Chapter 9 Solutions

Chapter 9
Budgeting
Solution to Discussion Case
Some amount of slack may be desirable when the operating environment is

uncertain making it difficult to create accurate budgets. For example this
might be the case when a company is in a highly competitive environment
where key competitors change product prices or features rapidly. This
would make it difficult to budget with a high degree of accuracy what rev-
enues will be. If so, managers might be permitted to budget conservatively
(i.e., create some slack) to avoid setting budgets that would be difficult to
attain and thus not very motivating. In such environments having some
slack in the budget may also prevent managers from becoming tempted to
manipulate accounting reports in an effort to meet budget or from taking
actions in the short-run to meet unrealistic budgets that could have longer-
term negative consequences (e.g., reducing advertising spending to meet
profit targets).
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Solutions Manual, Chapter 9 1
Solutions to Questions
9-1 An example would be when the sales sources of revenues and other inflows (e.g., do-
budget reflects a significant increase over the nations) necessary to meet the costs.
prior year’s actual amount because of planned
product enhancements. In this case, the product 9-8 A participative budget is one in which
managers would need to work closely with the persons with responsibility over cost control
production department to ensure the enhance- prepare their own budgets. This is in contrast to
ments can be implemented on a timely basis a budget that is imposed from above. The major
and with the marketing managers to ensure advantages of a participative budget are: (1)
plans are in place to appropriately promote the Individuals at all levels of the organization are
enhanced product. recognized as members of the team whose
views and judgments are valued. (2) Budget
9-2 A bottleneck is a machine, activity or estimates prepared by front-line managers are
process that limits total output because it is op- often more accurate and reliable than estimates
erating at capacity. prepared by top managers who have less inti-
mate knowledge of markets and day-to-day op-
9-3 Responsibility accounting is a system in erations. (3) Motivation is generally higher when
which a manager is held responsible for those individuals participate in setting their own goals
items of revenues and costs—and only those than when the goals are imposed from above.
items—that the manager can control to a signifi- Participative budgets create commitment. (4) A
cant extent. Each line item in the budget is manager who is not able to meet a budget that
made the responsibility of a manager who is has been imposed from above can always say
then held responsible for differences between that the budget was unrealistic and impossible
budgeted and actual results. to meet. With a self-imposed budget, this ex-
cuse is not available.
9-4 Benchmarking is the comparison of rev- Participative budgets do carry with them
enue, cost or process performance to high per- the risk of budgetary slack. The budgets pre-
forming competitors in the same industry, to pared by lower-level managers should be care-
best-in-class companies, or to other successful fully reviewed to prevent too much slack.
business units in the same company.
9-9 Budget slack is the difference between
9-5 The level of sales impacts virtually every the revenues and expenses a manager believes
other aspect of the firm’s activities. It deter- can be achieved and the amounts included in
mines the production budget, cash collections, the budget. Managers create slack in an attempt
cash disbursements, and selling and administra- to increase the likelihood of receiving bonuses
tive budget that in turn determine the cash contingent upon meeting or beating budget.
budget and budgeted income statement and They may also create slack so that they do not
balance sheet. have to work as hard to attain their budget.
9-6 A budget committee is a group of key 9-10 A stretch budget is one that is highly
personnel responsible for policy matters related difficult to achieve. A challenging but attainable
to the budget program, coordination of the budget is one that attained by exerting a rea-
budget preparation, handling budget-related sonable effort.
disputes and approval of the final budget. Com-
panies use a budget committee to make the en- 9-11 The sales budget is a detailed schedule
tire process more efficient and effective. which indicates expected sales (in dollars or
units) for the budget period. It is so important
9-7 Budgeting at a not-for-profit organiza- because all other parts of the master budget are
tion typically starts with determining what it will dependent on the sales estimates (see Exhibit 9-
cost to deliver the planned programs and activi- 2).
ties. Having estimated the budgeted costs of the
planned activities, managers then budget the
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2 Managerial Accounting, 11th Canadian Edition
9-12 For a merchandising company (such as
Target or Sport Chek) the merchandise purchas-
es budget replaces the production budget.
9-13 Activity-based budgeting can help identi-

fy the need for additional production capacity
and it can lead to more accurate budgets.
9-14 An unfavourable flexible budget variance

for direct labour could be caused by several fac-
tors including: (a) actual labour rates (salaries or
hourly wages) that were higher than budgeted
(i.e., a labour rate variance); (b) actual labour
inputs per unit of output that were higher than
budgeted (i.e., a labour efficiency variance); or
(c) greater use of more skilled and more expen-
sive workers than budgeted (i.e., a labour mix
variance).
9-15 The sales volume variance is the differ-

ence between the flexible and static budget
amounts for all revenues and expenses.
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Foundational Exercises
1. The budgeted sales for July are computed as follows:
Unit sales (a) ............................. 10,000
Selling price per unit (b) ............. $70
Total sales (a) × (b) ................... $700,000
2. The expected cash collections for July are computed as follows:

July
June sales:
$588,000 × 60% ................... $352,800
July sales:
$700,000 × 40% ................... 280,000
Total cash collections ................ $632,800
3. The accounts receivable balance at the end of July is:

July sales (a) ............................. $700,000
Percent uncollected (b) ............... 60%
Accounts receivable (a) × (b)...... $420,000
4. The required production for July is computed as follows:

July
Budgeted sales in units .................. 10,000
Add desired ending inventory* ....... 2,400
Total needs ................................... 12,400
Less beginning inventory** ............ 2,000
Required production ...................... 10,400
*August sales of 12,000 units × 20% = 2,400 units.

**July sales of 10,000 units × 20% = 2,000 units.

Foundational Exercises (continued)
5. The raw material purchases for July are computed as follows:
July
Required production in units of finished goods ................. 10,400
Units of raw materials needed per unit of finished goods .. 5
Units of raw materials needed to meet production ............ 52,000
Add desired units of ending raw materials inventory* ....... 6,100
Total units of raw materials needed ................................. 58,100
Less units of beginning raw materials inventory** ............ 5,200
Units of raw materials to be purchased ............................ 52,900
*61,000 pounds × 10% = 6,100 pounds.
**52,000 pounds × 10% = 5,200 pounds.
6. The cost of raw material purchases for July is computed as follows:

Units of raw materials to be purchased (a)......... 52,900
Unit cost of raw materials (b) ............................ $2.00
Cost of raw materials to be purchased (a) × (b) . $105,800
7. The estimated cash disbursements for materials purchases in July is

computed as follows:
July
June purchases:
$88,880 × 70% ...................... $62,216
July purchases:
$105,800 × 30% .................... 31,740
Total cash disbursements ........... $93,956
8. The accounts payable balance at the end of July is:

July purchases (a) ...................... $105,800
Percent unpaid (b) ..................... 70%
Accounts payable (a) × (b) ......... $74,060

