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CHAPTER6

MASTERBUDGETANDRESPONSIBILITYACCOUNTING
61
a.
b.
c.
d.

Thebudgetingcycleincludesthefollowingelements:
Planningtheperformanceofthecompanyasawholeaswellasplanningtheperformance
ofitssubunits.Managementagreesonwhatisexpected.
Providingaframeofreference,asetofspecificexpectationsagainstwhichactualresults
canbecompared.
Investigatingvariationsfromplans.Ifnecessary,correctiveactionfollowsinvestigation.
Planningagain,inlightoffeedbackandchangedconditions.

62 Themasterbudgetexpressesmanagementsoperatingandfinancialplansforaspecified
period(usuallyafiscalyear)andincludesasetofbudgetedfinancialstatements.Itistheinitial
planofwhatthecompanyintendstoaccomplishintheperiod.
63 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies
how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish itsobjectives.Strategicanalysisunderlies both longrun and shortrunplanning.In
turn,theseplansleadtotheformulationofbudgets.Budgetsprovidefeedbacktomanagersabout
the likely effects of their strategic plans. Managers use this feedback to revise their strategic
plans.
64 We agree that budgeted performance is a better criterion than past performance for
judgingmanagers,becauseinefficienciesincludedinpastresultscanbedetectedandeliminated
inbudgeting.Also,futureconditionsmaybeexpectedtodifferfromthepast,andthesecanalso
befactoredintobudgets.
65 Productionand marketingtraditionally haveoperatedasrelatively independentbusiness
functions. Budgets can assist in reducing conflicts between these two functions in two ways.
ConsiderabeveragecompanysuchasCocaColaorPepsiCola:
Communication. Marketing could share information about seasonal demand with
production.
Coordination.Productioncouldensurethatoutputissufficienttomeet,forexample,
highseasonaldemandinthesummer.
66 Inmanyorganizations,budgetsimpelmanagerstoplan.Withoutbudgets,managersdrift
fromcrisistocrisis.Researchalsoshowsthatbudgetscanmotivatemanagerstomeettargetsand
improvetheirperformance.Thus,manytopmanagersbelievethatbudgetsmeetthecostbenefit
test.
67 A rolling budget, also called a continuous budget, is a budget or plan that is always
availableforaspecifiedfutureperiod,by continually addingaperiod(month,quarter,oryear)to
theperiodthatjustended.Afourquarterrollingbudgetfor2009issupersededbyafourquarter
rollingbudgetforApril2009toMarch2010,andsoon.

61

68

Thestepsinpreparinganoperatingbudgetareasfollows:
1. Preparetherevenuesbudget
2. Preparetheproductionbudget(inunits)
3. Prepare thedirectmaterialusagebudgetanddirectmaterialpurchasesbudget
4. Preparethedirectmanufacturinglaborbudget
5. Preparethemanufacturingoverheadbudget
6. Preparetheendinginventoriesbudget
7. Preparethecostofgoodssoldbudget
8. Preparethenonmanufacturingcostsbudget
9. Preparethebudgetedincomestatement

69 The sales forecast is typically the cornerstone for budgeting, because production (and,
hence,costs)andinventorylevelsgenerallydependontheforecastedlevelofsales.
610 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to
examinehowbudgetedamountschangewithchangesintheunderlyingassumptions.Thisassists
managers in monitoring those assumptions that are most critical to a company in attaining its
budgetandallowsthem tomaketimelyadjustmentstoplanswhenappropriate.
611 Kaizenbudgetingexplicitlyincorporatescontinuousimprovementanticipatedduringthe
budgetperiodintothebudgetnumbers.
612 Nonoutputbasedcostdriverscan be incorporated intobudgeting bytheuseofactivity
based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce
and sell products and services. Nonoutputbased cost drivers, such as the number of part
numbers,numberofbatches,andnumberofnewproductscanbeusedwithABB.
613 The choice of the type of responsibility center determines what the manager is
accountableforandtherebyaffectsthemanagersbehavior.Forexample,ifarevenuecenteris
chosen, the manager will focus on revenues, not on costs or investments. The choice of a
responsibilitycentertypeguidesthevariablestobeincludedinthebudgetingexercise.
614 Budgetinginmultinationalcompaniesmayinvolvebudgetinginseveraldifferentforeign
currencies.Further,managementaccountantsmusttranslateoperatingperformanceintoasingle
currency for reporting to shareholders, by budgeting for exchange rates. Managers and
accountants must understand the factors that impact exchange rates, and where possible, plan
financial strategies to limit the downside of unexpected unfavorable moves in currency
valuations.Indevelopingbudgetsforoperationsindifferentcountries,theymustalsohavegood
understandingofpolitical,legalandeconomicissuesinthosecountries.
615 No. Cash budgets and operating income budgets must be prepared simultaneously. In
preparing their operating income budgets, companies want to avoid unnecessary idle cash and
unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights
periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost
effectivewaysofeitherusingexcesscashorraisingcashfromoutsidetoachievethecompanys
operatingincomegoals.

62

616 (15min.) Salesbudget,servicesetting.


1.
McGrath&Sons
RadonTests
LeadTests

2009
At2009
Volume SellingPrices
11,000
$250
15,200
$200

Expected2010
ChangeinVolume
+5%
10%

Expected2010
Volume
11,550
13,680

McGrath&SonsSalesBudget
FortheYearEndedDecember31,2010

RadonTests
LeadTests

Selling
Price
$250
$200

Units
Sold
11,550
13,680

Total
Revenues
$2,887,500
2,736,000
$5,623,500

2.

McGrath&Sons
RadonTests
LeadTests

Expected
2010
Expected
2010
2009 Planned2010 Changein
Volume SellingPrices Volume
Volume
11,000
$250
+5%
11,550
15,200
$190
5%
14,440

McGrath&SonsSalesBudget
For theYearEndedDecember31,2010

RadonTests
LeadTests

Selling
Price UnitsSold
$250
11,550
$190
14,440

Total
Revenues
$2,887,500
2,743,600
$5,631,100

Expectedrevenuesatthe new2010pricesare$5,631,100,whicharegreaterthantheexpected
2010 revenues of $5,623,500 if the prices are unchanged. So, if the goal is to maximize sales
revenue and if Jim McGraths forecasts are reliable, the company should lower its price for a
leadtestin2010.

63

617 (5min.)

Salesandproductionbudget.

Budgetedsalesinunits
Addtargetendingfinishedgoodsinventory
Totalrequirements
Deductbeginningfinishedgoodsinventory
Unitstobeproduced
618 (5min.)

200,000
25,000
225,000
15,000
210,000

Directmaterialspurchasesbudget.

Directmaterialstobeusedinproduction(bottles)
Addtargetendingdirectmaterialsinventory(bottles)
Totalrequirements(bottles)
Deductbeginningdirectmaterialsinventory(bottles)
Directmaterialstobepurchased(bottles)

2,500,000
80,000
2,580,000
50,000
2,530,000

619 (10min.) Budgetingmaterialpurchases.


ProductionBudget:

Budgetedsales
Addtargetendingfinishedgoodsinventory
Totalrequirements
Deductbeginningfinishedgoodsinventory
Unitstobeproduced

FinishedGoods
(units)
45,000
18,000
63,000
16,000
47,000

DirectMaterialsPurchasesBudget:

Directmaterialsneededforproduction(47,000 3)
Addtargetendingdirectmaterialsinventory
Totalrequirements
Deductbeginningdirectmaterialsinventory
Directmaterialstobepurchased

64

DirectMaterials
(ingallons)
141,000
50,000
191,000
60,000
131,000

620 (30min.) Revenuesandproductionbudget.


1.

12ouncebottles
4gallonunits
a
b

Selling
Price
$0.25
1.50

Units
Sold
4,800,000a
1,200,000b

Total
Revenues
$1,200,000
1,800,000
$3,000,000

400,00012months=4,800,000
100,00012months =1,200,000

2.

Budgetedunitsales(12ouncebottles)
Addtargetendingfinishedgoodsinventory
Totalrequirements
Deductbeginningfinishedgoodsinventory
Unitstobeproduced

4,800,000
600,000
5,400,000
900,000
4,500,000

3.

Beginning = Budgeted +
Target
- Budgeted
inventory
sales
ending inventory production
=1,200,000+200,000 -1,300,000
=100,0004gallonunits

621 (30min.) Budgeting:directmaterialusage,manufacturingcostandgrossmargin.


1.
DirectMaterialUsageBudgetinQuantityandDollars
Material
Wool
PhysicalUnitsBudget
Directmaterialsrequiredfor
BlueRugs(100,000rugs30skeinsand0.5gal.) 3,000,0000skeins
CostBudget
Availablefrombeginningdirectmaterialsinventory
(underaFIFOcostflowassumption)
Wool:349,000skeins
$ 715,450
Dye:5,000gallons
Tobepurchasedthisperiod
Wool:(3,000,000 349,000)skeins$2perskein 5,302,000
Dye:(50,000 5,000)gal.$5pergal.
_________
Directmaterialstobeusedthisperiod:(a)+(b)
$6,017,450

65

Dye

Total

50,000gal.

