CHAPTER 9

PROFIT PLANNING AND BUDGETING

Questions, Exercises, Problems, and Cases: Answers and Solutions
9.1

See text or glossary at the end of the book.

9.2

A cost center is a responsibility center in which management is

responsible only for costs. In a profit center, management is responsible
for both costs and revenues.

9.3

An investment center is a responsibility center in which management is

responsible for managing costs, revenues, and assets. A profit center is
not responsible for assets.

9.4

Input/output relationships are not well defined in discretionary cost

centers. Evaluation of such centers from accounting data is difficult and
requires managerial judgment.

9.5

a.

Program or course director; possibly the instructor.

b.

Manager of the print department.

c.

Dean of the business school.

d.

Dean of the business school and/or finance department chairperson.

9.6

General economic trends are important in forecasting sales in the airline

industry. The overall health of the economy is an important factor
affecting the extent of business travel. In addition, the health of the
economy, safety concerns, and income levels affect the extent to which
the general public travels by air.

9.7

The sales manager's reward is based on sales dollars; it isn't surprising

the sales manager is concerned with revenues. If the company is
concerned about profits, their commission should be based on a
percentage of the profits generated by their sales as an incentive for the
sales force to sell more high-profit items.

9.8

The flexible budget and master budget serve two different purposes. The
master budget is a planning device, while the flexible budget is a control
device. The master budget is the benchmark, or goal, based on all the
information available at the time of preparation. It gives the profit goal
for the

9-1

Solutions

9.8 continued.
upcoming period, based on an estimated level of activity. Although the
firm may aim for that estimated level of activity, it may achieve above or
below it. The flexible budget is then used to determine what revenues
and costs should have been, given the actual activity level attained for
the period. The use of a flexible budget allows managers to separate
volume variances from those due to differences in unit selling prices, unit
variable costs, and fixed costs from the master budget.
9.9

Every firm has a constraining factor that determines the level of activity.
For most firms the constraining factor is the anticipated level of sales.
Once the level of sales is estimated, the production, marketing, and
administration costs can be forecast. If a firm can sell all that it makes,
then the constraining factor would be production, and one would start the
budgeting process with the production budget.

9.10

The master budget profit equals the flexible budget profit when the
budgeted level of sales volume equals the actual level of sales volume.

9.11

There is no difference between these two methods. In both cases the

variances due to sales volume changes are calculated.

9.12

Behavioral studies indicate that when the budget is an upper limit on

expenditures, employees will have a strong incentive to create budget
slack.
Thus, in a governmental setting we would expect a strong
incentive to overestimate costs to provide a cushion for future
expenditures.

9.13

In developing a budget to meet your college expenses, the primary steps

would be to project your cash receipts and your cash disbursements. Your
cash receipts could come from such sources as summer jobs, jobs held
during the academic year, college funds saved by relatives or friends for
your benefit, scholarships, and financial aid from your college or
university. You would also need to carefully project your college expenses.
Your expenses would include tuition, room and board, books and other
academic supplies, transportation, clothing and other personal needs, and
money for entertainment and miscellaneous expenses.

9.14

First there is an incentive for members of various subunits to overestimate

costs in order to achieve bonus awards. Of course, if the targets are set
so tight that they cannot be reasonably achieved then there may be a
problem for the entire incentive system. In addition, there may be a
disincentive to increase sales if it means increasing costs.

Solutions

9-2

9.15

Most companies find it essential to develop a budget for planning and

performance evaluation purposes, no matter where the company is
located. Without a plan, areas within a company would have difficulty
determining the resources needed to attain the goals of the company. For
example, the audit department of an accounting firm would not know how
many employees to hire (or fire!). The production department of a
manufacturing firm would not know the quantities of direct materials
required (and, therefore, how much to purchase). Airlines would not know
how many planes to purchase or lease. In addition, companies are able to
evaluate the performance of their employees by comparing actual results
with the initial budget.
Soliciting budget input from employees (including managers) not
only provides for more accurate forecasting, it creates a sense of
responsibility and ownership on the part of those involved. Employees
tend to look negatively at budgets that are imposed by executive
management rather than established by company employees.

9.16

Marketing, the laboratory, manufacturing, finance, and engineering all

have ideas to control costs. Preparing a budget requires ideas from
people in all these areas. The best way to get those ideas is to involve all
of the department managers who can control costs.

9.17

Company divisions around the world can submit budget information

electronically in spreadsheet form to one or more locations including
accounting.
The accounting department can then download this
information at its convenience in a format that can be easily modified
(rather than receiving a hard copy and having to input the information).
Also, time differences between countries are no longer as significant since
documents can be sent and received at the convenience of the
departments involved. Once budgets are finalized, information can be
provided on line to the appropriate departments.

9.18

(Jamison Company; solving for materials requirements.)

