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Chapter 10
Using Budgets to for
Planning and
Coordination
QUESTIONS
10-1 A budget is a quantitative model of the expected consequences of the
organization’s short-term operating activities. A budget typically expresses the
expected money inflows and outflows in order to assess whether the planned
operations will meet the organization’s financial objectives.
10-2 Flexible resources are those that vary with the activity level of the firm or
organization. Those that do not change with the activity level are capacityrelated (or committed or fixed resources).
10-3 Yes, a spending plan is a budget since it provides a summary, in financial terms,
of the student’s spending intentions.
10-4 In many ways the goal of a family budget is quite similar to the goal of a budget
developed for an organization. In these settings, the goal is to help both families
and organizations achieve their objectives by allocating their resources wisely.
Organizational budgets usually differ from family budgets in sheer size (the
dollar amounts proposed), scope (the number of operating units and their goals),
and number of iterations (submission and resubmissions of budgets) before the
final budget is determined.
10-5 A production plan is an exhibit that identifies proposed production during an
interval of time, such as a week or a month. A production plan in a courier
company identifies the number of drivers and trucks needed and assigns drivers
and trucks to routes.
10-6 Financial budgets represent projected financial results for an organization.
Such budgets include a statement of expected cash flows, projected balance
sheet, and a projected income statement. These are often called pro forma
financial statements. Operating budgets are plans used to guide the operations
of the organization. Such plans include sales, capital spending, production,
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materials purchasing, labor hiring and training, and administrative and
discretionary spending plans.
10-7 You should not jump to the conclusion that the university’s hiring and training
plan is likely to be more important because it hires skilled rather than unskilled
labor. A number of factors determine the importance of a labor hiring and
training plan in any organization. However, the two most important are likely
the amount of employee turnover that requires replacement and the amount of
ongoing retraining that the organization must provide. If the university has
reached relatively stable employment, the labor hiring and training plan would
be relatively unimportant since university faculty members are expected to
attend to their own training. If the municipality is continuously hiring new
employees or retraining existing employees to use equipment, it will have a
continuous need for a hiring and training plan.
10-8 The sales plan is based on the demand forecast. The numbers in the demand
forecast must not be less than the numbers in the sales plan. Otherwise the sales
plan is infeasible because it calls for selling more than customers will buy.
10-9 A demand forecast is an estimate of the number of units that customers would
be willing to buy under specified conditions. The intended sales in the sales
plan, a crucial component of the master budget process, cannot exceed the
numbers in the demand forecast. Thus, the demand forecast is used to develop
the sales plan.
10-10 Yes. Employee training does not have a physical relationship with the
organization’s activity level. (However, employee training should enhance
performance potential, supporting achievement of an organization’s strategy.)
10-11 A capital spending plan summarizes an organization’s plans to acquire or sell
long-term capital investments, such as buildings and equipment, that are needed
to meet the organization’s objectives.
10-12 A capacity-related expenditure is any expenditure that an organization cannot
avoid in the short-run. A payment on a long-term lease is a capacity-related
expenditure.
10-13 This is a tricky question. If the cafeteria is committed to preparing a given
amount of food for each student in the residence, whether the student shows up
for meals or not, the food cost is a capacity-related (fixed) cost. However, if the
cafeteria only prepares enough food for students who, on average, actually
show up to eat, the food cost is a variable cost.
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10-14 A defining characteristic of a flexible resource is one where you only pay for
what you use. Flexible resources can be acquired or disposed of in the short run
based on the number of output units. We usually assume that materials costs are
variable (flexible) because we can always carry materials until we use them.
However, if an organization pays a set amount for materials, no matter how
much it uses, the materials cost is a capacity-related (fixed) cost. A store that
buys merchandise may consider merchandise, or materials costs, a capacityrelated resource because it is unable to carry merchandise indefinitely or return
unused merchandise—but this is stretching the idea of a capacity-related
resource.
10-15 A line of credit is a short-term financing arrangement made between an
organization and a financial institution. A line of credit provides an organization
with a ready supply of cash, up to a limit negotiated between the organization
and its bank. We can think of a line of credit as a commitment from a financial
institution to allow the debtor to borrow money on demand up to a specified
maximum amount.
10-16 Planners use budget information for the following purposes:
(1) Identify broad resource requirements. This helps develop plans to put needed
resources in place.
(2) Identify potential problems. This helps to avoid problems or to deal with
them systematically.
(3) Compare projected operating and financial results to actual results. These
comparisons within an organization can be used to evaluate the efficiency of
the organization’s operating processes.
10-17 Both what-if and sensitivity analyses use the same model to evaluate future
alternatives. However, the approaches differ in their purposes. What-if-analysis
is a process that uses a model to predict the results of varying that model’s key
parameters or estimates. Sensitivity analysis is the process of selectively
varying key estimates of a plan or a budget to identify over what range a
decision option is preferred. In this way, sensitivity analysis enables planners to
identify estimates critical to the decision under consideration. What-if-analysis
relies on that model tested via sensitivity analysis.
10-18 A variance is a difference between an actual amount and a planned (budgeted)
amount. The oil pressure warning light comes on in a car when the oil pressure
falls outside a specified planned or expected range.
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10-19 Analysis of reasons for the variance between actual and estimated job costs can
help managers in several ways. If the managerial actions that led to actual costs
being lower than the estimated costs are identified, similar cost savings can be
realized by repeating those actions in the production of other jobs. If factors
resulting in actual costs being higher are identified, then managers may be able
to take the necessary actions to eliminate or control those factors. If cost
changes are likely to be permanent, however, the revised cost information can
be used in revising standards for future variance analyses and in bidding for
jobs in the future.
10-20 A flexible budget presents cost targets or forecasts for the organization’s
achieved level of activity.
10-21 The first level of variance analysis for a cost item focuses on the differences
between actual and estimated (master budget) costs for the item. The second
level of variance analysis decomposes the first-level variances into a flexible
budget variance and a planning variance. The flexible budget variance is the
difference between actual costs and flexible budget costs, which reflect the
volume level achieved, rather than planned. The planning variance is the
difference between flexible budget costs and master budget costs. For variable
costs, the third level of variance analysis decomposes the flexible budget
component of the second level variance into efficiency (use) and price (rate)
variances.
10-22 By classifying flexible budget variances into rate (price) and efficiency
(quantity) variances, managers can better understand the factors causing those
variances and correct the standards or institute changes that help reduce
expenses.
10-23 Yes. The labor efficiency variance will likely be favorable because fewer
(actual) hours will be required for a job when experienced workers work on the
job. The labor rate variance, however, will likely be unfavorable because
experienced workers’ wages will be higher than those of less experienced
workers.
10-24 The purchase and use of cheaper, lower-quality materials is likely to result in a
favorable material price variance, an unfavorable material quantity variance,
and an unfavorable labor efficiency variance, but the labor rate variance is not
likely to be affected.
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10-25 The first step isolates the effect of sales volume differences by computing sales
mix variances and sales quantity variances, and the second step isolates the
effect of sales price differences by computing sales price variances.
10-26 An appropriation is a planned cash outflow or spending plan. In a government
agency, it is an authorized spending limit. An example of an appropriation in a
university is an authorization for a faculty to spend a specified amount of
money on student entrance scholarships.
10-27 A periodic budget is a budget that is prepared for a fixed interval of time,
usually one year. After the period of time has elapsed, the budget is discarded.
10-28 This is called incremental budgeting because spending allocations for this
period are proportional adjustments of last period’s spending allocations.
10-29 This is called zero-based budgeting because each year the charities to which
you donate must reestablish their need.
10-30 Critics argue that the traditional budgeting process (1) reflects a top-down
approach to organizing that is inconsistent with the need to be flexible and
adapt to changing organization circumstances; (2) focuses on controls (such as
meeting the target budget) rather than on helping the organization achieve its
strategic objectives; and (3) causes resource allocations to be driven by political
power in the organization rather than strategic needs.
10-31 The beyond budgeting approach differs in two fundamental ways from
traditional budgeting. First, traditional budgets are based on fixed annual plans
that tie managers to predetermined actions. In the Beyond Budgeting approach
targets are developed based on stretch goals tied to peers, competitors, and key
global benchmarks. These targets are reviewed and modified if necessary and
managers are more motivated to achieve these goals since the goals represent
measures that link directly to the competition rather than an internal artificial
goal. Second, the Beyond Budgeting model provides a more decentralized way
of managing. Rather than relying on traditional hierarchical and centralized
management, managers are much more accountable to their teams and
workgroups since the targets directly pertain to what they are doing. This
provides everyone with a more direct sense of responsibility and is more
motivating.
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EXERCISES
10-32 If the organization solicits the information from the sales force, salespeople will
be motivated to understate sales potential in order to set low hurdles for
commissionable sales. Other approaches include using estimates based on
market surveys conducted by a drug industry association or other research
group, and using statistical models to identify a relationship between future
sales and current sales or trends in disease.
10-33 The primary purpose of budgets is for planning. Problems are created when
budgets are used after the fact for control. For example people whose
performance will be compared to the budget targets may understate their
potential in order to have achievable targets set. Therefore, tying plans to afterthe-fact control compromises the integrity of the information gathering process.
Some people have argued that information used for planning should not be used
in after the fact control. (Standards for after the fact control could, instead, be
based on independent benchmark information or improvements on previous
performance.) Some organizations have designed incentive schemes that reward
people jointly on their ability to improve performance and to meet budget
projections.
10-34 Wages paid to graders are controllable in the short-term if the wages are based
purely on the number of hours worked. The wages paid to lecturers who are
hired to teach for a semester are controllable in the intermediate-term because
there is no commitment to the lecturers beyond the end of the semester. The
wages paid to full-time faculty are only controllable in the long-term since most
faculty members are on long-term or permanent contracts. Because of the
nature of full-time staff teaching contracts, universities are notoriously
inflexible as student demands for programs and courses change.
10-35 Many organizations are run by the numbers. In these organizations managers
are held accountable for financial results. Therefore, their interest tends to focus
on projections of financial results and they judge the desirability of a set of
operating strategies based on the financial results projected for those strategies.
10-36 A consulting company is an organization that uses highly trained people to
deliver complex and customized products to its customers. This organization
might be experiencing a continuous need to hire and train personnel who can
provide the services that customers require. A planning process allows this
organization to anticipate the type and quantity of skills it will require and will
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allow it to develop a hiring and training plan that will provide the people it
needs at a minimum cost.
10-37 The vegetable canner acquires and packs its products over a very short period of
time following the growing seasons. Therefore, inventory levels will be
cyclical, building up after the growing season and declining until the end of the
next growing season. The organization will have to plan to acquire the funds it
needs to meet this need for a cyclical investment in inventory.
10-38 The credit granting policy is an important component of the organization’s
selling strategies. Tightening or eliminating credit terms might reduce sales. On
the other hand, tightening credit terms should speed cash collections and might
decrease the bad debts expense and reduce the opportunity cost of the accounts
receivable loans to customers. The organization’s planners must balance the
benefits of reduced bad debts expense and the opportunity costs of lending with
the profit on lost sales that might result from reducing credit terms.
10-39 A machine shop might accept and complete thousands of small jobs each year.
Because of the problems and errors in determining profits from individual small
jobs, this organization might want to compare its overall levels of efficiency
with those of its competitors by comparing its projected financial results with
those of its toughest competitors. Costs that are out of line with those of
competitors would be flagged and plans developed to improve the performance
of activities that created those costs.
10-40
Units
Sales
40,000
Desired ending inventory
5,000
Needs
45,000
Beginning inventory
6,000
Purchases
39,000
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10-41 (a)
Production Budget
January
February
March
Sales of G12
50,000
60,000
54,000
Desired ending inventorya
15,000
13,500
Needs
65,000
73,500
Beginning inventoryb
12,500
15,000
Production
52,500
58,500
a
25% of next month’s sales. For January, 25%  60,000 = 15,000; for February, 25%
 54,000 = 13,500
b
25% of current month’s sales. For January, 25%  50,000 = 12,500; for February,
25%  60,000 = 15,000
(b)
Purchases Budget
January
February
52,500
58,500
0.5
0.5
26,250
29,250
2,925
2,025
Total material needs
29,175
31,275
Beginning inventoryb
2,625
2,925
26,550
28,350
Units to be produced
Raw materials needed per unit
Total production needs
Desired ending inventorya
Total material purchases
a
10% of next month’s needs. For January, 10%  29,250 = 2,925; for February, 10%
 20,250 = 2,025
b
10% of current month’s needs. For January, 10%  26,250 = 2,625; for February,
10%  29,250 = 2,925
10-42 (a)
Let Q  sales level in units at which the costs are the same with both
machines.
($44  Q) + $32,000 = ($40  Q) + $40,000
$4Q = 8,000
Q = 2,000 units
(b)
Let R  sales level in dollars at which the use of the new machine results
in a 10% profit on sales ratio.
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Let Q be the corresponding number of units, so that R  $55  Q
$55  40  Q  $40,000  $55  Q  10%
15Q  55
. Q  40,000
40,000
Q
 4,211 units
9.5
R  $55  4,211
 $231,605
10-43 The most critical estimates are the demand estimates because they provide the
basis upon which all the other plans are based. Other critical estimates are those
relating to the consumption of each factor of production (such as raw materials,
labor, and machine capacities) by each unit of production since these estimates
will play an important role in estimating total resource requirements and
estimating costs.
