MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES

By Dennis Caplan, University at Albany (State University of New York)

CHAPTER 20: Operating Budgets

Exercises and Problems

20-1: ZFN anticipates sales of 20,000 units in March, 30,000 units in April, and 40,000 units in May. The company wants to have 20% of next month’s sales on hand at the end of the previous month. In fact, at the beginning of March, the company has 4,000 units on hand. How many units should the company produce during April?

20-2: Yue Yeung Industries has sales of $10,000 in May, $20,000 in June, and $30,000 in July. The company collects 25% of sales in the month of sale, and the remaining 75% in the following month. Calculate Accounts Receivable at June 30.

20-3: A merchandising company expects to sell 300 units in April, 400 units in May, and 500 units in June. The company plans to have 30% of each month’s sales, plus an additional 50 units, on hand in inventory at the beginning of each month. How many units should the company plan to purchase in May?

20-4: Quolala is a merchandising company. Quolala expects unit sales for the coming year as follows:

March 15,000

April 23,000

May 31,000

June 47,000

July 56,000

The average selling price is $23 per unit. The company’s policy is to maintain month-end inventory levels at 30% of next month’s anticipated sales. All sales are made on credit, and expected collections are as follows:

70% collected in the month of sale

20% collected in the month following the sale

10% collected in the second month following the sale.

Cost of goods sold equals 80% of the sales price. The company pays cash for all purchases of inventory, at the time of purchase.

Required:

A) How much inventory (how many units) will Quolala expect to purchase in June?

B) What will be the dollar amount of accounts receivable at the end of July?

C) How much should the company expect to pay (i.e., credits to cash, debits to inventory) for purchases of inventory in May?

D) What can the company expect to collect in receivables (i.e., debits to cash, credits to accounts receivable) in June?

20-5: The Gordon Candy Company is a wholesaler for peanut brittle and other candies. Gordon’s sales of peanut brittle for the last four months of 2006 are projected as follows:

September 150 cases

October 170 cases

November 190 cases

December 230 cases

Bill Gordon, founder, Chairman, President, and Chief Executive Officer of the company, plans to sell each case for $150, which represents a 25% mark-up over cost (Note: an item purchased for $1 and sold for $1.60 would represent a 60% mark-up over cost).

Bill manages his inventory purchases so that he has 45% of each month’s sales on hand at the beginning of the month. Bill makes all purchases on credit. Bill pays 60% of credit purchases in the month of purchase, and pays the remaining 40% in the month following the purchase.

On average, Bill’s customers pay cash at the time of purchase for 50% of purchases, and buy the remaining 50% on credit. Credit purchases are paid to the Gordon Candy Company as follows:

40% in the month of purchase

35% in the month immediately following the purchase

20% in the second month following the purchase

5% bad debt expense (Bill never collects this amount).

Required: Calculate the cash inflows from sales of peanut brittle and the cash outflows from purchases of peanut brittle, for November.

20-6: California Concepts sells hair products. Sales of shampoo for the last half of 2005 are projected as follows:

September: 100 cases

October: 120 cases

November: 130 cases

December: 160 cases

California Concepts plans to sell each case for $25, which represents a $7 mark-up over cost. The company manages its inventory purchases so that it always has 70% of each month’s unit sales on hand at the beginning of that month. The company buys inventory on credit. The company pays for these credit purchases in the month following the purchase.

On average, the company’s customers pay cash at the time of purchase for 60% of their purchases, and buy the remaining 40% on credit. These credit purchases are paid to California Concepts as follows:

30% in the month of purchase

40% in the month immediately following the purchase

30% in the second month following the purchase

Required:

A) Calculate Accounts Receivable for sales of shampoo as of the end of November, and Accounts Payable for purchases of shampoo as of the end of November.

B) Calculate net cash flows from sales and purchases of shampoo that occur in November.

20-7: The Piombino Manufacturing Company anticipates sales as follows:

September October November December

40,000 units 45,000 units 55,000 units 62,000 units

Piombino plans to have 35% of each month’s sales on hand as finished goods inventory at the beginning of the month. The manufacturing process requires 30 days (one month) from start to finish. Each unit requires two pounds of aluminum, and the aluminum is put into the production process at the beginning of production (day one of the 30 day production cycle). Aluminum costs $15 per pound. The company wants to have 50,000 pounds of aluminum raw materials on hand at the beginning of each month. Purchases of aluminum are paid 50% in the first month after purchase and 50% in the second month after purchase.

