Jacob Long, the controller of Arvada Corporation, is trying to prepare a sales budget for the coming year. The income statements for the last four quarters follow:

Historically, cost of goods sold is about 70 percent of sales revenue. Selling and administrative expenses are about 10 percent of sales revenue.

Fred Arvada, the chief executive officer, told Mr. Long that he expected sales next year to be 15 percent for each respective quarter above last year’s level. However, Rita Banks, the vice president of sales, told Mr. Long that she believed sales growth would be only 10 percent.

Required  

1. Prepare a pro forma income statement including quarterly budgets for the coming year using Mr. Arvada’s estimate.

2. Prepare a pro forma income statement including quarterly budgets for the coming year using Ms. Banks’ estimate.

PROBLEM 1:

Sales records for the last six quarters for Howard Bakery which is famous for its multi-grain bread are given below: (Sales data are in thousands of pounds, but ignore the last three zeros for ease of computation.)

Quarter                             Sales ($)

1. 240
2. 260
3. 300
4. 280
5. 320
6. 360

1. Using a three-quarter simple moving average method, forecast sales for each

successive quarter.

2. Using a three-quarter weighted moving average method, forecast sales for each successive quarter. (Use weights of 0.1, 0.3 and 0.6 for each quarter where 0.1 is for the most distant quarter, 0.3 for the next most distant quarter, and 0.6 for the most recent quarter.)  
   
3. Evaluate the two forecasts using the Cumulative Forecast Error (CFE) method (also called Bias or Arithmetic Sum of Forecast Error). Which of the two forecasts above—(a) or (b) is better based on the CFE test? Note: Show your computations.

Greenwork Accessories assembles a computer networking device from kits of imported components. You have been asked to develop a quarterly and annual operating budget and pro- forma income statements for 2016. You have obtained the following information: 20 points

Beginning-of-year balances

Desired end-of-quarter balances

Fixed cost per quarter

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                                $40,000.00

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                                 10,000.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                                $50,000.00

Selling and administrative costs

Variable cost per unit. . . . . . . . . . . . . . . . . . . . . . .. . . . . . .

Fixed costs per quarter:

$6.00

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                    $20,000.00

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                                                                    $25,000.00

Sales Forecast

Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     First      Second       Third        Fourth

Unit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      2,400      1,500             2,000         3,100

Additional information

All cash payments except purchases are made quarterly as incurred.

All borrowings occur at the start of the quarter.

All repayments on borrowings occur at the end of the quarter.

All interest on borrowed funds is paid at the end of each quarter.

Borrowings and repayments may be made in any amount.

Required – 20 points

A sales budget for each quarter and the year.

A production budget for each quarter and the year.

c.   A purchases budget for each quarter and the year.

d.   A manufacturing cost budget for each quarter and the year.

e.   A selling and administrative expense budget for each quarter and the year.

f.    A cash budget for each quarter and the year.

g.   A pro-forma contribution income statement for each quarter and the year.

Works Accessories assembles a computer networking device from kits of imported components. You have been asked to develop a quarterly and annual operating budget and pro- forma income statements for 2016. You have obtained the following information:

Beginning-of-year balances

Desired end-of-quarter balances

Fixed cost per quarter

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             $40,000.00

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              10,000.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            $50,000.00

Selling and administrative costs

Variable cost per unit. . . . . . . . . . . . . . . . . . . . . . .. . . . . . .

Fixed costs per quarter:

$6.00

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000.00

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000.00

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000.00

Sales Forecast

Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     First      Second       Third        Fourth

Unit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         2,400      1,500             2,000         3,100

Additional information

All cash payments except purchases are made quarterly as incurred.

All borrowings occur at the start of the quarter.

All repayments on borrowings occur at the end of the quarter.

All interest on borrowed funds is paid at the end of each quarter.

Borrowings and repayments may be made in any amount.

(a) A sales budget for each quarter and the year.

(b) A production budget for each quarter and the year.

c.   A purchases budget for each quarter and the year.

d.   A manufacturing cost budget for each quarter and the year.

e.   A selling and administrative expense budget for each quarter and the year.

f.    A cash budget for each quarter and the year.

g.   A pro-forma contribution income statement for each quarter and the year.

