CHAPTER 9

Profit Planning, Activity-Based Budgeting, and

e-Budgeting
SOLUTIONS TO EXERCISES
EXERCISE 9-22 (20 MINUTES)
1.
Sales...........................................................
Cash receipts:
From cash sales....................................
From sales on account.........................
Total cash receipts....................................
a

$100,000

= $80,000 .5

$30,000

= $60,000 .5

June
$100,000a

$ 40,000b
32,000d
$ 72,000

$ 30,000c
34,000
$ 64,000

$ 50,000
42,000e
$ 92,000

$32,000

(($80,000 x .5) .6) + (($40,000 x .5) .4)

$42,000

(($100,000 x .5) .6) + (($60,000 x .5) .4)

2.

May
$60,000

= $50,000 / .5

$40,000

April
$80,000

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............................................................

$ 300,000
1,200,000
(1,100,000)*
$ 400,000

*$1,100,000 = $300,000 + 1,200,000 400,000

3.

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

Sales on account during 20x1........................................................
Collections of accounts receivable during 20x1...........................
Accounts receivable, 12/31/x1........................................................

$ 340,000
900,000
(780,000)
$ 460,000

4.

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

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

$ 810,000
150,000
$ 960,000

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5.

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

Net income for 20x1.........................................................................
Dividends paid in 20x1....................................................................
Retained earnings, 12/31/x1............................................................
EXERCISE 9-24 (15 MINUTES)
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.

$2,050,000
400,000
-0-_
$2,450,000

480,000
50,000
80,000
450,000

Purchases of raw material (in units), assuming production of 500,000 finished units:

Raw material required for production (500,000 2)...................................

Add: Desired ending inventory on December 31........................................
Deduct: Beginning inventory on January 1.................................................
Required raw-material purchases during the year......................................
EXERCISE 9-27 (20 MINUTES)
1.

1,000,000
45,000
35,000
1,010,000

BIRMINGHAM FILM CORPORATION

EXPECTED CASH COLLECTIONS
AUGUST
Month
June...................................................
July....................................................
August...............................................
Total...............................................

2.

Sales
$60,000
78,000
66,000

Percent
9%
20%
70%

Expected
Collections
$ 5,400
15,600
46,200
$67,200

BIRMINGHAM FILM CORPORATION

EXPECTED CASH DISBURSEMENTS
AUGUST
July purchases to be paid in August............................................................
Less: 2% cash discount................................................................................
Net...............................................................................................................
Cash disbursements for expenses...............................................................
Total............................................................................................................

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$ 54,000
1,080
$ 52,920
14,400
$ 67,320

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3.

BIRMINGHAM FILM CORPORATION

EXPECTED CASH BALANCE
AUGUST 31
$22,000
67,200
67,320
$21,880

Balance, August 1..........................................................................................

Add: Expected collections............................................................................
Less: Expected disbursements....................................................................
Expected balance......................................................................................

SOLUTIONS TO PROBLEMS
PROBLEM 9-34 (30 MINUTES)
Note: all financial data in solution is in thousands (i.e., 000 omitted).
1.

Schedule of cash collections:

January
Collection of accounts receivable:
$55,000 x 20%...
Collection of January sales ($150,000):
60% in January; 35% in February ..
Collection of February sales ($180,000):
60% in February; 35% in March..
Collection of March sales ($185,000):
60% in March; 35% in April..
Sale of equipment.
Total cash collections

2.

February

$ 11,000
90,000

$101,000

$ 52,500
108,000

$ 63,000

$160,500

111,000
5,000
$179,000

Schedule of cash disbursements:

January
Payment of accounts payable...
Payment of January purchases ($90,000):
70% in January; 30% in February..
Payment of February purchases ($100,000):
70% in February; 30% in March..
Payment of March purchases ($140,000):
70% in March; 30% in April..
Cash operating costs..
Total cash disbursements...

3.

March

February

March

$ 22,000
63,000

31,000
$116,000

$ 27,000
70,000

$ 30,000

24,000
$121,000

98,000
45,000
$173,000

Cash budget:

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January

February

March

Beginning cash balance. $ 20,000

Total receipts.
101,000
Subtotal. $121,000
Less: Total disbursements
116,000
Cash excess (deficiency) before financing $ 5,000
Financing:
Borrowing to maintain $20,000 balance..
15,000
Loan principal repaid
Loan interest paid..
Ending cash balance $ 20,000

$ 20,000
160,500
$180,500
121,000
$ 59,500

$ 44,300
179,000
$223,300
173,000
$ 50,300

(15,000)
(200)*
$ 44,300

$ 50,300

* $15,000 x 8% x 2/12
PROBLEM 9-36 (45 MINUTES)
1.

