Professional Documents
Culture Documents
3. The planning and control functions of budgeting can benefit all organizations regardless of size. All organizations need to determine what their goals are and how best to
attain those goals. This is the planning function of budgeting. In addition, organizations
can compare what actually happens with
what was planned to see if the plans are unfolding as anticipated. This is the control
function of budgeting.
4. Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation, and improves the functions of
communication and coordination.
5. A master budget is the collection of all individual area and activity budgets. Operating
budgets are concerned with the incomegenerating activities of a firm. Financial
budgets are concerned with the inflows and
outflows of cash and with planned capital
expenditures.
6. The sales forecast is a critical input for building the sales budget. However, it is not necessarily equivalent to the sales budget.
Upon receiving the sales forecast, management may decide that the firm can do better
than the forecast indicates. Consequently,
actions may be taken to increase the sales
potential for the coming year (e.g., increasing advertising). This adjusted forecast then
becomes the sales budget.
7. Yes. All budgets are founded on the sales
budget. Before a production budget can be
created, it must have the planned sales. The
231
10.
11.
12.
Frequent feedback is important so that corrective action can be taken, increasing the
likelihood of achieving budget.
13.
14.
15.
16.
17.
18.
19.
232
21.
22.
23.
EXERCISES
81
1.
2.
3.
4.
5.
e
d
c
e
b
82
1.
2.
3.
4.
5.
H, I
E
I, F
G
D
6.
7.
8.
9.
10.
F
F
A
C
B
83
1.
Freshaire, Inc.
Sales Budget
For the Year 2008
Mint:
2.
Units
Price
Sales
1st Qtr.
80,000
$3.00
$240,000
2nd Qtr.
110,000
$3.00
$330,000
3rd Qtr.
124,000
$3.00
$372,000
4th Qtr.
140,000
$3.00
$420,000
Total
454,000
$3.00
$ 1,362,000
Lemon:
Units
Price
Sales
100,000
$3.50
$350,000
100,000
$3.50
$350,000
120,000
$3.50
$420,000
140,000
$3.50
$490,000
460,000
$3.50
$ 1,610,000
Total sales
$590,000
$680,000
$792,000
$910,000
$ 2,972,000
Freshaire, Inc., will use the sales budget in planning as the basis for the production budget and the succeeding budgets of the master budget. At the end
of the year, the company can compare actual sales against the budget to see
if expectations were achieved.
233
84
Freshaire, Inc.
Production Budget for Mint Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced
1st Qtr.
80,000
11,000
91,000
4,000
87,000
2nd Qtr.
110,000
12,400
122,400
11,000
111,400
3rd Qtr.
124,000
14,000
138,000
12,400
125,600
4th Qtr.
140,000
9,000
149,000
14,000
135,000
Total
454,000
9,000
463,000
4,000
459,000
4th Qtr.
140,000
22,000
162,000
28,000
134,000
Total
460,000
22,000
482,000
6,400
475,600
Freshaire, Inc.
Production Budget for Lemon Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced
1st Qtr.
100,000
20,000
120,000
6,400
113,600
2nd Qtr.
100,000
24,000
124,000
20,000
104,000
3rd Qtr.
120,000
28,000
148,000
24,000
124,000
85
Pescado, Inc.
Production Budget for Tuna
For the Year 20xx
Sales
Des. ending inventory
Total needs
Less: Beg. inventory
Units produced
January
200,000
84,000
284,000
38,000
246,000
February
240,000
77,000
317,000
84,000
233,000
234
March
220,000
70,000
290,000
77,000
213,000
Total
660,000
70,000
730,000
38,000
692,000
8-6
Pescado, Inc.
Direct Materials Purchases Budget
For January and February
Cans:
January
246,000
1
246,000
46,600
292,600
49,200
243,400
February
Total
233,000
479,000
1
1
233,000
479,000
42,600
42,600
275,600
521,600
46,600
49,200
229,000
472,400
January
Production
246,000
4 ounces
4
Ounces for production
984,000
Des. ending inventory
186,400
Total needs
1,170,400
Less: Beg. Inventory
196,800
Ounces purchased
973,600
984,000 * 20% = 196,800
February
Total
233,000
479,000
4
4
932,000 1,916,000
170,400
170,400
1,102,400 2,116,400
186,400
196,800
916,000 1,889,600
Production
1 can
Cans for production
Des. ending inventory
Total needs
Less: Beg. inventory
Ounces purchased
246,000 * 20% = 49,200
Tuna:
87
Carson, Inc.
