HMCost1e_SM_ch08

CHAPTER 8BUDGETING FOR PLANNING AND CONTROLDISCUSSION QUESTIONS1. Budgets are the quantitative expressions ofplans. Budgets are used to translate thegoals and strategies of an organization intooperational terms.2.Control is the process of setting standards,receiving feedback on actual performance,and taking corrective action whenever actualperformance deviates from planned per-formance. Budgets are the standards, andthey are compared with actual costs andrevenues to provide feedback.3.Budgeting forces managers to plan, pro-vides resource information for decision mak-ing, sets benchmarks for control and evalua-tion, and improves the functions of communication and coordination.4.The master budget is the collection of allindividual area and activity budgets. Operat-ing budgets are concerned with the income-generating activities of a firm. Financial budgets are concerned with the inflows andoutflows of cash and with planned capitalexpenditures.5.The sales forecast is a critical input for build-ing the sales budget. It, however, is not nec-essarily equivalent to the sales budget.Upon receiving the sales forecast, man-agement may decide that the firm can dobetter or needs to do better than the fore-cast is indicating. Consequently, actions may be taken to increase the sales potentialfor the coming year (e.g., increasing adver-tising). This adjustment then becomes thesales budget.6. Yes. All budgets essentially are founded onthe sales budget. The production budgetdepends on the level of planned sales. Themanufacturing budgets, in turn, depend onthe production budget. The same is true forthe financial budgets since sales is a criticalinput for budgets in that category.7. An accounts receivable aging schedulegives the proportion of accounts receivablethat are, on average, collected in the monthsfollowing sale. It is important in creating thecash budget, since the sales on account forpast months can be multiplied by the appro-priate percentage to yield the amount ofcash expected.8.If the vice president of sales is a pessimisticindividual, one might expect that she or hewould underestimate sales for the comingyear. In your role as head of the budgetprocess, you might increase the budgetedsales figure to take out the individual bias. 9.If the factory controller is a particularly opti-mistic individual, it is possible that the costsfor direct materials, direct labor, and over-head could be underestimated. For exam-ple, an optimistic person might assume thateverything will go well (e.g., that there willbe no problems in obtaining an adequatesupply of materials at the lowest possibleprice). As head of the budget process, youmight allow for somewhat higher costs tomore accurately reflect reality.10.The learning curve is the relationship be-tween unit costs of production and increas-ing number of units. As time goes on, thenumber of units produced in a time periodwill increase and the cost per unit will de-crease. The budgets affected will be thedirect materials purchases budget, the directlabor budget, and the overhead budget.11.Small firms often do not engage in a com-prehensive master budgeting process. (Per-sonally, we believe that is a mistake. Thebudgeting process helps management morefully understand the business and helpsthem to plan for the coming year.) Evensmall businesses create cash budgets, how-ever, because cash flow is critically impor-tant. For example, it is possible to havepositive operating income, but negative cashflow (e.g., if sales on account are high, butcustomers are slow to pay). Negative cashflow could put a company out of business inshort order.12.The master budget has been criticized forthe following reasons: it does not recognizethe interdependencies among departments,it is static, and it is results rather than proc-ess oriented. These criticisms are especiallyapparent when companies are in a competi-tive, dynamic environment. When the envi-ronment changes slowly, if at all, the masterbudget would do a good job of both planningand control.13. A static budget is one that is not adjusted forchanges in activity. Using a static budget forcontrol can be a real problem. For example,suppose that the master (static) budget isbased on the production and sale of100,000 units, but that only 90,000 units areactually produced and sold. Further supposethat the budgeted variable cost of goodssold was $2,000,000, and that the actualvariable cost of goods sold was $1,890,000.It looks as if the company spent less thanexpected for variable manufacturing costs.However, the budgeted variable cost was$20 per unit ($2,000,000/100,000), and theactual variable cost per unit is $21 per unit($1,890,000/90,000). Not adjusting thebudget for changes in activity level can mis-lead managers about efficiency. 