COST ACCOUNTING AND BUDGETS

Student Handout – Program Bachelor

Semester 1 – Year 2024-2025

Question Set 1

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Course related questions

1. Which of the following differentiates cost accounting and financial accounting?

A) The primary users of cost accounting are the investors, whereas the primary users
of financial accounting are the managers.
B) Cost accounting deals with product design, production, and marketing strategies,
whereas financial accounting deals mainly with pricing of the products.
C) Cost accounting measures only the financial information related to the costs of
acquiring fixed assets in an organization, whereas financial accounting measures
financial and nonfinancial information of a company's business transactions.
D) Cost accounting measures information related to the costs of acquiring or using
resources in an organization, whereas financial accounting measures a financial
position of a company to investors, banks, and external parties.

2. Cost accounting provides information for both management accounting and financial
accounting professionals. (True/False, Explain)

3. Which of the following statements about the direct/indirect cost classification is true?
A) Indirect costs are always traced.
B) Indirect costs are always allocated.
C) The design of sales target affects the direct/indirect classification.
D) The direct/indirect classification depends on the cost control measures.

4. The cost of electricity used in the production of multiple products would be classified
as indirect cost. (True/False, Explain)

5. A manufacturing plant produces two product lines: golf equipment and soccer
equipment. An example of a direct cost for the golf equipment line is:
A) beverages provided daily in the plant break room for the entire staff
B) monthly lease payments for a specialized piece of equipment needed to
manufacture the golf driver
C) salaries of the clerical staff that work in the company administrative offices
D) overheads incurred in producing both golf and soccer equipment

6. Within the certain expected range of production during the next year, which of the
following would be true?
A) total variable costs decrease as production increases
B) total fixed costs remain the same when production increases or decreases
C) fixed costs per unit decreases as production decreases
D) total variable costs remain the same when production increases or decreases

7. Variable costs per unit vary with the level of production or sales volume. (True/False,
Explain)

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8. The balance sheet of a manufacturing-sector companies would report:
A) only merchandise inventory
B) only finished goods inventory
C) direct materials inventory, work-in-process inventory, and finished goods
inventory accounts
D) direct materials inventory and finished goods inventory accounts only

9. Manufacturing overhead costs in an automobile manufacturing plant most likely

include:
A) labor costs of the painting department
B) indirect material costs such as lubricants
C) leather seat costs
D) tire costs

10. Work-in-process inventory would normally include:

A) direct materials in stock and awaiting use in the manufacturing process
B) goods partially worked on but not yet fully completed
C) goods fully completed but not yet sold
D) goods returned after being sold to be re-worked on further improvements and
quality

11. Total manufacturing costs are comprised of:

A) direct materials costs and period costs
B) direct materials costs, direct manufacturing labor costs, and manufacturing
overhead costs
C) indirect materials costs, indirect manufacturing labor costs, and manufacturing
overhead costs
D) prime costs and period costs

12. Which of the following is an inventoriable cost?

A) manufacturing overhead cost
B) customer service costs
C) distribution costs
D) marketing costs

13. Inventoriable costs are expensed on the income statement:

A) when direct materials for the product are purchased
B) when the direct materials are used in production
C) when the products are sold
D) when the goods move from work-in process to finished goods account

14. Inventoriable costs are reported as a liability on the balance sheet when incurred and
expensed on the income statement when the product is sold.

15. If each motorcycle requires a belt that costs $20 and 2,000 motorcycles are produced
for the month, the total cost for belts is ________.
A) considered to be a direct fixed cost
B) considered to be a direct variable cost
C) considered to be an indirect fixed cost
D) considered to be an indirect variable cost

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Exercise 1

Jezebel Company incurred fixed costs of $300,000. Total costs, both fixed and variable, are
$450,000 when 50,000 units are produced. Calculate the variable cost per unit.

Exercise 2

ABC Apparels is a clothing manufacturer. Unit costs associated with one of its products,
Product F10 are as follows:

Direct materials $80

Direct manufacturing labor 40
Variable manufacturing overhead 45
Fixed manufacturing overhead 31
Sales commissions (2% of sales) 7
Administrative salaries 20
Total $223

What are the inventoriable costs per unit associated with Product F10?