10-44 No. Incremental budgeting does not ensure that resources are best allocated.
Some university units (such as departments or colleges) may have major
inefficiencies and budgetary slack where other units may have already made
process improvements and have few inefficiencies and relatively little
budgetary slack. Moreover, some units may be seriously underfunded relative to
the trend in demand where other units may be overfunded relative to the trend
in demand.
10-45 (a)
Because the quantity purchased differs from the quantity used, the
material price variance uses the purchased quantity (PQ) instead of the
quantity used (AQ).
Material price variance = (AP – SP) × PQ
= ($2.50 – 2.20) × 12,000
= $3,600 U
(b)
Material quantity variance = (AQ – SQ) × SP
= (10,500 – (20 × 500)) × $2.20
= $1,100 U
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(c)
Direct labor rate variance   AR  SR  AH
 $12  10  1800
,
 $3,600 U
(d)
Direct labor efficiency variance = (AH – SH) × SR
= (1,800 – (4 × 500)) × $10
= $2,000 F
10-46 (a)
Direct material price variance   AP  SP  AQ
 $5,880  2,800  2  2,800
 $280 U
(b)
Direct material quantity variance = (AQ − SQ) × SP
= (2,800 − (5 × 500)) × $2
= $600 U
(c)
A favorable labor efficiency variance of $100 for job 822 implies that
100
 990 .
(AH – 2 × 500) × $10 = –100. Therefore, AH  1,000 
10
(d)
An unfavorable labor rate variance of $250 for job 822 implies that
(AR – 10) × 990 = 250. Therefore,
250
AR  10 
 $10.2525 .
990
Finally, the actual direct labor costs incurred for Job 822 are:
AR  AH  $10.2525  990  $10,150 (rounded).
10-47 (a)
Material price variance = (AP – SP)  AQ
= ($97 – 100)  40,000
= $120,000 F
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Chapter 10: Using Budgets for Planning and Coordination
(b)
(c)
(d)
Material quantity variance =  AQ  SQ  SP
 40,000  5  9,000  $100
 $500,000 F
Yes, the relationship with this new supplier should be maintained because
it appears the supplier is providing materials of good quality for a price
that is less than expected. However, as a precaution, the company could
make sure the lower cost materials are not leading to the unfavorable
labor efficiency variance in part (e).
Direct labor rate variance   AR  SR  AH
 $60,000  5,000  12  5,000
0
(e)
Direct labor efficiency variance = (AH – SH) × SR
= (5,000 – (0.50 × 9,000)) × $12
= $6,000 U
10-48 (a)
(b)
Material price variance = (AP – SP)  AQ
Component X: 0.30  AQ = 160, so AQ = 533.3 units of X.
Component Y: – 0.20  AQ = – 120, so AQ = 600 units of Y.
Component Z: 0.50  AQ = 192, so AQ = 384 units of Z.
Material quantity variance = (AQ – SQ)  SP
Component X: (533.3 – (1  220))  SP = 168, so SP = $0.536 per unit of X.
Component Y: (600 – (2  220))  SP = 100, so SP = $0.625 per unit of Y.
Component Z: (384 – (3  220))  SP = –84, so SP = $0.304 per unit of Z.
1,000,000
 40
25,000
1125
, ,000
 45
Flexible budget number of batches 
25,000
10-49 Planned number of batches 
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PROBLEMS
10-50
Month
Borders Manufacturing Production Plan
Unit sales
Production (rounded)
January
8,742
(8,742  .5)  (9,415  .5)  9,079
February
9,415
(9,415  .5)  (7,120  .5)  8,268
March
7,120
(7,120  .5)  (8,181  .5)  7,651
April
8,181
(8,181  .5)  (7,942  .5)  8,062
May
7,942
(7,942  .5)  (9,681  .5)  8,812
June
9,681
(9,681  .5)  (2,511  .5)  6,096
July
2,511
(2,511  .5)  (2,768  .5)  2,640
August
2,768
(2,768  .5)  (2,768  .5)  2,768
September
2,768
(2,768  .5)  (2,283  .5)  2,526
October
2,283
(2,283  .5)  (1,542  .5)  1,913
November
1,542
(1,542  .5)  (1,980  .5)  1,761
December
1,980
(8,725  .5)  (1,980  .5)  5,353
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10-51
Demand
Sales revenue (× $0.20)
Mira Vista Planters
Jan
Feb
Mar
8,692 5,765 8,134
$1,738 $1,153 $1,627
Apr
May
Jun
34,400 558,729 832,251
$6,880 $111,746 $166,450
Planters
Beginning of month
2
1
1
1
5
73
Added a
0
0
0
4
68
14
Trained b (whole numbers)
0
0
0
7
114
24
Laid off c
1
0
0
0
0
0
Ending
1
1
1
5
73
87
Capacity d
10,000 10,000 10,000
40,000 560,000 835,000
Wages e
$1,600 $1,600 $1,600
$6,400 $89,600 $133,600
Training Costse
Layoff Severance
0
0
0
2,800
45,600
9,600
400
0
0
0
0
0
Total Costs
$2,000 $1,600 $1,600
Profit
($262)
($447)
8,692
5,765
Demand
Beginning capacity
Difference
a
New planters needed
5/3 × number needed
$9,200 $135,200 $143,200
$27 ($2,320) ($23,454) $23,250
8,134
20,000 10,000 10,000
– 11,308 – 4,235 – 1,866
34,400 558,729 832,251
10,000
50,000 730,000
24,400 508,729 102,251
0
0
0
4
68
14
0.0
0.0
0.0
6.7
113.3
23.3
b
Planters trained
0
0
0
7
114
24
c
Planters laid off
1
0
0
0
0
0
d
e
Trainees add to capacity for only 3 weeks of their first month. For April, the capacity is
((1 × 10,000) + (4 × 10,000 × ¾)) = 40,000.
Trainees are hired at the beginning of the month and receive $400 for a week of training
and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month.
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Mira Vista Planters
Jul
Aug
Sep
Oct
Demand
1,286,700 895,449 733,094 203,525
Sales revenue (× $0.20) $257,340 $179,090 $146,619 $40,705
Nov
29,410
$5,882
Dec
9,827
$1,965
Planters
Beginning of month
87
143
90
74
21
3
Added a
56
0
0
0
0
0
Trained b (whole
numbers)
94
0
0
0
0
0
0
53
16
53
18
2
143
90
74
21
3
1
Capacity d
1,290,000 900,000 740,000 210,000
30,000
10,000
Wages e
$206,400 $144,000 $118,400 $33,600
$4,800
$1,600
Laid off c
Ending
Training Costse
Layoff Severance
Total Costs
Profit
Demand
0
0
0
0
0
0
21,200
6,400
21,200
7,200
800
$244,000 $165,200 $124,800 $54,800 $12,000
$2,400
$13,340 $13,890 $21,819 ($14,095) ($6,118)
($435)
29,410
9,827
Beginning capacity
870,000 1,430,000 900,000 740,000 210,000
30,000
Difference
416,700– 534,551 – 166,906 – 536,475 – 180,590 – 20,173
a
New planters needed
5/3 × number needed
1,286,700 895,449 733,094 203,525
56
0
0
0
0
0
93.3
0.0
0.0
0.0
0.0
0.0
b
Planters trained
94
0
0
0
0
0
c
Planters laid off
0
53
16
53
18
2
d
Trainees add to capacity for only 3 weeks of their first month. For April, the capacity is
((1 × 10,000) + (4 × 10,000 × ¾)) = 40,000.
Trainees are hired at the beginning of the month and receive $400 for a week of training
and 3 weeks of wages at $400 per week. Trained workers receive $1,600 a month.
e
(a)
37,600
Summing the profits for the 12 months, we see that if each month’s contract is
accepted, the profit for the year is $25,195. Declining contracts in months with
negative profit will only further decrease profit because of layoff costs, or the
cost of training workers when demand increases dramatically.
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(b)
The number of people hired for training (239) is shown in the “trained” line and in
footnote b.
(c)
The number of people laid off (143) is shown in the “laid off” line and in
footnote c.
10-52
1
Units rented
per night
(a)
3
46 48 54
Staff employed 4 4 4
Cleaning
capacity per
night
60 60 60
Excess capacity
per night
14 12 6
(b)
10-53
2
Linen contract
units
Excess linen
capacity per
night
Strathfield Motel
Week
4 5 6 7 8 9
10 11 12
60 60 60 55 55 50 45 37 30
4
4
4
4
4
4
3
3
2
60 60 60 60 60 60 45 45 30
0
0
0
5
5
10
0
8
0
60 60 60
60 60 60 60 60 50 50 50 50
14 12
0
6
0
0
5
5
0
Homebush School Band Estimated Travel Expenses
Month
Concerts
Hotel
Food
Bus
Other
5
13 20
Total
September
3
2,700
1,440
1,800
600
6,540
October
4
3,600
1,920
2,400
800
8,720
November
5
4,500
2,400
3,000
1,000
10,900
December
8
7,200
3,840
4,800
1,600
17,440
January
3
2,700
1,440
1,800
600
6,540
February
4
3,600
1,920
2,400
800
8,720
March
2
1,800
960
1,200
400
4,360
April
5
4,500
2,400
3,000
1,000
10,900
May
7
6,300
3,360
4,200
1,400
15,260
114
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-54
Month
Revenue
Worthington Company
Credit
Cash Sales Card Sales
Account
Sales
January
12,369,348 2,473,870
February
15,936,293 3,187,259
5,999,134 1,484,322 10,670,715
March
13,294,309 2,658,862
7,729,102 3,767,757 14,155,721
April
19,373,689 3,874,738
6,447,740 4,282,625 14,605,103
May
20,957,566 4,191,513
9,396,239 4,701,460 18,289,212
June
18,874,717 3,774,943 10,164,420 5,740,025 19,679,388
July
21,747,839 4,349,568
August
14,908,534 2,981,707 10,547,702 5,943,930 19,473,339
September
11,984,398 2,396,880
7,230,639 5,504,193 15,131,712
October
18,894,535 3,778,907
5,812,433 4,196,356 13,787,696
November
21,983,545 4,396,709
9,163,849 4,422,809 17,983,367
December
20,408,367 4,081,673 10,662,019 5,759,831 20,503,523
115
0
Total
0
2,473,870
9,154,238 5,873,569 19,377,375
Chapter 10: Using Budgets for Planning and Coordination
10-55
Ingredient
Masefield Dairy Ingredient Purchases
July*
August*
September*
Ingredient 1
759,685
668,699
530,425
Ingredient 2
1,307,959
1,141,857
911,474
Ingredient 3
914,870
790,589
641,667
Ingredient 4
800,129
687,840
513,190
Ingredient 5
515,301
470,475
365,560
Ingredient 6
1,366,313
1,207,774
998,986
*Details appear below.
July
Ingredients
1
2
3
4
5
6
E
47,867
191,468
95,734
95,734
47,867
Total
Purchases
759,685
1,307,959
914,870
800,129
515,301
1,366,313
Products
A
B
C
D
E
162,033 196,750 194,575 75,766
39,575
324,066
- 583,725 75,766 158,300
98,375 389,150 303,064
162,033 295,125
- 151,532 79,150
- 196,750 194,575
79,150
486,099 98,375 583,725
39,575
Total
Purchases
668,699
1,141,857
790,589
687,840
470,475
1,207,774
Products
A
B
C
D
129,857 152,990 170,654 55,966
259,714
- 511,962 55,966
76,495 341,308 223,864
129,857 229,485
- 111,932
- 152,990 170,654
389,571 76,495 511,962
-
Total
Purchases
530,425
911,474
641,667
513,190
365,560
998,986
A
194,675
389,350
194,675
584,025
B
209,712
104,856
314,568
209,712
104,856
Products
C
209,855
629,565
419,710
209,855
629,565
D
97,576
97,576
390,304
195,152
-
August
Ingredients
1
2
3
4
5
6
September
Ingredients
1
2
3
4
5
6
116
E
20,958
83,832
41,916
41,916
20,958
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-56
Week
Nathaniel’s Motor Shop
Work
Total
Hours
Overtime
Wages
Variable
Support
1
255
0
6,750
6,375
2
330
15
7,200
8,250
3
300
0
6,750
7,500
4
285
0
6,750
7,125
5
325
10
7,050
8,125
6
280
0
6,750
7,000
7
260
0
6,750
6,500
8
300
0
6,750
7,500
9
340
25
7,500
8,500
10
355
40
7,950
8,875
117
Chapter 10: Using Budgets for Planning and Coordination
10-57
Country Club Road Nurseries
Cash Outflows
Full-time staff
Full-time hours
Part-time hours
January February
15
15
2,400
2,400
480
480
March
15
2,400
800
April
15
2,400
800
May
15
2,400
2,400
June
15
2,400
2,400
Cash outflows
Full-time wages $40,500 $40,500 $40,500 $40,500 $40,500 $40,500
Part-time wages
4,800
4,800
8,000
8,000 24,000
24,000
Variable costs
36,000 36,000 36,000 36,000 12,000
12,000
Capacityrelated costs
55,000 55,000 55,000 55,000 55,000
55,000
Total outflows $136,300 $136,300 $139,500 $139,500 $131,500 $131,500
Full-time staff
Full-time hours
Part-time hours
July
15
2,400
2,400
August
15
2,400
2,400
Sept.