Diesel Information Continued (direct labor budget/overhead budget/selling and administrative expense budget/cash budget include a schedule of cash collections and payments/finished goods inventory calculator)

Chapter Contents

Chapter Review
Key Terms and Concepts

national income accountingnational income accountinga uniform means of measuring economic performance national income accounting a uniform means of measuring economic performance
gross domestic product (GDP)gross domestic product (GDP)the measure of economic performance based on the value of all final goods and services produced within a country during a given period gross domestic product (GDP) the measure of economic performance based on the value of all final goods and services produced within a country during a given period
double countingdouble countingadding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP double counting adding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP
expenditure approachexpenditure approachcalculation of GDP by adding the expenditures by market participants on final goods and services over a given period expenditure approach calculation of GDP by adding the expenditures by market participants on final goods and services over a given period
consumptionconsumptionpurchases of final goods and services consumption purchases of final goods and services
nondurable goodsnondurable goodstangible items consumed in a short period of time, such as food nondurable goods tangible items consumed in a short period of time, such as food
durable goodsdurable goodslonger-lived consumer goods, such as automobiles durable goods longer-lived consumer goods, such as automobiles
services
investmentinvestmentthe creation of capital goods to augment future production investment the creation of capital goods to augment future production
fixed investmentfixed investmentall new spending on capital goods by producers fixed investment all new spending on capital goods by producers
producer goodsproducer goodscapital goods that increase future production capabilities producer goods capital goods that increase future production capabilities
inventory investmentinventory investmentpurchases that add to the stocks of goods kept by the firm to meet consumer demand inventory investment purchases that add to the stocks of goods kept by the firm to meet consumer demand
factor paymentsfactor paymentswages (salaries), rent, interest payments, and profits paid to the owners of productive resources factor payments wages (salaries), rent, interest payments, and profits paid to the owners of productive resources
gross national product (GNP)gross national product (GNP)the difference between net income of foreigners and GDP gross national product (GNP) the difference between net income of foreigners and GDP
depreciationdepreciationannual allowance set aside to replace worn-out capital depreciation annual allowance set aside to replace worn-out capital
net national product (NNP)net national product (NNP)GNP minus depreciation net national product (NNP) GNP minus depreciation
indirect business taxesindirect business taxestaxes, such as sales tax, levied on goods and services sold indirect business taxes taxes, such as sales tax, levied on goods and services sold
national income (NI)national income (NI)a measure of income earned by owners of the factors of production national income (NI) a measure of income earned by owners of the factors of production
personal income (PI)personal income (PI)the amount of income received by households before personal taxes personal income (PI) the amount of income received by households before personal taxes
disposable personal incomedisposable personal incomethe personal income available after personal taxes disposable personal income the personal income available after personal taxes
real gross domestic product per capitareal gross domestic product per capitareal output of goods and services per person real gross domestic product per capita real output of goods and services per person

Chapter Contents

Chapter Review
Problems

1.

Answer the following questions about GDP.

What is the definition of GDP?

Why does GDP measure only the final value of goods and services?

Why does GDP measure only the value of goods and services produced within a country?

How does GDP treat the sales of used goods?

How does GDP treat sales of corporate stock from one stockholder to another?

2.

Which of the following are included in GDP calculations?

Cleaning services performed by Molly Maid Corporation

Lawn-mowing services performed by a neighborhood child

Drugs sold illegally on a local street corner

Prescription drugs manufactured in the United States and sold at a local pharmacy

A rug woven by hand in Turkey

Air pollution that diminishes the quality of the air you breathe

Toxic-waste cleanup performed by a local company

Car parts manufactured in the United States for a car assembled in Mexico

A purchase of 1,000 shares of IBM stock

Monthly Social Security payments received by a retiree

TBA, Inc., manufactures and sells concrete block for residential and commercial building. TBA expects to sell the following in 20x1:

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Units 2,000,0000 6,000,000 6,000,000 2,000,000

Unit Selling Price $0.70 $0.70 $0.80 $0.80

Quarter Units Sales Ending Inventory

1 2,000,000 500,000

2 6,000,000 500,000

3 6,000,000 100,000

4 2,000,000 100,000

Inventory on both January 1, 20x1, and January 1, 20x2, is expected to be 100,000 blocks.

Each block requires 26 pounds of raw materials (a mixture of cement, sand, gravel, shale, pumice, and water). TBA's raw materials inventory policy is to have 5 million pounds in ending inventory for the third and fourth quarters and 8 million pounds in ending inventory for the first and second quarters. Thus, desired direct materials inventory on both January 1, 20x1, and January 1, 20x2, is 5,000,000 pounds of materials. Each pound of raw materials costs $0.01.

