Chapter 11 Profit Planning and the role of budgeting Questions Questions 11-1 What is a budget? What is budgetary control? 11-2 Discuss some of the major benefits to be gained from budgeting. 11-3 What is meant by the term responsibility accounting? 11-4 What is a master budget? Briefly describe its contents. 11-5 Why is the sales forecast the starting point in budgeting? 11-6 As a practical matter, planning and control mean exactly the same thing. Do you agree? Explain. 11-7 Describe the flow of budget data in an organization. Who are the participants in the budgeting process, and how do they participate? 11-8 What is a self-imposed budget? What are the major advantages of self-imposed budgets? What caution must be exercised in their use? 11-9 How can budgeting assist a firm in its workforce staffing levels? 11-10 Briefly differentiate top-down and bottom-up budgeting 11-11 How does zero-based budgeting differ from traditional budgeting? Exercises E11-1 Silver Company Silver Company makes a product that is very popular as a Mothers Day gift. Thus, peak sales occur in May of each year. These peak sales are shown in the companys sales budget for the second quarter given below: From past experience, the company has learned that 20% of a months revenue is collected in the month of sale, that another 70% is collected in the month following sale, and that the remaining 10% is collected in the second month following sale. Bad debts are negligible and can be ignored. February revenue totalled £230,000 and March revenue totalled £260,000. 46,000, Required Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter. Assume that the company will prepare a budgeted statement of financial position as of 30 June. Compute the accounts receivable as of that date.February sales: February = 20%, march = 70%, April = 10% AprilMayJuneFebruary sales March Sales April Sales May Sales June Sales Total Cash Collections E11-2 Down Under Products Ltd Down Under Products Ltd of Australia has budgeted sales of its popular boomerang for the next four months as follows: The company is now in the process of preparing a production budget for the second quarter. Past experience has shown that end-of-month inventory levels must equal 10% of the following months sales. The inventory at the end of March was 5,000 units. Required Prepare a production budget for the second quarter. In your budget, show the number of units to be produced each month and for the quarter in total. E11-3 Musk Oil Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is 150 roubles per gram. (Siberia is located in Russia, whose currency is the rouble.) Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3. Musk oil has become so popular as a perfume base that it is now necessary to carry large inventories as a precaution against inventory-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarters production needs. Some 36,000 grams of musk oil will be on hand to start the first quarter of Year 2. Required Prepare a materials purchases budget for musk oil, by quarter and in total, for Year 2. At the bottom of your budget, show the amount of purchases in roubles for each quarter and for the year in total. E11-5 Krispin Company The direct labour budget of Krispin Company for the upcoming fiscal
year includes the following budgeted direct labour-hours: The companys variable manufacturing overhead rate is £1.75 per direct labour-hour and the companys fixed manufacturing overhead is £35,000 per quarter. The only non-cash item included in fixed manufacturing overhead is depreciation, which is £15,000 per quarter. Required Prepare the companys manufacturing overhead budget for the upcoming fiscal year.Compute the companys manufacturing overhead rate (including both variable and fixed manufacturing overhead) for the upcoming fiscal year. Round off to the nearest whole penny. E11-6 You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the companys operations: The cash balance on 1 December will be £40,000.Actual sales for October and November and expected sales for December are as follows: Sales on account are collected over a three-month period in the following ratio: 20% collected in the month of sale, 60% collected in the month following sale and 18% collected in the second month following sale. The remaining 2% is uncollectable. Purchases of inventory will total £280,000 for December and 30% of a months inventory purchases are paid during the month of purchase. The accounts payable remaining from Novembers inventory purchases total £161,000, all of which will be paid in December.Selling and administrative expenses are budgeted at £420,000 for December. Of this amount, £50,000 is for depreciation.A new web server for the Marketing Department costing £76,000 will be purchased for cash during December, and dividends totalling £9,000 will be paid during the month.The company must maintain a minimum cash balance of £20,000. An open line of credit is available from the companys bank to bolster the cash position as needed. Required Prepare a schedule of expected cash collections for December. Prepare a schedule of expected cash disbursements during December to suppliers for materials for inventory purchases.Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Problems P11-7 Production and purchases budgets Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimetres (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the companys products. The company is now planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements: The finished goods inventory on hand at the end of each month must be equal to 3,000 units of Supermix plus 20% of the next months sales. The finished goods inventory on 30 June is budgeted to be 10,000 units.The raw materials inventory on hand at the end of each month must be equal to one-half of the following months production needs for raw materials. The raw materials inventory on 30 June is budgeted to be 54,000 cc of solvent H300.The company maintains no work in progress inventories. A sales budget for Supermix for the last six months of the year follows. Required Prepare a production budget for Supermix for the months JulyOctober.Examine the production budget that you prepared in Requirement 1 above. Why will the company produce more units than it sells in July and August, and fewer units than it sells in September and October?Prepare a budget showing the quantity of solvent H300 to be purchased for July, August and September, and for the quarter in total.