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CHAPTER 9

Profit Planning, Activity-Based Budgeting, and


e-Budgeting
ANSWERS TO REVIEW QUESTIONS
9-3

A master budget, or profit plan, is a comprehensive set of budgets covering all phases of an
organization's operations for a specified period of time. The master budget includes the
following parts: sales budget, operational budgets (including a production budget,
inventory budgets, a labor budget, an overhead budget, a selling and administrative expense
budget, and a cash budget), and budgeted financial statements (including a budgeted
income statement, budgeted balance sheet, and budgeted statement of cash flows).

9-21
(a)
(b)
(c)
(d)
(e)

The five phases in a product's life cycle are as follows:


Product planning and concept design
Preliminary design
Detailed design and testing
Production
Distribution and customer service
It is important to budget these costs as early as possible in order to ensure that the revenue
a product generates over its life cycle will cover all of the costs to be incurred. A large
portion of a product's life-cycle costs will be committed well before they are actually
incurred.

9-22

(a) Ordering costs: The cost of preparing, placing, and receiving a purchase order.
(Examples include the clerical costs of preparing purchase orders, time spent finding
suppliers and expediting orders, transportation, and receiving costs, such as unloading and
inspection.)
Holding costs: The cost incurred in keeping inventory on hand for some period of time.
(Examples include the costs of storage space such as a warehouse, depreciation, security,
insurance, forgone interest on working capital tied up in inventory, and the costs of
deterioration and theft.)
Shortage costs: The cost incurred by the organization when it does not have materials or
finished goods on hand when needed. (Examples include the costs caused by disrupted
production when raw materials are unavailable, lost sales, dissatisfied customers, and the
loss of quantity discounts on purchases.)

(b)

(c)

SOLUTIONS TO EXERCISES
EXERCISE 9-26 (20 MINUTES)
1.
1

Sales...........................................................
Cash receipts:
From cash sales ....................................
From sales on account .........................
Total cash receipts ....................................

2.

a$270,000

= $135,000 2

b$120,000

= $240,000 .5

c$

= $180,000 .5

90,000

July
$240,000

August
$180,000

September
$270,000a

$120,000b
108,000d
$228,000

$ 90,000c
102,000
$ 192,000

$135,000
117,000e
$252,000

d$108,000

($120,000 .6) + ($90,000 .4)

e$117,000

($135,000 .6) + ($90,000 .4)

Accounts payable, 12/31/x0................................................................


Purchases of goods and services on account during 20x1.............
Payments of accounts payable during 20x1 .....................................
Accounts payable, 12/31/x1................................................................

600,000 euros
2,400,000 euros
(2,200,000) euros*
800,000 euros

*2,200,000 euros
= 600,000 euros + 2,400,000 euros 800,000 euros
3.

Accounts receivable, 12/31/x0............................................................


Sales on account during 20x1............................................................
Collections of accounts receivable during 20x1...............................
Accounts receivable, 12/31/x1............................................................

1,700,000y
4,500,000y
(3,900,000y)
2,300,000y

4.

Accumulated depreciation, 12/31/x0..................................................


Depreciation expense during 20x1 ....................................................
Accumulated depreciation, 12/31/x1..................................................

$ 405,000
75,000
$ 480,000

5.

Retained earnings, 12/31/x0 ...............................................................


Net income for 20x1 ............................................................................
Dividends paid in 20x1........................................................................
Retained earnings, 12/31/x1 ...............................................................

$1,537,500
300,000
0
$1,837,500

McGraw-Hill/Irwin
3-2

2005 The McGraw-Hill Companies, Inc.


Solutions Manual

EXERCISE 9-33 (25 MINUTES)


1.

Direct professional labor budget for the month of June:


Office visits per month = 48,000/12 = 4,000
Professional services in June:
One-hour visits (20% 4,000 1 hr.) ...................................
Half-hour visits (80% 4,000 1/2 hr.) ................................
Total direct professional labor..............................................
Hourly rate for dental associates..........................................
Total direct professional labor cost .....................................

2.

800 hours
1,600 hours
2,400 hours
$ 90
$216,000

Cash collections during June:


Half-hour visits (4,000 80%) ...............................................
Billing rate ..............................................................................
Total billings for half-hour visits...........................................
One-hour visits (4,000 20%)...............................................
Billing rate ..............................................................................
Total billings for one-hour visits...........................................
Total billings during month...................................................
Percentage of month's billings collected
during June ........................................................................
Collections during June ........................................................
Total collections in June ($27,600 + $248,400) ....................