Exercise 3

U.S. Systems Inc., had the following activities during 2021:

Direct materials:
Beginning inventory $ 24,000
Purchases 61,600
Ending inventory 11,000
Direct manufacturing labor 18,000
Manufacturing overhead 11,500
Beginning work-in-process inventory 1,000
Ending work-in-process inventory 3,500
Beginning finished goods inventory 25,000
Ending finished goods inventory 19,000

Required:
a. What is the cost of direct materials used during 2021?
b. What is cost of goods manufactured for 2021?
c. What is cost of goods sold for 2021?

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Question Set 2

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Exercise 1

Iron Company estimates direct labor costs and manufacturing overhead costs for the coming
year to be $800,000 and $500,000, respectively. Iron allocates overhead costs based on
machine hours. The estimated total labor hours and machine hours for the coming year are
16,000 hours and 10,000 hours, respectively. Calculate the predetermined overhead
allocation rate?

Exercise 2

Bradley Associates is a recently formed law partnership. Emmit Harrington, the managing
partner of Bradley Associates, has just finished a tense phone call with Martin Omar, president
of Campa Coal. Omar strongly complained about the price Bradley charged for some legal
work done for Campa Coal.

Harrington also received a phone call from its only other client (St. Edith’s Glass), which was
very pleased with both the quality of the work and the price charged on its most recent job.
Bradley Associates operates at capacity and uses a cost-based approach to pricing (billing) each
job. Currently it uses a simple costing system with a single direct-cost category (professional
labor-hours) and a single indirect-cost pool (general support). Indirect costs are allocated to
cases on the basis of professional labor-hours per case.

Campa Coal St. Edith’s Glass

Professional labor 150 hours 100 hours

Professional labor costs at Bradley Associates are $80 an hour. Indirect costs are allocated to
cases at $100 an hour. Total indirect costs in the most recent period were $25,000.

Required
Compute the costs of the Campa Coal and St. Edith’s Glass jobs using Bradley’s simple costing
system.

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Question Set 3

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Course related questions

1. Refining a cost system involves which of the following?

A) classifying as many costs as indirect costs as is feasible
B) creating as many cost pools as possible to capture all costs
C) identifying the activities involved in a process and understanding how those activities
consume resources
D) seeking an easier and more cost-effective way to calculate average costs

2. Which of the following is a reason that has accelerated the demand for refinements to
the costing system?
A) The declining demand for customized products has led managers to decrease the
variety of products and services their companies offer.
B) The use of product and process technology has led to an increase in indirect costs and
a decrease in direct costs.
C) The increased of automated processes has led to the increase in direct manufacturing
cost leading to a decrease in break-even point.
D) The increasing competition in product markets has led to an increase in contribution
margin resulting in a decrease of break-even point.

3. ABC systems create:

A) one large cost pool
B) homogeneous activity-related cost pools
C) activity-cost pools with a broad focus
D) activity-cost pools containing many direct costs

Exercise 1

Tiger Company provides the following ABC costing information:

Activities Total Costs Activity-cost drivers

Labor $320,000 8,000 hours
Gas $36,000 6,000 gallons
Invoices $40,000 2,500 invoices
Total costs $396,000

The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department

Labor 2,500 hours 1,200 hours 4,300 hours
Gas 1,700 gallons 800 gallons 3,500 gallons
Invoices 1,600 invoices 400 invoices 500 invoices

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Required
1. How much of the labor cost will be assigned to the Bush Department?

2. How much of invoice cost will be assigned to the Bush Department?

3. How much of the gas cost will be assigned to the Lawn Department?

4. How much of the total cost will be assigned to the Plowing Department?

Exercise 2

Ace Plastics produces different kinds of products, all in one manufacturing facility. They
have identified four activities for their costing system:

Materials management—allocated by number of purchase orders

Chemical processing—allocated on metric tons
Molding—allocated on direct labor hours
Packaging—allocated by number of units produced

The activity rates are as follows:

Materials management $12.00 Per purchase order

Chemical processing $7.50 Per metric ton
Molding $24.00 Per direct labor hour
Packaging $0.10 Per unit

Engineering design shows that the order will require direct material worth $540, direct labor
cost being $90, require 4 purchase orders to be placed, use 2 metric tons of chemical base, need
8 direct labor hours. The size of the order is to produce 3,000 units of product.

Required
Calculate total cost of production of the order.

