HOW CAN INFORMATION TECHNOLOGY BE USED IN THE BUDGETING PROCESS?
7. How can information technology be used in the budgeting process?
■
■ Excel can be used to conduct sensitivity analysis—a what if analysis.
■
■ Budgeting software allows business segments to integrate individual budgets into the companywide budget.
SMART TOUCH LEARNING Revised Sales Budget
For the Year Ended December 31, 2021
> Check Your Understanding 22-1
Check your understanding of the chapter by completing this problem and then looking at the solution. Use this practice to help identify which sections of the chapter you need to study more.
Smart Touch Learning has decided to revise its budget to show fourth quarter sales of 700 tablets due to the expectation of increased holiday sales. First quarter sales for the following year are not expected to change.
Requirements
1. Revise the following budgets (See Learning Objective 3):
a. Sales budget (Exhibit 22-4) b. Production budget (Exhibit 22-5)
2. Describe how the following budgets will be affected (without revising the budgets) (See Learning Objective 3):
a. Direct materials budget b. Direct labor budget
c. Manufacturing overhead budget d. Cost of goods sold budget
e. Selling and administrative expense budget
> Solution
Requirement 1
Revised figures appear in color for emphasis.
a. Revised sales budget
CHAPTER 22
b. Revised production budget
Requirement 2
a. Direct materials budget: An increase in production will require more direct materials and, therefore, more purchases of materials.
b. Direct labor budget: An increase in production will require additional labor and, therefore, increase the direct labor costs.
c. Manufacturing overhead budget: An increase in production will require additional variable manufacturing overhead and, therefore, an increase in variable manufacturing overhead costs. Fixed costs will not change unless the increased production takes Smart Touch Learning out of its relevant range.
d. Cost of goods sold budget: An increase in production will decrease the production cost per unit because the fixed costs will be distributed among more units. In other words, the predetermined overhead allocation rate will decrease. The small increase in production will only have a minor effect on production costs, however, because fixed manufacturing overhead costs are a small portion of the total production cost.
Therefore, total cost of goods sold will increase due to the increase in units sold.
e. Selling and administrative expense budget: If the increase in sales does not take Smart Touch Learning out of its relevant range, then fixed selling and administrative costs will not change. The variable selling and administrative cost, Supplies, will increase with the increase in sales.
> Check Your Understanding 22-2
Check your understanding of the chapter by completing this problem and then looking at the solution. Use this practice to help identify which sections of the chapter you need to study more.
Continue the revised Smart Touch Learning illustration from Check Your Understanding 22-1. Recall that the fourth quarter sales are revised to 700 tablets with the expectation of increased holiday sales.
Suppose a change in the receipt of cash from sales on account is as follows:
60% in the quarter of the sale 20% in the quarter after the sale 19% two quarters after the sale 1% never collected
Budgeted tablets to be sold
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Total
Plus: Desired tablets in ending inventory Total tablets needed
Less: Tablets in beginning inventory Budgeted tablets to be produced
*700 × 20%
110 120 140 200
500 550 600 700 2,350
200
410 560 620 700 2,290
110
610 670
120 140*
740 840 2,490
140 140
SMART TOUCH LEARNING Revised Production Budget For the Year Ended December 31, 2021
Requirement 2
The decrease in cash receipts will require Smart Touch Learning to borrow more funds on the short-term note payable. Increased borrowing will increase interest expense and decrease net income for the year.
> Solution
Requirement 1
Revised figures appear in color for emphasis.
Requirements
1. Revise the schedule of budgeted cash receipts (Exhibit 22-11) to include the increase in fourth quarter sales (from Check Your Understanding 22-1) and the change in the timing of customer receipts. (See Learning Objective 4)
2. How will the changes in cash receipts affect the cash budget? (See Learning Objective 4)
Total sales (from Check Your Understanding 22-1)
First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Total
Second
Quarter Third
Quarter Fourth
Quarter Total Cash Receipts from Customers:
Accounts Receivable balance, December 31, 2020 1st Qtr.—Cash sales (30%)
1st Qtr.—Credit sales (70%), 60% collected in 1st qtr.
1st Qtr.—Credit sales (70%), 20% collected in 2nd qtr.
1st Qtr.—Credit sales (70%), 19% collected in 3rd qtr.
