1CHAPTER 9Profit Planning, Activity-Based Budgeting, ande-Budgeting

ANSWERS TO REVIEW QUESTIONS9-3 A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an

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

9-21 The five phases in a product's life cycle are as follows:(a) Product planning and concept design(b) Preliminary design(c) Detailed design and testing(d) Production(e) Distribution and customer service

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

9-22 (a) Ordering costs: The cost of preparing, placing, and receiving a purchase order.(Examples include the clerical costs of preparing purchase orders, time spent findingsuppliers and expediting orders, transportation, and receiving costs, such as unloading andinspection.)

(b) Holding costs: The cost incurred in keeping inventory on hand for some period of time.(Examples include the costs of storage space such as a warehouse, depreciation, security,insurance, forgone interest on working capital tied up in inventory, and the costs ofdeterioration and theft.)

(c) Shortage costs: The cost incurred by the organization when it does not have materials orfinished goods on hand when needed. (Examples include the costs caused by disruptedproduction when raw materials are unavailable, lost sales, dissatisfied customers, and theloss of quantity discounts on purchases.)

SOLUTIONS TO EXERCISES

EXERCISE 9-26 (20 MINUTES)

1.

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July August SeptemberSales........................................................... $240,000 $180,000 $270,000aCash receipts:

From cash sales .................................... $120,000b $ 90,000c $135,000From sales on account ......................... 108,000d 102,000 117,000e

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

a$270,000 = $135,0002b$120,000 = $240,000.5c$ 90,000 = $180,000.5d$108,000 = ($120,000.6) + ($90,000.4)e$117,000 = ($135,000.6) + ($90,000.4)

2. Accounts payable, 12/31/x0................................................................ 600,000 eurosPurchases of goods and services on account during 20x1............. 2,400,000 eurosPayments of accounts payable during 20x1 ..................................... (2,200,000) euros*Accounts payable, 12/31/x1................................................................ 800,000 euros

*2,200,000 euros= 600,000 euros + 2,400,000 euros800,000 euros

3. Accounts receivable, 12/31/x0............................................................ 1,700,000ySales on account during 20x1............................................................ 4,500,000yCollections of accounts receivable during 20x1............................... (3,900,000y)Accounts receivable, 12/31/x1............................................................ 2,300,000y

4. Accumulated depreciation, 12/31/x0.................................................. $ 405,000Depreciation expense during 20x1 .................................................... 75,000Accumulated depreciation, 12/31/x1.................................................. $ 480,000

5. Retained earnings, 12/31/x0 ............................................................... $1,537,500Net income for 20x1 ............................................................................ 300,000Dividends paid in 20x1........................................................................ 0Retained earnings, 12/31/x1 ............................................................... $1,837,500

3EXERCISE 9-33 (25 MINUTES)

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

Office visits per month = 48,000/12 = 4,000

Professional services in June:

One-hour visits (20%4,0001 hr.) ................................... 800 hoursHalf-hour visits (80%4,0001/2 hr.) ................................ 1,600 hoursTotal direct professional labor.............................................. 2,400 hoursHourly rate for dental associates.......................................... $ 90Total direct professional labor cost ..................................... $216,000

2. Cash collections during June:May June

Half-hour visits (4,00080%) ............................................... 3,200 3,200Billing rate .............................................................................. $60 $60Total billings for half-hour visits........................................... $192,000 $192,000One-hour visits (4,00020%)............................................... 800 800Billing rate .............................................................................. $105 $105Total billings for one-hour visits........................................... $ 84,000 $ 84,000Total billings during month................................................... $276,000 $276,000Percentage of month's billings collected

during June ........................................................................ 10% 90%Collections during June ........................................................ $ 27,600 $248,400Total collections in June ($27,600 + $248,400) .................... $276,000

3. Overhead and administrative expense budget for June:Patient registration and records (4,000 visits$3.00 per visit).... $12,000Other overhead and administrative expenses

(2,400 hours$7.50 per hour)................................................... 18,000Total overhead and administrative expenses................................. $30,000

SOLUTIONS TO PROBLEMSPROBLEM 9-36 (30 MINUTES)

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1. Schedule of cash collections:January February March

Collection of accounts receivable:$165,000 x 20%......................................... $ 33,000

Collection of January sales ($450,000):60% in January; 35% in February ........... 270,000 $157,500

Collection of February sales ($540,000):60% in February; 35% in March .............. 324,000 $189,000

Collection of March sales ($555,000):60% in March; 35% in April ..................... 333,000

Sale of equipment.......................................... 15,000Total cash collections ............................. $303,000 $481,500 $537,000

2. Schedule of cash disbursements:January February March

Payment of accounts payable ...................... $ 66,000Payment of January purchases ($270,000):

70% in January; 30% in February ........... 189,000 $ 81,000Payment of February purchases ($300,000):

70% in February; 30% in March .............. 210,000 $ 90,000Payment of March purchases ($420,000):

70% in March; 30% in April ..................... 294,000Cash operating costs .................................... 93,000 72,000 135,000

Total cash disbursements....................... $348,000 $363,000 $519,000

3. Schedule of cash needs:January February March

Beginning cash balance. $ 60,000 $ 60,000 $132,900Total receipts. 303,000 481,500 537,000Subtotal. $363,000 $541,500 $669,900

Less: Total disbursements 348,000 363,000 519,000Cash excess (deficiency) before financing $ 15,000 $178,500 $150,900Financing:

Borrowing to maintain $60,000 balance.. 45,000 -0-Loan principal repaid (45,000) -0-Loan interest paid.. (600)* -0-

Ending cash balance $ 60,000 $132,900 $150,900

* $45,000 x 8% x 2/12

5PROBLEM 9-44 (60 MINUTES)

1. Sales budget:

Box C Box P TotalSales (in units) 500,000 500,000Sales price per unit $1.35 $1.95Sales revenue $675,000 $975,000 $1,650,000

2. Production budget (in units):

Box C Box PSales...................................................................................... 500,000 500,000Add: Desired ending inventory ........................................... 5,000 15,000Total units needed................................................................ 505,000 515,000Deduct: Beginning Inventory .............................................. 10,000 20,000Production requirements..................................................... 495,000 495,000

3. Raw-material budget:

CORRUGATING MEDIUM

Box C Box P TotalProduction requirements (number of boxes)......... 495,000 495,000Raw material required per box (pounds)................ .2 .3Raw material required for

production (pounds) ............................................ 99,000 148,500 247,500Add: Desired ending

raw-material inventory ......................................... 10,000Total raw-material needs ......................................... 257,500Deduct: Beginning raw-material inventory ............ 5,000Raw material to be purchased................................. 252,500Price (per pound) ..................................................... $.15Cost of purchases (corrugating medium) .............. $ 37,875Total cost of raw-material purchases

($145,500 + $37,875) ............................................. $183,375

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PAPERBOARD

Box C Box P TotalProduction requirement (number of boxes)........... 495,000 495,000Raw material required per box (pounds)................ .3 .7Raw material required for

production (pounds) ............................................ 148,500 346,500 495,000Add: Desired ending

raw-material inventory ......................................... 5,000Total raw-material needs ......................................... 500,000Deduct: Beginning raw-material inventory ............ 15,000Raw material to be purchased................................. 485,000Price (per pound) ..................................................... $.30Cost of purchases (paperboard) ............................. $145,500

4. Direct-labor budget:

Box C Box P TotalProduction requirements (number of boxes) 495,000 495,000Direct labor required per box (hours) ..................... .0025 .005Direct labor required for production (hours) 1,237.5 2,475 3,712.5Direct-labor rate ....................................................... $18Total direct-labor cost.............................................. $66,825

5. Manufacturing-overhead budget:

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

6. Selling and administrative expense budget:

Salaries and fringe benefits of sales personnel ........................................ $112,500Advertising ................................................................................................... 22,500Management salaries and fringe benefits .................................................. 135,000Clerical wages and fringe benefits ............................................................. 39,000Miscellaneous administrative expenses .................................................... 6,000Total selling and administrative expenses................................................. $315,000

77. Budgeted income statement:

Sales revenue [from sales budget, req. (1)] ............................................... $1,650,000Less: Cost of goods sold:

Box C: 500,000$.315* ............................................................ $157,500Box P: 500,000$.645* ........................................................... 322,500 480,000

Gross margin................................................................................................ $1,170,000Selling and administrative expenses.......................................................... 315,000Income before taxes..................................................................................... $ 855,000Income tax expense (35%)........................................................................... 299,250Net income.................................................................................................... $ 555,750

*Calculation of manufacturing cost per unit:

(a) Predetermined overhead rate =hourslabor-directofvolume

overheadingmanufacturbudgeted

=.005)(495,000)(.0025)(495,000)(

$222,750

= hourper$60hours3,712.5

$222,750

(b) Calculation of manufacturing cost per unit:

Box C Box PDirect material:

Paperboard.3 lb.$.30 per lb ......................................... $.090.7 lb.$.30 per lb ......................................... $.210

Corrugating medium.2 lb.$.15 per lb ......................................... .030.3 lb.$.15 per lb ......................................... .045

Direct labor:.0025 hr.$18 per hr ................................... .045.005 hr.$18 per hr ..................................... .090

Applied manufacturing overhead:.0025 hr.$60 per hr ................................... .150.005 hr.$60 per hr ..................................... ___ .300

Manufacturing cost per unit..................................... $.315 $.645

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PROBLEM 9-48 (25 MINUTES)

1. Annual cost of orderingand storing XL-20

=

unitpercost

holdingannual

2quantityorder

orderpercost

quantityorder

trequiremenannual

2. Economic order quantity =unitpercostholdingannual

order)pert)(costrequiremen(2)(annual

=$4

($150)(2)(4,800)

= 360,000 = 600

3. Using the formula given for requirement (1):Total annual cost of ordering

and storing XL-20= $4

2600

$150600

4,800

= $2,400Note that this cost does not include the actual cost of XL-20 purchases (i.e., thequantity purchased multiplied by the price).

4. Orders per year:

Number of orders per year = 8600

4,800quantityorder

trequiremenannual

5. Using the new cost data:

a. EOQ =unitpercostholdingannual

order)per(costt)requiremen(annual(2)

=$19.20

($20)(2)(4,800)

= 10,000 = 100

b. Number of orders per year =100

4,800quantityorder

trequiremenannual

= 48