Budgeting for Profit and Control

Budgeting for Profit and Control

Learning Objectives
1. Understand the role of budgets in overall organization plans.
2. Understand the importance of people in the budgeting process.
3. Estimate sales.
4. Develop production and cost budgets.
5. Estimate cash flows.
6. Develop budgeted financial statements.
7. Explain budgeting in merchandising and service organizations.
8. Explain why ethical issues arise in budgeting.
9. Explain how to use sensitivity analysis to budget under uncertainty.

Chapter Outline
I. HOW STRATEGIC PLANNING INCREASES COMPETITIVENESS
II. OVERALL PLAN
A. Organization goals
B. Strategic long-range profit plan
C. Master budget (Tactical short-range profit plan): Tying the strategic plan to
the operating plan
III. HUMAN ELEMENT IN BUDGETING
♦ Value of employee participation
IV. DEVELOPING THE MASTER BUDGET: WHERE TO START?
♦ Sales forecasting
1. Sales staff
2. Market researchers
3. Delphi technique
4. Trend analysis
5. Econometric model
V. COMPREHENSIVE ILLUSTRATION
A. Forecasting production
B. Forecasting production costs
1. Direct materials
2. Direct labor
3. Overhead
C. Completing the budgeted cost of goods sold
D. Revising the initial budget
VI. MARKETING AND ADMINISTRATIVE BUDGET
VII. PULLING IT TOGETHER INTO THE INCOME STATEMENT
VIII. KEY RELATIONSHIPS: THE SALES CYCLE
IX. USING CASH FLOW BUDGETS TO ESTIMATE CASH NEEDS
♦ Multiperiod Cash Flows
X. PLANNING FOR THE ASSETS AND LIABILITIES ON THE BUDGETED
BALANCE SHEETS
XI. BIG PICTURE: HOW IT ALL FITS TOGETHER
XII. BUDGETING IN RETAIL AND WHOLESALE ORGANIZATIONS
XIII. BUDGETING IN SERVICE ORGANIZATIONS
XIV. ETHICAL PROBLEMS IN BUDGETING

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XV. BUDGETING UNDER UNCERTAINTY

XVI. SUMMARY

Key Concepts
Bible Verse:
“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to
see if you have enough money to complete it?” (Luke 14:28)

LO 13-1 Understand the role of budgets in overall organization plans.

♦ Critical success factors are strengths of a company that enable it to outperform
competitors.

• By identifying critical success factors and ensuring that they are incorporated into
the strategic plan, companies are able to maintain an edge over competitors.

• Important critical success factors can be exploited to improve the company’s overall
competitiveness.

♦ The budget is a financial plan of the resources needed to carry out activities and meet
financial goals.

• A recent study shows that small businesses rely on budgets to help manage cash
flow, among things (see In-Action item for more information).

• The budgeting process is widely used and necessary for success. The usual problems
with budgeting are the use of budgets as targets and the dysfunctional effects caused
by that use.

• An overall organization plan is made up of three components:

(1) The organization goals,

(2) The strategic long-range profit plan, and
(3) The master budget (i.e., the tactical short-range profit plan).

• Organization goals are a company’s broad objectives established by management

that employees work to achieve.

• The strategic long-range profit plan is a statement detailing steps to take to

achieve a company’s organization goals. The plan provides a general framework for
guiding management’s operating decisions.

• Strategic plans discuss the major capital investments required to maintain present
facilities, increase capacity, diversify products and/or processes, and develop
particular markets.

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• The master budget (also known as the static budget, the budget plan, or the
planning budget) is the financial plan of an organization for the coming year or other
planning period.

• The profit plan is the income statement portion of the master budget.

• The master budget indicates the sales levels, production and cost levels, income, and
cash flows anticipated for the coming year. In addition, these budget data are used to
construct a budgeted balance sheet.

• Budgeting is a dynamic process that ties together goals, plans, decision making, and
employee performance evaluation.

• Exhibit 13.1 shows the master budget and its relationship to other plans, accounting
reports, and management decision-making processes.

