9GP.1 Sales Budget
9GP1.E1
ClockTower is a watchmaker with one product. The firm is budgeting the first quarter of next year (January, February, and March). It has the following expected sales and prices for these months.
- January: 1,500 sales at $650 each
- February: 2,500 sales at $750 each
- March: 2,000 sales at $700 each
Required
What is the firm’s expected revenue for Quarter 1?
Answer
Simply sum the revenue from each month.
1,500 * $650 + 2,500 * 750 + 2,000 * 700 = 4,250,000
9GP1.M1
ClockTower is a watchmaker with one product. The firm is budgeting the second quarter of next year (April, May, June). It has the following expected sales revenue for these months.
- April: $1,500,000
- May: $1,950,000
- June: $2,250,000
60% of each month’s sales are on credit. The firm expects to collect half of credit sales in the month following the month of the sale. It expects to collect 45% of credit sales in the month that is two months after the sale.
Required
What are expected cash collections June?
Answer
First of all, 60% of June’s sales are cash, so 40% of June’s sales revenue is collected in cash within the month of June.
$2,250,000 * 0.4 = $900,000 June sales collected in June
45% of credit sales from April will be collected in June (be sure not to use the total sales revenue number from April, 40% of those sales were collected in cash within the month of April).
$1,500,000 * 0.6 * 0.45 = $405,000 April sales collected in June
50% of credit sales from May will be collected in June.
$1,950,000 * 0.6 * 0.5 = $585,000 May sales collected in June.
Now we simply sum up these three sources for June collections.
900,000 June sales collections + 405,000 April sales collections + 585,000 May sales collections = $1,890,000 total June cash collections
It is important to label or otherwise keep track of which month the sale was made in and which month the collection is being made in.
9GP.2 Production Budget
9GP2.E1
ClockTower is budgeting next year’s Q1 (Quarter 1). It has the following sales information from the sales budget (the firm has just one product).
- January: 1,500 sales at $650 each
- February: 2,500 sales at $750 each
- March: 2,000 sales at $700 each
The firm has a policy of having 20% of next period’s production in ending inventory.
Required
How many units must ClockTower produce in February?
Answer
The firm’s production in a given month must support (1) the current month’s sales and (2) the period’s required ending inventory (if required by company policy). The firm can supply units to meet these two ends from either (A) from beginning inventory or (B) from current period production. So the firm’s current period production looks like this.
Current period sales (in units) + Required ending inventory – Beginning inventory = Required production
For February, the current period sales are 2,500 . The firm also needs to provide 2,000 * 0.2 = 400 units for required enging inventory. The firm would presumably be following company policy and end January with 20% of February’s inventory, 500 units.
2,500 + 400 – 500 = 2,400 units required production in February.
Note that you do not need to calculate the dollar revenue or the cash collections. The production budget feeds off of the first line of the sales budget: expected unit sales.
9GP2.M1
ClockTower has the following budgeted finished goods inventory balances.
- January 1: 300 units; January 31: 500 units
- February 1: 500 units; February 28: 400 units
- March 1: 400 units; March 31: 450 units
Required
In the Quarter 1 column in ClockTower’s production budget, what are the beginning and ending finished goods inventory?
Answer
This question may seem simple, but it can be counterintuitive when building the production budget. Most of the quarter column’s cells simply equal the sum of all the monthly numbers.
But the beginning and ending balances are different from that. Instead, you look at when the quarter, as a whole, begins (January 1) and ends (March 31). The balances on those dates are your beginning and ending balance, respectively. In this case, Quarter 1 has a beginning balance of 300 units and an ending balance of 450 units.
9GP.3 Direct Materials Budget
9GP3.E1
Clocktower budgets production as follows for the second quarter.
- April: 2,350 units
- May: 2,500 units
- June: 2,050 units
Each finished goods units uses two units of direct materials, and each unit of direct materials costs $17. The firm has a policy that 10% of next month’s direct materials should be on hand at the end of this month.
Required
How many units and dollars of direct material direct materials must be purchased in April?
Answer
Much like the production budget, the firm needs to account for end-of-period stockpiles when determining how much to purchase each period in the direct material budget.
One additional wrinkle is that we also need to translate required production numbers (which are in finished goods units) into direct materials units. Since there are two DM units per FG unit, we simply multiply the production numbers by two.
April production: 2,350 FG units * 2 DM units per FG unit = 4700 DM units
May production: 2,500 units * 2 = 5,000 DM units
Now we can start accounting for end-of-period inventory.
April beginning balance: 4,700 units * 0.1 = 470 DM units
April required ending balance: 5,000 * 0.1 = 500 DM units
4,700 + 500 – 470 = 4,730 DM units to be purchased in April
Since each unit of DM costs $15 we can simply multiply the units to be bought.
4,730 * 15 = $70,950
9GP3.M1
Clocktower budgets production as follows for the second quarter.
