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MODULE 6

PARTS 3 and 4: Master Budget Formulas

SALES BUDGET
Forecasted units sold x selling price = total sales
PRODUCTION BUDGET
Budgeted sales + desired ending inventory beginning inventory = required
production
DIRECT MATERIALS BUDGET
(Units to produce x raw materials per unit) + desired ending inventory
beginning inventory = raw materials to purchase
DIRECT LABOUR BUDGET
Units to produce x direct labour time per unit x direct labour cost per hour =
total direct labour cost
MANUFACTURING OVERHEAD BUDGET
(Direct labour hours x variable overhead rate) + FMOH depreciation= cash
disbursements for overhead
ENDING FINISHED GOOD INVENTORY BUDGET
(Direct materials cost per unit + direct labour cost per unit + manufacturing
overhead per unit) x ending finished goods inventory in units = ending
finished goods inventory
SELLING AND ADMINISTRATIVE EXPENSE BUDGET
(Unit sales x variable selling and administrative expense per unit) + fixed
selling and administrative expenses = total selling and administrative
expenses

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PART 3 Slides 17 20: Question 4 March 2005

Alarums Ltd. produces alarm clock radios with CD players built into them. They had the
following results for January 20XX:
January
Units:
Beginning inventory
0
Production
1,000
Sales
900
Ending inventory (all units are finished at the end of the period
there is no work in process)
100
Costs:
Variable manufacturing costs per unit:
Direct materials
Direct labour
Variable manufacturing overhead
Variable marketing costs per unit
Fixed manufacturing overhead
Fixed marketing and administrative costs

$ 10.00
5.00
3.00
2.00
8,000
12,000

Sales price per unit

$ 45.00

Required
a. Prepare in good form a variable-costing format income statement for Alarums for the month of
January.
b. Prepare in good form an absorption-costing format income statement for Alarums for the month of
January.
c. Prepare a schedule reconciling the net incomes for January under the variable and absorption costing
methods.

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PART 3 Slides 17 20: Question 4 March 2005 Solution

a.

ALARUMS LTD.
Variable Costing Income Statement
for the month ended January 31, 20XX
Sales
Less:

$ 40,500 1

Variable cost of goods sold

Variable marketing costs
Contribution margin
Less:
Fixed manufacturing costs
Fixed marketing and administrative costs
Net income
b.

8,000
12,000
$ 2,500

ALARUMS LTD.
Absorption Costing Income Statement
for the month ended January 31, 20XX
Sales
Cost of goods sold
Gross margin
Marketing and administrative costs
Net income

c.

16,200 2
1,800 3
22,500

$ 40,500 1
23,400 4
17,100
13,800 5
$ 3,300

Reconciliation of net incomes:

Net income under absorption costing
Less: Costs inventoried under absorption costing [100 ($8,000/1,000)]
Net income under variable costing

$ 3,300
(800)
$ 2,500

1 900

$45 = $40,500
$18 = $16,200
3 900 $2 = $1,800
4 900 $18 + (8,000/1,000) 900 = $23,400
5 $12,000 + (900 $2) = $13,800
2 900

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PART 3 Slides 17 20: Question 2 June 2003

Boat Refit Inc. produces and sells custom parts for powerboats. The company uses a costing
system based on actual costs. Selected accounting and production information for fiscal 2002
is as follows:
Net income (under absorption costing)
$ 400,000
Sales
$ 3,400,000
Fixed factory overhead
$ 600,000
Fixed selling and administrative costs (all these costs are fixed) $ 400,000
Net income (under variable costing)
$ 310,000
Units produced
2,000
Units sold
?
Boat Refit had no work in process inventory at either the beginning or the end of fiscal 2002.
The company also did not have any finished goods inventory at the beginning of the fiscal year.
Required
a. Calculate the units sold in fiscal 2002.
b. Calculate the total contribution margin under variable costing.
c. Calculate the gross margin under absorption costing.
d. Calculate the cost per unit sold under variable costing.
e. Calculate the cost per unit sold under absorption costing.

