Chapter 10
Using Budgets to for
Planning and
Coordination
QUESTIONS
10-1 A budget is a quantitative model of the expected consequences of the
organization’s short-term operating activities. A budget typically expresses the expected money inflows and outflows in order to assess whether the planned operations will meet the organization’s financial objectives.
10-2 Flexible resources are those that vary with the activity level of the firm or
organization. Those that do not change with the activity level are
capacity-related (or committed or fixed resources).
10-3 Yes, a spending plan is a budget since it provides a summary, in financial terms,
of the student’s spending intentions.
10-4 In many ways the goal of a family budget is quite similar to the goal of a budget
developed for an organization. In these settings, the goal is to help both families and organizations achieve their objectives by allocating their resources wisely. Organizational budgets usually differ from family budgets in sheer size (the dollar amounts proposed), scope (the number of operating units and their goals), and number of iterations (submission and resubmissions of budgets) before the final budget is determined.
materials purchasing, labor hiring and training, and administrative and discretionary spending plans.
10-7 You should not jump to the conclusion that the university’s hiring and training
plan is likely to be more important because it hires skilled rather than unskilled labor. A number of factors determine the importance of a labor hiring and training plan in any organization. However, the two most important are likely the amount of employee turnover that requires replacement and the amount of ongoing retraining that the organization must provide. If the university has reached relatively stable employment, the labor hiring and training plan would be relatively unimportant since university faculty members are expected to attend to their own training. If the municipality is continuously hiring new employees or retraining existing employees to use equipment, it will have a continuous need for a hiring and training plan.
10-8 The sales plan is based on the demand forecast. The numbers in the demand
forecast must not be less than the numbers in the sales plan. Otherwise the sales plan is infeasible because it calls for selling more than customers will buy.
10-9 A demand forecast is an estimate of the number of units that customers would
be willing to buy under specified conditions. The intended sales in the sales plan, a crucial component of the master budget process, cannot exceed the numbers in the demand forecast. Thus, the demand forecast is used to develop the sales plan.
10-10 Yes. Employee training does not have a physical relationship with the
organization’s activity level. (However, employee training should enhance performance potential, supporting achievement of an organization’s strategy.)
10-11 A capital spending plan summarizes an organization’s plans to acquire or sell
long-term capital investments, such as buildings and equipment, that are needed to meet the organization’s objectives.
10-12 A capacity-related expenditure is any expenditure that an organization cannot
avoid in the short-run. A payment on a long-term lease is a capacity-related expenditure.
10-13 This is a tricky question. If the cafeteria is committed to preparing a given
amount of food for each student in the residence, whether the student shows up for meals or not, the food cost is a capacity-related (fixed) cost. However, if the cafeteria only prepares enough food for students who, on average, actually show up to eat, the food cost is a variable cost.
10-14 A defining characteristic of a flexible resource is one where you only pay for
what you use. Flexible resources can be acquired or disposed of in the short run based on the number of output units. We usually assume that materials costs are variable (flexible) because we can always carry materials until we use them. However, if an organization pays a set amount for materials, no matter how much it uses, the materials cost is a capacity-related (fixed) cost. A store that buys merchandise may consider merchandise, or materials costs, a capacity-related resource because it is unable to carry merchandise indefinitely or return unused merchandise—but this is stretching the idea of a capacity-related resource.
10-15 A line of credit is a short-term financing arrangement made between an
organization and a financial institution. A line of credit provides an organization with a ready supply of cash, up to a limit negotiated between the organization and its bank. We can think of a line of credit as a commitment from a financial institution to allow the debtor to borrow money on demand up to a specified maximum amount.
10-16 Planners use budget information for the following purposes:
(1) Identify broad resource requirements. This helps develop plans to put needed resources in place.
(2) Identify potential problems. This helps to avoid problems or to deal with them systematically.
(3) Compare projected operating and financial results to actual results. These comparisons within an organization can be used to evaluate the efficiency of the organization’s operating processes.
10-17 Both what-if and sensitivity analyses use the same model to evaluate future
alternatives. However, the approaches differ in their purposes. What-if-analysis is a process that uses a model to predict the results of varying that model’s key parameters or estimates. Sensitivity analysis is the process of selectively
10-19 Analysis of reasons for the variance between actual and estimated job costs can
help managers in several ways. If the managerial actions that led to actual costs being lower than the estimated costs are identified, similar cost savings can be realized by repeating those actions in the production of other jobs. If factors resulting in actual costs being higher are identified, then managers may be able to take the necessary actions to eliminate or control those factors. If cost changes are likely to be permanent, however, the revised cost information can be used in revising standards for future variance analyses and in bidding for jobs in the future.
10-20 A flexible budget presents cost targets or forecasts for the organization’s
achieved level of activity.
10-21 The first level of variance analysis for a cost item focuses on the differences
between actual and estimated (master budget) costs for the item. The second
level of variance analysis decomposes the first-level variances into a flexible
budget variance and a planning variance. The flexible budget variance is the difference between actual costs and flexible budget costs, which reflect the volume level achieved, rather than planned. The planning variance is the difference between flexible budget costs and master budget costs. For variable costs, the third level of variance analysis decomposes the flexible budget component of the second level variance into efficiency (use) and price (rate) variances.
10-22 By classifying flexible budget variances into rate (price) and efficiency
(quantity) variances, managers can better understand the factors causing those variances and correct the standards or institute changes that help reduce expenses.
10-23 Yes. The labor efficiency variance will likely be favorable because fewer
(actual) hours will be required for a job when experienced workers work on the job. The labor rate variance, however, will likely be unfavorable because experienced workers’ wages will be higher than those of less experienced workers.
10-24 The purchase and use of cheaper, lower-quality materials is likely to result in a
favorable material price variance, an unfavorable material quantity variance, and an unfavorable labor efficiency variance, but the labor rate variance is not likely to be affected.
10-25 The first step isolates the effect of sales volume differences by computing sales
mix variances and sales quantity variances, and the second step isolates the effect of sales price differences by computing sales price variances.
10-26 An appropriation is a planned cash outflow or spending plan. In a government
agency, it is an authorized spending limit. An example of an appropriation in a university is an authorization for a faculty to spend a specified amount of money on student entrance scholarships.
10-27 A periodic budget is a budget that is prepared for a fixed interval of time,
usually one year. After the period of time has elapsed, the budget is discarded.
10-28 This is called incremental budgeting because spending allocations for this
period are proportional adjustments of last period’s spending allocations.
10-29 This is called zero-based budgeting because each year the charities to which
you donate must reestablish their need.
10-30 Critics argue that the traditional budgeting process (1) reflects a top-down
approach to organizing that is inconsistent with the need to be flexible and adapt to changing organization circumstances; (2) focuses on controls (such as meeting the target budget) rather than on helping the organization achieve its strategic objectives; and (3) causes resource allocations to be driven by political power in the organization rather than strategic needs.
10-31 The beyond budgeting approach differs in two fundamental ways from
traditional budgeting. First, traditional budgets are based on fixed annual plans that tie managers to predetermined actions. In the Beyond Budgeting approach targets are developed based on stretch goals tied to peers, competitors, and key global benchmarks. These targets are reviewed and modified if necessary and managers are more motivated to achieve these goals since the goals represent measures that link directly to the competition rather than an internal artificial
EXERCISES
10-32 If the organization solicits the information from the sales force, salespeople will
be motivated to understate sales potential in order to set low hurdles for commissionable sales. Other approaches include using estimates based on market surveys conducted by a drug industry association or other research group, and using statistical models to identify a relationship between future sales and current sales or trends in disease.
10-33 The primary purpose of budgets is for planning. Problems are created when
budgets are used after the fact for control. For example people whose performance will be compared to the budget targets may understate their potential in order to have achievable targets set. Therefore, tying plans to after-the-fact control compromises the integrity of the information gathering process. Some people have argued that information used for planning should not be used in after the fact control. (Standards for after the fact control could, instead, be based on independent benchmark information or improvements on previous performance.) Some organizations have designed incentive schemes that reward people jointly on their ability to improve performance and to meet budget projections.
