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CHAPTER 9 Profit Planning, Activity-Based Budgeting, and e-Budgeting ANSWERS TO REVIEW QUESTIONS 9-1 A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an organization's operations for a specified period of time. The master budget includes the following parts: sales budget, operational budgets (including a production budget, inventory budgets, a labor budget, an overhead budget, a selling and administrative expense budget, and a cash budget), and budgeted financial statements (including a budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows). 9-2 A budget facilitates communication and coordination by making each manager throughout the organization aware of the plans made by other managers. The budgeting process pulls together the plans of each manager in the organization. 9-3 An example of using the budget to allocate resources in a university is found in the area of research funds and grants. Universities typically have a limited amount of research-support resources that must be allocated among the various colleges and divisions within the university. This allocation process often takes place within the context of the budgeting process. 9-4 The flowchart on the following page depicts the components of the master budget for a service station. 9-5 General economic trends are important in forecasting sales in the airline industry. The overall health of the economy is an important factor affecting the extent of business travel. In addition, the health of the economy, inflation, and income levels affect the extent to which the general public travels by air. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-1

9-6 Operational budgets specify how an organization's operations will be carried out to meet the demand for its goods and services. The operational budgets prepared in a hospital would include a labor budget showing the number of professional personnel of various types required to carry out the hospital's mission, an overhead budget listing planned expenditures for such costs as utilities and maintenance, and a cash budget showing planned cash receipts and disbursements.

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 2002 The McGraw-Hill Companies, Solutions Manual

Flowchart for Review Question 9-4 Sales Budget: Gasoline, Related Products, and Services

Sales Budget

Operati onal Budgets

Materials Ending Budget: Inventory Gasoline Budget: Gasoline and Related Products

Labo r Budg et

Overh ead Budge t

Selling and Administrat ive Expense Budget

Cash Budget Budgeted Income Statement Budgete d Financia l Stateme nts

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Budgeted Balance Sheet Budgeted Statement of Cash Flows

 2002 The McGraw-Hill Companies, 9-3

9.7 Application of activity-based costing to the budgeting process yields activity-based budgeting (ABB). Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities necessary to produce these products and services are determined. Finally the resources needed to perform the specified activities are determined. ABB differs from traditional budgeting in the emphasis that it places on activities and its use of activity-based costing data in the budgeting process. 9.8 E-budgeting stands for an electronic and enterprisewide budgeting process. Under this approach the information needed to construct a budget is gathered via the Internet from individuals and subunits located throughout the enterprise. The Internet also is used to disseminate the resulting budget schedules and information to authorized users throughout the enterprise. 9-9 The city of New York could use budgeting for planning purposes in many ways. For example, the city's personnel budget would be important in planning for required employees in the police and fire departments. The city's capital budget would be used in planning for the replacement of the city's vehicles, computers, administrative buildings, and traffic control equipment. The city's cash budget would be important in planning for cash receipts and disbursements. It is important for any organization, including a municipal government, to make sure that it has enough cash on hand to meet its cash needs at all times. 9.10 The budget director, or chief budget officer, specifies the process by which budget data will be gathered, collects the information, and prepares the master budget. To communicate budget procedures and deadlines to employees throughout the organization, the budget director often develops and disseminates a budget manual.

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 2002 The McGraw-Hill Companies, Solutions Manual

9-11 The budget manual says who is responsible for providing various types of information, when the information is required, and what form the information is to take. The budget manual also states who should receive each schedule when the master budget is complete. 9-12 A company's board of directors generally has final approval over the master budget. By exercising its authority to make changes in the budget and grant final approval, the board of directors can wield considerable influence on the overall direction the organization takes. Since the budget is used as a resource-allocation mechanism, the board of directors can emphasize some programs and curtail or eliminate others by allocating funds through the budgeting process.

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 2002 The McGraw-Hill Companies, 9-5

9-13 Under zero-base budgeting, the budget for virtually every activity in the organization is initially set to zero. To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness. The zero-base budgeting approach forces management to rethink each phase of an organization's operations before allocating resources. 9-14 A master budget is based on many assumptions and predictions of unknown parameters. For example, the sales budget is built on an assumption about the nature of demand for goods or services. The direct-material budget requires an estimate of the direct-material price and the quantity of material required per unit of production. Many other assumptions are used throughout the rest of the budgeting process. 9-15 The difference between the revenue or cost projection that a person provides in the budgeting process and a realistic estimate of the revenue or cost is called budgetary slack. Building budgetary slack into the budget is called padding the budget. A significant problem caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely future events. Cost estimates are often inflated, and revenue estimates are often understated. In this situation, the budget loses its effectiveness as a planning tool. 9-16 An organization can reduce the problem of budgetary slack in several ways. First, it can avoid relying on the budget as a negative, evaluative tool. Second, managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections. 9-17 The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that "this is our budget," rather than the feeling that "this is the budget you imposed on us." When employees feel that they were part of the budgeting process, they are more likely to strive to achieve the budget. McGraw-Hill/Irwin Inc. 9-6

 2002 The McGraw-Hill Companies, Solutions Manual

9-18 This comment is occasionally heard from people who have started and run their own small business for a long period of time. These individuals have great knowledge in their minds about running their business. They feel that they do not need to spend a great deal of time on the budgeting process, because they can essentially run the business by feel. This approach can result in several problems. First, if the person who is running the business is sick or traveling, he or she is not available to make decisions and implement plans that could have been clarified by a budget. Second, the purposes of budgeting are important to the effective running of an organization. Budgets facilitate communication and coordination, are useful in resource allocation, and help in evaluating performance and providing incentives to employees. It is difficult to achieve these benefits without a budgeting process. 9-19 In developing a budget to meet your college expenses, the primary steps would be to project your cash receipts and your cash disbursements. Your cash receipts could come from such sources as summer jobs, jobs held during the academic year, college funds saved by relatives or friends for your benefit, scholarships, and financial aid from your college or university. You would also need to carefully project your college expenses. Your expenses would include tuition, room and board, books and other academic supplies, transportation, clothing and other personal needs, and money for entertainment and miscellaneous expenses. 9-20 Firms with international operations face a variety of additional challenges in preparing their budgets.

• A

multinational firm's budget must reflect the translation of foreign currencies into U.S. dollars. Almost all the world's currencies fluctuate in their values relative to the dollar, and this fluctuation makes budgeting for those translations difficult.

• It is difficult to prepare budgets when inflation is

high or unpredictable. Some foreign countries have experienced hyperinflation, sometimes with annual McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-7

inflation rates well over 100 percent. Predicting such high inflation rates is difficult and complicates a multinational's budgeting process.

• The economies of all countries fluctuate in terms of

consumer demand, availability of skilled labor, laws affecting commerce, and so forth. Companies with foreign operations face the task of anticipating such changing conditions in their budgeting processes. 9-21 The five phases in a product's life cycle are as follows: (a)

Product planning and concept design

(b)

Preliminary design

(c)

Detailed design and testing

(d)

Production

(e)

Distribution and customer service

It is important to budget these costs as early as possible in order to ensure that the revenue a product generates over its life cycle will cover all of the costs to be incurred. A large portion of a product's life-cycle costs will be committed well before they are actually incurred. 9-22 (a) Ordering costs: The cost of preparing, placing, and receiving a purchase order. (Examples include the clerical costs of preparing purchase orders, time spent finding suppliers and expediting orders, transportation, and receiving costs, such as unloading and inspection.) (b) Holding costs: The cost incurred in keeping inventory on hand for some period of time. (Examples include the costs of storage space such as a warehouse, depreciation, security, insurance, forgone interest on working capital tied up in inventory, and the costs of deterioration and theft.) (c) Shortage costs: The cost incurred by the organization when it does not have materials or finished goods on hand when needed. (Examples include the costs caused McGraw-Hill/Irwin Inc. 9-8

 2002 The McGraw-Hill Companies, Solutions Manual

by disrupted production when raw materials are unavailable, lost sales, dissatisfied customers, and the loss of quantity discounts on purchases.) 9-23 The EOQ approach assumes that some inventory must be held. The objective of the model is to balance the cost of ordering against the cost of holding inventory. In contrast, the JIT philosophy is to reduce all inventories to the absolute minimum, eliminating them completely if possible. The JIT viewpoint asserts that inventory holding costs tend to be higher than may be apparent because of the inefficiency and waste involved in storing inventory. This view, coupled with the JIT goal of reducing ordering costs to very low amounts, results in the desirability of more frequent and smaller order quantities. In addition, under JIT inventory management, order quantities typically will vary depending on requirements. In contrast, under the EOQ model, the order quantity remains constant.

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 2002 The McGraw-Hill Companies, 9-9

SOLUTIONS TO EXERCISES EXERCISE 9-24 (20 MINUTES) 1. April

May

June

Sales.................................. $80,000 Cash receipts: From cash sales...............

$

$

40,000b From sales on account..... Total cash receipts.............

36,000d $ 76,000

30,000c 34,000 $ 64,000

a

$90,0 00

= $45,000 × 2

b

$40,0 00

= $80,000 × .5

c

$30,0 00

= $60,000 × .5

d

$36,0 00

= ($40,000 × .6) + ($30,000 × .4)

$39,0 00

= ($45,000 × .6) + ($30,000 × .4)

e

2.

$60,000

$90,000a $ 45,000

39,000e $ 84,000

Accounts payable, 12/31/x0............................

300,000 DM   Purchases of goods and services on account 1,200,000 during 20x1.................................................... DM   Payments of accounts payable during 20x1..... (1,100,00 0DM)* Accounts payable, 12/31/x1............................ 400,000 DM   *1,100,000DM = 300,000DM + 1,200,000DM –

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 2002 The McGraw-Hill Companies, Solutions Manual

400,000DM 3.

Accounts receivable, 12/31/x0.........................

340, 000y Sales on account during 20x1......................... 900, 000y    Collections of accounts receivable during 20x1 (780,000y)   

Accounts receivable, 12/31/x1......................... 4.

460, 000y   $   810,000       150,000   $    960,000  

Accumulated depreciation, 12/31/x0................ Depreciation expense during 20x1.................. Accumulated depreciation, 12/31/x1................

5.

Retained earnings, 12/31/x0........................... Net income for 20x1....................................... Dividends paid in 20x1.................................... Retained earnings, 12/31/x1...........................

$  2,050,000   400,000         -0-_ $  2,450,000  

EXERCISE 9-25 (30 MINUTES) Answers will vary widely, depending on the governmental unit selected and the budgetary items on which the student focuses. In the past, students have expressed surprise at the proportion of the U.S. federal budget that goes to entitlement programs (e.g., Social Security and Medicare), interest expense, and the military. EXERCISE 9-26 (15 MINUTES) 1.

Production (in units) required for the year: Sales for the year............................................... Add: Desired ending finished-goods inventory on December 31...................................................... Deduct: Beginning finished-goods inventory on January 1........................................................... Required production during the year...................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

480,000 50,000 80,000 450,000

 2002 The McGraw-Hill Companies, 9-11

2.

