CHAPTER 8
BUDGETING FOR PLANNING AND CONTROL
QUESTIONS FOR WRITING AND DISCUSSION
1. Budgets are the quantitative expressions of
plans. Budgets are used to translate the
goals and strategies of an organization into
operational terms.
2. Control is the process of setting standards,
receiving feedback on actual performance,
and taking corrective action whenever actu-
al performance deviates from planned per-
formance. Budgets are the standards, and
they are compared with actual costs and
revenues to provide feedback.
3. Budgeting forces managers to plan,
provides resource information for decision
making, sets benchmarks for control and
evaluation, and improves the functions of
communication and coordination.
4. The master budget is the collection of all
individual area and activity budgets. Oper-
ating budgets are concerned with the in-
come-generating activities of a firm. Finan-
cial budgets are concerned with the inflows
and outflows of cash and with planned cap-
ital expenditures.
5. The sales forecast is a critical input for
building the sales budget. It, however, is
not necessarily equivalent to the sales
budget. Upon receiving the sales forecast,
management may decide that the firm can
do better or needs to do better than the
forecast is indicating. Consequently, ac-
tions may be taken to increase the sales
potential for the coming year (e.g., increas-
ing advertising). This adjustment then be-
comes the sales budget.
6. Yes. All budgets essentially are founded on
the sales budget. The production budget
depends on the level of planned sales. The
manufacturing budgets, in turn, depend on
the production budget. The same is true for
the financial budgets since sales is a critic-
al input for budgets in that category.
7. If the vice president of sales is a pessimist-
ic individual, one might expect that she or
he would underestimate sales for the com-
ing year. In your role as head of the budget
153
process, you might increase the budgeted
sales figure to take out the individual bias.
8. If the factory controller is a particularly op -
timistic individual, it is possible that the
costs for direct materials, direct labor, and
overhead could be underestimated. For ex-
ample, an optimistic person might assume
that everything will go well, e.g., that there
will be no problems in obtaining an ad-
equate supply of materials at the lowest
possible price. As head of the budget pro-
cess, you might allow for somewhat higher
costs to more accurately reflect reality.
9. The learning curve is the relationship
between unit costs of production and in-
creasing number of units. As time goes on,
the number of units produced in a time
period will increase and the cost per unit
will decrease. The budgets affected will be
the direct materials purchases budget, the
direct labor budget, and the overhead
budget.
10. Small firms often do not engage in a com -
prehensive master budgeting process.
(Personally, we believe that is a mistake.
The budgeting process helps management
more fully understand the business and
helps them to plan for the coming year.)
Even small businesses create cash
budgets, however, because cash flow is
critically important. For example, it is pos-
sible to have positive operating income,
but negative cash flow (e.g., if sales on ac-
count are high, but customers are slow to
pay). Negative cash flow will put a com -
pany out of business in short order.
11. The master budget has been criticized for
the following reasons: it does not recognize
the interdependencies among departments,
it is static, and it is results- rather than
process-oriented. These criticisms are es-
pecially apparent when companies are in a
competitive, dynamic environment. When
the environment changes slowly, if at all,
the master budget would do a good job of
both planning and control.
12. A static budget is one that is not adjusted tual level of activity. The first type of flexible
for changes in activity. Using a static budget is used for planning and sensitivity
budget for control can be a real problem. analysis. The second type of budget is
For example, suppose that the master used for control, since the actual costs of
(static) budget is based on the production the actual level of activity can be com-
and sale of 100,000 units, but that only pared with the planned costs for the actual
90,000 units are actually produced and level of activity.
sold. Further suppose that the budgeted
14. The activity-based budget starts with out-
variable cost of goods sold was
put, determines the activities necessary to
$2,000,000, and that the actual variable
create that output, and then determines the
cost of goods sold was $1,890,000. It looks
resources necessary to support the activit-
as if the company spent less than expected
ies. This differs from the traditional master
for variable manufacturing costs. However,
budgeting process in that the master
the budgeted variable cost was $20 per unit
budget leaps directly from output to re-
($2,000,000/100,000), and the actual vari-
sources. Some of the resource levels are
able cost per unit is $21 per unit
assumed to be fixed. This makes them in-
($1,890,000/90,000). Not adjusting the
dependent of volume changes and hides
bud- get for changes in activity level can
the drivers that actually do affect the fixed
mislead managers about efficiency.
resources. As a result, the budget format
does not support the creation of value and
the thinking that would go into determining
13. A flexible budget is (1) a budget for various
the sources of waste.
levels of activity or (2) a budget for the ac-

