Master Budget Questions

PROBLEM FOR SELF·STUDYConsider the Stylistic Furniture example described earlier. Suppose the selling price perlable is $431.20, a 10% increase over the $392 selling price used in the chapter illustration. All other data are undlanged. Required Prepare a budgeted income statement, that are different from the schedules remain unchanged. including presented all necessary detailed supporting budget schedules in the chapter. Indicate those schedules that will SOLUTION Schedules 1 and 8 will change. Schedule 1 changes because a change in selling price affects revenues. Schedule 8 changes because revenues are a cosl driver of variable non manufacturing costs. The remaining schedules will not change because a change in selling price has no effect on manufacturing costs. The revised schedules and the new budgeted income statement follow. ABC Schedule I: Revenue 1 :2 For the YtU Endi.n.:!: Dett]' B~et n 31,200' 3 Selling Units Total Price Sold Revenues 5 Coffee tables $431.20 52,000 $22,422,400 4 4 5 6 7 8 9 10 D ABC SrMdul,. 8: No~!U'uf;\rtu.riJt; _~f:I~ts Bu~~t For ih •. Ynl F.ndin; D,.r.- {herH,_ 'fl07 1 2 3 BusinessFunction R&DlProduct design (Variable cost: $22,422,400 x 0.Dl5) Marketing (Variable cost: $22,422,400 x 0.08) Distnbution (Variable cost: $22,422,400 x 0.025) Customer service (Variable cosl: $22,422,400 x 0.013) Administrative (Variable cost: $22,422,400 x 0.002) 1 2 3 4 5 6 1 8 9 10 11 12 13 Fixed Costs (as in Schedule 8, Variable Co.ts , 192) $ 336,336 $ 250,000 $ 586,336 1,793,792 290,000 2,083,792 560,560 220,000 780,560 291,491 240,000 531,491 44,845 $3027024 400,000 $1 400000 444,845 $4427024 A B Stylistic Furniture Bud;< For th •. Year Endi I! D,. Revenues Cost of goods sold Gross~ Operating costs R&DlProducl design Marketing costs Distnbution costs Customer-service costs AdministratM costs Operating income Total co.ts C $22,422,400 14,751,250 7,671,150 Schedule 1 Schedule 7 Schedule 8 Schedule 8 Schedule 8 Schedule 8 Schedule 8 D $ 586,336 2,083,792 780,560 531,491 444,845 4,427,024 $ 3244126 14 If we had also assumed that the price of the pal1icle board had increased to $4.20 per board foot and the price of the red oak had increased to $6.30 per board foot (as in Scenario 3 in Exhibit 6-4, p. 193), Schedules 3A, 30, GA, GO, and 7 would also have changed. actions. 203 . Capital budgeting is discussed in Chapter 21. and investment centers. . 5.DECISION POINTS Thefollowing question-and-answer format summarizes the chapter's learning objectives. Budgets are tools that. revenue centers. Costs in kaizen budgeting are based on improvements that are yet to be implemented rather than on current practices or methods. profit centers. The other part isthe financial budget. revenues. l> ~. (c) they provide a framework for judging performance. :: ~ ~. Shouldpertormance reports of responsibility center managers only include costs the manager can control? Controllable costs are costs primarily subject to the influence of a given responsibility center manager for a given time period. 3. or subunit of an organization whose manager is accountable for a specified set of activities. It is linked to activity-based costing but differs in its emphasis on future costs and future use of activity areas. The following supporting schedules are derived from the revenues budget: production budget. 'vvhich is one pan of the master budget.. by themselves. 6. Budgets are useful when administered skillfully. '" c '""-!c!. the cash budget. and actual results of each responsibility center. lb) they promote coordination and communication among subunits of the company. direct manufacturing labor budget. Decision Guidelines 1. segment. financing activities. Performance reports of responsibility center managers often include costs. budgets. Each decision presents a key question related to a learning objective. The starting point for the operating budget is generally the revenues budget. How can a company prepare a budget based on costs of different activities? Activity-based budgeting focuses on the budgeted costs of activities needed to produce and sell products and services. What is the operating budget and why is it useful? The operating budget is the budgeted income statement and its supporting budget schedules."•C APPENDIX: THE CASH BUDGET Thechapter illustrated the operating budget. cost of goods sold budget. and investments that the managers cannot control. the budgetedbalance sheet. :. Four types of responsibility centers are cost centers. direct material purchases budget. The guidelines are the answer to that question. "- '"• . distribution budget. and {dl they motivate managers and other employees.. are neither good nor bad. 7. The advantages of budgets include: lal they compel strategic analysis and planning. direct material usage budget. of determiningcash flowscorre· (Q sponds to the approach used in preparingthe cash budget. When should a company prepare budgets? What are the advantages of preparing budgets? Budgets should be prepared when their expected benefits exceed their expected costs. How should managers consider what might happen if the assumptions underlying the budget change? Managers should use computer~based financial planning models-mathematical statements of the relationships among operating activities. If you have studied the ~ W\ statement of cash flows g in afinancial accountingcourse. and other factors that affect the budget. Responsibility accounting associates financial items with managers on the basis of which manager has the most knowledge and information about the specific items. It expresses management's operating and financing plans-the formalized outline of the company's financial objectives and how they will be attained. Responsibility accounting systems are useful because they measure the plans. This appendix focuses on the cash budgetand the budgeted balance sheet. which comprises the capital expenditures budget. ending inventories budget. manufacturing overhead costs budget. and administrative budget. How do companies use responsibility centers and responsibility accounting? A responsibility center is a part. 2. and the budgeted statement of cash tlmvs. These models make it possible for management to conduct what-if (sensitivity) analysis of the effects on the master budget of changes in the original predicted data or changes in underlying assumptions and to develop plans to respond to changed conditions. regardless of the manager's abilityto exercise full control. What is the master budget and why is it useful? The master budget summarizes the financial projections of all the company's budgets. customer-service budget. How can budgets include the effects of future improvements? Kaizen budgeting is based on the idea that it is possible to continuously reduce costs over time. 4. The budgeted statement of cash flows is beyond the scope of this book (and generally is covered in financial accounting and corporate finance courses). R&D/product design budget. marketing budget. be aware thatthe direct method :. 8. 580.460 1.626. 2.000) Liabilitie.872. but the details of that formulation are not shown here to keep this illustration as brief and as focused as possible.000 4 $6.000 100.000 The quanerly data are based on the budgeted cash effects of the operations formulated in Sd1cdules 1 through 8 in the chapter.460 0 60. with $60.000 QWIrlers I $5. repayment. $0.460 2. including details of borrowing. and Stockholders' Cmrent Liabilities Accounts payable Income t8JreSpayable Total cmrent liabilities Long-term debt (interest at 10% per year) Total cmrent and long-term liabilities Stockholders' equity Common stock.000 1.875.979. By special arrangement.140 3. That is.152.500. Any remaining amount due is paid in April 2008.000) at the beginning and repayment at the end of the quarter under consideration. 3. Prepare a budgeted balance sheel on December 31.300 1.000 1.000 3. This statement should include interest expense and income taxes (at a rate of 36% of operating income).200 2 $4.700.000 960.460 1.000 $6.580.000 1. 