Solutions Chapter 8 - 2d Edition

Chapter 08 - Budgetary Planning
Chapter 8
Budgetary Planning
ANSWERS TO QUESTIONS
1. Budgetary planning is crucial because companies use budgets to plan their ongoing
operations so they will be able to meet their short-term and long-term objectives.
2. Budgets are an important part of organizing because they translate the company’s
objectives into financial terms and lay out the resources and expenditures required
over a limited horizon. Budgets give managers a goal to work toward as it directs
their actions, and may either motivate or demotivate them. Budgets impact the
control function because they serve as a basis against which actual results are
compared.
3. A strategic plan is the starting point of the planning process and is the vision of what
management wants the organization to achieve over the long term. A strategic plan
includes long-term goals which are typically over a 5-10 year period and also
includes short-term or intermediate steps needed to achieve the long-term goals.
4. Answers will vary, but students should clearly distinguish between the three
categories.
 Long-term goal: To have $X in personal assets by the age of 55.
 Short-term goals: To save $X per month from their paycheck, to generate $X in
return from specific investments, etc.
 Tactics: Cut costs by eliminating unnecessary expenses, to research potential
investments thoroughly, etc.
5. Benefits of budgeting include forcing managers to look ahead, which will help them
to foresee potential problems such as running out of cash or inventory. Budgets
also promote communication by allowing managers to share their expectations and
priorities for the future. And because budgets span the entire organization, they
require managers from different functional areas to coordinate their activities.
Finally, when implemented correctly, budgets can be useful for motivating
employees to work toward the organization’s objectives.
6. Answers will vary. Potential negative consequences of not developing budgets

include failure to consider a company’s long-term and short-term goals, lack of
communication between managers, and absence of motivation for employees
because there isn’t an identifiable goal.
8-1
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7. Unlike a “top down” approach to budgeting where budgets are set by upper
management and imposed on employees, participative budgeting allows employees
to provide input into their own budget. This may motivate them to work hard to
achieve the goal. It may also result in more accurate information as employees may
have more knowledge or information about the process. Disadvantages of
participative budgeting include the amount of time consumed and the fact that
employees may try to build slack into a budget.
8. Budgetary slack results from employees’ attempts to build a cushion or margin of

safety into their budget so that they will be more likely to meet or exceed their
budgetary goal, and thus receive a better performance evaluation. Budgetary slack
can be detrimental if other decisions are based on the budget, without adjustment for
budgetary slack. For example, a production manager may underestimate production
goals so that they will be easier to achieve. However, the raw materials purchases
manager who relies on this budget will not buy enough materials to meet actual
production needs.
9. a. Utilizing different budgets for planning and performance evaluation will minimize
the impact of budgetary slack.
b. Continuous budgeting gives managers a constant period of budgets available
and keeps them in a continuous planning mode instead of only once per period.
c. Zero-based budgeting requires managers to justify their expenditures each and
every budgeting cycle instead of simply assuming previous period’s levels are
still appropriate.
10. A master budget is a comprehensive set of budgets that covers all phases of an
organization’s planned activities for a specific period. It is made up of both operating
budgets (sales, production, direct materials purchases, direct labor, manufacturing
overhead, selling and administrative expenses, and income statement), and financial
budgets (cash receipts and disbursements, inventory, capital purchases, financing,
and balance sheet).
11. The sales forecast is the starting point because all of the other budgets are based on
the sales forecast. The production, direct materials purchases, direct labor,
manufacturing overhead, selling and administrative, cash receipts/disbursements,
and inventory budgets are all affected by the sales forecast.
12. The sales forecast is based on last period’s sales, industry trends, information from
top management about sales objectives, input from research and development, and
planned marketing activities. An inaccuracy in any of these sources would result in
an incorrect sales forecast which would, in turn, cause many operating budgets to be
inaccurate.
13. The operating budget is made up of the sales forecast, production budget, direct
materials purchases budget, direct labor budget, manufacturing overhead budget,
selling and administrative budget, and budgeted income statement.
8-2
14. The components of the cash budget include budgeted cash receipts, budgeted cash
payments, and financing.
15. The operating budgets feed directly into the cash budget. The sales budget is used
to compute the cash receipts, while the direct materials purchases, direct labor,
manufacturing overhead, and selling administrative expense budgets are used to
compute budgeted cash payments. The ending balance of cash appears on the
budgeted balance sheet. The operating budgets also affect other elements of the
budgeted balance sheet, including budgeted accounts receivable, inventory,
accounts payable, and owner’s equity.
16. The cash budget receives considerable attention because a company cannot exist
without sufficient cash. Sales revenue does not always become cash or there may
be a lag and companies need to know that they have sufficient cash on hand to pay
their expenses in the interim.
17. Depreciation is a non-cash expense. While it does increase a company’s total

expenses and decrease net operating income, it does not require a cash outflow
during the current period.
18. The end result of the budgeting process is a set of pro-forma financial statements
that includes a budgeted income statement, statement of cash flows, and budgeted
balance sheet. Each of these budgets provides managers with valuable information
to use for planning, managing operations, and making investing and financing
decisions.
19. Service firms do not need to prepare production budgets, inventory budgets, or
manufacturing overhead budgets. But they do need to prepare budgets to predict
sales revenue, labor costs, supplies, and other non-manufacturing expenses such
as commissions and advertising.
20. One of the primary operating budgets a merchandiser needs to prepare is the
merchandise purchases budget. Instead of considering production needs and raw
materials inventory, this budget is based on budgeted sales and the need to
maintain adequate levels of finished goods inventory. The other major difference
between merchandising and manufacturing firms’ budgets is that merchandising
firms do not have a raw materials, direct labor, or manufacturing overhead expense
budget.
8-3
Authors' Recommended Solution Time