Purchases of raw material (in units), assuming production of 500,000 finished units: 1,000,0 00 45,000 35,0 00 1,010,0 00

Raw material required for production (500,000 × 2)...................................................................... Add: Desired ending inventory on December 31. . Deduct: Beginning inventory on January 1........... Required raw-material purchases during the year

EXERCISE 9-27 (25 MINUTES) 1.

Cash collections in October: Month of Sale July..................................... August................................ September.......................... October............................... Total...................................

Amount Collected in October $ 2,400 $ 60,000 × 4%   7,000 70,000 × 10% 12,000 80,000 × 15% 63,000 90,000 × 70% $84,400

Notice that the amount of sales on account in June, $49,000 was not needed to solve the exercise.

McGraw-Hill/Irwin Inc. 9-12

 2002 The McGraw-Hill Companies, Solutions Manual

EXERCISE 9-27 (CONTINUED) 2.

Cash collections in fourth quarter from credit sales in fourth quarter. Amount Collected Month of Sale October.......................

November.................... December.................... Total............................

Total collections in fourth quarter from credit sales in fourth quarter.....................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Credit Sales $  90,000

Octob er $

Novem ber

Decem ber $9,000

63,00 0 100,00 – 0   85,000 –  0 $

$13,50 0 70,000

15,000

–

59,500

63,00 0

$83,50 0

$ 83,500

$230,0 00

 2002 The McGraw-Hill Companies, 9-13

EXERCISE 9-28 (20 MINUTES) 1.

The total required production is 655,720 units, computed as follows: Budgeted Sales (in units) June July August September October

200,000 210,000 1.05) 220,500 1.05) 231,525 1.05)

Planned Ending Inventory (in units) 160,000 (200,000 × 80%)

(given) (200,000 × (210,000 ×

185,220 (231,525 × 80%)

(220,500 ×

Sales in units:

2.

July................................................................... August.............................................................. September........................................................ Total for third quarter....................................... Add: Desired ending inventory, September 30.... Subtotal............................................................ Deduct: Desired ending inventory, June 30......... Total required production..................................

200,000 210,000 220,500 630,500 185,220 815,720 160,000 655,720

Assumed production during third quarter (in units)................................................................ Raw-material requirements per unit of product (in pounds)....................................................... Raw material required for production in third quarter (in pounds)........................................... Add: Desired ending raw-material inventory, September 30 (2,400,000 × 25%)........................................ Subtotal............................................................

600,000

Deduct: Ending raw-material inventory, June 30. McGraw-Hill/Irwin Inc. 9-14

×        4 2,400,0 00    600,000 3,000,0 00   

 2002 The McGraw-Hill Companies, Solutions Manual

Raw material to be purchased during third quarter (in pounds)........................................... Cost per pound of raw material.......................... Total raw-material purchases during third quarter.............................................................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

700,000 2,300,0 00 ×     $1.15 $2,645, 000

 2002 The McGraw-Hill Companies, 9-15

EXERCISE 9-29 (20 MINUTES) 1.

BINGHAMTON FILM CORPORATION EXPECTED CASH COLLECTIONS AUGUST Month June............................. July............................... August......................... Total..........................

2 .

Sales $60,000 78,000 66,000

Percent 9% 20% 70%

Expected Collections $5,400 15,600 46,200 $67,200

BINGHAMTON FILM CORPORATION EXPECTED CASH DISBURSEMENTS AUGUST July purchases to be paid in August..................... Less: 2% cash discount....................................... Net.................................................................. Cash disbursements for expenses....................... Total................................................................

3 .

$ 54,000    1,080 $ 52,920   14,400 $67,320

BINGHAMTON CORPORATION EXPECTED CASH BALANCE AUGUST 31 Balance, August 1............................................... Add: Expected collections................................... Less: Expected disbursements............................ Expected balance.............................................

McGraw-Hill/Irwin Inc. 9-16

$  22,000 67,200    67,320 $  21,880

 2002 The McGraw-Hill Companies, Solutions Manual

EXERCISE 9-30 (20 MINUTES) Memorandum Date:

Today

To:

President, East Bank of Mississippi

From: I.M. Student and Associates Subje Budgetary slack ct: Budgetary slack is the difference between a budget estimate that a person provides and a realistic estimate. The practice of creating budgetary slack is called padding the budget. The primary negative consequence of slack is that it undermines the credibility and usefulness of the budget as a planning and control tool. When a budget includes slack, the amounts in the budget no longer portray a realistic view of future operations. The bank's bonus system for the new accounts manager tends to encourage budgetary slack. Since the manager's bonus is determined by the number of new accounts generated over the budgeted number, the manager has an incentive to understate her projection of the number of new accounts. The description of the new accounts manager's behavior shows evidence of such understatement. A 10 percent increase over the bank's current 10,000 accounts would mean 1,000 new accounts in 20x2. Yet the new accounts manager's projection is only 700 new accounts. This projection will make it more likely that the actual number of new accounts will exceed the budgeted number.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-17

EXERCISE 9-31 (20 MINUTES) 1. Total Sales in January 20x2 $100,00 $130,0 $160,00 0 00 0 Cash receipts in January, 20x2 From December sales on account................................. From January cash sales..... From January sales on account................................. Total cash receipts.............

$  7,125* 75,0 † 00   20,000* * $ 102,125

$   $  7,125 7,125 97,500 120,000      32,000 26,000 $130,6 25

$159,12 5

*$7,125 = $190,000 × .25 × .15 † $75,000 = $100,000 × .75 **$20,000 = $100,000 × .25 × .80 2 .

Operational plans depend on various assumptions. Usually there is uncertainty about these assumptions, such as sales demand or inflation rates. Financial planning helps management answer "what if" questions about how the budget will look under various sets of assumptions.

EXERCISE 9-32 (30 MINUTES) 1 .

Budgeted cash collections for December: Month of Sale November................................. December................................. Total cash collections................

2 .

Collections in December $ 76,000 $200,000 × 38%  132,000 220,000 × 60% $208,000

Budgeted income (loss) for December:

McGraw-Hill/Irwin Inc. 9-18

 2002 The McGraw-Hill Companies, Solutions Manual

Sales revenue.....................................

$220,00 0 165,00 0 $ 55,000

Less: Cost of goods sold (75% of sales) Gross margin (25% of sales)................ Less:...................Operating expenses: Bad debts expense (2% of sales)... Depreciation ($216,000/12)........... Other expenses............................ Total operating expenses.............. Income before taxes...........................

$  4,400 18,000 22,600

  45,000 $ 10,000

EXERCISE 9-32 (CONTINUED) 3 .

Projected balance in accounts payable on December 31: The December 31 balance in accounts payable will be equal to December's purchases of merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods sold must be 75 percent of sales.

Month December....... January........... Total December purchases.....

Sales $220,0 00 200,00 0

Cost of Goods Sold $165,0 00 150,00 0

Amount Purchased in December $ $165,000 × 33,000 20% 150,000 × 80% 120,000 $153,00 0

Therefore, the December 31 balance in accounts payable will be $153,000.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-19

EXERCISE 9-33 (25 MINUTES) 1 .

Direct professional labor budget for the month of June: Office visits per month = 48,000/12 = 4,000 Professional services in June: One-hour visits (20% × 4,000 × 1 hr.)... Half-hour visits (80% × 4,000 × 1/2 hr.) Total direct professional labor.............. Hourly rate for dental associates.......... Total direct professional labor cost.......

McGraw-Hill/Irwin Inc. 9-20

800 hours    1,600 hours 2,400 hours ×    $ 60 $144,00 0

 2002 The McGraw-Hill Companies, Solutions Manual

EXERCISE 9-33 (CONTINUED) 2 .

Cash collections during June:

Half-hour visits (4,000 × 80%).............. Billing rate.......................................... Total billings for half-hour visits...........

One-hour visits (4,000 × 20%).............. Billing rate.......................................... Total billings for one-hour visits........... Total billings during month..................

May 3,200 × $40

June 3,200 × $40

$128,00 $128,00 0 0 800 800 × $70 × $70 $ $56,000 56,000 $184,00 0 $184,00 0

Percentage of month's billings collected during June....................................... Collections during June........................

Total collections in June ($18,400 + $165,600)............................................

× 10% $ 18,400

× 90%

$165,60 0 $184,00 0

3. Overhead and administrative expense budget for June: Patient registration and records (4,000 visits × $2.00 per visit).......................................................... $ 8,000 Other overhead and administrative expenses (2,400 hours × $5.00 per hour).............. 12,000 Total overhead and administrative expenses .......................................................... $20,000 McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-21

EXERCISE 9-34 (15 MINUTES) EOQ =

(2)(annuare l quiremen t)(costperorder) annualholdingcostperunit

Case A : EOQ =

CaseB : EOQ =

CaseC : EOQ =

(2)(13,23)($ 0 250) = 1,102,500 =1,050 $6 (2)(1,681 ($ ) 40) = 6,724=82 $20 (2)(560)($ 10) = 1,600=40 $7

EXERCISE 9-35 (10 MINUTES) 1 .

Safety stock: The lead time is one month, so the safety stock is equal to the difference between average monthly usage and the maximum usage in a month. Average monthly usage is 65 tons (780/12), and the maximum usage is 80 tons. Therefore, the safety stock is 15 tons (80 – 65).

2 .

Reorder point: The reorder point is 80 tons. This is the maximum amount of the bonding agent that would be used in a month, which is the time required to receive an order after it is placed.

McGraw-Hill/Irwin Inc. 9-22

 2002 The McGraw-Hill Companies, Solutions Manual

SOLUTIONS TO PROBLEMS PROBLEM 9-36 (40 MINUTES) 1.

Production and direct-labor budgets SPIFFY SHADES CORPORATION BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1

Sales (units)........................... Add: Ending inventory*........... Total needs............................ Deduct: Beginning inventory. . Units to be produced.............. Direct-labor hours per unit..... Total hours of direct labor time needed........................

Direct-labor costs: Wages ($16.00 per DLH)†..... Pension contributions ($.50 per DLH).................. Workers' compensation insurance ($.20 per DLH). . Employee medical insurance ($.80 per DLH).................. Employer's social security (at 7%)............................. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Januar y 10,00 0    16,00 0 26,00 0    16,00 0 10,00 0 ×      1

Month Februa March Quart ry er 12,000 8,000 30,000

×       1

     13,50 13,500 0 21,50 43,500 0      12,50 16,000 0 9,000   27,500 ×     .75

    8,500

       6,750 25,250

$160, $136,0 000 00

$108, $404,0 000 00

5,000

4,250

3,375 12,625

2,000

1,700

1,350

8,000

6,800

5,400 20,200

  

   

   10,00 0

   12,500 24,500    16,000 8,500

5,050

   

  

 2002 The McGraw-Hill Companies, 9-23

Total direct-labor cost............

11,20 9,520 0 $186, $158,2 200 70

7,560 28,280 $125, $470,1 685 55

*100 percent of the first following month's sales plus 50 percent of the second following month's sales. † DLH denotes direct-labor hour.

