Ch.08 Kinney 9e SM_Final

Chapter 8

CHAPTER 8 THE MASTER BUDGET QUESTIONS 1.

Budgeting translates goals and objectives into the resources, activities, and arrangements needed to accomplish those goals and objectives. That information is extended to assign activities and allocate resources to departments and personnel responsible for execution of the budget.

2.

The strategic plan defines an organization’s basic purposes and goals. As such, the strategic plan identifies the internal and external key variables that will largely determine the organization’s success. Internally, consideration must be given to resource availability, core competencies, product development, and product life cycles. Some external factors to be considered include the local and global economy, competitor actions, technology trends, raw material availability, outsourcing possibilities, and legislative and political climates. The longterm and shortterm information generated from the strategic plan influences the financial goals and objectives that underlie the budgeting process.

3.

Longer term (strategic) plans contain insufficient detail to direct a business. Although strategic plans provide general direction for a business, they are too vague to provide guidance on a daytoday basis. Consequently, shorter term (tactical) plans are compiled to implement the strategic plans for a specific period. Tactical plans are prepared with greater attention to current organizational and environmental constraints (current market, material, and labor conditions). Also, roles of specific middle and lowerlevel managers can be indicated in the detailed shortterm plans.

4.

The budget represents the cornerstone for a company’s management planning system. Budgeting originates with strategic planning and utilizes goals, objectives, and forecasts in developing plans for production, revenues, costs, cash flows, and resource procurement. As goals are implemented and programs/ products are developed, management needs information about various alternatives so they can be evaluated. When a specific plan of action is determined, the budget becomes management’s master plan. The budget provides a basis against which management can compare actual with forecasted outcomes. If the plan is “offtrack,” the budgettoactual comparison can be viewed as a control indicator to management as to where changes (if they are possible) need to be made. Without formal planning, there can be little control.

5.

An operating budget presents units expected to be sold or used by a company and the price/costs associated with those units. Sales, production, and purchasing budgets are operating budgets. Results from the operating budgets are input sources for financial budgets. Financial budgets detail the funds to be © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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generated or used during the budget period (cash budget and capital expenditure budget). For example, the sales figures in the (operating) sales budget affect the cash collections/receipts portion of the (financial) cash budget. Both types of budgets are needed because the units contained in operating budgets have to be “translated” into monetary amounts to generate the final result of the budgeting process—the budgeted financial statements. 6.

The master budget begins with a “demand driven” estimate of sales. It is, however, possible that demand does not “exist” at the point the budget is prepared (for example, when the company is introducing a new product); thus, estimates would be made about sales. Without sales or expected sales, the company would have no need to acquire resources or remain in operation. The production budget is prepared next as it follows directly from the sales budget. Production and purchases budgets are similar in that they begin with a key variable to their particular area, add ending inventory, and subtract beginning inventory. These budgets differ in that the key variable for the production area is sales, but the key variable for purchases is production. The production budget is used to schedule the needed manufacturing inputs of material, labor, and overhead. The purchases budget is used to determine the amount and timing of material input to the production process as well as provide input into the cash budget as to the amount and timing of cash disbursements for such purchases. Retail and service organizations will prepare purchasing budgets directly from sales budgets. To prepare the overhead budget for a specific production volume, costs must be separated into those that are volume dependent (variable costs) and those that are volume independent (fixed costs). The total variable cost is a function of the variable cost per unit and the expected volume of production. Expected overhead for a given period is the sum of the projected variable and fixed costs. Depreciation amounts must be noted separately as they are noncash items. Selling and administrative budgets follow, and then the cash budget is prepared. Managers estimate collections from sales through historical company data on collection patterns, industry trends/patterns, and judgment. Current economic information can play an important part in estimating the collection pattern since inflation or deflation, interest rates, and employment affect both business and consumer ability to pay. Cash collections are important in the budgeting process because of their impact on the cash budget and the availability of funds with which to make disbursements for operating and capital expenditures, and ownership distributions. After all of these budgets are prepared, a set of budgeted financial statements is prepared to visualize the expected financial results of operations and the ending balance sheet position. This sequence is necessary because the information from one budget is often a primary input into another budget. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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7.

A firm’s production budget is influenced by the finished goods inventory policy because that policy dictates the quantity of goods that are expected to be on hand at periodend. Thus, a company cannot simply make production equal to sales if some finished goods are desired. Additionally, the finished goods from one period become the beginning inventory for the next period, which also influences the quantity of production needed in the following period. The computation for production is sales plus desired ending finished goods inventory minus beginning finished goods inventory.

8.

Cash is an essential organizational resource because it is the medium of exchange for organizational inputs and outputs. A shortage of cash creates liquidity problems and may prevent the firm from acquiring inputs that are crucial to its survival. A firm can cover periods of cash shortages with loans, equity sales, or sales of assets. When the cash budget indicates a potential shortage, the accountant should suggest that management address the issue with the organization’s bank and (if extremely critical) creditors to make advance arrangements to borrow funds or defer payments.

9.

The cash budget and budgeted statement of cash flows are similar in that they both focus on the balance of cash and explain the change in cash balance over a period of time. However, the cash budget typically covers shorter time periods (generally monthly rather than for a quarter or year) and has as its primary objective the identification of periods of cash shortages and cash excesses. The statement of cash flows has as its primary purpose the identification of the activities (operating, investing, and financing) that explain the change in the cash balance for a period.

10. Continuous budgeting is becoming more popular because of the rapidity of change. Rather than having a 12month budget period that gets shorter as the year progresses, continuous budgeting allows managers to always have a 12 month budget period. Continuous budgeting assures that the planning process is ongoing rather than a “onceayear” activity that is entered into and then ignored until it is necessary to do again. 11. The process of developing a budget is important because managers are able to view the interactions of their areas on the firm as a whole. Also, a budget forces managers to determine what caused the differences between budgeted and actual outcomes. Sometimes the differences are caused by factors outside management’s control, but other times they are not—in which case, knowing the causes should help managers to better budget in future periods. 12. Budgetary slack results from an overestimation of expected expenses or an underestimation of expected revenues so that the budget will be more easily achieved. Because managerial performance is often evaluated on an actualto budget comparison, the actual performance will appear to be more favorable if sufficient slack is contained in the budget. Two primary ways to reduce budget © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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slack is to reduce participation by lowerlevel managers or to set up the reward system to encourage a more accurate budgeting process. 13. The budget manual provides a “standard” methodology for preparing the budget as well as a recognized standard for the budgeting process. The budget manual directs similar events to be budgeted in similar ways. Having and using a budget manual communicates top management’s commitment to an effective budgeting process for lowerlevel managers.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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EXERCISES 14. Each student will have a different answer; however, the following types of items might be included for each part. a. What inflation rates are expected for the countries in which the company operates? What will it cost to open a new plant in Country X? What will happen to net income if the price of an important raw material increases by X%? What would happen to demand if selling price was reduced by X%? Should the company attempt to advance the introduction of a new product by several months? What outsourcing opportunities are available, and how would using these affect the company’s profitability and reputation? b. What new taxes or tax rates will be imposed in the coming year? How will the new oneway streets affect the company’s customer traffic? Can the company afford to meet the new competitor’s lower prices? How will the change in minimum wage affect the company’s ability to retain or increase the number of salespeople? How would advertising in a new medium affect company sales and profitability? 15.

a. A SWOT analysis is an internal and external environmental scan that details information on the company’s strengths, weaknesses, opportunities, and threats. Such an analysis is useful in the planning process in that it helps match the firm’s resources and capabilities to the competitive environment in which the firm operates. When preparing a SWOT analysis, company management should be realistic about the organization’s strengths and weaknesses and should differentiate where the company is currently and where it could be in the future (and what it would take to get the firm to that “new” position). It is helpful if the analysis indicates where the firm is in relation to its competition. A SWOT analysis template is available at http://www.businessballs.com/free_SWOT_analysis_template.pdf. b. Each student will have a different answer. However, the following sites provide descriptions of SWOT analyses for four companies: http://www.marketingteacher.com/SWOT/walmartswot.htm http://www.marketingteacher.com/SWOT/starbucksswot.htm http://www.marketingteacher.com/SWOT/nikeswot.htm http://www.companiesandmarkets.com/CompanyProfile/stagestores,inc. swotanalysis727078.asp

16.

Each student will have a different answer. However, some possibilities are: © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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        

Reduce amounts spent for entertainment, including movies. Reduce amounts spent for dining out or inhome delivery. Put each person on an “allowance.” Set a maximum for gifts, and do not buy gifts for each other. Get permission from the other person before spending amounts over a specific amount, such as $25. Reduce amounts spent on food; buy more vegetables and fruits rather than meats and pastries. Vacation “on the cheap”—camping, visiting relatives, or enjoying home town. Don’t buy “it” if cash cannot be paid for “it.” Put some money aside each pay period for savings.

