Solution Chapter 8.pdf

8/14/2019 Solution Chapter 8.pdf

1/15

Solution to Chapter 8: Budgeting for Planning and Controlling

___________________________________________________________

1

CHAPTER 8

QUESTIONS FOR WRITING AND DISCUSSION

1. Budgets are the quantitative expressions ofplans. Budgets are used to translate thegoals and strategies of an organization intooperational terms.

2. Control is the process of setting standards,receiving feedback on actual performance,and taking corrective action whenever actualperformance deviates from planned per-formance. Budgets are standards, and theyare compared with actual costs and reve-nues to provide feedback.

3. The planning and control functions of budg-eting can benefit all organizations regard-less of size. All organizations need to de-termine what their goals are and how best toattain those goals. This is the planning func-tion of budgeting. In addition, organizations

can compare what actually happens withwhat was planned to see if the plans are un-folding as anticipated. This is the controlfunction 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 ofcommunication and coordination.

5. A master budget is the collection of all indi-vidual area and activity budgets. Operatingbudgets are concerned with the income-generating activities of a firm. Financialbudgets are concerned with the inflows andoutflows of cash and with planned capitalexpenditures.

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, man-agement may decide that the firm can dobetter than the forecast indicates. Conse-quently, actions may be taken to increasethe sales potential for the coming year (e.g.,increasing advertising). This adjusted fore-cast then becomes the sales budget.

7. Yes. All budgets are founded on the sales

budget. Before a production budget can becreated, it must have the planned sales. The

manufacturing budgets, in turn, depend onthe production budget. The same is true forthe financial budgets since sales is a criticalinput for budgets in that category.

8. For a merchandising firm, the productionbudget is replaced by a merchandise pur-chases budget. Merchandising firms alsolack direct materials and direct labor budg-ets. All other budgets are essentially thesame. For a service firm (for-profit), thesales budget doubles as the productionbudget, and there is no finished goods in-ventory budget. The rest of the budgetshave counterparts.

9. A static budget is for a particular level ofactivity. A flexible budget is one that can beestablished for any level of activity. For per-

formance reporting, it is necessary to com-pare the actual costs for the actual level ofactivity with the budgeted costs for the ac-tual level of activity. A flexible budget pro-vides the means to compute the budgetedcosts for the actual level of activity, after thefact.

10. A flexible budget is based on a simplefor- mula: Y = F + VX, which requiresknowledge of both fixed and variablecomponents.

11.Goal congruence is important becauseit means that the employees of anorganization are working toward the goalsof that organization.

12. Frequent feedback is important so thatcorrective action can be taken, increasingthe likelihood of achieving budget.

13. Both monetary and nonmonetaryincentives are used to encourage employeesof an organization to achieve theorganizations goals. Monetary incentivesappeal to the economic needs of anindividual, and non- monetary incentivesappeal to the psychological needs. Sinceindividuals are motivated by both economicand psychological factors, both types ofincentives ought to be present in a goodbudgetary system.


2/15


___________________________________________________________

2

Solutions

Chapter 8Budgeting for Planning and Controlling

831. Freshaire, Inc.

Sales BudgetFor the Year 2008

Mint:1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total

Units 80,000 110,000 124,000 140,000 454,000Price $3.00 $3.00 $3.00 $3.00 $3.00Sales $240,000 $330,000 $372,000 $420,000 $ 1,362,000Lemon:Units 100,000 100,000 120,000 140,000 460,000Price $3.50 $3.50 $3.50 $3.50 $3.50Sales $350,000 $350,000 $420,000 $490,000 $ 1,610,000Total 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 endof the year, the company can compare actual sales against the budget to seeif expectations were achieved.


3/15


___________________________________________________________

3

84Freshaire, Inc.

Production Budget for Mint FreshenerFor the Year 2008

1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. TotalSales 80,000 110,000 124,000 140,000 454,000Des. ending inventory 11,000 12,400 14,000 9,000 9,000Total needs 91,000 122,400 138,000 149,000 463,000Less: Beginning inventory 4,000 11,000 12,400 14,000 4,000

Units produced 87,000 111,400 125,600 135,000 459,000Freshaire, Inc.

