Hca16ge Ch06 SM

CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1 What are the four elements of the budgeting cycle?

The budgeting cycle includes the following elements:
a. Planning the performance of the company as a whole as well as planning the
performance of its subunits. Management agrees on what is expected.
b. Providing a frame of reference, a set of specific expectations against which actual
results can be compared.
c. Investigating variations from plans. If necessary, corrective action follows
investigation.
d. Planning again, in light of feedback and changed conditions.
6-2 Define master budget.

The master budget expresses management’s operating and financial plans for a specified period
(usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of
what the company intends to accomplish in the period.
6-3 List five the key questions which must be considered by managers for developing
successful strategies.
What are our main objectives? How can we create value for our customers and differentiate
ourselves from our competitors? Where is our market and who are our customers? What is the
best organizational and financial structure for us? What are the alternative strategies and
opportunities and their relevant risks?
6-4 “Budgets provide a framework for evaluating performance and improving learning.” Do
you agree? Explain.
Yes, budgets can help a company’s managers to measure and evaluate actual performance
against predicted performance. When actual outcomes differ from budgeted or planned results, it
prompts managers to investigate and find out the reason(s) for the variance(s). This exercise
leads to an improved learning for future budgeting.
6-5 “Budgets can promote coordination and communication among subunits within the
company.” Do you agree? Explain.
Yes, budgets can promote coordination and communication among all aspects of production or
service and all departments in a company. Budgets can provide a communication mechanism that
seamlessly links all subunits and their employees, helping them understand their individual goals
or objectives of the company. This understanding can facilitate coordination among individual
departments within the company.
6-6 “Budgets motivate managers and other employees to the company’s goals.” Do you
agree? Explain.
Yes, budgets create goals as well as challenges for managers and employees, and motivate them
to improve their performances and to achieve their goals. Managers and employees regard not
meeting their budgets as a failure and, therefore, they are motivated to work harder in order to
avoid such situations.
6-1
6-7 Define rolling budget. Give an example.
A rolling budget, also called a continuous budget, is a budget or plan that is always available for
a specified future period, by continually adding a period (month, quarter, or year) to the period
that just ended. A four-quarter rolling budget for 2017 is superseded by a four-quarter rolling
budget for April 2017 to March 2018, and so on.
6-8 Outline the steps in preparing an operating budget.

The steps in preparing an operating budget are as follows:
1. Prepare the revenues budget.
2. Prepare the production budget (in units).
3. Prepare the direct material usage budget and direct material purchases budget.
4. Prepare the direct manufacturing labor budget.
5. Prepare the manufacturing overhead budget.
6. Prepare the ending inventories budget.
7. Prepare the cost of goods sold budget.
8. Prepare the nonmanufacturing costs budget.
9. Prepare the budgeted income statement.
6-9 What is the usual starting point for the operating budget?
Usually, a revenues budget is the starting point for the operating budget because the forecasted
level of unit sales or revenues has a major impact on the production capacity, the inventory
levels planned, and determines all of the costs required to support the budgeted revenues.
6-10 How can sensitivity analysis be used to increase the benefits of budgeting?
How can sensitivity analysis be used to increase the benefits of budgeting?
Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how
budgeted amounts change with changes in the underlying assumptions. This assists managers in
monitoring those assumptions that are most critical to a company in attaining its budget and
allows them to make timely adjustments to plans when appropriate.
6-11 What is the key emphasis in Kaizen budgeting?

The key emphasis in Kaizen budgeting is continuous improvement, resulting in cost reductions,
during the budget period.
6-12 Describe how nonoutput-based cost drivers can be incorporated into budgeting.
Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based
budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell
products and services. Nonoutput-based cost drivers, such as the number of parts, number of
batches, and number of new products can be used with ABB.
6-13 Explain how the choice of the type of responsibility center (cost, revenue, profit, or
investment) affects behavior.
The choice of the type of responsibility center determines what the manager is accountable for
and thereby affects the manager’s behavior. For example, if a revenue center is chosen, the
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manager will focus on revenues, not on costs or investments. The choice of a responsibility
center type guides the variables to be included in the budgeting exercise.
6-14 What are some additional considerations that arise when budgeting in multinational
companies?
Budgeting in multinational companies may involve budgeting in several different foreign
currencies. Further, management accountants must translate operating performance into a single
currency for reporting to shareholders by budgeting for exchange rates. Managers and
accountants must understand the factors that impact exchange rates and, where possible, plan
financial strategies to limit the downside of unexpected unfavorable moves in currency
valuations. In developing budgets for operations in different countries, they must also have good
understanding of political, legal, and economic issues in those countries.
6-15 Explain why cash budgets are important.

Cash budgets are significantly important for cash planning and control, especially to avoid
having idle cash and unexpected cash deficiencies. The cash budget can help managers to not
only identify the periods of idle cash and periods of cash shortage but also to determine
necessary cash balances in line with their needs in any given period during the budget year. It
allows managers to make appropriate decisions in terms of either using excess cash or financing
from outside to achieve the company’s goals.
6-16 Master budget. Which of the following statements is correct regarding the components
of the master budget?
a. The cash budget is used to create the capital budget.
b. Operating budgets are used to create cash budgets.
c. The manufacturing overhead budget is used to create the production budget.
d. The cost of goods sold budget is used to create the selling and administrative expense budget.
SOLUTION
Master budget.
Choice "b" is correct. All of the operating budgets (like the sales budget, production budget,
selling and administrative expense budget, etc.) are used to create financial budgets like the cash
budget and the proforma financial statements. Of course, after cash budgets have been
formulated, companies use this information to also adjust the operating budget.
Choice "a" is incorrect. The capital budget is used to create the cash budget.
Choice "c" is incorrect. The factory overhead budget is derived from the production budget.
Choice "d" is incorrect. The cost of goods sold budget and the selling and administrative expense
budget are completely independent of one another and both are usually determined based on the
revenues budget.
6-3
6-17 Operating and financial budgets. Which of the following statements is correct regarding
the drivers of operating and financial budgets?
a. The sales budget will drive the cost of goods sold budget.
b. The cost of goods sold budget will drive the units of production budget.
c. The production budget will drive the selling and administrative expense budget.
d. The cash budget will drive the production and selling and administrative expense budgets.
SOLUTION
Operating and financial budgets.

Choice "a" is correct. The sales (or revenues) budget is the primary driver of most components of
the master budget, which includes both operating and financial budgets. The sales budget will
drive the production budget, which in turn drives budgets for direct materials, direct labor, and
factory overhead. All three of these budgets combine to form the cost of goods sold budget.
Choice "b" is incorrect. The units of production budget drives the budgets for direct materials,
direct labor, and manufacturing overhead. These three budgets combine to form the cost of goods
sold budget.
Choice "c" is incorrect. The selling and administrative expense budget is separate from the
production budget, although both are driven by the sales budget.
Choice "d" is incorrect. The cash budget is driven by the production and selling and
administrative expense budgets. Of course, cash needs might affect the final production and
selling budget.
6-18 Production budget. Superior Industries sales budget shows quarterly sales for the next
year as follows: Quarter 1–10,000; Quarter 2–8,000; Quarter 3–12,000; Quarter 4–14,000.
Company policy is to have a target finished-goods inventory at the end of each quarter equal to
20% of the next quarter’s sales. Budgeted production for the second quarter of next year would
be:
1. 7,200 units; 2. 8,800 units; 3. 12,000 units; 4. 10,400 units
SOLUTION
Production budget.
Choice "2" is correct. 8,800 units are the budgeted production for the second quarter.
The calculation proceeds with first determining the beginning inventory for the second quarter
(20% × second quarter sales, 8,000 units = 1,600 units) and the ending inventory for the second
quarter (20% × third quarter sales, 12,000 units = 2,400 units). We then use the following
equation to calculate production for the second quarter:
Beginning inventory + Production = Sales + Ending inventory
Production = Sales + Ending inventory – Beginning inventory
= 8,000 + 2,400 – 1,600 = 8,800 units
6-4
Check:
Second Quarter
Beginning inventory (20% × 8,000) 1,600 units
Add Production (plug) 8,800 units
10,400 units
Deduct Sales 8,000 units
Ending inventory (20% × 12,000) 2,400 units
6-19 Responsibility centers. Elmhurst Corporation is considering changes to its responsibility

accounting system. Which of the following statements is/are correct for a responsibility
accounting system.
I. In a cost center, managers are responsible for controlling costs but not revenue.
II. The idea behind responsibility accounting is that a manager should be held responsible for
those items that the manager can control to a significant extent.
III. To be effective, a good responsibility accounting system must help managers to plan and to
control.
IV. Costs that are allocated to a responsibility center are normally controllable by the
responsibility center manager.
1. I and II only are correct.
2. II and III only are correct.
3. I, II, and III are correct.
4. I, II and IV are correct.
SOLUTION
Responsibility centers.
Choice "3" is correct.
The question asks which of a series of statements is/are correct for a responsibility accounting
system. "None of the above" is not an available option, and neither is "All of the above."
Statement I says that, in a cost center, managers are responsible for controlling costs but not
revenue. Statement I is correct.
Statement II says that the idea behind responsibility accounting is that a manager should be held
responsible for those items that the manager can control to a significant extent. Statement II is
correct.
Statement III says that, to be effective, a good responsibility accounting system must help
managers to plan and control. Planning without control and control without planning is not
effective. Statement III is correct.
Statement IV says that costs that are allocated to a responsibility center are normally controllable
by the responsibility center manager. Costs that are allocated are normally not controllable by the
responsibility center manager. Statement IV is incorrect.
6-20 Cash budget. Mary Jacobs, the controller of the Jenks Company is working on Jenks’
cash budget for year 2. She has information on each of the following items:
I. Wages due to workers accrued as of December 31, year 1.
II. Limits on a line of credit that may be used to fund Jenks’ operations in year 2.
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III. The balance in accounts payable as of December 31, year 1, from credit purchases made in
year 1.
Which of the items above should Jacobs take into account when building the cash budget for
year 2?
a. I, II b. I, III
c. II, III d. I, II, III
SOLUTION
Cash budget
Choice "d" is correct. All of the elements listed should be considered when building the cash
budget. Accrued wages will be factored into the determination of cash disbursements in year 2,
which is part of the cash budget. Financing budgets, a component of the cash budget, cover how
a company will fund its current operations. One of the methods the company may use is a line of
credit, which will have limits as to how much cash a company can access at a given time. The
accounts payable balance is important as well, as eventually vendors must be paid in cash in year
2 for credit purchases made by the company in year 1.
Choice "a" is incorrect. This choice leaves out accounts payable, which eventually must be paid
with cash in year 2.
Choice "b" is incorrect. This choice leaves out the analysis of limits on a line of credit that the
company may need to fund its operations in year 2.
Choice "c" is incorrect. This choice leaves out accrued wages, which will ultimately have to be
paid by the company in year 2.
6-21 Sales budget, service setting. In 2017, Rouse & Sons, a small environmental-testing
firm, performed 12,200 radon tests for $290 each and 16,400 lead tests for $240 each. Because
newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by
10% next year. However, awareness of radon-related health hazards is expected to result in a 6%
increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his
price for lead testing to $230 per test, he will have to face only a 7% decline in lead-test sales in
2018.
Required:
1. Prepare a 2018 sales budget for Rouse & Sons assuming that Rouse holds prices at 2017
levels.
2. Prepare a 2018 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead
test to $230. Should Rouse lower the price of a lead test in 2018 if the company’s goal is to
maximize sales revenue?
SOLUTION
(15 min.) Sales budget, service setting.
1.
2017 At 2017 Expected 2018 Expected 2018
Rouse & Sons Volume Selling Prices Change in Volume Volume
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Radon Tests 12,200 $290 + 6% 12,932
Lead Tests 16,400 $240 –10% 14,760
Rouse & Sons Sales Budget

For the Year Ended December 31, 2018

Selling Units Total
Price Sold Revenues
Radon Tests $290 12,932 $3,750,280
Lead Tests $240 14,760 3,542,400
$7,292,680
2.
2017 Planned 2018 Expected 2018 Expected
Rouse & Sons Volume Selling Prices Change in Volume 2018 Volume
Radon Tests 12,200 $290 +6% 12,932
Lead Tests 16,400 $230 –7% 15,252
Rouse & Sons Sales Budget

For the Year Ended December 31, 2018

Selling Total
Price Units Sold Revenues
Radon Tests $290 12,932 $3,750,280
Lead Tests $230 15,252 3,507,960
$7,258,240
Expected revenues at the new 2018 prices are $7,258,240, which is lower than the expected 2018
revenues of $7,292,680 if the prices are unchanged. So, if the goal is to maximize sales revenue
and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead test in
2018.
6-22 Sales and production budget. The Albright Company manufactures ball pens and
expects sales of 452,000 units in 2018. Albright estimates that its ending inventory for 2018 will
be 65,400 pens. The beginning inventory is 46,500 pens. Compute the number of pens budgeted
for production in 2018.
(5 min.) Sales and production budget.
Budgeted sales in units 452,000

Add target ending finished goods inventory 65,400
Total requirements 517,400
Deduct beginning finished goods inventory 46,500
Units to be produced 470,900
6-23 Direct material budget. Polyhidron Corporation produces 5-gallon plastic buckets. The
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company expects to produce 430,000 buckets in 2018. Polyhidron purchases high quality plastic
granules for the production of buckets. Each pound of plastic granules produces two 5-gallon
buckets. Target ending inventory of the company is 35,200 pounds of plastic granules; its
beginning inventory is 22,500. Compute how many pounds of plastic granules need to be
purchased in 2018.
(5 min.) Direct materials purchases budget.
Direct materials to be used in production (pounds): (430,000÷2) 215,000

Add target ending direct materials inventory (pounds) 35,200
Total requirements (pounds) 250,200
Deduct beginning direct materials inventory (pounds) 22,500
Direct materials to be purchased (pounds) 227,700
6-24 Material purchases budget. The Ceremicon Company produces teapots from stoneware
clay. The company has prepared a sales budget of 150,000 units of teapots for a 3-month period.
It has an inventory of 34,000 units of teapots on hand at December 31 and has estimated an
inventory of 38,000 units of teapots at the end of the succeeding quarter.
One unit of teapot needs 2 pounds of stoneware clay. The company has an inventory of
82,000 pounds of stoneware clay at December 31 and has a target ending inventory of 95,000
pounds of stoneware clay at the end of the succeeding quarter. How many pounds of direct
materials (stoneware clay) should Ceremicon purchase during the 3 months ending March 31?
(10 min.) Budgeting material purchases.
Production Budget:
Finished Goods
(units)
Budgeted sales 150,000
Add target ending teapots inventory 38,000
Deduct beginning teapots inventory 34,000
Direct Materials (stoneware clay) Purchases Budget:

Direct Materials
(in pounds)
Direct materials needed for production (154,000  2) 308,000
Add target ending direct materials inventory 95,000
Deduct beginning direct materials inventory 82,000
Direct materials to be purchased 321,000
6-8
6-25 Revenues, production, and purchases budgets. The Deluxe Motorcar in northern
California manufactures motor cars of all categories. Its budgeted sales for the most popular
sedan model XE8 in 2018 is 4,000 units. Deluxe Motorcar has a beginning finished inventory of
600 units. Its ending inventory is 450 units. The present selling price of model XE8 to the
distributors and dealers is $35,200. The company does not want to increase its selling price in
2018.
Deluxe Motorcar does not produce tyres. It buys the tyres from an outside supplier. One
complete car requires five tyres including the tyre for the extra wheel. The company’s target
ending inventory is 400 tyres, and its beginning inventory is 350 tyres. The budgeted purchase
price is $45 per tyre.
Required:
1. Compute the budgeted revenues in dollars.
2. Compute the number of cars that Deluxe Motorcar should produce.
3. Compute the budgeted purchases of tyres in units and in dollars.
4. What actions can Deluxe Motorcar’s managers take to reduce budgeted purchasing costs of
tyres assuming the same budgeted sales for Model XE8?
SOLUTION
(15–20 min.) Revenues, production, and purchases budget.
1. 4,000 cars  $35,200 = $140,800,000
2. Budgeted sales (Model XE8 cars) 4,000

Add target ending finished goods inventory 450
Total requirements (units) 4,450
Deduct beginning finished goods inventory 600
3. Direct materials (tyres) to be used in production,

3,850× 5 (tyres) 19,250
Add target ending direct materials inventory 400
Deduct beginning direct materials inventory 350
Direct materials to be purchased (tyres) 19,300
Cost per tyre in dollars × $45
Direct materials purchase cost $ 868,500
4. Deluxe Motorcar does not maintain a high inventory of tyres. Note the relatively small
inventory of wheels. The company appears to be using something close to a just-in-time
inventory system, which is already saving the company the cost of holding materials
inventory. Nevertheless, Deluxe Motorcar’s managers would want to check why the target
ending inventory of tyres (400) is greater than the beginning inventory of 350. Could the
production time lag between the order of tyres placed and the ordered tyres received to
reduce the need to hold more inventories?
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Furthermore, Deluxe Motorcar could help and advice its tyre supplier to improve the
quality of its tyres by taking more quality control measures and to improve efficiency and
productivity of the employees by conducting effective training programmes which may result
in reduction of the cost of manufacturing tyres with a less number of defective tyres. It would
certainly reduce the price the supplier charges Deluxe Motorcar. Toyota routinely aids its
suppliers in this way and also reduces costs through better coordination between suppliers
and the company.
6-26 Revenues and production budget. Price, Inc., bottles and distributes mineral water from
the company’s natural springs in northern Oregon. Price markets two products: 12-ounce
disposable plastic bottles and 1-gallon reusable plastic containers.
Required:
1. For 2015, Price marketing managers project monthly sales of 420,000 12-ounce bottles and
170,000 1-gallon containers. Average selling prices are estimated at $0.20 per 12-ounce
bottle and $1.50 per 1-gallon container. Prepare a revenues budget for Price, Inc., for the year
ending December 31, 2015.
2. Price begins 2015 with 890,000 12-ounce bottles in inventory. The vice president of
operations requests that 12-ounce bottles ending inventory on December 31, 2015, be no less
than 680,000 bottles. Based on sales projections as budgeted previously, what is the
minimum number of 12-ounce bottles Price must produce during 2015?
3. The VP of operations requests that ending inventory of 1-gallon containers on December 31,
2015, be 240,000 units. If the production budget calls for Price to produce 1,900,000 1-gallon
containers during 2015, what is the beginning inventory of 1-gallon containers on January 1,
2015?
SOLUTION
(30 min.) Revenues and production budget.
1.
Selling Units Total
Price Sold Revenues
12-ounce bottles $0.20 5,040,000a $1,008,000
1-gallon units 1.50 2,040,000b 3,060,000
$4,068,000
a
420,000 × 12 months = 5,040,000
b
170,000 × 12 months = 2,040,000
2. Budgeted unit sales (12-ounce bottles) 5,040,000

Add target ending finished goods inventory 680,000
Total requirements 5,720,000
Deduct beginning finished goods inventory 890,000
6-10
Units to be produced 4,830,000
3. Beginning Inventory = Budgeted sales + Target ending inventory – Budgeted production

= 2,040,000 + 240,000  1,900,000
= 380,000 1-gallon units
6-27 Budgeting; direct material usage, manufacturing cost, and gross margin. Xander
Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One
rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost
of $6 per gallon. All other materials are indirect. At the beginning of the year Xander has an
inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of
$23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory cost-
flow method.
Xander blue rugs are very popular and demand is high, but because of capacity constraints
the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each.
There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.
Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are
accumulated in two cost pools—one for weaving and the other for dyeing. Weaving overhead is
allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is
allocated to products based on machine-hours (MH).
There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct
manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour. It budgets 0.2
machine-hours to dye each skein in the dyeing process.
The following table presents the budgeted overhead costs for the dyeing and weaving cost
pools:
Required:
1. Prepare a direct materials usage budget in both units and dollars.
2. Calculate the budgeted overhead allocation rates for weaving and dyeing.
3. Calculate the budgeted unit cost of a blue rug for the year.
4. Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or
(b) 185,000 blue rugs (that is, at two different sales levels).
5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
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6. Find the budgeted gross margin for blue rugs under each sales assumption.
7. What actions might you take as a manager to improve profitability if sales drop to 185,000
blue rugs?
8. How might top management at Xander use the budget developed in requirements 1–6 to
better manage the company?
SOLUTION
(30 min.) Budgeting: direct material usage, manufacturing cost, and gross margin.
1.
Direct Material Usage Budget in Quantity and Dollars

Material
Wool Dye Total
Physical Units Budget
Direct materials required for
Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.) 7,200,000 skeins 160,000 gal.

Cost Budget
Available from beginning direct materials inventory:
(a)
Wool: 458,000 skeins $ 961,800
Dye: 4,000 gallons $ 23,680
To be purchased this period: (b)
Wool: (7,200,000 – 458,000) skeins × $2 per skein 13,484,000
Dye: (160,000 – 4,000) gal. × $6 per gal. 936,000
Direct materials to be used this period: (a) + (b) $14,445,800 $ 959,680 $15,405,480
2.
= = $2.55 per DMLH
= = $12 per MH
3.
Budgeted Unit Cost of Blue Rug
Input per
Cost per Unit of
Unit of Input Output Total
Wool $ 2 36 skeins $ 72.00
Dye 6 0.8 gal. 4.80
6-12
Direct manufacturing labor 13 62 hrs. 806.00
Dyeing overhead 12 7.2 mach-hrs.
1
86.40
Weaving overhead 2.55 62 DMLH 158.10
Total $1,127.30
1
0.2 machine hour per skein 36 skeins per rug = 7.2 machine-hrs. per rug.
4.
Revenue Budget

Selling
Units Price Total Revenues
Blue Rugs 200,000 $2,000 $400,000,000
Blue Rugs 185,000 $2,000 $370,000,000
5a.
Sales = 200,000 rugs
Cost of Goods Sold Budget

From Schedule Total
Beginning finished goods inventory $ 0
Direct materials used $ 15,405,480
Direct manufacturing labor ($806 × 200,000) 161,200,000
Dyeing overhead ($86.40 × 200,000) 17,280,000
Weaving overhead ($158.10 × 200,000) 31,620,000 225,505,480
Cost of goods available for sale 225,505,480
Deduct ending finished goods inventory 0
Cost of goods sold $225,505,480
5b.
Production = 200,000 rugs

From Schedule Total
Direct materials used $ 15,405,480
Dyeing overhead ($86.40 × 200,000) 17,280,000
Weaving overhead ($158.10 × 200,000) 31,620,000 225,505,480
Deduct ending finished goods inventory
($1,127.30 × 15,000) 16,909,500
6-13
Some students assume that Xander will produce only 185,000 rugs to match 185,000 rugs that ar
expected to be sold and carry no finished good inventory of the rugs. In this case the Cost of
goods sold budget will be as follows. The Cost of Goods Sold budget is higher because the fixed
overhead costs in the dyeing and weaving cost pools do not get “inventoried” in the closing
inventory of rugs but are instead expensed in the current period.

Cost of Goods Sold Budget for Producing 185,000 rugs

From Schedule Total
Direct materials useda $ 14,253,480
Variable dyeing overhead ($70.55b × 185,000) 13,051,750
Fixed dyeing overhead c
3,170,000
Variable weaving overhead ($119.15d × 185,000) 22,042750
Fixed weaving overheade 7,790,000 209,417,980
Deduct ending finished goods inventory 0
a
[$961,800 + (185,000 rugs×36 skeins−458,000)×$2] + [$23,680 + (185,000 rugs×0.8 gallons−4,000)×$6]
b
Variable dyeing overhead cost per rug = ($6,560,000 + $7,550,000) ÷ 200,000 rugs = $70.55 per rug
c
Fixed dyeing overhead costs = $347,000 + $2,100,000 + $723,000 = $3,170,000
d
Variable weaving overhead cost per rug = ($15,400,000 + $5,540,000 + $2,890,000) ÷ 200,000 rugs = $119.15 per rug
e
Fixed weaving overhead costs = $1,700,000 + $274,000 + $5,816,000 = $7,790,000
6.
185,000 rugs sold 185,000 rugs sold
200,000 rugs sold 200,000 rugs produced 185,000 rugs produced
Revenue $400,000,000 $370,000,000 $370,000,000
Less: Cost of goods sold 225,505,480 208,595,980 209,417,980
Gross margin $174,494,520 $161,404,020 $160,582,020
7. If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce
less to reduce variable costs and inventory costs.
8. Top management can look for ways to increase (stretch) sales and improve quality,
efficiency, and input prices to reduce costs in each cost category such as direct materials, direct
manufacturing labor, and overhead costs. Top management can also use the budget to coordinate
and communicate across different parts of the organization, create a framework for judging
performance and facilitating learning, and motivate managers and employees to achieve “stretch”
targets of higher revenues and lower costs.
6-28 Budgeting, service company. Ever Clean Company provides gutter cleaning services to
residential clients. The company has enjoyed considerable growth in recent years due to a
successful marketing campaign and favorable reviews on service-rating Web sites. Ever Clean
owner Joanne Clark makes sales calls herself and quotes on jobs based on length of gutter
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surface. Ever Clean hires college students to drive the company vans to jobs and clean the
gutters. A part-time bookkeeper takes care of billing customers and other office tasks. Overhead
is allocated based on direct labor-hours (DLH).
Joanne Clark estimates that her gutter cleaners will work a total of 1,000 jobs during the year.
Each job averages 600 feet of gutter surface and requires 12 direct labor-hours. Clark pays her
gutter cleaners $15 per hour, inclusive of taxes and benefits. The following table presents the
budgeted overhead costs for 2018:
Required:
1. Prepare a direct labor budget in both hours and dollars.
2. Calculate the budgeted overhead allocation rate based on the budgeted quantity of the cost
drivers.
3. Calculate the budgeted total cost of all jobs for the year and the budgeted cost of an average
600-foot gutter-cleaning job.
4. Prepare a revenues budget for the year, assuming that Ever Clean charges customers $0.60 per
square foot.
5. Calculate the budgeted operating income.
6. What actions can Clark take if sales should decline to 900 jobs annually?
SOLUTION
(20 min.) Budgeting: service company.
1.
Direct Labor Budget in Hours and Dollars
Total
Hours Budget
Direct labor hours required
(1,000 jobs × 12 hours per job) 12,000 hours

Cost Budget
Wages (12,000 hours × $15 per hour) $180,000
Cost per direct-labor hour ($180,000 ÷ 12,000 DLH) $15.00/DLH
2.
Budgeted overhead rate = = $12 per DLH
3.
6-15
Budgeted Total Cost and Average Cost of 600-Foot Gutter-Cleaning Job
Direct labor costs $180,000
Overhead costs 144,000
Total costs of 1,000 jobs $324,000
Budgeted cost of average 600-foot gutter-cleaning job = $324,000 ÷ 1,000 = $324 per job.
4.
Revenue Budget

Feet of Gutter Surface Price per Foot Total Revenues

1,000 jobs  600 ft./job = 600,000 ft. $0.60 $360,000
5. Operating Income Budget

1,000 jobs
Revenue $360,000
Expenses 324,000
Operating Income $ 36,000
6. The following table shows Ever Clean’s profitability if sales decline to 900 jobs.
Revenue (900 jobs  600 sq. ft. 0.60/sq. ft. $324,000

Wages (900 jobs  12 hours per job × $15 per hour) $162,000
Supplies (900 jobs  12 hours per job × $6.50 per hour) 70,200
Fixed indirect labor costs 25,000
Fixed depreciation costs 17,000
Other fixed costs 24,000 298,200
$ 25,800
If revenue should fall to 900 jobs, Clark should examine the company’s fixed overhead costs to
determine if any cuts are possible. Variable product costs will naturally decline with a decline in
jobs, but Clark should evaluate if variable supplies cost of $6.50 per direct labor hour could be
reduced. Fixed costs will not decline without management taking action. While depreciation
cost is not likely something that management can reduce, the fixed indirect costs and “other”
fixed overhead costs are significant and should be examined.
6-29 Budgets for production and direct manufacturing labor. (CMA, adapted) Roletter
Company makes and sells artistic frames for pictures of weddings, graduations, and other special
events. Bob Anderson, the controller, is responsible for preparing Roletter’s master budget and has
accumulated the following information for 2018:
6-16
In addition to wages, direct manufacturing labor-related costs include pension contributions of
$0.50 per hour, worker’s compensation insurance of $0.20 per hour, employee medical insurance of
$0.30 per hour, and Social Security taxes. Assume that as of January 1, 2018, the Social Security tax
rates are 7.5% for employers and 7.5% for employees. The cost of employee benefits paid by
Roletter on its employees is treated as a direct manufacturing labor cost.
Roletter has a labor contract that calls for a wage increase to $13 per hour on April 1, 2018.
New laborsaving machinery has been installed and will be fully operational by March 1, 2018.
Roletter expects to have 17,500 frames on hand at December 31, 2018, and it has a policy of
carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the second
following month’s sales.
Required:
1. Prepare a production budget and a direct manufacturing labor budget for Roletter Company
by month and for the first quarter of 2018. You may combine both budgets in one schedule.
The direct manufacturing labor budget should include labor-hours and show the details for
each labor cost category.
2. What actions has the budget process prompted Roletter’s management to take?
3. How might Roletter’s managers use the budget developed in requirement 1 to better manage
the company?
SOLUTION
(15-25 min.) Budgets for production and direct manufacturing labor.
Roletter Company
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended March 31, 2018
January February March Quarter
Budgeted sales (units) 10,000 14,000 7,000 31,000
Add target ending finished goods
inventorya (units) 17,500 11,000 12,000 12,000
Total requirements (units) 27,500 25,000 19,000 43,000
Deduct beginning finished goods
inventory (units) 17,500 17,500 11,000 17,500
Units to be produced 10,000 7,500 8,000 25,500
Direct manufacturing labor-hours
(DMLH) per unit  2.0  2.0  1.5
Total hours of direct manufacturing
6-17
labor time needed 20,000 15,000 12,000 47,000
Direct manufacturing labor costs:
Wages ($12.00 per DMLH) $240,000 $180,000 $144,000 $564,000
Pension contributions ($0.50 per 10,000 7,500 6,000 23,500
DMLH)
Workers’ compensation insurance 4,000 3,000 2,400 9,400
($0.20 per DMLH)
Employee medical insurance ($0.30 6,000 4,500 3,600 14,100
per DMLH)
Social Security tax (employer’s share)
($12.00  0.075 = $0.90 per DMLH) 18,000 13,500 10,800 42,300
Total direct manufacturing labor costs $278,000 $208,500 $166,800 $653,300
100% of the first following month’s sales plus 50% of the second following month’s sales.
a
Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from
employees’ wages and paid to the government by the employer on behalf of the employees;
therefore, the 7.5% amounts are not additional costs to the employer.
2. The budget process would prompt Roletter’s management to look for ways to reduce finished
goods inventories, the manufacturing labor hours needed to produce each unit both before and
after installing new labor-saving machinery; some of the other costs such as Social Security tax
and workers’ compensation insurance may be fixed by law, while pension contributions and
medical insurance might be features that make Roletter an attractive employer.
3. We already see one example of a decision that Roletter’s management took based on
the budgeted expenses—installing labor-saving machines ahead of wage increases.
Roletter’s management should also continue to work with employees to increase labor
productivity.
6-30 Activity-based budgeting. The Jerico store of Jiffy Mart, a chain of small neighborhood
convenience stores, is preparing its activity-based budget for January 2018. Jiffy Mart has three
product categories: soft drinks (35% of cost of goods sold [COGS]), fresh produce (25% of
COGS), and packaged food (40% of COGS). The following table shows the four activities that
consume indirect resources at the Jerico store, the cost drivers and their rates, and the cost-driver
amount budgeted to be consumed by each activity in January 2018.
6-18
Required:
1. What is the total budgeted indirect cost at the Jerico store in January 2018? What is the total
budgeted cost of each activity at the Jerico store for January 2018? What is the budgeted
indirect cost of each product category for January 2018?
2. Which product category has the largest fraction of total budgeted indirect costs?
3. Given your answer in requirement 2, what advantage does Jiffy Mart gain by using an
activity-based approach to budgeting over, say, allocating indirect costs to products based on
cost of goods sold?
SOLUTION
(20–30 min.) Activity-based budgeting.
1.
Cost Soft Fresh Packaged
Activity Hierarchy Drinks Snacks Food Total
Ordering
$45  14; 24; 14 Batch-level $ 630 $1,080 $ 630 $ 2,340
Delivery
$41  12; 62; 19 Batch-level 492 2,542 779 3,813
Shelf-stocking Output-unit-
$10.50  16; 172; 94 level 168 1,806 987 2,961
Customer support Output-unit-
$0.09  4,600; 34,200; 10,750 level 414 3,078 968 4,460
Total budgeted indirect costs $1,704 $8,506 $3,364 $13,574
Percentage of total indirect costs 12.5% 62.7% 24.8%
Total indirect costs allocated