17. a. Competitors’ actions are extremely important to business planning because those actions will probably affect whether the planning company will succeed in its planned activities. Competitors may decide to offer new products, making other products obsolete; competitors may decide to enter or expand their markets, creating a market decline for other companies; competitors may lower prices, forcing others offering the same or similar products to also lower product prices or increase advertising that would explain higher prices to consumers. b.

Competitors’ actions may affect internal planning activities because of the implications of those actions on sales and related production figures. Also, actions such as “nointerest” installment promotions may impact sales and collection patterns. Changes in products may require changes in production technology or labor needs.

c.

Other internal factors that will affect the budgeting process are marketing promotions that are being planned, capital budgeting purchases and payments, stock or bond issuances, new management strategies (such as market entrances or departures), expansion or contraction of the company’s sales force, and technological changes that could affect training needs. Other external factors that will affect the budgeting process are interest rate changes, war or threats of war, expansion or contraction of oil (or other raw material) supplies, and changes in minimumwage laws.

18.

Business loans ($6,000,000  0.05) Consumer loans ($4,000,000  0.11) Investments ($1,600,000  0.045) Total projected revenue

$300,000 440,000 72,000 $812,000


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19. A

B

C

1st Quarter 2nd Quarter 3rd Quarter 600,000 300,000 640,000    $17    $16    $14 $10,200,000 $ 4,800,000 $ 8,960,000

4th Quarter 460,000    $12 $5,520,000

Total

$29,480,000

400,000 700,000 250,000    $17    $16    $14 $ 6,800,000 $11,200,000 $ 3,500,000

650,000    $12 $7,800,000

$29,300,000

530,000 480,000 800,000    $17    $16    $14 $ 9,010,000 $ 7,680,000 $11,200,000

190,000    $12 $2,280,000

$30,170,000

The most financially beneficial scenario would be C; however, given the large discrepancies in sales quantities per quarter, Pataky Company may not be able to smooth production activities over the year. There would need to be a large inventory buildup for the third quarter, which would increase the costs of non valueadded costs of moving and storing units. The extreme decline in fourth quarter sales might result in layoffs, if other valueadded activities could not be developed for direct labor employees. Scenario A might actually be a better situation because of the less dramatic adjustments between quarters. 20. Budgeted sales Ending inventory (5%) Total required Beginning inventory Budgeted production 21.

QUARTER 1 2 3 rd 1,080,000 1,360,000 980,000 136,000 98,000 110,000 1,216,000 1,458,000 1,090,000 (94,500) (136,000) (98,000) 1,121,500 1,322,000 992,000 st

Sales EI (10%) Total BI Production 22. a.

January February 102,400 96,000 4,800 6,400 107,200 102,400 (7,000) (4,800) 100,200 97,600

nd

January

February

March 128,000 7,680 135,680 (6,400) 129,280 Total 4 1,100,000 120,000 1,220,000 (110,000) 1,110,000 th

March

4,520,000 120,000 4,640,000 (94,500) 4,545,500 April


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Sales EI Total units needed BI Units produced

300 1,700 2,000 (1,000) 1,000

b.

c.

700 1,900 2,600 (1,700) 900

1,000 900 1,300 700 2,300 1,600 (1,900) (1,300) 400 300

Units produced Pounds of RM per unit RM needed for production EI Pounds of RM needed Pounds of RM in BI Pounds of RM to purchase Cost per pound Cost of RM purchases

February March 900 400    3    3 2,700 1,200 1,350 600 4,050 1,800 (1,500) (1,350) 2,550 450    $2.00    $2.30 $ 5,100 $ 1,035

Units produced DLHs per unit Total hours Cost per DLH Cost of DL

February 900    10 9,000    $12 $108,000

23. Sales of gowns EI of gowns Total BI of gowns Production

March 400    10 4,000    $12 $48,000

April 300    3 900 450 1,350 (600) 750    $2.40 $ 1,800 April 300    10 3,000    $12 $36,000

325,000 15,800 340,800 (21,000) 319,800

319,800  2.5 yards = 799,500 yards Yards needed for production Ending inventory Total Beginning inventory Yards to purchase Divided by yards in bolt Necessary bolts 24. a. and b. Sales (feet) EI Total

799,500 4,550 804,050 (5,000) 799,050 ÷ 15 53,270 190,000 10,000 200,000


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BI Production Production in feet Pounds per foot Pounds for production EI Total pounds needed BI Purchase (pounds) Cost per pound Total cost 25. a. Production budget Units of sales Units desired in ending inv. Units needed Units in beginning inv. Budgeted production

(12,250) 187,750 Concrete 187,750    4 751,000 34,300 785,300 (41,000) 744,300    $0.10 $ 74,430

Gravel 187,750    7.5 1,408,125 46,250 1,454,375 (32,650) 1,421,725    $0.04 $ 56,869

Boxes

Trays

42,000 1,800 43,800 (1,200) 42,600

30,000 650 30,650 (800) 29,850

b. Purchases budget—Material A Pounds needed for production: (42,600  2) + (29,850  1) = (85,200 + 29,850) Desired ending inventory Total requirements Less beginning inventory Pounds to be purchased Cost per pound Total cost of Material A purchases

115,050 1,500 116,550 (1,780) 114,770    $0.05 $5,738.50

Purchases budget—Material B Pounds needed for production: (42,600  1.5) + (29,850  0.8) = (63,900 + 23,880) Desired ending inventory Total requirements Less beginning inventory Pounds to be purchased Cost per pound Total cost of Material B purchases Material purchases: Material A 114,770 lbs. Material B 84,180 lbs. Total

87,780 1,400 89,180 (5,000) 84,180    $0.07 $5,892.60

$ 5,738.50 5,892.60 $11,631.10

c. Direct labor budget © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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Required hours:

12,780 5,970 18,750    $9.50 $178,125

Boxes (42,600  0.3) Trays (29,850  0.2)

Total DLHs Average DL wage rate Total DL cost d. Activity base (DLHs) Multiplied by OH rate Overhead applied 26. Cost of goods sold Ending inventory Beginning inventory Budgeted purchases

Boxes 12,780  $1.60 $20,448

Trays 5,970  $1.60 $9,552

Total

$30,000

$600,000 84,000 (60,000) $624,000

Monthly purchases: $624,000 ÷ 12 = $52,000 Payment for current year purchases ($52,000  11) Beginning A/P balance Total cash payments for purchases in 2014 27. Aug. credit sales (60%  $78,000  80%) Sept. cash sales (40%  $80,000) Sept. credit sales (60%  $80,000  20%) Sept. credit sales (60%  $80,000  80%) Oct. cash sales (40%  $95,000) Oct. credit sales (60%  $95,000  20%) Oct. credit sales (60%  $95,000  80%) Nov. cash sales (40%  $91,000) Nov. credit sales (60%  $91,000  20%) Total collections 28. a. Nov. sales (30%  $83,000) Dec. sales (30%  $76,000) Dec. sales (30%  $76,000) Jan. sales (40%  $79,000  99%) Jan. sales (30%  $79,000) Jan. sales (30%  $79,000) Feb. sales (40%  $88,000  99%) Feb. sales (30%  $88,000) Mar. sales (40%  $59,000  99%) Total collections

$572,000 40,000 $612,000

Sept. $37,440 32,000 9,600

Oct.

Nov.

$38,400 38,000 11,400

$79,040 January $24,900 22,800

$87,800

February

$45,600 36,400 10,920 $92,920

March

$22,800 31,284 23,700 $23,700 34,848 $78,984

b. Feb. sales to be collected in April (30%  $88,000)

$81,348

26,400 23,364 $73,464 $26,400


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17,700 17,700 $61,800

March sales to be collected in April (30%  $59,000) March sales to be collected in May (30%  $59,000) Total A/R balance at March 31 29. a. October collections: From A/R balance From October billings ($100,000  0.15) Total October collections

$11,000 15,000 $26,000

November collections: From October billings ($100,000  0.55) From November billings ($65,000  0.15) Total November collections

$55,000 9,750 $64,750

December collections: From October billings ($100,000  0.30) From November billings ($65,000  0.55) From December billings ($15,000  0.15) Total December collections

$30,000 35,750 2,250 $68,000

b. October collections Less October business costs Remainder 10/31 November collections Total Less November business costs Remainder 11/30

$ 26,000 (22,500) $ 3,500 64,750 $ 68,250 (22,500) $ 45,750

Yes, Irby could pay the $45,000 for the trip at the end of November. c.

