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©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1091
Chapter 20 Master Budgets and Performance Planning
QUESTIONS 1. A budget helps managers control and monitor a business by 1) communicating
plans to employees, 2) coordinating the activities of different parts of the organization, and 3) providing a basis for deciding whether actual performance is acceptable (through benchmarking). Budgeting also helps 4) promote analysis, 5) focus on the future, and 6) motivate employees.
2. Two common benchmarks used by managers to evaluate performance are: past performance and budgeted performance. Budgeted performance is generally more useful because it is based on more current business conditions and information that are presumably reflected in the numbers.
3. Continuous budgeting provides managers a full set of updated budgets each time a budget period goes by. In a changing environment, continuous budgeting should provide superior information for effective planning.
4. Three common short-term horizons for planning and budgeting purposes are: monthly, quarterly, and annually. A semiannual planning horizon is also popular.
5. Budgeting can be a strong positive motivating force if employees are involved or consulted in the process. This participation promotes their commitment to reaching the specified goals—such a process is called participatory budgeting. Alternatively, if employees are not consulted, budgets may produce negative attitudes and dysfunctional behavior in an organization.
6. Budgeting helps management coordinate and plan business activities by providing specific guidance for the individual activities of various departments and employees.
7. The sales budget reflects the expected sales to be made over a period of time, stated in dollars and/or units. The sales budget is the most important of all the component budgets of the master budget because it is used to set purchasing/production levels and the related selling and administrative activities and expenditures.
8. A selling expense budget is a plan of the expenses to be incurred to produce the planned amount of sales. The capital expenditures budget lists dollar amounts of plant assets to be disposed of and additional plant assets to be purchased during the budget period.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1092
9. Budgeting promotes good decision making by requiring managers to conduct research (or analysis) and by focusing their attention on the future.
10. A cash budget shows the planned cash receipts and cash disbursements for each budget period, including any loans to be received or repaid. Since the operating budgets and the capital expenditures budget reflect transactions and events that produce cash inflows and cash outflows, the cash budget can be completed only after these companion budgets are completed.
11. A production budget shows the number of units to be produced each budget period. Based on the number of units to be produced (taken from the production budget), the manufacturing budget shows the budgeted costs for direct materials, direct labor, and factory overhead.
12. A manager of an Apple store would have responsibility for and decision control over budgeting for his/her store. A manager at the corporate offices may participate in, but would not likely be involved in the budgeting for individual stores, but would have responsibility and decision control over administrative budgets.
13. With the exception of the decision to operate, the manager of an Arctic Cat distribution center is not likely to engage in a substantial amount of long-term budgeting. Once the distribution center is up and operating, the vast majority of decisions will focus on day-to-day operations. Most of the decisions concerning freight carriers, pricing, and product mix are often made at the corporate level. However, corporate level decision-making should incorporate information and expectations provided by the operating managers of distribution centers.
14.
Budget Participant Description
Sales manager .................... Information on estimated sales (units and dollars).
Production manager ........... Number of units to produce based on estimated sales.
Manufacturing manager ..... Amount of direct materials, direct labor, and manufacturing overhead to produce the estimated level of production.
Sales manager .................... Cost of selling the estimated sales level.
General & admini-strative managers ...............
Cost to support operations; most often are fixed costs.
Capital expenditures committee ...........................
Prepare plans to have available plant assets necessary to carry on business activities.
Cash managers ................... Working with the above budgets, this team will prepare cash flow analysis.
Accounting and finance staff .....................................
Financial budgets prepared from above information.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1093
QUICK STUDIES
Quick Study 20-1 (5 minutes) Correct answer is 4. Quick Study 20-2 (10 minutes) Three useful guidelines to help motivate employees with budgeting are
1. Employees affected by a budget should be consulted when it is prepared.
2. Goals reflected in a budget should be attainable.
3. Evaluations of performance should be made carefully with opportunities to explain any failures and discrepancies.
Quick Study 20-3 (15 minutes)
Montel Company Computation of Budgeted Cost of Purchases
For Month Ended July 31
Budgeted ending inventory ........................................................................ $ 40,000
Budgeted cost of goods to be sold [$600,000 x (1 – 40%)] ..................... 360,000
Required available merchandise ................................................................ 400,000
Less budgeted beginning inventory .......................................................... 50,000
Budgeted cost of purchases ...................................................................... $350,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1094
Quick Study 20-4 (10 minutes) 1. The bottom-up approach to budgeting is considered more successful
because without active employee involvement in preparing budget figures, there is a risk these employees will feel that the numbers fail to reflect their special problems and needs. It also has the benefit of directly involving those employees who regularly confront and deal with day-to-day situations.
2. Examples of bottom-up budgeting include
Involving the sales department in preparing sales estimates.
Involving the production department in preparing its own expense budget.
Quick Study 20-5 (15 minutes) Computation of budgeted Accounts Receivable balance as of July 31
Sales month
Total Sales
Credit Sales*
Percent Still Uncollected*
Amount Uncollected
June ..................... $420,000 $168,000 10% $ 16,800 July ...................... 398,000 159,200 80% 127,360 Total .................... $144,160
* Credit sales are 40% of total sales—of these credit sales, 20% are collected in the sale month, 70% are collected in the month after sale, and 10% are collected in the second month after sale.
Quick Study 20-6 (15 minutes)
Gado Merchandising Company Cash Budget
For Month Ended March 31
Beginning cash balance .......................................................... $ 72,000
Cash receipts from sales ........................................................ 300,000
Total cash available ................................................................. $372,000
Cash disbursements
Payments for purchases ........................................................ 140,000
Salaries .................................................................................... 80,000
Other expenses ....................................................................... 45,000
Repayment of bank loan ........................................................ 20,000
Total cash disbursements ..................................................... 285,000
Ending cash balance ............................................................... $ 87,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1095
Quick Study 20-7 (10 minutes)
1. Activity-based budgeting requires managers to focus on the activities of
their departments, forecast the individual activity levels, identify the
resources required to carry out the activities, and estimate the costs of
those resources.
2. Traditional budgeting consists of listing the amount of resources
required for each department (such as salaries and utilities). Activity-
based budgeting allows managers to better justify changes in budgeted
amounts based on changes in activity levels.
Quick Study 20-8 (15 minutes)
Forrest Company Production Budget
For Month Ended November 30
Next month’s budgeted sales ............................................................... 350,000
Ratio of inventory to future sales ......................................................... x 10%
Budgeted ending inventory .................................................................. 35,000
Add budgeted sales for the month ...................................................... 400,000
Required units of available production ............................................... 435,000
Less beginning inventory ..................................................................... 40,000
Units to be produced ............................................................................. 395,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1096
Quick Study 20-9 (15 minutes)
Forrest Company Factory Overhead Budget
For Month Ended November 30
Units to be produced (from QS 20-8) ................................................... 395,000
Variable factory overhead rate per unit ............................................... x $1.50
Budgeted variable overhead ................................................................. $ 592,500
Budgeted fixed overhead ...................................................................... 4,600,000
Budgeted total overhead ....................................................................... $5,192,500
Quick Study 20-10 (10 minutes)
Grace Sales Budget
For Month Ended June 30
Prior month’s unit sales ........................................................................ 1,000
Plus 4% growth in unit sales ................................................................ 40
Projected June sales (units) ................................................................. 1,040
Selling price per unit ............................................................................. x $250
Projected sales for June ....................................................................... $260,000
Quick Study 20-11 (10 minutes)
Grace Selling Expense Budget
For Month Ended June 30
Budgeted sales (from QS 20-10) .......................................................... $260,000
Sales commission percent ................................................................... x 8%
Sales commissions ............................................................................... 20,800
Sales manager’s monthly salary .......................................................... 6,000
Projected selling expense for June ..................................................... $ 26,800
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1097
Quick Study 20-12 (10 minutes)
Grace Budgeted Cash Receipts For Month Ended June 30
Budgeted sales (from QS 20-10) .......................................................... $260,000
Less ending accounts receivable ($260,000 x 0.40) ........................... 104,000
Cash sales ($260,000 x 0.60)) ............................................................... 156,000
Collections of last month’s receivables* ............................................. 100,000
Total cash receipts ................................................................................ $256,000
*$250,000 x 40% = $100,000. Last month’s sales of $250,000 from QS 20-10.
Quick Study 20-13 (15 minutes) Sales ....................................................................................................... BIS
Office salaries paid ............................................................................... BIS
Accumulated depreciation ................................................................... BBS
Amortization expense ........................................................................... BIS
Interest paid on note payable .............................................................. BIS
Cash dividends paid ............................................................................. NA
Bank loan owed ..................................................................................... BBS Cost of goods sold ................................................................................ BIS Quick Study 20-14 (10 minutes)
CANDLE SHOPPE Cash Receipts Budget
For Month Ended September 30
Cash receipts from September cash sales (40% x $170,000) ............ $ 68,000
Collection of prior month’s receivables (60% x $150,000) ................ 90,000
Total cash receipts ................................................................................ $158,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1098
Quick Study 20-15 (10 minutes)
WELLS COMPANY Budgeted Cash Receipts
For Month Ended November 30
Cash receipts from November cash sales (20% x $80,000) ............... $ 16,000
Collection of October’s sales (70% x $66,000) .................................... 46,200
Collection of September’s sales (10% x $55,000) ............................... 5,500
Total cash receipts ................................................................................ $ 67,700
Quick Study 20-16 (10 minutes)
GORDANDS Cash Disbursements for Merchandise (Budgeted)
For Month Ended September 30
Cash disbursements for September purchases (25% x $720,000) .... $180,000
Cash disbursements for August purchases (75% x $600,000) ........... 450,000
Total cash disbursements .................................................................... $630,000
Quick Study 20-17 (10 minutes)
MEYER CO. Cash Disbursements for Merchandise (Budgeted)
For January, February, and March
January February March
Purchases ..................................................... $15,800 $18,600 $20,200
Cash disbursements for
Current month’s purchases (40%) ......... $ 6,320 $ 7,440 $ 8,080
Prior month’s purchases (60%) ............... 22,000* 9,480 11,160
Total cash disbursements for purchases ..... $28,320 $16,920 $19,240
* Accounts payable balance at December 31
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1099
Quick Study 20-18 (5 minutes)
RAIDER-X CORP. Purchases Budget (in units) For Month Ended April 30
Budgeted ending inventory (130% x 3,000) ......................................... 3,900
Budgeted sales for April (units) ........................................................... 18,000
Required units of available inventory ..................................................
Less beginning inventory (units) .........................................................
21,900
(3,000)
Units to be purchased ........................................................................... 18,900
Quick Study 20-19 (15 minutes)
LEXI COMPANY Merchandise Purchases Budget
For April, May, and June
April May June
Next month’s budgeted sales (units) ......... 1,220,000 980,000 1,020,000
Ratio of inventory to future sales ............... x 30% x 30% x 30%
Budgeted ending inventory (units) ............ 366,000 294,000 306,000
Add budgeted sales (units) ......................... 1,040,000 1,220,000 980,000
Required units of available merch. ........... 1,406,000 1,514,000 1,286,000
Deduct beginning inventory (units) ........... (280,000) (366,000) (294,000)
Units to be purchased ................................. 1,126,000 1,148,000 992,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1100
Quick Study 20-20 (10 minutes)
CHAMP, INC. Production Budget
For Month Ended May 31
Next month’s budgeted sales (units) ................................................... 200
Ratio of inventory to future sales ......................................................... x 60%
Budgeted ending inventory (units) ...................................................... 120
Add budgeted sales for the month (units) .......................................... 180
Required units of available production ............................................... 300
Deduct beginning inventory (units) ..................................................... (50)
Units to be produced ............................................................................. 250
Quick Study 20-21 (10 minutes)
ZORTEK CORP. Direct Materials Budget
For Month Ended January 31
Budget production (units) ..................................................................... 400
Materials requirements per unit ........................................................... x 5 lbs.
Materials needed for production (lbs.) ................................................ 2,000
Add budgeted ending inventory (200* units x 5 lbs. per unit x 40%) .... 400
Total materials requirements (lbs.) ...................................................... 2,400
Deduct beginning inventory (lbs.) ........................................................ (130)
Materials to be purchased (lbs.) ........................................................... 2,270
Materials price per pound ..................................................................... $ 2
Total cost of direct materials purchases ............................................. $4,540
*February’s budgeted production.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1101
Quick Study 20-22 (5 minutes)
TORA CO. Direct Labor Budget
For Month Ended July 31
Budget production (units) ..................................................................... 1,020
Labor requirements per unit (hours) ................................................... x 2
Total labor hours needed ...................................................................... 2,040
Labor rate (per hour) ............................................................................. $ 20
Labor dollars .......................................................................................... $40,800
Quick Study 20-23 (10 minutes)
SCORA INC. Sales Budget
For January, February, and March
Budgeted Unit Sales
Budgeted Unit Price
Budgeted Total Sales
January ......................................................... 1,200 $50 $ 60,000
February ........................................................ 2,000 50 100,000
March ............................................................ 1,600 50 80,000
Totals for the quarter ................................... 4,800 $50 $240,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1102
Quick Study 20-24 (10 minutes)
SCORA INC. Cash Receipts Budget
For January, February, and March
January February March
Sales (from QS 20-23) .................................. $60,000 $100,000 $80,000
Less ending accts. receivable (60%) ......... 36,000 60,000 48,000
Cash receipts from
Cash sales (40% of sales) .......................... 24,000 40,000 32,000
Collections of prior month’s receivables ...... 15,000 36,000 60,000
Total cash receipts ..................................... $39,000 $76,000 $92,000
Quick Study 20-25 (10 minutes)
SCORA INC. Selling Expense Budget
For January, February, and March
January February March
Budgeted sales (from QS 20-23) ................ $60,000 $100,000 $80,000
Sales commission percent ......................... x 10% x 10% x 10%
Sales commissions .................................... 6,000 10,000 8,000
Sales manager monthly salary ................... 6,000 6,000 6,000
Total selling expenses ............................... $12,000 $ 16,000 $14,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1103
Quick Study 20-26 (5 minutes)
MESSERS COMPANY Cash Budget
For Month Ended February 28
Beginning cash balance ........................................................................ $ 20,000
Cash receipts ......................................................................................... 75,000
Total cash available ............................................................................... 95,000
Cash disbursements.............................................................................. (100,250)
Preliminary cash balance ...................................................................... $ (5,250)
Additional loan from bank .................................................................... 10,250
Ending cash balance ............................................................................. $ 5,000
Based on the cash budget above, the company must borrow $10,250 during February to maintain a $5,000 cash balance. Quick Study 20-27 (10 minutes) 1.