$ 24,850

225,000
$249,850

$6,267,300

2.
Weavingbudgeted = $18,852, 000 =$3.3664perDMLH
overheadrate
5,600,000DMLH
Dyeingbudgeted = $12,809, 000 =$28.4644perMH
overheadrate
450,000MH

3.
BudgetedUnitCostofBlueRug

Wool
Dye
Directmanufacturinglabor
Dyeingoverhead
Weavingoverhead
Total

Inputper
Unitof
Output
30skeins
0.5gal.
56hrs.
4.51 machhrs.
56DMLH

Costper
UnitofInput
$2
5
15
28.4644
3.3664

Total
$ 60.00
2.50
840.00
128.09
188.52
$1219.11

0.15machinehourperskein 30skeinsperrug=4.5machinehrs. perrug.

4.
RevenueBudget
Selling
Units Price TotalRevenues
BlueRugs 100,000 $2,000 $200,000,000
BlueRugs 95,000 $2,000 $190,000,000
5a.
Sales=100,000rugs
CostofGoodsSoldBudget
FromSchedule
Beginningfinishedgoodsinventory
Directmaterialsused
Directmanufacturinglabor($840 100,000)
Dyeingoverhead($128.09100,000)
Weavingoverhead($188.52 100,000)
Costofgoodsavailableforsale
Deductendingfinishedgoodsinventory
Costofgoodssold

66

Total
$

$ 6,267,300
84,000,000
12,809,000
18,852,000

121,928,300
121,928,300
0
$121,928,300

5b.
Sales=95,000rugs
CostofGoodsSoldBudget
FromSchedule
Beginningfinishedgoodsinventory
Directmaterialsused
Directmanufacturinglabor
($840 100,000)
Dyeingoverhead
($128.09 100,000)
Weavingoverhead
($188.52 100,000)
Costofgoodsavailableforsale
Deductendingfinishedgoodsinventory
($1,219.11 5,000)
Costofgoodssold

Total
$0

$6,267,300
84,000,000
12,809,000
18,852,000

121,928,300
121,928,300
6,095,550
$115,832,750

6.
Revenue
Less:Costofgoodssold
Grossmargin

100,000rugssold
$200,000,000
121,928,300
$ 78,071,700

95,000rugssold
$190,000,000
115,832,750
$ 74,167,250

622 (1520min.) Revenues,production,andpurchasesbudget.


1.

900,000motorcycles 400,000yen=360,000,000,000yen

2.

Budgetedsales(motorcycles)
Addtargetendingfinishedgoodsinventory
Totalrequirements
Deductbeginningfinishedgoodsinventory
Unitstobeproduced

3.

Directmaterialstobeusedinproduction,
880,0002(wheels)
Addtargetendingdirectmaterialsinventory
Totalrequirements
Deductbeginningdirectmaterialsinventory
Directmaterialstobepurchased(wheels)
Costperwheelinyen
Directmaterialspurchasecostinyen

900,000
80,000
980,000
100,000
880,000

1,760,000
60,000
1,820,000
50,000
1,770,000
16,000
28,320,000,000

Notetherelativelysmallinventoryofwheels.InJapan,supplierstendtobelocatedverycloseto
the major manufacturer.Inventoriesarecontrolledby justintimeandsimilarsystems.Indeed,
somedirectmaterialsinventoriesarealmostnonexistent.
67

623 (1525min.) Budgetsforproductionanddirectmanufacturinglabor.


RoletterCompany
BudgetforProductionandDirectManufacturingLabor
for theQuarterEndedMarch31,2010
January
10,000

Budgetedsales(units)
Addtargetendingfinishedgoods
inventorya (units)
16,000
Totalrequirements(units)
26,000
Deductbeginningfinishedgoods
inventory(units)
16,000
Unitstobeproduced
10,000
Directmanufacturinglaborhours
(DMLH)perunit
2.0
Totalhoursofdirectmanufacturing
labortimeneeded
20,000
Directmanufacturinglaborcosts:
Wages($10.00perDMLH)
$200,000
Pensioncontributions
($0.50perDMLH)
10,000
Workerscompensationinsurance
($0.15perDMLH)
3,000
Employeemedicalinsurance
($0.40perDMLH)
8,000
SocialSecuritytax(employersshare)
($10.00 0.075=$0.75perDMLH)
15,000
Totaldirectmanufacturing
laborcosts
$236,000
a

February
12,000

March
8,000

Quarter
30,000

12,500
24,500

13,500
21,500

13,500
43,500

16,000
8,500

12,500
9,000

16,000
27,500

2.0

1.5

17,000

13,500

50,500

$170,000 $135,000 $505,000


8,500

6,750

25,250

2,550

2,025

7,575

6,800

5,400

20,200

12,750

10,125

37,875

$200,600 $159,300 $595,900

100%ofthefirstfollowingmonthssalesplus50%ofthesecondfollowingmonthssales.
NotethattheemployeeSocialSecuritytaxof7.5%isirrelevant.Suchtaxesarewithheldfromemployees
wagesandpaidtothegovernmentbytheemployeronbehalfoftheemployeestherefore,the7.5%amountsarenot
additionalcoststotheemployer.

68

624 (2030min.) Activitybasedbudgeting.


1.
ThisquestionlinkstotheABCexampleusedintheProblemforSelfStudyinChapter5
andtoQuestion523(ABC,retailproductlineprofitability).
Cost
Hierarchy

Activity
Ordering
$90 142414
Delivery
$82 126219
Shelfstocking
$21 1617294
Customersupport
$0.18 4,600 34,20010,750
Totalbudgetedindirectcosts

Batchlevel
Batchlevel
Outputunit
level
Outputunit
level

Soft
Drinks

Fresh
Produce

Packaged
Food

Total

$1,260

$2,160

$1,260

$4,680

984

5,084

1,558

7,626

336

3,612

1,974

5,922

828
$3,408

6,156
$17,012

1,935
$6,727

8,919
$27,147

13%

63%

25%

Percentageoftotalindirectcosts
(subjecttorounding)

2.
Refer to the last row of the table in requirement 1. Fresh produce, which probably
representsthesmallestportionofCOGS,istheproductcategorythatconsumesthelargestshare
(63%)oftheindirectresources.Freshproducedemandsthehighest levelofordering,delivery,
shelfstocking and customer support resources of all three product categoriesit has to be
ordered,deliveredandstockedinsmall,perishablebatches,andsupermarketcustomersoftenask
foralotofguidanceonfreshproduceitems.
3.
An ABBapproachrecognizes howdifferentproductsrequiredifferentmixesofsupport
activities.Therelativepercentageofhoweachproductareausesthecostdriverateachactivity
areais:

Activity
Ordering
Delivery
Shelfstocking
Customersupport

Cost
Hierarchy
Batchlevel
Batchlevel
Outputunitlevel
Outputunitlevel

Soft
Fresh Packaged
Drinks Produce
Food
27%
46%
27%
13
67
20
6
61
33
9
69
22

Total
100%
100
100
100

Byrecognizingthesedifferences,FS managersarebetterabletobudgetfordifferentunitsales
levelsanddifferentmixesofindividualproductlineitemssold.Usingasinglecostdriver(such
as COGS) assumes homogeneity in the use of indirect costs (support activities) across product
lines which does not occur at FS. Other benefits cited by managers include: (1) better
identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3)
identification ofbudgetaryslack.

69

625 (2030min.) Kaizenapproachtoactivitybasedbudgeting(continuationof624).


1.
Activity
Ordering
Delivery
Shelfstocking
Customersupport

CostHierarchy
Batchlevel
Batchlevel
Outputunitlevel
Outputunitlevel

BudgetedCostDriverRates
January February
March
$90.00
$89.82000
$89.64
82.00
81.83600
81.67
21.00
20.95800
20.92
0.18
0.17964
0.179

TheMarch2008ratescanbeusedtocomputethetotalbudgetedcostforeachactivityareain
March2008:
Activity
Ordering
$89.64 142414
Delivery
$81.67 126219
Shelfstocking
$20.92 1617294
Customersupport
$0.179 4,600
34,20010,750
Total

Cost
Hierarchy

Soft
Drinks

Batchlevel

Fresh Packaged
Produce
Food

$1,255 $ 2,151

Total

$1,255

$4,661

Batchlevel

980

5,064

1,552

7,596

Outputunitlevel

335

3,598

1,966

5,899

823
6,122
$3,393 $16,935

1,924
$6,697

8,869
$27,025

Outputunitlevel

2.
A kaizen budgeting approach signals managements commitment to systematic cost
reduction.ComparethebudgetedcostsfromQuestion624and625.

