1. 1 Chapter 8. Profit Planning M11-Chp-09-1-Profit-Planning-2010-0523 Summer, 2011. Edited May 23, 2011. Copyright © 2011, Dr. Howard Godfrey This file contains illustrative problems that will be used in the lecture to illustrate important concepts and procedures. Want to know what your test will look like? (Look closely at these problems.) Copyright 2011. Dr. Howard Godfrey – M10-Chp-08-1-Profit-Planning-2011-0523

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3. 1: Budget process 3

4. Budgeting Process Question Which of the following steps in the preparation of a master budget would logically be performed first? a. Prepare a production schedule. b. Prepare a sales forecast. c. Prepare a cash budget. d. Prepare a budget of manufacturing costs. 4

5. 2: Sales budget 5

6. 2: Sales budget – an example. At the start of the recession, the CFO (of a company that produces gypsum board for homes) saw that housing starts were grinding to a halt. He revised their sales budget down dramatically and began to reduce costs (which often means shutting down factories, laying off workers, etc.). He also renegotiated loans.

7. 3: Production budget 7

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12. 4: Direct materials budget 12

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14. UNCC Production Budget-2 Continue the preceding question. How many pounds of Material B should be purchased during September? a. 328,000 b. 302,000 c. 298,000 d. 272,000 14

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18. 5: Direct labor budget 18

19. Big Corp. is preparing its direct labor budget for the next two months. Each unit of output requires 0.05 direct labor-hours. The direct labor rate is $7.50 per direct labor-hour. The production budget calls for producing 9,100 units in May and 8,800 units in June. If the direct labor work force is fully adjusted to the total direct labor-hours needed each month, what would be the total combined direct labor cost for the two months? A. $3,300.00 B. $3,412.50 C. $6,712.50 D. $3,356.25 19

20. 6: Manufacturing overhead budget 20

21. Formica Corp’s OH budget at is based on budgeted direct labor-hours. The direct labor budget indicates that 4,400 direct labor-hours will be required in October. The variable OH rate is $8.90 per direct labor-hour. Budgeted fixed factory OH is $86,680 per month, which includes depreciation of $16,280. All other fixed factory OH costs represent current cash flows. The company recomputes its predetermined OH rate every month. The predetermined OH rate for October will be: A. $19.70 B. $24.90 C. $8.90 D. $28.60

22. 7: Selling & administrative budget 22

23. 8: Cash budget 23

24. Reporting Collections Collections of cash from customers would appear on which of the following budgets? a. sales budget b. operating expense budget c. cash budget d. none of the above 24

25. Simplex Co. - Plan Cash Balances-1 Simplex Company must have a minimum cash balance of $6,000 on the first of every month for operating funds. On April 1, Simplex has cash of $9,000. Budgeted cash receipts for April are $45,000. Anticipated cash disbursements in April will be $52,000. In April, Simplex will need to borrow: a. $2,000 b. $4,000 c. $6,000 d. $8,000 e. none of these 25

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28. IBX-Budgeting Cash Collections IBX forecasts sales of $40,000, $30,000, and $35,000 for May, June, and July, respectively. Seventy percent of sales are collected in the month of the sale, 20% in the month following the sale, and 8% in the second month following the sale, (2% are uncollectible). No discount is allowed on any sale. What are budgeted cash receipts for July? a. $18,800 b. $24,500 c. $28,100 d. $31,550 e. $33,700 28

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31. ABC-Budgeting Cash Collections ABC forecasts sales of $40,000, $30,000, and $35,000 for May, June, and July, respectively. Seventy percent of sales are collected in the month of the sale, 20% in the month following the sale, and 8% in the second month following the sale, (2% are uncollectible). A 2% discount is allowed on all collections in month of sale and on one-half of the receivables collected in the month after the month of sale. What are budgeted cash receipts for July? a. $18,800 b. $24,500 c. $28,100 d. $31,550 e. $33,150 31

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40. How would your answer change on preceding slide, if markup is 50% of retail? 40