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Question Set 4

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Course related questions

1. Which of the following line items will appear on the income statement of a
merchandiser but not of a service company?
A) Salaries Expense
B) Depreciation Expense
C) Cost of Goods Sold
D) Supplies Inventory

2. Even in a perpetual inventory system that updates the inventory account as and when
transactions occur, the business must count inventory at least once in a year.
(True/False, Explain)

3. When a company uses the first-in, first-out (FIFO) method the cost of goods sold
correlates to the most recently purchased goods and the value of ending inventory
correlates to the oldest goods in stock. (True/False, Explain)

Exercise 1

Fit World began January with merchandise inventory of 80 crates of vitamins that cost a total
of €4,000 (€50 each). During the month, Fit World purchased and sold merchandise on account
as follows:

Jan. 5 Purchase 140 crates@ €55 each

13 Sale 160 crates@ €100 each

18 Purchase 160 crates@ €60 each

26 Sale 170 crates@ €110 each

Requirement:

1. Prepare a perpetual inventory record, using the FIFO inventory costing method, and
determine the company’s cost of goods sold and ending merchandise inventory.

2. Prepare a perpetual inventory record, using the weighted-average inventory costing

method, and determine the company’s cost of goods sold and ending merchandise
inventory. (Round weighted average cost per unit to two decimal places)

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Question Set 5

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Course related questions

1. Managers use cost-volume-profit (CVP) analysis to ________.

A) forecast the cost of capital for a given period of time
B) to study the behavior of and relationship among the elements such as total
revenues, total costs, and income
C) estimate the risks associated with a given job
D) analyse a firm's profitability and help to decide wealth distribution among its
stakeholders

2. One of the first steps to take when using CVP analysis to help make decisions is:
A) calculating the break-even point
B) identifying the variable and fixed costs
C) calculation of the degree of operating leverage for the company
D) estimating the volume of sales to make a good profit

3. The contribution margin income statement:

A) reports gross margin
B) is allowed for external reporting to shareholders
C) categorizes costs as either direct or indirect
D) can be used to predict operating income at different levels of activity

4. At breakeven point:
A) operating income is equal to zero
B) contribution margin minus fixed costs is equal to profits earned
C) revenues equal fixed costs minus variable costs
D) breakeven revenues equal fixed costs divided by the variable cost per unit

5. The breakeven point decreases if ________.

A) the variable cost per unit increases
B) the total fixed costs decrease
C) the contribution margin per unit decreases
D) the selling price per unit decreases

Exercise 1

Shine Jewelry sells 400 units resulting in $7,000 of sales revenue, $3,000 of variable costs,
and $1,500 of fixed costs. Calculate the contribution margin per unit and variable cost per
unit.

Exercise 2

Tiger Company sells a product for $80 per unit. Variable costs are $25 per unit and fixed
costs are $4,000 per month. Tiger sold 2,000 units in October, 2023. Prepare an income
statement for October using the contribution margin format.

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Exercise 3

How many units would have to be sold to yield a target operating income of $23,000,
assuming variable costs are $25 per unit, total fixed costs are $2,000, and the unit selling
price is $30?

Exercise 4

James Company sells glass vases at a wholesale price of $2.50 per unit. The variable cost of
manufacture is $1.75 per unit. The monthly fixed costs are $7,500. James's current sales are
25,000 units per month. If James wants to increase operating income by 20%, how many
additional units, must James sell? (Round your intermediate calculations to two decimal
places)

Exercise 5

Margaret sells hand-knit scarves at the flea market. Each scarf sells for $25. Margaret pays
$30 to rent a vending space for one day. The variable costs are $15 per scarf. How many
scarves should she sell each day in order to break even? What total revenue amount does she
need to earn to break even?

Exercise 6

Adrien Company is facing a $6 increase in the variable cost of producing one of its products
for the upcoming year. Because of this situation, the sales manager has made a proposal to
increase the selling price of the product while increasing the advertising budget at the same
time. The price increase will lower sales volume, but the other changes may help the
company maintain its profit margins. Adrien has provided the following information
regarding the current year results and the proposal made by the sales manager:

Current Year Proposal

Unit sales 27,000 18,000
Sales price per unit $48 $58
Variable cost per unit $30 $36
Fixed cost $76,000 $96,000
Required:
Relative to the current year, evaluate the sales manager's proposal.

Exercise 7

Divine Foods produces a gourmet condiment which sells for $16.00 per unit. Variable costs
are $6 per unit, and fixed costs are $5,000 per month. If Divine expects to sell 1,500 units,
compute the margin of safety in units and in dollars.

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Question Set 6

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Course related questions

1. A budget aids to coordinate what needs to be done to implement the proposed plan.
(True/False, Explain)

2. Which of the following is true of a budget?

A) Budgets are used to express only the operational plans and not the strategic plans
of a company.
B) Budgets do not account for nonfinancial aspects of the upcoming period.
C) Budgets are most useful when they are planned independent of the company's
strategic plans.
D) Budgets help managers to revise their plans and strategies.

