CH 07

CHAPTER 7 SOLUTIONS
Solutions to Questions for Review and Discussion
1. Joyce Hengesbach certainly has negative attitudes about budgeting. She probably thinks
budgets are just paperwork that accountants put together to keep busy and feels they aren't
worthy of her time. She thinks that budgets will constrain her ability to stay in control and to
adjust quickly to new opportunities. Looking at each of her comments:
(a) "How can I plan? Things always change so fast!" Joyce definitely feels that once a budget
is prepared it is carved in stone and that the accountants will never let her change a thing.
However, this is not the case. Budgets can be very flexible and, in fact, should be. If conditions
change that warrant a change in the budget, it should be made to keep the budget current and
useful.
(b) "My business isn't suited to anything so formal. My managers and I need to be flexible, fast
on our feet, and ready to change direction overnight, if need be." Here Joyce feels that budgets
are very formalized and that only one budgeting style is available for all businesses to use.
Someone should explain to Joyce that, while standard budget formats exist, a business can
design budgets in any style that fit its needs. Merchandising firms use different budgets than a
manufacturing firm would use. It would be wise to inform Joyce about "rolling update" budgets
that allow for up-to-date changes in the business environment. Also of note are the complaints
that her managers have expressed about the lack of information and too much disorganization.
A "plan of action" could give everyone at least a basic "game plan."
(c) "The budget always says we can't do it. I just say 'do it!'" Budgets don't tell an organization
it can't do something. Rather, budgets help identify problems areas in the organization, such as
bottlenecks, resource needs, or time and people constraints that need to be addressed to meet
the firm's goals and objectives.
(d) "The budget reports always tell me where I've been, never where I'm going." Not true at all.
Budgets are designed to plan for the future, not the past. However, you can learn something
from analyses of past results that can make your firm more profitable in the future. It is entirely
possible that Joyce never saw a budget until after the budget period was over and only saw the
deviations from the budget, too late to be of any significant value. Instead, budgets should be
used to make decisions that help meet the plan throughout the budgeting period.
(e) "That's the accountant's budget; it doesn't tell me what my problems are and what to do
about them." All people in the organization should be helping to prepare the budgets and using
them. Joyce probably feels that budgets are just numbers that the accountants crunched to
keep busy and never bothered to discover what budgets can do for her. Production budgets can
help identify scheduling problems, and a cash budget could help identify a collections problem.
(f) "We can't wait for approvals and variance reports. Budgets hold us back!" Budgets should
never hold back a company because they aren't prepared. Budgets should be ready in advance
of the budget period. Therefore, if any problem areas are identified, they can be addressed
quickly. Also, actual results should be made available for comparison to budgets as soon as
possible. This allows management to be aware of large variances in time to make adjustments
for the next budgeting period.
Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-1

2. The major components of a planning and control system are:
(a) Strategic planning process consisting of the firm's mission, long-range goals, and a strategic
plan.
(b) Business plan and personal goal setting.
(c) Planning process and timetable.
(d) Responsibility accounting system.
(e) Reward or incentive system.
(f) Financial modeling.
(g) Participatory budgeting.
3. The question asks for at least five purposes. Eight purposes for budgeting were mentioned in
the text:
(1) Formalize the planning process. This forces managers to think about the future. It moves
the organization from a reactionary mode, in which management simply reacts to a problem,
to an anticipatory mode, in which problems are foreseen before they arise and positive action
is taken to remedy the situations before they occur.
(2) Create a plan of action. The emphasis is on ACTION! The planning process brings
together ideas, forecasts, resource availabilities, and financial realities to create a plan that
meets the firm's goals and objectives. But to meet those actual goals and objectives, the
plan must be put to use. If it is not used to make decisions, it will only become more paper
being pushed around the organization. Budgets are not cheap to prepare; they should be
used.
(3) Create a basis for performance evaluation. Any actual result is meaningless unless it is
compared to a target, a plan, or a budgeted number. Actual results are compared to
budgeted targets, and significant variances can be identified which may require explanations
and corrective action by the manager responsible.
(4) Promote continuous improvement. Budgeting should always be striving to improve

operations. As processes are budgeted, managers should be examining ways to eliminate
waste or nonvalue-added activities, to improve quality, and to improve throughput. Budgeting
should encourage careful examination of all activities.
(5) Coordinate and integrate management's efforts. This requires meshing and balancing an
organization's resources so that overall goals and objectives are attained. To run an
organization successfully, all segments must coordinate their efforts and open lines of
communication within the organization, both up and down and across organizational lines.
(6) Aid in resource allocation. The resources of a firm (people, time, money, equipment, etc.)
are in short supply, and often many people in a firm want access to them at the same time.
Budgets can be used to distribute the resources to the highest bidder. If the budgeting
process is handled correctly, it can be a powerful managerial tool for rewarding past
achievements and selecting the most promising future uses of funds.
(7) Create an "aura of control." Budgets help to ensure that managers understand their
authority and limits. They can give employees confidence that management has control over
business activities and that policies are in place and followed. One must be careful, as too
much control will stifle management's creativity.
(8) Motivate managers and employees positively. When people play a role in preparing their
budgets and goals, they feel a personal responsibility for them and will strive harder to

achieve them. Budgets also help managers see the "big picture" of how their department fits
into the organization as a whole and help mold employees into team players. Promotions
and raises should also be tied to job performance and achievement of budgeted goals.
4. Budgeted activity is generally regarded as more appropriate than historical data. The major
drawback of using historical data for performance evaluation is that inefficiencies in past
performance may be concealed and allowed to continue. Also, changes in economic conditions,
technology, competition, and personnel create invalid comparisons between present and past
performances. The budget should be the best estimate of expected results. Actual should be
compared to expected results.
5. A cost center is a responsibility center where a manager has control over incurring costs. An
activity center and a cost center are both commonly defined as the smallest part of an
organization around which we will want to accumulate costs. In fact, in most carefully defined
cost systems, the terms activity center and cost center can be used interchangeably. An activity
center can, however, be smaller than or a subdivision of a cost center. Activity centers will not
encompass more than one cost center. A manager can have responsibility for one or more
activity or cost centers. In many situations, the term cost center is used as a generic label for
activity, cost, profit, and investment centers.
A profit center is a responsibility center where control exists over generating revenues and
incurring costs within a certain area. An investment center is a responsibility center where
control exists over specific assets and also over revenues and costs in a particular area.
6. In general, sales is the limiting factor in the preparation of a budget. Firms are always striving to
generate more sales. Production will depend on sales levels; cash receipts and payments
depend on sales; and employment depends on sales. When sales is not the limiting factor, the
new limiting factor is often temporary.
In a manufacturing firm that produces labor-intensive goods, skilled direct labor hours may be a
limiting factor.
In a heavily automated firm, such as a robotic-controlled machining operation, the limiting factor
could be machine hours.
In a retail grocery, shelf space in the store will often limit the budget.
In a service firm, labor hours are usually the limiting factor. For example, in a public accounting
firm, staff time before April 15 is limited; and the amount of work available may be literally
unlimited.
7. Variables that can be changed by the planner or budget analyst or external values that must be
defined before the budget is assembled are called independent variables. All remaining
variables in the budget are determined by a formula and are called dependent variables. The
relationship between independent and dependent variables is that the value of a dependent
variable is determined by the values of the independent variables, other dependent variables,
and a formula.
Examples of independent variables are planning assumptions, product cost and price data, and
a sales forecast. Examples of dependent variables would be production required in a quarter,
purchases of raw materials for the year, mid-year cash borrowings, and ending balance sheet
values.
8. A variable cost, stated in per unit (or per some activity) terms, never changes. As the activity

level changes, the variable cost per unit stays constant. However, total variable cost will change
with the change in activity.
A fixed cost is a certain dollar amount of cost that does not change with changing activity levels.
Total fixed cost always stays the same. However, as the total fixed cost amount is divided by
different levels of activity, the fixed cost per unit changes. Note: If a cost does not change when
a cost driver activity level changes, it is possible that we have not found the correct cost driver.
9. Budgets that are oriented toward particular events, specific jobs, and one-time tasks and serve
as guidelines to the probable results of such events are referred to as project budgets. Projects
are one-time efforts, such as construction projects and research and development projects.
Time schedules, which merge many activities happening at the same time, and decision points
are key factors in planning and controlling projects.
10. The expected value of the contribution margin is the weighted average of the various
probabilities for different levels of key variables, such as sales volume, price, and variable costs.
It is the estimated value that best represents the combination of possibilities.
11. The major human behavior concerns in budgeting fall into several categories: (1) top
management support, (2) management expectations, (3) budget slack, and (4) ethics. All top
management actions must cement the impression that a commitment exists for budgeting and
performance reporting. Nothing will destroy the effectiveness of the budgeting process quicker
than lower level management's perception that top management does not support the process.
Budgets should be positive motivators and bring out the best in managers. If management's
expectations are unrealistic, budgeting will often foster feelings of animosity toward the
budgeting process which will threaten the security and self-esteem of the managers involved.
This also involves the level of budget stress managers should impose on subordinates.
Budget slack occurs when managers include more funds in a budget than they need to support
the budgeted level of activities or underestimate revenues that may be generated by those
activities. This situation indicates either poor relations between top management and the lower
management or poor administration of the budgeting process.
Budgets can produce serious ethical dilemmas. Managers' evaluations often include budget
performance appraisals. Many managers try to manipulate the budget system to make
themselves appear to be better managers than the facts might indicate. Budget gamesmanship
can create a negative environment both in the creation of the budget and while evaluating
performance. Managers may take actions that are to detriment of the firm but help them achieve
personal goals.
12. Budget slack, often called "padding the budget," occurs when managers intentionally request
more funds than needed to support the budgeted level of activities or underestimate revenues
that may be generated by those activities. Slack is an indication of either poor relations between
top management and lower management or poor administration of the budgeting process.
Budget slack can undermine the credibility of the budget numbers. Managers may pad their
budgets and "try to hide resources" in case problems arise later. Loose budget approvals and
lack of serious reviews during the planning period can allow resources that could be used to
make the firm more profitable to be wasted.
Budget slack could be good only if it is identified by superiors and if managers are given
discretion to use or not use the extra resources to achieve firm goals. On the other hand, if
persons feel they have to pad their budget to achieve goals, this signifies a problem in the
planning process and maybe in the organization itself. The organization must reexamine its

budgeting process to eliminate the need for persons to pad their budgets.
13.The master budget sequences for a manufacturer and for a wholesaler vary as follows:
Manufacturer: Wholesaler:
A. Sales forecast A. Sales forecast

B. Production plan B. Purchases plan
C. Manufacturing cost budgets
1. Materials requirements
2. Direct labor
3. Factory overhead
(a) Flexible budget
(b) Factory overhead
D. Supporting schedules C. Supporting schedules
1. Accounts receivable 1. Accounts receivable
2. Inventories 2. Inventories
3. Accounts payable 3. Accounts payable
E. Cost of goods manufactured and sold D. Cost of goods sold
F. Operating expenses budgets E. Operating expenses budgets
1. Selling expenses 1. Selling expenses
2. Administrative expenses 2. Administrative expenses
G. Cash-flow forecast F. Cash-flow forecast
14. The master budget sequences for a manufacturer and for a service firm differ as follows:
Manufacturer: Interior designer:
A. Sales forecast A. Sales forecast

B. Production plan B. Direct client services plan
C. Manufacturing cost budgets 1. Personnel budget
1. Materials requirements 2. Direct expense budget
2. Direct labor
3. Factory overhead
(a) Flexible budget
(b) Factory overhead
D. Supporting schedules C. Supporting schedules
1. Accounts receivable 1. Accounts receivable
2. Inventories 2. Accounts payable
3. Accounts payable
E. Cost of goods manufactured and sold D. Cost of client services
F. Operating expenses budgets E. Operating expenses budgets
1. Selling expenses 1. Selling expenses
2. Administrative expenses 2. Administrative expenses
G. Cash-flow forecast F. Cash-flow forecast
15. Independent variables:

Operating and financial goals given at the beginning of the example
All information provided in Schedules 1 and 2
Unit sales forecast in Schedule 3
Beginning balance sheet for many accounts (12/31/01)
Specific variable overhead rates and fixed overhead amounts in Schedule 7
Specific selling and administrative expense amounts in Schedule 13

