Activity – Sample Problems

Problem 1. Budgeted sales for the first six months of 2001 for Henry Corp. are listed below:
Jan Feb Mar Apr May June
UNITS: 6,000 7,000 8,000 7,000 5,000 4,000
Henry Corp. has a policy of maintaining an inventory of finished goods equal to 40 percent of the next month's
budgeted sales. If Henry Corp. plans to produce 6,000 units in June, what are budgeted sales for July?
A. 1,000 units C. 8,000 units
B. 3,600 units D. 9,000 units

Problem 2. are based on the following information.

Sta. Barbara is one of the manufacturers of a part used in the production of a popular consumer product. Sales of the
consumer product in 1985 are estimated at 5,000,000 units. Sta. Barbara regularly supplies 40% of the parts used in
the new products. Two parts units are needed for each product unit. Aside from the new products, there is also a
replacement parts market. Over the past three years, the company has sold the following number of replacement parts:
1982 300,000
1983 330,000
1984 363,000
This trend is expected to continue. The parts are sold for P4 per piece in the new products market and P4.50 in the
replacement parts market.

2. The estimated number of parts to be sold by Sta. Barbara in 1985 is

A. 2,399,300 C. 4,399,300
B. 4,000,000 D. 4,435,600

3. The amount of expected revenue based on the estimated number of parts to be sold in 1985 is
A. P9,796,850 C. P17,597,200
B. P16,000,000 D. P17,796,850

Problem 3. Beatless Corp, plans to sell 200,000 units of Let-It-Be product in July and anticipate a growth in
sales of 5% per month. The target ending inventory in units of the product is 80% of the next month’s
estimated sales. There are 150,000 units in inventory as of the end of June. The production requirement
in units of Let-It-Be for the quarter ending September 30 would be
A. 665,720 C. 675,925
B. 670,560 D. 691,525

Problem 4. Each unit of product ZIM takes five direct labor hours to make. Quality standards are high and
8% of units produced are normally rejected due to substandard quality. Next month’s budgets are as
follows:
Beginning inventory of finished goods 3,000 units
Planned ending inventory of finished goods 7,600 units
Budgeted sales of ZIM 36,800 units
All stocks of finished goods must have successfully passed the quality control check. What is the direct
labor budget for the month?
A. 198,720 hours C. 223,500 hours
B. 200,000 hours D. 225,000 hours
 Problem 5. Next month’s budgeted sales for TEMP is 18,000 units.
Each unit of product TEMP uses 6
kilograms of raw materials. The production and inventory budgets for June 1992 are as follows:
Opening Inventory Planned Ending Inventory
Raw materials 21,000 kgs. 24,400 kgs.
Finished goods 15,000 units 11,400 units
During the production process, it is usually found that 10% of production units are scrapped as defective and this loss occurs after the
raw materials have been placed in process.
What will the raw material purchases be in June?
A. 89,800 kgs. C. 98,440 kgs.
B. 96,000 kgs. D. 99,400 kgs.

Problem 6: GLORIA CORP. has the following budget estimates for its second year of operations:
Projected sales – P3,500,000
Projected net income before tax – 12% of sales
Estimated selling and administrative expenses – 25% of sales
Direct labor and factory overhead are budgeted at 70% of the total manufacturing cost.
Inventories are estimated as follows:
Raw materials Goods in process Finished goods
Beginning P220,000 P250,000 P350,000
Ending 270,000 300,000 420,000
The estimated purchases of raw materials would be
A. P697,000 C. P747,500
B. P732,500 D. P967,500

COMPREHENSIVE PROBLEMS

1. Purchase Budget – Merchandising Business

Gerdie Company has the following information:
Month Budgeted Sales
March $50,000
April 53,000
May 51,000
June 54,500
July 52,500
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales.
Required:
Prepare a purchases budget for April through June.

