Chap009 Ma

CHAPTER 9
Profit Planning and Activity-Based Budgeting

ANSWERS TO REVIEW QUESTIONS
9-1 A budget facilitates communication and coordination by
making each manager throughout the organization aware
of the plans made by other managers. The budgeting
process pulls together the plans of each manager in the
organization.
9-2 An example of using the budget to allocate resources in a
university is found in the area of research funds and
grants. Universities typically have a limited amount of
research-support resources that must be allocated among
the various colleges and divisions within the university.
This allocation process often takes place within the
context of the budgeting process.
9-3 A master budget, or profit plan, is a comprehensive set of
budgets covering all phases of an organization's
operations for a specified period of time. The master
budget includes the following parts:
sales budget,
operational budgets (including a production budget,
inventory budgets, a labor budget, an overhead budget, a
selling and administrative expense budget, and a cash
budget), and budgeted financial statements (including a
budgeted income statement, budgeted balance sheet, and
budgeted statement of cash flows).
9-4 The flowchart on the following page depicts the
components of the master budget for a service station.
9-5 General economic trends are important in forecasting
sales in the airline industry. The overall health of the
economy is an important factor affecting the extent of
business travel. In addition, the health of the economy,
inflation, and income levels affect the extent to which the
general public travels by air.
McGraw-Hill/Irwin
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Managerial Accounting, 8/e
2009 The McGraw-Hill Companies,

9-1
9-6 Operational budgets specify how an organization's

operations will be carried out to meet the demand for its
goods and services. The operational budgets prepared in
a hospital would include a labor budget showing the
number of professional personnel of various types
required to carry out the hospital's mission, an overhead
budget listing planned expenditures for such costs as
utilities and maintenance, and a cash budget showing
planned cash receipts and disbursements.
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9-2

Solutions Manual
Flowchart for Review Question 9-4

Sales Budget:
Gasoline,
Related
Products, and
Services
Sales
Budget
Operati
onal
Budgets
Materials
Ending
Budget:
Inventory
Gasoline
Budget:
Gasoline and Related
Products
Labo
r
Budg
et
Overh
ead
Budge
t
Selling and
Administrat
ive Expense
Budget
Cash
Budget
Budgeted
Income
Statement
Budgete
d
Financia
l
Stateme
nts
McGraw-Hill/Irwin
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Budgeted
Balance
Sheet
Budgeted
Statement
of Cash
Flows

9-3
9.7 Application
of
activity-based
costing
to
the
budgeting process yields activity-based budgeting
(ABB).
Under ABB, the first step is to specify the
products or services to be produced and the customers
to be served. Then the activities necessary to produce
these products and services are determined. Finally
the resources needed to perform the specified
activities are determined. ABB differs from traditional
budgeting in the emphasis that it places on activities
and its use of activity-based costing data in the
budgeting process.
9.8 E-budgeting stands for an electronic and enterprisewide budgeting process.
Under this approach the
information needed to construct a budget is gathered
via the Internet from individuals and subunits located
throughout the enterprise. The Internet also is used to
disseminate the resulting budget schedules and
information to authorized users throughout the
enterprise.
9-9 The city of Boston could use budgeting for planning
purposes in many ways. For example, the city's personnel
budget would be important in planning for required
employees in the police and fire departments. The city's
capital budget would be used in planning for the
replacement
of
the
city's
vehicles,
computers,
administrative buildings, and traffic control equipment.
The city's cash budget would be important in planning for
cash receipts and disbursements. It is important for any
organization, including a municipal government, to make
sure that it has enough cash on hand to meet its cash
needs at all times.
9.10 The budget director, or chief budget officer, specifies
the process by which budget data will be gathered,
collects the information, and prepares the master
budget. To communicate budget procedures and
deadlines to employees throughout the organization,
the budget director often develops and disseminates a
budget manual.
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Solutions Manual
9-11 The budget manual says who is responsible for providing

various types of information, when the information is
required, and what form the information is to take. The
budget manual also states who should receive each
schedule when the master budget is complete.
9-12 A company's board of directors generally has final
approval over the master budget. By exercising its
authority to make changes in the budget and grant final
approval, the board of directors can wield considerable
influence on the overall direction the organization takes.
Since the budget is used as a resource-allocation
mechanism, the board of directors can emphasize some
programs and curtail or eliminate others by allocating
funds through the budgeting process.
McGraw-Hill/Irwin
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9-5
9-13 A master budget is based on many assumptions and

predictions of unknown parameters. For example, the
sales budget is built on an assumption about the nature
of demand for goods or services. The direct-material
budget requires an estimate of the direct-material price
and the quantity of material required per unit of
production. Many other assumptions are used throughout
the rest of the budgeting process.
9-14 The difference between the revenue or cost projection
that a person provides in the budgeting process and a
realistic estimate of the revenue or cost is called
budgetary slack. Building budgetary slack into the budget
is called padding the budget. A significant problem
caused by budgetary slack is that the budget ceases to be
an accurate portrayal of likely future events. Cost
estimates are often inflated, and revenue estimates are
often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-15 An organization can reduce the problem of budgetary
slack in several ways. First, it can avoid relying on the
budget as a negative, evaluative tool. Second, managers
can be given incentives not only to achieve budgetary
projections but also to provide accurate projections.
9-16 The idea of participative budgeting is to involve
employees throughout an organization in the budgetary
process. Such participation can give employees the
feeling that "this is our budget," rather than the feeling
that "this is the budget you imposed on us." When
employees feel that they were part of the budgeting
process, they are more likely to strive to achieve the
budget.
9-17 This comment is occasionally heard from people who have
started and run their own small business for a long period
of time. These individuals have great knowledge in their
minds about running their business. They feel that they
do not need to spend a great deal of time on the
budgeting process, because they can essentially run the
business by feel. This approach can result in several
problems. First, if the person who is running the business
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9-6

Solutions Manual
is sick or traveling, he or she is not available to make

decisions and implement plans that could have been
clarified by a budget. Second, the purposes of budgeting
are important to the effective running of an organization.
Budgets facilitate communication and coordination, are
useful in resource allocation, and help in evaluating
performance and providing incentives to employees. It is
difficult to achieve these benefits without a budgeting
process.
McGraw-Hill/Irwin
Inc.

9-7
9-18 In developing a budget to meet your college expenses,

the primary steps would be to project your cash receipts
and your cash disbursements. Your cash receipts could
come from such sources as summer jobs, jobs held during
the academic year, college funds saved by relatives or
friends for your benefit, scholarships, and financial aid
from your college or university. You would also need to
carefully project your college expenses. Your expenses
would include tuition, room and board, books and other
academic supplies, transportation, clothing and other
personal needs, and money for entertainment and
miscellaneous expenses.
9-19 Firms with international operations face a variety of
additional challenges in preparing their budgets.
multinational firm's budget must reflect the

translation of foreign currencies into U.S. dollars.
Almost all the world's currencies fluctuate in their
values relative to the dollar, and this fluctuation makes
budgeting for those translations difficult.
It is difficult to prepare budgets when inflation is
high or unpredictable. Some foreign countries have

experienced hyperinflation, sometimes with annual
inflation rates well over 100 percent. Predicting such
high inflation rates is difficult and complicates a
multinational's budgeting process.
The economies of all countries fluctuate in terms of
consumer demand, availability of skilled labor, laws

affecting commerce, and so forth. Companies with
foreign operations face the task of anticipating such
changing conditions in their budgeting processes.
9-20 The five phases in a product's life cycle are as follows:
(a)
Product planning and concept design
(b)
Preliminary design
(c)
Detailed design and testing
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9-8

Solutions Manual
(d)
Production
(e)
Distribution and customer service
It is important to budget these costs as early as possible

in order to ensure that the revenue a product generates
over its life cycle will cover all of the costs to be incurred.
A large portion of a product's life-cycle costs will be
committed well before they are actually incurred.
McGraw-Hill/Irwin
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9-9
SOLUTIONS TO EXERCISES
EXERCISE 9-21 (20 MINUTES)
1.
The total required production is 131,144 units, computed

as follows:
Budgeted Sales
(in units)
June
July
August
September
October
40,000
42,000
1.05)
44,100
1.05)
46,305
1.05)
(given)
(40,000
(42,000
Planned Ending
Inventory
(in units)
32,000 (40,000 80%)
37,044 (46,305 80%)
(44,100
Sales in units:
2.
July...................................................................
August..............................................................
September........................................................
Total for third quarter.......................................
Add: Desired ending inventory, September 30....
Subtotal............................................................
Deduct: Desired ending inventory, June 30.........
Total required production..................................
40,000
42,000
44,100
126,100
37,044
163,144
32,000
131,144
Assumed production during third quarter (in

units)................................................................
Raw-material requirements per unit of product
(in pounds).......................................................
Raw material required for production in third
quarter (in pounds)...........................................
Add: Desired ending raw-material inventory,
September 30
(480,000 25%)..........................................
Subtotal............................................................
Deduct: Ending raw-material inventory, June 30.
120,000
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9-10

4
480,000
120,000
600,000

Solutions Manual
Raw material to be purchased during third

quarter (in pounds)...........................................
Cost per pound of raw material..........................
Total raw-material purchases during third
quarter.............................................................
McGraw-Hill/Irwin
Inc.
140,000
460,000

$1.40
$
644,000

9-11

1.
Cash collections in October:

Month of Sale
July.....................................
August................................
September..........................
October...............................
Total...................................
Amount Collected in
October
$150,000 $ 6,000
4%
17,500
175,000
10%
30,000
200,000
15%
157,500
225,000
70%
$211,000
Notice that the amount of sales on account in June,

$122,500 was not needed to solve the exercise.
2.
Cash collections in fourth quarter from credit sales in

fourth quarter.
Amount Collected
Month of Sale
October.......................
November....................
December....................
Total............................
Total collections in
fourth quarter from
credit sales in fourth
quarter.....................
McGraw-Hill/Irwin
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9-12
Credit
Sales
Octob
er
$225,0 $157,
00 500
250,00
0
212,50
0
$157,
500
Novem
ber
$
33,750
175,00
0
208,7
50
Decem
ber
$
22,500
37,500
148,7
50
$208,7
50
$575,0
00

Solutions Manual
3.
In the electronic version of the solutions manual, press the

CTRL key and click on the following link: BUILD A
SPREADSHEET
McGraw-Hill/Irwin
Inc.

