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 Planned Ending Inventory

(in units) (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. WHITE MOUNTAIN FURNITURE SHOWROOM

EXPECTED CASH COLLECTIONS
NOVEMBER
Expected
Month Sales Percent Collections
September......................................... $200,000 8% $ 16,000
October.............................................. 400,000 30% 120,000
November.......................................... 300,000 60% 180,000
Total............................................... $316,000

2. WHITE MOUNTAIN 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. WHITE MOUNTAIN 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
........................................................................

2. 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

3. 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

3. 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
First
December January February March 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
First
January February March 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
First
December January February March 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
First
January February March 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
First
January February March 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