10-34 Wages paid to graders are controllable in the short-term if the wages are based
purely on the number of hours worked. The wages paid to lecturers who are hired to teach for a semester are controllable in the intermediate-term because there is no commitment to the lecturers beyond the end of the semester. The wages paid to full-time faculty are only controllable in the long-term since most faculty members are on long-term or permanent contracts. Because of the nature of full-time staff teaching contracts, universities are notoriously inflexible as student demands for programs and courses change.
10-35 Many organizations are run by the numbers. In these organizations managers
are held accountable for financial results. Therefore, their interest tends to focus on projections of financial results and they judge the desirability of a set of operating strategies based on the financial results projected for those strategies.
10-36 A consulting company is an organization that uses highly trained people to
deliver complex and customized products to its customers. This organization might be experiencing a continuous need to hire and train personnel who can provide the services that customers require. A planning process allows this organization to anticipate the type and quantity of skills it will require and will
allow it to develop a hiring and training plan that will provide the people it needs at a minimum cost.
10-37 The vegetable canner acquires and packs its products over a very short period of
time following the growing seasons. Therefore, inventory levels will be cyclical, building up after the growing season and declining until the end of the next growing season. The organization will have to plan to acquire the funds it needs to meet this need for a cyclical investment in inventory.
10-38 The credit granting policy is an important component of the organization’s
selling strategies. Tightening or eliminating credit terms might reduce sales. On the other hand, tightening credit terms should speed cash collections and might decrease the bad debts expense and reduce the opportunity cost of the accounts receivable loans to customers. The organization’s planners must balance the benefits of reduced bad debts expense and the opportunity costs of lending with the profit on lost sales that might result from reducing credit terms.
10-39 A machine shop might accept and complete thousands of small jobs each year.
Because of the problems and errors in determining profits from individual small jobs, this organization might want to compare its overall levels of efficiency with those of its competitors by comparing its projected financial results with those of its toughest competitors. Costs that are out of line with those of competitors would be flagged and plans developed to improve the performance of activities that created those costs.
10-40 Units
Sales 40,000
Desired ending inventory 5,000
Needs 45,000
10-41 (a)
Production Budget January February March
Sales of G12 50,000 60,000 54,000
Desired ending inventorya 15,000 13,500
Needs 65,000 73,500
Beginning inventoryb 12,500 15,000
Production 52,500 58,500
a 25% of next month’s sales. For January, 25% 60,000 = 15,000; for February, 25% 54,000 = 13,500
b 25% of current month’s sales. For January, 25% 50,000 = 12,500; for February, 25% 60,000 = 15,000
(b)
Purchases Budget January February
Units to be produced 52,500 58,500 Raw materials needed per unit 0.5 0.5 Total production needs 26,250 29,250 Desired ending inventorya 2,925 2,025 Total material needs 29,175 31,275 Beginning inventoryb 2,625 2,925 Total material purchases 26,550 28,350
a 10% of next month’s needs. For January, 10% 29,250 = 2,925; for February, 10% 20,250 = 2,025
b 10% of current month’s needs. For January, 10% 26,250 = 2,625; for February, 10% 29,250 = 2,925
10-42 (a) Let Q sales level in units at which the costs are the same with both machines.
($44 Q) + $32,000 = ($40 Q) + $40,000 $4Q = 8,000
Q = 2,000 units
(b) Let R sales level in dollars at which the use of the new machine results in a 10% profit on sales ratio.
Let Q be the corresponding number of units, so that R $55 Q $ $40, $55 . , , . $55 $231, 55 40 000 10% 15 55 40 000 40 000 9 5 4,211 4,211 605 Q Q Q Q Q R units
10-43 The most critical estimates are the demand estimates because they provide the
basis upon which all the other plans are based. Other critical estimates are those relating to the consumption of each factor of production (such as raw materials, labor, and machine capacities) by each unit of production since these estimates will play an important role in estimating total resource requirements and estimating costs.
10-44 No. Incremental budgeting does not ensure that resources are best allocated.
Some university units (such as departments or colleges) may have major inefficiencies and budgetary slack where other units may have already made process improvements and have few inefficiencies and relatively little budgetary slack. Moreover, some units may be seriously underfunded relative to the trend in demand where other units may be overfunded relative to the trend in demand.
10-45 (a) Because the quantity purchased differs from the quantity used, the material price variance uses the purchased quantity (PQ) instead of the quantity used (AQ).
Material price variance = (AP – SP) × PQ
(c)
Direct labor rate variance AR SR AH U $12 , $3, 10 1800 600
(d) Direct labor efficiency variance = (AH – SH) × SR
= (1,800 – (4 × 500)) × $10
= $2,000 F
10-46 (a)
Direct material price variance
AP SP AQ U $ , $280 5 880 2,800 2 2,800
(b) Direct material quantity variance = (AQ − SQ) × SP
= (2,800 − (5 × 500)) × $2 = $600 U
(c) A favorable labor efficiency variance of $100 for job 822 implies that (AH – 2 × 500) × $10 = –100. Therefore, AH 1 000100
10 990
, .
(d) An unfavorable labor rate variance of $250 for job 822 implies that (AR – 10) × 990 = 250. Therefore,
AR10 250
990 $10.2525.
Finally, the actual direct labor costs incurred for Job 822 are: AR AH $10.2525 990 $10,150 (rounded).
10-47 (a) Material price variance = (AP – SP) AQ = ($97 – 100) 40,000 = $120,000 F
(b)
Material quantity variance = AQ SQ SP F 40 000 5 9,000 000 , $100 $500,
(c) Yes, the relationship with this new supplier should be maintained because it appears the supplier is providing materials of good quality for a price that is less than expected. However, as a precaution, the company could make sure the lower cost materials are not leading to the unfavorable labor efficiency variance in part (e).
(d)
Direct labor rate variance
AR SR AH
$ 60 000 5 000, , 12 5 000, 0
(e) Direct labor efficiency variance = (AH – SH) × SR
= (5,000 – (0.50 × 9,000)) × $12 = $6,000 U
10-48 (a) Material price variance = (AP – SP) AQ
Component X: 0.30 AQ = 160, so AQ = 533.3 units of X. Component Y: – 0.20 AQ = – 120, so AQ = 600 units of Y. Component Z: 0.50 AQ = 192, so AQ = 384 units of Z. (b) Material quantity variance = (AQ – SQ) SP
Component X: (533.3 – (1 220)) SP = 168, so SP = $0.536 per unit of X. Component Y: (600 – (2 220)) SP = 100, so SP = $0.625 per unit of Y. Component Z: (384 – (3 220)) SP = –84, so SP = $0.304 per unit of Z.