Production Budget
For the First Quarter, 20XX
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced
January
200,000
36,000
236,000
18,000
218,000
235
February
240,000
33,000
273,000
36,000
237,000
March
220,000
30,000
250,000
33,000
217,000
Total
660,000
30,000
690,000
18,000
672,000
88
Manning Company
Direct Materials Purchases Budget
For March, April, and May 20XX
Units to be produced
Direct materials per unit
(yards)
Production needs
Desired ending inventory
(yards)
Total needs
Less beginning inventory
Direct materials to be
purchased (yards)
Cost per yard
Total purchase cost
March
20,000
April
60,000
May
100,000
Total
180,000
25
500,000
25
1,500,000
25
2,500,000
25
4,500,000
300,000
800,000
100,000
500,000
2,000,000
300,000
60,000
2,560,000
500,000
60,000
4,560,000
100,000
700,000
$0.30
$210,000
1,700,000
$0.30
$ 510,000
2,060,000
$0.30
$ 618,000
4,460,000
$0.30
$1,338,000
89
Manning Company
Direct Labor Budget
For March, April, and May 20XX
Units to be produced
Direct labor time per
unit (hours)
Total hours needed
Cost per hour
Total direct labor cost
March
20,000
0.04
800
$12
$ 9,600
236
April
60,000
0.04
2,400
$12
$ 28,800
May
100,000
Total
180,000
0.04
4,000
$12
$ 48,000
0.04
7,200
$12
$ 86,400
810
Swasey, Inc.
Sales Budget
For the Coming Year
Model
LB-1
LB-2
WE-6
WE-7
WE-8
WE-9
Total
1
2
3
4
5
Units
33,6001
21,6002
25,2003
19,4404
9,6005
4,0006
Price
$30.00
15.00
10.40
10.00
22.00
26.00
Total Sales
$1,008,000
324,000
262,080
194,400
211,200
104,000
$2,103,680
16,800 units * 200% = 33,600; Price increased to $30
18,000 + (18,000 * 20%) = 21,600; no change in price
Quantity remains the same; price decreases by 20%; $13 * 80% = $10.40
16,200 + (16,200 * 20%) = 19,440; no change in price
Oct, Nov, and Dec represent 3 months of sales; 2,400 / 3 = 800 sales per
month for 12 months = 9,600 units; no change in price.
6 1,000 / 3 * 12 = 4,000 units; no change in price
811
1.
Sept.
200
15
215
20
195
237
Oct.
150
18
168
15
153
Nov.
180
25
205
18
187
Dec.
250
10
260
25
235
811
2.
Continued
Raylenes Flowers and Gifts
Direct Materials Purchases Budget
For September, October, and November
Fruit:
Production
Amount/basket (lbs.)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Sept.
195
1
195
8
203
10
193
Small gifts:
Production
Amount/basket (items)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Sept.
195
5
975
383
1,358
488
870
Cellophane:
Production
Amount/basket (feet)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Sept.
195
3
585
230
815
293
522
238
Oct.
153
1
153
9
162
8
154
Oct.
153
5
765
468
1,233
383
850
Oct.
153
3
459
281
740
230
510
Nov.
187
1
187
12
199
9
190
Nov.
187
5
935
588
1,523
468
1,055
Nov.
187
3
561
353
914
281
633
811
Concluded
Basket:
Production
Amount/basket (item)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
3.
Sept.
195
1
195
77
272
98
174
Nov.
187
1
187
118
305
94
211
A direct materials purchases budget for December requires January production which cannot be computed without a February sales forecast.
812
1. Credit sales in May = $240,000 x 0.9 = $216,000
Credit sales in June = $230,000 x 0.9 = $207,000
Credit sales in July = $246,000 x 0.9 = $221,400
Credit sales in August = $250,000 x 0.9 = $225,000
2.
Oct.
153
1
153
94
247
77
170
Lawrence, Inc.
Schedule of Cash Receipts
Cash sales
Payments on account:
From May credit sales
(0.07 x $216,000)
From June credit sales
(0.60 x $207,000)
(0.07 x $207,000)
From July credit sales
(0.30 x $221,400)
(0.60 x $221,400)
From August credit sales
(0.30 x $225,000)
Cash receipts
July
24,600
August
25,000
15,120
---
124,200
14,490
66,420
132,840
--67,500
$230,340 $239,830
239
813
1.
Janzen, Inc.
Cash Receipts Budget
For July
Payments on account:
From May credit sales (0.15 $220,000) .................................
From June credit sales (0.60 $230,000) ...............................
From July credit sales (0.20 $210,000) .................................
Less: July cash discount (0.02 $42,000) ..............................
Cash receipts ............................................................................
2.
$ 33,000
138,000
42,000
(840)
$212,160
Janzen, Inc.
Cash Receipts Budget
For August
Payments on account:
From June credit sales (0.15 $230,000) ...............................
From July credit sales (0.60 $210,000) .................................
From August credit sales (0.20 $250,000) ...........................
Less: August cash discount (0.02 $50,000) .........................
