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The budget committee has assembled the

following data. As the business manager, you must prepare the budgeted
income statements for May and June 2008.
Sales budget information: Sales in April were $42,100. You forecast
that monthly sales will increase by 2% each month 2.0%. Cash are collected in the month of sale fully
Inventory, purchases, and cost of goods sold budget information:
Company maintains inventory of $9,000 plus 25% of the sales revenue
budgeted for the following month. Monthly purchases average 50%
of sales revenue in that same month. Actual inventory on April 30 is
$14,000. Sales budgeted for July are $42,500. Cash ending balance in April is $10,000
Operating expense budget information:
a. Monthly salaries amount to $4,000. Sales commissions equal 3%
of sales for that month. Combine salaries and commissions into a
single figure.
b. Other monthly expenses are:
Rent expense $3,000 paid as incurred
Depreciation expense $600
Insurance expense $200 expiration of prepaid amount

Requirements
1. Prepare a cash budget for May and June
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Company manufactures embroidered jackets. The company prepares flexible
budgets and uses a standard cost system to control manufacturing
costs. The standard unit cost of a jacket is based on static budget volume
of 14,000 jackets per month:

Direct materials (3.0 sq. ft @ $4.00 per sq. ft) $12.00

Direct labor (2 hours @ $9.40 per hour) 18.8
Manufacturing overhead: $1.30
Variable (2 hours @ $0.65 per hour) 4.4
Fixed (2 hours @ $2.20 per hour) 5.7
Total cost per jacket $36.50

Actual cost and production information:

a. Actual production was 13,600 jackets.
b. Actual direct materials usage was 2.8 square feet per jacket, at an
actual price of $4.10 per square foot.
c. Actual direct labor usage of 25,000 hours at a total cost of
$237,500.00
d. Total actual overhead cost was $79,000.

Requirements
1. Compute the price and efficiency variances for direct materials and
direct labor.
2. For manufacturing overhead, compute the total variance, the flexible
budget variance, and the production volume variance. (Hint:
Remember that the fixed overhead in the flexible budget equals the
fixed overhead in the static budget.
3. Management intentionally purchased superior materials for
November production. How did this decision affect the cost variances?
Overall, was the decision wise?
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Company develops software for Internet applications. The market is
very competitive. Company offers a wide variety of different software—
from simple programs that enable new users to create personal Web
pages (called Personal-Page), to complex commercial search engines
(called Hi-Secure). The company’s managers know they need accurate
product-cost data. They have developed the following information to
determine if an activity-based costing system would be beneficial.

Requirements
1. Compute the cost allocation rate for each activity.

2. Use the activity-based cost allocation rates to compute the activity

costs per unit of Personal-Page and Hi-Secure. (Hint: First compute
the total activity costs allocated to each product line, and then compute
the cost per unit.)
3.Company’s original single-allocation-base costing system allocated
indirect costs to products at $50 per programmer hour. Personal-
Page requires 10,000 programmer hours; Hi-Secure requires
15,000 programmer hours. Compute the total indirect costs
allocated to Personal-Page and Hi-Secure under the original
system. Then compute the indirect cost per unit for each product.
4. Compare the activity-based costs per unit to the costs from the
single-allocation-base system. How have the unit costs changed?
Explain why the costs changed as they did.
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Suppose a company is deciding whether to purchase new software. The payback

period for the $30,000 software package is 4 years, and the software’s
expected life is 6 years. What are the expected annual net cash savings from the
new software?
a. $5,000
b. $130
c. $200
d. $7,500

In computing the net present value of the Snow Park Lodge expansion, managers
would consider all of the following except:
a. Predicted net cash inflows over the life of the expansion
b. The cost of the expansion
c. Depreciation on the assets built in the expansion
d. The company’s required rate of return on investments

Suppose Prentice Hall is considering investing in warehouse-management software

that costs $500,000 and should lead to cost savings of $120,000 a year
for its 5-year life. If Prentice Hall has a 12% required rate of return, what is the
net present value of the software investment?
a. ($67,400)
b. ($88,040)
c. $411,960
d. $432,600

Which of the following is the most reliable method for making capital budgeting
decisions?
a. Incremental method
b. Accounting rate of return method
c. Payback method
d. Net present value method
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Rye Financial Services provides banks access to sophisticated financial information
and analysis systems over the Web. The company combines these tools with
access to benchmarking data, including e-mail and wireless communications, so that
banks can instantly evaluate individual loan applications and entire loan portfolios.
Rye Financial Services’ CEO Jon Wise is happy with the company’s growth. To better
focus on client service, Wise is considering outsourcing some functions. CFO Jenny
Lee suggests that the company’s e-mail may be the place to start. She recently attended a
conference and learned that many companies were outsourcing their e-mail function.
Wise asks Lee to identify costs related to Rye Financial Services’ in-house Microsoft
Exchange e-mail application, which has 2,300 mailboxes. This information follows:

Variable costs:
E-mail license $ 7 per mailbox per month
Virus protection license $ 1 per mailbox per month
Other variable costs $ 4 per mailbox per month

Fixed costs:
Computer hardware costs $ 94,300 per month
monthly salary for two information technology $ 8,050 per month
staff members who work only on e-mail $ 16,100 per month

Requirements
1. Compute the total cost per mailbox per month of Rye Financial Services’ current
e-mail function.
2. Suppose Mail.com, a leading provider of Internet-messaging outsourcing services,
offers to host Rye Financial Services’ e-mail function for $9 per mailbox
per month. If Rye Financial Services outsources its e-mail to Mail.com, Rye
Financial Services will still need the virus protection license, its computer hardware,
and one information technology staff member, who would be responsible
for maintaining virus protection, quarantining suspicious e-mail, and managing
content (e.g., screening e-mail for objectionable content). Should CEO Wise
accept Mail.com’s offer?
3. Suppose for an additional $5 per mailbox per month, Mail.com also will provide
virus protection, quarantine, and content-management services. Outsourcing
these additional functions would mean that Rye Financial Services
would not need either an e-mail information technology staff member or the
separate virus protection license. Should CEO Wise outsource these additional
services to Mail.com?