Schedules containing only dependent variables:
Production plan (Schedule 4)
Materials requirements (Schedule 5)
Direct labor requirements (Schedule 6)
Factory overhead expense (Schedule 8)
Accounts receivable (Schedule 9)
Inventories (Schedule 10)
Accounts payable (Schedule 11)
Cost of goods manufactured and sold (Schedule 12)
Cash-flow forecast (Schedule 15)
Project budgets (Schedule 14)
Forecast income and expense statements
Forecast balance sheets (except for the December 31, 2001, balance sheet)
16. Assuming a balanced beginning balance sheet, it is essential that a budgeted balance sheet
balance. An unbalanced balance sheet indicates that an error has been made somewhere in the
budgeting process. Either an incorrect relationship has been included in the budget, a
mathematical error has been made, or part of the budget has been omitted.
17. To determine the cash-flow forecast, all budgeted cash flows must have been prepared. The
cash-flow forecast calculates the change in cash by evaluating the beginning and ending values
in all the balance sheet accounts. Other income statement information is also needed.
Therefore, all operating and project budget schedules must be prepared to know the cash flows
predicted in each part of the master budget. These amounts are also needed to prepare the
balance sheet ending balances.
18. "What if" analysis refers to an analysis that seeks to know the impacts of a change in an
independent variable. It answers a specific question, such as "If sales were 5 percent lower,
what would be the effect on cash collections?" A change is made in an independent variable,
and the impact of the change on certain dependent variables is analyzed. The most common
application of "what if" analysis is in computerized spreadsheets. The spreadsheet model is
constructed and then changed according to the question being asked. The effects of the change
are noted.
19. Beginning with the number given, the formulas and the source data are tracked back to the
original independent variables.
(a) On Schedule 5, 8,550 square feet: This is the portion of second quarter plywood production
needs that should be in ending plywood inventory. The formula is:
0.20 (from Schedule 2) x 42,750 (plywood needs for the second quarter)
Formula for 42,750 is: production units in the second quarter times the per unit
requirements:
2,850 x 15 (from Schedule 1)
Production units is from Schedule 4 based on ending finished inventory and the sales forecast:
2,800 + 750 – 700 = 2,850

(b) On Schedule 6, 3,050 hours: This is from the production plan in Schedule 4. The hours
formula is:
3,050 (from Schedule 4) x 1 hour (from Schedule 1)

(c) On Schedule 8, $14,535 of indirect labor and fringe benefit expenses: This is the variable rate
times the number of direct labor hours scheduled for the second quarter. The expense formula
is:
$5.10 (from Schedule 7) x 2,850 hours (from Schedule 6)
The 2,850 hours is from the expected production in the second quarter.
See Part (a) for the source of the production units.
(d) On Schedule 11, $6,525 payment of prior quarter's purchases: This is second quarter
purchases. The formula is:
$16,312 (from Schedule 5) x 1 – 0.60 (from Schedule 2)
Purchases of $16,312 in Schedule 5 is the sum of plywood and trim purchases for the
second quarter. Purchases is found using the same formulation as in Part (a).
20. The financial planning model consists of three basic elements: inputs, the model, and outputs.
The first element consists of the inputs that reflect the basic databases, parameters,
assumptions, and forecasts indicators. Inputs can be expressed as absolute numbers for each
future period, as percentages of important figures such as sales or assets, as a number with a
subsequent growth rate, or in any way meaningful to the organization. The second element, the
model, is made up of calculation, inquiry, and report routines, a database management system,
and the computer processing system itself; it is the execution of intermediate calculations leading
to outputs. The third element is outputs. Output can come in the forms of proforma financial
statements, "what if" analyses, forecasts, statistical analyses, detailed cash-flow information,
response to online inquiries, or any other information format that the organization finds useful.
21. Models can include simulation capabilities that will show the results of different combinations of
independent variables. These models can be studied as a basis for selecting the most likely situation
and the best combination of values for the budgeted variables. It also can point to areas where
changes can be made to improve the organization's planned level of performance. More time is
available for analysis due to the decrease in the time required for computation. Managerial efforts
can be devoted to budget analysis rather than to time-consuming budget calculations and
consolidation.
22. A financial planning model should aid management in the following areas: (1) reacting to change
in the shortest possible time; (2) indicating the direction and magnitude of the impact of a
change; (3) taking longer, more meaningful looks into the future; (4) evaluating different courses
of action; and (5) identifying areas that require planning attention by acting as an early warning
system.
A financial planning model could help a bank to plan more effectively its cash position for a
number of periods into the future and its asset/liability management process (the acquisition and
use of funds). It can help evaluate the impacts of changes in interest rates, in lending policies,
and in regulatory requirements.
A financial planning model could help a travel agency by analyzing the effect of new airline
pricing strategies on its sales commissions. It can also evaluate the profitability of promotional
efforts, group travel programs, and individual clients. It can highlight staffing and expense
control problems that might arise in the future.
A financial planning model could help an automobile manufacturer in analyzing the effects of
reducing raw materials inventories on materials handling costs. Cost-volume-profit relationships

can be analyzed for option programs, special fleet sales, and new program capital budgeting
programs.
23. John has selected an excellent illustration of the model firm. It is a financial model. The
accounts and their balances represent the things owned by the firm and those who have claims
on the assets. The formula A = L + E is a mathematical expression and can be used to model
the impacts that transactions have on the financial position of the firm. The model can be
expanded to include expense and income accounts. It can also be designed to report cash
inflows and outflows. The number of accounts can be expanded to give greater detail.
At the heart of nearly every financial model is this simple and basic relationship. It describes the
real world firm in financial terms, including major items and combining minor items into other
accounts.
Solutions to Exercises
7-1.
(a) Probably a profit center. Most parts are sold to service departments and directly to customers. A
dealer might consider the parts department to be a cost center, but most will try to account for it
as a profit center and permit the manager to sell the parts at market prices to the service
department and to outsiders. Given a parts inventory, an argument could be made for calling
this an investment center.
(b) Most likely a profit center. Although the corporate office determines what will be sold and sets
the selling prices, the convenience store is not treated as a cost center. Part of its profitability is
tied to how well the manager controls costs. However, the manager can influence the volume of
sales through customer service and, perhaps, some promotional efforts. It is probably not an
investment center, because decisions to acquire and dispose of property, plant, or equipment are
not under the control of store managers in most convenience store organizations.
(c) A cost center.
(d) A cost center.
(e) A profit center, because the manager has control over costs incurred and revenues.
(f) A cost center. However, if this department sells TV time, it could be viewed as a profit center or
maybe a revenue center.
(g) A cost center.
(h) A product line will have costs, revenues, and investments associated with it. Therefore, it may be
a profit center or an investment center. If the product line manager controls the investment, the
product line is an investment center. Otherwise, it will be a profit center.
(i) A cost center.
(j) A cost center, if departments are not charged for autos used, or, possibly, a profit center, if
charges are made to using departments. The charges may merely cover operating costs or may
actually include a "profit."
7-2.
Case A. Control for the administrative allocations most likely exists outside the cost center.
Allocations are usually made based on a predetermined rate or actual spending. Therefore,
variances in the activity level create a situation where too much or too little is allocated to a
department. Or spending in these administrative areas (well outside the control of this
manager)is much higher than the original budget expected. In evaluating a segment, the
supervisor should only have to account for costs that he controls. This large variance counters
the otherwise fine job of controlling expenses in this manager's own cost center. This variance
makes this manager look bad in an area beyond his control.

Case B. The root of the problem is the reason for the rework. Ideally, the cost of rework should be
charged to the source of the problem. This rarely occurs. The problem should be investigated
and solved. However, budget reports can turn managers against one another since they are
often used for performance evaluations by the supervisors. Therefore, too much time can be
wasted on determining who should be "nailed" with the cost. More time should be used to
eliminate the problem. This is an example of where a TQM system can be beneficial. For
example in team systems, each area is responsible for production, maintenance, and quality.
Any problem detected allows any worker to stop the production line for investigation and
correction. This prevents the finger pointing apparent in this problem.
Case C. Again, this is a situation where budgets should be flexible for the system. The company
needs to deal with bottleneck problems it has at this time. The budgets should be more flexible
and explanative so that supervisors are not evaluated based solely on their department's
numbers. Here, a JIT system would tell the Stamping Department that no parts are needed.
Stamping could work on other jobs or remain idle until parts are requested. The responsibility
system must measure Stamping on its ability to meet demand, not on its ability to keep busy
when parts are not needed.
7-3. To solve for the estimated cash payments in November, the amount of estimated
purchases for November must be found:
Purchases: November
Ending inventory $ 16,000
Plus: Cost of goods sold 90,000
Total needed $106,000
Minus: Beginning inventory -18,000
November purchases $ 88,000
Cash payments:
November purchases ($88,000 x 80%) $ 70,400
Purchases prior to November 21,000
Total cash payments $ 91,400
7-4. To prepare the purchases budget for the plastic materials, first prepare a production budget for
finished goods for the first three quarters of the year and then the purchases budget.
Miller Co. production budget in units:

First Quarter Second Quarter Third Quarter
Sales units 1,000 1,100 1,200
Plus: Ending inventory
(20% of next quarter's sales) 220 240 260
Total needed 1,220 1,340 1,460
Minus: Beginning inventory -200 -220 -240
Production required 1,020 1,120 1,220
Miller Co. planned purchases budget in pounds:
First Quarter Second Quarter Third Quarter
Production 1,020 1,120 1,220
Times: 2 pounds per unit x2 x2 x2
Materials required 2,040 2,240 2,440
(30% of next quarter's needs) 672 732

Total needed 2,712 2,972
Minus: Beginning inventory -612 -672
Purchases required 2,100 2,300
7-5. Dale Company's cash receipts:
January February March April May June

Sales (units x £20) £120,000 £140,000 £150,000 £170,000 £156,000 £166,000
(1) Cash receipts:

Cash sales (20%) £32,000 £28,000 £30,000 £34,000 £31,200 £33,200
Credit sales:
December sales 40,000
January sales 57,600 38,400
February sales 67,200 44,800
March sales 72,000 48,000
April sales 81,600 54,400
May sales 49,920 74,880
June sales 79,680
Totals £129,600 £133,600 £146,800 £163,600 £160,480 £162,800
(2) Cash receipts:

Cash sales (40%) £68,000 £62,400 £66,400
Credit sales:
March sales £36,000
April sales 61,200 £40,800
May sales 56,160
£37,440
June sales 59,760
Totals £165,200 £159,360 £163,600
Total second quarter receipts if cash sales are 20 percent £486,880

Total second quarter receipts if cash sales are 40 percent 488,160
Cash receipts increase £1,280
7-6.
A. Beginning balance $75,000
+ Sales 160,000
Total receivables available $235,000
- Collections of this month’s sales (0.7 x $160,000) (112,000)
- Collections of beginning balance (0.6 x $75,000) (45,000)
Ending balance $78,000

B. Third Q Fourth Q
Sales $750,000 $800,000
Cost of sales (0.6 x $750,000) $450,000 $480,000
+ Ending inventory needed (0.2) 96,000
Total needed $546,000
- Beginning inventory (120,000)
Purchases $426,000
C. First Q Second Q
Sales $600,000 $800,000
Cash collections: This quarter (0.8) $640,000
Prior quarter (0.2) 120,000
Total collections for the second quarter $760,000
7-7. Gaffigan Company purchases and payments:

January February March April May
Sales, dollars $6,000 $4,000 $3,000 $6,000 $1,000
(1) Purchases budget:

Sales, units (sales divided by $10) 600 400 300 600 100
(40% of next month's sales) 160 120 240 40
Total units needed 760 520 540 640
Minus: Beginning inventory -240 -160 -120 -240
Purchases required 520 360 420 400
Purchases, dollars (units x $6) $3,120 $2,160 $2,520 $2,400
(2) Cash payments budget:

Cash payments of purchases:
January purchases ($3,120 x 30%) $ 936
February purchases ($2,160 x 70%; x 30%) 1,512 $ 648
March purchases ($2,520 x 70%; x 30%) 1,764 $ 756
April purchases ($2,400 x 70%) 1,680
Total cash paid for purchases $2,448 $2,412 $2,436
7-8.
A. Original Adjusted (Over)/Under
Budget Budget Actual Spending
Activity in clerical hours 20,000 18,000 18,000
Fixed overhead costs $100,000 $100,000 ? ?
Variable overhead costs 100,000 90,000 ? ?
Total costs $200,000 $190,000 $180,000 $10,000
B. Adjusted
5,000 unit 7,500 unit Budget for (Over)/Under
Budget Budget 6,000 units Actual Budget
Sales $500,000 $750,000 $600,000 $540,000 ($60,000)
Operating expenses 400,000 550,000 460,000 500,000 (40,000)
Net income $100,000 $200,000 $140,000 $40,000 ($100,000)
$550,000 – $400,000 = $0.60 variable cost per $1 of sales

$750,000 – $500,000

$550,000 – (0.6 x $750,000) = $100,000 fixed costs
C. Before: $4 (10,000) + $80,000 / 10,000 hours = $12 per hour overhead rate
Flexible O/H Budget