2nd Qtr.—Cash sales (30%)
2nd Qtr.—Credit sales (70%), 60% collected in 2nd qtr.
2nd Qtr.—Credit sales (70%), 20% collected in 3rd qtr.
2nd Qtr.—Credit sales (70%), 19% collected in 4th qtr.
3rd Qtr.—Cash sales (30%)
3rd Qtr.—Credit sales (70%), 20% collected in 4th qtr.
4th Qtr.—Cash sales (30%)
4th Qtr.—Credit sales (70%), 60% collected in 4th qtr.
Total cash receipts from customers
$ 35,000
$ 33,250 82,500
115,500
$ 233,000
$ 36,575
147,000
$ 250,000 $ 275,000 $ 300,000 $ 350,000 $ 1,175,000
$ 70,000
$ 250,000 75,000 105,000
38,500
126,000 90,000
42,000 105,000
$ 287,750 $ 330,575 $ 1,101,325 First
Quarter
3rd Qtr.—Credit sales (70%), 60% collected in 3rd qtr.
CHAPTER 22
1. A company can expect to receive which of the following benefits when it starts its budgeting process?
a. The budget provides managers with a benchmark against which to compare actual results for performance evaluation.
b. The planning required to develop the budget helps managers foresee and avoid potential problems before they occur.
c. The budget helps motivate employees to achieve sales growth and cost- reduction goals.
d. All of the above.
2. A company prepares a five-year budget. This budget would be considered a(n) a. strategic budget.
b. operational budget.
c. master budget.
d. flexible budget.
3. Which of the following is the cornerstone of the master budget?
a. The selling and administrative expense budget b. The budgeted balance sheet
c. The sales budget d. The production budget
Use the following information to answer questions 4 through 7.
Suppose Iron City manufactures cast iron skillets. One model is a 10-inch skillet that sells for $20. Iron City projects sales of 500 10-inch skillets per month. The production costs are $9 per skillet for direct materials, $1 per skillet for direct labor, and $2 per skillet for manufacturing overhead. Iron City has 50 10-inch skillets in inventory at the beginning of July but wants to have an ending inventory equal to 20%
of the next month’s sales. Selling and administrative expenses for this product line are
$1,500 per month.
4. How many 10-inch skillets should Iron City produce in July?
a. 500 skillets b. 550 skillets
c. 600 skillets d. 650 skillets
Learning Objective 1
Learning Objective 2
Learning Objective 3
Learning Objective 3
> Key Terms
Benchmarking (p. 1186) Budget (p. 1184)
Budgetary Slack (p. 1186) Capital Expenditures
Budget (p. 1190) Cash Budget (p. 1190) Continuous Budget (p. 1188)
Cost of Goods Sold Budget (p. 1196) Direct Labor Budget (p. 1194)
Direct Materials Budget (p. 1193) Financial Budget (p. 1190) Flexible Budget (p. 1188)
Inventory, Purchases, and Cost of Goods Sold Budget (p. 1211) Manufacturing Overhead
Budget (p. 1195) Master Budget (p. 1188) Operating Budget (p. 1189)
Operational Budget (p. 1187) Participative Budget (p. 1186) Production Budget (p. 1192) Sales Budget (p. 1191)
Selling and Administrative Expense Budget (p. 1197)
Static Budget (p. 1188) Strategic Budget (p. 1187) Zero-based Budget (p. 1187)
> Quick Check
5. Compute the total amount budgeted for product costs for July.
a. $6,000 b. $6,500
c. $6,600 d. $7,200 6. Compute the budgeted cost of goods sold for July.
a. $6,000 b. $6,500
c. $6,600 d. $7,200 7. Compute the budgeted gross profit for July.
a. $6,000 b. $5,000
c. $4,000 d. $3,000
8. The budgeted income statement is part of which element of the master budget?
a. The financial budget b. The operating budget
c. The capital expenditures budget d. None of the above
9. Which of the following expenses would not appear in the cash budget?
a. Depreciation expense b. Marketing expense
c. Interest expense d. Wages expense Use the following information to answer questions 10 and 11.
Suppose Mallcentral sells 1,000 hardcover books per day at an average price of $30.
Assume that Mallcentral’s cost for the books is 75% of the selling price it charges retail customers. Mallcentral has no beginning inventory, but it wants to have a three-day supply of ending inventory. Assume that selling and administrative expenses are $1,000 per day.
