Ch8 000

CHAPTER 8: STRATEGY AND THE MASTER BUDGET
QUESTIONS 8-1 Compel strategic planning and facilitate implementation of strategic plans. An organizations strategy, strategic plans, and budgets are interrelated. Preparing budgets compels reviews of an organizations strategy and its strategic plans and can facilitate implementations of the strategic plan. Feedback from budgets often results in improvements to an organizations strategy and strategic plan. Serve as a basis for performance evaluation. Budgets serve as the benchmark against which actual performance can be compared. Budgets are a better basis for judging performance than past performance for two reasons. First, budgeted amounts take into account expected changes and improvements in the environment. Second, past performance is a result of past events and operations and may not be suitable to serve as a benchmark. To the extent past performance was not effective/efficient it does not make sense to use this as the standard against which actual performance is compared. Motivate managers and employees. Budgets, if internalized, serve as goals for managers and employees and, if properly implemented, can motivate them toward achievements of the goals. Promote coordination and communication within the organization. Budgets compel managers to think of interdependencies and interrelationships among subunits of the organization. A budget is also a communication device that helps all employees and managers understand and accept the organizations objectives and expected roles and contributions over the coming period. Authorization to act. The approved budget, particularly in a not-for-profit setting, gives the manager authorization to act (make decisions, etc.). Other benefits include serving as a basis for resource allocation, aiding cash-flow management, and providing authorization documentation. 8-2 An organizations strategic plan describes how the organization matches its strengths and weaknesses with the opportunities and threats in the marketplace in order to accomplish its long-term goals (e.g., achieve sustainable competitive advantage). It is the guideline for the firms short-term and long-term operations. A strategic plan may extend over several budget periods (e.g., years) covered by a master budget. A master budget is a comprehensive operational plan of action for the coming year. It includes both operating budgets and financial budgets and culminates in a set of forecasted (i.e., pro-forma) financial statements (cash flow, income statement, and balance sheet). The strategic plan of a firm guides, in a general sense, the determination of the master budgets prepared annually by the organization. Specialized consulting companies now provide software that can be used to integrate master budgets with strategic plans as part of a comprehensive performance management system. (See, for example, Geac, at www.performance.geac.com.)
Blocher, Stout, Cokins, Chen, Cost Management, 4/e
8-1
The McGraw-Hill Companies 2008
8-3 A master budget is a comprehensive plan of action for an organization for a future period while a capital budget is an investment (and financing) plan for a major project or program that has long-range effects on operations. As indicated in text Exhibit 8.3, resources specified in the capital budget of the current period are included in the master budget of the period. 8-4 A master budget is a comprehensive plan of action for a future period; as such, the master budget includes both operating and financial budgets. An operating budget consists of plans regarding revenues and resource acquisition/use across all major operating areas of the organization (e.g., sales, production, purchasing, marketing, research and development, and general administrative activities). The set of operating budgets culminates in a budgeted income statement. Financial budgets relate to sources and uses of funds for an upcoming period. The set of financial budgets culminates in a budgeted cash flow statement and budgeted balance sheet. 8-5 Successful budgeting systems typically: have full support by one or more key managers in the organization become personalized budgets of the people who have the responsibility for carrying them out; as such, they serve an important motivational function are perceived by managers and employees as planning and coordinating tools, not pressure devices or mechanisms designed to stifle creativity and opportunity are not viewed as a basis for placing blame. provide for a two-way flow of information in the budget-preparation process include budgets that are highly achievable 8-6 The budget committee of an organization is the highest authority in the organization for all matters related to the budget. The committee sets or approves the overall budget goals for the organization and its major business units, directs and coordinates budget preparation, resolves conflicts and differences that may arise during the budget-preparation process, approves the final budget, monitors operations as the year unfolds, and reviews operating results at the end of the period. The budget committee also approves major revisions of the budget during the period. 8-7 No, these terms are not synonymous. The term sales forecast refers to estimated sales volume for an upcoming period. As such, the sales forecast is generally the starting point in preparing the sales budget for the period. The term sales budget refers to forecasted sales dollars for an upcoming period. Alternatively, rather than focusing on the difference between sales volume and sales dollars, some writers distinguish between these two terms on the basis of the level of control: we use the term sales forecast to refer to both units and dollars because, unlike costs, these elements are affected by external (e.g., competitor actions) as well as internal factors (e.g., product promotion expenditures).
8-2
8-8 The sales budget is often regarded as the cornerstone in the master budget because all operating activities in a business emanate from efforts to attain the level of sales specified in the sales budget. A firm can complete the plan for other activities of a period only after it knows the expected sales levels for the current and the immediate future periods. A manufacturing firm, for example, cannot complete its production schedule for the upcoming period without knowing the number of units it must produce for each of its products. The firm can ascertain the number of units to be produced only after it knows both forecasted sales and the desired ending inventory. The units to be produced, in turn, affect many other activities of the firm including amount and kinds of materials to be purchased, number of employees to be hired, levels of factory overhead, and selling and administrative expenses. 8-9 When sales volume is seasonal in nature, the three most significant items to coordinate are: production volume, finished goods inventory, and sales volume. 8-10 Additional factors include: beginning and desired ending inventories of work-in-process and finished goods the required material inputs (in lbs., liters, etc.) for each product beginning and desired ending inventories of direct materials the cost of materials (per lb., liter, etc.) 8-11 The two factors that determine the amount of factory overhead for a period are management decision and planned production volume. The former refers to capacity-related (i.e., fixed overhead) costs while the latter refers to the planned utilization of that capacity (i.e., variable overhead costs). 8-12 A cash budget generally includes three major components: Cash available (i.e., beginning cash balance plus budgeted cash receipts) Cash disbursements (other than interest expense), and Financing activity (new financing, repayment of principal, and interest expense) 8-13 The following are some of the similarities between cash budgets and cash-flow statements required by GAAP: Both include sources and uses of funds Both are prepared for a period of time Neither includes any non-cash revenues and expenses Among differences between these two statements are: A cash-flow statement reports the results of past activities while a cash budget describes effects of planned operations. A firm needs to follow GAAP in preparing cash-flow statement while the guiding principle for preparing a cash budget is relevance and usefulness to management.
8-3
The major categories of cash-flow statements are operating, financing, and investing activities. Each of these categories may include both sources and uses of cash. The major categories of cash budgets are cash available, cash disbursements, and financing. Both cash available and cash disbursements may include cash from either operating or investing activities. 8-14 In comparison with manufacturing organizations, unique budget characteristics of service organizations include: absence of production and materials purchases budgets emphasis on workforce planning 8-15 In contrast to business firms (i.e., for-profit entities), a not-for-profit organization: has no single bottom-line amount such as operating income is more likely to use its budgets as the source of authorization for its activities limits the total amount in the budget to the expected total revenues (Federal budgets are exceptions) 8-16 Zero-base budgeting (ZBB) is a budgeting process that requires managers to prepare budgets each period from ground zero for all operations. A typical budgeting process is incremental in nature. That is, budgets for the upcoming period start from the approved budgets for the current period, with amounts added to reflect planned changes for the upcoming period. Thus, traditional budgets assume that most, if not all, of the current activities and functions will continue into the coming budget period. In contrast, a zero-base budgeting process allows no activities or functions to be included in the budget unless managers can justify their need. Pure forms of ZBB are expensive and time-consuming. For this reason, some companies have partial ZBB systems. A number of companies (e.g., Xerox, Texas Instruments) and government organizations (e.g., State of Georgia) have at one time or another used ZBB. 8-17 No. Kaizen budgeting is a budgeting approach that explicitly incorporates continuous improvement standards/expectations in the approved budgets. In contrast, activity-based budgeting (ABB) is a budgeting process that relies on the costs of activities and activity-cost drivers to prepare budgets. In other words, ABB develops master budget data using the organizations activity-based cost (ABC) system. Thus, ABB begins by quantifying products and services to be produced for an upcoming period. These forecasts are then used to estimate the amount of activities, across the internal value chain, that are needed to meet forecasted output (products or services). The budgeting process is completed by assigning estimated resource costs to the specified activities. Both American Express and AT&T Paradyne provide examples of actual implementation of ABB systems. See, Player, S. & Keys, D. E. (eds.), Activity-Based Management: Arthur Andersens Lessons from the ABM Battlefield. New York: John Wiley & Sons, 1999.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-4 The McGraw-Hill Companies 2008
8-18 Budgetary slack, or "padding" the budget, is the practice of knowingly including a higher amount of expenditure in the budget (or lower amount of revenue) than managers actually believe should be the case. One reason that it is common to find slacks in budgets is the desire of managers to use such slack as a cushion for unpredictable/uncontrollable future events (e.g., worker attrition, machine breakdowns/malfunctions). Another reason is the increased recognition or reward that might accrue to those who beat their budget target. Finally, managers may believe that the budgets they submit will be cut in the budget negotiation process. Therefore, such managers must pad their budgets in order to secure the amount of resources they feel they actually need. 8-19 A highly achievable budget has a target that is achievable by most managers most of the time (e.g., 80 to 90 percent of the time). In a study by Merchant (1990), the author finds that a budget with a highly achievable target serves well in the vast majority of organizational situations, especially when accompanied by extra rewards for performance exceeding the target. Among the advantages of using a highly achievable budget target are the following: 1. 2. 3. 4. Increasing managers' commitment to achieving the budget target. Maintaining managers' confidence in the budget. Decreasing organizational control cost. Reducing the risk that managers will engage in harmful earningsmanagement practices or violate corporate ethical standards. 5. Allowing effective and efficient managers greater operating flexibility. 6. Improving predictability of earnings or operating results. 7. Enhancing the usefulness of a budget as a planning and coordinating tool.
