Chapter 7 Exercises

Step-by-Step Exercises

Prepare a cash collections budget.

Question 1

Virginia Corporation expects to earn revenues of $3,000,000 in October, $3,500,000 in November, and $3,800,000 in December. Half of Virginia’s sales are cash and half are credit. Of the credit sales, 60% are collected in the month of sale, 25% in the month following sale, 10% in the second month following sale, and 5% are uncollectible.

Prepare a cash collections budget for December.

Question 2

Blue Haven earned revenues of $400,000 last month (January), and expects revenues to increase by 10% each month. Blue Haven makes all sales on credit; historically, 75% of Blue Haven’s customers pay in the month of sale, 15% in the month following sale, and 10% in the second month following sale.

Prepare a cash collections budget for March.

Question 3

Post Company has budgeted revenues of $200,000 for March; $350,000 for April; $400,000 for May; and $375,000 for June. Twenty percent of sales are in cash, and the remainder are on credit. Post collects on 50% of their credit sales in the month following sale, 40% in the second month following sale, 5% in the third month following sale, and 5% are uncollectible.

Prepare a cash collections budget for June.

Prepare a direct materials purchases budget.

Question 4

Marri Company has budgeted production of 20,000 units in June and 22,000 units in July. Each unit of product requires 2 feet of wood, which costs $5 per foot. Marri’s policy is to end each month with 20% of the following month’s production needs in raw materials inventory.

Prepare a direct materials purchases budget for June.

Question 5

Ellicot Corporation has budgeted production of 3,000 units in February and 2,800 units in March. Each unit requires 40 components costing $145 each and a casing costing $5,000. Ellicot carries 10% of the following month’s production needs as ending raw materials inventory.

Prepare a direct materials purchases budget for February.

Question 6

Hempstill Company is planning to produce 10,000 units this month and then increase production by 10% the following month. Hempstill uses 14 yards of canvas costing $4.80 per yard and 30 embellishments costing $2.50 when producing a unit. Hempstill’s ending raw materials inventory policy is 15% of the following month’s production needs.

Prepare a direct materials purchases budget for this month.

Prepare a cash disbursements budget.

Question 7

Beeser Corporation has budgeted the following costs for July and August:

Beeser pays 50% down when they purchase direct materials, then pays the remainder in the following month. Direct labor is paid in the month incurred. All other expenses are paid for in the month after they are incurred.

Calculate cash disbursements for August.

Question 8

Heady Manufacturing spends $50 per unit for direct materials and $30 per unit for direct labor and incurs $200,000 in manufacturing overhead (all fixed) and $250,000 in operating expenses (all fixed) each month. Heady plans to sell 40,000 units in September and 45,000 in October. There are no raw materials or finished goods inventories. Direct materials are paid for in the month following purchase. All other expenses are paid for in the month incurred.

Calculate cash disbursements for October.

Question 9

Emvee Company plans to spend the following in the second quarter:

Emvee has a payment plan scheduled with their suppliers that calls for payments of one-third during the month of purchase, one-third during the month after purchase, and one-third during the second month after purchase. Direct labor is paid during the month incurred. All other expenses are paid for in the month following purchase.

Calculate cash disbursements for June.

Calculate the ending balance in the Cash account.

Question 10

Lemons, Inc. had a beginning Cash account balance of $830,000. Cash disbursements are budgeted to be $713,000, and cash collections are budgeted to be $750,000.

Calculate the ending balance in the Cash account.

Question 11

Marsoni Corporation began June with $400,000 in the bank. Cash collections are budgeted to be $1,200,000, and cash disbursements are budgeted to be $1,350,000.

Calculate the ending balance in the Cash account.

Question 12

Welling, Inc. has $100,000 in the bank. Welling anticipates that they will collect $418,000 from customers next month and pay $403,000 for expenses next month.

Calculate the ending balance in the Cash account.

