Solutions Chapter 8

Chapter 08 - Budgetary Planning

Chapter 8 Budgetary Planning

ANSWERS TO QUESTIONS 1. Budgetary planning is crucial because companies use budgets to plan their ongoing operations so they will be able to meet their short-term and long-term objectives. 2. Budgets are an important part of organizing because they translate the company’s objectives into financial terms and lay out the resources and expenditures required over a limited horizon. Budgets give managers a goal to work toward as it directs their actions, and may either motivate or demotivate them. Budgets impact the control function because they serve as a basis against which actual results are compared. 3. A strategic plan is the starting point of the planning process and is the vision of what management wants the organization to achieve over the long term. A strategic plan includes long-term goals which are typically over a 5-10 year period and also includes short-term or intermediate steps needed to achieve the long-term goals. 4. Answers will vary, but students should clearly distinguish between the three categories.  Long-term goal: To have $X in personal assets by the age of 55.  Short-term goals: To save $X per month from their paycheck, to generate $X in return from specific investments, etc.  Tactics: Cut costs by eliminating unnecessary expenses, to research potential investments thoroughly, etc. 5. Benefits of budgeting include forcing managers to look ahead, which will help them to foresee potential problems such as running out of cash or inventory. Budgets also promote communication by allowing managers to share their expectations and priorities for the future. And because budgets span the entire organization, they require managers from different functional areas to coordinate their activities. Finally, when implemented correctly, budgets can be useful for motivating employees to work toward the organization’s objectives. 6. Answers will vary. Potential negative consequences of not developing budgets include failure to consider a company’s long-term and short-term goals, lack of communication between managers, and absence of motivation for employees because there isn’t an identifiable goal.

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Chapter 08 - Budgetary Planning

7. Unlike a “top down” approach to budgeting where budgets are set by upper management and imposed on employees, participative budgeting allows employees to provide input into their own budget. This may motivate them to work hard to achieve the goal. It may also result in more accurate information as employees may have more knowledge or information about the process. Disadvantages of participative budgeting include the amount of time consumed and the fact that employees may try to build slack into a budget. 8. Budgetary slack results from employees’ attempts to build a cushion or margin of safety into their budget so that they will be more likely to meet or exceed their budgetary goal, and thus receive a better performance evaluation. Budgetary slack can be detrimental if other decisions are based on the budget, without adjustment for budgetary slack. For example, a production manager may underestimate production goals so that they will be easier to achieve. However, the raw materials purchases manager who relies on this budget will not buy enough materials to meet actual production needs. 9. a. Utilizing different budgets for planning and performance evaluation will minimize the impact of budgetary slack. b. Continuous budgeting gives managers a constant period of budgets available and keeps them in a continuous planning mode instead of only once per period. c. Zero-based budgeting requires managers to justify their expenditures each and every budgeting cycle instead of simply assuming previous period’s levels are still appropriate. 10. A master budget is a comprehensive set of budgets that covers all phases of an organization’s planned activities for a specific period. It is made up of both operating budgets (sales, production, direct materials purchases, direct labor, manufacturing overhead, selling and administrative expenses, and income statement), and financial budgets (cash receipts and disbursements, inventory, capital purchases, financing, and balance sheet). 11. The sales forecast is the starting point because all of the other budgets are based on the sales forecast. The production, direct materials purchases, direct labor, manufacturing overhead, selling and administrative, cash receipts/disbursements, and inventory budgets are all affected by the sales forecast. 12. The sales forecast is based on last period’s sales, industry trends, information from top management about sales objectives, input from research and development, and planned marketing activities. An inaccuracy in any of these sources would result in an incorrect sales forecast which would, in turn, cause many operating budgets to be inaccurate. 13. The operating budget is made up of the sales forecast, production budget, direct materials purchases budget, direct labor budget, manufacturing overhead budget, selling and administrative budget, and budgeted income statement. 8-2 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 08 - Budgetary Planning

14. The components of the cash budget include budgeted cash receipts, budgeted cash payments, and financing. 15. The operating budgets feed directly into the cash budget. The sales budget is used to compute the cash receipts, while the direct materials purchases, direct labor, manufacturing overhead, and selling administrative expense budgets are used to compute budgeted cash payments. The ending balance of cash appears on the budgeted balance sheet. The operating budgets also affect other elements of the budgeted balance sheet, including budgeted accounts receivable, inventory, accounts payable, and owner’s equity. 16. The cash budget receives considerable attention because a company cannot exist without sufficient cash. Sales revenue does not always become cash or there may be a lag and companies need to know that they have sufficient cash on hand to pay their expenses in the interim. 17. Depreciation is a non-cash expense. While it does increase a company’s total expenses and decrease net operating income, it does not require a cash outflow during the current period. 18. The end result of the budgeting process is a set of pro-forma financial statements that includes a budgeted income statement, statement of cash flows, and budgeted balance sheet. Each of these budgets provides managers with valuable information to use for planning, managing operations, and making investing and financing decisions. 19. Service firms do not need to prepare production budgets, inventory budgets, or manufacturing overhead budgets. But they do need to prepare budgets to predict sales revenue, labor costs, supplies, and other non-manufacturing expenses such as commissions and advertising. 20. One of the primary operating budgets a merchandiser needs to prepare is the merchandise purchases budget. Instead of considering production needs and raw materials inventory, this budget is based on budgeted sales and the need to maintain adequate levels of finished goods inventory. The other major difference between merchandising and manufacturing firms’ budgets is that merchandising firms do not have a raw materials, direct labor, or manufacturing overhead expense budget.