Production Budget for Lemon FreshenerFor the Year 2008

1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. TotalSales 100,000 100,000 120,000 140,000 460,000Des. ending inventory 20,000 24,000 28,000 22,000 22,000Total needs 120,000 124,000 148,000 162,000 482,000Less: Beginning inventory 6,400 20,000 24,000 28,000 6,400

Units produced 113,600 104,000 124,000 134,000 475,600


4/15


___________________________________________________________

4

88

Manning CompanyDirect Materials Purchases Budget

For March, April, and May 20XX

March April May TotalUnits to be produced 20,000 60,000 100,000 180,000Direct materials per unit

(yards) 25 25 25 25Production needs 500,000 1,500,000 2,500,000 4,500,000Desired ending inventory

(yards) 300,000 500,000 60,000 60,000Total needs 800,000 2,000,000 2,560,000 4,560,000Less beginning inventory 100,000 300,000 500,000 100,000Direct materials to be

purchased (yards) 700,000 1,700,000 2,060,000 4,460,000Cost per yard $0.30 $0.30 $0.30 $0.30

Total purchase cost $210,000 $ 510 ,000 $ 618 ,000 $1,338,000

89

Manning CompanyDirect Labor Budget

For March, April, and May 20XX

March April May TotalUnits to be produced 20,000 60,000 100,000 180,000Direct labor time per

unit (hours) 0.04 0.04 0.04 0.04Total hours needed 800 2,400 4,000 7,200Cost per hour $12 $12 $12 $12Total direct labor cost $ 9,600 $ 28,800 $ 48,000 $ 86,400


5/15


___________________________________________________________

5

811

1. Raylenes Flowers and GiftsProduction Budget for Gift Baskets

For September, October, November, and DecemberSept. Oct. Nov. Dec.

Sales 200 150 180 250Desired ending inventory 15 18 25 10Total needs 215 168 205 260Less: Beginning inventory 20 15 18 25Units produced 195 153 187 235

2. Raylenes Flowers and GiftsDirect Materials Purchases Budget

For September, October, and NovemberFruit: Sept. Oct. Nov.Production 195 153 187Amount/basket (lbs.) 1 1 1Needed for production 195 153 187Desired ending inventory 8 9 12Needed 203 162 199Less: Beginning inventory 10 8 9

Purchases 193 154 190Small gifts: Sept. Oct. Nov.Production 195 153 187Amount/basket (items) 5 5 5Needed for production 975 765 935Desired ending inventory 383 468 588Needed 1,358 1,233 1,523Less: Beginning inventory 488 383 468

Purchases 870 850 1,055Cellophane: Sept. Oct. Nov.Production 195 153 187Amount/basket (feet) 3 3 3Needed for production 585 459 561Desired ending inventory 230 281 353Needed 815 740 914Less: Beginning inventory 293 230 281

Purchases 522 510 633


6/15


___________________________________________________________

6

8111. Raylenes Flowers and Gifts

Production Budget for Gift BasketsFor September, October, November, and December

Sept. Oct. Nov. Dec.Sales 200 150 180 250Desired ending inventory 15 18 25 10Total needs 215 168 205 260Less: Beginning inventory 20 15 18 25Units produced 195 153 187 235

Raylenes Flowers and GiftsDirect Materials Purchases Budget

For September, October, and NovemberFruit: Sept. Oct. Nov.Production 195 153 187Amount/basket (lbs.) 1 1 1Needed for production 195 153 187Desired ending inventory 8 9 12Needed 203 162 199Less: Beginning inventory 10 8 9

Purchases 193 154 190Small gifts: Sept. Oct. Nov.Production 195 153 187Amount/basket (items) 5 5 5Needed for production 975 765 935Desired ending inventory 383 468 588Needed 1,358 1,233 1,523Less: Beginning inventory 488 383 468

