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Cash Budget and Cost Variance Analysis

Please see the attached file for better format.

Problem 5: Preparation of a Cash Budget

The sales budget of Mulls Company for the fourth quarter of 20X6 is as follows:

October November December
Sales $91,000 $76,000 $108,000

Sales are 20% cash, 80% credit.

Cost of goods gold is 70% of total sales.

Desired ending inventory for each month is equal to 25% of cost of goods sold for the following
month.

Collections on credit sales are as follows:
50% in the month sale
30% in the month following
15% in the second month following sale
5% uncollectible

October 1 inventory is $16,000.

Expected sales for January 20X7 are $84,000.

Payments for inventory are 70% in the month following purchase and 30% two months following purchase.

Required:

a) Compute the cash collections for December.
b) Compute the cash disbursements for purchases during December.

Problem 6 - Cost Variance Analysis

Sarah Beth's Art Supply Company produces various types of paints. Actual direct
manufacturing labor hours in the factory that produces paint have been higher than
budgeted hours for the last few months and the owner, Sarah B. Jones, is concerned
about the effect this has had on the company's cost overruns. Because variable
manufacturing overhead is allocated to units produced using direct manufacturing labor
hours, Sarah feels that the mismanagement of labor will have a twofold effect on
company profitability. Following are the relevant budgeted and actual results for the
second quarter of 2009.

Budgeted information Actual results
Paint set production 10,000 13,000
Direct manufacturing labor
hours per paint set 0.5 hour 0.75 hour
Direct manufacturing labor
rate $20 per hour $20.20 per hour
Variable manufacturing
overhead rate $10 per hour $9.75 per hour

Required:

1. Calculate the direct manufacturing labor price and efficiency variances and indicate
whether each is favorable (F) or unfavorable (U).
2. Calculate the variable manufacturing overhead spending and efficiency variances and
indicate whether each if favorable (F) or unfavorable (U).
3. Is Sarah correct in her assertion that the mismanagement of labor has a twofold effect on
cost overruns? Why might the variable manufacturing overhead efficiency variance not
be an accurate representation of the effect of labor overruns on variable manufacturing
overhead costs?

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Solution Preview

Please see the attached file for better format.

Problem 5: Preparation of a Cash Budget

The sales budget of Mulls Company for the fourth quarter of 20X6 is as follows:

October November December
Sales $91,000 $76,000 $108,000

Sales are 20% cash, 80% credit.

Cost of goods gold is 70% of total sales.

Desired ending inventory for each month is equal to 25% of cost of goods sold for the following
month.

Collections on credit sales are as follows:
50% in the month sale
30% in the month following
15% in the second month following sale
5% uncollectible

October 1 inventory is $16,000.

Expected sales for January 20X7 are $84,000.

Payments for inventory are 70% in the month following purchase and 30% two months following purchase.

Required:

a) Compute the cash collections for December.

First, we have to separately calculate how much is received immediately as cash sales and credit sales. Then, we will be able to calculate how much the company can collect its credit sales before calculating the cash collections for December.
October November December
Sales $91,000 $76,000 $108,000
Cash Sales (20%) 18,200 15,200 21,600
Credit Sales (80%) 72,800 60,800 86,400

Collections on credit sales are as follows:
50% in the month sale 36,400 30,400 ...

Solution Summary

This solution is comprised of a detailed explanation to prepare cash budget.

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