Ch. 10 Using Budgets To For Planning and Coordination Solution

Atkinson, Solutions Manual t/a Management Accounting, 6E
Chapter 10
Using Budgets to for
Planning and
Coordination
QUESTIONS
1011 A budget is a quantitative model of the expected consequences of the

organization’s short-term operating activities. A budget typically expresses the
expected money inflows and outflows in order to assess whether the planned
operations will meet the organization’s financial objectives.
1012 Flexible resources are those that vary with the activity level of the firm or
organization. Those that do not change with the activity level are capacity1
related (or committed or fixed resources).
1013 Yes, a spending plan is a budget since it provides a summary, in financial terms,
of the student’s spending intentions.
1014 In many ways the goal of a family budget is quite similar to the goal of a budget
developed for an organization. In these settings, the goal is to help both families
and organizations achieve their objectives by allocating their resources wisely.
Organizational budgets usually differ from family budgets in sheer size (the
dollar amounts proposed), scope (the number of operating units and their goals),
and number of iterations (submission and resubmissions of budgets) before the
final budget is determined.
1015 A production plan is an exhibit that identifies proposed production during an

interval of time, such as a week or a month. A production plan in a courier
company identifies the number of drivers and trucks needed and assigns drivers
and trucks to routes.
1016 Financial budgets represent projected financial results for an organization.

Such budgets include a statement of expected cash flows, projected balance
sheet, and a projected income statement. These are often called pro forma
financial statements. Operating budgets are plans used to guide the operations
of the organization. Such plans include sales, capital spending, production,
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materials purchasing, labor hiring and training, and administrative and

discretionary spending plans.
1017 You should not jump to the conclusion that the university’s hiring and training
plan is likely to be more important because it hires skilled rather than unskilled
labor. A number of factors determine the importance of a labor hiring and
training plan in any organization. However, the two most important are likely
the amount of employee turnover that requires replacement and the amount of
ongoing retraining that the organization must provide. If the university has
reached relatively stable employment, the labor hiring and training plan would
be relatively unimportant since university faculty members are expected to
attend to their own training. If the municipality is continuously hiring new
employees or retraining existing employees to use equipment, it will have a
continuous need for a hiring and training plan.
1018 The sales plan is based on the demand forecast. The numbers in the demand
forecast must not be less than the numbers in the sales plan. Otherwise the sales
plan is infeasible because it calls for selling more than customers will buy.
1019 A demand forecast is an estimate of the number of units that customers would
be willing to buy under specified conditions. The intended sales in the sales
plan, a crucial component of the master budget process, cannot exceed the
numbers in the demand forecast. Thus, the demand forecast is used to develop
the sales plan.
10110 Yes. Employee training does not have a physical relationship with the
organization’s activity level. (However, employee training should enhance
performance potential, supporting achievement of an organization’s strategy.)
10111 A capital spending plan summarizes an organization’s plans to acquire or sell

long-term capital investments, such as buildings and equipment, that are needed
to meet the organization’s objectives.
10112 A capacity-related expenditure is any expenditure that an organization cannot

avoid in the short-run. A payment on a long-term lease is a capacity-related
expenditure.
10113 This is a tricky question. If the cafeteria is committed to preparing a given

amount of food for each student in the residence, whether the student shows up
for meals or not, the food cost is a capacity-related (fixed) cost. However, if the
cafeteria only prepares enough food for students who, on average, actually
show up to eat, the food cost is a variable cost.
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Chapter 10: Using Budgets for glanning and Coordination
10114 A defining characteristic of a flexible resource is one where you only pay for
what you use. Flexible resources can be acquired or disposed of in the short run
based on the number of output units. We usually assume that materials costs are
variable (flexible) because we can always carry materials until we use them.
However, if an organization pays a set amount for materials, no matter how
much it uses, the materials cost is a capacity-related (fixed) cost. A store that
buys merchandise may consider merchandise, or materials costs, a capacity-
related resource because it is unable to carry merchandise indefinitely or return
unused merchandise—but this is stretching the idea of a capacity-related
resource.
10115 A line of credit is a short-term financing arrangement made between an

organization and a financial institution. A line of credit provides an
organization with a ready supply of cash, up to a limit negotiated between the
organization and its bank. We can think of a line of credit as a commitment
from a financial institution to allow the debtor to borrow money on demand up
to a specified maximum amount.
10116 Planners use budget information for the following purposes:

(1) Identify broad resource requirements. This helps develop plans to put needed
resources in place.
(2) Identify potential problems. This helps to avoid problems or to deal with
them systematically.
(3) Compare projected operating and financial results to actual results. These
comparisons within an organization can be used to evaluate the efficiency of
the organization’s operating processes.
10117 Both what-if and sensitivity analyses use the same model to evaluate future
alternatives. However, the approaches differ in their purposes. What-if-analysis
is a process that uses a model to predict the results of varying that model’s key
parameters or estimates. Sensitivity analysis is the process of selectively
varying key estimates of a plan or a budget to identify over what range a
decision option is preferred. In this way, sensitivity analysis enables planners to
identify estimates critical to the decision under consideration. What-if-analysis
relies on that model tested via sensitivity analysis.
10118 A variance is a difference between an actual amount and a planned (budgeted)

amount. The oil pressure warning light comes on in a car when the oil pressure
falls outside a specified planned or expected range.
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10119 Analysis of reasons for the variance between actual and estimated job costs can
help managers in several ways. If the managerial actions that led to actual costs
being lower than the estimated costs are identified, similar cost savings can be
realized by repeating those actions in the production of other jobs. If factors
resulting in actual costs being higher are identified, then managers may be able
to take the necessary actions to eliminate or control those factors. If cost
changes are likely to be permanent, however, the revised cost information can
be used in revising standards for future variance analyses and in bidding for
jobs in the future.
10120 A flexible budget presents cost targets or forecasts for the organization’s
achieved level of activity.
10121 The first level of variance analysis for a cost item focuses on the differences
between actual and estimated (master budget) costs for the item. The second
level of variance analysis decomposes the first-level variances into a flexible
budget variance and a planning variance. The flexible budget variance is the
difference between actual costs and flexible budget costs, which reflect the
volume level achieved, rather than planned. The planning variance is the
difference between flexible budget costs and master budget costs. For variable
costs, the third level of variance analysis decomposes the flexible budget
component of the second level variance into efficiency (use) and price (rate)
variances.
10122 By classifying flexible budget variances into rate (price) and efficiency
(quantity) variances, managers can better understand the factors causing those
variances and correct the standards or institute changes that help reduce
expenses.
10123 Yes. The labor efficiency variance will likely be favorable because fewer
(actual) hours will be required for a job when experienced workers work on the
job. The labor rate variance, however, will likely be unfavorable because
experienced workers’ wages will be higher than those of less experienced
workers.
10124 The purchase and use of cheaper, lower-quality materials is likely to result in a
favorable material price variance, an unfavorable material quantity variance,
and an unfavorable labor efficiency variance, but the labor rate variance is not
likely to be affected.
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10125 The first step isolates the effect of sales volume differences by computing sales
mix variances and sales quantity variances, and the second step isolates the
effect of sales price differences by computing sales price variances.
10126 An appropriation is a planned cash outflow or spending plan. In a government

agency, it is an authorized spending limit. An example of an appropriation in a
university is an authorization for a faculty to spend a specified amount of
money on student entrance scholarships.
10127 A periodic budget is a budget that is prepared for a fixed interval of time,
usually one year. After the period of time has elapsed, the budget is discarded.
10128 This is called incremental budgeting because spending allocations for this
period are proportional adjustments of last period’s spending allocations.
10129 This is called zero-based budgeting because each year the charities to which
you donate must reestablish their need.
10130 Critics argue that the traditional budgeting process (1) reflects a top-down
approach to organizing that is inconsistent with the need to be flexible and
adapt to changing organization circumstances; (2) focuses on controls (such as
meeting the target budget) rather than on helping the organization achieve its
strategic objectives; and (3) causes resource allocations to be driven by political
power in the organization rather than strategic needs.
10131 The beyond budgeting approach differs in two fundamental ways from
traditional budgeting. First, traditional budgets are based on fixed annual plans
that tie managers to predetermined actions. In the Beyond Budgeting approach
targets are developed based on stretch goals tied to peers, competitors, and key
global benchmarks. These targets are reviewed and modified if necessary and
managers are more motivated to achieve these goals since the goals represent
measures that link directly to the competition rather than an internal artificial
goal. Second, the Beyond Budgeting model provides a more decentralized way
of managing. Rather than relying on traditional hierarchical and centralized
management, managers are much more accountable to their teams and
workgroups since the targets directly pertain to what they are doing. This
provides everyone with a more direct sense of responsibility and is more
motivating.
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EXERCISES
10132 If the organization solicits the information from the sales force, salespeople will
be motivated to understate sales potential in order to set low hurdles for
commissionable sales. Other approaches include using estimates based on
market surveys conducted by a drug industry association or other research
group, and using statistical models to identify a relationship between future
sales and current sales or trends in disease.
10133 The primary purpose of budgets is for planning. Problems are created when
budgets are used after the fact for control. For example people whose
performance will be compared to the budget targets may understate their
potential in order to have achievable targets set. Therefore, tying plans to after-
the-fact control compromises the integrity of the information gathering process.
Some people have argued that information used for planning should not be used
in after the fact control. (Standards for after the fact control could, instead, be
based on independent benchmark information or improvements on previous
performance.) Some organizations have designed incentive schemes that reward
people jointly on their ability to improve performance and to meet budget
projections.
10134 Wages paid to graders are controllable in the short-term if the wages are based
purely on the number of hours worked. The wages paid to lecturers who are
hired to teach for a semester are controllable in the intermediate-term because
there is no commitment to the lecturers beyond the end of the semester. The
wages paid to full-time faculty are only controllable in the long-term since most
faculty members are on long-term or permanent contracts. Because of the
nature of full-time staff teaching contracts, universities are notoriously
inflexible as student demands for programs and courses change.
10135 Many organizations are run by the numbers. In these organizations managers
are held accountable for financial results. Therefore, their interest tends to focus
on projections of financial results and they judge the desirability of a set of
operating strategies based on the financial results projected for those strategies.
10136 A consulting company is an organization that uses highly trained people to

deliver complex and customized products to its customers. This organization
might be experiencing a continuous need to hire and train personnel who can
provide the services that customers require. A planning process allows this
organization to anticipate the type and quantity of skills it will require and will
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allow it to develop a hiring and training plan that will provide the people it
needs at a minimum cost.
10137 The vegetable canner acquires and packs its products over a very short period of
time following the growing seasons. Therefore, inventory levels will be
cyclical, building up after the growing season and declining until the end of the
next growing season. The organization will have to plan to acquire the funds it
needs to meet this need for a cyclical investment in inventory.
10138 The credit granting policy is an important component of the organization’s

selling strategies. Tightening or eliminating credit terms might reduce sales. On
the other hand, tightening credit terms should speed cash collections and might
decrease the bad debts expense and reduce the opportunity cost of the accounts
receivable loans to customers. The organization’s planners must balance the
benefits of reduced bad debts expense and the opportunity costs of lending with
the profit on lost sales that might result from reducing credit terms.
10139 A machine shop might accept and complete thousands of small jobs each year.
Because of the problems and errors in determining profits from individual small
jobs, this organization might want to compare its overall levels of efficiency
with those of its competitors by comparing its projected financial results with
those of its toughest competitors. Costs that are out of line with those of
competitors would be flagged and plans developed to improve the performance
of activities that created those costs.
10140 Units
Sales 40,000
Desired ending inventory 5,000
Needs 45,000
Beginning inventory 6,000
Purchases 39,000
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10141 (a)
Production Budget January February March
Sales of G12 50,000 60,000 54,000
Desired ending inventorya 15,000 13,500
Needs 65,000 73,500
Beginning inventoryb 12,500 15,000
Production 52,500 58,500
a
25% of next month’s sales. For January, 25%  60,000 = 15,000; for February,
25%  54,000 = 13,500
b
25% of current month’s sales. For January, 25%  50,000 = 12,500; for February,
25%  60,000 = 15,000
(b)
Purchases Budget January February
Units to be produced 52,500 58,500
Raw materials needed per unit 0.5 0.5
Total production needs 26,250 29,250
Desired ending inventorya 2,925 2,025
Total material needs 29,175 31,275
Beginning inventoryb 2,625 2,925
Total material purchases 26,550 28,350
a
10% of next month’s needs. For January, 10%  29,250 = 2,925; for February, 10%
 20,250 = 2,025
b
10% of current month’s needs. For January, 10%  26,250 = 2,625; for February,
10%  29,250 = 2,925
10142 (a) Let Q  sales level in units at which the costs are the same with both
machines.
($44  Q) + $32,000 = ($40  Q) + $40,000
$4Q = 8,000
Q = 2,000 units
(b) Let R  sales level in dollars at which the use of the new machine results
in a 10% profit on sales ratio.
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Let Q be the corresponding number of units, so that R  $55  Q
$55  40 Q  $40,000 $55 Q 10%

