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Chapter 9 Profit Planning

True/False Questions

1. The usual starting point in budgeting is to make a forecast of net income.

Ans: False AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: 1%& #evel: 'as(

). A budget committee helps provide consistenc( in the budgeting process because itprepares all of the budgets for the various segments of the organi*ation.

Ans: False AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: 1 #evel: 'as(

+. A continuous or perpetual budget is one ,hich covers a 1)-month period but ,hich isconstantl( adding a ne, month on the end as the current month is completed.

Ans: True AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: 1 #evel: 'as(

. Control involves developing ob/ectives and preparing the various budgets to achievethose ob/ectives.


0. A self-imposed budget is one prepared b( top management and passed do,n,ardthrough an organi*ation.


. 2hen using the self-imposed budget approach% it is generall( best for top managementto accept all budget estimates ,ithout 3uestion in order to minimi*e adversebehavioral responses from emplo(ees.

Ans: False AACSB: Reflective ThinkingAC!A BB: Resource 4anagement% Critical Thinking AC!A F": Reporting#$: 1 #evel: 'as(

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 9-5


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5. Cash collections in a schedule of cash collections t(picall( consist of collections onsales made to customers in prior periods plus collections on sales made in the current

budget period.

Ans: True AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: ) #evel: 'as(

6. n a production budget% if the number of units in finished goods inventor( at the end ofthe period is less than the number of units in finished goods inventor( at the beginningof the period% then the e7pected number of units sold is greater than the number ofunits to be produced during the period.

Ans: True AACSB: Reflective Thinking AC!A BB: Critical Thinking

AC!A F": Reporting #$: + #evel: 4edium

&. n a merchandising compan(% the re3uired merchandise purchases for a period aredetermined b( subtracting the units in beginning inventor( from the sum of the unitsto be sold during the period and the desired ending inventor(.

Ans: True AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: + #evel: 'as(

18. The direct materials to be purchased for a period can be obtained b( subtracting thedesired ending inventor( of direct materials from the total direct materials needed for

the period.

Ans: False AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: #evel: 4edium

11. The direct labor budget begins ,ith sales in units from the sales budget.


1). The selling and administrative e7pense budget lists all costs of production other than

direct materials and direct labor.

Ans: False AACSB: Reflective Thinking AC!A BB: Critical ThinkingAC!A F": Reporting #$: %5 #evel: 'as(

9-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


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16. 2hich of the follo,ing budgets are prepared before the cash budget;

Selling and Administrative '7pense Budget !roduction BudgetA =es =esB =es "oC "o =es


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)). 2hen preparing a merchandise purchases budget% the re3uired purchases in unitse3uals:

A budgeted unit sales @ beginning merchandise inventor( @ desired merchandiseending inventor(.

B budgeted unit sales - beginning merchandise inventor( @ desired merchandiseending inventor(.

C budgeted unit sales - beginning merchandise inventor( - desired merchandiseending inventor(.


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)0. 2hich of the follo,ing statements is "$T correct concerning the Cash Budget;A t is not necessar( to prepare an( other budgets before preparing the Cash

Budget.B The Cash Budget should be prepared before the Budgeted ncome Statement.C The Cash Budget should be prepared before the Budgeted Balance Sheet.


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)5. Siou7 Compan( is estimating the follo,ing sales for the first si7 months of ne7t (ear:

anuar(.......)08%88

8

Februar(.....))8%88

8

4arch.........)8%88

8

April...........+88%88

8

4a(............+8%88

8

Sales at Siou7 are normall( collected as 8 in the month of sale% +0 in the monthfollo,ing the sale% and the remaining 0 being uncollectible. Based on thisinformation% ho, much cash should Siou7 e7pect to collect during the month of April;A )08%688B )%888C )&8%588


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)6. All of Ea(lord Compan(>s sales are on account. Thirt(-five percent of the credit salesare collected in the month of sale% 0 in the month follo,ing sale% and the rest are

collected in the second month follo,ing sale. Bad debts are negligible and should beignored. The follo,ing are budgeted sales data for the compan(:

anuar( Februar( 4arch April

Total sales........... ...08%88

8 8%8888%88

8+8%88

8

2hat is the amount of cash that should be collected in 4arch;A +&%888B +5%888C )5%088


