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CHAPTER 9

Profit Planning, Activity-Based Budgeting, and


e-Budgeting
ANSWERS TO REVIEW QUESTIONS
9-1 A master budget, or profit plan, is a comprehensive set of
budgets covering all phases of an organization's
operations for a specified period of time. The master
budget includes the following parts:
sales budget,
operational budgets (including a production budget,
inventory budgets, a labor budget, an overhead budget, a
selling and administrative expense budget, and a cash
budget), and budgeted financial statements (including a
budgeted income statement, budgeted balance sheet, and
budgeted statement of cash flows).
9-2 A budget facilitates communication and coordination by
making each manager throughout the organization aware
of the plans made by other managers. The budgeting
process pulls together the plans of each manager in the
organization.
9-3 An example of using the budget to allocate resources in a
university is found in the area of research funds and
grants. Universities typically have a limited amount of
research-support resources that must be allocated among
the various colleges and divisions within the university.
This allocation process often takes place within the
context of the budgeting process.
9-4 The flowchart on the following page depicts the
components of the master budget for a service station.
9-5 General economic trends are important in forecasting
sales in the airline industry. The overall health of the
economy is an important factor affecting the extent of
business travel. In addition, the health of the economy,
inflation, and income levels affect the extent to which the
general public travels by air.
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9-6 Operational budgets specify how an organization's


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

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Flowchart for Review Question 9-4


Sales Budget:
Gasoline,
Related
Products, and
Services

Sales
Budget

Operati
onal
Budgets

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

Labo
r
Budg
et

Overh
ead
Budge
t

Selling and
Administrat
ive Expense
Budget

Cash
Budget
Budgeted
Income
Statement
Budgete
d
Financia
l
Stateme
nts

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Budgeted
Balance
Sheet
Budgeted
Statement
of Cash
Flows

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9-3

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

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9-11 The budget manual says who is responsible for providing


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

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9-13 Under zero-base budgeting, the budget for virtually every


activity in the organization is initially set to zero. To
receive funding during the budgeting process, each
activity must be justified in terms of its continued
usefulness. The zero-base budgeting approach forces
management to rethink each phase of an organization's
operations before allocating resources.
9-14 A master budget is based on many assumptions and
predictions of unknown parameters. For example, the
sales budget is built on an assumption about the nature
of demand for goods or services. The direct-material
budget requires an estimate of the direct-material price
and the quantity of material required per unit of
production. Many other assumptions are used throughout
the rest of the budgeting process.
9-15 The difference between the revenue or cost projection
that a person provides in the budgeting process and a
realistic estimate of the revenue or cost is called
budgetary slack. Building budgetary slack into the budget
is called padding the budget. A significant problem
caused by budgetary slack is that the budget ceases to be
an accurate portrayal of likely future events. Cost
estimates are often inflated, and revenue estimates are
often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-16 An organization can reduce the problem of budgetary
slack in several ways. First, it can avoid relying on the
budget as a negative, evaluative tool. Second, managers
can be given incentives not only to achieve budgetary
projections but also to provide accurate projections.
9-17 The idea of participative budgeting is to involve
employees throughout an organization in the budgetary
process. Such participation can give employees the
feeling that "this is our budget," rather than the feeling
that "this is the budget you imposed on us." When
employees feel that they were part of the budgeting
process, they are more likely to strive to achieve the
budget.
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9-18 This comment is occasionally heard from people who have


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

multinational firm's budget must reflect the


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

It is difficult to prepare budgets when inflation is

high or unpredictable. Some foreign countries have


experienced hyperinflation, sometimes with annual
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9-7

inflation rates well over 100 percent. Predicting such


high inflation rates is difficult and complicates a
multinational's budgeting process.

The economies of all countries fluctuate in terms of

consumer demand, availability of skilled labor, laws


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

Product planning and concept design

(b)

Preliminary design

(c)

Detailed design and testing

(d)

Production

(e)

Distribution and customer service

It is important to budget these costs as early as possible


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


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

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

May

June

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

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

36,000d
$
76,000

30,000c
34,000
$
64,000

$90,0
00

= $45,000 2

$40,0
00

= $80,000 .5

$30,0
00

= $60,000 .5

$36,0
00

= ($40,000 .6) + ($30,000 .4)

$39,0
00

= ($45,000 .6) + ($30,000 .4)

2.

$60,000

$90,000a
$
45,000

39,000e
$
84,000

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

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

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400,000DM
3.

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

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

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


4.

460,
000y
$
810,000

150,000
$
960,000

Accumulated depreciation, 12/31/x0................


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

5.

Retained earnings, 12/31/x0...........................


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

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

EXERCISE 9-25 (30 MINUTES)


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

Production (in units) required for the year:


Sales for the year...............................................
Add: Desired ending finished-goods inventory on
December 31......................................................
Deduct: Beginning finished-goods inventory on
January 1...........................................................
Required production during the year...................

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

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9-11

2.

Purchases of raw material (in units), assuming production


of 500,000 finished units:
1,000,0
00
45,000
35,0
00
1,010,0
00

Raw material required for production (500,000


2)......................................................................
Add: Desired ending inventory on December 31. .
Deduct: Beginning inventory on January 1...........
Required raw-material purchases during the year

EXERCISE 9-27 (25 MINUTES)


1.

Cash collections in October:


Month of Sale
July.....................................
August................................
September..........................
October...............................
Total...................................

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

Notice that the amount of sales on account in June,


$49,000 was not needed to solve the exercise.

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EXERCISE 9-27 (CONTINUED)


2.

Cash collections in fourth quarter from credit sales in


fourth quarter.
Amount Collected
Month of Sale
October.......................

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

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

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Credit
Sales
$
90,000

Octob
er
$

Novem
ber

Decem
ber
$9,000

63,00
0
100,00

0
85,000

0
$

$13,50
0
70,000

15,000

59,500

63,00
0

$83,50
0

$
83,500

$230,0
00

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9-13

EXERCISE 9-28 (20 MINUTES)


1.