15
2,400
1,200
October
15
2,400
600
Nov.
15
2,400
0
December
15
2,400
0
Cash outflows
Full-time wages $40,500 $40,500 $40,500 $40,500 $40,500 $40,500
Part-time wages
24,000 24,000 12,000
6,000
0
0
Variable costs
48,000 48,000 48,000 24,000
0
0
Capacityrelated costs
55,000 55,000 55,000 55,000 55,000 55,000
Total outflows $167,500 $167,500 $155,500 $125,500 $95,500 $95,500
118
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-58 (a)
(b)
10-59 (a)
Cash inflows
From September sales: $1,000,000  0.3
From October sales: 40,000  $32  0.7
Cash outflows
For September purchases: $880,000  0.8
For October purchases: 38,000  $20  0.2
Selling and admin.: $350,000  $20,000
Net cash flow
Opening cash balance
Ending cash balance
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Net income
Merchandise inventory
Units
Required for sales
Desired ending inventory
Needs
Less beginning inventory
Budgeted purchases
12,000
3,000
15,000
2,000
13,000
$300,000
896,000 $1,196,000
704,000
152,000
330,000
40,000  $32 =
40,000  $20 =
40,000  $12 =
$1,280,000
800,000
480,000
350,000
$130,000
Dollar value
$480,000
120,000
600,000
80,000
$520,000
(b)
Sales
12,000  $60 =
Cost of goods sold
12,000  $40 =
Gross margin
12,000  $20 =
Selling and admin. expenses
Net income
(c)
Cash inflows
From Nov. sales: $600,000  .4
From Dec. sales: $720,000  .6
Cash outflows
For Nov. purchases: $340,000  .5
For Dec. purchases: $520,000  .5
Selling and admin.: $200,000  $40,000
Net cash flow
Opening cash balance
119
1,186,000
10,000
40,000
$50,000
$720,000
480,000
240,000
200,000
$40,000
$240,000
432,000
170,000
260,000
160,000
$672,000
590,000
82,000
30,000
Chapter 10: Using Budgets for Planning and Coordination
Ending cash balance
10-60 (a)
$112,000
With 2,000,000 medical claims Shadyside Insurance Company should employ
13.33 = ((2,000,000/150,000)  1) supervisors, 26.67 = ((2,000,000/150,000) 
2) senior clerks, and 80 = ((2,000,000/150,000)  6) junior clerks. Assuming
that the organization hires full-time people, clerical costs are a step variable
cost (which means that they must round up to a full employee) and the
budgeted number of people for this level of activity is 14 supervisors, 27
senior clerks, and 80 junior clerks. The total cost of this group would be
$4,147,000 = (14  $42,000) + (27  $37,000) + (80  $32,000).
The actual cost to this group was $4,354,000 = (14  $42,000) + (30 
$37,000) + (83  $32,000). The excess cost of $207,000 = 4,354,000 
4,147,000 was created by having 3 more senior clerks than budgeted and
3 more junior clerks than budgeted.
(b)
The issue is why the clerical group is employing more people than it
should be for the workload it faces. There are many possible reasons for
this result, including training inefficiencies, continued growth requiring
more people, an inappropriate standard, overestimating requirements
when hiring took place, and processing inefficiencies. The report from
the manager of this unit should identify the amount of the excess
spending, its cause, and what will be done to correct the variance.
120
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-61 (a)
Let p be the unit sales price to earn a budgeted profit (before income
taxes) of $200,000.
Sales (260,000 units)
260,000p
Cost of goods sold:
Direct materials
300,000 × 130% × 120%
468,000
Direct labor
200,000 × 130% × 115%
299,000
Variable manufacturing support
60,000 × 130% × 110%
85,800
Fixed manufacturing support
40,000 × 105%
42,000
Gross margin
894,800
260,000p – 894,800
Selling expenses: 150,000  108%
162,000
Administrative expenses
100,000 × 106%
106,000
Profit (before income taxes)
268,000
260,000p – 1,162,800
Therefore, 260,000p – 1,162,800  200,000 or p  $5.24.
121
Chapter 10: Using Budgets for Planning and Coordination
(b)
Let x be the number of units that must be sold at $5.00 to earn $200,000.
Sales (x units)
5.00x
Cost of goods sold:
Direct materials
300,000 
x
 120%
200,000
1.80x
Direct labor
200,000 
115
. x
x
 115 %
200,000
Variable manufacturing support
60,000 
x
 110 %
200,000
0.33x
Fixed manufacturing support
40,000 × 105%
42,000
3.28 x  42,000
172
. x  42,000
Gross margin
Selling expenses
150,000 + [(150,000  8%) 
x  200,000
]
60,000
Administrative expenses: 100,000 × 106%
0.2x +
110,000
106,000 0.2 x  216,000
152
. x  258,000
Profit (before income taxes)
Therefore, 1.52x – 258,000 = 200,000 or x = 301,316 units.
122
Atkinson, Solutions Manual t/a Management Accounting, 6E
(c)
Sales: 220,000 units  $5.24
$1,152,800
Cost of goods sold:
Direct materials: 300,000 × 110% × 120%
Direct labor: 200,000 × 110% × 115%
$396,000
253,000
Variable manufacturing support
(60,000 × 110% × 110%)
72,600
Fixed manufacturing support
42,000
763,600
Gross margin
389,200
Selling expenses
150,000 + [(150,000  8%)
20,000
]
60,000
Administrative expenses: 100,000 × 106%
$154,000
106,000
Profit (before income taxes)
10-62 (a)
260,000
$129,200
Last month’s profit
 $0.40  1,000,000  $0.25  1,000,000  $60,000  $90,000
.  $135,000
Current month’s target profit  $90,000  15
Let x be the maximum amount that can be spent on advertising.
($0.40 × 2,000,000) – ($0.25 × 2,000,000) – $(60,000 + x) = $135,000.
x  $105,000
(b)
Let y be the number of units to break even.
0.4 y  0.25 y  60,000  0 or y  400,000 .
Let p be the selling price to maintain the same breakeven point.
p  400,000  0.30  400,000  60,000  0 or p = $0.45 per bar. That is, if
variable cost is increased by 5 cents per bar, then the sales price must also
increase by 5 cents to maintain the same break-even point.
(c)
Let z be the sales volume in units that would be needed at the new price
for the company to earn the same profit as last month.
Therefore, 0.5z  0.25z  60,000  90,000 or z  600,000 bars.
123
Chapter 10: Using Budgets for Planning and Coordination
10-63 (a)
Old Machine New Machine
$18
$20
Selling price per unit
Variable cost per unit
$14
$14
Contribution margin
4
6
Monthly fixed costs
$120,000
$250,000
30,000
41,667
Breakeven points (in units)
(b)
Let SP = selling price, Q = quantity, FC = fixed costs, and V = variable
costs.
SP  Q  FC  V  Q  10%  SP  Q
$20  Q  $250,000  $14  Q  010
.  $20  Q
Q
$250,000
 62,500
$20  14  2
(c)
Q   SP1  VC1  FC1  Q   SP2  VC2  FC2
$4  Q  $120,000  $6  Q  $250,000
$250,000  120,000
Q
 65,000
$6  4
(d)
The old machine represents a lower risk of making a loss because it has a
lower breakeven point.
(e)
Q  SP1  VC1  FC1 Q   SP2  VC2  FC2

Q  SP1
Q  SP2
4  Q  120,000 6  Q  250,000

18  Q
20  Q
204  Q  120,000  186  Q  250,000
28  Q  2,100,000
Q  75,000 units
124
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-64 (a)
Deluxe rackets
Without
With
$40.00
$36.00
20.00
20.00
4.00
3.60
16.00
12.40
50,000
65,000
Total contribution margin
Contribution margin lost
(Standard rackets)
$800,000
$806,000
Net impact on profits
$800,000
Sales price per racket
Variable costs:
Manufacturing
Commission
Contribution margin per racket
Sales (units)
*
50,000*
$756,000
Contribution margin lost on Standard rackets = $(30 – 17 – 3)  5,000. Tenneco’s
profits will decrease by $44,000 = ($800,000 – $756,000).
Contribution margin per racket
Increased sales (units)
Standard Deluxe
$10
$16
2,000
Total increase in contribution
margin
1,000
Pro
$20
Total
1,000
$20,000$16,000$20,000$56,000
The $56,000 increase in the contribution margin is greater than the
incremental advertising expense of $50,000. Therefore, this decision is
advisable.
(c)
Yes. Assuming each line of rackets uses the same manufacturing support
resources, it is in the best interest of the company to push high-priced
rackets because they have higher unit contribution margins (in this case)
than the lower-priced rackets.
125
Chapter 10: Using Budgets for Planning and Coordination
10-65 (a)
Breakeven point in units = (fixed costs)/(contribution margin per unit) =
$200,000/$125 = 1,600 units
Breakeven point in dollars = 1,600 × $250 = $400,000
(b)
Let X  increase in sales in units per month to justify the additional
expenditure. The contribution margin from the increase in sales must
equal the additional advertising expenditure. That is, $125X = $22,500, or
22,500
X
 180 .
125
Sales must increase by 180 units per month or $45,000 = $250 × $18 in
order to break even on the monthly expenditures.
(c)
New contribution margin per unit =
Old contribution margin per unit − Decrease in selling price
= $125 − $25 = $100.
Total contribution margin  $100  2,400  $240,000
New fixed costs  $200,000  $22,500  $222,500
Net income = $240,000 – 222,500 = $17,500.
10-66 (a)
Sales price:
$35.00
Less variable costs:
Raw materials
$16.00
Direct labor
7.00
Manufacturing
4.00
Selling
1.60
Contribution margin per 100 packets
$6.40
Contribution margin per packet
Total fixed cost
$0.0640
$468,000
Break-even point: 468,000  0.0640 = 7,312,500 packets
126
28.60
Atkinson, Solutions Manual t/a Management Accounting, 6E
(b)
Let X  number of packets to earn $156,000 profits
468,000  156,000
0.0640
 9,750,000 packets
X
(c)
New contribution margin  $0.0640  5% 
Break-even point 
(d)
468,000
 7,735,537
0.0605
7
 $0.0605
100
Let P  selling price per 100 packets to maintain the same contribution
margin ratio.
6.40
P  28.60  5%  7

35.00
P
6.40 × P = 35 × (P – 28.95)
(35 – 6.40) P = 1,013.25
P = $35.43 per 100 packets
10-67 The budgeted direct materials cost is $630,000/90,000 = $7 per unit; the
budgeted direct labor cost per unit is $247,500/90,000 = $2.75 per unit; the
budgeted fixed costs equal $420,000. Below, these costs are used to prepare the
flexible budget for the actual production level of 80,000 units.
