Chap 009

(1)

CHAPTER 9 Profit Planning and Activity-Based Budgeting

ANSWERS TO REVIEW QUESTIONS

9-1 A budget facilitates communication and coordination by making each manager

throughout the organization aware of the plans made by other managers. The budgeting process pulls together the plans of each manager in the organization.

9-2 An example of using the budget to allocate resources in a university is found in the

area of research funds and grants. Universities typically have a limited amount of research-support resources that must be allocated among the various colleges and divisions within the university. This allocation process often takes place within the context of the budgeting process.

9-3 A master budget, or profit plan, is a comprehensive set of budgets covering all

phases of an organization's operations for a specified period of time. The master budget includes the following parts: sales budget, operational budgets (including a production budget, inventory budgets, a labor budget, an overhead budget, a selling and administrative expense budget, and a cash budget), and budgeted financial statements (including a budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows).

9-4 The flowchart on the following page depicts the components of the master budget

for a service station.

9-5 General economic trends are important in forecasting sales in the airline industry.

The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air.

9-6 Operational budgets specify how an organization's operations will be carried out to

meet the demand for its goods and services. The operational budgets prepared in a hospital would include a labor budget showing the number of professional personnel of various types required to carry out the hospital's mission, an overhead budget listing planned expenditures for such costs as utilities and maintenance, and a cash

(2)

Flowchart for Review Question 9-4 Sales Budget Operational Budgets Budgeted Financial Statements Budgeted Balance Sheet Budgeted Statement of Cash Flows Budgeted Income Statement Cash Budget Ending Inventory Budget: Gasoline Materials Budget: Gasoline and Related Products Labor

Budget Overhead Budget

Selling and Administrative Expense Budget Sales Budget: Gasoline, Related Products, and Services

(3)

9.7 Application of activity-based costing to the budgeting process yields activity-based budgeting (ABB). Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities necessary to produce these products and services are determined. Finally the resources needed to perform the specified activities are determined. ABB differs from traditional budgeting in the emphasis that it places on activities and its use of activity-based costing data in the budgeting process.

9.8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this approach the information needed to construct a budget is gathered via the Internet from individuals and subunits located throughout the enterprise. The Internet also is used to disseminate the resulting budget schedules and information to authorized users throughout the enterprise.

9-9 The city of Boston could use budgeting for planning purposes in many ways. For

example, the city's personnel budget would be important in planning for required employees in the police and fire departments. The city's capital budget would be used in planning for the replacement of the city's vehicles, computers, administrative buildings, and traffic control equipment. The city's cash budget would be important in planning for cash receipts and disbursements. It is important for any organization, including a municipal government, to make sure that it has enough cash on hand to meet its cash needs at all times.

9.10The budget director, or chief budget officer, specifies the process by which budget data will be gathered, collects the information, and prepares the master budget. To communicate budget procedures and deadlines to employees throughout the organization, the budget director often develops and disseminates a budget manual. 9-11 The budget manual says who is responsible for providing various types of

information, when the information is required, and what form the information is to take. The budget manual also states who should receive each schedule when the master budget is complete.

9-12 A company's board of directors generally has final approval over the master budget. By exercising its authority to make changes in the budget and grant final approval, the board of directors can wield considerable influence on the overall direction the organization takes. Since the budget is used as a resource-allocation mechanism,

(4)

9-13 A master budget is based on many assumptions and predictions of unknown parameters. For example, the sales budget is built on an assumption about the nature of demand for goods or services. The direct-material budget requires an estimate of the direct-material price and the quantity of material required per unit of production. Many other assumptions are used throughout the rest of the budgeting process.

9-14 The difference between the revenue or cost projection that a person provides in the budgeting process and a realistic estimate of the revenue or cost is called budgetary slack. Building budgetary slack into the budget is called padding the budget. A significant problem caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely future events. Cost estimates are often inflated, and revenue estimates are often understated. In this situation, the budget loses its effectiveness as a planning tool.

9-15 An organization can reduce the problem of budgetary slack in several ways. First, it can avoid relying on the budget as a negative, evaluative tool. Second, managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections.

9-16 The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that "this is our budget," rather than the feeling that "this is the budget you imposed on us." When employees feel that they were part of the budgeting process, they are more likely to strive to achieve the budget.

9-17 This comment is occasionally heard from people who have started and run their own small business for a long period of time. These individuals have great knowledge in their minds about running their business. They feel that they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by feel. This approach can result in several problems. First, if the person who is running the business is sick or traveling, he or she is not available to make decisions and implement plans that could have been clarified by a budget. Second, the purposes of budgeting are important to the effective running of an organization. Budgets facilitate communication and coordination, are useful in resource allocation, and help in evaluating performance and providing incentives to

(5)

9-18 In developing a budget to meet your college expenses, the primary steps would be to project your cash receipts and your cash disbursements. Your cash receipts could come from such sources as summer jobs, jobs held during the academic year, college funds saved by relatives or friends for your benefit, scholarships, and financial aid from your college or university. You would also need to carefully project your college expenses. Your expenses would include tuition, room and board, books and other academic supplies, transportation, clothing and other personal needs, and money for entertainment and miscellaneous expenses.

9-19 Firms with international operations face a variety of additional challenges in preparing their budgets.

•

A multinational firm's budget must reflect the translation of foreign currencies

into U.S. dollars. Almost all the world's currencies fluctuate in their values relative to the dollar, and this fluctuation makes budgeting for those translations difficult.

•

It is difficult to prepare budgets when inflation is high or unpredictable. Some

foreign countries have experienced hyperinflation, sometimes with annual inflation rates well over 100 percent. Predicting such high inflation rates is difficult and complicates a multinational's budgeting process.