- April: 2,350 units
- May: 2,500 units
- June: 2,050 units
Each finished goods units uses two units of direct materials, and each unit of direct materials costs $17. The firm has a policy that 10% of next month’s direct materials should be on hand at the end of this month.
The firm has arrangements with its direct materials suppliers that allows it to pay 75% of its purchases in the month following the purchase.
Required
How much is the required cash disbursement for direct materials purchases in May?
Answer
We already know the purchase dollars for April from the prior problem ($70,950 in April DM purchases). Now we need to figure out purchases for May, and then age the cash disbursements.
May production: 2,500 FG units * 2 = 5,000 DM units
June production: 2,050 FG units * 2 = 4,100 DM units
May beginning balance: 5,000 units * 0.1 = 500 DM units
May required ending balance: 4,100 * 0.1 = 410 DM units
5,000 + 410 – 500 = 4,910 DM units to be purchased in May
Since each unit of DM costs $15 we can simply multiply the units to be bought.
4,910 * 15 = $73,650 May DM purchases
25% of May’s DM purchases are paid in cash in May.
$73,650 * 0.25 = $18,412.50 May purchases paid in May
75% of April’s DM purchases are paid in cash in May.
$70,950 * 0.75 = 53,212.50 April purchases paid in April
Total cash disbursements for DM purchases in May:
18,412.50 + 53,212.50 = $71,625
9GP.4 Direct Labor Budget
9GP3.M1
ClockTower has two workers: a Swiss clock specialist and a laborer. The firm expects to produce 1,000 units for a certain period. It takes 0.5 hours from the specialist and 0.25 hours from the laborer per watch.
The specialist is paid $45 per hour and the laborer is paid $20 per hour. The laborer’s employment contract guarantees him a minimum wage equal to 400 hours of work regardless of volume.
Required
What is the budgeted direct labor expense for this period?
Answer
The specialist’s wages are equal to the number of hours he is expected to take to produce 1,000 units times his $45 per hour wage.
1,000 * 0.5 * 45 = $22,500
The laborer’s pay is the higher of (1) the number of hours he is expected to take to produce times his $20 per hour wage or (2) the minimum guaranteed pay of 400 * 20 = $8,000.
1,000 * 0.25 * 20 = 5,000 (this is too low, so the laborer will be paid $8,000 instead, per his contract)
The total direct labor cost then is $22,500 + $8,000 = $30,500
9GP.5 Overhead Budget
9GP5.M1
ClockTower has variable overhead based on machine hours: $50 per machine hour. It has the following budgeted machine hours for the quarter.
- July: 100 machine hours
- August: 200 machine hours
- September: 150 machine hours
The firm also has fixed overhead of $10,000 each month, 75% of which is depreciation.
Required
(A) What is the total overhead cost for the quarter?
(B) What is the expected cash disbursements for overhead for the quarter?
(C) What is the firm’s PDOH rate for this quarter? (Assume the firm is not lean and uses a traditional job-order costing system. Assume the firm uses machine hours as it’s cost driver.)
Answer (A)
Variable overhead is total machine hours times the variable overhead rate.
(100 + 200 + 150) * 50 = $22,500
Fixed overhead is simply 10,000 * 3 = $30,000. Therefore total overhead for the quarter is 22,500 + 30,000 = $52,500.
Answer (B)
Because depreciation is just an accounting expense and does not reflect cash flow, we need to back out depreciation expenses for the quarter before. Fixed overhead (which we calculated in Part A is 30,000) is 75% depreciation.
30,000 * 0.75 = 22,500
52,500 total overhead costs – 22,500 non-cash overhead = 30,000 cash disbursements for overhead.
Answer (C)
If the firm uses a PDOH to allocate overhead, it will take the total overhead cost (not the cash disbursements figure from Part B) divided by the total budgeted cost driver.
52,500 / (200 + 100 + 150) = $116.67 per machine hour (rounded).
9GP.6 Finished Goods Inventory Budget
9GP6.M1
ClockTower insures its finished goods inventory and sometimes includes it in loan contracts. Budgeting the finished goods inventory, then, is an important part of its budgeting process. The following details are derived from elsewhere in the budget for an upcoming quarter. (These details do not necessarily match the answers to other guided practice questions.)
- Required ending finished goods inventory is 20% of the next month’s sales. The month following the quarter in question has sales of 1,800 units
- Direct materials purchases for the quarter are $61,200 for 3,600 direct materials units.
- There are two units of direct materials per finished goods unit.
- For direct labor, 0.5 specialist hours per unit and 0.25 laborer hours per unit (assume neither is constrained by a contract for this problem).
- The specialist earns $45 per hour and the laborer earns $20 per hour.
- The firm’s PDOH rate is $1.80 per machine hour for the quarter and 2 machine hours are expected per unit.
Required
What is the value of finished goods inventory at the end of this quarter?