If Irby pays for the trip and if everything works out exactly as planned, she would have $750 of cash on hand in the business. This is an exceptionally small “cushion” and she should probably not make such a large cash expenditure at the end of November. Remainder 11/30 December collections Total Less December business costs Remainder 12/31

$ 45,750 68,000 $113,750 (22,500) $ 91,250

However, if Irby has good credit, she could borrow the $45,000 to pay for the trip at the end of November and pay the money back at the end of December when she has a substantial cash balance. If she can borrow at 12%, she would incur 1% per month for interest—or $450 ($45,000  0.01) until the end of December. By paying for the trip in November, she’d be saving $5,000 and spending $450—saving a total of $4,550. 30. a. Balance at May 31

$119,600


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Remainder of May credit sales Remainder of April credit sales % of April credit sales uncollected at end of May April sales on credit % of total sales made on credit Total April sales

(90,000) $ 29,600 ÷ 0.10 $296,000 ÷ 0.80 $370,000

b. Remainder of May credit sales % of May credit sales uncollected at end of May May credit sales

$ 90,000 ÷ 0.30 $300,000

c. June collections of April credit sales (remainder) June collections of May credit sales ($300,000  20%) June cash sales ($450,000  20%) June collections of June credit sales ($450,000  80% = $360,000 credit sales; $360,000  70%) Total June collections

252,000 $431,600

d. Balance from May sales ($300,000  10%) Balance from June sales ($360,000  30%) Total June 30 A/R balance

$ 30,000 108,000 $138,000

31. a. Balance at October 1 Remainder of September billings Remainder of August billings % of August billings uncollected at end of September August billings b.

Remainder of September billings % uncollected at end of September September billings % estimated uncollectible Total September billings expected to be uncollectible

c.

Oct. collections of Aug. billings ($610,000  22%) Oct. collections of Sept. billings ($600,000  55%) Oct. collections of Oct. billings ($750,000  20%) Total October collections

32. a. Units produced Pounds per unit Pounds needed EI in pounds Total required BI Pounds to purchase

January 20,000    2 40,000 25,000 65,000 (0) 65,000

February 50,000    2 100,000 35,000 135,000 (25,000) 110,000

$ 29,600 60,000 90,000

$ 632,500 (480,000) $ 152,500 ÷ 0.25 $ 610,000 $ 480,000 ÷ 0.80 $ 600,000    0.03 $ 18,000 $ 134,200 330,000 150,000 $ 614,200 March 70,000    2 140,000 35,000 175,000 (35,000) 140,000

Total 140,000    2 280,000 35,000 315,000 (0) 315,000


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Cost per pound Total cost of RM b.

c.

   $7 $455,000

   $7 $770,000

January Jan. (40% less disc.; 60%) $163,800 Feb. purchases Mar. purchases Total payments $163,800

February $273,000 277,200 $550,200

   $7 $980,000

   $7 $2,205,000

March

Total $ 436,800 739,200 352,800 $1,528,800

$462,000 352,800 $814,800

If Campbell Manufacturing uses a perpetual inventory system, purchase discounts will not appear on the budgeted financial statements. The discount amounts will simply reduce the cost of Raw Material Inventory. If the company uses a periodic inventory system, the discounts will be recorded as a contraaccount to Purchases and will be closed (along with the other purchases accounts) at the end of the period in determination of Cost of Goods Manufactured.


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33. Beginning cash balance Income after taxes Depreciation (no cash involved) Accrued income tax expense (no cash involved) Increase in A/R (sold more than collected) Decrease in A/P (paid for more than purchased) Estimated bad debts (no cash involved) Dividends declared (no effect on income or cash) Dividends paid Projected increase in cash Ending cash balance

$ 23,000 $336,000 56,200 82,000 (8,000) (7,000) 4,100 0 (47,000)

416,300 $439,300

34. a. CGS ($2,700,000  0.60) Less decrease in inventory (sold more than bought) Plus decrease in A/P (paid for more than bought) Cash payments for inventory

$1,620,000 (43,750) 35,000 $1,611,250

b. Cash payments for inventory Wages expense Less increase in W/P (expensed more than paid) Other cash expenses Total cash disbursements

$1,611,250 325,500 (42,000) 245,000 $2,139,750

35. Beginning cash balance Cash receipts Total cash available Cash disbursements: Payments on account Wage expenses Overhead costs Total disbursements Cash excess (inadequacy) Minimum cash balance Cash available (needed) Financing: Borrowings (repayments) Sell (acquire) investments Receive (pay) interest Ending cash balance

July $ 7,400 16,400 $ 23,800

August $ 7,200 20,200 $ 27,400

Sept. $ 7,200 33,800 $41,000

Total $ 7,400 70,400 $ 77,800

$ 2,600 10,000 8,000 $20,600 $ 3,200 (7,000) $ (3,800)

$ 7,800 12,200 9,200 $ 29,200 $ (1,800) (7,000) $ (8,800)

$11,400 12,400 8,800 $32,600 $ 8,400 (7,000) $ 1,400

$ 21,800 34,600 26,000 $ 82,400 $ (4,600) (7,000) $(11,600)

$ 4,000 0 0 $ 7,200

$ 9,000 0 0 $ 7,200

$ (1,000) 0 (20) $ 7,380

$ 12,000 0 (20) $ 7,380

36. a. CGS = $2,000,000 + (0.65  $8,000,000) = $7,200,000 b. CGS ($800,000  0.75) Increase in Inventory Decrease in Accounts Payable

$600,000 20,000 45,000


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Total cash payment for inventories c.

$665,000

y = $250,000 + $17.50X y = $250,000 + ($17.50  7,500) y = $250,000 + $131,250 = $381,250 total overhead Cash overhead cost = $381,250 – $95,000 = $286,250

d. Beginning cash balance Cash collections Total cash available Disbursements: Payoff of note payable Interest on note payable Purchase of computer system Operating costs and inventory purchases Direct labor wages Overhead costs Selling and administrative costs Cash deficiency Borrowings needed Ending cash balance 37.

$ 15,000 470,500 $ 485,500 $ 52,500 4,700 17,900 193,500 110,000 106,400 94,800 (579,800) $ (94,300) 100,000 $ 5,700

New sales in units = 100,000  1.25 = 125,000 New DM cost per unit = [($400,000 ÷ 100,000)  1.10] = $4.40 New DL cost per unit = [($200,000 ÷ 100,000)  1.10] = $2.20 Overhead rate = $100,000 ÷ $200,000 = 50% of DL cost = $1.10 per unit Total cost per unit = $4.40 + $2.20 + $1.10 = $7.70 Variable selling expenses = $104,000 – $24,000 = $80,000 $80,000 ÷ $1,000,000 = 8% of sales Desired NI = 10% of Sales Sales – CGS – Selling Exp. – Admin. Exp. = Net Income Sales – DM – DL – OH – SE – AE = NI Sales – ($7.70  125,000) – $24,000 – (0.08  Sales) – $120,000 = (0.10  Sales) Sales – $962,500 – $24,000 – (0.08  Sales) – $120,000 = (0.10  Sales) Sales – $1,106,500 – (0.08  Sales) = (0.10  Sales) Sales – (0.08  Sales) – (0.10  Sales) = $1,106,500 0.82 Sales = $1,106,500 Sales = $1,349,390 (rounded) Selling price per unit = $1,349,390 ÷ 125,000 = $10.80 (rounded) Sales (125,000  $10.80) Cost of goods sold Direct material Direct labor Overhead Gross profit

$1,350,000 $550,000 275,000 137,500

(962,500) $ 387,500


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Expenses Selling* ($24,000 + $108,000) Administrative Net income before taxes

$132,000 120,000

(252,000) $ 135,500

*

Variable selling expenses = (0.08  $1,350,000) = $108,000 Proof: $135,500 ÷ $1,350,000 = 10.04% (off due to rounding)

38. Revenue: Hardware ($4,800,000  1.1  1.05) Software (2,000,000  1.08) Maintenance (1,200,000  1.05) Total Revenue Costs and Expenses: Hardware ($3,360,000  1.04  1.05) Software ($1,200,000  1.04  1.08) Marketing ($600,000  1.05) Maintenance ($640,000 + $120,000) Administration Total Expenses Budgeted Operating Income

$5,544,000 2,160,000 1,260,000 $ 8,964,000 $3,669,120 1,347,840 630,000 760,000 1,120,000

(7,526,960) $ 1,437,040 (CIA adapted)

39. a. Beginning balance of A/R July credit sales Cash collections in July Writeoffs of A/R in July Ending balance of A/R

$ 750,000 900,000 (660,000) (27,000) $ 963,000

b. Cash collections, $660,000 c. Credit sales, $900,000, and the provision for uncollectible accounts, $20,000. (CPA adapted) 40.