9. The estimated raw materials inventory balance at the end of July is

Ending raw materials inventory (pounds) (a) ...... 6,100
Cost per pound (b) ........................................... $2.00
Raw material inventory balance (a) × (b) .......... $12,200
10. The estimated direct labor cost for July is computed as follows:
July
Required production in units .............. 10,400
Direct labor hours per unit ................. × 2.0
Total direct labor-hours needed (a)..... 20,800
Direct labor cost per hour (b) ............. $15
Total direct labor cost (a) × (b) .......... $312,000
11. The estimated unit product cost is computed as follows:
Quantity Cost Total

Direct materials ....................... 5 pounds $2 per pound $10.00
Direct labor ............................. 2 hours $15 per hour 30.00
Manufacturing overhead .......... 2 hours $10 per hour 20.00
Unit product cost ..................... $60.00
12. The estimated finished goods inventory balance at the end of July is
Ending finished goods inventory in units (a) ....... 2,400
Unit product cost (b) ........................................ $60.00
Ending finished goods inventory (a) × (b).......... $144,000

13. The estimated cost of goods sold for July is computed as follows:
Unit sales (a) ................................................... 10,000
Unit product cost (b) ........................................ $60.00
Estimated cost of goods sold (a) × (b) .............. $600,000
The estimated gross margin for July is computed as follows:
Total sales (a) .................................................. $700,000
Cost of goods sold (b) ...................................... 600,000
Estimated gross margin (a) – (b)....................... $100,000
14. The estimated selling and administrative expense for July is computed
as follows:
July
Budgeted unit sales ................................... 10,000
Variable selling and administrative..............
expense per unit..................................... × $1.80
Total variable expense ............................... $18,000
Fixed selling and administrative expenses ... 60,000
Total selling and administrative expenses ... $78,000
15. The estimated operating income for July is computed as follows:

Gross margin (a) .............................................. $100,000
Selling and administrative expenses (b) ............. 78,000
Operating income (a) – (b) ............................... $ 22,000

Exercise 9-1 (20 minutes)
1. April May June Total
February sales:
$230,000 × 10% ....... $ 23,000 $ 23,000
March sales: $260,000
× 70%, 10% ............. 182,000 $ 26,000 208,000
April sales: $300,000 ×
20%, 70%, 10% ....... 60,000 210,000 $ 30,000 300,000
May sales: $500,000 ×
20%, 70% ................ 100,000 350,000 450,000
June sales: $200,000 ×
20% ......................... 40,000 40,000
Total cash collections .... $265,000 $336,000 $420,000 $1,021,000
Notice that even though sales peak in May, cash collections peak in
June. This occurs because the bulk of the company’s customers pay in
the month following sale. The lag in collections that this creates is even
more pronounced in some companies. Indeed, it is not unusual for a
company to have the least cash available in the months when sales are
greatest.
2. Accounts receivable at June 30:

From May sales: $500,000 × 10% ........................ $ 50,000
From June sales: $200,000 × (70% + 10%) ......... 160,000
Total accounts receivable at June 30 ..................... $210,000

1. Graber Corporation
Sales Budget
1st Quar- 2nd 3rd Quar- 4th Quar-
ter Quarter ter ter Year
Budgeted unit sales ............... 16,000 15,000 14,000 15,000 60,000
Selling price per unit.............. × $22.00 × $22.00 × $22.00 × $22.00 × $22.00
Total sales ............................ $352,000 $330,000 $308,000 $330,000 $1,320,000
Schedule of Expected Cash Collections

Accounts receivable, begin-
ning balance....................... $ 66,000 $ 66,000
1 Quarter sales ....................
st
264,000 $ 70,400 334,400
2nd Quarter sales ................... 247,500 $ 66,000 313,500
3rd Quarter sales ................... 231,000 $ 61,600 292,600
4th Quarter sales.................... 247,500 247,500
Total cash collections............. $330,000 $317,900 $297,000 $309,100 $1,254,000

Exercise 9-2 (continued)
2. Graber Corporation
Production Budget
1st Quar- 2nd Quar- 3rd Quar- 4th Quar-
ter ter ter ter Year
Budgeted unit sales ............... 16,000 15,000 14,000 15,000 60,000
Add desired ending inventory . 3,000 2,800 3,000 3,400 3,400
Total units needed ................ 19,000 17,800 17,000 18,400 63,400
Less beginning inventory ....... 3,200 3,000 2,800 3,000 3,200
Required production .............. 15,800 14,800 14,200 15,400 60,200

Quarter—Year 2 Year 3
First Second Third Fourth First
Required production of calculators ........... 60,000 90,000 150,000 100,000 80,000
Number of chips per calculator ................ × 3 × 3 × 3 × 3 × 3
Total production needs—chips ................. 180,000 270,000 450,000 300,000 240,000
Year 2
First Second Third Fourth Year
Production needs—chips.......................... 180,000 270,000 450,000 300,000 1,200,000
Add desired ending inventory—chips ........ 54,000 90,000 60,000 48,000 48,000
Total needs—chips .................................. 234,000 360,000 510,000 348,000 1,248,000
Less beginning inventory—chips .............. 36,000 54,000 90,000 60,000 36,000
Required purchases—chips ...................... 198,000 306,000 420,000 288,000 1,212,000
Cost of purchases at $3 per chip .............. $594,000 $918,000 $1,260,000 $864,000 $3,636,000

1. Assuming that the direct labour workforce is adjusted each quarter, the direct labour budget would be:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Units to be produced ................... 10,000 8,800 9,000 9,800 37,600
Direct labour time per unit (hours) ×0.50 ×0.50 ×0.50 ×0.50 ×0.50
Total direct labour hours needed .. 5,000 4,400 4,500 4,900 18,800
Direct labour cost per hour .......... ×$15.00 ×$15.00 ×$15.00 ×$15.00 ×$15.00
Total direct labour cost ................ $75,000 $66,000 $67,500 $73,500 $282,000
2. Assuming that the direct labour workforce is not adjusted each quarter and that overtime wages are
paid, the direct labour budget would be:
1st 2nd 3rd 4th
Direct labour time per unit (hours) ×0.50 ×0.50 ×0.50 ×0.50 ×0.50
Total direct labour hours needed .. 5,000 4,400 4,500 4,900 18,800
Regular hours paid ...................... 4,500 4,500 4,500 4,500 18,000
Overtime hours paid .................... 500 0 0 400 900
Wages for regular hours
(@ $15.00 per hour) ................. $67,500 $67,500 $67,500 $67,500 $270,000
Overtime wages (@ $15.00 per
hour × 1.5 hours) ..................... 11,250 0 0 9,000 20,250

1. Yuvwell Corporation
Manufacturing Overhead Budget
1st 2nd 3rd 4th
Budgeted direct labor-hours ................................ 8,000 8,200 8,500 7,800 32,500
Variable manufacturing overhead rate ................. × $3.25 × $3.25 × $3.25 × $3.25 × $3.25
Variable manufacturing overhead ........................ $26,000 $26,650 $27,625 $25,350 $105,625
Fixed manufacturing overhead ............................ 48,000 48,000 48,000 48,000 192,000
Total manufacturing overhead ............................ 74,000 74,650 75,625 73,350 297,625
Less depreciation ............................................... 16,000 16,000 16,000 16,000 64,000
Cash disbursements for manufacturing overhead . $58,000 $58,650 $59,625 $57,350 $233,625
2. Total budgeted manufacturing overhead for the year (a) ... $297,625
Budgeted direct labor-hours for the year (b) ..................... 32,500
Predetermined overhead rate for the year (a) ÷ (b) .......... $9.16