(Time in minutes)
Cases and
Mini-exercises Exercises Problems Projects*
No. Time No. Time No. Time No. Time
1 4 1 7 PA−1 15 1 45
2 5 2 8 PA−2 12 2 45
3 3 3 8 PA−3 12
4 5 4 7 PA−4 12
5 3 5 7 PA- 5 12
6 4 6 8 PA-6 15
7 5 7 8 PB−1 15
8 4 8 7 PB−2 12
9 5 9 7 PB−3 12
10 5 10 8 PB−4 12
11 5 11 9 PB−5 12
12 7 PB−6 15
13 7
14 8
15 7
16 7
17 8
18 8
19 8
20 8
21 8
* Due to the nature of cases, it is very difficult to estimate the amount of time students
will need to complete them. As with any open-ended project, it is possible for students
to devote a large amount of time to these assignments. While students often benefit
from the extra effort, we find that some become frustrated by the perceived difficulty of
the task. You can reduce student frustration and anxiety by making your expectations
clear, and by offering suggestions (about how to research topics or what companies to
select).
8-4
ANSWERS TO MINI-EXERCISES
M8−1
No, he isn’t correct. Planning, directing, and control are very interrelated functions
within any organization. Managerial accounting plays a crucial role in each of these
functions.
M8−2
Potential consequences of CC’s philosophy include a lack of vision for the company’s
future development, failure to communicate goals to employees, and inability to
evaluate performance of the company or its employees.
M8−3
a) Cash receipts and payments budget Financial

b) Sales budget Operating
c) Raw materials purchases budget Operating
d) Selling and administrative expense budget Operating
e) Budgeted balance sheet Financial
f) Manufacturing overhead budget Operating
g) Direct labor budget Operating
h) Budgeted income statement Operating
i) Production budget Operating
M8−4
October November December 4th Quarter

Budgeted sales (units) 7,200 7,400 7,100 21,700
Budgeted unit price x $27.50 x $27.50 x $27.50 x $27.50
Budgeted sales revenue $ 198,000 $ 203,500 $ 195,250 $ 596,750
M8−5
July August
Production 480 400
Material required per unit x 10 x 10
Material required for production 4,800 4,000
Ending raw materials inventory 300 300
Beginning raw materials inventory (300) (300)
Materials purchases 4,800 4,000
Average cost per foot x $ 1.50 x $ 1.50
Budgeted raw materials purchases $ 7,200 $ 6,000
8-5
M8−6
July August
Production 480 400
Average direct labor hours per unit x 1.75 x 1.75
Total direct labor hours required 840 700
Average hourly labor rate x $ 9.00 x $ 9.00
Budgeted direct labor cost $ 7,560 $ 6,300
M8−7
1st Quarter 2nd Quarter
Sales $ 200,000 $ 236,000
Variable overhead rate x 19% x 19%
Variable manufacturing overhead 38,000 44,840
Fixed overhead 46,500 46,500
Budgeted manufacturing overhead $ 84,500 $ 91,340
M8−8
January February March
Sales $ 87,000 $ 81,000 $ 92,000
Variable selling and administrative rate x 8% x 8% x 8%
Variable selling and administrative expenses 6,960 6,480 7,360
Fixed selling and administrative expenses 11,000 11,000 11,000
Budgeted selling and administrative expenses $ 17,960 $ 17,480 $ 18,360
M8-9
February March
Budgeted sales revenue (given) $235,000 $298,000
Cash sales
(35% of budgeted sales revenue) $ 82,250 $104,300
Credit collections
(65% of budgeted sales revenue):
60% during month of sale 91,650 116,220
40% in month following sale 52,000 61,100
Budgeted cash receipts $225,900 $281,620
8-6
M8-10

Budgeted sales revenue (given) $450,000 $510,000 $530,000
Cash sales
20% of budgeted sales revenue 90,000 102,000 106,000
Credit collections (80% of sales)
50% during month of sale 180,000 204,000 212,000
50% during month following sale 304,000* 180,000 204,000
Budgeted cash receipts $574,000 $486,000 $522,000
* December sales $760,000 x 80% x 50% = $304,000
M8−11
March
Unit sales 1,300
Ending inventory (30% of April sales of 900) 270
Beginning inventory (30% of March sales of 1,300) (390)
Purchases (units) 1,180
Cost per unit x $ 40
Total purchases $47,200
8-7
ANSWERS TO EXERCISES
E8-1
Req. 1
If Samantha knows that Leslie will automatically increase the estimate she gives her,
then she has a motivation to underestimate her budget. Additionally, the fact that
Samantha’s bonus is tied to her ability to “beat” the budget gives her incentive to
underestimate production because this will increase her chances of receiving a bonus.
Req. 2
Budgeted production is used to make raw material purchases, inventory storage, and
labor staffing decisions. If Samantha’s underestimated production numbers are used,
the Purchasing Manager and Human Resources Director will both be impacted. As a
result, they may not have enough resources on hand at the time they are needed which
could result in increased costs or a necessary reduction in production levels.
E8-2
1. Master budget
2. Operating budgets
3. Participative; Top-down
4. Budgetary slack
5. Controlling
6. Sales forecast
7. Budgeted income statement
8. Rolling budget
9. Budgeted balance sheet
10. Production budget
E8−3
Likely Order of
Preparation Budget
9* Cash receipts and payments budget.
7* Selling and administrative expense budget.
5* Manufacturing overhead budget.
3* Raw materials purchases budget.
10 Budgeted balance sheet.
1 Sales budget.
4* Direct labor budget.
8 Budgeted income statement.
6* Budgeted cost of goods sold.
2 Production budget.
*Order shown is the order presented in the book. Some budgets are independent of
others and could be prepared in slightly different order.
8-8
All of the budgets above would be overstated if the sales forecast were overstated.
E8−4
Shaded answers are provided below:

Ending Beginning
Production Sales Inventory Inventory
550 500 125 75
930 965 90 125
750 710 120 80
900 1,200 85 385
805 740 225 160
845 795 290 240
E8−5
Req. 1 May June

Sales (units) 600 800
Price per unit x $ 18 x $ 18
Budgeted total sales $10,800 $14,400
Req. 2 May June

Sales 600 800
Ending inventory 50 60
Beginning inventory (75) (50)
Budgeted production (units) 575 810
E8−6
Req. 1 May June

Production 575 810
x Closures required per unit x 1 x 1
Total closures required for production 575 810
+ Ending Inventory 20 25
- Beginning Inventory (30) (20)
Budgeted purchases 565 815
x Cost per closure x $1.50 x $1.50
Budgeted cost of closures purchased $ 847.50 $1,222.50
Req. 2
Production (units) 575 810
x Variable overhead rate x $ 1.25 x $ 1.25
Budgeted variable overhead 718.75 1,012.50
+ Budgeted fixed overhead 1,000.00 1,000.00
Budgeted manufacturing overhead $1,718.75 $2,012.50
8-9
E8-7
May June
Production 575 810
Total direct labor hours required 172.50 243
Budgeted direct labor cost $ 1,552.50 $2,187.00
E8-8
Req. 1
Budgeted manufacturing cost per unit Cost Per Unit
Direct materials $ 4.00
Total direct labor (.30 hrs each X $9.00 per hour) 2.70
Variable manufacturing overhead ($1.25 per unit) 1.25
Fixed manufacturing overhead (given as $2.00 per unit) 2.00
Manufacturing cost per unit $ 9.95
Req. 2
Shadee Corp.
Cost of Goods Sold Budget
May June
Budgeted sales (units) 600 800
Budgeted manufacturing cost per unit x $9.95 x $9.95
Budgeted cost of goods sold $ 5,970 $ 7,960
E8-9
May June
Sales $10,800 $14,400
Variable selling and administrative rate x 6% x 6%
Variable selling and administrative expenses 648 864
Fixed selling and administrative expenses 1,200 1,200
Budgeted selling and administrative expenses $ 1,848 $ 2,064
E8-10
Shadee Corp.
Budgeted Income Statement
May June
Budgeted Sales $ 10,800 $ 14,400
Less: Cost of goods sold 5,970 7,960
Budgeted gross margin $ 4,830 $ 6,440
Less: Budgeted selling and administrative 2,064
8-10
expenses 1,848
Budgeted net operating income $ 2,982 $ 4,376
E8−11
July August September

Sales (units) 625 490 450
x Unit sales price x $ 18 x $ 18 x $ 18
Budgeted sales revenue $11,250 $ 8,820 $ 8,100
August September
Cash sales (60% of budgeted sales revenue) $5,292 $ 4,860
Credit collections (40% of budgeted sales revenue)
50% during month of sale
(40% x 50% x current month budgeted sales) 1,764 1,620
45% in month following sales
(40% x 45% x previous month budgeted sales) 2,025 1,588*
Budgeted cash collections $ 9,081 $ 8,068
*Rounded
E8-12
Req. 1
April May June July
Sales 3,850 3,875 4,260 4,135
+ Ending inventory (60% of next month 2,325 2,556 2,481 2,154
sales)
- Beginning inventory 2,310 2,325 2,556 2,481
Budgeted production (units) 3,865 4,106 4,185 3,808
Req. 2
April May June
Production 3,865 4,106 4,185
x Pounds required per unit x 2 x2 x 2
Total pounds required for production 7,730 8,212 8,370
+ Ending Inventory (50% of next
month needs) 4,106 4,185 3,808
- Beginning Inventory 3,865 4,106 4,185
Budgeted purchases 7,971 8,291 7,993
x Cost per pound x $ 3.10 x $ 3.10 x $ 3.10
Budgeted cost of material purchased $ 24,710.10 $ 25,702.10 $24,778.30
8-11
E8-13
Strike Model Cutting Sewing

Production 2,500 2,500
Total direct labor hours required for Strike 250 750
Turkey Model
Production 3,250 3,250
Total direct labor hours required for Turkey 650 1,625
Total direct labor hours required (for both models) 900 2,375
Budgeted October direct labor cost for Alleyway $ 13,500 $28,500
E8−14
November December
Budgeted sales (units) 3,100 3,600
Price per unit x $ 95 x $ 95
Budgeted sales revenue $294,500 $342,000
Variable selling & administrative expenses

(11% of sales revenue) $ 32,395 $ 37,620
Fixed selling and administrative expenses
($5,000 + $2,500 + $2,500 + $3,500 + $1,500 + $800) 15,800 15,800
Total budgeted selling and administrative expenses $ 48,195 $ 53,420
E8-15
Req. 1
Budgeted Manufacturing Costs Per Unit
Direct materials (2 pounds x $2.00 per pound) $ 4.00
Direct labor (1.5 hours x $15.00 per hour) 22.50
Manufacturing overhead 3.00
Budgeted manufacturing cost per unit $ 29.50
Budgeted unit sales 15,000
Budgeted cost of goods sold $442,500
Req. 2
Budgeted sales revenue (15,000 x $41.00) $615,000
Less: Budgeted cost of goods sold (15,000 x $29.50) - 442,500
Budgeted gross margin 172,500
Less: Budgeted selling and administrative expenses (135,870)
Budgeted net operating income $ 36,630
8-12
E8−16
March
Cash receipts from customers $ 36,450
Cash paid to suppliers $ 22,300