PROBLEMS
10-50 Borders Manufacturing Production Plan
Month Unit sales Production (rounded)
January 8,742 (8,742 .5) (9,415 .5) 9,079 February 9,415 (9,415 .5) (7,120 .5) 8,268 March 7,120 (7,120 .5) (8,181 .5) 7,651 April 8,181 (8,181 .5) (7,942 .5) 8,062 May 7,942 (7,942 .5) (9,681 .5) 8,812 June 9,681 (9,681 .5) (2,511 .5) 6,096 July 2,511 (2,511 .5) (2,768 .5) 2,640 August 2,768 (2,768 .5) (2,768 .5) 2,768 September 2,768 (2,768 .5) (2,283 .5) 2,526 October 2,283 (2,283 .5) (1,542 .5) 1,913 November 1,542 (1,542 .5) (1,980 .5) 1,761 December 1,980 (8,725 .5) (1,980 .5) 5,353
10-51 Mira Vista Planters
Jan Feb Mar Apr May Jun
Demand 8,692 5,765 8,134 34,400 558,729 832,251 Sales revenue (× $0.20) $1,738 $1,153 $1,627 $6,880 $111,746 $166,450 Planters
Beginning of month 2 1 1 1 5 73
Added a 0 0 0 4 68 14
Trained b (whole numbers) 0 0 0 7 114 24
Laid off c 1 0 0 0 0 0 Ending 1 1 1 5 73 87 Capacity d 10,000 10,000 10,000 40,000 560,000 835,000 Wages e $1,600 $1,600 $1,600 $6,400 $89,600 $133,600 Training Costse 0 0 0 2,800 45,600 9,600 Layoff Severance 400 0 0 0 0 0 Total Costs $2,000 $1,600 $1,600 $9,200 $135,200 $143,200 Profit ($262) ($447) $27 ($2,320) ($23,454) $23,250 Demand 8,692 5,765 8,134 34,400 558,729 832,251 Beginning capacity 20,000 10,000 10,000 10,000 50,000 730,000 Difference – 11,308 – 4,235 – 1,866 24,400 508,729 102,251
a New planters needed 0 0 0 4 68 14
5/3 × number needed 0.0 0.0 0.0 6.7 113.3 23.3
b Planters trained 0 0 0 7 114 24
Mira Vista Planters
Jul Aug Sep Oct Nov Dec
Demand 1,286,700 895,449 733,094 203,525 29,410 9,827 Sales revenue (× $0.20) $257,340 $179,090 $146,619 $40,705 $5,882 $1,965 Planters Beginning of month 87 143 90 74 21 3 Added a 56 0 0 0 0 0 Trained b (whole numbers) 94 0 0 0 0 0 Laid off c 0 53 16 53 18 2 Ending 143 90 74 21 3 1 Capacity d 1,290,000 900,000 740,000 210,000 30,000 10,000 Wages e $206,400 $144,000 $118,400 $33,600 $4,800 $1,600 Training Costse 37,600 0 0 0 0 0 Layoff Severance 0 21,200 6,400 21,200 7,200 800 Total Costs $244,000 $165,200 $124,800 $54,800 $12,000 $2,400 Profit $13,340 $13,890 $21,819 ($14,095) ($6,118) ($435) Demand 1,286,700 895,449 733,094 203,525 29,410 9,827 Beginning capacity 870,000 1,430,000 900,000 740,000 210,000 30,000 Difference 416,700– 534,551– 166,906 – 536,475 – 180,590 – 20,173
a New planters needed 56 0 0 0 0 0
5/3 × number needed 93.3 0.0 0.0 0.0 0.0 0.0
b Planters trained 94 0 0 0 0 0
c Planters laid off 0 53 16 53 18 2
d Trainees add to capacity for only 3 weeks of their first month. For April, the capacity is ((1 × 10,000) + (4 × 10,000 × ¾)) = 40,000.
e Trainees are hired at the beginning of the month and receive $400 for a week of training and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month. (a) Summing the profits for the 12 months, we see that if each month’s contract is
accepted, the profit for the year is $25,195. Declining contracts in months with negative profit will only further decrease profit because of layoff costs, or the cost of training workers when demand increases dramatically.
(b) The number of people hired for training (239) is shown in the “trained” line and in footnote b.
(c) The number of people laid off (143) is shown in the “laid off” line and in footnote c. 10-52 Strathfield Motel Week 1 2 3 4 5 6 7 8 9 10 11 12 Units rented per night 46 48 54 60 60 60 55 55 50 45 37 30
(a) Staff employed 4 4 4 4 4 4 4 4 4 3 3 2
Cleaning capacity per night 60 60 60 60 60 60 60 60 60 45 45 30 Excess capacity per night 14 12 6 0 0 0 5 5 10 0 8 0 (b) Linen contract units 60 60 60 60 60 60 60 60 50 50 50 50 Excess linen capacity per night 14 12 6 0 0 0 5 5 0 5 13 20
10-53 Homebush School Band Estimated Travel Expenses
Month Concerts Hotel Food Bus Other Total
September 3 2,700 1,440 1,800 600 6,540
October 4 3,600 1,920 2,400 800 8,720
November 5 4,500 2,400 3,000 1,000 10,900
10-54 Worthington Company Month Revenue Cash Sales
Credit Card Sales Account Sales Total January 12,369,348 2,473,870 0 0 2,473,870 February 15,936,293 3,187,259 5,999,134 1,484,322 10,670,715 March 13,294,309 2,658,862 7,729,102 3,767,757 14,155,721 April 19,373,689 3,874,738 6,447,740 4,282,625 14,605,103 May 20,957,566 4,191,513 9,396,239 4,701,460 18,289,212 June 18,874,717 3,774,943 10,164,420 5,740,025 19,679,388 July 21,747,839 4,349,568 9,154,238 5,873,569 19,377,375 August 14,908,534 2,981,707 10,547,702 5,943,930 19,473,339 September 11,984,398 2,396,880 7,230,639 5,504,193 15,131,712 October 18,894,535 3,778,907 5,812,433 4,196,356 13,787,696 November 21,983,545 4,396,709 9,163,849 4,422,809 17,983,367 December 20,408,367 4,081,673 10,662,019 5,759,831 20,503,523
10-55 Masefield Dairy Ingredient Purchases
Ingredient July* August* September*
Ingredient 1 759,685 668,699 530,425 Ingredient 2 1,307,959 1,141,857 911,474 Ingredient 3 914,870 790,589 641,667 Ingredient 4 800,129 687,840 513,190 Ingredient 5 515,301 470,475 365,560 Ingredient 6 1,366,313 1,207,774 998,986
*Details appear below. July Products Total Ingredients A B C D E Purchases 1 194,675 209,712 209,855 97,576 47,867 759,685 2 389,350 - 629,565 97,576 191,468 1,307,959 3 - 104,856 419,710 390,304 - 914,870 4 194,675 314,568 - 195,152 95,734 800,129 5 - 209,712 209,855 - 95,734 515,301 6 584,025 104,856 629,565 - 47,867 1,366,313 August Products Total Ingredients A B C D E Purchases 1 162,033 196,750 194,575 75,766 39,575 668,699 2 324,066 - 583,725 75,766 158,300 1,141,857 3 - 98,375 389,150 303,064 - 790,589 4 162,033 295,125 - 151,532 79,150 687,840 5 - 196,750 194,575 - 79,150 470,475 6 486,099 98,375 583,725 - 39,575 1,207,774 September
10-56 Nathaniel’s Motor Shop Week Work Hours Overtime Total Wages Variable Support 1 255 0 6,750 6,375 2 330 15 7,200 8,250 3 300 0 6,750 7,500 4 285 0 6,750 7,125 5 325 10 7,050 8,125 6 280 0 6,750 7,000 7 260 0 6,750 6,500 8 300 0 6,750 7,500 9 340 25 7,500 8,500 10 355 40 7,950 8,875
10-57 Country Club Road Nurseries Cash Outflows
January February March April May June
Full-time staff 15 15 15 15 15 15 Full-time hours 2,400 2,400 2,400 2,400 2,400 2,400 Part-time hours 480 480 800 800 2,400 2,400 Cash outflows Full-time wages $40,500 $40,500 $40,500 $40,500 $40,500 $40,500 Part-time wages 4,800 4,800 8,000 8,000 24,000 24,000 Variable costs 36,000 36,000 36,000 36,000 12,000 12,000 related costs 55,000 55,000 55,000 55,000 55,000 55,000 Total outflows $136,300 $136,300 $139,500 $139,500 $131,500 $131,500
July August Sept. October Nov. December
Full-time staff 15 15 15 15 15 15 Full-time hours 2,400 2,400 2,400 2,400 2,400 2,400 Part-time hours 2,400 2,400 1,200 600 0 0 Cash outflows Full-time wages $40,500 $40,500 $40,500 $40,500 $40,500 $40,500 Part-time wages 24,000 24,000 12,000 6,000 0 0 Variable costs 48,000 48,000 48,000 24,000 0 0 related costs 55,000 55,000 55,000 55,000 55,000 55,000 Total outflows $167,500 $167,500 $155,500 $125,500 $95,500 $95,500
10-58 (a) Cash inflows
From September sales: $1,000,000 0.3 $300,000
From October sales: 40,000 $32 0.7 896,000 $1,196,000 Cash outflows
For September purchases: $880,000 0.8 704,000 For October purchases: 38,000 $20 0.2 152,000
Selling and admin.: $350,000 $20,000 330,000 1,186,000
Net cash flow 10,000
Opening cash balance 40,000
Ending cash balance $50,000
(b) Sales 40,000 $32 = $1,280,000
Cost of goods sold 40,000 $20 = 800,000
Gross margin 40,000 $12 = 480,000
Selling and administrative expenses 350,000
Net income $130,000
10-59 (a) Merchandise inventory Units Dollar value
Required for sales 12,000 $480,000
Desired ending inventory 3,000 120,000
Needs 15,000 600,000
Less beginning inventory 2,000 80,000
Budgeted purchases 13,000 $520,000
(b) Sales 12,000 $60 = $720,000
Cost of goods sold 12,000 $40 = 480,000
Gross margin 12,000 $20 = 240,000
Selling and admin. expenses 200,000
Net income $40,000
(c) Cash inflows
From Nov. sales: $600,000 .4 $240,000
From Dec. sales: $720,000 .6 432,000 $672,000 Cash outflows
For Nov. purchases: $340,000 .5 170,000 For Dec. purchases: $520,000 .5 260,000
Selling and admin.: $200,000 $40,000 160,000 590,000
Net cash flow 82,000
Ending cash balance $112,000
10-60 (a) With 2,000,000 medical claims Shadyside Insurance Company should employ 13.33 = ((2,000,000/150,000) 1) supervisors, 26.67 = ((2,000,000/150,000) 2) senior clerks, and 80 = ((2,000,000/150,000) 6) junior clerks. Assuming that the organization hires full-time people, clerical costs are a step variable cost (which means that they must round up to a full employee) and the budgeted number of people for this level of activity is 14 supervisors, 27 senior clerks, and 80 junior clerks. The total cost of this group would be $4,147,000 = (14 $42,000) + (27 $37,000) + (80 $32,000).