according to COGS
(35%; 25%; 40%  13,574) $4,751 $3,393 $5,430
2. Refer to the last row of the table in requirement 1. Fresh snacks, which represents the
smallest portion of COGS (25%), is the product category that consumes the largest share (62.7%)
of the indirect resources. Fresh snacks demand the highest level of ordering, delivery, shelf-
stocking, and customer support resources of all three product categories—it has to be ordered,
delivered, and stocked in small, perishable batches, and convenience store customers often
require more assistance when purchasing.
3. An ABB approach recognizes how different products require different mixes of support
activities. The relative percentage of how each product area uses the cost driver at each activity
area is:

Activity Hierarchy Drinks Snacks Food Total
6-19
Ordering Batch-level 27% 46% 27% 100%
Delivery Batch-level 13 67 20 100
Shelf-stocking Output-unit-level 6 61 33 100
Customer support Output-unit-level 9 69 22 100
By recognizing these differences, Jiffy Mart’s managers are better able to budget for different
unit sales levels and different mixes of individual product-line items sold. Using a single cost
driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities)
across product lines which does not occur at Jiffy Mart. If Jiffy Mart had used COGS to allocate
costs, Fresh Snacks would have been allocated 25% of the indirect costs, much lower than the
62.7% of the indirect costs based on an analysis of the activities it actually uses. Soft Drinks
would have been allocated 35% and Packaged Food 40% of the indirect costs, much higher than
the 12.5% and 24.8% respectively based on the cost of activities they actually use. Other benefits
cited by managers include: (1) better identification of resource needs, (2) clearer linking of costs
with staff responsibilities, and (3) identification of budgetary slack.
6-31 Kaizen approach to activity-based budgeting (continuation of 6-30). Jiffy Mart has a
Kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of
2018. Each successive month, the budgeted cost-driver rate decreases by 0.4% relative to the
preceding month. So, for example, February’s budgeted cost-driver rate is 0.996 times January’s
budgeted cost-driver rate, and March’s budgeted cost-driver rate is 0.996 times the budgeted
February rate. Jiffy Mart assumes that the budgeted amount of cost-driver usage remains the same
each month.
Required:
1. What are the total budgeted cost for each activity and the total budgeted indirect cost for
March 2018?
2. What are the benefits of using a Kaizen approach to budgeting? What are the limitations of
this approach, and how might Jiffy Mart management overcome them?
SOLUTION
(20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-30).
1.
Budgeted Cost-Driver Rates
Activity Cost Hierarchy January February March
Ordering Batch-level $45.00 $44.82000 a
$44.64072
Delivery Batch-level 41.00 40.83600 40.67266
Shelf-stocking Output-unit-level 10.50 10.45800 10.41617
Customer support Output-unit-level 0.09 0.08964 0.08928
a
$45 × 0.996 = $44.82000; b$44.82000 × 0.996 = $44.64072
The March 2018 rates can be used to compute the total budgeted cost for each activity area in
March 2018:
6-20
Activity Hierarchy Drinks Produce Food Total
Ordering
$44.64072 14; 24; 14 Batch-level $ 625 $1,071 $ 625 $ 2,321
Delivery
$40.67266 12; 62; 19 Batch-level 488 2,522 773 3,783
Shelf-stocking
$10.41617 16; 172; 94 Output-unit-level 167 1,792 979 2,938
Customer support
$0.08928 4,600;
34,200; 10,750 Output-unit-level 411 3,053 960 4,424
Total $1,691 $8,438 $3,337 $13,466
2. A Kaizen budgeting approach signals management’s commitment to systematic cost

reduction. Compare the budgeted costs from Question 6-30 and 6-31.
Shelf- Customer
Ordering Delivery Stocking Support
Exercise 6-30 $2,340 $3,813 $2,961 $4,460
Exercise 6-31 (Kaizen) 2,321 3,783 2,938 4,424
The Kaizen budget number will show unfavorable variances for managers whose activities
do not meet the required monthly cost reductions. This likely will put more pressure on managers
to creatively seek out cost reductions by working “smarter” within Jiffy Mart or by having
“better” interactions with suppliers or customers.
One limitation of Kaizen budgeting, as illustrated in this question, is that it assumes small
incremental improvements each month. It is possible that some cost improvements arise from
large discontinuous changes in operating processes, supplier networks, or customer interactions.
Companies need to highlight the importance of seeking these large discontinuous improvements
as well as the small incremental improvements.
A second limitation is the difficulty and challenge of determining the rate of improvement
(0.4% in this example) and whether a constant percentage improvement can be sustained over a
period of time. Jiffy’s managers might determine this rate of improvement by benchmarking
against other companies or evaluating Jiffy’s performance over time. It might decrease the rate
of improvement if it concludes that the rate of improvement is difficult to sustain and needs to be
lowered.
6-32 Responsibility and controllability. Consider each of the following independent

situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for
commercial properties. The company also contracts to service both its own and other brands of
fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the
manufacturing plant and the service technicians (who often need parts to repair fountains), and
12 service vans. The service technicians drive to customer sites to service the fountains. Prestige
owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own
tools.
1. In the manufacturing plant, the production manager is not happy with the motors that the
purchasing manager has been purchasing. In May, the production manager stops requesting
motors from the supply warehouse and starts purchasing them directly from a different motor
6-21
manufacturer. Actual materials costs in May are higher than budgeted.
2. Overhead costs in the manufacturing plant for June are much higher than budgeted.
Investigation reveals a utility rate hike in effect that was not figured into the budget.
3. Gasoline costs for each van are budgeted based on the service area of the van and the amount
of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs
exceeding the budget for van 3. After investigating, the service manager finds that the driver
has been driving the van for personal use.
4. Regency Mall, one of Prestige’s fountain service customers, calls the service people only for
emergencies and not for routine maintenance. Thus, the materials and labor costs for these
service calls exceeds the monthly budgeted costs for a contract customer.
5. Prestige’s service technicians are paid an hourly wage of $22, regardless of experience or
time with the company. As a result of an analysis performed last month, the service manager
determined that service technicians in their first year of employment worked on average 20%
more slowly than other employees. Prestige bills customers per service call, not per hour.
6. The cost of health insurance for service technicians has increased by 40% this year, which
caused the actual health insurance costs to greatly exceed the budgeted health insurance costs
for the service technicians.
Required:
For each situation described, determine where (that is, with whom) (a) responsibility and (b)
controllability lie. Suggest ways to solve the problem or to improve the situation.
SOLUTION
(15 min.) Responsibility and controllability.
1. (a) Production manager

(b) Purchasing Manager
The purchasing manager has control of the cost to the extent that he/she is doing the purchasing
and can seek or contract for the best price. The production manager should work with the
purchasing manager. They can, together, possibly find a combination of better motor and better
price for the motor than the production manager has found.
2. (a) Production Manager

(b) External Forces
In the case of the utility rate hike, the production manager would be responsible for the costs, but
they are hard to control. The rates are fixed by the utility company, and there is usually no
choice of which utility company to use. The production manager can try to reduce waste (turn
off lights when not in use, turn of machines when not running, don’t leave water running, etc.)
but other than conservation measures, the manager has no say in the utility rates. The production
manager might consider purchasing more energy-efficient machines.
3. (a) Van 3 driver

(b) Service manager
6-22
The driver of each van has the responsibility to stay within budget for the costs of the service
vehicle. The service manager should set policies to which the drivers must adhere, including not
using the van for personal use. The service manager could install GPS in the vans to make sure
they are where they are supposed to be, and can also fire the driver of Van 3 for misusing
company property. (Using the van for personal driving affects the tax deductibility of the van for
the firm as well).
4. (a) Prestige’s service manager

(b) Regency manager
Because Regency has a maintenance contract with Prestige, both the mall manager and Prestige’s
service manager should work together to make sure routine maintenance is scheduled for the
mall’s fountains. This will decrease the number and cost of the repair emergencies. The manager
should also consider the average cost of service calls over the months where there were no calls.
5. (a) Service manager

(b) Service manager
It is not surprising that service technicians who are new to the job may work more slowly than
those with more experience. Unless the service manager feels that it is necessary to pay new
employees the full $22 per hour in order to attract qualified applicants, he or she may consider
paying a 20% lower hourly wage to employees in the first year, with an increase at the beginning
of the second year. He or she may also consider additional training for new employees to help
them get up to speed more quickly. It is probably not a good idea for Prestige to convert to an
hourly charge for service calls, as it would punish customers for whom the new technicians were
assigned.
6. (a) Service manager
(b) External forces
Like the cost of utilities, the cost of employee health insurance is determined externally.
However, unlike the case of utilities, it is possible that the service manager can seek out bids
from other providers or negotiate another rate with the existing company. The service manager
may also choose to require employees to pay a greater share of the cost of the health insurance
premium to at least partially offset the increase.
6-33 Responsibility, controllability, and stretch targets. Consider each of the following
independent situations for Sunrise Tours, a company owned by David Bartlett that sells motor
coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and
employs 12 drivers, maintenance technician, 3 sales representatives, and an office manager.
Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per
mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are
visiting their destinations). The maintenance technician and office manager are both full-time
salaried employees. The sales representatives work on straight commission.
1. When the office manager receives calls from potential customers, she is instructed to handle
the contracts herself. Recently, however, the number of contracts written up by the office
manager has declined. At the same time, one of the sales representatives has experienced a
significant increase in contracts. The other two representatives believe that the office
6-23
manager has been colluding with the third representative to send him the prospective
customers.
2. One of the motor coach drivers seems to be reaching his destinations more quickly than any
of the other drivers and is reporting longer idle time.
3. Regular preventive maintenance of the motor coaches has been proven to improve fuel
efficiency and reduce overall operating costs by averting costly repairs. During busy
months, however, it is difficult for the maintenance technician to complete all of the
maintenance tasks within his 40-hour workweek.
4. David Bartlett has read about stretch targets, and he believes that a change in the
compensation structure of the sales representatives may improve sales. Rather than a straight
commission of 10% of sales, he is considering a system where each representative is given a
monthly goal of 50 contracts. If the goal is met, the representative is paid a 12% commission.
If the goal is not met, the commission falls to 8%. Currently, each sales representative
averages 45 contracts per month.
5. Fuel consumption has increased significantly in recent months. David Bartlett is considering
ways to promote improved fuel efficiency and reduce harmful emissions using stretch
environmental targets, where drivers and the maintenance mechanic would receive a bonus if
fuel consumption falls below 90% of budgeted fuel usage per mile driven.
Required:
For situations 1–3, discuss which employee has responsibility for the related costs and the extent
to which costs are controllable and by whom. What are the risks or costs to the company? What
can be done to solve the problem or improve the situation? For situations 4 and 5, describe the
potential benefits and costs of establishing stretch targets.
SOLUTION
(15 min.) Responsibility, controllability, and stretch targets.
1. The office manager has the responsibility to follow company guidelines and write contracts
herself for customers who call her directly. She can also control these costs. Diverting potential
customers to the sales representative costs the company a sales commission that would not have
otherwise been paid. If satisfaction surveys are sent to customers asking about their first contact
with the company, this may be enough to prevent the office manager from breaking the rules.
2. Each driver is responsible for controlling and keeping an accurate accounting of his or her
time. Because the drivers are paid for mileage while driving and an hourly rate while in idle,
there is an incentive to report less travel time and more idle time. The cost could be controlled by
using global positioning systems (GPS) to track the movement and location of the motor
coaches.
3. The maintenance technician is clearly responsible for completing all of the preventative
maintenance. Requiring the technician to work significant overtime will likely decrease his
efficiency. Ignoring routine maintenance will end up costing the company more money in fuel
and repair costs. If the technician cannot complete the tasks during busy months, the company
6-24
should consider outsourcing some of the more routine maintenance jobs or hiring additional help
during those months.
4. The maintenance technician is clearly responsible for completing all of the preventative
maintenance. If he cannot complete the tasks during busy months, the company should consider
outsourcing some of the more routine maintenance jobs. Requiring the technician to work
significant overtime will likely decrease his efficiency. Ignoring routine maintenance will end up
costing the company more money in fuel and repair costs.
5. Bartlett has designed the stretch target system correctly. Taking advantage of loss aversion,
Bartlett has set a stretch target of 50 contracts rewarding the representative with a 12 percent
commission (assuming paying this amount of commission is profitable). If the target is not met,
the commission decreases to 8 percent. This will motivate the representatives to achieve 50
contracts.
In establishing “stretch targets,” Bartlett should be sure that there are sufficient potential
contracts to allow all three sales representatives to achieve the higher target. Otherwise, the
stretch target may cause friction among the sales representatives. One or more of the sales
representatives may decide that the 8 percent commission is not sufficient incentive to stay with
the company, and may leave to work for a competitor, resulting in overall reduced sales.
5. The drivers are responsible for driving the motor coaches at fuel-efficient speeds on the
highway. The maintenance technician is responsible for maintaining the vehicles to improve
efficiency. An increase in fuel consumption would be difficult to pin on either employee
because either could be responsible. However, the bonus offered to drivers would have to
exceed the loss of pay due to driving slower, as they are paid by the mile, and the loss in personal
comfort from sitting in a hot or cold bus may outweigh the bonus from fuel savings while the bus
is idle. “Stretch targets” such as these are more challenging when employees from different
departments must both work in order to achieve them but this may be necessary to get better fuel
efficiency. For the reduced emissions target, Bartlett could consider rewarding just the
technicians, as the maintenance they perform has a direct impact on emissions.
6-34 Cash flow analysis, sensitivity analysis. HealthMart is a retail store selling home medical
supplies. HealthMart also services home oxygen equipment, for which the company bills
customers monthly. HealthMart has budgeted for increases in service revenue of $500 each
month due to a recent advertising campaign. The forecast of sales and service revenue for the
March–June 2018 is as follows:
6-25
Almost all of the retail sales are credit card sales; cash sales are negligible. The credit card
company deposits 92% of the revenue recorded each day into HealthMart’s account overnight.
70% of oxygen service billed each month is collected in the month of the service, and 30% is
collected in the month after the service.
Required:
1. Calculate the cash that HealthMart expects to collect in April, May, and June 2018. Show
calculations for each month.
2. HealthMart has budgeted expenditures for May of $14,100.
a. Given your answer to requirement 1, and assuming a beginning cash balance for
May of $650, will HealthMart be able to cover its payments for May?
b. Assume (independently for each situation) that May revenues might also be 10%
lower or that costs might be 5% higher. Under each of those two scenarios, show
the total net cash for May and the amount HealthMart would have to borrow if
cash receipts are less than cash payments. The company requires a minimum cash
balance of $600. (Again, assume a balance of $650 on May 1.)
3. Why do HealthMart’s managers prepare a cash budget in addition to the revenue,
expenses, and operating income budget? Has preparing the cash budget been helpful?
Explain briefly.
SOLUTION
(30 min.) Cash flow analysis, sensitivity analysis.
1. The cash that HealthMart can expect to collect during April, May, and June is calculated
below.
Cash collection in April May June

