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.

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

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

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

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

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

McGraw-Hill/Irwin Inc.(d) Production (e) Distribution and customer service It is important to budget these costs as early as possible in order to ensure that the revenue a product generates over its life cycle will cover all of the costs to be incurred. A large portion of a product's life-cycle costs will be committed well before they are actually incurred. 8/e  2009 The McGraw-Hill Companies. Managerial Accounting. 9-9 .

.........................305 × 80%) (44. June 30......000 × (42............... 120....................000 42..........SOLUTIONS TO EXERCISES EXERCISE 9-21 (20 MINUTES) 1........................... August...100 × Sales in units: 2............................. Raw material required for production in third quarter (in pounds).044 163........... Add: Desired ending raw-material inventory.................. July....05) 44............................................000 × Planned Ending Inventory (in units) 32............. Add: Desired ending inventory.100 126......................100 1.....000 (40...000 131...... The total required production is 131..............000 42............000    120....... Solutions Manual .....144 32.........144 Assumed production during third quarter (in units)....... June 30...... Total for third quarter.........05) 46................ computed as follows: Budgeted Sales (in units) June July August September October 40.......................... 9-10 ×        4 480....... September....... Subtotal......................144 units... Raw-material requirements per unit of product (in pounds)...........000 1......................................000 × 80%) 37........... Deduct: Desired ending inventory...............000 × 25%)..................................000     2009 The McGraw-Hill Companies...000 McGraw-Hill/Irwin Inc.100 37.044 (46...000 600. Total required production.... 40.........000 44.... Deduct: Ending raw-material inventory..... September 30 (480..........................305 1....................................... Subtotal... September 30...05) (given) (40.........

................Raw material to be purchased during third quarter (in pounds).....000 460............ McGraw-Hill/Irwin Inc.40 $ 644............ Managerial Accounting........ 9-11 ........ Total raw-material purchases during third quarter............................ 8/e 140......000 ×     $1.............000  2009 The McGraw-Hill Companies...................... Cost per pound of raw material.......

..0 $157..00 – 0 212..0 00  2009 The McGraw-Hill Companies..........500 148.... Solutions Manual . Cash collections in October: Month of Sale July..........................000 × 15% 157.........750 175........ 2.......... Amount Collected in October $150...............500 175........7 50 Decem ber $ 22........000 200.EXERCISE 9-22 (25 MINUTES) 1..000 × $ 6.500 was not needed to solve the exercise.......................... $122.............. October.7 50 $575.....000 × 70% $211..................... McGraw-Hill/Irwin Inc...... Total collections in fourth quarter from credit sales in fourth quarter...... Amount Collected Month of Sale October.000 4%   17.. 500 Novem ber $ 33.............. Total. 9-12 Credit Sales Octob er $225............50 – 0 $157.7 50 $208.... Total.. August.......... 00 500 250.. November..........................500 225...00 0 – 208. Cash collections in fourth quarter from credit sales in fourth quarter............ September...000 × 10% 30.........500 37...... December......000 Notice that the amount of sales on account in June.

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. Managerial Accounting.3. 8/e  2009 The McGraw-Hill Companies. 9-13 .

..........EXERCISE 9-23 (20 MINUTES) 1...4) e 2..000 euros  2009 The McGraw-Hill Companies......000 × .... 000 = $135.. Payments of accounts payable during 20x1.......... $ 120............000d $ 228......000 × .....000 × ..000b From sales on account..000e $ 252......4) $117.......000 108.... 12/31/x1.. Total cash receipts. McGraw-Hill/Irwin Inc..000 × 2 $120.6) + ($90..5 b $ 90..000 × .. Accounts payable. July August Septemb er Sales..000c $270....00 0a $ 135.. 9-14 600... Accounts payable... .. 000 = $240.........000 c d $108.............000 euros 2.. Purchases of goods and services on account during 20x1......6) + ($90...000 a $180.. $240..200...00 0 Cash receipts: From cash sales... $270.000 117.000 $ = $180..........000 102..000 × ....000 × ....... Solutions Manual .... 000 = ($120... 000 = ($135..5 90...... 12/31/x0...000 euros  (2...000) euros* 800.00 0 $ 192..400...........

....*2.... $ Retained earnings.000 0 $1....700......................... 12/31/x1........0 00y)   2.... Accounts receivable.. Accounts receivable...... Retained earnings.........537.........837........ 1.......    4........... 12/31/x0.... Accumulated depreciation.... Depreciation expense during 20x1.. 9-15 ........500 McGraw-Hill/Irwin Inc..... 12/31/x1..900.................... 12/31/x0...000 euros – 800.000 75. $1........000 euros = 600...........................0 00y Sales on account during 20x1................000 480...500 300..... 8/e $ 405......200......000 euros 3..000  2009 The McGraw-Hill Companies..300.... 000y    (3.......................... 12/31/x0........000 euros + 2..............400. 12/31/x1. Collections of accounts receivable during 20x1....... Accumulated depreciation..500... 5................ Managerial Accounting..00 0y 4....... Net income for 20x1..... Dividends paid in 20x1.

.....................000.150..................... Add: Desired ending inventory on December 31...0 00 3......... 2...........................070.000 finished units: Raw material required for production (3......000 × 2).... Solutions Manual .. Production (in units) required for the year: Sales for the year..0 00 7............................. 3..500......000 560.. 9-16 7.....................0 00 315..................EXERCISE 9-24 (15 MINUTES) 1........ Deduct: Beginning finished-goods inventory on January 1....0 00  2009 The McGraw-Hill Companies....... Required production during the year........0 00 350..360.................... Required raw-material purchases during the year McGraw-Hill/Irwin Inc.......000 245........... assuming production of 3....500.... ...... Deduct: Beginning inventory on January 1.. Add: Desired ending finished-goods inventory on December 31.............0 00 Purchases of raw material (in units)..........