Cash paid for manufacturing overhead ($6,100 - $1,200 depreciation) 4,900
Cash paid for direct labor 8,250
Cash paid for selling and administrative expenses 4,200
Cash paid for equipment 7,000
Budgeted cash payments $ 46,650
Beginning cash balance $ 16,320

+ Budgeted cash receipts 36,450
- Budgeted cash payments - 46,650
Preliminary cash balance $ 6,120
Cash borrowed ($10,000 – 6,120 = $3,880 needed ~ $4,000 loan) 4,000
Ending cash balance $ 10,120
E8−17
July August
Budgeted sales revenue (given) $25,000 $23,000 Calculation
Cash sales
(60% of budgeted sales revenue) $13,800.00 (23,000 x .60)
Credit collections
(40% of budgeted sales revenue):
60% during month of sale 5,520.00 (23,000 x .40 x .60)
40% in month following sale 4,000.00 (25,000 x .40 x .40)
Budgeted cash receipts $23,320.00
8-13
E8-18
Req. 1 July August

Sales revenue $160,000 $145,000
Cash sales (70% of budgeted sales revenue) $112,000 $101,500
Credit collections (30% of budgeted sales revenue)
40% during month of sale
(30% x 40% x current month budgeted sales) 19,200 17,400
60% in month following sales
(30% x 60% x previous month budgeted sales) 20,700* 28,800
Budgeted cash collections $151,900 $ 147,700
* $115,000 x 30% = $34,500; $34,500 x 60% = $20,700
Req. 2 July August

Purchases (All on account) $150,000 $ 80,000
Cash disbursements:
Credit purchases paid in month of purchase (55%) 82,500 44,000
Credit purchases paid in month following purchase
(45%) 42,750** 67,500
Cash paid for operating expenses 38,250 34,700
Budgeted cash payments $ 163,500 $146,200
** $95,000 x 45% = $42,750
E 8-19

Sales $400,000 $480,000 $640,000
Budgeted cost of goods sold 160,000 192,000 256,000
(40% sales)
Add: Desired ending inventory 48,000 64,000 68,000*
Total inventory required $208,000 $256,000 $324,000
Less: Beginning inventory 40,000 48,000 64,000
Required purchases $168,000 $208,000 $260,000
* $680,000 x 40% = $272,000 (April budgeted COGS) x 25% = $68,000
8-14
E8-20
Req. 1 April May June

Sales $220,000 $190,000 $310,000
(30% sales)
Add: Desired ending inventory 11,400 18,600 5,400*
Total inventory required $77,400 $75,600 $98,400
Less: Beginning inventory 13,200 11,400 18,600
Required purchases $64,200 $64,200 $79,800
* $90,000 x 30% = $27,000 (August budgeted COGS) x 20% = $5,400
Citrus Girl Company

Budgeted Income Statement
For the Month Ending
Req. 2 April 30 May 31 June 30
Budgeted sales $220,000 $190,000 $310,000
Budgeted gross margin $154,000 $133,000 $217,000
Less: Budgeted selling and 44,535 43,335 48,135
administrative expenses*
Budgeted net operating income $109,465 $89,665 $168,865
* For each month total of salaries $30,000, delivery expense 4% of monthly sales, rent
expense on the warehouse $4,500, utilities $800, insurance $175, and other expenses
$260.
8-15
E8-21
Budgeted cash collections:

Req. 1 June July August
Sales $24,000 $36,000 $38,000
Cash collected in month of sale
(60%) 14,400 21,600 22,800
Cash collected in month
following sale (35%) 7,700 8,400 12,600
nd
Cash collected in 2 month
following sale (5%) 800 1,100 1,200
Total cash receipts $22,900 $31,100 $36,600
Budgeted cash payments:

June July August
Purchases $9,000 $17,000 $12,000
Cash paid in month of purchase
(50%) 4,500 8,500 6,000
Cash paid in month following
purchase (50%) 2,500* 4,500 8,500
Total cash payments $7,000 $13,000 $14,500
May purchases $5,000 x 50%
Req. 2
Balances for August 31 budgeted balance sheet
Cash
June 1 balance $14,600
Add: Total cash receipts 90,600
Less: Total cash payments 34,500
August 31 balance $70,700
Supplies Inventory
15% of August purchases $1,800
Accounts Receivable
40% of August sales $15,200
5% of July sales 1,800
Balance at August 31 $17,000
Accounts Payable
50% of August purchases $6,000
8-16
GROUP A PROBLEMS
PA8−1
Req. 1 April May June 2nd Quarter

Budgeted sales (units) 250 300 400 950
x Unit sales price x $ 25 x $ 25 x $ 25 x $ 25
Budgeted sales revenue $ 6,250 $ 7,500 $10,000 $23,750

+Ending finished goods inventory
(40% of next month’s budgeted sales) 120 160 150 150
- Beginning finished goods inventory
(40% of current month’s budgeted sales) - 100 - 120 - 160 - 100
Budgeted production 270 340 390 1,000

x Material requirements per unit x 4 x 4 x 4 x 4
Total material needed for production 1,080 1,360 1,560 4,000
+ Ending raw materials inventory
(30% of next month’s production needs) 408 468 474* 474
- Beginning raw materials inventory
(30% of current month production needs) - 324 - 408 - 468 - 324
Budgeted raw materials purchases 1,164 1,420 1,566 4,150
x Material cost per foot x $ 2.00 x $ 2.00 x $ 2.00 x $ 2.00
Budgeted cost of raw material purchases $ 2,328 $ 2,840 $ 3,132 $ 8,300
*July budgeted production = 375 + (.40 x 425) – (.40 x 375) = 395

