Solutions Chapter 8

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Chapter 8

Budgetary Planning

ANSWERS TO QUESTIONS

1. Budgetary planning is crucial because companies use budgets to plan their ongoing operations so they will be able to meet their short-term and long-term objectives. 2. Budgets are an important part of organizing because they translate the company’s

objectives into financial terms and lay out the resources and expenditures required over a limited horizon. Budgets give managers a goal to work toward as it directs their actions, and may either motivate or demotivate them. Budgets impact the control function because they serve as a basis against which actual results are compared.

3. A strategic plan is the starting point of the planning process and is the vision of what management wants the organization to achieve over the long term. A strategic plan includes long-term goals which are typically over a 5-10 year period and also

includes short-term or intermediate steps needed to achieve the long-term goals. 4. Answers will vary, but students should clearly distinguish between the three

categories.

 Long-term goal: To have $X in personal assets by the age of 55.

 Short-term goals: To save $X per month from their paycheck, to generate $X in

return from specific investments, etc.

 Tactics: Cut costs by eliminating unnecessary expenses, to research potential

investments thoroughly, etc.

5. Benefits of budgeting include forcing managers to look ahead, which will help them to foresee potential problems such as running out of cash or inventory. Budgets also promote communication by allowing managers to share their expectations and priorities for the future. And because budgets span the entire organization, they require managers from different functional areas to coordinate their activities. Finally, when implemented correctly, budgets can be useful for motivating employees to work toward the organization’s objectives.

6. Answers will vary. Potential negative consequences of not developing budgets include failure to consider a company’s long-term and short-term goals, lack of communication between managers, and absence of motivation for employees because there isn’t an identifiable goal.

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7. Unlike a “top down” approach to budgeting where budgets are set by upper

management and imposed on employees, participative budgeting allows employees to provide input into their own budget. This may motivate them to work hard to achieve the goal. It may also result in more accurate information as employees may have more knowledge or information about the process. Disadvantages of

participative budgeting include the amount of time consumed and the fact that employees may try to build slack into a budget.

8. Budgetary slack results from employees’ attempts to build a cushion or margin of

safety into their budget so that they will be more likely to meet or exceed their budgetary goal, and thus receive a better performance evaluation. Budgetary slack can be detrimental if other decisions are based on the budget, without adjustment for budgetary slack. For example, a production manager may underestimate production goals so that they will be easier to achieve. However, the raw materials purchases manager who relies on this budget will not buy enough materials to meet actual production needs.

9. a. Utilizing different budgets for planning and performance evaluation will minimize the impact of budgetary slack.

b. Continuous budgeting gives managers a constant period of budgets available and keeps them in a continuous planning mode instead of only once per period. c. Zero-based budgeting requires managers to justify their expenditures each and

every budgeting cycle instead of simply assuming previous period’s levels are still appropriate.

10. A master budget is a comprehensive set of budgets that covers all phases of an organization’s planned activities for a specific period. It is made up of both operating budgets (sales, production, direct materials purchases, direct labor, manufacturing overhead, selling and administrative expenses, and income statement), and financial budgets (cash receipts and disbursements, inventory, capital purchases, financing, and balance sheet).

11. The sales forecast is the starting point because all of the other budgets are based on the sales forecast. The production, direct materials purchases, direct labor,

manufacturing overhead, selling and administrative, cash receipts/disbursements, and inventory budgets are all affected by the sales forecast.

12. The sales forecast is based on last period’s sales, industry trends, information from

top management about sales objectives, input from research and development, and planned marketing activities. An inaccuracy in any of these sources would result in an incorrect sales forecast which would, in turn, cause many operating budgets to be inaccurate.

13. The operating budget is made up of the sales forecast, production budget, direct materials purchases budget, direct labor budget, manufacturing overhead budget, selling and administrative budget, and budgeted income statement.

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14. The components of the cash budget include budgeted cash receipts, budgeted cash payments, and financing.

15. The operating budgets feed directly into the cash budget. The sales budget is used to compute the cash receipts, while the direct materials purchases, direct labor, manufacturing overhead, and selling administrative expense budgets are used to compute budgeted cash payments. The ending balance of cash appears on the budgeted balance sheet. The operating budgets also affect other elements of the budgeted balance sheet, including budgeted accounts receivable, inventory, accounts payable, and owner’s equity.

16. The cash budget receives considerable attention because a company cannot exist without sufficient cash. Sales revenue does not always become cash or there may be a lag and companies need to know that they have sufficient cash on hand to pay their expenses in the interim.

17. Depreciation is a non-cash expense. While it does increase a company’s total expenses and decrease net operating income, it does not require a cash outflow during the current period.

18. The end result of the budgeting process is a set of pro-forma financial statements that includes a budgeted income statement, statement of cash flows, and budgeted balance sheet. Each of these budgets provides managers with valuable information to use for planning, managing operations, and making investing and financing decisions.

19. Service firms do not need to prepare production budgets, inventory budgets, or manufacturing overhead budgets. But they do need to prepare budgets to predict sales revenue, labor costs, supplies, and other non-manufacturing expenses such as commissions and advertising.