Sales (current year) .................................................................
(in € millions)
€25,400
Sales growth (€25,400 x 3%) ................................................... 762
Budgeted sales (next year) ..................................................... €26,162
2.
Note: Assume sales of €26,000 for this question.
Budgeted selling expenses (€26,000 x 20%) .........................
€5,200
Budgeted general and admin. expenses (€26,000 x 4%) ..... 1,040
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1104
EXERCISES
Exercise 20-1 (25 minutes)
KAYAK COMPANY Cash Budget
For January, February, and March
January February March
Beginning cash balance .............................. $ 30,000 $ 30 ,000 $ 69,294
Cash receipts ............................................... 525,000 400,000 450,000
Total cash available ..................................... 555,000 430,000 519,294
Cash disbursements.................................... 475,000 350,000 525,000
Interest expense
January ($60,000 x 1%) ............................ 600
February ($10,600 x 1%) ............................ ________ 106 ________
Preliminary cash balance ............................ 79,400 79,894 (5,706)
Additional loan from bank .......................... 35,706
Repayment of loan to bank ......................... (49,400) (10,600) ________
Ending cash balance ................................... $ 30,000 $ 69,294 $ 30,000
Ending loan balance*................................... $ 10,600 $ 0 $ 35,706
*Loan balance is $60,000 at the beginning of January. January’s ending loan balance is computed as $60,000 – 49,400.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1105
Exercise 20-2 (30 minutes) 1. Merchandise Purchases Budget Note: Shaded numbers represent known information provided in the exercise.
Walker Company Merchandise Purchases Budget For July, August, and September
July August September
Next month’s budgeted sales .............. 315,000 270,000 200,000 (10)
Ratio of inventory to next month sales . x 15% (9) x 15% (9) x 15% (9)
Budgeted ending inventory ................. 47,250 (6) 40,500 (3) 30,000
Add budgeted sales for month ............ 180,000 315,000 270,000
Required units available inventory ..... 227,250 (7) 355,500 (4) 300,000 (1)
Less beginning inventory .................... 27,000 (8) 47,250 (5) 40,500 (2)
Budgeted merchandise purchases ..... 200,250 308,250 259,500
The following notes (1) through (10) provide supporting calculations and explanations.
Notes: (1) September required units Ending inventory 30,000 Add budgeted sales 270,000 Total required in September 300,000
(2) September beginning Inventory
Total required (1 above) 300,000 Less budgeted purchases (259,500) September beginning inventory 40,500
(3) September Beginning Inventory = August Ending Inventory
(4) August required units
Ending inventory 40,500 Add budgeted sales 315,000 Total required in August 355,500
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1106
Exercise 20-2 (concluded)
Notes: concluded
(5) August beginning inventory Total required (4 above) 355,500 Less budgeted purchases (308,250) August beginning inventory 47,250
(6) August Beginning Inventory = July Ending Inventory
(7) July required units
Ending inventory 47,250 Add budgeted sales 180,000 Total required in July 227,250
(8) July Beginning Inventory
Total required (7 above) 227,250 Less budgeted purchases (200,250) July beginning inventory 27,000
(9) Percent of Sales to be held as Ending Inventory
Ending inventory for August September Sales
= 40,500 = 15% 270,000
This percentage is constant for the three months.
(10) October expected sales September Ending Inventory
Required % = 30,000 = 200,000 15%
2. Monthly ending inventory is 15% of next month’s sales (see note #9). 3. October budgeted sales = 200,000 (see note #10 above).
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1107
Exercise 20-3 (25 minutes)
ACCO COMPANY Cash Budget
For Month Ended July 31
Beginning cash balance ................................................ $ 50,000
Cash receipts from sales (note 1) .................................. 1,364,000
Total cash available ....................................................... $1,414,000
Cash disbursements
Payments for merchandise (note 2) ............................. 730,000
Salaries ......................................................................... 275,000
Other expenses ............................................................ 200,000
Accrued taxes .............................................................. 80,000
Interest on bank loan .................................................. 6,600
Total cash disbursements ............................................ 1,291,600
Ending cash balance ..................................................... $ 122,400
Supporting calculations (1) Cash receipts in July from sales
From May sales ($1,720,000 x 20%) .............. $ 344,000 From June sales ($1,200,000 x 50%) ............. 600,000 From July sales ($1,400,000 x 30%) .............. 420,000 Total ................................................................. $1,364,000
(2) Cash disbursements in July for merchandise
For June purchases ($700,000 x 40%) .......... $ 280,000 For July purchases ($750,000 x 60%) ........... 450,000 Total ................................................................. $ 730,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1108
Exercise 20-4 (45 minutes)
ACCO COMPANY Budgeted Income Statement
For Month Ended July 31
Sales (from Exercise 20-3) .................................................. $1,400,000
Cost of goods sold (note 1) ............................................. 770,000
Gross profit ..................................................................... 630,000
Operating expenses
Salaries expense (note 2) .............................................. $285,000
Depreciation expense (from Exercise 20-3) .................... 36,000
Other cash expenses (from Exercise 20-3) ..................... 200,000
Bank loan interest expense ......................................... 6,600
Total expenses ................................................................ 527,600
Income before taxes ....................................................... 102,400
Income tax expense (note 3) ............................................ 30,720
Net income ....................................................................... $ 71,680
Supporting calculations (1) Cost of goods sold
Sales ................................................................ $1,400,000 Cost percent .................................................... 55% Cost of goods sold ......................................... $ 770,000
(2) Salaries expense
Cash paid ......................................................... $ 275,000 Less beginning payable ................................. (50,000) Plus ending payable ....................................... 60,000 Salaries expense ............................................. $ 285,000
(3) Income tax expense
Pre-tax income ................................................ $ 102,400 Tax rate ............................................................ 30% Income tax expense ........................................ $ 30,720
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20 1109
Exercise 20-4 (Continued)
ACCO COMPANY
Budgeted Balance Sheet As of July 31
ASSETS
Cash (from Exercise 20-3) .................................................. $ 122,400
Accounts receivable (note 1) .......................................... 1,220,000
Inventory (given) .............................................................. 60,000
Total current assets ....................................................... 1,402,400
Equipment ...................................................................... $1,600,000
Less accumulated depreciation (note 2) ....................... 316,000 1,284,000
Total assets .................................................................... $2,686,400
LIABILITIES AND EQUITY
Liabilities
Accounts payable (note 3) ............................................ $ 300,000
Salaries payable .......................................................... 60,000
Income taxes payable ................................................. 30,720
Total current liabilities ................................................ 390,720
Bank loan payable ....................................................... 660,000 1,050,720
Stockholders’ equity
Common stock ............................................................. 600,000
Retained earnings (note 4) ........................................... 1,035,680 1,635,680
Total liabilities and equity ............................................. $2,686,400
Supporting calculations (1) Accounts receivable
June sales (20% x $1,200,000) ................................... $ 240,000 July sales (70% x $1,400,000)................................... 980,000 Total .............................................................................. $ 1,220,000
(2) Accumulated depreciation Beginning ..................................................................... $ 280,000 Expense ........................................................................ 36,000 Ending .......................................................................... $ 316,000
(3) Accounts payable Purchases .................................................................... $ 750,000 Percent unpaid............................................................. 40% Payable ......................................................................... $ 300,000
(4) Retained earnings Beginning ..................................................................... $ 964,000 Net income ................................................................... 71,680 Ending .......................................................................... $1,035,680
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1110
Exercise 20-5 (30 minutes) Preliminary calculations (sales, cost of sales, beginning and ending inventory)
August September October November
Sales ........................................................... $325,000 $ 320,000 $250,000 $310,000 Cost to sales percent ................................. x 60% x 60% x 60% x 60% Cost of goods sold ..................................... 195,000 192,000 150,000 186,000 Beginning inventory percent ..................... x 20% x 20% x 20% x 20% Beginning inventory ................................... $ 39,000 $ 38,400 $ 30,000 $ 37,200 Ending inventory (from next month) ......... $ 38,400 $ 30,000 $ 37,200
Merchandise purchases budgets (* denotes from preliminary calculations) August September October
Budgeted ending inventory (*) ........................ $ 38,400 $ 30,000 $ 37,200 Add budgeted cost of goods sold (*) ............. 195,000 192,000 150,000 Cost of available merchandise ....................... 233,400 222,000 187,200 Less beginning inventory (*) ........................... (39,000) (38,400) (30,000) Budgeted purchases ....................................... $194,400 $183,600 $157,200
Cash payments for purchases (on accounts) in October Dollars Percent Paid
For purchases from August ........................... $194,400 15% $ 29,160 For purchases from September ..................... 183,600 35 64,260 For purchases from October .......................... 157,200 50 78,600 Total cash payments for purchases .............. $172,020 Exercise 20-6 (25 minutes) 1. Budgeted merchandise purchases June July August
Ending accounts payable ......................... $ 200,000 $ 235,000 $ 195,000
Cash paid on accounts payable ............... 1,490,000 1,425,000 1,495,000
Total payable during month ...................... 1,690,000 1,660,000 1,690,000
Less beginning accounts payable ........... (150,000) (200,000) (235,000)
Purchases during month .......................... $1,540,000 $1,460,000 $1,455,000
2. Budgeted cost of goods sold June July August
Beginning inventory .................................. $ 250,000 $ 400,000 $ 300,000
Plus purchases .......................................... 1,540,000 1,460,000 1,455,000
Less ending inventory ............................... (400,000) (300,000) (330,000)
Cost of goods sold .................................... $1,390,000 $1,560,000 $1,425,000
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Solutions Manual, Chapter 20 1111
Exercise 20-7 (40 minutes) 1. Preliminary calculations (sales, cost of sales, beginning inventory)
July August September October November
Budgeted sales ............................... $350,000 $290,000 $320,000 $275,000 $265,000 Cost to sales percent ..................... x 70% x 70% x 70% x 70% x 70% Budgeted cost of goods sold ........ 245,000 203,000 224,000 192,500 185,500 Budgeted inventory percent .......... x 20% x 20% x 20% x 20% x 20% Budgeted beginning inventory ......... $ 49,000 $ 40,600 $ 44,800 $ 38,500 $ 37,100
Budgeted merchandise purchases
July August September October
Budgeted ending inventory ................. $ 40,600 $ 44,800 $ 38,500 $ 37,100 Budgeted cost of goods sold .............. 245,000 203,000 224,000 192,500 Cost of available merchandise ............ 285,600 247,800 262,500 229,600 Less beginning inventory .................... (49,000) (40,600) (44,800) (38,500) Budgeted purchases ............................ $236,600 $207,200 $217,700 $191,100
2. Budgeted payments on accounts payable in September Purchases Percent Paid Dollars Paid
For purchases from September .......... $217,700 25% $ 54,425 For purchases from August ................. 207,200 60 124,320 For purchases from July ...................... 236,600 15 35,490 Total payments ..................................... $214,235
Budgeted payments on accounts payable in October Purchases Percent Paid Dollars Paid
For purchases from October ............... $191,100 25% $ 47,775 For purchases from September .......... 217,700 60 130,620 For purchases from August ................. 207,200 15 31,080 Total payments ..................................... $209,475
3. Budgeted balance of accounts payable at the end of September Purchases Percent Unpaid Dollars Unpaid
From purchases in September ............ $217,700 75% $163,275 From purchases in August .................. 207,200 15 31,080 Total ....................................................... $194,355
Budgeted balance of accounts payable at the end of October Purchases Percent Unpaid Dollars Unpaid
From purchases in October ................. $191,100 75% $143,325 From purchases in September ............ 217,700 15 32,655 Total ....................................................... $175,980
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Financial & Managerial Accounting, 5th Edition 1112
Exercise 20-8 (15 minutes)
ELECTRO COMPANY Production Budget
Second and Third Quarters
Second Third Quarter Quarter
Budgeted ending inventories
Second quarter (20% x 525,000) ........................................... 105,000
Third quarter (20% x 475,000) ............................................... 95,000
Add budgeted sales ................................................................. 450,000 525,000
Required units of available production ................................. 555,000 620,000
Less actual or budgeted beginning inventories ................... (75,000) (105,000)
Units to be produced ............................................................... 480,000 515,000
Exercise 20-9 (15 minutes)
ELECTRO COMPANY Direct Materials Budget
Second Quarter
Units to be produced (from Exercise 20-8) ................................. 480,000
Materials requirement per unit ............................................... x 0.80
Materials needed for production (units) ................................ 384,000
Add budgeted ending inventory (units)* ............................... 206,000
Total materials requirements (units) ...................................... 590,000
Deduct beginning inventory (units)** ....................................
Materials to be purchased (units) .........................................
Material price per unit..............................................................
Total cost of direct materials purchases ...............................
(192,000)
398,000
x $170
$67,660,000
* (515,000 x 0.80) x 50% **384,000 x 50%
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Solutions Manual, Chapter 20 1113
Exercise 20-10 (15 minutes)
ELECTRO COMPANY Direct Labor Budget
Second Quarter
Units to be produced (from Exercise 20-8) .................................