Actual O/H for 9,500 hours Applied O/H
Variable overhead ? $38,000 $38,000
Fixed overhead ? 80,000 76,000
Total overhead$115,000 $118,000 $114,000
Spending: $118,000 – $115,000 = $3,000 underspent
Applied: $114,000 – $115,000 = $1,000 underapplied
7-9.
(a) Dan's true cost function for overhead is $10,000 + $10 per bike. It is dangerous in any analysis
to try to turn a fixed cost into a variable cost by dividing the fixed costs by the budgeted activity
level since the per unit cost changes as volume changes.
(b) Dan’s spending really was $300 under budget: $15,200 - [$10,000 + ($10 x 550)]. However,
while this is a tentative indication that Jim controlled costs well, the cause of the variance would
need to be more thoroughly investigated before any meaningful conclusions can be drawn.
(c) Dan’s adjusted budget was $15,500, calculated as follows: $10,000 + ($10 x 550) = $10,000 +
$5,500 = $15,500. His original budget was $15,000: $10,000 + ($10 x 500).
(d) This is an improper application of budget reporting when variable costs exist; the $15,000
originally budgeted is based on an activity level of 500 bikes, but actual results should be
compared to budget for the actual activity level of 550 bikes.
7-10.
(1) Using only total variable and fixed costs, Wegner’s costs were over budget (therefore, not well
controlled) this year.
Fav/(Unfav)
Flexible Budget Actual Results Variance
Variable costs €980,000 €992,000 (€12,000)
Fixed costs 400,000 445,000 (45,000)
Total costs €1,380,000 €1,437,000 (€57,000)
(2) Excluding the extra production costs, Wegner's variable costs were well controlled (€28,000
under budget). Rudolph's fixed costs were still €5,000 over budget.
Fav/(Unfav)
Flexible Budget Actual Results Variance
Variable costs €980,000 €952,000 €28,000
Fixed costs 400,000 405,000 (5,000)
Total costs €1,380,000 €1,357,000 €23,000
(3) The overhead rate was €6 per stein [€4 + (€400,000/200,000)]. A total of €1,470,000 (€6 x
245,000) was added to the products. Overhead was overapplied by €33,000, which is found by
subtracting actual overhead from the overhead applied (€1,470,000 - €1,437,000). Notice that
overhead was overspent by €57,000 as determined in Part (1). But because 45,000 more steins

were produced than planned, more fixed overhead than expected was added to products.
Probably, the overspending was the result of higher production levels. However, the sum of
overspending and the higher than expected production resulted in a net favorable variance of
€23,000.
7-11.
Desert Rat Rentals Dune Buggy Department
Fav/(Unfav)
Budget Actual Variance
Variable costs:
Fuel and oil $ 9,600 $ 9,735 ($135)
Semivariable costs:
Chassis & other lubricants 2,200 2,190 10
Repairs 2,640 2,705 (65)
Fixed costs:
Depreciation 2,500 2,500 0
Licenses, taxes, & fees 2,600 2,930 (330)
Insurance expenses 1,600 1,735 (135)
Total costs $21,140 $21,795 ($655)
7-12.
Project status report:
Performance to Date Total Project
Original Budget Budget Revised Projected
Original Resources For Portion Overrun Project Budget
Project Used To Date Completed To Date Budget Overrun
Costs $200,000 $160,000 $114,286 ($45,714) $240,000 ($40,000)
(4/7 x $200,000)
Time 6 months 4 months 3.4 months (0.6 month) 7 months (1 month)
(4/7 x 6)
(1) From a control perspective, the project is at least .6 of a month behind schedule and overspent
by $45,714, using time as the basis of performance. This assumes that the original schedule
and budget are now spread over seven months instead of only six. The person in charge of the
project is not doing very well controlling the time and money spent on the project.
Another way to measure performance is to base the portion completed on revised budget
dollars. After spending $160,000 of a total of $240,000, we should be two-thirds finished. This
has the strange impact of showing us as being two-thirds of a month ahead of schedule based
on spending. It also tends to hide the degree of overspending.
Performance to Date Total Project

Costs $200,000 $160,000 $133,333 ($26,667) $240,000 ($40,000)
($160/$240) x $200,000
Time 6 months 4 months 4.67 months .67 month 7 months (1 month)
($160/$240) x 7
(2) To evaluate this project from a planning perspective for the future, we must first revise the
budget with new time and cost estimates. By doing this, we can see that we must add $40,000

and a month to the schedule. Management needs to re-evaluate this project to determine if it
wants to continue it. The additional $40,000 of cost and one month of work must be planned
and included in spending and manpower budgets.
Students must remember that when evaluating a project as a whole they need to compare actual
results to the original budget. The revised budget is adequate for planning from this point on, but
it is not a valid base for comparison with actual results, since the overbudget or underbudget
variances to date are rolled into the revised budget.
7-13.
(a) One of the key purposes of budgeting is to formalize the planning process for the future. The
budget should be a plan of action, a guide for managers in decision making. Budgets are
neither a "cost reduction" tool or a "cost control" tool in and of themselves, although they can
help an organization in these areas. Budgets help management identify areas where costs can
be reduced or areas where costs seem to be out of control. However, it is the managers who
make decisions using the budget information to reduce and control costs, not the budget itself.
Cost minimization (cost reduction) does not lead to optimal operations. It is true that at times we
must spend money to make money. Cost control implies matching spending needs and actual
spending. The task is to find the optimal combination of resources needed to achieve the
organization's goals.
(b) These three statements are all advantages of participatory budgeting: (1) When employees play
a role in preparing their budgets they have a feeling of ownership of budget goals and will strive
harder to achieve them. They identify with the goals and realize the importance of them
because they participated in preparing the goals. (2) If management allows workers to
participate in preparing budgets and goals, workers will begin to get an understanding of some
of the activities of management; and this will help to eliminate the "us" versus "them" attitude
between workers and management. Workers feel they have some control over the things they
do and aren't just being told what to do by management. This increases worker morale. (3)
When workers help to prepare the budgets, they begin to realize that they are part of a team in
the organization and all players must work together to accomplish their common goals. People
begin to understand how their actions affect other people on the team and begin to become
team players.
(c) This is true; much stress can be associated with budgets because the person responsible for the
budget feels that if the goals are not achieved repercussions will be felt. For budgets to be the
most effective, both the person preparing the budget and the person responsible for the budget
must be communicating with each other. When management creates unrealistic expectations,
budgeting too often fosters feelings of animosity toward the budgeting process and threatens the
security and self-esteem of the people involved. People must work as a team not only in
preparing budgets but also in using them to achieve goals.

7-14.
(1) Expected value of net income (all dollar amounts in thousands):
Probabilities
Variable Contribution Variable Expected
Sales – Cost = Margin Sales Cost Joint Value
Possible outcomes:
Sales of 600,000 units x $7 per unit (40%)
Unit variable cost:
$5 $4,200 – $3,000 = $1,200 x (0.40 x 0.80) = 0.32 $384
6 4,200 – 3,600 = 600 x (0.40 x 0.20) = 0.08 48
$432
Sales of 500,000 units x $8 per unit (60%)
Unit variable cost:
$5 $4,000 – $2,500 = $1,500 x (0.60 x 0.80) = 0.48 $720
6 4,000 – 3,000 = 1,000 x (0.60 x 0.20) = 0.12 120
$840
Total expected value of contribution margin $1,272
Minus fixed costs -800
Expected value of net income before tax $472
(2) The net income shown is a result of two probabilities. The expected value is the "average"
outcome. A number of questions should be raised. Who made the probability assessments?
Are other values as outcomes possible? Are the combinations of volume and price valid? Do
interrelationships exist between price and cost alternatives? Should other variables be
evaluated on a probabilistic basis?
7-15.
(1) Purchases budget (units) First Second Third Fourth Fifth
Quarter Quarter Quarter Quarter Quarter1
Production units 24,000 30,000 32,000 42,000 28,000
Materials units per production unit x4 x4 x4 x4 x4
Units of material required 96,000 120,000 128,000 168,000 112,000
Plus: Ending inventory (25% of next
quarter's production requirements) 30,000 32,000 42,000 28,000
Total needed 126,000 152,000 170,000 196,000
Minus: Beginning inventory -24,000 2 -30,000 -32,000 -42,000
Purchases 102,000 122,000 138,000 154,000
1
The fifth quarter is the first quarter following the budget year.
2
Beginning inventory is 25 percent of first quarter's requirements (.25 x 96,000).
(2) Purchases cost budget: First Second Third Fourth

Quarter Quarter Quarter Quarter
Purchases, units 102,000 122,000 138,000 154,000
Times unit cost x $0.60 x $0.60 x $0.60 x $0.60
Total cost $61,200 $73,200 $82,800 $92,400
(3) Cash payments for purchases: First Second Third Fourth

Beginning accounts payable $38,400 $24,480 $ 29,280 $ 33,120
Plus: Purchases 61,200 73,200 82,800 92,400
Total payables $99,600 $97,680 $112,080 $125,520

Minus: Ending accounts payable
(40% of current month's purchases) -24,480 -29,280 -33,120 -36,960
Cash payments $75,120 $68,400 $78,960 $88,560
7-16.
(1) Since inventory is purchased at cost, the sales figures given must be converted into cost of
goods sold:
February March April May
Sales, dollars A$90,000 A$120,000 A$110,000 A$100,000
Cost of goods sold
(70% of sales) A$63,000 A$ 84,000 A$ 77,000 A$ 70,000
(40% of next month's needs) 33,600 30,800
Total needed A$96,600 A$114,800
Minus: Beginning inventory -36,600 1 -33,600
Purchases required A$60,000 A$ 81,200
1
Since the purchases required in February is given as $60,000, we back into the beginning
inventory level for February.
Wuerth Corporation cash budget:
Beginning cash balance, March 1 A$20,000

Cash receipts:
Cash sales (A$120,000 x 30%) 36,000
Cash collections of receivables:
February sales (A$90,000 x 70% x 40%) 25,200
March sales (A$120,000 x 70% x 60%) 50,400
Total cash receipts A$111,600
Total cash available A$131,600
Cash payments:
February purchases (A$60,000 x 60%) $24,000
March purchases (A$81,200) x 60%) 48,720
Operating expenses 28,000 1
Total cash payments A$100,720
Ending cash balance, March 31 A$ 30,880
1
Operating expenses total A$30,000, including A$2,000 of depreciation that is not a cash
expense.
(2) If Wuerth pays A$20,000 for a computer system, the firm has A$10,880 in its ending cash
balance. This is A$9,120 below the target A$20,000 balance. Wuerth may need to borrow
funds. One risk is not having enough cash for vendor payments, payroll, and other operating
expenses. Collections may be slower than planned, causing more stress on the cash balance.
Sales may also not materialize as planned.

7-17. Students will need to recognize that a 25 percent gross profit rate implies a cost of goods sold
ratio of 75 percent.
(1) Purchases and cash payments budget:

April May June July August
Sales $50,000 $48,000 $60,000 $72,000 $56,000
Cost of goods sold ratio x .75 x .75 x .75 x .75 x .75
(a) Cost of goods sold $37,500 $36,000 $45,000 $54,000 $42,000
Plus: Ending inventory (cost
of sales for next two months 81,000 99,000 96,000
Total needed $118,500 $135,000 $141,000
Minus: Beginning inventory -106,000 -81,000 -99,000
(b) Purchases $12,500 $54,000 $42,000
Payments for current month's

purchases (50%) $2,500 $27,000 $21,000
Payments for previous month's
purchases (50%) 24,000 1 2,500 27,000
(c) Total cash payments $26,500 $29,500 $48,000
1
Beginning accounts payable
(2) Cash receipts budget:

April May June
Sales $50,000 $48,000 $60,000
Cash receipts from current
month's sales (75%) $37,500 $36,000 $45,000
Cash receipts from previous
month's sales (25%) 35,000 1 10,000 12,000
Total cash receipts $72,500 $46,000 $57,000
1
Beginning accounts receivable
7-18.
(1) Ponytail Production Shows cash receipts budget:
July August September October November December

Sales $67,000 $69,000 $72,000 $75,000 $80,000 $90,000
Collections from:
Current month (60%) $45,000 $48,000 $54,000
First previous month (30%) 21,600 22,500 24,000
Second previous month (8%) 5,520 5,760 6,000
Total cash collections $72,120 $76,260 $84,000
(2) Revised cash receipts budget:
July August September October November December

Sales $67,000 $69,000 $72,000 $75,000 $80,000 $90,000
Collections from:
Current month (40%) $30,000 $32,000 $36,000
First previous month (40%) 28,800 30,000 32,000
Second previous month (15%) 10,350 10,800 11,250
Total cash collections $69,150 $72,800 $79,250

Difference between Part (1) and Part (2) forecasts $2,970 $3,460 $4,750
Since sales are increasing each month, the slowdown in collections causes cash inflows to slow
continually. The net cash slowdown totals $11,180 for the fourth quarter. This is cash that would
not be available for reinvestment in the business. Or, it is money that must be borrowed to
continue operations as planned.
7-19.
(1) Production cost budget (all euros in thousands):
First Second Third Fourth

Quarter Quarter Quarter Quarter Total
Direct materials (€600 per unit) €28,800 €33,600 €38,400 €36,000 €136,800
Direct labor (€400 per unit) 19,200 22,400 25,600 24,000 91,200
Overhead (200% of direct labor) 38,400 44,800 51,200 48,000 182,400
Total manufacturing costs €86,400 €100,800 €115,200 €108,000 €410,400
(2) Schedule of cost of goods sold (euros in thousands except for unit costs):