8-20 Participative budgeting is a bottom-up approach that involves everyone in the budget-preparation processfrom low-level workers all the way to the top managers of the organization. The principal idea is to have employees/managers internalize (i.e., take ownership of) the budgets that are prepared. For participative budgeting to be effective, top management needs to be actively involved. Furthermore, top management should institute incentives to guard against excessive budget padding, and encourage the generation of accurate budgetary projections. Finally, top managers may have to serve as arbiters when irreconcilable differences occur in the budget preparation process.
8-5
8-21
BRIEF EXERCISES Sales2007 Projected % increase for 2008 Estimated Sales Volume2008 x Estimated Unit Selling Price2008 Estimated Sales Dollars2008 Q2 16,000 25% 20,000 $4.00 $80,000 Q3 15,000 25% 18,750 $4.00 $75,000
8-22
Payment history: % paid in month of purchase: 25% % paid in month following month of purchase: 75% Expected Cash Disbursements: February: ($5,500 x 0.75) + ($6,500 x 0.25) = March: ($6,500 x 0.75) + ($8,000 x 0.25) = $5,750 $6,875
8-23
Number of units produced in Qtr. 1: Ending inventory of DM (in lbs.) = 50,000 Target ending inventory % = 25% of following months production requirements Therefore, RM used for production in Qtr. 1 = 50,000/0.25 = 200,000 lbs. Units produced in Qtr. 1 = lbs. of RM used/lbs. of RM per unit of output = 200,000/8 = 25,000 units DM requirements (in lbs.), Qtr. 2 = Planned production, Qtr. 2 x DM lbs./unit = (25,000 units x 1.10) x 8 lbs./unit = 27,500 units x 8 lbs./unit = 220,000 lbs.
8-24 Scheduled Production, Quarter 2: Units required to meet estimated sales, Qtr. 2 Units required to meet targeted ending inventory: 15,000 units x 10% Total units needed Less: Beginning inventory, Qtr.2 (12,000 units x 10%) Scheduled production, Quarter 2 8-25 Current level of monthly operating costs = $10,000: Estimated operating costs, January = $10,000 x 0.991 = Estimated operating costs, June = $10,000 x 0.996 = Estimated operating costs, December = $10,000 x 0.9912 = $9,900 $9,415 $8,864 = = = = 12,000 units 1,500 units 13,500 units 1,200 units 12,300 units
8-6
8-26 Collection of Credit SalesNovember: 30% of Credit Sales made in October = 0.30 x $30,000 = 70% of Credit Sales made in November = 0.70 x $24,000 = Total Estimated Collections--November = Collection of Credit SalesDecember: 30% of Credit Sales made in November = 0.30 x $24,000 = 70% of Credit Sales made in December = 0.70 x $20,000 = Total Estimated Collections--December = 8-27 Collection of Credit SalesDecember: From credit sales made in November = 0.20 x $90,000 From credit sales made in December: = (0.75 x $100,000) x 0.98 Total Estimated CollectionsDecember = = = $18,000 $73,500 $91,500 $7,200 $14,000 $21,200 $9,000 $16,800 $25,800
8-28 Estimated interest expenseApril = borrowing in April x (annual rate/12) = [($30,000 - $18,000) + $1,000] x (0.12/12) = $13,000 x 0.01 = $130.00 Note that, strictly speaking, to maintain a minimum cash balance of $30,000, the company would have to borrow an extra $1,000 to be able to cover the interest payment (eom) and still have at least $30,000 of cash. Estimated financing transactionsMay: Interest expense (paid eom): $13,000 x 0.01 = Principal repayment: Beginning-of-month cash balance = $18,000 + ($13,000 - $130) = Plus: net cash flow in May, prior to financing = Cash balance prior to financing transactions = Less: interest expense (eom) for May Less: minimum cash balance requirement = Cash available for principal repayment = Rounded down to nearest $1,000 = Total financing transactionsMay = 8-29 DM purchases, December = (DM issued to production + ending DM inventory) - beginning DM inventory = ($150,000 + $39,500) - $37,000 = $152,500 $130 $30,870 $22,000 $52,870 ($130) ($30,000) $22,740 $22,000 $22,130
8-7
8-30 Total estimated marketing expenses, 4 quarter: Variable costs = $0.05/unit x (4,000 units x 1.10) = $0.05/unit x 4,400 units = Fixed costs: Salaries = $10,000 Depreciation = $5,000 Insurance = $2,000 th Total estimated marketing expenses, 4 quarter Less: non-cash charges: Depreciation expense Estimated cash payments for marketing expenses $220
th
$17,000 $5,000
$17,220 $12,220
8-8
EXERCISES 8-31 What-If Analysis (20 Minutes) 1. The term what if analysis is one example of the more general term sensitivity analysis and is used to explore the effects (e.g., on a decision or a budget for an upcoming period) of different marketing, production, or selling strategies (e.g., the effect on revenues of lowering product selling prices, the profit-effect of using a different sales-promotion plan). That is, a what-if analysis examines how a result will change if the original (base-line) data are not achieved or, as in the present case, if an underlying assumption (viz., rate of bad-debts expense) changes. 2.
3. Managers today work in a world of uncertainty. One way to cope with uncertainty in the master budgeting process is to model the underlying relationships associated with the various budgets that are prepared and then to perform sensitivity analysis. One form of sensitivity analysis is the what-if analysis described above. For Tyson Company, this type of analysis can help the firm decide whether it might need to implement a more restrictive credit-granting policy and, if so, how much it might be willing to spend in this regard.
8-9
8-32 Behavioral Considerations (15 Minutes) There are at least two issues here. One is the failure to take advantage of all the cash discount included in the sales term. (In this regard, see Exercise 8-37.) The other is the constant occurrence of rush orders, last-minute changes, and other operating emergencies that require the purchasing department to do last minute purchases. Janet needs to ensure that the Accounting Department records all purchases at the net price whenever a purchase is made with cash discounts included in the sales terms. Any additional amount that the firm has to pay because of the failure to make the payment within the payment terms should be charged to the finance department as a loss and not treated as an adjustment to the cost of purchase. The firm needs to be very clear in its operating procedures about the minimum amount of time required for purchases. Any additional acquisition cost because of rush orders, last-minute changes, or operating emergencies should be borne by the department making the request.
8-10
8-33 Budgetary Slack and Zero-Based Budgeting (ZBB) (20 minutes) 1. Budgetary slack is a planned difference between budgeted revenue and expected revenue, and/or budgeted expenditures and expected expenditures. Budgetary slack describes the tendency of managers to under-estimate revenues and over-estimate expenditures during the budgetary process in order to build in allowances (cushions) for unexpected declines in revenue and/or unforeseen expenses. Budgetary slack occurs because of conflicts between the personal interests of a manager and the interests of the organization. These conflicts include pressure from top management to achieve budgets and the desire on the part of the manager to look favorable in the eyes of top management. 2. a. From the point of view of the business unit manager, budgetary slack provides: performance that will look better in the eyes of their superiors a coping mechanism regarding uncertainty a way to obtain what is needed since initially submitted budgets tend to be cut during the budget-negotiation process However, the use of budgetary slack limits the objective evaluation of a business unit and, therefore, limits the objective evaluation of the performance of the unit manager. It also becomes more difficult for the business unit manager to evaluate the performance of subordinates and to use the budget as a control mechanism over subordinate performance. b. From the perspective of corporate management, the use of budgetary slack increases the probability that budgets will be achieved. This increased probability facilitates the overall corporate budgeting process. Corporate management may also allow budgetary slack as a form of reward to managers for previous good performance. However, from the point of view of the business unit management, the use of budgetary slack increases the likelihood of inefficient allocation of scarce resources, and decreases the ability to identify potential weaknesses or trouble spots in operating activities.
8-11
8-33 (Continued) 3. a. Zero-based budgeting (ZBB) is a budgeting technique that evaluates all proposed operating and administrative expenditures as though they were being initiated for the first time. Each manager must evaluate the proposed expenditure for each activity to be undertaken during the upcoming budget period, investigate alternative means of conducting each activity, and rank expenditures in order of perceived importance. b. Atlantis Laboratories could benefit from ZBB as each of the business unit managers would be required to identify and justify all proposed expenditures for the upcoming year. This increased evaluation of expenditures would make it difficult to include budgetary slack in the budget for the upcoming year and likely uncover opportunities of cost savings and operational improvements. c. The biggest disadvantage of ZBB is the significant amount of time and cost involved in its implementation. In addition, the concept of zero-based budgeting may be difficult for management to learn and accept. Atlantis must be sure that the benefits of ZBB outweigh the associated costs.
8-12
8-34 Budgeted Cash Disbursements (25 minutes) 1. Budgeted cash payments for merchandise purchases: a. February: 25% x $100,000 = 75% x $120,000 = b. March: 25% x $120,000 = 75% x $110,000 = $25,000 $90,000 $30,000 $82,500
$115,000
$112,500
2. Budgeted cash payments for merchandise purchases: a. February: 25% x $100,000 x 0.98 = 75% x $120,000 x 0.98 = b. March: 25% x $120,000 x 0.98 = 75% x $110,000 x 0.98 = $24,500 $88,200 $29,400 $80,850
$112,700
$110,250
3. The financial cost of not taking advantage of the early-payment discount can be approximated by the following formula: Opportunity cost (%) = [discount %/(1 - discount %)] x [365/no. of extra days allowed if discount is not taken] = [0.02/(1 - 0.02)] x [365/20] = 0.020408 x 18.25 = 37.25% Basically, if you choose not to take the early-payment discount, you are giving up a 2% discount (on the net amount) in return for an extra 20 days in which to pay. There are 18.25 (365/20) 20-day periods in a year. Note that in the first term of this formula we divide the 2% discount rate by 98% (1 - 2%) because, in effect, you are paying 2% to delay for 20 days paying 98% of the total bill. So, the percentage rate you are paying in this case is really 2.0408% of the net bill (the bill without financing cost). Regardless of the technicalities here, students should understand that the opportunity cost of not taking advantage of the early-payment (cash) discount can be very significant, as is the case here. For this reason, firms record purchases at net cost and any discounts lost as interest expense.
8-13
8-35 Budgeted Cash Receipts and Disbursements (20 minutes) 1. Budgeted Cash Receipts: November: ($100,000 x 0.95) x 0.35 x 0.80 x 0.98 ($100,000 x 0.95) x 0.35 x 0.20 ($150,000 x 0.95) x 0.65 x 0.80 x 0.98 ($150,000 x 0.95) x 0.65 x 0.20 December: ($150,000 x 0.95) x 0.35 x 0.80 x 0.98 ($150,000 x 0.95) x 0.35 x 0.20 ($ 90,000 x 0.95) x 0.65 x 0.80 x 0.98 ($ 90,000 x 0.95) x 0.65 x 0.20 2. Budgeted Cash Disbursements: November: ($170,000 x 0.75) x 0.25 ($270,000 x 0.75) x 0.75 December: ($200,000 x 0.75) x 0.25 ($170,000 x 0.75) x 0.75 = = = = $31,875 $151,875 $37,500 $95,625 = = = = = = = = $26,068 $6,650 $72,618 $18,525 $39,102 $9,975 $43,571 $11,115
$123,861
$103,763
$183,750
$133,125
8-14
8-36 Production and materials purchases budgets (20 minutes) Production Budget: Budgeted sales Desired ending inventory (10%) Total units needed Beginning inventory Total units to produce 2nd Quarter 38,000 + 3,400 41,400 3,800 37,600 3rd Quarter 34,000 + 4,800 38,800 3,400 35,400
Budgeted Purchases of Direct Materials for the Second quarter: Budgeted production Direct materials per unit Direct materials needed in production Desired ending inventory of direct materials (20% of 106,200) Total direct materials needed Beginning inventory of DM (20% of 112,800) Budgeted purchases of direct materials (lbs.) 2nd Quarter 37,600 x 3 112,800 + 21,240 134,040 22,560 111,480 3rd Quarter 35,400 x 3 106,200
8-15