Complete Problems

Question 13

Jewell Company has prepared the following budget for January:

Description	Amount	Total
Sales revenue (for 106,000 units)		6,042,000
Cost of goods sold
Direct materials used	742,000
Direct labor	1,060,000
Variable factory overhead	848,000
Fixed factory overhead	915,000	3,565,000
Gross margin		2,477,000
Operating expenses
Variable	742,000
Fixed	346,000	1,088,000
Operating income		Single Line1,389,000Double Line

Selling price per unit, variable cost per unit, total fixed costs, work-in-process inventory, and finished goods inventory are anticipated to remain constant each month. Raw materials inventory is always 10% of the following month’s production needs. Unit sales have increased 5% each month for the last 6 months, and that trend is expected to continue through the first half of next year.

The Cash account balance at the beginning of January is $1,000,000. Jewell collects 50% of revenues in the month of sale, 30% in the following month, 15% in the second month following sale, and 5% are uncollectible. Materials costs are paid in the month following purchase, and all other costs are paid for as incurred.

Prepare a cash budget for January.

Question 14

Earle Company has prepared the following budget for June:

Description	Amount	Total
Sales revenue (for 33,000 units)		7,029,000
Cost of goods sold
Direct materials used	1,617,000
Direct labor	1,254,000
Variable factory overhead	990,000
Fixed factory overhead	735,000	4,596,000
Gross margin		2,433,000
Operating expenses
Variable	1,122,000
Fixed	728,000	1,850,000
Operating income		Single Line583,000Double Line

Unit sales, selling price per unit, variable cost per unit, total fixed costs, and finished goods inventories are anticipated to remain constant each month. Unit sales were in 32,000 in May. Beginning raw materials inventory in May was $25,000 higher than ending raw materials inventory in May.

The Cash account balance at the beginning of June is $950,000. Earle collects 80% of revenues in the month of sale and 20% in the following month. Materials costs are paid in the month following purchase, and all other costs are paid for as incurred.

Prepare a cash budget for June.

Question 15

Anron Company has prepared the following budget for January:

Description	Amount	Total
Sales revenue (for 60,000 units)		10,500,000
Cost of goods sold
Direct materials used	3,180,000
Direct labor	1,800,000
Variable factory overhead	1,680,000
Fixed factory overhead	485,000	7,145,000
Gross margin		3,355,000
Operating expenses
Variable	1,920,000
Fixed	423,000	2,343,000
Operating income		Single Line1,012,000Double Line

Unit sales, selling price per unit, variable cost per unit, total fixed costs, and finished goods inventories are anticipated to remain constant each month. Unit sales were 54,000 in December and 49,000 in November. Ending raw materials inventory is projected at 5% of the next month’s budgeted direct materials usage.

The Cash account balance at the beginning of January is $610,000. Fifty percent of sales are in cash. Sixty percent of credit sales are collected in the month following sale, and 40% are collected in the second month following sale. Materials costs are paid in the month following purchase, and all other costs are paid for as incurred.

Prepare a cash budget for January.

Question 16

Worinski, Inc. used the following information to prepare the master budget for next year:

• Selling price: $250 per unit
• Direct materials cost: 3 pounds per unit at $16 per pound
• Direct labor cost: 2 hours per unit at $27.50 per hour
• Variable overhead: 80% of direct labor cost
• Fixed overhead: $21,000,000 per month
• Variable period costs: $17 per unit
• Fixed period costs: $8,200,000 per month

Sales units are budgeted to be 400,000 in June, 450,000 in July, and 475,000 in August. While finished goods inventory is projected to remain constant, raw materials inventories should be kept at 15% of the next month’s production needs.

Worinski’s sales are 20% cash and 80% credit. Of the credit sales, 60% are collected in the month of sale, 30% in the month following sale, 5% in the second month following sale, and 5% are uncollectible. Worinski pays for variable costs in the month after they are incurred, and fixed costs in the month during which they are incurred.

The Cash account balance at the beginning of August is $1,250,000.

Prepare a cash budget for August.

Question 17

Kipperly Enterprises has prepared the following budget for October, when they expect to sell 150,000 units:

Kipperly expects sales to increase in November by 20% and again in December by 10%. In January, sales should go back to October levels.

