Solutions Chapter 8

Chapter 08 - Budgetary Planning

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Chapter 8 Budgetary Planning

ANSWERS TO QUESTIONS

1. Budgetary planning is crucial because companies use budgets to plan their ongoing operations so they will be able to meet their short-term and long-term objectives.

2. Budgets are an important part of organizing because they translate the company’s

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

3. A strategic plan is the starting point of the planning process and is the vision of what

management wants the organization to achieve over the long term. A strategic plan includes long-term goals which are typically over a 5-10 year period and also includes short-term or intermediate steps needed to achieve the long-term goals.

4. Answers will vary, but students should clearly distinguish between the three

categories.

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

Short-term goals: To save $X per month from their paycheck, to generate $X in return from specific investments, etc.

Tactics: Cut costs by eliminating unnecessary expenses, to research potential investments thoroughly, etc.

5. Benefits of budgeting include forcing managers to look ahead, which will help them

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

6. Answers will vary. Potential negative consequences of not developing budgets

include failure to consider a company’s long-term and short-term goals, lack of communication between managers, and absence of motivation for employees because there isn’t an identifiable goal.




7. Unlike a “top down” approach to budgeting where budgets are set by upper management and imposed on employees, participative budgeting allows employees to provide input into their own budget. This may motivate them to work hard to achieve the goal. It may also result in more accurate information as employees may have more knowledge or information about the process. Disadvantages of participative budgeting include the amount of time consumed and the fact that employees may try to build slack into a budget.

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

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

9. a. Utilizing different budgets for planning and performance evaluation will minimize

the impact of budgetary slack. b. Continuous budgeting gives managers a constant period of budgets available

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

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

10. A master budget is a comprehensive set of budgets that covers all phases of an

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

11. The sales forecast is the starting point because all of the other budgets are based on

the sales forecast. The production, direct materials purchases, direct labor, manufacturing overhead, selling and administrative, cash receipts/disbursements, and inventory budgets are all affected by the sales forecast.

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

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

13. The operating budget is made up of the sales forecast, production budget, direct

materials purchases budget, direct labor budget, manufacturing overhead budget, selling and administrative budget, and budgeted income statement.




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

payments, and financing. 15. The operating budgets feed directly into the cash budget. The sales budget is used

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

16. The cash budget receives considerable attention because a company cannot exist

without sufficient cash. Sales revenue does not always become cash or there may be a lag and companies need to know that they have sufficient cash on hand to pay their expenses in the interim.

17. Depreciation is a non-cash expense. While it does increase a company’s total

expenses and decrease net operating income, it does not require a cash outflow during the current period.

18. The end result of the budgeting process is a set of pro-forma financial statements

that includes a budgeted income statement, statement of cash flows, and budgeted balance sheet. Each of these budgets provides managers with valuable information to use for planning, managing operations, and making investing and financing decisions.

19. Service firms do not need to prepare production budgets, inventory budgets, or

manufacturing overhead budgets. But they do need to prepare budgets to predict sales revenue, labor costs, supplies, and other non-manufacturing expenses such as commissions and advertising.

20. One of the primary operating budgets a merchandiser needs to prepare is the

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




Authors' Recommended Solution Time

(Time in minutes)

Mini-exercises

Exercises

Problems

Cases and Projects*

No. Time No. Time No. Time No. Time

1 4 1 7 PA−1 15 1 45 2 5 2 8 PA−2 12 2 45 3 3 3 8 PA−3 12 4 5 4 7 PA−4 12 5 3 5 7 PA- 5 12 6 4 6 8 PA-6 15 7 5 7 8 PB−1 15 8 4 8 7 PB−2 12 9 5 9 7 PB−3 12

10 5 10 8 PB−4 12 11 5 11 9 PB−5 12

12 7 PB−6 15 13 7 14 8 15 7 16 7 17 8 18 8 19 8 20 8 21 8

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




ANSWERS TO MINI-EXERCISES M8−1 No, he isn’t correct. Planning, directing, and control are very interrelated functions within any organization. Managerial accounting plays a crucial role in each of these functions. M8−2 Potential consequences of CC’s philosophy include a lack of vision for the company’s future development, failure to communicate goals to employees, and inability to evaluate performance of the company or its employees. M8−3

a) Cash receipts and payments budget Financial b) Sales budget Operating c) Raw materials purchases budget Operating d) Selling and administrative expense budget Operating e) Budgeted balance sheet Financial f) Manufacturing overhead budget Operating g) Direct labor budget Operating h) Budgeted income statement Operating i) Production budget Operating M8−4 October November December 4th Quarter Budgeted sales (units) 7,200 7,400 7,100 21,700 Budgeted unit price x $27.50 x $27.50 x $27.50 x $27.50 Budgeted sales revenue $ 198,000 $ 203,500 $ 195,250 $ 596,750 M8−5 July August Production 480 400 Material required per unit x 10 x 10 Material required for production 4,800 4,000 Ending raw materials inventory 300 300 Beginning raw materials inventory (300) (300) Materials purchases 4,800 4,000 Average cost per foot x $ 1.50 x $ 1.50 Budgeted raw materials purchases $ 7,200 $ 6,000




