Chapter 10
Budgetary Planning and Control
QUESTIONS
1. Budgets are useful in the planning process because they increase communication and
coordination. Also, they force managers to carefully consider their goals and means to
achieve them.
2. Budgets are useful in the control process because they provide benchmarks for evaluating
performance.
3. In a top-down approach, budgets are prepared by high level managers without much input
from subordinates. In a bottom-up approach, budgets are set with substantial input from
subordinates.
4. In a zero-based budget, expenses are justified afresh in each budgeting period. Thus, no
continuing project or activity receives funding automatically.
5. A spreadsheet allows you to change assumptions quickly and easily, facilitating “what-if”
analysis. You can set up the spreadsheet with formulas representing your assumptions.
Then you can change the assumptions in one cell and the spreadsheet will update
automatically.
6. Cash receipt and disbursement budgets are prepared so that necessary loans can be
arranged to deal with cash shortages (or so that the company can plan to deal with cash
surpluses).
7. A static budget is a budget for one anticipated level of business activity. A flexible budget
is a set of budget relationships that can be used to prepare budgets for various activity
levels.
8. The costs of spoilage, rework, warranty repairs, and returns are some of the financial
measures that capture the effect of defects in a process.
9. In absence of budgets, performance in a period might be compared to performance in prior
periods to evaluate positive or negative trends.
10. Effective planning requires that managers provide truthful information and estimates for
setting budgets. However, because a manager’s performance may be evaluated in
comparison to a budget, he or she has an incentive to provide biased information so that
budget goals are easier to achieve. Thus, there is inherent conflict between the planning
and control uses of budgets.
10-2
Jiambalvo Managerial Accounting
EXERCISES
E1. If a manager knows that income will exceed the upper bound, he/she may
shift income to the next period to increase budget-based compensation in that
period. If a manager knows that income will be below the lower bound,
he/she may shift income from the next period to obtain the hurdle and
variable bonus.
E2. Budgets can be padded by decreasing revenue estimates and increasing
expense estimates. Padding makes it more likely that a manager will receive
the hurdle bonus and the maximum variable bonus.
E3. The following features are listed on the Hyperion Web site.
Scalable Web infrastructure enables flexible data entry, analysis and frequent
real-time updates from anywhere, using a standard Web browser.
Powerful workflow and process management including e-mail notification
and alerts empowers users to track and communicate the progress of their
plans and budgets; create, validate and change plans; identify bottlenecks;
conduct “what if” analysis and scenario testing.
Flexible modeling and business rules and easy-to-use graphical interface
creates and communicates corporate and user-defined rules and assumptions,
complex calculations, company standards and allocations at all levels. Set toplevel targets, test scenarios, and perform detailed bottom up calculations.
Supporting Plan Details – from the web browser, users can add their own
supporting detail to aggregated lines such as travel and construct their own
‘supporting plan’, that they can drill-down to an alternative stage and adjust if
necessary.
Powerful reporting and analysis empowers users to check progress of each
planning unit, analyze variances and change plans in real-time, all from a
central data platform.
Chapter 10 Budgetary Planning and Control
10-3
E4. b, d, a, and c.
E5.
Locksafe Company
Sales Budget
For the Year Ending December 31, 2007
First
Quarter
Sales for 2006
in units
21,000
Projected sales at
130% of prior year
27,300
Sales price per unit $
20
Budgeted revenue
for 2007
$546,000
E6.
Second
Quarter
26,000
Third
Quarter
25,000
Fourth
Quarter
30,000
Year
102,000
33,800
32,500
$
20 $
20
39,000
132,600
$
20 $
20
$676,000 $650,000
$780,000 $2,652,000
Sunny M
Production Budget
January
15,600
Unit sales
Plus desired ending inventory
of finished units
1,650
Total needed
17,250
Less beginning inventory of
finished units
1,600
Units to be produced
15,650
*Equals 10% of April sales of 18,500 units.
February
16,500
March
16,000
Quarter
48,100
1,600
18,100
1,850*
17,850
1,850
49,950
1,650
16,450
1,600
16,250
1,600
48,350
10-4
E7.
