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solution chapteSM9

solution chapteSM9



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solution to manual managerial accounting by garrison brewer and noreen chapter one to fifteen
solution to manual managerial accounting by garrison brewer and noreen chapter one to fifteen

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© The McGraw-Hill Companies, Inc., 2006. All rights reserved.Solutions Manual, Chapter 9 491
Chapter 9
Profit Planning
Solutions to Questions
A budget is a detailed plan outlining theacquisition and use of financial and other re-sources over a given time period. As such, itrepresents a plan for the future expressed informal quantitative terms. Budgetary controlinvolves the use of budgets to control the
 activities of a firm.
1. Budgets provide a means of communicat-ing management’s plans throughout the organi-zation.2. Budgets force managers to think aboutand plan for the future.3. The budgeting process provides a meansof allocating resources to those parts of the or-ganization where they can be used most effec-tively.4. The budgeting process can uncover po-tential bottlenecks before they occur.5. Budgets coordinate the activities of theentire organization. Budgeting helps to ensurethat everyone in the organization is pulling inthe same direction.6. Budgets define goals and objectives thatcan serve as benchmarks for evaluating subse-quent performance.
Responsibility accounting is a system inwhich a manager is held responsible for thoseitems of revenues and costs—and only thoseitems—that the manager can control to a signifi-cant extent. Each line item in the budget ismade the responsibility of a manager who isthen held responsible for differences betweenbudgeted and actual results.
A master budget represents a summaryof all of management’s plans and goals for thefuture, and outlines the way in which theseplans are to be accomplished. The masterbudget is composed of a number of smaller,specific budgets encompassing sales, produc-tion, raw materials, direct labor, manufacturingoverhead, selling and administrative expenses,and inventories. The master budget generallyalso contains a budgeted income statement,budgeted balance sheet, and cash budget.
The level of sales impacts virtually everyother aspect of the firm’s activities. It deter-mines the production budgets, cash collections,cash disbursements, and selling and administra-tive budgets that in turn determine the cashbudget and budgeted income statement andbalance sheet.
No. Planning and control are different,although related, concepts. Planning involvesdeveloping objectives and formulating steps toachieve those objectives. Control, by contrast,involves the means by which management en-sures that the objectives set down at the plan-ning stage are attained.
The flow of information moves in twodirections—upward and downward. The initialflow should be from the bottom of the organiza-tion upward. Each person having responsibilityover revenues or costs should prepare thebudget data against which his or her subsequentperformance will be measured. As the budgetdata are communicated upward, higher-levelmanagers should review the budgets for consis-tency with the overall goals of the organizationand the plans of other units in the organization. Any issues should be resolved in discussionsbetween the individuals who prepared thebudgets and their managers. All levels of an organization should par-ticipate in the budgeting process—not just topmanagement or the accounting department.Generally, the lower levels will be more familiarwith detailed, day-to-day operating data, and for
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.492 Managerial Accounting, 11th Editionthis reason will have primary responsibility fordeveloping the specifics in the budget. Top lev-els of management will have a better perspec-tive concerning the company’s strategy.
A self-imposed budget is one in whichpersons with responsibility over cost controlprepare their own budgets, i.e., the budget isnot imposed from above. The major advantagesare: (1) the views and judgments of personsfrom all levels of an organization are repre-sented in the final budget document; (2) budgetestimates generally are more accurate and reli-able, since they are prepared by those who areclosest to the problems; (3) managers generallyare more motivated to meet budgets which theyhave participated in setting; (4) self-imposedbudgets reduce the amount of upward “blaming” resulting from inability to meet budget goals.One caution must be exercised in the use of self-imposed budgets. The budgets prepared bylower-level managers should be carefully re-viewed to prevent too much slack.
Budgeting can assist a firm in its em-ployment policies by providing information onprobable future staffing needs. Budgeting canalso assist in stabilizing a company’s work force.By careful planning through the budget process,a company can often “smooth out” its activitiesand avoid erratic hiring and laying off employ-ees.
No, although this is clearly one of thepurposes of the cash budget. The principal pur-pose is to provide information on probable cashneeds
the budget period, so that bank loans and other sources of financing can be an-ticipated and arranged well in advance.
Zero-based budgeting requires thatmanagers start at zero levels every year and justify all costs as if all programs were beingproposed for the first time. In traditional budg-eting, by contrast, budgets are usually based onthe previous year’s data. 
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.Solutions Manual, Chapter 9 493
Exercise 9-1
(20 minutes)1.
 April May June Total 
February sales:$230,000 × 10%..........$ 23,000 $ 23,000 March sales: $260,000× 70%, 10%................182,000$ 26,000 208,000  April sales: $300,000 ×20%, 70%, 10%..........60,000210,000$ 30,000 300,000 May sales: $500,000 ×20%, 70%...................100,000350,000 450,000 June sales: $200,000 ×20%............................ 40,000 40,000Total cash collections.......$265,000$336,000$420,000 $1,021,000
Observe that even though sales peak in May, cash collections peak inJune. This occurs because the bulk of the company’s customers pay inthe month following sale. The lag in collections that this creates is evenmore pronounced in some companies. Indeed, it is not unusual for acompany to have the least cash available in the months when sales aregreatest.2. Accounts receivable at June 30:From May sales: $500,000 × 10%..........................$ 50,000From June sales: $200,000 × (70% + 10%)........... 160,000Total accounts receivable at June 30.......................$210,000

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