Master
Budget
Planning
Variance
90,000 units
Flexible
Budget
Flexible
Budget
Variance
80,000 units
Actual
80,000 units
Costs
DM
$630,000
$(70,000) F
$560,000
$(10,000) F
$550,000
DL
247,500
(27,500) F
220,000
5,000 U
225,000
FOH
420,000
420,000
(20,000) F
400,000
$(97,500) F $1,200,000
$(25,000) F
$1,175,000
Total
$1,297,500
$0
127
Chapter 10: Using Budgets for Planning and Coordination
10-68 (a)
Total direct material cost variance
= Actual direct material cost – standard direct material cost
= $205,150 – ($16 × 0.25 × 40,000)
= $205,150 – $160,000
= $45,150 Unfavorable
(b)
Total direct labor cost variance
= Actual direct labor cost – standard direct labor cost
= ($9.50 × 8,240) – ($10 × 0.20 × 40,000)
= $78,280 – $80,000
= $1,720 Favorable
(c)
Total variable support cost variance
= Actual variable support cost – standard variable support cost
= $131,840 – ($15 × 0.20 × 40,000)
= $131,840 – $120,000
= $11,840 Unfavorable
(d)
(e)
(g)
(h)
(i)
Direct material price variance
Error: Reference source not found
Direct material quantity variance
Error: Reference source not found
(f)
Direct labor rate variance
Error: Reference source not foundError: Reference source not found
Direct labor efficiency variance
Error: Reference source not found
Variable support rate variance
Error: Reference source not foundError: Reference source not found
Variable support efficiency (use) variance
Error: Reference source not found
10-69 (a) Total direct material cost variance
= Actual direct material cost – standard direct material cost
= ($9.75 × 4,200) – ($10 × 2 × 2,000)
= $40,950 – $40,000
= $950 Unfavorable
128
Atkinson, Solutions Manual t/a Management Accounting, 6E
(b)
Total direct labor cost variance
= Actual direct labor cost – standard direct labor cost
= ($11 × 2,000) – ($10 × 1 × 2,000)
= $22,000 – $20,000
= $2,000 Unfavorable
(c)
Total flexible support cost variance
= Actual flexible support cost – standard flexible support cost
= $48,000 – ($25 × 1 × 2,000)
= $48,000 – $50,000
= $2,000 Favorable
129
Chapter 10: Using Budgets for Planning and Coordination
(d)
(e)
(g)
(h)
(i)
Direct material price variance
Error: Reference source not found
Direct material quantity variance
Error: Reference source not found
(f)
Direct labor rate variance
Error: Reference source not foundError: Reference source not found
Direct labor efficiency variance
Error: Reference source not found
Variable support rate variance
Error: Reference source not found
Variable support efficiency (use) variance
Error: Reference source not found
(AP – SP) × AQ = $50
(AP × AQ) – (SP × AQ) = $50
$2,000 – ($2 × AQ) = $50
AQ = 975 pounds
(AH – SH) × SR = –100
(AH × 15) – (2 × 200 × 15) = –100
AH 
6,000  100
1
 393 hours
15
3
(AR – SR) × AH = 60
AR × AH = (SR × AH) + 60
AR × AH = (15 ×
5,900
)
15
+ 60
= $5,960
= (AQ – SQ) × SP
= [975 – (5 × 200)] × 2
= $50 F
(AH – SH) × SR = $60
(500 – 3 × Q) × $12 = $60
(see solution to part h, for AH)
36Q = 6,000 – 60
Q=
5,940
36
130
= 165 units
Atkinson, Solutions Manual t/a Management Accounting, 6E
(AQ – SQ) × SP = –100
[1,000 – (165.28 × S)] × 3 = –100
495.84 × S = 3,000 + 100
S = 6.252 pounds per unit
(AP – SP) × AQ = –500
AP × AQ = (3 × 1,000) – 500
= $2,500
(AR – SR) × AH = –200
(AR × AH) – (SR × AH) = –200
5,800 – (12 × AH) = –200
AH = 500 hours
131
Chapter 10: Using Budgets for Planning and Coordination
10-71 (a)
(b)
(c)
(d)
Direct material price variance
Error: Reference source not found
Direct material quantity variance
Error: Reference source not found
No, the contract should not be signed. Although the new supplier is
offering the materials at only $11.50 per pound, the materials do not seem
to hold up well in production, as shown by the large unfavorable direct
material quantity variance.
Direct labor rate variance
Direct labor efficiency variance
Error: Reference source not found
Yes, the new labor mix should be continued. Although it increases the
average hourly labor cost from $15 to $16, thereby causing a $6,400
unfavorable direct labor rate variance, this is more than offset by greater
efficiency of labor time. Notice that the direct labor efficiency variance is
$12,000 favorable. Thus, the new labor mix reduces overall labor costs.
132
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-72 The total nursing labor variance for the fourth floor nursing unit of Mountain
View Hospital for May is $1,745 unfavorable. Of this amount, $460 (favorable)
is attributable to labor efficiency and $2,205 (unfavorable) to rate differences.
The calculation of these amounts is presented below.
Labor class
RN
LPN
Aide
Total
Actual hours  Actual rate
8,150  $12.30  $100,245
4,300  8.20  35,260
4,400  5.75  25,300
$160,805
Labor class
RN
LPN
Aide
Total
Actual hours  Standard rate
8,150  $12.00  $97,800
4,300  8.00  34,400
4,400  6.00  26,400
$158,600
Labor class
RN
LPN
Aide
Total
Standard hours  Standard rate
7,920  $12.00  $95,040
4,620  8.00  36,960
4,510  6.00  27,060
$159,060
Labor
class
Labor efficiency
RN $97,800  $95,040
 $2,760U
Variances
Labor rate
$100,245  $97,800
 $2,445U
LPN $34,400  $36,960
 $2,560 F
$35,260  $34,400
 $860U
$35,260  $36,960
Aide $26,400  $27,060
 $660 F
$25,300  $26,400
 $1,100 F
$25,300  $27,060
 $1,760 F
Total $158,600  $159,060 $160,805  $158,600
 $460 F
 $2,205U
133
Total
$100,245  $95,040
 $5,205U
 $1,700 F
$160,805  $159,060
 $1,745U
Chapter 10: Using Budgets for Planning and Coordination
10-73 (a)
(b)
(i)
Direct material price variance = (AP – SP) × AQ
Error: Reference source not found
(ii) Direct material quantity variance = (AQ – SQ) × SP
Error: Reference source not
found
(iii) Direct labor rate variance = (AR – SR) × AH
Error: Reference source not found
(iv) Direct labor efficiency variance = (AH – SH) × SR
Error: Reference source not found
These variances reflect tradeoffs made by Asahi USA. More expensive
materials may have been acquired with the expectation of reducing
materials waste. Less expensive labor may have been used that may have
led to a lower level of labor efficiency. The overall total cost variances
for materials and labor individually were favorable, indicating that the
positive effects of these decisions outweigh their negative effects.
10-74 We first compute percentages of total unit sales for each product line for
planned and actual sales.
Unit Price
Unit Sales
Total
Planned Sales for February
Muffins
Scones
Carrot Bread
Units % Total Units % Total Units % Total Total
$1.35
$1.75
$2.75
1,600 26.67% 3,400 56.67% 1,000 16.67%
6,000
$2,160
$5,950
$2,750
$10,860
134
Atkinson, Solutions Manual t/a Management Accounting, 6E
Unit Price
Unit Sales
Total
(a)
Actual Sales for February
Muffins
Scones
Carrot Bread
Units % Total Units % Total Units % Total Total
$1.55
$1.60
$3.25
1,400 19.44% 4,500 62.50% 1,300 18.06%
7,200
$2,170
$7,200
$4,225
$13,595
The sales mix variance is computed as follows:
Actual total sales units of all products  (actual sales mix percentage of
this product – planned sales mix percentage of this product)  planned
revenue per unit of this product
Muffins: 7,200  (19.44% – 26.67%)  $1.35 = $ –702, that is, $702
unfavorable. This means that because sales of muffins comprised less
than the planned percentage of total sales, revenues of $702 were lost on
this product.
Scones: 7,200  (62.50% – 56.67%)  $1.75 = $735 favorable. This
means that because sales of scones comprised more than the planned
percentage of total sales, revenues of $735 were gained on this product.
Carrot bread: 7,200  (18.06% – 16.67%) $2.75 = $275 favorable. This
means that because sales of carrot bread comprised more than the
planned percentage of total sales, revenues of $275 were gained on this
product.
(b)
The sales quantity variance for each product line is computed as follows:
(Actual total sales units of all products – planned total sales units of all
products)  planned sales mix percentage of this product  planned
revenue per unit of this product.
Muffins: (7,200 – 6,000)  26.67%  $1.35 = $432 favorable. This means
that because of the overall increase in sales, if the muffins sales mix
percentage had remained as planned, then an increase in sales revenue of
$432 would have been realized on this product.
Scones: (7,200 – 6,000)  56.67%  $1.75 = $1,190 favorable. This
means that because of the overall increase in sales, if the scones sales mix
135
Chapter 10: Using Budgets for Planning and Coordination
percentage had remained as planned, then an increase in sales revenue of
$1,190 would have been realized on this product.
Carrot bread: (7,200 – 6,000)  16.67%  $2.75 = $550 favorable. This
means that because of the overall increase in sales, if the carrot bread
sales mix percentage had remained as planned, then an increase in sales
revenue of $550 would have been realized on this product.
(c)
The sales price variance for each product line is computed as follows:
Actual number of units sold  (actual price per unit – planned price per
unit)
Muffins: 1,400  ($1.55 – $1.35) = $280 favorable. This means that
because the company sold the muffins at more than the planned price per
unit, $280 of revenues was gained on the 1,400 units of muffins.
Scones: 4,500  ($1.60 – $1.75) = $ –675, that is, $675 unfavorable. This
means that because the company sold the scones at less than the planned
price per unit, $675 of revenues was lost on the 4,500 units of scones.
Carrot bread: 1,300  ($3.25 – $2.75) = $650 favorable. This means that
because the company sold the carrot bread at more than the planned price
per unit, $650 of revenues was gained on the 1,300 units of carrot bread.
Summary:
Price Variance
Sales Mix Variance
Sales Quantity Variance
Total
Muffins Scones
$280
-$675
-702
735
432
1,190
$10 $1,250
136
Carrot
Bread Total
$650 $255favorable
275
308favorable
550 2,172favorable
$1,475 $2,735favorable
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-75 Variance analysis is a form of exception reporting. That is, the focus is on what
went wrong rather than what went right. An excessive preoccupation on
negative results, rather than a balance between complimenting people for
positive results and investigating negative results, can create a negative
organization environment.
A variance is a signal that something unplanned happened. For variances to be
signals, they must be reasonable in the sense of reflecting a reasonable level of
performance. Some organizations believe in setting very tight standards, which,
in turn, trigger a steady stream of unfavorable variances. Beyond being
motivationally debilitating, a steady stream of negative variances reduces their
value as a signal because they are always there.
As signals, variances should trigger an investigation to find out what caused the
variance. They provide no information about cause, but rather reflect only the
effect of the cause. In some organizations people become preoccupied with
arguing about the nature and size of variances rather than focusing on finding
the underlying cause of the variance.
Finally, superiors often use variances to check up on subordinates (people may
use variances to check up on their own work.) Because of this, in many
organizations, variances and the management accountants who produce the
variances have a negative reputation. Many people believe that superiors use
variances in accusatory and invasive ways rather than constructively to improve
organization performance.
137
Chapter 10: Using Budgets for Planning and Coordination
CASES
10-76 (a)
Sales (1)
Rust Manufacturing Co.
BUDGET FOR ACE AND BELL
For the Year Ending December 31, 2011
Ace
Bell
$8,000,000
$2,000,000
Variable costs:
Direct materials (2)
$1,600,000
$300,000
2,000,000
500,000
200,000
$3,800,000
50,000
$850,000
$4,200,000
$1,150,000
$140,000
$60,000
78,000
52,000
Other mfg. support (7)
200,000
50,000
Selling costs (8)
120,000
60,000
32,000
8,000
$570,000
$230,000
$3,630,000
$920,000
Direct labor (3)
Variable mfg. support (4)
Contribution margin
Fixed costs:
Depreciation (5)
Rent (6)
Gen. & admin. costs (9)
Pretax operating profit
Supporting calculations:
(1)
Ace: 200,000 units  $40/unit  $8M
Bell: 100,000 units  $20/unit  $2M
(2)
Ace: 200,000 units  $8/unit  $1.6M
Bell: 100,000 units  $3/unit  $300K
(3)
Ace: 200,000 units  2 hours  $5/hour  $2M
Bell: 100,000  1 hour  $5/hour  $500K
(4)
Ace: $2M  10%  $200K
Bell: $500K  10%  $50K
138
Atkinson, Solutions Manual t/a Management Accounting, 6E
(5)
Ace: $200K  70%  $140K
Bell: $200K  30%  $60K
(6)
Ace: $130K  60%  $78K
Bell: $130K  40%  $52K
(7)
Ace:
$2 M
$2.5 M
× ($500K – $250K) = $200K
Bell:
$500 K
$2.5 M
× ($500K – $250K) = $50K
(8)
Ace: 200,000 units
Bell: 100,000 units
300,000 units
200
 $180K  $120K
300
100
 $180K  $60K
Bell:
300
Ace:
$8M
 $40K  $32K
$10M
$2M
 $40K  $8K
Bell:
$10M
(Note: M stands for millions and K stands for thousands.)
(9)
Ace:
Ace
Bell
$21.00
$11.50
Pretax operating profit per unit $18.15
$ 9.20
Contribution margin per unit
(c)
Decrease in contribution from 10% decrease in production and sales:
Ace: 200,000  10%  $21  $420,000
Bell: 100,000  10%  $11.5  $115,000
139
Chapter 10: Using Budgets for Planning and Coordination
(d) The above analysis relies on cost estimates based on allocation of other
manufacturing support, selling support, and general and administrative
costs between Ace and Bell that ignores the activities that result in these
support costs and the relative demands placed by Ace and Bell for these
manufacturing, selling, and administrative support activities. As a
result, it is possible that the above costs misrepresent the true cost of
operations for Ace and Bell.
10-77 (a)
Number of Deliveries
Number of
Deliveries Delivery Overtime Regular Overtime Total
Required Capacitya Hours
Wagesc
Cost
Cost
70
80
0
$480
$0
$480
80
80
0
480
0
480
b
d
90
80
5
480
90
570
Unit
Delivery
Cost
$6.857
6.000
6.333
5 workers  8 hours  2 per hour  80 deliveries
(90 − 80) ÷ 2 = 5 hours
c
$12  5  8 = $480
d
$12  1.5  5 = $90
a
b
(b)
Based on the old hiring policy
Number of
Unit
Deliveries Delivery Overtime Regular Overtime Total Delivery
Required Capacity Hours Hours Cost
Cost Cost
Monday
65
80
0.0
$480
$0
$480 $7.385
Tuesday
70
80
0.0
480
0
480 6.857
Wednesday
80
80
0.0
480
0
480 6.000
Thursday
85
80
2.5
480
45
525 6.176
Friday
95
80
7.5
480
135
615 6.474
Total
$2,580
140
Atkinson, Solutions Manual t/a Management Accounting, 6E
Based on the new hiring policy
Number of
Unit
Deliveries Delivery Overtime Regular Overtime Total Delivery
Required Capacity Hours Hours
Cost
Cost Cost
Monday
65
64
0.5
$384
$9
$393 $6.046
Tuesday
70
64
3.0
384
54
438 6.257
Wednesday
80
80
0.0
480
0
480 6.000
Thursday
85
80
2.5
480
45
525 6.176
Friday
95
96
0.0
576
0
576 6.063
Total
$2,412
The expected savings per week of the new hiring policy:
$2, 580  $2, 412  $168
141
Chapter 10: Using Budgets for Planning and Coordination
10-78 Judd’s Reproductions (Calculations were performed in an Excel spreadsheet.)