Question624
Question625(Kaizen)

Ordering
$4,680
4,661

Delivery
$7,626
7,596

Shelf
Stocking
$5,922
5,899

Customer
Support
$8,919
8,869

Thekaizenbudgetnumberwillshowunfavorablevariancesformanagerswhoseactivitiesdonot
meet the required monthly cost reductions. This likely will put more pressure on managers to
creatively seek out cost reductions by working smarter within FS or by having better
interactionswithsuppliersorcustomers.
One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small
incremental improvements each month. It is possible that some cost improvements arise from
largediscontinuouschangesinoperatingprocesses,suppliernetworks,orcustomerinteractions.
Companiesneedtohighlighttheimportanceofseekingtheselargediscontinuousimprovements
aswellasthesmallincrementalimprovements.

610

626 (15min.) Responsibilityandcontrollability.


1. (a) Salesman
(b) VPofSales
Permitthesalesmantoofferareasonablediscounttocustomers, butrequirethathe
clearbiggerdiscountswiththeVP.Also,basehisbonus/performanceevaluationnot
justonrevenuesgenerated,butalsoonmargins(or,abilitytomeetbudget).
2. (a) VPofSales
(b) VPofSales
VPofSalesshouldcomparebudgetedsaleswithactuals,andaskforananalysisofall
the sales during the quarter. Discuss with salespeople why so many discounts are
beingofferedaretheyreallyneededtocloseeachsale.Areourpricestoohigh(i.e.,
uncompetitive)?
3. (a) Manager,Shippingdepartment
(b) ManagerorDirectorofOperations(includingshipping)
Shipping department manager must report delays more regularly and request
additionalcapacity inatimely manner.Operations managershouldask forareview
ofshippingcapacityutilization,andconsiderexpandingthedepartment.
4. (a) HRdepartment
(b) Productionsupervisor
Theproductionsupervisorshoulddevisehisorherowneducationalstandardsthatall
newplantemployeesareheldtobeforetheyareallowedtoworkontheplantfloor.
Offerremedialinplanttrainingtothoseworkerswhoshowpromise.Beveryspecific
about the types of skills required when using the HR department to hire plant
workers.Testtheworkersperiodicallyforrequiredskills.
5. (a) Productionsupervisor
(b) Productionsupervisor
Get feedback from the workers, analyze it, and act on it. Get extra coaching and
trainingfromexperiencedmentors.
6. (a) Maintenancedepartment
(b) Productionsupervisor
First, get the requisite maintenance done on the machines. Make sure that the
maintenance department head clearly understands the repercussions of poor
maintenance. Discuss and establish maintenance standards that must be met
(frequencyofmaintenanceandtolerancelimits,forexample).Testandkeepalogof
themaintenancework.

611

627 (30min.) Cashflowanalysis,chapter appendix.


1.

ThecashthatTabComp,Inc.,canexpecttocollectduringApril2006iscalculatedbelow.
Aprilcashreceipts:
Aprilcashsales($400,000 .25)
Aprilcreditcardsales($400,000 .30 .96)
Collectionsonaccount:
March($480,000 .45 .70)
February($500,000 .45 .28)
January(uncollectiblenotrelevant)
Totalcollections

$100,000
115,200
151,200
63,000
0
$429,400

2.
(a)TheprojectednumberoftheMZB33computerhardwareunitsthatTabComp,Inc.,
willorderonJanuary25,2006,iscalculatedasfollows.

Marchsales
Plus:Endinginventorya
Totalneeded
Less:Beginninginventoryb
Projectedpurchasesinunits

MZB33
Units
110
27
137
33
104

0.30 90unitsalesinApril

0.30 110unitsalesinMarch

(b)
Sellingprice=$2,025,000 675units,orforMarch,$330,000 110units
=$3,000perunit
$1,800
Purchasepriceperunit,60% $3,000
Projectedunitpurchases
x 104
$187,200
TotalMZB33purchases,$1,800 104
3.
MonthlycashbudgetsarepreparedbycompaniessuchasTabComp,Inc.,inordertoplan
for their cash needs. This means identifying when both excess cash and cash shortages may
occur.Acompanyneedstoknowwhencashshortageswilloccursothatpriorarrangementscan
be made with lending institutions in order to have cash available for borrowing when the
company needs it. Atthesametime,acompany should beawareofwhenthere isexcesscash
availableforinvestmentorforrepayingloans.

612

628 (40min.) Budgetschedulesforamanufacturer.


1a.

RevenuesBudget
Unitssold
Sellingprice
Budgetedrevenues

b.

Executive
Line
740
$1,020
$754,800

Chairman
Line
390
$1,600
$624,000

$1,378,800

ProductionBudgetinUnits
Budgetedunitsales
Addbudgetedendingfin.goodsinventory
Totalrequirements
Deductbeginningfin.goods.inventory
Budgetedproduction

c.

Total

Executive
Line
740
30
770
20
750

Chairman
Line
390
15
405
5
400

DirectMaterialsUsageBudget(units)
Oak
ExecutiveLine:
1.Budgetedinputperf.g.unit
2.Budgetedproduction
3.Budgetedusage(12)
ChairmanLine:
4.Budgetedinputperf.g.unit
5.Budgetedproduction
6.Budgetedusage(45)
7.Totaldirectmaterials
usage(3+6)
DirectMaterialsCostBudget
8.Beginninginventory
9.Unitprice(FIFO)
10.CostofDMusedfrom
beginninginventory(89)
11.Materialstobeusedfrom
purchases(78)
12.CostofDMinMarch
13.CostofDMpurchasedand
usedinMarch(1112)
14.Directmaterialstobeused
(10+13)

16
750
12,000

Red
Oak

RedOak
Legs

Total

4
750
3,000

25
400
10,000

4
400
1,600

12,000

10,000

3,000

1,600

320

150

100

40

$18

$23

$11

$17

$5,760

$3,450

$1,100

$680

11,680
$20

9,850
$25

2,900
$12

1,560
$18

$233,600

$246,250

$34,800

$28,080 $542,730

$239,360

$249,700

$35,900

$28,760 $553,720

613

Oak
Legs

$10,990

DirectMaterialsPurchasesBudget

Budgetedusage
(fromline7)
Addtargetendinginventory
Totalrequirements
Deductbeginninginventory
TotalDMpurchases
Purchaseprice(March)
Totalpurchases

d.

RedOak

Oak
Legs

12,000
192
12,192
320
11,872
$20
$237,440

10,000
200
10,200
150
10,050
$25
$251,250

3,000
80
3,080
100
2,980
$12
$35,760

Direct
Output Manuf.Labor
Units
Hoursper
Produced OutputUnit
750
3
400
5

Total
Hours
2,250
2,000
4,250

Total

1,600
44
1,644
40
1,604
$18 ________
$28,872 $553,322

Hourly
Rate
$30
$30

Total
$67,500
60,000
$127,500

ManufacturingOverheadBudget
Variablemanufacturingoverheadcosts (4,250$35)
Fixedmanufacturingoverheadcosts
Totalmanufacturingoverheadcosts
$191,250
Totalmanuf.overheadcostperhour =
=
4,250
$42,500
Fixedmanuf.overheadcostperhour =
=
4,250

f.

RedOak
Legs

DirectManufacturingLaborBudget

ExecutiveLine
ChairmanLine

e.

Oak

$148,750
42,500
$191,250
$45perdirectmanufacturinglaborhour
$10perdirectmanufacturinglaborhour

Computationofunitcostsofendinginventoryoffinishedgoods
Executive
Chairman
Line
Line
Directmaterials
Oaktop($2016,0)
$320
$0
Redoak($250,25)
0
625
Oaklegs($124,0)
48
0
Redoaklegs($180,4)
0
72
Directmanufacturinglabor($303,5)
90
150
Manufacturingoverhead
Variable($353,5)
105
175
Fixed($103,5)
30
50
Totalmanufacturingcost
$593
$1,072

614

EndingInventoriesBudget
CostperUnit

Units

Total

DirectMaterials
Oaktop
Redoaktop
Oaklegs
Redoaklegs

$20
25
12
18

192
200
80
44

$3,840
5,000
960
792
10,592

FinishedGoods
Executive
Chairman

593
1,072

30
15

17,790
16,080
33,870
$44,462

Total
g.

2.