Sluyter Corp. Budgeted Income Statement For the Month Ended May 31, 2014 Sales Cost of goods sold ($400,000 ÷ 1.60) Gross margin Selling and administrative expenses Depreciation expense Bad debts expense ($400,000  0.03) Net income

$ 400,000 (250,000) $ 150,000 $55,000 8,000 12,000

(75,000) $ 75,000 (CPA adapted)

41. a. Sales (240,000  $25)

$ 6,000,000


Chapter 8

Variable costs (0.65  $6,000,000) Fixed costs Net income b.

(3,900,000) (1,400,000) $ 700,000

Current variable cost per unit = 0.65  $25 = $16.25 New variable cost per unit = $16.25  0.80 = $13.00

c. Sales (240,000  $25) Variable costs (240,000  $13) Fixed costs ($1,400,000 + $700,000) Net income d.

42.

$ 6,000,000 (3,120,000) (2,100,000) $ 780,000

Assuming all costs related to the machine have been considered in the analysis, the equipment should be acquired because income will increase. The company does, however, need to make certain that costs such as training for employees to use the equipment and any increased future maintenance costs for the equipment have been accurately forecast.

Each student will have a different answer. However, the following items would be representative of their answers; these items were included in J. Magee and A. Adams, “Budgeting Best Practices,” CPA Practice Management Forum (July 2010), pp. 5, 9–11. a. Human resources: Headcounts, salaries, benefits, turnover, recruiting, retention, professional training (i.e., CPE), and chargeable-hour goals b. Information technology: Capital expenditures and operating expenses, such as telephone, internet, cell phones, leases, software, supplies, maintenance, networking, and copiers c. Marketing/business development: Advertising, branding, public relations, marketing campaigns, events (including webinars, seminars, etc.), benchmarking surveys, and research materials (such as those provided by companies like FirstResearch) d. Accounts receivable: Restructured fee schedules, delinquent accounts, bad debts (and related in-house or external collection costs)

43. The spenditorloseit attitude is induced by the incentives in the budget and evaluation cycle. It is more likely that a manager will be called to task for overspending rather than underspending the budget. This perception encourages a manager to build slack into the budget. In part because of budget slack, managers may find themselves in an “underspent” position near the end of the fiscal year. If the manager ends the year with a big budget surplus, the budget slack would be revealed. Naturally, the manager would be fearful of revealing the budgetary slack because a consequence would be that a smaller budget would be awarded in ensuing years.


240

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Both superior and subordinate managers have an ethical obligation to overcome the spenditorloseit attitude. Honest communication between upper and lower managers is the fastest approach to curing this attitude. Further, upper managers have an obligation to provide incentives to lower managers that do not encourage the spenditorloseit attitude. 44. Continuous budgeting means that a budget that covers the coming 12 months of operations is constantly maintained. As one month expires, another month is added to the budget. The advantage of a continuous budget is that a constant planning horizon of 12 months is maintained. If only annual budgets are prepared, the budget covers a fixed period, typically one year. With a continuous budget, the process is an ongoing activity and budgeting skills are maintained throughout the year; also, the time crunch that typically accompanies annual budgeting is avoided. One further benefit is that a continuous budget may be more flexible in that revisions can be made as conditions warrant. The main disadvantage of the continuous budget is the time dedicated to planning activities. Continuous budgeting is more time intensive because planning activities are always under way. 45. Each student will have a different answer. No solution is provided.


Chapter 8

PROBLEMS 46.

Production Budget—2014

Jan.–June 1,160,000 72,000 (50,000) 1,182,000

July–Dec. 1,440,000 120,000 (72,000) 1,488,000

Total 2,600,000 120,000 (50,000) 2,670,000

Material A Purchases Budget—2014 Jan.–June Production 1,182,000 Number of pounds    3 Production budget 3,546,000 Ending inventory 270,000 Beginning Inventory (240,000) Purchases 3,576,000 Times cost per pound    $2.50 Total cost $8,940,000

July–Dec. 1,488,000    3 4,464,000 284,000 (270,000) 4,478,000    $2.50 $11,195,000

Total 2,670,000    3 8,010,000 284,000 (240,000) 8,054,000    $2.50 $20,135,000

Material B Purchases Budget—2014 Jan.–June Production 1,182,000 Number of gallons    0.75 Production budget 886,500 Ending inventory 70,000 Beginning Inventory (90,000) Purchases 866,500 Times cost per gallon    $1.80 Total cost $1,559,700

July–Dec. Total 1,488,000 2,670,000    0.75    0.75 1,116,000 2,002,500 76,000 76,000 (70,000) (90,000) 1,122,000 1,988,500    $1.80    $1.80 $2,019,600 $3,579,300

Sales budget Ending inventory Beginning inventory Production

47. a. Production Sales Ending inventory Beginning inventory Production Purchases—Material M Production Pounds needed Needed for production Ending inventory Beginning inventory Purchases in pounds

January 72,000 16,000 (18,000) 70,000

February March 64,000 60,000 15,000 14,000 (16,000) (15,000) 63,000 59,000

Total 196,000 14,000 (18,000) 192,000

January 70,000    4 280,000 12,000 (13,500) 278,500

February March Total 63,000 59,000 192,000    4    4    4 252,000 236,000 768,000 11,250 10,500 10,500 (12,000) (11,250) (13,500) 251,250 235,250 765,000


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Purchases—Material N Production Pounds needed Needed for production Ending inventory Beginning inventory Purchases in pounds

January 70,000    2.5 175,000 8,000 (9,000) 174,000

February 63,000    2.5 157,500 7,500 (8,000) 157,000

March 59,000    2.5 147,500 7,000 (7,500) 147,000

Total 192,000    2.5 480,000 7,000 (9,000) 478,000

Purchases—Material O Production Pounds needed Needed for production Ending inventory Beginning inventory Purchases in pounds

January 70,000    2 140,000 9,400 (7,300) 142,100

February 63,000    2 126,000 8,200 (9,400) 124,800

March 59,000    2 118,000 8,500 (8,200) 118,300

Total 192,000    2 384,000 8,500 (7,300) 385,200

b. While each student’s memo will differ, the following points should be included. The nature of the production process affects the efficiency of the conversion of materials into finished products. One benefit of using newer technology is the reduction that can be achieved in waste, scrap, and defective products. It may be expected that the material required per unit of finished product will decrease to some extent if the new technology is acquired. c. The vendor of the new technology, an inhouse engineering department, and knowledgeable production managers should be able to offer valuable insights as to how material requirements might change with acquisition of the new technology. In fact, the change in material requirements is likely to have been one of the factors that was considered in evaluating the purchase of the new technology. 48. a. Sales Ending inventory (750,000  0.05) Beginning inventory Production Budget

600,000 37,500 (24,600) 612,900 cans

b. Purchases—Tea Production budget [(612,900  14.5) ÷ 16] Ending inventory [(37,500  14.5) ÷ 16] Beginning inventory Purchases (pounds)

555,440.625 33,984.375 (750.000) 588,675.000

c. Purchases—Sugar Substitute Production budget [(612,900  1.5) ÷ 16] Ending inventory [(37,500  1.5) ÷ 16] Beginning inventory Purchases (pounds)

57,459.375 3,515.625 (200.000) 60,775.000


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d. ($3.50  588,675) + ($0.40  60,775) = $2,060,362.50 + $24,310 = $2,084,672.50 e. $2,084,672.50  0.40  0.98 = $817,191.62 cash paid for purchases $2,084,672.50  0.60 = $1,250,803.50 remaining A/P balance at 6/30 49. Production Budget Sales Ending inventory Beginning inventory Production Purchases—Steel Production Times pounds Needed for production Ending inventory Beginning inventory Purchases (pounds)

#587Q #253X 80,000 30,000 640 900 (800) (1,200) 79,840 29,700 Total

79,840    3 239,520

29,700    5 148,500

79,840    0.5 39,920

29,700    0.2 5,940

Direct Labor Production Times required hours Needed for production Times wage rate Cost of direct labor

79,840    2 159,680    $10.50 $1,676,640

29,700    3 89,100 248,780  $10.50    $10.50 $935,550 $2,612,190

Overhead Production Times machine hours Needed for production Times overhead rate Cost of overhead

79,840    0.5 39,920    $15 $598,800

29,700    0.7 20,790    $15 $311,850

Purchases—Wood Production Times board feet Needed for production Ending inventory Beginning inventory Purchases (board feet)

50. a. Sales Ending inventory (20%) Beginning inventory Production

388,020 1,400 (2,000) 387,420

45,860 600 (800) 45,660

60,710    $15 $910,650

January February March 6,400 5,200 7,400 1,040 1,480 1,600 (1,220) (1,040) (1,480) 6,220 5,640 7,520

Total 19,000 1,600 (1,220) 19,380


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b. (Scrap iron) Production Pounds per unit Pounds needed End. inventory1 Beg. inventory Purchases (lbs.) Cost per pound Purchases

January 6,220    2 12,440 2,820 (1,580) 13,680    $3 $41,040

February March Total 5,640 7,520 19,380    2    2    2 11,280 15,040 38,760 3,760 4,000 4,000 (2,820) (3,760) (1,580) 12,220 15,280 41,180    $3    $3    $3 $36,660 $45,840 $123,540

1

Ending inventory = 25% of the next month’s production requirements January = 0.25  11,280 = 2,820 February = 0.25  15,040 = 3,760 March = 0.25  (8,000 + 1,600 – 1,600) = 0.25  8,000 = 2,000  2 lbs. = 4,000

(Bases) Production End. inventory2 Beg. inventory Purchases (bases) Cost per base Purchases

January 6,220 1,410 (1,200) 6,430  $2.50 $16,075

February March 5,640 7,520 1,880 2,000 (1,410) (1,880) 6,110 7,640  $2.50  $2.50 $15,275 $19,100

Total 19,380 2,000 (1,200) 20,180    $2.50 $ 50,450

Total purchases

$57,115

$51,935

$173,990

$64,940

2

Ending inventory = 25% of the next month’s production requirements January = 0.25  5,640 = 1,410 February = 0.25  7,520 = 1,880 March = 0.25  (8,000 + 1,600 – 1,600) = 0.25  8,000 = 2,000

c.

