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223311
CHAPTER 8
BUDGETING FOR PLANNING AND CONTROL
QUESTIONS FOR WRITING AND DISCUSSION
1. Budgets are the quantitative expressions of
plans. Budgets are used to translate the
goals and strategies of an organization into
operational terms.
2. Control is the process of setting standards,
receiving feedback on actual performance,
and taking corrective action whenever actual
performance deviates from planned perfor-
mance. Budgets are standards, and they are
compared with actual costs and revenues to
provide feedback.
3. The planning and control functions of bud-
geting can benefit all organizations regard-
less of size. All organizations need to de-
termine what their goals are and how best to
attain those goals. This is the planning func-
tion of budgeting. In addition, organizations
can compare what actually happens with
what was planned to see if the plans are un-
folding as anticipated. This is the control
function of budgeting.
4. Budgeting forces managers to plan, pro-
vides resource information for decision mak-
ing, sets benchmarks for control and evalua-
tion, and improves the functions of
communication and coordination.
5. A master budget is the collection of all indi-
vidual area and activity budgets. Operating
budgets are concerned with the income-
generating activities of a firm. Financial
budgets are concerned with the inflows and
outflows of cash and with planned capital
expenditures.
6. The sales forecast is a critical input for build-
ing the sales budget. However, it is not nec-
essarily equivalent to the sales budget.
Upon receiving the sales forecast, manage-
ment may decide that the firm can do better
than the forecast indicates. Consequently,
actions may be taken to increase the sales
potential for the coming year (e.g., increas-
ing advertising). This adjusted forecast then
becomes the sales budget.
7. Yes. All budgets are founded on the sales
budget. Before a production budget can be
created, it must have the planned sales. The
manufacturing budgets, in turn, depend on
the production budget. The same is true for
the financial budgets since sales is a critical
input for budgets in that category.
8. For a merchandising firm, the production
budget is replaced by a merchandise pur-
chases budget. Merchandising firms also
lack direct materials and direct labor budg-
ets. All other budgets are essentially the
same. For a service firm (for-profit), the
sales budget doubles as the production
budget, and there is no finished goods in-
ventory budget. The rest of the budgets
have counterparts.
9. A static budget is for a particular level of
activity. A flexible budget is one that can be
established for any level of activity. For per-
formance reporting, it is necessary to com-
pare the actual costs for the actual level of
activity with the budgeted costs for the ac-
tual level of activity. A flexible budget pro-
vides the means to compute the budgeted
costs for the actual level of activity, after the
fact.
10. A flexible budget is based on a simple for-
mula: Y = F + VX, which requires knowledge
of both fixed and variable components.
11. Goal congruence is important because it
means that the employees of an organiza-
tion are working toward the goals of that or-
ganization.
12. Frequent feedback is important so that cor-
rective action can be taken, increasing the
likelihood of achieving budget.
13. Both monetary and nonmonetary incentives
are used to encourage employees of an or-
ganization to achieve the organization’s
goals. Monetary incentives appeal to the
economic needs of an individual, and non-
monetary incentives appeal to the psycho-
logical needs. Since individuals are moti-
vated by both economic and psychological
factors, both types of incentives ought to be
present in a good budgetary system.
223322
14. Participative budgeting is a system of bud-
geting that allows subordinate managers a
say in how the budgets are established. Par-
ticipative budgeting fosters creativity and
communicates a sense of responsibility to
subordinate managers. It also creates a
higher likelihood of goal congruence since
managers have more of a tendency to make
the budget’s goals their own personal goals.
15. Agree. Individuals who are not challenged
tend to lose interest and maintain a lower
level of performance. A challenging, but
achievable, budget tends to extract a higher
level of performance.
16. Top management should provide guidelines
and statistical input (e.g., industrial fore-
casts) and should review the budgets to mi-
nimize the possibility of budgetary slack and
ensure that the budget is compatible with
the strategic objectives of the firm. Top
management should also provide the incen-
tive and reward system associated with the
budgetary system.
17. By underestimating revenues and overesti-
mating costs, the budget is more easily
achieved.
18. To meet budget, it is possible to take actions
that reduce costs in the short run but in-
crease them in the long run. For example,
lower-priced, lower-quality materials can be
substituted for the usual quality of materials.
19. Other performance measures include prod-
uctivity, personnel development, market
share, and product quality. A manager
would have to be rewarded for improve-
ments achieved in each area. A major diffi-
culty is determining how much weight to as-
sign to each performance area.
20. Behavioral factors can make or break a
budgetary control system. It is absolutely
essential to consider the behavioral ramifica-
tions. Ignoring them can and probably will
produce dysfunctional consequences.
21. Across-the-board cuts have the appearance
of being fair, but they unfairly penalize good
programs. In an era of scarce resources, an
organization must decide what it wishes to
emphasize and allocate resources accor-
dingly. This may mean the complete elimina-
tion of weak programs and the strengthening
of strong programs. To cut each program
equally without considering which ones are
vital to the success of the organization is not
good planning.
22. Activity-based budgeting requires three
steps: (1) identification of activities; (2) esti-
mation of activity output demands; and (3)
estimation of the costs of resources needed
to provide the activity output demanded.
23. Functional-based flexible budgeting relies on
unit-based drivers to build cost formulas for
various cost items. Activity flexible budgeting
uses activity drivers to build a cost formula
for the costs of each activity.
223333
EXERCISES
8–1
1. e
2. d
3. c
4. e
5. b
8–2
1. H, I
2. E
3. I, F
4. G
5. D
6. F
7. F
8. A
9. C
10. B
8–3
1. Freshaire, Inc.
Sales Budget
For the Year 2008
Mint:
1st
Qtr. 2nd
Qtr. 3rd
Qtr. 4th
Qtr. Total
Units 80,000 110,000 124,000 140,000 454,000
× Price × $3.00 × $3.00 × $3.00 × $3.00 × $3.00
Sales $240,000 $330,000 $372,000 $420,000 $ 1,362,000
Lemon:
Units 100,000 100,000 120,000 140,000 460,000
× Price × $3.50 × $3.50 × $3.50 × $3.50 × $3.50
Sales $350,000 $350,000 $420,000 $490,000 $ 1,610,000
Total sales $590,000 $680,000 $792,000 $910,000 $ 2,972,000
2. Freshaire, Inc., will use the sales budget in planning as the basis for the pro-
duction budget and the succeeding budgets of the master budget. At the end
of the year, the company can compare actual sales against the budget to see
if expectations were achieved.
223344
8–4
Freshaire, Inc.
Production Budget for Mint Freshener
For the Year 2008
1st
Qtr. 2nd
Qtr. 3rd
Qtr. 4th
Qtr. Total
Sales 80,000 110,000 124,000 140,000 454,000
Des. ending inventory 11,000 12,400 14,000 9,000 9,000
Total needs 91,000 122,400 138,000 149,000 463,000
Less: Beginning inventory 4,000 11,000 12,400 14,000 4,000
Units produced 87,000 111,400 125,600 135,000 459,000
Freshaire, Inc.
Production Budget for Lemon Freshener
For the Year 2008
1st
Qtr. 2nd
Qtr. 3rd
Qtr. 4th
Qtr. Total
Sales 100,000 100,000 120,000 140,000 460,000
Des. ending inventory 20,000 24,000 28,000 22,000 22,000
Total needs 120,000 124,000 148,000 162,000 482,000
Less: Beginning inventory 6,400 20,000 24,000 28,000 6,400
Units produced 113,600 104,000 124,000 134,000 475,600
8–5
Pescado, Inc.
Production Budget for Tuna
For the Year 20xx
January February March Total
Sales 200,000 240,000 220,000 660,000
Des. ending inventory 84,000 77,000 70,000 70,000
Total needs 284,000 317,000 290,000 730,000
Less: Beg. inventory 38,000 84,000 77,000 38,000
Units produced 246,000 233,000 213,000 692,000
223355
8-6
Pescado, Inc.
Direct Materials Purchases Budget
For January and February
Cans:
January February Total
Production 246,000 233,000 479,000
× 1 can × 1 × 1 × 1
Cans for production 246,000 233,000 479,000
Des. ending inventory 46,600 42,600 42,600
Total needs 292,600 275,600 521,600
Less: Beg. inventory 49,200 46,600 49,200
Ounces purchased 243,400 229,000 472,400
246,000 * 20% = 49,200
Tuna:
January February Total
Production 246,000 233,000 479,000
× 4 ounces × 4 × 4 × 4
Ounces for production 984,000 932,000 1,916,000
Des. ending inventory 186,400 170,400 170,400
Total needs 1,170,400 1,102,400 2,116,400
Less: Beg. Inventory 196,800 186,400 196,800
Ounces purchased 973,600 916,000 1,889,600
984,000 * 20% = 196,800
8–7
Carson, Inc.
Production Budget
For the First Quarter, 20XX
January February March Total
Sales 200,000 240,000 220,000 660,000
Desired ending inventory 36,000 33,000 30,000 30,000
Total needs 236,000 273,000 250,000 690,000
Less: Beginning inventory 18,000 36,000 33,000 18,000
Units to be produced 218,000 237,000 217,000 672,000
223366
8–8
Manning Company
Direct Materials Purchases Budget
For March, April, and May 20XX
March April May Total
Units to be produced 20,000 60,000 100,000 180,000
Direct materials per unit
(yards) × 25 × 25 × 25 × 25
Production needs 500,000 1,500,000 2,500,000 4,500,000
Desired ending inventory
(yards) 300,000 500,000 60,000 60,000
Total needs 800,000 2,000,000 2,560,000 4,560,000
Less beginning inventory 100,000 300,000 500,000 100,000
Direct materials to be
purchased (yards) 700,000 1,700,000 2,060,000 4,460,000
Cost per yard × $0.30 × $0.30 × $0.30 × $0.30
Total purchase cost $210,000 $ 510,000 $ 618,000 $1,338,000
8–9
Manning Company
Direct Labor Budget
For March, April, and May 20XX
March April May Total
Units to be produced 20,000 60,000 100,000 180,000
Direct labor time per
unit (hours) × 0.04 × 0.04 × 0.04 × 0.04
Total hours needed 800 2,400 4,000 7,200
Cost per hour × $12 × $12 × $12 × $12
Total direct labor cost $ 9,600 $28,800 $48,000 $86,400
223377
8–10
Swasey, Inc.
Sales Budget
For the Coming Year
Model Units Price Total Sales
LB-1 33,6001
$30.00 $1,008,000
LB-2 21,6002
15.00 324,000
WE-6 25,2003
10.40 262,080
WE-7 19,4404
10.00 194,400
WE-8 9,6005
22.00 211,200
WE-9 4,0006
26.00 104,000
Total $2,103,680
1 16,800 units * 200% = 33,600; Price increased to $30
2 18,000 + (18,000 * 20%) = 21,600; no change in price
3 Quantity remains the same; price decreases by 20%; $13 * 80% = $10.40
4 16,200 + (16,200 * 20%) = 19,440; no change in price
5 Oct, Nov, and Dec represent 3 months of sales; 2,400 / 3 = 800 sales per
month for 12 months = 9,600 units; no change in price.
6 1,000 / 3 * 12 = 4,000 units; no change in price
8–11
1. Raylene’s Flowers and Gifts
Production Budget for Gift Baskets
For September, October, November, and December
Sept. Oct. Nov. Dec.
Sales 200 150 180 250
Desired ending inventory 15 18 25 10
Total needs 215 168 205 260
Less: Beginning inventory 20 15 18 25
Units produced 195 153 187 235
223388
8–11 Continued
2. Raylene’s Flowers and Gifts
Direct Materials Purchases Budget
For September, October, and November
Fruit: Sept. Oct. Nov.
Production 195 153 187
× Amount/basket (lbs.) × 1 × 1 × 1
Needed for production 195 153 187
Desired ending inventory 8 9 12
Needed 203 162 199
Less: Beginning inventory 10 8 9
Purchases 193 154 190
Small gifts: Sept. Oct. Nov.
Production 195 153 187
× Amount/basket (items) × 5 × 5 × 5
Needed for production 975 765 935
Desired ending inventory 383 468 588
Needed 1,358 1,233 1,523
Less: Beginning inventory 488 383 468
Purchases 870 850 1,055
Cellophane: Sept. Oct. Nov.
Production 195 153 187
× Amount/basket (feet) × 3 × 3 × 3
Needed for production 585 459 561
Desired ending inventory 230 281 353
Needed 815 740 914
Less: Beginning inventory 293 230 281
Purchases 522 510 633
223399
8–11 Concluded
Basket: Sept. Oct. Nov.
Production 195 153 187
× Amount/basket (item) × 1 × 1 × 1
Needed for production 195 153 187
Desired ending inventory 77 94 118
Needed 272 247 305
Less: Beginning inventory 98 77 94
Purchases 174 170 211
3. A direct materials purchases budget for December requires January produc-
tion which cannot be computed without a February sales forecast.
8–12
1. Credit sales in May = $240,000 x 0.9 = $216,000
Credit sales in June = $230,000 x 0.9 = $207,000
Credit sales in July = $246,000 x 0.9 = $221,400
Credit sales in August = $250,000 x 0.9 = $225,000
2. Lawrence, Inc.
Schedule of Cash Receipts
July August
Cash sales 24,600 25,000
Payments on account:
From May credit sales
(0.07 x $216,000) 15,120 ---
From June credit sales
(0.60 x $207,000) 124,200
(0.07 x $207,000) 14,490
From July credit sales
(0.30 x $221,400) 66,420
(0.60 x $221,400) 132,840
From August credit sales
(0.30 x $225,000) --- 67,500
Cash receipts $230,340 $239,830
224400
8–13
1. Janzen, Inc.
Cash Receipts Budget
For July
Payments on account:
From May credit sales (0.15 × $220,000)................................. $ 33,000
From June credit sales (0.60 × $230,000) ............................... 138,000
From July credit sales (0.20 × $210,000)................................. 42,000
Less: July cash discount (0.02 × $42,000).............................. (840)
Cash receipts ............................................................................ $212,160
2. Janzen, Inc.
Cash Receipts Budget
For August
Payments on account:
From June credit sales (0.15 × $230,000) ............................... $ 34,500
From July credit sales (0.60 × $210,000)................................. 126,000
From August credit sales (0.20 × $250,000) ........................... 50,000
Less: August cash discount (0.02 × $50,000)......................... (1,000)
Cash receipts............................................................................. $209,500
8–14
MarvelI agree with comment Company
Schedule of Cash Payments for August
Payments on accounts payable:
From July purchases (0.75 x $25,000) $18,750
From August purchases (0.25 x $30,000) 7,500
Direct labor payments:
From July (0.10 x $40,000) 4,000
From August (0.90 x $50,000) 45,000
Overhead ($70,000 - $5,500) 64,500
Loan repayment [$10,000 + ($10,000 x 0.12 x 4/12)]10,400
Cash payments $150,150
224411
8–15
Cash Budget
For the Month of June 20XX
Beginning cash balance $ 345
Collections:
Cash sales 20,000
Credit sales:
Current month ($30,000 × 50%) 15,000
May credit sales ($25,000 × 30%) 7,500
April credit sales* 3,778
Total cash available $46,623
Less disbursements:
Inventory purchases:
Current month ($50,000 × 60% × 40%) $12,000
Prior month ($40,000 × 60% × 60%) 14,400
Salaries and wages 8,700
Rent 1,200
Taxes 5,500
Total cash needs 41,800
Excess of cash available $ 4,823
*$25,000 × 15% = $3,750
$3,750/2 × 0.015 = $28
$3,750 + $28 = $3,778
2. No. Without the possibility of short-term loans, the owner should consider
taking less cash salary.