Finished
Units to Be
Produced

Units
to Be
Produced

42,000
Units to Be
Sold

24,000 Units
in Ending
Inventory

22,000 Units
in Beginning
Inventory

44,000

9-3

Solutions

9.18 continued.
Units of
Raw
Materials
to Be
Used
Units of
Raw
Materials
to Be
Purchased

4 Units of Raw
Materials per X 44,000 Finished Units = 176,000
Finished Unit

176,000 Units
110,000 Units
to Be Used + Desired Ending
Inventory

=
9.19

100,000 Units
in Beginning
Inventory

186,000 Units
of Raw Materials.

(Scott Company; solving for budgeted manufacturing costs.)

Budgeted Sales...................................................
Plus Ending Inventory....................................
Total Units Needed...
Less Beginning Inventory....................................
Units to Be Produced..........................................

10,000,000 Units
20,000
10,020,000
(80,000)
9,940,000

Costs to Be Incurred:
Direct Materials (9,940,000 Units X $24 per Unit).......... $
238,560,000....................................................................
Direct Labor (9,940,000 Units X $18 per Unit)...............
178,920,000 Variable Overhead (9,940,000 Units X $6 per Unit)
59,640,000
Total Budgeted Costs...................................................... $
477,120,000
9.20

(Appendix 9.1) (Lyndhurst Corporation; solving for cash collections.)

a.

Budgeted Cash Collection in March:

From January Sales (.18 X $1,000,000)................................ $ 180,000
From February Sales (.30 X $1,200,000)..............................
360,000
From March Sales (.50 X $800,000).....................................
400,000
Total Budgeted Collections in March................................ $ 940,000

b.

Budgeted Cash Collection in April:

From February Sales (.18 X $1,200,000).............................. $ 216,000
From March Sales (.30 X $800,000).....................................
240,000

Solutions

9-4

From April Sales (.50 X $1,000,000).....................................

500,000
Total Budgeted Collections in April.................................. $ 956,000

9-5

Solutions

9.21

(Appendix 9.1) (Alabama Corporation; solving for cash payments.)

Budgeted Cash Payments to Suppliers in October:
August Purchases (.10 X $1,000,000)......................................... $ 100,000
September Purchases (.20 X $900,000).....................................
180,000
October Purchases (.70 X $1,250,000).......................................
875,000
Total Budgeted October Cash Payments.................................. $
1,1
55,000
Budgeted Cash Payments to Suppliers in November:
September Purchases (.10 X $900,000)..................................... $
90,000
October Purchases (.20 X $1,250,000).......................................
250,000
November Purchases (.70 X $1,750,000)................................... 1,225,000
Total Budgeted November Cash Payments.............................. $1,565,000
Budgeted Cash Payments to Suppliers in December:
October Purchases (.10 X $1,250,000)....................................... $ 125,000
November Purchases (.20 X $1,750,000)...................................
350,000
December Purchases (.70 X $950,000)......................................
665,000
Total Budgeted December Cash Payments.............................. $1,140,000

9.22

(Lomaine Company; sales volume variance analysis.)

Sales Revenue......................
Less Variable Costs..............
Contribution Margin.............
Less Fixed Costs...................
Operating Profit....................

Flexible
Budget
(14,200
Units)
$ 170,400a
71,000c
$ 99,400
21,000
$ 78,400

a$170,400 = 14,200 Units X $12.

b$168,000 = 14,000 Units X $12.
c$71,000 = 14,200 Units X $5.
d$70,000 = 14,000 Units X $5.

Solutions

9-6

Sales
Volume
Variance
$ 2,400 F
1,000 U
$ 1,400 F
-$ 1,400 F

Master
Budget
(14,000
Units)
$ 168,000b
70,000d
$ 98,000
21,000
$ 77,000

9.23

(Lions Company; sales volume variance analysis.)

Sales Revenue......................
Less Variable Costs..............
Contribution Margin.............
Less Fixed Costs...................
Operating Profit....................

Flexible
Budget
(58,000
Units)
$4,350,000a
580,000c
$3,770,000
2,000,000
$1,770,000

Sales
Volume
Variance
$ 225,000 F
30,000 U
$ 195,000 F
-$ 195,000 F

Master
Budget
(55,000
Units)
$4,125,000b
550,000d
$ 3,575,000
2,000,000
$ 1,575,000

a$4,350,000 = 58,000 Units X $75.

b$4,125,000 = 55,000 Units X $75.
c$580,000 = 58,000 Units X $10.
d$550,000 = 55,000 Units X $10.
9.24

(Graphic comparison of budgeted and actual costs.)

a.

Variable Unit Cost:

$1.60 per Unit = ($6,000,000- $2,000,000)/2,500,000 units

9.25

b.

C = $5,200,000 = $2,000,000 + (2,000,000 Units X $1.60).

c.