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+8. Bet* Compan(>s sales budget sho,s the follo,ing pro/ections for ne7t (ear:

Sales in unitsFirst Kuarter....................... 8%888Second Kuarter.................. 68%888Third Kuarter..................... 0%888Fourth Kuarter................... 00%888

nventor( at the beginning of the (ear ,as 16%888 units. The finished goods inventor(at the end of each 3uarter is to e3ual +8 of the ne7t 3uarter>s budgeted unit sales.Io, man( units should be produced during the first 3uarter;A )%888B 6%888

C %888


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+1. The follo,ing information relates to 4inorca 4anufacturing Corporation for ne7t3uarter:

anuar( Februar( 4arch

'7pected sales 9in units............................8%88

8 +&8%88888%88

8


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+). 4


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+. The follo,ing are budgeted data:

4onth 1 4onth ) 4onth +Sales in units...................... 10%888 )8%888 16%888!roduction in units............. 1%888 ))%888 10%888

$ne pound of material is re3uired for each finished unit. The inventor( of materials atthe end of each month should e3ual )8 of the follo,ing month>s production needs.At the beginning of 4onth 1% +%)88 lbs. of materials ,ere on hand. !urchases of ra,materials for 4onth ) ,ould be budgeted to be:A 15%88 poundsB )+%88 poundsC )8%88 pounds


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+. Earr( 4anufacturing Corporation>s most recent production budget indicates thefollo,ing re3uired production:

$ctober "ovember


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+6. !ooler Corporation is ,orking on its direct labor budget for the ne7t t,o months. 'achunit of output re3uires 8.10 direct labor-hours. The direct labor rate is 5.88 per direct

labor-hour. The production budget calls for producing %088 units in April and %)88units in 4a(. The compan( guarantees its direct labor ,orkers a 8-hour paid ,ork,eek. 2ith the number of ,orkers currentl( emplo(ed% that means that the compan(is committed to pa(ing its direct labor ,ork force for at least 1%888 hours in total eachmonth even if there is not enough ,ork to keep them bus(. 2hat ,ould be the totalcombined direct labor cost for the t,o months;A 1+%6)0.88B 1+%++0.88C 1%888.88


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+&. Traverse Compan( manufactures and sells ,omen>s skirts. 'ach skirt 9unit re3uires).0 (ards of cloth. Selected data from Traverse>s master budget for ne7t 3uarter are

sho,n belo,:

ul( August September

Budgeted sales 9in units................%88

8 6%888 &%888

Budgeted production 9in units......6%88

8 18%088 1)%888

'ach unit re3uires 1.0 hours of direct labor% and the average hourl( cost of Traverse>sdirect labor is 18. 2hat is the cost of Traverse Compan(>s direct labor in September;A 1+0%888

B 168%888C 105%088


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H +8%)8 @ 0+%58 H 6%888

9-#" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


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+. The manufacturing overhead budget at Frankl(n Corporation is based on budgeteddirect labor-hours. The direct labor budget indicates that %88 direct labor-hours ,ill

be re3uired in anuar(. The variable overhead rate is 1.+8 per direct labor-hour. Thecompan(>s budgeted fi7ed manufacturing overhead is 8%)68 per month% ,hichincludes depreciation of 15%18. All other fi7ed manufacturing overhead costsrepresent current cash flo,s. The anuar( cash disbursements for manufacturingoverhead on the manufacturing overhead budget should be:A 0%5)8B +%1)8C 6%68


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0. The selling and administrative e7pense budget of Choo Corporation is based onbudgeted unit sales% ,hich are %88 units for August. The variable selling and

administrative e7pense is 5.+8 per unit. The budgeted fi7ed selling and administrativee7pense is 01%&68 per month% ,hich includes depreciation of %8 per month. Theremainder of the fi7ed selling and administrative e7pense represents current cashflo,s. The cash disbursements for selling and administrative e7penses on the Augustselling and administrative e7pense budget should be:A 60%08B 0%08C 5&%1)8