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Chapter 08 - Budgetary Planning

Authors' Recommended Solution Time (Time in minutes)

Mini-exercises No. Time 1 4 2 5 3 3 4 5 5 3 6 4 7 5 8 4 9 5 10 5 11 5

Exercises No. Time 1 7 2 8 3 8 4 7 5 7 6 8 7 8 8 7 9 7 10 8 11 9 12 7 13 7 14 8 15 7 16 7 17 8 18 8 19 8 20 8 21 8

Problems No. Time PA−1 15 PA−2 12 PA−3 12 PA−4 12 PA- 5 12 PA-6 15 PB−1 15 PB−2 12 PB−3 12 PB−4 12 PB−5 12 PB−6 15

Cases and Projects* No. Time 1 45 2 45

* Due to the nature of cases, it is very difficult to estimate the amount of time students will need to complete them. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about how to research topics or what companies to select).

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Chapter 08 - Budgetary Planning

ANSWERS TO MINI-EXERCISES M8−1 No, he isn’t correct. Planning, directing, and control are very interrelated functions within any organization. Managerial accounting plays a crucial role in each of these functions. M8−2 Potential consequences of CC’s philosophy include a lack of vision for the company’s future development, failure to communicate goals to employees, and inability to evaluate performance of the company or its employees. M8−3 a) b) c) d) e) f) g) h) i)

Cash receipts and payments budget Sales budget Raw materials purchases budget Selling and administrative expense budget Budgeted balance sheet Manufacturing overhead budget Direct labor budget Budgeted income statement Production budget

Financial Operating Operating Operating Financial Operating Operating Operating Operating

M8−4

Budgeted sales (units) Budgeted unit price Budgeted sales revenue

October 7,200 x $27.50 $ 198,000

November 7,400 x $27.50 $ 203,500

December 7,100 x $27.50 $ 195,250

4th Quarter 21,700 x $27.50 $ 596,750

M8−5 July 480 x 10 4,800 300 (300) 4,800 x $ 1.50 $ 7,200

Production Material required per unit Material required for production Ending raw materials inventory Beginning raw materials inventory Materials purchases Average cost per foot Budgeted raw materials purchases

August 400 x 10 4,000 300 (300) 4,000 x $ 1.50 $ 6,000

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Chapter 08 - Budgetary Planning

M8−6 July Production Average direct labor hours per unit Total direct labor hours required Average hourly labor rate Budgeted direct labor cost

480 x 1.75 840 x $ 9.00 $ 7,560

August 400 x 1.75 700 x $ 9.00 $ 6,300

M8−7 1st Quarter $ 200,000 x 19% 38,000 46,500 $ 84,500

Sales Variable overhead rate Variable manufacturing overhead Fixed overhead Budgeted manufacturing overhead

2nd Quarter $ 236,000 x 19% 44,840 46,500 $ 91,340

M8−8 Sales Variable selling and administrative rate Variable selling and administrative expenses Fixed selling and administrative expenses Budgeted selling and administrative expenses

January $ 87,000 x 8% 6,960 11,000 $ 17,960

February $ 81,000 x 8% 6,480 11,000 $ 17,480

March $ 92,000 x 8% 7,360 11,000 $ 18,360

February $235,000

March $298,000

$ 82,250

$104,300

91,650 52,000 $225,900

116,220 61,100 $281,620

M8-9 Budgeted sales revenue (given) Cash sales (35% of budgeted sales revenue)

Credit collections (65% of budgeted sales revenue): 60% during month of sale 40% in month following sale

Budgeted cash receipts

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Chapter 08 - Budgetary Planning

M8-10

Budgeted sales revenue (given) Cash sales 20% of budgeted sales revenue Credit collections (80% of sales) 50% during month of sale 50% during month following sale Budgeted cash receipts

January $450,000

February $510,000

March $530,000

90,000

102,000

106,000

180,000 304,000* $574,000

204,000 180,000 $486,000

212,000 204,000 $522,000

* December sales $760,000 x 80% x 50% = $304,000 M8−11 Unit sales Ending inventory (30% of April sales of 900) Beginning inventory (30% of March sales of 1,300) Purchases (units) Cost per unit Total purchases

March 1,300 270 (390) 1,180 x $ 40 $47,200

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Chapter 08 - Budgetary Planning

ANSWERS TO EXERCISES E8-1 Req. 1 If Samantha knows that Leslie will automatically increase the estimate she gives her, then she has a motivation to underestimate her budget. Additionally, the fact that Samantha’s bonus is tied to her ability to “beat” the budget gives her incentive to underestimate production because this will increase her chances of receiving a bonus. Req. 2 Budgeted production is used to make raw material purchases, inventory storage, and labor staffing decisions. If Samantha’s underestimated production numbers are used, the Purchasing Manager and Human Resources Director will both be impacted. As a result, they may not have enough resources on hand at the time they are needed which could result in increased costs or a necessary reduction in production levels. E8-2 1. Master budget 2. Operating budgets 3. Participative; Top-down 4. Budgetary slack 5. Controlling 6. Sales forecast 7. Budgeted income statement 8. Rolling budget 9. Budgeted balance sheet 10. Production budget E8−3 Likely Order of Preparation 9* 7* 5* 3* 10 1 4* 8 6* 2

Budget Cash receipts and payments budget. Selling and administrative expense budget. Manufacturing overhead budget. Raw materials purchases budget. Budgeted balance sheet. Sales budget. Direct labor budget. Budgeted income statement. Budgeted cost of goods sold. Production budget.