Weller Company
Selling and Administrative Expense Budget
1st 2nd 3rd 4th
Budgeted unit sales ........................................... 15,000 16,000 14,000 13,000 58,000
Variable selling and administrative expense per
unit ................................................................ × $2.50 × $2.50 × $2.50 × $2.50 × $2.50
Variable selling and administrative expense ......... $ 37,500 $ 40,000 $ 35,000 $ 32,500 $145,000
Fixed selling and administrative expenses:
Advertising...................................................... 8,000 8,000 8,000 8,000 32,000
Executive salaries ............................................ 35,000 35,000 35,000 35,000 140,000
Insurance ....................................................... 5,000 5,000 10,000
Property taxes................................................. 8,000 8,000
Depreciation ................................................... 20,000 20,000 20,000 20,000 80,000
Total fixed selling and administrative expenses .... 68,000 71,000 68,000 63,000 270,000
Total selling and administrative expenses ............ 105,500 111,000 103,000 95,500 415,000
Less depreciation ............................................... 20,000 20,000 20,000 20,000 80,000
Cash disbursements for selling and administra-
tive expenses .................................................. $ 85,500 $ 91,000 $ 83,000 $ 75,500 $335,000

Quarter (000 omitted)

1 2 3 4 Year
Cash balance, beginning .......... $ 6 * $ 5 $ 5 $ 5 $ 6
Add collections from customers 65 70 96 * 92 323 *
Total cash available .................. 71 * 75 101 97 329
Less disbursements:
Purchase of inventory ............ 35 * 45 * 48 35 * 163
Operating expenses ............... 28 30 * 30 * 25 113 *
Equipment purchases ............ 8 * 8 * 10 * 10 36 *
Dividends ............................. 2 * 2 * 2 * 2 * 8
Total disbursements ................. 73 85 * 90 72 320
Excess (deficiency) of cash
available over disbursements . (2)* (10) 11 * 25 9
Financing:
Borrowings ........................... 7 15 * 0 0 22
Repayments ......................... 0 0 (6) (16)* (22)
Total financing ......................... 7 15 (6) (16) 0
Cash balance, ending ............... $5 $ 5 $ 5 $ 9 $ 9
*Given.

Auto Lavage Inc.

Flexible Budget
For the Month Ended October 31
Budgeted
Amount
Per Unit Cars Washed
(per car) 8,000 9,000
Sales $5.90 $47,200 $53,100
Variable expenses:
Cleaning supplies ......................... 0.70 5,600 6,300
Electricity .................................... 0.10 800 900
Maintenance ................................ 0.30 2,400 2,700
Wages and salaries ...................... 0.40 3,200 3,600
Administrative .............................. 0.05 400 450
Total variable expenses ................... 1.55 12,400 13,950
Contribution margin…………………. $4.35 34,800 39,150
Fixed expenses:
Electricity ..................................... 1,400 1,400
Wages and salaries ...................... 4,700 4,700
Depreciation...................... .......... 8,300 8,300
Rent............................. 2,100 2,100
Administrative...................... 1,800 1,800
Total fixed expenses ....................... 18,300 18,300
Operating income ........................... $16,500 $20,850

1.
Auto Lavage Inc.
Flexible Budget Performance Report
For the Month Ended October 31
Actual number of cars .................. 8,100
Cost
Formula Flexible
(per Flexible Budget
car) Actual Budget Variance
Sales $5.90 $49,300 $47,790 $1,510 F
Variable expenses:
Cleaning supplies ......................... 0.70 6,075 5,670 (405) U
Electricity ................................ 0.10 891 810 (81) U
Maintenance ................................ 0.30 2,187 2,430 243 F
Wages and supplies ...................... 0.40 3,402 3,240 (162) U
Administrative ..............................0.05 486 405 (81) U
Total variable expenses ................... 1.55 13,041 12,555 (486) U
Contribution margin ........................

4.35 36,259 35,235 1,024 F
Fixed expenses:
Electricity ................................ 1,450 1,400 (50) U
Wages and salaries ...................... 4,700 4,700 0
Depreciation ................................ 8,300 8,300 0
Rent ............................................ 2,100 2,100 0
Administrative .............................. 1,745 1,800 55 F
Total fixed expenses ....................... 18,295 18,300 5 F
Operating income ........................... $17,964 $16,935 $1,029 F
Students may question the variances for fixed costs. Electricity expenses
may have increased because of unforeseen rate increases and administra-
tive expenses may have decreased for reasons such as price decreases of-
fered by service providers (e.g., internet services) because of increased
competition.

Exercise 9-9 Part 2.
Actual Flexible Flexible Sales Static

(8,100 Budget Budget Volume Budget
cars) Variance (8,100 cars) Variance (8,000 cars)
Sales $49,300 $1,510 F $47,790 $590 F $47,200
Variable expenses:
Cleaning supplies 6,075 405 U 5,670 70 U 5,600
Electricity 891 81 U 810 10 U 800
Maintenance 2,187 (243) F 2,430 30 U 2,400
Wages and supplies 3,402 162 U 3,240 40 U 3,200
Administrative 486 81 U 405 5U 400
Total variable expenses 13,041 486 U 12,555 155 U 12,400
Contribution margin 36,259 1,024 F 35,235 435 F 34,800
Fixed expenses:
Electricity 1,450 50 U 1,400 0 1,400
Wages and salaries 4,700 0 4,700 0 4,700
Depreciation 8,300 0 8,300 0 8,300
Rent 2,100 0 2,100 0 2,100
Administrative 1,745 (55) F 1,800 0 1,800
Total fixed expenses 18,295 (5) F 18,300 0 18,300
Operating income $17,964 $1,029 F $16,935 $435 F $16,500
Total static-budget variance: $1,464 F

Air Assurance Corporation
Comprehensive
Performance Report
For the Month Ended March 31
Flexible Sales Vol-
Budget Flexible ume Static
Actual Variance Budget Variance Budget
Jobs ..................................................... 98 98 100
Revenue ............................................... $24,750 ($2,200) U $26,950 (550) U $27,500
Variable Expenses:
Mobile lab operating expenses ............ 2,744 (98) F 2,842 58 F 2,900
Office expenses.................................. 294 0 294 6 F 300
Miscellaneous expenses ...................... 196 0 196 4 F 200
Total variable expenses ...................... 3,234 (98) F 3,332 68 F 3,400
Contribution margin 21,516 (2,102) U 23,618 (482) U 24,100
Less fixed expenses:
Technician wages ............................ 8,450 (150) F 8,600 0 8,600
Mobile lab operating expenses .......... 5,216 316 U 4,900 0 4,900
Office expenses................................ 2,556 (144) F 2,700 0 2,700
Advertising expenses ........................ 1,650 70 U 1,580 0 1,580
Insurance ....................................... 2,870 0 2,870 0 2,870
Miscellaneous................................... 269 (691) F 960 0 960
Total fixed expenses ......................... 21,011 (599) F 21,610 0 21,610
Operating income ................................. $ 505 ($1,503) U $ 2,008 ($482) U $ 2,490