May
3,200
$60
$192,000
800
$105
$ 84,000
$276,000

June
3,200
$60
$192,000
800
$105
$ 84,000
$276,000

10%
$ 27,600

90%
$248,400
$276,000

3. Overhead and administrative expense budget for June:


Patient registration and records (4,000 visits $3.00 per visit)....
Other overhead and administrative expenses
(2,400 hours $7.50 per hour)...................................................
Total overhead and administrative expenses.................................

SOLUTIONS TO PROBLEMS
PROBLEM 9-36 (30 MINUTES)

$12,000
18,000
$30,000

1.

Schedule of cash collections:


January
Collection of accounts receivable:
$165,000 x 20%.........................................
Collection of January sales ($450,000):
60% in January; 35% in February ...........
Collection of February sales ($540,000):
60% in February; 35% in March ..............
Collection of March sales ($555,000):
60% in March; 35% in April .....................
Sale of equipment..........................................
Total cash collections .............................

2.

February

$ 33,000
270,000

$303,000

$157,500
324,000

$189,000

$481,500

333,000
15,000
$537,000

Schedule of cash disbursements:


January
Payment of accounts payable ......................
Payment of January purchases ($270,000):
70% in January; 30% in February ...........
Payment of February purchases ($300,000):
70% in February; 30% in March ..............
Payment of March purchases ($420,000):
70% in March; 30% in April .....................
Cash operating costs ....................................
Total cash disbursements.......................

3.

March

February

March

$ 66,000
189,000

93,000
$348,000

$ 81,000
210,000

$ 90,000

72,000
$363,000

294,000
135,000
$519,000

Schedule of cash needs:


January

February

March

Be
g
i
n
ni
ngc
a
s
hb
a
l
a
nc
e
. $ 60,000
T
ot
a
l
r
e
c
e
i
pt
s
. 303,000
Subt
o
t
a
l
. $363,000
L
e
s
s
:To
t
a
l
d
i
s
bu
r
s
e
me
nt
s
348,000
Ca
s
he
x
c
e
s
s(
de
f
i
c
i
e
nc
y
)be
f
o
r
ef
i
n
a
nc
i
n
g $ 15,000
Financing:
Borrowing to maintain $60,000 balance..
45,000
Lo
a
npr
i
n
c
i
pa
l
r
e
pa
i
d

Lo
a
ni
nt
e
r
e
s
tp
a
i
d.
.
Endi
n
gc
a
s
hba
l
a
n
c
e
$ 60,000

$ 60,000
481,500
$541,500
363,000
$178,500

$132,900
537,000
$669,900
519,000
$150,900

(45,000)
(600)*
$132,900

-0-0-0$150,900

* $45,000 x 8% x 2/12

McGraw-Hill/Irwin
3-4

2005 The McGraw-Hill Companies, Inc.


Solutions Manual

PROBLEM 9-44 (60 MINUTES)


1.

Sales budget:
Box C
500,000
$1.35
$675,000

Sales (in units)


Sales price per unit
Sales revenue
2.

Box P
500,000
$1.95
$975,000

$1,650,000

Production budget (in units):


Sales......................................................................................
Add: Desired ending inventory ...........................................
Total units needed................................................................
Deduct: Beginning Inventory ..............................................
Production requirements.....................................................

3.

Total

Box C
500,000
5,000
505,000
10,000
495,000

Box P
500,000
15,000
515,000
20,000
495,000

Raw-material budget:
CORRUGATING MEDIUM
Production requirements (number of boxes).........
Raw material required per box (pounds)................
Raw material required for
production (pounds) ............................................
Add: Desired ending
raw-material inventory .........................................
Total raw-material needs .........................................
Deduct: Beginning raw-material inventory ............
Raw material to be purchased.................................
Price (per pound) .....................................................
Cost of purchases (corrugating medium) ..............
Total cost of raw-material purchases
($145,500 + $37,875) .............................................