• The master budget is derived from the long-range plan in consideration of conditions
expected during the coming period. Such plans are subject to change as the events of
the year unfold.

• Benchmarking is the continuous process of measuring products, services, or

activities against competitors’ performance.

• Competitive intelligence can be part of a benchmarking activity in which some

companies gather information by speaking to their competitors, customers, and
suppliers.

LO 13-2 Understand the importance of people in the budgeting process.

♦ Although budgets are often viewed in purely quantitative, technical terms, managers’
personal goals and values will affect their beliefs about the coming period.

• Budget preparation rests on human estimates of an unknown future. People’s

forecasts are likely to be greatly influenced by their experiences with various
segments of the company.

• One challenge of budgeting is to identify who in the organization is best able to

provide the most accurate information about particular topics.

• Participative budgeting (also called grass roots budgeting) is the use of input from
lower- and middle-management employees for budget preparation.

• Participative budgeting is time consuming, yet it enhances employee motivation and

acceptance of goals, and provides information that enables employees to associate
rewards and penalties with performance. It also serves a training or development role
for managers.

• Studies have found that managers often provide inaccurate data when asked to give
budget estimates. Managers who believe that the budget will be used as a norm for

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evaluating their performance could provide an estimate that will not be too hard to
achieve.
• Ideally, the budget will motivate people and facilitate their activities so that the
organization can achieve its goals.

LO 13-3 Estimate sales.

♦ All budgeting processes share some common elements.

• After organization goals, strategies, and long-range plans have been developed,
work begins on the master budget, a detailed budget for the coming fiscal year with
some less-detailed figures for subsequent years.

• The bulk of the work preparing the master budget is usually done in the six months
immediately preceding the beginning of the coming fiscal year.

• Final budget approvals by the chief executive and board of directors are made one
month to six weeks before the beginning of the coming fiscal year.

♦ Beginning with a sales forecast, the firm can plan the activities over which it has more
control. As better information about sales becomes available, it is reasonably easy to adjust
the rest of the budget.

• In most firms, forecasting sales is the most difficult aspect of budgeting because it is
most uncertain.

• If, on the other hand, production is more uncertain than sales because of
unpredictable supply of materials, the firm may want to begin with a raw material and
production forecast.

♦ Salespeople are in the unique position of being close to the customers, and they may
possess the best information and the best local knowledge in the company about customers’
immediate and near-term needs.

• Salespeople realize that they will be evaluated based, in part, on the budget. As a
result, they have an incentive to bias their sales forecasts.

• Incentive compensation plans can be designed to motivate different behaviors, each

with their own strengths and weaknesses.

♦ Market researchers do not have the same incentives that sales personnel have to bias the
budget.

• Market researchers have a different perspective on the market. That is, they can
predict long-term trends in attitudes and the effects of social and economic changes
on the company’s sales, potential markets, and products.

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♦ The Delphi technique is a forecasting method in which individual forecasts of group

members are submitted anonymously and evaluated by the group as a whole.

• Each group member obtains a copy of all forecasts but is unaware of their sources.

• Differences among individual forecasts can be addressed and reconciled without

involving the personality or position of individual forecasters.

• After the differences are discussed, the process is repeated until the forecasts
converge on a single best estimate of the coming year’s sales level.

♦ Trend analysis is a forecasting method that ranges from simple visual extrapolation of
points on a graph to highly sophisticated computerized time series analysis.

• Time series techniques use only past observations of the data series to be forecasted.

• This approach is relatively economical.

• Forecasting techniques based on trend analysis often requires long series of past data
to derive a suitable solution. When used in accounting applications, monthly data are
required to obtain an adequate number of observations.

♦ Econometric models are statistical methods of forecasting economic data using regression
models.

• Econometric models can include many relevant predictors. Manipulating the

assumed values of the predictors makes it possible to examine a variety of
hypothetical conditions and relate them to the sales forecast.

♦ No model removes the uncertainty surrounding sales forecasts. Cost-benefit tests should be
used to determine which methods are most appropriate.

LO 13-4 Develop production and cost budgets.