8-37 Purchase Discounts on Credit Purchases (20 minutes) The financial cost of not taking advantage of the early-payment discount for purchases made on credit can be approximated by the following formula (we use the term approximate here to denote the fact that the estimate below does not assume compounding of interest and as such provides a conservative estimate): Opportunity cost (%) = [discount %/(1 - discount %)] x [365/no. of extra days allowed if discount is not taken] 1. In the case of 2/10, n/30, the approximate economic cost of not taking advantage of the early-payment discount is: = [0.02/(1 - 0.02)] x [365/20] = 0.020408 x 18.25 = 37.25% Basically, if you choose not to take the early-payment discount, you are giving up a 2% discount (on the net amount) in return for an extra 20 days in which to pay. There are 18.25 (365/20) 20-day periods in a year. Note that in the first term of this formula we divide the 2% discount rate by 98% (1 - 2%) because, in effect, you are paying 2% to delay for 20 days paying 98% of the total bill. So, the percentage rate you are paying in this case is really 2.0408% of the net bill (the bill without financing cost). 2. In the case of 1/10, n/30, the opportunity cost of not taking advantage of the early-payment cash discount is: = [0.01/(1 - 0.01)] x [365/20] = 0.010101 x 18.25 = 18.43% 3. Given the significant opportunity cost of not taking advantage of early-payment cash discounts, good accounting practice would be to record purchases at their net-of-discount amount and then to record as interest expense or purchase discounts lost any cash discounts not taken advantage of.
8-16
8-38 Production and materials budgets--process costing (20 minutes) 1. Budgeted Production (XPL30): Budgeted sales Budgeted finished goods ending inventory (June 30, 2008) Total number of units needed Less: Budgeted finished goods beginning inventory Budgeted production (units) 2. Units of XPL30 to Start into Production: Budgeted production (from (1) above) Budgeted WIP ending inventory (June 30, 2008) Total number of units needed Less: Budgeted WIP beginning inventory (July 1, 2007) Total units of XPL30 to start into production 3. Raw Materials Purchases Budget: Units of XPL30 to start into production (from (2) above) Units of raw materials needed per unit of XPL30 Total raw materials needed for production Budgeted raw materials ending inventory (June 30, 2008) Total number of units of raw materials needed Budgeted raw materials beginning inventory (July 1, 2007) Total units of raw materials that must be purchased x + 460,000 2 920,000 50,000 970,000 40,000 930,000 + 450,000 20,000 470,000 10,000 460,000 Units 480,000 + 50,000 530,000 80,000 450,000
4. While the timing of the addition of materials would affect the calculation for number of equivalent units produced, number of equivalent units in the ending WIP inventory, and the raw materials cost per equivalent unit, it will have no impact on the budgeted purchases of materials for the period.
8-17
8-39 Cash Budget--Financing Effects (20 minutes) Hartz & Co. Cash Budget For November and December, 2007 November Cash balance, beginning Plus: Cash receipts Total cash available (A) Cash disbursements, prior to financing (B) Plus: Minimum cash balance (given) Total cash needed (C) Excess (deficiency of) cash, before financing (D) = (A) - (B) Financing: Short-term borrowing Repayments (loan principal) Interest (@12%) Total Effects of Financing = (E) Ending cash balance = (A) - (B) + (E) $75,000 $525,000 $600,000 $450,500 $50,000 $500,500 $99,500 -0($50,000) ($500) ($50,500) $99,000 December $99,000 $450,000 $549,000 $550,000 $50,000 $600,000 ($51,000) $51,000 -0($510) $50,490 $49,490
8-18
8-40 Cash budget (10-15 minutes) Cash Available Cash balance, beginning Cash collections from customers Total cash available Cash Disbursements Direct materials purchases Operating expenses $50,000 Less: Depreciation expenses - 20,000 Payroll Income taxes Machinery purchase Total cash disbursements prior to financing Financing: Cash excess (shortage) before financing Minimum cash balance desired Financing need $ 10,000 150,000 $160,000 $ 25,000 30,000 75,000 6,000 + 30,000 $166,000 ($ 6,000) - 20,000 $26,000
8-19
8-41 Cash budget (15 minutes) Cash Available: Cash balance, beginning (given) Cash collections from customers (given) Total cash available Budgeted Cash Disbursements, 2007: Payroll Other operating expenses $18,000 Less: Property taxes (see below) - 3,000 Less: Depreciation expense - 5,000 Cash operating expenses Property taxes: 2nd half of 2006 (0.50 x $2,500) $1,250 1st half of 2007 (0.50 x $3,000) 1,500 Payment for office equipment Total cash disbursements, prior to financing Financing: Cash balance before financing $ 6,000 + 175,000 $181,000 $160,000
10,000 2,750 + 6,000 $178,750 $2,250
No, the cash budget shows that Bill will not be able to meet the minimum cash balance requirement of $6,000. As such, borrowing (or some other source of financing) must occur in order to meet the minimum cash requirement.
8-20
8-42 Cash Budgeting: Not-for-Profit Context (30 minutes) 1. Endowment fund: a gift (contribution) whose principal must be maintained but whose income may be expended. (You might use the example of an endowed professorship as an example.) 2. Cash Budget for Tri-County Social Service Agency 2007 (in thousands) Quarters I II III Cash Balance, beginning $11 $8 $8 Receipts: Grants $80 $70 $75 Contracts $20 $20 $20 Mental Health Income $20 $25 $30 Charitable donations $250 $350 $200 Total Cash Available $381 $473 $333 Less: Disbursements: Salaries and Benefits $335 $342 $342 Office expenses $70 $65 $71 Equipment purchases & maintenance $2 $4 $6 Specific assistance $20 $15 $18 Total disbursements $427 $426 $437 Excess (deficiency) of cash available over disbursements ($46) $47 ($104) Financing: Borrow from endowment fund $54 $0 $112 Repayments $0 ($39) $0 ($39) $112 Total financing effects $54 Cash Balance, ending $8 $8 $8
IV $8 $75 $20 $30 $400 $533 $346 $50 $5 $20 $421 $112 $0 ($104) ($104) $8
Year $11 $300 $80 $105 $1,200 $1,696 $1,365 $256 $17 $73 $1,711 ($15) $166 ($143) $23 $8
3. $23,000. 4. It is probable that both donations and requests for services are unevenly distributed over the year. The agency may want to increase requests for donations and seek additional grants. 5. No. Assuming there is careful fiscal management, borrowing only occurs when necessary.
8-21
8-43 Collection of Accounts Receivable (15-20 minutes) 1. Month of Sale October September August July Total Credit Sales $90,000 80,000 70,000 60,000 % to be Collected in October 70% 15% 10% 4% Budgeted Cash Collection In October $ 63,000 12,000 7,000 2,400 $84,400 Budgeted collection in the 4th quarter from th sales in the 4 Quarter $ 63,000 13,500 10% November December 100,000 85,000
th
Estimated Total Cash Collections in October 2. Month of Sale October Amount of Credit Sales $ 90,000 % Collected in Oct. Nov. Dec. 70% 15% 70% 15% 70% Total budgeted cash collections in the 4 quarter th from credit sales made in the 4 quarter
9,000 70,000 15,000 59,500 $230,000
8-22
8-44
Accounts Receivable Collections and Sensitivity Analysis (45 minutes) $120,000 $150,000 $200,000 25% 60% 10% 5% $12,000 $90,000 $50,000 $152,000 $22,500 $150,000 $172,500 $172,500 $7,500 $10,000 $155,000 $120,000 $150,000 $200,000 60% 25% 10% 5%
Original Assumptions/Data: Actual credit sales for March Actual credit sales for April Estimated credit sales for May Estimated collections in month of sale Estimated collections in first month following month of sale Estimated collections in the second month after month of sale Estimated provision for bad debts in month of sale 1. Estimated cash receipts from collections in May: Collection from sales in March (0.10 x $120,000) Collection from sales in April (0.60 x $150,000) Collection from sales in May (0.25 x $200,000) Total estimated cash collections in May
st 2. Gross accounts receivable, May 31 : From credit sales made in April (0.15 x $150,000) From credit sales made in May (0.75 x $200,000) Estimated gross accounts receivable, May 31st
3. Net accounts receivable, May 31st: Gross accounts receivable, May 31st Less: Allowance for uncollectible accounts: From credit sales made in April From credit sales made in May Net accounts receivable, May 31st 4. Revised data/assumptions: Actual credit sales for March Actual credit sales for April Estimated credit sales for May Estimated collections in month of sale Estimated collections in first month following month of sale Estimated collections in the second month after month of sale Estimated provision for bad debts in month of sale
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8-44 (Continued) a. Estimated cash receipts from collections in May: Collection from sales in March (0.10 x $120,000) Collection from sales in April (0.25 x $150,000) Collection from sales in May (0.60 x $200,000) Total cash collections in May b. Gross accounts receivable, May 31st: From credit sales made in April (0.15 x $150,000) From credit sales made in May (0.40 x $200,000) Gross accounts receivable, May 31st $12,000 $37,500 $120,000 $169,500 $22,500 $80,000 $102,500
Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object and then select Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document. Input Data Actual credit sales for March $120,000 Actual credit sales for April $150,000 Estimated credit sales for May $200,000 Estimated collections in month of sale 25% Estimated collections in first month following month of sale 60% Estimated collections in the second month after month of sale 10% 5. The principal benefit is the accelerated receipt of cash, which the company can potentially employ to pay down debt, reduce borrowing, invest, etc. Principal costs would relate to whatever programs are needed to secure the accelerated collection of cash. These costs could include personal, travel, mailings, telephone, incentive programs, and costs related to customer relations.
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8-45 Budgeting: Not-for-Profit Sector (25 minutes) 1. Stewardship is defined by Merriam-Webster Online Dictionary as the conducting, supervising, or managing of something; especially: the careful and responsible management of something entrusted to one' s care. The Socially Responsible Investment Guidelines cited states: Although it is a moral and legal fiduciary responsibility of the trustees to ensure an adequate return on investment for the support of the work of the church, their stewardship embraces broader moral concerns. Also, the principles of stewardship lists two fundamental and interdependent principles: The Conference should exercise responsible financial stewardship over its economic resources. and The Conference should exercise ethical and social stewardship in its investment policy. The latter states: Socially responsible investment involves investment strategies based on Catholic moral principles. These strategies are based on the moral demands posed by the virtues of prudence and justice. They recognize the reality that socially beneficial activities and socially undesirable or even immoral activities are often inextricably linked in the products produced and the policies followed by individual corporations. Given the realities of mergers, buyouts and conglomeration, it is increasingly likely that investments will be in companies whose policies or products make the holding of their stock a "mixed investment" from a moral and social point of view. Nevertheless, by prudently applying traditional Catholic moral teaching, and employing traditional principles on cooperation and toleration, as well as the duty to avoid scandal, the Conference can reflect moral and social teaching in investments. 2. These two major principles work together to encourage the Conference to identify investment opportunities that meet both our financial needs and our social criteria. These principles are carried out through strategies that seek: 1) to avoid participation in harmful activities, 2) to use the Conference' s role as stockholder for social stewardship, and 3) to promote the common good. 3. No. (Reasons should vary.) 4. Yes.
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8-46 Budgeting Cash Receipts: Cash Discounts Allowed on Receivables (30 Minutes) 1. Breakdown of Cash/ Sales Data Amount Bank Credit-Card Sales June $60,000 Cash sales 40% July $80,000 Credit cards 60% August $90,000 September $96,000 Bank charges 3% October $88,000 Credit sales: Collection of Credit Sales Current month 20% Sales Breakdown and Terms 1st month 50% Cash and bank credit card sales 25% 2nd month 15% Credit sales 75% 3rd month 12% Terms 1/eom, n/45 Late charge/mo. 2% September Total Cash sales $96,000 Bank credit card sales $96,000 Collections of A/R: September credit sales $96,000 August credit sales $90,000 July credit sales $80,000 June credit sales $60,000 Total Cash Receipts, September Sales % 25% 25% 75% 75% 75% 75% % Paid 40% 60% 20% 50% 15% 12% % Collected 97% 99% 102% Cash Receipts $ 9,600 $13,968 $14,256 $33,750 $ 9,000 $ 5,508 $86,082
2. Appropriate accounting treatment for: a) Bank service (collection) fees: these can be considered an offset to gross sales and thus can be reflected as a deduction in determining net sales (see text Exhibit 8.15). Alternatively, these amounts can be considered selling expenses and, as such, be treated as an operating expense, (i.e., an element of Selling and Administrative Expenses on the Income Statement). b) Cash discounts allowed on collection of receivables: these can be considered a selling expense and, as such, would be included within the Selling and Administrative expense category on the Income Statement.
