CHAPTER 8 BUDGETING FOR PLANNING AND CONTROL QUESTIONS FOR WRITING AND DISCUSSION 1. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms.
manufacturing budgets, in turn, depend on the production budget. The same is true for the financial budgets since sales is a critical input for budgets in that category.
2. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned performance. Budgets are standards, and they are compared with actual costs and revenues to provide feedback.
8. For a merchandising firm, the production budget is replaced by a merchandise purchases budget. Merchandising firms also lack direct materials and direct labor budgets. All other budgets are essentially the same. For a service firm (for-profit), the sales budget doubles as the production budget, and there is no finished goods inventory budget. The rest of the budgets have counterparts.
3. The planning and control functions of budgeting can benefit all organizations regardless of size. All organizations need to determine what their goals are and how best to attain those goals. This is the planning function of budgeting. In addition, organizations can compare what actually happens with what was planned to see if the plans are unfolding as anticipated. This is the control function of budgeting.
9. A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. For performance reporting, it is necessary to compare the actual costs for the actual level of activity with the budgeted costs for the actual level of activity. A flexible budget provides the means to compute the budgeted costs for the actual level of activity, after the fact.
4. Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation, and improves the functions of communication and coordination. 5. A master budget is the collection of all individual area and activity budgets. Operating budgets are concerned with the incomegenerating activities of a firm. Financial budgets are concerned with the inflows and outflows of cash and with planned capital expenditures. 6. The sales forecast is a critical input for building the sales budget. However, it is not necessarily equivalent to the sales budget. Upon receiving the sales forecast, management may decide that the firm can do better than the forecast indicates. Consequently, actions may be taken to increase the sales potential for the coming year (e.g., increasing advertising). This adjusted forecast then becomes the sales budget. 7. Yes. All budgets are founded on the sales budget. Before a production budget can be created, it must have the planned sales. The
231
10.
A flexible budget is based on a simple formula: Y = F + VX, which requires knowledge of both fixed and variable components.
11.
Goal congruence is important because it means that the employees of an organization are working toward the goals of that organization.
12.
Frequent feedback is important so that corrective action can be taken, increasing the likelihood of achieving budget.
13.
Both monetary and nonmonetary incentives are used to encourage employees of an organization to achieve the organization’s goals. Monetary incentives appeal to the economic needs of an individual, and nonmonetary incentives appeal to the psychological needs. Since individuals are motivated by both economic and psychological factors, both types of incentives ought to be present in a good budgetary system.
14.
15.
16.
Participative budgeting is a system of budgeting that allows subordinate managers a say in how the budgets are established. Participative budgeting fosters creativity and communicates a sense of responsibility to subordinate managers. It also creates a higher likelihood of goal congruence since managers have more of a tendency to make the budget’s goals their own personal goals. Agree. Individuals who are not challenged tend to lose interest and maintain a lower level of performance. A challenging, but achievable, budget tends to extract a higher level of performance. Top management should provide guidelines and statistical input (e.g., industrial forecasts) and should review the budgets to minimize the possibility of budgetary slack and ensure that the budget is compatible with the strategic objectives of the firm. Top management should also provide the incentive and reward system associated with the budgetary system.
17.
By underestimating revenues and overestimating costs, the budget is more easily achieved.
18.
To meet budget, it is possible to take actions that reduce costs in the short run but increase them in the long run. For example, lower-priced, lower-quality materials can be substituted for the usual quality of materials.
19.
Other performance measures include productivity, personnel development, market
232
share, and product quality. A manager would have to be rewarded for improvements achieved in each area. A major difficulty is determining how much weight to assign to each performance area. 20.
Behavioral factors can make or break a budgetary control system. It is absolutely essential to consider the behavioral ramifications. Ignoring them can and probably will produce dysfunctional consequences.
21.
Across-the-board cuts have the appearance of being fair, but they unfairly penalize good programs. In an era of scarce resources, an organization must decide what it wishes to emphasize and allocate resources accordingly. This may mean the complete elimination of weak programs and the strengthening of strong programs. To cut each program equally without considering which ones are vital to the success of the organization is not good planning.
22.
Activity-based budgeting requires three steps: (1) identification of activities; (2) estimation of activity output demands; and (3) estimation of the costs of resources needed to provide the activity output demanded.
23.
Functional-based flexible budgeting relies on unit-based drivers to build cost formulas for various cost items. Activity flexible budgeting uses activity drivers to build a cost formula for the costs of each activity.
EXERCISES 8–1 1. 2. 3. 4. 5.
e d c e b
8–2 1. 2. 3. 4. 5.
H, I E I, F G D
6. 7. 8. 9. 10.
F F A C B
8–3 1.
Freshaire, Inc. Sales Budget For the Year 2008 Mint:
2.
Units × Price Sales
1st Qtr. 80,000 × $3.00 $240,000
2nd Qtr. 110,000 × $3.00 $330,000
3rd Qtr. 124,000 × $3.00 $372,000
4th Qtr. 140,000 × $3.00 $420,000
Total 454,000 × $3.00 $ 1,362,000
Lemon: Units × Price Sales
100,000 × $3.50 $350,000
100,000 × $3.50 $350,000
120,000 × $3.50 $420,000
140,000 × $3.50 $490,000
460,000 × $3.50 $ 1,610,000
Total sales
$590,000
$680,000
$792,000
$910,000
$ 2,972,000
Freshaire, Inc., will use the sales budget in planning as the basis for the production budget and the succeeding budgets of the master budget. At the end of the year, the company can compare actual sales against the budget to see if expectations were achieved.
