Chapter Eight Strategy and The Master Budget: Solutions Manual

CHAPTER EIGHT STRATEGY AND THE MASTER BUDGET
8-1 Compel strategic planning and facilitate implementation of strategic plans. An organizations strategy, strategic plans, and budgets are interrelated. Preparing budgets compel reviews of an organizations strategy and its strategic plans and facilitate implementations of the strategic plans. Feedbacks from budgets often result in improvements of an organizations strategy and its strategic plans. Provide a framework for guidance and control of operations . A budget delineates the roadmap the organization expects to traverse and thereby provides a framework for guiding, monitoring, and controlling operations. Serve as a basis for performance evaluation . udgeted performance measures are better for !udging performances than using past performance for two reasons. First, budgeted amounts take into account expected changes in environment and improvements. "econd, past performance is a result of past events and operations and may not be suitable to serve as a benchmark. #xpected results as delineated in budgets are better benchmarks for assessing performances. Motivate managers and employees . udgets set the goals for managers and employees and motivate them toward achievements of the goals. Promote coordination and communication within the organization . udget preparation compels managers to think of interdependencies and interrelationships among all operational units of the organization. A budget is a communication device that helps all employees understand and accept the organizations ob!ectives. $ther benefits include serving as a basis for resource allocation, aiding cash flow management, and providing authorization documentation. 8-2 A firms strategic plan describes how the firm matches its strengths and weaknesses with the opportunities and threats in the marketplace in order to accomplish its long%term goals. &t is the guideline for the firms short%term and long%term operations. A strategic plan may extend over several budget periods normally covered by a master budget. A master budget is a comprehensive operation plan of a business unit for a future period, which is for one year or less in most instances. 'he strategic plan of a firm underlies each of the firms master budgets. A master budget coordinates operations and delineates detailed implementation of the planned activities and includes both financial and non%financial (operating) aspects of the planned activities. 8-3 A master budget is a comprehensive plan of operations for a business unit for a future period while a capital budget is an investment plan for a ma!or pro!ect or program that has long%range effects on operations. *apital budgets are prepared for the purpose of bringing an organization+s capabilities in line with the needs of its long%range plan and long%term sales forecast. 'he capacity that an organization has is a result of capital investments made in prior budgeting periods. ,esources needed in the capital budget for the planned activities of the current period are included in the master budget of the period.
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8-4 A master budget is a comprehensive plan of operations for a future period that includes both operating and financial budgets. An operating budget consists of plans of resources re-uired in all aspects of operating activities during the budget period, including sales and services, production, purchasing, marketing, research and development, and general administrative activities. A financial budget delineates funds from operations that are available for uses during the budgeted period and uses of funds in operation during the budget period. 8-5 *ommon characteristics of successful budgets include. fully accepted and supported by key managers. become personalized budgets of the people who have the responsibility for carrying them out. Perceived as planning and coordinating tools, not as pressure devices. /ot viewed as a basis for seeking blame. "erved as motivating devices, not as excuses for not doing things beneficial to the organization. technically correct with all the numbers in the budgets reasonably accurate. 8-6 'he budget committee of an organization is the highest authority in the organization for all matters related to the budget. 'he committee sets or approves the overall budget goals for the organization and its ma!or business units, directs and coordinates budget preparation, resolves conflicts and differences that may arise during budget preparation, approves the final budget, monitors operations as the year unfolds, and reviews the operating results at the end of the period. 'he budget committee also approves ma!or revisions of the budget during the period. 8-7 'hey are not synonymous. "ales forecasts estimate sales units of the firms products and are often the starting point in preparing the sales budget for the period. A sales budget describes expected sales dollars of the firms products based on the results of sales forecasts. "ales forecasts rely heavily on past sales levels and external factors, while sales budgets incorporate internal factors, decisions, and activity levels in their preparations. An accurate sales forecast enhances the usefulness of the budget as a planning and control tool.
Blocher, Chen, Cokins, Lin: Cost Management, 3e
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The McGraw-Hill Companies, nc!, "##$
8-8 'he sales budget is often regarded as the cornerstone in budget preparations because all activities in business organizations emanate from efforts to attain the desired sales. A firm can complete the plan for other activities of a period only after it knows the expected sales level of the current and the immediate future periods. A manufacturing firm, for example, cannot complete its production schedule for the upcoming period without knowing the number of units it must produce for each of its products. 'he firm can ascertain the number of units to be produced only after it knows the number of units to be sold during the period and the desired ending inventories. 'he units to be produced, in turn, affect many other activities of the firm including units and kinds of materials to be purchased, number of employees to be hired, levels of factory overhead, and selling and administrative expenses. 8-9 0hen sales volume is seasonal in nature, the three most significant items to coordinate are production volume, finished goods inventory, and sales volume.
8-10 Additional factors include. the beginning inventories on hand and the desired ending inventories of both work%in%process and finished products. the re-uired materials for each product. the beginning inventories of materials on hand and the desired ending inventories of materials. the cost of materials. 8-11 'he two factors that determine the amount of factory overhead for a period are management !udgment (decision) and production volume. 1anagement !udgement determines the level of operation, which is the underlying factor that sets the amounts of fixed factory overheads. Production volume often dictates the total amount of variable factory overheads. 8-12 *ash budget generally includes three ma!or components. *ash available, *ash disbursements, and Financing.
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8.13 'he following are some of the characteristics that are similar between cash budgets and cash flow statements. oth show sources and uses of funds. oth are prepared for a period of time. /either includes any non%cash revenues and expenses. Among differences between these two statements are. A cash flow statement reports the results of past activities while a cash budget describes effects of planned operations. A firm needs to follow 2AAP in preparing cash flow statement while the guiding principle for preparing a cash budget is relevance and usefulness to management. 'he ma!or categories of cash flow statements are operating, financing, and investing activities. #ach of these categories may include both sources and uses of cash. 'he ma!or categories of cash budgets are cash available, cash disbursements, and financing. oth cash available and cash disbursements may include cash from either operating or investing activities. 8-14 &n comparison with manufacturing organizations, uni-ue budget characteristics of service organizations include. absence of production and materials purchase budgets. emphasis on work force planning. 8-15 &n contrast to business firms, a not%for%profit organization has no single bottom%line amount such as operating income that often serves as the ultimate consideration in budgeting. is more likely to use its budgets as the source of authorization for its activities. limits the total amount in the budget to the expected total revenues (Federal budgets are exceptions). 8-16 3ero%base budgeting is a budgeting process that re-uires managers to prepare budgets from ground zero for all operations. A typical budgeting process starts from the budget for the current period and assumes that most, if not all, the current activities and functions will continue into the budget period. &n contrast, a zero%base budgeting process allows no activities or functions to be included in the budget unless managers can !ustify their need. 8-17 /o. 4aizen budgeting is a budgeting approach that explicitly demands continuous improvement and incorporates all the expected improvements in budgets. &n contrast, activity%based budgeting is a budgeting process that focuses on costs of activities or cost drivers necessary for the operations. 'he final A * budget is a budget of the costs of performing various activities and may not be a kaizen budget.
Blocher, Chen, Cokins, Lin: Cost Management, 3e 8-& The McGraw-Hill Companies, nc!, "##$
8-18
udget slack, or 5padding5 the budget, is the practice of knowingly including a higher amount of expenditure in the budget than managers actually believe is needed. $ne reason that it is common to find slacks in budgets is the desire of many managers to use budget slack as a cushion for unpredictable future events.
8-19 A highly achievable budget has a target that is achievable by most managers 67 to 87 percent of the time. &n a study by 1erchant (9887), the author finds that a budget with a highly achievable target serves -uite well in the vast ma!ority of organizational situations, especially when accompanied by extra rewards for performance exceeding the target. Among the advantages of using a highly achievable budget target are these. 9. &ncreasing managers+ commitment to achieving the budget target. :. 1aintaining managers+ confidence in the budget. ;. <ecreasing organizational control cost. =. ,educing the risk that managers will engage in harmful earnings management practices or violate corporate ethical standards. 'wenty%nine percent of workers responding to a survey felt pressure to violate ethical standards of their firms because of overly aggressive business goals. >. Allowing effective and efficient managers greater operating flexibility. ?. &mproving predictability of earnings or operating results. @. #nhancing the usefulness of a budget as a planning and coordinating tool. 8-20 A participative budgeting process is a bottom%up approach in budget preparation. "uch a budgeting process involves everybody from low%level workers all the way to the top managers in budget preparations. For a budget to be effective, top management needs to be actively involved and show strong interest in all aspects of the budget.
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EXERCISES 8-21 Among the first steps that the management accountant must do is to synchronize the budgeting and accounting system with the organizational structure, to ensure that budgeted data are incorporated in performance reports, and to provide timely reports to all responsible units. 8-22 'here are at least two issues here. $ne is the failure to take advantage of all the cash discount included in the sales term. 'he other is the constant occurrence of rush orders, last%minute changes, and other operating emergencies that re-uire the purchasing department to do last minute purchases. Aanet needs to ensure that the Accounting <epartment records all purchases at the net price whenever a purchase is made with cash discount included in the sales term. Any additional amount that the firm has to pay because of the failure to make the payment within the payment term should be charged to the finance department as a lossB it should never be treated as an ad!ustment to the cost of purchase. 'he firm needs to be very clear in its operating procedure about the minimum amount of time re-uired for purchases. Any additional ac-uisition cost because of rush order, last%minute change, or operating emergency should be borne by the department making the re-uest. 8-23 9. udgetary slack is a planned difference between budgeted revenue and expected revenue, andCor budgeted expenditures and expected expenditures. udgetary slack describes the tendency of managers to under%estimate revenues and over%estimate expenditures during the budgetary process in order to build in allowances for unexpected declines in revenue andCor unforeseen expenses. udgetary slack occurs because of conflicts between the personal interests of a manager and the interests of the organization. 'hese conflicts include pressure from top management to achieve budgets and the desire on the part of the manager to look favorable in the eyes of top management.
