PROB PROBLEM LEM FO FOR R SELF·STUDY SELF·STUDY Consid Consider er the Styl Stylis istic tic Furnitu Furniture re exampl examplee descri described bed earlie earlier. r. Suppo Suppose se the the sellin selling g price price perlabl perlablee is $431 $431.20 .20,, a 10% incr increas easee over over the $392 $392 sellin selling g price price used used in the the chapter chapter illus illustra tratio tion. n. All All oth other er data data are undla undlange nged. d. Required Prepar Preparee a budge budgeted ted income income statem statemen ent, t, that that are diff differ eren entt from from the the sched schedul ules es remain remain
includ includin ing g pres presen ente ted d
all neces necessar sary y detail detailed ed supp support orting ing budg budget et schedu schedules les in the the chap chapte ter. r. Indi Indica cate te thos thosee sche schedu dule less that that will will
unchange unchanged. d.
SOLUTIO ION
Sche Schedu dule less 1 and and 8 wil willl chan change ge.. Sche Schedu dule le 1 chan change gess beca becaus usee a cha chang ngee in sel selli ling ng pric pricee affe affect ctss revrevenue enues. s. Sche Schedu dule le 8 cha chang nges es beca becaus usee reve revenu nues es are are a cosl cosl drive driverr of vari variab able le non non man manuf ufac actu turi ring ng cost costs. s. The The rema remain inin ing g sche schedu dule less will will not not chan change ge beca becaus usee a chan change ge in sel selli ling ng pric pricee has has no effe effect ct on manu manu-fact factur urin ing g cost costs. s. The The revi revise sed d sche schedu dule less and and the the new new budg budget eted ed inco income me stat statem emen entt foll follow ow.. ABC 1
Schedule I: Revenue
:2
For the
B~et
Y tUEndi.n.:!: D ett]' n
31,200'
3 Selling
Units
Total
Price rice Sold Reven evenue uess $431.20 52,000 52,000 $22,422,400 $22,422,400 5 Coffee Coffee tables tables $431.20
4
D
ABC f:I~ts Bu~~t SrMdul,. SrMdul,. 8: No~!U'uf;\r No~!U'uf;\rtu.riJt; tu.riJt; _~f:I~ts For ih•. Ynl F.ndin; F.ndin; D,.r.- {her H,_ H,_ 'fl07
1 2 3
4
BusinessFunction
Fixed Costs (as in Schedu Schedule le 8, Variable Co.ts , 192)
Total Total co.ts co.ts
R&DlProduct design (Variable cost: $22,422,400 x 0.Dl5) 5 (Variable
6 7 8 9 10
Marketing (Variablecost: $22,422,400 x 0.08) Distnbution (Variable (Variable cost: $22,422,400 x 0.025) Customer service (Variable (Variable cosl: $22,422,400 x 0.013) Administrative (Variable (Variable cost: $22,422,400 x 0.002)
A
1 2 3
$ 586,3 586,336 36
$ 336,3 336,336 36
$ 250,000
1,793,792
290,000
560,560
2 2 0 ,0 0 0
7 8 0 ,5 6 0
291,491
2 4 0 ,0 0 0
5 3 1 ,4 9 1
44,845 $3027024
4 0 0 ,0 0 0 $1 400000
B
C
2,083,792
4 4 4 ,8 4 5 $4427024
D
Stylisti Stylisticc Furnitu Furniture re Bud;< Bud;< For th •. Year Endi Endi I!D,.
4
Reve Revenu nues es
5
Cost Cost of goo goods ds sold sold
6 Gros Gross~ s~ 1 Operatin Operating g costs costs 8 R&Dl R&DlPr Prod oduc ucll desi design gn 9 10
Mark Market etin ing g cost costss Dist Distnb nbut utio ion n cos costs ts
Schedule 8 Schedule 8 Schedule 8
11 12
Custom Customerer-ser servi vice ce costs costs Admi Admini nist stra ratM tM cost costss
Schedule 8 Schedule 8
13 Operatin Operating g income
$22,422,400 14,751,250 7,671,150
Schedule 1 Schedule 7
$ 586,3 586,336 36 2,083,792 780,560 531,491 444,845
4,427,024 $ 3244126 3244126
14 If we had had also also assum assumed ed that that the the pric pricee of the the pal1 pal1ic icle le boar board d had had incr increa ease sed d to $4.2 $4.20 0 per per boar board d foot foot and and the the pric pricee of the the red oak oak had had incr increa ease sed d to $6.3 $6.30 0 per per board board foot foot (as (as in Scen Scenar ario io 3 in Exh Exhib ibit it 6-4, 6-4, p. 193), Schedules 3A, 30, GA, G O , and and 7 wou would ld also also have have chang changed. ed.
D E C ISIO N
PO IN T S
The following question-and-answer format summarizes the chapter's learning objectives. Each decision pr esen ts a key question related to a learning objective. The guidelines are the answer to that question.
Decision
Guidelines
1. What is the master budget and wh y is i t useful?
The master budget summarizes the financial projections of all the company's budgets. It expresses management's operating and financing plans-the formalized outline of the company's financial objectives and how they will be attained. Budgets are tools that, by themselves, are neither good nor bad, Budgets are useful when administered skillfully.
2. When should a company prepare budgets?What are the advantages of preparing budgets?
Budgets should be prepared when their expected benefits exceed their expected costs. The advantages of budgets include: lal they compel strategic analysis and planning. lb) they promote coordination and communication among subunits of the company, (c) they provide a framework for judging performance, and {dl they motivate managers and other employees.
3. What is the operating budget and w hy is it useful?
The operating budget is the budgeted income statement and its supporting budget schedules. The starting point for the operating budget is generally the revenues budget. The following supporting schedules are derived from the revenues budget: production budget, direct material usage budget, direct material purchases budget, direct manufacturing labor budget, manufacturing overhead costs budget, ending inventories budget, cost of goods sold budget, R&D/product design budget, marketing budget, distribution budget, customer-service budget, and administrative budget.
4. How should managers consider what might happen i f the assumptions underlying the budget change?
Managers should use computer~based financial planning models-mathematical statements of the relationships among operating activities, financing activities, and other factors that affect the budget. These models make it possible for management to conduct what-if (sensitivity) analysis of the effects on the master budget of changes in the original predicted data or changes in underlying assumptions and to develop plans to respond to changed conditions.
5, How can budgets include the effects of future improvements?
Kaizen budgeting is based on the idea that it is possible to continuously reduce costs over time. Costs in kaizen budgeting are based on improvements that are yet to be implemented rather than on current practices or methods.
6. How can a company prepare a budget based on costs of different activities?
Activity-based budgeting focuses on the budgeted costs of activities needed to produce and sell products and services. It is linked to activity-based costing but differs in its emphasis on future costs and future use of activity areas.
7. How do companies use responsibility centers and responsibility accounting?
A responsibility center is a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. Four types of responsibility centers are cost centers, revenue centers, profit centers, and investment centers. Responsibility accounting systems are useful because they measure the plans, budgets, actions, and actual results of each responsibility center.
8. Shouldpertormance reports of responsibility center managers only include costs the manager can control?
Controllable costs are costs primarily subject to the influence of a given responsibility center manager for a given time period. Performance reports of responsibility center managers often include costs, revenues, and investments that the managers cannot control. Responsibility accounting associates financial items with managers on the basis of which manager has the most knowledge and information about the specific items, regardless of the manager's abilityto exercise full control.
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A P P EN D IX :
THE
CASH
BUDGET
Thechapter illustrated the operating budget, 'vvhich is one pan of the master budget. The other part isthe financial budget, which comprises the capital expenditures budget, the cash budget, the budgetedbalance sheet, and the budgeted statement of cash tlmvs. This appendix focuses on the cash budgetand the budgeted balance sheet. Capital budgeting is discussed in Chapter 21. The budgeted statement of cash flows is beyond the scope of this book (and generally is covered in financial accounting and corporate finance courses).
::
~ ~ . l>
~, If you have studied the ~ W\ statement of cash flows g inafinancialaccountingcourse. :;. be aware thatthe direct method :;. of determiningcash flowscorre· (Q sponds to the approachused in preparingthe cash budget. 203
EXHIBIT
6-5
Balance Sheel lor Slylislic Furnilure, D ecember 31, 2006
A
B
I As.ets 2 Current Assets 3 C ash 4 Accounts receivable 5 D irect materials inventory 6 Finished goods inwntory 7 Property, plant and equipment 8 Land 9 Building and equipment 10 Accumulated depreciation 1 1 T o ta l 12 13 Liabilitie. and Stockholders' 14 Cm rent Liabilities 1 5 A cc ou nt s p ay ab le 16 Income t8JreSpayable 17 T o t al c m re nt l ia b il it ie s 18 Lo ng-term debt (interest at 10% per year) 19 T otal cm rent a nd long-term liabilities 20 Stockholders' equity 21 Com mon stock, $0.01 parvalue, 300,000 sheres outstanding 22 Retained earnings 23 Total 24
D
$ 500,000 1,881,600 223,000 1,375,000 $3,979,600 1,200,000 $2,300,000 (800,000)
1 ,5 00 ,0 0 0
2 ,7 00 ,0 0 0 $6.679600
ui $ 384,000 20,460 404,460 2,400,000
$2,804,460
3,000 3 ,8 72 ,1 4 0
3 ,8 75 ,1 4 0 $6.679600
Suppose Stylistic Furniture had the balance sheet for the year ended December 31,2006, shown in Exhibit 6-5. The budgeted cash nows for 2007 are:
A I 2 3 C ollections from customers 4 Disb1ll'Sements D irect materials 5 6 Payroll 7 O th er co sts 8 M a c hin er y p un :h es e 9 Interest expense on long-term debt 10 Income taxes
C
D
QWIrlers 2 3 $5,331,200 $4,704,000 $4,704,000 I
960 ,0 00 1 ,1 52 ,0 00 1,152,000 1,626,300 I 1,626,300 1 , 88 8,6 00 1,580,460 1,580,460 1 ,5 80 ,4 60 0 0 1 ,800 ,0 00 60,000 60 ,000 60 ,000 100,000 120 ,460 1 00 ,0 00
E 4 $6,272,000
T 1,536,000 1 ,6 26 ,3 00 1 ,5 80 ,4 60 0 60,00 0 100,000
The quanerly data are based on the budgeted cash effects of the operations formulated in Sd1cdules 1 through 8 in the chapter, but the details of that formulation are not shown here to keep this illustration as brief and as focused as possible.