154
 EXERCISES

8–1

Weber Company
Production Budget
For the Second Quarter, 20XX
April May June Quarter
Sales........................................... 12,000 50,000 30,000 92,000
Desired ending inventory.......... 7,500 4,500 4,200 4,200
Total needs........................... 19,500 54,500 34,200 96,200
Less: Beginning inventory........ 1,800 7,500 4,500 1,800
Units to be produced............ 17,700 47,000 29,700 94,400

8–2

1. Sleepeze Company
Sales Budget

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year

Standard Pillow:
Units 5,000 6,500 10,000 5,500 27,000
Unit price × $4.00 × $4.00 × $4.00 × $4.00 × $4.00
$ 20,000 $ 26,000 $ 40,000 $ 22,000$108,000
Neck Roll:
Units 4,000 4,500 8,000 5,000 21,500
Unit price × $3.00 × $3.00 × $3.00 × $3.00 × $3.00
$ 12,000 $ 13,500 $ 24,000 $ 15,000 $ 64,500
Total $ 32,000 $ 39,500 $ 64,000 $ 37,000 $172,500

2. Sleepeze Company probably asked the marketing vice president for sales
quantity and price estimates. This vice president might have considered the
level of the past year’s sales of the two products, the actions of competitors,
the state of the economy, and so on.

155
8–2 Concluded

3. Production budget for standard pillows:

Quarter 1 Quarter 2 Quarter 3
Sales 5,000 6,500 10,000
Desired ending inventory 1,300 2,000 1,100
Total needs 6,300 8,500 11,100
Less: Beginning inventory 300 1,300 2,000
Units to produce 6,000 7,200 9,100

Production budget for neck rolls:

Quarter 1 Quarter 2 Quarter 3
Sales 4,000 4,500 8,000
Desired ending inventory 450 800 500
Total needs 4,450 5,300 8,500
Less: Beginning inventory 170 450 800
Units to produce 4,280 4,850 7,700

8–3
1. Ivans Company
Purchase Budget for Fabric
For the Fourth Quarter, 20XX
October November December Total
Units to be produced 40,000 80,000 50,000 170,000
DM per unit (yd.) × 0.10 × 0.10 × 0.10 × 0.10
Production needs 4,000 8,000 5,000 17,000
Desired end. inventory (yd.) 1,200 750 900 900
Total needs 5,200 8,750 5,900 17,900
Less: Beginning inventory 600 1,200 750 600
DM to be purchased (yd.) 4,600 7,550 5,150 17,300
Cost per yard × $3.50 × $3.50 × $3.50 × $3.50
Total purchase cost $ 16,100 $ 26,425 $ 18,025 $ 60,550

156
8–3 Concluded
2. Ivans Company
Purchase Budget for Polyfiberfill
For the Fourth Quarter, 20XX
October November December Total
Units to be produced 40,000 80,000 50,000 170,000
DM per unit (oz.) × 3 × 3 × 3 × 3
Production needs 120,000 240,000 150,000 510,000
Desired end. inventory (oz.) 72,000 45,000 54,000 54,000
Total needs 192,000 285,000 204,000 564,000
Less: Beg. inventory 36,000 72,000 45,000 36,000
DM to be purchased (oz.) 156,000 213,000 159,000 528,000
Cost per ounce × $0.05 × $0.05 × $0.05 × $0.05
Total purchase cost $ 7,800 $ 10,650 $ 7,950 $ 26,400

3. Ivans Company
Direct Labor Budget
For the Fourth Quarter, 20XX
October November December Total
Units to be produced 40,000 80,000 50,000 170,000
Direct labor time per
unit (hrs.) × 0.20 × 0.20 × 0.20 × 0.20
Total hours needed 8,000 16,000 10,000 34,000
Wage per hour × $10.50 × $10.50 × $10.50 × $10.50
Total direct labor cost $ 84,000 $168,000 $105,000 $357,000

157
8–4
1.
January February March April May
Sales........................... 150 140 145 160 200
Desired EI................... 28 29 32 40 52
Needed.................. 178 169 177 200 252
Less: BI....................... 84 28 29 32 40
Unit purchases...... 94 141 148 168 212

2. Sales price = $8 (monthly dollar sales/unit sales)

Cost × 1.60 = Price
Cost = $8/1.60
Cost = $5

Unit Unit Total

Month Purchases Cost Cost
January........ 94 $5 $ 470
February....... 141 5 705
March........... 148 5 740
April.............. 168 5 840
May............... 212 5 1,060

