CH 09

CHAPTER 9
Budgetary Planning
ASSIGNMENT CLASSIFICATION TABLE
Brief A
Learning Objectives Questions Exercises Do It! Exercises Problems
1. State the essentials of effective 1, 2, 3, 4, 5, 1 1 1

budgeting and the components of 6, 7, 8, 9,
the master budget. 10
2. Prepare budgets for sales, 11, 12, 13 2, 3, 4, 2 2, 3, 4, 5, 6, 1A, 2A, 3A

production, and direct materials. 7, 8, 10
3. Prepare budgets for direct labor, 14, 15, 16, 5, 6, 7, 8 3 9, 10, 11, 1A, 2A, 6A
manufacturing overhead, and 17, 18 12, 13
selling and administrative
expenses, and a budgeted
income statement.
4. Prepare a cash budget and a 19, 20 9 4 14, 15, 16, 4A, 6A

budgeted balance sheet. 17, 18, 19
5. Apply budgeting principles to 21, 22 10 5 19, 20, 21 5A

nonmanufacturing companies.
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only) 9-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Prepare budgeted income statement and supporting Simple 30–40

budgets.
2A Prepare sales, production, direct materials, direct labor, Simple 40–50

and income statement budgets.
3A Prepare sales and production budgets and compute cost Moderate 30–40
per unit under two plans.
4A Prepare cash budget for two months. Moderate 30–40
5A Prepare purchases and income statement budgets for a Simple 30–40

merchandiser.
6A Prepare budgeted cost of goods sold, income statement, Complex 40–50

retained earnings and balance sheet.
9-2 Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems
Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

1. State the essentials of DI9-1 Q9-1 Q9-7 BE9-1
effective budgeting and Q9-2 Q9-8
the components of the Q9-3 Q9-9
master budget. Q9-4 Q9-10
Q9-5 E9-1
Q9-6
2. Prepare budgets for sales, Q9-11 Q9-12 E9-2 E9-8 P9-3A
production, and direct Q9-13 E9-3 E9-10
materials. BE9-2 E9-4 P9-1A
BE9-3 E9-5 P9-2A
BE9-4 E9-6
DI9-2 E9-7
3. Prepare budgets for direct Q9-14 E9-9 P9-2A P9-
labor, manufacturing Q9-18 Q9-15 E9-10 6A
Q9-16
overhead, and selling and E9-11
Q9-17
administrative expenses, E9-12
BE9-5
and a budgeted income BE9-6 E9-13
statement. BE9-7 P9-1A
BE9-8
DI9-3
4. Prepare a cash budget and Q9-19 Q9-20 E9-15 P9-4A E9-16
a budgeted balance sheet. BE9-9 E9-17 P9-6A
DI9-4 E9-18
E9-14 E9-19
5. Apply budgeting principles Q9-21 BE9-10 E9-20
to nonmanufacturing Q9-22 DI9-5 E9-21
companies. E9-19 P9-5A
Expand Your Critical Thinking CT9-2 CT9-1 CT9-5
CT9-3 CT9-6
CT9-4 CT9-7
ANSWERS TO QUESTIONS
1. (a) A budget is a formal written statement of management’s plans for a specified future time period,
expressed in financial terms.
(b) A budget aids management in planning because it represents the primary method of commu-
nicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes
an important basis for evaluating performance.
LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Decision Modeling IMA: Budget Preparation
2. The primary benefits of budgeting are:

(1) It requires all levels of management to plan ahead and to formalize goals on a recurring basis.
(2) It provides definite objectives for evaluating performance at each level of responsibility.
(3) It creates an early warning system for potential problems, so that management can make
changes before things get out of hand.
(4) It facilitates the coordination of activities within the business by correlating the goals of
each segment with overall company objectives.
(5) It results in greater management awareness of the entity’s overall operations and the
impact of external factors such as economic trends.
(6) It motivates personnel throughout the organization to meet planned objectives.
3. The essentials of effective budgeting are: (1) a sound organizational structure, (2) research and
analysis, and (3) acceptance by all levels of management.
4. (a) Disagree. Accounting information makes major contributions to the budgeting process. Accounting
provides the starting point of budgeting by providing historical data on revenues, costs, and
expenses. An accountant becomes the translator of the budget and communicates the budget
to all areas of responsibility. Accountants also prepare periodic budget reports that compare
actual results with planned objectives and provide a basis for evaluating performance.
(b) The budget itself, and the administration of the budget, are the responsibility of management.
5. The budget period should be long enough to provide an attainable goal under normal business
conditions. The budget period should minimize the impact of seasonal and cyclical business
fluctuations, but it should not be so long that reliable estimates are impossible. The most common
budget period is one year.
6. Disagree. Long-range planning usually encompasses a period of at least five years. It involves
the selection of strategies to achieve long-term goals and the development of policies and plans to
implement the strategies. In addition, long-range planning reports contain considerably less detail
than budget reports.
7. Participative budgeting involves the use of a “bottom-to-top” approach, which requires input from
lower level management during the budgeting process so as to involve employees from various
levels and areas within the company. The potential benefits of this approach are lower-level
managers have more detailed knowledge of the specifics of their job, and thus should
be able to provide better budgetary estimates. In addition, by involving lower-level managers in
the process, it is more likely that they will perceive the budget as being fair and reasonable. One
disadvantage of participative budgeting is that it takes more time, and thus costs more. Another
disadvantage of participative budgeting is that it may enable managers to game the system
through such practices as budgetary slack.
Questions Chapter 9 (Continued)
8. Budgetary slack is the amount by which a manager intentionally underestimates budgeted
revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary
goals. Managers may have an incentive to create budgetary slack in order to increase the likelihood of
receiving a bonus, or decrease the likelihood of losing their job.
9. A master budget is a set of interrelated budgets that constitutes a plan of action for a specified
time period. The master budget is developed within the framework of a sales forecast.
10. The sales budget is the starting point in preparing the master budget. An inaccurate sales budget
may adversely affect net income. An overly optimistic sales budget may result in excessive
inventories and a very conservative sales budget may lead to inventory shortages.
11. The statement is false. The production budget only shows the units that must be produced to meet
anticipated sales and ending inventory requirements.
12. The required units of production are 155,000 (160,000 + 15,000 = 175,000 – 20,000 = 155,000).
LO2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget Preparation
(160,000 + 15,000 – 20,000 = 155,000)
(Bud. sales + Desired end. inv. – Beg. inv. = Req. units of production)
13. The desired ending direct materials units are 21,000 (64,000 + 9,000 = 73,000 – 52,000 = 21,000).
(64,000 + 9,000 – 52,000 = 21,000)
(Req. purch. + Beg. inv. – Req. for production = Desired end. inv.)
14. Total budgeted direct labor costs are $960,000 (80,000 X .75 X $16 = $960,000).
(80,000 x .75 x $16 = $960,000)
(Fin. units to be produced x % of hr./unit x DL rate/hr. = Tot. bud. DL costs)
15. (a) Manufacturing overhead rate based on direct labor cost is 48% [$198,000 + $162,000 =
$360,000; $360,000 ÷ (150,000 X 1/3 X $15/hr.) = 48%].
[($198,000 + $162,000) ÷ (150,000 x 1/3 x $15/hr.) = 48%]
[(Tot. VOH costs + Tot. FOH casts) ÷ (Units to be produced x Fraction of hr./unit x DL rate/hr.) = Predet. OH rate]
(b) Manufacturing overhead rate per direct labor hour is $7.20 ($360,000 ÷ 50,000).
16. The first quarter budgeted selling and administrative expenses are $74,000 [(12% X $200,000) +
$50,000]. The second quarter total is $78,800 [(12% X $240,000) + $50,000].
[1st Qtr.: (12% x $200,000) + $50,000 = $74,000]
[1st Qtr.:(Var. S&A % of sales x Bud. sales) + Fix. S&A = Tot. bud. S&A exp.]
17. The budgeted cost per unit of product is $46 ($10 + $20 + $16). Gross profit per unit is $19 ($65 – $46).
Total budgeted gross profit is $475,000 (25,000 X $19).
[($10 + $20 + ($20 x 80%) = $46); ($65 - $46 = $19); (25,000 x $19 = $475,000)]
[(DM/unit + DL/unit + (DL/unit x Mfg. OH as % of DL/unit) = Bud. cost /unit); (USP – Unit cost = GP/ unit); (Units sold x GP/unit = Tot. bud.
GP)]
18. The supporting schedules are the budgets for sales, direct materials, direct labor, and manufacturing
overhead.
Questions Chapter 9 (Continued)
19. The three sections of a cash budget are: (1) cash receipts, (2) cash disbursements, and (3) financing.
The cash budget also shows the beginning and ending cash balances.
LO4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Decision Modeling IMA: Budget Preparation
20. Cash collections are:

January—$600,000 X 40% = $240,000.
February—$600,000 X 50% = $300,000.
March—$600,000 X 10% = $60,000.
21. The formula is: Budgeted cost of goods sold plus desired ending merchandise inventory minus
beginning merchandise inventory equals required merchandise purchases.
22. In a service company, expected revenues can be obtained from expected output or expected
input. The former is based on anticipated billings of clients for services provided. The latter is based
on expected billable time of the professional staff.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
Sales
Budget
Production
Budget
Direct Direct Manufacturing

Operating
Materials Labor Overhead
Budgets
Budget Budget Budget
Selling and
Administrative
Expense
Budget
Budgeted
Income
Statement
Capital Budgeted
Financial
Expenditure Cash Budget Balance
Budgets
Budget Sheet
LO1 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget
Preparation
BRIEF EXERCISE 9-2
PAIGE COMPANY
Sales Budget
For the Year Ending December 31, 2020
Quarter
1 2 3 4 Year
Expected
unit 10,000 14,000 15,000 18,000 57,000
sales
Unit selling X $70 X $70 X $70 X $70 X $70
price $700,000 $980,000 $1,050,000 $1,260,000 $3,990,000
Total sales
LO2 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget
Preparation
BRIEF EXERCISE 9-3
PAIGE COMPANY
Production Budget
For the Six Months Ending June 30, 2020
Quarter Six
1 2 Months
Expected unit sales 10,000 14,000
Add: Desired ending finished goods 3,500 a 3,750 c
Total required units 13,500 17,750
Less: Beginning finished goods inventory 2,500 b 3,500
Required production units 11,000 14,250 25,250
a b c
14,000 X .25 10,000 X .25 15,000 X .25
Preparation
[(Qtr. 1: 10,000 + (14,000 x .25) – (10,000 x .25) = 11,000); (Qtr. 2: 14,000 + (15,000 x .25) – 3,500 = 14,250)]
[(Qtr. 1: Exp. unit sales + (Qtr. 2 exp. unit sales x Desired % on hand) – (Qtr. 1 exp. unit sales x Desired % on
hand) = Req. production units); (Qtr. 2: Exp. unit sales + (Qtr. 3 exp. unit sales x Desired % on hand) – Qtr. 1
desired end. inv. = Req. production units)]
BRIEF EXERCISE 9-4
PERINE COMPANY
Direct Materials Budget
For the Month Ending January 31, 2020
Units to be produced........................................................ 4,000

