Managerial Accounting 2nd Edition Davis Solutions Manual 1

Chapter 5 – Planning and Forecasting
Planning and Forecasting
Managerial Accounting 2nd

Edition Davis Solutions Manual
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Learning Objectives
1. Describe the budget development process and explain how it fits into management’s planning
process. (Unit 5.1)
2. Calculate the standard cost of a product. (Unit 5.2)
3. Prepare the operating budget and describe the relationships among its components. (Unit 5.3)
4. Prepare the cash budget and describe the relationships among its components. (Unit 5.4)
5. Prepare pro-forma financial statements and describe their relationship to the master budget
components. (Unit 5.5)
Summary of End of Chapter Material

Difficulty: E = Easy, M = Moderate, D = Difficult
Bloom: K = Knowledge, C = Comprehension, AP = Application, AN = Analysis, S = Synthesis, E = Evaluation
AACSB: A = Analytic, C = Communication, E = Ethics
AICPA FN: DM = Decision modeling, RA = Risk Analysis, M = Measurement, R = Reporting, RS = Research, T = Technology
AICPA PC: C = Communication, I = Interaction, L = Leadership, P = Professional demeanor, PM = Project Management,
PS = Problem Solving and Decision Making, T = Technology
IMA: BA = Business applications, BP = Budget Preparation, CM = Cost Management, DA = Decision Analysis,
PM = Performance Measurement, R = Reporting, SP = Strategic Planning
Item L. O.Difficulty Minutes to Bloom’s AACSB AICPA AICPA IMA Ethics

Level Complete Taxonomy FN PC Coverage
GUIDED UNIT PREPARATION
Unit 5.1
1 1 E 3 C A R C BP
2 1 E 1 K A R C BP
3 1 M 3 E A R C BP
4 1 M 5-7 C A R C BP
5 1 E 4 K A R C BP
6 1 E 4 K A R C BP
Unit 5.2
1 2 M 3 K, C A R C PM
2 2 M 3 C A R C PM
5-1
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
3 2 E 3 C A M PS PM
4 2 E 2 K A R C PM
Unit 5.3
1 3 E 2 K A R C BP
2 3 M 4 V A R C BP
3 3 M 2 V A R C BP
4 3 M 3 K A R C BP
5 3 E 3 K A R C BP
Unit 5.4
1 4 E 10 K A R C BP
2 4 M 3 K A R C BP
3 4 E 3 C A R C BP
Unit 5.5
1 5 M 2 C A R C BP
2 5 M 2 K A R C BP
Item L. O. Difficulty Minutes to Bloom’s AACSB AICPA AICPA IMA Ethics
EXERCISES
5-1 1 M 10 C A R C BP
5-2 2 M 10 AP A M PS PM
5-3 2 E 10 AP A M PS PM
5-4 2 E 5 AP A M PS PM
5-5 2 D 10 AP A M PS PM
5-6 2 D 10-15 AP A M PS PM
5-7 3 E 10 AP A M PS BP
5-8 3 E 15 AP A M PS BP
5-9 3 M 15 AP A M PS BP
5-10 3 E 10-15 AP A M PS BP
5-11 3 E 10-15 AP A M PS BP
5-12 3 M 15 AP, AN A M PS BP
5-13 3 M 10-15 AP A M PS BP
5-14 3 D 15 AP A M PS BP
5-15 3 D 15 AP A M PS BP
5-16 3 E 10-15 AP A M PS BP
5-17 3 E 10 AP A M PS BP
5-18 3 M 15-20 AP A M PS BP
5-19 3 M 20 AP A M PS BP
5-20 3 D 30 AP A M PS BP
5-21 4 M 20 AP A M PS BP
5-22 4 M 20 AP A M PS BP
5-23 4 M 20 AP A M PS BP
5-24 4 M 20 AP A M PS BP
5-25 4 M 20 AP A M PS BP
5-26 4 D 15-20 AP A M PS BP
5-27 4 M 20-25 AN A M PS BP
5-28 4 D 30 AP, AN A M PS BP
5-29 5 D 10 C, AN, A R C R
AP
5-2
5-30 5 D 20-25 AP, AN A M PS BP

PROBLEMS
5-31 3 D 20-25 AP A M PS BP
5-32 3 D 30-35 AP A M PS BP
5-33 3, 4 M 20 AP A M PS BP
5-34 4 M 30-35 AP, AN A M PS BP
5-35 4 M 35-40 AP A M PS BP
C&C CONTINUING CASE
5-36 3 M 20 AP A M PS BP
CASES
5-37 2 D 20-25 E, AN E R C BA 
5-38 3, 4, D 50-60 AP A M PS BP
5
Item L. O. Difficulty Minutes to Bloom’s AACSB AICPA AICPA IMA Ethics
5-39 3, 4, D 60 AP, AN A M PS BP
5
5-40 3, 4, D 50-60 AP A M PS BP
5
5-41 1, 3, D 30-35 E, AN E R C BA 
4, 5
5-3
SOLUTIONS TO GUIDED UNIT PREPARATION
Unit 5.1
1. Budgets are tactical plans that guide employees as they strive to

achieve an organization’s strategic objectives. Budgets communicate
management’s intentions regarding resource allocation, and they help
managers anticipate the financial results of various decisions before
those decisions are implemented.
2. It is management’s responsibility to set the budget.
3. No. Budgeting is important for organizations of all sizes. Small

businesses are especially susceptible to cash flow problems, so
budgeting will help those managers plan appropriately to avoid
financial distress.
4. With top-down budgeting, upper management determines the budget

and imposes the budget on lower level managers and employees.
Top-down budgeting is more efficient because fewer people are
involved in the budgeting process. Employees are less likely to buy
in to the budget since their input has not been solicited.
With bottom-up, or participative, budgeting, expectations about sales

and expenses are determined by lower- and middle-level managers.
As those budgets are completed, they are reviewed by upper-level
managers. If the upper-level managers make changes, then the
reasons for those changes should be communicated to the lower-
level managers. Bottom-up budgets are likely to be more realistic as
they are prepared by the employees who are closer to operations.
On the other hand, such budgets are subject to budgetary slack as
the lower-level managers may be motivated to develop budgets that
are easy to meet or beat. Bottom-up budgets are likely to be better
received by employees since the employees were involved in their
preparation.
5. Budgetary slack involves under-estimating revenues or over-

estimating expenses to give managers a better chance of meeting or
exceeding budget figures. It is an issue in budget preparation
5-4
because when managers under-estimate income, they may prevent

the company from taking advantage of profitable projects.
6. Zero-based budgeting requires managers to justify every budget line

item instead of starting from a prior period’s balance. It is much more
time-consuming than a budgeting process that simply estimates each
line item from prior period results. However, it provides greater
likelihood that non-strategic projects are not funded from year-to-
year.
Unit 5.2
1. Standards are guides or rules that specify a particular level of

performance or quality. Examples include: entrance standards to get
into graduate school; a score of par in a game of golf; steel standards
indicate the strength of a grade of steel; safety standards for
automobiles.
2. Ideal standards specify results from perfect circumstances. Practical

standards allow for normal interruptions in performance or normal
material waste. Practical standards can be achieved with reasonable
effort, whereas ideal standards cannot be achieved. Practical
standards are often more appealing since they can be achieved.
3. A standard price is what a company pays per unit of input (e.g., price
per pound of direct materials, rate per hour of direct labor, or
overhead rate). A standard cost is the budgeted cost to produce one
unit of product. It is determined by multiplying the standard price of
an input by the standard quantity of an input per product for each of
direct materials, direct labor and overhead.
4. Direct materials, direct labor and overhead
Unit 5.3
1. The operating budget is the first major component of the master

budget. It provides a plan for operations, that is items that will affect
the income statement.
5-5
2. The operating budget is made up of the following component

budgets: sales, production, materials, labor, overhead, ending
inventory and cost of goods sold budget, and selling and
administrative expenses. The sales budget is used to determine the
production budget, which in turn is used to determine the materials,
labor and overhead budgets. The sales budget is also used to
determine the selling and administrative expenses budget.
3. The sales budget impacts every other budget in one way or another.
Inaccurate sales forecasts render all other budgets inaccurate.
4. Monthly and quarterly budgets will show seasonal trends that are not
apparent in an annual budget. These interim budgets are more
helpful to managers to ensure that plans are in place to borrow cash
during periods of expected cash shortages, or hire temporary workers
during periods of high production.
5. The master budget is a collection of smaller budgets that lead to pro-

forma financial statements. The first budget prepared is the operating
budget, followed by the cash budget, income statement and then the
balance sheet.
Unit 5.4
1. The cash budget has five components:

Cash available to spend – made up of the beginning cash balance for
the period plus cash collections from sales (determined via the cash
receipts budget).
Cash disbursements – made up of the various cash outflows that will

occur, such as payments for materials (determined via the cash
payments for materials budget), payments for labor, overhead, selling
and administrative expenses, etc.
Cash excess or cash needed – the difference between cash available

to spend and cash disbursements, adjusted by the minimum cash
balance required.
5-6
Short-term financing – made up of borrowings during periods of cash

deficiency, repayments of borrowings and interest on borrowings.
Ending cash balance – cash available less cash disbursements plus

short-term financing; this amount should be greater than or equal to
the minimum cash balance.
2. Companies establish minimum cash balances to ensure that they are

able to meet obligations as they come due and meet unexpected
cash needs without having to borrow at high short-term interest rates.
3. It is better to prepare monthly or quarterly cash budgets so managers

can identify expected periods of cash deficiencies before the
company runs out of cash.
Unit 5.5
1. Pro-forma financial statements are expectations of what financial

results will occur in the future. The master budget provides the detail
from which the financial statement accounts are determined.
2. The balance sheet is prepared last. The income statement has to be

prepared before the balance sheet because net income is needed to
determine retained earnings.
5-7
SOLUTIONS TO EXERCISES
Exercise 5-1
Budgeting is part of the planning process that all organizations should

follow. With cash flow problems being one of the main reasons new
businesses fail, it is important for Mark to understand when he
expects to receive and disburse cash. Identifying expected cash
shortfalls through a budget will allow him to be proactive in obtaining
short-term financing before major problems arise.
Mark might not know what sales will be, but he should know his
expenses: rent, utilities, insurance, salaries, inventory, etc. He could
begin the budgeting process by calculating monthly costs and then
determine the amount of sales necessary to cover these costs. As he
gains a better understanding of the demand for gourmet coffee in
Fountain, his budgeting will become more predictive rather than
reactive.
Exercise 5-2
Item Price
List price $6.50
Volume discount (.65) ($6.50 × 10%)
 $100 
Shipping .08  
 (50 gallons  25 drums) 
Storage .55
Standard price per gallon $6.48
5-8
Exercise 5-3
Item Rate
Base hourly rate $20
Benefits 6 ($20 × 30%)
Employment taxes 2 ($20 × 10%)
Standard rate per hour $28
Exercise 5-4
Item Quantity
Completed unit 2.5 board feet
Scrap allowance 1.5 board feet
Standard quantity per stand 4.0 board feet
Exercise 5-5
Activity Time Required

 60 minutes 
Personalization 6.0 minutes  
 10 quilts 
 15 minutes 
Break time 1.5 minutes  
 10 quilts 
 5 minutes 
Setup 0.5 minutes  
 10 quilts 
Standard quantity of direct labor 8.0 minutes
per quilt
5-9
Exercise 5-6
Item Standard Cost

 $0.80 
Commercial cookie mix $0.50 10 oz.  
 16 oz. 
 $4.00 
Milk chocolate 1.25  5 oz.  
 16 oz. 
 $12.00 
Almonds .75 1 oz.  
 16 oz. 
 $14.40 
Mixing labor .24 1 min.  
 60 min. 
 $18.00 
Baking labor .60  2 min.  
 60 min. 
 $32.40 
Variable overhead 1.62  3 min.  
 60 min. 
 $60.00 
Fixed overhead 3.00  3 min.  
 60 min. 
Standard cost per pound $7.96
Exercise 5-7
January February March Quarter
Budgeted units sold 20,000 24,000 16,000 60,000

Budgeted sales price × $ 80 × $ 80 × $ 80 × $ 80
Budgeted revenue $1,600,000 $1,920,000 $1,280,000 $4,800,000
Exercise 5-8

Budgeted sales price × $15 × $15 × $15 × $15
Budgeted revenue $300,000 $585,000 $525,000 $1,410,000
5-10
Exercise 5-9
Commission $15,000 $29,250 $26,250 $70,500

Bad debt expense 12,000 23,400 21,000 56,400
Depreciation 10,000 10,000 10,000 30,000
Sales staff salaries 25,000 25,000 25,000 75,000
Advertising 1,000 1,000 1,000 3,000
Executive salaries 10,000 10,000 10,000 30,000
Miscellaneous 500 500 500 1,500
Total budgeted expenses $73,500 $99,150 $93,750 $266,400
Less: non-cash expenses
Depreciation 10,000 10,000 10,000 30,000
Bad debt expense 12,000 23,400 21,000 56,400
Total cash costs $51,500 $65,750 $62,750 $180,000
Exercise 5-10
April May June Quarter

Budgeted unit sales 10,000 12,000 8,000 30,000
+ Budgeted ending inventory 6,000 4,000 4,500 4,500
= Total units required 16,000 16,000 12,500 34,500
- Beginning inventory 5,000 6,000 4,000 5,000
= Budgeted production 11,000 10,000 8,500 29,500
Exercise 5-11

a
+ Budgeted ending inventoryb 7,800 7,000 5,800 5,800
a See exercise 5-8
b Budgeted ending inventory for March: 29,000 × 20% = 5,800 (20% of April sales)
5-11
5-12
Exercise 5-12
a.
+ Budgeted ending inventorya 8,750 7,500 3,000 3,000
a 2,400 = April production × 20%
April production = 12,000 kites
12,000 kites × 25% = 3,000 kites
b. direct materials purchases budget, ending inventory and cost of goods

sold budget, cash payments budget, direct labor budget,
manufacturing overhead budget, cash budget, balance sheet
5-13
Exercise 5-13
January February March Quarter April

Budgeted production 10,000 8,000 9,000 27,000 12,000
× Standard pounds per unit × 3 × 3 × 3 × 3 × 3
= Production needs 30,000 24,000 27,000 81,000 36,000
= Total DM required (lbs.) 59,300 56,900 70,700 124,700
- Beginning inventorya 36,500 29,300 32,900 36,500
= Budgeted purchases (lbs.) 22,800 27,600 37,800 88,200
a Budgeted ending inventory is equal to 120% of the following month’s production needs, plus an additional 500 pounds. For January, this is
calculated as (24,000 pounds × 1.20) + 500 pounds = 29,300 pounds.
b January beginning inventory = 120% of January production needs plus 500 pounds: (1.2 × 30,000 pounds) + 500 pounds = 36,500 pounds
5-14
Exercise 5-14
1st 2nd 3rd 4th 1st Quarter

Quarter Quarter Quarter Quarter Annual next year
Budgeted production 5,000 7,500 9,000 12,000 33,500 6,000
× Standard ounces per gallon × 100 × 100 × 100 × 100 × 100 × 100
= Production needs 500,000 750,000 900,000 1,200,000 3,350,000 600,000
+ Budgeted ending inventorya 150,000 180,000 240,000 120,000 120,000
= Total DM required (lbs.) 650,000 930,000 1,140,000 1,320,000 3,470,000
- Beginning inventory 80,000 150,000 180,000 240,000 80,000
= Budgeted purchases (lbs.) 570,000 780,000 960,000 1,080,000 3,390,000
× Standard price per ounce × $0.15 × $0.15 × $0.15 × $0.15 × $0.15
= Budgeted purchases cost $85,500 $117,000 $144,000 $162,000 $508,500
a Budgeted ending inventory is equal to 20% of the following quarter’s production needs. For the first quarter, this is calculated as 750,000
ounces × 0.20 = 150,000 ounces.
5-15
Exercise 5-15
January February March Quarter April

