Master Budget Sample Problems
Master Budget Sample Problems
Master Budget Sample Problems
SALES BUDGET
Forecasted units sold x selling price = total sales
PRODUCTION BUDGET
Budgeted sales + desired ending inventory – beginning inventory = required
production
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Alarums Ltd. produces alarm clock radios with CD players built into them. They had the
following results for January 20XX:
January
Units:
Beginning inventory 0
Production 1,000
Sales 900
Ending inventory (all units are finished at the end of the period
— there is no work in process) 100
Costs:
Variable manufacturing costs per unit:
Direct materials $ 10.00
Direct labour 5.00
Variable manufacturing overhead 3.00
Variable marketing costs per unit 2.00
Fixed manufacturing overhead 8,000
Fixed marketing and administrative costs 12,000
Required
a. Prepare in good form a variable-costing format income statement for Alarums for the month of
January.
b. Prepare in good form an absorption-costing format income statement for Alarums for the month of
January.
c. Prepare a schedule reconciling the net incomes for January under the variable and absorption costing
methods.
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
a. ALARUMS LTD.
Variable Costing Income Statement
for the month ended January 31, 20XX
Sales $ 40,500 1
Less:
Variable cost of goods sold 16,200 2
Variable marketing costs 1,800 3
Contribution margin 22,500
Less:
Fixed manufacturing costs 8,000
Fixed marketing and administrative costs 12,000
Net income $ 2,500
b. ALARUMS LTD.
Absorption Costing Income Statement
for the month ended January 31, 20XX
Sales $ 40,500 1
Cost of goods sold 23,400 4
Gross margin 17,100
Marketing and administrative costs 13,800 5
Net income $ 3,300
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Boat Refit Inc. produces and sells custom parts for powerboats. The company uses a costing
system based on actual costs. Selected accounting and production information for fiscal 2002
is as follows:
Boat Refit had no work in process inventory at either the beginning or the end of fiscal 2002.
The company also did not have any finished goods inventory at the beginning of the fiscal year.
Required
a. Calculate the units sold in fiscal 2002.
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Since absorption costing net income exceeds variable costing net income, this means that sales must
have been less than production.
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Management has designated $30,000 as the firm’s minimum monthly cash balance. Other information
about the firm and its operations is as follows:
1. Sales revenues of $280,000, $336,000, and $250,000 are expected for October, November,
and December, respectively. All goods are sold on account.
2. The collection pattern for accounts receivable is 55% in the month of sale, 44% in the month
following the month of sale, and 1% uncollectible, which is set up as an allowance.
4. Management’s target ending balance of merchandise inventory is 10% of the current month’s
sales.
5. All accounts payable for inventory are paid in the month of purchase.
6. Other monthly expenses are $37,800, which includes $2,800 of amortization but does not
include bad debt expense.
7. Borrowings and investments can only be made in $5,000 increments at the end of a month. Interest is
charged at the rate of 10% per year; interest will be earned at the rate of 8% per year.
Required
b. Prepare the cash budgets for October and November including the effects of
financing (borrowing or investing)
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
a.
BEFORE you attempt to answer this part of the question, review the “formula” for the purchase
budget.
October November
Cost of goods sold (60% x sales) 168,000 201,600
Plus desired ending inventory 10% x 168,000 10% x 201,600 16,800 20,160
Total needs 184,800 221,760
Less beginning inventory 21,000 16,800
Cost of Purchases 163,800 204,960
October collections:
September sales collected: A/R - AFDA 98,560
October sales collected: 280,000 x 55% 154,000 252,560
Total cash inflows 282,560
Disbursements
Merchandise purchases 163,800
Other monthly expenses 37,800 – 2,800 35,000
Total disbursements (198,800)
Excess of cash inflows over outflows 83,760
Investment 50,000
Ending cash balance $ 33,760
November collections:
October sales collected: 280,000 x 44% 123,200
November sales collected: 336,000 x 55% 184,800 308,000
Total cash inflows 341,760
Disbursements
Merchandise purchases 204,960
Other monthly expenses 37,800 – 2,800 35,000
Total disbursements (239,960)
Excess of cash inflows over outflows 101,800
Interest on investments: 1/12 x 8% x 50,000 333
102,133
Investment 70,000
Ending cash balance $ 32,133
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
The Mosquito Nest Co. Inc. presents you with the following selected information:
Part of the trial balance at April 1, 1990 showed:
Debits Credits
Cash $ 6,000
Accounts receivable 19,500
Allowance for bad debts $ 2,400
Merchandise inventory 12,000
Accounts payable, merchandise 9,000
The company’s purchases are payable within ten days. Assume that one-third of the purchases
of any month are due and paid for in the following month.
The unit invoice cost of the merchandise purchased is $10. At the end of each month, the
company’s policy is to have an inventory equal to 50% of the following month’s unit sales.
Sales terms include a 1% discount if payment is made by the end of the calendar month in which
the sale took place. Past experience indicates that 60% of the billings will be collected during the
month of the sale, 30% in the following calendar month, 6% in the next following calendar
month, and 4% will be uncollectible.
Sales data:
Selling price per unit $ 15
February actual sales revenue 15,000
March actual sales revenue 45,000
April estimated sales revenue 36,000
May estimated sales revenue 27,000
Total sales expected in the fiscal year 450,000
Exclusive of bad debts, the total budgeted selling and general administrative expenses for the
fiscal year are estimated at $70,500, of which $21,000 is fixed expense (inclusive of a $9,000
annual depreciation charge). These fixed expenses are incurred uniformly throughout the year.