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8-47 Cash Discounts; Spreadsheet application (45 Minutes) Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select worksheet object, then select Open 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. The screen should then return you to the Word document below.
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 B Sales Data June July August Septem ber October Sales Terms Cash and bank credit-card sales Credit sales Discount term C Am ount $60,000 $80,000 $90,000 $96,000 $88,000 D E F G Breakdow n of Cash/Bank Credit-Card Sales Cash sales 40% Bank credit-card sales 60% Bank processing fee 3% Collection of Credit Sales: Current m onth 20% 1st m onth 50% 25% 2nd m onth 15% 75% 3rd m onth 12% 1% Late charge/m o. 2% Sales Pay. % % 25% 40% 25% 60% 75% 75% 75% 75% 20% 50% 15% 12% Coll. % $ 97% $ 99% $ $ $ 102% $ $ $ 97% $ 99% $ $ $ 102% $ $ Cash Receipts 9,600 13,968 14,256 33,750 9,000 5,508 86,082 8,800 12,804 13,068 36,000 10,125 7,344 88,141
Cash Receipts for Septem ber Cash sales Bank credit-card sales Collection of accounts receivable: Septem ber credit sales August credit sales July credit sales June credit sales Total Cash Receipts Cash Receipts for October Cash sales Credit cards sales Collections of account receivables October credit sales Septem ber credit sales August credit sales July credit sales Total Cash Receipts
Total $96,000 $96,000 $96,000 $90,000 $80,000 $60,000
$88,000 $88,000 $88,000 $96,000 $90,000 $80,000
25% 40% 25% 60% 75% 75% 75% 75% 20% 50% 15% 12%
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8-48 Activity-Based Budgeting (ABB) (20 Minutes) 1. Activity Storage Requisition Handling Pick Packing Data Entry Desktop Delivery 2. Budgeted Cost Volume Driver Rate 400,000 $0.4925 30,000 800,000 800,000 30,000 12,000 $12.50 $ 1.50 $ 0.80 $ 1.20 $30.00 Total Cost $ 197,000 $ 375,000 $1,200,000 $ 640,000 $ 36,000 $ 360,000 $2,808,000
Total Budgeted Cost for the Division Average number of cartons/delivery
= 1,170,000 cartons 11,700 deliveries = 100 cartons/delivery Total number of cartons budgeted for delivery in January 2007: 12,000 deliveries x 100 cartons/delivery = 1,200,000 cartons Cost per carton delivered = $2,808,000 1,200,000 = $2.34 Therefore, the total budgeted cost for the division remains the same at $2,808,000. 3. Expected saving in costsJanuary 2007: Requisition Handling Data Entry: number of lines Data Entry: number of requisitions Expected Cost Savings, January 2007 = $ 375,000 640,000 36,000 $1,051,000
If the firm uses a single cost-rate system based on the number of cartons delivered, the firm will not be able to estimate the savings without special efforts to gather additional information.
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8-49 Activity-Based Budgeting with Kaizen (40 Minutes) 1. Unit-Level: Batch-Level: Pick packing, Data entryLines Requisition handling, Data entryRequisitions, Desktop delivery
2.
Cost driver rates: Cost-Driver Rates January February $12.50 $12.250 $ 1.50 $ 1.485 $ 0.80 $ 0.792 $ 1.20 $ 1.176 $30.00 $29.400 March $12.0050 $ 1.4702 $ 0.7841 $ 1.1525 $28.8120
Cost-Reduction Activity Rate (per month) Requisition Handling 98% Pick Packing 99% Data EntryLines 99% Data EntryRequisitions 98% Desktop Delivery 98% Budgeted Costs: Activity Requisition Handling Pick Packing Data EntryLines Data EntryRequisitions Desktop Delivery Divisional Totals 3. Activity Volume 30,000 800,000 800,000 30,000 12,000
February $ 367,500 $1,188,000 $ 633,600 $ 35,280 $ 352,800 $2,577,180
March $ 360,150 $1,176,120 $ 627,264 $ 34,574 $ 345,744 $2,543,852
Factors that may influence the success of a continuous improvement (Kaizen) program include: Reasonable or achievable cost reductions. Awareness of all employees on the expected (scheduled) cost improvements over at least the immediate future periods. Acceptance by both management and employees. Commitment of both management and employees on the strategic importance of the success of the continuous improvement program. Close link between the scheduled improvements and performance evaluations and rewards. Cost reductions possible from small, incremental improvements, not from large discontinuous changes in factors such as operating processes, capital equipment, supplier networks, or customer interactions.
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8-49 (Continued) 4. Primary criticisms of Kaizen (continuous improvement) budgets include the following: The budgeting process tends to place enormous pressure on employees to reduce all costs, which can lead to employee burnout. The use of Kaizen budgets tends to motivate small, incremental rather than major/significant process improvements. If the Kaizen targets are confined to the manufacturing function (including product and process design engineering), frictions can arise if manufacturing believes that other parts of the organization (e.g., marketing) are not subjected to the same budgetary pressure.
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8-50 Cash budget (30 minutes) 1. Total credit sales in November Percentage collectible Total amount collectible from credit sales in November Percentage collected in the month following month of sales Budgeted collections in December from Nov. credit sales 2. Cash sales in January Collections from credit sales in January: Total collectible from credit sales $180,000 x 95% = Percentage to be collected in January Collections from credit sales in December: Total collectible from credit sales $360,000 x 95% = Percentage to be collected in January Budgeted total cash receipts in January $240,000 x _ 95% $228,000 x 40% $ 91,200 $ 60,000 $171,000 60% $342,000 40%
$102,600
136,800 $299,400
3. Total inventory purchases in November: For November sales: $320,000 x 0.3 X 0.6 = For December sales: $460,000 x 0.7 X 0.6 = Percentage of Nov. purchases to be paid in December Payment in December for purchases in November Budgeted purchases in December: For December sales: $460,000 x 0.3 X 0.6 = For January sales: $240,000 x 0.7 X 0.6 = Percentage of Dec. purchases to be paid in December Payment in December for purchases in December Budgeted payment in December for inventory purchases
$ 57,600 193,200
$250,800 x 75% $188,100 $183,600 x 25% $45,900 $234,000
$ 82,800 100,800
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8-51 Budgeting for a Service Firm (60-75 minutes) Total hours for the budgeted activities: Total Revenue (Given) $1,000,000 $1,200,000 $1,640,000 $3,840,000 Hourly Rate (Given) $250 $100 $50
Business return Complex individual return Simple individual return
Total Hours 4,000 12,000 32,800
Staff requirements for the budgeted activities: Total Hours Required Business return 4,000 Complex individual return 12,000 Simple individual return 32,800 Total Hours 48,800 Hours per week # of weeks needed # of weeks per employee per year # of employees needed Excess (deficiency) hours Partner Each Total 0.30 1,200 0.05 600 0.00 0 1,800 50 36 40 1 Manager Each Total 0.20 800 0.15 1,800 0.00 0 2,600 45 58 45 2
Senior Consultant Each Total 0.50 2,000 0.40 4,800 0.20 6,560 13,360 40 334 45 8 1,040
Each 0.00 0.40 0.80
Total 0 4,800 26,240 31,040 40 776 48 16 (320)
Note: Because Consultants can be hired on a part-time basis, we round the calculation DOWN for this class of labor. The other three labor classes are given (i.e., do not have to be planned for based on data in the problem).
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8-51 (Continued) SOLUTION: 1. Since, according to the present staffing plan and anticipated workload needs, there is an excess of senior consultant hours, the budgeted cost for overtime hours worked by senior consultants would be $0. 2. Number of full-time consultants needed for the year: Total number of consultant-weeks needed for the year = Number of weeks per full-time consultant per year = Number of full-time consultants needed per year = 776 48 16
3. The manager' s total compensation, assuming that the revenues from preparing tax returns remains the same: Annual Salaries: Per partner = Per manager = Per senior consultant = Per support staff = $250,000 $90,000 $90,000 $40,000
Consultant' s pay (assumed paid on an hourly basis): Earnings per year = $60,000 Hrs. worked/year = 1,920 Hourly pay rate = $31.25 Staffing Plan: Partners = Managers = Senior consultants = Full-time Consultants = Support staff = 1 1 8 16 5
Number of part-time (PT) hours, consultants = 320
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8-51 (Continued) AccuTax, Inc. Budget Operating Income Year ended August 31, 2007 Revenue Partner Manager Senior consultantsbase pay Senior consultantspay for overtime hours Consultants: Full-time $960,000 Part-time $10,000 Support staff General and administrative expenses Operating income before bonus to manager Less: manager' s bonus Operating income before taxes Total compensation for the manager: Salary (given) Bonus (0.10 x [$1,237,000 - $500,000]) Total $3,840,000 Payroll expenses: $250,000 $90,000 $720,000 $0 $970,000 $200,000
$2,230,000 $373,000 $1,237,000 $73,700 $1,163,300
$90,000 $73,700 $163,700
Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. Total hours for the budgeted activities: Total Hourly Revenue Rate Total (Given) (Given) Hours
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8-52 Budgetary Pressure and Ethics (20-25 minutes) 1. The use of alternative accounting methods to manipulate reported earnings is professionally unethical because it violates the Standards contained in the IMAs Statement of Ethical Professional Practice (see: www.imanet.org). The Competence standard is violated because of failure to perform duties in accordance with relevant accounting (technical) standards. It can probably be argued that the competence standard is also violated because the accountant is not providing information that is accurate. The Integrity standard is violated because the underlying activity would discredit the profession. The Credibility standard is violated because of failure to communicate information fairly and objectively. 2. Yes, costs related to revenue should be expensed in the period in which the revenue is recognized (matching principle). Perishable supplies are purchased for use in the current period, will not provide benefits in future periods, and should therefore be matched against revenue recognized in the current period. In short, the accounting treatment for supplies was not in accordance with generally accepted accounting principles (GAAP). Note that similar issues, but on an extremely large basis, occurred at WorldCom and at Global Crossing. In the case of the latter, the company was engaging simultaneously in contracts to buy and to sell bandwidth, treating the former as capitalized expenses and the latter as revenue for the current accounting period. 3. The actions of Gary Woods were appropriate. Upon discovering how supplies were being accounted for, Wood brought the matter to the attention of his immediate superior, Gonzales. Upon learning of the arrangement with P&R, Wood told Gonzales that the action was improper; he then requested that the accounts be corrected and the arrangement discontinued. Wood clarified the situation with a qualified and objective peer (advisor) before disclosing Gonzaless arrangement with P&R to Belcos division manager, Tom LinGonzaless immediate superior. Contact with levels above the immediate superior should be initiated only with the superiors knowledge, assuming the superior is not involved. In this case, however, the superior is involved. According to the IMAs statement regarding Resolution of Ethical Conduct, Wood acted appropriately by approaching Lin without Gonzaless knowledge and by having a confidential discussion with an impartial advisor.