Budgeted productiona 22,200 38,200 33,800 94,200 27,800
× Standard pounds per unit × 5 × 5 × 5 × 5 × 5
+ Budgeted ending inventoryb 19,100 16,900 13,900 13,900
= Total DM required (lbs.) 130,100 207,900 182,900 484,900
= Budgeted purchases (lbs.) 111,200 188,800 166,000 466,000
× Standard cost per pound $0.40 $0.40 $0.40 $0.40
= Budgeted purchases cost $ 44,480 $ 75,520 $ 66,400 $186,400
a See exercise 5-11
b Budgeted ending inventory is equal to 10% of the following month’s production needs. For March, first compute April production as follows:
April
Budgeted unit sales 29,000
Budgeted ending inventory 4,600
Total units required 33,600
Beginning inventory 5,800
Budgeted production 27,800
5-16
Exercise 5-16
Machining
July August September 3rd Quarter
Budgeted production 20,000 16,000 18,000 54,000
× Standard DLH per unit ×2 ×2 ×2 ×2
= Total DLH required 40,000 32,000 36,000 108,000
× Standard wage rate × $6.75 × $6.75 × $6.75 × $6.75
= Budgeted DL cost $270,000 $216,000 $243,000 $729,000
Assembly
July August September 3rd Quarter
× Standard DLH per unit × .5 × .5 × .5 × .5
× Standard wage rate × $12 × $12 × $12 × $12
= Budgeted DL cost $120,000 $96,000 $108,000 $324,000
Total DL cost $390,000 $312,000 $351,000 $1,053,000
Exercise 5-17

a
× Standard DLH per unit × .25 × .25 × .25 × .25
× Standard wage rate × $20 × $20 × $20 × $20
= Budgeted DL cost $111,000 $191,000 $169,000 $471,000
a See exercise 5-11
5-17
Exercise 5-18
4th Quarter
Budgeted production 28,000
Variable overhead
Indirect materials ($5.75 per hammock) $161,000
Indirect labor ($12.50 per hammock 350,000
Other ($2.25 per hammock) 63,000
Total variable overhead costs 574,000
Fixed overhead
Salaries 78,000
Insurance 5,000
Depreciation 35,000
Total fixed overhead 118,000
Total manufacturing overhead 692,000
Less non-cash items
Depreciation (35,000)
Total cash cost $657,000
Exercise 5-19

a
DLH worked 5,550 9,550 8,450 23,550
× VOH per DLH $0.70 $0.70 $0.70 $0.70
= Budgeted VOH 3,885 6,685 5,915 16,485
+ Budgeted FOH 112,500 112,500 112,500 337,500
= Total Budgeted MOH 116,385 119,185 118,415 353,985
- Noncash MOH items
Depreciation 30,000 30,000 30,000 90,000
= Total Cash MOH cost $86,385 $89,185 $88,415 $263,985
a See exercise 5-17
5-18
Exercise 5-20
Direct Materials
Beginning DM Inventory $7,560 18,900 lbs. × $0.40/lb. (see 5-15)

+ DM purchases 186,400 DM purchases budget (see 5-15)
- DM used in production 188,400 471,000 lbs. × $0.40/lb. (see 5-15)
= Ending DM Inventory $ 5,560 13,900 lbs. × $0.40/lb. (see 5-15)
Finished Goods Inventory
Unit Costs
Direct material $ 2.00 5 lbs. × $0.40/lb.
+ Direct labor 5.00 .25 DLH ×$20/DLH
+ Overhead 3.175 $12.70 × .25 DLH
= Total std. cost per unit $10.175
× Ending FG inventory (units) 5,800 See 5-11
= Ending FG inventory ($) $59,015
Cost of Goods Sold
Beginning WIP $ 0
+ Direct materials used 188,400 See above
+ Direct labor 471,000 See 5-17
+ Overhead 353,985 See 5-19
= Total Mfg. Cost 1,013,385
- Ending WIP 0
= COGM 1,013,385
+ Beginning FG inventory 49,000 See 5-11
- Ending FG inventory 59,015 See above
= Budgeted COGS $1,003,370
5-19
Exercise 5-21
Sales Budget
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual
Budgeted units sold 25,000 40,000 50,000 80,000 195,000
Budgeted sales price × $ 12 × $ 12 × $ 12 × $ 12 × $ 12
Budgeted sales revenue $300,000 $480,000 $600,000 $960,000 $2,340,000
Cash Receipts Budget

1st 2nd 3rd 4th Total Cash Bad Accounts
Quarter Quarter Quarter Quarter Receipts Debts Receivable
1st quarter sales
$300,000 × 70% $210,000 $210,000
$300,000 × 25% $ 75,000 75,000
$300,000× 5% $15,000
nd
2 quarter sales
$480,000 × 70% 336,000 336,000
$480,000 × 25% $120,000 120,000
$480,000 × 5% 24,000
rd
3 quarter sales
$600,000 × 70% 420,000 420,000
$600,000 × 25% $150,000 150,000
$600,000× 5% 30,000
th
4 quarter sales
$960,000 × 70% 672,000 672,000
$960,000 × 25% 240,000
$960,000 × 5% 48,000
Totals $210,000 $411,000 $540,000 $822,000 $1,983,000 $117,000 $240,000
Note: Collections in the 1st quarter do not include Accounts Receivable from a prior period because the company is just beginning operations.
5-20
Exercise 5-22
Total Cash Accounts

April May June Receipts Receivable
Cash salesa $ 33,600 $ 34,500 $ 37,500 $105,600
March sales
$110,000 × 70%× 25% 19,250 19,250
April sales
$112,000 × 70%× 75% 58,800 58,800
$112,000 × 70%× 25% 19,600 19,600
May sales
$115,000 × 70%× 75% 60,375 60,375
$115,000 × 70%× 25% 20,125 20,125
June sales
$125,000 × 70%× 75% 65,625 65,625
$125,000 × 70%× 25% $21,875
Totals $111,650 $114,475 $123,250 $349,375 $21,875
a Cash collections = 30% of current month’s sales
5-21
Exercise 5-23
Total Cash Accounts

January February March Receipts Uncollectible Receivable
December credit sales $ 58,500 $ 58,500
January salesa
$300,000 × 70% 210,000 210,000
$300,000 × 26% $78,000 78,000
$300,000 × 4% $12,000
February sales
$585,000 × 70% 409,500 409,500
$585,000 × 26% $152,100 152,100
$585,000 × 4% 23,400
March sales
$525,000 × 70% 367,500 367,500
$525,000 × 26% 136,500
$525,000 × 4% 21,000
Totals $268,500 $487,500 $519,600 $1,275,600 $56,400 $136,500
a See Exercise 5-8
5-22
Exercise 5-24
Accounts
st nd rd th
1 Quarter 2 Quarter 3 Quarter 4 Quarter Annual Payable
A/P from last quarter $330,000 $ 330,000
1st quarter purchases
$320,000 × 30% 96,000 96,000
$320,000 × 70% $224,000 224,000
nd
2 quarter purchases
$400,000 × 30% 120,000 120,000
$400,000 × 70% $280,000 280,000
rd
3 quarter purchases
$465,000 × 30% 139,500 139,500
$465,000 × 70% $325,500 325,500
th
4 quarter purchases
$525,000 × 30% 157,500 157,500
$525,000 × 70% $367,500
Total $426,000 $344,000 $419,500 $483,000 $1,627,500 $367,500
5-23
Exercise 5-25
Total Cash Accounts

January February March Payments Payable
December A/P $18,000 $18,000
January purchasesa
$44,480 × 50% 22,240 22,240
$44,480 × 50% $22,240 22,240
February purchases
$75,520 × 50% 37,760 37,760
$75,520 × 50% $37,760 37,760
March purchases
$66,400 × 50% 33,200 33,200
$66,400 × 50% $33,200
Total cash payments $40,240 $60,000 $70,960 $171,200 $33,200
a See Exercise 5-15
5-24
Exercise 5-26
a.
Beginning cash balance $ 50,200
+ Cash collections, March 700,000
= Total cash available to spend 750,200
- Cash disbursements, March 710,300
= Cash excess (deficiency) 39,900
- Minimum cash balance 50,000
= Cash excess (needed) ($10,100)
Since borrowings must be done in increments of $500, Austin Paints

must borrow $10,500.
2
b. Accrued interest at end of April = $10,500 × × 10% = $175
12
Excess cash $7,000

- Interest payment 175
= Cash available for principal $6,825
Since principal repayment must be done in increments of $500, Austin

Paints can repay only $6,500.
5-25
Exercise 5-27
October November December Quarter