20. One of the primary operating budgets a merchandiser needs to prepare is the merchandise purchases budget. Instead of considering production needs and raw materials inventory, this budget is based on budgeted sales and the need to maintain adequate levels of finished goods inventory. The other major difference between merchandising and manufacturing firms’ budgets is that merchandising firms do not have a raw materials, direct labor, or manufacturing overhead expense budget.

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Authors' Recommended Solution Time (Time in minutes)

Mini-exercises Exercises Problems

Cases and Projects* No. Time No. Time No. Time No. Time

1 4 1 7 PA−1 15 1 45 2 5 2 8 PA−2 12 2 45 3 3 3 8 PA−3 12 4 5 4 7 PA−4 12 5 3 5 7 PA- 5 12 6 4 6 8 PA-6 15 7 5 7 8 PB−1 15 8 4 8 7 PB−2 12 9 5 9 7 PB−3 12 10 5 10 8 PB−4 12 11 5 11 9 PB−5 12 12 7 PB−6 15 13 7 14 8 15 7 16 7 17 8 18 8 19 8 20 8 21 8

* Due to the nature of cases, it is very difficult to estimate the amount of time students will need to complete them. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about how to research topics or what companies to select).

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ANSWERS TO MINI-EXERCISES M8−1

No, he isn’t correct. Planning, directing, and control are very interrelated functions within any organization. Managerial accounting plays a crucial role in each of these functions.

M8−2

Potential consequences of CC’s philosophy include a lack of vision for the company’s future development, failure to communicate goals to employees, and inability to evaluate performance of the company or its employees.

M8−3

a) Cash receipts and payments budget Financial

b) Sales budget Operating

c) Raw materials purchases budget Operating

d) Selling and administrative expense budget Operating

e) Budgeted balance sheet Financial

f) Manufacturing overhead budget Operating

g) Direct labor budget Operating

h) Budgeted income statement Operating

i) Production budget Operating

M8−4

October November December 4th_Quarter

Budgeted sales (units) 7,200 7,400 7,100 21,700

Budgeted unit price x $27.50 x $27.50 x $27.50 x $27.50

Budgeted sales revenue $ 198,000 $ 203,500 $ 195,250 $ 596,750

M8−5

July August

Production 480 400

Material required per unit x 10 x 10

Material required for production 4,800 4,000

Ending raw materials inventory 300 300

Beginning raw materials inventory (300) (300)

Materials purchases 4,800 4,000

Average cost per foot x $ 1.50 x $ 1.50

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M8−6

July August

Production 480 400

Average direct labor hours per unit x 1.75 x 1.75

Total direct labor hours required 840 700

Average hourly labor rate x $ 9.00 x $ 9.00

Budgeted direct labor cost $ 7,560 $ 6,300

M8−7

1st_Quarter ₂nd_Quarter

Sales $ 200,000 $ 236,000

Variable overhead rate x 19% x 19%

Variable manufacturing overhead 38,000 44,840

Fixed overhead 46,500 46,500

Budgeted manufacturing overhead $ 84,500 $ 91,340

M8−8

January February March

Sales $ 87,000 $ 81,000 $ 92,000

Variable selling and administrative rate x 8% x 8% x 8%

Variable selling and administrative expenses 6,960 6,480 7,360

Fixed selling and administrative expenses 11,000 11,000 11,000

Budgeted selling and administrative expenses $ 17,960 $ 17,480 $ 18,360

M8-9

February March

Budgeted sales revenue (given) $235,000 $298,000

Cash sales

(35% of budgeted sales revenue) $ 82,250 $104,300 Credit collections

(65% of budgeted sales revenue):

60% during month of sale 91,650 116,220

40% in month following sale 52,000 61,100

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M8-10

January February March Budgeted sales revenue (given) $450,000 $510,000 $530,000 Cash sales

20% of budgeted sales revenue 90,000 102,000 106,000 Credit collections (80% of sales)

50% during month of sale 180,000 204,000 212,000 50% during month following sale 304,000* 180,000 204,000 Budgeted cash receipts $574,000 $486,000 $522,000

* December sales $760,000 x 80% x 50% = $304,000

M8−11

March

Unit sales 1,300

Ending inventory (30% of April sales of 900) 270

Beginning inventory (30% of March sales of 1,300) (390)

Purchases (units) 1,180

Cost per unit x $ 40

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ANSWERS TO EXERCISES E8-1

Req. 1

If Samantha knows that Leslie will automatically increase the estimate she gives her, then she has a motivation to underestimate her budget. Additionally, the fact that Samantha’s bonus is tied to her ability to “beat” the budget gives her incentive to underestimate production because this will increase her chances of receiving a bonus. Req. 2

Budgeted production is used to make raw material purchases, inventory storage, and labor staffing decisions. If Samantha’s underestimated production numbers are used, the Purchasing Manager and Human Resources Director will both be impacted. As a result, they may not have enough resources on hand at the time they are needed which could result in increased costs or a necessary reduction in production levels.