233
8–4 Freshaire, Inc. Production Budget for Mint Freshener For the Year 2008 Sales Des. ending inventory Total needs Less: Beginning inventory Units produced
1st Qtr. 80,000 11,000 91,000 4,000 87,000
2nd Qtr. 110,000 12,400 122,400 11,000 111,400
3rd Qtr. 124,000 14,000 138,000 12,400 125,600
4th Qtr. 140,000 9,000 149,000 14,000 135,000
Total 454,000 9,000 463,000 4,000 459,000
4th Qtr. 140,000 22,000 162,000 28,000 134,000
Total 460,000 22,000 482,000 6,400 475,600
Freshaire, Inc. Production Budget for Lemon Freshener For the Year 2008 Sales Des. ending inventory Total needs Less: Beginning inventory Units produced
1st Qtr. 100,000 20,000 120,000 6,400 113,600
2nd Qtr. 100,000 24,000 124,000 20,000 104,000
3rd Qtr. 120,000 28,000 148,000 24,000 124,000
8–5 Pescado, Inc. Production Budget for Tuna For the Year 20xx Sales Des. ending inventory Total needs Less: Beg. inventory Units produced
January 200,000 84,000 284,000 38,000 246,000
February 240,000 77,000 317,000 84,000 233,000
234
March 220,000 70,000 290,000 77,000 213,000
Total 660,000 70,000 730,000 38,000 692,000
8-6 Pescado, Inc. Direct Materials Purchases Budget For January and February Cans: January 246,000 × 1 246,000 46,600 292,600 49,200 243,400
February Total 233,000 479,000 × 1 × 1 233,000 479,000 42,600 42,600 275,600 521,600 46,600 49,200 229,000 472,400
January Production 246,000 × 4 ounces × 4 Ounces for production 984,000 Des. ending inventory 186,400 Total needs 1,170,400 Less: Beg. Inventory 196,800 Ounces purchased 973,600 984,000 * 20% = 196,800
February Total 233,000 479,000 × 4 × 4 932,000 1,916,000 170,400 170,400 1,102,400 2,116,400 186,400 196,800 916,000 1,889,600
Production × 1 can Cans for production Des. ending inventory Total needs Less: Beg. inventory Ounces purchased 246,000 * 20% = 49,200 Tuna:
8–7 Carson, Inc. Production Budget For the First Quarter, 20XX Sales Desired ending inventory Total needs Less: Beginning inventory Units to be produced
January 200,000 36,000 236,000 18,000 218,000
235
February 240,000 33,000 273,000 36,000 237,000
March 220,000 30,000 250,000 33,000 217,000
Total 660,000 30,000 690,000 18,000 672,000
8–8 Manning Company Direct Materials Purchases Budget For March, April, and May 20XX Units to be produced Direct materials per unit (yards) Production needs Desired ending inventory (yards) Total needs Less beginning inventory Direct materials to be purchased (yards) Cost per yard Total purchase cost
March 20,000
April 60,000
May 100,000
Total 180,000
× 25 500,000
× 25 1,500,000
× 25 2,500,000
× 25 4,500,000
300,000 800,000 100,000
500,000 2,000,000 300,000
60,000 2,560,000 500,000
60,000 4,560,000 100,000
700,000 × $0.30 $210,000
1,700,000 × $0.30 $ 510,000
2,060,000 × $0.30 $ 618,000
4,460,000 × $0.30 $1,338,000
8–9 Manning Company Direct Labor Budget For March, April, and May 20XX Units to be produced Direct labor time per unit (hours) Total hours needed Cost per hour Total direct labor cost
March 20,000 × 0.04 800 × $12 $ 9,600
236
April 60,000 ×
0.04 2,400 × $12 $ 28,800
May 100,000
Total 180,000
×
×
0.04 4,000 × $12 $ 48,000
0.04 7,200 × $12 $ 86,400
8–10 Swasey, Inc. Sales Budget For the Coming Year Model LB-1 LB-2 WE-6 WE-7 WE-8 WE-9 Total 1 2 3 4 5
Units 33,6001 21,6002 25,2003 19,4404 9,6005 4,0006
Price $30.00 15.00 10.40 10.00 22.00 26.00
Total Sales $1,008,000 324,000 262,080 194,400 211,200 104,000 $2,103,680 16,800 units * 200% = 33,600; Price increased to $30 18,000 + (18,000 * 20%) = 21,600; no change in price Quantity remains the same; price decreases by 20%; $13 * 80% = $10.40 16,200 + (16,200 * 20%) = 19,440; no change in price Oct, Nov, and Dec represent 3 months of sales; 2,400 / 3 = 800 sales per month for 12 months = 9,600 units; no change in price. 6 1,000 / 3 * 12 = 4,000 units; no change in price
8–11 1.
Raylene’s Flowers and Gifts Production Budget for Gift Baskets For September, October, November, and December Sales Desired ending inventory Total needs Less: Beginning inventory Units produced
Sept. 200 15 215 20 195
237
Oct. 150 18 168 15 153
Nov. 180 25 205 18 187
Dec. 250 10 260 25 235
8–11 2.
Continued Raylene’s Flowers and Gifts Direct Materials Purchases Budget For September, October, and November
Fruit: Production × Amount/basket (lbs.) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases
Sept. 195 × 1 195 8 203 10 193
Small gifts: Production × Amount/basket (items) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases
Sept. 195 × 5 975 383 1,358 488 870
Cellophane: Production × Amount/basket (feet) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases
Sept. 195 × 3 585 230 815 293 522
238
Oct. 153 × 1 153 9 162 8 154 Oct. 153 × 5 765 468 1,233 383 850 Oct. 153 × 3 459 281 740 230 510
Nov. 187 × 1 187 12 199 9 190 Nov. 187 × 5 935 588 1,523 468 1,055 Nov. 187 × 3 561 353 914 281 633
8–11
Concluded
Basket: Production × Amount/basket (item) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases 3.
Sept. 195 × 1 195 77 272 98 174
Nov. 187 × 1 187 118 305 94 211
A direct materials purchases budget for December requires January production which cannot be computed without a February sales forecast.
8–12 1. Credit sales in May = $240,000 x 0.9 = $216,000 Credit sales in June = $230,000 x 0.9 = $207,000 Credit sales in July = $246,000 x 0.9 = $221,400 Credit sales in August = $250,000 x 0.9 = $225,000
2.
Oct. 153 × 1 153 94 247 77 170
Lawrence, Inc. Schedule of Cash Receipts
Cash sales Payments on account: From May credit sales (0.07 x $216,000) From June credit sales (0.60 x $207,000) (0.07 x $207,000) From July credit sales (0.30 x $221,400) (0.60 x $221,400) From August credit sales (0.30 x $225,000) Cash receipts
July 24,600
August 25,000
15,120
---
124,200 14,490 66,420 132,840 --67,500 $230,340 $239,830
239
8–13 1.
Janzen, Inc. Cash Receipts Budget For July Payments on account: From May credit sales (0.15 × $220,000) ................................. From June credit sales (0.60 × $230,000) ............................... From July credit sales (0.20 × $210,000) ................................. Less: July cash discount (0.02 × $42,000) .............................. Cash receipts ............................................................................
2.
$ 33,000 138,000 42,000 (840) $212,160
Janzen, Inc. Cash Receipts Budget For August Payments on account: From June credit sales (0.15 × $230,000) ............................... From July credit sales (0.60 × $210,000) ................................. From August credit sales (0.20 × $250,000) ........................... Less: August cash discount (0.02 × $50,000) ......................... Cash receipts.............................................................................
8–14 MarvelI agree with comment Company Schedule of Cash Payments for August
Payments on accounts payable: From July purchases (0.75 x $25,000) $18,750 From August purchases (0.25 x $30,000) 7,500 Direct labor payments: From July (0.10 x $40,000) 4,000 From August (0.90 x $50,000) 45,000 Overhead ($70,000 - $5,500) 64,500 Loan repayment [$10,000 + ($10,000 x 0.12 x 4/12)]10,400 Cash payments
$150,150
240
$ 34,500 126,000 50,000 (1,000) $209,500
8–15 Cash Budget For the Month of June 20XX
Beginning cash balance Collections: Cash sales Credit sales: Current month ($30,000 × 50%) May credit sales ($25,000 × 30%) April credit sales* Total cash available Less disbursements: Inventory purchases: Current month ($50,000 × 60% × 40%) Prior month ($40,000 × 60% × 60%) Salaries and wages Rent Taxes Total cash needs Excess of cash available
$
345
20,000 15,000 7,500 3,778 $46,623
$12,000 14,400 8,700 1,200 5,500 41,800 $ 4,823
*$25,000 × 15% = $3,750 $3,750/2 × 0.015 = $28 $3,750 + $28 = $3,778 2.
No. Without the possibility of short-term loans, the owner should consider taking less cash salary.
241
8–16 1. Units produced Direct materials cost Direct labor cost Total a. b.