The total required production is 655,720 units, computed


as follows:
Budgeted Sales
(in units)
June
July
August
September
October

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

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

(given)
(200,000
(210,000

185,220 (231,525
80%)

(220,500

Sales in units:

2.

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

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

Assumed production during third quarter (in


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

600,000

Deduct: Ending raw-material inventory, June 30.


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2,400,0
00

600,000
3,000,0
00

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Raw material to be purchased during third


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

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700,000
2,300,0
00

$1.15
$2,645,
000

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9-15

EXERCISE 9-29 (20 MINUTES)


1.

BINGHAMTON FILM CORPORATION


EXPECTED CASH COLLECTIONS
AUGUST
Month
June.............................
July...............................
August.........................
Total..........................

2
.

Sales
$60,000
78,000
66,000

Percent
9%
20%
70%

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

BINGHAMTON FILM CORPORATION


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

3
.

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

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

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$
22,000
67,200

67,320
$
21,880

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EXERCISE 9-30 (20 MINUTES)


Memorandum
Date:

Today

To:

President, East Bank of Mississippi

From: I.M. Student and Associates


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

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9-17

EXERCISE 9-31 (20 MINUTES)


1.
Total Sales in January 20x2
$100,00 $130,0 $160,00
0
00
0
Cash receipts in January, 20x2
From December sales on
account.................................
From January cash sales.....
From January sales on
account.................................
Total cash receipts.............

$
7,125*
75,0

00

20,000*
*
$
102,125

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

$159,12
5

*$7,125 = $190,000 .25 .15

$75,000 = $100,000 .75


**$20,000 = $100,000 .25 .80
2
.

Operational plans depend on various assumptions. Usually


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

EXERCISE 9-32 (30 MINUTES)


1
.

Budgeted cash collections for December:


Month of Sale
November.................................
December.................................
Total cash collections................

2
.

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

Budgeted income (loss) for December:

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

$220,00
0
165,00
0
$55,000

Less: Cost of goods sold (75% of sales)


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

$
4,400
18,000
22,600

45,000
$10,000

EXERCISE 9-32 (CONTINUED)


3
.

Projected balance in accounts payable on December 31:


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

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

Sales
$220,0
00
200,00
0

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

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

Therefore, the December 31 balance in accounts payable


will be $153,000.

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9-19

EXERCISE 9-33 (25 MINUTES)


1
.

Direct professional labor budget for the


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

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

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EXERCISE 9-33 (CONTINUED)


2
.

Cash collections during June:

Half-hour visits (4,000 80%)..............


Billing rate..........................................
Total billings for half-hour visits...........

One-hour visits (4,000 20%)..............


Billing rate..........................................
Total billings for one-hour visits...........
Total billings during month..................

May
3,200
$40

June
3,200
$40

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

Percentage of month's billings collected


during June.......................................
Collections during June........................

Total collections in June ($18,400 +


$165,600)............................................

10%
$
18,400

90%

$165,60
0
$184,00
0

3. Overhead and administrative expense budget for June:


Patient registration and records (4,000 visits $2.00 per
visit)..........................................................
$ 8,000
Other overhead and administrative expenses
(2,400 hours $5.00 per hour)..............
12,000
Total overhead and administrative expenses
.......................................................... $20,000
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9-21

EXERCISE 9-34 (15 MINUTES)


EOQ =

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

Case A : EOQ =

CaseB : EOQ =

CaseC : EOQ =

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

EXERCISE 9-35 (10 MINUTES)


1
.

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

2
.

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

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

Production and direct-labor budgets


SPIFFY SHADES CORPORATION
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1

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

Direct-labor costs:
Wages ($16.00 per DLH).....
Pension contributions
($.50 per DLH)..................
Workers' compensation
insurance ($.20 per DLH). .
Employee medical insurance
($.80 per DLH)..................
Employer's social security
(at 7%).............................
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Januar
y
10,00
0

16,00
0
26,00
0

16,00
0
10,00
0

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

13,50 13,500
0
21,50 43,500
0

12,50 16,000
0
9,000

27,500

.75

8,500

6,750 25,250

$160, $136,0
000
00

$108, $404,0
000
00

5,000

4,250

3,375 12,625

2,000

1,700

1,350

8,000

6,800

5,400 20,200

10,00
0

12,500
24,500

16,000
8,500

5,050

2002 The McGraw-Hill Companies,


9-23

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

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

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

*100 percent of the first following month's sales plus 50


percent of the second following month's sales.

DLH denotes direct-labor hour.

McGraw-Hill/Irwin
Inc.
9-24

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-36 (CONTINUED)


2.

Use of data throughout the master budget:


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

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

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

Manufacturing-overhead budget (for determining the


overhead application rate)

Components of the master budget, other than the


production budget and the direct-labor budget, that would
also use the direct-labor cost data include the following:

Manufacturing-overhead budget (for determining the


overhead application rate)

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

2002 The McGraw-Hill Companies,


9-25

McGraw-Hill/Irwin
Inc.
9-26

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-36 (CONTINUED)


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

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

March

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

27,000
47,250

$109,000 $90,250

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

PROBLEM 9-37 (25 MINUTES)


1.

Tuition revenue budget:


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

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

2002 The McGraw-Hill Companies,


9-27

revenue.
2.

,000

Faculty needed to cover classes:


Total
student 8,40
body.
0
Classes per student per year [(15
credit hours 3 credit hours) x
x
2 semesters].
10
Total student class enrollments to 84,0
be covered.
00
Students
per

class.
25
Classes
to
be 3,36
taught.
0
Classes
taught
per

professor.
5
Faculty
672
needed

McGraw-Hill/Irwin
Inc.
9-28

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-37 (CONTINUED)


3.

Possible actions might include:


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

4.

No. While the number of faculty may be a key driver, the


number of faculty is highly dependent on the number of
students.
Students (and tuition revenue) are akin to
salesthe starting point in the budgeting process.

PROBLEM 9-38 (30 MINUTES)


1.

Schedule of cash collections:


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

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

Januar
y

Febru
ary

March

$
11,00
0
90,
000

$
52,50
0
108,
000

$
63,00
0
111,
000

2002 The McGraw-Hill Companies,


9-29

Sale of
equipment
.
Total cash
collections
2.