Problem 9-11 (60 minutes)
1. The sales budget for the third quarter:
July Aug. Sept. Quarter
Budgeted sales (pairs) ..... 6,000 7,000 5,000 18,000
Selling price per pair ........ × $50 × $50 × $50 × $50
Total budgeted sales ........ $300,000 $350,000 $250,000 $900,000
The schedule of expected cash collections from sales:

Accounts receivable, be-
ginning balance ............ $130,000 $130,000
July sales:
$300,000 × 40%, 50% . 120,000 $150,000 270,000
August sales:
$350,000 × 40%, 50% . 140,000 $175,000 315,000
September sales:
$250,000 × 40% .......... 100,000 100,000
Total cash collections ....... $250,000 $290,000 $275,000 $815,000
2. The production budget for July through October:

July Aug. Sept. Oct.
Budgeted sales (pairs) ...................... 6,000 7,000 5,000 4,000
Add desired ending inventory ............ 700 500 400 300
Total needs ...................................... 6,700 7,500 5,400 4,300
Less beginning inventory................... 600 700 500 400
Required production (pairs) ............... 6,100 6,800 4,900 3,900

Problem 9-11 (continued)
3. The direct materials budget for the third quarter:
Required production—pairs
(above) ............................ 6,100 6,800 4,900 17,800
Raw materials needs per
pair (lbs.) ......................... ×2 ×2 ×2 ×2
Production needs (lbs.) ........ 12,200 13,600 9,800 35,600
Add desired ending invento-
ry..................................... 2,720 1,960 1,560 * 1,560
Total needs ......................... 14,920 15,560 11,360 37,160
Less beginning inventory 2,440 2,720 1,960 2,440
Raw materials to be pur-
chased ............................. 12,480 12,840 9,400 34,720
Cost of raw materials to be
purchased at $2.50 per lb.. $31,200 $32,100 $23,500 $86,800
*3,900 pairs (October) × 2 lbs. per pair= 7,800 lbs.;

7,800 lbs. × 20% = 1,560 lbs.
The schedule of expected cash disbursements:

Accounts payable, beginning
balance ................................ $11,400 $11,400
July purchases:
$31,200 × 60%, 40% ........... 18,720 $12,480 31,200
August purchases:
$32,100 × 60%, 40% ........... 19,260 $12,840 32,100
September purchases:
$23,500 × 60% .................... 14,100 14,100
Total cash disbursements ......... $30,120 $31,740 $26,940 $88,800

1. December cash sales .................................. $ 83,000

Collections on account:
October sales: $400,000 × 18% ............... 72,000
November sales: $525,000 × 60%............ 315,000
December sales: $600,000 × 20% ............ 120,000
Total cash collections ............................... $590,000
2. Payments to suppliers:
November purchases (accounts payable) ... $161,000
December purchases: $280,000 × 30% .... 84,000
Total cash payments ................................ $245,000
3. Ashton Company
Cash Budget
For the Month of December
Beginning cash balance ................................... $ 40,000
Add collections from customers ........................ 590,000
Total cash available.......................................... 630,000
Less cash disbursements:
Payments to suppliers for inventory ............... $245,000
Selling and administrative expenses* ............. 380,000
New web server ............................................ 76,000
Dividends paid .............................................. 9,000
Total cash disbursements ................................. 710,000
Excess (deficiency) of cash available over
disbursements .............................................. (80,000)
Financing:
Borrowings ................................................... 100,000
Repayments ................................................. 0
Interest ........................................................ 0
Total financing ................................................. 100,000
Ending cash balance ........................................ $ 20,000
*$430,000 – $50,000 = $380,000.

1. The budget at Springfield is an imposed “top-down” budget that fails to
consider both the need for realistic data and the human interaction es-
sential to an effective budgeting/control process. The President has not
given any basis for his goals, so one cannot know whether they are real-
istic for the company. True participation of company employees in prep-
aration of the budget is minimal and limited to mechanical gathering
and manipulation of data. This suggests there will be little enthusiasm
for implementing the budget.
The sales by product line should be based on an accurate sales forecast
of the potential market. Therefore, the sales by product line should have
been developed first to derive the sales target rather than the reverse.
The initial meeting between the Vice President of Finance, Executive
Vice President, Marketing Manager, and Production Manager should have
been held earlier. This meeting was held too late in the budget process.
2. Springfield should consider adopting a “bottom-up” 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 that are realistic within the constraints under which the company
operates. Although time consuming, the approach should produce a
more acceptable, honest, and workable goal-control mechanism.
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, controllable and non-controllable, discre-
tionary and nondiscretionary. Flexible budgeting techniques could then
allow departments to identify costs that can be modified in the planning
process.

3. 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. For
costs that 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:
a. control is exercised over the costs within their function.
b. budgeted costs were more than adequate for the originally targeted
sales, i.e., slack was present.
c. budgeted costs vary to some extent with changes in sales.
d. there are discretionary costs that can be delayed or omitted with no
serious effect on the department.
(Adapted unofficial CMA Solution)

1. Production budget:
July August September October
Budgeted sales (units) ........... 60,000 75,000 105,000 53,000
Add desired ending inventory . 23,000 29,000 18,600 14,000
Total needs ........................... 83,000 104,000 123,600 67,000
Less beginning inventory ....... 22,000 23,000 29,000 18,600
Required production .............. 61,000 81,000 94,600 48,400
Note: July E.I. = 8,000 units + 75,000 (next month’s sales) x 20%
October E.I. = 8,000 units + 30,000 (Nov. Sales) x 20%
2. During July and August the company is building inventories in anticipa-

tion of peak sales in September. Therefore, production exceeds sales
during these months. In September and October inventories are being
reduced in anticipation of a decrease in sales during the last months of
the year. Therefore, production is less than sales during these months
to cut back on inventory levels.
3. Direct materials budget:

Third
July August September Quarter
Required production (units) .. 61,000 81,000 94,600 236,600
Material D236 needed per
unit .................................. x 4 kgs. x 4 kgs. x 4 kgs. x 4 kgs.
Production needs (kgs.) ....... 244,000 324,000 378,400 946,400
ry (kgs.) ........................... 129,600 151,360 77,440 * 77,440
Total Material D236 needs .... 373,600 475,360 455,840 1,023,840
Less beginning inventory
(kgs.) ............................... 129,000 129,600 151,360 129,000
Material D236 purchases
(kgs.) ............................... 244,600 345,760 304,480 894,840
* 48,400 units (October production) × 4 kgs. per unit = 193,600
kgs.; 193,600 kgs. × 0.4 = 77,440 kgs.
As shown in part (1), production is greatest in September. However, as
shown in the raw material purchases budget, the purchases of materials
is greatest a month earlier because materials must be on hand to sup-
port the heavy production scheduled for September.