E8-2 1. Master budget 2. Operating budgets 3. Participative; Top-down 4. Budgetary slack 5. Controlling 6. Sales forecast

7. Budgeted income statement 8. Rolling budget

9. Budgeted balance sheet 10.Production budget

E8−3

Likely Order of

Preparation Budget

9* Cash receipts and payments budget.

7* Selling and administrative expense budget.

5* Manufacturing overhead budget.

3* Raw materials purchases budget.

10 Budgeted balance sheet.

1 Sales budget.

4* Direct labor budget.

8 Budgeted income statement.

6* Budgeted cost of goods sold.

2 Production budget.

*Order shown is the order presented in the book. Some budgets are independent of others and could be prepared in slightly different order.

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All of the budgets above would be overstated if the sales forecast were overstated.

E8−4

Shaded answers are provided below:

Production Sales Ending Inventory Beginning Inventory 550 500 125 75 930 965 90 125 750 710 120 80 900 1,200 85 385 805 740 225 160 845 795 290 240 E8−5 Req. 1 May June Sales (units) 600 800 Price per unit x $ 18 x $ 18 Budgeted total sales $10,800 $14,400 Req. 2 May June Sales 600 800 Ending inventory 50 60 Beginning inventory (75) (50)

Budgeted production (units) 575 810

E8−6 Req. 1 May June Production 575 810

x Closures required per unit x 1 x 1 Total closures required for production 575 810

+ Ending Inventory 20 25

- Beginning Inventory (30) (20)

Budgeted purchases 565 815

x Cost per closure x $1.50 x $1.50 Budgeted cost of closures purchased $ 847.50 $1,222.50 Req. 2 Production (units) 575 810

x Variable overhead rate x $ 1.25 x $ 1.25

Budgeted variable overhead 718.75 1,012.50

+ Budgeted fixed overhead 1,000.00 1,000.00

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E8-7

May June

Production 575 810

Total direct labor hours required 172.50 243

Budgeted direct labor cost $ 1,552.50 $2,187.00

E8-8

Req. 1

Budgeted manufacturing cost per unit Cost Per Unit

Direct materials $ 4.00

Total direct labor (.30 hrs each X $9.00 per hour) 2.70

Variable manufacturing overhead ($1.25 per unit) 1.25

Fixed manufacturing overhead (given as $2.00 per unit) 2.00

Manufacturing cost per unit $ 9.95

Req. 2

Shadee Corp.

Cost of Goods Sold Budget

May June

Budgeted sales (units) 600 800

Budgeted manufacturing cost per unit x $9.95 x $9.95

Budgeted cost of goods sold $ 5,970 $ 7,960

E8-9

May June

Sales $10,800 $14,400

Variable selling and administrative rate x 6% x 6%

Variable selling and administrative expenses 648 864

Fixed selling and administrative expenses 1,200 1,200

Budgeted selling and administrative expenses $ 1,848 $ 2,064

E8-10

Shadee Corp.

Budgeted Income Statement

May June

Budgeted Sales $ 10,800 $ 14,400

Less: Cost of goods sold 5,970 7,960

Budgeted gross margin $ 4,830 $ 6,440

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expenses 1,848

Budgeted net operating income $ 2,982 $ 4,376

E8−11

July August September

Sales (units) 625 490 450

x Unit sales price x $ 18 x $ 18 x $ 18

Budgeted sales revenue $11,250 $ 8,820 $ 8,100

August September

Cash sales (60% of budgeted sales revenue) $5,292 $ 4,860

Credit collections (40% of budgeted sales revenue)

50% during month of sale

(40% x 50% x current month budgeted sales) _1,764 _1,620 45% in month following sales

(40% x 45% x previous month budgeted sales) _2,025 _1,588*

Budgeted cash collections $ 9,081 $ 8,068

*Rounded

E8-12

Req. 1

April May June July

Sales 3,850 3,875 4,260 4,135

+ Ending inventory (60% of next month sales)

2,325 2,556 2,481 2,154

- Beginning inventory 2,310 2,325 2,556 2,481

Budgeted production (units) 3,865 4,106 4,185 3,808

Req. 2

April May June

Production 3,865 4,106 4,185

x Pounds required per unit x 2 x 2 x 2

Total pounds required for production 7,730 8,212 8,370

+ Ending Inventory (50% of next

month needs) 4,106 4,185 3,808

- Beginning Inventory 3,865 4,106 4,185

Budgeted purchases 7,971 8,291 7,993

x Cost per pound x $ 3.10 x $ 3.10 x $ 3.10

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E8-13

Strike Model Cutting Sewing

Production 2,500 2,500

Total direct labor hours required for Strike 250 750

Turkey Model

Production 3,250 3,250

Total direct labor hours required for Turkey 650 1,625

Total direct labor hours required (for both models) 900 2,375

Budgeted October direct labor cost for Alleyway $ 13,500 $28,500

E8−14

November December

Budgeted sales (units) 3,100 3,600

Price per unit x $ 95 x $ 95

Budgeted sales revenue $294,500 $342,000

Variable selling & administrative expenses

(11% of sales revenue) $ 32,395 $ 37,620 Fixed selling and administrative expenses