McGraw-Hill/Irwin Inc. 9-24

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-36 (CONTINUED) 2.

Use of data throughout the master budget: Components of the master budget, other than the production budget and the direct-labor budget, that would also use the sales data include the following:

• Sales budget • Cost-of-goods-sold budget • Selling and administrative expense budget Components of the master budget, other than the production budget and the direct-labor budget, that would also use the production data include the following:

• Direct-material budget • Manufacturing-overhead budget • Cost-of-goods-sold budget Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-labor-hour data include the following:

• Manufacturing-overhead budget (for determining the overhead application rate)

Components of the master budget, other than the production budget and the direct-labor budget, that would also use the direct-labor cost data include the following:

• Manufacturing-overhead budget (for determining the overhead application rate)

• Cost-of-goods-sold budget • Cash budget • Budgeted income statement McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-25

McGraw-Hill/Irwin Inc. 9-26

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-36 (CONTINUED) 3. Manufacturing overhead budget: SPIFFY SHADES CORPORATION MANUFACTURING OVERHEAD BUDGET FOR THE FIRST QUARTER OF 20X1 Month January February Shipping and handling Purchasing, material handling, and inspection................. Other overhead......... Total manufacturing overhead...................

$ 20,000 30,000 70,0 00 $120,0 00

March

$ 24,000 $16,000 25,500 59,500

27,000 47,250

$109,000 $90,250

Quarter $ 60,000 82,500 176,75 0 $319,25 0

PROBLEM 9-37 (25 MINUTES) 1.

Tuition revenue budget: Current student 8,000 enrollment……………………. Add: 5% increase in student body…………… 400 Total student 8,400 body………………………………. Less: Tuition-free scholarships………………. 120 Tuition-paying 8,280 students………………………… Credit hours per student per year……………. x 30 Total credit 248,400 hours……………………………….. Tuition rate per x hour……………………………. $75 Forecasted tuition $18,630

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 2002 The McGraw-Hill Companies, 9-27

revenue……………………. 2.

,000

Faculty needed to cover classes: Total student 8,40 body……………………………………. 0 Classes per student per year [(15 credit hours ÷ 3 credit hours) x x 2 semesters]…………………. 10 Total student class enrollments to 84,0 be covered…. 00 Students per ÷ class……………………………………. 25 Classes to be 3,36 taught…………………………………. 0 Classes taught per ÷ professor………………………. 5 Faculty 672 needed……………………………………… …

McGraw-Hill/Irwin Inc. 9-28

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-37 (CONTINUED) 3.

Possible actions might include: • Hire part-time instructors • Use graduate teaching assistants • Increase the teaching load for each professor • Increase class size and reduce the number of sections to be offered • Have students take an Internet-based course offered by another university • Shift courses to a summer session

4.

No. While the number of faculty may be a key driver, the number of faculty is highly dependent on the number of students. Students (and tuition revenue) are akin to sales—the starting point in the budgeting process.

PROBLEM 9-38 (30 MINUTES) 1.

Schedule of cash collections: Collection of accounts receivable: $55,000 x 20% …………………………... Collection of January sales ($150,000): 60% in January; 35% in February ….. Collection of February sales ($180,000): 60% in February; 35% in March…….. Collection of March sales ($185,000): 60% in March; 35% in April…………..

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Januar y

Febru ary

March

$ 11,00 0 90, 000

$ 52,50 0 108, 000

$ 63,00 0 111, 000

 2002 The McGraw-Hill Companies, 9-29

Sale of equipment……………………… …. Total cash collections………………… 2.

Schedule of cash disbursements:

Payment of accounts payable………………... Payment of January purchases ($90,000): 70% in January; 30% in February………..

5, 000 $101, 000

$160, 500

Januar y

McGraw-Hill/Irwin Inc. 9-30

Febru ary

March

$ 22,00 0 63, 000

Payment of February purchases ($100,000): 70% in February; 30% in March………….. Payment of March purchases ($140,000): 70% in March; 30% in April……………….. Cash operating costs………………………….. Total cash disbursements………………...

$179, 000

$ 27,00 0 70, 000

31, 000 $116, 000

24, 000 $121, 000

$ 30,00 0 98, 000 45, 000 $173, 000

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-38 (CONTINUED) 3.

Schedule of cash needs:

Beginning cash balance………………………. Total receipts……………………………… ……. Subtotal…………………………… …………. Less: Total disbursements…………………… Cash excess (deficiency) before financing… Financing: Borrowing to maintain $20,000 balance.. Loan principal repaid……………………… Loan interest paid………………………….. Ending cash balance……………………………

Januar Februar y y

March

$ 20,00 0 101, 000

$ 20,000

$ 44,30 0 179, 000

$121, 000 116, 000 $ 5,000

$180,50 0 121,00 0 $ 59,500

160,50 0

$223, 300 173, 000 $ 50,30 0

15, 000

$ 20,00 0

(15,00 0) (2 00)* $ 44,300

$ 50,30 0

* $15,000 x 8% x 2/12 PROBLEM 9-39 (45 MINUTES) 1.

Income statement for the two months ended March 31, 20x1: Sales revenue ($250,000 + $260,000)………… Cost of goods sold ($510,000 x 70%)………...

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$510, 000 357, 000

 2002 The McGraw-Hill Companies, 9-31

Gross margin………………………………… ….. Operating expenses: Cash operating expenses $100, ($50,000 x 2)… 000 Depreciation ($12,000 x 2) 24, …………………. 000 Net income………………………………… ……...

McGraw-Hill/Irwin Inc. 9-32

$153, 000

124, 000 $ 29,00 0

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-39 (CONTINUED) 2.

Balance sheet as of March 31, 20x1: Assets: Cash…………………………………… ………… Accounts receivable…………………………... Merchandise inventory……………………….. Land…………………………………… ………… Plant & equipment (net) ………………………. Total assets………………………………… Liabilities & stockholders’ equity: Accounts payable……………………………… Loan payable………………………………… … Common stock…………………………………. Retained earnings……………………………... Total liabilities & stockholders’ equity...

$114,0 00 91,0 00 14,0 00 62,0 00 56,0 00 $337,0 00

$180,0 00 57,0 00 140,0 00 (40,0 00) $337,0 00

Supporting calculations: Cash: $22,000a + $84,000b + ($250,000 x 65%)c + ($250,000 x 35%)d + ($260,000 x 65%)e $150,000f – ($260,000 x 60%)g - $50,000h $50,000h - $5,000i = $114,000 1/31/01 Cash balance 1/31/01 Accounts Receivable balance c 65% of February sales a

b

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-33

35% of February sales 65% of March sales f 1/31/01 Accounts Payable balance g 60% of March sales h Monthly operating expenses i Down payment on land purchase d e

Accounts receivable: 35% of March sales, or $260,000 x .35 = $91,000 Alternatively, a more detailed approach follows: Accounts receivable: $84,000 - $84,000 + $250,000 – ($250,000 x 65%) + $260,000 – ($250,000 x 35%) – ($260,000 x 65%) = $91,000

McGraw-Hill/Irwin Inc. 9-34

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-39 (CONTINUED) Merchandise inventory: $35,000 + ($260,000 x 60%)a – ($250,000 x 70%)b + ($300,000 x 60%)c – ($260,000 x 70%)d = $14,000 a

February purchases = 60% of March sales February cost of goods sold = 70% of

b

February sales

c

March purchases = 60% of April sales March cost of goods sold = 70% of March

d

sales

= $56,000

Land: $0 + $62,000 = $62,000 Plant & equipment: $80,000 - $12,000 - $12,000 Accounts payable: $150,000 - $150,000 + ($260,000 x 60%) – ($260,000 x 60%) + ($300,000 x 60%) = $180,000 Loan payable: $0 + ($62,000 - $5,000) =

$57,000

3.

Common stock: $140,000 Retained earnings: $(69,000) + $250,000 + $260,000 – ($250,000 x 70%) – ($260,000 x 70%) - $50,000 - $50,000 - $12,000 $12,000 = $(40,000)

Metroplex began February with a debit balance in Retained Earnings (i.e., a deficit), presumably because of cumulative losses. By the end of March, the deficit had been trimmed from $69,000 to $40,000 courtesy of profitable operations during the two-month period. Despite this turnaround, Metroplex may soon find itself in a cash bind. Cash and near-cash projected for 3/31/01 total $219,000 ($114,000 + $91,000 + $14,000), while short-term debt amounts to $237,000 ($180,000 + $57,000). The situation would be somewhat more favorable without the land acquisition, with cash and near-cash assets totaling $224,000 ($219,000 + $5,000) and Accounts Payable of $180,000 being the only liability

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-35

outstanding. From a liquidity perspective, the acquisition will not help the firm.

McGraw-Hill/Irwin Inc. 9-36

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-40 (30 MINUTES) 1.

Sales are collected over a two-month period, 40% in the month of sale and 60% in the following month. December receivables of $216,000 equal 60% of December’s sales; thus, December sales total $360,000 ($216,000 ÷ .6). Since the selling price is $40 per unit, Badlands sold 9,000 units ($360,000 ÷ $40).

2.

Since the company expects to sell 10,000 units, sales revenue will total $400,000 (10,000 units x $40).

3.

Badlands collected 40% of February’s sales in February, or $156,800. Thus, February’s sales total $392,000 ($156,800 ÷ .4). Combining January sales ($152,000 + $228,000), February sales ($392,000), and March sales ($400,000), the company will report revenue of $1,172,000.

4.

Sixty percent of March’s sales will be outstanding, or $240,000 ($400,000 x 60%).

5.

Finished-goods inventories are maintained at 20% of the following month’s sales. January sales total $380,000 ($152,000 + $228,000), or 9,500 units ($380,000 ÷ $40). Thus, the December 31 inventory is 1,900 units (9,500 x 20%).

6.

February sales will total 9,800 units ($392,000 ÷ $40), giving rise to a January 31 inventory of 1,960 units (9,800 x 20%). Letting X denote production, then: 12/31/x0 inventory + X – January ‘x1 sales = 1/31/x1 inventory 1,900 + X - 9,500 = 1,960 X – 7,600 = 1,960 X = 9,560

7.

Financing required is $7,000 ($30,000 minimum balance $23,000 ending balance): Cash balance, January $ 1………………………… 45,00

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-37

Add: January receipts ($216,000 + $152,000).. Subtotal…………………………… …………… Less: January payments………………………… Cash balance before financing………………….

McGraw-Hill/Irwin Inc. 9-38

0

368, 000 $413, 000 390, 000 $ 23,00 0

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-41 (25 MINUTES) 1.

Sales budget Sales (in sets)..................... Sales price per set............... Sales revenue.....................

2.

April 10,000 × $50

May 12,000 × $50

June 15,000 × $50

$500,00 0 $600,00 0

$750,00 0

Production budget (in sets) April

May

June

10,000 2,400

12,000 3,000

15,000 3,000

12,400 2,000

15,000 2,400

18,000 3,000

10,400

12,600

15,000

Sales.................................. Add: Desired ending inventory............................ Total requirements.............. Less: Projected beginning inventory............................ Planned production.............