Jiambalvo Managerial Accounting
Ajax Chemical Company
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
$710,400
$747,200
$667,200
$2,882,400
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Year
46,000
42,000
50,000
39,000
177,000
16 $
16 $
16
$
16 $
16 $
$736,000 $672,000 $800,000 $624,000 $2,832,000
201,600
240,000
187,200
230,400
230,400
937,600
912,000
987,200
854,400
3,062,400
180,000
201,600
240,000
187,200
180,000
$757,600
Equals 30% of next quarter’s material requirements.
Units to be produced
Cost of raw material per unit (4 × $4)
Cost of raw material needed for production
Add desired ending inventory of raw material a
Total material needed
Less beginning inventory of raw material
Required raw material
purchases
a
E8.
Labor hours per unit
Labor rate per hour
Labor cost per unit
Units to be produced
Labor cost
Total hours
Average hours per quarter
Approximate number of employees
needed
Chapter 10 Budgetary Planning and Control
Quarter 1
2.5
$
20
50
46,000
$2,300,000
115,000
450
233
Quarter 2
2.5
$
20
50
42,000
$2,100,000
105,000
450
278
Quarter 3
2.5
$
20
50
50,000
$2,500,000
125,000
450
217
Quarter 4
2.5
$
20
50
39,000
$1,950,000
97,500
450
Ajax Chemical Company
Direct Labor Budget
For the Year Ending December 31, 2006
256
10-5
Year
2.5
$
20
50
177,000
$8,850,000
10-6
E9.
80,000
30,000
4,100
114,100
$332,600
$103,500
69,000
46,000
218,500
Quarter 1
46,000
80,000
30,000
4,100
114,100
$313,600
$ 94,500
63,000
42,000
199,500
Quarter 2
42,000
80,000
30,000
4,100
114,100
$351,600
$112,500
75,000
50,000
237,500
Quarter 3
50,000
80,000
30,000
4,100
114,100
$299,350
$ 87,750
58,500
39,000
185,250
Quarter 4
39,000
320,000
120,000
16,400
456,400
$1,297,150
$ 398,250
265,500
177,000
840,750
Year
177,000
Ajax Chemical Company
Manufacturing Overhead Budget
For the Year Ending December 31, 2006
Jiambalvo Managerial Accounting
Units to be produced
Variable costs:
Indirect material ($2.25/unit)
Indirect labor ($1.50/unit)
Utilities ($1.00/unit)
Total variable overhead
Fixed Costs:
Supervisory salaries
Factory depreciation
Other
Total fixed overhead
Total overhead
Chapter 10 Budgetary Planning and Control
January
E10.
Collection of credit sales
Collection of December sales
Collection of January sales
Collection of January sales
Collection of February sales
Collection of February sales
Collection of March sales
E11. Cash disbursements
for purchases
Payment of December purchases
Payment of January purchases
Payment of January purchases
Payment of February purchases
Payment of February purchases
Payment of March purchases
February
10-7
March
$20,000
48,000
$12,000
64,000
$68,000
$76,000
$16,000
72,000
$88,000
January
$63,000
4,200
February
March
$37,800
5,600
$67,200
$43,400
$50,400
6,300
$56,700
10-8
E12.
Jiambalvo Managerial Accounting
April
Collection of credit sales
Collection of February sales $17,000
Collection of March sales
28,500
Collection of April sales
37,500
Collection of March sales
Collection of April sales
Collection of May sales
Collection of April sales
Collection of May sales
Collection of June sales
$83,000
E13. Cash disbursements
for purchases
April
Payment of March purchases $40,000
Payment of April purchases
11,000
Payment of April purchases
Payment of May purchases
Payment of May purchases
Payment of June purchases
$51,000
May
June
$19,000
22,500
42,500
$84,000
$15,000
25,500
54,000
$94,500
May
June
$44,000
13,000
$57,000
$52,000
17,600
$69,600
Chapter 10 Budgetary Planning and Control
E14. Variable costs:
Direct material
Direct labor
Variable overhead
Variable cost per unit
$5.30
2.50
1.20
$9.00
Fixed costs:
Supervisory salaries
Depreciation
Other fixed costs
Fixed costs per month
$14,000
8,500
1,100
$23,600
10-9
Manufacturing costs for 8,000 units = $9 (8,000) + $23,600 = $95,600.
