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Test bank to chapter 8 solutions, 4e
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SOLUTION - CHAPTER 8: STRATEGY AND THE MASTER BUDGET
CHAPTER 8: STRATEGY AND THE MASTER BUDGET
QUESTIONS
8-1Compel strategic planning and facilitate implementation of strategic plans. An organizations strategy, strategic plans, and budgets are interrelated. Preparing budgets compels reviews of an organizations strategy and its strategic plans and can facilitate implementations of the strategic plan. Feedback from budgets often results in improvements to an organizations strategy and strategic plan.
Serve as a basis for performance evaluation. Budgets serve as the benchmark against which actual performance can be compared. Budgets are a better basis for judging performance than past performance for two reasons. First, budgeted amounts take into account expected changes and improvements in the environment. Second, past performance is a result of past events and operations and may not be suitable to serve as a benchmark. To the extent past performance was not effective/efficient it does not make sense to use this as the standard against which actual performance is compared.
Motivate managers and employees. Budgets, if internalized, serve as goals for managers and employees and, if properly implemented, can motivate them toward achievements of the goals.
Promote coordination and communication within the organization. Budgets compel managers to think of interdependencies and interrelationships among subunits of the organization. A budget is also a communication device that helps all employees and managers understand and accept the organizations objectives and expected roles and contributions over the coming period.
Authorization to act. The approved budget, particularly in a not-for-profit setting, gives the manager authorization to act (make decisions, etc.).
Other benefits include serving as a basis for resource allocation, aiding cash-flow management, and providing authorization documentation.
8-2An organizations strategic plan describes how the organization matches its strengths and weaknesses with the opportunities and threats in the marketplace in order to accomplish its long-term goals (e.g., achieve sustainable competitive advantage). It is the guideline for the firms short-term and long-term operations. A strategic plan may extend over several budget periods (e.g., years) covered by a master budget.
A master budget is a comprehensive operational plan of action for the coming year. It includes both operating budgets and financial budgets and culminates in a set of forecasted (i.e., pro-forma) financial statements (cash flow, income statement, and balance sheet). The strategic plan of a firm guides, in a general sense, the determination of the master budgets prepared annually by the organization. Specialized consulting companies now provide software that can be used to integrate master budgets with strategic plans as part of a comprehensive performance management system. (See, for example, Geac, at www.performance.geac.com.)
8-3A master budget is a comprehensive plan of action for an organization for a future period while a capital budget is an investment (and financing) plan for a major project or program that has long-range effects on operations. As indicated in text Exhibit 8.3, resources specified in the capital budget of the current period are included in the master budget of the period.
8-4A master budget is a comprehensive plan of action for a future period; as such, the master budget includes both operating and financial budgets. An operating budget consists of plans regarding revenues and resource acquisition/use across all major operating areas of the organization (e.g., sales, production, purchasing, marketing, research and development, and general administrative activities). The set of operating budgets culminates in a budgeted income statement. Financial budgets relate to sources and uses of funds for an upcoming period. The set of financial budgets culminates in a budgeted cash flow statement and budgeted balance sheet.
8-5Successful budgeting systems typically:
have full support by one or more key managers in the organization
become personalized budgets of the people who have the responsibility for carrying them out; as such, they serve an important motivational function
are perceived by managers and employees as planning and coordinating tools, not pressure devices or mechanisms designed to stifle creativity and opportunity
are not viewed as a basis for placing blame.
provide for a two-way flow of information in the budget-preparation process
include budgets that are highly achievable
8-6The budget committee of an organization is the highest authority in the organization for all matters related to the budget. The committee sets or approves the overall budget goals for the organization and its major business units, directs and coordinates budget preparation, resolves conflicts and differences that may arise during the budget-preparation process, approves the final budget, monitors operations as the year unfolds, and reviews operating results at the end of the period. The budget committee also approves major revisions of the budget during the period.
8-7No, these terms are not synonymous. The term sales forecast refers to estimated sales volume for an upcoming period. As such, the sales forecast is generally the starting point in preparing the sales budget for the period. The term sales budget refers to forecasted sales dollars for an upcoming period.
Alternatively, rather than focusing on the difference between sales volume and sales dollars, some writers distinguish between these two terms on the basis of the level of control: we use the term sales forecast to refer to both units and dollars because, unlike costs, these elements are affected by external (e.g., competitor actions) as well as internal factors (e.g., product promotion expenditures).
8-8The sales budget is often regarded as the cornerstone in the master budget because all operating activities in a business emanate from efforts to attain the level of sales specified in the sales budget. A firm can complete the plan for other activities of a period only after it knows the expected sales levels for the current and the immediate future periods. A manufacturing firm, for example, cannot complete its production schedule for the upcoming period without knowing the number of units it must produce for each of its products. The firm can ascertain the number of units to be produced only after it knows both forecasted sales and the desired ending inventory. The units to be produced, in turn, affect many other activities of the firm including amount and kinds of materials to be purchased, number of employees to be hired, levels of factory overhead, and selling and administrative expenses.
8-9When sales volume is seasonal in nature, the three most significant items to coordinate are: production volume, finished goods inventory, and sales volume.
8-10Additional factors include:
beginning and desired ending inventories of work-in-process and finished goods
the required material inputs (in lbs., liters, etc.) for each product
beginning and desired ending inventories of direct materials
the cost of materials (per lb., liter, etc.)
8-11The two factors that determine the amount of factory overhead for a period are management decision and planned production volume. The former refers to capacity-related (i.e., fixed overhead) costs while the latter refers to the planned utilization of that capacity (i.e., variable overhead costs).
8-12 A cash budget generally includes three major components:
Cash available (i.e., beginning cash balance plus budgeted cash receipts)
Cash disbursements (other than interest expense), and
Financing activity (new financing, repayment of principal, and interest expense)
8-13 The following are some of the similarities between cash budgets and cash-flow statements required by GAAP:
Both include sources and uses of funds
Both are prepared for a period of time
Neither includes any non-cash revenues and expenses
Among differences between these two statements are:
A cash-flow statement reports the results of past activities while a cash budget describes effects of planned operations.
A firm needs to follow GAAP in preparing cash-flow statement while the guiding principle for preparing a cash budget is relevance and usefulness to management.
The major categories of cash-flow statements are operating, financing, and investing activities. Each of these categories may include both sources and uses of cash. The major categories of cash budgets are cash available, cash disbursements, and financing. Both cash available and cash disbursements may include cash from either operating or investing activities.
8-14In comparison with manufacturing organizations, unique budget characteristics of service organizations include:
absence of production and materials purchases budgets
emphasis on workforce planning
8-15In contrast to business firms (i.e., for-profit entities), a not-for-profit organization:
has no single bottom-line amount such as operating income
is more likely to use its budgets as the source of authorization for its activities
limits the total amount in the budget to the expected total revenues (Federal budgets are exceptions)
8-16Zero-base budgeting (ZBB) is a budgeting process that requires managers to prepare budgets each period from ground zero for all operations.
A typical budgeting process is incremental in nature. That is, budgets for the upcoming period start from the approved budgets for the current period, with amounts added to reflect planned changes for the upcoming period. Thus, traditional budgets assume that most, if not all, of the current activities and functions will continue into the coming budget period. In contrast, a zero-base budgeting process allows no activities or functions to be included in the budget unless managers can justify their need. Pure forms of ZBB are expensive and time-consuming. For this reason, some companies have partial ZBB systems.
A number of companies (e.g., Xerox, Texas Instruments) and government organizations (e.g., State of Georgia) have at one time or another used ZBB.
8-17No. Kaizen budgeting is a budgeting approach that explicitly incorporates continuous improvement standards/expectations in the approved budgets.
In contrast, activity-based budgeting (ABB) is a budgeting process that relies on the costs of activities and activity-cost drivers to prepare budgets. In other words, ABB develops master budget data using the organizations activity-based cost (ABC) system. Thus, ABB begins by quantifying products and services to be produced for an upcoming period. These forecasts are then used to estimate the amount of activities, across the internal value chain, that are needed to meet forecasted output (products or services). The budgeting process is completed by assigning estimated resource costs to the specified activities. Both American Express and AT&T Paradyne provide examples of actual implementation of ABB systems. See, Player, S. & Keys, D. E. (eds.), Activity-Based Management: Arthur Andersens Lessons from the ABM Battlefield. New York: John Wiley & Sons, 1999.
8-18Budgetary slack, or "padding" the budget, is the practice of knowingly including a higher amount of expenditure in the budget (or lower amount of revenue) than managers actually believe should be the case. One reason that it is common to find slacks in budgets is the desire of managers to use such slack as a cushion for unpredictable/uncontrollable future events (e.g., worker attrition, machine breakdowns/malfunctions). Another reason is the increased recognition or reward that might accrue to those who beat their budget target. Finally, managers may believe that the budgets they submit will be cut in the budget negotiation process. Therefore, such managers must pad their budgets in order to secure the amount of resources they feel they actually need.