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8-23 ( !"#$"%&'( :. a. From the point of view of the business unit manager, budgetary slack provides flexibility under unexpected circumstances. the opportunity to show consistent performance despite variations in departmental resources and workloads. a blending of personal and organization goals. Dowever, the use of budgetary slack limits the ob!ective evaluation of a business unit and, therefore, limits the ob!ective evaluation of the performance of the unit manager. &t also becomes more difficult for the business unit manager to evaluate the performance of subordinates and to use the budget as a control mechanism over subordinate performance. b. From the perspective of corporate management, the use of budgetary slack increases the probability that budgets will be achieved. 'his increased probability facilitates the overall corporate budgeting process. *orporate management may also allow budgetary slack as a form of reward to managers for previous good performance. From the point of view of corporate management, the use of budgetary slack increases the likelihood of inefficient allocation of scarce corporate planning process, and decreases the ability to identify potential weaknesses or trouble spots in the budgeting process and, thus, limits corrective actions. ;. a. 3ero%based budgeting is a planning budgeting techni-ue that evaluates all proposed operating and administrative expenditures as though they were being initiated for the first time. #ach manager must evaluate each expenditure, investigate alternative means of conducting each activity, evaluate alternative budget amounts for various levels of service, !ustify each expenditure, and finally rank expenditures in order of importance. Atlantis Eaboratories could benefit from zero%based budgeting as each of the business unit managers would be re-uired to specifically identify and !ustify all proposed expenditures for the upcoming year. 'his increased evaluation of expenditures would make it difficult to include budgetary slack in the budget for the upcoming year. 'he biggest disadvantage of zero%based budgeting is the significant amount of time and cost involved in its implementation. Additionally, the concept of zero%based budgeting may be difficult for management to learn and accept. Atlantis must be sure that the benefits of zero% based budgeting outweigh the associated costs.
b.
c.
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6%:= P)!'% #$!" *%'+&# (5 ,$"%#&-( udgeted sales <esired ending inventory (9:,777 x :7F) 'otal units needed eginning inventory (6,777 x :7F) udgeted production 8-25 P%) ./-& *%'+&# (5 ,$"%#&-( First Huarter udgeted sales in unit <esired ending inventory 'otal units needed eginning inventory 'otal units to be produced "econd Huarter udgeted sales in unit <esired ending inventory 'otal units needed eginning inventory 'otal units to be produced ?7,777 G :=,777 6=,777 % 96,777 ??,777 67,777 G 9;,>77 8;,>77 % :=,777 ?8,>77 6,777 G :,=77 97,=77 % 9,?77 6,677
67,777 x ;7F I
=>,777 x ;7F I
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8-26 P)!'% #$!" /"' ,/#&)$/0- 1%) ./-& *%'+&#- (10 ,$"%#&-( udgeted Production udgeted sales <esired ending inventory (97F) 'otal units needed eginning inventory ;,=77 'otal units to produce :nd Huarter ;rd Huarter ;6,777 ;=,777 G ;,=77 G =,677 =9,=77 ;6,677 % ;,677 % ;@,?77 ;>,=77
udgeted Purchases of <irect 1aterials for the "econd -uarter :nd Huarter ;rd Huarter udgeted production ;@,?77 ;>,=77 <irect materials per unit x ; x ; <irect materials needed in production 99:,677 97?,:77 <esired direct materials ending inventory (:7F of 97?,:77) G :9,:=7 'otal direct materials needed 9;=,7=7 eginning inventory (:7F of 99:,677) % ::,>?7 udgeted purchases of direct materials 999,=67 8-27 P)!'% #$!" /"' ,/#&)$/0- 1%) ./-& *%'+&#- (10 ,$"%#&-( udget production of 2";7 udgeted sales <esired ending inventory 'otal units needed eginning inventory udgeted production udget purchases of materials udgeted production of 2";7 ,e-uired materials per unit 'otal materials needed in production <esired ending inventory 'otal materials needed eginning inventory udget purchases
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977,777 G 97,777 997,777 % :7,777 87,777 Aluminum 87,777 x : 967,777 G 96,777 986,777 % :>,777 9@;,777 Alloy 87,777 x ; :@7,777 G :=,777 :8=,777 % ::,777 :@:,777
8-28 P)!'% #$!" /"' ,/#&)$/0- *%'+&#--1)! &--$"+ ,$"%#&-( 9. Jnits of Finished 2oods (KPE;7) to 1anufacture Jnit
!-#$"+
(10
udgeted sales udgeted finished goods ending inventory (Aune ;7, :77?) G 'otal number of units needed udgeted finished goods beginning inventory % 'otal units to manufacture :. Jnits of KPE;7 'o "tart &nto Production 'otal units to manufacture udgeted 0&P ending inventory 'otal units needed in production udgeted 0&P beginning inventory 'otal units of KPE;7 to start into production ,aw 1aterials Purchase udget Jnits of KPE;7 to start into production =?7,777 Jnits of raw materials needed for one unit of KPE;7 'otal raw materials needed in production udgeted raw materials ending inventory 'otal number of units of raw materials needed udgeted raw materials beginning inventory 'otal units of raw materials to purchase ;.
=67,777 >7,777 >;7,777 67,777 =>7,777 =>7,777 :7,777 =@7,777 97,777 =?7,777
G %
x G %
: 8:7,777 >7,777 8@7,777 =7,777 8;7,777
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8-29 P)!'% #$!" /"' ,/#&)$/0- *%'+&#--1)! &--$"+ ,$"%#&-( 9. Jnits of Finished 2oods (KPE;7) to 1anufacture Jnit
!-#$"+
(10
udgeted sales udgeted finished goods ending inventory (Aune ;7, :77?) G 'otal number of units needed udgeted finished goods beginning inventory % 'otal units to manufacture :. Jnits of KPE;7 'o "tart &nto Production 'otal units to manufacture udgeted 0&P ending inventory 'otal units needed in production udgeted 0&P beginning inventory 'otal units of KPE;7 to start into production ,aw 1aterials Purchase udget Jnits of KPE;7 to start into production =?7,777 udgeted 0&P ending inventory Jnits to start and complete during the period udgeted 0&P beginning inventory Jnits of KPE;7 re-uiring raw materials Jnits of raw materials needed for one unit of KPE;7 'otal raw materials needed in production udgeted raw materials ending inventory 'otal number of units of raw materials needed udgeted raw materials beginning inventory 'otal units of raw materials to purchase ;.
=67,777 >7,777 >;7,777 67,777 =>7,777 =>7,777 :7,777 =@7,777 97,777 =?7,777
G %
% G x G %
:7,777 ==7,777 97,777 =>7,777 : 877,777 >7,777 8>7,777 =7,777 897,777
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8-30 C/-. *%'+&# (5 ,$"%#&-( *ash Available *ash balance, beginning *ollections from customers 'otal cash available *ash <isbursements <irect materials purchases $perating expenses Eess. <epreciation expenses Payroll &ncome taxes 1achinery purchase 'otal cash disbursements *ash shortage before financing 1inimum cash balance desired Financing need L 97,777 G 9>7,777 L9?7,777 L :>,777 ;7,777 @>,777 ?,777 G ;7,777 % L9??,777 (L ?,777) % :7,777 L:?,777
L>7,777 % :7,777
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8-31 C/-. *%'+&# (10 ,$"%#&-( *ash Available *ash balance, beginning *ollections from customers 'otal cash available *ash <isbursements Payroll $perating expenses L96,777 Eess. Property taxes % ;,777 Eess. <epreciation expenses % >,777 Property taxes. :77? L9,:>7 :77@ 9,>77 Payment for office e-uipment update 'otal cash disbursements *ash balance L 9:,777 G 9@>,777 L96@,777 L9?7,777 97,777 :,@>7 G ?,777 % L9@6,@>7 L6,:>7
Mes, the cash budget shows that ill can meet the minimum cash balance re-uirement with an excess amount of L:,:>7.
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8-32 E-#$,/#& /-. !00& #$!"- (5 ,$"%#&-( *ollections for credit sales prior to April *ollections for credit sales in April (L9>7,777 x @7F) *ollections for credit sales in 1ay (L:77,777 x :>F) 'otal cash receipts from accounts receivable collections in 1ay G L 9?,777 97>,777 >7,777 L9@9,777
8-33 ACC2UNTS RECEI3AB4E C244ECTI2NS (10 ,$"%#&-( 9. 1onth of "ale $ctober "eptember August Auly 'otal *redit "ale L87,777 67,777 @7,777 ?7,777 Percentage to be *ollected in $ctober @7F L ?;,777 9>F 97F =F udgeted *ash *ollection &n $ctober 9:,777 @,777 :,=77 L6=,=77
th
#stimated 'otal *ash *ollection in $ctober :. 1onth of "ale $ctober Amount of "ale L 87,777
udgeted collection F *ollected in in the = -uarter from $ct. /ov. <ec. sales in the =th Huarter @7F L ?;,777 9>F 97F 9;,>77 8,777 @7,777 9>F 9>,777 >8,>77 L:;7,777 @7F
/ovember <ecember
977,777 6>,777
@7F
'otal budgeted collection in the fourth -uarter
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8-34 A
!%"#- R& &$5/*0&- C!00& #$!"- (10 ,$"%#&-( L9:7,777 x 97F I L9>7,777 x ?7F I L:77,777 x :>F I L 9:,777 87,777 >7,777 L9>:,777
9. *ollection from sales in 1arch *ollection from sales in April *ollection from sales in 1ay 'otal *ash *ollections in 1ay
:. 2ross amount of accounts receivable on 1ay ;9. From credit sales in April From credit sales in 1ay 'otal L9>7,777 x 9>FN I L:77,777 x @>FO I L ::,>77 9>7,777 L9@:,>77
N977F % :>F (collected in April) % ?7F (collected in 1ay) I 9>F

O
977F % :>F (collected in 1ay) I @>F
;. /et balance of accounts receivable on 1ay ;9. 2ross amount of accounts receivable on 1ay ;9 Allowance for uncollectible accounts. From credit sales in April L9>7,777 x >F I L @,>77 From credit sales in 1ay L:77,777 x >FI 'otal 97,777 9@,>77 L9>>,777 L9@:,>77
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8-35 C/-. D$- !%"# (10 M$"%#&-( 'otal L@>,777 L?7,777 L>7,777 F =7F ?7F *ollection F Amount *ash &nflow L;7,777 :6,::= =,;:7 9,>77 L?=,7==
*ash sales *ollections of AC, Aune sales 0ith cash discount efore end of month 1ay sales 'otal *ash *ollection
L;?,777 67F L:6,677 9:F L =,;:7 ?7F >F
8-36 C/-. D$- !%"# (20 M$"%#&-( S/0&- D/#/ Aune Auly August "eptember $ctober A,!%"# L?7,777 L67,777 L87,777 L8?,777 L66,777 C!00& #$!" P/##&)" *ash sales *redit cards ank charges *redit sales. *urrent month 9st month :nd month ;rd month Eate charge F *ollected 8@F 88F 97:F =7F ?7F ;F :7F >7F 9>F 9:F :F *ash ,eceipt L 8,?77 L9;,8?6 L9=,:>? L;;,@>7 L 8,777 L >,>76 L6?,76:
S/0&- B)&/6'!7" /"' T&), *ash and credit cards sales :>F *redit sale @>F 'erm 9Ceom, nC=>
S&1#&,*&) *ash sales *redit cards sales *ollections of AC,. "eptember credit sales August credit sales Auly credit sales Aune credit sales 'otal *ash *ollection
"ales F 'otal F Paid L8?,777 L8?,777 L8?,777 L87,777 L67,777 L?7,777 :>F :>F @>F @>F @>F @>F =7F ?7F :7F >7F 9>F 9:F
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8-37 C/-. D$- !%"# (60 M$"%#&-( /ote to &nstructors. Mou can show the formula by following these steps. 9. ,ight click anywhere in the worksheet. :. "elect Pworksheet ob!ect.Q ;. "elect P$pen.Q =. ,ight click any cell that you wish to show the formula. 'he embedded formula for the selected cell is shown right above the spreadsheet on the screen. >. &f you click PFileQ and select P*lose R ,eturn to SQ while you are in the spreadsheet mode the screen will return to the solution that shows the completed calculations.
