Cost Accounting: Chapter 8 Solutions, 4e

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:


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:


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


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:



RM 2 needed for production036,20036,200


1,000


37,200


1,500


35,700

Cost per pound

$2.50


$89,250 Raw Material 3:





1,500


34,350


1,000


33,350

Cost per pound

$0.50


$16,6758-56 (Continued-2)4. Direct Manufacturing Labor BudgetSpring Manufacturing Company

Direct Labor Budget

2007

C12 D57 Total


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


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


RM-2$2.504$10.00

RM-3$0.501$0.50



Fixed factory OH ($254,750/50,950)$5.003$15.00


$135.708-56 (Continued-4)7. Budgeted selling and administrative expenses:


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


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:




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


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)



2007






4,000


267,400


3,000


264,400

Cost per pound

$2.00







1,000


73,200


1,500


71,700

Cost per pound

$2.50







1,500


43,350


1,000


42,350

Cost per pound

$0.50



Direct Labor Budget

2007

C12 D57 Total


Direct labor hours (DLH) per unit x 2 x 3


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


2007

Variable Factory Overhead ($6.40/DLH x 77,950)$498,880

Fixed Factory Overhead:

Supervision

$120,000




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


2007

C12 D57 Total

Sales volume12,00018,00030,000


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


RM-3$0.502$1.00



Fixed factory OH ($254,750/77,950)$3.268122$6.53624


$90.33624Schedule 2: Cost per UnitProduct D57:

Inputs Cost


RM-2$2.504$10.00

RM-3$0.501$0.50



Fixed factory OH ($254,750/77,950)$3.268123$9.80436


$130.504368-57 (Continued-4)7. Selling and Administrative Expense BudgetSpring Manufacturing Company


2007

Selling Expenses:

Advertising$60,000







Supplies 4,000



$645,0008. Budgeted Income StatementSpring Manufacturing Company


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)


$1,081,886Income taxes (@40%)


$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:



3. To return to the Word document, select File and then Close and

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


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)



2007






4,000


174,450


3,000


171,450

Cost per pound

$2.00




Pounds per Unitx 0x 3.6



1,000


33,580


1,500


32,080

Cost per pound

$2.50




Pounds per Unitx 1.8x 0.8



1,500


30,160


1,000


29,160

Cost per pound

$0.50



Direct Labor Budget

2007

C12 D57 Total


Direct labor hours per unit x 1.5 x 2


Hourly wage rate

$30.00Budgeted direct labor costs $1,078,5005. Factory Overhead BudgetSpring Manufacturing Company


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




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


2007

C12 D57 Total

Sales volume12,0009,00021,000


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


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


$86.391708-58 (Continued-4)Schedule 2: Cost per UnitProduct D57:

Inputs Cost


RM-2$2.503.6$9.00

RM-3$0.500.8$0.40


Variable factory OH ($293,472/35,950)$8.163342$16.32668Fixed factory OH ($245,579/35,950)$6.831132$13.66225


$113.388937. Selling and Administrative Expense BudgetSpring Manufacturing Company


2007Selling Expenses:

Advertising$60,000







Supplies 4,000



$645,0008-58 (Continued-5)8. Budgeted Income StatementSpring Manufacturing Company


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)


$1,077,800Income taxes (@40%)


$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.

Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open this spreadsheet object that follows by doing the following:




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

Documents

Cost Accounting: Chapter 8 Solutions, 4e