Solution to Chapter 8: Budgeting for Planning and Controlling

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CHAPTER 8
QUESTIONS FOR WRITING AND DISCUSSION
1. Budgets are the quantitative expressions of
plans. Budgets are used to translate the
goals and strategies of an organization into
operational terms.

manufacturing budgets, in turn, depend on

the production budget. The same is true for
the financial budgets since sales is a critical
input for budgets in that category.

2. Control is the process of setting standards,

receiving feedback on actual performance,
and taking corrective action whenever actual
performance deviates from planned performance. Budgets are standards, and they
are compared with actual costs and revenues to provide feedback.

8. For a merchandising firm, the production

budget is replaced by a merchandise purchases budget. Merchandising firms also
lack direct materials and direct labor budgets. All other budgets are essentially the
same. For a service firm (for-profit), the
sales budget doubles as the production
budget, and there is no finished goods inventory budget. The rest of the budgets
have counterparts.

3. The planning and control functions of budgeting can benefit all organizations regardless of size. All organizations need to determine what their goals are and how best to
attain those goals. This is the planning function of budgeting. In addition, organizations
can compare what actually happens with
what was planned to see if the plans are unfolding as anticipated. This is the control
function of budgeting.
4. Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation,
and improves the functions of
communication and coordination.
5. A master budget is the collection of all individual area and activity budgets. Operating
budgets are concerned with the incomegenerating activities of a firm. Financial
budgets are concerned with the inflows and
outflows of cash and with planned capital
expenditures.
6. The sales forecast is a critical input for building the sales budget. However, it is not necessarily equivalent to the sales budget.
Upon receiving the sales forecast, management may decide that the firm can do
better than the forecast indicates. Consequently, actions may be taken to increase
the sales potential for the coming year (e.g.,
increasing advertising). This adjusted forecast then becomes the sales budget.
7. Yes. All budgets are founded on the sales
budget. Before a production budget can be
created, it must have the planned sales. The

9.

A static budget is for a particular level of

activity. A flexible budget is one that can be
established for any level of activity. For performance reporting, it is necessary to compare the actual costs for the actual level of
activity with the budgeted costs for the actual level of activity. A flexible budget provides the means to compute the budgeted
costs for the actual level of activity, after the
fact.

10. A flexible budget is based on a simple

for- mula: Y = F + VX, which requires
knowledge of both fixed and variable
components.
11. Goal congruence is important because
it means that the employees of an
organization are working toward the goals
of that organization.
12. Frequent feedback is important so that
corrective action can be taken, increasing
the likelihood of achieving budget.
13. Both
monetary
and
nonmonetary
incentives are used to encourage employees
of an organization
to
achieve
the
organizations goals. Monetary incentives
appeal to the economic needs of an
individual, and non- monetary incentives
appeal to the psycho- logical needs. Since
individuals are motivated by both economic
and psychological factors, both types of
incentives ought to be present in a good
budgetary system.

Solution to Chapter 8: Budgeting for Planning and Controlling

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Solutions
Chapter 8
Budgeting for Planning and Controlling
83
1.

Freshaire, Inc.
Sales Budget
For the Year 2008
Mint:
1st Qtr.

2nd Qtr.

3rd Qtr.

4th Qtr.

Total

80,000
$3.00
$240,000

110,000
$3.00
$330,000

124,000
$3.00
$372,000

140,000
$3.00
$420,000

454,000

$3.00
$ 1,362,000

Units
Price
Sales

100,000
$3.50
$350,000

100,000
$3.50
$350,000

120,000
$3.50
$420,000

140,000
$3.50
$490,000

460,000

$3.50
$ 1,610,000

Total sales

$590,000

$680,000

$792,000

$910,000

$ 2,972,000

Units
Price
Sales
Lemon:

2. Freshaire, Inc., will use the sales budget in planning as the basis for the production budget and the succeeding budgets of the master budget. At the end
of the year, the company can compare actual sales against the budget to see
if expectations were achieved.