Long-term debt is $2.4 million at an annual interest rate of 10%, with $60,000 interest payable every quarter. The company "vants to maintain a $100,000 minimum cash balance at the end of each quarter. The company can borrow or repay money at an interest rate of 12% per year. Management does not want to borrow any more short-term cash than is necessary. By special arrangement, interest is computed and paid when the principal is repaid. Assume, for simplicity, that borrowing takes place (in multiples of $1,000) at the beginning and repayment at the end of the quarter under consideration. Interest is computed to the nearest dollar. Suppose the management accountant at Stylistic is given the preceding data and the other data contained in the budgets in the chapter (pp. 188-193). She is instructed as follows: Prepare a cash budget for 2007 by quarter. That is, prepare a statemenl of cash receipts and dis bursements by quarter, including details of borrowing, repayment. and interest. 2. Prepare a budgeted balance sheel on December 31, 2007. 3. Prepare a budgeted income stalement for the year ended December 31, 2007. This statement should include interest expense and income taxes (at a rate of 36% of operating income). In April 2007, Stylistic will pay $120,640 of income taxes. This amount is the remaining payment due for the 2006 income tax year togelher with tlle $100,000 Stylistic pays each quarter of 2007 toward its 2007 income tax bill. Any remaining amount due is paid in April 2008. 1.
204
A
B
1 2 3 Cash balance, beginnir1g 4 Add receipts 5
Quarters
I
2
J
4
$ 500,000
$1,504,440
$1,669,220
$ 100,160
5,331,200
4,704,000
4,704,000
6,272,000
5,831,200
6,208,440
6,373,220
6,372,160
960,000
1,152,000
1,152,000
1,536,000
4,800,000
1,626,300
1,626,300
1,888,600
1,626,300
6,161,500
1,580,460
1,580,460
o
1,580,460
1,580,460
6,321,840
o
1,800,000
0
1,800,000
60,000
60,000
60,000
60,000
240,000
100,000
120,460
100,000
100,000
420,460
4,326,160
4,539,220
6,581,060
4,902,160
20,349,800
100,000
100,000
100,000
100,000
100,000
4,639,220
6,681,060
5,002,160
20,449,800
Collections from customers:
6 Total cash available for needs (x) 7 Deduct disbursements 8 D u.c tm at e~ 9 Payroll 1 0 Other costs Machinery purchase 11 1 2 Interest expense on long-tem debt 1 3 Income taxes Total disbursements (y) 14 1 5 Minimum cash balance desu.d 1 6 Total cash needed 1 7 CashelOCoss(defIciency)' 1 8 Financing 1 9 Bonowing (at beginning) 20 Repayment (at end) 21 Interest (at 12% per annum) b 22 Total effects of fmancing 23 Cash balance, ending'
D
C
4,426,160 $1404440
$
$ $1.504440
$1 569.220
o o o
$
0 $ $1.669220
$ (301 840) $1 369 400
$ 1 061 400
o o o
$ 308,000
0
$ 308.000
$ (326480)
$
$
$1 142920
$1142920
o o 100.160
$
0
$
308,000
(308,000)
(308,000)
(18,480)
(18,480) (8480)
24 25 aExcess of total cash available ow:r total ca:>h:needed before current fmancing.
-26 bNote that the short~tenn interest payn\enb pertain only to the amowtt of principal being repaid at the end 27 of, -'ere $308,000 x 0.12 X 0.5 = $18,480. 28 cEno:fu1g cash balance
= Total cash available for needs (x) - Total disbursements (y) + Total effects offUW'L Cing.
preparation of BUdgets The I .
cash budget (Exhibit 6-6) is a schedule of expected cash receipts and disbursements. It
predicts the effects on the cash position at the given level of operations. Exhibit 6-6 presents the cash budget by quarters to show the impact of cash flow timing on bank loans and their
repayment. In practice, monthly-and sometimes weekly or even daily-cash budgets are critical for cash planning and control. Cash budgets help avoid unnecessary idle cash and unex pected cash deficiencies. They thus keep cash balances in line \-"ith needs. Ordinarily, the cash budget has these main sections: a. The beginning cash balance plus cash receipts equals the total cash available before financing. Cash receipts depend on collections of accounts receivable, cash sales, and miscellaneous recurring sources, such as rental or royalty receipts. Infonnauon on the expected colledibility of accounts receivable is needed for accurate predictions. Keyfactors include bad-debt (uncollectible accounts) experience and average time lag between sales and colledions. b. Cash disbursements by Stylistic Furniture include: i. Direa material purchases. Suppliers are paid in full three v..leeksafter the goods are
delivered. ii. Direalabor
and other wage and salary outlays. All payroll-related costs are paid in the month in which the labor effort occurs.
iii. Other cos/s. These depend on timing and credil terms. Not.e, depreciation does not. require a cash outlay.
~~
IIi!l
There's no need to memorizethe format of the cash
budget ifvou remember that it's similar to the way your bank statement
works:
beginning
balance + deposits (receiptsldisbursements=ending balance (before
financingl.
This ending
b al anc e r ev eal s h ow m uc h must be borrowed or can be repaid/invested. ~~ Keep in mind three points ~aboutcashbudgets:(l1 The ending balance fEB)ofcash in one quarter is the beginning balance(BBiofcash quarter. Whole"
inthe next m In t he " Ye ar a s a column. receipts and
disbursements are totaled for the four quarters. However, the SS in that column is the BB for quarter 1, and the EB is the EB for quarter4.(3)
Depreciation
is
nota cash disbursement.
iv. Other disbllrsement.s. These include outlays for property, plant, equipment, and other long-term investments. v. Inrerest on long-term borrowing.
vi. Income tax payment.s. c. Shan-term financing requirements depend on how the total cash available for needs [keyed as (x) in Exhibit 6-61compares with the total cash disbursements !keyed as (y)J, plus the minimum ending cash balance desired. The financing plans ,"viIIdepend on the relationship between total cash available for needs and total cash needed. If there is a deficiency of cash, loans will be obtained. If there is excess cash, any oUlslanding loans will be repaid. d. The ending cash balance.
205
A Revenues Cost of goods sold Gross margin O pemting costs R&D il'r oduct design Marketing costs D istnbution costs Custom er·setvice costs Administrative costs O perating Uu:ome Interest expense Income before income taxes Income taxes N et In co m e
B
C
D $20,384,000 14,751,250 5,632,750
Schedule 1 Schedule 7
Schedule Schedule ] S c he du le S c he du le S c he du le
8 $ 555,760 ' 8, 1,920,720 8 7 2 9, 60 0 8 5 0 4,9 92 8 4 40 ,7 68
4,151,840 1,480,910 258,480 1,222,430 440,075 $ 7 82 35 5
The cash budget in Exhibit G -G shows the pattern of short-term "self-liquidating" cash loans. In quarter 3, Stylistic budgets a $307,840 cash deficiency. Hence, it undertakes short-term borrowing of $308,000 for six months. Seasonal peaks of production or sales often result in heavy cash disbursements for purchases, payroll, and other operating outlays as the products are produced and sold. Cash receipts from customers typically lag behind sales. The loan is self-liquidating in the sense that the borrowed money is used to acquire resources that are used to produce and sell finished goods, and the proceeds from sales are used to repay the loan. This self-liquidating cycle is the movement from cash to inventories to receivables and back to cash. The budgeted income statement is presented in Exhibit 6-7. It is merely the budgeted operating income statement in Exhibit 6-3 (p. ] 93) expanded to include interest expense and income taxes. in Exhibit 6-8. Each item is projected in light of the 3. The budgeted balance sheet is presented
2.
details of the business plan as expressed in all the previous budget schedules. For example, the ending balance of accounts receivable of $ 1,254,400 is computed by adding the budgeted revenues of $20,384,000 (from Schedule 1) to the beginning balance of accounts receivable of $1,881,600 (from Exhibit 6-5) and subtracting cash receipts of$21,Oll,200 (from Exhibit 6-6). For simplicity, the cash receipts and disbursements were given explicitly in this illustration. Usually, the receipts and disbursements are calculated based on the lags bet\',,'een the items reported on the accrual basis of accounting in an income statement and balance sheet and their related cash receipts and disbursements. Consider accounts receivable. In the first three quarters, Stylistic esti-
A
C
D
ABseil
Current Assets Cesh Accounts receivable D irect ma terials inventory Finished goods inventory Property, plant end equipment Land Building end equipment Accumulated depreciation Total
1,200,000
$4,100,000 (1,300.000)
2 ,8 00 ,0 0 0
Liahilin..
and Slotkholders'
Current Liabilities Accounts payable Income taxes payable T otaI current liabilities Long-term debt (interest at 10% per year) Total current end long-term liabilities Stockholders' equity Co mm on stock, $0.01 parvalue, 300,000 shares outstending Retained earnings Total
206
$1,142,920 1,254,400 204,000 854,250 $3,455,570
4 ,0 0 0,0 0 0 $7.455,570
Equity
$ 358,000 40,075 398,075 2,400,000 $2,798,075 3,000 4,654,495 4,657,495 $7455570
mates that 70% of all sales made in a quarter are collected in the same quarter and 30% are collected in the following quarter. In the fourth quarter, Stylistic anticipates, based on its prior history, that it will collect slightly less than 80% of sales (79.445%). Estimated collections from customers each quarter are calculated in the following table (assuming sales by quarter of $4,928,000,
$ 4 ,6 0 8, 00 0, $ 4 ,7 4 5, 14 3,
a nd $ 6, 10 2 ,8 5 7
t ha t e q u al 2 00 7 b u dg e te d
s ale s of $ 2 0, 38 4 ,0 0 0) .