Manufacturing costs for 10,000 units = $9 (10,000) + $23,600 = $113,600.
Manufacturing costs for 12,000 units = $9 (12,000) + $23,600 = $131,600.
E15.
Number of units
Variable costs:
Direct material
Direct labor
Variable overhead
Fixed costs:
Supervisory salaries
Depreciation
Other fixed costs
Total overhead
Flexible
Budget
12,000
Actual
12,000
Difference
0
$ 63,600
30,000
14,400
108,000
$ 71,900
28,500
15,300
115,700
$8,300
(1,500)
900
7,700
14,000
8,500
1,100
23,600
$131,600
13,750
8,500
1,360
23,610
$139,310
(250)
0
260
10
$7,710
10-10 Jiambalvo Managerial Accounting
E16. The following performance report assumes that material and labor are
variable costs and the remaining costs are fixed.
Flexible
Budget
Actual
Difference
Sales
$600,000
$600,000
$
0
Variable costs:
Material
$120,000
$119,000
($ 1,000)
Labor
240,000
260,000
20,000
360,000
379,000
19,000
Fixed costs:
Owner’s salary
60,000
60,000
0
Rent
50,000
50,000
0
Depreciation
40,000
40,000
0
( 1,000)
Utilities
20,000
19,000
170,000
169,000
( 1,000)
Total cost
$530,000
$548,000
$18,000
The only expense that Girard should focus on is labor—it is $20,000 (8.33%)
higher than the flexible budget.
E17. Walter has an incentive to understate revenue and overstate expense in his
budget. With biased estimates, it will be easier to beat the budget and achieve
a bonus.
Chapter 10 Budgetary Planning and Control
10-11
PROBLEMS
P1.
a.
Sales
Less variable cost of sales
Contribution margin
Less fixed production costs
Less fixed selling and
administrative expenses
Income before taxes
Less taxes on income
Net income
$525,000
315,000
210,000
$101,840
50,860
5% increase over prior quarter
5% increase over prior quarter
$8,000 + 1.02 ($100,000 - $8,000)
152,700
57,300
22,920
$ 34,380
$7,000 + 1.02 ($50,000 - $7,000)
40% of income before taxes
b.
Cash collected from sales:
(.5 x $500,00 + .5 x $525,000)
Cash payments:
Payment of material
(.4 x $300,000 x .4) + (.4 x $315,000 x .6)
Payment for labor
(.4 x $315,000)
Payment for variable overhead
(.2 x $315,000)
Payment for fixed production costs
($101,840 - $8,000)
Payment for fixed sell. and adm. expense
($50,860 - $7,000)
Payment of income taxes
Plus beginning cash balance
Ending cash balance
$512,500
$123,600
126,000
63,000
93,840
43,860
22,920
473,220
$ 39,280
150,000
$189,280
10-12 Jiambalvo Managerial Accounting
c.
Assets:
Cash
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment
Less accumulated depreciation
Total assets
Liabilities and owners’ equity
Accounts payable
Common stock
Retained earnings
Total liabilities and
owners’ equity
$ 189,280
262,500 .5 x $525,000
350,000 No change
801,780
400,000
(115,000) $100,000 + $8,000 + $7,000
$1,086,780
$
50,400
500,000
536,380
$1,086,780
.4 x .4 x $315,000
$502,000 + $34,380
Chapter 10 Budgetary Planning and Control
P2.
Part A:
Budgeted Cash Receipts and Disbursements
For January 2007
Cash receipts
Collection of December 2006 tuition
Collection of January 2007 tuition
Total cash receipts
$30,000.00
35,000.00
65,000.00
Cash Disbursements
Payment of salaries
Payment of rent
Payment of utilities
Payment of other expenses
Payment for purchases of computer equipment
Payment of interest on note
Payment of taxes
Total cash disbursements
30,000.00
2,000.00
500.00
1,000.00
30,000.00
417.00
10,879.05
(74,796.05)
Plus beginning cash balance
Ending cash balance
40,000.00
$30,203.95
10-13
10-14 Jiambalvo Managerial Accounting
Part B.
