CH 06 Sol

CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

6-1
a.
b.
c.
d.
The budgeting cycle includes the following elements:

Planning the performance of the company as a whole as well as planning the performance
of its subunits. Management agrees on what is expected.
Providing a frame of reference, a set of specific expectations against which actual results
can be compared.
Investigating variations from plans. If necessary, corrective action follows investigation.
Planning again, in light of feedback and changed conditions.
6-2
The master budget expresses management's operating and financial plans for a specified
period (usually a year) and comprises a set of budgeted financial statements. It is the initial plan
of what the company intends to accomplish in the period.
6-3
Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies
how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In
turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about
the likely effects of their strategic plans. Managers use this feedback to revise their strategic
plans.
6-4
Budgeted performance is better than past performance for judging managers. Why?
Mainly because inefficiencies included in past results can be detected and eliminated in
budgeting. Also, future conditions may be expected to differ from the past.
6-5
Production and marketing traditionally have operated as relatively independent business

functions. Budgets can assist in reducing battles between these two functions in two ways.
Consider a beverage company such as Coca-Cola or Pepsi-Cola:
Communication. Marketing could share information about seasonal demand with production.
Coordination. Production could ensure that output is sufficient to meet, for example, high
seasonal demand in the summer.
6-6
A company that shares its own internal budget information with other companies can gain
multiple benefits. One benefit is better coordination with suppliers, which can reduce the
likelihood of supply shortages. Better coordination with customers can result in increased sales
as demand by customers is less likely to exceed supply. Better coordination across the whole
supply chain can also help a company reduce inventories and thus reduce the costs of holding
inventories. In addition, a company can gain information about competitors that will be useful in
strategic planning and benchmarking.
6-7
In many organizations, budgets impel managers to plan. Without budgets, managers drift
from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and
improve their performance. Thus, many top managers believe that budgets meet the cost-benefit
test.
6-1
6.8
A rolling budget, also called a continuous budget, is a budget or plan that is always
available for a specified future period, by adding a period (month, quarter, or year) in the future
as the period just ended is dropped. A four-quarter rolling budget for 2004 is superceded by a
four-quarter rolling budget for April 2004 to March 2005, and so on.
6.9
The steps in preparing an operating budget are:

1.
Prepare the revenues budget
2.
Prepare the production budget (in units)
3.
Prepare the direct materials usage budget and direct materials purchase
budget
4.
Prepare the direct manufacturing labor budget
5.
Prepare the manufacturing overhead budget
6.
Prepare the ending inventories budget
7.
Prepare the cost of goods sold budget
8.
Prepare the nonmanufacturing costs budget
9.
Prepare the budgeted income statement
6-10 The sales forecast is typically the cornerstone for budgeting, because production (and,
hence, costs) and inventory levels generally depend on the forecasted level of sales.
6.11 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine
how budgeted amounts change with changes in the underlying assumptions. This assists
managers to monitor those assumptions that are most critical to a company attaining its budget or
make timely adjustments to plans when appropriate.
6.12 Factors reducing the effectiveness of budgeting of companies include:

1.
2.
3.
4.
Lack of a well-defined strategy,

Lack of a clear linkage of strategy to operational plans,
Lack of individual accountability for results, and
Lack of meaningful performance measures.
6.13 Kaizen budgeting explicitly incorporates continuous improvement during the budget period
into the budget numbers.
6.14 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activitybased budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce
and sell products and services. Nonoutput-based cost drivers, such as the number of part
numbers, number of batches, and number of new products can be used with ABB.
6-15 The choice of a responsibility center type guides the variables to be included in the
budgeting exercise. For example, if a revenue center is chosen, the focus will be on variables
that assist in forecasting revenue. Factors related to, say, costs of the investment base will be
considered only if they assist in forecasting revenue.
6-2
6-16 (15 min.) Advantages of budgeting.

(a)
(b)
(c)
(d)
6-17
6-18
6.19
Budgets compel strategic planning and facilitate implementation of plans. An

organizations strategy, plans, and budgets are interrelated. Formulation of budgets is
necessary for implementation of plans which, in turn, is necessary for the organizations
strategy. Sometimes the feedback from budgets may result in a revision of strategic plans.
Budgets provide a framework for judging performance. Budgeted performance measures
are preferable to using past performance for evaluating actual results for two reasons. First,
past performance may have been mediocre and not suitable to serve as a benchmark.
Secondly, due to globalization and the advances in information technology, communication
technology, and distribution technology, the future environment may be expected to be very
different from the past. Budgeted performance measures take into account anticipated
changes and improvements.
Budgets motivate managers and employees.
Budgets promote coordination and communication within the organization. Coordination
compels managers to think of interdependencies and interrelationships. Communication
helps all employees understand and accept the organizational objectives.
(5 min.) Sales and production budget.
Budgeted sales in units
Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced
(5 min.) Direct materials purchases budget.
Direct materials to be used in production (bottles)
Add target ending direct materials inventory (bottles)
Total requirements (bottles)
Deduct beginning direct materials inventory (bottles)
Direct materials to be purchased (bottles)
100,000
11,000
111,000
7,000
104,000
1,500,000
50,000
1,550,000
20,000
1,530,000
(10 min.) Budgeting material purchases.

Production Budget:
Budgeted sales
Total requirements
Direct Materials Purchases Budget:
Direct materials needed for production (44,000 3)
Add target ending direct materials inventory
Total requirements
Deduct beginning direct materials inventory
6-3
Finished Goods
(units)
42,000
24,000
66,000
22,000
44,000
Direct Materials
(in gallons)
132,000
110,000
242,000
90,000
Direct materials to be purchased
152,000
6-4
6-20
(30 min.)
Sales and production budget.
1.
Selling
Price
$0.25
1.50
12-ounce bottles
4-gallon units
a
b
Units
Sold
4,800,000a
1,200,000b
Total
Revenues
$1,200,000
1,800,000
$3,000,000
400,000 12 months = 4,800,000

100,000 12 months = 1,200,000
2.
Budgeted unit sales (12-ounce bottles)
Total requirements
3.
Beginning
inventory
Budgeted
sales
Target
ending inventory
4,800,000
600,000
5,400,000
900,000
4,500,000
Budgeted
production
= 1,200,000 + 200,000 1,300,000

= 100,000 4-gallon units
6-21
(45 min.)
Direct materials usage, unit costs and gross margins.
1. Direct Materials Usage Budget

12-ounce Units
Physical Units Budget
To be used in production:
12-ounce units
4-gallon units
4,500,000
1,300,000
Cost Budget
Available from beginning inventory:
12-ounce units
4-gallon units
To be used from purchases of this period:
12-ounce: $0.06 (4,500,000 500,000)
4-gallon: $0.30 (1,300,000 0)
Direct materials to be used
a
4-gallon Units
$0.06 500,000 = $30,000
6-5
$ 30,000a
$
240,000
_
$270,000
390,000
$390,000
6-21 (Contd.)
2.
1.
2.
3.
4.
5.
a
b
Output units produced

Number of ounces
Equivalent 8-ounce units (line 2 8)
Direct labor cost per 8 ounces
Total direct labor cost (line 3 line 4)
12-ounce
Bottles
4,500,000
54,000,000a
6,750,000
$0.01
$67,500
4-gallon
Units
1,300,000
665,600,000b
83,200,000
$0.01
$832,000
4,500,000 12 ounces per unit = 54,000,000

1,300,000 128 ounces per gallon 4 gallons per unit = 665,600,000
Total direct labor cost is:
12-ounce bottles
4-gallon units
$ 67,500
832,000
$899,500
3.
12-ounce bottle
Cost
per Unit
of
Input
Inputs Total
Direct materials
12-ounce bottles
4-gallon containers
Direct labor (per 8 ounce)
Manuf. overhead
Unit manuf. cost
$0.06
0.01
0.15
1.0
1.5
1.0
4-gallon container
Cost per
Unit of
Input
Inputs
Total
$0.30
0.01
0.15
1.0
64.0
1.0
$0.30
0.64
0.15
$1.09
$0.060
0.015
0.150
$0.225
4.
Selling price
Unit manuf. cost
Gross margin
Gross margin percentage
12-ounce
Bottles
$0.250
0.225
$0.025
4-gallon
Container
$1.500
1.090
$0.410
10%
27.3%
5. The chosen cost allocation base is units of production, with different products (12- ounce
bottles and 4-gallon containers) being given the same weight.
A key issue here is whether there is a cause-and-effect relationship between units
produced and manufacturing overhead. Alternative allocation bases include direct material costs,
direct manufacturing labor costs, direct manufacturing labor hours, and time on the production
line.
6-6
6-22 (15-20 min.) Revenue, production, and purchases budget.