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5. Bustillo nc. is ,orking on its cash budget for 4arch. The budgeted beginning cashbalance is +0%888. Budgeted cash receipts total 1)%888 and budgeted cash

disbursements total 101%888. The desired ending cash balance is +8%888. To attainits desired ending cash balance for 4arch% the compan( needs to borro,:A 8B %888C 0%888


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Solution:Actual ending cash balance H Beginning cash balance @ Cash receipts G Cash

disbursements H %888 @ +&%88 G 91)%888 @ &%888 @ 11%088 @ ))%888H 0%88 G 0%088 H 9&%188Amount borro,ed H


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08. The cash disbursements during the month of une for goods purchased for resale andfor selling and administrative e7penses should be:

A 8%888B 1%888C )%088


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Jse the follo,ing to ans,er 3uestions 01-0&:


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0+.


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00. The net income for


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0. The cash balance at the end of


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Jse the follo,ing to ans,er 3uestions 8-+:

Bramble Corporation is a small ,holesaler of gourmet food products. s operations follo,:

Sales are budgeted at +8%888 for "ovember% +)8%888 for


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8. '7pected cash collections in


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).


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Jse the follo,ing to ans,er 3uestions -5:

nformation on the actual sales and inventor( purchases of the #a, Compan( for the first3uarter follo,:

Sales nventor( !urchases

anuar(...................1)8%88

8 8%888

Februar(.................188%88

8 56%888

4arch.....................1+8%88

8 &8%888

Collections from #a, Compan(>s customers are normall( 8 in the month of sale% +8 inthe month follo,ing sale% and 6 in the second month follo,ing sale. The balance isuncollectible. #a, Compan( takes full advantage of the + discount allo,ed on purchasespaid for b( the end of the follo,ing month.

The compan( e7pects sales in April of 108%888 and inventor( purchases of 188%888. Sellingand administrative e7penses for the month of April are e7pected to be +6%888% of ,hich10%888 is salaries and 6%888 is depreciation. The remaining selling and administrativee7penses are variable ,ith respect to the amount of sales in dollars. Those selling andadministrative e7penses re3uiring a cash outla( are paid for during the month incurred. #a,Compan(>s cash balance on 4arch 1 ,as +%888% and on April 1 ,as +0%888.

. The e7pected cash collections from customers during April ,ould be:A 108%888B 1+5%888C 1+&%888


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0. The e7pected cash disbursements during April for inventor( purchases ,ould be:A 188%888

B &5%888C &8%888


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5. The e7pected cash balance on April +8 ,ould be:A 0%588

B )%588C 1&%588


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6. The budgeted accounts receivable balance on September +8 is:A 1)%888

B 16%888C 1%888


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Jse the follo,ing to ans,er 3uestions 58-51:

Sarafin( Corporation is in the process of preparing its annual budget. The follo,ingbeginning and ending inventor( levels are planned for the (ear.

Beginning nventor( 'nding nventor(Finished goods 9units........ )8%888 +8%888Ra, material 9grams......... 08%888 8%888

'ach unit of finished goods re3uires 5 grams of ra, material.

58. f the compan( plans to sell )58%888 units during the (ear% the number of units it,ould have to manufacture during the (ear ,ould be:

A +88%888 unitsB )58%888 unitsC )8%888 units


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Jse the follo,ing to ans,er 3uestions 5)-5+:

#BC Corporation makes and sells a product called !roduct 2P. 'ach unit of !roduct 2Pre3uires +.0 hours of direct labor at the rate of 1.08 per direct labor-hour. 4anagement,ould like (ou to prepare a


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Barle( 'nterprises has budgeted unit sales for the ne7t four months as follo,s:

$ctober.................. %688 units"ovember............. . 0%688 unitss sales inunits. The inventor( on September +8 ,as belo, this level and contained onl( 88 units.