♦ The production budget is the production plan of resources needed to meet current sales
demand and ensure that inventory levels are sufficient for future sales.

• It is necessary to determine the required inventory level for the beginning and end of
the budget period.

• The basic cost flow equation (also known as the basic inventory formula) can be
adapted for inventories, production, and sales to solve for the required production.
Recall from Chapter 6 the inventory equation:

Beginning balance (BB) + Transfer in (TI) – Transfer out (TO) = Ending balance
(EB).

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• Rearranging the terms, this revised equation states that production equals the sales
demand plus or minus an inventory adjustment.

Required = Budgeted + Units in ending - Units in beginning

production (units) sales (units) inventory inventory

• Another way to solve the required production is to go through the following T-

account:

Finished goods Inventory

Units in beginning inventory
Budgeted sales
Required production (?) (from sales forecast)
Units in ending inventory

• Production and inventory are stated in equivalent finished units.

• Exhibit 13.2 presents a production budget example.

• Management of the production facilities reviews the production budget to ascertain

whether the budgeted level of production can be reached with the capacity available.

• One benefit of the budgeting process is that it facilitates the coordination of

activities.

======================
Demonstration Problem 1
East Mountain Bike expects to sell 25,000 electronic bicycles next year. The management
estimates that the beginning and ending inventory will be 2,000 units and 3,500 units,
respectively.

Required:
Prepare a production budget for next year.

Solution:

East Mountain Bike

Production Budget
For the budget year ended December 31
(in units)

Expected sales 25,000

Add: Desired ending inventory of finished goods 3,500
Total needs 28,500
Less: Beginning inventory of finished goods (2,000)
Units to be produced 26,500

======================

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♦ Once the sales and production budgets have been developed and the efforts of the sales and
production groups have been coordinated, the next step is to estimate costs of direct materials,
direct labor, and manufacturing overhead at budgeted levels of production so the budgeted
cost of goods sold can be prepared.

♦ Direct materials purchases needed for the budget period are derived from the equation:

Required material = Materials to + Estimated ending - Estimated

purchases be used in materials beginning materials
production inventory inventory

• Another way to solve the required materials purchases is to go through the following
T- account:
Materials Inventory
Estimated beginning inventory Required usage
(converted from production
Required purchases (?) budget)
Estimated ending inventory

Required usage = Required production × Materials needed per unit of output.

Cost of materials to be purchased = Required purchases × Cost of materials per unit.

• Exhibit 13.3 shows the direct materials budget.

======================
Demonstration Problem 2
(Continued from Demonstration Problem 1)
Each electronic bicycle produced at East Mountain Bike requires two major parts (frame and
tires) and an electronic subassembly from its suppliers as inputs. The following information is
available:
Frame Tires Electronic subassembly
Material per bike 1 2 1
Unit cost $900 $30 $420
Beginning inventory 1,100 2,000 950
Ending inventory 2,500 3,200 1,800

Required:
Prepare the direct material budget for next year.

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Solution:
East Mountain Bike
Direct Materials Budget
For the budget year ended December 31
Units to be produced next year (from the production budget above): 26,500

Electronic
Frame Tires subassembly
Direct material needed per bike 1 2 1
Total production needs 26,500 53,000 26,500
Add: Desired ending inventory 2,500 3,200 1,800
Total direct materials needs 29,000 56,200 28,300
Less: Beginning inventory (1,100) (2,000) (950)
Direct materials to be purchased 27,900 54,200 27,350
Unit cost $900 $30 $420
Total cost of direct materials to be purchased $25,110,000 $1,626,000 $11,487,000
Total materials cost $38,223,000
======================
♦ Estimates of direct labor costs often are obtained from engineering and production
management.

Direct labor usage = Required production × Labor hours needed per unit of output.

Direct labor cost = Direct labor usage × Direct labor cost per hour.

• Exhibit 13.4 shows a direct labor budget.