158
8–5
1. Cash Budget
For the Month of October, 20XX
Beginning cash balance............................................. $ 1,980
Collections:
Cash sales............................................................ 10,000
Credit sales:
October ($65,000 × 50%).............................. 32,500
September ($90,000 × 30%).......................... 27,000
August ($80,000 × 15%)............................... 12,000
Total cash available.................................................... $
83,480
Less disbursements:
Inventory purchases:
October ($75,000 × 70% × 40%)................... $21,000
September ($110,000 × 70% × 60%)............. 46,200
Salaries and wages.............................................. 2,000
Rent...................................................................... 2,700
Taxes.................................................................... 5,000
Other operating expenses................................... 800
Owner withdrawal................................................ 4,000
Advertising........................................................... 500 82,200
Ending cash balance.................................... $ 1,280

2. The ending cash balance does not meet the desired level of $2,000. To
quickly adjust the expected ending cash balance, the owner could consider
withdrawing less for his own salary or decreasing discretionary expenses
such as certain items in Other Operating Expenses.

8–6
1. From payments in May for credit sales in:

May ($85,000 × 0.40)................................. $34,000

April ($80,000 × 0.30)............................... 24,000
March ($70,000 × 0.25)............................. 17,500
February ($65,000 × 0.05)........................ 3,250
Total..................................................... $ 78,750

2. April credit sales = $80,000

Decrease in cash from April credit sales = (0.02 × $80,000) = $1,600

8–7

159
 Kevin Campbell’s
Schedule of Anticipated Cash Receipts
August September
Cash sales............................................................. $ 15,000 $ 16,000
Received from sales in:
June (0.8)($85,000)(0.18)(1.02).......... 12,485 —
July ...................(0.8)(0.65)($55,000) 28,600
(0.8)(0.18)($55,000)(1.02).......... 8,078
August (0.8)(0.15)($75,000)................... 9,000
(0.8)(0.65)($75,000)................... 39,000
September (0.8)(0.15)($80,000)................... — 9,600
Total...................................................................... $ 65,085 $ 72,678

8–8
1. Production budget for August:
Sales............................................... 2,500
Desired ending inventory.............. 840
Total needs.............................. 3,340
Less: Beginning inventory........... 1,000
Units to produce...................... 2,340

2. August purchases budget for table legs:

Units to be produced..................... 1,600

DM per unit (leg)............................ × 4
Production needs.......................... 6,400
Desired ending inventory*............ 4,320
Total needs.................................... 10,720
Less: Beginning inventory............ 4,200
DM to be purchased (leg).............. 6,520

*Desired ending inventory = (1,800 × 4) × 0.60 = 4,320.

3. Number of direct labor hours = 1,800 units × 0.3 direct labor hour per unit
= 540 direct labor hours

Number of employees = Direct labor hours/Hours per week

= 540/(40 × 4) = 3.375

8–9
1. Zebro Products

160
 Overhead Budget
For the Year Ended December 31, 20XX
Formula 30,000 DLH*
Variable costs:
Maintenance............................. 0.20 $ 6,000
Power....................................... 0.50 15,000
Indirect labor........................... 1.50 45,000
Total variable costs......... $ 66,000
Fixed costs:
Maintenance............................. $ 10,000
Indirect labor........................... 43,600
Rent.......................................... 24,000
Total fixed costs.............. 77,600
Total overhead costs...................... $143,600
*Counter wipes: (0.01 × 500,000)................. 5,000
Floor wipes: (0.05 × 500,000)..................... 25,000
Total direct labor hours......................... 30,000

161
8–9 Concluded
2.

10% higher:
Zebro Products
Overhead Budget
For the Year Ended December 31, 20XX
Formula 33,000 DLH*
Variable costs:
Maintenance............................. 0.20 $ 6,600
Power....................................... 0.50 16,500
Indirect labor........................... 1.50 49,500
Total variable costs......... $ 72,600
Fixed costs:
Maintenance............................. $ 10,000
Indirect labor........................... 43,600
Rent......................................... 24,000
Total fixed costs.............. 77,600
Total overhead costs...................... $ 150,200
*30,000 DLH × 110% = 33,000.

20% lower:
Zebro Products
Overhead Budget
For the Year Ended December 31, 20XX
Formula 24,000 hours*
Variable costs:
Maintenance............................. 0.20 $ 4,800
Power....................................... 0.50 12,000
Indirect labor........................... 1.50 36,000
Total variable costs......... $ 52,800
Fixed costs:
Maintenance............................. $ 10,000
Indirect labor........................... 43,600
Rent......................................... 24,000
Total fixed costs.............. 77,600
Total overhead costs...................... $130,400
*30,000 DLH × 80% = 24,000.