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

000 45...S........ Collections in December $400... Total operating expenses...000 440.... Depreciation ($432. students have expressed surprise at the proportion of the U.... Income before taxes................200   90. December... Solutions Manual ..000 $ 20..00 0 330.00 0 Less: Cost of goods sold (75% of sales) Gross margin (25% of sales)........ Less:.000  2009 The McGraw-Hill Companies...Operating expenses: Bad debts expense (2% of sales)...... 2 .......... interest expense.....000 Budgeted income (loss) for December: Sales revenue..............................EXERCISE 9-26 (30 MINUTES) Answers will vary widely...................... $440................. McGraw-Hill/Irwin Inc. Total cash collections........000/12).....800 36..000 × $152................. In the past.....000 × 60% $416.......... Other expenses........00 0 $110......... depending on the governmental unit selected and the budgetary items on which the student focuses............................... EXERCISE 9-27 (30 MINUTES) 1 ..000 38%  264.g..... 9-18 $  8...... Social Security and Medicare). federal budget that goes to entitlement programs (e. and the military. Budgeted cash collections for December: Month of Sale November.

. 8/e  2009 The McGraw-Hill Companies.000. $306.. 9-19 .0 00 400....00 0 Cost of Goods Sold $330.. its cost of goods sold must be 75 percent of sales......000 20% 300.... Sales $440..00 0 Amount Purchased in December $ $330.EXERCISE 9-27 (CONTINUED) 3 . Month December. Projected balance in accounts payable on December 31: The December 31 balance in accounts payable will be equal to December's purchases of merchandise.000 Total December purchases.000 × 80% 240.0 00 300.. McGraw-Hill/Irwin Inc. Since the store's gross margin is 25 percent of sales. the December 31 balance in accounts payable will be $306. Managerial Accounting.. January....00 0 Therefore.000 × 66.

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

000 × ...250 14.) Total direct professional labor...25 × . Hourly rate for dental associates..000/12 = 4..600 hours 2...000 00 $261..000 × 1 hr..).....0 $320.. Direct professional labor budget for the month of June: Office visits per month = 48..2 50 $318. Half-hour visits (80% × 4... Managerial Accounting........00 $260.........000 Professional services in June: One-hour visits (20% × 4. Usually there is uncertainty about these assumptions..000 = $200.. Operational plans depend on various assumptions.... Total direct professional labor cost.25 0 *$14...80 2 ..... EXERCISE 9-30 (25 MINUTES) 1 .......000 × ...... 20x5 From December sales on account... 9-21 .EXERCISE 9-29 (20 MINUTES) 1.......00 0 00 0 Cash receipts in January. Total cash receipts.00 240..25 × . $  14...0   64....15 † $150.. Financial planning helps management answer "what if" questions about how the budget will look under various sets of assumptions............000* * $ 204...0 00†   40.....250 195...00 0  2009 The McGraw-Hill Companies. McGraw-Hill/Irwin Inc.250 = $380...000 = $200..250* 150... 8/e 800 hours    1.....000 × . From January cash sales.000 × 1/2 hr.. such as sales demand or inflation rates.... From January sales on account.000 0 52..250 $  $  14...75 **$40...400 hours ×    $ 90 $216... Total Sales in January 20x5 $200..

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

00 0 3.....000 × 20%)...... Total billings for one-hour visits....... Cash collections during June: Half-hour visits (4..... Billing rate............ Total billings for half-hour visits......50 per hour)............. Overhead and administrative expense budget for June: Patient registration and records (4..... Total billings during month............. Total collections in June ($27..............200 × $60 $192..................................... $30...... One-hour visits (4................. × 10% $ 27........600 × 90% $248............ 18......000 84.................600 + $248.......... 9-23 ...00 0 Percentage of month's billings collected during June......................00 0 0 800 800 × $105 × $105 $ $84.000 $276.......... $12....................................................... Collections during June.......00 per visit). May 3..000 Other overhead and administrative expenses (2...........400)...............000 McGraw-Hill/Irwin Inc........000 visits × $3....... 8/e  2009 The McGraw-Hill Companies..........00 $192.....EXERCISE 9-30 (CONTINUED) 2 ..............400 hours × $7............ Managerial Accounting....40 0 $276.200 × $60 June 3......00 0 $276............. Billing rate...000 Total overhead and administrative expenses .000 × 80%).......

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

....... Managerial Accounting..SOLUTIONS TO PROBLEMS PROBLEM 9-31 (30 MINUTES) 1...... Sale of equipment.........00 0  2009 The McGraw-Hill Companies.......... 000 15..........00 0 Collection of January sales ($450.....000): 60% in February............... Collection of March sales ($555........ 500 324...... 9-25 .. 000 Schedule of cash disbursements: Januar y Payment of accounts payable Payment of January purchases ($270...........................000): 60% in January....00 0 189.000 x 20% .. 000 $157...... 000 $481.............. 30% in February....................... 000 $ 81..... 35% in February.....000): 60% in March ....................000): 70% in January... Payment of February purchases McGraw-Hill/Irwin Inc............ 000 $189......... Januar y 2....... Schedule of cash collections: Collection of accounts receivable: $165.... 000 $537.... 000 $303...... 8/e Febru ary March $ 66........ 35% in March............... Total cash collections ....... March $ 33.. 500 333. Febru ary 270...... Collection of February sales ($540..

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

. 000 348.50 0 537.00 0 -0(45. 9-27 . Total receipts……………………………… …….00 0) (6 00)* $132. Less: Total disbursements…………………… Cash excess (deficiency) before financing… Financing: Borrowing to maintain $60.00 0 $178.000 x 8% x 2/12 McGraw-Hill/Irwin Inc. 900 481.000 $132. 8/e  2009 The McGraw-Hill Companies. 000 $ 15. Managerial Accounting. 900 45. Schedule of cash needs: Beginning cash balance……………………….000 balance. 000 $363. Ending cash balance…………………………… Januar Februar y y March $ 60. 000 $150.90 0 -0-0$150. Subtotal…………………………… ………….PROBLEM 9-31 (CONTINUED) 3. Loan principal repaid……………………… Loan interest paid…………………………..00 0 $541.50 0 363. 900 519.00 0 303. 000 $ 60.50 0 $669. 000 $ 60. 900 * $45.