($5,000 + $2,500 + $2,500 + $3,500 + $1,500 + $800) 15,800 15,800

Total budgeted selling and administrative expenses $ 48,195 $ 53,420

E8-15

Req. 1

Budgeted Manufacturing Costs Per Unit

Direct materials (2 pounds x $2.00 per pound) $ 4.00

Direct labor (1.5 hours x $15.00 per hour) 22.50

Manufacturing overhead 3.00

Budgeted manufacturing cost per unit $ 29.50

Budgeted unit sales 15,000

Budgeted cost of goods sold $442,500

Req. 2

Budgeted sales revenue (15,000 x $41.00) $615,000

Less: Budgeted cost of goods sold (15,000 x $29.50) - 442,500

Budgeted gross margin 172,500

Less: Budgeted selling and administrative expenses (135,870)

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E8−16

March

Cash receipts from customers $ 36,450

Cash paid to suppliers $ 22,300

Cash paid for manufacturing overhead ($6,100 - $1,200 depreciation) 4,900

Cash paid for direct labor 8,250

Cash paid for selling and administrative expenses 4,200

Cash paid for equipment 7,000

Budgeted cash payments $ 46,650

Beginning cash balance $ 16,320

+ Budgeted cash receipts 36,450

- Budgeted cash payments - 46,650

Preliminary cash balance $ 6,120

Cash borrowed ($10,000 – 6,120 = $3,880 needed ~ $4,000 loan) 4,000

Ending cash balance $ 10,120

E8−17

July August

Budgeted sales revenue (given) $25,000 $23,000 Calculation

Cash sales

(60% of budgeted sales revenue) $13,800.00 (23,000 x .60) Credit collections

(40% of budgeted sales revenue):

60% during month of sale 5,520.00 (23,000 x .40 x .60)

40% in month following sale 4,000.00 (25,000 x .40 x .40)

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E8-18

Req. 1 July August

Sales revenue $160,000 $145,000

Cash sales (70% of budgeted sales revenue) $112,000 $101,500

Credit collections (30% of budgeted sales revenue)

40% during month of sale

(30% x 40% x current month budgeted sales) _19,200 _17,400 60% in month following sales

(30% x 60% x previous month budgeted sales) _20,700* _28,800

Budgeted cash collections $151,900 $ 147,700

* $115,000 x 30% = $34,500; $34,500 x 60% = $20,700

Req. 2 July August

Purchases (All on account) $150,000 $ 80,000

Cash disbursements:

Credit purchases paid in month of purchase (55%) 82,500 44,000

Credit purchases paid in month following purchase

(45%) 42,750** 67,500

Cash paid for operating expenses 38,250 34,700

Budgeted cash payments $ 163,500 $146,200

** $95,000 x 45% = $42,750 E 8-19

January February March Sales $400,000 $480,000 $640,000 Budgeted cost of goods sold

(40% sales)

Add: Desired ending inventory

160,000 48,000 192,000 64,000 256,000 68,000* Total inventory required $208,000 $256,000 $324,000 Less: Beginning inventory 40,000 48,000 64,000 Required purchases $168,000 $208,000 $260,000

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E8-20

Req. 1 April May June Sales $220,000 $190,000 $310,000 Budgeted cost of goods sold

(30% sales)

Add: Desired ending inventory

66,000 11,400 57,000 18,600 93,000 5,400* Total inventory required $77,400 $75,600 $98,400 Less: Beginning inventory 13,200 11,400 18,600 Required purchases $64,200 $64,200 $79,800

* $90,000 x 30% = $27,000 (August budgeted COGS) x 20% = $5,400

Citrus Girl Company Budgeted Income Statement

For the Month Ending

Req. 2 April 30 May 31 June 30 Budgeted sales $220,000 $190,000 $310,000 Budgeted cost of goods sold

Budgeted gross margin Less: Budgeted selling and administrative expenses* 66,000 $154,000 44,535 57,000 $133,000 43,335 93,000 $217,000 48,135

Budgeted net operating income $109,465 $89,665 $168,865

* For each month total of salaries $30,000, delivery expense 4% of monthly sales, rent expense on the warehouse $4,500, utilities $800, insurance $175, and other expenses $260.