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PART 3 Slides 17 20: Question 2 June 2003 Solution

a.

Number of units sold:

Net income under absorption costing
Net income under variable costing
Absorption costing exceeds variable costing $

$ 400,000
310,000
90,000

Since absorption costing net income exceeds variable costing net income, this means that sales must
have been less than production.
Fixed factory overhead/Units produced = Cost per unit
$600,000/2,000 = $300
Therefore, the number of units transferred to inventory = $90,000/$300 = 300 units.
Sales for May = 2,000 300 = 1,700 units
b.

Contribution margin under variable costing:

Sales
$3,400,000
Variable costs
?
Contribution margin
?
Fixed overhead
(600,000)
Fixed selling and admin. Expenses
(400,000)
Net income
310,000
3,400,000 600,000 - 400,000 310,000 = variable costs of $2,090,000
3,400,000 2,090,000 = 1,310,000 contribution margin

c.

Gross margin under absorption costing:

Sales
Cost of goods sold
Gross margin
Fixed selling and administrative expenses
Net income
3,400,000 400,000 400,000 = cost of goods sold of $2,600,000

3,400,000
?
?
(400,000)
400,000

3,400,000 2,600,000 = $800,000 Gross margin

d.

Cost per unit sold under variable costing:

Contribution margin
Add back variable manufacturing costs
Sales

$ 1,310,000
2,090,000
$ 3,400,000

Cost per unit ($2,090,000/1,700)

e.

$ 1,229.41

Cost per unit sold under absorption costing:

Fixed costs of production/Production level = Fixed cost per unit
$600,000/2,000 units = $300
Cost per unit = $1,229.41 + $300 = $1,529.41
OR Cost of goods sold calculated in part c of $2,600,000 / 1700 units = $1,529,41

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MODULE 6

PART 7 Slides 80-82 Exercise 9-1, page 410

1.

July

August

September

Total

$
43,000
$ 43,000
378,000 $ 54,000
432,000
120,000
420,000 $ 60,000
600,000
180,000
630,000
810,000
100,000
100,000
$541,000 $654,000 $790,000 $1,985,000

May sales: $430,000 10%

June sales: $540,000 70%, 10%
July sales: $600,000 20%, 70%, 10%
August sales: $900,000 20%, 70%
September sales: $500,000 20%
Total cash collections

2. Accounts receivable at September 30:

From August sales: $900,000 10% ..........................................................................
$ 90,000
From September sales:
$500,000 (70% + 10%) ......................................................................................... 400,000
Total accounts receivable .............................................................................................$490,000
PART 7 Slides 80-82 Exercise 9-2, page 410

Budgeted sales in units

July
30,000

Add desired ending inventory*

Total needs
Less beginning inventory
Required production

August September
45,000
60,000

Quarter
135,000

4,500

6,000

5,000

5,000

34,500

51,000

65,000

140,000

3,000

4,500

6,000

3,000

31,500

46,500

59,000

137,000

*10% of the following months sales

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MODULE 6

PART 8 Slides 83 86: Question 5 March 2004

OMB Ltd.s September balance sheet contains the following information:
Cash
$ 30,000 (dr)
Accounts receivable
100,800 (dr)
Allowance for doubtful accounts
2,240 (cr)
Merchandise inventory
21,000 (dr)
Management has designated $30,000 as the firms minimum monthly cash balance. Other information
about the firm and its operations is as follows:
1.

Sales revenues of $280,000, $336,000, and $250,000 are expected for October, November,
and December, respectively. All goods are sold on account.

2.

The collection pattern for accounts receivable is 55% in the month of sale, 44% in the month
following the month of sale, and 1% uncollectible, which is set up as an allowance.

3.

Cost of goods sold is 60% of sales revenues.

4.

Managements target ending balance of merchandise inventory is 10% of the current months
sales.

5.