Quarter Quarter Quarter Quarter Total
Sales of prior production (25%) 12,000 1 12,000 14,000 16,000 54,000

Sales of current production (75%) 36,000 42,000 48,000 45,000 171,000
Total sales 48,000 54,000 62,000 61,000 225,000
Times unit cost2 x €1,800 x €1,800 x €1,800 x €1,800 x €1,800
Cost of goods sold (000s) €86,400 €97,200 €111,600 €109,800 €405,000
1
December 31, 2007, inventory
2
Computation of unit cost: Direct materials per unit €600
Direct labor per unit 400
Overhead (200% of direct labor) 800
Cost per unit €1,800
(3) Overhead is budgeted according to a cost formula of €200 per unit sold plus €36,000,000 per
quarter. An overhead rate of €800 per unit means that €600 per unit is the fixed cost portion.
Dividing the €36,000,000 per quarter by €600 gives an expected or normal production of 60,000
units per quarter or 240,000 per year. With total units produced of 228,000 in four quarters,
expected factory overhead is calculated as (€200 x 228,000 units) + (4 quarters x €36,000,000)
= €189,600,000. Total applied overhead comes to €182,400,000. Therefore, overhead was
underapplied by €7,200,000. This is the fixed portion of the overhead rate (€600 per unit) times
the 12,000 units of under production (240,000 units minus 228,000 produced). This
underapplied overhead is a budgeted variance. This will be on the income statement as an
adjustment to cost of goods sold.
7-20.
(1) Cash budget: May June July August
Sales $118,000 $152,000 $160,000 $156,000

Beginning cash balance $7,000 $10,400 $16,700 $31,300
Plus:
Cash sales receipts $72,000 $84,000 $88,000 $86,000
65% of current month's billed sales 29,900 44,200 46,800 45,500
35% of previous month's billed sales 14,000 16,100 23,800 25,200
Total receipts $115,900 $144,300 $158,600 $156,700
Total cash available $122,900 $154,700 $175,300 $188,000
Minus:
Food costs payments (75% of sales) $ 88,500 $114,000 $120,000 $117,000
Fixed operating costs payments 24,000 24,000 24,000 24,000
Total disbursements $112,500 $138,000 $144,000 $141,000
Ending cash balance $10,400 $16,700 $31,300 $47,000
(2) Projected dividends:

Ending cash balance $47,000
Minus minimum cash balance -20,000
Cash available for dividends $27,000
(3) a. Cash budget: May June July August

Minus:
Projected dividends:
Minus minimum cash balance -20,000
Cash available for dividends $ 0
(3) b. Cash budget: May June July August

Beginning cash balance $7,000 $3,500 $6,500 $20,500
Plus:
Cash sales receipts $ 72,000 $ 84,000 $ 88,000 $ 86,000
50% of current month's billed sales 23,000 34,000 36,000 35,000
50% of previous month's billed sales 14,000 1 23,000 34,000 36,000
Total receipts $109,000 $141,000 $158,000 $157,000
Minus:
Projected dividends:
Minus Minimum cash balance -20,000
Cash available for dividends $16,500
1
Beginning accounts receivable balance
7-21. To prepare a budgeted balance sheet, we first must find the projected balances of the
accounts at the end of 2008.

Various schedules of ending balances:
Cash: Accounts receivable:

Beginning balance $ 82,000 Beginning balance $ 112,000
+ Cash receipts 846,000 + Net sales 930,000
Total cash available $928,000 Total receivables $1,042,000
- Cash payments -838,000 - Cash collections -846,000
Ending balance $ 90,000 Ending balance $ 196,000
Accounts payable: Buildings and fixtures, net:

Beginning balance $ 62,000 Beginning balance $358,000
+ Purchases 715,000 - Depreciation -75,000
Total payables $777,000 Ending balance $283,000
- Cash payments
($838,000 – $126,000) -712,000
Ending balance $ 65,000
Retained earnings: Schedule A (Net income):

Beginning balance $326,000
+ Net income 15,000 Sales $930,000
Ending balance $341,000 Cost of goods sold:
Beginning inventory $136,000
+ Purchases 715,000
Income taxes payable: Total available $851,000
Beginning balance $0
- Ending inventory -147,000
+ Taxes on 2003 income 10,000
Cost of goods sold $704,000
Ending balance $10,000 Gross margin $226,000
- Operating expenses -201,000
Operating expenses: Net income before taxes $25,000
Cash expenses $126,000 - Income taxes (40%) -10,000
+ Depreciation expense 75,000
Net income after taxes $15,000
Total operating expenses $201,000
With the ending balances, we can construct the budgeted balance sheet, December 31, 2008:
Assets Liabilities and Equity

Cash $ 90,000 Accounts payable $ 65,000
Accounts receivable 196,000 Income taxes payable 10,000
Inventory 147,000 Total liabilities $ 75,000
Building and fixtures, net 283,000 Capital stock $300,000
Retained earnings 341,000
Total equity $641,000
Total assets $716,000 Total liabilities and equity $716,000
7-22. While this pattern is not an exact match to any company's experience, similar stories of
budget incentive systems going haywire are commonplace. It is almost a truism that budget
systems rarely stay the same for more than a few years. Managers seem to be able to figure out
how to "play the game" and reap the rewards without truly achieving the intended budget goals.
But most companies have some reward system in place. The hope in many firms is that the

gains will outweigh the dysfunctional behavior the budget incentives create.
Many systems have progressed from simple "meet the expense budget" to multiple criteria that
include inventory turnover goals, head count control and reduction, minimization of personnel
turnover, cash-flow targets, contribution margin percentage goals, and TQM programs aimed at
reducing quality costs and improving productivity.
The specific cases are samples of problems resulting from a good idea. The first case appealed
to the good intentions of managers to control expenses. In many cases, managers have a large
number of demands on their time and interests. If top management does not show strong
interest in the effort or if the payoff is insignificant, managers will quickly conclude that other
goals are more important.
The second case will generate interest and action, but not the actions the plan intended. Often,
incentive systems not carefully thought through can create results that are more damaging than
the prior situation produced. Gamesmanship may be at play here; or, simply, the right message
was sent, but the wrong message was heard. Probably, next year's new system would try to
control inventories.
The retreat into measuring "net profit" is almost always doomed to failure. Even if strong
arbitrary rules are imposed to eliminate haggling, a sense of unfairness soon prevails. And
again, gamesmanship will come to the fore and generate debates.
The last attempt includes budget slack, optimization of resources, and fundamental human
relations issues. Achieving goals may require managers to act in an unethical manner to position
themselves, and then to act in an irrational way to meet arbitrary targets. The organization may
well suffer for many years from lost skills, morale problems, and lack of direction.
Budget incentive systems have much to offer as part of an overall management strategy. But
the implications, the ties to other incentive systems, and a careful articulation of its goals are
critical to successful budget incentives.
7-23. Don is purposely budgeting sales at low levels so that he looks good at the end of the year.
Also, his salary is targeted at $90,000. Half of this is commission based on his budgeted sales
level. Therefore, low budgeted sales means higher commissions for him when he exceeds his
budget.
The incentive system should encourage Don to forecast carefully. Production planning,
purchasing, and many other units in the organization depend on valid sales estimates. Now,
Don is encouraged to exceed his budget to his benefit. The lower the budget, the greater the
probability of a favorable sales variance.
Also, Don should not have so much power in determining the sales figures. It gives him control
over his own performance evaluation and salary. Therefore, upper management should realize
what he is doing and participate more in the sales forecasting process. The budget should be
made to challenge the employees. Therefore, upper management must make the final decision
on sales figures. Furthermore, the budget could be revised on a quarterly basis.
A customer-by-customer analysis should be done at corporate level to get an early prediction of
future sales. Don will have important input in revising these numbers. But at least, his superiors
will have an initial target sales level. A careful negotiation must be held to continue to allow Don
to have important input but to hold him to more accurate forecasts.
Solutions to Problems

7-24.
Evaluation of budget report:
Strengths:
Variable and fixed costs are separated.
Allocated costs are identified separately.
Time period covered is indicated.
Cost driver and its activity level are shown.
Budget, actual, and variance amounts are presented.
Weaknesses:
Budget has not been adjusted to the actual activity level.
More than one manager is apparently responsible for the same expenses.
No identification of controllable vs. noncontrollable costs.
Allocated costs may not be needed on this report, not controllable by her (them).
Report contains the salaries of the supervisor(s), not controllable by her (them).
Year-to-date amounts are not given.
A week may be too short to see expense control patterns effectively.
Flexible Budget Report for the Week Ended April 9, 2007
Supervisor responsible: Kelli Tunnell Adjusted Fav/(Unfav)

Budget Actual Variance
Cost driver – personnel hours 850 850
Variable costs:
Delivery personnel $17,000 $16,500 $500
Controllable departmental fixed costs:
Equipment maintenance 30,000 29,250 750
Noncontrollable departmental fixed costs:
Supervisor salaries 10,000 10,610 (610)
Total costs $57,000 $56,360 $640
The revised report goes to one supervisor (selected at random). If the expenses are for both
managers, the expenses for each manager should be reported separately. This information is
not available. Therefore, one manager was dropped to show the proper relationships. This
revised report assumes supervision is a direct cost but not controllable. This is not given in the
problem. Allocated costs are not included in the performance report. The flexible budget is
adjusted to 850 hours.
7-25. Responsibility reports:
(a) Pampa Packaging Corporation – Illinois Plant

Responsibility Report For Forming Department
Adjusted Variance
Actual Budget Fav/(Unfav)
Tons produced 1,500 1,500 --
Direct materials $10,600 $12,000 $1,400
Direct labor 23,400 22,500 (900)
Factory overhead 13,200 15,500 2,300
Total costs $47,200 $50,000 $2,800

(b) Pampa Packaging Corporation – Illinois Plant
Responsibility Report For Plant Manager
Variance
Packing department $ 34,900 $ 33,000 ($1,900)
Forming department 47,200 50,000 2,800
Plant manager's office 58,300 57,000 (1,300)
Total costs $140,400 $140,000 ($400)
(c) Pampa Packaging Corporation

Responsibility Report for Vice-President of Production
Variance
Illinois plant $140,400 $140,000 ($400)
Singapore plant 70,100 67,000 (3,100)
Vice-president's office 55,500 54,000 1,500)
Total costs $266,000 $261,000 ($5,000)
(d) Pampa Packaging Corporation

Responsibility Report For President
Variance
Vice-president of production $266,000 $261,000 ($5,000)
Vice-president of marketing 109,800 112,600 2,800
President's office 62,300 60,000 (2,300)
Total costs $438,100 $433,600 ($4,500)
7-26.
(1) The limiting factor is a shortage of materials, shown as follows:
Capacity = 400,000 units at 2 pounds per unit = 800,000 pounds needed

Sales = 300,000 units at 2 pounds per unit = 600,000 pounds needed
Supply of metal (in pounds):

On hand 30,000
Available purchases 290,000
Total available 320,000
Although capacity allows processing of 800,000 pounds and sales could consume 600,000
pounds, only 320,000 pounds are available for use.

