You are on page 1of 94

CHAPTER 9

Profit Planning and Activity-Based Budgeting
ANSWERS TO REVIEW QUESTIONS
9-1 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.
9-2 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.
9-3 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).
9-4 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, 8/e

 2009 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.

McGraw-Hill/Irwin
Inc.
9-2

 2009 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

McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e

Budgeted
Balance
Sheet
Budgeted
Statement
of Cash
Flows

 2009 The McGraw-Hill Companies,
9-3

The Internet also is used to disseminate the resulting budget schedules and information to authorized users throughout the enterprise. specifies the process by which budget data will be gathered.7 Application of activity-based costing to the budgeting process yields activity-based budgeting (ABB). administrative buildings. 9-9 The city of Boston could use budgeting for planning purposes in many ways. 9-4  2009 The McGraw-Hill Companies. For example. the city's personnel budget would be important in planning for required employees in the police and fire departments. to make sure that it has enough cash on hand to meet its cash needs at all times. Under ABB. Finally the resources needed to perform the specified activities are determined.9. including a municipal government. Solutions Manual . or chief budget officer. To communicate budget procedures and deadlines to employees throughout the organization. the first step is to specify the products or services to be produced and the customers to be served. The city's capital budget would be used in planning for the replacement of the city's vehicles. McGraw-Hill/Irwin Inc. collects the information. Then the activities necessary to produce these products and services are determined. and traffic control equipment. 9. the budget director often develops and disseminates a budget manual. It is important for any organization. The city's cash budget would be important in planning for cash receipts and disbursements. 9. and prepares the master budget.10 The budget director. Under this approach the information needed to construct a budget is gathered via the Internet from individuals and subunits located throughout the enterprise.8 E-budgeting stands for an electronic and enterprisewide budgeting process. computers. 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.

the board of directors can wield considerable influence on the overall direction the organization takes. The budget manual also states who should receive each schedule when the master budget is complete. when the information is required. 8/e  2009 The McGraw-Hill Companies. and what form the information is to take. 9-12 A company's board of directors generally has final approval over the master budget. 9-5 . McGraw-Hill/Irwin Inc. Managerial Accounting.9-11 The budget manual says who is responsible for providing various types of information. Since the budget is used as a resource-allocation mechanism. By exercising its authority to make changes in the budget and grant final approval. the board of directors can emphasize some programs and curtail or eliminate others by allocating funds through the budgeting process.

Such participation can give employees the feeling that "this is our budget. For example. Solutions Manual . the sales budget is built on an assumption about the nature of demand for goods or services. Cost estimates are often inflated. they are more likely to strive to achieve the 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. 9-14 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. The direct-material budget requires an estimate of the direct-material price and the quantity of material required per unit of production. evaluative tool. if the person who is running the business McGraw-Hill/Irwin Inc.9-13 A master budget is based on many assumptions and predictions of unknown parameters. 9-16 The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. the budget loses its effectiveness as a planning tool. First. Many other assumptions are used throughout the rest of the budgeting process. First. 9-6  2009 The McGraw-Hill Companies. These individuals have great knowledge in their minds about running their business. Building budgetary slack into the budget is called padding the budget. 9-15 An organization can reduce the problem of budgetary slack in several ways. This approach can result in several problems. 9-17 This comment is occasionally heard from people who have started and run their own small business for a long period of time. A significant problem caused by budgetary slack is that the budget ceases to be an accurate portrayal of likely future events. managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections. it can avoid relying on the budget as a negative. because they can essentially run the business by feel. In this situation. and revenue estimates are often understated. They feel that they do not need to spend a great deal of time on the budgeting process. Second.

McGraw-Hill/Irwin Inc. Second. he or she is not available to make decisions and implement plans that could have been clarified by a budget. are useful in resource allocation. Budgets facilitate communication and coordination. and help in evaluating performance and providing incentives to employees. the purposes of budgeting are important to the effective running of an organization. It is difficult to achieve these benefits without a budgeting process.is sick or traveling. 9-7 . 8/e  2009 The McGraw-Hill Companies. Managerial Accounting.

Almost all the world's currencies fluctuate in their values relative to the dollar. and this fluctuation makes budgeting for those translations difficult. scholarships. Some foreign countries have experienced hyperinflation. clothing and other personal needs. Solutions Manual . room and board. laws affecting commerce. You would also need to carefully project your college expenses. college funds saved by relatives or friends for your benefit. sometimes with annual inflation rates well over 100 percent.S. 9-20 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 McGraw-Hill/Irwin Inc. jobs held during the academic year. books and other academic supplies. and so forth. Your cash receipts could come from such sources as summer jobs. 9-8  2009 The McGraw-Hill Companies. and money for entertainment and miscellaneous expenses. Companies with foreign operations face the task of anticipating such changing conditions in their budgeting processes. availability of skilled labor. • A multinational firm's budget must reflect the translation of foreign currencies into U. dollars. • The economies of all countries fluctuate in terms of consumer demand. transportation. Your expenses would include tuition. • It is difficult to prepare budgets when inflation is high or unpredictable. Predicting such high inflation rates is difficult and complicates a multinational's budgeting process. and financial aid from your college or university. 9-19 Firms with international operations face a variety of additional challenges in preparing their budgets.9-18 In developing a budget to meet your college expenses. the primary steps would be to project your cash receipts and your cash disbursements.

A large portion of a product's life-cycle costs will be committed well before they are actually incurred.(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. McGraw-Hill/Irwin Inc. 8/e  2009 The McGraw-Hill Companies. Managerial Accounting. 9-9 .

.....144 units...000 × 25%).. Solutions Manual ........... Raw material required for production in third quarter (in pounds).............100 1................................................... Subtotal...................................000 × Planned Ending Inventory (in units) 32...................305 × 80%) (44. Total required production.....................................SOLUTIONS TO EXERCISES EXERCISE 9-21 (20 MINUTES) 1..144 Assumed production during third quarter (in units).000    120.........05) 46.......... 120. September 30......000 1................................................ Deduct: Ending raw-material inventory..............000 600................. July......000 × (42..................... September............................144 32.044 163...000 42.......... The total required production is 131...... June 30...000 McGraw-Hill/Irwin Inc...... Raw-material requirements per unit of product (in pounds)................05) 44....044 (46.05) (given) (40............... Add: Desired ending raw-material inventory... September 30 (480............100 126..000 (40......... computed as follows: Budgeted Sales (in units) June July August September October 40.000 131.... 9-10 ×        4 480.......000 × 80%) 37...000 44....................100 37.........305 1........ Subtotal....000 42...000     2009 The McGraw-Hill Companies.................................................... 40............................... Total for third quarter........... Deduct: Desired ending inventory............................. June 30. August... Add: Desired ending inventory.100 × Sales in units: 2................

..000 460.... Cost per pound of raw material........40 $ 644........................................ 9-11 .... Managerial Accounting....... McGraw-Hill/Irwin Inc.Raw material to be purchased during third quarter (in pounds)............... Total raw-material purchases during third quarter.......000 ×     $1.000  2009 The McGraw-Hill Companies................................ 8/e 140.................

... 2... 00 500 250....0 00  2009 The McGraw-Hill Companies....500 37.000 × $ 6.... 9-12 Credit Sales Octob er $225........ Cash collections in fourth quarter from credit sales in fourth quarter..............000 200............000 4%   17...000 × 10% 30.....00 0 – 208. Total...... September.......................000 × 15% 157..... October... Cash collections in October: Month of Sale July.............7 50 $575.........................50 – 0 $157........500 was not needed to solve the exercise....500 175..7 50 $208....000 × 70% $211..500 148...... August...........500 225..... McGraw-Hill/Irwin Inc......... December................................... Total...EXERCISE 9-22 (25 MINUTES) 1....000 Notice that the amount of sales on account in June.... Amount Collected Month of Sale October.....00 – 0 212..... $122...................7 50 Decem ber $ 22. Amount Collected in October $150.............. 500 Novem ber $ 33. Solutions Manual ...750 175.......0 $157.......... November. Total collections in fourth quarter from credit sales in fourth quarter....

In the electronic version of the solutions manual. press the CTRL key and click on the following link: BUILD A SPREADSHEET McGraw-Hill/Irwin Inc. 9-13 .3. Managerial Accounting. 8/e  2009 The McGraw-Hill Companies.

..6) + ($90...... Accounts payable........ $240....200......000 euros  (2..000 117......5 b $ 90...000 euros 2....4) $117..........00 0 Cash receipts: From cash sales. July August Septemb er Sales.... 000 = ($135.........000 a $180. Solutions Manual .........EXERCISE 9-23 (20 MINUTES) 1. Accounts payable.000 × ..000d $ 228..........000 × 2 $120...00 0a $ 135..00 0 $ 192.......000 × ...........000 c d $108.000 × ..000c $270. McGraw-Hill/Irwin Inc.000 102..000 108.400..000 × .. Payments of accounts payable during 20x1...000b From sales on account. 000 = $240. 000 = $135... Total cash receipts...........000 × ... 12/31/x1...000e $ 252..000 × .6) + ($90.. $ 120...000) euros* 800.......... 12/31/x0......5 90. $270....000 $ = $180.... Purchases of goods and services on account during 20x1.... ...... 000 = ($120..4) e 2........000 euros  2009 The McGraw-Hill Companies.. 9-14 600.........