M8−6 July August Production 480 400 Average direct labor hours per unit x 1.75 x 1.75 Total direct labor hours required 840 700 Average hourly labor rate x $ 9.00 x $ 9.00 Budgeted direct labor cost $ 7,560 $ 6,300 M8−7 1st Quarter 2nd Quarter Sales $ 200,000 $ 236,000 Variable overhead rate x 19% x 19% Variable manufacturing overhead 38,000 44,840 Fixed overhead 46,500 46,500 Budgeted manufacturing overhead $ 84,500 $ 91,340 M8−8 January February March Sales $ 87,000 $ 81,000 $ 92,000 Variable selling and administrative rate x 8% x 8% x 8% Variable selling and administrative expenses 6,960 6,480 7,360 Fixed selling and administrative expenses 11,000 11,000 11,000 Budgeted selling and administrative expenses $ 17,960 $ 17,480 $ 18,360 M8-9 February March Budgeted sales revenue (given) $235,000 $298,000 Cash sales (35% of budgeted sales revenue)

$ 82,250

$104,300

Credit collections (65% of budgeted sales revenue):

60% during month of sale 91,650 116,220 40% in month following sale 52,000 61,100 Budgeted cash receipts $225,900 $281,620




M8-10 January February March Budgeted sales revenue (given) $450,000 $510,000 $530,000 Cash sales 20% of budgeted sales revenue 90,000 102,000 106,000 Credit collections (80% of sales) 50% during month of sale 180,000 204,000 212,000 50% during month following sale 304,000* 180,000 204,000 Budgeted cash receipts $574,000 $486,000 $522,000 * December sales $760,000 x 80% x 50% = $304,000 M8−11 March Unit sales 1,300 Ending inventory (30% of April sales of 900) 270 Beginning inventory (30% of March sales of 1,300) (390) Purchases (units) 1,180 Cost per unit x $ 40 Total purchases $47,200




ANSWERS TO EXERCISES E8-1 Req. 1 If Samantha knows that Leslie will automatically increase the estimate she gives her, then she has a motivation to underestimate her budget. Additionally, the fact that Samantha’s bonus is tied to her ability to “beat” the budget gives her incentive to underestimate production because this will increase her chances of receiving a bonus. Req. 2 Budgeted production is used to make raw material purchases, inventory storage, and labor staffing decisions. If Samantha’s underestimated production numbers are used, the Purchasing Manager and Human Resources Director will both be impacted. As a result, they may not have enough resources on hand at the time they are needed which could result in increased costs or a necessary reduction in production levels. E8-2

1. Master budget

2. Operating budgets

3. Participative; Top-down

4. Budgetary slack

5. Controlling

6. Sales forecast

7. Budgeted income statement

8. Rolling budget

9. Budgeted balance sheet

10. Production budget

E8−3 Likely Order of Preparation

Budget

9* Cash receipts and payments budget. 7* Selling and administrative expense budget. 5* Manufacturing overhead budget. 3* Raw materials purchases budget. 10 Budgeted balance sheet. 1 Sales budget. 4* Direct labor budget. 8 Budgeted income statement. 6* Budgeted cost of goods sold. 2 Production budget.

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




All of the budgets above would be overstated if the sales forecast were overstated. E8−4 Shaded answers are provided below:

Production

Sales

Ending Inventory

Beginning Inventory

550 500 125 75 930 965 90 125 750 710 120 80 900 1,200 85 385 805 740 225 160 845 795 290 240

E8−5

Req. 1 May June Sales (units) 600 800 Price per unit x $ 18 x $ 18 Budgeted total sales $10,800 $14,400 Req. 2 May June Sales 600 800 Ending inventory 50 60 Beginning inventory (75) (50) Budgeted production (units) 575 810 E8−6 Req. 1 May June Production 575 810 x Closures required per unit x 1 x 1 Total closures required for production 575 810 + Ending Inventory 20 25 - Beginning Inventory (30) (20) Budgeted purchases 565 815 x Cost per closure x $1.50 x $1.50 Budgeted cost of closures purchased $ 847.50 $1,222.50 Req. 2 Production (units) 575 810 x Variable overhead rate x $ 1.25 x $ 1.25 Budgeted variable overhead 718.75 1,012.50 + Budgeted fixed overhead 1,000.00 1,000.00 Budgeted manufacturing overhead $1,718.75 $2,012.50




E8-7 May June Production 575 810 Average direct labor hours per unit x 0.3 x 0.3 Total direct labor hours required 172.50 243 Average hourly labor rate x $ 9.00 x $ 9.00 Budgeted direct labor cost $ 1,552.50 $2,187.00 E8-8 Req. 1

Budgeted manufacturing cost per unit Cost Per Unit Direct materials $ 4.00 Total direct labor (.30 hrs each X $9.00 per hour) 2.70 Variable manufacturing overhead ($1.25 per unit) 1.25