Schedule of cash disbursements:

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

5,
000
$101,
000

$160,
500

Januar
y

McGraw-Hill/Irwin
Inc.
9-30

Febru
ary

March

$
22,00
0
63,
000

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

$179,
000

$
27,00
0
70,
000

31,
000
$116,
000

24,
000
$121,
000

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

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-38 (CONTINUED)


3.

Schedule of cash needs:

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

Januar Februar
y
y

March

$
20,00
0
101,
000

$
20,000

$
44,30
0
179,
000

$121,
000
116,
000
$
5,000

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

160,50
0

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

15,
000

$
20,00
0

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

$
50,30
0

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

Income statement for the two months ended March 31,


20x1:
Sales revenue ($250,000 +
$260,000)
Cost of goods sold ($510,000 x
70%)...

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

$510,
000
357,
000

2002 The McGraw-Hill Companies,


9-31

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

McGraw-Hill/Irwin
Inc.
9-32

$153,
000

124,
000
$
29,00
0

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-39 (CONTINUED)


2.

Balance sheet as of March 31, 20x1:


Assets:
Cash

Accounts
receivable...
Merchandise
inventory..
Land

Plant & equipment (net)


.
Total
assets
Liabilities
&
stockholders
equity:
Accounts
payable
Loan
payable

Common
stock.
Retained
earnings...
Total
liabilities
&
stockholders equity...

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

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

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

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

2002 The McGraw-Hill Companies,


9-33

35% of February sales


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

Accounts receivable: 35% of March sales, or


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

McGraw-Hill/Irwin
Inc.
9-34

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-39 (CONTINUED)


Merchandise inventory: $35,000 + ($260,000 x
60%)a ($250,000 x 70%)b + ($300,000 x
60%)c ($260,000 x 70%)d = $14,000
a

February purchases = 60% of March sales


February cost of goods sold = 70% of

February sales

March purchases = 60% of April sales


March cost of goods sold = 70% of March

sales

= $56,000

Land: $0 + $62,000 = $62,000


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

$57,000

3.

Common stock: $140,000


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

Metroplex began February with a debit balance in


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

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

2002 The McGraw-Hill Companies,


9-35

outstanding. From a liquidity perspective, the acquisition


will not help the firm.

McGraw-Hill/Irwin
Inc.
9-36

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-40 (30 MINUTES)


1.

Sales are collected over a two-month period, 40% in the


month of sale and 60% in the following month. December
receivables of $216,000 equal 60% of Decembers sales;
thus, December sales total $360,000 ($216,000 .6).
Since the selling price is $40 per unit, Badlands sold 9,000
units ($360,000 $40).

2.

Since the company expects to sell 10,000 units, sales


revenue will total $400,000 (10,000 units x $40).

3.

Badlands collected 40% of Februarys sales in February,


or $156,800.
Thus, Februarys sales total $392,000
($156,800 .4). Combining January sales ($152,000 +
$228,000), February sales ($392,000), and March sales
($400,000), the company will report revenue of
$1,172,000.

4.

Sixty percent of Marchs sales will be outstanding, or


$240,000 ($400,000 x 60%).

5.

Finished-goods inventories are maintained at 20% of the


following months sales. January sales total $380,000
($152,000 + $228,000), or 9,500 units ($380,000 $40).
Thus, the December 31 inventory is 1,900 units (9,500 x
20%).

6.

February sales will total 9,800 units ($392,000 $40),


giving rise to a January 31 inventory of 1,960 units (9,800
x 20%). Letting X denote production, then:
12/31/x0 inventory + X January x1 sales = 1/31/x1
inventory
1,900 + X - 9,500 = 1,960
X 7,600 = 1,960
X = 9,560

7.

Financing required is $7,000 ($30,000 minimum balance $23,000 ending balance):


Cash
balance,
January $
1
45,00

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

2002 The McGraw-Hill Companies,


9-37

Add:
January
receipts
($216,000 + $152,000)..
Subtotal

Less:
January
payments
Cash
balance
before
financing.

McGraw-Hill/Irwin
Inc.
9-38

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

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-41 (25 MINUTES)


1.

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

2.

April
10,000
$50

May
12,000
$50

June
15,000
$50

$500,00
0
$600,00
0

$750,00
0

Production budget (in sets)


April

May

June

10,000
2,400

12,000
3,000

15,000
3,000

12,400
2,000

15,000
2,400

18,000
3,000

10,400

12,600

15,000

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

3.

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

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

April
10,400

May
12,600

June
15,000

10

104,000

10

126,00
0

10

150,000

2002 The McGraw-Hill Companies,


9-39

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

Less: Projected beginning


inventory of
raw material (board feet)....
Planned purchases of raw
material
(board feet).......................
Cost per board foot...............
Planned purchases of raw
material
(dollars).............................

McGraw-Hill/Irwin
Inc.
9-40

12,600

15,000

16,000

116,600

141,00
0

166,000

10,400

12,600

15,000

106,200

151,000

$.50

128,40
0
$.50

$
53,100

$
64,200

$
75,500

$.50

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-41 (CONTINUED)


4.

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

April
10,400
1.5
15,600
$20

May
12,600
1.5
18,900
$20

$312,00
0
$378,0
00

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

PROBLEM 9-42 (40 MINUTES)


1.

Empire Chemical Companys production budget (in


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

2.

Yarex

Darol

Norex

5,200
60,000
65,200

2,800
40,000
42,800

2,400
25,000
27,400

4,800
60,400

3,200
39,600

2,000
25,400

The companys conversion cost budget for 20x2 is shown


in the following schedule:
Conversion hours required:
Yarex (60,400 .07)...........
Darol (39,600 .10)...........
Norex (25,400 .16)...........

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

2002 The McGraw-Hill Companies,


9-41

PROBLEM 9-42 (CONTINUED)


3.

Since the 20x1 usage of Islin is 100,000 gallons, the firms


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

4.

The company should continue using Islin, because the


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

McGraw-Hill/Irwin
Inc.
9-42

2002 The McGraw-Hill Companies,


Solutions Manual

Decrease in conversion cost......................