(2) Available materials 320,000 pounds
Divided by pounds per unit 2
Production possible 160,000 units
We can produce internally and sell 160,000 units next year.
(3) Produce internally 160,000 units

Purchase externally 100,000
Maximum sales forecast 260,000 units
7-27. Several formats for the Giacomazza Company performance report could be correct. The
one presented here is an example of effective presentation form:
Acct Cost Category or June Year To Date

No. Account Name Budget Actual Fav/(Unf) Budget Actual Fav/(Unf)
Variable costs:
6100 Direct Materials $1,388 $1,319 $69 $8,328 $8,178 $150
6200 Direct Labor 751 749 2 4,506 4,599 (93)
Total variable costs $2,139 $2,068 $71 $12,834 $12,777 $57
Semivariable costs:
6330 Factory Utilities $33 $34 ($1) $218 $237 ($19)
6340 Indirect Labor 174 176 (2) 1,044 1,056 (12)
6360 Repairs & Maintenance 50 47 3 320 351 (31)
Total semivariable costs $257 $257 $0 $1,582 $1,644 ($62)
Fixed costs:
6310 Depreciation – Factory machinery $45 $45 $0 $280 $275 $5
6320 Factory Rent 244 244 0 1,464 1,464 0
6350 Property Taxes – Factory machinery 21 19 2 126 114 12
Total fixed costs $310 $308 $2 $1,870 $1,853 $17
Totals costs $2,706 $2,633 $73 $16,286 $16,274 $12
Note: This solution makes an assumption about the cost behavior of most accounts. Students may
classify certain costs, such as factory utilities, indirect labor, repairs, and property taxes, as
variable, semivariable, or fixed. A student may also use controllable and noncontrollable
categories instead of fixed, variable, and semivariable. Advertising, bad debts, administrative
salaries, and sales commissions are not manufacturing expenses and are excluded.
7-28. Iannotti cash forecast:
(1) To begin this problem, first solve for purchases in January and February (Cost of goods sold is
60% of sales.):
January February March April
Sales $70,000 $90,000 $80,000 $60,000
Cost of goods sold $42,000 $54,000 $48,000
Plus ending inventory (80% of next month's sales) 43,200 38,400
Total goods needed $85,200 $92,400
Minus beginning inventory -40,000 -43,200
Purchases $45,200 $49,200
Before the cash budget for February is prepared, a budget for January must be completed. John
Iannotti's cash budget is:
January February

Beginning cash balance $ 8,000 $ 1,000
Cash receipts:
Cash collections of receivables:
December sales, ($20,000  60%) x 60% $20,000
January sales, $70,000 x 40%; x 60% 28,000 $42,000
February sales, 90,000 x 40% 36,000
Total cash receipts $48,000 $78,000
Total cash available $56,000 $79,000
Cash payments:
Purchases $45,000 1 $45,200
Other variable costs (10% of sales) 7,000 9,000
Fixed costs 3,000 3,000
Total cash payments $55,000 $57,200
Ending cash balance $1,000 $21,800
1
Purchases are paid in the month after purchase. Therefore, the December ending accounts
payable balance represents December's purchases.
(2) Tenuous assumptions:

 The monthly sales forecast
 The percentage of sales collected in each month
Assumptions with most certainty:

 Estimates of variable and fixed operating expenses
 Inventory levels
 Other beginning balances
7-29.
Note: One of the features of this problem is that costs vary with different factors. Recognition of
this situation is important to anyone working with budgets or analyzing business activities.
(1) Ole Route 66 Motel budgeted income statement:
Gross revenues:
Total Expected
Persons Occupancy1 Probability Value Price Revenue
One 1,200 x 0.2 x 240 x $18 = $4,320
Two 1,200 x 0.2 x 240 x 28 = 6,720
Three 1,200 x 0.3 x 360 x 31 = 11,160
Four 1,200 x 0.2 x 240 x 34 = 8,160
Five 1,200 x 0.1 x 120 x 36 = 4,320
Totals 1.0 1,200 $34,680
1
50 rooms x 30 days x 80% occupancy = 1,200
Operating costs:
Laundry:

Persons Nights Cost
1 x 240 = $240
2 x 240 = 480
3 x 360 = 1,080
4 x 240 = 960
5 x 120 = 600
Total laundry $3,360
Cleaning (1,200 x $6 x 0.5 hour) 3,600
Other variable operating expenses (1,200 x $4) 4,800
Maintenance and grounds 1,500
Clerks ($1,200 x 2) 2,400
Depreciation 2,000
Other fixed expenses 3,500
Total expenses $21,160
Net income $13,520
(2) Break-even occupancy percentage:
Revenue $31 x (50 rooms x X x 30 days) $46,500 X
Laundry 1 x 3 people x (50 rooms x X x 30 days) = $ 4,500X

Cleaning 6 x 0.5 hour x (50 rooms x X x 30 days) = 4,500X
Other variable 4 x (50 rooms x X x 30 days) = 6,000X
Total variable costs $15,000 X
Maintenance $ 1,500
Clerks 2,400
Depreciation 2,000
Other cash fixed 3,500
Total fixed costs $ 9,400
$46,500x – $15,000x – $9,400 = 0

$31,500x = $9,400
x = 29.8% occupancy rate to break even
7-30.
(1) Baxter Medical Services procedure cost budget:
3rd Quarter 4th Quarter Total

Procedure 1:
Units of product 1,200 1,600 2,800
Time per unit x 1/4 hr x 1/4 hr x 1/4 hr
Hours required 300 400 700
Rate per hour x $15 x $16
Direct labor cost $ 4,500 $ 6,400 $10,900
Procedure 2:
Units of product 1,500 1,800 3,300
Time per unit x 1/3 hr x 1/3 hr x 1/3 hr
Hours required 500 600 1,100
Rate per hour x $15 x $16
Direct labor cost $ 7,500 $ 9,600 $17,100
Total direct labor cost $12,000 $16,000 $28,000

(2) Baxter Medical Services fringe benefit cost budget:
3rd Quarter 4th Quarter Total

Total direct labor cost $12,000 $16,000 $28,000
Fringe benefit cost
(55% and 60% of DL$) 6,600 9,600 16,200
Total direct labor & fringe benefits $18,600 $25,600 $44,200
Between the third and fourth quarters, Procedure 1's volume increased by one-third, and
Procedure 2's volume increased by 20 percent. But labor and fringe benefits increased by 37.6
percent. In fact, fringe benefits increased by over 45 percent. The additional volume probably
generates more profits, but with these increases in labor and fringe benefits costs, the
percentage increase in profits will be hurt.
7-31. To budget level production during the first six months of the year, first solve for the total
production during that time and then divide by six:
Production for the first six months of the year (in thousands of units):
Sales units (January through June sales) 200

Plus ending inventory 20
Total needed 220
Minus beginning inventory -10
Production required 210  6 = 35,000 units per month
To solve for ending inventories, the normal equation of:
Production = Sales + Ending inventory – Beginning inventory
Ending inventory = Beginning inventory + Production – Sales
Handorf Company production budget (in thousands of units):
Jan Feb Mar Apr May Jun Total

Beginning inventory 10 5 15 30 40 35 10
Plus: Production 35 35 35 35 35 35 210
Minus: Sales -40 -25 -20 -25 -40 -50 -200
Ending inventory 5 15 30 40
20 20
The problem with this system is the large build-up of inventory. Although the inventory is helpful
in buffering any problems such as sales fluctuations and defects, it is very expensive to carry.
Also, inventory simply hides problems and does not create solutions for them.
The main advantage is the constant staffing needed to produce at the same level. Overtime can
be avoided; greater efficiency may be developed; and schedules can be prepared well in
advance for materials and labor planning.

7-32.
(1) The Greenberg Health Clinic budget of medicines and supplies costs:
October November December Total

Number of patients 900 1,100 1,200 3,200
Variable costs ($5 per patient) $ 4,500 $ 5,500 $ 6,000 $16,000
Fixed costs 15,000 15,000 15,000 45,000
Total costs $19,500 $20,500 $21,000 $61,000
(2) Part-time labor budget:

October November December
Number of patients 900 1,100 1,200
Divide by 50 per part-time employee 18 22 24
Number of hours (100 hours per employee) 1,800 2,200 2,400
Rate per hour x $12 x $12 x $12
Labor costs $21,600 $26,400 $28,800
(3) The Greenberg Health Clinic budget of supplies and labor cost:
October November December Total

Medicine and supplies $ 19,500 $ 20,500 $ 21,000 $ 61,000
Contracts, physicians 50,000 50,000 50,000 150,000
Salaries, nurses 40,000 40,000 40,000 120,000
Part-time employees 21,600 26,400 28,800 76,800
Total costs $131,100 $136,900 $139,800 $407,800
7-33.
(1) Osann Corporation: Performance to Date Total Project
Margin: $200,000 $160,000 ($40,000)
Costs: 100,000 $60,000 $ 33,333 ($26,667) 160,000 (60,000)
(4/12 x $100,000)
Benefit: $100,000 $ 0 ($100,000)
Time: 6 months 4 months 2 months (2 months) 12 months (6 months)
(1/3 x 6)
As of this point, the project is 2 months and $26,667 over budget based on the time and cost data.
The total budget is now a break-even project. It is predicted to be 6 months late, cost $60,000 more
than planned, and earn $40,000 less than promised.
(2) If the project is continued, Osann must schedule six incremental months of manpower and an
additional $60,000 of spending. This incremental spending is in addition to the remaining $40,000
already in the budget. The incremental 6 months of personnel is in addition to the 2 months already
budgeted for the project.
(3) On a pure dollars basis, incremental benefits of $160,000 are to be gained (assuming that no
benefits have been accrued from the work done already). Incremental costs are $100,000. This is
still a good investment. However, based on the total project, it is a break-even proposition. Because
of the serious cost overruns and overestimates of benefits, this project needs very careful
monitoring.

7-34.
(1) Anderson Manufacturing Company budgeted income statement (in thousands):
Expected sales revenue:

Expected Expected
Units Probability Value (Units) Price Value (Dollars)
800 0.20 160 $25 $4,000
700 0.30 210 28 5,880
600 0.40 240 32 7,680
500 0.10 50 36 1,800
660 $19,360
Expected variable costs:

Manufacturing:
Cost Probability Expected Value

$8 0.80 $6.40
10 0.20 2.00
$8.40 x 660 expected units $5,544
Selling and administrative:

$2 0.20 $0.40
3 0.70 2.10
4 0.10 0.40
$2.90 x 660 expected units 1,914
Total expected variable costs $7,458

Expected contribution margin $11,902
Expected fixed costs:

Manufacturing:

$4,000 0.90 $3,600
5,000 0.10 500 $4,100
Selling and administrative:

$5,000 0.60 $3,000
6,000 0.40 2,400 5,400
Total expected fixed costs $9,500

Expected net income $2,402
Note:
Students should be made aware that this solution is, in a sense, the expected value of all
possibilities. It assumes that all the probabilities are independent of one another. Simulation can
be used to model the multiple probabilities in this problem. Analysis should be done to
determine which variables are critical to changes in profit levels. This solution is a finite answer
but only scratches the surface of the analysis possible here.

A spreadsheet solution of this problem will allow the students to see the hundreds of
combinations of possible outcomes.
7-35.
(1) The scenario in which sales are only $6,500,000 and cost of goods sold is 80 percent is the least
favorable for the Knevil Equipment Company. See the analysis in Part (2).
(2) Net cash flow provided by operations: Expected

Total
Alternative 1 Alternative 2 Alternative 3 Cash Flow
Sales $8,500,000 $8,500,000 $6,500,000
Cost of goods sold -5,950,000 -6,800,000
Operating expenses -1,050,000 -1,200,000
Operating income $1,500,000 $500,000 $200,000
Minus income taxes (40%) -600,000 -200,000 -80,000
Net income $900,000 $300,000 $120,000
Plus depreciation:
Cost of goods sold $350,000 $350,000 $350,000
Operating expenses 280,000 280,000 280,000
Net cash flow from operations $1,530,000 $930,000 $750,000
Probability percentage x 30% x 50% x 20%
Expected cash flow $459,000 $465,000 $150,000 $1,074,000
(3) Financing cash flows: Expected

Total
Alternative 1 Alternative 2 Alternative 3 Cash Flow
Cash flow from operations $1,530,000 $930,000 $750,000 $1,074,000
Plus proceeds – equipment sales 600,000 600,000 600,000 600,000
Total cash available $2,130,000 $1,530,000 $1,350,000 $1,674,000
Minus:
Payment on long-term notes -$350,000 -$350,000 -$350,000 -$350,000
Dividends -300,000 -300,000 -300,000 -300,000
New equipment purchase -1,800,000 -1,800,000 -1,800,000 -1,800,000
Total cash needs -$2,450,000 -$2,450,000 -$2,450,000 -$2,450,000
Financing required $320,000 $920,000 $1,100,000 $776,000
7-36.
(1) Accrual expense budget:
Rent DKr1,500 DKr1,500 DKr1,500 DKr1,500
Insurance 210 210 210 210
Salaries 18,000 18,000 18,000 18,000
Outside services 3,000 12,000 15,000 6,000
Telephone and postage 600 600 600 600
Travel expense 0 3,000 3,000 0
Supplies 300 300 300 300
Depreciation 150 150 150 150
Total DKr23,760 DKr35,760 DKr38,760 DKr26,760
(2) Cash payments budget:

Rent DKr 6,000 DKr0 DKr0 DKr0
Insurance 840 0 0 0
Salaries 18,000 18,000 18,000 18,000
Outside services 0 0 36,000 0
Telephone and postage 600 600 600 600
Travel expense 0 6,000 0 0
Supplies 1,200 0 0 0
Total DKr26,640 DKr24,600 DKr54,600 DKr18,600
7-37.
(1) Cost of a unit manufactured:
Materials cost (3 pounds at $5 per pound) $15.00
Direct labor (.5 hour at $8 per hour) 4.00
Variable factory overhead ($15 x .40) 6.00
Fixed factory overhead ($90,000  60,000 units) 1.50
Total cost per unit $26.50
(2) To prepare the budgeted income statements, first prepare production budgets to calculate the
number of units produced each month for cost of goods manufactured.
Saleem Plastic Products production budget:
January February March April May

Sales in units 40,000 55,000 50,000 70,000 60,000
Plus ending inventory
(40% of next month's sales) 22,000 20,000 28,000 24,000
Total needed 62,000 75,000 78,000 94,000
Minus beginning inventory -25,000 -22,000 -20,000 -28,000
Production required 37,000 53,000 58,000 66,000
Saleem Plastic products budgeted income statement:
January February March April