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PROBLEMS 8-53 Small business budgets (30 minutes) 1. Key features that need to be considered in developing a profit plan for a small business include: Estimation of key factors such as revenues (sales demand, sales price) and expenses for the budget period. Systematic evaluation of all available resources (materials, labor, technology) and their utilization rates. Coordination of related functions or elements, such as scheduling production to meet sales forecasts or providing sufficient capacity to meet sales demand. Critical evaluations of non-operational sources and uses of cash. Nonoperational items may pose a more serious threat to small businesses than to large businesses. Greater control over monthly cash flows and short-term financing than may be necessary in large enterprises. Greater needs for continuous budgeting than for large organizations, because of the higher risks associated with economic, competitive, and financial factors for small businesses. 2. The management accountant must exercise care to ensure that the small business manager does not suffer from information overload (i.e., strive for simplicity and parsimony). A profit-management system should be established that captures sufficient data on a timely basis to allow a reasonable level of operational control and evaluation without becoming too costly or too sophisticated for the business. Many large enterprises may continue operations simply by inertia. With small businesses, a strategic plan linked to the master budget is critical, especially in the early stage of a products life cycle. The concepts of activity-based management (ABM), total quality management (TQM), logistics management, life-cycle and target costing, and constraints- management (e.g., Theory of Constraints) are essential for the long-run survival and growth of small businesses. 3. The management accountant can insist upon, and assist in the preparation of, continuous cash budgets. These cash-flow reports should identify the major operational and nonoperational sources and uses of cash, and point out the periods of potential cash shortages or surpluses. This will facilitate planning for short-term lines-of-credit financing and short-term investments. A profit-management system should be created, utilizing the principles of activity-based costing (ABC) and cost-variance reporting including activity-based standard costing and activity-based cost variances. Segmented income statements comparing budgeted to actual results with profit-variance summaries should be an integral component of the high-quality profit-management system.
8-54 Ethics in Budgeting/Budgetary Slack (40 minutes) 1. a. The reasons that Marge Atkins and Pete Granger use budgetary slack include the following: These employees are hedging against the unexpected (i.e., they use slack to deal with or reduce uncertainty and risk). Budgetary slack allows employees to look good, (i.e., to exceed expectations and/or show consistent performance). This is particularly important when performance is evaluated on the basis of actual versus budgeted results. Employees who are able to blend personal and organizational goals through budgetary slack and show good performance generally are rewarded with higher salaries, promotions, and bonuses. By padding the budget, the manager is more likely to get what he/she actually needs in terms of resources for the upcoming period. b. The use of budgetary slack can adversely affect Atkins and Granger by: limiting the usefulness of the budget to motivate their employees to top performance affecting their ability to identify trouble spots and take appropriate corrective action reducing their credibility in the eyes of management reducing the ability of top management to effectively allocate resources to organizational subunits on the basis of actual economic performance. For example, the use of budgetary slack may affect management decision-making, as the budgets will show lower contribution margins (lower sales, higher expenses). Decisions regarding the profitability of product lines, staffing levels, incentives, etc. could have an adverse effect on Atkins' s and Granger' s departments. 2. The use of budgetary slack, particularly if it has a detrimental effect on the company, may be unethical. In assessing the situation, the IMAs Statement of Ethical Professional Practice can be consulted (www.imanet.org). This statement notes that a commitment to ethical professional practice includes: overarching principles (expressions of core values) and a set of standards intended to guide actual conduct and practice.
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8-54 (Continued) The IMAs overarching PRINCIPLES include: Honesty, Fairness, Objectivity, and Responsibility. The list of STANDARDS includes the following: Competence, Confidentiality, Integrity, and Credibility. The following Standards could be referenced in conjunction with the use of budgetary slack, as described above: Competence: Provide decision support information and recommendations that are accurate, clear, concise, and timely. Integrity: Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Credibility: Communicate information fairly and objectively; disclose all relevant information that could reasonably be expected to influence an intended users understanding of the reports, analyses, or recommendations. Though not asked for in the original CMA exam problem, you might want to discuss with students how, in practice, they would deal with ethical dilemmas. In its Resolution of Ethical Conflict statement the IMA provides the following guidance: 1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. If you cannot achieve a satisfactory resolution, submit the issue to the next management level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with levels above the immediate superior should be initiated only with your superiors knowledge, assuming he or she is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law. 2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action. 3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
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8-55 Master Budget (40-45 minutes) 1. The benefits that can be derived from implementing a master budgeting system include the following: The preparation of budgets forces management to plan ahead and to establish goals and objectives that can be quantified. Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the objectives of the entire firm. The budgeting process promotes internal communication and coordination of subunit activities. Budgets provide directions for day-to-day operations, clarify duties to be performed, and assign responsibility for these duties. Budgets provide a framework for measuring financial performance. A properly implemented budgeting system can motivate employees and managers to higher levels of performance, particularly if goals and outputs are linked through appropriate incentives. Budgets allow managers to anticipate problem areas (e.g., cash short-falls) and opportunities (e.g., short-term investment of excess cash).
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8-55 (Continued) 2. a & b: The basic intent here is to demonstrate the interrelationships that exist among budgets contained in the organizations master budget. Schedule/Statement Sales Budget Subsequent Budget Schedule/Statement Production Budget Selling Expense Budget Budgeted Income Statement Production Budget Direct Materials Purchases Budget Direct Materials Usage Budget Direct Labor Budget Factory Overhead Budget Cost of Goods Manufactured Budget Cost of Goods Manufactured Budget Cost of Goods Manufactured Budget Cost of Goods Sold Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Income Statement Budgeted Income Statement Budgeted Balance Sheet Cash Budget Cash Budget Cash Budget Budgeted Balance Sheet
Ending Inventory Budget (units) Production Budget (units)
Direct Materials Budget Direct Labor Budget Factory Overhead Budget Cost of Goods Manufactured Budget Cost of Goods Sold Budget Selling Expense Budget Research & Development Budget Budgeted Income Statement Capital Expenditures Budget Cash Receipts Budget Cash Disbursements Budget Cash Budget
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8-56 Comprehensive Profit Plan (90 minutes) 1. Sales Budget Spring Manufacturing Company Sales Budget 2007 Sales (in units) x Selling Price Per Unit Total Sales Revenue C12 12,000 $150 $1,800,000 D57 9,000 $220 $1,980,000 Total 21,000 $3,780,000
2. Production Budget Spring Manufacturing Company Production Budget 2007 C12 Budgeted Sales (in units) 12,000 + Desired finished goods ending inventory 300 Total units needed 12,300 Beginning finished goods inventory 400 Budgeted Production (in units) 11,900
D57 9,000 200 9,200 150 9,050
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8-56 (Continued-1) 3. Direct Materials Purchases Budget Spring Manufacturing Company Direct Materials Purchases Budget (units and dollars) 2007 Raw Material (RM) 1: Budgeted Production Pounds per Unit RM 1 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 1 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 1 (lbs.) Cost per pound Budgeted purchases, RM 1 Raw Material (RM) 2: Budgeted Production Pounds per Unit RM 2 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 2 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 2 (lbs.) Cost per pound Budgeted purchases, RM 2 Raw Material 3: Budgeted Production Pounds per Unit RM 3 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 3 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 3 (lbs.) Cost per pound Budgeted purchases, RM 3 C12 11,900 x 10 119,000 D57 9,050 x8 72,400 Total
191,400 4,000 195,400 3,000 192,400 $2.00 $384,800
11,900 x0 0
9,050 x4 36,200
36,200 1,000 37,200 1,500 35,700 $2.50 $89,250
11,900 x2 23,800
9,050 x1 9,050
32,850 1,500 34,350 1,000 33,350 $0.50 $16,675
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8-56 (Continued-2) 4. Direct Manufacturing Labor Budget Spring Manufacturing Company Direct Labor Budget 2007 Budgeted production Direct labor hours per unit Total direct labor hours needed Hourly wage rate Budgeted direct labor costs 5. Factory Overhead Budget Spring Manufacturing Company Factory Overhead Budget 2007 Variable Factory Overhead: Indirect materials Miscellaneous supplies and tools Indirect labor Payroll taxes and fringe benefits Maintenance costs Heat, light, and power Fixed Factory Overhead: Supervision Maintenance costs Heat, light, and power Total Cash Fixed Factory Overhead Depreciation Total Budgeted Factory Overhead $10,000 5,000 40,000 250,000 10,080 11,000 $120,000 20,000 43,420 $183,420 71,330 C12 11,900 x 2 23,800 D57 9,050 x 3 27,150 Total 50,950 $25.00 $1,273,750
$326,080
$254,750 $580,830
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8-56 (Continued-3) 6. Budgeted Cost of Goods Sold Spring Manufacturing Company Ending Finished Goods Inventory and Budgeted CGS 2007 Sales volume Cost per unit (Schedule 1 and 2) Cost of goods sold Finished goods ending inventory Cost per unit (Schedule 1 and 2) Budgeted ending inventories C12 12,000 $93.80 $1,125,600 300 $93.80 $28,140 D57 9,000 $135.70 $1,221,300 200 $135.70 $27,140 Total 21,000 $2,346,900
$55,280
Schedule 1: Cost per Unit--Product C12: Cost Element RM-1 RM-3 Direct labor Variable factory OH ($326,080/50,950) Fixed factory OH ($254,750/50,950) Manufacturing cost per unit Schedule 2: Cost per Unit--Product D57: Cost Element RM-1 RM-2 RM-3 Direct labor Variable factory OH ($326,080/50,950) Fixed factory OH ($254,750/50,950) Manufacturing cost per unit
Inputs Unit Input Cost Quantity $2.00 10 $0.50 2 $25.00 2 $6.40 2 $5.00 2
Cost Per Unit $20.00 $1.00 $50.00 $12.80 $10.00 $93.80 Cost Per Unit $16.00 $10.00 $0.50 $75.00 $19.20 $15.00 $135.70
Inputs Unit Input Cost Quantity $2.00 8 $2.50 4 $0.50 1 $25.00 3 $6.40 3 $5.00 3
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8-56 (Continued-4) 7. Budgeted selling and administrative expenses: Spring Manufacturing Company Selling and Administrative Expense Budget 2007 Selling Expenses: Advertising Sales salaries Travel and entertainment Depreciation Administrative expenses: Offices salaries Executive salaries Supplies Depreciation Total selling and administrative expenses 8. Budgeted Income Statement: Spring Manufacturing Company Budget Income Statement For the Year 2007 C12 Sales (part 1) $1,800,000 Cost of goods sold (part 6) 1,125,600 Gross profit $674,400 Selling and administrative expenses (part 7) Pre-tax operating income Income taxes (@40%) After-tax operating income D57 $1,980,000 1,221,300 $758,700 Total $3,780,000 2,346,900 $1,433,100 $645,000 $788,100 $315,240 $472,860 $60,000 200,000 60,000 5,000 $60,000 250,000 4,000 6,000
$325,000
$320,000 $645,000
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8-56 (Continued-5) Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-56 Spring Manufacturing Company 1. Sales Budget Spring Manufacturing Company Sales Budget 2007 C12 D57 Total
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8-57 Spring Manufacturing CompanyComprehensive Profit Plan (90 Minutes, but much less if used in conjunction with 8-56 and completed with an Excel spreadsheet) 1. Sales Budget Spring Manufacturing Company Sales Budget 2007 Sales (in units) x Selling Price Per Unit Total revenue 2. Production Budget Spring Manufacturing Company Production Budget 2007 Budgeted Sales (in units) Plus: Desired finished goods ending inventory Total units needed Less: Beginning finished goods inventory Budgeted Production (in units) C12 12,000 300 12,300 400 11,900 D57 18,000 200 18,200 150 18,050 C12 12,000 $160 $1,920,000 D57 18,000 $180 $3,240,000 Total 30,000 $5,160,000
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8-57 (Continued-1) 3. Direct Materials Purchases Budget (units and dollars) Spring Manufacturing Company Direct Materials Purchases Budget (units and dollars) 2007 C12 D57 Total Raw Material (RM) 1: Budgeted Production 11,900 18,050 Pounds per Unit x 10 x8 RM 1 needed for production 119,000 144,400 263,400 Plus: Desired Ending Inventory (lbs.) 4,000 Total RM 1 needed (lbs.) 267,400 Less: Beginning inventory (lbs.) 3,000 Required purchases of RM 1 (lbs.) 264,400 Cost per pound $2.00 Budgeted purchases, RM 1 $528,800 Raw Material (RM) 2: Budgeted Production Pounds per Unit RM 2 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 2 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 2 (lbs.) Cost per pound Budgeted purchases, RM 2 Raw Material 3: Budgeted Production Pounds per Unit RM 3 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 3 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 3 (lbs.) Cost per pound Budgeted purchases, RM 3 11,900 x0 0 9,050 x4 72,200
