CH.

9 solutions
This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great
knowledge in their minds about running their business. They feel that they do
not need to spend a great deal of time on the budgeting process, because they
can essentially run the business by feel. This approach can result in several
problems. First, if the person who is running the business is sick or traveling,
he or she is not available to make decisions and implement plans that could
have been clarified by a budget. Second, the purposes of budgeting are
important to the effective running of an organization. Budgets facilitate
communication and coordination, are useful in resource allocation, and help in
evaluating performance and providing incentives to employees. It is difficult to
achieve these benefits without a budgeting process.
9-18 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.
9-19 Firms with international operations face a variety of additional challenges in
preparing their budgets.
A multinational firm's budget must reflect the translation of foreign
currencies into U.S. dollars. Almost all the world's currencies fluctuate in
their values relative to the dollar, and this fluctuation makes budgeting for
those translations difficult.

It is difficult to prepare budgets when inflation is high or unpredictable.

Some foreign countries have experienced hyperinflation, sometimes with
annual inflation rates well over 100 percent. Predicting such high inflation
rates is difficult and complicates a multinational's budgeting process.

The economies of all countries fluctuate in terms of consumer demand,

availability of skilled labor, laws affecting commerce, and so forth.
Companies with foreign operations face the task of anticipating such
changing conditions in their budgeting processes.

9-20 The five phases in a product's life cycle are as follows:

(a) Product planning and concept design
(b) Preliminary design
(c) Detailed design and testing
(d) Production
(e) 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.
EXERCISE 9-22 (25 MINUTES)

1. Cash collections in October:

Month of Sale Amount Collected in October

July...................................................... $150,000 4% $ 6,000
August................................................. 175,000 10% 17,500
 September........................................... 200,000 15% 30,000
October................................................ 225,000 70% 157,500
Total.................................................... $211,000

Notice that the amount of sales on account in June, $122,500 was not needed to
solve the exercise.

2. Cash collections in fourth quarter from credit sales in fourth quarter.

Amount Collected
Credit
Month of Sale Sales October November December
October..................................... $225,000 $157,500 $ 33,750 $ 22,500
November.................................. 250,000 175,000 37,500
December.................................. 212,500 148,750
Total.......................................... $157,500 208,750 $208,750
Total collections in fourth quarter
from credit sales in fourth
quarter................................... $575,000

3. THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL BUILD A SPREADSHEET

SOLUTIONS IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE HILTON, 8E WEBSITE:
www.mhhe.com/hilton8e.

EXERCISE 9-27 (30 MINUTES)

1. Budgeted cash collections for December:

Month of Sale Collections in December

November.................................................... $400,000 38% $152,000
December.................................................... 440,000 60% 264,000
Total cash collections................................... $416,000

2. Budgeted income (loss) for December:

Sales revenue............................................................ $440,000

Less: Cost of goods sold (75% of sales)...................... 330,000
Gross margin (25% of sales)....................................... $110,000
Less: Operating expenses:..........................................
Bad debts expense (2% of sales)....................... $ 8,800
Depreciation ($432,000/12)................................ 36,000
Other expenses................................................. 45,200
Total operating expenses................................... 90,000
Income before taxes................................................... $ 20,000
EXERCISE 9-27 (CONTINUED)

3. Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to December's

purchases of merchandise. Since the store's gross margin is 25 percent of sales, its
cost of goods sold must be 75 percent of sales.

Cost of
Goods
Month Sales Sold Amount Purchased in
December
December................ $440,000 $330,000 $330,000 20% $ 66,000
January................... 400,000 300,000 300,000 80% 240,000
Total December
purchases.............. $306,000

Therefore, the December 31 balance in accounts payable will be $306,000.

EXERCISE 9-28 (20 MINUTES)

Memorandum

Date: Today

To: President, East Bank of Mississippi

From: I.M. Student and Associates

Subject: Budgetary slack

Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding
the budget. The primary negative consequence of slack is that it undermines the
credibility and usefulness of the budget as a planning and control tool. When a
budget includes slack, the amounts in the budget no longer portray a realistic view
of future operations.

The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts
in 20x5. Yet the new accounts manager's projection is only 800 new accounts. This
projection will make it more likely that the actual number of new accounts will
exceed the budgeted number.
Problem 9-32 (40 minutes)

1. Production and direct-labor budgets

SHADY SHADES, INC.

BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Month
January February March Quarter
Sales (units)............................................. 20,000 24,000 16,000 60,000
Add: Ending inventory*............................. 32,00 25,000 27,00 27,000
0 0
Total needs............................................... 52,000 49,000 43,000 87,000
Deduct: Beginning inventory...................... 32,00 32,000 25,00 32,000
0 0
Units to be produced................................. 20,000 17,000 18,000 55,000
Direct-labor hours per unit........................ 1 .75
1
Total hours of direct labor
time needed......................................... 17,000 13,50 50,500
20,000 0

Direct-labor costs:
Wages ($16.00 per DLH) ...................... $320,00 $272,000 $216,00 $808,000
0 0
Pension contributions
($.50 per DLH).................................. 10,000 8,500 6,750 25,250
Workers' compensation
insurance ($.20 per DLH).................. 4,000 3,400 2,700 10,100
Employee medical insurance
($.80 per DLH).................................. 16,000 13,600 10,800 40,400
Employer's social security
(at 7%)............................................. 22,40 19,040 15,12 56,560
0 0
Total direct-labor cost............................... $372,40 $316,540 $251,37 $940,310
0 0

*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.

DLH denotes direct-labor hour.
Problem 9-32 (Continued)

2. Use of data throughout the master budget:

Components of the master budget, other than the production budget and the
direct-labor budget, that would also use the sales data include the following:
PROBLEM 9-42 (120 MINUTES)

1. Sales budget:

20x0 20x1
First
Decembe January February March Quarter
r
Total sales.................... $800,000 $880,00 $968,00 $1,064,80 $2,912,80
0 0 0 0
Cash sales*.................. 200,000 220,000 242,000 266,200 728,200
Sales on account ......... 600,000 660,000 726,000 798,600 2,184,600

*25% of total sales.

75% of total sales.

2. Cash receipts budget:

20x1
First
January February March Quarter
Cash sales...................................... $220,00 $242,000 $266,20 $ 728,200
0 0
Cash collections from credit
sales made during current
month*........................................ 66,000 72,600 79,860 218,460
Cash collections from credit
sales made during preceding
month ......................................... 594,000 1,787,400
540,000 653,400
Total cash receipts.......................... $826,00 $908,600 $999,46 $2,734,060
0 0

*10% of current month's credit sales.

90% of previous month's credit
sales.
PROBLEM 9-42 (CONTINUED)

3. Purchases budget:

20x0 20x1
First
December January February March Quarter
Budgeted cost of
goods sold...............$560,000 $616,00 $677,600 $745,360 $2,038,960

0
Add: Desired
ending inventory....... 308,000 372,680 372,680 *
338,800 372,680
Total goods
needed.....................$868,000 $954,80 $1,050,28 $1,118,04 $2,411,640
0 0 0

Less: Expected
beginning
inventory..................280,000 338,800 372,680
308,000 308,000**
Purchases....................$588,000 $646,80 $711,480 $745,360 $2,103,640

0

*Since April's expected sales and cost of goods sold are the same as the
projections for March, the desired ending inventory for March is the same as that
for February.

The desired ending inventory for the quarter is equal to the desired ending
inventory on March 31, 20x1.

**The beginning inventory for the quarter is equal to the December ending
inventory.

50% x $560,000 (where $560,000 = December cost of goods sold = December
sales of $800,000 x 70%)
PROBLEM 9-42 (CONTINUED)

4. Cash disbursements budget:

20x1
First
January February March Quarter
Inventory purchases:
Cash payments for purchases
during the current month*...... $258,72 $284,592 $298,14 $ 841,456
0 4
Cash payments for purchases
during the preceding
month .................................. 352,800 388,080 426,888 1,167,768
Total cash payments for
inventory purchases................... $611,52 $672,672 $725,03 $2,009,224
0 2

Other expenses:
Sales salaries............................. $ $ 42,000 $ $ 126,000
42,000 42,000
Advertising and promotion.......... 32,000 32,000 32,000 96,000
Administrative salaries................ 42,000 42,000 42,000 126,000
Interest on bonds**..................... 30,000 -0- -0- 30,000
Property taxes**......................... -0- 10,800 -0- 10,800
Sales commissions..................... 9,680 29,128
8,800 10,648

Total cash payments for other

expenses................................... $154,80 $136,480 $126,64 $ 417,928
0 8
Total cash disbursements................ $766,32 $809,152 $851,68 $2,427,152
0 0

*40% of current month's purchases [see requirement (3)].

60% of the prior month's purchases [see requirement (3)].