From sales revenue (credit cards)
April ($8,400 × 0.92) $7,728
May ($9,100 × 0.92) $8,372
April ($10,500 × 0.92) $9,660
From service revenue
March ($5,000 × 0.30) $1,500
April ($5,000 × 0.70; 0.30) $3,850 $1,650
May ($5,000 × 0.70; 0.30) $4,200 $1,800
June ($5,000 × 0.70; 0.30) $4,550
Total collections $13,078 $14,222 $16,010
2. (a) Beginning balance $650 + Collections $14,222 – Expenditures $14,100 = $772. Yes,
HealthMart will be able to cover the budgeted expenditures and maintain a minimum
ending balance of more than $600.
(b)
6-26
Original May Revenues May Costs
Numbers Decrease 10% Increase 5%
Beginning cash $650.00 $650.00 $650.00
Collections 14,222.00 12,799.80 14,222.00
Expenditures 14,100.00 14,100.00 14,805.00
Total $772.00 ($650.20) $67.00
If May costs increase by as much as 5%, it would not be necessary to borrow money. If May
revenues decrease 10%, HealthMart would have to borrow $1,250.20 ($650.20 + $600) in order
to maintain an ending balance of $600.
3. HealthMart’s managers prepare a cash budget in addition to the operating income budget
to plan cash flows to ensure that the company has adequate cash to make expenditures as they
come due. HealthMart’s managers may need to initiate a plan to borrow money to finance any
shortfall. Building a profitable operating plan does not guarantee that adequate cash will be
available, so HealthMart’s managers need to prepare a cash budget in addition to an operating
income budget.
6-35 Budget schedules for a manufacturer. Lame Specialties manufactures, among other
things, woollen blankets for the athletic teams of the two local high schools. The company sews
the blankets from fabric and sews on a logo patch purchased from the licensed logo store site.
The teams are as follows:
■ Knights, with red blankets and the Knights logo

■ Raiders, with black blankets and the Raider logo
Also, the black blankets are slightly larger than the red blankets. The budgeted direct-cost inputs
for each product in 2017are as follows:
Unit data pertaining to the direct materials for March 2017 are as follows:
6-27
Unit cost data for direct-cost inputs pertaining to February 2017and March 2017 are as follows:
Manufacturing overhead (both variable and fixed) is allocated to each blanket on the basis of
budgeted direct manufacturing labor-hours per blanket. The budgeted variable manufacturing
overhead rate for March 2017 is $16 per direct manufacturing labor-hour. The budgeted fixed
manufacturing overhead for March 2017 is $14,640. Both variable and fixed manufacturing
overhead costs are allocated to each unit of finished goods.
Data relating to finished goods inventory for March 2017are as follows:
Budgeted sales for March 2017 are 130 units of the Knights blankets and 190 units of the
Raiders blankets. The budgeted selling prices per unit in March 2017 are $229 for the
Knights blankets and $296 for the Raiders blankets. Assume the following in your answer:
 Work-in-process inventories are negligible and ignored.

 Direct materials inventory and finished goods inventory are costed using the FIFO
method.
 Unit costs of direct materials purchased and finished goods are constant in March2017.
Required:
6-28
1. Prepare the following budgets for March2017:
a. Revenues budget
b. Production budget in units
c. Direct material usage budget and direct material purchases budget
d. Direct manufacturing labor budget
e. Manufacturing overhead budget
f. Ending inventories budget (direct materials and finished goods)
g. Cost of goods sold budget
2. Suppose Lame Specialties decides to incorporate continuous improvement into its
budgeting process. Describe two areas where it could incorporate continuous improvement into
the budget schedules in requirement 1.
SOLUTION
(40 min.) Budget schedules for a manufacturer.
1a. Revenues Budget

Knights Raiders
Blankets Blankets Total
Units sold 130 190
Selling price $ 229 $ 296
Budgeted revenues $29,770 $56,240 $86,010
b. Production Budget in Units

Knights Raiders
Blankets Blankets
Budgeted unit sales 130 190
Add budgeted ending fin. goods inventory 22 27
Total requirements 152 217
Deduct beginning fin. goods inventory 12 17
Budgeted production 140 200
c. Direct Materials Usage Budget (units)

Red Black Knights Raiders
wool wool logo patches logo Total
patches
Knights blankets:
1. Budgeted input per f.g. unit 4 – 1 –
2. Budgeted production 140 – 140 –
3. Budgeted usage (1 × 2) 560 – 140 –
Raiders blankets:
4. Budgeted input per f.g. unit – 5 – 1
5. Budgeted production – 200 – 200
6. Budgeted usage (4 × 5) – 1,000 – 200
7. Total direct materials
usage (3 + 6) 560 1,000 140 200
6-29
Direct Materials Cost Budget
8. Beginning inventory 35 15 45 60
9. Unit price (FIFO) $ 9 $ 12 $ 7 $ 6
10. Cost of DM used from
beginning inventory (8 × 9) $ 315 $ 180 $315 $ 360 $ 1,170
11. Materials to be used from
purchases (7 – 8) 525 985 95 140
12. Cost of DM in March $ 10 $ 11 $ 7 $ 8
13. Cost of DM purchased and
used in March (11 × 12) $5,250 $10,835 $665 $1,120 $17,870
14. Direct materials to be used
(10 + 13) $5,565 $11,015 $980 $1,480 $19,040
Direct Materials Purchases Budget

Black Knight Raiders
Red wool wool s logos logos Total
Budgeted usage
(from line 7) 560 1,000 140 200
Add target ending
inventory 25 25 25 25
Total requirements 585 1,025 165 225
Deduct beginning
inventory 35 15 45 60
Total DM purchases 550 1,010 120 165
Purchase price (March) $ 10 $ 11 $ 7 $ 8
Total purchases $5,500 $11,110 $840 $1,320 $18,770
d. Direct Manufacturing Labor Budget

Direct
Budgete Manuf. Labor-
d
Units Hours per Total Hourly
Produce Output Unit Hours Rate Total
d
Knights
blankets 140 3 420 $27 $11,340
Raiders
blankets 200 4 800 $27 21,600
1,220 $32,940
e. Manufacturing Overhead Budget
Variable manufacturing overhead costs (1,220 × $16) $19,520
6-30
Fixed manufacturing overhead costs 14,640
Total manufacturing overhead costs $34,160
Total manuf. overhead cost per hour = $34,160 ÷ 1,220 = $28 per direct manufacturing labor-
hour
Fixed manuf. overhead cost per hour = $ 14,640 ÷ 1,220 = $12 per direct manufacturing labor-
hour
f. Computation of unit costs of ending inventory of finished goods

Knights Raiders
Blankets Blankets
Direct materials
Red wool ($10 × 4, 0) $ 40 $ 0
Black wool ($11 × 0, 5) 0 55
Knights logos ($7 × 1, 0) 7 0
Raiders logos ($8 × 0, 1) 0 8
Direct manufacturing labor ($27 × 3, 4) 81 108
Manufacturing overhead
Variable ($16 × 3, 4) 48 64
Fixed ($12 × 3, 4) 36 48
Total manufacturing cost $212 $283
Ending Inventories Budget

Cost per Unit Units Total
Direct Materials
Red wool $ 10 25 $ 250
Black wool 11 25 275
Knights logo patches 7 25 175
Raiders logo patches 8 25 200
900
Finished Goods
Knights blankets 212 22 4,664
Raiders blankets 283 27 7,641
12,305
Total $13,205

Beginning fin. goods inventory, March 1, 2014 ($1,440 + $2,550) $ 3,990
Direct materials used (from Dir. materials cost budget) $19,040
Direct manufacturing labor (Dir. manuf. labor budget) 32,940
Manufacturing overhead (Manuf. overhead budget) 34,160
Cost of goods manufactured 86,140
Cost of goods available for sale 90,130
Deduct ending fin. goods inventory, March 31, 2014 (Inventories budget) 12,305
Cost of goods sold $77,825
6-31
2. Areas where continuous improvement might be incorporated into the budgeting process:
a. Direct materials. Either an improvement in usage or price could be budgeted. For
example, the budgeted usage amounts for the fabric could be related to the maximum
improvement (current usage – minimum possible usage) of yards of fabric for either
blanket. It may also be feasible to decrease the price paid, particularly with quantity
discounts on things like the logo patches.
b. Direct manufacturing labor. The budgeted usage of 3 hours/4 hours could be
continuously revised on a monthly basis. Similarly, the manufacturing labor cost per
hour of $27 could be continuously revised down. The former appears more feasible
than the latter.
c. Variable manufacturing overhead. By budgeting more efficient use of the allocation
base, a signal is given for continuous improvement. A second approach is to budget
continuous improvement in the budgeted variable overhead cost per unit of the
allocation base.
d. Fixed manufacturing overhead. The approach here is to budget for reductions in the
year-to-year amounts of fixed overhead. If these costs are appropriately classified as
fixed, then they are more difficult to adjust down on a monthly basis.
6-36 Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA)

manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following:
Budgeted sales and selling price per unit are as follows:
USA has the opportunity to switch from using the dye it currently uses to using an
environmentally friendly dye that costs $1.25 per ounce. The company would still need 4 ounces
of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in
profit), but the Environmental Protection Agency has threatened to fine the company $130,000 if
it continues to use the harmful but less expensive dye.
Required:
1. Given the preceding information, would USA be better off financially by switching to the
environmentally friendly dye? (Assume all other costs would remain the same.)
2. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to
the new dye. The production manager suggests trying Kaizen costing. If USA can reduce
fabric and labor costs each by 1% per month on all the shirts it manufactures, by how much
will overall costs decrease at the end of 12 months? (Round to the nearest dollar for
6-32
calculating cost reductions.)
3. Refer to requirement 2. How could the reduction in material and labor costs be
accomplished? Are there any problems with this plan?
SOLUTION
(45 min.) Budgeted costs, Kaizen improvements.
1.
Increase in Costs for the Year
Assume US Apparel uses New Dye
Units to dye 50,000
Cost differential ($1.25 – $0.50) per ounce × 4 ounces × $3.00
Increase in costs $150,000
Because the fine is only $130,000, US Apparel would be financially better off by not switching.
3. If US Apparel switches to the new dye, costs will increase by $150,000.

If US Apparel implements Kaizen costing, costs will be reduced as follows:
Original monthly costs
Input Unit cost Number of units Total cost Annual cost

Fabric $6.00 5,000* $30,000 $360,000
Labor $4.00 5,000* 20,000 240,000
Total $50,000 $600,000
*
(10,000 + 50,000)/12 months = 5,000 units
Monthly decrease in costs

(calculated at 99% of previous month’s cost)
Fabric Labor cost
Month 1 $ 30,000 Month 1 $ 20,000
Month 2 29,700 Month 2 19,800
Month 3 29,403 Month 3 19,602
Month 4 29,109 Month 4 19,406
Month 5 28,818 Month 5 19,212
Month 6 28,530 Month 6 19,020
Month 7 28,245 Month 7 18,830
Month 8 27,963 Month 8 18,642
Month 9 27,683 Month 9 18,456
Month 10 27,406 Month 10 18,271
Month 11 27,132 Month 11 18,088
Month 12 26,861 Month 12 17,907
TOTAL $340,850 $227,234 $568,064
6-33
Difference between costs with and without Kaizen improvements
($600,000 – $568,064) $ 31,916
This means costs increase a net amount of $150,000 – 31,916 = $118,084. With Kaizen, the cost
of using the higher cost dye is less than the $130,000 fine for using the harmful dye. US Apparel
would be better off by switching to the new dye.
3. Reduction in materials can be accomplished by reducing waste and scrap. Reduction in

direct labor can be accomplished by improving the efficiency of operations and decreasing down
time.
Employees who make and dye the T-shirts may have suggestions for ways to do their
jobs more efficiently. For instance, employees may recommend process changes that reduce idle
time, setup time, and scrap. To motivate workers to improve efficiency, many companies have
set up programs that share productivity gains with the workers. US Apparel must be careful that
productivity improvements and cost reductions do not in any way compromise product quality.
6-37 Revenue and production budgets. (CPA, adapted) The Sabat Corporation manufactures
and sells two products: Thingone and Thingtwo. In July 2016, Sabat’s budget department
gathered the following data to prepare budgets for 2017:
2017 Projected Sales
2017 Inventories in Units
The following direct materials are used in the two products:
Projected data for 2017 for direct materials are:
6-34
Projected direct manufacturing labor requirements and rates for 2017 are:
Manufacturing overhead is allocated at the rate of $24 per direct manufacturing labor-hour.
Required:
Based on the preceding projections and budget requirements for Thingone and Thingtwo,
prepare the following budgets for 2017:
1. Revenues budget (in dollars)
2. What questions might the CEO ask the marketing manager when reviewing the revenues
budget? Explain briefly.
3. Production budget (in units)
4. Direct material purchases budget (in quantities)
5. Direct material purchases budget (in dollars)
6. Direct manufacturing labor budget (in dollars)
7. Budgeted finished-goods inventory at December 31, 2017 (in dollars)
8. What questions might the CEO ask the production manager when reviewing the production,
direct materials, and direct manufacturing labor budgets?
9. How does preparing a budget help Sabat Corporation’s top management better manage the
company?
SOLUTION
(30–40 min.) Revenue and production budgets.
This is a routine budgeting problem. The key to its solution is to compute the correct quantities
of finished goods and direct materials. Use the following general formula:
= + –
1. Sabat Corporation
Revenues Budget for 2017
Units Price Total

