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CHAPTER 7 - Practice Problem

# CHAPTER 7 - Practice Problem - CHAPTER7 COMPREHENSIVE...

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CHAPTER 7 COMPREHENSIVE  BUDGETING EXAMPLE

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COMPREHENSIVE BUDGETING Royal Company is preparing budgets for the 2nd  quarter, which ends on June 30.  Budgeted sales of the company’s only product  for the next five months are: April 20,000 units May 50,000 units June 30,000 units July 25,000 units August 15,000 units The selling price is \$10 per unit. The following elements of the master budget  will be prepared in this example:
COMPREHENSIVE BUDGETING 1. Sales budget (with a schedule of expected      cash collections). 2. Production budget. 3. Direct materials budget (with a schedule of  expected cash disbursements for materials). 4. Direct labor budget. 5. Manufacturing overhead budget. 6. Ending finished goods inventory budget. 7. Selling and administrative expense budget. 8. Cash budget. 9. Budgeted income statement. 10. Budgeted balance sheet.

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SALES BUDGET April May June Quarter Budgeted unit sales 20,000 50,000 30,000 100,000 Selling price per unit      ×  \$10      ×  \$10      ×  \$10         ×  \$10 Total sales \$200,000 \$500,000 \$300,000 \$1,000,000
SCHEDULE OF EXPECTED CASH  COLLECTIONS  Additional data: All sales are on account. The company collects 70% of these  credit  sales in the month of the sale;  25% are  collected in the month following  sale; and the  remaining 5% are  uncollectible. The accounts receivable balance on  March 31  was \$30,000. All of this  balance was  collectible.

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SCHEDULE OF EXPECTED CASH  COLLECTIONS April May June Quarter Accounts receivable  beginning balance \$ 30,000 \$ 30,000 April sales 70%  ×  \$200,000 140,000 140,000 25%  ×  \$200,000 \$ 50,000 50,000 May sales 70%  ×  \$500,000 350,000 350,000 25%  ×  \$500,000 \$125,000 125,000 June sales 70%  ×  \$300,000                             210,000   210,000 Total cash collections \$170,000 \$400,000 \$335,000 \$905,000
PRODUCTION BUDGET  Additional data: The company desires to have  inventory on hand at the end of  each  month equal to 20% of the  following  month’s budgeted unit  sales. On March 31, 4,000 units were on  hand.

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PRODUCTION BUDGET April May June July Budgeted unit sales  20,000 50,000 30,000 25,000  Add desired ending inventory 10,000   6,000   5,000   3,000 * Total needs 30,000 56,000 35,000 28,000  Less beginning inventory   4,000 10,000   6,000   5,000   Required production 26,000 46,000 29,000 23,000   * Budgeted sales for August = 15,000 units.    Desired ending inventory in July = 15,000 units  ×  20% = 3,000 units.
DIRECT MATERIALS BUDGET 5 pounds of material are required  per unit  of product. Management desires to have  materials on  hand at the end of  each  month equal to 10%  of the  following month’s production needs.

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CHAPTER 7 - Practice Problem - CHAPTER7 COMPREHENSIVE...

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