8-19A highly achievable budget has a target that is achievable by most managers most of the time (e.g., 80 to 90 percent of the time). In a study by Merchant (1990), the author finds that a budget with a highly achievable target serves well in the vast majority of organizational situations, especially when accompanied by extra rewards for performance exceeding the target.
Among the advantages of using a highly achievable budget target are the following:
1. Increasing managers' commitment to achieving the budget target.
2. Maintaining managers' confidence in the budget.
3. Decreasing organizational control cost.
4. Reducing the risk that managers will engage in harmful earnings-management practices or violate corporate ethical standards.
5. Allowing effective and efficient managers greater operating flexibility.
6. Improving predictability of earnings or operating results.
7. Enhancing the usefulness of a budget as a planning and coordinating tool.
8-20Participative budgeting is a bottom-up approach that involves everyone in the budget-preparation processfrom low-level workers all the way to the top managers of the organization. The principal idea is to have employees/managers internalize (i.e., take ownership of) the budgets that are prepared.
For participative budgeting to be effective, top management needs to be actively involved. Furthermore, top management should institute incentives to guard against excessive budget padding, and encourage the generation of accurate budgetary projections. Finally, top managers may have to serve as arbiters when irreconcilable differences occur in the budget preparation process.
BRIEF EXERCISES
8-21
Q2 Q3
Sales200716,00015,000
Projected % increase for 2008 25% 25%
Estimated Sales Volume2008 20,00018,750
x Estimated Unit Selling Price2008 $4.00$4.00
Estimated Sales Dollars2008$80,000$75,0008-22
Payment history:
% paid in month of purchase: 25%
% paid in month following month of purchase: 75%
Expected Cash Disbursements:
February: ($5,500 x 0.75) + ($6,500 x 0.25) =
$5,750
March: ($6,500 x 0.75) + ($8,000 x 0.25) =
$6,8758-23
Number of units produced in Qtr. 1:
Ending inventory of DM (in lbs.) = 50,000
Target ending inventory % = 25% of following months production requirements
Therefore, RM used for production in Qtr. 1 = 50,000/0.25 = 200,000 lbs.
Units produced in Qtr. 1 = lbs. of RM used/lbs. of RM per unit of output = 200,000/8 = 25,000 units
DM requirements (in lbs.), Qtr. 2 = Planned production, Qtr. 2 x DM lbs./unit
= (25,000 units x 1.10) x 8 lbs./unit
= 27,500 units x 8 lbs./unit
= 220,000 lbs.8-24Scheduled Production, Quarter 2:
Units required to meet estimated sales, Qtr. 2 =12,000 units
Units required to meet targeted ending inventory:
15,000 units x 10% =
1,500 units
Total units needed
13,500 units
Less: Beginning inventory, Qtr.2 (12,000 units x 10%) = 1,200 units
Scheduled production, Quarter 2 =12,300 units8-25Current level of monthly operating costs = $10,000:
Estimated operating costs, January = $10,000 x 0.991 =$9,900
Estimated operating costs, June = $10,000 x 0.996 = $9,415
Estimated operating costs, December= $10,000 x 0.9912 =$8,864
8-26Collection of Credit SalesNovember:
30% of Credit Sales made in October = 0.30 x $30,000 =
$9,000
70% of Credit Sales made in November = 0.70 x $24,000=
$16,800
Total Estimated Collections--November
=
$25,800
Collection of Credit SalesDecember:
30% of Credit Sales made in November = 0.30 x $24,000 =
$7,200
70% of Credit Sales made in December = 0.70 x $20,000 =
$14,000
Total Estimated Collections--December
=
$21,2008-27Collection of Credit SalesDecember:
From credit sales made in November = 0.20 x $90,000=$18,000
From credit sales made in December:
= (0.75 x $100,000) x 0.98=$73,500
Total Estimated CollectionsDecember
= $91,5008-28Estimated interest expenseApril = borrowing in April x (annual rate/12)
= [($30,000 - $18,000) + $1,000] x (0.12/12)
= $13,000 x 0.01 = $130.00
Note that, strictly speaking, to maintain a minimum cash balance of $30,000, the company would have to borrow an extra $1,000 to be able to cover the interest payment (eom) and still have at least $30,000 of cash.
Estimated financing transactionsMay:
Interest expense (paid eom): $13,000 x 0.01 = $130
Principal repayment:
Beginning-of-month cash balance
= $18,000 + ($13,000 - $130) = $30,870
Plus: net cash flow in May, prior to financing
= $22,000
Cash balance prior to financing transactions
=$52,870
Less: interest expense (eom) for May
($130)
Less: minimum cash balance requirement
= ($30,000)
Cash available for principal repayment = $22,740
Rounded down to nearest $1,000
= $22,000
Total financing transactionsMay
=$22,130
8-29DM purchases, December = (DM issued to production + ending DM inventory) - beginning DM inventory
= ($150,000 + $39,500) - $37,000 = $152,5008-30Total estimated marketing expenses, 4th quarter:
Variable costs = $0.05/unit x (4,000 units x 1.10)
= $0.05/unit x 4,400 units =
$220
Fixed costs:
Salaries = $10,000
Depreciation =$5,000
Insurance =$2,000$17,000
Total estimated marketing expenses, 4th quarter
$17,220
Less: non-cash charges:
Depreciation expense$5,000
Estimated cash payments for marketing expenses
$12,220EXERCISES
8-31 What-If Analysis (20 Minutes)
1.The term what if analysis is one example of the more general term sensitivity analysis and is used to explore the effects (e.g., on a decision or a budget for an upcoming period) of different marketing, production, or selling strategies (e.g., the effect on revenues of lowering product selling prices, the profit-effect of using a different sales-promotion plan). That is, a what-if analysis examines how a result will change if the original (base-line) data are not achieved or, as in the present case, if an underlying assumption (viz., rate of bad-debts expense) changes.
2.
3.Managers today work in a world of uncertainty. One way to cope with uncertainty in the master budgeting process is to model the underlying relationships associated with the various budgets that are prepared and then to perform sensitivity analysis. One form of sensitivity analysis is the what-if analysis described above. For Tyson Company, this type of analysis can help the firm decide whether it might need to implement a more restrictive credit-granting policy and, if so, how much it might be willing to spend in this regard. 8-32Behavioral Considerations (15 Minutes)
There are at least two issues here. One is the failure to take advantage of all the cash discount included in the sales term. (In this regard, see Exercise 8-37.) The other is the constant occurrence of rush orders, last-minute changes, and other operating emergencies that require the purchasing department to do last minute purchases.
Janet needs to ensure that the Accounting Department records all purchases at the net price whenever a purchase is made with cash discounts included in the sales terms. Any additional amount that the firm has to pay because of the failure to make the payment within the payment terms should be charged to the finance department as a loss and not treated as an adjustment to the cost of purchase.
The firm needs to be very clear in its operating procedures about the minimum amount of time required for purchases. Any additional acquisition cost because of rush orders, last-minute changes, or operating emergencies should be borne by the department making the request.
8-33Budgetary Slack and Zero-Based Budgeting (ZBB) (20 minutes)
1. Budgetary slack is a planned difference between budgeted revenue and expected revenue, and/or budgeted expenditures and expected expenditures. Budgetary slack describes the tendency of managers to under-estimate revenues and over-estimate expenditures during the budgetary process in order to build in allowances (cushions) for unexpected declines in revenue and/or unforeseen expenses. Budgetary slack occurs because of conflicts between the personal interests of a manager and the interests of the organization. These conflicts include pressure from top management to achieve budgets and the desire on the part of the manager to look favorable in the eyes of top management.
2. a. From the point of view of the business unit manager, budgetary slack provides:
performance that will look better in the eyes of their superiors
a coping mechanism regarding uncertainty
a way to obtain what is needed since initially submitted budgets tend to be cut during the budget-negotiation process
However, the use of budgetary slack limits the objective evaluation of a business unit and, therefore, limits the objective evaluation of the performance of the unit manager. It also becomes more difficult for the business unit manager to evaluate the performance of subordinates and to use the budget as a control mechanism over subordinate performance.
b. From the perspective of corporate management, the use of budgetary slack increases the probability that budgets will be achieved. This increased probability facilitates the overall corporate budgeting process. Corporate management may also allow budgetary slack as a form of reward to managers for previous good performance.
However, from the point of view of the business unit management, the use of budgetary slack increases the likelihood of inefficient allocation of scarce resources, and decreases the ability to identify potential weaknesses or trouble spots in operating activities.