(a) Original situation
Oct.
Unit
production
and sales
- Chairs
- Tables
- Cabinets
Total
revenuea
Cash sales:
25% of
revenue
Credit card
sales: 35%
of rev.
Exporter
sales: 40%
of rev.
Bad debts:
3% of
export sales
Cash sales
discounts:
5% of cash
sales
Cred. Card
fees: 3% of
credit card
sales
900
175
90
Nov.
975
188
102
Dec.
950
201
95
Jan.
1,020
200
109
$499,500 $547,800 $541,900 $580,200
Feb.
1,191
237
120
Mar.
1,179
243
119
Apr.
May
1,195
250
126
1,200
252
122
$667,500 $668,700 $690,800
$686,400
124,875 136,950 135,475
145,050
166,875
167,175
172,700
171,600
174,825 191,730 189,665
203,070
233,625
234,045
241,780
240,240
199,800 219,120 216,760
232,080
267,000
267,480
276,320
274,560
$6,962
$8,010
$8,024
$8,290
$8,237
7,253
8,344
8,359
8,635
8,580
6,092
7,009
7,021
7,253
7,207
a Chair price is $200, table price is $900, and cabinet price is $1,800.
142
Atkinson, Solutions Manual t/a Management Accounting, 6E
Judd’s Reproductions (Continued)
(a) Original situation (Continued
June
Unit
production
and sales
- Chairs
- Tables
- Cabinets
Total
revenuea
Cash sales:
25% of
Revenue
Credit card
sales: 35%
of rev.
Exporter
sales: 40%
of rev.
Bad debts:
3% of
export sales
- Cash sales
discounts:
5% of cash
sales
- Cred. card
fees: 3% of
credit card
sales
1,204
255
125
July
1,194
242
123
Aug.
1,199
253
121
Sept.
1,222
243
127
Oct.
1,219
248
126
Nov.
1,207
244
126
Dec.
Total
1,192
255
119
$695,300 $678,000 $685,300 $691,700 $693,800 $687,800 $682,100 $8,107,600
173,825 169,500 171,325 172,925
173,450 171,950 170,525 2,026,900
243,355 237,300 239,855 242,095
242,830 240,730 238,735 2,837,660
278,120 271,200 274,120 276,680
277,520 275,120 272,840 3,243,040
$8,344
$8,136
$8,224
$8,300
$8,326
$8,254
$8,185
$97,291
8,691
8,475
8,566
8,646
8,673
8,598
8,526
101,345
7,301
7,119
7,196
7,263
7,285
7,222
7,162
85,130
a Chair price is $200, table price is $900, and cabinet price is $1,800.
143
Chapter 10: Using Budgets for Planning and Coordination
Carpenter and helper hours
- Required carpenter hoursb
- Carpentersc
- Helpers: 1.5  number of
carpenters
- Carpenter regular hours:
172 per carpenter
- Carpenter overtime hours
- 5% of regular carpenter hrs,
must be > overtime hoursc
- Helper regular hours:
172 per helper
- Helper overtime hours
Carpenter and helper hours
- Required carpenter hoursb
- Carpentersc
- Helpers: 1.5  number of
carpenters
- Carpenter regular hours:
172 per carpenter
- Carpenter overtime hours
- 5% of regular carpenter hrs,
must be > overtime hoursc
- Helper regular hours:
172 per helper
- Helper overtime hours
Dec.
9
14
Jan.
Feb.
Mar.
Apr.
May
June
1,562 1,788.9 1,793.1 1,859 1,842 1,869.1
9
10
10
11
11
11
14
15
15
17
17
17
1,548
14
1,720
68.9
1,720
73.1
1,892
0
1,892
0
1,892
0
77.4
86
86
94.6
94.6
94.6
2,408
0
2,580
103.35
2,580
109.65
2,924
0
2,924
0
2,924
0
July
Aug.
Sept.
Oct.
Nov.
Dec.
1,820.6 1,838.1 1,858.3 1,863.6 1,848.8 1,828.3
11
11
11
11
11
11
17
17
17
17
17
17
1,892
0
1,892
0
1,892
0
1,892
0
1,892
0
1,892
0
94.6
94.6
94.6
94.6
94.6
94.6
2,924
0
2,924
0
2,924
0
2,924
0
2,924
0
2,924
0
b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.
c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours
available.
144
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cash inflows
- From 3 months previous:
17% of export sales
- From 2 months previous:
50% of export sales
- From 1 month previous:
30% of export sales + 97% of
credit card sales
- From current month:
95% of cash sales
- Interest on cash balance:
3%/yr if previous mo. ending
bal > $50,000
- Total cash inflows
Cash inflows
- From 3 months previous:
17% of export sales
- From 2 months previous:
50% of export sales
- From 1 month previous:
30% of export sales + 97% of
credit card sales
- From current month: 95% of
cash sales
- Interest on cash balance:
3%/yr if previous mo. ending
bal. > $50,000
- Total cash inflows
Jan.
Feb.
Mar.
Apr.
May
June
$33,966
$37,250
$36,849
$39,454
$45,390
$45,472
109,560
108,380
116,040
133,500
133,740
138,160
249,003
266,602
306,716
307,268
317,423
315,401
137,798
158,531
158,816
164,065
163,020
165,134
0
0
0
0
0
$530,327 $570,764 $618,422 $644,286 $659,573
5
2
$664,218
July
Aug.
Sept.
Oct.
Nov.
Dec.
$46,974
$46,675
$47,280
$46,104
$46,600
$47,036
137,280
139,060
135,600
137,060
138,340
138,760
319,490
311,541
314,895
317,836
318,801
316,044
161,025
162,759
164,279
164,778
163,353
161,999
33
120
400
68
59
88
0
0
2
9
$665,100 $660,155 $662,455 $666,458 $667,686 $664,727
145
Chapter 10: Using Budgets for Planning and Coordination
Cash outflows
- Carpenter wages: $24 per
regular hr.; $36 per
overtime hr.
- Helper wages: $14 per
regular hr.; $21 per
overtime hr.
- Supplies, etc.: $5 per
carpenter hr.
- Variable support costs:
$20 per carpenter hr.
- Maintenance costs: $15
per carpenter hr.
- Wood costs: $30 per unit
of woodd
- Factory rent: $150,000
per quarter
- Fixed costs:
$40,000 per month
- Administrative salaries:
$25,000 per month
- Selling costs: $30,000
per month
- Advertising
expenditures:
$50,000 per mo.
- Shipping costse
- Variable selling costs: 6%
of product list prices
- Interest on line of credit:
10%/yr based on last
month’s balance
- Mach. purchases:
$5,000  no. of carpenters
(Jan. and July)
- Total cash outflows
Jan.
Feb.
Mar.
Apr.
May
$37,656
$43,760
$43,912 $45,408 $45,408
33,712
38,290
38,423
40,936
40,936
40,936
7,810
8,945
8,966
9,295
9,210
9,346
31,240
35,778
35,862
37,180
36,840
37,382
23,430
26,834
26,897
27,885
27,630
28,037
127,650
146,610
147,240 152,550 151,380
153,570
150,000
0
40,000
40,000
40,000
25,000
25,000
30,000
0 150,000
June
$45,408
0
0
40,000
40,000
40,000
25,000
25,000
25,000
25,000
30,000
30,000
30,000
30,000
30,000
50,000
43,015
50,000
49,470
50,000
49,545
50,000
51,185
50,000
50,850
50,000
51,510
34,812
40,050
40,122
41,448
41,184
41,718
0
1,242
952
273
747
0
45,000
0
0
0
0
$679,325 $535,978 $536,917 $701,160 $549,185
0
$552,906
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
146
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cash outflows
July
Aug.
Sept.
Oct.
Nov.
Dec.
- Carpenter wages:
$24 per regular hr.;
$36 per overtime hr.
$45,408 $45,408 $45,408 $45,408 $45,408 $45,408
- Helper wages: $14 per
regular hr.; $21 per
overtime hr.
40,936
40,936
40,936
40,936 40,936
40,936
- Supplies, etc.: $5 per
carpenter hr.
9,103
9,191
9,292
9,318
9,244
9,142
- Variable support costs:
$20 per carpenter hr.
36,412
36,762
37,166
37,272 36,976
36,566
- Maintenance costs: $15
per carpenter hr.
27,309
27,572
27,875
27,954 27,732
27,425
- Wood costs: $30 per unit
149,250 151,140 152,130 152,790 151,470 150,510
of woodd
- Factory rent: $150,000
per quarter
150,000
0
0 150,000
0
0
- Fixed costs:
$40,000 per month
40,000
40,000
40,000
40,000 40,000
40,000
- Administrative salaries:
$25,000 per month
25,000
25,000
25,000
25,000 25,000
25,000
- Selling costs: $30,000
per month
30,000
30,000
30,000
30,000 30,000
30,000
- Advertising
expenditures:
$50,000 per mo.
50,000
50,000
50,000
50,000 50,000
50,000
e
50,245
50,765
51,270
51,415
50,975
50,520
- Shipping costs
- Variable selling costs:
6% of product list prices
40,680
41,118
41,502
41,628 41,268
40,926
- Interest on line of credit:
10%/yr based on last
month’s balance
0
0
0
0
0
0
- Mach. purch.: $5,000 
no. of carpenters (Jan.
55,000
0
0
0
0
0
and July)
- Total cash outflows
$749,343 $547,891 $550,578 $701,721 $549,009 $546,432
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
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Chapter 10: Using Budgets for Planning and Coordination
Cash flow analysis
- Opening cash
- Net cash flow: Cash
inflows - cash outflows
- Cash before financing
- Opening line-of credit
- Line-of-credit increase
- Line-of-credit payment
- Line of credit closing
balance
- Ending cash: $50,000
minimum
Dec.
Jan.
$50,000
Feb.
$50,000
Mar.
$50,000
Apr.
$50,000
May
$50,000
June
$70,806
–148,998
–98,998
0
148,998
0
34,785
84,785
148,998
0
34,785
81,505
131,505
114,213
0
81,505
–56,873
–6,873
32,709
56,873
0
110,388
160,388
89,582
0
89,582
111,312
182,118
0
0
0
0
148,998
114,213
32,709
89,582
0
0
50,000
50,000
50,000
50,000
50,000
70,806
182,118
Cash flow analysis
July
- Opening cash
$182,118
- Net cash flow: Cash
inflows - cash outflows
–84,243
- Cash before financing
97,875
- Opening line-of credit
0
- Line-of-credit increase
0
- Line-of-credit payment
0
- Line of credit closing
balance
0
- Ending cash: $50,000
minimum
97,875
Aug.
Sept.
Oct.
Nov.
Dec.
$97,875 $210,139 $322,016 $286,753 $405,429
112,264
210,139
0
0
0
111,877
322,016
0
0
0
–35,263
286,753
0
0
0
118,677
405,429
0
0
0
118,295
523,724
0
0
0
0
0
0
0
0
210,139
322,016
286,753
405,429
523,724
148
Atkinson, Solutions Manual t/a Management Accounting, 6E
Judd’s Reproductions
Projected Income Statement
For the Year Ended December 31, 2012
Original Situation
Revenue
Chairs
Tables
Cabinets
$2,844,400
2,629,800
2,633,400
Variable expenses
Carpenters
Helpers
Maintenance
Variable support
Selling
Shipping
Supplies
Wood
Contribution margin
534,000
478,849
326,577
435,436
486,456
600,765
108,859
1,786,290
Fixed expenses
Administrative staff
a
Depreciation
Factory rent
Selling
Other factory
Other expenses
Advertising costs
Bad debts
Cash sales discounts
Credit card fees
Net interest charges: $3,213 – 3,063
Income before taxes
a
Depreciation:
Machinery, Jan. 1, 2012
Purchases: $45,000 in January and $55,000 in July
Depreciation expense: 10% of year-end balance
Machinery, Dec. 31, 2012
149
$8,107,600
4,757,232
$3,350,368
300,000
46,000
600,000
360,000
480,000
600,000
97,291
101,345
85,130
150
$360,000
100,000
(46,000)
$414,000
1,786,000
883,916
$680,452
Chapter 10: Using Budgets for Planning and Coordination
Cash
Accounts receivablea
Machinery and
equipmentb
Total
Assets
Judd’s Reproductions
Projected Balance Sheet
December 31, 2012
Original Situation
$523,724
727,737
Bank loan
414,000
Owners’
equity
$1,665,461
$0
1,665,461
Total liabilities and
owners’ equity
$1,665,461
a
Accounts receivable, December 31, 2012 balance = $727,737 = 97% of Dec. credit
card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively.
b
Machinery, Jan. 1, 2012
Purchases: $45,000 in January and $55,000 in July
Depreciation expense: 10% of year-end balance
Machinery, Dec. 31, 2012
150
$360,000
100,000
(46,000)
$414,000
Atkinson, Solutions Manual t/a Management Accounting, 6E
(b) Cash sales to exporters lead to 5%  40% drop in sales across products
(Multiply original sales quantities by 0.98 and round the result to the nearest unit.)
