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Chapter 13 - Planning and Budgeting

13

Planning and Budgeting

Solutions to Review Questions


13-1.
Next periods budget has more detail because it is closer in time than the longer-range
forecasts. The budget plan is a blueprint for operations in the coming period. It must be
sufficiently detailed so that it provides adequate direction to the various people
responsible for operations.
13-2.
Cash receipts and disbursements often take place in different time periods from when
items are recognized in the income statement and balance sheet. Thus, a company
needs to prepare a cash budget to ensure that cash needs will be met.
13-3.
Answers will vary, but examples include:
a. Econometric methodsusing economic data to forecast using statistical models;
b. Delphi techniquecollecting and synthesizing the opinion of experts;
c. Estimates from salespeople and other knowledgeable personnel;
d. Trend analysisstatistical analysis of historical data;
e. Market researchcollecting information on the macroeconomic trends in the
industry and in the local markets.

13-1

Chapter 13 - Planning and Budgeting

13-4.
The master budget links long-term objectives and short-term, tactical plans.
Organization goals are broad-based statements of purpose. Strategic plans take the
broad-based statements and express them in terms of detailed steps needed to attain
those goals. Budgets are the short-term plans used to implement the steps included in
the strategic plans.
For example, a company might have a goal of "Becoming the number 1 company in the
industry." The strategic plans would include such statements as: "Increase sales volume
by 20% per year." The master budget would state the number of units that are needed
to be produced and sold in the coming period to meet the 20% volume increase as well
as the production and marketing costs necessary to attain that objective. The master
budget would also include estimates of the levels of cash, accounts receivable,
inventories, and fixed assets needed to support the budgeted level of activity.
13-5.
Because middle management has better knowledge about operations at lower levels in
the organization, and because budgets are usually used to evaluate performance or
compute bonuses for middle management, middle management might have a tendency
to underestimate revenues and overestimate costs. This bias arises because if the
biased plans are adopted, middle management will find it easier to meet targets and to
achieve bonus awards. Of course, if upper management always "tightens" the budget
plans suggested by middle management, gaming might result. The disadvantage of this
gaming is that the planning effectiveness might be reduced.
13-6.
Budgeting aids in coordination in a number of ways. By relating sales forecasts to
production activities it is possible to reduce the likelihood of over- or under-production. It
coordinates production so that plants making subassemblies are making the
appropriate number at the right time as needed by the plant making the final
assemblies. In addition, the budget process is used to make certain that adequate cash
is on hand to finance company activities for the coming period. Guidelines are set for
administrative and selling departments so that their costs are commensurate with the
companys income and output goals.

13-2

Chapter 13 - Planning and Budgeting

Solutions to Critical Analysis and Discussion Questions


13-7.
The strategic plan provides broad, long-range goals for the company. The budget
provides more detail for how to work toward achieving those goals on an annual (or
quarterly, or monthly) basis.
13-8.
Answers will vary. Two possible reasons are (1) smaller firms have less of a cushion
and therefore require better estimates of cash and (2) smaller firms might have more
difficulty (might need to pay higher rates) borrowing money.
13-9.
The earlier the budgeting process is started, the earlier the company will understand
some of the problems it must address. In addition, an early start allows managers to
work on the budget, step back and think about it, and then revise it. A later start avoids
some of the costs of developing budgets only to have them revised as more current
data become available.
13-10.
Because inventories would be eliminated, the timing of purchases would be closer to
the time of production. This would minimize the differences between the timing of cash
outflows for materials purchases, work in process and finished goods, and the time
when the related costs are recognized in the production budget.
13-11.
The purpose of tying spending to budgets is to ensure that the wishes of the legislature
are carried out. The problem is that managers cannot take advantage of funds in one
budget to use in another area, even if that means lower overall costs to the government.

13-3

Chapter 13 - Planning and Budgeting

13-12.
Planning communicates the goals of the organization and can be used to coordinate the
activities of different units in the organization. The control purpose of the budget is to
provide a mechanism to influence managers, either by limiting resources available or by
providing a performance evaluation benchmark.
Problems can arise when the manager who is most knowledgeable, and, therefore the
best source of information for planning, will be evaluated at the end of the period.
Knowing that the information he or she submits for planning purposes will be used to
evaluate

13-4

Chapter 13 - Planning and Budgeting

performance can affect the managers actions when providing information needed for
preparing the budget.
13-13.
It is common to start the budgeting process with a sales forecast because sales are
most out of control of managers. However, if raw materials were difficult to obtain and a
ready market existed for output, especially if prices were regulated, a company might
start with a forecast of production. Electricity production might be an example.
13-14.
In organizations where spending is literally tied to the budget, managers often spend
what remains in the budget as the year ends to avoid losing the funds and potentially
leading to lower budgets in the future.
13-15.
A positive balance at the end of the budgeting period does not ensure that there is
always cash available. An example is when all bills are due on the first of the month and
receipts are collected at the end of the month. The net cash flows can be positive even
though, during the month, there is a negative cash balance.