.......... 12/31/x1..500... Dividends paid in 20x1.............*2............... 000y    (3....00 0y 4.........537........................... 12/31/x1.. 12/31/x0..................000 0 $1. Retained earnings.000 euros + 2. $ Retained earnings............000 euros 3... Accumulated depreciation. 1......... Accounts receivable.000 euros – 800......837.........000 480... 9-15 ......700........... $1..... Accounts receivable........000 75.. Managerial Accounting.........0 00y)   2. 12/31/x0. Net income for 20x1............. Depreciation expense during 20x1..    4....0 00y Sales on account during 20x1.......... Accumulated depreciation.....300...........000 euros = 600..... 12/31/x1...... 8/e $ 405............ Collections of accounts receivable during 20x1..............200.....000  2009 The McGraw-Hill Companies.....500 McGraw-Hill/Irwin Inc....400.......... 5.......500 300.900........... 12/31/x0......

........ assuming production of 3....500......... 2.... 3..................... Required production during the year.........000 560.....0 00 350...............000..... Deduct: Beginning finished-goods inventory on January 1.0 00 7.......... Production (in units) required for the year: Sales for the year........ Solutions Manual ...........0 00  2009 The McGraw-Hill Companies.... ...... Required raw-material purchases during the year McGraw-Hill/Irwin Inc.........0 00 Purchases of raw material (in units).......EXERCISE 9-24 (15 MINUTES) 1.............000 × 2)....... 9-16 7.000 245........................000 finished units: Raw material required for production (3................... Add: Desired ending inventory on December 31............360.............500.............................070....0 00 315........0 00 3......150..... Add: Desired ending finished-goods inventory on December 31. Deduct: Beginning inventory on January 1...

..700 $132....30 0   36.. November 1....EXERCISE 9-25 (20 MINUTES) 1.......... WHITE MOUNTAIN FURNITURE COMPANY EXPECTED CASH COLLECTIONS NOVEMBER Month September...........................000 165........................... 9-17 ........... Expected balance............ Sales $150...... November............................................. McGraw-Hill/Irwin Inc................... Total.......500 $168...500 39........000 195.............. $135..............30 0 WHITE MOUNTAIN FURNITURE COMPANY EXPECTED CASH BALANCE NOVEMBER 30 Balance.......00 0    2........ 3 ......... Add: Expected collections..... October.......000 115.........000   168........ 8/e $  55............................ Net......000 WHITE MOUNTAIN FURNITURE COMPANY EXPECTED CASH DISBURSEMENTS NOVEMBER October purchases to be paid in November........ Total....000 $168.......... 2 .....................700  2009 The McGraw-Hill Companies......................... Cash disbursements for expenses... Managerial Accounting.. Less: Expected disbursements..................................................300 $  54............. Less: 2% cash discount.000 168..........000 Percent 9% 20% 70% Expected Collections $ 13.................

....EXERCISE 9-26 (30 MINUTES) Answers will vary widely.............. $440................. December....000 Budgeted income (loss) for December: Sales revenue...... and the military... interest expense.00 0 330..000 × $152.. Total cash collections...000 440.... Depreciation ($432........... Social Security and Medicare)............ Solutions Manual .... Less:...200   90...000 × 60% $416................ students have expressed surprise at the proportion of the U.....000 38%  264.............000 45..Operating expenses: Bad debts expense (2% of sales)..... Budgeted cash collections for December: Month of Sale November........... 9-18 $  8...... EXERCISE 9-27 (30 MINUTES) 1 ................. 2 . Income before taxes......00 0 Less: Cost of goods sold (75% of sales) Gross margin (25% of sales)......800 36.. McGraw-Hill/Irwin Inc..... Other expenses....... Collections in December $400.00 0 $110. depending on the governmental unit selected and the budgetary items on which the student focuses.......S......000/12)........................ federal budget that goes to entitlement programs (e...000 $ 20.......g. Total operating expenses....... In the past.....000  2009 The McGraw-Hill Companies..........

.000 20% 300. Projected balance in accounts payable on December 31: The December 31 balance in accounts payable will be equal to December's purchases of merchandise. its cost of goods sold must be 75 percent of sales. Month December. January.0 00 400..000 Total December purchases.00 0 Therefore. McGraw-Hill/Irwin Inc.. Since the store's gross margin is 25 percent of sales.00 0 Cost of Goods Sold $330......000 × 80% 240......0 00 300. Sales $440. the December 31 balance in accounts payable will be $306...EXERCISE 9-27 (CONTINUED) 3 .. 8/e  2009 The McGraw-Hill Companies.000. $306.. 9-19 .000 × 66.. Managerial Accounting..00 0 Amount Purchased in December $ $330..

McGraw-Hill/Irwin Inc. This projection will make it more likely that the actual number of new accounts will exceed the budgeted number. the manager has an incentive to understate her projection of the number of new accounts. East Bank of Mississippi From: I. The primary negative consequence of slack is that it undermines the credibility and usefulness of the budget as a planning and control tool. Since the manager's bonus is determined by the number of new accounts generated over the budgeted number. Student and Associates Subje Budgetary slack ct: Budgetary slack is the difference between a budget estimate that a person provides and a realistic estimate. When a budget includes slack. Yet the new accounts manager's projection is only 800 new accounts. 9-20  2009 The McGraw-Hill Companies.000 accounts would mean 1. A 10 percent increase over the bank's current 10. the amounts in the budget no longer portray a realistic view of future operations. Solutions Manual . The description of the new accounts manager's behavior shows evidence of such understatement.M.EXERCISE 9-28 (20 MINUTES) Memorandum Date: Today To: President.000 new accounts in 20x5. The practice of creating budgetary slack is called padding the budget. The bank's bonus system for the new accounts manager tends to encourage budgetary slack.

..........0 00†   40.000 × .000 × 1/2 hr.25 × . From January cash sales. From January sales on account......000* * $ 204... such as sales demand or inflation rates....75 **$40...... 9-21 .000 Professional services in June: One-hour visits (20% × 4.... Direct professional labor budget for the month of June: Office visits per month = 48..000 00 $261.000 0 52..)........00 $260...00 240.250 $  $  14...80 2 ..EXERCISE 9-29 (20 MINUTES) 1....250 14....000/12 = 4.000 × 1 hr.. 20x5 From December sales on account....250 195...600 hours 2. Hourly rate for dental associates......25 0 *$14..... $  14. Usually there is uncertainty about these assumptions...250* 150.. Total direct professional labor cost. Financial planning helps management answer "what if" questions about how the budget will look under various sets of assumptions..000 = $200.000 × ..2 50 $318...... EXERCISE 9-30 (25 MINUTES) 1 .. 8/e 800 hours    1.000 × .000 = $200....00 0 00 0 Cash receipts in January...... Total Sales in January 20x5 $200...... Total cash receipts..) Total direct professional labor.00 0  2009 The McGraw-Hill Companies.15 † $150....250 = $380. Managerial Accounting...... Operational plans depend on various assumptions....0   64....400 hours ×    $ 90 $216.0 $320. McGraw-Hill/Irwin Inc... Half-hour visits (80% × 4....25 × ....

Solutions Manual .McGraw-Hill/Irwin Inc. 9-22  2009 The McGraw-Hill Companies.

00 0 Percentage of month's billings collected during June................................ Total billings for one-hour visits................000 McGraw-Hill/Irwin Inc...............000 visits × $3.00 $192.... Billing rate.200 × $60 June 3..000 $276.......... May 3.........40 0 $276... $30. 8/e  2009 The McGraw-Hill Companies....... Cash collections during June: Half-hour visits (4.......................200 × $60 $192....................000 Total overhead and administrative expenses .......... Billing rate.. Total billings during month..... Collections during June............. $12.. Total collections in June ($27..................... One-hour visits (4..................00 0 0 800 800 × $105 × $105 $ $84........ Managerial Accounting.. 9-23 ......EXERCISE 9-30 (CONTINUED) 2 ......................................... Total billings for half-hour visits.............00 0 3....00 per visit).......................400)..400 hours × $7............. 18.............00 0 $276.......50 per hour).......000 84. × 10% $ 27.....600 + $248........600 × 90% $248....000 Other overhead and administrative expenses (2.........000 × 80%).... Overhead and administrative expense budget for June: Patient registration and records (4............000 × 20%)....................

9-24  2009 The McGraw-Hill Companies. In the electronic version of the solutions manual. Solutions Manual .4. press the CTRL key and click on the following link: BUILD A SPREADSHEET McGraw-Hill/Irwin Inc.

