CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1
What are the four elements of the budgeting cycle?
The budgeting cycle includes the following elements:
a. Planning the performance of the company as a whole as well as planning the
performance of its subunits. Management agrees on what is expected.
b. Providing a frame of reference, a set of specific expectations against which actual
results can be compared.
c. Investigating variations from plans. If necessary, corrective action follows
investigation.
d. Planning again, in light of feedback and changed conditions.
6-2
Define master budget.
The master budget expresses management’s operating and financial plans for a specified period
(usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of
what the company intends to accomplish in the period.
List five the key questions which must be considered by managers for developing
successful strategies.
What are our main objectives? How can we create value for our customers and differentiate
ourselves from our competitors? Where is our market and who are our customers? What is the
best organizational and financial structure for us? What are the alternative strategies and
opportunities and their relevant risks?
6-3
“Budgets provide a framework for evaluating performance and improving learning.” Do
you agree? Explain.
Yes, budgets can help a company’s managers to measure and evaluate actual performance against
predicted performance. When actual outcomes differ from budgeted or planned results, it
prompts managers to investigate and find out the reason(s) for the variance(s). This exercise
leads to an improved learning for future budgeting.
6-4
6-5
“Budgets can promote coordination and communication among subunits within the
company.” Do you agree? Explain.
Yes, budgets can promote coordination and communication among all aspects of production or
service and all departments in a company. Budgets can provide a communication mechanism that
seamlessly links all subunits and their employees, helping them understand their individual goals
or objectives of the company. This understanding can facilitate coordination among individual
departments within the company.
“Budgets motivate managers and other employees to the company’s goals.” Do you
agree? Explain.
Yes, budgets create goals as well as challenges for managers and employees, and motivate them
to improve their performances and to achieve their goals. Managers and employees regard not
meeting their budgets as a failure and, therefore, they are motivated to work harder in order to
avoid such situations.
6-6
6-7
Define rolling budget. Give an example.
6-1
A rolling budget, also called a continuous budget, is a budget or plan that is always available for
a specified future period, by continually adding a period (month, quarter, or year) to the period
that just ended. A four-quarter rolling budget for 2017 is superseded by a four-quarter rolling
budget for April 2017 to March 2018, and so on.
6-8
Outline the steps in preparing an operating budget.
The steps in preparing an operating budget are as follows:
1. Prepare the revenues budget.
2. Prepare the production budget (in units).
3. Prepare the direct material usage budget and direct material purchases budget.
4. Prepare the direct manufacturing labor budget.
5. Prepare the manufacturing overhead budget.
6. Prepare the ending inventories budget.
7. Prepare the cost of goods sold budget.
8. Prepare the nonmanufacturing costs budget.
9. Prepare the budgeted income statement.
6-9
What is the usual starting point for the operating budget?
Usually, a revenues budget is the starting point for the operating budget because the forecasted
level of unit sales or revenues has a major impact on the production capacity, the inventory levels
planned, and determines all of the costs required to support the budgeted revenues.
6-10 How can sensitivity analysis be used to increase the benefits of budgeting?
How can sensitivity analysis be used to increase the benefits of budgeting?
Sensitivity analysis adds an extra dimension to budgeting. It enables managers to examine how
budgeted amounts change with changes in the underlying assumptions. This assists managers in
monitoring those assumptions that are most critical to a company in attaining its budget and
allows them to make timely adjustments to plans when appropriate.
6-11 What is the key emphasis in Kaizen budgeting?
The key emphasis in Kaizen budgeting is continuous improvement, resulting in cost reductions,
during the budget period.
6-12 Describe how nonoutput-based cost drivers can be incorporated into budgeting.
Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based
budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce and sell
products and services. Nonoutput-based cost drivers, such as the number of parts, number of
batches, and number of new products can be used with ABB.
Explain how the choice of the type of responsibility center (cost, revenue, profit, or
investment) affects behavior.
The choice of the type of responsibility center determines what the manager is accountable for
and thereby affects the manager’s behavior. For example, if a revenue center is chosen, the
manager will focus on revenues, not on costs or investments. The choice of a responsibility
center type guides the variables to be included in the budgeting exercise.
6-13
6-14
What are some additional considerations that arise when budgeting in multinational
companies?
6-2
Budgeting in multinational companies may involve budgeting in several different foreign
currencies. Further, management accountants must translate operating performance into a single
currency for reporting to shareholders by budgeting for exchange rates. Managers and
accountants must understand the factors that impact exchange rates and, where possible, plan
financial strategies to limit the downside of unexpected unfavorable moves in currency
valuations. In developing budgets for operations in different countries, they must also have good
understanding of political, legal, and economic issues in those countries.
6-15 Explain why cash budgets are important.
Cash budgets are significantly important for cash planning and control, especially to avoid
having idle cash and unexpected cash deficiencies. The cash budget can help managers to not
only identify the periods of idle cash and periods of cash shortage but also to determine
necessary cash balances in line with their needs in any given period during the budget year. It
allows managers to make appropriate decisions in terms of either using excess cash or financing
from outside to achieve the company’s goals.
6-16 Master budget. Which of the following statements is correct regarding the components
of the master budget?
a. The cash budget is used to create the capital budget.
b. Operating budgets are used to create cash budgets.
c. The manufacturing overhead budget is used to create the production budget.
d. The cost of goods sold budget is used to create the selling and administrative expense budget.
SOLUTION
Master budget.
Choice "b" is correct. All of the operating budgets (like the sales budget, production budget,
selling and administrative expense budget, etc.) are used to create financial budgets like the cash
budget and the proforma financial statements. Of course, after cash budgets have been
formulated, companies use this information to also adjust the operating budget.
Choice "a" is incorrect. The capital budget is used to create the cash budget.
Choice "c" is incorrect. The factory overhead budget is derived from the production budget.
