1 problem 9 23 cash budget with supporting schedules changing assumptions lo9 2 lo9 3580754

1. Problem 9-23 Cash Budget with Supporting Schedules; Changing Assumptions [LO9-2, LO9-4, LO9-8]

Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter:


  1. Budgeted monthly absorption costing income statements for April–July are:


  April May June July
Sales $ 630,000   $ 1,130,000   $ 590,000   $ 490,000  
Cost of goods sold   441,000     791,000     413,000     343,000  
Gross margin   189,000     339,000     177,000     147,000  
Selling and administrative expenses:                        
Selling expense   117,000     108,000     70,000     49,000  
Administrative expense*   49,500     67,200     43,400     47,000  
Total selling and administrative expenses   166,500     175,200     113,400     96,000  
Net operating income $ 22,500   $ 163,800   $ 63,600   $ 51,000  

*Includes $31,000 of depreciation each month.


  1. Sales are 20% for cash and 80% on account.
  2. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale; and the remaining 20% collected in the second month following the month of sale. February’s sales totaled $275,000, and March’s sales totaled $290,000.
  3. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $125,300.
  4. Each month’s ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $88,200.
  5. Dividends of $38,000 will be declared and paid in April.
  6. Land costing $46,000 will be purchased for cash in May.
  7. The cash balance at March 31 is $60,000; the company must maintain a cash balance of atleast $40,000 at the end of each month.
  8. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner lows:


  1. Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section.
  2. The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $88,200 and accounts payable for inventory purchases at March 31 remains $125,300.



  1. Using the president’s new assumptions in (1) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total.


2. Problem 5-19 Variable Costing Income Statement; Reconciliation [LO5-2, LO5-3]

During Heaton Company’s first two years of operations, the company reported absorption costing net operating income as follows:


  Year 1   Year 2
Sales (@ $61 per unit) $ 1,037,000     $ 1,647,000  
Cost of goods sold (@ $41 per unit)   697,000       1,107,000  
Gross margin   340,000       540,000  
Selling and administrative expenses*   301,000       331,000  
Net operating income $ 39,000   $ 209,000  


* $3 per unit variable; $250,000 fixed each year.

The company’s $41 unit product cost is computed as follows:


Direct materials $ 7  
Direct labor   13  
Variable manufacturing overhead   5  
Fixed manufacturing overhead ($352,000 ÷ 22,000 units)   16  
Absorption costing unit product cost $ 41  


Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists
of depreciation charges on production equipment and buildings.

Production and cost data for the two years are:


  Year 1   Year 2
Units produced   22,000       22,000  
Units sold   17,000       27,000  



  1. Prepare a variable costing contribution format income statement for each year.


3. Exercise 6-2 First Stage Allocation [LO6-2]

SecuriCorp operates a fleet of armored cars that make scheduled pickups and deliveries in the Los Angeles area. The company is implementing an activity-based costing system that has four activity cost pools: Travel, Pickup and Delivery, Customer Service, and Other. The activity measures are miles for the Travel cost pool, number of pickups and deliveries for the Pickup and Delivery cost pool, and number of customers for the Customer Service cost pool. The Other cost pool has no activity measure because it is an organization-sustaining activity. The following costs will be assigned using the activity-based costing system:


Driver and guard wages $ 1,140,000
Vehicle operating expense   570,000
Vehicle depreciation   450,000
Customer representative salaries and expenses   480,000
Office expenses   340,000
Administrative expenses   640,000
Total cost $ 3,620,000


The distribution of resource consumption across the activity cost pools is as follows:


  Travel Pickup
Other Totals
Driver and guard wages 50 % 35 % 10 % 5 % 100 %
Vehicle operating expense 70 % 5 % 0 % 25 % 100 %
Vehicle depreciation 60 % 15 % 0 % 25 % 100 %
Customer representative salaries and expenses 0 % 0 % 90 % 10 % 100 %
Office expenses 0 % 20 % 30 % 50 % 100 %
Administrative expenses 0 % 5 % 60 % 35 % 100 %



Complete the first stage allocations of costs to activity cost pools.



4. Exercise 6-3 Compute Activity Rates [LO6-3]

Green Thumb Gardening is a small gardening service that uses activity-based costing to estimate costs for pricing and other purposes. The proprietor of the company believes that costs are driven primarily by the size of customer lawns, the size of customer garden beds, the distance to travel to customers, and the number of customers. In addition, the costs of maintaining garden beds depends on whether the beds are low maintenance beds (mainly ordinary trees and shrubs) or high maintenance beds (mainly flowers and exotic plants). Accordingly, the company uses the five activity cost pools listed below:


Activity Cost Pool Activity Measure
Caring for lawn Square feet of lawn
Caring for garden beds–low maintenance Square feet of low maintenance beds
Caring for garden beds–high maintenance Square feet of high maintenance beds
Travel to jobs Miles
Customer billing and service Number of customers


The company has already completed its first stage allocations of costs and has summarized its annual costs and activity as follows:


Activity Cost Pool Estimated
Expected Activity
Caring for lawn $ 82,600 165,000 square feet of lawn
Caring for garden beds–low maintenance $ 35,200 27,000 square feet of low maintenance beds
Caring for garden beds–high maintenance $ 56,280 21,000 square feet of high maintenance beds
Travel to jobs $ 4,600 18,000 miles
Customer billing and service $ 9,500 38 customers




Compute the activity rate for each of the activity cost pools. (Round your answers to 2 decimal places.)



5. Problem 7-18 Relevant Cost Analysis in a Variety of Situations [LO 7-2, LO 7-3, LO 7-4]

Andretti Company has a single product called a Dak. The company normally produces and sells 83,000 Daks each year at a selling price of $44 per unit. The company’s unit costs at this level of activity are given below:


Direct materials $ 8.50  
Direct labor   9.00  
Variable manufacturing overhead   2.60  
Fixed manufacturing overhead   8.00 ($664,000 total)
Variable selling expenses   2.70  
Fixed selling expenses   4.50 ($373,500 total)
Total cost per unit $ 35.30  


A number of questions relating to the production and sale of Daks follow. Each question is independent.



1-a. Assume that Andretti Company has sufficient capacity to produce 103,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 83,000 units each year if it were willing to increase the fixed selling expenses by $100,000. Calculate the incremental net operating income. (Round your answers to the nearest whole number.)



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