Thingone 62,000 $172 $10,664,000
6-35
Thingtwo 46,000 264 12,144,000
Budgeted revenues $22,808,000
2. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?
Production Budget (in units) for 2017
Thingone Thingtwo
Budgeted sales in units 62,000 46,000
Add target finished goods inventories,
December 31, 2017 26,000 14,000
Total requirements 88,000 60,000
Deduct finished goods inventories,
January 1, 2017 21,000 13,000
Units to be produced 67,000 47,000
Direct Materials Purchases Budget (in quantities) for 2017
Direct Materials
A B C
Direct materials to be used in production
• Thingone (budgeted production of 67,000
units times 5 lbs. of A, 3 lbs. of B) 335,000 201,000 --
• Thingtwo (budgeted production of 47,000
units times 6 lbs. of A, 4 lbs. of B, 2 lb. of C) 282,000 188,000 94,000
Total 617,000 389,000 94,000
Add target ending inventories, December 31, 40,000 35,000 12,000
2017
Total requirements in units 657,000 424,000 106,000
Deduct beginning inventories, January 1, 2017 37,000 32,000 10,000
Direct materials to be purchased (units) 620,000 392,000 96,000
Direct Materials Purchases Budget (in dollars) for 2017
Budgeted Expected
Purchases Purchase
(Units) Price per unit Total
Direct material A 620,000 $11 $6,820,000
Direct material B 392,000 6 2,352,000
Direct material C 96,000 5 480,000
6-36
Budgeted purchases $9,652,000
Direct Manufacturing Labor Budget (in dollars) for 2017
Direct
Budgeted Manufacturing Rate
Production Labor-Hours Total per
(Units) per Unit Hours Hour Total
Thingone 67,000 3 201,000 $11 $2,211,000
Thingtwo 47,000 4 188,000 14 2,632,000
Total $4,843,000
Budgeted Finished Goods Inventory
at December 31, 2017
Thingone:
Direct materials costs:
A, 5 pounds × $11 $55
B, 3 pounds × $6 18 $ 73
Direct manufacturing labor costs,
3 hours × $11 33
Manufacturing overhead costs at $19 per direct
manufacturing labor-hour (3 hours × $19) 57
Budgeted manufacturing costs per unit $163
Finished goods inventory of Thingone
$163 × 26,000 units $4,238,000
Thingtwo:
Direct materials costs:
A, 6 pounds × $11 $66
B, 4 pounds × $6 24
C, 2 each × $5 10 $100
Direct manufacturing labor costs,
4 hours × $14 56
Manufacturing overhead costs at $19 per direct
manufacturing labor-hour (4 hours × $19) 76
Budgeted manufacturing costs per unit $232
Finished goods inventory of Thingtwo
$232 × 14,000 units
3,248,000
Budgeted finished goods inventory, December 31,2017 $7,486,000
8. The CEO would want to ask the production manager why the target ending inventories have
increased. Could production be more closely tailored to demand? Could the efficiency and
productivity of direct materials and direct manufacturing labor be increased? Could direct
materials inventory be reduced?
6-37
9. Preparing a budget helps Saadi Corporation manage costs based on revenues and production
needs, look for opportunities to increase efficiencies, reduce costs, particularly in areas where
costs are high, coordinate and communicate across different parts of the organization, create a
framework for judging performance and facilitating learning, and motivate managers and
employees to achieve “stretch” targets of higher revenues and lower costs.
6-38 Budgeted income statement. (CMA, adapted) Smart Video Company is a manufacturer
of videoconferencing products. Maintaining the videoconferencing equipment is an important
area of customer satisfaction. A recent downturn in the computer industry has caused the
videoconferencing equipment segment to suffer, leading to a decline in Smart Video’s financial
performance. The following income statement shows results for 2017:
Smart Video Company Income Statement for the Year Ended December 31, 2017
(in thousands)
Smart Video’s management team is preparing the 2018 budget and is studying the following
information:
1. Selling prices of equipment are expected to increase by 10% as the economic recovery
begins. The selling price of each maintenance contract is expected to remain unchanged from
2017.
2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in
units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and
quality improvements.
4. Marketing costs are expected to increase by $290,000, but administration costs are expected
to remain at 2017 levels.
5. Distribution costs vary in proportion to the number of units of equipment sold.
6. Two maintenance technicians are to be hired at a total cost of $160,000, which covers wages
and related travel costs. The objective is to improve customer service and shorten response
time.
7. There is no beginning or ending inventory of equipment.
6-38
Required:
1. Prepare a budgeted income statement for the year ending December 31, 2018.
2. How well does the budget align with Smart Video’s strategy?
3. How does preparing the budget help Smart Video’s management team better manage the
company?
SOLUTION
(30 min.) Budgeted income statement.
1.
Smart Video Company
Budgeted Income Statement for 2017
(in thousands)
Revenues
Equipment ($8,000 × 1.06 × 1.10) $9,328
Maintenance contracts ($1,900 × 1.06) 2,014
Total revenues $11,342
Cost of goods sold ($4,000 × 1.06 × 1.05) 4,452
Gross margin 6,890
Operating costs:
Marketing costs ($630 + $290) 920
Distribution costs ($100 × 1.06) 106
Customer maintenance costs ($1,100 + $160) 1,260
Administrative costs 920
Total operating costs 3,206
Operating income $3,684
2. The budget aligns with Videocom’s key strategy of customer satisfaction through
maintaining videoconferencing equipment by hiring maintenance technicians and increasing
costs of customer maintenance by 14.55% ($160,000 ÷ $1,100,000) more than the 6% forecasted
increase in sales.
3. Preparing a budget helps Videocom manage costs based on revenues and production
needs, look for opportunities to increase efficiencies, reduce costs, particularly in areas where
costs are high, coordinate and communicate across different parts of the organization, create a
framework for judging performance and facilitating learning, and motivate managers and
employees to achieve “stretch” targets of higher revenues and lower costs.
6-39 Responsibility in a restaurant. Christa Schuller owns an outlet of a popular chain of

restaurants in the southern part of Germany. One of the chain’s popular lunch items is the
cheeseburger. It is a hamburger topped with cheese. On demand, purchasing agents from each
outlet orders the cheese and meat patties from the Central Warehouse. In January 2018, one of
the freezers in Central Warehouse broke down and the production of meat patty and storing of
cheese were reduced by 20-30% for 4 days. During these 4 days, Christa’s franchise runs out of
6-39
meat patties and cheese slices while facing a high demand for cheeseburgers. Christa’s chef,
Kelly Lyn, decides to prepare cheeseburgers using ingredients from a local market, sending one
of the kitchen helpers to the market to buy the ingredients. Although the customers’ are satisfied,
Christa’s restaurant has to pay twice the cost of the Central Warehouse’s products to procure
meat and cheese from the local market, and the restaurant loses money on this item for those 4
days. Christa is angry with the purchasing agent for not ordering enough meat patty and cheese
to avoid running out of stock, and with Kelly for spending too much money on the procurement
of meat and cheese.
Required:
Who is responsible for the cost of the meat patty and cheese as ingredients of a
cheeseburger? At what level is the cost controllable? Do you agree that Christa should be angry
with the purchasing agent? With Kelly? Why or why not?
SOLUTION
(15 min.) Responsibility of purchasing agent.
The procurement of meat patties and cheese slices is usually the responsibility of the purchasing
agent, though the costs of these items are not under his control. It is usually controllable by the
Central Warehouse. However, in this scenario, Kelly, the cook, has taken the responsibility for
the cost of the meat to be used in meat patties and cheese slices from the local market by making
a purchasing decision. As Christa holds the purchasing agent responsible for the costs of meat
and cheese, and presuming that Kelly knew this, Kelly should have discussed her decision with
the purchasing agent before sending the kitchen helper to the local market.
In any case, Christa should not be angry because her employees acted to satisfy the
customers on a short-term emergency basis. Assuming that the Central Warehouse does not
consistently have problems with their freezer, there is no way the purchasing agent could foresee
the incident beforehand and plan accordingly. The problem only lasted four days, which, in the
course of the year (or even the month) will not seriously harm the profits of a restaurant that sells
a variety of foods along with the cheeseburger. However, if they had not cooked the
cheeseburger with local ingredients when they went out of meat patties and cheese slices for four
days, there could have been a long-term implications on customer satisfaction and customer
loyalty, and in the long run this could harm profits as customers could have found other
restaurants to frequent for lunch.
6-40 Comprehensive problem with ABC costing. Animal Gear Company makes two pet
carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but
the Cat-allac is smaller. Information for the two products for the month of April is given in the
following tables:
6-40
Animal Gear accounts for direct materials using a FIFO cost-flow assumption.
Animal Gear uses a FIFO cost-flow assumption for finished-goods inventory.
Animal Gear uses an activity-based costing system and classifies overhead into three activity
pools: Setup, Processing, and Inspection. Activity rates for these activities are $105 per setup-
hour, $10 per machine-hour, and $15 per inspection-hour, respectively. Other information
follows:
If necessary, round up to calculate number of batches.

Nonmanufacturing fixed costs for March equal $32,000, half of which are salaries. Salaries
are expected to increase 5% in April. Other nonmanufacturing fixed costs will remain the same.
The only variable nonmanufacturing cost is sales commission, equal to 1% of sales revenue.
Prepare the following for April:
6-41
Required:
1. Revenues budget
2. Production budget in units
3. Direct material usage budget and direct material purchases budget
4. Direct manufacturing labor cost budget
5. Manufacturing overhead cost budgets for each of the three activities
6. Budgeted unit cost of ending finished-goods inventory and ending inventories budget
7 Cost of goods sold budget
8. Nonmanufacturing costs budget
9. Budgeted income statement (ignore income taxes)
10. How does preparing the budget help Animal Gear’s management team better manage the
company?
SOLUTION
(60 min.) Comprehensive problem with ABC costing
1.
Revenue Budget
For the Month of April
Units Selling Price Total Revenues

Cat-allac 530 $205 $108,650
Dog-eriffic 225 310 69,750
Total $178,400
2.
Production Budget

Product
Cat-allac Dog-eriffic
Budgeted unit sales 530 225
Add target ending finished goods inventory 30 10
Total required units 560 235
Deduct beginning finished goods inventory 10 19
Units of finished goods to be produced 550 216
3.

Material
Plastic Metal Total
6-42
Cat-allac (550 units × 4 lbs. and 0.5 lb.) 2,200 lbs. 275 lbs.
Dog-eriffic (216 units × 6 lbs. and 1 lb.) 1,296 lbs. 216 lbs.
Total quantity of direct material to be used 3,496 lbs. 491 lbs.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Plastic: 290 lbs. × $3.80 per lb. $ 1,102
Metal: 70 lbs. × $3.10 per lb. $ 217
To be purchased this period
Plastic: (3,496 – 290) lbs. $5 per lb. 16,030
Metal: (485 – 70) lbs. $4 per lb. _ 1,684
Direct materials to be used this period $17,132 $1,901 $19,033
Direct Material Purchases Budget

Material
Plastic Metal Total
To be used in production (requirement 3) 3,496 lbs. 491 lbs.
Add target ending inventory 410 lbs. 65 lbs.
Total requirements 3,906 lbs. 556 lbs.
Deduct beginning inventory 290 lbs. 70 lbs.
Purchases to be made 3,616 lbs. 486 lbs.
Cost Budget
Plastic: 3,616 lbs. $5 $18,080
Metal: 486 lbs. $4 _______ $1,944
Purchases $18,080 $1,944 $20,024
4.
Direct Manufacturing Labor Costs Budget
Output Units
Produced DMLH Total Hourly Wage
(requirement 2) per Unit Hours Rate Total
Cat-allac 550 3 1,650 $10 $16,500
Dog-eriffic 216 5 1,080 10 10,800
Total $27,300
5. Machine Setup Overhead

Cat-allac Dog-eriffic Total
Units to be produced 550 216
Units per batch ÷ 25 ÷9
Number of batches (rounded up) 22 24
6-43
Setup time per batch ×1.50 hrs. ×1.75 hrs.
Total setup time 33 hrs. 42 hrs. 75 hrs.
Budgeted machine setup costs = $105 per setup hour 75 hours

= $7,875
Processing Overhead
Budgeted machine-hours (MH) = (11 MH per unit × 550 units) + (19 MH per unit × 216 units)
= 6,050 MH + 4,104 MH = 10,154 MH
Budgeted processing costs = $10 per MH × 10,154 MH
= $101,540
Inspection Overhead
Budgeted inspection-hours = (0.5 22 batches) + (0.7 24 batches)
= 11 + 16.8 = 27.8 inspection hrs.
Budgeted inspection costs = $15 per inspection hr. 27.8 inspection hours
= $417
Manufacturing Overhead Budget

Machine setup costs $ 7,875
Processing costs 101,540
Inspection costs 417
Total costs $109,832
6.
Unit Costs of Ending Finished Goods Inventory
April 30
Product
Cat-allac Dog-eriffic
Cost per Input per Input per
Unit of Unit of Unit of
Input Output Total Output Total
Plastic $ 5 4 lbs. $ 20.00 6 lbs. $ 30.00
Metal 4 0.5 lbs. 2.00 1 lb. 4.00
Direct manufacturing labor 10 3 hrs. 30.00 5 hrs. 50.00
Machine setup 105 0.06 hrs.a 6.30 0.2 hra 21.00
Processing 10 11 MH 110.00 19 MH 190.00
Inspection 15 0.02 hrb 0.30 0.08 hr.b 1.20
Total $168.60 $296.20
a
33 setup-hours ÷ 550 units = 0.06 hours per unit; 42 setup-hours ÷ 210 units = 0.2 hours per unit
b
11 inspection hours ÷ 550 units = 0.02 hours per unit; 16.8 inspection hours ÷ 210 units = 0.08 hours per unit