Costofgoodssoldbudget
Budgetedfin.goodsinventory,March1,2009 ($10,480+$4,850)
Directmaterialsused(fromDir.materialspurch.budget)
$553,720
Directmanufacturinglabor(Dir.manuf.laborbudget)
127,500
Manufacturingoverhead(Manuf.overheadbudget)
191,250
Costofgoodsmanufactured
Costofgoodsavailableforsale
Deductendingfin.goodsinventory,March31,2009(Inventoriesbudget)
Costofgoodssold

$15,330

872,470
887,800
33,870
$853,930

Areaswherecontinuousimprovementmightbeincorporatedintothebudgetingprocess:
(a) Direct materials. Either an improvement in usage or price could be budgeted. For
example,thebudgetedusageamountscouldberelatedtothemaximumimprovement
(currentusageminimumpossibleusage)of1squarefootforeitherdesk:
Executive:16squarefeet15squarefeetminimum=1squarefoot
Chairman:25squarefeet24squarefeetminimum=1squarefoot
Thus,a1%reductiontargetpermonthcouldbe:
Executive:15squarefeet+(0.991)=15.99
Chairman:24squarefeet+(0.991)=24.99
Some students suggested the 1% be applied to the 16 and 25 squarefoot amounts.
Thiscanbedonesolongasafterseveralimprovementcycles,thebudgetedamountis
notlessthantheminimumdeskrequirements.
(b)Direct manufacturing labor. The budgeted usage of 3 hours/5 hours could be
continuouslyrevisedonamonthlybasis.Similarly,themanufacturinglaborcostper
hourof$30could becontinuouslyreviseddown.The formerappears more feasible
thanthelatter.
(c) Variablemanufacturingoverhead.Bybudgetingmoreefficientuseoftheallocation
base,asignalisgivenforcontinuousimprovement.Asecondapproachistobudget
continuousimprovementinthebudgetedvariableoverheadcostperunitofthe
allocationbase.
(d) Fixedmanufacturingoverhead.Theapproachhereistobudgetforreductionsinthe
yeartoyearamountsoffixedoverhead.Ifthesecostsareappropriatelyclassifiedas
fixed,thentheyaremoredifficulttoadjustdownonamonthlybasis.

615

629 (45min.) Activitybasedbudget:kaizenimprovements.


1.
RevenueBudget
FortheQuarterEndingMarch31,20xx
Units
20,000
Sellingprice

$120
Totalrevenues
$2,400,000

2.
DirectMaterialUsageBudgetinQuantityandDollars
FortheQuarterEndingMarch31,20xx
Physicalunitsbudget
Directmaterialsrequired
(20,000units 10oz.)
200,000oz.
Costbudget
Tobepurchasedthisperiod
$8,000,000
(200,000oz. $4peroz.)
Directmaterialstobeusedthisperiod
$8,000,000
3.
DirectManufacturingLaborCostsBudget
FortheQuarterEndingMarch31,20xx
Outputunitsproduced
20,000
Directmanufacturinglaborhoursperunit
2
Totaldirectmanufacturinglaborhours
40,000
Hourlywagerate

$15
Total directmanufacturinglaborcosts
$600,000
4.
ManufacturingOverheadCostsBudget
FortheQuarterEndingMarch31,20xx
Machinesetupoverhead
(400setuphours $80perhour)
$32,0001
Operationsoverhead
64,000
(40,000hours $1.60perhour)
Totalmanufacturingoverheadcosts
$96,000
20,000units =200batches.Eachbatchrequires2setuphours,so
100unitsperbatch
200batches 2setuphoursperbatch=400setuphours
1

616

5.
BudgetedUnitCost
FortheQuarterEndingMarch31,20xx
Costper
Unitof
Inputper
Input
UnitofOutput
Directmaterial
$ 4
10oz.
Directmanufacturinglabor
15
2DMLH
Machinesetupoverhead
80
0.02setuphours1
Operationsoverhead
1.60
2DMLH
Total costpergizmo

Total
$40.00
30.00
1.60
3.20
$74.80

Setuphourspergizmo=400setuphours20,000gizmos=0.02setuphourspergizmo.

Alternatively,
BudgetedUnitCost
FortheQuarterEndingMarch31,20xx
Total
Perunit
(1)
(2)=(1)20,000
Directmaterial costs
(requirement2)
$ 800,000
$40.00
Directmanufacturinglaborcosts
600,000
30.00
(requirement3)
Machinesetupoverheadcosts
32,000
1.60
(requirement4)
Operationsoverheadcosts
64,000
3.20
(requirement4)
Total costs
$1,496,000
$74.80
6.
CostofGoodsSoldBudget
FortheQuarterEndingMarch31,20xx
Total
Beginningfinishedgoodsinventory,Jan.1
Directmaterialsused
Directmanufacturinglabor
Manufacturingoverhead
Costofgoodsmanufactured
Costofgoodsavailableforsale
Deduct:Endingfinishedgoodsinventory,Mar.311
Costofgoodssold
1

72,000

$800,000
600,000
96,000
1,496,000
1,568,000
72,000
$1,496,000

UnderLIFOcostflowassumption,the1,000gizmosinbeginningfinishedgoodsinventory thatremainin
inventory onMarch31continuetobevaluedat$72,000.

617

7.
BudgetedGrossMargin
FortheQuarterEndingMarch31,20xx
Revenues
$2,400,000
Costofgoodssold
1,496,000
Grossmargin
$ 904,000
8.

Directmaterial
Directmanufacturinglabor
Machinesetupoverhead
Operationsoverhead

1st Quarter
Quantity
(1)
10oz
2DMLH
0.02setuphours
2DMLH

2dQuarter
3rd QuarterRevised
RevisedQuantity
Quantity
(3)=(1)(100%(2)) (4)=(3)(100%(2))
9.9oz.
9.8oz.
1.98DMLH
1.96DMLH
0.0194setuphours
0.01882setuphours
1.98DMLH
1.96DMLH

Proposed
Decrease
(2)
1%
1%
3%
1%

BudgetedUnitCost
FortheQuartersEndingJune30andSept.30,20xx

Directmaterial
Directmanufacturinglabor
Machinesetupoverhead
Operationsoverhead
Total

Costper
Unitof
Input
$ 4
15
80
1.60

2dQuarter
Inputper
UnitofOutput
9.9oz.
1.98DMLH
0.0194setuphrs.
1.98DMLH

Budgeted
UnitCost
June30
$39.60
29.70
1.55
3.17
$74.02

BudgetedGrossMargin
FortheQuartersEnding
June30,20xx
$2,400,000

Revenues
Costofgoodssold
($74.02$73.2420,000)
Grossmargin

1,480,400
$ 919,600

3rd Quarter
Inputper
UnitofOutput
9.80oz
1.96DMLH
0.0188setuphr
1.96DMLH

Budgeted
UnitCost
Sept.30
$39.20
29.40
1.50
3.14
$73.24

Sept.30,20xx
$2,400,000
1,464,800
$ 935,200

9.
Reductioninmaterialscanbeaccomplishedby reducingwasteandscrap.Reductionin
directlaborandsetuptimecanbeaccomplishedbyimprovingtheefficiencyofoperationsand
decreasingdowntime.
Employeeswhomakethegizmosmayhavesuggestionsforwaystodotheirjobsmore
efficiently.Forinstance,employeesmayrecommendprocesschangesthatreduceidletime,
setuptime,andscrap. Tomotivateworkerstoimproveefficiency,manycompanieshavesetup
programsthatshareproductivitygainswiththeworkers. Kornamustbecarefulthatproductivity
improvementsandcostreductionsdonotinanywaycompromiseproductquality.

618

630 (3040min.) Revenueandproductionbudgets.


Thisisaroutinebudgetingproblem.Thekeytoitssolutionistocomputethecorrectquantities
offinishedgoodsanddirectmaterials.Usethefollowinggeneralformula:
Budgeted Target Budgeted Beginning

production = ending + salesor



inventory
orpurchases inventory materialsused
1.

ScarboroughCorporation
RevenueBudgetfor2010

Thingone
Thingtwo
Budgetedrevenues
2.

Units
60,000
40,000

Total
$9,900,000
10,000,000
$19,900,000

ScarboroughCorporation
ProductionBudget(inunits)for2010

Budgetedsalesinunits
Addtargetfinishedgoodsinventories,
December31,2010
Totalrequirements
Deductfinishedgoodsinventories,
January1,2010
Unitstobeproduced
3.

Price
$165
250

Thingone
60,000

Thingtwo
40,000

25,000
85,000

9,000
49,000

20,000
65,000

8,000
41,000

ScarboroughCorporation
DirectMaterialsPurchasesBudget(inquantities)for2007

A
Directmaterialstobeusedinproduction
Thingone(budgetedproductionof65,000
unitstimes4lbs.ofA,2lbs.ofB)
Thingtwo(budgetedproductionof41,000
unitstimes5lbs.ofA,3lbs.ofB,1lb.ofC)
Total
Addtargetendinginventories,December31,2010
Totalrequirementsinunits
Deductbeginninginventories,January1,2010
Directmaterialstobepurchased(units)

619

DirectMaterials
B
C

260,000

130,000

205,000
465,000
36,000
501,000
32,000
469,000

123,000
253,000
32,000
285,000
29,000
256,000

41,000
41,000
7,000
48,000
6,000
42,000

4.

ScarboroughCorporation
DirectMaterialsPurchasesBudget(indollars)for2010

DirectmaterialA
DirectmaterialB
DirectmaterialC
Budgetedpurchases
5.

Expected
Purchase
Priceperunit
$12
5
3

Total
$5,628,000
1,280,000
126,000
$7,034,000

ScarboroughCorporation
DirectManufacturingLaborBudget(indollars)for2010

Thingone
Thingtwo
Total
6.

