Hilton and Platt (11th Edition)
Answers to TUTORIAL QUESTIONS
CHAPTER 9
Financial Planning and Analysis:
The Master Budget
 All Review Qs” (9.1 – 9.20);
 Exercises: 25,27,28, and 29;
 Problems: 31, 35, 36, and 43
ANSWERS TO REVIEW QUESTIONS
9-1
A budget facilitates communication and coordination by making each manager
throughout the organization aware of the plans made by other managers. The
budgeting process pulls together the plans of each manager in the organization.
9-2
An example of using the budget to allocate resources in a university is found in the
area of research funds and grants. Universities typically have a limited amount of
research-support resources that must be allocated among the various colleges and
divisions within the university. This allocation process often takes place within the
context of the budgeting process.
9-3
A master budget, or profit plan, is a comprehensive set of budgets covering all phases
of an organization's operations for a specified period of time. The master budget
includes the following parts: sales budget, operational budgets (including a
production budget, inventory budgets, a labor budget, an overhead budget, a selling
and administrative expense budget, and a cash budget), and budgeted financial
statements (including a budgeted income statement, budgeted balance sheet, and
budgeted statement of cash flows).
9-4
The flowchart on the following page depicts the components of the master budget for
a service station.
9-5
General economic trends are important in forecasting sales in the airline industry. The
overall health of the economy is an important factor affecting the extent of business
travel. In addition, the health of the economy, inflation, and income levels affect the
extent to which the general public travels by air. For example, with inflation and rising
price levels, consumer confidence falls and spending decreases. Airlines may
therefore budget lower sales in future quarters of the year.
9-6
Operational budgets specify how an organization's operations will be carried out to
meet the demand for its goods and services. The operational budgets prepared in a
hospital would include a labor budget showing the number of professional personnel
of various types required to carry out the hospital's mission, an overhead budget
listing planned expenditures for such costs as utilities and maintenance, and a cash
budget showing planned cash receipts and disbursements.
Flowchart for Review Question 9-4
Sales Budget:
Gasoline, Related
Products, and
Services
Sales
Budget
Operational
Budgets
Ending
Inventory
Budget:
Gasoline
Materials Budget:
Gasoline and
Related Products
Labor
Budget
Overhead
Budget
Selling and
Administrative
Expense
Budget
Cash
Budget
Budgeted
Income
Statement
Budgeted
Financial
Statements
Budgeted
Balance Sheet
Budgeted
Statement of
Cash Flows
9-7
Application of activity-based costing to the budgeting process yields activity-based
budgeting (ABB). In the logic of activity-based costing, the company engages in a
certain mix and quantity of activities and this enables it to produce the products or
services that it markets. ABB follows this logic: the planned production tells us how
much of various activities will be needed, and if we can then project the cost per unit
of the activity (much as we project the cost per hour for direct labor) we can then
extend the calculation to tell us how much will have to be spent.
9-8
E-budgeting stands for an electronic and enterprise-wide budgeting process. Under
this approach the information needed to construct a budget is gathered via the Internet
from individuals and subunits located throughout the enterprise. The Internet also is
used to disseminate the resulting budget schedules and information to authorized
users throughout the enterprise.
9-9
The city of Boston could use budgeting for planning purposes in many ways. For
example, the city's personnel budget would be important in planning for required
employees in the police and fire departments. The city's capital budget would be used
in planning for the replacement of the city's vehicles, computers, administrative
buildings, and traffic control equipment. The city's cash budget would be important in
planning for cash receipts and disbursements. It is important for any organization,
including a municipal government, to make sure that it has enough cash on hand to
meet its cash needs at all times.
9-10
The budget director, or chief budget officer, specifies the process by which budget
data will be gathered, collects the information, and prepares the master budget. To
communicate budget procedures and deadlines to employees throughout the
organization, the budget director often develops and disseminates a budget manual.
9-11
The budget manual says who is responsible for providing various types of
information, when the information is required, and what form the information is to take.
The budget manual also states who should receive each schedule when the master
budget is complete.
9-12
A company's board of directors generally has final approval over the master budget.