Each block requires 0.015 direct labor hour; direct labor is paid $14 per direct labor hour.

Variable overhead is $8 per direct labor hour. Fixed overhead is budgeted at $320,000 per quarter ($100,000 for supervision, $200,000 for depreciation, and $20,000 for rent).

TBA also provided the information that beginning finished goods inventory is $55,000; and the ending finished goods inventory budget for ABT for the year $67,000.

TBA's only variable marketing expense is a $0.05 commission per unit (block) sold. Fixed marketing expenses for each quarter include the following:

Salaries: $20,000

Depreciation: 5,000

Travel: 3,000

Advertising expense is $10,000 in Quarters 1, 3, and 4. However, at the beginning of the summer building season, TBA increases advertising; in Quarter 2, advertising expense is $15,000.

TBA has no variable administrative expenses. Fixed administrative expenses for each quarter include the following:

Salaries $35,000

Insurance 4,000

Depreciation 12,000

Travel 2,000

Income taxes are paid at the rate of 30 percent of operating income.

Of the sales on account, 70 percent are collected in the quarter of sale; the remaining 30 percent are collected in the quarter following the sale. Total sales for the fourth quarter of 20x0 totaled $2,000,000.

All materials are purchased on account; 80 percent of purchases are paid for in the quarter of purchase. The remaining 20 percent are paid in the following quarter. The purchases for the fourth quarter of 20x0 were $500,000.

TBA requires a $100,000 minimum cash balance for the end of each quarter. On December 31, 20x0, the cash balance was $120,000.

Money can be borrowed and repaid in multiples of $100,000. Interest is 12 percent per year. Interest payments are made only for the amount of the principal being repaid. All borrowing takes place at the beginning of a quarter, and all repayment takes place at the end of a quarter.

Budgeted depreciation is $200,000 per quarter for overhead, $5,000 for marketing expense, and $12,000 for administrative expense. (Remember that depreciation is not a cash expense and must be deleted from total expenses before the cash budget is prepared.)

The capital budget for 20x1 revealed plans to purchase additional equipment for $600,000 in the first quarter. The acquisition will be financed with operating cash, supplementing it with short-term loans as necessary.

Corporate income taxes of $20,700 will be paid at the end of the fourth quarter.

The balance sheet for the beginning of the year is given:

Balance Sheet

December 31, 20x0

Assets

Current assets:

Cash..................................................................... $ 120,000

Account receivable............................................... 300,000

Material inventory................................................. 50,000

Finished goods inventory..................................... 55,000

Total goods inventory....................................................................... $525,000

Property, plant, and equipment (PP&E):

Land..................................................................... $ 2,500,000

Buildings and equipment...................................... 9,000,000

Accumulated depreciation.................................... (4,500,000)

Total PP&E:.................................................................................... 7,000,000

Total Assets.............................................................................................. $ 7,525,000

Liabilities and Stockholders' Equity

Current Liabilities:

Account payable........................................................................................ $ 100,000   

Stockholders' equity:

Common Stock, no par....................................... $ 600,000

Retained earnings.............................................. 6,825,000

Total stockholders' equity.............................................................. 7,425,000

Total liabilities and stockholders' equity ................................................... $ 7,525,000

REQUIREMENTS (to be completed using Excel

Total assets

1. Construct an overhead budget for the coming year. Show total amounts by quarter and in total for the year.

2. Prepare a cost of goods sold budget for the coming year.

3. Construct a marketing expense budget for the coming year. Show total amounts by quarter and in total for the year

4. Construct an administrative expense budget for the coming year. Show total amounts by quarter and in total for the year.

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Tyler is manufacturing only one product—a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Required:

3. During the second quarter of operations, the company again produced 31,500 units but sold 34,500 units. (Assume no change in total fixed costs.)

a. What is the company’s variable costing net operating income (loss) for the second quarter?

b. What is the company’s absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Tyler is manufacturing only one product—a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

1.During the second quarter of operations, the company again produced 33,450 units but sold 38,450 units. (Assume no change in total fixed costs.) What is the company’s absorption costing net operating income (loss) for the second quarter?

2.During the second quarter of operations, the company again produced 33,450 units but sold 38,450 units. (Assume no change in total fixed costs.) Reconcile the variable costing and absorption costing net operating incomes (losses) for the second quarter.