Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 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 organization’s 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.
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ Solutions Chapter 8 Budgeting for Planning and Controlling 8–3 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.
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 8–4 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 8–8 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
8–9 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 8–11 1.
Raylene’s 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
Raylene’s 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 8–11 1.
Raylene’s 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
Raylene’s 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
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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.
8–13 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
___________________________________________________________ 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.
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 8–24 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________
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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 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
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Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________ 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
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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)
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