•

The economies of all countries fluctuate in terms of consumer demand,

availability of skilled labor, laws affecting commerce, and so forth. Companies with foreign operations face the task of anticipating such changing conditions in their budgeting processes.

9-20 The five phases in a product's life cycle are as follows: (a) Product planning and concept design

(b) Preliminary design

(c) Detailed design and testing (d) Production

(6)

SOLUTIONS TO EXERCISES

EXERCISE 9-21 (20 MINUTES)

1. The total required production is 131,144 units, computed as follows:

Budgeted Sales

(in units) Planned Ending Inventory (in units)

June 32,000 (40,000 × 80%) July 40,000 (given) August 42,000 (40,000 × 1.05) September 44,100 (42,000 × 1.05) 37,044 (46,305 × 80%) October 46,305 (44,100 × 1.05) Sales in units: July... 40,000 August... 42,000 September... 44,100

Total for third quarter... 126,100

Add: Desired ending inventory, September 30... 37,044

Subtotal... 163,144

Deduct: Desired ending inventory, June 30... 32,000

Total required production... 131,144

2. Assumed production during third quarter (in units)... 120,000

Raw-material requirements per unit of product (in pounds)... _× 4

Raw material required for production in third quarter (in pounds)... 480,000

Add: Desired ending raw-material inventory, September 30

(480,000 × 25%)... 120,000 Subtotal... 600,000

Deduct: Ending raw-material inventory, June 30... 140,000

(7)

1. Cash collections in October:

Month of Sale Amount Collected in October

July... $150,000 × 4% $ 6,000

August... 175,000 × 10% 17,500

September... 200,000 × 15% 30,000

October... 225,000 × 70% 157,500

Total... $211,000

Notice that the amount of sales on account in June, $122,500 was not needed to solve the exercise.

2. Cash collections in fourth quarter from credit sales in fourth quarter.

Amount Collected

Month of Sale Credit Sales October November December

October... $225,000 $157,500 $ 33,750 $ 22,500

November... 250,000 – 175,000 37,500

December... 212,500 – – 148,750

Total... $157,500 208,750 $208,750

Total collections in fourth quarter from credit sales in fourth

quarter... $575,000

3. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:

(8)

EXERCISE 9-23 (20 MINUTES) 1.

July August September

Sales... $240,000 $180,000 $270,000a

Cash receipts:

From cash sales... $120,000b _{$ 90,000}c _$135,000

From sales on account... 108,000d _102,000 _117,000e

Total cash receipts... $ 228,000 $ 192,000 $ 252,000

a_{$270,000 = $135,000}_×₂

b_{$120,000 = $240,000}_×_.5

c_{$ 90,000 = $180,000}_×_.5

d_{$108,000 = ($120,000}_×_{.6) + ($90,000}_×_.4)

e_{$117,000 = ($135,000}_×_{.6) + ($90,000}_×_.4)

2. Accounts payable, 12/31/x0... 600,000 euros

Purchases of goods and services on account during 20x1... 2,400,000 euros

Payments of accounts payable during 20x1... (2,200,000 ) eur os*

Accounts payable, 12/31/x1... 800,000 euros *2,200,000 euros

= 600,000 euros + 2,400,000 euros – 800,000 euros

3. Accounts receivable, 12/31/x0... 1,700,000y

Sales on account during 20x1... 4,500,000y

Collections of accounts receivable during 20x1... (3,900,000 y )

Accounts receivable, 12/31/x1... 2,300,000 y

4. Accumulated depreciation, 12/31/x0... $ 405,000

(9)

1. Production (in units) required for the year:

Sales for the year... 3,360,000

Add: Desired ending finished-goods inventory on December 31... 350,000

Deduct: Beginning finished-goods inventory on January 1... 560,000

Required production during the year... 3,150,000

2. Purchases of raw material (in units), assuming production of 3,500,000 finished units:

Raw material required for production (3,500,000 × 2)... 7,000,000

Add: Desired ending inventory on December 31... 315,000

Deduct: Beginning inventory on January 1... 245,000

(10)

1. WHITE MOUNTAIN FURNITURE COMPANY

EXPECTED CASH COLLECTIONS

NOVEMBER

Month Sales Percent

Expected Collections September... $150,000 9% $ 13,500 October... 195,000 20% 39,000 November... 165,000 70% 115,500 Total... $168,000

EXPECTED CASH DISBURSEMENTS

NOVEMBER

October purchases to be paid in November... $135,000

Less: 2% cash discount... 2,700

Net... $132,300

Cash disbursements for expenses... 36,000

Total... $168,300

EXPECTED CASH BALANCE

NOVEMBER 30

Balance, November 1... $ 55,000

Add: Expected collections... 168,000

Less: Expected disbursements... 168,300

(11)

Answers will vary widely, depending on the governmental unit selected and the budgetary items on which the student focuses. In the past, students have expressed surprise at the proportion of the U.S. federal budget that goes to entitlement programs (e.g., Social Security and Medicare), interest expense, and the military.

1. Budgeted cash collections for December:

Month of Sale Collections in December

November... $400,000 × 38% $152,000

December... 440,000 × 60% 264,000

Total cash collections... $416,000

2. Budgeted income (loss) for December:

Sales revenue... $440,000

Less: Cost of goods sold (75% of sales)... 330,000

Gross margin (25% of sales)... $110,000

Less: Operating expenses:...

Bad debts expense (2% of sales)... $ 8,800

Depreciation ($432,000/12)... 36,000

Other expenses... 45,200

Total operating expenses... 90,000

(12)

EXERCISE 9-27 (CONTINUED)

3. Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to December's purchases of merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods sold must be 75 percent of sales.