S/0&- D/#/ Aune Auly August "eptember $ctober S/0&- T&), *ash and credit cards sales *redit sale <iscount term A,!%"# C!00& #$!" P/##&)" L?7,777 *ash sales =7F L67,777 *redit cards ?7F L87,777 ank charges ;F L8?,777 *redit sales. L66,777 *urrent month :7F 9st month >7F :>F :nd month 9>F @>F ;rd month 9:F 9F Eate charge :F "ales Pay. *oll. F F F :>F =7F :>F ?7F @>F @>F @>F @>F *ash ,eceipt
'otal S&1#&,*&) *ash sales *redit cards sales *ollections of account receivables "eptember credit sales August credit sales Auly credit sales Aune credit sales 'otal *ash *ollection 2 #!*&) *ash sales *redit cards sales *ollections of account receivables $ctober credit sales "eptember credit sales August credit sales Auly credit sales 'otal *ash *ollection L8?,777 L8?,777 L8?,777 L87,777 L67,777 L?7,777
L 8,?77 8@F L 9;,8?6 L 9=,:>? L ;;,@>7 L 8,777 L >,>76 L 6?,76:
:7F 88F >7F 9>F 9:F 97:F
L66,777 L66,777 L66,777 L8?,777 L87,777 L67,777
:>F =7F :>F ?7F @>F @>F @>F @>F
L 6,677 8@F L 9:,67= L 9;,7?6 L ;?,777 L 97,9:> L @,;== L 66,9=9
:7F 88F >7F 9>F 9:F 97:F
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8-38 ACTI3ITY-BASED BUDGETING (5 M$"%#&-( 9. Activity "torage ,e-uisition Dandling Pick Packing <ata #ntry <esktop <elivery '$'AE Tolume =77,777 ;7,777 677,777 677,777 ;7,777 9:,777 *ost ,ate 'otal *ost L7.=8:> L9:.>7 L 9.>7 L 7.67 L 9.:7 L;7.77 L 98@,777 L ;@>,777 L9,:77,777 L ?=7,777 L ;?,777 L ;?7,777 L:,676,777
:. Average size per delivery. 9,9@7,777 99,@77 I 977 *artons 'otal number of cartons budgeted for delivery in Aanuary :77?. 9:,777 <eliveries x 977 I 9,:77,777 *artons *ost per carton delivered. L:,676,777. ;. #xpected saving in costs. ,e-uisition Dandling <ata #ntry % number of lines <ata #ntry % number of re-uisitions 'otal "aving L ;@>,777 ?=7,777 ;?,777 L9,7>9,777 L:,676,777 9,:77,777 I L:.;= 'he total budgeted cost for the division remains the same at
'he saving from Aanuary alone is L9,7>9,777. &f the firm uses a single cost rate system based on the number of cartons delivered, the firm will not be able to estimate the savings without special efforts to gather additional information.
8-18
8-39
9.
A #$5$#8-B/-&' B%'+&#$"+ 9$#. :/$;&" (> 1inutes) Jnit%Eevel. Pick packing, <ata entry U Eines atch%Eevel. ,e-uisition handling, <ata entry % ,e-uisitions, <esktop delivery *ost driver rates. Activity ,ate Aanuary February ,e-uisition Dandling 86F L9:.>7 L9:.:>7 Pick Packing 88F L 9.>7 L 9.=6> <ata #ntry % Eines 88F L 7.67 L 7.@8: <ata #ntry % ,e-uisitions 86F L 9.:7 L 9.9@? <esktop <elivery 86F L;7.77 L:8.=77 Aanuary L ;@>,777 L9,:77,777 L ?=7,777 L ;?,777 L ;?7,777 L:,?99,777 1arch L9:.77>7 L 9.=@7: L 7.@6=9 L 9.9>:> L:6.69:7 1arch L ;?7,9>7 L9,9@?,9:7 L ?:@,:?= L ;=,>@= L ;=>,@== L:,>=;,6>:
:.
*ost of Activities. Activity Tolume ,e-uisition Dandling ;7,777 Pick Packing 677,777 <ata #ntry % Eines 677,777 <ata #ntry % ,e-uisitions ;7,777 <esktop <elivery 9:,777 'otal
February L ;?@,>77 L9,966,777 L ?;;,?77 L ;>,:67 L ;>:,677 L:,>@@,967
;. Factors that may influence the success of a continuous improvement program include. ,easonable or achievable cost reductions. Awareness of all employees on the expected (scheduled) cost improvements over at least the immediate future periods. Accepted by both the management and employees. *ommitment of both the firm and all the employees on the importance on the success of the continuous improvement program. *lose link between the scheduled improvements and performance evaluations and rewards. *ost reductions arising from small continuous incremental improvements, not from large discontinuous changes in factors such as operating processes, capital e-uipment, supplier networks, or customer interactions.
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8-40 C/-. *%'+&# (20 ,$"%#&-( 9. 'otal credit sales in /ovember Percentage collectible 'otal amount collectible from credit sales in /ovember Percentage collected in the month following the month of sales udgeted collections in <ecember from credit sales in /ovember :. *ash sales in Aanuary *ollections from credit sales in Aanuary. 'otal collectible from credit sales L967,777 x 8>F I L9@9,777 Percentage to be collected in Aanuary x ?7F *ollections from credit sales in Aanuary *ollections from credit sales in <ecember. 'otal collectible from credit sales L;?7,777 x 8>F I L;=:,777 Percentage to be collected in Aanuary x =7F *ollections from credit sales in <ecember udgeted total cash receipts in Aanuary ;. Purchases in /ovember. For /ovember sales L;:7,777 x .; K .? I L >@,?77 For <ecember sales =?7,777 x .@ K .? I 98;,:77 'otal purchases in /ovember Percentage to be paid in <ecember Payment in <ecember for purchases in /ovember udgeted purchases in <ecember. For <ecember sales L=?7,777 x .; K .? I L 6:,677 For Aanuary sales :=7,777 x .@ K .? I 977,677 'otal purchases in <ecember Percentage to be paid in <ecember Payment in <ecember for purchases in <ecember udgeted total cash payment in <ecember for inventory purchases L:=7,777 x V 8>F L::6,777 x =7F L 89,:77 L ?7,777
97:,?77
G 9;?,677 L:88,=77
L:>7,677 x @>F L966,977
L96;,?77 x :>F G =>,877 L:;=,777
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6%=9 "ervice Firm udget (:> minutes) 9. R :. 'otal hours for the budgeted activities 'otal Dourly ,evenue ,ate usiness return L9,777,777 L:>7 *omplex return L9,:77,777 L977 "imple return L9,?=7,777 L>7 L ;,6=7,777 'otal Dours =,777 9:,777 ;:,677
"taff re-uirements for the budgeted activities "enior 'otal Partner 1anager *onsultant *onsultant Dours #ach 'otal #ach 'otal #ach 'otal #ach 'otal usiness return =,777 7.; 9,:77 7.: 677 7.> :,777 7 *omplex return 9:,777 7.7> ?77 7.9> 9,677 7.= =,677 7.= =,677 "imple return ;:,677 7 7 7.: ?,>?7 7.6 :?,:=7 '$'AE 9,677 :,?77 9;,;?7 ;9,7=7 Dours per week >7 => =7 =7 O of weeks needed ;? >6 ;;= @@? O of wks per employee per year =7 => => =6 O of employees needed 7.8 9.:6 @.=:: 9?.9@ 'otal number of employees 6 9? 'otal hours available. "enior *onsultants (6 "enior *. x =7 hrs. x => wks) 9=,=77 *onsultants(9? *onsult. x =7 hrs. x =6 wks) ;7,@:7 #xcess hours (part%time hours) 9,7=7 ;:7 9. /o overtime premium for senior consultants. :. 'he firm will have to have 9? full%time and ;:7 hours of part%time consultants.
Solutions Manual
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6%=9 (*ontinued) ; Accu'ax &nc. udget &ncome "tatement for the year ended August ;9, :77@ ,evenue Payroll expenses. Partner L:>7,777 1anager 87,777 "enior consultant @:7,777 *onsultant 0hole time L8?7,777 Part%timeN 97,777 8@7,777 "upporting staff :77,777 2eneral and Administrative expenses $perating income before bonus to manager Eess. manager+s bonus $perating income before taxes 'otal compensation for the manager. "alary onus 'otal L ;,6=7,777
:,:;7,777 ;@;,777 L 9,:;@,777 @;,@77 L 9,9?;,;77
L L
87,777 @;,@77 9?;,@77
NDourly wage rate. L?7,777 (=7 hours x =6 weeks) I L;9.:> 0ages for part%time consultants. ;:7 hours x L;9.:> I L97,777
8-""
6%=: Accu%'ax (:> minutes) 9. 'otal hours for the budgeted activities East Mear+s #xpected Dourly 'otal Dours ,evenue ,evenue ,ate ,e-uired usiness return L9,777,777 L 9,:77,777 L:>7 =,677 *omplex return L9,:77,777 L 9,;:7,777 L977 9;,:77 "imple return L9,?=7,777 L 9,67=,777 L>7 ;?,767 L ;,6=7,777 L =,;:=,777
:. "taff re-uirements for the budgeted activities 'otal Dours "enior ,e-uired Partner 1anager *onsultant *onsultant usiness return =,677 8?7 9,==7 :,=77 7 *omplex return 9;,:77 ??7 :,?=7 @,:?7 :,?=7 "imple return ;?,767 9,67= 8,7:7 :>,:>? '$'AE 9,?:7 >,66= 96,?67 :@,68? Dours per week >7 => =7 =7 /umber of weeks needed ;:.=7 9;7.@? =?@ ?8@.=7 O of weeks per employee per year =7 => => =6 /umber of employees needed 7.69 :.89 97.;6 9=.>; /umber of employees ; 97 9= 'otal hours available. "enior consultants (97 "* x =7 hours x => weeks) 96,777 *onsultants (9= *onsultants x =7 hours x =6 weeks) :?,667 $vertime or Part%time hours ?67 9,79? 9. Dourly wage rate. L87,777 (=7 hours x => weeks) I L>7.77 $vertime premium. ?67 hours x L>7 x 9>7F I L>9,777 :. 9= *onsultants with additional 9,79? part%time hours.