3. A master budget:
A) is the initial plan of what the company intends to accomplish in the period and
evolves from both the operating and financing decisions
B) is only prepared for manufacturers as they are the only type of company with
material purchases and work-in-process accounts
C) improves companies' market capitalization and evolves from both the investing
and financing decisions
D) is another name given to the financial budget

4. The starting point in the budgeting process is the preparation of the:

A) cash budget.
B) production budget.
C) sales budget.
D) budgeted income statement.

5. Unlike a manufacturing company, the cash budget is the cornerstone for the master
budget of a merchandiser. (True/False, Explain)

6. The operating budget process generally concludes with the preparation of the
________.
A) production budget
B) cash flow statement
C) research and development budget
D) budgeted income statement

7. The revenues budget identifies ________.

A) expected cash flows for each product
B) actual sales from last year for each product
C) the expected level of sales for the company
D) the variance of sales from actual for each product

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Exercise 1

Vivian Company manufactures luggage sets. It sells its luggage sets to department stores.
Vivian expects to sell 1,500 luggage sets for $175 each in January, and 1,750 luggage sets for
$175 each in February. All sales are cash only. Prepare the sales budget for January and
February.

Exercise 2

Tremont, Inc. sells tire rims. The manager projects the following quarterly sales:

- First quarter: $120,000

- Second quarter: $170,000
- Third quarter: $145,000

Sales are 20% cash and 80% on account. In the past, cost of goods sold has been 40% of
total sales. The director of marketing and the financial vice president agree that each
quarter’s ending inventory should not be below $20,000 plus 10% of cost of goods sold
for the following quarter. The marketing director expects sales of $220,000 during the
fourth quarter. The January 1 inventory was $32,000.

Requirement
Prepare a sales budget for the first three quarters of the year.

Exercise 3

James Company sells 5 products. The sales director presents the CEO with 3 forecast
hypotheses. Present the company's projected sales based on the three hypotheses. Which
hypothesis would you recommend to the CEO? What comments would you make on the
selected hypothesis?

Product A B C D E
Quantity 2100 4000 1500 9050 5000
N-1
Price per 1000 850 5000 1200 500
unit
Hypothesis 1
 Quantity 6% 12% 22% 5% 3%
 PU 0% -1% 2% -3% -12%
Hypothesis 2
 Quantity 2% 1% 2% 1% -4%
 PU 5% 6% 10% 7% 9%
Hypothesis 3
 Quantity 4% 5% 11% 4% -1%
 PU 2% 0% 5% 2% 5%

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Question Set 7

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Course related questions

1. Budgeted production equals ________.

A) beginning finished goods inventory + budgeted unit sales - targeted ending finished
goods inventory
B) targeted ending finished goods inventory + beginning finished goods inventory -
budgeted unit sales
C) budgeted unit sales + targeted ending finished goods inventory - beginning finished
goods inventory
D) budgeted unit sales + targeted ending finished goods inventory + beginning finished
goods inventory

2. Antique Brass Company has budgeted sales volume of 120,000 units and budgeted
production of 108,000 units, while 20,000 units are in beginning finished goods inventory.
How many units are targeted for ending finished goods inventory?
A) 20,000 units
B) 32,000 units
C) 12,000 units
D) 8,000 units

Exercise 1

Vivian Company manufactures luggage sets. It sells its luggage sets to department stores.
Vivian expects to sell 1,500 luggage sets for $175 each in January, and 1,750 luggage sets for
$175 each in February. Vivian has 200 luggage sets on hand on January 1 and desires to have
an ending inventory equal to 10% of the next month’s sales. March sales are expected to be
1,800 luggage sets.

Requirement:
Prepare the production budget for January and February.

Exercise 2

Tremont, Inc. sells tire rims. The manager projects the following quarterly sales:

- First quarter: $120,000

- Second quarter: $170,000
- Third quarter: $145,000

Sales are 20% cash and 80% on account. In the past, cost of goods sold has been 40% of
total sales. The director of marketing and the financial vice president agree that each
quarter’s ending inventory should not be below $20,000 plus 10% of cost of goods sold
for the following quarter. The marketing director expects sales of $220,000 during the
fourth quarter. The January 1 inventory was $32,000.

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 Requirement:
Prepare an inventory, purchases, and cost of goods sold budget for the first three quarters
of the year.