Month Sales

Cost of Goods

Sold Amount Purchased in December

December... $440,000 $330,000 $330,000 × 20% $ 66,000

January... 400,000 300,000 300,000 × 80% 240,000

Total December

purchases... $306,000

(13)

Memorandum

Date: Today

To: President, East Bank of Mississippi

From: I.M. Student and Associates

Subject: Budgetary slack

Budgetary slack is the difference between a budget estimate that a person provides and a realistic estimate. The practice of creating budgetary slack is called padding the budget. The primary negative consequence of slack is that it undermines the credibility and usefulness of the budget as a planning and control tool. When a budget includes slack, the amounts in the budget no longer portray a realistic view of future operations.

The bank's bonus system for the new accounts manager tends to encourage budgetary slack. Since the manager's bonus is determined by the number of new accounts generated over the budgeted number, the manager has an incentive to understate her projection of the number of new accounts. The description of the new accounts manager's behavior shows evidence of such understatement. A 10 percent increase over the bank's current 10,000 accounts would mean 1,000 new accounts in 20x5. Yet the new accounts manager's projection is only 800 new accounts. This projection will make it more likely that the actual number of new accounts will exceed the budgeted number.

(14)

EXERCISE 9-29 (20 MINUTES) 1.

Total Sales in January 20x5

$200,000 $260,000 $320,000

Cash receipts in January, 20x5

From December sales on account... $ 14,250* $ 14,250 $ 14,250

From January cash sales... 150,000† _195,000 _240,000

From January sales on account... 40,000 ** 52,000 64,000

Total cash receipts... $ 204,250 $261,250 $318,250

*$14,250 = $380,000 × .25 × .15

†_{$150,000 = $200,000}_×_.75

**$40,000 = $200,000 × .25 × .80

2. Operational plans depend on various assumptions. Usually there is uncertainty about these assumptions, such as sales demand or inflation rates. Financial planning helps management answer "what if" questions about how the budget will look under various sets of assumptions.

1. Direct professional labor budget for the month of June:

Office visits per month = 48,000/12 = 4,000 Professional services in June:

One-hour visits (20% × 4,000 × 1 hr.)... 800 hours

Half-hour visits (80% × 4,000 × 1/2 hr.)... 1,600 hours

Total direct professional labor... 2,400 hours

Hourly rate for dental associates... _×$ 90

(15)

EXERCISE 9-30 (CONTINUED) 2. Cash collections during June:

May June

Half-hour visits (4,000 × 80%)... 3,200 3,200

Billing rate... _× $60 × $60

Total billings for half-hour visits... $192,000 $192,000

One-hour visits (4,000 × 20%)... 800 800

Billing rate... _× $105 × $105

Total billings for one-hour visits... $ 84,000 $ 84,000

Total billings during month... $276,000 $276,000

Percentage of month's billings collected

during June... × 10 % × 90 %

Collections during June... $ 27,600 $248,400

Total collections in June ($27,600 + $248,400)... $276,000

3. Overhead and administrative expense budget for June:

Patient registration and records (4,000 visits × $3.00 per visit)... $12,000

Other overhead and administrative expenses

(2,400 hours × $7.50 per hour)... 18,000

Total overhead and administrative expenses... $30,000

4. The electronic version of the Solutions Manual “BUILD A SPREADSHEET SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

(16)

SOLUTIONS TO PROBLEMS

PROBLEM 9-31 (30 MINUTES)

1. Schedule of cash collections:

January February March

Collection of accounts receivable: $165,000 x 20%

...

$ 33,000 Collection of January sales ($450,000):

60% in January; 35% in February

...

270,000 $157,500

Collection of February sales ($540,000): 60% in February; 35% in March

...

324,000 $189,000

Collection of March sales ($555,000): 60% in March

...

333,000

Sale of equipment... 15,000

Total cash collections

...

$303,000 $481,500 $537,000

2. Schedule of cash disbursements:

Payment of accounts payable... $ 66,000

Payment of January purchases ($270,000):

70% in January; 30% in February... 189,000 $ 81,000

Payment of February purchases ($300,000):

70% in February; 30% in March... 210,000 $ 90,000

Payment of March purchases ($420,000):

70% in March... 294,000

Cash operating costs... 93,000 72,000 135,000

(17)

PROBLEM 9-31 (CONTINUED)

3. Schedule of cash needs:

Beginning cash balance………. $ 60,000 $ 60,000 $132,900

Total receipts………. 303,000 481,500 537,000

Subtotal………. $363,000 $541,500 $669,900

Less: Total disbursements……… 348,000 363,000 519,000

Cash excess (deficiency) before financing… $ 15,000 $178,500 $150,900

Financing:

Borrowing to maintain $60,000 balance.. 45,000

-0-Loan principal repaid……… (45,000)

-0-Loan interest paid……….. (600) *

-0-Ending cash balance……… $ 60,000 $132,900 $150,900

(18)

1. Production and direct-labor budgets

SHADY SHADES, INC.

BUDGET FOR PRODUCTION AND DIRECT LABOR

FORTHE FIRST QUARTEROF 20X1 Month

January February March Quarter

Sales (units)... 20,000 24,000 16,000 60,000

Add: Ending inventory*... 32,000 25,000 27,000 27,000

Total needs... 52,000 49,000 43,000 87,000

Deduct: Beginning inventory... 32,000 32,000 25,000 32,000

Units to be produced... 20,000 17,000 18,000 55,000

Direct-labor hours per unit... _×

1

× 1 × .75

Total hours of direct labor

time needed... 20,000 17,000 13,500 50,500 Direct-labor costs: Wages ($16.00 per DLH)†_... _$320,000 _{$272,000 $216,000} _$808,000 Pension contributions ($.50 per DLH)... 10,000 8,500 6,750 25,250 Workers' compensation insurance ($.20 per DLH)... 4,000 3,400 2,700 10,100

Employee medical insurance

($.80 per DLH)... 16,000 13,600 10,800 40,400

Employer's social security

(at 7%)... 22,400 19,040 15,120 56,560

Total direct-labor cost... $372,400 $316,540 $251,370 $940,310

*100 percent of the first following month's sales plus 50 percent of the second following month's sales.