June raw materials ending inventory = 395 x 4 = 1,580 x 30% = 474

x Direct labor requirements per unit x .5 x .5 x .5 x .5
Direct labor hours required 135 170 195 500
x Direct labor rate x $ 12 x $ 12 x $ 12 x $ 12
Budgeted direct labor cost $ 1,620 $ 2,040 $ 2,340 $ 6,000

Budgeted production 270 340 390 1000
x Variable manufacturing overhead rate x $0.30 x $0.30 x $0.30 x $0.30
Budgeted variable manufacturing 81.00 102.00 117.00 300.00
+ Fixed manufacturing overhead 600.00 600.00 600.00 1,800.00
Budgeted manufacturing overhead $ 681.00 $ 702.00 $ 717.00 $ 2,100.00
8-17
PA8−1 (Continued)
Req. 6
Direct materials (4 ft x $2.00 per ft) $ 8.00
Direct labor (.5 hours x $12 per hour) 6.00
Variable manufacturing overhead 0.30
Fixed manufacturing overhead ($7,200 / 4,000 units) 1.80
April May June 2nd Quarter

Budgeted sales 250 300 400 950
x Budgeted manufacturing cost per unit x $16.10 x $16.10 x $16.10 x $16.10
Budgeted cost of goods sold $4,025.00 $4,830.00 $6,440.00 $15,295.00
Req. 7 April May June 2nd Qtr

x Variable selling and administrative rate x $.60 x $.60 x $.60 x $.60
Budgeted variable selling and adm. expenses 150 180 240 570
+ Budgeted fixed selling and adm. expenses 650 650 650 1,950
Total budgeted selling and adm. expenses $ 800 $ 830 $ 890 $ 2,520
PA8−2

Budgeted sales revenue $6,250.00 $7,500.00 $10,000.00 $23,750.00
Less: Budgeted cost of goods sold - 4,025.00 - 4,830.00 - 6,440.00 - 15,295.00
Budgeted gross margin 2,225.00 2,670.00 3,560.00 8,455.00
Less: Budgeted selling and
administrative expenses (800.00) (830.00) (890.00) (2,520.00)
Budgeted net operating income $1,425.00 $1,840.00 $2,670.00 $ 5,935.00
8-18
PA8−3
Req. 1
Budgeted sales revenue April May June 2nd Quarter
(from Req. 1 of PA 8-1) $ 6,250 $ 7,500 $10,000 $23,750
Cash collections
(80% of budgeted sales) $ 5,000 $ 6,000 $ 8,000 $ 19,000
Credit collections
(20% of budgeted sales)
50% collected in month of sale
(20% x 50% x current month sales) 625 750 1,000 2,375
50% collected in month following sale
(20% x 50% x previous month sales) 688* 625 750 2,063
Budgeted cash receipts $6,313 $7,375 $9,750 $23,438
*Credit collections from March sales = 275 units x $25 = $6,875 x 20% x 50% = $687.50 (rounded to
$688)
Req. 2
Budgeted raw materials purchases April May June 2nd Quarter
(from PA 8-1 Req. 3) $ 2,328 $ 2,840 $ 3,132 $ 8,300
Cash disbursements:
Raw material purchases
80% paid in the month of purchase
(Current month purchases x .80) $1,862.40 $2,272.00 $2,505.60 $6,640.00
20% paid in the following month
(Prior month purchases x .20) 400.00* 465.60 568.00 1,433.60
Direct labor
(from PA 8-1 Req. 4) 1,620.00 2,040.00 2,340.00 6,000.00
Manufacturing overhead
(from PA 8-1 Req. 5) 681.00 702.00 717.00 2,100.00
Less: Depreciation (given) - 150.00 - 150.00 - 150.00 - 450.00
Selling and administrative expenses
(from PA 8-1 Req. 7) 800.00 830.00 890.00 2,520.00
Purchase of Equipment 3,000.00 - - 3,000.00
Total budgeted cash payments $8,213.40 $6,159.60 $6,870.60 $21,243.60

*March purchases given at $2,000 x 20% = $400
Req. 3
Beginning cash balance $ 10,800.00 $10,899.10 $10,114.50 $10,800.00
Plus: Budgeted cash receipts 6,312.50 7,375.00 9,750.00 23,437.50
Less: Budgeted cash payments - 8,213.40 - 6,159.60 - 6,870.60 - 21,243.60
Preliminary cash balance $8,899.10 $12,114.50 $12,993.90 $12,993.90
Cash borrowed/Repaid 2,000.00 (2,000,00) - -
Ending cash balance 10,899.10 10,114.50 $12,993.90 $12,993.90
8-19
PA8−4
Req. 1 January February March 1st Quarter

Sales (units) 2,000 2,200 2,700 6,900
Budgeted Sales $ 88,000 $ 96,800 $ 118,800 $ 303,600

Sales (units) 2,000 2,200 2,700 6,900
+ Ending finished goods inventory
(30% of next month’s sales) 660 810 750 750
(30% of current month’s sales) - 600 - 660 - 810 - 600
Budgeted production 2,060 2,350 2,640 7,050