Deduct: Beginning inventory..............000 0 32.... Employer's social security (at 7%).250 4..........100 16...00 per DLH)†.000 18... 32. BUDGET FOR PRODUCTION AND DIRECT LABOR FOR THE FIRST QUARTER OF 20X1 Sales (units)..0 000 00 $216...400 0 22...... Solutions Manual . Pension contributions ($.... Employee medical insurance ($... Total hours of direct labor time needed. INC..00 60. $272..400 2...600 0 10....000 0 ×       ×    1  .000 16......0 25........... Total needs. 120 56. Units to be produced....50 per DLH)....... $808... Production and direct-labor budgets SHADY SHADES... 9-28 Januar y 20. Workers' compensation insurance ($.0 00 000 00 49.... McGraw-Hill/Irwin Inc..... 000 52...0 00 13..........00 0 ×      1    20..00 55. Direct-labor costs: Wages ($16.00 87.00 0 8... 400 19.....80 per DLH)...00 13.......0 000 00 10. ......5 60  2009 The McGraw-Hill Companies..000 0 25....PROBLEM 9-32 (40 MINUTES) 1.00 0 Month Februa March Quart ry er 24... Direct-labor hours per unit......0 40 15....0 00 000 00 17....... .....00 0 32........700 10.....0 27. 27.5 00 $320.....00 0 32..750 25..75 17........ 000 20.....000 3. 500 50.80 40.000 43.500 6. Add: Ending inventory*...20 per DLH).

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

that would also use the production data include the following: • Direct-material budget • Manufacturing-overhead budget • Cost-of-goods-sold budget Components of the master budget. other than the production budget and the direct-labor budget. other than the production budget and the direct-labor budget. that would also use the direct-labor-hour data include the following: • Manufacturing-overhead budget (for determining the overhead application rate) Components of the master budget. other than the production budget and the direct-labor budget. Solutions Manual . other than the production budget and the direct-labor budget. 9-30  2009 The McGraw-Hill Companies. 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. 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. Use of data throughout the master budget: Components of the master budget.PROBLEM 9-32 (CONTINUED) 2.

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

50 0 $327.600 130..... Deduct: Inventory..600 6....... 530.......00 0 81....... Solutions Manual . Febru ary March Quarter $ 60....800 The company’s conversion cost budget for 20x2 is shown in the following schedule: McGraw-Hill/Irwin Inc.. $957. Manufacturing overhead budget: SHADY SHADES.600 _4.000 76... Total required... 9-32  2009 The McGraw-Hill Companies. Darol Norex 120....... Niagra Chemical Company’s production budget (in gallons) for the three products for 20x2 is calculated as follows: Yarex Sales for 20x2.750 750 PROBLEM 9-33 (40 MINUTES) 1..000 50..000 $48.400 120... Add: Inventory..800 9. Total manufacturing overhead...... material handling.08 × 20x2 sales). Required production in 20x2 2...250 750 $270...000 $ 72.000 00 90... MANUFACTURING OVERHEAD BUDGET FOR THE FIRST QUARTER OF 20X1 Month January Shipping and handling Purchasing...500 210.. 12/31/x2 (.400 _5.....000 50.PROBLEM 9-32 (CONTINUED) 3.000 80...200 4.0 $180......800 79....... and inspection.08 × 20x3 sales)..800 54.00 0 178.......400 85...00 0 $360.500 0 141....00 247....000 _10... 12/31/x1 (.... Other overhead.... INC......

.... Managerial Accounting.... 8.....16).............Conversion hours required: Yarex (120......456 7..504 Conversion cost budget $490.. 9-33 .. Norex (50.800 × ...... 8/e  2009 The McGraw-Hill Companies.... Darol (79........07).920 _8...504 x $20)...10)..200 × ....128 24.....800 × ........ Total hours.... 0 McGraw-Hill/Irwin Inc..08 (24...

..........200 × ....000 gallons....... 55... 804 Deduct: Inventory.. 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.....800 × 1)......... 000 Required purchases (gallons)........10).640 × $5 × 1...........009.640 × .... 640 Add: Required inventory. Solutions Manual .. ……………….... $1.640 × $5)...... Darol (79........... 12/31/x2 20....64 0 Change in conversion cost from McGraw-Hill/Irwin Inc...................PROBLEM 9-33 (CONTINUED) 3........ 440 25. 840 1...2)...... 221.. 800 Norex (50........000 × ......10)...008....... $ 201............ The company should continue using Islin......632 greater than using Islin..... 1/1/x2 (200.............. 9-34  2009 The McGraw-Hill Companies........... Islin (201... (201............. because the cost of using Philin is $152.......5)... 200 Increase in cost of raw material. 201.... 120.......800 × . 20.7)........ 164 Subtotal.804 gallons × $5 $1....... calculated as follows: Change in material cost from substituting Philin for Islin: 20x2 production requirements: Philin (201.................. per gallon)........ 020 4... 400 Subtotal………………………………………………… 201.....209.... 804 Purchases budget (201............ Since the 20x1 usage of Islin is 200............................

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

945 revenue……………………. 180 Tuition-paying 12. x 30 Total credit 372.600 body………………………………. $75 Forecasted tuition $27. ..6 00 x 10 126. Classes to be taught…………………………………. Tuition revenue budget: Current student 12. 12. Students per class……………………………………. 000 ÷ 25 5. Tuition rate per x hour…………………………….04 0 ÷ 5 1. Total student class enrollments to be covered….600 hours………………………………. Less: Tuition-free scholarships………………. Add: 5% increase in student body…………… 600 Total student 12.000 2. Classes per student per year [(15 credit hours ÷ 3 credit hours) x 2 semesters]………………….000 enrollment……………………. Faculty needed……………………………………… … 3. 9-36  2009 The McGraw-Hill Companies. 008 Possible actions might include: • Hire part-time instructors McGraw-Hill/Irwin Inc.420 students………………………… Credit hours per student per year……………. Solutions Manual .PROBLEM 9-34 (25 MINUTES) 1. Classes taught per professor………………………. Faculty needed to cover classes: Total student body…………………………………….

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

....................................200 6.200 1..............300 7..... Less: Projected beginning inventory of McGraw-Hill/Irwin Inc.. Add: Desired ending inventory.......... Add: Desired ending inventory of raw material (board feet).000 1.PROBLEM 9-35 (25 MINUTES) 1. Solutions Manual .........500 8..200 9. Sales budget Sales (in sets)......000 7. 3.... Total requirements....... Sales revenue.000 6........... 9-38 July August 5... July July August 5....500 × × × 10 10 10 52.......000 × $60 6...500 5.000 58. Raw material required per set (board feet)...... Planned production.500 1........300 70.......500 1..........200 6..... Total requirements.........300 Septem ber 7..200 6.......500 6....................000 1......00 0 $360.00 0 Septem ber 7.. Raw material required for production (board feet)... 2.500 Raw-material purchases Planned production (sets).000 5..000 63.000 75....... Sales price per set.500 Septem ber 7.......500 × $60 $450........000 1... August 5....200 6.....300 7.500 83....500  2009 The McGraw-Hill Companies..300 7.........000 × $60 $300....00 0 Production budget (in sets) Sales.. Less: Projected beginning inventory...........