224422
8–16
1.
Performance Report
Actual Budgeted Variance
Units produced 1,100 1,000 100 F
Direct materials cost $11,200 $10,000a
$1,200 U
Direct labor cost 4,400 4,000b
400 U
Total $15,600 $14,400 $1,600 U
a. 1,000 units * 2 leather straps * $5 = $10,000
b. 1,000 units * .5 hours per unit * $8 = $4,000
2. The performance report compares costs at two different levels of activity and
so cannot be used to assess efficiency.
8–17
1. Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
Formula 55,000 Hours*
Variable costs:
Maintenance $0.40 $22,000
Power 0.50 27,500
Indirect labor 1.60 88,000
Total variable costs $137,500
Fixed costs:
Maintenance $17,000
Indirect labor 26,500
Rent 18,000
Total fixed costs 61,500
Total overhead costs $199,000
*BasicDiet: (0.25 × 100,000) 25,000
SpecDiet: (0.30 × 100,000) 30,000
Total DLH 55,000
224433
8–17 Concluded
2. 10% higher: Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
Formula 60,500 Hours*
Variable costs:
Maintenance $0.40 $24,200
Power 0.50 30,250
Indirect labor 1.60 96,800
Total variable costs $151,250
Fixed costs:
Maintenance $17,000
Indirect labor 26,500
Rent 18,000
Total fixed costs 61,500
Total overhead costs $212,750
*55,000 DLH × 110% = 60,500
20% lower: Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
Formula 44,000 Hours*
Variable costs:
Maintenance $0.40 $17,600
Power 0.50 22,000
Indirect labor 1.60 70,400
Total variable costs $110,000
Fixed costs:
Maintenance $17,000
Indirect labor 26,500
Rent 18,000
Total fixed costs 61,500
Total overhead costs $171,500
*55,000 DLH × 80% = 44,000
224444
8–18
1. Pet-Care Company
Performance Report
For the Current Year
Actual Budget Variance
Units produced 220,000 220,000 0
Production costs*:
Maintenance $ 40,500 $ 41,000 $ 500 F
Power 31,700 30,000 1,700 U
Indirect labor 119,000 122,500 3,500 F
Rent 18,000 18,000 0
Total costs $209,200 $211,500 $2,300 F
*Flexible budget amounts are based on 60,000 DLH:
(0.25 × 120,000) + (0.30 × 100,000) = 60,000 DLH
Maintenance: $17,000 + $0.40(60,000) = $41,000
Power: $0.50(60,000) = $30,000
Indirect labor: $26,500 + $1.60(60,000) = $122,500
Rent: $18,000 + 0 = $18,000
2. All of the variances are within 5 to 10 percent of budgeted amounts. Most
would probably view the variances as immaterial. There are numerous rea-
sons for variances. For example, a favorable maintenance variance could be
caused by less preventive maintenance or by increased efficiency by individ-
ual maintenance workers. Indirect labor could be favorable because (among
other things) lower-priced labor was used to carry out higher-skilled jobs.
Power could be more expensive than planned because of a rate increase. An
investigation would be needed to know exactly why the variances occurred.
224455
8–19
1. a. An imposed budgetary approach does not allow input from those who are
directly affected by the process. This can tend to make the employees feel
that they are unimportant and that management is concerned only with
meeting budgetary goals and not necessarily with the well-being of their
employees. The employees will probably feel less of a bond with the or-
ganization and will feel that they are meeting standards set by others. An
imposed budgetary approach is impersonal and can give employees the
feeling that goals are set arbitrarily or that some people benefit at the ex-
pense of others. Goals that are perceived as belonging to others are less
likely to be internalized, increasing the likelihood of dysfunctional beha-
vior. Furthermore, imposed budgets fail to take advantage of the know-
ledge subordinate managers have of operations and local market condi-
tions.
b. A participative budgetary approach allows subordinate managers consi-
derable say in how budgets are established. This communicates a sense
of responsibility to the managers and fosters creativity. It also increases
the likelihood that the goals of the budget will become the manager’s per-
sonal goals, due to their participation. This results in a higher degree of
goal congruence. Many feel that there will be a higher level of performance
because it is felt that individuals who are involved in setting their own
standards will work harder to achieve them. When managers are allowed
to give input in developing the budget, they tend to feel that its success or
failure reflects personally on them.
2. a. In an imposed budgetary setting, communication flows from the top to the
bottom and is mostly a one-way flow. Any upward flow would have to do
with understanding the budgets being communicated. For participative
budgeting, the communication flows are necessarily in both directions,
with much of the communication being initiated by subordinate managers.
b. The first communication process (imposed budgeting) leaves the impres-
sion that the opinions and thoughts of lower-level managers are unim-
portant. Subordinate managers may feel that no input is being solicited
because their input is not valued. The second process (participative
budgeting), however, conveys the impression that opinions and views are
important and valued. This tends to create a greater feeling of worth to the
organization and a stronger commitment to achieving its goals.
224466
8–20
1. First, calculate the inspection hours needed: (50,000 units/1000 units
per batch) × 100 testing hours per batch = 5,000 projected testing hours.
This requires the hiring of three inspectors (5,000 projected testing
hours/2,000 inspector hours per year) = 2.5 required inspectors and the
lease of one piece of testing equipment. Thus, the budget for 5,000 in-
spection hours is given as follows:
Resource Formula 5,000 inspection hours
Fixed Variable
Salaries $150,000 — $150,000
Lease 10,000 — 10,000
Power -- $2.00 10,000
Total $160,000 $2.00 $170,000
2. Inspection hours needed: (60,000 units/1,000 units per batch) × 100
hours per batch = 6,000 projected testing hours. Inspectors needed =
6,000/2,000 = 3; equipment needed = 6,000/5,00 = 1.2 (rounds up to 2).
Thus, the budget is as follows:
Resource Formula 6,000 inspection hours
Fixed Variable
Salaries $150,000 — $150,000
Lease 20,000 — 20,000
Power -- $2.00 12,000
Total $170,000 $2.00 $182,000
3. First determine the capacity need to service: (80,000/1,000) × 100 = 8,000
inspection hours. Inspectors required = 8,000/2,000 = 4. Equipment
needed = 8,000/5,000 = 1.6 (rounded up to 2).
Letting Y = total cost, the flexible formula is
Y = $220,000 + $2X.
Fixed expenses = Salaries of 4 * $50,000 = $200,000
2 Equipment Leases = $20,000
Total Fixed Expenses = $220,000
224477
The formula is only valid for this range because of the step-cost nature of
the “fixed resources.” Outside this range the number of inspectors and
equipment needed may change.
8–21
1. Resource Formula 60,000 Moves (activity output)
Fixed Variable
Salaries $400,000 — $400,000
Lease 24,000 — 24,000
Crates — $1.00 60,000
Fuel — 0.06 3,600
Total $424,000 $1.06 $487,600
Note: Cycles, instead of moves, could have been used as the output meas-
ures. In this case, the variable cost per unit would double. In some ways,
cycles is a better measure because crates then become a strictly variable
cost (for moves, it is a step-variable cost treated as a variable cost). For either
moves or cycles, salaries and leases are step-fixed costs. Also, capacity is
determined by operators: 3 × 2,000 × 10 = 60,000 moves. The forklifts actually
supply more potential capacity: 3 × 24 × 280 × 3 = 60,480, but they cannot
move without operators.
2. Resource Formula 54,000 Moves (activity output)
Fixed Variable
Salaries $400,000 — $400,000
Lease 24,000 — 24,000
Crates — $1.00 54,000
Fuel — 0.06 3,240
Total $424,000 $1.06 $481,240
The reduction in output reduces the demand for crates and fuel, but the num-
ber of operators and forklifts would stay the same (even if the reduction in ac-
tivity output were permanent).
3. Resource Formula 15,000 Moves (activity output)
Fixed Variable
Salaries $120,000 — $120,000
Lease 8,000 — 8,000
Crates — $1.00 15,000
Fuel — 0.06 900
Total $128,000 $1.06 $143,900
Note: Reducing demand permanently to 15,000 moves requires three
operators (3 × 2,000 × 3 = 18,000), assuming that part-time help is not per-
mitted, and one forklift (24 × 280 × 3 = 20,160). If part-time operators are al-
224488
lowed, then the cost for salaries would be budgeted at $100,000. This illu-
strates the lumpy nature of resources and their role in budgeting.
224499
PROBLEMS
8–22
First, separate fixed and variable costs for each category using the high-low me-
thod.
Maintenance:
V = ($13,100 – $10,100)/(2,000 – 1,000) = $3.00
F = Y2 – VX2 = $13,100 – $3(2,000) = $7,100
Maintenance cost = $7,100 + $3X
Supplies:
V = ($4,800 – $2,400)/1,000 = $2.40
F = $4,800 – $2.40(2,000) = 0
Supplies cost = $2.40X
Power:
V = ($2,000 – $1,000)/1,000 = $1.00
F = $2,000 – $1.00(2,000) = 0
Power cost = $1.00X
Other:
V = ($14,240 – $12,940)/1,000 = $1.30
F = $14,240 – $1.30(2,000) = $11,640
Other costs = $11,640 + $1.30X
1,800 Direct Labor Hours
Maintenance $12,500
Depreciation 7,000
Supervision 16,000
Supplies 4,320
Power 1,800
Other 13,980
Total $55,600
225500
8–23
Kendall Law Firm
Cash Receipts Budget
August September
Cash fees..................................................................... $ 72,000 $ 90,000
Received from sales in:
June: (0.7)($255,000)(0.17)(1.02) ............... 30,952 —
July:
(0.7)(0.7)($204,000)........................... 99,960 —
(0.7)(0.17)($204,000)(1.02) ............... — 24,762
August:
(0.7)(0.1)($240,000)........................... 16,800
(0.7)(0.7)($240,000)........................... 117,600
September: (0.7)(0.1)($300,000)........................... — 21,000
Total ............................................................................. $219,712 $253,362
8–24
Briggs Manufacturing
For the Quarter Ended March 31, 20XX
1. Schedule 1: Sales Budget
January February March Total
Units 40,000 50,000 60,000 150,000
Selling price × $215 × $215 × $215 × $215
Sales $8,600,000 $10,750,000 $12,900,000 $32,250,000
2. Schedule 2: Production Budget
January February March Total
Sales (Schedule 1) 40,000 50,000 60,000 150,000
Desired ending inventory 40,000 48,000 48,000 48,000
Total needs 80,000 98,000 108,000 198,000
Less: Beginning inventory 32,000 40,000 48,000 32,000
Units to be produced 48,000 58,000 60,000 166,000
225511
8–24 Continued
3. Schedule 3: Direct Materials Purchases Budget
January February
Metal Components Metal Components
Units to be produced
(Schedule 2) 48,000 48,000 58,000 58,000
Direct materials
per unit (lbs.) × 10 × 6 × 10 × 6
Production needs 480,000 288,000 580,000 348,000
Desired ending
inventory 250,000 150,000 300,000 180,000
Total needs 730,000 438,000 880,000 528,000
Less: Beginning
inventory 200,000 120,000 250,000 150,000
Direct materials to
be purchased 530,000 318,000 630,000 378,000
Cost per pound × $8 × $2 × $8 × $2
Total cost $4,240,000 $636,000 $5,040,000 $756,000
(Schedule 3 continued)
March Total
Metal Components Metal Components
Units to be produced
(Schedule 2) 60,000 60,000 166,000 166,000
Direct materials
per unit (lbs.) × 10 × 6 × 10 × 6
Production needs 600,000 360,000 1,660,000 996,000
Desired ending
inventory 300,000 180,000 300,000 180,000
Total needs 900,000 540,000 1,960,000 1,176,000
Less: Beginning
inventory 300,000 180,000 200,000 120,000
Direct materials to
be purchased 600,000 360,000 1,760,000 1,056,000
Cost per pound × $8 × $2 × $8 × $2
Total cost $4,800,000 $720,000 $14,080,000 $2,112,000
225522
8–24 Continued
4. Schedule 4: Direct Labor Budget
January February March Total
Units to be produced
(Schedule 2) 48,000 58,000 60,000 166,000
Direct labor time
per unit (hours) × 4 × 4 × 4 × 4
Total hours needed 192,000 232,000 240,000 664,000
Cost per hour × $9.25 × $9.25 × $9.25 × $9.25
Total cost $1,776,000 $2,146,000 $2,220,000 $6,142,000
5. Schedule 5: Overhead Budget
January February March Total
Budgeted direct labor
hours (Schedule 4) 192,000 232,000 240,000 664,000
Variable overhead rate × $3.40 × $3.40 × $3.40 × $3.40
Budgeted variable overhead $652,800 $ 788,800 $ 816,000 $2,257,600
Budgeted fixed overhead 338,000 338,000 338,000 1,014,000
Total overhead $990,800 $1,126,800 $1,154,000 $3,271,600
6. Schedule 6: Selling and Administrative Expenses Budget
January February March Total
Planned sales (Schedule 1) 40,000 50,000 60,000 150,000
Variable selling and
administrative expenses
per unit × $3.60 × $3.60 × $3.60 × $3.60
Total variable expense $144,000 $180,000 $216,000 $540,000
Fixed selling and
administrative expenses:
Salaries $ 50,000 $ 50,000 $ 50,000 $150,000
Depreciation 40,000 40,000 40,000 120,000
Other 20,000 20,000 20,000 60,000
Total fixed expenses $110,000 $110,000 $110,000 $330,000
Total selling and
administrative expenses $254,000 $290,000 $326,000 $870,000
225533
8–24 Continued
7. Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials: Metal (10 @ $8) = $80
Comp. (6 @ $2) = 12 $ 92.00
Direct labor (4 × $9.25) 37.00
Overhead:
Variable (4 @ $3.40) 13.60
Fixed (4 × $1,014,000/664,000) 6.11
Total unit cost $148.71
Finished goods inventory = Units × Unit cost
= 48,000 × $148.71
= $7,138,080
8. Schedule 8: Cost of Goods Sold Budget
Direct materials used (Schedule 3)
Metal (1,660,000 × $8) $13,280,000
Components (996,000 × $2) 1,992,000 $15,272,000
Direct labor used (Schedule 4) 6,142,000
Overhead (Schedule 5) 3,271,600
Budgeted manufacturing costs $24,685,600
Add: Beginning finished goods (32,000 × $148.71) 4,758,720
Goods available for sale $29,444,320
Less: Ending finished goods (Schedule 7) 7,138,080
Budgeted cost of goods sold $22,306,240
9. Schedule 9: Budgeted Income Statement
Sales (Schedule 1) $32,250,000
Less: Cost of goods sold (Schedule 8) 22,306,240
Gross margin $ 9,943,760
Less: Selling and admin. expenses (Schedule 6) 870,000
Income before income taxes $ 9,073,760
225544
8–24 Concluded
10. Schedule 10: Cash Budget
January February March Total
Beg. balance $ 378,000 $ 1,321,200 $ 2,952,400 $ 378,000
Cash receipts 8,600,000 10,750,000 12,900,000 32,250,000
Cash available $8,978,000 $12,017,200 $15,852,400 $32,628,000
Less:
Disbursements:
Purchases $4,876,000 $5,796.000 $ 5,520,000 $16,192,000
Direct labor 1,776,000 2,146,000 2,220,000 6,142,000
Overhead 790,800 926,800 954,000 2,671,600
Selling & admin. 214,000 250,000 286,000 750,000
Total $7,656,800 $9,118.800 $ 8,980,000 $25,755,600
Tentative
ending balance $1,321,200 2,952,400 $ 6,872,400 $6,872,400
Borrowed/(repaid)
Interest paid — —
Ending balance $1,321,200 $ 2,952,400 $ 6,872,400 $ 6,872,400
*(0.12 × 2/12 × $56,800) + (0.12 × 1/12 × $6,800)
225555
8–25
1. To determine accounts payable as of June 30, a schedule of purchases will be
constructed. This schedule will also be used to build the cash budget.