5. The total units to be produced in $ctober are:

A %0+8B 0%858C 0%58


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Iarden% nc.% has budgeted sales in units for the ne7t five months as follo,s:

une........................ 5%888 unitsul(......................... 0%+88 unitsAugust.................... 5%188 unitsSeptember.............. %688 units$ctober.................. %&88 units

!ast e7perience has sho,n that the ending inventor( for each month should be e3ual to 10of the ne7t month>s sales in units. The inventor( on 4a( +1 contained 1%808 units. Thecompan( needs to prepare a production budget for the ne7t five months.

5. The beginning inventor( for September should be:A 1%8)8 unitsB 1%808 unitsC 1%80 units


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55. The total number of units produced in ul( should be:A 0%+88 units

B %+0 unitsC 0%058 units


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56. The desired ending inventor( of urislon for the month of September is:A 61%5)8

B 5%68C 1&1%588


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Jse the follo,ing to ans,er 3uestions 68-6+:

The nternational Compan( makes and sells onl( one product% !roduct S2. The compan( isin the process of preparing its Selling and Administrative '7pense Budget for the last half ofthe (ear. The follo,ing budget data are available:

ariable Cost!er Jnit Sold

4onthl( Fi7edCost

Sales commissions............................... 8.58Shipping............................................... 1.18Advertising.......................................... 8.)8 1%888'7ecutive salaries................................ +%888


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61. f the compan( has budgeted to sell )8%888 units of !roduct S2 in $ctober then thetotal budgeted variable selling and administrative e7penses for $ctober ,ill be:

A 0%888B 8%888C 0%)08


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6+. f the compan( has budgeted to sell )%888 units of !roduct S2 in September% thenthe total budgeted fi7ed selling and administrative e7penses for September ,ould be:

A 0%888B 6%888C 5%888


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60. f the budgeted direct labor time for "ovember is 5%888 hours% then the total budgetedcash disbursements for "ovember must be:

A 1%&88B 1)5%&88C 6%888s budgeted fi7edmanufacturing overhead is +&%&+8 per month% ,hich includes depreciation of 1)%658. Allother fi7ed manufacturing overhead costs represent current cash flo,s. The direct laborbudget indicates that +%+88 direct labor-hours ,ill be re3uired in April.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 9-%9


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6&. The $ctober cash disbursements for manufacturing overhead on the manufacturingoverhead budget should be:

A 6%688B %&8C 1%5)8


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&1. The compan( recomputes its predetermined overhead rate ever( month. Thepredetermined overhead rate for anuar( should be:

A 1.88B 1).)8C 11.)8


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&+. The compan( recomputes its predetermined overhead rate ever( month. Thepredetermined overhead rate for Februar( should be:

A +.8B )1.18C 15.58


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Jse the follo,ing to ans,er 3uestions &0-&5:

!orter Corporation makes and sells a single product called a =ute. The compan( is in theprocess of preparing its Selling and Administrative '7pense Budget for the last 3uarter of the(ear. The follo,ing budget data are available:

ariable Cost!er =ute Sold

4onthl( Fi7edCost

Sales commissions.................................. 0.&8Shipping.................................................. 0.+8Advertising............................................. 6.&8 +)%888'7ecutive salaries................................... 156%888


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&. f the compan( has budgeted to sell 1)%888 =utes in


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Jse the follo,ing to ans,er 3uestions &6-188:

The Bandeiras Compan(% a merchandising firm% has budgeted its activit( for


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&&. The budgeted cash disbursements for


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181. The e7cess 9deficienc( of cash available over disbursements for ul( is:A )+%888

B )%888C 1%888


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18+. The e7cess 9deficienc( of cash available over disbursements for anuar( is:A )+%888

B 1+%888C 90%888


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180. The e7cess 9deficienc( of cash available over disbursements for April ,ill be:A +)%888

B 1&8%888C 6%888


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185. The e7cess 9deficienc( of cash available over disbursements for 4arch ,ill be:A )10%888

B )%888C )%888


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Jse the follo,ing to ans,er 3uestions 18&-11+:

Carver #umber sells lumber and general building supplies to building contractors in amedium-si*ed to,n in 4ontana. s operations follo,:

Sales are budgeted at +08%888 for "ovember% +)8%888 for


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18&. The net income for


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Beginning cash balance% $ctober +1........................ 1&%888Add "ovember net cash inflo,................................ &0%+88

