Chapter 22: 5RQ (page 1228)
Explain the difference between strategic and operational budgets
The strategic budget is for three to ten years, whereas the span of the operational budget is less than or equal to one year.
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Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2018 and 280 tents in 2019. At the beginning of 2018, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year’s sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?
Preparing a financial budget
This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).
Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.
Requirements
1. Prepare Piedmont Computer Company’s cash budget for January and February 2020.
2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?
Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, directing, controlling, coordinating and communicating, and benchmarking.
1. Managers are required to think about future business activities.
2. Managers use feedback to identify corrective action.
3. Managers use results to evaluate employees’ performance.
4. Managers work with managers in other divisions.
Preparing an operating budget—direct materials, direct labor, and manufacturing overhead budgets
Grady, Inc. manufactures model airplane kits and projects production at 650, 500, 450, and 600 kits for the next four quarters. Direct materials are 4 ounces of plastic per kit and the plastic costs \(1 per ounce. Indirect materials are considered insignificant and are not included in the budgeting process. Beginning Raw Materials Inventory is 850 ounces, and the company desires to end each quarter with 10% of the materials needed for the next quarter’s production. Grady desires a balance of 200 ounces in Raw Materials Inventory at the end of the fourth quarter. Each kit requires 0.10 hours of direct labor at an average cost of \)10 per hour. Manufacturing overhead is allocated using direct labor hours as the allocation base. Variable overhead is \(0.20 per kit, and fixed overhead is \)165 per quarter. Prepare Grady’s direct materials budget, direct labor budget, and manufacturing overhead budget for the year. Round the direct labor hours needed for production, budgeted overhead costs, and predetermined overhead allocation rate to two decimal places. Round other amounts to the nearest whole number.
Using sensitivity analysis Rucker Company prepared the following budgeted income statement for 2019:
Requirements
1. Prepare a budgeted income statement with columns for 700 units, 1,300 units, and 1,700 units sold.
2. How might managers use this type of budgeted income statement?
3. How might spreadsheet software such as Excel assist in this type of analysis?
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