Cost Accounting: Chapter 8 Solutions, 4e

CHAPTER 8: STRATEGY AND THE MASTER BUDGETQUESTIONS 8-1 Compel strategic planning and facilitate implementation of strategic plans. An organization’s strategy, strategic plans, and budgets are interrelated. Preparing budgets compels reviews of an organization’s strategy and its strategic plans and can facilitate implementations of the strategic plan. Feedback from budgets often results in improvements to an organization’s strategy and strategic plan. Serve as a basis for performance evaluation. Budgets serve as the benchmark against which actual performance can be compared. Budgets are a better basis for udging performance than past performance for two reasons. First, budgeted amounts take into account e!pected changes and improvements in the environment. "econd, past performance is a result of past events and operations and may not be suitable to serve as a benchmark. #o the e!tent past performance was not effective$efficient it does not make sense to use this as the standard against which actual performance is compared. Motivate managers and employees. Budgets, if internalized, serve as goals for managers and employees and, if properly implemented, can motivate them toward achievements of the goals. Promote coordination and communication within the organization. Budgets compel managers to think of interdependencies and interrelationships among subunits of the organization. A budget is also a communication device that helps all employees and managers understand and accept the organization’s obectives and e!pected roles and contributions over the coming period. Authorization to act. #he approved budget, particularly in a not%for%profit setting, gives the manager authorization to act &make decisions, etc.'. (ther benefits include serving as a basis for resource allocation, aiding cash-flow management, and providing authorization documentation. 8-2 An organization’s strategic plan describes how the organization matches its strengths and weaknesses with the opportunities and threats in the marketplace in order to accomplish its long%term goals &e.g., achieve sustainable competitive advantage'. )t is the guideline for the firm’s short%term and long%term operations. A strategic plan may e!tend over several budget periods &e.g., years' covered by a master budget. A master budget is a comprehensive operational plan of action for the coming year. )t includes both operating budgets and financial budgets and culminates in a set of forecasted &i.e., pro-forma' financial statements &cash flow, income statement, and balance sheet'. #he strategic plan of a firm guides, in a general sense, the determination of the master budgets prepared annually by the organization. "pecialized consulting companies now provide software that can be used to integrate master budgets with strategic plans as part of a comprehensive performance management system. &"ee, for e!ample, *eac, at www.performance.geac.com.' Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1 ©The McGraw-Hill Companies 2008 8-3 A master budget is a comprehensive plan of action for an organization for a future period while a capital budget is an investment &and financing' plan for a maor proect or program that has long%range effects on operations. As indicated in te!t +!hibit ,.-, resources specified in the capital budget of the current period are included in the master budget of the period. 8-4 A master budget is a comprehensive plan of action for a future period. as such, the master budget includes both operating and financial budgets. An operating budget consists of plans regarding revenues and resource ac/uisition$use across all maor operating areas of the organization &e.g., sales, production, purchasing, marketing, research and development, and general administrative activities'. #he set of operating budgets culminates in a budgeted income statement. inancial budgets relate to sources and uses of funds for an upcoming period. #he set of financial budgets culminates in a budgeted cash flow statement and budgeted balance sheet. 8-5 "uccessful budgeting systems typically0  have full support by one or more key managers in the organization  become personalized budgets of the people who have the responsibility for carrying them out. as such, they serve an important motivational function  are perceived by managers and employees as planning and coordinating tools, not pressure devices or mechanisms designed to stifle creativity and opportunity  are not viewed as a basis for placing blame.  provide for a two%way flow of information in the budget%preparation process  include budgets that are 1highly achievable2 8-6 #he budget committee of an organization is the highest authority in the organization for all matters related to the budget. #he committee sets or approves the overall budget goals for the organization and its maor business units, directs and coordinates budget preparation, resolves conflicts and differences that may arise during the budget%preparation process, approves the final budget, monitors operations as the year unfolds, and reviews operating results at the end of the period. #he budget committee also approves maor revisions of the budget during the period. 8-7 3o, these terms are not synonymous. #he term 1sales forecast! refers to estimated sales volume for an upcoming period. As such, the sales forecast is generally the starting point in preparing the sales budget for the period. #he term 1 sales budget2 refers to forecasted sales dollars for an upcoming period. Alternatively, rather than focusing on the difference between sales volume and sales dollars, some writers distinguish between these two terms on the basis of the level of control0 we use the term sales forecast to refer to both units and dollars because, unlike costs, these elements are affected by e!ternal &e.g., competitor actions' as well as internal factors &e.g., product promotion e!penditures'. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2 ©The McGraw-Hill Companies 2008 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8- ©The McGraw-Hill Companies 2008 8-8 #he sales budget is often regarded as the cornerstone in the master budget because all operating activities in a business emanate from efforts to attain the level of sales specified in the sales budget. A firm can complete the plan for other activities of a period only after it knows the e!pected sales levels for the current and the immediate future periods. A manufacturing firm, for e!ample, cannot complete its production schedule for the upcoming period without knowing the number of units it must produce for each of its products. #he firm can ascertain the number of units to be produced only after it knows both forecasted sales and the desired ending inventory. #he units to be produced, in turn, affect many other activities of the firm including amount and kinds of materials to be purchased, number of employees to be hired, levels of factory overhead, and selling and administrative e!penses. 8-9 4hen sales volume is seasonal in nature, the three most significant items to coordinate are0 production volume, finished goods inventory, and sales volume. 8-10 Additional factors include0  beginning and desired ending inventories of work%in%process and finished goods  the re/uired material inputs &in lbs., liters, etc.' for each product  beginning and desired ending inventories of direct materials  the cost of materials &per lb., liter, etc.' 8-11 #he two factors that determine the amount of factory overhead for a period are management decision and planned production volume. #he former refers to capacity%related &i.e., fi!ed overhead' costs while the latter refers to the planned utilization of that capacity &i.e., variable overhead costs'. 8-12 A cash budget generally includes three maor components0  5ash available &i.e., beginning cash balance plus budgeted cash receipts'  5ash disbursements &other than interest e!pense', and  Financing activity &new financing, repayment of principal, and interest e!pense' 813#he following are some of the similarities between cash budgets and cash-flow statements re/uired by *AAP0  Both include sources and uses of funds  Both are prepared for a period of time  3either includes any non%cash revenues and e!penses Among differences between these two statements are0  A cash%flow statement reports the results of past activities while a cash budget describes effects of planned operations.  A firm needs to follow *AAP in preparing cash%flow statement while the guiding principle for preparing a cash budget is relevance and usefulness to Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-! ©The McGraw-Hill Companies 2008 management. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-" ©The McGraw-Hill Companies 2008  #he maor categories of cash%flow statements are operating, financing, and investing activities. +ach of these categories may include both sources and uses of cash. #he maor categories of cash budgets are cash available, cash disbursements, and financing. Both cash available and cash disbursements may include cash from either operating or investing activities. 8-14 )n comparison with manufacturing organizations, uni/ue budget characteristics of service organizations include0  absence of production and materials purchases budgets  emphasis on workforce planning 8-15 )n contrast to business firms &i.e., for%profit entities', a not%for%profit organization0  has no single bottom%line amount such as operating income  is more likely to use its budgets as the source of authorization for its activities  limits the total amount in the budget to the e!pected total revenues &Federal budgets are e!ceptions' 8-16 "ero-base budgeting &6BB' is a budgeting process that re/uires managers to prepare budgets each period from ground zero for all operations. A typical budgeting process is 1incremental2 in nature. #hat is, budgets for the upcoming period start from the approved budgets for the current period, with amounts added to reflect planned changes for the upcoming period. #hus, traditional budgets assume that most, if not all, of the current activities and functions will continue into the coming budget period. )n contrast, a zero%base budgeting process allows no activities or functions to be included in the budget unless managers can ustify their need. Pure forms of 6BB are e!pensive and time%consuming. For this reason, some companies have partial 6BB systems. A number of companies &e.g., 7ero!, #e!as )nstruments' and government organizations &e.g., "tate of *eorgia' have at one time or another used 6BB. 8-17 3o. #aizen budgeting is a budgeting approach that e!plicitly incorporates continuous improvement standards$e!pectations in the approved budgets. )n contrast, activity%based budgeting &ABB' is a budgeting process that relies on the costs of activities and activity%cost drivers to prepare budgets. )n other words, ABB develops master budget data using the organization’s activity%based cost &AB5' system. #hus, ABB begins by /uantifying products and services to be produced for an upcoming period. #hese forecasts are then used to estimate the amount of activities, across the internal value chain, that are needed to meet forecasted output &products or services'. #he budgeting process is completed by assigning estimated resource costs to the specified activities. Both American $%press and A&'& Paradyne provide e!amples of actual implementation of ABB systems. "ee, Player, ". 8 9eys, :. +. &eds.', Activity-(ased Management) Arthur Andersen*s +essons from the A(M (attlefield. 3ew ;ork0 <ohn 4iley 8 "ons, =>>>. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-# ©The McGraw-Hill Companies 2008 8-18 (udgetary slac,, or ?padding? the budget, is the practice of knowingly including a higher amount of e!penditure in the budget &or lower amount of revenue' than managers actually believe should be the case. (ne reason that it is common to find slacks in budgets is the desire of managers to use such slack as a cushion for unpredictable$uncontrollable future events &e.g., worker attrition, machine breakdowns$malfunctions'. Another reason is the increased recognition or reward that might accrue to those who 1beat2 their budget target. Finally, managers may believe that the budgets they submit will be 1cut2 in the budget negotiation process. #herefore, such managers must 1pad2 their budgets in order to secure the amount of resources they feel they actually need. 8-19 A 1highly achievable2 budget has a target that is achievable by most managers 1most of the time2 &e.g., ,@ to >@ percent of the time'. )n a study by Aerchant &=>>@', the author finds that a budget with a highly achievable target serves well in the vast maority of organizational situations, especially when accompanied by e!tra rewards for performance e!ceeding the target. Among the advantages of using a highly achievable budget target are the following0 =. )ncreasing managersB commitment to achieving the budget target. C. Aaintaining managersB confidence in the budget. -. :ecreasing organizational control cost. D. Eeducing the risk that managers will engage in harmful earnings% management practices or violate corporate ethical standards. F. Allowing effective and efficient managers greater operating fle!ibility. G. )mproving predictability of earnings or operating results. H. +nhancing the usefulness of a budget as a planning and coordinating tool. 8-20 Participative budgeting is a 1bottom%up2 approach that involves everyone in the budget%preparation processIfrom low%level workers all the way to the top managers of the organization. #he principal idea is to have employees$managers 1internalize2 &i.e., take ownership of' the budgets that are prepared. For participative budgeting to be effective, top management needs to be actively involved. Furthermore, top management should institute incentives to guard against e!cessive budget padding, and encourage the generation of accurate budgetary proections. Finally, top managers may have to serve as arbiters when irreconcilable differences occur in the budget preparation process. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$ ©The McGraw-Hill Companies 2008 BRIE! E"ERCISES 8-21 JC J- "alesIC@@H =G,@@@ =F,@@@ Proected K increase for C@@, CFK CFK +stimated "ales LolumeIC@@, 20#000 18#750 ! +stimated Mnit "elling PriceIC@@, ND.@@ ND.@@ +stimated "ales :ollarsIC@@, $80#000 $75#000 8-22 Payment history0 K paid in month of purchase0 CFK K paid in month following month of purchase0 HFK +!pected 5ash :isbursements0 February0 &NF,F@@ ! @.HF' O &NG,F@@ ! @.CF' P $5#750 Aarch0 &NG,F@@ ! @.HF' O &N,,@@@ ! @.CF' P $6#875 8-23 3umber of units produced in Jtr. =0 +nding inventory of :A &in lbs.' P F@,@@@ #arget ending inventory K P CFK of following month’s production re/uirements #herefore, EA used for production in Jtr. = P F@,@@@[email protected] P C@@,@@@ lbs. Mnits produced in Jtr. = P lbs. of EA used$lbs. of EA per unit of output P C@@,@@@$, P CF,@@@ units :A re/uirements &in lbs.', Jtr. C P Planned production, Jtr. C ! :A lbs.$unit P &CF,@@@ units ! =.=@' ! , lbs.$unit P CH,F@@ units ! , lbs.$unit P 220#000 %&' 8-24 "cheduled Production, Juarter C0 Mnits re/uired to meet estimated sales, Jtr. C P =C,@@@ units Mnits re/uired to meet targeted ending inventory0 =F,@@@ units ! =@K P =,F@@ units #otal units needed =-,F@@ units Qess0 Beginning inventory, Jtr.C &=C,@@@ units ! =@K' P =,C@@ units "cheduled production, Juarter C P 12#300 ()*+' 8-25 5urrent level of monthly operating costs P N=@,@@@0 +stimated operating costs, <anuary P N=@,@@@ ! @.>> = P $9#900 +stimated operating costs, <une P N=@,@@@ ! @.>> G P $9#415 +stimated operating costs, :ecember P N=@,@@@ ! @.>> =C P $8#864 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-8 ©The McGraw-Hill Companies 2008 8-26 5ollection of 5redit "alesI3ovember0 -@K of 5redit "ales made in (ctober P @.-@ ! N-@,@@@ P N>,@@@ H@K of 5redit "ales made in 3ovember P @.H@ ! NCD,@@@ P N=G,,@@ #otal +stimated 5ollections%%3ovember P $25#800 5ollection of 5redit "alesI:ecember0 -@K of 5redit "ales made in 3ovember P @.-@ ! NCD,@@@ P NH,C@@ H@K of 5redit "ales made in :ecember P @.H@ ! NC@,@@@ P N=D,@@@ #otal +stimated 5ollections%%:ecember P $21#200 8-27 5ollection of 5redit "alesI:ecember0 From credit sales made in 3ovember P @.C@ ! N>@,@@@ P N=,,@@@ From credit sales made in :ecember0 P &@.HF ! N=@@,@@@' ! @.>, P NH-,F@@ #otal +stimated 5ollectionsI:ecember P $91#500 8-28 +stimated interest e!penseIApril P borrowing in April ! &annual rate$=C' P R&N-@,@@@ % N=,,@@@' O N=,@@@S ! &@.=C$=C' P N=-,@@@ ! @.@= P $13000 3ote that, strictly speaking, to maintain a minimum cash balance of N-@,@@@, the company would have to borrow an e!tra N=,@@@ to be able to cover the interest payment &eom' and still have at least N-@,@@@ of cash. +stimated financing transactionsIAay0 )nterest e!pense &paid eom'0 N=-,@@@ ! @.@= P N=-@ Principal repayment0 Beginning%of%month cash balance P N=,,@@@ O &N=-,@@@ % N=-@' P N-@,,H@ Plus0 net cash flow in Aay, prior to financing P NCC,@@@ 5ash balance prior to financing transactions P NFC,,H@ Qess0 interest e!pense &eom' for Aay &N=-@' Qess0 minimum cash balance re/uirement P &N-@,@@@ ' 5ash available for principal repayment P NCC,HD@ Eounded down to nearest N=,@@@ P NCC,@@@ T,+-% .*)-)/*)0 +1-)'-/+*,)'2M-3 P $22#130 8-29 :A purchases, :ecember P &:A issued to production O ending :A inventory' % beginning :A inventory P &N=F@,@@@ O N->,F@@' % N-H,@@@ P $152#500 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-% ©The McGraw-Hill Companies 2008 8-30 #otal estimated marketing e!penses, D th /uarter0 Lariable costs P N@.@F$unit ! &D,@@@ units ! =.=@' P N@.@F$unit ! D,D@@ units P NCC@ Fi!ed costs0 "alaries P N=@,@@@ :epreciation P NF,@@@ )nsurance P NC,@@@ N=H,@@@ #otal estimated marketing e!penses, D th /uarter $17#220 Qess0 non%cash charges0 :epreciation e!pense NF,@@@ +stimated cash payments for marketing e!penses $12#220 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-10 ©The McGraw-Hill Companies 2008 E"ERCISES 8-31 456-+-I.7 A)-%3'*' 820 M*)(+9': =. #he term 1what if2 analysis is one e!ample of the more general term 1sensitivity analysis2 and is used to e!plore the effects &e.g., on a decision or a budget for an upcoming period' of different marketing, production, or selling strategies &e.g., the effect on revenues of lowering product selling prices, the profit%effect of using a different sales%promotion plan'. #hat is, a 1what%if2 analysis e!amines how a result will change if the original &base%line' data are not achieved or, as in the present case, if an underlying assumption &viz., rate of bad%debts e!pense' changes. C. -. Aanagers today work in a world of uncertainty. (ne way to cope with uncertainty in the master budgeting process is to model the underlying relationships associated with the various budgets that are prepared and then to perform sensitivity analysis. (ne form of sensitivity analysis is the 1what%if2 analysis described above. For #yson 5ompany, this type of analysis can help the firm decide whether it might need to implement a more restrictive credit%granting policy and, if so, how much it might be willing to spend in this regard. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-11 ©The McGraw-Hill Companies 2008 8-32 B96-;*,1-% C,)'*<91-+*,)' 815 M*)(+9': #here are at least two issues here. (ne is the failure to take advantage of all the cash discount included in the sales term. &)n this regard, see +!ercise ,%-H.' #he other is the constant occurrence of rush orders, last%minute changes, and other operating emergencies that re/uire the purchasing department to do last minute purchases. <anet needs to ensure that the Accounting :epartment records all purchases at the net price whenever a purchase is made with cash discounts included in the sales terms. Any additional amount that the firm has to pay because of the failure to make the payment within the payment terms should be charged to the finance department as a loss and not treated as an adustment to the cost of purchase. #he firm needs to be very clear in its operating procedures about the minimum amount of time re/uired for purchases. Any additional ac/uisition cost because of rush orders, last%minute changes, or operating emergencies should be borne by the department making the re/uest. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-12 ©The McGraw-Hill Companies 2008 8-33 B(<09+-13 S%-/= -)< >91,-B-'9< B(<09+*)0 8>BB: 820 ?*)(+9': =. (udgetary slac, is a planned difference between budgeted revenue and e!pected revenue, and$or budgeted e!penditures and e!pected e!penditures. Budgetary slack describes the tendency of managers to under%estimate revenues and over% estimate e!penditures during the budgetary process in order to build in allowances &1cushions2' for une!pected declines in revenue and$or unforeseen e!penses. Budgetary slack occurs because of conflicts between the personal interests of a manager and the interests of the organization. #hese conflicts include pressure from top management to achieve budgets and the desire on the part of the manager to look favorable in the eyes of top management. C. a. From the point of view of the business unit manager, budgetary slack provides0  performance that will 1look better2 in the eyes of their superiors  a coping mechanism regarding uncertainty  a way to obtain what is needed since initially submitted budgets tend to be cut during the budget%negotiation process Towever, the use of budgetary slack limits the obective evaluation of a business unit and, therefore, limits the obective evaluation of the performance of the unit manager. )t also becomes more difficult for the business unit manager to evaluate the performance of subordinates and to use the budget as a control mechanism over subordinate performance. b. From the perspective of corporate management, the use of budgetary slack increases the probability that budgets will be achieved. #his increased probability facilitates the overall corporate budgeting process. 5orporate management may also allow budgetary slack as a form of reward to managers for previous good performance. Towever, from the point of view of the business unit management, the use of budgetary slack increases the likelihood of inefficient allocation of scarce resources, and decreases the ability to identify potential weaknesses or trouble spots in operating activities. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1 ©The McGraw-Hill Companies 2008 8-33 8C,)+*)(9<: -. a. "ero-based budgeting &6BB' is a budgeting techni/ue that evaluates all proposed operating and administrative e!penditures as though they were being initiated for the first time. +ach manager must evaluate the proposed e!penditure for each activity to be undertaken during the upcoming budget period, investigate alternative means of conducting each activity, and rank e!penditures in order of perceived importance. b. Atlantis Qaboratories could benefit from 6BB as each of the business unit managers would be re/uired to identify and ustify all proposed e!penditures for the upcoming year. #his increased evaluation of e!penditures would make it difficult to include budgetary slack in the budget for the upcoming year and likely uncover opportunities of cost savings and operational improvements. c. #he biggest disadvantage of 6BB is the significant amount of time and cost involved in its implementation. )n addition, the concept of zero%based budgeting may be difficult for management to learn and accept. Atlantis must be sure that the benefits of 6BB outweigh the associated costs. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1! ©The McGraw-Hill Companies 2008 8-34 B(<09+9< C-'6 D*'&(1'9?9)+' 825 ?*)(+9': =. Budgeted cash payments for merchandise purchases0 a. February0 CFK ! N=@@,@@@ P NCF,@@@ HFK ! N=C@,@@@ P N>@,@@@ $115#000 b. Aarch0 CFK ! N=C@,@@@ P N-@,@@@ HFK ! N==@,@@@ P N,C,F@@ $112#500 C. Budgeted cash payments for merchandise purchases0 a. February0 CFK ! N=@@,@@@ ! @.>, P NCD,F@@ HFK ! N=C@,@@@ ! @.>, P N,,,C@@ $112#700 b. Aarch0 CFK ! N=C@,@@@ ! @.>, P NC>,D@@ HFK ! N==@,@@@ ! @.>, P N,@,,F@ $110#250 -. #he financial cost of not taking advantage of the early%payment discount can be appro!imated by the following formula0 (pportunity cost &K' P Rdiscount K$&= % discount K'S ! R-GF$no. of e!tra days allowed if discount is not takenS P R@.@C$&= % @.@C'S ! R-GF$C@S P @.@C@D@, ! =,.CF P 3725@ Basically, if you choose not to take the early%payment discount, you are giving up a CK discount &on the net amount' in return for an e!tra C@ days in which to pay. #here are =,.CF &-GF$C@' C@%day periods in a year. 3ote that in the first term of this formula we divide the CK discount rate by >,K &= % CK' because, in effect, you are paying CK to delay for C@ days paying >,K of the total bill. "o, the percentage rate you are paying in this case is really C.@D@,K of the net bill &the bill without financing cost'. Eegardless of the technicalities here, students should understand that the opportunity cost of not taking advantage of the early% payment &cash' discount can be very significant, as is the case here. For this reason, firms record purchases at net cost and any discounts lost as interest e!pense. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1" ©The McGraw-Hill Companies 2008 8-35 B(<09+9< C-'6 R9/9*A+' -)< D*'&(1'9?9)+' 820 ?*)(+9': =. Budgeted 5ash Eeceipts0 3ovember0 &N=@@,@@@ ! @.>F' ! @.-F ! @.,@ ! @.>, P NCG,@G, &N=@@,@@@ ! @.>F' ! @.-F ! @.C@ P NG,GF@ &N=F@,@@@ ! @.>F' ! @.GF ! @.,@ ! @.>, P NHC,G=, &N=F@,@@@ ! @.>F' ! @.GF ! @.C@ P N=,,FCF $123#861 :ecember0 &N=F@,@@@ ! @.>F' ! @.-F ! @.,@ ! @.>, P N->,=@C &N=F@,@@@ ! @.>F' ! @.-F ! @.C@ P N>,>HF &N >@,@@@ ! @.>F' ! @.GF ! @.,@ ! @.>, P ND-,FH= &N >@,@@@ ! @.>F' ! @.GF ! @.C@ P N==,==F $103#763 C. Budgeted 5ash :isbursements0 3ovember0 &N=H@,@@@ ! @.HF' ! @.CF P N-=,,HF &NCH@,@@@ ! @.HF' ! @.HF P N=F=,,HF $183#750 :ecember0 &NC@@,@@@ ! @.HF' ! @.CF P N-H,F@@ &N=H@,@@@ ! @.HF' ! @.HF P N>F,GCF $133#125 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1# ©The McGraw-Hill Companies 2008 8-36 P1,<(/+*,) -)< ?-+91*-%' A(1/6-'9' &(<09+' 820 ?*)(+9': Production Budget0 Cnd Juarter -rd Juarter Budgeted sales -,,@@@ -D,@@@ :esired ending inventory &=@K' O -,D@@ O D,,@@ #otal units needed D=,D@@ -,,,@@ Beginning inventory U -,,@@ U -,D@@ #otal units to produce 37#600 -F,D@@ Budgeted Purchases of :irect Aaterials for the "econd /uarter0 Cnd Juarter -rd Juarter Budgeted production -H,G@@ -F,D@@ :irect materials per unit ! - ! - :irect materials needed in production ==C,,@@ =@G,C@@ :esired ending inventory of direct materials &C@K of =@G,C@@' O C=,CD@ #otal direct materials needed =-D,@D@ Beginning inventory of :A &C@K of ==C,,@@' U CC,FG@ Budgeted purchases of direct materials &lbs.' 111#480 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1$ ©The McGraw-Hill Companies 2008 8-37 P(1/6-'9 D*'/,()+' ,) C19<*+ P(1/6-'9' 820 ?*)(+9': #he financial cost of not taking advantage of the early%payment discount for purchases made on credit can be appro!imated by the following formula &we use the term 1appro!imate2 here to denote the fact that the estimate below does not assume compounding of interest and as such provides a conservative estimate'0 (pportunity cost &K' P Rdiscount K$&= % discount K'S ! R-GF$no. of e!tra days allowed if discount is not takenS =. )n the case of C$=@, n$-@, the appro!imate economic cost of not taking advantage of the early%payment discount is0 P R@.@C$&= % @.@C'S ! R-GF$C@S P @.