... 000 $303.000): 70% in January................. Collection of February sales ($540......... Schedule of cash collections: Collection of accounts receivable: $165................ 30% in February..... Febru ary 270....... 000 15...... 000 $ 81....... 9-25 ...... 8/e Febru ary March $ 66..........000 x 20% ... 000 $189.00 0 189.................000): 60% in March ..000): 60% in February...... Januar y 2......................... 500 333...................... 35% in March..... 500 324............ Sale of equipment......... March $ 33..SOLUTIONS TO PROBLEMS PROBLEM 9-31 (30 MINUTES) 1.... 000 Schedule of cash disbursements: Januar y Payment of accounts payable Payment of January purchases ($270........... Collection of March sales ($555.. Payment of February purchases McGraw-Hill/Irwin Inc.. Managerial Accounting..00 0 Collection of January sales ($450................ 000 $157............... 000 $537....000): 60% in January............ Total cash collections ........ 35% in February.. 000 $481.00 0  2009 The McGraw-Hill Companies...

Cash operating costs......00 0 294........... 000  2009 The McGraw-Hill Companies... 000 135........... Solutions Manual ..000): 70% in March...... Total cash disbursements.. 210...... 000 72... 000 $519. 000 $363. 30% in March. 000 $ 90........ . McGraw-Hill/Irwin Inc....... 000 $348.... 9-26 93...($300....... 000 Payment of March purchases ($420..000): 70% in February.

900 45. Ending cash balance…………………………… Januar Februar y y March $ 60.00 0 -0(45.50 0 537..50 0 363.90 0 -0-0$150. 8/e  2009 The McGraw-Hill Companies.000 x 8% x 2/12 McGraw-Hill/Irwin Inc. Managerial Accounting.PROBLEM 9-31 (CONTINUED) 3.00 0 303.00 0) (6 00)* $132. Total receipts……………………………… ……. 900 481.000 $132. 000 $ 15. Less: Total disbursements…………………… Cash excess (deficiency) before financing… Financing: Borrowing to maintain $60.000 balance. Loan principal repaid……………………… Loan interest paid…………………………. 9-27 .00 0 $541. 000 $ 60. 000 $363.50 0 $669..00 0 $178. Subtotal…………………………… …………. 900 * $45. 900 519. Schedule of cash needs: Beginning cash balance………………………. 000 $150. 000 $ 60. 000 348.

....... Employee medical insurance ($....00 per DLH)†.0 00 13...........5 00 $320..00 0 ×      1    20.. Direct-labor costs: Wages ($16.00 0 Month Februa March Quart ry er 24.....0 27. $272... Workers' compensation insurance ($. Solutions Manual . Deduct: Beginning inventory. 500 50..80 40........ Employer's social security (at 7%)....75 17. Total needs............... $808..... INC........ .... ..750 25.00 0 8.. 32...0 25.....600 0 10...80 per DLH)....000 16......PROBLEM 9-32 (40 MINUTES) 1. Direct-labor hours per unit. Production and direct-labor budgets SHADY SHADES......000 3.000 43. McGraw-Hill/Irwin Inc.. Units to be produced.50 per DLH).100 16.....5 60  2009 The McGraw-Hill Companies.. 000 20..0 000 00 10..0 00 000 00 49. 9-28 Januar y 20.400 0 22..000 0 25.......00 87.... 120 56. Pension contributions ($.0 00 000 00 17....0 000 00 $216........00 0 32............ 400 19.. 000 52....000 18... Add: Ending inventory*. BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1 Sales (units).....20 per DLH)..000 0 32..00 0 32..... Total hours of direct labor time needed.700 10....0 40 15.........400 2.00 13...... 27.00 60...500 6.000 0 ×       ×    1  ..00 55..250 4.....

9-29 .5 400 40 $251. $940.Total direct-labor cost... Managerial Accounting. $316. 8/e  2009 The McGraw-Hill Companies.. † DLH denotes direct-labor hour.. McGraw-Hill/Irwin Inc.... $372....3 370 10 *100 percent of the first following month's sales plus 50 percent of the second following month's sales..

Solutions Manual . 9-30  2009 The McGraw-Hill Companies. 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. 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. 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. 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.PROBLEM 9-32 (CONTINUED) 2. other than the production budget and the direct-labor budget. Use of data throughout the master budget: Components of the master budget.

Managerial Accounting. 9-31 .McGraw-Hill/Irwin Inc. 8/e  2009 The McGraw-Hill Companies.

000 50. Other overhead.200 4. Required production in 20x2 2. Total manufacturing overhead...800 9..500 0 141......08 × 20x3 sales)..0 $180....50 0 $327.600 6....000 00 90... 12/31/x2 (..000 $ 72..00 0 $360. Add: Inventory.. Darol Norex 120. Total required..750 750 PROBLEM 9-33 (40 MINUTES) 1.00 247.. 9-32  2009 The McGraw-Hill Companies..PROBLEM 9-32 (CONTINUED) 3......... MANUFACTURING OVERHEAD BUDGET FOR THE FIRST QUARTER OF 20X1 Month January Shipping and handling Purchasing..000 80.. Niagra Chemical Company’s production budget (in gallons) for the three products for 20x2 is calculated as follows: Yarex Sales for 20x2.. Solutions Manual .400 120.....000 $48........600 _4....000 50...... material handling...250 750 $270..800 54..000 _10. 530...........800 79..800 The company’s conversion cost budget for 20x2 is shown in the following schedule: McGraw-Hill/Irwin Inc.....000 76.00 0 81.500 210.400 85.. 12/31/x1 (.400 _5... Febru ary March Quarter $ 60..... Deduct: Inventory.600 130....... INC.. Manufacturing overhead budget: SHADY SHADES. and inspection..... $957..00 0 178..08 × 20x2 sales)..........

Conversion hours required: Yarex (120...................10). 9-33 ....... 8/e  2009 The McGraw-Hill Companies.456 7.504 x $20).. Total hours.....07)...16)...200 × .......504 Conversion cost budget $490....... Norex (50.128 24...... Darol (79.....800 × .800 × .920 _8.......... Managerial Accounting. 8.08 (24. 0 McGraw-Hill/Irwin Inc.........

..008....................... ………………........ The company should continue using Islin....800 × .................. 9-34  2009 The McGraw-Hill Companies......... 164 Subtotal........ 020 4........800 × 1). 804 Purchases budget (201.. 804 Deduct: Inventory............... 55... 1/1/x2 (200.209........... $1........... 20.804 gallons × $5 $1.................009. Islin (201........64 0 Change in conversion cost from McGraw-Hill/Irwin Inc.... 640 Add: Required inventory. per gallon)......2). 800 Norex (50...........10)... 12/31/x2 20..640 × $5 × 1. 200 Increase in cost of raw material.... 400 Subtotal………………………………………………… 201...... 840 1..... $ 201....... 120.......000 × .. Darol (79......200 × . because the cost of using Philin is $152........10)...640 × $5).............5).... 201.........000 gallons. 440 25.. 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 (120...... (201... calculated as follows: Change in material cost from substituting Philin for Islin: 20x2 production requirements: Philin (201.... 000 Required purchases (gallons)......................632 greater than using Islin... 221.................. Solutions Manual ................7)..... Since the 20x1 usage of Islin is 200.640 × .PROBLEM 9-33 (CONTINUED) 3..

. Islin (24...504 × $20)...... Net increase in production cost.....substituting Philin for Islin: Philin (24......504 × $20 × ........ Managerial Accounting...............63 2  2009 The McGraw-Hill Companies..9). 8/e $ 441.................. 080 $ (49.... 9-35 ............................. Decrease in conversion cost.008 ) $ 152. McGraw-Hill/Irwin Inc..07 2 490.

Total student class enrollments to be covered…. 12.6 00 x 10 126. x 30 Total credit 372. 9-36  2009 The McGraw-Hill Companies. Solutions Manual . 180 Tuition-paying 12.420 students………………………… Credit hours per student per year……………. Classes to be taught…………………………………. Tuition revenue budget: Current student 12. Tuition rate per x hour……………………………. Faculty needed……………………………………… … 3. . Add: 5% increase in student body…………… 600 Total student 12.600 body………………………………. Students per class…………………………………….600 hours………………………………. Classes per student per year [(15 credit hours ÷ 3 credit hours) x 2 semesters]…………………. Classes taught per professor……………………….945 revenue…………………….04 0 ÷ 5 1.000 enrollment……………………. 000 ÷ 25 5.PROBLEM 9-34 (25 MINUTES) 1. $75 Forecasted tuition $27. Less: Tuition-free scholarships……………….. Faculty needed to cover classes: Total student body……………………………………. 008 Possible actions might include: • Hire part-time instructors McGraw-Hill/Irwin Inc.000 2.

Managerial Accounting. the number of faculty is highly dependent on the number of students. McGraw-Hill/Irwin Inc.• 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. 9-37 . 8/e  2009 The McGraw-Hill Companies. Students (and tuition revenue) are akin to sales—the starting point in the budgeting process. While the number of faculty may be a key driver.

.............500 Septem ber 7.....200 6...200 6..500 1..300 Septem ber 7................ August 5............... Raw material required per set (board feet).........200 1.... Sales revenue. Add: Desired ending inventory.. 2.500 6....000 7........500 Raw-material purchases Planned production (sets)...... Raw material required for production (board feet)...000 1..... July July August 5. Total requirements....000 58.....300 70..300 7..00 0 Production budget (in sets) Sales..500 × × × 10 10 10 52..00 0 $360...........000 63.... 3....000 × $60 $300...........500  2009 The McGraw-Hill Companies..000 × $60 6........000 6..300 7.........................200 9..500 8..PROBLEM 9-35 (25 MINUTES) 1.500 5.000 1...200 6......500 83........200 6....... Sales price per set.500 1........... Total requirements... Add: Desired ending inventory of raw material (board feet).. Planned production.......................000 5..... Less: Projected beginning inventory of McGraw-Hill/Irwin Inc.000 1. Sales budget Sales (in sets).. 9-38 July August 5.....300 7.500 × $60 $450.. Solutions Manual ..... Less: Projected beginning inventory......000 75.00 0 Septem ber 7.........