15Q  55
. Q 40,000
40,000
Q 4,211 units
9.5
R $55 4,211
$231,605
10143 The most critical estimates are the demand estimates because they provide the
basis upon which all the other plans are based. Other critical estimates are those
relating to the consumption of each factor of production (such as raw materials,
labor, and machine capacities) by each unit of production since these estimates
will play an important role in estimating total resource requirements and
estimating costs.
10144 No. Incremental budgeting does not ensure that resources are best allocated.
Some university units (such as departments or colleges) may have major
inefficiencies and budgetary slack where other units may have already made
process improvements and have few inefficiencies and relatively little
budgetary slack. Moreover, some units may be seriously underfunded relative
to the trend in demand where other units may be overfunded relative to the
trend in demand.
10145 (a) Because the quantity purchased differs from the quantity used, the
material price variance uses the purchased quantity (gQ) instead of the
quantity used (AQ).
Material price variance = (Ag – Sg) × gQ

= ($2.50 – 2.20) × 12,000
= $3,600 U
(b) Material quantity variance = (AQ – SQ) × Sg

= (10,500 – (20 × 500)) × $2.20
= $1,100 U
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Direct labor rate variance  AR  SR  AH

(c) $12  10 1800
,
$3,600 U
(d) Direct labor efficiency variance = (AH – SH) × SR

= (1,800 – (4 × 500)) × $10
= $2,000 F
Direct material price variance  Ag  Sg  AQ

10146 (a) $5,880 2,800  2 2,800
$280 U
(b) Direct material quantity variance = (AQ − SQ) × Sg

= (2,800 − (5 × 500)) × $2
= $600 U
(c) A favorable labor efficiency variance of $100 for job 822 implies that
100
(AH – 2 × 500) × $10 = –100. Therefore, AH 1,000  990 .
10
(d) An unfavorable labor rate variance of $250 for job 822 implies that
(AR – 10) × 990 = 250. Therefore,
250
AR 10  $10.2525 .
990
Finally, the actual direct labor costs incurred for Job 822 are:
AR  AH $10.2525 990 $10,150 (rounded).
10147 (a) Material price variance = (Ag – Sg)  AQ

= ($97 – 100)  40,000
= $120,000 F
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(b)
Material quantity variance =  AQ  SQ Sg
40,000  5 9,000 $100
$500,000 F
(c) Yes, the relationship with this new supplier should be maintained
because it appears the supplier is providing materials of good quality for
a price that is less than expected. However, as a precaution, the company
could make sure the lower cost materials are not leading to the
unfavorable labor efficiency variance in part (e).
Direct labor rate variance  AR  SR  AH

(d) $60,000 5,000  12 5,000
0
(e) Direct labor efficiency variance = (AH – SH) × SR

= (5,000 – (0.50 × 9,000)) × $12
= $6,000 U
10148 (a) Material price variance = (Ag – Sg)  AQ

Component X: 0.30  AQ = 160, so AQ = 533.3 units of X.
Component Y: – 0.20  AQ = – 120, so AQ = 600 units of Y.
Component Z: 0.50  AQ = 192, so AQ = 384 units of Z.
(b) Material quantity variance = (AQ – SQ)  Sg

Component X: (533.3 – (1  220))  Sg = 168, so Sg = $0.536 per unit of X.
Component Y: (600 – (2  220))  Sg = 100, so Sg = $0.625 per unit of Y.
Component Z: (384 – (3  220))  Sg = –84, so Sg = $0.304 per unit of Z.
1,000,000
10149 Planned number of batches  40
25,000
1125
, ,000
Flexible budget number of batches  45
25,000
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PROBLEMS
10150 Borders Manufacturing Production Plan

Month Unit sales Production (rounded)
January 8,742 (8,742  .5)  (9,415  .5)  9,079
February 9,415 (9,415  .5)  (7,120  .5)  8,268
March 7,120 (7,120  .5)  (8,181  .5)  7,651
April 8,181 (8,181  .5)  (7,942  .5)  8,062
May 7,942 (7,942  .5)  (9,681  .5)  8,812
June 9,681 (9,681  .5)  (2,511  .5)  6,096
July 2,511 (2,511  .5)  (2,768  .5)  2,640
August 2,768 (2,768  .5)  (2,768  .5)  2,768
September 2,768 (2,768  .5)  (2,283  .5)  2,526
October 2,283 (2,283  .5)  (1,542  .5)  1,913
November 1,542 (1,542  .5)  (1,980  .5)  1,761
December 1,980 (8,725  .5)  (1,980  .5)  5,353
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10151 Mira Vista Planters

Jan Feb Mar Apr May Jun
Demand 8,692 5,765 8,134 34,400 558,729 832,251
Sales revenue (× $0.20) $1,738 $1,153 $1,627 $6,880 $111,746 $166,450
Planters
Beginning of month 2 1 1 1 5 73
Added a 0 0 0 4 68 14
Trained b (whole numbers) 0 0 0 7 114 24
Laid off c 1 0 0 0 0 0
Ending 1 1 1 5 73 87
Capacity d 10,000 10,000 10,000 40,000 560,000 835,000
Wages e $1,600 $1,600 $1,600 $6,400 $89,600 $133,600
Training Costse 0 0 0 2,800 45,600 9,600
Layoff Severance 400 0 0 0 0 0
Total Costs $2,000 $1,600 $1,600 $9,200 $135,200 $143,200
Profit ($262) ($447) $27 ($2,320) ($23,454) $23,250
Demand 8,692 5,765 8,134 34,400 558,729 832,251
Beginning capacity 20,000 10,000 10,000 10,000 50,000 730,000
Difference – 11,308 – 4,235 – 1,866 24,400 508,729 102,251
a
New planters needed 0 0 0 4 68 14
5/3 × number needed 0.0 0.0 0.0 6.7 113.3 23.3
b
Planters trained 0 0 0 7 114 24
c
Planters laid off 1 0 0 0 0 0
d
Trainees add to capacity for only 3 weeks of their first month. For April, the capacity is
((1 × 10,000) + (4 × 10,000 × ¾)) = 40,000.
e
Trainees are hired at the beginning of the month and receive $400 for a week of training
and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month.
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Mira Vista Planters

Jul Aug Sep Oct Nov Dec
Demand 1,286,700 895,449 733,094 203,525 29,410 9,827
Sales revenue (× $0.20) $257,340 $179,090 $146,619 $40,705 $5,882 $1,965
Planters
Beginning of month 87 143 90 74 21 3
Added a 56 0 0 0 0 0
Trained b (whole 94 0 0 0 0 0
numbers)
Laid off c 0 53 16 53 18 2
Ending 143 90 74 21 3 1
Capacity d 1,290,000 900,000 740,000 210,000 30,000 10,000
Wages e $206,400 $144,000 $118,400 $33,600 $4,800 $1,600
Training Costse 37,600 0 0 0 0 0
Layoff Severance 0 21,200 6,400 21,200 7,200 800
Total Costs $244,000 $165,200 $124,800 $54,800 $12,000 $2,400
Profit $13,340 $13,890 $21,819 ($14,095) ($6,118) ($435)
Demand 1,286,700 895,449 733,094 203,525 29,410 9,827
Beginning capacity 870,000 1,430,000 900,000 740,000 210,000 30,000
Difference 416,700– 534,551 – 166,906 – 536,475 – 180,590 – 20,173
a
New planters needed 56 0 0 0 0 0
5/3 × number needed 93.3 0.0 0.0 0.0 0.0 0.0
b
Planters trained 94 0 0 0 0 0
c
Planters laid off 0 53 16 53 18 2
d
Trainees add to capacity for only 3 weeks of their first month. For April, the capacity is
((1 × 10,000) + (4 × 10,000 × ¾)) = 40,000.
e
Trainees are hired at the beginning of the month and receive $400 for a week of training
and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month.
(a) Summing the profits for the 12 months, we see that if each month’s contract is
accepted, the profit for the year is $25,195. Declining contracts in months with
negative profit will only further decrease profit because of layoff costs, or the
cost of training workers when demand increases dramatically.
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(b) The number of people hired for training (239) is shown in the “trained” line and in
footnote b.
(c) The number of people laid off (143) is shown in the “laid off” line and in
footnote c.
10152 Strathfield Motel

Week
1 2 3 4 5 6 7 8 9 10 11 12
Units rented
per night 46 48 54 60 60 60 55 55 50 45 37 30
(a) Staff employed 4 4 4 4 4 4 4 4 4 3 3 2
Cleaning
capacity per
night 60 60 60 60 60 60 60 60 60 45 45 30
Excess capacity
per night 14 12 6 0 0 0 5 5 10 0 8 0
(b) Linen contract
units 60 60 60 60 60 60 60 60 50 50 50 50
Excess linen
capacity per
night 14 12 6 0 0 0 5 5 0 5 13 20
10153 Homebush School Band Estimated Travel Expenses

Month Concerts Hotel Food Bus Other Total
September 3 2,700 1,440 1,800 600 6,540
October 4 3,600 1,920 2,400 800 8,720
November 5 4,500 2,400 3,000 1,000 10,900
December 8 7,200 3,840 4,800 1,600 17,440
January 3 2,700 1,440 1,800 600 6,540
February 4 3,600 1,920 2,400 800 8,720
March 2 1,800 960 1,200 400 4,360
April 5 4,500 2,400 3,000 1,000 10,900
May 7 6,300 3,360 4,200 1,400 15,260
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10154 Worthington Company

Credit Account
Month Revenue Cash Sales Card Sales Sales Total
January 12,369,348 2,473,870 0 0 2,473,870
February 15,936,293 3,187,259 5,999,134 1,484,322 10,670,715
March 13,294,309 2,658,862 7,729,102 3,767,757 14,155,721
April 19,373,689 3,874,738 6,447,740 4,282,625 14,605,103
May 20,957,566 4,191,513 9,396,239 4,701,460 18,289,212
June 18,874,717 3,774,943 10,164,420 5,740,025 19,679,388
July 21,747,839 4,349,568 9,154,238 5,873,569 19,377,375
August 14,908,534 2,981,707 10,547,702 5,943,930 19,473,339
September 11,984,398 2,396,880 7,230,639 5,504,193 15,131,712
October 18,894,535 3,778,907 5,812,433 4,196,356 13,787,696
November 21,983,545 4,396,709 9,163,849 4,422,809 17,983,367
December 20,408,367 4,081,673 10,662,019 5,759,831 20,503,523
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10155 Masefield Dairy Ingredient Purchases