162
8–10
Zebro Products
Performance Report
For the Year Ended December 31, 20XX
Actual Budget Variance
(a) (b) (c) = (a) – (b)
DLH for units produced.......... 30,500 30,500 0
Production costs*:
Maintenance...................... $ 15,600 $ 16,100 $ (500) F
Power................................. 17,250 15,250 2,000 U
Indirect labor..................... 89,000 89,350 (350) F
Rent................................... 24,000 24,000 0
Total............................ $145,850 $ 144,700 $ 1,150 U

*Flexible budget amounts are based on 30,500 DLH:

(0.01 × 550,000 + 0.05 × 500,000) = 30,500 DLH
Maintenance $10,000 + $0.20(30,500) = $16,100
Power $0.50(30,500) = $15,250
Indirect labor $43,600 + $1.50(30,500) = $89,350

8–11

1. Sales revenue:
Pessimistic Expected Optimistic
Sleepeze............................ $2,250,000 $ 3,000,000 $ 3,600,000
Plushette........................... 3,000,000 4,200,000 5,040,000
Ultima................................ 1,800,000 5,000,000 6,000,000
Total sales.................... $ 7,050,000 $ 12,200,000 $14,640,000

2.
Pessimistic Expected Optimistic
Salaries.............................. $ 130,000 $ 130,000 $ 130,000
Depreciation...................... 20,000 20,000 20,000
Office supplies & other.... 21,000 21,000 21,000
Advertising:
Sleepeze & Plushette. . 20,000 20,000 20,000
Ultima........................... 90,000 250,000 300,000
Commissions.................... 157,500 216,000 259,200
Shipping:
Sleepeze....................... 625,000 750,000 900,000
Plushette...................... 500,000 600,000 700,000
Ultima........................... 150,000 375,000 375,000
Total................................... $ 1,713,500 $ 2,382,000 $ 2,725,200
8–12

163
1. Activity-based budget:
Research:
Salary..................................... $ 30,000
Internet connection............... 1,920 $ 31,920
Shipping:
Salaries.................................. $ 24,500
Telephone.............................. 2,500
Ship sleepeze........................ 750,000
Ship plushette....................... 600,000
Ship ultima............................. 375,000 1,752,000
Jobbers:
Salaries.................................. $ 18,750
Telephone.............................. 2,500
Commissions........................ 216,000 237,250
Basic ads:
Salaries.................................. $ 16,000
Advertising............................ 20,000 36,000
Ultima ads:
Salaries.................................. $ 20,750
Advertising............................ 250,000 270,750
Manage office:
Salaries.................................. $ 20,000
Depreciation.......................... 20,000
Internet.................................. 480
Other office supplies............ 13,600 54,080
Total............................................ $2,382,000

2. Clearly, shipping is the most costly activity, followed by ultima advertising

and commissions to jobbers. It would be worthwhile to investigate shipping
costs to see if those could be reduced, for example, by getting bids from sev-
eral shippers. It is unlikely that ultima advertising should be reduced the first
year. It is a very different, and expensive, model, and consumers may need to
be educated as to its benefits. Another method of selling to retail stores
might be worth investigating. For example, the use of a salaried sales staff.

164
 PROBLEMS

8–13

1. Schedule 1: Sales budget

January February March Total
Units......................... 20,000 25,000 30,000 75,000
Unit selling price...... × $90 × $90 × $90 × $90
Sales.................... $1,800,000 $ 2,250,000 $ 2,700,000 $
6,750,000

2. Schedule 2: Production budget

January February March Total
Sales (Schedule 1)................... 20,000 25,000 30,000 75,000
Desired ending inventory....... 17,500 21,000 21,000 21,000
Total needs......................... 37,500 46,000 51,000 96,000
Less: Beginning inventory...... 13,000 17,500 21,000 13,000
Units to be produced......... 24,500 28,500 30,000 83,000

3. Schedule 3: Direct materials purchases budget

January February
Part 714 Part 502 Part 714 Part 502
Units to be produced......... 24,500 24,500 28,500 28,500
Dir. mat. per unit................. × 5 × 3 × 5 × 3
Production needs......... 122,500 73,500 142,500 85,500
Desired EI........................... 62,500 37,500 75,000 45,000
Total needs.................... 185,000 111,000 217,500 130,500
Less: BI.............................. 50,000 30,000 62,500 37,500
Dir. mat. to purchase.... 135,000 81,000 155,000 93,000
Cost per unit....................... × $4 × $3 × $4 × $3
Total cost....................... $ 540,000 $243,000 $ 620,000 $279,000