......raw material (board feet)... 8/e 53.500 × $....520 $ 45.60 $ 31......860 $ 38............. 9-39 .. Planned purchases of raw material (board feet)... Cost per board foot.. McGraw-Hill/Irwin Inc..60 × $.....300  2009 The McGraw-Hill Companies....100 64............ Managerial Accounting.200 75............ Planned purchases of raw material (dollars).....60 × $..

.. Direct-labor hours required.800 × $21 6.. 5.200 × 1....... press the CTRL key and click on the following link: BUILD A SPREADSHEET McGraw-Hill/Irwin Inc.PROBLEM 9-35 (CONTINUED) 4....300 × 1.... Solutions Manual .5 9..5 11... .500 × 1..4 50 $236.. July August 5....5 7. 9-40  2009 The McGraw-Hill Companies.250 × $21 $163.. Direct-labor budget Planned production (sets).80 0 $198.....450 × $21 Septem ber 7..... Cost per hour..25 0 In the electronic version of the solutions manual.. .. Direct-labor hours per set. Planned direct-labor cost..

000 ($108.960 X = 9.PROBLEM 9-36 (30 MINUTES) 1. the December 31 inventory is 1. and March sales ($200. 40% in the month of sale and 60% in the following month.800 units ($196. December receivables of $108.000 ÷ .000).560 7. 5. February sales ($196.000 x 60%). Financing required is $3. 8/e balance. or $78.000 equal 60% of December’s sales.900 + X . giving rise to a January 31 inventory of 1. Sales are collected over a two-month period.000 ÷ $20).000 ÷ $20).000 units ($180.400 ÷ .000). Dakota Fan sold 9.000 units.000 ($78.000). Letting X denote production. Thus.000 ($200.000. sales revenue will total $200. Finished-goods inventories are maintained at 20% of the following month’s sales.9.500 x 20%). or 9. or $120. Combining January sales ($76.000 + $114.600 = 1. Thus. January $  2009 The McGraw-Hill Companies.500 ($15. Since the selling price is $20 per unit.500): Cash McGraw-Hill/Irwin Inc. then: 12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory 1.500 units ($190.000).000 minimum balance less ending cash balance of $11.960 units (9. February’s sales total $196. thus. February sales will total 9.400.000 ÷ $20). the company will report revenue of $586. Sixty percent of March’s sales will be outstanding.900 units (9. 6.6).000 ($76.000 (10. December sales total $180. Managerial Accounting.960 X – 7.000 units x $20).500 = 1. Dakota Fan collected 40% of February’s sales during February. 4.000 + $114. January sales total $190. 9-41 . Since the company expects to sell 10.800 x 20%). 2.4). 3.

1………………………… 22.50 0 Add: January receipts 184.000 + $76.000). Solutions Manual . ($108. 9-42  2009 The McGraw-Hill Companies. payments………………………… 000 Cash balance before $ financing………………….50 0 McGraw-Hill/Irwin Inc.. 11. 000 Subtotal…………………………… $206. …………… 500 Less: January 195.

• Budgets help in measuring performance and providing incentives. • The budgeting process communication and coordination. clarify duties to be performed. 9-43 . 8/e  2009 The McGraw-Hill Companies.PROBLEM 9-37 (45 MINUTES) 1. promotes internal • Budgets provide directions for day-to-day control of operations. • 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 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. McGraw-Hill/Irwin Inc. Managerial Accounting. and assign responsibility for these duties. • Budgets provide a vehicle for resource allocation.

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. Schedule Sales Budget b. a. Solutions Manual .PROBLEM 9-37 (CONTINUED) 2. 9-44  2009 The McGraw-Hill Companies.

8/e  2009 The McGraw-Hill Companies. 9-45 .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.

..............000 20..000 Light Coils 60..........000 130........ 20x3.............. Production requirements................ Production required (units).......... Total requirements..... Units 60......000 units projected to be produced).... McGraw-Hill/Irwin Inc. December 31.000 Price $130 Heavy coils...000 25................PROBLEM 9-38 (60 MINUTES) 1.................0 00 7.. 9-46 260.........000  9..600 ..... Production budget (in units) for 20x3: Projected sales.... Sales budget for 20x3: Light coils......000 41..........000 $190 $ 7.........000 49......000 253....000  7.. Add: Desired inventories..000 41.......000 $15..000 123.........................000 Projected sales.............000  8..000  36... January 1.000 65. Total Raw-material purchases budget (in quantities) for 20x3: Raw Material S Cop heet per Platfo M W rms etal ire Light coils (65....... Deduct: Expected inventories..........000 units projected to be produced)....000  32................. Heavy coils (41.....................000 Heavy Coils 40.. 2 ..000  2009 The McGraw-Hill Companies........000 __ 205....000 465........400 ... Add: Desired inventories...000 85.....................000 41... 3 ...800....... 40....... 20x3. Solutions Manual .........

. Total requirements.....000  6....000 469... Purchase requirements (units)....000 42.. 9-47 .000  32.......... Deduct: Expected inventories..000  2009 The McGraw-Hill Companies.. 20x3.......000 256.....000  29.. Managerial Accounting.. 8/e 501.....000 48.000 285....... January 1.... 20x3..... McGraw-Hill/Irwin Inc........December 31.....

...... utilities..00 0 Total………………………………………… …………......0 00 Copper wire.504.000 $10.0 00 $8..............50 $362..... coils b McGraw-Hill/Irwin Inc............. 9-48 Cost Driver Rate Budgete d Cost $............... and 106............000  2009 The McGraw-Hill Companies....000 Heavy coils....... Total 10 $ 7.. Anticipa ted Purchas e Price $16 Hours per Unit 4 6 Total Hour s Rate 260...900....0 00 246......820.....00 848. 256...........000 handling......a Depreciation................ Solutions Manual .. 42......560...... 41...............0 00 Manufacturing overhead budget for 20x3: Cost Driver Quantity Purchasing and material 725.............000 2...0 00 Platforms.PROBLEM 9-38 (CONTINUED) 4 .000 inspection....50 0 $8......920.. Project ed Produc tion (units) 65...............000 6 ___252....... 6. 5......... 469........0 00 $15 20 Total Cost $3..... lb.000 Total.....0 00 4...316....00 0 Direct-labor budget for 20x3: Light coils.. Raw-material purchases budget for 20x3: Raw Material Raw Material Required (units) Sheet metal...

.......000 + 246.000 (from req.. d Total manufacturing overhead.000 $6...000 = 260...000 = 469.000 + 256.000 + 40. 000 $4. $2. Managerial Accounting..... 5) a b McGraw-Hill/Irwin Inc.000 (from req.. from problem) d 506....000 + 41. 3) 106...00 200.446.000c General manufacturing overhead 506.000 hr. 2) c 100..000 (from req....00 3.. 8/e  2009 The McGraw-Hill Companies. 100.. 9-49 ....000 = 60..036.000 = 65. 500 725..000 (total units sold...Shipping....

.00 0 0 0  2009 The McGraw-Hill Companies....... Total units needed..............35 $1............... Raw material required for production (pounds).........000            5.........000    505.. Box   Box C P 500.......000 500.0 00 Production budget (in units):   Sales.....0 495.......... 9-50 Box C Box P 495........ Raw material required per box (pounds)...........2 3 Total   148..000      495...... Production requirements.0 500... Deduct: Beginning Inventory.... McGraw-Hill/Irwin Inc.00 00 0 ×     ×     ...... Add: Desired ending inventory.................. $975... ..00 00 0 ×    ×    $1..........0 000 00 Sales (in units) Sales price per unit Sales revenue 2.50 99.......000   15...........................650.....50 247.....000  20.... Total $1...........PROBLEM 9-39 (60 MINUTES) 1.....000 515........ Solutions Manual . 3....000 495........ Sales budget: Box C Box P 500.....000           10..000       Raw-material budget: CORRUGATING MEDIUM Production requirements (number of boxes).95 $675.

... Deduct: Beginning raw-material inventory..........50 0    5............15 $ 37. 8/e    10...........875).........................000 252..50 0 ×    $. Raw material to be purchased.. Cost of purchases (corrugating medium)..... Managerial Accounting.500 + $37... Price (per pound).. Total raw-material needs.. 9-51 ..................... 375  2009 The McGraw-Hill Companies... Total cost of raw-material purchases ($145.. McGraw-Hill/Irwin Inc.....000 257............................875 $183..............Add: Desired ending raw-material inventory......