Choice "d" is incorrect. The cost of goods sold budget and the selling and administrative expense
budget are completely independent of one another and both are usually determined based on the
revenues budget.
6-17 Operating and financial budgets. Which of the following statements is correct regarding
the drivers of operating and financial budgets?
a. The sales budget will drive the cost of goods sold budget.
b. The cost of goods sold budget will drive the units of production budget.
c. The production budget will drive the selling and administrative expense budget.
d. The cash budget will drive the production and selling and administrative expense budgets.
6-3
SOLUTION
Operating and financial budgets.
Choice "a" is correct. The sales (or revenues) budget is the primary driver of most components of
the master budget, which includes both operating and financial budgets. The sales budget will
drive the production budget, which in turn drives budgets for direct materials, direct labor, and
factory overhead. All three of these budgets combine to form the cost of goods sold budget.
Choice "b" is incorrect. The units of production budget drives the budgets for direct materials,
direct labor, and manufacturing overhead. These three budgets combine to form the cost of goods
sold budget.
Choice "c" is incorrect. The selling and administrative expense budget is separate from the
production budget, although both are driven by the sales budget.
Choice "d" is incorrect. The cash budget is driven by the production and selling and
administrative expense budgets. Of course, cash needs might affect the final production and
selling budget.
6-18 Production budget. Superior Industries sales budget shows quarterly sales for the next
year as follows: Quarter 1–10,000; Quarter 2–8,000; Quarter 3–12,000; Quarter 4–14,000.
Company policy is to have a target finished-goods inventory at the end of each quarter equal to
20% of the next quarter’s sales. Budgeted production for the second quarter of next year would
be:
1. 7,200 units; 2. 8,800 units; 3. 12,000 units; 4. 10,400 units
SOLUTION
Production budget.
Choice "2" is correct. 8,800 units are the budgeted production for the second quarter.
The calculation proceeds with first determining the beginning inventory for the second quarter
(20% × second quarter sales, 8,000 units = 1,600 units) and the ending inventory for the second
quarter (20% × third quarter sales, 12,000 units = 2,400 units). We then use the following
equation to calculate production for the second quarter:
Beginning inventory + Production = Sales + Ending inventory
Production = Sales + Ending inventory – Beginning inventory
= 8,000 + 2,400 – 1,600 = 8,800 units
Check:
Second Quarter
Beginning inventory (20% × 8,000) 1,600 units
Add Production (plug)
8,800 units
10,400 units
Deduct Sales
8,000 units
Ending inventory (20% × 12,000) 2,400 units
6-19 Responsibility centers. Elmhurst Corporation is considering changes to its responsibility
accounting system. Which of the following statements is/are correct for a responsibility
accounting system.
6-4
I. In a cost center, managers are responsible for controlling costs but not revenue.
II. The idea behind responsibility accounting is that a manager should be held responsible for
those items that the manager can control to a significant extent.
III. To be effective, a good responsibility accounting system must help managers to plan and to
control.
IV.Costs that are allocated to a responsibility center are normally controllable by the
responsibility center manager.
1. I and II only are correct.
2. II and III only are correct.
3. I, II, and III are correct.
4. I, II and IV are correct.
SOLUTION
Responsibility centers.
Choice "3" is correct.
The question asks which of a series of statements is/are correct for a responsibility accounting
system. "None of the above" is not an available option, and neither is "All of the above."
Statement I says that, in a cost center, managers are responsible for controlling costs but not
revenue. Statement I is correct.
Statement II says that the idea behind responsibility accounting is that a manager should be held
responsible for those items that the manager can control to a significant extent. Statement II is
correct.
Statement III says that, to be effective, a good responsibility accounting system must help
managers to plan and control. Planning without control and control without planning is not
effective. Statement III is correct.
Statement IV says that costs that are allocated to a responsibility center are normally controllable
by the responsibility center manager. Costs that are allocated are normally not controllable by the
responsibility center manager. Statement IV is incorrect.
6-20 Cash budget. Mary Jacobs, the controller of the Jenks Company is working on Jenks’
cash budget for year 2. She has information on each of the following items:
I. Wages due to workers accrued as of December 31, year 1.
II. Limits on a line of credit that may be used to fund Jenks’ operations in year 2.
III. The balance in accounts payable as of December 31, year 1, from credit purchases made in
year 1.
Which of the items above should Jacobs take into account when building the cash budget for
year 2?
a. I, II
b. I, III
c. II, III
d. I, II, III
SOLUTION
Cash budget
Choice "d" is correct. All of the elements listed should be considered when building the cash
budget. Accrued wages will be factored into the determination of cash disbursements in year 2,
which is part of the cash budget. Financing budgets, a component of the cash budget, cover how
a company will fund its current operations. One of the methods the company may use is a line of
6-5
credit, which will have limits as to how much cash a company can access at a given time. The
accounts payable balance is important as well, as eventually vendors must be paid in cash in year
2 for credit purchases made by the company in year 1.
Choice "a" is incorrect. This choice leaves out accounts payable, which eventually must be paid
with cash in year 2.
Choice "b" is incorrect. This choice leaves out the analysis of limits on a line of credit that the
company may need to fund its operations in year 2.
Choice "c" is incorrect. This choice leaves out accrued wages, which will ultimately have to be
paid by the company in year 2.
6-21 Sales budget, service setting. In 2017, Rouse & Sons, a small environmental-testing
firm, performed 12,200 radon tests for $290 each and 16,400 lead tests for $240 each. Because
newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by
10% next year. However, awareness of radon-related health hazards is expected to result in a 6%
increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his
price for lead testing to $230 per test, he will have to face only a 7% decline in lead-test sales in
2018.
Required:
1. Prepare a 2018 sales budget for Rouse & Sons assuming that Rouse holds prices at 2017
levels.
2. Prepare a 2018 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead
test to $230. Should Rouse lower the price of a lead test in 2018 if the company’s goal is to
maximize sales revenue?