Let X = Cost of sales, and sales = 1.00.
If X + 0.25X = 1.00, then X = 0.80.
June July August September
Cost of sales $ 96,000 $ 72,000 $ 80,000 $108,000
Desired end. inventory* 36,000 40,000 54,000 44,000
Total requirements $132,000 $112,000 $134,000 $152,000
Less: Beginning inventory 48,000 36,000 40,000 54,000
Purchases $ 84,000 $ 76,000 $ 94,000 $ 98,000
*0.50 × Next month’s cost of sales
Since purchases are paid for in the following month, accounts payable at the
end of June is $84,000. Inventory for June 30 is $36,000.
Accounts receivable for June 30 is computed as follows:
From June: 0.7 × $120,000 × 0.8* = $67,200
From May: 0.7 × $100,000 × 0.3* = 21,000
Total $88,200
*By June 30, 20% of June credit sales and 70% of May credit sales have been
collected, leaving 80% and 30%, respectively, to be collected.
Given accounts payable, the total liabilities plus stockholders’ equity must
equal $562,750 ($84,000 + $210,000 + $268,750). Cash is the difference be-
tween total assets and all other assets except cash ($562,750 – $425,000 –
$36,000 – $88,200). This difference is $13,550.
Liabilities and
Assets Stockholders’ Equity
Cash $ 13,550
Accounts receivable 88,200
Inventory 36,000
Plant and equipment 425,000
Accounts payable $ 84,000
Common stock 210,000
Retained earnings 268,750
Total $562,750 $562,750
225566
8–25 Continued
2. Grange Retailers
Cash Budget
For the Quarter Ending September 30, 2008
July August September Total
Beginning cash balance $ 13,550 $ 10,450 $ 10,405 $ 13,550
Cash collections* 102,600 100,700 113,300 316,600
Total cash available $ 116,150 $ 111,150 $ 123,705 $ 330,150
Cash disbursements:
Purchases** $ 84,000 $ 76,000 $ 94,000 $ 254,000
Salaries and wages 10,000 10,000 10,000 30,000
Utilities 1,000 1,000 1,000 3,000
Other 1,700 1,700 1,700 5,100
Property taxes 15,000 15,000
Advertising fees 6,000 6,000
Lease 5,000 5,000
Total disbursement $ 111,700 $ 94,700 $ 111,700 $ 318,100
Minimum cash balance 10,000 10,000 10,000 10,000
Total cash needs $ 121,700 $ 104,700 $ 121,700 $ 328,100
Excess (deficiency) $ (5,550) $ 6,450 $ 2,005 $ 2,050
Financing:
Borrowings $ 6,000 $ 6,000
Repayments $ (6,000) (6,000)
Interest*** (45) $ 0 (45)
Total financing $ 6,000 $ (6,045) $ 0 $ (45)
Ending cash balance $ 10,450 $ 10,405 $ 12,005 $ 12,005
*Cash collections:
Cash sales $ 27,000 $ 30,000 $ 40,500 $ 97,500
Credit sales:
Current month 12,600 14,000 18,900 45,500
Prior month 42,000 31,500 35,000 108,500
From two months ago 21,000 25,200 18,900 65,100
Total collections $ 102,600 $ 100,700 $ 113,300 $ 316,600
**Taken from the purchases schedule developed in Requirement 1.
***$6,000 × 0.09/12
225577
8–25 Concluded
3. Grange Retailers
Pro Forma Balance Sheet
September 30, 2008
Liabilities and
Assets Stockholders’ Equity
Cash $ 12,005
Accounts receivablea
96,600
Inventoryb
44,000
Plant and equipmentc
413,000
Accounts payableb
$ 98,000
Common stock 210,000
Retained earningsd
257,605
Total $565,605 $565,605
a
(0.7 × $135,000 × 0.8) + (0.7 × $100,000 × 0.3).
b
From purchases schedule prepared in Requirement 1.
c
[$425,000 – 3($4,000)].
d
If total assets equal $565,605, then liabilities plus stockholders’ equity must
also equal that amount. Subtracting accounts payable and common stock
from total liabilities and stockholders’ equity gives retained earnings of
$257,605.
8–26
1. Participative budgeting communicates a sense of responsibility to subordi-
nate managers and fosters creativity. Since the subordinate manager creates
the budget, it also increases the likelihood that the goals of the budget will
become the manager’s personal goals, resulting in a higher degree of goal
congruence. Many believe that the increased responsibility and challenge
provide nonmonetary incentives that lead to a higher level of performance
because it is felt that individuals who are involved in setting their own stan-
dards work harder to achieve them. It also involves individuals whose know-
ledge of local conditions may enhance the entire planning process.
225588
8–26 Concluded
There are also certain disadvantages or problems associated with participa-
tive budgeting. Some managers may tend to either set the budget too loosely
or too tightly. Participative budgeting also creates the opportunity for manag-
ers to build slack into the budget by underestimating revenues or overesti-
mating costs. Another problem is that top management may assume total
control of the budgeting process and, simultaneously, seek superficial partic-
ipation of lower-level managers. The participation is generally limited to an
endorsement activity, and no real input is sought. In this case, the advantag-
es of participation are negated.
2. Scott Weidner’s participative budgetary policy has certain deficiencies. They
are as follows:
a. Managers do not participate in setting the appropriation target figure.
Recommendation: Managers should have the opportunity to give some in-
put as to what the target figure will be.
b. Setting an upper spending constraint gives indirect approval to spending
up to that level whether justified or not. Recommendation: Zero-based
budgeting could be used.
c. Setting prior constraints, such as maximum limits and inclusion of non-
controllable fixed expenditures prior to departmental input, defeats the pur-
pose of participative management. Recommendation: Divisional constraints
should be known to management prior to budgeting, but individual limits
should be determined with the input of managers.
d. Arbitrary allocation of the approved budget defeats the purpose of a parti-
cipative budget process. Recommendation: The department managers
should be involved in the reallocation of the approved budget.
e. The division manager holds back a specified percentage of each depart-
ment’s appropriation for discretionary use. Recommendation: Contingen-
cy funds should not be a part of a departmental budget. These funds
should be identified and provided for before the allocation process to de-
partments.
f. Exception reporting and evaluation based on performance must be ac-
companied by rewards. Recommendation: Recognition should be given to
those attaining budget goals, not just exceptions. (Part 2 is adapted from
CMA unofficial answers.)
225599
8–27
Minota Company
Cash Budget
For the Month of July 2008
Beginning cash balance....................................................... $ 27,000
Collections:
Cash sales (0.3 × $1,140,000) ......................................... 342,000
Credit sales:
July:
With discounta
....................................................... 234,612
Without discountb
................................................. 239,400
Junec
........................................................................... 140,000
Mayd
............................................................................. 84,000
Sale of old equipment .......................................................... 25,200
Total cash available ........................................................ $1,092,212
Less disbursements:
Raw materials:
Julye
............................................................................. $ 144,000
Junef
............................................................................ 136,800
Direct labor ...................................................................... 110,000
Operating expenses........................................................ 280,000
Dividends ......................................................................... 140,000
Equipment........................................................................ 168,000
Total disbursements.................................................. $ 978,800
Minimum cash balance ........................................................ 20,000
Total cash needs................................................................... $ 998,800
Excess of cash available over needs.................................. $ 93,412
Ending cash balance............................................................ $ 113,412
a
(0.7 × $1,140,000) × 0.6 × 0.5 × 0.98
b
(0.7 × $1,140,000) × 0.6 × 0.5
c
(0.7 × $1,000,000) × 0.2
d
(0.7 × $600,000) × 0.2
e
July requirements (0.24 × $1,140,000) ............................... $273,600
Desired ending inventory (0.24 × $1,200,000)................... 288,000
Total requirements .............................................................. $561,600
Less: Beginning inventory ................................................. 273,600
Purchases ............................................................................ $288,000
July payment: $288,000/2 = $144,000
f
$273,600/2 = $136,800 (June purchases are computed as shown for July.)
226600
8–28
1. a. The new budget system allows the managers to focus on those areas that
need attention. By dividing the annual budget into 12 equal parts, manag-
ers can take corrective action before the error is compounded (frequent
feedback is provided). Also, the company has segregated costs into fixed
and variable components, an essential step for good control. A major
weakness of the budget is the failure to properly define responsibility. Be-
cause of this, supervisors are being held accountable for areas over which
they have no control.
b. The performance report should emphasize those items over which the
manager has control. The report should also compare actual costs with
budgeted costs for the actual level of activity. Currently, the report is at-
tempting to compare costs at two different levels: the original budget for
3,000 units with the actual costs for production of 3,185 units. A flexible
budgeting system needs to be employed.
2. Berwin, Inc.
Machining Department Performance Report
For the Month Ended May 31, 2008
Budget* Actual Variance
Volume in units 3,185 3,185 0
Variable manufacturing costs:
Direct materials $25,480 $24,843 $ 637 F
Direct labor 29,461 29,302 159 F
Variable overhead 35,354 35,035 319 F
Total variable costs $90,295 $89,180 $1,115 F
Fixed manufacturing costs:
Indirect labor $ 3,300 $ 3,334 $ 34 U
Depreciation 1,500 1,500 0
Taxes 300 300 0
Insurance 240 240 0
Other 930 1,027 97 U
Total fixed costs $ 6,270 $ 6,401 $ 131 U
Total costs $96,565 $95,581 $ 984 F
*For the variable costs: 3,185 × $24,000/3,000; 3,185 × $27,750/3,000; 3,185 ×
$33,300/3,000
226611
8–28 Concluded
3. Berwin’s budgetary system could also be improved by offering monetary and
nonmonetary incentives to reach budget goals. The managers and supervi-
sors should be allowed and encouraged to participate in the budgetary
process because they will be responsible for controlling the budget. The con-
troller needs to be certain that the budget objectives are based on realistic
conditions and expectations. The managers should be held accountable only
for costs over which they have control.
8–29
1. Actual Costs Budgeted Costs Budget Variance
Direct labor $210,000 $200,000 $ 10,000 U
Power 135,000 85,000 50,000 U
Setups 140,000 100,000 40,000 U
Total $485,000 $385,000 $100,000 U
Note: Budgeted costs use the actual direct labor hours and the labor-based
cost formulas. Example: Direct labor cost = $10 × 20,000 = $200,000; Power
cost = $5,000 + ($4 × 20,000) = $85,000; and Setup cost = $100,000 (fixed).
2. Actual Costs Budgeted Costs Budget Variance
Direct labor $210,000 $200,000 $10,000 U
Power 135,000 149,000 14,000 F
Setups 140,000 142,000 2,000 F
Total $485,000 $491,000 $ 6,000 F
Note: Budgeted costs use the individual driver formulas: Direct labor = $10 ×
20,000 = $200,000; Power = $68,000 + ($0.90 × 90,000) = $149,000; and Setups
= $98,000 + ($400 × 110) = $142,000.
3. The multiple-cost-driver approach captures the cause-and-effect cost rela-
tionships and, consequently, is more accurate than the direct-labor-based
approach.
226622
8–30
1. Westcott, Inc.
Performance Report
For the Year 2008
Actual Costs Budgeted Costs* Budget Variance
Direct materials $ 440,000 $ 480,000 $40,000 F
Direct labor 355,000 320,000 35,000 U
Depreciation 100,000 100,000 0
Maintenance 425,000 435,000 10,000 F
Machining 142,000 137,000 5,000 U
Materials handling 232,500 240,000 7,500 F
Inspections 160,000 145,000 15,000 U
Total $1,854,500 $1,857,000 $ 2,500 F
*Budget formulas for each item can be computed by using the high-low me-
thod (using the appropriate cost driver for each method). Using this ap-
proach, the budgeted costs for the actual activity levels are computed as fol-
lows:
Direct materials: $6 × 80,000
Direct labor: $4 × 80,000
Depreciation: $100,000
Maintenance: $60,000 + ($1.50 × 250,000)
Machining: $12,000 + ($0.50 × 250,000)
Materials handling: $40,000 + ($6.25 × 32,000)
Inspections: $25,000 + ($1,000 × 120)
226633
8–30 Concluded
2. Pool rates: $1,100,000/100,000 = $11 per DLH
$672,000/300,000 = $2.24 per MHr
$290,000/40,000 = $7.25 per move
$225,000/200 = $1,125 per batch
Note: The first pool has material and labor costs included.
Unit cost:
Pool 1: $11 × 10,000 = $110,000
Pool 2: $2.24 × 15,000 = 33,600
Pool 3: $7.25 × 500 = 3,625
Pool 4: $1,125 × 5 = 5,625
Total $152,850
Units ÷ 10,000
Unit cost $ 15.29*
*Rounded
3. Knowing the resources consumed by activities and how the resource costs
change with the activity driver should provide more insight into managing the
activity and its associated costs. For example, if moves could be reduced to
20,000 from the expected 40,000, then costs can be reduced by not only eli-
minating the need for four operators, but by reducing the need to lease from
four to two forklifts. However, in the short run, the cost of leasing forklifts
may persist even though demand for their service is reduced.