(19)

2. Use of data throughout the master budget:

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the sales data include the following:

•

Sales budget

•

Cost-of-goods-sold budget

•

Selling and administrative expense budget

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the production data include the following:

•

Direct-material budget

•

Manufacturing-overhead budget

•

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-direct-labor-hour data include the following:

•

Manufacturing-overhead budget (for determining the overhead application rate)

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-direct-labor cost data include the following:

•

Manufacturing-overhead budget (for determining the overhead application rate)

•

Cash budget

(20)

3. Manufacturing overhead budget:

SHADY SHADES, INC.

MANUFACTURING OVERHEAD BUDGET FORTHE FIRST QUARTEROF 20X1

Month

January February March Quarter

Shipping and handling... $ 60,000 $ 72,000 $48,000 $180,000

Purchasing, material handling,

and inspection... 90,000 76,500 81,000 247,500

Other overhead... 210,000 178,500 141,750 530,250

Total manufacturing overhead... $360,000 $327,000 $270,750 $957,750

1. Niagra Chemical Company’s production budget (in gallons) for the three products for

20x2 is calculated as follows:

Yarex Darol Norex

Sales for 20x2... 120,000 80,000 50,000 Add: Inventory, 12/31/x2 (.08 × 20x3 sales)... _10,400 _5,600 _4,800 Total required... 130,400 85,600 54,800 Deduct: Inventory, 12/31/x1 (.08 × 20x2 sales)... 9,600 6,400 4,000 Required production in 20x2... 120,800 79,200 50,800

(21)

3. Since the 20x1 usage of Islin is 200,000 gallons, the firm’s raw-material purchases

budget (in dollars) for Islin for 20x2 is as follows:

Quantity of Islin required for production in 20x2 (in gallons): Yarex (120,800 × 1)... Darol (79,200 × .7)... Norex (50,800 × .5)... 120,800 55,440 25,400 Subtotal……….. 201,640

Add: Required inventory, 12/31/x2 (201,640 × .10)... 20,164

Subtotal... 221,804

Deduct: Inventory, 1/1/x2 (200,000 × .10)... 20,000

Required purchases (gallons)... 201,804

Purchases budget (201,804 gallons × $5 per gallon)... _$1,009,020

4. The company should continue using Islin, because the cost of using Philin is

$152,632 greater than using Islin, calculated as follows: Change in material cost from substituting Philin for Islin: 20x2 production requirements:

Philin (201,640 × $5 × 1.2)...

Islin (201,640 × $5)... $1,209,840 1,008,200

Increase in cost of raw material... $ 201,640

Change in conversion cost from substituting Philin for Islin:

Philin (24,504 × $20 × .9)... $ 441,072

Islin (24,504 × $20)... 490,080

Decrease in conversion cost... $ (49,008 )

(22)

1. Tuition revenue budget:

Current student enrollment………. 12,000

Add: 5% increase in student body……… 600

Total student body………. 12,600

Less: Tuition-free scholarships………. 180

Tuition-paying students……… 12,420

Credit hours per student per year………. x 30

Total credit hours……….. 372,600

Tuition rate per hour………. x $75

Forecasted tuition revenue………. $27,945,000

2. Faculty needed to cover classes:

Total student body………. 12,600

Classes per student per year [(15 credit hours ÷

3 credit hours) x 2 semesters]………. x 10

Total student class enrollments to be covered…. 126,000

Students per class………. ÷ 25

Classes to be taught………. 5,040

Classes taught per professor………. ÷ 5

Faculty needed……… 1,008

3. Possible actions might include:

• Hire part-time instructors

• Use graduate teaching assistants

• Increase the teaching load for each professor

• Increase class size and reduce the number of sections to be offered

• Have students take an Internet-based course offered by another university

• Shift courses to a summer session

4. No. While the number of faculty may be a key driver, the number of faculty is highly

dependent on the number of students. Students (and tuition revenue) are akin to sales—the starting point in the budgeting process.

(23)

1. Sales budget

Sales (in sets)... 5,000 6,000 7,500

Sales price per set... _× $60 × $60 × $60

Sales revenue... $300,000 $360,000 $450,000

2. Production budget (in sets)

Sales... 5,000 6,000 7,500

Add: Desired ending inventory... 1,200 1,500 1,500

Total requirements... 6,200 7,500 9,000

Less: Projected beginning inventory... 1,000 1,200 1,500

Planned production... 5,200 6,300 7,500

3. Raw-material purchases

Planned production (sets)... 5,200 6,300 7,500

Raw material required per set

(board feet)... _× 10 × 10 × 10

Raw material required for production

(board feet)... 52,000 63,000 75,000

Add: Desired ending inventory of raw

material (board feet)... 6,300 7,500 8,000

Less: Projected beginning inventory of

raw material (board feet)... 5,200 6,300 7,500

Planned purchases of raw material

(board feet)... 53,100 64,200 75,500

Cost per board foot... _× $.60 × $.60 × $.60

Planned purchases of raw material

(24)

4. Direct-labor budget

Planned production (sets)... 5,200 6,300 7,500

Direct-labor hours per set... _× 1.5 × 1.5 × 1.5

Direct-labor hours required... 7,800 9,450 11,250

Cost per hour... _× $21 × $21 × $21

Planned direct-labor cost... $163,800 $198,450 $236,250

5. The electronic version of the Solutions Manual “BUILD A SPREADSHEET

SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website: www.mhhe.com/hilton8e.