1.
800,000 motorcycles 400,000 yen = 320,000,000,000 yen
2.
Budgeted sales (units)

Total requirements
3.
Direct materials to be used in production, 780,000 2

Add target ending direct materials inventory
Total requirements
Deduct beginning direct materials inventory
Direct materials to be purchased (units)
Cost per wheel in yen
Direct materials purchase cost in yen
800,000
100,000
900,000
120,000
780,000
1,560,000
30,000
1,590,000
20,000
1,570,000
16,000
25,120,000,000
Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very close to
the major manufacturer. Inventories are controlled by just-in-time and similar systems. Indeed,
some direct materials inventories are almost nonexistent.
6-7
6-23 (15-25 min.) Budget for production and direct manufacturing labor.
Roletter Company
Budget for Production and Direct Manufacturing Labor
For the Quarter Ended March 31, 2005
Budgeted sales (units)
Add target ending finished goods
a
inventory (units)
Total requirements (units)
Deduct beginning finished goods
inventory (units)
Direct manufacturing labor-hours
(DMLH) per unit
Total hours of direct manufacturing
labor time needed
Direct manufacturing labor costs:
Wages ($10.00 per DMLH)
Pension contributions
($0.50 per DMLH)
Workers' compensation insurance
($0.15 per DMLH)
Employee medical insurance
($0.40 per DMLH)
Social Security tax (employer's share)
($10.00 0.075 = $0.75 per DMLH)
Total direct manufacturing
labor costs
January
10,000
February
12,000
March
8,000
Quarter
30,000
16,000
26,000
12,500
24,500
13,500
21,500
13,500
43,500
16,000
10,000
16,000
8,500
12,500
9,000
16,000
27,500
2.0
2.0
1.5
20,000
17,000
13,500
50,500
$200,000
$170,000
$135,000
$505,000
10,000
8,500
6,750
25,250
3,000
2,550
2,025
7,575
8,000
6,800
5,400
20,200
15,000
12,750
10,125
37,875
$236,000
$200,600
$159,300
$595,900
100% of the first following month's sales plus 50% of the second following month's sales.
Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld
from employees' wages and paid to the government by the employer on behalf of the employees;
therefore, the 7.5% amounts are not additional costs to the employer.
6-8
6-24 (20-30 min.) Activity-based budgeting.

1.
This question links to the ABC example used in the Problem for Self-Study in Chapter 5
and to Question 5-24 (ABC, retail product-line profitability).
Activity
Ordering
$90 14; 24; 14
Delivery
$82 12; 62; 19
Shelf-stocking
$21 16; 172; 94
Customer support
$0.18 4,600; 34,200; 10,750
Total budgeted costs
Cost
Hierarchy
Batch-level
Batch-level
Output-unitlevel
Output-unitlevel
Soft
Drinks
Fresh
Produce
Packaged
Food
$1,260
$ 2,160
$1,260
$ 4,680
984
5,084
1,558
7,626
336
3,612
1,974
5,922
828
$3,408
6,156
$17,012
1,935
$6,727
8,919
$27,147
Total
2.
An ABB approach recognizes how different products require different mixes of support
activities. The relative percentage of how each product area uses the cost driver at each activity
area is:
Activity
Ordering
Delivery
Shelf-stocking
Customer support
Cost
Hierarchy
Batch-level
Batch-level
Output-unit-level
Output-unit-level
Soft
Drinks
26.9
12.9
5.7
9.3
Fresh
Produce
46.2
66.7
61.0
69.0
Packaged
Food
26.9
20.4
33.3
21.7
Total
100.0%
100.0
100.0
100.0
By recognizing these differences, FS managers are better able to budget for different unit sales
levels and different mixes of individual product-line items sold. Using a single cost driver (such
as COGS) assumes homogeneity in the use of indirect costs (support activities) across product
lines which does not occur at FS. Other benefits cited by managers include: (1) better
identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3)
identification of budgetary slack.
6-9
6-25 (20-30 min.) Kaizen approach to activity-based budgeting

(continuation of 6-24).
1.
March 2002 rates

Activity
Ordering
Delivery
Shelf-stocking
Customer support
Cost Hierarchy
Batch-level
Batch-level
Output-unit-level
Output-unit-level
January
$90.00
82.00
21.00
0.18
February
$89.82000
81.83600
20.95800
0.17964
March
$89.64
81.67
20.92
0.179
These March 2002 rates can be used to compute the total budgeted cost for each activity area:
Activity
Ordering
$89.64 14; 24; 14
Delivery
$81.67 12; 62; 19
Shelf-stocking
$20.92 16; 172; 94
Customer support
$0.179 4,600; 34,200; 10,750
Cost
Hierarchy
Soft
Drinks
Fresh
Produce
Packaged
Food
Total
Batch-level
$1,255
$2,151
$1,255
$ 4,661
Batch-level
980
5,063
1,552
7,595
Output-unit-level
335
3,598
1,966
5,899
Output-unit-level
823
$3,393
6,122
$16,934
1,924
$6,697
8,869
$27,024
2.
A kaizen budgeting approach signals management's commitment to systematic cost
reduction. Compare the budgeted costs from Question 6-24 and 6-25.
Question 6-24
Question 6-25 (Kaizen)
Ordering
$4,680
4,661
Delivery
$7,626
7,595
ShelfStocking
$5,922
5,899
Customer
Support
$8,919
8,869
The kaizen budget number will show unfavorable variances for managers whose activities do not
meet the required monthly cost reductions. This likely will put more pressure on managers to
creatively seek out cost reductions by working "better" within FS or by having "better"
interactions with suppliers or customers.
One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small
incremental improvements each month. It is possible that some cost improvements arise from
large discontinuous changes in operating processes, supplier networks, or customer interactions.
Companies need to highlight the importance of seeking these large discontinuous improvements
as well as the small incremental improvements.
6-10
6-26 (15 min.) Responsibility and controllability.

1. (a) Purchasing agent
(b) Purchasing agent
2. (a) Purchasing agent
(b) Supplier
3. (a) Production department supervisor
(b) Purchasing agent
(b) Production department supervisor
(b) Maintenance department supervisor
6. (a) New division manager
(b) Former division manager
7. (a) *Production department supervisor
(b) Plant superintendent / Bottleneck department supervisor
*The production department here refers to the one operating below capacity, and not the next,
bottleneck, production department.
6-11
6-27 (30 min.) Cash flow analysis, Chapter Appendix.