2006 I 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 B D As. In April 2007.000 20.300 I 1.536.600 1.ets Current Assets Cash Accounts receivable Direct materials inventory Finished goods inwntory Property.000 sheres outstanding Retained earnings Total 1.375. She is instructed as follows: 204 1.804.679600 Suppose Stylistic Furniture had the balance sheet for the year ended December 31. Management does not want to borrow any more short-term cash than is necessary. shown in Exhibit 6-5. Assume. The budgeted cash nows for 2007 are: A I 2 3 Collections from customers 4 Disb1ll'Sements Direct materials 5 6 Payroll 7 Other costs 8 Machinery pun:hese 9 Interest expense on long-term debt 10 Income taxes C D E 3 $4.000 (800. prepare a statemenl of cash receipts and disbursements by quarter.704. The company can borrow or repay money at an interest rate of 12% per year.580.000 minimum cash balance at the end of each quarter.EXHIBIT A 6-5 Balance Sheel lor Slylislic Furnilure.152.272.460 1. This amount is the remaining payment due for the 2006 income tax year togelher with tlle $100. and interest. Interest is computed to the nearest dollar.000 T 1. Suppose the management accountant at Stylistic is given the preceding data and the other data contained in the budgets in the chapter (pp. December 31.000 1. plant and equipment Land Building and equipment Accumulated depreciation Total $ 500. for simplicity.000 1.600 223.626.000 $2. The company "vants to maintain a $100.000 1.640 of income taxes.679600 ui $ 384.888. Stylistic will pay $120.000 interest payable every quarter.000 2. Long-term debt is $2.000 $3.881.460 404.01 parvalue.000 120. Prepare a budgeted income stalement for the year ended December 31.580. that borrowing takes place (in multiples of $1.460 0 0 60. interest is computed and paid when the principal is repaid. 2007. Prepare a cash budget for 2007 by quarter. 300.704.2006.000 100. .000 60.331.200.140 $6.4 million at an annual interest rate of 10%. 2007.000 60.800.300 1. 188-193).000 100.300.400.000 Stylistic pays each quarter of 2007 toward its 2007 income tax bill.460 3.626.000 $2.600 1. 449.460 20. These include outlays for property. the SS in that column is the BB for quarter 1.060 5.331. and the EB is the EB for quarter4. cash sales. 205 .leeksafter the goods are delivered.000 100. -'ere $308.000) (18.000 6.580.060 4.373.669.639.581.000 $1. depreciation does not.480) $ (326480) $1 142920 4.220 100.800 100. ~~ There's no need to memorizethe format of the cash budget ifvou remember that it's similar to the way your bank statement works: beginning balance + deposits (receiptsldisbursements=ending balance (before financingl..536.321.000 100.580. c. beginnir1g 4 Add receipts 5 B Quarters I 2 $ 500. receipts and disbursements are totaled for the four quarters. In the "Year as a Whole" column. Keyfactors include bad-debt (uncollectible accounts) experience and average time lag between sales and colledions. plant. Ordinarily. -26 bNote that the short~tenn interest payn\enb pertain only to the amowtt of principal being repaid at the end 27 of. Infonnauon on the expected colledibility of accounts receivable is needed for accurate predictions.800.000 (308. This ending balance reveals how much must be borrowed or can be repaid/invested.426.300 1.000) (18.840 1. monthly-and sometimes weekly or even daily-cash budgets are critical for cash planning and control.000 6.000 60.000 1.800. vi.000 6. These depend on timing and credil terms. m iv.300 1. Suppliers are paid in full three v.161.A 1 2 3 Cash balance. The ending cash balance.002.000 4.349.000 0 60.208.000 4.160 960. The beginning cash balance plus cash receipts equals the total cash available before financing. Inrerest on long-term borrowing. b.326. require a cash outlay.160 5. ending' D C o o 60.460 Collections from customers: 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total cash available for needs (x) Deduct disbursements Du.000 100.220 $1 569.152.152.440 J $1. and miscellaneous recurring sources. Exhibit 6-6 presents the cash budget by quarters to show the impact of cash flow timing on bank loans and their repayment.220 $ $ $1.888.000 120. v.580.5 = $18. Income tax payment.704.000 o o 0 $ 308.The cash budget (Exhibit 6-6) is a schedule of expected cash receipts and disbursements. It predicts the effects on the cash position at the given level of operations.220 4 $ 100.626. Not. such as rental or royalty receipts.800 $ 1 061 400 $ 308. Other disbllrsement.160 100.12 X 0.460 4.272.160 $1404440 60.160 $ (301 840) $1 369 400 $ 308.d Total cash needed CashelOCoss(defIciency)' Financing Bonowing (at beginning) Repayment (at end) 21 Interest (at 12% per annum) b 22 Total effects of fmancing 23 Cash balance.200 5.000 1.000 1. Direalabor and other wage and salary outlays.626.000 420.669220 o o o 1.000 6. any oUlslanding loans will be repaid.Total disbursements (y) + Total effects offUW'LCing. Cash receipts depend on collections of accounts receivable. If there is a deficiency of cash.626.372. Shan-term financing requirements depend on how the total cash available for needs [keyed as (x) in Exhibit 6-61 compares with the total cash disbursements !keyed as (y)J.831.000 6. In practice.460 1. ii.000 x 0. 28 cEno:fu1g cash balance = Total cash available for needs (x) .504440 o o o $ 0 $ $1. Other cos/s.000 240."viIIdepend on the relationship between total cash available for needs and total cash needed. Direa material purchases.000 20. equipment.902. preparation of BUdgets I.220 6.600 1.000 6.s.000 $ 100.480.ctmate~ Payroll Other costs Machinery purchase Interest expense on long-tem debt Income taxes Total disbursements (y) Minimum cash balance desu. plus the minimum ending cash balance desired.681. If there is excess cash.000 1. The financing plans .800. the cash budget has these main sections: a.460 1. IIi!l ~~ Keep in mind three points ~aboutcashbudgets:(l1 The ending balance fEB)ofcash in one quarter is the beginning balance(BBiofcash inthe next quarter.200 4.460 1. loans will be obtained.160 $ 0 (308.580. Cash budgets help avoid unnecessary idle cash and unexpected cash deficiencies. and other long-term investments.160 100. d.504.e. Cash disbursements by Stylistic Furniture include: i.440 4.300 1.539. iii. They thus keep cash balances in line \-"ith needs. However.(3) Depreciation is nota cash disbursement.s. All payroll-related costs are paid in the month in which the labor effort occurs.500 6.480) $ (8480) $1142920 24 25 aExcess of total cash available ow:r total ca:>h :needed before current fmancing.704.000 100.000 4. 840 cash deficiency.400 204.600 (from Exhibit 6-5) and subtracting cash receipts of$21. the cash receipts and disbursements were given explicitly in this illustration.200.000 (1. The budgeted balance sheet is presented in Exhibit 6-8. Seasonal peaks of production or sales often result in heavy cash disbursements for purchases. and the proceeds from sales are used to repay the loan..798.100. and other operating outlays as the products are produced and sold. For example.000 (from Schedule 1) to the beginning balance of accounts receivable of $1.570 ABseil Current Assets Cesh Accounts receivable Direct materials inventory Finished goods inventory Property. It is merely the budgeted operating income statement in Exhibit 6-3 (p.495 4.000) Liahilin.000 $4.455. In the first three quarters. 3. it undertakes short-term borrowing of $308.075 2.430 Income taxes 440.657. This self-liquidating cycle is the movement from cash to inventories to receivables and back to cash. Consider accounts receivable.075 Net Income $ 782355 The cash budget in Exhibit G-G shows the pattern of short-term "self-liquidating" cash loans. Stylistic budgets a $307. Each item is projected in light of the details of the business plan as expressed in all the previous budget schedules.300.000 Cost of goods sold Schedule 7 14. ] 93) expanded to include interest expense and income taxes.000 4. The budgeted income statement is presented in Exhibit 6-7.480.200 (from Exhibit 6-6).920 1.01 parvalue.570 Equity $ 358.A B C D Revenues Schedule 1 $20. and Slotkholders' Current Liabilities Accounts payable Income taxes payable TotaI current liabilities Long-term debt (interest at 10% per year) Total current end long-term liabilities Stockholders' equity Common stock..'een the items reported on the accrual basis of accounting in an income statement and balance sheet and their related cash receipts and disbursements.840 Operating Uu:ome 1.654. Usually.600 Customer·setvice costs Schedule 8 504.000.920.250 $3.768 4. 300.750 Opemting costs R&Dil'roduct design Schedule 8 $ 555. Hence.480 Income before income taxes 1. 2. payroll. In quarter 3.000 shares outstending Retained earnings Total 206 2. The loan is self-liquidating in the sense that the borrowed money is used to acquire resources that are used to produce and sell finished goods.250 Gross margin 5.992 Administrative costs Schedule 8 440.000 $7.Oll.000 854.000 for six months.881.400 is computed by adding the budgeted revenues of $20.142.455. plant end equipment Land Building end equipment Accumulated depreciation Total 1.254.495 $7455570 . 1.910 Interest expense 258.384.222.384.751. Stylistic esti- A C D $1.000 4. Cash receipts from customers typically lag behind sales.400. $0. the receipts and disbursements are calculated based on the lags bet\'.632.075 398. the ending balance of accounts receivable of $ 1.000 40.254.000 $2.800. For simplicity.760 ' Marketing costs Schedule 8.720 Distnbution costs ] Schedule 8 729.151.075 3. 276. '"!!Q ~ "-~ '" .910 0 1.20 431. 