1. Zan Corporation
Direct Materials Budget
1st Quar- 2nd Quar- 3rd Quar- 4th Quar-
ter ter ter ter Year
Required production in units of fin-
ished goods ...................................... 5,000 8,000 7,000 6,000 26,000
Units of raw materials needed per unit
of finished goods .............................. ×8 ×8 ×8 ×8 ×8
Units of raw materials needed to meet
production........................................ 40,000 64,000 56,000 48,000 208,000
Add desired units of ending raw mate-
rials inventory................................... 16,000 14,000 12,000 8,000 8,000
Total units of raw materials needed...... 56,000 78,000 68,000 56,000 216,000
Less units of beginning raw materials
inventory.......................................... 6,000 16,000 14,000 12,000 6,000
Units of raw materials to be pur-
chased ............................................. 50,000 62,000 54,000 44,000 210,000
Unit cost of raw materials .................... × $1.20 × $1.20 × $1.20 × $1.20 × $1.20
purchased ........................................ $60,000 $74,400 $64,800 $52,800 $252,000

Schedule of Expected Cash Disbursements for Materials

Beginning accounts payable ......... $ 2,880 $ 2,880
1st Quarter purchases ................. 36,000 $24,000 60,000
2nd Quarter purchases ................ 44,640 $29,760 74,400
3rd Quarter purchases ................. 38,880 $25,920 64,800
4th Quarter purchases ................. 31,680 31,680
Total cash disbursements for ma-
terials ...................................... $38,880 $68,640 $68,640 $57,600 $233,760
2. Zan Corporation
Direct Labor Budget
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year
Required production in units ........ 5,000 8,000 7,000 6,000 26,000
Direct labor-hours per unit ........... × 0.20 × 0.20 × 0.20 × 0.20 × 0.20
Total direct labor-hours needed.... 1,000 1,600 1,400 1,200 5,200
Direct labor cost per hour ............ × $11.50 × $11.50 × $11.50 × $11.50 × $11.50
Total direct labor cost .................. $ 11,500 $ 18,400 $ 16,100 $ 13,800 $ 59,800

1. Culbert Dessert Corporation

Direct Labour Budget
1st 2nd 3rd 4th
Direct labour time per unit (hours) 0.30 0.30 0.30 0.30 0.30
Total direct labour-hours needed .. 2,400 3,300 2,700 3,900 12,300
Direct labour cost per hour .......... $10.50 $10.50 $10.50 $10.50 $10.50
2. Culbert Dessert Corporation

Manufacturing Overhead Budget
1st 2nd 3rd 4th
Budgeted direct labour-hours ....... 2,400 3,300 2,700 3,900 12,300
Variable overhead rate ................ $1.50 $1.50 $1.50 $1.50 $1.50
Variable manufacturing overhead . $ 3,600 $ 4,950 $ 4,050 $ 5,850 $18,450
Fixed manufacturing overhead ..... 23,000 23,000 23,000 23,000 92,000
Total manufacturing overhead ..... 26,600 27,950 27,050 28,850 110,450
Less depreciation ........................ 7,000 7,000 7,000 7,000 28,000
Cash disbursements for manufac-
turing overhead ........................ $19,600 $20,950 $20,050 $21,850 $82,450

1. Schedule of expected cash collections:
Month
July August September Quarter
From accounts receivable. $126,000 $126,000
From July sales:
30% × 200,000 ............ 60,000 60,000
70% × 200,000 ............ $140,000 140,000
From August sales:
30% × 220,000 ............ 66,000 66,000
70% × 220,000 ............ $154,000 154,000
From September sales:
30% × 210,000 ............ 63,000 63,000
2. a. Merchandise purchases budget:

July August Sept. Total
Budgeted cost of goods sold .... $130,000 $143,000 $136,500 $409,500
Add desired ending inventory* . 57,200 54,600 59,800 59,800
Total needs ............................. 187,200 197,600 196,300 469,300
Less beginning inventory ......... 52,000 57,200 54,600 52,000
Required purchases ................. $135,200 $140,400 $141,700 $417,300
*
At July 31: $143,000 × 40% = $57,200.
b. Schedule of cash disbursements for purchases:

July August Sept. Total
From accounts payable .......... $ 61,100 $ 61,100
For July purchases................. 67,600 $ 67,600 135,200
For August purchases ............ 70,200 $ 70,200 140,400
For September purchases ...... 70,850 70,850
Total cash disbursements ....... $128,700 $137,800 $141,050 $407,550

Solutions Manual, Chapter 9
3.
Colerain Corporation
Income Statement
For the Quarter Ended September 30
Sales ($200,000 + $220,000 + $210,000).. $630,000

Cost of goods sold (Part 2a) ..................... 409,500
Gross margin ............................................ 220,500
Selling and administrative expenses
($65,000 × 3 months) ........................... 195,000
Operating income ..................................... 25,500
Interest expense ...................................... 0
Net income .............................................. $ 25,500
4.
Colerain Corporation
Balance Sheet
September 30
Assets
Cash
($80,000 + $609,000 – $407,550 – ($60,000 × 3)) $101,450
Accounts receivable ($210,000 × 70%) ..................... 147,000
Inventory (Part 2a) ................................................... 59,800
Plant and equipment, net ($200,000 – ($5,000 ×3))... 185,000
Total assets .............................................................. $493,250
Liabilities and Shareholders’ Equity
Accounts payable ($141,700 × 50%) ......................... $ 70,850

Common shares (Given)............................................ 300,000
Retained earnings ($96,900 + $25,500) ..................... 122,400
Total liabilities and stockholders’ equity ...................... $493,250

1. Schedule of cash receipts:
Cash sales—May ................................................ $ 60,000
Collections on account receivable:
April 30 balance .............................................. 54,000
May sales (50% × $140,000) .......................... 70,000
Total cash receipts ............................................. $184,000
Schedule of cash payments for purchases:

April 30 accounts payable balance ...................... $ 63,000
May purchases (40% × $120,000) ..................... 48,000
Total cash payments .......................................... $111,000
Minden Company
Cash Budget
For the Month of May
Beginning cash balance ..................................... $ 9,000
Add collections from customers (above) .............. 184,000
Total cash available............................................ 193,000
Less cash disbursements:
Purchase of inventory (above) ......................... 111,000
Selling and administrative expenses ................. 72,000
Purchases of equipment .................................. 6,500
Total cash disbursements ................................... 189,500
Excess of cash available over disbursements ....... 3,500
Financing:
Borrowing—note ............................................. 20,000
Repayments—note .......................................... (14,500)
Interest .......................................................... (100)
Total financing ................................................... 5,400
Ending cash balance .......................................... $ 8,900

2.
Minden Company
Budgeted Income Statement
For the Month of May
Sales ....................................................... $200,000
Cost of goods sold:
Beginning inventory ............................... $ 30,000
Add purchases ....................................... 120,000
Goods available for sale .......................... 150,000
Ending inventory .................................... 40,000
Cost of goods sold .................................... 110,000
Gross margin............................................ 90,000
Selling and administrative expenses
($72,000 + $2,000) ............................... 74,000
Net operating income ............................... 16,000
Interest expense ...................................... 100
Net income .............................................. $ 15,900
3.
Minden Company
Budgeted Balance Sheet
May 31
Assets
Cash ......................................................................... $ 8,900
Accounts receivable (50% × $140,000) ...................... 70,000
Inventory .................................................................. 40,000
Buildings and equipment, net of depreciation
($207,000 + $6,500 – $2,000) ................................. 211,500
Total assets ............................................................... $330,400
Accounts payable (60% × 120,000)............................ $ 72,000
Note payable ............................................................. 20,000
Common stock .......................................................... 180,000
Retained earnings ($42,500 + $15,900) ...................... 58,400
Total liabilities and stockholders’ equity ....................... $330,400