*Order shown is the order presented in the book. Some budgets are independent of others and could be prepared in slightly different order. 8-8 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 08 - Budgetary Planning

All of the budgets above would be overstated if the sales forecast were overstated. E8−4 Shaded answers are provided below: Production 550 930 750 900 805 845

Ending Inventory 125 90 120 85 225 290

Sales 500 965 710 1,200 740 795

Beginning Inventory 75 125 80 385 160 240

E8−5 Req. 1 Sales (units) Price per unit Budgeted total sales

May 600 x $ 18 $10,800

June 800 x $ 18 $14,400

May 600 50 (75) 575

June 800 60 (50) 810

Req. 2 Sales Ending inventory Beginning inventory Budgeted production (units)

E8−6 Req. 1 Production x Closures required per unit Total closures required for production + Ending Inventory - Beginning Inventory Budgeted purchases x Cost per closure Budgeted cost of closures purchased

May 575 x 1 575 20 (30) 565 x $1.50 $ 847.50

Req. 2 Production (units) x Variable overhead rate Budgeted variable overhead + Budgeted fixed overhead Budgeted manufacturing overhead

575 x $ 1.25 718.75 1,000.00 $1,718.75

June 810 x 1 810 25 (20) 815 x $1.50 $1,222.50

810 x $ 1.25 1,012.50 1,000.00 $2,012.50

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Chapter 08 - Budgetary Planning

E8-7 May 575 x 0.3 172.50 x $ 9.00 $ 1,552.50

Production Average direct labor hours per unit Total direct labor hours required Average hourly labor rate Budgeted direct labor cost

June 810 x 0.3 243 x $ 9.00 $2,187.00

E8-8 Req. 1 Budgeted manufacturing cost per unit Direct materials Total direct labor (.30 hrs each X $9.00 per hour) Variable manufacturing overhead ($1.25 per unit) Fixed manufacturing overhead (given as $2.00 per unit) Manufacturing cost per unit

Cost Per Unit $ 4.00 2.70 1.25 2.00 $ 9.95

Req. 2 Shadee Corp. Cost of Goods Sold Budget

Budgeted sales (units) Budgeted manufacturing cost per unit Budgeted cost of goods sold

x $

May 600 $9.95 5,970

x $

June 800 $9.95 7,960

E8-9 May $10,800 x 6% 648 1,200 $ 1,848

Sales Variable selling and administrative rate Variable selling and administrative expenses Fixed selling and administrative expenses Budgeted selling and administrative expenses

June $14,400 x 6% 864 1,200 $ 2,064

E8-10 Shadee Corp. Budgeted Income Statement May $ 10,800 5,970 $ 4,830

Budgeted Sales Less: Cost of goods sold Budgeted gross margin Less: Budgeted selling and administrative

June $ 14,400 7,960 $ 6,440 2,064

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Chapter 08 - Budgetary Planning

expenses Budgeted net operating income

$

1,848 2,982

$

4,376

E8−11 July 625 x $ 18 $11,250

Sales (units) x Unit sales price Budgeted sales revenue

Cash sales (60% of budgeted sales revenue) Credit collections (40% of budgeted sales revenue) 50% during month of sale (40% x 50% x current month budgeted sales) 45% in month following sales (40% x 45% x previous month budgeted sales)

Budgeted cash collections *Rounded

August 490 x $ 18 $ 8,820

September 450 x $ 18 $ 8,100

August $5,292

September $ 4,860

1,764

1,620

2,025 $ 9,081

1,588* $ 8,068

E8-12 Req. 1 Sales + Ending inventory (60% of next month sales) - Beginning inventory Budgeted production (units)

April 3,850 2,325

May 3,875 2,556

June 4,260 2,481

July 4,135 2,154

2,310 3,865

2,325 4,106

2,556 4,185

2,481 3,808

Req. 2 Production x Pounds required per unit Total pounds required for production + Ending Inventory (50% of next month needs) - Beginning Inventory Budgeted purchases x Cost per pound Budgeted cost of material purchased

April 3,865 x 2 7,730 4,106 3,865 7,971 x $ 3.10 $ 24,710.10

May 4,106 x2 8,212

June 4,185 x 2 8,370

4,185 3,808 4,106 4,185 8,291 7,993 x $ 3.10 x $ 3.10 $ 25,702.10 $24,778.30

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Chapter 08 - Budgetary Planning

E8-13 Strike Model Production Average direct labor hours per unit Total direct labor hours required for Strike Turkey Model Production Average direct labor hours per unit Total direct labor hours required for Turkey

Total direct labor hours required (for both models) Average hourly labor rate Budgeted October direct labor cost for Alleyway

Cutting 2,500 x 0.1 250

Sewing 2,500 x 0.3 750

3,250 x 0.2 650

3,250 x 0.5 1,625

900 x $ 15.00 $ 13,500

2,375 x $ 12.00 $28,500

E8−14 Budgeted sales (units) Price per unit Budgeted sales revenue

November 3,100 x $ 95 $294,500

December 3,600 x $ 95 $342,000

$ 32,395

$ 37,620

15,800 $ 48,195

15,800 $ 53,420

Variable selling & administrative expenses (11% of sales revenue)

Fixed selling and administrative expenses ($5,000 + $2,500 + $2,500 + $3,500 + $1,500 + $800)

Total budgeted selling and administrative expenses E8-15 Req. 1 Budgeted Manufacturing Costs Direct materials (2 pounds x $2.00 per pound) Direct labor (1.5 hours x $15.00 per hour) Manufacturing overhead Budgeted manufacturing cost per unit Budgeted unit sales Budgeted cost of goods sold

Per Unit $ 4.00 22.50 3.00 $ 29.50 15,000 $442,500

Req. 2 Budgeted sales revenue (15,000 x $41.00) Less: Budgeted cost of goods sold (15,000 x $29.50) Budgeted gross margin Less: Budgeted selling and administrative expenses Budgeted net operating income

$615,000 - 442,500 172,500 (135,870) $ 36,630

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Chapter 08 - Budgetary Planning

E8−16 Cash receipts from customers

March $ 36,450

Cash paid to suppliers Cash paid for manufacturing overhead ($6,100 - $1,200 depreciation) Cash paid for direct labor Cash paid for selling and administrative expenses Cash paid for equipment Budgeted cash payments

$ 22,300 4,900 8,250 4,200 7,000 $ 46,650

Beginning cash balance + Budgeted cash receipts - Budgeted cash payments Preliminary cash balance Cash borrowed ($10,000 – 6,120 = $3,880 needed ~ $4,000 loan) Ending cash balance

