Exercises: Set B 1

EXERCISES: SET B
E9-1B Welton Electronics Inc. produces and sells two models of calculators, XQ-103 and Prepare a sales budget for
XQ-104. The calculators sell for $15 and $25, respectively. Because of the intense competition 2 quarters.
Welton faces, management budgets sales semiannually. Its projections for the first 2 quarters of (SO 3)
2008 are as follows.
Unit Sales
Product Quarter 1 Quarter 2
XQ-103 20,000 25,000
XQ-104 10,000 16,000

No changes in selling prices are anticipated.

Instructions
Prepare a sales budget for the 2 quarters ending June 30, 2008. List the products and show
for each quarter and for the 6 months, units, selling price, and total sales by product and in
total.
E9-2B Agler and Poole, CPAs, are preparing their service revenue (sales) budget for the Prepare a sales budget for four
coming year (2008). The practice is divided into three departments: auditing, tax, and consulting. quarters.
Billable hours for each department, by quarter, are provided below. (SO 3)

Department Quarter 1 Quarter 2 Quarter 3 Quarter 4

Auditing 2,200 1,600 2,000 2,400
Tax 3,000 2,400 2,000 2,500
Consulting 1,500 1,500 1,500 1,500
Average hourly billing rates are: auditing $70, tax $80, and consulting $90.

Instructions
Prepare the service revenue (sales) budget for 2008 by listing the departments and showing for
each quarter and the year in total, billable hours, billable rate, and total revenue.
E9-3B Samson Company produces and sells automobile batteries, the heavy-duty HD-240. Prepare quarterly production
The 2008 sales budget is as follows. budgets.
(SO 3)
Quarter HD-240
1 5,000
2 7,000
3 8,000
4 10,000
The January 1, 2008, inventory of HD-240 is 1,500 units. Management desires an ending inven-
tory each quarter equal to 30% of the next quarter’s sales. Sales in the first quarter of 2009 are
expected to be 20% higher than sales in the same quarter in 2008.

Instructions
Prepare quarterly production budgets for each quarter and in total for 2008.
E9-4B Berroa Industries has adopted the following production budget for the first 4 months Prepare a direct materials
of 2009. purchases budget.
(SO 3)
Month Units Month Units
January 10,000 March 5,000
February 8,000 April 4,000
Each unit requires 4 pounds of raw materials costing $2 per pound. On December 31, 2008,
the ending raw materials inventory was 10,000 pounds. Management wants to have a raw
materials inventory at the end of the month equal to 25% of next month’s production
requirements.

Instructions
Prepare a direct materials purchases budget by month for the first quarter.
2 Chapter 9 Budgetary Planning

Prepare production and direct E9-5B On January 1, 2009 the Esteban Company budget committee has reached agreement
materials budgets by quarters on the following data for the 6 months ending June 30, 2009.
for 6 months.
Sales units: First quarter 5,000; second quarter 6,000; third quar-
(SO 3), AP
ter 7,000
Ending raw materials inventory: 40% of the next quarter’s production requirements
Ending finished goods inventory: 20% of the next quarter’s expected sales units
Third-quarter production: 7,250 units
The ending raw materials and finished goods inventories at December 31, 2008, follow the same
percentage relationships to production and sales that occur in 2009. Three pounds of raw materi-
als are required to make each unit of finished goods. Raw materials purchased are expected to
cost $4 per pound.
Instructions
(a) Prepare a production budget by quarters for the 6-month period ended June 30, 2009.
(b) Prepare a direct materials budget by quarters for the 6-month period ended June 30, 2009.
Prepare a direct labor budget. E9-6B Cosby, Inc., is preparing its direct labor budget for 2008 from the following production
(SO 3) budget based on a calendar year.
Quarter Units Quarter Units
1 20,000 3 35,000
2 25,000 4 30,000
Each unit requires 1.4 hours of direct labor.
Instructions
Prepare a direct labor budget for 2008. Wage rates are expected to be $15 for the first 2 quarters
and $16 for quarters 3 and 4.
Prepare a manufacturing over- E9-7B Willis Company is preparing its manufacturing overhead budget for 2008. Relevant
head budget for the year. data consist of the following.
(SO 3) Units to be produced (by quarters): 10,000, 12,000, 15,000, 18,000.
Direct labor: Time is 1.2 hours per unit.
Variable overhead costs per direct labor hour: Indirect materials $0.70; indirect labor $1.20; and
maintenance $0.50.
Fixed overhead costs per quarter: Supervisory salaries $35,000; depreciation $16,000; and main-
tenance $14,000.
Instructions
Prepare the manufacturing overhead budget for the year, showing quarterly data.
Prepare a selling and adminis- E9-8B Counsell Company combines its operating expenses for budget purposes in a selling
trative expense budget for and administrative expense budget. For the first 6 months of 2008, the following data are available.
2 quarters.
1. Sales: 30,000 units quarter 1; 33,000 units quarter 2.
(SO 3) 2. Variable costs per dollar of sales: Sales commissions 5%, delivery expense 2%, and advertis-
ing 3%.
3. Fixed costs per quarter: Sales salaries $15,000, office salaries $6,000, depreciation $4,200, in-
surance $1,500, utilities $800, and repairs expense $600.
4. Unit selling price: $20.
Instructions
Prepare a selling and administrative expense budget by quarters for the first 6 months of 2008.
Prepare a production and a E9-9B Schellencamp Company’s sales budget projects unit sales of part 198Z of 10,000 units
direct materials budget. in January, 12,000 units in February, and 13,000 units in March. Each unit of part 198Z requires 2
(SO 3) pounds of materials, which cost $4 per pound. Schellencamp Company desires its ending raw
materials inventory to equal 30% of the next month’s production requirements, and its ending
finished goods inventory to equal 20% of the next month’s expected unit sales. These goals were
met at December 31, 2007.
Instructions
(a) Prepare a production budget for January and February 2008.
(b) Prepare a direct materials budget for January 2008.
 Exercises: Set B 3

