CHAPTER 9
Budgetary Planning
ASSIGNMENT CLASSIFICATION TABLE
Brief Exercises A Problems B Problems
Study Objectives
Question s
Do It!
Exercises
1.
Indicate the benefits of budgeting.
1, 2, 4
1
2.
State the essentials of effective budgeting.
3, 5, 6, 7, 8
1
1
3.
Identify the budgets that comprise the master budget.
9, 10, 11, 12, 13, 14, 15, 16
1, 2, 3, 4, 5, 6, 7
1, 2, 3
1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13
1A, 2A, 3A
1B, 2B, 3B
4.
Describe the sources for preparing the budgeted income statement.
17, 18
8
4
13
1A, 2A, 3A, 6A
1B, 2B, 3B
5.
Explain the principal sections of a cash budget.
19, 20
9
5
14, 15, 16, 17, 18, 19
4A, 6A
4B
6.
Indicate the applicability of budgeting in nonmanufacturing companies.
21, 22
10
3,18, 19, 20
5A
5B
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9-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number Description Difficulty Level Time Allotted (min.)
1A Prepare budgeted income statement and supporting Simple 30–40 Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Proble budgets.
Study Objective
2A
Knowledge Prepare sales, production, direct materials, direct labor, Comprehension and income statement budgets. Application Analysis
Simple
40–50
3A
1. Q9-1 Q9-2 Q9-4 E9-1 5A
Prepare sales and production budgets and compute cost Synthesis per unit under two plans. Evaluation
Indicate the benefits of budgeting.
Moderate
30–40
4A
Prepare cash budget for two months.
Moderate
30–40
Prepare purchases and income statement budgets for a merchandiser. Prepare budgeted income statement and balance sheet.
Simple
30–40
6A
2.
Complex
40–50
State the essentials of effective budgeting.
DI9-1 Q9-3 Q9-5 Q9-6 Q9-7 2B Q9-8 E9-1
1B
Prepare budgeted income statement and supporting budgets. Prepare sales, production, direct materials, direct labor, and income statement budgets. Prepare sales and production budgets and compute cost per unit under two plans.
Identify the budgets
Simple
30–40
Simple
40–50
3B
3.
Moderate
30–40
that comprise the budget for two months. 4B Prepare cash master budget. DI9-1 Q9-9 5B Q9-10 Q9-11 E9-1
Moderate
30–40
Prepare purchases and income statement budgets for a merchandiser.
Simple
30–40
Q9-12 Q9-13 Q9-14 Q9-15 Q9-16 BE9-2 BE9-3 9-2 Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only) BE9-4 BE9-5 BE9-6 BE9-7
DI9-3 E9-2 E9-3 E9-4 E9-5 E9-6 E9-7 E9-8 E9-9 E9-10 E9-11 E9-12 E9-13 P9-1A P9-2A P9-1B P9-2B BE9-1 P9-3A P9-3B 4. Q9-18 Q9-17 BE9-8 DI9-4 E9-13 P9-1A P9-2A P9-6A P9-1B P9-2B Describe the sources for preparing the budgeted income statement.
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BLOOM’S TAXONOMY TABL
P9-3A P9-3B 5. Explain the principal sections of a cash budget.
Q9-19 Q9-20 BE9-9 DI9-5 E9-14 E9-15 E9-16 E9-17 E9-18 E9-19 P9-4A
P9-4B
6.
1. Q9-21
Indicate the applicability of budgeting in nonmanufacturing companies.
ANSWERS TO QUESTIONS
(a) A budget is a formal written statement of management’s plans for a specified future time Q9-22 period, expressed in financial terms. (b) A budget aids management in planning because it represents the primary method of communicating agreed-upon objectives throughout the organization. Once adopted, a budget BE9-10 becomes an important basis for evaluating performance. E9-3
E9-18 E9-19 2. The
primary benefits of budgeting are: (1) It requires all levels of management to plan ahead and to formalize goals on a recurring E9-20 basis. P9-5A (2) It provides definite objectives for evaluating performance at each level of responsibility. P9-5B (3) It creates an early warning system for potential problems, so that management can make changes before things get out of hand. (4) It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. Broadening Your Perspective (5) It results in greater management awareness of the entity’s overall operations and the impact of external factors such as economic trends. (6) It Real-World Focusmotivates personnel throughout the organization to meet planned objectives.
All The essentials of effective budgeting are: (1) a sound organizational structure, (2) research and 3. About You analysis, and Manag. Analysis (3) acceptance by all levels of management. Communication Real-World Focus 4. (a) Disagree. Accounting information makes major contributions to the Exploring the Accounting provides the starting point of budgeting by providing historical web
budgeting process. data on revenues, costs, and expenses. An accountant becomes the translator of the budget and communicates the Decision Making Across budget to all areas of responsibility. Accountants also prepare periodic budget reports that the compare actual results with planned objectives and provide a basis for evaluating performance. Organization (b) The budget itself, and the administration of the budget, are the responsibility of Manag. Analysis Communication management.
Ethics Case Decision Making 5. The budget period should be long enough to provide an attainable goal under normal business Across the conditions. The budget period should minimize the impact of seasonal and cyclical business Organization fluctuations, All About You but it should not be so long that reliable estimates are impossible. The most common budget
period is one year.
6.
Disagree. Long-range planning usually encompasses a period of at least five years. It involves the selection of strategies to achieve long-term goals and the development of policies and plans to implement the strategies. In addition, long-range planning reports contain considerably less detail than budget reports. Participative budgeting involves the use of a “bottom-to-top” approach, which requires input from lower level management during the budgeting process so as to involve employees from various levels and areas within the company. The potential benefits of this approach are lower-level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower-level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack.
7.
9-4
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Questions Chapter 9 (Continued) 8. Budgetary slack is the amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals. Managers may have an incentive to create budgetary slack in order to increase the likelihood of receiving a bonus, or decrease the likelihood of losing their job. A master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. The master budget is developed within the framework of a sales forecast. The sales budget is the starting point in preparing the master budget. An inaccurate sales budget may adversely affect net income. An overly optimistic sales budget may result in excessive inventories and a very conservative sales budget may lead to inventory shortages. The statement is false. The production budget only shows the units that must be produced to meet anticipated sales and ending inventory requirements. The required units of production are 165,000 (160,000 + 20,000 = 180,000 – 15,000 = 165,000). The desired ending direct materials units are 19,000 (64,000 + 7,000 = 71,000 – 52,000 = 19,000). Total budgeted direct labor costs are $640,000 (80,000 X .5 X $16 = $640,000). (a) Manufacturing overhead rate based on direct labor cost is 60% [$198,000 + $162,000 = $360,000; $360,000 ÷ (160,000 X 1/4 X $15/hr.) = 60%]. (b) Manufacturing overhead rate per direct labor hour is $9 ($360,000 ÷ 40,000). The first quarter budgeted selling and administrative expenses are $70,000 [(10% X $200,000) + $50,000]. The second quarter total is $75,000 [(10% X $250,000) + $50,000]. The budgeted cost per unit of product is $48 ($10 + $20 + $18). Gross profit per unit is $21 ($69 – $48). Total budgeted gross profit is $525,000 (25,000 X $21). The supporting schedules are the budgets for sales, direct materials, direct labor, and manufacturing overhead. The three sections of a cash budget are: (1) cash receipts, (2) cash disbursements, and (3) financing. The cash budget also shows the beginning and ending cash balances. Cash collections are: January—$500,000 X 45% = $225,000. February—$500,000 X 50% = $250,000. March—$500,000 X 5% = $25,000. The formula is: Budgeted cost of goods sold plus desired ending merchandise inventory minus beginning merchandise inventory equals required merchandise purchases. In a service enterprise, expected revenues can be obtained from expected output or expected input. The former is based on anticipated billings of clients for services rendered. The latter is based on expected billable time of the professional staff.
9. 10.
11. 12. 13. 14. 15.
16. 17. 18. 19. 20.
21. 22.