Performance Report Actual Budgeted Variance 1,100 1,000 100 F a $11,200 $10,000 $1,200 U 4,400 4,000b 400 U $15,600 $14,400 $1,600 U
1,000 units * 2 leather straps * $5 = $10,000 1,000 units * .5 hours per unit * $8 = $4,000
2. The performance report compares costs at two different levels of activity and so cannot be used to assess efficiency.
8–17 1.
Pet-Care Company Overhead Budget For the Coming Year Formula Variable costs: Maintenance Power Indirect labor Total variable costs Fixed costs: Maintenance Indirect labor Rent Total fixed costs Total overhead costs
Activity Level 55,000 Hours* $0.40 0.50 1.60
$22,000 27,500 88,000 $137,500 $17,000 26,500 18,000 61,500 $199,000
*BasicDiet: (0.25 × 100,000) SpecDiet: (0.30 × 100,000) Total DLH
25,000 30,000 55,000
242
8–17 2.
Concluded
10% higher:
Pet-Care Company Overhead Budget For the Coming Year Activity Level 60,500 Hours*
Formula Variable costs: Maintenance Power Indirect labor Total variable costs Fixed costs: Maintenance Indirect labor Rent Total fixed costs Total overhead costs
$0.40 0.50 1.60
$24,200 30,250 96,800 $151,250 $17,000 26,500 18,000 61,500 $212,750
*55,000 DLH × 110% = 60,500 20% lower:
Pet-Care Company Overhead Budget For the Coming Year
Formula Variable costs: Maintenance Power Indirect labor Total variable costs Fixed costs: Maintenance Indirect labor Rent Total fixed costs Total overhead costs
Activity Level 44,000 Hours* $0.40 0.50 1.60
$17,600 22,000 70,400 $110,000 $17,000 26,500 18,000 61,500 $171,500
*55,000 DLH × 80% = 44,000
243
8–18 1.
Pet-Care Company Performance Report For the Current Year Units produced Production costs*: Maintenance Power Indirect labor Rent Total costs
Actual 220,000
Budget 220,000
Variance 0
$ 40,500 31,700 119,000 18,000 $209,200
$ 41,000 30,000 122,500 18,000 $211,500
$ 500 1,700 3,500 0 $2,300
F U F F
*Flexible budget amounts are based on 60,000 DLH: (0.25 × 120,000) + (0.30 × 100,000) = 60,000 DLH Maintenance: $17,000 + $0.40(60,000) = $41,000 Power: $0.50(60,000) = $30,000 Indirect labor: $26,500 + $1.60(60,000) = $122,500 Rent: $18,000 + 0 = $18,000 2.
All of the variances are within 5 to 10 percent of budgeted amounts. Most would probably view the variances as immaterial. There are numerous reasons for variances. For example, a favorable maintenance variance could be caused by less preventive maintenance or by increased efficiency by individual maintenance workers. Indirect labor could be favorable because (among other things) lower-priced labor was used to carry out higher-skilled jobs. Power could be more expensive than planned because of a rate increase. An investigation would be needed to know exactly why the variances occurred.
244
8–19 1.
a. An imposed budgetary approach does not allow input from those who are directly affected by the process. This can tend to make the employees feel that they are unimportant and that management is concerned only with meeting budgetary goals and not necessarily with the well-being of their employees. The employees will probably feel less of a bond with the organization and will feel that they are meeting standards set by others. An imposed budgetary approach is impersonal and can give employees the feeling that goals are set arbitrarily or that some people benefit at the expense of others. Goals that are perceived as belonging to others are less likely to be internalized, increasing the likelihood of dysfunctional behavior. Furthermore, imposed budgets fail to take advantage of the knowledge subordinate managers have of operations and local market conditions. b. A participative budgetary approach allows subordinate managers considerable say in how budgets are established. This communicates a sense of responsibility to the managers and fosters creativity. It also increases the likelihood that the goals of the budget will become the manager’s personal goals, due to their participation. This results in a higher degree of goal congruence. Many feel that there will be a higher level of performance because it is felt that individuals who are involved in setting their own standards will work harder to achieve them. When managers are allowed to give input in developing the budget, they tend to feel that its success or failure reflects personally on them.
2.
a. In an imposed budgetary setting, communication flows from the top to the bottom and is mostly a one-way flow. Any upward flow would have to do with understanding the budgets being communicated. For participative budgeting, the communication flows are necessarily in both directions, with much of the communication being initiated by subordinate managers. b. The first communication process (imposed budgeting) leaves the impression that the opinions and thoughts of lower-level managers are unimportant. Subordinate managers may feel that no input is being solicited because their input is not valued. The second process (participative budgeting), however, conveys the impression that opinions and views are important and valued. This tends to create a greater feeling of worth to the organization and a stronger commitment to achieving its goals.
245
8–20 1. First, calculate the inspection hours needed: (50,000 units/1000 units per batch) × 100 testing hours per batch = 5,000 projected testing hours. This requires the hiring of three inspectors (5,000 projected testing hours/2,000 inspector hours per year) = 2.5 required inspectors and the lease of one piece of testing equipment. Thus, the budget for 5,000 inspection hours is given as follows:
Resource Salaries Lease Power Total
Formula Variable Fixed $150,000 — 10,000 — -$2.00 $160,000 $2.00
5,000 inspection hours $150,000 10,000 10,000 $170,000
2. Inspection hours needed: (60,000 units/1,000 units per batch) × 100 hours per batch = 6,000 projected testing hours. Inspectors needed = 6,000/2,000 = 3; equipment needed = 6,000/5,00 = 1.2 (rounds up to 2). Thus, the budget is as follows: Resource Salaries Lease Power Total
Formula Fixed Variable $150,000 — 20,000 — -$2.00 $2.00 $170,000
6,000 inspection hours $150,000 20,000 12,000 $182,000
3. First determine the capacity need to service: (80,000/1,000) × 100 = 8,000 inspection hours. Inspectors required = 8,000/2,000 = 4. Equipment needed = 8,000/5,000 = 1.6 (rounded up to 2). Letting Y = total cost, the flexible formula is Y = $220,000 + $2X. Fixed expenses = Salaries of 4 * $50,000 = $200,000 2 Equipment Leases = $20,000 Total Fixed Expenses = $220,000
246
The formula is only valid for this range because of the step-cost nature of the “fixed resources.” Outside this range the number of inspectors and equipment needed may change. 8–21 1.
Resource Salaries Lease Crates Fuel Total
Formula Variable Fixed $400,000 — 24,000 — — $1.00 — 0.06 $1.06 $424,000
60,000 Moves (activity output) $400,000 24,000 60,000 3,600 $487,600
Note: Cycles, instead of moves, could have been used as the output measures. In this case, the variable cost per unit would double. In some ways, cycles is a better measure because crates then become a strictly variable cost (for moves, it is a step-variable cost treated as a variable cost). For either moves or cycles, salaries and leases are step-fixed costs. Also, capacity is determined by operators: 3 × 2,000 × 10 = 60,000 moves. The forklifts actually supply more potential capacity: 3 × 24 × 280 × 3 = 60,480, but they cannot move without operators. 2.
Resource Salaries Lease Crates Fuel Total
Formula Fixed Variable $400,000 — 24,000 — — $1.00 — 0.06 $424,000 $1.06
54,000 Moves (activity output) $400,000 24,000 54,000 3,240 $481,240
The reduction in output reduces the demand for crates and fuel, but the number of operators and forklifts would stay the same (even if the reduction in activity output were permanent). 3.