E9-10B Nunez Company has accumulated the following budget data for the year 2008. Prepare a budgeted income
1. Sales: 25,000 units, unit selling price $80. statement for the year.
2. Cost of one unit of finished goods: Direct materials 2 pounds at $4 per pound, direct labor (SO 3, 4)
3 hours at $12 per hour, and manufacturing overhead $6 per direct labor hour.
3. Inventories (raw materials only): Beginning, 10,000 pounds; ending, 15,000 pounds.
4. Raw materials cost: $4 per pound.
5. Selling and administrative expenses: $200,000.
6. Income taxes: 30% of income before income taxes.
Instructions
(a) Prepare a schedule showing the computation of cost of goods sold for 2008.
(b) Prepare a budgeted income statement for 2008.
E9-11B Peavy Company expects to have a cash balance of $46,000 on January 1, 2008. Prepare a cash budget for
Relevant monthly budget data for the first 2 months of 2008 are as follows. 2 months.
Collections from customers: January $100,000, February $160,000. (SO 5)

Payments for direct materials: January $60,000, February $80,000.

Direct labor: January $30,000, February $45,000. Wages are paid in the month they are incurred.
Manufacturing overhead: January $21,000, February $31,000. These costs include depreciation of
$1,000 per month. All other overhead costs are paid as incurred.
Selling and administrative expenses: January $15,000, February $20,000.These costs are exclusive
of depreciation. They are paid as incurred.
Sales of marketable securities in January are expected to realize $10,000 in cash. Peavy
Company has a line of credit at a local bank that enables it to borrow up to $25,000.The company
wants to maintain a minimum monthly cash balance of $25,000.
Instructions
Prepare a cash budget for January and February.
E9-12B Chamberlain Corporation is projecting a cash balance of $31,000 in its December 31, Prepare a cash budget.
2007, balance sheet. Chamberlain’s schedule of expected collections from customers for the first (SO 5)
quarter of 2008 shows total collections of $185,000. The schedule of expected payments for direct
materials for the first quarter of 2008 shows total payments of $45,000. Other information gath-
ered for the first quarter of 2008 is: sale of equipment $3,500; direct labor $70,000, manufacturing
overhead $35,000, selling and administrative expenses $45,000; and purchase of securities $12,000.
Chamberlain wants to maintain a balance of at least $20,000 cash at the end of each quarter.
Instructions
Prepare a cash budget for the first quarter.
E9-13B Key Company’s budgeted sales and direct materials purchases are as follows. Prepare schedules of expected
collections and payments.
Budgeted Sales Budgeted D.M. Purchases
(SO 5)
January $180,000 $30,000
February 220,000 35,000
March 290,000 45,000
Key’s sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale,
50% in the month following sale, and 36% in the second month following sale; 4% are uncol-
lectible. Key’s purchases are 50% cash and 50% on account. Purchases on account are paid 40%
in the month of purchase, and 60% in the month following purchase.
Instructions
(a) Prepare a schedule of expected collections from customers for March.
(b) Prepare a schedule of expected payments for direct materials for March.
E9-14B Green Yards Landscaping Inc. is preparing its budget for the first quarter of 2008. Prepare schedules for cash
The next step in the budgeting process is to prepare a cash receipts schedule and a cash payments receipts and cash payments,
schedule. To that end the following information has been collected. and determine ending balances
for balance sheet.
Clients usually pay 60% of their fee in the month that service is provided, 30% the month after,
and 10% the second month after receiving service. (SO 5, 6)

Actual service revenue for 2007 and expected service revenues for 2008 are: November 2007, $90,000;
December 2007, $70,000; January 2008, $110,000; February 2008, $120,000; March 2008, $130,000.
4 Chapter 9 Budgetary Planning