8-33 (Continued)3. a. Zero-based budgeting (ZBB) is a budgeting technique that evaluates all proposed operating and administrative expenditures as though they were being initiated for the first time. Each manager must evaluate the proposed expenditure for each activity to be undertaken during the upcoming budget period, investigate alternative means of conducting each activity, and rank expenditures in order of perceived importance.
b. Atlantis Laboratories could benefit from ZBB as each of the business unit managers would be required to identify and justify all proposed expenditures for the upcoming year. This increased evaluation of expenditures would make it difficult to include budgetary slack in the budget for the upcoming year and likely uncover opportunities of cost savings and operational improvements.
c. The biggest disadvantage of ZBB is the significant amount of time and cost involved in its implementation. In addition, the concept of zero-based budgeting may be difficult for management to learn and accept. Atlantis must be sure that the benefits of ZBB outweigh the associated costs.
8-34Budgeted Cash Disbursements (25 minutes)
1. Budgeted cash payments for merchandise purchases:
a. February:
25% x $100,000 =$25,000
75% x $120,000 =$90,000$115,000
b. March:
25% x $120,000 =$30,000
75% x $110,000 =$82,500$112,500
2. Budgeted cash payments for merchandise purchases:
a. February:
25% x $100,000 x 0.98 = $24,500
75% x $120,000 x 0.98 =$88,200$112,700
b. March:
25% x $120,000 x 0.98 =$29,400
75% x $110,000 x 0.98 =$80,850$110,250
3. The financial cost of not taking advantage of the early-payment discount can be approximated by the following formula:
Opportunity cost (%) = [discount %/(1 - discount %)] x [365/no. of extra
days allowed if discount is not taken]
= [0.02/(1 - 0.02)] x [365/20] = 0.020408 x 18.25 = 37.25%
Basically, if you choose not to take the early-payment discount, you are giving up a 2% discount (on the net amount) in return for an extra 20 days in which to pay. There are 18.25 (365/20) 20-day periods in a year. Note that in the first term of this formula we divide the 2% discount rate by 98% (1 - 2%) because, in effect, you are paying 2% to delay for 20 days paying 98% of the total bill. So, the percentage rate you are paying in this case is really 2.0408% of the net bill (the bill without financing cost). Regardless of the technicalities here, students should understand that the opportunity cost of not taking advantage of the early-payment (cash) discount can be very significant, as is the case here. For this reason, firms record purchases at net cost and any discounts lost as interest expense.
8-35Budgeted Cash Receipts and Disbursements (20 minutes)
1. Budgeted Cash Receipts:
November:
($100,000 x 0.95) x 0.35 x 0.80 x 0.98=$26,068
($100,000 x 0.95) x 0.35 x 0.20 = $6,650
($150,000 x 0.95) x 0.65 x 0.80 x 0.98=$72,618
($150,000 x 0.95) x 0.65 x 0.20=$18,525$123,861
December:
($150,000 x 0.95) x 0.35 x 0.80 x 0.98=$39,102
($150,000 x 0.95) x 0.35 x 0.20=$9,975
($ 90,000 x 0.95) x 0.65 x 0.80 x 0.98=$43,571
($ 90,000 x 0.95) x 0.65 x 0.20=$11,115$103,763
2. Budgeted Cash Disbursements:
November:
($170,000 x 0.75) x 0.25 =$31,875
($270,000 x 0.75) x 0.75=$151,875$183,750
December:
($200,000 x 0.75) x 0.25=$37,500
($170,000 x 0.75) x 0.75=$95,625$133,1258-36Production and materials purchases budgets (20 minutes)
Production Budget:
2nd Quarter3rd Quarter
Budgeted sales38,00034,000
Desired ending inventory (10%)+ 3,400 + 4,800
Total units needed41,40038,800
Beginning inventory 3,800 3,400
Total units to produce37,60035,400
Budgeted Purchases of Direct Materials for the Second quarter:
2nd Quarter3rd Quarter
Budgeted production37,60035,400
Direct materials per unitx 3 x 3
Direct materials needed in production112,800106,200
Desired ending inventory of direct materials
(20% of 106,200)+ 21,240
Total direct materials needed134,040
Beginning inventory of DM (20% of 112,800) 22,560
Budgeted purchases of direct materials (lbs.)111,4808-37 Purchase Discounts on Credit Purchases (20 minutes)
The financial cost of not taking advantage of the early-payment discount for purchases made on credit can be approximated by the following formula (we use the term approximate here to denote the fact that the estimate below does not assume compounding of interest and as such provides a conservative estimate):
Opportunity cost (%) = [discount %/(1 - discount %)] x [365/no. of
extra days allowed if discount is not taken]
1.In the case of 2/10, n/30, the approximate economic cost of not taking advantage of the early-payment discount is:
= [0.02/(1 - 0.02)] x [365/20] = 0.020408 x 18.25 = 37.25%
Basically, if you choose not to take the early-payment discount, you are giving up a 2% discount (on the net amount) in return for an extra 20 days in which to pay. There are 18.25 (365/20) 20-day periods in a year. Note that in the first term of this formula we divide the 2% discount rate by 98% (1 - 2%) because, in effect, you are paying 2% to delay for 20 days paying 98% of the total bill. So, the percentage rate you are paying in this case is really 2.0408% of the net bill (the bill without financing cost).
2. In the case of 1/10, n/30, the opportunity cost of not taking advantage of the early-payment cash discount is:
= [0.01/(1 - 0.01)] x [365/20] = 0.010101 x 18.25 = 18.43%3. Given the significant opportunity cost of not taking advantage of early-payment cash discounts, good accounting practice would be to record purchases at their net-of-discount amount and then to record as interest expense or purchase discounts lost any cash discounts not taken advantage of. 8-38Production and materials budgets--process costing (20 minutes)
1.Budgeted Production (XPL30):
Units Budgeted sales
480,000
Budgeted finished goods ending inventory (June 30, 2008) + 50,000Total number of units needed
530,000
Less: Budgeted finished goods beginning inventory
80,000Budgeted production (units)
450,0002.Units of XPL30 to Start into Production:
Budgeted production (from (1) above)
450,000
Budgeted WIP ending inventory (June 30, 2008) + 20,000
Total number of units needed
470,000
Less: Budgeted WIP beginning inventory (July 1, 2007) 10,000
Total units of XPL30 to start into production
460,0003.Raw Materials Purchases Budget:
Units of XPL30 to start into production (from (2) above)
460,000
Units of raw materials needed per unit of XPL30 x 2Total raw materials needed for production 920,000
Budgeted raw materials ending inventory (June 30, 2008)+ 50,000Total number of units of raw materials needed
970,000
Budgeted raw materials beginning inventory (July 1, 2007) 40,000Total units of raw materials that must be purchased
930,0004. While the timing of the addition of materials would affect the calculation for number of equivalent units produced, number of equivalent units in the ending WIP inventory, and the raw materials cost per equivalent unit, it will have no impact on the budgeted purchases of materials for the period.
8-39 Cash Budget--Financing Effects (20 minutes)
Hartz & Co.
Cash Budget
For November and December, 2007
November DecemberCash balance, beginning$75,000$99,500
Plus: Cash receipts$525,000$450,500Total cash available (A)$600,000$550,000Cash disbursements, prior to financing (B)$450,000$550,000
Plus: Minimum cash balance (given)$50,000$50,000Total cash needed (C) $500,000$600,000Excess (deficiency of) cash, before
financing (C) = (A) - (B)$100,000($50,000)
Financing:
Short-term borrowing-0-
$51,000
Repayments (loan principal)($50,000)-0-
Interest (@12%) ($500)($510)Total Effects of Financing = (E)($50,500)$50,490Ending cash balance = (A) - (B) + (E)$99,500$50,490
8-40Cash budget (10-15 minutes)
Cash Available
Cash balance, beginning
$ 10,000
Cash collections from customers
+ 150,000
Total cash available
$160,000
Cash Disbursements
Direct materials purchases $ 25,000
Operating expenses $50,000
Less: Depreciation expenses - 20,00030,000
Payroll 75,000
Income taxes
6,000
Machinery purchase + 30,000
Total cash disbursements prior to financing
$166,000
Financing:
Cash excess (shortage) before financing
($ 6,000)
Minimum cash balance desired - 20,000
Financing need
$26,000
8-41Cash budget (15 minutes)
Cash Available:
Cash balance, beginning (given)
$ 6,000
Cash collections from customers (given)
+ 175,000
Total cash available
$181,000
Budgeted Cash Disbursements, 2007:
Payroll $160,000
Other operating expenses $18,000
Less: Property taxes (see below)- 3,000
Less: Depreciation expense - 5,000
Cash operating expenses
10,000
Property taxes:
2nd half of 2006 (0.50 x $2,500) $1,250
1st half of 2007 (0.50 x $3,000) 1,5002,750
Payment for office equipment + 6,000
Total cash disbursements, prior to financing
$178,750
Financing:
Cash balance before financing
$2,250
No, the cash budget shows that Bill will not be able to meet the minimum cash balance requirement of $6,000. As such, borrowing (or some other source of financing) must occur in order to meet the minimum cash requirement. 8-42Cash Budgeting: Not-for-Profit Context (30 minutes)
1. Endowment fund: a gift (contribution) whose principal must be maintained but whose income may be expended. (You might use the example of an endowed professorship as an example.)
