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EXERCISE 9.

22
1 Calculate estimated cash receipts in October using an Excel spreadsheet:

Month Credit sales Percentage collected Collected in October


October $90 000 70% $63 000
September $80 000 15% 12 000
August $70 000 10% 7 000
July $60 000 4% 2 400
Total $84 400
2 Calculate estimated cash receipts in fourth quarter from credit sales in fourth quarter.
Collected in Collected in Collected in
Month Credit sales October November December
October $90 000 $63 000 $ 13 500 $9 000
November $100 000 70 000 15 000
December $85 000 59 500
Total $63 000 $83 500 $83 500
Total estimated cash receipts in fourth quarter $230 000

The spreadsheet might look like this:


Same next 2nd
Collection month month month month 3rd month
70% 15% 10% 4%
Cash receipts
Augus Septembe Octobe Decembe
Sales June July t r r November r TOTAL 1%
June 55 000 38 500 8 250 5 500 2 200 54 450 550 55 000
July 60 000 42 000 9 000 6 000 2 400 59 400 600 60 000
49
August 70 000 000 10 500 7 000 2 800 69 300 700 70 000
Septembe
r 80 000 56 000 12 000 8 000 3 200 79 200 800 80 000
October 90 000 63 000 13 500 9 000 85 500 900 86 400

November 10 000 70 000 15 000 85 000 1000 86 000

December 85 000 59 500 59 500 850 60 350


63
TOTAL 38 500 50 250 500 74 700 84 400 94 300 86 700 49 2350
incomplete

incomplete
One can see from this that October collections are $84 400, collections in June, July and August
are understated due to the omission of sales in earlier months, and collections for the months of October, November and
December are understated due to collections in later months. We can also see that collections during the last quarter from
sales in the last quarter total $233 000. Note that where the collections are complete for one months sales, the total
collected will fall short of the sales amount by 1% (final two columns used as a check).

3 The revised spreadsheet can look like this. The shaded cells show where figures have changed. The collections
in October will now be $85 400.

Cash receipts
Sales June July August September October November December TOTAL
June 70 000 49 000 10 500 7000 2 800 69 300
July 85 000 59 500 12 750 8 500 3 400 84 150
August 70 000 49 000 10 500 7 000 2 800 69 300
September 80 000 56 000 12 000 8 000 3 200 79 200
October 90 000 63 000 13 500 9 000 85 500
November 100 000 70 000 15 000 85 000
December 85 000 59 500 59 500
TOTAL 49 000 70 000 68 750 77 800 85 400 94 300 86 700 531 950

EXERCISE 9.24
1 Budgeted cash receipts for December:

Month of sale Collections in December


November $400 000 38% $152 000
December 440 000 60% 264 000
Total cash collections $416 000

2 Budgeted profit (loss) before income taxes for December:


Sales revenue $440 000
Less Cost of goods sold (75% of sales) 330 000
Gross margin (25% of sales) $110 000
Less Operating expenses:
Bad debts expense (2% of sales) $8 800
Depreciation ($432 000/12) 36 000
Other expenses 45 200
Total operating expenses 90 000
Profit before tax $20 000

3 Projected balance in accounts payable on 31 December:


The 31 December balance in accounts payable will be equal to Decembers purchases of merchandise. Since the
stores gross margin is 25 per cent of sales, its cost of goods sold must be 75 per cent of sales.

Cost of goods
Month Sales sold Amount purchased in December
December $440 000 $330 000 $330 000 20% = $ 66 000
January 400 000 300 000 300 000 80% = 240 000
Total December purchases $306 000
Therefore, the 31 December balance in accounts payable will be $306 000.
EXERCISE 9.25

Memorandum

Date: Today

To: Managing Director, Southpac Bank

From: I.M. Student and Associates

Subject: Budgetary slack

Budgetary slack is the difference between the revenue or cost that a person provides and a realistic estimate of the
revenue or cost. The practice of creating budgetary slack is called padding the budget. The primary negative consequence
of slack is that it undermines the credibility and usefulness of the budget as a planning and control tool. When a budget
includes slack, the amounts in the budget no longer portray a realistic view of future operations.

The banks bonus system for the new accounts manager may encourage budgetary slack. Since the managers bonus is
determined by the number of new accounts generated over the budgeted number, there is an incentive for the manager to
understate her projection of the number of new accounts. There is evidence of this in the description of the new account
managers behaviour. A 10 per cent increase over the banks current 10 000 accounts would mean 1000 new accounts in
next year. Yet the new account managers projection is only 700 new accounts. This will make it more likely that the
actual number of new accounts will exceed the budgeted number, resulting in the manager obtaining a bonus for her
apparent good performance.