10. Compute Mallcentral’s budgeted sales for the next (seven-day) week.
a. $157,500 b. $217,000
c. $435,000 d. $210,000
11. Determine Mallcentral’s budgeted purchases for the next (seven-day) week.
a. $300,000 b. $225,000
c. $157,500 d. $75,000
12. The budgeted balance sheet is part of which element of the master budget?
a. Financial budget b. Operating budget
c. Capital expenditures budget d. None of the above
13. Information technology has made it easier for managers to perform all of the following tasks except
a. preparing performance reports that identify variances between actual and budgeted revenues and costs.
Learning Objective 3
Learning Objective 3
Learning Objective 4
Learning Objective 4
Learning Objective 4
Learning Objective 5
Learning Objective 5
Learning Objective 6
Learning Objective 7
1. List the four budgeting objectives.
2. One benefit of budgeting is coordination and communication. Explain what this means.
3. How is benchmarking beneficial?
4. What is budgetary slack? Why might managers try to build slack into their budgets?
5. Explain the difference between strategic and operational budgets.
6. Explain the difference between static and flexible budgets.
7. What is a master budget?
8. In a manufacturing company, what are the three types of budgets included in the master budget? Describe each type.
9. Why is the sales budget considered the cornerstone of the master budget?
10. What is the formula used to determine the number of units to be produced?
11. What is the formula used to determine the amount of direct materials to be purchased?
12. What are the two types of manufacturing overhead? How do they affect the manufacturing overhead budget calculations?
13. How is the predetermined overhead allocation rate determined?
14. What is the capital expenditures budget?
15. What are the three sections of the cash budget?
16. What are the budgeted financial statements? How do they differ from regular financial statements?
17. How does the master budget for a merchandising company differ from a manufacturing company?
18. What is the formula used to determine the amount of merchandise inventory to be purchased?
19. What budgets are included in the financial budget for a merchandising company?
20. What is sensitivity analysis? Why is it important for managers?
ASSESS YOUR PROGRESS
> Review Questions
CHAPTER 22
> Short Exercises
S22-1 Budgeting benefits
List the three key benefits companies get from preparing a budget.
S22-2 Budgeting types
Consider the following budgets and budget types.
Cash Cost of Goods Sold Flexible Master
Operational Sales Static Strategic Learning Objective 1
Learning Objective 2
Which budget or budget type should be used to meet the following needs?
a. Upper management is planning for the next five years.
b. A store manager wants to plan for different levels of sales.
c. The accountant wants to determine if the company will have sufficient funds to pay expenses.
d. The CEO wants to make companywide plans for the next year.
S22-3 Preparing an operating budget—sales budget
Brown Company manufactures luggage sets. Brown sells its luggage sets to depart- ment stores. Brown expects to sell 1,700 luggage sets for $180 each in January and 2,050 luggage sets for $180 each in February. All sales are cash only. Prepare the sales budget for January and February.
S22-4 Preparing an operating budget—production budget
Bailey Company expects to sell 1,500 units of finished product in January and 1,750 units in February. The company has 180 units on hand on January 1 and desires to have an ending inventory equal to 80% of the next month’s sales. March sales are expected to be 1,820 units. Prepare Bailey’s production budget for January and February.
S22-5 Preparing an operating budget—direct materials budget
Bell expects to produce 1,800 units in January and 2,155 units in February. The com- pany budgets 3 pounds per unit of direct materials at a cost of $10 per pound. Indirect materials are insignificant and not considered for budgeting purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 4,950 pounds.
Bell desires the ending balance in Raw Materials Inventory to be 20% of the next month’s direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell’s direct materials budget for January and February.
S22-6 Preparing an operating budget—direct labor budget
Baker Company expects to produce 2,050 units in January and 1,994 units in February.
Baker budgets five direct labor hours per unit. Direct labor costs average $9 per hour.
Prepare Baker’s direct labor budget for January and February.
S22-7 Preparing an operating budget—manufacturing overhead budget Bennett Company expects to produce 2,030 units in January that will require 8,120 hours of direct labor and 2,210 units in February that will require 8,840 hours of direct labor. Bennett budgets $10 per unit for variable manufacturing overhead; $2,100 per month for depreciation; and $78,460 per month for other fixed manufacturing overhead costs. Prepare Bennett’s manufacturing overhead budget for January and February, including the predetermined overhead allocation rate using direct labor hours as the allocation base.