2.
Cash Budget for Tri-County Social Service Agency
2007
(in thousands)
Quarters
I II III
IVYearCash Balance, beginning$11$8$8$8$11
Receipts:
Grants$80$70$75$75$300
Contracts$20$20$20$20$80
Mental Health Income$20$25$30$30$105
Charitable donations$250$350$200$400$1,200Total Cash Available$381$473$333$533$1,696Less: Disbursements:
Salaries and Benefits$335$342$342$346$1,365
Office expenses $70$65$71$50$256
Equipment purchases & maintenance$2$4$6$5$17
Specific assistance$20$15$18$20$73 Total disbursements$427$426$437$421$1,711Excess (deficiency) of cash available
over disbursements($46)$47($104)$112($15)Financing:
Borrow from endowment fund$54$0$112$0$166 Repayments$0($39)$0($104)($143) Total financing effects$54($39)$112($104)$23Cash Balance, ending$8$8$8$8$83. $23,000.
4. It is probable that both donations and requests for services are unevenly distributed over the year. The agency may want to increase requests for donations and seek additional grants.
5. No. Assuming there is careful fiscal management, borrowing only occurs when necessary.
8-43 Collection of Accounts Receivable (15-20 minutes)
1. Month Total % to be Collected Budgeted Cash
of Sale Credit Sales in October Collection In October
October $90,000 70% $ 63,000
September 80,000 15% 12,000
August
70,000 10%7,000
July
60,000 4% 2,400
Estimated Total Cash Collections in October
$84,4002.
Amount
Budgeted collection
Month of Credit % Collected in
in the 4th quarter from
of Sale Sales
Oct.Nov.Dec. sales in the 4th Quarter October $ 90,00070%
$ 63,000
15%
13,500
10%9,000
November 100,000 70%
70,000
15%15,000
December 85,000
70% 59,500
Total budgeted cash collections in the 4th quarter
from credit sales made in the 4th quarter
$230,0008-44
Accounts Receivable Collections and Sensitivity Analysis (45 minutes)
Original Assumptions/Data:
Actual credit sales for March$120,000
Actual credit sales for April$150,000
Estimated credit sales for May$200,000
Estimated collections in month of sale25%
Estimated collections in first month following month of sale60%
Estimated collections in the second month after month of sale10%
Estimated provision for bad debts in month of sale5%
1. Estimated cash receipts from collections in May:
Collection from sales in March (0.10 x $120,000)$12,000
Collection from sales in April (0.60 x $150,000)$90,000
Collection from sales in May (0.25 x $200,000)$50,000
Total estimated cash collections in May$152,000 2. Gross accounts receivable, May 31st:
From credit sales made in April (0.15 x $150,000)$22,500
From credit sales made in May (0.75 x $200,000)$150,000
Estimated gross accounts receivable, May 31st $172,500
3. Net accounts receivable, May 31st:
Gross accounts receivable, May 31st$172,500
Less: Allowance for uncollectible accounts:
From credit sales made in April$7,500
From credit sales made in May$10,000
Net accounts receivable, May 31st$155,000
4. Revised data/assumptions:
Actual credit sales for March$120,000
Actual credit sales for April$150,000
Estimated credit sales for May$200,000
Estimated collections in month of sale60%
Estimated collections in first month following month of sale25%
Estimated collections in the second month after month of sale10%
Estimated provision for bad debts in month of sale5%
8-44 (Continued)
a. Estimated cash receipts from collections in May:
Collection from sales in March (0.10 x $120,000)$12,000
Collection from sales in April (0.25 x $150,000)$37,500
Collection from sales in May (0.60 x $200,000)$120,000
Total cash collections in May$169,500 b. Gross accounts receivable, May 31st:
From credit sales made in April (0.15 x $150,000) $22,500
From credit sales made in May (0.40 x $200,000)$80,000
Gross accounts receivable, May 31st$102,500Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document.
5. The principal benefit is the accelerated receipt of cash, which the company can potentially employ to pay down debt, reduce borrowing, invest, etc. Principal costs would relate to whatever programs are needed to secure the accelerated collection of cash. These costs could include personal, travel, mailings, telephone, incentive programs, and costs related to customer relations.
8-45Budgeting: Not-for-Profit Sector (25 minutes)
1. Stewardship is defined by Merriam-Webster Online Dictionary as the conducting, supervising, or managing of something; especially: the careful and responsible management of something entrusted to one's care.
The Socially Responsible Investment Guidelines cited states: Although it is a moral and legal fiduciary responsibility of the trustees to ensure an adequate return on investment for the support of the work of the church, their stewardship embraces broader moral concerns. Also, the principles of stewardship lists two fundamental and interdependent principles: The Conference should exercise responsible financial stewardship over its economic resources. and The Conference should exercise ethical and social stewardship in its investment policy.
The latter states: Socially responsible investment involves investment strategies based on Catholic moral principles. These strategies are based on the moral demands posed by the virtues of prudence and justice. They recognize the reality that socially beneficial activities and socially undesirable or even immoral activities are often inextricably linked in the products produced and the policies followed by individual corporations. Given the realities of mergers, buyouts and conglomeration, it is increasingly likely that investments will be in companies whose policies or products make the holding of their stock a "mixed investment" from a moral and social point of view. Nevertheless, by prudently applying traditional Catholic moral teaching, and employing traditional principles on cooperation and toleration, as well as the duty to avoid scandal, the Conference can reflect moral and social teaching in investments.
2. These two major principles work together to encourage the Conference to identify investment opportunities that meet both our financial needs and our social criteria. These principles are carried out through strategies that seek: 1) to avoid participation in harmful activities, 2) to use the Conference's role as stockholder for social stewardship, and 3) to promote the common good.
3. No. (Reasons should vary.)
4. Yes.
8-46Budgeting Cash Receipts: Cash Discounts Allowed on Receivables (30 Minutes)
1. Breakdown of Cash/
Sales Data Amount
Bank Credit-Card Sales
June$60,000Cash sales40%
July$80,000Credit cards 60%
August$90,000
September$96,000Bank charges3%
October$88,000
Credit sales:
Collection of Credit Sales
Current month20%
Sales Breakdown and Terms
1st month
50%
Cash and bank credit card sales25%2nd month
15%
Credit sales 75%3rd month
12%
Terms 1/eom, n/45Late charge/mo. 2%
Sales % %Cash
September Total % Paid Collected Receipts
Cash sales$96,00025%40%
$ 9,600
Bank credit card sales$96,00025%60%97% $13,968
Collections of A/R:
September credit sales$96,00075%20%99% $14,256
August credit sales$90,00075%50%
$33,750
July credit sales$80,00075%15%
$ 9,000
June credit sales$60,00075%12%102% $ 5,508
Total Cash Receipts, September
$86,082 2. Appropriate accounting treatment for:
a) Bank service (collection) fees: these can be considered an offset to gross sales and thus can be reflected as a deduction in determining net sales (see text Exhibit 8.15). Alternatively, these amounts can be considered selling expenses and, as such, be treated as an operating expense, (i.e., an element of Selling and Administrative Expenses on the Income Statement).
b) Cash discounts allowed on collection of receivables: these can be considered a selling expense and, as such, would be included within the Selling and Administrative expense category on the Income Statement.
8-47Cash Discounts; Spreadsheet application (45 Minutes)Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object, then select Open
3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document below.
8-48 Activity-Based Budgeting (ABB) (20 Minutes)
1. Budgeted Cost
Activity Volume Driver Rate Total CostStorage400,000$0.4925 $ 197,000 Requisition Handling30,000$12.50 $ 375,000 Pick Packing800,000$ 1.50 $1,200,000 Data Entry800,000$ 0.80 $ 640,000
30,000$ 1.20 $ 36,000 Desktop Delivery12,000$30.00 $ 360,000 Total Budgeted Cost for the Division
$2,808,000 2. Average number of cartons/delivery
= 1,170,000 cartons ( 11,700 deliveries = 100 cartons/delivery
Total number of cartons budgeted for delivery in January 2007:
12,000 deliveries x 100 cartons/delivery = 1,200,000 cartons
Cost per carton delivered = $2,808,000 ( 1,200,000 = $2.34
Therefore, the total budgeted cost for the division remains the same at $2,808,000.
3.Expected saving in costsJanuary 2007:
Requisition Handling$ 375,000
Data Entry: number of lines 640,000
Data Entry: number of requisitions 36,000Expected Cost Savings, January 2007 =$1,051,000
If the firm uses a single cost-rate system based on the number of cartons delivered, the firm will not be able to estimate the savings without special efforts to gather additional information.