Ingredient July* August* September*
Ingredient 1 759,685 668,699 530,425
Ingredient 2 1,307,959 1,141,857 911,474
Ingredient 3 914,870 790,589 641,667
Ingredient 4 800,129 687,840 513,190
Ingredient 5 515,301 470,475 365,560
Ingredient 6 1,366,313 1,207,774 998,986
*Details appear below.
July
Products Total
Ingredients A B C D E Purchases
1 194,675 209,712 209,855 97,576 47,867 759,685
2 389,350 - 629,565 97,576 191,468 1,307,959
3 - 104,856 419,710 390,304 - 914,870
4 194,675 314,568 - 195,152 95,734 800,129
5 - 209,712 209,855 - 95,734 515,301
6 584,025 104,856 629,565 - 47,867 1,366,313
August
Products Total
1 162,033 196,750 194,575 75,766 39,575 668,699
2 324,066 - 583,725 75,766 158,300 1,141,857
3 - 98,375 389,150 303,064 - 790,589
4 162,033 295,125 - 151,532 79,150 687,840
5 - 196,750 194,575 - 79,150 470,475
6 486,099 98,375 583,725 - 39,575 1,207,774
September
Products Total
1 129,857 152,990 170,654 55,966 20,958 530,425
2 259,714 - 511,962 55,966 83,832 911,474
3 - 76,495 341,308 223,864 - 641,667
4 129,857 229,485 - 111,932 41,916 513,190
5 - 152,990 170,654 - 41,916 365,560
6 389,571 76,495 511,962 - 20,958 998,986
372
10156 Nathaniel’s Motor Shop

Work Total Variable
Week Hours Overtime Wages Support
1 255 0 6,750 6,375
2 330 15 7,200 8,250
3 300 0 6,750 7,500
4 285 0 6,750 7,125
5 325 10 7,050 8,125
6 280 0 6,750 7,000
7 260 0 6,750 6,500
8 300 0 6,750 7,500
9 340 25 7,500 8,500
10 355 40 7,950 8,875
373
10157 Country Club Road Nurseries

Cash Outflows
January February March April May June

Full-time staff 15 15 15 15 15 15
Full-time hours 2,400 2,400 2,400 2,400 2,400 2,400
Part-time hours 480 480 800 800 2,400 2,400
Cash outflows
Full-time wages $40,500 $40,500 $40,500 $40,500 $40,500 $40,500
Part-time wages 4,800 4,800 8,000 8,000 24,000 24,000
Variable costs 36,000 36,000 36,000 36,000 12,000 12,000
Capacity-
related costs 55,000 55,000 55,000 55,000 55,000 55,000
Total outflows $136,300 $136,300 $139,500 $139,500 $131,500 $131,500
July August Sept. October Nov. December

Full-time staff 15 15 15 15 15 15
Full-time hours 2,400 2,400 2,400 2,400 2,400 2,400
Part-time hours 2,400 2,400 1,200 600 0 0
Cash outflows
Full-time wages $40,500 $40,500 $40,500 $40,500 $40,500 $40,500
Part-time wages 24,000 24,000 12,000 6,000 0 0
Variable costs 48,000 48,000 48,000 24,000 0 0
Capacity-
related costs 55,000 55,000 55,000 55,000 55,000 55,000
Total outflows $167,500 $167,500 $155,500 $125,500 $95,500 $95,500
374
10158 (a) Cash inflows

From September sales: $1,000,000  0.3 $300,000
From October sales: 40,000  $32  0.7 896,000 $1,196,000
Cash outflows
For September purchases: $880,000  0.8 704,000
For October purchases: 38,000  $20  0.2 152,000
Selling and admin.: $350,000  $20,000 330,000 1,186,000
Net cash flow 10,000
Opening cash balance 40,000
Ending cash balance $50,000
(b) Sales 40,000  $32 = $1,280,000

Cost of goods sold 40,000  $20 = 800,000
Gross margin 40,000  $12 = 480,000
Selling and administrative expenses 350,000
Net income $130,000
10159 (a) Merchandise inventory Units Dollar value
Required for sales 12,000 $480,000

Desired ending inventory 3,000 120,000
Needs 15,000 600,000
Less beginning inventory 2,000 80,000
Budgeted purchases 13,000 $520,000
(b) Sales 12,000  $60 = $720,000

Cost of goods sold 12,000  $40 = 480,000
Gross margin 12,000  $20 = 240,000
Selling and admin. expenses 200,000
Net income $40,000
(c) Cash inflows

From Nov. sales: $600,000  .4 $240,000
From Dec. sales: $720,000  .6 432,000 $672,000
Cash outflows
For Nov. purchases: $340,000  .5 170,000
For Dec. purchases: $520,000  .5 260,000
Selling and admin.: $200,000  $40,000 160,000 590,000
Net cash flow 82,000
Opening cash balance 30,000
375
Ending cash balance $112,000
10160 (a) With 2,000,000 medical claims Shadyside Insurance Company should employ
13.33 = ((2,000,000/150,000)  1) supervisors, 26.67 = ((2,000,000/150,000) 
2) senior clerks, and 80 = ((2,000,000/150,000)  6) junior clerks. Assuming
that the organization hires full-time people, clerical costs are a step variable
cost (which means that they must round up to a full employee) and the
budgeted number of people for this level of activity is 14 supervisors, 27
senior clerks, and 80 junior clerks. The total cost of this group would be
$4,147,000 = (14  $42,000) + (27  $37,000) + (80  $32,000).
The actual cost to this group was $4,354,000 = (14  $42,000) + (30 
$37,000) + (83  $32,000). The excess cost of $207,000 = 4,354,000 
4,147,000 was created by having 3 more senior clerks than budgeted and
3 more junior clerks than budgeted.
(b) The issue is why the clerical group is employing more people than it
should be for the workload it faces. There are many possible reasons for
this result, including training inefficiencies, continued growth requiring
more people, an inappropriate standard, overestimating requirements
when hiring took place, and processing inefficiencies. The report from
the manager of this unit should identify the amount of the excess
spending, its cause, and what will be done to correct the variance.
376
10161 (a) Let p be the unit sales price to earn a budgeted profit (before income
taxes) of $200,000.
Sales (260,000 units) 260,000p

Cost of goods sold:
Direct materials
300,000 × 130% × 120% 468,000
Direct labor
200,000 × 130% × 115% 299,000
Variable manufacturing support
60,000 × 130% × 110% 85,800
Fixed manufacturing support
40,000 × 105% 42,000 894,800
Gross margin 260,000p – 894,800
Selling expenses: 150,000  108% 162,000
Administrative expenses
100,000 × 106% 106,000 268,000
Profit (before income taxes) 260,000p – 1,162,800
Therefore, 260,000p – 1,162,800  200,000 or p  $5.24.
377
(b) Let x be the number of units that must be sold at $5.00 to earn $200,000.
Sales (x units) 5.00x

Cost of goods sold:
Direct materials
x
300,000  120%
200,000 1.80x
Direct labor
x 115
. x
200,000  115%
200,000

x
60,000  110%
200,000 0.33x
Fixed manufacturing support
40,000 × 105% 42,000 3.28 x  42,000
Gross margin . x  42,000
172
Selling expenses
x  200,000 0.2x +
150,000 + [(150,000  8%)  ] 110,000
60,000
Administrative expenses: 100,000 × 106% 106,000 0.2 x  216,000
Profit (before income taxes) . x  258,000
152
Therefore, 1.52x – 258,000 = 200,000 or x = 301,316 units.
378
(c) Sales: 220,000 units  $5.24 $1,152,800

Cost of goods sold:
Direct materials: 300,000 × 110% × 120% $396,000
Direct labor: 200,000 × 110% × 115% 253,000
(60,000 × 110% × 110%) 72,600
Fixed manufacturing support 42,000 763,600
Gross margin 389,200
Selling expenses
20,000
150,000 + [(150,000  8%) ] $154,000
60,000
Administrative expenses: 100,000 × 106% 106,000 260,000
Profit (before income taxes) $129,200
10162 (a) Last month’s profit
$0.40 1,000,000  $0.25 1,000,000  $60,000 $90,000
Current month’s target profit $90,000 15

. $135,000
Let x be the maximum amount that can be spent on advertising.
($0.40 × 2,000,000) – ($0.25 × 2,000,000) – $(60,000 + x) = $135,000.

x $105,000
(b) Let y be the number of units to break even.

0.4 y  0.25 y  60,000 0 or y 400,000 .
Let p be the selling price to maintain the same breakeven point.
p 400,000  0.30 400,000  60,000 0 or p = $0.45 per bar. That is, if
variable cost is increased by 5 cents per bar, then the sales price must
also increase by 5 cents to maintain the same break-even point.
(c) Let z be the sales volume in units that would be needed at the new price
for the company to earn the same profit as last month.
Therefore, 0.5z  0.25z  60,000 90,000 or z 600,000 bars.
379
10163 (a) Old Machine New Machine

Selling price per unit $18 $20
Variable cost per unit $14 $14
Contribution margin 4 6
Monthly fixed costs $120,000 $250,000
Breakeven points (in units) 30,000 41,667
(b) Let Sg = selling price, Q = quantity, FC = fixed costs, and V = variable

costs.
Sg Q  FC  V Q 10% Sg Q
$20 Q  $250,000  $14 Q 010
. $20 Q
$250,000
Q 62,500
$20  14  2
(c) Q Sg1  VC1  FC1 Q Sg2  VC2  FC2

$4 Q  $120,000 $6 Q  $250,000
$250,000  120,000
Q 65,000
$6  4
(d) The old machine represents a lower risk of making a loss because it has a
lower breakeven point.
(e) Q Sg1  VC1  FC1 Q Sg2  VC2  FC2


Q Sg1 Q Sg2
4 Q  120,000 6 Q  250,000

18 Q 20 Q
204 Q  120,000 186 Q  250,000
28 Q 2,100,000
Q 75,000 units
380
10164 (a) Deluxe rackets Without With

Sales price per racket $40.00 $36.00
Variable costs:
Manufacturing 20.00 20.00
Commission 4.00 3.60
Contribution margin per racket 16.00 12.40
Sales (units) 50,000 65,000
Total contribution margin $800,000 $806,000
Contribution margin lost
(Standard rackets) 50,000*
Net impact on profits $800,000 $756,000
* Contribution margin lost on Standard rackets = $(30 – 17 – 3)  5,000. Tenneco’s
profits will decrease by $44,000 = ($800,000 – $756,000).
Standard Deluxe Pro Total

Contribution margin per racket $10 $16 $20
Increased sales (units) 2,000 1,000 1,000
Total increase in contribution
margin $20,000$16,000$20,000$56,000
The $56,000 increase in the contribution margin is greater than the

incremental advertising expense of $50,000. Therefore, this decision is
advisable.
(c) Yes. Assuming each line of rackets uses the same manufacturing support
resources, it is in the best interest of the company to push high-priced
rackets because they have higher unit contribution margins (in this case)
than the lower-priced rackets.
381
10165 (a) Breakeven point in units = (fixed costs)/(contribution margin per unit) =
$200,000/$125 = 1,600 units
Breakeven point in dollars = 1,600 × $250 = $400,000
(b) Let X  increase in sales in units per month to justify the additional
expenditure. The contribution margin from the increase in sales must
equal the additional advertising expenditure. That is, $125X = $22,500, or
22,500
X 180 .
125
Sales must increase by 180 units per month or $45,000 = $250 × $18 in
order to break even on the monthly expenditures.
(c) New contribution margin per unit =
Old contribution margin per unit − Decrease in selling price
= $125 − $25 = $100.
Total contribution margin $100 2,400 $240,000

New fixed costs $200,000  $22,500 $222,500
Net income = $240,000 – 222,500 = $17,500.
10166 (a) Sales price: $35.00

Less variable costs:
Raw materials $16.00
Direct labor 7.00
Manufacturing 4.00
Selling 1.60 28.60
Contribution margin per 100 packets $6.40
Contribution margin per packet $0.0640
Total fixed cost $468,000
Break-even point: 468,000  0.0640 = 7,312,500 packets
382
(b) Let X  number of packets to earn $156,000 profits
468,000  156,000
X
0.0640
9,750,000 packets
7
(c) New contribution margin $0.0640  5%  $0.0605
100
468,000
Break-even point  7,735,537
0.0605
(d) Let g  selling price per 100 packets to maintain the same contribution
margin ratio.
6.40 g  28.60  5% 7