(25)

1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the

following month. December receivables of $108,000 equal 60% of December’s sales; thus, December sales total $180,000 ($108,000 ÷ .6). Since the selling price is $20 per unit, Dakota Fan sold 9,000 units ($180,000 ÷ $20).

2. Since the company expects to sell 10,000 units, sales revenue will total $200,000

(10,000 units x $20).

3. Dakota Fan collected 40% of February’s sales during February, or $78,400. Thus,

February’s sales total $196,000 ($78,400 ÷ .4). Combining January sales ($76,000 + $114,000), February sales ($196,000), and March sales ($200,000), the company will report revenue of $586,000.

4. Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x 60%).

5. Finished-goods inventories are maintained at 20% of the following month’s sales.

January sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 ÷ $20). Thus, the December 31 inventory is 1,900 units (9,500 x 20%).

6. February sales will total 9,800 units ($196,000 ÷ $20), giving rise to a January 31

inventory of 1,960 units (9,800 x 20%). Letting X denote production, then: 12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory 1,900 + X - 9,500 = 1,960

X – 7,600 = 1,960 X = 9,560

7. Financing required is $3,500 ($15,000 minimum balance less ending cash balance of

$11,500):

Cash balance, January 1……… $ 22,500

Add: January receipts ($108,000 + $76,000).. 184,000

Subtotal……… $206,500 Less: January payments……… 195,000

(26)

1. The benefits that can be derived from implementing a budgeting system include the

following:

•

The preparation of budgets forces management to plan ahead and to establish

goals and objectives that can be quantified.

•

Budgeting compels departmental managers to make plans that are in congruence

with the plans of other departments as well as the objectives of the entire firm.

•

The budgeting process promotes internal communication and coordination.

•

Budgets provide directions for day-to-day control of operations, clarify duties to

be performed, and assign responsibility for these duties.

•

Budgets help in measuring performance and providing incentives.

(27)

PROBLEM 9-37 (CONTINUED) 2.

a. Schedule b. Subsequent Schedule

Sales Budget Production Budget

Selling Expense Budget Budgeted Income Statement

Ending Inventory Budget (units) Production Budget

Production Budget (units) Direct-Material Budget

Direct-Labor Budget

Manufacturing-Overhead Budget

Direct-Material Budget Cost-of-Goods-Manufactured Budget

Direct-Labor Budget Cost-of-Goods-Manufactured Budget

Manufacturing-Overhead Budget Cost-of-Goods-Manufactured Budget

Cost-of-Goods-Manufactured Budget Cost-of-Goods-Sold Budget

Cost-of-Goods-Sold Budget (includes ending inventory in dollars)

Budgeted Income Statement Budgeted Balance Sheet

Selling Expense Budget Budgeted Income Statement

Research and Development Budget Budgeted Income Statement

Administrative Expense Budget Budgeted Income Statement

Budgeted Income Statement Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Capital Expenditures Budget Cash Receipts and Disbursements Budget

Budgeted Balance Sheet

Budgeted Statement of Cash Flows Cash Receipts and Disbursements

Budget Budgeted Balance SheetBudgeted Statement of Cash Flows

(28)

PROBLEM 9-38 (60 MINUTES) 1. Sales budget for 20x3:

Units Price Total

Light coils... 60,000 $130 $ 7,800,000

Heavy coils... 40,000 $190 7,600,000

Projected sales... $15,400,000

2. Production budget (in units) for 20x3:

Light

Coils Heavy Coils

Projected sales... 60,000 40,000

Add: Desired inventories,

December 31, 20x3... 25,000 9,000

Total requirements... 85,000 49,000

Deduct: Expected inventories, January 1, 20x3... 20,000 8,000

Production required (units)... 65,000 41,000

3. Raw-material purchases budget (in quantities) for 20x3:

Raw Material Sheet

Metal Copper Wire Platforms Light coils (65,000 units projected

to be produced)... 260,000 130,000 __

Heavy coils (41,000 units projected

to be produced)... 205,000 123,000 41,000

Production requirements... 465,000 253,000 41,000

Add: Desired inventories, December 31, 20x3... 36,000 32,000 7,000

(29)

4. Raw-material purchases budget for 20x3:

Raw Material Raw Material Required (units) Anticipated Purchase Price Total Sheet metal... 469,000 $16 $ 7,504,000 Copper wire... 256,000 10 2,560,000 Platforms... 42,000 6 ___252,000 Total………. $10,316,000

5. Direct-labor budget for 20x3:

Projected Production (units) Hours per Unit Total Hours Rate Total Cost Light coils... 65,000 4 260,000 $15 $3,900,000 Heavy coils... 41,000 6 246,000 20 4,920,000 Total... $8,820,000

6. Manufacturing overhead budget for 20x3:

Cost Driver Quantity

Cost Driver

Rate Budgeted Cost

Purchasing and material handling... 725,000 lb.a _$.50 _$362,500

Depreciation, utilities, and inspection... 106,000 coils b _$8.00 _848,000

Shipping... 100,000c _$2.00 _200,000

General manufacturing overhead... 506,000 hr. d _$6.00 _3,036,000

Total manufacturing overhead... $4,446,500

a_{725,000 = 469,000 + 256,000 (from req. 3)}

(30)