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9-5
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1 Sales Budget
Production Budget
Direct Materials Budget
Direct Labor Budget
Manufacturing Overhead Budget
Operating Budgets
Selling and Administrative Expense Budget
Budgeted Income Statement
9-6
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Capital Expenditure Budget
Cash Budget
Budgeted Balance Sheet
Financial Budgets
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BRIEF EXERCISE 9-2 MUSSATTO COMPANY Sales Budget For the Year Ending December 31, 2011 Quarter 1 Expected unit sales Unit selling price Total sales 2 3 4 Year
10,000 X $80 $800,0 00
12,000 X $80 $960,0 00
14,000 $80 $1,120,0 00 X
18,00 0 $80 $1,440,00 0 X
54,000 $80 $4,320,00 0 X
BRIEF EXERCISE 9-3 MUSSATTO COMPANY Production Budget For the Six Months Ending June 30, 2011 Quarter Six Month s
1 Expected unit sales Add: Desired ending finished goods Total required units Less: Beginning finished goods inventory
9-8
2 12,00 0 2,800
10,00 0 2,400 12,40
a
c
b
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Required production units
0 2,000 10,40 0
14,80 0 2,400 12,40 0
22,80 0
a
12,000 X .20
b
10,000 X .20
c
14,000 X .20
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9-9
BRIEF EXERCISE 9-4 HANNON COMPANY Direct Materials Budget For the Month Ending January 31, 2012 Units to be produced......................................................... Direct materials per unit.................................................... Total pounds required for production............................. Add: Desired ending inventory (20% X 5,500 X 2)........ Total materials required.................................................... Less: Beginning materials inventory.............................. Direct materials purchases............................................... Cost per pound................................................................... Total cost of direct materials purchases......................... 4,000 X 2 8,000 2,200 10,200 1,600 8,600 X $6 $51,600
BRIEF EXERCISE 9-5 COBB COMPANY Direct Labor Budget For the Six Months Ending June 30, 2011 Quarter Six Months
1 Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost 5,000 X 1.5 7,500 X $14 $105,00 0
2 6,000 X 1.5 9,000 X $14 $126,00 0
$231,00 0
9-10
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BRIEF EXERCISE 9-6 ECKERT INC. Manufacturing Overhead Budget For the Year Ending December 31, 2011
Quarter 1 Variable costs Fixed costs Total manufacturing overhead $20,00 0 35,000 $55,00 0 2 $24,00 0 35,000 $59,00 0 3 $28,00 0 35,000 $63,00 0 4 $32,00 0 35,000 $67,00 0 Year $104,00 0 140,000 $244,00 0
BRIEF EXERCISE 9-7 KASPAR COMPANY Selling and Administrative Expense Budget For the Year Ending December 31, 2011
Quarter 1 Variable expenses Fixed expenses Total selling and administrative expenses $25,00 0 40,000 $65,00 0 2 $30,00 0 40,000 $70,00 0 3 $35,00 0 40,000 $75,00 0 4 $40,00 0 40,000 $80,00 0 Year $130,00 0 160,000 $290,00 0
BRIEF EXERCISE 9-8
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9-11
PAIGE COMPANY Budgeted Income Statement For the Year Ending December 31, 2011 Sales..................................................................................... Cost of goods sold (50,000 X $22).................................... Gross profit......................................................................... Selling and administrative expenses................................ Income before income taxes............................................. Income tax expense............................................................ Net income........................................................................... $2,000,000 1,100,000 900,000 300,000 600,000 150,000 $ 450,000
9-12
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BRIEF EXERCISE 9-9 Collections from Customers Credit Sales January, $200,000 February, $260,000 March, $310,000 January $140,00 0 Februar y $ 60,000 182,000 $242,00 0 March
$140,00 0
$ 78,000 217,000 $295,00 0
BRIEF EXERCISE 9-10 Budgeted cost of goods sold ($400,000 X 60%)......................... Add: Desired ending inventory ($475,000 X 60% X 20%)........ Total inventory required............................................................... Less: Beginning inventory ($400,000 X 60% X 20%)................ Required merchandise purchases for April............................... SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 9-1 1. 2. 3. 4. 5. 6. Operating budgets Master budget Participative budgeting Financial budgets Sales forecast Long-range plans $240,000 57,000 297,000 48,000 $249,000
DO IT! 9-2 WELLSTONE COMPANY Production Budget For the Six Months Ending June 30, 2011
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9-13
Quarter Expected unit sales Add: Desired ending finished goods inventory Total required units Less: Beginning finished goods inventory Required production units 1 18,000 2,400 20,400 1,800 18,600 2 24,000 3,000 27,000 2,400 24,600
Six Months
43,200
9-14
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DO IT! 9-3 OAK CREEK COMPANY Sales Budget For the Year Ending December 31, 2011
Quarter
1
2
3
4
Year
Expected unit sales Unit selling price Total sales
200,000 250,000 250,000 300,000 1,000,000 X $40 X $40 X $40 X $45 $8,000,00 $10,000,00 $10,000,000 $13,500,000 $41,500,000 0 0
OAK CREEK COMPANY Production Budget For the Year Ending December 31, 2011
Quarter
1
2
3
4
Year
Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units
200,000 50,000 250,000
250,000 50,000 300,000
250,000 300,000 60,000 44,000* 310,000 344,000 50,000 60,000 260,000 284,000
40,000** 50,000 210,000 250,000
1,004,000
*Estimated first-quarter 2012 sales volume 200,000 + (200,000 X 10%) = 220,000: 220,000 X 20%. **20% of estimated first-quarter 2010 sales units (200,000 X 20%).
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9-15
DO IT! 9-3 (Continued) OAK CREEK COMPANY Direct Materials Budget For the Year Ending December 31, 2011
Quarter
1
2
3
4
Year
Units to be produced 210,000 Direct materials per unit X 2 Total pounds needed for production 420,000 Add: Desired ending direct materials (pounds) 50,000 Total materials required 470,000 Less: Beginning direct materials (pounds) **42,000 Direct materials purchases 428,000 Cost per pound X $10 Total cost of direct materials purchases $4,280,000
250,000 X 2
260,000 X 2
284,000 X 2
500,000
520,000
568,000
52,000 552,000
56,800 576,800 52,000
*50,000 618,000 56,800
50,000 502,000 X $10 $5,248,000 $5,020,00 0 524,800 X $10
561,200 X $10
$20,160,000
$5,612,000
*Estimated first-quarter 2012 production requirements 500,000 X 10% = 50,000 **10% of estimated first-quarter pounds needed for production.
DO IT! 9-4 (a) Total unit cost: Cost Element Direct materials.............................
9-16
Quantity 2
Unit Cost $10.00
Total $20.00
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Direct labor.................................... Manufacturing overhead.............. Total unit cost.......................
pounds 0.3 hours 0.3 hours
$14.00 $20.00
4.20 6.00 $30.20
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DO IT! 9-4 (Continued) (b) OAK CREEK COMPANY Budgeted Income Statement For the Year Ending December 31, 2011 Sales (1,000,000) units from sales budget, page 9-11....... Cost of goods sold (1,000,000 X $30.20/unit)................... Gross profit.......................................................................... Selling and administrative expenses................................ Net income........................................................................... DO IT! 9-5 VENETIAN COMPANY Cash Budget April Beginning cash balance............................................................... Add: Cash receipts for April........................................................ Total available cash....................................................................... Less: Cash disbursements in April............................................ Excess of available cash over cash disbursements................. Financing ($20,000 – $11,000)...................................................... Ending cash balance..................................................................... $ 22,000 245,000 267,000 256,000 11,000 9,000 $ 20,000 $41,500,000 30,200,000 11,300,000 7,000,000 $ 4,300,000
To maintain the desired minimum cash balance of $20,000, Venetian Company must borrow $9,000.