The balance of the selling and general administrative expenses varies with sales. Expenses are
paid as incurred.
REQUIRED:
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Receipts
From February: 6% x 15,000 900
From March: 30% x 45,000 13,500
From April: 60% x 36,000 x .99 21,384
41,784
Disbursements
Purchases: March 9,000
1
April 14,000 ( 23,000)
Calculation
1
April May
Sales $ $36,000 $27,000
Cost of sales
(2/3 of sales) 24,000 18,000
Desired end invent.
(50% of following month) 9,000
Total needs 33,000
Beginning inventory
(Given) (12,000)
Purchases 21,000
Cash disbursement for April purchase
(2/3 paid in April 21,000 x 2/3) $14,000
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Stromwitz Co. Ltd., and sells Widgets. Budgeted unit sales for the first six months of 1992 are as follows:
Month Sales
January 3,500
February 4,000
March 6,000
April 8,000
May 12,000
June 12,000
Each Widget requires three pounds of direct materials which cost $5.00 per pound.
Stromwitz’s inventory policy is to have available at the end of each month finished units equal to 25%
of the following month’s sales. For direct materials, their policy is to have on hand at the end of each
month enough material for 30% of the following month’s production.
A total of 50% of purchases are paid for in the month of purchase and 50% in the following month.
REQUIRED:
Compute the April cash disbursements for payment of accounts payable regarding direct materials
purchases.
Solution
March April May
Sales 6,000 8,000 12,000
FG desired ending inv. 2,0002 3,0003 3,0003
FG, beginning (1,500)1 (2,000) (3,000)
Produced 6,500 9,000 12,000
Calculations
1
25%(6,000) = 1,500
2
25%(8,000) = 2,000
3
25%(12,000) = 3,000
March April
Units to produce 6,500 9,000 Payment
RM per unit 3 3
RM needs 19,500 27,000 March: $108,750 x ½ = $ 54,375
DM, ending 8,1002 10,8003 April: $148,500 x ½ = 74,250
DM, beginning (5,850)1 (8,100)2 $128,625
Total needs 21,750 29,700
Unit cost $5 $5
Total cost $108,750 $148,500
Calculations
1
30%(6,500 x 3) = 5,850
2
30%(9,000 x 3) = 8,100
3
30%(12,000 x 3) = 10,800
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Q1. Parts (a), (b), (c), and (d) refer to the following information: March 2003 exam
The following information is from Skiros Company’s records for the year ended December 31, 2002:
Sales $1,400,000
Cost of goods manufactured:
Variable $ 630,000
Fixed $ 315,000
Operating expenses:
Variable $ 98,000
Fixed $ 140,000
Units manufactured 70,000 units
Units sold 60,000 units
Finished goods inventory, January 1, 2002 0 units
There were no work in process inventories at the beginning or end of the year.
a. What would be the cost of the ending finished goods inventory cost under variable costing?
answer: 1)
b. What would be the cost of the ending finished goods inventory cost under absorption costing?
answer: 4)
c. What would be the operating profit for the year under absorption costing?
d. What would be the operating profit for the year under variable costing?
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
What was the May variance from the master budget operating income?
Q3. A company has the following incomplete production budget data for the first quarter:
In the previous December, ending inventory was 100 units, which was the minimum required, at 10%
of projected sales units in the coming month.
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MA1 2007-2008 MANAGEMENT ACCOUNTING MODULE 6
Q4. Which of the following statements regarding the use of variable costing versus absorption costing is
true?
1) Absorption costing treats all costs of production as product costs, regardless of whether the
costs are variable or fixed.
2) Absorption costing treats only variable costs of production as product costs.
3) Absorption costing treats only fixed costs of production as product costs.
4) Absorption costing harmonizes fully with the contribution approach and cost-volume-profit
concepts.
Q5. How does the accounting treatment of selling and administration costs differ between absorption and
variable costing if more units are produced than are sold?
1) The variable portion is added to the cost of ending inventory based on a pro rata portion of
units produced to those sold.
2) The fixed portion is added to the costs of ending inventory based on a pro rata portion of
units produced to those sold.
3) There is no difference in the treatment.
4) Both fixed and variable portions are added to the cost of ending inventory based on a pro rata
portion of units produced to those sold. Fixed selling and administration
costs are treated as period costs
March 2007 exam answer: 3) under both methods.
Q6. Use the following information to answer parts (a) and (b) December 2006 exam
For the year ended December 31, 2005, Ventor Corporation has the following records of its costs:
Direct materials used $ 600,000
Direct labour 200,000
Variable manufacturing overhead 100,000
Fixed manufacturing overhead 160,000
Selling and administrative costs (variable) 80,000
Selling and administrative costs (fixed) 40,000
a. If Ventor uses variable costing, what would the inventoriable costs for the year ended
December 31, 2005 be?
For variable costing, only variable manufacturing costs
1) $ 800,000 are inventoriable:
2) $ 900,000
Total inventoriable costs = Direct material + Direct
3) $ 980,000
labour + Variable manufacturing overhead
4) $ 1,060,000
= $600,000 + 200,000 + 100,000 = $900,000
December 2007 exam answer: 2)
b. If Ventor were to use absorption costing instead, what would the inventoriable costs be?
For absorption costing, all costs of production are
1) $ 800,000 capitalized into inventory:
2) $ 900,000
3) $ 1,060,000 Total inventoriable costs = Variable manufacturing cost
4) $ 1,180,000 + Fixed manufacturing overhead
= $900,000 + $160,000 = $1,060,000
December 2007 exam answer: 3)
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