1. Sales budget:

Box C Box P Total

Sales (in units) 500,000 500,000

Sales price per unit _× $1.35 × $1.95

Sales revenue $675,000 $975,000 $1,650,000

2. Production budget (in units):

Box C Box P

Sales... 500,000 500,000

Add: Desired ending inventory... 5,000 15,000

Total units needed... 505,000 515,000

Deduct: Beginning Inventory... 10,000 20,000

Production requirements... 495,000 495,000

3. Raw-material budget:

CORRUGATING MEDIUM

Production requirements (number of boxes)... 495,000 495,000

Raw material required per box (pounds)... _× .2 × .3

Raw material required for

production (pounds)... 99,000 148,500 247,500

Add: Desired ending

raw-material inventory... 10,000

Total raw-material needs... 257,500

Deduct: Beginning raw-material inventory... 5,000

Raw material to be purchased... 252,500

Price (per pound)... _× $.15

(31)

PAPERBOARD

Production requirement (number of boxes)... 495,000 495,000

Raw material required per box (pounds)... _× .3 × .7

Raw material required for

production (pounds)... 148,500 346,500 495,000

Add: Desired ending

raw-material inventory... 5,000

Total raw-material needs... 500,000

Deduct: Beginning raw-material inventory... 15,000

Raw material to be purchased... 485,000

Price (per pound)... _× $.30

Cost of purchases (paperboard)... $145,500

4. Direct-labor budget:

Production requirements (number of boxes) 495,000 495,000

Direct labor required per box (hours)... _× .0025 × .005

Direct labor required for production (hours) 1,237.5 2,475 3,712.5

Direct-labor rate... _× $18

Total direct-labor cost... $66,825

5. Manufacturing-overhead budget: Indirect material... $ 15,750 Indirect labor... 75,000 Utilities... 37,500 Property taxes... 27,000 Insurance... 24,000 Depreciation... 43,500 Total overhead... $222,750

(32)

6. Selling and administrative expense budget:

Salaries and fringe benefits of sales personnel... $112,500

Advertising... 22,500

Management salaries and fringe benefits... 135,000

Clerical wages and fringe benefits... 39,000

Miscellaneous administrative expenses... 6,000

Total selling and administrative expenses... $315,000

7. Budgeted income statement:

Sales revenue [from sales budget, req. (1)]... $1,650,000

Less: Cost of goods sold:

Box C: 500,000 × $.315*... $157,500

Box P: 500,000 × $.645* ... 322,500 480,000 Gross margin... $1,170,000

Selling and administrative expenses... 315,000

Income before taxes... $ 855,000 Income tax expense (35%)... 299,250 Net income... $ 555,750 *Calculation of manufacturing cost per unit:

(a) Predetermined overhead rate = budgeted_volumemanufactur_of_direct_-_laboringoverhead_hours

= _(495,000)(_.0025)$222,750₊_(495,000)(_.005) = _3,712.5$222,750_hours= $60perhour

(33)

(b) Calculation of manufacturing cost per unit:

Box C Box P Direct material: Paperboard .3 lb. × $.30 per lb... $.090 .7 lb. × $.30 per lb... $.210 Corrugating medium .2 lb. × $.15 per lb... .030 .3 lb. × $.15 per lb... .045 Direct labor: .0025 hr. × $18 per hr... .045 .005 hr. × $18 per hr... .090

Applied manufacturing overhead:

.0025 hr. × $60 per hr... .150

.005 hr. × $60 per hr... ___ .300

(34)

1. The revised operating budget for Vancouver Consulting Associates for

the fourth quarter is presented below. Supporting calculations follow:

VANCOUVER CONSULTING ASSOCIATES

REVISED OPERATING BUDGET

FOR THE FOURTH QUARTER OF 20X4 Revenue:

Consulting fees:

Computer system consulting... $ 956,250

Management consulting... 936,000

Total consulting fees... $1,892,250

Other revenue... 20,000 Total revenue... $1,912,250 Expenses:

Consultant salary expenses*... $1,021,300

Travel and related expenses... 115,750

General and administrative expenses... 186,000

Depreciation expense... 80,000

Corporate expense allocation... 150,000 Total expenses... $1,553,050 Operating income... $ 359,200 *$1,021,300 = $490,000 + $531,300. (See supporting calculations.)

(35)

PROBLEM 9-40 (CONTINUED) Supporting calculations:

•

Schedule of projected revenues for the fourth quarter of 20x4:

Computer System

Consulting Management Consulting

Third Quarter:

Revenue... $843,750 $630,000

Hourly billing rate... ÷ $150 ÷ $180

Billable hours... 5,625 3,500

Number of consultants... ÷ 15 ÷ 10

Hours per consultant... 375 350

Fourth-quarter planned increase... 50 50

Billable hours per consultant... 425 400

Number of consultants... _× 15 × 13

Billable hours... 6,375 5,200

Billing rate... _× $150 × $180

(36)

•

Schedules of projected salaries, travel, general and administrative, and allocated

corporate expenses:

Computer System

Consulting ManagementConsulting

Compensation:

Existing consultants:

Annual salary... $ 92,000 $100,000

Quarterly salary... $ 23,000 $ 25,000

Planned increase (10%)... 2,300 2,500

Total fourth-quarter salary per consultant... $ 25,300 $27,500

Number of consultants... × 15 × 10

Total... $379,500 $275,000

New consultants at old salary (3 × $25,000)... -0- 75,000

Total salary... $379,500 $350,000

Benefits (40%)... 151,800 140,000

Total compensation... $531,300 $490,000

Travel expenses:

Computer system consultants (425 hrs. × 15)... 6,375

Management consultants (400 hrs. × 13)... 5,200

Total hours... 11,575

Rate per hour*... × $10

Total travel expense... $115,750

General and administrative ($200,000 × 93%)... $186,000

Corporate expense allocation ($100,000 × 150%)... $150,000

*Third-quarter travel expense ÷ hours = rate

$91,250 ÷ 9,125† _{= $10.00}

(37)

1. Strategic planning identifies the overall objective of an organization and generally

considers the impact of external factors such as competitive forces, market demand, and technological changes when identifying overall objectives. Budgeting is the quantitative expression of plans evolving from strategic planning. The time horizon for budgeting is generally a year, or an operating cycle, and greater attention is focused on internal factors than on external factors.