Cash receipts.............................................................................
814
MarvelI agree with comment Company
Schedule of Cash Payments for August
$150,150
240
$ 34,500
126,000
50,000
(1,000)
$209,500
815
Cash Budget
For the Month of June 20XX
345
20,000
15,000
7,500
3,778
$46,623
$12,000
14,400
8,700
1,200
5,500
41,800
$ 4,823
No. Without the possibility of short-term loans, the owner should consider
taking less cash salary.
241
816
1.
Units produced
Direct materials cost
Direct labor cost
Total
a.
b.
Performance Report
Actual
Budgeted Variance
1,100
1,000
100 F
a
$11,200
$10,000 $1,200 U
4,400
4,000b
400 U
$15,600
$14,400
$1,600 U
2. The performance report compares costs at two different levels of activity and
so cannot be used to assess efficiency.
817
1.
Pet-Care Company
Overhead Budget
For the Coming Year
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
Activity Level
55,000 Hours*
$0.40
0.50
1.60
$22,000
27,500
88,000
$137,500
$17,000
26,500
18,000
61,500
$199,000
25,000
30,000
55,000
242
817
2.
Concluded
10% higher:
Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
60,500 Hours*
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
$0.40
0.50
1.60
$24,200
30,250
96,800
$151,250
$17,000
26,500
18,000
61,500
$212,750
Pet-Care Company
Overhead Budget
For the Coming Year
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
Activity Level
44,000 Hours*
$0.40
0.50
1.60
$17,600
22,000
70,400
$110,000
$17,000
26,500
18,000
61,500
$171,500
243
818
1.
Pet-Care Company
Performance Report
For the Current Year
Units produced
Production costs*:
Maintenance
Power
Indirect labor
Rent
Total costs
Actual
220,000
Budget
220,000
Variance
0
$ 40,500
31,700
119,000
18,000
$209,200
$ 41,000
30,000
122,500
18,000
$211,500
$ 500
1,700
3,500
0
$2,300
F
U
F
F
244
819
1.
a. An imposed budgetary approach does not allow input from those who are
directly affected by the process. This can tend to make the employees feel
that they are unimportant and that management is concerned only with
meeting budgetary goals and not necessarily with the well-being of their
employees. The employees will probably feel less of a bond with the organization and will feel that they are meeting standards set by others. An
imposed budgetary approach is impersonal and can give employees the
feeling that goals are set arbitrarily or that some people benefit at the expense of others. Goals that are perceived as belonging to others are less
likely to be internalized, increasing the likelihood of dysfunctional behavior. Furthermore, imposed budgets fail to take advantage of the knowledge subordinate managers have of operations and local market conditions.
b. A participative budgetary approach allows subordinate managers considerable say in how budgets are established. This communicates a sense
of responsibility to the managers and fosters creativity. It also increases
the likelihood that the goals of the budget will become the managers personal goals, due to their participation. This results in a higher degree of
goal congruence. Many feel that there will be a higher level of performance
because it is felt that individuals who are involved in setting their own
standards will work harder to achieve them. When managers are allowed
to give input in developing the budget, they tend to feel that its success or
failure reflects personally on them.
2.
245
820
1. First, calculate the inspection hours needed: (50,000 units/1000 units
per batch) 100 testing hours per batch = 5,000 projected testing hours.
This requires the hiring of three inspectors (5,000 projected testing
hours/2,000 inspector hours per year) = 2.5 required inspectors and the
lease of one piece of testing equipment. Thus, the budget for 5,000 inspection hours is given as follows:
Resource
Salaries
Lease
Power
Total
Formula
Variable
Fixed
$150,000
10,000
-$2.00
$160,000
$2.00
Formula
Fixed
Variable
$150,000
20,000
-$2.00
$2.00
$170,000
246
The formula is only valid for this range because of the step-cost nature of
the fixed resources. Outside this range the number of inspectors and
equipment needed may change.
821
1.
Resource
Salaries
Lease
Crates
Fuel
Total
Formula
Variable
Fixed
$400,000
24,000
$1.00
0.06
$1.06
$424,000
Note: Cycles, instead of moves, could have been used as the output measures. In this case, the variable cost per unit would double. In some ways,
cycles is a better measure because crates then become a strictly variable
cost (for moves, it is a step-variable cost treated as a variable cost). For either
moves or cycles, salaries and leases are step-fixed costs. Also, capacity is
determined by operators: 3 2,000 10 = 60,000 moves. The forklifts actually
supply more potential capacity: 3 24 280 3 = 60,480, but they cannot
move without operators.
2.
Resource
Salaries
Lease
Crates
Fuel
Total
Formula
Fixed
Variable
$400,000
24,000
$1.00
0.06
$424,000
$1.06
The reduction in output reduces the demand for crates and fuel, but the number of operators and forklifts would stay the same (even if the reduction in activity output were permanent).