Resource Salaries Lease Crates Fuel Total
Formula Fixed Variable $120,000 — 8,000 — — $1.00 — 0.06 $128,000 $1.06
15,000 Moves (activity output) $120,000 8,000 15,000 900 $143,900
Note: Reducing demand permanently to 15,000 moves requires three operators (3 × 2,000 × 3 = 18,000), assuming that part-time help is not permitted, and one forklift (24 × 280 × 3 = 20,160). If part-time operators are al-
247
lowed, then the cost for salaries would be budgeted at $100,000. This illustrates the lumpy nature of resources and their role in budgeting.
248
PROBLEMS 8–22 First, separate fixed and variable costs for each category using the high-low method. Maintenance: V = ($13,100 – $10,100)/(2,000 – 1,000) = $3.00 F = Y2 – VX2 = $13,100 – $3(2,000) = $7,100 Maintenance cost = $7,100 + $3X Supplies: V = ($4,800 – $2,400)/1,000 = $2.40 F = $4,800 – $2.40(2,000) = 0 Supplies cost = $2.40X Power: V = ($2,000 – $1,000)/1,000 = $1.00 F = $2,000 – $1.00(2,000) = 0 Power cost = $1.00X Other: V = ($14,240 – $12,940)/1,000 = $1.30 F = $14,240 – $1.30(2,000) = $11,640 Other costs = $11,640 + $1.30X
Maintenance Depreciation Supervision Supplies Power Other Total
1,800 Direct Labor Hours $12,500 7,000 16,000 4,320 1,800 13,980 $55,600
249
8–23 Kendall Law Firm Cash Receipts Budget Cash fees ..................................................................... Received from sales in: June: (0.7)($255,000)(0.17)(1.02) ............... July: (0.7)(0.7)($204,000)........................... (0.7)(0.17)($204,000)(1.02) ............... August: (0.7)(0.1)($240,000)........................... (0.7)(0.7)($240,000)........................... September: (0.7)(0.1)($300,000)........................... Total .............................................................................
August $ 72,000
September $ 90,000
30,952
—
99,960 —
— 24,762
16,800 — $219,712
117,600 21,000 $253,362
8–24 Briggs Manufacturing For the Quarter Ended March 31, 20XX 1. Schedule 1: Sales Budget Units Selling price Sales 2.
January 40,000 × $215 $8,600,000
February 50,000 × $215 $10,750,000
March 60,000 × $215 $12,900,000
Total 150,000 × $215 $32,250,000
Schedule 2: Production Budget Sales (Schedule 1) Desired ending inventory Total needs Less: Beginning inventory Units to be produced
January 40,000 40,000 80,000 32,000 48,000
250
February 50,000 48,000 98,000 40,000 58,000
March 60,000 48,000 108,000 48,000 60,000
Total 150,000 48,000 198,000 32,000 166,000
8–24 3.
Continued
Schedule 3: Direct Materials Purchases Budget Metal
January Components
Units to be produced (Schedule 2) 48,000 Direct materials per unit (lbs.) × 10 Production needs 480,000 Desired ending inventory 250,000 Total needs 730,000 Less: Beginning inventory 200,000 Direct materials to be purchased 530,000 Cost per pound × $8 Total cost $4,240,000
Metal
48,000
February Components
58,000
58,000
10 580,000
× 6 348,000
150,000 438,000
300,000 880,000
180,000 528,000
120,000
250,000
150,000
318,000 × $2 $636,000
630,000 × $8 $5,040,000
378,000 × $2 $756,000
× 6 288,000
×
(Schedule 3 continued) Metal
March Components
Units to be produced (Schedule 2) 60,000 Direct materials per unit (lbs.) × 10 Production needs 600,000 Desired ending inventory 300,000 Total needs 900,000 Less: Beginning inventory 300,000 Direct materials to be purchased 600,000 Cost per pound × $8 Total cost $4,800,000
Metal
60,000 × 6 360,000
Total Components
166,000 ×
10 1,660,000
166,000 ×
6 996,000
180,000 540,000
300,000 1,960,000
180,000 1,176,000
180,000
200,000
120,000
360,000 × $2 $720,000
1,760,000 × $8 $14,080,000
1,056,000 × $2 $2,112,000
251
8–24 4.
Continued
Schedule 4: Direct Labor Budget January Units to be produced (Schedule 2) Direct labor time per unit (hours) Total hours needed Cost per hour Total cost
5.
February
48,000
58,000
×
×
4 192,000 × $9.25 $1,776,000
4 232,000 × $9.25 $2,146,000
Total
60,000 ×
4 240,000 × $9.25 $2,220,000
166,000 ×
4 664,000 × $9.25 $6,142,000
Schedule 5: Overhead Budget January Budgeted direct labor hours (Schedule 4) 192,000 Variable overhead rate × $3.40 Budgeted variable overhead $652,800 Budgeted fixed overhead 338,000 Total overhead $990,800
6.
March
February 232,000 × $3.40 $ 788,800 338,000 $1,126,800
March
Total
240,000 × $3.40 $ 816,000 338,000 $1,154,000
664,000 × $3.40 $2,257,600 1,014,000 $3,271,600
Schedule 6: Selling and Administrative Expenses Budget Planned sales (Schedule 1) Variable selling and administrative expenses per unit Total variable expense Fixed selling and administrative expenses: Salaries Depreciation Other Total fixed expenses Total selling and administrative expenses
January 40,000
February 50,000
March 60,000
Total 150,000
× $3.60 $144,000
× $3.60 $180,000
× $3.60 $216,000
× $3.60 $540,000
$ 50,000 40,000 20,000 $110,000
$ 50,000 40,000 20,000 $110,000
$ 50,000 40,000 20,000 $110,000
$150,000 120,000 60,000 $330,000
$254,000
$290,000
$326,000
$870,000
252
8–24 7.
Continued
Schedule 7: Ending Finished Goods Inventory Budget Unit cost computation: Direct materials: Metal (10 @ $8) = $80 Comp. (6 @ $2) = 12 Direct labor (4 × $9.25) Overhead: Variable (4 @ $3.40) Fixed (4 × $1,014,000/664,000) Total unit cost
$ 92.00 37.00 13.60 6.11 $148.71
Finished goods inventory = Units × Unit cost = 48,000 × $148.71 = $7,138,080 8.
Schedule 8: Cost of Goods Sold Budget Direct materials used (Schedule 3) Metal (1,660,000 × $8) $13,280,000 Components (996,000 × $2) 1,992,000 Direct labor used (Schedule 4) Overhead (Schedule 5) Budgeted manufacturing costs Add: Beginning finished goods (32,000 × $148.71) Goods available for sale Less: Ending finished goods (Schedule 7) Budgeted cost of goods sold
9.