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

Manufacturing cost per unit $ 9.95 Req. 2

Shadee Corp. Cost of Goods Sold Budget

May June

Budgeted sales (units) 600 800

Budgeted manufacturing cost per unit x $9.95 x $9.95

Budgeted cost of goods sold $ 5,970 $ 7,960 E8-9 May June Sales $10,800 $14,400 Variable selling and administrative rate x 6% x 6%

Variable selling and administrative expenses 648 864 Fixed selling and administrative expenses 1,200 1,200

Budgeted selling and administrative expenses $ 1,848 $ 2,064 E8-10

Shadee Corp. Budgeted Income Statement

May June Budgeted Sales $ 10,800 $ 14,400 Less: Cost of goods sold 5,970 7,960

Budgeted gross margin $ 4,830 $ 6,440 Less: Budgeted selling and administrative 2,064




expenses 1,848

Budgeted net operating income $ 2,982 $ 4,376 E8−11 July August September Sales (units) 625 490 450 x Unit sales price x $ 18 x $ 18 x $ 18 Budgeted sales revenue $11,250 $ 8,820 $ 8,100 August September Cash sales (60% of budgeted sales revenue) $5,292 $ 4,860 Credit collections (40% of budgeted sales revenue) 50% during month of sale (40% x 50% x current month budgeted sales)

1,764

1,620

45% in month following sales (40% x 45% x previous month budgeted sales)

2,025

1,588*

Budgeted cash collections $ 9,081 $ 8,068 *Rounded E8-12 Req. 1

April May June July Sales 3,850 3,875 4,260 4,135 + Ending inventory (60% of next month sales)

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

- Beginning inventory 2,310 2,325 2,556 2,481 Budgeted production (units) 3,865 4,106 4,185 3,808 Req. 2 April May June Production 3,865 4,106 4,185 x Pounds required per unit x 2 x 2 x 2 Total pounds required for production 7,730 8,212 8,370 + Ending Inventory (50% of next month needs)

4,106

4,185

3,808

- Beginning Inventory 3,865 4,106 4,185 Budgeted purchases 7,971 8,291 7,993 x Cost per pound x $ 3.10 x $ 3.10 x $ 3.10 Budgeted cost of material purchased $ 24,710.10 $ 25,702.10 $24,778.30




E8-13 Strike Model Cutting Sewing Production 2,500 2,500 Average direct labor hours per unit x 0.1 x 0.3 Total direct labor hours required for Strike 250 750 Turkey Model Production 3,250 3,250 Average direct labor hours per unit x 0.2 x 0.5 Total direct labor hours required for Turkey 650 1,625 Total direct labor hours required (for both models) 900 2,375 Average hourly labor rate x $ 15.00 x $ 12.00 Budgeted October direct labor cost for Alleyway $ 13,500 $28,500 E8−14 November December Budgeted sales (units) 3,100 3,600 Price per unit x $ 95 x $ 95 Budgeted sales revenue $294,500 $342,000 Variable selling & administrative expenses (11% of sales revenue)

$ 32,395

$ 37,620

Fixed selling and administrative expenses ($5,000 + $2,500 + $2,500 + $3,500 + $1,500 + $800)

15,800

15,800

Total budgeted selling and administrative expenses $ 48,195 $ 53,420 E8-15

Req. 1 Budgeted Manufacturing Costs Per Unit Direct materials (2 pounds x $2.00 per pound) $ 4.00 Direct labor (1.5 hours x $15.00 per hour) 22.50 Manufacturing overhead 3.00 Budgeted manufacturing cost per unit $ 29.50 Budgeted unit sales 15,000 Budgeted cost of goods sold $442,500 Req. 2 Budgeted sales revenue (15,000 x $41.00) $615,000 Less: Budgeted cost of goods sold (15,000 x $29.50) - 442,500 Budgeted gross margin 172,500 Less: Budgeted selling and administrative expenses (135,870) Budgeted net operating income $ 36,630




E8−16 March Cash receipts from customers $ 36,450 Cash paid to suppliers $ 22,300 Cash paid for manufacturing overhead ($6,100 - $1,200 depreciation) 4,900 Cash paid for direct labor 8,250 Cash paid for selling and administrative expenses 4,200 Cash paid for equipment 7,000 Budgeted cash payments $ 46,650 Beginning cash balance $ 16,320 + Budgeted cash receipts 36,450 - Budgeted cash payments - 46,650 Preliminary cash balance $ 6,120 Cash borrowed ($10,000 – 6,120 = $3,880 needed ~ $4,000 loan) 4,000 Ending cash balance $ 10,120 E8−17 July August Budgeted sales revenue (given) $25,000 $23,000 Calculation Cash sales (60% of budgeted sales revenue)

$13,800.00

(23,000 x .60)

Credit collections (40% of budgeted sales revenue):

60% during month of sale 5,520.00 (23,000 x .40 x .60) 40% in month following sale 4,000.00 (25,000 x .40 x .40) Budgeted cash receipts $23,320.00




E8-18 Req. 1 July August Sales revenue $160,000 $145,000 Cash sales (70% of budgeted sales revenue) $112,000 $101,500 Credit collections (30% of budgeted sales revenue) 40% during month of sale (30% x 40% x current month budgeted sales)