$8,400,000 = $2,000,000 + (4,000,000 Units X $1.60).

(Maxum Company; preparing flexible budgets [CPA adapted].)

It is probably best to rearrange the statements to a contribution margin
format. The solution then becomes:
Flexible
Budgeta
(170
Units)
Sales Revenue............................................................................ $ 17,000
Variable Costs:
Manufacturing........................................................................
6,630
Marketing...............................................................................
1,870
Contribution Margin................................................................... $ 8,500
Fixed Costs:
Manufacturing........................................................................
500
Marketing...............................................................................
1,000
Administrative........................................................................
1,000
Operating Profit.......................................................................... $ 6,000
aSales revenue and the variable costs are 85 percent (= 170 units/200
units) of the master budget amounts. Fixed costs remain the same.

9-7

Solutions

1. (Maxum Company; sales volume variance analysis.)

Flexible
Budget
(170 Units)
Sales Revenue......................
$ 17,000
Variable Costs:
Manufacturing..................
6,630
Marketing.........................
1,870
Contribution Margin.............
$ 8,500
Fixed Costs:
Manufacturing..................
500
Marketing.........................
1,000
Administrative..................
1,000
Operating Profit....................
$ 6,000
9.27

Sales
Volume
Variance
$ 3,000 U

Master
Budget
(200 Units)
$ 20,000

1,170 F
330 F
$ 1,500 U

7,800
2,200
$ 10,000

---$ 1,500 U

500
1,000
1,000
7,500

(Interpreting the flexible budget line.)

a.

CM =
where CM = Contribution Margin
Xm = Master Budget Activity Level
F = Fixed Costs.
m = Profit at the Master Budget Activity Level
CM

= ($240,000 + $84,000)/18,000 units = $18 per

Unit.
b.

Xf = ($240,000 + $192,000)/$18 = 24,000 Units

where Xf = Flexible Budget Activity Level.

Solutions

9-8

9.28

(Interpreting the flexible budget line.)

a.

Flexible Budget Activity Level (Actual Units Sold):

Profit = (P V)X F
$(3,500) = $7X $35,000
$7X
X

= $(3,500) + $35,000
= [$3,500) = $35,000]/$7

X = 4,500 Units.
b.

Master Budget Activity Level:

$14,000 = $7X $35,000
$7X
X

= $14,000 + $35,000
= ($14,000 + $35,000)/$7

X = 7,000 Units.

9-9

Solutions

9.29

(Appendix 9.2) (Incentives for accurate forecasting.)

Actual sales
a. $2,500

Forecasted sales
$2,500

b.

3,000

2,500

110

c.

3,500

2,500

120

d.

2,500

3,000

95

e.

3,000

3,000

120

f.

3,500

3,000

130

g.

2,500

3,500

90

h.

3,000

3,500

115

i.

3,500

3,500

140

Calculations:
a
$100 = .04($2,500).
b
$110 = .04($2,500) + .02($3,000 $2,500).
c
$120 = .04($2,500) + .02($3,500 $2,500).
d
$95 = .04($3,000) .05($3,000 $2,500).
e
$120 = .04($3,000).
f
$130 = .04($3,000) + .02($3,500 $3,000).
g
$90 = .04($3,500) .05($3,500 $2,500).
h
$115 = .04($3,500) .05($3,500 $3,000).
i
$140 = .04($3,500).

Solutions

Bonus
$100

9-10

9.30

(Appendix 9.2) (Incentives for accurate forecasting.)

20
21
Actual
Sales,
Y

22
23
24

^
Forecasted Sales,
Y
20
21
22
23
24
a
i
$2,000 $1,950f $1,900 $1,850 $1,800
2,070b
2,100g 2,050j 2,000 1,950
2,140c
2,170h 2,200 2,150 2,100
2,210d
2,280e

2,240

2,270

2,300 2,250

2,310

2,340

2,370 2,400

a
$2,000 = $100(20).
b
$2,070 = $2,000 + $70(21 20).
c
$2,140 = $2,000 + $70(22 20).
d
$2,210 = $2,000 + $70(23 20).
e
$2,280 = $2,000 + $70(24 20).
f
$1,950 = $100(21) $150(21 20).
g
$2,100 = $100(21).
h
$2,170 = $2,100 + $70(22 21), etc.
i
$1,900 = $100(22) $150(22 20).
j
$2,050 = $2,200 $150(22 21), etc.

9.31

(Flexible budgetingmanufacturing costs.)

9-11

Solutions

a.

Expected Manufacturing Costs:

Direct Materials:
($10.00 per Unit X 20,000 Units)....................................... $ 200,000
Direct Labor:
($6.00 per Unit X 20,000 Units)......................................... 120,000
Manufacturing Overhead:
Variable Overhead ($3.00 per Unit X 20,000 Units)...........
60,000
Fixed Overhead................................................................. 100,000
Total Budgeted Manufacturing Costs................................ $ 480,000

b.