35.00 g
6.40 × g = 35 × (g – 28.95)
(35 – 6.40) g = 1,013.25
g = $35.43 per 100 packets
10167 The budgeted direct materials cost is $630,000/90,000 = $7 per unit; the
budgeted direct labor cost per unit is $247,500/90,000 = $2.75 per unit; the
budgeted fixed costs equal $420,000. Below, these costs are used to prepare the
flexible budget for the actual production level of 80,000 units.
Flexible
Master Planning Flexible Budget
Budget Variance Budget Variance Actual
90,000 units 80,000 units 80,000 units
Costs
DM $630,000 $(70,000) F $560,000 $(10,000) F $550,000
DL 247,500 (27,500) F 220,000 5,000 U 225,000
FOH 420,000 $0 420,000 (20,000) F 400,000
Total $1,297,500 $(97,500) F $1,200,000 $(25,000) F $1,175,000
383
10168 (a) Total direct material cost variance

= Actual direct material cost – standard direct material cost
= $205,150 – ($16 × 0.25 × 40,000)
= $205,150 – $160,000
= $45,150 Unfavorable
(b) Total direct labor cost variance

= Actual direct labor cost – standard direct labor cost
= ($9.50 × 8,240) – ($10 × 0.20 × 40,000)
= $78,280 – $80,000
= $1,720 Favorable
(c) Total variable support cost variance

= Actual variable support cost – standard variable support cost
= $131,840 – ($15 × 0.20 × 40,000)
= $131,840 – $120,000
(d) Direct material price variance

Error: Reference source not found
(e) Direct material quantity variance
(f) Direct labor rate variance
Error: Reference source not foundError: Reference source not found
(g) Direct labor efficiency variance
(h) Variable support rate variance
(i) Variable support efficiency (use) variance
10169 (a) Total direct material cost variance
= Actual direct material cost – standard direct material cost
= ($9.75 × 4,200) – ($10 × 2 × 2,000)
= $40,950 – $40,000
= $950 Unfavorable
384
(b) Total direct labor cost variance

= Actual direct labor cost – standard direct labor cost
= ($11 × 2,000) – ($10 × 1 × 2,000)
= $22,000 – $20,000
(c) Total flexible support cost variance

= Actual flexible support cost – standard flexible support cost
= $48,000 – ($25 × 1 × 2,000)
= $48,000 – $50,000
= $2,000 Favorable
385
(d) Direct material price variance

(e) Direct material quantity variance
(f) Direct labor rate variance
(g) Direct labor efficiency variance
(h) Variable support rate variance
(i) Variable support efficiency (use) variance
(Ag – Sg) × AQ = $50
(Ag × AQ) – (Sg × AQ) = $50
$2,000 – ($2 × AQ) = $50
AQ = 975 pounds
(AH – SH) × SR = –100

(AH × 15) – (2 × 200 × 15) = –100
6,000  100 1
AH  393 hours
15 3
(AR – SR) × AH = 60
AR × AH = (SR × AH) + 60
5,900
AR × AH = (15 × ) + 60
15
= $5,960
= (AQ – SQ) × Sg
= [975 – (5 × 200)] × 2
= $50 F
(AH – SH) × SR = $60

(500 – 3 × Q) × $12 = $60 (see solution to part h, for AH)
36Q = 6,000 – 60
5,940
Q= = 165 units
36
386
(AQ – SQ) × Sg = –100

[1,000 – (165.28 × S)] × 3 = –100
495.84 × S = 3,000 + 100
S = 6.252 pounds per unit
(Ag – Sg) × AQ = –500

Ag × AQ = (3 × 1,000) – 500
= $2,500
(AR – SR) × AH = –200

(AR × AH) – (SR × AH) = –200
5,800 – (12 × AH) = –200
AH = 500 hours
387
10171 (a) Direct material price variance

Direct material quantity variance
(b) No, the contract should not be signed. Although the new supplier is
offering the materials at only $11.50 per pound, the materials do not
seem to hold up well in production, as shown by the large unfavorable
direct material quantity variance.
(c) Direct labor rate variance Direct labor efficiency variance

(d) Yes, the new labor mix should be continued. Although it increases the
average hourly labor cost from $15 to $16, thereby causing a $6,400
unfavorable direct labor rate variance, this is more than offset by greater
efficiency of labor time. Notice that the direct labor efficiency variance is
$12,000 favorable. Thus, the new labor mix reduces overall labor costs.
388
10172 The total nursing labor variance for the fourth floor nursing unit of Mountain
View Hospital for May is $1,745 unfavorable. Of this amount, $460 (favorable)
is attributable to labor efficiency and $2,205 (unfavorable) to rate differences.
The calculation of these amounts is presented below.
Labor class Actual hours  Actual rate

RN 8,150 $12.30 $100,245
LPN 4,300 8.20 35,260
Aide 4,400 5.75 25,300
Total $160,805
Labor class Actual hours  Standard rate
RN 8,150 $12.00 $97,800
LPN 4,300 8.00 34,400
Aide 4,400 6.00 26,400
Total $158,600
Labor class Standard hours  Standard rate
RN 7,920 $12.00 $95,040
LPN 4,620 8.00 36,960
Aide 4,510 6.00 27,060
Total $159,060
Labor Variances
class Labor efficiency Labor rate Total
RN $97,800  $95,040 $100,245  $97,800 $100,245  $95,040
$2,760U $2,445U $5,205U
LPN $34,400  $36,960 $35,260  $34,400 $35,260  $36,960
$2,560 F $860U $1,700 F
Aide $26,400  $27,060 $25,300  $26,400 $25,300  $27,060
$660 F $1,100 F $1,760 F
Total $158,600  $159,060 $160,805  $158,600 $160,805  $159,060
$460 F $2,205U $1,745U
389
10173 (a) (i) Direct material price variance = (Ag – Sg) × AQ

(ii) Direct material quantity variance = (AQ – SQ) × Sg
Error: Reference source not
found
(iii) Direct labor rate variance = (AR – SR) × AH
(iv) Direct labor efficiency variance = (AH – SH) × SR
(b) These variances reflect tradeoffs made by Asahi USA. More expensive
materials may have been acquired with the expectation of reducing
materials waste. Less expensive labor may have been used that may have
led to a lower level of labor efficiency. The overall total cost variances
for materials and labor individually were favorable, indicating that the
positive effects of these decisions outweigh their negative effects.
10174 We first compute percentages of total unit sales for each product line for
planned and actual sales.
Planned Sales for February

Muffins Scones Carrot Bread
Units % Total Units % Total Units % Total Total
Unit Price $1.35 $1.75 $2.75
Unit Sales 1,600 26.67% 3,400 56.67% 1,000 16.67% 6,000
Total $2,160 $5,950 $2,750 $10,860
390
Actual Sales for February

Muffins Scones Carrot Bread
Units % Total Units % Total Units % Total Total
Unit Price $1.55 $1.60 $3.25
Unit Sales 1,400 19.44% 4,500 62.50% 1,300 18.06% 7,200
Total $2,170 $7,200 $4,225 $13,595
(a) The sales mix variance is computed as follows:

Actual total sales units of all products  (actual sales mix percentage of
this product – planned sales mix percentage of this product)  planned
revenue per unit of this product
Muffins: 7,200  (19.44% – 26.67%)  $1.35 = $ –702, that is, $702

unfavorable. This means that because sales of muffins comprised less
than the planned percentage of total sales, revenues of $702 were lost on
this product.
Scones: 7,200  (62.50% – 56.67%)  $1.75 = $735 favorable. This

means that because sales of scones comprised more than the planned
percentage of total sales, revenues of $735 were gained on this product.
Carrot bread: 7,200  (18.06% – 16.67%) $2.75 = $275 favorable.

This means that because sales of carrot bread comprised more than the
planned percentage of total sales, revenues of $275 were gained on this
product.
(b) The sales quantity variance for each product line is computed as follows:
(Actual total sales units of all products – planned total sales units of all
products)  planned sales mix percentage of this product  planned
revenue per unit of this product.
Muffins: (7,200 – 6,000)  26.67%  $1.35 = $432 favorable. This

means that because of the overall increase in sales, if the muffins sales
mix percentage had remained as planned, then an increase in sales
revenue of $432 would have been realized on this product.
Scones: (7,200 – 6,000)  56.67%  $1.75 = $1,190 favorable. This

means that because of the overall increase in sales, if the scones sales mix
391
percentage had remained as planned, then an increase in sales revenue of

$1,190 would have been realized on this product.
Carrot bread: (7,200 – 6,000)  16.67%  $2.75 = $550 favorable. This

means that because of the overall increase in sales, if the carrot bread
sales mix percentage had remained as planned, then an increase in sales
revenue of $550 would have been realized on this product.
(c) The sales price variance for each product line is computed as follows:
Actual number of units sold  (actual price per unit – planned price per
unit)
Muffins: 1,400  ($1.55 – $1.35) = $280 favorable. This means that

because the company sold the muffins at more than the planned price per
unit, $280 of revenues was gained on the 1,400 units of muffins.
Scones: 4,500  ($1.60 – $1.75) = $ –675, that is, $675 unfavorable.

This means that because the company sold the scones at less than the
planned price per unit, $675 of revenues was lost on the 4,500 units of
scones.
Carrot bread: 1,300  ($3.25 – $2.75) = $650 favorable. This means that
because the company sold the carrot bread at more than the planned price
per unit, $650 of revenues was gained on the 1,300 units of carrot bread.
Summary:
Carrot
Muffins Scones Bread Total
Price Variance $280 -$675 $650 $255favorable
Sales Mix Variance -702 735 275 308favorable
Sales Quantity Variance 432 1,190 550 2,172favorable
Total $10 $1,250 $1,475 $2,735favorable
392
10175 Variance analysis is a form of exception reporting. That is, the focus is on what
went wrong rather than what went right. An excessive preoccupation on
negative results, rather than a balance between complimenting people for
positive results and investigating negative results, can create a negative
organization environment.
A variance is a signal that something unplanned happened. For variances to be

signals, they must be reasonable in the sense of reflecting a reasonable level of
performance. Some organizations believe in setting very tight standards, which,
in turn, trigger a steady stream of unfavorable variances. Beyond being
motivationally debilitating, a steady stream of negative variances reduces their
value as a signal because they are always there.
As signals, variances should trigger an investigation to find out what caused the
variance. They provide no information about cause, but rather reflect only the
effect of the cause. In some organizations people become preoccupied with
arguing about the nature and size of variances rather than focusing on finding
the underlying cause of the variance.
Finally, superiors often use variances to check up on subordinates (people may

use variances to check up on their own work.) Because of this, in many
organizations, variances and the management accountants who produce the
variances have a negative reputation. Many people believe that superiors use
variances in accusatory and invasive ways rather than constructively to improve
organization performance.
393
CASES
10176 (a) Rust Manufacturing Co.