8-49Activity-Based Budgeting with Kaizen (40 Minutes)1.Unit-Level:Pick packing, Data entryLines
Batch-Level:Requisition handling, Data entryRequisitions,
Desktop delivery2.Cost driver rates:
Cost-Reduction Cost-Driver RatesActivityRate (per month)January FebruaryMarchRequisition Handling 98%$12.50$12.250 $12.0050
Pick Packing
99%$ 1.50$ 1.485$ 1.4702
Data EntryLines
99%$ 0.80$ 0.792$ 0.7841
Data EntryRequisitions98%$ 1.20$ 1.176$ 1.1525
Desktop Delivery
98%$30.00$29.400 $28.8120
Budgeted Costs:
Activity
Activity VolumeFebruary
MarchRequisition Handling
30,000$ 367,500$ 360,150
Pick Packing
800,000$1,188,000 $1,176,120
Data EntryLines
800,000 $ 633,600 $ 627,264
Data EntryRequisitions30,000 $ 35,280 $ 34,574
Desktop Delivery
12,000 $ 352,800 $ 345,744 Divisional Totals
$2,577,180 $2,543,852
3.Factors that may influence the success of a continuous improvement (Kaizen) program include:
Reasonable or achievable cost reductions.
Awareness of all employees on the expected (scheduled) cost improvements over at least the immediate future periods.
Acceptance by both management and employees.
Commitment of both management and employees on the strategic importance of the success of the continuous improvement program.
Close link between the scheduled improvements and performance evaluations and rewards.
Cost reductions possible from small, incremental improvements, not from large discontinuous changes in factors such as operating processes, capital equipment, supplier networks, or customer interactions.
8-49 (Continued)
4. Primary criticisms of Kaizen (continuous improvement) budgets include the following:
The budgeting process tends to place enormous pressure on employees to reduce all costs, which can lead to employee burnout.
The use of Kaizen budgets tends to motivate small, incremental rather than major/significant process improvements.
If the Kaizen targets are confined to the manufacturing function (including product and process design engineering), frictions can arise if manufacturing believes that other parts of the organization (e.g., marketing) are not subjected to the same budgetary pressure.
8-50Cash budget (30 minutes)
1. Total credit sales in November
$240,000
Percentage collectible
x _ 95%Total amount collectible from credit sales in November
$228,000
Percentage collected in the month following month of sales x 40%Budgeted collections in December from Nov. credit sales
$ 91,2002.Cash sales in January
$ 60,000
Collections from credit sales in January:
Total collectible from credit sales
$180,000 x 95% =
$171,000
Percentage to be collected in January x 60%$102,600
Collections from credit sales in December:
Total collectible from credit sales
$360,000 x 95% =
$342,000
Percentage to be collected in January
x 40% 136,800Budgeted total cash receipts in January
$299,4003. Total inventory purchases in November:
For November sales:$320,000 x 0.3 X 0.6 =$ 57,600
For December sales:$460,000 x 0.7 X 0.6 = 193,200$250,800
Percentage of Nov. purchases to be paid in December
x 75%
Payment in December for purchases in November
$188,100Budgeted purchases in December:
For December sales: $460,000 x 0.3 X 0.6 =$ 82,800
For January sales:
$240,000 x 0.7 X 0.6 = 100,800$183,600
Percentage of Dec. purchases to be paid in December
x 25%
Payment in December for purchases in December
$45,900Budgeted payment in December for inventory purchases $234,0008-51Budgeting for a Service Firm (60-75 minutes)Total hours for the budgeted activities:
Total
Hourly
Revenue
Rate Total
(Given)
(Given)Hours
Business return$1,000,000 $250 4,000
Complex individual return$1,200,000 $100 12,000
Simple individual return$1,640,000 $50 32,800
$3,840,000
Staff requirements for the budgeted activities:
Senior
Total Hours Partner Manager Consultant
Required Each Total Each Total Each Total Each TotalBusiness return4,000 0.301,2000.20 800 0.502,0000.000
Complex individual return12,000 0.05 600 0.15 1,800 0.404,8000.404,800
Simple individual return32,800 0.0000.00
00.206,5600.8026,240
Total Hours48,800 1,800
2,600 13,360 31,040
Hours per week
50
45
40
40
# of weeks needed
36
58
334
776
# of weeks per employee per year
40
45
45
48
# of employees needed
1
2
8
16
Excess (deficiency) hours
1,040
(320)
Note: Because Consultants can be hired on a part-time basis, we round the calculation DOWN for this class of labor. The other three labor classes are given (i.e., do not have to be planned for based on data in the problem).
8-51 (Continued)SOLUTION:
1. Since, according to the present staffing plan and anticipated workload needs, there is an excess of senior consultant hours, the budgeted cost for overtime hours worked by senior consultants would be $0.
2. Number of full-time consultants needed for the year:
Total number of consultant-weeks needed for the year =
776
Number of weeks per full-time consultant per year =
48
Number of full-time consultants needed per year =
16
3. The manager's total compensation, assuming that the revenues from preparing tax returns remains the same:
Annual Salaries:
Per partner =$250,000
Per manager =$90,000
Per senior consultant = $90,000
Per support staff =$40,000
Consultant's pay (assumed paid on an hourly basis):
Earnings per year =$60,000
Hrs. worked/year =1,920
Hourly pay rate =$31.25
Staffing Plan:
Partners =1
Managers =1
Senior consultants =8
Full-time Consultants =16
Support staff =5
Number of part-time (PT) hours, consultants =320
8-51 (Continued)AccuTax, Inc.
Budget Operating Income
Year ended August 31, 2007
Revenue
$3,840,000 Payroll expenses:
Partner
$250,000
Manager
$90,000
Senior consultantsbase pay
$720,000
Senior consultantspay for overtime hours
$0
Consultants:
Full-time$960,000
Part-time$10,000 $970,000
Support staff
$200,000 $2,230,000
General and administrative expenses
$373,000 Operating income before bonus to manager
$1,237,000
Less: manager's bonus
$73,700
Operating income before taxes
$1,163,300Total compensation for the manager:
Salary (given)
$90,000
Bonus (0.10 x [$1,237,000 - $500,000])
$73,700
Total
$163,700
Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select Worksheet Object, then Open.
3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-52 Budgetary Pressure and Ethics (20-25 minutes)
1.The use of alternative accounting methods to manipulate reported earnings is professionally unethical because it violates the Standards contained in the IMAs Statement of Ethical Professional Practice (see: www.imanet.org). The Competence standard is violated because of failure to perform duties in accordance with relevant accounting (technical) standards. It can probably be argued that the competence standard is also violated because the accountant is not providing information that is accurate. The Integrity standard is violated because the underlying activity would discredit the profession. The Credibility standard is violated because of failure to communicate information fairly and objectively.
2. Yes, costs related to revenue should be expensed in the period in which the revenue is recognized (matching principle). Perishable supplies are purchased for use in the current period, will not provide benefits in future periods, and should therefore be matched against revenue recognized in the current period. In short, the accounting treatment for supplies was not in accordance with generally accepted accounting principles (GAAP). Note that similar issues, but on an extremely large basis, occurred at WorldCom and at Global Crossing. In the case of the latter, the company was engaging simultaneously in contracts to buy and to sell bandwidth, treating the former as capitalized expenses and the latter as revenue for the current accounting period.
3.The actions of Gary Woods were appropriate. Upon discovering how supplies were being accounted for, Wood brought the matter to the attention of his immediate superior, Gonzales. Upon learning of the arrangement with P&R, Wood told Gonzales that the action was improper; he then requested that the accounts be corrected and the arrangement discontinued. Wood clarified the situation with a qualified and objective peer (advisor) before disclosing Gonzaless arrangement with P&R to Belcos division manager, Tom LinGonzaless immediate superior. Contact with levels above the immediate superior should be initiated only with the superiors knowledge, assuming the superior is not involved. In this case, however, the superior is involved. According to the IMAs statement regarding Resolution of Ethical Conduct, Wood acted appropriately by approaching Lin without Gonzaless knowledge and by having a confidential discussion with an impartial advisor.
PROBLEMS8-53Small business budgets (30 minutes)
1.Key features that need to be considered in developing a profit plan for a small business include:
Estimation of key factors such as revenues (sales demand, sales price) and expenses for the budget period.
Systematic evaluation of all available resources (materials, labor, technology) and their utilization rates.
Coordination of related functions or elements, such as scheduling production to meet sales forecasts or providing sufficient capacity to meet sales demand.
Critical evaluations of non-operational sources and uses of cash. Nonoperational items may pose a more serious threat to small businesses than to large businesses.
Greater control over monthly cash flows and short-term financing than may be necessary in large enterprises.
Greater needs for continuous budgeting than for large organizations, because of the higher risks associated with economic, competitive, and financial factors for small businesses.
2.The management accountant must exercise care to ensure that the small business manager does not suffer from information overload (i.e., strive for simplicity and parsimony). A profit-management system should be established that captures sufficient data on a timely basis to allow a reasonable level of operational control and evaluation without becoming too costly or too sophisticated for the business.
Many large enterprises may continue operations simply by inertia. With small businesses, a strategic plan linked to the master budget is critical, especially in the early stage of a products life cycle. The concepts of activity-based management (ABM), total quality management (TQM), logistics management, life-cycle and target costing, and constraints- management (e.g., Theory of Constraints) are essential for the long-run survival and growth of small businesses.