The actual cost to this group was $4,354,000 = (14 $42,000) + (30 $37,000) + (83 $32,000). The excess cost of $207,000 = 4,354,000 4,147,000 was created by having 3 more senior clerks than budgeted and 3 more junior clerks than budgeted.
(b) The issue is why the clerical group is employing more people than it should be for the workload it faces. There are many possible reasons for this result, including training inefficiencies, continued growth requiring more people, an inappropriate standard, overestimating requirements when hiring took place, and processing inefficiencies. The report from the manager of this unit should identify the amount of the excess spending, its cause, and what will be done to correct the variance.
10-61 (a) Let p be the unit sales price to earn a budgeted profit (before income taxes) of $200,000.
Sales (260,000 units) 260,000p
Cost of goods sold:
Direct materials
300,000 × 130% × 120% 468,000
Direct labor
200,000 × 130% × 115% 299,000
Variable manufacturing support
60,000 × 130% × 110% 85,800
Fixed manufacturing support
40,000 × 105% 42,000 894,800
Gross margin 260,000p – 894,800
Selling expenses: 150,000 108% 162,000 Administrative expenses
100,000 × 106% 106,000 268,000
Profit (before income taxes) 260,000 p – 1,162,800 Therefore, 260,000p – 1,162,800 200,000 or p $5.24.
(b) Let x be the number of units that must be sold at $5.00 to earn $200,000.
Sales (x units) 5.00x
Cost of goods sold:
Direct materials 120% 000 , 200 000 , 300 x 1.80x Direct labor 115% 000 , 200 000 , 200 x 115. x Variable manufacturing support
110% 000 , 200 000 , 60 x 0.33x
Fixed manufacturing support
40,000 × 105% 42 000, 3 28. x42 000,
Gross margin 172. x42 000,
Selling expenses
150,000 + [(150,000 8%) x60,000200,000] 110,0000.2x +
Administrative expenses: 100,000 × 106% 106 000, 0 2. x216 000,
Profit (before income taxes) 152. x258 000, Therefore, 1.52x – 258,000 = 200,000 or x = 301,316 units.
(c) Sales: 220,000 units $5.24 $1,152,800
Cost of goods sold:
Direct materials: 300,000 × 110% × 120% $396,000 Direct labor: 200,000 × 110% × 115% 253,000 Variable manufacturing support
(60,000 × 110% × 110%) 72,600
Fixed manufacturing support 42,000 763,600
Gross margin 389,200
Selling expenses
150,000 + [(150,000 8%)60,000 ]20,000 $154,000
Administrative expenses: 100,000 × 106% 106,000 260,000
Profit (before income taxes) $129,200
10-62 (a) Last month’s profit
$0.40 1 000 000 , , $0.25 1 000 000 , , $60,000$90,000 Current month’s target profit $90,000 15 . $135,000
Let x be the maximum amount that can be spent on advertising.
($0.40 × 2,000,000) – ($0.25 × 2,000,000) – $(60,000 + x) = $135,000. x$105,000
(b) Let y be the number of units to break even. 0 4. y0 25. y60 000 0, or y400 000, .
Let p be the selling price to maintain the same breakeven point.
p400 000 0 30 400 000 60 000 0, . , , or p = $0.45 per bar. That is, if variable cost is increased by 5 cents per bar, then the sales price must also increase by 5 cents to maintain the same break-even point.
(c) Let z be the sales volume in units that would be needed at the new price for the company to earn the same profit as last month.
10-63 (a) Old Machine New Machine
Selling price per unit $18 $20
Variable cost per unit $14 $14
Contribution margin 4 6
Monthly fixed costs $120,000 $250,000
Breakeven points (in units) 30,000 41,667
(b) Let SP = selling price, Q = quantity, FC = fixed costs, and V = variable costs. SP Q FC V Q SP Q Q Q Q Q 10% 000 010 000 20 14 2 62,500 $20 $250, $14 . $20 $250, $ (c) Q SP VC FC Q SP VC FC Q Q Q 1 1 1 2 2 2 000 000 250 000 120 000 6 4 65 000 $4 $120, $6 $250, $ , , $ ,
(d) The old machine represents a lower risk of making a loss because it has a lower breakeven point.
(e) Q SP VC FC Q SP Q SP VC FC Q SP Q Q Q Q 1 1 1 1 2 2 2 2 4 120 000 18 6 250 000 20 , ,
10-64 (a) Deluxe rackets Without With
Sales price per racket $40.00 $36.00
Variable costs:
Manufacturing 20.00 20.00
Commission 4.00 3.60
Contribution margin per racket 16.00 12.40
Sales (units) 50,000 65,000
Total contribution margin $800,000 $806,000
Contribution margin lost
(Standard rackets) 50,000*
Net impact on profits $800,000 $756,000
* Contribution margin lost on Standard rackets = $(30 – 17 – 3) 5,000. Tenneco’s profits will decrease by $44,000 = ($800,000 – $756,000).
Standard Deluxe Pro Total Contribution margin per racket $10 $16 $20
Increased sales (units) 2,000 1,000 1,000 Total increase in contribution
margin $20,000$16,000$20,000$56,000
The $56,000 increase in the contribution margin is greater than the incremental advertising expense of $50,000. Therefore, this decision is advisable.
(c) Yes. Assuming each line of rackets uses the same manufacturing support resources, it is in the best interest of the company to push high-priced rackets because they have higher unit contribution margins (in this case) than the lower-priced rackets.
10-65 (a) Breakeven point in units = (fixed costs)/(contribution margin per unit) = $200,000/$125 = 1,600 units
Breakeven point in dollars = 1,600 × $250 = $400,000
(b) Let X increase in sales in units per month to justify the additional expenditure. The contribution margin from the increase in sales must equal the additional advertising expenditure. That is, $125X = $22,500, or
X 22 500
125 180
, .