1.
The cash that TabComp Inc. can expect to collect during April 2005 is calculated below.
April cash receipts:
$100,000
April cash sales ($400,000 .25)
115,200
April credit card sales ($400,000 .30 .96)
Collections on account:
151,200
March ($480,000 .45 .70)
63,000
February ($500,000 .45 .28)
January (uncollectible-not relevant)
0
Total collections
$429,400
2.
(a) The projected number of the MZB-33 computer hardware units that TabComp Inc.
will order on January 25, 2005, is calculated as follows.
MZB-33
Units
110
March sales
Plus: Ending inventory
Total needed
27
137
b
Less: Beginning inventory
Projected purchases in units
a
0.30 90 unit sales in April
b
33
104
0.30 110 unit sales in March
(b) Purchase price =

c
$3,000 selling price per unit
60%
Projected unit purchases
Total MZB-33 purchases
c
1,800
104
$187,200
Selling price = $2,025,000 675 units, or for March, $330,000 110 units
= $3,000 per unit
3.
Monthly cash budgets are prepared by companies such as TabComp 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
6-12
company needs it. At the same time, a company should be aware of when there is excess cash
available for investment or for repaying loans.
6-28 (40 min.) Budget schedules for a manufacturer.
a.
Revenues Budget
Units sold
Selling price
Budgeted revenues
b.
Executive Line
740
$ 1,020
$754,800
Chairman Line
390
$ 1,600
$624,000
$1,378,800
Production Budget in Units
Executive Line
740
30
770
20
750
Budgeted unit sales

Add budgeted ending fin. goods inventory
Total requirements
Deduct beginning fin. goods. inventory
Budgeted production
c.
Total
Chairman Line
390
15
405
5
400
Direct Materials Usage Budget (units):
Executive Line:
1. Budgeted input per f.g.
unit
2. Budgeted production
3. Budgeted usage (1 2)
Chairman Line:
4. Budgeted input per f.g.
unit
5. Budgeted production
6. Budgeted usage (4 5)
7. Total direct materials
usage (3 + 6)
Oak
Red Oak
16
750
12,000
12,000
Oak
Legs
Red Oak
Legs
4
750
3,000
25
400
10,000
4
400
1,600
10,000
3,000
1,600
Total
Direct Materials Cost Budget

8. Beginning inventory
320
150
100
40
9. Unit price (FIFO)
$18
$23
$11
$17
$5,760
$3,450
$1,100
$680
9,850
$25
2,900
$12
1,560
$18
$246,250
$34,800
$28,080
10. Cost of DM used from

beginning inventory (8 9)
11. Materials to be used from

purchases (7 8)
11,680
$20
12. Cost of DM in March
13. Cost of DM purchased and
$233,600
used in March (11 12)
6-13
$10,990
542,730
14. Direct materials to be

used (10 +13)
$239,360
$249,700
$35,900
Red Oak
10,000
200
10,200
150
10,050
$25
$251,250
Oak
Legs
3,000
80
3,080
100
2,980
$12
$35,760
$28,760
$553,720
6-28 (Contd.)
Direct Materials Purchases Budget:
Oak
Budgeted usage (from line 7)
12,000
Add target ending inventory
192
Total requirements
12,192
Deduct beginning inventory
320
Total DM purchases
11,872
Purchase price (March)
$20
Total purchases
$237,440
Direct manufacturing labor budget

Direct
Output
Manu. LaborUnits
Hours per
Produced
Output Unit
Executive Line
750
3
Chairman Line
400
5
Red Oak
Legs
Total
1,600
44
1,644
40
1,604
$18 ________
$28,872 $553,322
d.
e.
f.
Total
Hours
2,250
2,000
4,250
Manufacturing overhead budget

Variable manufacturing overhead costs
(4,250 $35)
Fixed manufacturing overhead costs
Total manufacturing overhead costs
Total manufacturing overhead cost per hour
= = $45 per direct manufacturing labor-hour
Fixed manufacturing overhead cost per hour
=
= $10 per direct manufacturing labor-hour
Hourly
Rate
$30
$30
Total
$ 67,500
60,000
$127,500
$148,750
42,500
$191,250
Computation of unit costs of ending inventory of finished goods:
Executive Line
Direct materials
Oak top ($20 16, 0)
Red oak ($25 0, 25)
Oak legs ($12 4, 0)
Red oak legs ($18 0, 4)
Direct manufacturing labor ($30 3, 5)
Manufacturing overhead
Variable ($35 3, 5)
Fixed ($10 3, 5)
Total manufacturing cost
6-14
Chairman Line
$320
0
48
0
90
0
625
0
72
150
105
30
$593
175
50
$1,072
6-28 (Contd.)
Ending Inventories Budget
Cost per Unit

Direct Materials
Oak top
Red oak top
Oak legs
Red oak legs
Finished Goods
Executive
Chairman
Total
20
25
12
18
192
200
80
44
$ 3,840
5,000
960
792
10,592
593
1,072
30
15
17,790
16,080
33,870
$44,462
Units
Total
g.
Cost of goods sold budget
Budgeted finished goods inventory,
March 1, 2005
($10,480 + $4,850)
$ 15,330
Direct materials used (from Dir. materials cost budget) $553,720
Direct manufacturing labor (Dir. manuf. labor budget)
127,500
Manufacturing overhead (Manuf. overhead budget)
191,250
Cost of goods manufactured
872,470
Cost of goods available for sale
887,800
Deduct ending finished goods inventory,
March 31, 2002 (Inventories budget)
33,870
Cost of goods sold
$853,930
2.
Areas where continuous improvement might be incorporated into the budgeting process:
(a)
Direct materials. Either an improvement in usage or price could be budgeted. For
example, the budgeted usage amounts could be related to the maximum improvement (current
usage minimum possible usage) of 1 square foot for either desk:
Executive: 16 square feet 15 square feet minimum = 1 square foot
Chairman: 25 square feet 24 square feet minimum = 1 square foot
Thus, a 1% reduction target per month could be:
Executive: 15 square feet + (0.99 1) = 15.99
Chairman: 24 square feet + (0.99 1) = 24.99
Some students suggested the 1% be applied to the 16 and 25 square-foot amounts. This can be
done so long as after several improvement cycles, the budgeted amount is not less than the
minimum desk requirements.
(b)
Direct manufacturing labor. The budgeted usage of 3 hours/5 hours could be
continuously revised on a monthly basis. Similarly, the manufacturing labor cost per hour of $30
could be continuously revised down. The former appears more feasible than the latter.
(c)
Variable manufacturing overhead. By budgeting more efficient use of the allocation base,
a signal is given for continuous improvement. A second approach is to budget continuous
improvement in the budgeted variable overhead cost per unit of the allocation base.
(d)
Fixed manufacturing overhead. The approach here is to budget for reductions in the
year-to-year amounts of fixed overhead. If these costs are appropriately classified as fixed, then
they are more difficult to adjust down on a monthly basis.
6-15
6-29 (45 min.) Sensitivity analysis, changing budget assumptions, and kaizen
approach.
1.
Chippo
Revenues
Chippo, $3 500,000
Choco, $3 500,000
Cost of goods sold
Chocolate chips
($2 250,000a; $2 125,000b)
Cookie dough
($1 250,000a; $1 375,000b)
Direct manufacturing labor
($20 2,000; $20 3,000)
Indirect manufacturing costs
(50% $160,000;
50% $160,000)
Cost of goods sold
Gross margin
Choco
Total
$1,500,000
$1,500,000
$1,500,000
$1,500,000
1,500,000
$3,000,000
500,000
250,000
750,000
250,000
375,000
625,000
40,000
60,000
100,000
80,000
870,000
$ 630,000
80,000
765,000
$ 735,000
160,000
1,635,000
$1,365,000
$1,500,000
Chippo: 500,000 0.50 = 250,000 pounds chocolate chips; 500,000 0.50 = 250,000 pounds
cookie dough
b
Choco: 500,000 0.25 = 125,000 pounds chocolate chips; 500,000 0.75 = 375,000 pounds
cookie dough
2.
Chippo
Revenues
Chippo $3 500,000
Choco $3 500,000
Choco
Total
$1,500,000
$1,500,000
$1,500,000
1,500,000
$3,000,000
$1,500,000
$1,500,000
Cost of goods sold

Chocolate chips
($1.94 250,000; $1.94 125,000) 485,000
Cookie dough
($0.97 250,000; $0.97 375,000) 242,500
($20 2,000; $20 3,000)
40,000
(50% $160,000; 50% $160,000)
80,000
847,500
Gross margin
$ 652,500
6-16
242,500
727,500
363,750
606,250
60,000
100,000
80,000
746,250
$ 753,750
160,000
1,593,750
$1,406,250
6-29 (Contd.)
3.
Chippo
Revenues
Chippo $3 500,000
Choco $3 500,000
Choco
$1,500,000
$1,500,000
Cost of goods sold