Budgeted Income Statement
For January 2007
Tuition revenue
Less:
Salaries
Rent
Utilities
Other Expenses
Depreciation
Interest expense
Total expense
Income before taxes
Taxes on income
Net income
$70,000.00
$30,000.00
2,000.00
500.00
1,000.00
5,000.00
417.00
38,917.00
31,083.00
10,879.05
$20,203.95
Chapter 10 Budgetary Planning and Control
Part C.
Budgeted Balance Sheet
As of January 30, 2007
Assets
Cash
Accounts receivable
Equipment (net)
Total assets
Liabilities
Accounts payable
Note payable
Total liabilities
Owner equity
Retained earnings
Common stock
Total owner’s equity
Total liabilities and owner’s equity
$ 30,203.95
35,000.00
115,000.00
$180,203.95
$ 20,000.00
50,000.00
70,000.00
90,203.95
20,000.00
110203.95
$180,203.95
10-15
10-16 Jiambalvo Managerial Accounting
P3. a.
Botanical Soap Company
Budgeted Income Statement for the First Quarter, 2007
Sales ($200,000 × 1.1)
Less cost of sales (50% of sales)
Gross margin
Less selling, general and
administrative expenses ($7,000 increase)
Income before taxes
Less income taxes (35%)
Net Income
$220,000
110,000
110,000
47,000
63,000
22,050
$ 40,950
Chapter 10 Budgetary Planning and Control
10-17
b.
Botanical Soap Company
Cash receipts and disbursements budget for the First Quarter, 2007
Cash Receipts
Collections of sales:
10% of Quarter 4, 2006 sales
90% of Quarter 1, 2007 sales
Total cash receipts
Cash Disbursements
Payment for inventory purchases
20% of Quarter 4, 2006 purchases
80% of Quarter 1, 2007 purchases*
Selling, general and adm. expenses
(excludes $1,000 of depreciation)
Income taxes
Total disbursements
Plus beginning cash balance
Ending Cash balance
$ 20,000
198,000
$218,000
16,000
94,600
46,000
22,050
(178,650)
24,000
$ 63,350
*Beginning inventory in 2007 is $82,500. Cost of goods sold in the first
quarter is $110,000 (50% of $220,000 sales). Ending inventory is $90,750
[75% of $121,000 (cost of goods sold in second quarter of 2007)]. Thus,
purchases in the first quarter of 2007 are $118,250 (cost of goods sold plus
ending inventory minus beginning inventory).
10-18 Jiambalvo Managerial Accounting
c.
Botanical Soap Company
Budgeted Balance Sheet
As at the end of the First Quarter, 2007
Assets:
Cash (from cash receipts and disbursements budget)
$ 63,350
Accounts receivable (10% of first quarter, 2007 sales)
22,000
Inventory (75% of cost of sales in second quarter
of 2007—$121,000)
90,750
Furniture and fixtures ($40,000 less $1,000 depreciation)
39,000
Total assets
$215,100
Liabilities:
Accounts payable (20% of purchases in
first quarter of 2007—$118,250)
Stockholder's equity:
Common stock
Retained earnings ($90,500 plus net income)
Total stockholder's equity
Total liabilities and stockholder's equity
$ 23,650
60,000
131,450
191,450
$215,100
d. As the ending cash balance for January is $63,350, a minimum desired
cash balance of $25,000 will leave only $38,350 for opening the store.
However, a store opening requires $40,000. Thus, the company requires a
small amount of additional cash to open the store.
Chapter 10 Budgetary Planning and Control
P4.
10-19
Modern Healthcare
Budgeted Income for 2007
Revenue (decrease of 5 percent)
Less operating expenses:
Salaries
Physicians(no change)
Physician assistant (new position)
Nurses (no change)
Nursing aid (no change)
Receptionist (no change)
Accounting services (no change)
Training (increase of $15,000)
Supplies (increase to 8.5 percent of revenue)
Phone and fax (no change)
Insurance (no change)
Depreciation on office and equipment (increase of $20,000)
Utilities (increase of 5 percent)
Miscellaneous (increase of 5 percent)
Total operating expenses
Income before taxes
Less taxes on income (35 percent)
Net income
$2,280,000
1,000,000
70,000
140,000
62,375
45,200
34,450
170,000
193,800
2,500
250,000
220,000
18,900
63,000
2,270,225
9,775
3,421
$
6,354
10-20 Jiambalvo Managerial Accounting
P5. a.