The cash budget for Alpha-Tech for the second quarter of 20x5 is presented below.
Supporting calculations follow.
ALPHA-TECH
Cash Budget

For the Second Quarter of 20x5

Beginning balance.................................................
Collections:a
February sales.................................................
March sales......................................................
April sales.........................................................
May sales..........................................................
Add: Total receipts................................................
Total cash available...............................................
Disbursements:
Accounts payableb...........................................
Wagesc..............................................................
General and administratived............................
Property taxes..................................................
Income taxese...................................................
Deduct: Total disbursements................................
Cash balance..........................................................
Cash borrowed.......................................................
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April
May
$ 500,000 $ 500,000
4,000,000
5,400,000

3,600,000
6,900,000

$9,400,000 $10,500,000
$9,900,000 $11,000,000
$4,155,000 $ 4,735,000
3,450,000
3,750,000
900,000
900,000
1,280,000
$9,785,000 $ 9,385,000
$ 115,000 $ 1,615,000
385,000

June
$ 1,230,000

4,600,000
7,500,000
$12,100,000
$13,330,000
$ 5,285,000
4,200,000
900,000
340,000
$10,725,000
$ 2,605,000

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Cash repaid
Ending balance......................................................

(385,000)
500,000 $ 1,230,000 $ 2,605,000

60% of sales in first month after sale; 40% of sales in second month after sale.
See next page.
c
30% of current month sales.
d
(Total, less property taxes and depreciation) divided by 12.
e
40% $3,200,000.
b

Accounts payable:

Total*
Cost of goods sold:
February....
$4,000,000
March.........
3,600,000
March.........
3,600,000
April...........
4,600,000
April...........
4,600,000
May............
5,000,000
May............
5,000,000
June...........
5,600,000

Percentage

February

.30
.70
.30
.70
.30
.70
.30
.70

$1,200,000
2,520,000

$3,720,000
4,300,000
4,300,000
4,880,000
4,880,000
5,420,000

April

May

June

$1,080,000
3,220,000
$1,380,000
3,500,000
$3,720,000

Payments:
February....
March.........
March.........
April...........
April...........
May............

March

$4,300,000

.25
.75
.25
.75
.25
.75

$4,880,000

$1,500,000
3,920,000
$5,420,000

$ 930,000
3,225,000
$1,075,000
3,660,000
$

$4,155,000

$4,735,000

$1,220,000
4,065,000
$5,285,000

*For cost of goods sold, this amount is equal to 40% of sales. For payments, this amount is
equal to the cost of goods sold.
2.

Cash budgeting is important for Alpha-Tech because as sales grow, so will

expenditures for inputs. Since these expenditures generally precede cash receipts,
the company must plan for possible financing to cover the gap between payments
and receipts. The cash budget shows the probable cash position at certain points in
time, allowing the company to plan for borrowing, as Alpha-Tech must do in April.
Cash budgeting also facilitates the control of excess cash. The company may be
losing investment opportunities if excess cash is left idle. The cash budget alerts
management to periods when there will be excess cash available for investment,
thus facilitating financial planning and cash control.

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PROBLEM 9-38 (25 MINUTES)

1.

Sales budget
Sales (in sets)..............................................
Sales price per set......................................
Sales revenue..............................................

2.

June
15,000

$54
$810,000

April
10,000
2,400
12,400
2,000
10,400

May
12,000
3,000
15,000
2,400
12,600

June
15,000
3,000
18,000
3,000
15,000

Raw-material purchases
Planned production (sets).............................
Raw material required per set
(cubic meters)............................................
Raw material required for production
(cubic meters)............................................
Add: Desired ending inventory of raw
material (cubic meters).............................
Total requirements........................................
Less: Projected beginning inventory of
raw material (cubic meters)......................
Planned purchases of raw material
(cubic meters)............................................
Cost per cubic meter.....................................
Planned purchases of raw material
(dollars)......................................................

4.

May
12,000

$54
$648,000

Production budget (in sets)

Sales............................................................
Add: Desired ending inventory..................
Total requirements......................................
Less: Projected beginning inventory........
Planned production....................................

3.

April
10,000

$54
$540,000

April
10,400

.02

May
12,600

.02

June
15,000

.02

208.0

252.0

300.0

25.2
233.2

30.0
282.0

32.0
332.0

20.8

25.2

30.0

212.4
$250

256.8
$250

302.0
$250

$ 53,100

$ 64,200

$ 75,500

April
10,400

1.5
15,600

$22

May
12,600

1.5
18,900

$22

June
15,000

1.5
22,500

$22

Direct-labor budget
Planned production (sets).............................
Direct-labor hours per set.............................
Direct-labor hours required..........................
Cost per hour.................................................

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Planned direct-labor cost..............................

$343,200

$415,800

$495,000

5.

In the electronic version of the solutions manual, press the CTRL key and click on
the following link: Build a Spreadsheet 09-38.xls
PROBLEM 9-45 (120 MINUTES)
1.