Schedule of Cash Collections Quarters
2 Accounts receivable balance on 1-1-2007(p. 2041 (Fourth quarter sales from prior year collected in first quarter of 2007) Fromfirst-quarter 2007 sales (8 4,8 28,000x 0.70; $4,928,00 0 x 0.30) Fromsecond-quarter 2007 sales 184,608,000x 0.70; $4,608,000 x 0.301 Fromthird-quarter 2007 sales 184,745,143x 0.70; $4,745,143 x 0.301 Fromfourth-quarter 2007 sales (estimated collections from sales of $6,102,8571 Totalcollections
3
4
$1,881,600
3,44 8,6 00
$1,478,400 3,225,600
$5,331,200
$4,704,000
$1,382,400 3 ,3 2 1, 60 0
$ 1 ,4 2 3, 54 3
$4,704,000
4,848,457 $6,272,000
Note that the quarterly cash collections from customers calculated in this schedule equal the cash collections by quarter shown on page 204. Purthermore, the difference betv.'een fourth-quarter sales and the cash collected from fourth-quarter sales, $6,102,857 - $4,848,457 '= $1,254,400 appears as accounts receivable in the budgeted balance sheet as of December 31, 2007 (see Exhibit 6-8).
sensitivity Analysis and Cash Flows Exhibit 6-4 (p. 195) shows how differing
assumptions
about
selling
!'-...,
S tu dy T ip : To check ~yourunderstandingof cash budgeting, see Featured Exercise 2,multiple-choice question 8, and Review Exercise 3 (Student Guide, beginning p. 65). Fully explained answers begin on page 7 1.
prices of coffee tables and
direct material prices led to differing amounts for budgeted operating income for Stylistic Furniture. Akeyuse of sensitivity analysis is to budget cash flow. Exhibit 6-9 outlines the short-term borrowingimplications of the nine combinations examined in Exhibit GA. Scenarios 7 to 9, with the lov,fer selling price per table ($352.80), require large amounts of short-term borrowing in quarters 3 and 4. Scenario 9, with the combination of a 10% lower selling price and 5% higher direct 111aterial costs,requires the largest amount of borrowing by Stylistic Furniture. Sensitivity analysis helps managersanticipate such outcomes and take steps to minimize the effects of expected reductions in cash flowsfrom operations. A
B 1 2 3 Sellin; 4 Scenario Prke 5 1 $ 43 1.2 0 6 2 431.20 7 3 431.20 8 4 392.00 9 5 392.00 10 6 392.00 11 7 352.80 12 8 352.80 13 9 352.80
TERMS
TO
C D F E G H Diretl Malerial Purc:hase Co./J Budgeled. Short-Ten" Bo Partide Red Operating Quarto •• Board I Oak lru;ome I 2 J 4 $ 3.8 0 $5.70 $3,458,226 $ 0 $0 $ 0 $ 0 4.00 6 .0 0 3 ,2 44 ,1 26 0 0 0 0 4.2 0 6.30 3,030,026 0 0 0 0 3.8 0 5.70 1,695,010 0 o ~ 0 145,000 4.00 6.00 1,4&0,910 0 0 308,000 0 4.2 0 6.30 1,266,810 ' 0 0 472,000 0 3.8 0 5.70 (68,206) I 0 0 1,413,000 717,000 4.00 6.00 (28 2,3 06) 0 0 1 ,5 76,000 997,000 4.2 0 6.30 (496,406) 0 0 1 ,7 39,000 1,276,000
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;: Thechapter and the Glossary at the end of the book contain definitions
activity-based budgeting (ABB ) (p. 186) budgetaryslack (p. 1991 cashbudget (p. 2051 continuous budget (p. 1841 controllability (p. 188) controllable cost(p. 1981 costcenter (p. 187)
of:
financial budget (p. 1861 financial planning models (p. 1931 investment center (p. 197) kaizen budgeting (p. 1951 master budget (p. 1821 operating budget (p. 186) organization structure (p. 197)
pro forma statements (p. 1821 profit center (p. 197) responsibility accounting (p. 1971 responsibility center Ip. 1971 revenue center (p. 1971 rolling budget (p. 1841
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n n
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201
Prentice Hall Grade Assist IPHGAI
P H G ra d e A s s is t
Y o u r p r o fe ss o r m a y a s k y o u to c o m p le te s el ec t ed e x er c is es a nd p r o b le m s i n P r en t ic e H a ll Grade Assist (PHGA). PHGA is an online tool that can help you master the chapter's topics. I t p r o v i d es y o u w i th m u l t ip l e v a r ia ti o n s o f ex e r ci s es a n d p r o b l em s d e s ig n a te d b y t h e P H G A icon. You can rework these exercises and problems-each time with new data-as many t i m es a s y o u n e ed . Y o u al s o r e c ei v e i m m e d ia te f e ed b a ck a n d g r a d in g .
ASSIGNM ENT
M ATERIAL
Questions 6-1 What are the four elements
of the budgeting
cycle?
6-2 Define master budget. 6-3 "Strategy,
plans, and budgets are unrelated
6-4 "Budgeted performance you agree? Explain.
is a better criterion
to one another."
Do you agree? Explain.
than past performance
for judging managers."
Do
6-5 "Production
managers and marketing managers are like oil and water. They just don't mix." How can a budget assist in reducing battles between these two areas?
6-6 "Budgets
meet the cost-benefit
test. They force managers
to act differently."
Do you agree?
Explain.
6-7 Define rolling budget. Give an example. 6-8 Outline the steps in preparing an operating budget. 6-9 "The sales forecast is the cornerstone for budgeting." 6-10 How can sensitivity
analysis
be used to increase
Why?
the benefits
of budgeting?
6-11 Define kaizen budgeting. 6-12 Describe
how nonoutput-based
cost drivers
can be incorporated
into budgeting.
6-13
Explain how the choice mentl affects behavior.
6-14
What are som e additional consid erations that arise when b udgeting in multinational com panies?
of the type of responsibility
6-15 "Cash budgets must be prepared
before the operating
center least, revenue,
income budget."
profit, or invest-
Do you agree? Explain.
Exercises 6-16 Sales budget, service setting_ In 2006, McGrath & Sons, a small environmental-testing firm, performed 11,000 radon tests for S250 each and 15,200 lead tests for $200 each. Because newer homes are b e in g b u i lt w i th l ea d -f r ee p i p es , l e ad - te s ti n g v o l u m e i s e x p ec t ed t o d e c r ea s e b y 1 0% n e x t y ea r. H o w e v er , awareness of radon-related health hazards is expected to result in a 5% increase in radon·test volume each year in the near future. Jim McGrath feels that if he lowers his price for lead testing to $190 per test, he will have to face o nly a 5% decline in lead-test sales in 2007. -------
Required
1. Prepare a 2007 sales budget for McGrath & Sons assuming that they hold prices at 2006 levels_ 2. Prepare a 2007 sales budget for McGrath & Sons assuming that they lower the price of a lead test to $190. Should McGrath lower the price of a lead test in 2007 if its goal is to maximize sales revenue? 6-17 Sales and production budget. The Mendez Company expects sales in 2007 of 100,000 units of servi n g t ra ys . M en d ez 's b eg i nn i ng i n v en t or y f o r 2 00 7 i s 7 ,0 00 t ra ys ; t ar g et e nd i ng i n v en t or y , 1 1,0 00 t r ay s . Compute the number of trays budgeted for production in 2007. 6-18 Direct material budget Inglenook Co. produces wine. The company expects to produce 1,500,000 two-liter bottles of Chablis in 2007. Inglenook purchases empty glass bottles from an outside vendor. Its target ending inventory of such bottles is 50,000; its beginning inventory is 20,000. For simplicity, ignore breakage_ Compute the number of bottles to be purchased in 2007.
Budgeting material purchases, The Mahoney Company has prepared a sales budget of 42,000 fin~ .. .•u n i ts f o r a th r ee -m o n t h p e ri o d . T h e c o m p a n y h a s a n i n v en t o r y o f 22 ,0 00 u n i ts o f f i n is h e d g o o d s o n hand at December 31 and has a target finished goods inventory of 24,000 units at the end of the succeeding quarter. I tt ak e s t h r ee g a ll o n s o f d ir ec t m a te r ia ls t o m ak e o n e u n i t o f fi n is h e d p r o d u c t. T h e c o m p a n y h a s an i n v e n tory of 90,000 gallons of direct materials at December 31 and has a target ending inventory of 110,000 gall o n s at t h e e n d o f t h e s u c c ee d in g q u ar t er . H o w m a n y g a l lo n s o f d ir ec t m a t er i al s s h o u l d b e p u r c h a se d d u r i n g t h e th r e e m o n t h s e n d i n g M a rc h 3 1?
6~20
Revenues and production
budget. Purity, Inc., bottles and distributes
mineral water from the com-
pany's natural springs in northern Oregon. Purity markets two products: twelve-ounce bottles and four-gallon reusable plastic containers.
disposable
plastic
l1 J 1
0 1 f P H C lldlA ssis 1
1. For 2007, Purity marketing managers project monthly sales of 400,000 twelve-ounce bottles and 100,000 four-gallon containers. Average selling prices are estimated at $0.25 per twelve-ounce bottle and Sl.5O per four-gallon container. Prepare a revenues budget for Purity, Inc., for the year ending December 31 2007.
•••• ulr•••
f
2. Purity begins 2007 with 900,000 twelve-ounce
bottles
in inventory.