$15,272,000 6,142,000 3,271,600 $24,685,600 4,758,720 $29,444,320 7,138,080 $22,306,240
Schedule 9: Budgeted Income Statement Sales (Schedule 1) Less: Cost of goods sold (Schedule 8) Gross margin Less: Selling and admin. expenses (Schedule 6) Income before income taxes
253
$ 32,250,000 22,306,240 $ 9,943,760 870,000 $ 9,073,760
8–24
Concluded
10. Schedule 10: Cash Budget Beg. balance Cash receipts Cash available Less: Disbursements: Purchases Direct labor Overhead Selling & admin. Total Tentative ending balance Borrowed/(repaid) Interest paid Ending balance
January $ 378,000 8,600,000 $8,978,000
February $ 1,321,200 10,750,000 $12,017,200
March $ 2,952,400 12,900,000 $15,852,400
Total $ 378,000 32,250,000 $32,628,000
$4,876,000 1,776,000 790,800 214,000 $7,656,800
$5,796.000 2,146,000 926,800 250,000 $9,118.800
$ 5,520,000 2,220,000 954,000 286,000 $ 8,980,000
$16,192,000 6,142,000 2,671,600 750,000 $25,755,600
$1,321,200
2,952,400
$ 6,872,400
$6,872,400
— $1,321,200
— $ 2,952,400
$ 6,872,400
$ 6,872,400
*(0.12 × 2/12 × $56,800) + (0.12 × 1/12 × $6,800)
254
8–25 1.
To determine accounts payable as of June 30, a schedule of purchases will be constructed. This schedule will also be used to build the cash budget. Let X = Cost of sales, and sales = 1.00. If X + 0.25X = 1.00, then X = 0.80. Cost of sales Desired end. inventory* Total requirements Less: Beginning inventory Purchases
June $ 96,000 36,000 $132,000 48,000 $ 84,000
July $ 72,000 40,000 $112,000 36,000 $ 76,000
August $ 80,000 54,000 $134,000 40,000 $ 94,000
September $108,000 44,000 $152,000 54,000 $ 98,000
*0.50 × Next month’s cost of sales Since purchases are paid for in the following month, accounts payable at the end of June is $84,000. Inventory for June 30 is $36,000. Accounts receivable for June 30 is computed as follows: From June: From May: Total
0.7 × $120,000 × 0.8* = $67,200 0.7 × $100,000 × 0.3* = 21,000 $88,200
*By June 30, 20% of June credit sales and 70% of May credit sales have been collected, leaving 80% and 30%, respectively, to be collected. Given accounts payable, the total liabilities plus stockholders’ equity must equal $562,750 ($84,000 + $210,000 + $268,750). Cash is the difference between total assets and all other assets except cash ($562,750 – $425,000 – $36,000 – $88,200). This difference is $13,550.
Cash Accounts receivable Inventory Plant and equipment Accounts payable Common stock Retained earnings Total
Liabilities and Assets $ 13,550 88,200 36,000 425,000
$562,750
255
Stockholders’ Equity
$ 84,000 210,000 268,750 $562,750
8–25 2.
Continued Grange Retailers Cash Budget For the Quarter Ending September 30, 2008
Beginning cash balance Cash collections* Total cash available Cash disbursements: Purchases** Salaries and wages Utilities Other Property taxes Advertising fees Lease Total disbursement Minimum cash balance Total cash needs Excess (deficiency) Financing: Borrowings Repayments Interest*** Total financing Ending cash balance *Cash collections: Cash sales Credit sales: Current month Prior month From two months ago Total collections
July $ 13,550 102,600 $ 116,150
August $ 10,450 100,700 $ 111,150
September $ 10,405 113,300 $ 123,705
Total $ 13,550 316,600 $ 330,150
$ 84,000 10,000 1,000 1,700 15,000
$ 76,000 10,000 1,000 1,700
$ 94,000 10,000 1,000 1,700
$ 254,000 30,000 3,000 5,100 15,000 6,000 5,000 $ 318,100 10,000 $ 328,100 $ 2,050
6,000 $ 111,700 10,000 $ 121,700 $ (5,550) $
$ 94,700 10,000 $ 104,700 $ 6,450
5,000 $ 111,700 10,000 $ 121,700 $ 2,005
6,000
$ 6,000 $ 10,450
(6,000) (45) $ (6,045) $ 10,405
$
$ 0 $ 0 $ 12,005
6,000 (6,000) (45) $ (45) $ 12,005
$ 27,000
$ 30,000
$ 40,500
$ 97,500
12,600 42,000 21,000 $ 102,600
14,000 31,500 25,200 $ 100,700
18,900 35,000 18,900 $ 113,300
45,500 108,500 65,100 $ 316,600
$
**Taken from the purchases schedule developed in Requirement 1. ***$6,000 × 0.09/12
256
8–25
Concluded
3.
Grange Retailers Pro Forma Balance Sheet September 30, 2008
Cash Accounts receivablea Inventoryb Plant and equipmentc Accounts payableb Common stock Retained earningsd Total
Liabilities and Assets $ 12,005 96,600 44,000 413,000
$565,605
Stockholders’ Equity
$ 98,000 210,000 257,605 $565,605
a
(0.7 × $135,000 × 0.8) + (0.7 × $100,000 × 0.3). From purchases schedule prepared in Requirement 1. c [$425,000 – 3($4,000)]. d If total assets equal $565,605, then liabilities plus stockholders’ equity must also equal that amount. Subtracting accounts payable and common stock from total liabilities and stockholders’ equity gives retained earnings of $257,605. b
8–26 1.
Participative budgeting communicates a sense of responsibility to subordinate managers and fosters creativity. Since the subordinate manager creates the budget, it also increases the likelihood that the goals of the budget will become the manager’s personal goals, resulting in a higher degree of goal congruence. Many believe that the increased responsibility and challenge provide nonmonetary incentives that lead to a higher level of performance because it is felt that individuals who are involved in setting their own standards work harder to achieve them. It also involves individuals whose knowledge of local conditions may enhance the entire planning process.
257
8–26
Concluded
There are also certain disadvantages or problems associated with participative budgeting. Some managers may tend to either set the budget too loosely or too tightly. Participative budgeting also creates the opportunity for managers to build slack into the budget by underestimating revenues or overestimating costs. Another problem is that top management may assume total control of the budgeting process and, simultaneously, seek superficial participation of lower-level managers. The participation is generally limited to an endorsement activity, and no real input is sought. In this case, the advantages of participation are negated. 2.
Scott Weidner’s participative budgetary policy has certain deficiencies. They are as follows: a. Managers do not participate in setting the appropriation target figure. Recommendation: Managers should have the opportunity to give some input as to what the target figure will be. b. Setting an upper spending constraint gives indirect approval to spending up to that level whether justified or not. Recommendation: Zero-based budgeting could be used. c. Setting prior constraints, such as maximum limits and inclusion of noncontrollable fixed expenditures prior to departmental input, defeats the purpose of participative management. Recommendation: Divisional constraints should be known to management prior to budgeting, but individual limits should be determined with the input of managers. d. Arbitrary allocation of the approved budget defeats the purpose of a participative budget process. Recommendation: The department managers should be involved in the reallocation of the approved budget. e. The division manager holds back a specified percentage of each department’s appropriation for discretionary use. Recommendation: Contingency funds should not be a part of a departmental budget. These funds should be identified and provided for before the allocation process to departments. f. Exception reporting and evaluation based on performance must be accompanied by rewards. Recommendation: Recognition should be given to those attaining budget goals, not just exceptions. (Part 2 is adapted from CMA unofficial answers.)
258
8–27 Minota Company Cash Budget For the Month of July 2008 Beginning cash balance ....................................................... Collections: Cash sales (0.3 × $1,140,000) ......................................... Credit sales: July: With discounta....................................................... Without discountb ................................................. Junec ........................................................................... Mayd............................................................................. Sale of old equipment .......................................................... Total cash available ........................................................