2. Production & Raw Materials Purchase Budget

Lubriderm Corporation has the following budgeted sales for the next six-month period:
June 90,000 August 210,00 October 180,000
0
July 120,000 September 150,00 Novembe 120,000
0 r
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products
that equal 20% of the unit sales for the next month.
Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are
equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds.
Required:
a. Prepare production budgets in units for July, August, and September.
b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for
each month.
 3. Production and related schedules
The Jansen Company manufactures and sells two products: plastic boxes and plastic trays. Estimated needs for a unit of each are
Boxe Trays
s
Material A 2 pounds 1 pound
Material B 4 pounds 4 pounds
Direct labor 2 hours 2 hours

Overhead is applied on the basis of $2 per direct labor hour. The estimated sales by product for 2000 are:
Boxes Trays
Sales 42,000 24,000
The beginning inventories are expected to be as follows:
Material A 4,000 pounds
Material B 6,000 pounds
Boxes 1,000 units
Trays 500 units
The desired inventories are one month's production requirements, assuming constant sales throughout the year.

Prepare the following information:

A. Production schedule
B. Purchases budget in units
C. Direct labor budget in hours
D. Overhead to be charged to production

4. Cash Receipts & Cash Disbursements

The following are forecasts of sales and purchases for a company.
Sales Purchases
April $80,000 $30,000
May 90,000 40,000
June 85,000 30,000
All sales are on credit. Records show that 70 percent of the customers pay the month of the sale, 20 percent pay the month
after the sale, and the remaining 10 percent pay the second month after the sale. Purchases are all paid the following month at a
2 percent discount. Cash disbursements for operating expenses in June were $5,000.
REQUIRED:
Prepare a schedule of cash receipts and disbursements for June.

5. Cash budget
The January 31, 1999, balance sheet of Sara's Plaques follows:

Assets
Cash $12,000
Accounts Receivable (Net of Allowance for Uncollectibles of $1,440) 34,560
Inventory 52,400
Plant Assets (Net of Accumulated Depreciation of $60,000 36,000
Total Assets $134,960

Liabilities and Stockholders' Equity

Accounts Payable $70,200
Common Stock 90,000
Retained Earnings (Deficit) (25,240) 64,960
Total Liabilities & Stockholders’ Equity $134,960

Additional information about the company includes the following:

 Expected sales for February and March are $120,000 and $130,000, respectively.
 The collection pattern from the month of sale forward is 50%, 48%, and 2% uncollectible.
 Cost of goods sold is 75% of sales.
 Purchases each month are 55% of the current month’s sales and 45% of the next month’s projected sales. All purchases are paid for in full in the month
following purchase.
 Other cash expenses each month are $21,500. The only noncash expense each month is $4,000 of depreciation.
 Required:
a. What are budgeted cash collections for February 2000?
b. What will be the inventory balance at February 29, 2000?
c. What will be the projected balance in Retained Earnings at February 29, 2000?
d. If the company wishes to maintain a minimum cash balance of $8,000, how much will be available for investment or need to be borrowed at the end
of February 2000?

6. Understanding budgets
Following are Blaisdel Company’s balance sheet at December 31, 20X0, and information regarding Blaisdel’s policies and past experiences.
Blaisdel Company
Balance Sheet at December 31,20X0

Assets Equities
Cash $ 33,000 Accounts payable $ 9,000
Receivables 31,000 Income taxes payable 8,000
Inventory 59,000 Common stocks 180,000
Fixed assets, net 102,000 Retained earnings 28,000
Total $225,000 Total $225,000

Additional information:
A. All sales are on credit and are collected 20% in the month of sale and 80% in the month after sale.
B. Budgeted sales for the first five months of 20X1 are $50,000, $60,000, $70,000, $66,000, and $65,000, respectively.
C. Inventory in maintained at budgeted sales requirements for the following two months.
D. Purchases are all on credit and are paid 80% in the month of purchase and 20% in the month after purchase.
E. Other variable cost are 20% of sales and are paid in the month incurred.
F. Fixed costs are $6,000 per month, including $1,000 of depreciation. Cash fixed costs are paid in the month incurred.
G. Blaisdel’s income tax rate is 25%, with taxes being paid in the month after they are accrued.
H. Cost of goods sold is expected to be 60% of sales.