195) shows how differing assumptions about selling prices of coffee tables and direct material prices led to differing amounts for budgeted operating income for Stylistic Furniture.r~ .000x 0.70.000 1.600 $1.:: ~ 'ito c Q. 1991 financial planning models (p.400 appears as accounts receivable in the budgeted balance sheet as of December 31.600 Totalcollections $5.000 1.70 6.000 Note that the quarterly cash collections from customers calculated in this schedule equal the cash collections by quarter shown on page 204.928.20 392.80 4. Exhibit 6-9 outlines the short-term borrowingimplications of the nine combinations examined in Exhibit GA.requires the largest amount of borrowing by Stylistic Furniture..30 5.704. 1931 cashbudget (p. 1971 revenue center (p.030."- '" 201 .30) Fromsecond-quarter 2007 sales 184.20 3.000 1.000 4.600 3 4 $1.306) 0 (496.457 '= $1.00 4.608.458.$4.413.80 352. 1821 controllable cost(p.30 5.254. Fully explained answers begin on page 71.143. Akey use of sensitivity analysis is to budget cash flow.70.8571 $1. Exhibit 6-4 (p. 186) financial budget (p. In the fourth quarter.745.848. Sensitivity analysis helps managersanticipate such outcomes and take steps to minimize the effects of expected reductions in cash flowsfrom operations.00 6.745.457 $6.00 352.80 4.30 $3.400 $4. sensitivity Analysis and Cash Flows !'-.00 4. 1841 .20 3.20 $5.301 Fromfourth-quarter 2007 sales (estimated collections from sales of $6. with the combination of a 10% lower selling price and 5% higher direct 111aterial costs.810 ' 0 (68. see Featured Exercise 2..20 431.. $6.70 6.00 6. $4.739. $4. 1841 kaizen budgeting (p.928..80 C D E F G H Diretl Malerial Purc:hase Co. $4.423. 1971 responsibility center Ip. Scenarios 7 to 9. 187) organization structure (p.478.321.445%).695.mates that 70% of all sales made in a quarter are collected in the same quarter and 30% are collected in the following quarter.000 997. Prke $431."~ LEARN Q .857 that equal 2007 budgeted sales of $20. 188) master budget (p.000 x 0. Estimated collections from customers each quarter are calculated in the following table (assuming sales by quarter of $4.000 472.. 197) continuous budget (p. 197) pro forma statements (p.272.226 $0 3.384. Stylistic anticipates. Short-Ten" Bo Partide Red Operating Quarto •• Board I Oak lru.80 4.301 Fromthird-quarter 2007 sales 184.331.ome I 2 J $3.000x 0.00 392.244. Scenario 9.400 3.000).000.848./J Budgeled.406) 0 o~ $0 0 0 0 0 0 0 0 0 $ 0 0 0 145. 1861 budgetaryslack (p.225.576.000 3.828. based on its prior history.543 $4. and Review Exercise 3 (Student Guide.600 $1.608. 1951 controllability (p.126 0 3. n n 0 c .143x 0. 186) costcenter (p.000 308.000 4 $ 0 0 0 0 0 0 717. Schedule of Cash Collections Quarters 2 Accounts receivable balance on 1-1-2007(p. 1971 rolling budget (p. 197) responsibility accounting (p.010 1. A 1 2 3 4 Scenario 5 1 6 2 7 3 8 4 9 5 10 6 11 7 12 8 13 9 TERMS TO B Sellin.200 3. 65).70 6. the difference betv. require large amounts of short-term borrowing in quarters 3 and 4. 2007 (see Exhibit 6-8).70.4&0.608. $4.448.000. Study Tip: To check ~yourunderstandingof cash budgeting.143 x 0. that it will collect slightly less than 80% of sales (79. Purthermore.857 . 1981 operating budget (p.026 0 1. 2041 (Fourth quarter sales from prior year collected in first quarter of 2007) Fromfirst-quarter 2007 sales (84.102.00 4.000 .multiple-choice question 8.102.000 1.266. 2051 investment center (p.'een fourth-quarter sales and the cash collected from fourth-quarter sales.382.: Thechapter and the Glossary at the end of the book contain definitions of: activity-based budgeting (ABB) (p.00 392. 1821 profit center (p.80 352. with the lov.704.000 x 0.206) I 0 (282.00 6.881. beginning p.745..fer selling price per table ($352. and $6.80).102. $4. 000 units of finished goods on hand at December 31 and has a target finished goods inventory of 24. The company expects to produce 1. 6-18 Direct material budget Inglenook Co. The company has an inventory of 90. The company has an inventory of 22. The Mendez Company expects sales in 2007 of 100. They just don't mix. ignore breakage_ Compute the number of bottles to be purchased in 2007. is a better criterion meet the cost-benefit to one another. cost drivers can be incorporated of the type of responsibility into budgeting.000 gallons at the end of the succeeding quarter. profit." How can a budget assist in reducing battles between these two areas? 6-6 "Budgets Explain. Jim McGrath feels that if he lowers his price for lead testing to $190 per test. than past performance test. ASSIGNMENT MATERIAL Questions 6-1 6-2 6-3 6-4 What are the four elements 6-5 "Production managers and marketing managers are like oil and water.000 trays. service setting_ In 2006. You can rework these exercises and problems-each time with new data-as many times as you need. center least. Mendez's beginning inventory for 2007 is 7. The Mahoney Company has prepared a sales budget of 42. PHGA is an online tool that can help you master the chapter's topics. awareness of radon-related health hazards is expected to result in a 5% increase in radon·test volume each year in the near future. a small environmental-testing firm.. Inglenook purchases empty glass bottles from an outside vendor." Do you agree? Explain. For simplicity.000. "Strategy. and budgets are unrelated "Budgeted performance you agree? Explain. plans. You also receive immediate feedback and grading." Do Do you agree? Define rolling budget. Describe how nonoutput-based Explain how the choice mentl affects behavior. ------- Required 1. 6-7 6-8 6-9 6-10 6-11 6-12 6-13 of the budgeting cycle? Define master budget. Exercises 6-16 Sales budget. "The sales forecast is the cornerstone How can sensitivity analysis be used to increase for budgeting.000. Compute the number of trays budgeted for production in 2007. or invest- 6-14 What are some additional considerations that arise when budgeting in multinational companies? 6-15 "Cash budgets must be prepared before the operating income budget.Prentice Hall Grade Assist IPHGAI Your professor may ask you to complete selected exercises and problems in Prentice Hall Grade Assist (PHGA). performed 11. Because newer homes are being built with lead-free pipes. its beginning inventory is 20.000 radon tests for S250 each and 15.000 units of serving trays. How many gallons of direct materials should be purchased during the three months ending March 31? .. Give an example. However. lead-testing volume is expected to decrease by 10% next year.000 gallons of direct materials at December 31 and has a target ending inventory of 110." Do you agree? Explain. McGrath & Sons." Why? the benefits of budgeting? Define kaizen budgeting. They force managers for judging managers. Its target ending inventory of such bottles is 50. target ending inventory.000 trays.•units for a three-month period. It provides you with multiple variations of exercises and problems designated by the PHGA PH Grade Assist icon.000 fin~. Outline the steps in preparing an operating budget. produces wine. Should McGrath lower the price of a lead test in 2007 if its goal is to maximize sales revenue? 6-17 Sales and production budget.200 lead tests for $200 each." to act differently.000 units at the end of the succeeding quarter. Ittakes three gallons of direct materials to make one unit of finished product. revenue.500.000 two-liter bottles of Chablis in 2007. 11. he will have to face only a 5% decline in lead-test sales in 2007. Prepare a 2007 sales budget for McGrath & Sons assuming that they lower the price of a lead test to $190. Prepare a 2007 sales budget for McGrath & Sons assuming that they hold prices at 2006 levels_ 2. Budgeting material purchases. isresponsiblefor preparing Roletter's master budget and has accumulated the following information for 2007: 2007 Estimated sales in units Selling price Direct manufacturing laborhours per unit Wage per direct manufacturing labor-hour Januarv February March April May 10. disposable plastic l1J1 01f PHClldlAssis1 1.000 four-gallon containers.000 empty 12-ounce bottles in inventory. The vice president of operations requests that twelve-ounce ending inventory on December 31. direct manufacturing labor-related costs include pension contributions of $0. 1.15 per hour. 200n 6·21 Direct material usage. 3..00 $10. The VP of operations requests that ending inventory of four-gallon containers on December 31. 2. the social security tax rates are 7. Calculate the manufacturing cost per unit for each product. Assume that as of January 1. production. -------------------- 1. prepare a direct manufacturing labor budget for 2007. (Note: A unit can be a 12-ounce bottle or a 4-gallon containerl. Assuming average selling prices as in Exercise 6-20. Suzuki's target endinginventory is 100.5% for employersand7. and its beginning inventory is 20.000 4-gallon containers. and socialsecurity taxes.000 wheels. 