19,200

17,400

60% in month following sales (30% x 60% x previous month budgeted sales)

20,700*

28,800

Budgeted cash collections $151,900 $ 147,700 * $115,000 x 30% = $34,500; $34,500 x 60% = $20,700 Req. 2 July August Purchases (All on account) $150,000 $ 80,000 Cash disbursements: Credit purchases paid in month of purchase (55%) 82,500 44,000 Credit purchases paid in month following purchase (45%)

42,750**

67,500

Cash paid for operating expenses 38,250 34,700 Budgeted cash payments $ 163,500 $146,200 ** $95,000 x 45% = $42,750 E 8-19 January February March Sales $400,000 $480,000 $640,000 Budgeted cost of goods sold (40% sales) Add: Desired ending inventory

160,000

48,000

192,000

64,000

256,000

68,000*

Total inventory required $208,000 $256,000 $324,000 Less: Beginning inventory 40,000 48,000 64,000 Required purchases $168,000 $208,000 $260,000 * $680,000 x 40% = $272,000 (April budgeted COGS) x 25% = $68,000




E8-20

Req. 1 April May June Sales $220,000 $190,000 $310,000 Budgeted cost of goods sold (30% sales) Add: Desired ending inventory

66,000

11,400

57,000

18,600

93,000

5,400*

Total inventory required $77,400 $75,600 $98,400 Less: Beginning inventory 13,200 11,400 18,600 Required purchases $64,200 $64,200 $79,800

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

Citrus Girl Company

Budgeted Income Statement For the Month Ending

Req. 2 April 30 May 31 June 30 Budgeted sales $220,000 $190,000 $310,000 Budgeted cost of goods sold Budgeted gross margin Less: Budgeted selling and administrative expenses*

66,000 $154,000

44,535

57,000 $133,000

43,335

93,000 $217,000

48,135

Budgeted net operating income $109,465 $89,665 $168,865 * For each month total of salaries $30,000, delivery expense 4% of monthly sales, rent expense on the warehouse $4,500, utilities $800, insurance $175, and other expenses $260.




E8-21

Budgeted cash collections: Req. 1 June July August Sales $24,000 $36,000 $38,000 Cash collected in month of sale (60%) Cash collected in month following sale (35%) Cash collected in 2nd month following sale (5%) Total cash receipts

14,400

7,700

800

$22,900

21,600

8,400

1,100

$31,100

22,800

12,600

1,200

$36,600

Budgeted cash payments: June July August Purchases $9,000 $17,000 $12,000 Cash paid in month of purchase (50%) Cash paid in month following purchase (50%) Total cash payments

4,500

2,500* $7,000

8,500

4,500

$13,000

6,000

8,500

$14,500

May purchases $5,000 x 50% Req. 2 Balances for August 31 budgeted balance sheet

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




GROUP A PROBLEMS PA8−1 Req. 1 April May June 2nd Quarter Budgeted sales (units) 250 300 400 950 x Unit sales price x $ 25 x $ 25 x $ 25 x $ 25 Budgeted sales revenue $ 6,250 $ 7,500 $10,000 $23,750 Req. 2 April May June 2nd Quarter Budgeted sales (units) 250 300 400 950 +Ending finished goods inventory (40% of next month’s budgeted sales)

120

160

150

150

- Beginning finished goods inventory (40% of current month’s budgeted sales)

- 100

- 120

- 160

- 100

Budgeted production 270 340 390 1,000 Req. 3 April May June 2nd Quarter Budgeted production 270 340 390 1,000 x Material requirements per unit x 4 x 4 x 4 x 4 Total material needed for production 1,080 1,360 1,560 4,000 + Ending raw materials inventory (30% of next month’s production needs)

408

468

474*

474

- Beginning raw materials inventory (30% of current month production needs)

- 324

- 408

- 468

- 324

Budgeted raw materials purchases 1,164 1,420 1,566 4,150 x Material cost per foot x $ 2.00 x $ 2.00 x $ 2.00 x $ 2.00 Budgeted cost of raw material purchases $ 2,328 $ 2,840 $ 3,132 $ 8,300 *July budgeted production = 375 + (.40 x 425) – (.40 x 375) = 395 June raw materials ending inventory = 395 x 4 = 1,580 x 30% = 474 Req. 4 April May June 2nd Quarter Budgeted production 270 340 390 1,000 x Direct labor requirements per unit x .5 x .5 x .5 x .5 Direct labor hours required 135 170 195 500 x Direct labor rate x $ 12 x $ 12 x $ 12 x $ 12 Budgeted direct labor cost $ 1,620 $ 2,040 $ 2,340 $ 6,000 Req. 5 April May June 2nd Quarter Budgeted production 270 340 390 1000 x Variable manufacturing overhead rate x $0.30 x $0.30 x $0.30 x $0.30 Budgeted variable manufacturing 81.00 102.00 117.00 300.00 + Fixed manufacturing overhead 600.00 600.00 600.00 1,800.00 Budgeted manufacturing overhead $ 681.00 $ 702.00 $ 717.00 $ 2,100.00