Box C Box P 495... 5 ×    $18 $66. Total direct-labor cost.................... ..........00 00 0 0    5...712..............5 2...................50 495.00 0 ×    $................ Raw material required for production (pounds)....... Price (per pound).. 3 7 148.000 500..30 $145. 5..PROBLEM 9-39 (CONTINUED) PAPERBOARD Production requirement (number of boxes)............ Direct-labor budget: Production requirements (number of boxes) Direct labor required per box (hours)............................00 00 0 × .00 0   15........23    7..................8 25 Manufacturing-overhead budget: McGraw-Hill/Irwin Inc.. 4..................... Total Box C Box P 495.......000 485. ×  .... ×     ....... Direct labor required for production (hours) Direct-labor rate......0 495.. Deduct: Beginning raw-material inventory....475 Total 3..00 00 0 ×     ..... Add: Desired ending raw-material inventory. Solutions Manual ....5 346... 0025 005 1... 500 Total raw-material needs.....0 495.................... 9-52  2009 The McGraw-Hill Companies............ Raw material required per box (pounds).................. Raw material to be purchased. Cost of purchases (paperboard)..

................Indirect material..... Managerial Accounting.................................. Property taxes................................................................... Insurance....................................... 8/e $ 15...750 75.....500 27.... Depreciation............ McGraw-Hill/Irwin Inc..........000 24.......................... Utilities....................... Total overhead.................000 43...50 0 $222............................................75 0  2009 The McGraw-Hill Companies........................ Indirect labor...000 37............ 9-53 ....................................

............. $1.....50 0 22..... Miscellaneous administrative expenses..................000 × $... 7. Income before taxes.....................000)( ............. 250 $ 555.......... 000 480....750 = (495....... Less: Cost of goods sold: Box C: 500...................... Clerical wages and fringe benefits..... 000 315.... Selling and administrative expense budget: Salaries and fringe benefits of sales personnel...........650.... 9-54  2009 The McGraw-Hill Companies..00 0 $315.............. $157.... Total selling and administrative expenses.. Net income........645* ............................. 000 $1.................... Income tax expense (35%).........000 × $.... Box P: 500....... 000 $ 855..750 *Calculation of manufacturing cost per unit: (a Predetermined ) overhead rate = budgeted manufactur ingoverhead volume ofdirect -laborhours $222...........00 0 Budgeted income statement: Sales revenue [from sales budget...... Advertising...... 500 Gross margin.....005) McGraw-Hill/Irwin Inc......... Selling and administrative expenses............. (1)]....... 500 322......000)( .PROBLEM 9-39 (CONTINUED) 6................ Solutions Manual .... Management salaries and fringe benefits...................500 135.170........ req....000 6....000 39.............315*.. $112....0025)+(495....000 299..........

8/e  2009 The McGraw-Hill Companies. 9-55 .$222.712.750 = $60perhour = 3. Managerial Accounting.5 hours McGraw-Hill/Irwin Inc.

Corrugating medium .PROBLEM 9-39 (CONTINUED) (b ) Calculation of manufacturing cost per unit: Box C Direct material: Paperboard ........... × $18 per hr. × $.. .....2 lb.. ... ........005 hr..0025 hr.315  .......645  2009 The McGraw-Hill Companies. McGraw-Hill/Irwin Inc....3 lb... × $. ........ × $18 per hr. × $60 per hr.005 hr.....30 per lb...210 ..150 ___   $. × $..........30 per lb.300 $.....15 per lb..............090 . × $..15 per lb.. Manufacturing cost per unit....045 ...... Applied manufacturing overhead: ..7 lb......... Solutions Manual .... 9-56 Box P $..3 lb...0025 hr..030 ...090 $.. Direct labor: . × $60 per hr.045 ...

................912................. Operating income......000 80.............. 000 $1... Supporting calculations follow: VANCOUVER CONSULTING ASSOCIATES REVISED OPERATING BUDGET FOR THE FOURTH QUARTER OF 20X4 Revenue: Consulting fees: Computer system consulting................. (See supporting calculations................. Other revenue............. 000 $1........................ 8/e  2009 The McGraw-Hill Companies.....PROBLEM 9-40 (45 MINUTES) 1............ 250 $1......... $ 956...... Travel and related expenses........... Managerial Accounting...............200 *$1............................ 300 115. Total consulting fees............. 9-57 . Expenses: Consultant salary expenses*................. Corporate expense allocation...... Management consulting......021.................. General and administrative expenses....021.892.... 000 $1....250 936..............750 186. Total expenses. Depreciation expense...................300 = $490...... 050 $ 359... The revised operating budget for Vancouver Consulting Associates for the fourth quarter is presented below.......... 250 20..) McGraw-Hill/Irwin Inc...........553................300.........000 150.......... Total revenue............000 + $531................

Billable hours per consultant.......................00 50 0 ÷   ÷   $180 $150 5.................. 9-58 Manage ment Consulti ng $843..........2 $936......................................... Billable hours................. Billable hours...... Solutions Manual ............ Fourth-quarter planned increase.................. Number of consultants........... Billing rate.............PROBLEM 9-40 (CONTINUED) Supporting calculations: • Schedule of projected revenues for the fourth quarter of 20x4: Compu ter System Consult ing Third Quarter: Revenue................500 ÷      ÷     10 15 375 350      50      50 425 400 ×     ×     13 15 6..375 5......................200 ×   ×   $180 $150 $956......................... Projected revenue.........625 3.................. Hours per consultant..... Hourly billing rate......................00 50 0  2009 The McGraw-Hill Companies. Number of consultants..7 $630........ McGraw-Hill/Irwin Inc.........................

. travel.....................00 0 $490............... Benefits (40%). Management consultants (400 hrs.............200 11.............75 0 $186.... General and administrative ($200.... Rate per hour*........... 9-59 .......00 0 140..........000)......000 $350.....575 ×    $10 $115..... Quarterly salary. Total compensation.000    2.....00 0   75.....000    2.......50 0        -0$379....................... 8/e $ 92.........50 0 151....... Total salary....00 0 $ 25...........375    5............................ general and administrative.............000 McGraw-Hill/Irwin Inc.500 $27....00 0 6.............PROBLEM 9-40 (CONTINUED) • Schedules of projected salaries... Number of consultants.00  2009 The McGraw-Hill Companies...........300 ×      15 $379.................. × 15).... and allocated corporate expenses: Comput er System Consulti ng Compensation: Existing consultants: Annual salary...... New consultants at old salary (3 × $25...30 0 Manage ment Consulti ng $100........ Total travel expense...........................80 0 $531........ Planned increase (10%).................... × 13) Total hours..... Travel expenses: Computer system consultants (425 hrs...........000 $ 23.... Total fourth-quarter salary per consultant...................................... Managerial Accounting.......300 $ 25.. Total...................................500 ×     10 $275...........

Changes in assumptions involving external factors may include changes in demand for the company's products or services.........00 9.... Corporate expense allocation ($100..... *Third-quarter travel expense 0 $150................... An organization would prepare a revised operating budget when the assumptions underlying the original budget are no longer valid.250 ÷ 9........12 5† = $10.....00 0 ÷ hour = rate s $91..............000 × 150%).× 93%).......... or changes in the economic or political environment in which the company operates. changes in the cost of various inputs to the company.... Solutions Manual . McGraw-Hill/Irwin Inc.......125 = (350 × 10) + (375 × 15) † 2 ........ Changes in assumptions involving internal factors may include changes in company goals or objectives.. 9-60  2009 The McGraw-Hill Companies. The assumptions may involve factors outside or inside the company........

70 = $1.000)/ $1. Objective Increase sales by 12% ($1.500−$1. market demand.700. The time horizon for budgeting is generally a year.15 = $241.100.000 × 1.700.12 = $1.6% (rounded) McGraw-Hill/Irwin Inc.904.000/$4. CALCULATION OF FINANCIAL OBJECTIVES: FIT-FOR-LIFE.16 = $656.500 × . and technological changes when identifying overall objectives. and greater attention is focused on internal factors than on external factors.326.700..000) Attained $616.100.500−$210. Strategic planning identifies the overall objective of an organization and generally considers the impact of external factors such as competitive forces.895. For each of the financial objectives established by the board of directors and president of Fit-for-Life. Managerial Accounting.000 = 11.000 (rounded) Maintain cost of goods sold at or below 70% of sales ($1. or an operating cycle.000) Attained / Not Attained Not attained Calculations ($1.500) Attained ($241.000 × .000)/$210. the calculations to determine whether John Winslow’s budget attains these objectives are presented in the following table.5% Increase before-tax income by 15% ($210. Budgeting is the quantitative expression of plans evolving from strategic planning.000 × 1.500 70. INC. 2.PROBLEM 9-41 (40 MINUTES) 1.895.339.850) Not attained $1. 9-61 .000*/$1. 8/e = 15% =  2009 The McGraw-Hill Companies. Inc.895.000 = 15% Maintain long-term debt at or below 16% of assets ($4.

149. manufacturing cost = The accounting adjustments contemplated by John Winslow are unethical because they will result in intentionally overstating income by understating the cost of goods sold. McGraw-Hill/Irwin Inc.550 = $1.450 + $189.*Variable cost of goods sold + fixed $1. Solutions Manual . 9-62  2009 The McGraw-Hill Companies. Winslow violated the integrity standard by engaging in an activity that prejudiced his ability to carry out his duties ethically. by not communicating unfavorable as well as favorable information.000 3. The specific standards of ethical conduct for management accountants violated by Winslow are as follows: Integrity. and by engaging in an activity that appears to be a conflict of interest.339.