14. A flexible budget is (1) a budget for variouslevels of activity or (2) a budget for the ac-tual level of activity. The first type of flexiblebudget is used for planning and sensitivityanalysis. The second type of budget is usedfor control, since the actual costs of the ac-tual level of activity can be compared withthe planned costs for the actual level of ac-tivity.15.The activity-based budget starts with output,determines the activities necessary to createthat output, and then determines the re-sources necessary to support the activities.This differs from the traditional master bud-geting process in that the master budgetleaps directly from output to resources.Some of the resource levels are assumed tobe fixed. This makes them independent ofvolume changes and hides the drivers thatactually do affect the fixed resources. As aresult, the budget format does not supportthe creation of value and the thinking thatwould go into determining the sources ofwaste.CORNERSTONE EXERCISESCornerstone Exercise 8–11. StrikeSmart CompanySales BudgetFor the First QuarterJanuary FebruaryMarch Quarterball:PracticeUnits.................. 70,000 65,000 100,000 235,000price..........× $9.50 × $9.50 × $9.50 × $9.50 UnitSales................. $665,000 $617,500 $ 950,000 $2,232,500 ball:MatchUnits.................. 10,000 8,000 15,000 33,000price..........× $18.00 ×Unit$18.00 × $18.00 × $18.00Sales................. $180,000 $144,000 $ 270,000 $ 594,000 sales............$845,000 $761,500 $1,220,000 $2,826,500Total2. StrikeSmart CompanySales BudgetFor the First QuarterJanuaryFebruary March Quarterball:PracticeUnits.................. 70,000 65,000 100,000 235,000Unit price..........× $9.50 × $9.50 × $9.50 × $9.50Sales................. $665,000 $617,500 $ 950,000 $2,232,500 ball:MatchUnits..................6,000 4,800 9,000 19,800$18.00 × $18.00 × $18.00 price..........× $18.00 ×Unit86,400 $ 162,000 $ 356,400 Sales................. $108,000 $ball:TournamentUnits..................4,000 3,200 6,000 13,200Unit$40.00 × $40.00 × $40.00 price..........× $40.00 ×Sales................. $160,000 $128,000 $ 240,000 $ 528,000 sales............$933,000 $831,900 $1,352,000 $3,116,900TotalCornerstone Exercise 8–21. Production budget for practice balls:March January FebruaryUnit sales..................................... 70,000 65,000 100,000 Desired ending inventory........... 13,000 20,000 24,000needed.......................... 83,000 85,000 124,000 TotalLess: Beginning inventory......... 10,000 13,000 20,000produced...................... 73,000 72,000 104,000 UnitsProduction budget for match balls:January February MarchUnit sales..................................... 10,000 8,000 15,000 Desired ending inventory........... 1,6003,000 5,000needed.......................... 11,600 11,000 20,000 TotalLess: Beginning inventory......... 1,500 1,600 3,000produced...................... 10,100 9,400 17,000 Units2. In order to construct a production budget for April, you would need Maysales.This is due to the calculation of desired ending inventory, which is 20 percent of the next period’s sales.Cornerstone Exercise 8–31. Direct materials purchases budget for practice balls:Polyvinyl chloride panels: January FebruaryUnits produced..............................................73,000 72,000Direct materials per unit...............................× 0.7 × 0.7 Direct materials for production............... 51,100 50,400 Desired ending inventory*............................ 5,040 7,280Totalneeded.............................................56,140 57,680 Less: Beginning inventory**........................ 5,110 5,040materials purchases..................... 51,030 52,640 Direct*Desired ending inventory = 0.10 × next month’s production needs; Januaryending inventory = 0.10 × 50,400 = 5,040; February ending inventory = 0.10 ×(104,000 × 0.7 sq. yd.) = 7,280**Beginning inventory for January equals ending inventory for December= 0.10 × 51,100 = 5,110Cornerstone Exercise 8–3 (Concluded)Bladder and valve: January FebruaryUnits produced..............................................73,000 72,0001 Direct materials per unit...............................× 1 × Direct materials for production............... 73,000 72,000 Desired ending inventory*............................ 7,200 10,400 needed.............................................80,200 82,400 TotalLess: Beginning inventory**........................7,300 7,200 materials purchases..................... 72,900 75,200 Direct*Desired ending inventory = 0.10 × next month’s production needs; January ending inventory = 0.10 × 72,000 = 7,200; February ending inventory = 0.10 × (104,000 × 1) = 10,400**Beginning inventory for January equals ending inventory for December= 0.10 × 73,000 = 7,300Glue: January FebruaryUnits produced..............................................73,000 72,000 Direct materials per unit...............................× 3 × 3 Direct materials for production............... 219,000 216,00031,200 Desired ending inventory*............................ 21,600needed.............................................240,600 247,200 TotalLess: Beginning inventory**........................ 