Budgeted
Purchases
(Units)
469,000
256,000
42,000

Direct
Budgeted Manufacturing
Production LaborHours
Total
(Units)
perUnit
Hours
65,000
2
130,000
41,000
3
123,000

Rate
per
Hour
$12
16

Total
$1,560,000
1,968,000
$3,528,000

ScarboroughCorporation
BudgetedFinishedGoodsInventory
atDecember31,2010
Thingone:
Directmaterialscosts:
A,4pounds$12
$48
B,2pounds$5
10
Directmanufacturinglaborcosts,
2hours$12
Manufacturingoverheadcostsat$20perdirect
manufacturinglaborhour(2hours$20)
Budgetedmanufacturingcostsperunit
FinishedgoodsinventoryofThingone
$12225,000units
Thingtwo:
Directmaterialscosts:
A,5pounds$12
$60
B,3pounds$5
15
C,1each$3
3
Directmanufacturinglaborcosts,
3hours$16
Manufacturingoverheadcostsat$20perdirect
manufacturinglaborhour(3hours$20)
Budgetedmanufacturingcostsperunit
FinishedgoodsinventoryofThingtwo
$1869,000units
Budgetedfinishedgoodsinventory,December31,2010

620

$58
24
40
$122
$3,050,000

$78
48
60
$186
1,674,000
$4,724,000

631 (30min.) Budgetedincomestatement.


EasecomCompany
BudgetedIncomeStatementfor2008
(inthousands)
Revenues
Equipment($6,0001.061.10)
Maintenancecontracts($1,8001.06)
Totalrevenues
Costofgoodssold($4,6001.031.06)
Grossmargin
Operatingcosts:
Marketingcosts($600+$250)
Distributioncosts($1501.06)
Customermaintenancecosts($1,000+$130)
Administrativecosts
Totaloperatingcosts
Operatingincome

$6,996
1,908
$8,904
5,022
3,882
850
159
1,130
900
3,039
$843

632 (15min.) Responsibilityofpurchasingagent.


The time lost in the plant should be charged tothe purchasing department. The plant manager
probablyshouldnotbeaskedtounderwritealossduetofailureofdeliveryoverwhichhehadno
supervision. Although the purchasing agent may feel that he has done everything he possibly
could,hemustrealizethat,inthewholeorganization,heistheonewhoisinthebestpositionto
evaluatethesituation.Hereceivesanassignment.Hemayacceptitorrejectit.Butifheaccepts,
hemustperform.Ifhefails,thedamageisevaluated.Everybodymakesmistakes.Theimportant
point is to avoid making too many mistakes and also to understand fully that the extensive
control reflected in responsibility accounting is the necessary balance to the great freedom of
actionthatindividualexecutivesaregiven.
Discussionsofthisproblemhaveagainandagainrevealedatendencyamongstudents(and
among accountants and managers) to fix the blameas if the variances arising from a
responsibilityaccountingsystemshouldpinpointmisbehaviorandprovideanswers.Thepointis
that no accounting system or variances can provide answers. However, variances can lead to
questions. In this case, in deciding where the penalty should be assigned, the student might
inquirewhoshouldbeaskednotwhoshouldbeblamed.
Classroomdiscussionshavealsoraisedthefollowingdiversepoints:
(a)Istherailroadcompanyliable?
(b)Costsof idletimeareusuallyroutinelychargedtotheproductiondepartment.Shouldthe
informationsystembefinetunedtoreallocatesuchcoststothepurchasingdepartment?
(c)How willthepurchasingmanagersbehaveinthefutureregardingwillingnesstotakerisks?
The text emphasizes the following: Beware of overemphasis on controllability. For
example,atimehonoredthemeofmanagementisthatresponsibilityshouldnotbegiven without
accompanyingauthority.Suchaguideisausefulfirststep,butresponsibilityaccountingismore
farreaching. The basic focus should be on information or knowledge, noton control. The key
questionis:Whoisthebestinformed?Putanotherway,Whoisthepersonwhocantellusthe
mostaboutthespecificitem,regardlessofabilitytoexertpersonalcontrol?
621

633 (60min.) ComprehensiveproblemwithABCcosting


1.
RevenueBudget
FortheMonthofApril

Catallac
Dogeriffic
Total

Units SellingPrice Total Revenues


500
$160
$80,000
300
250
75,000
$155,000

2.
ProductionBudget
FortheMonthofApril
Product
Catallac Dogeriffic
Budgetedunitsales
500
300
Addtargetendingfinishedgoodsinventory
35
15
Totalrequiredunits
535
315
Deductbeginningfinishedgoodsinventory
15
30
Unitsoffinishedgoodstobeproduced
520
285
3a.
DirectMaterialUsageBudgetinQuantityandDollars
FortheMonthofApril
Material
Plastic
Metal
PhysicalUnitsBudget
Directmaterialsrequiredfor
Catallac(520units4lbs.and0.5lb.)
Dogerrific(285units6lbs.and1lb.)
Totalquantityofdirectmaterial tobeused

2,080lbs.
1,710lbs.
3,790lbs.

CostBudget
Availablefrombeginningdirectmaterialsinventory
(underaFIFOcostflowassumption)
Plastic:250lbs.$3.80perlb.
$ 950
Metal:60lbs.$3perlb.
Tobepurchasedthisperiod
.
Plastic:(3,790250)lbs. $4perlb.
14,160
Metal:(54560)lbs. $3perlb.
______
Directmaterialstobeusedthisperiod
$15,110

622

Total

260lbs.
285lbs.
545lbs.

$180

1,455
$1,635

$16,745

DirectMaterialPurchasesBudget
FortheMonthofApril
Material
Plastic
Metal
PhysicalUnitsBudget
Tobeusedinproduction(requirement3)
Addtargetendinginventory
Totalrequirements
Deductbeginninginventory
Purchasestobemade
CostBudget
Plastic:3,920lbs. $4
Metal:540lbs. $3
Purchases

3,790lbs.
380 lbs.
4,170lbs.
250lbs.
3,920lbs.

$15,680
______
$15,680

Total

545lbs.
55 lbs.
600lbs.
60 lbs.
540 lbs.

$1,620
$1,620

$17,300

4.
DirectManufacturingLaborCostsBudget
FortheMonthofApril

Catallac
Dogerrific
Total

OutputUnits
Produced
(requirement2)
520
285

DMLH
perUnit
3
5

Total
Hours
1,560
1,425

Hourly
Wage
Rate
$10
10

Total
$15,600
14,250
$29,850

5. MachineSetupOverhead
Unitstobeproduced
Unitsperbatch
Numberofbatches
Setuptimeperbatch
Totalsetuptime

Catallac
520
20
26
1.5 hrs.
39 hrs.

Dogerrific
285
15
19
1.75 hrs.
33.25 hrs.

Total

72.25hrs.

Budgetedmachinesetupcosts=$100persetuphour 72.25hours
= $7,225
ProcessingOverhead
Budgetedmachinehours(MH)=(10MHperunit520units)+(18MHperunit285units)
=5,200 MH+5,130MH=10,330MH
Budgetedprocessingcosts=$5perMH 10,330MH
=$51,650
InspectionOverhead
Budgetedinspectionhours=(0.5 26batches)+(0.6 19batches)
=13+11.4=24.4inspectionhrs.
Budgetedinspectioncosts=$16perinspectionhr. 24.4inspectionhours
=$390.40
623

ManufacturingOverheadBudget
FortheMonthofApril
Machinesetupcosts
$ 7,225
Processingcosts
51,650
Inspection costs
390
Total costs
$59,265
6.
UnitCostsofEndingFinishedGoodsInventory
April30,20xx
Product
Catallac
Dogerrific
Costper Inputper
Inputper
Unitof Unitof
Unitof
Total
Total
Input Output
Output
Plastic
$ 4
4lbs.
$16.00
6lbs.
$ 24.00
Metal
3
0.5lbs.
1.50
1lb.
3.00
Directmanufacturinglabor 10
3hrs.
30.00
5hrs.
50.00
Machinesetup
100
0.075 hrs.1
7.50
0.1167hr1
11.67
Processing
5
10MH
50.00
18MH
90.00
2
2
Inspection
16
0.025hr
0.40
0.04hr.
0.64
Total
$105.40
$179.31
1
2

39setuphours520units=0.075 hours perunit33.25setuphours 285units=0.1167 hours perunit


13inspectionhours520units= 0.025 hoursperunit11.4inspectionhours 285units=0.04 hours perunit

EndingInventoriesBudget
April30,20xx
Quantity
DirectMaterials
Plastic
Metals
Finishedgoods
Catallac
Dogerrific
Totalendinginventory

Costperunit

Total

380
55

$4
3

$1,520
165

35
15

$105.40
179.31

$3,689
2,690

624

$1,685

6,379
$8,064

7.
CostofGoodsSoldBudget
FortheMonthofApril,20xx
Beginningfinishedgoodsinventory,April,1($1,500+$5,580)
Directmaterialsused(requirement3)
$16,745
Directmanufacturinglabor(requirement4)
29,850
Manufacturingoverhead(requirement5)
59,265
Costofgoodsmanufactured
Costofgoodsavailableforsale
Deduct:Endingfinishedgoodsinventory,April30(reqmt.6)
Costofgoodssold

