CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6 16 Master budget Which of the following statements is correct regarding the components of the master budget? a The cash budget is used to create[.]
CHAPTER MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6-16 Master budget Which of the following statements is correct regarding the components of the master budget? a The cash budget is used to create the capital budget b Operating budgets are used to create cash budgets c The manufacturing overhead budget is used to create the production budget d The cost of goods sold budget is used to create the selling and administrative expense budget 6-17 Operating and financial budgets Which of the following statements is correct regarding the drivers of operating and financial budgets? a The sales budget will drive the cost of goods sold budget b The cost of goods sold budget will drive the units of production budget c The production budget will drive the selling and administrative expense budget d The cash budget will drive the production and selling and administrative expense budgets 6-18 Production budget Superior Industries sales budget shows quarterly sales for the next year as follows: Quarter 1–10,000; Quarter 2–8,000; Quarter 3–12,000; Quarter 4–14,000 Company policy is to have a target finished-goods inventory at the end of each quarter equal to 20% of the next quarter’s sales Budgeted production for the second quarter of next year would be: 7,200 units; 8,800 units; 12,000 units; 10,400 units 6-19 Responsibility centers Elmhurst Corporation is considering changes to its responsibility accounting system Which of the following statements is/are correct for a responsibility accounting system I In a cost center, managers are responsible for controlling costs but not revenue II The idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent III To be effective, a good responsibility accounting system must help managers to plan and to control IV Costs that are allocated to a responsibility center are normally controllable by the responsibility center manager I and II only are correct II and III only are correct I, II, and III are correct I, II and IV are correct 6-20 Cash budget Mary Jacobs, the controller of the Jenks Company is working on Jenks’ cash budget for year She has information on each of the following items: I Wages due to workers accrued as of December 31, year II Limits on a line of credit that may be used to fund Jenks’ operations in year III The balance in accounts payable as of December 31, year 1, from credit purchases made in year Which of the items above should Jacobs take into account when building the cash budget for year 2? a I, II b I, III c II, III d I, II, III 6-21 Sales budget, service setting In 2017, Hart & Sons, a small environmental-testing firm, performed 11,400 radon tests for $260 each and 15,000 lead tests for $210 each Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 12% next year However, awareness of radon-related health hazards is expected to result in a 5% increase in radon-test volume each year in the near future Jim Hart feels that if he lowers his price for lead testing to $200 per test, he will have to face only a 4% decline in lead-test sales in 2018 Required: Prepare a 2018 sales budget for Hart & Sons assuming that Hart holds prices at 2017 levels Prepare a 2018 sales budget for Hart & Sons assuming that Hart lowers the price of a lead test to $200 Should Hart lower the price of a lead test in 2018 if the company’s goal is to maximize sales revenue? 6-23 Direct material budget Dawson Co produces wine The company expects to produce 2,535,000 two-liter bottles of Chablis in 2018 Dawson purchases empty glass bottles from an outside vendor Its target ending inventory of such bottles is 77,000; its beginning inventory is 54,000 For simplicity, ignore breakage Compute the number of bottles to be purchased in 2018 6-24 Material purchases budget The McGrath Company has prepared a sales budget of 42,000 finished units for a 3-month period The company has an inventory of 13,000 units of finished goods on hand at December 31 and has a target finished-goods inventory of 15,000 units at the end of the succeeding quarter It takes gallons of direct materials to make one unit of finished product The company has an inventory of 61,000 gallons of direct materials at December 31 and has a target ending inventory of 53,000 gallons at the end of the succeeding quarter How many gallons of direct materials should McGrath Company purchase during the months ending March 31? 