9-18
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SOLUTIONS TO EXERCISES
EXERCISE 9-1 MEMO To Jim Thome
From: Student Re: Budgeting
I am glad Raney Company is considering preparing a formal budget. There are many benefits derived from budgeting, as I will discuss later in this memo. A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms. The master budget generally consists of operating budgets such as the sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget, and budgeted income statement; and financial budgets such as the capital expenditure budget, cash budget, and budgeted balance sheet. The primary benefits of budgeting are: 1. It requires all levels of management to plan ahead and formalize their goals. 2. It provides definite objectives for evaluating performance. TRUSLER ELECTRONICS INC. 3. It creates an early warning system for potential problems. Sales Budget 4. It facilitates theFor the Six Months Ending June 30, 2011 coordination of activities within the business. 5. It results in greater management awareness of the entity’s overall operations. 6. It motivates personnel throughout the organization to meet planned Quarter 1 objectives. In order maximize these benefits, it is essential that budgeting takes place Six so authority and responsibility for all within a sound organizational structure, Months phases of operations are clearly defined. Also, the budget should be based on research and analysis that results in realistic goals. Finally, the effectiveness of a budget program is directly related to its acceptance by all levels of management. Product
Units
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Quarter 2
Selling Price Total
9-19
Units Selling Price Total If you want further explanation of any of these assumptions, please contact me.
CREDE AND RENSING, CPAs Sales Revenue Budget For the Year Ending December 31, 2011
Sales Units
Selling Quarter 1 Quarter 2 Price Quarter 3 Quarter 4 Total Sales Billable
Billable Total Billable Billable Total Billable Billable Total Billable Billable Total
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9-15
EXERCISE 9-2
XQ-103 XQ-104 Totals
Dept.
Rev. Hours $12 Rate 25 Rev. Hours $240,000 Rate Rev. 300,000 Hours $540,000 Rate Rev. Auditing
20,000 12,000 Hours Rate 32,000
25,000 15,000 40,000 $12 25
2,200 $ 80 $176,000 1,600 $ 80
$300,000 375,000 $675,000
Tax
45,000 27,000 72,000 $12 25 $ 540,000 675,000 $1,215,000
2,000 $ 80 $160,000 2,400 $ 80 $192,000 3,000 90 270,000 2,400 90 216,000 2,000 90 180,000 2,500 90 225,000 1,500 100 150,000 1,500 100 150,000 1,500 100 150,000 1,500 100 150,000
Consulting
Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-3
Totals
$596,000
$494,000
$490,000
$567,000
Year Billable
Total Dept. Hours Rate Rev. Auditing
EXERCISE 9-4
PLETCHER COMPANY $ 80 Production Budget $ 656,000 Tax For the Year Ending December 31, 2011 9,900 b 8,200a
Product Consulting
HD-240
Quarter
90 891,000 6,000c 100 600,000
Totals
1 Expected unit sales Add: Desired ending finished goods units(1) Total required units Less: Beginning finished goods units Required production units
2
3
4
$2,147,000
Year
2,2005,00 + 1,600 + 2,000 + 2,400 3,000 + 2,400 + 2,000 + 2,500 0 7,000 8,000 c 1,500 X 4 a b
10,00 0
(2
3,50 0 8,50 0 2,50 0 6,00 0
4,000 11,00 0 3,500 7,500
5,000 13,00 0 4,000 9,000
3,250 13,25 0 5,000 8,250
)
30,75 0
(1) (2)
50% of next quarter’s sales. 50% X (5,000 X 130%).
9-22
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EXERCISE 9-5 DEWITT INDUSTRIES Direct Materials Purchases Budget For the Quarter Ending March 31, 2012 Januar y Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (pounds)* Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials purchases 10,000 X 3 30,000 7,20 0 37,200 9,00 0 28,200 X $2 $56,40 0 Februar y 8,000 X 3 24,000 4,50 0 28,500 7,20 0 21,300 X $2 $42,60 0 March 5,00 0 X 3 15,00 0 3,60 0 18,60 0 4,50 0 14,10 0 X $2 $28,20 0 *30% of next month’s production needs. EXERCISE 9-6 (a) LOVELL COMPANY Production Budget For the Six Months Ending June 30, 2012
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9-23
Quarter
Six Month s
1 Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units 5,000 1,800 6,800 1,500 5,300
(1)
2 6,00 0
(
(3)
2,10 0 8,100 1,80 0 6,30 0
2 )
11,600
30% X 6,000. 30% X 7,000. (3)30% X 5,000.
(1) (2)
9-24
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EXERCISE 9-6 (Continued) (b) LOVELL COMPANY Direct Materials Budget For the Six Months Ending June 30, 2012 Quarter Six Months
1 Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (pounds) Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials Purchases 5,300 X 3 15,900
(
2 6,30 0 X 3 18,90 0 10,87 5 29,77 5 9,45 0 20,32 5 X $4 $81,30 0
( 2 )
9,45 0 25,350 7,95 0 17,400 X $4 $69,60 0
1 )
( 3 )
0000,0 00 $150,9 00
50% X 18,900. 7,250 X (3 X 50%). (3)50% X 15,900.
(1) (2)
EXERCISE 9-7 Finished goods: Ending inventory...................................................... Plus: Sales................................................................ 2,190 2,475
9-25
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Total required................................................................ Less: beginning inventory...................................... Production required...................................................... Direct materials per unit............................................... Units of direct material required for production........ Plus: ending inventory................................................. Total required................................................................ Less: beginning inventory...................................... Purchases of direct material required........................ Cost per unit.................................................................. Total cost of materials.................................................. The May raw material purchases would be $19,840.
(a)
4,665 2,230 2,435 X 2 4,870 3,012(a) 7,882 2,922 4,960 $4.00 $19,840
2,390 + 2,310 – 2,190 = 2,510; 2,510 X 2 X .60 = 3,012
9-26
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EXERCISE 9-8 GONZALES, INC. Direct Labor Budget For the Year Ending December 31, 2011
Quarter 1 Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost 20,000 X 1.6 2 25,000 X 1.6 3 35,00 0 X 1.6 4 30,000 X 1.6 48,00 0 X $16 $768,00 0 Year 110,000 .2
40,000 32,000 X $15 $480,00 0 X $15 $600,00 0 56,00 0 X $16 $896,00 0 $2,744,0 00
EXERCISE 9-9 CHOO-FOO COMPANY Production Budget For the Quarter Ending March 31, 2011 Jan 10,000 16,000 26,000 16,000 10,000 Feb 12,000 12,500 24,500 16,000 8,500 Mar 8,000 13,500 21,500 12,500 9,000 Total 30,000 13,500 43,500 16,000 27,500
Sales in units Plus: desired ending inventory Total needs Less: beginning inventory Production needed
CHOO-FOO COMPANY
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9-27
Direct Labor Budget For the Quarter Ending March 31, 2011 Jan 10,000 X 2.00 20,000 X $8.00 $160,000 Feb 12,000 X 2.00 24,000 X $8.00 $192,000 Mar 8,000 X 1.50 12,000 X $8.00 $96,000 Total
Sales in units Direct labor hours per unit Total hours needed Rate per hour Total direct labor
$448,000
9-28
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EXERCISE 9-10 FRIZELL COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2011
Quarter 1 Variable costs Indirect materials ($.70/hour) Indirect labor ($1.20/hour) Maintenance ($.50/hour) Total variable Fixed costs Supervisory salaries Depreciation Maintenance Total fixed Total manufacturing overhead Direct labor hours Manufacturing overhead rate per direct labor hour ($439,200 ÷ 78,000) 2 3 4 Year
$10,50 0 18,00 0 7,50 0 36,00 0 35,00 0 16,00 0 12,00 0 63,00 0 $99,00 0 15,00 0
$ 12,600 21,600 9,000 43,200 35,000 16,000 12,000 63,000 $106,200 18,000
$ 14,700 25,200 10,50 0 50,40 0 35,000 16,000 12,00 0 63,00 0 $113,40 0 21,000
$ 16,800 28,800 12,000 57,600 35,000 16,000 12,000 63,000 $120,600 24,000
$ 54,600 93,600 39,000 187,200 140,000 64,000 48,000 252,000 $439,20 0 78,00 0 $5.63
EXERCISE 9-11 MEDINA COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2011
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Quarter
Six Months
1 Budgeted sales in units Variable expenses (1) Sales commissions Delivery expense Advertising Total variable 20,00 0
2 22,000
$20,00 0 8,000 12,000 40,000
$22,000 8,800 13,200 44,000
$42,000 16,800 25,200 84,000
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EXERCISE 9-11 (Continued) MEDINA COMPANY Selling and Administrative Expense Budget (Continued) For the Six Months Ending June 30, 2011 Quarter Six Months
1 Fixed expenses Sales salaries Office salaries Depreciation Insurance Utilities Repairs expense Total fixed Total selling and administrative expenses
2
10,000 6,000 4,200 1,500 800 60 0 23,10 0 $63,10 0
10,000 6,000 4,200 1,500 800 600 23,10 0 $67,10 0
20,000 12,000 8,400 3,000 1,600 1,20 0 46,20 0 $130,20 0
(1) Variable costs per dollar of sales are: Sales commissions $.05, Delivery expense $.02, and Advertising $.03.