2. For each of the financial objectives established by the board of directors and

president of Fit-for-Life, Inc., the calculations to determine whether John Winslow’s budget attains these objectives are presented in the following table.

CALCULATION OF FINANCIAL OBJECTIVES: FIT-FOR-LIFE, INC.

Objective

Attained/

Not Attained Calculations Increase sales by 12%

($1,700,000 × 1.12 = $1,904,000) Not attained ($1,895,500−$1,700,000)/$1,700,000 = 11.5% Increase before-tax income by 15%

($210,000 × 1.15 = $241,500) Attained ($241,500−$210,000)/$210,000 = 15% Maintain long-term debt at or below

16% of assets

($4,100,000 × .16 = $656,000)

Attained $616,000/$4,100,000 = 15% (rounded)

Maintain cost of goods sold at or below 70% of sales

($1,895,500 × .70 = $1,326,850)

Not attained $1,339,000*/$1,895,500 = 70.6% (rounded)

*Variable cost of goods sold + fixed manufacturing cost = $1,149,450 + $189,550 = $1,339,000

3. The accounting adjustments contemplated by John Winslow are unethical because

they will result in intentionally overstating income by understating the cost of goods sold. The specific standards of ethical conduct for management accountants violated by Winslow are as follows:

(38)

Competence. By making the accounting adjustments, Winslow violated the

competency standard by not preparing financial statements in accordance with technical standards.

Objectivity. By overstating the inventory and reclassifying certain costs, Winslow

has violated the objectivity standard. He has failed to communicate information fairly and objectively and has failed to disclose all relevant information that would influence the users’ understanding of the report.

20x0 20x1

December January February March QuarterFirst

Total sales... $800,000 $880,000 $968,000 $1,064,800 $2,912,800

Cash sales*... 200,000 220,000 242,000 266,200 728,200

Sales on account†_... _600,000 _660,000 _726,000 _798,600 _2,184,600

*25% of total sales.

†_{75% of total sales.}

2. Cash receipts budget:

20x1

First Quarter

Cash sales... $220,000 $242,000 $266,200 $ 728,200

Cash collections from credit sales made during current

(39)

3. Purchases budget:

20x0 20x1

December January February March QuarterFirst

Budgeted cost of goods sold... $560,000 $616,000 $677,600 $745,360 _$2,038,960 Add: Desired ending inventory. . 308,000 338,800 372,680 372,680 * 372,680† Total goods needed... $868,000 $954,800 $1,050,280 $1,118,040 $2,411,640 Less: Expected beginning inventory... ††_280,000 _308,000 _338,800 _372,680 _308,000 _** Purchases... $588,000 $646,800 $711,480 $745,360 $2,103,640

*Since April's expected sales and cost of goods sold are the same as the projections for March, the desired ending inventory for March is the same as that for February.

†_{The desired ending inventory for the quarter is equal to the desired ending inventory}

on March 31, 20x1.

**The beginning inventory for the quarter is equal to the December ending inventory.

††_{50% x $560,000 (where $560,000 = December cost of goods sold = December sales of}

(40)

4. Cash disbursements budget:

20x1

January February March QuarterFirst

Inventory purchases:

Cash payments for purchases

during the current month*... $258,720 $284,592 $298,144 $ 841,456

Cash payments for purchases during the preceding

month†_... _352,800 _388,080 _426,888 _1,167,768

Total cash payments for

inventory purchases... $611,520 $672,672 $725,032 $2,009,224

Other expenses:

Sales salaries... $ 42,000 $ 42,000 $ 42,000 $ 126,000

Advertising and promotion... 32,000 32,000 32,000 96,000

Administrative salaries... 42,000 42,000 42,000 126,000

Interest on bonds**... 30,000 -0- -0- 30,000

Property taxes**... -0- 10,800 -0- 10,800

Sales commissions... 8,800 9,680 10,648 29,128

Total cash payments for other

expenses... $154,800 $136,480 $126,648 $ 417,928

Total cash disbursements... $766,320 $809,152 $851,680 $2,427,152

*40% of current month's purchases [see requirement (3)].

†_{60% of the prior month's purchases [see requirement (3)].}

**Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on February 28 and August 31.

(41)

5. Summary cash budget:

20x1

January February March QuarterFirst

Cash receipts [from req. (2)]... $ 826,000 $ 908,600 $ 999,460 $2,734,060

Cash disbursements

[from req. (4)]... (766,320 ) (809,152 ) (851,680 ) (2,427,152 )

Change in cash balance

during period due to operations. . $ 59,680 $ 99,448 $147,780 $ 306,908

Sale of marketable securities

(1/2/x1)... 30,000 30,000

Proceeds from bank loan

(1/2/x1)... 200,000 200,000

Purchase of equipment... (250,000) (250,000)

Repayment of bank loan

(3/31/x1)... (200,000) (200,000)

Interest on bank loan*... (5,000) (5,000)

Payment of dividends... (100,000) (100,000 )

Change in cash balance during

first quarter... $ (18,092 )

Cash balance, 1/1/x1... 70,000

Cash balance, 3/31/x1... $ 51,908

*$200,000 × 10% per year × 1/4 year = $5,000

6. Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0... $ 70,000

Less: Minimum cash balance... 50,000

Cash available for equipment purchases... $ 20,000

Projected proceeds from sale of marketable securities... 30,000

(42)

7. GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT

FORTHE FIRST QUARTEROF 20X1

Sales revenue... $2,912,800

Less: Cost of goods sold... 2,038,960

Gross margin... $ 873,840

Selling and administrative expenses:

Sales salaries... $126,000

Sales commissions... 29,128

Advertising and promotion... 96,000

Administrative salaries... 126,000

Depreciation... 150,000

Interest on bonds... 15,000

Interest on short-term bank loan... 5,000

Property taxes... 5,400

Total selling and administrative expenses... 552,528

Net income... $ 321,312

BUDGETED STATEMENTOF RETAINED EARNINGS

FORTHE FIRST QUARTEROF 20X1

Retained earnings, 12/31/x0... $ 215,000

Add: Net income... 321,312

Deduct: Dividends... 100,000

(43)

BUDGETED BALANCE SHEET

MARCH 31, 20X1

Cash... $ 51,908

Accounts receivable*... 718,740

Inventory... 372,680

Buildings and equipment (net of accumulated depreciation)†_... _1,352,000

Total assets... $2,495,328 Accounts payable**... $ 447,216

Bond interest payable... 10,000

Property taxes payable... 1,800

Bonds payable (10%; due in 20x6)... 600,000

Common Stock... 1,000,000

Retained earnings... 436,312

Total liabilities and stockholders' equity... $2,495,328

*Accounts receivable, 12/31/x0... $ 540,000

Sales on account [req. (1)]... 2,184,600

Total cash collections from credit sales

[(req. (2)] ($218,460 + $1,787,400)... (2,005,860)

Accounts receivable, 3/31/x1... $ 718,740

†_{Buildings and equipment (net), 12/31/x0...} _$1,252,000

Cost of equipment acquired... 250,000

Depreciation expense for first quarter... (150,000 )

Buildings and equipment (net), 3/31/x1... $1,352,000

**Accounts payable, 12/31/x0... $ 352,800

Purchases [req. (3)]... 2,103,640

Cash payments for purchases [req. (4)]... (2,009,224)

(44)

SOLUTIONS TO CASES

CASE 9-43 (35 MINUTES)

1. Some of the operational and behavioral benefits that are generally attributed to a

participatory budgeting process are as follows:

- Utilization of the best knowledge of activities in a specific area, because the participants are close to daily operations.

- Goals that are more realistic and acceptable.

- Improved communication and group cohesiveness.

- A sense of commitment and willingness to be held accountable for the budget.

2. Four deficiencies in Jack Riley’s participatory policy for planning and performance

evaluation, along with recommendations of how the deficiencies can be corrected:

Deficiencies Recommendations

The setting of constraints on fixed expenditures includes uncontrollable fixed costs, thereby mitigating the positive effects of participatory budgeting.

Rewards should be based on meeting budget and/or organizational goals or objectives.

The arbitrary revision of approved budgets

defeats the participatory process. The contingency budget should be separate, over and above each department’s original

submission. The division manager holds back a

percentage of each budget for discretionary use.

Managers should be involved in the revision of budgets. Managers could submit a budget with programs at different levels of funding.

Evaluation based on budget performance

must be accompanied with intrinsic rewards. Divisional constraints could be communicated at a budget “kick-off” meeting; however, individual limits of controllable expenses should be set by each

(45)

1. Yes, Triple-F Health Club should be better able to plan its cash receipts with the new

membership plan and fee structure. The cash flows should be more predictable and certain because the large, prepaid membership fee becomes the only factor affecting cash receipts. The hourly court fees, which were dependent upon a variable that could fluctuate daily, are eliminated.

2. a. Factors that management should consider before adopting the new membership

plan and fee structure include:

•

Costs associated with the plan changeover

•

Public acceptance of the new proposal

•

The expected number of memberships by classes that can be sold for each

plan at the specified rates

•

The anticipated rate of return for excess cash or cost of borrowing funds in

periods of cash shortages

b. Financial analyses conducted by Triple F’s management could include a

forecast of projected cash inflows and outflows by months, an income statement including interest revenue and expense, a cost-volume-profit analysis, and a cash management plan for excess cash or cash shortages.

3. Because Triple-F's cash flows should be more predictable, management should be

better able to plan for and control cash disbursements. In addition, management should be better able to plan for short-term investments when excess cash occurs or to arrange for short-term financing when there are cash shortages.

The collection and billing function is also simplified with the new membership plan and fee structure. There would be only a one-time cash receipt rather than multiple transactions.

(46)

20x4 20x5

4th

Quarter Quarter1st Quarter2nd Quarter3rd Quarter4th Entire Year

S frame unit sales... 50,000 55,000 60,000 65,000 70,000 250,000 × S sales price.... × × $10 $10 × × $10 $10 x $10 × $10 S frame sales revenue... $ 500,000 $ 550,000 $ 600,000 $ 650,000 $ 700,000 $2,500,000 L frame unit sales... 40,000 45,000 50,000 55,000 60,000 210,000 × L sales price.... × × $15 $15 × $15 × $15 × × $15 $15 L frame sales revenue... $ 600,000 $ 675,000 $ 750,000 $ 825,000 $ 900,000 $3,150,000 Total sales revenue... $1,100,000 $1,225,000 $1,350,000 $1,475,000 $1,600,000 $5,650,000 Cash sales*... $ 440,000 $ 490,000 $ 540,000 $590,000 $640,000 $2,260,000 Sales on account†_... _660,000 _735,000 _810,000 _885,000 _960,000 _3,390,000 *40% of total sales. †_{60% of total sales.}