8.
NonmanufacturingCostsBudget
FortheMonthofApril,20xx
Salaries($36,0002 1.05)
$18,900
Otherfixedcosts($36,0002)
18,000
Salescommissions($155,000 1%)
1,550
Total nonmanufacturingcosts
$38,450
9.
BudgetedIncomeStatement
FortheMonthofApril,20xx
Revenues
$155,000
Costofgoodssold
106,561
Grossmargin
48,439
Operating(nonmanufacturing)costs
38,450
Operatingincome
$ 9,989

625

$ 7,080

105,860
112,940
6,379
$106,561

634 (25min.) (Continuationof633)Cashbudget(Appendix)


CashBudget
April30,20xx
Cashbalance,April1,20xx
Addreceipts
Cashsales($155,00010%)
Creditcardsales($155,00090%97%)
Totalcashavailableforneeds(x)
Deductcashdisbursements
Directmaterials($8,500+$17,30050%)
Directmanufacturinglabor
Manufacturingoverhead($59,265$20,000depreciation)
Nonmanufacturingsalaries
Salescommissions
Othernonmanufacturingfixedcosts($18,000$10,000deprn)
Machinerypurchase
Incometaxes
Totaldisbursements(y)
Financing
Repaymentofloan
1
Interestat12%($2,000 12% )
12
Totaleffectsoffinancing(z)
Endingcashbalance,April30(x)(y) (z)

626

$ 5,360
15,500
135,315
$156,175
$ 17,150
29,850
39,265
18,900
1,550
8,000
13,700
5,000
$133,415
$ 2,000
20
$ 2,020
$ 20,740

635 (60min.) Comprehensiveoperatingbudget,budgetedbalancesheet.


1. Schedule1:RevenuesBudgetfor theYearEndedDecember31,2010
Snowboards

UnitsSellingPrice
1,000
$450

TotalRevenues
$450,000

2. Schedule2:ProductionBudget(inUnits)fortheYearEndedDecember31,2010
Snowboards
Budgetedunitsales(Schedule1)
1,000
Addtargetendingfinishedgoodsinventory
200
Totalrequirements
1,200
Deductbeginningfinishedgoodsinventory
100
Unitstobeproduced
1,100
3. Schedule3A:DirectMaterialsUsageBudgetfor theYearEndedDecember31,2010
Wood

Fiberglass

Total

PhysicalUnitsBudget
Wood:1,1005.00b.f.
Fiberglass:1,1006.00yards
Tobeusedinproduction
CostBudget
Availablefrombeginninginventory
Wood:2,000b.f.$28.00
Fiberglass:1,000b.f.$4.80
Tobeusedfrompurchasesthisperiod
Wood:(5,500 2,000)$30.00
Fiberglass:(6,6001,000)$5.00
Totalcostofdirectmaterialstobeused

5,500
5,500

6,600
6,600

$56,000
$4,800
105,000
$161,000

28,000
$32,800 $193,800

Schedule3B:DirectMaterialsPurchasesBudgetfor theYearEndedDecember31,2010
Wood
PhysicalUnitsBudget
Productionusage(fromSchedule3A)
Addtargetendinginventory
Totalrequirements
Deductbeginninginventory
Purchases
CostBudget
Wood:5,000$30.00
Fiberglass:7,600$5.00)
Purchases

5,500
1,500
7,000
2,000
5,000

Fiberglass Total
6,600
2,000
8,600
1,000
7,600

$150,000
$150,000

627

$38,000
$38,000 $188,000

4. Schedule4:DirectManufacturingLaborBudgetfor theYearEndedDecember31,2010
LaborCategory
Manufacturinglabor

CostDriver
Units
1,100

DMLHoursper
DriverUnit
5.00

Total
Hours
5,500

Wage
Rate
$25.00

Total
$137,500

5. Schedule5:ManufacturingOverheadBudgetfortheYearEndedDecember31,2010
AtBudgetedLevelof5,500
DirectManufacturingLaborHours
Variablemanufacturingoverheadcosts
($7.005,500)
Fixedmanufacturingoverheadcosts
Totalmanufacturingoverheadcosts

$38,500
66,000
$104,500

$104,500
=$19.00perhour
5,500
$104,500
7. Budgetedmanufacturingoverheadcostperoutputunit:
=$95.00peroutputunit
1,100
8. Schedule6A:ComputationofUnitCostsofManufacturingFinishedGoodsin2010
6. Budgetedmanufacturingoverheadrate:

Directmaterials
Wood
Fiberglass
Directmanufacturinglabor
Totalmanufacturingoverhead

Costper
Unitof
Inputa

Inputsb

$30.00
5.00
25.00

5.00
6.00
5.00

Total
$150.00
30.00
125.00
95.00
$400.00

costisperboardfoot,yardorperhour
inputsistheamountofeachinputperboard

9. Schedule6B:EndingInventoriesBudget,December31,2010
Costper
Units
Unit
Total
Directmaterials
Wood
1,500
$30.00
$45,000
Fiberglass
2,000
5.00
10,000
Finishedgoods
Snowboards
200
400.00
80,000
TotalEndingInventory
$135,000

628

10. Schedule7:CostofGoodsSoldBudget fortheYearEndedDecember31,2010


From
Schedule
Total
Beginningfinishedgoodsinventory
January1,2010,$374.80100
Given
$37,480
Directmaterialsused
3A
$193,800
Directmanufacturinglabor
4
137,500
Manufacturingoverhead
5
104,500
Costofgoodsmanufactured
435,800
Costofgoodsavailableforsale
473,280
Deductendingfinishedgoods
inventory,December31,2010
6B
80,000
Costofgoodssold
$393,280
11. BudgetedIncomeStatementforSlopesfortheYearEndedDecember31,2010
Revenues
Schedule1
$450,000
Costofgoodssold
Schedule7
393,280
Grossmargin
56,720
Operatingcosts
Variablemarketingcosts($25030)
$7,500
Fixednonmanufacturingcosts
30,000
37,500
Operatingincome
$ 19,220
12. BudgetedBalanceSheetforSlopesasofDecember31,2010
Cash
$10,000
Inventory
Schedule6B
135,000
Property,plant,andequipment(net)
850,000
Totalassets
$995,000
Currentliabilities
Longtermliabilities
Stockholdersequity
Totalliabilitiesandstockholdersequity

629

$17,000
178,000
800,000
$995,000

636 (30min.) Cashbudgeting,chapter appendix.


1.

ProjectedSales
May

Salesinunits
Revenues(Salesinunits$450)

80

June
120

July
200

August September October


100

60

$36,000 $54,000 $90,000 $45,000

$27,000

40

CollectionsofReceivables
May

June

Fromsalesin:
May(30% $36,000)
June(50%30% $54,000)
July(20%50%30% $90,000)
August(20%50% $45,000)
September(20% $27,000)
Total

July

August September October

$10,800
27,000 $16,200
18,000 45,000
9,000
$55,800 $70,200

$ 27,000
22,500
5,400
$54,900

CalculationofPayables
May
MaterialandLaborUse,Units
Budgetedproduction
Directmaterials
Wood(boardfeet)
Fiberglass(yards)
Directmanuf.labor(hours)

June

July

August September October

200

100

60

40

1,000
1,200
1,000

500
600
500

300
360
300

200
240
200

$30,000 $15,000

$9,000

DisbursementofPayments
Directmaterials
Wood
(1,000500300 $30)
Fiberglass
(1,200600360 $5)
Directmanuf.labor
(500300200 $25)
Interestpayment
(6% $30,00012)
VariableOverhead Calculation
Variableoverhead rate
Overhead driver
(directmanuf.laborhours)
Variable overheadexpense

630

6,000

3,000

1,800

12,500

7,500

5,000

150

150

150

$7

$7

500
$3,500

300
$2,100

200
$1,400

CashBudgetforthemonthsofJuly,August,September2007
July
August
Beginningcashbalance
$10,000
$5,650

September
$40,100

Addreceipts:Collectionofreceivables
Totalcashavailable

55,800
$65,800

70,200
$75,850

54,900
$95,000

Deductdisbursements:
Materialpurchases
Directmanufacturinglabor
Variablecosts
Fixedcosts
Interestpayments
Totaldisbursements
Endingcashbalance

$36,000
12,500
3,500
8,000
150
60,150
$5,650

$18,000
7,500
2,100
8,000
150
35,750
$40,100

$10,800
5,000
1,400
8,000
150
25,350
$69,650

2.
Yes.Slopeshasabudgetedcashbalanceof$69,650on10/1/2010andso itwillbeina
positiontopayoffthe$30,0001yearnoteonOctober1,2010.
3.
No. Slopes does not maintain a $10,000 minimum cash balance in July. To maintain a
$10,000 cash balance in each of the three months, it could perhaps encourage its customers to
pay earlier by offering a discount. Alternatively, Slopes could seek shortterm credit from a
bank.