EXERCISE 9-12 (a) ORTIZ COMPANY Production Budget For the Two Months Ending February 28, 2011 ____________________________________________________________
___ Januar y Expected unit sales............................................ 10,000 February 12,000
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Add: desired ending finished goods inventory.................................................. Total required units............................................ Less: beginning finished goods inventory..... Required production units................................ *25% X next month’s expected sales **25% X 10,000
3,000 * 13,000 2,500* * 10,500
3,250* 15,250 3,000 12,250
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EXERCISE 9-12 (Continued) (b) ORTIZ COMPANY Direct Materials Budget For the Month Ending January 31, 2011 ____________________________________________________________
___ January Units to be produced............................................................. Direct material pounds per unit............................................ Total pounds needed for production................................... Add: desired pounds in ending materials inventory......... Total materials required........................................................ Less: beginning direct materials (pounds)......................... Direct materials purchases................................................... Cost per pound....................................................................... Total cost of direct materials purchases............................. *(12,250 X 2) X 40% **(10,500 X 2) X 40% 10,500 X 2
21,000 9,800* 30,800 8,400** 22,400 X $3 $67,200
EXERCISE 9-13 (a) YONO COMPANY Computation of Cost of Goods Sold For the Year Ending December 31, 2011 Cost of one unit of finished goods: Direct materials (2 X $5)................................................................. Direct labor (3 X $12)...................................................................... Manufacturing overhead (3 X $6).................................................. Total........................................................................................ 30,000 units X $64 = $1,920,000.
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$10 36 18 $64
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EXERCISE 9-13 (Continued) (b) YONO COMPANY Budgeted Income Statement For the Year Ending December 31, 2011 Sales (30,000 X $80).............................................................. Cost of goods sold (see part (a))........................................ Gross profit........................................................................... Selling and administrative expenses................................. Income before income taxes............................................... Income tax expense ($280,000 X 30%)............................... Net income............................................................................ $2,400,000 1,920,000 480,000 200,000 280,000 84,000 $ 196,000
EXERCISE 9-14 MALONE COMPANY Cash Budget For the Two Months Ending February 28, 2011 January Februar y $ 26,000 150,000 0 150,000 176,000
Beginning cash balance....................................... Add: Receipts Collections from customers..................... Sale of marketable securities................... Total receipts.............................................. Total available cash............................................... Less: Disbursements
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$ 46,000 85,000 10,000 95,000 141,000
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Direct materials.......................................... Direct labor................................................. Manufacturing overhead........................... Selling and administrative expenses....... Total disbursements.................................. Excess (deficiency) of available cash over cash disbursements.................................................... Financing Borrowings..................................................... Repayments.................................................... Ending cash balance.............................................
50,000 30,000 20,000 15,000 115,000 26,000 0 0 $ 26,000
70,000 45,000 24,000 20,000 159,000 17,000 3,000 0 $ 20,000
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EXERCISE 9-15 FULTZ CORPORATION Cash Budget For the Quarter Ended March 31, 2011 Beginning cash balance........................................................... Add: Receipts Collections from customers......................................... Sale of equipment.......................................................... Total receipts........................................................... Total available cash.................................................................. Less: Disbursements Direct materials.............................................................. Direct labor..................................................................... Manufacturing overhead............................................... Selling and administrative expense............................ Purchase of securities.................................................. Total disbursements............................................... Excess of available cash over disbursements...................... Financing Borrowings..................................................................... Repayments.................................................................... Ending cash balance................................................................ $ 31,000 180,000 3,500 183,500 214,500 41,000 70,000 35,000 45,000 12,000 203,000 11,500 13,500 –0– $ 25,000
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Copyright © 2010 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-16 (a) HARRINGTON COMPANY Cash Budget For the Month Ended July 31, 2011 Beginning cash balance............................. Cash collections.......................................... Total cash available..................................... Cash disbursements Merchandise purchases...................... Operating expenses............................ Equipment purchase........................... Total cash disbursements.......................... Borrowings excess (deficiency)................ Ending cash balance................................... $45,000 89,000 $134,000
$56,200 36,800 20,500 113,500 20,500 4,500 $ 25,000
Cash disbursements of $113,500 plus the desired ending cash balance of $25,000 exceeds the $134,000 total cash available by $4,500. Therefore, Harrington Company will have to borrow $4,500. (b) An advantage of cash budgeting is that it allows cash shortfalls to be predicted. If the timing of future cash shortfalls is known, arrangements to borrow funds can be made well in advance, which often means that interest rates may be more favorable than if the funds are needed on short notice.
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EXERCISE 9-17 (a) CDK COMPANY Expected Collections from Customers March March cash sales (40% X $270,000)..................................... $108,00 0 16,200 66,000 43,200 $233,40 0
Collection of March credit sales [(60% X $270,000) X 10%]................................................... Collection of February credit sales [(60% X $220,000) X 50%]................................................... Collection of January credit sales [(60% X $200,000) X 36%]................................................... Total collections........................................................
(b)
CDK COMPANY Expected Payments for Direct Materials March March cash purchases (50% X $41,000).............................. Payment of March credit purchases [(50% X $41,000) X 40%]..................................................... Payment of February credit purchases [(50% X $35,000) X 60%]..................................................... Total payments.......................................................... $20,500 8,200 10,500 $39,200
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EXERCISE 9-18 (a) (1) GREEN LANDSCAPING INC. Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2011
January November ($90,000)... December ($80,000)... January ($100,000).... February ($120,000)... March ($130,000)........ Total collections.... $ 9,000 24,000 60,000 February March Quarter $ 9,000 32,000 100,000 108,000 78,000 $327,000
$ 8,000 30,000 72,000
______
$93,000
_______
$110,000
$ 10,000 36,000 78,000 $124,000
(2) GREEN LANDSCAPING INC. Schedule of Expected Payments for Landscaping Supplies For the Quarter Ending March 31, 2011 __________________________________________________________
January December ($14,000)... January ($12,000)...... February ($15,000)..... March ($18,000).......... Total payments...... $ 8,400 4,800 February March Quarter $ 8,400 12,000 15,000 7,200 $42,600
$ 7,200 6,000 $13,200
$13,200
$ 9,000 7,200 $16,200
(b (1) Accounts receivable at March 31, 2011: ($120,000 X 10%) + ) ($130,000 X 40%) = $64,000 (2) Accounts payable at March 31, 2011: ($18,000 X 60%) = $10,800
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EXERCISE 9-19 DEITZ DENTAL CLINIC Cash Budget For the Two Quarters Ending June 30, 2011 1st Quarter Beginning cash balance..................................... Add: Receipts Collections from clients........................ Sale of equipment.................................. Investment interest................................ Total receipts................................... Total cash available............................................. Less: Disbursements Professional salaries............................ Overhead costs...................................... Selling and administrative costs......... Equipment purchase............................. Payment of income taxes..................... Total disbursements....................... Excess (deficiency) of cash available over cash disbursements................................ Financing Borrowings....................................................... Repayments...................................................... Ending cash balance........................................... $ 30,000 230,000 15,000 0 245,00 0 275,00 0 140,000 75,000 47,000* 0 0 262,00 0 13,000 12,000 0 $ 25,000 *$50,000 – $3,000 **$70,000 – $3,000 2nd Quarter $ 25,000 380,000 0 5,000 385,000 410,000 140,000 100,000 67,000** 50,000 4,000 361,000 49,000 0 12,300 $ 36,700
9-40
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EXERCISE 9-20 (a) DALBY STORES Merchandise Purchases Budget For the Month Ending June 30, 2011 Budgeted cost of goods sold ($500,000 X 70%)................... Add: Desired ending merchandise inventory ($600,000 X 70% X 40%)....................................................... Total........................................................................................... Less: Beginning merchandise inventory ($350,000 X 40%).......................................................... Required merchandise purchases......................................... $350,000 168,000 518,000 140,000 $378,000
(b)
DALBY STORES Budgeted Income Statement For the Month Ending June 30, 2011 Sales......................................................................................... Cost of goods sold (70% X $500,000).................................... Gross profit.............................................................................. $500,000 350,000 $150,000
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SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
ZELMER FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2012 Quarter Six Months
1 Expected unit sales...................... Unit selling price.......................... Total sales..................................... 28,000 X $60 $1,680,000
2 42,000 X $60 $2,520,000 70,000 X $60 $4,200,000
ZELMER FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2012 Quarter Six Months
1 Expected unit sales...................................... Add: Desired ending finished goods units.................................................... Total required units...................................... Less: Beginning finished goods units...... Required production units..........................