72,200 1,000 73,200 1,500 71,700 $2.50 $179,250
11,900 x2 23,800
18,050 x1 18,050
41,850 1,500 43,350 1,000 42,350 $0.50 $21,175
8-48
8-57 (Continued-2) 4. Direct Manufacturing Labor Budget Spring Manufacturing Company Direct Labor Budget 2007 Budgeted production Direct labor hours (DLH) per unit Total direct labor hours needed Hourly wage rate Budgeted direct labor costs 5. Factory Overhead Budget Variable OH per DLH (from Prob. 8-56): Spring Manufacturing Company Factory Overhead Budget 2007 Variable Factory Overhead ($6.40/DLH x 77,950) Fixed Factory Overhead: Supervision Maintenance costs Heat, light, and power Total Cash Fixed Factory Overhead Depreciation Total Budgeted Factory Overhead Variable OH rate per DLH Fixed OH rate per DLH ($254,750/77,950 DLHs) $498,880 $120,000 20,000 43,420 $183,420 71,330 $6.40 C12 11,900 x 2 23,800 D57 18,050 x 3 54,150 Total
77,950 $25.00 $1,948,750
$254,750 $753,630 $6.40 $3.26812
8-49
8-57 (Continued-3) 6. Budgeted CGS and Ending Finished Goods Inventory Budget Spring Manufacturing Company Ending Finished Goods Inventory and Budgeted CGS 2007 Sales volume Cost per unit (Schedule 1 and 2) Cost of goods sold Finished goods ending inventory Cost per unit (Schedule 1 and 2) Budgeted ending inventories C12 12,000 $90.33624 $1,084,035 300 $90.33624 $27,101 D57 18,000 $130.50436 $2,349,079 200 $114.50 $26,101 Total 30,000 $3,433,114
$53,202
Schedule 1: Cost per UnitProduct C12: Cost Element RM-1 RM-3 Direct labor Variable factory OH ($326,080/50,950) Fixed factory OH ($254,750/77,950) Manufacturing cost per unit Schedule 2: Cost per UnitProduct D57: Cost Element RM-1 RM-2 RM-3 Direct labor Variable factory OH ($326,080/50,950) Fixed factory OH ($254,750/77,950) Manufacturing cost per unit
Inputs Unit Input Cost Quantity $2.00 10 $0.50 2 $25.00 2 $6.40 2 $3.26812 2
Cost Per Unit $20.00 $1.00 $50.00 $12.80 $6.53624 $90.33624
Inputs Unit Input Cost Quantity $2.00 8 $2.50 4 $0.50 1 $25.00 3 $6.40 3 $3.26812 3
Cost Per Unit $16.00 $10.00 $0.50 $75.00 $19.20 $9.80436 $130.50436
8-50
8-57 (Continued-4) 7. Selling and Administrative Expense Budget Spring Manufacturing Company Selling and Administrative Expense Budget 2007 Selling Expenses: Advertising Sales salaries Travel and entertainment Depreciation Administrative expenses: Offices salaries Executive salaries Supplies Depreciation Total selling and administrative expenses $60,000 200,000 60,000 5,000 $60,000 250,000 4,000 6,000
$325,000
$320,000 $645,000
8. Budgeted Income Statement Spring Manufacturing Company Budget Income Statement For the Year 2007 C12 Sales (part 1) $1,920,000 Cost of goods sold (part 6) 1,084,035 Gross profit $835,965 Selling and administrative expenses (part 7) Pre-tax operating income Income taxes (@40%) After-tax operating income D57 $3,240,000 2,349,079 $890,921 Total $5,160,000 3,433,114 $1,726,886 $645,000 $1,081,886 $432,754 $649,132
8-51
8-57 (Continued-5) Answers: 1. The projected increase in after-tax operating income = $649,132 $472,860 = $176,272 2. While the changes are projected to increase after-tax operating income, the company should examine the decision more closely. Although the company increases its after-tax operating income by 37% ($176,272/$472,860), it requires a doubling of units of D57 to achieve this. In fact, a 100% increase in units sold of D57 increases the gross profit of D57 from $758,700 to $890,921, an increase of $132,221, while the total change in gross profit is $293,786 (from $1,433,100 to $1,726,886). The 100% increase in D57 accounts for only 45% ($132,221 $293,786) of the increase in gross profit; C12 contributes 55% of the increase. Further, the price increase in C12 has no effect on the units sold. This may be an indication that C12 may have a higher potential than the firm perceived. Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-57 Spring Manufacturing Company 1. Budgeted Sales (units): C12 = 12,000 D57 = 18,000 Budgeted Selling Prices/Unit: C12 = $160 D57 = $180
8-52
8-58 Comprehensive Profit Plan with Kaizen (90 minutes, but much less if assigned in conjunction with 8-56 and completed with an Excel spreadsheet) 1. Sales Budget Spring Manufacturing Company Sales Budget 2007 Sales (in units) x Selling Price Per Unit Total revenue 2. Production Budget Spring Manufacturing Company Production Budget 2007 Budgeted Sales (in units) Plus: Desired finished goods ending inventory Total units needed Less: Beginning finished goods inventory Budgeted Production (in units) C12 12,000 300 12,300 400 11,900 D57 9,000 200 9,200 150 9,050 C12 12,000 $150 $1,800,000 D57 9,000 $220 $1,980,000 Total 21,000 $3,780,000
8-53
8-58 (Continued-1) 3. Direct Materials Purchases Budget (units and dollars) Spring Manufacturing Company Direct Materials Purchases Budget (units and dollars) 2007 Raw Material (RM) 1: Budgeted Production Pounds per Unit RM 1 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 1 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 1 (lbs.) Cost per pound Budgeted purchases, RM 1 Raw Material (RM) 2: Budgeted Production Pounds per Unit RM 2 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 2 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 2 (lbs.) Cost per pound Budgeted purchases, RM 2 Raw Material 3: Budgeted Production Pounds per Unit RM 3 needed for production Plus: Desired Ending Inventory (lbs.) Total RM 3 needed (lbs.) Less: Beginning inventory (lbs.) Required purchases of RM 3 (lbs.) Cost per pound Budgeted purchases, RM 3 C12 11,900 x9 107,100 D57 9,050 x7 63,350 Total
170,450 4,000 174,450 3,000 171,450 $2.00 $342,900
11,900 x0 0
9,050 x 3.6 32,580
32,580 1,000 33,580 1,500 32,080 $2.50 $80,200
11,900 x 1.8 21,420
9,050 x 0.8 7,240
28,660 1,500 30,160 1,000 29,160 $0.50 $14,580
8-54
8-58 (Continued-2) 4. Direct Manufacturing Labor Budget Spring Manufacturing Company Direct Labor Budget 2007 Budgeted production Direct labor hours per unit Total direct labor hours needed Hourly wage rate Budgeted direct labor costs 5. Factory Overhead Budget Spring Manufacturing Company Factory Overhead Budget 2007 Original Variable OH Budget: Indirect materials Miscellaneous supplies and tools Indirect labor Payroll taxes and fringe benefits Maintenance costs Heat, light, and power Total Variable Factory Overhead Reduction Rate for Variable OH Costs Original Fixed OH, Excluding Depreciation: Supervision Maintenance costs Heat, light, and power Total Cash Fixed Factory Overhead Depreciation Total Original Fixed OH Reduction Rate for Cash Fixed OH Costs = $120,000 20,000 43,420 $183,420 71,330 $254,750 5.00% $10,000 5,000 40,000 250,000 10,080 11,000 $326,080 10.00% C12 11,900 x 1.5 17,850 D57 9,050 x 2 18,100 Total 35,950 $30.00 $1,078,500
8-55
8-58 (Continued-3) Budgeted Variable OH: ($326,080 x (1 - 0.10)) = Budgeted Fixed OH: Cash Charges = ($183,420 x (1 - 0.05)) Depreciation (same as last year) Total Budgeted Fixed OH
$293,472 = = = $174,249 $71,330 $245,579
6. Budgeted CGS and Ending Finished Goods Inventory Budget Spring Manufacturing Company Ending Finished Goods Inventory and Budgeted CGS 2007 Sales volume Cost per unit (Schedule 1 and 2) Cost of goods sold Finished goods ending inventory Cost per unit (Schedule 1 and 2) Budgeted ending inventories C12 12,000 $86.39170 $1,036,700 300 $86.39170 $25,918 D57 9,000 $113.38893 $1,020,500 200 $113.38893 $22,678 Total 21,000 $2,057,200
$48,596
Schedule 1: Cost per UnitProduct C12: Cost Element RM-1 RM-3 Direct labor Variable factory OH ($293,472/35,950) Fixed factory OH ($245,579/35,950) Manufacturing cost per unit
Inputs Unit Input Cost Quantity $2.00 9 $0.50 1.8 $30.00 1.5 $8.16334 1.5 $6.83113 1.5
Cost Per Unit $18.00 $0.90 $45.00 $12.24501 $10.24669 $86.39170
8-56
8-58 (Continued-4) Schedule 2: Cost per UnitProduct D57: Cost Element RM-1 RM-2 RM-3 Direct labor Variable factory OH ($293,472/35,950) Fixed factory OH ($245,579/35,950) Manufacturing cost per unit 7. Selling and Administrative Expense Budget Spring Manufacturing Company Selling and Administrative Expense Budget 2007 Selling Expenses: Advertising $60,000 Sales salaries 200,000 Travel and entertainment 60,000 Depreciation 5,000 $325,000 Administrative expenses: Offices salaries $60,000 Executive salaries 250,000 Supplies 4,000 Depreciation 6,000 $320,000 Total selling and administrative expenses $645,000
Inputs Unit Input Cost Quantity $2.00 7 $2.50 3.6 $0.50 0.8 $30.00 2 $8.16334 2 $6.83113 2
Cost Per Unit $14.00 $9.00 $0.40 $60.00 $16.32668 $13.66225 $113.38893
8-57
8-58 (Continued-5) 8. Budgeted Income Statement Spring Manufacturing Company Budget Income Statement For the Year 2007 C12 Sales (part 1) $1,800,000 Cost of goods sold (part 6) 1,036,700 Gross profit $763,300 Selling and administrative expenses (part 7) Pre-tax operating income Income taxes (@40%) After-tax operating income Answers: 1. The budgeted after-tax operating income with Kaizen is $646,680. 2. The immediate benefit is an increase of $173,820 in operating income, or 37% from $472,860. The firm is also likely benefit in the long-run from the reductions in materials, labor hours, and factory overhead required in production. Decreases in consumption of manufacturing elements reduce wear and tear of equipment and other facilities and lessens the need for additional capital investments/replacements. Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open this spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode. D57 $1,980,000 1,020,500 $959,500 Total $3,780,000 2,057,200 $1,722,800 $645,000 $1,077,800 $431,120 $646,680
8-58 Spring Manufacturing Company 1. Budgeted Sales (units):
8-58
8-59 Retailer Budget (45-50 minutes) 1. Budgeted merchandise purchases D. Tomlinson Retail Budgeted Merchandise Purchases May and June Sales (in units) Cost per unit Cost of Goods Sold (CGS) Ending inventory (130% of next month' s CGS) Total needed Beginning inventory (130% of this month' s CGS) Budgeted Merchandise Purchases 2. Budgeted cash disbursements S, G, & A expenses: Sales revenue S, G, & A expense ratio Total S, G, & A expense Less: Depreciation Out-of-pocket S, G & A expense May $357,000 x 0.15 $ 53,550 2,000 $ 51,550 June $342,000 x 0.15 $ 51,300 2,000 $ 49,300 May 11,900 x $20 $238,000 + 296,400 $534,400 309,400 $225,000 + June 11,400 x $20 $228,000 312,000 $540,000 July 12,000 x $20 $240,000
296,400 $243,600
D. Tomlinson Retail Budgeted Cash Disbursements for June Merchandise purchases Out-of-Pocket S, G, & A expenses Total payables Payment for the current months payables (54%) Owed from last month (46%) Budgeted cash outflow for payables May $ 225,000 + 51,550 $276,550 June $ 243,600 + 49,300 $292,900 $158,166 + 127,213 $285,379
8-59
8-59 (Continued) 3. Budgeted cash collections D. Tomlinson Retail Cash Collections May From last month' s (April) credit sales Within the discount period After the discount period ($363,000) x 60% x 97% = $363,000 x 25% = $211,266 90,750
From credit sales two months ago (i.e., March) Collection of credit sales made in March Total cash collections 4. Gross and Net Balance of Accounts Receivable (AR) as of May 31 Sales Remaining AR % AR Balance (Gross) Bad-debt allowance* AR Balance (Net) March $354,000 6% $21,240 $21,240 April $363,000 15% $54,450 $21,780 May $357,000 100% $357,000 $21,420 Total $432,690 64,440 $368,250 $354,000 x 9% = 31,860 $333,876
* @ 6% of gross sales dollars
8-60
8-60 Sales budget and pro-forma financial statements (75 minutes) 1. Sales (units): Beginning inventory of finished goods (9/1/2007) Estimated production for the 2007-8 fiscal year Units available for sale Planned ending finished goods inventory (8/31/2008) Projected unit sales, 2007-8 fiscal year Selling price/unit: 9,300 162,000 171,300 3,300 168,000 Original Budget Data
Selling Price/Unit = =
Projected Dollars of Sales Projected Unit Sales $31,248,00 0 = $186 168,000
a. & b. Revised sales volume--units and dollars: Sales in units in the original budget (see above) Increase in units of production (170,000 - 162,000)* Revised total salesunits Selling price per unit (see above) Revised projected dollar-volume of net sales 168,000 + x $ 8,000 186 176,000 $32,736,000
*With no change in the ending finished goods inventory (3,300 units) the increase in production is a result of the expected increase in sales.
8-61
8-60 (Continued-1) 2.
Molid Company Pro-Forma Statement of Cost of Goods Sold (Revised) For the Year Ending August 31, 2008 Direct materials: Materials inventory, 9/1/07 Materials purchases
1
$ 1,360,000 15,576,000 $16,936,000 1,709,400 $15,226,600 1,215,200
Materials available for use Materials inventory, 8/31/082 Direct Materials used Direct labor3 Factory overhead: Indirect material
4
$ 1,522,660 3,320,000 4,842,660 $21,284,460 1,169,000 $22,453,460