MONTH OF PAYMENT January February March Total purchases $ 57,115 $ 51,935 $ 64,940 % in month    0.75    0.75    0.75 $ 42,836.25 $ 38,951.25 $ 48,705 Less discount    0.99    0.99    0.99 Cash pymt. $ 42,407.89 $ 38,561.74 $ 48,217.95

Total $ 173,990    0.75 $ 130,492.50    0.99 $ 129,187.58

Total purchase Predisc. amt. Remainder

$ 64,940.00 (48,705.00) $ 16,235.00

$ 173,990.00 (130,492.50) $ 43,497.50

March

Total

$ 57,115.00 $ 51,935.00 (42,836.25) (38,951.25) $ 14,278.75 $ 12,983.75

January Mo. of purchase December $ 5,800.00

February

$ 5,800.00


Chapter 8

January February March Total

42,407.89 $48,207.89

$14,278.75 38,561.74 $52,840.49

d. Mfg. OH Production Var. cost per unit Total var. mfg. cost Fixed mfg. cost Total mfg. OH

January 6,220  $1.30 $ 8,086 14,000 $22,086

S&A costs: Sales revenue VC (10% of sales) Total var. S&A cost Fixed S&A cost Total S&A OH Total mfg. OH Total S&A OH Total cash OH cost e. Beg. Balance Collections Cash available Cash needed: Purchases Overhead DL* Bonuses Tax pymt. Total Cash exc. (def.) Min. balance (Needed) Avail. Financing: Borrow (repay) Sell (invest) Rec. (pay) int. End. Balance

56,686.64 51,545.49 48,217.95 $162,250.08

$12,983.75 48,217.95 $61,201.70

February 5,640  $1.30 $ 7,332 14,000 $21,332

March 7,520  $1.30 $ 9,776 14,000 $23,776

Total 19,380  $1.30 $25,194 42,000 $67,194

January $128,000    0.10 $ 12,800 13,600 $ 26,400

February $104,000    0.10 $ 10,400 13,600 $ 24,000

March $148,000    0.10 $ 14,800 13,600 $ 28,400

Total $380,000    0.10 $ 38,000 40,800 $ 78,800

$ 22,086 26,400 $ 48,486

$ 21,332 24,000 $ 45,332

$ 23,776 $ 67,194 28,400 78,800 $ 52,176 $145,994

January $ 18,320.00 116,200.00 $134,520.00

February $ 10,472.11 81,300.00 $ 91,772.11

$ 48,207.89 $ 52,840.49 48,486.00 45,332.00 4,354.00 3,948.00 35,000.00 0.00 0.00 0.00 $136,047.89 $102,120.49 $ (1,527.89) $ (10,348.38) (10,000.00) (10,000.00) $ (11,527.89) $ (20,348.38)

March Total $ 10,651.62 $ 18,320.00 101,500.00 299,000.00 $112,151.62 $317,320.00 $ 61,201.70 52,176.00 5,264.00 0.00 5,000.00 $123,641.70 $ (11,490.08) (10,000.00) $ (21,490.08)

$162,250.08 145,994.00 13,566.00 35,000.00 5,000.00 $361,810.08 $ (44,490.08) (10,000.00) $ (54,490.08)

12,000.00

21,000.00

22,000.00

55,000.00

$ 10,472.11

$ 10,651.62

$ 10,509.92

$ 10,509.92

*

Direct labor = $0.70 per bookstand January: 6,220  $0.70 = $4,354 February: 5,640  $0.70 = $3,948


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Chapter 8

March: 7,520  $0.70 = $5,264 Total: 19,380  $0.70 = $13,566

51. a. $1,500,000 ÷ 0.60 = $2,500,000 .b

($2,500,000  0.70) – ($1,500,000 – $80,000) = $330,000

.c

Total expenses = 85% of sales Total variable costs = 70% of sales Total fixed costs = 85% – 70% = 15% Fixed costs = 0.15  $2,500,000 = $375,000 Fixed S&A expenses = $375,000 – $80,000 = $295,000

.d

Cash receipts: $2,500,000  0.55 = $1,375,000 $2,125,000 Total expenses ($2,500,000  0.85) Depreciation (45,000) Pending expenses $2,080,000 Percent paid in cash    0.65 Cash disbursements $1,352,000

52. a. Sales in units Perunit selling price Total revenues b.

April 60,000    $12 $720,000

May 140,000    $12 $1,680,000

June 46,000    $12 $552,000

Quarter 246,000    $12 $2,952,000

April $144,000

May June $ 336,000 $ 110,400

Quarter $ 590,400

Cash sales (20%) Collections from 4/1/13 A/R balance 36,000 Credit sales April ($576,000) 144,000 May ($1,344,000) June ($441,600) Total collections $324,000

295,000 316,800 103,680 336,000 739,200 110,400 $1,283,800 $1,063,680

c. Beginning A/R Credit sales ($2,952,000  0.80) Collections ($2,671,480 – $590,400) Ending A/R Alternative: Beginning A/R not collected ($346,000 – $331,000) April credit sales not collected ($576,000  2%) May credit sales not collected ($1,344,000  20%) June credit sales not collected ($441,600  75%) Ending A/R d.

331,000 564,480 1,075,200 110,400 $2,671,480

$ 346,000 2,361,600 (2,081,080) $ 626,520 $ 15,000 11,520 268,800 331,200 $626,520

Estimated bad debts expense = $2,361,600  2% = $47,232

e. Accounts Receivable

$626,520


Chapter 8

Allowance ($35,000 – $15,000 + $47,232) Net realizable value f.

bears

Beginning inventory $ ÷ Cost per bear = $208,000 ÷ $8 = 26,000

Sales in units EI (40%) BI Purchases Perunit cost Total purchases g.

h.

(67,232) $559,288

Beginning A/P April ($720,000) May ($819,200) June ($316,800) Total payments

April 60,000 56,000 (26,000) 90,000    $8 $720,000

May 140,000 18,400 (56,000) 102,400    $8 $819,200

April $455,000 216,000

May

$671,000

$504,000 245,760 $749,760

June Quarter 46,000 246,000 12,000 12,000 (18,400) (26,000) 39,600 232,000    $8    $8 $316,800 $1,856,000 June

Quarter $ 455,000 720,000 $573,440 819,200 95,040 95,040 $668,480 $2,089,240

Ending A/P = $316,800  70% = $221,760

53. a. March sales: ($69,120 + $2,880) = $72,000; $72,000 ÷ 0.50 = $144,000 b. Collections = ($144,000  0.48) + ($240,000  0.50) = $69,120 + $120,000 = $189,120 c. BI + P – CGS = EI April 1 beginning inventory Purchases during April: 60% of April’s CGS + 30% of May’s CGS = ($240,000  0.65  0.60) + ($260,000  0.65  0.30) = $93,600 + $50,700 Cost of Goods Sold ($240,000  0.65) Ending inventory

$ 104,800

144,300 (156,000) $ 93,100

d. Beginning balance of RE + NI – Dividends = Ending balance of RE Sales CGS Gross margin Selling & administrative expenses Expected net income

$ 240,000 (156,000) $ 84,000 (43,000) $ 41,000

Beginning balance, RE Expected net income Dividends declared Ending balance

$ 79,520 41,000 (20,000) $ 100,520


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Chapter 8

e.