PA8−1 (Continued)

Req. 6 Budgeted Manufacturing Costs Per Unit Direct materials (4 ft x $2.00 per ft) $ 8.00 Direct labor (.5 hours x $12 per hour) 6.00 Variable manufacturing overhead 0.30 Fixed manufacturing overhead ($7,200 / 4,000 units) 1.80 Budgeted manufacturing cost per unit $ 16.10 April May June 2nd Quarter Budgeted sales 250 300 400 950 x Budgeted manufacturing cost per unit x $16.10 x $16.10 x $16.10 x $16.10 Budgeted cost of goods sold $4,025.00 $4,830.00 $6,440.00 $15,295.00

Req. 7 April May June 2nd Qtr Budgeted sales (units) 250 300 400 950 x Variable selling and administrative rate x $.60 x $.60 x $.60 x $.60 Budgeted variable selling and adm. expenses 150 180 240 570 + Budgeted fixed selling and adm. expenses 650 650 650 1,950 Total budgeted selling and adm. expenses $ 800 $ 830 $ 890 $ 2,520 PA8−2 April May June 2nd Quarter Budgeted sales revenue $6,250.00 $7,500.00 $10,000.00 $23,750.00 Less: Budgeted cost of goods sold - 4,025.00 - 4,830.00 - 6,440.00 - 15,295.00 Budgeted gross margin 2,225.00 2,670.00 3,560.00 8,455.00 Less: Budgeted selling and administrative expenses

(800.00)

(830.00)

(890.00)

(2,520.00)

Budgeted net operating income $1,425.00 $1,840.00 $2,670.00 $ 5,935.00




PA8−3 Req. 1 Budgeted sales revenue (from Req. 1 of PA 8-1)

April May June 2nd Quarter $ 6,250 $ 7,500 $10,000 $23,750

Cash collections (80% of budgeted sales)

$ 5,000

$ 6,000

$ 8,000

$ 19,000

Credit collections (20% of budgeted sales)

50% collected in month of sale (20% x 50% x current month sales)

625

750

1,000

2,375

50% collected in month following sale (20% x 50% x previous month sales)

688*

625

750

2,063

Budgeted cash receipts $6,313 $7,375 $9,750 $23,438 *Credit collections from March sales = 275 units x $25 = $6,875 x 20% x 50% = $687.50 (rounded to $688)

Req. 2 Budgeted raw materials purchases (from PA 8-1 Req. 3)

April May June 2nd Quarter $ 2,328 $ 2,840 $ 3,132 $ 8,300

Cash disbursements: Raw material purchases

80% paid in the month of purchase (Current month purchases x .80)

$1,862.40

$2,272.00

$2,505.60

$6,640.00

20% paid in the following month (Prior month purchases x .20)

400.00*

465.60

568.00

1,433.60

Direct labor (from PA 8-1 Req. 4)

1,620.00

2,040.00

2,340.00

6,000.00

Manufacturing overhead (from PA 8-1 Req. 5)

681.00

702.00

717.00

2,100.00

Less: Depreciation (given) - 150.00 - 150.00 - 150.00 - 450.00 Selling and administrative expenses (from PA 8-1 Req. 7)

800.00

830.00

890.00

2,520.00

Purchase of Equipment 3,000.00 - - 3,000.00

Total budgeted cash payments $8,213.40

$6,159.60

$6,870.60

$21,243.60

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

Req. 3 Beginning cash balance

April May June 2nd Quarter $ 10,800.00 $10,899.10 $10,114.50 $10,800.00

Plus: Budgeted cash receipts 6,312.50 7,375.00 9,750.00 23,437.50 Less: Budgeted cash payments - 8,213.40 - 6,159.60 - 6,870.60 - 21,243.60 Preliminary cash balance $8,899.10 $12,114.50 $12,993.90 $12,993.90 Cash borrowed/Repaid 2,000.00 (2,000,00) - - Ending cash balance 10,899.10 10,114.50 $12,993.90 $12,993.90




PA8−4 Req. 1 January February March 1st Quarter Sales (units) 2,000 2,200 2,700 6,900 x Unit sales price x $ 44 x $ 44 x $ 44 x $ 44 Budgeted Sales $ 88,000 $ 96,800 $ 118,800 $ 303,600 Req. 2 January February March 1st Quarter Sales (units) 2,000 2,200 2,700 6,900 + Ending finished goods inventory (30% of next month’s sales)

660

810

750

750

- Beginning finished goods inventory (30% of current month’s sales)

- 600

- 660

- 810

- 600

Budgeted production 2,060 2,350 2,640 7,050 Req. 3 January February March 1st Quarter Budgeted production 2,060 2,350 2,640 7,050 X Material requirements per unit x 1 x 1 x 1 x 1 Total material required for production 2,060 2,350 2,640 7,050 + Ending raw materials (25% of

following month’s production needs)

588**

660

580*

580 - Beginning raw materials (25% of

current month’s production needs)