All accounts payable for inventory are paid in the month of purchase.

6.

Other monthly expenses are $37,800, which includes $2,800 of amortization but does not
include bad debt expense.

7. Borrowings and investments can only be made in $5,000 increments at the end of a month. Interest is
charged at the rate of 10% per year; interest will be earned at the rate of 8% per year.
Required
a.

Prepare a cost of purchases schedule for October and November.

b.

Prepare the cash budgets for October and November including the effects of
financing (borrowing or investing)

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PART 8 Slides 83 86: Question 5 March 2004 Solution

a.
BEFORE you attempt to answer this part of the question, review the formula for the purchase
budget.
October
168,000
16,800
184,800
21,000
163,800

Cost of goods sold (60% x sales)

Plus desired ending inventory 10% x 168,000 10% x 201,600
Total needs
Less beginning inventory
Cost of Purchases

b.

November
201,600
20,160
221,760
16,800
204,960

October Cash Budget

Beginning cash balance

$ 30,000

October collections:
September sales collected: A/R - AFDA
October sales collected: 280,000 x 55%
Total cash inflows
Disbursements
Merchandise purchases
Other monthly expenses 37,800 2,800
Total disbursements
Excess of cash inflows over outflows
Investment
Ending cash balance

98,560
154,000

252,560
282,560

163,800
35,000
(198,800)
83,760
50,000
$ 33,760

November Cash Budget

Beginning cash balance

$ 33,760

November collections:
October sales collected: 280,000 x 44%
November sales collected: 336,000 x 55%
Total cash inflows
Disbursements
Merchandise purchases
Other monthly expenses 37,800 2,800
Total disbursements
Excess of cash inflows over outflows
Interest on investments: 1/12 x 8% x 50,000
Investment
Ending cash balance

-8-

123,200
184,800

308,000
341,760

204,960
35,000
(239,960)
101,800
333
102,133
70,000
$ 32,133

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PART 9 Slides 87 88: Question 4 June 1991

The Mosquito Nest Co. Inc. presents you with the following selected information:
Part of the trial balance at April 1, 1990 showed:
Debits
Cash
Accounts receivable
Allowance for bad debts
Merchandise inventory
Accounts payable, merchandise

Credits

$ 6,000
19,500
$ 2,400
12,000
9,000

The companys purchases are payable within ten days. Assume that one-third of the purchases
of any month are due and paid for in the following month.
The unit invoice cost of the merchandise purchased is $10. At the end of each month, the
companys policy is to have an inventory equal to 50% of the following months unit sales.
Sales terms include a 1% discount if payment is made by the end of the calendar month in which
the sale took place. Past experience indicates that 60% of the billings will be collected during the
month of the sale, 30% in the following calendar month, 6% in the next following calendar
month, and 4% will be uncollectible.
Sales data:
Selling price per unit
February actual sales revenue
March actual sales revenue
April estimated sales revenue
May estimated sales revenue
Total sales expected in the fiscal year

15
15,000
45,000
36,000
27,000
450,000

The companys fiscal year begins February 1.

Exclusive of bad debts, the total budgeted selling and general administrative expenses for the
fiscal year are estimated at $70,500, of which $21,000 is fixed expense (inclusive of a $9,000
annual depreciation charge). These fixed expenses are incurred uniformly throughout the year.
The balance of the selling and general administrative expenses varies with sales. Expenses are
paid as incurred.
REQUIRED:
Prepare a cash budget for the month of April.