20,000 moves 40,000 moves
Materials handling:
Forklifts $ 40,000 $ 40,000
Operators 120,000 240,000
Fuel 5,000 10,000
Total $165,000 $ 290,000
The detail assumes that forklift leases must continue in the short run but that
the number of operators may be reduced (assumes each operator can do
5,000 moves per year).
226644
8–31
a. Schedule 1: Sales Budget (units and total sales in thousands)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Units 65 70 75 90 300
Unit price × $400 × $400 × $400 × $400 × $400
Total sales $26,000 $28,000 $30,000 $36,000 $120,000
b. Schedule 2: Production Budget
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Sales (Schedule 1) 65,000 70,000 75,000 90,000 300,000
Desired ending
inventory 13,000 15,000 20,000 10,000 10,000
Total needs 78,000 85,000 95,000 100,000 310,000
Less: Beginning
inventory 0 13,000 15,000 20,000 0
Production 78,000 72,000 80,000 80,000 310,000
c. Schedule 3: Direct Materials Purchases Budget (in thousands)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Production 78.0 72.0 80.0 80.0 310.0
Materials/unit × 3 × 3 × 3 × 3 × 3
Production needs 234.0 216.0 240.0 240.0 930.0
Desired ending
inventory 63.0 67.5 81.0 65.7 65.7
Total needs 297.0 283.5 321.0 305.7 995.7
Less: Beginning
inventory 65.7 63.0 67.5 81.0 65.7
Purchases 231.3 220.5 253.5 224.7 930.0
Cost per unit × $80 × $80 × $80 × $80 × $80
Purchase cost $18,504 $17,640 $20,280 $17,976 $74,400
226655
8–31 Continued
d. Schedule 4: Direct Labor Budget (in thousands)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Production 78 72 80 80 310
Hours per unit × 5 × 5 × 5 × 5 × 5
Hours needed 390 360 400 400 1,550
Cost per hour × $10 × $10 × $10 × $10 × $10
Total cost $3,900 $3,600 $4,000 $4,000 $15,500
e. Schedule 5: Overhead Budget (in thousands)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Budgeted hours 390 360 400 400 1,550
Variable rate × $6 × $6 × $6 × $6 × $6
Budgeted VOH $2,340 $2,160 $2,400 $2,400 $ 9,300
Budgeted FOH 1,000 1,000 1,000 1,000 4,000
Total OH $3,340 $3,160 $3,400 $3,400 $13,300
f. Schedule 6: Selling and Administrative Expenses Budget (in thousands)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Planned sales 65 70 75 90 300
Variable rate × $10 × $10 × $10 × $10 × $10
Variable expenses $ 650 $ 700 $ 750 $ 900 $3,000
Fixed expenses 250 250 250 250 1,000
Total expenses $ 900 $ 950 $1,000 $1,150 $4,000
g. Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials (3 units @ $80) $240.00
Direct labor (5 hours @ $10) 50.00
Overhead:
Variable (5 hours @ $6) 30.00
Fixed ($4,000,000/310,000) 12.90*
Total unit cost $332.90
Finished goods = 10,000 × $332.90 = $3,329,000
*Rounded
226666
8–31 Continued
h. Schedule 8: Cost of Goods Sold Budget
Direct materials used (Schedule 3) $ 74,400,000
Direct labor used (Schedule 4) 15,500,000
Overhead (Schedule 5) 13,300,000
Budgeted manufacturing costs $103,200,000
Add: Beginning finished goods inventory (Schedule 2) 0
Goods available for sale $103,200,000
Less: Ending finished goods inventory (Schedule 7) 3,329,000
Budgeted cost of goods sold $ 99,871,000
i. Cash Budget (in thousands)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Beginning cash bal. $ 250 $ 1,110 $ 3,128 $ 5,568 $ 250
Collections:
Credit sales:
Current quarter 22,100 23,800 25,500 30,600 102,000
Prior quarter 3,3001
3,900 4,200 4,500 15,900
Cash available $25,650 $28,810 $32,828 $40,668 $118,150
Less disbursements:
Direct materials:
Current quarter $ 9,252 $ 8,820 $10,140 $ 8,988 $ 37,200
Prior quarter 7,248 9,252 8,820 10,140 35,460
Direct labor 3,900 3,600 4,000 4,000 15,500
Overhead 2,990 2,810 3,050 3,050 11,900
Selling and admin. 850 900 950 1,100 3,800
Dividends 300 300 300 300 1,200
Equipment 2,000 2,000
Total cash needs $24,540 $25,682 $27,260 $29,578 $107,060
Ending cash bal. $ 1,110 $ 3,128 $ 5,568 $11,090 $ 11,090
1. 55,000 * 400 * .15 = 3,300
226677
8–31 Concluded
j. Optima Company
Pro Forma Income Statement
For the Year Ending December 31, 2008
Sales (Schedule 1) .................................................................... $120,000,000
Less: Cost of goods sold (Schedule 8)................................... 99,871,000
Gross margin ....................................................................... $ 20,129,000
Less: Selling and administrative expenses (Schedule 6) ..... 4,000,000
Income before income taxes .............................................. $ 16,129,000
k. Optima Company
Pro Forma Balance Sheet
December 31, 2008
Assets
Cash ........................................................................................... $11,090,000
Accounts receivable ................................................................. 5,400,000
Direct materials inventory........................................................ 5,256,000
Finished goods inventory ........................................................ 3,329,000
Plant and equipment................................................................. 33,900,000a
Total assets ............................................................................... $58,975,000
Liabilities and Stockholders’ Equity
Accounts payable ..................................................................... $ 8,988,000
Capital stock.............................................................................. 27,000,000
Retained earnings..................................................................... 22,987,000b
Total liabilities and stockholders’ equity .......................... $58,975,000
a
Beginning plant and equipment............. $33,500,000
Add: New equipment ............................... 2,000,000
Less: Depreciation expense ................... (1,600,000)
Ending plant and equipment .............. $33,900,000
b
Beginning retained earnings .................. $ 8,058,000
Plus: Net income* .................................... 16,129,000
Less: Dividends paid............................... (1,200,000)
Ending retained earnings ................... $22,987,000
*Ignore taxes.
226688
8–32
1. The flexible budgets presented are based on three different activity levels,
none of which coincide with the actual level of performance for November.
The budget must be restated to a level of activity that matches the actual re-
sults. The fixed and variable components of the mixed costs must be segre-
gated and a budgeted cost calculated for the level of activity attained.
2. Patterson Company
Selling Expenses Report
For the Month of November
Monthly Expenses Budget Actual Variance
Advertising and promotion $1,200,000 $1,350,000 $150,000 U
Administrative salaries 57,000 57,000 0
Sales salariesa
84,000 84,000 0
Sales commissionsb
327,000 327,000 0
Salesperson travelc
187,200 185,000 2,200 F
Sales office expensed
500,500 497,200 3,300 F
Shipping expensee
705,000 730,000 25,000 U
Total $3,060,700 $3,230,200 $169,500 U
a
($75,600/72)(80) = $84,000
b
($300,000/$10,000,000)($10,900,000) = $327,000
c
Change in cost: $175,000 – $170,000 = $5,000
Change in sales dollars: $10,625,000 – $10,000,000 = $625,000
Variable cost per dollar of sales = Change in cost divided by change in
activity level
$5,000/$625,000 = $0.008 per dollar of sales
Fixed cost at 72-person level:
$170,000 – ($10,000,000 × 0.008) = $90,000
Fixed cost at 80-person level:
($90,000/72) × 80 = $100,000
Total travel budget:
$100,000 fixed + ($10,900,000 × 0.008) variable = $187,200
226699
8–32 Concluded
d
Change in cost: $498,750 – $490,000 = $8,750
Change in number of orders: 4,250 – 4,000 = 250
Variable cost per order: $8,750/250 = $35
Fixed cost: $490,000 – (4,000 × $35) = $350,000
Total office expense budget:
$350,000 + (4,300 × $35) = $500,500
e
Change in cost: $712,500 – $675,000 = $37,500
Change in number of units: 425,000 – 400,000 = 25,000
Variable cost per unit: $37,500/25,000 = $1.50
Fixed cost: $675,000 – (400,000 × $1.50) = $75,000
Total shipping expense budget:
$75,000 + (420,000 × $1.50) = $705,000
227700
MANAGERIAL DECISION CASES
8–33
1. Linda’s behavior is not ethical. In the budgeting process, she is deliberately
misrepresenting the capabilities of her division for personal gain. To ensure
that she achieves budget (either this year or next), she manipulates account-
ing procedures. This manipulation is in opposition to generally accepted ac-
counting principles. Her decisions are based on her own self-interest rather
than on the interest of the company. Deceptive and manipulative behavior for
personal gain is clearly wrong.
2. There are few, if any, legitimate reasons for deferring the closing of sales.
Thus, if a marketing manager were asked to engage in this behavior, the first
response must be to find out why the request is being made. If there is no
sound reason offered, then a simple refusal should suffice. If it takes on the
nature of an order and no sound reason exists, then the marketing manager
should consider appealing to a higher-level manager. Certainly, deferral of
closings so that it increases the likelihood of meeting budget for the coming
year is not a sound reason, and, in fact, is wrong.
3. It would be hard to go against a common practice that seems to have the ap-
proval of the plant managers. The widespread knowledge of the practice may
even suggest that higher-level management is aware of it and essentially
condones the practice—or at least adjusts for it. If higher-level management
is aware of the practice and adjusts for it, then the ability to achieve bonus
may not be enhanced as much as believed. The plant manager could investi-
gate and find out the extent to which upper-level management is aware of
padding. At the same time, the manager could obtain some advice on what
his behavior ought to be. If told that the practice is acceptable, then the man-
ager has to decide whether to continue in an organization that accepts decep-
tive behavior (or go against the grain and simply report what he or she feels
is really achievable by the plant).
4. This is a clear violation of the ethical code for management accountants. A
management accountant is obligated to report information fairly and objec-
tively and to disclose all information that can be expected to influence a us-
er’s understanding of accounting reports. Moreover, management accoun-
tants must perform their duties in accordance with relevant laws, regulations,
and technical standards. Accelerating the recognition of expenses violates
generally accepted accounting principles.
227711
8–34
1. Dr. Roger Jones
Cash Budget
Cash collections and cash available* .......................... $21,360
Less cash disbursements:
Salaries...................................................................... $12,700
Benefits ..................................................................... 1,344
Building lease ........................................................... 1,500
Dental supplies ......................................................... 1,200
Janitorial.................................................................... 300
Utilities....................................................................... 400
Phone......................................................................... 150
Office supplies.......................................................... 100
Lab fees ..................................................................... 5,000
Loan payments ......................................................... 570
Interest payments..................................................... 500
Miscellaneous ........................................................... 500
Total cash needs............................................................ $24,264
Deficiency of cash available over needs ..................... $ (2,904)
*Total revenues for a month:
Fillings ($50 × 90).................. $ 4,500
Crowns ($300 × 19) ............... 5,700
Root canals ($170 × 8) .......... 1,360
Bridges ($500 × 7) ................. 3,500
Extractions ($45 × 30)........... 1,350
Cleaning ($25 × 108) ............. 2,700
X-rays ($15 × 150) ................. 2,250
$21,360
The budget shows that there is $2,904 more cash going out than coming in.
227722
8–34 Continued
2. Dr. Jones must either increase revenues to make up the deficiency or cut
costs or a combination of the two. Three possible approaches are outlined
below:
a. Extend office hours so that a total of 40 hours are worked each week. This
could increase revenues by as much as $5,340. Based on a four-week
month, the current revenue earned per hour is $166.88 ($21,360/128). Thus,
the total revenue increase possible is $166.88 × 32 hours = $5,340. Dr.
Jones would need to inform his assistants and receptionist of the in-
creased time and indicate that each will receive a 15% increase in salary
for the additional time. (The office is currently open 34 hours per week.)
Benefits (primarily FICA and unemployment insurance benefits) would al-
so increase. Other expenses that will likely increase with an increase in
sales are dental supplies, lab fees, and utilities (representing about 31% of
sales). The remaining expenses appear to be fixed. Thus, the increase in
cash flow is computed as follows:
Incremental revenues $ 5,340
Salary increases (0.15 × $3,400) (510)
Benefits ($1,344/$12,700)($510) (54)
Variable expenses (0.31 × $5,340) (1,655)
Cash flow increase $ 3,121
Approach 1 carries with it some risk. Increasing office hours may not in-
crease business. If business does not increase as expected, the cash flow
problems could be aggravated rather than relieved. The likelihood of increas-
ing business would be increased if the additional hours are offered in the ear-
ly evening instead of Friday afternoon. Evening hours are a major conveni-
ence for patients who must work during the day and are reluctant to lose
work hours.
227733
8–34 Continued
Dr. Roger Jones
Revised Cash Budget
Cash collections and cash avail. ($21,360 + $5,340)........ $26,700
Less cash disbursements:
Salaries ($12,700 + $510) .................................................... $13,210
Benefits ($1,344 + $54)........................................................ 1,398
Building lease ...................................................................... 1,500
Dental supplies ($1,200 + $300*) ........................................ 1,500
Janitorial............................................................................... 300
Utilities ($400 + $100*)......................................................... 500
Phone.................................................................................... 150
Office supplies..................................................................... 100
Lab fees ($5,000 + $1,255*) ................................................. 6,255
Loan payments .................................................................... 570
Interest payments................................................................ 500
Miscellaneous ...................................................................... 500
Total cash needs ................................................................. $26,483
Excess cash available over needs..................................... $ 217
*Variable expenses increase by 25% (8 added hours/32 original hours).
b. Cut one dental assistant, eliminate the salary to Mrs. Jones and the activi-
ties she does, and cut Dr. Jones’s salary back by $1,000 per month. The
savings are given below:
Assistant (salary and benefits)...................... $1,051*
Salaries............................................................ 2,000
Total ............................................................. $3,051
*($1,900/2) + [($950/$12,700) × $1,344] = $1,051 (rounded) (This provides a
reasonable approximation of the benefits assigned to an assistant.)
Although this achieves the savings, the solution may not be feasible. The
solution depends to a large extent on how well the Jones family can do
with a $2,000 per month cut in their income. In all likelihood, this would be
unacceptable to the Jones family. Also, cutting an assistant would require
the receptionist to become involved in assisting. This may not be possible
without laying off the receptionist and hiring a person that has both sets of
skills. Additionally, using the receptionist as an assistant would result in
phone calls going unanswered and/or incoming patients being ignored.
227744
8–34 Concluded
c. A third possibility is to increase the fees charged for the various dental ser-
vices. Assuming a variable cost ratio of 31% (from Approach 1), the in-
crease in revenues needed to cover the $2,900 deficiency can be com-
puted as follows:
0.69R = $2,900
R = $2,900/0.69
R = $4,203
This increase would call for fees to increase an average of 19.7%. Whether
this increase is possible or not depends to some extent on how Dr.