Oct.
Unit production
and sales
- Chairs
- Tables
- Cabinets
- Total revenuea
- Cash sales:
(25%+35%)/
95% of revenue
- Credit card
sales: 35% /95%
of rev.
- Exporter sales:
40% of rev. in
2011; all cash
in 2012
- Bad debts: 3%
of export sales
- Cash sales
discounts: 5% of
cash sales
- Cred. card fees:
3% of credit
card sales
Nov.
Dec.
Jan.
Feb.
Mar.
Apr.
May
900
975
950
1,000
1,167
1,155
1,171
175
188
201
196
232
238
245
90
102
95
107
118
117
123
$499,500 $547,800 $541,900 $569,000 $654,600 $655,800 $676,100
1,176
247
120
$673,500
$124,875 $136,950 $135,475 $359,368 $413,432 $414,189 $427,011
$425,368
$174,825 $191,730 $189,665 $209,632 $241,168 $241,611 $249,089
$248,132
$199,800 $219,120 $216,760
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$17,968
$20,672
$20,709
$21,351
$21,268
$6,289
$7,235
$7,248
$7,473
$7,444
a Chair price is $200, table price is $900, and cabinet price is $1,800.
151
Chapter 10: Using Budgets for Planning and Coordination
June
Unit production
and sales
- Chairs
- Tables
- Cabinets
- Total revenuea
- Cash sales:
(25%+35%)/
95% of revenue
- Credit card
sales: 35%/95%
of rev.
- Exporter sales:
40% of rev. in
2011; all cash
in 2012
- Bad debts: 3%
of export sales
- Cash sales
discounts: 5%
of cash sales
- Cred. card fees:
3% of credit
card sales
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
1,180
1,170
1,175
1,198
1,195
1,183
1,168
250
237
248
238
243
239
250
123
121
119
124
123
123
117
$682,400 $665,100 $672,400 $677,000 $679,100 $673,100 $669,200 $7,947,300
$430,989 $420,063 $424,674 $427,579 $428,905 $425,116 $422,653 $5,019,347
$251,411 $245,037 $247,726 $249,421 $250,195 $247,984 $246,547 $2,927,953
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$21,549
$21,003
$21,234
$21,379
$21,445 $21,256
$21,133
$250,967
$7,542
$7,351
$7,432
$7,483
$7,396
$87,839
$7,506
a Chair price is $200, table price is $900, and cabinet price is $1,800.
152
$7,440
Atkinson, Solutions Manual t/a Management Accounting, 6E
Carpenter and helper hours
- Required carpenter hoursb
- Carpentersc
- Helpers: 1.5  number of
carpenters
- Carpenter regular hours:
172 per carpenter
- Carpenter overtime hours
- 5% of regular carpenter hrs,
must be > overtime hoursc
- Helper regular hours:
172 per helper
- Helper overtime hours
Dec.
Jan. Feb. Mar. Apr. May June
1,5321,754.8 1,7591,818.91,807.9 1,835
9
9
10
10
11
11
11
Carpenter and helper hours
- Required carpenter hoursb
- Carpentersc
- Helpers: 1.5  number of
carpenters
- Carpenter regular hours:
172 per carpenter
- Carpenter overtime hours
- 5% of regular carpenter hrs,
must be > overtime hoursc
- Helper regular hours:
172 per helper
- Helper overtime hours
July
Aug. Sept. Oct. Nov. Dec.
1,786.5 1,8041,818.21,823.51,808.71,794.2
11
11
11
11
11
11
14
14
17
17
1,548 1,720 1,720 1,892 1,892
0 34.8
39
0
0
1,892
0
77.4
17
15
94.6
2,408 2,580 2,580 2,924 2,924
0 52.2 58.5
0
0
2,924
0
17
86
17
94.6
17
86
15
17
94.6
17
17
1,892 1,892 1,892 1,892 1,892 1,892
0
0
0
0
0
0
94.6
94.6
94.6
94.6
94.6
94.6
2,924 2,924 2,924 2,924 2,924 2,924
0
0
0
0
0
0
b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.
c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours
available.
153
Chapter 10: Using Budgets for Planning and Coordination
Cash inflows
- From 3 months previous:
17% of export sales
- From 2 months previous:
50% of export sales
- From 1 month previous: 30% of
export sales + 97% of credit
card sales
- From current month:
95% of cash sales
- Interest on cash balance: 3%/yr if
previous mo. Ending bal. .> $50,000
- Total cash inflows
Cash inflows
- From 3 months previous:
17% of export sales
- From 2 months previous:
50% of export sales
- From 1 month previous: 30% of
export sales + 97% of credit
card sales
- From current month:
95% of cash sales
- Interest on cash balance: 3%/yr if
previous mo. Ending bal.> $50,000
- Total cash inflows
Jan.
Feb.
Mar.
Apr.
$33,966 $37,250 $36,849
May
June
$0
$0
$0
0
0
0
249,003 203,343 233,933 234,362 241,617
240,688
341,400 392,760 393,480 405,660 404,100
409,440
109,560 108,380
0
1
68
1,03
90
1,160
0
51
9
2
0
$733,929 $741,884 $664,952 $641,054 $646,616 $651,287
July
Aug.
Sept.
Oct.
Nov.
Dec.
$0
$0
$0
$0
$0
$0
0
0
0
0
0
0
243,868 237,686 240,295 241,938 242,689 240,545
399,060 403,440 406,200 407,460 403,860 401,520
1,421
1,173
1,424
1,684
1,575
1,840
$644,349 $642,299 $647,918 $651,083 $648,124 $643,904
154
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cash outflows
Jan.
Feb.
Mar.
Apr.
May
June
- Carpenter wages:
$24 per regular hr.;
$36 per overtime hr.
$37,152 $42,533 $42,684 $45,408 $45,408 $45,408
- Helper wages:
$14 per regular hr.;
$21 per overtime hr.
33,712 37,216 37,349 40,936 40,936
40,936
- Supplies, etc.:
$5 per carpenter hr.
7,660
8,774
8,795
9,095
9,040
9,175
- Variable support costs:
$20 per carpenter hr.
30,640 35,096 35,180 36,378 36,158
36,700
- Maintenance costs:
$15 per carpenter hr.
22,980 26,322 26,385 27,284 27,119
27,525
- Wood costs:
$30 per unit of woodd 125,190 143,790 144,420 149,280 148,560 150,750
- Factory rent:
$150,000 per quarter
150,000
0
0 150,000
0
0
- Fixed costs:
$40,000 per month
40,000 40,000 40,000 40,000 40,000
40,000
- Administrative
salaries:
$25,000 per month
25,000 25,000 25,000 25,000 25,000
25,000
- Selling costs:
$30,000 per month
30,000 30,000 30,000 30,000 30,000
30,000
- Advertising
expenditures:
$50,000 per mo.
50,000 50,000 50,000 50,000 50,000
50,000
e
42,185 48,515 48,590 50,095 49,895
50,555
- Shipping costs
- Variable selling costs:
6% of product list prices
34,140 39,276 39,348 40,566 40,410
40,944
- Interest on line of
credit: 10%/yr based
on last month’s balance
0
0
0
0
0
0
- Mach. purch.: $5,000 
no. of carpenters (Jan.
45,000
0
0
0
0
0
and July)
- Total cash outflows
$673,659 $526,522 $527,751 $694,041 $542,525 $546,993
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
155
Chapter 10: Using Budgets for Planning and Coordination
Cash outflows
July
Aug.
Sept.
Oct.
Nov.
Dec.
- Carpenter wages:
$24 per regular hr.;
$36 per overtime hr.
$45,408 $45,408 $45,408 $45,408 $45,408 $45,408
- Helper wages:
$14 per regular hr.;
$21 per overtime hr.
40,936 40,936 40,936 40,936 40,936 40,936
- Supplies, etc.:
$5 per carpenter hr.
8,933
9,020
9,091
9,118
9,044
8,971
- Variable support costs:
$20 per carpenter hr.
35,730 36,080 36,364 36,470 36,174 35,884
- Maintenance costs:
$15 per carpenter hr.
26,798 27,060 27,273 27,353 27,131 26,913
- Wood costs:
$30 per unit of woodd 146,430 148,320 148,860 149,520 148,200 147,690
- Factory rent:
$150,000 per quarter
150,000
0
0 150,000
0
0
- Fixed costs:
$40,000 per month
40,000 40,000 40,000 40,000 40,000 40,000
- Administrative
salaries:
$25,000 per month
25,000 25,000 25,000 25,000 25,000 25,000
- Selling costs:
$30,000 per month
30,000 30,000 30,000 30,000 30,000 30,000
- Advertising
expenditures:
$50,000 per mo.
50,000 50,000 50,000 50,000 50,000 50,000
e
49,290 49,810 50,180 50,325 49,885 49,565
- Shipping costs
- Variable selling costs:
6% of product list prices
39,906 40,344 40,620 40,746 40,386 40,152
- Interest on line of
credit: 10%/yr based on
last month’s balance
0
0
0
0
0
0
- Mach. purch.: $5,000 
no. of carpenters (Jan.
55,000
0
0
0
0
0
and July)
- Total cash outflows
$743,430 $541,978 $543,732 $694,875 $542,163 $540,519
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
156
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cash flow analysis
- Opening cash
- Net cash flow:
Cash inflows –
cash outflows
- Cash before
financing
- Opening line-of
credit
- Line-of-credit
increase
- Line-of-credit
payment
- Line of credit
closing balance
- Ending cash:
$50,000 min.
Dec.
Jan.
Feb.
Mar.
Apr.
May
$50,000 $110,270 $325,632 $462,833 $409,846
June
$513,938
60,270
215,362
137,201
–52,987
104,091
104,294
110,270
325,632
462,833
409,846
513,938
618,232
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
50,000
110,270
325,632
462,833
409,846
513,938
618,232
Cash flow analysis July
Aug.
Sept.
Oct.
Nov.
Dec.
- Opening cash
$618,232 $519,151 $619,471 $723,658 $679,865 $785,826
- Net cash flow:
Cash inflows –
cash outflows
–99,081 100,321 104,186 –43,792 105,961 103,385
- Cash before
financing
519,151 619,471 723,658 679,865 785,826 889,211
- Opening line-of
credit
0
0
0
0
0
0
- Line-of-credit
increase
0
0
0
0
0
0
- Line-of-credit
payment
0
0
0
0
0
0
- Line of credit
closing balance
0
0
0
0
0
0
- Ending cash:
$50,000 min.
519,151 619,471 723,658 679,865 785,826 889,211
157
Chapter 10: Using Budgets for Planning and Coordination
Judd’s Reproductions
Projected Income Statement
For the Year Ended December 31, 2012
Cash Sales to Exporters
Revenue
Chairs
Tables
Cabinets
$2,787,600
2,576,700
2,583,000
Variable expenses
Carpenters
Helpers
Maintenance
Variable support
Selling
Shipping
Supplies
Wood
Contribution margin
531,041
476,701
320,141
426,854
476,838
588,890
106,714
1,751,010
Fixed expenses
Administrative staff
a
Depreciation
Factory rent
Selling
Other factory
Other expenses
Advertising costs
Bad debts
Cash sales discounts
Credit card fees
Net interest charges
Income before taxes
a
300,000
46,000
600,000
360,000
480,000
600,000
0
250,967
87,839
–13,047
Depreciation:
Machinery, Jan. 1, 2012
Purchases: $45,000 in January and $55,000 in July
Depreciation expense: 10% of year-end balance
Machinery, Dec. 31, 2012
Based on profitability, this change is not desirable.
158
$360,000
100,000
(46,000)
$414,000
$7,947,300
4,678,189
$3,269,111
1,786,000
925,759
$557,352
Atkinson, Solutions Manual t/a Management Accounting, 6E
Judd’s Reproductions
Projected Balance Sheet
December 31, 2012
Cash Sales to Exporters
Cash
Accounts
receivablea
Machinery and
equipmentb
Total assets
$889,211
239,151
Bank
loan
414,000
Owners’
equity
$1,542,362
Total liabilities and
owners’ equity
$1,542,362
$1,542,362
$0
a
Accounts receivable, December 31, 2012 balance = $239,151 = 97% of Dec. credit
card sales.
B
Machinery, Jan. 1, 2012
Purchases: $45,000 in January and
$55,000 in July
Depreciation expense: 10% of year-end
balance
Machinery, Dec. 31, 2012
159
$360,000
100,000
(46,000)
$414,000
Chapter 10: Using Budgets for Planning and Coordination
(c)
Increased sales effort
Oct.