♦ Overhead is composed of many different types of costs with varying cost behaviors.
• Budgeting overhead requires an estimate based on production levels, management
discretion, long-range capacity and other corporate policies, and external factors such
as increases in property taxes.
• To simplify the budgeting process, overhead costs are usually divided into fixed and
variable components, with discretionary and semi-fixed costs treated as fixed costs
within the relevant range.

• Exhibit 13.5 presents a sample schedule of budgeted manufacturing overhead.

♦ The total manufacturing costs can be determined by adding materials, labor, and overhead
together. Exhibit 13.6 shows the calculation for the budgeted statement of cost of goods sold.

• In most companies, estimates of work-in-process inventories are omitted from the

budget because they have a minimal impact on the budget.

• The calculation of the cost of goods sold follows the equation:

Estimated cost of = Estimated + Estimated cost of - Estimated ending

goods sold beginning finished goods finished goods
goods inventory manufactured inventory

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• Another way to determine the estimated cost of goods sold is to go through the
finished goods T-account:

Finished goods Inventory

Beginning inventory

Cost of goods manufactured Cost of goods sold (?)

Ending inventory

• This part of the budgeting effort can be extremely complex for manufacturing
companies. It can be very difficult to coordinate production schedules among
numerous plants; it is also difficult to coordinate production schedules with sales
forecasts.

♦ The budget usually undergoes a good deal of coordinating and revising before it is
considered final.

• Not part of the budget is really formally adopted until the board of directors finally
approves the master budget.
♦ Budgeting marketing and administrative costs is very difficult because managers have
discretion about how much money is spent and the timing of the expenditures.

• The budgeting objective is to estimate the amount of marketing and administrative

costs required to operate the company at its projected level of sales and production,
and to achieve long-term company goals.

• An easy and inexpensive way is to start with a previous period’s actual or budgeted
amounts and make adjustments for inflation, changes in operations, and similar
changes between periods.

• Exhibit 13.7 shows a schedule of budgeted marketing and administrative costs.

Variable marketing costs vary with sales. Fixed marketing costs are usually those that
can be changed at management’s discretion.

♦ The budgeting process culminates in the projected operating profits reported in the
budgeted income statement, as shown in Exhibit 13.8.

• The budgeted income statement also includes estimated federal and other income
taxes.

• The process will be repeated to see if sales revenue can be increased, or costs cut,
until the desired financial results can be reached.

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======================
Demonstration Problem 3
Emerson Manufacturing Company produces two products: Model S and Model Z. The
following income statement shows this year’s operating results.

Emerson Manufacturing Company

Income Statement
For the year ended December 31

Revenue:
Model S $300,000
Model Z 200,000 $500,000
Cost of goods sold:
Model S $150,000
Model Z 120,000 (270,000)
Gross margin $230,000
Operating costs:
Marketing $60,000
Distribution 50,000
Depreciation 21,000
Administration 30,000 (161,000)
Operating income $69,000

Emerson’s management is in the process of preparing next year’s budget. The following
information is under consideration.

1. The selling price of Model S is expected to remain the same, but the units sold will
increase by 6 percent
2. The selling price and units of Model Z will increase by 5 percent and 10 percent,
respectively.
3. As indicated by the suppliers of key components, the cost of each unit sold will
increase by 3 percent.
4. Marketing costs are expected to increase by $20,000.
5. Distribution costs remain the same fixed percentage of total sales revenue.
6. Depreciation costs remain unchanged.
7. A new administrative aide will be hired part time for $25,000.
8. There is no beginning or ending inventory.

Required:
Prepare a budgeted income statement for next year.

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Solution:
Emerson Manufacturing Company
Budgeted Income Statement
For the budget year ended December 31

Revenue:
Model S $318,000a
Model Z 231,000b $549,000
Cost of goods sold:
Model S $154,500c
Model Z 123,600d (278,100)
Gross margin $270,900
Operating costs:
Marketing $80,000e
Distribution 54,900f
Depreciation 21,000
Administration 55,000g (210,900)
Operating income $60,000

a
$300,000 × 1.06 = $318,000.
b
$200,000 × 1.05 × 1.10 = $231,000.
c
$150,000 × 1.03 = $154,500.
d
$120,000 × 1.03 = $123,600.
e
$60,000 + $20,000 = $80,000.
f
$50,000 ÷ $500,000 = 0.1; $549,000 × 0.1 = $54,900.
g
$30,000 + $25,000 = $55,000.