3.
Resource
Salaries
Lease
Crates
Fuel
Total
Formula
Fixed
Variable
$120,000
8,000
$1.00
0.06
$128,000
$1.06
247
lowed, then the cost for salaries would be budgeted at $100,000. This illustrates the lumpy nature of resources and their role in budgeting.
248
PROBLEMS
822
First, separate fixed and variable costs for each category using the high-low method.
Maintenance:
V = ($13,100 $10,100)/(2,000 1,000) = $3.00
F = Y2 VX2 = $13,100 $3(2,000) = $7,100
Maintenance cost = $7,100 + $3X
Supplies:
V = ($4,800 $2,400)/1,000 = $2.40
F = $4,800 $2.40(2,000) = 0
Supplies cost = $2.40X
Power:
V = ($2,000 $1,000)/1,000 = $1.00
F = $2,000 $1.00(2,000) = 0
Power cost = $1.00X
Other:
V = ($14,240 $12,940)/1,000 = $1.30
F = $14,240 $1.30(2,000) = $11,640
Other costs = $11,640 + $1.30X
Maintenance
Depreciation
Supervision
Supplies
Power
Other
Total
249
823
Kendall Law Firm
Cash Receipts Budget
Cash fees .....................................................................
Received from sales in:
June:
(0.7)($255,000)(0.17)(1.02) ...............
July:
(0.7)(0.7)($204,000)...........................
(0.7)(0.17)($204,000)(1.02) ...............
August:
(0.7)(0.1)($240,000)...........................
(0.7)(0.7)($240,000)...........................
September: (0.7)(0.1)($300,000)...........................
Total .............................................................................
August
$ 72,000
September
$ 90,000
30,952
99,960
24,762
16,800
$219,712
117,600
21,000
$253,362
824
Briggs Manufacturing
For the Quarter Ended March 31, 20XX
1. Schedule 1: Sales Budget
Units
Selling price
Sales
2.
January
40,000
$215
$8,600,000
February
50,000
$215
$10,750,000
March
60,000
$215
$12,900,000
Total
150,000
$215
$32,250,000
January
40,000
40,000
80,000
32,000
48,000
250
February
50,000
48,000
98,000
40,000
58,000
March
60,000
48,000
108,000
48,000
60,000
Total
150,000
48,000
198,000
32,000
166,000
824
3.
Continued
January
Components
Units to be produced
(Schedule 2)
48,000
Direct materials
per unit (lbs.)
10
Production needs
480,000
Desired ending
inventory
250,000
Total needs
730,000
Less: Beginning
inventory
200,000
Direct materials to
be purchased
530,000
Cost per pound
$8
Total cost
$4,240,000
Metal
48,000
February
Components
58,000
58,000
10
580,000
6
348,000
150,000
438,000
300,000
880,000
180,000
528,000
120,000
250,000
150,000
318,000
$2
$636,000
630,000
$8
$5,040,000
378,000
$2
$756,000
6
288,000
(Schedule 3 continued)
Metal
March
Components
Units to be produced
(Schedule 2)
60,000
Direct materials
per unit (lbs.)
10
Production needs
600,000
Desired ending
inventory
300,000
Total needs
900,000
Less: Beginning
inventory
300,000
Direct materials to
be purchased
600,000
Cost per pound
$8
Total cost
$4,800,000
Metal
60,000
6
360,000
Total
Components
166,000
10
1,660,000
166,000
6
996,000
180,000
540,000
300,000
1,960,000
180,000
1,176,000
180,000
200,000
120,000
360,000
$2
$720,000
1,760,000
$8
$14,080,000
1,056,000
$2
$2,112,000
251
824
4.
Continued
5.
February
48,000
58,000
4
192,000
$9.25
$1,776,000
4
232,000
$9.25
$2,146,000
Total
60,000
4
240,000
$9.25
$2,220,000
166,000
4
664,000
$9.25
$6,142,000
6.
March
February
232,000
$3.40
$ 788,800
338,000
$1,126,800
March
Total
240,000
$3.40
$ 816,000
338,000
$1,154,000
664,000
$3.40
$2,257,600
1,014,000
$3,271,600
January
40,000
February
50,000
March
60,000
Total
150,000
$3.60
$144,000
$3.60
$180,000
$3.60
$216,000
$3.60
$540,000
$ 50,000
40,000
20,000
$110,000
$ 50,000
40,000
20,000
$110,000
$ 50,000
40,000
20,000
$110,000
$150,000
120,000
60,000
$330,000
$254,000
$290,000
$326,000
$870,000
252
824
7.
Continued
$ 92.00
37.00
13.60
6.11
$148.71
9.