2007. The 12-ounce bottles are purchasedfrom Plastico. If the production budget calls for Purity to produce 1.000 $51. be 200.6~20 Revenues and production budget. bottles and distributesmineral water from the company's natural springs in northern Oregon. 2007.300. •••• ulr ••• f 2. so the only cost incurred is that of sterilization.000 units. 4. Prepare a revenues budget for Purity.50 9. for the year ending December 31 2007. 2007. and its beginning inventory is 120. at a cost of 6 cents per bottle. Average selling prices are estimated at $0.000 $54. Compute the budgeted revenues in yen.000 units. Required 6-23 Budgets lor production and direct manufacturing labor.00 12.00 $11. employee medical insurance of $0. Accounting for sterilization as the only cost of the 4-gallon containers. graduations. the production budgetcalls for the production of 4.000 $51. Compute the number of motorcycles to be produced. The company's budgeted selling priceto its distributors and dealers is 400. unit costs.000 twelve-ounce bottles and 100.000 yen (¥) per wheel. Purity markets two products: 12-ouncedisposable plastic bottles and 4-gallon reusable plastic containers. The Suzuki Co. Based on the data given.000 empty 12-ounce bottles in beginning inventory on January 1. In 2007.5O per four-gallon container.50 8. Inc.25 per twelve-ounce bottle and Sl. Can you suggest alternative cost-allocation bases? aequl •. Spring water is extracted at a direct labor costof 1 cent per 8 ounces (there are 128 ounces in a gallon).•d 6·22 Revenues. Purity. 3. what is the expected average gross margin per unit for each product? 5.000 twelve-ounce bottles in inventory.5 1. Consider Purity's choice of the cost-allocation base for manufacturing overhead.000 bottles. Inc. 209 . Purity marketing managers project monthly sales of 400.50 9.000 $51. a plastics manufacturer. and gross margins (continuation of 6-20).000 12-ounce bottles and 1.300. The 4-gallon containers are sterilizedand put back into service at a cost of 30 cents per container.000 units.40 per hour.5 1. Assume 4-gallon containers are fully depreciated. Manufacturing overhead is allocated atthe rate of 15cents per unit. what is the minimum number of twelve-ounce bottles Purity must produce during 200n 3.000 units. and other special events.5% for employees. Beginning and ending inventories for 4-gallon containers are zero.ICMA. be no less than 600. Compute the budgeted purchases of wheels in units and in yen. The vice president of operations would like to end 2007with 300. adaptedl Roletter Company makes and sellsartistic frames for pictures of weddings. Based on sales projections as budgeted above.. in Japan has a division that manufacturestwo-wheel motorcycles. what is the beginning inventory of four-gallon containers on January 1.000 four-gallon containers during 2007. bottles and distributes mineral water from the com- pany's natural springs in northern Oregon.50 per hour.) The company's ~rget ending inventory is 30.500.00 Sl1. and purchases budgets. prepare a direct material usage budget (relating to both bottles and containersl in both units and dollars.. The cost of direct manufacturing labor is captured through the extraction cost as detailed above. Suzuki buys all its wheels from an outside supplier. Purity. 2007. Inc. (Suzuki's needs forextra wheels for replacement parts are ordered by a separate division of the company. the controller. There are 500. 2.worker's compensation insurance of $0. Its budgeted sales for Model G in 2007 is 800. Bob Anderson.50 20 2.5 $10.0 1.000 yen (¥) per motorcycle. No defective wheels are accepted. For 2007. The budgeted purchaseprice is 16.00 Besides wages.000 $51.00 $10. Purity markets two products: twelve-ounce bottles and four-gallon reusable plastic containers. The cost of employee benefits paid by Roletter on its employees is treated as adirect manufacturing labor cost.000 wheels. Purity begins 2007 with 900. the cost drivers and their rates. with whom) (a) responsibility and (b) controllability lie. The Chelsea store of Family Supermarket (FSI. February's budgeted cost-driver rate is 0. and the cost-driver amount budgeted to be consumed by each activity in January 2008. Which product category has the largest fraction of total budgeted indirect costs? 3. the budgeted cost-driver rate decreases by 0. Revenues for the second quarter have been lower than budgeted. is preparing its activity· based budget for January 200B. the production supervisor notices that a significantly larger number of direct manufacturing labor-hours were used than had been bud· geted. B A C January 2008 BwIgl!red 1 2 COlt-Driver 3 4 5 6 7 ------R_qulred ----- R••• ul •••• AdM Ordering Delivery Shelf-stocking Customer support •. If you want to use Excel to solve this exercise. The shipping department of Amcorp has limited capacity.com/horngren/cost12e and download the template for Exercise 6-24. and packaged food. a relatively new production supervisor finds that more direct manufacturing laborhours were used than had been budgeted. and sales orders are being cancelled by cus· tamers because of delays in delivery. Food 14 24 14 12 62 19 16 172 94 34.2006. . allocating indirect costs to products based on cost of goods sold? 6-25 Kaizen approach to activity-based budgeting (continuation of 6-24).______ Required Roletter has a labor contract that calls for a wage increase to $11 per hour on April 1. Family Supermarkets (FS) has a kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of 2008. of the following month's sales plus 50% of the second following month's sales.000 frames on hand at December 31. The VP of sales notices that revenues are substantially lower than budgeted. For each situation described. The direct manufacturing labor budget should include labor-hours. fresh produce. go to the Excel Lab at www.18 If you want to use Excel to solve this exercise. At Planetel Corp. the production supervisor traces the excessive consumption of direct materials (relative to the budget) to the fact that waste was high on machines that had not been properly maintained.99Btimes the budgeted February 200B rate I.2% relative to the preceding month (so. for example. and show the details for each labor cost category. Both budgets may be combined in one schedule.600 and controllability.750 4. a chain of small neigh· borhood grocery stores. Each successive month. 6. and March's budgeted cost-driver rate is 0. New laborsaving machinery has been installed and will be fully operational by March t. FS has three product cat· egories: soft drinks. Prepare a production budget and a direct manufacturing labor budget for Roletter Company by month and for the first quarter of 2007.prenhall. say. Interviews revealed that workers were unhappy with his management style and were intentionally working slowly and inefficiently. Suggest what might be done to solve the problem or to improve the situation.200 10.prenhall. a manufacturer ohelecommunications equipment. what advantage does FS gain by using an activity-based approach to budgeting over..998 times January's budgeted cost·driver rate. Roletter expects to have 16. 2007. What is the total budgeted cost for each activity and the total budgeted indirect cost for March 200B? 2. A very successful salesman at Amcorp Computers regularly ignores the published sales catalog and offers lowered prices to his customers in order to close sales. 2007. 2. and how might FS management overcome them? 6-26 Responsibility '~ " '" CoslDriver Number of purchase orde•• Number of deliveries Hours of stocking time Number of items sold D E F January 2008 BwIgl!red Amounl of Coil Driver Used Soft Fresh Pa<k:aged Drinks Prodw:.. and it has a policy of carrying an end-of-month inventory of '_00_'1<_. The following table shows the four activities that consume indirect resources at the Chelsea store. >- « J:: u 210 _______ R_qulred Rare $ 90 $ 82 $ 21 $0. Consider each of the following independent situations: 1. 6-24 Activity-based budgeting. Given your answer in requirement 2. FS assumes that the budgeted amount of cost-driver usage remains the same each month. What are the benefits of using a kaizen approach to budgeting? What are the limitations of this approach. 1. 4. What is the total budgeted indirect cost atthe Chelsea store in January 2008? What is the total budgeted cost of each activity at the Chelsea store for January 2008? What is the budgeted indirect cost of each product category for January 200B? 2. 5.. Investigation revealed that it was due to a decline in educational standards required by the HR department when they interviewed applicants for hourly production jobs six months earlier. At Planetel Corp. Revenues for the past month have been lower than budgeted. 