Add


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11+. Retained earnings at the end of


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Essay Questions

11. 2eller ndustrial Eas Corporation supplies acet(lene and other compressed gases toindustr(. s operations follo,:

Sales are budgeted at ++8%888 for "ovember% +88%888 for


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d. !repare Budgeted ncome Statements for "ovember and


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Ans:

a. "ovember


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e. Statement of Financial !ositions board of directors has established a polic( to commence in April that theinventor( at the end of each month should contain 8 of the units re3uired for thefollo,ing month>s budgeted sales.The selling price is ) per unit. $ne-third of sales are paid for b( customers in themonth of the sale% the balance is collected in the follo,ing month.



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Re3uired:

a. !repare a merchandise purchases budget sho,ing ho, man( units should be

purchased for each of the months April% 4a(% and une.b. !repare a schedule of e7pected cash collections for each of the months April% 4a(%

and une.

9-7" Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


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Ans:

a. April 4a( une ul(

Budgeted sales% in units............... 8%888 50%888 &8%88861%88

8


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11. Capes Corporation is a ,holesaler of industrial goods. soperations follo,:

Sales are budgeted at +&8%888 for "ovember% +8%888 for


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AACSB: Anal(tic AC!A BB: Critical ThinkingAC!A F": Reporting% 4easurement #$: )%+ #evel: 4edium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 9-7$


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Ans:

a. April 4a( une!roduction units.......................... 8%888 08%888 08%888Cash re3uired per unit................. D 0 D 0 D 0

!roduction costs..........................+88%88

8)08%88

8)08%88

8

Cash disbursements:April 4a( une

!roduction this month 98......1)8%88

8188%88

8188%88

8!roduction prior month 98.. .. 1&8%888 168%888 108%888

Selling and administrative........... 188%888 188%888 188%888

Total disbursements.....................18%88

8+68%88

8+08%88

8

!a(ments relating to the prior month 94arch in April represent the balance ofaccounts pa(able at 4arch +1.

b. April 4a( une

Sales units................................... 08%888 8%888 8%888Sales price................................... D 1 D 1 D 1

Total sales...................................588%88

808%88

868%88

8

April 4a( uneCash receipts:Februar( sales............................. &8%888

4arch sales................................. +85%08818)%08

8April sales................................... )8%888 )18%888 58%8884a( sales..................................... ++%888 16%888une sales..................................... 08%888

Total receipts...............................615%08

86%08

85)%88

8

AACSB: Anal(tic AC!A BB: Critical ThinkingAC!A F": Reporting% 4easurement #$: )% #evel: Iard



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116. The


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Ans:

a. Cash sales% 4arch: 58%888 D )8......... 1%888Collections on account:an. sales: 8%888 D 68 D 6............. )%08Feb. sales: 08%888 D 68 D +8........... 1)%8884ar. sales: 58%888 D 68 D 8.......... ++%88Total cash receipts................................... )%18

b. Cash balance% beginning......................... %888

Add cash receipts from sales................... )%18Total cash available................................. 6%18

#ess disbursements:nventor( purchases................................ )6%888Selling and administrative e7penses....... 8%888


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11&. A sales budget is given belo, for one of the products manufactured b( the e( Co.:

anuar(................... )1%888 units

Februar(................. +%888 units4arch..................... 1%888 unitsApril....................... 1%888 units4a(........................ +1%888 unitsune........................ )0%888 units

The inventor( of finished goods at the end of each month should e3ual )8 of thene7t month>s sales. Io,ever% on


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'nding inventor(% 4arch +1: 9+&%888 D + D 8.+ H +0%188

AACSB: Anal(tic AC!A BB: Critical Thinking

AC!A F": Reporting% 4easurement #$: #evel: Iard



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1)8. $ne 3uarter gram of a rare seasoning is re3uired for each bottle of


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1)1. 2hitmer Corporation is ,orking on its direct labor budget for the ne7t t,o months.'ach unit of output re3uires 8.80 direct labor-hours. The direct labor rate is 11.68 perdirect labor-hour. The production budget calls for producing 5%188 units in Februar(

and %688 units in 4arch.

