MODULE 4

EXERCISES
SUGGESTED SOLUTIONS

PROBLEM 1
Budgets aid in determining how to acquire resources, and when and how these
resources should be used. In plain and simple terms, a formal budgeting program is
a key ingredient to effective management. The five purposes of budgeting are to:
1. Develop a plan of action.
2. Facilitate communication of the plan and coordinate various views within an
organization.
3. Allocate limited resources effectively and efficiently.
4. Serve as a benchmark to control profit and operations.
5. Evaluate performance and provide incentives to managers.

PROBLEM 2
• Past sales levels and economic trends for the firm as well as for the industry as a
whole
• General conditions in the economy such as growth or decline, recession or boom,
etc.
• External forces such as weather or potential strikes
• Political or legal factors such as litigation or new legislation
• Pricing policies of the organization
• Advertising and promotion plans
• Competitors' actions
• Potential for new product lines
• Market research studies

PROBLEM 3
Memorandum
Date: Today
To: President, East Bank of Clarion
From: I.M. Student and Associates
Subject: Budgetary slack

Budgetary slack is the difference between a budget estimate that a person provides
and a realistic determination of the amount. The practice of creating budgetary slack
is called padding the budget. The primary negative consequence of slack is that it
undermines the credibility and usefulness of the budget as a planning and control
tool. When a budget includes slack, the amounts in the budget no longer portray a
realistic view of future operations.

The bank's bonus system for the new-accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts opened in excess of the budgeted number, there is an incentive for the
manager to understate her activity projections. There is evidence of this behavior,
as a 10% increase over the bank's current 10,000 accounts would be 1,000 new
accounts in 20x2. Tara's projection, however, is only 700.

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PROBLEM 4

Participative budgets will make the plant managers feel that their opinions are
valued by top management and, generally speaking, the plant managers will have a
better attitude about trying to achieve the budget. Additionally, it is possible in this
case that the participative approach will result in a more realistic budget document.
Chicago personnel may be too far removed from daily activities in Dallas to get an
accurate picture of on-going operations.

On the negative side, a participative budget may take longer to prepare and may
lead to some local in-fighting when compared with one that is imposed from
corporate headquarters. Also, participative budgets may have some padding or
slack, as the Dallas managers are faced with an aging facility. This facility may be
inefficient and, with their participation, managers may bend the numbers a bit to
improve appearance.

PROBLEM 5

Budgeted sales in June (units) 4,500

Add: Desired ending finished-goods inventory (5,100 x 70%) 3,570
Total finished units needed 8,070
Less: Beginning finished-goods inventory
40
Number of units to be produced in June 8,030

Budgeted sales in July (units) 5,100

Add: Desired ending finished-goods inventory (4,900 x 70%) 3,430
Total finished units needed 8,530
Less: Beginning finished-goods inventory 3,570
Number of units to be produced in July 4,960

PROBLEM 6

October November
Planned production 20,000 24,000
Units of part no. 879 x x
4 4
Units of part no. 879 used in production 80,000 96,000
Add: Desired ending inventory*
38,400 48,000
Total units of part no. 879 needed 144,000
118,400
Less: Beginning inventory of part no. 879
35,000 38,400
Units of part no. 879 to be purchased 83,400 105,600
Cost per unit x x
P7 P7
Cost of direct material purchases P583,80 P739,200
0
*October: 24,000 x 4 x 40%; November:
30,000 x 4 x 40%

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PROBLEM 7

A. Projected sales:
July 400,000
August (400,000 x 1.05) 420,000
September (420,000 x 1.05) 441,000
Quarterly total 1,261,000

Total quarterly sales 1,261,000

Add: Desired 9/30 inventory (463,050* x 80%) 370,440
Total units needed 1,631,440
Less: 6/30 inventory 300,000
Total quarterly production requirement 1,331,440

*October sales: 441,000 x 1.05 = 463,050

B. Material to be used in production (1,200,000 x 4 pounds) 4,800,000

Add: Desired 9/30 inventory (4,800,000 x 25%) 1,200,000
Direct materials needed 6,000,000
Less: 6/30 inventory 1,600,000
Pounds to be purchased during the quarter 4,400,000
Direct material cost per pound x P1.50
Total quarterly cost of purchases P6,600,000

PROBLEM 8

A. Finished-goods inventory is expected to increase by 450 units (1,850 - 1,400).

Thus, the company will assemble 25,450 bicycles (25,000 + 450).