Sales must increase by 180 units per month or $45,000 = $250 × $18 in order to break even on the monthly expenditures.
(c) New contribution margin per unit =
Old contribution margin per unit − Decrease in selling price = $125 − $25 = $100.
Total contribution margin $1002 400, $240,000 New fixed costs $200,000$22,500$222,500 Net income = $240,000 – 222,500 = $17,500.
10-66 (a) Sales price: $35.00
Less variable costs:
Raw materials $16.00
Direct labor 7.00
(b) Let X number of packets to earn $156,000 profits X 468 000 156 000 0 0640 9 750 000 , , . , , packets
(c) New contribution margin $0.0640 5% 7 $0.
100 0605
Break-even point 468 000
0 0605 7 735 537 ,
. , ,
(d) Let P selling price per 100 packets to maintain the same contribution margin ratio. P P 28.60 5% 7 00 . 35 40 . 6 6.40 × P = 35 × (P – 28.95) (35 – 6.40) P = 1,013.25 P = $35.43 per 100 packets
10-67 The budgeted direct materials cost is $630,000/90,000 = $7 per unit; the
budgeted direct labor cost per unit is $247,500/90,000 = $2.75 per unit; the budgeted fixed costs equal $420,000. Below, these costs are used to prepare the flexible budget for the actual production level of 80,000 units.
Flexible
Master Planning Flexible Budget
Budget Variance Budget Variance Actual
90,000 units 80,000 units 80,000 units
Costs
DM $630,000 $(70,000) F $560,000 $(10,000) F $550,000
DL 247,500 (27,500) F 220,000 5,000 U 225,000
FOH 420,000 $0 420,000 (20,000) F 400,000 Total $1,297,500 $(97,500) F $1,200,000 $(25,000) F $1,175,000
10-68 (a) Total direct material cost variance
= Actual direct material cost – standard direct material cost = $205,150 – ($16 × 0.25 × 40,000)
= $205,150 – $160,000 = $45,150 Unfavorable
(b) Total direct labor cost variance
= Actual direct labor cost – standard direct labor cost = ($9.50 × 8,240) – ($10 × 0.20 × 40,000)
= $78,280 – $80,000 = $1,720 Favorable
(c) Total variable support cost variance
= Actual variable support cost – standard variable support cost = $131,840 – ($15 × 0.20 × 40,000)
= $131,840 – $120,000 = $11,840 Unfavorable
(d) Direct material price variance Error: Reference source not found (e) Direct material quantity variance
Error: Reference source not found (f) Direct labor rate variance
Error: Reference source not foundError: Reference source not found (g) Direct labor efficiency variance
Error: Reference source not found (h) Variable support rate variance
(b) Total direct labor cost variance
= Actual direct labor cost – standard direct labor cost = ($11 × 2,000) – ($10 × 1 × 2,000)
= $22,000 – $20,000 = $2,000 Unfavorable
(c) Total flexible support cost variance
= Actual flexible support cost – standard flexible support cost = $48,000 – ($25 × 1 × 2,000)
= $48,000 – $50,000 = $2,000 Favorable
(d) Direct material price variance Error: Reference source not found (e) Direct material quantity variance
Error: Reference source not found (f) Direct labor rate variance
Error: Reference source not foundError: Reference source not found (g) Direct labor efficiency variance
Error: Reference source not found (h) Variable support rate variance
Error: Reference source not found
(i) Variable support efficiency (use) variance Error: Reference source not found
(AP – SP) × AQ = $50 (AP × AQ) – (SP × AQ) = $50 $2,000 – ($2 × AQ) = $50 AQ = 975 pounds (AH – SH) × SR = –100 (AH × 15) – (2 × 200 × 15) = –100 hours 3 1 393 15 100 000 , 6 AH (AR – SR) × AH = 60 AR × AH = (SR × AH) + 60 AR × AH = (15 × 15 900 , 5 ) + 60 = $5,960 = (AQ – SQ) × SP
(AQ – SQ) × SP = –100 [1,000 – (165.28 × S)] × 3 = –100
495.84 × S = 3,000 + 100
S = 6.252 pounds per unit
(AP – SP) × AQ = –500
AP × AQ = (3 × 1,000) – 500 = $2,500
(AR – SR) × AH = –200 (AR × AH) – (SR × AH) = –200 5,800 – (12 × AH) = –200 AH = 500 hours
10-71 (a) Direct material price variance Error: Reference source not found Direct material quantity variance
Error: Reference source not found
(b) No, the contract should not be signed. Although the new supplier is offering the materials at only $11.50 per pound, the materials do not seem to hold up well in production, as shown by the large unfavorable direct material quantity variance.
(c) Direct labor rate variance Direct labor efficiency variance Error: Reference source not found
(d) Yes, the new labor mix should be continued. Although it increases the average hourly labor cost from $15 to $16, thereby causing a $6,400 unfavorable direct labor rate variance, this is more than offset by greater efficiency of labor time. Notice that the direct labor efficiency variance is $12,000 favorable. Thus, the new labor mix reduces overall labor costs.
10-72 The total nursing labor variance for the fourth floor nursing unit of Mountain
View Hospital for May is $1,745 unfavorable. Of this amount, $460 (favorable) is attributable to labor efficiency and $2,205 (unfavorable) to rate differences. The calculation of these amounts is presented below.
Labor class Actual hours Actual rate RN 8 150, $12.30$100,245 LPN 4 300 8 20 35 260, . , Aide 4 400 5 75 25 300, . ,
Total $160,805
Labor class Actual hours Standard rate RN 8 150, $12.00$97,800 LPN 4 300 8 00 34 400, . , Aide 4 400 6 00 26 400, . ,
Total $158,600
Labor class Standard hours Standard rate RN 7 920, $12.00$95,040 LPN 4 620 8 00 36 960, . , Aide 4 510 6 00 27 060, . ,
Total $159,060
Labor Variances
class Labor efficiency Labor rate Total
RN $97, $95, $2, 800 040 760 U $100, $97, $2, 245 800 445 U $100, $95, $5, 245 040 205 U LPN $34, $36, $2, 400 960 560 F $35, $34, $860 260 400 U $35, $36, $1, 260 960 700 F Aide $26, $27, $660 400 060 F $25, $26, $1, 300 400 100 F $25, $27, $1, 300 060 760 F Total $158, $159, $460 600 060 F $160, $158, $2, 805 600 205 U $160, $159, $1, 805 060 745 U
10-73 (a) (i) Direct material price variance = (AP – SP) × AQ Error: Reference source not found (ii) Direct material quantity variance = (AQ – SQ) × SP
Error: Reference source not found
(iii) Direct labor rate variance = (AR – SR) × AH
Error: Reference source not found (iv) Direct labor efficiency variance = (AH – SH) × SR
Error: Reference source not found (b) These variances reflect tradeoffs made by Asahi USA. More expensive
materials may have been acquired with the expectation of reducing materials waste. Less expensive labor may have been used that may have led to a lower level of labor efficiency. The overall total cost variances for materials and labor individually were favorable, indicating that the positive effects of these decisions outweigh their negative effects.
10-74 We first compute percentages of total unit sales for each product line for
planned and actual sales.
Planned Sales for February
Muffins Scones Carrot Bread
Units % Total Units % Total Units % Total Total
Unit Price $1.35 $1.75 $2.75
Unit Sales 1,600 26.67% 3,400 56.67% 1,000 16.67% 6,000
Actual Sales for February
Muffins Scones Carrot Bread
Units % Total Units % Total Units % Total Total
Unit Price $1.55 $1.60 $3.25
Unit Sales 1,400 19.44% 4,500 62.50% 1,300 18.06% 7,200
Total $2,170 $7,200 $4,225 $13,595
(a) The sales mix variance is computed as follows:
Actual total sales units of all products (actual sales mix percentage of this product – planned sales mix percentage of this product) planned revenue per unit of this product
Muffins: 7,200 (19.44% – 26.67%) $1.35 = $ –702, that is, $702 unfavorable. This means that because sales of muffins comprised less than the planned percentage of total sales, revenues of $702 were lost on this product.
