Financial Planning and Analysis: the Master Budget

CHAPTER 9

Financial Planning and Analysis:
The Master Budget

Solutions to exercises

Exercise 9-21 (20 minutes)

1. / The total required production is 131,144 units, computed as follows:
Budgeted Sales
(in units) / Planned Ending Inventory
(in units)
June / 32,000 (40,000  80%)
July / 40,000 (given)
August / 42,000 (40,000  1.05)
September / 44,100 (42,000  1.05) / 37,044 (46,305  80%)
October / 46,305 (44,100  1.05)
Sales in units:
July...... / 40,000
August...... / 42,000
September...... / 44,100
Total for third quarter...... / 126,100
Add: Desired ending inventory, September 30...... / 37,044
Subtotal...... / 163,144
Deduct: Desired ending inventory, June 30...... / 32,000
Total required production...... / 131,144
2. / Assumed production during third quarter (in units)..... / 120,000
Raw-material requirements per unit of product (in pounds) /  4
Raw material required for production in third quarter (in pounds) / 480,000
Add: Desired ending raw-material inventory, September 30
(480,000  25%)...... /
120,000
Subtotal...... / 600,000
Deduct: Ending raw-material inventory, June 30...... / 140,000
Raw material to be purchased during third quarter (in pounds) / 460,000
Cost per pound of raw material...... / $1.40
Total raw-material purchases during third quarter...... / $ 644,000

Exercise 9-23 (20 minutes)

1.

July / August / September
Sales...... / $240,000 / $180,000 / $270,000a
Cash receipts:
From cash sales...... / $ 120,000b / $ 90,000c / $ 135,000
From sales on account...... / 108,000d / 102,000 / 117,000e
Total cash receipts...... / $ 228,000 / $ 192,000 / $ 252,000
a$270,000 / = / $135,000  2
b$120,000 / = / $240,000  .5
c$ 90,000 / = / $180,000  .5
d$108,000 / = / ($120,000  .6) + ($90,000  .4)
e$117,000 / = / ($135,000  .6) + ($90,000  .4)
2. / Accounts payable, 12/31/x0...... / € 600,000
Purchases of goods and services on account during 20x1 / 2,400,000
Payments of accounts payable during 20x1...... / (2,200,000)*
Accounts payable, 12/31/x1...... / € 800,000
*€2,200,000 = €600,000 + €2,400,000 – €800,000
3. / Accounts receivable, 12/31/x0...... / ¥ 1,700,000
Sales on account during 20x1...... / 4,500,000
Collections of accounts receivable during 20x1..... / (3,900,000)
Accounts receivable, 12/31/x1...... / ¥ 2,300,000
4. / Accumulated depreciation, 12/31/x0...... / $ 405,000
Depreciation expense during 20x1...... / 75,000
Accumulated depreciation, 12/31/x1...... / $ 480,000
5. / Retained earnings, 12/31/x0...... / $1,537,500
Net income for 20x1...... / 300,000
Dividends paid in 20x1...... / 0
Retained earnings, 12/31/x1...... / $1,837,500

Exercise 9-24 (15 minutes)

1. / Production (in units) required for the year:
Sales for the year...... / 360,000
Add: Desired ending finished-goods inventory on December 31 / 35,000
Deduct: Beginning finished-goods inventory on January 1 / 55,000
Required production during the year...... / 340,000
2. / Purchases of raw material (in units), assuming production of 350,000 finished units:
Raw material required for production (350,000  2)...... / 700,000
Add: Desired ending inventory on December 31...... / 31,000
Deduct: Beginning inventory on January 1...... / 26,000
Required raw-material purchases during the year...... / 705,000

Exercise 9-25 (20 minutes)

1. / WhiteMountain Furniture Showroom
Expected Cash Collections
November
Month /
Sales /
Percent / Expected Collections
September...... / $200,000 / 8% / $ 16,000
October...... / 400,000 / 30% / 120,000
November...... / 300,000 / 60% / 180,000
Total...... / $316,000
2. / WhiteMountain Furniture Showroom
Expected Cash Disbursements
November
October purchases to be paid in November...... / $150,000
Less: 3% cash discount...... / 4,500
Net...... / $145,500
Cash disbursements for expenses...... / 40,000
Total...... / $185,500
3. / WhiteMountain Furniture Showroom
Expected Cash Balance
November 30
Balance, November 1...... / $68,500
Add: Expected collections...... / 316,000
Less: Expected disbursements...... / 185,500
Expected balance...... / $199,000