March Total
Part 714 Part 502 Part 714 Part 502
Units to be produced......... 30,000 30,000 83,000 83,000
Dir. mat. per unit................. × 5 × 3 × 5 × 3
Production needs......... 150,000 90,000 415,000 249,000
Desired EI........................... 75,000 45,000 75,000 45,000
Total needs.................... 225,000 135,000 490,000 294,000
Less: BI............................... 75,000 45,000 50,000 30,000
Dir. mat. to purchase.... 150,000 90,000 440,000 264,000
Cost per unit....................... × $4 × $3 × $4 × $3
Total cost....................... $ 600,000 $270,000 $ 1,760,000 $792,000

8–13 Continued

165
4. Schedule 4: Direct labor budget
January February March Total

Units to be produced
(Schedule 2)...................... 24,500 28,500 30,000 83,000
Direct labor time per
unit (hrs.)........................... × 2 × 2 × 2 × 2
Total hours needed................. 49,000 57,000 60,000 166,000
Wages per hour....................... × $15 × $15 × $15 × $15
Total dir. labor cost.......... $ 735,000 $ 855,000 $ 900,000 $
2,490,000

5. Schedule 5: Overhead budget

January February March Total
Budgeted direct labor
hours (Schedule 4)........... 49,000 57,000 60,000 166,000
Variable overhead rate............ × $3.90 × $3.90 × $3.90 × $3.90
Budgeted var. overhead.......... $191,100 $222,300 $234,000 $ 647,400
Budget fixed overhead............ 205,000 205,000 205,000 615,000
Total overhead.................. $ 396,100 $ 427,300 $439,000 $
1,262,400

6. Schedule 6: Selling and administrative expense budget

January February March Total
Planned sales (Schedule 1).... 20,000 25,000 30,000 75,000
Variable selling &
administrative expense
per unit.............................. × $3.75 × $3.75 × $3.75 × $3.75
Total variable expense............ $ 75,000 $ 93,750 $112,500 $
281,250
Fixed selling &
administrative expense:
Salaries....................... $ 30,000 $ 30,000 $ 30,000 $ 90,000
Depreciation............... 5,000 5,000 5,000 15,000
Other........................... 10,000 10,000 10,000 30,000
Total fixed expenses............... $ 45,000 $ 45,000 $ 45,000 $
135,000
Total selling &
administrative exp...... $ 120,000 $138,750 $157,500 $
416,250

166
8–13 Continued
7. Schedule 7: Ending finished goods inventory budget
Unit cost computation:
Direct materials Part 714 (5 × $4) = $ 20
Part 502 (3 × $3) = 9........................... $29.00
Direct labor (2 × $15).............................................................. 30.00
Overhead:
Variable (2 × $3.90).......................................................... 7.80
Fixed (2 × $3.705)*........................................................... 7.41
Total unit cost........................................................................ $74.21
* Total fixed OH / Total DLH = $615,000/166,000 = $3.705 per DLH

Units Cost per Unit Total Amount

Finished goods........................ 21,000 $74.21 $1,558,410

8. Schedule 8: Cost of goods sold budget

Direct materials used (Schedule 3):
Part 714 (415,000 × $4.00).................................. $1,660,000
Part 502 (249,000 × $3.00).................................. 747,000 $
2,407,000
Direct labor used (Schedule 4)................................. 2,490,000
Overhead (Schedule 5).............................................. 1,262,400
Budgeted manufacturing costs......................... $6,159,400
Add: Beginning finished goods (13,000 × $74.21)*. 964,730
Goods available for sale.................................... $ 7,124,130
Less: Ending finished goods (Schedule 7).............. 1,558,410
Budgeted cost of goods sold............................ $5,565,720
*Assumes that these units cost the same as current quarter’s production.

9. Schedule 9: Budgeted income statement

Sales (Schedule 1)........................................................................... $
6,750,000
Less: Cost of goods sold (Schedule 8).......................................... 5,565,720
Gross margin............................................................................ $
1,184,280
Less: Selling and administrative expense (Schedule 6)............... 416,250
Income before taxes................................................................. $ 768,030

167
8–13 Concluded
10. Schedule 10: Cash budget
January February March Total
Beg. balance............................ $ 162,900 $ 33,800 $ 0 $ 162,900
Cash receipts........................... 1,800,000 2,250,000 2,700,000 6,750,000
Cash available................... $1,962,900 $ 2,283,800 $ 2,700,000 $6,912,900
Less disbursements:
Purchases......................... $ 783,000 $ 899,000 $ 870,000 $2,552,000
DL payroll.......................... 735,000 855,000 900,000 2,490,000
Overhead*.......................... 296,100 327,300 339,000 962,400
Marketing & admin.*.......... 115,000 133,750 152,500 401,250
Land................................... 90,000 90,000
Total.............................. $1,929,100 $ 2,305,050 $ 2,261,500 $
6,495,650
Ending balance........................ $ 33,800 $ (21,250) $ 438,500 $ 417,250
Borrowed/repaid...................... 0 21,250 (21,250) 0
Interest paid............................. 0 0 (213) (213)
Ending balance................. $ 33,800 $ 0 $ 417,037 $ 417,037
*Excludes depreciation, which is a noncash expense.