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2 42,00 0 18,00 0 60,00
28,00 0 12,00 0 40,00
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0 8,000 32,00 0
0 12,00 0 48,00 0
80,000
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PROBLEM 9-1A (Continued) ZELMER FARM SUPPLY COMPANY Direct Materials Budget—Gumm For the Six Months Ending June 30, 2012
Quarter Six Months
1 Units to be produced................................. Direct materials per unit............................ Total pounds needed for production....... Add: Desired ending direct materials (pounds)............................................ Total materials required............................ Less: Beginning direct materials (pounds).......................................... Direct materials purchases....................... Cost per pound........................................... Total cost of direct materials purchases................................................ 32,000 X 4 128,000 10,00 0 138,000 9,00 0 129,000 X $4 $516,00 0
2 48,000 X 4 192,000 13,00 0 205,000 10,00 0 195,000 X $4 $780,00 0 $1,296,0 00
ZELMER FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2012
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Quarter
Six Months
1 Units to be produced.......................... Direct labor time (hours) per unit...... Total required direct labor hours...... Direct labor cost per hour.................. Total direct labor cost........................ 32,000 X 1/4 8,000 X $14 $112,000
2 48,000 X 1/4 12,000 X $14 $168,00 0
$280,00 0
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PROBLEM 9-1A (Continued) ZELMER FARM SUPPLY COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2012 Quarter Six Months
1 Budgeted sales in units Variable (.15 X sales)......................... Fixed................................................... Total.................................................... 28,000 $252,000 175,000 $427,000
2 42,000 $378,000 175,000 $553,000 70,000 $630,000 350,000 $980,000
ZELMER FARM SUPPLY COMPANY Budgeted Income Statement For the Six Months Ending June 30, 2012 Sales............................................................................................... Cost of goods sold (70,000 X $33.75)*........................................ Gross profit.................................................................................... Selling and administrative expenses.......................................... Income from operations................................................................ Income tax expense (30%)............................................................ Net income..................................................................................... *Cost Per Bag Cost Element Direct materials Gumm..........................................
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$4,200,000 2,362,500 1,837,500 980,000 857,500 257,250 $ 600,250
Quantity
Unit Cost $ 4.00
Total
4
$16.00
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Tarr.............................................. Direct labor.................................... Manufacturing overhead (150% of direct labor cost)........ Total........................................
pounds 6 pounds 1/4 hour
1.50 14.00
9.00 3.50 5.25 $33.75
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PROBLEM 9-2A
(a)
JANTZEN INC. Sales Budget For the Year Ending December 31, 2012 JB 50 Expected unit sales......... Unit selling price.............. Total sales........................ 400,000 X $20 $8,000,000 JB 60 200,000 X $25 $5,000,000 Total
000,000,0 $13,000,00 0
(b)
JANTZEN INC. Production Budget For the Year Ending December 31, 2012 JB 50 Expected unit sales........................... Add: Desired ending finished goods units.............................. Total required units........................... Less: Beginning finished goods units.......................................... Required production units............... 400,000 25,000 425,000 30,000 395,000 JB 60 200,000 15,000 215,000 10,000 205,000 Total
600,00 0
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PROBLEM 9-2A (Continued) (c) JANTZEN INC. Direct Materials Budget For the Year Ending December 31, 2012
JB 50 Units to be produced................. Direct materials per unit............ Total pounds needed for production............................... Add: Desired ending direct materials (pounds)........... Total materials required............. Less: Beginning direct materials (pounds)........... Direct materials purchases....... Cost per pound........................... Total cost of direct materials purchases................................ 395,000 X 2 790,000 30,000 820,000 40,000 780,000 X $3 $2,340,000 JB 60 205,000 X 3 615,000 15,000 630,000 10,000 620,000 X $4 $2,480,000 $4,820,00 0 Total
(d)
JANTZEN INC. Direct Labor Budget For the Year Ending December 31, 2012
JB 50 Units to be produced................. Direct labor time (hours) per unit........................................... Total required direct labor hours........................................ Direct labor cost per hour......... Total direct labor cost................ 395,000 X .4 158,000 X $12 $1,896,000 JB 60 205,000 X .6 — 123,000 X $12 $1,476,000 301,000 X $10 $3,372,00 0
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Total 650,000
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PROBLEM 9-2A (Continued) (e) JANTZEN INC. Budgeted Income Statement For the Year Ending December 31, 2012 JB 50 Sales................................... Cost of goods sold............ Gross profit........................ Operating expenses Selling expenses............ Administrative expenses..................... Total operating expenses.............. Income before income taxes................................ Income tax expense (30%)............................... Net income......................... $8,000,00 0 4,800,000 3,200,000 660,000 540,000 1,200,000 $2,000,00 0 JB 60 $5,000,00 0 4,200,00 0 800,000 360,000 340,000 700,000 $ 100,000 Total $13,000,00 0 9,000,000 4,000,000 1,020,000 880,000 1,900,000 2,100,000 630,000 $ 1,470,000 400,000 X $12. (2)200,000 X $21.
(1)
( 1 )
( 2 )
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PROBLEM 9-3A
(a)
NIETO INDUSTRIES Sales Budget For the Year Ending December 31, 2012 Plan A Expected unit sales..................................... Unit selling price......................................... Total sales....................................................
(1)
Plan B
(1)
760,000 X $8.40 $6,384,000
950,000 (2) X $7.50 $7,125,000
$6,400,000 ÷ $8 = 800,000 X 95% = 760,000. (2)800,000 + 150,000 = 950,000.
(b)
NIETO INDUSTRIES Production Budget For the Year Ending December 31, 2012 Plan A Expected unit sales............................................ Add: Desired ending finished goods units.... Total required units............................................ Less: Beginning finished goods units............ Required production units................................. 760,00 0 38,000 798,00 0 40,000 758,00 0 Plan B 950,000 50,00 0 1,000,00 0 40,00 0 960,00 0
( 1 )
(1)
760,000 X 5%
(c) Variable costs = $4.25 per unit ($1.80 + $1.25 + $1.20) for both plans.
Plan A Plan B
9-52
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Total variable costs Total fixed costs Total costs (a) Total units (b) Unit cost (a) ÷ (b)
$3,221,50 (758,000 X 0 $4.25) 1,895,000 $5,116,50 0 758,000 $6.75
$4,080,00 (960,000 X 0 $4.25) 1,895,000 $5,975,00 0 960,000 $6.22
The difference is due to the fact that fixed costs are spread over a larger number of units (202,000) in Plan B.
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PROBLEM 9-3A (Continued) (d)
Plan A Sales Cost of goods sold Gross profit $6,384,00 0 (760,000 X $6.75) 5,130,000 $1,254,00 0
Gross Profit
Plan B $7,125,0 00 (950,000 X $6.22) 5,909,00 0 $1,216,0 00
Plan A should be accepted because it produces a higher gross profit than Plan B.