Beginning balance Cash collections Cash available Cash disbursements: Accounts Payable S&A expenses ($43,000 – $8,000) Dividends paid Cash available

$ 24,000 189,120 $140,400 35,000 20,000

$ 213,120

(195,400) $ 17,720

Since there is $17,720 of cash available and the minimum cash balance is $16,000, there is $1,720 available for investment. Only $1,000 can be invested, since investments must be made in $1,000 amounts.

54. a. Schedule A (Collections from Customers): 2014 Sales $900,000 Beg. A/R (liquidated in 2013) 0 Total $900,000 End. A/R (1/12 of sales) (75,000) Collections $825,000

2015 $1,080,000 75,000 $1,155,000 (90,000) $1,065,000

Schedule B (Disbursements for Direct Material): 2014 2015 Unit sales 10,000 12,000 Required ending inventory1 2,000 2,500 Total needed 12,000 14,500 Beginning inventory (liq. in 2013) 0 (2,000) Production 12,000 12,500 Times DM cost per unit    $20    $20 Total purchases $240,000 $250,000 Delayed payment (1/12) (20,000) (20,833) Paid previous balance 0 20,000 Disbursements for DM $220,000 $249,167 1

EI is 60 days usage. For 2014: 12,000 units  2/12 = 2,000; for 2015: 15,000 units  2/12 = 2,500

Vassar Corp. Cash Budget For Years Ending March 31, 2014 and 2015 Beginning cash balance Collections—Sch. A Total Disbursements:

2014 $ 0 825,000 $ 825,000

2015 $ (95,000) 1,065,000 $ 970,000


Chapter 8

DM—Sch. B DL ($30 per unit) VOH ($10 per unit) Fixed costs Total Cash available Payments to creditors* Ending cash balance

$220,000 360,000 120,000 130,000

(830,000) $ (5,000) (90,000) $ (95,000)**

$249,167 375,000 125,000 130,000

(879,167) $ 90,833 (90,833) $ 0

*

Made from the 2013 liquidation of A/R and Inventories. Can be paid to creditors or carried forward.

**

A/P = ($600,000  60%) – ($50,000 + $40,000) = $360,000 – $90,000 = $270,000 at 4/1/13; $270,000 – $90,833 = $179,167 still owed to creditors at 3/31/15.

The solution is not feasible, given the creditors’ condition of full payment on or by 3/31/15. (CPA adapted)

55. a. & b. (Supporting calculations for these requirements are keyed to the amounts and follow the cash budgets.) CME, INC. Cash Budgets (in thousands)

Cash balance, Jan.1 Cash receipts: Program revenue Membership income Total cash available Cash outflows: Seminar Instruction fees Facilities Promotion Total Salaries Benefits, staff Office lease Gen. admin. Gen. promotion Research grants Capital equipment Total Ending cash balance

For Year Ending For Month Ending December 31, 2014 January 31, 2014 $ 750 $ 750 12,000 10,000a $ 22,750

1,440c 0 $ 2,190

$ 8,400b 5,600 1,000 $ 15,000 960 240 240 1,500 600 3,000 510 (22,050) $ 700

$ 0 672d 100e $ 772 80f 18g 20h 125 50i 500 102j (1,667) $ 523


250

Chapter 8

Supporting calculations: a

100,000 members  $100 = $10,000,000 $12,000,000  70% = $8,400,000 c $12,000,000  12% = $1,440,000 d $5,600,000  12% = $672,000 e $1,000,000 ÷ 10 = $100,000 f $960,000 ÷ 12 = $80,000 g ($240,000 – $24,000) ÷ 12 = $18,000 h $240,000 ÷ 12 = $20,000 i $600,000 ÷ 12 = $50,000 j $510,000 ÷ 5 = $102,000 b

c. CME’s most important operating problem is shortterm liquidity. Additionally, shortterm borrowing will be necessary during the second and third quarters, and the interest on such has not been forecast. Finally, total facility and faculty costs exceed seminar revenue in 2014. (CPA adapted) 56. a. Accounts Receivable Collections (in thousands): Apr. May Prior month’s sales (60%) $2,160 $2,640 Two months’ prior sales (40%) 1,600 1,440 Total collections $3,760 $4,080 Material Purchases (in thousands): Feb. Mar. Sales $4,000 $3,600 Mat. cost (50%) $2,000 $1,800 Material Receipts: This month’s costs (40%) Next month’s costs (60%) Total receipts

June $3,000 1,760 $4,760

Apr. $4,400 $2,200

May $5,000 $2,500

June $5,600 $2,800

$ 880

$1,000

$ 1,120

1,080 1,320 1,500 1,680 $1,880 $2,040 $2,380 $2,680

1,800 $ 2,920

$ 800

$ 720

Material Payments: Prior month’s goods (80%) Two months’ prior goods (20%) Total payments Admin. Expenses (in thousands): Salaries (1/12 of annual) Promotion (1/12 of annual) Prop. taxes (1/4 of annual) Insurance (1/12 of annual) Utilities (1/12 of annual) Total expense

$1,632

$1,904

$2,144

376 408 $2,008 $2,312

476 $2,620

$ 80 110

$ 80 110 120 60 50 $ 420

$ 80 110

60 60 50 50 $ 300 $ 300

July $6,000 $3,000


Chapter 8

Income Tax expense: First quarter pretax income = Net income ÷ (1 – Tax rate) = $1,224,000 ÷ 0.6 = $2,040,000 Tax expense = 0.4  $2,040,000 = $816,000 Blackman Corp. Budgeted Schedule of Cash Receipts and Disbursements Second Quarter 2014 (in thousands) Beginning cash balance A/R collections Cash available Disbursements: Material purchases Wages (20% of sales) Administrative Income tax Total disbursements Cash excess (deficiency) Cash borrowed (invested) Ending cash balance

April $ 200 3,760 $3,960 $2,008 880 300 816 $4,004 $ (44) 244 $ 200

May $ 200 4,080 $4,280

June $ 200 4,760 $4,960

$2,312 1,000 300 $3,612 $ 668 (468) $ 200

$2,620 1,120 420 $4,160 $ 800 (600) $ 200

b. Cash budgeting is particularly important for a rapidly expanding company because, as sales increase, so do expenditures for product purchases. These expenditures generally precede cash receipts, often by a considerable time period, and a growing company must be prepared to finance this increasing gap between expenditures and receipts. c. Monthly cash budgets do ignore the timing of receipts and disbursements within a month. Thus, when cash flows are extremely variable, this lack of information can be a reason to prepare cash budgets for shorter time intervals. (CPA adapted) 57. a. Sales Budget Unit sales Selling price Total sales

Jan. 25,000    $18

Feb. 30,000    $18

March 32,000    $18

Total 87,000    $18

$450,000

$540,000

$576,000

$1,566,000

Feb. March 30,000 32,000 8,000 8,750

Total 87,000 8,750

b. Production Budget Jan. Unit sales 25,000 EI 7,500


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BI Production

(0) 32,500

(7,500) 30,500

(8,000) 32,750

(0) 95,750

c. Purchases Budget Jan. Feb. March Total Production 32,500 30,500 32,750 95,750 EI 6,100 6,550 6,800 6,800 BI (0) (6,100) (6,550) (0) Units 38,600 30,950 33,000 102,550 Pounds per unit    2    2    2    2 Total lbs. 77,200 61,900 66,000 205,100 Price per lb.  $0.75  $0.75  $0.75    $0.75 Purchases $57,900 $46,425 $49,500 $153,825 d.

Direct Labor Budget Jan. Production 32,500 DL time per unit    0.5 DLHs 16,250 DL rate    $15 DL cost $243,750

e.

Overhead Budget

Feb. 30,500    0.5 15,250    $15 $228,750

March 32,750    0.5 16,375    $15 $245,625

Total 95,750    0.5 47,875    $15 $718,125

Jan. 32,500    $2

Feb. 30,500    $2

March 32,750    $2

Total 95,750    $2

$65,000

$61,000

$65,500

$191,500

25,000 $90,000

25,000 $86,000

25,000 $90,500

75,000 $266,500

Cash Receipts Schedule Jan. Jan. $109,125 Feb. March Total $109,125

Feb. $315,000 130,950 $445,950

Cash Payments Schedule Jan. Jan. $34,740 Feb.

Feb. $23,160 27,855

Production VOH unit rate Total VOH FOH cost Total OH f.