3.

Raw-material purchases Planned production (sets)..... Raw material required per set (board feet)....................... Raw material required for production (board feet)....................... Add: Desired ending

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

April 10,400

May 12,600

June 15,000

×

×

×

10

104,000

10

126,00 0

10

150,000

 2002 The McGraw-Hill Companies, 9-39

inventory of raw material (board feet).......... Total requirements...............

Less: Projected beginning inventory of raw material (board feet).... Planned purchases of raw material (board feet)....................... Cost per board foot............... Planned purchases of raw material (dollars).............................

McGraw-Hill/Irwin Inc. 9-40

12,600

15,000

16,000

116,600

141,00 0

166,000

10,400

12,600

15,000

106,200

151,000

× $.50

128,40 0 × $.50

$ 53,100

$ 64,200

$ 75,500

× $.50

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-41 (CONTINUED) 4.

Direct-labor budget Planned production (sets)..... Direct-labor hours per set..... Direct-labor hours required. . . Cost per hour........................ Planned direct-labor cost......

April 10,400 × 1.5 15,600 × $20

May 12,600 × 1.5 18,900 × $20

$312,00 0 $378,0 00

June 15,000 × 1.5 22,500 × $20 $450,00 0

PROBLEM 9-42 (40 MINUTES) 1.

Empire Chemical Company’s production budget (in gallons) for the three products for 20x2 is calculated as follows: Inventory, 12/31/x2 (.08 × 20x3 sales)............ Add: Sales for 20x2............. Total required.................... Deduct: Inventory, 12/31/x1 (.08 × 20x2 sales)........... Required production in 20x2

2.

Yarex

Darol

Norex

5,200 60,000 65,200

2,800 40,000 42,800

2,400 25,000 27,400

4,800 60,400

3,200 39,600

2,000 25,400

The company’s conversion cost budget for 20x2 is shown in the following schedule: Conversion hours required: Yarex (60,400 × .07)........... Darol (39,600 × .10)........... Norex (25,400 × .16)...........

4,228 3,960 4,06 4 Total hours......................... 12,25 2 Conversion cost budget $245,04 (12,252 × $20)................... 0 McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-41

PROBLEM 9-42 (CONTINUED) 3.

Since the 20x1 usage of Islin is 100,000 gallons, the firm’s raw-material purchases budget (in dollars) for Islin for 20x2 is as follows: Quantity of Islin required for production in 20x2 (in gallons): Yarex (60,400 × 1)................................ 60,400 Darol (39,600 × .7)................................ 27,720 Norex (25,400 × .5)............................... 12,70 0 Subtotal............................. 100,82 0 Add: Required inventory, 12/31/x2 (100,820 10,08 × .10)................................. 2 Subtotal................................................... 110,90 2 Deduct: Inventory, 1/1/x2 (100,000 × .10). 10,00 0 Required purchases (gallons).................... 100,90 2 Purchases budget (100,902 gallons × $5 $504,5 per gallon)............................................... 10

4.

The company should continue using Islin, because the cost of using Philin is $76,316 greater than using Islin, calculated as follows: Change in material cost from substituting Philin for Islin: 20x2 production requirements: Philin (100,820 × $5 × 1.2).................... $604,9 Islin (100,820 × $5)............................... 20 504,1 00 Increase in cost of raw material................ $100,8 20 Change in conversion cost from substituting Philin for Islin: Philin (12,252 × $20 × .9)...................... $220,5 36 Islin (12,252 × $20)............................... 245,0

McGraw-Hill/Irwin Inc. 9-42

 2002 The McGraw-Hill Companies, Solutions Manual

Decrease in conversion cost...................... Net increase in production cost.................

40 $(24,50 4) $ 76,316

PROBLEM 9-43 (60 MINUTES) 1. Sales budget for 20x0: Light coils...................................

Units 60,000

Price $65

Heavy coils.................................

40,000

$95

Projected sales...........................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Total $3,900, 000   3,800,0 00 $7,700, 000

 2002 The McGraw-Hill Companies, 9-43

PROBLEM 9-43 (CONTINUED) 2 .

Production budget (in units) for 20x0:

Projected sales......................................... Add: Desired inventories, December 31, 20x0................................ Total requirements................................... Deduct: Expected inventories, January 1, 20x0......................................................... Production required (units)....................... 3 .

25,000 85,000 20,000

 9,000 49,000  8,000

65,000

41,000

Raw-material purchases budget (in quantities) for 20x0:

Sheet Metal Light coils (65,000 units projected to be produced)...................... Heavy coils (41,000 units projected to be produced)...................... Production requirements............. Add: Desired inventories, December 31, 20x0..................... Total requirements..................... Deduct: Expected inventories, January 1, 20x0....................... Purchase requirements (units).... 4 .

Light Heavy Coils Coils 60,000 40,000

Raw Material Copper Wire Platfor ms

260,000 130,000

__

205,000 123,000

41,000

465,000 253,000  36,000  32,000

41,000  7,000

501,000 285,000

48,000

 32,000  29,000 469,000 256,000

 6,000 42,000

Raw-material purchases budget for 20x0: Raw Material

McGraw-Hill/Irwin Inc. 9-44

Anticipa ted

 2002 The McGraw-Hill Companies, Solutions Manual

Raw Material

Required (units) Sheet metal............................... 469,0 00 Copper wire............................... 256,0 00 Platforms................................... 42,00 0

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Purchas Total e Price $8 $3,752,000 5

1,280,000

3

126,000

 2002 The McGraw-Hill Companies, 9-45

PROBLEM 9-43 (CONTINUED) 5.

Direct-labor budget for 20x0:

Light coils..................

Project ed Produc tion (units) 65,000

Heavy coils................

41,000

Hours per Unit 2 3

Total Hour s

Rate

130,0 00 123,0 00

$15 20

Total..........................

6.

Total Cost $1,950,0 00   2,460,00 0 $4,410,0 00

Manufacturing overhead budget for 20x0: Cost Driver Quantity

Purchasing and material handling.................................... Depreciation, utilities, and inspection.................................. Shipping.................................... General manufacturing overhead Total manufacturing overhead....

725,000 lb.a 106,000 coils b 100,000c 253,000 hr. d

Cost Driver Rate

Budgete d Cost

$.25 $181,25 0 $4.00 424,000 $1.00 100,000 $3.00 759, 000 $1,464, 250

725,000 = 469,000 + 256,000 (from req. 4) 106,000 = 65,000 + 41,000 (from req. 2) c 100,000 = 60,000 + 40,000 (total units sold, from problem) d 253,000 = 130,000 + 123,000 (from req. 5) a

b

McGraw-Hill/Irwin Inc. 9-46

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-44 (45 MINUTES) 1.

The benefits that can be derived from implementing a budgeting system include the following:

• The preparation of budgets forces management to plan

ahead and to establish goals and objectives that can be quantified.

• Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the objectives of the entire firm.

• The

budgeting process communication and coordination.

promotes

internal

• Budgets provide directions for day-to-day control of

operations, clarify duties to be performed, and assign responsibility for these duties.

• Budgets help in measuring performance and providing incentives.

• Budgets provide a vehicle for resource allocation.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-47

PROBLEM 9-44 (CONTINUED) 2. a. Schedule Sales Budget

b. Subsequent Schedule Production Budget Selling Expense Budget Budgeted Income Statement

Ending Inventory Budget (units)

Production Budget

Production Budget (units)

Direct-Material Budget Direct-Labor Budget Manufacturing-Overhead Budget

Direct-Material Budget

Cost-of-Goods-Manufactured Budget

Direct-Labor Budget

Cost-of-Goods-Manufactured Budget

Manufacturing-Overhead Budget

Cost-of-Goods-Manufactured Budget

Cost-of-Goods-Manufactured Budget

Cost-of-Goods-Sold Budget

Cost-of-Goods-Sold Budget (includes ending inventory in dollars)

Budgeted Income Statement Budgeted Balance Sheet

Selling Expense Budget

Budgeted Income Statement

Research and Development Budget

Budgeted Income Statement

Administrative Expense Budget

Budgeted Income Statement

Budgeted Income Statement

Budgeted Balance Sheet Budgeted Statement of Cash Flows

Capital Expenditures Budget

Cash Receipts and Disbursements Budget Budgeted Balance Sheet

McGraw-Hill/Irwin Inc. 9-48

 2002 The McGraw-Hill Companies, Solutions Manual

Budgeted Statement of Cash Flows Cash Receipts and Disbursements Budget

Budgeted Balance Sheet Budgeted Statement of Cash Flows

Budgeted Balance Sheet

Budgeted Statement of Cash Flows

Budgeted Statement of Cash Flows

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-49

PROBLEM 9-45 (45 MINUTES) 1.

The revised operating budget for Toronto Business Associates for the fourth quarter is presented below. Supporting calculations follow: TORONTO BUSINESS ASSOCIATES REVISED OPERATING BUDGET FOR THE FOURTH QUARTER OF 20X1 Revenue: Consulting fees: Computer system consulting...................... Management consulting............................. Total consulting fees............................. Other revenue................................................ Total revenue............................................ Expenses: Consultant salary expenses*........................... Travel and related expenses........................... General and administrative expenses............. Depreciation expense..................................... Corporate expense allocation......................... Total expenses.......................................... Operating income...............................................

$478,12 5   468,000 $946,12 5    10,000 $956,12 5 $510,65 0 57,875 93,000 40,000   75,000 $776,52 5 $179,60 0

*$510,650 = $245,000 + $265,650. (See supporting calculations.)

McGraw-Hill/Irwin Inc. 9-50

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-45 (CONTINUED) Supporting calculations:

• Schedule of projected revenues for the fourth quarter of 20x1:

Compu ter System Consult ing Third Quarter: Revenue........................................... Hourly billing rate............................ Billable hours................................... Number of consultants..................... Hours per consultant........................ Fourth-quarter planned increase.......... Billable hours per consultant................ Number of consultants......................... Billable hours...................................... Billing rate.......................................... Projected revenue...............................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$421,8 75 ÷    $75 5,625 ÷      15 375      50 425 ×     15 6,375 ×    $75 $478,1 25

Manage ment Consulti ng $315,00 0 ÷    $90 3,500 ÷     10 350      50 400 ×     13 5,200 ×    $90 $468,00 0

 2002 The McGraw-Hill Companies, 9-51

PROBLEM 9-45 (CONTINUED)

• Schedules of projected salaries, travel, general and administrative, and allocated corporate expenses: Comput er System Consulti ng Compensation: Existing consultants: Annual salary.............................. Quarterly salary.......................... Planned increase (10%)............... Total fourth-quarter salary per consultant.......................................... Number of consultants................ Total............................................... New consultants at old salary (3 × $12,500)............................................. Total salary..................................... Benefits (40%)................................ Total compensation.................... Travel expenses: Computer system consultants (425 hr × 15).................................................. Management consultants (400 hr. × 13) Total hours................................. Rate per hour*................................ Total travel expense................... General and administrative ($100,000 × 93%)............................................... McGraw-Hill/Irwin Inc. 9-52

Manage ment Consulti ng

$  $ 50,000 46,000 $  $ 12,500 11,500    1,150    1,250 $   $ 13,750 12,650 ×      ×     10 15 $ $137,50 189,750 0          37,500 -0$ $175,00 189,750 0      70,000 75,900 $ $245,00 265,650 0 6,375    5,200 11,575 ×     $5 $ 57,875 $ 93,000

 2002 The McGraw-Hill Companies, Solutions Manual

Corporate expense allocation ($50,000 × 150%)............................................. *Third-quarter travel expense

$ 75,000

÷ hour = rate s

$45,625 ÷ 9,12 5†

= $5.00

9,125 = (350 × 10) + (375 × 15) †

2 .