..100 64.. Managerial Accounting...... McGraw-Hill/Irwin Inc...........500 × $........60 $ 31.....60 × $.... 9-39 ........ 8/e 53..300  2009 The McGraw-Hill Companies...raw material (board feet).200 75... Planned purchases of raw material (board feet)........60 × $.. Planned purchases of raw material (dollars)...... Cost per board foot..860 $ 38........520 $ 45...

.80 0 $198. July August 5. ...PROBLEM 9-35 (CONTINUED) 4..800 × $21 6... Planned direct-labor cost. Direct-labor budget Planned production (sets)......... Direct-labor hours per set.300 × 1.25 0 In the electronic version of the solutions manual.... 9-40  2009 The McGraw-Hill Companies.4 50 $236. .450 × $21 Septem ber 7.... 5. Solutions Manual ..5 11. Direct-labor hours required........ press the CTRL key and click on the following link: BUILD A SPREADSHEET McGraw-Hill/Irwin Inc.200 × 1..5 7...250 × $21 $163...5 9...500 × 1. Cost per hour..

4. the company will report revenue of $586.960 X = 9.000 ($78.900 + X .000).500 x 20%). 2. February sales will total 9.500 ($15.960 X – 7. or $78. the December 31 inventory is 1.000 (10. Letting X denote production.000 units ($180.800 units ($196.000 ÷ $20).000 ÷ $20).000 units x $20). January sales total $190.800 x 20%). or 9.PROBLEM 9-36 (30 MINUTES) 1.000 + $114. Sales are collected over a two-month period.500 = 1.000 ($200. Sixty percent of March’s sales will be outstanding. then: 12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory 1.000).560 7.400 ÷ . February sales ($196. 5. 9-41 .000 ($76.4).000 + $114.000 equal 60% of December’s sales. Thus. Since the selling price is $20 per unit.500 units ($190.000 ÷ $20).960 units (9. Dakota Fan collected 40% of February’s sales during February. giving rise to a January 31 inventory of 1. or $120.000 minimum balance less ending cash balance of $11. and March sales ($200. February’s sales total $196.9.000). Since the company expects to sell 10. sales revenue will total $200.500): Cash McGraw-Hill/Irwin Inc. Financing required is $3. December receivables of $108. Managerial Accounting.000 ($108.000 units. 3. Thus. December sales total $180.000). January $  2009 The McGraw-Hill Companies. 8/e balance. thus. 6.000 x 60%). Finished-goods inventories are maintained at 20% of the following month’s sales.000 ÷ .600 = 1.6).400.900 units (9. 40% in the month of sale and 60% in the following month. Dakota Fan sold 9. Combining January sales ($76.000.

50 0 McGraw-Hill/Irwin Inc.50 0 Add: January receipts 184. payments………………………… 000 Cash balance before $ financing………………….. 9-42  2009 The McGraw-Hill Companies. 11. 000 Subtotal…………………………… $206. …………… 500 Less: January 195.000). ($108.1………………………… 22.000 + $76. Solutions Manual .

• Budgets provide a vehicle for resource allocation. Managerial Accounting. 9-43 . • Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the objectives of the entire firm. • The budgeting process communication and coordination. 8/e  2009 The McGraw-Hill Companies. clarify duties to be performed. promotes internal • Budgets provide directions for day-to-day control of operations. McGraw-Hill/Irwin Inc. and assign responsibility for these duties. • Budgets help in measuring performance and providing incentives.PROBLEM 9-37 (45 MINUTES) 1. The benefits that can be derived from implementing a budgeting system include the following: • The preparation of budgets forces management to plan ahead and to establish goals and objectives that can be quantified.

a. Solutions Manual . 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.PROBLEM 9-37 (CONTINUED) 2. Schedule Sales Budget b. 9-44  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. 8/e  2009 The McGraw-Hill Companies. Managerial Accounting.

January 1.........000 130.....000 465............000 20... Total requirements..000  36........000 $15.......400 ....600 .. Heavy coils (41..000  2009 The McGraw-Hill Companies........000 units projected to be produced)......... 20x3......000 units projected to be produced)......000  7.. Add: Desired inventories.....000 41........... Production requirements. Total Raw-material purchases budget (in quantities) for 20x3: Raw Material S Cop heet per Platfo M W rms etal ire Light coils (65..000 $190 $ 7. Add: Desired inventories............000 41........ Production required (units)....000 49................000 __ 205....................................... 3 .. Units 60.. 9-46 260...800....000  32.. 40.. Production budget (in units) for 20x3: Projected sales...............000 Heavy Coils 40...000 85... Deduct: Expected inventories.....PROBLEM 9-38 (60 MINUTES) 1..000 41.........000 Price $130 Heavy coils......... Sales budget for 20x3: Light coils. McGraw-Hill/Irwin Inc........................000 65..000 253.....000  8...........000 Projected sales....000 123... 20x3.............0 00 7...000  9...... Solutions Manual ................000 Light Coils 60.. 2 ....................000 25.......................... December 31.

000 256......... Managerial Accounting.000  29........... 9-47 .... Purchase requirements (units).. Total requirements.......000  6....... Deduct: Expected inventories..December 31....000  2009 The McGraw-Hill Companies... January 1.... 8/e 501. McGraw-Hill/Irwin Inc.. 20x3...000  32.000 48....000 42..... 20x3.000 285.......000 469.......

....................900....00 848.920.....000 $10.....000 inspection.000 6 ___252.......0 00 4.0 00 Manufacturing overhead budget for 20x3: Cost Driver Quantity Purchasing and material 725........ Project ed Produc tion (units) 65........................ 256... Raw-material purchases budget for 20x3: Raw Material Raw Material Required (units) Sheet metal.......000 Total..PROBLEM 9-38 (CONTINUED) 4 .316..... Anticipa ted Purchas e Price $16 Hours per Unit 4 6 Total Hour s Rate 260...0 00 $8.......a Depreciation.............00 0 Direct-labor budget for 20x3: Light coils.....000 Heavy coils........... Solutions Manual ...50 $362....0 00 Platforms...0 00 246. 41......... 42........... 469..... 9-48 Cost Driver Rate Budgete d Cost $........ lb.000 handling..504..00 0 Total………………………………………… …………......0 00 Copper wire...... coils b McGraw-Hill/Irwin Inc.... Total 10 $ 7.............. 6..... 5. utilities.......50 0 $8...560.820..... and 106...0 00 $15 20 Total Cost $3..................000 2......000  2009 The McGraw-Hill Companies..