9-13

1.
July
August
Septemb
er
Sales..................................
$240,00
0
Cash receipts:
From cash sales...............
$
120,000b
From sales on account.....

Total cash receipts.............
$270,
000
= $135,000 2
$120,
000
= $240,000 .5
$
90,000c
$270,00
0a
$
135,000
102,000
108,000d
$
228,000
$180,00
0
$
192,000
117,000e
$
252,000
$
= $180,000 .5
90,000
c
$108,
000
= ($120,000 .6) + ($90,000 .4)
$117,
000
= ($135,000 .6) + ($90,000 .4)
2.
Accounts payable, 12/31/x0..........................

Purchases of goods and services on account
during 20x1.................................................
Payments of accounts payable during 20x1. .
Accounts payable, 12/31/x1..........................
McGraw-Hill/Irwin
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9-14
600,000
euros
2,400,000
euros
(2,200,000)
euros*
800,000
euros

Solutions Manual
*2,200,000 euros
= 600,000 euros + 2,400,000 euros
800,000 euros
3.
Accounts receivable, 12/31/x0......................
1,700,00
0y
4,500,
000y
(3,900,0
00y)
2,300,0
00y
Sales on account during 20x1.......................

Collections of accounts receivable during
20x1............................................................
Accounts receivable, 12/31/x1......................
4.
5.
Accumulated depreciation, 12/31/x0.............

Depreciation expense during 20x1................
Accumulated depreciation, 12/31/x1.............
Retained earnings, 12/31/x0.........................

Net income for 20x1.....................................
Dividends paid in 20x1.................................
Retained earnings, 12/31/x1.........................
$1,537,500
300,000
0
$1,837,500
McGraw-Hill/Irwin
Inc.
405,000
75,000
480,000

9-15

1.
Production (in units) required for the year:

Sales for the year...............................................
Add: Desired ending finished-goods inventory on
December 31......................................................
Deduct: Beginning finished-goods inventory on
January 1...........................................................
Required production during the year...................
2.
3,360,0
00
350,000
560,0
00
3,150,0
00
Purchases of raw material (in units), assuming production

of 3,500,000 finished units:
Raw material required for production (3,500,000
2)...................................................................
Add: Desired ending inventory on December 31. .
Deduct: Beginning inventory on January 1...........
Required raw-material purchases during the year
McGraw-Hill/Irwin
Inc.
9-16
7,000,0
00
315,000
245,0
00
7,070,0
00

Solutions Manual

1.
WHITE MOUNTAIN FURNITURE COMPANY

EXPECTED CASH COLLECTIONS
NOVEMBER
Month
September....................
October........................
November.....................
Total..........................
2
.
Sales
$150,000
195,000
165,000
Percent
9%
20%
70%
Expected
Collections
$ 13,500
39,000
115,500
$168,000

EXPECTED CASH DISBURSEMENTS
NOVEMBER
October purchases to be paid in November.........
Less: 2% cash discount.......................................
Net..................................................................
Cash disbursements for expenses.......................
Total................................................................
3
.
$135,00
0
2,700
$132,30
0
36,000
$168,30
0

EXPECTED CASH BALANCE
NOVEMBER 30
Balance, November 1..........................................
Add: Expected collections...................................
Less: Expected disbursements............................
Expected balance.............................................
McGraw-Hill/Irwin
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$
55,000
168,000
168,300
$
54,700

9-17

Answers will vary widely, depending on the governmental unit
selected and the budgetary items on which the student
focuses. In the past, students have expressed surprise at the
proportion of the U.S. federal budget that goes to entitlement
programs (e.g., Social Security and Medicare), interest
expense, and the military.
1
.
Budgeted cash collections for December:

Month of Sale
November.................................
December.................................
Total cash collections................
2
.
Collections in December
$400,000 $152,000
38%
264,000
440,000
60%
$416,000
Budgeted income (loss) for December:

Sales revenue.....................................
$440,00
0
330,00
0
$110,00
0
Less: Cost of goods sold (75% of sales)

Gross margin (25% of sales)................
Less:...................Operating expenses:
Bad debts expense (2% of sales)...
Depreciation ($432,000/12)...........
Other expenses............................
Total operating expenses..............
Income before taxes...........................
McGraw-Hill/Irwin
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9-18
$
8,800
36,000
45,200
90,000
$20,000

Solutions Manual
EXERCISE 9-27 (CONTINUED)

3
.
Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal
to December's purchases of merchandise. Since the store's
gross margin is 25 percent of sales, its cost of goods sold
must be 75 percent of sales.
Month
December.......
January...........
Sales
$440,0
00
400,00
0
Cost of
Goods
Sold
$330,0
00
300,00
0
Amount Purchased in
December
$
$330,000
66,000
20%
300,000
80%
240,000
Total December
purchases.....
$306,00
0
Therefore, the December 31 balance in accounts payable
will be $306,000.
McGraw-Hill/Irwin
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9-19

Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From: I.M. Student and Associates

Subje Budgetary slack
ct:
Budgetary slack is the difference between a budget
estimate that a person provides and a realistic estimate.
The practice of creating budgetary slack is called padding
the budget. The primary negative consequence of slack is
that it undermines the credibility and usefulness of the
budget as a planning and control tool. When a budget
includes slack, the amounts in the budget no longer portray
a realistic view of future operations.
The bank's bonus system for the new accounts
manager tends to encourage budgetary slack. Since the
manager's bonus is determined by the number of new
accounts generated over the budgeted number, the
manager has an incentive to understate her projection of
the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such
understatement. A 10 percent increase over the bank's
current 10,000 accounts would mean 1,000 new accounts in
20x5. Yet the new accounts manager's projection is only
800 new accounts. This projection will make it more likely
that the actual number of new accounts will exceed the
budgeted number.
McGraw-Hill/Irwin
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9-20

Solutions Manual

1.
Total Sales in January 20x5
$200,00 $260,0 $320,00
0
00
0
Cash receipts in January, 20x5
From December sales on
account.................................
From January cash sales.....
From January sales on
account.................................
Total cash receipts.............
$
14,250*
150,0
00
40,000*
*
$
204,250
$
$
14,250
14,250
195,00 240,000
0
52,0 64,000
00
$261,2
50
$318,25
0
*$14,250 = $380,000 .25 .15
$150,000 = $200,000 .75

**$40,000 = $200,000 .25 .80
2
.
Operational plans depend on various assumptions. Usually

there is uncertainty about these assumptions, such as sales
demand or inflation rates. Financial planning helps
management answer "what if" questions about how the
budget will look under various sets of assumptions.

1
.
Direct professional labor budget for the

month of June:
Office visits per month = 48,000/12 = 4,000
Professional services in June:
One-hour visits (20% 4,000 1 hr.)...
Half-hour visits (80% 4,000 1/2 hr.)
Total direct professional labor..............
Hourly rate for dental associates..........
Total direct professional labor cost.......
McGraw-Hill/Irwin
Inc.
800 hours
1,600 hours
2,400 hours
$ 90
$216,00
0

9-21
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9-22

Solutions Manual
EXERCISE 9-30 (CONTINUED)

2
.
Cash collections during June:
Half-hour visits (4,000 80%)..............

Billing rate..........................................
Total billings for half-hour visits...........
One-hour visits (4,000 20%)..............