Direct materials per unit................................................... X 2
Total pounds required for production............................. 8,000
Add: Desired ending inventory (25% X 5,000 X 2)........ 2,500
Total materials required.................................................... 10,500
Less: Beginning materials inventory………………………..
..................................................................................2,000
Direct materials purchases.............................................. 8,500
Cost per pound.................................................................. X $6
Total cost of direct materials purchases........................ $51,000
Preparation
[(4,000 x 2) + (5,000 x 2 x 25%) – (4,000 x 2 x 25%) = 8,500]
[(Jan. units to be produced x DM/unit) + (Feb. units to be produced x DM/unit x Desired end. inv. %) - (Jan. units
to be produced x DM/unit x Desired end. inv. %) = DM purch.]
BRIEF EXERCISE 9-5
GUNDY COMPANY
Direct Labor Budget
Quarter Six
1 2 Months
Units to be produced 5,000 7,000
Direct labor time (hours) per unit X 1.6 X 1.6
Total required direct labor hours 8,000 11,200
Direct labor cost per hour X $15 X $15
Total direct labor cost $120,000 $168,000 $288,000
Preparation
BRIEF EXERCISE 9-6
ROCHE INC.
Manufacturing Overhead Budget
Quarter
1 2 3 4 Year
Variable costs $20,000 $25,000 $30,000 $35,000 $110,000
Fixed costs 40,000 40,000 40,000 40,000 160,000
Total manufacturing overhead $60,000 $65,000 $70,000 $75,000 $270,000
Preparation
BRIEF EXERCISE 9-7
ELBERT COMPANY
Selling and Administrative Expense Budget
Quarter
1 2 3 4 Year
Variable expenses $24,000 $28,000 $32,000 $36,000 $120,000
Fixed expenses 40,000 40,000 40,000 40,000 160,000
Total selling and
administrative $64,000 $68,000 $72,000 $76,000 $280,000
expenses
Preparation
BRIEF EXERCISE 9-8
NORTH COMPANY
Budgeted Income Statement
Sales.................................................................................... $2,250,000
Cost of goods sold (50,000 X $25).................................... 1,250,000
Gross profit........................................................................ 1,000,000
Selling and administrative expenses............................... 300,000
Income from operations.................................................... 700,000
Interest expense................................................................. 10,000
Income before income taxes............................................. 690,000
Income tax expense........................................................... 200,000
Net income.......................................................................... $ 490,000
BRIEF EXERCISE 9-8 (Cont’d)
Preparation
BRIEF EXERCISE 9-9

Collections from Customers
Credit Sales January February March
January, $220,000 $165,000 $ 55,000
February, $260,000 195,000 $ 65,000
March, $300,000 225,000
$165,000 $250,000 $290,000
Preparation
[(Jan.: $220,000 x 75% = $165,000); (Feb.: ($220,000 x 25%) + ($260,000 x 75%) = $250,000); (Mar.: ($260,000
x 25%) + ($300,000 x 75%) = $290,000)]
[(Jan.: Jan. credit sales x % collect. in Jan. = Cash collect.); (Feb.: (Jan. credit sales x % collect. in Feb.) + (Feb.
credit sales x % collect. in Feb.) = Cash collect.); (Mar.: (Feb. credit sales x % collect. in Mar.) + (Mar. credit sales
x % collect. in Mar.) = Cash collect.)]
BRIEF EXERCISE 9-10

Budgeted cost of goods sold ($400,000 X 65%)........................ $260,000
Add: Desired ending inventory ($480,000 X 65% X 20%)........ 62,400
Total inventory required.............................................................. 322,400
Less: Beginning inventory ($400,000 X 65% X 20%)................ 52,000
Required merchandise purchases for April............................... $270,400
Preparation
[($400,000 x 65%) + ($480,000 x 65% x 20%) – ($400,000 x 65% x 20%) = $270,400]
[(Apr. sales x CGS %) + (May sales x CGS % x Desired end. inv. %) – (Apr. sales x CGS % x Desired end. inv.
%) = Req. merch. purch. for Apr.]
SOLUTIONS FOR DO IT! EXERCISES
DO IT! 9-1
1. Operating budgets
2. Master budget
3. Participative budgeting
4. Financial budgets
5. Sales forecast
6. Long-range plans
DO IT! 9-2
PARGO COMPANY
Sales Budget
Quarter
1 2 3 4 Year
Expected unit 200,000a 250,000b 250,000b 300,000c 1,000,000

sales X $40 X $40 X $40 X $45 —
Unit selling price $8,000,000 $10,000,000 $10,000,000 $13,500,000 $41,500,000
Total sales
a 1,000,000 x 20% b 1,000,000 x 25% c 1,000,000 x 30%
PARGO COMPANY
Production Budget
Quarter
1 2 3 4 Year
Expected unit sales 200,000 250,000 250,000 300,000

Add: Desired ending finished
goods units 62,500 62,500 75,000 60,000*
Total required units 262,500 312,500 325,000 360,000
Less: Beginning finished
goods units 50,000** 62,500 62,500 75,000
Required production units 212,500 250,000 262,500 285,000 1,010,000
*Estimated first-quarter 2021 sales volume 200,000 + (200,000 X 20%) = 240,000: 240,000 X 25%.
**25% of estimated first-quarter 2020 sales units (200,000 X 25%).
[(Qtr. 1: (1,000,000 x 20%) + (250,000 x 25%) – (200,000 x 20%) = 212,500); (Qtr. 4: (1,000,000 x 30%) +
(200,000 x 120% x 25%) – (300,000 x 25%) = 285,000)]
DO IT! 9-2 (Continued)
[(Qtr. 1: Exp. unit sales + (Qtr. 2 exp. unit sales x desired end. inv. %) – (Qtr. 1 exp. unit sales x desired end. inv.
%) = Req. production units); (Qtr. 4: Exp. unit sales + ((Qtr. 1 exp. unit sales x Exp. % incr.) x Desired end. inv. %)
– (Qtr. 4 exp. unit sales x Desired end. inv. %) = Req. production units)]
PARGO COMPANY
Quarter
1 2 3 4 Year
Units to be produced 212,500 250,000 262,500 285,000

Direct materials per unit X 2 X 2 X 2 X 2
Total pounds needed for
production 425,000 500,000 525,000 570,000
Add: Desired ending
direct materials
(pounds) 50,000 52,500 57,000 *45,000
Total materials required 475,000 552,500 582,000 615,000
Less: Beginning direct
materials (pounds) **42,500 50,000 52,500 57,000
Direct materials
purchases 432,500 502,500 529,500 558,000
Cost per pound X $12 X $12 X $12 X $12
Total cost of direct
materials purchases $5,190,000 $6,030,000 $6,354,000 $6,696,000 $24,270,000
*Estimated first-quarter 2021 production requirements 450,000 X 10% = 45,000
**10% of estimated first-quarter pounds needed for production.
[(Qtr. 1: (212,500 x 2) + (250,000 x 2 x 10%) – (212,500 x 2 x 10%) = 432,500); (Qtr. 4: (285,000 x 2) + (450,000
x 10%) – (570,000 x 10%) = 558,000)]
[(Qtr. 1: (Qtr. 1 fin. units to be produced x No. DM units/fin. unit) + (Qtr. 2 fin. units to be produced x No. DM
units/fin. unit x End. inv. %) - (Qtr. 1 fin. units to be produced x No. DM units/fin. unit x End. inv. %) = DM purch.);
(Qtr. 4: (Qtr. 4 fin. units to be produced x No. DM units/fin. unit) + (2021 Qtr. 1 DM needed for production x End.
inv. %) - (Qtr. 4 fin. units to be produced x No. DM units/fin. unit x End. inv. %) = DM purch.)]
LO2 BT: AP Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget
Preparation
DO IT! 9-3
(a) Total unit cost:

Cost Element Quantity Unit Cost Total
Direct materials............................... 2 pounds $12.00 $24.00
Direct labor....................................... 0.3 hours $15.00 4.50
Manufacturing overhead................. 0.3 hours $20.00 6.00
Total unit cost......................... $34.50
(b) PARGO COMPANY

Sales (1,000,000) units from sales budget, DO IT! 9-2....... $41,500,000

Cost of goods sold (1,000,000 X $34.50/unit)................... 34,500,000
Gross profit......................................................................... 7,000,000
Selling and administrative expenses................................ 6,000,000
Net income.......................................................................... $ 1,000,000
[$41,500,000 – (1,000,000 x ($24 + $4.50 + $6)) - $6,000,000 = $1,000,000]
[Sales from sales bud. in DO IT! 9-2 – (Units sold x (DM/unit + DL/unit + Mfg. OH/unit)) – S&A exp. = Net inc.]
Preparation
DO IT! 9-4
BATISTA COMPANY
Cash Budget
April
Beginning cash balance.............................................................. $ 25,000

Add: Cash receipts for April....................................................... 245,000
Total available cash...................................................................... 270,000
Less: Cash disbursements in April............................................ 255,000
Excess of available cash over cash disbursements................. 15,000
Add: Financing ($25,000 – $15,000)........................................... 10,000
Ending cash balance.................................................................... $ 25,000
To maintain the desired minimum cash balance of $25,000, Batista Com-