Chocolate chips
($1.94 250,000; $1.94 125,000) 485,000
Cookie dough
($0.97 250,000; $0.97 375,000) 242,500
($20 1,980c; $20 2,970d)
39,600
(50% $156,800e; 50% $156,800e)
78,400
845,500
Gross margin
$ 654,500
$1,500,000
$1,500,000
$1,500,000
1,500,000
$3,000,000
242,500
727,500
363,750
606,250
59,400
99,000
78,400
744,050
$ 755,950
156,800
1,589,550
$1,410,450
c2,000 (1 0.01); d3,000 (1 0.01); e$160,000 (1 0.02)
6-17
Total
6-29 (Contd.)
6-29 Excel Application

Master Budget and Responsibility Accounting
Choco Chips
Original Data
% Chips
% Dough
Projected Sales (Packages)
Estimated Selling Price per Pack.
Cost of Chocolate ($/lb)
Cost of Cookie Dough ($/lb)
Budgeted Direct Manuf. Labor Hours
Direct Manuf. Labor Rate ($/hr)
Indirect Manufacturing Costs
Chippo
50%
50%
500,000
$3.00
$2.00
$1.00
2,000
$20
$80,000
Choco
25%
75%
500,000
$3.00
$2.00
$1.00
3,000
$20
$80,000
Chippo
Choco
Total
$1,500,000
$1,500,000
$1,500,000
$1,500,000
1,500,000
$3,000,000
500,000
250,000
750,000
250,000
375,000
625,000
40,000
80,000
870,000
$630,000
60,000
80,000
765,000
$735,000
100,000
160,000
1,635,000
$1,365,000
Problem 1
Revenues
Chippo, $3 x 500,000
Choco, $3 x 500,000
Total Revenues
Cost of Goods Sold
Chocolate Chips
($2 x 250,000a;$2 x 125,000b)
Cookie Dough
($1 x 250,000a;$1 x 375,000b)
Direct Manufacturing Labor
($20 x 2,000; $20 x 3,000)
Total Cost of Goods Sold
Gross Margin
$1,500,000
aChippo: 500,000 x 0.50 = 250,000 pounds chocolate chips;

500,000 x 0.50 = 250,000
pounds cookie dough

bChoco: 500,000 x 0.25 = 125,000 pounds chocolate chips;
500,000 x 0.75 = 375,000
pounds cookie dough
6-18
6-29 (Contd.)
Problem 2
Chippo
Revenues
Chippo, $3 x 500,000
Choco, $3 x 500,000
Total Revenues
Choco
Total
$1,500,000
$1,500,000
$1,500,000
$1,500,000
1,500,000
$3,000,000
485,000
242,500
727,500
242,500
363,750
606,250
40,000
80,000
847,500
$652,500
60,000
80,000
746,250
$753,750
100,000
160,000
1,593,750
$1,406,250
Chippo
Choco
Total
$1,500,000
$1,500,000
$1,500,000
$1,500,000
1,500,000
$3,000,000
485,000
242,500
727,500
242,500
363,750
606,250
39,600
78,400
845,500
$654,500
59,400
78,400
744,050
$755,950
99,000
156,800
1,589,550
$1,410,450
$1,500,000
Cost of Goods Sold

Chocolate Chips
($1.94 x 250,000;$1.94 x 125,000)
Cookie Dough
($0.97 x 250,000;$0.97 x 375,000)
($20 x 2,000; $20 x 3,000)
Gross Margin
Problem 3
Revenues
Chippo, $3 x 500,000
Choco, $3 x 500,000
Total Revenues
Cost of Goods Sold
Chocolate Chips
($1.94 x 250,000;$1.94 x 125,000)
Cookie Dough
($0.97 x 250,000;$0.97 x 375,000)
($20 x 1,980; $20 x 2,970)
Gross Margin
$1,500,000
6-19
6-30 (30-40 min.) Revenue and production budgets.

This is a routine budgeting problem. The key to its solution is to compute the correct quantities
of finished goods and direct materials. Use the following general formula:
=+
1.
Thingone
Thingtwo
Budgeted revenues
2.
Scarborough Corporation
Revenue Budget for 2006
Units
Price
60,000
$165
40,000
250
Total
$ 9,900,000
10,000,000
$19,900,000
Production Budget (in units) for 2006
Budgeted sales in units

Add target finished goods inventories,
December 31, 2006
Total requirements
Deduct finished goods inventories,
January 1, 2006
3.
Thingone
60,000
Thingtwo
40,000
25,000
85,000
9,000
49,000
20,000
65,000
8,000
41,000
Direct Materials Purchases Budget (in quantities) for 2006
A
Direct materials to be used in production

Thingone (budgeted production of 65,000
units times 4 lbs. of A, 2 lbs. of B)
Thingtwo (budgeted production of 41,000
units times 5 lbs. of A, 3 lbs. of B, 1 lb. of C)
Total
Add target ending inventories, December 31, 2006
Total requirements in units
Deduct beginning inventories, January 1, 2006
Direct materials to be purchased (units)
6-20
Direct Materials
B
260,000
130,000
--
205,000
465,000
36,000
501,000
32,000
469,000
123,000
253,000
32,000
285,000
29,000
256,000
41,000
41,000
7,000
48,000
6,000
42,000
6-30 (Contd.)
4.
Direct Materials Purchases Budget (in dollars) for 2006
Budgeted
Expected
Purchases
Purchase
(Units)
Price per unit
Total
Direct material A
469,000
$12
$5,628,000
Direct material B
256,000
5
1,280,000
Direct material C
42,000
3
126,000
Budgeted purchases
$7,034,000
5.
Direct Manufacturing Labor Budget (in dollars) for 2006
Direct
Budgeted
Manufacturing
Rate
Production
Labor-Hours
Total
per
(Units)
per Unit
Hours
Hour
Total
Thingone
65,000
2
130,000
$12
$1,560,000
Thingtwo
41,000
3
123,000
16
1,968,000
Total
$3,528,000
6.
Budgeted Finished Goods Inventory
At December 31, 2006
Thingone:
Direct materials costs:
A, 4 pounds $12
$48
B, 2 pounds $5
10
$ 58
Direct manufacturing labor costs,
2 hours $12
24
Manufacturing overhead costs at $20 per direct
manufacturing labor-hour (2 hours $20)
40
Budgeted manufacturing costs per unit
$122
Finished goods inventory of Thingone
$122 25,000 units
$3,050,000
Thingtwo:
Direct materials costs:
A, 5 pounds $12
$60
B, 3 pounds $5
15
C, 1 each $3
3
$ 78
Direct manufacturing labor costs,
3 hours $16
48
Manufacturing overhead costs at $20 per direct
manufacturing labor-hour (3 hours $20)
60
Budgeted manufacturing costs per unit
$186
Finished goods inventory of Thingtwo
$186 9,000 units
1,674,000
Budgeted finished goods inventory, December 31, 2006
$4,724,000
6-21
6-31 (30 min.)
Budgeted income statement.

Easecom Company
Budgeted Income Statement for 2005
(in thousands)
Revenues
Equipment ($6,000 1.06 1.10)
Maintenance contracts ($1,800 1.06)
Total revenues
Cost of goods sold ($4,600 1.03 1.06)
Gross margin
Operating costs:
Marketing costs ($600 + $250)
Distribution costs ($150 1.06)
Customer maintenance costs ($1,000 + $130)
Administrative costs
Total operating costs
Operating income
$6,996
1,908
$8,904
5,022
3,882
850
159
1,130
900
3,039
$ 843
6.32 (15 min.) Responsibility of purchasing agent.