Solutions to Problems

PROBLEM 9-31 (30 MINUTES)

1. Schedule of cash collections:

January / February / March
Collection of accounts receivable:
$210,000 x 30%...... / $ 63,000
Collection of January sales ($600,000):
70% in January; 25% in February / 420,000 / $150,000
Collection of February sales ($750,000):
70% in February; 25% in March. / 525,000 / $187,500
Collection of March sales ($810,000):
70% in March...... / 567,000
Sale of equipment...... / 31,500
Total cash collections...... / $483,000 / $675,000 / $786,000

1. Schedule of cash disbursements:

January / February / March
Payment of accounts payable.... / $ 81,000
Payment of January purchases ($420,000):
80% in January; 20% in February / 336,000 / $ 84,000
Payment of February purchases ($550,000):
80% in February; 20% in March. / 440,000 / $110,000
Payment of March purchases ($680,000):
80% in March...... / 544,000
Cash operating costs...... / 113,000 / 86,000 / 150,000
Total cash disbursements..... / $530,000 / $610,000 / $804,000

1. Schedule of cash needs:

January / February / March
Beginning cash balance………………………. / $ 50,000 / $ 50,000 / $ 67,530
Total receipts……………………………………. / 483,000 / 675,000 / 786,000
Subtotal………………………………………. / $533,000 / $725,000 / $853,530
Less: Total disbursements…………………… / 530,000 / 610,000 / 670,000
Cash excess (deficiency) before financing… / $ 3,000 / $115,000 / $183,530
Financing:
Borrowing to maintain $50,000 balance.. / 47,000 / -0-
Loan principal repaid……………………… / (47,000) / -0-
Loan interest paid………………………….. / (470)* / -0-
Ending cash balance…………………………… / $ 50,000 / $ 67,530 / $183,530

* $47,000 x 6% x 2/12

Problem 9-32 (40 minutes)

1. / Production and direct-labor budgets
Shady Shades, Inc.
Budget for Production and Direct Labor
For the First Quarter of 20x1
Month
January / February / March / Quarter
Sales (units)...... / 20,000 / 24,000 / 16,000 / 60,000
Add: Ending inventory*...... / 32,000 / 25,000 / 27,000 / 27,000
Total needs...... / 52,000 / 49,000 / 43,000 / 87,000
Deduct: Beginning inventory...... / 32,000 / 32,000 / 25,000 / 32,000
Units to be produced...... / 20,000 / 17,000 / 18,000 / 55,000
Direct-labor hours per unit...... / 1 / 1 / .75
Total hours of direct labor
time needed...... /
20,000 /
17,000 /
13,500 /
50,500
Direct-labor costs:
Wages ($16.00 per DLH)†...... / $320,000 / $272,000 / $216,000 / $808,000
Pension contributions
($.50 per DLH)...... /
10,000 /
8,500 /
6,750 /
25,250
Workers' compensation
insurance ($.20 per DLH)..... /
4,000 /
3,400 /
2,700 /
10,100
Employee medical insurance
($.80 per DLH)...... /
16,000 /
13,600 /
10,800 /
40,400
Employer's social security
(at 7%)...... /
22,400 /
19,040 /
15,120 /
56,560
Total direct-labor cost...... / $372,400 / $316,540 / $251,370 / $940,310
*100 percent of the first following month's sales plus 50 percent of the second following month's sales.
†DLH denotes direct-labor hour.
2. / Use of data throughout the master budget (excluding financial statement budgets):
Components of the master budget, other than the production budget and the direct-labor budget, that would also directly or indirectly use the sales data include the following:

• Sales budget

• Cost-of-goods-sold budget

• Selling and administrative expense budget

Components of the master budget, other than the production budget and the direct-labor budget, that would also directly or indirectly use the production data include the following:

• Direct-material budget

• Production-overhead budget

• Cost-of-goods-sold budget

Components of the master budget, other than the production budget and the direct-labor budget, that would also directly or indirectly use the direct-labor-hour data include the following:

• Production-overhead budget (for determining the overhead application rate)

• Cash disbursements budget
• Cash budget

Components of the master budget, other than the production budget and the direct-labor budget, that would also directly or indirectly use the direct-labor cost data include the following:

• Production-overhead budget (for determining the overhead application rate)

• Cost-of-goods-sold budget

• Cash disbursements budget
• Cash budget

1. Production overhead budget:

Shady Shades, Inc.
Production Overhead Budget

For the First Quarter of 20x1

Month
January / February / March / Quarter
Shipping and handling.. / $ 60,000 / $ 72,000 / $48,000 / $180,000
Purchasing, material handling, and inspection / 90,000 / 76,500 / 81,000 / 247,500
Other overhead...... / 210,000 / 178,500 / 141,750 / 530,250
Total production overhead / $360,000 / $327,000 / $270,750 / $957,750

Problem 9-42 (120 minutes)

1. / Sales budget:
20x0 / 20x1
December /
January /
February /
March / First Quarter
Total sales...... / $800,000 / $880,000 / $968,000 / $1,064,800 / $2,912,800
Cash sales*...... / 200,000 / 220,000 / 242,000 / 266,200 / 728,200
Sales on account†. / 600,000 / 660,000 / 726,000 / 798,600 / 2,184,600
*25% of total sales.
†75% of total sales.
2. / Cash receipts budget:
20x1
January /
February /
March / First Quarter
Cash sales...... / $220,000 / $242,000 / $266,200 / $ 728,200
Cash collections from credit
sales made during current
month*...... /
66,000 /
72,600 /
79,860 /
218,460
Cash collections from credit
sales made during preceding
month†...... /
540,000 /
594,000 /
653,400 /
1,787,400
Total cash receipts...... / $826,000 / $908,600 / $999,460 / $2,734,060
*10% of current month's credit sales.
†90% of previous month's credit sales.
3. / Purchases budget:
20x0 / 20x1
December /
January /
February /
March / First
Quarter
Budgeted cost of
goods sold..... /
$560,000 /
$616,000 /
$677,600 /
$745,360 /
$2,038,960
Add: Desired
ending inventory /
308,000 /
338,800 /
372,680 /
372,680* /
372,680†
Total goods
needed...... /
$868,000 /
$954,800 /
$1,050,280 /
$1,118,040 /
$2,411,640
Less: Expected
beginning
inventory...... /
††280,000 /
308,000 /
338,800 /
372,680 /
308,000**
Purchases...... / $588,000 / $646,800 / $711,480 / $745,360 / $2,103,640
*Since April's expected sales and cost of goods sold are the same as the projections for March, the desired ending inventory for March is the same as that for February.
†The desired ending inventory for the quarter is equal to the desired ending inventory on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
††50% x $560,000 (where $560,000 = December cost of goods sold = December sales of $800,000 x 70%)
4. / Cash disbursements budget:
20x1
January /
February /
March / First Quarter
Inventory purchases:
Cash payments for purchases
during the current month* /
$258,720 / $284,592 / $298,144 / $ 841,456
Cash payments for purchases
during the preceding
month†...... /
352,800 /
388,080 /
426,888 /
1,167,768
Total cash payments for
inventory purchases...... /
$611,520 /
$672,672 /
$725,032 /
$2,009,224
Other expenses:
Sales salaries...... / $ 42,000 / $ 42,000 / $ 42,000 / $ 126,000
Advertising and promotion. / 32,000 / 32,000 / 32,000 / 96,000
Administrative salaries.... / 42,000 / 42,000 / 42,000 / 126,000
Interest on bonds**...... / 30,000 / -0- / -0- / 30,000
Property taxes**...... / -0- / 10,800 / -0- / 10,800