$ 16,320 36,450 - 46,650 $ 6,120 4,000 $ 10,120

E8−17

Budgeted sales revenue (given) Cash sales

July $25,000

(60% of budgeted sales revenue)

August $23,000 Calculation $13,800.00 (23,000 x .60)

Credit collections (40% of budgeted sales revenue): 60% during month of sale 40% in month following sale

5,520.00 (23,000 x .40 x .60) 4,000.00 (25,000 x .40 x .40) $23,320.00

Budgeted cash receipts

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Chapter 08 - Budgetary Planning

E8-18 Req. 1 Sales revenue Cash sales (70% of budgeted sales revenue) Credit collections (30% of budgeted sales revenue) 40% during month of sale (30% x 40% x current month budgeted sales) 60% in month following sales (30% x 60% x previous month budgeted sales)

Budgeted cash collections

July $160,000 $112,000

August $145,000 $101,500

19,200

17,400

20,700* $151,900

28,800 $ 147,700

July $150,000

August $ 80,000

82,500

44,000

42,750** 38,250

67,500 34,700

$ 163,500

$146,200

* $115,000 x 30% = $34,500; $34,500 x 60% = $20,700 Req. 2 Purchases (All on account) Cash disbursements: Credit purchases paid in month of purchase (55%) Credit purchases paid in month following purchase (45%) Cash paid for operating expenses

Budgeted cash payments ** $95,000 x 45% = $42,750 E 8-19

Sales Budgeted cost of goods sold (40% sales) Add: Desired ending inventory Total inventory required Less: Beginning inventory Required purchases

January $400,000 160,000

February March $480,000 $640,000 192,000 256,000

48,000 $208,000 40,000 $168,000

64,000 68,000* $256,000 $324,000 48,000 64,000 $208,000 $260,000

* $680,000 x 40% = $272,000 (April budgeted COGS) x 25% = $68,000

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Chapter 08 - Budgetary Planning

E8-20

Req. 1 Sales Budgeted cost of goods sold (30% sales) Add: Desired ending inventory Total inventory required Less: Beginning inventory Required purchases

April $220,000 66,000 11,400 $77,400 13,200 $64,200

May June $190,000 $310,000 57,000 93,000 18,600 $75,600 11,400 $64,200

5,400* $98,400 18,600 $79,800

* $90,000 x 30% = $27,000 (August budgeted COGS) x 20% = $5,400

Req. 2 Budgeted sales Budgeted cost of goods sold Budgeted gross margin Less: Budgeted selling and administrative expenses* Budgeted net operating income

Citrus Girl Company Budgeted Income Statement For the Month Ending April 30 May 31 June 30 $220,000 $190,000 $310,000 66,000 57,000 93,000 $154,000 $133,000 $217,000 44,535 43,335 48,135 $109,465

$89,665 $168,865

* For each month total of salaries $30,000, delivery expense 4% of monthly sales, rent expense on the warehouse $4,500, utilities $800, insurance $175, and other expenses $260.

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Chapter 08 - Budgetary Planning

E8-21 Budgeted cash collections: Req. 1 June Sales $24,000 Cash collected in month of sale (60%) 14,400 Cash collected in month following sale (35%) 7,700 nd Cash collected in 2 month following sale (5%) 800 Total cash receipts $22,900

July $36,000

August $38,000

21,600

22,800

8,400

12,600

1,100 $31,100

1,200 $36,600

June $9,000

July $17,000

August $12,000

4,500

8,500

6,000

2,500* $7,000

4,500 $13,000

8,500 $14,500

Budgeted cash payments: Purchases Cash paid in month of purchase (50%) Cash paid in month following purchase (50%) Total cash payments May purchases $5,000 x 50% Req. 2 Balances for August 31 budgeted balance sheet Cash June 1 balance Add: Total cash receipts Less: Total cash payments August 31 balance

$14,600 90,600 34,500 $70,700

Supplies Inventory 15% of August purchases

$1,800

Accounts Receivable 40% of August sales 5% of July sales Balance at August 31

$15,200 1,800 $17,000

Accounts Payable 50% of August purchases

$6,000 8-16

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Chapter 08 - Budgetary Planning

GROUP A PROBLEMS PA8−1 Req. 1 Budgeted sales (units) x Unit sales price Budgeted sales revenue

May 300 x $ 25 $ 7,500

June 400 x $ 25 $10,000

2nd Quarter 950 x $ 25 $23,750

April 250

May 300

June 400

2nd Quarter 950

120

160

150

150

- 100 270

- 120 340

- 160 390

- 100 1,000

April 270 x 4 1,080

May 340 x 4 1,360

June 390 x 4 1,560

408

468

474*

474

- 324 1,164 x $ 2.00 $ 2,328

- 408 1,420 x $ 2.00 $ 2,840

- 468 1,566 x $ 2.00 $ 3,132

- 324 4,150 x $ 2.00 $ 8,300

April 250 x $ 25 $ 6,250

Req. 2 Budgeted sales (units) +Ending finished goods inventory (40% of next month’s budgeted sales)

- Beginning finished goods inventory (40% of current month’s budgeted sales)

Budgeted production Req. 3 Budgeted production x Material requirements per unit Total material needed for production + Ending raw materials inventory (30% of next month’s production needs)

2nd Quarter 1,000 x 4 4,000

- Beginning raw materials inventory (30% of current month production needs)

Budgeted raw materials purchases x Material cost per foot Budgeted cost of raw material purchases

*July budgeted production = 375 + (.40 x 425) – (.40 x 375) = 395 June raw materials ending inventory = 395 x 4 = 1,580 x 30% = 474 Req. 4 Budgeted production x Direct labor requirements per unit Direct labor hours required x Direct labor rate Budgeted direct labor cost Req. 5 Budgeted production x Variable manufacturing overhead rate Budgeted variable manufacturing + Fixed manufacturing overhead Budgeted manufacturing overhead