21,90021,600purchases.....................218,700225,600 materialsDirect*Desired ending inventory = 0.10 × next month’s production needs; January ending inventory = 0.10 × 216,000 = 21,600; February ending inventory = 0.10 × (104,000 × 3) = 31,200**Beginning inventory for January equals ending inventory for December= 0.10 × 219,000 = 21,9002. If the desired ending inventory percentage increases, then more must be or-dered to satisfy the increased need for materials on hand.1. Number of wrong numbers = Total calls × Percent= 5,000 × 0.10 = 500Number of answering machine calls = Total calls × Percent= 5,000 × 0.15 = 750Number of alumni contact calls = Total calls × Percent= 5,000 × 0.75 = 3,750Minutes for wrong numbers (500 × 3)........................... 1,500 Minutes for answering machine calls (750 × 2)............1,500Minutes for alumni contact calls (3,750 × 10)...............37,500minutes..................................................................40,500Total60÷ 60 Minutes per hour..................................................... ÷ student hours.. (675)Total15÷ Number of students..................................................... ÷Total hours per volunteer (45)3 ÷ 3 Hours per night......................................................... ÷of calling (15)nightsTotal2. Minutes for wrong numbers (500 × 1) (500)Minutes for answering machine calls (750 × 0) 0Minutes for alumni contact calls (3,750 × 8).................30,000minutes..................................................................30,500Total60÷ 60 Minutes per hour..................................................... ÷ student hours........................................................ 508.33Total15÷ Number of students..................................................... ÷Total hours per volunteer............................................... 33.893 ÷ 3 Hours per night......................................................... ÷ Total nights of calling...............................................11.301. Direct labor hours = Budgeted unit × Budgeted direct labor hours per unit= 160,000 × 1.5 = 240,000 direct labor hours Variable overhead = Supplies + Gas = $264,000 + $60,000 = $324,000Variable overhead rate = ($264,000 + $60,000)/240,000= $1.35 per direct labor hourBudgeted fixed overhead:labor........................................................ $180,000 IndirectSupervision.......................................................... 75,000onequipment................................ 60,000 Depreciationthe building.............................. 45,000onDepreciationspecial equipment............................... 12,000 RentalofElectricity............................................................. 32,400 Telephone............................................................. 4,300 service........................................... 1,200 LandscapingOtheroverhead.................................................... 50,000overhead...................................... $459,900Totalfixed2. Overhead BudgetFor the Year Budgeted direct labor hours....................................240,000$1.35Variableoverhead rate............................................. ×variableoverhead.................................... $324,000Budgeted459,900 Budgeted fixed overhead.........................................overhead.................................... $783,900TotalbudgetedFixed overhead rate = $459,900/240,000 = $1.92 per direct labor hourTotal overhead rate = $783,900/240,000 = $3.27 per direct labor hour3. Overhead BudgetFor the Yearlabor hours*................................... 225,000directBudgetedoverhead rate............................................. ×$1.35Variableoverhead.................................... $303,750variableBudgeted459,900 Budgeted fixed overhead.........................................Totaloverhead.................................... $763,650budgeted*Budgeted direct labor hours = 150,000 × 1.5 = 225,000Fixed overhead rate = $459,900/225,000 = $2.04 per direct labor hourTotal overhead rate = $763,650/225,000 = $3.39 per direct labor hour1. Unit costs:materials..................................... $1.67Directlabor............................................ 0.56DirectOverhead:Budgeted variable overhead..........0.72overhead............... 1.80fixedBudgetedTotal cost per unit......................................$4.75Total ending inventory cost = Units ending inventory* × Unit cost= 31,000 × $4.75 = $147,250*Units ending inventory = Beginning inventory + Units produced – Units sales= (16,000 + 300,000) – 285,000 = 31,0002. If the number of units sold increases to 290,000, there will be 5,000 fewer unitsin ending inventory, and the cost of ending inventory will decrease to $123,500 (26,000 units in ending inventory × $4.75).Cornerstone Exercise 8–71. Budgeted direct materials = $1.67 × 300,000 = $501,000Budgeted direct labor = $0.56 × 300,000 = $168,000Budgeted overhead = ($0.72 + $1.80) × 300,000 = $756,000501,0002. Direct materials..................................................... $Directlabor............................................................ 168,000756,000Overhead...............................................................Totalmanufacturing cost..................................... $1,425,000 Add: Beginning inventory, finished goods*....... 