Jones’s charges compare with other dentists in the area. If some increase
is possible, then the increase could be combined with elements of the oth-
er two approaches, (e.g., a 10 percent increase in fees and working an ex-
tra four hours per week, say, on Wednesday evening). I would expect Dr.
Jones to be more likely to accept a combination like the one just men-
tioned rather than accepting any of the approaches in their pure form.
The behavioral principles discussed in the chapter do have a role in this type
of setting. Dr. Jones’s personal goals must be in line with the goals of his
professional organization, and he must have the motivation to achieve those
goals. There is, however, a significant difference. Dr. Jones owns and manag-
es the organization. To a large extent, his goals are the goals of the organiza-
tion.
RESEARCH ASSIGNMENT
8–35
Answers will vary.

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Chapter 8 Budgeting For Planning and Control

  • 1. 223311 CHAPTER 8 BUDGETING FOR PLANNING AND CONTROL QUESTIONS FOR WRITING AND DISCUSSION 1. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms. 2. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned perfor- mance. Budgets are standards, and they are compared with actual costs and revenues to provide feedback. 3. The planning and control functions of bud- geting can benefit all organizations regard- less of size. All organizations need to de- termine what their goals are and how best to attain those goals. This is the planning func- tion of budgeting. In addition, organizations can compare what actually happens with what was planned to see if the plans are un- folding as anticipated. This is the control function of budgeting. 4. Budgeting forces managers to plan, pro- vides resource information for decision mak- ing, sets benchmarks for control and evalua- tion, and improves the functions of communication and coordination. 5. A master budget is the collection of all indi- vidual area and activity budgets. Operating budgets are concerned with the income- generating activities of a firm. Financial budgets are concerned with the inflows and outflows of cash and with planned capital expenditures. 6. The sales forecast is a critical input for build- ing the sales budget. However, it is not nec- essarily equivalent to the sales budget. Upon receiving the sales forecast, manage- ment may decide that the firm can do better than the forecast indicates. Consequently, actions may be taken to increase the sales potential for the coming year (e.g., increas- ing advertising). This adjusted forecast then becomes the sales budget. 7. Yes. All budgets are founded on the sales budget. Before a production budget can be created, it must have the planned sales. The manufacturing budgets, in turn, depend on the production budget. The same is true for the financial budgets since sales is a critical input for budgets in that category. 8. For a merchandising firm, the production budget is replaced by a merchandise pur- chases budget. Merchandising firms also lack direct materials and direct labor budg- ets. All other budgets are essentially the same. For a service firm (for-profit), the sales budget doubles as the production budget, and there is no finished goods in- ventory budget. The rest of the budgets have counterparts. 9. A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. For per- formance reporting, it is necessary to com- pare the actual costs for the actual level of activity with the budgeted costs for the ac- tual level of activity. A flexible budget pro- vides the means to compute the budgeted costs for the actual level of activity, after the fact. 10. A flexible budget is based on a simple for- mula: Y = F + VX, which requires knowledge of both fixed and variable components. 11. Goal congruence is important because it means that the employees of an organiza- tion are working toward the goals of that or- ganization. 12. Frequent feedback is important so that cor- rective action can be taken, increasing the likelihood of achieving budget. 13. Both monetary and nonmonetary incentives are used to encourage employees of an or- ganization to achieve the organization’s goals. Monetary incentives appeal to the economic needs of an individual, and non- monetary incentives appeal to the psycho- logical needs. Since individuals are moti- vated by both economic and psychological factors, both types of incentives ought to be present in a good budgetary system.
  • 2. 223322 14. Participative budgeting is a system of bud- geting that allows subordinate managers a say in how the budgets are established. Par- ticipative budgeting fosters creativity and communicates a sense of responsibility to subordinate managers. It also creates a higher likelihood of goal congruence since managers have more of a tendency to make the budget’s goals their own personal goals. 15. Agree. Individuals who are not challenged tend to lose interest and maintain a lower level of performance. A challenging, but achievable, budget tends to extract a higher level of performance. 16. Top management should provide guidelines and statistical input (e.g., industrial fore- casts) and should review the budgets to mi- nimize the possibility of budgetary slack and ensure that the budget is compatible with the strategic objectives of the firm. Top management should also provide the incen- tive and reward system associated with the budgetary system. 17. By underestimating revenues and overesti- mating costs, the budget is more easily achieved. 18. To meet budget, it is possible to take actions that reduce costs in the short run but in- crease them in the long run. For example, lower-priced, lower-quality materials can be substituted for the usual quality of materials. 19. Other performance measures include prod- uctivity, personnel development, market share, and product quality. A manager would have to be rewarded for improve- ments achieved in each area. A major diffi- culty is determining how much weight to as- sign to each performance area. 20. Behavioral factors can make or break a budgetary control system. It is absolutely essential to consider the behavioral ramifica- tions. Ignoring them can and probably will produce dysfunctional consequences. 21. Across-the-board cuts have the appearance of being fair, but they unfairly penalize good programs. In an era of scarce resources, an organization must decide what it wishes to emphasize and allocate resources accor- dingly. This may mean the complete elimina- tion of weak programs and the strengthening of strong programs. To cut each program equally without considering which ones are vital to the success of the organization is not good planning. 22. Activity-based budgeting requires three steps: (1) identification of activities; (2) esti- mation of activity output demands; and (3) estimation of the costs of resources needed to provide the activity output demanded. 23. Functional-based flexible budgeting relies on unit-based drivers to build cost formulas for various cost items. Activity flexible budgeting uses activity drivers to build a cost formula for the costs of each activity.
  • 3. 223333 EXERCISES 8–1 1. e 2. d 3. c 4. e 5. b 8–2 1. H, I 2. E 3. I, F 4. G 5. D 6. F 7. F 8. A 9. C 10. B 8–3 1. Freshaire, Inc. Sales Budget For the Year 2008 Mint: 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total Units 80,000 110,000 124,000 140,000 454,000 × Price × $3.00 × $3.00 × $3.00 × $3.00 × $3.00 Sales $240,000 $330,000 $372,000 $420,000 $ 1,362,000 Lemon: Units 100,000 100,000 120,000 140,000 460,000 × Price × $3.50 × $3.50 × $3.50 × $3.50 × $3.50 Sales $350,000 $350,000 $420,000 $490,000 $ 1,610,000 Total sales $590,000 $680,000 $792,000 $910,000 $ 2,972,000 2. Freshaire, Inc., will use the sales budget in planning as the basis for the pro- duction budget and the succeeding budgets of the master budget. At the end of the year, the company can compare actual sales against the budget to see if expectations were achieved.
  • 4. 223344 8–4 Freshaire, Inc. Production Budget for Mint Freshener For the Year 2008 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total Sales 80,000 110,000 124,000 140,000 454,000 Des. ending inventory 11,000 12,400 14,000 9,000 9,000 Total needs 91,000 122,400 138,000 149,000 463,000 Less: Beginning inventory 4,000 11,000 12,400 14,000 4,000 Units produced 87,000 111,400 125,600 135,000 459,000 Freshaire, Inc. Production Budget for Lemon Freshener For the Year 2008 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total Sales 100,000 100,000 120,000 140,000 460,000 Des. ending inventory 20,000 24,000 28,000 22,000 22,000 Total needs 120,000 124,000 148,000 162,000 482,000 Less: Beginning inventory 6,400 20,000 24,000 28,000 6,400 Units produced 113,600 104,000 124,000 134,000 475,600 8–5 Pescado, Inc. Production Budget for Tuna For the Year 20xx January February March Total Sales 200,000 240,000 220,000 660,000 Des. ending inventory 84,000 77,000 70,000 70,000 Total needs 284,000 317,000 290,000 730,000 Less: Beg. inventory 38,000 84,000 77,000 38,000 Units produced 246,000 233,000 213,000 692,000
  • 5. 223355 8-6 Pescado, Inc. Direct Materials Purchases Budget For January and February Cans: January February Total Production 246,000 233,000 479,000 × 1 can × 1 × 1 × 1 Cans for production 246,000 233,000 479,000 Des. ending inventory 46,600 42,600 42,600 Total needs 292,600 275,600 521,600 Less: Beg. inventory 49,200 46,600 49,200 Ounces purchased 243,400 229,000 472,400 246,000 * 20% = 49,200 Tuna: January February Total Production 246,000 233,000 479,000 × 4 ounces × 4 × 4 × 4 Ounces for production 984,000 932,000 1,916,000 Des. ending inventory 186,400 170,400 170,400 Total needs 1,170,400 1,102,400 2,116,400 Less: Beg. Inventory 196,800 186,400 196,800 Ounces purchased 973,600 916,000 1,889,600 984,000 * 20% = 196,800 8–7 Carson, Inc. Production Budget For the First Quarter, 20XX January February March Total Sales 200,000 240,000 220,000 660,000 Desired ending inventory 36,000 33,000 30,000 30,000 Total needs 236,000 273,000 250,000 690,000 Less: Beginning inventory 18,000 36,000 33,000 18,000 Units to be produced 218,000 237,000 217,000 672,000
  • 6. 223366 8–8 Manning Company Direct Materials Purchases Budget For March, April, and May 20XX March April May Total Units to be produced 20,000 60,000 100,000 180,000 Direct materials per unit (yards) × 25 × 25 × 25 × 25 Production needs 500,000 1,500,000 2,500,000 4,500,000 Desired ending inventory (yards) 300,000 500,000 60,000 60,000 Total needs 800,000 2,000,000 2,560,000 4,560,000 Less beginning inventory 100,000 300,000 500,000 100,000 Direct materials to be purchased (yards) 700,000 1,700,000 2,060,000 4,460,000 Cost per yard × $0.30 × $0.30 × $0.30 × $0.30 Total purchase cost $210,000 $ 510,000 $ 618,000 $1,338,000 8–9 Manning Company Direct Labor Budget For March, April, and May 20XX March April May Total Units to be produced 20,000 60,000 100,000 180,000 Direct labor time per unit (hours) × 0.04 × 0.04 × 0.04 × 0.04 Total hours needed 800 2,400 4,000 7,200 Cost per hour × $12 × $12 × $12 × $12 Total direct labor cost $ 9,600 $28,800 $48,000 $86,400
  • 7. 223377 8–10 Swasey, Inc. Sales Budget For the Coming Year Model Units Price Total Sales LB-1 33,6001 $30.00 $1,008,000 LB-2 21,6002 15.00 324,000 WE-6 25,2003 10.40 262,080 WE-7 19,4404 10.00 194,400 WE-8 9,6005 22.00 211,200 WE-9 4,0006 26.00 104,000 Total $2,103,680 1 16,800 units * 200% = 33,600; Price increased to $30 2 18,000 + (18,000 * 20%) = 21,600; no change in price 3 Quantity remains the same; price decreases by 20%; $13 * 80% = $10.40 4 16,200 + (16,200 * 20%) = 19,440; no change in price 5 Oct, Nov, and Dec represent 3 months of sales; 2,400 / 3 = 800 sales per month for 12 months = 9,600 units; no change in price. 6 1,000 / 3 * 12 = 4,000 units; no change in price 8–11 1. Raylene’s Flowers and Gifts Production Budget for Gift Baskets For September, October, November, and December Sept. Oct. Nov. Dec. Sales 200 150 180 250 Desired ending inventory 15 18 25 10 Total needs 215 168 205 260 Less: Beginning inventory 20 15 18 25 Units produced 195 153 187 235
  • 8. 223388 8–11 Continued 2. Raylene’s Flowers and Gifts Direct Materials Purchases Budget For September, October, and November Fruit: Sept. Oct. Nov. Production 195 153 187 × Amount/basket (lbs.) × 1 × 1 × 1 Needed for production 195 153 187 Desired ending inventory 8 9 12 Needed 203 162 199 Less: Beginning inventory 10 8 9 Purchases 193 154 190 Small gifts: Sept. Oct. Nov. Production 195 153 187 × Amount/basket (items) × 5 × 5 × 5 Needed for production 975 765 935 Desired ending inventory 383 468 588 Needed 1,358 1,233 1,523 Less: Beginning inventory 488 383 468 Purchases 870 850 1,055 Cellophane: Sept. Oct. Nov. Production 195 153 187 × Amount/basket (feet) × 3 × 3 × 3 Needed for production 585 459 561 Desired ending inventory 230 281 353 Needed 815 740 914 Less: Beginning inventory 293 230 281 Purchases 522 510 633
  • 9. 223399 8–11 Concluded Basket: Sept. Oct. Nov. Production 195 153 187 × Amount/basket (item) × 1 × 1 × 1 Needed for production 195 153 187 Desired ending inventory 77 94 118 Needed 272 247 305 Less: Beginning inventory 98 77 94 Purchases 174 170 211 3. A direct materials purchases budget for December requires January produc- tion which cannot be computed without a February sales forecast. 8–12 1. Credit sales in May = $240,000 x 0.9 = $216,000 Credit sales in June = $230,000 x 0.9 = $207,000 Credit sales in July = $246,000 x 0.9 = $221,400 Credit sales in August = $250,000 x 0.9 = $225,000 2. Lawrence, Inc. Schedule of Cash Receipts July August Cash sales 24,600 25,000 Payments on account: From May credit sales (0.07 x $216,000) 15,120 --- From June credit sales (0.60 x $207,000) 124,200 (0.07 x $207,000) 14,490 From July credit sales (0.30 x $221,400) 66,420 (0.60 x $221,400) 132,840 From August credit sales (0.30 x $225,000) --- 67,500 Cash receipts $230,340 $239,830
  • 10. 224400 8–13 1. Janzen, Inc. Cash Receipts Budget For July Payments on account: From May credit sales (0.15 × $220,000)................................. $ 33,000 From June credit sales (0.60 × $230,000) ............................... 138,000 From July credit sales (0.20 × $210,000)................................. 42,000 Less: July cash discount (0.02 × $42,000).............................. (840) Cash receipts ............................................................................ $212,160 2. Janzen, Inc. Cash Receipts Budget For August Payments on account: From June credit sales (0.15 × $230,000) ............................... $ 34,500 From July credit sales (0.60 × $210,000)................................. 126,000 From August credit sales (0.20 × $250,000) ........................... 50,000 Less: August cash discount (0.02 × $50,000)......................... (1,000) Cash receipts............................................................................. $209,500 8–14 MarvelI agree with comment Company Schedule of Cash Payments for August Payments on accounts payable: From July purchases (0.75 x $25,000) $18,750 From August purchases (0.25 x $30,000) 7,500 Direct labor payments: From July (0.10 x $40,000) 4,000 From August (0.90 x $50,000) 45,000 Overhead ($70,000 - $5,500) 64,500 Loan repayment [$10,000 + ($10,000 x 0.12 x 4/12)]10,400 Cash payments $150,150
  • 11. 224411 8–15 Cash Budget For the Month of June 20XX Beginning cash balance $ 345 Collections: Cash sales 20,000 Credit sales: Current month ($30,000 × 50%) 15,000 May credit sales ($25,000 × 30%) 7,500 April credit sales* 3,778 Total cash available $46,623 Less disbursements: Inventory purchases: Current month ($50,000 × 60% × 40%) $12,000 Prior month ($40,000 × 60% × 60%) 14,400 Salaries and wages 8,700 Rent 1,200 Taxes 5,500 Total cash needs 41,800 Excess of cash available $ 4,823 *$25,000 × 15% = $3,750 $3,750/2 × 0.015 = $28 $3,750 + $28 = $3,778 2. No. Without the possibility of short-term loans, the owner should consider taking less cash salary.