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PART 9 Slides 87 88: Question 4 June 1991 Solution

Cash balance, beginning

6,000

Receipts
From February: 6% x 15,000
From March: 30% x 45,000
From April: 60% x 36,000 x .99
Disbursements
Purchases: March
April

900
13,500
21,384
41,784
9,000
14,000

( 23,000)

Selling and administration

Variable [ (70,500 21,000) / 450,000 ] x 36,000
Fixed (21,000 9,000) / 12
Cash balance, April 30

( 3,960)
( 1,000)
13,824

Calculation
1

Sales $
Cost of sales
(2/3 of sales)
Desired end invent.
(50% of following month)
Total needs
Beginning inventory
(Given)
Purchases
Cash disbursement for April purchase
(2/3 paid in April 21,000 x 2/3)

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April
$36,000

May
$27,000

24,000

18,000

9,000
33,000
(12,000)
21,000
$14,000

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PART 10 Slides 89 90: Question 3 December 1992

Stromwitz Co. Ltd., and sells Widgets. Budgeted unit sales for the first six months of 1992 are as follows:
Month
January
February
March
April
May
June

Sales
3,500
4,000
6,000
8,000
12,000
12,000

Each Widget requires three pounds of direct materials which cost $5.00 per pound.
Stromwitzs inventory policy is to have available at the end of each month finished units equal to 25%
of the following months sales. For direct materials, their policy is to have on hand at the end of each
month enough material for 30% of the following months production.
A total of 50% of purchases are paid for in the month of purchase and 50% in the following month.
REQUIRED:
Compute the April cash disbursements for payment of accounts payable regarding direct materials
purchases.
Solution
Sales
FG desired ending inv.
FG, beginning
Produced
Calculations
1
25%(6,000)
2
25%(8,000)
3
25%(12,000)
March
April
Units to produce
6,500
9,000
RM per unit
3
3
RM needs
19,500 27,000
DM, ending
8,1002 10,8003
DM, beginning (5,850)1 (8,100)2
Total needs
21,750 29,700
Unit cost
$5
$5
Total cost
$108,750 $148,500

March
6,000
2,0002
(1,500)1
6,500

April
8,000
3,0003
(2,000)
9,000

May
12,000
3,0003
(3,000)
12,000

= 1,500
= 2,000
= 3,000

Payment
March: $108,750 x =
April: $148,500 x =

$ 54,375
74,250
$128,625

Calculations
1

30%(6,500 x 3) = 5,850
30%(9,000 x 3) = 8,100
3
30%(12,000 x 3) = 10,800
2

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MODULE 6

PART 11 Slides 91-94 Multiple Choice Questions - Module 6

Q1. Parts (a), (b), (c), and (d) refer to the following information: March 2003 exam
The following information is from Skiros Companys records for the year ended December 31, 2002:
Sales
Cost of goods manufactured:
Variable
Fixed
Operating expenses:
Variable
Fixed
Units manufactured
Units sold
Finished goods inventory, January 1, 2002

$1,400,000
$ 630,000
$ 315,000
$ 98,000
$ 140,000
70,000 units
60,000 units
0 units

There were no work in process inventories at the beginning or end of the year.
a.

What would be the cost of the ending finished goods inventory cost under variable costing?
1)
2)
3)
4)

$ 90,000
$104,000
$105,000
$135,000

10,000 (DM + DL + VOH)

= 10,000 (630,000/70,000)
= 10,000 (9)
= 90,000

answer: 1)
b. What would be the cost of the ending finished goods inventory cost under absorption costing?
1)
2)
3)
4)

$ 90,000
$104,000
$105,000
$135,000

10,000 (DM + DL + VOH + FOH)

= 10,000 (9 + 315,000/70,000)
= 10,000 (9 + 4.50)
= 135,000

answer: 4)
c.

What would be the operating profit for the year under absorption costing?
1)
2)
3)
4)

$217,000
$307,000
$352,000
$374,000

Sales
1,400,000
COGS 60,000(13.50)
810,000
Gross profit
590,000
Fixed selling
( 140,000)
Variable selling
( 98.000)
Operating profit
352,000

answer: 3)

d. What would be the operating profit for the year under variable costing?
1)
2)
3)
4)

$135,000
$217,000
$307,000
$352,000

Sales
1,400,000
Variable COGS (60,000 x 9)
( 540,000)
Variable selling
( 98,000)
Contribution margin
762,000
FOH + FSE (315,000 + 140,000) ( 455,000)
Operating profit
307,000

answer: 3)

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PART 11 Slides 91-94 Multiple Choice Questions (continued)

Q2.