SOLUTION
(15 min.) Sales budget, service setting.
1.
Rouse & Sons
Radon Tests
Lead Tests
2017
At 2017
Volume Selling Prices
12,200 $290
16,400 $240
Expected 2018
Change in Volume
+ 6%
–10%
Expected 2018
Volume
12,932
14,760
Rouse & Sons Sales Budget
For the Year Ended December 31, 2018
Radon Tests
Lead Tests
Selling
Price
$290
$240
Units
Sold
12,932
14,760
Total
Revenues
$3,750,280
3,542,400
$7,292,680
2.
Rouse & Sons
Radon Tests
Lead Tests
2017
Planned 2018
Expected 2018
Volume Selling Prices Change in Volume
12,200 $290
+6%
16,400 $230
–7%
6-6
Expected
2018 Volume
12,932
15,252
Rouse & Sons Sales Budget
For the Year Ended December 31, 2018
Radon Tests
Lead Tests
Selling
Price
Units Sold
$290
12,932
$230
15,252
Total
Revenues
$3,750,280
3,507,960
$7,258,240
Expected revenues at the new 2018 prices are $7,258,240, which is lower than the expected 2018
revenues of $7,292,680 if the prices are unchanged. So, if the goal is to maximize sales revenue
and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead test in
2018.
6-22 Sales and production budget. The Albright Company manufactures ball pens and
expects sales of 452,000 units in 2018. Albright estimates that its ending inventory for 2018 will
be 65,400 pens. The beginning inventory is 46,500 pens. Compute the number of pens budgeted
for production in 2018.
(5 min.) Sales and production budget.
Budgeted sales in units
Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced
452,000
65,400
517,400
46,500
470,900
6-23 Direct material budget. Polyhidron Corporation produces 5-gallon plastic buckets. The
company expects to produce 430,000 buckets in 2018. Polyhidron purchases high quality plastic
granules for the production of buckets. Each pound of plastic granules produces two 5-gallon
buckets. Target ending inventory of the company is 35,200 pounds of plastic granules; its
beginning inventory is 22,500. Compute how many pounds of plastic granules need to be
purchased in 2018.
(5 min.)
Direct materials purchases budget.
Direct materials to be used in production (pounds): (430,000÷2)
Add target ending direct materials inventory (pounds)
Total requirements (pounds)
Deduct beginning direct materials inventory (pounds)
Direct materials to be purchased (pounds)
215,000
35,200
250,200
22,500
227,700
6-24 Material purchases budget. The Ceremicon Company produces teapots from stoneware
clay. The company has prepared a sales budget of 150,000 units of teapots for a 3-month period.
It has an inventory of 34,000 units of teapots on hand at December 31 and has estimated an
inventory of 38,000 units of teapots at the end of the succeeding quarter.
One unit of teapot needs 2 pounds of stoneware clay. The company has an inventory of
6-7
82,000 pounds of stoneware clay at December 31 and has a target ending inventory of 95,000
pounds of stoneware clay at the end of the succeeding quarter. How many pounds of direct
materials (stoneware clay) should Ceremicon purchase during the 3 months ending March 31?
(10 min.)
Budgeting material purchases.
Production Budget:
Finished Goods
(units)
150,000
38,000
188,000
34,000
154,000
Budgeted sales
Add target ending teapots inventory
Total requirements
Deduct beginning teapots inventory
Units to be produced
Direct Materials (stoneware clay) Purchases Budget:
Direct materials needed for production (154,000  2)
Add target ending direct materials inventory
Total requirements
Deduct beginning direct materials inventory
Direct materials to be purchased
Direct Materials
(in pounds)
308,000
95,000
403,000
82,000
321,000
6-25 Revenues, production, and purchases budgets. The Deluxe Motorcar in northern
California manufactures motor cars of all categories. Its budgeted sales for the most popular
sedan model XE8 in 2018 is 4,000 units. Deluxe Motorcar has a beginning finished inventory of
600 units. Its ending inventory is 450 units. The present selling price of model XE8 to the
distributors and dealers is $35,200. The company does not want to increase its selling price in
2018.
Deluxe Motorcar does not produce tyres. It buys the tyres from an outside supplier. One
complete car requires five tyres including the tyre for the extra wheel. The company’s target
ending inventory is 400 tyres, and its beginning inventory is 350 tyres. The budgeted purchase
price is $45 per tyre.
Required:
1.
2.
3.
4.
Compute the budgeted revenues in dollars.
Compute the number of cars that Deluxe Motorcar should produce.
Compute the budgeted purchases of tyres in units and in dollars.
What actions can Deluxe Motorcar’s managers take to reduce budgeted purchasing costs of
tyres assuming the same budgeted sales for Model XE8?
SOLUTION
(15–20 min.)
1.
Revenues, production, and purchases budget.
4,000 cars  $35,200 = $140,800,000
6-8
2.
Budgeted sales (Model XE8 cars)
Add target ending finished goods inventory
Total requirements (units)
Deduct beginning finished goods inventory
Units to be produced
3.
Direct materials (tyres) to be used in production,
3,850× 5 (tyres)
Add target ending direct materials inventory
Total requirements
Deduct beginning direct materials inventory
Direct materials to be purchased (tyres)
Cost per tyre in dollars
Direct materials purchase cost
4,000
450
4,450
600
3,850
19,250
400
19,650
350
19,300
×
$45
$ 868,500
4. Deluxe Motorcar does not maintain a high inventory of tyres. Note the relatively small
inventory of wheels. The company appears to be using something close to a just-in-time
inventory system, which is already saving the company the cost of holding materials
inventory. Nevertheless, Deluxe Motorcar’s managers would want to check why the target
ending inventory of tyres (400) is greater than the beginning inventory of 350. Could the
production time lag between the order of tyres placed and the ordered tyres received to
reduce the need to hold more inventories?