Billing rate..........................................
Total billings for one-hour visits...........
Total billings during month..................
May
3,200
$60
June
3,200
$60
$192,00 $192,00
0
0
800
800
$105
$105
$
$84,000
84,000
$276,00
0
$276,00
0
Percentage of month's billings collected

during June.......................................
Collections during June........................
Total collections in June ($27,600 +

$248,400)............................................
10%
$
27,600
90%
$248,40
0
$276,00
0
3. Overhead and administrative expense budget for June:

Patient registration and records (4,000 visits $3.00 per
visit)..........................................................
$12,000
Other overhead and administrative expenses
(2,400 hours $7.50 per hour)..............
18,000
Total overhead and administrative expenses
.......................................................... $30,000
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9-23
4. In the electronic version of the solutions manual, press

the CTRL key and click on the following link: BUILD A
SPREADSHEET
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9-24

Solutions Manual
SOLUTIONS TO PROBLEMS
PROBLEM 9-31 (30 MINUTES)
1.
Schedule of cash collections:

Collection of accounts
receivable:
$165,000 x 20%
............................................
Januar
y
2.
March
$
33,00
0
Collection of January sales

($450,000):
60% in January; 35% in
February...............................
Collection of February sales
($540,000):
60% in February; 35% in
March...................................
Collection of March sales
($555,000):
60% in March
............................................
Sale of equipment.................
Total cash collections
............................................
Febru
ary
270,
000
$303,
000
$157,
500
324,
000
$189,
000
$481,
500
333,
000
15,
000
$537,
000
Schedule of cash disbursements:

Januar
y
Payment of accounts payable
Payment of January purchases
($270,000):
70% in January; 30% in
February...............................
Payment of February purchases
McGraw-Hill/Irwin
Inc.
Febru
ary
March
$
66,00
0
189,
000
$
81,00
0

9-25
($300,000):
70% in February; 30% in
March...................................
210,
000
Payment of March purchases

($420,000):
70% in March.....................
Cash operating costs.............
Total cash disbursements. .
McGraw-Hill/Irwin
Inc.
9-26
93,
000
$348,
000
72,
000
$363,
000
$
90,00
0
294,
000
135,
000
$519,
000

Solutions Manual
PROBLEM 9-31 (CONTINUED)

3.
Schedule of cash needs:
Beginning cash
balance.
Total
receipts
.
Subtotal
.
Less: Total
disbursements
Cash excess (deficiency)
before financing
Financing:
Borrowing to maintain
$60,000 balance..
Loan principal
repaid
Loan interest
paid..
Ending cash
balance
Januar Februar
y
y
March
$
60,00
0
303,
000
$
60,000
$132,
900
481,50
0
537,
000
$363,
000
348,
000
$
15,00
0
$541,50
0
363,00
0
$178,50
0
$669,
900
519,
000
$150,
900
45,
000
$
60,00
0
-0(45,00
0)
(6
00)*
$132,90
0
-0-0$150,
900
* $45,000 x 8% x 2/12
McGraw-Hill/Irwin
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9-27

1.
Production and direct-labor budgets

SHADY SHADES, INC.
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Sales (units)...........................
Add: Ending inventory*...........
Total needs............................
Deduct: Beginning inventory. .
Units to be produced..............
Direct-labor hours per unit.....
Total hours of direct labor
time needed........................
Direct-labor costs:
Wages ($16.00 per DLH).....
Pension contributions
($.50 per DLH)..................
Workers' compensation
insurance ($.20 per DLH). .
Employee medical insurance
($.80 per DLH)..................
Employer's social security
(at 7%).............................
McGraw-Hill/Irwin
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9-28
Januar
y
20,00
0
32,
000
52,00
0
32,
000
20,00
0
20,00
0
Month
Februa March Quart
ry
er
24,000 16,00 60,000
0
25,0
27,
27,0
00
000
00
49,000 43,00 87,000
0
32,0
25,
32,0
00
000
00
17,000 18,00 55,000
0

1
.75
17,0
00
13,
500
50,5
00
$320, $272,0
000
00
$216, $808,0
000
00
10,00
0
8,500
6,750 25,250
4,000
3,400
2,700 10,100
16,00 13,600
0
10,80 40,400
0
22,
400
19,0
40
15,
120
56,5
60

Solutions Manual
Total direct-labor cost............
$372, $316,5
400
40
$251, $940,3
370
10
*100 percent of the first following month's sales plus 50

percent of the second following month's sales.
DLH denotes direct-labor hour.
McGraw-Hill/Irwin
Inc.

9-29

2.
Use of data throughout the master budget:

Components of the master budget, other than the
production budget and the direct-labor budget, that would
also use the sales data include the following:
Sales budget
Cost-of-goods-sold budget
Selling and administrative expense budget
also use the production data include the following:
Direct-material budget
Manufacturing-overhead budget
also use the direct-labor-hour data include the following:
Manufacturing-overhead budget (for determining the

overhead application rate)

also use the direct-labor cost data include the following:
Manufacturing-overhead budget (for determining the

overhead application rate)
Cash budget
Budgeted income statement
McGraw-Hill/Irwin
Inc.
9-30

Solutions Manual
McGraw-Hill/Irwin
Inc.

9-31

3. Manufacturing overhead budget:
SHADY SHADES, INC.
MANUFACTURING OVERHEAD BUDGET
Month
January
Shipping and handling
Purchasing, material
handling,
and
inspection.................
Other overhead.........
Total manufacturing
overhead...................
Febru
ary
March Quarter
$
60,000
$
72,000
$48,0 $180,000
00
90,000
76,500
210,00
0
$360,00
0
178,50
0
$327,00
0
81,00 247,500
0
141,
530,250
750
$270, $957,750
750

1.
Niagra Chemical Companys production budget (in

gallons) for the three products for 20x2 is calculated as
follows:
Yarex
Sales for 20x2....................
Add: Inventory, 12/31/x2
(.08 20x3 sales)............
Total required....................
Deduct: Inventory, 12/31/x1
(.08 20x2 sales)...........
Required production in 20x2
2.
Darol
Norex
120,000 80,000
50,000
_10,400 _5,600
130,400 85,600
_4,800
54,800
9,600
6,400
120,800 79,200
4,000
50,800
The companys conversion cost budget for 20x2 is shown

in the following schedule:
McGraw-Hill/Irwin
Inc.
9-32

Solutions Manual
Conversion hours required:

Yarex (120,800 .07).........
Darol (79,200 .10)...........
Norex (50,800 .16)...........
Total hours.........................
8,456
7,920
_8,128
24,504
Conversion
cost
budget $490,08
(24,504 x $20)....................
0
McGraw-Hill/Irwin
Inc.

9-33

3.
Since the 20x1 usage of Islin is 200,000 gallons, the firms

raw-material purchases budget (in dollars) for Islin for
20x2 is as follows:
Quantity of Islin required for production in 20x2 (in
gallons):
Yarex (120,800 1)..............................
120,
Darol (79,200 .7)................................
800
Norex (50,800 .5)...............................
55,
440
25,
400
Subtotal
201,
..
640
Add:
Required
inventory,
12/31/x2
20,
(201,640 .10)..................
164
Subtotal...................................................
221,
804
Deduct: Inventory, 1/1/x2 (200,000 .10).
20,
000
Required purchases (gallons)....................
201,
804
Purchases budget (201,804 gallons $5 $1,009,
per gallon)...............................................
020
4.
The company should continue using Islin, because the

cost of using Philin is $152,632 greater than using Islin,
calculated as follows:
Change in material cost from substituting Philin for Islin:
20x2 production requirements:
Philin (201,640 $5 1.2).................... $1,209,
Islin (201,640 $5)...............................
840
1,008,
200
Increase in cost of raw material................
$
201,64
0
Change
in
conversion
cost
from
McGraw-Hill/Irwin
Inc.
9-34

Solutions Manual
substituting Philin for Islin:

Philin (24,504 $20 .9)......................
Islin (24,504 $20)...............................
Decrease in conversion cost......................
Net increase in production cost.................
McGraw-Hill/Irwin
Inc.
$
441,07
2
490,
080
$
(49,008
)
$
152,63
2

9-35

1.
Tuition revenue budget:

Current
student
12,000
enrollment.
Add: 5% increase in student
body
600
Total
student
12,600
body.
Less:
Tuition-free
scholarships.
180
Tuition-paying
12,420
students
Credit hours per student per
year.
x 30
Total
credit 372,600
hours..
Tuition
rate
per
x
hour.
$75
Forecasted
tuition $27,945
revenue.
,000
2.
Faculty needed to cover classes:

Total
student
body.
Classes per student per year [(15
credit hours 3 credit hours)
x 2 semesters].
Total student class enrollments
to be covered.
Students
per
class.
Classes
to
be
taught.
Classes
taught
per
professor.
Faculty
needed
3.
12,6
00
x
10
126,
000
25
5,04
0
5
1,
008
Possible actions might include:

Hire part-time instructors
McGraw-Hill/Irwin
Inc.
9-36

Solutions Manual
Use graduate teaching assistants

Increase the teaching load for each professor
Increase class size and reduce the number of
sections to be offered
Have students take an Internet-based course offered
by another university
Shift courses to a summer session
4.
No. While the number of faculty may be a key driver, the

number of faculty is highly dependent on the number of
students.
Students (and tuition revenue) are akin to
salesthe starting point in the budgeting process.
McGraw-Hill/Irwin
Inc.

9-37

1.
Sales budget
Sales (in sets).....................

Sales price per set...............
Sales revenue.....................
2.
August
5,000
$60
6,000
$60
$300,00
0
$360,00
0
Septem
ber
7,500
$60
$450,00
0
Production budget (in sets)
Sales..................................
Add: Desired ending
inventory............................
Total requirements..............
Less: Projected beginning
inventory............................
Planned production.............
3.
July
July
August
5,000
1,200
6,000
1,500
Septem
ber
7,500
1,500
6,200
1,000
7,500
1,200
9,000
1,500
5,200
6,300
7,500
Raw-material purchases
Planned production (sets).....

Raw material required per
set
(board feet).......................
Raw material required for
production
(board feet).......................
Add: Desired ending
inventory of raw
material (board feet)..........
Total requirements...............
Less: Projected beginning
inventory of
McGraw-Hill/Irwin
Inc.
9-38
July
August
5,200
6,300
Septem
ber
7,500
10
10
10
52,000
63,000
75,000
6,300
7,500
8,000
58,300
70,500
83,000
5,200
6,300
7,500

Solutions Manual
raw material (board feet)....