April 30
Quantity Cost per unit Total

Direct Materials
6-44
Plastic 410 $ 5 $2,050
Metals 65 4 260 $ 2,310
Finished goods
Cat-allac 30 $168.60 $5,058
Dog-eriffic 10 296.20 2,962 8,020
Total ending inventory $10,330
7.
Beginning finished goods inventory, April, 1 ($1,000 + $4,650) $ 5,650
Direct materials used (requirement 3) $ 19,033
Direct manufacturing labor (requirement 4) 27,300
Manufacturing overhead (requirement 5) 109,832
Deduct: Ending finished goods inventory, April 30 (requirement 6) 8,020
8.
Nonmanufacturing Costs Budget
Salaries ($32,000 ÷ 2 1.05) $16,800
Other fixed costs ($32,000 ÷ 2) 16,000
Sales commissions ($178,400 1%) 1,784
Total nonmanufacturing costs $34,584
9.
Budgeted Income Statement
Revenues $178,400
Cost of goods sold 153,795
Gross margin 24,605
Operating (nonmanufacturing)
costs 34,584
Operating income $ (9,979)
10. Animal Gear is making a loss and will need to increase revenues and manage costs to
turn around the business. Preparing a budget helps Animal Gear manage costs based on revenues
and production needs, look for opportunities to increase efficiencies, reduce costs, particularly in
6-45
areas where costs are high, coordinate and communicate across different parts of the
organization, create a framework for judging performance and facilitating learning, and motivate
management and employees to achieve “stretch” targets of higher revenues and lower costs.
6-41 Cash budget (continuation of 6-40). Refer to the information in Problem 6-40.
Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only
to the public and accepts cash and credit cards; 90% of its sales are to customers using credit
cards, for which AG gets the cash right away, less a 2% transaction fee.
Purchases of materials are on account. AG pays for half the purchases in the period of the
purchase and the other half in the following period. At the end of March, AG owes suppliers
$8,000.
AG plans to replace a machine in April at a net cash cost of $13,000.
Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month
incurred except of course depreciation, which is not a cash flow. Depreciation is $25,000 of the
manufacturing cost and $10,000 of the nonmanufacturing cost for April.
AG currently has a $2,000 loan at an annual interest rate of 12%. The interest is paid at the
end of each month. If AG has more than $7,000 cash at the end of April it will pay back the loan.
AG owes $5,000 in income taxes that need to be remitted in April. AG has cash of $5,900 on
hand at the end of March.
Required:
1. Prepare a cash budget for April for Animal Gear.
2. Why do Animal Gear’s managers prepare a cash budget in addition to the revenue, expenses,
and operating income budget?
SOLUTION
(25 min.) Cash budget (Continuation of 6-40) (Appendix)
Cash Budget
April 30
Cash balance, April 1 $ 5,900
Add receipts
Cash sales ($178,400 × 10%) 17,840
Credit card sales ($178,400 × 90% × 98%) 157,349
Total cash available for needs (x) $181,089
Deduct cash disbursements
Direct materials ($8,000 + $20,024 × 50%) $ 18,012
Direct manufacturing labor 27,300
Manufacturing overhead ($109,832 ─ $25,000 depreciation) 84,832
Nonmanufacturing salaries 16,800
Sales commissions 1,784
Other nonmanufacturing fixed costs ($16,000 ─ $10,000 depreciation) 6,000
Machinery purchase 13,000
Income taxes 5,000
6-46
Total disbursements (y) $172,728
Financing
Repayment of loan $ 2,000
20
Interest at 12% ($2,000 12% )
Total effects of financing (z) $ 2,020
Ending cash balance, April 30 (x) ─ (y) ─ (z) $ 6,341
Note: The solution assumes that the loan is repaid. Some students may point out that the cash
balance at the end of April after the loan is paid is anticipated to be $6,341, which is less than
$7,000 and so Animal Gear would not repay the loan. Under this assumption, the $2,000
repayment would not be shown. Our assumption is that Animal Gear has $8,361 ($181,089 −
$172,728) at the end of April before the loan is paid which is more than $7,000 and so the loan
will be repaid.
2. Animal Gear’s managers prepare a cash budget in addition to the operating income
budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet
payroll, and pay operating expenses as these payments come due. Animal Gear could be very
profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be
delayed and result in insufficient cash being available to make scheduled payments for its
expenses. Animal Gear’s managers may then need to initiate a plan to borrow money to finance
any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be
available, so Animal Gear’s managers need to prepare a cash budget in addition to an operating
income budget.
6-42 Comprehensive operating budget. Skulas, Inc., manufactures and sells snowboards.
Skulas manufactures a single model, the Pipex. In late 2017, Skulas’s management accountant
gathered the following data to prepare budgets for January 2018:
Skulas’s CEO expects to sell 2,900 snowboards during January 2018 at an estimated retail price
of $650 per board. Further, the CEO expects 2018 beginning inventory of 500 snowboards and
would like to end January 2018 with 200 snowboards in stock.
Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also
6-47
$81,000 in fixed manufacturing overhead costs budgeted for January 2018. Skulas combines
both variable and fixed manufacturing overhead into a single rate based on direct manufacturing
labor-hours. Variable marketing costs are allocated at the rate of $250 per sales visit. The
marketing plan calls for 38 sales visits during January 2018. Finally, there are $35,000 in fixed
nonmanufacturing costs budgeted for January 2018.
Other data include:
The inventoriable unit cost for ending finished-goods inventory on December 31, 2017, is
$374.80. Assume Skulas uses a FIFO inventory method for both direct materials and finished
goods. Ignore work in process in your calculations.
Required:
1. Prepare the January 2018 revenues budget (in dollars).
2. Prepare the January 2018 production budget (in units).
3. Prepare the direct material usage and purchases budgets for January 2018.
4. Prepare a direct manufacturing labor costs budget for January 2018.
5. Prepare a manufacturing overhead costs budget for January 2018.
6. What is the budgeted manufacturing overhead rate for January 2018?
7. What is the budgeted manufacturing overhead cost per output unit in January 2018?
8. Calculate the cost of a snowboard manufactured in January 2018.
9. Prepare an ending inventory budget for both direct materials and finished goods for January
2018.
10. Prepare a cost of goods sold budget for January 2018.
11. Prepare the budgeted income statement for Skulas, Inc., for January 2018.
12. What questions might the CEO ask the management team when reviewing the budget?
Should the CEO set stretch targets? Explain briefly.
13. How does preparing the budget help Skulas’s management team better manage the company?
SOLUTION
(60 min.) Comprehensive operating budget, budgeted balance sheet.
1. Schedule 1: Revenues Budget for January 2018

Snowboards 2,900 $650 $1,885,000
2. Schedule 2: Production Budget (in Units) for January 2018

Snowboards
Budgeted unit sales (Schedule 1) 2,900
6-48
Add target ending finished goods inventory 200
Deduct beginning finished goods inventory 500
3. Schedule 3A: Direct Materials Usage Budget for January 2018

Wood Fiberglass Total
Wood: 2,600 × 9 b.f. 23,400
Fiberglass: 2,600 × 10 yards _______ 26,000
To be used in production 23,400 26,000
Cost Budget
Available from beginning inventory
Wood: 2,040 b.f. × $32.00 $ 65,280
Fiberglass: 1,040 b.f. × $8.00 $ 8,320
To be used from purchases this period
Wood: (23,400 – 2,040) × $34.00 726,240
Fiberglass: (26,000 – 1,040) × $9.00 _______ 224,640
Total cost of direct materials to be used $791,520 $232,960 $1,024,480
Schedule 3B: Direct Materials Purchases Budget for January 2018

Wood Fiberglass Total
Production usage (from Schedule 3A) 23,400 26,000
Add target ending inventory 1,540 2,040
Total requirements 24,940 28,040
Deduct beginning inventory 2,040 1,040
Purchases 22,900 27,000
Cost Budget
Wood: 22,900 × $34.00 $778,600
Fiberglass: 27,000 × $9.00 ________ $243,000
Purchases $778,600 $243,000 $1,021,600
6-49
4. Schedule 4: Direct Manufacturing Labor Budget for January 2018
Cost Driver DML Hours per Total Wage

Labor Category Units Driver Unit Hours Rate Total
Manufacturing labor 2,600 5.00 13,000 $29.00 $377,000
5. Schedule 5: Manufacturing Overhead Budget for January 2018

At Budgeted Level of 13,000
Direct Manufacturing Labor-Hours
Variable manufacturing overhead costs
($7.00 × 13,000) $ 91,000
Fixed manufacturing overhead costs 81,000
Total manufacturing overhead costs $172,000
6. Budgeted manufacturing overhead rate: = $13.23 per hour
7. Budgeted manufacturing overhead cost per output unit: = $66 per output unit
8. Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in January 2018
Cost per
Unit of
Inputa Inputsb Total
Direct materials
Wood $34.00 9.00 $306.00
Fiberglass 9.00 10.00 90.00
Direct manufacturing labor 29.00 5.00 145.00
Total manufacturing overhead 66.00
$607.00
a
Cost is per board foot, yard, or per hour
b
Inputs is the amount of each input per board
9. Schedule 6B: Ending Inventories Budget, January 31, 2018
Cost per
Units Unit Total
Direct materials
Wood 1,540 $ 34.00 $ 52,360
Fiberglass 2,040 9.00 18,360
Finished goods
Snowboards 200 607.00 121,400
Total Ending Inventory $192,120
6-50
10. Schedule 7: Cost of Goods Sold Budget for January 2018
From
Schedule Total
Beginning finished goods inventory
January 1, 2018, $374.80 × 500 Given $ 187,400
Direct materials used 3A $1,024,480
Direct manufacturing labor 4 377,000
Manufacturing overhead 5 172,000
Cost of goods manufactured 1,573,480
Deduct ending finished goods
inventory, January 31, 2018 6B 121,400
11. Budgeted Income Statement for Skulas for January 2018

Revenues Schedule 1 $1,885,000
Cost of goods sold Schedule 7 1,639,480
Gross margin 245,520
Operating costs
Variable marketing costs ($250 × 38) $ 9,500
Fixed nonmanufacturing costs 35,000 44,500
Operating income $ 201,020
13. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?
The CEO would want to ask the production manager if production could be more closely
tailored to demand? Could the efficiency and productivity of direct materials and direct
manufacturing labor be increased? Could direct materials inventory be reduced?
The CEO should set stretch targets that are challenging but achievable because creating
some performance anxiety motivates employees to exert extra effort and attain better
performance. A major rationale for stretch targets is the psychological motivation that comes
from loss aversion—people feel the pain of loss more than the joy of success. Setting challenging
targets motivates employees to reach these targets because failing to achieve a target is seen as
failing. At no point should the pressure for performance push employees to engage in illegal or
unethical practices. So, while setting stretch targets, the CEO must place great emphasis on
adhering to codes of conduct and following appropriate norms and values. The CEO should also
not set targets that are very difficult or impossible to achieve. Such targets demotivate employees
because they give up on trying to achieve them.
14. Preparing a budget helps Skulas manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
high, coordinate and communicate across different parts of the organization, create a framework
for judging performance and facilitating learning, and motivate management and employees to
achieve “stretch” targets of higher revenues and lower costs.
6-51
6-43 Cash budgeting, budgeted balance sheet. (Continuation of 6-42) (Appendix)
Refer to the information in Problem 6-42.
Budgeted balances at January 31, 2018 are as follows:
Selected budget information for December 2017 follows:
Customer invoices are payable within 30 days. From past experience, Skulas’s accountant
projects 40% of invoices will be collected in the month invoiced, and 60% will be collected in
the following month.
Accounts payable relates only to the purchase of direct materials. Direct materials are
purchased on credit with 50% of direct materials purchases paid during the month of the
purchase, and 50% paid in the month following purchase.
Fixed manufacturing overhead costs include $64,000 of depreciation costs and fixed
nonmanufacturing overhead costs include $10,000 of depreciation costs. Direct manufacturing
labor and the remaining manufacturing and nonmanufacturing overhead costs are paid monthly.
All property, plant, and equipment acquired during January 2018 were purchased on credit
and did not entail any outflow of cash.
There were no borrowings or repayments with respect to long-term liabilities in January
2018.
On December 15, 2017, Skulas’s board of directors voted to pay a $160,000 dividend to
stockholders on January 31, 2018.
Required:
1. Prepare a cash budget for January 2018. Show supporting schedules for the calculation of
collection of receivables and payments of accounts payable, and for disbursements for fixed
manufacturing and nonmanufacturing overhead.
2. Skulas is interested in maintaining a minimum cash balance of $120,000 at the end of each
month. Will Skulas be in a position to pay the $160,000 dividend on January 31?
3. Why do Skulas’s managers prepare a cash budget in addition to the revenue, expenses, and
operating income budget?
4. Prepare a budgeted balance sheet for January 31, 2018 by calculating the January 31, 2018
balances in (a) cash (b) accounts receivable (c) inventory (d) accounts payable and (e)
plugging in the balance for stockholders’ equity.
SOLUTION
6-52
(30 min.) Cash budgeting, chapter appendix.
1.
Cash Collections from Receivables

From sales in:
December7 (60%  $1,650,000) $ 990,000
January (40%  $1,885,000) 754,000
Total $1,744,000
Cash Disbursements for Material Purchases
For purchases in:

December (50% × $820,000) $410,000
January (50% × $1,021,600a) 510,800
Total $920,800
6-37, Schedule 3B
a
Cash Disbursements for Fixed Overhead Costs

Fixed manufacturing overhead ($81,000b – $64,000) $17,000
Fixed nonmanufacturing overhead ($35,000c – $10,000) 25,000
Total $42,000
6-42, Schedule 5
b
6-42, Budgeted Income Statement

c
Cash Budget for January 2018
Beginning cash balance $ 124,000
Add receipts: Collection of receivables 1,744,000

Total cash available $1,868,000
Deduct disbursements:
Material purchases $ 920,800
Variable manufacturing overhead 91,000
Fixed manufacturing overhead 17,000
Variable marketing costs 9,500
Fixed nonmanufacturing costs 25,000
Cash dividends 160,000
Total disbursements 1,600,300
Ending cash balance $ 267,700
6-53
2. Yes. Skulas has a budgeted cash balance of $267,700 on January 31, 2018, after paying the
dividend of $160,000 at the end of January.
3. Skulas’ managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Skulas could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Skulas’ managers
may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable
operating plan does not guarantee that adequate cash will be available, so Skulas’ managers need
to prepare a cash budget in addition to an operating income budget.
4. Budgeted Balance Sheet for Skulas as of January 31, 2018

Cash $ 267,700
Accounts receivable (60% × $1,885,000) 1,131,000
Inventory Schedule 6B 192,120
Property, plant, and equipment (net) 1,175,600
Total assets $2,766,420
Accounts Payable $ 510,800

Long-term liabilities 182,000
Stockholders’ equity 2,073,620
Total liabilities and stockholders’ equity $2,766,420
6-44 Comprehensive problem; ABC manufacturing, two products. Hazlett, Inc., operates
at capacity and makes plastic combs and hairbrushes. Although the combs and brushes are a
matching set, they are sold individually and so the sales mix is not 1:1. Hazlett’s management is
planning its annual budget for fiscal year 2018. Here is information for 2018:
6-54
Hazlett accounts for direct materials using a FIFO cost flow.
Hazlett uses a FIFO cost-flow assumption for finished-goods inventory.