Sales revenue ($32 per unit) $1,280,000 $1,760,000 $1,600,000 $2,240,000
Cost of goods sold:
Beginning inventory $ 662,500 $ 583,000 $ 530,000 $ 742,000
Cost of goods manufactured:
Materials ($15) $ 555,000 $ 795,000 $ 870,000 $ 990,000
Direct labor ($4) 148,000 212,000 232,000 264,000
Variable overhead ($6) 222,000 318,000 348,000 396,000
Fixed overhead ($1.50) 55,500 79,500 87,000 99,000
Total $980,500 $1,404,500 $1,537,000 $1,749,000
Goods available for sale $1,643,000 $1,987,500 $2,067,000 $2,491,000
Minus ending inventory -583,000 -530,000 -742,000 -636,000
Cost of goods sold $1,060,000 $1,457,500 $1,325,000 $1,855,000
Over/(underapplied) overhead -34,500 -10,500 -3,000 9,000
Adjusted cost of goods sold $1,094,500 $1,468,000 $1,328,000 $1,846,000
Gross profit $185,500 $292,000 $272,000 $394,000
Minus selling and admin exp -100,000 -130,000 -120,000 -160,000
Net income before taxes $85,500 $162,000 $152,000 $234,000
Minus income taxes (40%) -34,200 -64,800 -60,800 -93,600

Net income after taxes $51,300 $97,200 $91,200 $140,400
(3) a. Finished goods inventory requirements are reduced to 20 percent:
The impact on net income of this change is a small decline. Finished goods inventories will
decline by 50 percent, meaning fewer units will be produced. The amount of underapplied
overhead will increase by a net of $18,000. This is the 12,000 unit decline in April's ending
finished goods inventory. The $18,000 will be distributed over the four months.
(3) b. Normal capacity is 50,000 units per month:
The impact on net income in any given month is difficult to determine because of two forces.
First, the unit cost will increase by $0.30 per unit because of the change in fixed costs per unit
($90,000  50,000). But fixed overhead will be overapplied in every month in Part (2) except
January. For the four months combined, profits will increase because more costs will be in
ending finished goods inventory. The difference will be the decrease in ending inventory
between the beginning of January and the end of April (25,000 units to 24,000 units). In dollar
terms, this is $300 (1,000 units x $0.30).
7-38.
(1) Forecast income statement:
Net sales $1,000,000

Cost of goods sold (400,000)
Gross margin $600,000
Operating expenses:
Wages $230,000
Other 95,000
Depreciation 50,000
Total expenses (375,000)
Net income $225,000
(2) Forecast cash flow from operations:
Net income $225,000

Adjustments to net income:
Plus depreciation expense $50,000
Minus increase in accounts receivable (30,000)
Minus increase in inventory (50,000)
Minus increase in wages payable 7,000
Minus increase in accounts payable 15,000
Total adjustments ($8,000)
Cash provided by operations $217,000
The bank will probably be quite satisfied in knowing that the company's cash balance is
expected to increase by $217,000, over twice the amount of the loan. However, two planned
events cloud this outlook. The company plans to purchase plant and equipment and pay
dividends totaling $200,000. After these two cash outflows, Newton's cash balance will be only
$32,000. The firm may well want to control the growth in receivables and inventory. These
consume $80,000 in 2002. Also, the dividends are under Newton's board of directors' control.
The bank may want to put stipulations on the use of cash for dividends and on even the level of
expansion permitted if the loan is approved.

7-39.
(1) Cash budget (See Schedule A for cash and credit sales.):
January February March April May June Total

Beginning cash $ 82,000 $131,720 $157,320 $213,120 $271,480 $316,400 $82,000
Plus collections:
Curr month's cr sales (60%) $ 57,540 $ 59,640 $ 76,440 $ 71,400 $ 65,520 $ 62,160 $392,700
Prior month's cr sales (40%) 66,0801 38,360 39,760 50,960 47,600 43,680 286,440
Plus cash sales (30%) 41,100 42,600 54,600 51,000 46,800 44,400 280,500
Total collections $164,720 $140,600 $170,800 $173,360 $159,920 $150,240 $ 959,640
Cash available $246,720 $272,320 $328,120 $386,480 $431,400 $466,640 $1,041,640
Minus cash disbursements -115,000 -115,000 -115,000 -115,000 -115,000 -115,000 -690,000
Ending cash $131,720 $157,320 $213,120 $271,480 $316,400 $351,640 $351,640
1
$165,200 x .40
Schedule A: Original credit and cash sales:
December January February March April May June

Net sales $236,000 $137,000 $142,000 $182,000 $170,000 $156,000 $148,000
Minus cash sales (30%) -70,800 -41,100 -42,600 -54,600 -51,000 -46,800 -44,400
Credit sales $165,200 $95,900 $99,400 $127,400 $119,000 $109,200 $103,600
(2) Bryja Markets will not be able to repay the loan and maintain its minimum desired cash balance of
$60,000. If it repays the loan with interest, Bryja would only have a cash balance of $51,640.
(3) "What if" cash budget (See Schedule B for cash and credit sales.):

Beginning cash $82,000 $120,248 $136,788 $180,508 $226,532 $260,460
Plus collections:
This month's credit sales (60%) $51,786 $53,676 $68,796 $64,260 $58,968
$55,944
Prior month's credit sales (40%) 59,472 34,524 35,784 45,864 42,840
39,312
Plus cash sales (30%) 36,990 38,340 49,140 45,900 2,120 39,960
Total collections $148,248 $126,540 $153,720 $156,024 $143,928 $135,216
Cash available $230,248 $ 246,788 $290,508 $336,532 $370,460 $395,676
Minus cash disbursements -110,000 -110,000 -110,000 -110,000 -110,000 -110,000
Ending cash $120,248 $136,788 $180,508 $226,532 $260,460 $285,676
Schedule B: "What-if" credit and cash sales:
December January February March April May June

Net sales $212,400 $123,300 $127,800 $163,800 $153,000 $140,400 $133,200
Minus cash sales (30%) -63,720 -36,990 -38,340 -49,140 -45,900 -42,120 -39,960
Credit sales $148,680 $86,310 $89,460 $114,660 $107,100 $98,280 $93,240
Bryja would not be able to repay the loan with interest. Doing so would create a deficit of cash.
(4) "What-if" cash budget (See Schedule B in Part 3 for cash and credit sales.):

Beginning cash $ 82,000 $132,722 $148,632 $187,312 $234,848 $270,540
Plus collections:
Current month's credit sales (40%) $34,524 $35,784 $45,864 $42,840 $39,312 $37,296
Prior month's credit sales (60%) 89,208 51,786 53,676 68,796 64,260 58,968
Plus cash sales (30%) 36,990 38,340 49,140 45,900 42,120 39,960

Total cash inflows $160,722 $125,910 $148,680 $157,536 $145,692 $136,224
Cash available $242,722 $258,632 $297,312 $344,848 $380,540 $406,764
Minus cash disbursements -110,000 -110,000 -110,000 -110,000 -110,000 -110,000
Ending cash $132,722 $148,632 $187,312 $234,848 $270,540 $296,764
Bryja would not be able to repay its loan with interest.
7-40.
(1) The apparent normal capacity was 7,000 units:
This is calculated using the $42,000 ($10,500 per quarter) total fixed expenses from the flexible
budget and the $1.50 fixed overhead rate per unit, as follows:
$42,000  $1.50 per unit = 28,000 units or 7,000 units per quarter
(2) The cost function is based on 7,000 units per quarter. If 7,000 units of production were
budgeted, budgeted spending on overhead would equal the budgeted applied overhead. But
the planned production was 6,800, 6,500, 6,900, and 7,400, respectively, for the four quarters.
Thus, overhead is underapplied in the first three quarters and overapplied in the fourth quarter.
The flexible spending budget is using the application equation of $1.50 per unit + $42,000. The
overhead is being applied at a rate of $3.00 per unit ($1.50 variable and $1.50 fixed).
The over/under variances are due to the differences in the way the fixed overhead is handled.
The flexible budget assumes $42,000 over the entire year (or $10,500 a quarter), while the
applied budget uses $1.50 per unit with a different number of units produced every quarter. The
overhead variance is $1.50 per unit (fixed overhead rate) times the difference between expected
volume and budgeted volume.
Q-1 Q-2 Q-3 Q-4 Total

Units over or (under) expected (200) (500) (100) 400 (400)
Overapplied or (underapplied) ($300) ($750) ($150) $600 ($600)
In the flexible budget, 28,000 unit are expected to be produced (normal volume) during the year;
whereas overhead is applied to 27,600 units, the planned production level [(27,600 units –
28,000 units) x $1.50 per unit = $600 underapplied].
(3) The budget is "flexed" to the level of 27,600 units for the year using the flexible overhead
equation given in Part (2):
($1.50 per unit x 27,600 units) + $42,000 = $83,400

7-41.
(1) Budgeted product costs:
This year's overhead application rate = $2,100,000 = $14 per hour

150,000 hours
This year's variable overhead = $2,400,000 – $2,000,000 = $8 per hour

200,000 – 150,000
Last year's fixed overhead = $2,400,000 – ($8 x 200,000) = $800,000
Product Lines
Red White Blue Total
Direct materials (reduced by 10%):
$5.40 x 300,000 units $1,620,000
$2.70 x 240,000 units $ 648,000
$4.50 x 340,000 units $1,530,000 $3,798,000
Direct labor:
$15 per hour x (300,000 units  6) 750,000
$15 per hour x (240,000 units  8) 450,000
$15 per hour x (340,000 units  10) 510,000 1,710,000
Overhead applied:
$14 x 50,000 hours 700,000
$14 x 30,000 hours 420,000
$14 x 34,000 hours 476,000 1,596,000
Total product line cost $3,070,000 $1,518,000 $2,516,000 $7,104,000
Cost per unit $10.2333 $6.325 $7.40
Overhead applied:
Product line Red $ 700,000
Product line White 420,000
Product line Blue 476,000
Total applied $1,596,000
Overhead spending budget:

Variable: (50,000 + 30,000 + 34,000 hours) x $8 $ 912,000
Fixed 900,000
Total overhead spending budget $1,812,000
Budgeted underapplied overhead $216,000
Total product line spending $7,104,000

Budgeted underapplied overhead 216,000
Total budgeted spending this year $7,320,000
(2) Cost saving over last year:

Product Lines
Red White Blue Total
Direct materials (reduced by 10%):
$6 x 300,000 units $1,800,000
$3 x 240,000 units $ 720,000
$5 x 340,000 units $1,700,000 $4,220,000

Direct labor:
$12 per hour x (300,000 units  4) 900,000
$12 per hour x (240,000 units  6) 480,000
$12 per hour x (340,000 units  4) 1,020,000 2,400,000
Overhead applied:
$12 x 75,000 hours 900,000
$12 x 40,000 hours 480,000
$12 x 85,000 hours 1,020,000 2,400,000
Total product line cost $3,600,000 $1,680,000 $3,740,000 $9,020,000
Overhead applied:
Product line Red $ 900,000
Product line White 480,000
Product line Blue 1,020,000
Total applied $2,400,000
Overhead spending budget:
Variable: (75,000 + 40,000 + 85,000 hours) x $8 $1,600,000
Fixed 800,000
Total overhead spending budget $2,400,000
Budgeted underapplied overhead $0
Total budgeted spending at last year’s cost levels $9,020,000

Minus budgeted spending at this year’s cost levels (7,320,000)
Production cost savings this year over last year $1,700,000
Total cost savings in materials are $422,000, or 10 percent of last year's materials costs. The
labor cost savings are $690,000, a huge savings from the increased efficiency. Product line Blue
accounted for $544,000 of the savings. Overhead savings are more complex. Savings were
$588,000, due to reduced usage of labor hours minus underapplied fixed overhead.
Hopefully, the cost savings are real. The largest unit cost reduction is in applied factory
overhead. If costs are not reduced significantly below the $2,100,000 level, a large
underapplied overhead variance will occur. The three products are only absorbing $1,596,000
of the spending budget, instead of $1,812,000. The more efficient process will cut the direct
labor hours from 200,000 to 114,000 hours. This means the workforce must be downsized,
possibly a costly and disruptive process.
7-42. It appears by mere inspection that Vardallas Services, Inc. will be able to meet its obligations
and still maintain the desired level of cash. Mere inspection is not enough. However, the
forecast indicates that operations generate enough cash to cover the disbursements.
Vardallas Services, Inc., forecast statement of cash flows:
Cash balance, April 1, 2002 $142,000

Cash from operations:
Net income $114,000
Depreciation 81,000
Increase in inventory (62,000)
Decrease in accounts receivable 47,000
Increase in accounts payable 38,000
Cash flow from operations 218,000
Estimated cash balance June 30, 2002 $360,000
Obligations for payment in July:

Payment of short-term loans $150,000
Dividends ($0.40 x 60,000 shares) 24,000
Office equipment 38,000
Total obligations (212,000)
Estimated cash balance after payments $148,000
Through budgeting, Vardallas now knows that it should have enough cash to cover its
obligations and still maintain the $120,000 target minimum cash balance. Further, it now has a
way to evaluate its actual performance.
7-43. Note: Figures are in millions.