Sales budget:
20x0
December
$400,000
100,000
300,000

Total sales........................
Cash sales*......................
Sales on account............

20x1
January
$440,000
110,000
330,000

February
$484,000
121,000
363,000

March
$532,400
133,100
399,300

First
Quarter
$1,456,400
364,100
1,092,300

*25% of total sales.

75% of total sales.

2.

Cash receipts budget:

20x1
Cash sales.............................................
Cash collections from credit
sales made during current
month*...............................................
Cash collections from credit
sales made during preceding
month................................................
Total cash receipts...............................

3.

January
$110,000

February
$121,000

March
$133,100

First
Quarter
$ 364,100

33,000

36,300

39,930

109,230

270,000
$413,000

297,000
$454,300

326,700
$499,730

893,700
$1,367,030

*10% of current month's credit sales.

90% of previous month's credit sales.

Purchases budget:
20x0
December
Budgeted cost of
goods sold............

$280,000

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20x1
January
$308,000

February

March

First
Quarter

$338,800

$372,680

$1,019,480

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Add: Desired
ending inventory. .
Total goods
needed..................
Less: Expected
beginning
inventory...............
Purchases..................

154,000

169,400

186,340

186,340*

186,340

$434,000

$477,400

$525,140

$559,020

$1,205,820

140,000
$294,000

154,000
$323,400

169,400
$355,740

186,340
$372,680

154,000**
$1,051,820

*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.

4.

50% x $280,000 (where $280,000 = December cost of goods sold = December sales of
$400,000 x 70%)
Cash disbursements budget:
20x1
First
Quarter

January

February

$129,360

$142,296

$149,072

$ 420,728

176,400

194,040

213,444

583,884

$305,760

$336,336

$362,516

$1,004,612

Other expenses:
Sales salaries...................................
Advertising and promotion.............
Administrative salaries...................
Interest on bonds**.........................
Property taxes**...............................
Sales commissions.........................

$21,000
16,000
21,000
15,000
-04,400

$21,000
16,000
21,000
-05,400
4,840

$21,000
16,000
21,000
-0-05,324

$ 63,000
48,000
63,000
15,000
5,400
14,564

Total cash payments for other

expenses..........................................

$ 77,400

$ 68,240

$ 63,324 $ 208,964

Inventory purchases:
Cash payments for purchases
during the current month*........
Cash payments for purchases
during the preceding
month........................................
Total cash payments for
inventory purchases.......................

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March

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Total cash disbursements....................

5.

$383,160

$404,576

$425,840 $1,213,576

*40% of current months 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.
Summary cash budget:
20x1
Cash receipts [from req. (2)]..............
Cash disbursements
[from req. (4)].................................
Change in cash balance
during period due to operations. .
Sale of marketable securities
(1/2/x1)............................................
Proceeds from bank loan
(1/2/x1)............................................
Purchase of equipment......................
Repayment of bank loan
(3/31/x1)..........................................
Interest on bank loan*........................
Payment of dividends.........................

January
$ 413,000

February
$ 454,300

March
$ 499,730

First
Quarter
$1,367,030

(383,160)

(404,576)

(425,840)

(1,213,576)

$ 29,840

$ 49,724

$ 73,890

$ 153,454

15,000

15,000

100,000
(125,000)

100,000
(125,000)
(100,000)
(100,000)
(2,500)
(2,500)
(50,000) (50,000)

Change in cash balance during

first quarter....................................
Cash balance, 1/1/x1...........................
Cash balance, 3/31/x1.........................

$(9,046)
35,000
$ 25,954

*$100,000 10% per year 1/4 year = $2,500

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.......................................................
Required short-term borrowing....................................................................

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$ 35,000
25,000
$ 10,000
15,000
$ 25,000
125,000
$(100,000)

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INTERCOASTAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
FOR THE FIRST QUARTER OF 20X1

7.

Sales revenue.........................................................................
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.

9.

$1,456,400
1,019,480
$ 436,920
$63,000
14,564
48,000
63,000
75,000
7,500
2,500
2,700

276,264
$ 160,656

INTERCOASTAL ELECTRONICS COMPANY

BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE FIRST QUARTER OF 20X1
Retained earnings, 12/31/x0........................................................................
Add: Net income...........................................................................................
Deduct: Dividends........................................................................................
Retained earnings, 3/31/x1..........................................................................
INTERCOASTAL ELECTRONICS COMPANY
BUDGETED BALANCE SHEET
MARCH 31, 20X1

$ 107,500
160,656
50,000
$ 218,156

Cash................................................................................................................
Accounts receivable*....................................................................................
Inventory........................................................................................................
Buildings and equipment (net of accumulated depreciation)...................
Total assets....................................................................................................

$ 25,954
359,370
186,340
676,000
$1,247,664

Accounts payable**.......................................................................................
Bond interest payable...................................................................................
Property taxes payable..................................................................................

$ 223,608
5,000
900

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