The vice president
of operations
requests that twelve-ounce ending inventory on December 31, 2007, be no less than 600,000 bottles. Based on sales projections as budgeted above, what is the minimum number of twelve-ounce bottles Purity must produce during 200n 3. The VP of operations requests that ending inventory of four-gallon containers on December 31, 2007, be 200,000 units. If the production budget calls for Purity to produce 1,300,000 four-gallon containers during 2007, what is the beginning inventory of four-gallon containers on January 1, 200n 6·21 Direct material usage, unit costs, and gross margins (continuation of 6-20). Purity, Inc., bottles and distributesmineral water from the company's natural springs in northern Oregon. Purity markets two products: 12-ouncedisposable plastic bottles and 4-gallon reusable plastic containers. The 12-ounce bottles are purchasedfrom Plastico, a plastics manufacturer, at a cost of 6 cents per bottle. The 4-gallon containers are sterilizedand put back into service at a cost of 30 cents per container. Spring water is extracted at a direct labor costof 1 cent per 8 ounces (there are 128 ounces in a gallon). Manufacturing overhead is allocated atthe rate of 15cents per unit. (Note: A unit can be a 12-ounce bottle o r a 4-gallon containerl. In 2007, the production budgetcalls for the production of 4,500,000 12-ounce bottles and 1,300,000 4-gallon containers. 1. Assume 4-gallon containers are fully depreciated, so the only cost incurred is that of sterilization. Beginning and ending inventories for 4-gallon containers are zero. There are 500,000 empty 12-ounce bottles in beginning inventory on January 1, 2007. The vice president of operations would like to end 2007with 300,000 empty 12-ounce bottles in inventory. Accounting for sterilization as the only cost of the 4-gallon containers, prepare a direct material usage budget (relating to both bottles and containersl in both units and dollars. 2. The cost of direct manufacturing labor is captured through the extraction cost as detailed above. Based on the data given, prepare a direct manufacturing labor budget for 2007. 3. Calculate the manufacturing cost per unit for each product. 4. Assuming average selling prices as in Exercise 6-20, what is the expected average gross margin per unit for each product? 5. Consider Purity's choice of the cost-allocation base for manufacturing overhead. Can you suggest alternative cost-allocation bases?
aequl •.•d
6·22 Revenues. production. and purchases budgets. The Suzuki Co. in Japan has a division that manufacturestwo-wheel motorcycles. Its budgeted sales for Model G in 2007 is 800,000 units. Suzuki's target endinginventory is 100,000 units, and its beginning inventory is 120,000 units. The company's budgeted selling priceto its distributors and dealers is 400,000 yen (¥) per motorcycle. Suzukibuys all its wheels from an outside supplier. No defective wheels are accepted. (Suzuki's needs forextra wheels for replacement parts are ordered by a separate division of the company.) The company's ~rget ending inventory is 30,000 wheels, and its beginning inventory is 20,000 wheels. The budgeted purchaseprice is 16,000 yen (¥) per wheel.
-------------------
1. Compute the budgeted revenues in yen. 2. Compute the number of motorcycles to be produced. 3. Compute the budgeted purchases of wheels in units and in yen.
Required
6-23 Budgets lor production and direct manufacturing labor.ICMA, adaptedl Roletter Company makes and sellsartistic frames for pictures of weddings, graduations, and other special events. Bob Anderson, the controller, isresponsiblefor preparing Roletter's master budget and has accumulated the following information for 2007: 2007
Estimated sales in units Selling price Direct manufacturing laborhours per unit Wage per direct manufacturing labor-hour
J an ua rv
F eb ru ary
M arc h
April
M ay
10,000 $54.00
12,000 $51.50
8,000 $51.50
9,000 $51.50
9,000 $51.50
20
2 .0
1.5
1.5
1.5
$10.00
$10.00
$10.00
Sl1.00
$11.00
Besides wages, direct manufacturing labor-related costs include pension contributions of $0.50 per hour,w orker's compensation insurance of $0.15 per hour, employee medical insurance of $0.40 per hour, and socials ecurity taxes. Assume that as of January 1, 2007, the social security tax rates are 7.5% for employersand7.5% for employees. The cost of employee benefits paid by Roletter on its employees is treated as adirect manufacturing labor cost.
209
______
Required
Roletter has a labor contract that calls for a wage increase to $11 per hour on April 1, 2007. New laborsaving machinery has been installed and will be fully operational by March t, 2007. Roletter expects to have 16,000 frames on hand at December 31,2006, and it has a policy of carrying an end-of-month inventory of ' _ 0 0 _ ' 1 < _ , of the following month's sales plus 50% of the second following month's sales. Prepare a production budget and a direct manufacturing labor budget for Roletter Company by month and for the first quarter of 2007. Both budgets may be combined in one schedule. The direct manufacturing labor budget should include labor-hours, and show the details for each labor cost category. 6-24 Activity-based
budgeting. The Chelsea store of Family Supermarket (FSI. a chain of small neigh· borhood grocery stores, is preparing its activity· based budget for January 200B. FS has three product cat· egories: soft drinks, fresh produce, and packaged food. The following table shows the four activities that consume indirect resources at the Chelsea store, the cost drivers and their rates, and the cost-driver amount budgeted to be consumed by each activity in January 2008.
B
A
1 2
C January 2008 BwIgl!red
COlt-Driver
3 AdM 4 Ordering 5 Delivery 6 Shelf-stocking 7 Customer support
CoslDriver Number of purchase orde •• N um ber o f deliv eries Hours of stocking time Number of items sold
Rare $ 90 $ 82 $ 21 $0.18
D E F January 2008 BwIgl!red Amounl of Coil Driver Used Soft Fresh Pa
If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost12e and download the template for Exercise 6-24.
-----R_qulred
1. What is the total budgeted indirect cost atthe Chelsea store in January 2008? What is the total budgeted cost of each activity at the Chelsea store for January 2008? What is the budgeted indirect cost of each product category for January 200B? 2. Which product category has the largest fraction of total budgeted indirect costs? 3, Given your answer in requirement 2, what advantage does FS gain by using an activity-based approach to budgeting over, say, allocating indirect costs to products based on cost of goods sold? 6-25 Kaizen approach to activity-based budgeting (continuation of 6-24). Family Supermarkets (FS) has a kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of 2008. Each successive month, the budgeted cost-driver rate decreases by 0.2% relative to the preceding month (so, for example, February's budgeted cost-driver rate is 0.998 times January's budgeted cost·driver rate, and March's budgeted cost-driver rate is 0.99Btimes the budgeted February 200B rate I. FS assumes that the budgeted amount of cost-driver usage remains the same each month. If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost12e and download the template for Exercise 6-24.
-----
R••• ul ••••
1. What is the total budgeted cost for each activity and the total budgeted indirect cost for March 200B? 2. What are the benefits of using a kaizen approach to budgeting? What are the limitations of this approach, and how might FS management overcome them? 6-26 Responsibility
'~ "
•. '">-
« J: :
u
_______ R_qulred
2 10
and controllability.
Consider each of the following independent situations:
1. A very successful salesman at Amcorp Computers regularly ignores the published sales catalog and offers lowered prices to his customers in order to close sales. The VP of sales notices that revenues are substantially lower than budgeted. 2. Every "special deal" offered to a customer by any salesperson at Amcorp Computers has to be cleared by the VP of sales. Revenues for the second quarter have been lower than budgeted. 3. The shipping department of Amcorp has limited capacity, and sales orders are being cancelled by cus· tamers because of delays in delivery. Revenues for the past month have been lower than budgeted. 4. At Planetel Corp., a manufacturer ohelecommunications equipment, the production supervisor notices that a significantly larger number of direct manufacturing labor-hours were used than had been bud· geted. Investigation revealed that it was due to a decline in educational standards required by the HR department when they interviewed applicants for hourly production jobs six months earlier. 5. At Planetel Corp., a relatively new production supervisor finds that more direct manufacturing laborhours were used than had been budgeted. Interviews revealed that workers were unhappy with his management style and were intentionally working slowly and inefficiently. 6. At Planetel Corp., the production supervisor traces the excessive consumption of direct materials (relative to the budget) to the fac t tha t wa ste wa s hig h on ma chine s tha t had not been pro perly ma intain ed. For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllability lie. Suggest what might be done to solve the problem or to improve the situation.
6·27 C a s h f lo w a n a ly sis , c h ap te r a p pe n d ix . IC M A , a d ap te d ) T a b C om p , In c ., i s a r et ail d is tr ib u to r f or M Z B -3 3 c o m p u te r h a rd w a re a nd r e la te d s o f tw a re a nd s u p p o rt s er v ic e s. T ab C o m p p r ep a re s a nn u al s al es forecasts of which the first six months for 2006 are presented here. Cash sales account for 25% of TabComp's total sales, 30% of the total sales are paid by bank credit card, a n d t h e r em a in i n g 4 5% a re o n o p e n a c c o u n t ( Ta b Co m p ' s o w n c h ar g e a c co u n ts ). T h e c a s h s al es a n d c a sh f r om b a nk c r ed i t- ca rd s al es a re r ec e iv e d i n t h e m o n t h o f th e s a le . B a n k c r ed i t- ca rd s al es a re s u b je c t t o a 4% discount deducted at the time of the daily deposit. The cash receipts for sales an open account are 70% in the month following the sale and 28% in the second month after the sale. The remaining accounts receivable are estimated to be u ncollectible. T ab C o m p 's m o n th -e n d i n v en t o ry r eq u i re m en t s f o r c o m p u te r h ar d w ar e u n i ts a r e 30 % o f t h e n ex t m o n t h ' s sales.A one-month lead time is required for delivery from the manufacturer. Thus, orders for computer hardw a re u ni t s a re p l ac e d o n th e 2 5t h o f e a c h m o n t h t o a s s ur e t h at t h ey w i l l b e i n t h e s t o re b y t he f i r s t d a y o f t h e m o n t h n e ed e d. T h e c o m p u t er h a rd w a re u n i ts a r e p u r c h as ed u n d er t er m s o f n /4 5 (p a y m en t i n f u l l w it h in 45 days of invoice), measured from the time the units are delivered to TabComp. TabComp's purchase price for the computer units is 60% of the selling price.
T ob C om p In c, Soles F oreco sl F irst S ix M on lh s of 200 6 Hardware Units January February March April May June Total
13 0 12 0 11 0 90 10 0 12 5
Software Sales and Support
Dollars
S 390,000
Jill
Sales
360,000 330,000 270,000 300,000 375,000 $2025000
$160,000 140,000 150,000 130,000 125,000 225,000
~
Total Revenues $ 5 50 ,0 00 500,000 480,000 400,000 425,000 600,000 $2955000
1. Calculate the cash that TabComp, Inc., can expect to collect during April 2006. Be sure to show all of your calculations.
•••• ul••••
1. TabComp, Inc., is determining how many M2B-33 computer hardware units to order on January 25, 2006. a , D et er m i ne t h e p r o je c te d n u m b er o f c om p u t er h a rd w a re u n i ts t h at w i l l b e o rd e re d . b. Calculate the dollar amount of the order that TabComp will place for these c om p u t er h a rd w a re u n i ts . 3 . A s p ar t of t he a n n ua l b u dg e t p ro c es s, T a b C om p p re p ar es a c as h b u dg e t b y m o nt h f or t h e e n ti re y e ar . E x p la in w h y a co m p a ny s u c h a s Ta b Co m p p r ep a re s a ca sh b u d g et by month for the entire year.