pany must borrow $10,000.
Preparation
DO IT! 9-5
Zeller COMPANY
Merchandise Purchases Budget
Quarter Six
1 2 Months
Budgeted cost of goods sold
(Sales  .50) $20,000 $24,000
Add: Desired ending merchandise
inventory (10% of next
quarter’s cost of goods sold) 2,400 2,900
Total 22,400 26,900
Less: Beginning merchandise
inventory (10% this quarter’s
cost of goods sold) 2,000 2,400
Required merchandise purchases $20,400 $24,500 $44,900
Preparation
[(Qtr. 1: ($40,000 x 50%) + ($48,000 x 50% x 10%) – ($40,000 x 50% x 10%) = $20,400); (Qtr. 2: ($48,000 x 50%)
+ ($58,000 x 50% x 10%) – ($48,000 x 50% x 10%) = $24,500)]
[(Qtr. 1: (Qtr. 1 sales x CGS %) + (Qtr. 2 sales x CGS % x End. inv. %) – (Qtr. 1 sales x CGS % x End. inv. %) =
Req. merch. purch.); (Qtr. 2 sales x CGS %) + (Qtr. 3 sales x CGS % x End. inv. %) – (Qtr. 2 sales x CGS % x
End. inv. %) = Req. merch. purch.)]
SOLUTIONS TO EXERCISES
EXERCISE 9-1
MEMO
To Jim Dixon
From: Student
Re: Budgeting
I am glad Trusler Company is considering preparing a formal budget. There are
many benefits derived from budgeting, as I will discuss later in this memo.
A budget is a formal written statement of management’s plans for a specified
future time period, expressed in financial terms. The master budget gener-
ally consists of operating budgets such as the sales budget, production
budget, direct materials budget, direct labor budget, manufacturing overhead
budget, selling and administrative expense budget, and budgeted income
statement; and financial budgets such as the capital expenditure budget,
cash budget, and budgeted balance sheet.
The primary benefits of budgeting are:
1. It requires all levels of management to plan ahead and to formalize
goals on a recurring basis.
2. It provides definite objectives for evaluating performance at each
level of responsibility.
3. It creates an early warning system for potential problems, so that
management can make changes before things get out of hand.
4. It facilitates the coordination of activities within the business by cor-
relating the goals of each segment with overall company objectives.
5. It results in greater management awareness of the entity’s overall
operations and the impact of external factors such as economic
trends.
6. It motivates personnel throughout the organization to meet planned
objectives.
In order to maximize these benefits, it is essential that budgeting take place
within a sound organizational structure, so authority and responsibility for all
phases of operations are clearly defined. Also, the budget should be based on
research and analysis that results in realistic goals. Finally, the effectiveness
of a budget program is directly related to its acceptance by all levels of
management.
If you want further explanation of any of these topics, please contact me.
LO1 BT: C Difficulty: Easy TOT: 15 min. AACSB: None AICPA FC: Reporting AICPA PC: Communication
IMA: Budget Preparation, Reporting
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 8/e, Solutions Manual (For Instructor Use Only)
EXERCISE 9-2
EDINGTON ELECTRONICS INC.
Sales Budget
Quarter 1 Quarter 2 Six Months

Selling Total Selling Total Selling Total
Product Units Price Sales Units Price Sales Units Price Sales
XQ-103 20,000 $15 $300,000 22,000 $15 $330,000 42,000 $15 $ 630,000
XQ-104 12,000 25 300,000 15,000 25 375,000 27,000 25 675,000
Totals 32,000 $600,000 37,000 $705,000 69,000 $1,305,000
9-17
9-18
EXERCISE 9-3
Copyright © 2018 John Wiley & Sons, Inc. Weygandt, Managerial Accounting,8 /e, Solutions Manual (For Instructor Use Only)
THOME AND CREDE, CPAs

Service Revenue Budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Billable Billable Total Billable Billable Total Billable Billable Total Billable Billable Total
Dept. Hours Rate Rev. Hours Rate Rev. Hours Rate Rev. Hours Rate Rev.
Auditing 2,300 $ 80 $184,000 1,600 $ 80 128,000 2,000 $ 80 $160,000 2,400 $ 80 $192,000
Tax 3,000 90 270,000 2,200 90 198,000 2,000 90 180,000 2,500 90 225,000
Consulting 1,500 110 165,000 1,500 110 165,000 1,500 110 165,000 1,500 110 165,000
Totals $619,000 $491,000 $505,000 $582,000
Year
Billable Billable Total
Dept. Hours Rate Rev.
Auditing 8,300a $ 80 $ 664,000
Tax 9,700b 90 873,000
Consulting 6,000c 110 660,000
Totals $2,197,000
a
2,300 + 1,600 + 2,000 + 2,400
b
3,000 + 2,200 + 2,000 + 2,500
c
1,500  4
EXERCISE 9-4
TURNEY COMPANY
Production Budget
Product HD-240
Quarter
1 2 3 4 Year
Expected unit sales 5,000 7,000 8,000 10,000
Add: Desired ending
finished goods units(1) 2,800 3,200 4,000 2,500 (2)
Total required units 7,800 10,200 12,000 12,500
goods units 2,000 2,800 3,200 4,000
Required production units 5,800 7,400 8,800 8,500 30,500
(1)
40% of next quarter’s sales.
(2)
40% X (5,000 X 125%).
Preparation
[(Qtr. 1: 5,000 + (7,000 x 40%) – (5,000 x 40%) = 5,800); (Qtr. 4: 10,000 + (5,000 x 125% x 40%) – (10,000 x
40%) = 8,500)]
[(Qtr. 1: Qtr. 1 exp. unit sales + (Qtr. 2 exp. unit sales x end. inv. %) – (Qtr. 1 exp. unit sales x end. inv. %) = Req.
production units); (Qtr. 4: Qtr. 4 exp. unit sales + (2021 Qtr. 1 exp. unit sales x end. inv. %) – (Qtr. 4 exp. unit
sales x end. inv. %) = Req. production units)]
EXERCISE 9-5
DEWITT INDUSTRIES
Direct Materials Purchases Budget
For the Quarter Ending March 31, 2020
January February March

Units to be produced 10,000 8,000 5,000
Direct materials per unit X 2 X 2 X 2
Total pounds needed for production 20,000 16,000 10,000
Add: Desired ending direct materials
(pounds)* 3,200 2,000 1,600
Total materials required 23,200 18,000 11,600
Less: Beginning direct materials
(pounds) 4,000 3,200 2,000
Direct materials purchases 19,200 14,800 9,600
Cost per pound X $3 X $3 X $3
Total cost of direct materials
purchases $57,600 $44,400 $28,800
*20% of next month’s production needs.

Preparation
[March: (5,000 x 2) + (4,000 x 2 x 20%) – (5,000 x 2 x 20%) = 9,600]
[March: (March units to be produced x DM/unit) + (Apr. units to be produced x DM/unit x End. inv. %) – (March
units to be produced x DM/unit x End. inv. %) = DM purch.]
EXERCISE 9-6
(a) HARDIN COMPANY

Production Budget
Quarter Six
1 2 Months
Expected unit sales 5,000 6,000
Add: Desired ending finished goods
units 1,500 (1) 1,750 (2)
Total required units 6,500 7,750
Less: Beginning finished goods units 1,250 (3) 1,500
Required production units 5,250 6,250 11,500
(1)
25% X 6,000. (2)25% X 7,000. (3)25% X 5,000.
EXERCISE 9-6 (Continued)
(b) HARDIN COMPANY
Quarter Six
1 2 Months
Units to be produced 5,250 6,250
Direct materials per unit X 3 X 3
Total pounds needed for production 15,750 18,750
Add: Desired ending direct
materials (pounds) 7,500 (1) 8,640 (2)
Total materials required 23,250 27,390
(pounds) 6,300 (3) 7,500
Direct materials purchases 16,950 19,890
Cost per pound X $4 X $4 0000,000
Purchases $67,800 $79,560 $147,360
(1)
40% X 18,750.
(2)
7,200 X (3 X 40%).
(3)
40% X 15,750.
[(Qtr. 1: (5,250 x 3) + (6,250 x 3 x 40%) – (5,250 x 3 x 40%) = 16,950); (Qtr. 2: (6,250 x 3) + (7,200 x 3 x 40%) –
(6,250 x 3 x 40%) = 19,890)]
[(Qtr. 1: (Qtr. 1 units to be produced x DM/unit) + (Qtr. 2 units to be produced x DM/unit x End. inv. %) - (Qtr. 1
units to be produced x DM/unit) x End. inv. % = DM purch.): (Qtr. 2: (Qtr. 2 units to be produced x DM/unit) + (Qtr.
3 units to be produced x DM/unit x End. inv. %) - (Qtr. 2 units to be produced x DM/unit x End. inv. %) = DM
purch.)]
Preparation
EXERCISE 9-7
Finished goods:
Sales......................................................................... 2,675
Plus: Ending inventory............................................ 2,200
Total required............................................................... 4,875
Less: beginning inventory..................................... 2,230
Production required..................................................... 2,645
Direct materials per unit.............................................. X 2
Units of direct material required for production........ 5,290
Plus: ending inventory................................................. 2,500(a)
Total required............................................................... 7,790
Less: beginning inventory..................................... 2,645(b)
Purchases of direct material required........................ 5,145
Cost per unit................................................................. X $4
Total cost of materials................................................. $20,580
The May raw material purchases would be $20,580.
(a)
2,390 + 2,310 – 2,200 = 2,500; 2,500 X 2 X .50 = 2,500
(b)
2,675 + 2,200 – 2,230 = 2,645; 2,645 X 2 X .50 = 2,645
Preparation
[((2,675 + 2,200 – 2,230) x 2) + ((2,390 + 2,310 – 2,200) x 2 x 50%) – ((2,675 + 2,200 – 2,230) x 2 x 50%) =
5,145]
[((Sales + End. inv. – Beg. inv.) x DM/unit) + ((June sales + June end. inv. – May end. inv.) x DM/unit x DM end.
inv. %) – ((May sales + May end. inv. – Apr. end. inv.) x DM/unit x DM end. inv. %) = Req. DM purch.]
EXERCISE 9-8
(a) FUQUA COMPANY

Production Budget
For the Two Months Ending February 28, 2020
______________________________________________________________
January February
Expected unit sales............................................. 10,000 12,000
Add: desired ending finished goods
inventory................................................... 2,400* 2,600***
Total required units............................................. 12,400 14,600
Less: beginning finished goods inventory....... 2,000** 2,400
Required production units.................................. 10,400 12,200
*20% X next month’s expected sales or 12,000 X 20%
**20% X 10,000
***20% X 13,000
EXERCISE 9-8 (Continued)
(b) FUQUA COMPANY

For the Month Ending January 31, 2020
_______________________________________________________________
January
Units to be produced.............................................................. 10,400
Direct material pounds per unit............................................. X 4
Total pounds needed for production.................................... 41,600
Add: desired pounds in ending materials inventory.......... 19,520*
Total materials required......................................................... 61,120
Less: beginning direct materials (pounds).......................... 16,640**
Direct materials purchases.................................................... 44,480
Cost per pound....................................................................... X $2
Total cost of direct materials purchases.............................. $88,960
*(12,200 X 4) X 40% **(10,400 X 4) X 40%

[(10,400 x 4) + (12,200 x 4 x 40%) – (10,400 x 4 x 40%) = 44,480]
[(Units to be produced x DM/unit) + (Feb. units to be produced x DM/unit x DM end. inv. %) – (Jan. units to be
produced x DM/unit x DM end. inv. %) = DM purch.]
Preparation
EXERCISE 9-9
RODRIQUEZ, INC.
Direct Labor Budget
Quarter
1 2 3 4 Year
Units to be produced 20,000 25,000 35,000 30,000 110,000
Direct labor time
(hours) per unit X 1.5 X 1.5 X 1.5 X 1.5 .2
Total required direct
labor hours 30,000 37,500 52,500 45,000
Direct labor cost per
hour X $16 X $16 X $18 X $18
Total direct labor $480,000 $600,000 $945,000 $810,000 $2,835,000
cost
Preparation
EXERCISE 9-10
LOWELL COMPANY
Production Budget
Jan Feb Mar Total