Unit production
and sales
- Chairs
- Tables
- Cabinets
- Total revenuea
- Cash sales:
25% of
revenue
- Credit card
sales: 35% of
rev.
- Exporter
sales: 40% of
rev.
- Bad debts:
3% of export
sales
- Cash sales
discounts: 5%
of cash sales
- Cred. card
fees: 3% of
credit card
sales
Nov.
Dec.
Jan.
Feb.
Mar.
Apr.
May
900
975
950
1,326
1,548
1,533
1,554
175
188
201
260
308
316
325
90
102
95
142
156
155
164
$499,500 $547,800 $541,900 $717,060 $824,220 $826,500 $853,575
1,560
328
159
$848,730
$124,875 $136,950 $135,475 $179,265 $206,055 $206,625 $213,394
$212,183
$174,825 $191,730 $189,665 $250,971 $288,477 $289,275 $298,751
$297,056
$199,800 $219,120 $216,760 $286,824 $329,688 $330,600 $341,430
$339,492
$8,605
$9,891
$9,918
$10,243
$10,185
$8,963
$10,303
$10,331
$10,670
$10,609
$7,529
$8,654
$8,678
$8,963
$8,912
a Chair price is $190, table price is $855, and cabinet price is $1,710 beginning in January.
160
Atkinson, Solutions Manual t/a Management Accounting, 6E
June
Unit production
and sales
- Chairs
- Tables
- Cabinets
- Total
revenuea
- Cash sales:
25% of
revenue
- Credit card
sales: 35% of
rev.
- Exporter
sales: 40% of
rev.
- Bad debts:
3% of export
sales
- Cash sales
discounts: 5%
of cash sales
- Cred. card
fees: 3% of
credit card
sales
1,565
332
163
July
1,552
315
160
Aug.
1,559
329
157
Sept.
1,589
316
165
Oct.
1,585
322
164
Nov.
1,569
317
164
Dec.
Total
1,550
332
155
$859,940 $837,805 $845,975 $854,240 $856,900 $849,585 $843,410 $10,017,940
$214,985 $209,451 $211,494 $213,560 $214,225 $212,396 $210,853
$2,504,485
$300,979 $293,232 $296,091 $298,984 $299,915 $297,355 $295,194
$3,506,279
$343,976 $335,122 $338,390 $341,696 $342,760 $339,834 $337,364
$4,007,176
$10,319
$10,054
$10,152
$10,251
$10,283
$10,195
$10,121
$120,215
$10,749
$10,473
$10,575
$10,678
$10,711
$10,620
$10,543
$125,224
$9,029
$8,797
$8,883
$8,970
$8,997
$8,921
$8,856
$105,188
a Chair price is $190, table price is $855, and cabinet price is $1,710 beginning in January.
161
Chapter 10: Using Budgets for Planning and Coordination
Carpenter and helper hours
- Required carpenter hoursb
- Carpentersc
- Helpers: 1.5  number of
carpenters
- Carpenter regular hours:
172 per carpenter
- Carpenter overtime hours
- 5% of regular carpenter hrs,
must be > overtime hoursc
- Helper regular hours:
172 per helper
- Helper overtime hours
Carpenter and helper hours
- Required carpenter hoursb
- Carpentersc
- Helpers: 1.5  number of
carpenters
- Carpenter regular hours:
172 per carpenter
- Carpenter overtime hours
- 5% of regular carpenter hrs,
must be > overtime hoursc
- Helper regular hours:
172 per helper
- Helper overtime hours
Dec.
Jan.
Feb.
Mar.
Apr. May June
2,032.4 2,325.2 2,333.2 2,418.1 2,398 2,434
9
12
13
13
14
14
14
14
18
20
20
21
21
21
2,064
2,236
2,236
2,408 2,408
2,408
0
103.2
89.2
111.8
97.2
111.8
10.1
0
120.4 120.4
26
120.4
3,096
3,440
3,440
3,612 3,612
3,612
0
47.8
59.8
15.15
0
July
Aug. Sept.
Oct.
Nov. Dec.
2,368.3 2,388.1 2,415.6 2,423 2,404.1 2,380
14
14
14
14
14
14
21
21
21
21
21
21
2,408
2,408
2,408
2,408
2,408 2,408
0
120.4
0
120.4
7.6
120.4
15
120.4
0
0
120.4 120.4
3,612
3,612
3,612
3,612
3,612 3,612
0
0
11.4
22.5
0
0
b Carpenter hours for chairs, tables, and cabinets are 0.4, 2.5, and 6, respectively.
c Add new carpenters if projected monthly overtime exceeds 5% of total regular carpenter hours
available.
162
39
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cash inflows
- From 3 months previous:
17% of export sales
- From 2 months previous:
50% of export sales
- From 1 month previous:
30% of export sales + 97%
of credit card sales
- From current month:
95% of cash sales
- Interest on cash balance:
3%/yr if previous mo.
ending bal > $50,000
- Total cash inflows
Cash inflows
- From 3 months previous:
17% of export sales
- From 2 months previous:
50% of export sales
- From 1 month previous:
30% of export sales +
97% of credit card sales
- From current month:
95% of cash sales
- Interest on cash balance:
3%/yr if previous mo.
ending bal > $50,000
- Total cash inflows
Jan.
Feb.
Mar.
Apr.
May
June
$33,966 $37,250 $36,849 $48,760 $56,047 $56,202
109,560 108,380 143,412 164,844 165,300 170,715
249,003 329,489 378,729 379,777 392,218 389,991
170,302 195,752 196,294 202,724 201,573 204,236
0
0
0
0
0
0
$562,831 $670,872 $755,284 $796,105 $815,138 $821,144
July
Aug.
Sept.
Oct.
Nov.
Dec.
$58,043 $57,714 $58,476 $56,971 $57,526 $58,088
169,746 171,988 167,561 169,195 170,848 171,380
395,142 384,971 388,726 392,523 393,746 390,384
198,979 200,919 202,882 203,514 201,776 200,310
0
163
480
428
767
45
$821,955 $815,592 $817,807 $822,682 $824,325 $820,930
163
Chapter 10: Using Budgets for Planning and Coordination
Cash outflows
- Carpenter wages:
$24 per regular hr.;
$36 per overtime hr.
Jan.
Feb.
Mar.
Apr.
May
June
$49,536
- Helper wages:
$14 per regular hr.;
$21 per overtime hr.
43,344
49,164
49,416
50,886
50,568
51,387
- Supplies, etc.:
$5 per carpenter hr.
10,162
11,626
11,666
12,091
11,990
12,170
- Variable support costs:
$20 per carpenter hr.
40,648
46,504
46,664
48,362
47,960
48,680
- Maintenance costs:
$15 per carpenter hr.
30,486
34,878
34,998
36,272
35,970
36,510
190,560 191,580 198,420 197,070
199,980
$56,875 $57,163 $58,156 $57,792
- Wood costs:
$30 per unit of woodd
166,080
- Factory rent:
$150,000 per quarter
150,000
0
- Fixed costs:
$40,000 per month
40,000
40,000
40,000
- Administrative salaries:
$25,000 per month
25,000
25,000
- Selling costs:
$30,000 per month
30,000
- Advertising expenditures:
$75,000 per mo.
0
0
40,000
40,000
40,000
25,000
25,000
25,000
25,000
30,000
30,000
30,000
30,000
30,000
75,000
75,000
75,000
75,000
75,000
75,000
- Shipping costse
55,960
64,300
64,460
66,575
66,185
67,060
- Variable selling costs: 6%
of product list prices
43,024
49,453
49,590
51,215
50,924
51,596
0
2,137
2,175
1,529
1,924
884
60,000
0
0
0
0
0
- Interest on line of credit:
10%/yr based on last
month’s balance
- Mach. purch.: $5,000  no.
of carpenters (Jan. and July)
- Total cash outflows
0 150,000
$58,728
$819,240 $675,497 $677,712 $843,504 $690,383 $696,996
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
164
Atkinson, Solutions Manual t/a Management Accounting, 6E
Cash outflows
- Carpenter wages:
$24 per regular hr.;
$36 per overtime hr.
July
Aug.
Sept.
Oct.
Nov.
Dec.
$57,792 $57,792 $58,066 $58,332 $57,792 $57,792
- Helper wages:
$14 per regular hr.;
$21 per overtime hr.
50,568
50,568
50,807
51,041
50,568
50,568
- Supplies, etc.:
$5 per carpenter hr.
11,842
11,941
12,078
12,115
12,021
11,900
- Variable support costs:
$20 per carpenter hr.
47,366
47,762
48,312
48,460
48,082
47,600
- Maintenance costs:
$15 per carpenter hr.
35,525
35,822
36,234
36,345
36,062
35,700
- Wood costs:
$30 per unit of woodd
194,160 196,380 197,760 198,630 196,950 195,930
- Factory rent:
$150,000 per quarter
150,000
0
- Fixed costs:
$40,000 per month
40,000
40,000
40,000
- Administrative salaries:
$25,000 per month
25,000
25,000
- Selling costs:
$30,000 per month
30,000
- Advertising expenditures:
$75,000 per mo.
0
0
40,000
40,000
40,000
25,000
25,000
25,000
25,000
30,000
30,000
30,000
30,000
30,000
75,000
75,000
75,000
75,000
75,000
75,000
- Shipping costse
65,355
65,965
66,650
66,845
66,280
65,755
- Variable selling costs: 6% of
product list prices
50,268
50,759
51,254
51,414
50,975
50,605
0
524
0
0
0
0
70,000
0
0
0
0
0
- Interest on line of credit:
10%/yr based on last
month’s balance
- Mach. purch.: $5,000  no.
of carpenters (Jan. and July)
- Total cash outflows
0 150,000
$902,875 $687,511 $691,161 $843,182 $688,729 $685,850
d Units of wood required per chair, table, and cabinet are 1, 8, and 15, respectively.
e Packaging and shipping costs: chairs are $15, tables are $65, and cabinets are $135.
165
Chapter 10: Using Budgets for Planning and Coordination
Cash flow analysis
- Opening cash
Dec.
Jan.
Feb.
Mar.
Apr.
May
June
$50,000 $50,000 $50,000 $50,000 $50,000 $50,000
- Net cash flow: Cash
inflows – cash outflows
-256,409
- Cash before financing
-206,409 45,375 127,572
- Opening line-of credit
2,601 174,755 174,149
0 256,409 261,034 183,462 230,861 106,106
- Line-of-credit increase
256,409
- Line-of-credit payment
0
- Line of credit closing
balance
-4,625 77,572 -47,399 124,755 124,149
4,625
0 47,399
0 77,572
0
0
0 124,755 106,106
0 256,409 261,034 183,462 230,861 106,106
0
- Ending cash:
$50,000 minimum
50,000
- Cash flow analysis
- Opening cash
July
Aug.
Sept.
Oct.
Nov.
Dec.
$68,042 $50,000 $115,203 $241,849 $221,350 $356,946
50,000 50,000 50,000 50,000 50,000
68,042
Net cash flow: Cash
inflows – cash outflows -80,920 128,081 126,646 -20,499 135,596 135,080
- Cash before financing
-12,877 178,081 241,849 221,350 356,946 492,026
- Opening line-of credit
0
62,877
0
0
0
0
- Line-of-credit increase
62,877
0
0
0
0
0
- Line-of-credit payment
0
62,877
0
0
0
0
- Line of credit closing
balance
62,877
0
0
0
0
0
- Ending cash:
$50,000 minimum
50,000 115,203 241,849 221,350 356,946 492,026
166
Atkinson, Solutions Manual t/a Management Accounting, 6E
Judd’s Reproductions
Projected Income Statement
For the Year Ended December 31, 2012
Increased Sales Effort
Revenue
Chairs
Tables
Cabinets
$3,513,100
3,249,000
3,255,840
Variable expenses
Carpenters
Helpers
Maintenance
Variable support
Selling
Shipping
Supplies
Wood
Contribution margin
685,816
598,885
424,800
566,400
601,076
781,390
141,600
2,323,500
Fixed expenses
Administrative staff
a
Depreciation
Factory rent
Selling
Other factory
Other expenses
Advertising costs
Bad debts
Cash sales discounts
Credit card fees
Net interest charges
Income before taxes
300,000
49,000
600,000
360,000
480,000
900,000
120,215
125,224
105,188
7,289
$10,017,940
6,123,467
$3,894,473
1,789,000
1,257,916
$847,557
1,257,916
a
Depreciation:
Machinery, Jan. 1, 2012
Purchases: $60,000 in January and $70,000 in July
Depreciation expense: 10% of year-end balance
Machinery, Dec. 31, 2012
Based on profitability, this change is highly desirable.