41. 9: Budgeted income statement 41

42. Big Co.- Budget Net Income- 1 Big Co is preparing its October budget. Sales are budgeted at $300,000. All sales are credit sales. A provision for bad debts is made monthly at the rate of 2% of sales. Inventory was $70,000 at Sept. 30, and an increase of $10,000 is planned in October. Selling price of inventory is cost plus 25%. Cash payments for selling and administrative expenses in October will be $40,000. Depreciation for October will be $5,000. Budgeted operating income for October is: a. $6,000 b. $9,000 c. $56,000 d. $66,000 42

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45. 10: Budgeted balance sheet 45

46. Printing Large Items Some of the slides will print with very small print, when you print six slides per page. You may want to print a few slides in this file separately -- a single slide per page so you can read the page easily. 46

47. The following problem requires a complete set of budgeted financial statements. 47

48. Charlotte Co. Budgeting – 1 Please study Charlotte Company’s balance sheet on Slide-2 and the transaction data on Slide-3. Complete the T accounts for February transactions on Slide-4 Prepare Income Statement for February on Slide-6. Prepare Retained Earnings Statement February-Slide-8. Prepare Balance Sheet at February 28, 2010- Slide 10. 48

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50. Charlotte Co. Budgeting – 3 Enter February projections in T Accounts on next Slide (by number) Beginning balances have been entered in the T Accounts. 1. Collect beginning Accounts Receivable. 2. Write off uncollectible accounts from January sales. 3. Pay full amount of beginning Accounts Payable 4. Record sales for February based on following budget: February - $110,000 March - $120,000 April - $140,000 50

51. Charlotte Co. Budgeting – 3 5. Record projected February collections based on collection history: 60% in the month of sale, 38% the next month, and 2% uncollectible. 6. Record cost of goods sold (gross margin is 25% of sales). 7. Purchases each month are sufficient to cover the next month's projected sales. 8. Other expenses each month, paid in cash, are $16,500. 9. Depreciation each month is $5,000. 10. Record estimated bad debts expense 51

52. Charlotte Co. Budgeting – 4 52

53. Charlotte Co. Budgeting – 5 53

54. Charlotte Co. Budgeting – 6 54

55. Charlotte Co. Budgeting – 7 55

56. Charlotte Co. Budgeting – 8 56

57. Charlotte Co. Budgeting – 9 57

60. UNCC Co. Budgeting – 1 Please review study UNCC Company’s balance sheet on Slide-2 and the transaction data on Slides-3 & 4. Complete the T accounts for February transactions on Slide-5. Answer the multiple choice questions. (Note: this is a repeat of the Charlotte Co. case covered earlier in this file. You may refer back to that solution. This is an extension of that earlier case) 60

61. UNCC Co. Budgeting – 2 61

62. UNCC Co. Budgeting – 3 Enter February projections in T Accounts on next Slide (by number) Beginning balances have been entered in the T Accounts. 1. Collect beginning Accounts Receivable. 2. Write off uncollectible accounts from January sales. 3. Pay full amount of beginning Accounts Payable 4. Record sales for February based on following budget: February - $110,000 March - $120,000 April - $140,000 62

63. UNCC Co. Budgeting – 4 5. Record projected February collections based on collection history: 60% in the month of sale, 38% the next month, and 2% uncollectible. 6. Record cost of goods sold (gross margin is 25% of sales). 7. Purchases each month are sufficient to cover the next month's projected sales. 8. Other expenses each month, paid in cash, are $16,500. 9. Depreciation each month is $5,000. 10. Record estimated bad debts expense 63

64. UNCC Co. Budgeting – 5 64

65. UNCC Co. Budgeting – 6 1. What are the budgeted cash collections in April? a. $142,900 b. $129,600 c. $113,800 d. $104,000 2. What is the projected accounts payable balance on March 31? a. $82,500 b. $86,250 c. $90,000 d. $105,000 3. The cash disbursements in April for purchases are expected to be: a. $82,500 b. $86,250 c. $90,000 d. $105,000 4. The cash disbursements in April for expenses are expected to be: a. $16,500 b. $21,500 c. $23,900 d. $38,800 e. $38,900 65

66. UNCC Co. Budgeting – 7 66

67. UNCC Co. Budgeting – 8 67

68. UNCC Co. Budgeting – 9 68

69. The End 69