Box C
495,000
.2

Box P
495,000
.3

Total

99,000

148,500

247,500
10,000
257,500
5,000
252,500
$.15
$ 37,875
$183,375

PAPERBOARD
Production requirement (number of boxes)...........
Raw material required per box (pounds)................
Raw material required for
production (pounds) ............................................
Add: Desired ending
raw-material inventory .........................................
Total raw-material needs .........................................
Deduct: Beginning raw-material inventory ............
Raw material to be purchased.................................
Price (per pound) .....................................................
Cost of purchases (paperboard) .............................
4.

Box P
495,000
.7

Total

148,500

346,500

495,000
5,000
500,000
15,000
485,000
$.30
$145,500

Direct-labor budget:
Production requirements (number of boxes)
Direct labor required per box (hours) .....................
Direct labor required for production (hours)
Direct-labor rate .......................................................
Total direct-labor cost..............................................

5.

Box C
495,000
.3

Box C
495,000
.0025
1,237.5

Box P
495,000
.005
2,475

3,712.5
$18
$66,825

Manufacturing-overhead budget:
Indirect material ...........................................................................................
Indirect labor ................................................................................................
Utilities ..........................................................................................................
Property taxes ..............................................................................................
Insurance ......................................................................................................
Depreciation .................................................................................................
Total overhead..............................................................................................

6.

Total

$ 15,750
75,000
37,500
27,000
24,000
43,500
$222,750

Selling and administrative expense budget:


Salaries and fringe benefits of sales personnel ........................................
Advertising ...................................................................................................
Management salaries and fringe benefits ..................................................
Clerical wages and fringe benefits .............................................................
Miscellaneous administrative expenses ....................................................
Total selling and administrative expenses.................................................

McGraw-Hill/Irwin
3-6

$112,500
22,500
135,000
39,000
6,000
$315,000

2005 The McGraw-Hill Companies, Inc.


Solutions Manual

7.

Budgeted income statement:


Sales revenue [from sales budget, req. (1)] ...............................................
Less: Cost of goods sold:
Box C: 500,000 $.315* ............................................................ $157,500
Box P: 500,000 $.645* ........................................................... 322,500
Gross margin................................................................................................
Selling and administrative expenses..........................................................
Income before taxes.....................................................................................
Income tax expense (35%)...........................................................................
Net income....................................................................................................

$1,650,000
480,000
$1,170,000
315,000
$ 855,000
299,250
$ 555,750

*Calculation of manufacturing cost per unit:


(a)

(b)

Predetermined overhead rate

budgeted manufacturing overhead


volume of direct-labor hours

$222,750
(495,000)(.0025) (495,000)(.005)

$222,750
$60 per hour
3,712.5 hours

Calculation of manufacturing cost per unit:


Box C
Direct material:
Paperboard
.3 lb. $.30 per lb .........................................
.7 lb. $.30 per lb .........................................
Corrugating medium
.2 lb. $.15 per lb .........................................
.3 lb. $.15 per lb .........................................
Direct labor:
.0025 hr. $18 per hr ...................................
.005 hr. $18 per hr .....................................
Applied manufacturing overhead:
.0025 hr. $60 per hr ...................................
.005 hr. $60 per hr .....................................
Manufacturing cost per unit.....................................

Box P

$.090
$.210
.030
.045
.045
.090
.150
___
$.315

.300
$.645

PROBLEM 9-48 (25 MINUTES)

1.

Annual cost of ordering


and storing XL-20

2.

Economic order quantity

3.

annual
annual

cost per order quantity holding


requirement

=
order
cost per
order
2

unit
quantity

(2)(annual requirement)(cost per order)


annual holding cost per unit

(2)(4,800)($150)
$4

360,000 = 600

Using the formula given for requirement (1):


Total annual cost of ordering
=
and storing XL-20

4,800
600
$150

$4

600
2

= $2,400
Note that this cost does not include the actual cost of XL-20 purchases (i.e., the
quantity purchased multiplied by the price).
4.

Orders per year:


Number of orders per year =

5.

annual requirement 4,800

8
order quantity
600

Using the new cost data:


a.

EOQ =

b.

(2) (annual requirement) (cost per order)


annual holding cost per unit

(2)(4,800)($20)
$19.20

10,000 = 100
Number of orders per year =
=

McGraw-Hill/Irwin
3-8

annual requirement 4,800

order quantity
100
48

2005 The McGraw-Hill Companies, Inc.


Solutions Manual