Problems 6 ·2 8 B u d g et s c h ed u l es f o r a m a n u fa c tu r er . products: • E x e cu tiv e d e sk s- 3' x 5 ' o a k d e sk s • C h ai rm a n d es k s-6 ' x 4' re d o ak d e sk s
Thebudgeted direct-cost
S i er r a F u r n i tu r e i s a n e li te d e s k m a n u fa c tu r er .
It m a k es t w o
inputs for each product in 2006 are: Ex ec utive lin e
Oak top Red oak top Oak legs Red oak legs D i re c t m a n u f ac t u ri n g
Ch airm an lin e
16 square feet
o
o
25 square feet
4
o
o
4 5 hours
l ab o r
3 hours
Unitdata pertaining to the direct materials for March 2006 are:
c '"
0-
Ac tu al Be ginn ing Dire ct M at er ials
Oak Red Oak Red
In ve nt or y
E x ec u t iv e l in e
Chairman line
320
o 150 o
top (square feet) oak top {square feetl legs oak legs
TargetE nding Direct Materials
' "!l
(3 /1 JZ O O 6)
o 1 00 o
top (square feet) oak top (square feet) legs oak legs
0 -
'• " •
-0
o , • ~
~ '
Inventory (3/3112006)
E x ec u t iv e
Oak Red Oak Red
40
, o
Line
C h ai r m an L i n e
l>
n n
o
192
o
o
20 0
80
o
' ""
o
44
211
C
~
Unit cost data for direct-cost
inputs pertaining to February 2006 and March 2006 are: February 2006 lactuall
Oak top (per square foot) Red oak top (per square foot) Oak legs (per legl Red oak legs (per leg) Manufacturing labor cost per hour
March 2006 (budgetedl
S18 23 11 17 30
$20 25 12 18 30
Manufacturing overhead (both variable and fixed) is allocated to each desk on the basis of budgeted direct m a n u fa c tu r i ng l ab o r -h o u r s p e r d es k . T h e b u d g et ed v a ri ab l e m a n u fa c tu r in g o v e rh e ad r at e fo r M a r c h 2 00 6 i s $ 35 p e r d ir ec t m a n u fa c tu r in g l ab o r -h o u r . T h e b u d g e t ed f i x ed m a n u fa c tu r i ng o v e rh e ad f o r M a rc h 2 00 6 i s $42,500. Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods. D at a r e l at i n g t o f in i s h ed g o o d s i n v e n to r y f o r M a rc h 2 00 6 ar e:
B eg inn ing in ven to ry in units B eg inn in g in ve ntor y in d olla rs (c ost) Targ et en din g in vento ry in un its
E xec ut iv e
C hai rm an l in e
20 $ 10,4 80 30
5 $ 4,85 0 15
Budgeted sales for March 2006 are 740 units of the executive line and 390 units of the chairman line. The budgeted selling prices per unit in March 2006 are $1,020 for the executive-line desk and $1,600 for the c h a ir m a n- li n e d e sk . A s s u m e t h e f o l l o w i n g i n y o u r a n sw e r: • W o r k -i n -p r o c es s i n v en t o r ie s a re n e g li g i b le a n d i g n o r ed . • D i re c t m a t er i al s i n v en t o r y a n d fi n i sh e d g o o d s i n v e n to r y a re c a s te d u s i n g t h e F IF O m e t h od . - Un i t c o s t s o f d i r ec t m a t er i al s p u r c h as ed a n d f i n is h ed g o o d s ar e c o n st an t i n M ar c h 2 00 6. R••• ul ••••
1. Prepare the following budgets for March 2006: a. Revenues budget b . P r o d uc t i o n b u d g et i n u n it s c . D i re c t m a t er i al u s ag e b u d g et a n d d i r ec t m a t er i al p u r c h as es b u d g et d . D i re c t m a n u fa c tu r i ng l ab o r b u d g et e . M an u f ac t u ri n g o v e rh e ad b u d g et I. Ending inventory budget (direct materials and finished goodsl g. Cost of goods sold budget 2 . S u p p o se S i er r a F u rn i t ur e d e c i d es t o i nc o r p o ra te c o n t i nu o u s i m p r o v em e n t i n t o i t s b u d g et i n g p r o c es s . D es c r ib e t w o a r ea s w h e r e S i er r a c o u l d i n c o r p o r at e c o n t in u o u s i m p r o v em e n t i n t o t h e b ud g e t s c h ed ules in requirement 1.
6-29 Se n si t iv i t y a n al y s i s, c h a ng i n g b u d g et a s su m p t i o n s, k a iz en a p p ro a c h. C h ac o C h i p s p r o du c es t w o PIl C lade A ssisl
Requl ••••
b r an d s o f c h o c o l at e c h i p c o o k i es : C h i p p o a n d C h o k k o . T h e c o o k i es a re p r o d u c ed f r o m o n l y t w o i n g r ed i en t s : chocolate chips and cookie dough. Chippo is 50% chips by weight and 50% dough, whereas Chokko is 25% chips by weight and 75% dough; there is negligible loss while baking the cookies. Packages of either brand weigh 1 pound. Chaco Chips's master budget projects sales of 500,000 packages of each brand in 2007, at $3 per package. Forecasted 2007 ingredients' costs are $2 per pound of chocolate chips and $1 per pound of cookie dough. A total of 5,000 direct manufacturing labor-hours-40% for Chippo and 60% for Chokko-are budgeted, at $20 per hour. Manufacturing overhead costs are expected to be $160,000,alia· cated between the two p roducts on the basis of packages produced. There is no beginning o r ending inventory.
1. Calculate budgeted gross margins for each product and for Chaco Chips in 2007. 2 . B y w o rk i n g w i t h i t s c u r re n t s u p p l ie rs , C h ac o C h i p s es t im a t es i t c o u l d r ed u c e t h e c o s t o f i n g re d ie n ts b y 3%. Calculate Chaco Chips's revised budgeted gross m argin in 2007. 3 . A n a n al y s i s o f al l a c ti v i ti es b y a c r o s s- fu n c t io n a l t ea m r es p o n s ib l e f o r c o n t in u o u s i m p r o v em e n t s h o w s t h at i f t h e c o m p a n y p u r c h as es b e tt er -q u al i ty i n g r ed i en t s f r o m a d if f er en t s u p p li er c o s t in g 5 % m o r e th a n t h e o r i gi n al i n gr ed i en t s, t h er e w i ll b e fe w er q u al it y -r el at ed p r od u c ti o n l in e s t op p ag es , w h i ch w i ll r ed u c e m a n u fa c tu r in g o v e rh e ad c o s t s an d d i re c t m a n uf a ct u ri n g l ab o r -h o u r s b y 2 % . C a lc u l at e C h ac o Chips's revised 2007 budgeted gross margin under this scenario. 4 . B a s e d o n bu~geted gross margin alone, which of the three scenarios here do you think Chaco Chips's management would prefer? What other factors w ould yo u consider before choosing between (2) and (3) above?
6-30 Revenue and production budgets. (CPA, adaptedl The Scarborough Corporation manufactures and sells two products: Thingone and Thingtwo. In July 2006, Scarborough's budget department gathered the following data to prepare budgets for 2007: 2007 Projected
212
Sales
Product
Units
Price
Thingone Thingtwo
60,000 40,000
$165 $250
20 01 /n ve nt or ie s
in U ni ts
Expected Target Product
January 1,2007
Thingone Thingtwo
December 31, 2007
20,000 8,000
25,000 9,000
The following direct materials are used in the two products: A m o u n t Us ed p er Un it Direct Material
Unit
Thingone
A B C
pound pound each
4 2 0
Projected data for 2007 with respectto Direct Material
Thingtwo 5
3 1
direct materials are as follows:
A n ti c ip at ed Pu r c h as e
Ex p ec te d In v en to ries
Inventories
Price
January 1, 2007
December 31, 2007
Target
$12 5 3
A B C Projected direct manufacturing
32,000 lb . 36,000 lb . 29,000 lb . 32,000 lb . 6,000 units 7,000 units labor requirements and rates for 2007 are as follows:
Pro d u c t
Ho u r s p er Un it
Rate p er Ho u r
Thingone Thingtwo
2 3
$12 16
Manufacturing overhead is allocated at the rate of £20 per direct manufacturing labor-hour. Based on the preceding projections and budget requirements for Thingone and Thingtwo, prepare the following budgets for 2007:
R••• ul ••••
t Revenues budget lin dollars) 2, Production budget (in units) 3. Direct material purchases budget (in quantities) 4. Direct material purchases budget (in dollars) 5 . Oirect manufacturing labor budget (in dollars) 6. Budgeted finished goods inventory at December 31, 2007 (in dollars)
6·31 Budgeted income statement
ICMA, adapted) Easecom Company is a manufacturer of videoconferencing products. Regular units are manufactured to meet marketing projections, and specialized unitsare made after an order is received. Maintaining the video-conferencing equipment is an important areaof customer satisfaction. With the recent downturn in the computer industry, the video-conferencing equipmentsegment has suffered, leading to a decline in Easecom's financial performance. The following incomestatement shows results for 2007. Easecom Company Income 5talement For the Year Ended December 31. 2007 (in tbousands) Revenues: Equipment $6,000 Maintenance contracts 1,800 Total revenues $7,800 Cost of goods sold 4,600 Gross margin 3,200 Operating costs 600 Marketing Distribution 150 Custom er m aintenance 1,000 Administration 900 2,650 Total operating costs $ 55 0 Operating income Easecom'smanagement team is in the process of preparing the 2008 budget and is studying the following infDrmati~ 1. Sellin ces of equipment are expected to increase by 10% as the economic recovery begins. The sellir ce of each maintenance contract is expected to remain unchanged from 2007. 2. EqIt sales in units are .expected to increase by 6%, with a corresponding 6% growth in units of maintenance contracts. 3. Costof each unit sold is expected to increase by 3% to pay for the necessary technology and quality improvements.