B. Atlantic's production will require 50,900 wheels (25,450 x 2). Given that
inventory will drop by 215 units (4,300 x 5%), the company must purchase
50,685 wheels (50,900 - 215).

C. Assembly time: 25,450 bicycles x 30/60 = 12,725

hours
Labor cost:
Wages: 12,725 hours x P14 P178,15
0
Pension and insurance: 12,725 hours x P2 25,450
Social Security taxes: P178,150 x 8%
14,252
Total P217,85
2

D. Purchasing activity would likely affect the balance sheet in several ways.
Atlantic's Cash account would decrease and any end-of-period obligations to
suppliers would be disclosed as accounts payable. In addition, the wheels on
hand at the end of the period would affect raw-material inventories, and the
cost of wheels acquired and used would influence the ending inventory of
bicycles.

3
PROBLEM 9

A. A B
Sales volume in units 10,000 12,000
Add: Ending finished-goods inventory 3,000
2,000
Total units required 12,000 15,000
Less: Beginning finished-goods inventory 9,000
7,000
Total units to be produced 6,000
5,000
B. Raw Material Usage A B
X: 2 pounds x 5,000 10,000
Y: 1 pound x 5,000; 1 pound x 6,000 5,000 6,000
Z: 3 pounds x 6,000 18,000

X: 10,000 pounds x P2.00 P20,00

0
Y: (5,000 + 6,000) pounds x P2.50 27,500
Z: 18,000 pounds x P1.25
22,50
0
Total cost P70,00
0

C. Cutting
Production in units 5,000
Direct labor hours per unit x 3
Usage in direct labor hours 15,000
Direct labor rate x P10
Direct labor cost P150,000

Finishing
Production in units 5,000
Direct labor hours per unit x 2
Usage in direct labor hours 10,000
Direct labor rate x P18
Direct labor cost P180,000
Total budgeted direct labor cost P330,000

4
PROBLEM 10

A. Month of Sale October Collections

July P30,000 x 4% = P 1,200
August P35,000 x 10% 3,500
=
September P40,000 x 15% 6,000
=
October P45,000 x 70% 31,500
=
Total P42,200

B. Credit Amount Collected

Month of Sale Sales October November Decembe
r
July P 30,000 P
1,200
August 35,000 3,500 P 1,400
September 40,000 6,000 4,000 P 1,600
October 45,000 31,500 6,750 4,500
November 50,000 35,000 7,500
December 42,500 29,750

Total P242,500 P42,20 P47,150 P43,350

0

Total collections in the fourth quarter P132,70

0

PROBLEM 11

A. January: Accounts receivable (P195,000) + January cash sales (P500,000 x 40%)

+ January credit sales collected in January (P500,000 x 60% x 30%) =
P485,000
February: January credit sales collected in February (P500,000 x 60% x 70%) +
February cash sales (P530,000 x 40%) + February credit sales collected in
February (P530,000 x 60% x 30%) = P517,400

B. Since credit sales are collected over two months, 70% of February's credit sales
are still outstanding: P530,000 x 60% x 70% = P222,600

C. Although sales have increased, the credit and collection patterns have
deteriorated. One of the company's likely objectives is to accelerate cash inflows.
Notice that in percentage terms, cash sales have declined (40% vs. 20%); credit
customers now take longer to pay as judged by collections in the month of sale
(30% vs. 15%); and high levels of uncollectibles have arisen (0% vs. 10%).

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 D. The data reveal that total sales increased as did the percentage of sales made on
credit. It appears that the sales manager's emphasis on market share may have
led to sales being made to poor credit risks [as judged by the high rate of
uncollectibles and reduced percentages of sales being settled in the month of sale
(both cash and credit)]. These actions may have been triggered by a commission
system based on gross sales, thus "encouraging" employees to increase sales
despite the credit worthiness and profitability of the customer.