April 270 x .5 135 x $ 12 $ 1,620

May 340 x .5 170 x $ 12 $ 2,040

June 390 x .5 195 x $ 12 $ 2,340

2nd Quarter 1,000 x .5 500 x $ 12 $ 6,000

April 270 x $0.30 81.00 600.00 $ 681.00

May 340 x $0.30 102.00 600.00 $ 702.00

June 390 x $0.30 117.00 600.00 $ 717.00

2nd Quarter 1000 x $0.30 300.00 1,800.00 $ 2,100.00

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Chapter 08 - Budgetary Planning

PA8−1 (Continued) Req. 6 Budgeted Manufacturing Costs Direct materials (4 ft x $2.00 per ft) Direct labor (.5 hours x $12 per hour) Variable manufacturing overhead Fixed manufacturing overhead ($7,200 / 4,000 units) Budgeted manufacturing cost per unit

Budgeted sales x Budgeted manufacturing cost per unit Budgeted cost of goods sold

Per Unit $ 8.00 6.00 0.30 1.80 $ 16.10

April May June 250 300 400 x $16.10 x $16.10 x $16.10 $4,025.00 $4,830.00 $6,440.00

Req. 7 Budgeted sales (units) x Variable selling and administrative rate Budgeted variable selling and adm. expenses + Budgeted fixed selling and adm. expenses Total budgeted selling and adm. expenses

April 250 x $.60 150 650 $ 800

May 300 x $.60 180 650 $ 830

June 400 x $.60 240 650 $ 890

2nd Quarter 950 x $16.10 $15,295.00 2nd Qtr 950 x $.60 570 1,950 $ 2,520

PA8−2

Budgeted sales revenue Less: Budgeted cost of goods sold Budgeted gross margin Less: Budgeted selling and administrative expenses Budgeted net operating income

April $6,250.00 - 4,025.00 2,225.00

May June $7,500.00 $10,000.00 - 4,830.00 - 6,440.00 2,670.00 3,560.00

(800.00) $1,425.00

(830.00) $1,840.00

(890.00) $2,670.00

2nd Quarter $23,750.00 - 15,295.00 8,455.00 (2,520.00) $ 5,935.00

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Chapter 08 - Budgetary Planning

PA8−3 Req. 1 Budgeted sales revenue (from Req. 1 of PA 8-1) Cash collections

April $ 6,250

May $ 7,500

June $10,000

2nd Quarter $23,750

(80% of budgeted sales)

$ 5,000

$ 6,000

$ 8,000

$ 19,000

625

750

1,000

2,375

625 $7,375

750 $9,750

2,063 $23,438

Credit collections (20% of budgeted sales) 50% collected in month of sale (20% x 50% x current month sales) 50% collected in month following sale (20% x 50% x previous month sales)

688* $6,313

Budgeted cash receipts

*Credit collections from March sales = 275 units x $25 = $6,875 x 20% x 50% = $687.50 (rounded to $688)

Req. 2 Budgeted raw materials purchases (from PA 8-1 Req. 3) Cash disbursements: Raw material purchases

April $ 2,328

80% paid in the month of purchase (Current month purchases x .80) 20% paid in the following month (Prior month purchases x .20)

$1,862.40 400.00*

June $ 3,132

2nd Quarter $ 8,300

$2,272.00 $2,505.60

$6,640.00

May $ 2,840

465.60

568.00

1,433.60

1,620.00

2,040.00

2,340.00

6,000.00

681.00 - 150.00

702.00 - 150.00

717.00 - 150.00

2,100.00 - 450.00

830.00 -

890.00 -

2,520.00 3,000.00

$6,159.60 $6,870.60

$21,243.60

Direct labor (from PA 8-1 Req. 4)

Manufacturing overhead (from PA 8-1 Req. 5)

Less: Depreciation (given) Selling and administrative expenses (from PA 8-1 Req. 7)

800.00 3,000.00

Purchase of Equipment Total budgeted cash payments

$8,213.40

*March purchases given at $2,000 x 20% = $400

Req. 3 Beginning cash balance Plus: Budgeted cash receipts Less: Budgeted cash payments Preliminary cash balance Cash borrowed/Repaid Ending cash balance

April May June $ 10,800.00 $10,899.10 $10,114.50 6,312.50 7,375.00 9,750.00 - 8,213.40 - 6,159.60 - 6,870.60 $8,899.10 $12,114.50 $12,993.90 2,000.00 (2,000,00) 10,899.10 10,114.50 $12,993.90

2nd Quarter $10,800.00 23,437.50 - 21,243.60 $12,993.90 $12,993.90

8-19 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 08 - Budgetary Planning

PA8−4 Req. 1 Sales (units) x Unit sales price Budgeted Sales

Req. 2 Sales (units) + Ending finished goods inventory

January 2,000 x $ 44 $ 88,000

February 2,200 x $ 44 $ 96,800

March 2,700 x $ 44 $ 118,800

1st Quarter 6,900 x $ 44 $ 303,600

January 2,000

February 2,200

March 2,700

1st Quarter 6,900

660

810

750

750

- 600 2,060

- 660 2,350

- 810 2,640

- 600 7,050

(30% of next month’s sales)

- Beginning finished goods inventory (30% of current month’s sales)

Budgeted production

Req. 3 Budgeted production

X Material requirements per unit Total material required for production + Ending raw materials (25% of following month’s production needs) - Beginning raw materials (25% of current month’s production needs)

Budgeted raw material purchases X Material cost per housing Budgeted cost of raw material purchases