By exercising its authority to make changes in the budget and grant final approval, the
board of directors can wield considerable influence on the overall direction the
organization takes. Since the budget is used as a resource-allocation mechanism, the
board of directors can emphasize some programs and curtail or eliminate others by
allocating funds through the budgeting process.
9-13
A master budget is based on many assumptions and predictions of unknown
parameters. For example, the sales budget is built on an assumption about the nature
of demand for goods or services. The direct-material budget requires an estimate of
the direct-material price and the quantity of material required per unit of production.
Many other assumptions are used throughout the rest of the budgeting process.
9-14
The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary
slack. Building budgetary slack into the budget is called padding the budget. A
significant problem caused by budgetary slack is that the budget ceases to be an
accurate portrayal of likely future events. Cost estimates are often inflated, and
revenue estimates are often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-15
An organization can reduce the problem of budgetary slack in several ways. First, it
can avoid relying on the budget as a negative evaluative tool. Second, managers can
be given incentives not only to achieve budgetary projections but also to provide
accurate projections.
9-16
The idea of participative budgeting is to involve employees throughout an
organization in the budgetary process. Such participation can give employees the
feeling that "this is our budget," rather than the feeling that "this is the budget you
imposed on us." When employees feel that they were part of the budgeting process,
they are more likely to strive to achieve the budget.
9-17
This comment is occasionally heard from entrepreneurs and others who have started
and/or run their own small business for a long period of time. These individuals have
great knowledge in their minds about running their business. They feel that they do
not need to spend a great deal of time on the budgeting process, because they can
essentially run the business by feel. This approach can result in several problems.
First, if the person who is running the business is sick or traveling, he or she is not
available to make decisions and implement plans that could have been clarified by a
budget. Second, the purposes of budgeting are important to the effective running of
an organization. Budgets facilitate communication and coordination, are useful in
resource allocation, and help in evaluating performance and providing incentives to
employees. It is difficult to achieve these benefits without a budgeting process. This
is one of the reasons that many entrepreneurs are replaced by “professional
managers” as the company grows.
9-18
In developing a budget to meet your college expenses, the primary steps would be to
project your cash receipts and your cash disbursements. Your cash receipts could
come from such sources as summer jobs, jobs held during the academic year, college
funds saved by relatives or friends for your benefit, scholarships, and financial aid
from your college or university. You would also need to carefully project your college
expenses. Your expenses would include tuition, room and board, books and other
academic supplies, transportation, clothing and other personal needs, and money for
entertainment and miscellaneous expenses.
9-19
Firms with international operations face a variety of additional challenges in preparing
their budgets.
 A multinational firm's budget must reflect the translation of foreign currencies into
U.S. dollars. Almost all the world's currencies fluctuate in their values relative to
the dollar, and this fluctuation makes budgeting for those translations difficult.
 It is difficult to prepare budgets when inflation is high or unpredictable. Some
foreign countries have experienced hyperinflation, sometimes with annual
inflation rates well over 100 percent. Predicting such high inflation rates is difficult
and complicates a multinational's budgeting process.
 The economies of all countries fluctuate in terms of consumer demand, availability
of skilled labor, laws affecting commerce, and so forth. Companies with foreign
operations face the task of anticipating such changing conditions in their
budgeting processes.
9-20
Most of the differences in budgeting between manufacturing and non-manufacturing
firms derive from the need for inventories in manufacturing. Because of this,
additional budget schedules are generally required in manufacturing firms. These
usually include:
(a) Production budget
(b) Direct-materials budget
(c) Budgeted schedule of cost of goods manufactured and sold
In addition, other budgets are often more complex because of the large number of
suppliers needed for manufacturing.
 Exercises: 25,27,28, and 29;
Exercise 9-25 (20 minutes)
1. The total required production is 655,720 units, computed as follows:
Budgeted Sales
(in units)
June
July
August
September
October
200,000 (given)
210,000 (200,000  1.05)
220,500 (210,000  1.05)
231,525 (220,500  1.05)
Planned Ending Inventory
(in units)
160,000 (200,000  80%)
185,220 (231,525  80%)
Sales in units:
July ...............................................................................................................
August ..........................................................................................................
September ....................................................................................................
Total for third quarter ..................................................................................