1. The sales budget for the third quarter:
Budgeted sales (units) ..... 6,500 5,000 4,000 15,500
Selling price per unit ........ x $60 x $60 x $60 x $60
Total budgeted sales ........ $390,000 $300,000 $240,000 $930,000
The schedule of expected cash collections from sales:

Accounts receivable, be-
ginning balance ............ $160,000 $160,000
July sales:
$390,000 × 50%, 45% . 195,000 $175,500 370,500
August sales:
$300,000 × 50%, 45% . 150,000 $135,000 285,000
September sales:
$240,000 × 50% .......... 120,000 120,000
2. The production budget for July through October:

July Aug. Sept. Oct.
Budgeted sales (units) ...................... 6,500 5,000 4,000 3,000
Add desired ending inventory ............ 1,000 800 600 500
Total needs ...................................... 7,500 5,800 4,600 3,500
Less beginning inventory................... 1,300 1,000 800 600
Required production (units)............... 6,200 4,800 3,800 2,900

3. The direct materials purchases budget for the third quarter:
Required production—units
(above) ............................ 6,200 4,800 3,800 14,800
Raw materials needs per
unit .................................. x 3 kgs. x 3 kgs. x 3 kgs. x 3 kgs.
Production needs (kgs.) ....... 18,600 14,400 11,400 44,400
ry..................................... 2,880 2,280 1,740 * 1,740
Total needs ......................... 21,480 16,680 13,140 46,140
Less beginning inventory 3,720 2,880 2,280 3,720
Raw materials to be pur-
chased ............................. 17,760 13,800 10,860 42,420
purchased at $3.50 per
kg. ................................... $62,160 $48,300 $38,010 $148,470
*2,900 units (October) × 3 kgs. per unit = 8,700 kgs.;
8,700 kgs. × 20% = 1,740 kgs.
The schedule of expected cash disbursements:

Accounts payable, beginning
balance ................................ $11,400 $11,400
July purchases:
$62,160 × 70%, 30% ........... 43,512 $18,648 62,160
August purchases:
$48,300 × 70%, 30% ........... 33,810 $14,490 48,300
September purchases:
$38,010 × 70% .................... 26,607 26,607

1.
Schedule of Expected Cash Collections
April May June Quarter
Cash sales .......................
$36,000 $43,200 $54,000 $133,200
20,000†
Credit sales* .................... 24,000 28,800 72,800
Total collections ...............
$56,000 $67,200 $82,800 $206,000
*40% of the preceding month’s sales.
†
Given.
2.
Inventory Purchases Budget
Budgeted cost of $45,000 †
$54,000 †
$67,500 $166,500
goods sold* ............................
Add desired ending 43,200† 54,000 28,800 28,800
inventory ‡ ................................
Total needs............................. 88,200† 108,000 96,300 195,300

Less beginning in- 36,000 †
43,200 54,000 36,000
ventory................................
Required purchases ................. $52,200† $64,800 $42,300 $159,300
*For April sales: $60,000 sales  75% cost ratio = $45,000.
†
Given.
‡
At April 30: $54,000  80% = $43,200.
At June 30: July sales $48,000  75% cost ratio  80% =
$28,800.
Schedule of Expected Cash Disbursements—Purchases

March pur-
chases .........................
$21,750* $ 21,750*
April purchases ............
26,100* $26,100* 52,200*
May purchases ............. 32,400 $32,400 64,800
June purchases ............ 21,150 21,150
Total dis-
bursements .................
$47,850* $58,500 $53,550 $159,900
*Given.

3.
Schedule of Expected Cash Disbursements—Operating Expenses
Commissions................... $ 7,200* $ 8,640 $10,800 $26,640
Rent ...............................2,500* 2,500 2,500 7,500
Other expenses ............... 3,600* 4,320 5,400 13,320
Total disbursements ........ $13,300* $15,460 $18,700 $47,460
*Given.
4.
Cash Budget
Cash balance, be- $ 8,000* $ 4,000 $ 4,000 $ 8,000
ginning
Add cash collections 56,000* 67,200 82,800 206,000
Total cash available 64,000* 71,200 86,800 214,000
Less disbursement
For inventory 47,850* 58,500 53,550 159,900
For expenses 13,300* 15,460 18,700 47,460
For equipment 1,500* 1,500
Total disbursements 62,650* 73,960 72,250 208,860
Excess (deficiency) 1,350* (2,760) 14,550 5,140
of cash
Financing:
Borrowings** 2,677 6,856 9,533
Repayments (9,533) (9,533)
Interest*** (27) (96) (96) (219)
Total financing 2,650 6,760 (9,629) (219)
Cash balance, end- $ 4,000 $ 4,000 $ 4,921 $ 4,921
ing
*Given.
**April: $1,350 + X - .01X = $4,000, X = $2,677 (rounded)
May: ($2,760) + X - .01X - $27 = $4,000, X = $6,856 (rounded)
***April: $2,677 x 1% = $27; May & June: ($2,677 + $6,856) x 1% = $96

5.
SOPER COMPANY
Income Statement
For the Quarter Ended June 30
Sales ($60,000 + $72,000 + $222,000
90,000) ................................................
Less cost of goods sold:
Beginning inventory (Given) ................ $ 36,000
Add purchases (Part 2) ........................ 159,300
Goods available for sale ....................... 195,300
Ending inventory (Part 2) ....................28,800 166,500*
Gross margin ........................................ 55,500
Less operating expenses:
Commissions (Part 3) ..........................26,640
Rent (Part 3) ................................ 7,500
Depreciation ($900  3)....................... 2,700
Other expenses (Part 3) ......................13,320 50,160
Operating income................................ 5,340
Less interest expense (Part 4) ................ 219
Net income ........................................... $ 5,121
*A simpler computation would be
$222,000  75% = $166,500.

6.
SOPER COMPANY
Balance Sheet
June 30
Assets
Current assets:
Cash (Part 4) ................................ $ 4,921
Accounts receivable ($90,000  36,000
40%) ....................................................
Inventory (Part 2) ................................ 28,800
Total current assets................................ 69,721
Building and equipment—net 118,800
($120,000 + $1,500 – $2,700) ................
Total assets ........................................... $188,521
Accounts payable (Part 2: $42,300 $ 21,150
 50%)..................................................
Shareholders’ equity:..............................
Common shares (Given) ....................... $150,000
Retained earnings* .............................. 17,371 167,371
Total liabilities and shareholders’ $188,521
equity ....................................................
*Retained earnings, beginning ................