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E8-21

Budgeted cash collections:

Req. 1 June July August Sales $24,000 $36,000 $38,000 Cash collected in month of sale

(60%)

Cash collected in month following sale (35%)

Cash collected in 2nd_month

following sale (5%) Total cash receipts

14,400 7,700 800 $22,900 21,600 8,400 1,100 $31,100 22,800 12,600 1,200 $36,600 Budgeted cash payments:

June July August Purchases $9,000 $17,000 $12,000 Cash paid in month of purchase

(50%)

Cash paid in month following purchase (50%)

Total cash payments

4,500 2,500* $7,000 8,500 4,500 $13,000 6,000 8,500 $14,500 May purchases $5,000 x 50% Req. 2

Balances for August 31 budgeted balance sheet

Cash

June 1 balance $14,600 Add: Total cash receipts 90,600 Less: Total cash payments 34,500 August 31 balance $70,700 Supplies Inventory 15% of August purchases $1,800 Accounts Receivable 40% of August sales $15,200 5% of July sales 1,800 Balance at August 31 $17,000 Accounts Payable 50% of August purchases $6,000

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GROUP A PROBLEMS PA8−1

Req. 1 April May June 2nd_Quarter

Budgeted sales (units) 250 300 400 950

x Unit sales price x $ 25 x $ 25 x $ 25 x $ 25

Budgeted sales revenue $ 6,250 $ 7,500 $10,000 $23,750

+Ending finished goods inventory

(40% of next month’s budgeted sales) 120 160 150 150 - Beginning finished goods inventory

(40% of current month’s budgeted sales) - 100 - 120 - 160 - 100

Budgeted production 270 340 390 1,000

x Material requirements per unit x 4 x 4 x 4 x 4

Total material needed for production 1,080 1,360 1,560 4,000

+ Ending raw materials inventory

(30% of next month’s production needs) 408 468 474* 474 - Beginning raw materials inventory

(30% of current month production needs) - 324 - 408 - 468 - 324

Budgeted raw materials purchases 1,164 1,420 1,566 4,150

x Material cost per foot x $ 2.00 x $ 2.00 x $ 2.00 x $ 2.00

Budgeted cost of raw material purchases $ 2,328 $ 2,840 $ 3,132 $ 8,300

*July budgeted production = 375 + (.40 x 425) – (.40 x 375) = 395 June raw materials ending inventory = 395 x 4 = 1,580 x 30% = 474

x Direct labor requirements per unit x .5 x .5 x .5 x .5

Direct labor hours required 135 170 195 500

x Direct labor rate x $ 12 x $ 12 x $ 12 x $ 12

Budgeted direct labor cost $ 1,620 $ 2,040 $ 2,340 $ 6,000

Budgeted production 270 340 390 1000

x Variable manufacturing overhead rate x $0.30 x $0.30 x $0.30 x $0.30

Budgeted variable manufacturing 81.00 102.00 117.00 300.00

+ Fixed manufacturing overhead 600.00 600.00 600.00 1,800.00

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PA8−1 (Continued)

Req. 6

Direct materials (4 ft x $2.00 per ft) $ 8.00

Direct labor (.5 hours x $12 per hour) 6.00

Variable manufacturing overhead 0.30

Fixed manufacturing overhead ($7,200 / 4,000 units) 1.80

April May June 2nd_Quarter

Budgeted sales 250 300 400 950

x Budgeted manufacturing cost per unit x $16.10 x $16.10 x $16.10 x $16.10

Budgeted cost of goods sold $4,025.00 $4,830.00 $6,440.00 $15,295.00

Req. 7 April May June 2nd_Qtr

x Variable selling and administrative rate x $.60 x $.60 x $.60 x $.60

Budgeted variable selling and adm. expenses 150 180 240 570

+ Budgeted fixed selling and adm. expenses 650 650 650 1,950

Total budgeted selling and adm. expenses $ 800 $ 830 $ 890 $ 2,520

PA8−2

Budgeted sales revenue $6,250.00 $7,500.00 $10,000.00 $23,750.00

Less: Budgeted cost of goods sold - 4,025.00 - 4,830.00 - 6,440.00 - 15,295.00

Budgeted gross margin 2,225.00 2,670.00 3,560.00 8,455.00

Less: Budgeted selling and

administrative expenses (800.00) (830.00) (890.00) (2,520.00)

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PA8−3

Req. 1

Budgeted sales revenue (from Req. 1 of PA 8-1)

$ 6,250 $ 7,500 $10,000 $23,750

Cash collections

(80% of budgeted sales) _{$ 5,000} _{$ 6,000} _{$ 8,000} _{$ 19,000}

Credit collections

(20% of budgeted sales) 50% collected in month of sale

(20% x 50% x current month sales) ₆₂₅ ₇₅₀ _1,000 _2,375 50% collected in month following sale

(20% x 50% x previous month sales) _688* ₆₂₅ ₇₅₀ _2,063

Budgeted cash receipts $6,313 $7,375 $9,750 $23,438

*Credit collections from March sales = 275 units x $25 = $6,875 x 20% x 50% = $687.50 (rounded to $688)

Req. 2

Budgeted raw materials purchases (from PA 8-1 Req. 3)