March $378,000 139,680 $517,680 March $18,570

Total $ 424,125 508,950 139,680 $1,072,755 Total $ 57,900 46,425


Chapter 8

March Total

$34,740

$51,015

29,700 $48,270

29,700 $134,025

58. a. Accounts receivable at July 31: July sales (0.75  $184,000) June sales (0.15  $204,000) Balance

$138,000 30,600 $168,600

Accounts payable at July 31 = 0.40 of month’s purchases = 0.40  $116,000 = $46,400 b. August cash collections: From June sales (0.15  $204,000) From July sales (0.60  $184,000) From August sales (0.25  $232,000) Total August collections

$ 30,600 110,400 58,000 $199,000

c. August cash disbursements: July purchases (0.40  $116,000) August purchases (0.98  0.60  $160,000) Monthly expenses [$48,000 + (0.12  $232,000)] Total August disbursements

$ 46,400 94,080 75,840 $216,320

d. Davide’s Arrangements Cash Budget For Month Ending August 31, 2014 Beginning balance Cash collections in August Total cash available exclusive of financing Disbursements Cash excess Minimum cash balance desired Cash needed Borrowings Ending cash balance

$ 28,470 199,000 $ 227,470 (216,320) $ 11,150 (28,000) $ (16,850) 17,000 $ 28,150

e. Davide’s Arrangements Income Statement For Month Ending August 31, 2014 Sales

$ 232,000


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Chapter 8

Cost of goods sold (0.55  $232,000) Gross profit Operating expenses: Monthly expenses [from (c)] Depreciation Net income before taxes

(127,600) $ 104,400 $75,840 8,000

(83,840) $ 20,560

f. Perishables can spoil; thus, there is need for a closer match between production and sales than for nonperishables—almost mandating the use of JIT to manage inventory levels. 59. a. Fixed production cost [($2,600,000  1.075)  0.80] Estimated production Estimated fixed production cost per unit Variable production cost ($55  1.15) Total production cost per unit

$2,236,000 ÷ 400,000 $ 5.59 63.25 $68.84

b. Selling price = $68.84  1.25 = $86.05; selling price = $86 c. Sales ($86  400,000) CGS ($68.84  400,000) Gross margin Variable S&A ($34,400,000  0.08) Fixed S&A ($2,600,000  1.075  0.20) Income before taxes

$ 34,400,000 (27,536,000) $ 6,864,000 (2,752,000) (559,000) $ 3,553,000

d. X = unit selling price that gives pretax income of 25% of sales 400,000X – $27,536,000 – 0.08(400,000X) – $559,000 = 0.25(400,000X) 400,000X – 0.08(400,000X) – $28,095,000 = 100,000X 400,000X – 132,000X = $28,095,000 268,000X = $28,095,000 X = $104.83 Proof: Sales ($104.83  400,000) CGS ($68.84  400,000) Gross margin Variable S&A ($41,932,000  0.08) Fixed S&A ($2,600,000  1.075  0.20) Income before taxes ($41,932,000  0.25 = $10,483,000 off due to rounding)

$ 41,932,000 (27,536,000) $ 14,396,000 (3,354,560) (559,000) $ 10,482,440

60. a. Blanco Co. Budgeted Income Statement For Month Ended November 30, 2014 Sales $ 330,000,000 Cost of Goods Sold (70% of sales) 231,000,000 Gross Profit (30% of sales) $ 99,000,000 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 8

Other Expenses Cash expense Depreciation Uncollectible accounts Net Income before Taxes

$46,500,000 15,000,000 6,600,000

(68,100,000) $ 30,900,000

b. Beginning Cash balance $ 28,000,000 Collections from prior months’ sales 57,000,000 231,000,000 Collections from current sales (0.70  $330,000,000) Payments on account (165,000,000) Monthly cash expenditures (46,500,000) Ending Cash balance $ 104,500,000 Beginning Accounts Receivable balance Sales Collections from October sales Collections from November sales Ending Accounts Receivable balance

$ 60,000,000 330,000,000 (57,000,000) (231,000,000) $ 102,000,000

Allowance for Uncollectibles = $3,000,000 + (0.02  $330,000,000) = $9,600,000 Beginning Inventory balance Purchases (0.70  $360,000,000) Cost of Goods Sold Ending Inventory balance

$ 52,500,000 252,000,000 (231,000,000) $ 73,500,000

PP&E = $150,000,000 – ($37,500,000 + $15,000,000) = $97,500,000 Accounts Payable = 0.70  $360,000,000 = $252,000,000 Retained Earnings = ($35,000,000) + $30,900,000 = ($4,100,000)


256

Chapter 8 Blanco Co.

Budgeted Balance Sheet November 30, 2014 Assets Cash Accounts Receivable (net of Allowance) Inventory Property, Plant & Equipment (net of Acc. Depr.) Total Assets

$104,500,000 92,400,000 73,500,000 97,500,000 $367,900,000

Liabilities & Stockholders’ Equity Accounts Payable Common Stock Retained Earnings (deficit) Total Liabilities & Stockholders’ Equity

$252,000,000 120,000,000 (4,100,000) $367,900,000

c. Because Blanco Co. has a RE deficit, it will be very difficult for the company to borrow funds needed for operations. If able to obtain financing, Blanco will have to pay very high interest rates and pledge specific assets for collateral. One thing Blanco could do is sell its Accounts Receivable and use that cash to finance operations and reduce Accounts Payable. Blanco should also examine its assets to see if any exist that have market values considerably above book values. If so, the assets could be sold to increase income, reduce the RE deficit, and increase cash. However, Blanco must be careful to avoid selling assets that are critical to its ability to remain a going concern—unless similar assets are available at reasonable rates to lease. Blanco should try to reduce its inventory to generate cash, increase income, and reduce the RE deficit. Blanco should also assess why CGS is so high relative to sales. Possibly activitybased costing could be used to eliminate some NVA activities and, thus, decrease costs. 61. a. Sales Budget: Mixers ($90  60,000) Breadmakers ($140  40,000) Total budgeted sales b. Production Budget: Budgeted sales Ending inventory Beginning inventory Budgeted production c. Purchasing Budget: Mixer production Breadmaker production Ending inventory Beginning inventory Units to be purchased

$ 5,400,000 5,600,000 $11,000,000 Mixers 60,000 20,000 (15,000) 65,000

Breadmakers 40,000 5,000 (4,000) 41,000

Motors Beaters 65,000 130,000 41,000 164,000 3,600 24,000 (2,000) (21,000) 107,600 297,000

Fuses 130,000 123,000 7,500 (6,000) 254,500


Chapter 8

Times price per unit Budgeted purchases

   $18 $1,936,800

d. Direct Labor Budget: Mixers ($8  2  65,000) Breadmakers ($10  3  41,000) Budgeted labor cost

   $1.75 $519,750

   $2.40 $610,800

$1,040,000 1,230,000 $2,270,000

e. Mixer = $18.00 + (2  $1.75) + (2  $2.40) + (2  $8.00) + (2  $7.50) = $18.00 + $3.50 + $4.80 + $16.00 + $15.00 = $57.30 Breadmaker = $18.00 + (4  $1.75) + (3  $2.40) + (3  $10.00) + (3  $7.50) = $18.00 + $7.00 + $7.20 + $30.00 + $22.50 = $84.70 (CPA adapted) 62. Sales Budget: January 8,000    $12 $96,000

February 10,000    $12 $120,000

March 15,000    $12 $180,000

April 12,000    $12 $144,000

Accounts Receivable collections (70%, 20%, 10%): January February March November $ 7,000 December 13,000 $ 6,500 January 67,200 19,200 $ 9,600 February 0 84,000 24,000 March 0 0 126,000 Total $87,200 $109,700 $159,600

Total $ 7,000 19,500 96,000 108,000 126,000 $356,500

Accts. Rec. ending balance = $26,500 + $396,000 – $356,500 = $66,000 Production Budget:

January 8,000 500 (400) 8,100

February 10,000 750 (500) 10,250

March 15,000 600 (750) 14,850

Purchases Budget: January Production 8,100 Gallons    1.2 Prod. needs 9,720 Ending inv. 615 Beginning Inv. (1,000)

February 10,250    1.2 12,300 891 (615)

March 14,850    1.2 17,820 717 (891)

Sales Ending inv. Beginning Inv. Production

Total April 33,000 12,000 600 550 (400) (600) 33,200 11,950 Total 33,200    1.2 39,840 717 (1,000)

April 11,950    1.2 14,340


258

Chapter 8

Purchases Per gallon Cost

9,335  $0.80 $ 7,468

12,576  $0.80 $10,061

Payment of Accounts Payable (60%, 40%): January February December $2,148 January 4,481 $2,987 February 6,037 March Total $6,629 $9,024

17,646  $0.80 $14,117

39,557  $0.80 $31,646

March

Total $ 2,148 7,468 10,061 8,470 $28,147

$ 4,024 8,470 $12,494

A/P ending balance = $2,148 + $31,646 – $28,147 = $5,647 Direct Labor Budget: January Production 8,100 DLH per unit    0.5 Total DLHs 4,050 DL rate    $6 DL cost $24,300

February 10,250    0.5 5,125    $6 $30,750

March 14,850    0.5 7,425    $6 $44,550

Total 33,200    0.5 16,600    $6 $99,600

Variable OH Budget: January Production 8,100 MH per unit    5 Total MHs 40,500 VOH rate  $0.06 VOH cost $ 2,430

February 10,250    5 51,250  $0.06 $ 3,075

March 14,850    5 74,250  $0.06 $ 4,455

Total 33,200    5 166,000    $0.06 $ 9,960

February $ 6,500 1,000 200 2,300 $10,000

March Total $ 6,500 $19,500 1,000 3,000 200 600 2,550 7,150 $10,250 $30,250

Fixed OH Budget Salaries Utilities Insurance Depr. FOH cost

January $ 6,500 1,000 200 2,300 $10,000

Other Payments, Collections, and Cost Adjustments: January February March Dividends $10,000 Equipment $ 7,200

Int. expense* Int. received**

250

$ 217 16

Comments

(cash) (cash) (decr. in ppd. ins.) (incr. in acc. depr.)

