Hilton Ch 9 Select Solutions

CH. 9 solutions

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 employees. It is difficult to achieve these benefits without a budgeting process.

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.

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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

(e) Distribution and customer service

It is important to budget these costs as early as possible in order to ensure that the revenue a product generates over its life cycle will cover all of the costs to be incurred. A large portion of a product's life-cycle costs will be committed well before they are actually incurred.

EXERCISE 9-22 (25 MINUTES) 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 CreditSales 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: www.mhhe.com/hilton8e.

EXERCISE 9-27 (30 MINUTES)

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 Income before taxes... $ 20,000 

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

EXERCISE 9-28 (20 MINUTES)

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.

PROBLEM 9-32 (40 MINUTES)

1. Production and direct-labor budgets

SHADY SHADES, INC.

BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 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.

†_{DLH denotes direct-labor hour.}

PROBLEM 9-32 (CONTINUED)

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:

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PROBLEM 9-42 (120 MINUTES) 1. Sales budget:

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

January February March QuarterFirst Cash sales... $220,000 $242,000 $266,200 $ 728,200  Cash collections from credit

sales made during current

month*... 66,000 72,600 79,860 218,460 Cash collections from credit

sales made during preceding

month†_{...  540,000  594,000  653,400 1,787,400}

Total cash receipts... $826,000 $908,600 $999,460 $2,734,060 *10% of current month's credit sales.

PROBLEM 9-42 (CONTINUED) 3. Purchases budget:

20x0 20x1

December January February March

First Quarter 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}

PROBLEM 9-42 (CONTINUED) 4. Cash disbursements budget:

20x1 January February March

First Quarter 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.

PROBLEM 9-42 (CONTINUED) 5. Summary cash budget:

20x1 January February March

First Quarter 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  

Cash available... $ 50,000    

Less: Cost of investment in equipment...    250,000  

PROBLEM 9-42 (CONTINUED)

7. GLOBAL ELECTRONICS COMPANY BUDGETED INCOME STATEMENT FOR THE FIRST QUARTER OF 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  8. GLOBAL ELECTRONICS COMPANY

BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE FIRST QUARTER OF 20X1

Retained earnings, 12/31/x0... $ 215,000 Add: Net income... 321,312 Deduct: Dividends...   100,000 Retained earnings, 3/31/x1... $ 436,312

PROBLEM 9-42 (CONTINUED)

9. GLOBAL ELECTRONICS COMPANY 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) Accounts payable, 3/31/x1... $ 447,216 PROBLEM 9-34 (25 MINUTES)

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.

PROBLEM 9-35 (25 MINUTES) 1. Sales budget

July August September 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)

July August September 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

July August September 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 Total requirements... 58,300 70,500 83,000 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

PROBLEM 9-35 (CONTINUED) 4. Direct-labor budget

July August September 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:

PROBLEM 9-36 (30 MINUTES)

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

Cash balance before

PROBLEM 9-37 (45 MINUTES)

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

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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 Budgeted Balance Sheet Budgeted Statement of Cash Flows Budgeted Statement of Cash Flows