@C@D@, ! =,.CF P 3725@ Basically, if you choose not to take the early%payment discount, you are giving up a CK discount &on the net amount' in return for an e!tra C@ days in which to pay. #here are =,.CF &-GF$C@' C@%day periods in a year. 3ote that in the first term of this formula we divide the CK discount rate by >,K &= % CK' because, in effect, you are paying CK to delay for C@ days paying >,K of the total bill. "o, the percentage rate you are paying in this case is really C.@D@,K of the net bill &the bill without financing cost'. C. )n the case of =$=@, n$-@, the opportunity cost of not taking advantage of the early%payment cash discount is0 P R@.@=$&= % @.@='S ! R-GF$C@S P @.@=@=@= ! =,.CF P 1843@ -. *iven the significant opportunity cost of not taking advantage of early% payment cash discounts, good accounting practice would be to record purchases at their net%of%discount amount and then to record as 1interest e!pense2 or 1purchase discounts lost2 any cash discounts not taken advantage of. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-18 ©The McGraw-Hill Companies 2008 8-38 P1,<(/+*,) -)< ?-+91*-%' &(<09+'--A1,/9'' /,'+*)0 820 ?*)(+9': =. Budgeted Production &7PQ-@'0 Mnits Budgeted sales D,@,@@@ Budgeted finished goods ending inventory &<une -@, C@@,' O F@,@@@ #otal number of units needed F-@,@@@ Qess0 Budgeted finished goods beginning inventory U ,@,@@@ Budgeted production &units' 450#000 C. Mnits of 7PQ-@ to "tart into Production0 Budgeted production &from &=' above' DF@,@@@ Budgeted 4)P ending inventory &<une -@, C@@,' O C@,@@@ #otal number of units needed DH@,@@@ Qess0 Budgeted 4)P beginning inventory &<uly =, C@@H' U =@,@@@ #otal units of 7PQ-@ to start into production 460#000 -. Eaw Aaterials Purchases Budget0 Mnits of 7PQ-@ to start into production &from &C' above' DG@,@@@ Mnits of raw materials needed per unit of 7PQ-@ ! C #otal raw materials needed for production >C@,@@@ Budgeted raw materials ending inventory &<une -@, C@@,' O F@,@@@ #otal number of units of raw materials needed >H@,@@@ Budgeted raw materials beginning inventory &<uly =, C@@H' U D@,@@@ #otal units of raw materials that must be purchased 930#000 D. 4hile the timing of the addition of materials would affect the calculation for number of e/uivalent units produced, number of e/uivalent units in the ending 4)P inventory, and the raw materials cost per e/uivalent unit, it will have no impact on the budgeted purchases of materials for the period. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1% ©The McGraw-Hill Companies 2008 8-39 C-'6 B(<09+--!*)-)/*)0 E..9/+' 820 ?*)(+9': Tartz 8 5o. 5ash Budget For 3ovember and :ecember, C@@H 3ovember :ecember 5ash balance, beginning NHF,@@@ N>>,F@@ Plus0 5ash receipts NFCF,@@@ NDF@,F@@ #otal cash available &A' NG@@,@@@ NFF@,@@@ 5ash disbursements, prior to financing &B' NDF@,@@@ NFF@,@@@ Plus0 Ainimum cash balance &given' NF@,@@@ NF@,@@@ #otal cash needed &5' NF@@,@@@ NG@@,@@@ +!cess &deficiency of' cash, before financing &5' P &A' % &B' N=@@,@@@ &NF@,@@@ ' Financing0 "hort%term borrowing %@% NF=,@@@ Eepayments &loan principal' &NF@,@@@' %@% )nterest &V=CK' &NF@@ ' &NF=@ ' #otal +ffects of Financing P &+' &NF@,F@@ ' NF@,D>@ +nding cash balance P &A' % &B' O &+' $99#500 $50#490 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-20 ©The McGraw-Hill Companies 2008 8-40 C-'6 &(<09+ 810-15 ?*)(+9': 5ash Available 5ash balance, beginning N =@,@@@ 5ash collections from customers O =F@,@@@ #otal cash available N=G@,@@@ 5ash :isbursements :irect materials purchases N CF,@@@ (perating e!penses NF@,@@@ Qess0 :epreciation e!penses % C@,@@@ -@,@@@ Payroll HF,@@@ )ncome ta!es G,@@@ Aachinery purchase O -@,@@@ #otal cash disbursements prior to financing N=GG,@@@ Financing0 5ash e!cess &shortage' before financing &N G,@@@' Ainimum cash balance desired % C@,@@@ Financing need $26#000 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-21 ©The McGraw-Hill Companies 2008 8-41 C-'6 &(<09+ 815 ?*)(+9': 5ash Available0 5ash balance, beginning &given' N G,@@@ 5ash collections from customers &given' O =HF,@@@ #otal cash available N=,=,@@@ Budgeted 5ash :isbursements, C@@H0 Payroll N=G@,@@@ (ther operating e!penses N=,,@@@ Qess0 Property ta!es &see below' % -,@@@ Qess0 :epreciation e!pense % F,@@@ 5ash operating e!penses =@,@@@ Property ta!es0 C nd half of C@@G &@.F@ ! NC,F@@' N=,CF@ = st half of C@@H &@.F@ ! N-,@@@' =,F@@ C,HF@ Payment for office e/uipment O G,@@@ #otal cash disbursements, prior to financing N=H,,HF@ Financing0 5ash balance before financing $2#250 3o, the cash budget shows that Bill will not be able to meet the minimum cash balance re/uirement of NG,@@@. As such, borrowing &or some other source of financing' must occur in order to meet the minimum cash re/uirement. 8-42 C-'6 B(<09+*)0: N,+-.,1-P1,.*+ C,)+9B+ 830 ?*)(+9': Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-22 ©The McGraw-Hill Companies 2008 =. 1+ndowment fund02 a gift &contribution' whose principal must be maintained but whose income may be e!pended. &;ou might use the e!ample of an 1endowed professorship2 as an e!ample.' C. C-'6 B(<09+ .,1 T1*-C,()+3 S,/*-% S91;*/9 A09)/3 2007 8*) +6,('-)<': Juarters ) )) ))) )L ;ear 5ash Balance, beginning N== $8 $8 $8 N== Eeceipts0 *rants N,@ NH@ -./ -./ N-@@ 5ontracts $20 $20 $20 $20 N,@ Aental Tealth )ncome NC@ $25 $30 $30 N=@F 5haritable donations NCF@ $350 NC@@ ND@@ $1,200 #otal 5ash Available $381 NDH- N--- $533 $1,696 Qess0 :isbursements0 "alaries and Benefits $335 N-DC $342 $346 N=,-GF (ffice e!penses NH@ $65 NH= NF@ NCFG +/uipment purchases 8 maintenance NC ND NG $5 N=H "pecific assistance NC@ N=F N=, $20 NH- #otal disbursements $427 $426 $437 $421 $1,711 +!cess &deficiency' of cash available over disbursements &NDG ' $47 ($104) N==C ($15 ) Financing0 Borrow from endowment fund $54 $0 N==C $0 $166 Eepayments $0 &N-> ' $0 ($104 ) ($143 ) #otal financing effects $54 ($39 ) $112 ($104 ) $23 5ash Balance, ending $8 $8 $8 $8 $8 -. NC-,@@@. D. )t is probable that both donations and re/uests for services are unevenly distributed over the year. #he agency may want to increase re/uests for donations and seek additional grants. F. 3o. Assuming there is careful fiscal management, borrowing only occurs when necessary. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2 ©The McGraw-Hill Companies 2008 8-43 C,%%9/+*,) ,. A//,()+' R9/9*;-&%9 815-20 ?*)(+9': =. Aonth #otal K to be 5ollected Budgeted 5ash of "ale 5redit "ales in (ctober 5ollection )n (ctober (ctober N>@,@@@ H@K N G-,@@@ "eptember ,@,@@@ =FK =C,@@@ August H@,@@@ =@K H,@@@ <uly G@,@@@ DK C,D@@ +stimated #otal 5ash 5ollections in (ctober $84#400 C. Amount Budgeted collection Aonth of 5redit K 5ollected in in the D th /uarter from of "ale "ales (ct. 3ov. :ec. sales in the D th Juarter (ctober N >@,@@@ H@K N G-,@@@ =FK =-,F@@ =@K >,@@@ 3ovember =@@,@@@ H@K H@,@@@ =FK =F,@@@ :ecember ,F,@@@ H@K F>,F@@ #otal budgeted cash collections in the D th /uarter from credit sales made in the D th /uarter $230#000 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2! ©The McGraw-Hill Companies 2008 8-44 A//,()+' R9/9*;-&%9 C,%%9/+*,)' -)< S9)'*+*;*+3 A)-%3'*' 845 ?*)(+9': (riginal Assumptions$:ata0 Actual credit sales for Aarch N=C@,@@@ Actual credit sales for April N=F@,@@@ +stimated credit sales for Aay NC@@,@@@ +stimated collections in month of sale CFK +stimated collections in first month following month of sale G@K +stimated collections in the second month after month of sale =@K +stimated provision for bad debts in month of sale FK =. +stimated cash receipts from collections in Aay0 5ollection from sales in Aarch &@.=@ ! N=C@,@@@' N=C,@@@ 5ollection from sales in April &@.G@ ! N=F@,@@@' N>@,@@@ 5ollection from sales in Aay &@.CF ! NC@@,@@@' NF@,@@@ #otal estimated cash collections in Aay $152#000 C. 0ross accounts receivable, Aay -= st 0 From credit sales made in April &@.=F ! N=F@,@@@' NCC,F@@ From credit sales made in Aay &@.HF ! NC@@,@@@' N=F@,@@@ +stimated gross accounts receivable, Aay -= st $172#500 -. 3et accounts receivable, Aay -= st 0 *ross accounts receivable, Aay -= st N=HC,F@@ Qess0 Allowance for uncollectible accounts0 From credit sales made in April NH,F@@ From credit sales made in Aay N=@,@@@ 3et accounts receivable, Aay -= st $155#000 D. Eevised data$assumptions0 Actual credit sales for Aarch N=C@,@@@ Actual credit sales for April N=F@,@@@ +stimated credit sales for Aay NC@@,@@@ +stimated collections in month of sale G@K +stimated collections in first month following month of sale CFK +stimated collections in the second month after month of sale =@K +stimated provision for bad debts in month of sale FK Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2" ©The McGraw-Hill Companies 2008 8-44 &5ontinued' a. +stimated cash receipts from collections in Aay0 5ollection from sales in Aarch &@.=@ ! N=C@,@@@' N=C,@@@ 5ollection from sales in April &@.CF ! N=F@,@@@' N-H,F@@ 5ollection from sales in Aay &@.G@ ! NC@@,@@@' N=C@,@@@ #otal cash collections in Aay $169#500 b. 0ross accounts receivable, Aay -=st0 From credit sales made in April &@.=F ! N=F@,@@@' NCC,F@@ From credit sales made in Aay &@.D@ ! NC@@,@@@' N,@,@@@ *ross accounts receivable, Aay -=st $102#500 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 1worksheet obect2 and then select 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. #he screen should then return you to the 4ord document. F. #he principal benefit is the accelerated receipt of cash, which the company can potentially employ to pay down debt, reduce borrowing, invest, etc. Principal costs would relate to whatever programs are needed to secure the accelerated collection of cash. #hese costs could include personal, travel, mailings, telephone, incentive programs, and costs related to customer relations. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2# ©The McGraw-Hill Companies 2008 I)A(+ D-+- Actual credit sales for Aarch N=C@,@@@ Actual credit sales for April N=F@,@@@ +stimated credit sales for Aay NC@@,@@@ +stimated collections in month of sale CFK +stimated collections in first month following month of sale G@K +stimated collections in the second month after month of sale=@K 8-45 B(<09+*)0: N,+-.,1-P1,.*+ S9/+,1 825 ?*)(+9': 1& "tewardship is defined by Merriam-3ebster 4nline 5ictionary as 1the conducting, supervising, or managing of something. especially0 the careful and responsible management of something entrusted to oneBs care.2 #he "ocially Eesponsible )nvestment *uidelines cited states0 1Although it is a moral and legal fiduciary responsibility of the trustees to ensure an ade/uate return on investment for the support of the work of the church, their stewardship embraces broader moral concerns.2 Also, the principles of stewardship lists two fundamental and interdependent principles0 1#he 5onference should e!ercise responsible financial stewardship over its economic resources.2 and 1#he 5onference should e!ercise ethical and social stewardship in its investment policy.2 #he latter states0 1"ocially responsible investment involves investment strategies based on 5atholic moral principles. #hese strategies are based on the moral demands posed by the virtues of prudence and ustice. #hey recognize the reality that socially beneficial activities and socially undesirable or even immoral activities are often ine!tricably linked in the products produced and the policies followed by individual corporations. *iven the realities of mergers, buyouts and conglomeration, it is increasingly likely that investments will be in companies whose policies or products make the holding of their stock a ?mi!ed investment? from a moral and social point of view. 3evertheless, by prudently applying traditional 5atholic moral teaching, and employing traditional principles on cooperation and toleration, as well as the duty to avoid scandal, the 5onference can reflect moral and social teaching in investments.2 C. 1#hese two maor principles work together to encourage the 5onference to identify investment opportunities that meet both our financial needs and our social criteria. #hese principles are carried out through strategies that seek0 =' to avoid participation in harmful activities, C' to use the 5onferenceBs role as stockholder for social stewardship, and -' to promote the common good.2 -. 3o. &Eeasons should vary.' D. ;es. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2$ ©The McGraw-Hill Companies 2008 8-46 B(<09+*)0 C-'6 R9/9*A+': C-'6 D*'/,()+' A%%,C9< ,) R9/9*;-&%9' 830 M*)(+9': =. Breakdown of 5ash$ "ales :ata Amount Bank 5redit%5ard "ales <une NG@,@@@ 5ash sales D@K <uly N,@,@@@ 5redit cards G@K August N>@,@@@ "eptember N>G,@@@ Bank charges -K (ctober N,,,@@@ 5redit sales0 5ollection of 5redit "ales 5urrent month C@K "ales Breakdown and #erms =st month F@K 5ash and bank credit card sales CFK Cnd month =FK 5redit sales HFK -rd month =CK #erms =$eom, n$DF Qate charge$mo. CK "ales K K 5ash S9A+9?&91 #otal K Paid 5ollected Eeceipts 5ash sales N>G,@@@ CFK D@K N >,G@@ Bank credit card sales N>G,@@@ CFK G@K >HK N=-,>G, 5ollections of A$E0 "eptember credit sales N>G,@@@ HFK C@K >>K N=D,CFG August credit sales N>@,@@@ HFK F@K N--,HF@ <uly credit sales N,@,@@@ HFK =FK N >,@@@ <une credit sales NG@,@@@ HFK =CK =@CK N F,F@, #otal 5ash Eeceipts, "eptember $86#082 C. Appropriate accounting treatment for0 a' (an, service 6collection7 fees0 these can be considered an offset to gross sales and thus can be reflected as a deduction in determining 1net sales2 &see te!t +!hibit ,.=F'. Alternatively, these amounts can be considered 1selling e!penses2 and, as such, be treated as an 1operating e!pense,2 &i.e., an element of 1"elling and Administrative +!penses2 on the )ncome "tatement'. b' Cash discounts allowed on collection of receivables0 these can be considered a 1selling e!pense2 and, as such, would be included within the 1"elling and Administrative2 e!pense category on the )ncome "tatement. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-28 ©The McGraw-Hill Companies 2008 8-47 C-'6 D*'/,()+'D SA19-<'699+ -AA%*/-+*,) 845 M*)(+9': 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 1worksheet obect,2 then select 1(pen2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. #he screen should then return you to the 4ord document below. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2% ©The McGraw-Hill Companies 2008 S-%9' D-+- A?,()+ B19-=<,C) ,. C-'6EB-)= C19<*+-C-1< S-%9' <une NG@,@@@ 5ash sales D@K <uly N,@,@@@ Bank credit%card sales G@K August N>@,@@@ Bank processing fee -K "eptember N>G,@@@ C,%%9/+*,) ,. C19<*+ S-%9': (ctober N,,,@@@ 5urrent month C@K S-%9' T91?' =st month F@K 5ash and bank credit%card sales CFK Cnd month =FK 5redit sales HFK -rd month =CK :iscount term =K Qate charge$mo. CK S-%9' P-3 C,%% C-'6 T,+-% @ @ @ R9/9*A+' C-'6 R9/9*A+' .,1 S9A+9?&91 5ash sales N>G,@@@ CFK D@K >,G@@ N Bank credit%card sales N>G,@@@ CFK G@K >HK =-,>G, N 5ollection of accounts receivable0 "eptember credit sales N>G,@@@ HFK C@K >>K =D,CFG N August credit sales N>@,@@@ HFK F@K --,HF@ N <uly credit sales N,@,@@@ HFK =FK >,@@@ N <une credit sales NG@,@@@ HFK =CK =@CK F,F@, N #otal 5ash Eeceipts 86#082 $ C-'6 R9/9*A+' .,1 O/+,&91 5ash sales N,,,@@@ CFK D@K ,,,@@ N 5redit cards sales N,,,@@@ CFK G@K >HK =C,,@D N 5ollections of account receivables (ctober credit sales N,,,@@@ HFK C@K >>K =-,@G, N "eptember credit sales N>G,@@@ HFK F@K -G,@@@ N August credit sales N>@,@@@ HFK =FK =@,=CF N <uly credit sales N,@,@@@ HFK =CK =@CK H,-DD N #otal 5ash Eeceipts 88#141 $ 8-48 A/+*;*+3-B-'9< B(<09+*)0 8ABB: 820 M*)(+9': =. Budgeted 5ost Activity Lolume :river Eate #otal 5ost "torage D@@,@@@ [email protected]>CF N =>H,@@@ Ee/uisition Tandling -@,@@@ N=C.F@ N -HF,@@@ Pick Packing ,@@,@@@ N =.F@ N=,C@@,@@@ :ata +ntry ,@@,@@@ N @.,@ N GD@,@@@ -@,@@@ N =.C@ N -G,@@@ :esktop :elivery =C,@@@ N-@.@@ N -G@,@@@ #otal Budgeted 5ost for the :ivision $2#808#000 C. Average number of cartons$delivery P =,=H@,@@@ cartons ÷ ==,H@@ deliveries P =@@ cartons$delivery #otal number of cartons budgeted for delivery in <anuary C@@H0 =C,@@@ deliveries ! =@@ cartons$delivery P =,C@@,@@@ cartons 5ost per carton delivered P NC,,@,,@@@ ÷ =,C@@,@@@ P $234 #herefore, the total budgeted cost for the division remains the same at $2#808#000. -. +!pected saving in costsI<anuary C@@H0 Ee/uisition Tandling N -HF,@@@ :ata +ntry0 number of lines GD@,@@@ :ata +ntry0 number of re/uisitions -G,@@@ +!pected 5ost "avings, <anuary C@@H P $1#051#000 )f the firm uses a single cost%rate system based on the number of cartons delivered, the firm will not be able to estimate the savings without special efforts to gather additional information. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-0 ©The McGraw-Hill Companies 2008 8-49 A/+*;*+3-B-'9< B(<09+*)0 C*+6 F-*G9) 840 M*)(+9': =. Mnit%Qevel0 Pick packing, :ata entryIQines Batch%Qevel0 Ee/uisition handling, :ata entryIEe/uisitions, :esktop delivery C. 5ost driver rates0 5ost%Eeduction 5ost%:river Eates Activity Eate &per month' <anuary February Aarch Ee/uisition Tandling >,K N=C.F@ N=C.CF@ N=C.@@F@ Pick Packing >>K N =.F@ N =.D,F N =.DH@C :ata +ntryIQines >>K N @.,@ N @.H>C N @.H,D= :ata +ntryIEe/uisitions >,K N =.C@ N =.=HG N =.=FCF :esktop :elivery >,K N-@.@@ NC>.D@@ NC,.,=C@ Budgeted 5osts0 Activity Activity Lolume February Aarch Ee/uisition Tandling -@,@@@ N -GH,F@@ N -G@,=F@ Pick Packing ,@@,@@@ N=,=,,,@@@ N=,=HG,=C@ :ata +ntryIQines ,@@,@@@ N G--,G@@ N GCH,CGD :ata +ntryIEe/uisitions -@,@@@ N -F,C,@ N -D,FHD :esktop :elivery =C,@@@ N -FC,,@@ N -DF,HDD :ivisional #otals NC,FHH,=,@ NC,FD-,,FC -. Factors that may influence the success of a continuous improvement &#aizen' program include0  Eeasonable or achievable cost reductions.  Awareness of all employees on the e!pected &scheduled' cost improvements over at least the immediate future periods.  Acceptance by both management and employees.  5ommitment of both management and employees on the strategic importance of the success of the continuous improvement program.  5lose link between the scheduled improvements and performance evaluations and rewards.  5ost reductions possible from small, incremental improvements, not from large discontinuous changes in factors such as operating processes, capital e/uipment, supplier networks, or customer interactions. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1 ©The McGraw-Hill Companies 2008 8-49 8C,)+*)(9<: D. Primary criticisms of #aizen &continuous improvement' budgets include the following0  #he budgeting process tends to place enormous pressure on employees to reduce all costs, which can lead to employee 1burnout.2  #he use of 9aizen budgets tends to motivate small, incremental rather than maor$significant process improvements.  )f the 9aizen targets are confined to the manufacturing function &including product and process design engineering', frictions can arise if manufacturing believes that other parts of the organization &e.g., marketing' are not subected to the same budgetary pressure. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2 ©The McGraw-Hill Companies 2008 8-50 C-'6 &(<09+ 830 ?*)(+9': =. #otal credit sales in 3ovember NCD@,@@@ Percentage collectible ! W >FK #otal amount collectible from credit sales in 3ovember NCC,,@@@ Percentage collected in the month following month of sales ! D@K Budgeted collections in :ecember from 3ov. credit sales $ 91#200 C. 5ash sales in <anuary N G@,@@@ 5ollections from credit sales in <anuary0 #otal collectible from credit sales N=,@,@@@ ! >FK P N=H=,@@@ Percentage to be collected in <anuary ! G@K N=@C,G@@ 5ollections from credit sales in :ecember0 #otal collectible from credit sales N-G@,@@@ ! >FK P N-DC,@@@ Percentage to be collected in <anuary ! D@K =-G,,@@ Budgeted total cash receipts in <anuary $299#400 -. #otal inventory purchases in 3ovember0 For 3ovember sales0 N-C@,@@@ ! @.- 7 @.G P N FH,G@@ For :ecember sales0 NDG@,@@@ ! @.H 7 @.G P =>-,C@@ NCF@,,@@ Percentage of 3ov. purchases to be paid in :ecember ! HFK Payment in :ecember for purchases in 3ovember N=,,,=@@ Budgeted purchases in :ecember0 For :ecember sales0 NDG@,@@@ ! @.- 7 @.G P N ,C,,@@ For <anuary sales0 NCD@,@@@ ! @.H 7 @.G P =@@,,@@ N=,-,G@@ Percentage of :ec. purchases to be paid in :ecember ! CFK Payment in :ecember for purchases in :ecember NDF,>@@ Budgeted payment in :ecember for inventory purchases $234#000 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8- ©The McGraw-Hill Companies 2008 8-51 B(<09+*)0 .,1 - S91;*/9 !*1? 860-75 ?*)(+9': #otal hours for the budgeted activities0 #otal Tourly Eevenue Eate #otal &*iven' &*iven' Tours Business return N=,@@@,@@@ NCF@ D,@@@ 5omple! individual return N=,C@@,@@@ N=@@ =C,@@@ "imple individual return N=,GD@,@@@ NF@ -C,,@@ N-,,D@,@@@ "taff re/uirements for the budgeted activities0 "enior #otal Tours Aanager 5onsultant Ee/uired #otal +ach #otal Business return D,@@@ @.-@ =,C@@ @.C@ ,@@ @.F@ @.@@ @ 5omple! individual return =C,@@@ @.@F G@@ @.=F =,,@@ @.D@ D,,@@ @.D@ D,,@@ "imple individual return -C,,@@ @.@@ @ @.@@ @ @.C@ G,FG@ @.,@ CG,CD@ #otal Tours D,,,@@ =,,@@ C,G@@ =-,-G@ -=,@D@ Tours per week F@ DF D@ D@ X of weeks needed -G F, --D HHG X of weeks per employee per year D@ DF DF D, X of employees needed = C , =G +!cess &deficiency' hours =,@D@ &-C@' N,+9: Because 5onsultants can be hired on a part%time basis, we round the calculation :(43 for this class of labor. #he Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2 ©The McGraw-Hill Companies 2008 other three labor classes are given &i.e., do not have to be planned for based on data in the problem'. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8- ©The McGraw-Hill Companies 2008 8-51 &5ontinued' SOHUTION: =. "ince, according to the present staffing plan and anticipated workload needs, there is an e!cess of senior consultant hours, the budgeted cost for overtime hours worked by senior consultants would be N@. C. 3umber of full%time consultants needed for the year0 #otal number of consultant%weeks needed for the year P HHG 3umber of weeks per full%time consultant per year P D, 3umber of full%time consultants needed per year P 16 -. #he managerBs total compensation, assuming that the revenues from preparing ta! returns remains the same0 Annual "alaries0 Per partner P NCF@,@@@ Per manager P N>@,@@@ Per senior consultant P N>@,@@@ Per support staff P ND@,@@@ 5onsultantBs pay &assumed paid on an hourly basis'0 +arnings per year P NG@,@@@ Trs. worked$year P =,>C@ Tourly pay rate P N-=.CF "taffing Plan0 Partners P = Aanagers P = "enior consultants P , Full%time 5onsultants P =G "upport staff P F 3umber of part%time &P#' hours, consultants P-C@ Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-! ©The McGraw-Hill Companies 2008 8-51 &5ontinued' Accu#a!, )nc. Budget (perating )ncome ;ear ended August -=, C@@H Eevenue N-,,D@,@@@ Payroll e!penses0 Partner NCF@,@@@ Aanager N>@,@@@ "enior consultantsIbase pay NHC@,@@@ "enior consultantsIpay for overtime hours N@ 5onsultants0 Full%time N>G@,@@@ Part%time N=@,@@@ N>H@,@@@ "upport staff NC@@,@@@ NC,C-@,@@@ *eneral and administrative e!penses N-H-,@@@ (perating income before bonus to manager N=,C-H,@@@ Qess0 managerBs bonus NH-,H@@ (perating income before ta!es $1#163#300 #otal compensation for the manager0 "alary &given' N>@,@@@ Bonus &@.=@ ! RN=,C-H,@@@ % NF@@,@@@S' NH-,H@@ #otal $163#700 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-" ©The McGraw-Hill Companies 2008 #otal hours for the budgeted activities0 #otal Tourly Eevenue Eate #otal &*iven' &*iven' Tours 8-52 B(<09+-13 P19''(19 -)< E+6*/' 820-25 ?*)(+9': =. #he use of alternative accounting methods to manipulate reported earnings is professionally unethical because it violates the "tandards contained in the )AA’s Statement of $thical Professional Practice &see0 www.imanet.org'. #he C,?A9+9)/9 '+-)<-1< is violated because of failure to perform duties in accordance with relevant accounting &technical' standards. )t can probably be argued that the competence standard is also violated because the accountant is not providing information that is accurate. #he I)+901*+3 '+-)<-1< is violated because the underlying activity would discredit the profession. #he C19<*&*%*+3 '+-)<-1< is violated because of failure to communicate information fairly and obectively. C. ;es, costs related to revenue should be e!pensed in the period in which the revenue is recognized &1matching principle2'. Perishable supplies are purchased for use in the current period, will not provide benefits in future periods, and should therefore be matched against revenue recognized in the current period. )n short, the accounting treatment for supplies was not in accordance with generally accepted accounting principles &*AAP'. 3ote that similar issues, but on an e!tremely large basis, occurred at 4orld5om and at *lobal 5rossing. )n the case of the latter, the company was engaging simultaneously in contracts to buy and to sell bandwidth, treating the former as capitalized e!penses and the latter as revenue for the current accounting period. -. #he actions of *ary 4oods were appropriate. Mpon discovering how supplies were being accounted for, 4ood brought the matter to the attention of his immediate superior, *onzales. Mpon learning of the arrangement with P8E, 4ood told *onzales that the action was improper. he then re/uested that the accounts be corrected and the arrangement discontinued. 4ood clarified the situation with a /ualified and obective peer &advisor' before disclosing *onzales’s arrangement with P8E to Belco’s division manager, #om QinI *onzales’s immediate superior. 5ontact with levels above the immediate superior should be initiated only with the superior’s knowledge, assuming the superior is not involved. )n this case, however, the superior is involved. According to the )AA’s statement regarding 8esolution of $thical Conduct, 4ood acted appropriately by approaching Qin without *onzales’s knowledge and by having a confidential discussion with an impartial advisor. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-# ©The McGraw-Hill Companies 2008 PROBHEMS 8-53 S?-%% &('*)9'' &(<09+' 830 ?*)(+9': =. 9ey features that need to be considered in developing a profit plan for a small business include0  +stimation of key factors such as revenues &sales demand, sales price' and e!penses for the budget period.  "ystematic evaluation of all available resources &materials, labor, technology' and their utilization rates.  5oordination of related functions or elements, such as scheduling production to meet sales forecasts or providing sufficient capacity to meet sales demand.  5ritical evaluations of non%operational sources and uses of cash. 3onoperational items may pose a more serious threat to small businesses than to large businesses.  *reater control over monthly cash flows and short%term financing than may be necessary in large enterprises.  *reater needs for continuous budgeting than for large organizations, because of the higher risks associated with economic, competitive, and financial factors for small businesses. C. #he management accountant must e!ercise care to ensure that the small business manager does not suffer from information overload &i.e., strive for simplicity and parsimony'. A profit%management system should be established that captures sufficient data on a timely basis to allow a reasonable level of operational control and evaluation without becoming too costly or too sophisticated for the business. Aany large enterprises may continue operations simply by inertia. 