Exercise 3

Grippers sells its rock-climbing shoes worldwide. Grippers expects to sell 8,500 pairs of
shoes for $180 each in January and 3,500 pairs of shoes for $190 each in February. All sales
are cash only.

Requirement

a. Prepare the sales budget for January and February.

Grippers expects cost of goods sold to average 60% of sales revenue, and the company
expects to sell 4,100 pairs of shoes in March for $260 each. Grippers’ target ending inventory
is $10,000 plus 50% of the next month’s cost of goods sold.

b. Use the information above and the sales budget to prepare Grippers’ inventory,
purchases, and cost of goods sold budget for January and February.

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Question Set 8

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Course related questions

1. The direct material budget is prepared on the basis of the:

A) cash budget.
B) master budget.
C) capital expenditure budget.
D) production budget.

2. The order to follow when preparing the operating budget is ________.

A) revenues budget, production budget, and direct manufacturing labor costs budget
B) costs of goods sold budget, production budget, and cash budget
C) revenues budget, manufacturing overhead costs budget, and production budget
D) cash expenditures budget, revenues budget, and production budget

Exercise 1

The Deluxe Motorcar in northern California manufactures motor cars of all categories. Its
budgeted sales volume for the most popular sedan model XE8 in 2024 is 4,000 units.
Deluxe Motorcar has a beginning finished inventory of 600 units. Its ending inventory is
450 units. The present selling price of model XE8 to the distributors and dealers is $35,200.
The company does not want to increase its selling price in 2024.
Deluxe Motorcar does not produce tires. It buys the tires from an outside supplier. One
complete car requires five tires including the tire for the extra wheel. The company’s target
ending inventory is 400 tires, and its beginning inventory is 350 tires. The budgeted
purchase price is $45 per tire.

Requirements:
1.Compute the budgeted revenues.
2.Compute the number of cars that Deluxe Motorcar should produce.
3.Compute the budgeted purchases of tires in units and in dollars.

Exercise 2

Vivian Company manufactures luggage sets. It sells its luggage sets to department stores.
Vivian expects to sell 1,500 luggage sets for $175 each in January, and 1,750 luggage sets for
$175 each in February. Vivian has 200 luggage sets on hand on January 1 and desires to have
an ending inventory equal to 10% of the next month’s sales. March sales are expected to be
1,800 luggage sets.

Vivian budgets $65 per luggage set for direct materials. The balance in the Direct Materials
Inventory account on January 1 is $45,000. Vivian desires the ending balance in Direct
Materials Inventory to be 40% of the next month’s direct materials needed for production.
Desired ending balance for February is $46,800.

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Requirement:
a) Prepare the direct materials budget for January and February.

Vivian budgets two direct labor hours per luggage set. Direct labor costs average $15 per
hour.

Requirement:
b) Prepare the direct labor budget for January and February.

Vivian budgets $5 per luggage set for variable manufacturing overhead; $1,500 per month for
depreciation; and $16,225 per month for other fixed manufacturing overhead costs.

Requirement:
c) Prepare the manufacturing overhead budget for January and February, including the
predetermined overhead allocation rate using direct labor hours as the allocation base.

The beginning balance in Finished Goods Inventory is 200 luggage sets at $111each for a
total of $22,200. The firm uses FIFO inventory costing method.

Requirement:
d) Prepare the cost of goods sold budget for January and February.

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Question Set 9

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Course related questions

1. The cash budget is the prerequisite for the master budget. (True/False, Explain)

2. Which of the following sections is not part of the cash budget?

A) Cash receipts
B) Cash payments
C) Short-term financing
D) Actual budget

3. Preparation of the budgeted balance sheet is the final step in preparing the operating
budget. (True/False, Explain)

4. A company has prepared the operating budget and the cash budget and is now
preparing the budgeted balance sheet. The balance of Accounts Receivable can be
obtained from:
A) the inventory, purchases and cost of goods sold budget.
B) cash receipts from customers.
C) the capital expenditures budget.
D) the selling and administrative expenses budget.

5. Gamma Corp. is preparing their budget for the 1st quarter of 2015. The following data
is provided:

Inventory, Purchases and COGS

Budget Jan Feb Mar
Cost of goods sold (a) $30,000 $28,500 $22,500
Desired ending inventory(b) 10,700 9,500 9,800
Total inventory required 40,700 38,000 32,300
less Beginning inventory -11,000 -10,700 -9,500
Purchases 29,700 27,300 22,800
(a) COGS = 75% of sales
(b) $5,000 + 20% of COGS for next
month

The amount of Merchandise Inventory to be shown on the budgeted balance sheet at

March 31 would be:
A) $9,500.
B) $10,700.
C) $8,750.
D) $9,800.