13-5

Chapter 13 - Planning and Budgeting

Solutions to Exercises
13-16. (15 min.)Estimate Sales Revenues: SVI.
.90 = market volume in the coming year (as a percent of last year)
.85 = number of trades in the coming year (as a percent of last year)
1.15 = average commission per trade in the coming year (as a percent of last year)
150,000 trades x $60 per trade x .85 x .90 x 1.15 = $7,917,750.
Note: This is not the same as a 25 percent reduction (15% + 10%) because the volume
would not have been 10 percent of last years volume but 10 percent of the reduced
volume of 127,500 trades (= 150,000 x 85%).
13-17. (15 min.) Estimate Sales Revenues: EZ-Credit, Inc.
Portfolio
Interest
Income
Amount
Rate
(thousands)
Consumer loans..................................................
$84 million
12%
$10,080
Home equity loans..............................................
60 million
8
4,800
Securities.............................................................
16 million
7
1,120
Total..............................................................
$16,000
13-18. (15 min.)Estimate Sales Revenues: Starlite Company.
Market size last year = 45,000 units 0.3 = 150,000 units
Market size next year = 1.10 x 150,000 units
= 165,000 units
Company share
= 25% x 165,000 units
= 41,250 units
Sales revenue
= 41,250 units x $11 per unit
= $453,750

13-6

Chapter 13 - Planning and Budgeting

13-19. (15 min.)Estimate Production Levels: Hofmann Corporation.


Hoffmann Corporation
Production Budget
For the Year Ended December 31
(in units)
Expected Sales................................................................... 72,000 units
Add: Desired ending inventory of finished goods
(1 months 12 months) x 72,000................................... 6,000
Total needs.......................................................................... 78,000
Less: Beginning inventory of finished goods...................... 3,900
Units to be produced........................................................... 74,100 units

13-20. (15 min.)Estimate Sales Levels Using Production Budgets: Sanlax, Inc.
Sanlax, Inc.
Sales Budget
For the Year Ended December 31
(in units)
Expected Production........................................................... 200,000 units
Subtract: Increase in inventory level...............................
20,000 units
Available for sale............................................................. 180,000 units

13-7

Chapter 13 - Planning and Budgeting

13-21. (25 min.)Estimate Production and Materials Requirements: Wyoming


Machines.
a.
Wyoming Machines
Casings Plant
Production Budget
For the Year Ended December 31
(in units)
Expected sales................................................................................. 160,000 units
Add: Desired ending inventory of finished goods.............................
5,000
Total needs....................................................................................... 165,000
Less: Beginning inventory of finished goods....................................
20,000
Units to be produced........................................................................ 145,000 units
b.

Wyoming Machines
Casings Plant
Direct Materials Requirements
For the Year Ended December 31
(in units)
Units to be produced........................................................................... 145,000
Direct materials needed per unit.........................................................
x 6 ounces
Total production needs (amount per unit times 145,000 units).......... 870,000 ounces
Add: Desired ending inventory
(2 months 12 months) x 160,000 x 6................................... 160,000
Total direct materials needs................................................................ 1,030,000
Less: Beginning inventory of materials...............................................
60,000
Direct materials to be purchased........................................................ 970,000 ounces
Alternative Method
Production (P)assumes finished goods in inventory reduced to 20,000 units at the
end of this year (BB = Beginning Balance; EB = Ending Balance):
BB + P = Sales + EB
20,000 + P = 160,000 + 5,000
P = 145,000 units
Materials Requirements:
BB + P = Usage + EB
60,000 + P = (6 x 145,000) + (2 12) x 160,000 x 6 oz.
P =
970,000 oz.

13-8

Chapter 13 - Planning and Budgeting

13-22. (25 min.)Estimate Purchases And Cash Disbursements: Westile


Company.
a. and b.

Westile Company
Merchandise Purchases Budget
For the Period Ended March 31
(in units)
January

Estimated sales...................................................
24,800
Add: Estimated sales inventory...........................
90,400a
Total merchandise needs................................
115,200
Less: Beginning inventory...................................
56,000
Merchandise to be purchased.............................
59,200
Estimated cost per unit........................................ x $2
Total estimated cost of merchandise...................
$118,400

February March
35,600
74,000
109,600
90,400
19,200
x $2
$38,400

26,400
62,000
88,400
74,000
14,400
x $2
$28,800

Estimated sales for following three months: 90,400 = 35,600 (February) + 26,400
(March) + 28,400 (April)
a

Note: Once the process reaches equilibrium, the estimated purchases (in units) are
equal to the budgeted sales three months in the future.

13-9

Chapter 13 - Planning and Budgeting

13-23. (25 min.)Estimate Purchases And Cash Disbursements: White Products.


a.