An organization would prepare a revised operating budget when the assumptions underlying the original budget are no longer valid. The assumptions may involve factors outside or inside the company. Changes in assumptions involving external factors may include changes in demand for the company's products or services, changes in the cost of various inputs to the company, or changes in the economic or political environment in which the company operates. Changes in assumptions involving internal factors may include changes in company goals or objectives.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-53

PROBLEM 9-46 (60 MINUTES) 1.

Sales budget: Box C Box P 500,0 500,00 00 0 ×     ×    $.90 $1.30 $450, $650,0 000 00

Sales (in units) Sales price per unit Sales revenue 2.

$1,100,0 00

Production budget (in units): Sales.................................................. Add: Desired ending inventory............ Total units needed.............................. Deduct: Beginning Inventory............... Production requirements....................

3.

Total

 Box C 500,000       5,000  

  Box P 500,000      15,000    515,000      20,000    495,000   

505,000      10,000    495,000   

Raw-material budget: PAPERBOARD Production requirement (number of boxes)..................................... Raw material required per box (pounds)..................................... Raw material required for production (pounds).................. Add: Desired ending raw-material inventory..............

McGraw-Hill/Irwin Inc. 9-54

Box C Box P 495,0 495,00 00 0 ×     . ×     . 3 7

Total

148,5 346,50 00 0

495,0 00   

 2002 The McGraw-Hill Companies, Solutions Manual

Total raw-material needs............. Deduct: Beginning raw-material inventory.................................... Raw material to be purchased...... Price (per pound)........................ Cost of purchases (paperboard).. .

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

5,000 500,0 00   15,00 0 485,0 00 ×    $.20 $ 97,00 0

 2002 The McGraw-Hill Companies, 9-55

PROBLEM 9-46 (CONTINUED) CORRUGATING MEDIUM Production requirements (number of boxes)..................................... Raw material required per box (pounds)..................................... Raw material required for production (pounds).................. Add: Desired ending raw-material inventory..............

Box C Box P 495,0 495,00 00 0 ×     ×     . .2 3

  148,50 247,50 99,00 0 0 0    10,000 257,50 0    5,000 252,50 0 ×    $.10 $ 25,250

Total raw-material needs............. Deduct: Beginning raw-material inventory.................................... Raw material to be purchased...... Price (per pound)........................ Cost of purchases (corrugating medium)..................................... Total cost of raw-material purchases ($97,000 + $25,250).................. 4.

Total

$122, 250

Direct-labor budget: Production requirements (number of boxes) Direct labor required per box (hours)........................................ Direct labor required for production (hours) Direct-labor rate.......................... Total direct-labor cost.................

McGraw-Hill/Irwin Inc. 9-56

Box C Box P 495,0 495,00 00 0 × . ×  . 0025 005 1,23    7.5 2,475

Total

3,712. 5 ×    $12 $44,5

 2002 The McGraw-Hill Companies, Solutions Manual

50 5.

Manufacturing-overhead budget: Indirect material................................................ Indirect labor.................................................... Utilities............................................................. Property taxes.................................................. Insurance.......................................................... Depreciation..................................................... Total overhead..................................................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$   10,500 50,000 25,000 18,000 16,000     29,000 $  148,500

 2002 The McGraw-Hill Companies, 9-57

PROBLEM 9-46 (CONTINUED) 6.

Selling and administrative expense budget: Salaries and fringe benefits of sales personnel... Advertising....................................................... Management salaries and fringe benefits........... Clerical wages and fringe benefits..................... Miscellaneous administrative expenses.............. Total selling and administrative expenses..........

7.

$   75,000 15,000 90,000 26,000      4,000 $  210,000

Budgeted income statement: Sales revenue [from sales budget, req. (1)]........ Less: Cost of goods sold:* Box C: 500,000 × $.21..........................

$105, 000   Box P: 500,000 × $.43 ......................... 215,0 00 Gross margin..................................................... Selling and administrative expenses.................. Income before taxes.......................................... Income tax expense (40%)................................. Net income........................................................

$1,100, 000

320,000 $  780,000    210,000 $  570,000    228,000 $  342,000

*Calculation of cost of goods sold: (a Predetermined ) overhead rate

=

budgeted manufactur ingoverhead volume ofdirect -laborhours $148,500

= (495,000)( .0025)+(495,000)( .005) McGraw-Hill/Irwin Inc. 9-58

 2002 The McGraw-Hill Companies, Solutions Manual

$148,500

= $40perhour = 3,712.5 hours

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-59

PROBLEM 9-46 (CONTINUED) (b )

Calculation of manufacturing cost per unit: Box C Direct material: Paperboard .3 lb. × $.20 per lb................ .7 lb. × $.20 per lb................ Corrugating medium .2 lb. × $.10 per lb................ .3 lb. × $.10 per lb................ Direct labor: .0025 hr. × $12 per hr.......... .005 hr. × $12 per hr............ Applied manufacturing overhead: .0025 hr. × $40 per hr.......... .005 hr. × $40 per hr............ Manufacturing cost per unit.........

Box P

$.06 $.14 .02 .03 .03 .06 .10 ___   $.21

 .20 $.43

PROBLEM 9-47 (40 MINUTES) 1.

Strategic planning identifies the overall objective of an organization and generally considers the impact of external factors such as competitive forces, market demand, and technological changes when identifying overall objectives. Budgeting is the quantitative expression of plans evolving from strategic planning. The time horizon for budgeting is generally a year, or an operating cycle, and greater attention is focused on internal factors than on external factors.

McGraw-Hill/Irwin Inc. 9-60

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-47 (CONTINUED) 2.

For each of the financial objectives established by the board of directors and president of Healthful Foods, Inc., the calculations to determine whether John Winslow’s budget attains these objectives are presented in the following table.

CALCULATION OF FINANCIAL OBJECTIVES: HEALTHFUL FOODS, INC.

Objective Increase sales by 12% ($850,000 × 1.12 = $952,000) Increase before-tax income by 15% ($105,000 × 1.15 = $120,750) Maintain long-term debt at or below 16% of assets ($2,050,000 × .16 = $328,000) Maintain cost of goods sold at or below 70% of sales ($947,750 × .70 = $663,425)

3.

Attained/ Not Attained Not attained

Calculations ($947,750−$850,000)/ $850,000 = 11.5%

Attained

($120,750−$105,000)/ $105,000 = 15%

Attained

$308,000/$2,050,000 = 15% (rounded)

Attained

$574,725/$947,750 = 60.6% (rounded)

The accounting adjustments contemplated by John Winslow are unethical because they will result in intentionally overstating income by understating the cost of goods sold. The specific standards of ethical conduct for management accountants violated by Winslow are as follows: Competence. By making the accounting adjustments, Winslow violated the competency standard by not preparing financial statements in accordance with technical standards. Integrity. Winslow violated the integrity standard by engaging in an activity that prejudiced his ability to carry

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-61

out his duties ethically, by not communicating unfavorable as well as favorable information, and by engaging in an activity that appears to be a conflict of interest. Objectivity. By overstating the inventory and reclassifying certain costs, Winslow has violated the objectivity standard. He has failed to communicate information fairly and objectively and has failed to disclose all relevant information that would influence the users’ understanding of the report.

McGraw-Hill/Irwin Inc. 9-62

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-48 (120 MINUTES) 1.

Sales budget: 20x0

Total sales.......... Cash sales*......... Sales on account†

20x1

Decem Januar ber y $400,0 $440, 00 000 100,00 110,0 0 00 300,00 330,0 0 00

First Februa March Quarte ry r $484,0 $532, $1,456, 00 400 400 121,00 133,1 364,10 0 00 0 363,00 399,3 1,092,3 0 00 00

*25% of total sales. † 75% of total sales. 2.

Cash receipts budget: 20x1

Cash sales....................... Cash collections from credit sales made during current month*......................... Cash collections from credit sales made during preceding month†.......................... Total cash receipts.......... McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Januar Februa March y ry $110, $121,0 $133, 000 00 100

First Quarte r $  364,10 0

33,00 36,300 0

39,93 0

109,23 0

    270,0 297,00 00 0 $413, $454,3 000 00

     326,7 893,70 00 0 $499, $1,367, 730 030

 2002 The McGraw-Hill Companies, 9-63

*10% of current month's credit sales. † 90% of previous month's credit sales.

McGraw-Hill/Irwin Inc. 9-64

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-48 (CONTINUED) 3.

Purchases budget: 20x0

Budgeted cost of goods sold. . Add: Desired ending inventory........ Total goods needed........ Less: Expected beginning inventory.... Purchases.......

20x1 March

First Quarter

Decem ber

January

Febru ary

$280,0 00

$308,0 00

$338, 800

$372,6 $1,019,4 80   80   

  154,00 0

  169,40 0

  186,3 40

  186,34 0*

$434,0 00

$477,4 00

$525, 140

$559,0 $1,205,8 20   20   

  140,00 0 $294,0 00

  154,00 0 $323,4 00

  169,4 00 $355, 740

    186,34 154,000 0   ** $372,6 $1,051,8 80   20   

   186,340†   

*Since April's expected sales and cost of goods sold are the same as the projections for March, the desired ending inventory for March is the same as that for February. † The desired ending inventory for the quarter is equal to the desired ending inventory on March 31, 20x1. **The beginning inventory for the quarter is equal to the December ending inventory.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-65

PROBLEM 9-48 (CONTINUED) 4.

Cash disbursements budget: 20x1 Januar Februa March y ry Inventory purchases: Cash payments for purchases during the current month*............................ Cash payments for purchases during the preceding month†..................... Total cash payments for inventory purchases..... Other expenses: Sales salaries............... Advertising and promotion....................... Administrative salaries. Interest on bonds**...... Property taxes**.......... Sales commissions....... Total cash payments for other ................expenses Total cash disbursements

McGraw-Hill/Irwin Inc. 9-66

First Quarter

$129, $142,2 360 96

$149, $ 072 420,728

176,4 194,04 00 0

213,4 583,884 44

$305, $336,3 760 36

$362, 516

$1,004, 612

$  $  21,00 21,000 0 16,00 16,000 0 21,00 21,000 0 15,00 -00 -05,400         4,400 4,840

$  21,00 0 16,00 0 21,00 0 -0-

$   63,000

-0    5,324

5,400     14,564

$ $ 77,40 68,240 0 $383, $404,5 160 76

$ $    63,32 208,964 4 $425, $  840 1,213,5

48,000 63,000 15,000

 2002 The McGraw-Hill Companies, Solutions Manual

76 *40% of current months' purchases [see requirement (3)]. † 60% of the prior month's purchases [see requirement (3)]. **Bond interest is paid every six months, on January 31 and July 31. Property taxes also are paid every six months, on February 28 and August 31.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-67

PROBLEM 9-48 (CONTINUED) 5.