Furthermore, Deluxe Motorcar could help and advice its tyre supplier to improve the
quality of its tyres by taking more quality control measures and to improve efficiency and
productivity of the employees by conducting effective training programmes which may result
in reduction of the cost of manufacturing tyres with a less number of defective tyres. It would
certainly reduce the price the supplier charges Deluxe Motorcar. Toyota routinely aids its
suppliers in this way and also reduces costs through better coordination between suppliers
and the company.
6-26 Revenues and production budget. Price, Inc., bottles and distributes mineral water from
the company’s natural springs in northern Oregon. Price markets two products: 12-ounce
disposable plastic bottles and 1-gallon reusable plastic containers.
Required:
1. For 2015, Price marketing managers project monthly sales of 420,000 12-ounce bottles and
170,000 1-gallon containers. Average selling prices are estimated at $0.20 per 12-ounce
bottle and $1.50 per 1-gallon container. Prepare a revenues budget for Price, Inc., for the year
ending December 31, 2015.
2. Price begins 2015 with 890,000 12-ounce bottles in inventory. The vice president of
operations requests that 12-ounce bottles ending inventory on December 31, 2015, be no less
than 680,000 bottles. Based on sales projections as budgeted previously, what is the
minimum number of 12-ounce bottles Price must produce during 2015?
3. The VP of operations requests that ending inventory of 1-gallon containers on December 31,
2015, be 240,000 units. If the production budget calls for Price to produce 1,900,000 1-gallon
6-9
containers during 2015, what is the beginning inventory of 1-gallon containers on January 1,
2015?
SOLUTION
(30 min.)
Revenues and production budget.
1.
12-ounce bottles
1-gallon units
a
b
Selling
Price
$0.20
1.50
Units
Sold
5,040,000a
2,040,000b
Total
Revenues
$1,008,000
3,060,000
$4,068,000
420,000 × 12 months = 5,040,000
170,000 × 12 months = 2,040,000
2.
Budgeted unit sales (12-ounce bottles)
5,040,000
Add target ending finished goods inventory
680,000
Total requirements
5,720,000
Deduct beginning finished goods inventory
890,000
Units to be produced
4,830,000
3. Beginning Inventory = Budgeted sales + Target ending inventory – Budgeted production
= 2,040,000 + 240,000  1,900,000
= 380,000 1-gallon units
6-27 Budgeting; direct material usage, manufacturing cost, and gross margin. Xander
Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One
rug is budgeted to use 36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost
of $6 per gallon. All other materials are indirect. At the beginning of the year Xander has an
inventory of 458,000 skeins of wool at a cost of $961,800 and 4,000 gallons of dye at a cost of
$23,680. Target ending inventory of wool and dye is zero. Xander uses the FIFO inventory costflow method.
Xander blue rugs are very popular and demand is high, but because of capacity constraints
the firm will produce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each.
There are no rugs in beginning inventory. Target ending inventory of rugs is also zero.
Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are
accumulated in two cost pools—one for weaving and the other for dyeing. Weaving overhead is
allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is
allocated to products based on machine-hours (MH).
There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct
manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour. It budgets 0.2
machine-hours to dye each skein in the dyeing process.
The following table presents the budgeted overhead costs for the dyeing and weaving cost
pools:
6-10
Required:
1.
2.
3.
4.
5.
6.
7.
8.
Prepare a direct materials usage budget in both units and dollars.
Calculate the budgeted overhead allocation rates for weaving and dyeing.
Calculate the budgeted unit cost of a blue rug for the year.
Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or
(b) 185,000 blue rugs (that is, at two different sales levels).
Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.
Find the budgeted gross margin for blue rugs under each sales assumption.
What actions might you take as a manager to improve profitability if sales drop to 185,000
blue rugs?
How might top management at Xander use the budget developed in requirements 1–6 to
better manage the company?
SOLUTION
(30 min.) Budgeting: direct material usage, manufacturing cost, and gross margin.
1.
Direct Material Usage Budget in Quantity and Dollars
Material
Wool
Physical Units Budget
Direct materials required for
Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.)
Cost Budget
Available from beginning direct materials inventory:
(a)
Wool: 458,000 skeins
Dye: 4,000 gallons
To be purchased this period: (b)
Wool: (7,200,000 – 458,000) skeins × $2 per skein
Dye: (160,000 – 4,000) gal. × $6 per gal.
Direct materials to be used this period: (a) + (b)
6-11
7,200,000 skeins
$
Dye
Total
160,000 gal.
961,800
$ 23,680
13,484,000
$14,445,800
936,000
$ 959,680
$15,405,480
2.
$31,620,000
Weaving budgeted
=
= $2.55 per DMLH
overhead rate
12,400,000 DMLH
$17, 280, 000
Dyeing budgeted
=
= $12 per MH
overhead rate
1, 440,000 MH
3.
Budgeted Unit Cost of Blue Rug
Wool
Dye
Direct manufacturing labor
Dyeing overhead
Weaving overhead
Total
1
Input per
Unit of
Output
36 skeins
0.8 gal.
62 hrs.
7.21 mach-hrs.
62 DMLH
Cost per
Unit of Input
$ 2
6
13
12
2.55
Total
72.00
4.80
806.00
86.40
158.10
$1,127.30
$
0.2 machine hour per skein 36 skeins per rug = 7.2 machine-hrs. per rug.
4.
Revenue Budget
Blue Rugs
Blue Rugs
Selling
Units
Price Total Revenues
200,000 $2,000 $400,000,000
185,000 $2,000 $370,000,000
5a.
Sales = 200,000 rugs
Cost of Goods Sold Budget
From Schedule
Beginning finished goods inventory
Direct materials used
Direct manufacturing labor ($806 × 200,000)
Dyeing overhead ($86.40 × 200,000)
Weaving overhead ($158.10 × 200,000)
Cost of goods available for sale
Deduct ending finished goods inventory
Cost of goods sold
5b.