BUDGET FOR ACE AND BELL
For the Year Ending December 31, 2011
Ace Bell
Sales (1) $8,000,000 $2,000,000
Variable costs:
Direct materials (2) $1,600,000 $300,000
Direct labor (3) 2,000,000 500,000
Variable mfg. support (4) 200,000 50,000
$3,800,000 $850,000
Contribution margin $4,200,000 $1,150,000
Fixed costs:
Depreciation (5) $140,000 $60,000

Rent (6) 78,000 52,000
Other mfg. support (7) 200,000 50,000
Selling costs (8) 120,000 60,000
Gen. & admin. costs (9) 32,000 8,000
$570,000 $230,000
Pretax operating profit $3,630,000 $920,000
Supporting calculations:
(1) Ace: 200,000 units  $40/unit  $8M

Bell: 100,000 units  $20/unit  $2M
(2) Ace: 200,000 units  $8/unit  $1.6M

Bell: 100,000 units  $3/unit  $300K
(3) Ace: 200,000 units  2 hours  $5/hour  $2M

Bell: 100,000  1 hour  $5/hour  $500K
(4) Ace: $2M  10%  $200K

Bell: $500K  10%  $50K
394
(5) Ace: $200K  70%  $140K

Bell: $200K  30%  $60K
(6) Ace: $130K  60%  $78K

Bell: $130K  40%  $52K
$2 M
(7) Ace: $2.5 M
× ($500K – $250K) = $200K
$500 K
Bell: $2.5 M
× ($500K – $250K) = $50K
(8) Ace: 200,000 units

Bell: 100,000 units
300,000 units
200
Ace: $180K $120K
300
100
Bell: $180K $60K
300
$8M
(9) Ace: $40K $32K
$10M
$2M
Bell: $40K $8K
$10M
(Note: M stands for millions and K stands for thousands.)
Ace Bell
Contribution margin per unit $21.00 $11.50
Pretax operating profit per unit $18.15 $ 9.20
(c) Decrease in contribution from 10% decrease in production and sales:

Ace: 200,000 10% $21 $420,000
Bell: 100,000 10% $11.5 $115,000
395
(d) The above analysis relies on cost estimates based on allocation of other
manufacturing support, selling support, and general and administrative
costs between Ace and Bell that ignores the activities that result in these
support costs and the relative demands placed by Ace and Bell for these
manufacturing, selling, and administrative support activities. As a
result, it is possible that the above costs misrepresent the true cost of
operations for Ace and Bell.
10177 (a) Number of Deliveries

Number of Unit
Deliveries Delivery Overtime Regular Overtime Total Delivery
Required Capacitya Hours Wagesc Cost Cost Cost
70 80 0 $480 $0 $480 $6.857
80 80 0 480 0 480 6.000
b d
90 80 5 480 90 570 6.333
a
5 workers  8 hours  2 per hour  80 deliveries
b
(90 − 80) ÷ 2 = 5 hours
c
$12  5  8 = $480
d
$12  1.5  5 = $90
(b) Based on the old hiring policy
Number of Unit
Required Capacity Hours Hours Cost Cost Cost
Monday 65 80 0.0 $480 $0 $480 $7.385
Tuesday 70 80 0.0 480 0 480 6.857
Wednesday 80 80 0.0 480 0 480 6.000
Thursday 85 80 2.5 480 45 525 6.176
Friday 95 80 7.5 480 135 615 6.474
Total $2,580
396
Based on the new hiring policy
Number of Unit
Required Capacity Hours Hours Cost Cost Cost
Monday 65 64 0.5 $384 $9 $393 $6.046
Tuesday 70 64 3.0 384 54 438 6.257
Wednesday 80 80 0.0 480 0 480 6.000
Thursday 85 80 2.5 480 45 525 6.176
Friday 95 96 0.0 576 0 576 6.063
Total $2,412
The expected savings per week of the new hiring policy:

$2, 580  $2, 412 $168
397
10178 Judd’s Reproductions (Calculations were performed in an Excel spreadsheet.)

(a) Original situation
Oct. Nov. Dec. Jan. Feb. Mar. Apr. May

Unit
production
and sales
- Chairs 900 975 950 1,020 1,191 1,179 1,195 1,200
- Tables 175 188 201 200 237 243 250 252
- Cabinets 90 102 95 109 120 119 126 122
Total
revenuea $499,500 $547,800 $541,900 $580,200 $667,500 $668,700 $690,800 $686,400
Cash sales:
25% of
revenue 124,875 136,950 135,475 145,050 166,875 167,175 172,700 171,600
Credit card
sales: 35%
of rev. 174,825 191,730 189,665 203,070 233,625 234,045 241,780 240,240
Exporter
sales: 40%
of rev. 199,800 219,120 216,760 232,080 267,000 267,480 276,320 274,560
Bad debts:
3% of
export sales $6,962 $8,010 $8,024 $8,290 $8,237
Cash sales
discounts:
5% of cash
sales 7,253 8,344 8,359 8,635 8,580
Cred. Card
fees: 3% of
credit card
sales 6,092 7,009 7,021 7,253 7,207
a Chair price is $200, table price is $900, and cabinet price is $1,800.
398
Judd’s Reproductions (Continued)

(a) Original situation (Continued
June July Aug. Sept. Oct. Nov. Dec. Total

Unit
production
and sales
- Chairs 1,204 1,194 1,199 1,222 1,219 1,207 1,192
- Tables 255 242 253 243 248 244 255
- Cabinets 125 123 121 127 126 126 119
Total
revenuea $695,300 $678,000 $685,300 $691,700 $693,800 $687,800 $682,100 $8,107,600
Cash sales:
25% of
Revenue 173,825 169,500 171,325 172,925 173,450 171,950 170,525 2,026,900
Credit card
sales: 35%
of rev. 243,355 237,300 239,855 242,095 242,830 240,730 238,735 2,837,660
Exporter
sales: 40%
of rev. 278,120 271,200 274,120 276,680 277,520 275,120 272,840 3,243,040
Bad debts:
3% of
export sales $8,344 $8,136 $8,224 $8,300 $8,326 $8,254 $8,185 $97,291
- Cash sales
discounts:
5% of cash
sales 8,691 8,475 8,566 8,646 8,673 8,598 8,526 101,345
- Cred. card
fees: 3% of
credit card
sales 7,301 7,119 7,196 7,263 7,285 7,222 7,162 85,130
399
Carpenter and helper hours Dec. Jan. Feb. Mar. Apr. May June
- Required carpenter hoursb 1,562 1,788.9 1,793.1 1,859 1,842 1,869.1
- Carpentersc 9 9 10 10 11 11 11
- Helpers: 1.5  number of
carpenters 14 14 15 15 17 17 17
- Carpenter regular hours:
172 per carpenter 1,548 1,720 1,720 1,892 1,892 1,892
- Carpenter overtime hours 14 68.9 73.1 0 0 0
- 5% of regular carpenter hrs,
must be > overtime hoursc 77.4 86 86 94.6 94.6 94.6
- Helper regular hours:
172 per helper 2,408 2,580 2,580 2,924 2,924 2,924
- Helper overtime hours 0 103.35 109.65 0 0 0
Carpenter and helper hours July Aug. Sept. Oct. Nov. Dec.
- Required carpenter hoursb 1,820.6 1,838.1 1,858.3 1,863.6 1,848.8 1,828.3
- Carpentersc 11 11 11 11 11 11
carpenters 17 17 17 17 17 17
172 per carpenter 1,892 1,892 1,892 1,892 1,892 1,892
- Carpenter overtime hours 0 0 0 0 0 0
must be > overtime hoursc 94.6 94.6 94.6 94.6 94.6 94.6
172 per helper 2,924 2,924 2,924 2,924 2,924 2,924
- Helper overtime hours 0 0 0 0 0 0
b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.
c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours
available.
400
Cash inflows Jan. Feb. Mar. Apr. May June

- From 3 months previous:
17% of export sales $33,966 $37,250 $36,849 $39,454 $45,390 $45,472
50% of export sales 109,560 108,380 116,040 133,500 133,740 138,160
- From 1 month previous:
30% of export sales + 97% of
credit card sales 249,003 266,602 306,716 307,268 317,423 315,401
- From current month:
95% of cash sales 137,798 158,531 158,816 164,065 163,020 165,134
- Interest on cash balance:
3%/yr if previous mo. ending
bal > $50,000 5
0 0 0 0 0 2
- Total cash inflows $530,327 $570,764 $618,422 $644,286 $659,573 $664,218
Cash inflows July Aug. Sept. Oct. Nov. Dec.

17% of export sales $46,974 $46,675 $47,280 $46,104 $46,600 $47,036
50% of export sales 137,280 139,060 135,600 137,060 138,340 138,760
30% of export sales + 97% of
credit card sales 319,490 311,541 314,895 317,836 318,801 316,044
- From current month: 95% of
cash sales 161,025 162,759 164,279 164,778 163,353 161,999
3%/yr if previous mo. ending
bal. > $50,000 33 120 400 68 59 88
0 0 2 9
401
Cash outflows Jan. Feb. Mar. Apr. May June

- Carpenter wages: $24 per
regular hr.; $36 per
overtime hr. $37,656 $43,760 $43,912 $45,408 $45,408 $45,408
- Helper wages: $14 per
overtime hr. 33,712 38,290 38,423 40,936 40,936 40,936
- Supplies, etc.: $5 per
carpenter hr. 7,810 8,945 8,966 9,295 9,210 9,346
- Variable support costs:
$20 per carpenter hr. 31,240 35,778 35,862 37,180 36,840 37,382
- Maintenance costs: $15
per carpenter hr. 23,430 26,834 26,897 27,885 27,630 28,037
- Wood costs: $30 per unit
of woodd 127,650 146,610 147,240 152,550 151,380 153,570
- Factory rent: $150,000
per quarter 150,000 0 0 150,000 0 0
- Fixed costs:
$40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000
- Administrative salaries:
$25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs: $30,000
per month 30,000 30,000 30,000 30,000 30,000 30,000
- Advertising
expenditures:
$50,000 per mo. 50,000 50,000 50,000 50,000 50,000 50,000
- Shipping costse 43,015 49,470 49,545 51,185 50,850 51,510
- Variable selling costs: 6%
of product list prices 34,812 40,050 40,122 41,448 41,184 41,718
- Interest on line of credit:
10%/yr based on last
month’s balance 0 1,242 952 273 747 0
- Mach. purchases:
$5,000  no. of carpenters
(Jan. and July) 45,000 0 0 0 0 0
- Total cash outflows $679,325 $535,978 $536,917 $701,160 $549,185 $552,906
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
402
Cash outflows July Aug. Sept. Oct. Nov. Dec.

- Carpenter wages:
$24 per regular hr.;
$36 per overtime hr. $45,408 $45,408 $45,408 $45,408 $45,408 $45,408
- Helper wages: $14 per
overtime hr. 40,936 40,936 40,936 40,936 40,936 40,936
- Supplies, etc.: $5 per
carpenter hr. 9,103 9,191 9,292 9,318 9,244 9,142
$20 per carpenter hr. 36,412 36,762 37,166 37,272 36,976 36,566
- Maintenance costs: $15
per carpenter hr. 27,309 27,572 27,875 27,954 27,732 27,425
- Wood costs: $30 per unit
of woodd 149,250 151,140 152,130 152,790 151,470 150,510
- Factory rent: $150,000
per quarter 150,000 0 0 150,000 0 0
- Fixed costs:
$40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000
$25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs: $30,000
per month 30,000 30,000 30,000 30,000 30,000 30,000
- Advertising
expenditures:
$50,000 per mo. 50,000 50,000 50,000 50,000 50,000 50,000
- Shipping costs e 50,245 50,765 51,270 51,415 50,975 50,520
- Variable selling costs:
6% of product list prices 40,680 41,118 41,502 41,628 41,268 40,926
month’s balance 0 0 0 0 0 0
- Mach. purch.: $5,000 
no. of carpenters (Jan.
and July) 55,000 0 0 0 0 0
403
Cash flow analysis Dec. Jan. Feb. Mar. Apr. May June
- Opening cash $50,000 $50,000 $50,000 $50,000 $50,000 $70,806
- Net cash flow: Cash
inflows - cash outflows –148,998 34,785 81,505 –56,873 110,388 111,312
- Cash before financing –98,998 84,785 131,505 –6,873 160,388 182,118
- Opening line-of credit 0 148,998 114,213 32,709 89,582 0
- Line-of-credit increase 148,998 0 0 56,873 0 0
- Line-of-credit payment 0 34,785 81,505 0 89,582 0
- Line of credit closing
balance 0 148,998 114,213 32,709 89,582 0 0
- Ending cash: $50,000
minimum 50,000 50,000 50,000 50,000 50,000 70,806 182,118
Cash flow analysis July Aug. Sept. Oct. Nov. Dec.