Total Comments $10,000 (cash) 7,200 (cash; incr. in

equip.; will cause $250 incr. in depr. exp. and acc. depr.) 467 (cash) 16 (cash)


Chapter 8

S&A costs

32,800

32,800

32,800

98,400 (cash)

*

January: $25,000 Note Payable  0.12  1/12 = $250 February: $25,000 N/P – $3,300 repayment = $21,700  0.12  1/12 = $217 ** March: $4,700 Invt.  0.04  1/12 = $16 (rounded)

Kalogridis Corp. Cash Budget For the First Quarter of 2014 Beg. balance Collections Cash available Disbursements: Purchases DL VOH FOH S&A Equip. Total Cash excess Min. bal. Cash avail. Financing: Repay Investment Pay div. Receive (pay) interest Total Ending balance

January February $ 5,080 $ 5,071 87,200 109,700 $ 92,280 $ 114,771

March $ 5,005 159,600 $164,605

Total $ 5,080 356,500 $361,580

$ 6,629 24,300 2,430 7,500 32,800 $ 73,659 $ 18,621 (5,000) $ 13,621

$ 9,024 30,750 3,075 7,500 32,800 $ 83,149 $ 31,622 (5,000) $ 26,622

$ 12,494 $ 28,147 44,550 99,600 4,455 9,960 7,500 22,500 32,800 98,400 7,200 7,200 $108,999 $265,807 $ 55,606 $ 95,773 (5,000) (5,000) $ 50,606 $ 90,773

$ (3,300)

$ (21,700) (4,700)

$ (50,600)

$ (25,000) (55,300) (10,000)

(217) $(26,617) $ 5,005

16 $ (50,584) $ 5,022

(451) $ (90,751) $ 5,022

(10,000) (250) $(13,550) $ 5,071

Kalogridis Corp. Budgeted Schedule of Cost of Goods Manufactured For the First Quarter of 2014 Beginning work in process Raw material used: Beginning raw material Purchases Available for use Ending inventory (717  $0.80) Cost of raw material used Direct labor Variable factory overhead

$ 0 $ 800 31,646 $32,446 (574) $31,872 99,600 9,960


260

Chapter 8

Fixed factory overhead Total mfg. costs in process Ending work in process Cost of goods manufactured

30,250

171,682 $171,682 0 $171,682

Kalogridis Corp. Budgeted Income Statement For the First Quarter of 2014 Sales Cost of Goods Sold Beginning inventory—FG Cost of goods manufactured Cost of goods avail. for sale Ending inv.—FG (600  $5.26) Gross margin Selling & administrative expenses Operating income Other income and expenses Interest expense Interest revenue Income before taxes Income tax (35%) Net income

$ 396,000 $ 2,104 171,682 $173,786 (3,156)

(170,630) $ 225,370 (98,400) $ 126,970

$ (467) 16 (451) $ 126,519 (44,282) $ 82,237

Kalogridis Corp. Budgeted Balance Sheet March 31, 2014 Assets: Cash Accounts receivable Raw material inventory Finished goods inventory Prepaid insurance Investments Building and machinery Accumulated depreciation* Total Assets Liabilities and Stockholders’ Equity Liabilities: Accounts payable Income tax payable Note payable—equipment

$309,000 (27,150)

$ 5,647 44,282 1,800

$ 5,022 66,000 574 3,156 600 55,300 281,850 $412,502

$ 51,729


Chapter 8

Stockholders’ Equity: Common stock Paidin capital Retained earnings** Total Liabilities & Stockholders’ Equity

$100,000 50,000 210,773

360,773 $412,502

$20,000 + $7,150 = $27,150

*

**$128,536 + $82,237 = $210,773

63. a. X = gross billings to meet required return objective X – $425,000 – 0.20X = $700,000 + $240,780 0.80X = $1,365,780 X = $1,707,225 Budget: Gross billings Variable expenses Overhead Client service Contribution margin Fixed costs Salaries Overhead Net operating earnings

$1,707,225 $256,084 85,361 $300,000 125,000

(341,445) $1,365,780 (425,000) $ 940,780

b. A number of actions are possible depending largely on the operating climate of the firm. Many of the actions that could be taken can fit within one of the three groupings that follow: 1.

Increase the staffing level. A larger staff is a reasonable alternative only if there is an expectation that billings can be increased well above the budgeted level if the firm was allowed to grow.

2.

Reduce the budgeted billings level and try to maintain the budgeted level of earnings by cutting costs. In selecting activities to cut, the firm would try to identify those activities that are nonvalueadded.

3.

Try to selectively cut down the size of the business by dropping those clients that contribute the least to the bottom line. This action requires the firm to have knowledge about the relative profitability of the various services it offers and the relative amounts of profits generated by various classes of clients (large, small, industry group, tax service, audit, etc.).

64. a. Attala Co. Revised Operating Budget © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

262

Chapter 8

Fourth Quarter 2014 Revenues: Consulting fees: Management consulting EDP consulting Total consulting revenue Other revenue Total revenue

Expenses: Consulting salary expense Travel and related expense General and admin. expense Depreciation expense Corporate allocation Total expenses Operating income

$468,000 478,125

$510,650 57,875 93,000 40,000 75,000

$ 946,125 10,000 $ 956,125

(776,525) $ 179,600

Supporting computations: Schedule of Projected Revenues for Fourth Quarter 2014 Mgmt. Consulting EDP Consulting Third Quarter Revenues $315,000 $421,875 Divided by billing rate ÷ $90 ÷ $75 Billable hours 3,500 5,625 Divided by # of consultants ÷ 10 ÷ 15 Hours per consultant 350 375 Fourth Quarter Planned increase + 50 + 50 Billable hrs. per consultant 400 425 # of consultants    13    15 Billable hrs. 5,200 6,375 Billing rate    $90    $75 Projected revenue $468,000 $478,125 Schedules of Projected Salaries, Travel, General and Administrative, and Allocated Corporate Expenses Mgmt. Consulting EDP Consulting Compensation: Existing consultants: Annual salary $ 50,000 $ 46,000 ($50,000  92%) Quarterly salary $ 12,500 $ 11,500 Planned increase (10%) 1,250 1,150 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 8

Total # of consultants Total New consultants (3) at old salary (3  $12,500) Total Benefits (40%) Total

$ 13,750    10 $137,500

$ 12,650    15 $189,750

37,500 $175,000 70,000 $245,000

0 $189,750 75,900 $265,650

Total compensation = $245,000 + $265,650 = $510,650

Travel expense: Management consultants (400 hrs.  13) EDP consultants (425 hrs.  15) Total hours Rate per hour* Total travel expense

5,200 6,375 11,575    $5 $57,875

*

Third quarter travel expense divided by hours = rate per hour ($45,625 ÷ 9,125 = $5).

General and administrative ($100,000  93%) Corporate allocation ($50,000  150%)

$93,000 $75,000

b. An organization would prepare a revised forecast when the assumptions underlying the original forecast are no longer valid. The assumptions may involve external or internal factors. External factors may include changes in demand for the company’s products or services, in costs of various organizational inputs, or in the economic or political environment in which the company operates. Internal factors may include changes in organizational goals and objectives or new products being offered or old products being discontinued. c. Although JI’s management can allocate costs using an “abilitytobear” basis, the increase can be demoralizing to Attala Co.’s personnel unless the increased activity can be shown to have caused an increase in corporate expenses. (CPA adapted) 65. Each student will have a different answer. But two important costs that are often seen in budgeting for international operations at significantly higher amounts than in domestic budgets are costs of security and insurance. In lesser developed countries, gangs often loot trucks or railroad cars of commercial merchandise and kidnapping is an ongoing possibility. An excellent discussion of this topic is found in Joel Millman’s “Gangs Plague Central America; © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

264

Chapter 8

Security Expenses Become Big Factor in Business Budgeting,” Wall Street Journal (December 11, 2003), p. A14.


Ch.08 Kinney 9e SM_Final

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