250
Cost of goods sold (20x3 sales x 62%) 161,975
Gross profit 99,275
Less: Operating expenses [($0.50 x 95,000] + $10,000) 57,500
Net income $ 41,775
169. Brad Corporation is using the kaizen approach to budgeting for 20x5. The budgeted income statement for January 20x5 is as follows:
Sales (240,000 units) $720,000
Less: Cost of goods sold 480,000
Gross margin 240,000
Operating expenses (includes $64,000 of fixed costs) 192,000
Net income $ 48,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.
Required:
Prepare a kaizen-based budgeted income statement for March of 20x5.
Answer:
Sales $720,000
Less: Cost of goods sold ($480,000 x 0.99 x 0.99) 470,448
Gross margin 249,552
Operating expenses [($128,000 x 0.99 x 0.99) + $64,000] 189,453
Net income $ 60,099
170. Allscott Company is developing its budgets for 20x5 and, for the first time, will use the kaizen approach. The initial 20x5 income statement, based on static data from 20x4, is as follows:
Sales (140,000 units) $420,000
Less: Cost of goods sold 280,000
Gross margin 140,000
Operating expenses (includes $28,000 of depreciation) 112,000
Net income $28,000
Selling prices for 20x5 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%.
Required:
Prepare a kaizen-based budgeted income statement for 20x5.
Answer:
Sales (126,000 x $3.24) $408,240
Less: COGS (126,000 x $1.80) 226,800
Gross margin 181,440
Operating expenses ($28,000 + $79,800) 107,800
Net income $ 73,640
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