(1) Balance Sheet Estimated Results
Beginning Budgeted Transactions Ending
Accounts Debit Credit Debit Credit Debit Credit
Cash $ 479 (2) $ 3,218 (1) $ 321
(6) 34 (5) 2,861
(7) 29 $ 520
Accounts receivable, net 590
3,253 (2) 3,218 625
Inventories 511 (3) 15 496
Prepaid expenses 30 (3) 10 40
Plant & equip 1,397
339 1,736
Accumulated depreciation $ 462
105 $ 567
Accounts payable 249 (5) 2,682 (3) 1,111
(3) 1,583 261
Accrued income taxes 132 (5) 179 (8) 134 87
Other liabilities 280
70 350
Long-term debt 143
18 161
Capital stock 356
34 390
Retained earnings 1,385 (7) 29 (9) 245 1,601
Sales (2) 3,253
Cost of goods sold (3) 1,583 1,583
Marketing expense (3) 590 590
General & administrative (3) 358 358
Research and development (3) 343 343
Provision for taxes (8) 134 134
Net income (summary) (9) 245 245
$3,007 $3,007 $12,997 $12,997 $6,670 $6,670
Budgeted balance sheet:
Assets Liabilities & Equities

Cash $ 520 Accounts payable $ 261
Accounts receivable, net 625 Accrued income taxes 87
Inventories 496 Other liabilities 350
Prepaid expenses 40 Long-term debt 161
Plant and equipment, net 1,169 Common stock 390
Retained earnings 1,601

Total assets $2,850
Total liabilities & equities $2,850
(2) It appears that there will not be a significant strain on cash. The cash balance is forecast to
increase by $31 million. The financing needed to buy the equipment will only increase long-term
debt by $18 million.
(3) The cash position is heavily supported by strong estimated sales and collection rates. Any
changes in these figures could severely swing the cash-flow amounts. Other sources of cash
can be found on the balance sheet. The company appears to be able to further finance
operations from long-term debt. It could factor receivables. Cash needed to finance inventory
could be reduced by lowering inventory levels through several inventory management
techniques.
7-44.
(1) Since materials yield a 75 percent usage rate, materials requirements are 32 pounds, 16
pounds, and 16 pounds for Material A, B, and C, respectively.
Budgeted income statement, current situation:
Net sales (1,800,000 x $14) $25,200,000

Cost of goods sold:
Material A ($0.12 x 32 x 1,800,000) $6,912,000
Material B ($0.08 x 16 x 1,800,000) 2,304,000
Material C ($0.08 x 16 x 1,800,000) 2,304,000
Direct labor [(1,800,000  12) x $14.40] 2,160,000
Variable overhead (1,800,000 x $2) 3,600,000
Total cost of goods sold (17,280,000)
Contribution margin $7,920,000
Minus fixed overhead (2,700,000)
Manufacturing profits $5,220,000
(2) a. With the new materials yield of 80 percent, the materials requirements are 30 pounds, 15 pounds,
and 15 pounds for Material A, B, and C, respectively.
Budgeted income statement, with materials savings:
Net sales (1,800,000 x $14) $25,200,000

Cost of goods sold:
Material A ($0.12 x 30 x 1,800,000) $6,480,000
Material B ($0.08 x 15 x 1,800,000) 2,160,000
Material C ($0.08 x 15 x 1,800,000) 2,160,000
Direct labor [(1,800,000  12) x $14.40] 2,160,000
This savings would contribute $720,000 ($5,940,000 – 5,220,000) to profits.
(2) b. Budgeted income statement, with labor savings:

Net sales (1,800,000 x $14) $25,200,000

Cost of goods sold:
Material A ($.12 x 32 x 1,800,000) $6,912,000
Material B ($.08 x 16 x 1,800,000) 2,304,000
Material C ($.08 x 16 x 1,800,000) 2,304,000
Direct labor [(1,800,000  15) x $14.40] 1,728,000
This savings would contribute $432,000 ($5,652,000 – $5,220,000) to profits.
(2) c. Budgeted income statement, with materials and labor savings:
Net sales (1,800,000 x $14) $25,200,000

Cost of goods sold:
Material A ($0.12 x 30 x 1,800,000) $6,480,000
Material B ($0.08 x 15 x 1,800,000) 2,160,000
Material C ($0.08 x 15 x 1,800,000) 2,160,000
Direct labor [(1,800,000  15) x $14.40] 1,728,000
These savings would contribute $1,152,000 ($6,372,000 – $5,220,000) to profits.
7-45. Jeff's clients apparently believe in his model. Therefore, Jeff is in a position to use the model
to tell his clients what they should do with their money based on the model's outputs. The fact is
that Jeff makes most of his money from selling insurance and mutual funds to clients. Therefore,
Jeff might be influenced to bias the assumptions included in the model so that the answers tend
to encourage the actions that will benefit him most -- sales of insurance and certain types of
mutual funds. Such manipulation could put clients' best interests second to his own personal
income goals. In the extreme, clients may be encourage to take risks that are beyond their
ability to absorb losses. These risks include precious metals trading, futures and options, and
growth funds when, in fact, income is important. He might suggest buying insurance when the
model does not agree.
Clients may run into cash-flow crunches at different periods of their lives if the model is incorrect.
Instead of playing with the model's inputs, Jeff could also simply mislead the client with invalid
suggestions. The investment planning area is fraught with many unknowns and with many
people having little or no knowledge of appropriate strategies. Jeff is in a critical position of trust.
He may give sound advice that later proves to be bad strategy because of future events. He
cannot avoid this possibility. He must make the client aware of the risks as well as the possible
returns. Most of us want to hear positive things and tend to downplay adverse outcomes. But
Jeff’s job is to use tools like his "black box" to simplify, inform, and teach difficult investment
concepts and vehicles to clients.
Jeff might first want to make sure that the client is aware that the suggestions given are indeed
from the model and are based only on information the client provided. The return assumptions
of each investment should be clearly stated and compared to recent history. Also, he should

assure them that the correct information was entered into the model. He might allow the
customer to enter the information. Jeff should show the customer official printouts of the inputs
and outputs from the model. Furthermore, he might suggest that a third party verify the input
and output of the model so that he can assure the information is not organized to manipulate
customers.
7-46. Budgeted income statement relationships (all figures in Belgian francs):
Legend:
t Current month
t-1 Prior month
St Sales revenue for the current month
CGSt Cost of goods sold for the current month
OEt Operating expenses for the current month
NIt Net income for the current month
CRt Cash receipts for the current month
Pt Purchases for the current month
CDt Cash disbursements for the current month
G Growth rate (presently set at 0.5 percent per month)
CG% Cost of goods sold percentage (presently 75 percent)
CaS Percentage of cash sales (presently 60 percent)
CrS Percentage of credit sales (presently 100 percent – CaS%)
VC Variable cost percentage per month (presently 1 percent of sales)
FC Fixed cost dollars per month (presently €20,000)
CR1 Credit sales collected in current month (presently 50 percent)
CR2 Credit sales collected next month (presently 45 percent)
CR3 Credit sales collected two months later (presently 5 percent)
D Purchases discount (presently 2 percent of Q)
Q Percentage of purchases in current month qualifying for discount (presently 50 percent)
PP1 Purchases percentage paid for in month of purchase (presently 70 percent)
PP2 Purchases percentage paid for next month (presently 100 percent – PP%1)
DE Depreciation expense per month (presently €2,000)
CE Ending cash balance
Relationships (All formulas shown in spreadsheet format.):
St = (1 + G) * St-1
CGSt = CG% * St
OEt = (VC * St) + FC
NIt = St – CGSt – OEt
Budgeted cash receipts and disbursements relationships:
CRt = (CaS * St) + ((CrS * CR1) * St) + ((CrS * CR2) * St-1) + ((CrS * CR3) * St-2)
Pt = CGSt+1
CDt = ((PP1 * Q * (1 – D) * Pt) + ((PP1 * (1 – Q) * Pt) + (PP2 * Pt-1) + (OEt - DE)
CEt = CEt-1 + CRt – CDt

7-47. Symbols used for the formulas:
S1 = Salary professional grade 1

S2 = Salary professional grade 2
SE = Salary general design engineer
SA = Salary administration persons
BR1 = Billing rate professional grade 1
BR2 = Billing rate professional grade 2
BRE = Billing rate general design engineer
n1 = Number of professional grade 1 persons
n2 = Number of professional grade 2 persons
nE = Number of general design engineers
nA = Number of administration persons
AnT = Annual hours per engineer
B% = Billing percentage of 75 percent
CRt = Cash receipts in current period
CDt = Cash disbursements in current period
CNt = Cash disbursements for nonpayroll administrative expenses in current period
FAE = Annual fixed administrative expenses of $500,000
EAE = Annual per employee administrative expenses of $10,000 per employee
PAE = Administrative expenses that are 10 percent of salaries
AR% = Percentage of accounts receivable paid in the month billed of 75 percent
ESC = Annual equipment and software lease costs of $1,890,000
ER = Engineering revenue
ES = Engineering salaries
Pt = Payroll in current period
OI = Net income before taxes
ITR = Income tax rate of 40 percent
IT = Income taxes
NI = Net income
M = 12 months
All formulas shown in spreadsheet format.
(1) Engineering revenue for the current month:
ERt = (BR1 * ((AnT  M) * B%) * n1) + (BR2 * ((AnT  M) * B%) * n2) + (BRE * ((AnT  M)
* B%) * nE)
(2) Costs of engineers for the current month:
ESt = ((S1  M) * n1) + ((S2  M) * n2) + ((SE  M) * nE)
(3) Total payroll for the current month:
Pt = ESt + ((SA  M) * nA)
(4) Cash inflow from customers for the current month (dollars):
CRt = (ERt-1 * AR%) + (ERt-2 * (1 – AR%)
(5) Cash outflow for all nonpayroll administrative expenses for the current month:
CNt = (FAE  M) + ((EAE  M) * (n1t+1 + n2t+1 + nEt+1 + nAt+1)) + (PAE * Pt-1) + (ESC  M)

(6) Net income before taxes for the current month:
OIt = ERt – Pt – CNt
(7) Income taxes for the current month:
ITt = OIt * ITR
(8) Ending cash account balance for the current month:
Ct = Ct-1 + CRt - Pt - CNt
Solutions to Cases
CASE 7A – COSMO LEARNING SYSTEMS
(1) The manager does not really control the number of seminars conducted and the number of
participants attending each seminar. However, the manager controls the promotion and has the
responsibility to generate interest in the seminars. Consequently, the manager can be viewed as
having control for performance evaluation purposes.
(2) The variances for seminar participants and number of seminars indicate the budget for
comparison was based on 8,400 participants and 200 seminars. Since these levels were not
achieved, the variances have little meaning for evaluating the manager. The reason is that too
many factors may impact the variances. The budget, for comparative purposes, should be one
that would have been prepared for the 7,020 participants and 175 seminars actually achieved.
The costs and variances the manager does not control are his own salary and the divisional
overhead allocated to this profit center.
(3) Improved performance report:
Formulas for costs:

Food: [($70,200 + $10,800)  8,400] x 7,020 = $67,693
Handbooks and handouts: [($274,890 + $85,110)  8,400] x 7,020 = $300,857
Instructors' fees: [($280,000 + $40,000)  200] x 175 = $280,000
Rental sites: [($21,600 – $2,630)  200] x 175 = $16,599
Equipment rental: [($8,110 – $510)  200] x 175 = $6,650
Cosmo Learning Systems: Professional Seminar Division

Government Contract Accounting Seminars
For The Last Fiscal Year
Fav/(Unf)
Actual Budget Variance
Seminar participants 7,020 7,020 --
Number of seminars given 175 175 --
Revenues $1,404,000 $1,404,000

Variable costs:

Costs which vary with number of participants:
Food $70,200 $67,693 ($2,507)
Workbooks and handbooks 274,890 300,857 25,967
Costs which vary with number of seminars:
Instructor's fees 280,000 280,000 0
Rental of sites 21,600 16,599 (5,001)
Equipment rental 8,110 6,650 (1,460
Total variable costs $654,800 $671,799 $16,999
Contribution margin $749,200 $732,201 $16,999
Controllable fixed costs:
Salaries of assistants $64,000 $60,000 ($4,000)
Office expenses 13,000 12,360 (640)
Promotion of seminars 89,000 96,500 7,500
Total controllable fixed costs $166,000 $168,860 $2,860
Controllable margin $583,200 $563,341 $19,859
Direct noncontrollable fixed costs:
Manager's salary 60,000 60,000 $0
Direct contribution margin $523,200 $503,341 $19,859
CASE 7B – Bridges & Bridges
(1) Cash budget: October November December Fourth Q