Solutions Manual
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6%=: (*ontd) ;. $perating &ncome and onus to 1anager Accu'ax &nc. udget &ncome "tatement For the Mear #nded August ;9, :77@ ,evenue Payroll expenses. Partner 1anager "enior consultant ,egular $vertime *onsultant Full%time Part%time "upporting staff 2eneral R Administrative expenses $perating income (before bonus) Eess. manager+s bonus $perating income before taxes 'otal compensation for the manager. L =,;:=,777 L:>7,777 :@7,777 L 877,777 >9,777 L 6=7,777 ;9,@>7
8>9,777
6@9,@>7 :=7,777
:,>6:,@>7 =76,:@> L 9,;;:,8@> 9:=,8=? L 9,:76,7:8 L87,777 ?:,=@; L9>:,=@;
"alary onus 'otal
Dourly wage rate. L?7,777 (=7 hours x =6 weeks) I L;9.:> 0ages for part%time consultants. 9,79? hours x L;9.:> I L;9,@>7
8-"&
PR2B4EMS 8-43 S,/00 *%-$"&-- *%'+&# (10 ,$"%#&-( 9. 'he key features that need to be considered in developing a profit plan for a small business include. #stimations of key factors such as revenues (sales demand, sales price) and expenses for the plan period. "ystematic evaluation of all available resources (materials, labor, technology) and their uses. *oordination of related functions or elements, such as scheduling production to meet sales or sufficient productive capacity to meet sales demand. *ritical evaluations of nonoperational sources and uses of cash. /onoperational items may pose a more serious threat to small businesses than to large businesses. 2reater control over monthly cash flows and short%term financing than may be necessary in large enterprises. 2reater needs for continuous budgeting than for large organizations, because of the higher risks associated with economic, competitive, and financial factors for small businesses. :. 'he management accountant must exercise care to ensure that the small business managers do not suffer from information overload (strive for simplicity). A profit management system should be established that captures sufficient data on a timely basis to allow a reasonable level of operations control and evaluation without becoming too costly or too sophisticated for the business. 1any large enterprises may continue operations simply by inertia. 0ith small businesses, a strategic plan rationally linked to the master budget is critical, especially in the early stage of its products life cycles. 'he concepts of activity%based management, total -uality management, logistics management, life cycle and target costing, and constraints management are essential for the long%run survival and growth of small businesses.
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8-43 (C!"#$"%&'( ;. 'he management accountant can insist upon, and assist in the preparation of, continuous cash budgets. 'hese cash flow reports should identify the ma!or operational and nonoperational sources and uses of cash, and point out the periods of potential cash shortages or surpluses. 'his will facilitate planning for short%term lines%of%credit financing and short%term investments. A profit management system should be created, utilizing the principles of activity%based costing and cost variance reporting including activity%based standard costing and activity%based cost variances. "egmented income statements comparing budgeted to actual results with profit variance summaries should be an integral component of the high%-uality profit management system.
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8-44 E#.$ - $" *%'+&#$"+ (10 ,$"%#&-( 9. a. 'he reasons that 1arge Atkins and Pete 2ranger use budgetary slack include the following. 'hese employees are hedging against the unexpected (reducing uncertaintyCrisk). 'he use of budgetary slack allows employees to exceed expectations andCor show consistent performance. 'his is particularly important when performance is evaluated on the basis of actual results versus budget. #mployees who are able to blend personal and organizational goals through budgetary slack and show good performance generally are rewarded with higher salaries, promotions, and bonuses. b. 'he use of budgetary slack can adversely affect Atkins and 2ranger by limiting the usefulness of the budget to motivate their employees to top performance. affecting their ability to identify trouble spots and take appropriate corrective action. reducing their credibility in the eyes of management. Also, the use of budgetary slack may affect management decision% making, as the budgets will show lower contribution margins (lower sales, higher expenses). <ecisions regarding the profitability of product lines, staffing levels, incentives, etc. could have an adverse effect on Atkins+ and 2ranger+s departments.
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8-44 (C!"#$"%&'( :. 'he use of budgetary slack, particularly if it has a detrimental effect on the company, may be unethical. &n assessing the situation, the specific standards of S#/#&,&"#- !" M/"/+&,&"# A !%"#$"+ N%,*&) 1C (SMAC(< 5"tandards of #thical *onduct for 1anagement Accountants,5 that should be considered are listed below. *ompetence *lear reports using relevant and reliable information should be prepared. *onfidentiality 'he standards of confidentiality do not apply in this situation. &ntegrity Any activity that subverts the legitimate goals of the company should be avoided. Favorable as well as unfavorable information should be communicated. $b!ectivity &nformation should be fairly and ob!ectively communicated. All relevant information should be disclosed.
8-"8
8-45 M/-#&) *%'+&# (15 ,$"%#&-( 9. 'he benefits that can be derived from implementing a master budget system include the following. 'he preparation of budgets forces management to plan ahead and to establish goals and ob!ectives that can be -uantified. udgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the ob!ectives of the entire firm. 'he budgeting process promotes internal communication and coordination. udgets provide directions for day%to%day operations, clarify duties to be performed, and assign responsibility for these duties. udgets provide a framework for measuring performance.
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8-45 (C!"#$"%&'( :. a R b "cheduleC"tatement "ales udget "ubse-uent $perating udget "cheduleC"tatement Production udget "elling #xpense udget udgeted &ncome "tatement Production udget <irect 1aterials udget <irect Eabor udget Factory $verhead udget *ost of 2oods 1anufactured udget *ost of 2oods 1anufactured udget *ost of 2oods 1anufactured udget *ost of 2oods "old udget 1anufactured udget udgeted &ncome "tatement udgeted "tatement of Financial Position udgeted &ncome "tatement udgeted &ncome "tatement udgeted "tatement of Financial
#nding &nventory udget (units) Production udget (units)
<irect 1aterials udget <irect Eabor udget Factory $verhead udget *ost of 2oods *ost of 2oods "old udget (includes ending inventory in dollars) "elling #xpense udget ,esearch R <evelopment udget udgeted &ncome "tatement Position Financial udget. *apital #xpenditures udget udget Position
udgeted "tatement of *hanges in Financial Position *ash ,eceipts and <isbursements udgeted "tatement of Financial udgeted "tatement of *hanges in Financial Position
8-%#
6%=? "pring 1anufacturing *ompany (?7 minutes) 9. "ales udget "pring 1anufacturing *ompany "ales udget :77? *9: 9:,777 L 9>7 L9,677,777 <>@ 8,777 L ::7 L9,867,777 'otal :9,777 L;,@67,777
"ales (in units) x Price Per Jnit 'otal "ales
:. Production udget "pring 1anufacturing *ompany Production udget :77? *9: "ales (in units) G <esired finished goods ending inventory 'otal units needed % eginning finished goods inventory Production unit 9:,777 ;77 9:,;77 =77 99,877 <>@ 8,777 :77 8,:77 9>7 8,7>7
6%=? (*ontd%9)
Solutions Manual
8-%1
;. <irect 1aterials Purchase udget "pring 1anufacturing *ompany ,aw 1aterials Purchase udget :77? ,aw 1aterial 9 *9: <>@ Production unit 99,877 8,7>7 x Pounds per unit 97 6 ,19 needed in production (pounds) 998,777 @:,=77 G <esired ending inventory 'otal needed (pounds) % eginning inventory 'otal ,19 to purchase (pounds) x *ost per pound udgeted purchase cost of ,19 ,aw 1aterial : Production unit Pounds per unit ,1: needed in production (pounds) <esired ending inventory 'otal ,1: needed (pounds) eginning inventory Pounds of ,1: to purchase *ost per pound udgeted purchase cost of ,1: *9: 99,877 7 % <>@ 8,7>7 = ;?,:77
'otal
989,=77 =,777 98>,=77 ;,777 98:,=77 L :.77 L ;6=,677
'otal
x G
%
x
;?,:77 9,777 ;@,:77 9,>77 ;>,@77 L :.>7 L 68,:>7
8-%"
6%=? (*ontd%:)
,aw 1aterial ; Production unit Pounds per unit ,1; needed in production (pounds) <esired ending inventory 'otal units of ,1; needed eginning inventory Jnits of ,1; to purchase *ost per pound udgeted purchase cost of ,1; *9: 99,877 : :;,677 <>@ 8,7>7 9 8,7>7 'otal