631

637 (4050min.) Cashbudgeting,chapterappendix.


ItamiWholesaleCo.
StatementofBudgetedCashReceiptsandDisbursements
FortheMonthsofDecember2009andJanuary2010

Cashbalance,beginning
Addreceipts:
Collectionsofreceivables(Schedule1)
(a)Totalcashavailableforneeds
Deductdisbursements:
Formerchandisepurchases(Schedule2)
Forvariablecosts(Schedule3)
Forfixedcosts(Schedule3)
(b)Totaldisbursements
Cashbalance,endofmonth(ab)

December2009
$10,000

January2010
$2,025

235,900
245,900

285,800
287,825

$183,875
50,000
10,000
243,875
$2,025

$141,750
25,000
10,000
176,750
$111,075

EnoughcashshouldbeavailableforrepaymentofthenoteonJanuary31,2010.
Schedule1:CollectionsofReceivables
Collectionsin
December

October
$14,400a

November
$50,000b}
171,500c
20,000d

January

December

$235,900
$60,000e}
205,800f

0.08$180,000 0.20$250,000 0.70$250,000.98


d
0.08$250,000 e0.20$300,000 f0.70$300,000.98

632

Total

$285,800

Schedule2:PaymentsforMerchandise
Targetendinginventory(inunits)
Addunitssold(sales$100)
Totalrequirements
Deductbeginninginventory(inunits)
Purchases(inunits)
Purchasesindollars(units$70)

Cashdisbursements:
ForDecember,accountspayable
ForJanuary,Decemberspurchasesat50%
Forcurrentmonthspurchasesat50%

December
875a
3,000
3,875
1,250b
2,625
$183,750

January
800c
1,500
2,300
875
1,425
$99,750

December

January

$92,000
91,875
$183,875

$91,875
49,875
$141,750

500units+0.25($150,000$100)
$87,500$70
c
500units+0.25($120,000$100)
b

Schedule3:Marketing,Distribution,andCustomerServiceCosts
Totalannualfixedcosts,$150,000,minus$30,000depreciation
$120,000
Monthlyfixedcostrequiringcashoutlay
$10,000
$400,000 -$150,000
Variablecostratiotosales=
=1/6
$1,500,000
Decembervariablecosts:1/6$300,000sales
$50,000
Januaryvariablecosts:1/6$150,000sales
$25,000

633

638 (60min.) ComprehensiveproblemABCmanufacturing,twoproducts.


1.
RevenuesBudget
FortheYearEndingDecember31,2009

Chairs
Tables
Total

Units
172,000
45,000

Selling
Price TotalRevenues
$ 80
$13,760,000
$900
$40,500,000
$54,260,000

2a.Totalbudgetedmarketingcosts=Budgetedvariablemarketingcosts+Budgetedfixedmarketingcosts
=$2,011,200+$4,500,000=$6,511,200
$6,511, 200
Marketingallocationrate=
=$0.12persalesdollar
$54, 260, 000
2b.Totalbudgeteddistributioncosts= Budgetedvariabledistributioncosts+ Budgetedfixeddistributioncosts
=$54,000+$380,000=$434,000
Chairs:
Tables:
Total

172,000units500unitsperdelivery 344deliveries
45,000units500unitsperdelivery 90deliveries
434deliveries

Deliveryallocationrate=

$434, 000
=$1,000perdelivery
434deliveries

3.
ProductionBudget (inUnits)
FortheYearEndingDecember31,2009
Product
Chairs
Tables
Budgetedunitsales
172,000
45,000
Addtargetendingfinishedgoodsinventory
8,500
2,250
Totalrequiredunits
180,500
47,250
Deductbeginningfinishedgoodsinventory
8,000
2,100
Unitsoffinishedgoods tobeproduced
172,500
45,150

634

4a.
Machinesetupoverhead
Unitstobeproduced
Unitsperbatch
Numberof setups
Hourstosetupperbatch
Totalsetuphours

Chairs

Tables

Total

172,500
500
345
3
1,035

45,150
50
903
2
1,806

2,841

Totalbudgetedsetupcosts=Budgetedvariablesetupcosts+Budgetedfixedsetupcosts
=$97,000+$300,740=$397,740
$397,740
Machinesetup =
=$140persetuphour
allocationrate 2,841setuphours
b.
Chairs:
Tables:
Total

172,500units3MHperunit 517,500MH
45,150units5MHperunit 225,750 MH
743,250 MH

Totalbudgetedprocessingcosts=Budgetedvariableprocessingcosts+Budgeted fixedprocessingcosts
=$789,250+$5,900,000=$6,689,250
Processingallocationrate=

$6,689, 250
= $9perMH
743, 250MH

5.
DirectMaterialUsageBudgetinQuantityandDollars
FortheYearEndingDecember31,2009
Material
Wood
Glass
PhysicalUnitsBudget
Directmaterialsrequiredfor
Chairs(172,500units5b.f.and0sheets)
Tables(45,150units7b.f.and2sheets)
Totalquantityofdirectmaterialstobeused

862,500b.f.
316,050 b.f.
1,178,550 b.f.

CostBudget
Availablefrombeginningdirectmaterialsinventory
(underaFIFOcostflowassumption)
$ 170,352
Tobepurchasedthisperiod
Wood: (1,178,550b.f.109,200b.f.)$1.60perb.f. 1,710,960
Glass:(90,300sheets8,750sheets)$12persheet_________
Directmaterialstobeusedthisperiod
$1,881,312

635

Total

90,300sheets
90,300sheets

$ 109,375

978,600
$1,087,975

$2,969,287

DirectMaterialsPurchasesBudget
FortheYear EndingDecember31,2009
Material
PhysicalUnitsBudget
Tobeusedinproduction(requirement5)
Add:Targetendingdirectmaterialinventory
Totalrequirements
Deduct:Beginningdirectmaterialinventory
Purchasestobemade
CostBudget
Wood:1,186,850b.f. $1.60perb.f.
Glass:90,550sheets $12persheet
Purchases

Wood

Glass

1,178,550b.f.
117,500 b.f.
1,296,050b.f.
109,200 b.f.
1,186,850

90,300sheets
9,000sheets
99,300sheets
8,750sheets
90,550sheets

$ 1,898,960
__________
$ 1,898,960

$1,086,600
$ 1,086,600

Total

$2,985,560

Totalbudgeted
materialshandlingcosts= Budgetedvariablematerialshandlingcosts+Budgetedfixedmaterialshandlingcosts
=$342,840+$600,000=$942,840
Materialshandling = $942,840 =$0.80perb.f.
allocationrate
1,178,550b.f.

7.
DirectManufacturingLaborCostsBudget
FortheYearEndingDecember31,2009

Chairs
Tables
Total

OutputUnits
Produced
172,500
45,150

DirectManufacturing Total HourlyWage


Total
LaborHoursperUnit Hours
Rate
4
690,000
$15
$10,350,000
8
361,200
15
5,418,000
$15,768,000

8.
ManufacturingOverheadCostBudget
FortheYearEndingDecember31,2009

Materialshandling
Machinesetup
Processing
Total

Variable
$ 342,840
97,000
789,250
$1,229,090

Fixed
$600,000
300,740
5,900,000
$6,800,740

636

Total
$942,840
397,740
6,689,250
$8,029,830

9.
UnitCostsofEndingFinishedGoodsInventory
FortheYearEndingDecember31,2009

Wood
Glass
Directmanufacturinglabor
Materialshandling
Machinesetup
Processing
Total
1

Costper
Unitof
Input
$1.60
12
15
0.80
140
9

Chair
Table
Inputper
Inputper
Unitof
Unitof
Output
Total
Output
5b.f.
$8.00
7b.f.