9-49 .000 (from req.. from problem) d 506.. 000 $4. 2) c 100..000 + 246.000 (from req..00 200...000 $6.... 8/e  2009 The McGraw-Hill Companies.000 = 469... d Total manufacturing overhead.000 (from req.00 3...Shipping.000 hr... $2...036. 100.. 5) a b McGraw-Hill/Irwin Inc. 500 725.....000c General manufacturing overhead 506.446.........000 = 65. Managerial Accounting......000 + 41.. 3) 106.000 + 256.000 = 60..000 + 40.000 = 260..000 (total units sold.

000    505.. Solutions Manual ... 3................. Box   Box C P 500........000 515. $975......650.............0 500. Total units needed.......000            5....... Deduct: Beginning Inventory....................50 247.....000 500. ..000  20...2 3 Total   148....35 $1....................... Sales budget: Box C Box P 500.... 9-50 Box C Box P 495.95 $675.000           10... Production requirements..... Add: Desired ending inventory............................0 00 Production budget (in units):   Sales.........000   15............... Total $1......50 99......000       Raw-material budget: CORRUGATING MEDIUM Production requirements (number of boxes).0 000 00 Sales (in units) Sales price per unit Sales revenue 2...00 00 0 ×    ×    $1......00 00 0 ×     ×     ...... Raw material required for production (pounds)..00 0 0 0  2009 The McGraw-Hill Companies.......... McGraw-Hill/Irwin Inc......PROBLEM 9-39 (60 MINUTES) 1... Raw material required per box (pounds)...000      495.000 495....0 495....

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

........00 0 ×    $.. Direct-labor budget: Production requirements (number of boxes) Direct labor required per box (hours)....... Solutions Manual .. 5............ Raw material required per box (pounds)..0 495.... Cost of purchases (paperboard)........ Raw material to be purchased....0 495.. 9-52  2009 The McGraw-Hill Companies.............5 346.....23    7....... ×  ...00 00 0 × ... Total Box C Box P 495.... Direct labor required for production (hours) Direct-labor rate.....712... Total direct-labor cost...00 00 0 0    5. 4...000 485........... ×     .........00 0   15.............8 25 Manufacturing-overhead budget: McGraw-Hill/Irwin Inc.......000 500...................... Add: Desired ending raw-material inventory...............00 00 0 ×     .5 2... 3 7 148...................................30 $145..... Deduct: Beginning raw-material inventory....................... ..... 500 Total raw-material needs... Price (per pound).......... 5 ×    $18 $66. Raw material required for production (pounds)..50 495....... 0025 005 1............PROBLEM 9-39 (CONTINUED) PAPERBOARD Production requirement (number of boxes). Box C Box P 495...475 Total 3..........

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

................000 × $...........0025)+(495. $1...................... 9-54  2009 The McGraw-Hill Companies.. 500 Gross margin......... $112. 500 322..000 299..... Selling and administrative expense budget: Salaries and fringe benefits of sales personnel.................... (1)]..000 6............ Solutions Manual ..........005) McGraw-Hill/Irwin Inc.......................... Box P: 500............. 000 315..170......... Advertising...... Less: Cost of goods sold: Box C: 500.50 0 22........... 000 480... Total selling and administrative expenses........ Net income..500 135..............000)( . 000 $ 855....000)( ...............00 0 $315.000 39...650..................... Clerical wages and fringe benefits..... 000 $1...................315*.....645* ............... $157............. Income tax expense (35%)....000 × $..... Miscellaneous administrative expenses........750 = (495..... 250 $ 555.....00 0 Budgeted income statement: Sales revenue [from sales budget.......................... req...PROBLEM 9-39 (CONTINUED) 6...... Management salaries and fringe benefits.............. Selling and administrative expenses...... 7.... Income before taxes..750 *Calculation of manufacturing cost per unit: (a Predetermined ) overhead rate = budgeted manufactur ingoverhead volume ofdirect -laborhours $222..

750 = $60perhour = 3. 8/e  2009 The McGraw-Hill Companies. 9-55 .712.5 hours McGraw-Hill/Irwin Inc.$222. Managerial Accounting.

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

.................................021.000 + $531...... Total revenue...021.......... 300 115.................... Managerial Accounting............ Other revenue.......912.............. Operating income............ 000 $1............. Management consulting... General and administrative expenses...... $ 956.............300 = $490................ 8/e  2009 The McGraw-Hill Companies........ The revised operating budget for Vancouver Consulting Associates for the fourth quarter is presented below....250 936......300...... Depreciation expense...................................200 *$1.... 250 20...892. Corporate expense allocation.....) McGraw-Hill/Irwin Inc............ Travel and related expenses......000 80...... Total consulting fees.PROBLEM 9-40 (45 MINUTES) 1.... 000 $1.. Supporting calculations follow: VANCOUVER CONSULTING ASSOCIATES REVISED OPERATING BUDGET FOR THE FOURTH QUARTER OF 20X4 Revenue: Consulting fees: Computer system consulting...............553............................... 000 $1..000 150...... 9-57 ..................... Total expenses............. Expenses: Consultant salary expenses*.........................750 186... (See supporting calculations....... 250 $1.... 050 $ 359...................