Planned purchases of raw
material
(board feet).......................
Cost per board foot...............
Planned purchases of raw
material
(dollars).............................
McGraw-Hill/Irwin
Inc.
53,100
64,200
75,500
$.60
$.60
$.60
$
31,860
$
38,520
$
45,300

9-39

4.
Direct-labor budget
Planned production (sets).....

Direct-labor hours per set.....
Direct-labor hours required. . .
Cost per hour........................
Planned direct-labor cost......
5.
July
August
5,200
1.5
7,800
$21
6,300
1.5
9,450
$21
Septem
ber
7,500
1.5
11,250
$21
$163,80
0
$198,4
50
$236,25
0
In the electronic version of the solutions manual, press

the CTRL key and click on the following link: BUILD A
SPREADSHEET
McGraw-Hill/Irwin
Inc.
9-40

Solutions Manual

1.
Sales are collected over a two-month period, 40% in the

month of sale and 60% in the following month. December
receivables of $108,000 equal 60% of Decembers sales;
thus, December sales total $180,000 ($108,000 .6).
Since the selling price is $20 per unit, Dakota Fan sold
9,000 units ($180,000 $20).
2.
Since the company expects to sell 10,000 units, sales

revenue will total $200,000 (10,000 units x $20).
3.
Dakota Fan collected 40% of Februarys sales during

February, or $78,400.
Thus, Februarys sales total
$196,000 ($78,400 .4).
Combining January sales
($76,000 + $114,000), February sales ($196,000), and
March sales ($200,000), the company will report revenue
of $586,000.
4.
Sixty percent of Marchs sales will be outstanding, or

$120,000 ($200,000 x 60%).
5.
Finished-goods inventories are maintained at 20% of the

following months sales. January sales total $190,000
($76,000 + $114,000), or 9,500 units ($190,000 $20).
Thus, the December 31 inventory is 1,900 units (9,500 x
20%).
6.
February sales will total 9,800 units ($196,000 $20),

giving rise to a January 31 inventory of 1,960 units (9,800
x 20%). Letting X denote production, then:
12/31/x0 inventory + X January 20x1 sales = 1/31/x1
inventory
1,900 + X - 9,500 = 1,960
X 7,600 = 1,960
X = 9,560
7.
Financing required is $3,500 ($15,000 minimum balance

less ending cash balance of $11,500):
Cash
McGraw-Hill/Irwin
Inc.
balance,
January $
9-41
22,50
0
Add:
January
receipts
184,
($108,000 + $76,000)..
000
Subtotal
$206,
500
Less:
January
195,
payments
000
Cash
balance
before $
financing.
11,50
0
McGraw-Hill/Irwin
Inc.
9-42

Solutions Manual

1.
The benefits that can be derived from implementing a

budgeting system include the following:
The preparation of budgets forces management to plan
ahead and to establish goals and objectives that can be

quantified.
Budgeting compels departmental managers to make

plans that are in congruence with the plans of other
departments as well as the objectives of the entire firm.
The
budgeting
process
communication and coordination.
promotes
internal
Budgets provide directions for day-to-day control of
operations, clarify duties to be performed, and assign

responsibility for these duties.
Budgets help in measuring performance and providing

incentives.
Budgets provide a vehicle for resource allocation.
McGraw-Hill/Irwin
Inc.

9-43

2.
a. Schedule
Sales Budget
b. Subsequent Schedule
Production Budget
Selling Expense Budget
Budgeted Income Statement
Ending Inventory Budget

(units)
Production Budget
Production Budget (units)
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead
Budget
Direct-Material Budget
Cost-of-Goods-Manufactured
Budget
Direct-Labor Budget
Budget
Manufacturing-Overhead
Budget
Budget
Budget
Cost-of-Goods-Sold Budget
Cost-of-Goods-Sold Budget
(includes ending inventory in
dollars)

Budgeted Balance Sheet
Selling Expense Budget
Research and Development

Budget
Administrative Expense
Budget

Budgeted Statement of Cash
Flows
Capital Expenditures Budget
Cash Receipts and

Disbursements Budget
McGraw-Hill/Irwin
Inc.
9-44

Solutions Manual

Flows
Cash Receipts and
Disbursements
Budget

Flows

Flows

Flows
McGraw-Hill/Irwin
Inc.

9-45

1. Sales budget for 20x3:
Light coils...................................
Units
60,000
Price
$130
Heavy coils.................................
40,000
$190
$
7,800,0
00
7,600
,000
$15,400
,000
Light
Coils
60,000
Heavy
Coils
40,000
25,000
85,000
20,000
9,000
49,000
8,000
65,000
41,000
Projected sales...........................
2
.
Production budget (in units) for 20x3:
Projected sales.........................................
Add: Desired inventories,
December 31, 20x3................................
Total requirements...................................
Deduct: Expected inventories, January 1,
20x3.........................................................
Production required (units).......................
3
.
Total
Raw-material purchases budget (in

quantities) for 20x3:
Raw Material
S
Cop
heet
per
Platfo
M
W rms
etal
ire
Light coils (65,000 units

projected
to be produced)......................
Heavy coils (41,000 units
projected
to be produced)......................
Production requirements.............
Add: Desired inventories,
McGraw-Hill/Irwin
Inc.
9-46
260,000 130,000
__
205,000 123,000
41,000
465,000 253,000
36,000 32,000
41,000
7,000

Solutions Manual
December 31, 20x3.....................

Total requirements.....................
Deduct: Expected inventories,
January 1, 20x3.......................
Purchase requirements (units)....
McGraw-Hill/Irwin
Inc.
501,000 285,000
48,000
32,000 29,000
469,000 256,000
6,000
42,000

9-47

4
.
Raw-material purchases budget for

20x3:
Raw
Material
Raw Material
Required
(units)
Sheet metal...............................
469,0
00
Copper wire...............................
256,0
00
Platforms...................................
42,00
0
Total
.
5.
Total
10
$
7,504,000
2,560,000
___252,000
$10,316,00
0
Direct-labor budget for 20x3:
Light coils..................
Project
ed
Produc
tion
(units)
65,000
Heavy coils................
41,000
Total..........................
6.
Anticipa
ted
Purchas
e Price
$16
Hours
per
Unit
4
6
Total
Hour
s
Rate
260,0
00
246,0
00
$15
20
Total
Cost
$3,900,0
00
4,920,0
00
$8,820,0
00
Manufacturing overhead budget for 20x3:

Cost
Driver
Quantity
Purchasing and material

725,000
handling....................................
lb.a
Depreciation, utilities, and
106,000
inspection.................................. coils b
McGraw-Hill/Irwin
Inc.
9-48
Cost
Driver
Rate
Budgete
d Cost
$.50 $362,50
0
$8.00 848,000

Solutions Manual
Shipping.................................... 100,000c
General manufacturing overhead 506,000
hr. d
Total manufacturing overhead....
$2.00 200,000
$6.00
3,036,
000
$4,446,
500
725,000 = 469,000 + 256,000 (from req. 3)

106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
506,000 = 260,000 + 246,000 (from req. 5)
a
McGraw-Hill/Irwin
Inc.

9-49

1.
Sales budget:
Box C
Box P
500,0 500,00
00
0

$1.35
$1.95
$675, $975,0
000
00
Sales (in units)

Sales price per unit
Sales revenue
2.
Total
$1,650,0
00
Production budget (in units):
Sales..................................................
Add: Desired ending inventory............
Total units needed..............................
Deduct: Beginning Inventory...............
Production requirements....................
3.
Box
Box
C
P
500,000 500,000
5,000 15,000
505,000 515,000
10,000 20,000
495,000 495,000
Raw-material budget:
CORRUGATING MEDIUM
Production requirements (number
of boxes).....................................
Raw material required per box
(pounds).....................................
production (pounds)..................
McGraw-Hill/Irwin
Inc.
9-50
Box C Box P
495,0 495,00
00
0

.
.2
3
Total
148,50 247,50
99,00
0
0
0
Solutions Manual
Add: Desired ending

raw-material inventory..............
Total raw-material needs.............
Deduct: Beginning raw-material
inventory....................................
Raw material to be purchased......
Price (per pound)........................
Cost of purchases (corrugating
medium).....................................
Total cost of raw-material
purchases
($145,500 + $37,875)................
McGraw-Hill/Irwin
Inc.
10,000
257,50
0
5,000
252,50
0

$.15
$
37,875
$183,
375

9-51

PAPERBOARD
Production requirement (number
of boxes).....................................
Raw material required per box
(pounds).....................................
production (pounds)..................
Add: Desired ending
raw-material inventory..............
Box C
Box P
495,0 495,00
00
0
. .
3
7
148,5 346,50 495,00

00
0
0
5,000
500,00
0
15,000
485,00
0

$.30
$145,
500
Total raw-material needs.............