1. Every "special deal" offered to a customer by any salesperson at Amcorp Computers has to be cleared by the VP of sales.com/horngren/cost12e and download the template for Exercise 6-24. determine where (that is. At Planetel Corp. go to the Excel Lab at www. 3. 000 270.000 130. TobComp Inc. 30% of the total sales are paid by bank credit card. -0 o • ~ ~' Chairman Line o l> n n o C ~ o '"" 44 211 200 . Thus.. can expect to collect during April 2006. is a retail distributor for MZB-33 computer hardware and related software and support services..000 140.000 150.000 375. First Six Monlhs of 2006 Soles Forecosl Hardware Sales January February March April May June Total Units Dollars 130 120 110 90 100 125 S 390.. a. orders for computer hardware units are placed on the 25th of each month to assure that they will be in the store by the first day of the month needed. 0- '"•• . Inc. products: • Executive desks-3' x 5' oak desks • Chairman desks-6' x 4' red oak desks Thebudgeted direct-cost Sierra Furniture is an elite desk manufacturer.000 480. b. Calculate the cash that TabComp.000 $2025000 Jill ~ 1. The cash receipts for sales an open account are 70% inthe month following the sale and 28% in the second month after the sale.000 500. TabComp's month-end inventory requirements for computer hardware units are 30% of the next month's sales. and the remaining 45% are on open account (TabComp's own charge accounts). measured from the time the units are delivered to TabComp. Bank credit-card sales are subject to a 4% discount deducted at the time of the daily deposit. Determine the projected number of computer hardware units that will be ordered. TabComp prepares annual sales forecasts of which the first six months for 2006 are presented here.000 425. Be sure to show all of your calculations. Inc.000 400. 2006. Inc. ICMA.6·27 Cash flow analysis.000 300. The cash sales and cash from bank credit-card sales are received in the month of the sale. A one-month lead time is required for delivery from the manufacturer. is determining how many M2B-33 computer hardware units to order on January 25. Problems 6·28 Budget schedules for a manufacturer.000 225. The computer hardware units are purchased under terms of n/45 (payment in full within 45 days of invoice). chapter appendix.000 330. Calculate the dollar amount of the order that TabComp will place for these computer hardware units. adapted) TabComp. Cash sales account for 25% of TabComp's total sales. 3. TabComp.000 600.000 Software Sales and Support Total Revenues $160. As part of the annual budget process.000 $ 550.000 125. inputs for each product in 2006 are: Executive line Oak top Red oak top Oak legs Red oak legs Direct manufacturing 16 square feet o o 25 square feet o 4 o labor Chairman line 3 hours 4 5 hours Unitdata pertaining to the direct materials for March 2006 are: Actual Beginning Direct Materials Oak Red Oak Red It makes two Inventory (3/1JZOO6) Executive line top (square feet) oak top {square feetl legs oak legs TargetEnding Direct Materials 320 o 100 o Inventory (3/3112006) Executive Line Oak top (square feet) Red oak top (square feet) Oak legs Red oak legs 192 o 80 o '"c0- Chairman line o 150 o 40 '"!l o .000 $2955000 360. The remaining accounts receivable are estimated to be uncollectible. •••• ul •••• 1. TabComp prepares a cash budget by month for the entire year. Explain why a company such as TabComp prepares a cash budget by month for the entire year. TabComp's purchase price for the computer units is 60% of the selling price. A total of 5. The budgeted selling prices per unit in March 2006 are $1. Suppose Sierra Furniture decides to incorporate continuous improvement into its budgeting process. which of the three scenarios here do you think Chaco Chips's management would prefer? What other factors would you consider before choosing between (2) and (3) above? 6-30 Revenue and production budgets. Chaco Chips's master budget projects sales of 500. The cookies are produced from only two ingredients: chocolate chips and cookie dough.850 15 Budgeted sales for March 2006 are 740 units of the executive line and 390 units of the chairman line. which will reduce manufacturing overhead costs and direct manufacturing labor-hours by 2%. Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods.000 direct manufacturing labor-hours-40% for Chippo and 60% for Chokko-are budgeted. Chaco Chips estimates it could reduce the cost of ingredients by 3%. Cost of goods sold budget 2. Calculate Chaco Chips's revised 2007 budgeted gross margin under this scenario.000. at $3 per package. Production budget in units c.600 for the chairman-line desk. 2. 3. alia· cated between the two products on the basis of packages produced. There is no beginning or ending inventory. 6-29 Sensitivity analysis. Prepare the following budgets for March 2006: a. Manufacturing overhead budget I.000 40. By working with its current suppliers.480 30 5 $4.000 $165 $250 . R••• ul •••• PIl Clade Assisl Requl •••• 1. The budgeted fixed manufacturing overhead for March 2006 is $42. changing budget assumptions.020 for the executive-line desk and $1. Direct material usage budget and direct material purchases budget d. Direct manufacturing labor budget e. An analysis of all activities by a cross-functional team responsible for continuous improvement shows that if the company purchases better-quality ingredients from a different supplier costing 5% more than the original ingredients. Assume the following in your answer: • Work-in-process inventories are negligible and ignored . In July 2006.000 packages of each brand in 2007. Forecasted 2007 ingredients' costs are $2 per pound of chocolate chips and $1 per pound of cookie dough. Describe two areas where Sierra could incorporate continuous improvement into the budget schedules in requirement 1.500. Packages of either brand weigh 1 pound. (CPA. 1. Data relating to finished goods inventory for March 2006 are: Beginning inventory in units Beginning inventory in dollars (cost) Target ending inventory in units Executive Chairman line 20 $10. Chippo is 50% chips by weight and 50% dough. Revenues budget b. Based on bu~geted gross margin alone. The budgeted variable manufacturing overhead rate for March 2006 is $35 per direct manufacturing labor-hour. Manufacturing overhead costs are expected to be $160. Chaco Chips produces two brands of chocolate chip cookies: Chippo and Chokko. Calculate budgeted gross margins for each product and for Chaco Chips in 2007. at $20 per hour. Scarborough's budget department gathered the following data to prepare budgets for 2007: 2007 Projected Sales 212 Product Units Price Thingone Thingtwo 60. there is negligible loss while baking the cookies. kaizen approach. adaptedl The Scarborough Corporation manufactures and sells two products: Thingone and Thingtwo. whereas Chokko is 25% chips by weight and 75% dough. there will be fewer quality-related production line stoppages. 4. • Direct materials inventory and finished goods inventory are casted using the FIFO method.Unit cost data for direct-cost inputs pertaining to February 2006 and March 2006 are: March 2006 (budgetedl February 2006 lactuall Oak top (per square foot) Red oak top (per square foot) Oak legs (per legl Red oak legs (per leg) Manufacturing labor cost per hour S18 23 11 17 30 $20 25 12 18 30 Manufacturing overhead (both variable and fixed) is allocated to each desk on the basis of budgeted direct manufacturing labor-hours per desk. Ending inventory budget (direct materials and finished goodsl g. -Unit costs of direct materials purchased and finished goods are constant in March 2006. Calculate Chaco Chips's revised budgeted gross margin in 2007. with a corresponding 6% growth in units of maintenance contracts. 2. the video-conferencing equipmentsegment has suffered. The following incomestatement shows results for 2007.800 Total revenues $7. 2007 (in tbousands) Revenues: Equipment $6.650 Operating income $ 550 Easecom'smanagement team is in the process of preparing the 2008 budget and is studying the following infDrmati~ 1.000 25. Oirect manufacturing labor budget (in dollars) 6.000 8. prepare the following budgets for 2007: R••• ul •••• t Revenues budget lin dollars) 2. 7. adapted) Easecom Company is a manufacturer of videoconferencing products.000 9. With the recent downturn in the computer industry. Production budget (in units) 3.expected to increase by 6%. 29. 213 . EqIt sales in units are . Direct material purchases budget (in quantities) 4. and specialized unitsare made after an order is received. 6.000 units Projected direct manufacturing labor requirements and rates for 2007 are as follows: Product Hours per Unit Rate per Hour Thingone Thingtwo 2 $12 3 16 Manufacturing overhead is allocated at the rate of £20 per direct manufacturing labor-hour. 2007 Target Inventories December 31. Sellin ces of equipment are expected to increase by 10% as the economic recovery begins.000 lb. 2007 A B C $12 5 3 32. Budgeted finished goods inventory at December 31. 