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.
1
Solution to Chapter 8: Budgeting for Planning and Controlling
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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.
2
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
3
Solution to Chapter 8: Budgeting for Planning and Controlling
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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
4
Solution to Chapter 8: Budgeting for Planning and Controlling
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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
5
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
6
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
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1.
Performance Report
Actual
Budgeted Variance
Units produced
1,100
Direct materials cost
Direct labor cost
Total
$15,600
a.
b.
1,000
$11,200
4,400
$14,400
100 F
$10,000a
b
4,000
$1,600 U
$1,200 U
400 U
1,000 units * 2 leather straps * $5 = $10,000
1,000 units * .5 hours per unit * $8 = $4,000
2. The performance report compares costs at two different
levels of activity and so cannot be used to assess efficiency.
8
Solution to Chapter 8: Budgeting for Planning and Controlling
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8-17
Pet-Care Company Overhead Budget For the Coming Year
Activity Level
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
*BasicDiet: (0.25 × 100,000)
SpecDiet: (0.30 × 100,000)
Total DLH
55,000 Hours*
$0.40
0.50
1.60
$22,000
27,500
88,000
$137,500
$17,000
26,500
18,000
61,500
$199,000
25,000
30,000
55,000
9
Solution to Chapter 8: Budgeting for Planning and Controlling
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2. 10% higher:
Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
60,500 Hours*
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
$0.40
0.50
1.60
$24,200
30,250
96,800
$151,250
$17,000
26,500
18,000
61,500
$212,750
*55,000 DLH × 110% = 60,500
20% lower:
Pet-Care Company Overhead Budget For
the Coming Year
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs
Activity Level
44,000 Hours*
$0.40
0.50
1.60
$17,600
22,000
70,400
$110,000
$17,000
26,500
18,000
61,500
$171,500
*55,000 DLH × 80% = 44,000
10
Solution to Chapter 8: Budgeting for Planning and Controlling
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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
11
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
12
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
13
Solution to Chapter 8: Budgeting for Planning and Controlling
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7. Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials:
Metal (10 @ $8) = $80
Comp.
(6 @ $2)
= 12
Direct labor (4 × $9.25)
Overhead:
Variable (4 @ $3.40)
Fixed (4 × $1,014,000/664,000)
Total unit cost
$ 92.00
37.00
13.60
6.11
$148.71
Finished goods inventory = Units × Unit cost
= 48,000 × $148.71
= $7,138,080
8. Schedule 8: Cost of Goods Sold Budget
Direct materials used (Schedule 3)
Metal (1,660,000 × $8)
$13,280,000
Components (996,000 × $2)
1,992,000
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Add: Beginning finished goods (32,000 × $148.71)
Goods available for sale
Less: Ending finished goods (Schedule 7)
Budgeted cost of goods sold
9.
$15,272,000
6,142,000
3,271,600
$24,685,600
4,758,720
$29,444,320
7,138,080
$22,306,240
Schedule 9: Budgeted Income Statement
Sales (Schedule 1)
Less: Cost of goods sold (Schedule 8)
Gross margin
Less: Selling and admin. expenses (Schedule 6)
Income before income taxes
$ 32,250,000
22,306,240
$ 9,943,760
870,000
$ 9,073,760
14
Solution to Chapter 8: Budgeting for Planning and Controlling
___________________________________________________________
10. Schedule 10: Cash Budget
January
Beg. balance
$ 378,000
Cash receipts
8,600,000
Cash available
$8,978,000
Less:
Disbursements:
Purchases
$4,876,000
Direct labor
1,776,000
Overhead
790,800
Selling & admin.
214,000
Total
$7,656,800
Tentative
ending balance
Borrowed/(repaid)
Interest paid
Ending balance
February
$ 1,321,200
10,750,000
$12,017,200
March
$ 2,952,400
12,900,000
$15,852,400
Total
378,000
32,250,000
$32,628,000
$5,796.000
2,146,000
926,800
250,000
$9,118.800
$ 5,520,000
2,220,000
954,000
286,000
$ 8,980,000
$16,192,000
6,142,000
2,671,600
750,000
$25,755,600
$1,321,200
2,952,400
$ 6,872,400
$6,872,400
—
$1,321,200
—
$ 2,952,400
$ 6,872,400
$ 6,872,400
$
*(0.12 × 2/12 × $56,800) + (0.12 × 1/12 × $6,800)
15