PROBLEM 12

A. Month Sales Percent Collections

March P165,00 10% P 16,500
0
April 30% 53,400
178,000
May 60% 99,600
166,000
Total P169,500

B. April purchases to be paid in May P154,00

0
Less: 3% cash discount
4,620
Net amount P149,38
0
Add: Cash payments for expenses
119,500
Total expected cash disbursements P268,88
0

C. Balance, May 1 P127,80

0
Add: Expected collections
169,500
Subtotal P297,30
0
Less: Expected payments
268,880
Expected balance, May 31 P
28,420

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PROBLEM 13

A. July sales: P105,000 + P45,000 = P150,000; P150,000 ÷ P20 = 7,500 units

B. July sales collected in July: P105,000 ÷ P150,000 = 70%
Seventy percent of credit sales are collected in the month of sale; the remaining
30% are collected in the month following sale.
C. Seventy percent of August sales were collected in August; thus, total August
sales =
P168,000 ÷ 0.70, or P240,000. August sales in units: P240, 000 ÷ P20 = 12,000
D. P240,000 - P168,000 = P72,000

PROBLEM 14

A. The income statement will report revenues earned of P788,125 [P250,000 +

(P250,000 x 1.05 = P262,500) + (P262,500 x 1.05 = P275,625)].

B. Collections for the first quarter total P766,225 (P240,400 + P256,500 +

P269,325):

January:
Given P240,400
February:
January receivables P120,000
February cash services: P262,500 x 20% 52,500
February credit services: P262,500 x 80% 84,000 P256,500
x 40%
March:
February credit services: P262,500 x 80% P126,000
x 60%
March cash services: P275,625 x 20% 55,125
March credit services: P275,625 x 80% x 88,200 P269,325
40%

C. The ending cash balance is P47,225: P23,000 (January 1 balance) + P766,225

(collections) - P28,000 (December payables) - P750,000 (monthly cash expenses
x 3) + P36,000 (March payables).

D. Several possible actions include securing a short-term loan or line of credit,

working with clients in an attempt to accelerate inflows, and working with
vendors to temporarily delay payments. The goal is to have added funds on
hand so that operations continue smoothly and are not disrupted because of
sporadic or ongoing shortages.

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PROBLEM 15

A. Income Statement for the Two Months Ended March 31, 20x1

Sales revenue (P350,000 + P360,000) P710,00

0
Cost of goods sold (P710,000 x 60%)
426,000
Gross margin P284,00
0
Operating expenses:
Cash operating expenses (P60,000 x 2) P120,00
0
Depreciation (P18,000 x 2)
36,000 156,000
Net income P128,00
0

B. Accounts receivable: P115,000 - P115,000 + P350,000 - (P350,000 x 70%) +

P360,000 - (P350,000 x 30%) - (P360,000 x 70%) = P108,000
Plant and equipment (net): P107,000 - P18,000 - P18,000 = P71,000
Retained earnings: P85,000 + P128,000 = P213,000

PROBLEM 16

A. The standard provides a measure of how much material should be used for a unit
of product and how much each pound of raw material should cost. This standard
serves as a basis for evaluating performance by allowing a comparison to be
made of standard cost/usage against actual cost/usage.

B. The degree of controllability is important because not all factors are subject to
the same amount of control. For example, the market for the raw material may
be a seller's market in which case management would have very little control
over the material price variance. On the other hand, management generally has
more control over the usage of materials because of the ability to influence the
amount of scrap and rejected units produced.

PROBLEM 17
While a connection between these variances cannot be guaranteed, the following
scenario is plausible. Better-than-standard quality materials were purchased,
leading to an unfavorable materials price variance. When these materials were used
during the period (JIT basis for raw materials purchases), favorable efficiency
variances arose because the material was easier for labor and machines to process.

PROBLEM 18
A. An unfavorable price variance reduces any net favorable variance that may have
arisen during the year. A sufficient number of such events could cause the net
materials price variance to be unfavorable and would eliminate the bonus to the
materials purchasing manager.

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 B. The use of the variance in this way would lead to an undesirable behavioral
outcome. The materials purchasing manager is a gatekeeper; that is, this
manager observes the purchasing opportunities available and determines
whether or not the firm will follow them. In this case, the manager would be
unlikely to pursue the grade 4A material because of the negative effect on the
bonus calculation. As a result, the overall possibility of offsetting higher purchase
costs with savings in yield and productivity would not materialize.

PROBLEM 19

A. Purchase price per drum P45.00

Less: 2% discount (0.90)
P44.10
Shipping fee per drum (P420 ÷ 200 drums) 2.10
Total P46.20

Total purchase price (P46.20) ÷ 55 gallons = P0.84 per gallon

B. Three quarts of Proctol are required for each gallon of Lush 'N Green;
however, 4% of Proctol input is lost through evaporation and spills.
Thus, the standard input is 3.125 quarts (3 ÷ 0.96).