3.000 Maintenance contracts 1.000 lb. Cost of each unit sold is expected to increase by 3% to pay for the necessary technology and quality improvements. 32. Direct material purchases budget (in dollars) 5.000 lb. Maintaining the video-conferencing equipment is an important areaof customer satisfaction.2001/nventories in Units Expected Target Product January 1. Based on the preceding projections and budget requirements for Thingone and Thingtwo.200 Operating costs Marketing 600 Distribution 150 Customer maintenance 1.000 Administration 900 Total operating costs 2.000 The following direct materials are used in the two products: Amount Used per Unit Direct Material Unit Thingone Thingtwo A B C pound pound each 4 2 0 5 Projected data for 2007 with respectto 3 1 direct materials are as follows: Direct Material Anticipated Purchase Price Expected Inventories January 1.600 Gross margin 3. The sellir ce of each maintenance contract is expected to remain unchanged from 2007. 2007 (in dollars) 6·31 Budgeted income statement ICMA. Regular units are manufactured to meet marketing projections.000 units 36.800 Cost of goods sold 4. leading to a decline in Easecom's financial performance. Easecom Company Income 5talement For the Year Ended December 31.2007 December 31.000 lb. 2007 Thingone Thingtwo 20. In the summer of 2006. run Inspection $80.500 20 20 8. Distribution costs vary in proportion to the number of units of equipment sold. but administration costs are expected to remain at 2007 levels.000 machine-hours 40 production runs 15.000 + $0 per purch. What department should bear the costs of time lost in the plant due to the delayed shipment? Why? As purchasing agent. do you think it is fair that such costs be charged to your department? 6-33 Activity-based budgeting. 6. b.000 7. ------- Re••ulred Prepare a budgeted income statement for the year ending December 31. The matter was so important that on Thursday of week 31.000 simple valves ISV2) and tOO. order Indirect labor $45. Anderson Manufacturing. run Indirect materials $0 + S4 per purch.000. 7. But on Tuesday of week 32. He then selects suppliers and negotiates prices. Villers) Mark Richards is the purchasing agent for the Hart Manufacturing Company. the Pipex. Slopes.) per snowboard 6 yards per snowboard 5 hours per snowboard . The following table contains cost-driver and budgeted indirect-cost information for 2007 for the different activities. d. Two maintenance technicians are to be hired at a total cost of £130. c.2008.f. manufactures two types of valves..OOO per prod. Yes. manufactures and sells snowboards-"-lP. the shipment had left in time. 2.IAdapted from a description by R.500 3. say. Inc.200 per prod.000. 6-32 Responsibility _____ Re'lulred of purchasing agent.000 purchase orders 100 engineering-hours 100. the part had not arrived. budgeted balance sheet. Ves. Use the cost-driver rates calculated in requirement 1 to calculate budgeted indirect costs allocated to each product in total and per unit. He called everywhere and finally found a supplier in the Midwest who accepted the commitment.ees manufactures a single model. 3. In_q~uiryrevealed that the shipment had been misdirected by the railroad and was still in Chicago. Sampson gives Richards a general purchasing program.000 per prod. order Engineering $75. Richards is advised that Part No. Richards checked by phone.000 40. He followed up bye-mail. Items in Cost Pool (fixed cost + cost per unit of cost driver) Activitv Cost Driver Machining Machine hours Setups and quality assurance Production runs Procurement Purchase orders Design Materials handling Engineering hours Square feet of materials handled Indirect materials SO + $10 per machine-hour Indirect labor S20. Calculate the total budgeted cast for each activity in 2007 and the cost-driver rate for each activity. Inc. Every six months.000 + $2. 6-34 Comprehensive operating budget. Marketing costs are expected to increase by $250. Richards was reassured and did not check further.-hour Indirect materials $0 + $2 per sq ft Indirect labor $30. The objective is to improve customer service and shorten response time.. which covers wages and related travel costs. When he took this job.000 Total Budgeted Volnme of Cost Driver 10. What advantages might Anderson gain by using an activity-based budgeting approach over. There is no beginning or ending inventory of equipment. Required Machining Setups and quality assurance Procurement Design Materials handling SV2 Cl9 6. the supplier assured him.OOOcomplex valves (CL9). e.000 25 75 60. 5. 300. describing the amount of activity resources used by the two types of valves follows: Quantity of Cost Driver Used By Activity a. 1234-a critical part-would be needed for assembly on Tuesday morning of week 32.. run Indirect labor $0 + $1.000 + $0 per sq ft Additional budget data for 2007. the part would be ready. He found that the regular supplier could not deliver. an approach that allocates the cost of these activities to products as a percentage of the cost of goods sold. Richards gets specifications from the Engineering Department. Richards was informed very clearly that he bore responsibility for meeting the general purchasing program once he accepted it from Sampson.4. Anderson uses activity-based costing and activity-based budgeting.000 square feet 1. Kent Sampson is head of the Production Planning and Control Department. Slopes's management accountant g red the following data to prepare budgets for 2007: Materials a 214 !Jorrequirements Direct materials Wood Fiberglass Direct manufacturing labor 5 board feet Ib.000 + $15 per machine-hour Utilities SO + 55 per machine-hour Indirect materials SO + Sl.000 + $50 per engg. During week 24. in the selected accounts are: Cash Properly. Other data includes: Wood Fiberglass Direct manufacturing labor are also S66. Prepare a direct manufacturing labor budget. Prepare an ending inventory budget for bath direct materials and finished goods. 9. $ 5.000 in fixed nonmanufacturing costs budgeted for 2007.00 per b. 8udgeted balances at December 31.80.. Inc. The marketing plan calls for 30 sales visits there are $30. To meet demand. plant. Direct materials inventories Wood Fiberglass Beginning Inventorv 1/1/2007 Ending Inventory 12/31/2007 2.00 per b.500per month. Retail outlets purchase snowboards from Slopes. Slopes.he expects 2007 beginning inventory of 100 boards and would like to end 2007 with 200 snowboards in stock. 2006 Unit Price 2007 Unit Price $28. The averageselling price per snowboard is $450. 6·35 •• "ul•••• Cash budgeting. as of December 31. Prepare a manufacturing overhead budget. Invoices are payable within 60 days. There fixed manufacturing overhead costs budgeted for 2007.000 178. Prepare a cost of goods sold budget.Slopes's CEO expects to sell 1. 50% are paidin the following month. through- out the year.000 1. Further.500 2. 2.500 per month and fixed nonmanufacturing overhead costs of$2. Projected Sales May June July 80 units 120 units 200 units August September October 100 units 60 units 40 units 215 . also incursfixed manufacturing overhead costs of $5. Prepare the budgeted income statement for Slopes. Inc. Prepare the direct material usage and purchases budgets. chapter appendix. Outlets are billed when boards are ordered.000 17. 6. 12.00 per hour The inventoriable unit cost for ending finished goods inventory on December 31. Duringthis period there is no production for inventory. Slopes's accountant projects 20% of invoices are paid in the month invoiced.. However. outlets ramp up inventories fromMay through August. 11. Inc.80 per yard $24. 4.000 in and fixed manufacmarketing costs are during 2007. 10. 2007.000 Variable manufacturing overhead is $7 per direct manufacturing labor-hour. Prepare the 2007 production budget (in units). for the year ending December 31.000 1.2007.00 per yard $25. and equipment Inetl Current liabilities Long-term liabilities Stockholders' equity S 10. 3. in anticipation of late summer and early fall purchases. there are no sales visits during the months studied. What is the budgeted manufacturing overhead rate? 7. Direct manufacturing labor and manufacturing overhead are paid monthly.00 per hour $30. 5. However. 