Sales in units 12,000 14,000 13,000 39,000
Plus: desired ending inventory 19,200(1) 17,400 (2)
15,400(3) 15,400
Total needs 31,200 31,400 28,400 54,400
Less: beginning inventory 17,600 19,200 17,400 17,600
Required production units 13,600 12,200 11,000 36,800
(1)
(14,000 X 100%) + (13,000 X 40%)
(2)
(13,000 X 100%) + (11,000 X 40%)
(3)
(11,000 X 100%) + (11,000 X 40%)
[(Jan.: 12,000 + ((14,000 x 100%) + (13,000 x 40%)) – 17,600 = 13,600); (Feb: 14,000 + ((13,000 x 100%) +
(11,000 x 40%)) – 19,200 = 12,200); (Mar.: 13,000 + ((11,000 x 100%) + (11,000 x 40%)) – 17,400 = 11,000)]
[(Jan.: Jan. unit sales + ((Feb. unit sales x End. inv. %) + (Mar. unit sales x End. inv. %)) – Jan. beg. inv. = Req.
production units); (Feb.: Feb. unit sales + ((Mar. unit sales x End. inv. %) + (Apr. unit sales x End. inv. %)) – Feb.
beg. inv. = Req. production units); (Mar.: Mar. unit sales + ((Apr. unit sales x End. inv. %) + (May unit sales x End.
inv. %)) – Mar. beg. inv. = Req. production units)]
LOWELL COMPANY
Direct Labor Budget
Jan Feb Mar Total

Production in units 13,600 12,200 11,000
Direct labor hours per unit X 2.00 X 2.00 X 1.50
Total hours needed 27,200 24,400 16,500
Rate per hour X $8.00 X $8.00 X $8.00
Total direct labor $217,600 $195,200 $132,000 $544,800
LO2, 3 BT: AP Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget
Preparation
EXERCISE 9-11
ATLANTA COMPANY
Quarter
1 2 3 4 Year
Variable costs
Indirect materials ($.80/hour) $12,000 $ 14,400 $ 16,800 $ 19,200 $ 62,400
Indirect labor ($1.20/hour) 18,000 21,600 25,200 28,800 93,600
Maintenance ($.50/hour) 7,500 9,000 10,500 12,000 39,000
Total variable 37,500 45,000 52,500 60,000 195,000
Fixed costs
Supervisory salaries 35,000 35,000 35,000 35,000 140,000
Depreciation 15,000 15,000 15,000 15,000 60,000
Maintenance 12,000 12,000 12,000 12,000 48,000
Total fixed 62,000 62,000 62,000 62,000 248,000
Total manufacturing overhead $99,500 $107,000 $114,500 $122,000 $443,000
Direct labor hours 15,000* 18,000 21,000 24,000 78,000

Manufacturing overhead rate
per direct labor hour $5.68
($443,000 ÷ 78,000)
*(10,000 X 1.5)
Preparation
[Qtr. 1: (10,000 x 1.5 = 15,000); ((15,000 x $.80) + (15,000 x $1.20) + (15,000 x $.50) = $37,500); ($35,000 +
$15,000 + $12,000 = $62,000)]
[Qtr. 1: (Units produced x DLH/unit = DLHs); ((DLHs x Ind. Mat/hr.) + (DLHs x Ind. Labor/hr.) + (DLHs x Maint./hr.)
= Tot. VC); (Super. sal. + Depr. + Maint. = Tot. FC)]
EXERCISE 9-12
KIRKLAND COMPANY
Quarter
Six
1 2 Months
Budgeted sales in units 20,000 22,000
Variable expenses (1)

Sales commissions $20,000* $22,000 $ 42,000
Delivery expense 8,000 8,800 16,800
Advertising 12,000 13,200 25,200
Total variable 40,000 44,000 84,000
Fixed expenses
Sales salaries 12,000 12,000 24,000
Office salaries 8,000 8,000 16,000
Depreciation 4,200 4,200 8,400
Insurance 1,500 1,500 3,000
Utilities 800 800 1,600
Repairs expense 500 500 1,000
Total fixed 27,000 27,000 54,000
Total selling and administrative
expenses $67,000 $71,000 $138,000
(1) Variable costs per dollar of sales are: Sales commissions (5%), Delivery
expense (2%), and Advertising (3%).
*(20,000 X $20 X 5%)
Preparation
[Qtr. 1: ((20,000 x $20 x 5%) + (20,000 x $20 x 2%) + (20,000 x $20 x 3%) = $40,000); ($12,000 + $8,000 +
$4,200 + $1,500 + $800 + $500 = $27,000)]
[Qtr. 1: ((Units sold x USP x Sales comm. %) + (Units sold x USP x Del. exp. %) + (Units sold x USP x Advert. %)
= Tot. VC); (Sales sal. + Off. sal. + Depr. + Ins. + Util. + Repairs exp. = Tot. FC)]
EXERCISE 9-13
(a)
FULTZ COMPANY
Computation of Cost of Goods Sold
Cost of one unit of finished goods:

Direct materials (1 X $5)................................................................ $ 5
Direct labor (3 X $15)..................................................................... 45
Manufacturing overhead (3 X $5)................................................. 15
Total....................................................................................... $65
Cost of goods sold = 30,000 units X $65 = $1,950,000.
(b)
FULTZ COMPANY
Sales (30,000 X $85)............................................................. $2,550,000

Cost of goods sold (see part (a))........................................ 1,950,000
Gross profit.......................................................................... 600,000
Selling and administrative expenses................................. 170,000
Income from operations...................................................... 430,000
Interest expense................................................................... 30,000
Income before income taxes............................................... 400,000
Income tax expense ($400,000 X 30%)............................... 120,000
Net income............................................................................ $ 280,000
Preparation
[(30,000 x $85) – (30,000 x ($5 + $45 + $15)) - $170,000 - $30,000 – ($400,000 x 30%) = $280,000]
[(Units sold x USP) – (Units sold x (DM/unit + DL/unit + Mfg. OH/unit)) – Sell. % admin. exp. – Int. exp. – (Inc.
before inc. tax. x tax rate) = Net inc.]
EXERCISE 9-14
DANNER COMPANY
Cash Budget
January February
Beginning cash balance........................................... $ 45,000 $ 27,500
Add: Receipts
Collections from customers........................ 85,000 150,000
Sale of marketable securities...................... 12,000 0
Total receipts................................................ 97,000 150,000
Total available cash.................................................. 142,000 177,500
Less: Disbursements
Direct materials............................................ 50,000 75,000
Direct labor................................................... 30,000 45,000
Manufacturing overhead*............................ 19,500 23,500
Selling and administrative expenses.......... 15,000 20,000
Total disbursements.................................... 114,500 163,500
Excess (deficiency) of available cash over cash
disbursements........................................................ 27,500 14,000
Financing
Add: Borrowings...................................................... 0 6,000
Less: Repayments.................................................... 0 0
Ending cash balance................................................ $ 27,500 $ 20,000
*Jan: $21,000 - $1,500 depreciation Feb: $25,000 - $1,500 depreciation

Preparation
[Feb.: ($27,500 + $150,000 = $177,500) – ($75,000 + $45,000 + ($25,000 - $1,500) + $20,000 = $163,500);
($177,500 - $163,500 = $14,000); ($14,000 + $6,000 = $20,000)]
[Feb.: (Beg. cash bal. + Collect. from cust. = Tot. avail. cash); (DM + DL + (Mfg. OH – Depr.) + Sell. & admin. exp.
= Tot. disb.); (Tot. avail. cash – Tot. disb. = Excess of avail. cash over cash disb.); (Excess of avail. cash over
cash disb. + Borrow. = End. cash bal.)]
EXERCISE 9-15
DEITZ CORPORATION
Cash Budget
For the Quarter Ended March 31, 2020
Beginning cash balance............................................................. $ 30,000

Add: Receipts
Collections from customers.......................................... 185,000
Sale of equipment.......................................................... 3,000
Total receipts............................................................ 188,000
Total available cash.................................................................... 218,000
Less: Disbursements
Direct materials.............................................................. 43,000
Direct labor..................................................................... 70,000
Manufacturing overhead................................................ 35,000
Selling and administrative expenses............................ 45,000
Purchase of securities................................................... 14,000
Total disbursements................................................ 207,000
Excess of available cash over disbursements......................... 11,000
Financing
Add: Borrowings ($25,000 - $11,000)...................................... 14,000
Less: Repayments...................................................................... –0–
Ending cash balance.................................................................. $ 25,000
Preparation
[($30,000 + ($185,000 + $3,000) = $218,000); ($43,000 + $70,000 + $35,000 + $45,000 + $14,000 = $207,000);
($218,000 - $207,000 = $11,000); ($11,000 + $14,000 = $25,000)]
[(Beg. cash bal. + (Collect. from cust. + Sale of equip.) = Tot. avail. cash); (DM + DL + Mfg. OH + Sell. & admin.
exp. + Purch. of sec. = Tot. disb.); (Tot. avail. cash – Tot. disb. = Excess of avail. cash over disb.); (Excess of
avail. cash over disb. + Borrow. = End. cash bal.)]
EXERCISE 9-16
(a) TRENSHAW COMPANY

Cash Budget
For the Month Ended July 31, 2020
Beginning cash balance............................. $45,000

Add: Cash collections............................... 90,000
Total cash available.................................... $135,000
Less: Cash disbursements

Merchandise purchases.......... $56,200
Operating expenses................ 40,800
Equipment purchase............... 20,000
Total cash disbursements.......................... 117,000
Excess of available cash
over disbursements................................. 18,000
Add: Borrowings ($25,000 - $18,000)....... 7,000
Ending cash balance.................................. $ 25,000
Cash disbursements of $117,000 plus the desired ending cash balance

of $25,000 exceeds the $135,000 total cash available by $7,000. Therefore,
Trenshaw Company will have to borrow $7,000.
[($45,000 + $90,000 = $135,000); ($56,200 + $40,800 + $20,000 = $117,000); ($135,000 - $117,000 = $18,000);
($18,000 + $7,000 = $25,000)]
[(Beg. cash bal. + Cash collect. = Tot. cash avail.); (Merch purch. + Oper. exp. + Equip. purch. = Tot. cash disb.);
(Tot. cash avail. – Tot. cash disb. = Excess of avail. cash over disb.); (Excess of avail. cash over disb. + Borrow. =
End. cash bal.)]
(b) An advantage of cash budgeting is that it allows cash shortfalls to be

predicted. If the timing of future cash shortfalls is known, arrange-
ments to borrow funds can be made well in advance, which often
means that interest rates may be more favorable than if the funds are
needed on short notice.
LO4 BT: AN Difficulty: Easy TOT: 8 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget
Preparation
EXERCISE 9-17
(a) NIETO COMPANY