Add: Desired ending inventory, September 30 .........................................
Subtotal ........................................................................................................
Deduct: Desired ending inventory, June 30 ..............................................
Total required production ...........................................................................
200,000
210,000
220,500
630,500
185,220
815,720
160,000
655,720
Exercise 9-25 (continued)
2.
Assumed production during third quarter (in units) ................................
Raw-material requirements per unit of product (in pounds) ....................
Raw material required for production in third quarter (in pounds) .........
Add: Desired ending raw-material inventory, September 30
(2,400,000  25%) ................................................................................
Subtotal ........................................................................................................
Deduct: Ending raw-material inventory, June 30 ......................................
Raw material to be purchased during third quarter (in pounds) .............
Cost per pound of raw material ..................................................................
Total raw-material purchases during third quarter ...................................
600,000

4
2,400,000
600,000
3,000,000
700,000
2,300,000
 $1.15
$2,645,000
Exercise 9-27 (20 minutes)
Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From:
I.M. Student and Associates
Subject: Budgetary slack
Budgetary slack is the difference between a budget estimate that a person provides and
a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
and usefulness of the budget as a planning and control tool. When a budget includes
slack, the amounts in the budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts in
20x2. Yet the new accounts manager's projection is only 700 new accounts. This
projection will make it more likely that the actual number of new accounts will exceed
the budgeted number.
Exercise 9-28 (20 minutes)
1.
Total Sales in January 20x2
$100,000
$130,000
$160,000
Cash receipts in January, 20x2
From December sales on account ...........
From January cash sales .........................
From January sales on account ..............
Total cash receipts....................................
$
7,125*
75,000†
20,000**
$ 102,125
$ 7,125
97,500
26,000
$130,625
$ 7,125
120,000
32,000
$159,125
*$7,125 = $190,000  .25  .15
†$75,000 = $100,000  .75
**$20,000 = $100,000  .25  .80
2.
Operational plans depend on various assumptions. Usually there is uncertainty about
these assumptions, such as sales demand or inflation rates. Financial planning helps
management answer "what if" questions about how the budget will look under various
sets of assumptions.
Exercise 9-29 (30 minutes)
1. Budgeted cash collections for December:
Month of Sale
November.............................................................
December .............................................................
Total cash collections .........................................
2.
Collections in December
$ 76,000
$200,000  38%
132,000
220,000  60%
$208,000
Budgeted income (loss) for December:
Sales revenue .......................................................................
Less: Cost of goods sold (75% of sales) ............................
Gross margin (25% of sales) ...............................................
Less: Operating expenses:..................................................
Bad debts expense (2% of sales) ..............................
Depreciation ($216,000/12) ........................................
Other expenses ..........................................................
Total operating expenses ..........................................
Income before taxes.............................................................
$220,000
165,000
$ 55,000
$ 4,400
18,000
22,600
45,000
$ 10,000
EXERCISE 9-29 (CONTINUED)
3.
Projected balance in accounts payable on December 31:
The December 31 balance in accounts payable will be equal to December's purchases of
merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.
Month
December ...................
January ......................
Total December
purchases ...............
Sales
$220,000
200,000
Cost of
Goods
Sold
Amount Purchased in December
$165,000
$165,000  20% $ 33,000
150,000
120,000
150,000  80%
Therefore, the December 31 balance in accounts payable will be $153,000.
$153,000
 Problems: 31, 35, 36, and 43
SOLUTIONS TO PROBLEMS
Problem 9-31 (40 minutes)
1.
Production and direct-labor budgets
SPIFFY SHADES CORPORATION
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Sales (units).....................................................
Add: Ending inventory* ..................................
Total needs ......................................................
Deduct: Beginning inventory .........................
Units to be produced ......................................
Direct-labor hours per unit .............................
Total hours of direct labor
time needed ................................................
Direct-labor costs:
Wages ($16.00 per DLH)† ...........................
Pension contributions
($.50 per DLH) .........................................
Workers' compensation
insurance ($.20 per DLH) .......................
Employee medical insurance
($.80 per DLH) .........................................
Employer's social security
(at 7%) .....................................................
Total direct-labor cost ....................................