Scones: 7,200 (62.50% – 56.67%) $1.75 = $735 favorable. This means that because sales of scones comprised more than the planned percentage of total sales, revenues of $735 were gained on this product. Carrot bread: 7,200 (18.06% – 16.67%) $2.75 = $275 favorable. This means that because sales of carrot bread comprised more than the
planned percentage of total sales, revenues of $275 were gained on this product.
(b) The sales quantity variance for each product line is computed as follows: (Actual total sales units of all products – planned total sales units of all products) planned sales mix percentage of this product planned revenue per unit of this product.
Muffins: (7,200 – 6,000) 26.67% $1.35 = $432 favorable. This means that because of the overall increase in sales, if the muffins sales mix percentage had remained as planned, then an increase in sales revenue of $432 would have been realized on this product.
Scones: (7,200 – 6,000) 56.67% $1.75 = $1,190 favorable. This means that because of the overall increase in sales, if the scones sales mix
percentage had remained as planned, then an increase in sales revenue of $1,190 would have been realized on this product.
Carrot bread: (7,200 – 6,000) 16.67% $2.75 = $550 favorable. This means that because of the overall increase in sales, if the carrot bread sales mix percentage had remained as planned, then an increase in sales revenue of $550 would have been realized on this product.
(c) The sales price variance for each product line is computed as follows: Actual number of units sold (actual price per unit – planned price per unit)
Muffins: 1,400 ($1.55 – $1.35) = $280 favorable. This means that because the company sold the muffins at more than the planned price per unit, $280 of revenues was gained on the 1,400 units of muffins.
Scones: 4,500 ($1.60 – $1.75) = $ –675, that is, $675 unfavorable. This means that because the company sold the scones at less than the planned price per unit, $675 of revenues was lost on the 4,500 units of scones. Carrot bread: 1,300 ($3.25 – $2.75) = $650 favorable. This means that because the company sold the carrot bread at more than the planned price per unit, $650 of revenues was gained on the 1,300 units of carrot bread. Summary:
Carrot
Muffins Scones Bread Total
Price Variance $280 -$675 $650 $255favorable
10-75 Variance analysis is a form of exception reporting. That is, the focus is on what
went wrong rather than what went right. An excessive preoccupation on negative results, rather than a balance between complimenting people for positive results and investigating negative results, can create a negative organization environment.
A variance is a signal that something unplanned happened. For variances to be signals, they must be reasonable in the sense of reflecting a reasonable level of performance. Some organizations believe in setting very tight standards, which, in turn, trigger a steady stream of unfavorable variances. Beyond being motivationally debilitating, a steady stream of negative variances reduces their value as a signal because they are always there.
As signals, variances should trigger an investigation to find out what caused the variance. They provide no information about cause, but rather reflect only the effect of the cause. In some organizations people become preoccupied with arguing about the nature and size of variances rather than focusing on finding the underlying cause of the variance.
Finally, superiors often use variances to check up on subordinates (people may use variances to check up on their own work.) Because of this, in many organizations, variances and the management accountants who produce the variances have a negative reputation. Many people believe that superiors use variances in accusatory and invasive ways rather than constructively to improve organization performance.
CASES
10-76 (a) Rust Manufacturing Co.
BUDGET FOR ACE AND BELL For the Year Ending December 31, 2011
Ace Bell Sales (1) $8,000,000 $2,000,000 Variable costs: Direct materials (2) $1,600,000 $300,000 Direct labor (3) 2,000,000 500,000 Variable mfg. support (4) 200,000 50,000 $3,800,000 $850,000 Contribution margin $4,200,000 $1,150,000 Fixed costs: Depreciation (5) $140,000 $60,000 Rent (6) 78,000 52,000 Other mfg. support (7) 200,000 50,000 Selling costs (8) 120,000 60,000
Gen. & admin. costs (9) 32,000 8,000 $570,000 $230,000
Pretax operating profit $3,630,000 $920,000
Supporting calculations:
(5) Ace: $200K 70% $140K Bell: $200K 30% $60K (6) Ace: $130K 60% $78K Bell: $130K 40% $52K (7) Ace: $$22.5 M M × ($500K – $250K) = $200K Bell: $$5002.5 M K × ($500K – $250K) = $50K (8) Ace: 200,000 units Bell: 100,000 units 300,000 units Ace: 200 300$180K$120K Bell: 100 300$180K$60K (9) Ace: $8M $10M $40K $32K Bell: $2M $10M $40K $8K
(Note: M stands for millions and K stands for thousands.)
Ace Bell
Contribution margin per unit $21.00 $11.50 Pretax operating profit per unit $18.15 $ 9.20
(c) Decrease in contribution from 10% decrease in production and sales: Ace: 200 000 10%, $21 $420, 000
(d) The above analysis relies on cost estimates based on allocation of other manufacturing support, selling support, and general and administrative costs between Ace and Bell that ignores the activities that result in these support costs and the relative demands placed by Ace and Bell for these manufacturing, selling, and administrative support activities. As a result, it is possible that the above costs misrepresent the true cost of operations for Ace and Bell.
10-77 (a) Number of Deliveries
Number of Deliveries Required Delivery Capacitya Overtime Hours Regular Wagesc Overtime Cost Total Cost Unit Delivery Cost 70 80 0 $480 $ 0 $480 $6.857 80 80 0 480 0 480 6.000 90 80 5b 480 90d 570 6.333
a5 workers 8 hours 2 per hour 80 deliveries b (90 − 80) ÷ 2 = 5 hours
c $12 5 8 = $480 d $12 1.5 5 = $90
(b) Based on the old hiring policy Number of Deliveries Required Delivery Capacity Overtime Hours Regular Hours Overtime Cost Total Cost Unit Delivery Cost Monday 65 80 0.0 $480 $0 $480 $7.385 Tuesday 70 80 0.0 480 0 480 6.857 Wednesday 80 80 0.0 480 0 480 6.000 Thursday 85 80 2.5 480 45 525 6.176 Friday 95 80 7.5 480 135 615 6.474 Total $2,580
Based on the new hiring policy Number of Deliveries Required Delivery Capacity Overtime Hours Regular Hours Overtime Cost Total Cost Unit Delivery Cost Monday 65 64 0.5 $384 $9 $393 $6.046 Tuesday 70 64 3.0 384 54 438 6.257 Wednesday 80 80 0.0 480 0 480 6.000 Thursday 85 80 2.5 480 45 525 6.176 Friday 95 96 0.0 576 0 576 6.063 Total $2,412
The expected savings per week of the new hiring policy: $ ,2 580$ ,2 412$168
10-78 Judd’s Reproductions (Calculations were performed in an Excel spreadsheet.)