X Material requirements per unit x 1 x 1 x 1 x 1
Total material required for production 2,060 2,350 2,640 7,050
+ Ending raw materials (25% of
following month’s production needs) 588** 660 580* 580
- Beginning raw materials (25% of
current month’s production needs) - 515 - 588 - 660 - 515
Budgeted raw material purchases 2,133 2,422 2,560 7,115
X Material cost per housing x $7.00 x $7.00 x $7.00 x $7.00
Budgeted cost of raw material
purchases $14,931 $ 16,954 $ 17,920 $49,805
* April production = 2,500 + (1,900 x .30) – (2,500 x .30) = 2,320

March ending raw materials inventory = 2,320 x 1 x .25 = 580
**Rounded

x Direct labor hours per unit x .75 x .75 x .75 x .75
Direct labor requirements 1,545.00 1,762.50 1,980.00 5,287.50
x Average labor rate x $18.00 x $18.00 x $18.00 x $18.00
Budgeted direct labor cost $27,810.00 $31,725.00 $35,640.00 $95,175.00
8-20
PA8−5
Req. 1
Direct materials ($7 + $4.50) $11.50
Direct labor (.75 hrs x $18.00) 13.50
Total budgeted mfg cost per unit $28.87
January February March 1st Quarter

Sales (units) 2,000 2,200 2,700 6,900
Budgeted cost of goods sold* $ 57,733 $ 63,507 $ 77,940 $ 199,180
*Rounded

Budgeted sales revenue $ 88,000 $ 96,800 $ 118,800 $ 303,600
x Variable selling and administrative
rate (7% of budgeted sales revenue) x 7% x 7% x 7% x 7%
Variable selling and adm. expenses 6,160 6,776 8,316 21,252
+ Fixed selling and adm. expenses 18,000 18,000 18,000 54,000
Budgeted selling and adm. expenses $24,160 $24,776 $26,316 $75,252

Budgeted sales revenue $ 88,000 $ 96,800 $118,800 $ 303,600
Budgeted cost of goods sold 57,733 63,507 77,940 199,180
Budgeted gross profit 30,267 33,293 40,860 104,420
Budgeted selling and adm. expenses 24,160 24,776 26,316 75,252
Budgeted net operating income $ 6,107 $ 8,517 $ 14,544 $ 29,168
8-21
PA8-6
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Budgeted unit sales 40,000 60,000 30,000 60,000
Budgeted sales price $ 15.00 $ 15.00 $ 15.00
Budgeted sales revenue $ 600,000 $ 900,000 $ 450,000
Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Plus: Planned ending inventory
(25% of next quarter sales) 15,000 7,500 15,000
Less: Planned beginning inventory
(25% of current quarter sales) (10,000) (15,000) (7,500)
Budgeted purchases (units) 45,000 52,500 37,500
Cost of merchandise $ 6.00 $ 6.00 $ 6.00
Total cost of merchandise purchased $ 270,000 $ 315,000 $ 225,000
Cost of Goods Sold Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted cost of merchandise $ 6.00 $ 6.00 $ 6.00
Budgeted cost of goods sold $ 240,000 $ 360,000 $ 180,000
Selling and Administrative Expense Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Variable Selling Expenses $ 60,000 $ 90,000 $ 45,000
Fixed Administrative Expenses $ 80,000 $ 80,000 $ 80,000
Budgeted Selling and Adm. Expenses $ 140,000 $ 170,000 $ 125,000
Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Less: Budgeted cost of goods sold 240,000 360,000 180,000
Budgeted gross margin $ 360,000 $ 540,000 $ 270,000
Less: Budgeted selling and adm. expenses 140,000 170,000 125,000
Budgeted net operating income $ 220,000 $ 370,000 $ 145,000
8-22
GROUP B PROBLEMS
PB8−1

Budgeted sales (units) 700 650 720 2,070
Budgeted sales revenue $14,000 $13,000 $14,400 $41,400

+ Ending finished goods inventory 195 216 249 249
(30% of next month’s budgeted sales)
(30% of current month’s budgeted sales) - 210 - 195 - 216 - 210

Budgeted Production 685 671 753 2,109
Total material needed for production 1,370.00 1,342.00 1,506.00 4,218.00
+ Ending raw materials inventory
(20% of next month’s production needs) 268.40 301.20 323.60* 323.60
- Beginning raw materials inventory
(20% of current month production needs) - 274.00 - 268.40 - 301.20 - 274.00
Budgeted raw materials purchases 1,364.40 1,374.80 1,528.40 4,267.60
x Material cost per yard x $ 0.60 x $ 0.60 x $ 0.60 x $ 0.60
Budgeted cost of raw materials purchases $ 818.64 $ 824.88 $ 917.04 $ 2,560.56
*July production = 830 + (.30 x 760) – (.30 x 830) = 809

June ending raw materials inventory = 809 x 2 = 1,618 x 20% = 323.60

x Direct labor requirements per unit x .50 x .50 x .50 x .50
Direct labor hours required 342.50 335.50 376.50 1,054.50
x Direct labor rate x $ 8.00 x $ 8.00 x $ 8.00 x $ 8.00
Budgeted direct labor cost $ 2,740 $ 2,684 $ 3,012 $ 8,436

x Variable manufacturing overhead rate x $0.40 x $0.40 x $0.40 x $0.40
Budgeted variable manufacturing 274.00 268.40 301.20 843.60
+ Fixed manufacturing overhead 750.00 750.00 750.00 2,250.00
Budgeted manufacturing overhead $1,024.00 $1,018.40 $1,051.20 $ 3,093.60
8-23
PB8−1 (Continued)
Req. 6
Direct materials (2 yards x $0.60 per yard) $ 1.20
Direct labor (.50 hours x $8 per hour) 4.00