The time lost in the plant should be charged to the purchasing department. The plant
manager probably should not be asked to underwrite a loss due to failure of delivery over which
he had no supervision. Although the purchasing agent may feel that he has done everything he
possibly could, he must realize that, in the whole organization, he is the one who is in the best
position to evaluate the situation. He receives an assignment. He may accept it or reject it. But if
he accepts, he must perform. If he fails, the damage is evaluated. Everybody makes mistakes.
The important point is to avoid making too many mistakes and also to understand fully that the
extensive control reflected in responsibility accounting is the necessary balance to the great
freedom of action that individual executives are given.
Discussions of this problem have again and again revealed a tendency among students (and
among accountants and managers) to "fix the blame"as if the variances arising from a
responsibility accounting system should pinpoint misbehavior and provide answers. The point is
that no accounting system or variances can provide answers. However, variances can lead to
questions. In this case, in deciding where the penalty should be assigned, the student might
inquire who should be askednot who should be blamed.
Classroom discussions have also raised the following diverse points:
(a) Is the railroad company liable?
(b) Costs of idle time are usually routinely charged to the production department. Should the
information system be fine-tuned to reallocate such costs to the purchasing department?
(c) How will the purchasing managers behave in the future regarding willingness to take risks?
The text emphasizes the following: Beware of overemphasis on controllability. For
example, a time-honored theme of management is that responsibility should not be given without
accompanying authority. Such a guide is a useful first step, but responsibility accounting is more
far-reaching. The basic focus should be on information or knowledge, not on control. The key
question is: Who is the best informed? Put another way, "Who is the person who can tell us the
most about the specific item, regardless of ability to exert personal control?"
6-33 (30 min.) Activity-based budgeting.
6-22
a. Machining
Indirect materials [$0 + ($10/hour 10,000 hours)]
Indirect labor [$20,000 + ($15/hour 10,000 hours)]
Utilities [$0 + ($5/hour 10,000 hours)]
b. Setups and quality assurance
Indirect materials [$0 + $1,000/run 40 runs]
Indirect labor [$0 + $1,200/run 40 runs]
Inspection [ $80,000 + ($2,000/run 40 runs)]
c. Procurement
Indirect materials [$0 + ($4/order 15,000 orders)]
Indirect labor [$45,000 + $0]
d. Design
Engineering hours [$75,000 + ($50/hour 100 hours)]
e. Material handling
Indirect materials [$0 + ($2/sq. ft. 100,000 sq. ft.)]
Indirect labor ($30,000 + $0)
6-23
$100,000
170,000
50,000
$320,000
40,000
48,000
160,000
$248,000
$ 60,000
45,000
$105,000
$ 80,000
$200,000
30,000
$230,000
6-34 (60 min.) Comprehensive operating budget, budgeted balance sheet.

1.
2.
Schedule 1: Revenues Budget

For the Year Ended December 31, 2004
Units Selling Price
Snowboards
1,000
$450
Schedule 2: Production Budget (in Units)
for the Year Ended December 31, 2004
Snowboards
1,000
200
1,200
100
1,100
Budgeted unit sales (Schedule 1)

Total requirements
3.
Total Revenues
$450,000
Schedule 3A: Direct Materials Usage Budget

Wood
Wood: 1,100 5.00 b.f.
Fiberglass: 1,100 6.00 yards
To be used in production
Cost Budget
Available from beginning inventory
Wood: 2,000 b.f. $28.00
Fiberglass: 1,000 b.f. 4.80
To be used from purchases this period
Wood: (5,500 2,000) $30.00
Fiberglass: (6,600 1,000) $5.00
Total cost of direct materials to be used
Fiberglass
Total
5,500
5,500
6,600
6,600
56,000
4,800
105,000
$161,000
Schedule 3B: Direct Materials Purchases Budget

Wood
Production usage (from Schedule 3A)
5,500
Add target ending inventory
1,500
Total requirements
7,000
Deduct beginning inventory
2,000
Purchases
5,000
6-24
28,000
$32,800
Fiberglass
6,600
2,000
8,600
1,000
7,600
$193,800
Total
6-34 (Contd.)
Cost Budget
Wood: 5,000 $30.00
$150,000
Fiberglass: 7,600 $5.00)
$38,000
Purchases
$150,000
$38,000 $188,000
4. Schedule 4: Direct Manufacturing Labor Budget
Cost Driver DML Hours per
Labor Category
Units
Driver Unit Total Hours Wage Rate
Total
Manufacturing Labor
1,100
5.00
5,500
$25.00 $137,500
5.
Schedule 5: Manufacturing Overhead Budget

At Budgeted Level of 5,500
Direct Manufacturing Labor-Hours
($7.00 5,500)
$ 38,500
66,000
$104,500
6.
Budgeted manufacturing overhead rate:
7.
Budgeted manufacturing overhead cost per output unit:
$104,500
= $19.00 per hour
5,500
8.
$104,500
= $95.00 per output unit
1,100
Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2004

Cost per
Unit of
Inputa
Inputsb
Total
Direct materials
Wood
$30.00
5.00
$150.00
Fiberglass
5.00
6.00
30.00
25.00
5.00
125.00
Total manufacturing overhead
95.00
$400.00
a
cost is per board foot, yard or per hour
b
inputs is the amount of each input per board
9. Schedule 6B: Ending Inventories Budget
December 31, 2004
Cost per
Units
Unit
Total
Direct materials
Wood
1,500
$ 30.00
$ 45,000
Fiberglass
2,000
5.00
10,000
Finished goods
Snowboards
200
400.00
80,000
Total Ending Inventory
$135,000
6-25
6-34 (Contd.)
10. Schedule 7: Cost of Goods Sold Budget
From
Schedule
Beginning finished goods inventory
January 1, 2004, $374.80 100
Given
Direct materials used
3A
4
5
Deduct ending finished goods
inventory, December 31, 2004
6B
Cost of goods sold
Total
$ 37,480
$193,800
137,500
104,500
435,800
473,280
80,000
$393,280
11. Budgeted Income Statement for Slopes

Revenues
Schedule 1
Cost of goods sold
Schedule 7
Gross margin
Operating costs
Variable marketing costs ($250 30)
Fixed nonmanufacturing costs
Operating income
$450,000
393,280
56,720
$ 7,500
30,000
37,500
$ 19,220
12. Budgeted Balance Sheet for Slopes

as of December 31, 2004
Cash
Inventory
Property, plant, and equipment (net)
Total assets
Schedule 6B
Current liabilities
Long-term liabilities
Stockholders equity
Total liabilities and stockholders equity
6-26
$ 10,000
135,000
850,000
$995,000
$ 17,000
178,000
800,000
$995,000
6.35 (30 min.) Cash budgeting (Chapter Appendix)

1. Projected Sales
Sales in Units
Revenues
May
80
$36,000
June
120
$54,000
July
200
$90,000
August
100
$45,000
September
60
$27,000
October
40
May
June
July
August
September
October
Collections of Receivables
From sales in:
May (30% $36,000)
June (50%; 30% $54,000)
July (20%; 50%; 30% $90,000)
August (20%; 50% $45,000)
September (20% $27,000)
Total
Calculation of Payables
$10,800
27,000
18,000
$55,800
May
Material and Labor Use, Units