2007. Frompast experience.. because the snowboards are produced a month prior to their projected sale. Assume Slopes uses a FIFO inventory method for both direct materials and finished goods. $ 4. Variable allocated at the rate of $250 per sales visit. Direct materials are purchased in the month of productionand are paid for during the fallowing month Iterms are payment in full within 30 days of the invoice date). What is the budgeted manufacturing overhead cast per output unit? 8. Prepare the budgeted balance sheet for Slopes. Finally. Variable marketing costs are driven by the number of sales visits.000 800. Inc.. and no materials are purchased for inventory. Prepare the 2007 revenues budget lin dollars) .000 snowboards during 2007 at an estimated retail price of $450 per board. Slopes combines both variable turing overhead into a single rate based on direct manufacturing labor-hours.000 850.000 1.f. Calculate the cost of a snowboard manufactured in 2007. Variable manufacturing overheadis incurred at the rate of $7 per direct manufacturing labar-hour. and 30% of invoices are paid two months after the month of invoice. is $374.2006.t. Ignore work in process inyour calculations. Slopes increases production from April through July. 000 ? 15.:ess (defICiency) Financing Borrowing (at be!9nning) Repayment (at end) Interest (at 12% per annum) Total effects of fmancing Cash balance.000 $ 5000 ? (50.000 ? ? ? ? ? --- Vearas a 4 ? J ? $ .000 40.000 0 125.000 ? 50.000 ? ? 14.370.000 ? 61.000 ? ? 15.000 118.000 49.000 ? ? ? $ 0 (50.000 $ ? ? ? ? $ (50.000) (4.000 0 ? ? 345.000) (4.000 2 385. ending 1 $ 15. beginning Add receipts Collections from customers Total cash available for needs Deduct disbursements Direct materials Payroll Other costs Machine>y purchese Interest costs (bond) Income taxes Total disbursements Minimum cash balance desired Total cash needed Cash ".000 ? $ $ 0 0 0 0 0 0 ? ? Whole ? $365.360. ? 155.500) $ (4500) ? $ .000 0 ? 12.500 ? 448.000 368.Q $ 32 000 ? $310.000 45.000 ? ? 95. 2007 (in thousands) Quarton Cash balance. C•• h Budget for 1he Vear Ending Deeemher 31.000 110.500) $ (54 500) $ 15.000 175.000 ? ? $347.000 ? $1. Inc.Required C A 216 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Sbuport.000 ? 85.000 260.000 1.000) 0 0 0 L-. The remaining 2% will be uncollectable.000.0001 = $63. The average unit purchase cost is $70. The interest rate is 18% 217 .(Payments on purchases are to be made in 30 days. Experience has shown that 70% of the billings will be collected within the discount period.000 3. the Itami Wholesale Co. and customer-service costs. fill in schedules. Credit sales: Sales are 75% cash.000 must be maintained.500 92. On December 1. net 100.000 150. None I DIE I F G H Recent and anticipated sales: September October November Dec:ember January $40. She has the following information: 1. The accounts receivable on September 30 are the result of September's credit sales (25% of $40.000 are considered fixed land include depreciation of $30. These costs are paid in cash each month. all repayments are made at month-end. 2007. 8.) Newporttakes all available discounts by paying in the month of the purchase. 6.000 280. with the balance due by the end of the month after sale.000. On this latter date. Selected general ledger balances on December 1 are: $ 10. A B I N""1'ort Stationery Store 2 BalaJu:e Sheet as of Sep1emberJO.000 300.6-37 Cash budgeting.000 Cash Accounts receivable Allowance for bad debts Inventory Accounts payable $15.000 5 Accounts ReceNoble 10. and in November.000).000 $36. This amount was borrowed in September to carry the company through the seasonal peak in November and December. Actual and projected sales are: October actual November actual December estimated January estimated February estimated Total estimated for year ending June 30. and customer-service costs for the year are S400. n130.000 6 Inventory 63. other operating costs. Terms on inventory purchases are 2110. Of this amount. excluding depreciation. Newport treats cash discounts on purchases as "other income" in the income statement.000 per month. 2007 3 CurrentAssets 4 Cash $ 12. 5. 4.000.000 250. Each month it purchases just enough inventory to cover the following month's sales. 1. The average selling price of the company's products is $100 per unit. 25% on credit. Target ending inventories are 500 units plus 25% of the next month's unit sales.000minimum inventory plus cost of sales equal to 70% (100% . payments for merchandise. and 8% in the following month.000 + 10.gross margin of 30%) of October's anticipated sales of $48. a 2% discount is available if full payment is made within 10 days of purchase.000 8 Liabilities as of September 30 2.000 $80. a note will be payable in the amount of $100. Supply supporting schedules for collections of receivables.000 $60.000). Monthly operating costs: Salaries and wages average 15% of revenues. There are no cash sales. rent 5%.000 120.000 Sales terms call for a 2% discount if payment is made within the first 10 days of the month after sale. and customer-service costs are paid as incurred .$150. The remainder vary with sales.2008. and interest is paid only at the time of repaying the principal. and marketing. •• qul •••• 6-38 Comprehensive budget. distribution.600].OOo-occurs atthe beginning of the month. 20% by the end of the month after purchase. distribution.000 All purchases are payable within 15 days. is attempting to project cash receipts and disbursements through January 31. these amounts will be capitalized. All borrowing-in multiples of $1.7x $48.500. Total budgeted marketing. The inventory on September 30 is the S30. Equipment purchases: In October.000 [$30. Both fixed and variable marketing. Prepare a cash budget for December 2007 and January 2008. 2008 $ 180.600 7 Equipment . approximately 50% of the purchases in a month are due and payable in the next month.. Gross margin averages 30% of revenues. Thus. chapter appendix.000 $1. Inventory purchases: Newport always keeps a basic minimum inventory of $30. Loans are repaid when sufficient cash is available. Newport will spend $600 on light fixtures. The manager of Newport Stationery Store is working on the final quarter's budget for 2007.800 87. distribution. Depreciation is $'.000 $48. $400. Credit accounts are all collected within 30 days of sale. A minimum cash balance of $8. 4%. 000 Item Total sales Credit .000 10. 2007. What do you think is the mostlogical type of loan lor Newport to take when it needs cash? Explain your reasoning.200 ut. '" w 1- ••• -<: :r: u 218 1 2 3 4 5 6 7 8 9 10 II 12 \3 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 B Schedule A Budgeted Monthly Cash 's tember $40..000 12.per year. 1. Some simplifications have been made in the design of this problem. ------•••• ul •• d II you want to use Excel to solve this problem.720 8. 3.280) 4.160 Schedule C Budgeted Monthly Cas».160 Cash operating costs 11. uarter -4th uarter -4th wu1er -- I December' 4th -- uarter uarter -- .000 $ 8720 -- -- -- 4th -4th.280) 4. go to the Excel Lab at www. 4.000 Deduct 2% cash discount 840 Total disbursement. Complete the lollowing schedules A through F.280 Net cash increase (decrease) $ (7 280) t -- -- -- t- -- Item Beginning cash baleru:e Net cash increase (decrease) Cash position before borrowing Mincmurn cash baleru:e required Cash excess (defu:iency) Borrowing required Interest payments Borrowing repaid Ending cash baleru:e Schedule F Financing Required October November $12.000 (7.prenhall.400 Rent Other cash operating costs ~ Total disbursement. Ignore income taxes.000 10. Disbursements for Operations Item October November December Salaries and wages $ 7.ales Cash sales ~ceipts: Cash sales Collections on accounts receivable Total -- Receipts October $48.000 -- -- -- -- Schedule B Budgeted Monthly Cash Disbursements for Purchases Item October November December Purchases (70% of next month'.000 $46 000 November December $60. 2. $41. Prepare a budgeted income statement for the fourth quarter and a budgeted balance sheet as of December 31.520 Light fIxtures 600 Total disbursement. What complicating factors may arise in compiling cash and financing budgets in a business such as Newport Stationery Store? A .000 $80.com/horngren/costlZe and download the template lor Problem 6-38.000 -$36. $11 520 -Schedule D Budgeted Total Monthly Cash Disbursements Item October November 1December Purchases $41. 2. $53280 Schedule E Budgeted Cash Receipts and Disbursements Item October November I December Total receipts $46..000 Total disbursements 53. Management does not want to borrow any more cash than is necessary and wants to repay as soon as cash is available. sales) $42.000 (3. 2005) inventory of direct materials • Syrup for lemonade. 2.300 per lot • Diet lemonade.000 per lot $ 800 per lot All direct material purchases are on account. Ittakes two hours to bottle one lot of lemonade and two hours to bottle one lot of diet lemonade. There is no work-in-process inventory.000 cases as the unit of analysis in its budgeting. How would you suggest Marge Atkins handle this situation? Re••ulred Collaborative Learning Problem 6-40 Comprehensive Review 01 Budgeting. Distribution costs are forecast to be 8% of revenues for 2005. he says..000 cases) of beverage. etc. Budgeted beginning balances on January I. 16).200. Atkins learns that each salesperson is expecting to make sales of at least 20% more in 2007 than in the current year.000 for depreciation. 