C. Standard cost of purchases (1,200 drums x P46.20) P55,440

Actual cost of purchases 54,960
Direct-material price variance P 480

D. Actual usage: (1,200 - 15) = 1,185 drums; 1,185 drums x 55 gallons x 4

quarts = 260,700 quarts
Standard usage: 82,000 gallons x 3.125 = 256,250 quarts

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PROBLEM 20

Actual Material Cost Standard Material Cost

Actual Actual Actual Standard Standard Standard
x x x
Quantity Price Quantity Price Quantity Price
16,900 x P11.50 16,900 x P11.00 17,360* x P11.00
P194,350 P185,900 P190,960
P8,450U P5,060F
Direct-material Direct-material
price variance quantity variance
*2,800 units x 6.2 pounds

Actual Labor Cost Standard Labor Cost

Actual Actual Actual Standard Standard Standard
x x x
Hours Rate Hours Rate Hours Rate
17,500 x P22.50 17,500 x P23.00 16,800# x P23.00
P393,750 P402,500 P386,400
P8,750F P16,100U
Direct-labor Direct-labor
rate variance efficiency variance
#2,800 units x 6 hours

PROBLEM 21

A.
Actual Labor Cost Standard Labor Cost
Actual Actual Actual Standard Standard Standard
x x X
Hours Rate Hours Rate Hours Rate
2,550 x P18.80 2,550 x P15.00 2,890* x P15.00
P47,940 P38,250 P43,350
P9,690U P5,100F
Direct-labor Direct-labor
rate variance efficiency variance
*85 units x 34 hours

B. Yes. A tight labor market often means that premium wages are needed to attract
qualified employees. These wages would give rise to an unfavorable rate
variance.

C. Ventura has two favorable variances: labor efficiency and material (paint)
quantity. The favorable efficiency variance indicates that the crew is spending
less time than budgeted, perhaps rushing the jobs and being a bit sloppy. It is
also possible that employees are being somewhat skimpy in their use of paint,
using less than expected (e.g., applying one coat rather than two in certain
applications).

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PROBLEM 22

A. No. The variance is favorable and small, being less than 2% of the budgeted
amount.

B.
Actual Labor Cost Standard Labor Cost
Actual Actual Actual Standard Standard Standard
x x x
Hours Rate Hours Rate Hours Rate
42,000 x P18.00* 42,000 x P14.00 55,000# x P14.00
P756,000 P588,000 P770,000
P168,000U P182,000F
Direct-labor Direct-labor
rate variance efficiency variance
*P756,000 ÷ 42,000 hours
#20,000 units x 2.75 hours

C. Yes. Although the combined variance of P14,000F is small, a more detailed

analysis reveals the presence of sizable, offsetting variances. Both the rate
variance and the efficiency variance are in excess of 21% of budgeted amounts
(P770,000). A variance investigation should be undertaken if benefits of the
investigation exceed the costs. Put simply, things are not going as smoothly as
the vice-president believes.

D. The favorable efficiency variance means that the company is producing units by
consuming fewer hours than expected. This may be the result of the team-
building/morale-boosting exercises, as a contented, well-trained work force tends
to be efficient in nature. However, another totally plausible explanation could be
that Diablo is paying premium wages (as indicated by the unfavorable rate
variance) to hire laborers with above-average skill levels.

PROBLEM 23

Actual Labor Cost Standard Labor Cost

Actual Actual Actual Standard Standard Standard
x x x
Hours Rate Hours Rate Hours Rate
2,600 x P13.80 2,600 x P14.00 2,400* x P14.00
P35,850 P36,400 P33,600
P520F P2,800U
Direct-labor Direct-labor
rate variance efficiency variance
*3,200 units x 0.75 hours

1. Standard hours allowed: 2,400

2. Actual hours worked: 2,600
3. Actual wage rate: P13.80

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PROBLEM 24

Materials Materials Quantity Labor Labor Efficiency

Price Rate
Variance Variance Variance Variance
1. U F
2.
3. U F
4. U
5. F F

PROBLEM 25

A. Processing time 15.0

Inspection time 0.5
Waiting time in production 3.0
Move time 1.5
Total 20.0

B. Processing time (15.0) ÷ [Processing time (15.0) + inspection time

(0.5) + waiting time in production (3.0) + move time (1.5)] = 0.75

C. 1. 75% (cycle efficiency)

2. 25% (100% - 75%)

D. Waiting time until start of project 6.0

Manufacturing cycle time 20.0
Total 26.0

- done -

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