213
4. Marketing costs are expected to increase by $250,000, but administration costs are expected to remain at 2007 levels. 5 . D i s t ri b u ti o n c o s t s v ar y i n p ro p o r ti o n t o th e n u m b e r o f u n it s o f eq u i p m en t s o l d . 6 . Tw o m a in t en an c e t ec h n ic i an s a re t o b e h i r ed a t a t o ta l c o st o f £ 13 0,0 00 , w h i ch c o v er s w ag es a nd r el at ed t r av e l c o s t s. T h e o b j ec t i v e i s t o i m p ro v e c u s to m e r s er v i ce a n d s h o r te n r es p o n s e t i m e. 7 . T h e re i s n o b eg i n n in g o r e n di n g i n v en t o r y o f eq u i p m en t . -
Re••ulred
_____ Re'lulred
P r ep a re a b u d g et ed i n c o m e s t at em e n t f o r t h e y ea r e n di n g D ec e m b er 3 1,2 00 8.
6-32 Responsibility of purchasing agent.IAdapted from a description by R. Villers) Mark Richards is the p u r c h as i n g a g en t f o r t h e H ar t M an u f ac t u ri n g C o m p an y . K e n t S am p s o n i s h e ad o f t he P r o d uc t i on P l an n i n g a nd C o nt ro l D ep ar tm e nt . E v er y s i x m o n t hs , S am p s o n g i ve s R i c h ar d s a gen er al p u rc h as in g p r og r am . R i c h ar d s g et s s p ec i f ic a ti o n s f r o m t h e E n g in e er i ng D ep a rt m en t . H e t h en s el ec t s s u p p li er s a n d n eg o t i at es p r i c es . W h e n h e t o o k t h i s j o b , R ic h a rd s w a s i n f o rm e d v e ry clearly that h e b o r e r e sp o n s i bi l it y f o r m e et i n g t h e g e n er al p u r c h as i n g p r o g ra m o n c e h e ac c ep t ed i t f r o m S a m p s on . During week 24, Richards is advised that Part No. 1234-a critical part-would be needed for assembly on Tuesday morning of week 32. He found that the regular supplier could not deliver. He called everywhere and finally found a supplier in the Midwest who accepted the commitment. H e f ol lo w ed u p b y e -m ai l. V es , t h e s u p pl ie r a ss u red h i m , t h e p a r t w o ul d b e r ea dy . T h e m a t te r w as s o important that on Thursday of week 31, Richards checked by phone. Yes, the shipment had left in time. R i c h ar d s w a s r ea ss u re d a n d d i d n o t c h ec k f u r th e r. B u t o n Tu es d ay o f w e ek 3 2, t h e p a r t h a d n o t a rr i v ed . In_ q~u iryr ev e al ed t h at t h e s h i p m en t h a d b e en m i s d ir ec t ed b y t h e r a il r o ad a n d w a s s t il l i n C h i c ag o . What department should bear the costs of time lost in the plant due to the delayed shipment? Why? As p u r c h as i n g a g en t , d o y o u t h in k i t i s f ai r t h at s u c h c o s t s b e c h ar g ed t o y o u r d e p a rt m e nt ?
6-33 A c t iv i ty -b as ed b u dg et in g . A n d er so n M an u fa ct ur in g , In c ., m an u fac t ur es t w o t y p es o f v al v es , 300,000 simple valves ISV2) and tOO,OOOcomplex valves (CL9). Anderson uses activity-based costing and a c ti v i ty - b as ed b u d g et i n g . T h e f o l lo w i n g t ab l e c o n t a in s c o s t -d r iv e r a n d bu d g et ed i n d ir ec t -c o s t i n f o rm a t io n for 2007 for the different activities. A cti v it v
I te m s i n C o st P o o l ( f i x ed c o s t + c o s t p e r u n i t o f c o s t d r i v er )
Cost Driver
Machining
M ac h i n e h o u r s
Setups and quality assurance
P r o d uc t i o n r u n s
Procurement
Purchase orders
Design Materials handling
Engineering hours Square feet of materials handled
Indirect materials SO + $10 per machine-hour Indirect labor S20,000 + $15 per machine-hour Utilities SO + 55 per machine-hour Indirect materials SO + Sl,OOO per prod. run Indirect labor $0 + $1,200 per prod. run Inspection $80,000 + $2,000 per prod. run Indirect materials $0 + S4 per purch. order Indirect labor $45,000 + $0 per purch. order Engineering $75,000 + $50 per engg.-hour Indirect materials $0 + $2 per sq ft Indirect labor $30,000 + $0 per sq ft
A d dit io nal budg et dat a for 20 07 , d es cri bin g th e am ount o f ac ti vit y re sourc es follows: Quantity of Cost Driver Used By
Activity a. b. c. d. e. Required
Machining Setups and quality assurance P r o c ur em e n t D es i g n Materials handling
us ed b y th e tw o ty pes o f v al ves
SV2
Cl9
Total Budgeted Volnme of Cost Driver
6,500 20 8,000
3,500 20 7,000
10,000 machine-hours 4 0 p r o d u ct i o n r u n s 15,000 purchase orders 100 engineering-hours 100,000 square feet
25
75
60,000
40,000
1 . C al c u la te t h e t o t al b u d g et ed c a st f o r ea c h a c t i v it y i n 2 00 7 an d th e c o s t -d r i ve r r at e fo r ea c h a c t i v it y . 2 . U s e th e c o s t -d r i ve r r at es c a lc u l at ed i n r eq u i re m en t 1 t o c al c u la te b u d g et ed i n d ir ec t c o s t s a l lo c at ed t o e ac h p r o d uc t i n t o t al a n d p e r u n i t. 3. What advantages might Anderson gain by using an activity-based budgeting approach over, say, an approach that allocates the cost of these activities to products as a percentage of the cost of goods sold.
6-34 C o m p r eh e n si v e
o p er at i n g b u d g et , b u d g e t ed b a la n c e s h ee t. S l o pe s, I nc . , m an u f ac t u re s a n d s el l s snowboards-"-lP..ees manufactures a single model, the Pipex. In the summ er of 2006, Slopes's management accountant g red the following data to prepare budgets for 2007:
Ma teri als a
21 4
!Jo rreq uirements Direct m aterials Wood Fiberglass D i re c t m a n uf ac t u ri n g
l ab o r
5 board feet Ib.f.) per snowboard 6 yards per snowboard 5 hours per snowboard
Slopes's CEO expects to sell 1,000 snowboards during 2007 at an estimated retail price of $450 per board. Further,he expects 2007 beginning inventory of 100 boards and would like to end 2007 with 200 snowboards in s to c k .
D ir ec t m at er ia ls
in ve nt or ie s
Wood Fiberglass
Beginning Inventorv 1/1/2007
Ending Inventory 12/31/2007
2,000 1,000
1,500 2,000
V ar i ab l e m a n uf ac t u ri n g o v er h ea d i s $ 7 p er d i r ec t m a n uf a ct u ri n g l ab o r -h o u r . T h er e a re a l s o S 66 ,0 00 i n f i x ed m a n u f ac t u ri n g o v e rh e ad c o s ts b u d g et ed f o r 2 00 7. S lo p e s c o m b i n es b o t h v ar i ab l e a n d f ix e d m a n u fa c turing overhead into a single rate based on direct manufacturing labor-hours. Variable marketing costs are allocated at the rate of $250 per sales visit. The marketing plan calls for 30 sales visits during 2007. Finally, there are $30,000 in fixed nonmanufacturing costs budgeted for 2007. Other data includes:
Wood Fiberglass D i re c t m a n u f ac t u ri n g
l ab o r
2006 Unit Price
2007 Unit Price
$28.00 per b.t. $ 4.80 per yard $24.00 per hour
$30.00 per b.f. $ 5.00 per yard $25.00 per hour
T h e i n v en t o ri ab l e u n i t c o s t f o r e n d i n g f i n is h ed g o o d s i n v en t o ry o n D e ce m b er 3 1,2 00 6, i s $ 37 4.8 0. A s s u m e Slopes uses a FIFO inventory method for both direct materials and finished g o o d s . I g n o re w o r k i n p r o c es s in your calculations. 8udgeted balances at December 31, 2007, in the selected accounts are:
Cash P roperly, plan t, and equipm ent Inetl Current liabilities Long-term liabilities Stockholders' equity
S 10,000 850,000 17,000 178,000 800,000
1. Prepare the 2007 revenues budget lin dollars) . 2, Prepare the 2007 production budget (in units). 3. Prepare the direct material usage and purchases budgets. 4, Prepare a direct manufacturing labor budget. 5. Prepare a manufacturing overhead budget. 6 . W h at i s t h e b u d g et ed m a n uf a ct u ri n g o v e rh e ad r at e? 7 . W h at i s t h e b u d g et ed m a n uf a ct u ri n g o v e rh e ad c a st p e r o u tp u t u n i t? 8, Calculate the cost of a snowboard manufactured in 2007. 9 . P r ep a re a n e n d i ng i n v en t o ry b u d g et f o r b a t h d i r e c t m a t er i al s a n d f in i s h ed g o o d s . 10. Prepare a cost of goods sold budget. 11. Prepare the budgeted income statement for Slopes, Inc., for the year ending December 31, 2007. 12. Prepare the budgeted balance sheet for Slopes, Inc., as of December 31,2007.
•• "ul••••
6·35 Cash budgeting, chapter appendix. Retail outlets purchase snowboards from Slopes, Inc., through-
ou t th e y e ar . H o w ev e r, i n an t i c ip a ti o n o f l at e s u m m e r a n d e ar l y f al l p u r c h as es , o u t le ts r am p u p i n v en t o ri es fromMay through August. Outlets are billed when boards are ordered. Invoices are payable within 60 days. Frompast experience. Slopes's accountant projects 20% of invoices are paid in the month invoiced, 50% are p a id i n t h e f o l lo w i n g m o n t h , a n d 3 0 % o f i n v o i c es a re p a id t w o m o n t h s a ft er t h e m o n t h o f i n v o ic e . T h e a v e rageselling price per snowboard is $450. T o m e et d e m an d , S lo p es i n cr ea se s p r od u ct io n f ro m A p ri l t h ro u gh J u ly , b ec au s e t h e s n ow b o ar d s a re p r o d u c ed a m o n th p r i o r t o t h ei r p r o j ec t ed s al e. D i re c t m a te ri al s a re p u r c h as ed i n t h e m o n t h o f p r o d uc tionand are paid for during the fallowing month Iterms are payment in full within 30 days of the invoice date). D u ri n gt h i s p e ri o d t h e r e i s n o p r o d u c ti o n f o r i n v e nt o r y , a n d n o m a t er i al s a re p u r c h as ed f o r i n v e nt o r y . D i re c t m a n uf ac t u ri n g l ab o r a n d m a n uf ac t u ri n g o v e rh e ad a re p a i d m o n t h l y . Va ri ab l e m a n u fa c tu r in g o v e rh e ad i s i n c u rr ed a t t h e r a te o f $ 7 p er d i r ec t m a n u fa c tu r in g l ab a r- ho u r . V ar i ab l e m a r k et i n g c o s t s a re d r i v en b y th e number of sales visits. However, there are no sales visits during the months studied. Slopes, Inc., also incursfixed manufacturing overhead costs of $5,500 per month and fixed nonmanufacturing overhead costs of$2,500per month.