$ 12,250
Add net income................................ 5,121
Retained earnings, ending ......................
$ 17,371

1. Collections on sales: July August Sept. Quarter

Cash sales .............................. $ 8,000 $14,000 $10,000 $ 32,000
Credit sales:
May: $30,000 × 80% × 20% .. 4,800 4,800
June: $36,000 × 80% × 70%,
20% .................................. 20,160 5,760 25,920
July: $40,000 × 80% × 10%,
70%, 20% ......................... 3,200 22,400 6,400 32,000
Aug.: $70,000 × 80% × 10%,
70% .................................. 5,600 39,200 44,800
Sept.: $50,000 × 80% × 10% 4,000 4,000
Total cash collections ............... $36,160 $47,760 $59,600 $143,520

July August Sept. Oct.
Budgeted cost of goods sold* .. $24,000 $42,000 $30,000 $27,000
Add desired ending inventory** 31,500 22,500 20,250
Total needs ............................. 55,500 64,500 50,250
Less beginning inventory ......... 18,000 31,500 22,500
Required inventory purchases .. $37,500 $33,000 $27,750
*Cost of goods sold is 60% of sales, based on income statements provided
in the problem.
*75% of the next month’s budgeted cost of goods sold.
b. Schedule of expected cash disbursements for merchandise purchases:

July August Sept. Quarter
Accounts payable, June 30 ....... $11,700 $11,700
July purchases ........................ 18,750 $18,750 37,500
August purchases .................... 16,500 $16,500 33,000
September purchases .............. 13,875 13,875

3. Scott Products, Inc.

Cash Budget
Cash balance, beginning ........ $ 8,000 $ 8,000 $ 8,000 $ 8,000
Add collections from sales 36,160 47,760 59,600 143,520
Total cash available ............. 44,160 55,760 67,600 151,520
Less disbursements:
For inventory purchases ...... 30,450 35,250 30,375 96,075
For selling expenses ............ 7,200 11,700 8,500 27,400
For administrative expenses 3,600 5,200 4,100 12,900
For land ............................. 4,500 0 0 4,500
For dividends ...................... 0 0 1,000 1,000
Total disbursements .............. 45,750 52,150 43,975 141,875
available over disburse-
ments ................................ (1,590) 3,610 23,625 9,645
Financing:
Borrowings* ....................... 9,687 4,532 14,219
Repayment ......................... 0 0 (14,219) (14,219)
Interest** .......................... (97) (142) (142) (381)
Total financing ...................... 9,590 4,390 (14,361) (381)
Cash balance, ending ............ $ 8,000 $ 8,000 $ 9,264 $ 9,264
*July: ($1,590) + X - .01X = $8,000, X = $9,687 (rounded)

August: $3,610 + X - .01X - $97 = $8,000, X = $4,532 (rounded)
**July: $9,687 x 1% = $97
August and September: ($9,687 + $4,532) x 1% = $142

1. Collections on sales: July August Sept. Quarter

Cash sales .............................. $ 8,000 $14,000 $10,000 $ 32,000
Credit sales:
May: $30,000 × 80% × 20% 4,800 4,800
June: $36,000 × 80% ×
70%, 20% ......................... 20,160 5,760 25,920
July: $40,000 × 80% × 25%,
60%, 15% ......................... 8,000 19,200 4,800 32,000
August: $70,000 × 80% ×
25%, 60% ......................... 14,000 33,600 47,600
September: $50,000 × 80%
× 25% .............................. 10,000 10,000
Total cash collections ............... $40,960 $52,960 $58,400 $152,320

July August Sept. Oct.
Budgeted cost of goods sold .... $24,000 $42,000 $30,000 $27,000
Add desired ending inventory* . 10,500 7,500 6,750
Total needs ............................. 34,500 49,500 36,750
Less beginning inventory ......... 18,000 10,500 7,500
Required inventory purchases .. $16,500 $39,000 $29,250
*25% of the next month’s budgeted cost of goods sold.
b. Schedule of expected cash disbursements for merchandise purchases:

Accounts payable, June 30 ....... $11,700 $11,700
July purchases ........................ 8,250 $ 8,250 16,500
August purchases .................... 19,500 $19,500 39,000
September purchases .............. 14,625 14,625

3. Scott Products, Inc.

Cash Budget
Cash balance, beginning ........ $ 8,000 $13,710 $22,020 $ 8,000
Add collections from sales 40,960 52,960 58,400 152,320
Total cash available ............. 48,960 66,670 80,420 160,320
Less disbursements:
For inventory purchases ...... 19,950 27,750 34,125 81,825
For selling expenses ............ 7,200 11,700 8,500 27,400
For administrative expenses 3,600 5,200 4,100 12,900
For land ............................. 4,500 0 0 4,500
For dividends ...................... 0 0 1,000 1,000
Total disbursements .............. 35,250 44,650 47,725 127,625
available over disburse-
ments ................................ 13,710 22,020 32,695 32,695
Financing:
Borrowings ......................... 0 0 0 0
Repayment ......................... 0 0 0 0
Interest .............................. 0 0 0 0
Total financing ...................... 0 0 0 0
Cash balance, ending ............ $13,710 $22,020 $32,695 $ 32,695
4. Collecting accounts receivable sooner and reducing inventory levels in-

creased net cash flows, eliminating the company’s need to borrow mon-
ey and pay interest during the third quarter. The total excess of cash
available over disbursements under the president’s assumptions is
$32,695 for the quarter compared to only $9,645 in Problem 9-21.

1. April May June Quarter

Budgeted sales.................... 30,000 53,000 75,000 158,000
ry*................................... 10,600 15,000 13,600 13,600
Total needs ......................... 40,600 68,000 88,600 171,600
Less beginning inventory ..... 6,000 10,600 15,000 6,000
Required production ............ 34,600 57,400 73,600 165,600
*20% of the next month’s sales.
2. Material #226: April May June Quarter

Required production—
units ............................ 34,600 57,400 73,600 165,600
Material #226 per unit ..... × 2 kgs. × 2 kgs. × 2 kgs. × 2 kgs.
Production needs—
kilograms ..................... 69,200 114,800 147,200 331,200
Add desired ending in-
ventory* ...................... 68,880 88,320 76,080 76,080
Total needs—kilograms .... 138,080 203,120 223,280 407,280
Less beginning inventory . 23,000 68,880 88,320 23,000
Required purchases—
kilograms ..................... 115,080 134,240 134,960 384,280
Required purchases at
$4.00 per kilogram........ $460,320 $536,960 $539,840 $1,537,120
* 60% of the following month’s production needs. For June: July
production 68,000 + 9,000 – 13,600 = 63,400 units; 63,400
units × 2 kgs. per unit = 126,800 kgs.; 126,800 kgs. × 60% =
76,080 kgs.