♦ The master budget is rooted in some key relations among sales, accounts receivable, and
cash flows in the sales cycle. That is,

Sales Accounts receivable Cash

BB BB
Budgeted Budgeted Collection Collection on Disbursements
sales sales account
EB Other receipts
EB

BB and EB refer to beginning and ending balances, respectively. All sales are assumed to be
on account.

• If an amount in the sales cycle is unknown, the basic accounting equation (BB + TI
– TO = EB) can be used to find it.

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LO 13-5 Estimate cash flows.

♦ The cash budget refers to a statement of cash on hand at the start of the budget period,
expected cash receipts, expected cash disbursements, and the resulting cash balance at the
end of the budget period.

• Cash budgeting is important to ensure company solvency, maximize interest earned

on cash balances, and determine whether the company is generating enough cash for
present and future operations.

• Preparing a cash budget requires that all revenues, costs, and other transactions be
examined in terms of their effects on cash.

• Cash receipts come from the collection of accounts receivable, cash sales, sale of
assets, borrowing, issuing stock, and other cash-generating activities.

• Cash disbursements are used to pay for materials purchases, manufacturing and
other operations, federal income taxes, and stockholder dividends.

• A cash budget is shown in Exhibit 13.9.

• A more detailed analysis looks at multiperiod cash receipts (Exhibit 13.10) and cash
disbursements (Exhibit 13.11) to ensure that the company will not run out of cash
during the year.
=====================
Demonstration Problem 4
The management at Emerson Manufacturing Company is studying the cash inflow pattern in
preparation for its cash budget. The following information is available.

Cash collected from current month’s sales 40%

Cash collected from last month’s sales 55%
Cash discount taken 2%
Uncollectible sales 3%
100%
For the second quarter of next year, the beginning balance of accounts receivable ($23,000) is
expected to be collected in full in April. The expected credit sales of the second quarter are:

April $40,000
May 45,000
June 50,000

Required:
Prepare a multiperiod schedule of cash collections for the second quarter of next year.

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Solution:

Emerson Manufacturing Company

Multiperiod Schedule of Cash Collections
For the quarter ended June 30

Month April May June Total

Accounts receivable, April 1 $23,000 $23,000
April credit sales 16,000a $22,000b 38,000
May credit sales 18,000c $24,750d 42,750
June credit sales 20,000e 20,000
Total cash collection $39,000 $40,000 $44,750 $123,750

a
$40,000 × 40% = $16,000.
b
$40,000 × 55% = $22,000.
c
$45,000 × 40% = $18,000.
d
$45,000 × 55% = $24,750.
e
$50,000 × 40% = $20,000.
======================

LO 13-6 Develop budgeted financial statements.

♦ Budgeted balance sheets are statements of budgeted financial position.

• Budgeted balance sheets combine an estimate of financial position at the beginning

of the budget period with the estimated results of operations for the period and
estimated changes in assets and liabilities.

• Decision making in these areas is, for the most part, the treasurer’s function.

• Exhibit 13.12 presents budgeted balance sheets at the beginning and end of the
budget period.

♦ A model of the budgeting process for a manufacturing firm is presented in Exhibit 13.13.

• Assembling a master budget is a complex process requiring careful coordination of

many different organization segments.

LO 13-7 Explain budgeting in merchandising and service organizations.

♦ Budgeting is used extensively in different types of organizations.

• As in manufacturing, the sales budget in retail and wholesale (often called

merchandising) businesses drives the rest of the budgeted income statement.

• A merchandiser has no production budget but a merchandise purchases budget,

which is much like the direct materials purchases budget in manufacturing.

• Exhibit 13.14 presents a merchandise purchases budget.

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• Because of the critical importance of timing and seasonality in merchandising,

special attention is usually given to short-term budgets. The budget helps formalize an
ongoing process of coordinating buying and selling.