4ith small businesses, a strategic plan linked to the master budget is critical, especially in the early stage of a product’s life cycle. #he concepts of activity%based management &ABA', total /uality management &#JA', logistics management, life%cycle and target costing, and constraints% management &e.g., #heory of 5onstraints' are essential for the long%run survival and growth of small businesses. -. #he management accountant can insist upon, and assist in the preparation of, continuous cash budgets. #hese cash%flow reports should identify the maor operational and nonoperational sources and uses of cash, and point out the periods of potential cash shortages or surpluses. #his will facilitate planning for short%term lines%of%credit financing and short%term investments. A profit%management system should be created, utilizing the principles of activity% based costing &AB5' and cost%variance reporting including activity%based standard costing and activity%based cost variances. "egmented income statements comparing budgeted to actual results with profit%variance summaries should be an integral component of the high%/uality profit%management system. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$ ©The McGraw-Hill Companies 2008 8-54 E+6*/' *) B(<09+*)0EB(<09+-13 S%-/= 840 ?*)(+9': 1& a. #he reasons that Aarge Atkins and Pete *ranger use budgetary slac, include the following0  #hese employees are hedging against the une!pected &i.e., they use slack to deal with or reduce uncertainty and risk'.  (udgetary slac, allows employees to 1look good,2 &i.e., to e!ceed e!pectations and$or show consistent performance'. #his is particularly important when performance is evaluated on the basis of actual versus budgeted results.  +mployees who are able to blend personal and organizational goals through budgetary slack and show good performance generally are rewarded with higher salaries, promotions, and bonuses.  By 1padding the budget,2 the manager is more likely to get what he$she actually needs in terms of resources for the upcoming period. b. #he use of budgetary slac, can adversely affect Atkins and *ranger by0  limiting the usefulness of the budget to motivate their employees to top performance  affecting their ability to identify trouble spots and take appropriate corrective action  reducing their credibility in the eyes of management  reducing the ability of top management to effectively allocate resources to organizational subunits on the basis of actual economic performance. For e!ample, the use of budgetary slac, may affect management decision% making, as the budgets will show lower contribution margins &lower sales, higher e!penses'. :ecisions regarding the profitability of product lines, staffing levels, incentives, etc. could have an adverse effect on AtkinsBs and *rangerBs departments. C. #he use of budgetary slac,, particularly if it has a detrimental effect on the company, may be unethical. )n assessing the situation, the )AA’s Statement of $thical Professional Practice can be consulted &www.imanet.org'. #his statement notes that 1a commitment to ethical professional practice2 includes0 overarching principles &e!pressions of core values' and a set of standards intended to guide actual conduct and practice. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-8 ©The McGraw-Hill Companies 2008 8-54 8C,)+*)(9<: #he )AA’s overarching PE)35)PQ+" include0 Tonesty, Fairness, (bectivity, and Eesponsibility. #he list of "#A3:AE:" includes the following0 5ompetence, 5onfidentiality, )ntegrity, and 5redibility. #he following "tandards could be referenced in conunction with the use of budgetary slack, as described above0  5ompetence0 Provide decision support information and recommendations that are accurate, clear, concise, and timely.  )ntegrity0 Eefrain from engaging in any conduct that would preudice carrying out duties ethically.  5redibility0 5ommunicate information fairly and obectively. disclose all relevant information that could reasonably be e!pected to influence an intended user’s understanding of the reports, analyses, or recommendations. #hough not asked for in the original 5AA e!am problem, you might want to discuss with students how, in practice, they would deal with ethical dilemmas. )n its 8esolution of $thical Conflict statement the )AA provides the following guidance0 1& 5iscuss the issue with your immediate supervisor e%cept when it appears that the supervisor is involved. )n that case, present the issue to the ne!t level. )f you cannot achieve a satisfactory resolution, submit the issue to the ne!t management level. )f your immediate superior is the chief e!ecutive officer or e/uivalent, the acceptable reviewing authority may be a group such as the audit committee, e!ecutive committee, board of directors, board of trustees, or owners. 5ontact with levels above the immediate superior should be initiated only with your superior’s knowledge, assuming he or she is not involved. 5ommunication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, unless you believe there is a clear violation of the law. 2&Clarify relevant ethical issues by initiating a confidential discussion with an 2MA $thics Counselor or other impartial advisor to obtain a better understanding of possible courses of action. &Consult your own attorney as to legal obligations and rights concerning the ethical conflict. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-% ©The McGraw-Hill Companies 2008 8-55 M-'+91 B(<09+ 840-45 ?*)(+9': =. #he benefits that can be derived from implementing a master budgeting system include the following0  #he preparation of budgets forces management to plan ahead and to establish goals and obectives that can be /uantified.  Budgeting compels departmental managers to make plans that are in congruence with the plans of other departments as well as the obectives of the entire firm.  #he budgeting process promotes internal communication and coordination of subunit activities.  Budgets provide directions for day%to%day operations, clarify duties to be performed, and assign responsibility for these duties.  Budgets provide a framework for measuring financial performance.  A properly implemented budgeting system can motivate employees and managers to higher levels of performance, particularly if goals and outputs are linked through appropriate incentives.  Budgets allow managers to anticipate problem areas &e.g., cash short%falls' and opportunities &e.g., short%term investment of e!cess cash'. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!0 ©The McGraw-Hill Companies 2008 8-55 8C,)+*)(9<: C. a 8 b0 #he basic intent here is to demonstrate the interrelationships that e!ist among budgets contained in the organization’s master budget. "ubse/uent "chedule$"tatement Budget "chedule$"tatement "ales Budget Production Budget "elling +!pense Budget Budgeted )ncome "tatement +nding )nventory Budget &units' Production Budget Production Budget &units' :irect Aaterials Purchases Budget :irect Aaterials Msage Budget :irect Qabor Budget Factory (verhead Budget :irect Aaterials Budget 5ost of *oods Aanufactured Budget :irect Qabor Budget 5ost of *oods Aanufactured Budget Factory (verhead Budget 5ost of *oods Aanufactured Budget 5ost of *oods Aanufactured 5ost of *oods "old Budget Budget 5ost of *oods "old Budget Budgeted )ncome "tatement Budgeted Balance "heet "elling +!pense Budget Budgeted )ncome "tatement Eesearch 8 :evelopment Budget Budgeted )ncome "tatement Budgeted )ncome "tatement Budgeted Balance "heet 5apital +!penditures Budget 5ash Budget 5ash Eeceipts Budget 5ash Budget 5ash :isbursements Budget 5ash Budget 5ash Budget Budgeted Balance "heet Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!1 ©The McGraw-Hill Companies 2008 8-56 C,?A1969)'*;9 P1,.*+ P%-) 890 ?*)(+9': =. "ales Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 S-%9' B(<09+ 2007 5=C :FH #otal "ales &in units' =C,@@@ >,@@@ C=,@@@ ! "elling Price Per Mnit N=F@ NCC@ #otal "ales Eevenue $1#800#000 $1#980#000 $3#780#000 C. Production Budget "pring Aanufacturing 5ompany Production Budget C@@H 5=C :FH Budgeted "ales &in units' =C,@@@ >,@@@ O :esired finished goods ending inventory -@@ C@@ #otal units needed =C,-@@ >,C@@ U Beginning finished goods inventory D@@ =F@ Budgeted Production &in units' 11#900 9#050 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!2 ©The McGraw-Hill Companies 2008 8-56 &5ontinued%=' -. :irect Aaterials Purchases Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 D*19/+ M-+91*-%' P(1/6-'9' B(<09+ 8()*+' -)< <,%%-1': 2007 5=C :FH #otal Eaw Aaterial &EA' =0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! =@ ! , EA = needed for production ==>,@@@ HC,D@@ =>=,D@@ Plus0 :esired +nding )nventory &lbs.' D,@@@ #otal EA = needed &lbs.' =>F,D@@ Qess0 Beginning inventory &lbs.' -,@@@ Ee/uired purchases of EA = &lbs.' 192#400 5ost per pound NC.@@ Budgeted purchases, EA = $384#800 Eaw Aaterial &EA' C0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! @ ! D EA C needed for production @ -G,C@@ -G,C@@ Plus0 :esired +nding )nventory &lbs.' =,@@@ #otal EA C needed &lbs.' -H,C@@ Qess0 Beginning inventory &lbs.' =,F@@ Ee/uired purchases of EA C &lbs.' 35#700 5ost per pound NC.F@ Budgeted purchases, EA C $89#250 Eaw Aaterial -0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! C ! = EA - needed for production C-,,@@ >,@F@ -C,,F@ Plus0 :esired +nding )nventory &lbs.' =,F@@ #otal EA - needed &lbs.' -D,-F@ Qess0 Beginning inventory &lbs.' =,@@@ Ee/uired purchases of EA - &lbs.' 33#350 5ost per pound [email protected]@ Budgeted purchases, EA - $16#675 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-! ©The McGraw-Hill Companies 2008 8-56 &5ontinued%C' D. :irect Aanufacturing Qabor Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 D*19/+ H-&,1 B(<09+ 2007 5=C :FH #otal Budgeted production ==,>@@ >,@F@ :irect labor hours per unit ! C ! - #otal direct labor hours needed C-,,@@ CH,=F@ F@,>F@ Tourly wage rate NCF.@@ Budgeted direct labor costs $1#273#750 F. Factory (verhead Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 !-/+,13 O;9169-< B(<09+ 2007 Lariable Factory (verhead0 )ndirect materials N=@,@@@ Aiscellaneous supplies and tools F,@@@ )ndirect labor D@,@@@ Payroll ta!es and fringe benefits CF@,@@@ Aaintenance costs =@,@,@ Teat, light, and power ==,@@@ N-CG,@,@ Fi!ed Factory (verhead0 "upervision N=C@,@@@ Aaintenance costs C@,@@@ Teat, light, and power D-,DC@ #otal 5ash Fi!ed Factory (verhead N=,-,DC@ :epreciation H=,--@ NCFD,HF@ #otal Budgeted Factory (verhead $580#830 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!! ©The McGraw-Hill Companies 2008 8-56 &5ontinued%-' G. Budgeted 5ost of *oods "old SA1*)0 M-)(.-/+(1*)0 C,?A-)3 E)<*)0 !*)*'69< G,,<' I);9)+,13 -)< B(<09+9< CGS 2007 5=C :FH #otal "ales volume =C,@@@ >,@@@ C=,@@@ 5ost per unit &"chedule = and C' N>-.,@ N=-F.H@ 5ost of goods sold N=,=CF,G@@ N=,CC=,-@@ $2#346#900 Finished goods ending inventory -@@ C@@ 5ost per unit &"chedule = and C' N>-.,@ N=-F.H@ Budgeted ending inventories NC,,=D@ NCH,=D@ $55#280 "chedule =0 5ost per Mnit%%Product 5=C0 )nputs 5ost 5ost +lement Mnit )nput 5ost Juantity Per Mnit EA%= NC.@@ =@ NC@.@@ EA%- [email protected]@ C N=.@@ :irect labor NCF.@@ C NF@.@@ Lariable factory (T &N-CG,@,@$F@,>F@' NG.D@ C N=C.,@ Fi!ed factory (T &NCFD,HF@$F@,>F@' NF.@@ C N=@.@@ Aanufacturing cost per unit $9380 "chedule C0 5ost per Mnit%%Product :FH0 )nputs 5ost 5ost +lement Mnit )nput 5ost Juantity Per Mnit EA%= NC.@@ , N=G.@@ EA%C NC.F@ D N=@.@@ EA%- [email protected]@ = [email protected]@ :irect labor NCF.@@ - NHF.@@ Lariable factory (T &N-CG,@,@$F@,>F@' NG.D@ - N=>.C@ Fi!ed factory (T &NCFD,HF@$F@,>F@' NF.@@ - N=F.@@ Aanufacturing cost per unit $13570 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!" ©The McGraw-Hill Companies 2008 8-56 &5ontinued%D' H. Budgeted selling and administrative e!penses0 SA1*)0 M-)(.-/+(1*)0 C,?A-)3 S9%%*)0 -)< A<?*)*'+1-+*;9 EBA9)'9 B(<09+ 2007 "elling +!penses0 Advertising NG@,@@@ "ales salaries C@@,@@@ #ravel and entertainment G@,@@@ :epreciation F,@@@ N-CF,@@@ Administrative e!penses0 (ffices salaries NG@,@@@ +!ecutive salaries CF@,@@@ "upplies D,@@@ :epreciation G,@@@ N-C@,@@@ #otal selling and administrative e!penses $645#000 ,. Budgeted )ncome "tatement0 SA1*)0 M-)(.-/+(1*)0 C,?A-)3 B(<09+ I)/,?9 S+-+9?9)+ !,1 +69 Y9-1 2007 5=C :FH #otal "ales &part =' N=,,@@,@@@ N=,>,@,@@@ N-,H,@,@@@ 5ost of goods sold &part G' =,=CF,G@@ =,CC=,-@@ C,-DG,>@@ *ross profit NGHD,D@@ NHF,,H@@ N=,D--,=@@ "elling and administrative e!penses &part H' NGDF,@@@ Pre%ta! operating income NH,,,=@@ )ncome ta!es &VD@K' N-=F,CD@ After%ta! operating income $472#860 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!# ©The McGraw-Hill Companies 2008 8-56 &5ontinued%F' 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!$ ©The McGraw-Hill Companies 2008 ,%FG "pring Aanufacturing 5ompany =. "ales Budget "pring Aanufacturing 5ompany "ales Budget 5=C :FH #otal C@@H 8-57 SA1*)0 M-)(.-/+(1*)0 C,?A-)32C,?A1969)'*;9 P1,.*+ P%-) 890 M*)(+9'# &(+ ?(/6 %9'' *. ('9< *) /,)I()/+*,) C*+6 8-56 -)< /,?A%9+9< C*+6 -) EB/9% 'A19-<'699+: =. "ales Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 S-%9' B(<09+ 2007 5=C :FH #otal "ales &in units' =C,@@@ =,,@@@ -@,@@@ ! "elling Price Per Mnit N=G@ N=,@ #otal revenue $1#920#000 $3#240#000 $5#160#000 C. Production Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 P1,<(/+*,) B(<09+ 2007 5=C :FH Budgeted "ales &in units' =C,@@@ =,,@@@ Plus0 :esired finished goods ending inventory -@@ C@@ #otal units needed =C,-@@ =,,C@@ Qess0 Beginning finished goods inventory D@@ =F@ Budgeted Production &in units' 11#900 18#050 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!8 ©The McGraw-Hill Companies 2008 8-57 &5ontinued%=' -. :irect Aaterials Purchases Budget &units and dollars' SA1*)0 M-)(.-/+(1*)0 C,?A-)3 D*19/+ M-+91*-%' P(1/6-'9' B(<09+ 8()*+' -)< <,%%-1': 2007 5=C :FH #otal Eaw Aaterial &EA' =0 Budgeted Production ==,>@@ =,,@F@ Pounds per Mnit ! =@ ! , EA = needed for production ==>,@@@ =DD,D@@ CG-,D@@ Plus0 :esired +nding )nventory &lbs.' D,@@@ #otal EA = needed &lbs.' CGH,D@@ Qess0 Beginning inventory &lbs.' -,@@@ Ee/uired purchases of EA = &lbs.' 264#400 5ost per pound NC.