$15,272,000
6,142,000
3,271,600
$24,685,600
4,758,720
$29,444,320
7,138,080
$22,306,240
253
$ 32,250,000
22,306,240
$ 9,943,760
870,000
$ 9,073,760
824
Concluded
January
$ 378,000
8,600,000
$8,978,000
February
$ 1,321,200
10,750,000
$12,017,200
March
$ 2,952,400
12,900,000
$15,852,400
Total
$ 378,000
32,250,000
$32,628,000
$4,876,000
1,776,000
790,800
214,000
$7,656,800
$5,796.000
2,146,000
926,800
250,000
$9,118.800
$ 5,520,000
2,220,000
954,000
286,000
$ 8,980,000
$16,192,000
6,142,000
2,671,600
750,000
$25,755,600
$1,321,200
2,952,400
$ 6,872,400
$6,872,400
$1,321,200
$ 2,952,400
$ 6,872,400
$ 6,872,400
254
825
1.
June
$ 96,000
36,000
$132,000
48,000
$ 84,000
July
$ 72,000
40,000
$112,000
36,000
$ 76,000
August
$ 80,000
54,000
$134,000
40,000
$ 94,000
September
$108,000
44,000
$152,000
54,000
$ 98,000
*By June 30, 20% of June credit sales and 70% of May credit sales have been
collected, leaving 80% and 30%, respectively, to be collected.
Given accounts payable, the total liabilities plus stockholders equity must
equal $562,750 ($84,000 + $210,000 + $268,750). Cash is the difference between total assets and all other assets except cash ($562,750 $425,000
$36,000 $88,200). This difference is $13,550.
Cash
Accounts receivable
Inventory
Plant and equipment
Accounts payable
Common stock
Retained earnings
Total
Liabilities and
Assets
$ 13,550
88,200
36,000
425,000
$562,750
255
Stockholders Equity
$ 84,000
210,000
268,750
$562,750
825
2.
Continued
Grange Retailers
Cash Budget
For the Quarter Ending September 30, 2008
July
$ 13,550
102,600
$ 116,150
August
$ 10,450
100,700
$ 111,150
September
$ 10,405
113,300
$ 123,705
Total
$ 13,550
316,600
$ 330,150
$ 84,000
10,000
1,000
1,700
15,000
$ 76,000
10,000
1,000
1,700
$ 94,000
10,000
1,000
1,700
$ 254,000
30,000
3,000
5,100
15,000
6,000
5,000
$ 318,100
10,000
$ 328,100
$ 2,050
6,000
$ 111,700
10,000
$ 121,700
$ (5,550)
$
$ 94,700
10,000
$ 104,700
$ 6,450
5,000
$ 111,700
10,000
$ 121,700
$ 2,005
6,000
$ 6,000
$ 10,450
(6,000)
(45)
$ (6,045)
$ 10,405
$
0
$
0
$ 12,005
6,000
(6,000)
(45)
$
(45)
$ 12,005
$ 27,000
$ 30,000
$ 40,500
$ 97,500
12,600
42,000
21,000
$ 102,600
14,000
31,500
25,200
$ 100,700
18,900
35,000
18,900
$ 113,300
45,500
108,500
65,100
$ 316,600
256
825
Concluded
3.
Grange Retailers
Pro Forma Balance Sheet
September 30, 2008
Cash
Accounts receivablea
Inventoryb
Plant and equipmentc
Accounts payableb
Common stock
Retained earningsd
Total
Liabilities and
Assets
$ 12,005
96,600
44,000
413,000
$565,605
Stockholders Equity
$ 98,000
210,000
257,605
$565,605
826
1.
Participative budgeting communicates a sense of responsibility to subordinate managers and fosters creativity. Since the subordinate manager creates
the budget, it also increases the likelihood that the goals of the budget will
become the managers personal goals, resulting in a higher degree of goal
congruence. Many believe that the increased responsibility and challenge
provide nonmonetary incentives that lead to a higher level of performance
because it is felt that individuals who are involved in setting their own standards work harder to achieve them. It also involves individuals whose knowledge of local conditions may enhance the entire planning process.
257
826
Concluded
There are also certain disadvantages or problems associated with participative budgeting. Some managers may tend to either set the budget too loosely
or too tightly. Participative budgeting also creates the opportunity for managers to build slack into the budget by underestimating revenues or overestimating costs. Another problem is that top management may assume total
control of the budgeting process and, simultaneously, seek superficial participation of lower-level managers. The participation is generally limited to an
endorsement activity, and no real input is sought. In this case, the advantages of participation are negated.
2.
258
827
Minota Company
Cash Budget
For the Month of July 2008
Beginning cash balance .......................................................
Collections:
Cash sales (0.3 $1,140,000) .........................................
Credit sales:
July:
With discounta.......................................................