  • 12. 224422 8–16 1. Performance Report Actual Budgeted Variance Units produced 1,100 1,000 100 F Direct materials cost $11,200 $10,000a $1,200 U Direct labor cost 4,400 4,000b 400 U Total $15,600 $14,400 $1,600 U a. 1,000 units * 2 leather straps * $5 = $10,000 b. 1,000 units * .5 hours per unit * $8 = $4,000 2. The performance report compares costs at two different levels of activity and so cannot be used to assess efficiency. 8–17 1. Pet-Care Company Overhead Budget For the Coming Year Activity Level Formula 55,000 Hours* Variable costs: Maintenance $0.40 $22,000 Power 0.50 27,500 Indirect labor 1.60 88,000 Total variable costs $137,500 Fixed costs: Maintenance $17,000 Indirect labor 26,500 Rent 18,000 Total fixed costs 61,500 Total overhead costs $199,000 *BasicDiet: (0.25 × 100,000) 25,000 SpecDiet: (0.30 × 100,000) 30,000 Total DLH 55,000
  • 13. 224433 8–17 Concluded 2. 10% higher: Pet-Care Company Overhead Budget For the Coming Year Activity Level Formula 60,500 Hours* Variable costs: Maintenance $0.40 $24,200 Power 0.50 30,250 Indirect labor 1.60 96,800 Total variable costs $151,250 Fixed costs: Maintenance $17,000 Indirect labor 26,500 Rent 18,000 Total fixed costs 61,500 Total overhead costs $212,750 *55,000 DLH × 110% = 60,500 20% lower: Pet-Care Company Overhead Budget For the Coming Year Activity Level Formula 44,000 Hours* Variable costs: Maintenance $0.40 $17,600 Power 0.50 22,000 Indirect labor 1.60 70,400 Total variable costs $110,000 Fixed costs: Maintenance $17,000 Indirect labor 26,500 Rent 18,000 Total fixed costs 61,500 Total overhead costs $171,500 *55,000 DLH × 80% = 44,000
  • 14. 224444 8–18 1. Pet-Care Company Performance Report For the Current Year Actual Budget Variance Units produced 220,000 220,000 0 Production costs*: Maintenance $ 40,500 $ 41,000 $ 500 F Power 31,700 30,000 1,700 U Indirect labor 119,000 122,500 3,500 F Rent 18,000 18,000 0 Total costs $209,200 $211,500 $2,300 F *Flexible budget amounts are based on 60,000 DLH: (0.25 × 120,000) + (0.30 × 100,000) = 60,000 DLH Maintenance: $17,000 + $0.40(60,000) = $41,000 Power: $0.50(60,000) = $30,000 Indirect labor: $26,500 + $1.60(60,000) = $122,500 Rent: $18,000 + 0 = $18,000 2. All of the variances are within 5 to 10 percent of budgeted amounts. Most would probably view the variances as immaterial. There are numerous rea- sons for variances. For example, a favorable maintenance variance could be caused by less preventive maintenance or by increased efficiency by individ- ual maintenance workers. Indirect labor could be favorable because (among other things) lower-priced labor was used to carry out higher-skilled jobs. Power could be more expensive than planned because of a rate increase. An investigation would be needed to know exactly why the variances occurred.
  • 15. 224455 8–19 1. a. An imposed budgetary approach does not allow input from those who are directly affected by the process. This can tend to make the employees feel that they are unimportant and that management is concerned only with meeting budgetary goals and not necessarily with the well-being of their employees. The employees will probably feel less of a bond with the or- ganization and will feel that they are meeting standards set by others. An imposed budgetary approach is impersonal and can give employees the feeling that goals are set arbitrarily or that some people benefit at the ex- pense of others. Goals that are perceived as belonging to others are less likely to be internalized, increasing the likelihood of dysfunctional beha- vior. Furthermore, imposed budgets fail to take advantage of the know- ledge subordinate managers have of operations and local market condi- tions. b. A participative budgetary approach allows subordinate managers consi- derable say in how budgets are established. This communicates a sense of responsibility to the managers and fosters creativity. It also increases the likelihood that the goals of the budget will become the manager’s per- sonal goals, due to their participation. This results in a higher degree of goal congruence. Many feel that there will be a higher level of performance because it is felt that individuals who are involved in setting their own standards will work harder to achieve them. When managers are allowed to give input in developing the budget, they tend to feel that its success or failure reflects personally on them. 2. a. In an imposed budgetary setting, communication flows from the top to the bottom and is mostly a one-way flow. Any upward flow would have to do with understanding the budgets being communicated. For participative budgeting, the communication flows are necessarily in both directions, with much of the communication being initiated by subordinate managers. b. The first communication process (imposed budgeting) leaves the impres- sion that the opinions and thoughts of lower-level managers are unim- portant. Subordinate managers may feel that no input is being solicited because their input is not valued. The second process (participative budgeting), however, conveys the impression that opinions and views are important and valued. This tends to create a greater feeling of worth to the organization and a stronger commitment to achieving its goals.
  • 16. 224466 8–20 1. First, calculate the inspection hours needed: (50,000 units/1000 units per batch) × 100 testing hours per batch = 5,000 projected testing hours. This requires the hiring of three inspectors (5,000 projected testing hours/2,000 inspector hours per year) = 2.5 required inspectors and the lease of one piece of testing equipment. Thus, the budget for 5,000 in- spection hours is given as follows: Resource Formula 5,000 inspection hours Fixed Variable Salaries $150,000 — $150,000 Lease 10,000 — 10,000 Power -- $2.00 10,000 Total $160,000 $2.00 $170,000 2. Inspection hours needed: (60,000 units/1,000 units per batch) × 100 hours per batch = 6,000 projected testing hours. Inspectors needed = 6,000/2,000 = 3; equipment needed = 6,000/5,00 = 1.2 (rounds up to 2). Thus, the budget is as follows: Resource Formula 6,000 inspection hours Fixed Variable Salaries $150,000 — $150,000 Lease 20,000 — 20,000 Power -- $2.00 12,000 Total $170,000 $2.00 $182,000 3. First determine the capacity need to service: (80,000/1,000) × 100 = 8,000 inspection hours. Inspectors required = 8,000/2,000 = 4. Equipment needed = 8,000/5,000 = 1.6 (rounded up to 2). Letting Y = total cost, the flexible formula is Y = $220,000 + $2X. Fixed expenses = Salaries of 4 * $50,000 = $200,000 2 Equipment Leases = $20,000 Total Fixed Expenses = $220,000
  • 17. 224477 The formula is only valid for this range because of the step-cost nature of the “fixed resources.” Outside this range the number of inspectors and equipment needed may change. 8–21 1. Resource Formula 60,000 Moves (activity output) Fixed Variable Salaries $400,000 — $400,000 Lease 24,000 — 24,000 Crates — $1.00 60,000 Fuel — 0.06 3,600 Total $424,000 $1.06 $487,600 Note: Cycles, instead of moves, could have been used as the output meas- ures. In this case, the variable cost per unit would double. In some ways, cycles is a better measure because crates then become a strictly variable cost (for moves, it is a step-variable cost treated as a variable cost). For either moves or cycles, salaries and leases are step-fixed costs. Also, capacity is determined by operators: 3 × 2,000 × 10 = 60,000 moves. The forklifts actually supply more potential capacity: 3 × 24 × 280 × 3 = 60,480, but they cannot move without operators. 2. Resource Formula 54,000 Moves (activity output) Fixed Variable Salaries $400,000 — $400,000 Lease 24,000 — 24,000 Crates — $1.00 54,000 Fuel — 0.06 3,240 Total $424,000 $1.06 $481,240 The reduction in output reduces the demand for crates and fuel, but the num- ber of operators and forklifts would stay the same (even if the reduction in ac- tivity output were permanent). 3. Resource Formula 15,000 Moves (activity output) Fixed Variable Salaries $120,000 — $120,000 Lease 8,000 — 8,000 Crates — $1.00 15,000 Fuel — 0.06 900 Total $128,000 $1.06 $143,900 Note: Reducing demand permanently to 15,000 moves requires three operators (3 × 2,000 × 3 = 18,000), assuming that part-time help is not per- mitted, and one forklift (24 × 280 × 3 = 20,160). If part-time operators are al-
  • 18. 224488 lowed, then the cost for salaries would be budgeted at $100,000. This illu- strates the lumpy nature of resources and their role in budgeting.
  • 19. 224499 PROBLEMS 8–22 First, separate fixed and variable costs for each category using the high-low me- thod. Maintenance: V = ($13,100 – $10,100)/(2,000 – 1,000) = $3.00 F = Y2 – VX2 = $13,100 – $3(2,000) = $7,100 Maintenance cost = $7,100 + $3X Supplies: V = ($4,800 – $2,400)/1,000 = $2.40 F = $4,800 – $2.40(2,000) = 0 Supplies cost = $2.40X Power: V = ($2,000 – $1,000)/1,000 = $1.00 F = $2,000 – $1.00(2,000) = 0 Power cost = $1.00X Other: V = ($14,240 – $12,940)/1,000 = $1.30 F = $14,240 – $1.30(2,000) = $11,640 Other costs = $11,640 + $1.30X 1,800 Direct Labor Hours Maintenance $12,500 Depreciation 7,000 Supervision 16,000 Supplies 4,320 Power 1,800 Other 13,980 Total $55,600
  • 20. 225500 8–23 Kendall Law Firm Cash Receipts Budget August September Cash fees..................................................................... $ 72,000 $ 90,000 Received from sales in: June: (0.7)($255,000)(0.17)(1.02) ............... 30,952 — July: (0.7)(0.7)($204,000)........................... 99,960 — (0.7)(0.17)($204,000)(1.02) ............... — 24,762 August: (0.7)(0.1)($240,000)........................... 16,800 (0.7)(0.7)($240,000)........................... 117,600 September: (0.7)(0.1)($300,000)........................... — 21,000 Total ............................................................................. $219,712 $253,362 8–24 Briggs Manufacturing For the Quarter Ended March 31, 20XX 1. Schedule 1: Sales Budget January February March Total Units 40,000 50,000 60,000 150,000 Selling price × $215 × $215 × $215 × $215 Sales $8,600,000 $10,750,000 $12,900,000 $32,250,000 2. Schedule 2: Production Budget January February March Total Sales (Schedule 1) 40,000 50,000 60,000 150,000 Desired ending inventory 40,000 48,000 48,000 48,000 Total needs 80,000 98,000 108,000 198,000 Less: Beginning inventory 32,000 40,000 48,000 32,000 Units to be produced 48,000 58,000 60,000 166,000
  • 21. 225511 8–24 Continued 3. Schedule 3: Direct Materials Purchases Budget January February Metal Components Metal Components Units to be produced (Schedule 2) 48,000 48,000 58,000 58,000 Direct materials per unit (lbs.) × 10 × 6 × 10 × 6 Production needs 480,000 288,000 580,000 348,000 Desired ending inventory 250,000 150,000 300,000 180,000 Total needs 730,000 438,000 880,000 528,000 Less: Beginning inventory 200,000 120,000 250,000 150,000 Direct materials to be purchased 530,000 318,000 630,000 378,000 Cost per pound × $8 × $2 × $8 × $2 Total cost $4,240,000 $636,000 $5,040,000 $756,000 (Schedule 3 continued) March Total Metal Components Metal Components Units to be produced (Schedule 2) 60,000 60,000 166,000 166,000 Direct materials per unit (lbs.) × 10 × 6 × 10 × 6 Production needs 600,000 360,000 1,660,000 996,000 Desired ending inventory 300,000 180,000 300,000 180,000 Total needs 900,000 540,000 1,960,000 1,176,000 Less: Beginning inventory 300,000 180,000 200,000 120,000 Direct materials to be purchased 600,000 360,000 1,760,000 1,056,000 Cost per pound × $8 × $2 × $8 × $2 Total cost $4,800,000 $720,000 $14,080,000 $2,112,000
  • 22. 225522 8–24 Continued 4. Schedule 4: Direct Labor Budget January February March Total Units to be produced (Schedule 2) 48,000 58,000 60,000 166,000 Direct labor time per unit (hours) × 4 × 4 × 4 × 4 Total hours needed 192,000 232,000 240,000 664,000 Cost per hour × $9.25 × $9.25 × $9.25 × $9.25 Total cost $1,776,000 $2,146,000 $2,220,000 $6,142,000 5. Schedule 5: Overhead Budget January February March Total Budgeted direct labor hours (Schedule 4) 192,000 232,000 240,000 664,000 Variable overhead rate × $3.40 × $3.40 × $3.40 × $3.40 Budgeted variable overhead $652,800 $ 788,800 $ 816,000 $2,257,600 Budgeted fixed overhead 338,000 338,000 338,000 1,014,000 Total overhead $990,800 $1,126,800 $1,154,000 $3,271,600 6. Schedule 6: Selling and Administrative Expenses Budget January February March Total Planned sales (Schedule 1) 40,000 50,000 60,000 150,000 Variable selling and administrative expenses per unit × $3.60 × $3.60 × $3.60 × $3.60 Total variable expense $144,000 $180,000 $216,000 $540,000 Fixed selling and administrative expenses: Salaries $ 50,000 $ 50,000 $ 50,000 $150,000 Depreciation 40,000 40,000 40,000 120,000 Other 20,000 20,000 20,000 60,000 Total fixed expenses $110,000 $110,000 $110,000 $330,000 Total selling and administrative expenses $254,000 $290,000 $326,000 $870,000
  • 23. 225533 8–24 Continued 7. Schedule 7: Ending Finished Goods Inventory Budget Unit cost computation: Direct materials: Metal (10 @ $8) = $80 Comp. (6 @ $2) = 12 $ 92.00 Direct labor (4 × $9.25) 37.00 Overhead: Variable (4 @ $3.40) 13.60 Fixed (4 × $1,014,000/664,000) 6.11 Total unit cost $148.71 Finished goods inventory = Units × Unit cost = 48,000 × $148.71 = $7,138,080 8. Schedule 8: Cost of Goods Sold Budget Direct materials used (Schedule 3) Metal (1,660,000 × $8) $13,280,000 Components (996,000 × $2) 1,992,000 $15,272,000 Direct labor used (Schedule 4) 6,142,000 Overhead (Schedule 5) 3,271,600 Budgeted manufacturing costs $24,685,600 Add: Beginning finished goods (32,000 × $148.71) 4,758,720 Goods available for sale $29,444,320 Less: Ending finished goods (Schedule 7) 7,138,080 Budgeted cost of goods sold $22,306,240 9. Schedule 9: Budgeted Income Statement Sales (Schedule 1) $32,250,000 Less: Cost of goods sold (Schedule 8) 22,306,240 Gross margin $ 9,943,760 Less: Selling and admin. expenses (Schedule 6) 870,000 Income before income taxes $ 9,073,760
  • 24. 225544 8–24 Concluded 10. Schedule 10: Cash Budget January February March Total Beg. balance $ 378,000 $ 1,321,200 $ 2,952,400 $ 378,000 Cash receipts 8,600,000 10,750,000 12,900,000 32,250,000 Cash available $8,978,000 $12,017,200 $15,852,400 $32,628,000 Less: Disbursements: Purchases $4,876,000 $5,796.000 $ 5,520,000 $16,192,000 Direct labor 1,776,000 2,146,000 2,220,000 6,142,000 Overhead 790,800 926,800 954,000 2,671,600 Selling & admin. 214,000 250,000 286,000 750,000 Total $7,656,800 $9,118.800 $ 8,980,000 $25,755,600 Tentative ending balance $1,321,200 2,952,400 $ 6,872,400 $6,872,400 Borrowed/(repaid) Interest paid — — Ending balance $1,321,200 $ 2,952,400 $ 6,872,400 $ 6,872,400 *(0.12 × 2/12 × $56,800) + (0.12 × 1/12 × $6,800)