Summary cash budget: 20x1 First January Februa March Quarter ry Cash receipts [from req. $ $ $ $1,367, (2)]................................ 413,00 454,30 499,73 030 0 0 0 Cash disbursements [from req. (4)]............. (383,1 (404,5 (425,8 (1,213, 60) 76) 40) 576) Change in cash balance during period due to $  $  $ $  operations..................... 29,840 49,724 73,890 153,454 Sale of marketable securities 15,000 15,000 (1/2/x1)....................... Proceeds from bank loan (1/2/x1)....................... 100,00 100,000 0 Purchase of equipment... (125,00 (125,00 0) 0) Repayment of bank loan (3/31/x1)..................... (100,0 (100,00 00) 0) Interest on bank loan*.... (2,500 (2,500) ) Payment of dividends..... (50,00    0) (50,000 ) Change in cash balance during first quarter................ Cash balance, 1/1/x1....... Cash balance, 3/31/x1.....

McGraw-Hill/Irwin Inc. 9-68

$   (9,046)     35,000 $  25,954  2002 The McGraw-Hill Companies, Solutions Manual

*$100,000 × 10% per year × 1/4 year = $2,500 6.

Analysis of short-term financing needs: Projected cash balance as of December 31, 20x0. Less: Minimum cash balance............................... Cash available for equipment purchases............. Projected proceeds from sale of marketable securities........................................................... Cash available.................................................... Less: Cost of investment in equipment................

$  35,000      25,000   $  10,000       15,000   $  25,000      125,000   

Required short-term borrowing...........................

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$(100,0 00)

 2002 The McGraw-Hill Companies, 9-69

PROBLEM 9-48 (CONTINUED) 7.

INTERCOASTAL ELECTRONICS COMPANY BUDGETED INCOME STATEMENT FOR THE FIRST QUARTER OF 20X1 Sales revenue......................................

$1,456, 400   1,019,4 80 $  436,920

Less: Cost of goods sold....................... Gross margin....................................... Selling and administrative expenses: Sales salaries................................... Sales commissions........................... Advertising and promotion............... Administrative salaries..................... Depreciation.................................... Interest on bonds............................. Interest on short-term bank loan...... Property taxes................................. Total selling and administrative expenses............................................. Net income.......................................... 8.

$63,000 14,564 48,000 63,000 75,000 7,500 2,500   2,700    276,264 $  160,656

INTERCOASTAL ELECTRONICS COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE FIRST QUARTER OF 20X1 Retained earnings, 12/31/x0.............................. Add: Net income................................................ Deduct: Dividends............................................. Retained earnings, 3/31/x1................................

McGraw-Hill/Irwin Inc. 9-70

$ 107,500 160,656    50,000 $ 218,156

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-48 (CONTINUED) 9.

INTERCOASTAL ELECTRONICS COMPANY BUDGETED BALANCE SHEET MARCH 31, 20X1 Cash.................................................................. Accounts receivable*.......................................... Inventory........................................................... Buildings and equipment (net of accumulated depreciation)†..................................................... Total assets....................................................... Accounts payable**............................................ Bond interest payable........................................ Property taxes payable....................................... Bonds payable (10%; due in 20x6)...................... Common Stock................................................... Retained earnings.............................................. Total liabilities and stockholders' equity.............

*Accounts receivable, 12/31/x0........................... Sales on account [see req. (1)]............................ Total cash collections from credit sales ($109,230 + $893,700)..................................... Accounts receivable, 3/31/x1.............................. †

Buildings and equipment (net), 12/31/x0............

Cost of equipment acquired................................ Depreciation expense for first quarter................ Buildings and equipment (net), 3/31/x1............... McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$   25,954 359,370 186,340    676,000 $1,247,6 64 $  223,608 5,000 900 300,000 500,000     218,156 $ 1,247,66 4 $   270,000 1,092,30 0 (1,002,93) 0 $  359,370 $  626,000 125,000   (75,000) $ 

 2002 The McGraw-Hill Companies, 9-71

676,000 **Accounts payable, 12/31/x0.............................. Purchases [req. (3)]............................................ Cash payments for purchases [req. (4)]............... Accounts payable, 3/31/x1..................................

McGraw-Hill/Irwin Inc. 9-72

$  176,400 1,051,82 0 (1,004,61) 2 $  223,608

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-49 (25 MINUTES)

 a  n  a n n u n a u l a l     r t  c ep   o qo q he r us urod t a ile rdn r e i t n mi t g y e     +     o  o   r 2 r cd p d o e e s r r t     q  u  u a n n i i t t y   

1.

Annual cost of ordering and storing XL-20

=

2.

Economic order quantity

=

(2)(annuare l quiremet)(co n stperorder) annualholdingcostperunit

=

(2)(4,800 ($ ) 150) $4

=

360,000

3.

= 600

Using the formula given for requirement (1): Total annual cost of ordering and storing

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 4,800 

 600

) +   ( $4) =  600 ( $150  2   2002 The McGraw-Hill Companies, 9-73

XL-20 = $2,400 Note that this cost does not include the actual cost of XL20 purchases (i.e., the quantity puchased multiplied by the price). 4.

Orders per year: Number of orders per = year

5.

annual requiremen t 4,800 = =8 orderquantity 600

Using the new cost data: a.

EO = Q =

(2)(annualrequiremen t)(cost perorder) annualholdingcostperunit (2)(4,800 ($ ) 20) $19.20

10,000 = 100 = PROBLEM 9-49 (CONTINUED)

b.

Number of orders per = year

annualrequiremen t 4,800 = orderquantity 100

= 48 PROBLEM 9-50 (20 MINUTES) 1.

Tabulation of inventory ordering and holding costs: 400 Number of orders (4,800 ÷ order size).......... Ordering cost ($150 × number of orders) Average inventory (order size ÷ 2).................

McGraw-Hill/Irwin Inc. 9-74

Order size 600

800

12

8

6

$1,80 0

$1,200

$900

200

300

400

 2002 The McGraw-Hill Companies, Solutions Manual

Holding costs ($4 × average inventory). . Total annual costs (ordering costs + holding costs).......

$800

$1,200

$1,600

$2,60 0

$2,400

$2,500

minim um 2.

The tabular method is cumbersome and does not necessarily identify the optimal order quantity. If the optimal order quantity does not happen to be selected as one of the order quantities for the tabular analysis, an order quantity other than those included in the table will be the least-cost order quantity.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-75

PROBLEM 9-51 (25 MINUTES) Graphical analysis of economic order quantity:

McGraw-Hill/Irwin Inc. 9-76

 2002 The McGraw-Hill Companies, Solutions Manual

Total annual cost

$3,500

$3,000

•

$2,500

•

Minimum cost

•

$2,000

Total annual cost

Holding costs

• •

$1,500

• $1000

•

•

Ordering costs

$500

200

400

600

800

Order quantity 1,000

Economic order quantity (EOQ)

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-77

PROBLEM 9-52 (35 MINUTES) 1.

Reorder point: Monthly usage = =

annual usage 12 4,800 = 400canisters 12

Usage during 1- = 400 canisters month lead time Reorder point = 400 canisters The chemical XL-20 should be ordered in the economic order quantity of 600 canisters when the inventory level falls to 400 canisters. In the one month it takes to receive the order, those 400 canisters will be used in production.

McGraw-Hill/Irwin Inc. 9-78

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-52 (CONTINUED) 2.

Graph of usage, lead time and reorder point: Quantity (canisters) of XL-20 600

Usage of XL-20

400

200

Time 1 month lead timeOrder

Denotes 1 month

received

Reorder point, when inventory equals 400 canisters. Order

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-79

PROBLEM 9-52 (CONTINUED) 3.

Safety stock and new reorder point: Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average monthly usage still is 400 canisters, there is the potential for an excess range of 100 canisters in any particular month. The safety stock of XL20 is equal to the potential excess monthly usage of 100 canisters. With a safety stock of 100 canisters, the reorder point is 500 canisters (400 + 100). The materials and parts manager should order the EOQ of 600 canisters when the inventory of XL-20 falls to 500 canisters. During the onemonth lead time, another 300 to 500 canisters of XL-20 will be used in production.

PROBLEM 9-53 (45 MINUTES) 1.

The ordering cost per order is composed of the following costs: Inspection fee................................................... Direct labor: receiving clerk (8 hours × $9.00).... Variable overhead (8 hours × $2.50).................. Processing cost*................................................ Total ordering cost per order............................. *Processing cost per order

$ 75.00 72.00 20.00    5.80 $172.80

changeinordering cost

= changeinnumberoforders =

$12,300 −$11,900 95−15

=

$400 80

= $5.00 Recognition of 16% cost increase

= $5.00 × 1.16 = $5.80

McGraw-Hill/Irwin Inc. 9-80

 2002 The McGraw-Hill Companies, Solutions Manual

PROBLEM 9-53 (CONTINUED) 2.

The storage cost per windshield is composed of the following costs: Variable warehouse rent (fixed fee not relevant) Breakage cost................................................... Taxes and fire insurance.................................... Other storage costs........................................... Total storage cost per windshield......................

3.

$

5.35 3.00 1.15 10.50 $ 20.00

The economic order quantity (EOQ) is calculated as follows: EOQ =

(2)(10,80)($ 0 172.80) $20.00

EOQ = 432 windshields per order 4.

The minimum annual relevant cost at the economic order quantity is calculated as follows: Minimum cost = ordering cost + storage cost =

10,800 ×$172.80 432×$20.00 + 432 2

= $4,320 + $4,320 = $8,640 5.

The reorder point in units is calculated as follows: Usage per day × lead time in = 36* units × 6 days days = 216 windshields *10,800 ÷ 50 weeks ÷ 6 days

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-81

PROBLEM 9-53 (CONTINUED) 6.

Using the new cost estimates: a.

EOQ = =

b. Number of orders per year

=

(2)(10,800 )($32.40) $60.00 11,664

order

= 108 windshields per

annualrequiremen t 10,800 = orderquantity 108

= 100 orders c.

Minimum cost = ordering cost + storage cost =

10,800 ×$32.40 108×$60.00 + 108 2

= $3,240 + $3,240 = $6,480

McGraw-Hill/Irwin Inc. 9-82

 2002 The McGraw-Hill Companies, Solutions Manual

SOLUTIONS TO CASES CASE 9-54 (60 MINUTES) 1.

Yes, City Raquetball Club (CRC) should be better able to plan its cash receipts with the new membership plan and fee structure. The cash flows should be more predictable and certain because the large, prepaid membership fee becomes the only factor affecting cash receipts. The hourly court fees, which were dependent upon a variable that could fluctuate daily, are eliminated.