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PROBLEM 9-4A
(a) (1)
Expected Collections from Customers January Februar y $ 0 64,000 105,000 200,000 $369,00 0
November ($260,000).............................. December ($320,000)............................... January ($350,000).................................. February ($400,000)................................. Total collections..............................
$ 52,000 96,000 175,000
.
$323,00 0 (2) Expected Payments for Direct Materials January
Februar y $ 0 44,000 78,00 0 $122,00 0
December ($100,000)............................... January ($110,000).................................. February ($130,000)................................. Total payments................................
$ 40,000 66,000
.
$106,00 0
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PROBLEM 9-4A (Continued) (b) DINKLE COMPANY Cash Budget For the Two Months Ending February 28, 2012 January Beginning cash balance................................ Add: Receipts Collections from customers............ [See Schedule (1)] Notes receivable............................... Sale of securities.............................. Total receipts............................. Total available cash........................................ Less: Disbursements Direct materials................................ [See Schedule 2] Direct labor....................................... Manufacturing overhead................. Selling and administrative expenses*..................................... Withdrawal by owner....................... Total disbursements................ Excess (deficiency) of available cash over cash disbursements........................... Financing Borrowings.............................................. Repayments............................................. Ending cash balance...................................... $ 60,000 323,000 15,000 338,000 398,000 106,000 90,000 70,000 78,000 344,000 54,000 0 0 $ 54,000 February $ 54,000 369,000 6,000 375,000 429,000 122,000 100,000 75,000 85,000 5,000 387,000 42,000 8,000 0 $ 50,000
*Selling and administrative expenses less $1,000 depreciation.
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PROBLEM 9-5A
(a)
HARDESTY COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2012 May Budgeted cost of goods sold........................... Add: Desired ending merchandise inventory.... Total.................................................................... Less: Beginning merchandise inventory........ Required merchandise purchases................... June
$600,000 $660,00 (1) 132,000 (2) 0 (3) 732,000 120,000 (4) 145,200 $612,000 805,200 132,00 0 $673,20 0
$800,000 X 110% = $880,000; $880,000 X 75% = $660,000. (2)$660,000 X 20% = $132,000. (3)$880,000 X 110% = $968,000; $968,000 X 75% = $726,000; $726,000 X 20% = $145,200. (4)$600,000 X 20% = $120,000.
(1)
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PROBLEM 9-5A (Continued) (b) HARDESTY COMPANY San Miguel Store Budgeted Income Statement For the Months of May and June, 2012 May Sales.................................................................... Cost of goods sold Beginning inventory................................... Purchases................................................... Cost of goods available for sale............... Less: Ending inventory............................. Cost of goods sold............................. Gross profit......................................................... Operating expenses Sales salaries.............................................. Advertising*................................................ Delivery**..................................................... Sales commissions***................................ Rent.............................................................. Depreciation................................................ Utilities......................................................... Insurance..................................................... Total..................................................... Income from operations.................................... Income tax expense (30%)................................ Net income.......................................................... $800,00 0 120,000 612,000 732,000 132,000 600,000 200,000 30,000 40,000 24,000 32,000 5,000 800 600 500 132,900 67,100 20,130 $ 46,970 June $880,00 0 132,000 673,200 805,200 145,200 660,000 220,000 30,000 44,000 26,400 35,200 5,000 800 600 50 0 142,500 77,500 23,250 $ 54,250
*5% of sales. **3% of sales. ***4% of sales.
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PROBLEM 9-6A
CLARKE INDUSTRIES Budgeted Income Statement For the Year Ending December 31, 2012 Sales (8,000 X $35)..................................................... Cost of goods sold Finished goods inventory, January 1.............. Cost of goods manufactured ($69,400 + $56,600 + $54,000)........................ Cost of goods available for sale....................... Finished goods inventory, December 31 (3,000 X $20).................................................... Cost of goods sold..................................... Gross profit................................................................ Selling and administrative expenses....................... Income from operations............................................ Interest expense......................................................... Income before income taxes.................................... Income tax expense (30%)........................................ Net income.................................................................. $280,000 $ 30,000 180,000 210,000 60,000 150,000 130,000 76,000 54,000 3,500 50,500 15,150 $ 35,350
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PROBLEM 9-6A (Continued) CLARKE INDUSTRIES Budgeted Balance Sheet December 31, 2012 Assets Current assets Cash........................................................................ $ 7,950 Accounts receivable ($84,000 X 40%).................. 33,600 Finished goods inventory (3,000 units X $20).............................................. 60,000 Total current assets....................................... Property, plant, and equipment Equipment ($40,000 + $19,000)............................. Less: Accumulated depreciation ($10,000 + $4,000)....................................... Total assets.................................................... $59,000 14,000 45,000 $146,550
$101,550
Liabilities and Stockholders’ Equity Liabilities Notes payable ($25,000 – $8,000)......................... Accounts payable ($8,500* + $5,700)................... Income taxes payable............................................ Total liabilities................................................ Stockholders’ equity Common stock....................................................... Retained earnings ($30,000 + $35,350 – $5,000).............................. Total stockholders’ equity............................ Total liabilities and stockholders’ equity........................................................... *$17,000 X 50% $17,000 14,200 5,000 $ 36,200 $50,000 60,350 110,350 $146,550
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PROBLEM 9-1B
SUPPAN FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2011 Quarter Six Months
1 Expected unit sales................... Unit selling price........................ Total sales................................... 40,000 X $65 $2,600,000
2 50,000 X $65 $3,250,000 90,000 X $65 $5,850,000
SUPPAN FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2011 Quarter Six Months
1 Expected unit sales.................................... Add: Desired ending finished goods units.................................................. Total required units.................................... Less: Beginning finished goods units.... Required production units........................ 40,000 15,000 55,000 10,000 45,000
2 50,000 20,000 70,000 15,000 55,000
100,000
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PROBLEM 9-1B (Continued) SUPPAN FARM SUPPLY COMPANY Direct Materials Budget—Crup For the Six Months Ending June 30, 2011
Quarter Six Months 2 55,000 X 6 330,000 15,00 0 345,000 12,00 0 333,000 X $4 $1,332,00 0
1 Units to be produced............................. Direct materials per unit........................ Total pounds needed for production... Add: Desired ending direct materials (pounds)........................................ Total materials required........................ Less: Beginning direct materials (pounds)...................................... Direct materials purchases................... Cost per pound....................................... Total cost of direct materials purchases............................................ 45,000 X 6 270,000 12,00 0 282,000 9,00 0 273,000 X $4 $1,092,00 0
$2,424,00 0
SUPPAN FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2011 Quarter Six Months
1
2
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Units to be produced........................ Direct labor time (hours) per unit.... Total required direct labor hours.... Direct labor cost per hour................ Total direct labor cost......................
45,000 X .25 11,250 X $10 $112,500
55,000 X . 25 13,750 X $10 $137,50 0
$250,000
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PROBLEM 9-1B (Continued) SUPPAN FARM SUPPLY COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2011 Quarter Six Months 2 50,00 0 $325,00 0 160,00 0 $485,00 0 90,000 $585,000 320,000 $905,000
1 Budgeted sales in units................... Variable (.10 X sales)........................ Fixed.................................................. Total................................................... 40,000 $260,000 160,000 $420,000
SUPPAN FARM SUPPLY COMPANY Budgeted Income Statement For the Six Months Ending June 30, 2011 Sales.............................................................................................. Cost of goods sold (90,000 X $44).............................................. Gross profit................................................................................... Selling and administrative expenses......................................... Income from operations............................................................... Income tax expense (30%)........................................................... Net income.................................................................................... Cost Per Bag Cost Element Quantity Unit Cost Total $5,850,000 3,960,000 1,890,000 905,000 985,000 295,500 $ 689,500
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Direct materials Crup........................................... Dert............................................ Direct labor................................... Manufacturing overhead (100% of direct labor cost)...... Total.......................................