Net increase in production cost.................

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

PROBLEM 9-43 (60 MINUTES)


1. Sales budget for 20x0:
Light coils...................................

Units
60,000

Price
$65

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

40,000

$95

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

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

Total
$3,900,
000

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

2002 The McGraw-Hill Companies,


9-43

PROBLEM 9-43 (CONTINUED)


2
.

Production budget (in units) for 20x0:

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

25,000
85,000
20,000

9,000
49,000
8,000

65,000

41,000

Raw-material purchases budget (in


quantities) for 20x0:

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

Light
Heavy
Coils
Coils
60,000
40,000

Raw Material
Copper
Wire
Platfor
ms

260,000 130,000

__

205,000 123,000

41,000

465,000 253,000
36,000 32,000

41,000
7,000

501,000 285,000

48,000

32,000 29,000
469,000 256,000

6,000
42,000

Raw-material purchases budget for


20x0:
Raw
Material

McGraw-Hill/Irwin
Inc.
9-44

Anticipa
ted

2002 The McGraw-Hill Companies,


Solutions Manual

Raw Material

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

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

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

1,280,000

126,000

2002 The McGraw-Hill Companies,


9-45

PROBLEM 9-43 (CONTINUED)


5.

Direct-labor budget for 20x0:

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

Project
ed
Produc
tion
(units)
65,000

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

41,000

Hours
per
Unit
2
3

Total
Hour
s

Rate

130,0
00
123,0
00

$15
20

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

6.

Total
Cost
$1,950,0
00

2,460,00
0
$4,410,0
00

Manufacturing overhead budget for 20x0:


Cost
Driver
Quantity

Purchasing and material


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

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

Cost
Driver
Rate

Budgete
d Cost

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

725,000 = 469,000 + 256,000 (from req. 4)


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

McGraw-Hill/Irwin
Inc.
9-46

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-44 (45 MINUTES)


1.

The benefits that can be derived from implementing a


budgeting system include the following:

The preparation of budgets forces management to plan

ahead and to establish goals and objectives that can be


quantified.

Budgeting compels departmental managers to make


plans that are in congruence with the plans of other
departments as well as the objectives of the entire firm.

The

budgeting
process
communication and coordination.

promotes

internal

Budgets provide directions for day-to-day control of

operations, clarify duties to be performed, and assign


responsibility for these duties.

Budgets help in measuring performance and providing


incentives.

Budgets provide a vehicle for resource allocation.

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

2002 The McGraw-Hill Companies,


9-47

PROBLEM 9-44 (CONTINUED)


2.
a. Schedule
Sales Budget

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

Ending Inventory Budget


(units)

Production Budget

Production Budget (units)

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

Direct-Material Budget

Cost-of-Goods-Manufactured
Budget

Direct-Labor Budget

Cost-of-Goods-Manufactured
Budget

Manufacturing-Overhead
Budget

Cost-of-Goods-Manufactured
Budget

Cost-of-Goods-Manufactured
Budget

Cost-of-Goods-Sold Budget

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

Budgeted Income Statement


Budgeted Balance Sheet

Selling Expense Budget

Budgeted Income Statement

Research and Development


Budget

Budgeted Income Statement

Administrative Expense
Budget

Budgeted Income Statement

Budgeted Income Statement

Budgeted Balance Sheet


Budgeted Statement of Cash
Flows

Capital Expenditures Budget

Cash Receipts and


Disbursements Budget
Budgeted Balance Sheet

McGraw-Hill/Irwin
Inc.
9-48

2002 The McGraw-Hill Companies,


Solutions Manual

Budgeted Statement of Cash


Flows
Cash Receipts and
Disbursements
Budget

Budgeted Balance Sheet


Budgeted Statement of Cash
Flows

Budgeted Balance Sheet

Budgeted Statement of Cash


Flows

Budgeted Statement of Cash


Flows

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

2002 The McGraw-Hill Companies,


9-49

PROBLEM 9-45 (45 MINUTES)


1.

The revised operating budget for Toronto


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

$478,12
5

468,000
$946,12
5

10,000
$956,12
5
$510,65
0
57,875
93,000
40,000

75,000
$776,52
5
$179,60
0

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


supporting calculations.)

McGraw-Hill/Irwin
Inc.
9-50

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-45 (CONTINUED)


Supporting calculations:

Schedule of projected revenues for the fourth


quarter of 20x1:

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

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

$421,8
75

$75
5,625

15
375
50
425

15
6,375

$75
$478,1
25

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

2002 The McGraw-Hill Companies,


9-51

PROBLEM 9-45 (CONTINUED)

Schedules of projected salaries, travel, general and


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

Manage
ment
Consulti
ng

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

2002 The McGraw-Hill Companies,


Solutions Manual

Corporate expense allocation ($50,000


150%).............................................
*Third-quarter
travel expense

$ 75,000

hour = rate
s

$45,625 9,12
5

= $5.00

9,125 = (350 10) +


(375 15)

2
.

An organization would prepare a revised operating budget


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

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

2002 The McGraw-Hill Companies,


9-53

PROBLEM 9-46 (60 MINUTES)


1.

Sales budget:
Box C
Box P
500,0 500,00
00
0


$.90
$1.30
$450, $650,0
000
00

Sales (in units)


Sales price per unit
Sales revenue
2.

$1,100,0
00

Production budget (in units):


Sales..................................................
Add: Desired ending inventory............
Total units needed..............................
Deduct: Beginning Inventory...............
Production requirements....................

3.

Total

Box C
500,000

5,000

Box P
500,000

15,000

515,000

20,000

495,000

505,000

10,000

495,000

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

McGraw-Hill/Irwin
Inc.
9-54

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

Total

148,5 346,50
00
0

495,0
00

2002 The McGraw-Hill Companies,


Solutions Manual

Total raw-material needs.............


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

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

5,000
500,0
00

15,00
0
485,0
00

$.20
$
97,00
0

2002 The McGraw-Hill Companies,


9-55

PROBLEM 9-46 (CONTINUED)


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

Box C Box P
495,0 495,00
00
0

.
.2
3

148,50 247,50
99,00
0
0
0

10,000
257,50
0

5,000
252,50
0

$.10
$
25,250

Total raw-material needs.............