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

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

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

700.70 = $1. market demand.500) Attained ($241. the calculations to determine whether John Winslow’s budget attains these objectives are presented in the following table. CALCULATION OF FINANCIAL OBJECTIVES: FIT-FOR-LIFE. For each of the financial objectives established by the board of directors and president of Fit-for-Life. The time horizon for budgeting is generally a year. INC.6% (rounded) McGraw-Hill/Irwin Inc. Budgeting is the quantitative expression of plans evolving from strategic planning.904.500−$1.700.000 (rounded) Maintain cost of goods sold at or below 70% of sales ($1. Managerial Accounting.15 = $241.000)/$210.500 × .000)/ $1.000 × 1.000 = 11.100. and technological changes when identifying overall objectives.339.12 = $1.895..000 = 15% Maintain long-term debt at or below 16% of assets ($4.000/$4. or an operating cycle.000*/$1.326.16 = $656.000 × . 9-61 .895.PROBLEM 9-41 (40 MINUTES) 1. 2. Strategic planning identifies the overall objective of an organization and generally considers the impact of external factors such as competitive forces.000 × 1.500 70.000) Attained $616.850) Not attained $1. Inc.000) Attained / Not Attained Not attained Calculations ($1. 8/e = 15% =  2009 The McGraw-Hill Companies. Objective Increase sales by 12% ($1.100.700.500−$210.5% Increase before-tax income by 15% ($210.895. and greater attention is focused on internal factors than on external factors.

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. by not communicating unfavorable as well as favorable information.*Variable cost of goods sold + fixed $1. 9-62  2009 The McGraw-Hill Companies. and by engaging in an activity that appears to be a conflict of interest. The specific standards of ethical conduct for management accountants violated by Winslow are as follows: Integrity.550 = $1.339. Solutions Manual .149.450 + $189.000 3. Winslow violated the integrity standard by engaging in an activity that prejudiced his ability to carry out his duties ethically.

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

Cash payments for purchases during the preceding month†. Interest on bonds**............. 9-66 First Quarter $258.... Administrative salaries.00 0 30.00 0 32.....680 $154..000 -010.456 352.. Total cash payments for inventory purchases.000 0 32.928 $851...009..4 800 80 $766..PROBLEM 9-42 (CONTINUED) 4. 768 $611..800     29...00 0 -0    8. $  648 417. $ 144 841.000 $ 42...... $2... 224 $ 42....800     9.8 388...8 88 1.00 96... Solutions Manual ... Total cash payments for other ... Sales commissions.expenses Total cash disbursements McGraw-Hill/Irwin Inc......00 0 42...00 126.. $809.. Property taxes**.. Other expenses: Sales salaries..........167...00 126....427.000 32........000 0 42....000 42..........64 8 10...000 0 -030. 032 $2....5 720 92 $298.....08 00 0 426..1 320 52 -0   10..... $672. $136. Cash disbursements budget: 20x1 Januar Februa March y ry Inventory purchases: Cash payments for purchases during the current month*.........6 520 72 $725....128 $126.800 $ $ 42... 680 152  2009 The McGraw-Hill Companies.. Advertising and promotion. $284......

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

......... Summary cash budget: 20x1 January Februa March ry Cash receipts [from req....... 152) $ 306......427..448 80 Sale of marketable securities 30.000 200..... 59... 3/31/x1.......0 00) Change in cash balance during first quarter..... 826.000 (1/2/x1)............000 (250... (4)]....680 99.. 9-68 First Quarter $2.. $ $ $ (2)].......1 (851....908  2009 The McGraw-Hill Companies...........000)   (100.....00 0) Repayment of bank loan (3/31/x1).0 00) Interest on bank loan*.. Proceeds from bank loan (1/2/x1).. 1/1/x1....... Cash balance...00 0) (200.00 0) $  (18.7 operations.. Solutions Manual .....00 0 Purchase of equipment. (200..00 908.60 999.......000 $  51......734. McGraw-Hill/Irwin Inc.......908 30...... (250..46 0 0 0 Cash disbursements [from req..... 200..... (100.6 20) 52) 80) Change in cash balance during period due to $  $   $147....00 0) (5.........000 ) Payment of dividends.. (5..... (766....PROBLEM 9-42 (CONTINUED) 5.. 060 (2...............092 )     70.3 (809.. Cash balance..

.......... Cash available for equipment purchases...................... 9-69 ............. Less: Cost of investment in equipment..........000 6.... Managerial Accounting.000      250...000      50.. 8/e $(200...000       30............... McGraw-Hill/Irwin Inc.. $  70............. Less: Minimum cash balance......................... Projected proceeds from sale of marketable securities.......0 00)  2009 The McGraw-Hill Companies..................000 × 10% per year × 1/4 year = $5.................. Cash available................000   $  50..........*$200..000    Required short-term borrowing......000   $  20..... 20x0....... Analysis of short-term financing needs: Projected cash balance as of December 31..

312   100........000 126..............................000   5....00 0 29.400    552.................... Retained earnings..... 8.. Selling and administrative expenses: Sales salaries.........840 Less: Cost of goods sold..... Interest on bonds................................................... 12/31/x0........ Add: Net income...............................912....... Advertising and promotion... Property taxes.000 150................ Solutions Manual .......... Sales commissions.. McGraw-Hill/Irwin Inc.......................PROBLEM 9-42 (CONTINUED) 7... $126......... Deduct: Dividends.................000 15............... Interest on short-term bank loan.312  2009 The McGraw-Hill Companies................. Total selling and administrative expenses...... Administrative salaries...038...000 321..... Depreciation. 800   2........528 $  321......... 9-70 $ 215........000 5.................. $2.............9 60 $  873............. Gross margin........................ GLOBAL ELECTRONICS COMPANY BUDGETED INCOME STATEMENT FOR THE FIRST QUARTER OF 20X1 Sales revenue................000 $ 436................................................................. Net income............................... 3/31/x1........................312 GLOBAL ELECTRONICS COMPANY BUDGETED STATEMENT OF RETAINED EARNINGS FOR THE FIRST QUARTER OF 20X1 Retained earnings...............128 96..........

..........352.000  ) (150.. Property taxes payable..460 + $1... 8/e $   51.0 00 250.....000......005..216 10......................400)..........................00 0    436........... (2)] ($218..740 $1.740 372......0 00 $2.............. Total liabilities and stockholders' equity.............312 $2..................787......000 2....... 9-71 ..000  2009 The McGraw-Hill Companies.... Accounts payable**................. Common Stock.... 12/31/x0......... (1)]. Bonds payable (10%........... Depreciation expense for first quarter.............680 1.......... Accounts receivable*... Retained earnings..908 718..........184.................................... 12/31/x0...........60 0 (2.....................3 28 $  447...... 20X1 Cash.............................. Buildings and equipment (net of accumulated depreciation)†.............. Accounts receivable........... † Buildings and equipment (net)................................000 1...................800 600..............................................PROBLEM 9-42 (CONTINUED) 9.................252.. Total assets.........495.......................... Total cash collections from credit sales [(req.................. Inventory..... Sales on account [req..... 3/31/x1.. Cost of equipment acquired........000 1....... Bond interest payable.. Managerial Accounting............495.................... GLOBAL ELECTRONICS COMPANY BUDGETED BALANCE SHEET MARCH 31......3 28 $ 540...................................................................... McGraw-Hill/Irwin Inc............ *Accounts receivable.....86) 0 $  718................ due in 20x6)............................