Sales = 185,000 rugs
Production = 200,000 rugs
6-12
Total
$
$ 15,405,480
161,200,000
17,280,000
31,620,000
0
225,505,480
225,505,480
0
$225,505,480
Cost of Goods Sold Budget
From Schedule
Beginning finished goods inventory
Direct materials used
Direct manufacturing labor ($806 × 200,000)
Dyeing overhead ($86.40 × 200,000)
Weaving overhead ($158.10 × 200,000)
Cost of goods available for sale
Deduct ending finished goods inventory
($1,127.30 × 15,000)
Cost of goods sold
Total
$
$ 15,405,480
161,200,000
17,280,000
31,620,000
0
225,505,480
225,505,480
16,909,500
$208,595,980
Some students assume that Xander will produce only 185,000 rugs to match 185,000 rugs that ar
expected to be sold and carry no finished good inventory of the rugs. In this case the Cost of
goods sold budget will be as follows. The Cost of Goods Sold budget is higher because the fixed
overhead costs in the dyeing and weaving cost pools do not get “inventoried” in the closing
inventory of rugs but are instead expensed in the current period.
Sales = 185,000 rugs
Cost of Goods Sold Budget for Producing 185,000 rugs
From Schedule
Beginning finished goods inventory
Direct materials useda
Direct manufacturing labor ($806 × 185,000)
Variable dyeing overhead ($70.55b × 185,000)
Fixed dyeing overheadc
Variable weaving overhead ($119.15d × 185,000)
Fixed weaving overheade
Cost of goods available for sale
Deduct ending finished goods inventory
Cost of goods sold
Total
$
$ 14,253,480
149,110,000
13,051,750
3,170,000
22,042750
7,790,000
0
209,417,980
209,417,980
0
$209,417,980
a
[$961,800 + (185,000 rugs×36 skeins−458,000)×$2] + [$23,680 + (185,000 rugs×0.8 gallons−4,000)×$6]
Variable dyeing overhead cost per rug = ($6,560,000 + $7,550,000) ÷ 200,000 rugs = $70.55 per rug
c
Fixed dyeing overhead costs = $347,000 + $2,100,000 + $723,000 = $3,170,000
d
Variable weaving overhead cost per rug = ($15,400,000 + $5,540,000 + $2,890,000) ÷ 200,000 rugs = $119.15 per rug
e
Fixed weaving overhead costs = $1,700,000 + $274,000 + $5,816,000 = $7,790,000
b
6.
Revenue
Less: Cost of goods sold
Gross margin
200,000 rugs sold
$400,000,000
225,505,480
$174,494,520
185,000 rugs sold
200,000 rugs produced
$370,000,000
208,595,980
$161,404,020
185,000 rugs sold
185,000 rugs produced
$370,000,000
209,417,980
$160,582,020
7.
If sales drop to 185,000 blue rugs, Xander should look to reduce fixed costs and produce
less to reduce variable costs and inventory costs.
6-13
8.
Top management can look for ways to increase (stretch) sales and improve quality,
efficiency, and input prices to reduce costs in each cost category such as direct materials, direct
manufacturing labor, and overhead costs. Top management can also use the budget to coordinate
and communicate across different parts of the organization, create a framework for judging
performance and facilitating learning, and motivate managers and employees to achieve “stretch”
targets of higher revenues and lower costs.
6-28 Budgeting, service company. Ever Clean Company provides gutter cleaning services to
residential clients. The company has enjoyed considerable growth in recent years due to a
successful marketing campaign and favorable reviews on service-rating Web sites. Ever Clean
owner Joanne Clark makes sales calls herself and quotes on jobs based on length of gutter
surface. Ever Clean hires college students to drive the company vans to jobs and clean the
gutters. A part-time bookkeeper takes care of billing customers and other office tasks. Overhead
is allocated based on direct labor-hours (DLH).
Joanne Clark estimates that her gutter cleaners will work a total of 1,000 jobs during the year.
Each job averages 600 feet of gutter surface and requires 12 direct labor-hours. Clark pays her
gutter cleaners $15 per hour, inclusive of taxes and benefits. The following table presents the
budgeted overhead costs for 2018:
Required:
1. Prepare a direct labor budget in both hours and dollars.
2. Calculate the budgeted overhead allocation rate based on the budgeted quantity of the cost
drivers.
3. Calculate the budgeted total cost of all jobs for the year and the budgeted cost of an average
600-foot gutter-cleaning job.
4. Prepare a revenues budget for the year, assuming that Ever Clean charges customers $0.60 per
square foot.
5. Calculate the budgeted operating income.
6. What actions can Clark take if sales should decline to 900 jobs annually?
SOLUTION
(20 min.) Budgeting: service company.
1.
Direct Labor Budget in Hours and Dollars
Total
Hours Budget
Direct labor hours required
(1,000 jobs × 12 hours per job)
12,000 hours
6-14
Cost Budget
Wages (12,000 hours × $15 per hour)
Cost per direct-labor hour ($180,000 ÷ 12,000 DLH)
$180,000
$15.00/DLH
2.
Budgeted overhead rate =
$144,000
= $12 per DLH
12,000 DLH
3.
Budgeted Total Cost and Average Cost of 600-Foot Gutter-Cleaning Job
Direct labor costs
$180,000
Overhead costs
144,000
Total costs of 1,000 jobs
$324,000
Budgeted cost of average 600-foot gutter-cleaning job = $324,000 ÷ 1,000 = $324 per job.
4.
Revenue Budget
Feet of Gutter Surface
1,000 jobs  600 ft./job = 600,000 ft.
5.
Price per Foot Total Revenues
$0.60
$360,000
Operating Income Budget
1,000 jobs
Revenue
$360,000
Expenses
324,000
Operating Income
$ 36,000
6. The following table shows Ever Clean’s profitability if sales decline to 900 jobs.
Revenue (900 jobs  600 sq. ft. 0.60/sq. ft.