x G
%
x
;:,6>7 9,>77 ;=,;>7 9,777 ;;,;>7 L7.>7 L9?,?@>
=. <irect Eabor udget "pring 1anufacturing *ompany <irect Eabor udget :77? *9: 99,877 : :;,677 <>@ 8,7>7 ; :@,9>7 'otal
Production unit x <irect labor hours per unit 'otal direct labor hours needed x Dourly wage rate udgeted direct labor costs
>7,8>7 L :>.77 L9,:@;,@>7
Solutions Manual
8-%%
6%=? (*ontd%;)
>. Factory $verhead udget "pring 1anufacturing *ompany Factory $verhead udget :77? Tariable Factory $verhead. &ndirect materials L97,777 1iscellaneous supplies and tools >,777 &ndirect labor =7,777 Payroll taxes and fringe benefits :>7,777 1aintenance costs 97,767 Deat, light, and power 99,777 'otal Tariable Factory $verhead L;:?,767 Fixed Factory $verhead. "upervision 1aintenance costs Deat, light, and power 'otal *ash Fixed Factory $verhead <epreciation 'otal Fixed Factory $verhead 'otal udgeted Factory $verhead
Factory overhead rate. Tariable factory overhead Fixed factory overhead 'otal
L9:7,777 :7,777 =;,=:7 L96;,=:7 @9,;;7 L:>=,@>7 L>67,6;7

'otal udgeted <ED L;:?,767 >7,8>7 :>=,@>7 >7,8>7 L>67,6;7 ,ate L?.=7 L>.77 L99.=7
8-%&
6%=? (*ontd%=) "pring 1anufacturing *ompany udgeted *ost of 2oods "old and Finished 2oods #nding &nventory :77? "ales volume *ost per unit ("chedules 9 and :) *ost of goods sold *9: <>@ 'otal 9:,777 8,777 :9,777 L 8;.67 L 998.@7 L9,9:>,?77 L9,7@@,;77 L:,:7:,877 *9: Finished goods ending inventory *ost per unit ("chedules 9 and :) udget finished goods ending balances "chedule 9. *ost *ard % Product *9: udgeted *ost #lement *ost #lement *ostCPound Huantity ,aw material 9 L :.77 97 ,aw material ; 7.>7 : <irect labor :>.77 : Tariable factory $D (L;:?,767C>7,8>7) ?.=7 : Fixed factory $D (L:>=,@>7C>7,8>7) >.77 : *ost Per Jnit "chedule :. *ost *ard % Product <>@ udgeted *ost #lement *ost #lement *ostCPound Huantity ,aw material 9 L :.77 6 ,aw material : :.>7 = ,aw material ; 7.>7 9 <irect labor :>.77 ; Tariable factory $D (L;:?,767C>7,8>7) ?.=7 ; Fixed factory $D (L:>=,@>7C>7,8>7) >.77 ; *ost Per Jnit 6%=? (*ontd%>)
Solutions Manual
8-%$
<>@ :77 L998.@7 L:;,8=7
'otal
;77 L 8;.67 L:6,9=7
L>:,767 udgeted *ostCJnit L:7.77 9.77 >7.77 9:.67 97.77 L8;.67
udgeted *ostCJnit L 9?.77 97.77 7.>7 @>.77 98.:7 9>.77 L998.@7
@. "elling and Administrative #xpense udget "pring 1anufacturing *ompany "elling and Administrative #xpense udget :77? "elling #xpenses. Advertising "ales salaries 'ravel and entertainment <epreciation 'otal selling expenses
L ?7,777 :77,777 ?7,777 >,777 L;:>,777
Administrative expenses. $ffices salaries L ?7,777 #xecutive salaries :>7,777 "upplies =,777 <epreciation ?,777 'otal administrative expenses L;:7,777 'otal selling and administrative expenses L?=>,777 6. udgeted &ncome "tatement "pring 1anufacturing *ompany udgeted &ncome "tatement For the Mear :77? *9: L9,677,777 9,9:>,?77 L ?@=,=77 <>@ L9,867,777 9,::9,;77 L @>6,@77 'otal L;,@67,777 :,;=?,877 L9,=;;,977 ?=>,777 L @66,977 ;9>,:=7 L =@:,6?7
"ales *ost of goods sold 2ross profit "elling and administrative expenses Pretax net operating income &ncome taxes (=7F) After tax net operating income
8-%'
6%=@ "pring 1anufacturing *ompany U comprehensive Profit Plan Jsing "preadsheet (?7 min.) /ote to instructor. *hanges can be made by clicking on the table to be changed, opening the spreadsheet, and entering the desired changes. 9. "ales udget "pring 1anufacturing *ompany "ales udget :77? *9: 9:,777 L 9?7 L9,8:7,777 <>@ 96,777 L 967 L;,:=7,777 'otal ;7,777 L>,9?7,777
"ales (in units) x Price Per Jnit 'otal "ales
6%=@ (*ontd%9)
Solutions Manual
8-%(
;. <irect 1aterials Purchase udget "pring 1anufacturing *ompany ,aw 1aterials Purchase udget :77? ,aw 1aterial 9 *9: <>@ Production unit 99,877 96,7>7 x Pounds per unit 97 6 ,19 needed in production (pounds) 998,777 9==,=77 G <esired ending inventory 'otal needed (pounds) % eginning inventory 'otal ,19 to purchase (pounds) x *ost per pound udgeted purchase cost of ,19 ,aw 1aterial : Production unit Pounds per unit ,1: needed in production (pounds) <esired ending inventory 'otal ,1: needed (pounds) eginning inventory Pounds of ,1: to purchase *ost per pound udgeted purchase cost of ,1: *9: 99,877 7 % <>@ 96,7>7 = @:,:77
'otal
:?;,=77 =,777 :?@,=77 ;,777 :?=,=77 L :.77 L >:6,677.77
'otal
x G
%
x
L L
@:,:77 9,777 @;,:77 9,>77 @9,@77 :.>7 9@8,:>7
8-%8
6%=@ (*ontd%:)
,aw 1aterial ; Production unit Pounds per unit ,1; needed in production (pounds) <esired ending inventory 'otal units of ,1; needed eginning inventory Jnits of ,1; to purchase *ost per pound udgeted purchase cost of ,1; *9: 99,877 : :;,677 <>@ 96,7>7 9 96,7>7 'otal
x G
%
x
=9,6>7 9,>77 =;,;>7 9,777 =:,;>7 L 7.>7 L:9,9@>
=. <irect Eabor udget "pring 1anufacturing *ompany <irect Eabor udget :77? *9: 99,877 : :;,677 <>@ 96,7>7 ; >=,9>7 'otal
@@,8>7 L :>.77 L 9,8=6,@>7
Solutions Manual
8-%)
6%=@ (*ontd%;)
>. Factory $verhead udget "pring 1anufacturing *ompany Factory $verhead udget :77? Tariable Factory $verhead.N &ndirect materials L9>,:88 1iscellaneous supplies and tools @,?>7 &ndirect labor ?9,98@ Payroll taxes and fringe benefits ;6:,=6; 1aintenance costs 9>,=:: Deat, light, and power 9?,6:8 'otal Tariable Factory $verhead L=86,667 Fixed Factory $verhead. "upervision 1aintenance costs Deat, light, and power 'otal *ash Fixed Factory $verhead <epreciation 'otal Fixed Factory $verhead 'otal udgeted Factory $verhead
L9:7,777 :7,777 =;,=:7 L96;,=:7 @9,;;7 L:>=,@>7 L@>;,?;7
N Assuming variable factory overheads vary proportionatly with changes in direct labor hours
Factory overhead rate. Tariable factory overhead Fixed factory overhead 'otal 'otal udgeted <ED L=86,667 @@,8>7 :>=,@>7 @@,8>7 L>67,6;7 ,ate L?.=7 L;.:@ L8.?@
8-&#
6%=@ (*ontd%=)
6. B%'+&#&' C!-# != G!!'- S!0' /"' >$"$-.&' G!!'- E"'$"+ I"5&"#!)8 S1)$"+ M/"%=/ #%)$"+ C!,1/"8 B%'+&#&' C!-# != G!!'- S!0' /"' >$"$-.&' G!!'- E"'$"+ I"5&"#!)8 2006 C12 D57 12<000 18<000 ? 90.3362 ? 114.5044 ?1<084<035 ?2<061<079 C12 >$"$-.&' +!!'- &"'$"+ $"5&"#!)8 C!-# 1&) %"$# (S .&'%0&- 1 /"' 2( E"'$"+ B/0/" & S .&'%0& 1@ C!-# C/)' - P)!'% # C12 B%'+&#&' C!-# E0&,&"# B%'+&#&' C!-# E0&,&"# C!-#AP!%"' B%/"#$#8 C!-#AU"$# R/7 ,/#&)$/0 1 ? 2.0000 10 ? 20.0000 R/7 ,/#&)$/0 3 ? 0.5000 2 ? 1.0000 D$)& # 0/*!) ? 25.0000 2 ? 50.0000 3/)$/*0& =/ #!)8 2H (?326<080A50<950( ? 6.4000 2 ? 12.8000 >$C&' =/ #!)8 2H (?254<750A77<950( ? 3.2681 2 ? 6.5362 C!-# P&) U"$# ? 90.3362 S .&'%0& 2@ C!-# C/)' - P)!'% # D57 B%'+&#&' C!-# E0&,&"# C!-# E0&,&"# C!-#AP!%"' B%/"#$#8 R/7 ,/#&)$/0 1 ? 2.0000 8 R/7 ,/#&)$/0 2 ? 2.5000 4 R/7 ,/#&)$/0 3 ? 0.5000 1 D$)& # 0/*!) ? 25.0000 3 3/)$/*0& =/ #!)8 2H (?326<080A50<950( ? 6.4000 3 >$C&' =/ #!)8 2H (?254<750A77<950( ? 3.2681 3 C!-# P&) U"$#
Solutions Manual
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S/0&- 5!0%,& C!-# 1&) %"$# (S .&'%0&- 1 /"' 2( C!-# != +!!'- -!0'
T!#/0 30<000 ?3<145<113 T!#/0
D57 200 ?114.50 ?22<901
300 ? 90.34 ?27<101
?50<002
B%'+&#&' C!-#AU"$# ? 16.0000 ? 10.0000 ? 0.5000 ? 75.0000 ? 19.2000 ? 9.8044 ?114.5044
6%=@ (*ontd%>)
@. "elling and Administrative #xpense udget "pring 1anufacturing *ompany "elling and Administrative #xpense udget :77? "elling #xpenses. Advertising "ales salaries 'ravel and entertainment <epreciation 'otal selling expenses Administrative expenses. $ffices salaries #xecutive salaries "upplies <epreciation 'otal administrative expenses 'otal selling and administrative expenses
L ?7,777 :77,777 ?7,777 >,777 L;:>,777
L ?7,777 :>7,777 =,777 ?,777 L;:7,777 L?=>,777
8-&"
6%=@ (*ontd%?) 6. udget &ncome "tatement "pring 1anufacturing *ompany udget &ncome "tatement For the Mear :77? *9: <>@ 'otal L9,8:7,777 L;,:=7,777 L>,9?7,777 9,76=,7;> :,7?9,7@8 ;,9=>,99; L 6;>,8?> L9,9@6,8:9 L:,79=,66@ ?=>,777 L9,;?8,66@ >=@,8>> L 6:9,8;:
Answer 9. &ncrease in after%tax operating income. L6:9,8;: % L=@:,6?7 I L;=8,7@: :. 0hile the changes increased the after%tax operating income, the firm should examine the decision more closely. Although the firm increases its operating income by @=F (L;=8,7@:CL=@:,6?7), it re-uires doubling of units of <>@. &n fact, a 977F increase in units sold of <>@ increased the gross profit from <>@ from L@>6,@77 to L9,9@6,8:9, an increase of L=:7,=:9 while the total change in the gross profit is L>69,@6@ (from L9,=;;,977 to L:,79=,66@). 'he 977F increase in <>@ accounts for only @:F (L=:7,=:9 L>69,@6@) of the increase in profit. *9: contributes to :6F of the increase in profit. Further, the price increase in *9: has no effect on the units sold. 'his may be an indication that *9: may have a higher potential than the firm perceived.