Deduct: Beginning raw-material
inventory....................................
Raw material to be purchased......
Price (per pound)........................
Cost of purchases (paperboard).. .
4.
Direct-labor budget:
Production requirements (number
of boxes)
Direct labor required per box
(hours)........................................
Direct labor required for
production (hours)
Direct-labor rate..........................
Total direct-labor cost.................
5.
Total
Box C Box P
495,0 495,00
00
0
.
.
0025
005
1,23
7.5
2,475
Total
3,712.
5

$18
$66,8
25
Manufacturing-overhead budget:
McGraw-Hill/Irwin
Inc.
9-52

Solutions Manual
Indirect material................................................
Indirect labor....................................................
Utilities.............................................................
Property taxes..................................................
Insurance..........................................................
Depreciation.....................................................
Total overhead..................................................
McGraw-Hill/Irwin
Inc.
$
15,750
75,000
37,500
27,000
24,000
43,50
0
$222,75
0

9-53

6.
Selling and administrative expense budget:

Salaries and fringe benefits of sales personnel...
Advertising.......................................................
Management salaries and fringe benefits...........
Clerical wages and fringe benefits.....................
Miscellaneous administrative expenses..............
Total selling and administrative expenses..........
7.
$112,50
0
22,500
135,000
39,000
6,00
0
$315,00
0
Budgeted income statement:

Sales revenue [from sales budget, req. (1)]........
Less: Cost of goods sold:
Box C: 500,000 $.315*......................
$157,
500
322,
Box P: 500,000 $.645* .....................
500
Gross margin.....................................................
Selling and administrative expenses..................
Income before taxes..........................................
Income tax expense (35%).................................
Net income........................................................
$1,650,
000
480,
000
$1,170,
000
315,
000
$
855,000
299,
250
$
555,750
*Calculation of manufacturing cost per unit:

(a Predetermined
)
overhead rate
budgeted
manufactur
ingoverhead
volume
ofdirect
-laborhours
$222,750
= (495,000)(
.0025)+(495,000)(
.005)
McGraw-Hill/Irwin
Inc.
9-54

Solutions Manual
$222,750
= $60perhour
= 3,712.5
hours
McGraw-Hill/Irwin
Inc.

9-55

(b
)
Calculation of manufacturing cost per unit:

Box
C
Direct material:
Paperboard
.3 lb. $.30 per lb................
.7 lb. $.30 per lb................
Corrugating medium
.2 lb. $.15 per lb................
.3 lb. $.15 per lb................
Direct labor:
.0025 hr. $18 per hr..........
.005 hr. $18 per hr............
Applied manufacturing overhead:
.0025 hr. $60 per hr..........
.005 hr. $60 per hr............
Manufacturing cost per unit.........
McGraw-Hill/Irwin
Inc.
9-56
Box P
$.090
$.210
.030
.045
.045
.090
.150
___
$.315
.300
$.645

Solutions Manual

1.
The revised operating budget for Vancouver

Consulting Associates for the fourth quarter is
presented below. Supporting calculations follow:
VANCOUVER CONSULTING ASSOCIATES
REVISED OPERATING BUDGET
FOR THE FOURTH QUARTER OF 20X4
Revenue:
Consulting fees:
Computer system consulting......................
Management consulting.............................
Total consulting fees.............................
Other revenue................................................
Total revenue............................................
Expenses:
Consultant salary expenses*...........................
Travel and related expenses...........................
General and administrative expenses.............
Depreciation expense.....................................
Corporate expense allocation.........................
Total expenses..........................................
Operating income...............................................
$
956,250
936,
000
$1,892,
250
20,
000
$1,912,
250
$1,021,
300
115,750
186,000
80,000
150,
000
$1,553,
050
$
359,200
*$1,021,300 = $490,000 + $531,300. (See

supporting calculations.)
McGraw-Hill/Irwin
Inc.

9-57

Supporting calculations:
Schedule of projected revenues for the fourth

quarter of 20x4:
Compu
ter
System
Consult
ing
Third Quarter:
Revenue...........................................
Hourly billing rate............................
Billable hours...................................
Number of consultants.....................
Hours per consultant........................
Fourth-quarter planned increase..........
Billable hours per consultant................
Number of consultants.........................
Billable hours......................................
Billing rate..........................................
Projected revenue...............................
McGraw-Hill/Irwin
Inc.
9-58
Manage
ment
Consulti
ng
$843,7 $630,00
50
0
$180
$150
5,625
3,500
10
15
375
350
50
50
425
400
13
15
6,375
5,200
$180
$150
$956,2 $936,00
50
0

Solutions Manual
Schedules of projected salaries, travel, general and

administrative, and allocated corporate expenses:
Comput
er
System
Consulti
ng
Compensation:
Existing consultants:
Annual salary..............................
Quarterly salary..........................
Planned increase (10%)...............
Total fourth-quarter salary per
consultant..........................................
Number of consultants................
Total...............................................
New consultants at old salary (3
$25,000).............................................
Total salary.....................................
Benefits (40%)................................
Total compensation....................
Travel expenses:
Computer system consultants (425
hrs. 15)...........................................
Management consultants (400 hrs.
13)
Total hours.................................
Rate per hour*................................
Total travel expense...................
General and administrative ($200,000
McGraw-Hill/Irwin
Inc.
$
92,000
$
23,000
2,300
$
25,300

15
$379,50
0

-0$379,50
0
151,80
0
$531,30
0
Manage
ment
Consulti
ng
$100,00
0
$
25,000
2,500
$27,500
10
$275,00
0
75,000
$350,00
0
140,00
0
$490,00
0
6,375
5,200
11,575
$10
$115,75
0
$186,00

9-59
93%)...............................................
Corporate expense allocation ($100,000
150%).............................................
*Third-quarter
travel expense
0
$150,00
0
hour = rate
s
$91,250 9,12
5
= $10.00
9,125 = (350 10) +

(375 15)
2
.
An organization would prepare a revised operating budget

when the assumptions underlying the original budget are
no longer valid. The assumptions may involve factors
outside or inside the company. Changes in assumptions
involving external factors may include changes in demand
for the company's products or services, changes in the cost
of various inputs to the company, or changes in the
economic or political environment in which the company
operates. Changes in assumptions involving internal factors
may include changes in company goals or objectives.
McGraw-Hill/Irwin
Inc.
9-60

Solutions Manual

1.
Strategic planning identifies the overall objective of an

organization and generally considers the impact of
external factors such as competitive forces, market
demand, and technological changes when identifying
overall objectives.
Budgeting is the quantitative
expression of plans evolving from strategic planning. The
time horizon for budgeting is generally a year, or an
operating cycle, and greater attention is focused on
internal factors than on external factors.
2.
For each of the financial objectives established by the

board of directors and president of Fit-for-Life, Inc., the
calculations to determine whether John Winslows budget
attains these objectives are presented in the following
table.
CALCULATION OF FINANCIAL OBJECTIVES: FIT-FOR-LIFE, INC.
Objective
Increase sales by 12%
($1,700,000 1.12 =
$1,904,000)
Attained
/
Not
Attained
Not
attained
Calculations
($1,895,500$1,700,000)/
$1,700,000 = 11.5%
Increase
before-tax
income by 15%
($210,000 1.15 =
$241,500)
Attained
($241,500$210,000)/$210,000
= 15%
Maintain long-term debt

at or below 16% of
assets
($4,100,000 .16 =
$656,000)
Attained
$616,000/$4,100,000
(rounded)
Maintain cost of goods

sold at or below 70% of
sales
($1,895,500 .70 =
$1,326,850)
Not
attained
$1,339,000*/$1,895,500
70.6% (rounded)
McGraw-Hill/Irwin
Inc.
15%

9-61
*Variable cost of goods sold + fixed

$1,149,450 + $189,550 = $1,339,000
3.
manufacturing
cost
The accounting adjustments contemplated by John

Winslow are unethical because they will result in
intentionally overstating income by understating the cost
of goods sold. The specific standards of ethical conduct
for management accountants violated by Winslow are as
follows:
Integrity.
Winslow violated the integrity standard by
engaging in an activity that prejudiced his ability to carry
out
his
duties
ethically,
by
not
communicating
unfavorable as well as favorable information, and by
engaging in an activity that appears to be a conflict of
interest.
McGraw-Hill/Irwin
Inc.
9-62

Solutions Manual

Competence.
By making the accounting adjustments,
Winslow violated the competency standard by not
preparing financial statements in accordance with
technical standards.
Objectivity.
By
overstating
the
inventory
and
reclassifying certain costs, Winslow has violated the
objectivity standard.
He has failed to communicate
information fairly and objectively and has failed to
disclose all relevant information that would influence the
users understanding of the report.