Schedule of Expected Collections from Customers - March
March
March cash sales (30% X $250,000)...................................... $ 75,000
Collection of March credit sales
[(70% X $250,000) X 10%]..................................................... 17,500
Collection of February credit sales
[(70% X $220,000) X 50%]..................................................... 77,000
Collection of January credit sales
[(70% X $200,000) X 36%]..................................................... 50,400
Total collections......................................................... $219,900
[($250,000 x 30%) + ($250,000 x 70% x 10%) + ($220,000 x 70% x 50%) + ($200,000 x 70% x 36%) = $219,900]
[(Mar. sales x Cash %) + (Mar. sales x Credit sales % x Collect. % in mo. of sale) + (Feb. sales x Credit sales % x
Collect. % in mo. after sale) + (Jan. sales x Credit sales % x Collect. % in 2 nd mo. after sale) = Tot. collect.]
(b) NIETO COMPANY

Schedule of Expected Payments for Direct Materials - March
March
March cash purchases (50% X $38,000)............................... $19,000
Payment of March credit purchases
[(50% X $38,000) X 40%]....................................................... 7,600
Payment of February credit purchases
[(50% X $36,000) X 60%]....................................................... 10,800
Total payments........................................................... $37,400
Preparation
EXERCISE 9-18
(a) (1)
GREEN LANDSCAPING INC.
Schedule of Expected Collections From Clients
January February March Quarter

November ($80,000)...............................................
$ 8,000 $ 8,000
December ($90,000)...............................................
27,000 $ 9,000 36,000
January ($100,000).................................................
60,000 30,000 $ 10,000 100,000
February ($120,000)...............................................
72,000 36,000 108,000
______ _______
March ($140,000).................................................... 84,000 84,000
Total collections...............................................
$95,000 $111,000 $130,000 $336,000
(2)
GREEN LANDSCAPING INC.
Schedule of Expected Payments for Landscaping Supplies
_________________________________________________________
January February March Quarter
December ($14,000)...............................................
$ 5,600 $ 5,600
January ($12,000)...................................................
7,200 $ 4,800 12,000
February ($15,000).................................................
9,000 $ 6,000 15,000

March ($18,000)...................................................... 10,800 10,800
Total payments.................................................
$12,800 $13,800 $16,800 $43,400
(b) (1) Accounts receivable at March 31, 2020: ($120,000 X 10%) +

($140,000 X 40%) = $68,000
[($120,000 x 10%) + ($140,000 x 40%) = $68,000]
[(Feb serv. rev. x Uncollect. %) + (Mar. serv. rev. x Uncollect. %) = Mar. end. accts. rec. bal.]
(2) Accounts payable at March 31, 2020: ($18,000 X 40%) = $7,200

Preparation
EXERCISE 9-19
PLETCHER DENTAL CLINIC

Cash Budget
For the Two Quarters Ending June 30, 2020
1st Quarter 2nd Quarter

Beginning cash balance........................................... $ 30,000 $ 25,000
Add: Receipts
Collections from patients.......................... 235,000 380,000
Sale of equipment...................................... 12,000 0
Investment interest.................................... 0 7,000
Total receipts........................................ 247,000 387,000
Total cash available.................................................. 277,000 412,000
Less: Disbursements
Professional salaries................................. 140,000 140,000
Overhead costs.......................................... 77,000 100,000
Selling and administrative costs.............. 48,000a 68,000b
Equipment purchase................................. 0 50,000
Payment of income taxes.......................... 0 4,000
Total disbursements............................ 265,000 362,000
Excess (deficiency) of cash available
over cash disbursements....................................... 12,000 50,000
Financing
Add: Borrowings ($25,000 - $12,000).................... 13,000 0
Less: Repayments................................................... 0 13,200c
Ending cash balance................................................ $ 25,000 $ 36,800
a c
$50,000 – $2,000 $13,000 principle + $200 interest
b
$70,000 – $2,000
LO4, 5 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Decision Modeling IMA: Budget
Preparation
[Qtr. 2: ($25,000 + ($380,000 + $7,000) = $412,000); ($140,000 + $100,000 + ($70,000 - $2,000) + $50,000 +
$4,000 = $362,000); ($412,000 - $362,000 = $50,000); ($50,000 – ($13,000 + $200) = $36,800)]
[Qtr. 2: (Beg. cash bal. + (Collect. from patients + Invest. int.) = Tot. cash avail.); (Prof. sal. + OH costs + (Sell. &
admin. costs – Depr.) + Equip. purch. + Pmt. of inc. tax. = Tot. disb.); (Tot. cash avail. – Tot. disb. = Excess of
cash avail. over cash disb.); (Excess of cash avail. over cash disb. – (Loan repmt. + Int. pmt.) = End. cash bal.)]
EXERCISE 9-20
(a) GRAND STORES

For the Month Ending June 30, 2020
Budgeted cost of goods sold ($500,000 x 75%)................... $375,000

Add: Desired ending merchandise inventory
($600,000 x 75% x 30%)........................................................ 135,000
Total......................................................................................... 510,000
Less: Beginning merchandise inventory
($375,000 x 30%).......................................................... 112,500
Required merchandise purchases........................................ $397,500
[($500,000 x 75%) + ($600,000 x 75% x 30%) – ($375,000 x 30%) = $397,500]
[(June sales x CGS %) + (Jul. sales x CGS % x End. merch. Inv. %) – (June CGS x End. merch. Inv. %) = Req.
merch purch.]
(b) GRAND STORES

Sales........................................................................................ $500,000
Cost of goods sold (75% x $500,000)................................... 375,000
Gross profit............................................................................. $125,000
Preparation
EXERCISE 9-21
EMERIC AND ELLIE’S PAINTING SERVICE

Direct Labor Budget
Small Medium Large Total

Home to be painted 10 5 2
Direct labor time (hours)
per house X 40 X 70 X 120
Total required direct
labor hours 400 350 240
Direct labor cost per X $18 X $18 X $18
hour
Total direct labor cost $7,200 $6,300 $4,320 $17,820
Preparation
SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
COOK FARM SUPPLY COMPANY

Sales Budget
Quarter Six
1 2 Months
Expected unit sales...................... 40,000 56,000 96,000
Unit selling price.......................... X $60 X $60 X $60
Total sales.................................... $2,400,000 $3,360,000 $5,760,000

Production Budget
Quarter Six
1 2 Months
Expected unit sales............................................. 40,000 56,000
Add: Desired ending finished goods
units.......................................................... 15,000 18,000
Total required units............................................. 55,000 74,000
Less: Beginning finished goods units............. 8,000 15,000
Required production units................................. 47,000 59,000 106,000
PROBLEM 9-1A (Continued)

Direct Materials Budget—Gumm
Quarter Six
1 2 Months
Units to be produced..................................... 47,000 59,000
Direct materials per unit................................ X 4 X 4
Total pounds needed for production........... 188,000 236,000
Add: Desired ending direct materials
(pounds).............................................. 10,000 13,000
Total materials required................................ 198,000 249,000
(pounds)............................................. 9,000 10,000
Direct materials purchases........................... 189,000 239,000
Cost per pound.............................................. X $3.80 X $3.80
purchases..................................................... $718,200 $908,200 $1,626,400
[Qtr. 1: ((47,000 x 4) + 10,000 – 9,000) x $3.80 = $718,200]
[Qtr. 1: ((Units to be produced x DM/unit) + DM end. inv. – DM beg. inv.) x Cost/DM lb. = Tot. cost of DM purch.]

Direct Labor Budget
Quarter
Six
1 2 Months
Units to be produced............................. 47,000 59,000
Direct labor time (hours) per unit......... X 1/4 X 1/4
Total required direct labor hours......... 11,750 14,750
Direct labor cost per hour..................... X $16 X $16
Total direct labor cost........................... $188,000 $236,000 $424,000

Quarter Six
1 2 Months
Budgeted sales in units 40,000 56,000 96,000
Variable (15% x sales dollars)............ $360,000 $504,000 $ 864,000

Fixed..................................................... 175,000 175,000 350,000
Total...................................................... $535,000 $679,000 $1,214,000

Sales.............................................................................................. $5,760,000
Cost of goods sold (96,000 X $33.20)*........................................ 3,187,200
Gross profit................................................................................... 2,572,800
Selling and administrative expenses.......................................... 1,214,000
Income from operations............................................................... 1,358,800
Interest expense........................................................................... 100,000
Income before income tax........................................................... 1,258,800
Income tax expense (30% x $1,258,800)..................................... 377,640
Net income.................................................................................... $ 881,160
*Cost Per Bag
Cost Element Quantity Unit Cost Total

Direct materials
Gumm............................................. 4 pounds $ 3.80 $15.20
Tarr 6 pounds 1.50 9.00
Direct labor....................................... 1/4 hour 16.00 4.00
Manufacturing overhead
(125% of direct labor cost)............ 5.00
Total......................................... $33.20
[(4 x $3.80) + (6 x $1.50) + (1/4hr. x $16) + (1/4 hr. x $16 x 125%) = $33.20]
[(Gumm lbs./unit x Cost/lb.) + (Tarr lbs./unit x Cost/lb.) + (Hrs./unit x Hrly. rate) + (Hrs./unit x Hrly. rate x MOH
rate) = Tot. cost/unit]
LO2, 3 BT: AP Difficulty: Simple TOT: 40 min. AACSB: Analytic AICPA FC: Decision Modeling, Reporting
IMA: Budget Preparation
PROBLEM 9-2A
(a) DELEON INC.

Sales Budget
JB 50 JB 60 Total
Expected unit sales.............. 400,000 200,000
Unit selling price................... X $20 X $25 000,000,0
Total sales............................. $8,000,000 $5,000,000 $13,000,000
(b) DELEON INC.

Production Budget
JB 50 JB 60
Expected unit sales............................... 400,000 200,000
Add: Desired ending finished
goods units................................. 30,000 15,000
Total required units............................... 430,000 215,000
Less: Beginning finished goods
units............................................. 25,000 10,000
Required production units.................... 405,000 205,000
(c) DELEON INC.

JB 50 JB 60 Total
Units to be produced....................... 405,000 205,000
Direct materials per unit................. X 2 X 3
production...................................... 810,000 615,000
Add: Desired ending direct
materials (pounds)............... 30,000 10,000
Total materials required.................. 840,000 625,000
Less: Beginning direct
materials (pounds)............... 40,000 15,000
Direct materials purchases............ 800,000 610,000
Cost per pound................................ X $3 X $4
purchases..................................... $2,400,000 $2,440,000 $4,840,000
[(JB 50: ((405,000 x 2) + 30,000 – 40,000) x $3 = $2,400,000); (JB 60: ((205,000 x 3) + 10,000 – 15,000) x $4 =
$2,440,000)]
[(JB 50: ((Units to be produced x DM/unit) + DM end. inv. – DM beg. inv.) x Cost/lb. = Tot. cost of DM purch.); (JB
60: ((Units to be produced x DM/unit) + DM end. inv. – DM beg. inv.) x Cost/lb. = Tot. cost of DM purch.)]
(d) DELEON INC.