January 2,060 x 1 2,060

February 2,350 x 1 2,350

March 2,640 x 1 2,640

1st Quarter 7,050 x 1 7,050

588**

660

580*

580

- 515 2,133 x $7.00

- 588 2,422 x $7.00

- 660 2,560 x $7.00

- 515 7,115 x $7.00

$14,931

$ 16,954

$ 17,920

$49,805

January February March 2,060 2,350 2,640 x .75 x .75 x .75 1,545.00 1,762.50 1,980.00 x $18.00 x $18.00 x $18.00 $27,810.00 $31,725.00 $35,640.00

1st Quarter 7,050 x .75 5,287.50 x $18.00 $95,175.00

* April production = 2,500 + (1,900 x .30) – (2,500 x .30) = 2,320 March ending raw materials inventory = 2,320 x 1 x .25 = 580 **Rounded Req. 4 Budgeted production

x Direct labor hours per unit Direct labor requirements x Average labor rate Budgeted direct labor cost

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Chapter 08 - Budgetary Planning

PA8−5 Req. 1 Budgeted Manufacturing Costs Direct materials ($7 + $4.50) Direct labor (.75 hrs x $18.00) Variable manufacturing overhead Fixed manufacturing overhead ($72,000 / 27,000 units) Total budgeted mfg cost per unit

Sales (units) x Budgeted manufacturing cost per unit Budgeted cost of goods sold* *Rounded

January 2,000 x $28.87 $ 57,733

Per Unit $11.50 13.50 1.20 2.67 $28.87 February 2,200 x $28.87 $ 63,507

March 2,700 x $28.87 $ 77,940

1st Quarter 6,900 x $28.87 $ 199,180

Req. 2 Budgeted sales revenue x Variable selling and administrative rate (7% of budgeted sales revenue) Variable selling and adm. expenses + Fixed selling and adm. expenses Budgeted selling and adm. expenses

January $ 88,000

February $ 96,800

March $ 118,800

1st Quarter $ 303,600

x 7% 6,160 18,000 $24,160

x 7% 6,776 18,000 $24,776

x 7% 8,316 18,000 $26,316

x 7% 21,252 54,000 $75,252

Req. 3 Budgeted sales revenue Budgeted cost of goods sold Budgeted gross profit Budgeted selling and adm. expenses Budgeted net operating income

January $ 88,000 57,733 30,267 24,160 $ 6,107

February $ 96,800 63,507 33,293 24,776 $ 8,517

March $118,800 77,940 40,860 26,316 $ 14,544

1st Quarter $ 303,600 199,180 104,420 75,252 $ 29,168

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Chapter 08 - Budgetary Planning

PA8-6 Budgeted unit sales

Quarter 1 40,000

Quarter 2 60,000

Quarter 3 30,000

Budgeted sales price

$

$

$

Budgeted sales revenue

$ 600,000

$ 900,000

$ 450,000

Merchandise Purchases Budget Budgeted unit sales Plus: Planned ending inventory (25% of next quarter sales) Less: Planned beginning inventory (25% of current quarter sales) Budgeted purchases (units) Cost of merchandise Total cost of merchandise purchased

Quarter 1 40,000

Quarter 2 60,000

Quarter 3 30,000

15,000

7,500

15,000

(10,000)

(15,000)

(7,500)

45,000

52,500

37,500

$

15.00

6.00

$

15.00

6.00

$

Quarter 4 60,000

15.00

Quarter 4 60,000

6.00

$ 270,000

$ 315,000

$ 225,000

Cost of Goods Sold Budget Budgeted unit sales

Quarter 1 40,000

Quarter 2 60,000

Quarter 3 30,000

Budgeted cost of merchandise

$

$

$

Budgeted cost of goods sold

$ 240,000

$ 360,000

$ 180,000

Selling and Administrative Expense Budget Budgeted sales revenue Variable Selling Expenses Fixed Administrative Expenses Budgeted Selling and Adm. Expenses

Quarter 1 $ 600,000 $ 60,000 $ 80,000 $ 140,000

Quarter 2 $ 900,000 $ 90,000 $ 80,000 $ 170,000

Quarter 3 $ 450,000 $ 45,000 $ 80,000 $ 125,000

Quarter 4

Budgeted Income Statement Budgeted sales revenue

Quarter 1 $ 600,000

Quarter 2 $ 900,000

Quarter 3 $ 450,000

Quarter 4

Less: Budgeted cost of goods sold Budgeted gross margin

240,000 $ 360,000

360,000 $ 540,000

180,000 $ 270,000

140,000

170,000

125,000

$ 220,000

$ 370,000

$ 145,000

Less: Budgeted selling and adm. expenses Budgeted net operating income

6.00

6.00

Quarter 4 60,000

6.00

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Chapter 08 - Budgetary Planning

GROUP B PROBLEMS PB8−1 Req. 1 Budgeted sales (units) x Unit sales price Budgeted sales revenue

May 650 x $ 20 $13,000

June 720 x $ 20 $14,400

2nd Quarter 2,070 x $ 20 $41,400

April 700 195

May 650 216

June 720 249

2nd Quarter 2,070 249

- 210 685

- 195 671

- 216 753

- 210 2,109

April 685 x 2 1,370.00

May 671 x 2 1,342.00

June 753 x 2 1,506.00

268.40

301.20

- 274.00 1,364.40 x $ 0.60 $ 818.64

- 268.40 1,374.80 x $ 0.60 $ 824.88

April 700 x $ 20 $14,000

Req. 2 Budgeted sales (units) + Ending finished goods inventory (30% of next month’s budgeted sales)

- Beginning finished goods inventory (30% of current month’s budgeted sales)

Budgeted production

Req. 3 Budgeted Production x Material requirements per unit Total material needed for production + Ending raw materials inventory (20% of next month’s production needs)

323.60*

2nd Quarter 2,109 x 2 4,218.00 323.60

- Beginning raw materials inventory (20% of current month production needs)

Budgeted raw materials purchases x Material cost per yard Budgeted cost of raw materials purchases