Purchases on landscaping supplies (direct materials) are paid 40% in the month of purchase
and 60% the following month. Actual purchases for 2007 and expected purchases for 2008
are: December 2007, $14,000; January 2008, $13,000; February 2008, $15,000; March 2008,
$20,000.
Instructions
(a) Prepare the following schedules for each month in the first quarter of 2008 and for the
quarter in total:
(1) Expected collections from clients.
(2) Expected payments for landscaping supplies.
(b) Determine the following balances at March 31, 2008:
(1) Accounts receivable.
(2) Accounts payable.
Prepare a cash budget for two E9-15B Matthews Dental Clinic is a medium-sized dental service specializing in family den-
quarters. tal care. The clinic is currently preparing the master budget for the first 2 quarters of 2008. All
(SO 5, 6) that remains in this process is the cash budget.The following information has been collected from
other portions of the master budget and elsewhere.
Beginning cash balance $ 30,000
Required minimum cash balance 20,000
Payment of income taxes (2nd quarter) 4,000
Professional salaries:
1st quarter 140,000
2nd quarter 140,000
Interest from investments (2nd quarter) 5,000
Overhead costs:
1st quarter 95,000
2nd quarter 120,000
Selling and administrative costs, including
$3,000 depreciation:
1st quarter 50,000
2nd quarter 70,000
Purchase of equipment (2nd quarter) 50,000
Sale of equipment (1st quarter) 15,000
Collections from clients:
1st quarter 245,000
2nd quarter 390,000
Interest payments (2nd quarter) 300
Instructions
Prepare a cash budget for each of the first two quarters of 2008.
Prepare a purchases budget E9-16B In May 2008, the budget committee of Haren Stores assembles the following data in
and budgeted income statement preparation of budgeted merchandise purchases for the month of June.
for a merchandiser.
1. Expected sales: June $550,000, July $600,000.
(SO 6)
2. Cost of goods sold is expected to be 70% of sales.
3. Desired ending merchandise inventory is 40% of the following (next) month’s cost of goods sold.
4. The beginning inventory at June 1 will be the desired amount.
Instructions
(a) Compute the budgeted merchandise purchases for June.
(b) Prepare the budgeted income statement for June through gross profit.
 Problems: Set C 5

PROBLEMS: SET C
P9-1C Suppan Farm Supply Company manufactures and sells a fertilizer called Basic II. The Prepare budgeted income state-
following data are available for preparing budgets for Basic II for the first 2 quarters of 2008. ment and supporting budgets.
1. Sales: Quarter 1, 40,000 bags; quarter 2, 50,000 bags. Selling price is $65 per bag. (SO 3, 4)
2. Direct materials: Each bag of Basic II requires 6 pounds of Crup at a cost of $4 per pound and
10 pounds of Dert at $1.50 per pound.
3. Desired inventory levels:
Type of Inventory January 1 April 1 July 1
Basic II (bags) 10,000 15,000 20,000
Crup (pounds) 9,000 12,000 15,000
Dert (pounds) 15,000 20,000 25,000
4. Direct labor: Direct labor time is 15 minutes per bag at an hourly rate of $10 per hour.
5. Selling and administrative expenses are expected to be 10% of sales plus $160,000 per
quarter.
6. Income taxes are expected to be 30% of income from operations.
Your assistant has prepared two budgets: (1) The manufacturing overhead budget shows ex-
pected costs to be 100% of direct labor cost. (2) The direct materials budget for Dert which shows
the cost of Dert to be $682,500 in quarter 1 and $825,00 in quarter 2.
Instructions
Prepare the budgeted income statement for the first 6 months of 2008 and all required supporting Net income $689,500
budgets by quarters. (Note: Use variable and fixed in the selling and administrative expense budget.) Cost per bag $44.00
Do not prepare the manufacturing overhead budget or the direct materials budget for Dert.
P9-2C Durham Inc. is preparing its annual budgets for the year ending December 31, 2008. Prepare sales, production,
Accounting assistants furnish the following data. direct materials, direct labor,
and income statement budgets.
(SO 3, 4)
Product Product
LN 35 LN 40
Sales budget:
Anticipated volume in units 400,000 240,000
Unit selling price $25 $35
Production budget:
Desired ending finished goods units 30,000 25,000
Beginning finished goods units 20,000 15,000
Direct materials budget:
Direct materials per unit (pounds) 2 3
Desired ending direct materials pounds 50,000 20,000
Beginning direct materials pounds 40,000 10,000
Cost per pound $2 $3
Direct labor budget:
Direct labor time per unit 0.5 0.75
Direct labor rate per hour $12 $12
Budgeted income statement:
Total unit cost $11 $20