White Products
Merchandise Purchase Budget
For the Period Ended May 31
(in units)
April

May

Estimated sales...................................................
8,600
Add: Estimated ending inventory........................
7,000
Total merchandise needs....................................
15,600
Less: Beginning inventory...................................
8,000
Merchandise to be purchased.............................
7,600

7,000
7,400
14,400
7,000
7,400

b. Payments for these purchases are made as follows:


Month of Payment

Total

March

April.....................................................................
$385,200
$180,000a
May......................................................................
336,600
$180,000 = 40% x $45 x 10,000 units.
b $205,200 = 60% x $45 x 7,600 units.
c $136,800 = 40% x $45 x 7,600 units.
d $199,800 = 60% x $45 x 7,400 units.
a

13-10

Month of Delivery
April
$205,200b
136,800c

May
0
$199,800d

Chapter 13 - Planning and Budgeting

13-24. (15 min.)Estimate Cash Disbursements: Ashland Corporation.


Ashland Corporation
Schedule of Cash Disbursements
For the Period Ended October 31
Payments for purchases prior to September...................
Payments for September purchases................................
October purchases...........................................................
Total cash disbursements................................................
a $462,000

$ 30,000
165,000
462,000a
$657,000

= $660,000 70%

13-25. (15 min.)Estimate Cash Collections: Duluth Company.


Duluth Company
Schedule of Cash Collections
For the Month Ended December 31
Collections in December for sales prior to November........ $24,000
November sales.................................................................. 157,500a
December sales.................................................................. 75,000b
Total cash collections.......................................................... $256,500
a $157,500 = $225,000 x 70%
b $75,000 = $300,000 x 25%

13-11

Chapter 13 - Planning and Budgeting

13-26. (20 min.)Estimate Cash Collections: Nassau Products.


Nassau Products
Schedule of Cash Collections
For the Month Ended April 30
April
January sales......................................................
$11,400a
February sales.....................................................
16,800b
March sales.........................................................
167,400c
April sales............................................................
75,000d
Total cash collections.......................................
$270,600
a$11,400

= $285,000 x 4%
b$16,800 = $240,000 x 7%
c$167,400 = $270,000 x 62%
d$75,000 = $300,000 x 25%

13-12

Chapter 13 - Planning and Budgeting

13-27. (30 min.)Estimate Cash Receipts: Scare-2-B-U.


a. Revenues are as follows:
April.....................................................................
$12,000 = 75 occasions x $160
May......................................................................
$7,200 = 45 occasions x $160
June.....................................................................
$4,800 = 30 occasions x $160
July......................................................................
$9,600 = 60 occasions x $160
August.................................................................
$12,000 = 75 occasions x $160
September...........................................................
$26,400 = 165 occasions x $160
b. Cash receipts are as follows:
Scare-2-B-U
Multiperiod Schedule of Cash Receipts
Cash Receipts in Month of:
April
May
June
July
April sales............................................................
$3,600a
May sales............................................................
3,600b $2,160
June sales...........................................................
960c
2,400
$1,440
July sales.............................................................
1,920
4,800
$2,880
August sales........................................................
2,400
6,000
September sales.................................................
5,280
________ ______
_______
Total cash collections

$8,160

______
$6,480

a $3,600

_______
$8,640

= 12,000 x 30%
b $3,600 = $7,200 x 50%
c $960 = $4,800 x 20%
This pattern is repeated for subsequent months.

13-13

$14,160

Total Cash
Receipts for
Period
$3,600
5,760
4,800
9,600
8,400
5,280
$37,440

Chapter 13 - Planning and Budgeting

13-28. (30 min.)Estimate Cash Receipts: Varmit-B-Gone.


Revenues are as follows:
March......
April.........
May.........
June........
July.........
August.....

$28,800
50,400
168,000
320,000
384,000
288,000

=
=
=
=
=
=

0.6 calls
0.9 calls
1.5 calls
2.5 calls
3.0 calls
2.4 calls

x
x
x
x
x
x

600 subscribers
700 subscribers
1,400 subscribers
1,600 subscribers
1,600 subscribers
1,500 subscribers

x
x
x
x
x
x

$80
$80
$80
$80
$80
$80

Collections of these revenues are expected according to the following schedule:


Varmit-B-Gone
Multiperiod Schedule of Cash Receipts
Cash Receipts in Month of:
May
June
July
August
March sales.........................................................
$ 2,304a
($15,000)
April sales............................................................
30,240b
$4,032
($27,000)
May sales............................................................
50,400c
100,800
($97,500)
June sales...........................................................
96,000
($187,500)
July sales.............................................................
($225,000)
August sales........................................................
_________ ________
($168,000)

Total Cash
Receipts
for Period
$2,304
34,272

$13,440

164,640

192,000 $25,600

313,600

115,200

230,400

345,600

86,400

86,400

Total cash collections.......................................