S22-8 Preparing an operating budget—cost of goods sold budget
Butler Company expects to sell 1,650 units in January and 1,550 units in February. The
Learning Objective 3
Learning Objective 3
Learning Objective 3
Learning Objective 3
Learning Objective 3
Learning Objective 3
CHAPTER 22
The beginning balance in Finished Goods Inventory is 250 units at $200 each for a total of $50,000. Butler uses FIFO inventory costing method. Prepare the cost of goods sold budget for Butler for January and February.
S22-9 Preparing a financial budget—schedule of cash receipts
Berry expects total sales of $359,000 in January and $405,000 in February. Assume that Berry’s sales are collected as follows:
80% in the month of the sale 10% in the month after the sale 6% two months after the sales 4% never collected
November sales totaled $350,000, and December sales were $325,000. Prepare a schedule of cash receipts from customers for January and February. Round answers to the nearest dollar.
S22-10 Preparing a financial budget—schedule of cash payments
Barnes Company budgeted direct materials purchases of $191,990 in January and
$138,610 in February. Assume Barnes pays for direct materials purchases 60% in the month of purchase and 40% in the month after purchase. The Accounts Payable balance on January 1 is $75,000. Prepare a schedule of cash payments for purchases for January and February. Round to the nearest dollar.
S22-11 Preparing a financial budget—cash budget
Booth has $12,500 in cash on hand on January 1 and has collected the following budget data:
January February
Sales $ 529,000 $ 568,000
Cash receipts from customers 443,000 502,200
Cash payments for direct materials purchases 180,624 160,284
Direct labor costs 135,010 113,348
Manufacturing overhead costs (includes depreciation
of $900 per month) 55,058 53,922
Assume direct labor costs and manufacturing overhead costs are paid in the month incurred. Additionally, assume Booth has cash payments for selling and administrative expenses including salaries of $40,000 per month plus commissions that are 1% of sales, all paid in the month of sale. The company requires a minimum cash balance of
$20,000. Prepare a cash budget for January and February. Round to the nearest dollar.
Will Booth need to borrow cash by the end of February?
S22-12 Understanding the components of the master budget
The following are some of the components included in the master budget of a merchandising company.
a. Budgeted balance sheet b. Sales budget
c. Capital expenditures budget
Learning Objective 4
Learning Objective 4
Learning Objective 4
Learning Objective 5
d. Budgeted income statement
e. Cash budget
f. Inventory, purchases, and cost of goods sold budget g. Selling and administrative expense budget
List the items of the master budget in order of preparation.
S22-13 Preparing an operating budget—sales budget
Trailers sells its rock-climbing shoes worldwide. Trailers expects to sell 6,500 pairs of shoes for $185 each in January and 4,000 pairs of shoes for $220 each in February. All sales are cash only. Prepare the sales budget for January and February.
S22-14 Preparing an operating budget—inventory, purchases, and cost of goods sold budget
Brooks Company expects to sell 8,500 units for $175 each for a total of $1,487,500 in January and 2,500 units for $200 each for a total of $500,000 in February. The company expects cost of goods sold to average 70% of sales revenue, and the company expects to sell 4,700 units in March for $280 each. Brooks’s target ending inventory is $20,000 plus 50% of the next month’s cost of goods sold. Prepare Brooks’s inventory, purchases, and cost of goods sold budget for January and February.
S22-15 Preparing a financial budget—schedule of cash receipts
Victors expects total sales of $702,000 for January and $349,000 for February. Assume that Victors’s sales are collected as follows:
50% in the month of the sale 30% in the month after the sale 16% two months after the sale 4% never collected
November sales totaled $388,000, and December sales were $407,000. Prepare a schedule of cash receipts from customers for January and February. Round answers to the nearest dollar.
S22-16 Preparing a financial budget—schedule of cash payments
Jefferson Company has budgeted purchases of merchandise inventory of $457,500 in January and $533,250 in February. Assume Jefferson pays for inventory purchases 70% in the month of purchase and 30% in the month after purchase. The Accounts Payable balance on December 31 is $98,275. Prepare a schedule of cash payments for purchases for January and February.
S22-17 Preparing a financial budget—cash budget
Wilson Company has $11,000 in cash on hand on January 1 and has collected the fol- lowing budget data:
Learning Objective 5
Learning Objective 5
Learning Objective 6
Learning Objective 6
Learning Objective 6
CHAPTER 22
Assume Wilson has cash payments for selling and administrative expenses including salaries of $55,000 plus commissions of 2% of sales, all paid in the month of sale. The company requires a minimum cash balance of $8,500. Prepare a cash budget for January and February. Will Wilson need to borrow cash by the end of February?
Note: Short Exercise S22-15 must be completed before attempting Short Exercise S22-18.
S22-18 Using sensitivity analysis in budgeting
Refer to the Victors schedule of cash receipts from customers that you prepared in Short Exercise S22-15. Now assume that Victors’s sales are collected as follows:
40% in the month of the sale 20% in the month after the sale 39% two months after the sale 1% never collected
Prepare a revised schedule of cash receipts for January and February.
Note: Short Exercise S22-9 must be completed before attempting Short Exercise S22-19.
S22-19 Using sensitivity analysis in budgeting
Refer to the Berry’s schedule of cash receipts from customers that you prepared in Short Exercise S22-9. Now assume that Berry’s sales are collected as follows:
60% in the month of the sale 20% in the month after the sale 18% two months after the sale 2% never collected
Prepare a revised schedule of cash receipts for January and February.
S22-20 Using sensitivity analysis in budgeting
Riverbed Sporting Goods Store has the following sales budget:
Learning Objective 7
Learning Objective 7
Learning Objective 7
$ 81,000 May
April June July Total
RIVERBED SPORTING GOODS STORE Sales Budget
Four Months Ended July 31
Cash sales (75%) Credit sales (25%) Total sales
20,250
$ 60,750
$ 52,000 13,000
$ 39,000
$ 65,000 16,250
$ 48,750
$ 52,000 13,000
$ 39,000
$ 250,000 62,500
$ 187,500
Suppose June sales are expected to be $81,000 rather than $65,000. Revise Riverbed’s sales budget.
E22-21 Describing master budget components
Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?” Answer Sarah’s question.
E22-22 Preparing an operating budget—sales budget
Yarbrough Company manufactures T-shirts printed with tourist destination logos.
The following table shows sales prices and projected sales volume for the summer months:
Projected Sales in Units T-Shirt Sizes Sales Price June July August
Youth $ 7 575 500 525
Adult—regular 17 625 900 825
Adult—oversized 18 400 500 475
Prepare a sales budget for Yarbrough Company for the three months.
E22-23 Preparing an operating budget—sales and production budgets
Lugo Company manufactures drinking glasses. One unit is a package of eight glasses, which sells for $30. Lugo projects sales for April will be 2,000 packages, with sales increasing by 250 packages per month for May, June, and July. On April 1, Lugo has 325 packages on hand but desires to maintain an ending inventory of 20% of the next month’s sales. Prepare a sales budget and a production budget for Lugo for April, May, and June.
E22-24 Preparing an operating budget—direct materials, direct labor, and manufacturing overhead budgets
Grady, Inc. manufactures model airplane kits and projects production at 650, 500, 450, and 600 kits for the next four quarters. Direct materials are 4 ounces of plastic per kit and the plastic costs $1 per ounce. Indirect materials are considered insignifi- cant and are not included in the budgeting process. Beginning Raw Materials Inven- tory is 850 ounces, and the company desires to end each quarter with 10% of the materials needed for the next quarter’s production. Grady desires a balance of 200 ounces in Raw Materials Inventory at the end of the fourth quarter. Each kit requires 0.10 hours of direct labor at an average cost of $10 per hour. Manufacturing over- head is allocated using direct labor hours as the allocation base. Variable overhead is
$0.20 per kit, and fixed overhead is $165 per quarter. Prepare Grady’s direct materials budget, direct labor budget, and manufacturing overhead budget for the year. Round the direct labor hours needed for production, budgeted overhead costs, and prede-
Learning Objective 2
Learning Objective 3 Jul. total sales $27,800
Learning Objective 3 May pkg. produced 2,300
Learning Objective 3 3rd Qtr. OH $255.00
> Exercises