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

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

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

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

350..000 55.00 0 $   $2...000 55. $ 440.0 0 00 *40% of total sales..00 0 $  750.000 60...100.650. 20x4 4th Quarte r 2nd Quarte r 20x5 3rd Quarte r 1st Quarte r 4th Quarte r Entire Year 50.150. 9-76  2009 The McGraw-Hill Companies..00 0 $590...00 0 $  675. $1.000 ×      $15 ×      $15 ×      $15 ×      $15 ×      $15 $ 600....00 0 735...000 ×      $10 ×      $10 ×      $10 ×      $10 x      $10 250. 000 000 000 000 000 000 Cash sales*. S frame sales revenue.....225.. × S sales price... Sales on account†. L frame sales revenue.CASE 9-45 (120 MINUTES) 1.000 60....... L frame unit sales. 00 000 660..000 45.. 700.260... Sales budget: S frame unit sales.600.00 0 ×      $10 $ 500...00 0 ×      $15 $  $3..00 0 885.00 0 $  550.0 $2.390...00 0 $  650.00 0 $  600.500.00 000 0 Total sales revenue. $1.. 900...00 0 $  825. × L sales price..00 0 960..00 0 210. $5.. McGraw-Hill/Irwin Inc.. $1.00 0 $ 490..00 000 0 40.475. $1.00 0 810...0 00 $640.00 3..000 70. Solutions Manual ..000 50.000 65..00 0 $ 540. $1.

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

....335. .585.00 2. 1st Quarte r $  490. $1.00 708..00 177.0 current 0 0 0 0 00 quarter*..712..590...... 000 000 000 000 000 *80% of current quarter's credit sales..00 648.. Solutions Manual ....... 640..460.. † 20% of previous quarter's credit sales..260.. $1..00 618... $5... 9-78  2009 The McGraw-Hill Companies.00 0 2nd Quarte r $ 540. Cash receipts budget: Cash sales... Cash collections from credit sales made during                previous 132...00 147..00 † quarter ..00 162... 0 0 0 0 0 Total cash receipts..00 000 0 Cash collections from credit sales made during 588. McGraw-Hill/Irwin Inc.. $1.. $1.00 768...00 0 4th Entire Quarte Year r $ $2.210..CASE 9-45 (CONTINUED) 2.00 0 20x5 3rd Quarte r $ 590...

. Total units needed Less: Expected beginning inventory...00 0 0 0 210.. 9-79 .00 0 0 0   11..0 00 254..00 0 0 0 61.00 0 0 0 Units to be 51. 0 56.....000 inventory. 0 McGraw-Hill/Irwin Inc..00 56...00 0 0 0 250.00 13.00 produced. .00 70..00 60.00 0 11.00 0 0 0 55..... 000 10.00 11... 000 12. 40.00 67. ..00 0    9..00 12.0 00 265... 49.00 85..00 66. Production budget: 20x4 4th Quart er 1st Quart er 2nd Quart er 20x5 3rd 4th Quart Quart er er Entir e Year 55......00 71.... 0 Total units needed Less: Expected beginning inventory.00 inventory...00 0 0 0 51.00 13..00 0 0 0    9.00 0 60.00 produced..CASE 9-45 (CONTINUED) 3 . 000 45... . 000  2009 The McGraw-Hill Companies........ Managerial Accounting.00 55.00 0 214.. L frames: Sales (in units).00 0 73...00 0 Add: Desired ending 9..00 65..00 14.00 0 Add: Desired ending 11.00 0 12.. 000 10....00 15.00 0 50...00 0 61...000 8..00 0 61. .00 0 13..0 00 10. 50.00 61.. 000 S frames: Sales (in units).00 0 67..00 0 0 0   15.000 Units to be 41..00 0 11..00 14.00 0 73..00 12.. 8/e 46.0 00 223.00 0 0   13..00 79.

.000 0 66.00 61. × Price per foot... 9-80  2009 The McGraw-Hill Companies..00 0 56.. Total metal needed for production....00 00 0   168.. × Metal quantity per unit (ft.)...00 0 ×       3 ×       3 ×       3 ×       3 ×       3 ×        3   123.........00 51...00 0 41.00 0 225.. 000 $325.. Cost of metal strips to be purchased: 20x4 4th Quart er 1st Quart er 51..0 1.0 00 250....00 0 61....00 00 0 300.0 00 00 ×      $1 ×      $1 ×      $1 ×      $1 ×      $1 $225..0 00   142..0 000 00 $300.0 00    642. Solutions Manual . 000 $250....0 00   183..CASE 9-45 (CONTINUED) 4 . L frames to be produced.........00 0 214.00 0 46....0 00     112.0 00     138..00 0 ×       2 ×       2 ×       2 ×       2 ×       2 ×        2   102..... 000 000 2nd Quarte r 20x5     3rd 4th Quart Quart er er Entire Year ×       $1 *Direct-material budget continued on next page...00 0 71. to be purchased (ft..000 0 56. $1..0 00 325..).0 122.150.00 0 254.... Direct-material budget:* Metal strips: S frames to be produced.. × Metal quantity per unit (ft..150...0 153..0 00    508.00 00 0   132. $275.0 275.. McGraw-Hill/Irwin Inc...)... Needed for L frame production. Needed for S frame production...