234,612 239,400 140,000 84,000 25,200 $1,092,212
Less disbursements: Raw materials: Julye............................................................................. Junef ............................................................................ Direct labor ...................................................................... Operating expenses ........................................................ Dividends ......................................................................... Equipment ........................................................................ Total disbursements .................................................. Minimum cash balance ........................................................ Total cash needs ...................................................................
$ 144,000 136,800 110,000 280,000 140,000 168,000 $ 978,800 20,000 $ 998,800
Excess of cash available over needs..................................
$
Ending cash balance ............................................................
$ 113,412
a
$
27,000 342,000
93,412
(0.7 × $1,140,000) × 0.6 × 0.5 × 0.98 (0.7 × $1,140,000) × 0.6 × 0.5 c (0.7 × $1,000,000) × 0.2 d (0.7 × $600,000) × 0.2 e July requirements (0.24 × $1,140,000) ............................... $273,600 Desired ending inventory (0.24 × $1,200,000) ................... 288,000 Total requirements .............................................................. $561,600 Less: Beginning inventory ................................................. 273,600 Purchases ............................................................................ $288,000 July payment: $288,000/2 = $144,000 f $273,600/2 = $136,800 (June purchases are computed as shown for July.) b
259
8–28 1.
a. The new budget system allows the managers to focus on those areas that need attention. By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded (frequent feedback is provided). Also, the company has segregated costs into fixed and variable components, an essential step for good control. A major weakness of the budget is the failure to properly define responsibility. Because of this, supervisors are being held accountable for areas over which they have no control. b. The performance report should emphasize those items over which the manager has control. The report should also compare actual costs with budgeted costs for the actual level of activity. Currently, the report is attempting to compare costs at two different levels: the original budget for 3,000 units with the actual costs for production of 3,185 units. A flexible budgeting system needs to be employed.
2.
Berwin, Inc. Machining Department Performance Report For the Month Ended May 31, 2008 Volume in units
Budget* 3,185
Actual 3,185
Variance 0
Variable manufacturing costs: Direct materials Direct labor Variable overhead Total variable costs
$ 25,480 29,461 35,354 $ 90,295
$ 24,843 29,302 35,035 $ 89,180
$ 637 159 319 $1,115
Fixed manufacturing costs: Indirect labor Depreciation Taxes Insurance Other Total fixed costs
$ 3,300 1,500 300 240 930 $ 6,270
$ 3,334 1,500 300 240 1,027 $ 6,401
$
34 U 0 0 0 97 U $ 131 U
Total costs
$ 96,565
$ 95,581
$ 984 F
F F F F
*For the variable costs: 3,185 × $24,000/3,000; 3,185 × $27,750/3,000; 3,185 × $33,300/3,000
260
8–28 3.
Concluded
Berwin’s budgetary system could also be improved by offering monetary and nonmonetary incentives to reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the budgetary process because they will be responsible for controlling the budget. The controller needs to be certain that the budget objectives are based on realistic conditions and expectations. The managers should be held accountable only for costs over which they have control.
8–29 1. Direct labor Power Setups Total
Actual Costs $210,000 135,000 140,000 $485,000
Budgeted Costs $200,000 85,000 100,000 $385,000
Budget Variance $ 10,000 U 50,000 U 40,000 U $100,000 U
Note: Budgeted costs use the actual direct labor hours and the labor-based cost formulas. Example: Direct labor cost = $10 × 20,000 = $200,000; Power cost = $5,000 + ($4 × 20,000) = $85,000; and Setup cost = $100,000 (fixed). 2. Direct labor Power Setups Total
Actual Costs $210,000 135,000 140,000 $485,000
Budgeted Costs $200,000 149,000 142,000 $491,000
Budget Variance $10,000 U 14,000 F 2,000 F $ 6,000 F
Note: Budgeted costs use the individual driver formulas: Direct labor = $10 × 20,000 = $200,000; Power = $68,000 + ($0.90 × 90,000) = $149,000; and Setups = $98,000 + ($400 × 110) = $142,000. 3.
The multiple-cost-driver approach captures the cause-and-effect cost relationships and, consequently, is more accurate than the direct-labor-based approach.
261
8–30 1.
Westcott, Inc. Performance Report For the Year 2008 Direct materials Direct labor Depreciation Maintenance Machining Materials handling Inspections Total
Actual Costs $ 440,000 355,000 100,000 425,000 142,000 232,500 160,000 $1,854,500
Budgeted Costs* $ 480,000 320,000 100,000 435,000 137,000 240,000 145,000 $1,857,000
Budget Variance $40,000 F 35,000 U 0 10,000 F 5,000 U 7,500 F 15,000 U $ 2,500 F
*Budget formulas for each item can be computed by using the high-low method (using the appropriate cost driver for each method). Using this approach, the budgeted costs for the actual activity levels are computed as follows: Direct materials: $6 × 80,000 Direct labor: $4 × 80,000 Depreciation: $100,000 Maintenance: $60,000 + ($1.50 × 250,000) Machining: $12,000 + ($0.50 × 250,000) Materials handling: $40,000 + ($6.25 × 32,000) Inspections: $25,000 + ($1,000 × 120)
262
8–30 2.
Concluded
Pool rates: $1,100,000/100,000 $672,000/300,000 $290,000/40,000 $225,000/200
= $11 per DLH = $2.24 per MHr = $7.25 per move = $1,125 per batch
Note: The first pool has material and labor costs included. Unit cost: Pool 1: $11 × 10,000 Pool 2: $2.24 × 15,000 Pool 3: $7.25 × 500 Pool 4: $1,125 × 5 Total Units Unit cost
= = = =
$110,000 33,600 3,625 5,625 $152,850 ÷ 10,000 $ 15.29*
*Rounded 3.
Knowing the resources consumed by activities and how the resource costs change with the activity driver should provide more insight into managing the activity and its associated costs. For example, if moves could be reduced to 20,000 from the expected 40,000, then costs can be reduced by not only eliminating the need for four operators, but by reducing the need to lease from four to two forklifts. However, in the short run, the cost of leasing forklifts may persist even though demand for their service is reduced. 20,000 moves Materials handling: Forklifts Operators Fuel Total
40,000 moves $ 40,000 120,000 5,000 $ 165,000
$ 40,000 240,000 10,000 $ 290,000
The detail assumes that forklift leases must continue in the short run but that the number of operators may be reduced (assumes each operator can do 5,000 moves per year).
263
8–31 a.
Schedule 1: Sales Budget (units and total sales in thousands) Units Unit price Total sales
Qtr. 1 65 × $400 $26,000
Qtr. 2 70 × $400 $28,000
Qtr. 3 75 × $400 $30,000
Qtr. 4 90 × $400 $36,000
Total 300 × $400 $120,000
Qtr. 1 65,000
Qtr. 2 70,000
Qtr. 3 75,000
Qtr. 4 90,000
Total 300,000
13,000 78,000
15,000 85,000
20,000 95,000
10,000 100,000
10,000 310,000
0 78,000
13,000 72,000
15,000 80,000
20,000 80,000
0 310,000
b. Schedule 2: Production Budget Sales (Schedule 1) Desired ending inventory Total needs Less: Beginning inventory Production c.