Flexible Budget for Production Department (16,000 Units of Activity):

Total Costs
for Production
Department

Fixed
Costs

Direct
Materials

Direct
Variable
Labor + Overhead

= $100,000 + ($10.00 + $6.00 + $3.00) X (Units

Produced)
= $100,000 + ($19.00 X 16,000 Units Produced)
Total Production
Costs for 16,000
Units of Activity
c.

= $404,000.

Total Production Costs for 25,000 Units Produced:

= $100,000 + ($19.00 X 25,000 Units Produced) = $575,000.

9.32

Solutions

(Victorias Gourmet Coffee; marketing cost budget.)

9-12

Fixed Costs:
Salaries ....................................................................................
Advertising.................................................................................
Sales Office Costs......................................................................
Travel.........................................................................................

$25,000
30,000
8,400
2,000
$65,400

Variable Costs:
Shipping Costs = $.02 per Unit Sold and Shipped
Commissions
= 2% of Sales, or .02 X Units Sold X Selling Price per Unit

Unit
Variable Costs =$.02 X Units Shipped + .02 X $6 Selling X Units
Price
Sold
Marketing Cost Flexible Budget:
$65,400 + [$.02 X Units Shipped] +

[$.12 X Units Sold]

Case 1:
Marketing Costs

= $65,400 + ($.02 X 60,000) + ($.12 X 60,000)

= $65,400 + $1,200 + $7,200
= $73,800.

Case 2:
Marketing Costs

= $65,400 + ($.02 X 75,000) + ($.12 X 75,000)

= $65,400 + $1,500 + $9,000
= $75,900.

Case 3:
Marketing Costs

= $65,400 + ($.02 X 64,000) + ($.12 X 64,000)

= $65,400 + $1,280 + $7,680
= $74,360.

9.33

(Victorias Gourmet Coffee; administrative cost budget.)

9-13

Solutions

Fixed costs are $44,800.

"Flexible" Administrative Budget = $44,800.
The term "flexible" budget is somewhat of a misnomer because
administrative costs are not a function of production but are fixed,
presumably, over the entire relevant range. Since there are no variable
costs, the flexible budget will be $44,800 regardless of anticipated
production-sales levels within the relevant range of activity.

9.34

(Sales volume variance analysis.)

Product X: Total sales volume variance is $1,800 favorable as shown
below.

Solutions

9-14

Sales....................................
Variable Costs......................
Contribution Margin.............

Flexible
Budget
(5,300
Units)
$ 53,000
21,200
$ 31,800

Sales
Volume
Variance
$ 3,000 F
1,200 U
$ 1,800 F

Master
Budget
(5,000
Units)
$ 50,000
20,000
$ 30,000

Product Y: Total sales volume variance is $400 favorable as shown

below.
Flexible
Budget
(240 Units)
Sales....................................
$ 12,000
Variable Costs......................
9,600
Contribution Margin.............
$ 2,400

Sales
Volume
Variance
$ 2,000 F
1,600 U
$
400 F

Master
Budget
(200 Units)
$ 10,000
8,000
$ 2,000

Product Z: Total sales volume variance is $2,000 unfavorable as shown

below.

Sales....................................
Variable Costs......................
Contribution Margin.............

9.35

Flexible
Budget
(48,000
Units)
$ 120,000
72,000
$ 48,000

Sales
Volume
Variance
$ 5,000 U
3,000 F
$ 2,000 U

Master
Budget
(50,000
Units)
$ 125,000
75,000
$ 50,000

(Estimating flexible selling expense budget and computing

variances.)
a.

Fixed Costs
Office]

= $20,000 [Salaries] + $50,000 [Advertising] + $4,000 [Sales

9-15

Solutions

= $74,000.
Variable Costs
as a Function
of Revenue

= (.05 [Commissions] X Revenue) + (.03 [Travel] X Revenue).

Variable Costs
as a Function
of Units Sold

= ($.05 [Office] X Units Sold) + ($.10 [Shipping] X Units Sold).

Total
Selling
Expenses

b.

= $74,000 + (.08 X Revenues) + ($.15 X Units Sold).

Sales Volume Variance Analysis

Sales Revenue......................
Less Variable Costs..............
Contribution Margin.............
Less Fixed Costs...................
Operating Profit....................

Flexible
Budget
(50,000
Units)
$ 275,000a
29,500c
$ 245,500
74,000
$ 171,500

Sales
Volume
Variance
$ 82,500 U
8,850 F
$ 73,650 U
-$ 73,650 U

Master
Budget
(65,000
Units)
$ 357,500b
38,350d
$ 319,150
74,000
$ 245,150

a$275,000 = $5.50 X 50,000 units.

b$357,500 = $5.50 X 65,000 units.
c$29,500 = (.08 X $275,000) + ($.15 X 50,000) = $22,000 + $7,500.
d$38,350 = (.08 X $357,500) + ($.15 X 65,000) = $28,600 + $9,750.