1.
Sales budget:
20x0
Total sales..........
Cash sales*.........
Sales on account
20x1
Decem Januar
ber
y
$800,0 $880,
00
000
200,00 220,0
0
00
600,00 660,0
0
00
Febru March
ary
$968, $1,064,
000
800
242,0 266,20
00
0
726,0 798,60
00
0
First
Quarte
r
$2,912,
800
728,20
0
2,184,6
00
*25% of total
sales.
75% of total
sales.
2.
Cash receipts
budget:
20x1
Januar Februa March
y
ry
McGraw-Hill/Irwin
Inc.
First
Quarter

9-63
Cash sales.......................
Cash collections from
credit
sales made during
current
month*.........................
Cash collections from
credit
sales made during
preceding
month..........................
Total cash receipts..........
$220, $242,0
000
00
$266,
$
200 728,200
66,00 72,600
0
79,86 218,460
0
540,0 594,00
00
0
$826, $908,6
000
00
653,4
00
$999,
460
1,787,
400
$2,734,
060
*10% of current month's

credit sales.
90% of previous month's

credit sales.
McGraw-Hill/Irwin
Inc.
9-64

Solutions Manual

3.
Purchases
budget:
20x0
Budgeted cost
of
goods sold. .
Add: Desired
ending
inventory........
Total goods
needed........
Less: Expected
beginning
inventory....
Purchases.......
20x1
Decem
ber
Januar
y
Februa
ry
March
First
Quarter
$560,0
00
$616,
000
$677,6
00
$745,3
60
$2,038,9
60
308,00
0
338,8
00
372,68
0
372,68
0*
372,680
$868,0
00
$954, $1,050, $1,118, $2,411,6

800
280
040
40
280,0
00
$588,0
00
308,0
00
$646,
800
338,80
0
$711,4
80
372,68
0
$745,3
60
308,000
**
$2,103,6
40
*Since April's expected sales and cost of goods sold are the
same as the projections for March, the desired ending
inventory for March is the same as that for February.
The desired ending inventory for the quarter is equal to
the desired ending inventory on March 31, 20x1.
**The beginning inventory for the quarter is equal to the

December ending inventory.
50% x $560,000 (where $560,000 = December cost of
goods sold = December sales of $800,000 x 70%)
McGraw-Hill/Irwin
Inc.

9-65

4.
Cash disbursements
budget:
20x1
Januar Februa March
y
ry
Inventory purchases:
Cash payments for
purchases
during the current
month*............................
Cash payments for
purchases
during the preceding
month.....................
Total cash payments for
inventory purchases.....
Other expenses:
Sales salaries...............
Advertising and
promotion.......................
Administrative salaries.
Interest on bonds**......
Property taxes**..........
Sales commissions.......
Total cash payments for

other ................expenses
Total cash disbursements
McGraw-Hill/Irwin
Inc.
9-66
First
Quarter
$258, $284,5
720
92
$298,
$
144 841,456
352,8 388,08
00
0
426,8
88
1,167,
768
$611, $672,6
520
72
$725,
032
$2,009,
224
$
42,00
0
32,00
0
42,00
0
30,00
0
-0
8,800
$
$
42,00 126,000
0
32,00
96,000
0
42,00 126,000
0
-030,000
$
42,000
32,000
42,000
-010,800
9,680
$154, $136,4
800
80
$766, $809,1
320
52
-0
10,64
8
10,800
29,128
$126,
$
648 417,928
$851, $2,427,
680
152

Solutions Manual
*40% of current month's purchases [see requirement (3)].
60% of the prior month's purchases [see requirement (3)].
**Bond interest is paid every six months, on January 31 and

July 31. Property taxes also are paid every six months, on
February 28 and August 31.
McGraw-Hill/Irwin
Inc.

9-67

5.
Summary cash budget:

20x1
January Februa March
ry
Cash receipts [from req.
$
$
$
(2)]................................ 826,00 908,60 999,46
0
0
0
Cash disbursements
[from req. (4)]............. (766,3
(809,1 (851,6
20)
52)
80)
Change in cash balance
during period due to
$
$ $147,7
operations..................... 59,680 99,448
80
Sale of marketable
securities
30,000
(1/2/x1).......................
Proceeds from bank loan
(1/2/x1)....................... 200,00
0
Purchase of equipment... (250,00
0)
Repayment of bank loan
(3/31/x1).....................
(200,0
00)
Interest on bank loan*....
(5,000
)
Payment of dividends.....
(100,0
00)
during
first quarter................
Cash balance, 1/1/x1.......
Cash balance, 3/31/x1.....
McGraw-Hill/Irwin
Inc.
9-68
First
Quarter
$2,734,
060
(2,427,
152)
$
306,908
30,000
200,000
(250,00
0)
(200,00
0)
(5,000)
(100,00
0)
$
(18,092
)
70,000
$
51,908

Solutions Manual
*$200,000 10% per year 1/4 year = $5,000

6.
Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0.
Less: Minimum cash balance...............................
Cash available for equipment purchases.............
Projected proceeds from sale of marketable
securities...........................................................
Cash available....................................................
Less: Cost of investment in equipment................
$
70,000
50,000
$
20,000
30,000
$
50,000
250,000
Required short-term borrowing...........................
McGraw-Hill/Irwin
Inc.
$(200,0
00)

9-69

7.
GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
Sales revenue......................................
$2,912,
800
2,038,9
60
$
873,840
Less: Cost of goods sold.......................

Gross margin.......................................
Selling and administrative expenses:
Sales salaries...................................
Sales commissions...........................
Advertising and promotion...............
Administrative salaries.....................
Depreciation....................................
Interest on bonds.............................
Interest on short-term bank loan......
Property taxes.................................
Total selling and administrative
expenses.............................................
Net income..........................................
8.
$126,00
0
29,128
96,000
126,000
150,000
15,000
5,000
5,400
552,528
$
321,312

BUDGETED STATEMENT OF RETAINED EARNINGS
Retained earnings, 12/31/x0..............................
Add: Net income................................................
Deduct: Dividends.............................................
Retained earnings, 3/31/x1................................
McGraw-Hill/Irwin
Inc.
9-70
$
215,000
321,312
100,000
$
436,312

Solutions Manual

9.

BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash..................................................................
Accounts receivable*..........................................
Inventory...........................................................
Buildings and equipment (net of accumulated
depreciation).....................................................
Total assets.......................................................
Accounts payable**............................................
Bond interest payable........................................
Property taxes payable.......................................
Bonds payable (10%; due in 20x6)......................
Common Stock...................................................
Retained earnings..............................................
Total liabilities and stockholders' equity.............
*Accounts receivable, 12/31/x0...........................
Sales on account [req. (1)]..................................
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400)..................
Accounts receivable, 3/31/x1..............................
Buildings and equipment (net), 12/31/x0............
Cost of equipment acquired................................

Depreciation expense for first quarter................
McGraw-Hill/Irwin
Inc.
$
51,908
718,740
372,680
1,352,0
00
$2,495,3
28
$
447,216
10,000
1,800
600,000
1,000,00
0
436,312
$2,495,3
28
$
540,000
2,184,60
0
(2,005,86)
0
$
718,740
$1,252,0
00
250,000
)
(150,000

9-71
Buildings and equipment (net), 3/31/x1...............
$1,352,0
00
**Accounts payable, 12/31/x0..............................
$
352,800
2,103,64
0
(2,009,22)
4
$
447,216
Purchases [req. (3)]............................................

Cash payments for purchases [req. (4)]...............
Accounts payable, 3/31/x1..................................
McGraw-Hill/Irwin
Inc.
9-72

Solutions Manual
SOLUTIONS TO CASES
CASE 9-43 (35 MINUTES)
1.
Some of the operational and behavioral benefits that are

generally attributed to a participatory budgeting process
are as follows:
- Utilization of the best knowledge of activities in a

specific area, because the
participants are close to daily
operations.
- Goals that are more realistic and acceptable.
- Improved communication and group cohesiveness.
- A sense of commitment and willingness to be held
accountable for the budget.
2.
Four deficiencies in Jack Rileys participatory policy for

planning and performance evaluation, along with
recommendations of how the deficiencies can be
corrected:
Deficiencies
Recommendations
The setting of constraints on

fixed expenditures includes
uncontrollable
fixed
costs,
thereby
mitigating
the
positive
effects
of
participatory budgeting.
Rewards should be based on

meeting
budget
and/or
organizational
goals
or
objectives.
The
arbitrary
revision
of The
contingency
budget
approved budgets defeats the should be separate, over and
participatory process.
above
each
departments
original submission.
The division manager holds Managers should be involved
back a percentage of each in the revision of budgets.
budget for discretionary use.
Managers could submit a
budget
with
programs
at
different levels of funding.
Evaluation based on budget Divisional constraints could be
performance
must
be communicated at a budget
accompanied
with
intrinsic kick-off meeting; however,
McGraw-Hill/Irwin
Inc.

9-73
rewards.
McGraw-Hill/Irwin
Inc.
9-74
individual
limits
of
controllable expenses should
be set by each manager.

Solutions Manual

1.
Yes, Triple-F Health Club should be better able to plan its

cash receipts with the new membership plan and fee
structure. The cash flows should be more predictable and
certain because the large, prepaid membership fee
becomes the only factor affecting cash receipts. The hourly
court fees, which were dependent upon a variable that
could fluctuate daily, are eliminated.
2.
a.
Factors that management should consider before

adopting the new membership plan and fee structure
include:
Costs associated with the plan changeover

Public acceptance of the new proposal
The expected number of memberships by classes
that can be sold for each plan at the specified rates
The anticipated rate of return for excess cash or cost

of borrowing funds in periods of cash shortages
b.
3.
Financial
analyses
conducted
by
Triple
Fs
management could include a forecast of projected cash
inflows and outflows by months, an income statement
including interest revenue and expense, a cost-volumeprofit analysis, and a cash management plan for excess
cash or cash shortages.
Because Triple-F's cash flows should be more predictable,

management should be better able to plan for and control
cash disbursements. In addition, management should be
better able to plan for short-term investments when
excess cash occurs or to arrange for short-term financing
when there are cash shortages.
The collection and billing function is also simplified
with the new membership plan and fee structure. There
would be only a one-time cash receipt rather than multiple
transactions.
McGraw-Hill/Irwin
Inc.