Unit sales
Plus: Desired ending inventory of
finished units (20% of next
quarter sales)
Total needed
Less: beginning inventory of
finished units
Units to be produced
10,000
50,000
Quarter 1
40,000
10,000
58,600
18,600
68,600
Quarter 2
50,000
18,600
81,600
7,200
100,200
Quarter 3
93,000
7,200
40,800
12,000
48,000
Quarter 4
36,000
11,000
220,000
12,000
231,000
Year
219,000
BugAway Inc
Production Budget for 2007
11,000
39,000
b.
Units to be produced
Ounces of chemical A per unit
Ounces of chemical A required
for production
Chapter 10 Budgetary Planning and Control
Quarter 1
39,000
6
351,600
Quarter 2
58,600
6
36,720
526,320
489,600
Quarter 3
81,600
6
60,000
304,800
244,800
Quarter 4
40,800
6
60,000
1,380,000
1,320,000
Year
220,000
6
BugAway Inc
Material Purchases Budget 2007
Chemical A
234,000
73,440
425,040
73,440
452,880
$0.12
$54,345.60
36,720
57,000
268,080
1,323,000
$0.12
$0.12
$32,169.60 $158,760.00
52,740
372,300
$0.12
$44,676.00
Plus desired ending inventory of
chemical A (15% of next quarter
production needs)
52,740
Total needed
286,740
Less: beginning inventory of
finished units
57,000
Ounces to be purchased
229,740
Cost per ounce
$0.12
Cost of purchases of chemical A $27,568.80
10-21
10-22 Jiambalvo Managerial Accounting
Quarter 3
40,800
10
220,000
10
c.
Quarter 2
81,600
10
BugAway Inc
Material Purchases Budget 2007
Chemical B
Quarter 1
58,600
10
Year
39,000
10
2,200,000
Quarter 4
Units to be produced
Ounces of chemical B per unit
408,000
102,000
2,302,000
816,000
102,000
510,000
586,000
61,200
877,200
390,000
122,400
708,400
122,400
754,800
$0.09
$67,932.00
61,200
97,000
448,800
2,205,000
$0.09
$0.09
$40,392.00 $198,450.00
87,900
620,500
$0.09
$55,845.00
Ounces of chemical B required
for production
Plus desired ending inventory of
chemical B (15% of next quarter
production needs)
87,900
Total needed
477,900
Less: beginning inventory of
finished units
97,000
Ounces to be purchased
380,900
Cost per ounce
$0.09
Cost of purchases of chemical B $34,281.00
d.
Sales
Less variable costs:
Variable cost of goods sold
Variable selling and adm.
Contribution margin
Less fixed costs:
Fixed production costs
Fixed selling and adm.
Net income
Variable cost of sales per bottle:
Chemical A
Chemical B
Direct labor
Variable overhead
Total
Chapter 10 Budgetary Planning and Control
$398,000
156,000
19,900
321,600
$497,500
Quarter 2
40,000
50,000
$508,176
290,160
37,014
598,176
$925,350
Quarter 3
40,000
50,000
$141,552
112,320
14,328
231,552
$358,200
Quarter 4
160,000
200,000
$1,048,608
683,280
87,162
1,408,608
$2,179,050
Year
BugAway Inc
Budgeted Income, 2007
124,800
15,920
257,280
40,000
50,000
$231,600
Quarter 1
40,000
50,000
$167,280
$ 0.72
0.90
0.60
0.90
$3.12
10-23
10-24 Jiambalvo Managerial Accounting
Cash disbursements
Payment for purchases:
Payment of previous quarter's purchases (20%)
Payment of current quarter's purchases (80%)
Cash receipts
Collection of credit sales:
Collection of previous quarter's sales (40%)
Collection of current quarter's sales (60%)
Total cash receipts
190,000
0
35,000
565,000
60,000
280,000
$200,000
360,000
560,000
Quarter 1
$ 27,500
190,000
0
52,500
632,500
70,000
320,000
$240,000
420,000
660,000
Quarter 2
$ 60,000
190,000
0
70,000
700,000
80,000
360,000
$280,000
480,000
760,000
Quarter 3
$ 54,500
190,000
50,000
87,500
805,500
90,000
388,000
$320,000
540,000
860,000
Quarter 4
$ 137,000
760,000
50,000
245,000
2,703,000
300,000
1,348,000
$1,040,000
1,800,000
2,840,000
Year
P6.