- 515

- 588

- 660

- 515 Budgeted raw material purchases 2,133 2,422 2,560 7,115 X Material cost per housing x $7.00 x $7.00 x $7.00 x $7.00 Budgeted cost of raw material purchases

$14,931

$ 16,954

$ 17,920

$49,805

* April production = 2,500 + (1,900 x .30) – (2,500 x .30) = 2,320 March ending raw materials inventory = 2,320 x 1 x .25 = 580 **Rounded Req. 4 January February March 1st Quarter Budgeted production 2,060 2,350 2,640 7,050 x Direct labor hours per unit x .75 x .75 x .75 x .75 Direct labor requirements 1,545.00 1,762.50 1,980.00 5,287.50 x Average labor rate x $18.00 x $18.00 x $18.00 x $18.00 Budgeted direct labor cost $27,810.00 $31,725.00 $35,640.00 $95,175.00




PA8−5 Req. 1 Budgeted Manufacturing Costs Per Unit Direct materials ($7 + $4.50) $11.50 Direct labor (.75 hrs x $18.00) 13.50 Variable manufacturing overhead 1.20 Fixed manufacturing overhead ($72,000 / 27,000 units) 2.67 Total budgeted mfg cost per unit $28.87 January February March 1st Quarter Sales (units) 2,000 2,200 2,700 6,900 x Budgeted manufacturing cost per unit x $28.87 x $28.87 x $28.87 x $28.87 Budgeted cost of goods sold* $ 57,733 $ 63,507 $ 77,940 $ 199,180 *Rounded

Req. 2 January February March 1st Quarter Budgeted sales revenue $ 88,000 $ 96,800 $ 118,800 $ 303,600 x Variable selling and administrative rate (7% of budgeted sales revenue)

x 7%

x 7%

x 7%

x 7%

Variable selling and adm. expenses 6,160 6,776 8,316 21,252 + Fixed selling and adm. expenses 18,000 18,000 18,000 54,000 Budgeted selling and adm. expenses $24,160 $24,776 $26,316 $75,252

Req. 3 January February March 1st Quarter Budgeted sales revenue $ 88,000 $ 96,800 $118,800 $ 303,600 Budgeted cost of goods sold 57,733 63,507 77,940 199,180 Budgeted gross profit 30,267 33,293 40,860 104,420 Budgeted selling and adm. expenses 24,160 24,776 26,316 75,252 Budgeted net operating income $ 6,107 $ 8,517 $ 14,544 $ 29,168




PA8-6

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted unit sales 40,000 60,000 30,000 60,000

Budgeted sales price $ 15.00 $ 15.00 $ 15.00

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

Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4


Plus: Planned ending inventory

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

Less: Planned beginning inventory

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

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

Cost of merchandise $ 6.00 $ 6.00 $ 6.00

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

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


Budgeted cost of merchandise $ 6.00 $ 6.00 $ 6.00

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

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


Variable Selling Expenses $ 60,000 $ 90,000 $ 45,000

Fixed Administrative Expenses $ 80,000 $ 80,000 $ 80,000

Budgeted Selling and Adm. Expenses $ 140,000 $ 170,000 $ 125,000

Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4


Less: Budgeted cost of goods sold 240,000 360,000 180,000

Budgeted gross margin $ 360,000 $ 540,000 $ 270,000

Less: Budgeted selling and adm. expenses 140,000 170,000 125,000

Budgeted net operating income $ 220,000 $ 370,000 $ 145,000




GROUP B PROBLEMS PB8−1 Req. 1 April May June 2nd Quarter Budgeted sales (units) 700 650 720 2,070 x Unit sales price x $ 20 x $ 20 x $ 20 x $ 20 Budgeted sales revenue $14,000 $13,000 $14,400 $41,400 Req. 2 April May June 2nd Quarter Budgeted sales (units) 700 650 720 2,070 + Ending finished goods inventory (30% of next month’s budgeted sales)

195 216 249 249

- Beginning finished goods inventory (30% of current month’s budgeted sales)

- 210

- 195

- 216

- 210

Budgeted production 685 671 753 2,109 Req. 3 April May June 2nd Quarter Budgeted Production 685 671 753 2,109 x Material requirements per unit x 2 x 2 x 2 x 2 Total material needed for production 1,370.00 1,342.00 1,506.00 4,218.00 + Ending raw materials inventory (20% of next month’s production needs)

268.40

301.20

323.60*

323.60

- Beginning raw materials inventory (20% of current month production needs)

- 274.00

- 268.40

- 301.20

- 274.00

Budgeted raw materials purchases 1,364.40 1,374.80 1,528.40 4,267.60 x Material cost per yard x $ 0.60 x $ 0.60 x $ 0.60 x $ 0.60 Budgeted cost of raw materials purchases $ 818.64 $ 824.88 $ 917.04 $ 2,560.56