480,000
Labor requirements per unit (hours) ..................................... x 4
Total labor hours needed ........................................................ 1,920,000
Labor rate (per hour) ............................................................... x $12
Labor dollars ............................................................................ $23,040,000
Exercise 20-11 (10 minutes)
HECTOR COMPANY Budgeted Cash Disbursements
For August and September
August Sept.
Payments for merchandise* ................................................... $14,400 $19,200
Selling expenses (10% of sales) ............................................. 7,200 6,600
Administrative expenses (8% of sales) ................................. 5,760 5,280
Rent expense ............................................................................ 7,400 7,400
Total cash disbursements ...................................................... $34,760 $38,480
**Equals prior month’s purchases. Note that depreciation expense is excluded since it is a non-cash expense.
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Financial & Managerial Accounting, 5th Edition 1114
Exercise 20-12 (15 minutes)
JASPER COMPANY Cash Receipts Budget
For April, May, and June
April May June
Sales .............................................................. $525,000 $535,000 $560,000
Less ending accts. receivable (70%) ......... 367,500 374,500 392,000
Cash receipts from
Cash sales (30% of sales) .......................... 157,500 160,500 168,000
Collections of prior month’s receivables ...... 400,000 367,500 374,500
Total cash receipts ..................................... $557,500 $528,000 $542,500
Exercise 20-13 (20 minutes)
KARIM CORP. Cash Budget
For July, August, and September
July August Sept.
Beginning cash balance .............................. $ 8,400 $ 8,000 $ 8,000
Cash receipts ............................................... 20,000 26,000 40,000
Total cash available .................................... 28,400 34,000 48,000
Cash disbursements.................................... 28,000 30,000 22,000
Interest on bank loan
August ($7,600 x 1%) ................................
September ($11,676 x 1%)* ......................
Preliminary cash balance ...........................
______
$ 400
76
______
$ 3,924
117
$25,883
Additional loan from bank .......................... 7,600 4,076
Repayment of loan to bank ......................... ______ _______ 11,676
Ending cash balance ................................... $ 8,000 $ 8,000 $14,207
Loan balance, end of month ....................... $ 7,600 $11,676 $ 0
* Rounded to nearest whole dollar.
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Solutions Manual, Chapter 20 1115
Exercise 20-14 (20 minutes)
FOYERT CORP. Cash Budget
For October, November, and December
Oct. Nov. Dec.
Beginning cash balance* ............................ $ 30,000 $ 30,000 $ 30,000
Cash receipts ............................................... 110,000 80,000 100,000
Total cash available .................................... 140,000 110,000 130,000
Cash disbursements.................................... 120,000 75,000 80,000
Interest on bank loan
October ($10,000 x 1%) ............................
November ($20,100 x 1%) .........................
December ($15,300 x 1%) .........................
Preliminary cash balance ...........................
100
_______
$ 19,900
201
_______
$ 34,799
153
$ 49,847
Additional loan from bank .......................... 10,100
Repayment of loan to bank ......................... _______ 4,799 15,301
Ending cash balance ................................... $ 30,000 $ 30,000 $ 34,546
Loan balance, end of month ....................... $ 20,100 $ 15,301 $ 0
*October’s beginning cash balance includes an outstanding loan balance of $10,000.
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Financial & Managerial Accounting, 5th Edition 1116
Exercise 20-15 (25 minutes)
CASTOR, INC. Cash Budget
For April, May, and June
April May June
Beginning cash balance* ............................ $12,000 $12,000 $12,279
Cash receipts**............................................. 28,000 36,000 32,000
Total cash available .................................... 40,000 48,000 44,279
Cash disbursements
Payments for merchandise ......................... 20,200 16,800 17,200
Sales commissions (10% of sales) ............ 3,200 4,000 2,400
Shipping (2% of sales) ................................ 640 800 480
Office salaries ..............................................
Rent ...............................................................
Interest on bank loan
April ($2,000 x 1%) ....................................
May ($6,060 x 1%) .....................................
Preliminary cash balance ...........................
5,000
3,000
20
______
$7,940
5,000
3,000
61
$18,339
5,000
3,000
_______
$16,199
Additional loan from bank .......................... 4,060
Repayment of loan to bank ......................... _______ 6,060 _______
Ending cash balance ................................... $12,000 $12,279 $16,199
Loan balance, end of month ....................... $ 6,060 $ 0 $ 0
*April’s beginning cash balance includes an outstanding loan payable of $2,000. **Per cash receipts budget on next page
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Solutions Manual, Chapter 20 1117
Exercise 20-15 (continued)
CASTOR, INC. Cash Receipts Budget
For April, May, and June
April May June
Sales .............................................................. $32,000 $40,000 $24,000
Less ending accts. receivable (50%) ......... 16,000 20,000 12,000
Cash receipts from
Cash sales (50% of sales) .......................... 16,000 20,000 12,000
Collections of prior month’s receivables ...... 12,000 16,000 20,000
Total cash receipts ..................................... $28,000 $36,000 $32,000
Exercise 20-16 (30 minutes) (1)
KELSEY Cash Receipts Budget
For July, August, and September
July August Sept.
Sales .............................................................. $64,000 $80,000 $48,000
Less ending accts. receivable (80%) ......... 51,200 64,000 38,400
Cash receipts from
Cash sales (20% of sales) .......................... 12,800 16,000 9,600
Collections of prior month’s receivables ...... 45,000 51,200 64,000
Total cash receipts ..................................... $57,800 $67,200 $73,600
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Financial & Managerial Accounting, 5th Edition 1118
Exercise 20-16 (continued) (2)
KELSEY Cash Budget
For July, August, and September
July August Sept.
Beginning cash balance* ............................ $15,000 $15,000 $25,504
Cash receipts (from part 1) ......................... 57,800 67,200 73,600
Total cash available .................................... 72,800 82,200 99,104
Cash disbursements
Payments for merchandise ......................... 40,400 33,600 34,400
Sales commissions (10% of sales) ............ 6,400 8,000 4,800
Office salaries ..............................................
Rent ...............................................................
Interest on bank loan**
July (5,000 x 1%) .......................................
August ($4,550 x 1%) ................................
Preliminary cash balance ...........................
4,000
6,500
50
_______
$15,450
4,000
6,500
46
$30,054
4,000
6,500
_______
$49,404
Additional loan from bank ..........................
Repayment of loan to bank ......................... 450 4,550 ______
Ending cash balance ................................... $15,000 $25,504 $49,404
Loan balance, end of month ....................... $ 4,550 $ 0 $ 0
*July’s beginning cash balance includes a loan payable of $5,000. ** Rounded to the nearest dollar. Answers vary slightly if rounded to the nearest cent.
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Solutions Manual, Chapter 20 1119
Exercise 20-17 (15 minutes)
ZETROV COMPANY
Budgeted Balance Sheet
As of March 31
ASSETS
Cash ................................................................................ $ 50,000
Accounts receivable ($140,000 x 70%) ............................. 98,000
Merchandise inventory (600 units x $35) ........................ 21,000
Total current assets ....................................................... 169,000
Equipment ...................................................................... $84,000
Less accumulated depreciation (note 1) ...................... 47,000 37,000
Total assets .................................................................... $206,000
LIABILITIES AND EQUITY
Liabilities
Accounts payable ....................................................... $89,000
Income taxes payable ................................................. 26,000
Bank loan payable ....................................................... 10,000 125,000
Stockholders’ equity
Common stock ............................................................. 25,000
Retained earnings (note 2) .......................................... 56,000 81,000
Total liabilities and equity ............................................. $206,000
Supporting calculations
(1) Accumulated depreciation
Beginning ..................................................................... $46,000 Depreciation expense ................................................. 1,000 Ending .......................................................................... $47,000
(2) Retained earnings Beginning ..................................................................... $ 8,000 Net income ................................................................... 48,000 Ending .......................................................................... $56,000
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Financial & Managerial Accounting, 5th Edition 1120
Exercise 20-18 (15 minutes)
FORTUNE, INC. Budgeted Income Statement For Quarter Ended March 31
Sales (note 1) ..................................................................... $3,750,000
Cost of goods sold (note 2) ............................................. 2,100,000
Gross profit ..................................................................... 1,650,000
Operating expenses
Commissions expense (8% of sales) ............................. $300,000
Rent expense ($14,000 x 3) ............................................. 42,000
Advertising expense (15% of sales) ............................... 562,500
Office salaries expense ($75,000 x 3) ............................ 225,000
Depreciation expense ($40,000 x 3) ............................... 120,000
Interest expense ($250,000 x 15% x 3/12) .........................
Total operating expenses ............................................
9,375
1,258,875
Income before income taxes ......................................... 391,125
Income tax expense (note 3) ............................................ 117,338
Net income ....................................................................... $ 273,787
Supporting calculations (1) Sales
Unit sales (45,000 + 55,000 + 50,000) ............. 150,000 Unit price ......................................................... $25 Sales dollars .................................................... $3,750,000
(2) Cost of goods sold
Unit sales (45,000 + 55,000 + 50,000) ............. 150,000 Unit cost........................................................... $14 Cost of goods sold dollars ............................. $2,100,000
(3) Income tax expense
Pre-tax income ................................................ $ 391,125 Tax rate ............................................................ 30% Income tax expense ........................................ $ 117,338*
* Rounded to the nearest dollar.
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Solutions Manual, Chapter 20 1121
Exercise 20-19 (10 minutes)
MANNER COMPANY Direct Labor Budget
For July, August, and September
July August Sept.
Budgeted production (units) ...................... 620 680 540
Labor requirements per unit (hours) ......... x 2 x 2 x 2
Total labor hours needed ............................ 1,240 1,360 1,080
Labor rate per hour ...................................... $ 20 $ 20 $ 21
Labor dollars ................................................ $24,800 $27,200 $22,680
Exercise 20-20 (15 minutes)
HOSPITABLE CO. Production Budget
For April, May, and June
April May June
Next month’s budgeted sales (units) ......... 580 540 620
Ratio of inventory to future sales ............... x 25% x 25% x 25%
Budgeted ending inventory (units) ........... 145 135 155
Add budgeted sales for the month ............ 500 580 540
Required units of available production ..... 645 715 695
Deduct beginning inventory (units) ........... (190) (145) (135)
Units to be produced ................................... 455 570 560
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Financial & Managerial Accounting, 5th Edition 1122
Exercise 20-21 (15 minutes)
HOSPITABLE CO. Direct Materials Budget For April, May, and June
April May June
Budgeted production (units)* ..................... 455 570 560
Materials requirements per unit ................. x 5 x 5 x 5
Materials needed for production (lbs.) ...... 2,275 2,850 2,800
Add budgeted ending inventory** .............. 855 840 810
Total materials requirements (lbs.) ............ 3,130 3,690 3,610
Deduct beginning inventory (lbs.) .............. (663) (855) (840)
Materials to be purchased (lbs.) ................. 2,467 2,835 2,770
* From Exercise 20-20
** 30% of next month’s materials needed for production. July’s materials needed for production (2,700 pounds = 540 units x 5) is given.
Exercise 20-22 (10 minutes) (1) h (2) d (3) g (4) e (5) i (6) b (7) a (8) f (9) c Exercise 20-23 (5 minutes) Potential negative outcomes from participatory budgeting include the
potential for employees to (1) understate sales budgets and//or overstate
expense budgets, (2) commit unethical or fraudulent acts in order to meet
budgeted results, and (3) always spend budgeted amounts, even if on
unnecessary items.
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Solutions Manual, Chapter 20 1123
Exercise 20-24 (15 minutes)
RENDER CO. CPA Activity-Based Budget
For Year Ending December 31, 2013
Budgeted Hours
Budgeted Price/hour
Budgeted Cost
Data-entry ..................................................... 2,200 $10 $ 22,000
Auditing ........................................................ 4,800 40 192,000
Tax ................................................................. 4,300 50 215,000
Consulting ....................................................
Total ..............................................................
750
12,050
50
37,500
$466,500
Exercise 20-25 (15 minutes)
RIDA INC. Direct Materials Budget
Second Quarter
Units to be produced ...............................................................
240,000
Materials requirement per unit ............................................... x .60
Materials needed for production (units) ................................ 144,000
Add budgeted ending inventory (units)* ............................... 15,750
Total materials requirements (units) ...................................... 159,750
Deduct beginning inventory (units)** ....................................
Materials to be purchased (units) .........................................
Material price per unit..............................................................
Total cost of direct materials purchases ...............................
(72,000)
87,750
x $175
$15,356,250
*(52,500 x 0.60) x 50%
**144,000 x 50%
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Financial & Managerial Accounting, 5th Edition 1124
Exercise 20-26 (15 minutes) 1.
RIDA INC. Direct Labor Budget
Second Quarter
Units to be produced ...............................................................
240,000
Labor requirements per unit (hours) ..................................... x 4
Total labor hours needed ........................................................ 960,000
Labor rate (per hour) ............................................................... x $9
Labor dollars ............................................................................ $8,640,000
2.
RIDA INC. Factory Overhead Budget
Second Quarter
Total labor hours needed ........................................................
960,000
Variable overhead rate per DL hour ....................................... x $11
Budgeted variable overhead ................................................... $10,560,000
Budgeted fixed overhead ........................................................ 450,000
Budgeted total overhead ......................................................... $11,010,000
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Solutions Manual, Chapter 20 1125
Exercise 20-27 (20 minutes)
RAD CO. Direct Materials Budget For April, May, and June
April May June
Budget production (units) ........................... 442 570 544
Materials requirements per unit ................. x 5 x 5 x 5
Materials needed for production (lbs.) ...... 2,210 2,850 2,720
Add budgeted ending inventory* ............... 855 816 810
Total materials requirements (lbs.) ............ 3,065 3,666 3,530
Deduct beginning inventory (lbs.) .............. (663) (855) (816)
Materials to be purchased (lbs.) ................. 2,402 2,811 2,714
*30% of next month’s materials needed for production. July’s materials needed for production equals 2,700 pounds (540 units x 5).