$82,944 $200,832 $320,640 $342,400

$946,816

a $2,304

= 8% x $28,800
b $30,240 = 60% x $50,400
c $50,400 = 30% x $168,000
This pattern is repeated for subsequent months.

13-14

Chapter 13 - Planning and Budgeting

13-29. (30 min.) Prepare Budgeted Financial Statements: Varmit-B-Gone.


Varmit-B-Gone
Budgeted Income Statement
For the Month of September

Calculations
Revenues............................................................
$207,360 (90% x 1,500) x (80% x 2.4) x $80
Less manufacturing costs:
Variable costs..................................................
$ 17,280 (.72a x $24,000)
Maintenance and repair...................................
22,220 (1.01 x $22,000)
Depreciation.....................................................
42,000 (no change)
Total service costs...............................................
$ 81,500
Marketing and administrative:
Marketing (variable) ........................................
$ 10,440 (.72a x $14,500)
Administrative (fixed) ......................................
57,750 (1.05 x $55,000)
Total marketing and administrative costs............
$ 68,190
Total costs............................................................
$149,690
Operating profit....................................................
$ 57,670
a Ratio of September to August volume:
September: (90% x 1,500) x (80% x 2.4) = 2,592
August: 1,500 x 2.4 = 3,600
Ratio = .72 = 2,592 3,600
or
Ratio = .80 x .90 = .72

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Chapter 13 - Planning and Budgeting

13-30. (15 min.) Prepare Budgeted Financial Statements: Rhodes, Inc.


Rhodes, Inc.
Budgeted Income Statement
August
Revenues (240 units @ $675/unit) ....................
$162,000
Less
Manufacturing costs:
Variable........................................................
$ 26,994
Depreciation (fixed) .....................................
22,950
Total manufacturing costs...................................
$ 49,994
Gross profit margin..............................................
$112,056
Less:
Marketing and Administrative
Fixed costs (cash) .......................................
$61,974
Depreciation (fixed) .....................................
19,050
Total marketing and administrative costs............
$81,024
Operating profits..................................................
$31,032

13-16

Calculations
($150,000 x 1.20 x .90)

($21,840 x 1.20 x 1.03)


(unchanged)

($56,340 x 1.10)
(unchanged)

Chapter 13 - Planning and Budgeting

13-31. (15 min.) Prepare Budgeted Financial Statements: Carreras Caf.


Carreras Caf
Budgeted Income Statement
June
Revenues (2,520 meals @ $18.75/meal) ..........
$47,250
Less
Service costs:
Food.............................................................
$ 7,623
Labor.................................................................
10,080
Other variable costs..........................................3,450
Fixed service costs .....................................9,600
Total manufacturing costs...................................
$ 30,753
Gross profit margin..............................................
$16,497
Less:
Marketing and Administrative
Marketing (variable) ....................................
$ 3,780
Administrative ..............................................5,000
Total marketing and administrative costs............
$8,780
Operating profits..................................................
$7,717

13-17

Calculations
($15 x 4,200 x 0.60 x 1.25)

($11,550 x 0.60 x 1.10)


($16,800 x 0.60)
($5,750 x 0.60)
(unchanged)

($6,300 x 0.60)
(unchanged)

Chapter 13 - Planning and Budgeting

13-32. (15 min.)Incentives and Sales ForecastsEthical Issues: Northwest


Hardware.
a. One explanation is that Lloyd has better (more specific) local knowledge about
conditions in the Montana District that the statistical analysis does not include. A second
explanation is that Lloyd wants to be conservative in his estimate because he believes
his performance evaluation depends on how well the district does relative to this
forecast.
b. The first explanation is the same as in requirement (a); Lloyd has better information.
A second explanation is that Lloyd is trying to justify hiring additional employees to sell
in the district and thinks it will be easier to justify if the sales forecast is higher.
c. Answers will vary. Gaming the system is common and, given that firms use targets to
assess performance, is expected. The answer to this question depends, in part, on
what Lloyds motives are and how good his information is. For example, if he knows
that the sales will be $1 million, but reports $900,000 to ensure a higher bonus, that
might be considered unethical. If he thinks sales might be $1 million, but knows he will
be fired if he fails to meet the target, that would not generally be considered unethical.
The controller should consider both forecasts. Both forecasts represent different types
of knowledge and the forecasters have different incentives (and biases).
By understanding the knowledge incorporated in each forecast and the incentives that
the forecasters have, the controller is in a better position to use the information from
both forecasts.
13-33. (15 min.) Budget RevisionsEthical Issues: Galaxy Electronics.
a. Elizabeth is probably hoping that because the company is committed to the aircraft
guidance program, it will not cut funding for that program and she can protect the other
projects, including her favorite.
Is this ethical? Answers will vary. It certainly depends on Elizabeths motives. If she
believes that cutting other programs will truly harm them, more than cuts to the aircraft
guidance program, then she is doing what she is paid to do, manage the department. At
the other extreme, if she is simply trying to fund her personal project at the expense of
the company, that might be considered unethical.
b. The managers of the company probably have been promoted from positions similar
to Elizabeths and understand her motives and incentives. They can adjust the budget
after she submits the revision. The final budget will depend on many factors including
negotiation skills.