6-25 Revenues, production, and purchases budgets The Yucatan Co in Mexico has a division that manufactures bicycles Its budgeted sales for Model XG in 2018 are 95,000 units Yucatan’s target ending inventory is 7,000 units, and its beginning inventory is 11,000 units The company’s budgeted selling price to its distributors and dealers is 3,500 pesos per bicycle Yucatan buys all its wheels from an outside supplier No defective wheels are accepted Yucatan’s needs for extra wheels for replacement parts are ordered by a separate division of the company The company’s target ending inventory is 14,000 wheels, and its beginning inventory is 16,000 wheels The budgeted purchase price is 400 pesos per wheel Required: Compute the budgeted revenues in pesos Compute the number of bicycles that Yucatan should produce Compute the budgeted purchases of wheels in units and in pesos What actions can Yucatan’s managers take to reduce budgeted purchasing costs of wheels assuming the same budgeted sales for Model XG? 6-26 Revenues and production budget Saphire, Inc., bottles and distributes mineral water from the company’s natural springs in northern Oregon Saphire markets two products: 12-ounce disposable plastic bottles and 1-gallon reusable plastic containers Required: For 2018, Saphire marketing managers project monthly sales of 500,000 12-ounce bottles and 130,000 1-gallon containers Average selling prices are estimated at $0.30 per 12-ounce bottle and $1.60 per 1-gallon container Prepare a revenues budget for Saphire, Inc., for the year ending December 31, 2018 Saphire begins 2018 with 980,000 12-ounce bottles in inventory The vice president of operations requests that 12-ounce bottles ending inventory on December 31, 2018, be no less than 660,000 bottles Based on sales projections as budgeted previously, what is the minimum number of 12-ounce bottles Saphire must produce during 2018? The VP of operations requests that ending inventory of 1-gallon containers on December 31, 2018, be 300,000 units If the production budget calls for Saphire to produce 1,200,000 1-gallon containers during 2018, what is the beginning inventory of 1-gallon containers on January 1, 2018? 6-27 Budgeting; direct material usage, manufacturing cost, and gross margin Xander Manufacturing Company manufactures blue rugs, using wool and dye as direct materials One rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost of $6 per gallon All other materials are indirect At the beginning of the year Xander has an inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of $23,680 Target ending inventory of wool and dye is zero Xander uses the FIFO inventory cost-flow method Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year The budgeted selling price is $2,000 each There are no rugs in beginning inventory Target ending inventory of rugs is also zero Xander makes rugs by hand, but uses a machine to dye the wool Thus, overhead costs are accumulated in two cost pools—one for weaving and the other for dyeing Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH) Dyeing overhead is allocated to products based on machine-hours (MH) There is no direct manufacturing labor cost for dyeing Xander budgets 62 direct manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour It budgets 0.2 machine-hours to dye each skein in the dyeing process The following table presents the budgeted overhead costs for the dyeing and weaving cost pools: Required: Prepare a direct materials usage budget in both units and dollars Calculate the budgeted overhead allocation rates for weaving and dyeing Calculate the budgeted unit cost of a blue rug for the year Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels) Calculate the budgeted cost of goods sold for blue rugs under each sales assumption Find the budgeted gross margin for blue rugs under each sales assumption What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs? How might top management at Xander use the budget developed in requirements 1–6 to better manage the company? 6-34 Cash flow analysis, sensitivity analysis HealthMart is a retail store selling home oxygen equipment HealthMart also services home oxygen equipment, for which the company bills customers monthly HealthMart has budgeted for increases in service revenue of $200 each month due to a recent advertising campaign The forecast of sales and service revenue for the March–June 2018 is as follows: Almost all of the sales revenues of the oxygen equipment are credit card sales; cash sales are negligible The credit card company deposits 97% of the revenues recorded each day into HealthMart’s account overnight For the servicing of home oxygen equipment, 60% of oxygen services billed each month is collected in the month of the service, and 40% is collected in the month following the service Required: Calculate the cash that HealthMart expects to collect in April, May, and June 2018 from sales and service revenues Show calculations for each month HealthMart has budgeted expenditures for May of $11,000 and requires a minimum cash balance of $250 at the end of each month It has a cash balance on May of $400 a Given your answer to requirement 1, will HealthMart need to borrow cash to cover its payments for May and maintain a minimum cash balance of $250 at the end of May? b Assume (independently for each situation) that (1) May total revenues might be 10% lower or that (2) total costs might be 5% higher Under each of those two scenarios, show the total net cash for May and the amount HealthMart would have to borrow to cover its cash payments for May and maintain a minimum cash balance of $250 at the end of May (Again, assume a balance of $400 on May 1.) Why HealthMart’s managers prepare a cash budget in addition to the revenue, expenses, and operating income budget? Has preparing the cash budget been helpful? Explain briefly