• A key difference in the master budget of a service enterprise is the absence of

product or material inventories. Neither a production budget (for manufacturing firms)
nor a merchandise purchases budget (for merchandising firms) is needed.
• Service businesses need to carefully coordinate sales with the necessary labor.
Managers must ensure that personnel with the right skills are available at the right
times.

Example: Revenue projections for a consulting firm may be based on estimates of

the number and types of clients to be served in the budget year and the amount of
services requested. The forecasts stem primarily from services provided in previous
years with adjustments for new clients, new services to existing clients, loss of
clients, and changes in the rates charged for services.

Once the amount of services is forecast, the firm develops its budget for personnel.
The firm faces a trade-off between not having the staff to do the work and having
costly staff who are underemployed.

• In governmental organizations, the budget serves as an expression of the

legislature’s desires and is a legally binding authorization.

LO 13-8 Explain why ethical issues arise in budgeting.

♦ Budgeting creates serious ethical issues for many people.

• Managers and employees provide much of the information for the budget. Their
performance then is compared with the budget they help develop.

• Part of the problem is the form of the merit pay schedule that creates strong
incentives right around the target.

• The company must recognize the trade-off between encouraging unbiased reporting
by local managers and the use of this information in performance evaluation and
reward.
• While the conflict cannot be avoided, managers who are aware of the potential
problems are in a position to take steps to mitigate the consequences.

LO 13-9 Explain how to use sensitivity analysis to budget under

uncertainty.
♦ Formal planning models allow many alternatives and options to be explored in the planning
process.

• Any projection of the future is uncertain.

• Managers often perform sensitivity analysis on their projections.

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• By asking and answering hypothetical questions during the planning phase,

management can determine the risk of various phases of its operations and can
develop contingency plans.

• Local managers can be asked to provide three forecasts of prices and quantities: a
best estimate, an optimistic estimate (an estimate so high that there is only a 10
percent or less chance that conditions will be better than the optimistic estimate), and
a pessimistic estimate (an estimate so low that there is only a 10 percent or less
chance that conditions will be worse than the pessimistic estimate). Nine possible
scenarios can be defined by selling prices and sales quantity combinations.

• The incorporation of uncertainty into budget estimates can be quite useful.

• Spreadsheets are extremely useful in preparing budgets, which require considerable

what-if thinking.

• Exhibit13.15 shows a spreadsheet analysis of alternative budgeting scenarios.

Matching
A. Budget G. Organization goals
B. Cash budget H. Participative budgeting
C. Critical success factors I. Production budget
D. Delphi technique J. Profit plan
E. Econometric models K. Strategic long-range plan
F. Master budget L. Trend analysis

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_____ 1. A statement of cash on hand at the start of the budget period, expected cash
receipts, expected cash disbursements, and the resulting cash balance at the end of the budget
period.

_____ 2. A company’s broad objectives established by management that employees work

to achieve.

_____ 3. Strengths of a company that enable it to outperform competitors.

_____ 4. A forecasting method in which individual forecasts of group members are

submitted anonymously and evaluated by the group as a whole.

_____ 5. The financial plan of an organization for the coming year or other planning period.

_____ 6. The use of input from lower- and middle-management employees for budget
preparation.

_____ 7. The income statement portion of the master budget.

_____ 8. A forecasting method that ranges from simple visual extrapolation of points on a
graph to highly sophisticated computerized time series analysis.

_____ 9. Statistical methods of forecasting economic data using regression models.

_____ 10. A financial plan of the resources needed to carry out activities and meet financial
goals.

_____ 11. A statement detailing steps to take to achieve a company’s organization goals.

_____ 12. The production plan of resources needed to meet current sales demand and ensure
that inventory levels are sufficient for future sales.
Answers: B, G, C, D, F, H, J, L, E, A, K, I

Multiple Choice
1. Which of the following statements is correct?
a. Critical success factors are strengths of a company that enable it to outperform
competitors.
b. The strategic long-range profit plan is a statement detailing steps to take to achieve a
company’s budget.
c. The master budget is a long-range financial plan of an organization.
d. Budgeting is a static process.