Required: How much money will be disbursed in November for aluminum?

20-8: Mary River Distributors sells brandy and other alcoholic beverages. Sales of brandy for the last four months of 2005 are projected as follows:

September 1,700 cases

October 1,900 cases

November 2,300 cases

December 2,800 cases

The increase through the year arises due to the increasing popularity of brandy as the weather turns cold, and particularly the high consumption around the holiday season.

Mary River plans to sell each case for $250, which represents a 35% mark-up over cost (Note: an item purchased for $1 and sold for $1.60 would represent a 60% mark-up).

Mary River manages its inventory purchases so that it always has 40% of each month’s sales on hand at the beginning of the month. The company buys all brandy on credit. The company pays 60% of credit purchases in the month of purchase, and pays the remaining 40% in the month following the purchase.

On average, Mary River’s customers pay cash at the time of purchase for 20% of their purchases, and buy the remaining 80% on credit. These credit purchases are paid to Mary River as follows:

50% in the month of purchase

25% in the month immediately following the purchase

20% in the second month following the purchase

5% bad debt expense (Mary River never collects this amount).

Required: Because “cash is king,” Mary River asks you to calculate the net cash inflows (receipts less disbursements) from sales and purchases of brandy, in November.

20-9: Muravera, Inc., budgets sales as follows:

April May June July August September October

$520,000 600,000 580,000 450,000 420,000 470,000 500,000

Sales are 30% cash sales and 70% credit sales. Credit sales are collected, on average, according to the following schedule:

In the month of purchase In the first month after purchase In the second month after purchase In the third month after purchase In the fourth month after purchase

25% 30% 20% 15% 10% 100%

Required: If all goes according to the budget, what will be the balance in Accounts Receivable at September 30?

20-10: The Dorsely Manufacturing Company anticipates sales of 62,000 units in April, 55,000 units in May, 45,000 units in June, 38,000 units in July, and 29,000 units in August. Dorsely plans to have 40% of each month’s sales on hand as finished goods inventory at the beginning of the month. The manufacturing process requires 60 days (two months) from start to finish. Each unit requires three feet of wire, and the wire is put into the production process half-way through production (day 30 of the 60-day production cycle). Wire costs $7 per foot. The company wants to have 110% of each month’s wire raw materials requirements on hand at the beginning of the month. Purchases of wire are paid 50% in the month of purchase and 50% in the first month after purchase.

Required: What will be the balance for Accounts Payable for wire at June 30?

20-11: Edwin’s Clothing Store expects revenues of $27,000 in March, $32,000 in April, $33,000 in May, and $36,000 in June. Eighty percent of these revenues are cash sales, and the remaining 20% are credit sales. Bad debt expense is accrued monthly such that the allowance for uncollectible accounts (the contra-asset balance sheet account) is 10% of the gross receivables at the end of any given month. Credit sales are collected as follows: 10% in the month of sale, 35% in the month following the sale, 25% in the second month following the sale, and 20% in the third month following the sale. Ten percent is never collected, and uncollected accounts receivable are written off at the end of the third month following the sale.

Required: Calculate net accounts receivable (net of the allowance for uncollectible accounts) as of June 30 (after the closing entries for the month have been made).

20-12: The Trinidad Community Hospital expects patient revenues of $240,000 in March, $250,000 in April, $270,000 in May, and $260,000 in June. Anticipated collections are as follows: 40% of patient revenues are from Medicare patients, and Medicare reimburses the hospital in the month after the services are provided (i.e. payment is received the month after the revenue has been recognized). 10% of the revenues are from Medicaid patients, and Medicaid reimburses the hospital two months after the services are provided. 30% of the revenues are from patients covered by private insurance, and the insurance companies reimburse the hospital 50% in the month of service, and 50% in the month following service. 20% of the patients are not covered by insurance at all. Among these patients, there is a bad debt rate of 30%. Bad debt expense is accrued in the month the revenue is earned. The revenue that is collected from these patients is received as follows: 10% in the month of service, 30% in the month following service, 40% in the second month following service, and 20% in the third month following service.

Required: Calculate patient receivables at June 30, net of the allowance for uncollectible accounts.

Return to Chapter 20

Go to the Next Chapter

Return to the Table of Contents

Management Accounting Concepts and Techniques; copyright 2006; most recent update: November 2010

For a printer-friendly version, contact Dennis Caplan at dcaplan@uamail.albany.edu