13-18

Chapter 13 - Planning and Budgeting

13-34. (15 min.) Sensitivity Analysis: Sanjanas Sweet Shoppe.


The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown
in row 2, do not enter the opening quote (). Replace the # in the formula with the
specific row number. For example, to enter the formula for gross margin for unit gross
margin of $2 and 15,000 customers, place the cursor in cell c6 and type everything
between, not including, the following quotation marks: =a6*b6.
Notice the range of incomes is quite large, from a loss of $5,900 to a profit of $90,500.

13-35. (15 min.) Sensitivity Analysis: Bay Area Limos.


The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown
in row 2, do not enter the opening quote (). Replace the # in the formula with the
specific row number. For example, to enter the formula for gross margin for unit gross
margin of $20 and 2,000 customers, place the cursor in cell c6 and type everything
between, not including, the following quotation marks: =a6*b6.
Notice the range of incomes is quite large, from a loss of $29,000 to a profit of
$142,000.

13-19

Chapter 13 - Planning and Budgeting

Solutions to Problems
13-36. (30 min.)Prepare Budgeted Financial Statements: Dancer Components.
Dancer Components
Budgeted Income Statement
For Year 2

Calculations
Revenues............................................................
$6,389,700a $5,700,000 x 1.18 x .95
Manufacturing costs:
Materials..........................................................
$ 364,762 $336,000 x .92 x 1.18
Other variable costs.........................................329,343 $284,800 x .98 x 1.18
Fixed cash costs..............................................687,960 $655,200 x 1.05
Depreciation (fixed) .........................................
1,998,000 unchanged
Total manufacturing costs...................................
$3,380,065
Marketing and administrative costs:
Marketing (variable, cash) ..............................
$ 996,864 $844,800 x 1.18
Marketing depreciation....................................299,200 unchanged
Administrative (fixed, cash) .............................
1,120,240 $1,018,400 x 1.10
Administrative depreciation..............................149,600 unchanged
Total marketing and administrative costs............
$2,565,904
Total costs............................................................
$5,945,969
Operating profits..................................................
$443,731
a

Alternatively, $6,389,700 = (1.18 x 300,000 units) x (.95 x $19.00 per unit)

13-20

Chapter 13 - Planning and Budgeting

13-37. (10 min.)Estimate Cash from Operations: Dancer Components.


Dancer Components
Cash Basis Budgeted Income Statement
For Year 2
Revenues............................................................ $6,389,700
Manufacturing costs:
Materials.......................................................... $ 364,762
Other variable costs.........................................
329,343
Fixed cash costs..............................................
687,960
Total manufacturing costs................................... $ 1,382,065
Marketing and administrative costs:
Marketing (variable, cash) .............................. $ 996,864
Administrative (fixed, cash) .............................
1,120,240
Total marketing and administrative costs............ $2,117,104
Total costs............................................................ $3,499,169
Cash operating profits......................................... $2,890,531
Cash from operations would equal revenues less cash costs, which excludes
depreciation.

13-21

Chapter 13 - Planning and Budgeting

13-38. (30 min.)Prepare Budgeted Financial Statements: Cameron Parts.


Cameron Parts
Budgeted Income Statement
For Year 2
Calculations
Revenues............................................................
$1,328,477 $1,119,000 x 1.12 x 1.06
Manufacturing costs:
Materials..........................................................
$ 245,784 $199,500 x 1.12 x 1.10
Variable cash costs..........................................
291,756 $271,350 x 1.12 x .96
Fixed cash costs..............................................
100,440 $108,000 x .93
Depreciation (fixed) .........................................
139,950 $133,500 $14,550 + $21,000
Total manufacturing costs...................................
$777,930
Marketing and administrative costs:
Marketing (variable, cash) ..............................
$ 159,600 $142,500 x 1.12
Marketing depreciation....................................
33,900 unchanged
Administrative (fixed, cash) .............................
145,978 $135,165 x 1.08
Administrative depreciation..............................
12,600 unchanged
Total marketing and administrative costs............
$352,078
Total costs............................................................
$1,130,008
Operating profits..................................................
$198,469

13-22

Chapter 13 - Planning and Budgeting

13-39. (10 min.)Estimate Cash from Operations: Cameron Parts.


Cameron Parts
Cash Basis Budgeted Income Statement
For Year 2
Revenues............................................................ $1,328,477
Manufacturing costs:
Materials.......................................................... $ 245,784
Variable cash costs..........................................
291,756
Fixed cash costs..............................................
100,440
Total manufacturing costs................................... $637,980
Marketing and administrative costs:
Marketing (variable, cash) .............................. $ 159,600
Administrative (fixed, cash) .............................
145,978
Total marketing and administrative costs............ $305,578
Total costs............................................................ $943,558
Cash operating profits......................................... $384,919
Cash from operations would equal revenues less cash costs, which excludes
depreciation.