Beginning cash balance $16,500a $15,500 $16,900j $16,500
Collections from sales 55,000 80,500f 103,100k 238,600
Total cash available 71,500 96,000 120,000 255,100q
Less disbursements
Materials purchases 12,000b 10,000 14,000 36,000
Direct labor 5,000 6,000 8,000 19,000
Manufacturing overhead 20,000 23,000 22,000 65,000r
Selling & administrative expenses 29,000 30,000 32,000o 91,000s
Equipment purchase 15,000n 15,000
Dividends 5,000 5,000
Total disbursements 66,000 69,000g 96,000m 231,000t
Excess (deficiency) of cash 5,500c 27,000 24,000l 24,100u
Minimum cash balance 15,000 15,000 15,000 15,000v
Cash available (needed) (9,500) 12,000h 9,000 9,100w
Financing:
Borrowings 10,000d 10,000
i
Repayments (10,000) (10,000)
Interest (100) (100)
Total financing 10,000e (10,100) (100)
Ending cash balance $15,500 $16,900 $24,000p $24,000x
5-26
5-27, continued
Solve in order of notation

a
Beg. Cash Bal. + $55,000 = $71,500; Beg. Cash Bal. = $16,500
b
Materials purchases + $5,000 + $20,000 + $29,000 = $66,000; Materials
purchases = $12,000
c
$71,500 – $66,000 = Excess (deficiency) of cash
d
Cash deficiency of $9,500 requires $10,000 in borrowing, since all
borrowings are in increments of $1,000
e
Borrowings – Repayments – Interest = total financing; $10,000 - $0 - $0 =
$10,000
f
$15,500 + collections from sales = $96,000; collections from sales =
$80,500
g
$10,000 + $6,000 + $23,000 + $30,000
h
$27,000 – $15,000 = cash available (needed)
i
Borrowings – Repayments – Interest = Total financing
$0 – Repayments – $100 = ($10,100); Repayments = $10,000
j
Ending balance from November = $16,900
k
$16,900 + collections from sales = $120,000; collections from sales =
$103,100
l
Excess (deficiency) of cash – $15,000 = $9,000; Excess of cash =
$24,000
m
Total cash available – Total disbursements = Excess (deficiency) of cash
$120,000 – Total disbursements = $24,000; Total disbursements =
$96,000
n
from $15,000 equipment purchase total for quarter
o
$14,000 + $8,000 + $22,000 + S&A Expenses + $15,000 + $5,000 =
$96,000; S&A Expenses = $32,000
p
Excess (deficiency) of cash – total financing; $24,000 – 0 = $24,000
q
$16,500 + $238,600
r
$20,000 + $23,000 + $22,000
s
$29,000 + $30,000 + $32,000
t
$66,000 + $69,000 + $96,000
u
$255,100 – $231,000
v
minimum cash balance of $15,000
w
$24,100 – $15,000
x
$24,100 + $10,000 – $10,000 – $100
5-27
Exercise 5-28

Beginning cash balance $ 60,000 $ 30,115 $ 30,380 $ 60,000
Collections from salesa 268,500 487,500 519,600 1,275,600
Total cash available to spend 328,500 517,615 549,980 1,335,600
Less disbursements
Payments for direct materialsb 40,240 60,000 70,960 171,200
Direct laborc 111,000 191,000 169,000 471,000
Manufacturing overheadd 86,385 89,185 88,415 263,985
Selling & administrative expensese 51,500 65,750 62,750 180,000
Income taxes 75,260 75,260
Equipment purchases 72,000 60,000 132,000
Dividends 49,000 49,000
Total cash disbursements 413,385 477,935 451,125 1,342,445
Cash excess (deficiency) (84,885) 39,680 98,855 (6,845)
Minimum cash balance (30,000) (30,000) (30,000) (30,000)
Cash excess (needed) (114,885) 9,680 68,855 (36,845)
Financing:
Borrowings 115,000 115,000
Repayments (7,000) (67,000) (74,000)
Interest (2,300)f (1,080) (3,380)
Total financing 115,000 (9,300) (68,080) 37,620
Ending cash balance $ 30,115 $ 30,380 $ 30,775 $ 30,775
a See Exercise 5-23
b See Exercise 5-25
c See Exercise 5-17
d See Exercise 5-19
e See Exercise 5-9
f $115,000 × 12% × 2
12
5-28
Exercise 5-29
a. The amounts reported in the footnote to the financial statements are

pro-forma amounts. They represent the amounts “as if” the purchase
had been made before the beginning of the fiscal year.
b. Monterey Holdings reported the pro-forma amounts to provide users of

the financial statements with information that would assist in interpreting
the company’s operating results and making decisions about the
company’s future prospects.
Exercise 5-30
a.
Sales revenue $1,410,000 (See Exercise 5-8)

Cost of goods sold 1,003,370 (See Exercise 5-20)
Gross margin 406,630
Selling & administrative expense 266,400 (See Exercise 5-9)
Operating income 140,230
Interest expense 3,380 (See Exercise 5-28)
Income before taxes 136,850
Income tax expense 41,055
Net income $ 95,795
5-29
b.
Cash $ 30,775 (See Exercise 5-28)
Accounts receivable 136,500 (See Exercise 5-23)
Direct materials inventory 5,560 (See Exercise 5-20)
Finished goods inventory 59,015 (See Exercise 5-20)
Property, plant & equipment 432,000 ($300,000 + 72,000 + 60,000)
Accumulated depreciation (195,000) ($75,000 + 30,000 + 90,000)
Total assets $468,850
Accounts payable $ 33,200 (See Exercise 5-25)

Taxes payable 41,055 (See income statement above)
Note payable 41,000 (See Exercise 5-28)
Common stock 100,000
Retained earnings 253,595 ($206,800 + 95,795 – 49,000)
Total liabilities and equities $468,850
5-30
SOLUTIONS TO PROBLEMS
Problem 5-31
a.
Acoustic:
Budgeted units sold 400 500 300 600 1,800
Budgeted sales price × $ 1,260 × $ 1,260 × $ 1,260 × $ 1,260 × $ 1,260
Budgeted revenue $504,000 $630,000 $378,000 $756,000 $2,268,000
Electric:
Budgeted units sold 200 80 100 120 500
Budgeted sales price × $ 2,530 × $ 2,530 × $ 2,530 × $ 2,530 × $ 2,530
Budgeted revenue $506,000 $202,400 $253,000 $303,600 $1,265,000
Total revenue $1,010,000 $832,400 $631,000 $1,059,600 $3,533,000
b.
Budgeted unit sales 400 500 300 600 1,800
+ Budgeted ending inventorya 100 60 120 90 90
= Total units required 500 560 420 690 1,890
- Beginning inventory 60 100 60 120 60
= Budgeted production 440 460 360 570 1,830
a Budgeted ending inventory for the 1st quarter is 20% of the following quarter’s sales based on the statement that the desired ending inventory on
December 31 was 80 guitars¸ 20% of 1st quarter sales of 400 guitars. Budgeted ending inventory for the 4 th quarter is 20% of 1st quarter 2016
sales of 450 acoustic guitars.
5-31
5-31 continued
c.

Budgeted production 440 460 360 570 1,830
× Standard necks per guitar × 1.2 × 1.2 × 1.2 × 1.2 × 1.2
= Production needs 528 552 432 684 2,196
+ Budgeted ending inventory 276 216 342 300 300
= Total DM required (necks) 804 768 774 984 2,496
= Budgeted purchases (necks) 404 492 558 642 2,096
× Standard price per neck × $60 × $60 × $60 × $60 × $60
= Budgeted purchases cost $24,240 $29,520 $33,480 $38,520 $125,760
5-32
Problem 5-32
a.
Budgeted unit sales 2,500 2,700 2,900 2,200 10,300
+ Budgeted ending inventory 540 580 440 600 600
= Total units required 3,040 3,280 3,340 2,800 10,900
= Budgeted production 2,540 2,740 2,760 2,360 10,400
b.
× Standard board feet (b.f.) × 25 × 25 × 25 × 25 × 25
= Total DM required (b.f.) 70,350 75,400 74,900 69,000 270,000
= Budgeted purchases (b.f.) 64,850 68,550 68,000 63,100 264,500
× Standard price per board foot × $5 × $5 × $5 × $5 × $5
= Budgeted purchases cost $324,250 $342,750 $340,000 $315,500 $1,322,500
a10% of next quarter’s production needs
5-33
5-32 continued
c.
× Standard DLH per unit × 12 × 12 × 12 × 12 × 12
= Total DLH required 30,480 32,880 33,120 28,320 124,800
× Standard wage rate × $18 × $18 × $18 × $18 × $18
= Budgeted DL cost $548,640 $591,840 $596,160 $509,760 $2,246,400
d.
DLH needed 30,480 32,880 33,120 28,320
- DLH availablea 30,000 30,000 30,000 30,000
= Overtime hours 480 2,880 3,120 0 6,480
× Overtime rateb × $27 × $27 × $27 × $27 × $27
= Overtime cost $12,960 77,760 84,240 $0 $174,960
+ Regular hours at $18/DLHc 540,000 540,000 540,000 540,000 2,160,000
= Budgeted DL cost $552,960 $617,760 $624,240 $540,000 $2,334,960
a60 employees × 500 hours
b($18× 1.5)
cbased on 30,000 DLH
5-34
Problem 5-33
a.
September October November