(a) Original situation
Oct. Nov. Dec. Jan. Feb. Mar. Apr. May
Unit production and sales - Chairs 900 975 950 1,020 1,191 1,179 1,195 1,200 - Tables 175 188 201 200 237 243 250 252 - Cabinets 90 102 95 109 120 119 126 122 Total revenuea $499,500 $547,800 $541,900 $580,200 $667,500 $668,700 $690,800 $686,400 Cash sales: 25% of revenue 124,875 136,950 135,475 145,050 166,875 167,175 172,700 171,600 Credit card sales: 35% of rev. 174,825 191,730 189,665 203,070 233,625 234,045 241,780 240,240 Exporter sales: 40% of rev. 199,800 219,120 216,760 232,080 267,000 267,480 276,320 274,560 Bad debts: 3% of export sales $6,962 $8,010 $8,024 $8,290 $8,237 Cash sales discounts: 5% of cash sales 7,253 8,344 8,359 8,635 8,580 Cred. Card fees: 3% of credit card sales 6,092 7,009 7,021 7,253 7,207
Judd’s Reproductions (Continued)
(a) Original situation (Continued
June July Aug. Sept. Oct. Nov. Dec. Total Unit production and sales - Chairs 1,204 1,194 1,199 1,222 1,219 1,207 1,192 - Tables 255 242 253 243 248 244 255 - Cabinets 125 123 121 127 126 126 119 Total revenuea $695,300 $678,000 $685,300 $691,700 $693,800 $687,800 $682,100 $8,107,600 Cash sales: 25% of Revenue 173,825 169,500 171,325 172,925 173,450 171,950 170,525 2,026,900 Credit card sales: 35% of rev. 243,355 237,300 239,855 242,095 242,830 240,730 238,735 2,837,660 Exporter sales: 40% of rev. 278,120 271,200 274,120 276,680 277,520 275,120 272,840 3,243,040 Bad debts: 3% of export sales $8,344 $8,136 $8,224 $8,300 $8,326 $8,254 $8,185 $97,291 - Cash sales discounts: 5% of cash sales 8,691 8,475 8,566 8,646 8,673 8,598 8,526 101,345 - Cred. card fees: 3% of credit card sales 7,301 7,119 7,196 7,263 7,285 7,222 7,162 85,130
Carpenter and helper hours Dec. Jan. Feb. Mar. Apr. May June - Required carpenter hoursb 1,562 1,788.9 1,793.1 1,859 1,842 1,869.1
- Carpentersc 9 9 10 10 11 11 11
- Helpers: 1.5 number of
carpenters 14 14 15 15 17 17 17
- Carpenter regular hours:
172 per carpenter 1,548 1,720 1,720 1,892 1,892 1,892 - Carpenter overtime hours 14 68.9 73.1 0 0 0 - 5% of regular carpenter hrs,
must be > overtime hoursc 77.4 86 86 94.6 94.6 94.6
- Helper regular hours:
172 per helper 2,408 2,580 2,580 2,924 2,924 2,924 - Helper overtime hours 0 103.35 109.65 0 0 0 Carpenter and helper hours July Aug. Sept. Oct. Nov. Dec.
- Required carpenter hoursb 1,820.6 1,838.1 1,858.3 1,863.6 1,848.8 1,828.3
- Carpentersc 11 11 11 11 11 11
- Helpers: 1.5 number of
carpenters 17 17 17 17 17 17
- Carpenter regular hours:
172 per carpenter 1,892 1,892 1,892 1,892 1,892 1,892 - Carpenter overtime hours 0 0 0 0 0 0 - 5% of regular carpenter hrs,
must be > overtime hoursc 94.6 94.6 94.6 94.6 94.6 94.6
- Helper regular hours:
172 per helper 2,924 2,924 2,924 2,924 2,924 2,924
- Helper overtime hours 0 0 0 0 0 0
b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.
c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours
Cash inflows Jan. Feb. Mar. Apr. May June - From 3 months previous:
17% of export sales $33,966 $37,250 $36,849 $39,454 $45,390 $45,472 - From 2 months previous:
50% of export sales 109,560 108,380 116,040 133,500 133,740 138,160 - From 1 month previous:
30% of export sales + 97% of
credit card sales 249,003 266,602 306,716 307,268 317,423 315,401 - From current month:
95% of cash sales 137,798 158,531 158,816 164,065 163,020 165,134 - Interest on cash balance:
3%/yr if previous mo. ending
bal > $50,000 0 0 0 0 0 5 2 - Total cash inflows $530,327 $570,764 $618,422 $644,286 $659,573 $664,218
Cash inflows July Aug. Sept. Oct. Nov. Dec. - From 3 months previous:
17% of export sales $46,974 $46,675 $47,280 $46,104 $46,600 $47,036 - From 2 months previous:
50% of export sales 137,280 139,060 135,600 137,060 138,340 138,760 - From 1 month previous:
30% of export sales + 97% of
credit card sales 319,490 311,541 314,895 317,836 318,801 316,044 - From current month: 95% of
cash sales 161,025 162,759 164,279 164,778 163,353 161,999 - Interest on cash balance:
3%/yr if previous mo. ending
bal. > $50,000 33
0 120 400 680 592 889 - Total cash inflows $665,100 $660,155 $662,455 $666,458 $667,686 $664,727
Cash outflows Jan. Feb. Mar. Apr. May June - Carpenter wages: $24 per
regular hr.; $36 per
overtime hr. $37,656 $43,760 $43,912 $45,408 $45,408 $45,408 - Helper wages: $14 per
regular hr.; $21 per
overtime hr. 33,712 38,290 38,423 40,936 40,936 40,936 - Supplies, etc.: $5 per
carpenter hr. 7,810 8,945 8,966 9,295 9,210 9,346 - Variable support costs:
$20 per carpenter hr. 31,240 35,778 35,862 37,180 36,840 37,382 - Maintenance costs: $15
per carpenter hr. 23,430 26,834 26,897 27,885 27,630 28,037 - Wood costs: $30 per unit
of woodd 127,650 146,610 147,240 152,550 151,380 153,570 - Factory rent: $150,000 per quarter 150,000 0 0 150,000 0 0 - Fixed costs: $40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000 - Administrative salaries: $25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000 - Selling costs: $30,000 per month 30,000 30,000 30,000 30,000 30,000 30,000 - Advertising expenditures: $50,000 per mo. 50,000 50,000 50,000 50,000 50,000 50,000 - Shipping costse 43,015 49,470 49,545 51,185 50,850 51,510 - Variable selling costs: 6%
of product list prices 34,812 40,050 40,122 41,448 41,184 41,718 - Interest on line of credit:
10%/yr based on last
month’s balance 0 1,242 952 273 747 0 - Mach. purchases:
Cash outflows July Aug. Sept. Oct. Nov. Dec. - Carpenter wages:
$24 per regular hr.;
$36 per overtime hr. $45,408 $45,408 $45,408 $45,408 $45,408 $45,408 - Helper wages: $14 per
regular hr.; $21 per
overtime hr. 40,936 40,936 40,936 40,936 40,936 40,936 - Supplies, etc.: $5 per
carpenter hr. 9,103 9,191 9,292 9,318 9,244 9,142 - Variable support costs:
$20 per carpenter hr. 36,412 36,762 37,166 37,272 36,976 36,566 - Maintenance costs: $15
per carpenter hr. 27,309 27,572 27,875 27,954 27,732 27,425 - Wood costs: $30 per unit
of woodd 149,250 151,140 152,130 152,790 151,470 150,510 - Factory rent: $150,000 per quarter 150,000 0 0 150,000 0 0 - Fixed costs: $40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000 - Administrative salaries: $25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000 - Selling costs: $30,000 per month 30,000 30,000 30,000 30,000 30,000 30,000 - Advertising expenditures: $50,000 per mo. 50,000 50,000 50,000 50,000 50,000 50,000 - Shipping costse 50,245 50,765 51,270 51,415 50,975 50,520 - Variable selling costs:
6% of product list prices 40,680 41,118 41,502 41,628 41,268 40,926 - Interest on line of credit:
10%/yr based on last
month’s balance 0 0 0 0 0 0
- Mach. purch.: $5,000
no. of carpenters (Jan.
and July) 55,000 0 0 0 0 0 - Total cash outflows $749,343 $547,891 $550,578 $701,721 $549,009 $546,432
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively. e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
Cash flow analysis Dec. Jan. Feb. Mar. Apr. May June - Opening cash $50,000 $50,000 $50,000 $50,000 $50,000 $70,806 - Net cash flow: Cash
inflows - cash outflows –148,998 34,785 81,505 –56,873 110,388 111,312 - Cash before financing –98,998 84,785 131,505 –6,873 160,388 182,118 - Opening line-of credit 0 148,998 114,213 32,709 89,582 0 - Line-of-credit increase 148,998 0 0 56,873 0 0 - Line-of-credit payment 0 34,785 81,505 0 89,582 0 - Line of credit closing
balance 0 148,998 114,213 32,709 89,582 0 0 - Ending cash: $50,000
minimum 50,000 50,000 50,000 50,000 50,000 70,806 182,118 Cash flow analysis July Aug. Sept. Oct. Nov. Dec.