13-23

Chapter 13 - Planning and Budgeting

13-40. (25 min.)Prepare A Production Budget: Chander, Inc.


Chander, Inc.
Production Budget
Coming Year
(in units)
Expected Sales......................................................... 270,000 units
Add: Desired ending inventory of finished goods..... 105,000
Total needs................................................................ 375,000
Less: Beginning inventory of finished goods............ 60,000
Units to be produced................................................. 315,000 units
Alternative method:
First, compute the estimated production:
P = Sales + EB BB
P = Sales + (105,000 60,000)
= 270,000 + 45,000
= 315,000 units
Next estimate the costs:
Direct materials
Cotton 315,000 x 1 yard x $6.00 x 1.20..............$2,268,000
Canvas 315,000 x 0.2 yards x $20.00................ 1,260,000
Total direct materials........................................ $3,528,000
Direct labor:
315,000 x 0.5 hr. x $32.................................... $5,040,000
Overhead:
Indirect labor........................................................
315,000 x $1.00
$ 315,000
Indirect materials.................................................
315,000 x $.30
94,500
Power...................................................................
315,000 x $.60
189,000
Equipment costs..................................................
300,000 x $2.50
750,000
Building occupancy.............................................
300,000 x $1.60
480,000
Total overhead............................................... $ 1,828,500
Total budgeted manufacturing costs...................$10,396,500

13-24

Chapter 13 - Planning and Budgeting

13-41. (25 min.)Prepare A Production Budget: Lotus Fixtures, Inc.


Lotus Fixtures, Inc.
Production Budget
Year 2
(in units)
Expected Sales......................................................... 420,000 units
Add: Desired ending inventory of finished goods..... 20,000
Total needs................................................................ 440,000
Less: Beginning inventory of finished goods............ 40,000
Units to be produced................................................. 400,000 units
Alternative method:
First, compute the estimated production:
P = Sales + EB BB
P = Sales + (20,000 40,000)
= 420,000 20,000
= 400,000 units
Next estimate the costs:
Direct materials
Steel 400,000 x 2 pounds x $0.40 x 0.80...........
Alloy 400,000 x 0.5 pounds x $3.00....................
Total direct materials........................................
Direct labor:
400,000 x 0.01 hr. x $30 x 1.10.......................
Overhead:
Indirect materials.................................................
400,000 x $0.50
Indirect labor........................................................
400,000 x $0.80
Utilities.................................................................
400,000 x $0.40
Plant and equipment depreciation......................
500,000 x $1.00 x 1.05
Miscellaneous......................................................
500,000 x $0.70
Total overhead...............................................
Total budgeted manufacturing costs...................

13-25

$256,000
600,000
$856,000
$132,000
$ 200,000
320,000
160,000
525,000
350,000
$1,555,000
$2,543,000

Chapter 13 - Planning and Budgeting

13-42. (25 min.)Sales Expense Budget: Capstone Corporation.

Item
January
Adjustments
Sales commissions.............................................
$607,500 x 1.05 x 1.10
=
Sales staff salaries..............................................
144,000 x 1.04
=
Telephone & mailing............................................
72,900 x 1.08 x 1.10
=
Building lease payment.......................................
90,000 (unchanged)
=
Utilities.................................................................
18,450 x 1.15
=
Packaging & delivery...........................................
123,300 x 1.10
=
Depreciation........................................................
56,250 + ($85,500 120 months) =
Marketing consultants.........................................
0 + $157,500
=
Total budgeted costs. .

13-26

Budgeted
Typical Month
$701,663
149,760
86,605
90,000
21,218
135,630
56,963
157,500
$1,399,339

Chapter 13 - Planning and Budgeting

13-43. (30 min.)Budgeted Purchases And Cash Flows: Delhi, Inc.


a. $900,000
BB + P = Sales + EB
(130% x 47,600) + P = 47,600 + (130% x 45,600)
61,880 + P = 47,600 + 59,280
P = 47,600 + 59,280 61,880
= 45,000 units
45,000 x $20 = $900,000
b. $974,400
BB + P = Sales + EB
(130% x 45,600) + P = 45,600 + (130% x 48,000)
59,280 + P = 45,600 + 62,400
P = 45,600 + 62,400 59,280
= 48,720 units
48,720 x $20 = $974,400
c. $1,318,776
60%
25%
9%

x $1,452,000 x 97%
x $1,452,000
x $1,416,000

=
=
=

$845,064
363,000
127,440
$1,335,504

13-27

Chapter 13 - Planning and Budgeting

13-43. (continued)
d. $1,141,516 September cash disbursement.
August purchases paid in September:

$900,000* x 46% = $414,000

August selling general and administrative expenses paid in September:


[($1,428,000 x 15%) $8,000] x 46% = $94,852
September purchases paid in September:
$974,400** x 54% = $526,176
September selling, general and administrative expenses paid in September:
[($1,368,000 x 15%) $8,000] x 54% = $106,488
$414,000 + $94,852 + $526,176 + $106,488 = $1,141,516
*From part a. of this problem
**From part b. of this problem
e. 49,040
BB + P = Sales + EB
(130% x 48,000) + P = 48,000 + (130% x 48,800)
P = 48,000 + 63,440 62,400
= 49,040 units

13-28

Chapter 13 - Planning and Budgeting

13-44. (40 min.)Comprehensive Budget Plan: Brighton, Inc.


a. (1)

Brighton, Inc.
Schedule Computing Production
Budget (Units)
For April, May, and June

Budgeted salesUnits........................................
Inventory required at end of montha...................
Total to be accounted for.....................................
Less inventory on hand at beginning of month...
Budgeted productionUnits...............................
a April:

May:
June:

(2)

April
600,000
90,000
690,000
120,000
570,000

May
450,000
120,000
570,000
90,000
480,000

450,000 x .2 = 90,000
600,000 x .2 = 120,000
600,000 x .2 = 120,000
Schedule Computing Raw Materials Inventory
Purchase Budget (Pounds)
For April and May
April

Budgeted productionPounds (1/4 lb. per Unit) a...... 142,500


....................................................................................
Inventory required at end of monthb...........................
48,000
Total to be accounted for............................................ 190,500
Less inventory on hand at beginning of month..........
57,000
Balance required by purchase.................................... 133,500
Budgeted purchasesPounds
(Based on Minimum Shipments of 62,500 lbs. each)
a April:

570,000 x .25 = 142,500


May: 480,000 x .25 = 120,000

b April:

480,000 x .4 x .25 = 48,000


May: 600,000 x .4 x .25 = 60,000

June
600,000
120,000
720,000
120,000
600,000

102,000 = 57,000 + 187,500 142,500

13-29

187,500

May
120,000
60,000
180,000
102,000c
78,000
125,000

Chapter 13 - Planning and Budgeting

13-44. (continued)
b.
Brighton, Inc.
Projected Income Statement
For the Month of May
Sales (450,000 Units at $4) ......................................................
$1,800,000
Less: Cash discounts on Sales................................................. $18,000
Estimated bad debts (1/2 percent of gross sales) ...................
9,000
27,000
Net Sales...................................................................................
$1,773,000
Cost of Sales:
$1,100,000
Variable cost per unit (=
x 450,000 Units) ................................................
$990,000
500,000
Fixed Cost................................................................................ 400,000
1,390,000
Gross profit on sales...................................................................
$383,000
Expenses:
Selling (10 percent of gross sales) .........................................$180,000
Administrative ($165,000 per month) ..................................... 165,000
Interest expense (.01 x $500,000) .........................................
5,000
350,000
Operating profit...........................................................................
$33,000

13-30

Chapter 13 - Planning and Budgeting

13-45. (60 min.)Comprehensive Budget Plan: Panther Corporation


Panther Corporation
Budgeted Income Statement
(in thousands)
Actual
For the Year Ended
December 31,
(Year 1)

Revenue:
Sales............................................................
$1,800,000
Other income................................................
60,000
Total Revenue...........................................$1,860,000
Expenses:
Cost of goods manufactured &
sold:
Materials.......................................................
$ 528,000
Direct labor...................................................
540,000
Variable overhead........................................
324,000
Fixed overhead
48,000
(Depreciation and other)..........................
$1,440,000
Beginning inventory.........................................
192,000
$1,632,000
Ending inventory..............................................
192,000 $1,440,000
Marketing:
Salaries........................................................
$ 54,000
Commissions................................................
60,000
Promotions and advertising.........................
126,000
240,000
Administrative:
Salaries........................................................
$ 56,000
Travel............................................................
8,000
Office costs..................................................
32,000
96,000
Income taxes (credit) ......................................
33,600
Total expenses.............................................$1,809,600
Operating profit (loss) ......................................... $50,400
a

Budgeted
For the Year Ended
December 31,
(Year 2)
$2,400,000
36,000

$2,436,000

$ 852,000
872,000
520,000
51,000
$2,295,000
192,000
$2,487,000
459,000a $2,028,000
$

64,000
80,000
180,000
64,000
10,000
36,000

324,000

110,000
(10,400)a
$2,451,600
$ (15,600)

See notes to the balance sheet.

CMA adapted
Note: Actual for December 31, Last Year not required but included for comparison.