6 pounds 10 pounds .25 hour
$ 4.00 1.50 10.00
$24.0 0 15.00 2.50 2.50 $44.0 0
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PROBLEM 9-2B
(a)
DURHAM INC. Sales Budget For the Year Ending December 31, 2011 LN 35 Expected unit sales............ Unit selling price................ Total sales........................... 400,000 X $25 $10,000,00 0 LN 40 240,000 X $35 $8,400,00 0 Total
000,000,0 $18,400,00 0
(b)
DURHAM INC. Production Budget For the Year Ending December 31, 2011 LN 35 Expected unit sales............................ Add: Desired ending finished goods units................................ Total required units............................ Less: Beginning finished goods units........................................... Required production units................. 400,00 0 30,000 430,00 0 20,000 410,00 0 LN 40 240,00 0 25,000 265,00 0 15,000 250,00 0 Total
660,00 0
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PROBLEM 9-2B (Continued) (c) DURHAM INC. Direct Materials Budget For the Year Ending December 31, 2011
LN 35 Units to be produced................. Direct materials per unit............ Total pounds needed for production............................... Add: Desired ending direct materials (pounds)........... Total materials required............ Less: Beginning direct materials (pounds)........... Direct materials purchases....... Cost per pound.......................... Total cost of direct materials purchases............................... 410,000 X 2 820,000 750,000 50,00 0 870,000 40,00 0 830,000 X $2 $1,660,00 0 20,00 0 770,000 10,00 0 760,000 X $3 $2,280,00 0 LN 40 250,000 X 3 Total
$3,940,00 0
(d)
DURHAM INC. Direct Labor Budget For the Year Ending December 31, 2011
LN 35 Units to be produced................... Direct labor time (hours) per unit............................................ Total required direct labor hours......................................... Direct labor cost per hour.......... Total direct labor cost................. 410,000 X .5 205,000 LN 40 250,000 X . 75 Total 550,000
322,500 X $10 $4,710,00
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X $12 $2,460,00 0
187,500 X $12 $2,250,00 0
0
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PROBLEM 9-2B (Continued) (e) DURHAM INC. Budgeted Income Statement For the Year Ending December 31, 2011 LN 35 Sales.................................... Cost of goods sold............ Gross profit........................ Operating expenses Selling expenses............ Administrative expenses..................... Total operating expenses.............. Income before income taxes................................ Income tax expense (30%)................................ Net income......................... $10,000,00 0 4,400,000 5,600,000 750,000 420,000 1,170,00 0 $ 4,430,000 LN 40 $8,400,00 0 4,800,000 3,600,000 590,000 380,000 970,000 $2,630,00 0 Total $18,400,00 0 9,200,000 9,200,000 1,340,000 800,000 2,140,000 7,060,000 2,118,00 0 $ 4,942,000 400,000 X $11. (2)240,000 X $20.
(1)
( 1 )
( 2 )
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PROBLEM 9-3B
(a)
SPEIER INDUSTRIES Sales Budget For the Year Ending December 31, 2011 Plan A Expected unit sales.................................... Unit selling price........................................ Total sales................................................... 720,000 X $7.60 $5,472,000
(1)
Plan B 900,000 (2 X $6.65 ) $5,985,000 (3
)
800,000 X 90% = 720,000. 800,000 + 100,000 = 900,000. (3)$7.00 X 95% = $6.65.
(1) (2)
(b)
SPEIER INDUSTRIES Production Budget For the Year Ending December 31, 2011 Plan A Expected unit sales............................................. Add: Desired ending finished goods units..... Total required units............................................. Less: Beginning finished goods units............. Required production units.................................. 720,00 0 90,000 810,00 0 70,000 740,00 0 Plan B 900,000 100,00 0 1,000,00 0 70,000 930,00 0
(c) Variable costs = $4.00 per unit ($2.00 + $1.50 + $.50) for both plans.
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Plan A Total variable costs Total fixed costs Total costs (a) Total units (b) Unit cost (a) ÷ (b) $2,960,0 (740,000 X 00 $4.00) 925,000 $3,885,0 00 740,000 $5.25
Plan B $3,720,00 (930,000 X 0 $4.00) 925,000 $4,645,00 0 930,000 $4.99
The difference is due to the fact that fixed costs are spread over a larger number of units (190,000) in Plan B.
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PROBLEM 9-3B (Continued) (d)
Plan A Sales Cost of goods sold Gross profit $5,472,00 0 (720,000 X $5.25) 3,780,000 $1,692,00 0
Gross Profit
Plan B $5,985,0 00 4,491,00 0 $1,494,0 00
(900,000 X $4.99)
Plan A should be accepted because it produces a higher gross profit than Plan B.
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PROBLEM 9-4B
(a) 1.
Expected Collections from Customers Januar y November ($200,000)................................. December ($280,000)................................. January ($350,000).................................... February ($400,000)................................... Total collections................................ $ 20,000 84,000 210,000 $314,00 0 Februar y $ 0 28,000 105,000 240,00 0 $373,00 0
2.
Expected Payments for Direct Materials Januar y December ($90,000)................................... January ($120,000).................................... February ($110,000)................................... Total payments.................................. $63,000 36,000 $99,000 Februar y $ 0 84,000 33,00 0 $117,00 0
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PROBLEM 9-4B (Continued) (b) VIDRO COMPANY Cash Budget For the Two Months Ending February 28, 2012 January Februar y $ 48,000 373,000 5,00 0 378,00 0 426,00 0
Beginning cash balance................................. Add: Receipts Collections from customers.................. [See Schedule (1)] Interest receivable.................................. Sale of securities.................................... Total receipts................................... Total available cash.........................................
$ 50,000 314,000 3,000 317,000 367,000
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Less: Disbursements Direct materials..................................... [See Schedule 2] Direct labor........................................ Manufacturing overhead.................. Selling and administrative expenses........................................ Purchase of land............................... Total disbursements................. Excess (deficiency) of available cash over cash disbursements............................ Financing Borrowings............................................... Repayments.............................................. Ending cash balance.......................................
99,000 85,000 60,000 75,000 319,000 48,000 0 0 $ 48,000
117,000 115,000 75,000 80,000 20,00 0 407,00 0 19,000 21,000 0 $ 40,000
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PROBLEM 9-5B
(a)
GUZMAN COMPANY Westwood Store Merchandise Purchases Budget For the Months of July and August, 2011 July Budgeted cost of goods sold............................. Add: Desired ending merchandise inventory... Total....................................................................... Less: Beginning merchandise inventory.................................................... Required merchandise purchases.....................
(1)
August
$240,000 $270,000 54,000 (1) 60,000 (2) 294,000 330,000 48,000 (3) 54,000 $246,000 $276,000
$270,000 X 20% = $54,000. (2)$500,000 X 60% = $300,000; $300,000 X 20% = $60,000. (3)$240,000 X 20% = $48,000.
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PROBLEM 9-5B (Continued) (b) GUZMAN COMPANY Westwood Store Budgeted Income Statement For the Months of July and August, 2011 July Sales..................................................................... Cost of goods sold Beginning inventory.................................... Purchases..................................................... Cost of goods available for sale................ Less: Ending inventory.............................. Cost of goods sold...................................... Gross profit.......................................................... $400,00 0 48,000 246,000 294,000 54,000 240,000 160,000 August $450,00 0 54,000 276,000 330,000 60,000 270,000 180,000 50,000 18,000 9,000 13,500 3,000 700 500 300 95,000 85,000 25,500 $ 59,500
Operating expenses Sales salaries............................................... Advertising*.................................................. Delivery expense**....................................... Sales commissions***................................. Rent............................................................... Depreciation................................................. Utilities.......................................................... Insurance...................................................... Total....................................................... Income from operations...................................... Income tax expense (30%).................................. Net income........................................................... *4% of sales
50,000 16,000 8,000 12,000 3,000 700 500 300 90,500 69,500 20,850 $ 48,650
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**2% of sales ***3% of sales
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BYP 9-1
DECISION MAKING ACROSS THE ORGANIZATION
(a) The budget at Lanier Corporation is an imposed “top-down” budget which fails to consider both the need for realistic data and the human interaction essential to an effective budgeting/control process. The president has not given any basis for his goals, so one cannot know whether they are realistic for the company. True participation of company employees in preparation of the budget is minimal and limited to mechanical gathering and manipulation of data. This suggests there will be little enthusiasm for implementing the budget. The budget process is the merging of the requirements of all facets of the company on a basis of sound judgment and equity. Specific instances of poor procedures other than the approach and goals include the following: 1. The sales by product line should be based upon an accurate sales forecast of potential market. Therefore, the sales by product line should have been developed first to derive the sales target rather than the reverse. Production costs probably would be the easiest and most certain costs to estimate. Given variable and fixed production costs, one could estimate the sales volume needed to cover manufacturing costs plus the costs of other aspects of the operation. This would be helpful before budgets for marketing costs and corporate office expenses are set. The initial meeting between the vice president of finance, executive vice president, marketing manager, and production manager should be held earlier. This meeting is held too late in the budgeting process.