@@ Budgeted purchases, EA = $528#800 Eaw Aaterial &EA' C0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! @ ! D EA C needed for production @ HC,C@@ HC,C@@ Plus0 :esired +nding )nventory &lbs.' =,@@@ #otal EA C needed &lbs.' H-,C@@ Qess0 Beginning inventory &lbs.' =,F@@ Ee/uired purchases of EA C &lbs.' 71#700 5ost per pound NC.F@ Budgeted purchases, EA C $179#250 Eaw Aaterial -0 Budgeted Production ==,>@@ =,,@F@ Pounds per Mnit ! C ! = EA - needed for production C-,,@@ =,,@F@ D=,,F@ Plus0 :esired +nding )nventory &lbs.' =,F@@ #otal EA - needed &lbs.' D-,-F@ Qess0 Beginning inventory &lbs.' =,@@@ Ee/uired purchases of EA - &lbs.' 42#350 5ost per pound [email protected]@ Budgeted purchases, EA - $21#175 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-!% ©The McGraw-Hill Companies 2008 8-57 &5ontinued%C' D. :irect Aanufacturing Qabor Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 D*19/+ H-&,1 B(<09+ 2007 5=C :FH #otal Budgeted production ==,>@@ =,,@F@ :irect labor hours &:QT' per unit ! C ! - #otal direct labor hours needed C-,,@@ FD,=F@ HH,>F@ Tourly wage rate NCF.@@ Budgeted direct labor costs $1#948#750 F. Factory (verhead Budget Lariable (T per :QT &.1,? P1,& 8-56'0 NG.D@ SA1*)0 M-)(.-/+(1*)0 C,?A-)3 !-/+,13 O;9169-< B(<09+ 2007 Lariable Factory (verhead &NG.D@$:QT ! HH,>F@' ND>,,,,@ Fi!ed Factory (verhead0 "upervision N=C@,@@@ Aaintenance costs C@,@@@ Teat, light, and power D-,DC@ #otal 5ash Fi!ed Factory (verhead N=,-,DC@ :epreciation H=,--@ NCFD,HF@ #otal Budgeted Factory (verhead $753#630 Lariable (T rate per :QT $640 Fi!ed (T rate per :QT &NCFD,HF@$HH,>F@ :QTs' $326812 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"0 ©The McGraw-Hill Companies 2008 8-57 &5ontinued%-' G. Budgeted 5*" and +nding Finished *oods )nventory Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 E)<*)0 !*)*'69< G,,<' I);9)+,13 -)< B(<09+9< CGS 2007 5=C :FH #otal "ales volume =C,@@@ =,,@@@ -@,@@@ 5ost per unit &"chedule = and C' N>@.--GCD [email protected]@D-G 5ost of goods sold N=,@,D,@-F NC,-D>,@H> $3#433#114 Finished goods ending inventory -@@ C@@ 5ost per unit &"chedule = and C' N>@.--GCD N==D.F@ Budgeted ending inventories NCH,=@= NCG,=@= $53#202 "chedule =0 5ost per MnitIProduct 5=C0 )nputs 5ost 5ost +lement Mnit )nput 5ost Juantity Per Mnit EA%= NC.@@ =@ NC@.@@ EA%- [email protected]@ C N=.@@ :irect labor NCF.@@ C NF@.@@ Lariable factory (T &N-CG,@,@$F@,>F@' NG.D@ C N=C.,@ Fi!ed factory (T &NCFD,HF@$HH,>F@' N-.CG,=C C NG.F-GCD Aanufacturing cost per unit $9033624 "chedule C0 5ost per MnitIProduct :FH0 )nputs 5ost 5ost +lement Mnit )nput 5ost Juantity Per Mnit EA%= NC.@@ , N=G.@@ EA%C NC.F@ D N=@.@@ EA%- [email protected]@ = [email protected]@ :irect labor NCF.@@ - NHF.@@ Lariable factory (T &N-CG,@,@$F@,>F@' NG.D@ - N=>.C@ Fi!ed factory (T &NCFD,HF@$HH,>F@' N-.CG,=C - N>.,@D-G Aanufacturing cost per unit $13050436 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"1 ©The McGraw-Hill Companies 2008 8-57 &5ontinued%D' H. "elling and Administrative +!pense Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 S9%%*)0 -)< A<?*)*'+1-+*;9 EBA9)'9 B(<09+ 2007 "elling +!penses0 Advertising NG@,@@@ "ales salaries C@@,@@@ #ravel and entertainment G@,@@@ :epreciation F,@@@ N-CF,@@@ Administrative e!penses0 (ffices salaries NG@,@@@ +!ecutive salaries CF@,@@@ "upplies D,@@@ :epreciation G,@@@ N-C@,@@@ #otal selling and administrative e!penses $645#000 ,. Budgeted )ncome "tatement SA1*)0 M-)(.-/+(1*)0 C,?A-)3 B(<09+ I)/,?9 S+-+9?9)+ !,1 +69 Y9-1 2007 5=C :FH #otal "ales &part =' N=,>C@,@@@ N-,CD@,@@@ NF,=G@,@@@ 5ost of goods sold &part G' =,@,D,@-F C,-D>,@H> -,D--,==D *ross profit N,-F,>GF N,>@,>C= N=,HCG,,,G "elling and administrative e!penses &part H' NGDF,@@@ Pre%ta! operating income N=,@,=,,,G )ncome ta!es &VD@K' ND-C,HFD After%ta! operating income $649#132 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"2 ©The McGraw-Hill Companies 2008 8-57 8C,)+*)(9<-5: Answers0 =. #he proected increase in after%ta! operating income P NGD>,=-C U NDHC,,G@ P $176#272 C. 4hile the changes are proected to increase after%ta! operating income, the company should e!amine the decision more closely. Although the company increases its after%ta! operating income by -HK &N=HG,CHC$NDHC,,G@', it re/uires a doubling of units of :FH to achieve this. )n fact, a =@@K increase in units sold of :FH increases the gross profit of :FH from NHF,,H@@ to N,>@,>C=, an increase of N=-C,CC=, while the total change in gross profit is NC>-,H,G &from N=,D--,=@@ to N=,HCG,,,G'. #he =@@K increase in :FH accounts for only DFK &N=-C,CC= ÷ NC>-,H,G' of the increase in gross profit. 5=C contributes FFK of the increase. Further, the price increase in 5=C has no effect on the units sold. #his may be an indication that 5=C may have a higher potential than the firm perceived. 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-" ©The McGraw-Hill Companies 2008 ,%FH "pring Aanufacturing 5ompany =. Budgeted "ales &units'0 5=C P =C,@@@ :FH P =,,@@@ Budgeted "elling Prices$Mnit0 5=C P N=G@ :FH P N=,@ 8-58 C,?A1969)'*;9 P1,.*+ P%-) C*+6 Kaizen 890 ?*)(+9'# &(+ ?(/6 %9'' *. -''*0)9< *) /,)I()/+*,) C*+6 8-56 -)< /,?A%9+9< C*+6 -) EB/9% 'A19-<'699+: =. "ales Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 S-%9' B(<09+ 2007 5=C :FH #otal "ales &in units' =C,@@@ >,@@@ C=,@@@ ! "elling Price Per Mnit N=F@ NCC@ #otal revenue $1#800#000 $1#980#000 $3#780#000 C. Production Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 P1,<(/+*,) B(<09+ 2007 5=C :FH Budgeted "ales &in units' =C,@@@ >,@@@ Plus0 :esired finished goods ending inventory -@@ C@@ #otal units needed =C,-@@ >,C@@ Qess0 Beginning finished goods inventory D@@ =F@ Budgeted Production &in units' 11#900 9#050 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"! ©The McGraw-Hill Companies 2008 8-58 &5ontinued%=' -. :irect Aaterials Purchases Budget &units and dollars' SA1*)0 M-)(.-/+(1*)0 C,?A-)3 D*19/+ M-+91*-%' P(1/6-'9' B(<09+ 8()*+' -)< <,%%-1': 2007 5=C :FH #otal Eaw Aaterial &EA' =0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! > ! H EA = needed for production =@H,=@@ G-,-F@ =H@,DF@ Plus0 :esired +nding )nventory &lbs.' D,@@@ #otal EA = needed &lbs.' =HD,DF@ Qess0 Beginning inventory &lbs.' -,@@@ Ee/uired purchases of EA = &lbs.' =H=,DF@ 5ost per pound NC.@@ Budgeted purchases, EA = $342#900 Eaw Aaterial &EA' C0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! @ ! -.G EA C needed for production @ -C,F,@ -C,F,@ Plus0 :esired +nding )nventory &lbs.' =,@@@ #otal EA C needed &lbs.' --,F,@ Qess0 Beginning inventory &lbs.' =,F@@ Ee/uired purchases of EA C &lbs.' -C,@,@ 5ost per pound NC.F@ Budgeted purchases, EA C $80#200 Eaw Aaterial -0 Budgeted Production ==,>@@ >,@F@ Pounds per Mnit ! =., ! @., EA - needed for production C=,DC@ H,CD@ C,,GG@ Plus0 :esired +nding )nventory &lbs.' =,F@@ #otal EA - needed &lbs.' -@,=G@ Qess0 Beginning inventory &lbs.' =,@@@ Ee/uired purchases of EA - &lbs.' C>,=G@ 5ost per pound [email protected]@ Budgeted purchases, EA - $14#580 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"" ©The McGraw-Hill Companies 2008 8-58 &5ontinued%C' D. :irect Aanufacturing Qabor Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 D*19/+ H-&,1 B(<09+ 2007 5=C :FH #otal Budgeted production ==,>@@ >,@F@ :irect labor hours per unit ! =.F ! C #otal direct labor hours needed =H,,F@ =,,=@@ -F,>F@ Tourly wage rate N-@.@@ Budgeted direct labor costs $1#078#500 F. Factory (verhead Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 !-/+,13 O;9169-< B(<09+ 2007 (riginal Lariable (T Budget0 )ndirect materials N=@,@@@ Aiscellaneous supplies and tools F,@@@ )ndirect labor D@,@@@ Payroll ta!es and fringe benefits CF@,@@@ Aaintenance costs =@,@,@ Teat, light, and power ==,@@@ #otal Lariable Factory (verhead N-CG,@,@ Eeduction Eate for Lariable (T 5osts =@.@@K (riginal Fi!ed (T, +!cluding :epreciation0 "upervision N=C@,@@@ Aaintenance costs C@,@@@ Teat, light, and power D-,DC@ #otal 5ash Fi!ed Factory (verhead N=,-,DC@ :epreciation H=,--@ #otal (riginal Fi!ed (T NCFD,HF@ Eeduction Eate for Cash Fi!ed (T 5osts P F.@@K Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"# ©The McGraw-Hill Companies 2008 8-58 &5ontinued%-' Budgeted Lariable (T0 &N-CG,@,@ ! &= % @.=@'' P $293#472 Budgeted Fi!ed (T0 5ash 5harges P &N=,-,DC@ ! &= % @.@F'' P N=HD,CD> :epreciation &same as last year' P NH=,--@ #otal Budgeted Fi!ed (T P $245#579 G. Budgeted 5*" and +nding Finished *oods )nventory Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 E)<*)0 !*)*'69< G,,<' I);9)+,13 -)< B(<09+9< CGS 2007 5=C :FH #otal "ales volume =C,@@@ >,@@@ C=,@@@ 5ost per unit &"chedule = and C' N,G.->=H@ N==-.-,,>- 5ost of goods sold N=,@-G,H@@ N=,@C@,F@@ $2#057#200 Finished goods ending inventory -@@ C@@ 5ost per unit &"chedule = and C' N,G.->=H@ N==-.-,,>- Budgeted ending inventories NCF,>=, NCC,GH, $48#596 "chedule =0 5ost per MnitIProduct 5=C0 )nputs 5ost 5ost +lement Mnit )nput 5ost Juantity Per Mnit EA%= NC.@@ > N=,.@@ EA%- [email protected]@ =., N@.>@ :irect labor N-@.@@ =.F NDF.@@ Lariable factory (T &NC>-,DHC$-F,>F@' N,.=G--D =.F N=C.CDF@= Fi!ed factory (T &NCDF,FH>$-F,>F@' NG.,-==- =.F [email protected]> Aanufacturing cost per unit $8639170 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"$ ©The McGraw-Hill Companies 2008 8-58 &5ontinued%D' "chedule C0 5ost per MnitIProduct :FH0 )nputs 5ost 5ost +lement Mnit )nput 5ost Juantity Per Mnit EA%= NC.@@ H N=D.@@ EA%C NC.F@ -.G N>.@@ EA%- [email protected]@ @., [email protected]@ :irect labor N-@.@@ C NG@.@@ Lariable factory (T &NC>-,DHC$-F,>F@' N,.=G--D C N=G.-CGG, Fi!ed factory (T &NCDF,FH>$-F,>F@' NG.,-==- C N=-.GGCCF Aanufacturing cost per unit $11338893 H. "elling and Administrative +!pense Budget SA1*)0 M-)(.-/+(1*)0 C,?A-)3 S9%%*)0 -)< A<?*)*'+1-+*;9 EBA9)'9 B(<09+ 2007 "elling +!penses0 Advertising NG@,@@@ "ales salaries C@@,@@@ #ravel and entertainment G@,@@@ :epreciation F,@@@ N-CF,@@@ Administrative e!penses0 (ffices salaries NG@,@@@ +!ecutive salaries CF@,@@@ "upplies D,@@@ :epreciation G,@@@ N-C@,@@@ #otal selling and administrative e!penses $645#000 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"8 ©The McGraw-Hill Companies 2008 8-58 &5ontinued%F' ,. Budgeted )ncome "tatement SA1*)0 M-)(.-/+(1*)0 C,?A-)3 B(<09+ I)/,?9 S+-+9?9)+ !,1 +69 Y9-1 2007 5=C :FH #otal "ales &part =' N=,,@@,@@@ N=,>,@,@@@ N-,H,@,@@@ 5ost of goods sold &part G' =,@-G,H@@ =,@C@,F@@ C,@FH,C@@ *ross profit NHG-,-@@ N>F>,F@@ N=,HCC,,@@ "elling and administrative e!penses &part H' NGDF,@@@ Pre%ta! operating income N=,@HH,,@@ )ncome ta!es &VD@K' ND-=,=C@ After%ta! operating income $646#680 A)'C91': =. #he budgeted after%ta! operating income with 9aizen is $646#680. C. #he immediate benefit is an increase of N=H-,,C@ in operating income, or -HK from NDHC,,G@. #he firm is also likely benefit in the long%run from the reductions in materials, labor hours, and factory overhead re/uired in production. :ecreases in consumption of manufacturing elements reduce wear and tear of e/uipment and other facilities and lessens the need for additional capital investments$replacements. 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open this spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-"% ©The McGraw-Hill Companies 2008 ,%F, "pring Aanufacturing 5ompany =. Budgeted "ales &units'0 8-59 R9+-*%91 B(<09+ 845-50 ?*)(+9': =. Budgeted merchandise purchases D T,?%*)',) R9+-*% B(<09+9< M91/6-)<*'9 P(1/6-'9' M-3 -)< J()9 Aay <une <uly "ales &in units' ==,>@@ ==,D@@ =C,@@@ 5ost per unit ! NC@ ! NC@ ! NC@ 5ost of *oods "old &5*"' NC-,,@@@ NCC,,@@@ NCD@,@@@ +nding inventory &=-@K of ne!t monthBs 5*"' O C>G,D@@ O -=C,@@@ #otal needed NF-D,D@@ NFD@,@@@ Beginning inventory &=-@K of this monthBs 5*"' U -@>,D@@ U C>G,D@@ Budgeted Aerchandise Purchases $225#000 $243#600 C. Budgeted cash disbursements ", *, 8 A e!penses0 Aay <une "ales revenue N-FH,@@@ N-DC,@@@ ", *, 8 A e!pense ratio ! @.=F ! @.=F #otal ", *, 8 A e!pense N F-,FF@ N F=,-@@ Qess0 :epreciation U C,@@@ U C,@@@ (ut%of%pocket ", * 8 A e!pense N F=,FF@ N D>,-@@ D T,?%*)',) R9+-*% B(<09+9< C-'6 D*'&(1'9?9)+' .,1 J()9 Aay <une Aerchandise purchases N CCF,@@@ N CD-,G@@ (ut%of%Pocket ", *, 8 A e!penses O F=,FF@ O D>,-@@ #otal payables NCHG,FF@ NC>C,>@@ Payment for the current month’s payables &FDK' N=F,,=GG (wed from last month &DGK' O =CH,C=- Budgeted cash outflow for payables $285#379 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#0 ©The McGraw-Hill Companies 2008 8-59 &5ontinued' -. Budgeted cash collections D T,?%*)',) R9+-*% C-'6 C,%%9/+*,)' M-3 From last monthBs &April' credit sales 4ithin the discount period &N-G-,@@@' ! G@K ! >HK P NC==,CGG After the discount period N-G-,@@@ ! CFK P >@,HF@ From credit sales two months ago &i.e., Aarch' 5ollection of credit sales made in Aarch N-FD,@@@ ! >K P -=,,G@ #otal cash collections $333#876 D. *ross and 3et Balance of Accounts Eeceivable &AE' as of Aay -= Aarch April Aay #otal "ales N-FD,@@@ N-G-,@@@ N-FH,@@@ Eemaining AE K GK =FK =@@K AE Balance &*ross' NC=,CD@ NFD,DF@ N-FH,@@@ $432#690 Bad%debt allowanceY NC=,CD@ NC=,H,@ NC=,DC@ GD,DD@ AE Balance &3et' $368#250 Y V GK of gross sales dollars Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#1 ©The McGraw-Hill Companies 2008 8-60 S-%9' &(<09+ -)< A1,-.,1?- .*)-)/*-% '+-+9?9)+' 875 ?*)(+9': =. (riginal Budget :ata "ales &units'0 Beginning inventory of finished goods &>$=$C@@H' >,-@@ +stimated production for the C@@H%, fiscal year =GC,@@@ Mnits available for sale =H=,-@@ Planned ending finished goods inventory &,$-=$C@@,' -,-@@ Proected unit sales, C@@H%, fiscal year =G,,@@@ "elling price$unit0 a. 8 b. Eevised sales volume%%units and dollars0 "ales in units in the original budget &see above' =G,,@@@ )ncrease in units of production &=H@,@@@ % =GC,@@@'Y O ,,@@@ Eevised total salesIunits 176#000 "elling price per unit &see above' ! N =,G Eevised proected dollar%volume of net sales $32#736#000 Y4ith no change in the ending finished goods inventory &-,-@@ units' the increase in production is a result of the e!pected increase in sales. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#2 ©The McGraw-Hill Companies 2008 N=,G P =G,,@@@ @ N-=,CD,,@@ P "ales Mnit Proected "ales of :ollars Proected P Price$Mnit "elling 8-60 &5ontinued%=' C. M,%*< C,?A-)3 P1,-!,1?- S+-+9?9)+ ,. C,'+ ,. G,,<' S,%< 8R9;*'9<: !,1 +69 Y9-1 E)<*)0 A(0('+ 31# 2008 :irect materials0 Aaterials inventory, >$=$@H N =,-G@,@@@ Aaterials purchases = =F,FHG,@@@ Aaterials available for use N=G,>-G,@@@ Aaterials inventory, ,$-=$@, C =,H@>,D@@ :irect Aaterials used N=F,CCG,G@@ :irect labor - =,C=F,C@@ Factory overhead0 )ndirect material D N =,FCC,GG@ *eneral factory overhead F -,-C@,@@@ D,,DC,GG@ 5ost of goods manufactured NC=,C,D,DG@ Plus0 Finished goods inventory, >$=$@H &given' =,=G>,@@@ 5ost of goods available for sale NCC,DF-,DG@ Qess0 Finished goods inventory, ,$-=$@, G D=-,=G> 5ost of goods sold $ 22#040#291 = "upporting 5alculations &units represent 1e/uivalent units of output2'0 -H,F@@ units V N,,.@@Y P N -,-@@,@@@ DF,@@@ unitsYY V N,,.@@ P -,>G@,@@@ >@,@@@ units V N>C.D@YYYP ,,-=G,@@@ N=F,FHG,@@@ Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-# ©The McGraw-Hill Companies 2008 8-60 &5ontinued%C' YN-,-@@,@@@$-H,F@@ units P N,,.@@ YY:esired ending inventory of materials =,,F@@ Aaterials needed for production this year O =H@,@@@ #otal materials needed =,,,F@@ Beginning inventory U =G,@@@ #otal materials purchases for the year =HC,F@@ Qess0 Aaterials purchased in the = st /uarter U -H,F@@ Aaterials yet to be purchased during the year =-F,@@@ 3umber of remaining /uarters Z - Aaterials to be purchased in each remaining /uarter DF,@@@ YYYN,,.@@ ! =.@F P N>C.D@ C =,,F@@ units V N>C.D@ P N=,H@>,D@@ - :irect labor cost D )ndirect material0N=F,CCG,G@@ ! @.=@ P N=,FCC,GG@ F *eneral factory overhead0 Lariable0 N=,GC@,@@@ ! &=H@,@@@units$=GC,@@@units' P N=,H@@,@@@ Fi!ed N-,CD@,@@@ ! =$C P =,GC@,@@@ #otal N-,-C@,@@@ G Average manufacturing cost$unit, C@@H%,0 NC=,C,D,DG@ $=H@,@@@ units P N=CF.C@CH +nding finished goods inventory &units' ! -,-@@ 5ost of ending finished goods inventory &F)F( basis' N D=-,=G> Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#! ©The McGraw-Hill Companies 2008 N=,C=F,C@@ CF,C@@ P .@, ! units =H@,@@@ units DF,@@@ ! N=,=>@,@@@ N=,=>@,@@@ P units =GC,@@@ units =H@,@@@ ! N=,=-D,@@@ 8-60 &5ontinued%-' -. a. "avings in working capital from eliminating ending inventory0 Finished goods N D=-,=G> :irect materials N>C.D@ ! &=,,F@@ U =@@' P =,H@@,=G@ #otal savings NC,==-,-C> #he firm can reduce the need for working capital by NC,==-,-C>. #he final net savings depends on the cost of capital of the firm. At =@K, the company saves financing costs of over NC@@,@@@ per year. #he firm can save more than NC==,--- per year if the cost of capital e!ceeds =@K. 3ote that this estimate refers to financing &cost%of%capital%related' costs, not operating costs. b. ;es. Mnder the assumption that the company’s cost of capital is =@K, the economic savings would represent about DK of its current pre%ta! operating income figure, as shown below. 3ote that these savings put the company in an improved economic position, although the formal accounting statements might not reflect this. As such, this gives the instructor the opportunity to discuss with students the notion of 1+conomic Lalue Added2 &+LA[' as alternative financial performance indicator to conventional accounting income statements. M,%*< C,?A-)3 P1,-!,1?- S+-+9?9)+ I)/,?9 S+-+9?9)+ !,1 +69 Y9-1 E)<*)0 A(0('+ 31# 2008 3et sales &part =b above' N-C,H-G,@@@ 5ost of goods sold &part C above' CC,@D@,C>= *ross profit N=@,G>F,H@> (perating e!penses &givenIsee te!t'0 Aarketing N-,C@@,@@@ *eneral and administrative C,C@@,@@@ F,D@@,@@@ )ncome from operations before income ta!es N F,C>F,H@> NC==,---$NF,C>F,H@> P DK c. )n addition to financial terms, the firm needs to consider carefully, among other items0  ade/uacy of the firmBs e/uipment to support the new system  proficiency of the firmBs accounting information system to handle the new system  support of vendors  acceptance of factory managers and production workers Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#" ©The McGraw-Hill Companies 2008 8-61 B(<09+*)0 .,1 - M91/6-)<*'*)0 !*1? 850-60 ?*)(+9': =. Budgeted cash collectionsI:ecember0 From 3ovember’s sales P net A$E, 3ovember -@ th P N HG,@@@ From :ecember’s sales P NCC@,@@@ ! G@K ! >>K P =-@,G,@ Budgeted cash collections%%:ecember $206#680 C. 3et accounts receivableI:ecember -= st 0 Budgeted sales in :ecember &given' NCC@,@@@ Allowance for doubtful accounts NCC@,@@@ ! CK P D,D@@ 3et A$E from sales in :ecember NC=F,G@@ 5ollections of :ecember sales in :ecember NCC@,@@@ ! G@K P =-C,@@@ 3et Accounts EeceivableI:ecember -= st $ 83#600 -. Budgeted pre%ta! operating incomeI:ecember0 #otal sales NCC@,@@@ *ross margin ratio ! CFK *ross margin N FF,@@@ (perating e!penses0 Aonthly cash operating e!penses NCC,G@@ Bad%debts e!pense NCC@,@@@ ! CK P D,D@@ :epreciation e!pense NC=G,@@@$=C P =,,@@@ DF,@@@ Pre%ta! operating income $10#000 D. Budgeted )nventoryI:ecember -= st 0 )nventory, :ecember -= st P &NC@@,@@@ ! @.HF' ! ,@K P $120#000 F. Budgeted PurchasesI:ecember0 )nventory, :ecember = st &given' P N=-C,@@@ P%(': P(1/6-'9' <(1*)0 D9/9?&91 8A%(0 .*0(19: K 153#000 5ost of goods available for sale NC,F,@@@ Qess0 5ost of goods sold NCC@,@@@ ! HFK P =GF,@@@ )nventory, :ecember -= st &part D above' P N=C@,@@@ Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-## ©The McGraw-Hill Companies 2008 8-61 8C,)+*)(9<: G. Budgeted Accounts PayableI:ecember -= st 0 Accounts Payable, :ecember = st &given' N=GC,@@@ Plus0 Budgeted Purchases, :ecember &part F above' N=F-,@@@ #otal Accounts Payable during :ecember N-=F,@@@ Qess0 Payments in :ecember &entire beginning balance' N=GC,@@@ Budgeted Accounts Payable, :ecember -= st $153#000 Alternatively, the end%of%:ecember Accounts Payable Balance P Purchases made in :ecember P answer to Part F above. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#$ ©The McGraw-Hill Companies 2008 8-62 B(<09+' .,1 - S91;*/9 !*1? 850 M*)(+9': =. #he annual cash budget is presented on the ne!t page. C. (perating problems that #riple%F Tealth 5lub could e!perience include0  &he cash contribution from lessons and classes will decrease because the pro9ected wage increase for lesson and class employees is significantly greater than the pro9ected increases in revenues 6i.e., in additional volume7. Qast year, the cash generated from these operations was N->,@@@ &NC-D,@@@ U N=>F,@@@'. #he C@@> proection is only N=C,GHF &N-@D,C@@ U NC>=,FCF'.  4perating e%penses are increasing faster than revenues from membership fees. Qast year &C@@,', cash generated from regular operations was N>=,@@@ R&N-FF,@@@ O NC,@@@' U &NDG=,@@@ U N=>F,@@@'S. #he C@@> proection is only N>C,D,C R&ND@C,C=F O NC,GGH' U &NG@-,>CF U NC>=,FCF'S. #he increase in cash from regular operations is proected to be about DK, whereas these revenues are proected to increase =-K.  &riple- :ealth Club seems to have a cash-management problem. #he club does not generate enough cash from operations to meet its obligations. )t may not be able to meet e!penditures for day%to%day operations if the trend continues. #o avoid cash crises, the club should prepare monthly cash budgets to help cash management.  1on-operational payments are pro9ected to use up virtually all of the cash generated from operations. *iven the recent declines in mortgage interest rates, management should consider refinancing this debt to reduce this cash drain. -. <ane 5roweBs concern with regard to the BoardBs e!pansion goals is ustified. #he C@@> budget proections show only a minimal increase in the cash balance &i.e., an increase of only NC,HFH'. #he total cash available is well short of the NG@,@@@ annual additional cash needed for the land purchase. )f the Board desires to purchase the adoining property, it is going to have to consider increases in fees, refinancing e!isting debt, or other methods of financing the ac/uisition &such as additional mortgage debt or membership bonds'. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#8 ©The McGraw-Hill Companies 2008 8-62 &continued' TRIPHE-! HEAHTH CHUB C-'6 B(<09+ !,1 +69 Y9-1 E)<*)0 O/+,&91 31# 2009 Price C@@, *rowth )ncrease C@@> OA91-+*)0 C-'6 I).%,C': Annual membership fees N-FF,@@@ -.@K =@.@K ND@C,C=F Qesson and class fees C-D,@@@ -@.@K -@D,C@@ Aiscellaneous C,@@@ --.--K C,GGH #otal (perating 5ash )nflows $591#000 $709#082 OA91-+*)0 C-'6 O(+.%,C': Aanager’s salary and benefits N-G,@@@ =F.@K ND=,D@@ +mployee wages and benefits0 Eegular employees =>@,@@@ =F.@K C=,,F@@ Qesson and class employees =>F,@@@ -@.@K =F.@K C>=,FCF #owels and supplies =G,@@@ CF.@K C@,@@@ Mtilities &heat and lights' CC,@@@ CF.@K CH,F@@ Aiscellaneous C,@@@ CF.@K C,F@@ Payoff of outstanding A$P 3$A given C,F@@ #otal (perating 5ash (utflows $461#000 $603#925 N9+ OA91-+*)0 C-'6 !%,C $130#000 $102#400 N,)-OA91-+*)0 C-'6 O(+.%,C': Payoff of e/uipment payable given N=F,@@@ Aortgage principal given -@,@@@ Aortgage interest -C,D@@ Planned e/uipment purchases given CF,@@@ #otal 3on%(perating 5ash (utflow $104#900 3et 5ash Flow NC,HFH Beginning 5ash Balance &given' H,-@@ B(<09+9< E)<*)0 C-'6 B-%-)/9 $10#057 WWWWWWWWWWWWWWW = N-G@,@@@ ! @.@> P N-C,D@@ Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-#% ©The McGraw-Hill Companies 2008 8-63 B(<09+*)0 .,1 M-1=9+*)0 EBA9)'9'D S+1-+903 845-50 ?*)(+9': =. #he following screen shots are from the +!cel spreadsheet created for this problem. )t shows that the original monthly budgeted marketing e!pense is N--,,@@@ and that the revised &budgeted' amount is $372#628# an overall increase of [email protected]. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$0 ©The McGraw-Hill Companies 2008 8-63 &5ontinued' C. )n order to achieve the monthly targeted cost of N-F@,@@@, the rate of 1telephone and mailing2 costs cannot increase at all &as is the case in the proposed budget'. in fact, the results of the 1goal seek2 analysis indicates that such rates must be decreased by appro!imately D-K, as shown below0 #hese results are generated by completing the following dialog bo! that appears after activating the 1goal%seek2 command from the #ools menu in +!cel0 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$1 ©The McGraw-Hill Companies 2008 8-63 &5ontinued' -. As indicated in the te!t, budgets can be used both for control and for planning purposes. #he relative importance of each can be linked either to the competitive strategy the business is pursuing or to the product life%cycle. )n the present case &start%up company, competing on the basis of a product%differentiation strategy', the relative emphasis of the marketing budget is likely more for planning than control. #hat is, the information contained in this budget can assist the company in determining its financing needs. Towever, it probably should not be used for 1controlling2 &i.e., cutting' e!penses in situations where the underlying e!penditures are determinants of competitive success. Further, many types of so%called 1discretionary costs2 &such as marketing' are fi!ed &or at least 1sticky2' and therefore difficult to cut in the short run. As such, the primary benefit of the budget in such cases is to better plan for, rather than control, the underlying e!penses. 1ote to 2nstructor0 #he +!cel spreadsheet solution referred to above is embedded in this document. ;ou can open the spreadsheet 1obect2 by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$2 ©The McGraw-Hill Companies 2008 8-64 S+1-+903# A1,<(/+ %*.9-/3/%9# -)< /-'6 .%,C 825-30 ?*)(+9': =. #he development stage is generally characterized by large cash outflows and little or no cash inflows. +!penditures for research and development, plant and e/uipment, retooling, distribution, and promotion are re/uired. :uring this stage, a proect or company normally generates losses and may re/uire an infusion of outside capital. :uring the growth stage, sales and revenues rise rapidly. "ignificant cash inflows are generally present. however, these may be offset in part or completely by cash outflows to build production capacity and for growing inventories and receivables. :uring this stage, manufacturing efficiencies will improve contribution margins as volume increases. :uring the maturity stage, net cash inflows are generally at an optimum. Production capacity is in place and inventories and receivables should approach a steady state. Towever, by this stage, competitors generally have entered the market resulting in higher promotional costs to maintain market share. As a conse/uence, margins may begin to decline. :uring the decline stage, both sales volume and profits fall. )ncreased price competition and the increased availability of alternative products will reduce margins. #he declining volume will generally increase the unit cost at the manufacturing level. "ometimes, significant cash inflows can be generated from the li/uidation of inventories and other product%related assets. C. #he maturity stage, the period of optimum net cash inflows, is missing from Burke 5ompanyBs product cycle. #he company must be able to generate or raise sufficient cash to support E 8 :, capital investment, and promotional costs during the development stages and depend on the growth stage for significant cash inflows. #his will re/uire rapid improvement in manufacturing efficiencies and careful investment in production facilities and inventories. )n addition, inventory control is e!tremely important in order to minimize cash investment and reduce potential obsolescence. -. #he techni/ues that :evin 4ard should consider to cope with Burke 5ompanyBs cash%management problems include0  careful, timely cash%flow proections and monitoring, matching the cash receipts from products in the growth stage with the e!penditures for products in the development stage.  