540 lots atSS.100 purchase price per lot • Containers.500 selling price per lot • Syrup for lemonade. we give ourselves a little breathing room. All these costs are paid during the month when incurred. Variable manufacturing overhead is forecast to be $600 per hour of bottling time. so. 100 lots at $5. Sales • Lemonade. not meeting projections is so bad for the morale of the sales team . is working on the 2007 budget.080 lots at $9.000in 2007. (Each case contains 24 bottles. 20051 inventory of finished goods • Lemonade. Marketing costs are forecast to be 12% of revenues for 2005. Scott Ford. 100 lots • Syrup for diet lemonade.200 per lot $1.. 1. 200 lots at S950 purchase price per lot • Syrup for diet lemonade. 20051 inventory of direct materials • Diet lemonade.000 sales budget this year. 9. 70 lots at $1. the production manager.. Target ending IDecember 31.6-39 Budgetary slack and ethics. 1.000 219 . 50 lots at $5. 30 lots • Containers. should Marge Atkins take the position that the behavior described by Scott Ford and Pete Granger is unethical? Refer to the Standards of Ethical Conduct for Management Accountants described in Chapter lip. 8.100 per lot $1. The only difference in the bottling process for thetwo soft drinks is the syrup.000for 2005. All inventory is in direct materials and finished goods at the end of each working day. As a management accountant. a manufacturer of baby furniture.000.000 300.000 selling price per lot All sales are on account. bottling time is the time the filling equipment is in operation. "Well. Chapter Appendix.000 per lot $ 800 per lot SI.200. Assume there are no depreciation or amortization expenses. 80 lots at $1. Each lot requires 20 direct manufacturing labor-hours at the 2005 budgeted rate of $25 per hour. Direct manufacturing labor costs are paid atthe end of each month. makes similar adjustments. 10. 20 lots • Diet lemonade. Included in the fixed manufacturing overhead forecast is $400.200 per lot 4. the new management accountant at Norton Company. 400 lots at $900 purchase price per lot 3. 2005: Accounts receivable (from sales) Accounts payable Ifor direct materials) Cash $550. The following purchase prices are forecast for direct materials in 2005: Syrup Containers (bottles. in which one lot of direct materials is the input necessary to yield one lot (1. The syrup for both soh drinks is purchased from Cad bury Schweppes. When Atkins asks Ford about this. Hours of budgeted bottling time is the sale cost~allocation base for all fixed manufacturing overhead. Assume all variable manufacturing overhead costs are paid during the same month when incurred. Beginning (January I. 10 lots 6. But. Beginning IJanuary I. 7. Cash Budgeting.000 100. Administration costs are forecast to be 10% of the cost of goods manufactured for 2005. Target ending (December 31. padding estimated costs by about 10% to come up with the budgeted costs. The two soft drinks are bottled using the same equipment. Wilson Beverages uses a lot size of 1.ICMAllt is fall 2006 and Marge Atkins. Fixed manufacturing overhead is forecast to be $1. Wilson Beverages bottles two soft drinks under license to Cadbury Schweppes at its Manchester plant. has projected sales of S2. The two soft drinks bottled by Wilson Beverages are lemonade and diet lemonade.000 purchase price per lot • Packaging. the northeast sales manager.) Direct materials are expressed in terms of lots. 200 lots 5. 2005) inventory of finished goods • Lemonade. and you know how the top brass froths at the mouth when we miss our target by even a little bit . caps. 1. All manufacturing overhead costs are paid as incurred. Summary data used in developing budgets for 2005 are 1.) Packaging lemonade Diet lemonade $1. 20 lots • Packaging. whose sales team will easily meet its $2. in conversations with individual salespeople.." Intrigued. Atkins investigates further and finds that Pete Granger. Accuracy can be critical for a business whose occupancy can fluctuate significantly from day to day. depending on group or company bookings. prepare the following budgets for 2005: •. With locations ranging from the United States to Bahrain to China. Ending finished goods inventory budget h. Budgeted income statement m. and use of meetings rooms and conference facilities? 3. restaurants. Other standards are used for meeting rooms and food and beverages. Manufacturing overhead costs budget Get Connected: Cost Accounting g. with explanations of revisions provided as needed. on cost control and budgets. Adjusting prices can be particularly important if a large group cancels at the last minute or if other unforeseen events cause occupancy to drop suddenly. On the 25th of each month. behind the scenes of course. Any changes are communicated to corporate headquarters. b. 2005: Accounts receivable (from sales) Accounts payable (for direct materials) $600. Budgeted sources of revenue include hotel rooms. Yet it is this very approach that makes it possible for the Ritz-Carlton to offer the legendary grandeur all guests expect during their stay. are used to build the budget for guest room stays. Marketing costs budget j. actual monthly performance against plan is monitored.11. as well as against the actual performance of other Ritz-Carlton hotels. CHAPTER 6 Video Case RITZ-CARLTON HOTELS: Budgets and Responsibility Accounting '"'" . The Ritz-Carlton uses responsibility accounting for its world· wide hotel and resort operations. d.000 12. and food and beverage. not just the success of their own hotel properties. The Ritz-Carlton gives all employees at each of its hotels the chance to meet with their hotel's controller to review budgets and reports on actual performance.000 400. local forecasts and budgets are prepared annually and are the basis of subsequent performance evaluations. operating costs. Distribution costs budget I. Ideas for boosting revenues and reducing costs are regularly shared among hotel controllers.350." That's the motto of the Ritz-Carlton. and planned events or promotions that might affect costs. as happened after the World Trade Center terrorist attacks in 2001. How is uncertainty handled in Ritz-Carlton's budgeting process? 4. The completed sales budget and annual operating budget are sent to corporate headquarters. These exercises offer you the opportunity to analyze and reflect on how cost accounting helps managers to make better decisions and handle the challenges of strategic planning and implementation.com/hornaren/cost12eforadditional online exercise!s) that explore issues affecting the accounting world today. A hotel's performance is the responsibility of the general manager and controller at each location worldwide. Estimated income tax expense for 2005 ------lI. special events. and have the ability to adjust prices in the reservation system if they so choose. w 0- ••• ::c u 220 "ladies and gentlemen serving ladies and gentlemen. Cost of goods sold budget i. or changes in local competition. The controller then seeks input from all employees-from maintenance staff to kitchen workers-about anticipated payroll changes. prepared by the hotel's sales director. What factors might affect the Ritz-Carlton's annual sales forecast for room occupancy. On the basis of the preceding data. based on cost per occupied room. first-out method for costing all inventories. What levels of responsibility reports would you expectto see throughoutthe company? . Cash budget in the News Go to wwworenhall. merchandise. Preparation of the annual budget begins with the sales budget. and meeting facilities. Budgeted ending balances on December 31. c. What advantages or disadvantages do you see with this approach? 2.. convention. Meeting the monthly budgeted goals is primarily the responsibility of each hotel's controller. Revenues budget (in dollars) Production budget (in unitsl Direct materials usage budget (in units and dollars) Direct materials purchases budget Administration costs budget (in units and dollars) Direct manufacturing labor budget f. e. From there. Budgeted equipment purchase in May 13. This aura of old-world elegance stands in stark contrast to its rather heavy emphasis. who recognize the value of contributing to the entire organization's success. as a form of participatory budgeting.qulre" $1. wedding. the grand 58-hotel chain is known for its indulgent luxury and sumptuous surroundings. Standard costs.000 Assume Wilson Beverages uses the first-in.. budgets for the next three months are reviewed to be sure goals are still accurate. k. The controller of each hotel receives a monthly report from corporate headquarters that shows how the hotel performed against budget.000 $ 625. QUESTIONS 1. Managers of each hotel meet daily to review performance to date. 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