9-75

1.
Sales budget:
S frame
unit
sales.........
S sales
price..........
S frame
sales
revenue.....
L frame
unit
sales.........
L sales
price..........
L frame
sales
revenue.....
20x4
4th
Quarte
r
2nd
Quarte
r
20x5
3rd
Quarte
r
1st
Quarte
r
4th
Quarte
r
Entire
Year
50,000
55,000
60,000
65,000
70,000

$10

$10

$10

$10
x
$10
250,00
0

$10
$
500,00
0
$
550,00
0
$
600,00
0
$
650,00
0
$ $2,500,
700,00
000
0
40,000
45,000
50,000
55,000
60,000

$15

$15

$15

$15

$15
$
600,00
0
$
675,00
0
$
750,00
0
$
825,00
0
210,00
0

$15
$ $3,150,
900,00
000
0
Total sales
revenue..... $1,100, $1,225, $1,350, $1,475, $1,600, $5,650,
000
000
000
000
000
000
Cash sales*.
Sales on
account....
$
440,00
0
$
490,00
0
$
540,00
0
$590,0
00
$640,0 $2,260,
00
000
660,00
0
735,00
0
810,00
0
885,00
0
960,00 3,390,0
0
00
*40% of total sales.

McGraw-Hill/Irwin
Inc.
9-76

Solutions Manual
60% of total sales.
McGraw-Hill/Irwin
Inc.

9-77
CASE 9-45 (CONTINUED)

2.
Cash receipts budget:
Cash sales...............
1st
Quarte
r
$
490,00
0
2nd
Quarte
r
$
540,00
0
20x5
3rd
Quarte
r
$
590,00
0
4th
Entire
Quarte
Year
r
$ $2,260,
640,00
000
0
Cash collections
from credit
sales made during
588,00 648,00 708,00 768,00 2,712,0
current
0
0
0
0
00
quarter*................
Cash collections
from credit
sales made during
previous
132,00 147,00 162,00 177,00 618,00
quarter .................
0
0
0
0
0
Total cash receipts. . $1,210, $1,335, $1,460, $1,585, $5,590,
000
000
000
000
000
*80% of current quarter's credit
sales.
20% of previous quarter's credit

sales.
McGraw-Hill/Irwin
Inc.
9-78

Solutions Manual

3
.
Production budget:
20x4
4th
Quart
er
1st
Quart
er
2nd
Quart
er
20x5
3rd
4th
Quart Quart
er
er
Entir
e
Year
55,00
0
60,00 65,00 70,00

0
0
0
250,
000
12,00
0
13,00 14,00 15,00

0
0
0
61,00
0
67,00
0
73,00 79,00 85,00

0
0
0
15,0
00
265,
000
10,00
0
11,00
0
12,00 13,00 14,00

0
0
0
Units to be
51,00
produced..............
0
56,00
0
61,00 66,00 71,00

0
0
0
11,0
00
254,
000
45,00
0
50,00 55,00 60,00

0
0
0
210,
000
10,00
0
11,00 12,00 13,00

0
0
0
55,00
0
61,00 67,00
0
0
13,0
00
223,
000
S frames:
Sales (in units). . . 50,00
0
Add: Desired
ending
11,00
inventory..........
0
Total units needed
Less: Expected
beginning
inventory.............
L frames:
Sales (in units). . . 40,00
0
Add: Desired
ending
9,000
inventory..........
Total units needed
Less: Expected
beginning
inventory.............
49,00
0
9,000
8,000
Units to be
41,00
produced..............
0
McGraw-Hill/Irwin
Inc.
46,00
0
73,0
00
10,00 11,00 12,00

0
0
0
51,00 56,00 61,00
0
0
0
9,00
0
214,
000

9-79

4
.
Direct-material budget:*
Metal strips:
S frames to be
produced.......
Metal
quantity per
unit (ft.).........
Needed for S
frame
production.....
L frames to be
produced.......
Metal
quantity per
unit (ft.).........
Needed for L
frame
production.....
Total metal
needed
for
production; to
be purchased
(ft.)...................
Price per
foot...................
Cost of metal
strips to
be purchased:
20x4
4th
Quart
er
1st
Quart
er
51,00
0
56,00 61,000
0
66,00
0
71,00
0
254,00
0
102,0
00
112,0 122,00
00
0
132,0
00
142,0
00
508,00
0
41,00
0
46,00 51,000
0
56,00
0
61,00
0
214,00
0
123,0
00
138,0 153,00
00
0
168,0
00
183,0
00
642,00
0
225,0
00
250,0 275,00
00
0
300,0
00
325,0 1,150,0
00
00

$1

$1

$1

$1

$1
$225,
000
$250, $275,0
000
00
$300,
000
$325, $1,150,
000
000
2nd
Quarte
r
20x5
3rd
4th
Quart Quart
er
er
Entire
Year

$1
*Direct-material budget continued on next page.

McGraw-Hill/Irwin
Inc.
9-80

Solutions Manual

20x4
Glass sheets:
S frames to be
produced.......
Glass
quantity per
unit (sheets). .
Needed for S
frame
production.....
L frames to be
produced.......
Glass
quantity per
unit (sheets). .
Needed for L
frame
production.....
Total glass
needed
for production
(sheets).........
Add: Desired
ending
inventory.......
Total glass
needs................
Less: Expected
beginning
inventory...........
McGraw-Hill/Irwin
Inc.
20x
4th
Quart
er
1st
Quart
er
51,00
0
2nd
Quarte
r
3rd
Quart
er
4th
Quart
er
Entire
Year
56,00 61,000
0
66,00
0
71,00
0
254,00
0
.2
5
.2
5
.2
5
.2
5
.2
5
.
25
12,75
0
14,00 15,250
0
16,50
0
17,75
0
63,500
41,00
0
46,00 51,000
0
56,00
0
61,00
0
214,00
0
.
5
. .5
5
.
5
. .
5
5
20,50
0
23,00 25,500
0
28,00
0
30,50
0
107,00
0
33,25
0
37,00 40,750
0
44,50
0
48,25
0
170,50
0
7,400
8,150
8,900
9,650
10,400
40,65
0
45,15 49,650
0
54,15
0
10,40
0
58,65
0
6,650
7,400
8,900
9,650
7,400
8,150
180,90
0

9-81
Glass to be
purchased......
Price per
glass
sheet.............
Cost of glass to
be
purchased......
Total rawmaterial
purchases
(metal
and glass)......
McGraw-Hill/Irwin
Inc.
9-82
34,00
0
37,75 41,500
0
45,25
0
49,00
0
173,50
0

$8

$8

$8

$8

$8

$8
$272,
000
$302, $332,0
000
00
$362,
000
$392, $1,388,
000
000
$497,
000
$552, $607,0
000
00
$662,
000
$717, $2,538,
000
000

Solutions Manual

5. Cash disbursements budget:*
1st
Quart
er
Raw-material purchases:
Cash payments for
purchases during
the current
$441,
quarter ...................
600
Cash payments for
purchases during
the
preceding
quarter**.................
Total cash
payments for
raw-material
purchases................
Direct labor:
Frames produced
(S and L)............
4th
Quarte
r
Entire
Year
$
$
485,60 529,600
0
$ $2,030,
573,60
400
0
99,40
0
110,40 121,400
0
132,40
0
$541,
000
$
$
596,00 651,000
0
$ $2,494,
706,00
000
0
102,0
00
112,00 122,000
0
132,00
0
468,00
0

.1
.
1

.1

.1
11,200
12,200
13,200
46,800

$20

$20

$20

$20
$
$
224,00 244,000
0
$
264,00
0
$
936,00
0
Direct-labor
hours per
.
frame.................
1
Direct-labor hours
to be
10,20
used...................
0
Rate per directlabor

hour...................
$20
Total cash
payments for
$204,
direct labor.........
000
McGraw-Hill/Irwin
Inc.
2nd
Quarte
r
20 5
3rd
Quarter
463,60
0

9-83
*Cash disbursements budget continued on next page.
80% of current quarters purchases

**20% of previous quarters purchases
McGraw-Hill/Irwin
Inc.
9-84

Solutions Manual
Manufacturing
overhead:
Indirect material....
Indirect labor........
Other....................
Total cash
payments for
manufacturing
overhead............
Cash payments for
selling
and
administrative
expenses............
Total cash
disbursements.........
McGraw-Hill/Irwin
Inc.
1st
Quart
er
2nd
Quarte
r
3rd
Quarter
4th
Quarte
r
Entire
Year
$
10,20
0
40,80
0
31,00
0
$
11,200
$
$
12,200 13,200
$
46,800
44,800
48,800
52,800
36,000
41,000
46,000
187,20
0
154,00
0
$
82,00
0
$
$
92,000 102,000
$
112,00
0
$
388,00
0
$100,
000
$
$
$
$
100,00 100,000 100,00 400,00
0
0
0
$927, $1,012, $1,097, $1,182, $4,218,
000
000
000
000
000

9-85

6
.
Summary cash budget:
Cash receipts [from

req. (2)].......................
Less: Cash
disbursements
[from req. (5)]...........
due to
operations................
Payment of dividends...
20x5
1st
2nd
3nd
4th
Entire
Quarter
Quarter
Quarter
Quarter
Year
$1,210,0 $1,335,0 $1,460,0 $1,585,0 $5,590,0
00
00
00
00
00
1,012,00 1,097,00 1,182,00 4,218,00
927,000
0
0
0
0
$
283,000
(50,000)
$
323,000
$
363,000
(50,000)
(50,000)
$ $1,372,0
403,000
00
(50,000) (200,000
)
1,000,00
0
(1,000,0
00)
Proceeds from bank

1,000,00
loan (1/2/x5)................
0
Purchase of equipment (1,000,00
0)
Quarterly installment
on loan
(250,000 (250,000 (250,000 (250,000
principal...................
)
)
)
)
Quarterly interest
payment*..................... (25,000) (18,750) (12,500)

(6,250)
during
$
$
$
$
the period................. (42,000)

4,250
50,500
96,750
McGraw-Hill/Irwin
9-86
2009 The McGraw-Hill Companies, Inc.