Direct Labor Budget
JB 50 JB 60 Total
Units to be produced....................... 405,000 205,000 650,000
Direct labor time (hours) per
unit X .4 X .6 —
Total required direct labor
hours............................................... 162,000 123,000 301,000
Direct labor cost per hour............... X $12 X $12 X $10
Total direct labor cost..................... $1,944,000 $1,476,000 $3,420,000
(e) DELEON INC.

JB 50 JB 60 Total
Sales....................................... $8,000,000 $5,000,000 $13,000,000
(1)
Cost of goods sold................ 5,200,000 4,000,000 (2) 9,200,000
Gross profit............................ 2,800,000 1,000,000 3,800,000
Operating expenses
Selling expenses................. 560,000 360,000 920,000
Administrative
expenses............................ 540,000 340,000 880,000
Total operating
expenses........................ 1,100,000 700,000 1,800,000
Income from operations....... $1,700,000 $ 300,000 2,000,000
Interest expense.................... 150,000
Income before income
taxes..................................... 1,850,000
Income tax expense
(30% x $1,850,000)............... 555,000
Net income............................. $ 1,295,000
(1)
400,000 X $13.
(2)
200,000 X $20.
[(JB 50: $8,000,000 – (400,000 x $13) – ($560,000 + $540,000) = $1,700,000); (JB 60: $5,000,000 – (200,000 x
$20) – ($360,000 + $340,000) = $300,000)]
[(JB 50: Sales – (Units sold x Unit cost) – (Sell. exp. + Admin. exp.) = Inc. from oper.); (JB 60: Sales – (Units sold
x Unit cost) – (Sell. exp. + Admin. exp.) = Inc. from oper.)]
LO2, 3 BT: AP Difficulty: Simple TOT: 50 min. AACSB: Analytic AICPA FC: Decision Modeling, Reporting
IMA: Budget Preparation
PROBLEM 9-3A
(a) HILL INDUSTRIES

Sales Budget
Plan A Plan B
Expected unit sales..................................... 765,000 (1) 950,000 (2)
Unit selling price......................................... X $8.40 X $7.50 (3)
Total sales.................................................... $6,426,000 $7,125,000
(1)
$6,800,000 ÷ $8 = 850,000 X 90% = 765,000.
(2)
850,000 + 100,000 = 950,000.
(3)
$8.00 – $0.50
[(Plan A: (($6,800,000 ÷ $8) x 90%) x $8.40 = $6,426,000); (Plan B: ((850,000 + 100,000) x ($8.00 - $.50)) =
$7,125,000)]
[(Plan A: ((Tot. sales ÷ USP) x % of 2019 level) x 2020 USP = Tot. sales); (Plan B: ((2019 sales units + exp. incr.)
x (2019 USP – USP decr.)) = $7,125,000)]
(b) HILL INDUSTRIES

Production Budget
Plan A Plan B
Expected unit sales............................................... 765,000 950,000
(1)
Add: Desired ending finished goods units........ 38,250 60,000
Total required units............................................... 803,250 1,010,000
Less: Beginning finished goods units................ 40,000 40,000
Required production units.................................... 763,250 970,000
(1)
765,000 X 5%
(c) Variable costs = $4.40 per unit ($1.80 + $1.40 + $1.20) for both plans.
Plan A Plan B
Total variable costs $3,358,300 (763,250 X $4.40) $4,268,000 (970,000 X $4.40)
Total fixed costs 1,895,000 1,895,000
Total costs (a) $5,253,300 $6,163,000
Total units (b) 763,250 970,000
Unit cost (a) ÷ (b) $6.88 $6.35
The difference is due to the fact that fixed costs are spread over a larger
number of units (206,750) in Plan B.
[(Plan A: ((763,250 x ($1.80 + $1.40 + $1.20)) + $1,895,000 = $5,253,300); ($5,253,300 ÷ 763,250 = $6.88));
(Plan B: ((970,000 x ($1.80 + $1.40 + $1.20)) + $1,895,000 = $6,163,000); ($6,163,000 ÷ 970,000 = $6.35)]
[(Plan A: ((Units to be produced x (DL/unit + DM/unit + VOH/unit)) + FC = Tot. costs); (Tot. costs ÷ Units to be
produced = Unit cost)); (Plan B: ((Units to be produced x (DL/unit + DM/unit + VOH/unit)) + FC = Tot. costs); (Tot.
costs ÷ Units to be produced = Unit cost)]
(d) Gross Profit
Plan A Plan B
Sales $6,426,000 $7,125,000
Cost of goods sold 5,263,200 (765,000 X $6.88) 6,032,500 (950,000 X $6.35)
Gross profit $1,162,800 $1,092,500
Plan A should be accepted because it produces a higher gross profit than

Plan B.
LO2 BT: E Difficulty: Moderate TOT: 40 min. AACSB: AP AICPA FC: Decision Modeling, Reporting IMA:
Budget Preparation
PROBLEM 9-4A
(a) (1) Expected Collections from Customers
January February
November ($250,000)................................. $ 50,000 $ 0
December ($320,000)................................. 96,000 64,000
January ($360,000)..................................... 180,000 108,000
February ($400,000)................................... . 200,000
Total collections............................... $326,000 $372,000
[(Jan.: ($250,000 x 20%) + ($320,000 x 30%) + ($360,000 x 50%) = $326,000); (Feb.: ($320,000 x 20%) +
($360,000 x 30%) + ($400,000 x 50%) = $372,000)]
[(Jan.: (Nov. sales x 2nd mo. after sale %) + (Dec. sales x 1st mo. after sale %) + (Jan. sales x Mo. of sale %) =
Tot. collect.); (Feb.: Dec. sales x 2nd mo. after sale %) + (Jan. sales x 1st mo. after sale %) + (Feb. sales x Mo. of
sale %) = Tot. collect.)]
(2) Expected Payments for Direct Materials
January February
December ($100,000)................................. $ 40,000 $ 0
January ($120,000)..................................... 72,000 48,000
February ($125,000)................................... . 75,000
Total payments................................. $112,000 $123,000
[(Jan.: ($100,000 x 40%) + ($120,000 x 60%) = $112,000); (Feb.: ($120,000 x 40%) + ($125,000 x 60%) =
$123,000)]
[(Jan.: (Dec. DM purch. x Mo. after purch. %) + (Jan. DM purch. x Mo. of purch. %) = Tot. pmts.); (Feb.: Jan. DM
purch. x Mo. after purch. %) + (Feb. DM purch. x Mo. of purch. %) = Tot. pmts.)]
(b) COLTER COMPANY

Cash Budget
January February
Beginning cash balance................................... $ 60,000 $ 51,000
Add: Receipts
Collections from customers................ 326,000 372,000
[See Schedule (1)]
Notes receivable.................................. 15,000
Sale of securities................................. 6,000
Total receipts.................................... 341,000 378,000
Total available cash.......................................... 401,000 429,000
Less: Disbursements
Direct materials................................... 112,000 123,000
[See Schedule 2]
Direct labor.......................................... 90,000 100,000
Manufacturing overhead.................... 70,000 75,000
Selling and administrative
expenses*.......................................... 78,000 84,000
Cash dividend..................................... 6,000
Total disbursements....................... 350,000 388,000
Excess (deficiency) of available cash
over cash disbursements............................... 51,000 41,000
Financing
Add: Borrowings ($50,000 - $41,000)............. 0 9,000
Less: Repayments............................................ 0 0
Ending cash balance......................................... $ 51,000 $ 50,000
*Selling and administrative expenses less $1,000 depreciation.

LO4 BT: AP Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget
Preparation
PROBLEM 9-5A
(a) SUPPAR COMPANY

San Miguel Store
For the Months of May and June, 2020
May June
Budgeted cost of goods sold........................... $600,000 $630,000 (1)
Add: Desired ending merchandise inventory..... 63,000 (2) 66,150 (3)
Total.................................................................... 663,000 696,150
(4)
Less: Beginning merchandise inventory......... 60,000 63,000
Required merchandise purchases................... $603,000 $633,150
(1)
$800,000 X 105% = $840,000; $840,000 X 75% = $630,000.
(2)
$630,000 X 10% = $63,000.
(3)
$840,000 X 105% = $882,000; $882,000 X 75% = $661,500; $661,500 X
10% = $66,150.
(4)
$600,000 X 10% = $60,000.
[(May: ($800,000 x 75%) + ($800,000 x 105% x 75% x 10%) – ($800,000 x 75% x 10%) = $603,000); (Jun.:
($800,000 x 105% x 75%) + ($800,000 x 105% x 105% x 75% x 10%) – ($800,000 x 105% x 75% x 10%) =
$633,150)]
[(May: (May sales x CGS %) + (May sales x monthly % incr. x CGS % x End. inv. %) – (May sales x CGS % x
End. inv. %) = Req. merch. purch.); (Jun.: (May sales x Monthly % incr. x CGS %) + (May sales x Monthly % incr.
x Monthly % incr. x CGS % x End. inv. %) – (May sales x Monthly % incr. x CGS % x End. inv. %) = Req. merch.
purch.)]
(b) SUPPAR COMPANY

San Miguel Store
For the Months of May and June, 2020
May June
Sales.................................................................... $800,000 $840,000
Cost of goods sold
Beginning inventory................................... 60,000 63,000
Purchases.................................................... 603,000 633,150
Cost of goods available for sale................ 663,000 696,150
Less: Ending inventory............................. 63,000 66,150
Cost of goods sold.............................. 600,000 630,000
Gross profit......................................................... 200,000 210,000
Operating expenses
Sales salaries.............................................. 35,000 35,000
Advertising*................................................. 48,000 50,400
Delivery**..................................................... 16,000 16,800
Sales commissions***................................ 40,000 42,000
Rent.............................................................. 5,000 5,000
Depreciation................................................ 800 800
Utilities......................................................... 600 600
Insurance..................................................... 500 500
Total..................................................... 145,900 151,100
Income from operations..................................... 54,100 58,900
Interest expense................................................. 2,000 2,000
Income before income taxes............................. 52,100 56,900
Income tax expense (30%)................................. 15,630 17,070
Net income.......................................................... $ 36,470 $ 39,830
*6% of sales.
**2% of sales.
***5% of sales.
LO5 BT: AP Difficulty: Simple TOT: 40 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget Preparation
PROBLEM 9-6A
KRAUSE INDUSTRIES
Budgeted Cost of Goods Sold
Finished goods inventory, 1/1/20............................ $ 24,000