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

Total

$122,
250

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

McGraw-Hill/Irwin
Inc.
9-56

Box C Box P
495,0 495,00
00
0
.
.
0025
005
1,23

7.5
2,475

Total

3,712.
5

$12
$44,5

2002 The McGraw-Hill Companies,


Solutions Manual

50
5.

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

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

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

29,000
$
148,500

2002 The McGraw-Hill Companies,


9-57

PROBLEM 9-46 (CONTINUED)


6.

Selling and administrative expense budget:


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

7.

$
75,000
15,000
90,000
26,000

4,000
$
210,000

Budgeted income statement:


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

$105,
000

Box P: 500,000 $.43 .........................


215,0
00
Gross margin.....................................................
Selling and administrative expenses..................
Income before taxes..........................................
Income tax expense (40%).................................
Net income........................................................

$1,100,
000

320,000
$
780,000

210,000
$
570,000

228,000
$
342,000

*Calculation of cost of goods sold:


(a Predetermined
)
overhead rate

budgeted
manufactur
ingoverhead
volume
ofdirect
-laborhours
$148,500

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

2002 The McGraw-Hill Companies,


Solutions Manual

$148,500

= $40perhour
= 3,712.5
hours

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

2002 The McGraw-Hill Companies,


9-59

PROBLEM 9-46 (CONTINUED)


(b
)

Calculation of manufacturing cost per unit:


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

Box P

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

.20
$.43

PROBLEM 9-47 (40 MINUTES)


1.

Strategic planning identifies the overall objective of an


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

McGraw-Hill/Irwin
Inc.
9-60

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-47 (CONTINUED)


2.

For each of the financial objectives established by the


board of directors and president of Healthful Foods, Inc.,
the calculations to determine whether John Winslows
budget attains these objectives are presented in the
following table.

CALCULATION OF FINANCIAL OBJECTIVES: HEALTHFUL FOODS,


INC.

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

3.

Attained/
Not
Attained
Not
attained

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

Attained

($120,750$105,000)/
$105,000 = 15%

Attained

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

Attained

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

The accounting adjustments contemplated by John


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

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

2002 The McGraw-Hill Companies,


9-61

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

McGraw-Hill/Irwin
Inc.
9-62

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-48 (120 MINUTES)


1.

Sales budget:
20x0

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

20x1

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

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

*25% of total
sales.

75% of total
sales.
2.

Cash receipts
budget:
20x1

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

Januar Februa March


y
ry
$110, $121,0 $133,
000
00
100

First
Quarte
r
$
364,10
0

33,00 36,300
0

39,93
0

109,23
0

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

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

2002 The McGraw-Hill Companies,


9-63

*10% of current month's


credit sales.

90% of previous month's


credit sales.

McGraw-Hill/Irwin
Inc.
9-64

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-48 (CONTINUED)


3.

Purchases
budget:
20x0

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

20x1
March

First
Quarter

Decem
ber

January

Febru
ary

$280,0
00

$308,0
00

$338,
800

$372,6 $1,019,4
80
80

154,00
0

169,40
0

186,3
40

186,34
0*

$434,0
00

$477,4
00

$525,
140

$559,0 $1,205,8
20
20

140,00
0
$294,0
00

154,00
0
$323,4
00

169,4
00
$355,
740

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

186,340

*Since April's expected sales and cost of goods sold are the
same as the projections for March, the desired ending
inventory for March is the same as that for February.

The desired ending inventory for the quarter is equal to


the desired ending inventory on March 31, 20x1.
**The beginning inventory for the quarter is equal to the
December ending inventory.

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

2002 The McGraw-Hill Companies,


9-65

PROBLEM 9-48 (CONTINUED)


4.

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

McGraw-Hill/Irwin
Inc.
9-66

First
Quarter

$129, $142,2
360
96

$149,
$
072 420,728

176,4 194,04
00
0

213,4 583,884
44

$305, $336,3
760
36

$362,
516

$1,004,
612

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

4,400
4,840

$
21,00
0
16,00
0
21,00
0
-0-

$
63,000

-0
5,324

5,400

14,564

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

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

48,000
63,000
15,000

2002 The McGraw-Hill Companies,


Solutions Manual

76
*40% of current months' purchases [see requirement (3)].

60% of the prior month's purchases [see requirement (3)].


**Bond interest is paid every six months, on January 31 and
July 31. Property taxes also are paid every six months, on
February 28 and August 31.

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

2002 The McGraw-Hill Companies,


9-67

PROBLEM 9-48 (CONTINUED)


5.

Summary cash budget:


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

0) (50,000
)
Change in cash balance
during
first quarter................
Cash balance, 1/1/x1.......
Cash balance, 3/31/x1.....

McGraw-Hill/Irwin
Inc.
9-68

$
(9,046)

35,000
$
25,954
2002 The McGraw-Hill Companies,
Solutions Manual

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


6.

Analysis of short-term financing needs:


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

$
35,000

25,000
$
10,000

15,000
$
25,000

125,000

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

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

$(100,0
00)

2002 The McGraw-Hill Companies,


9-69

PROBLEM 9-48 (CONTINUED)


7.

INTERCOASTAL ELECTRONICS COMPANY


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

$1,456,
400

1,019,4
80
$
436,920

Less: Cost of goods sold.......................


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

$63,000
14,564
48,000
63,000
75,000
7,500
2,500
2,700

276,264
$
160,656

INTERCOASTAL ELECTRONICS COMPANY


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

McGraw-Hill/Irwin
Inc.
9-70

$
107,500
160,656

50,000
$
218,156

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-48 (CONTINUED)


9.

INTERCOASTAL ELECTRONICS COMPANY


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

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


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

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

Cost of equipment acquired................................