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Financial & Managerial Accounting, 5th Edition 1126
Exercise 20-28 (15 minutes) 1.
RAD CO. Direct Labor Budget
For April, May, and June
April May June
Budget production (units) ........................... 442 570 544
Direct labor hours per unit .......................... x 0.50 x 0.50 x 0.50
Total labor hours needed ............................ 221 285 272
Labor rate (per hour) ................................... x $16 x $16 x $16
Labor cost ..................................................... $3,536 $4,560 $4,352
2.
RAD CO. Factory Overhead Budget For April, May, and June
April May June
Total labor hours needed ............................ 221 285 272
Variable factory overhead rate ................... x $20 x $20 x $20
Budgeted variable overhead ....................... $4,420 $5,700 $5,440
Budgeted fixed overhead ............................ 8,000 8,000 8,000
Total factory overhead ................................ $12,420 $13,700 $13,440
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Solutions Manual, Chapter 20 1127
PROBLEM SET A
Problem 20-1A (60 minutes)
Part 1
KEGGLER’S SUPPLY Merchandise Purchases Budgets
For March, April, and May
March April May
FOOTWEAR
Budgeted sales for next month ........................... 25,000 32,000 35,000
Ratio of ending inventory to future sales ........... 30% 30% 30%
Budgeted ending inventory ................................. 7,500 9,600 10,500
Add budgeted sales .............................................. 15,000 25,000 32,000
Required units of available merchandise ........... 22,500 34,600 42,500
Less actual (or budgeted) beginning inventory ....... (20,000) (7,500) (9,600)
Budgeted purchases ............................................ 2,500 27,100 32,900
SPORTS EQUIPMENT
Budgeted sales for next month ........................... 90,000 95,000 90,000
Ratio of ending inventory to future sales ........... 30% 30% 30%
Budgeted ending inventory ................................. 27,000 28,500 27,000
Add budgeted sales .............................................. 70,000 90,000 95,000
Required units of available merchandise ........... 97,000 118,500 122,000
Less actual (or budgeted) beginning inventory ....... (80,000) (27,000) (28,500)
Budgeted purchases ............................................ 17,000 91,500 93,500
APPAREL
Budgeted sales for next month ........................... 38,000 37,000 25,000
Ratio of ending inventory to future sales ........... 30% 30% 30%
Budgeted ending inventory ................................. 11,400 11,100 7,500
Add budgeted sales .............................................. 40,000 38,000 37,000
Required units of available merchandise ........... 51,400 49,100 44,500
Less actual (or budgeted) beginning inventory ....... (50,000) (11,400) (11,100)
Budgeted purchases ............................................ 1,400 37,700 33,400
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Financial & Managerial Accounting, 5th Edition 1128
Problem 20-1A (Continued)
Part 2. Analysis Component
The factor that causes the first month’s purchases to be so much smaller is
the excess inventory that accumulated just prior to the budgeting period.
For example, 20,000 units of footwear are in March’s beginning inventory;
however, March sales are budgeted at only 15,000 units. Accordingly,
budgeted purchases are smaller because it is management’s goal to
reduce the inventory to only 30% of the next month’s sales.
This overstocking factor could exist for a number of reasons, including:
Management may have simply lost sight of inventory levels, thereby
allowing them to reach inappropriately high levels.
There may have been some potentially disruptive factor (such as a
strike, bad weather, or political uncertainty) that would have temporarily
interrupted the smooth delivery of products from the supplier. Thus,
management would have found it prudent to accumulate an excess as a
temporary safety stock against an interrupted supply.
The company’s suppliers may have only recently become more
dependable than they were in the past.
A supplier may have recently located a new distribution facility nearby,
with the result that the merchandise can be delivered more promptly.
Competition among suppliers may have caused them to become more
customer oriented, with the result that they will deliver products in
smaller lots more quickly.
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Solutions Manual, Chapter 20 1129
Problem 20-2A (50 minutes)
ONEIDA COMPANY Cash Budget
For September, October, and November
September October November
Beginning balance .......................................... $ 5,000 $ 99,250 $ 69,500
Cash receipts
Collection on accounts receivable* ............ 159,250 249,250 338,100
Receipts from bank loan .............................. 100,000 _______ _______
Total cash available ........................................ 264,250 348,500 407,600
Cash disbursements
Payments on accounts payable** ............... 100,000 217,000 228,000
Payroll ............................................................ 20,000 22,000 24,000
Rent ................................................................ 10,000 10,000 10,000
Other expenses ............................................. 35,000 30,000 20,000
Repayment on bank loan ............................. 100,000
Interest on bank loan*** ............................... ________ ________ 3,000
Total cash disbursements ........................... 165,000 279,000 385,000
Ending cash balance ...................................... $ 99,250 $ 69,500 $ 22,600
*** Interest at 12% on $100,000 for 3 months is $3,000. Supporting schedules
Collections of credit sales* August September October November
Aug. sales ($215,000)—[25%: 45%: 20%: 9%] ................ $ 53,750 $ 96,750 $ 43,000 $ 19,350 Sept. sales ($250,000)—[25%: 45%: 20%] ....................... - 62,500 112,500 50,000 Oct. sales ($375,000)—[25%: 45%] .................................. - - 93,750 168,750 Nov. sales ($400,000)—[25%] .......................................... - - - 100,000 Total .................................................................................. $ 53,750 $159,250 $249,250 $338,100
Payments on credit purchases** August September October November
Aug. purchases ($125,000)—(0%: 80%: 20%) ........................................ $ 0 $100,000 $ 25,000 $ - Sept. purchases ($240,000)—(0%: 80%: 20%) ....................................... - 0 192,000 48,000 Oct. purchases ($225,000)—(0%: 80%) .................................................. - - 0 180,000 Nov. purchases ($200,000)—(0%) .......................................................... - - - 0 Total ......................................................................................................... $ 0 $100,000 $217,000 $228,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial & Managerial Accounting, 5th Edition 1130
Problem 20-3A (70 minutes)
Part 1
Cash collections of credit sales (accounts receivable)
From sales in Total % Collected June July
April .............................................. $ 720,000 28% $201,600 May ............................................... 360,000 50 180,000 ............................................... 28 $100,800 June .............................................. 1,080,000 20 216,000 .............................................. 50 540,000 July ............................................... 900,000 20 _______ 180,000 Total collected ............................. $597,600 $820,800
Part 2
Budgeted ending inventories (in units)
April May June July
Next month’s budgeted sales ..................... 2,000 6,000 5,000 3,800 Ratio of inventory to future sales ............... 20% 20% 20% 20% Budgeted “base” ending inventory ........... 400 1,200 1,000 760 Plus safety stock.......................................... 100 100 100 100 Budgeted ending inventory ........................ 500 1,300 1,100 860
Part 3
AZTEC COMPANY Merchandise Purchases Budgets
For May, June, and July
May June July
Budgeted ending inventory (from part 2) ............ 1,300 1,100 860
Add budgeted sales .......................................... 2,000 6,000 5,000
Required units of available merchandise ....... 3,300 7,100 5,860
Deduct beginning inventory ............................ (500) (1,300) (1,100)
Budgeted purchases (units) ............................ 2,800 5,800 4,760
Budgeted cost per unit ..................................... $110 $110 $110
Budgeted cost of merchandise purchases ........ $308,000 $638,000 $523,600
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Solutions Manual, Chapter 20 1131
Problem 20-3A (Continued)
Part 4
Cash payments on product purchases (for June and July)
From purchases in Total % Paid June July
May ................................................ $308,000 40% $123,200 June ............................................... 638,000 60 382,800 .............................................. 40 $255,200 July ................................................ 523,600 60 ________ 314,160 Total paid ...................................... $506,000 $569,360
Part 5
AZTEC COMPANY Cash Budget June and July
June July
Beginning cash balance ................................................ $100,000 $100,000
Cash receipts from customers ..................................... 597,600 820,800
Total available cash ....................................................... 697,600 920,800
Cash disbursements Payments on purchases ............................................. 506,000 569,360
Selling and administrative expenses ......................... 110,000 110,000
Interest expense* ......................................................... 250 437
Total disbursements ................................................... 616,250 679,797
Preliminary cash balance .............................................. 81,350 241,003
Additional loan from bank ............................................ 18,650 0
Repayment of loan to bank ........................................... ________ 43,650
Ending cash balance ..................................................... $100,000 $197,353
Ending loan balance** ................................................... $ 43,650 $ 0
* Interest expense ** Loan balance June = $25,000 x 12%/12 = $250 June = $25,000 + $18,650 = $43,650 July = $43,650 x 12%/12 = $437 (rounded) July = $43,650 - $43,650 = $0
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Financial & Managerial Accounting, 5th Edition 1132
Problem 20-3A (Concluded) Part 6
Information about the need for cash in the near future would be helpful to
the management of Aztec Company because they would be able to enter
into negotiations with potential lenders well ahead of any immediate need
to obtain the cash. They would not only be able to avoid the risk of being
unable to pay their bills, they would also be able to enter into the debt
agreement on the most favorable terms available to them.
In addition, a good cash budget is likely to be helpful to management in
negotiating the terms of the loan. In this situation, the company can tell the
bank that it will need another loan in the following month. Hopefully, the
company will be able to develop additional cash budgets that will show
enough cash being accumulated to allow the loans to be paid back. If
management is armed with this kind of information, it should be able to
negotiate more favorable terms with the bank.
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Solutions Manual, Chapter 20 1133
Problem 20-4A (50 minutes)
Part 1
MERLINE Budgeted Income Statement
For Months of January, February, and March, 2014
January February March
Sales* ....................................................... $2,062,500 $2,268,750 $2,495,625
Cost of goods sold* ................................ 1,237,500 1,361,250 1,497,375
Gross profit ............................................. 825,000 907,500 998,250
Expenses
Sales commissions (10%) .................... 206,250 226,875 249,563
Advertising ($250,000 x 1.15) .............. 287,500 287,500 287,500
Store rent ............................................... 30,000 30,000 30,000
Administrative salaries ........................ 45,000 45,000 45,000
Depreciation .......................................... 50,000 50,000 50,000
Other expenses ..................................... 10,000 10,000 10,000
Total expenses ........................................ 628,750 649,375 672,063
Net income ............................................... $ 196,250 $ 258,125 $ 326,187
* Volume for the next three months increases by 10% per month
Sales Cost of Goods Units (@ $125) Sold (@ $75)
December ($2,250,000/$150) ..................... 15,000 January ...................................................... 16,500 $2,062,500 $1,237,500 February ..................................................... 18,150 2,268,750 1,361,250 March .......................................................... 19,965 2,495,625 1,497,375
Part 2: Analysis Component
The plan for increasing sales volume by reducing the price and increasing advertising would cause the company to generate less net income in each of the three months of the next quarter than was earned in December. This result is not encouraging. However, the rate of increase in earnings over the three months is substantial. If the growth rate for sales can be maintained without increasing commissions or other expenses, a large payoff would be earned by making the changes and riding out the short-run period of relatively lower profits. This is a common problem for management when introducing a new strategy, product, or service to the market.
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Financial & Managerial Accounting, 5th Edition 1134
Problem 20-5A (130 minutes)
Part 1
DIMSDALE SPORTS CO. Sales Budgets
January, February, and March 2014
Budgeted Units
Budgeted Unit Price
Budgeted Total Dollars
January 2014 ........................................................ 7,000 $55 $ 385,000
February 2014....................................................... 9,000 55 495,000
March 2014 ........................................................... 11,000 55 605,000
Total for the first quarter ..................................... 27,000 $1,485,000
Part 2
DIMSDALE SPORTS CO. Merchandise Purchases Budgets
January, February, and March 2014
January February March Total
Next month’s budgeted sales ............... 9,000 11,000 10,000
Ratio of inventory to future sales ......... x 20% x 20% x 20%
Budgeted ending inventory .................. 1,800 2,200 2,000
Add budgeted sales ............................... 7,000 9,000 11,000
Required available merchandise .......... 8,800 11,200 13,000
Deduct beginning inventory ................. (5,000) (1,800) (2,200)
Units to be purchased ........................... 3,800 9,400 10,800 24,000
Budgeted cost per unit .......................... $ 30 $ 30 $ 30 $ 30
Budgeted merchandise purchases ...... $114,000 $282,000 $324,000 $720,000
Part 3
DIMSDALE SPORTS CO. Selling Expense Budgets
January, February, and March 2014 January February March Total
Budgeted sales ..................................... $385,000 $495,000 $605,000
Sales commission percent .................. x 20% x 20% x 20%
Sales commissions expense ............... 77,000 99,000 121,000 $297,000
Sales salaries........................................ 5,000 5,000 5,000 15,000
Total selling expenses ......................... $ 82,000 $104,000 $126,000 $312,000
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Solutions Manual, Chapter 20 1135
Problem 20-5A (Continued)
Part 4
DIMSDALE SPORTS CO. General and Administrative Expense Budgets
January, February, and March 2014
January February March Total
Salaries ....................................................... $12,000 $12,000 $12,000 $36,000
Maintenance ............................................... 2,000 2,000 2,000 6,000
Depreciation* .............................................. 6,000 7,000 7,300 20,300
Total expenses ........................................... $20,000 $21,000 $21,300 $62,300
* Depreciation expense calculations
Annual Amount January February March Total
Equipment owned on 12/31/2013 ....................