Cost of goods manufactured
Direct materials used........................................ $62,500
Direct labor........................................................ 50,900
Manufacturing overhead applied..................... 48,600 162,000
Cost of goods available for sale.............................. 186,000
Finished goods inventory 12/31/20 (2,500  $18)... 45,000
Cost of goods sold.................................................... $141,000
[(($62,500 + $50,900 + $48,600) ÷ 9,000 units = $18/unit); ($24,000 + ($62,500 + $50,900 + $48,600) – (2,500 x
$18) = $141,000)]
[((DM used + DL + MOH app.) ÷ No. units produced = Cost/unit); (Beg. fin. gds. inv. + (DM used + DL + MOH
app.) – (Units in end. fin. gds. inv. x Cost/unit) = CGS)]
KRAUSE INDUSTRIES
Sales revenue (8,000  $32)...................................... $256,000

Cost of goods sold.................................................... 141,000
Gross profit................................................................ 115,000
Selling and administrative expenses...................... 75,000
Income from operations........................................... 40,000
Interest expense........................................................ 3,500
Income before income taxes.................................... 36,500
Income tax expense (40% x $36,500)...................... 14,600
Net income................................................................. $ 21,900
KRAUSE INDUSTRIES
Budgeted Retained Earnings Statement
Retained earnings, 1/1/20......................................... $25,000

Add: Net income........................................................ 21,900
46,900
Deduct: Dividends..................................................... 8,000
Retained earnings 12/31/20...................................... $38,900
KRAUSE INDUSTRIES
Budgeted Balance Sheet
December 31, 2020
Assets
Current assets
Cash....................................................................... $ 5,880
Accounts receivable ($76,800 X 40%)................. 30,720
Finished goods inventory
(2,500 X $18)........................................................ 45,000
Total current assets...................................... $81,600
Property, plant, and equipment

Equipment ($40,000 + $9,000).............................. $49,000
Less: Accumulated depreciation
($10,000 + $4,000)...................................... 14,000 35,000
Total assets.................................................... $116,600
Liabilities and Stockholders’ Equity

Liabilities
Notes payable ($25,000 – $8,000)......................... $17,000
Accounts payable ($8,500* + $7,200)................... 15,700
Income taxes payable........................................... 5,000
Total liabilities................................................ $ 37,700
Stockholders’ equity
Common stock...................................................... $40,000
Retained earnings................................................. 38,900
Total stockholders’ equity............................ 78,900
Total liabilities and stockholders’
equity............................................................ $116,600
*$17,000 X 50%
Proof of budgeted cash balance December 31, 2020 (Optional)
Beginning Cash......................................................... $ 7,500

Collections
Beginning accounts receivable............................... $ 73,500
2020 sales less ending accounts receivable
($256,000 – $30,720).......................................... 225,280 298,780
$306,280
Payments
Beginning accounts payable................................... 45,000
Note payment............................................................ 8,000
Equipment purchase................................................. 9,000
Dividends................................................................... 8,000
Direct materials purchases
($62,500 – $8,500)........................................................ 54,000
Direct labor.................................................................... 50,900
Manufacturing overhead and selling and admin exp.
less depreciation and ending accts. payable
$48,600 + $75,000 – $4,000 – $7,200.................... 112,400
Interest expense............................................................ 3,500
Income taxes (14,600 – $5,000).................................... 9,600 300,400
Ending cash................................................................... $ 5,880
[$7,500 + ($73,500 + ($256,000 - $30,720)) – ($45,000 + $8,000 + $9,000 + $8,000 + ($62,500 - $8,500) +
$50,900 + ($48,600 + $75,000 - $4,000 - $7,200) + $3,500 + ($14,600 - $5,000) = $5,880]
[Beg. cash bal. + (Beg. accts. rec. + (2020 sales – end. accts rec.)) – (Beg. accts. pay. + Note pmt. + Equip.
purch. + Div. + (DM purch. – Unpd. bal.) + DL + (MOH + Sell. & admin. exp. – depr. – End. accts. pay.) + Int. exp.
+ (Inc. tax exp. – Unpd. bal.) = End. cash bal.]
LO3, 4 BT: AP Difficulty: Complex TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget
Preparation
CD9 CURRENT DESIGNS
CURRENT DESIGNS
Production Budget
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total
Expected unit sales 1,000 1,500 750 750 4,000
Add: desired ending
finished goods units 300* 150* 150* 220** 220
Total required units 1,300 1,650 900 970 4,220
goods units 200*** 300 150 150 200
Required production units 1,100 1,350 750 820 4,020
*(20% of next quarter’s sales)
**20% X 1,100
***given in problem
[Qtr. 1: 1,000 + (1,500 x 20%) – (1,000 x 20%) = 1,100]
[Qtr. 1: Exp. unit sales + (Qtr. 2 exp. unit sales x End. inv. %) – (Qtr. 1 unit sales x End. inv. %) = Req. production
units]
CD9 (Continued)
CURRENT DESIGNS
Units to be produced 1,100 1,350 750 820 4,020
Pounds of polyethylene
powder per unit X 54 X 54 X 54 X 54 X 54
production 59,400 72,900 40,500 44,280 217,080
Add: desired ending
inventory of powder 18,225* 10,125* 11,070* 15,930** 15,930
Total pounds of powder
required 77,625 83,025 51,570 60,210 233,010
Less: Beginning inventory
of powder 19,400*** 18,225 10,125 11,070 19,400
Pounds of Polyethylene
powder to be purchased 58,225 64,800 41,445 49,140 213,610
Cost per pound X $1.50 X $1.50 X $1.50 X $1.50 X $1.50
Cost of polyethylene
powder to be purchased $ 87,337.50 $ 97,200.00 $ 62,167.50 $ 73,710.00 $ 320,415.00
Cost of required finishing
kits
(one kit per kayak 187,000.00 229,500.00 127,500.00 139,400.00 683,400.00
manufactured) @$170 each
Total costs for direct $274,337.50 $326,700.00 $189,667.50 $213,110.00 $1,003,815.00
materials
*25% of needs for next quarter
**Desired ending inventory for Quarter 4 = 25% of amount needed for first
quarter of 2021 production.
Production for first quarter of 2021 = 1,100 + 300 – 220 = 1,180 units
Desired ending inventory for Quarter 4 of 2020 = 25%
*(1,180 units X 54 pounds per unit x 25%) = 15,930 pounds
***given in problem
[Qtr. 1: ((1,100 x 54) + (1,350 x 54 x 25%) – 19,400 = 58,225); ((58,225 x $1.50) + (1,100 x $170) = $274,337.50)]
[Qtr. 1: ((Qtr. 1 units to be produced x Lbs. of powder/unit) + (Qtr. 2 units to be produced x Lbs. of powder/unit x
End. inv. %) – Beg. inv. of powder = Lbs. of powder to be purch.); ((Lbs. of powder to be purch. x Cost/Lb.) + (No.
of finishing kits needed x Cost/kit) = Tot. cost of DM purch.)]
CD9 (Continued)
CURRENT DESIGNS
Direct Labor Budget
Number of hours of more skilled
labor/unit X 2 X 2 X 2 X 2 X 2
Total number of hours of more
skilled labor 2,200 2,700 1,500 1,640 8,040
Hourly rate for more skilled labor X $15 X $15 X $15 X $15 X $15
Total cost of more skilled labor $33,000 $40,500 $22,500 $24,600 $120,600

Number of hours of less skilled
labor/unit X 3 X 3 X 3 X 3 X 3
Total number of hours of less
skilled labor 3,300 4,050 2,250 2,460 12,060
Hourly rate for less skilled labor X $12 X $12 X $12 X $12 X $12
Total cost of less skilled labor 39,600 48,600 27,000 29,520 144,720
Total cost for direct labor $72,600 $89,100 $49,500 $54,120 $265,320
CURRENT DESIGNS
Total costs for direct
labor $72,600 $89,100 $49,500 $54,120 $265,320
Manufacturing
overhead rate per
direct labor dollar X 150% X 150% X 150% X 150% X 150%
Manufacturing
overhead costs $108,900 $133,650 $74,250 $81,180 $397,980
CD 9 (Continued)
CURRENT DESIGNS
Expected unit sales 1,000 1,500 750 750 4,000
Variable selling and
administrative costs
at $45 per unit sold $45,000 $67,500 $33,750 $33,750 $180,000
Fixed selling and
administrative costs 7,500 7,500 7,500 7,500 30,000
Total selling and
administrative costs $52,500 $75,000 $41,250 $41,250 $210,000
LO2, 3 BT: AP Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Reporting IMA: Budget
Preparation
CT 9-1 DECISION-MAKING ACROSS THE ORGANIZATION
(a) The budget at Palmer Corporation is an imposed “top-down” budget

which fails to consider both the need for realistic data and the human
interaction essential to an effective budgeting/control process. The
president has not given any basis for his goals, so one cannot know
whether they are realistic for the company. True participation of company
employees in preparation of the budget is minimal and limited to mechani-
cal gathering and manipulation of data. This suggests there will be little
enthusiasm for implementing the budget.
The budget process is the merging of the requirements of all facets of
the company on a basis of sound judgment and equity. Specific instances
of poor procedures other than the approach and goals include the
following:
1. The sales by product line should be based upon an accurate sales
forecast of potential market. Therefore, the sales by product line
should have been developed first to derive the sales target rather
than the reverse.
2. Production costs probably would be the easiest and most certain
costs to estimate. Given variable and fixed production costs, one could
estimate the sales volume needed to cover manufacturing costs
plus the costs of other aspects of the operation. This would be helpful
before budgets for marketing costs and corporate office expenses
are set.
3. The initial meeting between the vice president of finance, executive
vice president, marketing manager, and production manager should
be held earlier. This meeting is held too late in the budgeting process.
(b) Palmer Corporation should consider the adoption of a “bottom to top”
(participative) budget process. This means that the people responsible
for performance under the budget would participate in the decisions
by which the budget is established. In addition, this approach requires
initial and continuing involvement of sales, financial, and production
personnel to define sales and profit goals which are realistic within the
constraints under which management operates. Although time-consuming,
the approach should produce a more acceptable, honest, and workable
goal-control mechanism. It also provides for goal congruence possibili-
ties for both individuals and departments within the firm.
CT 9-1 (Continued)
The sales forecast should be developed considering internal sales

forecasts as well as external factors. Costs within departments should
be divided into fixed and variable, discretionary and nondiscretionary.
(c) The functional areas should not necessarily be expected to cut costs
when sales volume falls below budget. The time frame of the budget
(one year) is short enough so that many costs are relatively fixed in
amount. For those costs which are fixed, there is little hope for a
reduction as a consequence of short-run changes in volume. However, the
functional areas should be expected to cut costs should sales volume
fall below target when:
1. Control is exercised over the costs within their function.
2. Budgeted costs were more than adequate for the originally targeted
sales; i.e., slack was present.
3. Budgeted costs vary to some extent with changes in sales.
4. There are discretionary costs which can be delayed or omitted with