Payment for selling and adm. expenses:
(excludes depreciation of $10,000)
Payment for capital expenditure
Payment of taxes*
Total cash disbursements
($5,000)
Casey Wholesalers
Cash Receipts and Disbursements Budget, 2007
Excess of receipts over disbursements
* Taxes equal 35 percent of pretax income. For quarter 1, pretax income equals $100,000 [Sales ($600,000) minus cost of sales
(300,000), minus selling and administrative expense (200,000)].
P7.
Step 1
Step 2
Step 3
Step 4
Step 5
Chapter 10 Budgetary Planning and Control
Expected sales in 2007 = (1.25 × sales of the same quarter previous year)
Cost of sales = (.6 × Expected Sales)
Ending inventory = (.5 × cost of sales next quarter)
Beginning inventory = Previous quarter's ending inventory
Purchases = Cost of sales + ending inventory - beginning inventory
$862,500
84,000
75,000
$ 871,500
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Year
$200,000 $250,000 $300,000 $400,000 $1,150,000
250,000
312,500
375,000
500,000
1,437,500
300,000
84,000
150,000
$234,000
Sales in 2006
Expected sales in 2007
225,000
150,000
112,500
$262,500
150,000
93,750
75,000
$168,750
187,500
112,500
93,750
$206,250
Cost of sales
Plus Ending inventory
Less Beginning Inventory
Equals Purchases
10-25
Q-1, 2008
$280,000
168,000
10-26 Jiambalvo Managerial Accounting
P 8.
Results for basic assumption:
Q1, 2006
Sales
200,000.00
Q2, 2006
210,000.00
Q3, 2006
220,000.00
Q4, 2006
185,000.00
Q2, 2007
231,000.00
Q3, 2007
242,000.00
Q4, 2007
203,500.00
Q1, 2008
242,000.00
66,000.00
13,860.00
66,000.00
13,860.00
69,300.00
14,520.00
13,860.00
69,960.00
72,600.00
12,210.00
14,520.00
70,290.00
61,050.00
14,520.00
12,210.00
63,360.00
72,600.00
Q1, 2006
200,000.00
Q2, 2006
210,000.00
Q3, 2006
220,000.00
Q4, 2006
185,000.00
Q2, 2007
231,000.00
Q3, 2007
242,000.00
Q4, 2007
203,500.00
Q1, 2008
242,000.00
76,230.00
17,569.20
16,770.60
77,028.60
79,860.00
14,774.10
17,569.20
77,064.90
67,155.00
17,569.20
14,774.10
69,950.10
79,860.00
Sales growth
Desired ending inventory %
Cost of sales %
Sales
1.10
0.20
0.30
Q1, 2007
220,000.00
Cost of sales
Plus desired ending inventory
Less beginning inventory
Purchases
Results for combination 1:
Sales
Sales growth
Desired ending inventory %
Cost of sales %
Sales
1.10
0.22
0.33
Q1, 2007
220,000.00
Cost of sales
Plus desired ending inventory
Less beginning inventory
Purchases
72,600.00
16,770.60
66,000.00
23,370.60
Chapter 10 Budgetary Planning and Control
10-27
Results for combination 2:
Sales
Q1, 2006
200,000.00
Q2, 2006
210,000.00
Q3, 2006
220,000.00
Q4, 2006
185,000.00
Q2, 2007
241,500.00
Q3, 2007
253,000.00
Q4, 2007
212,750.00
Q1, 2008
264,500.00
64,400.00
16,228.80
66,000.00
14,628.80
67,620.00
17,001.60
16,228.80
68,392.80
70,840.00
14,296.80
17,001.60
68,135.20
59,570.00
17,774.40
14,296.80
63,047.60
74,060.00
Q1, 2006
200,000.00
Q2, 2006
210,000.00
Q3, 2006
220,000.00
Q4, 2006
185,000.00
Q2, 2007
228,000.00
Q3, 2007
239,800.00
Q4, 2007
201,650.00
Q1, 2008
237,620.00
91,560.00
32,612.80
31,130.40
93,042.40
95,920.00
27,424.40
32,612.80
90,731.60
80,660.00
32,316.32
27,424.40
85,551.92
95,048.00
Sales growth
Desired ending inventory %
Cost of sales %
Sales
1.15
0.24
0.28
Q1, 2007
230,000.00
Cost of sales
Plus desired ending inventory
Less beginning inventory
Purchases
Results for combination 3:
Sales
Sales growth
Desired ending inventory %
Cost of sales %
Sales
1.09
0.34
0.40
Q1, 2007
218,000.00
Cost of sales
Plus desired ending inventory
Less beginning inventory
Purchases
87,200.00
31,130.40
66,000.00
52,330.40
10-28 Jiambalvo Managerial Accounting
P9. a. Both individuals are fighting for their self-interests, which are in conflict.