Wages (900 jobs  12 hours per job × $15 per hour)
Supplies (900 jobs  12 hours per job × $6.50 per hour)
Fixed indirect labor costs
Fixed depreciation costs
Other fixed costs
$324,000
$162,000
70,200
25,000
17,000
24,000
298,200
$ 25,800
If revenue should fall to 900 jobs, Clark should examine the company’s fixed overhead costs to
determine if any cuts are possible. Variable product costs will naturally decline with a decline in
jobs, but Clark should evaluate if variable supplies cost of $6.50 per direct labor hour could be
reduced. Fixed costs will not decline without management taking action. While depreciation cost
is not likely something that management can reduce, the fixed indirect costs and “other” fixed
overhead costs are significant and should be examined.
6-29 Budgets for production and direct manufacturing labor. (CMA, adapted) Roletter
Company makes and sells artistic frames for pictures of weddings, graduations, and other special
events. Bob Anderson, the controller, is responsible for preparing Roletter’s master budget and has
6-15
accumulated the following information for 2018:
In addition to wages, direct manufacturing labor-related costs include pension contributions of
$0.50 per hour, worker’s compensation insurance of $0.20 per hour, employee medical insurance of
$0.30 per hour, and Social Security taxes. Assume that as of January 1, 2018, the Social Security tax
rates are 7.5% for employers and 7.5% for employees. The cost of employee benefits paid by
Roletter on its employees is treated as a direct manufacturing labor cost.
Roletter has a labor contract that calls for a wage increase to $13 per hour on April 1, 2018.
New laborsaving machinery has been installed and will be fully operational by March 1, 2018.
Roletter expects to have 17,500 frames on hand at December 31, 2018, and it has a policy of
carrying an end-of-month inventory of 100% of the following month’s sales plus 50% of the second
following month’s sales.
Required:
1. Prepare a production budget and a direct manufacturing labor budget for Roletter Company
by month and for the first quarter of 2018. You may combine both budgets in one schedule.
The direct manufacturing labor budget should include labor-hours and show the details for
each labor cost category.
2. What actions has the budget process prompted Roletter’s management to take?
3. How might Roletter’s managers use the budget developed in requirement 1 to better manage
the company?
SOLUTION
(15-25 min.) Budgets for production and direct manufacturing labor.
Budgeted sales (units)
Add target ending finished goods
inventorya (units)
Total requirements (units)
Deduct beginning finished goods
inventory (units)
Units to be produced
Direct manufacturing labor-hours
(DMLH) per unit
Roletter Company
Budget for Production and Direct Manufacturing Labor
for the Quarter Ended March 31, 2018
January
February
March
Quarter
10,000
14,000
7,000
31,000
17,500
27,500
11,000
25,000
12,000
19,000
12,000
43,000
17,500
10,000
17,500
7,500
11,000
8,000
17,500
25,500
 2.0
 2.0
 1.5
6-16
Total hours of direct manufacturing
labor time needed
Direct manufacturing labor costs:
Wages ($12.00 per DMLH)
Pension contributions ($0.50 per
DMLH)
Workers’ compensation insurance
($0.20 per DMLH)
Employee medical insurance ($0.30
per DMLH)
Social Security tax (employer’s share)
($12.00  0.075 = $0.90 per DMLH)
Total direct manufacturing labor costs
20,000
15,000
12,000
47,000
$240,000
10,000
$180,000
7,500
$144,000
6,000
$564,000
23,500
4,000
3,000
2,400
9,400
6,000
4,500
3,600
14,100
18,000
$278,000
13,500
$208,500
10,800
$166,800
42,300
$653,300
a
100% of the first following month’s sales plus 50% of the second following month’s sales.
Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from
employees’ wages and paid to the government by the employer on behalf of the employees;
therefore, the 7.5% amounts are not additional costs to the employer.
2. The budget process would prompt Roletter’s management to look for ways to reduce finished
goods inventories, the manufacturing labor hours needed to produce each unit both before and
after installing new labor-saving machinery; some of the other costs such as Social Security tax
and workers’ compensation insurance may be fixed by law, while pension contributions and
medical insurance might be features that make Roletter an attractive employer.
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6-30 Activity-based budgeting. The Jerico store of Jiffy Mart, a chain of small neighborhood
convenience stores, is preparing its activity-based budget for January 2018. Jiffy Mart has three
product categories: soft drinks (35% of cost of goods sold [COGS]), fresh produce (25% of
COGS), and packaged food (40% of COGS). The following table shows the four activities that
consume indirect resources at the Jerico store, the cost drivers and their rates, and the cost-driver
amount budgeted to be consumed by each activity in January 2018.
Required:
6-17
1. What is the total budgeted indirect cost at the Jerico store in January 2018? What is the total
budgeted cost of each activity at the Jerico store for January 2018? What is the budgeted
indirect cost of each product category for January 2018?
2. Which product category has the largest fraction of total budgeted indirect costs?
3. Given your answer in requirement 2, what advantage does Jiffy Mart gain by using an
activity-based approach to budgeting over, say, allocating indirect costs to products based on
cost of goods sold?
SOLUTION
(20–30 min.) Activity-based budgeting.
1.
Cost
Hierarchy
Activity
Ordering
$45  14; 24; 14
Delivery
$41  12; 62; 19
Shelf-stocking
$10.50  16; 172; 94
Customer support
$0.09  4,600; 34,200; 10,750
Total budgeted indirect costs
Batch-level
Batch-level
Output-unitlevel
Output-unitlevel
Percentage of total indirect costs
Total indirect costs allocated
according to COGS
(35%; 25%; 40%  13,574)
Soft
Drinks
Fresh
Snacks
Packaged
Food
$ 630
$1,080
$ 630
$ 2,340
492
2,542
779
3,813
168
1,806
987
2,961
414
$1,704
3,078
$8,506
968
$3,364
4,460
$13,574
12.5%
62.7%
24.8%
$4,751
$3,393
Total
$5,430
2.