  • 25. 225555 8–25 1. To determine accounts payable as of June 30, a schedule of purchases will be constructed. This schedule will also be used to build the cash budget. Let X = Cost of sales, and sales = 1.00. If X + 0.25X = 1.00, then X = 0.80. June July August September Cost of sales $ 96,000 $ 72,000 $ 80,000 $108,000 Desired end. inventory* 36,000 40,000 54,000 44,000 Total requirements $132,000 $112,000 $134,000 $152,000 Less: Beginning inventory 48,000 36,000 40,000 54,000 Purchases $ 84,000 $ 76,000 $ 94,000 $ 98,000 *0.50 × Next month’s cost of sales Since purchases are paid for in the following month, accounts payable at the end of June is $84,000. Inventory for June 30 is $36,000. Accounts receivable for June 30 is computed as follows: From June: 0.7 × $120,000 × 0.8* = $67,200 From May: 0.7 × $100,000 × 0.3* = 21,000 Total $88,200 *By June 30, 20% of June credit sales and 70% of May credit sales have been collected, leaving 80% and 30%, respectively, to be collected. Given accounts payable, the total liabilities plus stockholders’ equity must equal $562,750 ($84,000 + $210,000 + $268,750). Cash is the difference be- tween total assets and all other assets except cash ($562,750 – $425,000 – $36,000 – $88,200). This difference is $13,550. Liabilities and Assets Stockholders’ Equity Cash $ 13,550 Accounts receivable 88,200 Inventory 36,000 Plant and equipment 425,000 Accounts payable $ 84,000 Common stock 210,000 Retained earnings 268,750 Total $562,750 $562,750
  • 26. 225566 8–25 Continued 2. Grange Retailers Cash Budget For the Quarter Ending September 30, 2008 July August September Total Beginning cash balance $ 13,550 $ 10,450 $ 10,405 $ 13,550 Cash collections* 102,600 100,700 113,300 316,600 Total cash available $ 116,150 $ 111,150 $ 123,705 $ 330,150 Cash disbursements: Purchases** $ 84,000 $ 76,000 $ 94,000 $ 254,000 Salaries and wages 10,000 10,000 10,000 30,000 Utilities 1,000 1,000 1,000 3,000 Other 1,700 1,700 1,700 5,100 Property taxes 15,000 15,000 Advertising fees 6,000 6,000 Lease 5,000 5,000 Total disbursement $ 111,700 $ 94,700 $ 111,700 $ 318,100 Minimum cash balance 10,000 10,000 10,000 10,000 Total cash needs $ 121,700 $ 104,700 $ 121,700 $ 328,100 Excess (deficiency) $ (5,550) $ 6,450 $ 2,005 $ 2,050 Financing: Borrowings $ 6,000 $ 6,000 Repayments $ (6,000) (6,000) Interest*** (45) $ 0 (45) Total financing $ 6,000 $ (6,045) $ 0 $ (45) Ending cash balance $ 10,450 $ 10,405 $ 12,005 $ 12,005 *Cash collections: Cash sales $ 27,000 $ 30,000 $ 40,500 $ 97,500 Credit sales: Current month 12,600 14,000 18,900 45,500 Prior month 42,000 31,500 35,000 108,500 From two months ago 21,000 25,200 18,900 65,100 Total collections $ 102,600 $ 100,700 $ 113,300 $ 316,600 **Taken from the purchases schedule developed in Requirement 1. ***$6,000 × 0.09/12
  • 27. 225577 8–25 Concluded 3. Grange Retailers Pro Forma Balance Sheet September 30, 2008 Liabilities and Assets Stockholders’ Equity Cash $ 12,005 Accounts receivablea 96,600 Inventoryb 44,000 Plant and equipmentc 413,000 Accounts payableb $ 98,000 Common stock 210,000 Retained earningsd 257,605 Total $565,605 $565,605 a (0.7 × $135,000 × 0.8) + (0.7 × $100,000 × 0.3). b From purchases schedule prepared in Requirement 1. c [$425,000 – 3($4,000)]. d If total assets equal $565,605, then liabilities plus stockholders’ equity must also equal that amount. Subtracting accounts payable and common stock from total liabilities and stockholders’ equity gives retained earnings of $257,605. 8–26 1. Participative budgeting communicates a sense of responsibility to subordi- nate managers and fosters creativity. Since the subordinate manager creates the budget, it also increases the likelihood that the goals of the budget will become the manager’s personal goals, resulting in a higher degree of goal congruence. Many believe that the increased responsibility and challenge provide nonmonetary incentives that lead to a higher level of performance because it is felt that individuals who are involved in setting their own stan- dards work harder to achieve them. It also involves individuals whose know- ledge of local conditions may enhance the entire planning process.
  • 28. 225588 8–26 Concluded There are also certain disadvantages or problems associated with participa- tive budgeting. Some managers may tend to either set the budget too loosely or too tightly. Participative budgeting also creates the opportunity for manag- ers to build slack into the budget by underestimating revenues or overesti- mating costs. Another problem is that top management may assume total control of the budgeting process and, simultaneously, seek superficial partic- ipation of lower-level managers. The participation is generally limited to an endorsement activity, and no real input is sought. In this case, the advantag- es of participation are negated. 2. Scott Weidner’s participative budgetary policy has certain deficiencies. They are as follows: a. Managers do not participate in setting the appropriation target figure. Recommendation: Managers should have the opportunity to give some in- put as to what the target figure will be. b. Setting an upper spending constraint gives indirect approval to spending up to that level whether justified or not. Recommendation: Zero-based budgeting could be used. c. Setting prior constraints, such as maximum limits and inclusion of non- controllable fixed expenditures prior to departmental input, defeats the pur- pose of participative management. Recommendation: Divisional constraints should be known to management prior to budgeting, but individual limits should be determined with the input of managers. d. Arbitrary allocation of the approved budget defeats the purpose of a parti- cipative budget process. Recommendation: The department managers should be involved in the reallocation of the approved budget. e. The division manager holds back a specified percentage of each depart- ment’s appropriation for discretionary use. Recommendation: Contingen- cy funds should not be a part of a departmental budget. These funds should be identified and provided for before the allocation process to de- partments. f. Exception reporting and evaluation based on performance must be ac- companied by rewards. Recommendation: Recognition should be given to those attaining budget goals, not just exceptions. (Part 2 is adapted from CMA unofficial answers.)
  • 29. 225599 8–27 Minota Company Cash Budget For the Month of July 2008 Beginning cash balance....................................................... $ 27,000 Collections: Cash sales (0.3 × $1,140,000) ......................................... 342,000 Credit sales: July: With discounta ....................................................... 234,612 Without discountb ................................................. 239,400 Junec ........................................................................... 140,000 Mayd ............................................................................. 84,000 Sale of old equipment .......................................................... 25,200 Total cash available ........................................................ $1,092,212 Less disbursements: Raw materials: Julye ............................................................................. $ 144,000 Junef ............................................................................ 136,800 Direct labor ...................................................................... 110,000 Operating expenses........................................................ 280,000 Dividends ......................................................................... 140,000 Equipment........................................................................ 168,000 Total disbursements.................................................. $ 978,800 Minimum cash balance ........................................................ 20,000 Total cash needs................................................................... $ 998,800 Excess of cash available over needs.................................. $ 93,412 Ending cash balance............................................................ $ 113,412 a (0.7 × $1,140,000) × 0.6 × 0.5 × 0.98 b (0.7 × $1,140,000) × 0.6 × 0.5 c (0.7 × $1,000,000) × 0.2 d (0.7 × $600,000) × 0.2 e July requirements (0.24 × $1,140,000) ............................... $273,600 Desired ending inventory (0.24 × $1,200,000)................... 288,000 Total requirements .............................................................. $561,600 Less: Beginning inventory ................................................. 273,600 Purchases ............................................................................ $288,000 July payment: $288,000/2 = $144,000 f $273,600/2 = $136,800 (June purchases are computed as shown for July.)
  • 30. 226600 8–28 1. a. The new budget system allows the managers to focus on those areas that need attention. By dividing the annual budget into 12 equal parts, manag- ers can take corrective action before the error is compounded (frequent feedback is provided). Also, the company has segregated costs into fixed and variable components, an essential step for good control. A major weakness of the budget is the failure to properly define responsibility. Be- cause of this, supervisors are being held accountable for areas over which they have no control. b. The performance report should emphasize those items over which the manager has control. The report should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is at- tempting to compare costs at two different levels: the original budget for 3,000 units with the actual costs for production of 3,185 units. A flexible budgeting system needs to be employed. 2. Berwin, Inc. Machining Department Performance Report For the Month Ended May 31, 2008 Budget* Actual Variance Volume in units 3,185 3,185 0 Variable manufacturing costs: Direct materials $25,480 $24,843 $ 637 F Direct labor 29,461 29,302 159 F Variable overhead 35,354 35,035 319 F Total variable costs $90,295 $89,180 $1,115 F Fixed manufacturing costs: Indirect labor $ 3,300 $ 3,334 $ 34 U Depreciation 1,500 1,500 0 Taxes 300 300 0 Insurance 240 240 0 Other 930 1,027 97 U Total fixed costs $ 6,270 $ 6,401 $ 131 U Total costs $96,565 $95,581 $ 984 F *For the variable costs: 3,185 × $24,000/3,000; 3,185 × $27,750/3,000; 3,185 × $33,300/3,000
  • 31. 226611 8–28 Concluded 3. Berwin’s budgetary system could also be improved by offering monetary and nonmonetary incentives to reach budget goals. The managers and supervi- sors should be allowed and encouraged to participate in the budgetary process because they will be responsible for controlling the budget. The con- troller needs to be certain that the budget objectives are based on realistic conditions and expectations. The managers should be held accountable only for costs over which they have control. 8–29 1. Actual Costs Budgeted Costs Budget Variance Direct labor $210,000 $200,000 $ 10,000 U Power 135,000 85,000 50,000 U Setups 140,000 100,000 40,000 U Total $485,000 $385,000 $100,000 U Note: Budgeted costs use the actual direct labor hours and the labor-based cost formulas. Example: Direct labor cost = $10 × 20,000 = $200,000; Power cost = $5,000 + ($4 × 20,000) = $85,000; and Setup cost = $100,000 (fixed). 2. Actual Costs Budgeted Costs Budget Variance Direct labor $210,000 $200,000 $10,000 U Power 135,000 149,000 14,000 F Setups 140,000 142,000 2,000 F Total $485,000 $491,000 $ 6,000 F Note: Budgeted costs use the individual driver formulas: Direct labor = $10 × 20,000 = $200,000; Power = $68,000 + ($0.90 × 90,000) = $149,000; and Setups = $98,000 + ($400 × 110) = $142,000. 3. The multiple-cost-driver approach captures the cause-and-effect cost rela- tionships and, consequently, is more accurate than the direct-labor-based approach.
  • 32. 226622 8–30 1. Westcott, Inc. Performance Report For the Year 2008 Actual Costs Budgeted Costs* Budget Variance Direct materials $ 440,000 $ 480,000 $40,000 F Direct labor 355,000 320,000 35,000 U Depreciation 100,000 100,000 0 Maintenance 425,000 435,000 10,000 F Machining 142,000 137,000 5,000 U Materials handling 232,500 240,000 7,500 F Inspections 160,000 145,000 15,000 U Total $1,854,500 $1,857,000 $ 2,500 F *Budget formulas for each item can be computed by using the high-low me- thod (using the appropriate cost driver for each method). Using this ap- proach, the budgeted costs for the actual activity levels are computed as fol- lows: Direct materials: $6 × 80,000 Direct labor: $4 × 80,000 Depreciation: $100,000 Maintenance: $60,000 + ($1.50 × 250,000) Machining: $12,000 + ($0.50 × 250,000) Materials handling: $40,000 + ($6.25 × 32,000) Inspections: $25,000 + ($1,000 × 120)
  • 33. 226633 8–30 Concluded 2. Pool rates: $1,100,000/100,000 = $11 per DLH $672,000/300,000 = $2.24 per MHr $290,000/40,000 = $7.25 per move $225,000/200 = $1,125 per batch Note: The first pool has material and labor costs included. Unit cost: Pool 1: $11 × 10,000 = $110,000 Pool 2: $2.24 × 15,000 = 33,600 Pool 3: $7.25 × 500 = 3,625 Pool 4: $1,125 × 5 = 5,625 Total $152,850 Units ÷ 10,000 Unit cost $ 15.29* *Rounded 3. Knowing the resources consumed by activities and how the resource costs change with the activity driver should provide more insight into managing the activity and its associated costs. For example, if moves could be reduced to 20,000 from the expected 40,000, then costs can be reduced by not only eli- minating the need for four operators, but by reducing the need to lease from four to two forklifts. However, in the short run, the cost of leasing forklifts may persist even though demand for their service is reduced. 20,000 moves 40,000 moves Materials handling: Forklifts $ 40,000 $ 40,000 Operators 120,000 240,000 Fuel 5,000 10,000 Total $165,000 $ 290,000 The detail assumes that forklift leases must continue in the short run but that the number of operators may be reduced (assumes each operator can do 5,000 moves per year).