9.36 (Master budget profit plan.)

SOLANO PRODUCTS
MASTER BUDGET PROFIT PLAN

Solutions

9-16

FOR YEAR 2
Sales .......................................
Less Variable Costs:
Materials...........................
Other Manufacturing.........
Marketing..........................
Contribution Margin.................
Less Fixed Costs:
Manufacturing Depreciation.................................
Other Manufacturing.........
Marketing Depreciation.....
Administrative Depreciation.................................
Administrative...................
Operating Profit.......................

$ 913,500

Calculations
$725,000 X 1.20 X 1.05

46,368 $ 42,000 X 1.20 X .92

41,866 $ 35,600 X 1.20 X .98
126,720 $105,600 X 1.20
$ 698,546
249,750
85,995
37,400

Unchanged
$ 81,900 X 1.05
Unchanged

18,700 Unchanged
140,030 $127,300 X 1.10
$ 166,671

The projected operating profit for year 2 is more than six times the operating
profit for year 1. This substantial increase occurs because sales increase by
26%, while variable costs increase by 20% or less and fixed costs increase by
10% or less.

9-17

Solutions

9.37 (Master budget profit plan.)

FLORAL PRODUCTS
MASTER BUDGET PROFIT PLAN
FOR YEAR 2
Sales .......................................
Less Variable Costs:
Materials...........................
Other Manufacturing.........
Marketing..........................
Contribution Margin.................
Less Fixed Costs:
Manufacturing Depreciation.................................
Other Manufacturing.........
Marketing Depreciation.....
Administrative Depreciation.................................
Administrative...................
Operating Profit.......................

$ 885,651
163,856
194,504
106,400
$ 420,891
89,000
66,960
22,600
8,400
97,319
$ 136,612

Calculations
$746,000 X 1.12 X 1.06
$133,000 X 1.12 X 1.10
$180,900 X 1.12 X .96
$ 95,000 X 1.12

Unchanged
$ 72,000 X .93
Unchanged
Unchanged
$ 90,110 X 1.08

The projected operating profit will more than double the operating
profit for year 1. Revenue increases more than 18% while total
variable costs increase considerably less and total fixed costs increase
very little.

Solutions

9-18

9.38 (Production budget.)

COFFEE EXPRESS
PRODUCTION BUDGET
FOR THE YEAR ENDED DECEMBER 31
(IN UNITS)
First, compute units to be produced:
Expected Sales.........................................................
Add: Desired Ending Inventory of Finished Goods...
Total Units Needed...................................................
Less: Beginning Inventory of Finished Goods..........
Units to Be Produced...............................................

18,000 Units
7,000
25,000
(4,000)
21,000 Units

Next, estimate the costs:

Direct Materials:
Glass (21,000 Units. X $.40)............................................
Metal (21,000 Units X $1.60 X 1.10).................................
Total Direct Materials...................................................

8,400
36,960
45,360

Direct Labor:
21,000 Units X 1/4 hr. X $8.60..........................................

45,150

Overhead:
Indirect Labor (21,000 Units X $.12)................................
Indirect Materials (21,000 Units X $.03)...........................
Power (21,000 Units X $.07)............................................
Equipment Costs (20,000 Units X $.36)...........................
Building Occupancy (20,000 Units X $.19).......................
Total Overhead.............................................................
Total Budgeted Manufacturing Costs...................................

2,520
630
1,470
7,200
3,800
$ 15,620
$ 106,130

9-19

Solutions

9.39 (Production budget.)

ARIZONA, INC.
PRODUCTION BUDGET
FOR THE YEAR ENDED DECEMBER 31
(IN UNITS)
First, compute units to be produced:
Expected Sales.........................................................
Add: Desired Ending Inventory of Finished Goods...
Total Units Needed...................................................
Less: Beginning Inventory of Finished Goods..........
Units to Be Produced...............................................

10,000 Units
4,000
14,000
(2,000)
12,000 Units

Next, estimate the costs:

Direct Materials ( 12,000 Units X $1.20 X 1.10).....
15,840

Direct Labor:
12,000 Units X 1/4 hr. X $10.............................................
Overhead:
Indirect Labor (12,000 Units X $.10)................................
Indirect Materials (12,000 Units X $.08 X 1.10).................
Power (12,000 Units X $.07)............................................
Equipment Costs (10,000 Units X $.36)...........................
Building Occupancy (10,000 Units X $.19).......................
Total Overhead.............................................................
8,596
Total Budgeted Manufacturing Costs...................................
54,436

Solutions

9-20

30,000
1,200
1,056
840
3,600
1,900
$
$

9.40 (Marketing expense budget.)