8–14
1. Schedule of purchases:
Cost of sales + 0.3333 Cost of sales = Sales
Cost of sales = 0.75 Sales

August September October November

Cost of sales........................ $ 90,000 $67,500 $ 75,000 $101,250
Desired end. inventory*...... 27,000 30,000 40,500 45,000
Total requirements....... $117,000 $97,500 $115,500 $146,250
Less: Beg. inventory........... 36,000 27,000 30,000 40,500
Purchases..................... $ 81,000 $ 70,500 $ 85,500 $ 105,750
*0.40 × next month’s cost of sales.

Since purchases are paid for in the following month, accounts payable at the
end of August is $81,000. Inventory for August 31 is $27,000.

168
8–14 Continued
Accounts receivable for August 31 is computed as follows:

From August: 0.8 × $120,000 × 0.8* = $ 76,800

From July: 0.8 × $100,000 × 0.3 = 24,000
Total......................................... $ 100,800

*By August 31, 20% of August credit sales have been collected, leaving 80%
still on account.

Given accounts payable, the total assets must equal $569,750 ($81,000 +
$220,000 + $268,750). Cash is computed as the difference between total as-
sets and all other assets except cash ($569,750 – $425,000 – $33,750 –
$100,800). This difference is $10,200.

Assets L&OE
Cash......................................... $ 10,200
Accounts receivable............... 100,800
Inventory................................. 27,000
Plant and equipment............... 431,750
Accounts payable............ $ 81,000
Common stock................. 220,000
Retained earnings............ 268,750
Totals......................... $569,750 $ 569,750

169
8–14 Continued
2. Cash Budget
For the Period Ending November 30
September October November Total
Beginning cash balance.... $ 10,200 $ 10,900 $ 17,425 $ 10,200
Cash collectionsa............... 104,400 100,800 110,200 315,400
Total cash available.... $ 114,600 $ 111,700 $127,625 $
325,600

Cash disbursements:
Accounts Payableb...... $ 81,000 $ 70,500 $ 85,500 $
237,000
Salaries and wages..... 10,000 10,000 10,000 30,000
Utilities......................... 1,000 1,000 1,000 3,000
Other............................ 1,700 1,700 1,700 5,100
Property taxes............. 15,000 — — 15,000

Advertising fees.......... — 6,000 — 6,000

Lease........................... — — 5,000 5,000
Total disburse...... $108,700 $ 89,200 $103,200 $
301,100
Minimum cash balance.... 10,000 10,000 10,000 10,000
Total cash needs......... $ 118,700 $ 99,200 $113,200 $
311,100
Excess (deficiency)............ $ (4,100) $ 12,500 $ 14,425 $ 14,500
Financing:
Borrowings.................. $ 5,000 — — $ 5,000
Repayments................. — $ (5,000) — (5,000)
Interestc........................ — (75) — (75)

Total financing..... $ 5,000 $ (5,075) 0 $ (75)

Ending cash balanced........ $ 10,900 $ 17,425 $ 24,425 $ 24,425
a
Cash collections:
Cash sales......................... $ 18,000 $ 20,000 $ 27,000 $ 65,000
Credit sales:
Current month............. 14,400 16,000 21,600 52,000
Prior month.................. 48,000 36,000 40,000 124,000
From two months ago 24,000 28,800 21,600 74,400
Total collections............... $104,400 $ 100,800 $110,200 $
315,400
b
For Accounts Payable taken from the balance sheet developed in Requirement 1.
c
$5,000 × 0.09 × (2/12) (beginning of September to end of October).
d
Includes minimum cash balance of $10,000.

170
171
8–14 Concluded
3. Creighton Hardware Store
Balance Sheet
November 30
Cash......................................... $ 24,425
Accounts receivablea.............. 110,400
Inventoryb................................ 45,000
Plant and equipmentc.............. 413,000
Accounts payableb........... $105,750
Common stock................. 220,000
Retained earningsd........... 267,075
Totals......................... $592,825 $ 592,825
a
(0.8 × $135,000 × 0.8) + (0.8 × $100,000 × 0.3).
b
From purchases schedule prepared in Requirement 1.
c
[425,000 – 3(4,000)].
d
If total assets equal $592,825, then liabilities plus stockholders’ equity must
also equal that amount. Subtracting accounts payable and common stock
from total liabilities and stockholders’ equity gives retained earnings of
$267,075.