Solution to Chapter 8: Budgeting for Planning and Controlling

___________________________________________________________
84
Freshaire, Inc.
Production Budget for Mint Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced

1st Qtr.
80,000
11,000
91,000
4,000
87,000

2nd Qtr.
110,000
12,400
122,400
11,000
111,400

3rd Qtr.
124,000
14,000
138,000
12,400
125,600

4th Qtr.
140,000
9,000
149,000
14,000
135,000

Total
454,000
9,000
463,000
4,000
459,000

4th Qtr.
140,000
22,000
162,000
28,000
134,000

Total
460,000
22,000
482,000
6,400
475,600

Freshaire, Inc.
Production Budget for Lemon Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced

1st Qtr.
100,000
20,000
120,000
6,400
113,600

2nd Qtr.
100,000
24,000
124,000
20,000
104,000

3rd Qtr.
120,000
28,000
148,000
24,000
124,000

Solution to Chapter 8: Budgeting for Planning and Controlling

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88
Manning Company
Direct Materials Purchases Budget
For March, April, and May 20XX
Units to be produced
Direct materials per unit
(yards)
Production needs
Desired ending inventory
(yards)
Total needs
Less beginning inventory
Direct materials to be
purchased (yards)
Cost per yard
Total purchase cost

March
20,000

April
60,000

May
100,000

Total
180,000

25
500,000

25
1,500,000

25
2,500,000

25
4,500,000

300,000
800,000
100,000

500,000
2,000,000
300,000

60,000
2,560,000
500,000

60,000
4,560,000
100,000

700,000
$0.30
$210,000

1,700,000
$0.30
$ 510,000

2,060,000
$0.30
$ 618,000

4,460,000
$0.30
$1,338,000

89
Manning Company
Direct Labor Budget
For March, April, and May 20XX
Units to be produced
Direct labor time per
unit (hours)
Total hours needed
Cost per hour
Total direct labor cost

March
20,000
0.04
800
$12
$ 9,600

April
60,000
0.04
2,400

$12
$ 28,800

May
100,000

Total
180,000

0.04
4,000

$12
$ 48,000

0.04
7,200

$12
$ 86,400

Solution to Chapter 8: Budgeting for Planning and Controlling

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811
1.

Raylenes Flowers and Gifts

Production Budget for Gift Baskets
For September, October, November, and December
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units produced

2.

Sept.
200
15
215
20
195

Oct.
150
18
168
15
153

Nov.
180
25
205
18
187

Dec.
250
10
260
25
235

Oct.
153
1
153
9
162
8
154

Nov.
187
1
187
12
199
9
190

Raylenes Flowers and Gifts

Direct Materials Purchases Budget
For September, October, and November
Fruit:
Production
Amount/basket (lbs.)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Small gifts:
Production
Amount/basket (items)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Cellophane:
Production
Amount/basket (feet)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases

Sept.
195
1
195
8
203
10
193
Sept.
195
5
975
383
1,358
488
870
Sept.
195
3
585
230
815
293
522

Oct.
153
5
765
468
1,233
383
850

Nov.
187
5
935
588
1,523
468
1,055

Oct.
153
3
459
281
740
230
510

Nov.
187
3
561
353
914
281
633

Solution to Chapter 8: Budgeting for Planning and Controlling

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811
1.

Raylenes Flowers and Gifts

Production Budget for Gift Baskets
For September, October, November, and December
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units produced

Sept.
200
15
215
20
195

Oct.
150
18
168
15
153

Nov.
180
25
205
18
187

Dec.
250
10
260
25
235

Oct.
153
1
153
9
162
8
154

Nov.
187
1
187
12
199
9
190

Raylenes Flowers and Gifts

Direct Materials Purchases Budget
For September, October, and November
Fruit:
Production
Amount/basket (lbs.)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Small gifts:
Production
Amount/basket (items)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
Cellophane:
Production
Amount/basket (feet)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases 522 510 633

Sept.
195
1
195
8
203
10
193
Sept.
195
5
975
383
1,358
488
870
Sept.
195
3
585
230
815
293

Oct.
153
5
765
468
1,233
383
850

Nov.
187
5
935
588
1,523
468
1,055

Oct.
153
3
459
281
740
230

Nov.
187
3
561
353
914
281

Solution to Chapter 8: Budgeting for Planning and Controlling

___________________________________________________________
Concluded
Basket:
Production
Amount/basket (item)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases

Sept.
195
1
195
77
272
98
174

Oct.
153
1
153
94
247
77
170

Nov.
187
1
187
118
305
94
211

3. A direct materials purchases budget for December requires January production which cannot be computed without a February sales forecast.