Refer to the last row of the table in requirement 1. Fresh snacks, which represents the
smallest portion of COGS (25%), is the product category that consumes the largest share (62.7%)
of the indirect resources. Fresh snacks demand the highest level of ordering, delivery, shelfstocking, and customer support resources of all three product categories—it has to be ordered,
delivered, and stocked in small, perishable batches, and convenience store customers often
require more assistance when purchasing.
3.
An ABB approach recognizes how different products require different mixes of support
activities. The relative percentage of how each product area uses the cost driver at each activity
area is:
Activity
Ordering
Delivery
Shelf-stocking
Customer support
Cost
Hierarchy
Batch-level
Batch-level
Output-unit-level
Output-unit-level
Soft
Drinks
27%
13
6
9
Fresh
Snacks
46%
67
61
69
Packaged
Food
27%
20
33
22
Total
100%
100
100
100
By recognizing these differences, Jiffy Mart’s managers are better able to budget for different
unit sales levels and different mixes of individual product-line items sold. Using a single cost
driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities)
6-18
across product lines which does not occur at Jiffy Mart. If Jiffy Mart had used COGS to allocate
costs, Fresh Snacks would have been allocated 25% of the indirect costs, much lower than the
62.7% of the indirect costs based on an analysis of the activities it actually uses. Soft Drinks
would have been allocated 35% and Packaged Food 40% of the indirect costs, much higher than
the 12.5% and 24.8% respectively based on the cost of activities they actually use. Other benefits
cited by managers include: (1) better identification of resource needs, (2) clearer linking of costs
with staff responsibilities, and (3) identification of budgetary slack.
6-31 Kaizen approach to activity-based budgeting (continuation of 6-30). Jiffy Mart has a
Kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of
2018. Each successive month, the budgeted cost-driver rate decreases by 0.4% relative to the
preceding month. So, for example, February’s budgeted cost-driver rate is 0.996 times January’s
budgeted cost-driver rate, and March’s budgeted cost-driver rate is 0.996 times the budgeted
February rate. Jiffy Mart assumes that the budgeted amount of cost-driver usage remains the same
each month.
Required:
1. What are the total budgeted cost for each activity and the total budgeted indirect cost for
March 2018?
2. What are the benefits of using a Kaizen approach to budgeting? What are the limitations of
this approach, and how might Jiffy Mart management overcome them?
SOLUTION
(20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-30).
1.
Activity
Ordering
Delivery
Shelf-stocking
Customer support
Cost Hierarchy
Batch-level
Batch-level
Output-unit-level
Output-unit-level
Budgeted Cost-Driver Rates
January
February
March
$45.00
$44.82000a $44.64072b
40.67266
40.83600
41.00
10.41617
10.45800
10.50
0.08928
0.08964
0.09
a
$45 × 0.996 = $44.82000; b$44.82000 × 0.996 = $44.64072
The March 2018 rates can be used to compute the total budgeted cost for each activity area in
March 2018:
Activity
Ordering
$44.64072 14; 24; 14
Delivery
$40.67266 12; 62; 19
Shelf-stocking
$10.41617 16; 172; 94
Customer support
$0.08928 4,600;
34,200; 10,750
Total
Cost
Hierarchy
Soft
Drinks
Fresh
Produce
Packaged
Food
Batch-level
$ 625
$1,071
$ 625
$ 2,321
Batch-level
488
2,522
773
3,783
Output-unit-level
167
1,792
979
2,938
Output-unit-level
411
$1,691
3,053
$8,438
960
$3,337
4,424
$13,466
6-19
Total
2.
A Kaizen budgeting approach signals management’s commitment to systematic cost
reduction. Compare the budgeted costs from Question 6-30 and 6-31.
ShelfCustomer
Ordering Delivery
Stocking
Support
Exercise 6-30
$2,340
$3,813
$2,961
$4,460
Exercise 6-31 (Kaizen)
2,321
3,783
2,938
4,424
The Kaizen budget number will show unfavorable variances for managers whose activities
do not meet the required monthly cost reductions. This likely will put more pressure on managers
to creatively seek out cost reductions by working “smarter” within Jiffy Mart or by having
“better” interactions with suppliers or customers.
One limitation of Kaizen budgeting, as illustrated in this question, is that it assumes small
incremental improvements each month. It is possible that some cost improvements arise from
large discontinuous changes in operating processes, supplier networks, or customer interactions.
Companies need to highlight the importance of seeking these large discontinuous improvements
as well as the small incremental improvements.
A second limitation is the difficulty and challenge of determining the rate of improvement
(0.4% in this example) and whether a constant percentage improvement can be sustained over a
period of time. Jiffy’s managers might determine this rate of improvement by benchmarking
against other companies or evaluating Jiffy’s performance over time. It might decrease the rate of
improvement if it concludes that the rate of improvement is difficult to sustain and needs to be
lowered.
6-32 Responsibility and controllability. Consider each of the following independent
situations for Prestige Fountains. Prestige manufactures and sells decorative fountains for
commercial properties. The company also contracts to service both its own and other brands of
fountains. Prestige has a manufacturing plant, a supply warehouse that supplies both the
manufacturing plant and the service technicians (who often need parts to repair fountains), and
12 service vans. The service technicians drive to customer sites to service the fountains. Prestige
owns the vans, pays for the gas, and supplies fountain parts, but the technicians own their own
tools.
1. In the manufacturing plant, the production manager is not happy with the motors that the
purchasing manager has been purchasing. In May, the production manager stops requesting
motors from the supply warehouse and starts purchasing them directly from a different motor
manufacturer. Actual materials costs in May are higher than budgeted.
2. Overhead costs in the manufacturing plant for June are much higher than budgeted.
Investigation reveals a utility rate hike in effect that was not figured into the budget.