Solutions Manual
8-&%
6%=6 "pring 1anufacturing *ompany % 0ith 4aizen (?7 min.) 9. "ales udget "pring 1anufacturing *ompany "ales udget :77? *9: "ales (in units) x Price Per Jnit 9:,777 L 9>7 L <>@ 8,777 ::7 'otal :9,777
8-&&
6%=6 (*ontd%9)
;. <irect 1aterials Purchase udget "pring 1anufacturing *ompany ,aw 1aterials Purchase udget :77? ,aw 1aterial 9 *9: <>@ Production unit 99,877 8,7>7 x Pounds per unit 8 @ ,19 needed in production (pounds) 97@,977 ?;,;>7 G <esired ending inventory 'otal needed (pounds) % eginning inventory 'otal ,19 to purchase (pounds) x *ost per pound udgeted purchase cost of ,19 ,aw 1aterial : Production unit Pounds per unit ,1: needed in production (pounds) <esired ending inventory 'otal ,1: needed (pounds) eginning inventory Pounds of ,1: to purchase *ost per pound udgeted purchase cost of ,1: *9: 99,877 7 % <>@ 8,7>7 ;.? ;:,>67
'otal
9@7,=>7 =,777 9@=,=>7 ;,777 9@9,=>7 L :.77 L ;=:,877
'otal
x G
%
x
;:,>67 9,777 ;;,>67 9,>77 ;:,767 L :.>7 L 67,:77
Solutions Manual
8-&$
6%=6 (*ontd%:)
,aw 1aterial ; Production unit Pounds per unit ,1; needed in production (pounds) <esired ending inventory 'otal units of ,1; needed eginning inventory Jnits of ,1; to purchase *ost per pound udgeted purchase cost of ,1; *9: 99,877 9.67 :9,=:7 <>@ 8,7>7 7.67 @,:=7 'otal
x G
%
x
:6,??7 9,>77 ;7,9?7 9,777 :8,9?7 L 7.>7 L9=,>67
=. <irect Eabor udget "pring 1anufacturing *ompany <irect Eabor udget :77? *9: <>@ 99,877 8,7>7 9.> : 9@,6>7 96,977 'otal
;>,8>7 L ;7.77 L 9,7@6,>77
8-&'
6%=6 (*ontd%;) >. Factory $verhead udget "pring 1anufacturing *ompany Factory $verhead udget :77? Tariable Factory $verhead. &ndirect materials 1iscellaneous supplies and tools &ndirect labor Payroll taxes and fringe benefits 1aintenance costs Deat, light, and power 'otal Tariable Factory $verhead Fixed Factory $verhead. "upervision 1aintenance costs Deat, light, and power 'otal *ash Fixed Factory $verhead <epreciation 'otal Fixed Factory $verhead 'otal udgeted Factory $verhead Factory overhead rate. Tariable factory overhead Fixed factory overhead 'otal 'his Mear East Mear L 8,777 L 97,777 =,>77 >,777 ;?,777 =7,777 ::>,777 :>7,777 8,7@: 97,767 8,877 99,777 L:8;,=@: L;:?,767
L99=,777 98,777 =9,:=8 9@=,:=8 @9,;;7 L:=>,>@8 L>;8,7>9
L9:7,777 :7,777 =;,=:7 L96;,=:7 @9,;;7 L:>=,@>7 L>67,6;7
'otal udgeted <ED ,ate L:8;,=@: ;>,8>7 L 6.9? :=>,>@8 ;>,8>7 L ?.6; L>;8,7>9 L9=.88
6%=6 (*ontd%=) ?. udgeted *ost of 2oods "old and Finished 2oods #nding &nventory
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"pring 1anufacturing *ompany
8-&8
udgeted *ost of 2oods "old and Finished 2oods #nding &nventory
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For the Mear:77?
8-$#
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8-$1
*9:
<>@
'otal
8-$"
"ales volume
9:,777
8,777
:9,777
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8-$%
*ost per unit ("chedules 9 and :)
6?.;8 L
88.;8
8-$&
*ost of goods sold
L9,7;?,@77 L68=,>77 L9,8;9,:79
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8-$'
*9:
<>@
'otal
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8-$(
Finished goods ending inventory
;77
:77
8-$8
*ost per unit ("chedules 9 and :)
L 6?.;8
L 88.;8
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udget finished goods ending balances
L:>,896
L98,6@6
L=>,@8>
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"chedule 9. *ost *ard % Product *9: *ost #lement ,aw material 9 ,aw material ; <irect labor Tariable factory $D Fixed factory $D *ost Per Jnit udgeted *ost #lement udgeted *ostCPound Huantity *ostCJnit L :.77 8 L96.77 7.>7 9.6 7.87 ;7.77 9.> =>.77 6.9? 9.> 9:.:> ?.6; 9.> 97.:> L6?.;8 udgeted *ost #lement udgeted *ostCPound Huantity *ostCJnit L:.77 @ L9=.77 :.>7 ;.? 8.77 7.>7 7.6 7.=7 ;7.77 : ?7.77 6.9? : 9?.;; ?.6; : 9;.?? L88.;8
"chedule :. *ost *ard % Product <>@ *ost #lement ,aw material 9 ,aw material : ,aw material ; <irect labor Tariable factory $D Fixed factory $D *ost Per Jnit
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6%=6 (*ontd%>) @. "elling and Administrative #xpense udget "pring 1anufacturing *ompany "elling and Administrative #xpense udget :77?
"elling #xpenses. Advertising "ales salaries 'ravel and entertainment <epreciation 'otal selling expenses Administrative expenses. $ffices salaries #xecutive salaries "upplies <epreciation 'otal administrative expenses 'otal selling and administrative expenses
6. udget &ncome "tatement
L ?7,777 :77,777 ?7,777 >,777 L;:>,777
L ?7,777 :>7,777 =,777 ?,777 L;:7,777 L?=>,777
"pring 1anufacturing *ompany udget &ncome "tatement For the Mear :77? *9: <>@ 'otal L9,677,777 L9,867,777 L;,@67,777 9,7;?,@77 68=,>77 9,8;9,:79 L @?;,;77 L9,76>,>77 L9,6=6,@88 ?=>,777 L9,:7;,@88 =69,>:7 L@::,:67
8-'" The McGraw-Hill Companies, nc!, "##$
6%=6 (*ontd%?) Answer 9. 'he budgeted after%tax operating income with 4aizen is L@::,:67. :. 'he immediate benefit is an increase of L:=8,=:7 in operating income, or >;F from L=@:,6?7. 'he firm is also likely benefit in the long%run from the reductions in materials, labor hours, and factory overheads re-uired in production. <ecreases in consumptions of manufacturing elements reduce wear and tear of e-uipment and other facilities and lessen the need for capital investments.
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8-49 R&#/$0&) B%'+&# (40 ,$"%#&-( 9 <. 'omlinson ,etail 1erchandise Purchases udget for 1ay and Aune 1ay 99,877 x L:7 L:;6,777 G :8?,=77 L>;=,=77 % ;78,=77 L::>,777 Aune 99,=77 x L:7 L::6,777 G % ;9:,777 L>=7,777 :8?,=77 L:=;,?77 Auly 9:,777 x L:7 L:=7,777
"ales (in units) *ost of goods sold per unit *$2" #nding inventory (9;7F of next month+s *$2") 'otal needed eginning inventory (9;7F of this month+s *$2s) udget Purchases
: *ash #xpenditures for ", 2 R A expenses 1ay "ales revenue L;>@,777 ", 2 R A expenses ratio x 7.9> 'otal ", 2 R A expenses L >;,>>7 <epreciation % :,777 *ash ", 2 R A expenses L >9,>>7
Aune L;=:,777 x 7.9> L >9,;77 % :,777 L =8,;77
udget *ash <isbursement <. 'omlinson ,etail udgeted *ash <isbursements For Aune 1ay 1aterials purchase L ::>,777 *ash #xpenditures for ", 2 R A expenses G >9,>>7 'otal account payables L:@?,>>7 Payment for the current month payables (>=F) $wed from last month (=?F) *ash outflow for payments of accounts payables
Aune L :=;,?77 G =8,;77 L:8:,877 L9>6,9?? G 9:@,:9; L:6>,;@8
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8-49 (C!"#$"%&'( ;. <. 'omlinson ,etail *ollection of "ales in 1ay L:99,:?? 87,@>7 ;9,6?7 L;;;,6@?
From last month+s (April) credit sales 0ithin the discount period L;?;,777 x ?7F x 8@F I After the discount period ;?;,777 x :>F I From credit sales two months ago *redit sale in 1arch 'otal cash collection from sales L;>=,777 x 8F I
=. 2ross and /et alance of Accounts ,eceivables as of 1ay ;9 1arch April 1ay 'otal "ales L;>=,777 L;?;,777 L;>@,777 ,emaining A, F ?F 9>F 977F A, alance (2ross) L:9,:=7 L>=,=>7 L;>@,777 L =;:,?87 ad debt allowance L:9,:=7 L:9,@67 L:9,=:7 ?=,==7 A, alance (/et) L ;?6,:>7
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8-50 S/0&- *%'+&# /"' 1)! =!),/ =$"/" $/0 -#/#&,&"#- (35 ,$"%#&-( 9. a. Original udget eginning inventory of finished goods #stimated production from the :77?%@ fiscal year Jnits available for sale Planned ending finished goods inventory Pro!ected number of units to be sold during the :77?%@ fiscal year
Selling Price Per Unit =
8,;77 9?:,777 9@9,;77 ;,;77 9?6,777
Projects ollars of Sales $31,248,000 = = $186 Projected Units of Sales 168,000
b. ,evised total sales in unit. "ales in units in the original budget &ncrease in units of production (9@7,777 % 9?:,777)N ,evised total sales (units) "elling price per unit ,evised pro!ected dollar volume of net sales x L G 9?6,777 6,777 9@?,777 96? L;:,@;?,777
N0ith no change in the ending finished goods inventory the increase in production is a result of the expected increase in sales.