- 301.20 1,528.40 x $ 0.60 $ 917.04

- 274.00 4,267.60 x $ 0.60 $ 2,560.56

*July production = 830 + (.30 x 760) – (.30 x 830) = 809 June ending raw materials inventory = 809 x 2 = 1,618 x 20% = 323.60 June 753 x .50 376.50 x $ 8.00 $ 3,012

2nd Quarter 2,109 x .50 1,054.50 x $ 8.00 $ 8,436

April May June 685 671 753 x $0.40 x $0.40 x $0.40 274.00 268.40 301.20 750.00 750.00 750.00 $1,024.00 $1,018.40 $1,051.20

2nd Quarter 2,109 x $0.40 843.60 2,250.00 $ 3,093.60

Req. 4 Budgeted production x Direct labor requirements per unit Direct labor hours required x Direct labor rate Budgeted direct labor cost Req. 5 Budgeted production x Variable manufacturing overhead rate Budgeted variable manufacturing + Fixed manufacturing overhead Budgeted manufacturing overhead

April 685 x .50 342.50 x $ 8.00 $ 2,740

May 671 x .50 335.50 x $ 8.00 $ 2,684

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Chapter 08 - Budgetary Planning

PB8−1 (Continued) Req. 6 Budgeted Manufacturing Costs Direct materials (2 yards x $0.60 per yard) Direct labor (.50 hours x $8 per hour) Variable manufacturing overhead Fixed manufacturing overhead ($9,000 / 9,000 units) Budgeted manufacturing cost per unit

Budgeted sales x Budgeted manufacturing cost per unit Budgeted cost of goods sold Req. 7 Budgeted sales (units) x Variable selling and administrative rate ($.75 per unit sold) Budgeted variable selling and administrative expenses + Budgeted fixed selling and administrative expenses (given) Budgeted selling and administrative expenses

Per Unit $ 1.20 4.00 0.40 1.00 $ 6.60

April May June 700 650 720 x $6.60 x $6.60 x $6.60 $4,620.00 $4,290.00 $4,752.00

2nd Quarter 2,070 x $6.60 $13,662.00

April 700

May 650

June 720

2nd Qtr 2,070

x $.75

x $.75

x $.75

x $.75

525.00

487.50

540.00

1, 552.50

820.00

820.00

820.00

2,460.00

$1,345.00 $1,307.50 $1,360.00

$4,012.50

8-24 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 08 - Budgetary Planning

PB8−2

Budgeted sales revenue Less: Budgeted cost of goods sold Budgeted gross margin Less: Budgeted selling and administrative expenses Budgeted net operating income

April May June $14,000.00 $13,000.00 $14,400.00 4,620.00 4,290.00 4,752.00 9,380.00 8,710.00 9,648.00

2nd Quarter $ 41,400.00 13,662.00 27,738.00

1,345.00 $ 8,035.00

4,012.50 $ 23,725.50

1,307.50 1,360.00 $ 7,402.50 $ 8,288.00

PB8−3 Req. 1 Budgeted sales revenue (from Req. 1 of PB 8-1)

April $ 14,000

May $13,000

June $ 14,400

2nd Quarter $ 41,400

$ 8,400

$ 7,800

$ 8,640

$ 24,840

2,800

2,600

2,880

8,280

2,800 $13,200

2,600 $14,120

8,800 $41,920

Cash collections (60% of budgeted sales) Credit collections (40% of budgeted sales) 50% collected in month of sale (40% x 50% x current month sales) 50% collected in month following sale (40% x 50% x previous month sales)

Budgeted cash receipts

3,400* $14,600

*Credit collections from March sales = 850 units x $20 = $17,000 x 40% x 50% = $3,400 Req. 2 Budgeted raw material purchases (from PB 8-1 Req. 3) Cash disbursements: Raw material purchases

April $ 818.64

May $ 824.88

June $ 917.04

2nd Quarter $ 2,560.56

$ 491.18

$ 494.93

$550.22

$1,536.34

320.00*

327.46

329.95

977.41

2,740.00

2,684.00

3,012.00

8,436.00

1,024.00 - 280.00

1,018.40 - 280.00

1,051.20 - 280.00

3,093.60 - 840.00

1,345.00 15,000.00

1,307.50 -

1,360.00 -

4,012.50 15,000.00

$20,640.18 $5,552.29 $6,023.37

$32,215.85

60% paid in the month of purchase (Current month purchases x .60) 40% paid in the following month (Prior month purchases x .40)

Direct labor (from PB 8-1 Req. 4)

Manufacturing overhead (from PB 8-1 Req. 5)

Less: Depreciation (given) Selling and administrative expenses (from PB 8-1 Req. 7)

Cash paid for equipment Total budgeted cash payments

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Chapter 08 - Budgetary Planning

*March purchases given at $800 x 40% = $320 Req. 3 Beginning cash balance Plus: Budgeted cash receipts Less: Budgeted cash payments Preliminary cash balance Cash borrowed (repaid) Ending cash balance

April $12,200.00 14,600.00 (20,640.18) $6,159.82 $4,000.00 $10,159.82

May June $10,159.82 $13,807.53 13,200.00 14,120.00 (5,552.29) (6,023.37) $17,807.53 $21,904.16 $(4,000.00) $13,807.53 $21,904.16

2nd Quarter $12,200.00 41,920.00 (32,215.84) $21,904.16 $21,904.16

PB8−4 Req. 1 Sales (units) x Unit sales price Budgeted Sales

Req. 2 Sales (units) + Ending finished goods inventory

January 8,000 x $ 30 $240,000

February 7,400 x $ 30 $222,000

March 8,700 x $ 30 $261,000

1st Quarter 24,100 x $ 30 $723,000

January 8,000

February 7,400

March 8,700

1st Quarter 24,100

1,850

2,175

2,375

2,375

- 2,000 7,850

- 1,850 7,725

- 2,175 8,900

- 2,000 24,475

March 8,900 x 1 8,900

1st Quarter 24,475 x 1 24,475

(25% of next month’s sales)