Budgeted sales $53,000 $60,000 $48,000
× COGS percentage × .40 × .40 × .40
= Cost of goods sold 21,200 24,000 19,200
+ Budgeted ending inventorya 15,600 12,480
= Total inventory required 36,800 36,480
- Beginning inventoryb 13,780 15,600
= Budgeted purchases $23,020 $20,880
a 65%of next month’s cost of goods sold
b September beginning inventory is the same as August ending inventory, 65% of September cost of
goods sold.
b. 60% of September purchases: $23,020  .6 = $13,812

40% of October purchases: $20,880  .4 = 8,352
$22,164
5-35
Problem 5-34
a.
Total Cash Bad Accounts
April May June Receipts Debts Receivable
March sales
$580,000  32% $185,600 $185,600
April sales
$625,000  50%  98% 306,250 306,250
$625,000  15% 93,750 93,750
$625,000  32% $200,000 200,000
$625,000  3% $18,750
May sales
$560,000  50%  98% 274,400 274,400
$560,000  15% 84,000 84,000
$560,000  32% $179,200 179,200
$560,000  3% 16,800
June sales
$600,000  50%  98% 294,000 294,000
$600,000  15% 90,000 90,000
$600,000  32% $192,000
$600,000  3% 18,000
Totals $585,600 $558,400 $563,200 $1,707,200 $53,550 $192,000
b. April: $625,000  50%  2% = $6,250

May: $560,000  50%  2% = 5,600
June: $600,000  50%  2% = 6,000
$17,850
5-36
5-34 continued
c. Conradt may have offered the discount to customers because competitors were doing the same
thing, or it could be that the company needed to accelerate its cash flows to be able to pay its bills
on time.
Problem 5-35
a.
Total Cash Accounts
April May June Receipts Receivable
February sales
$1,000,000  40% $400,000 $400,000
March sales
$900,000  60% 540,000 540,000
$900,000  40% $360,000 360,000
April sales
$1,150,000  60% 690,000 690,000
$1,150,000  40% $460,000 460,000
May sales
$1,250,000  60% 750,000 750,000
$1,250,000  40% $500,000
Totals $940,000 $1,050,000 $1,210,000 $3,200,000 $500,000
5-37
5-35 continued
b.
Total
April May June Purchases
April COGS
$1,150,000  40%  30% $138,000 $138,000
May COGS
$1,250,000  40%  70% 350,000 350,000
$1,250,000  40%  30% $150,000 150,000
June COGS
$1,400,000  40%  70% 392,000 392,000
$1,400,000  40%  30% $168,000 168,000
July COGS
$1,500,000  40%  70% $420,000 $420,000
Totals $488,000 $542,000 $588,000 $1,618,000
5-38
5-35 continued
c.
Total Cash Accounts
April May June Payments Payable
March purchases
$430,000a  25% $107,500 $107,500
April purchases
$488,000  75% 366,000 366,000
$488,000  25% $122,000 122,000
May purchases
$542,000  75% 406,500 406,500
$542,000  25% $135,500 135,500
June purchases
$588,000  75% 441,000 441,000
$588,000  25% $147,000
Totals $473,500 $528,500 $576,500 $1,578,500 $147,000
a 30% of March COGS + 70% of April COGS = ($900,000  40%  30%) + ($1,150,000  40%  70%)
5-39
5-35 continued
d.
Beginning cash balance $50,000 $50,500 $50,080 $50,000
Collections from sales (from Part a) 940,000 1,050,000 1,210,000 3,200,000
Total cash available to spend 990,000 1,100,500 1,260,080 3,250,000
Less disbursements
Payments for inventory (from Part c) 473,500 528,500 576,500 1,578,500
Wages (30% of sales) 345,000 375,000 420,000 1,140,000
Salaries 27,000 27,000 27,000 81,000
Advertising 31,000 31,000 31,000 93,000
Property taxes 34,000 34,000
Insurance 16,000 16,000 16,000 48,000
Utilities 15,000 15,000 15,000 45,000
Income taxes 128,000 128,000
Total cash disbursements 1,035,500 992,500 1,119,500 3,147,500
Cash excess (deficiency) (45,500) 108,000 140,580 102,500
Minimum cash balance 50,000 50,000 50,000 50,000
Cash excess (needed) (95,500) 58,000 90,580 52,500
Financing:
Borrowings 96,000 96,000
b
Repayments (56,000) (40,000) (96,000)
Interest (1,920)a (400)c (2,320)
Total financing 96,000 (57,920) (40,400) (2,320)
Ending cash balance $50,500 $50,080 $100,180 $100,180
2
a $96,000  12%  = $1,920
12
b $58,000 – 1,920 = $56,080 → $56,000
c ($96,000 - $56,000)  12%  1 = $400

12
5-40
SOLUTIONS TO C&C RUNNING CASE
Case 5-36
a.
Budgeted sales price × $14.80 × $14.80 × $14.80 × $14.80
Budgeted revenue $ 59,200 $ 88,800 $222,000 $370,000
b.
SOLUTIONS TO CASES
Case 5-37
a. Any time standards are changed, there is potential for negative

employee behavior. Among the possible negative behaviors that
might occur are:
• Employees may view the new standards as unreasonable.

• Employees may believe that top management is imposing new
stricter standards, possibly as a punitive action.
• Employees may view the new standards as unattainable;
therefore, they are not motivated to work to achieve the
standards.
• Employees may deliberately slow down in retaliation of the
newly imposed standards.
5-41
b. Negative behaviors may be mitigated if Kate will:
• clearly communicate her reasons for changing the standards to

the employees.
• explain what is expected from the employees under the new
standards.
• revise the performance evaluation system to reflect the new
standards.
• actively promote the new standards to employees to obtain
their commitment.
c. Tightening the standards may result in positive behaviors by:
• motivating employees to meet the challenge in attaining the

tighter standards.
• providing an incentive to attain excellence.
• encouraging employees to form groups and use teamwork to
meet the tighter standards.
• encouraging employees to be creative.
• promoting continuous improvement.
d. The employees who will be affected by the new standards should be

involved in setting those standards. These are the employees who
will be affected and evaluated by the new standards. Allowing them
input in the standard setting process will promote commitment to
achieving the standards, foster a sense of ownership and enhance
the perception that the standards are fair.
5-42
Case 5-38
a. Sales Budget
Budgeted sales price × $ 10 × $ 10 × $ 10 × $ 10
Budgeted sales revenue $200,000 $500,000 $300,000 $1,000,000
Selling and Administrative Expense Budget

a
Depreciation $10,000 $10,000 $10,800 $30,800
Sales personnel compensationb 35,000 50,000 40,000 125,000
Advertising 1,000 1,000 1,000 3,000
Management salaries 10,000 10,000 10,000 30,000
Bad debtsc 10,000 25,000 15,000 50,000
Less non-cash expenses
Depreciation $10,000 $10,000 $10,800 $30,800
Bad debts 10,000 25,000 15,000 50,000
Total cash costs $46,500 $61,500 $51,500 $159,500
$48,000
a $10,000 per month for April and May. Add $800 ( ) for June
60 months
b $25,000 + (.05 × sales revenue)
c $0.50 × units sold
5-43
5-38, continued
Production Budget
April May June Quarter July
= Total units required 30,000 56,000 35,000 105,000 28,000
= Budgeted production 26,000 46,000 29,000 101,000 23,000
a Budgeted ending inventory is equal to 20% of the following month’s unit sales
10,000 = 50,000 × 20%
6,000 = 30,000 × 20%
5,000 = 25,000 × 20%
3,000 = 15,000 × 20%
5-44
5-38, continued
Materials Purchases Budget