2. Which of the following method(s) can be used to extract sales forecast?

a. Delphi technique.
b. Trend analysis.
c. Econometric models.
d. All of the above.

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3. Jim is preparing the production budget for his company. He estimates that 21,000 units
have to be produced to meet the sales forecast of 18,000 units and the desired ending
inventory of 4,000 units. How many units should be in the beginning inventory?
a. 750 units.
b. 800 units.
c. 1,000 units.
d. 1,200 units.

4. For next year, 21,000 units of finished goods have to be produced, each consuming 3
units of materials at $6. The expected beginning and ending materials inventories are
8,000 units and 12,000 units, respectively. How much is expected to be spent for
materials purchases next year?
a. $360,000.
b. $372,000.
c. $390,000.
d. $402,000.

5. For next year, 21,000 units of finished goods have to be produced, each requiring 1.5
hours of labor. The prevailing hourly rate is expected to be $12 per hour. What is the
direct labor cost for next year?
a. $332,000.
b. $356,000.
c. $378,000.
d. $412,000.

6. Which of the following statements is incorrect?

a. To simplify the budgeting process, overhead costs are usually divided into fixed and
variable components.
b. Most companies estimate work-in-process inventories.
c. The budget usually undergoes a good deal of coordinating and revising.
d. Budgeting marketing and administrative costs is very difficult because managers have
discretion about how much money is spent and the timing of the expenditures.

7. The following information is available.

Cash collected from current month’s sales 40%

Cash collected from last month’s sales 55%
Uncollectible sales 5%
100%

The expected credit sales of the second quarter are:

April $400,000
May 450,000
June 500,000
How much cash will be collected in May?
a. $360,000.
b. $400,000.
c. $420,000.
d. $480,000.

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8. The following information is available.

Cash payment for current month’s purchases 30%

Cash payment for last month’s purchases 67%
Cash discount taken 3%
100%
The expected credit purchases of the second quarter are:

April $180,000
May 250,000
June 300,000

How much cash will be paid in May?

a. $184,500.
b. $195,600.
c. $200,750.
d. $221,400.
9. Which of the following statements is incorrect?
a. A key difference in the master budget between a service enterprise and a
manufacturing firm is the absence of product or material inventories.
b. Service businesses need to carefully coordinate sales with the necessary labor.
c. The purchase budget in retail and wholesale businesses drives the rest of the budgeted
income statement.
d. A merchandiser has no production budget.

10. Which of the following statements is correct?

a. Managers and employees provide much of the information for the budget.
b. Performance of managers and employees is compared with the budget they help
develop.
c. The company must recognize the trade-off between encouraging unbiased reporting
by managers and the use of this information in performance evaluation and reward.
d. All of the above.

11. Participative budgeting

a. Relies on input from top management for budget preparation.
b. Is also called grass root budgeting.
c. Is efficient and expedient.
d. Prevents employees from accepting the goals of their organization.

12. Which of the following statements is correct?

a. Sales forecast can be done after sales budget is prepared.
b. Market researchers are concerned with short-term sales.
c. Salespeople have an incentive to bias their sales forecasts.
d. Delphi technique encourages participants to identify themselves and foster
communication.

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Budgeting for Profit and Control

Answers
1. a LO1

2. d LO3

3. c LO4

BB + 21,000 – 18,000 = 4,000.

BB = 1,000 units.

4. d LO4

8,000 units + TI – 21,000 × 3 = 12,000 units.

TI = 67,000 units.
Cost of materials purchases = $6 × 67,000 units = $402,000.
5. c LO4

$12 × 1.5 hours × 21,000 units = $378,000.

6. b LO4

7. b LO5

$400,000 × 55% + $450,000 × 40% = $400,000.

8. b LO5

$180,000 × 67% + $250,000 × 30% = $195,600.

9. c LO7

10. d LO8

11. b LO2

12. c LO3

Reflection:

Bible Verse related to the topic:

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