Question

Review question?

What is a budget?

Benefits of budgeting?

3 barriers to effective budgeting?

Four primary component of master budgeting?

What is an operating budgeting?

What is a capital use budgeting?

Starting point of a budgeting process

What data sources do manager rely on to create sales budget?

What is an operating expense budget?

Exercise and problem

5. Shatz Fine Clothiers expects to make inventory purchases in the first quarter of 20X5 as follows: January February March $50,000 60,000 70,000 Historical data shows that the company pays for 70 percent of its purchases in the month of purchase and the remaining balance is paid in the month following the purchase. On January 1, 20X5, the company owed $20,000 for prior-year purchases. a. Prepare a schedule of cash payments for January , February, and March. b. What amount of accounts payable will be outstanding on March 31?

6. Major Drumstick Poultry Company expects to have the following sales in the f irst quarter of 20X5: January February March $70,000 80,000 90,000 Historical data shows that the company collects 80 percent of its sales in the month of the sale and the remaining balance is collected in the month following the sale. On January 1, 20X5, accounts receivable related to December sales totaled $10,000. a. Compute total sales for December 20X4. b. Prepare a schedule of cash receipts for January , February, and March. c. What amount of accounts receivable will be outstanding on March 31?

8. Seattle Brewing Company incurs the following fixed costs each quarter: Advertising Rent Salaries Insurance Depreciation $30,000 20,000 80,000 2,000 15,000. the company pays 80 percent of it cash expenses in the period incurred. The remaining 20 percent are paid in the following fiscal quarter . Accounts payable totaling $25,000 were outstanding at the beginning of the year. Using these data, complete the following requirements. a. Prepare a quarterly fixed cost budget for the coming year . b. Prepare a cash payments schedule for the coming year . c .   Compute the total accounts payable expected to be outstanding at year end.

9. Heart & Soul Music Store expects to sell 20,000 CDs in the first four months of business in 20X1. Each CD sells for $12 and costs $8. Management wants to prepare an operating budget for the first fiscal quarter (Q1). Q1 consists of January, February, and March. Monthly sales are projected to be as follows: 20X1 Expected sales (in units) January   2,500 February   4,000 March   7,500   April 6,000 a.   Prepare a monthly sales forecast in dollars for Q1 (January , February, and March). b. Prepare a monthly contribution margin statement for Q1. c.   Assume that for Heart & Soul’ s operations, ending inventory is projected to be 80 percent of next month’s sales. Assume the company started 20X1 with 2,000 CDs in its inventory. How many CDs does the company need to buy in each month of Q1? d. What is the cost of inventory purchases for each month?

10. Eggs Cetera is new breakfast café. Based on a recent market analysis, the company expects the following quarterly demand (number of customers): Q1 10,000 Q2 15,000 Q3 20,000 Q4 18,000 The typical customer spends $10 per meal at the restaurant. Management estimates that food accounts for 80 percent of each customer’ s bill. The other 20 percent comes from beverages. Food costs the café 75 percent of its selling price, while beverages cost only 20 percent of their selling price. Based on these data, prepare the following: a. A quarterly sales forecast. b. A quarterly contribution margin forecast.

Answer 1

1. A Budget is a financial plan for a defined period of time, usually a year. It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities & cash flow statements. It is the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them. It may include a budget surplus, providing money for use at a future time, or a deficit in which expenses exceed income.

2.Benefits of Budgeting are:-

• To control resources
• To communicate plans to various responsibility center managers
• To motivate managers to strive to achieve budget goals
• To evaluate the performance of managers
• To provide visibility into the company's performance
• For accountability

3.  Barriers to Effective Budgeting

1. Shortsightedness- Shortsighted behavior can cause executive managers to stop in their tracks. By focusing on current projects rather than broader, long-term goals.

2. Communication Barriers -Communication barriers arise from language or cultural differences, or if a manager simply is an ineffective communicator, poor communication can make it hard to express goals and organizational mission.

3.Poor Leadership-A leader who cannot lead, or who is unapproachable, cannot collect suggestions and ideas from employees that are essential to effective planning can be barrier.

4. Primary components of Master Budgeting are :-

1. Materials & Utilities Budget

2. Revenue & Expenses Budget

3. Production Budget

4.Capital Expenditure Budget

5. Operating Budgeting - A detailed projection of all estimated income and expenses based on forecasted sales revenue during a given period (usually one year). It generally consists of several sub-budgets, the most important one being the sales budget, which is prepared first.