January
10,000
16,000
26,000
16,000
10,000

1
Month
February
12,000
12,500
24,500
16,000
8,500

1
March
8,000
13,500
21,500
12,500
9,000

.75
Quarter
30,000
13,500
43,500
16,000
27,500
10,000
8,500
6,750
25,250
$160,000
$136,000
$108,000
$404,000
5,000
4,250
3,375
12,625
2,000
1,700
1,350
5,050
8,000
6,800
5,400
20,200
11,200
$186,200
9,520
$158,270
7,560
$125,685
28,280
$470,155
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
†DLH denotes direct-labor hour.
Problem 9-31 (Continued)
2.
Use of data throughout the master budget:
Components of the master budget, other than the production budget and the directlabor budget, that would also use the sales data include the following:
 Sales budget
 Cost-of-goods-sold budget
 Selling and administrative expense budget
Components of the master budget, other than the production budget and the directlabor budget, that would also use the production data include the following:
 Direct-material budget
 Production-overhead budget
 Cost-of-goods-sold budget
Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor-hour data include the following:
 Production-overhead budget (for determining the overhead application rate)
Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor cost data include the following:
 Production-overhead budget (for determining the overhead application rate)
 Cost-of-goods-sold budget
 Cash budget
 Budgeted income statement
PROBLEM 9-31 (CONTINUED)
3. Production overhead budget:
SPIFFY SHADES CORPORATION
PRODUCTION OVERHEAD BUDGET
FOR THE FIRST QUARTER OF 20X1
Month
January
Shipping and handling ..............
February
March
Quarter
$ 20,000
$ 24,000
$16,000
$ 60,000
30,000
25,500
27,000
82,500
Other overhead ..........................
70,000
59,500
47,250
176,750
Total production overhead ........
$120,000
$109,000
$90,250
$319,250
Purchasing, material handling,
and inspection ............................
PROBLEM 9-35 (45 MINUTES)
1.
The cash budget for Alpha-Tech for the second quarter of 20x5 is presented below.
Supporting calculations follow.
ALPHA-TECH
Cash Budget
For the Second Quarter of 20x5
Beginning balance ................................................
Collections:a
February sales .................................................
March sales .....................................................
April sales ........................................................
May sales .........................................................
Add: Total receipts................................................
Total cash available ..............................................
Disbursements:
Accounts payableb ..........................................
Wagesc .............................................................
General and administratived ...........................
Property taxes .................................................
Income taxese ..................................................
Deduct: Total disbursements ...............................
Cash balance .........................................................
Cash borrowed ......................................................
Cash repaid
Ending balance .....................................................
a60%
April
May
$ 500,000 $ 500,000
4,000,000
5,400,000
3,600,000
6,900,000
$9,400,000 $10,500,000
$9,900,000 $11,000,000
$4,155,000 $ 4,735,000
3,450,000
3,750,000
900,000
900,000
1,280,000
$9,785,000 $ 9,385,000
$ 115,000 $ 1,615,000
385,000
(385,000)
$ 500,000 $ 1,230,000
of sales in first month after sale; 40% of sales in second month after sale.
next page.
c30% of current month sales.
d(Total, less property taxes and depreciation) divided by 12.
e40% × $3,200,000.
bSee
June
$ 1,230,000
4,600,000
7,500,000
$12,100,000
$13,330,000
$ 5,285,000
4,200,000
900,000
340,000
$10,725,000
$ 2,605,000
$ 2,605,000
PROBLEM 9-35 (CONTINUED)
bAccounts
payable:
Total*
Cost of goods sold:
February ...
$4,000,000
March ........
3,600,000
March ........
3,600,000
April ...........
4,600,000
April ...........
4,600,000
May ............
5,000,000
May ............
5,000,000
June ..........
5,600,000
Percentage
.30
.70
.30
.70
.30
.70
.30
.70
February
$1,200,000
2,520,000
$3,720,000
4,300,000
4,300,000
4,880,000
4,880,000
5,420,000
April
May
June
$1,080,000
3,220,000
$1,380,000
3,500,000
$3,720,000
Payments:
February ...
March ........
March ........
April ...........
April ...........
May ............