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8.50 (C!"#$"%&'-1( :. 1olid *ompany Pro Forma "tatement of *ost of 2oods "old For the Mear #nding August ;9, :77@ <irect materials. 1aterials inventory, 8C9C7? 1aterials purchases9 1aterials available for use 1aterials inventory, 6C;9C7@: <irect 1aterials used <irect labor; Factory overhead. &ndirect material= 2eneral factory overhead> *ost of goods manufactured Finished goods inventory, 8C9C7? *ost of goods available for sale Finished goods inventory, 6C;9C7@? *ost of goods sold
9
L 9,;?7,777 9>,>@?,777 L9?,8;?,777 9,@78,=77 L9>,::?,?77 9,:9>,:77 L 9,>::,??7 ;,;:7,777 =,6=:,??7 L:9,:6=,=?7 9,9?8,777 L::,=>;,=?7 =9;,9?8 L ::,7=7,:89
"upporting *alculations ;@,>77 units 87,777 units W L66.77N I L ;,;77,777 I ;,8?7,777 6,;9?,777 L9>,>@?,777 W L8:.=7NNNI =>,777 unitsNN W L66.77
N L;,;77,777C;@,>77 units I L66.77
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8.50 (C!"#$"%&'-2( NN<esired materials ending inventory 'otal materials needed for the year 'otal units of materials needed eginning inventory 'otal materials purchase for the year 1aterials purchased in the 9st -uarter 1aterials yet to purchase before the end of the year /umber of remaining -uarters Jnits of materials to purchase in each -uarter NNN L66.77 x 9.7> I L8:.=7 : 96,>77 units W L8:.=7 I L9,@78,=77
;
G % % *
96,>77 9@7,777 966,>77 9?,777 9@:,>77 ;@,>77 9;>,777 ; =>,777
<irect labor cost

$1,134,000 # 1%0,000 $nits = 162,000 $nits 4!,000 $nits $1,1&0,000 # # "08 = 1%0,000 $nits $1,1&0,000 2!,200 $1,21!,200
&ndirect material.
L9>,::?,?77 x .9 I L9,>::,??7 L9,@77,777 9,?:7,777 L;,;:7,777 L9:>.:7:@ x ;,;77 L =9;,9?8
>
2eneral factory overhead. Tariable L9,?:7,777 x (9@7,777unitsC9?:,777units) I Fixed L;,:=7,777 x 9C: I 'otal Average product cost per unit for unit manufactured in :77?%@. L:9,:6=,=?7 C9@7,777 units I Finished ending inventory 'otal cost of finished goods ending inventory
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8.50 (C!"#$"%&'-3( ;. a. "avings in working capitals from eliminating ending inventory. Finished goods L =9;,9?8 <irect materials L8:.=7 x (96,>77 % 977) I 9,@77,9?7 'otal savings L:,99;,;:8 'he firm can reduce the need for working capital by L:,99;,;:8. 'he final net saving depends on the cost of capital of the firm. 'he firm can save more than L:99,;;; if the cost of capital of the firm is at least 97F. b. Mes. 'he firm can increase its pro!ected net income from operations before taxes by approximately = percent as shown below. 1olid *ompany Pro Forma "tatement &ncome "tatement For the Mear #nding August ;9, :77@ /et sales *ost of goods sold 2ross profit $perating expenses 1arketing L;,:77,777 2eneral and administrative :,:77,777 &ncome from operations before income taxes L:99,;;; ) L>,:8>,@78 I =F c. &n addition to financial terms, the firm needs to consider carefully, among other items. ade-uacy of the firm+s e-uipment to support the new system proficiency of the firm+s accounting information system to handle the new system support of vendors acceptance of factory managers and production workers L;:,@;?,777 ::,7=7,:89 L97,?8>,@78 >,=77,777 L >,:8>,@78
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8-51 B%'+&# =!) M&) ./"'$-& >$), (15 ,$"%#&-( 9. *ash collections in <ecember From accounts receivable, /ovember ;7 L @?,777 From <ecembers sales L::7,777 x ?7F x 88F I 'otal cash collections in <ecember :. ook value of accounts receivables 'otal sales in <ecember Allowance for doubtful accounts L::7,777 x :F I 'otal amount collectible from sales in <ecember *ollections in <ecember L::7,777 x ?7F I
9;7,?67 L:7?,?67 L::7,777 =,=77 L:9>,?77 9;:,777
ook value of Accounts ,eceivables, <ecember ;9 L 6;,?77 ;. /et income for <ecember 'otal sales L::7,777 2ross margin ratio x :>F 2ross margin L >>,777 $perating expenses. 1onthly operating expenses L::,?77 Jncollectible accounts L::7,777 x :F I =,=77 <epreciation expense L:9?,777 ) 9: I 96,777 =>,777 /et income before taxes L97,777 =. Accounts payable Purchases in <ecember. For sales in <ecember L::7,777 x @>F x :7F I For sales in Aanuary L:77,777 x @>F x 67F I alance on <ecember ;9, Accounts payable >. #nding inventory &nventory, <ecember 9 Purchases 'otal cost of goods available for sale *ost of goods sold &nventory, <ecember ;9
L ;;,777 9:7,777 L9>;,777 L9;:,777 9>;,777 L:6>,777 9?>,777 L9:7,777
L::7,777 x @>F I
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8-52 C/-. B%'+&# (60 M$"%#&-( 9. 'he annual cash budget is presented on the next page. :. $perating problems that 'riple%F Dealth *lub could experience include. X 'he cash contribution from lessons and classes will decrease because the pro!ected wage increase for lesson and class employees is significantly greater than the pro!ected increases in revenues. East year, the cash generated from these operations was L;8,777 (L:;=,777 % L98>,777). 'he :776 pro!ection is only L9:,?@> (L;7=,:77 % L:89,>:>). X $perating expenses are increasing faster than revenues from membership fees. East year, the cash generated from regular operations was L89,777 Y(L;>>,777 G L:,777) U (L=?9,777 % L98>,777)Z. 'he :776 pro!ection is only L8=,86: Y(L=7:,:9> G L:,??@) U (L?79,=:> % L:89,>:>)Z. 'he increase in cash from regular operations is pro!ected to be about =F, whereas these revenues are pro!ected to increase 9;F. X 'riple%F Dealth *lub seems to have a cash management problem. 'he club does not generate enough cash from operations to meet its obligations. &t may not be able to meet expenditures for day%to%day operations if the trend continues. 'o avoid cash crises, the club should prepare monthly cash budgets to help cash management. X /onoperational payments are pro!ected to use up virtually all of the cash generated from operations. 2iven the recent declines in mortgage interest rates, management should consider refinancing this debt to reduce this cash drain. ;. Aane *rowe+s concern with regard to the oard+s expansion goals is !ustified. 'he :776 budget pro!ections show an increase in the cash balance of only L:,@>@. 'he total cash available is well short of the L?7,777 annual additional cash needed for the land purchase. &f the oard desires to purchase the ad!oining property, it is going to have to consider increases in fees, refinancing existing debt, or other methods of financing the ac-uisition.
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8-52 ( !"#$"%&'( ',&PE#%F D#AE'D *EJ *ash udget For the Mear #nding $ctober ;9, :776 :77@ 2PERATI2N CASH IN>429@ 1embership fee Eesson and class fees 1iscellaneous T2TA4 2PERATI2N CASH IN>429 2PERATI2N CASH 2UT>429@ 1anager+s salary and benefits #mployee+s wages and benefits. ,egular employees Eesson and class employees 'owels and supplies Jtilities (heat and lights) 1iscellaneous T2TA4 2PERATI2N CASH 2UT>429 CASH >R2M 2PERATI2N N2N-2PERATI2N PAYMENTS@ Accounts payable Accounts payable % e-uipment 1ortgage principal 1ortgage interest Planned new e-uipment purchases T2TA4 N2N2PERATI2N CASH 2UT>429 NET CASH IN>429 CASH BA4ANCE< END 2> PERI2D Price 2rowth &ncrease :776
L;>>,777 97;.77F 997.77F L=7:,:9> :;=,777 9;7.77F ;7=,:77 :,777 9;;.;;F :,??@ L>89,777 L@78,76: L ;?,777 99>.77F L =9,=77
987,777 99>.77F :96,>77 98>,777 9;7.77F 99>.77F :89,>:> 9?,777 9:>.77F :7,777 ::,777 9:>.77F :@,>77 :,777 9:>.77F :,>77 L=?9,777 L?79,=:> L9;7,777 L97@,?>@ L9>,777 ;7,777 ;>,977 L67,977 L=8,877 L @,;77 given given given 8.77F given :,>77 9>,777 ;7,777 ;:,=77 :>,777 L97=,877 L :,@>@ L 97,7>@
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8.53 E-#$,/#& =!)&$+" -/0&- )&5&"%& (10 ,$"%#&-( 9. Eet ! be the number of units sold in the domestic market. 9.6! I 8,777,777 ! I >,777,777 And the units of foreign sales I >,777,777 x 7.6 I =,777,777 *ondensed income statement "ales <omestic Foreign 'otal sales *osts of sales *ontribution margin :. L;7C7.? I L>7 ;. Eet "P be the target%selling price per unit to earn the desired contribution margin. 'otal domestic sales G 'otal foreign sales in J.". dollars - *osts of sales I <esired *ontribution 1argin >,777,777 x "P G (=,777,777 x "P x 7.?) % (L9> x 8,777,777) I L9> x 8,777,777 @,=77,777 "P I :@7,777,777 "P I L;?.=8 L9> x 8,777,777 I >,777,777 x L;7 I =,777,777 x L;7 x 7.? I L9>7,777,777 @:,777,777 L:::,777,777 9;>,777,777 L 6@,777,777
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8.54 S#)/#&+8< 1)!'% # 0$=& 8 0&< /"' /-. =0!7 (20 ,$"%#&-( 9. 'he development stage is generally characterized by large cash outflows and little or no cash inflows. #xpenditures for research and development, plant and e-uipment, retooling, distribution, and promotion are re-uired. <uring this stage, a pro!ect or company normally generates losses and may re-uire an infusion of outside capital. <uring the growth stage, sales and revenues rise rapidly. "ignificant cash inflows are generally presentB however, these may be offset in part or completely by cash outflows to build production capacity and for growing inventories and receivables. <uring this stage, manufacturing efficiencies will improve contribution margins as volume increases. <uring the maturity stage, net cash inflows are generally at an optimum. Production capacity is in place and inventories and receivables should approach a steady state. Dowever, by this stage, competitors generally have entered the market resulting in higher promotional costs to maintain market share. As a conse-uence, margins may begin to decline. <uring the decline, both sales volume and profits fall. &ncreased price competition and the increased availability of alternative products will reduce margins. 'he declining volume will generally increase the unit cost at the manufacturing level. "ometimes, significant cash inflows can be generated from the li-uidation of inventories and other product%related assets. :. 'he maturity stage, the period of optimum net cash inflows, is missing from urke *ompany+s product cycle. 'he company must be able to generate or raise sufficient cash to support , R <, capital investment, and promotional costs during the development stages and depend on the growth stage for significant cash inflows. 'his will re-uire rapid improvement in manufacturing efficiencies and careful investment in production facilities and inventories. &n addition, inventory control is extremely important in order to minimize cash investment and reduce potential obsolescence.