Debra wants budgeted revenue low and budgeted expenses high so that she
can easily achieve income goals that affect her bonus. Barney is interested
in the accuracy of budget numbers (i.e., he is interested in developing a
realistic plan) and making sure that Debra does not receive bonus
compensation that is not justified (at least, in his opinion).
b. One option for the President is to ask Debra and Barney to bring all
relevant information to the table and make sure they understand each
other’s position. He should also ask for information on the
factors—controllable and uncontrollable—that contributed to the
exceptional performance in 2006, and whether or not they are likely to
continue in 2007. Then, the president may let Debra and Barney reach an
agreement or set a budget according to his/her own best judgment.
Chapter 10 Budgetary Planning and Control
10-29
P10. a. Assumptions:
Salaries of customer consultants are variable costs. Salaries of
supervisors, office space expense, and depreciation are fixed costs.
12,000 calls 12,000 calls
Flex. Budget
Actual
Salaries of customer consultants $144,000
$160,000
Salaries of supervisors
18,000
17,500
Office space charge
5,000
5,000
Depreciation of equipment
4,000
5,000
Total
$171,000
$187,500
Difference
$16,000
(500)
0
1,000
$(16,500)
b. It appears that variances for salaries of customer consultants and
depreciation of equipment are significant variances at about 11 percent and
25 percent of the flexible budget amounts.
Some possible explanations:
Call volume increased by 20 percent, this may have resulted in overtime
premium paid to existing customer consultants. Or, possibly, additional
consultants were hired at higher salaries. Possibly, additional consultants
required additional telecom equipment. That might explain most of the
increase in depreciation expense.
c. Relevant non-financial measures might include: number of calls answered,
average customer waiting time for a response, average duration of call,
number of repeat calls for the same problem, level of customer
satisfaction, and the number of customer complaints related to customer
service.
10-30 Jiambalvo Managerial Accounting
P11. The variances are “favorable” because the budget has not been adjusted for
the actual number of units produced (which is less than planned). A flexible
budget may indicate that actual costs are higher than expected (once the
budget is adjusted for the actual level of production)
The president is not likely to be impressed by favorable cost variances that
are simply due to producing less than planned—especially if the lower
output is due to quality problems in manufacturing!
P12. a. Budget padding involves biasing estimates of sales downward and
expenses upward so that actual profit is more likely to exceed budgeted
profit. Jack has an incentive to pad his budget because exceeding the
budget increases his budget-based bonus compensation.
Budget padding may hurt company performance if the budget is less useful
in terms of coordinating internal activities. This would be the case if the
purchasing department bought too little material because they purchased a
quantity consistent with budgeted sales (which are biased downward).
b. The budget was set at $40,000,000 and budget compensation is capped
when actual profit is more than 120% of budget or $48,000,000. Thus,
there is no “need” to have profit higher than this amount. By delaying
shipments for the last two weeks, Jack can shift the “excess” profit to the
next quarter helping to ensure that he will maximize his bonus that quarter.
This action could hurt shareholder value if customers become upset that
they do not receive orders on time.
P13. 1.
2.
3.
4.
Customer satisfaction rating based on market survey data
Percent of orders delivered at customers’ requested delivery date
Production defect rate
Percent of sales related to new products (a product innovation measure)
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Chapter 10 Budgetary Planning and Control