March
$4,300,000
.25
.75
.25
.75
.25
.75
$4,880,000
$1,500,000
3,920,000
$5,420,000
$ 930,000
3,225,000
$1,075,000
3,660,000
$
0
$
0
$4,155,000
$4,735,000
$1,220,000
4,065,000
$5,285,000
*For cost of goods sold, this amount is equal to 40% of sales. For payments, this amount is
equal to the cost of goods sold.
2.
Cash budgeting is important for Alpha-Tech because as sales grow, so will
expenditures for inputs. Since these expenditures generally precede cash receipts,
the company must plan for possible financing to cover the gap between payments and
receipts. The cash budget shows the probable cash position at certain points in time,
allowing the company to plan for borrowing, as Alpha-Tech must do in April.
Cash budgeting also facilitates the control of excess cash. The company may be
losing investment opportunities if excess cash is left idle. The cash budget alerts
management to periods when there will be excess cash available for investment, thus
facilitating financial planning and cash control.
Problem 9-36 (40 minutes)
1. The use of alternative accounting methods to manipulate reported earnings is unethical
because it violates the Standards of Ethical Professional Practice for Management
Accountants (see Chapter 1). The competence standard is violated because of failure to
comply with technical standards and lack of appropriate analysis. The integrity standard
is violated because this action induces people to carry out duties unethically due to
extreme management pressure, subverts the attainment of an organization's objectives,
and discredits the profession. The credibility standard is violated because of failure to
communicate information fully and fairly.
2.
Yes, costs related to revenue should be expensed in the period in which the revenue is
recognized. Perishable supplies are purchased for use in the current period, will not
provide benefits in future periods, and should be matched against the revenue recognized
in the current period. The accounting treatment for the supplies was not in accordance
with generally accepted accounting principles.
3.
Gary Wood's actions were consistent with the IMA guidelines for Resolution of Ethical
Conflict. Upon discovering the change in the method of accounting for supplies, Wood
brought the matter to the attention of his immediate superior, Kern. Upon learning of the
arrangement with Pristeel, Wood told Kern the action was improper and requested that
the accounts be corrected and the arrangement discontinued. Wood clarified the situation
with a qualified and objective peer (advisor) before disclosing Kern's arrangement with
Pristeel to TCC’s president, Kern's immediate superior. Contact with levels above the
immediate superior should be initiated only with the superior's knowledge, assuming the
superior is not involved. In this case, the superior is involved. Thus, Wood has acted
appropriately by approaching North without Kern's knowledge.
PROBLEM 9-43 (CONTINUED)
2.
For each of the financial objectives established by the board of directors and president
of Healthful Foods, Inc., the calculations to determine whether John Winslow’s budget
attains these objectives are presented in the following table.
CALCULATION OF FINANCIAL OBJECTIVES: HEALTHFUL FOODS, INC.
Objective
Increase sales by 12%
($850,000 × 1.12 = $952,000)
Increase before-tax income by 15%
($105,000 × 1.15 = $120,750)
Maintain long-term debt at or below 16%
of assets
($2,050,000 × .16 = $328,000)
Maintain cost of goods sold at or below
70% of sales
($947,750 × .70 = $663,425)
3.
Attained/
Not Attained
Not attained
Calculations
($947,750$850,000)/$850,000 = 11.5%
Attained
($120,750$105,000)/$105,000 = 15%
Attained
$308,000/$2,050,000 = 15% (rounded)
Not attained
$669,500/$947,750 = 70.6% (rounded)
The accounting adjustments contemplated by John Winslow are unethical because
they will result in intentionally overstating income by understating the cost of goods
sold. The specific standards of ethical conduct for management accountants violated
by Winslow are as follows:
Competence. By making the accounting adjustments, Winslow violated the
competency standard by not preparing financial statements in accordance with
technical standards.
Integrity. Winslow violated the integrity standard by engaging in an activity that
prejudiced his ability to carry out his duties ethically, and by engaging in an activity
that appears to be a conflict of interest.
Credibility. By overstating the inventory and reclassifying certain costs, Winslow has
violated the credibility standard. He has failed to communicate information fairly and
objectively and has failed to disclose all relevant information that would influence the
users’ understanding of the report.