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Chapter 22: 19RQ (page 1228)
What budgets are included in the financial budget for a merchandising company?
The financial budget for a merchandising company includes a capital expenditure budget and a cash budget.
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Preparing a financial budget—budgeted income statement and balance sheet
Ballentine Company has the following post-closing trial balance on December 31, 2018:
The company’s accounting department has gathered the following budgeting information for the first quarter of 2019:
Budgeted total sales, all on account $ 305,500 Budgeted direct materials to be purchased and used 40,000 Budgeted direct labor cost 12,500 Budgeted manufacturing overhead costs: Variable manufacturing overhead 2,600 Depreciation 800 Insurance and property taxes 1,100 Budgeted cost of goods sold 71,300 Budgeted selling and administrative expenses: Salaries expense7,000 Rent expense 3,500 Insurance expense 2,000 Depreciation expense 350 Supplies expense 3,055 Budgeted cash receipts from customers 263,500 Budgeted income tax expense 44,000 Budgeted purchase and payment for capital expenditures
(additional equipment) 34,000
Additional information:
a. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter.
b. Direct labor, ma following budgeted income statement manufacturing overhead, selling and administrative costs, and income tax expense are paid in the quarter incurred.
c. Accounts payable at December 31, 2018 are paid in the first quarter of 2019. Requirements
1. Prepare Ballentine Company’s budgeted income statement for the first quarter of 2019.
2. Prepare Ballentine Company’s budgeted balance sheet as of March 31, 2019.
Completing a comprehensive budgeting problem—manufacturing company The Gavin Tire Company manufactures racing tires for bicycles. Gavin sells tires for \(70 each. Gavin is planning for the next year by developing a master budget by quarters. Gavin’s balance sheet for December31, 2018, follows:
Other data for Gavin Tire Company: a. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 200 tires per quarter. Cash sales are expected to be 10% of total sales, with the remaining 90% of sales on account. b. Finished Goods Inventory on December 31, 2018, consists of 300 tires at \)36 each.
c. Desired ending Finished Goods Inventory is 40% of the next quarter’s sales; first quarter sales for 2020 are expected to be 1,800 tires; FIFO inventory costing method is used. d. Raw Materials Inventory on December 31, 2018 consists of 750 pounds of rubber compound used to manufacture the tires. e. Direct materials requirements are 2.5 pounds of rubber compound per tire. The cost of the compound Is \(4 per pound. f. Desired ending Raw Materials Inventory is 40% of the next quarter’s direct materials needed for production; desired ending inventory for December 31, 2019 is 750 pounds; indirect materials are insignificant and not considered for budgeting purposes. g. Each tire requires 0.30 hours of direct labor; direct labor costs average \)20 per hour. h. Variable manufacturing overhead is \(3 per tire. i. Fixed manufacturing overhead includes \)6,000 per quarter in depreciation and \(10,860 per quarter for other costs, such as utilities, insurance, and property taxes. j. Fixed selling and administrative expenses include \)8,000 per quarter for salaries; \(4,800 per quarter for rent; \)1,950 per quarter for insurance; and \(2,000 per quarter for depreciation. k. Variable selling and administrative expenses include supplies at 2% of sales. l. Capital expenditures include \)25,000 for new manufacturing equipment, to be purchased and paid in the first quarter. m. Cash receipts for sales on account are 70% in the quarter of the sale and 30% in the quarter following the sale; December 31, 2018, Accounts Receivable is received in the first quarter of 2019; uncollectible accounts are considered insignificant and not considered for budgeting purposes. n. Direct materials purchases are paid 50% in the quarter purchased and 50% in the following quarter; December 31, 2018, Accounts Payable is paid in the first quarter of 2019. o. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred. p. Income tax expense is projected at \(3,500 per quarter and is paid in the quarter incurred. q. Gavin desires to maintain a minimum cash balance of \)20,000 and borrows from the local bank as needed in increments of \(1,000 at the beginning of the quarter; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of \)1,000; interest is 12% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.
Requirements
1. Prepare Gavin’s operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, cost of goods sold budget, selling and administrative expense budget, schedule of cash receipts, schedule of cash payments, and cash budget. Manufacturing overhead costs are allocated basedon direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Gavin’s annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.
Preparing the financial budget—budgeted balance sheet
Barker, Inc. has the following balance sheet at December 31, 2018:
Barker projects the following transactions for 2019:
Sales on account, \(20,000
Cash receipts from customers from sales on account, \)17,600
Purchase of raw materials on account, \(7,000
Payments on account, \)3,500
Total cost of completed products, \(16,600, which includes the following:
Raw materials used, \)7,100
Direct labor costs incurred and paid, \(3,900
Manufacturing overhead costs incurred and paid, \)4,800
Depreciation on manufacturing equipment, \(800
Cost of goods sold, \)14,800
Selling and administrative costs incurred and paid, \(500
Purchase of equipment, paid in 2019, \)2,000
Prepare a budgeted balance sheet for Barker, Inc. for December 31, 2019. (Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine the ending balance of each account.)
Preparing an operating budget—direct labor budget Baker Company expects to produce 2,050 units in January and 1,994 units in February. Baker budgets five direct labor hours per unit. Direct labor costs average $9 per hour. Prepare Baker’s direct labor budget for January and February.
What is budgetary slack? Why might managers try to build slack into their budgets?
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