Sales commissions...... / 8,800 / 9,680 / 10,648 / 29,128
Total cash payments for other expenses /
$154,800 /
$136,480 /
$126,648 /
$ 417,928
Total cash disbursements... / $766,320 / $809,152 / $851,680 / $2,427,152
*40% of current month's purchases [see requirement (3)].
†60% of the prior month's purchases [see requirement (3)].
**Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on February 28 and August 31.
5. / Summary cash budget:
20x1
January /
February /
March / First
Quarter
Cash receipts [from req. (2)].. / $ 826,000 / $ 908,600 / $ 999,460 / $2,734,060
Cash disbursements
[from req. (4)]...... /
(766,320) /
(809,152) /
(851,680) /
(2,427,152)
Change in cash balance
during period due to operations /
$ 59,680 /
$ 99,448 /
$147,780 /
$ 306,908
Sale of marketable securities
(1/2/x1)...... /
30,000 /
30,000
Proceeds from bank loan
(1/2/x1)...... /
200,000 /
200,000
Purchase of equipment...... / (250,000) / (250,000)
Repayment of bank loan
(3/31/x1)...... /
(200,000) /
(200,000)
Interest on bank loan*...... / (5,000) / (5,000)
Payment of dividends...... / (100,000) / (100,000)
Change in cash balance during
first quarter...... /
$ (18,092)
Cash balance, 1/1/x1...... / 70,000
Cash balance, 3/31/x1...... / $ 51,908
*$200,000  10% per year  1/4 year = $5,000
6. / Analysis of short-term financing needs:
Projected cash balance as of December 31, 20x0...... / $ 70,000
Less: Minimum cash balance...... / 50,000
Cash available for equipment purchases...... / $ 20,000
Projected proceeds from sale of marketable securities... / 30,000
Cash available...... / $ 50,000
Less: Cost of investment in equipment...... / 250,000
Required short-term borrowing...... / $(200,000)
7. / Global Electronics Company
Budgeted Income Statement
for the First Quarter of 20x1
Sales revenue...... / $2,912,800
Less: Cost of goods sold...... / 2,038,960
Gross margin...... / $ 873,840
Selling and administrative expenses:
Sales salaries...... / $126,000
Sales commissions...... / 29,128
Advertising and promotion...... / 96,000
Administrative salaries...... / 126,000
Depreciation...... / 150,000
Interest on bonds...... / 15,000
Interest on short-term bank loan...... / 5,000
Property taxes...... / 5,400
Total selling and administrative expenses.... / 552,528
Net income...... / $ 321,312
8. / Global Electronics Company
Budgeted Statement of Retained Earnings
for the First Quarter of 20x1
Retained earnings, 12/31/x0...... / $ 215,000
Add: Net income...... / 321,312
Deduct: Dividends...... / 100,000
Retained earnings, 3/31/x1...... / $ 436,312
9. / Global Electronics Company
Budgeted Balance Sheet
March 31, 20x1
Cash...... / $ 51,908
Accounts receivable*...... / 718,740
Inventory...... / 372,680
Buildings and equipment (net of accumulated depreciation)† / 1,352,000
Total assets...... / $2,495,328
Accounts payable**...... / $ 447,216
Bond interest payable...... / 10,000
Property taxes payable...... / 1,800
Bonds payable (10%; due in 20x6)...... / 600,000
Common Stock...... / 1,000,000
Retained earnings...... / 436,312
Total liabilities and stockholders' equity...... / $2,495,328
*Accounts receivable, 12/31/x0...... / $ 540,000
Sales on account [req. (1)]...... / 2,184,600
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400)...... /
(2,005,860 /
)
Accounts receivable, 3/31/x1...... / $ 718,740
†Buildings and equipment (net), 12/31/x0...... / $1,252,000
Cost of equipment acquired...... / 250,000
Depreciation expense for first quarter...... / (150,000 / )
Buildings and equipment (net), 3/31/x1...... / $1,352,000
**Accounts payable, 12/31/x0...... / $ 352,800
Purchases [req. (3)]...... / 2,103,640
Cash payments for purchases [req. (4)]...... / (2,009,224 / )
Accounts payable, 3/31/x1...... / $ 447,216