Purchases 870 850 1,055Cellophane: Sept. Oct. Nov.Production 195 153 187Amount/basket (feet) 3 3 3Needed for production 585 459 561Desired ending inventory 230 281 353Needed 815 740 914Less: Beginning inventory 293 230 281

Purchases 522 510 633


7/15


___________________________________________________________

7

ConcludedBasket: Sept. Oct. Nov.Production 195 153 187Amount/basket (item) 1 1 1Needed for production 195 153 187Desired ending inventory 77 94 118Needed 272 247 305Less: Beginning inventory 98 77 94

Purchases 174 170 2113. A direct materials purchases budget for December requires January produc-

tion which cannot be computed without a February sales forecast.

8131. Janzen, Inc.

Cash Receipts Budget

For July

Payments on account:From May credit sales (0.15 $220,000)................................. $ 33,000From June credit sales (0.60 $230,000) ............................... 138,000From July credit sales (0.20 $210,000)................................. 42,000Less: July cash discount (0.02 $42,000) .............................. (840)Cash receipts ........................................................................... $212,160

2. Janzen, Inc.Cash Receipts BudgetFor August

Payments on account:From June credit sales (0.15 $230,000) ............................... $ 34,500From July credit sales (0.60 $210,000)................................. 126,000From August credit sales (0.20 $250,000) ........................... 50,000Less: August cash discount (0.02 $50,000)......................... (1,000)Cash receipts ............................................................................ $209,500

8-16

1


8/15


___________________________________________________________

8

1. Performance ReportActual Budgeted Variance

Direct materials cost $11,200 $10,000a

$1,200 UDirect labor cost 4,400 4,000b 400 UUnits produced 1,100 1,000 100 F

Total $15,600 $14,400 $1,600 Ua. 1,000 units * 2 leather straps * $5 = $10,000b. 1,000 units * .5 hours per unit * $8 = $4,000

2. The performance report compares costs at two differentlevels of activity and so cannot be used to assess efficiency.


9/15


___________________________________________________________

9

8-17Pet-Care Company Overhead Budget For the Coming Year

Activity LevelFormula 55,000 Hours*Variable costs:Maintenance $0.40 $22,000Power 0.50 27,500Indirect labor 1.60 88,000

Total variable costs $137,500Fixed costs:Maintenance $17,000Indirect labor 26,500Rent 18,000

Total fixed costs 61,500

Total overhead costs $199,000

*BasicDiet: (0.25 100,000) 25,000SpecDiet: (0.30 100,000) 30,000

Total DLH 55,000


10/15


___________________________________________________________

10

2. 10% higher: Pet-Care CompanyOverhead Budget

For the Coming Year


Total variable costs $151,250Fixed costs:Maintenance $17,000Indirect labor 26,500Rent 18,000

Total fixed costs 61,500Total overhead costs $212,750

*55,000 DLH 110% = 60,500

20% lower: Pet-Care Company Overhead Budget Forthe Coming Year

Total variable costs $110,000

Fixed costs:Maintenance $17,000Indirect labor 26,500Rent 18,000

Total fixed costs 61,500Total overhead costs $171,500

*55,000 DLH 80% = 44,000



11/15


___________________________________________________________

11

824Briggs Manufacturing

For the Quarter Ended March 31, 20XX1. Schedule 1: Sales Budget

January February March TotalUnits 40,000 50,000 60,000 150,000Selling price $215 $215 $215 $215Sales $8,600,000 $10,750,000 $12,900,000 $32,250,000

2. Schedule 2: Production BudgetJanuary February March Total

Sales (Schedule 1) 40,000 50,000 60,000 150,000Desired ending inventory 40,000 48,000 48,000 48,000Total needs 80,000 98,000 108,000 198,000Less: Beginning inventory 32,000 40,000 48,000 32,000Units to be produced 48,000 58,000 60,000 166,000


12/15


___________________________________________________________

12

3. Schedule 3: Direct Materials Purchases Budget

January FebruaryMetal Components Metal ComponentsUnits to be produced(Schedule 2) 48,000 48,000 58,000 58,000Direct materialsper unit (lbs.) 10 6 10 6Production needs 480,000 288,000 580,000 348,000Desired endinginventory 250,000 150,000 300,000 180,000Total needs 730,000 438,000 880,000 528,000Less: Beginninginventory 200,000 120,000 250,000 150,000

Direct materials tobe purchased 530,000 318,000 630,000 378,000Cost per pound $8 $2 $8 $2Total cost $4,240,000 $636,000 $5,040,000 $756,000

Units to be produced

March TotalMetal Components Metal Components

60,000 60,000 166,000 166,000Direct materialsper unit (lbs.)

10

6

10

6

Production needs 600,000 360,000 1,660,000 996,000Desired endinginventory 300,000 180,000 300,000 180,000Total needs 900,000 540,000 1,960,000 1,176,000Less: Beginninginventory 300,000 180,000 200,000 120,000Direct materials tobe purchased 600,000 360,000 1,760,000 1,056,000Cost per pound $8 $2 $8 $2Total cost $4,800,000 $720,000 $14,080,000 $2,112,000


13/15


___________________________________________________________

13

4. Schedule 4: Direct Labor Budget

January February March TotalUnits to be produced(Schedule 2) 48,000 58,000 60,000 166,000Direct labor time

per unit (hours)

4

4

4

4Total hours needed 192,000 232,000 240,000 664,000Cost per hour $9.25 $9.25 $9.25 $9.25Total cost $1,776,000 $2,146,000 $2,220,000 $6,142,000

5. Schedule 5: Overhead Budget

January February March TotalBudgeted direct laborhours (Schedule 4) 192,000 232,000 240,000 664,000Variable overhead rate $3.40 $3.40 $3.40 $3.40Budgeted variable overhead $652,800 $ 788,800 $ 816,000 $2,257,600

Budgeted fixed overhead 338,000 338,000 338,000 1,014,000Total overhead $990,800 $1,126,800 $1,154,000 $3,271,600

6. Schedule 6: Selling and Administrative Expenses Budget

January February March TotalPlanned sales (Schedule 1) 40,000 50,000 60,000 150,000Variable selling and administrative

expenses

per unit $3.60 $3.60 $3.60 $3.60Total variable expense $144,000 $180,000 $216,000 $540,000Fixed selling and administrative expenses:

Salaries $ 50,000 $ 50,000 $ 50,000 $150,000Depreciation 40,000 40,000 40,000 120,000Other 20,000 20,000 20,000 60,000

Total fixed expenses $110,000 $110,000 $110,000 $330,000Total selling and

administrative expenses $254,000 $290,000 $326,000 $870,000


14/15


___________________________________________________________

14

7. Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation:Direct materials: Metal (10 @ $8) = $80

Comp. (6 @ $2) = 12 $ 92.00Direct labor (4 $9.25) 37.00

Overhead:Variable (4 @ $3.40) 13.60Fixed (4 $1,014,000/664,000) 6.11Total 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 $15,272,000Direct labor used (Schedule 4) 6,142,000Overhead (Schedule 5) 3,271,600

Budgeted manufacturing costs $24,685,600Add: 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


15/15


___________________________________________________________

15

ending balance $1,321,200 2,952,400

Borrowed/(repaid)

Interest paid

10. Schedule 10: Cash Budget

January February March TotalBeg. balance $ 378,000 $ 1,321,200 $ 2,952,400 $ 378,000Cash receipts 8,600,000 10,750,000 12,900,000 32,250,000Cash available $8,978,000 $12,017,200 $15,852,400 $32,628,000Less:

Disbursements:Purchases $4,876,000 $5,796.000 $ 5,520,000 $16,192,000Direct labor 1,776,000 2,146,000 2,220,000 6,142,000Overhead 790,800 926,800 954,000 2,671,600Selling & admin. 214,000 250,000 286,000 750,000Total $7,656,800 $9,118.800 $ 8,980,000 $25,755,600

Tentative

$ 6,872,400 $6,872,400

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)

Solution Chapter 8.pdf

Documents

Transcript of Solution Chapter 8.pdf