Budgeting Cases-Problems

BUDGETING AND BUSINESS PERFORMANCE MANAGEMENT

Budgeted Balance Sheet

Putnam’s budgeted balance sheet for December 31, 20B, is presented next. Supporting calculations of the individual statement accounts are also provided.

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BUDGETING AND BUSINESS PERFORMANCE MANAGEMENT

Some Financial Calculations

To see what kind of financial condition the Putnam Company is expected to be in for the budgeting year, a sample of financial ratio calculations are in order. (Assume 20A after-tax net income was $45,000.)

Supporting computations:

a.From Schedule 8 (cash budget).

b.$100,000 (Accounts receivable, 12/31/20A) + $900,000 (Credit sales from Schedule 1) – $892,000 (Collections from Schedule 1) = $108,000, or 60% of 4th-quarter credit sales, from

d.From Schedule 6 (ending finished goods inventory budget).

e.From the 20A balance sheet and Schedule 8 (no change).

f.$250,000 (Building and Equipment, 12/31/20A) + $42,000 (purchases from Schedule 8) = $292,000.

g.$74,000 (Accumulated Depreciation, 12/31/20A) + $16,000 (depreciation expense from Schedule 5) = $90,000.

h.Note that all accounts payable relate to material purchases. $6,275 (Accounts payable, 12/31/20A) + $61,150 (credit purchases from Schedule 3) – $60,950 (payments for purchases

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from Schedule 3) = $6,475, or 50% of 4th-quarter purchase = 50% ($12,950) = $6,475.

i.From Schedule 9.

j.From the 20A balance sheet and Schedule 8 (no change).

k.$77,575 (Retained earnings, 12/31/20A) + $64,375 (net income for the period, Schedule 9) – $20,000 (cash dividends from Schedule 8) = $121,950.

Sample calculations indicate that the Putnam Company is expected to have better liquidity as measured by the current ratio. Overall performance will be improved as measured by return on total assets. This could be an indication that the contemplated plan may work out well.

a)There is a favorable sales variance of $3,700, consisting of the sales price variance and the sales volume variance.

b)Sales price variance = (Actual Selling Price - Budgeted Selling Price) * Actual Units Sold

c) Sales volume variance = (Actual Quantity - Budgeted Quantity) * Budgeted Selling Price

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BUDGETING AND BUSINESS PERFORMANCE MANAGEMENT

Case 3. Material Variances

Material purchased was 20,000 kl. Material issued to production was 15,000 kl. Material budgeted per unit is 1 kl. Budgeted price is $2.50 per kl while actual price is $3.00 per kl. Production was 10,000 units.

Material Price Variance = (Actual price - Standard price) * Quantity purchased

($3.00 - $2.50) * 20,000 = $10,000 U

Material Quantity Variance = (Actual quantity issued - Standard quantity) * Standard price

(15,000 - 10,000) * = $12,500 U

Case 4. Material Variances and Inflation

Assume these data for Charles Company for 20X1:

Standard price of material per foot $3.00

Actual price of material per foot 3.80

Actual material used 10,000 ft.

The inflation rate for the year is 16%

The direct material price variance can be broken down into the inflation aspect and the controllable element.

Price variance due to inflation = (Standard price - Inflation adjusted price) * Actual quantity

($3.00 - $3.48) * 10,000 ft = - $4,800

Controllable price variance = (Inflation adjusted price - Actual price) * Actual quantity

($3.48 - $3.80) * 10,000 ft = $3,200

Proof—Material Price Variance = (Standard price - Actual price) * Actual quantity

($3.00 - $3.80) * = $8,000

Case 5. Sales Mix and Quantity Variances

Shim and Siegel, Inc., sells two products, C and D. Product C has a budgeted unit CM (contribution margin) of $3 and Product D has a budgeted unit CM of $6. The budget for a recent month called for sales of 3,000 units of C and 9,000 units of D, for a total of 12,000 units. Actual sales totaled 12,200 units, 4,700 of C, and 7,500 of D. We compute the sales volume variance and break this variance down into the sales quantity variance and sales mix variance. Shim and

Siegel’s sales volume variance is computed next. As we can see, while total unit sales increased by 200 units, the shift in sales mix resulted in a $3,900 unfavorable sales volume variance.