$67,500
$5,625
$5,625
$5,625
$16,875
Purchased in January ........ 4,500 375 375 375 1,125 Purchased in February ....... 12,000 1,000 1,000 2,000 Purchased in March ............ 3,600 ______ ______ 300 300 Totals ................................... $6,000 $7,000 $7,300 $20,300
Part 5
DIMSDALE SPORTS CO. Capital Expenditures Budgets
January, February, and March 2014
January February March
Equipment purchases ......................................... $36,000 $96,000 $ 28,800
Land purchase ..................................................... ______ ______ 150,000
Total ...................................................................... $36,000 $96,000 $178,800
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Financial & Managerial Accounting, 5th Edition 1136
Problem 20-5A (Continued)
Part 6 DIMSDALE SPORTS CO.
Cash Budgets
January, February, and March 2014
January February March
Beginning cash balance ...................................... $ 36,000 $ 30,100 $210,300
Cash receipts from customers (note A)................ 221,250 697,000 489,500
Total cash available ............................................. 257,250 727,100 699,800
Cash disbursements
Payments for merchandise (note B) ................... 80,000 302,800 147,600
Sales commissions ........................................... 77,000 99,000 121,000
Sales salaries ..................................................... 5,000 5,000 5,000
General & administrative salaries .................... 12,000 12,000 12,000
Maintenance expense ....................................... 2,000 2,000 2,000
Interest ($15,000 x 1%) ............................................ 150
Taxes payable .................................................... 90,000
Purchases of equipment ................................... 36,000 96,000 28,800
Purchase of land ................................................ ________ ________ 150,000
Total cash disbursements .................................. 212,150 516,800 556,400
Preliminary cash balance .................................... 45,100 210,300 143,400
Repayment of loan to bank ................................. (15,000) _______ ________
Ending cash balance ........................................... $ 30,100 $210,300 $143,400
Loan balance, end of month ............................... $ 0 $ 0 $ 0
Supporting calculations January February March Total Note A: Cash receipts from customers Total sales ......................................................... $385,000 $495,000 $605,000 $1,485,000 Cash sales (25%) .............................................. 96,250 123,750 151,250 371,250 Credit sales (75%) ............................................ 288,750 371,250 453,750 1,113,750 Cash collections Receivables at 12/31/2013 ............................... $125,000 $400,000 $525,000 Month after sale (60%) ..................................... 173,250 $222,750 396,000 Second month (40%) ........................................ _______ _______ 115,500 115,500 Total from credit customers ............................ 125,000 573,250 338,250 1,036,500 Cash sales......................................................... 96,250 123,750 151,250 371,250 Total cash received .......................................... $221,250 $697,000 $489,500 $1,407,750
Note B: Cash payments for merchandise Credit purchases .............................................. $114,000 $282,000 $324,000 $720,000 Accounts payables at 12/31/2013 $ 80,000 $280,000 $360,000 Month after purchase (20%) ............................ 22,800 $ 56,400 79,200 Second month (80%) ........................................ _______ _______ 91,200 91,200 Total paid on purchases .................................. $ 80,000 $302,800 $147,600 $530,400
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Solutions Manual, Chapter 20 1137
Problem 20-5A (Continued)
Part 7
DIMSDALE SPORTS CO. Budgeted Income Statement
For Three Months Ended March 31, 2014
Sales ................................................................................ $1,485,000 Cost of goods sold (27,000 units @ $30) ..................... 810,000 Gross profit .................................................................... 675,000 Operating expenses
Sales commissions ..................................................... $297,000 Sales salaries ............................................................... 15,000 General administrative salaries ................................. 36,000 Maintenance expense ................................................. 6,000 Depreciation expense ................................................. 20,300 Interest expense .......................................................... 150 374,450
Income before taxes ...................................................... 300,550 Income taxes (40%) ....................................................... 120,220 Net income ...................................................................... $180,330
Part 8
DIMSDALE SPORTS CO. Budgeted Balance Sheet
March 31, 2014 ASSETS
Cash ............................................................ $ 143,400 Cash budget
Accounts receivable .................................. 602,250 Note C
Inventory ..................................................... 60,000 Note D
Total current assets ................................... 805,650
Land ............................................................ 150,000 Capital budget
Equipment .................................................. $700,800 Note E
Less accumulated depreciation ............... 87,800 613,000 Note F
Total assets ................................................ $1,568,650
LIABILITIES AND EQUITY
Accounts payable ...................................... $ 549,600 Note G
Bank loan payable ..................................... 0 Cash budget
Taxes payable (due 4/15/2014) ................. 120,220 Income stmt.
Total liabilities ............................................ 669,820
Common stock ........................................... $472,500 Unchanged
Retained earnings ...................................... 426,330 Note H
Total stockholders’ equity ........................ 898,830
Total liabilities and equity ......................... $1,568,650
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Financial & Managerial Accounting, 5th Edition 1138
Problem 20-5A (Concluded)
Supporting Footnotes
Note C Beginning receivables ...................................................... $ 525,000 Credit sales ........................................................................ 1,113,750 Less collections ................................................................ (1,036,500) Ending receivables ............................................................ $ 602,250 Note D Beginning inventory .......................................................... $ 150,000 Purchases .......................................................................... 720,000 Less cost of goods sold ................................................... (810,000) Ending inventory* .............................................................. $ 60,000 *Also equals 2,000 units @ $30 = $60,000 Note E Beginning equipment ........................................................ $ 540,000 Purchased in January ....................................................... 36,000 Purchased in February...................................................... 96,000 Purchased in March .......................................................... 28,800 Total ................................................................................... $ 700,800 Note F Beginning accumulated depreciation .............................. $ 67,500 Depreciation expense ....................................................... 20,300 Total ................................................................................... $ 87,800 Note G Beginning accounts payable ............................................ $ 360,000 Purchases .......................................................................... 720,000 Payments ........................................................................... (530,400) Ending accounts payable ................................................. $ 549,600 Note H Beginning retained earnings ............................................ $ 246,000 Net income ......................................................................... 180,330 Total ................................................................................... $ 426,330
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Solutions Manual, Chapter 20 1139
Problem 20-6A (40 minutes) Part 1
BLACK DIAMOND COMPANY Production Budget (in units)
Third Quarter
Budgeted ending inventory (skis) ......................................................... 3,500
Add budgeted sales ................................................................................ 150,000
Required units of available production ................................................ 153,500
Deduct beginning inventory (skis) ........................................................ (5,000)
Units to be manufactured ...................................................................... 148,500
Part 2
BLACK DIAMOND COMPANY Direct Materials Budget (in lbs, except where noted)
Third Quarter
Materials (carbon fiber) needed for production (148,500 x 2) ........ 297,000
Add budgeted ending inventory (carbon fiber) ............................... 4,000
Total materials (carbon fiber) requirements .................................... 301,000
Deduct beginning inventory (carbon fiber) ...................................... (6,000)
Units of materials (carbon fiber) to be purchased ........................... 295,000
Materials cost per pound ................................................................... $15
Total cost of materials purchases (295,000 x $15) .......................... $4,425,000
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Financial & Managerial Accounting, 5th Edition 1140
Problem 20-6A (concluded) Part 3
BLACK DIAMOND COMPANY Direct Labor Budget
Third Quarter
Units to be produced ............................................................... 148,500
Labor requirements per unit (hours) ..................................... x 0.50
Total labor hours needed ........................................................ 74,250
Labor rate (per hour) ............................................................... x $20
Labor dollars ............................................................................ $1,485,000
Part 4
BLACK DIAMOND COMPANY Factory Overhead Budget
Third Quarter
Total labor hours needed ........................................................
74,250
Variable overhead rate per DL hour ....................................... x $8
Budgeted variable overhead ................................................... $ 594,000
Budgeted fixed overhead ........................................................ 1,782,000
Budgeted total overhead ......................................................... $2,376,000
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Solutions Manual, Chapter 20 1141
Problem 20-7A (130 minutes) Part 1
ZIGBY MANUFACTURING Sales Budgets
April, May, and June 2013
Budgeted Units
Budgeted Unit Price
Budgeted Total Dollars
April 2013 .............................................................. 20,500 $23.85 $ 488,925
May 2013 ............................................................... 19,500 23.85 465,075
June 2013 .............................................................. 20,000 23.85 477,000
Total for the second quarter ............................... 60,000 $1,431,000
Part 2
ZIGBY MANUFACTURING Production Budget
April, May, and June 2013
April May June Total
Next month’s budgeted sales ............... 19,500 20,000 20,500
Ratio of inventory to future sales ......... x 80% x 80% x 80%
Budgeted ending inventory .................. 15,600 16,000 16,400
Add budgeted sales ............................... 20,500 19,500 20,000
Required units to be produced ............. 36,100 35,500 36,400
Deduct beginning inventory ................. (16,400) (15,600) (16,000)
Units to be produced ............................. 19,700 19,900 20,400 60,000
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Financial & Managerial Accounting, 5th Edition 1142
Problem 20-7A (continued)
Part 3
ZIGBY MANUFACTURING Raw Materials Budget
April, May, and June 2013
April May June Total
Production budget (units) ..................... 19,700 19,900 20,400
Materials requirement per unit ............. x 0.50 x 0.50 x 0.50
Materials needed for production .......... 9,850 9,950 10,200
Add budgeted ending inventory ........... 4,975 5,100 4,000
Total materials requirements (units) .... 14,825 15,050 14,200
Deduct beginning inventory ................. (4,925) (4,975) (5,100)
Materials to be purchased .................... 9,900 10,075 9,100 29,175
Material price per unit ........................... $ 20 $ 20 $ 20 $ 20
Total cost of direct material purchases ..... $198,000 $201,500 $182,000 $581,500
Part 4
ZIGBY MANUFACTURING Direct Labor Budget
April, May, and June 2013
April May June Total
Budgeted production (units) ................ 19,700 19,900 20,400
Labor requirements per unit (hours) .... x 0.50 x 0.50 x 0.50
Total labor hours needed ...................... 9,850 9,950 10,200 30,000
Labor rate (per hour) ............................. $ 15 $ 15 $ 15 $ 15
Labor dollars .......................................... $147,750 $149,250 $153,000 $450,000
Part 5
ZIGBY MANUFACTURING Factory Overhead Budget April, May, and June 2013
April May June Total
Labor hours needed ............................. 9,850 9,950 10,200
Variable factory overhead rate ............ x $2.70 x $2.70 x $2.70
Budgeted variable overhead ............... 26,595 26,865 27,540 $ 81,000
Fixed overhead ..................................... 20,000 20,000 20,000 60,000
Budgeted total overhead ..................... $46,595 $46,865 $47,540 $141,000
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Solutions Manual, Chapter 20 1143
Problem 20-7A (continued)
Part 6
ZIGBY MANUFACTURING Selling Expense Budgets April, May, and June 2013
April May June Total
Budgeted sales ..................................... $488,925 $465,075 $477,000
Sales commission percent .................. x 8% x 8% x 8%
Sales commissions expense ............... 39,114 37,206 38,160 $114,480
Sales salaries........................................ 3,000 3,000 3,000 9,000
Total selling expenses ......................... $ 42,114 $ 40,206 $ 41,160 $123,480
Part 7
ZIGBY MANUFACTURING General and Administrative Expense Budgets
April, May, and June 2013
April May June Total
Salaries ....................................................... $12,000 $12,000 $12,000 $36,000
Interest on long-term note ........................ 4,500 4,500 4,500 13,500
Total expenses ........................................... $16,500 $16,500 $16,500 $49,500
*$500,000 x 0.90%
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Financial & Managerial Accounting, 5th Edition 1144
Problem 20-7A (Continued)
Part 8 ZIGBY MANUFACTURING
Cash Budgets
April, May, and June 2013
April May June
Beginning cash balance ...................................... $ 40,000 $ 83,346 $124,295
Cash receipts from customers (note A)................ 488,925 481,770 468,653
Total cash available ............................................. 528,925 565,116 592,948
Cash disbursements
Payments for raw materials (note B) .................. 200,500 198,000 201,500
Payments for direct labor .................................
Payments for variable overhead ......................
Sales commissions ...........................................
147,750
26,595
39,114
149,250
26,865
37,206
153,000
27,540
38,160
Sales salaries ..................................................... 3,000 3,000 3,000
General & administrative salaries .................... 12,000 12,000 12,000
Dividends ........................................................... 10,000
Loan interest ($12,000 x 1%) .................................. 120
Long-term note interest ($500,000 x .0.9%) ............
Purchase of equipment .....................................
4,500
_______
4,500
_______
4,500
130,000
Total cash disbursements .................................. 433,579 440,821 569,700
Preliminary cash balance .................................... 95,346 124,295 23,248
Additional loan .....................................................
Repayment of loan to bank .................................
(12,000)
_______
16,752 _______
Ending cash balance ........................................... $ 83,346 $124,295 $ 40,000
Loan balance, end of month ............................... $ 0 $ 0 $ 16,752
Supporting calculations April May June Total Note A: Cash receipts from customers Total sales ......................................................... $488,925 $465,075 $477,000 $1,431,000 Cash sales (30%) .............................................. 146,677 139,522 143,100 429,299 Credit sales (70%) ............................................ 342,248 325,553 333,900 1,001,701 Cash collections Month after sale (100%) ................................... $342,248 $342,248 $325,553 $1,010,049 Cash sales......................................................... 146,677 139,522 143,100 429,299 Total cash received .......................................... $488,925 $481,770 $468,653 $1,439,348
Note B: Cash payments for raw materials Month after purchase (100%) .......................... $200,500 $198,000 $201,500 $ 600,000
NOTE: Cash sales are rounded down to the nearest whole dollar. All other amounts are rounded
up to the nearest whole dollar. Student answers will vary slightly if they round differently.