- Beginning finished goods inventory (25% of current month’s sales)

Budgeted production

Req. 3 Budgeted Production

x Material requirements per unit Total material required for production + Ending raw materials (30% of following month’s production needs) - Beginning raw materials (30% of current month’s production needs)

Budgeted raw material purchases x Cost per heating element Budgeted raw material cost

January 7,850 x 1 7,850

February 7,725 x 1 7,725

2,318**

2,670

- 2,355 - 2,318 7,813 8,077 x $1.25 x $1.25 $ 9,766 $10,096.25

2,824* - 2,670 9,054 x $1.25 $11,317.50

2,824 - 2,355 24,944 x $1.25 $ 31,180.00

* April production = 9,500 + (.25 x 9,150) – (.25 x 9,500) = 9,413 (rounded) March ending raw materials inventory = 9,413 x 1 x 30% = $2,824 (rounded) ** Rounded

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Chapter 08 - Budgetary Planning

Req. 4 Budgeted production

x Direct labor hours per unit Direct labor requirements x Average labor rate Budgeted direct labor cost

January February March 7,850 7,725 8,900 x .5 x .5 X .5 3,925 3,862.50 4,450 x $18.00 x $18.00 x $18.00 $70,650.00 $69,525.00 $80,100.00

1st Quarter 24,475 x .5 12,237.50 x $18.00 $220,275.00

PB8−5 Req. 1 Budgeted Manufacturing Costs Direct materials ($3.25 + 1.25) Direct labor (.5 hrs x $18.00) Variable manufacturing overhead Fixed manufacturing overhead ($96,900 / 102,000 units) Total budgeted mfg cost per unit

Sales (units) x Budgeted manufacturing cost per unit Budgeted cost of goods sold

January 8,000 x $15.45 $123,600

Per Unit $ 4.50 9.00 1.00 0.95 $15.45

February 7,400 x $15.45 $114,330

March 8,700 x $15.45 $134,415

1st Quarter 24,100 x $15.45 $372,345

Req. 2 Budgeted sales revenue x Variable selling and administrative rate (5% of budgeted sales revenue) Variable selling and administrative expenses + Fixed selling and administrative expenses ($17,500) Budgeted selling and administrative expenses

January $240,000

February $222,000

March $261,000

1st Quarter $723,000

x 5%

x 5%

x 5%

x 5%

12,000

11,100

13,050

36,150

17,500

17,500

17,500

52,500

$ 29,500

$ 28,600

$ 30,550

$ 88,650

Req. 3 Budgeted sales revenue Budgeted cost of goods sold Budgeted gross profit Budgeted selling and administrative expenses Budgeted net operating income

January $240,000 123,600 116,400

February $222,000 114,330 107,670

March $261,000 134,415 126,585

1st Quarter $723,000 372,345 350,655

29,500 $ 86,900

28,600 $ 79,070

30,550 $ 96,035

88,650 $262,005

8-27 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 08 - Budgetary Planning

PB8-6 Budgeted unit sales

Quarter 1 50,000

Quarter 2 70,000

Quarter 3 45,000

Budgeted sales price

$

$

$

Budgeted sales revenue Merchandise Purchases Budget Budgeted unit sales Plus: Planned ending inventory (30% of next quarter sales) Less: Planned beginning inventory (30% of current quarter sales) Budgeted purchases (units) Cost of merchandise Total cost of merchandise purchased

20.00

20.00

20.00

$ 1,000,000

$ 1,400,000

$ 900,000

Quarter 1 50,000

Quarter 2 70,000

Quarter 3 45,000

21,000

13,500

19,500

(15,000)

(21,000)

(13,500)

56,000

62,500

51,000

$

8.00

$

8.00

$

Quarter 4 65,000

Quarter 4 65,000

8.00

$ 448,000

$ 500,000

$ 408,000

Cost of Goods Sold Budget Budgeted unit sales

Quarter 1 50,000

Quarter 2 70,000

Quarter 3 45,000

Budgeted cost of merchandise

$

$

$

Budgeted cost of goods sold

$ 400,000

$ 560,000

$ 360,000

Selling and Administrative Expense Budget Budgeted sales revenue Variable selling expenses Fixed administrative expenses Budgeted selling and adm. expenses

Quarter 1 $ 1,000,000 $ 150,000 $ 60,000 $ 210,000

Quarter 2 $ 1,400,000 $ 210,000 $ 60,000 $ 270,000

Quarter 3 $ 900,000 $ 135,000 $ 60,000 $ 195,000

Quarter 4

Budgeted Income Statement Budgeted sales revenue

Quarter 1 $ 1,000,000

Quarter 2 $ 1,400,000

Quarter 3 $ 900,000

Quarter 4

Less: Budgeted cost of goods sold Budgeted gross margin

400,000 $ 600,000

560,000 840,000

360,000 $ 540,000

210,000

270,000

195,000

$ 390,000

$ 570,000

$ 345,000

Less: Budgeted selling and adm. expenses Budgeted net operating income

8.00

$

8.00

Quarter 4 65,000

8.00

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Chapter 08 - Budgetary Planning

ANSWERS TO SKILLS DEVELOPMENT CASES

S8−1 Student answers to this case will vary depending on the size and type of organization they choose to investigate. It is important that students examine the process from multiple perspectives and attempt to balance any dissatisfaction with the needs of other individuals and of the organization as a whole. Also, any recommendations should be considered from other perspectives and not just from the perspective of a single dissatisfied party. For example, a student who recommends a participative budgeting process be implemented should also consider any consequences that might result from this change.

S8−2 This case offers a chance for considerable in-class discussion and is an opportunity for instructors to pull a managerial accounting topic into students’ everyday lives. Other tools that could be introduced during discussion include estimates of the time it takes to pay off credit cards and calculating payment amounts in commonly-used software such as Microsoft Excel.

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