Schedule 3: Direct Materials Purchases Budget (in thousands) Production Materials/unit Production needs Desired ending inventory Total needs Less: Beginning inventory Purchases Cost per unit Purchase cost
Qtr. 1 78.0 × 3 234.0
Qtr. 2 72.0 × 3 216.0
Qtr. 3 80.0 × 3 240.0
Qtr. 4 80.0 × 3 240.0
Total 310.0 × 3 930.0
63.0 297.0
67.5 283.5
81.0 321.0
65.7 305.7
65.7 995.7
65.7 231.3 × $80 $18,504
63.0 220.5 × $80 $17,640
67.5 253.5 × $80 $20,280
81.0 224.7 × $80 $17,976
65.7 930.0 × $80 $74,400
264
8–31
Continued
d. Schedule 4: Direct Labor Budget (in thousands) Production Hours per unit Hours needed Cost per hour Total cost e.
Qtr. 2 72 × 5 360 × $10 $3,600
Qtr. 3 80 × 5 400 × $10 $4,000
Qtr. 4 80 × 5 400 × $10 $4,000
Total 310 × 5 1,550 × $10 $15,500
Qtr. 3 400 × $6 $2,400 1,000 $3,400
Qtr. 4 400 × $6 $2,400 1,000 $3,400
Total 1,550 × $6 $ 9,300 4,000 $13,300
Schedule 5: Overhead Budget (in thousands) Budgeted hours Variable rate Budgeted VOH Budgeted FOH Total OH
f.
Qtr. 1 78 × 5 390 × $10 $3,900
Qtr. 1 390 × $6 $2,340 1,000 $3,340
Qtr. 2 360 × $6 $2,160 1,000 $3,160
Schedule 6: Selling and Administrative Expenses Budget (in thousands) Planned sales Variable rate Variable expenses Fixed expenses Total expenses
Qtr. 1 65 × $10 $ 650 250 $ 900
Qtr. 2 70 × $10 $ 700 250 $ 950
Qtr. 3 75 × $10 $ 750 250 $1,000
g. Schedule 7: Ending Finished Goods Inventory Budget Unit cost computation: Direct materials (3 units @ $80) Direct labor (5 hours @ $10) Overhead: Variable (5 hours @ $6) Fixed ($4,000,000/310,000) Total unit cost
$240.00 50.00 30.00 12.90* $332.90
Finished goods = 10,000 × $332.90 = $3,329,000 *Rounded
265
Qtr. 4 90 × $10 $ 900 250 $1,150
Total 300 × $10 $3,000 1,000 $4,000
8–31
Continued
h. Schedule 8: Cost of Goods Sold Budget Direct materials used (Schedule 3) Direct labor used (Schedule 4) Overhead (Schedule 5) Budgeted manufacturing costs Add: Beginning finished goods inventory (Schedule 2) Goods available for sale Less: Ending finished goods inventory (Schedule 7) Budgeted cost of goods sold i.
1.
Cash Budget (in thousands) Qtr. 1 Beginning cash bal. $ 250 Collections: Credit sales: Current quarter 22,100 Prior quarter 3,3001 Cash available $25,650 Less disbursements: Direct materials: Current quarter $ 9,252 Prior quarter 7,248 Direct labor 3,900 Overhead 2,990 Selling and admin. 850 Dividends 300 Equipment Total cash needs $24,540 Ending cash bal. $ 1,110 55,000 * 400 * .15 = 3,300
$ 74,400,000 15,500,000 13,300,000 $103,200,000 0 $103,200,000 3,329,000 $ 99,871,000
Qtr. 2 $ 1,110
Qtr. 3 $ 3,128
Qtr. 4 $ 5,568
$
23,800 3,900 $28,810
25,500 4,200 $32,828
30,600 4,500 $40,668
102,000 15,900 $118,150
$ 8,820 9,252 3,600 2,810 900 300
$10,140 8,820 4,000 3,050 950 300
$25,682 $ 3,128
$27,260 $ 5,568
$ 8,988 10,140 4,000 3,050 1,100 300 2,000 $29,578 $11,090
$ 37,200 35,460 15,500 11,900 3,800 1,200 2,000 $107,060 $ 11,090
266
Total 250
8–31
Concluded
j.
Optima Company Pro Forma Income Statement For the Year Ending December 31, 2008 Sales (Schedule 1) .................................................................... Less: Cost of goods sold (Schedule 8) ................................... Gross margin ....................................................................... Less: Selling and administrative expenses (Schedule 6) ..... Income before income taxes ..............................................
k.
$120,000,000 99,871,000 $ 20,129,000 4,000,000 $ 16,129,000
Optima Company Pro Forma Balance Sheet December 31, 2008 Assets Cash ........................................................................................... Accounts receivable ................................................................. Direct materials inventory ........................................................ Finished goods inventory ........................................................ Plant and equipment ................................................................. Total assets ...............................................................................
$11,090,000 5,400,000 5,256,000 3,329,000 33,900,000a $58,975,000
Liabilities and Stockholders’ Equity Accounts payable ..................................................................... Capital stock .............................................................................. Retained earnings ..................................................................... Total liabilities and stockholders’ equity .......................... a
$33,500,000 2,000,000 (1,600,000) $33,900,000
b
$ 8,058,000 16,129,000 (1,200,000) $22,987,000
Beginning plant and equipment ............. Add: New equipment ............................... Less: Depreciation expense ................... Ending plant and equipment .............. Beginning retained earnings .................. Plus: Net income* .................................... Less: Dividends paid ............................... Ending retained earnings ...................
*Ignore taxes.
267
$ 8,988,000 27,000,000 22,987,000b $58,975,000
8–32 1.
The flexible budgets presented are based on three different activity levels, none of which coincide with the actual level of performance for November. The budget must be restated to a level of activity that matches the actual results. The fixed and variable components of the mixed costs must be segregated and a budgeted cost calculated for the level of activity attained.
2.
Patterson Company Selling Expenses Report For the Month of November Monthly Expenses Advertising and promotion Administrative salaries Sales salariesa Sales commissionsb Salesperson travelc Sales office expensed Shipping expensee Total a
Budget $1,200,000 57,000 84,000 327,000 187,200 500,500 705,000 $3,060,700
Actual $1,350,000 57,000 84,000 327,000 185,000 497,200 730,000 $3,230,200
Variance $150,000 U 0 0 0 2,200 F 3,300 F 25,000 U $169,500 U
($75,600/72)(80) = $84,000
b
($300,000/$10,000,000)($10,900,000) = $327,000
c
Change in cost: $175,000 – $170,000 = $5,000 Change in sales dollars: $10,625,000 – $10,000,000 = $625,000 Variable cost per dollar of sales = Change in cost divided by change in activity level $5,000/$625,000 = $0.008 per dollar of sales Fixed cost at 72-person level: $170,000 – ($10,000,000 × 0.008) = $90,000 Fixed cost at 80-person level: ($90,000/72) × 80 = $100,000 Total travel budget: $100,000 fixed + ($10,900,000 × 0.008) variable = $187,200
268
8–32
Concluded
d
Change in cost: $498,750 – $490,000 = $8,750 Change in number of orders: 4,250 – 4,000 = 250 Variable cost per order: $8,750/250 = $35 Fixed cost: $490,000 – (4,000 × $35) = $350,000 Total office expense budget: $350,000 + (4,300 × $35) = $500,500
e
Change in cost: $712,500 – $675,000 = $37,500 Change in number of units: 425,000 – 400,000 = 25,000 Variable cost per unit: $37,500/25,000 = $1.50 Fixed cost: $675,000 – (400,000 × $1.50) = $75,000 Total shipping expense budget: $75,000 + (420,000 × $1.50) = $705,000
269
MANAGERIAL DECISION CASES 8–33 1.