Budgeted production
Direct materials
Wood (board feet)
Fiberglass (yards)
Direct manuf. labor (hours)
June
July
16,200
45,000
9,000
$70,200
August
27,000
22,500
5,400
$54,900
September
200
100
60
40
1,000
1,200
1,000
500
600
500
300
360
300
200
240
200
$30,000
$15,000
$9,000
6,000
3,000
1,800
12,500
7,500
5,000
150
150
150
$7
500
$3,500
$7
300
$2,100
$7
200
$1,400
Disbursement of Payments
Direct materials
Wood
(1,000; 500; 300 $30)
Fiberglass
(1,200; 600; 360 $5)
Direct manuf. labor
(500; 300; 200 $25)
Interest payment
(6% $30,000 12)
Variable OHD Calculation
Variable OHD rate
OHD driver
Variable OHD expense
6-27
October
6-35 (Contd.)
Cash Budget for the months of July, August, September 2004
Beginning cash balance
Add receipts:
Collection of receivables
Total receipts
Total cash available
Deduct disbursements:
Material purchases
Variable costs
Fixed costs
Interest payments
Total disbursements
Ending cash balance
July
$10,000
August
$ 5,650
September
$40,100
55,800
55,800
$65,800
70,200
70,200
$75,850
54,900
54,900
$95,000
36,000
12,500
3,500
8,000
150
60,150
$ 5,650
18,000
7,500
2,100
8,000
150
35,750
$40,100
10,800
5,000
1,400
8,000
150
25,350
$69,650
2. Yes, Slopes has a budgeted cash balance of $69,650 on 10/1/2004 and so will be in a position
to pay off the $30,000 1-year note on October 1, 2004.
3. No. Slopes does not maintain a $10,000 minimum cash balance in July. It could encourage
its customers to pay earlier by offering a discount. Alternatively, slopes could seek short-term
credit from a bank.
6-28
6-36 (30 min.) Cash budget, fill in the blanks, chapter appendix.
Quarters
II
III
I
Cash balance, beginning
Add receipts
Collections from customers
Total cash available for needs
Deduct disbursements
Direct materials
Payroll
Other costs
Interest costs (bond)
Machinery purchase
Income taxes
Total disbursements
Minimum cash balance desired
Total cash needed
Cash excess (deficiency)
Financing
Borrowing (at beginning)
Repayment (at end)
Interest (at 12% per annum)
Total effects of financing
Cash balance, ending
IV
Year as a
Whole
$ 15,000
$ 32,000
$ 15,000
$ 50,000
385,000
400,000
315,000
347,000
295,000
310,000
365,000
415,000
1,360,000
1,375,000
175,000
125,000
50,000
3,000
0
15,000
368,000
125,000
110,000
45,000
3,000
85,000
14,000
382,000
110,000
95,000
40,000
3,000
0
12,000
260,000
155,000
118,000
49,000
3,000
0
20,000
345,000
565,000
448,000
184,000
12,000
85,000
61,000
1,355,000
15,000
383,000
15,000
397,000
15,000
275,000
15,000
360,000
15,000
1,370,000
35,000
55,000
5,000
50,000
(50,000)
(4,500)
(4,500)
17,000
(50,000)
0
0
0
0
50,000
0
0
50,000
0
0
0
0
0
(50,000)
(4,500)
(54,500)
$ 32,000
$ 15,000
$ 50,000
$ 15,500
15,000
15,500
Note that the short-term loan is only repaid when it can be paid in full and after maintaining the
minimum balance. The interest on the loan is only paid at the time the loan is repaid.
6-29
6-30
6-31
6-38
1.
2.
(60-75 min.)
Comprehensive budget; fill in schedules.
Schedule A: Budgeted Monthly Cash Receipts

Item
September
October
Total sales
$40,000*
$48,000*
Credit sales (25%)
10,000*
12,000*
Cash sales (75%)
$30,000
$36,000
Receipts:
Cash sales
$36,000*
Collections on accounts receivable
10,000*
Total
$46,000*
*Given.
November
$60,000*
15,000
$45,000
$45,000
12,000
$57,000
December
$80,000*
20,000
$60,000
$60,000
15,000
$75,000
Schedule B: Budgeted Monthly Cash Disbursements for Purchases

Item
Purchases
Deduct 2% cash discount
Disbursements
*Given. Note that purchases are
30%.
October November
December 4th Quarter
$42,000*
$56,000
$25,200
$123,200
840*
1,120
504
2,464
$41,160*
$54,880
$24,696
$120,736
70.0% of next months sales given a gross margin of
3.
Schedule C: Budgeted Monthly Cash Disbursements for Operating Costs

Item
October
November
December 4th Quarter
Salaries and wages
(15% of sales)
$ 7,200*
$ 9,000
$12,000
$28,200
Rent (5% of sales)
2,400*
3,000
4,000
9,400
Other cash operating costs
(4% of sales)
1,920*
2,400
3,200
7,520
Total
$11,520*
$14,400
$19,200
$45,120
*Given.
4.
Schedule D: Budgeted Total Monthly Cash Disbursements

Item
October
November
December
Purchases
$41,160*
$54,880
$24,696
Cash operating costs
11,520*
14,400
19,200
Light fixtures
600*
400
-Total
$53,280*
$69,680
$43,896
*Given.
5.
Schedule E: Budgeted Cash Receipts and Disbursements

Item
October
November
December
Receipts
$46,000*
$57,000
$75,000
Disbursements
53,280*
69,680
43,896
Net cash increase
$31,104
Net cash decrease
$ 7,280*
$12,680
*Given
6-32
4th Quarter
$120,736
45,120
1,000
$166,856
4th Quarter
$178,000
166,856
$ 11,144
6-38 (Contd.)
6.
Schedule F: Financing Required

Item
Beginning cash balance
Net cash increase
Net cash decrease
Cash position before
borrowing (a)
Minimum cash balance
required
Excess (Deficiency)
Borrowing required (b)
Interest payments (c)
Borrowing repaid (d)
Ending cash balance
(a+bcd)
*Given.
October
$12,000*
November
$ 8,720*
December
$ 8,040
31,104
4th Quarter
$12,000
11,144
7,280*
12,680
4,720*
(3,960)
39,144
23,144
8,000*
(3,280)*
4,000*
8,000
(11,960)
12,000
8,000
31,144
540
16,000
8,000
15,144
16,000
540
16,000
$22,604
$22,604
$ 8,720*
$ 8,040
Interest computation:
$ 4,000 @ 18% for 3 months =
$12,000 @ 18% for 2 months =
Total interest expense
$180
360
$540
7.
Short-term, self-liquidating financing is best. The schedules clearly demonstrate the
mechanics of a self-liquidating loan. The need for such a loan arises because of the seasonal
nature of many businesses. When sales soar, the payroll and suppliers must be paid in cash. The
basic source of cash is proceeds from sales. However, the credit extended to customers creates a
lag between the sale and the collection of cash. When the cash is collected, it in turn may be
used to repay the loan. The amount of the loan and the timing of the repayment are heavily
dependent on the credit terms that pertain to both the purchasing and selling functions of the
business. Somewhat strangely, in seasonal businesses, the squeeze on cash is often heaviest in
the months of peak sales and is lightest in the months of low sales.
6-33
6-38 (Contd.)
8.
Newport Stationery Store

Budgeted Income Statement
For the Quarter Ending December 31, 2004
RevenuesSchedule A
Cost of goods sold (70% of sales)
Gross margin
Operating costs
Salaries and wagesSchedule C
$28,200
RentSchedule C
9,400
Other cash operating costsSchedule C
7,520
Depreciation ($1,000 3 months)
3,000
Operating income
Deduct interest expense Schedule F
Add purchase discounts Schedule B
Net income (before taxes)
*Note: Ending inventory and proof of cost of goods sold:
Inventory, September 30
$ 63,600
Add purchasesSchedule B
123,200
Deduct inventory, December 31:
Basic inventory
30,000
December purchasesSchedule B
25,200
Cost of goods sold
6-34
$188,000
131,600*
56,400
48,120
8,280
540
2,464
$ 10,204
$186,800
55,200
$131,600
6-38 (Contd.)
Newport Stationery Store
Budgeted Balance Sheet
December 31, 2004
Assets:
Current assets:
CashSchedule F
Accounts receivable
December credit salesSchedule A
Inventory (see Note above)
Total current assets
Equipment and fixtures:
Equipmentnet ($100,000 $3,000 depreciation)
FixturesSchedule D
Total
Liabilities and Owners' Equity:
Liabilities
Owners equity
Total
*Owners equity, September 30:
$12,000 + $63,600 + $10,000 + $100,000 (Given)
Net income, quarter ended December 31
Owners equity, December 31
$ 22,604
20,000
55,200
97,804
$97,000
1,000
98,000
$195,804
None
$195,804*
$195,804
$185,600
10,204
$195,804
9.
All of the transactions have been simplifiedfor example, no bad debts are considered.
Also, many businesses face wide fluctuation of cash flows within a month. For example,
perhaps customer receipts lag and are bunched together near the end of a month, and
disbursements are due evenly throughout the month, or are bunched near the beginning of the
month. Cash needs would then need to be evaluated on a weekly and, perhaps, daily basis rather
than on a monthly basis.
6-35
6.40 (60 min.) Comprehensive review of budgeting, cash budgeting, chapter

appendix.
a.
b.
Schedule 1: Revenues Budget

Units (Lots)
Lemonade
1,080
Diet Lemonade
540
Total
Selling Price
$9,000
8,500
Total Sales
$ 9,720,000
4,590,000
$14,310,000
Schedule 2: Production Budget in Units