PROBLEM 9-41 (CONTINUED)
Competence.
By making the accounting adjustments,
Winslow violated the competency standard by not
preparing financial statements in accordance with
technical standards.
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.

PROBLEM 9-42 (120 MINUTES)
1.

Sales budget:
20x0

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

20x1

Decem Januar
ber
y
$800,0 $880,
00
000
200,00 220,0
0
00
600,00 660,0
0
00

Febru March
ary
$968, $1,064,
000
800
242,0 266,20
00
0
726,0 798,60
00
0

First
Quarte
r
$2,912,
800
728,20
0
2,184,6
00

*25% of total
sales.

75% of total
sales.
2.

Cash receipts
budget:
20x1
Januar Februa March
y
ry

McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e

First
Quarter

 2009 The McGraw-Hill Companies,
9-63

Cash sales.......................
Cash collections from
credit
sales made during
current
month*.........................
Cash collections from
credit
sales made during
preceding
month†..........................
Total cash receipts..........

$220, $242,0
000
00

$266,
$ 
200 728,200

66,00 72,600
0

79,86 218,460
0



540,0 594,00
00
0
$826, $908,6
000
00


653,4
00
$999,
460

1,787,
400
$2,734,
060

*10% of current month's
credit sales.

90% of previous month's
credit sales.

McGraw-Hill/Irwin
Inc.
9-64

 2009 The McGraw-Hill Companies,
Solutions Manual

PROBLEM 9-42 (CONTINUED)
3.

Purchases
budget:
20x0

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

20x1

Decem
ber

Januar
y

Februa
ry

March

First
Quarter

$560,0
00

$616,
000

$677,6
00

$745,3
60  

$2,038,9
60   


308,00
0


338,8
00


372,68
0


372,68
0*

  
372,680†

$868,0
00

$954, $1,050, $1,118, $2,411,6
800
280
040  
40   

††

280,0
00

$588,0
00


308,0
00
$646,
800


338,80
0
$711,4
80


372,68
0
$745,3
60

  


308,000
**
$2,103,6
40   

*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.
50% x $560,000 (where $560,000 = December cost of
goods sold = December sales of $800,000 x 70%)
††

McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e

 2009 The McGraw-Hill Companies,
9-65

....PROBLEM 9-42 (CONTINUED) 4... 768 $611. Solutions Manual ...800     9..8 88 1.. Advertising and promotion...128 $126....expenses Total cash disbursements McGraw-Hill/Irwin Inc.00 126....... $809..8 388... $  648 417...64 8 10.00 0 42.... Cash disbursements budget: 20x1 Januar Februa March y ry Inventory purchases: Cash payments for purchases during the current month*. $672...009.456 352.08 00 0 426. Cash payments for purchases during the preceding month†........5 720 92 $298. Total cash payments for inventory purchases.........000 0 42.000 0 -030...000 0 32........000 32..800 $ $ 42...427.. Administrative salaries.....680 $154.. $136....000 $ 42...800     29.000 42...1 320 52 -0   10......... 032 $2..00 96.00 0 32... 9-66 First Quarter $258... 224 $ 42... Property taxes**.... Other expenses: Sales salaries..167..928 $851.....00 0 30..... Total cash payments for other ...000 -010.4 800 80 $766...00 0 -0    8.. Sales commissions. $2.... $284........00 126..6 520 72 $725. Interest on bonds**..... 680 152  2009 The McGraw-Hill Companies... $ 144 841..

**Bond interest is paid every six months. on February 28 and August 31. on January 31 and July 31.*40% of current month's purchases [see requirement (3)]. † 60% of the prior month's purchases [see requirement (3)]. Managerial Accounting. McGraw-Hill/Irwin Inc. Property taxes also are paid every six months. 9-67 . 8/e  2009 The McGraw-Hill Companies.

$ $ $ (2)].....908 30.......000)   (100.00 0) (5..092 )     70.. 152) $ 306.....908  2009 The McGraw-Hill Companies.....1 (851.0 00) Change in cash balance during first quarter..... 200..680 99.. 1/1/x1..00 0 Purchase of equipment.. (200....7 operations. 9-68 First Quarter $2...... Cash balance...........00 908...00 0) (200........PROBLEM 9-42 (CONTINUED) 5........ 060 (2.......60 999...000 (250.46 0 0 0 Cash disbursements [from req..000 (1/2/x1)..00 0) Repayment of bank loan (3/31/x1).... 826..0 00) Interest on bank loan*....... (100..3 (809. Cash balance.000 ) Payment of dividends........ Solutions Manual ..448 80 Sale of marketable securities 30...00 0) $  (18....734.... Summary cash budget: 20x1 January Februa March ry Cash receipts [from req.... 59...........427....... (250. (766..... (5...................... (4)]......000 $  51.000 200..... 3/31/x1.6 20) 52) 80) Change in cash balance during period due to $  $   $147.. Proceeds from bank loan (1/2/x1)..... McGraw-Hill/Irwin Inc.....

..... Cash available..... Analysis of short-term financing needs: Projected cash balance as of December 31........... Less: Minimum cash balance.......000    Required short-term borrowing................ Managerial Accounting.....000 6........000   $  20... Less: Cost of investment in equipment......*$200....000      250................ Cash available for equipment purchases................................000   $  50.... $  70............ 9-69 .... 8/e $(200.000      50.0 00)  2009 The McGraw-Hill Companies.......... Projected proceeds from sale of marketable securities..........000       30.............. McGraw-Hill/Irwin Inc......... 20x0....000 × 10% per year × 1/4 year = $5...........................

.. Retained earnings......................................... $126......... 12/31/x0.... Sales commissions...... 8............................000 126..312   100................................ GLOBAL ELECTRONICS COMPANY BUDGETED INCOME STATEMENT FOR THE FIRST QUARTER OF 20X1 Sales revenue................ Solutions Manual ......912................. 9-70 $ 215............... McGraw-Hill/Irwin Inc.... Administrative salaries.............................. Selling and administrative expenses: Sales salaries.......................... Property taxes. Total selling and administrative expenses..................000 5... $2.128 96.......................................... Add: Net income.....000 $ 436..........................312  2009 The McGraw-Hill Companies................. Net income....400    552.........000 321.....038.... Interest on bonds......000 15........................PROBLEM 9-42 (CONTINUED) 7..............528 $  321..840 Less: Cost of goods sold................. 800   2....00 0 29...... Deduct: Dividends....000 150.................9 60 $  873.... Gross margin........... Advertising and promotion............................................... Depreciation.......... 3/31/x1......... Interest on short-term bank loan.000   5.312 GLOBAL ELECTRONICS COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE FIRST QUARTER OF 20X1 Retained earnings....................

...740 372............000..... Accounts receivable*..........740 $1...... Total cash collections from credit sales [(req.......... † Buildings and equipment (net)... McGraw-Hill/Irwin Inc.000 2............352................................ 12/31/x0....... due in 20x6)..........................60 0 (2....216 10...................... Cost of equipment acquired..... Accounts receivable........3 28 $  447.. 3/31/x1.............. Bonds payable (10%................................... Managerial Accounting..................................................495.........495.. 9-71 ..... Inventory......252.............. 20X1 Cash..... (2)] ($218......PROBLEM 9-42 (CONTINUED) 9........460 + $1....000 1...... 12/31/x0..005.................................. Property taxes payable.. Depreciation expense for first quarter.............. (1)]................312 $2......................00 0    436...680 1......908 718. GLOBAL ELECTRONICS COMPANY BUDGETED BALANCE SHEET MARCH 31. Accounts payable**...................000  ) (150.................... Bond interest payable.........787.... 8/e $   51...... *Accounts receivable...184.................. Sales on account [req............................. Buildings and equipment (net of accumulated depreciation)†..........3 28 $ 540. Total assets.................................................... Retained earnings......800 600.... Total liabilities and stockholders' equity......................................0 00 250....400)..................0 00 $2.................................... Common Stock......86) 0 $  718..000  2009 The McGraw-Hill Companies......000 1................

$1.................800 2.. (3)]...........216 Purchases [req... (4)]......22) 4 $ 447... 3/31/x1................352...................... $ 352......Buildings and equipment (net)...64 0 (2.. Solutions Manual ......... Accounts payable... 3/31/x1..... McGraw-Hill/Irwin Inc.. 12/31/x0.....103.. 9-72  2009 The McGraw-Hill Companies..........0 00 **Accounts payable.... Cash payments for purchases [req...............009........