167
$360,000
130,000
(49,000)
$441,000
Chapter 10: Using Budgets for Planning and Coordination
Judd’s Reproductions
Projected Balance Sheet
December 31, 2012
Increased Sales Effort
Cash
Accounts receivablea
Machinery and
equipmentb
Total
assets
(d)
$492,026
899,539
Bank loan
441,000
Owners’
equity
$1,832,565
$0
$1,832,565
Total liabilities and
owners’ equity
$1,832,565
a
Accounts receivable, December 31, 2012 balance = $899,539 = 97% of Dec. credit
card sales + 97%, 67%, and 17% of Dec., Nov., and Oct. export sales, respectively.
b
Machinery, Jan. 1, 2012
Purchases: $60,000 in January and $70,000 in July
Depreciation expense: 10% of year-end balance
Machinery, Dec. 31, 2012
$360,000
130,000
(49,000)
$441,000
Criteria other than profitability may be important to a company. For
example, the option in part (b) provides a stronger cash position for the
company so that the company is able to invest in growth opportunities, if
desired. Correspondingly, accounts receivable are greatly reduced. This
option will, as desired, eliminate bad debt. In the long run, however, sales
to exporters may decrease even further if Judd insists on cash payment,
reducing profit even further.
The option in part (c) increases sales and profit dramatically but creates
cash flow problems for the company; net interest charges will increase to
$7,289 from $150. Along with the profit increase, accounts receivable
increase substantially.
168
Atkinson, Solutions Manual t/a Management Accounting, 6E
10-79 (Note: Small discrepancies in totals are due to rounding.)
Peterborough Food—Flexible Budget Cost Analysis
Flexible
Master Planning Flexible
budget
budget variance budget
variance
Line 1—
Production units
Line 2—
Production units
Line 1—
Number of batches
Line 2—
Number of batches
Unit-related costs
Line 1—Materials
Line 1—Packaging
Line 1—Labor
Line 2—Materials
Line 2—Packaging
Line 2—Labor
Total
Batch-related costs
Line 1—Materials
Line 1—Labor
Line 2—Materials
Line 2—Labor
Total
945,000 255,000 1,200,000
1,175,000 (230,000)
Actual
0 1,200,000
945,000
0
945,000
189
51
240
(40)
200
235
(46)
189
21
210
$1,417,500 382,500 $1,800,000 (131,400) $1,668,600
42,525 11,475
54,000
(576)
53,424
221,130 59,670
280,800 (39,900) 240,900
2,056,250 (402,500) 1,653,750 295,313 1,949,063
44,650 (8,740)
35,910
4,404
40,314
190,350 (37,260)
153,090
19,373 172,463
$3,972,405
5,145 $3,977,550 147,214 $4,124,763
$226,800 61,200
40,824 11,016
358,375 (70,150)
67,68 (13,248)
0
$693,679 (11,182)
169
$288,000
51,840
288,225
54,432
$682,497
(23,000) $265,000
(11,690)
40,150
25,725 313,950
14,55
68,98
3
5
5,588 $688,085
Chapter 10: Using Budgets for Planning and Coordination
Peterborough Food—Flexible Budget Cost Analysis
Flexible
Master Planning Flexible
Budget
Budget Variance
Budget
Variance
Productsustaining costs
Line 1—Labor
$256,000
Line 1—Other
2,054,000
Line 2—Labor
305,000
Line 2—Other
1,927,000
Total
$4,542,000
Businesssustaining costs
Labor
$145,000
Other
4,560,000
Total
$4,705,000
Total all costs
$13,913,084
20,000
100,000
0
0
120,000
Actual
$276,000
2,154,000
305,000
1,927,000
$4,662,000
11,000
(31,000)
18,000
78,000
76,000
$287,000
2,123,000
323,000
2,005,000
$4,738,000
0
$145,000
140,000
4,700,000
140,000 $4,845,000
253,963 $14,167,047
7,000
40,000
47,000
275,802
$152,000
4,740,000
$4,892,000
$14,442,849
Recall that each variance in the above table equals the number that is to the left
of the reported variance subtracted from the number to the right of the reported
variance. A positive variance means that the cost is higher than the plan and is
therefore unfavorable. A negative variance means that the cost is lower than the
plan and is therefore favorable. The planning variances indicate the cost
changes expected as a result of changes in the volume of production. The
flexible budget variances indicate changes in cost per unit resulting from
material, labor and packaging use and cost per unit of production being
different than planned; the average number of units per batch being different
than planned; the material and labor cost per batch being different than planned;
the labor and other product-sustaining costs being different than planned; and
the labor and other business-sustaining costs being different than planned. The
following are the details of the flexible budget calculations that are used to
isolate the variances in the above table.
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Flexible Budget Item Calculations
Unit-Related Costs
Line 1
materials cost  actual number of boxes  grams of material per box
 material cost per gram
 1,200,000  500  $0.003  $1,800,000
packaging cost = actual no. of boxes  units per box  packing cost per unit
= 1,200,000  1  $0.045 = $54,000
labor cost  actual number of boxes  labor hours per box  labor cost per hour
 1,200,000  0.013  $18  $280,800
Line 2
materials cost  actual number of boxes  grams of material per box
 material cost per gram
 945,000  350  $0.005  $1,653,750
packaging cost = actual no. of boxes  units per box  packing cost per unit
= 945,000  1  $0.038 = $35,910
labor cost  actual number of boxes  labor hours per box  labor cost per hour
 945,000  0.009  $18  $153,090
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Chapter 10: Using Budgets for Planning and Coordination
Batch-Related Costs
Line 1
actual number of boxes
 material cost per batch
planned batch size
1,200,000

 $1,200  $288,000
5,000
actual number of boxes
labor cost 
 labor hours per batch
planned batch size
 labor cost per hour
1,200,000

 12  $18  $51,840
5,000
materials cost 
Line 2
actual number of boxes
 material cost per batch
planned batch size
945,000

 $1,525  $288,225
5,000
actual number of boxes
labor cost 
 labor hours per batch
planned batch size
 labor cost per hour
945,000

 16  $18  $54,432
5,000
materials cost 
Product-Sustaining Costs
Line 1
labor cost  master budget amount  expansion costs
 256,000  20,000  $276,000
other cost  master budget amount  expansion costs
 2,054,000  100,000  $2,154,000
Line 2
labor cost  master budget amount  contraction savings
 305,000  0  $305,000
other cost  master budget amount  contraction savings
 1,927,000  0  $1,927,000
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Business-Sustaining Costs
labor cost  master budget amount  expansion costs
 145,000  0  $145,000
other cost  master budget amount  expansion costs
 4,560,000  140,000  $4,700,000
Following the approach in the chapter, we can develop the details of the flexible
budget variances for unit-related costs. These variances decompose the total
flexible budget variances for materials, packaging and labor into components.
Unit-Related Cost Flexible Budget Variances
Line 1
Material price variance  grams of material purchased  (actual price per gram
– standard price per gram)
Material price variance  (1,200,000  515)  (0.0027 – 0.0030)  $185,400 F
Material quantity variance  standard price per gram  (material used –
standard material allowed)
Material quantity variance  0.0030  [(1,200,000  515) – (1,200,000  500)]
 $54,000 U
Material flexible budget variance  material price variance  material quantity
variance
Material flexible budget variance  –$185,400  $54,000  $131,400 F
Packaging price variance  units of packaging purchased  (actual price per
unit – standard price per unit)
Packaging price variance  (1,200,000  1.06)  (0.042 – 0.045)  $3,816 F
Packaging quantity variance  standard price per unit – (packaging used –
standard packaging allowed)
packaging quantity variance  0.045  [(1,200,000  1.06) – (1,200,000 
1.00)]  $3,240 U
Packaging flexible budget variance  packaging price variance  packaging
quantity variance
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Chapter 10: Using Budgets for Planning and Coordination
Packaging flexible budget variance  –$3,816  $3,240  $576 F
Labor rate variance  labor hours used  (actual rate per labor hour – standard
rate per labor hour)
Labor rate variance  (0.011  1,200,000)  (18.25 – 18)  $3,300 U
Labor efficiency variance  standard rate per labor hour  (labor hours used –
labor hours allowed)
Labor efficiency variance  18  [(0.011  1,200,000) – (0.013  1,200,000)] 
$43,200 F
Labor flexible budget variance  labor rate variance  labor efficiency variance
Labor flexible budget variance  $3,300 – $43,200  $39,900 F
Line 2
Material price variance  grams of material purchased  (actual price per gram
– standard price per gram)
Material price variance  (945,000  375)  (0.0055 – 0.0050)  $177,187.50 U
Material quantity variance  standard price per gram  (material used –
standard material allowed)
Material quantity variance  0.005  [(945,000  375) – (945,000  350)] 
$118,125 U
Material flexible budget variance  material price variance  material quantity
variance
Material flexible budget variance  $177,187.50 + $118,125  $295,312.50 U
Packaging price variance  units of packaging purchased  (actual price per
unit – standard price per unit)
Packaging price variance  (945,000  1.0405)(0.041 – 0.038)  $2,949.82 U
Packaging quantity variance  standard price per unit  (packaging used –
standard packaging allowed)
Packaging quantity variance  0.038  [(945,000  1.0405) – (945,000  1.00)]
 $1,454.36 U
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Atkinson, Solutions Manual t/a Management Accounting, 6E
Packaging flexible budget variance  packaging price variance  packaging
quantity variance
Packaging flexible budget variance  $2,949.82 + $1,454.36  $4,404.17 U
Labor rate variance  labor hours used  (actual rate per labor hour – standard
rate per labor hour)
Labor rate variance  (0.01  945,000)  (18.25 – 18)  $2,362.50 U
Labor efficiency variance  standard rate per labor hour  (labor hours used –
labor hours allowed)
Labor efficiency variance  18  [(0.010  945,000) – (0.009  945,000)] 
$17,010 U
Labor flexible budget variance  labor rate variance  labor efficiency variance
Labor flexible budget variance  $2,362.50 + $17,010  $19,372.50 U
Batch-Related Cost Flexible Budget Variances
Line 1
Batch materials variance  actual number of batches  (actual material cost per
batch – standard material cost per batch)
Batch materials variance  200  (1,325 – 1,200)  $25,000 U
Materials batch number variance  standard material cost per batch  (actual
number of batches – standard number of batches)
Materials batch number variance  1,200  (200 – 240)  $48,000 F
Batch materials flexible budget variance  batch materials variance  materials
batch number variance
Batch materials flexible budget variance  $25,000 – $48,000  $23,000 F
Batch labor variance  actual number of batches  (actual labor cost per batch –
standard labor cost per batch)
Batch labor variance  200  [(18.25  11) – (18.00  12)]  $3,050F
Labor batch number variance  standard labor cost per batch  (actual number
of batches – standard number of batches)
Labor batch number variance  (18.00  12)  (200 – 240)  $8,640 F
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Chapter 10: Using Budgets for Planning and Coordination
Batch labor flexible budget variance  batch labor variance  labor batch
number variance
Batch labor flexible budget variance  –$3,050 – $8,640  $11,690 F
176
Atkinson, Solutions Manual t/a Management Accounting, 6E
Line 2
Batch materials variance  actual number of batches  (actual material cost per
batch – standard material cost per batch)
Batch materials variance  210  (1,495 – 1,525)  $6,300 F
Materials batch number variance  standard material cost per batch  (actual
number of batches – standard number of batches)
Materials batch number variance  1,525  (210 – 189)  $32,025 U
Batch materials flexible budget variance  batch materials variance + materials
batch number variance
Batch materials flexible budget variance  –$6,300  $32,025  $25,725 U
Batch labor variance  actual number of batches  (actual labor cost per batch –
standard labor cost per batch)
Batch labor variance  210  [(18.25  18) – (18.00  16)]  $8,505 U
Labor batch number variance  standard labor cost per batch  (actual number
of batches – standard number of batches)
Labor batch number variance  (18.00  16)  (210 – 189)  $6,048 U
Batch labor flexible budget variance  batch labor variance  labor batch
number variance
Batch labor flexible budget variance  $8,505  $6,048  $14,553 U
177
Chapter 10: Using Budgets for Planning and Coordination
10-80 This problem is known as the free-rider problem in economics and raises the
issue of the point of sacrifice if other people’s behavior, and benefits, will be
affected by your sacrifice. Nate’s position is that the School of Business, judged
by the university’s own standard, is already one of the best performers costwise. However, Nate knows that there is still room for improvement. The key
problem is to identify what the other faculties will do—will they cooperate or
will many take advantage of those that do cooperate?
An issue in this case is whether the university’s basis for comparison is
legitimate. It is inappropriate to compare the cost per student in a medical
program with the cost per student in an English program, or the cost per student
in a music program with the cost per student in a pure mathematics program.
The funding formulas must reflect the legitimate differences in the cost of
educating students in different programs. Therefore, in itself, the 70% level at
which the School of Business operates is no justification for assuming that it
has done a superior job in controlling its legitimate costs.
The major problem here is that there is no motivation for schools (subunits of
the university) to make these cuts. It is likely that past experiences will
continue. The university administration must provide some motivation for the
deans to manage costs and make them accountable for their cost levels given
reasonable expectations about what it should cost to educate a student in each
program.
In the short-run, Nate’s issue reflects moral and professional considerations.
Nate has been asked to cut costs and knows that cuts are possible. Ethically,
these should be made. The question is the timing of these cuts and how Nate
might exploit his cooperation to ensure that other faculties do not take
advantage of his cooperation.
Therefore, the first option listed is inappropriate; it is dishonest and unethical.
Nate’s major options are second and third options listed. The second option
might provide the best approach to protecting the Business School’s interests.
178