Cost of goods sold is 10% fixed, 20% direct materials costs, and 70% other variable costs. Operating expenses are 20% fixed and 80% variable. There are no finished goods inventories, but raw materials are kept at 15% of the next month’s production needs.

Kipperly makes 40% of their sales in cash. Of their credit sales, 10% are collected in the month of sale, 60% in the month following sale, and 30% two months following sale. Kipperly pays for all costs in the month incurred.

Kipperly’s Cash account balance at the end of November will be $350,000.

Prepare a cash budget for December.

Question 18

Snee Corporation plans unit sales, production, and its raw materials inventory for the next three months as follows:

Snee sells its goods for $70 per unit. They collects 75% of revenues in the month of sale and 20% in the month following sale; 5% is uncollectible. Each unit uses 3 pounds of raw material that costs $10 per pound. Snee pays for direct materials in the month the costs are incurred and all other costs in the month after they are incurred. All costs other than direct materials are fixed, totaling $660,000 per month. At the beginning of December, Snee’s cash balance was $160,000.

Prepare a cash budget for December.

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 19

YunCorp has prepared the following budget for September:

 

Cost of goods sold is three-fourths variable and period costs are two-thirds variable. Half of variable cost of goods sold consists of direct materials costs. Sales are planned as follows:

• July: 28,000
• August: 31,000
• September: 30,000

YunCorp keeps finished goods inventory balances constant, but raw materials inventories are expected to be 15% of the following month’s production needs. YunCorp collects 80% of each month’s revenues in the month of sale, 15% in the following month, and the remainder is uncollectible. YunCorp pays for all costs in the month following purchase. YunCorp had $200,000 in their Cash account at the beginning of September.

Prepare a cash budget for September.

Challenge Problem

Question 20

Weadon Industries prepared the following budget for July as part of their master budget for the calendar year:

Description	Amount	Total
Sales revenue (for 81,000 units)		36,450,000
Cost of goods sold
Direct materials used	6,480,000
Direct labor	4,860,000
Variable factory overhead	7,290,000
Fixed factory overhead	1,000,000	19,630,000
Gross margin		16,820,000
Operating expenses
Variable		4,050,000
Fixed		2,500,000
Operating income		Single Line10,270,000Double Line

Weadon plans that sales will remain constant each month for the first 6 months of the year, then go down 10% each month in the third quarter, and then go up again by 20% each month in the fourth quarter.

Selling price per unit, all variable expenses per unit, and total fixed costs are anticipated to remain constant each month. Half of fixed costs consist of depreciation expense. Weadon plans to end each month with 10% of the following month’s sales needs in finished goods inventory, and 20% of the following month’s production needs in raw materials inventory.

The Cash account balance at the beginning of July is $50,000,000. Weadon makes 40% of their sales in cash. Of the credit sales, 20% is collected in the month of sale, 45% in the month after sale, 30% in the second month following sale, and 5% is uncollectible. Materials costs are paid in the month following purchase, and all other costs are paid for as incurred.

Prepare a cash budget for Weadon for July.

Pre-Assessment Problem

Use this problem to check whether you are fully prepared for the assessment. Work the problem under assessment conditions – don’t use any notes or other materials!

Question 21

Wapcaplett, Inc. has the following budgeted income statement for January and February:

Wapcaplett has noticed the following trends:

• 20% of all sales are in cash, and the other 80% are credit sales.
• Credit sales are collected 75% in the month of the sale and 25% in the following month.
• Wapcaplett does not keep finished goods inventory.
• Wapcaplett ends each month with raw materials inventory valued at 15% of the following month’s budgeted direct materials usage.
• Wapcapplett pays for materials in the month after purchase.
• Wapcaplett pays for all costs other than materials in the month incurred.

The cash balance at the end of January is expected to be $85,000.

1. What are budgeted cash collections for February?
2. What are budgeted direct materials purchases to be paid in February?
3. What are budgeted total cash disbursements for February?
4. What is the budgeted ending cash balance at the end of February?