8/e  2009 The McGraw-Hill Companies. budget for discretionary use. because the participants are close to daily operations. The division manager holds Managers should be involved back a percentage of each in the revision of budgets. . The arbitrary revision of The contingency budget approved budgets defeats the should be separate. . over and participatory process. Managerial Accounting. . along with recommendations of how the deficiencies can be corrected: Deficiencies Recommendations The setting of constraints on fixed expenditures includes uncontrollable fixed costs. however. Rewards should be based on meeting budget and/or organizational goals or objectives.Improved communication and group cohesiveness.A sense of commitment and willingness to be held accountable for the budget. 2.Goals that are more realistic and acceptable. above each department’s original submission.SOLUTIONS TO CASES CASE 9-43 (35 MINUTES) 1. Some of the operational and behavioral benefits that are generally attributed to a participatory budgeting process are as follows: . thereby mitigating the positive effects of participatory budgeting. McGraw-Hill/Irwin Inc.Utilization of the best knowledge of activities in a specific area. Four deficiencies in Jack Riley’s participatory policy for planning and performance evaluation. Evaluation based on budget Divisional constraints could be performance must be communicated at a budget accompanied with intrinsic “kick-off” meeting. Managers could submit a budget with programs at different levels of funding. 9-73 .

rewards. McGraw-Hill/Irwin Inc. 9-74 individual limits of controllable expenses should be set by each manager.  2009 The McGraw-Hill Companies. Solutions Manual .

Triple-F Health Club should be better able to plan its cash receipts with the new membership plan and fee structure. 8/e  2009 The McGraw-Hill Companies. The hourly court fees. McGraw-Hill/Irwin Inc. a.CASE 9-44 (60 MINUTES) 1. 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. Yes. prepaid membership fee becomes the only factor affecting cash receipts. In addition. There would be only a one-time cash receipt rather than multiple transactions. The collection and billing function is also simplified with the new membership plan and fee structure. Because Triple-F's cash flows should be more predictable. Financial analyses conducted by Triple F’s management could include a forecast of projected cash inflows and outflows by months. an income statement including interest revenue and expense. 2. and a cash management plan for excess cash or cash shortages. which were dependent upon a variable that could fluctuate daily. a cost-volumeprofit analysis. 3. are eliminated. 9-75 . Managerial Accounting. The cash flows should be more predictable and certain because the large. management should be better able to plan for and control cash disbursements. Factors that 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.

.. $1... $1.00 0 735.. $1.000 70.100... $ 440.00 0 810.. Solutions Manual .350.00 0 885.500.000 ×      $10 ×      $10 ×      $10 ×      $10 x      $10 250.600....00 000 0 40..0 00 $640. S frame sales revenue. $1..650...000 60.150. 9-76  2009 The McGraw-Hill Companies..000 55.....0 0 00 *40% of total sales...000 60..CASE 9-45 (120 MINUTES) 1.000 55.00 0 $ 490.00 0 210.00 0 $  825.000 50.00 0 $590. 20x4 4th Quarte r 2nd Quarte r 20x5 3rd Quarte r 1st Quarte r 4th Quarte r Entire Year 50.260..000 65. L frame unit sales....00 0 $ 540.00 0 $  600...00 000 0 Total sales revenue. 700. 000 000 000 000 000 000 Cash sales*. 00 000 660..00 0 ×      $10 $ 500...00 0 $  675. L frame sales revenue.00 0 $  550.475.000 45.. × S sales price.0 $2.00 0 ×      $15 $  $3.00 3.000 ×      $15 ×      $15 ×      $15 ×      $15 ×      $15 $ 600. Sales budget: S frame unit sales.00 0 $  750.. McGraw-Hill/Irwin Inc..390. $5.00 0 960...225. Sales on account†...00 0 $   $2. 900.00 0 $  650....... $1.... × L sales price..

8/e  2009 The McGraw-Hill Companies.† 60% of total sales. 9-77 . McGraw-Hill/Irwin Inc. Managerial Accounting.

CASE 9-45 (CONTINUED) 2.00 648.335.......00 147.. .. 9-78  2009 The McGraw-Hill Companies.0 current 0 0 0 0 00 quarter*. † 20% of previous quarter's credit sales...00 177. McGraw-Hill/Irwin Inc. 000 000 000 000 000 *80% of current quarter's credit sales.00 0 2nd Quarte r $ 540.... 1st Quarte r $  490. $1.......00 0 20x5 3rd Quarte r $ 590..00 000 0 Cash collections from credit sales made during 588.00 162.00 618. 640.... $1... Cash collections from credit sales made during                previous 132..210.. $1. 0 0 0 0 0 Total cash receipts.00 0 4th Entire Quarte Year r $ $2. $1...260..590.460....00 768..00 2.712. Solutions Manual ...... Cash receipts budget: Cash sales... $5.00 † quarter .00 708.....585.

.00 0 0 0    9..00 0 61..00 0 0 0 55..00 0 50.00 61.00 0 13. 49. 40.000 8.00 0 0 0 250.CASE 9-45 (CONTINUED) 3 ..00 0 214.000 inventory...00 0 Add: Desired ending 9.. ..00 85...00 13.00 0 73.00 0 73.00 0 0 0   15.00 70. Managerial Accounting. 0 Total units needed Less: Expected beginning inventory..00 0 61....00 11.00 0 Add: Desired ending 11... L frames: Sales (in units)..00 55...00 12.0 00 265...0 00 254... ...... 000 12.00 0 11.00 66...00 0 0 0 210...00 0    9.0 00 10..00 produced.00 0 0 0 Units to be 51...00 15. 8/e 46....00 71.00 produced.. 9-79 . Production budget: 20x4 4th Quart er 1st Quart er 2nd Quart er 20x5 3rd 4th Quart Quart er er Entir e Year 55.. 0 McGraw-Hill/Irwin Inc.00 0 67... ..00 67.. 50..00 0 12......00 inventory.0 00 223.000 Units to be 41. .00 14...00 65.00 0 0 0 61......00 0 0   13.00 13. Total units needed Less: Expected beginning inventory... 000 45. 000 10.00 14.. 0 56.00 79.. 000 10....00 60.00 0 11.. 000 S frames: Sales (in units).. 000  2009 The McGraw-Hill Companies.00 56.00 0 60.00 12.00 0 0 0   11.00 0 0 0 51..

0 00 325.0 275. $1.0 00    642.. Needed for L frame production..000 0 56..0 00   142..)..00 0 61.00 0 41.00 0 56.0 00 00 ×      $1 ×      $1 ×      $1 ×      $1 ×      $1 $225..00 00 0   168. × Metal quantity per unit (ft.0 00     112..00 0 71..00 00 0   132....00 0 ×       3 ×       3 ×       3 ×       3 ×       3 ×        3   123..0 00     138. Needed for S frame production.. Cost of metal strips to be purchased: 20x4 4th Quart er 1st Quart er 51...150.... 9-80  2009 The McGraw-Hill Companies.00 0 254.150.... 000 $325..00 0 46. $275..0 122...0 000 00 $300. × Price per foot. McGraw-Hill/Irwin Inc.. 000 000 2nd Quarte r 20x5     3rd 4th Quart Quart er er Entire Year ×       $1 *Direct-material budget continued on next page..00 51.....0 1.... × Metal quantity per unit (ft..0 00 250.00 0 225.).00 0 ×       2 ×       2 ×       2 ×       2 ×       2 ×        2   102..... L frames to be produced.. Total metal needed for production.0 00   183. Solutions Manual ...... to be purchased (ft..000 0 66...... Direct-material budget:* Metal strips: S frames to be produced... 000 $250.0 153..00 61.).00 0 214...........00 00 0 300..0 00    508......CASE 9-45 (CONTINUED) 4 ...

.650     10..150 180..... Needed for L frame production.650 0 54....00 0 46. ×     .50 0 48.50 0       23.40 0 58.00 0 2nd Quarte r 5 3rd Quart er 4th Quart er Entire Year 56.400 40.650     7. 8/e 20x 4th Quart er 1st Quart er 51..2 5 ×    .. 5 ×     ...00 0 254..650      7.00 40. Managerial Accounting.65 0 45..400     8. Less: Expected beginning inventory.50 0     7....75 0       14. McGraw-Hill/Irwin Inc.25 0 170... .2 5 ×      ....00 0 33.15 0    10...900     9..00 51. Total glass needed for production (sheets). ×       ..00 15.400     8.. L frames to be produced...2 5 ×    ....00 25. Needed for S frame production..75 0     63.00 0 ×    .. 25    12...... 5 5    20. 9-81 .90 0  2009 The McGraw-Hill Companies.25 0 37.5 5 ×     ...500 0    28.00 0 ×     ..00 0 71.. × Glass quantity per unit (sheets)..250 0    16.00 0 214.. 5 ×     ...15 49..65 0     6.00 0    30.00 0 61.500 41.CASE 9-45 (CONTINUED) 20x4 Glass sheets: S frames to be produced.400     8.2 5 ×    . × Glass quantity per unit (sheets)...150     8.00 61. Add: Desired ending inventory.000 0 66. .....2 5 ×    . Total glass needs...750 0 44.000 0 56.900     9.50 0    17.50 0    107...

. $332.500 0 45. $607..Glass to be purchased. 000 $717. × Price per glass sheet.. 000 $392..00 0 173.388.538...0 000 00 $662........ Solutions Manual .75 41. 9-82 34. $2..25 0 49. $1... Cost of glass to be purchased..00 0 37... Total rawmaterial purchases (metal and glass).. 000 $552... 000 000  2009 The McGraw-Hill Companies.. McGraw-Hill/Irwin Inc. 000 $302..50 0 ×      $8 ×      $8 ×      $8 ×      $8 ×      $8 ×       $8 $272.0 000 00 $362.. 000 000 $497...