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

$
25,954
359,370
186,340

676,000
$1,247,6
64
$
223,608
5,000
900
300,000
500,000

218,156
$
1,247,66
4
$
270,000
1,092,30
0
(1,002,93)
0
$
359,370
$
626,000
125,000
(75,000)
$

2002 The McGraw-Hill Companies,


9-71

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

McGraw-Hill/Irwin
Inc.
9-72

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

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-49 (25 MINUTES)

a n a n n u n a u l a l

r t c ep o qo q he r us urod t a ile rdn r e i t n mi t g y e
+
o o r 2 r cd p d o e e s r r t

q u u a n n i i t t y

1.

Annual cost of
ordering and
storing XL-20

2.

Economic order
quantity

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

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

360,000

3.

= 600

Using the formula given for requirement (1):


Total annual cost of
ordering and storing

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

4,800

600

) + ( $4)
= 600 ( $150
2
2002 The McGraw-Hill Companies,
9-73

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

Orders per year:


Number of orders per =
year

5.

annual
requiremen
t 4,800
=
=8
orderquantity
600

Using the new cost data:


a.

EO =
Q
=

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

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

b.

Number of orders per =


year

annualrequiremen
t 4,800
=
orderquantity
100

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

Tabulation of inventory ordering and holding costs:


400
Number of orders
(4,800 order size)..........
Ordering cost
($150 number of orders)
Average inventory
(order size 2).................

McGraw-Hill/Irwin
Inc.
9-74

Order size
600

800

12

$1,80
0

$1,200

$900

200

300

400

2002 The McGraw-Hill Companies,


Solutions Manual

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

$800

$1,200

$1,600

$2,60
0

$2,400

$2,500

minim
um
2.

The tabular method is cumbersome and does not


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

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

2002 The McGraw-Hill Companies,


9-75

PROBLEM 9-51 (25 MINUTES)


Graphical analysis of economic order quantity:

McGraw-Hill/Irwin
Inc.
9-76

2002 The McGraw-Hill Companies,


Solutions Manual

Total annual cost

$3,500

$3,000

$2,500

Minimum
cost

$2,000

Total annual
cost

Holding costs

$1,500

$1000

Ordering costs

$500

200

400

600

800

Order quantity
1,000

Economic order quantity


(EOQ)

McGraw-Hill/Irwin
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Managerial Accounting, 5/e

2002 The McGraw-Hill Companies,


9-77

PROBLEM 9-52 (35 MINUTES)


1.

Reorder point:
Monthly usage =
=

annual
usage
12
4,800
= 400canisters
12

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

McGraw-Hill/Irwin
Inc.
9-78

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-52 (CONTINUED)


2.

Graph of usage, lead time and reorder point:


Quantity
(canisters)
of XL-20
600

Usage of
XL-20

400

200

Time
1 month
lead timeOrder

Denotes
1 month

received

Reorder point,
when
inventory equals
400
canisters. Order

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

2002 The McGraw-Hill Companies,


9-79

PROBLEM 9-52 (CONTINUED)


3.

Safety stock and new reorder point:


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

PROBLEM 9-53 (45 MINUTES)


1.

The ordering cost per order is composed of the


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

$ 75.00
72.00
20.00
5.80
$172.80

changeinordering
cost

= changeinnumberoforders
=

$12,300
$11,900
9515

$400
80

= $5.00
Recognition of 16%
cost increase

= $5.00 1.16
= $5.80

McGraw-Hill/Irwin
Inc.
9-80

2002 The McGraw-Hill Companies,


Solutions Manual

PROBLEM 9-53 (CONTINUED)


2.

The storage cost per windshield is composed of


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

3.

5.35
3.00
1.15
10.50
$ 20.00

The economic order quantity (EOQ) is calculated as


follows:
EOQ =

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

EOQ = 432 windshields per order


4.

The minimum annual relevant cost at the economic order


quantity is calculated as follows:
Minimum cost = ordering cost + storage cost
=

10,800
$172.80 432$20.00
+
432
2

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

The reorder point in units is calculated as follows:


Usage per day lead time in = 36* units 6 days
days
= 216 windshields
*10,800 50 weeks 6 days

McGraw-Hill/Irwin
Inc.
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2002 The McGraw-Hill Companies,


9-81

PROBLEM 9-53 (CONTINUED)


6.

Using the new cost estimates:


a.

EOQ =
=

b. Number of orders
per year

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

order

= 108 windshields per

annualrequiremen
t 10,800
=
orderquantity
108

= 100 orders
c.

Minimum cost = ordering cost + storage cost


=

10,800
$32.40 108$60.00
+
108
2

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

McGraw-Hill/Irwin
Inc.
9-82

2002 The McGraw-Hill Companies,


Solutions Manual

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

Yes, City Raquetball Club (CRC) should be better able to


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

2.

a.

Factors that CRCs management should consider before


adopting the new membership plan and fee structure
include:

Costs associated with the plan changeover


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

The anticipated rate of return for excess cash or cost


of borrowing funds in periods of cash shortages

b.

3.

Financial analyses conducted by CRC could include a


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

Because CRC's cash flows should be more predictable,


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

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

2002 The McGraw-Hill Companies,


9-83

transactions.

McGraw-Hill/Irwin
Inc.
9-84

2002 The McGraw-Hill Companies,


Solutions Manual

CASE 9-55 (35 MINUTES)


1.

Some of the operational and behavioral benefits that are


generally attributed to a participatory budgeting process
are as follows:

Utilization of the best knowledge of activities in a specific


area, because the participants are close to daily operations.
Goals that are more realistic and acceptable.
Improved communication and group cohesiveness.
A sense of commitment and
accountable for the budget.
2.

willingness

to

be

held

Four deficiencies in Patricia Eklunds participatory policy


for planning and performance evaluation, along with
recommendations of how the deficiencies can be
corrected:
Deficiencies

Recommendations

The setting of constraints on


fixed expenditures includes
uncontrollable
fixed
costs,
thereby
mitigating
the
positive
effects
of
participatory budgeting.

Rewards should be based on


meeting
budget
and/or
organizational
goals
or
objectives.

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

Divisional constraints could be


communicated at a budget
kick-off meeting; however,
individual
limits
of
controllable expenses should
2002 The McGraw-Hill Companies,
9-85

be set by each manager.