813
1.

Janzen, Inc.
Cash Receipts Budget
For July
Payments on account:
From May credit sales (0.15 $220,000).................................
From June credit sales (0.60 $230,000) ...............................
From July credit sales (0.20 $210,000).................................
Less: July cash discount (0.02 $42,000) ..............................
Cash receipts ...........................................................................

2.

$ 33,000
138,000
42,000
(840)
$212,160

Janzen, Inc.
Cash Receipts Budget
For August
Payments on account:
From June credit sales (0.15 $230,000) ...............................
From July credit sales (0.60 $210,000).................................
From August credit sales (0.20 $250,000) ...........................
Less: August cash discount (0.02 $50,000).........................
Cash receipts ............................................................................

$ 34,500
126,000
50,000
(1,000)
$209,500

8-16
1
7

Solution to Chapter 8: Budgeting for Planning and Controlling

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1.

Performance Report
Actual
Budgeted Variance

Units produced
1,100
Direct materials cost
Direct labor cost
Total
$15,600
a.
b.

1,000
$11,200
4,400
$14,400

100 F
$10,000a
b
4,000
$1,600 U

$1,200 U
400 U

1,000 units * 2 leather straps * $5 = $10,000

1,000 units * .5 hours per unit * $8 = $4,000

2. The performance report compares costs at two different

levels of activity and so cannot be used to assess efficiency.

Solution to Chapter 8: Budgeting for Planning and Controlling

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8-17
Pet-Care Company Overhead Budget For the Coming Year
Activity Level

Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
*BasicDiet: (0.25 100,000)
SpecDiet: (0.30 100,000)
Total DLH

55,000 Hours*
$0.40
0.50
1.60

$22,000
27,500
88,000
$137,500
$17,000
26,500
18,000
61,500
$199,000

25,000
30,000
55,000

Solution to Chapter 8: Budgeting for Planning and Controlling

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2. 10% higher:

Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
60,500 Hours*

Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs

$0.40
0.50
1.60

$24,200
30,250
96,800
$151,250
$17,000
26,500
18,000
61,500
$212,750

*55,000 DLH 110% = 60,500

20% lower:

Pet-Care Company Overhead Budget For

the Coming Year

Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs

Activity Level
44,000 Hours*
$0.40
0.50
1.60

$17,600
22,000
70,400
$110,000
$17,000
26,500
18,000
61,500
$171,500

*55,000 DLH 80% = 44,000

10

Solution to Chapter 8: Budgeting for Planning and Controlling

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824
Briggs Manufacturing
For the Quarter Ended March 31, 20XX
1. Schedule 1: Sales Budget
Units
Selling price
Sales

January
40,000

$215
$8,600,000

February
50,000

$215
$10,750,000

March
60,000

$215
$12,900,000

Total
150,000

$215
$32,250,000

2. Schedule 2: Production Budget

Sales (Schedule 1)
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced

January
40,000
40,000
80,000
32,000
48,000

February
50,000
48,000
98,000
40,000
58,000

March
60,000
48,000
108,000
48,000
60,000

Total
150,000
48,000
198,000
32,000
166,000

11

Solution to Chapter 8: Budgeting for Planning and Controlling

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3. Schedule 3: Direct Materials Purchases Budget

Metal

January
Components

Units to be produced
(Schedule 2)
48,000
Direct materials
per unit (lbs.)

10
Production needs
480,000
Desired ending
inventory
250,000
Total needs
730,000
Less: Beginning
inventory
200,000
Direct materials to
be purchased
530,000
Cost per pound

$8
Total cost
$4,240,000

48,000

10
600,000

February
Components

58,000

6
288,000

58,000

10
580,000

6
348,000

150,000
438,000

300,000
880,000

180,000
528,000

120,000

250,000

150,000

318,000

$2
$636,000

630,000

$8
$5,040,000

378,000

$2
$756,000

March
Metal
Components
60,000
60,000

Units to be produced
Direct materials
per unit (lbs.)
Production needs
Desired ending
inventory
Total needs
Less: Beginning
inventory
Direct materials to
be purchased
Cost per pound
Total cost