... 9-83 .........00 0 ×       ..00 651....00 000 0 102.200 13.............00 244.CASE 9-45 (CONTINUED) 5.000 0 132.200 12. 000 $  $  596.030...... frame. $20 Total cash payments for $204..00 0 $  936........... 600 Cash payments for purchases during the preceding quarter**..00 122...00 0 × Direct-labor hours per ×      . 706.600 0 $ $2....40 0        110..... 8/e 2nd Quarte r 20× 5 3rd Quarter    463......... 1 Direct-labor hours to be 10..20 used...1 ×       .40 0 $541.. † quarter .....200 46..... 573.. 0 × Rate per directlabor ×    hour... Total cash payments for raw-material purchases... direct labor....... 4th Quarte r Entire Year $ $ 485..60 400 0   99.. Managerial Accounting.60 529..........00 0 468.. Cash disbursements budget:* 1st Quart er Raw-material purchases: Cash payments for purchases during the current $441.....800 ×      $20 ×      $20 ×      $20 ×      $20 $  $  224. 000 McGraw-Hill/Irwin Inc. 1 ×       .1 ×       . Direct labor: Frames produced (S and L)..60 0  2009 The McGraw-Hill Companies....000 0 $  264....000 0 $   $2..494.1 11...40 121..0 00 112....400 0    132.......

Solutions Manual . †  80% of current quarter’s purchases **20% of previous quarter’s purchases McGraw-Hill/Irwin Inc.*Cash disbursements budget continued on next page. 9-84  2009 The McGraw-Hill Companies.

.000     46... Total cash payments for manufacturing overhead....20 0    154...000 $ 112..00 0 0 0 $927. McGraw-Hill/Irwin Inc..00 0 $    11......012. 9-85 ..00 400.200 $    $    12. $4.200 13....800     36.. $1..800 44..CASE 9-45 (CONTINUED) Manufacturing overhead: Indirect material..000 102. $1...097....800 52.000     41.. Managerial Accounting. Total cash disbursements..00 0 $   $ 92...182....00 100.000 100..20 0 40... 8/e 1st Quart er 2nd Quarte r 3rd Quarter 4th Quarte r Entire Year $ 10..218.800 48..... 000 $ $ $ $ 100... Indirect labor.000 187.. Cash payments for selling and administrative expenses. 000 000 000 000 000  2009 The McGraw-Hill Companies..00 0 $ 388.. Other...00 0 $ 82.80 0    31.....00 0 $100... $1..200 $   46...

CASE 9-45 (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...

20x5
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/x5)................
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
9-86

 2009 The McGraw-Hill Companies, Inc.
Solutions Manual

(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
Managerial Accounting, 8/e

  
   

107,750 95,000  

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

 2009 The McGraw-Hill Companies, Inc.
9-87

$ 
204,500

CASE 9-45 (CONTINUED)
7.

PHOTO ARTISTRY COMPANY
BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X5

Direct material:
Raw-material inventory, 1/1/x5...........

$   
59,200   

2,538,00
0   
$2,597,2
00   

Add: Purchases of raw material [req.
(4)]
Raw material available for use............
Deduct: Raw-material inventory,
12/31/x5
([req. (4)] 10,400 × $8)...................
Raw material used

   
83,200   
$2,514,0
00   
936,000 

Direct labor [req. (5)].............................

  

Manufacturing overhead:
Indirect material................................

$
46,800
Indirect labor..................................... 187,20
0
Other overhead.................................. 154,00
0
Depreciation......................................
  
80,000
Total manufacturing overhead............

Cost of goods manufactured..................
Add: Finished-goods inventory, 1/1/x5....

__ *
468,000
$3,918,0 †
00  
  
167,000 
  

Cost of goods available for sale..............
Deduct: Finished-goods inventory,
12/31/x5................................................
Cost of goods sold.................................
McGraw-Hill/Irwin
Inc.
9-88

$4,085,0
00   
  
235,000
$3,850,0

**

††

 2009 The McGraw-Hill Companies,
Solutions Manual

..00 0 × Direct-labor hours per frame........ 8/e  2009 The McGraw-Hill Companies.. †† See next page.......... † McGraw-Hill/Irwin Inc................. 46.800 × Predetermined overhead rate per ×    hour.................. $10 Total manufacturing overhead applied $468..... 468.... The applied manufacturing overhead may be verified independently as follows: Total number of frames produced... budgeted and applied manufacturing overhead are equal..... 1 Total direct-labor hours. ×      . **See next page..00 *In the budget......... 9-89 ........ Managerial Accounting..........0 00 See next page.

......... McGraw-Hill/Irwin Inc....000 8.750.... S L Frames Frames 250. × Manufacturing cost per unit.....000 ×       ×      $7 $10 $1.. 9-90  2009 The McGraw-Hill Companies..918...000 ×        ×       $7 $10 $  $  105.... Total cost of goods sold (S and L).............000 210.............CASE 9-45 (CONTINUED) The cost of goods manufactured may be verified independently as follows: † Frames produced............... S L Frames Frames 254.... Grand total (S frames and L frames)...000 13. $2.... Total cost of ending inventory (S and L) S L Frames Frames 15....... 000 000 $3.000 The cost of goods sold may be verified independently as follows: †† Frames sold........100... Manufacturing cost per unit...... 000 000 $3.000 ×       ×      $7 $10 $1. $2...........................000 130..... Solutions Manual ....778........... Cost of ending inventory. Manufacturing cost per unit....................000 $235.....000 214.............140.. Cost of goods sold............. Total manufacturing cost......................000 **The finished-goods inventory on 12/31/x5 may be verified independently as follows: Projected inventory on 12/31/x5...850....

. McGraw-Hill/Irwin Inc... 000 Less: Cost of goods sold...........650......... 8/e $400............. 9-91 .......PHOTO ARTISTRY COMPANY BUDGETED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31... Managerial Accounting....... ..............500 $1.............800.. Interest expense........00 0    62..850.337................ 500  2009 The McGraw-Hill Companies.................500    462.0 00 $1.. $5............... Gross margin.......... 20X5 Sales revenue........ Net income........... Selling and administrative expenses....... 000   3.... .....

............. Accounts receivable*....... Finished goods.................. 12/31/x5.................................. Common stock...........920.........................400 5.. PHOTO ARTISTRY COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31................. 9-92 $  204........491..............................634..........................................491.............000 $4.. Total liabilities and stockholders' equity. Total assets............. Inventory: Raw material†.......000 83.. Solutions Manual ....................500 192.......634... Add: Net income........ 20X5 Retained earnings.....0 00 $9.. Retained earnings................................. Accounts payable††.CASE 9-45 (CONTINUED) 9... Deduct: Dividends............................................ McGraw-Hill/Irwin Inc...............337.............200 235.......................5 00    200........ 700 $  143..................... $3........................ Plant and equipment (net of accumulated depreciation)**............................................... 300 PHOTO ARTISTRY COMPANY BUDGETED BALANCE SHEET DECEMBER 31....000...................... 20X5 Cash........000   8. Retained earnings.....3 00 $9...... 700  2009 The McGraw-Hill Companies.................353.. 800 1................0 00   4..................... 1 0.... 12/31/x4.............

000 × 20% McGraw-Hill/Irwin Inc.000 + $1.*Fourth-quarter sales on account × 20% = $960.400 units × $8 **$8. 9-93 .000.000 × 20% † 10. Managerial Accounting. 8/e  2009 The McGraw-Hill Companies.000.000 †† Fourth-quarter purchases on account × 20% = $717.000 – $80.

This situation contains an unfortunate array of elements. the controller could provide supporting documentation with the budget to validate the estimates and to discourage top corporate managers from cutting the expense budget. and thus may cut budgeted expenses specifically to provide a ‘stretch’ goal for the division. inaccurate information creates a poor basis for cost management. If there is doubt at corporate level about the accuracy of the forecasts. 9-94  2009 The McGraw-Hill Companies. the controller should make every effort to provide accurate cost forecasts for the budgeting purpose. given the situation. They may be more focused on the use of the budget data to drive incentives than as accurate cost control tools.FOCUS ON ETHICS (See page 376 in the text. and budgets are cut by top management because they believe the submitted budget has been padded by lower-level managers.) Is padding the budget unethical? Some accountants argue that budget padding is a vicious cycle: budgets are padded by lower-level managers because they believe top management will cut the budget. top management may believe that the budget has been padded by the division. In cutting expenses. To do otherwise would be to compromise his or her own integrity and authority within the organization. then it should be dispelled. McGraw-Hill/Irwin Inc. and thus believe they are handing back a more accurate expense budget than was submitted to them. Solutions Manual . since it is hindering transparent cost management. It is regrettable that the budget process is intermingled with the employee incentive scheme via the bonus system in this way. No matter what the situation. Alternatively. then the divisional team could establish these for themselves. which raise serious obstacles to effective cost management. However. possibly based on previous budget submissions. there are several possible scenarios for the division controller to deal with. Further. top corporate managers may be revealing one of two things. For example. If greater ‘stretch’ goals are required by top management.