no serious effect on the department.
(CMA adapted)
LO1, 2 BT: S Difficulty: Moderate TOT: 30 min. AACSB: Communication AICPA PC: Communication IMA:
Budget Preparation, Reporting
CT 9-2 MANAGERIAL ANALYSIS
(a) Direct materials Either lower quality materials resulting in an inferior

product and possible lost sales, or fewer units
produced resulting in lost sales.
Direct labor Reduced production resulting in lost sales, or

reduction in quality of product resulting in lost sales.
Insurance Less coverage; may increase risk beyond acceptable

levels.
Depreciation To reduce depreciation, fixed assets would have to

be disposed of. Could result in less production and
lost sales.
Machine repairs Less efficient operations, or lost production and

sales.
Sales salaries Lost sales.
Office salaries Less effective administrative functions.
Factory salaries Lost production due to inefficiency, and therefore

lost sales.
(b) Given the nature of their product, a decline in quality should be

avoided, since this could result in lower future sales. Direct materials
represent the largest single cost, and thus perhaps the greatest
potential savings. Perhaps substitute materials of similar quality can
be found, or less expensive materials can be used for aspects of the
product where quality is not as critical. Additionally, it may be possible
to renegotiate prices with the supplier. Elliot & Hesse should be very
reluctant to reduce repair costs, since in the long run this can be very
expensive. Perhaps salaried and hourly employees can be encouraged
to take pay cuts if a profit-sharing mechanism is introduced.
LO N/A BT: AN Difficulty: Moderate TOT: 30 min. AACSB: Communication AICPA PC: Communication IMA:
CT 9-3 REAL-WORLD FOCUS
(a) According to Mr. LaFaive, zero-based budgeting requires that the

existence of a government program or programs be justified in each
fiscal year, as opposed to simply basing budgeting decisions on a
previous year’s funding level. Zero-based budgeting is often encouraged
by fiscal watchdog groups as a way to ensure against unnecessary
spending.
(b) In addition to saving money and improving services, zero-based

budgeting may:
 Increase restraint in developing budgets;

 Reduce the entitlement mentality with respect to cost increases; and
 Make budget discussions more meaningful during review sessions.
(c) On the cost side of the equation, zero-based budgeting:

 May increase the time and expense of preparing a budget;
 May be too radical a solution for the task at hand. You don’t need a
sledgehammer to pound in a nail;
 Can make matters worse if not done in the right way. A substantial
commitment must be made by all involved to ensure that this
doesn’t happen.
(d) In Oklahoma, which has recently adopted zero-based budgeting, officials

are applying the method to two departments and several agencies each
year. Once those reviews are complete, the same departments and
agencies will not see another zero-based review for eight years.
LO N/A BT: AN Difficulty: Easy TOT: 25 min. AACSB: Technology, Communication AICPA PC:
Communication IMA: Budget Preparation, Reporting
CT 9-4 COMMUNICATION ACTIVITY
Date 2020
Mrs. Megan Parcells, CEO

Life Protection Products (LPP)
Dear Mrs. Parcells:
Allow me to congratulate you on the success of your new venture! The

growth in sales you have experienced is phenomenal. You have managed the
business side of the venture very well also. At the same time, I understand
your concern about cash flow. You are selling these kits as fast as you can
make them, and yet you are running out of cash.
There is a solution to your problem. Before describing that, it may be

helpful for you to understand why this situation occurred. The primary
reason is that you are purchasing kit supplies at least two months in advance
of sales. As your business expands, these materials costs continue to
increase. Sales do not “catch up” until the Drs. Parcells have a seminar.
You did not describe in detail how often these seminars are, but I would
guess that they tend to run in cycles rather than being regularly spaced.
Eventually, as sales stabilize, you will find that cash inflows exceed cash
outflows, and your need for additional cash will subside. Presently, I think
it would be a good idea to try to borrow additional funds. I have not seen all
your financial data, but judging only from the cash budget you showed me,
it appears that you have the basis of a very successful company. If so, your
banker will be able to see the potential in your business and should be
happy to provide the cash you need. You will need to prepare a full set of
financial statements. I will be happy to assist you, if you desire.
There is also a possibility that you have underpriced your product. You are
providing a valuable service in assembling this information and these
materials. The fact that every seminar results in a sellout of the materials
may mean that you have priced your product too low. I know that your
husband wishes to have these materials available to every family, but
increasing the price a little may not make the price too high, and would
better compensate you for your efforts.
CT 9-4 (Continued)
However, even if you raised prices, you will find that you need additional
cash as long as the business continues to expand. It certainly does not
mean that you and Sue are doing anything wrong. It just means that you
will be investing additional funds as long as you continue to grow.
In my opinion, the best way to make sure these kits are available to as
many families as possible is for you and Sue to have a consultant evaluate
and determine the size of the market for you. Then you can decide whether
to expand to meet the need, or whether to keep your own business small
and allow competitors to imitate your product.
Congratulations again on a very successful product. Call or email this office if

we may be of further assistance preparing financial statements or providing
additional advice.
Sincerely,
Ima Student
Best and Superior, Certified Public Accountants
LO4 BT: AN Difficulty: Moderate TOT: 35 min. AACSB: Communication AICPA PC: Communication IMA:
CT 9-5 ETHICS CASE
(a) At best, if you disclose the errors in your calculations, you will be
embarrassed. At worst, you will be dismissed without a recommendation
for another job.
(b) The president will continue making presentations using data that are
grossly overstated. In time, your error may be detected when the events
you projected do not materialize.
(c) The most ethical scenario would be to admit your error, let the president
know about the error, provide the president with corrected projections,
and allow the president to decide how to alter his presentations during
the second week of his speech-making.
LO N/A BT: E Difficulty: Easy TOT: 20 min. AACSB: Ethics AICPA PC: Professional Demeanor,
Communication IMA: Business Applications
CT 9-6 ALL ABOUT YOU
Personal Budget
Typical Month
Income:
Wages earned.................................................... $2,500
Interest income................................................. 50
Income subtotal............................................................ 2,550
Income tax withheld..................................................... 300
Spendable income............................................ $2,250
Expenses:
Rent............................................................................... 500
Utilities
Electricity........................................................... 85
Telephone and Internet.................................... 125
Food:
Groceries........................................................... 100
Eating out.......................................................... 150
Insurance...................................................................... 100
Transportation.............................................................. 150
Student loan payments................................................ 375
Entertainment............................................................... 250
Savings......................................................................... 50
Miscellaneous............................................................... 210
Total investments and expenses............... 2,095
Surplus/Shortage......................................................... $ 155
LO N/A BT: E Difficulty: Easy TOT: 20 min. AACSB: Technology, Analytic AICPA FC: Reporting IMA: Budget
Preparation
CT 9-7 CONSIDERING YOUR COSTS AND BENEFITS
We are concerned that the personal budgets presented on websites and in

financial planning textbooks often list student loans among the sources of
income. This type of thinking can lead to an overreliance on debt during
college, and will result in accumulation of large amounts of debt that must
be repaid. We would prefer a format that lists nondebt sources of income,
then subtracts expenses, then shows debt borrowed. This format emphasizes
an important point: Just like a business, in the short run you can borrow
money when your cash inflows are not sufficient to meet your outflows, but in
the long run you need to learn to live within your income, and your budget.
LO N/A BT: E Difficulty: Easy TOT: 15 min. AACSB: Technology, Communication AICPA PC: Communication
IMA: Reporting

CH 09

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CH 09

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CHAPTER 9

ASSIGNMENT CLASSIFICATION TABLE

1. State the essentials of effective 1, 2, 3, 4, 5, 1 1 1

2. Prepare budgets for sales, 11, 12, 13 2, 3, 4, 2 2, 3, 4, 5, 6, 1A, 2A, 3A

4. Prepare a cash budget and a 19, 20 9 4 14, 15, 16, 4A, 6A

5. Apply budgeting principles to 21, 22 10 5 19, 20, 21 5A

Problem Difficulty Time

1A Prepare budgeted income statement and supporting Simple 30–40

2A Prepare sales, production, direct materials, direct labor, Simple 40–50

4A Prepare cash budget for two months. Moderate 30–40

5A Prepare purchases and income statement budgets for a Simple 30–40

6A Prepare budgeted cost of goods sold, income statement, Complex 40–50

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

2. The primary benefits of budgeting are:

20. Cash collections are:

BRIEF EXERCISE 9-1

Direct Direct Manufacturing

BRIEF EXERCISE 9-3

Units to be produced........................................................ 4,000

BRIEF EXERCISE 9-5

BRIEF EXERCISE 9-7

BRIEF EXERCISE 9-8

BRIEF EXERCISE 9-9

BRIEF EXERCISE 9-10

Expected unit 200,000a 250,000b 250,000b 300,000c 1,000,000

Expected unit sales 200,000 250,000 250,000 300,000

Units to be produced 212,500 250,000 262,500 285,000

(a) Total unit cost:

(b) PARGO COMPANY

Sales (1,000,000) units from sales budget, DO IT! 9-2....... $41,500,000

Beginning cash balance.............................................................. $ 25,000

To maintain the desired minimum cash balance of $25,000, Batista Com-

Quarter 1 Quarter 2 Six Months

THOME AND CREDE, CPAs

Quarter 1 Quarter 2 Quarter 3 Quarter 4

January February March

*20% of next month’s production needs.

(a) HARDIN COMPANY

(a) FUQUA COMPANY

(b) FUQUA COMPANY

*(12,200 X 4) X 40% **(10,400 X 4) X 40%

Jan Feb Mar Total

Jan Feb Mar Total

Direct labor hours 15,000* 18,000 21,000 24,000 78,000

Budgeted sales in units 20,000 22,000

Variable expenses (1)

Cost of one unit of finished goods:

Cost of goods sold = 30,000 units X $65 = $1,950,000.

Sales (30,000 X $85)............................................................. $2,550,000

*Jan: $21,000 - $1,500 depreciation Feb: $25,000 - $1,500 depreciation

Beginning cash balance............................................................. $ 30,000

(a) TRENSHAW COMPANY

Beginning cash balance............................. $45,000

Less: Cash disbursements

Cash disbursements of $117,000 plus the desired ending cash balance

(b) An advantage of cash budgeting is that it allows cash shortfalls to be

(a) NIETO COMPANY

(b) NIETO COMPANY

January February March Quarter

(b) (1) Accounts receivable at March 31, 2020: ($120,000 X 10%) +

(2) Accounts payable at March 31, 2020: ($18,000 X 40%) = $7,200

PLETCHER DENTAL CLINIC

1st Quarter 2nd Quarter