. McGraw-Hill/Irwin Inc.00 0 46.75 0       14.150     8.15 49..500 0    28.00 25...90 0  2009 The McGraw-Hill Companies.50 0 48..750 0 44. 5 ×     ...2 5 ×    ...650     10..00 0 254....00 0 ×     .50 0       23..900     9.75 0     63. Needed for L frame production.400 40..... Total glass needed for production (sheets)..000 0 56. ×     . 25    12..00 0 71..... .2 5 ×    .00 61....... 5 ×     .00 0 ×    . 8/e 20x 4th Quart er 1st Quart er 51. Needed for S frame production.00 0 61. Less: Expected beginning inventory....400     8.25 0 37..65 0 45.50 0     7.. × Glass quantity per unit (sheets).40 0 58.2 5 ×      .... Managerial Accounting..25 0 170.2 5 ×    .00 51.650      7.00 40.. Total glass needs.5 5 ×     .50 0    107..CASE 9-45 (CONTINUED) 20x4 Glass sheets: S frames to be produced......150 180.00 15...00 0    30..... ×       .50 0    17.00 0 214. L frames to be produced.250 0    16. 5 5    20.. × Glass quantity per unit (sheets). 9-81 .00 0 33.15 0    10.400     8.900     9..000 0 66..400     8.65 0     6.500 41..650 0 54.2 5 ×    ...650     7. Add: Desired ending inventory.00 0 2nd Quarte r 5 3rd Quart er 4th Quart er Entire Year 56...

..0 000 00 $362. $607..00 0 37. 000 000 $497. 000 $302. × Price per glass sheet.25 0 49...... McGraw-Hill/Irwin Inc.. 9-82 34.. 000 $392.. $332...75 41.. $2..00 0 173.. 000 000  2009 The McGraw-Hill Companies.... Cost of glass to be purchased.0 000 00 $662.50 0 ×      $8 ×      $8 ×      $8 ×      $8 ×      $8 ×       $8 $272. Total rawmaterial purchases (metal and glass).Glass to be purchased.. 000 $717.538. 000 $552..388. Solutions Manual ....500 0 45.. $1...

..40 0        110. $20 Total cash payments for $204.. 9-83 ...00 0 468.000 0 $   $2.. 573. 000 $  $  596....20 used...030.1 11. 8/e 2nd Quarte r 20× 5 3rd Quarter    463... Managerial Accounting........ Direct labor: Frames produced (S and L)...00 244. 1 ×       ... 1 Direct-labor hours to be 10.00 000 0 102.....1 ×       ..400 0    132.800 ×      $20 ×      $20 ×      $20 ×      $20 $  $  224...60 0  2009 The McGraw-Hill Companies..200 46... frame...00 651.CASE 9-45 (CONTINUED) 5... direct labor............00 0 $  936............1 ×       ...494. † quarter ......000 0 $  264..60 529...600 0 $ $2....40 121..0 00 112...... Cash disbursements budget:* 1st Quart er Raw-material purchases: Cash payments for purchases during the current $441.. 4th Quarte r Entire Year $ $ 485...........00 122.200 12... 600 Cash payments for purchases during the preceding quarter**... 0 × Rate per directlabor ×    hour..200 13..00 0 ×       .00 0 × Direct-labor hours per ×      ...000 0 132....60 400 0   99.......40 0 $541... 000 McGraw-Hill/Irwin Inc. Total cash payments for raw-material purchases............ 706.

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

....800 44...000 $ 112... Other..000 187..200 13.000     46....218... 8/e 1st Quart er 2nd Quarte r 3rd Quarter 4th Quarte r Entire Year $ 10........... Cash payments for selling and administrative expenses. 000 000 000 000 000  2009 The McGraw-Hill Companies...00 0 $    11... Total cash disbursements..00 100. $1..200 $    $    12..800 52. Managerial Accounting.800     36. 9-85 .20 0 40..000 100..012...000     41.800 48...097...CASE 9-45 (CONTINUED) Manufacturing overhead: Indirect material.. McGraw-Hill/Irwin Inc...00 0 $ 82.. $1..00 0 0 0 $927...20 0    154.00 0 $   $ 92. Total cash payments for manufacturing overhead..00 400.182..00 0 $100...000 102.. 000 $ $ $ $ 100. $1.00 0 $ 388.... $4.. Indirect labor.80 0    31..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

... 9-89 . 8/e  2009 The McGraw-Hill Companies..00 0 × Direct-labor hours per frame............. ×      ............00 *In the budget........ **See next page...0 00 See next page... 46.......... 468...... The applied manufacturing overhead may be verified independently as follows: Total number of frames produced.. Managerial Accounting........... †† See next page....... 1 Total direct-labor hours... † McGraw-Hill/Irwin Inc....800 × Predetermined overhead rate per ×    hour. budgeted and applied manufacturing overhead are equal... $10 Total manufacturing overhead applied $468...............

.. Total manufacturing cost....... × Manufacturing cost per unit.......... Solutions Manual ...000 8. 000 000 $3. S L Frames Frames 254....................000 ×       ×      $7 $10 $1....100..........000 ×       ×      $7 $10 $1....000 $235......... 9-90  2009 The McGraw-Hill Companies....... Manufacturing cost per unit..........................000 The cost of goods sold may be verified independently as follows: †† Frames sold..... McGraw-Hill/Irwin Inc............. $2.... Cost of ending inventory......... Cost of goods sold....000 13........ Total cost of ending inventory (S and L) S L Frames Frames 15..... 000 000 $3.. Grand total (S frames and L frames)..918........ Total cost of goods sold (S and L).....000 210...000 214..........000 **The finished-goods inventory on 12/31/x5 may be verified independently as follows: Projected inventory on 12/31/x5........ $2. Manufacturing cost per unit..750.....850....... S L Frames Frames 250...........140...CASE 9-45 (CONTINUED) The cost of goods manufactured may be verified independently as follows: † Frames produced.000 130.......778.............000 ×        ×       $7 $10 $  $  105.....

................ Selling and administrative expenses..650............. Managerial Accounting..................... 000 Less: Cost of goods sold.....0 00 $1. 9-91 .............. 500  2009 The McGraw-Hill Companies...............800...... Gross margin....... ............337. $5.. 20X5 Sales revenue... Interest expense.... ...............PHOTO ARTISTRY COMPANY BUDGETED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31..... 000   3...........500 $1........... 8/e $400.. McGraw-Hill/Irwin Inc.... Net income.500    462.850.....00 0    62.............

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

*Fourth-quarter sales on account × 20% = $960.000 – $80. Managerial Accounting.000 + $1.000.000. 9-93 .000 × 20% † 10. 8/e  2009 The McGraw-Hill Companies.000 †† Fourth-quarter purchases on account × 20% = $717.400 units × $8 **$8.000 × 20% McGraw-Hill/Irwin Inc.

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

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