3.The management accountant can insist upon, and assist in the preparation of, continuous cash budgets. These cash-flow reports should identify the major operational and nonoperational sources and uses of cash, and point out the periods of potential cash shortages or surpluses. This will facilitate planning for short-term lines-of-credit financing and short-term investments.
A profit-management system should be created, utilizing the principles of activity-based costing (ABC) and cost-variance reporting including activity-based standard costing and activity-based cost variances. Segmented income statements comparing budgeted to actual results with profit-variance summaries should be an integral component of the high-quality profit-management system.8-54Ethics in Budgeting/Budgetary Slack (40 minutes)
1. a.The reasons that Marge Atkins and Pete Granger use budgetary slack include the following:
These employees are hedging against the unexpected (i.e., they use slack to deal with or reduce uncertainty and risk).
Budgetary slack allows employees to look good, (i.e., to exceed expectations and/or show consistent performance). This is particularly important when performance is evaluated on the basis of actual versus budgeted results.
Employees who are able to blend personal and organizational goals through budgetary slack and show good performance generally are rewarded with higher salaries, promotions, and bonuses.
By padding the budget, the manager is more likely to get what he/she actually needs in terms of resources for the upcoming period.
b. The use of budgetary slack can adversely affect Atkins and Granger by:
limiting the usefulness of the budget to motivate their employees to top performance
affecting their ability to identify trouble spots and take appropriate corrective action
reducing their credibility in the eyes of management
reducing the ability of top management to effectively allocate resources to organizational subunits on the basis of actual economic performance. For example, the use of budgetary slack may affect management decision-making, as the budgets will show lower contribution margins (lower sales, higher expenses). Decisions regarding the profitability of product lines, staffing levels, incentives, etc. could have an adverse effect on Atkins's and Granger's departments.
2.The use of budgetary slack, particularly if it has a detrimental effect on the company, may be unethical. In assessing the situation, the IMAs Statement of Ethical Professional Practice can be consulted (www.imanet.org). This statement notes that a commitment to ethical professional practice includes: overarching principles (expressions of core values) and a set of standards intended to guide actual conduct and practice.
8-54 (Continued)
The IMAs overarching PRINCIPLES include: Honesty, Fairness, Objectivity, and Responsibility. The list of STANDARDS includes the following: Competence, Confidentiality, Integrity, and Credibility. The following Standards could be referenced in conjunction with the use of budgetary slack, as described above: Competence: Provide decision support information and recommendations that are accurate, clear, concise, and timely.
Integrity: Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Credibility: Communicate information fairly and objectively; disclose all relevant information that could reasonably be expected to influence an intended users understanding of the reports, analyses, or recommendations. Though not asked for in the original CMA exam problem, you might want to discuss with students how, in practice, they would deal with ethical dilemmas. In its Resolution of Ethical Conflict statement the IMA provides the following guidance:
1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superiors knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law.
2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action.
3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
8-55 Master Budget (40-45 minutes)
1.The benefits that can be derived from implementing a master budgeting system include the following:
The preparation of budgets forces management to plan ahead and to establish goals and objectives that can be quantified.
Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the objectives of the entire firm.
The budgeting process promotes internal communication and coordination of subunit activities.
Budgets provide directions for day-to-day operations, clarify duties to be performed, and assign responsibility for these duties.
Budgets provide a framework for measuring financial performance.
A properly implemented budgeting system can motivate employees and managers to higher levels of performance, particularly if goals and outputs are linked through appropriate incentives.
Budgets allow managers to anticipate problem areas (e.g., cash short-falls) and opportunities (e.g., short-term investment of excess cash).
8-55 (Continued)
2. a & b: The basic intent here is to demonstrate the interrelationships that exist among budgets contained in the organizations master budget.
Subsequent
Schedule/StatementBudget Schedule/Statement
Sales BudgetProduction Budget
Selling Expense Budget
Budgeted Income Statement
Ending Inventory Budget (units)Production Budget
Production Budget (units)
Direct Materials Purchases Budget
Direct Materials Usage Budget
Direct Labor Budget
Factory Overhead Budget
Direct Materials BudgetCost of Goods Manufactured Budget
Direct Labor Budget Cost of Goods Manufactured Budget
Factory Overhead Budget Cost of Goods Manufactured Budget
Cost of Goods Manufactured Cost of Goods Sold Budget
Budget
Cost of Goods Sold Budget Budgeted Income Statement
Budgeted Balance Sheet
Selling Expense BudgetBudgeted Income Statement
Research & Development Budget
Budgeted Income Statement
Budgeted Income StatementBudgeted Balance Sheet
Capital Expenditures Budget
Cash Budget
Cash Receipts Budget
Cash Budget
Cash Disbursements Budget
Cash Budget
Cash Budget
Budgeted Balance Sheet
8-56Comprehensive Profit Plan (90 minutes)
1. Sales BudgetSpring Manufacturing Company
Sales Budget
2007
C12 D57 Total
Sales (in units) 12,000 9,000 21,000
x Selling Price Per Unit $150 $220
Total Sales Revenue $1,800,000 $1,980,000 $3,780,0002. Production Budget
Spring Manufacturing Company
Production Budget
2007
C12 D57
Budgeted Sales (in units)12,0009,000
+Desired finished goods ending inventory 300 200 Total units needed 12,3009,200
Beginning finished goods inventory 400 150 Budgeted Production (in units) 11,9009,0508-56 (Continued-1)3. Direct Materials Purchases Budget
Spring Manufacturing Company
Direct Materials Purchases Budget (units and dollars)
2007
C12 D57 Total Raw Material (RM) 1:
Budgeted Production11,9009,050
Pounds per Unitx 10x 8
RM 1 needed for production119,00072,400191,400
Plus: Desired Ending Inventory (lbs.)
4,000
Total RM 1 needed (lbs.)
195,400
Less: Beginning inventory (lbs.)
3,000
Required purchases of RM 1 (lbs.)
192,400
Cost per pound
$2.00
Budgeted purchases, RM 1
$384,800 Raw Material (RM) 2:
Budgeted Production11,9009,050
Pounds per Unitx 0x 4
RM 2 needed for production036,20036,200
Plus: Desired Ending Inventory (lbs.)
1,000
Total RM 2 needed (lbs.)
37,200
Less: Beginning inventory (lbs.)
1,500
Required purchases of RM 2 (lbs.)
35,700
Cost per pound
$2.50
Budgeted purchases, RM 2
$89,250 Raw Material 3:
Budgeted Production11,9009,050
Pounds per Unitx 2x 1
RM 3 needed for production23,8009,05032,850
Plus: Desired Ending Inventory (lbs.)
1,500
Total RM 3 needed (lbs.)
34,350
Less: Beginning inventory (lbs.)
1,000
Required purchases of RM 3 (lbs.)
33,350
Cost per pound
$0.50
Budgeted purchases, RM 3
$16,6758-56 (Continued-2)4. Direct Manufacturing Labor BudgetSpring Manufacturing Company
Direct Labor Budget
2007
C12 D57 Total
Budgeted production11,9009,050
Direct labor hours per unit x 2 x 3
Total direct labor hours needed23,80027,150 50,950
Hourly wage rate
$25.00Budgeted direct labor costs $1,273,7505. Factory Overhead BudgetSpring Manufacturing Company
Factory Overhead Budget
2007
Variable Factory Overhead:
Indirect materials $10,000
Miscellaneous supplies and tools 5,000
Indirect labor40,000
Payroll taxes and fringe benefits 250,000
Maintenance costs10,080
Heat, light, and power 11,000$326,080
Fixed Factory Overhead:
Supervision$120,000
Maintenance costs 20,000
Heat, light, and power43,420
Total Cash Fixed Factory Overhead$183,420
Depreciation71,330 $254,750
Total Budgeted Factory Overhead $580,8308-56 (Continued-3)6. Budgeted Cost of Goods SoldSpring Manufacturing Company
Ending Finished Goods Inventory and Budgeted CGS
2007
C12 D57 Total
Sales volume12,0009,00021,000
Cost per unit (Schedule 1 and 2) $93.80$135.70
Cost of goods sold $1,125,600$1,221,300$2,346,900Finished goods ending inventory300 200
Cost per unit (Schedule 1 and 2)$93.80$135.70
Budgeted ending inventories $28,140$27,140$55,280Schedule 1: Cost per Unit--Product C12:
Inputs Cost
Cost Element Unit Input Cost QuantityPer UnitRM-1$2.0010$20.00
RM-3$0.502$1.00
Direct labor$25.002$50.00
Variable factory OH ($326,080/50,950)$6.402$12.80
Fixed factory OH ($254,750/50,950)$5.002$10.00
Manufacturing cost per unit
$93.80Schedule 2: Cost per Unit--Product D57:
Inputs Cost
Cost Element Unit Input Cost QuantityPer UnitRM-1$2.008$16.00
RM-2$2.504$10.00
RM-3$0.501$0.50
Direct labor$25.003$75.00
Variable factory OH ($326,080/50,950)$6.403$19.20
Fixed factory OH ($254,750/50,950)$5.003$15.00
Manufacturing cost per unit
$135.708-56 (Continued-4)7. Budgeted selling and administrative expenses:
Spring Manufacturing Company
Selling and Administrative Expense Budget
2007
Selling Expenses:
Advertising$60,000
Sales salaries200,000
Travel and entertainment60,000
Depreciation5,000$325,000
Administrative expenses:
Offices salaries$60,000
Executive salaries250,000
Supplies 4,000
Depreciation6,000$320,000
Total selling and administrative expenses
$645,0008. Budgeted Income Statement:Spring Manufacturing Company
Budget Income Statement
For the Year 2007
C12 D57 Total
Sales (part 1) $1,800,000$1,980,000$3,780,000
Cost of goods sold (part 6) 1,125,600 1,221,3002,346,900Gross profit $674,400$758,700$1,433,100
Selling and administrative expenses (part 7)
$645,000Pre-tax operating income
$788,100
Income taxes (@40%)
$315,240After-tax operating income
$472,8608-56 (Continued-5)Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select Worksheet Object, then Open.