Without discountb .................................................
Junec ...........................................................................
Mayd.............................................................................
Sale of old equipment ..........................................................
Total cash available ........................................................
234,612
239,400
140,000
84,000
25,200
$1,092,212
Less disbursements:
Raw materials:
Julye.............................................................................
Junef ............................................................................
Direct labor ......................................................................
Operating expenses ........................................................
Dividends .........................................................................
Equipment ........................................................................
Total disbursements ..................................................
Minimum cash balance ........................................................
Total cash needs ...................................................................
$ 144,000
136,800
110,000
280,000
140,000
168,000
$ 978,800
20,000
$ 998,800
$ 113,412
27,000
342,000
93,412
259
828
1.
a. The new budget system allows the managers to focus on those areas that
need attention. By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded (frequent
feedback is provided). Also, the company has segregated costs into fixed
and variable components, an essential step for good control. A major
weakness of the budget is the failure to properly define responsibility. Because of this, supervisors are being held accountable for areas over which
they have no control.
b. The performance report should emphasize those items over which the
manager has control. The report should also compare actual costs with
budgeted costs for the actual level of activity. Currently, the report is attempting to compare costs at two different levels: the original budget for
3,000 units with the actual costs for production of 3,185 units. A flexible
budgeting system needs to be employed.
2.
Berwin, Inc.
Machining Department Performance Report
For the Month Ended May 31, 2008
Volume in units
Budget*
3,185
Actual
3,185
Variance
0
$ 25,480
29,461
35,354
$ 90,295
$ 24,843
29,302
35,035
$ 89,180
$ 637
159
319
$1,115
$ 3,300
1,500
300
240
930
$ 6,270
$ 3,334
1,500
300
240
1,027
$ 6,401
34 U
0
0
0
97 U
$ 131 U
Total costs
$ 96,565
$ 95,581
$ 984 F
F
F
F
F
260
828
3.
Concluded
829
1.
Direct labor
Power
Setups
Total
Actual Costs
$210,000
135,000
140,000
$485,000
Budgeted Costs
$200,000
85,000
100,000
$385,000
Budget Variance
$ 10,000 U
50,000 U
40,000 U
$100,000 U
Note: Budgeted costs use the actual direct labor hours and the labor-based
cost formulas. Example: Direct labor cost = $10 20,000 = $200,000; Power
cost = $5,000 + ($4 20,000) = $85,000; and Setup cost = $100,000 (fixed).
2.
Direct labor
Power
Setups
Total
Actual Costs
$210,000
135,000
140,000
$485,000
Budgeted Costs
$200,000
149,000
142,000
$491,000
Budget Variance
$10,000 U
14,000 F
2,000 F
$ 6,000 F
Note: Budgeted costs use the individual driver formulas: Direct labor = $10
20,000 = $200,000; Power = $68,000 + ($0.90 90,000) = $149,000; and Setups
= $98,000 + ($400 110) = $142,000.
3.
The multiple-cost-driver approach captures the cause-and-effect cost relationships and, consequently, is more accurate than the direct-labor-based
approach.
261
830
1.
Westcott, Inc.
Performance Report
For the Year 2008
Direct materials
Direct labor
Depreciation
Maintenance
Machining
Materials handling
Inspections
Total
Actual Costs
$ 440,000
355,000
100,000
425,000
142,000
232,500
160,000
$1,854,500
Budgeted Costs*
$ 480,000
320,000
100,000
435,000
137,000
240,000
145,000
$1,857,000
Budget Variance
$40,000 F
35,000 U
0
10,000 F
5,000 U
7,500 F
15,000 U
$ 2,500 F
*Budget formulas for each item can be computed by using the high-low method (using the appropriate cost driver for each method). Using this approach, the budgeted costs for the actual activity levels are computed as follows:
Direct materials: $6 80,000
Direct labor: $4 80,000
Depreciation: $100,000
Maintenance: $60,000 + ($1.50 250,000)
Machining: $12,000 + ($0.50 250,000)
Materials handling: $40,000 + ($6.25 32,000)
Inspections: $25,000 + ($1,000 120)
262
830
2.
Concluded
Note: The first pool has material and labor costs included.
Unit cost:
Pool 1: $11 10,000
Pool 2: $2.24 15,000
Pool 3: $7.25 500
Pool 4: $1,125 5
Total
Units
Unit cost
=
=
=
=
$110,000
33,600
3,625
5,625
$152,850
10,000
$ 15.29*
*Rounded
3.
Knowing the resources consumed by activities and how the resource costs
change with the activity driver should provide more insight into managing the
activity and its associated costs. For example, if moves could be reduced to
20,000 from the expected 40,000, then costs can be reduced by not only eliminating the need for four operators, but by reducing the need to lease from
four to two forklifts. However, in the short run, the cost of leasing forklifts
may persist even though demand for their service is reduced.