Re3uired:

Construct the direct labor budget for the ne7t t,o months% assuming that the directlabor ,ork force is full( ad/usted to the total direct labor-hours needed each month.

Ans:Februar( 4arch

Re3uired production in units.. .... .. . 5%188 %688


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AACSB: Anal(tic AC!A BB: Critical ThinkingAC!A F": Reporting% 4easurement #$: 0 #evel: 4edium

9-# Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


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1)+. Brockne( nc. bases its manufacturing overhead budget on budgeted direct labor-hours. The variable overhead rate is 6.8 per direct labor-hour. The compan(>s

budgeted fi7ed manufacturing overhead is 185%&58 per month% ,hich includesdepreciation of &%58. All other fi7ed manufacturing overhead costs represent currentcash flo,s. The ul( direct labor budget indicates that %188 direct labor-hours ,ill bere3uired in that month.

Re3uired:

a.


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1). The manufacturing overhead budget of Reigle Corporation is based on budgeted directlabor-hours. The Februar( direct labor budget indicates that 0%688 direct labor-hours

,ill be re3uired in that month. The variable overhead rate is .8 per direct labor-hour. The compan(>s budgeted fi7ed manufacturing overhead is 6)%+8 per month%,hich includes depreciation of 1%6)8. All other fi7ed manufacturing overhead costsrepresent current cash flo,s.

Re3uired:

a.


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1). The selling and administrative e7pense budget of Earne( Corporation is based on thenumber of units sold% ,hich are budgeted to be 1%688 units in $ctober. The variable

selling and administrative e7pense is ).88 per unit. The budgeted fi7ed selling andadministrative e7pense is ))%68 per month% ,hich includes depreciation of 5%8)8.The remainder of the fi7ed selling and administrative e7pense represents current cashflo,s.

Re3uired:

!repare the selling and administrative e7pense budget for $ctober.

Ans:$ctober

Budgeted unit sales..................................................................... 1%688ariable selling and administrative e7pense per unit................. ).88Budgeted variable e7pense......................................................... +%88Budgeted fi7ed selling and administrative e7pense.................... ))%68Total budgeted selling and administrative e7pense.................... )%)68#ess depreciation........................................................................ 5%8)8

Cash disbursements for selling and administrative e7penses.....1&%)

8

AACSB: Anal(tic AC!A BB: Critical ThinkingAC!A F": Reporting% 4easurement #$: 5 #evel: 'as(

9-6 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


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1)5. Romeiro Corporation is preparing its cash budget for September. The budgetedbeginning cash balance is %888. Budgeted cash receipts total 18%888 and

budgeted cash disbursements total 10)%888. The desired ending cash balance is58%888. The compan( can borro, up to 1)8%888 at an( time from a local bank% ,ithinterest not due until the follo,ing month.

Re3uired:

!repare the compan(>s cash budget for September in good form.

Ans:

Cash balance% beginning........................................................... %888

Add cash receipts...................................................................... 18%888Total cash available.................................................................. )8%888#ess cash disbursements........................................................... 10)%888'7cess 9deficienc( of cash available over disbursements....... 0%888Borro,ings............................................................................... 1%888Cash balance% ending................................................................ 58%888




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1)6. Pole**i nc. is preparing its cash budget for 4arch. The budgeted beginning cashbalance is )%888. Budgeted cash receipts total 156%888 and budgeted cash

disbursements total 150%888. The desired ending cash balance is 08%888. Thecompan( can borro, up to 18%888 at an( time from a local bank% ,ith interest notdue until the follo,ing month.

Re3uired:

!repare the compan(>s cash budget for 4arch in good form. 4ake sure to indicate,hat borro,ing% if an(% ,ould be needed to attain the desired ending cash balance.

Ans:

Cash balance% beginning......................................................... )%888Add cash receipts................................................................... 156%888Total cash available................................................................ ))8%888#ess cash disbursements........................................................ 150%888'7cess 9deficienc( of cash available over disbursements... . 0%888Borro,ings............................................................................. 0%888Cash balance% ending.............................................................. 08%888


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