The bank could consider some alternative measures for balancing the dysfunctional aspects encouraged by the current
system. A bonus could be rewarded for any increase in new accounts above the 10 per cent increase that has occurred
over the past few years. Perhaps for every 1 per cent increase over the 10 per cent target, a bonus could be paid. New
account volumes should be calculated on a net basis; i.e. accounts that are closed during the year could be deducted from
the number of new accounts opened. This could encourage the manager to maintain customer satisfaction. Bonuses could
also be based on a range of performance targets, including the results of customer satisfaction surveys and reductions in
customer complaints.

PROBLEM 9.29

1 Revenue budget:
Current student enrolment 15 000
Add 5% increase in student enrolments 750
Total number of students 15 750
Less: Scholarship students 180
Fee-paying students 15 570
Subjects per student per year 8
Total enrolments in subjects 124 560
Fee per subject $3 000
Forecast revenue $373 680 000

2 Number of staff needed to cover classes:


Total students enrolled 15 750
Subjects per student per year (4 each semester 2 semesters) 8
Total student class enrolments to be covered 126 000
Students per class 80
Classes to be taught 1 575
Classes taught per staff member 3
Staff required 525

3 Possible actions might include:


hire sessional or part-time instructors
increase the teaching load for each academic staff member
increase class sizes and reduce the number of subjects offered
encourage students to take online subjects offered by another university for credit towards their degree
employ some academic staff on a teach only basis and require them to teach more than three subjects per year.

4 No. While the number of staff may be a key driver, the number of staff is highly dependent on the number of
students. Students (and tuition revenue) are similar to salesthe starting point in the budgeting process.
PROBLEM 9.30

1 Alice Springs Medical Centre


Schedule of budgeted cash receipts
for the quarter ending 30 September (000s)
Actual or estimated billings Percentages Receipts
Month Amount Type* Timing July August September
May $5000 HF 80% 20% $800
May 5000 DP 20% 30% 300
June 5000 HF 80% 20% 800
June 5000 DP 20% 40% 400
June 5000 HF 80% 20% $800
June 5000 DP 20% 30% 300
July 4500 HF 80% 50% 1800
July 4500 DP 20% 20% 180
July 4500 HF 80% 20% 720
July 4500 DP 20% 40% 360
July 4500 HF 80% 20% $720
July 4500 DP 20% 30% 270
August 5000 HF 80% 50% 2 000
August 5000 DP 20% 20% 200
August 5000 HF 80% 20% 800
August 5000 DP 20% 40% 400
September 5500 HF 80% 50% 2 200
September 5500 DP 20% 20% $220
Total receipts from billings $4280 $4380 $4610
Investment income 175 175 175
Total cash receipts $4455 $4555 $4785
*
HP denotes health fund billings; DP denotes direct patient billings.

Of $5 000 000 billed in May, 80 per cent was billed to health funds, for a total of $4 000 000. Of this amount,
20 per cent will be collected in the second month following service, which is July.

Alice Springs Medical Centre


Schedule of budgeted cash payments
for the quarter ending 30 September (000s)
Disbursements
July August September
Salaries:
Variable
$4500 20% $ 900
$5000 20% $1000
$5500 20% $1100
Total variable $ 900 $1000 $1100
Fixed 1500 1500 1500
Total salaries $ 400 $2500 $2600
Purchases of previous month 1200 1250 1500
Interest 0 0 450
Total cash payments $3600 $3750 $4550
Alice Springs Medical Centre
Cash budget as at 1 October (000s)
Cash balance, 1 July $ 300
Add Cash receipts in third quarter:
July $4455
August 4555
September 4785
Total cash available $13 795
Less Cash payments in third quarter:
July $3600
August 3750
September 4550 11 900
Projected cash balance, 30 September $ 2 195

2 Calculation of required borrowings (000s):


Projected cash balance, 30 September $ 2195
Less Minimum end of month cash balance required ($1850 10%) 185
Cash available to acquire capital items $ 2010
Less Capital expenditures planned for 1 October 3800*
Cash shortfall ($1790)

The amount of borrowing needed on 1 October to enable the purchase of the new equipment is $1 790 000.