6
General factory overhead5 Cost of goods manufactured Plus: Finished goods inventory, 9/1/07 (given) Cost of goods available for sale Less: Finished goods inventory, 8/31/08 Cost of goods sold
1
413,169 $ 22,040,291
Supporting Calculations (units represent equivalent units of output): 37,500 units 45,000 units** 90,000 units @ $88.00* @ $88.00 @ $92.40***= = $ 3,300,000 = 3,960,000 8,316,000 $15,576,000
8-62
8-60 (Continued-2) *$3,300,000/37,500 units = $88.00 **Desired ending inventory of materials Materials needed for production this year Total materials needed Beginning inventory Total materials purchases for the year st Less: Materials purchased in the 1 quarter Materials yet to be purchased during the year Number of remaining quarters Materials to be purchased in each remaining quarter ***$88.00 x 1.05 = $92.40
2 3
18,500 170,000 188,500 16,000 172,500 37,500 135,000 3 45,000
18,500 units @ $92.40 = $1,709,400 Direct labor cost

$1,134,000 x $1,190,000 x 170,000 units = 162,000 units 45,000 units x .08 = 170,000 units $1,190,000 25,200 $1,215,200
4 5
Indirect material:$15,226,600 x 0.10 = $1,522,660 General factory overhead: Variable: $1,620,000 x (170,000units/162,000units) = Fixed $3,240,000 x 1/2 = Total Average manufacturing cost/unit, 2007-8: $21,284,460 /170,000 units = Ending finished goods inventory (units) Cost of ending finished goods inventory (FIFO basis) $1,700,000 1,620,000 $3,320,000 $125.2027 3,300 $ 413,169
8-63
8-60 (Continued-3) 3. a. Savings in working capital from eliminating ending inventory: Finished goods Direct materials Total savings $92.40 x (18,500 100) = $ 413,169 1,700,160 $2,113,329
The firm can reduce the need for working capital by $2,113,329. The final net savings depends on the cost of capital of the firm. At 10%, the company saves financing costs of over $200,000 per year. The firm can save more than $211,333 per year if the cost of capital exceeds 10%. Note that this estimate refers to financing (cost-of-capitalrelated) costs, not operating costs. b. Yes. Under the assumption that the companys cost of capital is 10%, the economic savings would represent about 4% of its current pre-tax operating income figure, as shown below. Note that these savings put the company in an improved economic position, although the formal accounting statements might not reflect this. As such, this gives the instructor the opportunity to discuss with students the notion of Economic Value Added (EVA) as alternative financial performance indicator to conventional accounting income statements. Molid Company Pro-Forma Statement Income Statement For the Year Ending August 31, 2008 Net sales (part 1b above) Cost of goods sold (part 2 above) Gross profit Operating expenses (givensee text): Marketing $3,200,000 General and administrative 2,200,000 Income from operations before income taxes $211,333/$5,295,709 = 4% c. In addition to financial terms, the firm needs to consider carefully, among other items: adequacy of the firm' s equipment to support the new system proficiency of the firm' s accounting information system to handle the new system support of vendors acceptance of factory managers and production workers $32,736,000 22,040,291 $10,695,709 5,400,000 $ 5,295,709
8-64
8-61 Budgeting for a Merchandising Firm (50-60 minutes) 1. Budgeted cash collectionsDecember: th From Novembers sales = net A/R, November 30 = From Decembers sales = $220,000 x 60% x 99% = Budgeted cash collections--December 2. Net accounts receivableDecember 31st: Budgeted sales in December (given) Allowance for doubtful accounts Net A/R from sales in December Collections of December sales in December Net Accounts ReceivableDecember 31st $ 76,000 130,680 $206,680 $220,000 4,400 $215,600 132,000 $ 83,600 $220,000 25% $ 55,000
$220,000 x 2% = $220,000 x 60% =
3. Budgeted pre-tax operating incomeDecember: Total sales Gross margin ratio Gross margin Operating expenses: Monthly cash operating expenses Bad-debts expense $220,000 x 2% = Depreciation expense $216,000/12 = Pre-tax operating income
st 4. Budgeted InventoryDecember 31 :
x $22,600 4,400 18,000
45,000 $10,000
Inventory, December 31st = 5. Budgeted PurchasesDecember:
($200,000 x 0.75) x 80% =
$120,000
Inventory, December 1st (given) = Plus: Purchases during December (plug figure) = Cost of goods available for sale Less: Cost of goods sold $220,000 x 75% = st Inventory, December 31 (part 4 above) =
$132,000 153,000 $285,000 165,000 $120,000
8-65
8-61 (Continued) 6. Budgeted Accounts PayableDecember 31 : Accounts Payable, December 1 (given) Plus: Budgeted Purchases, December (part 5 above) Total Accounts Payable during December Less: Payments in December (entire beginning balance) Budgeted Accounts Payable, December 31st
st st
$162,000 $153,000 $315,000 $162,000 $153,000
Alternatively, the end-of-December Accounts Payable Balance = Purchases made in December = answer to Part 5 above.
8-66
8-62 Budgets for a Service Firm (50 Minutes) 1. The annual cash budget is presented on the next page. 2. Operating problems that Triple-F Health Club could experience include: The cash contribution from lessons and classes will decrease because the projected wage increase for lesson and class employees is significantly greater than the projected increases in revenues (i.e., in additional volume). Last year, the cash generated from these operations was $39,000 ($234,000 $195,000). The 2009 projection is only $12,675 ($304,200 $291,525). Operating expenses are increasing faster than revenues from membership fees. Last year (2008), cash generated from regular operations was $91,000 [($355,000 + $2,000) ($461,000 $195,000)]. The 2009 projection is only $92,482 [($402,215 + $2,667) ($603,925 $291,525)]. The increase in cash from regular operations is projected to be about 4%, whereas these revenues are projected to increase 13%. Triple-F Health Club seems to have a cash-management problem. The club does not generate enough cash from operations to meet its obligations. It may not be able to meet expenditures for day-to-day operations if the trend continues. To avoid cash crises, the club should prepare monthly cash budgets to help cash management. Non-operational payments are projected to use up virtually all of the cash generated from operations. Given the recent declines in mortgage interest rates, management should consider refinancing this debt to reduce this cash drain. 3. Jane Crowe' s concern with regard to the Board' s expansion goals is justified. The 2009 budget projections show only a minimal increase in the cash balance (i.e., an increase of only $2,757). The total cash available is well short of the $60,000 annual additional cash needed for the land purchase. If the Board desires to purchase the adjoining property, it is going to have to consider increases in fees, refinancing existing debt, or other methods of financing the acquisition (such as additional mortgage debt or membership bonds).
8-67
8-62 (continued) TRIPLE-F HEALTH CLUB Cash Budget For the Year Ending October 31, 2009 2008 $355,000 234,000 2,000 $591,000 $36,000 190,000 195,000 16,000 22,000 2,000 N/A $461,000 $130,000 given given given 30.0% Price Growth 3.0% 30.0% 33.33% Increase 10.0% 2009 $402,215 304,200 2,667 $709,082 $41,400 218,500 291,525 20,000 27,500 2,500 2,500 $603,925 $105,157 $15,000 30,000 32,4001 25,000 $102,400
Operating Cash Inflows: Annual membership fees Lesson and class fees Miscellaneous Total Operating Cash Inflows Operating Cash Outflows: Managers salary and benefits Employee wages and benefits: Regular employees Lesson and class employees Towels and supplies Utilities (heat and lights) Miscellaneous Payoff of outstanding A/P Total Operating Cash Outflows Net Operating Cash Flow Non-Operating Cash Outflows: Payoff of equipment payable Mortgage principal Mortgage interest Planned equipment purchases Total Non-Operating Cash Outflow
15.0% 15.0% 15.0% 25.0% 25.0% 25.0% given
Net Cash Flow $2,757 Beginning Cash Balance (given) 7,300 Budgeted Ending Cash Balance $10,057 _______________ 1 $360,000 x 0.09 = $32,400 ($360,000 = principal balance at beginning of the year)
8-68
8-63 Budgeting for Marketing Expenses; Strategy (45-50 minutes) 1. The following screen shots are from the Excel spreadsheet created for this problem. It shows that the original monthly budgeted marketing expense is $338,000 and that the revised (budgeted) amount is $372,628, an overall increase of 10.24%.
8-69
8-63 (Continued)
2. In order to achieve the monthly targeted cost of $350,000, the rate of telephone and mailing costs cannot increase at all (as is the case in the proposed budget); in fact, the results of the goal seek analysis indicates that such rates must be decreased by approximately 43%, as shown below:
These results are generated by completing the following dialog box that appears after activating the goal-seek command from the Tools menu in Excel:
8-70
8-63 (Continued)
3. As indicated in the text, budgets can be used both for control and for planning purposes. The relative importance of each can be linked either to the competitive strategy the business is pursuing or to the product life-cycle. In the present case (startup company, competing on the basis of a product-differentiation strategy), the relative emphasis of the marketing budget is likely more for planning than control. That is, the information contained in this budget can assist the company in determining its financing needs. However, it probably should not be used for controlling (i.e., cutting) expenses in situations where the underlying expenditures are determinants of competitive success. Further, many types of so-called discretionary costs (such as marketing) are fixed (or at least sticky) and therefore difficult to cut in the short run. As such, the primary benefit of the budget in such cases is to better plan for, rather than control, the underlying expenses. Note to Instructor: The Excel spreadsheet solution referred to above is embedded in this document. You can open the spreadsheet object by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-63 Budgeting for Marketing Expenses; Strategy Initial Data Cost Sales Commissions Amount $120,000
8-71
8-64 Strategy, product life-cycle, and cash flow (25-30 minutes) 1. The development stage is generally characterized by large cash outflows and little or no cash inflows. Expenditures for research and development, plant and equipment, retooling, distribution, and promotion are required. During this stage, a project or company normally generates losses and may require an infusion of outside capital. During the growth stage, sales and revenues rise rapidly. Significant cash inflows are generally present; however, these may be offset in part or completely by cash outflows to build production capacity and for growing inventories and receivables. During this stage, manufacturing efficiencies will improve contribution margins as volume increases. During the maturity stage, net cash inflows are generally at an optimum. Production capacity is in place and inventories and receivables should approach a steady state. However, by this stage, competitors generally have entered the market resulting in higher promotional costs to maintain market share. As a consequence, margins may begin to decline. During the decline stage, both sales volume and profits fall. Increased price competition and the increased availability of alternative products will reduce margins. The declining volume will generally increase the unit cost at the manufacturing level. Sometimes, significant cash inflows can be generated from the liquidation of inventories and other product-related assets. 2. The maturity stage, the period of optimum net cash inflows, is missing from Burke Company' s product cycle. The company must be able to generate or raise sufficient cash to support R & D, capital investment, and promotional costs during the development stages and depend on the growth stage for significant cash inflows. This will require rapid improvement in manufacturing efficiencies and careful investment in production facilities and inventories. In addition, inventory control is extremely important in order to minimize cash investment and reduce potential obsolescence. 3. The techniques that Devin Ward should consider to cope with Burke Company' s cashmanagement problems include: careful, timely cash-flow projections and monitoring, matching the cash receipts from products in the growth stage with the expenditures for products in the development stage. establishing good banking relationships and flexible lines of credit to facilitate shortterm borrowing needs. aggressive accounts-receivable management. tight control of materials purchasing and inventory management. improved cost controls. timely decisions on inventory liquidation as product life cycles near collapse.
8-65 Continuous budgeting (25-30 minutes) 1.a. The increase in sales could have the following effects on production: Production capacity may have to be reallocated to the three models based upon the composition of the sales increase. Some parts, in addition to the molded doors, may have to be purchased from outside suppliers. Depending upon the ability to purchase parts from outside suppliers and longterm sales projections, additional capacity may be required. 1.b. The increase in sales could have the following effects on finance and accounting: Short-term financing may be needed to finance increased receivable levels and for the replacement of depleted inventories. Long-term financing may be needed to expand production capacity. Budgeting may have to be revised because sales volume is probably beyond the relevant range assumed for the current budget. 1.c. The increase in sales could have the following effects on marketing: The need to advertise will probably decrease. Investigation into the credit-worthiness of potential credit customers may need to become more thorough and the number of investigations will probably increase. Collection efforts may have to be increased unless credit-granting is tightened. Customers may have to accept extended shipping dates or may receive units on some rational basis of output allocation.
1.d. The increase in sales could have the following effects on personnel: Increased stress levels because of the increased volume. Need to schedule additional shifts or overtime, which the employees may deem unnecessary or not beneficial. Need to hire additional workers to meet the increase in demand. 2.a. A continuous (rolling) budget is the preparation of a new twelve-month budget as each period (e.g., month, quarter) is completed. At the end of each period, the budget amounts for the period just completed are deleted, the amounts for the remaining periods of the old budget are revised as necessary, and budgeted amounts for the new period are added. Thus, a twelve-month budget is rolled forward as each period is completed. 2.b. The preparation of a continuous budget would force WestWood' s management to engage in planning on an almost continuous basis. Shorter planning cycles increase the chances that management will anticipate and give attention to problem situations earlier than would otherwise be the case. Thus, planning would be enhanced in all of the functional areas and there would not be any periods when a budget did not exist.