Projected Sales Ma y June July
80 units 120 units 200 units
August September October
100 units 60 units 40 units
215
Required
C
A
21 6
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Sbuport, Inc. C•• h Budget for 1he Vear Ending Deeemher 31, 2007 (in thousands)
C ash balance, beginning A d d r ec e ip ts Collections from customers
Total cash available for needs D educt disbursements D irect materials P ayroll O ther costs M achine>y purchese Interest costs (bond) Income taxes
T otal disbursem ents Minimum cash balance desired T otal cash needed C ash ",:ess (defIC iency) F in a n ci ng B o rr ow in g (a t b e! 9n nin g) Repaym ent (at end) Interest (at 12% per annum) T o ta l e ff ec ts o f f ma nc in g Cash balance, ending
Quarton
1 $ 1 5,000
2
385,000 ?
? $347,000
1 5,000 368,000
?
? $ (50.000)
a
Whole
?
$ 36 5,0 0 0 ?
$ 1 ,3 60 ,0 0 0 ?
1 55,000 1 1 8,000 49,000 0 ? ? 345,000 ? ? ?
? 448,000 ? 85,000
? 95,000 40,000 0 ? 1 2 ,000 2 60,000 ? ? ?
?
?
? ?
? $310,000
12 5,000 1 1 0,000 45,000 ? ? 1 4,000
?
4 ?
J ?
?
1 75,000 ? 50,000 0
Vearas
?
61 ,000 ? 1 5,000 1 ,370,000 $ 5000
--$
0 0 0
L-.Q $ 3 2 0 0 0
? $
$ 0 0
? ?
$
.
?
0 0 0 0
$
0 (50,000) (4,500) $ (54 500) $ 1 5.500
? (50,000) $ (4,500) $ (4500) ?
6-37 Cash budgeting, chapter appendix. On December 1, 2007, the Itami Wholesale Co. is attempting to project cash receipts and disbursements through January 31,2008. On this latter date, a note will be payable in the amount of $100,000. This amount was borrowed in September to carry the company through the seasonal peak in November and December. Selected general ledger balances on December 1 are: Cash Accounts receivable Allowance for bad debts Inventory Accounts payable
$ 1 0 ,0 0 0 280,000 $15,800 87,500
92,000
Sales terms call for a 2% discount if payment is made within the first 10 days of the month after sale, with the balance due by the end of the month after sale. Experience has shown that 70 % of the billings will be collected within the discount period, 20% by the end of the month after purchase, and 8% in the following month. The remaining 2% will be uncollectable. There are no cash sales. The average selling price of the company's products is $100 per unit. Actual and projected sales are: October actual November actual December estimated January estimated February estimated Total estimated for year ending June 3 0 , 2 0 0 8
$ 1 8 0, 00 0 250,000 300,000 150,000 120,000 $ 1 ,5 0 0 ,0 0 0
All purchases are payable within 15 days. Thus, approximately 50% of the purchases in a month are due and payable in the next month. The average unit purchase cost is $70. Target ending inventories are 500 units plus 25% of the next month's unit sales. Total budgeted marketing, distribution, and customer-service costs for the year are S400,000. Of this amount,$150,000 are considered fixed land include depreciation of $30,000). The remainder vary with sales. Both fixed and variable marketing, distribution, and customer-service costs are paid as incurred . Prepare a cash budget for December 2007 and January 2008. Supply supporting schedules for collections of receivables; payments for merchandise; and marketing, distribution, and customer-service costs.
•• qul••••
6-38 Comprehensive budget, fill in schedules. The manager of Newport Stationery Store is working on the final quarter's budget for 2007. She has the following information: 1.
A
B
I N""1'ort Stationery Store 2 BalaJu:eSheet as of Sep1emberJO, 2007 3 CurrentAssets 4 Cash $ 12,000 5 Accounts ReceNoble 10,000 6 Inventory 63,600 7 Equipment .. net 100,000 8 2.
Liabilities as of September 30
None
I
D IE I F G H Recent and anticipated sales: September October November Dec:ember January $40 ,0 00
$48,0 00
$60 ,0 00
$80 ,0 00
$36,000
3. Credit sales: Sales are 75% cash, 25% on credit. Credit accounts are all collected within 30 days of sale. The accounts receivable on September 30 are the result of September's credit sales (25% of $40,000). 4. Gross margin averages 30% of revenues. Newport treats cash discounts on purchases as "other income" in the income statement. 5. Monthly operating costs: Salaries and wages average 15% of revenues; rent 5%; other operating costs, excluding depreciation, 4%. These costs are paid in cash each month. Depreciation is $',000 per month. 6. Inventory purchases: Newport always keeps a basic minimum inventory of $30,000. Each month it purchases just enough inventory to cover the following month's sales. The inventory on September 30 is the S30,000minimum inventory plus cost of sales equal to 70% (100% - gross margin of 30%) of October's anticipated sales of $48,000 [$30,000 + 10.7 x $48,0001 = $63,600]. Terms on inventory purchases are 2 1 1 0 , n130.( Payments on purchases are to be made in 30 days; a 2% discount is available if full payment is made within 10 days of purchase.) Newporttakes all available discounts by paying in the month of the purchase. 1. Equipment purchases: In October, Newport will spend $600 on light fixtures, and in November, $400; these amounts will be capitalized. 8. A minimum cash balance of $8,000 must be maintained. All borrowing-in multiples of $1,OOo-occurs atthe beginning of the month; all repayments are made at month-end. Loans are repaid when sufficient cash is available, and interest is paid only at the time of repaying the principal. The interest rate is 18%
217
per year. Management does not want to borrow any more cash than is necessary and wants to repay as soon as cash is available. II you want to use Excel to solve this problem, go to the Excel Lab at www .prenhall.com/horngren/costlZe
and download the template lor Problem 6-38.
-----•••• ul•• d
1. C omplete the lollowing schedules A through F . 2. W hat do you think is the m ostlogical type of loan lor N ewport to take w hen it needs cash? Explain your reasoning. 3. Prepare a budgeted income statement for the fourth quarter and a budgeted balance sheet as of December 31, 2007. Ignore income taxes. 4. Some simplifications have been made in the design of this problem. What complicating factors may arise in compiling cash and financing budgets in a business such as Newport Stationery Store?
A
B S c he du le A Budgeted Monthly Cash 's tember $40,000 10,000
1 2 3 I tem 4 T o t al s al es 5 Credit ,ales 6 C a s h s al es 7 ~ceipts: 8 C a sh sa le s 9 Collections on accounts receivable 1 0 T ota l
Receipts O ctober $48,000 12,000
-
-
$36,000 10,000 $46 000
I I
November
December
$60,000
$80,000
-
--
--
-
S c he du le B 12 Budgeted Monthly Cash D isbursements for Purchases \ 3 I te m O c to be r N o ve mb er D e ce mb er 14 Purchases (70% of next month', sales) $42,000 15 D educt 2% cash discount 84 0 16 Total disbursement, $41.160 17 S c he du le C 18 Budgeted Monthly C as». D isbursements for O perations 1 9 I te m O ctober November December 20 Salaries and wages $ 7,200 ut 2 1 R en t , 2,400 22 O ther cash operating costs ~ 23 Total disbursement, $11 520 24 S c he du le D 25 Budgeted Total Monthly Cash D isbursements 26 Item O ctober N ovem ber 1D e ce m be r 27 Purchases $41,160 28 Cash operating costs 11,520 29 Light fIxtures 60 0 30 Total disbursement, $53280 31 S c he du le E 32 Budgeted Cash Receipts and D isbursements 3 3 I te m O c to b er N o v em b er I D e ce m be r 34 Total receipts $46,000 35 Total disbursements 53,280 36 N et cash increa se (decrease) $ (7 2 80 ) - 37 S c he du le F 38 Financing Required 3 9 I te m O c to b er N o v em b er I D ecember' 40 Beginning cash baleru:e $12,000 41 N et cash increase (decrease) (7,280) 42 Cash position before borrowing 4,720 43 Mincmurn cash baleru:e required 8,000 44 C ash excess (defu:iency) (3,280) 45 Borrowing required 4,000 46 Interest payments 47 Borrowing repaid 48 Ending cash baleru:e $ 8 72 0
4 th uarter
t
--
--
-4th.
uarter
-4 th uarter
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-
-
4 th wu1er
-4th uarter
6-39 Budgetary slack and ethics.ICMAllt
is fall 2006 and Marge Atkins, the new management accountant at Norton Company, a manufacturer of baby furniture, is working on the 2007 budget. Scott Ford, the northeast sales manager, whose sales team will easily meet its $2,000,000 sales budget this year, has projected sales of S2,200,000 in 2007. But, in conversations with individual salespeople, Atkins learns that each salesperson is expecting to make sales of at least 20% more in 2007 than in the current year. W hen Atkins asks Ford about this, he says, "Well, not meeting projections is so bad for the morale of the sales team ... and you know how the top brass froths at the mouth when we miss our target by even a little bit ... so, we give ourselves a little breathing room." Intrigued, Atkins investigates further and finds that Pete Granger, the production manager, m akes similar adjustments, padding estimated costs by about 10% to come up with the budgeted costs.
1. As a management accountant, should Marge Atkins take the position that the behavior described by Scott Ford and Pete Granger is unethical? Refer to the Standards of Ethical Conduct for Management A c co u nt an ts d e sc ri be d in C h ap te r lip . 1 6) . 2. How would you suggest Marge Atkins handle this situation?
