2024 – Budgeting Comments Exercise 6 13 Revised Select one of the following quotes from the text to discuss Clearly state whether

7-9. Basic Budget Relationships. Analyze the following situations.

1. Evan Corporation has a $75,000 balance in its accounts receivable account at the beginning of the budget month. Sales on account thismonth should be $160,000, and 70% of those sales should be collected in the month of the sale. In addition, 60% of the beginningbalance in accounts receivable is expected to be collected this month. What is expected to be the budget month’s ending balance ofaccounts receivable?
2. Henry Supply, a wholesaler, estimated sales of $750,000 for the third quarter and $800,000 for the fourth quarter. The estimated grossprofit rate is 40%. The June 30 inventory is $120,000. The targeted inventory at the end of the third quarter is to be 20% of fourthquarter sales volume. What quantity of inventory should be purchased in the third quarter?
3. Schneider’s Wholesale Apparel is budgeting for the year. The beginning accounts receivable and partial sales data are given below:
   First Quarter
   Second Quarter
   Accounts Receivable
   $200,000
   Sales
   $600,000
   $800,000
   Sales are all on credit, and 80% are collected in the quarter of sale. The remainder is collected in the next quarter. What are budgetedcash collections in the second quarter?

Question:

Find the requested amount in each situation.

7-10. Various Budget Schedules. Sloviter Candies is preparing a budget for the second quarter of the current calendar year. The Marchending inventory of merchandise was $106,000, which was higher than expected. The company prefers to carry ending inventory amountingto the expected sales volume of the next two months. Purchases of merchandise are paid half in the month of purchase and half in the monthfollowing purchase, and the balance due on accounts payable at the end of March was $24,000. Budgeted sales are as follows:

April

<

$50,000

July

$72,000

<

May

<

48,000

August

56,000

June

60,000

>september

September

60,000

Questions:

1. Assume that a 25% gross profit margin is budgeted. Prepare a budget schedule that shows the following for April, May, and June:
   1. Cost of goods sold
   2. Purchases required
   3. Cash payments for merchandise
2. Assume that the accounts receivable balance on April 1 was $35,000 and that three-fourths of all customers pay in the month of saleand one-fourth in the month following the sale. Prepare a budget showing the cash receipts from accounts receivable for April, May, andJune.

7-11. Adequacy of Cash Flow With “What Ifs.” Marcy Lynn is preparing a budget of cash receipts and disbursements for Newman FoodServices, Inc. Some sales are for cash, and the remainder is billed on a contract basis. Sales for April to August are:

Cash Sales

Billed Sales

Total Sales

April

$65,000

$40,000

$105,000

<

May

72,000

46,000

118,000

June

84,000

68,000

152,000

July

88,000

72,000

160,000

August

86,000

70,000

156,000

Of the billed sales, 65% is collected during the month of sale; the other 35% is collected the next month.

Food costs amounting to 75% of sales must be paid during the month of sales. Monthly operating costs are $24,000. The cash balance at May1 amounted to $7,000. If the cash balance is more than $20,000 on August 31, Marcy and the other shareholders will receive the excess asdividends.

Questions (use of spreadsheet software is recommended):

1. Prepare a budget of cash receipts and disbursements for each month, May to August, inclusive.
2. Compute the amount, if any, that can be paid in dividends at the end of August.
3. What is the impact on possible dividend payments in the following situations?
   1. “What if” competitive pressures cause food costs to increase to 80% of sales?
   2. “What if” collections of billed sales slow to 50% in the month of sale and 50% in the next month?

7-12. Cash Budgeting. Benporath Corporation, a Melbourne, Australia, firm, is preparing a cash budget for 2020 using the following data:

1. Each month, 70% of sales is on credit. Of credit sales, 60% is collected in the month of sale and 40% in the next month.
2. Cost of goods sold is 70% of sales. Of purchases, 60% is paid when purchased; and the remainder is paid in the next month.
3. Planned inventory is 40% of the next month’s sales. Budgeted purchases in February were A$60,000.
4. Operating expenses are A$30,000 per month, including A$2,000 of depreciation expense. These are paid when incurred.
5. Forecast cash balance as of March 1 is A$20,000, which is the target level.

Budgeted sales, in Australian dollars, for a portion of 2020 are: February A$90,000, March A$120,000, April A$110,000, and May A$100,000.

Questions:

1. Create a cash forecast for March.
2. If Benporath plans to buy a computer system for A$20,000, can the firm pay for it and keep a “safe” cash level? What are the main risks?

7-13. Managerial Behavior and Budget Ethics. Shulamith Corporation has seen a new revision of the budget system each year for the pastfive years. Bonuses followed strong budget performances. The following are changes made during the past few years:

• Change 1: One year top management felt that, since wages were 60% of total expenses, the budget should simply focus on keeping nextyear’s headcounts equal to or below the current year’s level. Most managers did this by shifting work to outside contractors.
• Change 2: Concern over customer service caused top management to budget the number of back orders issued because an item wasnot available from existing inventory. A trip to Tahiti was given to managers with zero actual back orders.
• Change 3: Because corporate expenses were viewed as being too high, the president, Jonathan Klein, decided to allocate all home officeexpenses to the nine divisions. Each division head budgeted down to “net income” and was evaluated on the comparison of actual toplanned “net income.”
• Change 4: Also, at the final budget approval stage for the last several years, Klein forced each division to reduce its total expenses by aneven 5% across the board. This year, Klein increased the across-the-board cuts to 10%.

Question:

Comment on Shulamith Corporation’s approach to budgeting and the possible impacts each change might have on the budget process andmanagers’ behavior.

“One major criticism of budgeting is that it is used as a ‘cost reduction’ tool rather than a ‘cost control’ tool.  The objective of the budget is to control costs at an efficient level of operation.”

“There are generally three benefits from allowing employees to participate in developing the budget:  (1) Employees tend to accept the budget as their own plan of action.  (2) Participation tends to increase morale among employees and toward management.  (3) Employee cohesiveness is increased, and productivity will also increase if dictated by the group norm.

“Even though budgets are quantitative tools, considerable emotion is connected to budgeting.  The individual in control often sees the budget as a means of getting things done.  People being controlled often have feelings of anxiety because their success and promotion are tied directly to the budget.