McGraw-Hill/Irwin
Inc.
9-86

2002 The McGraw-Hill Companies,


Solutions Manual

CASE 9-56 (120 MINUTES)


1.

Sales budget:

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

20x0
4th
Quarte
r

2nd
Quarte
r

20x1
3rd
Quarte
r

1st
Quarte
r

4th
Quarte
r

Entire
Year

50,000

55,000

60,000

65,000

70,000


$10


$10


$10


$10

x
$10

250,00
0

$10

$
500,00
0

$
550,00
0

$
600,00
0

$
650,00
0

$ $2,500,
700,00
000
0

40,000

45,000

50,000

55,000

60,000


$15


$15


$15


$15


$15

$
600,00
0

$
675,00
0

$
750,00
0

$
825,00
0

210,00
0

$15

$ $3,150,
900,00
000
0

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

$
440,00
0

$
490,00
0

$
540,00
0

$590,0
00

$640,0 $2,260,
00
000

660,00
0

735,00
0

810,00
0

885,00
0

960,00 3,390,0
0
00

*40% of total sales.


McGraw-Hill/Irwin
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Managerial Accounting, 5/e

2002 The McGraw-Hill Companies,


9-87

60% of total sales.

McGraw-Hill/Irwin
Inc.
9-88

2002 The McGraw-Hill Companies,


Solutions Manual

CASE 9-56 (CONTINUED)


2.

Cash receipts budget:

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

1st
Quarte
r
$
490,00
0

2nd
Quarte
r
$
540,00
0

20x1
3rd
Quarte
r
$
590,00
0

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

Cash collections
from credit
sales made during
588,00 648,00 708,00 768,00 2,712,0
current
0
0
0
0
00
quarter*................
Cash collections
from credit
sales made during

previous
132,00 147,00 162,00 177,00 618,00

quarter .................
0
0
0
0
0
Total cash receipts. . $1,210, $1,335, $1,460, $1,585, $5,590,
000
000
000
000
000
*80% of current quarter's credit
sales.

20% of previous quarter's credit


sales.

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

2002 The McGraw-Hill Companies,


9-89

CASE 9-56 (CONTINUED)


3
.

Production budget
20x0
4th
Quart
er

1st
Quart
er

2nd
Quart
er

20x1
3rd
4th
Quart Quart
er
er

Entir
e
Year

55,00
0

60,00 65,00 70,00


0
0
0

250,
000

12,00
0

13,00 14,00 15,00


0
0
0

61,00
0

67,00
0

73,00 79,00 85,00


0
0
0

15,0
00
265,
000

10,00
0

11,00
0

12,00 13,00 14,00


0
0
0

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

56,00
0

61,00 66,00 71,00


0
0
0

11,0
00
254,
000

45,00
0

50,00 55,00 60,00


0
0
0

210,
000

10,00
0

11,00 12,00 13,00


0
0
0

55,00
0

61,00 67,00
0
0

13,0
00
223,
000

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

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

49,00
0

9,000
8,000

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

McGraw-Hill/Irwin
Inc.
9-90

46,00
0

73,0
00

10,00 11,00 12,00


0
0
0
51,00 56,00 61,00
0
0
0

9,00
0
214,
000

2002 The McGraw-Hill Companies,


Solutions Manual

CASE 9-56 (CONTINUED)


4
.

Raw-material budget:*

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

20x0
4th
Quart
er

1st
Quart
er

51,00
0

56,00 61,000
0

66,00
0

71,00
0

254,00
0

102,0
00

112,0 122,00
00
0

132,0
00

142,0
00

508,00
0

41,00
0

46,00 51,000
0

56,00
0

61,00
0

214,00
0

123,0
00

138,0 153,00
00
0

168,0
00

183,0
00

642,00
0

225,0
00

250,0 275,00
00
0

300,0
00

325,0 1,150,0
00
00


$1


$1


$1


$1


$1

$225,
000

$250, $275,0
000
00

$300,
000

$325, $1,150,
000
000

2nd
Quarte
r

20x1
3rd
4th
Quart Quart
er
er

Entire
Year


$1

*Raw-material budget continued on next page.


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

2002 The McGraw-Hill Companies,


9-91

CASE 9-56 (CONTINUED)


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

51,00
0

56,00 61,000
0

66,00
0

71,00
0

254,00
0

.2
5

.2
5

.2
5

.2
5

.2
5

.
25

12,75
0

14,00 15,250
0

16,50
0

17,75
0

63,500

41,00
0

46,00 51,000
0

56,00
0

61,00
0

214,00
0

.
5

. .5
5

.
5

. .
5
5

20,50
0

23,00 25,500
0

28,00
0

30,50
0

107,00
0

33,25
0

37,00 40,750
0

44,50
0

48,25
0

170,50
0

7,400

8,150

8,900

9,650

10,400

40,65
0

45,15 49,650
0

54,15
0

10,40
0
58,65
0

6,650

7,400

8,150

8,900

9,650

7,400

34,00
0

37,75 41,500
0

45,25
0

49,00
0

173,50
0

180,90
0

2002 The McGraw-Hill Companies,


Solutions Manual

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

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

$8

$8

$8

$8

$8

$8

$272,
000

$302, $332,0
000
00

$362,
000

$392, $1,388,
000
000

$497,
000

$552, $607,0
000
00

$662,
000

$717, $2,538,
000
000

2002 The McGraw-Hill Companies,


9-93

CASE 9-56 (CONTINUED)


5. Cash disbursements budget:*

1st
Quart
er
Raw-material purchases:
Cash payments for
purchases during
the current
$441,

quarter ...................
600
Cash payments for
purchases during
the
preceding
quarter**.................
Total cash
payments for
raw-material
purchases................
Direct labor:
Frames produced
(S and L)............