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Solutions Manual, Chapter 20 1145
Problem 20-7A (Continued)
Part 9
ZIGBY MANUFACTURING Budgeted Income Statement
For Three Months Ended June 30, 2013
Sales ................................................................................ $1,431,000 Cost of goods sold (60,000 units @ $19.85) ................ 1,191,000 Gross profit .................................................................... 240,000 Operating expenses
Sales commissions ..................................................... $114,480 Sales salaries ............................................................... 9,000 General administrative salaries ................................. 36,000 Long-term note interest .............................................. 13,500 Interest expense .......................................................... 120 173,100
Income before taxes ...................................................... 66,900 Income taxes (35%) ....................................................... 23,415 Net income ...................................................................... $ 43,485
Part — Budgeted Retained Earnings & Budgeted Balance Sheet
ZIGBY MANUFACTURING Budgeted Balance Sheet
June 30, 2013 ASSETS
Cash ............................................................ $ 40,000 Cash budget
Accounts receivable .................................. 333,900 Note C
Raw materials inventory ........................... Finished goods inventory .........................
80,000 325,540
Note D Note E
Total current assets ................................... 779,440
Equipment .................................................. $730,000 Note F
Less accumulated depreciation ............... 210,000 520,000 Note G
Total assets ................................................ $1,299,440
LIABILITIES AND EQUITY
Accounts payable ...................................... $ 182,000 Note H
Bank loan payable ..................................... 16,752 Cash budget
Taxes payable ............................................ 23,415 Income stmt.
Total current liabilities .............................. 222,167
Long-term note payable ............................ Common stock ...........................................
$335,000
500,000 Unchanged
Retained earnings ...................................... 242,273 Note I
Total stockholders’ equity ........................ 577,273
Total liabilities and equity ......................... $1,299,440
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Financial & Managerial Accounting, 5th Edition 1146
Problem 20-7A (Concluded)
Supporting Footnotes
Note C Beginning receivables ...................................................... $ 342,248 Credit sales ........................................................................ 1,001,701 Less collections ................................................................ (1,010,049) Ending receivables ............................................................ $ 333,900 Note D Beginning raw materials inventory .................................. $ 98,500 Purchases of raw materials .............................................. 581,500 Less materials used in production** ................................ (600,000) Ending raw materials inventory* ...................................... $ 80,000 *Also equals 4,000 units @ $20 = $80,000 **30,000 units x $20 per unit
Note E Beginning finished goods inventory ................................ $ 325,540 Cost of goods completed during the period ................... 1,191,000 Less cost of goods sold during the period ..................... (1,191,000) Ending finished goods inventory*.................................... $ 325,540 *Also equals 16,400 units @ $19.85 = $325,540 Note F
Beginning equipment ........................................................ $ 600,000 Purchased in June ............................................................ 130,000 Total ................................................................................... $ 730,000 Note G Beginning accumulated depreciation .............................. $ 150,000 Depreciation expense ....................................................... 60,000 Total ................................................................................... $ 210,000 Note H Beginning accounts payable ............................................ $ 200,500 Purchases of raw materials .............................................. 581,500 Payments for raw materials .............................................. (600,000) Ending accounts payable ................................................. $ 182,000 Note I
ZIGBY MANUFACTURING Budgeted Statement of Retained Earnings
For Three Months Ended June 30, 2013
Retained earnings, Beginning ......................... $208,788 Add: Net income ......................................... 43,485 252,273 Less: Dividends ........................................... 10,000 Retained earnings, Ending .............................. $242,273
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Solutions Manual, Chapter 20 1147
PROBLEM SET B
Problem 20-1B (60 minutes)
Part 1
H2O SPORTS CORPORATION Merchandise Purchases Budgets
For April, May, and June
April May June
WATER SKIS
Budgeted sales for next month ........................... 90,000 130,000 100,000
Ratio of ending inventory to future sales ........... 10% 10% 10%
Budgeted ending inventory ................................. 9,000 13,000 10,000
Add budgeted sales .............................................. 70,000 90,000 130,000
Required units of available merchandise ........... 79,000 103,000 140,000
Less actual (or budgeted) beginning inventory ....... (40,000) (9,000) (13,000)
Budgeted purchases ............................................ 39,000 94,000 127,000
TOW ROPES
Budgeted sales for next month ........................... 90,000 110,000 100,000
Ratio of ending inventory to future sales ........... 10% 10% 10%
Budgeted ending inventory ................................. 9,000 11,000 10,000
Add budgeted sales .............................................. 100,000 90,000 110,000
Required units of available merchandise ........... 109,000 101,000 120,000
Less actual (or budgeted) beginning inventory ....... (90,000) (9,000) (11,000)
Budgeted purchases ............................................ 19,000 92,000 109,000
LIFE JACKETS
Budgeted sales for next month ........................... 190,000 200,000 120,000
Ratio of ending inventory to future sales ........... 10% 10% 10%
Budgeted ending inventory ................................. 19,000 20,000 12,000
Add budgeted sales .............................................. 160,000 190,000 200,000
Required units of available merchandise ........... 179,000 210,000 212,000
Less actual (or budgeted) beginning inventory ....... (150,000) (19,000) (20,000)
Budgeted purchases ............................................ 29,000 191,000 192,000
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Financial & Managerial Accounting, 5th Edition 1148
Problem 20-1B (Concluded) Part 2. Analysis Component
The factor that causes the first month’s purchases to be so much smaller is
the excess inventory that accumulated just prior to the budgeting period.
For example, 40,000 units of water skis are in April’s beginning inventory;
however, April sales are budgeted at only 70,000 units. Accordingly,
budgeted purchases are smaller because it is management’s goal to
reduce the inventory to only 10% of the next month’s sales.
This overstocking factor could exist for a number of reasons, including:
Management may have simply lost sight of inventory levels, thereby
allowing them to reach inappropriately high levels.
There may have been some potentially disruptive factor (such as a
strike, bad weather, or political uncertainty) that would have temporarily
interrupted the smooth delivery of products from the supplier. Thus,
management would have found it prudent to accumulate an excess as a
temporary safety stock against an interrupted supply.
The company’s suppliers may have only recently become more
dependable than they were in the past.
A supplier may have recently located a new distribution facility nearby,
with the result that the merchandise can be delivered more promptly.
Competition among suppliers may have caused them to become more
customer oriented, with the result that they will deliver products in
smaller lots more quickly.
This means H2O Sports can now get by with a much smaller safety stock.
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Solutions Manual, Chapter 20 1149
Problem 20-2B (50 minutes)
SONY STEREO Cash Budgets
For April, May, and June
April May June
Beginning balance .......................................... $ 3,000 $ 53,000 $ 44,000
Cash receipts
Collection on accounts receivable* ............ 136,000 210,000 290,200
Receipts from bank loan .............................. 80,000 _______ _______
Total cash available ........................................ 219,000 263,000 334,200
Cash disbursements
Payments on accounts payable** ............... 80,000 188,000 186,000
Payroll ............................................................ 16,000 17,000 18,000
Rent ................................................................ 6,000 6,000 6,000
Other expenses ............................................. 64,000 8,000 7,000
Repayment on bank loan ............................. 80,000
Interest on bank loan* .................................. ________ ________ 2,400
Total cash disbursements ........................... 166,000 219,000 299,400
Ending cash balance ...................................... $ 53,000 $ 44,000 $ 34,800
* Interest at 12% on $80,000 for 90 days is $2,400.
Supporting calculations
Collections of credit sales* March April May June
March sales ($180,000)—[25%: 45%: 20%: 9%] .............. $ 45,000 $ 81,000 $ 36,000 $ 16,200 April sales ($220,000)—[25%: 45%: 20%] ....................... - 55,000 99,000 44,000 May sales ($300,000)—[25%: 45%] .................................. - - 75,000 135,000 June sales ($380,000)—[25%] .......................................... - - - 95,000 Total .................................................................................. $ 45,000 $136,000 $210,000 $290,200
Payments on credit purchases** March April May June
March purchases ($100,000)—(0%: 80%: 20%) ..................................... $ 0 $ 80,000 $ 20,000 $ - April purchases ($210,000)—(0%: 80%: 20%) ........................................ - 0 168,000 42,000 May purchases ($180,000)—(0%: 80%) .................................................. - - 0 144,000 June purchases ($220,000)—(0%) .......................................................... - - - 0 Total ......................................................................................................... $ 0 $ 80,000 $188,000 $186,000
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Financial & Managerial Accounting, 5th Edition 1150
Problem 20-3B (70 minutes)
Part 1
Cash collections of credit sales (accounts receivable)
From sales in Total % Collected March April
January ..................................... $396,000 23% $ 91,080 February .................................... 495,000 35 173,250 ................................... 23 $113,850 March ........................................ 418,000 40 167,200 ......................................... 35 146,300 April ........................................... 412,500 40 _______ 165,000 Total collected .......................... $431,530 $425,150
Part 2
Budgeted ending inventories (in units) January February March April
Next month’s budgeted sales ..................... 22,500 19,000 18,750 21,000
Ratio of inventory to future sales ............... 20% 20% 20% 20%
Budgeted “base” ending inventory ........... 4,500 3,800 3,750 4,200
Plus safety stock.......................................... 100 100 100 100
Budgeted ending inventory ........................ 4,600 3,900 3,850 4,300 Part 3
CONNICK COMPANY Merchandise Purchases Budgets
For February, March, and April
February March April
Budgeted ending inventory (from part 2) ............ 3,900 3,850 4,300
Add budgeted sales .......................................... 22,500 19,000 18,750
Required units of available merchandise ....... 26,400 22,850 23,050
Deduct beginning inventory ............................ (4,600) (3,900) (3,850)
Budgeted purchases (units) ............................ 21,800 18,950 19,200
Budgeted cost per unit ..................................... $12 $12 $12
Budgeted cost of merchandise purchases ........ $261,600 $227,400 $230,400
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Solutions Manual, Chapter 20 1151
Problem 20-3B (Continued)
Part 4
Cash payments on product purchases (for March and April)
From purchases in Total % Paid March April
February ....................................... $261,600 70% $183,120 March ........................................... 227,400 30 68,220 ............................................ 70 $159,180 April .............................................. 230,400 30 _______ 69,120 Total paid ..................................... $251,340 $228,300
Part 5
CONNICK COMPANY Cash Budget
March and April
March April
Beginning cash balance .......................................................... $ 50,000 $ 58,070
Cash receipts from customers ............................................... 431,530 425,150
Total available cash ................................................................. 481,530 483,220
Cash disbursements
Payments on purchases ....................................................... 251,340 228,300
Selling and administrative expenses ................................... 160,000 160,000
Interest expense* ................................................................... 120 0
Total disbursements ............................................................. 411,460 388,300
Preliminary cash balance ........................................................ $ 70,070 $ 94,920
Additional loan .........................................................................
Repayment of loan ................................................................... (12,000) ________
Ending cash balance ............................................................... $ 58,070 $ 94,920
Ending loan balance ................................................................ $ 0 $ 0
*Interest expense: March = $12,000 x 12% /12 = $120
Part 6
Analysis Component: Information about the supply of cash in the near future would be helpful to the management of Connick Company. A good cash budget would be likely to be helpful to management in negotiating the terms of the loan. If the bank knows, for example, that the full borrowed amount is likely to be repaid in the following month, the interest rate could be substantially lower.
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Financial & Managerial Accounting, 5th Edition 1152
Problem 20-4B (50 minutes)
Part 1
COMP-MEDIA Budgeted Income Statement
For Months of July, August, and September, 2013
July August September
Sales* ......................................................... $1,265,000 $1,391,500 $1,530,650
Cost of goods sold* .................................. 660,000 726,000 798,600
Gross profit ............................................... 605,000 665,500 732,050
Expenses
Sales commissions (10%) ...................... 126,500 139,150 153,065
Advertising ($200,000 x 1.25) ................ 250,000 250,000 250,000
Store rent ................................................. 24,000 24,000 24,000
Administrative salaries .......................... 40,000 40,000 40,000
Depreciation ............................................ 50,000 50,000 50,000
Other ........................................................ 12,000 12,000 12,000
Total expenses .......................................... 502,500 515,150 529,065
Net income ................................................. $ 102,500 $ 150,350 $ 202,985
* Volume for the next three months increases by 10% per month
Sales Cost of Goods Units (@ $115) Sold (@ $60)
June ($1,300,000/$130) .............................. 10,000 July ............................................................. 11,000 $1,265,000 $660,000 August ........................................................ 12,100 1,391,500 726,000 September .................................................. 13,310 1,530,650 798,600
Part 2: Analysis Component
The plan for increasing sales volume by reducing the price and increasing advertising would cause the company to generate less net income in each of the three months of the next quarter than was earned in June. The expected results for the first three months are not encouraging. However, the September net income is 83% of that for June, and the rate of increase in earnings over the three months is substantial. If the growth rate for sales can be maintained without increasing commissions or other expenses, a large payoff might be earned by making the changes and riding out the short-run period of relatively lower profits. This is a common problem for management when introducing a new strategy, product, or service to the market.