3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-57 Spring Manufacturing CompanyComprehensive Profit Plan (90 Minutes, but much less if used in conjunction with 8-56 and completed with an Excel spreadsheet)
1. Sales Budget
Spring Manufacturing Company
Sales Budget
2007
C12 D57 Total
Sales (in units) 12,000 18,000 30,000
x Selling Price Per Unit $160$180
Total revenue $1,920,000 $3,240,000 $5,160,0002. Production BudgetSpring Manufacturing Company
Production Budget
2007
C12 D57Budgeted Sales (in units)12,00018,000
Plus: Desired finished goods ending inventory 300 200
Total units needed 12,30018,200
Less: Beginning finished goods inventory 400 150Budgeted Production (in units) 11,900
18,0508-57 (Continued-1)3. Direct Materials Purchases Budget (units and dollars)
Spring Manufacturing Company
Direct Materials Purchases Budget (units and dollars)
2007
C12 D57 Total Raw Material (RM) 1:
Budgeted Production11,90018,050
Pounds per Unitx 10x 8
RM 1 needed for production119,000144,400263,400
Plus: Desired Ending Inventory (lbs.)
4,000
Total RM 1 needed (lbs.)
267,400
Less: Beginning inventory (lbs.)
3,000
Required purchases of RM 1 (lbs.)
264,400
Cost per pound
$2.00
Budgeted purchases, RM 1
$528,800 Raw Material (RM) 2:
Budgeted Production11,9009,050
Pounds per Unitx 0x 4
RM 2 needed for production072,20072,200
Plus: Desired Ending Inventory (lbs.)
1,000
Total RM 2 needed (lbs.)
73,200
Less: Beginning inventory (lbs.)
1,500
Required purchases of RM 2 (lbs.)
71,700
Cost per pound
$2.50
Budgeted purchases, RM 2
$179,250 Raw Material 3:
Budgeted Production11,90018,050
Pounds per Unitx 2x 1
RM 3 needed for production23,80018,05041,850
Plus: Desired Ending Inventory (lbs.)
1,500
Total RM 3 needed (lbs.)
43,350
Less: Beginning inventory (lbs.)
1,000
Required purchases of RM 3 (lbs.)
42,350
Cost per pound
$0.50
Budgeted purchases, RM 3
$21,1758-57 (Continued-2)4. Direct Manufacturing Labor BudgetSpring Manufacturing Company
Direct Labor Budget
2007
C12 D57 Total
Budgeted production11,90018,050
Direct labor hours (DLH) per unit x 2 x 3
Total direct labor hours needed23,80054,150 77,950
Hourly wage rate
$25.00Budgeted direct labor costs $1,948,7505. Factory Overhead BudgetVariable OH per DLH (from Prob. 8-56):
$6.40 Spring Manufacturing Company
Factory Overhead Budget
2007
Variable Factory Overhead ($6.40/DLH x 77,950)$498,880
Fixed Factory Overhead:
Supervision
$120,000
Maintenance costs 20,000
Heat, light, and power43,420
Total Cash Fixed Factory Overhead$183,420
Depreciation
71,330$254,750Total Budgeted Factory Overhead
$753,630Variable OH rate per DLH
$6.40Fixed OH rate per DLH ($254,750/77,950 DLHs)
$3.268128-57 (Continued-3)6. Budgeted CGS and Ending Finished Goods Inventory BudgetSpring Manufacturing Company
Ending Finished Goods Inventory and Budgeted CGS
2007
C12 D57 Total
Sales volume12,00018,00030,000
Cost per unit (Schedule 1 and 2) $90.33624$130.50436
Cost of goods sold $1,084,035 $2,349,079$3,433,114Finished goods ending inventory300 200Cost per unit (Schedule 1 and 2)$90.33624$114.50Budgeted ending inventories $27,101$26,101$53,202Schedule 1: Cost per UnitProduct C12:
Inputs Cost
Cost Element Unit Input Cost QuantityPer UnitRM-1$2.0010$20.00
RM-3$0.502$1.00
Direct labor$25.002$50.00
Variable factory OH ($326,080/50,950)$6.402$12.80
Fixed factory OH ($254,750/77,950)$3.268122$6.53624
Manufacturing cost per unit
$90.33624Schedule 2: Cost per UnitProduct D57:
Inputs Cost
Cost Element Unit Input Cost QuantityPer UnitRM-1$2.008$16.00
RM-2$2.504$10.00
RM-3$0.501$0.50
Direct labor$25.003$75.00
Variable factory OH ($326,080/50,950)$6.403$19.20
Fixed factory OH ($254,750/77,950)$3.268123$9.80436
Manufacturing cost per unit
$130.504368-57 (Continued-4)7. Selling and Administrative Expense BudgetSpring Manufacturing Company
Selling and Administrative Expense Budget
2007
Selling Expenses:
Advertising$60,000
Sales salaries200,000
Travel and entertainment60,000
Depreciation5,000$325,000
Administrative expenses:
Offices salaries$60,000
Executive salaries250,000
Supplies 4,000
Depreciation6,000$320,000
Total selling and administrative expenses
$645,0008. Budgeted Income StatementSpring Manufacturing Company
Budget Income Statement
For the Year 2007
C12 D57 Total
Sales (part 1) $1,920,000$3,240,000$5,160,000
Cost of goods sold (part 6) 1,084,035 2,349,0793,433,114Gross profit $835,965$890,921$1,726,886Selling and administrative expenses (part 7)
$645,000Pre-tax operating income
$1,081,886Income taxes (@40%)
$432,754After-tax operating income
$649,1328-57 (Continued-5)Answers:
1.The projected increase in after-tax operating income =
$649,132 $472,860 = $176,2722.While the changes are projected to increase after-tax operating income, the company should examine the decision more closely. Although the company increases its after-tax operating income by 37% ($176,272/$472,860), it requires a doubling of units of D57 to achieve this. In fact, a 100% increase in units sold of D57 increases the gross profit of D57 from $758,700 to $890,921, an increase of $132,221, while the total change in gross profit is $293,786 (from $1,433,100 to $1,726,886). The 100% increase in D57 accounts for only 45% ($132,221 ( $293,786) of the increase in gross profit; C12 contributes 55% of the increase.
Further, the price increase in C12 has no effect on the units sold. This may be an indication that C12 may have a higher potential than the firm perceived.
Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following:
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2. Select Worksheet Object, then Open.
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return to... while you are in the spreadsheet mode.
8-58 Comprehensive Profit Plan with Kaizen (90 minutes, but much less if assigned in conjunction with 8-56 and completed with an Excel spreadsheet)
1. Sales Budget
Spring Manufacturing Company
Sales Budget
2007
C12 D57 Total
Sales (in units) 12,000 9,000 21,000
x Selling Price Per Unit $150$220
Total revenue $1,800,000 $1,980,000 $3,780,0002. Production BudgetSpring Manufacturing Company
Production Budget
2007
C12 D57Budgeted Sales (in units) 12,000 9,000
Plus: Desired finished goods ending inventory 300 200
Total units needed
12,300 9,200
Less: Beginning finished goods inventory 400
150Budgeted Production (in units) 11,900
9,0508-58 (Continued-1)3. Direct Materials Purchases Budget (units and dollars)
Spring Manufacturing Company
Direct Materials Purchases Budget (units and dollars)
2007
C12 D57 Total Raw Material (RM) 1:
Budgeted Production11,9009,050
Pounds per Unitx 9x 7
RM 1 needed for production107,10063,350170,450
Plus: Desired Ending Inventory (lbs.)
4,000
Total RM 1 needed (lbs.)
174,450
Less: Beginning inventory (lbs.)