Budgeted unit sales (Schedule 1)
Total requirements
6-36
Products
Lemonade
Diet Lemonade
1,080
540
20
10
1,100
550
100
50
1,000
500
6-40 (Contd.)
c. Schedule 3A: Direct Materials Usage Budget in Units and Dollars
SyrupSyrupLemon.
Diet Lem. Containers Packaging
Total
Units of direct materials to be used for production of
Lemonade (1,000 lots 1)
1,000
1,000
1,000
Units of direct materials to be used for production of
Diet Lemonade (500 lots 1)
500
500
500
Total direct materials to be used (in units)
1,000
500
1,500
1,500
Units of direct materials to be used from beginning
inventory (under FIFO)
80
70
200
400
Multiply by cost per unit of beginning inventory
$
1,100
$ 1,000
$
950
$
900
Cost of direct materials to be used from beginning
inventory (a)
$ 88,000
$ 70,000
$ 190,000
$ 360,000 $ 708,000
Units of direct materials to be used from purchases
(1,000 80; 500 70; 1,500 200; 1,500 400)
920
430
1,300
1,100
Multiply by cost per unit of purchased materials
$
1,200
$ 1,100
$
1,000
$
800
Cost of direct materials to be used from purchases (b) $1,104,000
$473,000
$1,300,000
$ 880,000 3,757,000
Total cost of direct materials to be used (a + b)
$1,192,000
$543,000
$1,490,000
$1,240,000 $4,465,000
d. Schedule 3B: Direct Materials Purchases Budget in Units and Dollars
SyrupSyrupLemon.
Diet Lem. Containers Packaging
Total
Direct materials to be used in production (in units)
from Schedule 3A
1,000
500
1,500
1,500
Add target ending direct materials inventory in units
30
20
100
200
Total requirements in units
1,030
520
1,600
1,700
Deduct beginning direct materials inventory in units
80
70
200
400
Units of direct materials to be purchased
950
450
1,400
1,300
Multiply by cost/unit of purchased materials
$
1,200
$ 1,100 $
1,000 $
800
Direct materials purchase costs
$1,140,000
$495,000 $1,400,000 $1,040,000 $4,075,000
6-37
6-40 (Contd.)
e.
Schedule 4: Direct Manufacturing Labor Budget

Output
Direct
Units
Manufacturing
Produced
Labor Hours Total
(Schedule 2)
per Unit
Hours
Lemonade
1,000
20
20,000
Diet Lemonade
500
20
10,000
Total
30,000
Hourly
Rate
Total
$25
$500,000
25
250,000
$750,000
f.
Schedule 5: Manufacturing Overhead Costs Budget

for the Year Ended December 31, 2005
Variable manufacturing overhead costs:
Lemonade [$600 2 hours per lot 1,000 lots (Schedule 2)]
$1,200,000
Diet Lemonade [$600 2 hours per lot 500 lots (Schedule 2)]
600,000
1,800,000
1,200,000
$3,000,000
Fixed manufacturing overhead per bottling hour = $1,200,000 3,000 = $400. Note that the total
number of bottling hours is 3,000 hours: 2,000 hours for Lemonade (2 hours per lot 1,000 lots)
plus 1,000 hours for Diet Lemonade (2 hours per lot 500 lots).
g. Schedule 6A: Ending Finished Goods Inventory Budget
as of December 31, 2005
Cost per
Units (Lots) Unit (Lot)
Direct materials:
Syrup for Lemonade
30
$1,200
$ 36,000
Syrup for Diet Lemonade
20
1,100
22,000
Containers
100
1,000
100,000
Packaging
200
800
160,000
Units
Finished goods:
Lemonade
20
Diet Lemonade
Total ending inventory
$5,500*
10
Total
$318,000
Cost per
Unit
5,400*
*From Schedule 6B
6-38
$110,000
54,000
164,000
$482,000
6-40 (Contd.)
Schedule 6B: Computation of Unit Costs of Manufacturing Finished Goods
Cost per
Unit (Lot)
or Hour
of Input
Syrup
Containers
Packaging
Variable manufacturing
overhead*
Fixed manufacturing
overhead*
Total
Lemonade
Inputs in
Units (Lots)
or Hours Amount
$1,200
Diet Lemonade
Inputs in
Units (Lots)
or Hours Amount
$1,100
1,000
800
500
20
1,000
800
500
1,200
$ 25
20
600
1,200
400
800
$5,500
800
$5,400
*Variable manufacturing overhead varies with bottling hours (2 hours per lot for both Lemonade and Diet
Lemonade). Fixed manufacturing overhead is allocated on the basis of bottling hours at the rate of $400 per bottling
hour calculated in Schedule 5.
h. Schedule 7: Cost of Goods Sold Budget

From
Schedule
Beginning finished goods inventory,
January 1, 2005
Direct materials used
Deduct ending finished goods inventory,
December 31, 2005
Cost of goods sold
Given*
3A
4
5
Total
$
790,000
$4,465,000
750,000
3,000,000
8,215,000
9,005,000
164,000
$8,841,000
*Given in description of basic data and requirements (Lemonade, $5,300 100; diet Lemonade, $5,200 50)
i. Schedule 8: Marketing Costs Budget

Marketing costs, 12% Revenues, $14,310,000
$1,717,200
j. Schedule 9: Distribution Costs Budget

Distribution costs, 8% Revenues, $14,310,000
$1,144,800
6-39
6-40 (Contd.)
k.
l.
Schedule 10: Administration Costs Budget

Administration costs, 10% Cost of goods
manufactured, $8,215,000
$ 821,500
Budgeted Income Statement

Sales
Cost of goods sold
Gross margin
Operating costs:
Marketing costs
Distribution costs
Administration costs
Total operating costs
Operating income
Income tax expense
Net income
Schedule 1
Schedule 7
Schedule 8
Schedule 9
Schedule 10
$14,310,000
8,841,000
5,469,000
$1,717,200
1,144,800
821,500
3,683,500
$ 1,785,500
625,000
$ 1,160,500
Schedule 11: Collections from Customers

Budgeted Revenue for 2005
Schedule 1
Add collections from beginning
accounts receivable balance
Given
Deduct ending accounts receivable
balance
Given
Schedule 12: Direct Materials Disbursements

Budgeted direct material purchase
costs for 2005
Schedule 3B
Add payment for beginning accounts
payable balance
Given
Deduct ending accounts payable
balance
Disbursements for direct materials
Given
Schedule 13: Variable Manufacturing Overhead Disbursements

Variable Manufacturing Overhead:
Lemonade (1,000 $600 2)
Schedule 5
Diet Lemonade (500 $600 2)
Schedule 5
Total
6-40
$14,310,000
550,000
14,860,000
600,000
$14,260,000
$ 4,075,000
300,000
4,375,000
400,000
$ 3,975,000
$ 1,200,000
600,000
$ 1,800,000
6-40 (Contd.)
Schedule 14: Fixed Manufacturing Overhead Disbursements
Budgeted fixed manufacturing overhead
Schedule 5
Deduct depreciation
Given
Cash disbursements for fixed overhead
m.
$ 1,200,000
400,000
$ 800,000
Cash Budget
December 31, 2005
Cash balance, beginning