Required:
1. What are budgeted cash receipts for January 20X1?
2. What is the budgeted inventory at January 31, 20X1?
3. What are budgeted purchases for January 20X1?
4. What is budgeted net income for January 20X1?
5. What is the budgeted cash balance at the end of January 20X1?
6. What are budgeted accounts receivable at February 28, 20X1?
7. What is the budgeted book value of fixed assets at March 31, 20X1?
8. What are budgeted accounts payable at March 31, 20X1?
9. If Blaisdel declared a cash dividend of $1,200 during January, payable in February, what balance would be reported for retained earnings in a pro forma
balance shet as of January 31, 20X1?
10. What amount would show as the liability for income taxes as of March 31, 20X1?

7. Comprehensive
Webster Company has the following sales budget.
January $200,000 March $300,000
February $240,000 April $360,000
Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in the following month. Webster keeps inventory equal to double the
coming month's budgeted sales requirements. It pays for purchases 80% in the month of purchase and 20% in the month after purchase. Inventory at the
beginning of January is $190,000. Webster has monthly fixed costs of $30,000 including $6,000 depreciation.
Fixed costs requiring cash are paid as incurred.

Required:
a. Compute budgeted cash receipts in March.
b. Compute budgeted accounts receivable at the end of March.
c. Compute budgeted inventory at the end of February.
d. Compute budgeted purchases in February.
e. March purchases are $290,000. Compute budgeted cash payments in March to suppliers of goods.
f. Compute budgeted accounts payable for goods at the end of February.
g. Cash at the end of February is $45,000. Cash disbursements are not required for anything other than payments to suppliers and fixed costs.
Compute the budgeted cash balance at the end of March.
SOLUTIONS
1. April May June Total
Desired ending inventory $ 9,180 $ 9,810 $ 9,450 $ 9,450
Plus COGS 31,800 30,600 32,700 95,100
Total needed 40,980 40,410 42,150 104,550
Less beginning inventory 9,540 9,180 9,810 9,540
Total purchases $31,440 $31,230 $32,340 $ 95,010

2. a. July August September

Budgeted sales 120,000 210,000 150,000
Add: Required ending inventory 42,000 30,000 36,000
Total inventory requirements 162,000 240,000 186,000
Less: Beginning inventory 24,000 42,000 30,000
Budgeted production 138,000 198,000 156,000

b. July August September

Production in units 138,000 198,000 156,000
Targeted ending inventory in lbs.* 297,000 234,000 **252,000
Production needs in lbs.*** 690,000 990,000 780,000
Total requirements in lbs. 987,000 1,224,000 1,032,000
Less: Beginning inventory in lbs. ****207,000 297,000 234,000
Purchases needed in lbs. 780,000 927,000 798,000
Cost ($8 per lb.) x $8 x $8 x $8
Total material purchases $6,240,000 $7,416,000 $6,384,000

* 0.3 times next month's needs

** (180,000 + 24,000 - 36,000) times 5 lbs. x 0.3
*** 5 lbs. times units to be produced
**** (690,000 x .3) = 207,000 lbs.

3. a. Production budget Boxes Trays

Units of sales 42,000 24,000
Units desired in ending inv. 3,500 2,000
Units needed 45,500 26,000
Units in beginning inv. (1,000) (500)
Budgeted production 44,500 25,500

b. Purchases budget - Material A Total

Units needed for production (89,000 + 25,500) 114,500
Required ending inventory (annual units ÷ 12) 9,542
Total requirements 124,042
Less beginning inventory (4,000)
Pounds to be purchased 120,042

Purchases budget - Material B

Units needed for production (178,000 + 102,000) 280,000
Required ending inventory (annual units ÷ 12) 23,333
Total requirements 303,333
Less beginning inventory (6,000)
Pounds to be purchased 297,333

c. Direct labor budget

Required hours 89,000 51,000 140,000

d. Overhead budget
Activity base (hours) 89,000 51,000
Multiply by rate × $2 × $2
Overhead cost $178,000 $102,000 $280,000
4. Schedules of Cash Receipts and Disbursements for June
Cash Receipts:
From current month sale (June) (.7 85,000) $59,500
From 1 month prior sale (May) (.2 90,000) 18,000
From 2 month prior sale (April) (.1 80,000) 8,000
Total cash receipts $85,500

Cash Disbursements:
May purchases @ 98% (less discount) (.98 40,000) $39,200
Operating expenses 5,000
Total cash disbursements $44,200
Net increase in cash for June $41,300

5. Cash Budget
a. (72,000* × 0.48) + ($120,000 × 0.50) = $94,560
*January sales: ($34,560 + $1,440) ÷ 0.50 = $72,000

b. Beginning inventory $ 52,400

Purchases ($120,000 × 0.75 × 0.55) +($130,000 × 0.75 × 0.45) 93,375
Cost of Goods Sold ($120,000 × 0.75) (90,000)
Ending inventory $ 55,775

c. First, determine expected earnings for February:

Sales $120,000
CGS (90,000)
Gross margin $ 30,000
Operating expenses (25,500)
Net income $ 4,500

Retained earnings, beginning balance $(14,000)

Earnings 4,500
Ending balance $( 9,500)

d. Beginning balance $ 12,000

Cash collections 94,560
Cash available $106,560
Cash disbursements:
Accounts Payable $70,200
Other 21,500 91,700
Cash excess $ 14,860

Since there is a cash excess of $14,860, ($14,860 - $8,000) = $6,860 is available for investment.
6. Understanding Budgets (20 minutes)
1. $41,000
Receivable at December 31, 20X0 $ 31,000
Collected on January sales ($50,000 x 20%) 10,000
Total $ 41,000

2. $78,000 [($60,000 + $70,000) x 60%]

3. $49,000
January cost of sales, $50,000 x 60% $ 30,000
Required ending inventory, requirement 2 78,000
Total requirements 108,000
Beginning inventory, given 59,000
Purchases $ 49,000

4. $3,000
Sales, given $ 50,000
Cost of sales (60%) 30,000
Gross profit 20,000
Other variable costs (20%) 10,000
Contribution margin 10,000
Fixed costs, given 6,000
Income before taxes 4,000
Taxes, at 25% 1,000
Net income $ 3,000
5. $2,800
Balance, 12/31 (given in balance sheet) $ 33,000
Receipts from sales, requirement 1 41,000
Total 74,000
Disbursements:
December purchases (accounts payable at 12/31) $ 9,000
January purchases (80% of requirement 3) 39,200
Variable cost for January (20% of January sales) 10,000
January fixed costs, cash only 5,000
Taxes on December income (liability at 12/31) 8,000 71,200
Balance $ 2,800

6. $48,000 ($60,000 x 80%)

7. $99,000 [$102,000 - (3 x $1,000)]

8. $7,800 (20% x $39,000)

March cost of sales (60% x $70,000) $ 42,000
Inventory 3/31 [60% x ($66,000 + $65,000)] 78,600
Required 120,600
Inventory 2/28 [60% x ($70,000 + $66,000)] 81,600
Purchases $ 39,000

9. $29,800
Retained earnings, 12/31 $ 28,000
Budgeted net income (requirement 4) 3,000
Total 31,000
Dividend 1,200
Budgeted retained earnings, 1/31 $ 29,800

10. $2,000, from March tax accrual. Taxes are paid in the month after accrual per item g.
Sales $ 70,000
Cost of sales at 60% 42,000
Gross profit 28,000
Other variable costs at 20% 14,000
Contribution margin 14,000
Fixed costs 6,000
Income before taxes $ 8,000
 Income taxes at 25% $ 2,000

7. a. March receipts: $264,000 [($240,000 x 60%) + ($300,000 x 40%)]

b. Receivables at end of March: $180,000 [$300,000 x (100% - 40%)]
b. Inventory at end of February: $420,000 ($300,000 x 70% x 2)
d. February purchases: $252,000 [($240,000 x 70%) + ($300,000 x 2 x 70%) – ($240,000 x 2 x 70%)]
e. March payments: $282,400 [(252,000 x 20%) + ($290,000 x 80%)]
f. AP at end of February: $50,400 ($252,000 x 20%)
g. Cash at end of March: $2,600 ($25,000 + $264,000 - $282,400 - $24,000)