$ 2,328 $ 2,840 $ 3,132 $ 8,300

Cash disbursements: Raw material purchases

80% paid in the month of purchase

(Current month purchases x .80) _$1,862.40 _$2,272.00 _$2,505.60 _$6,640.00

20% paid in the following month

(Prior month purchases x .20) _400.00* _465.60 _568.00 _1,433.60

Direct labor

(from PA 8-1 Req. 4) _1,620.00 _2,040.00 _2,340.00 _6,000.00

Manufacturing overhead

(from PA 8-1 Req. 5) 681.00 702.00 717.00 2,100.00

Less: Depreciation (given) - 150.00 - 150.00 - 150.00 - 450.00

Selling and administrative expenses

(from PA 8-1 Req. 7) 800.00 830.00 890.00 2,520.00

Purchase of Equipment 3,000.00 - - 3,000.00

Total budgeted cash payments _$8,213.40 _$6,159.60 _$6,870.60 _$21,243.60

*March purchases given at $2,000 x 20% = $400

Req. 3

Beginning cash balance

$ 10,800.00 $10,899.10 $10,114.50 $10,800.00

Plus: Budgeted cash receipts 6,312.50 7,375.00 9,750.00 23,437.50

Less: Budgeted cash payments - 8,213.40 - 6,159.60 - 6,870.60 - 21,243.60

Preliminary cash balance $8,899.10 $12,114.50 $12,993.90 $12,993.90

Cash borrowed/Repaid 2,000.00 (2,000,00) - -

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PA8−4

Req. 1 January February March 1st_Quarter

Sales (units) 2,000 2,200 2,700 6,900

Budgeted Sales $ 88,000 $ 96,800 $ 118,800 $ 303,600

Sales (units) 2,000 2,200 2,700 6,900

+ Ending finished goods inventory

(30% of next month’s sales) 660 810 750 750 - Beginning finished goods inventory

(30% of current month’s sales) - 600 - 660 - 810 - 600

Budgeted production 2,060 2,350 2,640 7,050

X Material requirements per unit x 1 x 1 x 1 x 1

Total material required for production 2,060 2,350 2,640 7,050

+ Ending raw materials (25% of

following month’s production needs) _588** ₆₆₀ _580* ₅₈₀

- Beginning raw materials (25% of

current month’s production needs) - 515 - 588 - 660 - 515

Budgeted raw material purchases 2,133 2,422 2,560 7,115

X Material cost per housing x $7.00 x $7.00 x $7.00 x $7.00

Budgeted cost of raw material

purchases $14,931 $ 16,954 $ 17,920 $49,805

* April production = 2,500 + (1,900 x .30) – (2,500 x .30) = 2,320 March ending raw materials inventory = 2,320 x 1 x .25 = 580 **Rounded

x Direct labor hours per unit x .75 x .75 x .75 x .75

Direct labor requirements 1,545.00 1,762.50 1,980.00 5,287.50

x Average labor rate x $18.00 x $18.00 x $18.00 x $18.00

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PA8−5

Req. 1

Direct materials ($7 + $4.50) $11.50

Direct labor (.75 hrs x $18.00) 13.50

Total budgeted mfg cost per unit $28.87

January February March 1st_Quarter

Sales (units) 2,000 2,200 2,700 6,900

Budgeted cost of goods sold* $ 57,733 $ 63,507 $ 77,940 $ 199,180

*Rounded

Budgeted sales revenue $ 88,000 $ 96,800 $ 118,800 $ 303,600

x Variable selling and administrative

rate (7% of budgeted sales revenue) x 7% x 7% x 7% x 7%

Variable selling and adm. expenses 6,160 6,776 8,316 21,252

+ Fixed selling and adm. expenses 18,000 18,000 18,000 54,000

Budgeted selling and adm. expenses $24,160 $24,776 $26,316 $75,252

Budgeted sales revenue $ 88,000 $ 96,800 $118,800 $ 303,600

Budgeted cost of goods sold 57,733 63,507 77,940 199,180

Budgeted gross profit 30,267 33,293 40,860 104,420

Budgeted selling and adm. expenses 24,160 24,776 26,316 75,252

(22)

PA8-6

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 40,000 60,000 30,000 60,000 Budgeted sales price $ 15.00 $ 15.00 $ 15.00

Budgeted sales revenue $ 600,000 $ 900,000 $ 450,000

Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 40,000 60,000 30,000 60,000 Plus: Planned ending inventory

(25% of next quarter sales) 15,000 7,500 15,000

Less: Planned beginning inventory

(25% of current quarter sales) (10,000) (15,000) (7,500)

Budgeted purchases (units) 45,000 52,500 37,500

Cost of merchandise $ 6.00 $ 6.00 $ 6.00

Total cost of merchandise purchased $ 270,000 $ 315,000 $ 225,000

Cost of Goods Sold Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 40,000 60,000 30,000 60,000 Budgeted cost of merchandise $ 6.00 $ 6.00 $ 6.00

Budgeted cost of goods sold $ 240,000 $ 360,000 $ 180,000

Selling and Administrative Expense Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted sales revenue $ 600,000 $ 900,000 $ 450,000 Variable Selling Expenses $ 60,000 $ 90,000 $ 45,000 Fixed Administrative Expenses $ 80,000 $ 80,000 $ 80,000 Budgeted Selling and Adm. Expenses $ 140,000 $ 170,000 $ 125,000

Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted sales revenue $ 600,000 $ 900,000 $ 450,000 Less: Budgeted cost of goods sold 240,000 360,000 180,000

Budgeted gross margin $ 360,000 $ 540,000 $ 270,000 Less: Budgeted selling and adm. expenses 140,000 170,000 125,000