Add receipts
Total cash available for needs
Deduct disbursements
Direct materials
Variable manufacturing overhead
Fixed manufacturing overhead
Equipment purchase
Marketing costs
Distribution costs
Administration costs
Income tax expense
Total disbursements
Cash excess (deficiency)
Financing
Borrowing
Repayment
Interest
Total effects of financing
Cash balance ending
Given
100,000
Schedule 11
14,260,000
$14,360,000
Schedule 12
Schedule 4
Schedule 13
Schedule 14
Given
Schedule 8
Schedule 9
Schedule 10
Given
$ 3,975,000
750,000
1,800,000
800,000
1,350,000
1,717,200
1,144,800
821,500
625,000
$12,983,500
$ 1,376,500
0
0
0
0
$ 1,376,500
6-41
Chapter 6 Internet Exercise

The Internet exercise is available to students only on the Prentice Hall Companion Website
www.prenhall.com/horngren. Students can click on Cost Accounting, 11th ed., and access the
Internet Exercise for the chapter, which links to the Web site of a company or organization. The
Internet Exercise on the Web will be updated periodically so that it is current with the latest
information available on the subject organization's Web site. A printout copy of the Internet
exercise for this chapter as of early 2002 appears below.
The solution to the Internet exercise, which will also be updated periodically, is available
to instructors from the Companion Website's faculty view. To access the solution, click on Cost
Accounting, 11th ed., Faculty link, and then register once to obtain your password through the
online form. After the initial registration, you will have a personal login ID and password to use
to log in. A printout of the solution to the Internet exercise for this chapter as of early 2002
follows. The exercise and solution provide instructors with an idea of the content of the Internet
exercise for this chapter.
Internet Exercise
Mark's Work Warehouse Ltd. provides a rare glimpse at budgeting and responsibility accounting
in action. Its award-winning annual report publishes corporate goals, forecasts, and senior
management objectives for the upcoming year. It also provides a "post-mortem" on whether it
achieved prior year's goals, forecasts, and objectives. To access Mark's Work Warehouse's
(MWW's) 2001 annual report go to http://www.marks.com and click on the "Corporate" link,
followed by "Investor Information."
1.
Primary advantages of budgets are that they compel planning, promote communication
within an organization, and provide criteria for evaluating performance. Provide examples
of how the budgetary disclosures in MWW's annual report help accomplish these goals.
Provide specific examples.
2.
Which forecasts are part of MWW's operating budget, and which are part of its financial
budget?
3.
In terms of responsibility and control, are the FY 2001 performance objectives for the
following senior managers appropriate?
a. President
b. Chief Financial Officer,
c. Vice President, Store Design
d. Vice President, Controller
4a.
Refer to MWW's operational goals. According to MWW, why are operational goals
important?
What were MWW's goals for sales per average retail square foot in its Mark's Division,
Work World Division, and Dockers Stores Divisions corporate stores in fiscal year 2001?
Did they meet their goals?
4b.
5a.
Refer to MWW's financial goals. What is MWW's stated objective in preparing and
publishing financial goals?
6-42
Internet Exercise (Contd.)

5b.
What were MWW's fiscal year 2001 goals for after-tax profit margin and return on equity?
Did they meet their goals?
Solution to Internet Exercise

1.
MWW's annual report includes a broad range of one to five-year budgets and
performance objectives. MWW provides fiscal year 2002 performance objectives for twelve top
senior managers, and offers a "postmortem" on fiscal year 2001. Publishing performance
objectives in the annual report clearly communicates expectations and provide a measure for
evaluating results. Presumably these published objectives are the outgrowth of communication
and planning.
In addition, MWW provides one and five-year operating and financial forecasts.
Operational goals include various turnover ratios, customer satisfaction measures, sales and
profit goals, as well as human resource goals. MWW assigns responsibility for meeting most
operational goals to specific individuals within the organization. MWW's financial budgets
include a broad range of profit, liquidity, solvency, and cash flow goals. MWW also provides
pro forma financial statements for fiscal year 2002.
2.
Part of the operating budget:

The senior management performance forecast
Operational goals
Other indicators
Master targets
The table of key assumptions
Part of the financial budget:
Financial goals
Pro forma financial statements
3a.
A pre-tax profit of $16.5 million is an appropriate performance goal for the president.
3b.
A 30% increase in the company's share price is not an appropriate goal for the CFO. A
company's share price is dependent upon many factors outside the direct control of the
CFO. These include such factors as interest rates, inflation, economic growth, and
competition.
3c.
Planning, relocating, and refurbishing stores at targeted costs is an appropriate goal for
the Vice President of Store Design.
3d.
Timely and accurate financial reporting, tax compliance, and budgeting are appropriate
goals for the Controller.
4a.
"Operational goals are key items that the Company monitors to gauge its progress towards
the achievement of its Strategic Plan and Mission. Operational goals and other indicators
also provide data that can be benchmarked against our competitors in the industry."
6-43
Internet Exercise (Contd.)

4b.
They met their goal in the Marks division but not in the other two divisions.
Marks Division
Work World Division
Dockers Stores Divisions
Goal
Actual
$258
$235
$446
$259
$221
$333
5a.
Financial goals are set and monitored to ensure that while the company is aggressively
pursuing its Strategic Plan and its Mission, it is still being financed conservatively and is
providing a superior return to its investors."
5b.
They did not meet either goal.

After-tax profit margin
Return on equity
Goal
2%
15%
Actual
1.7%
13.2%
6-44
6-45

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CHAPTER 6

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

The budgeting cycle includes the following elements:

Production and marketing traditionally have operated as relatively independent business

The steps in preparing an operating budget are:

6.12 Factors reducing the effectiveness of budgeting of companies include:

Lack of a well-defined strategy,

6-16 (15 min.) Advantages of budgeting.

Budgets compel strategic planning and facilitate implementation of plans. An

(10 min.) Budgeting material purchases.

Direct materials to be purchased

Sales and production budget.

400,000 12 months = 4,800,000

= 1,200,000 + 200,000 1,300,000

Direct materials usage, unit costs and gross margins.

1. Direct Materials Usage Budget

$0.06 500,000 = $30,000

Output units produced

4,500,000 12 ounces per unit = 54,000,000

6-22 (15-20 min.) Revenue, production, and purchases budget.

800,000 motorcycles 400,000 yen = 320,000,000,000 yen

Budgeted sales (units)

Direct materials to be used in production, 780,000 2

6-24 (20-30 min.) Activity-based budgeting.

6-25 (20-30 min.) Kaizen approach to activity-based budgeting

March 2002 rates

6-26 (15 min.) Responsibility and controllability.

6-27 (30 min.) Cash flow analysis, Chapter Appendix.

0.30 110 unit sales in March

(b) Purchase price =

Production Budget in Units

Budgeted unit sales

Direct Materials Usage Budget (units):

Direct Materials Cost Budget

9. Unit price (FIFO)

10. Cost of DM used from

11. Materials to be used from

14. Direct materials to be

Direct manufacturing labor budget

Manufacturing overhead budget

Computation of unit costs of ending inventory of finished goods:

Cost per Unit

Cost of goods sold

Cost of goods sold

c2,000 (1 0.01); d3,000 (1 0.01); e$160,000 (1 0.02)

6-29 Excel Application

aChippo: 500,000 x 0.50 = 250,000 pounds chocolate chips;

pounds cookie dough

pounds cookie dough

Cost of Goods Sold

6-30 (30-40 min.) Revenue and production budgets.

Budgeted sales in units

Direct materials to be used in production

6-31 (30 min.)

Budgeted income statement.

6.32 (15 min.) Responsibility of purchasing agent.

6-34 (60 min.) Comprehensive operating budget, budgeted balance sheet.

Schedule 1: Revenues Budget

Budgeted unit sales (Schedule 1)

Schedule 3A: Direct Materials Usage Budget

Schedule 3B: Direct Materials Purchases Budget

Schedule 5: Manufacturing Overhead Budget