**Bond interest is paid every six months, on January 31 and July 31. Property taxes
also are paid every six months, on February 28 and August 31.
PROBLEM 9-42 (CONTINUED)

5. Summary cash budget:

20x1
First
January February March Quarter
Cash receipts [from req. (2)]............ $ 826,000 $ $ $2,734,060
908,600 999,460
Cash disbursements
[from req. (4)]............................. (766,320 )
(809,152) (851,680) (2,427,152)
Change in cash balance
during period due to operations... $ 59,680 $ $147,780 $ 306,908
99,448
Sale of marketable securities
(1/2/x1)...................................... 30,000 30,000
Proceeds from bank loan
(1/2/x1)...................................... 200,000 200,000
Purchase of equipment.................... (250,000) (250,000)
Repayment of bank loan
(3/31/x1).................................... (200,000) (200,000)
Interest on bank loan*..................... (5,000) (5,000)
Payment of dividends...................... (100,000) (100,000 )

Change in cash balance during

first quarter................................ $ (18,092 )
Cash balance, 1/1/x1....................... 70,000
Cash balance, 3/31/x1..................... $ 51,908

*$200,000 10% per year 1/4 year = $5,000

6. Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0............................. $

70,000
Less: Minimum cash balance............................................................ 50,000
Cash available for equipment purchases........................................... $
20,000
Projected proceeds from sale of marketable securities......................
30,000
Cash available................................................................................. $
50,000
Less: Cost of investment in equipment..............................................
250,000
Required short-term borrowing......................................................... $(200,000)
PROBLEM 9-42 (CONTINUED)

7. GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
FOR THE FIRST QUARTER OF 20X1

Sales revenue............................................................. $2,912,800

Less: Cost of goods sold............................................. 2,038,960
Gross margin.............................................................. $ 873,840
Selling and administrative expenses:
Sales salaries......................................................... $126,000
Sales commissions................................................. 29,128
Advertising and promotion....................................... 96,000
Administrative salaries............................................ 126,000
Depreciation........................................................... 150,000
Interest on bonds.................................................... 15,000
Interest on short-term bank loan.............................. 5,000
Property taxes........................................................ 5,400
Total selling and administrative expenses..................... 552,528
Net income.................................................................. $ 321,312

8. GLOBAL ELECTRONICS COMPANY

BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE FIRST QUARTER OF 20X1

Retained earnings, 12/31/x0............................................................ $ 215,000

Add: Net income............................................................................. 321,312
Deduct: Dividends........................................................................... 100,000
Retained earnings, 3/31/x1............................................................. $ 436,312
PROBLEM 9-42 (CONTINUED)

9. GLOBAL ELECTRONICS COMPANY

BUDGETED BALANCE SHEET
MARCH 31, 20X1

Cash............................................................................................... $ 51,908
Accounts receivable*........................................................................ 718,740
Inventory......................................................................................... 372,680
Buildings and equipment (net of accumulated depreciation) .............. 1,352,000
Total assets..................................................................................... $2,495,328

Accounts payable**.......................................................................... $ 447,216

Bond interest payable...................................................................... 10,000
Property taxes payable..................................................................... 1,800
Bonds payable (10%; due in 20x6).................................................... 600,000
Common Stock................................................................................ 1,000,000
Retained earnings............................................................................ 436,312
Total liabilities and stockholders' equity............................................ $2,495,328

*Accounts receivable, 12/31/x0......................................................... $ 540,000

Sales on account [req. (1)]............................................................... 2,184,600
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400)................................................ (2,005,860)
Accounts receivable, 3/31/x1............................................................ $ 718,740

Buildings and equipment (net), 12/31/x0.......................................... $1,252,000
Cost of equipment acquired.............................................................. 250,000
Depreciation expense for first quarter............................................... (150,000)
Buildings and equipment (net), 3/31/x1............................................. $1,352,000

**Accounts payable, 12/31/x0........................................................... $ 352,800

Purchases [req. (3)]......................................................................... 2,103,640
Cash payments for purchases [req. (4)]............................................ (2,009,224)
Accounts payable, 3/31/x1................................................................ $ 447,216
PROBLEM 9-34 (25 MINUTES)

1. Tuition revenue budget:

Current student 12,000
enrollment.
Add: 5% increase in student 6
body 00
Total student 12,600
body.
Less: Tuition-free 1
scholarships. 80
 Tuition-paying 12,420
students
Credit hours per student per x
year. 30
Total credit 372,600
hours..
Tuition rate per x
hour. $75
Forecasted tuition $27,945,00
revenue. 0

2. Faculty needed to cover classes:

Total student 12,600
body.
Classes per student per year [(15 credit hours
3 credit hours) x 2 semesters] x 10
.
Total student class enrollments to be 126,00
covered. 0
Students per 25
class.
Classes to be 5,040
taught.
Classes taught per
professor. 5
Faculty 1,00
needed 8

3. Possible actions might include:

Hire part-time instructors
Use graduate teaching assistants
Increase the teaching load for each professor
Increase class size and reduce the number of sections to be offered
Have students take an Internet-based course offered by another university
Shift courses to a summer session

4. No. While the number of faculty may be a key driver, the number of faculty is
highly dependent on the number of students. Students (and tuition revenue)
are akin to salesthe starting point in the budgeting process.
PROBLEM 9-35 (25 MINUTES)