76,000Less: Ending inventory, finished goods............. 147,250Cost of goods sold............................................... $1,353,750*Beginning finished goods inventory = 16,000 × $4.75 = $76,0003. If the cost of beginning inventory of finished goods was only $4,750, the costof goods sold would decrease to $1,282,500.1. Hair-AgainMarketing Expense BudgetFor the Year Ended December 311 Quarter2 Quarter3 Quarter4 TotalQuarter Budgeted unit sales............. 5,000 15,000 40,000 35,000 95,000 Unit variable expense*.........× $0.45 × $0.45 × $0.45 × $0.45 × $0.45 Total variable expense.........$ 2,250 $ 6,750 $18,000 $15,750 $ 42,750 Fixed marketing expense:Internet ads........................$ 7,600 $ 7,600 $ 7,600 $ 7,600 $ 30,400 Television time...................10,000 10,000 10,000 10,000 40,000 Telephone operators.........4,000 4,000 4,000 4,000 16,000 Travel.................................. 3,000 3,000 3,000 3,000 12,000Total fixed expense.............. $24,600 $24,600 $24,600 $24,600 $ 98,400 Total marketing expense.....$26,850 $31,350 $42,600 $40,350 $141,150 *Unit variable expense = Selling price × 3% Commission ($15 × 0.03 = $0.45)2. If the cost of television time rises to $15,000 in Quarters 2, 3, and 4, the fixedmarketing expense in those quarters will be $5,000 higher, as will the total marketing expense. There will be no impact on variable marketing expense.Cornerstone Exercise 8–91. Green Earth Landscaping CompanyAdministrative Expense BudgetFor the Summer MonthsJuly August TotalJuneSalaries........................................$ 9,600 $ 9,600 $ 9,600 $28,800Insurance.....................................2,500 2,500 2,500 7,500Depreciation................................3,700 3,700 3,700 11,100 services...................500 500 500 1,500AccountingTotal administrative expense $16,300 $16,300 $16,300 $48,9002. The increase in insurance rates at the beginning of July will increase the totaladministrative cost by $100 in July and August.1. Coral Seas Jewelry CompanyBudgeted Income StatementFor the Coming Year15,900,000 Sales........................................................... $ Less: Cost of goods sold..........................8,750,000 margin............................................. $7,150,000 GrossLess:expense.................................$2,800,000Marketingexpense......................... 675,000Administrative3,475,000income......................................$ 3,675,000OperatingLess: Income taxes (0.40 × $3,675,000)...1,470,0002,205,000 income................................................. $Net2. If Coral Seas Jewelry Company has interest expense of $500,000, there wouldbe no impact on operating income. Interest expense would be subtracted fromoperating income to yield income before taxes of $3,175,000. Income taxes would be calculated on income before taxes and would equal $1,270,000. Net income would decrease to $1,905,000.Cornerstone Exercise 8–111. Cash Sales Credit SalesSales (10% of total sales) (90% of total sales)Quarter Total3, current year $2,800,000 $280,000 $2,520,0004, current year 2,400,000 240,000 2,160,0001, next year 2,500,000 250,000 2,250,0002, next year 3,000,000 300,000 2,700,0003, next year 3,100,000 310,000 2,790,0004, next year 2,900,000 290,000 2,610,000Cornerstone Exercise 8–11 (Concluded)2. Quarter 1 Quarter 2 Quarter 3 Quarter 4sales............................ $ 250,000 $ 300,000 $ 310,000 $ 290,000 CashReceived on account from:Quarter 3, current year a... 151,200Quarter 4, current year b.. 324,000 129,600Quarter 1, next year c........ 1,687,500 337,500 135,000Quarter 2, next year d....... 2,025,000 405,000 162,000 Quarter 3, next year e........ 2,092,500 418,500 Quarter 4, next year f........ 0 0 0 1,957,500 Total cash receipts.............. $2,412,700 $2,792,100 $2,942,500 $2,828,000 a$2,520,000 × 0.06 = $151,200b$2,160,000 × 0.15 = $324,000; $2,160,000 × 0.06 = $129,600c$2,250,000 × 0.75 = $1,687,500; $2,250,000 × 0.15 = $337,500; $2,250,000 ×0.06 = $135,000d$2,700,000 × 0.75 = $2,025,000; $2,700,000 × 0.15 = $405,000; $2,700,000 ×0.06 = $162,000e$2,790,000 × 0.75 = $2,092,500; $2,790,000 × 0.15 = $418,500f$2,610,000 × 0.75 = $1,957,5003. If Emerson’s percentage of uncollectible accounts rises to 10 percent, then nocash would be collected in the second quarter after the sale. The 10 percent of credit sales is bad debt expense; it never appears on the cash budget since it is never collected in cash. The following is the cash receipts budget using the new assumption.1Quarter 2 Quarter 3 Quarter 4Quarter sales............................ $ 250,000 $ 300,000 $ 310,000 $ 290,000 CashReceived on account from:Quarter 4, current year.... 324,000Quarter 1, next year......... 1,687,500 337,500Quarter 2, next year......... 2,025,000 405,000 Quarter 3, next year......... 2,092,500 418,500 Quarter 4, next year......... 1,957,500 Total cash receipts.............. $2,261,500 $2,662,500 $2,807,500 $2,666,0001. Jilly CompanyBudgetCashFor the Month of Novembercash account................................................. $ 53,817 balance,BeginningReceived on account from sales in:($1,300,000 × 0.35)...................................................... 