8-66 Cash Budget (45-50 minutes) I $30,000 425,000 0 $455,000 $200,000 117,000 60,000 20,000 0 0 20,000 $417,000 $30,000 $447,000 $8,000 $0 $0 $0 $0 $38,000
8-74
Cash balance, beginning Plus: Cash receipts: Collections from customers Equipment disposal Total cash available = (A) Cash disbursements: Raw material purchases Payroll S, G, & A expenses Equipment purchase Bond interest (@9%) Bond sinking fund payment Income taxes Total cash disbursements, prior to financing = (B) Plus: Minimum cash balance Total cash needed = (C) Excess cash (cash deficiency), prior to financing (D) = (A) - (C) Financing: Short-term borrowing Repayment (principal) Interest (@12%) Total Effects of Financing = (E) Ending cash balance = (A) - (B) + (E)
II $38,000
Quarters
III $30,520
IV $30,770 460,000 5,000 $495,770 $270,000 122,000 64,000 0 11,250 0 18,000 $485,250 $30,000 $515,250 ($19,480) $22,000 $0 ($1,890) $20,110 $30,630
Year $30,000 1,801,480 5,000 $1,836,480 $940,000 474,000 244,000 80,000 22,500 20,000 84,000 $1,864,500 $30,000 $1,894,500 $(58,020) $63,000 $0 ($4,350) $58,650 $30,630
437,000 0 $475,000 $220,000 120,000 62,000 30,000 11,250 20,000 21,000 $484,250 $30,000 $514,250 ($39,250) $41,000 $0 ($1,230) $39,770 $30,520
479,480 0 $510,000 $250,000 115,000 58,000 30,000 0 0 25,000 $478,000 $30,000 $508,000 $2,000 $0 $0 ($1,230) ($1,230) $30,770
8-67 Comprehensive Budget (90 minutes) 1. Schedule A: Budgeted Monthly Cash Receipts Item June Cash sales (80% x sales) $60,000 Credit sales (20% x sales) 15,000 Total sales $75,000 Receipts: Cash sales Collections on accounts (last months credit sales) Total cash collections July $64,000 16,000 $80,000 $64,000 15,000 $79,000 August $65,600 16,400 $82,000 $65,600 16,000 $81,600 Sept. $72,000 18,000 $90,000 $72,000 16,400 $88,400
Schedule B: Budgeted Monthly Cash Disbursements for Purchases Item Purchases (@ gross cost) Cash discount (1% of gross cost) Net purchases July $49,200 492 $48,708 August $54,000 540 $53,460 Sept. $60,000 600 $59,400 3rd Qtr. $163,200 1,632 $161,568
Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs Item Salaries and wages Rent & Property Taxes Other cash operating costs Total July $12,000 1,000 1,600 $14,600 August $12,100 1,000 1,640 $14,740 Sept. $12,500 1,000 1,800 $15,300 3rd Qtr. $36,600 3,000 5,040 $44,640
Schedule D: Budgeted Cash Disbursements Prior to Financing Item Cash operating costs Net purchases Equipment Total July $14,600 48,708 -0$63,308 August $14,740 53,460 63,500 $131,700 Sept. $15,300 59,400 -0$74,700 3rd Qtr. $44,640 161,568 63,500 $269,708
8-75
8-67 (Continued-1) Schedule E: Cash Budget Item Cash balance, beginning Total cash receipts Cash disbursements prior to financing Cash balance before financing Financing: Borrowing required Interest payment Borrowing repaid Net effect of financing Cash balance, ending Minimum cash balance required Check for minimum balance 2. July $25,000 79,000 63,308 $40,692 $0 $0 $0 $0 $40,692 $30,000 OK August $40,692 81,600 131,700 ($9,408) $50,000 $625 $0 $49,375 $39,967 $30,000 OK Sept. $39,967 88,400 74,700 $53,667 $0 $625 $20,000 ($20,625) $33,042 $30,000 OK 3rd Qtr. $25,000 249,000 269,708 $4,292 $50,000 $1,250 $20,000 $28,750 $33,042 $30,000 OK
Gold Sporting Equipment Budgeted Income Statement For the Third Quarter, 2007 Sales Cost of Goods Sold (sales x (1 - 0.40) x (1 - 0.01)) Gross Profit Operating Expenses: Salaries & wages Rent & property taxes Depreciation Other operating expenses Operating Income Other Income/Expenses: Interest Expense Pre-tax Income Income Taxes (@25%) Net Income $252,000 $149,688 $102,312 $36,600 $3,000 $2,400 $5,040
$47,040 $55,272 $1,250 $54,022 $13,506 $40,516
8-76
8-67 (Continued-3) Gold Sporting Equipment Budgeted Balance Sheet th th June 30 and September 30 , 2007 Assets Cash Accounts Receivable (A/R) Merchandise Inventory Building and equipment (net) Total Assets Liabilities and Stockholders Equity Short-term payable (new equipment purchase) Short-term bank loan payable Income Tax Payable Total Liabilities Stockholders' Equity Total Liabilities & Stockholders Equity June 30th $25,000 $15,000 $47,520 $200,000 $287,520 $0 $0 $0 $0 $287,520 $287,520 September 30th $33,042 1 $18,000 2 $59,400 3 $324,600 $435,042 $63,500 $30,000 $13,506 $107,006 $328,037 $435,042
Notes: 1 Credit sales made in September, to be collected in October 2 Net merchandise purchases made in September (to meet expected sales in October) 3 Beg. Balance (net) + New Equipment Purchased Depreciation Expense = $200,000 + $127,000 $2,400 Note to Instructor: An Excel spreadsheet solution file is embedded in this document. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-67 Comprehensive budget, strategy Data Input Account balances, June 30th Cash $25,000 Recent and forecasted sales June (actual)
8-77
8-67 (Continued-4) 3. Gold needs to borrow to finance part of the payment for the new equipment during the third quarter. In addition, fluctuations in business may require the firm to seek shortterm loans. Payrolls, materials, and supplies have to be paid before collections from customers. In anticipation of rising sales in the coming season, Gold may experience a peak demand for cash to pay for the increased purchases of materials, payrolls, and supplies while collections from customers may be at the lowest point of the year as the firm comes out of a low-activity season. A short-term financing arrangement is the best way to meet seasonal cash needs. A short-term loan can be repaid as soon as activities in cash collections increase and payrolls and purchases of materials and supplies decrease as the firm enters into a slow season. Although the firm may have to pay a higher cost for short-term borrowing, the total financing cost likely would be lower than if the firm raised sufficient funds through either issuing long-term bonds or capital stock to meet peak demands for cash. A bond requires interest payments whether or not the firm uses the funds raised from the bond in operations. Additional capital stock is not without cost. Management needs to earn a desired return on equity to satisfy investors. Furthermore, studies have shown that management is prone to be careless in spending when abundant funds are available. 4. The scenarios described involved many simplified assumptions in order to make the problem managable. Among possible complicating factors are: No bad debts are considered. Customers always make payment as prescribed in sales terms. Within a given month cash inflows are in time to meet cash outflows. It is conceivable that the bulk of cash inflows occur toward the end of the month while payments need to go out at the beginning of the month. Cash customers do not use bank credit cards for the purchases.
8-78
8-68 Cash Budgeting; Sensitivity Analysis (50 Minutes) 1. Estimated Cash Receipts, April 2007: April Cash Receipts: April cash sales (25.0% x $425,000) = April credit-card sales ($425,000 x 55% x 97%) = Collection of accounts receivable: From April Sales (20% x $425,000 x 25%) = From March Sales ($400,000 x 20% x 45%) = From February Sales ($550,000 x 20% x 27%) = Total $21,250 $36,000 $29,700 $419,938 $106,250 $226,738
2. Purchase Order for Hardware, executed January 25th (to be paid April 10th): a) Number of units to be ordered: Estimated Unit Sales, March = Plus: Desired End. Inv., March (30% x 100) = Total Needs (in Units) = Less: Beg. Inv., March (30% x 90) = Required Purchases (in Units) = b) Cost of purchases: Selling price per unit (e.g., $300,000/100 units) = Estimated cost per unit (@65% of selling price) = Total cost of purchases (93 units x $1,950/unit) = $3,000 $1,950 $181,350 90 30 120 27 93
Note that the cash outflow associated with these purchases will be 4/10/2007 (75 days after executing the purchase order).
8-79
8-68 (Continued-1) 3. Sensitivity Analysis: Three Senarios for March Sales and the CGS% Estimated SalesMarch Optimistic Estimate = Base-line Estimate = Pessimistic Estimate = March Sales (units) 100 100 100 90 90 90 80 80 80 Maximum = Minimum = Range = 100 90 80 CGS % 60% 65% 70% Cash Payment April 10th $180,000 $195,000 $210,000 $167,400 $181,350 $195,300 $154,800 $167,700 $180,600
Scenario 1 2 3 4 5 6 7 8 9
CGS % 60% 65% 70% 60% 65% 70% 60% 65% 70% $210,000 $154,800 $55,200
4. Monthly cash budgets are prepared by companies such as CompCity, Inc., in order to plan for their cash needs This means identifying when both excess cash and cash shortages may occur. A company needs to know when cash shortages will occur so that prior arrangements can be made with lending institutions in order to have cash available for borrowing when the company needs it. At the same time, a company should be aware of when there is excess cash available for investment or repaying loans so that planned usage of the excess can be made.
8-80
8-68 (Continued-2) Sensitivity analysis, one type of which is illustrated in part (3) above, can be used to help managers deal with uncertainties in the budgeting process. Sensitivity analysis enables managers to examine how a budget would change in response to changes in one or more underlying assumptions (such as sales volume level and CGS %). As such, the process enables managers to monitor key assumptions and to make timely adjustments to plans. In practice, management might view the base-line outcome as the expected value prediction. It might define, subjectively, optimistic and pessimistic values as those having a small probability, (e.g., 10% or less). Note to Instructor: An Excel spreadsheet solution file for this assignment is embedded below. You can open the spreadsheet object that follows by doing the following: 1. Right click anywhere in the worksheet area below. 2. Select Worksheet Object, then Open. 3. To return to the Word document, select File and then Close and return to... while you are in the spreadsheet mode.
8-68 Inputs Cash Budgeting; Sensitivity Analysis Hardware Revenue $360,000 $390,000 Software/Support Services Revenue $140,000 $160,000 Total Revenue $500,000 $550,000
Hardware Sales (Units) January 120 February 130
8-81
Check Figures: Chapter 8 8-31 Base case (5%) for March: $5,500 8-32 No check figure 8-33 No check figure 8-34 1(a) = $115,000; 2(b) = $110,250; 3 = 37.25% 8-35 1 (Nov.) = $123,861; 2 (Nov.) = $183,750 8-36 Production, Qtr. 2 = 37,600 units; Purchases, Qtr. 2 = 111,480 lbs. 8-37 1 = 37.25%; 2 = 18.43% 8-38 1 = 450,000; 2 = 460,000; 3 = 930,000 8-39 Ending cash balances: $99,500 (Nov.); $50,490 (Dec.) 8-40 $26,000 8-41 Cash balance before financing = $2,250 8-42 2. Qtr. I: Total cash available = $381; Salaries & benefits = $335; Total financing effects = $54. 8-43 1 = $84,400; 2 = $230.000 8-44 1 = $152,000; 2 = $172,500; 3 = $155,000; 4(a) = $169,500, 4(b) = $102,500 8-45 No check figure 8-46 1. $86,082 8-47 Total cash receipts: September = $86,082; October = $88,141 8-48 1. $2,808,000; 2. cost/carton delivered = $2.34; 3 = $1,051,000 (expected cost savings, January 2007) 8-49 2. Budgeted cost-driver rates, Data entryRequisitions: $1.20 (Jan.), $1.176 (Feb.), and $1.1525 (March) 8-50 1 = $91,200; 2 = $299,400; 3 = $234,000 8-51 1 = $0 (no budgeted overhead for senior consultants); 2 = 16; 3 = $163,700 (total compensation) 8-52 No check figure 8-53 No check figure 8-54 No check figure 8-55 No check figure 8-56 1 = $1,800,000 (C12); 2 = 11,900 (C12); 3 = $384,800 (budgeted purchases, RM1); 4 = $1,273,750; 5 = $580,830 (total budgeted overhead); 6 = $2,346,900 (CGS), $55,280 (Ending Inventory); 7 = $645,000; 8 = $472,860 (after-tax income).
8-57 1 = $1,920,000 (C12); 2 = 11,900 (C12); 3 = $528,800 (budgeted purchases, RM1); 4 = $1,948,750; 5 = $753,630 (total budgeted overhead); 6 = $3,433,113 (CGS), $50,002 (Ending Inventory); 7 = $645,000; 8 = $649,132 (after-tax income) 8-58 1 = $1,800,000 (C12); 2 = 11,900 (C12); 3 = $342,900 (budgeted purchases, RM1); 4 = $1,078,500; 5 = $293,472 (budgeted variable overhead), $245,579 (budgeted fixed overhead); 6 = $2,057,200 (CGS), $45,596 (Ending Inventory); 7 = $645,000; 8 = $646,680 (after-tax income) 8-59 1 = $225,000 (May); 2 = $285,379; 3 = $333,876; 4 = $368,250 (net accounts receivable) 8-60 1a = 176,000 units; 1b = $32,736,000; 2 = $22,040,291 (CGS); 3 = reduced investment in working capital = $2,113,329 8-61 1 = $206,680; 2 = $83,600; 3 = $10,000; 4 = $120,000; 5 = 153,000 units; 6 = $153,000 8-62 1. Total operating cash inflows, 2009 = $709,082; Total operating cash outflows: $461,000 (2008), $603,925 (2009); Budgeted ending cash balance, 2009 = $10,057. 8-63 1 = $372,628; 2: cost-reduction rate = 43% 8-64 No check figure 8-65 No check figure 8-66 Qtr. 1: Cash available = $455,000; bond sinking-fund payment = $0; Excess cash, prior to financing transactions = $8,000; total effects of financing = $0. Qtr. IV: Beginning cash balance = $30,770; payroll = $122,000; total cash needs = $515,250; total effect of financing = $20,110; ending cash balance = $30,630 8-67 1. Cash receipts: $79,000 (July); Cash Disbursements for Purchases: $59,400 (Sept.); Cash Disbursements for Operating Costs: $14,600 (July); Ending Cash Balance: $40,692 (July), $39,967 (August), $33,042 (Sept.).
th 2. Net Income = $40,516; Sept. 30 Balances: Total Assets = $435,042; Total Liabilities = $107, 006.
8-68 1 = $419,938; 2a = 93 units; 2b = $181,350; 3: Budgeted cash payment on April 10th when March Sales = 100 units and CGS % = 60%, is $180,000.
8-83

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CHAPTER 8: STRATEGY AND THE MASTER BUDGET

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

10,000 2,750 + 6,000 $178,750 $2,250

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

9,000 70,000 15,000 59,500 $230,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Total $96,000 $96,000 $96,000 $90,000 $80,000 $60,000

$88,000 $88,000 $88,000 $96,000 $90,000 $80,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

Total Budgeted Cost for the Division Average number of cartons/delivery

Blocher, Stout, Cokins, Chen, Cost Management, 4/e

The McGraw-Hill Companies 2008

February $ 367,500 $1,188,000 $ 633,600 $ 35,280 $ 352,800 $2,577,180

March $ 360,150 $1,176,120 $ 627,264 $ 34,574 $ 345,744 $2,543,852

Blocher, Stout, Cokins, Chen, Cost Management, 4/e