1. Sales budget

July August September

Sales (in sets)...................................... 5,000 6,000 7,500
Sales price per set................................ $60 $60 $60
Sales revenue...................................... $300,000 $360,000 $450,000

2. Production budget (in sets)

July August September

Sales................................................... 5,000 6,000 7,500
Add: Desired ending inventory.............. 1,200 1,500 1,500
Total requirements................................ 6,200 7,500 9,000
Less: Projected beginning inventory...... 1,000 1,200 1,500
Planned production............................... 5,200 6,300 7,500

3. Raw-material purchases

July August September

Planned production (sets)........................ 5,200 6,300 7,500
Raw material required per set
(board feet)......................................... 10 10 10
Raw material required for production
(board feet)......................................... 52,000 63,000 75,000
Add: Desired ending inventory of raw
material (board feet)............................ 6,300 7,500 8,000
Total requirements.................................. 58,300 70,500 83,000
Less: Projected beginning inventory of
raw material (board feet)...................... 5,200 6,300 7,500
Planned purchases of raw material
(board feet)......................................... 53,100 64,200 75,500
Cost per board foot................................. $.60 $.60 $.60
Planned purchases of raw material
(dollars).............................................. $ 31,860 $ 38,520 $ 45,300
PROBLEM 9-35 (CONTINUED)

4. Direct-labor budget

July August September

Planned production (sets)........................ 5,200 6,300 7,500
Direct-labor hours per set........................ 1.5 1.5 1.5
Direct-labor hours required...................... 7,800 9,450 11,250
Cost per hour.......................................... $21 $21 $21
Planned direct-labor cost......................... $163,800 $198,450 $236,250

5. The electronic version of the Solutions Manual BUILD A SPREADSHEET

SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 9-36 (30 MINUTES)

1. Sales are collected over a two-month period, 40% in the month of sale and
60% in the following month. December receivables of $108,000 equal 60% of
Decembers sales; thus, December sales total $180,000 ($108,000 .6).
Since the selling price is $20 per unit, Dakota Fan sold 9,000 units ($180,000
$20).

2. Since the company expects to sell 10,000 units, sales revenue will total
$200,000 (10,000 units x $20).

3. Dakota Fan collected 40% of Februarys sales during February, or $78,400.

Thus, Februarys sales total $196,000 ($78,400 .4). Combining January
sales ($76,000 + $114,000), February sales ($196,000), and March sales
($200,000), the company will report revenue of $586,000.

4. Sixty percent of Marchs sales will be outstanding, or $120,000 ($200,000 x

60%).

5. Finished-goods inventories are maintained at 20% of the following months

sales. January sales total $190,000 ($76,000 + $114,000), or 9,500 units
($190,000 $20). Thus, the December 31 inventory is 1,900 units (9,500 x
20%).

6. February sales will total 9,800 units ($196,000 $20), giving rise to a January
31 inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:

12/31/x0 inventory + X January 20x1 sales = 1/31/x1 inventory

1,900 + X - 9,500 = 1,960
X 7,600 = 1,960
X = 9,560

7. Financing required is $3,500 ($15,000 minimum balance less ending cash

balance of $11,500):

Cash balance, January $

1 22,500
Add: January receipts ($108,000 + 184,00
$76,000).. 0
Subtotal $206,50
0
Less: January 195,00
payments 0
Cash balance before $
financing. 11,500
PROBLEM 9-37 (45 MINUTES)

1. The benefits that can be derived from implementing a budgeting system include the
following:

The preparation of budgets forces management to plan ahead and to establish

goals and objectives that can be quantified.

Budgeting compels departmental managers to make plans that are in

congruence with the plans of other departments as well as the objectives of the
entire firm.

The budgeting process promotes internal communication and coordination.

Budgets provide directions for day-to-day control of operations, clarify duties to

be performed, and assign responsibility for these duties.

Budgets help in measuring performance and providing incentives.

Budgets provide a vehicle for resource allocation.

PROBLEM 9-37 (CONTINUED)
2.
a. Schedule
Sales Budget
Ending Inventory Budget (units)
Production Budget (units)
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Sold Budget (includes
ending inventory in dollars)
Selling Expense Budget
Research and Development Budget
Administrative Expense Budget
Budgeted Income Statement
Capital Expenditures Budget
Cash Receipts and Disbursements
Budget
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
b. Subsequent Schedule
Production Budget
Selling Expense Budget
Budgeted Income Statement
Production Budget
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Sold Budget
Budgeted Income Statement
Budgeted Balance Sheet
Budgeted Income Statement
Budgeted Income Statement
Budgeted Income Statement
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Cash Receipts and Disbursements Budget
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Budgeted Statement of Cash Flows