2.

a.

Factors that CRC’s management should consider before adopting the new membership plan and fee structure include:

• Costs associated with the plan changeover • Public acceptance of the new proposal • The expected number of memberships by classes that can be sold for each plan at the specified rates

• The anticipated rate of return for excess cash or cost of borrowing funds in periods of cash shortages

b.

3.

Financial analyses conducted by CRC could include a forecast of projected cash inflows and outflows by months, an income statement including interest revenue and expense, a cost-volume-profit analysis, and a cash management plan for excess cash or cash shortages.

Because CRC's cash flows should be more predictable, management should be better able to plan for and control cash disbursements. In addition, management should be better able to plan for short-term investments when excess cash occurs or to arrange for short-term financing when there are cash shortages. The collection and billing function is also simplified with the new membership plan and fee structure. There would be only a one-time cash receipt rather than multiple

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-83

transactions.

McGraw-Hill/Irwin Inc. 9-84

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-55 (35 MINUTES) 1.

Some of the operational and behavioral benefits that are generally attributed to a participatory budgeting process are as follows:

 Utilization of the best knowledge of activities in a specific area, because the participants are close to daily operations.  Goals that are more realistic and acceptable.  Improved communication and group cohesiveness.  A sense of commitment and accountable for the budget. 2.

willingness

to

be

held

Four deficiencies in Patricia Eklund’s participatory policy for planning and performance evaluation, along with recommendations of how the deficiencies can be corrected: Deficiencies

Recommendations

The setting of constraints on fixed expenditures includes uncontrollable fixed costs, thereby mitigating the positive effects of participatory budgeting.

Rewards should be based on meeting budget and/or organizational goals or objectives.

The arbitrary revision of The contingency budget approved budgets defeats the should be separate, over and participatory process. above each department’s original submission. The division manager holds Managers should be involved back a percentage of each in the revision of budgets. budget for discretionary use. Managers could submit a budget with programs at different levels of funding. Evaluation based on budget performance must be accompanied with intrinsic rewards. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

Divisional constraints could be communicated at a budget “kick-off” meeting; however, individual limits of controllable expenses should  2002 The McGraw-Hill Companies, 9-85

be set by each manager.

McGraw-Hill/Irwin Inc. 9-86

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-56 (120 MINUTES) 1.

Sales budget:

S frame unit sales......... × S sales price.......... S frame sales revenue..... L frame unit sales......... × L sales price.......... L frame sales revenue.....

20x0 4th Quarte r

2nd Quarte r

20x1 3rd Quarte r

1st Quarte r

4th Quarte r

Entire Year

50,000

55,000

60,000

65,000

70,000

×      $10

×      $10

×      $10

×      $10

x      $10

250,00 0 ×      $10

$ 500,00 0

$  550,00 0

$  600,00 0

$  650,00 0

$   $2,500, 700,00 000 0

40,000

45,000

50,000

55,000

60,000

×      $15

×      $15

×      $15

×      $15

×      $15

$ 600,00 0

$  675,00 0

$  750,00 0

$  825,00 0

210,00 0 ×      $15

$  $3,150, 900,00 000 0

Total sales revenue..... $1,100, $1,225, $1,350, $1,475, $1,600, $5,650, 000 000 000 000 000 000 Cash sales*. Sales on account†....

$ 440,00 0

$ 490,00 0

$ 540,00 0

$590,0 00

$640,0 $2,260, 00 000

660,00 0

735,00 0

810,00 0

885,00 0

960,00 3,390,0 0 00

*40% of total sales. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-87

†

60% of total sales.

McGraw-Hill/Irwin Inc. 9-88

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-56 (CONTINUED) 2.

Cash receipts budget:

Cash sales...............

1st Quarte r $  490,00 0

2nd Quarte r $ 540,00 0

20x1 3rd Quarte r $ 590,00 0

4th Entire Quarte Year r $ $2,260, 640,00 000 0

Cash collections from credit sales made during 588,00 648,00 708,00 768,00 2,712,0 current 0 0 0 0 00 quarter*................ Cash collections from credit sales made during                previous 132,00 147,00 162,00 177,00 618,00 † quarter ................. 0 0 0 0 0 Total cash receipts. . $1,210, $1,335, $1,460, $1,585, $5,590, 000 000 000 000 000 *80% of current quarter's credit sales. † 20% of previous quarter's credit sales.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-89

CASE 9-56 (CONTINUED) 3 .

Production budget 20x0 4th Quart er

1st Quart er

2nd Quart er

20x1 3rd 4th Quart Quart er er

Entir e Year

55,00 0

60,00 65,00 70,00 0 0 0

250, 000

12,00 0

13,00 14,00 15,00 0 0 0

61,00 0

67,00 0

73,00 79,00 85,00 0 0 0

  15,0 00 265, 000

10,00 0

11,00 0

12,00 13,00 14,00 0 0 0

Units to be 51,00 produced.............. 0

56,00 0

61,00 66,00 71,00 0 0 0

  11,0 00 254, 000

45,00 0

50,00 55,00 60,00 0 0 0

210, 000

10,00 0

11,00 12,00 13,00 0 0 0

55,00 0

61,00 67,00 0 0

  13,0 00 223, 000

S frames: Sales (in units). . . 50,00 0 Add: Desired ending 11,00 inventory.......... 0 Total units needed Less: Expected beginning inventory.............

L frames: Sales (in units). . . 40,00 0 Add: Desired ending 9,000 inventory.......... Total units needed Less: Expected beginning inventory.............

49,00 0

   9,000 8,000

Units to be 41,00 produced.............. 0

McGraw-Hill/Irwin Inc. 9-90

46,00 0

73,0 00

10,00 11,00 12,00 0 0 0 51,00 56,00 61,00 0 0 0

   9,00 0 214, 000

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-56 (CONTINUED) 4 .

Raw-material budget:*

Metal strips: S frames to be produced....... × Metal quantity per unit (ft.)......... Needed for S frame production..... L frames to be produced....... × Metal quantity per unit (ft.)......... Needed for L frame production..... Total metal needed for production; to be purchased (ft.)................... × Price per foot................... Cost of metal strips to be purchased:

20x0 4th Quart er

1st Quart er

51,00 0

56,00 61,000 0

66,00 0

71,00 0

254,00 0

×       2

×       2

×       2

×       2

×       2

×        2

  102,0 00

    112,0 122,00 00 0

  132,0 00

  142,0 00

   508,00 0

41,00 0

46,00 51,000 0

56,00 0

61,00 0

214,00 0

×       3

×       3

×       3

×       3

×       3

×        3

  123,0 00

    138,0 153,00 00 0

  168,0 00

  183,0 00

   642,00 0

225,0 00

250,0 275,00 00 0

300,0 00

325,0 1,150,0 00 00

×      $1

×      $1

×      $1

×      $1

×      $1

$225, 000

$250, $275,0 000 00

$300, 000

$325, $1,150, 000 000

2nd Quarte r

20x1     3rd 4th Quart Quart er er

Entire Year

×       $1

*Raw-material budget continued on next page. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-91

CASE 9-56 (CONTINUED) Glass sheets:. . . S frames to be produced....... × Glass quantity per unit (sheets). . Needed for S frame production..... L frames to be produced....... × Glass quantity per unit (sheets). . Needed for L frame production..... Total glass needed for production (sheets)......... Add: Desired ending inventory....... Total glass needs................ Less: Expected beginning inventory........... Glass to be purchased...... × Price per glass McGraw-Hill/Irwin Inc. 9-92

51,00 0

56,00 61,000 0

66,00 0

71,00 0

254,00 0

×    .2 5

×    .2 5

×    .2 5

×    .2 5

×    .2 5

×      . 25

   12,75 0

      14,00 15,250 0

   16,50 0

   17,75 0

    63,500

41,00 0

46,00 51,000 0

56,00 0

61,00 0

214,00 0

×     . 5

×     . ×     .5 5

×     . 5

×     . ×       . 5 5

   20,50 0

      23,00 25,500 0

   28,00 0

   30,50 0

   107,00 0

33,25 0

37,00 40,750 0

44,50 0

48,25 0

170,50 0

    7,400

    8,150

    8,900

    9,650

    10,400

40,65 0

45,15 49,650 0

54,15 0

   10,40 0 58,65 0

    6,650

    7,400

    8,150

    8,900

    9,650

     7,400

34,00 0

37,75 41,500 0

45,25 0

49,00 0

173,50 0

×     

×     

×     

×     

×      

×     

180,90 0

 2002 The McGraw-Hill Companies, Solutions Manual

sheet............. Cost of glass to be purchased...... Total rawmaterial purchases (metal and glass)......

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$8

$8

$8

$8

$8

$8

$272, 000

$302, $332,0 000 00

$362, 000

$392, $1,388, 000 000

$497, 000

$552, $607,0 000 00

$662, 000

$717, $2,538, 000 000

 2002 The McGraw-Hill Companies, 9-93

CASE 9-56 (CONTINUED) 5. Cash disbursements budget:*

1st Quart er Raw-material purchases: Cash payments for purchases during the current $441, † quarter ................... 600 Cash payments for purchases during the preceding quarter**................. Total cash payments for raw-material purchases................ Direct labor: Frames produced (S and L)............

4th Quarte r

Entire Year

$ $ 485,60 529,600 0

$ $2,030, 573,60 400 0

  99,40 0

       110,40 121,400 0

   132,40 0

$541, 000

$  $  596,00 651,000 0

$   $2,494, 706,00 000 0

102,0 00

112,00 122,000 0

132,00 0

468,00 0

×       .1

×       . 1

×       .1

×       .1

11,200

12,200

13,200

46,800

×      $20

×      $20

×      $20

×      $20

$  $  224,00 244,000 0

$  264,00 0

$  936,00 0

× Direct-labor hours per ×      . frame................. 1 Direct-labor hours to be 10,20 used................... 0 × Rate per directlabor ×    hour................... $20 Total cash payments for $204, direct labor......... 000

McGraw-Hill/Irwin Inc. 9-94

2nd Quarte r

20× 1 3rd Quarter

   463,60 0

 2002 The McGraw-Hill Companies, Solutions Manual

*Cash disbursements budget continued on next page. †  80% of current quarter’s purchases **20% of previous quarter’s purchases

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-95

CASE 9-56 (CONTINUED) Manufacturing overhead: Indirect material.... Indirect labor........ Other.................... Total cash payments for manufacturing overhead............ Cash payments for selling and administrative expenses............ Total cash disbursements.........

McGraw-Hill/Irwin Inc. 9-96

$ 10,20 0 40,80 0    31,00 0

$    11,200

$    $    12,200 13,200

$   46,800

44,800

48,800

52,800

    36,000

    41,000

    46,000

187,20 0    154,00 0

$ 82,00 0

$   $ 92,000 102,000

$ 112,00 0

$ 388,00 0

$100, 000

$ $ $ $ 100,00 100,000 100,00 400,00 0 0 0 $927, $1,012, $1,097, $1,182, $4,218, 000 000 000 000 000

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-56 (CONTINUED) 6 .