April May June Quarter July
× Standard pounds per unit 5 5 5 5 5
+ Budgeted ending inventory (pounds)a 23,000 14,500 11,500 11,500
= Total pounds required 153,000 244,500 156,500 516,500
= Budgeted purchases (pounds) 140,000 221,500 142,000 503,500
× Standard price per pound $0.40 $0.40 $0.40 $0.40
= Budgeted purchases cost $56,000 $88,600 $56,800 $201,400
a Budgeted ending inventory is equal to 10% of the following month’s production needs
23,000 = 230,000 × 10%
14,500 = 145,000 × 10%
11,500 = 115,000 × 10%
5-45
5-38, continued
Direct Labor Budget

× Standard DLH per unit 0.25 0.25 0.25 0.25
= Total direct labor hours required 6,500 11,500 7,250 25,250
× Standard wage rate $10 $10 $10 $10
= Budgeted direct labor cost $65,000 $115,000 $72,500 $252,500
Manufacturing Overhead Budget

× Variable overhead per unit 0.50 0.50 0.50 0.50
= Total variable overhead 13,000 23,000 14,500 50,500
+ Fixed overhead 50,000 50,000 50,000 150,000
Total budgeted manufacturing overhead 63,000 73,000 64,500 200,500
Less: Non-cash items
Depreciation 8,000 8,000 8,000 24,000
= Total cash costs $55,000 $65,000 $56,500 $176,500
5-46
5-38, continued
Ending Inventory and Cost of Goods Sold Budget
Raw Materials
Beginning balance $5,200
Purchases of raw materials (from materials purchases budget) 201,400
Less: Ending raw materials inventory (11,500 lbs.  $0.40) 4,600
Raw materials used $202,000
Finished Goods
Unit costs:
Direct materials ($0.40/lb. × 5 lbs.) $2.00
Direct labor ($10/DLH × .25 DLH) 2.50
$50,000 × 12 months 2.00
Overhead ( + $0.50/bag)
400,000 bags
Total standard unit cost 6.50
× Ending inventory units 5,000
Ending finished goods inventory $32,500
Cost of Goods Sold

Beginning work in process inventory $ 0
Direct materials used 202,000
Direct labor 252,500
Manufacturing overhead 200,500
Total manufacturing costs 655,000
Less: Ending work in process inventory 0
Cost of goods manufactured 655,000
Add: Beginning finished goods inventory 26,000
Less: Ending finished goods inventory 32,500
Cost of goods sold $648,500
5-47
5-38, continued

Total Cash Accounts
April May June Receipts Bad Debts Receivable
March salesa
$120,000 × 25% $30,000 $30,000
April sales
$200,000 × 70% 140,000 140,000
$200,000 × 25% $50,000 50,000
$200,000 × 5% $10,000
May sales
$500,000 × 70% 350,000 350,000
$500,000 × 25% $125,000 125,000
$500,000 × 5% 25,000
June sales
$300,000 × 70% 210,000 210,000
$300,000 × 5% 15,000
$300,000 × 25% $75,000
Totals $170,000 $400,000 $335,000 $905,000 $50,000 $75,000
a April collections of March sales: 3/31 Accounts Receivable balance (= $30,000)
5-48
5-38, continued
Cash Payments for Materials Budget
Total Cash Accounts

A/P from March $12,000 $ 12,000
April purchases
$56,000 × 50% 28,000 28,000
$56,000 × 50% $28,000 28,000
May purchases
$88,600 × 50% 44,300 44,300
$88,600 × 50% $44,300 44,300
June purchases
$56,800 × 50% 28,400 28,400
$56,800 × 50% $28,400
Total $40,000 $72,300 $72,700 $185,000 $28,400
5-49
5-38, continued
Cash Budget
Collections from sales 170,000 400,000 335,000 905,000
Total cash available to spend 210,000 430,500 365,180 945,000
Less disbursements
Materials purchases 40,000 72,300 72,700 185,000
Direct labor 65,000 115,000 72,500 252,500
Manufacturing overhead 55,000 65,000 56,500 176,500
Selling & administrative expenses 46,500 61,500 51,500 159,500
Equipment purchase 48,000 48,000
Dividends 49,000 49,000
Total cash disbursements 305,500 313,800 301,200 920,500
Financing:
Borrowings 126,000 126,000
Repaymentsb (84,000) (33,000) (117,000)
Interesta (2,520) (420) (2,940)
Total financing 126,000 (86,520) (33,420) 6,060
aMay 2
interest = $126,000 × 12% × = $2,520
12
1
June interest = ($126,000 - $84,000) × 12% × = $420
12
bMay repayment = $86,700 - $2,520 = $84,180, rounded down to $84,000
June repayment = $33,980 - $420 = $33,560, rounded down to $33,000
5-50
5-38, continued
b.
Income Statement for the quarter ended June 30
$1,000,00
Sales (see sales budget)
0
Cost of goods sold (see ending inventory and cost of goods sold budget) 648,500
Gross profit 351,500
Selling and administrative expense (see selling and administrative expense budget) 240,300
Interest expense (see cash budget) 2,940
Income tax expense (30%) 32,478
Net income $75,782
c.
Balance Sheet as of 6/30
Cash (see cash budget) $30,560
A/R (see cash receipts budget) 75,000
Finished Goods (see ending inventory and cost of goods sold budget) 32,500
Raw Materials Inventory (see ending inventory and cost of goods sold budget) 4,600
Property, Plant & Equipmenta 248,000
Less: Accumulated Depreciationb (104,800)
Total Assets $285,860
A/P(see cash payments for purchases budget) $28,400

Income Taxes Payable (see budgeted income statement) 32,478
Note Payablec 9,000
Common Stock 52,000
Retained Earningsd 163,982
Total Liabilities and Equities $285,860
a$200,000 + $48,000
b$50,000 + $30,800 + $24,000
c$126,000 borrowed - $117,000 repaid
d$137,200 + 75,782 - $49,000
5-51
Case 5-39
a. Changes from base case in 5-38: decrease price, increase advertising, increase units sold
Affected budget components All budgets affected

Net income impact Income increases by $5,544 ($81,326 – $75,782)
Balance sheet impact Accounts receivable increases by $5,025 due to higher
sales. By the end of the quarter, short-term debt is $2,000
less, though more cash had to be borrowed in April.
Increased initial borrowing caused interest expense to be
higher. Taxes payable and retained earnings are higher
due to increased net income.
Recommendation A 7% increase in net income is a good result. Before
Klandon implements this strategy, though, she needs to
conduct sensitivity analysis, reducing the number of units
sold to determine the minimum increase in sales required
to break even on the price change.
Sales Budget
Budgeted sales price × $ 9.70 × $ 9.70 × $ 9.70 × $ 9.70
5-52
5-39a, continued

Depreciation $10,000 $10,000 $10,800 $30,800
Sales personnel compensation 35,670 51,675 41,005 128,350
Advertising 2,000 2,000 2,000 6,000
Bad debts 10,670 26,675 16,005 53,350
Depreciation $10,000 $10,000 $10,800 $30,800
Bad debts 10,670 26,675 16,005 53,350
Total cash costs $48,170 $64,175 $53,505 $165,850
Production Budget
5-53
5-39a, continued

× Standard pounds per unit 5 5 5 5
= Production needs 145,000 253,000 159,500 557,500
+ Budgeted ending inventory (pounds) 25,300 15,950 12,650 12,650
Direct Labor Budget

× Standard DLH per unit 0.25 0.25 0.25 0.25
= Total direct labor hours required 7,250 12,650 7,975 27,875
× Standard wage rate $10 $10 $10 $10
= Budgeted direct labor cost $72,500 $126,500 $79,750 $278,750
5-54
5-39a, continued
Manufacturing Overhead Budget

× Variable overhead per unit 0.50 0.50 0.50 0.50
= Total variable overhead 14,500 25,300 15,950 55,750
+ Fixed overhead 50,000 50,000 50,000 150,000
Total budgeted manufacturing overhead 64,500 75,300 65,950 205,750
Less: Non-cash items
Depreciation 8,000 8,000 8,000 24,000
= Total cash costs $56,500 $67,300 $57,950 $181,750
5-55
5-39a, continued
Raw Materials
Purchases of raw materials 222,860
Finished Goods
Unit costs:
$50,000 × 12 months 2.00
400,000 bags
Cost of Goods Sold

5-56
5-39a, continued

Total Accounts
April May June Cash Receipts Bad Debts Receivable
March A/R $30,000 $30,000
April sales 149,380 $53,350 202,730 $10,670
May sales 373,450 $133,375 506,825 26,675
June sales 224,070 224,070 16,005 $80,025
Totals $179,380 $426,800 $357,445 $963,625 $53,350 $80,025
Total Cash Accounts