*July production = 830 + (.30 x 760) – (.30 x 830) = 809 June ending raw materials inventory = 809 x 2 = 1,618 x 20% = 323.60 Req. 4 April May June 2nd Quarter Budgeted production 685 671 753 2,109 x Direct labor requirements per unit x .50 x .50 x .50 x .50 Direct labor hours required 342.50 335.50 376.50 1,054.50 x Direct labor rate x $ 8.00 x $ 8.00 x $ 8.00 x $ 8.00 Budgeted direct labor cost $ 2,740 $ 2,684 $ 3,012 $ 8,436 Req. 5 April May June 2nd Quarter Budgeted production 685 671 753 2,109 x Variable manufacturing overhead rate x $0.40 x $0.40 x $0.40 x $0.40 Budgeted variable manufacturing 274.00 268.40 301.20 843.60 + Fixed manufacturing overhead 750.00 750.00 750.00 2,250.00 Budgeted manufacturing overhead $1,024.00 $1,018.40 $1,051.20 $ 3,093.60




PB8−1 (Continued)

Req. 6 Budgeted Manufacturing Costs Per Unit Direct materials (2 yards x $0.60 per yard) $ 1.20 Direct labor (.50 hours x $8 per hour) 4.00 Variable manufacturing overhead 0.40 Fixed manufacturing overhead ($9,000 / 9,000 units) 1.00 Budgeted manufacturing cost per unit $ 6.60 April May June 2nd Quarter Budgeted sales 700 650 720 2,070 x Budgeted manufacturing cost per unit x $6.60 x $6.60 x $6.60 x $6.60 Budgeted cost of goods sold $4,620.00 $4,290.00 $4,752.00 $13,662.00

Req. 7 April May June 2nd Qtr Budgeted sales (units) 700 650 720 2,070 x Variable selling and administrative rate ($.75 per unit sold)

x $.75

x $.75

x $.75

x $.75

Budgeted variable selling and administrative expenses

525.00

487.50

540.00

1, 552.50

+ Budgeted fixed selling and administrative expenses (given)

820.00

820.00

820.00

2,460.00

Budgeted selling and administrative expenses

$1,345.00

$1,307.50

$1,360.00

$4,012.50




PB8−2 April May June 2nd Quarter Budgeted sales revenue $14,000.00 $13,000.00 $14,400.00 $ 41,400.00 Less: Budgeted cost of goods sold 4,620.00 4,290.00 4,752.00 13,662.00 Budgeted gross margin 9,380.00 8,710.00 9,648.00 27,738.00 Less: Budgeted selling and administrative expenses

1,345.00

1,307.50

1,360.00

4,012.50

Budgeted net operating income $ 8,035.00 $ 7,402.50 $ 8,288.00 $ 23,725.50 PB8−3 Req. 1 Budgeted sales revenue (from Req. 1 of PB 8-1)

April May June 2nd Quarter $ 14,000 $13,000 $ 14,400 $ 41,400

Cash collections (60% of budgeted sales) $ 8,400 $ 7,800 $ 8,640 $ 24,840 Credit collections (40% of budgeted sales) 50% collected in month of sale (40% x 50% x current month sales)

2,800

2,600

2,880

8,280

50% collected in month following sale (40% x 50% x previous month sales)

3,400*

2,800

2,600

8,800

Budgeted cash receipts $14,600 $13,200 $14,120 $41,920 *Credit collections from March sales = 850 units x $20 = $17,000 x 40% x 50% = $3,400 Req. 2 Budgeted raw material purchases (from PB 8-1 Req. 3)

April May June 2nd Quarter $ 818.64 $ 824.88 $ 917.04 $ 2,560.56

Cash disbursements: Raw material purchases

60% paid in the month of purchase (Current month purchases x .60)

$ 491.18

$ 494.93

$550.22

$1,536.34

40% paid in the following month (Prior month purchases x .40)

320.00*

327.46

329.95

977.41

Direct labor (from PB 8-1 Req. 4)

2,740.00

2,684.00

3,012.00

8,436.00

Manufacturing overhead (from PB 8-1 Req. 5)

1,024.00

1,018.40

1,051.20

3,093.60

Less: Depreciation (given) - 280.00 - 280.00 - 280.00 - 840.00 Selling and administrative expenses (from PB 8-1 Req. 7)

1,345.00

1,307.50

1,360.00

4,012.50

Cash paid for equipment 15,000.00 - - 15,000.00 Total budgeted cash payments

$20,640.18

$5,552.29

$6,023.37

$32,215.85




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

April May June 2nd Quarter $12,200.00 $10,159.82 $13,807.53 $12,200.00

Plus: Budgeted cash receipts 14,600.00 13,200.00 14,120.00 41,920.00 Less: Budgeted cash payments (20,640.18) (5,552.29) (6,023.37) (32,215.84) Preliminary cash balance $6,159.82 $17,807.53 $21,904.16 $21,904.16 Cash borrowed (repaid) $4,000.00 $(4,000.00) - - Ending cash balance $10,159.82 $13,807.53 $21,904.16 $21,904.16 PB8−4 Req. 1 January February March 1st Quarter Sales (units) 8,000 7,400 8,700 24,100 x Unit sales price x $ 30 x $ 30 x $ 30 x $ 30 Budgeted Sales $240,000 $222,000 $261,000 $723,000 Req. 2 January February March 1st Quarter Sales (units) 8,000 7,400 8,700 24,100 + Ending finished goods inventory (25% of next month’s sales)