- Opening cash $182,118 $97,875 $210,139 $322,016 $286,753 $405,429
inflows - cash outflows –84,243 112,264 111,877 –35,263 118,677 118,295
- Cash before financing 97,875 210,139 322,016 286,753 405,429 523,724
- Opening line-of credit 0 0 0 0 0 0
- Line-of-credit increase 0 0 0 0 0 0
- Line-of-credit payment 0 0 0 0 0 0
balance 0 0 0 0 0 0
- Ending cash: $50,000
minimum 97,875 210,139 322,016 286,753 405,429 523,724
404
Judd’s Reproductions
Projected Income Statement
For the Year Ended December 31, 2012
Original Situation
Revenue
Chairs $2,844,400
Tables 2,629,800
Cabinets 2,633,400 $8,107,600
Variable expenses
Carpenters 534,000
Helpers 478,849
Maintenance 326,577
Variable support 435,436
Selling 486,456
Shipping 600,765
Supplies 108,859
Wood 1,786,290 4,757,232
Contribution margin $3,350,368
Fixed expenses
Administrative staff 300,000
a 46,000
Depreciation
Factory rent 600,000
Selling 360,000
Other factory 480,000 1,786,000
Other expenses
Advertising costs 600,000
Bad debts 97,291
Cash sales discounts 101,345
Credit card fees 85,130
Net interest charges: $3,213 – 3,063 150 883,916
Income before taxes $680,452
a
Depreciation:
Machinery, Jan. 1, 2012 $360,000
Purchases: $45,000 in January and $55,000 in July 100,000
Depreciation expense: 10% of year-end balance (46,000)
Machinery, Dec. 31, 2012 $414,000
405
Projected Balance Sheet
December 31, 2012
Original Situation
Cash $523,724
Accounts receivablea 727,737 Bank loan $0
Machinery and Owners’
equipmentb 414,000 equity 1,665,461
Total Total liabilities and
Assets $1,665,461 owners’ equity $1,665,461
a
Accounts receivable, December 31, 2012 balance = $727,737 = 97% of Dec. credit
card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively.
b $360,000
Machinery, Jan. 1, 2012
Machinery, Dec. 31, 2012 $414,000
406
(b) Cash sales to exporters lead to 5%  40% drop in sales across products
(Multiply original sales quantities by 0.98 and round the result to the nearest unit.)

Unit production
and sales
- Chairs 900 975 950 1,000 1,167 1,155 1,171 1,176
- Tables 175 188 201 196 232 238 245 247
- Cabinets 90 102 95 107 118 117 123 120
- Total revenuea $499,500 $547,800 $541,900 $569,000 $654,600 $655,800 $676,100 $673,500
- Cash sales:
(25%+35%)/
95% of revenue $124,875 $136,950 $135,475 $359,368 $413,432 $414,189 $427,011 $425,368
- Credit card
sales: 35% /95%
of rev. $174,825 $191,730 $189,665 $209,632 $241,168 $241,611 $249,089 $248,132
- Exporter sales:
40% of rev. in
2011; all cash
in 2012 $199,800 $219,120 $216,760 $0 $0 $0 $0 $0
- Bad debts: 3%
of export sales $0 $0 $0 $0 $0
- Cash sales
discounts: 5% of
cash sales $17,968 $20,672 $20,709 $21,351 $21,268
- Cred. card fees:
3% of credit
card sales $6,289 $7,235 $7,248 $7,473 $7,444
407

Unit production
and sales
- Chairs 1,180 1,170 1,175 1,198 1,195 1,183 1,168
- Tables 250 237 248 238 243 239 250
- Cabinets 123 121 119 124 123 123 117
- Total revenuea $682,400 $665,100 $672,400 $677,000 $679,100 $673,100 $669,200 $7,947,300
- Cash sales:
(25%+35%)/
95% of revenue $430,989 $420,063 $424,674 $427,579 $428,905 $425,116 $422,653 $5,019,347
- Credit card
sales: 35%/95%
of rev. $251,411 $245,037 $247,726 $249,421 $250,195 $247,984 $246,547 $2,927,953
- Exporter sales:
40% of rev. in
2011; all cash
in 2012 $0 $0 $0 $0 $0 $0 $0 $0
- Bad debts: 3%
of export sales $0 $0 $0 $0 $0 $0 $0 $0
- Cash sales
discounts: 5%
of cash sales $21,549 $21,003 $21,234 $21,379 $21,445 $21,256 $21,133 $250,967
- Cred. card fees:
3% of credit
card sales $7,542 $7,351 $7,432 $7,483 $7,506 $7,440 $7,396 $87,839
408
- Required carpenter hoursb 1,5321,754.8 1,7591,818.91,807.9 1,835
- Carpentersc 9 9 10 10 11 11 11
carpenters 14 14 15 15 17 17 17
172 per carpenter 1,548 1,720 1,720 1,892 1,892 1,892
- Carpenter overtime hours 0 34.8 39 0 0 0
must be > overtime hoursc 77.4 86 86 94.6 94.6 94.6
172 per helper 2,408 2,580 2,580 2,924 2,924 2,924
- Helper overtime hours 0 52.2 58.5 0 0 0
- Required carpenter hoursb 1,786.5 1,8041,818.21,823.51,808.71,794.2
- Carpentersc 11 11 11 11 11 11
carpenters 17 17 17 17 17 17
172 per carpenter 1,892 1,892 1,892 1,892 1,892 1,892
- Carpenter overtime hours 0 0 0 0 0 0
must be > overtime hoursc 94.6 94.6 94.6 94.6 94.6 94.6
172 per helper 2,924 2,924 2,924 2,924 2,924 2,924
- Helper overtime hours 0 0 0 0 0 0
available.
409

17% of export sales $33,966 $37,250 $36,849 $0 $0 $0
50% of export sales 109,560 108,380 0 0 0 0
- From 1 month previous: 30% of
export sales + 97% of credit
card sales 249,003 203,343 233,933 234,362 241,617 240,688
95% of cash sales 341,400 392,760 393,480 405,660 404,100 409,440
- Interest on cash balance: 3%/yr if
previous mo. Ending bal. .> $50,000 1 68 1,03 90 1,160
0 51 9 2 0

17% of export sales $0 $0 $0 $0 $0 $0
50% of export sales 0 0 0 0 0 0
- From 1 month previous: 30% of
export sales + 97% of credit
card sales 243,868 237,686 240,295 241,938 242,689 240,545
95% of cash sales 399,060 403,440 406,200 407,460 403,860 401,520
- Interest on cash balance: 3%/yr if
previous mo. Ending bal.> $50,000 1,421 1,173 1,424 1,684 1,575 1,840
410

- Carpenter wages:
$36 per overtime hr. $37,152 $42,533 $42,684 $45,408 $45,408 $45,408
- Helper wages:
$21 per overtime hr. 33,712 37,216 37,349 40,936 40,936 40,936
- Supplies, etc.:
$5 per carpenter hr. 7,660 8,774 8,795 9,095 9,040 9,175
$20 per carpenter hr. 30,640 35,096 35,180 36,378 36,158 36,700
- Maintenance costs:
$15 per carpenter hr. 22,980 26,322 26,385 27,284 27,119 27,525
- Wood costs:
$30 per unit of woodd 125,190 143,790 144,420 149,280 148,560 150,750
- Factory rent:
$150,000 per quarter 150,000 0 0 150,000 0 0
- Fixed costs:
$40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000
- Administrative
salaries:
$25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs:
$30,000 per month 30,000 30,000 30,000 30,000 30,000 30,000
- Advertising
expenditures:
$50,000 per mo. 50,000 50,000 50,000 50,000 50,000 50,000
- Shipping costse 42,185 48,515 48,590 50,095 49,895 50,555
- Interest on line of
credit: 10%/yr based
on last month’s balance 0 0 0 0 0 0
- Mach. purch.: $5,000 
and July) 45,000 0 0 0 0 0
411

- Carpenter wages:
$36 per overtime hr. $45,408 $45,408 $45,408 $45,408 $45,408 $45,408
- Helper wages:
$21 per overtime hr. 40,936 40,936 40,936 40,936 40,936 40,936
- Supplies, etc.:
$5 per carpenter hr. 8,933 9,020 9,091 9,118 9,044 8,971
$20 per carpenter hr. 35,730 36,080 36,364 36,470 36,174 35,884
$15 per carpenter hr. 26,798 27,060 27,273 27,353 27,131 26,913
- Wood costs:
$30 per unit of woodd 146,430 148,320 148,860 149,520 148,200 147,690
- Factory rent:
$150,000 per quarter 150,000 0 0 150,000 0 0
- Fixed costs:
$40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000
- Administrative
salaries:
$25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs:
$30,000 per month 30,000 30,000 30,000 30,000 30,000 30,000
- Advertising
expenditures:
$50,000 per mo. 50,000 50,000 50,000 50,000 50,000 50,000
- Shipping costs e 49,290 49,810 50,180 50,325 49,885 49,565
- Interest on line of
credit: 10%/yr based on
last month’s balance 0 0 0 0 0 0
- Mach. purch.: $5,000 
and July) 55,000 0 0 0 0 0
412
- Opening cash $50,000 $110,270 $325,632 $462,833 $409,846 $513,938
- Net cash flow:
Cash inflows –
cash outflows 60,270 215,362 137,201 –52,987 104,091 104,294
- Cash before
financing 110,270 325,632 462,833 409,846 513,938 618,232
- Opening line-of
credit 0 0 0 0 0 0
- Line-of-credit
increase 0 0 0 0 0 0
- Line-of-credit
payment 0 0 0 0 0 0
- Line of credit
closing balance 0 0 0 0 0 0 0
- Ending cash:
$50,000 min. 50,000 110,270 325,632 462,833 409,846 513,938 618,232
Cash flow analysis July Aug. Sept. Oct. Nov. Dec.

- Opening cash $618,232 $519,151 $619,471 $723,658 $679,865 $785,826
- Net cash flow:
Cash inflows –
cash outflows –99,081 100,321 104,186 –43,792 105,961 103,385
- Cash before
financing 519,151 619,471 723,658 679,865 785,826 889,211
- Opening line-of
credit 0 0 0 0 0 0
- Line-of-credit
increase 0 0 0 0 0 0
- Line-of-credit
payment 0 0 0 0 0 0
- Line of credit
closing balance 0 0 0 0 0 0
- Ending cash:
$50,000 min. 519,151 619,471 723,658 679,865 785,826 889,211
413
Cash Sales to Exporters
Revenue
Chairs $2,787,600
Tables 2,576,700
Cabinets 2,583,000 $7,947,300
Variable expenses
Carpenters 531,041
Helpers 476,701
Maintenance 320,141
Selling 476,838
Shipping 588,890
Supplies 106,714
Wood 1,751,010 4,678,189
Fixed expenses
a
Depreciation 46,000
Selling 360,000
Other factory 480,000 1,786,000
Other expenses
Bad debts 0
Net interest charges –13,047 925,759
a Depreciation:
Machinery, Jan. 1, 2012 $360,000
Machinery, Dec. 31, 2012 $414,000
Based on profitability, this change is not desirable.
414
December 31, 2012
Cash Sales to Exporters
Cash $889,211
Accounts Bank
receivablea 239,151 loan $0
equipmentb 414,000 equity $1,542,362
Total liabilities and
Total assets $1,542,362 owners’ equity $1,542,362
a Accounts receivable, December 31, 2012 balance = $239,151 = 97% of Dec. credit
card sales.
B Machinery, Jan. 1, 2012 $360,000

Purchases: $45,000 in January and 100,000
$55,000 in July
Depreciation expense: 10% of year-end (46,000)
balance
Machinery, Dec. 31, 2012 $414,000
415
(c) Increased sales effort

Unit production
and sales
- Chairs 900 975 950 1,326 1,548 1,533 1,554 1,560
- Tables 175 188 201 260 308 316 325 328
- Cabinets 90 102 95 142 156 155 164 159
- Total revenuea $499,500 $547,800 $541,900 $717,060 $824,220 $826,500 $853,575 $848,730
- Cash sales:
25% of
revenue $124,875 $136,950 $135,475 $179,265 $206,055 $206,625 $213,394 $212,183
- Credit card
sales: 35% of
rev. $174,825 $191,730 $189,665 $250,971 $288,477 $289,275 $298,751 $297,056
- Exporter
sales: 40% of
rev. $199,800 $219,120 $216,760 $286,824 $329,688 $330,600 $341,430 $339,492
- Bad debts:
3% of export
sales $8,605 $9,891 $9,918 $10,243 $10,185
- Cash sales
discounts: 5%
of cash sales $8,963 $10,303 $10,331 $10,670 $10,609
- Cred. card
fees: 3% of
credit card
sales $7,529 $8,654 $8,678 $8,963 $8,912
a Chair price is $190, table price is $855, and cabinet price is $1,710 beginning in January.
416