13-31

Chapter 13 - Planning and Budgeting

13-45. (continued)
Panther Corporation
Budgeted Balance Sheet
(in thousands)
Budgeted
December 31,
Year 2

Current Assets
Cash.................................................................
Accounts receivable.........................................
Inventory..........................................................
Income tax receivable......................................
Total current assets......................................
Plant and equipment...........................................
Less: Accumulated depreciation.....................
Total assets..................................................
Current liabilities
Accounts payable.............................................
Accrued payable..............................................
Notes payable..................................................
Total current liabilities...................................
Shareholders equity
Common stock.................................................
Retained earnings............................................
Total shareholders equity............................
Total liabilities and shareholders equity......
Notes on the next page:

13-32

$4,800
320,000
459,000a
10,400b
520,000
164,000

$180,000
93,000
200,000

280,000
397,200c

$794,200
356,000
$1,150,200

$473,000

677,200
$1,150,200

Chapter 13 - Planning and Budgeting

13-45. (continued)
a Inventory

Units:

$1,440,000
= 40,000 units
300,000
Added to inventory 450,000 400,000............... = 50,000 units
Ending inventory..................................................
90,000 units
Cost:
Manufacturing costs........................................$2,295,000
Units manufactured.......................................... 450,000
Cost per unit ($2,295,000 450,000) ............
$5.10
Ending units..................................................... x 90,000
Cost of ending inventory..................................
$459,000
Beginning inventory $192,000

b Income

tax:
Sales & other income..........................................
Cost of goods sold.............................................. $2,028,000
Selling expense...................................................
324,000
General & administrative expense......................
110,000
Total cost..........................................................
Tax loss...............................................................
Tax rate................................................................
Tax receivable.....................................................

$2,436,000

$2,462,000
$(26,000)
40%
$10,400

Ending retained earnings = Expected beginning balance plus net income Dividends
= $432,800 15,600 $20,000.

13-33

Chapter 13 - Planning and Budgeting

Solutions to Integrative Case


13-46. (40 min.)Prepare Cash Budget for Service Organization: Cortez Beach
Yacht Club.
The income statement is on a cash basis, hence we start with a budgeted income
statement.
a.

Cortez Beach Yacht Club


Budgeted Statement of Income (Cash Basis)
For the Year 10

Cash revenue
Annual membership fees....................................
$710,000 x 1.1 x 1.03

$804,430
..............................................................
Lesson and class fees ....................................
(468,000 360,000) x $468,000) $608,400
Miscellaneous .................................................
(4,000 3,000) x $4,000)
5,333
613,733
Total cash received ....................................................................................................................
$1,418,163
Cash costs
Managers salary and benefits ($72,000 x 1.15) .....................................
Regular employees wages and benefits ($380,000 x 1.15) ...................
Lesson and class employee wages and benefits (given).........................
Supplies ($32,000 x 1.25) ........................................................................
Utilities (heat and light) ($44,000 x 1.25) .................................................
Mortgage interest ($720,000 x .06) a.........................................................
Miscellaneous ($4,000 x 1.25) .................................................................
Total cash expenses..............................................................................
Cash income.................................................................................................
Additional Cash Flows
Cash payments:
Mortgage payment....................................................................................
Accounts payable balance at 10/31/Year 9..............................................
Accounts payable on equipment at 10/31/Year 9.....................................
Planned new equipment purchase...........................................................
Total cash payments..............................................................................
Cash inflows from income statement............................................................
Beginning cash balance (including petty cash)............................................
Cash available for working capital and to acquire property.........................

aOn

$82,800
437,000
604,650
40,000
55,000
43,200
5,000
$1,267,650
$150,513

$60,000
5,000
30,000
50,000
$ 145,000
150,513
14,600
$20,113

November 1, Year 9, the unpaid balance after annual payment is $720,000,


computed as follows: Balances after the $60,000 annual payment November 1, Year 6 =
$900,000; November 1, Year 7 = $840,000; November 1, Year 8 = $780,000; November
1, Year 9 = $720,000 and as given in the problem.

13-34

Chapter 13 - Planning and Budgeting

13-46. (continued)
b. Operating problems that Cortez Beach Yacht Club could experience in Year 10
include:

The lessons and classes contribution to cash decreased because the projected
wage increase for lesson and class employees is not made up by the increased
volume of lessons and classes.

Operating costs are increasing faster than revenues from membership fees.

CBYC seems to have a cash management problem. Although there appears to


be enough cash generated for the club to meet its obligations, there are past-due
amounts on equipment and regular accounts. Perhaps the cash balance might
not be large enough for day-to-day operating purposes.

c. The managers concern with regard to the Boards expansion goals is justified. The
Year 10 budget projections show only a minimal increase in the cash balance. The
total cash available is well short of the cash needed for the land purchase over and
above the clubs working capital needs. However, it appears that the new equipment
purchases can be made on an annual basis. If the Board desires to purchase the
adjoining property, it is going to have to consider significant increases in fees or
other methods of financing such as membership bonds, or additional mortgage debt.

13-35