8–15
a. Production budget:

January February March Total

Sales in units........................ 20,000 24,000 16,000 60,000
Plus: ending inventory......... 12,000 8,000 9,000 9,000
............Total units required 32,000 32,000 25,000
69,000
Less: beginning inventory... 10,000 12,000 8,000 10,000
Units to be produced....... 22,000 20,000 17,000 59,000

b. Direct labor budget (hours):

January February March Total

Units to be produced........... 22,000 20,000 17,000 59,000
Direct labor hours per unit... × 4.0 × 4.0 × 3.5
Total labor budget (hours) 88,000 80,000 59,500 227,500

172
8–15 Concluded
c. Direct materials budget:

January February March Total

Units to be produced........... 22,000 20,000 17,000 59,000
Cost per unit......................... × $10 × $10 × $10 × $10
Total direct materials....... $220,000 $200,000 $170,000 $590,000

d. Sales budget (dollars):

January February March Total

Sales in units........................ 20,000 24,000 16,000 60,000
Sales price per unit.............. × $80 × $80 × $75
Total sales revenue.......... $1,600,000 $1,920,000 $1,200,000 $
4,720,000

173
8–16
Friendly Freddie’s
Cash Budget
October through December
October November December
Beginning cash balance.......................... $ 8,800 $ 8,600 $ 9,120
Receipts:
Cash sales.......................................... $ 14,000 $ 29,000 $ 44,000
Collections of sales on account1...... 118,200 126,340 134,080
Note receivable repayment................ 13,000
Total cash receipts.................................. $145,200 $155,340 $178,080
Cash available.......................................... $154,000 $163,940 $187,200
Disbursements:
Payment of inventory purchases2..... $116,400 $108,640 $124,160
Operating expenses........................... 38,000 41,000 46,000
Loan repayment................................. 5,000 4,000
Interest3............................................... 180 80
Total disbursements............................... $154,400 $ 154,820 $174,240
Cash balance........................................... $ (400) $ 9,120 $ 12,960
Bank loan4................................................ 9,000
Adjusted cash balance............................ $ 8,600 $ 9,120 $ 12,960
1
Collections of sales on account:
October November December
July 6% of $130,000.............. $ 7,800
August 20% of $104,000............ 20,800
6% of $104,000.............. $ 6,240
September 70% of $128,000............ 89,600
20% of $128,000............ 25,600
6% of $128,000.............. $ 7,680
October 70% of $135,000............ 94,500
20% of $135,000............ 27,000
November 70% of $142,000............ 99,400
December 0......................................
Total.................................................... $118,200 $ 126,340 $134,080
2
Payments for inventory purchases:
October November December
September purchases (97% of $120,000). . $116,400
October purchases (97% of $112,000)....... $108,640
November purchases (97% of $128,000). . . $124,160
3
Total collections:
November—2% of $9,000
December—2% of $4,000
4
Loans must be taken out and repaid in multiples of $1,000.

174
8–17

1. Fixed costs:
Rent
Depreciation
Salaries
Utilities
Janitorial services
Accounting and financial services
Insurance
Other expenses

Variable costs:
Office supplies, driver is number of patients
Medical supplies, driver is number of 15-minute time slots

2.
Dorian Dermatology Associates
Overhead Budget
For the Month of May
Rent............................................................................ $ 1,200
Depreciation............................................................... 1,000
Supplies [(800 × $10) + (1,200 × $5)]......................... 14,000
Salaries
Office manager..................................................... $2,083
Medical assistants................................................ 3,000
Receptionist.......................................................... 1,250 6,333
Utilities....................................................................... 500
Janitorial services..................................................... 250
Accounting and financial services........................... 2,400
Insurance.................................................................... 3,000
Other expenses.......................................................... 700
Total...................................................................... $ 29,383

175
8–18
1.
Cost per Amount of Total
Activity Driver Unit of Driver Driver Cost
Schedule appointments # phone calls $ 1.00 875 $ 875
Initial screening # patients 7.25 800 5,800
Assist doctors # procedures 7.25 400 2,900
File insurance # claims 9.27 650 6,026
Handle disputed claims # disputed claims 123.50 40 4,940
Provide facilities 8,550
Total...................................................................................................... $
29,091

2. Clearly, the cost of each disputed claim is quite high. The office manager
should think about the reasons why claims are disputed, e.g., errors in filing
the initial claim, failing to provide sufficient information for unusual dia-
gnoses. Then, perhaps the number of disputes can be reduced.