Unit production
and sales
- Chairs 1,565 1,552 1,559 1,589 1,585 1,569 1,550
- Tables 332 315 329 316 322 317 332
- Cabinets 163 160 157 165 164 164 155
- Total
revenuea $859,940 $837,805 $845,975 $854,240 $856,900 $849,585 $843,410 $10,017,940
- Cash sales:
25% of
revenue $214,985 $209,451 $211,494 $213,560 $214,225 $212,396 $210,853 $2,504,485
- Credit card
sales: 35% of
rev. $300,979 $293,232 $296,091 $298,984 $299,915 $297,355 $295,194 $3,506,279
- Exporter
sales: 40% of
rev. $343,976 $335,122 $338,390 $341,696 $342,760 $339,834 $337,364 $4,007,176
- Bad debts:
3% of export
sales $10,319 $10,054 $10,152 $10,251 $10,283 $10,195 $10,121 $120,215
- Cash sales
discounts: 5%
of cash sales $10,749 $10,473 $10,575 $10,678 $10,711 $10,620 $10,543 $125,224
- Cred. card
fees: 3% of
credit card
sales $9,029 $8,797 $8,883 $8,970 $8,997 $8,921 $8,856 $105,188
a Chair price is $190, table price is $855, and cabinet price is $1,710 beginning in January.
417
- Required carpenter hoursb 2,032.4 2,325.2 2,333.2 2,418.1 2,398 2,434
- Carpentersc 9 12 13 13 14 14 14
- Helpers: 1.5  number of 14 18 20 20 21 21 21
carpenters
- Carpenter regular hours: 2,064 2,236 2,236 2,408 2,408 2,408
172 per carpenter
- Carpenter overtime hours 0 89.2 97.2 10.1 0 26
- 5% of regular carpenter hrs, 103.2 111.8 111.8 120.4 120.4 120.4
must be > overtime hoursc
- Helper regular hours: 3,096 3,440 3,440 3,612 3,612 3,612
172 per helper
- Helper overtime hours 0 47.8 59.8 15.15 0 39
- Required carpenter hoursb 2,368.3 2,388.1 2,415.6 2,423 2,404.1 2,380
- Carpentersc 14 14 14 14 14 14
- Helpers: 1.5  number of 21 21 21 21 21 21
carpenters
- Carpenter regular hours: 2,408 2,408 2,408 2,408 2,408 2,408
172 per carpenter
- Carpenter overtime hours 0 0 7.6 15 0 0
- 5% of regular carpenter hrs, 120.4 120.4 120.4 120.4 120.4 120.4
must be > overtime hoursc
- Helper regular hours: 3,612 3,612 3,612 3,612 3,612 3,612
172 per helper
- Helper overtime hours 0 0 11.4 22.5 0 0
available.
418

17% of export sales $33,966 $37,250 $36,849 $48,760 $56,047 $56,202
50% of export sales 109,560 108,380 143,412 164,844 165,300 170,715
30% of export sales + 97%
of credit card sales 249,003 329,489 378,729 379,777 392,218 389,991
95% of cash sales 170,302 195,752 196,294 202,724 201,573 204,236
3%/yr if previous mo.
ending bal > $50,000 0 0 0 0 0 0

17% of export sales $58,043 $57,714 $58,476 $56,971 $57,526 $58,088
50% of export sales 169,746 171,988 167,561 169,195 170,848 171,380
30% of export sales +
97% of credit card sales 395,142 384,971 388,726 392,523 393,746 390,384
95% of cash sales 198,979 200,919 202,882 203,514 201,776 200,310
3%/yr if previous mo.
ending bal > $50,000 45 0 163 480 428 767
419

- Carpenter wages:
$36 per overtime hr. $49,536 $56,875 $57,163 $58,156 $57,792 $58,728
- Helper wages:
$21 per overtime hr. 43,344 49,164 49,416 50,886 50,568 51,387
- Supplies, etc.:
$5 per carpenter hr. 10,162 11,626 11,666 12,091 11,990 12,170
$20 per carpenter hr. 40,648 46,504 46,664 48,362 47,960 48,680
$15 per carpenter hr. 30,486 34,878 34,998 36,272 35,970 36,510
- Wood costs:
$30 per unit of woodd 166,080 190,560 191,580 198,420 197,070 199,980
- Factory rent:
$150,000 per quarter 150,000 0 0 150,000 0 0
- Fixed costs:
$40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000
$25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs:
$30,000 per month 30,000 30,000 30,000 30,000 30,000 30,000
- Advertising expenditures:
$75,000 per mo. 75,000 75,000 75,000 75,000 75,000 75,000
- Shipping costse 55,960 64,300 64,460 66,575 66,185 67,060
- Variable selling costs: 6%
of product list prices 43,024 49,453 49,590 51,215 50,924 51,596
month’s balance 0 2,137 2,175 1,529 1,924 884
- Mach. purch.: $5,000  no.
of carpenters (Jan. and July) 60,000 0 0 0 0 0
420

- Carpenter wages:
$36 per overtime hr. $57,792 $57,792 $58,066 $58,332 $57,792 $57,792
- Helper wages:
$21 per overtime hr. 50,568 50,568 50,807 51,041 50,568 50,568
- Supplies, etc.:
$5 per carpenter hr. 11,842 11,941 12,078 12,115 12,021 11,900
$20 per carpenter hr. 47,366 47,762 48,312 48,460 48,082 47,600
$15 per carpenter hr. 35,525 35,822 36,234 36,345 36,062 35,700
- Wood costs:
$30 per unit of woodd 194,160 196,380 197,760 198,630 196,950 195,930
- Factory rent:
$150,000 per quarter 150,000 0 0 150,000 0 0
- Fixed costs:
$40,000 per month 40,000 40,000 40,000 40,000 40,000 40,000
$25,000 per month 25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs:
$30,000 per month 30,000 30,000 30,000 30,000 30,000 30,000
- Advertising expenditures:
$75,000 per mo. 75,000 75,000 75,000 75,000 75,000 75,000
- Shipping costse 65,355 65,965 66,650 66,845 66,280 65,755
- Variable selling costs: 6% of
product list prices 50,268 50,759 51,254 51,414 50,975 50,605
month’s balance 0 524 0 0 0 0
- Mach. purch.: $5,000  no.
of carpenters (Jan. and July) 70,000 0 0 0 0 0
- Total cash outflows $902,875$687,511 $691,161 $843,182 $688,729 $685,850
421
- Opening cash $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
inflows – cash outflows -256,409 -4,625 77,572 -47,399 124,755 124,149
- Cash before financing -206,409 45,375 127,572 2,601 174,755 174,149
- Opening line-of credit 0 256,409 261,034 183,462 230,861 106,106
- Line-of-credit increase 256,409 4,625 0 47,399 0 0
- Line-of-credit payment 0 0 77,572 0 124,755 106,106
balance 0 256,409 261,034 183,462 230,861 106,106 0
- Ending cash:
$50,000 minimum 50,000 50,000 50,000 50,000 50,000 50,000 68,042
- Cash flow analysis July Aug. Sept. Oct. Nov. Dec.

- Opening cash $68,042 $50,000 $115,203 $241,849 $221,350 $356,946
Net cash flow: Cash
inflows – cash outflows -80,920 128,081 126,646 -20,499 135,596 135,080
- Cash before financing -12,877 178,081 241,849 221,350 356,946 492,026
- Opening line-of credit 0 62,877 0 0 0 0
- Line-of-credit increase 62,877 0 0 0 0 0
- Line-of-credit payment 0 62,877 0 0 0 0
balance 62,877 0 0 0 0 0
- Ending cash:
$50,000 minimum 50,000 115,203 241,849 221,350 356,946 492,026
422
Increased Sales Effort
Revenue
Chairs $3,513,100
Tables 3,249,000
Cabinets 3,255,840 $10,017,940
Variable expenses
Carpenters 685,816
Helpers 598,885
Maintenance 424,800
Selling 601,076
Shipping 781,390
Supplies 141,600
Wood 2,323,500 6,123,467
Fixed expenses
a
Depreciation 49,000
Selling 360,000
Other factory 480,000 1,789,000
Other expenses
Bad debts 120,215
Net interest charges 7,289 1,257,916
1,257,916
a
Depreciation:
Machinery, Jan. 1, 2012 $360,000
Machinery, Dec. 31, 2012 $441,000
Based on profitability, this change is highly desirable.
423
December 31, 2012
Increased Sales Effort
Cash $492,026
Accounts receivablea 899,539 Bank loan $0
equipmentb 441,000 equity $1,832,565
Total Total liabilities and
assets $1,832,565 owners’ equity $1,832,565
a
Accounts receivable, December 31, 2012 balance = $899,539 = 97% of Dec. credit
card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively.
b $360,000
Machinery, Jan. 1, 2012
Machinery, Dec. 31, 2012 $441,000
(d) Criteria other than profitability may be important to a company. For

example, the option in part (b) provides a stronger cash position for the
company so that the company is able to invest in growth opportunities, if
desired. Correspondingly, accounts receivable are greatly reduced. This
option will, as desired, eliminate bad debt. In the long run, however, sales
to exporters may decrease even further if Judd insists on cash payment,
reducing profit even further.
The option in part (c) increases sales and profit dramatically but creates
cash flow problems for the company; net interest charges will increase to
$7,289 from $150. Along with the profit increase, accounts receivable
increase substantially.
424
10179 (Note: Small discrepancies in totals are due to rounding.)
Peterborough Food—Flexible Budget Cost Analysis

Flexible
Master Planning Flexible budget
budget variance budget variance Actual
Line 1—
Production units 945,000 255,000 1,200,000 0 1,200,000
Line 2—
Production units 1,175,000 (230,000) 945,000 0 945,000
Line 1—
Number of batches 189 51 240 (40) 200
Line 2—
Number of batches 235 (46) 189 21 210
Unit1related costs
Line 1—Materials $1,417,500 382,500 $1,800,000 (131,400) $1,668,600
Line 1—Packaging 42,525 11,475 54,000 (576) 53,424
Line 1—Labor 221,130 59,670 280,800 (39,900) 240,900
Line 2—Materials 2,056,250 (402,500) 1,653,750 295,313 1,949,063
Line 2—Packaging 44,650 (8,740) 35,910 4,404 40,314
Line 2—Labor 190,350 (37,260) 153,090 19,373 172,463
Total $3,972,405 5,145 $3,977,550 147,214 $4,124,763
Batch1related costs
Line 1—Materials $226,800 61,200 $288,000 (23,000) $265,000
Line 1—Labor 40,824 11,016 51,840 (11,690) 40,150
Line 2—Materials 358,375 (70,150) 288,225 25,725 313,950
Line 2—Labor 67,68 (13,248) 54,432 14,55 68,98
0 3 5
Total $693,679 (11,182) $682,497 5,588 $688,085
425
Peterborough Food—Flexible Budget Cost Analysis