A/P from March $12,000 $ 12,000
April purchases 31,460 31,460 62,920
May purchases 48,730 $48,730 97,460
June purchases 31,240 31,240 $31,240
Total $43,460 $80,190 $79,970 $203,620 $31,240
5-57
5-39a, continued
Cash Budget

Total cash available to spend 219,380 457,550 388,210 1,003,625
Less disbursements
Direct labor 72,500 126,500 79,750 278,750
Dividends 49,000 49,000
Financing:
Borrowings 131,000 131,000
Repayments (86,000) (38,000) (124,000)
Interest (2,620)a (450)a (3,070)
Total financing 131,000 (88,620) (38,450) 3,930
2 1
a$131,000 × 12% × = $2,620, ($131,000 – $86,000) × 12% × = $2,620 = $450
12 12
5-58
5-39a, continued

Sales $1,067,000
Cost of goods sold 697,750
Selling and administrative expense 250,000
Interest expense 3,070
Net income $81,326

Cash $30,585
Accounts receivable 80,025
Finished goods 35,750
Raw materials inventory 5,060
Property, plant & equipment 248,000
Less: Accumulated depreciation (104,800)
Accounts payable $31,240

Income taxes payable 34,854
Short-term note payable 7,000
Common stock 52,000
Retained earnings 169,526
5-59
5-39, continued
b. Changes from base case in 5-38: purchase lower quality rocks for $.32 per pound, requires 6
pounds per unit, maintain 15% ending raw materials inventory
Affected budget components Materials purchases budget, ending inventory & COGS
budget, payments for materials budget, cash budget, pro-
forma financial statements
Net income impact Income increases by $4,613 ($80,395 – $75,782), primarily
driven by a decrease in COGS. Interest expense increases
a slight bit, as does income tax expense.
Balance sheet impact Total assets don’t change by much. Finished goods
inventory decreases because of reduced materials cost, but
raw materials inventory increases since more materials
needs to be held. $2,000 in additional short-term borrowing
is required in April. But with the lower cash disbursements
in May and June, the ending note payable balance is $4,000
lower.
Recommendation This alternative could be a good idea if Klandon can be
convinced that the lower quality rocks won’t result in a lower
quality finished product. It also requires a higher investment
in inventory.
5-60
5-39b, continued

5-61
5-39b, continued
Raw Materials
Less: Ending raw materials inventory (20,700 lbs. $0.32) 6,624
Finished Goods
Unit costs:
$50,000 × 12 months 2.00
400,000 bags
Cost of Goods Sold

5-62
5-39b, continued
Total Cash Accounts

A/P from March $12,000 $ 12,000
April purchases 29,504 $29,504 59,008
May purchases 41,712 $41,712 83,424
June purchases 26,976 26,976 $26,976
Total $41,504 $71,216 $68,688 $181,408 $26,976
5-63
5-39b, continued
Cash Budget

Less disbursements
Direct labor 65,000 115,000 72,500 252,500
Dividends 49,000 49,000
Financing:
Borrowings 128,000 128,000
Repayments (85,000) (38,000) (123,000)
Interest (2,560)a (430)a (2,990)
Total financing 128,000 (87,560) (38,430) 2,010
2 1
a$128,000 × 12% × = $2,560, ($128,000 – $85,000) × 12% × = $2,620 = $430
12 12
5-64
5-39b, continued

Sales $1,000,000
Net income $80,395

Cash $30,102
A/R 75,000
Finished Goods 32,100
Raw Materials Inventory 6,624
Property, Plant & Equipment 248,000
Less: Accumulated Depreciation (104,800)
A/P $26,976
Income Taxes Payable 34,455
Note Payable 5,000
Common Stock 52,000
Retained Earnings 168,595
5-65
5-39, continued
c. Changes from base case in 5-38: purchase higher quality rocks for $.50 per pound; requires 4
pounds per unit; maintain 8% ending raw materials inventory
Affected budget components Materials purchases budget, ending inventory & COGS budget,
payments for materials budget, cash budget, pro-forma financial
statements
Net income impact Income increases by $959 ($76,741 – $75,782); COGS and
interest expense both decrease by a small amount
Balance sheet impact Total assets changes by very little, and only by the decrease in raw
materials inventory. $2,000 less short-term debt is borrowed in
April and in total, as cash disbursements are lower for the quarter.
Recommendation A $959 dollar difference in expected income may not be enough to
risk trying this strategy. While the cost of the rocks is certain, the
amount of rocks needed per unit may not be as low as expected.
A slight deviation from budgeted results could leave Klandon worse
off than if the change had not been made.
5-66
5-39c, continued

5-67
5-39c, continued
Raw Materials
Finished Goods
Unit costs:
$50,000 rhead bor ( 2.00
400,000 bags
Cost of Goods Sold

5-68
5-39c, continued
Total Cash Accounts

A/P from March $12,000 $ 12,000
April purchases 26,430 26,430 52,860
May purchases 44,640 44,640 89,280
June purchases 28,520 28,520 $28,520
Total $38,430 $71,070 $73,160 $182,660 $28,520
5-69
5-39c, continued
Cash Budget

Less disbursements
Direct labor 65,000 115,000 72,500 252,500
Dividends 49,000 49,000
Financing:
Borrowings 124,000 124,000
Repayments (85,000) (32,000) (117,000)
Interest (2,480)a (390)a (2,870)
Total financing 124,000 (87,480) (32,390) 4,130
2 1
a$124,000 × 12% × = $2,480, ($124,000 – $85,000) × 12% × = $2,620 = $390
12 12
5-70
5-39c, continued

Sales $1,000,000
Net income $76,741

Cash $30,970
A/R 75,000
A/P $28,520
Note Payable 7,000
Common Stock 52,000
5-71
5-39, continued
d. Changes from base case in 5-38: Sales price increased to $10.20; 2% cash discount; cash
collection pattern changed
Affected budget components sales budget, selling and administrative expense budget, cash
receipts budget, cash budget, pro-forma financial statements
Net income impact Income increases by $2,604 ($78,386 – $75,782) due to increase
in net sales and decrease in interest expense.
Balance sheet impact Cash increased by almost $40,000 due to decrease in accounts
receivable. By the end of the quarter, no short-term payable is
outstanding.
Recommendation While this strategy has a good result, Klandon has made no
prediction about the change in unit sales. Customers may not
respond favorably to the change, and if it is easy to switch to
another vendor, Klandon may lose sales. She needs to investigate
what her competitors are doing and have her sales reps visit with
customers before implementing this strategy.
Sales Budget
Budgeted sales price × $ 10.20 × $ 10.20 × $ 10.20 × $ 10.20
5-72
5-39d, continued

Depreciation $10,000 $10,000 $10,800 $30,800
Sales personnel compensation 35,200 50,500 40,300 126,000
Advertising 1,000 1,000 1,000 3,000
Bad debts 10,200 25,500 15,300 51,000
Depreciation $10,000 $10,000 $10,800 $30,800
Bad debts 10,200 25,500 15,300 51,000
Total cash costs $46,700 $62,000 $51,800 $160,500
5-73
5-39d, continued

Total Bad Accounts Sales
April May June Cash Receipts Debts Receivable Discounts
March A/R $30,000 $30,000

April sales
Cash 149,940 149,940 $3,060a
Credit 20,400 $20,400 40,800 $10,200
May sales
Cash 374,850 374,850 7,650b
Credit 51,000 $51,000 102,000 25,500
June sales
Cash 224,910 224,910 4,590c
Credit 30,600 30,600 15,300 $30,600
Totals $200,340 $446,250 $306,510 $953,100 $51,000 $30,600 $15,300
a $204,000 × 0.75 × 0.02
b $510,000 × 0.75 × 0.02
c $306,000 × 0.75 × 0.02
5-74
5-39d, continued
Cash Budget

Less disbursements
Direct labor 65,000 115,000 72,500 252,500
Dividends 49,000 49,000
Cash excess (needed) (95,360) 132,590 39,680 41,600
Financing:
Repayments (96,000) (96,000)
Interest (1,920)a (1,920)
Total financing 96,000 (97,920) (1,920)
a$96,000 2
× 12% × = $1,920
12
5-75
5-39d, continued