1,850

2,175

2,375

2,375

- Beginning finished goods inventory (25% of current month’s sales)

- 2,000

- 1,850

- 2,175

- 2,000

Budgeted production 7,850 7,725 8,900 24,475 Req. 3 January February March 1st Quarter Budgeted Production 7,850 7,725 8,900 24,475 x Material requirements per unit x 1 x 1 x 1 x 1 Total material required for production

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

+ Ending raw materials (30% of

following month’s production needs)

2,318**

2,670 2,824*

2,824

- Beginning raw materials (30% of

current month’s production needs)

- 2,355

- 2,318 - 2,670

- 2,355

Budgeted raw material purchases 7,813 8,077 9,054 24,944 x Cost per heating element x $1.25 x $1.25 x $1.25 x $1.25 Budgeted raw material cost $ 9,766 $10,096.25 $11,317.50 $ 31,180.00 * April production = 9,500 + (.25 x 9,150) – (.25 x 9,500) = 9,413 (rounded) March ending raw materials inventory = 9,413 x 1 x 30% = $2,824 (rounded) ** Rounded




Req. 4 January February March 1st Quarter Budgeted production 7,850 7,725 8,900 24,475 x Direct labor hours per unit x .5 x .5 X .5 x .5 Direct labor requirements 3,925 3,862.50 4,450 12,237.50 x Average labor rate x $18.00 x $18.00 x $18.00 x $18.00 Budgeted direct labor cost $70,650.00 $69,525.00 $80,100.00 $220,275.00 PB8−5

Req. 1 Budgeted Manufacturing Costs Per Unit Direct materials ($3.25 + 1.25) $ 4.50 Direct labor (.5 hrs x $18.00) 9.00 Variable manufacturing overhead 1.00 Fixed manufacturing overhead ($96,900 / 102,000 units) 0.95 Total budgeted mfg cost per unit $15.45 January February March 1st Quarter Sales (units) 8,000 7,400 8,700 24,100 x Budgeted manufacturing cost per unit x $15.45 x $15.45 x $15.45 x $15.45 Budgeted cost of goods sold $123,600 $114,330 $134,415 $372,345 Req. 2 January February March 1st Quarter Budgeted sales revenue $240,000 $222,000 $261,000 $723,000 x Variable selling and administrative rate (5% of budgeted sales revenue)

x 5%

x 5%

x 5%

x 5%

Variable selling and administrative expenses

12,000

11,100

13,050

36,150

+ Fixed selling and administrative expenses ($17,500)

17,500

17,500

17,500

52,500

Budgeted selling and administrative expenses

$ 29,500

$ 28,600

$ 30,550

$ 88,650

Req. 3 January February March 1st Quarter Budgeted sales revenue $240,000 $222,000 $261,000 $723,000 Budgeted cost of goods sold 123,600 114,330 134,415 372,345 Budgeted gross profit 116,400 107,670 126,585 350,655 Budgeted selling and administrative expenses

29,500

28,600

30,550

88,650

Budgeted net operating income $ 86,900 $ 79,070 $ 96,035 $262,005




PB8-6

Quarter 1 Quarter 2 Quarter 3 Quarter 4


Budgeted sales price $ 20.00 $ 20.00 $ 20.00

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

Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4


Plus: Planned ending inventory

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

Less: Planned beginning inventory

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

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

Cost of merchandise $ 8.00 $ 8.00 $ 8.00

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

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


Budgeted cost of merchandise $ 8.00 $ 8.00 $ 8.00

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

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


Variable selling expenses $ 150,000 $ 210,000 $ 135,000

Fixed administrative expenses $ 60,000 $ 60,000 $ 60,000

Budgeted selling and adm. expenses $ 210,000 $ 270,000 $ 195,000

Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4


Less: Budgeted cost of goods sold 400,000 560,000 360,000

Budgeted gross margin $ 600,000 $ 840,000 $ 540,000

Less: Budgeted selling and adm. expenses 210,000 270,000 195,000

Budgeted net operating income $ 390,000 $ 570,000 $ 345,000




ANSWERS TO SKILLS DEVELOPMENT CASES

S8−1 Student answers to this case will vary depending on the size and type of organization they choose to investigate. It is important that students examine the process from multiple perspectives and attempt to balance any dissatisfaction with the needs of other individuals and of the organization as a whole. Also, any recommendations should be considered from other perspectives and not just from the perspective of a single dissatisfied party. For example, a student who recommends a participative budgeting process be implemented should also consider any consequences that might result from this change. S8−2 This case offers a chance for considerable in-class discussion and is an opportunity for instructors to pull a managerial accounting topic into students’ everyday lives. Other tools that could be introduced during discussion include estimates of the time it takes to pay off credit cards and calculating payment amounts in commonly-used software such as Microsoft Excel.

Solutions Chapter 8

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Transcript of Solutions Chapter 8