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Chapter 22: 1SE (page 1228)
Budgeting benefits List the three key benefits companies get from preparing a budget.
The key benefits companies get from preparing a budget isplanning, coordination and communication, and benchmarking.
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Match the budget types to the definitions.
Budget Types Definitions
5. Financial a. Includes sales, production, and cost of goods sold budgets
6. Flexible b. Long-term budgets
7. Operating c. Includes only one level of sales volume
8. Operational d. Includes various levels of sales volumes
9. Static e. Short-term budgets
10. Strategic f. Includes the budgeted financial statements
Preparing an operating budget—sales budget
Trailers sells its rock-climbing shoes worldwide. Trailers expects to sell 6,500 pairs of shoes for \(185 each in January and 4,000 pairs of shoes for \)220 each in February. All sales are cash only. Prepare the sales budget for January and February.
Preparing an operating budget—direct materials budget
Bell expects to produce 1,800 units in January and 2,155 units in February. The company budgets 3 pounds per unit of direct materials at a cost of $10 per pound. Indirect materials are insignificant and not considered for budgeting purposes. The balance in the Raw Materials Inventory account (all direct materials) on January 1 is 4,950 pounds. Bell desires the ending balance in Raw Materials Inventory to be 20% of the next month’s direct materials needed for production. Desired ending balance for February is 4,860 pounds. Prepare Bell’s direct materials budget for January and February.
Crowley Company projects the following sales:
January February March
Cash sales (25%) \( 5,000 \) 5,500 \( 6,000
Sales on account (75%) 15,000 16,500 18,000
Total sales \) 20,000 \( 22,000 \) 24,000
Crowley collects sales on account in the month after the sale. The Accounts Receivable balance on January 1 is \(13,500, which represents December’s sales on account. Crowley projects the following cash receipts from customers:
January February March
Cash receipts from cash sales \) 5,000 \( 5,500 \) 6,000
Cash receipts from sales on account 13,500 15,000 16,500
Total cash receipts from customers \( 18,500 \) 20,500 $ 22,500
Recalculate cash receipts from customers if total sales remain the same but cash sales are only 20% of the total.
Preparing a financial budget
This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).
Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.
Requirements
1. Prepare Piedmont Computer Company’s cash budget for January and February 2020.
2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?
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