Linda’s behavior is not ethical. In the budgeting process, she is deliberately misrepresenting the capabilities of her division for personal gain. To ensure that she achieves budget (either this year or next), she manipulates accounting procedures. This manipulation is in opposition to generally accepted accounting principles. Her decisions are based on her own self-interest rather than on the interest of the company. Deceptive and manipulative behavior for personal gain is clearly wrong.
2.
There are few, if any, legitimate reasons for deferring the closing of sales. Thus, if a marketing manager were asked to engage in this behavior, the first response must be to find out why the request is being made. If there is no sound reason offered, then a simple refusal should suffice. If it takes on the nature of an order and no sound reason exists, then the marketing manager should consider appealing to a higher-level manager. Certainly, deferral of closings so that it increases the likelihood of meeting budget for the coming year is not a sound reason, and, in fact, is wrong.
3.
It would be hard to go against a common practice that seems to have the approval of the plant managers. The widespread knowledge of the practice may even suggest that higher-level management is aware of it and essentially condones the practice—or at least adjusts for it. If higher-level management is aware of the practice and adjusts for it, then the ability to achieve bonus may not be enhanced as much as believed. The plant manager could investigate and find out the extent to which upper-level management is aware of padding. At the same time, the manager could obtain some advice on what his behavior ought to be. If told that the practice is acceptable, then the manager has to decide whether to continue in an organization that accepts deceptive behavior (or go against the grain and simply report what he or she feels is really achievable by the plant).
4.
This is a clear violation of the ethical code for management accountants. A management accountant is obligated to report information fairly and objectively and to disclose all information that can be expected to influence a user’s understanding of accounting reports. Moreover, management accountants must perform their duties in accordance with relevant laws, regulations, and technical standards. Accelerating the recognition of expenses violates generally accepted accounting principles.
270
8–34 1.
Dr. Roger Jones Cash Budget Cash collections and cash available* .......................... Less cash disbursements: Salaries ...................................................................... Benefits ..................................................................... Building lease ........................................................... Dental supplies ......................................................... Janitorial .................................................................... Utilities ....................................................................... Phone ......................................................................... Office supplies .......................................................... Lab fees ..................................................................... Loan payments ......................................................... Interest payments ..................................................... Miscellaneous ........................................................... Total cash needs ............................................................
$21,360
Deficiency of cash available over needs .....................
$ (2,904)
$12,700 1,344 1,500 1,200 300 400 150 100 5,000 570 500 500 $24,264
*Total revenues for a month: Fillings ($50 × 90) .................. Crowns ($300 × 19) ............... Root canals ($170 × 8) .......... Bridges ($500 × 7) ................. Extractions ($45 × 30) ........... Cleaning ($25 × 108) ............. X-rays ($15 × 150) .................
$ 4,500 5,700 1,360 3,500 1,350 2,700 2,250 $21,360
The budget shows that there is $2,904 more cash going out than coming in.
271
8–34 2.
Continued
Dr. Jones must either increase revenues to make up the deficiency or cut costs or a combination of the two. Three possible approaches are outlined below: a. Extend office hours so that a total of 40 hours are worked each week. This could increase revenues by as much as $5,340. Based on a four-week month, the current revenue earned per hour is $166.88 ($21,360/128). Thus, the total revenue increase possible is $166.88 × 32 hours = $5,340. Dr. Jones would need to inform his assistants and receptionist of the increased time and indicate that each will receive a 15% increase in salary for the additional time. (The office is currently open 34 hours per week.) Benefits (primarily FICA and unemployment insurance benefits) would also increase. Other expenses that will likely increase with an increase in sales are dental supplies, lab fees, and utilities (representing about 31% of sales). The remaining expenses appear to be fixed. Thus, the increase in cash flow is computed as follows: Incremental revenues Salary increases (0.15 × $3,400) Benefits ($1,344/$12,700)($510) Variable expenses (0.31 × $5,340) Cash flow increase
$ 5,340 (510) (54) (1,655) $ 3,121
Approach 1 carries with it some risk. Increasing office hours may not increase business. If business does not increase as expected, the cash flow problems could be aggravated rather than relieved. The likelihood of increasing business would be increased if the additional hours are offered in the early evening instead of Friday afternoon. Evening hours are a major convenience for patients who must work during the day and are reluctant to lose work hours.
272
8–34
Continued Dr. Roger Jones Revised Cash Budget
Cash collections and cash avail. ($21,360 + $5,340) ........
$26,700
Less cash disbursements: Salaries ($12,700 + $510) .................................................... Benefits ($1,344 + $54) ........................................................ Building lease ...................................................................... Dental supplies ($1,200 + $300*) ........................................ Janitorial ............................................................................... Utilities ($400 + $100*) ......................................................... Phone .................................................................................... Office supplies ..................................................................... Lab fees ($5,000 + $1,255*) ................................................. Loan payments .................................................................... Interest payments ................................................................ Miscellaneous ...................................................................... Total cash needs .................................................................
$13,210 1,398 1,500 1,500 300 500 150 100 6,255 570 500 500 $26,483
Excess cash available over needs .....................................
$
217
*Variable expenses increase by 25% (8 added hours/32 original hours). b. Cut one dental assistant, eliminate the salary to Mrs. Jones and the activities she does, and cut Dr. Jones’s salary back by $1,000 per month. The savings are given below: Assistant (salary and benefits)...................... Salaries ............................................................ Total .............................................................
$1,051* 2,000 $3,051
*($1,900/2) + [($950/$12,700) × $1,344] = $1,051 (rounded) (This provides a reasonable approximation of the benefits assigned to an assistant.) Although this achieves the savings, the solution may not be feasible. The solution depends to a large extent on how well the Jones family can do with a $2,000 per month cut in their income. In all likelihood, this would be unacceptable to the Jones family. Also, cutting an assistant would require the receptionist to become involved in assisting. This may not be possible without laying off the receptionist and hiring a person that has both sets of skills. Additionally, using the receptionist as an assistant would result in phone calls going unanswered and/or incoming patients being ignored.
273
8–34 c.
Concluded
A third possibility is to increase the fees charged for the various dental services. Assuming a variable cost ratio of 31% (from Approach 1), the increase in revenues needed to cover the $2,900 deficiency can be computed as follows: 0.69R = $2,900 R = $2,900/0.69 R = $4,203 This increase would call for fees to increase an average of 19.7%. Whether this increase is possible or not depends to some extent on how Dr. Jones’s charges compare with other dentists in the area. If some increase is possible, then the increase could be combined with elements of the other two approaches, (e.g., a 10 percent increase in fees and working an extra four hours per week, say, on Wednesday evening). I would expect Dr. Jones to be more likely to accept a combination like the one just mentioned rather than accepting any of the approaches in their pure form. The behavioral principles discussed in the chapter do have a role in this type of setting. Dr. Jones’s personal goals must be in line with the goals of his professional organization, and he must have the motivation to achieve those goals. There is, however, a significant difference. Dr. Jones owns and manages the organization. To a large extent, his goals are the goals of the organization.
RESEARCH ASSIGNMENT 8–35 Answers will vary.
274