  • 34. 226644 8–31 a. Schedule 1: Sales Budget (units and total sales in thousands) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Units 65 70 75 90 300 Unit price × $400 × $400 × $400 × $400 × $400 Total sales $26,000 $28,000 $30,000 $36,000 $120,000 b. Schedule 2: Production Budget Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Sales (Schedule 1) 65,000 70,000 75,000 90,000 300,000 Desired ending inventory 13,000 15,000 20,000 10,000 10,000 Total needs 78,000 85,000 95,000 100,000 310,000 Less: Beginning inventory 0 13,000 15,000 20,000 0 Production 78,000 72,000 80,000 80,000 310,000 c. Schedule 3: Direct Materials Purchases Budget (in thousands) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Production 78.0 72.0 80.0 80.0 310.0 Materials/unit × 3 × 3 × 3 × 3 × 3 Production needs 234.0 216.0 240.0 240.0 930.0 Desired ending inventory 63.0 67.5 81.0 65.7 65.7 Total needs 297.0 283.5 321.0 305.7 995.7 Less: Beginning inventory 65.7 63.0 67.5 81.0 65.7 Purchases 231.3 220.5 253.5 224.7 930.0 Cost per unit × $80 × $80 × $80 × $80 × $80 Purchase cost $18,504 $17,640 $20,280 $17,976 $74,400
  • 35. 226655 8–31 Continued d. Schedule 4: Direct Labor Budget (in thousands) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Production 78 72 80 80 310 Hours per unit × 5 × 5 × 5 × 5 × 5 Hours needed 390 360 400 400 1,550 Cost per hour × $10 × $10 × $10 × $10 × $10 Total cost $3,900 $3,600 $4,000 $4,000 $15,500 e. Schedule 5: Overhead Budget (in thousands) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Budgeted hours 390 360 400 400 1,550 Variable rate × $6 × $6 × $6 × $6 × $6 Budgeted VOH $2,340 $2,160 $2,400 $2,400 $ 9,300 Budgeted FOH 1,000 1,000 1,000 1,000 4,000 Total OH $3,340 $3,160 $3,400 $3,400 $13,300 f. Schedule 6: Selling and Administrative Expenses Budget (in thousands) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Planned sales 65 70 75 90 300 Variable rate × $10 × $10 × $10 × $10 × $10 Variable expenses $ 650 $ 700 $ 750 $ 900 $3,000 Fixed expenses 250 250 250 250 1,000 Total expenses $ 900 $ 950 $1,000 $1,150 $4,000 g. Schedule 7: Ending Finished Goods Inventory Budget Unit cost computation: Direct materials (3 units @ $80) $240.00 Direct labor (5 hours @ $10) 50.00 Overhead: Variable (5 hours @ $6) 30.00 Fixed ($4,000,000/310,000) 12.90* Total unit cost $332.90 Finished goods = 10,000 × $332.90 = $3,329,000 *Rounded
  • 36. 226666 8–31 Continued h. Schedule 8: Cost of Goods Sold Budget Direct materials used (Schedule 3) $ 74,400,000 Direct labor used (Schedule 4) 15,500,000 Overhead (Schedule 5) 13,300,000 Budgeted manufacturing costs $103,200,000 Add: Beginning finished goods inventory (Schedule 2) 0 Goods available for sale $103,200,000 Less: Ending finished goods inventory (Schedule 7) 3,329,000 Budgeted cost of goods sold $ 99,871,000 i. Cash Budget (in thousands) Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total Beginning cash bal. $ 250 $ 1,110 $ 3,128 $ 5,568 $ 250 Collections: Credit sales: Current quarter 22,100 23,800 25,500 30,600 102,000 Prior quarter 3,3001 3,900 4,200 4,500 15,900 Cash available $25,650 $28,810 $32,828 $40,668 $118,150 Less disbursements: Direct materials: Current quarter $ 9,252 $ 8,820 $10,140 $ 8,988 $ 37,200 Prior quarter 7,248 9,252 8,820 10,140 35,460 Direct labor 3,900 3,600 4,000 4,000 15,500 Overhead 2,990 2,810 3,050 3,050 11,900 Selling and admin. 850 900 950 1,100 3,800 Dividends 300 300 300 300 1,200 Equipment 2,000 2,000 Total cash needs $24,540 $25,682 $27,260 $29,578 $107,060 Ending cash bal. $ 1,110 $ 3,128 $ 5,568 $11,090 $ 11,090 1. 55,000 * 400 * .15 = 3,300
  • 37. 226677 8–31 Concluded j. Optima Company Pro Forma Income Statement For the Year Ending December 31, 2008 Sales (Schedule 1) .................................................................... $120,000,000 Less: Cost of goods sold (Schedule 8)................................... 99,871,000 Gross margin ....................................................................... $ 20,129,000 Less: Selling and administrative expenses (Schedule 6) ..... 4,000,000 Income before income taxes .............................................. $ 16,129,000 k. Optima Company Pro Forma Balance Sheet December 31, 2008 Assets Cash ........................................................................................... $11,090,000 Accounts receivable ................................................................. 5,400,000 Direct materials inventory........................................................ 5,256,000 Finished goods inventory ........................................................ 3,329,000 Plant and equipment................................................................. 33,900,000a Total assets ............................................................................... $58,975,000 Liabilities and Stockholders’ Equity Accounts payable ..................................................................... $ 8,988,000 Capital stock.............................................................................. 27,000,000 Retained earnings..................................................................... 22,987,000b Total liabilities and stockholders’ equity .......................... $58,975,000 a Beginning plant and equipment............. $33,500,000 Add: New equipment ............................... 2,000,000 Less: Depreciation expense ................... (1,600,000) Ending plant and equipment .............. $33,900,000 b Beginning retained earnings .................. $ 8,058,000 Plus: Net income* .................................... 16,129,000 Less: Dividends paid............................... (1,200,000) Ending retained earnings ................... $22,987,000 *Ignore taxes.
  • 38. 226688 8–32 1. The flexible budgets presented are based on three different activity levels, none of which coincide with the actual level of performance for November. The budget must be restated to a level of activity that matches the actual re- sults. The fixed and variable components of the mixed costs must be segre- gated and a budgeted cost calculated for the level of activity attained. 2. Patterson Company Selling Expenses Report For the Month of November Monthly Expenses Budget Actual Variance Advertising and promotion $1,200,000 $1,350,000 $150,000 U Administrative salaries 57,000 57,000 0 Sales salariesa 84,000 84,000 0 Sales commissionsb 327,000 327,000 0 Salesperson travelc 187,200 185,000 2,200 F Sales office expensed 500,500 497,200 3,300 F Shipping expensee 705,000 730,000 25,000 U Total $3,060,700 $3,230,200 $169,500 U a ($75,600/72)(80) = $84,000 b ($300,000/$10,000,000)($10,900,000) = $327,000 c Change in cost: $175,000 – $170,000 = $5,000 Change in sales dollars: $10,625,000 – $10,000,000 = $625,000 Variable cost per dollar of sales = Change in cost divided by change in activity level $5,000/$625,000 = $0.008 per dollar of sales Fixed cost at 72-person level: $170,000 – ($10,000,000 × 0.008) = $90,000 Fixed cost at 80-person level: ($90,000/72) × 80 = $100,000 Total travel budget: $100,000 fixed + ($10,900,000 × 0.008) variable = $187,200
  • 39. 226699 8–32 Concluded d Change in cost: $498,750 – $490,000 = $8,750 Change in number of orders: 4,250 – 4,000 = 250 Variable cost per order: $8,750/250 = $35 Fixed cost: $490,000 – (4,000 × $35) = $350,000 Total office expense budget: $350,000 + (4,300 × $35) = $500,500 e Change in cost: $712,500 – $675,000 = $37,500 Change in number of units: 425,000 – 400,000 = 25,000 Variable cost per unit: $37,500/25,000 = $1.50 Fixed cost: $675,000 – (400,000 × $1.50) = $75,000 Total shipping expense budget: $75,000 + (420,000 × $1.50) = $705,000
  • 40. 227700 MANAGERIAL DECISION CASES 8–33 1. Linda’s behavior is not ethical. In the budgeting process, she is deliberately misrepresenting the capabilities of her division for personal gain. To ensure that she achieves budget (either this year or next), she manipulates account- ing procedures. This manipulation is in opposition to generally accepted ac- counting principles. Her decisions are based on her own self-interest rather than on the interest of the company. Deceptive and manipulative behavior for personal gain is clearly wrong. 2. There are few, if any, legitimate reasons for deferring the closing of sales. Thus, if a marketing manager were asked to engage in this behavior, the first response must be to find out why the request is being made. If there is no sound reason offered, then a simple refusal should suffice. If it takes on the nature of an order and no sound reason exists, then the marketing manager should consider appealing to a higher-level manager. Certainly, deferral of closings so that it increases the likelihood of meeting budget for the coming year is not a sound reason, and, in fact, is wrong. 3. It would be hard to go against a common practice that seems to have the ap- proval of the plant managers. The widespread knowledge of the practice may even suggest that higher-level management is aware of it and essentially condones the practice—or at least adjusts for it. If higher-level management is aware of the practice and adjusts for it, then the ability to achieve bonus may not be enhanced as much as believed. The plant manager could investi- gate and find out the extent to which upper-level management is aware of padding. At the same time, the manager could obtain some advice on what his behavior ought to be. If told that the practice is acceptable, then the man- ager has to decide whether to continue in an organization that accepts decep- tive behavior (or go against the grain and simply report what he or she feels is really achievable by the plant). 4. This is a clear violation of the ethical code for management accountants. A management accountant is obligated to report information fairly and objec- tively and to disclose all information that can be expected to influence a us- er’s understanding of accounting reports. Moreover, management accoun- tants must perform their duties in accordance with relevant laws, regulations, and technical standards. Accelerating the recognition of expenses violates generally accepted accounting principles.
  • 41. 227711 8–34 1. Dr. Roger Jones Cash Budget Cash collections and cash available* .......................... $21,360 Less cash disbursements: Salaries...................................................................... $12,700 Benefits ..................................................................... 1,344 Building lease ........................................................... 1,500 Dental supplies ......................................................... 1,200 Janitorial.................................................................... 300 Utilities....................................................................... 400 Phone......................................................................... 150 Office supplies.......................................................... 100 Lab fees ..................................................................... 5,000 Loan payments ......................................................... 570 Interest payments..................................................... 500 Miscellaneous ........................................................... 500 Total cash needs............................................................ $24,264 Deficiency of cash available over needs ..................... $ (2,904) *Total revenues for a month: Fillings ($50 × 90).................. $ 4,500 Crowns ($300 × 19) ............... 5,700 Root canals ($170 × 8) .......... 1,360 Bridges ($500 × 7) ................. 3,500 Extractions ($45 × 30)........... 1,350 Cleaning ($25 × 108) ............. 2,700 X-rays ($15 × 150) ................. 2,250 $21,360 The budget shows that there is $2,904 more cash going out than coming in.
  • 42. 227722 8–34 Continued 2. Dr. Jones must either increase revenues to make up the deficiency or cut costs or a combination of the two. Three possible approaches are outlined below: a. Extend office hours so that a total of 40 hours are worked each week. This could increase revenues by as much as $5,340. Based on a four-week month, the current revenue earned per hour is $166.88 ($21,360/128). Thus, the total revenue increase possible is $166.88 × 32 hours = $5,340. Dr. Jones would need to inform his assistants and receptionist of the in- creased time and indicate that each will receive a 15% increase in salary for the additional time. (The office is currently open 34 hours per week.) Benefits (primarily FICA and unemployment insurance benefits) would al- so increase. Other expenses that will likely increase with an increase in sales are dental supplies, lab fees, and utilities (representing about 31% of sales). The remaining expenses appear to be fixed. Thus, the increase in cash flow is computed as follows: Incremental revenues $ 5,340 Salary increases (0.15 × $3,400) (510) Benefits ($1,344/$12,700)($510) (54) Variable expenses (0.31 × $5,340) (1,655) Cash flow increase $ 3,121 Approach 1 carries with it some risk. Increasing office hours may not in- crease business. If business does not increase as expected, the cash flow problems could be aggravated rather than relieved. The likelihood of increas- ing business would be increased if the additional hours are offered in the ear- ly evening instead of Friday afternoon. Evening hours are a major conveni- ence for patients who must work during the day and are reluctant to lose work hours.
  • 43. 227733 8–34 Continued Dr. Roger Jones Revised Cash Budget Cash collections and cash avail. ($21,360 + $5,340)........ $26,700 Less cash disbursements: Salaries ($12,700 + $510) .................................................... $13,210 Benefits ($1,344 + $54)........................................................ 1,398 Building lease ...................................................................... 1,500 Dental supplies ($1,200 + $300*) ........................................ 1,500 Janitorial............................................................................... 300 Utilities ($400 + $100*)......................................................... 500 Phone.................................................................................... 150 Office supplies..................................................................... 100 Lab fees ($5,000 + $1,255*) ................................................. 6,255 Loan payments .................................................................... 570 Interest payments................................................................ 500 Miscellaneous ...................................................................... 500 Total cash needs ................................................................. $26,483 Excess cash available over needs..................................... $ 217 *Variable expenses increase by 25% (8 added hours/32 original hours). b. Cut one dental assistant, eliminate the salary to Mrs. Jones and the activi- ties she does, and cut Dr. Jones’s salary back by $1,000 per month. The savings are given below: Assistant (salary and benefits)...................... $1,051* Salaries............................................................ 2,000 Total ............................................................. $3,051 *($1,900/2) + [($950/$12,700) × $1,344] = $1,051 (rounded) (This provides a reasonable approximation of the benefits assigned to an assistant.) Although this achieves the savings, the solution may not be feasible. The solution depends to a large extent on how well the Jones family can do with a $2,000 per month cut in their income. In all likelihood, this would be unacceptable to the Jones family. Also, cutting an assistant would require the receptionist to become involved in assisting. This may not be possible without laying off the receptionist and hiring a person that has both sets of skills. Additionally, using the receptionist as an assistant would result in phone calls going unanswered and/or incoming patients being ignored.
  • 44. 227744 8–34 Concluded c. A third possibility is to increase the fees charged for the various dental ser- vices. Assuming a variable cost ratio of 31% (from Approach 1), the in- crease in revenues needed to cover the $2,900 deficiency can be com- puted as follows: 0.69R = $2,900 R = $2,900/0.69 R = $4,203 This increase would call for fees to increase an average of 19.7%. Whether this increase is possible or not depends to some extent on how Dr. Jones’s charges compare with other dentists in the area. If some increase is possible, then the increase could be combined with elements of the oth- er two approaches, (e.g., a 10 percent increase in fees and working an ex- tra four hours per week, say, on Wednesday evening). I would expect Dr. Jones to be more likely to accept a combination like the one just men- tioned rather than accepting any of the approaches in their pure form. The behavioral principles discussed in the chapter do have a role in this type of setting. Dr. Jones’s personal goals must be in line with the goals of his professional organization, and he must have the motivation to achieve those goals. There is, however, a significant difference. Dr. Jones owns and manag- es the organization. To a large extent, his goals are the goals of the organiza- tion. RESEARCH ASSIGNMENT 8–35 Answers will vary.