The following data were collected by Balto Co. for the month of May:
Master budget data:
Sales
Variable costs
Total fixed costs
Actual results:
Sales
Variable costs
Total fixed costs

9,000 units @ $30

$23 per unit
$18,800
9,600 units @ $29
$24 per unit
$18,200

What was the May variance from the master budget operating income?
1)
2)
3)
4)

$14,400 F
$14,400 U
$29,800 U
$44,200 F

Sales: 9,000 x 30; 9,600 x 29

VC: 9,000 x 23; 9,600 x 24
Fixed costs
Operating profit

Plan
270,000
(207,000)
( 18,800)
44,200

Actual
278,400
( 230,400)
( 18,200)
28,800

June 2003 exam answer: 2)

You have 14,400 less income than planned. Thus it is unfavourable.

Q3.

A company has the following incomplete production budget data for the first quarter:

Expected unit sales

January
1,000

February
3,000

March
4,000

In the previous December, ending inventory was 100 units, which was the minimum required, at 10%
of projected sales units in the coming month.
What is the expected production in February?
1)
2)
3)
4)

3,000 units
3,100 units
3,400 units
3,600 units

Find a formula!
Unit sales + desired ending inv. beg inventory = production
3,000

March 2006 exam

answer: 2)

+ (10% of 4,000) - (10% of 3,000) = 3,100

Production = 3,100 units

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PART 11 Slides 91-94 Multiple Choice Questions (continued)

Q4.

Which of the following statements regarding the use of variable costing versus absorption costing is
true?
1)
Absorption costing treats all costs of production as product costs, regardless of whether the
costs are variable or fixed.
2)
Absorption costing treats only variable costs of production as product costs.
3)
Absorption costing treats only fixed costs of production as product costs.
4)
Absorption costing harmonizes fully with the contribution approach and cost-volume-profit
concepts.
March 2007 exam answer: 1)

Q5.

How does the accounting treatment of selling and administration costs differ between absorption and
variable costing if more units are produced than are sold?
1)

The variable portion is added to the cost of ending inventory based on a pro rata portion of
units produced to those sold.
2)
The fixed portion is added to the costs of ending inventory based on a pro rata portion of
units produced to those sold.
3)
There is no difference in the treatment.
4)
Both fixed and variable portions are added to the cost of ending inventory based on a pro rata
portion of units produced to those sold.
Fixed selling and administration
costs are treated as period costs
March 2007 exam answer: 3)
under both methods.
Q6.

Use the following information to answer parts (a) and (b) December 2006 exam
For the year ended December 31, 2005, Ventor Corporation has the following records of its costs:
Direct materials used
$ 600,000
Direct labour
200,000
Variable manufacturing overhead
100,000
Fixed manufacturing overhead
160,000
Selling and administrative costs (variable)
80,000
Selling and administrative costs (fixed)
40,000
a.

If Ventor uses variable costing, what would the inventoriable costs for the year ended
December 31, 2005 be?
For variable costing, only variable manufacturing costs
are inventoriable:
1)
$ 800,000
2)
$ 900,000
Total inventoriable costs = Direct material + Direct
3)
$ 980,000
labour + Variable manufacturing overhead
4)
$ 1,060,000
= $600,000 + 200,000 + 100,000 = $900,000

December 2007 exam answer: 2)

b.

If Ventor were to use absorption costing instead, what would the inventoriable costs be?
1)
2)
3)
4)

For absorption costing, all costs of production are

capitalized into inventory:

$ 800,000
$ 900,000
$ 1,060,000
$ 1,180,000

Total inventoriable costs = Variable manufacturing cost

+ Fixed manufacturing overhead
= $900,000 + $160,000 = $1,060,000

December 2007 exam answer: 3)

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