2.
3.
(b) Lanier Corporation should consider the adoption of a “bottom to top” (participative) budget process. This means that the people responsible for performance under the budget would participate in the decisions by which the budget is established. In addition, this approach requires initial and continuing involvement of sales, financial, and production personnel to define sales and profit goals which are realistic within the constraints under which management operates. Although time-consuming, the approach should produce a more acceptable, honest, and workable goal-control mechanism. It also provides for goal congruence possibilities for both individuals and departments within the firm.
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BYP 9-1 (Continued) The sales forecast should be developed considering internal sales forecasts as well as external factors. Costs within departments should be divided into fixed and variable, discretionary and nondiscretionary. (c) The functional areas should not necessarily be expected to cut costs when sales volume falls below budget. The time frame of the budget (one year) is short enough so that many costs are relatively fixed in amount. For those costs which are fixed, there is little hope for a reduction as a consequence of short-run changes in volume. However, the functional areas should be expected to cut costs should sales volume fall below target when: 1. 2. Control is exercised over the costs within their function. Budgeted costs were more than adequate for the originally targeted sales; i.e., slack was present. Budgeted costs vary to some extent with changes in sales. There are discretionary costs which can be delayed or omitted with no serious effect on the department. (CMA adapted)
3. 4.
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BYP 9-2
MANAGERIAL ANALYSIS
(a) Direct materials
Either lower quality materials resulting in an inferior product and possible lost sales, or fewer units produced resulting in lost sales. Reduced production resulting in lost sales, or reduction in quality of product resulting in lost sales. Less coverage; may increase risk beyond acceptable levels. To reduce depreciation, fixed assets would have to be disposed of. Could result in less production and lost sales. Less efficient operations, or lost production and sales. Lost sales. Less effective administrative functions. Lost production due to inefficiency, and therefore lost sales.
Direct labor
Insurance
Depreciation
Machine repairs
Sales salaries Office salaries Factory salaries
(b) Given the nature of their product, a decline in quality should be avoided, since this could result in lower future sales. Direct materials represent the largest single cost, and thus perhaps the greatest potential savings. Perhaps substitute materials of similar quality can be found, or less expensive materials can be used for aspects of the product where quality is not as critical. Additionally, it may be possible to renegotiate prices with the supplier. Bedner & Flott should be very reluctant to reduce repair costs, since in the long run this can be very expensive. Perhaps salaried and hourly employees can be encouraged to take pay cuts if a profitsharing mechanism is introduced.
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BYP 9-3
REAL-WORLD FOCUS
(a) The factors that affect the budgeting process at Network Computing Devices, Inc. are general economic conditions affecting industry demand for computer products, the timing and market acceptance of new products of the Company and its competitors, the timing of significant orders from large customers, periodic changes in product pricing and discounting due to competitive factors, and the availability of key product components (raw materials). In addition, the budgeting process will be affected by the Company’s success with its products, its product and customer mix, and the level of competition it experiences. (b) Internationally, third quarter sales are adversely affected because European customers reduce their business activity in August. In addition, international sales are denominated in U.S. dollars and any change in the value of the dollar relative to foreign currencies could make the Company’s products more or less competitive in foreign markets.
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BYP 9-4
EXPLORING THE WEB
(a) According to Mr. LaFaive, zero-based budgeting requires that the existence of a government program or programs be justified in each fiscal year, as opposed to simply basing budgeting decisions on a previous year’s funding level. Zero-based budgeting is often encouraged by fiscal watchdog groups as a way to ensure against unnecessary spending. (b) In addition to saving money and improving services, zero-based budgeting may: • Increase restraint in developing budgets; • Reduce the entitlement mentality with respect to cost increases; and • Make budget discussions more meaningful during review sessions. (c) On the cost side of the equation, zero-based budgeting: • May increase the time and expense of preparing a budget; • May be too radical a solution for the task at hand. You don’t need a sledgehammer to pound in a nail; • Can make matters worse if not done in the right way. A substantial commitment must be made by all involved to ensure that this doesn’t happen. (d) In Oklahoma, which has recently adopted zero-based budgeting, officials are applying the method to two departments and several agencies each year. Once those reviews are complete, the same departments and agencies will not see another zero-based review for eight years.
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BYP 9-5
COMMUNICATION ACTIVITY
Date 2012 Mrs. Julie Fleming, CEO Life Protection Products Dear Mrs. Fleming: Allow me to congratulate you on the success of your new venture! The growth in sales you have experienced is phenomenal. You have managed the business side of the venture very well also. At the same time, I understand your concern about cash flow. You are selling these kits as fast as you can make them, and yet you are running out of cash. There is a solution to your problem. Before describing that, it may be helpful for you to understand why this situation occurred. The primary reason is that you are purchasing kit supplies at least two months in advance of sales. As your business expands, these materials costs continue to increase. Sales do not “catch up” until the Drs. Fleming have a seminar. You did not describe in detail how often these seminars are, but I would guess that they tend to run in cycles rather than being regularly spaced. Eventually, as sales stabilize, you will find that cash inflows exceed cash outflows, and your need for additional cash will subside. Presently, I think it would be a good idea to try to borrow additional funds. I have not seen all your financial data, but judging only from the cash budget you showed me, it appears that you have the basis of a very successful company. If so, your banker will be able to see the potential in your business and should be happy to provide the cash you need. You will need to prepare a full set of financial statements. I will be happy to assist you, if you desire. There is also a possibility that you have underpriced your product. You are providing a valuable service in assembling this information and these materials. The fact that every seminar results in a sellout of the materials may mean that you have priced your product too low. I know that your husband wishes to have these materials available to every family, but increasing the price a little may not make the price too high, and would better compensate you for your efforts.
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BYP 9-5 (Continued) However, even if you raised prices, you will find that you need additional cash as long as the business continues to expand. It certainly does not mean that you and Amy are doing anything wrong. It just means that you will be investing additional funds as long as you continue to grow. In my opinion, the best way to make sure these kits are available to as many families as possible is for you and Amy to have a consultant evaluate and determine the size of the market for you. Then you can decide whether to expand to meet the need, or whether to keep your own business small and allow competitors to imitate your product. Congratulations again on a very successful product. Call or email this office if we may be of further assistance preparing financial statements or providing additional advice. Sincerely, Ima Student Best and Superior, Certified Public Accountants
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BYP 9-6
ETHICS CASE
(a) At best, if you disclose the errors in your calculations, you will be embarrassed. At worst, you will be dismissed without a recommendation for another job. (b) The president will continue making presentations using data that are grossly overstated. In time, your error may be detected when the events you projected do not materialize. (c) The most ethical scenario would be to admit your error, let the president know about the error, provide the president with corrected projections, and allow the president to decide how to alter his presentations during the second week of his speech-making.
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BYP 9-7
ALL ABOUT YOU ACTIVITY
Personal Budget Typical Month Income: Wages earned.................................................... Interest income.................................................. Income subtotal............................................................ Income taxes withheld.................................................. Spendable income............................................. Expenses: Mortgage or rent........................................................... Utilities Electricity............................................................ Telephones......................................................... Food: Groceries............................................................ Eating out........................................................... Insurance....................................................................... Transportation............................................................... Student loans................................................................ Entertainment /recreation............................................ Savings.......................................................................... Miscellaneous............................................................... Total investments and expenses............... Surplus/Shortage..........................................................
$2,000 50 2,050 300 $1,750
400 22 90 80 150 100 150 275 250 50 110 1,677 $ 73
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