8–19
1. a. An imposed budgetary approach does not allow input from those who
are directly affected by the process. This can tend to make the employ-
ees feel that they are unimportant and that management is concerned
only with meeting budgetary goals and not necessarily with the well-be-
ing of employees. The employees will probably feel less of a bond with
the organization and will feel that they are meeting standards set by oth-
ers. An imposed budgetary approach is impersonal and can give employ-
ees the feeling that goals are set arbitrarily or that some people benefit at
the expense of others. Goals that are perceived as belonging to others
are less likely to be internalized, increasing the likelihood of dysfunction-
al behavior. Furthermore, imposed budgets fail to take advantage of the
knowledge subordinate managers have of operations and local market
conditions.

b. A participative budgetary approach allows subordinate managers consid-

erable say in how budgets are established. This communicates a sense
of responsibility to the managers and fosters creativity. It also increases
the likelihood that the goals of the budget will become the managers’
personal goals, due to their participation. This results in a higher degree
of goal congruence. Many feel that there will be a higher level of perform-
ance because individuals who are involved in setting their own standards
may work harder to achieve them. When managers are allowed to give in-
put in developing the budget, they tend to feel that its success or failure
reflects more personally on them.
8–19 Concluded

176
2. a. In an imposed budgetary setting, communication flows from the top to
the bottom and is mostly a 1-way flow. Any upward flow would have to
do with understanding the budgets being communicated. For participat-
ive budgeting, the communication flows are necessarily in both direc-
tions, with much of the communication being initiated by subordinate
managers.

b. The first communication process leaves the impression that the opinions
and thoughts of lower-level managers are unimportant. They may feel
that no input is being solicited because their input is not valued. The
second process, however, conveys the impression that opinions and
views are important and valued. This tends to create a greater feeling of
worth to the organization and a stronger commitment to achieving its
goals.

8–20
1. a. The reasons that Marge Atkins and Pete Granger use budgetary slack in-
clude the following:
• They are hedging against the unexpected, thereby reducing uncer-
tainty and risk.
• The use of budgetary slack allows employees to exceed expecta-
tions and/or show consistent performance. This is particularly im-
portant when performance is evaluated on the basis of actual results
versus budget.
• Employees are able to blend personal and organizational goals
through the use of budgetary slack as good performance generally
leads to higher salaries, promotions, and bonuses.

b. The use of budgetary slack can adversely affect Marge and Pete 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 actions.
• 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). Decisions regarding the profitability of
product line, staffing levels, incentives, etc., could have an adverse
effect on Marge’s and Pete’s departments.
8–20 Concluded

177
2. The use of budgetary slack, particularly if it has a detrimental effect on the
company, may be unethical. In assessing the situation, the specific provi-
sions of the “Standards of Ethical Conduct for Management Accountants”
that should be considered are:

Competence: Provide decision support information and recommendations

that are accurate, clear, concise, and timely.

Integrity: Refrain from engaging in any conduct that would prejudice carrying
out duties ethically.

Credibility: Information should be fairly and objectively communicated. All

relevant information should be disclosed.

178
 COLLABORATIVE LEARNING EXERCISE

8–21
1. Cash sales ($700,000 × 0.20)............................................................. $140,000
Credit sales ($700,000 × 0.80 × 0.30)................................................. 168,000
Cash received in March from March sales.................................. $ 308,000

2. April cash sales ($625,000 × 0.80 × 0.25).......................................... $125,000

Collection of credit sales in:
February ($650,000 × 0.80 × 0.25)................................................ 130,000
March ($700,000 × 0.80 × 0.40)..................................................... 224,000
April ($625,000 × 0.80 × 0.30)....................................................... 150,000
Total receipts.......................................................................... $ 629,000

3. February purchases for:

February sales ($650,000 × 0.40 × 0.70)............................................ $182,000
Ending inventory ($700,000 × 0.40 × 0.30)........................................ 84,000
Total February purchases............................................................ $ 266,000

4. February cost of goods sold = $650,000 × 0.40 = $260,000

5. Cash disbursements in April for operating expenses:

Variable operating expenses from March ($700,000 × 0.10)............ $ 70,000

Fixed expenses:
Advertising (1/12 × $720,000)...................................................... 60,000
Salaries (1/12 × $1,080,000)......................................................... 90,000
Insurance (1/4 × $180,000)........................................................... 45,000
Property taxes (1/2 × $240,000)................................................... 120,000
Total.................................................................................................... $ 385,000

CYBER RESEARCH CASE

8–22
Answers will vary.

179