Budgeted
For Next
July
= $

Item
July
Adjustments
Sales Commissions.............. $ 140,000 X 1.05 X 1.10
161,700............................
Sales Staff Salaries..............
60,000 X 1.04
=
62,400..............................
Telephone and Mailing.........
16,000 X 1.08 X 1.05
=
18,144..............................
Building Lease......................
20,000
None
=
20,000
5,000 X 1.12
Heat, Light, and Water.........
=
5,600................................
28,000 X 1.05
Packaging and Delivery........
=
29,400
=
Depreciation........................
15,000 + ($1,900/10 years)
..............................16,900
Marketing Consultants.........
20,000
Not Applicable
35,000
Total Budgeted Costs........................................................
$ 349,144
It appears that the company will barely achieve its goal of holding
the total marketing expense budget under $350,000 for the year. The
costs that increase the most are commissions. It might not be wise to
cut sales commissions. The company should start looking at ways to
cut telephone and mailing costs, perhaps with greater reliance on e
mail and the web.
9.41 (Marketing expense budget.)

Item
March
Adjustments
Sales Commissions.............. $ 135,000 X 1.05 X 1.10
Sales Staff Salaries..............
32,000 X 1.04
Telephone and Mailing.........
16,200 X 1.08 X 1.05
Building Lease......................
20,000
None
4,100 X 1.12
Heat, Light, and Water.........
27,400
X 1.05
Packaging and Delivery........
Depreciation........................
12,500
Marketing Consultants.........
19,700
Not Applicable
Total Budgeted Costs........................................................

9-21

=
=
=
=
=
=
=

Budgeted
Typical
Month
$ 155,925
33,280
18,371
20,000
4,592
28,770
12,500
35,000
$ 308,438

Solutions

9.42 (Budgeted purchases and cash flowsmultiple choice.)

a.

The correct answer is (3) $225,000.

BB + TI =
(130% X 11,900) + TI =
15,470 + TI =
TI =
=
11,250 X $20 =

b.

The correct answer is (2) $243,600.

BB + TI =
(130% X 11,400) + TI =
14,820 + TI =
TI =
=
12,180 X $20 =

c.

TO + EB
11,900 + (130% X 11,400)
11,900 + 14,820
11,900 + 14,820 15,470
11,250 Units
$225,000

TO + EB
11,400 + (130% X 12,000)
11,400 + 15,600
11,400 + 15,600 14,820
12,180 Units
$243,600

The correct answer is (5), none of the above, $328,116

60% X $363,000 X 97%= $ 211,266
25% X $363,000
=
90,750
9% X $290,000
=
26,100
$ 328,116

d.

The correct answer is (1) $285,379.

August purchases paid in September:
$225,000* X 46% = $103,500.
August selling, general, and administrative expenses
September:
[$357,000 X 15%) $2,000] X 46% = $23,713.
September purchases paid in September:

Solutions

9-22

paid

in

$243,600** X 54% = $131,544.

September selling, general, and administrative expenses paid in
September:
[$342,000 X 15%) $2,000] X 54% = $26,622.
$103,500 + $23,713 + $131,544 + $26,622 = $285,379
*From Part a. of this problem.
**From Part b. of this problem.
e.

The correct answer is (3) 12,260.

BB + TI =
(130% X 12,000) + TI =
15,600 + TI =
TI =
=

9-23

TO + EB
12,000 + (130% X 12,200)
12,000 + 15,860
12,000 + 15,860 15,600
12,260 Units

Solutions

9.43 (Budgeted purchases and cash flows)

a. Budgeted purchases in May.
BB + TI = TO + EB
(1.2 X 11,900) + TI = 11,900 + (1.2 X 11,400)
TI = 11,900 + 13,680 14,280
TI = 11,300 units or $226,000
b.

Budgeted purchases in June.

BB + TI = TO + EB
(1.2 X 11,400) + TI = 11,400 + (1.2 X 12,000)
TI = 11,400 + 14,400 13,680
TI = 12,120 units or $242,400

c. Cash collections for May.

60% X $363,000 X 97%= $ 211,266
25% X $363,000
=
90,750
10% X $354,000
=
35,400
$ 337,416
d. Cash disbursements in June.
May purchases paid in June:
$226,000 (from a) X 40% = $90,400.
May selling, general, and administrative expenses paid in June:
[$357,000 X 15%) $2,000] X 40% = $20,620.
June purchases paid in June:
$242,400 (from b) X 60% = $145,440.
June selling, general, and administrative expenses paid in June:
[$342,000 X 15%) $2,000] X 60% = $29,580.
$90,400 + $20,620 + $145,440 + $29,580 = $286,040
e. Number of units of inventory to purchase in July.
BB + TI = TO + EB
(1.2 X 12,000) + TI = 12,000 + (1.2 X 12,200)
TI = 12,000 + 14,640 14,400
TI = 12,240 units

Solutions

9-24

9.44 (Comprehensive budget plan.) (CPA adapted.)

a. (1)

SCHEDULE COMPUTING PRODUCTION

BUDGET (UNITS)
FOR OCTOBER, NOVEMBER, AND DECEMBER, YEAR 1

Budgeted SalesUnits.............
Inventory Required at End of
Montha.................................
Total to be Accounted for.........
Less Inventory on Hand at
Beginning of Month..............
Budgeted ProductionUnits....