Summary cash budget:

Cash receipts [from req. (2)]....................... Less: Cash disbursements [from req. (5)]........... Change in cash balance due to operations................ Payment of dividends...

20x1 1st 2nd 3nd 4th Entire Quarter Quarter Quarter Quarter Year $1,210,0 $1,335,0 $1,460,0 $1,585,0 $5,590,0 00   00   00   00   00       1,012,00 1,097,00 1,182,00 4,218,00 927,000   0   0   0   0   $  283,000   (50,000)

$ 323,000 

$  363,000 

 

 

(50,000)

(50,000)

$   $1,372,0 403,000  00    

(50,000) (200,000 ) 1,000,00 0   (1,000,0 00)

Proceeds from bank 1,000,00 loan (1/2/x1)................ 0   Purchase of equipment (1,000,00 0) Quarterly installment on loan (250,000 (250,000 (250,000 (250,000 principal................... ) ) ) ) Quarterly interest               payment*..................... (25,000) (18,750) (12,500) (6,250) Change in cash balance during $  $   $    $         the period................. (42,000) 4,250 50,500 96,750   McGraw-Hill/Irwin Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, Inc. 9-97

(1,000,0 00)    (62,500) $  109,500

 

Cash balance, beginning of period

    95,000  

   53,000  

    57,250  

Cash balance, end of period.........................

$    53,000  

$  57,250  

$  107,750 

$  204,500 

 

 

*$1,000,000 × 10% × $750,000 × 10% × ¼ $500,000 × 10% × ¼ $250,000 × 10% × ¼

McGraw-Hill/Irwin 9-98

         107,750 95,000    

¼ = $25,000 = $18,750 = $12,500 = $6,250

 2002 The McGraw-Hill Companies, Inc. Solutions Manual

$  204,500  

CASE 9-56 (CONTINUED) 7.

FRAME-IT COMPANY BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD FOR THE YEAR ENDED DECEMBER 31, 20X1

Direct material: Raw-material inventory, 1/1/x1...............

$    59,200      2,538,000 

Add: Purchases of raw material [req. (4)]

  

Raw material available for use...............

$2,597,20 0   

Deduct: Raw-material inventory, 12/31/x1 ([req. (4)] 10,400 × $8)....................... Raw material used Direct labor [req. (5)]................................ Manufacturing overhead: Indirect material.................................... Indirect labor......................................... Other overhead...................................... Depreciation.......................................... Total manufacturing overhead................ Cost of goods manufactured...................... Add: Finished-goods inventory, 1/1/x1........ Cost of goods available for sale.................. Deduct: Finished-goods inventory, 12/31/x1 Cost of goods sold..................................... McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

    83,200    $2,514,00 0    936,000    $ 46,80 0 187,2 00 154,0 00    80,00 0 468,000* $3,918,00 0†      167,000    $4,085,00 0       235,000** $3,850,00 0††

 2002 The McGraw-Hill Companies, 9-99

*In the budget, budgeted and applied manufacturing overhead are equal. The applied manufacturing overhead may be verified independently as follows: Total number of frames produced........... × Direct-labor hours per frame............... Total direct-labor hours.......................... × Predetermined overhead rate per hour Total manufacturing overhead applied. . .

468,000 ×      .1 46,800 ×    $10 $468,00 0

See next page. **See next page. †† See next page. †

McGraw-Hill/Irwin Inc. 9-100

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-56 (CONTINUED) The cost of goods manufactured may be verified independently as follows: †

Frames produced................................. × Manufacturing cost per unit.............. Total manufacturing cost..................... Grand total..........................................

S L Frames Frames 254,000 214,000 ×       ×      $7 $10 $1,778, $2,140, 000 000 $3,918,000

**The finished-goods inventory on 12/31/x1 may be verified independently as follows:

Projected inventory on 12/31/x1........... Manufacturing cost per unit................. Cost of ending inventory...................... Total cost of ending inventory (S and L)

S L Frames Frames 15,000 13,000 ×        ×       $7 $10 $  $  105,000 130,000 $235,000

The cost of goods sold may be verified independently as follows: ††

Frames sold......................................... Manufacturing cost per unit................. Cost of goods sold............................... Total cost of goods sold (S and L)......... 8.

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

S L Frames Frames 250,000 210,000 ×       ×      $7 $10 $1,750, $2,100, 000 000 $3,850,000

FRAME-IT COMPANY BUDGETED INCOME STATEMENT  2002 The McGraw-Hill Companies, 9-101

FOR THE YEAR ENDED DECEMBER 31, 20X1 Sales revenue.....................................

$5,650, 000   3,850,0 00 $1,800, 000

Less: Cost of goods sold...................... Gross margin...................................... Selling and administrative expenses. . . Interest expense................................. Net income.........................................

McGraw-Hill/Irwin Inc. 9-102

$400,00 0    62,500

   462,500 $1,337, 500

 2002 The McGraw-Hill Companies, Solutions Manual

CASE 9-56 (CONTINUED) 9.

FRAME-IT COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 20X1 Retained earnings, 12/31/x0.............................. Add: Net income................................................ Deduct: Dividends............................................. Retained earnings, 12/31/x1..............................

1 0.

$3,353, 800 1,337,5 00    200,000 $4,491, 300

FRAME-IT COMPANY BUDGETED BALANCE SHEET DECEMBER 31, 20X1 Cash................................................................. Accounts receivable*......................................... Inventory: Raw material†................................................ Finished goods.............................................. Plant and equipment (net of accumulated depreciation)**.................................................. Total assets...................................................... Accounts payable††............................................. Common stock................................................... Retained earnings............................................. Total liabilities and stockholders' equity............

McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

$  204,500 192,000 83,200 235,000   8,920,0 00 $9,634, 700 $  143,400 5,000,0 00   4,491,3 00 $9,634, 700

 2002 The McGraw-Hill Companies, 9-103

*Fourth-quarter sales on account × 20% = $960,000 × 20% † 10,400 units × $8 **$8,000,000 + $1,000,000 – $80,000 †† Fourth-quarter purchases on account × 20% = $717,000 × 20%

McGraw-Hill/Irwin Inc. 9-104

 2002 The McGraw-Hill Companies, Solutions Manual

CURRENT ISSUES IN MANAGERIAL ACCOUNTING ISSUE 9-57 "U.S. AIRLINES CONSIDER IMPACT OF HIGHER FUEL BILL," THE WALL STREET JOURNAL, OCTOBER 13, 2000. "AMERICAN'S NET SOARS, BUT HIGH OIL PRICES STING U.S. AIRWAYS," THE WALL STREET JOURNAL, OCTOBER 19, 2000, MELANIE TRUTTMAN AND SUSAN CAREY. 1. Higher fuel costs mean that airlines may have to raise airfares so that costs are met. 2. Higher fuel costs result in many expenses increasing throughout society. Since airlines have to purchase many different kinds of supplies, many of which could be affected by rising prices, increased fuel prices could affect the airlines’ budgets in many places in addition to their actual fuel costs.

ISSUE 9-58 "BUDGET PLANNING: THE NEXT INFORMATIONWEEK.COM, SEPTEMBER WHITING.

GENERATION," 25, 2000, RICK

1. Budgeting has moved to a combination of top-down and bottom-up processes. The idea is that managers will be able to measure results more accurately. Strategic planning begins with the organization's objectives and then builds a budget designed to achieve those goals. Input from all levels is needed to make strategic planning successful. 2. New technology via computer software allows employees from different levels of an organization to provide integrated input into budget formation. This has allowed a faster and more accurate process on a national as well as an international scale that is updated on a continuous basis. McGraw-Hill/Irwin Inc. Managerial Accounting, 5/e

 2002 The McGraw-Hill Companies, 9-105

3. Amway Corporation incorporated Adaytum Software to project reducing travel expenses by 5% for its executives. Next year Amway will use the software to eventually link several hundred managers into the budgeting process.

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 2002 The McGraw-Hill Companies, Solutions Manual

ISSUE 9-59 "INEFFICIENT BUDGETING COSTS COMPANIES DEARLY," MANAGEMENT ACCOUNTING, FEBRUARY 2000, JOHN FANNING. The traditional budget and associated processes, such as strategic planning, forecasting, monthly reviews and reward processes, consume an enormous amount of management time. If these processes are linked, rather than operating in isolation, the overall level of control over the business can be improved while eliminating, or substantially streamlining, redundant or superfluous activities.

ISSUE 9-60 "THE REVOLUTION IN PLANNING," CFO, AUGUST 1999, RUSS BANHAM. There are fewer best practices that are directly transferable from company to company than exist with re-engineering. This article discusses re-engineering the planning process. Planning pervades every corner of an organization and is steeped in a tradition of negotiation. Planning is the most political of all processes. Success in this area requires patience, communication with employees, investment in new data-gathering tools and time. It also requires finance to evolve from being a reporter to being a facilitator of the process. Companies that succeed in revamping this process believe they can accurately assess strategic decisions based on metrics intrinsic to the business. Since this is a continuous process that starts when senior management defines business objectives and communicates them to the operating lines, benefits begin immediately.

ISSUE 9-61

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 2002 The McGraw-Hill Companies, 9-107

"SELLING THE BUDGET," STRATEGIC FINANCE, SEPTEMBER 1999, CATHERINE M. STANKE. Using too much detail can bog an audience down and make them miss the overall message. The author of the article suggests choosing the view of a picture that is best for the message the presenter is trying to convey. Use bar graphs, pie charts, line graphs, and/or scatter graphs for the purpose they were intended. Present high-level assumptions that don't give more detail than is needed to make an informed decision. The presenter can always give more detail when answering a specific question. Value an audience's time, and respect their intelligence level. ISSUE 9-62 "MANAGEMENT ACCOUNTING IN CHINA CHANGES - PROBLEMS AND THE FUTURE," MANAGEMENT ACCOUNTING, JANUARY 1999, MIKE JONES AND JASON XIAO. 1. Economic Responsibility Contracts are designed to control and motivate enterprise management. Internal Responsibility Contracts are used by many enterprises to meet the ERC. While ERCs are becoming less popular, IRCs are still in operation in many companies. The IRC has four principal components. First, responsibility centers are established for appropriate internal departments, such as production, to facilitate income monitoring and cost control. Second, top management uses the company's overall financial targets to implement targets at the responsibility center level. Third, an internal bank is established which settles transactions between company divisions and lends funds raised from within or outside the company to internal divisions. Finally, performance by the IRC is evaluated periodically against pre-set targets. 2. ERCs involve management of a state-owned enterprise attaining an agreed level of sales and profit upon which it is then taxed. In return, the enterprise has autonomy to manage its business operations. A consequence of this system is that enterprises develop management McGraw-Hill/Irwin Inc. 9-108

 2002 The McGraw-Hill Companies, Solutions Manual

accounting techniques, such as budgeting and standard costing, to help them meet targets.

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 2002 The McGraw-Hill Companies, 9-109