Beginning balance $142,100 $120,000 $120,000 $142,100
Receipts: Receivables collection1 $730,575 $767,056 $805,424
$2,303,055
Rent income 24,000 0 0 24,000
Total receipts $754,575 $767,056 $805,424 $2,327,055
Total cash available $896,675 $887,056 $925,424 $2,469,155
Disbursements:
Accounts payable2 $702,339 $601,324 $630,938 $1,934,601
Other payables3 134,886 138,132 141,539 414,557
Equipment purchases 0 250,000 0
250,000
Dividends 0 0 45,000 45,000
Total disbursements $837,225 $989,456 $817,477 $2,644,158
Balance before loans and investments $59,450 ($102,400) $107,947 ($175,003)
Sale (purchase) of investments 60,550 139,450 0
Loans needed (repaid) 0 82,950 12,053
95,003
Ending balance $120,000 $120,000 $120,000 $120,000
Investments at month end $139,450 $ 0 $ 0 $ 0
Loans payable at month end $ 0 $82,950 $95,003 $95,003
1
Budgeted collections of sales: October November December
Cash receipts:
From prior month with discount
(98% x 40% x prior month sales) $308,700 $324,106 $340,334
From prior month without discount
(25% x prior month sales) 196,875 206,700 217,050
From second prior month
(30% x second prior month sales) 225,000 236,250 248,040
Total collections $730,575 $767,056 $805,424

Discounts given (2% x sales x 40%) $6,300 $6,614 $6,946
2
Payments on accounts payable: October November December
Beginning account payable balance $354,155 $232,123 $246,134

Plus purchases4 580,307 615,335 641,340
Total payables $934,462 $847,458 $887,474
Minus payments:
Current month purchases (60%) $348,184 $369,201 $384,804
Prior month purchases (40%) 354,155 a 232,123 246,134
Total payments $702,339 $601,324 $630,938
Ending balance $232,123 $246,134 $253,536
3
Payments on other payables: October November December
Beginning other payables balance $53,200 $54,458 $55,782

Plus: Selling & administrative expenses 111,340 113,410 115,580
Advertising expenses 24,804 26,046 27,348
Total payables $189,344 $193,914 $198,710
Minus payments:
Current month selling & admin (60%) $66,804 $68,046 $69,348
Prior month selling & admin (40%) 43,750a 44,536 45,364
Current month advertising (60%) 14,882 15,628 16,409
Prior month advertising (40%) 9,450a 9,922 10,418
Total payments $134,886 $138,132 $141,539
Ending balance $54,458 $55,782 $57,171
4
Purchases budget October November December January
Sales $826,800 $868,200 $911,600 $930,000
Cost of goods sold (70% x sales) $578,760 $607,740 $638,120 $651,000
Plus ending inventory (25% of next
month's cost of goods sold) 151,935 159,530 162,750
Total available $730,695 $767,270 $800,870
Minus beginning inventory 150,388 151,935 159,530
Purchases $580,307 $615,335 $641,340
a
Beginning balance of Accounts Payable is assumed to be purchases payables. Other
Payables are selling & administrative expenses (($868,800 x 0.05) + $70,000 x 0.4 =
$43,750) and advertising ($787,500 x 0.03 x 0.4 = $9,450).
(2) a. "What if" gross margin becomes 27.5 percent of sales:
Cash budget: October November December Fourth Q

Receipts: Receivables collection1 $730,575 $767,056 $805,424
2,303,055
Rent income 24,000 0 0
24,000
Total receipts $754,575 $767,056 $805,424 $ 2,327,055
Total cash available $896,675 $887,056 $925,424 $ 2,469,155
Disbursements:
Other payables3 134,886 138,132 141,539 414,557
Equipment purchases 0 250,000 0 250,000

Dividends 0 0 45,000
45,000
Total disbursements $852,883 $1,013,080 $840,011 $2,705,974
Balance before loans and investments $ 43,792 ($126,024) $ 85,413 ($236,819)
200,000
Loans needed (repaid) 0 122,232 34,587 156,819
Ending balance $120,000 $120,000 $120,000 $120,000
Balance of investments at month end $123,792 $ 0 $ 0 $ 0
Balance of loans at month end $ 0 $122,232 $156,819 $156,819
5
Beginning balance $354,155 $242,561 $254,925
Plus purchases6 606,403 637,312 664,245
Total payables $960,558 $879,873 $919,170
Minus payments:
For current month purchases (60%) $363,842 $382,387 $398,547
For prior month purchases (40%) 354,155 a 242,561 254,925
Total payments $717,997 $624,948 $653,472
Ending balance $242,561 $254,925 $265,698
6
Purchases budget: October November December January
Sales $826,800 $868,200 $911,600 $930,000
Cost of goods sold (72.5% x sales) $599,430 $629,445 $660,910 $674,250
Total available $756,791 $794,673 $829,473
Minus beginning inventory (150,388) (157,361) (165,228)
Purchases $606,403 $637,312 $664,245
If gross margin shrinks to 27.5 percent, purchase costs will increase and disbursements will be
higher each month. The result is an increase in the total loan balance in December by $61,816
($156,889 – $95,073).
(2) b. First, assume that the inventory level is changed to 30 percent:

Receipts: Receivables collection $730,575 $767,056 $805,424 $2,303,055
Rent income 24,000 0 0 24,000
Total receipts $754,575 $767,056 $805,424 $2,327,055
Disbursements:
Other payables3 134,886 138,132 141,539 414,557
250,000
Dividends 0 0 45,000
45,000
Balance before loans and investments $ 41,218 ($115,466) $106,953 ($207,295)
Sale (purchase) of investments 78,782 121,218 0 200,000
Loans needed (repaid) 0 114,248 13,047 $127,295
Ending balance $120,000 $120,000 $120,000 $120,000

7
Beginning balance $354,155 $244,278 $246,742
Plus purchases8 610,694 616,854 641,984
Total payables $964,849 $861,132 $888,726
Minus payments:
Total payments $720,571 $614,390 $631,932
Ending balance $244,278 $246,742 $256,794
8
Sales $826,800 $868,200 $911,600 $930,000
Total available $761,082 $799,176 $833,420
Purchases $610,694 $616,854 $641,984
The increase in inventory levels will require increased purchase costs and disbursements. The
net effect will be an increase in the total loan balance in December of $32,292 ($127,365 –
$95,073).
Second, assume that inventory level is changed to 40 percent:

Receipts: Receivables collection1 $730,575 $767,056 $805,424 $2,303,055
Rent income 24,000 0 0 24,000
Total receipts $754,575 $767,056 $805,424 $2,327,055
Disbursements:
Accounts payable9 $757,036 $640,522 $633,920 $ 2,031,478
Other payables3 134,886 138,132 141,539 414,557
250,000
Dividends 0 0 45,000 45,000
Balance before loans and investments $4,753 ($141,668) $104,965 ($271,950)
200,000
Loans needed (repaid) 0 176,915 15,035
191,950
Ending balance $120,000 $120,000 $120,000 $120,000
9
Payment on accounts payable: October November December
Beginning accounts payable balance$354,155 $268,587 $247,957
Plus purchases10 671,468 619,892 643,272
Total payables $1,025,623 $888,479 $891,229
Minus payments:

Total payments $757,036 $640,522 $633,920
Ending balance $268,587 $247,957 $257,309
10
Sales $826,800 $868,200 $911,600 $930,000
Plus ending inventory (40% of
next month's cost of goods sold) 243,096 255,248 260,400
Total available $821,856 $862,988 $898,520
Purchases $671,468 $619,892 $643,272
The increase in inventory levels to 40 percent will require increased purchase costs and
disbursements. The net effect will be an increase in the total loan balance in December of
$96,877 ($191,950 – $95,073).
(2) c. First, Mr. Bridges "what if":

Receipts: Receivables collection11 729,375 765,810 804,090 2,299,275
24,000
Total receipts $753,375 $765,810 $804,090 $2,323,275
Disbursements:
Purchases $702,339 $601,324 $630,938 $1,934,601
Other payables3 134,886 138,132 141,539 414,557
250,000
Dividends 0 0 45,000 45,000
200,000
Ending balance $120,000 $120,000 $120,000 $120,000
11
Budgeted collections of accounts rec: October November December
Beginning accounts receivable balance $807,750 $905,175 $1,007,565
Plus sales 826,800 868,200 911,600
Total receivables $1,634,550 $1,773,375 $1,919,165
Minus cash receipts:
(45% x prior month sales) $354,375 $372,060 $390,690
(50% x second prior month sales) 375,000 b 393,750 413,400
Ending balance $905,175 $1,007,565 $1,115,075

b
Note that if the balance sheet given in the problem is real life, the accounts receivables from
August will only be $225,000 because of existing credit policies and current account
balances. If this is the case, the sudden change in October would cause receipts to drop
and loans to increase by $150,000
Mr. Bridges idea would result in a $3,780 increase in loans required. Therefore, the reduction in
discount expense due to eliminating the discount does not compensate for the slow down it will
have on customer collections. However, in Part (1), we saw that discounts for the fourth quarter
totaled $19,856. This will pay the interest on a large amount of money. The savings on
discounts significantly outweigh the extra interest costs. This assumes that Mr. Bridges is correct
in his analysis of the change in cash flows. This analysis assumes that the fourth quarter of
2003 is part of a financial plan for the entire year.
Ms. Bridges "what if":

Receipts: Receivables collection12 $730,200 $766,648 $805,022 $2,301,870
24,000
Total receipts $754,200 $766,648 $805,022 $2,325,870
Disbursements:
Purchases $702,339 $601,324 $630,938 $1,934,601
Other payables3 134,886 138,132 141,539 414,557
Equipment purchases 0 250,000 0 250,000
Dividends 0 0 45,000 45,000
Sale (purchase) of investments 60,925 139,075 0 200,000
Ending balance $120,000 $120,000 $120,000 $120,000
12
Budgeted collections of accounts rec: October November December
Beginning accounts receivable balance $807,750 $904,350 $1,005,902
Plus sales 826,800 868,200 911,600
Total receivables $1,634,550 $1,772,550 $1,917,502
Minus cash receipts:
From prior month with discount
(97% x 60% x prior month sales) $458,325 $481,198 $505,292
(25% x prior month sales) 196,875 206,700 217,050
(10% x second prior month sales) 75,000 78,750 82,680
Ending balance $904,350 $1,005,902 $1,112,480
Total discounts (3% x sales x 60%) $14,175 $14,882 $15,628
Ms. Bridges idea would not have a positive benefit. The total loans required by December would
be $1,185 higher ($96,258 – $95,073). Therefore, the loss of revenue due to the greater
discount is bigger than any increase in customer collections. In fact, $44,685 in discounts were
given in the fourth quarter. This caused more cash to be collected but not enough to cover the

cash lost to discounts. This is a much more costly proposal than Mr. Bridges' suggestion.

CH 07

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CHAPTER 7 SOLUTIONS

Solutions to Questions for Review and Discussion

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-1

(4) Promote continuous improvement. Budgeting should always be striving to improve

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-2

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-3

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-4

A. Sales forecast A. Sales forecast

Manufacturer: Interior designer:

A. Sales forecast A. Sales forecast

15. Independent variables:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-5

2,850 x 15 (from Schedule 1)

2,800 + 750 – 700 = 2,850

3,050 (from Schedule 4) x 1 hour (from Schedule 1)

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-6

$5.10 (from Schedule 7) x 2,850 hours (from Schedule 6)

See Part (a) for the source of the production units.

$16,312 (from Schedule 5) x 1 – 0.60 (from Schedule 2)

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-7

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-8

Miller Co. production budget in units:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-9

7-5. Dale Company's cash receipts:

January February March April May June

(1) Cash receipts:

(2) Cash receipts:

Total second quarter receipts if cash sales are 20 percent £486,880

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-10

7-7. Gaffigan Company purchases and payments:

(1) Purchases budget:

(2) Cash payments budget:

$550,000 – $400,000 = $0.60 variable cost per $1 of sales

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-11

Flexible O/H Budget

Spending: $118,000 – $115,000 = $3,000 underspent

Applied: $114,000 – $115,000 = $1,000 underapplied

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-12

Performance to Date Total Project

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-13

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-14

(2) Purchases cost budget: First Second Third Fourth

(3) Cash payments for purchases: First Second Third Fourth

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-15

Wuerth Corporation cash budget:

Beginning cash balance, March 1 A$20,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-16

(1) Purchases and cash payments budget:

Payments for current month's

(2) Cash receipts budget:

July August September October November December

(2) Revised cash receipts budget:

July August September October November December

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-17

First Second Third Fourth

First Second Third Fourth

Sales of prior production (25%) 12,000 1 12,000 14,000 16,000 54,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-18

(2) Projected dividends:

(3) a. Cash budget: May June July August

(3) b. Cash budget: May June July August

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 7, Page 7-19