Metal

6
360,000

Total
Metal
Components
166,000
166,000

10
1,660,000

6
996,000

300,000
900,000

180,000
540,000

300,000
1,960,000

180,000
1,176,000

300,000

180,000

200,000

120,000

600,000

$8
$4,800,000

360,000

$2
$720,000

1,760,000

$8
$14,080,000

1,056,000

$2
$2,112,000

12

Solution to Chapter 8: Budgeting for Planning and Controlling

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4. Schedule 4: Direct Labor Budget
January
Units to be produced
(Schedule 2)
Direct labor time
per unit (hours)
Total hours needed
Cost per hour
Total cost

February

48,000
4
192,000

$9.25
$1,776,000

March

58,000
4
232,000

$9.25
$2,146,000

Total

60,000
4
240,000

$9.25
$2,220,000

166,000
4
664,000

$9.25
$6,142,000

5. Schedule 5: Overhead Budget

January
Budgeted direct labor
hours (Schedule 4)
Variable overhead rate
Budgeted variable overhead
Budgeted fixed overhead
Total overhead

192,000
$3.40
$652,800
338,000
$990,800

February
232,000

$3.40
$ 788,800
338,000
$1,126,800

March

Total

240,000

$3.40
$ 816,000
338,000
$1,154,000

664,000

$3.40
$2,257,600
1,014,000
$3,271,600

6. Schedule 6: Selling and Administrative Expenses Budget

January February March
Planned sales (Schedule 1)
40,000
50,000
60,000
Variable selling and administrative
expenses
per unit
$3.60 $3.60 $3.60
Total variable expense
$144,000 $180,000 $216,000
Fixed selling and administrative expenses:
Salaries
$ 50,000 $ 50,000 $ 50,000
Depreciation
40,000
40,000
40,000
Other
20,000
20,000
20,000
Total fixed expenses
Total selling and
administrative expenses $254,000

$110,000
$290,000

$110,000
$326,000

$110,000

Total
150,000

$3.60
$540,000
$150,000
120,000
60,000
$330,000

$870,000

13

Solution to Chapter 8: Budgeting for Planning and Controlling

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7. Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials:
Metal (10 @ $8) = $80
Comp.
(6 @ $2)
= 12
Direct labor (4 $9.25)
Overhead:
Variable (4 @ $3.40)
Fixed (4 $1,014,000/664,000)
Total unit cost

$ 92.00
37.00
13.60
6.11
$148.71

Finished goods inventory = Units Unit cost

= 48,000 $148.71
= $7,138,080
8. Schedule 8: Cost of Goods Sold Budget
Direct materials used (Schedule 3)
Metal (1,660,000 $8)
$13,280,000
Components (996,000 $2)
1,992,000
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Add: Beginning finished goods (32,000 $148.71)
Goods available for sale
Less: Ending finished goods (Schedule 7)
Budgeted cost of goods sold
9.

$15,272,000
6,142,000
3,271,600
$24,685,600
4,758,720
$29,444,320
7,138,080
$22,306,240

Schedule 9: Budgeted Income Statement

Sales (Schedule 1)
Less: Cost of goods sold (Schedule 8)
Gross margin
Less: Selling and admin. expenses (Schedule 6)
Income before income taxes

$ 32,250,000
22,306,240
$ 9,943,760
870,000
$ 9,073,760

14

Solution to Chapter 8: Budgeting for Planning and Controlling

___________________________________________________________
10. Schedule 10: Cash Budget
January
Beg. balance
$ 378,000
Cash receipts
8,600,000
Cash available
$8,978,000
Less:
Disbursements:
Purchases
$4,876,000
Direct labor
1,776,000
Overhead
790,800
Selling & admin.
214,000
Total
$7,656,800
Tentative
ending balance
Borrowed/(repaid)
Interest paid
Ending balance

February
$ 1,321,200
10,750,000
$12,017,200

March
$ 2,952,400
12,900,000
$15,852,400

Total
378,000
32,250,000
$32,628,000

$5,796.000
2,146,000
926,800
250,000
$9,118.800

$ 5,520,000
2,220,000
954,000
286,000
$ 8,980,000

$16,192,000
6,142,000
2,671,600
750,000
$25,755,600

$1,321,200

2,952,400

$ 6,872,400

$6,872,400

$1,321,200

$ 2,952,400

$ 6,872,400

$ 6,872,400

*(0.12 2/12 $56,800) + (0.12 1/12 $6,800)

15