Combs are manufactured in batches of 200, and brushes are manufactured in batches of 100.
It takes 20 minutes to set up for a batch of combs and 1 hour to set up for a batch of brushes.
Hazlett uses activity-based costing and has classified all overhead costs as shown in the
following table. Budgeted fixed overhead costs vary with capacity. Hazlett operates at capacity
so budgeted fixed overhead cost per unit equals the budgeted fixed overhead costs divided by the
budgeted quantities of the cost allocation base.
Delivery trucks transport units sold in delivery sizes of 1,000 combs or 1,000 brushes.
Do the following for the year 2018:
Required:
1. Prepare the revenues budget.
2. Use the revenues budget to:
a. Find the budgeted allocation rate for marketing costs.
b. Find the budgeted number of deliveries and allocation rate for distribution costs.
3. Prepare the production budget in units.
4. Use the production budget to:
a. Find the budgeted number of setups and setup-hours and the allocation rate for setup costs.
b. Find the budgeted total machine-hours and the allocation rate for processing costs.
c. Find the budgeted total units produced and the allocation rate for inspection costs.
5. Prepare the direct material usage budget and the direct material purchases budget in both
6-55
units and dollars; round to whole dollars.
6. Use the direct material usage budget to find the budgeted allocation rate for materials-
handling costs.
7. Prepare the direct manufacturing labor cost budget.
8. Prepare the manufacturing overhead cost budget for materials handling, setup, processing,
and inspection costs.
9. Prepare the budgeted unit cost of ending finished-goods inventory and ending inventories
budget.
10. Prepare the cost of goods sold budget.
11. Prepare the nonmanufacturing overhead costs budget for marketing and distribution.
12. Prepare a budgeted income statement (ignore income taxes).
13. How does preparing the budget help Hazlett’s management team better manage the
company?
SOLUTION
(60 min.) Comprehensive problem; ABC manufacturing, two products.
1.
Revenues Budget
For the Year Ending December 31, 2018

Selling
Units Price Total Revenues
Combs 12,000 $ 9 $108,000
Brushes 14,000 $30 420,000
Total $528,000
2a.
Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed marketing costs
= $21,150 + $90,000 = $111,150
Marketing allocation rate = $111,150 ÷ $528,000 = $0.2105 per sales dollar
2b.
Total budgeted distribution costs = Budgeted variable distribn. costs + Budgeted fixed distribn. costs
= $0 + $1,170 = $1,170
Combs: 12,000 units ÷ 1,000 units per delivery 12 deliveries

Brushes: 14,000 units ÷ 1,000 units per delivery 14 deliveries
Total 26 deliveries
Delivery allocation rate = $1,170 ÷ 26 deliveries = $45 per delivery
3.
Production Budget (in Units)
6-56
Product
Combs Brushes
Budgeted unit sales 12,000 14,000
Add target ending finished goods inventory 1,200 1,400
Total required units 13,200 15,400
Deduct beginning finished goods inventory 600 1,200
Units of finished goods to be produced 12,600 14,200
4a.
Combs Brushes Total
Machine setup overhead
Units to be produced 12,600 14,200
Units per batch ÷200 ÷100
Number of setups 63 142
Hours to setup per batch ×1/3 ×1
Total setup hours 21 142 163
Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs
= $10,245 + $16,650 = $26,895
= $26,895 ÷ 163 setup hours = $165 per setup hour
b.
Combs: 12,600 units × 0.025 MH per unit 315 MH
Brushes: 14,200 units × 0.1 MH per unit 1,420 MH
Total 1,735 MH
Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed processing costs
= $11,640 + $30,000 = $41,640
Processing allocation rate = $41,640 ÷ 1,735 MH = $24 per MH
c.
Total budgeted inspection costs = Budgeted variable inspection costs + Budgeted fixed inspection costs
= $10,500 + $1,560 = $12,060
Inspection allocation rate = $12,060 ÷ 26,800 units = $0.45 per unit
6-57
5.

Material
Plastic Bristles Total
Combs (12,600 units × 5 oz and 0 bunches) 63,000 oz.
Brushes (14,200 units × 8 oz and 16 bunches) 113,600 oz. 227,200 bunches
Total quantity of direct materials to be used 176,600 oz. 227,200 bunches
Cost Budget
(under a FIFO cost-flow assumption) $ 456 $ 1,419
Plastic: (176,600 oz. – 1,600 oz) × $0.30 per oz. 52,500
Bristles: (227,200 bunches – 1,820) × $0.75 per bunch _______ 169,035

Material
Plastic Bristles Total
To be used in production (requirement 5) 176,600 oz. 227,200 bunches
Add: Target ending direct material inventory 1,766 oz. 2,272 bunches
Total requirements 178,366 oz. 229,472 bunches
Deduct: Beginning direct material inventory 1,600 oz. 1,820 bunches
Purchases to be made 176,766 oz. 227,652 bunches
Cost Budget
Plastic: 176,766 oz. $0.30 per oz $ 53,030
Bristles : 227,652 bunches $0.75 per bunch _______ $170,739
Purchases $ 53,030 $170,739 $223,769
6. Total budgeted matls. handlg. cost = Budgeted variable matls. handlg. cost + Budgeted fixed
matls. handlg. cost
= $17,235 + $22,500 = $39,735
= $39,735 ÷ 176,600 oz = $0.225 per oz. of plastic
6-58
7.

Output Units Direct Manufacturing Total Hourly Wage Total
Produced Labor-Hours per Unit Hours Rate
Combs 12,600 0.05 630 $18 $11,340
Brushes 14,200 0.2 2,840 18 51,120
Total $62,460
8.
Manufacturing Overhead Cost Budget
Variable Fixed Total

Materials handling $17,235 $22,500 $ 39,735
Machine setup 10,245 16,650 26,895
Processing 11,640 30,000 41,640
Inspection 10,500 1,560 12,060
Total $49,620 $70,710 $120,330
9.
Combs Brushes
Unit of Unit of Unit of
Input Output Total Output Total
Plastic $0.30 5 oz. $1.50 8 oz $ 2.40
Bristles 0.75 ─ ─ 16 bunches 12.00
Direct manufacturing labor 18.00 0.05 hrs. 0.90 0.2 hour 3.60
Materials handling 0.225 5 oz. 1.125 8 oz 1.80
Machine setup 165.00 0.001667 hrs.a 0.275 0.01 setup-hra 1.65
Processing 24.00 0.025 MH 0.60 0.1 MH 2.40
Inspection 0.45 1 unit 0.45 1 unit 0.45
Totals $4.85 $24.30
a
21 setup-hours ÷ 12,600 units = 0.001667 hours per unit; 142 setup hours ÷ 14,200 units = 0.01 hours per unit
6-59
December 31, 2018

Direct Materials
Plastic 1,766 oz $0.30 $ 529.80
Bristles 2,272 bunches 0.75 1,704.00 $ 2,233.80
Finished goods
Combs 1,200 $4.85 $ 5,820.00
Brushes 1,400 24.30 34,020.00 39,840.00
Total ending inventory $42,073.80
10.
Beginning finished goods inventory, Jan. 1
($2,700 + $27,180) $ 29,880
Direct materials used (requirement 5) $223,410
Direct manufacturing labor (requirement 7) 62,460
Manufacturing overhead (requirement 8) 120,330
Deduct: Ending finished goods inventory, December 31
(reqmt. 9) 39,840
11.
Variable Fixed Total

Marketing $21,150 $90,000 $111,150
Distribution 0 1,170 1,170
Total $21,150 $91,170 $112,320
12.
Revenue $528,000
Operating (nonmanufacturing) costs 112,320
6-60
13. Preparing a budget helps Hazlett manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
high, coordinate and communicate across different parts of the organization, create a framework
for judging performance and facilitating learning, and motivate management and employees to
achieve “stretch” targets of higher revenues and lower costs.
6-45 Cash budget. (Continuation of 6-44) (Appendix)

Refer to the information in Problem 6-44.
All purchases made in a given month are paid for in the following month, and direct material
purchases make up all of the accounts payable balance and are reflected in the accounts payable
balances at the beginning and the end of the year.
Sales are made to customers with terms net 45 days. Fifty percent of a month’s sales are
collected in the month of the sale, 25% are collected in the month following the sale, and 25% are
collected two months after the sale and are reflected in the accounts receivables balances at the
beginning and the end of the year.
Direct manufacturing labor, variable manufacturing overhead and variable marketing costs
are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, 60% of fixed
marketing costs, and 100% of fixed distribution costs are depreciation expenses. The remaining
fixed manufacturing overhead and marketing costs are paid as they are incurred.
Selected balances for December 31, 2017, follow:
Selected budget information for December 2018 follows:
Hazlett has budgeted to purchase equipment costing $145,000 for cash during 2018. Hazlett
desires a minimum cash balance of $25,000. The company has a line of credit from which it may
borrow in increments of $1,000 at an interest rate of 12% per year. By special arrangement, with
the bank, Hazlett pays interest when repaying the principal, which only needs to be repaid in
2019.
Required:
1. Prepare a cash budget for 2018. If Hazlett must borrow cash to meet its desired ending cash
balance, show the amount that must be borrowed.
2. Does the cash budget for 2018 give Hazlett’s managers all of the information necessary to
manage cash in 2018? How might that be improved?
3. What insight does the cash budget give to Hazlett’s managers that the budgeted income
statement does not?
SOLUTION
6-61
Cash budget (Continuation of 6-44)
Cash Budget for 2018
Beginning cash balance $ 29,200

Add receipts:
Collections from customersa 519,500
Total cash available $ 548,700
Deduct disbursements:
Material purchasesb $ 217,449
Variable manufacturing overhead 49,620
Fixed manufacturing overheadc 35,355
Variable marketing costs 21,150
Fixed marketing costsd 36,000
Equipment purchase 145,000
Total disbursements 567,034
Excess or (deficiency) of cash (18,334)
Need to borrow 44,000
Ending cash balance $ 25,666
a
$40,000 beg. accounts receivable + $528,000 sales in 2018 - $48,500 ending accounts receivable =
$519,500 disbursed
b
$21,450 beg. accounts payable + $223,769 direct material purchases - $27,770 ending accounts payable
= $217,449 disbursed
c
$70,710 fixed manufacturing overhead – (50% × $70,710) depreciation = $35,355 disbursed
d
$90,000 fixed marketing overhead – (60% × $90,000) depreciation = $36,000 disbursed
2. The cash budget for 2018 does not show when during the year the equipment will be
purchased. As a result, Hazlett’s managers do not know when to plan to borrow the $44,000 to
achieve the minimum ending cash balance at the end of the year. It could be improved by
preparing a cash budget for each month of the year. The problem did not present the data in such
a way to make that possible here, but an actual company would have sufficient information.
3. Hazlett’s managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Hazlett could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Hazlett’s
managers may then need to initiate a plan to borrow money to finance any shortfall. Building a
profitable operating plan does not guarantee that adequate cash will be available, so Hazlett’s
managers need to prepare a cash budget in addition to an operating income budget.
6-46 Budgeting and ethics. Jayzee Company manufactures a variety of products in a variety
of departments and evaluates departments and departmental managers by comparing actual cost
and output relative to the budget. Departmental managers help create the budgets and usually
provide information about input quantities for materials, labor, and overhead costs.
6-62
Kurt Jackson is the manager of the department that produces product Z. Kurt has estimated
these inputs for product Z:
The department produces about 100 units of product Z each day. Kurt’s department always gets
excellent evaluations, sometimes exceeding budgeted production quantities. For each 100 units
of product Z produced, the company uses, on average, about 48 hours of direct manufacturing
labor (eight people working 6 hours each), 790 pounds of material, and 39.5 machine-hours.
Top management of Jayzee Company has decided to implement budget standards that will
challenge the workers in each department, and it has asked Kurt to design more challenging input
standards for product Z. Kurt provides top management with the following input quantities:
Required:
Discuss the following:
1. Are these budget standards challenging for the department that produces product Z?
2. Why do you suppose Kurt picked these particular standards?
3. What steps can Jayzee Company’s top management take to make sure Kurt’s standards really
meet the goals of the firm?
SOLUTION
(15 min.) Budgeting and ethics.
1. The standards proposed by Kurt are not challenging. In fact, he set the target at the level his
department currently achieves.
Direct materials: 7.9 lbs. × 100 units = 790 lbs.

Direct manufacturing labor: 29 min. × 100 units = 2,900 min ÷ 60 = 48.33 hrs.
Machine time: 23.6 min. × 100 units = 2,360 min. ÷ 60 = 39.33 hrs. approx
2. Kurt probably chose these standards so that his department would be able to make the goal and
receive any resulting reward. With a little effort, his department can likely beat these goals.
3. Top management should point out that the targets set by Kurt are targets that the department
already achieves. Top management is seeking targets that are slightly difficult to achieve, a
stretch target that would challenge workers.
As discussed in the chapter, benchmarking might also be used to highlight the easy targets set
by Kurt and to determine more challenging targets. Perhaps the organization has multiple plant
6-63
locations that could be used as comparisons. Alternatively, management could use industry
averages. Also, management should work with Kurt to better understand his department and
encourage him to set more realistic targets. Finally, the reward structure should be designed to
encourage increasing productivity, not beating the budget. Management could also set
continuous improvement standards.
6-47 Kaizen budgeting for carbon emissions. Apex Chemical Company currently operates
three manufacturing plants in Colorado, Utah, and Arizona. Annual carbon emissions for these
plants in the first quarter of 2018 are 125,000 metric tons per quarter (or 500,000 metric tons in
2018). Apex management is investigating improved manufacturing techniques that will reduce
annual carbon emissions to below 475,000 metric tons so that the company can meet
Environmental Protection Agency guidelines by 2019. Costs and benefits are as follows:
Total cost to reduce carbon emissions $10 per metric ton reduced in 2019 below 500,000
metric tons
Fine in 2019 if EPA guidelines are not met $300,000
Apex Management has chosen to use Kaizen budgeting to achieve its goal for carbon emissions.
Required:
1. If Apex reduces emissions by 1% each quarter, beginning with the second quarter of 2018,
will the company reach its goal of 475,000 metric tons by the end of 2019?
2. What would be the net financial cost or benefit of their plan? Ignore the time value of money.
3. What factors other than cost might weigh into Apex’s decision to carry out this plan?
SOLUTION
(30 min.) Kaizen budgeting for carbon emissions.
1. Yes, the company would achieve its goal. Total carbon emissions for 2019 are calculated in
the following table. Each quarter’s emissions are 99% of the previous quarter’s emissions since
Apex reduces emissions by 1% each quarter. Total emissions in 2019 would be 120,075 +
118,874 + 117,685 + 116,508 = 473,142 metric tons, which is below the Environmental
Protection Agency (EPA) guideline of 475,000 metric tons.
Quarter Quarterly Emissions

2018 Q1 125,000 metric tons
2018 Q2 123,750a metric tons
2018 Q3 122,513b metric tons
6-64
a
123,750 = 125,000 × 0.99; b122,513 = 123,750 × 0.99
2. Apex’s emissions are below the EPA guideline of 475,000 metric tons. Consequently the
EPA will not assess Apex a fine of $300,000.
Current annual emissions 500,000 metric tons

Emissions in 2019 473,142 metric tons
Reduction in emissions 26,858 metric tons
Fine avoided $300,000

Cost at $10 per metric ton reduction, 26,858 × $10 268,580
Net benefit of plan $ 31,420
3. While this plan would benefit Apex marginally by $31,420, avoidance of the EPA fine
should not be the company’s sole motivation in carrying out this plan. Reducing carbon
emissions is good for the environment, and will contribute to a smaller impact on climate
change. Research has shown that good environmental and sustainability practices has positive
effects on investors, consumers, and employees. Apex may also be able to share this plan with
the general population and gain favorable publicity. Apex may want to continue to reduce
carbon emissions if they have the technology to do so.
6-48 Comprehensive budgeting problem; activity-based costing, operating and financial

budgets. Tyva makes a very popular undyed cloth sandal in one style, but in Regular and
Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth-covered wooden
soles. Tyva is preparing its budget for June 2018 and has estimated sales based on past
experience.
Other information for the month of June follows:
6-65
Tyva accounts for direct materials using a FIFO cost-flow assumption.
Tyva uses a FIFO cost-flow assumption for finished-goods inventory.