Budgeted sales 700 650 720 2,070
Budgeted cost of goods sold $4,620.00 $4,290.00 $4,752.00 $13,662.00
Req. 7 April May June 2nd Qtr

x Variable selling and administrative rate
($.75 per unit sold) x $.75 x $.75 x $.75 x $.75
Budgeted variable selling and
administrative expenses 525.00 487.50 540.00 1, 552.50
+ Budgeted fixed selling and administrative
expenses (given) 820.00 820.00 820.00 2,460.00
Budgeted selling and administrative
expenses $1,345.00 $1,307.50 $1,360.00 $4,012.50
8-24
PB8−2

Budgeted sales revenue $14,000.00 $13,000.00 $14,400.00 $ 41,400.00
Less: Budgeted cost of goods sold 4,620.00 4,290.00 4,752.00 13,662.00
Budgeted gross margin 9,380.00 8,710.00 9,648.00 27,738.00
Less: Budgeted selling and
administrative expenses 1,345.00 1,307.50 1,360.00 4,012.50
Budgeted net operating income $ 8,035.00 $ 7,402.50 $ 8,288.00 $ 23,725.50
PB8−3
Req. 1
Budgeted sales revenue April May June 2nd Quarter
(from Req. 1 of PB 8-1) $ 14,000 $13,000 $ 14,400 $ 41,400
Cash collections (60% of budgeted sales) $ 8,400 $ 7,800 $ 8,640 $ 24,840

Credit collections (40% of budgeted sales)
50% collected in month of sale
(40% x 50% x current month sales) 2,800 2,600 2,880 8,280
50% collected in month following sale
(40% x 50% x previous month sales) 3,400* 2,800 2,600 8,800
Budgeted cash receipts $14,600 $13,200 $14,120 $41,920
*Credit collections from March sales = 850 units x $20 = $17,000 x 40% x 50% = $3,400
Req. 2
Budgeted raw material purchases April May June 2nd Quarter
(from PB 8-1 Req. 3) $ 818.64 $ 824.88 $ 917.04 $ 2,560.56
Cash disbursements:
Raw material purchases
60% paid in the month of purchase
(Current month purchases x .60) $ 491.18 $ 494.93 $550.22 $1,536.34
40% paid in the following month
(Prior month purchases x .40) 320.00* 327.46 329.95 977.41
Direct labor
(from PB 8-1 Req. 4) 2,740.00 2,684.00 3,012.00 8,436.00
Manufacturing overhead
(from PB 8-1 Req. 5) 1,024.00 1,018.40 1,051.20 3,093.60
Less: Depreciation (given) - 280.00 - 280.00 - 280.00 - 840.00
Selling and administrative expenses
(from PB 8-1 Req. 7) 1,345.00 1,307.50 1,360.00 4,012.50
Cash paid for equipment 15,000.00 - - 15,000.00
Total budgeted cash payments $20,640.18 $5,552.29 $6,023.37 $32,215.85
8-25
*March purchases given at $800 x 40% = $320
Req. 3
Beginning cash balance $12,200.00 $10,159.82 $13,807.53 $12,200.00
Plus: Budgeted cash receipts 14,600.00 13,200.00 14,120.00 41,920.00
Less: Budgeted cash payments (20,640.18) (5,552.29) (6,023.37) (32,215.84)
Preliminary cash balance $6,159.82 $17,807.53 $21,904.16 $21,904.16
Cash borrowed (repaid) $4,000.00 $(4,000.00) - -
Ending cash balance $10,159.82 $13,807.53 $21,904.16 $21,904.16
PB8−4

Sales (units) 8,000 7,400 8,700 24,100
Budgeted Sales $240,000 $222,000 $261,000 $723,000

Sales (units) 8,000 7,400 8,700 24,100
+ Ending finished goods inventory
(25% of next month’s sales) 1,850 2,175 2,375 2,375
(25% of current month’s sales) - 2,000 - 1,850 - 2,175 - 2,000

Budgeted Production 7,850 7,725 8,900 24,475
Total material required for 7,850 7,725 8,900 24,475
production
+ Ending raw materials (30% of
following month’s production needs) 2,318** 2,670 2,824* 2,824
- Beginning raw materials (30% of
current month’s production needs) - 2,355 - 2,318 - 2,670 - 2,355
Budgeted raw material purchases 7,813 8,077 9,054 24,944
x Cost per heating element x $1.25 x $1.25 x $1.25 x $1.25
Budgeted raw material cost $ 9,766 $10,096.25 $11,317.50 $ 31,180.00
* April production = 9,500 + (.25 x 9,150) – (.25 x 9,500) = 9,413 (rounded)

March ending raw materials inventory = 9,413 x 1 x 30% = $2,824 (rounded)
** Rounded
8-26

x Direct labor hours per unit x .5 x .5 X .5 x .5
Direct labor requirements 3,925 3,862.50 4,450 12,237.50
x Average labor rate x $18.00 x $18.00 x $18.00 x $18.00
Budgeted direct labor cost $70,650.00 $69,525.00 $80,100.00 $220,275.00
PB8−5
Req. 1
Direct materials ($3.25 + 1.25) $ 4.50
Direct labor (.5 hrs x $18.00) 9.00
Total budgeted mfg cost per unit $15.45
January February March 1st Quarter

Sales (units) 8,000 7,400 8,700 24,100
Budgeted cost of goods sold $123,600 $114,330 $134,415 $372,345

x Variable selling and administrative
rate (5% of budgeted sales revenue) x 5% x 5% x 5% x 5%
Variable selling and administrative
expenses 12,000 11,100 13,050 36,150
+ Fixed selling and administrative
expenses ($17,500) 17,500 17,500 17,500 52,500
expenses $ 29,500 $ 28,600 $ 30,550 $ 88,650