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Exercise 1

Farmerlands Enterprises has budgeted sales for the months of September and October at
$300,000 and $280,000, respectively. Monthly sales are 80% credit and 20% cash. Of the
credit sales, 50% are collected in the month of sale and 50% are collected in the following
month. Calculate cash collections for the month of October.

Exercise 2

Purchases for May were $100,000, while expected purchases for June and July are $110,000
and $125,000, respectively. All purchases are paid 25% in the month of purchase and 75%
the following month. Calculate the budgeted payments for the month of June.

Exercise 3

Nobell Inc. has a cash balance of $20,000 on April 1, 2015. They are now preparing the cash
budget for the second quarter. Budgeted cash collections and payments are as follows:

Apr May June

Cash collections $25,000 $22,000 $20,000
Cash payments:
Purchases of inventory 5,800 7,000 6,200
Operating expenses 3,500 4,600 5,300

There are no budgeted capital expenditures or financing transactions during the quarter.
Based on the above data, calculate the projected cash balance at the end of April.

Exercise 4

Christy Enterprises reports the year-end information from 2022 as follows:

Sales (100,000 units) $500,000

Cost of goods sold 300,000
Gross profit 200,000
Operating expenses (includes $20,000 of Depreciation) 120,000
Net income $ 80,000

Christy is developing the 2023 budget. In 2023 the company would like to increase selling
prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold
as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating
costs are variable.

Required:
Prepare a budgeted income statement for 2023.

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Exercise 5

Nobula Corp. is preparing their budget for the 2nd quarter and provides the following data:

Apr May Jun

Budgeted purchases $20,000 $24,000 $18,000
Budgeted Cash Payments for
Inventory Purchases Apr May Jun
60% of previous month purchases $6,000 $12,000 $14,400
40% of current month purchases 8,000 9,600 7,200
Total cash payments $14,000 $21,600 $21,600

Assume that accounts payable pertains only to suppliers of inventory. Based on the above
data, calculate the amount of Accounts Payable that should be shown in the budgeted balance
sheet as of June 30th.

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Question Set 10
Review

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Exercise 1

Vita Company makes 200 wooden kitchen chairs every month and sells them for €50 each.
Fixed monthly overheads are €3,000 and the standard cost of one chair is as follows:

Materials €15
Direct labor €8
Variable overheads €7

Requirements:
a. Calculate the variable cost per month for one chair.
b. Calculate breakeven point.
c. What is the operating income if 200 chairs are sold in one month?
d. Calculate the number of chairs that need to be sold to give a target operating income
of €4,000.

In an attempt to boost sales, Vita Company plans to decrease the selling price to €48,
increasing raw-material costs by 20% by using higher-quality materials, and increase its
advertising expenses by €1,000 a month.

e. Calculate the new breakeven point.

f. Compute the margin of safety in units if 350 chairs are sold.

Exercise 2

Fulkron Manufacturing provides the following data excerpted from its 3rd quarter budget:

Jul Aug Sep

Cash collections $66,000 $42,000 $45,000
Cash payments:
Purchases of inventory 50,000 48,000 25,000
Operating expenses 10,000 15,000 20,000
Capital expenditures 0 32,000 6,000

The cash balance on June 30 is projected to be $10,000. Based on the above data, calculate
the shortfall the company is projected to have at the end of September.

Exercise 3

Pillows Unlimited makes decorative throw pillows for home use. The company sells the
pillows to home decor retailers for $14 per pillow. Each pillow requires 1.25 yards of fabric,
which the company obtains at a cost of $6 per yard. The company would like to maintain an
ending stock of fabric equal to 10% of the next month's production requirements. The company

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would also like to maintain an ending stock of finished pillows equal to 20% of the next month's
sales. Sales (in units) are projected to be as follows for the first three months of the year:

January 100,000
February 110,000
March 115,000

Requirements

Prepare the following budgets for the first three months of the year, as well as a summary
budget for the quarter:

1. Prepare the sales budget, including a separate section that details the type of sales made.
For this section, assume that 10% of the company's pillows are cash sales, while the
remaining 90% are sold on credit terms.

2. Prepare the production budget. Assume that the company anticipates selling 120,000 units
in April.

3.Prepare the direct materials budget.

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