Answer
First we can calculated the number of units in finished goods inventory as 1,800 * 0.2 = 360.
DM per unit is 61,200 / 3,600 = 17. There are two DM units per FG unit, so the cost of DM in FG inventory is as follows.
17 * 2 * 360 = $12,240
DL in FG inventory is as follows.
Specialist: 360 * 0.5 * 45 = $8,100
Laborer: 360 * 0.25 * 20 = $1,800
Total: 8,100 + 1,800 = $9,900
OH cost in FG inventory is given as follows.
360 * 2 * 1.80 = $1,296
Total cost in FG inventory is 12,240 + 9,900 + 1,296 = $23,436.
9GP.7 SG&A Budget
9GP7.E1
ClockTower’s fixed SG&A costs are $61,000 per month, 25% of which are depreciation costs.
Required
If the firm has $60,000 in variable SG&A costs, how much is the cash disbursement for SG&A costs?
Answer
The variable and fixed SG&A costs are 61,000 + 60,000 = 121,000, but some of theses are non-cash costs (like depreciation).
121,000 – (61,000 * 0.25) = $105,750 cash disbursements for SG&A.
9GP7.M1
ClockTower has a contract with a saleswoman to help connect its watches to wholesalers and individuals clients. She earns a 1% commission for each watch sold. The firm also advertises (for $36,000 per month) and pays for various administrative and organization-level costs (estimated as being steady at $25,000 per month). The firm budgets the following sales for Quarter 4 of next year.
- October: 2,700 units at $800 each
- November: 3,000 units at $850 each
- December: 3,500 units at $900 each
Required
What are the firm’s expected SG&A costs for Q4?
Answer
The variable SG&A costs (the 1% sales commission) can be calculated from the sales data.
Oct: 2,700 * 800 * 0.01 = $21,600
Nov: 3,000 * 850 * 0.01 = $25,500
Dec: 3,500 * 900 * 0.01 = $31,500
Q4: 21,600 + 25,500 + 31,500 = $78,600
Fixed costs are advertising ($36,000 per month) and administrative costs ($25,000 per month).
(36,000 + 25,000) * 3 = $183,000
9GP.8 Cash Budget
9GP8.M1
ClockTower has the following budgeted information for the month of September. (This information does not necessarily match data from the other questions.)
- Sales revenue for July: $1,300,000 August: $1,000,000; September: $1,200,000.
- 60% of sales are on credit and half of credit sales are collected the month after the sale is made. 45% of credit sales are collected two months after the sale is made (5% is assumed to be uncollectible).
- Direct materials purchases for August: $100,000; September: $120,000.
- Half of direct materials purchases are on credit and are paid in cash during the month following the purchase.
- Direct labor costs for September are $75,000
- Overhead costs for September are $100,000 (25% of which is depreciation).
- SG&A costs for September are $150,000 (30% of which are depreciation).
- The firm has a line of credit for with a 6% simple annual interest rate.
- If the firm borrows money in a given month, it borrows the money at the beginning of the month. If the firm repays money in a given month, it repays that money at the end of the next month.
- The firm has a minimum cash balance of $100,000.
- In August, the firm budgets having to borrow $500,000 to get to the minimum balance of $100,000 (which is September’s beginning cash balance).
Required
What is the budgeted cash balance at the end of September?
Answer
First, let’s look at cash collections in September.
September: 1,200,000 * 0.4 = $480,000 September sales collected in September
August: 1,000,000 * 0.6 * 0.5 = $300,000 August sales collected in September
July: 1,300,000 * 0.6 * 0.45 = $351,0000 July sales collected in September
Total collections in September: 480,000 + 300,000 + 351,000 = $1,131,000
Now let’s look at cash disbursements for direct materials, direct labor, overhead, and SG&A.
September: 120,000 * 0.5 = 60,000
August: 100,000 * 0.5 = 50,000
50,000 + 90,000 = 110,000 total DM cash disbursements
75,000 DL + (100,000 * 0.75) OH + (150,000 * 0.7) = 255,000
110,000 + 255,000 = 365,000 total cash disbursements
Since the cash collections exceed cash disbursements by more than 100,000 (1,131,000 – 365,000 = 766,000 remaining cash), the firm can repay some debt. The remaining cash is enough to pay back all of the August debt and still have more than the $100,000 minimum balance. But we need calculate interest expense.
The load was out for two whole months (i.e. borrowed at the beginning of August and paid back at the end of September). Therefore two twelfths of the 6% interest rate is due as interest.
500,000 * 2 / 12 * 0.06 = $5,000 interest expense
766,000 cash remaining – 500,000 debt repayment – 5,000 interest expense = $261,000 ending cash balance
9GP.9 Budgeted Financial Statements
9GP9.E1
To be added at a future time
Answer
Answer.
9GP.10 Capital Budget
9GP10.E1
To be added at a future time
Answer
Answer.