Budgeted cost of goods sold 123,600 114,330 134,415 372,345
Budgeted gross profit 116,400 107,670 126,585 350,655
expenses 29,500 28,600 30,550 88,650
Budgeted net operating income $ 86,900 $ 79,070 $ 96,035 $262,005
8-27
PB8-6
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Budgeted sales price $ 20.00 $ 20.00 $ 20.00
Budgeted sales revenue $ 1,000,000 $ 1,400,000 $ 900,000
Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Plus: Planned ending inventory
(30% of next quarter sales) 21,000 13,500 19,500
Less: Planned beginning inventory
(30% of current quarter sales) (15,000) (21,000) (13,500)
Budgeted purchases (units) 56,000 62,500 51,000
Cost of merchandise $ 8.00 $ 8.00 $ 8.00
Total cost of merchandise purchased $ 448,000 $ 500,000 $ 408,000
Cost of Goods Sold Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted cost of merchandise $ 8.00 $ 8.00 $ 8.00
Budgeted cost of goods sold $ 400,000 $ 560,000 $ 360,000
Selling and Administrative Expense Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Variable selling expenses $ 150,000 $ 210,000 $ 135,000
Fixed administrative expenses $ 60,000 $ 60,000 $ 60,000
Budgeted selling and adm. expenses $ 210,000 $ 270,000 $ 195,000
Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Less: Budgeted cost of goods sold 400,000 560,000 360,000
Budgeted gross margin $ 600,000 $ 840,000 $ 540,000
Less: Budgeted selling and adm. expenses 210,000 270,000 195,000
Budgeted net operating income $ 390,000 $ 570,000 $ 345,000
8-28
ANSWERS TO SKILLS DEVELOPMENT CASES
S8−1
Student answers to this case will vary depending on the size and type of organization
they choose to investigate. It is important that students examine the process from
multiple perspectives and attempt to balance any dissatisfaction with the needs of other
individuals and of the organization as a whole. Also, any recommendations should be
considered from other perspectives and not just from the perspective of a single
dissatisfied party. For example, a student who recommends a participative budgeting
process be implemented should also consider any consequences that might result from
this change.
S8−2
This case offers a chance for considerable in-class discussion and is an opportunity for
instructors to pull a managerial accounting topic into students’ everyday lives. Other
tools that could be introduced during discussion include estimates of the time it takes to
pay off credit cards and calculating payment amounts in commonly-used software such
as Microsoft Excel.
8-29

Solutions Chapter 8 - 2d Edition

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Solutions Chapter 8 - 2d Edition

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Chapter 08 - Budgetary Planning

6. Answers will vary. Potential negative consequences of not developing budgets

8. Budgetary slack results from employees’ attempts to build a cushion or margin of

17. Depreciation is a non-cash expense. While it does increase a company’s total

Authors' Recommended Solution Time

a) Cash receipts and payments budget Financial

October November December 4th Quarter

January February March

* December sales $760,000 x 80% x 50% = $304,000

Shaded answers are provided below:

Req. 1 May June

Req. 2 May June

Req. 1 May June

July August September

Strike Model Cutting Sewing

Variable selling & administrative expenses

Cash paid to suppliers $ 22,300

Beginning cash balance $ 16,320

Req. 1 July August

* $115,000 x 30% = $34,500; $34,500 x 60% = $20,700

Req. 2 July August

Budgeted cash payments $ 163,500 $146,200

** $95,000 x 45% = $42,750

January February March

* $680,000 x 40% = $272,000 (April budgeted COGS) x 25% = $68,000

Req. 1 April May June

* $90,000 x 30% = $27,000 (August budgeted COGS) x 20% = $5,400

Citrus Girl Company

Budgeted cash collections:

Budgeted cash payments:

May purchases $5,000 x 50%

Balances for August 31 budgeted balance sheet

Req. 1 April May June 2nd Quarter

Req. 2 April May June 2nd Quarter

Req. 3 April May June 2nd Quarter

*July budgeted production = 375 + (.40 x 425) – (.40 x 375) = 395

Req. 4 April May June 2nd Quarter

Req. 5 April May June 2nd Quarter

April May June 2nd Quarter

Req. 7 April May June 2nd Qtr

April May June 2nd Quarter

Total budgeted cash payments $8,213.40 $6,159.60 $6,870.60 $21,243.60

Req. 1 January February March 1st Quarter

Req. 2 January February March 1st Quarter

Req. 3 January February March 1st Quarter

* April production = 2,500 + (1,900 x .30) – (2,500 x .30) = 2,320

Req. 4 January February March 1st Quarter

January February March 1st Quarter

Req. 2 January February March 1st Quarter

Req. 3 January February March 1st Quarter

Merchandise Purchases Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Cost of Goods Sold Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Selling and Administrative Expense Budget Quarter 1 Quarter 2 Quarter 3 Quarter 4

Budgeted Income Statement Quarter 1 Quarter 2 Quarter 3 Quarter 4

Req. 1 April May June 2nd Quarter

Req. 2 April May June 2nd Quarter

Req. 3 April May June 2nd Quarter

*July production = 830 + (.30 x 760) – (.30 x 830) = 809

Req. 4 April May June 2nd Quarter

Req. 5 April May June 2nd Quarter

April May June 2nd Quarter

Req. 7 April May June 2nd Qtr

April May June 2nd Quarter

Cash collections (60% of budgeted sales) $ 8,400 $ 7,800 $ 8,640 $ 24,840