4th
Quarte
r

Entire
Year

$
$
485,60 529,600
0

$ $2,030,
573,60
400
0

99,40
0

110,40 121,400
0

132,40
0

$541,
000

$
$
596,00 651,000
0

$ $2,494,
706,00
000
0

102,0
00

112,00 122,000
0

132,00
0

468,00
0


.1

.
1


.1


.1

11,200

12,200

13,200

46,800


$20


$20


$20


$20

$
$
224,00 244,000
0

$
264,00
0

$
936,00
0

Direct-labor
hours per
.
frame.................
1
Direct-labor hours
to be
10,20
used...................
0
Rate per directlabor

hour...................
$20
Total cash
payments for
$204,
direct labor.........
000

McGraw-Hill/Irwin
Inc.
9-94

2nd
Quarte
r

20 1
3rd
Quarter

463,60
0

2002 The McGraw-Hill Companies,


Solutions Manual

*Cash disbursements budget continued on next page.

80% of current quarters purchases


**20% of previous quarters purchases

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

2002 The McGraw-Hill Companies,


9-95

CASE 9-56 (CONTINUED)


Manufacturing
overhead:
Indirect material....
Indirect labor........
Other....................
Total cash
payments for
manufacturing
overhead............
Cash payments for
selling
and
administrative
expenses............
Total cash
disbursements.........

McGraw-Hill/Irwin
Inc.
9-96

$
10,20
0
40,80
0

31,00
0

$
11,200

$
$
12,200 13,200

$
46,800

44,800

48,800

52,800

36,000

41,000

46,000

187,20
0

154,00
0

$
82,00
0

$
$
92,000 102,000

$
112,00
0

$
388,00
0

$100,
000

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

2002 The McGraw-Hill Companies,


Solutions Manual

CASE 9-56 (CONTINUED)


6
.

Summary cash budget:

Cash receipts [from


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

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

$
323,000

$
363,000

(50,000)

(50,000)

$ $1,372,0
403,000
00

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

Proceeds from bank


1,000,00
loan (1/2/x1)................
0
Purchase of equipment (1,000,00
0)
Quarterly installment
on loan
(250,000 (250,000 (250,000 (250,000
principal...................
)
)
)
)
Quarterly interest

payment*..................... (25,000) (18,750) (12,500)


(6,250)
Change in cash balance
during
$
$
$
$

the period................. (42,000)


4,250
50,500
96,750
McGraw-Hill/Irwin
Managerial Accounting, 5/e

2002 The McGraw-Hill Companies, Inc.


9-97

(1,000,0
00)

(62,500)
$
109,500

Cash balance,
beginning of period

95,000

53,000

57,250

Cash balance, end of


period.........................

$
53,000

$
57,250

$
107,750

$
204,500

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

McGraw-Hill/Irwin
9-98

107,750 95,000

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

2002 The McGraw-Hill Companies, Inc.


Solutions Manual

$
204,500

CASE 9-56 (CONTINUED)


7.

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

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

$
59,200

2,538,000

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

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

$2,597,20
0

Deduct: Raw-material inventory,


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

83,200
$2,514,00
0
936,000
$
46,80
0
187,2
00
154,0
00

80,00
0
468,000*
$3,918,00
0

167,000
$4,085,00
0

235,000**
$3,850,00
0

2002 The McGraw-Hill Companies,


9-99

*In the budget, budgeted and applied manufacturing overhead


are equal. The applied manufacturing overhead may be
verified independently as follows:
Total number of frames produced...........
Direct-labor hours per frame...............
Total direct-labor hours..........................
Predetermined overhead rate per hour
Total manufacturing overhead applied. . .

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

See next page.


**See next page.

See next page.

McGraw-Hill/Irwin
Inc.
9-100

2002 The McGraw-Hill Companies,


Solutions Manual

CASE 9-56 (CONTINUED)


The cost of goods manufactured may be verified independently as
follows:

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

S
L
Frames Frames
254,000 214,000


$7
$10
$1,778, $2,140,
000
000
$3,918,000

**The finished-goods inventory on 12/31/x1 may be verified


independently as follows:

Projected inventory on 12/31/x1...........


Manufacturing cost per unit.................
Cost of ending inventory......................
Total cost of ending inventory (S and L)

S
L
Frames Frames
15,000
13,000


$7
$10
$
$
105,000 130,000
$235,000

The cost of goods sold may be verified independently as


follows:

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

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

S
L
Frames Frames
250,000 210,000


$7
$10
$1,750, $2,100,
000
000
$3,850,000

FRAME-IT COMPANY
BUDGETED INCOME STATEMENT
2002 The McGraw-Hill Companies,
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FOR THE YEAR ENDED DECEMBER 31, 20X1


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

$5,650,
000

3,850,0
00
$1,800,
000

Less: Cost of goods sold......................


Gross margin......................................
Selling and administrative expenses. . .
Interest expense.................................
Net income.........................................

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$400,00
0

62,500

462,500
$1,337,
500

2002 The McGraw-Hill Companies,


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CASE 9-56 (CONTINUED)


9.

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

1
0.

$3,353,
800
1,337,5
00

200,000
$4,491,
300

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

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$
204,500
192,000
83,200
235,000

8,920,0
00
$9,634,
700
$
143,400
5,000,0
00

4,491,3
00
$9,634,
700

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*Fourth-quarter sales on account 20% = $960,000 20%

10,400 units $8
**$8,000,000 + $1,000,000 $80,000

Fourth-quarter purchases on account 20% = $717,000


20%

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CURRENT ISSUES IN MANAGERIAL ACCOUNTING


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

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

GENERATION,"
25, 2000, RICK

1. Budgeting has moved to a combination of top-down and


bottom-up processes. The idea is that managers will be
able to measure results more accurately. Strategic
planning begins with the organization's objectives and
then builds a budget designed to achieve those goals.
Input from all levels is needed to make strategic planning
successful.
2. New technology via computer software allows employees
from different levels of an organization to provide
integrated input into budget formation. This has allowed a
faster and more accurate process on a national as well as
an international scale that is updated on a continuous
basis.
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3.
Amway Corporation incorporated Adaytum Software
to project reducing travel expenses by 5% for its
executives. Next year Amway will use the software to
eventually link several hundred managers into the
budgeting process.

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

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

ISSUE 9-61

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"SELLING THE BUDGET," STRATEGIC FINANCE, SEPTEMBER


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


costing, to help them meet targets.

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