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Solutions Manual, Chapter 20 1153
Problem 20-5B (130 minutes)
Part 1
ISLE CORPORATION Sales Budgets
January, February, and March 2014
Budgeted Units
Budgeted Unit Price
Budgeted Total Dollars
January 2014 ....................................................... 6,000 $45 $ 270,000
February 2014...................................................... 8,000 45 360,000
March 2014 .......................................................... 10,000 45 450,000
Total for the first quarter .................................... 24,000 $1,080,000
Part 2
ISLE CORPORATION Merchandise Purchases Budgets
January, February, and March 2014
January February March Total
Next month’s budgeted sales ............... 8,000 10,000 9,000
Ratio of inventory to future sales ......... x 25% x 25% x 25%
Budgeted ending inventory .................. 2,000 2,500 2,250
Add budgeted sales ............................... 6,000 8,000 10,000
Required available merchandise .......... 8,000 10,500 12,250
Deduct beginning inventory ................. (5,000) (2,000) (2,500)
Units to be purchased ........................... 3,000 8,500 9,750 21,250
Budgeted cost per unit .......................... $ 30 $ 30 $ 30 $ 30
Budgeted merchandise purchases ...... $90,000 $255,000 $292,500 $637,500
Part 3
ISLE CORPORATION Selling Expense Budgets
January, February, and March 2014
January February March Total
Budgeted sales ..................................... $270,000 $360,000 $450,000
Sales commission percent .................. x 20% x 20% x 20%
Sales commissions expense ............... 54,000 72,000 90,000 $216,000
Sales salaries........................................ 7,500 7,500 7,500 22,500
Total selling expenses ......................... $ 61,500 $ 79,500 $ 97,500 $238,500
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Financial & Managerial Accounting, 5th Edition 1154
Problem 20-5B (Continued) Part 4
ISLE CORPORATION General and Administrative Expense Budgets
January, February, and March 2014
January February March Total
Salaries ....................................................... $12,000 $12,000 $12,000 $36,000
Maintenance ............................................... 3,000 3,000 3,000 9,000
Depreciation* .............................................. 6,375 7,375 7,675 21,425
Total expenses ........................................... $21,375 $22,375 $22,675 $66,425
* Depreciation expense calculations
Annual Amount January February March Total
Equipment owned on 12/31/2013 ....................
$67,500
$5,625
$5,625
$5,625
$16,875
Purchased in January ........ 9,000 750 750 750 2,250 Purchased in February ....... 12,000 1,000 1,000 2,000 Purchased in March ............ 3,600 ______ ______ 300 300 Total ..................................... $6,375 $7,375 $7,675 $21,425
Part 5
ISLE CORPORATION Capital Expenditures Budgets
January, February, and March 2014
January February March
Equipment purchases ......................................... $72,000 $96,000 $ 28,800
Land purchase ..................................................... _______ _______ 150,000
Total ...................................................................... $72,000 $96,000 $178,800
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Solutions Manual, Chapter 20 1155
Problem 20-5B (Continued)
Part 6
ISLE CORPORATION Cash Budgets
January, February, and March 2014
January February March
Beginning cash balance ...................................... $ 36,000 $182,850 $ 107,850
Cash receipts from customers (note A)................ 382,500 421,500 355,500
Total cash available ............................................. 418,500 604,350 463,350
Cash disbursements Payments for merchandise (note B) ................... 72,000 306,000 123,000
Sales commissions ........................................... 54,000 72,000 90,000 Sales salaries ..................................................... 7,500 7,500 7,500 General & administrative salaries .................... 12,000 12,000 12,000 Maintenance expense ....................................... 3,000 3,000 3,000 Interest ($15,000 x 1%) ............................................ 150 Taxes payable .................................................... 90,000 Purchases of equipment ................................... 72,000 96,000 28,800 Purchase of land ................................................ ________ ________ 150,000
Total cash disbursements .................................. 220,650 496,500 504,300
Preliminary cash balance .................................... $197,850 $107,850 $ (40,950)
Repayment of loan to bank ................................. (15,000)
Additional loan from bank .................................. ________ ________ 76,950
Ending cash balance ........................................... $182,850 $107,850 $ 36,000
Loan balance, end of month ............................... $ 0 $ 0 $ 76,950
Supporting calculations January February March Total Note A: Cash receipts from customers Total sales ......................................................... $270,000 $360,000 $450,000 $1,080,000 Cash sales (25%) .............................................. $ 67,500 $ 90,000 $112,500 $ 270,000 Credit sales (75%) ............................................ $202,500 $270,000 $337,500 $ 810,000 Cash collections Receivables at 12/31/2013 (60%; 40%) ........... $315,000 $210,000 $ 525,000 January credit sales (60%; 40%) .................... 121,500 $ 81,000 202,500 February credit sales (60%; 40%) ................... _______ _______ 162,000 162,000 Total from credit customers ............................ $315,000 331,500 243,000 889,500 Cash sales......................................................... 67,500 90,000 112,500 270,000 Total cash received .......................................... $382,500 $421,500 $355,500 $1,159,500
Note B: Cash payments for merchandise Credit purchases .............................................. $90,000 $255,000 $292,500 $637,500 Accounts payable at 12/31/2013 (20%; 80%) . $72,000 $288,000 $360,000 January purchases (20%; 80%) ...................... 18,000 $72,000 90,000 February purchases (20%) .............................. _______ _______ 51,000 51,000 Total paid on purchases .................................. $72,000 $306,000 $123,000 $501,000
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Financial & Managerial Accounting, 5th Edition 1156
Problem 20-5B (Continued)
Part 7
ISLE CORPORATION Budgeted Income Statement
For Three Months Ended March 31, 2014
Sales ................................................................................ $1,080,000 Cost of goods sold (24,000 units @ $30) ..................... 720,000 Gross profit .................................................................... 360,000 Operating expenses
Sales commissions ..................................................... $216,000 Sales salaries ............................................................... 22,500 General administrative salaries ................................. 36,000 Maintenance expense ................................................. 9,000 Depreciation expense ................................................. 21,425 Interest expense .......................................................... 150 305,075
Income before taxes ...................................................... 54,925 Income taxes (40%) ....................................................... 21,970 Net income ...................................................................... $ 32,955
Part 8
ISLE CORPORATION Budgeted Balance Sheet
March 31, 2014 ASSETS
Cash ............................................................ $ 36,000 Cash budget
Accounts receivable .................................. 445,500 Note C
Inventory ..................................................... 67,500 Note D
Total current assets ................................... 549,000
Equipment .................................................. $736,800 Note E
Less accumulated depreciation ............... 88,925 647,875 Note F
Land ............................................................ 150,000 Capital budget
Total assets ................................................ $1,346,875
LIABILITIES AND EQUITY
Accounts payable ...................................... $ 496,500 Note G
Bank loan payable ..................................... 76,950 Cash budget
Taxes payable (due 4/15/2014) ................. 21,970 Income stmt.
Total liabilities ............................................ 595,420
Common stock ........................................... $472,500 Unchanged
Retained earnings ...................................... 278,955 Note H
Total stockholders’ equity ........................ 751,455
Total liabilities and equity ......................... $1,346,875
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Solutions Manual, Chapter 20 1157
Problem 20-5B (Concluded)
Supporting Footnotes
Note C Beginning receivables ................................................................. $ 525,000 Credit sales ................................................................................... 810,000 Less collections ........................................................................... (889,500) Ending receivables ....................................................................... $ 445,500 Note D Beginning inventory ..................................................................... $ 150,000 Purchases ..................................................................................... 637,500 Less cost of goods sold .............................................................. (720,000) Ending inventory* ......................................................................... $ 67,500 *Also equals 2,250 units @ $30 = $67,500 Note E Beginning equipment ................................................................... $ 540,000 Purchased in January .................................................................. 72,000 Purchased in February................................................................. 96,000 Purchased in March ..................................................................... 28,800 Total .............................................................................................. $ 736,800 Note F Beginning accumulated depreciation ......................................... $ 67,500 Depreciation expense .................................................................. 21,425 Total .............................................................................................. $ 88,925 Note G Beginning accounts payable ....................................................... $ 360,000 Purchases ..................................................................................... 637,500 Payments ...................................................................................... (501,000) Ending accounts payable ............................................................ $ 496,500 Note H Beginning retained earnings ....................................................... $ 246,000 Net income .................................................................................... 32,955 Total .............................................................................................. $ 278,955
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Financial & Managerial Accounting, 5th Edition 1158
Problem 20-6B (30 minutes) Part 1
NSA COMPANY Production Budget (in units)
Second Quarter
Budgeted ending inventory (bats) ........................................................ 6,000
Add budgeted sales ................................................................................ 250,000
Required units of available production ................................................ 256,000
Deduct beginning inventory (bats) ....................................................... (8,000)
Units to be manufactured ...................................................................... 248,000
Part 2
NSA COMPANY Direct Materials Budget (in lbs, except where noted)
Second Quarter
Materials (aluminum) needed for production (248,000 x 3) ............ 744,000
Add budgeted ending inventory (aluminum) ................................... 12,000
Total materials (aluminum) requirements ........................................ 756,000
Deduct beginning inventory (aluminum) .......................................... (15,000)
Units of materials (aluminum) to be purchased .............................. 741,000
Materials cost per pound ................................................................... $4
Total cost of materials purchases (741,000 x $4) ............................ $2,964,000
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Solutions Manual, Chapter 20 1159
Problem 20-6B (concluded) Part 3
NSA COMPANY Direct Labor Budget
Second Quarter
Units to be produced ............................................................... 248,000
Labor requirements per unit (hours) ..................................... x 0.50
Total labor hours needed ........................................................ 124,000
Labor rate (per hour) ............................................................... x $18
Labor dollars ............................................................................ $2,232,000
Part 4
NSA COMPANY Factory Overhead Budget
Second Quarter
Total labor hours needed ........................................................
124,000
Variable overhead rate per direct labor hour ........................ x $12
Budgeted variable overhead ................................................... $1,488,000
Budgeted fixed overhead ........................................................ 1,776,000
Budgeted total overhead ......................................................... $3,264,000
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Financial & Managerial Accounting, 5th Edition 1160
Problem 20-7B (130 minutes)
Part 1
NABAR MANUFACTURING Sales Budgets
July, August, and September 2013
Budgeted Units
Budgeted Unit Price
Budgeted Total Dollars
July 2013 ............................................................... 21,000 $17.00 $ 357,000
August 2013 .......................................................... 19,000 17.00 323,000
September 2013 ................................................... 20,000 17.00 340,000
Total for the first quarter ..................................... 60,000 $1,020,000
Part 2
NABAR MANUFACTURING Production Budget
July, August, and September 2013
July August Sept. Total
Next month’s budgeted sales ............... 19,000 20,000 24,000
Ratio of inventory to future sales ......... x 70% x 70% x 70%
Budgeted ending inventory .................. 13,300 14,000 16,800
Add budgeted sales ............................... 21,000 19,000 20,000
Required units to be produced ............. 34,300 33,000 36,800
Deduct beginning inventory ................. (16,800) (13,300) (14,000)
Units to be produced ............................. 17,500 19,700 22,800 60,000
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Solutions Manual, Chapter 20 1161
Problem 20-7B (continued) Part 3
NABAR MANUFACTURING Raw Materials Budget
July, August, and September 2013
July August Sept. Total
Production budget (units) ..................... 17,500 19,700 22,800
Materials requirement per unit ............. x 0.50 x 0.50 x 0.50
Materials needed for production .......... 8,750 9,850 11,400
Add budgeted ending inventory ........... 1,970 2,280 1,980
Total materials requirements (units) .... 10,720 12,130 13,380
Deduct beginning inventory ................. (4,375) (1,970) (2,280)
Materials to be purchased .................... 6,345 10,160 11,100 27,605
Material price per unit ........................... $ 8 $ 8 $ 8 $ 8
Total cost of direct material purchases ..... $ 50,760 $ 81,280 $ 88,800 $220,840
Part 4
NABAR MANUFACTURING Direct Labor Budget
July, August, and September 2013
July August Sept. Total
Budgeted production (units) ................ 17,500 19,700 22,800
Labor requirements per unit (hours) .... x 0.50 x 0.50 x 0.50
Total labor hours needed ...................... 8,750 9,850 11,400 30,000
Labor rate (per hour) ............................. $ 16 $ 16 $ 16 $ 16
Labor dollars .......................................... $140,000 $157,600 $182,400 $480,000
Part 5
NABAR MANUFACTURING Factory Overhead Budget
July, August, and September 2013 July August Sept. Total
Budgeted production (units) ............... 17,500 19,700 22,800
Variable factory overhead rate* .......... x $1.35 x $1.35 x $1.35
Budgeted variable overhead ............... 23,625 26,595 30,780 $ 81,000
Fixed overhead ..................................... 20,000 20,000 20,000 60,000
Budgeted total overhead ..................... $ 43,625 $ 46,595 $ 50,780 $141,000
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Financial & Managerial Accounting, 5th Edition 1162
Problem 20-7B (continued)
Part 6
NABAR MANUFACTURING Selling Expense Budgets
July, August, and September 2013 July August Sept. Total
Budgeted sales ..................................... $357,000 $323,000 $340,000
Sales commission percent .................. x 10% x 10% x 10%
Sales commissions expense ............... 35,700 32,300 34,000 $102,000
Sales salaries........................................ 3,500 3,500 3,500 10,500
Total selling expenses ......................... $ 39,200 $ 35,800 $ 37,500 $112,500
Part 7
NABAR MANUFACTURING General and Administrative Expense Budgets
July, August, and September 2013
July August Sept. Total
Salaries ....................................................... $ 9,000 $ 9,000 $ 9,000 $27,000
Interest on long-term note ........................ 2,700 2,700 2,700 8,100
Total expenses ........................................... $11,700 $11,700 $11,700 $35,100
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Solutions Manual, Chapter 20 1163
Problem 20-7B (Continued) Part 8
NABAR MANUFACTURING Cash Budgets
July, August, and September 2013
July August Sept.
Beginning cash balance ...................................... $ 40,000 $ 96,835 $141,180
Cash receipts from customers (note A)................ 357,000 346,800 328,100
Total cash available ............................................. 397,000 443,635 469,280
Cash disbursements
Payments for raw materials (note B) .................. 51,400 50,760 81,280
Payments for direct labor .................................
Payments for variable overhead ......................
Sales commissions ...........................................
140,000
23,625
35,700
157,600
26,595
32,300
182,400
30,780
34,000
Sales salaries ..................................................... 3,500 3,500 3,500
General & administrative salaries .................... 9,000 9,000 9,000
Income taxes ......................................................