455,000October× 0.60)................................................... 1,650,000November($2,750,000Total cash available........................................................................$2,158,817Disbursements:Payments for purchases made in:($950,000 × 0.75).................................................... 712,500 OctoberNovember($2,750,000 × 0.25)............................................. 687,500 Salaries paid for work in:× 0.10)...................................................... 3,450 October($34,500× 0.90).................................................. 31,050 November($34,500Rent............................................................................................15,600Utilities.......................................................................................7,650taxes..................................................................... 4,760 EmploymentCustoms duty and shipping ($2,750,000 × 0.20)..................... 550,000 expenses................................................................ 37,400 cashOtherdisbursements.......................................................................$2,049,910TotalEnding cash balance......................................................................$ 108,9072. If Jilly Company faced a customs duty and shipping percentage of 25 percent,the cost of customs duty and shipping for November would be $137,500 high-er and the budgeted ending balance of cash would be negative. Since Jilly Company cannot have a negative cash balance, the company would have to explore other options such as finding ways to cut expenses or obtaining short-term financing.1. VariableCost Range of Production in UnitsUnit 210,000 220,000 230,000percosts:ProductionVariable:materials................ $3.40 $ 714,000 $ 748,000 $ 782,000 Directlabor....................... 1.30 273,000 286,000 299,000 Directoverhead:VariableSupplies........................... 0.23 48,300 50,600 52,900Maintenance..................... 0.19 39,900 41,800 43,700Power................................ 0.18 37,800 39,600 41,400 Total variable costs............. $5.30 $1,113,000 $1,166,000 $1,219,000 overhead:Fixed110,000 $ 110,000 $ 110,000 Supervision...................... $Depreciation..................... 135,000 135,000 135,000Otheroverhead................ 245,000 245,000 245,000490,000 $ 490,000 $ 490,000 Total fixed costs.................. $Total production costs........ $1,603,000 $1,656,000 $1,709,0002. Per-unit product cost @ 210,000 units = $1,603,000/210,000 = $7.63 (rounded)Per-unit product cost @ 220,000 units = $1,656,000/220,000 = $7.53 (rounded)Per-unit product cost @ 230,000 units = $1,709,000/230,000 = $7.43 (rounded)3. If maintenance cost rose to $0.22 per unit, then the per-unit cost would in-crease by $0.03 ($0.22 – $0.19) per unit.Cornerstone Exercise 8–141. Actual Cost Flexible Budget Cost VarianceDirect materials......... $ 741,250 $ 736,100 $5,150 U labor................ 282,500 281,450 1,050UDirectU Supplies..................... 50,050 49,795 255UMaintenance.............. 41,420 41,135 285Power......................... 37,000 38,970F1,970USupervision............... 110,250 110,000 250Depreciation.............. 135,000 135,000 0 Other overhead......... 245,250 245,000 250 Ucost.............. $1,642,720 $1,637,450 $5,270 U Total2. If Melton Company’s actual direct materials cost was $736,100, the variancewould be zero and the total variance would decrease by $5,150 and would be$120 U.EXERCISESExercise 8–15Shippen CompanyProduction BudgetFor the Third QuarterJuly August SeptemberTotal Unit sales.................................... 23,400 35,600 34,000 93,000 Desired ending inventory.......... 7,120 6,800 5,600 5,600 needed.......................... 30,520 42,400 39,600 98,600 Total4,680 Less: Beginning inventory........ 4,680 7,120 6,80032,80093,92035,280Unitsproduced...................... 25,840Exercise 8–16Company1. BerringSales BudgetFor the Year Ended December 31Q uarter 2 Quarter 3 Quarter 4 Year1QuarterDeluxe:16,600 20,000 62,900Units............ 12,000 14,300Unit price.... × $40 × $40 × $40 × $40 × $40Sales........... $ 480,000 $ 572,000 $ 664,000 $ 800,000 $2,516,000Standard:92,000 91,600 362,000Units............ 90,000 88,400Unit price.... × $10 × $10 × $10 × $10 × $10Sales........... $ 900,000 $ 884,000 $ 920,000 $ 916,000 $3,620,000Total sales........ $1,380,000 $1,456,000 $ 1,584,000 $1,716,000 $6,136,0002. Berring Company probably asked the marketing vice president for salesquantity and price estimates. This vice president might have considered the level of the past year’s sales of the two products, the actions of competitors, status of customers, the state of the economy, and so on. However, the high demand for the standard could be due to deteriorating economic conditions and the desire of consumers to cut back on expenditures.。