establishing good banking relationships and fle!ible lines of credit to facilitate short%term borrowing needs.  aggressive accounts%receivable management.  tight control of materials purchasing and inventory management.  improved cost controls. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$ ©The McGraw-Hill Companies 2008  timely decisions on inventory li/uidation as product life cycles near collapse. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$! ©The McGraw-Hill Companies 2008 8-65 C,)+*)(,(' &(<09+*)0 825-30 ?*)(+9': =.a. #he increase in sales could have the following effects on production0  Production capacity may have to be reallocated to the three models based upon the composition of the sales increase.  "ome parts, in addition to the molded doors, may have to be purchased from outside suppliers.  :epending upon the ability to purchase parts from outside suppliers and long%term sales proections, additional capacity may be re/uired. =.b. #he increase in sales could have the following effects on finance and accounting0  "hort%term financing may be needed to finance increased receivable levels and for the replacement of depleted inventories.  Qong%term financing may be needed to e!pand production capacity.  Budgeting may have to be revised because sales volume is probably beyond the relevant range assumed for the current budget. =.c. #he increase in sales could have the following effects on mar,eting0  #he need to advertise will probably decrease.  )nvestigation into the credit%worthiness of potential credit customers may need to become more thorough and the number of investigations will probably increase.  5ollection efforts may have to be increased unless credit%granting is tightened.  5ustomers may have to accept e!tended shipping dates or may receive units on some rational basis of output allocation. =.d. #he increase in sales could have the following effects on personnel0  )ncreased stress levels because of the increased volume.  3eed to schedule additional shifts or overtime, which the employees may deem unnecessary or not beneficial.  3eed to hire additional workers to meet the increase in demand. C.a. A continuous &rolling' budget is the preparation of a new twelve%month budget as each period &e.g., month, /uarter' is completed. At the end of each period, the budget amounts for the period ust completed are deleted, the amounts for the remaining periods of the old budget are revised as necessary, and budgeted amounts for the new period are added. #hus, a twelve%month budget is rolled forward as each period is completed. C.b. #he preparation of a continuous budget would force 4est4oodBs management to engage in planning on an almost continuous basis. "horter planning cycles increase the chances that management will anticipate and give attention to problem situations earlier than would otherwise be the case. #hus, planning would be enhanced in all of the functional areas and there would not be any periods when a budget did not e!ist. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$" ©The McGraw-Hill Companies 2008 8-66 C-'6 B(<09+ 845-50 ?*)(+9': Juarters ) )) ))) )L ;ear 5ash balance, beginning N-@,@@@ $38,000 $30,520 $30,770 $30,000 Plus0 5ash receipts0 5ollections from customers DCF,@@@ 437,000 479,480 DG@,@@@ 1,801,480 +/uipment disposal 0 0 0 5,000 5,000 #otal cash available P &A' $455,000 NDHF,@@@ NF=@,@@@ $495,770 $1,836,480 5ash disbursements0 Eaw material purchases NC@@,@@@ NCC@,@@@ $250,000 NCH@,@@@ N>D@,@@@ Payroll 117,000 =C@,@@@ ==F,@@@ 122,000 DHD,@@@ ", *, 8 A e!penses G@,@@@ GC,@@@ F,,@@@ GD,@@@ 244,000 +/uipment purchase 20,000 30,000 30,000 0 80,000 Bond interest &V>K' 0 11,250 0 11,250 22,500 Bond sinking fund payment 0 20,000 0 0 20,000 )ncome ta!es C@,@@@ C=,@@@ CF,@@@ =,,@@@ 84,000 #otal cash disbursements, prior to financing P &B' $417,000 $484,250 $478,000 $485,250 $1,864,500 Plus0 Ainimum cash balance $30,000 $30,000 $30,000 $30,000 $30,000 #otal cash needed P &5' $447,000 $514,250 $508,000 $515,250 $1,894,500 +!cess cash &cash deficiency', prior to financing &:' P &A' % &5' $8,000 ($39,250 ) $2,000 ($19,480) $(58,020 ) Financing0 "hort%term borrowing N@ $41,000 $0 $22,000 $63,000 Eepayment &principal' $0 $0 $0 $0 $0 )nterest &V=CK' $0 ($1,230 ) ($1,230 ) ($1,890) ($4,350 ) #otal +ffects of Financing P &+' $0 $39,770 ($1,230 ) $20,110 $58,650 +nding cash balance P &A' % &B' O &+' N-,,@@@ $30,520 $30,770 $30,630 $30,630 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$# ©The McGraw-Hill Companies 2008 8-67 C,?A1969)'*;9 B(<09+ 890 ?*)(+9': =. "chedule A0 Budgeted Aonthly 5ash Eeceipts )tem <une <uly August "ept. 5ash sales &,@K ! sales' NG@,@@@ NGD,@@@ NGF,G@@ NHC,@@@ 5redit sales &C@K ! sales' =F,@@@ =G,@@@ =G,D@@ =,,@@@ #otal sales NHF,@@@ N,@,@@@ N,C,@@@ N>@,@@@ Eeceipts0 5ash sales NGD,@@@ NGF,G@@ NHC,@@@ 5ollections on accounts &last month’s credit sales' =F,@@@ =G,@@@ =G,D@@ #otal cash collections $79#000 $81#600 $88#400 "chedule B0 Budgeted Aonthly 5ash :isbursements for Purchases )tem <uly August "ept. -rd Jtr. Purchases &V gross cost' ND>,C@@ NFD,@@@ NG@,@@@ N=G-,C@@ 5ash discount &=K of gross cost' D>C FD@ G@@ =,G-C 3et purchases $48#708 $53#460 $59#400 $161#568 "chedule 50 Budgeted Aonthly 5ash :isbursements for (perating 5osts )tem <uly August "ept. -rd Jtr. "alaries and wages N=C,@@@ N=C,=@@ N=C,F@@ N-G,G@@ Eent 8 Property #a!es =,@@@ =,@@@ =,@@@ -,@@@ (ther cash operating costs =,G@@ =,GD@ =,,@@ F,@D@ #otal $14#600 $14#740 $15#300 $44#640 "chedule :0 Budgeted 5ash :isbursements Prior to Financing )tem <uly August "ept. -rd Jtr. 5ash operating costs N=D,G@@ N=D,HD@ N=F,-@@ NDD,GD@ 3et purchases D,,H@, F-,DG@ F>,D@@ =G=,FG, +/uipment %@% G-,F@@ %@% G-,F@@ #otal $63#308 $131#700 $74#700 $269#708 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$$ ©The McGraw-Hill Companies 2008 8-67 8C,)+*)(9<-1: "chedule +0 5ash Budget )tem <uly August "ept. -rd Jtr. 5ash balance, beginning NCF,@@@ ND@,G>C N->,>GH NCF,@@@ #otal cash receipts H>,@@@ ,=,G@@ ,,,D@@ CD>,@@@ 5ash disbursements prior to financing G-,-@, =-=,H@@ HD,H@@ CG>,H@, 5ash balance before financing ND@,G>C &N>,D@, ' NF-,GGH ND,C>C Financing0 Borrowing re/uired N@ NF@,@@@ N@ NF@,@@@ )nterest payment N@ NGCF NGCF N=,CF@ Borrowing repaid N@ N@ NC@,@@@ NC@,@@@ 3et effect of financing N@ ND>,-HF &NC@,GCF ' NC,,HF@ 5ash balance, ending $40#692 $39#967 $33#042 $33#042 Ainimum cash balance re/uired N-@,@@@ N-@,@@@ N-@,@@@ N-@,@@@ 5heck for minimum balance (9 (9 (9 (9 C. G,%< SA,1+*)0 EL(*A?9)+ B(<09+9< I)/,?9 S+-+9?9)+ !,1 +69 T6*1< Q(-1+91# 2007 "ales NCFC,@@@ 5ost of *oods "old &sales ! &= % @.D@' ! &= % @.@='' N=D>,G,, *ross Profit N=@C,-=C (perating +!penses0 "alaries 8 wages N-G,G@@ Eent 8 property ta!es N-,@@@ :epreciation NC,D@@ (ther operating e!penses NF,@D@ NDH,@D@ (perating )ncome NFF,CHC (ther )ncome$+!penses0 )nterest +!pense N=,CF@ Pre%ta! )ncome NFD,@CC )ncome #a!es &VCFK' N=-,F@G 3et )ncome $40#516 Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$8 ©The McGraw-Hill Companies 2008 8-67 8C,)+*)(9<-3: G,%< SA,1+*)0 EL(*A?9)+ B(<09+9< B-%-)/9 S699+ J()9 30 +6 -)< S9A+9?&91 30 +6 # 2007 <une -@ th "eptember -@ th Assets 5ash NCF,@@@ N--,@DC Accounts Eeceivable &A$E' N=F,@@@ N=,,@@@ = Aerchandise )nventory NDH,FC@ NF>,D@@ C Building and e/uipment &net' NC@@,@@@ N-CD,G@@ - #otal Assets NC,H,FC@ ND-F,@DC Qiabilities and "tockholders’ +/uity "hort%term payable &new e/uipment purchase' N@ NG-,F@@ "hort%term bank loan payable N@ N-@,@@@ )ncome #a! Payable N@ N=-,F@G #otal Qiabilities N@ N=@H,@@G "tockholdersB +/uity NC,H,FC@ N-C,,@-H #otal Qiabilities 8 "tockholders’ +/uity NC,H,FC@ ND-F,@DC N,+9': 1 5redit sales made in "eptember, to be collected in (ctober C 3et merchandise purchases made in "eptember &to meet e!pected sales in (ctober' - Beg. Balance &net' O 3ew +/uipment Purchased U :epreciation +!pense P NC@@,@@@ O N=CH,@@@ U NC,D@@ 1ote to 2nstructor0 An +!cel spreadsheet solution file is embedded in this document. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-$% ©The McGraw-Hill Companies 2008 8-67 8C,)+*)(9<-4: -. *old needs to borrow to finance part of the payment for the new e/uipment during the third /uarter. )n addition, fluctuations in business may re/uire the firm to seek short%term loans. Payrolls, materials, and supplies have to be paid before collections from customers. )n anticipation of rising sales in the coming season, *old may e!perience a peak demand for cash to pay for the increased purchases of materials, payrolls, and supplies while collections from customers may be at the lowest point of the year as the firm comes out of a low%activity season. A short%term financing arrangement is the best way to meet seasonal cash needs. A short%term loan can be repaid as soon as activities in cash collections increase and payrolls and purchases of materials and supplies decrease as the firm enters into a slow season. Although the firm may have to pay a higher cost for short%term borrowing, the total financing cost likely would be lower than if the firm raised sufficient funds through either issuing long%term bonds or capital stock to meet peak demands for cash. A bond re/uires interest payments whether or not the firm uses the funds raised from the bond in operations. Additional capital stock is not without cost. Aanagement needs to earn a desired return on e/uity to satisfy investors. Furthermore, studies have shown that management is prone to be careless in spending when abundant funds are available. D. #he scenarios described involved many simplified assumptions in order to make the problem managable. Among possible complicating factors are0  3o bad debts are considered.  5ustomers always make payment as prescribed in sales terms.  4ithin a given month cash inflows are in time to meet cash outflows. )t is conceivable that the bulk of cash inflows occur toward the end of the month while payments need to go out at the beginning of the month.  5ash customers do not use bank credit cards for the purchases. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-80 ©The McGraw-Hill Companies 2008 8-68 C-'6 B(<09+*)0D S9)'*+*;*+3 A)-%3'*' 850 M*)(+9': =. +stimated 5ash Eeceipts, April C@@H0 April 5ash Eeceipts0 April cash sales &CF.@K ! NDCF,@@@' P N=@G,CF@ April credit%card sales &NDCF,@@@ ! FFK ! >HK' P NCCG,H-, 5ollection of accounts receivable0 From April "ales &C@K ! NDCF,@@@ ! CFK' P NC=,CF@ From Aarch "ales &ND@@,@@@ ! C@K ! DFK' P N-G,@@@ From February "ales &NFF@,@@@ ! C@K ! CHK' P NC>,H@@ #otal $419#938 C. Purchase (rder for Tardware, e!ecuted <anuary CFth &to be paid April =@th'0 a' 3umber of units to be ordered0 +stimated Mnit "ales, Aarch P >@ Plus0 :esired +nd. )nv., Aarch &-@K ! =@@' P -@ #otal 3eeds &in Mnits' P =C@ Qess0 Beg. )nv., Aarch &-@K ! >@' P CH Ee/uired Purchases &in Mnits' P 93 b' 5ost of purchases0 "elling price per unit &e.g., N-@@,@@@$=@@ units' P N-,@@@ +stimated cost per unit &VGFK of selling price' P N=,>F@ #otal cost of purchases &>- units ! N=,>F@$unit' P $181#350 1ote that the cash outflow associated with these purchases will be ;<=><?>>. 6./ days after e%ecuting the purchase order7. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-81 ©The McGraw-Hill Companies 2008 8-68 &5ontinued%=' -. "ensitivity Analysis0 #hree "enarios for Aarch "ales and the 5*"K +stimated "alesIAarch 5*" K (ptimistic +stimate P =@@ G@K Base%line +stimate P >@ GFK Pessimistic +stimate P ,@ H@K Aarch 5ash "ales Payment "cenario &units' 5*" K April =@th = =@@ G@K C =@@ GFK - =@@ H@K D >@ G@K 5 90 65@ G >@ H@K H ,@ G@K , ,@ GFK > ,@ H@K Aa!imum P NC=@,@@@ Ainimum P N=FD,,@@ Eange P NFF,C@@ D. Aonthly cash budgets are prepared by companies such as 5omp5ity, )nc., in order to plan for their cash needs #his means identifying when both e!cess cash and cash shortages may occur. A company needs to know when cash shortages will occur so that prior arrangements can be made with lending institutions in order to have cash available for borrowing when the company needs it. At the same time, a company should be aware of when there is e!cess cash available for investment or repaying loans so that planned usage of the e!cess can be made. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-82 ©The McGraw-Hill Companies 2008 8-68 &5ontinued%C' Sensitivity analysis, one type of which is illustrated in part &-' above, can be used to help managers deal with uncertainties in the budgeting process. "ensitivity analysis enables managers to e!amine how a budget would change in response to changes in one or more underlying assumptions &such as sales volume level and 5*" K'. As such, the process enables managers to monitor key assumptions and to make timely adustments to plans. )n practice, management might view the base%line outcome as the e!pected value prediction. )t might define, subectively, 1optimistic2 and 1pessimistic2 values as those having a small probability, &e.g., =@K or less'. 1ote to 2nstructor0 An +!cel spreadsheet solution file for this assignment is embedded below. ;ou can open the spreadsheet 1obect2 that follows by doing the following0 =. Eight click anywhere in the worksheet area below. C. "elect 14orksheet (bect,2 then 1(pen.2 -. #o return to the 4ord document, select 1File2 and then 15lose and return to...2 while you are in the spreadsheet mode. Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-8 ©The McGraw-Hill Companies 2008 8-68 Cash Budgeting; Sensitivity Analysis Inputs Har'ware Har'ware So(tware)Support Total Sales *+nits, -e.enue Ser.ices -e.enue -e.enue /anuar0 120 1#0,000 11!0,000 1"00,000 2e3ruar0 10 1%0,000 11#0,000 1""0,000