All the sandals are made in batches of 50 pairs of sandals. Tyva incurs manufacturing
overhead costs, marketing and general administration, and shipping costs. Besides materials and
labor, manufacturing costs include setup, processing, and inspection costs. Tyva ships 40 pairs of
sandals per shipment. Tyva uses activity-based costing and has classified all overhead costs for
the month of June as shown in the following chart:
Required:
1. Prepare each of the following for June:
a. Revenues budget
6-66
b. Production budget in units
c. Direct material usage budget and direct material purchases budget in both units and
dollars; round to dollars
d. Direct manufacturing labor cost budget
e. Manufacturing overhead cost budgets for setup, processing, and inspection activities
f. Budgeted unit cost of ending finished-goods inventory and ending inventories budget
h. Marketing and general administration and shipping costs budget
2. Tyva’s balance sheet for May 31 follows.
Use the balance sheet and the following information to prepare a cash budget for Tyva for June.
Round to dollars.
• All sales are on account; 60% are collected in the month of the sale, 38% are collected the
following month, and 2% are never collected and written off as bad debts.
• All purchases of materials are on account. Tyva pays for 80% of purchases in the month of
purchase and 20% in the following month.
• All other costs are paid in the month incurred, including the declaration and payment of a
$15,000 cash dividend in June.
• Tyva is making monthly interest payments of 0.5% (6% per year) on a $150,000 long-term
loan.
• Tyva plans to pay the $10,800 of taxes owed as of May 31 in the month of June. Income tax
expense for June is zero.
• 30% of processing, setup, and inspection costs and 10% of marketing and general
administration and shipping costs are depreciation.
3. Prepare a budgeted income statement for June and a budgeted balance sheet for Tyva as of June
30, 2018.
6-67
SOLUTION
(60 min.) Comprehensive budgeting problem; activity-based costing, operating and financial
budgets.
1a.
Revenues Budget
For the Month of June, 2018


Regular 2,000 $120 $240,000
Deluxe 3,000 195 585,000
Total $825,000
b.
Production Budget

Product
Regular Deluxe
Budgeted unit sales 2,000 3,000
Add: target ending finished goods inventory 400 600
Deduct: beginning finished goods inventory 250 650
c.

Material
Cloth Wood Total
Regular (2,150 units × 1.3 yd.; 0 b.f.) 2,795 yds. 0 b.f.
Deluxe (2,950 units × 1.5 yds.; 2 b.f.) 4,425 yds. 5,900 b.f.
Total quantity of direct materials to be used 7,220 yds. 5,900 b.f.
Cost Budget
(under a FIFO cost-flow assumption) $ 3,219 $ 6,060

Cloth: (7,220 yd. – 610 yd.) × $5.25 per yd. 34,703
Wood: (5,900 – 800) × $7.50 per b. f. 38,250
6-68

Material
Cloth Wood Total
To be used in production 7,220 yds. 5,900 ft
Add: Target ending direct material inventory 386 yds. 295 ft
Total requirements 7,606 yds. 6,195 ft
Deduct: beginning direct material inventory 610 yds. 800 ft
Purchases to be made 6,996 yds. 5,395 ft
Cost Budget
Cloth: (6,996 yds. × $5.25 per yd.) $36,729
Wood: (5,395 ft × $7.50 per b.f.) ______ $40,463
Total $36,729 $40,463 $77,192
d.

Output Units Direct Manufacturing Total Hourly Wage Total
Produced Labor-Hours per Unit Hours Rate
Regular 2,150 5 10,750 $15 $161,250
Deluxe 2,950 7 20,650 15 309,750
Total 31,400 $471,000
e.
Manufacturing Overhead Costs Budget
For the Month of June 2018
Total
Machine setup
(Regular, 43 batchesa × 2 hrs./batch + Deluxe, 59 batchesb × 3 hrs./batch) $18/hour $ 4,734
Processing (31,400 DMLH $1.80) 56,520
Inspection [(2,150 + 2,950) pairs $1.35 per pair] 6,885
Total $68,139
a
Regular: 2,150 pairs ÷ 50 pairs per batch = 43; bDeluxe: 2,950 pairs ÷ 50 pairs per batch = 59
6-69
f.
Regular Deluxe
Unit of Input Unit of Output Total Unit of Output Total
Cloth $ 5.25 1.3 yd $ 6.83 1.5 yd $ 7.88
Wood 7.50 0 b.f. 0.00 2 b.f. 15.00
Direct manufacturing labor 15.00 5 hr. 75.00 7 hrs. 105.00
Machine setup 18.00 0.04 hra 0.72 0.06 hrb 1.08
Processing 1.80 5 hrs 9.00 7 hrs 12.60
Inspection 1.35 1 pair 1.35 1 pair 1.35
Total $92.90 $142.91
a
2 hours per setup ÷ 50 pairs per batch = 0.04 hr. per unit
b
3 hours per setup ÷ 50 pairs per batch = 0.06 hr. per unit

June, 2018

Direct Materials
Cloth 386 yards $5.25 $2,026.50
Wood 295 b.f. 7.50 2,212.50 $ 4,239
Finished goods
Regular 400 $ 92.90 $37,160
Deluxe 600 142.91 85,746 122,906
g.
Beginning finished goods inventory, June 1 ($23,250 + $92,625) $115,875
Direct materials used (requirement c) $ 82,232
Direct manufacturing labor (requirement d) 471,000
Manufacturing overhead (requirement e) 68,139
Deduct ending finished goods inventory, June 30 (requirement f) 122,906
6-70
h.
Total
Marketing and general administration
8% × $825,000 $66,000
Shipping
(5,000 pairs ÷ 40 pairs per shipment) × $15 1,875
Total $67,875
2.
Cash Budget
June 30, 2018
Cash balance, June 1 (from Balance Sheet) $ 9,435
Add receipts
Collections from May accounts receivable 307,800
Collections from June accounts receivable
($825,000 60%) 495,000
Total collection from customers 802,800

Total cash available for needs (x) $812,235
Deduct cash disbursements
Direct material purchases in May $ 15,600
Direct material purchases in June
($77,192 80%) 61,754
Manufacturing overhead
($68,139 70% because 30% is depreciation) 47,697
Nonmanufacturing costs
($67,875 90% because 10% is depreciation) 61,088
Taxes 10,800
Dividends 15,000
Total disbursements (y) $682,939
Financing
Interest at 6% ($150,000 6% 1 ÷ 12) (z) $ 750
Ending cash balance, June 30 (x) – (y) – (z) $128,546
3.
Revenues $825,000
Bad debt expense ($825,000 2%) 16,500
Net revenues $808,500
Operating (nonmanufacturing) costs $67,875
Interest expense (for June) 750 68,625
6-71
Net income $125,535
Budgeted Balance Sheet

June 30, 2018
Assets
Cash $ 128,546
Accounts receivable ($825,000 × 40%) $330,000
Less: allowance for doubtful accounts 16,500 313,500
Inventories
Direct materials $ 4,239
Finished goods 122,906 127,145
Fixed assets $870,000

Less: accumulated depreciation
($136,335 + $68,139 30% + $67,875 × 10%)) 163,564 706,436
Total assets $1,275,627
Liabilities and Equity

Accounts payable ($77,192 × 20%) $ 15,438
Interest payable 750
Long-term debt 150,000
Common stock 300,000
Retained earnings ($698,904 + $125,535 – $15,000)) 809,439
Total liabilities and equity $1,275,627
Try It 6-1 Solution

Schedule 1: Revenues Budget
for the Year Ending December 31, 2017
Knox 21,000 $25 $525,000
Ayer 10,000 40 400,000
Total $925,000
Schedule 2: Production Budget (in Units)

Product
Knox Ayer
Budgeted sales in units (Schedule 1) 21,000 10,000
Add target ending finished goods inventory 2,000 1,000
Deduct beginning finished goods inventory 3,000 1,000
6-72
Try It 6-2 Solution
Schedule 3A: Direct Material Usage Budget in Quantity and Dollars

Material
Metal Fabric Total
Direct materials required for Knox lamps 40,000 pounds 20,000 yards
(20,000 units × 2 pounds and 1 yard)
Direct materials required for Ayer lamps 30,000 pounds 15,000 yards
(10,000 units × 3 pounds and 1.5 yards)
Total quantity of direct materials to be used 70,000 pounds 35,000 yards
Cost Budget
Available from beginning direct materials
inventory (under a FIFO cost-flow assumption)
(Given)
Metal: 12,000 pounds × $3 per pound $ 36,000
Fabric: 7,000 yards × $4 per yard $ 28,000
To be purchased and used this period
Metal: (70,000 – 12,000) pounds × $3 per pound 174,000
Fabric:(35,000 – 7,000) yards × $4 per yard 112,000
Schedule 3B: Direct Material Purchases Budget

Material
Metal Fabric Total
To be used in production (from Schedule 70,000 pounds 35,000 yards
3A)
Add target ending inventory 10,000 pounds 5,000 yards
Total requirements 80,000 pounds 40,000 yards
Deduct beginning inventory 12,000 pounds 7,000 yards
Purchases to be made 68,000 pounds 33,000 yards
Cost Budget
Metal: 68,000 pounds × $3 per pound $204,000
Fabric: 33,000 yards × $4 per yard $132,000
Direct materials to be purchased this period $204,000 $132,000 $336,000
6-73
Schedule 4: Direct Manufacturing Labor Costs Budget
Direct
Output Units Manufacturing
Produced Labor-Hours Total Hourly
(Schedule 2) per Unit Hours Wage Rate Total
Knox 20,000 0.15 3,000 $20 $ 60,000
Ayer 10,000 0.2 2,000 20 40,000
Total 5,000 $100,000
Try It 6-3 Solution
Knox Ayer
1. Quantity of lamps to be produced 20,000 lamps 10,000 lamps
2. Number of lamps to be produced per batch 100 lamps/batch 80 lamps/batch
3. Number of batches (1) ÷ (2) 200 batches 125 batches
4. Setup time per batch 3 hours/batch 4 hours/batch
5. Total setup-hours (3) × (4) 600 hours 500 hours
Schedule 5: Manufacturing Overhead Costs Budget

Machine Setup Overhead Costs
Variable costs ($60 per setup-hour × 1,100 setup-hours) $66,000
Fixed costs (to support capacity of 1,100 setup-hours) 77,000
Total machine setup overhead costs $143,000
Try It 6-4 Solution
Schedule 6A: Budgeted Unit Costs of Ending Finished

Goods Inventory December 31, 2017
Product
Knox Ayer
Input per Input per
Cost per Unit Unit of Unit of
of Input Output Total Output Total
Metal $ 3 2 pounds. $ 6.00 3 pounds. $ 9.00
Fabric 4 1 yard 4.00 1.5 yards 6.00
Direct manufacturing labor 20 0.15 hrs. 3.00 0.2 hrs. 4.00
Machine setup overhead 130 0.03 hrs. 3.90 0.05 hrs. 6.50
Total $16.90 $25.50
Under the FIFO method, managers use this unit cost to calculate the cost of target ending
6-74
inventories of finished goods in Schedule 6B.
Schedule 6B: Ending Inventories Budget December 31, 2017

Quantity Cost per Unit Total
Direct materials
Metal 10,000 $ 3.00 $30,000
Fabric 5,000 4.00 20,000 $ 50,000
Finished goods
Knox 2,000 $16.90 $33,800
Ayer 1,000 25.50 25,500 59,300
Try It 6-5 Solution

Schedule 7: Cost of Goods Sold Budget
From Schedule Total
Beginning finished goods inventory, January 1, 2017 Given $ 76,200
Direct materials used 3A $350,000
Direct manufacturing labor 4 100,000
Manufacturing overhead 5 143,000
Deduct ending finished goods inventory, December 6B
31, 2017 59,300
Schedule 8: Nonmanufacturing Costs Budget

Business Function Variable Costs Fixed Costs Total Costs
Marketing (Variable cost: $925,000  0.04) $37,000 $ 43,000 $ 80,000
Distribution (Variable cost: $1.5030,000 cu. ft.) 45,000 40,000 85,000
Administration costs 0 75,000 75,000
$82,000 $158,000 $240,000
Budgeted Income Statement for Jimenez Corporation

From Schedule Total
Revenues Given* $925,000
Cost of goods sold 7 609,900
6-75
From Schedule Total
Operating costs
Marketing costs 8 80,000
Distribution costs 8 85,000
Administration costs 8 75,000 240,000
Try It 6-6 Solution
Schedule of Cash Collections

Quarters
1 2 3 4
Accounts receivable balance on 1-1-
2017 (Fourth-quarter sales from
2016 collected in first quarter of
2017) $ 46,000
From first-quarter 2017 sales
($230,000 0.80; $230,000 0.20) 184,000 $ 46,000
From second-quarter 2017 sales
($245,000 0.80; $245,000 0.20) 196,000 $ 49,000
From third-quarter 2017 sales
($210,000 0.80; $210,000 0.20) 168,000 $ 42,000
From fourth-quarter 2017 sales
($240,000 0.80) 192,000
Total collections $230,000 $242,000 $217,000 $234,000
6-76

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CHAPTER 6

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

6-1 What are the four elements of the budgeting cycle?

6-2 Define master budget.

6-8 Outline the steps in preparing an operating budget.

6-11 What is the key emphasis in Kaizen budgeting?

6-15 Explain why cash budgets are important.

Operating and financial budgets.

Production = Sales + Ending inventory – Beginning inventory

= 8,000 + 2,400 – 1,600 = 8,800 units

6-19 Responsibility centers. Elmhurst Corporation is considering changes to its responsibility

(15 min.) Sales budget, service setting.

Rouse & Sons Sales Budget

Rouse & Sons Sales Budget

(5 min.) Sales and production budget.

Budgeted sales in units 452,000

(5 min.) Direct materials purchases budget.

Direct materials to be used in production (pounds): (430,000÷2) 215,000

(10 min.) Budgeting material purchases.

Direct Materials (stoneware clay) Purchases Budget:

(15–20 min.) Revenues, production, and purchases budget.

1. 4,000 cars  $35,200 = $140,800,000

2. Budgeted sales (Model XE8 cars) 4,000

3. Direct materials (tyres) to be used in production,

(30 min.) Revenues and production budget.

2. Budgeted unit sales (12-ounce bottles) 5,040,000

3. Beginning Inventory = Budgeted sales + Target ending inventory – Budgeted production

Sales = 185,000 rugs

(20 min.) Budgeting: service company.

Feet of Gutter Surface Price per Foot Total Revenues

5. Operating Income Budget

Revenue (900 jobs  600 sq. ft. 0.60/sq. ft. $324,000

(15-25 min.) Budgets for production and direct manufacturing labor.

(20–30 min.) Activity-based budgeting.

Percentage of total indirect costs 12.5% 62.7% 24.8%

Total indirect costs allocated

Cost Soft Fresh Packaged

(20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-30).

2. A Kaizen budgeting approach signals management’s commitment to systematic cost

6-32 Responsibility and controllability. Consider each of the following independent

(15 min.) Responsibility and controllability.

1. (a) Production manager

2. (a) Production Manager

3. (a) Van 3 driver

4. (a) Prestige’s service manager

5. (a) Service manager

(15 min.) Responsibility, controllability, and stretch targets.

(30 min.) Cash flow analysis, sensitivity analysis.

Cash collection in April May June

■ Knights, with red blankets and the Knights logo

 Work-in-process inventories are negligible and ignored.

(40 min.) Budget schedules for a manufacturer.

1a. Revenues Budget

b. Production Budget in Units

c. Direct Materials Usage Budget (units)

Direct Materials Purchases Budget

d. Direct Manufacturing Labor Budget

e. Manufacturing Overhead Budget

Variable manufacturing overhead costs (1,220 × $16) $19,520

f. Computation of unit costs of ending inventory of finished goods

Ending Inventories Budget

g. Cost of goods sold budget

6-36 Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA)