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# Sales budget, cash collections and production budget preparations

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EXERCISE 7-12 Sales and Production Budgets (LO2,LO3)
The marketing department of Graber Corporation has submitted the following sales forecast for the upcoming fiscal year.
1st quarter 2nd quarter 3rd Quarter 4th Quarter
Budgeted sales (units) 16,000 15,000 14,000 15,000

The selling price of the company's product is \$22 per unit.Management expects to collect 75% of the sales in the quarter which the sales are made, 20% in the following quarter, and 5% of sales are expected to be noncollectable. The beginning balance of accounts receivable, all of which is expected to be collected in the first quarter, is \$66,000.
The company expects to start the first quarter with 3,200 units in finished goods inventor. Management desires an ending finished goods inventory in each quarter equal to 20% of the next quarter's budgeted sales. The desired ending finished goods inventory for the fourth quarter is 3,400 units.

Required:
1. Prepare the company's sales budget and schedule of expected cash collections.
2. Prepare the company's production budget for the upcoming fiscal year.

EXERCISE 7-14 Direct Materials and Direct Labor Budgets (LO4,LO5)
The production department of Priston Company has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year.
1st quarter 2nd quarter 3rd Quarter 4th Quarter
Units to be produced 6,000 7,000 8,000 5,000

In , addition, the beginning raw materials inventory for the first quarter is budgeted to be 3,600 pounds and the beginning accounts payable for the first quarter is budgeted to be \$11,775.
Each unit requires 3 pounds of raw material that cost \$2.50 per pound. Management desires to end each quarter with an inventory of raw materials equal to 20% of the following quarter's production needs. The desired ending inventory foe the fourth quarter is 3,700 pounds. Management plans to pay 70% of raw material purchases in the quarter acquired and 30% in the following quarter. Each unit requires 0.50 direct labor-hours and direct labor-hour workers are paid \$12 per hour.

Required:
1. Prepare the company's direct materials budget and schedule of expected cash disbursements for materials for the upcoming fiscal year.
2. Prepare the company's direct labor budget for the upcoming fiscal year, assuming that the direct labor workforce is adjusted each quarter to match the number of hours required to produce the forecasted number of units produced..

PROBLEM 7-19 Cash budget; Income Statement; Balance Sheet (LO4,LO8,LO9, LO10)
Quintien Company is a wholesale distributor of soft drinks. The company's balance sheet as of April 30 is given below:

QUINTEN COMPANY
Balance Sheet
April 30
Assets
Cash.........................................................................................
Accounts receivable, customers ......................................................
Inventory..................................................................................
Buildings and equipment, net of depreciation.......................................
Total assets................................................................................

Liabilities and Stockholders' Equity
Accounts payable, suppliers............................................................
Note payable..............................................................................
Capital stock, no par.....................................................................
Retained earnings........................................................................
Total liabilities and stockholders' equity.............................................
\$ 11,000
75,000
42,000
338,000
\$466,000

\$ 89,000
35,000
280,000
62,000
\$466,000

The company is in the process of preparing budget data for May. A number of budget items have already been prepared, as stated below:

a. Sales are budgeted at \$300,000 for May. Of these sales, \$120,000 will be for cash: the remainder will be credit sales. 35% of a month's credit sales are collected in the month the sales are made, and the remainders are collected in the following month. All of the April 30 receivables will be collected in May.
b. Purchases of inventory are expected to total \$216,000 during May. These purchases will all be on account. 60% of all purchases are paid for in the month of purchase: the remainder are paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.
c. The May 31 inventory balance is budgeted at \$50,000.
d. Operating expenses for May are budgeted at \$71,000 exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at \$5,000 for the month.
e. The note payable on the April 30 balance sheet will be paid during May, with \$200 in interest. (All of the interest relates to May.)
f. New refrigerating equipment costing \$10,000 will be purchased for cash during May.
g. During May, the company will borrow \$70,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

PROBLEM 8-14 Comprehensive Variance Analysis (LO2,LO3,LO4)
Kramer Toy Company manufactures a plastic swimming pool; at its East Crest Plant. The plant has been experiencing problems for some time as shown by its September income statement below:

Budgeted Actual
Sales (15,000 pools).......................

Less variable expenses:
Variable cost of goods sold*...........
Variable selling expenses..............
Total variable expenses..................
Contribution Margin.....................

Less fixed Expenses:
Total fixed expenses......................
Net operating income.....................

*contains direct materials, direct labor, and variable manufacturing overhead.
\$495,000

220,050
24,000
244,050
250,950

128,000
85,000
213,000
\$ 37,950
\$495,000

227,120
24,000
251,120
243,880

128,000
85,000
213,000
\$ 38,880

Janet Wilson, who has just been appointed general manager of the East Crest plant, has been given instructions to "get things under control." Upon reviewing the plant's income statement. Ms. Wilson has concluded that the major problem lies in the variable cost of goods sold. She has Been provided with the following standard cost per swimming peel:

Standard Quantity Standard Price Standard
or hours or rate Cost

Direct Materials .........
Direct labor...............
Total standard cost..................

* Based on Machine hours
3.2 pounds
0.8 hours
0.5 hours*
\$18.0 per pound
\$9.20 per hour
\$3.10 per hour
\$ 5.76
7.36
1.55
\$ 14.67

Ms.Wilson has determined that during September the plant produced 15,000 pools and incurred the following costs:
a. Purchased 62,000 pounds of materials at a cost of \$1.75 per pound.
b. Used 51,000 pounds of materials in production. (Finished goods and work in process inventories are insignificant and can be ignored.0
c. Worked 11,800 direct labor-hours at a cost of \$10.10 per hour.
d. Incurred variable manufacturing overhead cost totaling \$196,240 for the month. A total of 7,400 machine-hours was recorded. It is the company's policy to close all variances to cost of goods sold on a monthly basis.

Required:
1. Compute the following variances for September:
a. Direct materials price and quantity variances.
b. Direct labor rate and efficiency variances
c. Variable overhead spending and efficiency variances.
2. Summarize the variances that you computed in (1) above by showing the net overall favorable or unfavorable variance for the month. What impact did this figure have on the company's income statement? Show computations.
3. Pick out the two most significant variances that you computed in (1) above. Explain to Ms.Wilson possible causes of these variances.

Problem 9-15 Preparing a Performance Report (LO2,LO3,LO6)
Several years ago, Edwards Inc. Developed a comprehensive budgeting system for profit planning and control purposes. The line supervisors have been very happy with the system and with the reports being prepared on their performance, but both middle and upper management have expressed considerable dissatisfaction with the information being generated by the system.
A typical manufacturing overhead performance report for a recent period is shown:

EDWARDS INC.
Overhead Performance Report - Matching Department
For the Quarter Ended June 30
Actual Budget Variance
Machine-hours..........................

Indirect materials .....................
Rework time...........................
Utilities.................................
Machine setup ........................
Maintenance...........................
Inspection..............................

\$15,200
4,200
34,200
9,400
63,000

64,300
54,000
118,300
\$181,300
24,000

\$16,800
4,800
36,000
9,600
67,200

65,000
54,000
119,000
\$186,200

\$1,600F
, 600F
1,800F
200F
4,200F

700F
0
700F
\$ 4,900F

After receiving a copy of this overhead performance report, the supervisor of the Machining Department stated, "These reports are super. It makes me feel really good to see how well things are going in my department. I can't understand why those people upstairs complain so much."
The budget data above are for the original planned level of activity for the quarter.

1. The company's vice president is uneasy about the performance reports being prepared and would like you to evaluate their usefulness to the company.
2. What changes, if any, would you recommend be made in the overhead performance report above in order to give a better insight into how well the supervisor is controlling costs?
3. Prepare a new overhead performance report for the quarter, incorporating any changes you suggested in (2) above. (Include both the variable and the fixed costs in your report.)