- Opening cash $182,118 $97,875 $210,139 $322,016 $286,753 $405,429 - Net cash flow: Cash
inflows - cash outflows –84,243 112,264 111,877 –35,263 118,677 118,295 - Cash before financing 97,875 210,139 322,016 286,753 405,429 523,724 - Opening line-of credit 0 0 0 0 0 0 - Line-of-credit increase 0 0 0 0 0 0 - Line-of-credit payment 0 0 0 0 0 0 - Line of credit closing
balance 0 0 0 0 0 0
- Ending cash: $50,000
Judd’s Reproductions Projected Income Statement For the Year Ended December 31, 2012
Original Situation Revenue Chairs $2,844,400 Tables 2,629,800 Cabinets 2,633,400 $8,107,600 Variable expenses Carpenters 534,000 Helpers 478,849 Maintenance 326,577 Variable support 435,436 Selling 486,456 Shipping 600,765 Supplies 108,859 Wood 1,786,290 4,757,232 Contribution margin $3,350,368 Fixed expenses Administrative staff 300,000 Depreciationa 46,000 Factory rent 600,000 Selling 360,000 Other factory 480,000 1,786,000 Other expenses Advertising costs 600,000 Bad debts 97,291
Cash sales discounts 101,345
Credit card fees 85,130
Net interest charges: $3,213 – 3,063 150 883,916
Income before taxes $680,452
a
Depreciation:
Machinery, Jan. 1, 2012 $360,000
Purchases: $45,000 in January and $55,000 in July 100,000 Depreciation expense: 10% of year-end balance (46,000)
Judd’s Reproductions Projected Balance Sheet
December 31, 2012 Original Situation
Cash $523,724
Accounts receivablea 727,737 Bank loan $0
Machinery and
equipmentb 414,000 Owners’ equity 1,665,461
Total
Assets $1,665,461
Total liabilities and
owners’ equity $1,665,461
a
Accounts receivable, December 31, 2012 balance = $727,737 = 97% of Dec. credit card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively. b
Machinery, Jan. 1, 2012 $360,000
Purchases: $45,000 in January and $55,000 in July 100,000 Depreciation expense: 10% of year-end balance (46,000)
(b) Cash sales to exporters lead to 5% 40% drop in sales across products (Multiply original sales quantities by 0.98 and round the result to the nearest unit.)
Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Unit production and sales - Chairs 900 975 950 1,000 1,167 1,155 1,171 1,176 - Tables 175 188 201 196 232 238 245 247 - Cabinets 90 102 95 107 118 117 123 120 - Total revenuea $499,500 $547,800 $541,900 $569,000 $654,600 $655,800 $676,100 $673,500 - Cash sales: (25%+35%)/ 95% of revenue $124,875 $136,950 $135,475 $359,368 $413,432 $414,189 $427,011 $425,368 - Credit card sales: 35% /95% of rev. $174,825 $191,730 $189,665 $209,632 $241,168 $241,611 $249,089 $248,132 - Exporter sales: 40% of rev. in 2011; all cash in 2012 $199,800 $219,120 $216,760 $0 $0 $0 $0 $0 - Bad debts: 3% of export sales $0 $0 $0 $0 $0 - Cash sales discounts: 5% of cash sales $17,968 $20,672 $20,709 $21,351 $21,268 - Cred. card fees:
3% of credit
card sales $6,289 $7,235 $7,248 $7,473 $7,444
June July Aug. Sept. Oct. Nov. Dec. Total Unit production and sales - Chairs 1,180 1,170 1,175 1,198 1,195 1,183 1,168 - Tables 250 237 248 238 243 239 250 - Cabinets 123 121 119 124 123 123 117 - Total revenuea $682,400 $665,100 $672,400 $677,000 $679,100 $673,100 $669,200 $7,947,300 - Cash sales: (25%+35%)/ 95% of revenue $430,989 $420,063 $424,674 $427,579 $428,905 $425,116 $422,653 $5,019,347 - Credit card sales: 35%/95% of rev. $251,411 $245,037 $247,726 $249,421 $250,195 $247,984 $246,547 $2,927,953 - Exporter sales: 40% of rev. in 2011; all cash in 2012 $0 $0 $0 $0 $0 $0 $0 $0 - Bad debts: 3% of export sales $0 $0 $0 $0 $0 $0 $0 $0 - Cash sales discounts: 5% of cash sales $21,549 $21,003 $21,234 $21,379 $21,445 $21,256 $21,133 $250,967 - Cred. card fees:
3% of credit
card sales $7,542 $7,351 $7,432 $7,483 $7,506 $7,440 $7,396 $87,839
Carpenter and helper hours Dec. Jan. Feb. Mar. Apr. May June - Required carpenter hoursb 1,5321,754.8 1,7591,818.91,807.9 1,835
- Carpentersc 9 9 10 10 11 11 11
- Helpers: 1.5 number of
carpenters 14 14 15 15 17 17 17
- Carpenter regular hours:
172 per carpenter 1,548 1,720 1,720 1,892 1,892 1,892 - Carpenter overtime hours 0 34.8 39 0 0 0 - 5% of regular carpenter hrs,
must be > overtime hoursc 77.4 86 86 94.6 94.6 94.6 - Helper regular hours:
172 per helper 2,408 2,580 2,580 2,924 2,924 2,924 - Helper overtime hours 0 52.2 58.5 0 0 0 Carpenter and helper hours July Aug. Sept. Oct. Nov. Dec.
- Required carpenter hoursb 1,786.5 1,8041,818.21,823.51,808.71,794.2
- Carpentersc 11 11 11 11 11 11
- Helpers: 1.5 number of
carpenters 17 17 17 17 17 17
- Carpenter regular hours:
172 per carpenter 1,892 1,892 1,892 1,892 1,892 1,892 - Carpenter overtime hours 0 0 0 0 0 0 - 5% of regular carpenter hrs,
must be > overtime hoursc 94.6 94.6 94.6 94.6 94.6 94.6 - Helper regular hours:
172 per helper 2,924 2,924 2,924 2,924 2,924 2,924
- Helper overtime hours 0 0 0 0 0 0
b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.
c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours
Cash inflows Jan. Feb. Mar. Apr. May June - From 3 months previous:
17% of export sales $33,966 $37,250 $36,849 $0 $0 $0
- From 2 months previous:
50% of export sales 109,560 108,380 0 0 0 0
- From 1 month previous: 30% of export sales + 97% of credit
card sales 249,003 203,343 233,933 234,362 241,617 240,688 - From current month:
95% of cash sales 341,400 392,760 393,480 405,660 404,100 409,440 - Interest on cash balance: 3%/yr if
previous mo. Ending bal. .> $50,000 0 1 51 68 9 1,03 2 90 0 1,160 - Total cash inflows $733,929 $741,884 $664,952 $641,054 $646,616 $651,287
Cash inflows July Aug. Sept. Oct. Nov. Dec.
- From 3 months previous:
17% of export sales $0 $0 $0 $0 $0 $0
- From 2 months previous:
50% of export sales 0 0 0 0 0 0
- From 1 month previous: 30% of export sales + 97% of credit
card sales 243,868 237,686 240,295 241,938 242,689 240,545 - From current month:
95% of cash sales 399,060 403,440 406,200 407,460 403,860 401,520 - Interest on cash balance: 3%/yr if
previous mo. Ending bal.> $50,000 1,421 1,173 1,424 1,684 1,575 1,840 - Total cash inflows $644,349 $642,299 $647,918 $651,083 $648,124 $643,904