October November December

100,000
90,000
100,000
18,000
118,000

20,000
110,000

20,000
120,000

24,000
94,000

18,000
92,000

20,000
100,000

aOctober:
90,000 X .2 = 18,000
November: 100,000 X .2 = 20,000
December: 100,000 X .2 = 20,000
(2)

SCHEDULE COMPUTING RAW MATERIAL

PURCHASES BUDGET (POUNDS)
FOR OCTOBER AND NOVEMBER YEAR 1
October

Budgeted ProductionPounds
(1/2 lb. per Unit)a................
Inventory Required at End of
Monthb.................................
Total to be Accounted for.........
Less Inventory on Hand at
Beginning of Month..............
Balance Required by Purchase...................................
Budgeted PurchasesPounds
(Based on Shipments in
Multiples of 25,000).............
aOctober:
November:
bOctober:

November

47,000

46,000

18,400
65,400

20,000
66,000

22,800

25,800c

42,600

40,200

50,000

50,000

94,000 X .5 = 47,000
92,000 X .5 = 46,000
92,000 X .4 X .5 = 18,400

November: 100,000 X .4 X .5 = 20,000

c22,800 + 50,000 47,000 = 25,800.

9-25

Solutions

9.44 continued.
b.

REGIS CORPORATION
PROJECTED INCOME STATEMENT
FOR THE MONTH OF NOVEMBER, YEAR 1
Sales (90,000 Units X $2).............................
Less Variable Costs:
Cost of Sales..............................................
Selling (10% of Sales)................................
Contribution Margin......................................
Less Fixed Costs:
Overhead...................................................
Administrative ($33,000 per Month)..........
Interest (1% X $100,000)...........................
Operating Profit............................................

$ 180,000
$ 99,000*
18,000
$ 10,000
33,000
1,000

117,000
63,000

44,000
$ 19,000

*$99,000 = [($50,000 + $40,000 + $20,000)/100,000 units] X 90,000

units.

Solutions

9-26

9.45 (Comprehensive budget plan.) (CPA adapted.)

a. With 24,000 units of inventory on hand on October 1, the company has
sufficient
inventory to support
production for all three months. No inventory need be produced and no raw
materials need be purchased. (The high level of inventory in the fall might reflect
preparation for the coming winter sales season, but the level of inventory seems
excessive and might explain the companys cash needs.)
b.
BOARDS, INC.
PROJECTED INCOME STATEMENT
FOR THE MONTH OF NOVEMBER, YEAR 1
Sales (3,000 Units X $100)...........................
Less Variable Costs:
Cost of Sales..............................................
Selling (10% of Sales)................................
Contribution Margin......................................
Less Fixed Costs:
Overhead...................................................
Administrative ($33,000 per Month)..........
Interest (1% X $100,000)...........................
Operating Profit............................................

$ 300,000
$165,000*
30,000
$ 60,000
33,000
1,000

195,000
105,000

94,000
$ 11,000

*$165,000 = [($80,000 + $20,000 + $10,000)/2,000 units] X 3,000 units.

9-27

Solutions

9.46 (Ethical issues [CMA adapted].)

Solutions

a.

Their methods are a hedge against uncertainty, but more importantly,

they allow employees to exceed expectations.
By understating
budgeted sales, and overstating budgeted costs, one can excel when
compared to the budget.
This can be personally rewarding if
promotions, bonuses, etc., are based on actual versus budgeted
performance.

b.

The sales manager and the production manager will lose credibility in
the eyes of upper management if they continuously present poor
budgets. Furthermore, management may use these budgets for
important decisions, such as determining staffing levels or the
profitability of products or product lines. Submitting a budget with
lower sales and higher costs (a reduced contribution margin) could
have adverse effects on the company.

c.

The sales and production managers have an ethical responsibility to

prepare reports using relevant and reliable information. Clearly they
are not doing this. The budgets they are submitting are not prepared
objectively. There is also a question of integrity if they hope to benefit
from the use of budgetary slack. By submitting erroneous budgets
they are subverting the legitimate goals of the company.

9-28

9.47 (Solving for unknowns; cost-volume-profit and budget analysis [adapted

from a problem by David O. Green].)
a.
Year 0
Sales........................
Cost of Sales:
Material................
Labor....................
130,000 X $2.30
Variable Overhead..................