20,000 moves
Materials handling:
Forklifts
Operators
Fuel
Total
40,000 moves
$ 40,000
120,000
5,000
$ 165,000
$ 40,000
240,000
10,000
$ 290,000
The detail assumes that forklift leases must continue in the short run but that
the number of operators may be reduced (assumes each operator can do
5,000 moves per year).
263
831
a.
Qtr. 1
65
$400
$26,000
Qtr. 2
70
$400
$28,000
Qtr. 3
75
$400
$30,000
Qtr. 4
90
$400
$36,000
Total
300
$400
$120,000
Qtr. 1
65,000
Qtr. 2
70,000
Qtr. 3
75,000
Qtr. 4
90,000
Total
300,000
13,000
78,000
15,000
85,000
20,000
95,000
10,000
100,000
10,000
310,000
0
78,000
13,000
72,000
15,000
80,000
20,000
80,000
0
310,000
Qtr. 1
78.0
3
234.0
Qtr. 2
72.0
3
216.0
Qtr. 3
80.0
3
240.0
Qtr. 4
80.0
3
240.0
Total
310.0
3
930.0
63.0
297.0
67.5
283.5
81.0
321.0
65.7
305.7
65.7
995.7
65.7
231.3
$80
$18,504
63.0
220.5
$80
$17,640
67.5
253.5
$80
$20,280
81.0
224.7
$80
$17,976
65.7
930.0
$80
$74,400
264
831
Continued
Qtr. 2
72
5
360
$10
$3,600
Qtr. 3
80
5
400
$10
$4,000
Qtr. 4
80
5
400
$10
$4,000
Total
310
5
1,550
$10
$15,500
Qtr. 3
400
$6
$2,400
1,000
$3,400
Qtr. 4
400
$6
$2,400
1,000
$3,400
Total
1,550
$6
$ 9,300
4,000
$13,300
f.
Qtr. 1
78
5
390
$10
$3,900
Qtr. 1
390
$6
$2,340
1,000
$3,340
Qtr. 2
360
$6
$2,160
1,000
$3,160
Qtr. 1
65
$10
$ 650
250
$ 900
Qtr. 2
70
$10
$ 700
250
$ 950
Qtr. 3
75
$10
$ 750
250
$1,000
$240.00
50.00
30.00
12.90*
$332.90
265
Qtr. 4
90
$10
$ 900
250
$1,150
Total
300
$10
$3,000
1,000
$4,000
831
Continued
1.
$ 74,400,000
15,500,000
13,300,000
$103,200,000
0
$103,200,000
3,329,000
$ 99,871,000
Qtr. 2
$ 1,110
Qtr. 3
$ 3,128
Qtr. 4
$ 5,568
23,800
3,900
$28,810
25,500
4,200
$32,828
30,600
4,500
$40,668
102,000
15,900
$118,150
$ 8,820
9,252
3,600
2,810
900
300
$10,140
8,820
4,000
3,050
950
300
$25,682
$ 3,128
$27,260
$ 5,568
$ 8,988
10,140
4,000
3,050
1,100
300
2,000
$29,578
$11,090
$ 37,200
35,460
15,500
11,900
3,800
1,200
2,000
$107,060
$ 11,090
266
Total
250
831
Concluded
j.
Optima Company
Pro Forma Income Statement
For the Year Ending December 31, 2008
Sales (Schedule 1) ....................................................................
Less: Cost of goods sold (Schedule 8) ...................................
Gross margin .......................................................................
Less: Selling and administrative expenses (Schedule 6) .....
Income before income taxes ..............................................
k.
$120,000,000
99,871,000
$ 20,129,000
4,000,000
$ 16,129,000
Optima Company
Pro Forma Balance Sheet
December 31, 2008
Assets
Cash ...........................................................................................
Accounts receivable .................................................................
Direct materials inventory ........................................................
Finished goods inventory ........................................................
Plant and equipment .................................................................
Total assets ...............................................................................
$11,090,000
5,400,000
5,256,000
3,329,000
33,900,000a
$58,975,000
$33,500,000
2,000,000
(1,600,000)
$33,900,000
$ 8,058,000
16,129,000
(1,200,000)
$22,987,000
*Ignore taxes.
267
$ 8,988,000
27,000,000
22,987,000b
$58,975,000
832
1.
The flexible budgets presented are based on three different activity levels,
none of which coincide with the actual level of performance for November.
The budget must be restated to a level of activity that matches the actual results. The fixed and variable components of the mixed costs must be segregated and a budgeted cost calculated for the level of activity attained.
2.