Dividends ...........................................................
10,000
20,000
Loan interest ($24,000 x 1%) .................................. 240
Long-term note interest ($300,000 x .0.9%) ............
Purchase of equipment .....................................
2,700
_______
2,700
_______
2,700
100,000
Total cash disbursements .................................. 276,165 302,455 443,660
Preliminary cash balance .................................... 120,835 141,180 25,620
Additional loan .....................................................
Repayment of loan to bank .................................
(24,000)
_______
14,380 ________
Ending cash balance ........................................... $ 96,835 $141,180 $ 40,000
Loan balance, end of month ............................... $ 0 $ 0 $ 14,380
Supporting calculations July August Sept. Total Note A: Cash receipts from customers Total sales ......................................................... $357,000 $323,000 $340,000 $1,020,000 Cash sales (30%) .............................................. 107,100 96,900 102,000 306,000 Credit sales (70%) ............................................ 249,900 226,100 238,000 714,000 Cash collections Month after sale (100%) ................................... $249,900 $249,900 $226,100 $ 725,900 Cash sales......................................................... 107,100 96,900 102,000 306,000 Total cash received .......................................... $357,000 $346,800 $328,100 $1,031,900
Note B: Cash payments for raw materials Month after purchase (100%) .......................... $ 51,400 $ 50,760 $ 81,280 $ 183,440
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Financial & Managerial Accounting, 5th Edition 1164
Problem 20-7B (Continued)
Part 9
NABAR MANUFACTURING Budgeted Income Statement
For Three Months Ended September 30, 2013
Sales ................................................................................ $1,020,000 Cost of goods sold (60,000 units @ $14.35) ................ 861,000 Gross profit .................................................................... 159,000 Operating expenses
Sales commissions ..................................................... $102,000 Sales salaries ............................................................... 10,500 General administrative salaries ................................. 27,000 Long-term note interest .............................................. 8,100 Interest expense .......................................................... 240 147,840
Income before taxes ...................................................... 11,160 Income taxes (35%) ....................................................... 3,906 Net income ...................................................................... $ 7,254
Part — Budgeted Retained Earnings & Budgeted Balance Sheet
NABAR MANUFACTURING Budgeted Balance Sheet
September 30, 2013 ASSETS
Cash ............................................................ $ 40,000 Cash budget
Accounts receivable .................................. 238,000 Note C
Raw materials inventory ........................... Finished goods inventory .........................
15,840 241,080
Note D
Note E
Total current assets ................................... 534,920
Equipment .................................................. $820,000 Note F
Less accumulated depreciation ............... 300,000 520,000 Note G
Total assets ................................................ $1,054,920
LIABILITIES AND EQUITY
Accounts payable ...................................... $ 88,800 Note H
Bank loan payable ..................................... 14,380 Cash budget
Taxes payable ............................................ 3,906 Income stmt.
Total current liabilities .............................. 107,086
Long-term note payable ............................ Common stock ...........................................
$600,000
300,000
Unchanged
Retained earnings ...................................... 47,834 Note I
Total stockholders’ equity ........................ 647,834
Total liabilities and equity ......................... $1,054,920
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Solutions Manual, Chapter 20 1165
Problem 20-7B (Concluded)
Supporting Footnotes
Note C Beginning receivables ...................................................... $ 249,900 Credit sales ........................................................................ 714,000 Less collections ................................................................ (725,900) Ending receivables ............................................................ $ 238,000 Note D Beginning raw materials inventory .................................. $ 35,000 Purchases of raw materials .............................................. 220,840 Less materials used in production** ................................ (240,000) Ending inventory raw materials inventory* ..................... $ 15,840 *Also equals 1,980 units @ $8 = $15,840 **30,000 units x $8 per unit
Note E Beginning finished goods inventory ................................ $ 241,080 Cost of goods completed during the period ................... 861,000 Less cost of goods sold during the period ..................... (861,000) Ending inventory raw materials inventory* ..................... $ 241,080 *Also equals 16,800 units @ $14.35 = $241,080 Note F
Beginning equipment ........................................................ $ 720,000 Purchased in September .................................................. 100,000 Total ................................................................................... $ 820,000 Note G Beginning accumulated depreciation .............................. $ 240,000 Depreciation expense ....................................................... 60,000 Total ................................................................................... $ 300,000 Note H Beginning accounts payable ............................................ $ 51,400 Purchases of raw materials .............................................. 220,840 Payments for raw materials .............................................. (183,440) Ending accounts payable ................................................. $ 88,800 Note I
NABAR MANUFACTURING Budgeted Statement of Retained Earnings
For Three Months Ended September 30, 2013
Retained earnings, Beginning ......................... $60,580 Add: Net income ......................................... 7,254 67,834 Less: Dividends ........................................... 20,000 Retained earnings, Ending .............................. $47,834
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Financial & Managerial Accounting, 5th Edition 1166
Serial Problem — SP 20
Serial Problem, Success Systems (50 minutes)
Part 1
SUCCESS SYSTEMS Budgeted Income Statements
For Months of April, May, and June
April May June
Sales* ......................................................... $69,600 $75,550 $81,500
Cost of goods sold**................................. 54,000 57,750 61,500
Gross profit ............................................... 15,600 17,800 20,000
Expenses
Sales commissions (10%) ...................... 6,960 7,555 8,150
Advertising ($3,000 x 1.10) .................... 3,300 3,300 3,300
Other fixed expenses ............................. 6,000 6,000 6,000
Total expenses .......................................... 16,260 16,855 17,450
Net income ................................................. $ (660) $ 945 $ 2,550
*Results from per month volume increases for the next 3 months
Desks Units Sales (@ $1,150) Variable Cost of Sales (@ $750)
April ..................................................................... 48 $55,200 $36,000 May ...................................................................... 52 59,800 39,000 June .............................................................. 113 56 64,400 42,000
Chairs Units Sales (@ $450) Variable Cost of Sales (@ $250)
April ..................................................................... 32 $14,400 $8,000 May ...................................................................... 35 15,750 8,750 June .............................................................. 113 38 17,100 9,500
Total Desk & Chairs Sales Variable Cost of Sales
April ..................................................................... $69,600 = $55,200 + $14,400 $44,000 = $36,000 + $8,000 May ...................................................................... $75,550 = $59,800 + $15,750 $47,750 = $39,000 + $8,750 June .............................................................. 113 $81,500 = $64,400 + $17,100 $51,500 = $42,000 + $9,500
**Total Cost of Sales Variable Fixed Total Cost of Sales
April ..................................................................... $44,000 $10,000 $54,000
May ...................................................................... 47,750 10,000 57,750
June 51,500 10,000 61,500
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Solutions Manual, Chapter 20 1167
Serial Problem, Success Systems (Concluded) Part 2
The plan for increasing sales volume by reducing the price and increasing
advertising would cause the company to generate a loss in the first month
of the next quarter. This result is not encouraging. However, the company
would expect profits in each of the next two months of the quarter, and the
rate of increase in earnings over the three months is substantial. However,
the amount of profits in each of the next two months is low relative to the
company’s current income. If the growth rate for sales can be maintained
without increasing commissions or other expenses, a large payoff might be
earned by making the changes and riding out the short-run period of
relatively lower profits. This is a common problem for management when
introducing a new strategy, product, or service to the market.
Reporting in Action — BTN 20-1
1. Polaris’s statement of cash flows would report cash paid for
acquisitions of property and equipment among the activities disclosed in its cash flows from investing activities section.
2. a. Cash paid for acquisitions of property and equipment and reported on the statement of cash flows for the year ended December 31, 2011 is $84,484 (thousands).
b. Given the assumption—that Polaris’s annual cash payments for acquisitions of property and equipment equal 40% of the prior year’s net income—we would budget cash payments for the year ended 2012 of $91,030 (thousands), computed as $227,575 (thousands) x 40%.
3. Answers will depend on Polaris’s results obtained.
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Financial & Managerial Accounting, 5th Edition 1168
Comparative Analysis — BTN 20-2
1. Computation of inventory reduction under new distribution system
Amount of ending inventory required at the 30% rule [$1,000,000 x (1- 0.20) x 0.30] .................................................. $240,000
Amount of ending inventory required at the 10% rule [$1,000,000 x (1- 0.20) x 0.10] .................................................. 80,000
Difference (inventory reduction) ................................................. $160,000
This result implies that Arctic Cat can reduce its inventory level for the
Canadian market by $160,000 if it improves its distribution system.
2. An analysis such as in part 1 along with an explanation can make clear
to management the cost of funds necessary to support ending
inventory levels. Unless this type of information and analysis are
prepared, it is unlikely management will dedicate valuable time and
energy to investigate and implement a JIT inventory system.
To further illustrate, assuming a 15% interest cost of resources tied up
in inventory, a company can save money by reducing its inventory
level. In particular, by reducing its ending inventory by $160,000, Arctic
Cat would save $24,000 per year ($160,000 difference x 15% interest
cost) for just this one model and market. This means the operating
costs of a JIT inventory system can be as high as $24,000 per year and
be justified in terms of its costs being less than its benefits. Moreover,
if such a shift in inventory can benefit multiple future periods and
multiple product models, the savings are even greater. The type of
analysis here can show management the benefits of a JIT inventory
system, or any system, that reduces its inventory level. Extending this
analysis to all markets and product models, the benefits can be seen to
be substantial.
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Solutions Manual, Chapter 20 1169
Ethics Challenge — BTN 20-3
Report on “Use It or Lose It” Budgeting
Instructor note: There is no widely accepted solution to this problem. The key is for the student to think about the problem and work to at least modify the negative behavioral consequences of this practice.
Any plan offered as a solution must better align upper management’s
expectations with department managers’ behavior. For example, upper
management might only cut by one-half the amount not spent according to
budget. Another potential suggestion is to allow department managers the
option of justifying why the amount was not spent and explain why current
budget levels must be maintained.
Upper management must also keep in mind that efficient and effective
allocation of resources is necessary to provide high-quality services to
customers and the public. All spending behavior must be monitored.
Without monitoring in the budgeting system, even more money will be
wasted or used inefficiently.
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Financial & Managerial Accounting, 5th Edition 1170
Communicating in Practice — BTN 20-4
MEMORANDUM TO: ____________________ FROM: ____________________ DATE: ____________________ SUBJECT: ____________________
The content of this memorandum will vary among students. The student must emphasize the need to know the compensation structure of the sales staff to understand any potential bias in the information provided to the budget process.
The memorandum should explain why a concern with bias in the information does exist. Specifically, if a bonus is paid when sales go over budget, then the sales staff is likely to under report achievable sales to increase the likelihood of earning the bonus. However, setting the budget below what is actually expected to occur invalidates the budget activity. Useful budgeting depends on accurate and unbiased sales estimates.
Taking It to the Net — BTN 20-5 1. The “e-budgets” Website lists a number of benefits such as accuracy, timeliness, ease of
sharing information, ease of updating, real-time comparison of actual performance vs. estimates, and so on.
In the case of large, multi-divisional companies, coordination across and within divisions is extremely important, so that plans across the organization are consistent. It appears that e-budgeting allows managers to share information on a real-time basis. Therefore, any changes made to the estimates can be seen right away by others within the organization.
Moreover, e-budgets are spreadsheet based which allows for manipulation of data and sensitivity (or what-if) analysis.
2. As a senior manager, my biggest concern would be security, particularly
when the system is easily accessible and usable. It would be important to determine who in the organization will have access to the information, and who will have the authority to change information. Also, it would be important to review the security protocols of outsiders (pirates) accessing e-budgets’ databases.
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Solutions Manual, Chapter 20 1171
Teamwork in Action — BTN 20-6 There is no specific solution to this assignment. The instructor should
watch for proper development and identification of all reasonable costs.
Specifically, one should review the (1) items included in the budget, (2)
assumptions used in preparing the budget, and (3) proper format. For
example, one can look for how the team projected the costs of books and
supplies for courses yet to be attended. Taking the average cost of books
per course is one reasonable approach.
Entrepreneurial Decision — BTN 20-7
1. Budgeting allows an organization to plan its activities better by
allocating financial resources to the different activities. Consequently, it
can provide the owners with information that they can use for financing
purposes as well.
2. Sales forecasts and purchases budgets are particularly important in
businesses like Freshii that sell perishable items (food) and that try to
adapt rapidly to changing customer tastes. Failure to identify changing
sales trends could result in Matthew purchasing too much of certain
food items and too little of others. Purchasing excessive food items
could result in losses due to spoilage. Purchasing too little of certain
food items could result in missed sales.
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Financial & Managerial Accounting, 5th Edition 1172
Hitting the Road — BTN 20-8 Instructor note: This problem is designed to (1) show that external factors are important in determining price and volume and (2) develop awareness of external factors when preparing a sales budget.
1. & 2.
The types of external factors identified by the student for consideration in part (1), or selected as an explanatory factor for part (2), might include the following:
Location, such as near a convenient or busy traffic area.
Competitors’ responses to price and quality.
Climatic conditions.
Shifting demographics.
Changes to industrial base.
Labor supply.
Global Decision — BTN 20-9 1. The infrastructure and administration expense budget is likely to be an
important budget in the master budgeting process at KTM. In 2011,
infrastructure and administration expenses comprised about 4.0%
(€20,870,000/€526,801,000) of sales revenue. The amount of
infrastructure and administration expenses requires that due attention is
given to the infrastructure and administration expense budget
component of the master budget each year.
2. General office expenses
Top management salaries
Depreciation expense
3. The initial responsibility usually rests with a vice president or an
equivalent-level manager. KTM is organized by divisions. Therefore,
managers in each division may have initial responsibility for the
infrastructure and administration expense budget.