In multiproduct firms, the sales volume variance is further divided into a sales quantity variance and a sales mix variance. The computations of these variances are shown next.

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U

Problem 4. Percentage of sales forecasting method

Assume that the company plans to maintain its dividend payments ay the same level in 20X7 as in 20X6. Also assume that all of the additional financing needed is a form of short term notes payable. Determine the amount of additional financing required and pro-forma financial statements (that is balance sheet and income statement) for 20X7 under each of following conditions:

Industrial Supply Company Balance Sheet as of December 31, 20X6, $

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Problem 5. Projecting an Income Statement

Sales for 1st month = $60,000

Cost of sales = 42% of sales, all variable

Operating expenses = $10,000 fixed plus 5% of sales

Taxes = 46% of net income

Sales increase by 5% each month

a)Based on this information, we will create a spreadsheet for the contribution income statement for the next 12 months and in total.

b)We will do the same as above, assuming that sales increase by 10 percent and operating expenses = $10,000 plus 10 percent of sales.

Problem 6. Projecting an Income Statement

Delta Gamma Company wishes to prepare a three-year projection of net income, using this information:

a)The 2004 base year amounts are: Sales revenues $4,500,000

Cost of sales 2,900,000

Selling and administrative expenses 800,000 Net income before taxes 800,000

b)Use these assumptions:

Sales revenues increase by 6% in 2005, 7% in 2006, and 8% in 2007. Cost of sales increase by 5% each year.

Selling and administrative expenses increase only 1% in 2005 and will remain at the 2005 level thereafter.

The income tax rate = 46%.

Problem 7. Prepare a cash budget

Prepare a cash budget for Atlas Products, Inc., for the first quarter of 200X, based on the following information.

The budgeting section of the corporate finance department of Atlas Products, Inc., has received the following sales estimates from the marketing department:

The company has found that, on the average, about 25 percent of its credit sales are collected during the month when the sale is made, and the remaining 75 percent of credit sales are collected during the month following the sale. As a result, the company uses these figures for budgeting.

The company estimates its purchases at 60 percent of next month’s sales, and payments for those purchases are budgeted to lag the purchases by 1 month.

Various disbursements have been estimated as follows:

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In addition, a tax payment of $105000 is due on January 15, and $40000 in dividends will be declared in January and paid in March. Also, the company has ordered a $75000 piece of equipment. Delivery is scheduled for early January, and payment will be due in February.

The company’s projected cash balance at the beginning of January is $100000, and the company desires to maintain a balance of $100000 at the end of each month.

Problem 8. Prepare a cash budget

Prepare a cash budget for Elmwood Manufacturing Company for the first 3 months of 200X based on the following information:

The company has found that approximately 40 percent of sales are collected during the month the sale is made and the remaining 60 percent are collected during the month following the sale.

Material purchases are 30 percent of next month’s estimated sales and payments lag these purchases by 1 month labor. Labor costs are 35 percent of next month’s sales and are paid during the month incurred. Factory overhead and selling and administrative expenses are paid during the month incurred. In addition, a payment for new equipment of $1,5 million is due in February. Also, a tax payment of $1,6 million and a dividend payment of $650000 are due in March.

The company’s projected cash balance at the beginning of January is $1,5 million. Furthermore,

Elmwood desires to maintain a $750000 cash balance at the end of each month.

Problem 9. Regression Analysis

Forecast the volume of deposits, using the following relationship between interest rates and cash deposits.

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Problem 10. Develop a budget

Develop a budget under the following assumptions.

Problem 11. Regression Analysis

Examine, can variations in the number of marketing emails sent each month be used to help predict the income to the conference business? Use a set of data collected monthly for a period of one year.

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