PROBLEM SET 7

Budgeting

Problem 1 (Garrison et al. v15; 8-1)

Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales
occur in May of each year, as shown in the company’s sales budget for the second quarter given
below:

April May June Total

Budgeted sales (all on account) $300,000 $500,000 $200,000 $1,000,000

From past experience, the company has learned that 20% of a month’s sales are collected in the

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month of sale, another 70% are collected in the month following sale, and the remaining 10% are

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collected in the second month following sale. Bad debts are negligible and can be ignored.

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February sales totaled $230,000, and March sales totaled $260,000.

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1. Prepare as schedule of expected cash collections from sales, by month and in total, for the
second quarter.
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2. Assume that the company will prepare a budgeted balance sheet as of June 30. Compute
the accounts receivable as of that date.
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 Problem 1

1. April May June Total

February sales:
$230,000 × 10% ........ $ 23,000 $ 23,000
March sales: $260,000
× 70%, 10% .............. 182,000 $ 26,000 208,000
April sales: $300,000 ×
20%, 70%, 10% ........ 60,000 210,000 $ 30,000 300,000
May sales: $500,000 ×
20%, 70% ................. 100,000 350,000 450,000

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June sales: $200,000 ×

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20% .......................... 40,000 40,000

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Total cash collections ..... $265,000 $336,000 $420,000 $1,021,000

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Notice that even though sales peak in May, cash collections peak in

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June. This occurs because the bulk of the company’s customers pay in
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the month following sale. The lag in collections that this creates is even
more pronounced in some companies. Indeed, it is not unusual for a
company to have the least cash available in the months when sales are
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greatest.
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2. Accounts receivable at June 30:

From May sales: $500,000 × 10%........................ $ 50,000
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From June sales: $200,000 × (70% + 10%) ......... 160,000

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Total accounts receivable at June 30..................... $210,000

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 Problem 2 (Garrison et al. v15; 8-2)

Down Under Products, Ltd., of Australia has budgeted sales of its popular boomerang for the
next four months as follows:

Sales in Units
April 50,000
May 75,000
June 90,000
July 80,000

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
month’s sales. The inventory at the end of March was 5,000 units.

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1. 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.

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 Problem 2

April May June Quarter

Budgeted unit sales ................. 50,000 75,000 90,000 215,000
Add desired units of ending
finished goods inventory*...... 7,500 9,000 8,000 8,000
Total needs ............................. 57,500 84,000 98,000 223,000
Less units of beginning finished
goods inventory .................... 5,000 7,500 9,000 5,000
Required production in units .... 52,500 76,500 89,000 218,000
*10% of the following month’s sales in units.

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 Problem 3 (Garrison et al. v15; 8-3)

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 $1.50 per gram.
Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first
quarter of Year 3:

Year 2 Year 3
First Second Third Fourth First
Budgeted production, in bottles 60,000 90,000 150,000 100,000 70,000

Musk oil has become so popular as a perfume ingredient that it has become necessary to carry
large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at

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the end of a quarter must be equal to 20% of the following quarter’s production needs. Some

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36,000 grams of musk oil will be on hand to start the first quarter of Year 2.

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1. Prepare a direct materials budget for musk oil, by quarter and in total, for Year 2. At the
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bottom of your budget, show the amount of purchases for each quarter and for the year in
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total.
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 Problem 3

Quarter—Year 2

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First Second Third Fourth Year

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Required production in units of finished
goods ...................................................... 60,000 90,000 150,000 100,000 400,000

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Units of raw materials needed per unit of

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finished goods ......................................... × 3 × 3 × 3 × 3 × 3
Units of raw materials needed to meet

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production ............................................... 180,000 270,000 450,000 300,000 1,200,000
Add desired units of ending raw materials

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inventory ................................................. 54,000 90,000 60,000 42,000 42,000

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Total units of raw materials needed ............. 234,000 360,000 510,000 342,000 1,242,000
Less units of beginning raw materials

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inventory ................................................. 36,000 54,000 90,000 60,000 36,000
Units of raw materials to be purchased ........ 198,000 306,000 420,000 282,000 1,206,000

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Unit cost of raw materials ........................... × $1.50 × $1.50 × $1.50 × $1.50 × $1.50
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Cost of raw materials to purchased .............. $297,000 $459,000 $630,000 $423,000 $1,809,000
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 Problem 4 (Garrison et al. v15; 8-7)

Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management
has prepared the following summary of its budgeted cash flows:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Total cash receipts $ 180,000 $ 330,000 $ 210,000 $ 230,000
Total cash disbursements $ 260,000 $ 230,000 $ 220,000 $ 240,000

The company’s beginning cash balance for the upcoming fiscal year will be $20,000. The
company requires a minimum cash balance of $10,000 and may borrow any amount needed from
a local bank at a quarterly interest of 3%. The company may borrow any amount at the beginning
of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest
payment are due on any principal at the time it is repaid. For simplicity, assume that interest is

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not compounded.

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1. Prepare the company’s cash budget for the upcoming fiscal year.

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 Problem 4

Garden Depot
Cash Budget
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Beginning cash balance . $ 20,000 $ 10,000 $ 35,800 $ 25,800 $ 20,000
Total cash receipts ........ 180,000 330,000 210,000 230,000 950,000
Total cash available ...... 200,000 340,000 245,800 255,800 970,000
Less total cash
disbursements ........... 260,000 230,000 220,000 240,000 950,000
Excess (deficiency) of

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cash available over
disbursements ........... (60,000) 110,000 25,800 15,800 20,000

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Financing:

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Borrowings (at
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quarters)* ............... 70,000 70,000
Repayments (at ends
of quarters) ............. (70,000) (70,000)
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Interest§ .................... (4,200) (4,200)

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Total financing ............. 70,000 (74,200) (4,200)

Ending cash balance ..... $ 10,000 $ 35,800 $ 25,800 $ 15,800 $ 15,800
* Since the deficiency of cash available over disbursements is $60,000,
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the company must borrow $70,000 to maintain the desired ending cash
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balance of $10,000.
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$70,000 × 3% × 2 = $4,200.
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