Sales $1,020,000
Sales discounts 15,300
Net sales 1,004,700
Net income $78,386

Cash $69,680
A/R 30,600
A/P $28,400
Note Payable 0
Common Stock 52,000
5-76
Case 5-40
a. Sales Budget
July August September Quarter
Budgeted sales price × $225 × $225 × $225 × $225
Budgeted sales revenue $1,012,500 $1,057,500 $1,035,000 $3,105,000

Depreciation $9,000 $9,000 $9,000 $27,000
Rent 40,000 40,000 40,000 120,000
Advertising 84,000 114,000 84,000 282,000
Salaries 150,000 150,000 150,000 450,000
Bad debts 40,500 42,300 41,400 124,200
Total budgeted expenses 323,500 355,300 324,400 1,003,200
Depreciation 9,000 9,000 9,000 27,000
Bad debts 40,500 42,300 41,400 124,200
Total Budgeted Cash Expenses $274,000 $304,000 $274,000 $852,000
5-77
5-40, continued
Inventory Purchases Budget

July August September Quarter October

= Total materials required 5,675 5,850 5,750 14,950
= Budgeted purchases 4,550 4,675 4,600 13,825
× Cost per unit  $146  $146  $146  $146
= Budgeted purchases cost $664,300 $682,550 $671,600 $2,018,450
a Budgeted ending inventory is equal to 25% of the following month’s sales needs
Ending Inventory Budget

Inventory purchases 2,018,450
Less: Ending inventory (1,150  $146) (167,900)
Cost of goods sold $2,014,800
5-78
5-40, continued

Total Accounts
July August September Cash Receipts Bad Debts Receivable
June A/R $180,000 $180,000
July sales
$1,012,500 × 41% 415,125 415,125
$1,012,500 × 35% 354,375 354,375
$1,012,500 × 20% $202,500 202,500
$1,012,500 × 4% $40,500
August sales
$1,057,500 × 41% 433,575 433,575
$1,057,500 × 35% 370,125 370,125
$1,057,500 × 20% $211,500 211,500
$1,057,500 × 4% 42,300
September sales
$1,035,000 × 41% 424,350 424,350
$1,035,000 × 35% 362,250 362,250
$1,035,000 × 4% 41,400
$1,035,000 × 20% $207,000
Totals $949,500 $1,006,200 $998,100 $2,953,800 $124,200 $207,000
5-79
5-40, continued
Cash Payments for Inventory Budget
Total Cash Accounts

July August September Payments Payable
June A/P $175,000 $175,000
July purchases
$664,300 × 70% 465,010 465,010
$664,300 × 30% $199,290 199,290
August purchases
$682,550 × 70% 477,785 477,785
$682,550 × 30% $204,765 204,765
September purchases
$671,600 × 70% 470,120 470,120
$671,600 × 30% $201,480
Totals $640,010 $677,075 $674,885 $1,991,970 $201,480
5-80
5-40, continued
Cash Budget

Collections from sales 949,500 1,006,200 998,100 2,953,800
Total cash available to spend 970,500 1,026,690 1,018,935 2,974,800
Less disbursements
Inventory purchases 640,010 677,075 674,885 1,991,970
Accrued expenses 75,000 75,000
Total disbursements 989,010 981,075 993,885 2,963,970
Financing:
Repaymentsb (24,000) (4,000) (28,000)
Interesta (780) (150) (930)
Total financing 39,000 (24,780) (4,150) 10,070
a August 2
interest = $39,000 × 12% × = $780
12
1
September interest = ($39,000 - $24,000) × 12% × = $150
12
b August repayment = $25,615 - $780 = $24,835, rounded down to $24,000
September repayment = $5,050 - $150 = $4,900, rounded down to $4,000
5-81
5-40, continued
b.
Income Statement for the quarter ended September 30
Sales $3,105,000
Cost of goods sold 2,014,800
Gross profit 1,090,200
Selling and administrative expense 1,003,200
Interest expense 930
Net income $60,249
c.
Cash $20,900
A/R 207,000
Inventory 167,900
Property, Plant & Equipmenta 585,000
Less: Accumulated Depreciationb (162,000)
A/P $201,480
Note Payablec 11,000
Common Stock 300,000
Retained Earningsd 280,499
a $540,000 + $45,000
b $135,000 + $27,000
c $39,000 borrowed - $28,000 repaid
d $220,250 + $60,249
5-82
Case 5-41
a. Green cares about the budgeted net income because if the actual
results exceed the budgeted net income, he will be eligible for bonus
compensation. By budgeting a higher than expected increase in
expenses, it is more likely that actual net income will exceed the
budgeted amount.
b. There is no indication that Mayfield expects that budgetary padding is

occurring. If she doesn’t expect this behavior is occurring, she will
likely be surprised and disappointed to learn that her employees are
taking such action.
c. Duvall has little to gain from his actions. One possible benefit to him
is not having to endure the retaliation that Green apparently delivers
on those who do not follow his directives. Remaining in Green’s good
graces may also benefit Duvall indirectly when his wife opens a new
franchised store in the region in 2015.
Duvall has much to lose from his actions. Falsifying information is a

serious compromise of personal integrity. Repeating this action will
be easier the next time he is asked by Green to alter information, and
could spiral into larger, more serious manipulations and falsifications.
If discovered, Duvall could lose not only his job, but the chance for
future employment in the accounting field as well.
d. As a certified management accountant, Duvall is bound to abide by

the IMA’s Statement of Ethical Professional Practice. Based on his
actions, he has violated the Statement’s standards. By knowingly
providing false information in the budget, Duvall violated the
competence standard, which requires that information is accurate.
He violated the integrity standard by carrying out activities that might
discredit the accounting profession. Finally, he violated the credibility
standard by not disclosing all relevant information.
5-83

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Chapter 5 – Planning and Forecasting

Planning and Forecasting

Managerial Accounting 2nd

Solution Manual: https://testbankpack.com/p/solution-manual-for-managerial-

Test Bank: https://testbankpack.com/p/test-bank-for-managerial-accounting-2nd-

Summary of End of Chapter Material

Item L. O.Difficulty Minutes to Bloom’s AACSB AICPA AICPA IMA Ethics

5-30 5 D 20-25 AP, AN A M PS BP

SOLUTIONS TO GUIDED UNIT PREPARATION

1. Budgets are tactical plans that guide employees as they strive to

2. It is management’s responsibility to set the budget.

3. No. Budgeting is important for organizations of all sizes. Small

4. With top-down budgeting, upper management determines the budget

With bottom-up, or participative, budgeting, expectations about sales

5. Budgetary slack involves under-estimating revenues or over-

because when managers under-estimate income, they may prevent

6. Zero-based budgeting requires managers to justify every budget line

1. Standards are guides or rules that specify a particular level of

2. Ideal standards specify results from perfect circumstances. Practical

4. Direct materials, direct labor and overhead

1. The operating budget is the first major component of the master

2. The operating budget is made up of the following component

5. The master budget is a collection of smaller budgets that lead to pro-

1. The cash budget has five components:

Cash disbursements – made up of the various cash outflows that will

Cash excess or cash needed – the difference between cash available

Short-term financing – made up of borrowings during periods of cash

Ending cash balance – cash available less cash disbursements plus

2. Companies establish minimum cash balances to ensure that they are

3. It is better to prepare monthly or quarterly cash budgets so managers

1. Pro-forma financial statements are expectations of what financial

2. The balance sheet is prepared last. The income statement has to be

Budgeting is part of the planning process that all organizations should

Activity Time Required

Item Standard Cost

January February March Quarter

Budgeted units sold 20,000 24,000 16,000 60,000

January February March Quarter

Budgeted units sold 20,000 39,000 35,000 94,000

January February March Quarter

Commission $15,000 $29,250 $26,250 $70,500

April May June Quarter

January February March Quarter

b. direct materials purchases budget, ending inventory and cost of goods

January February March Quarter April

1st 2nd 3rd 4th 1st Quarter

January February March Quarter April

January February March Quarter

January February March Quarter

Beginning DM Inventory $7,560 18,900 lbs. × $0.40/lb. (see 5-15)

Finished Goods Inventory

Cost of Goods Sold

Cash Receipts Budget

Total Cash Accounts

Total Cash Accounts

Total Cash Accounts

Since borrowings must be done in increments of $500, Austin Paints

Excess cash $7,000

Since principal repayment must be done in increments of $500, Austin

October November December Quarter

Solve in order of notation

January February March Quarter

a. The amounts reported in the footnote to the financial statements are

b. Monterey Holdings reported the pro-forma amounts to provide users of