(23)

GROUP B PROBLEMS PB8−1

Budgeted sales (units) 700 650 720 2,070

Budgeted sales revenue $14,000 $13,000 $14,400 $41,400

(30% of next month’s budgeted sales) 195 216 249 249

- Beginning finished goods inventory

(30% of current month’s budgeted sales) - 210 - 195 - 216 - 210

Budgeted Production 685 671 753 2,109

Total material needed for production 1,370.00 1,342.00 1,506.00 4,218.00

+ Ending raw materials inventory

(20% of next month’s production needs) 268.40 301.20 323.60* 323.60 - Beginning raw materials inventory

(20% of current month production needs) - 274.00 - 268.40 - 301.20 - 274.00

Budgeted raw materials purchases 1,364.40 1,374.80 1,528.40 4,267.60

x Material cost per yard x $ 0.60 x $ 0.60 x $ 0.60 x $ 0.60

Budgeted cost of raw materials purchases $ 818.64 $ 824.88 $ 917.04 $ 2,560.56

*July production = 830 + (.30 x 760) – (.30 x 830) = 809

June ending raw materials inventory = 809 x 2 = 1,618 x 20% = 323.60

x Direct labor requirements per unit x .50 x .50 x .50 x .50

Direct labor hours required 342.50 335.50 376.50 1,054.50

x Direct labor rate x $ 8.00 x $ 8.00 x $ 8.00 x $ 8.00

Budgeted direct labor cost $ 2,740 $ 2,684 $ 3,012 $ 8,436

x Variable manufacturing overhead rate x $0.40 x $0.40 x $0.40 x $0.40

Budgeted variable manufacturing 274.00 268.40 301.20 843.60

(24)

PB8−1 (Continued)

Req. 6

Direct materials (2 yards x $0.60 per yard) $ 1.20

Direct labor (.50 hours x $8 per hour) 4.00

Budgeted sales 700 650 720 2,070

Budgeted cost of goods sold $4,620.00 $4,290.00 $4,752.00 $13,662.00

Req. 7 April May June 2nd_Qtr

x Variable selling and administrative rate

($.75 per unit sold) x $.75 x $.75 x $.75 x $.75

Budgeted variable selling and

administrative expenses 525.00 487.50 540.00 1, 552.50

+ Budgeted fixed selling and administrative

expenses (given) 820.00 820.00 820.00 2,460.00

Budgeted selling and administrative

(25)

PB8−2

Budgeted sales revenue $14,000.00 $13,000.00 $14,400.00 $ 41,400.00

Less: Budgeted cost of goods sold 4,620.00 4,290.00 4,752.00 13,662.00

Budgeted gross margin 9,380.00 8,710.00 9,648.00 27,738.00

Less: Budgeted selling and

administrative expenses 1,345.00 1,307.50 1,360.00 4,012.50

Budgeted net operating income $ 8,035.00 $ 7,402.50 $ 8,288.00 $ 23,725.50

PB8−3

Req. 1

Budgeted sales revenue (from Req. 1 of PB 8-1)

$ 14,000 $13,000 $ 14,400 $ 41,400

Cash collections (60% of budgeted sales) $ 8,400 $ 7,800 $ 8,640 $ 24,840

Credit collections (40% of budgeted sales) 50% collected in month of sale

(40% x 50% x current month sales) _2,800 _2,600 _2,880 _8,280 50% collected in month following sale

(40% x 50% x previous month sales) _3,400* _2,800 _2,600 _8,800

Budgeted cash receipts $14,600 $13,200 $14,120 $41,920

*Credit collections from March sales = 850 units x $20 = $17,000 x 40% x 50% = $3,400 Req. 2

Budgeted raw material purchases (from PB 8-1 Req. 3)

$ 818.64 $ 824.88 $ 917.04 $ 2,560.56

Cash disbursements: Raw material purchases

60% paid in the month of purchase

(Current month purchases x .60) _{$ 491.18} _{$ 494.93} _$550.22 _$1,536.34 40% paid in the following month

(Prior month purchases x .40) _320.00* _327.46 _329.95 _977.41

Direct labor

(from PB 8-1 Req. 4) _2,740.00 _2,684.00 _3,012.00 _8,436.00

Manufacturing overhead

(from PB 8-1 Req. 5) 1,024.00 1,018.40 1,051.20 3,093.60

Less: Depreciation (given) - 280.00 - 280.00 - 280.00 - 840.00

Selling and administrative expenses

(from PB 8-1 Req. 7) 1,345.00 1,307.50 1,360.00 4,012.50

Cash paid for equipment 15,000.00 - - 15,000.00

(26)

*March purchases given at $800 x 40% = $320 Req. 3

Beginning cash balance

$12,200.00 $10,159.82 $13,807.53 $12,200.00

Plus: Budgeted cash receipts 14,600.00 13,200.00 14,120.00 41,920.00

Less: Budgeted cash payments (20,640.18) (5,552.29) (6,023.37) (32,215.84)