Re••ulred
Collaborative Learning Problem 6-40 Co m pr eh e ns iv e R e vi ew 0 1 B u dg e tin g , C a sh B u d ge tin g , C h ap te r A p p en d ix . W i ls on B e ve ra g es b o ttlestwo soft drinks under license to Cadbury Schweppes at its Manchester plant. All inventory is in direct materials and finished goods at the end of each working day. There is no work-in-process inventory. The two soft drinks bottled by Wilson Beverages are lemonade and diet lemonade. The syrup for both soh drinks is purchased from Cad bury S chweppes. Wilson Beverages uses a lot size of 1,000 cases as the unit of analysis in its budgeting. (Each case contains 24 bottles.) Direct materials are expressed in terms of lots, in which one lot of direct materials is the input necessary to yield one lot (1,000 cases) of beverage. The following purchase prices are forecast for direct materials in 2005:
Syrup Containers (bottles, caps, etc.) Packaging
lemonade
Diet lemonade
$1,200 per lot $1,000 per lot $ 8 00 pe r l ot
SI,100 per lot $1,000 per lot $ 8 00 p er lo t
Alldirect material purchases are on account. The two soft drinks are bottled using the same equipment. The only difference in the bottling process for thetwo soft drinks is the syrup. Summary data used in developing budgets for 2005 are 1. Sales • Lemonade, 1,080 lots at $9,000 selling price per lot All sales are on account. 1. Beginning (January I, 20051 inventory of direct materials
• Diet lemonade, 540 lots atSS,500 selling price per lot
• Syrup for lemonade, 80 lots at $1,100 purchase price per lot • Containers, 200 lots at S950 purchase price per lot • Syrup for diet lemonade, 70 lots at $1,000 purchase price per lot • Packaging, 400 lots at $900 purchase price per lot 3. Beginning IJanuary I, 2005) inventory of finished goods • Lemonade, 100 lots at $5,300 per lot • Diet lemonade, 50 lots at $5,200 per lot 4. Target ending IDecember 31, 2005) inventory of direct materials • Syrup for lemonade, 30 lots • Containers, 100 lots • Syrup for diet lemonade, 20 lots • Packaging, 200 lots 5. Target ending (December 31, 20051 inventory of finished goods • Lemonade, 20 lots • D iet lemonade, 10 lots 6. Each lot requires 20 direct manufacturing labor-hours at the 2005 budgeted rate of $25 per hour. Direct manufacturing labor costs are paid atthe end of each month. 7. Variable manufacturing overhead is forecast to be $600 per hour of bottling time; bottling time is the time the filling equipment is in operation. Ittakes two hours to bottle one lot of lemonade and two hours to bottle one lot of diet lemonade. Assume all variable manufacturing overhead costs are paid during the same month when incurred.
Fixed manufacturing overhead is forecast to be $1,200,000for 2005. Included in the fixed manu facturing overhead forecast is $400,000 for depreciation. All manufacturing overhead costs are paid as incurred. 8. Hours of budgeted bottling time is the sale cost~allocation base for all fixed manufacturing overhead. 9. Administration costs are forecast to be 10% of the cost of goods manufactured for 2005. Marketing costs are forecast to be 12% of revenues for 2005. Distribution costs are forecast to be 8% of revenues for 2005.All these costs are paid during the month when incurred. Assume there are no depreciation or amortization expenses. 10. Budgeted beginning balances on January I, 2005: Accounts receivable (from sales) Accounts payable Ifor direct materials) Cash
$550,000 300,000 100,000
219
11. Budgeted ending balances on December 31, 2005: Accounts receivable (from sales) Accounts payable (for direct materials)
$600,000 400,000
12. Budgeted equipment purchase in May 13. Estimated income tax expense for 2005
-------
$1,350,000 $ 625,000
A ss um e Wi ls on B ev er ag es us es th e fi rs t-in , fir st -o ut m et ho d fo r cos ti ng al l in ven to ri es . preceding data, prepare the following budgets for 2005:
lI.qulre"
•. b, c. d. k. e. f.
Revenues budget (in dollars) Production budget (in unitsl Direct materials usage budget (in units and dollars) D i re c t m a t er i al s p u rc h as es b u d g et A d m i n is t ra ti o n c o s ts b u d g et ( in u n i ts a n d d o l l ar s ) D i re c t m a n u f ac t ur i ng l ab o r b u d g et M an u f ac t u ri n g o v er h ea d c o s ts b u d g et
Get Connected:
Cost Accounting
On th e bas is of th e
g. Ending finished goods inventory budget h, Cost of goods sold budget i. Marketing costs budget j . Distribution costs budget I . B u d g e t ed i n c o m e s t a t em e n t
m, Cash budget
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Go to wwworenhall.com/hornaren/cost12eforadditional online exercise!s) that explore issues affecting the a c co u n ti n g w o r ld t o d ay . T h es e e x er c is es o f f er y o u t h e o pp o r tu n i ty t o a na ly z e a n d r ef l ec t o n h o w c o s t accounting helps managers to make better decisions and handle the challenges of strategic planning and implementation.
CHA PTER
6
Video
Case
RITZ-CARLTON HOTELS: Budgets and Responsibility Accounting
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" l a di es a nd g e nt l em e n s er v in g l ad i es a nd g e nt l em e n ." T h at 's t h e m o t t o o f t h e R i t z- Ca rl t on . W i th l o c at io n s r an g i ng f r om t h e U n it ed S ta te s t o B a h r ai n t o C h in a, t h e g r a nd 5 8- ho t el c h ai n i s k n ow n f o r i t s i nd u lg en t l ux u ry a nd s u m pt uo u s s ur ro u nd in g s. T h is a u ra o f ol d -w o r ld e le ga n ce s t an d s i n s t ar k c o n tr as t t o i ts r at h er h e av y e m p ha si s , b e hi n d t h e s c en e s o f c ou r se , o n c os t c o n tr o l a nd b u d g et s . Y et i t i s t h is v e ry a pp r o ac h t h at m a k es i t possible for the Ritz-Carlton to offer the legendary grandeur all guests expect during their stay. A hot el 's per for m an ce is th e re sp on si bil it y of th e gen er al m a n ag e r a n d co n tr o ll er a t e ac h l o c at i on w o r ld w i d e. l o c al f o r ec as t s a n d b u d g et s a re p r e p ar ed a n nu a ll y a n d a r e t h e b a si s o f subsequent performance evaluations. Preparation of the annual budget begins with the sales budget, prepared by the hotel's s al es d ir ec to r. B u d ge te d s o ur ce s o f r ev en u e i nc lu d e h o te l r o om s ; c o n v e nt i on , w e d di n g , a n d m e et i ng f ac i li ti es ; m e rc h an d i se ; a nd f o o d a n d b e v er ag e. T h e c o n t ro l le r t h en s ee k s i n p ut f ro m a l l e m pl o ye es -f ro m m a in te na nc e s taf f to k it ch en w o rk e rs -a b ou t a n ti c ip at ed p ay r o ll c h an g es , o p er at i ng c o s ts , a nd planned events or promotions that might affect costs. Standard c o s ts , b as ed o n c o st p er o c c u p i ed r o om , a r e u s ed t o b u i l d t he budget for guest room stays. Other standards are used for meeting rooms and food and beverages. The completed sales budget a nd a n n u al o p er at i ng b u d g et a re s e n t t o c o r po r at e h ea d q ua rt er s . F r om th e re , a c tu a l m o n t h ly p e rf o rm a n ce a g ai n st p l an i s monitored. Onthe 25th of each month, budgets for the next three months are reviewed to be sure goals are still accurate. Accuracy can be c r it i ca l f o r a b u s in e ss w h o s e o c c u pa n cy c an f l u c tu at e s i gn i f icantly from day to day, depending on group or company bookings, special events, or changes in local competition. Any changes are c o m m u n i ca te d t o c o rp o r at e h ea d q ua rt er s , w i t h e x p la n at i on s o f
revisions provided as needed. Managers of each hotel meet daily t o r ev i ew p er f or m a nc e t o d at e, a nd h a ve t h e a b il i ty t o a dj u st p r ic e s i n t h e r e se rv a ti o n s y s te m i f t h ey s o c h o o se . A d j u st i ng p r ic e s c a n b e p a rt i cu l ar l y i m p o rt an t i f a la rg e g r o up c a nc el s a t the last minute or if other unforeseen events cause occupancy to drop suddenly, as happened after the World Trade Center terrorist attacks in 2001. M e et in g t he m o nt hly b ud ge te d g oa ls is p rim a rily t he r es p o ns i bi l it y o f ea c h h o t el 's c o n tr o ll er . T h e c o n t ro l le r o f ea c h h o te l r e c ei v es a m o n t h ly r ep o rt f r om c o rp o r at e h e ad q u ar t er s that shows how the hotel performed against budget, as well as a ga in s t t h e a c tu a l p e rf o rm a n c e o f o t h er R i tz -C ar l to n h o te ls . Id e as f o r b o o st in g r ev e nu es a nd r ed u c in g c o s ts a re r eg u l ar ly s ha re d a m on g h o te l c o n tr ol le rs , w h o r ec o gn iz e t he v al ue o f c o n tr i bu t in g t o t h e e n ti r e o r g an i za ti o n 's s u c c es s , n o t j u st t h e s u c ce ss o f t h ei r o w n h o t el p r op e rt i es .
QUESTIONS 1. The Ritz-Carlton gives all employees at each of its hotels t h e c h a n ce t o m e et w i t h t h e i r h o t el 's c o n tr o ll er t o r e v ie w b u d g et s a nd r ep o r ts o n ac t u al p e rf o rm a n c e, a s a f o rm o f p a rt i ci p at o ry b u d g et in g . W h at a d va nt ag e s o r d i sa dv a ntages do you see with this approach? 2. What factors might affect the Ritz-Carlton's annual sales f o re ca st f o r r o om o c cu p an c y , r es ta ur an ts , an d u s e of m e et i ng s r o o m s a n d c o n f er en c e f ac i li t ie s? 3 . Ho w i s u n ce rt ai n ty h an d le d i n R i tz -C ar lt on 's b u dg et in g process? 4. The Ritz-Carlton uses responsibility accounting for its world· wide hotel and resort operations. What levels of responsibility reports would you expectto see throughoutthe company?