An accounting assistant has prepared the detailed manufacturing overhead budget and the
selling and administrative expense budget. The latter shows selling expenses of $750,000 for
product LN 35 and $590,000 for product LN 40, and administrative expenses of $420,000 for
product LN 35 and $380,000 for product LN 40. Income taxes are expected to be 30%. (a) Total sales $18,400,000
Instructions (b) Required production units:
Prepare the following budgets for the year. Show data for each product. Quarterly budgets LN 35, 410,000
should not be prepared. (c) Total cost of direct materi-
als purchases $3,940,000
(a) Sales (d) Direct labor (d) Total direct labor cost
(b) Production (e) Income statement (Note: Income taxes are $4,710,000
(c) Direct materials not allocated to the products.) (e) Net income $4,942,000
6 Chapter 9 Budgetary Planning

Prepare sales and production P9-3C Speier Industries has sales in 2008 of $5,600,000 (800,000 units) and gross profit of
budgets and compute cost per $1,344,000. Management is considering two alternative budget plans to increase its gross profit
unit under two plans. in 2009.
(SO 3, 4) Plan A would increase the selling price per unit from $7.00 to $7.60. Sales volume would de-
crease by 10% from its 2008 level. Plan B would decrease the selling price per unit by 5%. The
marketing department expects that the sales volume would increase by 100,000 units.
At the end of 2008, Speier has 70,000 units on hand. If Plan A is accepted, the 2009 ending
inventory should be equal to 90,000 units. If Plan B is accepted, the ending inventory should be
equal to 100,000 units. Each unit produced will cost $2.00 in direct materials, $1.50 in direct labor,
and $0.50 in variable overhead. The fixed overhead for 2009 should be $925,000.
Instructions
(c) Unit cost: Plan A $5.25
(a) Prepare a sales budget for 2009 under (1) Plan A and (2) Plan B.
Plan B $4.99 (b) Prepare a production budget for 2009 under (1) Plan A and (2) Plan B.
(d) Gross profit: (c) Compute the cost per unit under (1) Plan A and (2) Plan B. Explain why the cost per unit is
Plan A $1,692,000 different for each of the two plans. (Round to two decimals.)
Plan B $1,494,000 (d) Which plan should be accepted? (Hint: Compute the gross profit under each plan.)
Prepare cash budget for P9-4C Vidro Company prepares monthly cash budgets. Relevant data from operating budg-
2 months. ets for 2009 are:
(SO 5) January February
Sales $350,000 $400,000
Direct materials purchases 120,000 110,000
Direct labor 85,000 115,000
Manufacturing overhead 60,000 75,000
Selling and administrative expenses 75,000 80,000
All sales are on account. Collections are expected to be 60% in the month of sale, 30% in the first
month following the sale, and 10% in the second month following the sale. Thirty percent (30%)
of direct materials purchases are paid in cash in the month of purchase, and the balance due is
paid in the month following the purchase. All other items above are paid in the month incurred.
Depreciation has been excluded from manufacturing overhead and selling and administrative
expenses.
Other data:
1. Credit sales: November 2008, $200,000; December 2008, $280,000.
2. Purchases of direct materials: December 2008, $90,000.
3. Other receipts: January—Collection of December 31, 2008, interest receivable $3,000;
February—Proceeds from sale of securities $5,000.
4. Other disbursements: February—payment of $20,000 for land.
The company’s cash balance on January 1, 2009, is expected to be $50,000. The company
(a) January: collections wants to maintain a minimum cash balance of $40,000.
$314,000
payments $99,000 Instructions
(b) Ending cash balance: (a) Prepare schedules for (1) expected collections from customers and (2) expected payments
January $48,000 for direct materials purchases.
February $40,000 (b) Prepare a cash budget for January and February in columnar form.
Prepare purchases and income P9-5C The budget committee of Guzman Company collects the following data for its
statement budgets for a Westwood Store in preparing budgeted income statements for July and August 2008.
merchandiser.
1. Expected sales: July $400,000, August $450,000, September $500,000.
(SO 6) 2. Cost of goods sold is expected to be 60% of sales.
3. Company policy is to maintain ending merchandise inventory at 20% of the following
month’s cost of goods sold.
4. Operating expenses are estimated to be:
Sales salaries $50,000 per month
Advertising 4% of monthly sales
Delivery expense 2% of monthly sales
Sales commissions 3% of monthly sales
Rent expense $3,000 per month
 Problems: Set C 7
Depreciation $700 per month
Utilities $500 per month
Insurance $300 per month
5. Income taxes are estimated to be 30% of income from operations.
Instructions (a) Purchases: July $246,000
(a) Prepare the merchandise purchases budget for each month in columnar form. August $276,000
(b) Prepare budgeted income statements for each month in columnar form. Show the details of (b) Net income: July $48,650
cost of goods sold in the statements. August $59,500