Preliminary cash balance $6,159.82 $17,807.53 $21,904.16 $21,904.16

Cash borrowed (repaid) $4,000.00 $(4,000.00) - -

Ending cash balance $10,159.82 $13,807.53 $21,904.16 $21,904.16

PB8−4

Sales (units) 8,000 7,400 8,700 24,100

Budgeted Sales $240,000 $222,000 $261,000 $723,000

Sales (units) 8,000 7,400 8,700 24,100

(25% of next month’s sales) _1,850 _2,175 _2,375 _2,375

- Beginning finished goods inventory

(25% of current month’s sales) - 2,000 - 1,850 - 2,175 - 2,000

Budgeted Production _7,850 _{7,725 8,900} _24,475

Total material required for production

7,850 7,725 8,900 24,475

+ Ending raw materials (30% of

following month’s production needs) 2,318** 2,670 2,824* 2,824

- Beginning raw materials (30% of

current month’s production needs) _{- 2,355} _{- 2,318} _{- 2,670} _{- 2,355}

Budgeted raw material purchases 7,813 8,077 9,054 24,944

x Cost per heating element x $1.25 x $1.25 x $1.25 x $1.25

Budgeted raw material cost $ 9,766 $10,096.25 $11,317.50 $ 31,180.00

* April production = 9,500 + (.25 x 9,150) – (.25 x 9,500) = 9,413 (rounded) March ending raw materials inventory = 9,413 x 1 x 30% = $2,824 (rounded) ** Rounded

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x Direct labor hours per unit x .5 x .5 X .5 x .5

Direct labor requirements 3,925 3,862.50 4,450 12,237.50

x Average labor rate x $18.00 x $18.00 x $18.00 x $18.00

Budgeted direct labor cost $70,650.00 $69,525.00 $80,100.00 $220,275.00

PB8−5

Req. 1

Direct materials ($3.25 + 1.25) $ 4.50

Direct labor (.5 hrs x $18.00) 9.00

Total budgeted mfg cost per unit $15.45

January February March 1st_Quarter

Sales (units) 8,000 7,400 8,700 24,100

Budgeted cost of goods sold $123,600 $114,330 $134,415 $372,345

x Variable selling and administrative

rate (5% of budgeted sales revenue) x 5% x 5% x 5% x 5%

Variable selling and administrative

expenses 12,000 11,100 13,050 36,150

+ Fixed selling and administrative

expenses ($17,500) 17,500 17,500 17,500 52,500

expenses $ 29,500 $ 28,600 $ 30,550 $ 88,650

Budgeted cost of goods sold 123,600 114,330 134,415 372,345

Budgeted gross profit 116,400 107,670 126,585 350,655

expenses 29,500 28,600 30,550 88,650

(28)

PB8-6

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 50,000 70,000 45,000 65,000 Budgeted sales price $ 20.00 $ 20.00 $ 20.00

Budgeted sales revenue $ 1,000,000 $ 1,400,000 $ 900,000

Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 50,000 70,000 45,000 65,000 Plus: Planned ending inventory

(30% of next quarter sales) 21,000 13,500 19,500

Less: Planned beginning inventory

(30% of current quarter sales) (15,000) (21,000) (13,500)

Budgeted purchases (units) 56,000 62,500 51,000

Cost of merchandise $ 8.00 $ 8.00 $ 8.00

Total cost of merchandise purchased $ 448,000 $ 500,000 $ 408,000

Cost of Goods Sold Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 50,000 70,000 45,000 65,000 Budgeted cost of merchandise $ 8.00 $ 8.00 $ 8.00

Budgeted cost of goods sold $ 400,000 $ 560,000 $ 360,000

Selling and Administrative Expense Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted sales revenue $ 1,000,000 $ 1,400,000 $ 900,000 Variable selling expenses $ 150,000 $ 210,000 $ 135,000 Fixed administrative expenses $ 60,000 $ 60,000 $ 60,000 Budgeted selling and adm. expenses $ 210,000 $ 270,000 $ 195,000

Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted sales revenue $ 1,000,000 $ 1,400,000 $ 900,000 Less: Budgeted cost of goods sold 400,000 560,000 360,000

Budgeted gross margin $ 600,000 $ 840,000 $ 540,000 Less: Budgeted selling and adm. expenses 210,000 270,000 195,000

(29)

ANSWERS TO SKILLS DEVELOPMENT CASES

S8−1

Student answers to this case will vary depending on the size and type of organization they choose to investigate. It is important that students examine the process from multiple perspectives and attempt to balance any dissatisfaction with the needs of other individuals and of the organization as a whole. Also, any recommendations should be considered from other perspectives and not just from the perspective of a single dissatisfied party. For example, a student who recommends a participative budgeting process be implemented should also consider any consequences that might result from this change.

S8−2

This case offers a chance for considerable in-class discussion and is an opportunity for instructors to pull a managerial accounting topic into students’ everyday lives. Other tools that could be introduced during discussion include estimates of the time it takes to pay off credit cards and calculating payment amounts in commonly-used software such as Microsoft Excel.