2sheets
4hrs.
60.00
8hrs.
5b.f.
4.00
7b.f.
0.006hrs.1
0.84 0.04 setuphr1
3MH
27.00
5MH
$99.84

Total
$11.20
24.00
120.00
5.60
5.60
45.00
$211.40

1,035 setuphours 172,500 units=0.006hours perunit 1,806 setuphours 45,150 units=0.04hours perunit

EndingInventoriesBudget
December31,2009
Quantity
DirectMaterials
Wood
Glass
Finishedgoods
Chairs
Tables
Total endinginventory

Costperunit

Total

117,500b.f.
9,000sheets

$1.60
12.00

$188,000
108,000

8,500
2,250

$99.84
211.40

$848,640
475,650

$ 296,000

1,324,290
$1,620,290

10.
CostofGoodsSoldBudget
FortheYearEndingDecember31,2009
Beginningfinishedgoodsinventory,Jan.1($760,000+$477,000)
Directmaterialsused(requirement5)
$ 2,969,287
Directmanufacturinglabor(requirement7)
15,768,000
Manufacturingoverhead(requirement8)
8,029,830
Costofgoodsmanufactured
Costofgoodsavailableforsale
Deduct:Endingfinishedgoodsinventory,December31 (reqmt.9)
Costofgoodssold
11.
NonmanufacturingCostsBudget
FortheYearEndingDecember31,2009

Marketing
Distribution
Total

Variable
$2,011,200
54,000
$2,065,200

Fixed
$4,500,000
380,000
$4,880,000
637

Total
$6,511,200
434,000
$6,945,200

$ 1,237,000

26,767,117
28,004,117
1,324,290
$26,679,827

12.
BudgetedIncomeStatement
FortheYearEndingDecember31,2009
Revenue
$54,260,000
Costofgoodssold
26,679,827
Grossmargin
27,580,173
Operating(nonmanufacturing)costs
6,945,200
Operatingincome
$20,634,973

13. Thebudgetedunitcostof thechairis$99.84,whichis$20morethanthesellingpriceof$80


perchair.
Thecompanyiswillingtoacceptthelossonchairsbecauseofthehighmarkupontables($900
$688.60
$211.40)=$688.60(
=76.5%).Customerswhopurchaseatablewilllikelywant
$900
matchingchairs.Thusthemarkupontablesmorethanrecoupsthelossonfourchairs.Dinette
could,ofcourse,reducethepriceontablesandincreasethepriceonchairs.If,however,
customerscarelessaboutthepriceofthetableandmoreabout thepriceofchairsandbuy4
chairsforevery1table,Dinettespricingstrategymaywellbeoptimal.

638

639 (15min.) Budgetingandethics.


1. ThestandardsproposedbyWertarenotchallenging.Infact,hesetthetargetatthelevelhis
departmentcurrentlyachieves.
DM 2.95lbs. 100units=295lbs.
DL 19.2min. 100units=1,920min60=32hrs.
MT 9.9min. 100units=990min.60=16.5hrs.
2.Wertprobablychosethesestandardssothathisdepartmentwouldbeabletomakethegoal
andreceiveanyresultingreward.Withalittleeffort,hisdepartmentcanlikelybeatthesegoals.
3. Asdiscussedinthechapter,benchmarkingmightbeusedtohighlighttheeasytargetssetby
Wert.Perhapstheorganizationhasmultipleplantlocationsthatcouldbeusedascomparisons.
Alternatively,managementcoulduseindustryaverages.Also,managementshouldworkwith
Werttobetterunderstandhisdepartmentandencouragehimtosetmorerealistictargets.
Finally,therewardstructureshouldbedesignedtoencourageincreasingproductivity,not
beatingthebudget.
640 (60 min.) Comprehensive budgeting problem activitybased costing, operating and
financialbudgets.
1a.
RevenuesBudget
FortheMonthof June,20xx

Large
Giant
Total

Units SellingPrice TotalRevenues


3,000
$3
$9,000
1,800
4
7,200
$16,200

b.
ProductionBudget
FortheMonthof June,20xx

Budgetedunitsales
Add:targetendingfinishedgoodsinventory
Totalrequiredunits
Deduct:beginningfinishedgoodsinventory
Unitsoffinishedgoodstobeproduced

639

Product
Large
Giant
3,000
1,800
300
180
3,300
1,980
200
150
3,100
1,830

c.
DirectMaterialUsageBudgetinQuantityandDollars
FortheMonthof June,20xx
Material
Sugar
Sticks
PhysicalUnitsBudget
Directmaterialsrequiredfor
Large(3,100 units0.25lb.1stick)
Giant(1,830units0.50 lb.1stick)
Totalquantityof directmaterialstobeused

775lbs.
915lbs.
1,690lbs.

CostBudget
Availablefrombeginningdirectmaterialsinventory
(underaFIFOcostflowassumption)
$ 64
Tobepurchasedthisperiod
Sugar:(1,690 lbs.125lbs.)$0.50 perlb.
783
Sticks:(4,930 350) $0.30 per stick
____
Directmaterialstobeusedthisperiod
$847

Total

3,100
1,830
4,930

$ 105

1,374
$1,479

$2,326

DirectMaterialsPurchasesBudget
FortheMonthof June,20xx
Material
Sugar
Sticks
PhysicalUnitsBudget
Tobeusedinproduction
Add:Targetendingdirectmaterialinventory
Totalrequirements
Deduct:beginningdirectmaterialinventory
Purchasestobemade

1,690lbs.
240lbs.
1,930lbs.
125 lbs.
1,805lbs.

CostBudget
Sugar:(1,805 lbs.$0.50perlb.)
Sticks:(5,060 $0.30 perstick)
Total

$903
____
$903

Total

4,930
480
5,410
350
5,060

$1,518
$1,518

$2,421

d.
DirectManufacturingLaborCostsBudget
FortheMonthof June,20xx

Large
Giant
Total

OutputUnits
Produced
3,100
1,830

DirectManufacturing Total HourlyWage


LaborHoursperUnit Hours
Rate
0.20
620
$8
0.25
457.5
8
1,077.5

640

Total
$4,960
3,660
$8,620

e.
ManufacturingOverheadCostsBudget
For theMonthofJune20xx
Total
Machinesetup
(Large310batches1 0.08hrs./batch +Giant183batches2 0.09hrs./batch) $20/hour
Processing(1,077.5DMLH $1.70)
Total

$825
1,832
$2,657

Large:3,100units10unitsperbatch=3102Giant:1,830units10unitsperbatch=183

f.

Sugar
Sticks
Directmanufacturinglabor
Machinesetup
Processing
Total

UnitCostsofEndingFinishedGoodsInventory
FortheMonth of June,20xx
Large
Giant
Costper
Inputper
Inputper
Unitof Input
UnitofOutput
Total
UnitofOutput
$ 0.50
0.25lb
$0.125
0.50lb.
0.30
1
0.30
1
8.00
0.2hr.
1.60
0.25hr.
20.00
0.008hr.1
0.16
0.009hr1
1.70
0.2hr
0.34
0.25hr
$2.525

Total
$0.25
0.30
2.00
0.18
0.425
$3.155

0.08hourpersetup 10unitsperbatch =0.008hr.perunit


0.09hourpersetup 10unitsperbatch =0.009hr.perunit.

EndingInventoriesBudget
June,20xx

DirectMaterials
Sugar
Sticks
Finishedgoods
Large
Giant
Total endinginventory

Quantity

Costperunit

240lbs.
480sticks

$0.50
0.30

$120
144

300
180

$2.525
3.155

$757
568

641

Total

$ 264

1,325
$1,589

g.
CostofGoodsSoldBudget
FortheMonthof June,20xx
Beginningfinishedgoodsinventory,June1($500+$474)
Directmaterialsused(requirementc)
Directmanufacturinglabor(requirementd)
Manufacturingoverhead(requiremente)
Costofgoodsmanufactured
Costofgoodsavailableforsale
Deductendingfinishedgoodsinventory,June30(requirementf)
Costofgoodssold

$ 974
$2,326
8,620
2,657
13,603
14,577
1,325
$13,252

h.
NonmanufacturingCostsBudget
FortheMonthof June,20xx
Total
Marketingandgeneraladministration
10% 16,200

$1,620

2.
CashBudget
June30,20xx
Cashbalance,June30,20xx
Addreceipts
CollectionsfromMayaccountsreceivable
CollectionsfromJuneaccountsreceivable
($16,200 80% 50%)
CollectionsfromJunecashsales
($16,200 20%)
Total collectionfromcustomers
Totalcashavailableforneeds(x)
Deductcashdisbursements
Directmaterial purchasesinMay
Directmaterial purchasesinJune
($2,421 70%)
Directmanufacturinglabor
Manufacturingoverhead
($2,657 60%because40%isdepreciation)
Nonmanufacturingcosts
($1,620 70%because30%isdepreciation)
Taxes
Totaldisbursements(y)
Financing
Interestat12%($20,000 12% 112) (z)
Endingcashbalance,June30(x) (y) (z)

642

587
4,704
6,480

3,240
14,424
$15,011
$

696
1,695
8,620
1,594

1,134
500
$14,239
$ 200
$ 572

3.
BudgetedIncomeStatement
FortheMonthof June,20xx
Revenues
Costofgoodssold
Grossmargin
Operating(nonmanufacturing)costs
Baddebtexpense($16,200 80% 1%)
Interestexpense(forJune)
Netincome

$16,200
13,252
2,948
$1,620
130
200

1,950
$998

Budgeted BalanceSheet
June30,20xx
Assets
Cash
Accountsreceivable($16,200 80% 50%))
Less:allowancefordoubtfulaccounts
Inventories
Directmaterials
Finishedgoods
Fixedassets
Less:accumulateddepreciation
($55,759+2,657 40%+1,620 30%)
Totalassets

$
$6,480
130

6,350

$264
1,325

1,589

$190,000

LiabilitiesandEquity
Accountspayable($2,421 30%)
Interestpayable
Longtermdebt
Commonstock
Retainedearnings($109,279+$998)
Totalliabilitiesandequity

643

572

57,308

132,692
$141,203

726
200
20,000
10,000
110,277
$141,203

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