Patterson Company
Selling Expenses Report
For the Month of November
Monthly Expenses
Advertising and promotion
Administrative salaries
Sales salariesa
Sales commissionsb
Salesperson travelc
Sales office expensed
Shipping expensee
Total
a
Budget
$1,200,000
57,000
84,000
327,000
187,200
500,500
705,000
$3,060,700
Actual
$1,350,000
57,000
84,000
327,000
185,000
497,200
730,000
$3,230,200
Variance
$150,000 U
0
0
0
2,200 F
3,300 F
25,000 U
$169,500 U
($75,600/72)(80) = $84,000
($300,000/$10,000,000)($10,900,000) = $327,000
268
832
Concluded
269
2.
There are few, if any, legitimate reasons for deferring the closing of sales.
Thus, if a marketing manager were asked to engage in this behavior, the first
response must be to find out why the request is being made. If there is no
sound reason offered, then a simple refusal should suffice. If it takes on the
nature of an order and no sound reason exists, then the marketing manager
should consider appealing to a higher-level manager. Certainly, deferral of
closings so that it increases the likelihood of meeting budget for the coming
year is not a sound reason, and, in fact, is wrong.
3.
It would be hard to go against a common practice that seems to have the approval of the plant managers. The widespread knowledge of the practice may
even suggest that higher-level management is aware of it and essentially
condones the practiceor at least adjusts for it. If higher-level management
is aware of the practice and adjusts for it, then the ability to achieve bonus
may not be enhanced as much as believed. The plant manager could investigate and find out the extent to which upper-level management is aware of
padding. At the same time, the manager could obtain some advice on what
his behavior ought to be. If told that the practice is acceptable, then the manager has to decide whether to continue in an organization that accepts deceptive behavior (or go against the grain and simply report what he or she feels
is really achievable by the plant).
4.
270
834
1.
$21,360
$ (2,904)
$12,700
1,344
1,500
1,200
300
400
150
100
5,000
570
500
500
$24,264
$ 4,500
5,700
1,360
3,500
1,350
2,700
2,250
$21,360
The budget shows that there is $2,904 more cash going out than coming in.
271
834
2.
Continued
Dr. Jones must either increase revenues to make up the deficiency or cut
costs or a combination of the two. Three possible approaches are outlined
below:
a. Extend office hours so that a total of 40 hours are worked each week. This
could increase revenues by as much as $5,340. Based on a four-week
month, the current revenue earned per hour is $166.88 ($21,360/128). Thus,
the total revenue increase possible is $166.88 32 hours = $5,340. Dr.
Jones would need to inform his assistants and receptionist of the increased time and indicate that each will receive a 15% increase in salary
for the additional time. (The office is currently open 34 hours per week.)
Benefits (primarily FICA and unemployment insurance benefits) would also increase. Other expenses that will likely increase with an increase in
sales are dental supplies, lab fees, and utilities (representing about 31% of
sales). The remaining expenses appear to be fixed. Thus, the increase in
cash flow is computed as follows:
Incremental revenues
Salary increases (0.15 $3,400)
Benefits ($1,344/$12,700)($510)
Variable expenses (0.31 $5,340)
Cash flow increase
$ 5,340
(510)
(54)
(1,655)
$ 3,121
Approach 1 carries with it some risk. Increasing office hours may not increase business. If business does not increase as expected, the cash flow
problems could be aggravated rather than relieved. The likelihood of increasing business would be increased if the additional hours are offered in the early evening instead of Friday afternoon. Evening hours are a major convenience for patients who must work during the day and are reluctant to lose
work hours.
272
834
Continued
Dr. Roger Jones
Revised Cash Budget
$26,700
$13,210
1,398
1,500
1,500
300
500
150
100
6,255
570
500
500
$26,483
217
$1,051*
2,000
$3,051
273
834
c.
Concluded
A third possibility is to increase the fees charged for the various dental services. Assuming a variable cost ratio of 31% (from Approach 1), the increase in revenues needed to cover the $2,900 deficiency can be computed as follows:
0.69R = $2,900
R = $2,900/0.69
R = $4,203
This increase would call for fees to increase an average of 19.7%. Whether
this increase is possible or not depends to some extent on how Dr.
Joness charges compare with other dentists in the area. If some increase
is possible, then the increase could be combined with elements of the other two approaches, (e.g., a 10 percent increase in fees and working an extra four hours per week, say, on Wednesday evening). I would expect Dr.
Jones to be more likely to accept a combination like the one just mentioned rather than accepting any of the approaches in their pure form.
The behavioral principles discussed in the chapter do have a role in this type
of setting. Dr. Joness personal goals must be in line with the goals of his
professional organization, and he must have the motivation to achieve those
goals. There is, however, a significant difference. Dr. Jones owns and manages the organization. To a large extent, his goals are the goals of the organization.
RESEARCH ASSIGNMENT
835
Answers will vary.
274