3,000
Required purchases of RM 1 (lbs.)
171,450
Cost per pound
$2.00
Budgeted purchases, RM 1
$342,900 Raw Material (RM) 2:
Budgeted Production11,9009,050
Pounds per Unitx 0x 3.6
RM 2 needed for production032,58032,580
Plus: Desired Ending Inventory (lbs.)
1,000
Total RM 2 needed (lbs.)
33,580
Less: Beginning inventory (lbs.)
1,500
Required purchases of RM 2 (lbs.)
32,080
Cost per pound
$2.50
Budgeted purchases, RM 2
$80,200 Raw Material 3:
Budgeted Production11,9009,050
Pounds per Unitx 1.8x 0.8
RM 3 needed for production21,4207,24028,660
Plus: Desired Ending Inventory (lbs.)
1,500
Total RM 3 needed (lbs.)
30,160
Less: Beginning inventory (lbs.)
1,000
Required purchases of RM 3 (lbs.)
29,160
Cost per pound
$0.50
Budgeted purchases, RM 3
$14,5808-58 (Continued-2)4. Direct Manufacturing Labor BudgetSpring Manufacturing Company
Direct Labor Budget
2007
C12 D57 Total
Budgeted production11,9009,050
Direct labor hours per unit x 1.5 x 2
Total direct labor hours needed17,85018,100 35,950
Hourly wage rate
$30.00Budgeted direct labor costs $1,078,5005. Factory Overhead BudgetSpring Manufacturing Company
Factory Overhead Budget
2007
Original Variable OH Budget:
Indirect materials $10,000
Miscellaneous supplies and tools 5,000
Indirect labor40,000
Payroll taxes and fringe benefits 250,000
Maintenance costs10,080
Heat, light, and power 11,000
Total Variable Factory Overhead$326,080
Reduction Rate for Variable OH Costs
10.00%
Original Fixed OH, Excluding Depreciation:
Supervision$120,000
Maintenance costs 20,000
Heat, light, and power43,420
Total Cash Fixed Factory Overhead$183,420
Depreciation
71,330
Total Original Fixed OH$254,750
Reduction Rate for Cash Fixed OH Costs =
5.00%
8-58 (Continued-3)
Budgeted Variable OH:
($326,080 x (1 - 0.10)) =$293,472
Budgeted Fixed OH:
Cash Charges = ($183,420 x (1 - 0.05)) =$174,249
Depreciation (same as last year) =$71,330
Total Budgeted Fixed OH =$245,5796. Budgeted CGS and Ending Finished Goods Inventory BudgetSpring Manufacturing Company
Ending Finished Goods Inventory and Budgeted CGS
2007
C12 D57 Total
Sales volume12,0009,00021,000
Cost per unit (Schedule 1 and 2) $86.39170$113.38893
Cost of goods sold $1,036,700
$1,020,500$2,057,200Finished goods ending inventory300 200
Cost per unit (Schedule 1 and 2)$86.39170$113.38893
Budgeted ending inventories $25,918$22,678$48,596Schedule 1: Cost per UnitProduct C12:
Inputs Cost
Cost Element Unit Input Cost QuantityPer UnitRM-1$2.009$18.00
RM-3$0.501.8$0.90
Direct labor$30.001.5$45.00
Variable factory OH ($293,472/35,950)$8.163341.5$12.24501Fixed factory OH ($245,579/35,950)$6.831131.5$10.24669
Manufacturing cost per unit
$86.391708-58 (Continued-4)Schedule 2: Cost per UnitProduct D57:
Inputs Cost
Cost Element Unit Input Cost QuantityPer UnitRM-1$2.007$14.00
RM-2$2.503.6$9.00
RM-3$0.500.8$0.40
Direct labor$30.002$60.00
Variable factory OH ($293,472/35,950)$8.163342$16.32668Fixed factory OH ($245,579/35,950)$6.831132$13.66225
Manufacturing cost per unit
$113.388937. Selling and Administrative Expense BudgetSpring Manufacturing Company
Selling and Administrative Expense Budget
2007Selling Expenses:
Advertising$60,000
Sales salaries200,000
Travel and entertainment60,000
Depreciation5,000$325,000
Administrative expenses:
Offices salaries$60,000
Executive salaries250,000
Supplies 4,000
Depreciation6,000$320,000
Total selling and administrative expenses
$645,0008-58 (Continued-5)8. Budgeted Income StatementSpring Manufacturing Company
Budget Income Statement
For the Year 2007
C12 D57 Total
Sales (part 1) $1,800,000$1,980,000$3,780,000
Cost of goods sold (part 6) 1,036,700 1,020,5002,057,200Gross profit $763,300$959,500$1,722,800Selling and administrative expenses (part 7)
$645,000Pre-tax operating income
$1,077,800Income taxes (@40%)
$431,120After-tax operating income
$646,680Answers:
1.The budgeted after-tax operating income with Kaizen is $646,680.
2.The immediate benefit is an increase of $173,820 in operating income, or 37% from $472,860.
The firm is also likely benefit in the long-run from the reductions in materials, labor hours, and factory overhead required in production. Decreases in consumption of manufacturing elements reduce wear and tear of equipment and other facilities and lessens the need for additional capital investments/replacements.
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2. Select Worksheet Object, then Open.
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8-59 Retailer Budget (45-50 minutes)1. Budgeted merchandise purchases
D. Tomlinson Retail
Budgeted Merchandise Purchases
May and June
May June July
Sales (in units) 11,900 11,400 12,000
Cost per unit x $20 x $20x $20Cost of Goods Sold (CGS) $238,000 $228,000 $240,000Ending inventory (130% of
next month's CGS) + 296,400 + 312,000Total needed $534,400 $540,000
Beginning inventory (130% of
this month's CGS) 309,400 296,400Budgeted Merchandise Purchases$225,000$243,6002. Budgeted cash disbursements S, G, & A expenses: May June
Sales revenue $357,000
$342,000
S, G, & A expense ratio x 0.15 x 0.15
Total S, G, & A expense $ 53,550 $ 51,300
Less: Depreciation 2,000 2,000
Out-of-pocket S, G & A expense $ 51,550$ 49,300 D. Tomlinson Retail
Budgeted Cash Disbursements for June
May June Merchandise purchases $ 225,000 $ 243,600
Out-of-Pocket S, G, & A expenses+ 51,550 + 49,300Total payables $276,550 $292,900Payment for the current months payables (54%)
$158,166
Owed from last month (46%)
+ 127,213Budgeted cash outflow for payables
$285,3798-59 (Continued)3. Budgeted cash collectionsD. Tomlinson Retail
Cash Collections
May
From last month's (April) credit sales
Within the discount period ($363,000) x 60% x 97% = $211,266
After the discount period $363,000 x 25% = 90,750
From credit sales two months ago (i.e., March)
Collection of credit sales made in March $354,000 x 9% = 31,860Total cash collections $333,8764. Gross and Net Balance of Accounts Receivable (AR) as of May 31
March April MayTotalSales$354,000$363,000$357,000
Remaining AR %6%15%100%
AR Balance (Gross)$21,240$54,450$357,000 $432,690 Bad-debt allowance*$21,240$21,780$21,420 64,440 AR Balance (Net)
$368,250
* @ 6% of gross sales dollars
8-60 Sales budget and pro-forma financial statements (75 minutes)
1.
Original Budget Data
Sales (units):
Beginning inventory of finished goods (9/1/2007)9,300
Estimated production for the 2007-8 fiscal year162,000
Units available for sale 171,300
Planned ending finished goods inventory (8/31/2008) 3,300
Projected unit sales, 2007-8 fiscal year 168,000
Selling price/unit:
a. & b. Revised sales volume--units and dollars:Sales in units in the original budget (see above)168,000
Increase in units of production (170,000 - 162,000)*+ 8,000Revised total salesunits176,000Selling price per unit (see above)x $ 186Revised projected dollar-volume of net sales $32,736,000*With no change in the ending finished goods inventory (3,300 units) the increase in production is a result of the expected increase in sales.
8-60 (Continued-1)2.
Molid Company
Pro-Forma Statement of Cost of Goods Sold (Revised)
For the Year Ending August 31, 2008
Direct materials:
Materials inventory, 9/1/07 $ 1,360,000
Materials purchases1 15,576,000
Materials available for use $16,936,000
Materials inventory, 8/31/082 1,709,400
Direct Materials used$15,226,600
Direct labor3 1,215,200
Factory overhead:
Indirect material4 $ 1,522,660
General factory overhead5 3,320,000 4,842,660Cost of goods manufactured $21,284,460
Plus: Finished goods inventory, 9/1/07 (given) 1,169,000Cost of goods available for sale $22,453,460
Less: Finished goods inventory, 8/31/086 413,169
Cost of goods sold $ 22,040,291
1Supporting Calculations (units represent equivalent units of output):
37,500 units @ $88.00* = $ 3,300,000
45,000 units**@ $88.00 = 3,960,000
Recommended