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8-54 (C!"#$"%&'( ;. 'he techni-ues that <evin 0ard should consider to cope with urke *ompany+s cash management problems include. *areful, timely cash flow pro!ections and monitoring, matching the cash receipts from products in the growth stage with the expenditures for products in the development stage. establishing good banking relationships and flexible lines of credit to facilitate short%term borrowing needs. aggressive accounts receivable management. tight control of materials purchasing and inventory management. improved cost controls. timely decisions on inventory li-uidation as product life cycles near collapse.
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8-55 C!"#$"%!%- *%'+&# (20 ,$"%#&-( 9.a. 'he increase in sales could have the following effects on production. Production capacity may have to be reallocated to the three models based upon the composition of the sales increase. "ome parts, in addition to the molded doors, may have to be purchased from outside suppliers. <epending upon the ability to purchase parts from outside suppliers and the long%term sales pro!ections, additional capacity may be re-uired. 9.b. 'he increase in sales could have the following effects on finance and accounting. "hort%term financing may be needed to finance increased receivable levels and for the replacement of depleted inventories. Eong%term financing may be needed to expand production capacity. udgeting may have to be revised because sales volume is probably beyond the relevant range assumed for the current budget. 9.c. 'he increase in sales could have the following effects on marketing. 'he need to advertise will probably decrease. &nvestigation into the credit%worthiness of potential credit customers may need to become more thorough and the number of investigations will probably increase. *ollection efforts may have to be increased unless credit granting is tightened. *ustomers may have to accept extended shipping dates or may receive units on some rational basis of output allocation. 9.d. 'he increase in sales could have the following effects on personnel. &ncreased stress levels because of the increased volume. /eeds to schedule additional shifts or overtime, which the employees may deem unnecessary or not beneficial. /eeds to hire additional workers to meet the increased demand.
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8-55 (C!"#$"%&'( :.a. A continuous (rolling cycle) budget is the preparation of a new twelve% month budget as each period (e.g., month, -uarter) is completed. At the end of each period, the budget amounts for the period !ust completed are deleted, the amounts for the remaining periods of the old budget are revised as necessary, and budget amounts for the new period are added. 'hus, a twelve%month budget is rolled forward as each period is completed. :.b. 'he preparation of a continuous budget would force 0est0ood+s management to engage in planning on an almost continuous basis. "horter planning cycles increase the chances that management will anticipate and give attention to problem situations earlier than would otherwise have been the case. 'hus, planning would be enhanced in all of the functional areas and there would not be any periods when a budget did not exist.
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6.>? Diggins 'echnologies (=> min.)

ank loan interest rate ond interest rate & *ash balance, beginning Add cash receipts. *ollections from customers #-uipment disposal 'otal cash available "ubtract cash disbursements. ,aw materials purchases Payroll ", 2, R A expenses #-uipment purchase ond interest ond sinking fund &ncome taxes 'otal cash disbursement 1inimum cash balance 'otal cash needed "hort%term Financing. orrowing ,epayment &nterest 'otal effects of financing *ash balance, ending 7 0 0 7 $ 41,000 0 (1,230) $ 39,770 0 0 (1,230) $ 22,000 0 (1,890) $ $ $ 63,000 (4,350) 58,650 30,630 L:77,777 L ::7,777 117,000 ?7,777 20,000 :7,777 9:7,777 ?:,777 30,000 11,250 20,000 :9,777 $ 250,000 99>,777 >6,777 30,000 :>,777 L:@7,777 122,000 ?=,777 11,250 96,777 $ 8=7,777 =@=,777 244,000 80,000 22,500 20,000 84,000 30,000 =:>,777 " 437,000 0 479,480 0 =?7,777 5,000 1,801,480 5,000 9:F 8F Huarters && &&& &T Mear 30,000 L ;7,777 $ 38,000 $ 30,520 $ 30,770 $
$ 455,000 L =@>,777 L >97,777
$ 495,770 $ 1,836,480
$ 417,000 $ 484,250 $ 478,000 $ 485,250 $ 1,864,500 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 447,000 $ 514,250 $ 508,000 $ 515,250 $ 1,894,500
$ (1,230) $ 20,110
L;6,777 $ 30,520 $ 30,770 $ 30,630
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8-57 C2MPREHENSI3E BUDGET (30 ,$"%#&-( 9. S .&'%0& A@ B%'+&#&' M!"#.08 C/-. R& &$1#I#&, D%"& D%08 *ash sales L ?7,777 L ?=,777 *redit sales 9>,777 9?,777 'otal sales L @>,777 L 67,777 ,eceipts. *ash sales L?=,777 *ollections on accounts 9>,777 'otal cash collections L @8,777
A%+%-# L ?>,?77 9?,=77 L 6:,777 L?>,?77 9?,777 L 69,?77
S&1#. L @:,777 96,777 L 87,777 L@:,777 9?,=77 L 66,=77
S .&'%0& B@ B%'+&#&' M!"#.08 C/-. D$-*%)-&,&"#- =!) P%) ./-&I#&, D%08 A%+%-# S&1#. 3)' B#). Purchases L=8,:77 L>=,777 L?7,777 L9?;,:77 *ash discount =8: >=7 ?77 9,?;: 'otal L =6,@76 L >;,=?7 L >8,=77 L 9?9,>?6 S .&'%0& C@ B%'+&#&' M!"#.08 C/-. D$-*%)-&,&"#- =!) 21&)/#$"+ C!-#I#&, D%08 A%+%-# S&1#. 3)' B#). "alaries and wages L9:,777 L9:,977 L9:,>77 L;?,?77 ,ent R Property 'axes 9,777 9,777 9,777 ;,777 $ther cash operating costs 9,?77 9,?=7 9,677 >,7=7 'otal L 9=,?77 L 9=,@=7 L 9>,;77 L ==,?=7 S .&'%0& D@ B%'+&#&' T!#/0 M!"#.08 C/-. D$-*%)-&,&"#I#&, D%08 A%+%-# S&1#. Purchases L=6,@76 L>;,=?7 L>8,=77 *ash operating costs 9=,?77 9=,@=7 9>,;77 &nterest payment on loan >77 >77 #-uipment % ?;,>77 % 'otal L ?;,;76 L 9;:,:77 L @>,:77
3)' B#). L9?9,>?6 ==,?=7 9,777 ?;,>77 L :@7,@76
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8-57 (C!"#E'-1( S .&'%0& E@ C/-. B%'+&# /"' B%'+&#&' >$"/" $"+ I#&, D%08 A%+%-# S&1#. *ash balance, beginning L:>,777 L=7,?8: L:8,>8: 'otal cash receipts @8,777 69,?77 66,=77 'otal cash available L97=,777 L9::,:8: L99@,88: 'otal cash disbursements ?;,;76 9;:,:77 @>,:77 *ash balance before financing L=7,?8: (L8,876) L=:,@8: orrowing re-uired 7 =7,777 7 &nterest payment >77 >77 orrowing repaid % % 97,777 *ash balance, ending L =7,?8: L :8,>8: L ;:,:8: 3)' B#). L:>,777 :=8,777 L:@=,777 :@7,@76 L;,:8: =7,777 9,777 97,777 L ;:,:8:
:. 2old "porting #-uipment udgeted &ncome "tatement For 'he 'hird Huarter, :77@ "ales *ost of goods sold 2ross 1argin $perating expenses. "alaries and wages ,ent and property taxes $ther operating expenses <epreciation 'otal operating expenses $perating income before income taxes $ther expenses. interest expenses /et income before taxes &ncome taxes /et operating income L :>:,777 9=8,?66 L 97:,;9: L ;?,?77 ;,777 >,7=7 :,=77 L L L =@,7=7 >>,:@: 9,777 >=,:@: 9;,>?6 =7,@7=
8-8#
8-57 (C!"#E'-2( 2old "porting #-uipment udgeted alance "heet "eptember ;7, :77@ A--&#*ash Account receivables &nventory uilding and e-uipment (net) 'otal Assets 4$/*$0$#$&- /"' S#! 6.!0'&)-F EG%$#8 Accounts payable /otes payable &ncome tax payable "tockholders #-uity 'otal Eiabilities and "tockholders+ #-uity L ;;,:8: 96,777 >8,=77 ;:=,?77 L =;>,:8:
L L
?;,>77 ;7,777 9;,>?6 L;:6,::= L =;>,:8:
Solutions Manual
8-81
6%>@ (*ontd%;) ;. 2old needs to borrow to finance part of the payment for the new e-uipment during the third -uarter. &n addition, fluctuations in business may re-uire the firm to seek short%term loans. Payrolls, materials, and supplies have to be paid before collections from customers. &n anticipation of rising sales in the coming season, 2old may experience a peak demand for cash to pay for the increased purchases of materials, payrolls, and supplies while collections from customers may be at the lowest point of the year as the firm comes out of a low activity season. A short%term financing arrangement is the best way to meet seasonal cash needs. A short%term loan can be repaid as soon as activities in cash collections increase and payrolls and purchases of materials and supplies decrease as the firm enters into a slow season. Although the firm may have to pay a higher cost for short%term borrowing, the total financing cost likely would be lower than if the firm raised sufficient funds through either issuing long%term bonds or capital stock to meet peak demands for cash. A bond re-uires interest payments whether or not the firm uses the funds raised from the bond in operations. Additional capital stock is not without cost. 'he management needs to earn a desired return on e-uity to satisfy investors. Furthermore, studies have shown that management is likely to be careless in spending when abundant funds are available. =. 'he scenarios described involved many simplified assumptions in order to make the problem managable. Among possible complicating factors are. /o bad debts are considered. *ustomers always make payment as prescribed in sales terms. 0ithin a given month cash inflows are in time to meet cash outflow. &t is conceivable that the bulk of cash inflows occur toward the end of the month while payments need to go out at the beginning of the month. *ash customers cannot use bank credit cards for the purchases.
8-8"

Chapter Eight Strategy and The Master Budget: Solutions Manual

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CHAPTER EIGHT STRATEGY AND THE MASTER BUDGET

Blocher, Chen, Cokins, Lin: Cost Management, 3e

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Blocher, Chen, Cokins, Lin: Cost Management, 3e

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Blocher, Chen, Cokins, Lin: Cost Management, 3e

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