100,000

$10

$ 1,000,000

$600,000
$600,000

X
X

.5
$ (300,000)
.33333

($600,000 X
.16667) $40,000

$0.66
Fixed Overhead.....
Selling......................
Administrative.........
Operating Profit.......

Year 1
$ 1,362,800*

130,000

$ (468,000)
(200,000)

130,000 X $3.60
(299,000)

(60,000)

(85,800)130,000

(42,000)
(162,000)
(106,000)
$ 200,000

1.05
1.08
1.06

(40,000)
(150,000)
(100,000)
$ 150,000

X
X
X

$40,000
$150,000
$100,000

*The $1,362,800 is found by adding costs to the $200,000 profit.

The sales price = $1,362,800/130,000 units = $10.48308.
b.

Sales (110,000 units X $10.48308)................................... $ 1,153,139

Cost of Sales:
Materials (110,000 X $3.60)..........................................
(396,000)
Labor (110,000 X $2.30)................................................
(253,000)
Variable Overhead (110,000 X $.66)..............................
(72,600)
Fixed Overhead.............................................................
(42,000)
Selling Costs [$150,000 + (.08/3 X 150,000)]...................
(154,000)
Administrative Costs.........................................................
(106,000)
Operating Profit................................................................. $ 129,539

c.

Selling costs have a fixed and a variable component.

In Year 0: Selling Costs = $150,000 = a + b(100,000 Units)
a

= $150,000 b(100,000)

From Part a.: Selling Costs = $162,000 = a + b(130,000 Units)

substituting from Year 0
$162,000 = $150,000 b(100,000) + b(130,000)
12,000 = 30,000b
b = $.40
a = $110,000

9-29

Solutions

9.47 c. continued.
Fixed Selling Costs
Variable Selling Costs

= $110,000
= $.40 per Unit

Variable Manufacturing
Cost per Unit

= $3.60 + $2.30 + $.66 = $6.56.

Total Fixed Costs:

Selling...................................
Overhead...............................
Administrative.......................
Variable Cost per Unit:
Manufacturing.......................
Selling...................................

$ 110,000
42,000
106,000
$ 258,000
$6.56
.40
$6.96

Let X = Units that must be sold at $10.00 each in order that Year 1
pretax income will be $200,000.
Total Sales = $10X
Total Variable Costs = $6.96X
Total Fixed Costs = $258,000
$10X $6.96X $258,000 = $200,000
$3.04X = $458,000
X = 150,658 Units.

Solutions

9-30

9.48 (River Beverages; budgeting case.)

a.

Open the class by asking for an overview of the case. Be sure that
the students discuss the various levels of the organization as well as
the regional structure of the organization. Draw the flow of the
budgeting process on the board. Students usually find it easier to
understand the corporate controls if they can examine the process
visually.
Points to be raised during the budget discussion are:
1. There are actually three sales projections made; one each by the
division managers, strategic research team, and district sales
managers.
2. Standard costs are used to develop the plant budget.
3. The purpose of the visit by the regional general managers and the
strategic research team appears to be to wave the corporate flag,
plus allow local managers to make their cases about budget
requests.
4. Distinguish between top down and bottom up budgeting. River
Beverages starts in the middle and works upward, then goes back
down to the lower levels of the organization.
5. How could the budget formulation process be changed? River
Beverages could start at the bottom with the district sales
managers. However, initial projections might be set low in order
to be easily attainable. If River Beverages starts higher in the
organization, budget forecasts could have a tendency to be
unrealistic because higher level managers do not know detailed
information at the district level.

b.

Question, Should the plants be treated as profit centers or cost

centers?
Main points to be made are:
1. Plant managers directly control costs. They have the ability to
decrease spending when sales are down. Also, their actions affect
sales. They can affect quality which affects sales in the long run.
They can miss or meet sales delivery deadlines which affects sales
in both the short run and the long run.
2. Plant managers do have responsibility for operating efficiency.
Ask, In the long run, is it better to motivate by minimizing costs
or maximizing efficiency? Minimizing costs could cause plant
managers to defer maintenance which could cause an unsafe work
place or a higher number of break downs in the future.

9-31

Solutions

Sales managers are responsible for revenue centers and plant

managers are responsible for profit centers. Ask the students, What
would be the effect of making the sales function a profit center?
Possible outcomes may be:
1. Sales managers may not be as flexible to changes or rush orders
of customers. Changes and rush orders cost more and would cut
into profit margins.
2. Sales managers may begin to focus on margins rather than
volumes.
Ask the students, Should the plants be operated as cost centers
rather than profit centers? If plants were cost centers, possible
outcomes might be:
1. Managers would be rewarded for minimizing costs. This could lead
to deferred maintenance or capital spending which would not
benefit the organization in the long run.
2. Plant managers would be less willing to complete rush jobs
because of higher costs.

Solutions

9-32

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9-33

Solutions