Flexible
Master Planning Flexible Budget
Budget Variance Budget Variance Actual
Product1
sustaining costs
Line 1—Labor $256,000 20,000 $276,000 11,000 $287,000
Line 1—Other 2,054,000 100,000 2,154,000 (31,000) 2,123,000
Line 2—Labor 305,000 0 305,000 18,000 323,000
Line 2—Other 1,927,000 0 1,927,000 78,000 2,005,000
Total $4,542,000 120,000 $4,662,000 76,000 $4,738,000
Business1
sustaining costs
Labor $145,000 0 $145,000 7,000 $152,000
Other 4,560,000 140,000 4,700,000 40,000 4,740,000
Total $4,705,000 140,000 $4,845,000 47,000 $4,892,000
Total all costs $13,913,084 253,963 $14,167,047 275,802 $14,442,849
Recall that each variance in the above table equals the number that is to the left
of the reported variance subtracted from the number to the right of the reported
variance. A positive variance means that the cost is higher than the plan and is
therefore unfavorable. A negative variance means that the cost is lower than the
plan and is therefore favorable. The planning variances indicate the cost
changes expected as a result of changes in the volume of production. The
flexible budget variances indicate changes in cost per unit resulting from
material, labor and packaging use and cost per unit of production being
different than planned; the average number of units per batch being different
than planned; the material and labor cost per batch being different than planned;
the labor and other product-sustaining costs being different than planned; and
the labor and other business-sustaining costs being different than planned. The
following are the details of the flexible budget calculations that are used to
isolate the variances in the above table.
426
Flexible Budget Item Calculations
Unit1Related Costs
Line 1
materials cost actual number of boxes grams of material per box
material cost per gram
1,200,000 500 $0.003 $1,800,000
packaging cost = actual no. of boxes  units per box  packing cost per unit
= 1,200,000  1  $0.045 = $54,000
labor cost actual number of boxes labor hours per box labor cost per hour
1,200,000 0.013 $18 $280,800
Line 2
materials cost actual number of boxes grams of material per box
material cost per gram
945,000 350 $0.005 $1,653,750
packaging cost = actual no. of boxes  units per box  packing cost per unit
= 945,000  1  $0.038 = $35,910
labor cost actual number of boxes labor hours per box labor cost per hour
945,000 0.009 $18 $153,090
427
Batch1Related Costs
Line 1
actual number of boxes
materials cost  material cost per batch
planned batch size
1,200,000
 $1,200 $288,000
5,000
labor cost  labor hours per batch
planned batch size
labor cost per hour
1,200,000
 12 $18 $51,840
5,000
Line 2
materials cost  material cost per batch
planned batch size
945,000
 $1,525 $288,225
5,000
labor cost  labor hours per batch
planned batch size
labor cost per hour
945,000
 16 $18 $54,432
5,000
Product1Sustaining Costs
Line 1
labor cost master budget amount  expansion costs
256,000  20,000 $276,000
other cost master budget amount  expansion costs
2,054,000  100,000 $2,154,000
Line 2
labor cost master budget amount  contraction savings
305,000  0 $305,000
other cost master budget amount  contraction savings
1,927,000  0 $1,927,000
428
Business1Sustaining Costs
labor cost master budget amount  expansion costs

145,000  0 $145,000
other cost master budget amount  expansion costs
4,560,000  140,000 $4,700,000
Following the approach in the chapter, we can develop the details of the flexible
budget variances for unit-related costs. These variances decompose the total
flexible budget variances for materials, packaging and labor into components.
Unit1Related Cost Flexible Budget Variances
Line 1
Material price variance  grams of material purchased  (actual price per gram
– standard price per gram)
Material price variance  (1,200,000  515)  (0.0027 – 0.0030)  $185,400
F
Material quantity variance  standard price per gram  (material used –

standard material allowed)
Material quantity variance  0.0030  [(1,200,000  515) – (1,200,000 
500)]  $54,000 U
Material flexible budget variance  material price variance  material quantity

variance
Material flexible budget variance  –$185,400  $54,000  $131,400 F
Packaging price variance  units of packaging purchased  (actual price per

unit – standard price per unit)
Packaging price variance  (1,200,000  1.06)  (0.042 – 0.045)  $3,816 F
Packaging quantity variance  standard price per unit – (packaging used –

standard packaging allowed)
packaging quantity variance  0.045  [(1,200,000  1.06) – (1,200,000 
1.00)]  $3,240 U
Packaging flexible budget variance  packaging price variance  packaging

quantity variance
Packaging flexible budget variance  –$3,816  $3,240  $576 F
429
Labor rate variance  labor hours used  (actual rate per labor hour – standard
rate per labor hour)
Labor rate variance  (0.011  1,200,000)  (18.25 – 18)  $3,300 U
Labor efficiency variance  standard rate per labor hour  (labor hours used –
labor hours allowed)
Labor efficiency variance  18  [(0.011  1,200,000) – (0.013  1,200,000)]
 $43,200 F
Labor flexible budget variance  labor rate variance  labor efficiency variance
Labor flexible budget variance  $3,300 – $43,200  $39,900 F
Line 2
Material price variance  grams of material purchased  (actual price per gram
– standard price per gram)
Material price variance  (945,000  375)  (0.0055 – 0.0050)  $177,187.50
U
Material quantity variance  standard price per gram  (material used –

standard material allowed)
Material quantity variance  0.005  [(945,000  375) – (945,000  350)] 
$118,125 U
Material flexible budget variance  material price variance  material quantity

variance
Material flexible budget variance  $177,187.50 + $118,125  $295,312.50 U
Packaging price variance  units of packaging purchased  (actual price per

unit – standard price per unit)
Packaging price variance  (945,000  1.0405)(0.041 – 0.038)  $2,949.82
U
Packaging quantity variance  standard price per unit  (packaging used –

standard packaging allowed)
Packaging quantity variance  0.038  [(945,000  1.0405) – (945,000 
1.00)]  $1,454.36 U
Packaging flexible budget variance  packaging price variance  packaging

quantity variance
Packaging flexible budget variance  $2,949.82 + $1,454.36  $4,404.17 U
430
Labor rate variance  labor hours used  (actual rate per labor hour – standard
rate per labor hour)
Labor rate variance  (0.01  945,000)  (18.25 – 18)  $2,362.50 U
Labor efficiency variance  standard rate per labor hour  (labor hours used –
labor hours allowed)
Labor efficiency variance  18  [(0.010  945,000) – (0.009  945,000)] 
$17,010 U
Labor flexible budget variance  labor rate variance  labor efficiency variance
Labor flexible budget variance  $2,362.50 + $17,010  $19,372.50 U
Batch1Related Cost Flexible Budget Variances
Line 1
Batch materials variance  actual number of batches  (actual material cost per
batch – standard material cost per batch)
Batch materials variance  200  (1,325 – 1,200)  $25,000 U
Materials batch number variance  standard material cost per batch  (actual
number of batches – standard number of batches)
Materials batch number variance  1,200  (200 – 240)  $48,000 F
Batch materials flexible budget variance  batch materials variance  materials

batch number variance
Batch materials flexible budget variance  $25,000 – $48,000  $23,000 F
Batch labor variance  actual number of batches  (actual labor cost per batch
– standard labor cost per batch)
Batch labor variance  200  [(18.25  11) – (18.00  12)]  $3,050F
Labor batch number variance  standard labor cost per batch  (actual number
of batches – standard number of batches)
Labor batch number variance  (18.00  12)  (200 – 240)  $8,640 F
Batch labor flexible budget variance  batch labor variance  labor batch
number variance
Batch labor flexible budget variance  –$3,050 – $8,640  $11,690 F
431
Line 2
Batch materials variance  actual number of batches  (actual material cost per
batch – standard material cost per batch)
Batch materials variance  210  (1,495 – 1,525)  $6,300 F
Materials batch number variance  standard material cost per batch  (actual
number of batches – standard number of batches)
Materials batch number variance  1,525  (210 – 189)  $32,025 U
Batch materials flexible budget variance  batch materials variance + materials
batch number variance
Batch materials flexible budget variance  –$6,300  $32,025  $25,725 U
Batch labor variance  actual number of batches  (actual labor cost per batch
– standard labor cost per batch)
Batch labor variance  210  [(18.25  18) – (18.00  16)]  $8,505 U
Labor batch number variance  standard labor cost per batch  (actual number
of batches – standard number of batches)
Labor batch number variance  (18.00  16)  (210 – 189)  $6,048 U
Batch labor flexible budget variance  batch labor variance  labor batch
number variance
Batch labor flexible budget variance  $8,505  $6,048  $14,553 U
432
10180 This problem is known as the free-rider problem in economics and raises the
issue of the point of sacrifice if other people’s behavior, and benefits, will be
affected by your sacrifice. Nate’s position is that the School of Business, judged
by the university’s own standard, is already one of the best performers cost-
wise. However, Nate knows that there is still room for improvement. The key
problem is to identify what the other faculties will do—will they cooperate or
will many take advantage of those that do cooperate?
An issue in this case is whether the university’s basis for comparison is

legitimate. It is inappropriate to compare the cost per student in a medical
program with the cost per student in an English program, or the cost per student
in a music program with the cost per student in a pure mathematics program.
The funding formulas must reflect the legitimate differences in the cost of
educating students in different programs. Therefore, in itself, the 70% level at
which the School of Business operates is no justification for assuming that it
has done a superior job in controlling its legitimate costs.
The major problem here is that there is no motivation for schools (subunits of
the university) to make these cuts. It is likely that past experiences will
continue. The university administration must provide some motivation for the
deans to manage costs and make them accountable for their cost levels given
reasonable expectations about what it should cost to educate a student in each
program.
In the short-run, Nate’s issue reflects moral and professional considerations.

Nate has been asked to cut costs and knows that cuts are possible. Ethically,
these should be made. The question is the timing of these cuts and how Nate
might exploit his cooperation to ensure that other faculties do not take
advantage of his cooperation.
Therefore, the first option listed is inappropriate; it is dishonest and unethical.

Nate’s major options are second and third options listed. The second option
might provide the best approach to protecting the Business School’s interests.
433

Ch. 10 Using Budgets To For Planning and Coordination Solution

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Atkinson, Solutions Manual t/a Management Accounting, 6E

1011 A budget is a quantitative model of the expected consequences of the

1015 A production plan is an exhibit that identifies proposed production during an

1016 Financial budgets represent projected financial results for an organization.

materials purchasing, labor hiring and training, and administrative and

10111 A capital spending plan summarizes an organization’s plans to acquire or sell

10112 A capacity-related expenditure is any expenditure that an organization cannot

10113 This is a tricky question. If the cafeteria is committed to preparing a given

10115 A line of credit is a short-term financing arrangement made between an

10116 Planners use budget information for the following purposes:

10118 A variance is a difference between an actual amount and a planned (budgeted)

10126 An appropriation is a planned cash outflow or spending plan. In a government

10136 A consulting company is an organization that uses highly trained people to

10138 The credit granting policy is an important component of the organization’s

Let Q be the corresponding number of units, so that R  $55  Q

$55  40 Q  $40,000 $55 Q 10%

Material price variance = (Ag – Sg) × gQ

(b) Material quantity variance = (AQ – SQ) × Sg

Direct labor rate variance  AR  SR  AH

(d) Direct labor efficiency variance = (AH – SH) × SR

Direct material price variance  Ag  Sg  AQ

(b) Direct material quantity variance = (AQ − SQ) × Sg

10147 (a) Material price variance = (Ag – Sg)  AQ

Direct labor rate variance  AR  SR  AH

(e) Direct labor efficiency variance = (AH – SH) × SR

10148 (a) Material price variance = (Ag – Sg)  AQ

(b) Material quantity variance = (AQ – SQ)  Sg

10150 Borders Manufacturing Production Plan

10151 Mira Vista Planters

Mira Vista Planters

10152 Strathfield Motel

10153 Homebush School Band Estimated Travel Expenses

10154 Worthington Company

10155 Masefield Dairy Ingredient Purchases

10156 Nathaniel’s Motor Shop

10157 Country Club Road Nurseries

January February March April May June

July August Sept. October Nov. December

10158 (a) Cash inflows

(b) Sales 40,000  $32 = $1,280,000

10159 (a) Merchandise inventory Units Dollar value

Required for sales 12,000 $480,000

(b) Sales 12,000  $60 = $720,000

(c) Cash inflows

Ending cash balance $112,000

Sales (260,000 units) 260,000p

Therefore, 260,000p – 1,162,800  200,000 or p  $5.24.

Sales (x units) 5.00x

Variable manufacturing support

Therefore, 1.52x – 258,000 = 200,000 or x = 301,316 units.

(c) Sales: 220,000 units  $5.24 $1,152,800

10162 (a) Last month’s profit

$0.40 1,000,000  $0.25 1,000,000  $60,000 $90,000

Current month’s target profit $90,000 15

Let x be the maximum amount that can be spent on advertising.

($0.40 × 2,000,000) – ($0.25 × 2,000,000) – $(60,000 + x) = $135,000.

(b) Let y be the number of units to break even.

10163 (a) Old Machine New Machine

(b) Let Sg = selling price, Q = quantity, FC = fixed costs, and V = variable

(c) Q Sg1  VC1  FC1 Q Sg2  VC2  FC2

(e) Q Sg1  VC1  FC1 Q Sg2  VC2  FC2

10164 (a) Deluxe rackets Without With

Standard Deluxe Pro Total