Material #301: April May June Quarter

Required production—
units ............................ 34,600 57,400 73,600 165,600
Material #301 per unit ..... × 5 mt. × 5 mt. × 5 mt. × 5 mt.
Production needs— 173,000 287,000 368,000 828,000
metres .........................
Add desired ending in-
ventory* ...................... 86,100 110,400 95,100 95,100
Total needs—metres ........ 259,100 397,400 463,100 923,100
Less beginning inventory . 35,000 86,100 110,400 35,000
Required purchases—
metres ......................... 224,100 311,300 352,700 888,100
Required purchases at
$1.50 per metre ........... $336,150 $466,950 $529,050 $1,332,150
* 30% of the following month’s production needs. For June:
July production 68,000 + 9,000 – 13,600 = 63,400 units;
63,400 units × 5 mt. per unit = 317,000 mt.;
317,000 mt. × 30% = 95,100 mt.
3. Direct labour budget:

Direct Labour
Hours
Units Per Cost per
Produced Unit Total DLH Total Cost
Cutting ....... 165,600 0.15 24,840 $16.00 $ 397,440
Assembly .... 165,600 0.60 99,360 $14.00 1,391,040
Finishing ..... 165,600 0.10 16,560 $18.00 298,080
140,760 $2,086,560

4. Manufacturing overhead budget:
Expected production for the year .............................. 380,000
Actual production through March 31 ......................... 48,000
Expected production, April through December ........... 332,000
Variable manufacturing overhead rate per unit
($124,800 ÷ 48,000 units) .................................... × $2.60
Variable manufacturing overhead ............................. $ 863,200
Fixed manufacturing overhead ($4,166,000 × 9/12) .. 3,124,500
Total manufacturing overhead .................................. 3,987,700
Less depreciation ($2,619,000 × 9/12) ..................... 1,964,250
Cash disbursement for manufacturing overhead ........ $2,023,450
CMA Solution, adapted

1. Schedule of expected cash collections:
Cash sales.................... $36,000 * $43,200 $54,000 $133,200
Credit sales1 ................. 20,000 * 24,000 28,800 72,800
Total collections ............ $56,000 * $67,200 $82,800 $206,000
1
40% of the preceding month’s sales.
* Given.
2. Merchandise purchases budget:

Budgeted cost of goods
sold1 ............................ $45,000 * $ 54,000 * $67,500 $166,500
Add desired ending mer-
chandise
inventory2 .................... 43,200 * 54,000 28,800 * 28,800
Total needs ..................... 88,200 * 108,000 96,300 195,300
Less beginning mer-
chandise inventory ........ 36,000 * 43,200 54,000 36,000
Required purchases ......... $52,200 * $ 64,800 $42,300 $159,300
1
For April sales: $60,000 sales × 75% cost ratio = $45,000.
2
At April 30: $54,000 × 80% = $43,200.
At June 30: July sales $48,000 × 75% cost ratio × 80% = $28,800.
* Given.
Schedule of expected cash disbursements—merchandise purchases

March purchases ............. $21,750 * $ 21,750 *
April purchases ............... 26,100 * $26,100 * 52,200 *
May purchases ................ 32,400 $32,400 64,800
June purchases ............... 21,150 21,150
Total disbursements ........ $47,850 * $58,500 $53,550 $159,900
* Given.

3. Cash budget:
Beginning cash balance . $ 8,000 * $ 4,000 $ 4,000 $ 8,000
Add collections from
customers .................. 56,000 * 67,200 82,800 206,000
Total cash available ....... 64,000 * 71,200 86,800 214,000
Less cash disburse-
ments:
For inventory .............. 47,850 * 58,500 53,550 159,900
For expenses .............. 13,300 * 15,460 18,700 47,460
For equipment ............ 1,500 * 0 0 1,500
Total cash disburse-
ments ........................ 62,650 * 73,960 72,250 208,860
Excess (deficiency) of
cash available over
disbursements ............ 1,350 * (2,760) 14,550 5,140
Financing:
Borrowings ................. 2,650 6,760 0 9,410
Repayments ............... 0 0 (9,410) (9,410)
Interest ($2,650 ×
1% × 3 + $6,760 ×
1% × 2) .................. 0 0 (215) (215)
Total financing .............. 2,650 6,760 (9,625) (215)
Ending cash balance ...... $ 4,000 $ 4,000 $ 4,925 $ 4,925
* Given.

4.
Shilow Company
Income Statement
For the Quarter Ended June 30
Sales ($60,000 + $72,000 + $90,000) ....... $222,000
Cost of goods sold:
Beginning inventory (Given) ................... $ 36,000
Add purchases (Part 2) ........................... 159,300
Goods available for sale .......................... 195,300
Ending inventory (Part 2) ....................... 28,800 166,500 *
Gross margin............................................ 55,500
Selling and administrative expenses:
Commissions (12% of sales) ................... 26,640
Rent ($2,500 × 3) .................................. 7,500
Depreciation ($900 × 3) ......................... 2,700
Other expenses (6% of sales) ................. 13,320 50,160
Net operating income ............................... 5,340
Interest expense (Part 4) .......................... 215
Net income .............................................. $ 5,125
* A simpler computation would be: $222,000 × 75% = $166,500.

5.
Shilow Company
Balance Sheet
June 30
Assets
Current assets:
Cash (Part 4) ............................................................... $ 4,925
Accounts receivable ($90,000 × 40%)........................... 36,000
Inventory (Part 2) ........................................................ 28,800
Total current assets ........................................................ 69,725
Building and equipment—net
($120,000 + $1,500 – $2,700)...................................... 118,800
Total assets .................................................................... $188,525
Liabilities and Stockholders’ Equity
Accounts payable (Part 2: $42,300 × 50%) .. $ 21,150

Stockholders’ equity:
Common stock (Given) ............................. $150,000
Retained earnings* .................................. 17,375 167,375
Total liabilities and stockholders’ equity ........ $188,525
* Beginning retained earnings .................... $12,250

Add net income....................................... 5,125
Ending retained earnings ......................... $17,375


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Chapter 9

Solution to Discussion Case

Some amount of slack may be desirable when the operating environment is

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9-13 Activity-based budgeting can help identi-

9-14 An unfavourable flexible budget variance

9-15 The sales volume variance is the differ-

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2. The expected cash collections for July are computed as follows:

3. The accounts receivable balance at the end of July is:

4. The required production for July is computed as follows:

*August sales of 12,000 units × 20% = 2,400 units.

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5. The raw material purchases for July are computed as follows:

6. The cost of raw material purchases for July is computed as follows:

7. The estimated cash disbursements for materials purchases in July is

8. The accounts payable balance at the end of July is:

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9. The estimated raw materials inventory balance at the end of July is

11. The estimated unit product cost is computed as follows:

Quantity Cost Total

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15. The estimated operating income for July is computed as follows:

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1. April May June Total

2. Accounts receivable at June 30:

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Schedule of Expected Cash Collections

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Quarter (000 omitted)

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Auto Lavage Inc.

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Contribution margin ........................

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Actual Flexible Flexible Sales Static

Total static-budget variance: $1,464 F

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The schedule of expected cash collections from sales:

2. The production budget for July through October:

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*3,900 pairs (October) × 2 lbs. per pair= 7,800 lbs.;

The schedule of expected cash disbursements:

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1. December cash sales .................................. $ 83,000

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2. Springfield should consider adopting a “bottom-up” budget process. This

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2. During July and August the company is building inventories in anticipa-

3. Direct materials budget:

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Schedule of Expected Cash Disbursements for Materials

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1. Culbert Dessert Corporation