Solutions Manual
(1,000,0
00)
(62,500)
$
109,500
Cash balance,
beginning of period
95,000
53,000
57,250
Cash balance, end of

period.........................
$
53,000
$
57,250
$
107,750
$
204,500
*$1,000,000 10%
$750,000 10%
$500,000 10%
$250,000 10%
McGraw-Hill/Irwin
107,750 95,000
= $25,000
= $18,750
= $12,500
= $6,250
2009 The McGraw-Hill Companies, Inc.

9-87
$
204,500

7.
PHOTO ARTISTRY COMPANY

BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X5
Direct material:
Raw-material inventory, 1/1/x5...........
$
59,200
2,538,00
0
$2,597,2
00
Add: Purchases of raw material [req.

(4)]
Raw material available for use............
Deduct: Raw-material inventory,
12/31/x5
([req. (4)] 10,400 $8)...................
Raw material used
83,200
$2,514,0
00
936,000
Direct labor [req. (5)].............................
Manufacturing overhead:
Indirect material................................
$
46,800
Indirect labor..................................... 187,20
0
Other overhead.................................. 154,00
0
Depreciation......................................
80,000
Total manufacturing overhead............
Cost of goods manufactured..................

Add: Finished-goods inventory, 1/1/x5....
__ *
468,000
$3,918,0
00
167,000
Cost of goods available for sale..............

Deduct: Finished-goods inventory,
12/31/x5................................................
Cost of goods sold.................................
McGraw-Hill/Irwin
Inc.
9-88
$4,085,0
00
235,000
$3,850,0
**

Solutions Manual
00
*In the budget, budgeted and applied manufacturing
overhead are equal. The applied manufacturing overhead
may be verified independently as follows:
Total number of frames produced....... 468,00
0
Direct-labor hours per frame........... .
1
Total direct-labor hours...................... 46,800
Predetermined overhead rate per

hour......................................................
$10
Total manufacturing overhead applied $468,0
00
See next page.
**See next page.
See next page.
McGraw-Hill/Irwin
Inc.

9-89

The cost of goods manufactured may be verified independently as
follows:
Frames produced.................................
Manufacturing cost per unit..............
Total manufacturing cost.....................
Grand total (S frames and L frames)....
S
L
Frames Frames
254,000 214,000

$7
$10
$1,778, $2,140,
000
000
$3,918,000
**The finished-goods inventory on 12/31/x5 may be verified

independently as follows:
Projected inventory on 12/31/x5...........

Manufacturing cost per unit.................
Cost of ending inventory......................
Total cost of ending inventory (S and L)
S
L
Frames Frames
15,000
13,000

$7
$10
$
$
105,000 130,000
$235,000
The cost of goods sold may be verified independently as

follows:
Frames sold.........................................
Manufacturing cost per unit.................
Cost of goods sold...............................
Total cost of goods sold (S and L).........
S
L
Frames Frames
250,000 210,000

$7
$10
$1,750, $2,100,
000
000
$3,850,000
8.
McGraw-Hill/Irwin
Inc.
9-90

Solutions Manual

BUDGETED INCOME STATEMENT
Sales revenue.....................................
$5,650,
000
3,850,0
00
$1,800,
000
Less: Cost of goods sold......................

Gross margin......................................
Selling and administrative expenses. . .
Interest expense.................................
Net income.........................................
McGraw-Hill/Irwin
Inc.
$400,00
0
62,500
462,500
$1,337,
500

9-91

9.

BUDGETED STATEMENT OF RETAINED EARNINGS
Add: Net income................................................
Deduct: Dividends.............................................
1
0.
$3,353,
800
1,337,5
00
200,000
$4,491,
300

BUDGETED BALANCE SHEET
DECEMBER 31, 20X5
Cash.................................................................
Accounts receivable*.........................................
Inventory:
Raw material................................................
Finished goods..............................................
Plant and equipment (net of accumulated
depreciation)**..................................................
Total assets......................................................
Accounts payable.............................................
Common stock...................................................
Retained earnings.............................................
Total liabilities and stockholders' equity............
McGraw-Hill/Irwin
Inc.
9-92
$
204,500
192,000
83,200
235,000
8,920,0
00
$9,634,
700
$
143,400
5,000,0
00
4,491,3
00
$9,634,
700

Solutions Manual
*Fourth-quarter sales on account 20% = $960,000 20%
10,400 units $8
**$8,000,000 + $1,000,000 $80,000
Fourth-quarter purchases on account 20% = $717,000

20%
McGraw-Hill/Irwin
Inc.

9-93
FOCUS ON ETHICS (See page 376 in the text.)

Is padding the budget unethical? Some accountants argue
that budget padding is a vicious cycle: budgets are padded
by lower-level managers because they believe top
management will cut the budget, and budgets are cut by top
management because they believe the submitted budget
has been padded by lower-level managers. This situation
contains an unfortunate array of elements, which raise
serious obstacles to effective cost management.
It is
regrettable that the budget process is intermingled with the
employee incentive scheme via the bonus system in this
way, since it is hindering transparent cost management.
However, given the situation, there are several possible
scenarios for the division controller to deal with.
In cutting expenses, top corporate managers may be
revealing one of two things. They may be more focused on
the use of the budget data to drive incentives than as
accurate cost control tools, and thus may cut budgeted
expenses specifically to provide a stretch goal for the
division. Alternatively, top management may believe that
the budget has been padded by the division, possibly based
on previous budget submissions, and thus believe they are
handing back a more accurate expense budget than was
submitted to them.
No matter what the situation, the controller should make
every effort to provide accurate cost forecasts for the
budgeting purpose.
To do otherwise would be to
compromise his or her own integrity and authority within
the organization. Further, inaccurate information creates a
poor basis for cost management. If greater stretch goals
are required by top management, then the divisional team
could establish these for themselves. If there is doubt at
corporate level about the accuracy of the forecasts, then it
should be dispelled.
For example, the controller could
provide supporting documentation with the budget to
validate the estimates and to discourage top corporate
managers from cutting the expense budget.
McGraw-Hill/Irwin
Inc.
9-94

Solutions Manual

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CHAPTER 9

Profit Planning and Activity-Based Budgeting

2009 The McGraw-Hill Companies,

9-6 Operational budgets specify how an organization's

2009 The McGraw-Hill Companies,

Flowchart for Review Question 9-4

2009 The McGraw-Hill Companies,

2009 The McGraw-Hill Companies,

9-11 The budget manual says who is responsible for providing

2009 The McGraw-Hill Companies,

9-13 A master budget is based on many assumptions and

2009 The McGraw-Hill Companies,

is sick or traveling, he or she is not available to make

2009 The McGraw-Hill Companies,

9-18 In developing a budget to meet your college expenses,

multinational firm's budget must reflect the

It is difficult to prepare budgets when inflation is

high or unpredictable. Some foreign countries have

The economies of all countries fluctuate in terms of

consumer demand, availability of skilled labor, laws

Product planning and concept design

Detailed design and testing

2009 The McGraw-Hill Companies,

Distribution and customer service

It is important to budget these costs as early as possible

2009 The McGraw-Hill Companies,

The total required production is 131,144 units, computed

37,044 (46,305 80%)

Assumed production during third quarter (in

2009 The McGraw-Hill Companies,

Raw material to be purchased during third

2009 The McGraw-Hill Companies,

EXERCISE 9-22 (25 MINUTES)

Cash collections in October:

Notice that the amount of sales on account in June,

Cash collections in fourth quarter from credit sales in

2009 The McGraw-Hill Companies,

In the electronic version of the solutions manual, press the

2009 The McGraw-Hill Companies,

EXERCISE 9-23 (20 MINUTES)

From sales on account.....

= ($120,000 .6) + ($90,000 .4)

= ($135,000 .6) + ($90,000 .4)

Accounts payable, 12/31/x0..........................

2009 The McGraw-Hill Companies,

Accounts receivable, 12/31/x0......................

Sales on account during 20x1.......................

Accumulated depreciation, 12/31/x0.............

Retained earnings, 12/31/x0.........................

2009 The McGraw-Hill Companies,

EXERCISE 9-24 (15 MINUTES)

Production (in units) required for the year:

Purchases of raw material (in units), assuming production

2009 The McGraw-Hill Companies,

EXERCISE 9-25 (20 MINUTES)

WHITE MOUNTAIN FURNITURE COMPANY

WHITE MOUNTAIN FURNITURE COMPANY

WHITE MOUNTAIN FURNITURE COMPANY

2009 The McGraw-Hill Companies,

EXERCISE 9-26 (30 MINUTES)

Budgeted cash collections for December:

Budgeted income (loss) for December:

Less: Cost of goods sold (75% of sales)