3. Gasoline costs for each van are budgeted based on the service area of the van and the amount
of driving expected for the month. The driver of van 3 routinely has monthly gasoline costs
exceeding the budget for van 3. After investigating, the service manager finds that the driver
has been driving the van for personal use.
4. Regency Mall, one of Prestige’s fountain service customers, calls the service people only for
emergencies and not for routine maintenance. Thus, the materials and labor costs for these
service calls exceeds the monthly budgeted costs for a contract customer.
5. Prestige’s service technicians are paid an hourly wage of $22, regardless of experience or
time with the company. As a result of an analysis performed last month, the service manager
determined that service technicians in their first year of employment worked on average 20%
more slowly than other employees. Prestige bills customers per service call, not per hour.
6. The cost of health insurance for service technicians has increased by 40% this year, which
6-20
caused the actual health insurance costs to greatly exceed the budgeted health insurance costs
for the service technicians.
Required:
For each situation described, determine where (that is, with whom) (a) responsibility and (b)
controllability lie. Suggest ways to solve the problem or to improve the situation.
SOLUTION
(15 min.) Responsibility and controllability.
1. (a) Production manager
(b) Purchasing Manager
The purchasing manager has control of the cost to the extent that he/she is doing the purchasing
and can seek or contract for the best price. The production manager should work with the
purchasing manager. They can, together, possibly find a combination of better motor and better
price for the motor than the production manager has found.
2. (a) Production Manager
(b) External Forces
In the case of the utility rate hike, the production manager would be responsible for the costs, but
they are hard to control. The rates are fixed by the utility company, and there is usually no
choice of which utility company to use. The production manager can try to reduce waste (turn
off lights when not in use, turn of machines when not running, don’t leave water running, etc.)
but other than conservation measures, the manager has no say in the utility rates. The production
manager might consider purchasing more energy-efficient machines.
3. (a) Van 3 driver
(b) Service manager
The driver of each van has the responsibility to stay within budget for the costs of the service
vehicle. The service manager should set policies to which the drivers must adhere, including not
using the van for personal use. The service manager could install GPS in the vans to make sure
they are where they are supposed to be, and can also fire the driver of Van 3 for misusing
company property. (Using the van for personal driving affects the tax deductibility of the van for
the firm as well).
4. (a) Prestige’s service manager
(b) Regency manager
Because Regency has a maintenance contract with Prestige, both the mall manager and Prestige’s
service manager should work together to make sure routine maintenance is scheduled for the
mall’s fountains. This will decrease the number and cost of the repair emergencies. The manager
should also consider the average cost of service calls over the months where there were no calls.
5. (a) Service manager
(b) Service manager
6-21
It is not surprising that service technicians who are new to the job may work more slowly than
those with more experience. Unless the service manager feels that it is necessary to pay new
employees the full $22 per hour in order to attract qualified applicants, he or she may consider
paying a 20% lower hourly wage to employees in the first year, with an increase at the beginning
of the second year. He or she may also consider additional training for new employees to help
them get up to speed more quickly. It is probably not a good idea for Prestige to convert to an
hourly charge for service calls, as it would punish customers for whom the new technicians were
assigned.
6. (a) Service manager
(b) External forces
Like the cost of utilities, the cost of employee health insurance is determined externally.
However, unlike the case of utilities, it is possible that the service manager can seek out bids
from other providers or negotiate another rate with the existing company. The service manager
may also choose to require employees to pay a greater share of the cost of the health insurance
premium to at least partially offset the increase.
6-33 Responsibility, controllability, and stretch targets. Consider each of the following
independent situations for Sunrise Tours, a company owned by David Bartlett that sells motor
coach tours to schools and other groups. Sunshine Tours owns a fleet of 10 motor coaches and
employs 12 drivers, maintenance technician, 3 sales representatives, and an office manager.
Sunshine Tours pays for all fuel and maintenance on the coaches. Drivers are paid $0.50 per
mile while in transit, plus $15 per hour while idle (time spent waiting while tour groups are
visiting their destinations). The maintenance technician and office manager are both full-time
salaried employees. The sales representatives work on straight commission.
1. When the office manager receives calls from potential customers, she is instructed to handle
the contracts herself. Recently, however, the number of contracts written up by the office
manager has declined. At the same time, one of the sales representatives has experienced a
significant increase in contracts. The other two representatives believe that the office
manager has been colluding with the third representative to send him the prospective
customers.
2. One of the motor coach drivers seems to be reaching his destinations more quickly than any
of the other drivers and is reporting longer idle time.
3. Regular preventive maintenance of the motor coaches has been proven to improve fuel
efficiency and reduce overall operating costs by averting costly repairs. During busy
months, however, it is difficult for the maintenance technician to complete all of the
maintenance tasks within his 40-hour workweek.
4. David Bartlett has read about stretch targets, and he believes that a change in the
compensation structure of the sales representatives may improve sales. Rather than a straight
commission of 10% of sales, he is considering a system where each representative is given a
monthly goal of 50 contracts. If the goal is met, the representative is paid a 12% commission.
If the goal is not met, the commission falls to 8%. Currently, each sales representative
averages 45 contracts per month.
5. Fuel consumption has increased significantly in recent months. David Bartlett is considering
ways to promote improved fuel efficiency and reduce harmful emissions using stretch
environmental targets, where drivers and the maintenance mechanic would receive a bonus if
fuel consumption falls below 90% of budgeted fuel usage per mile driven.
6-22
Required:
For situations 1–3, discuss which employee has responsibility for the related costs and the extent
to which costs are controllable and by whom. What are the risks or costs to the company? What
can be done to solve the problem or improve the situation? For situations 4 and 5, describe the
potential benefits and costs of establishing stretch targets.
SOLUTION
(15 min.) Responsibility, controllability, and stretch targets.
1. The office manager has the responsibility to follow company guidelines and write contracts
herself for customers who call her directly. She can also control these costs. Diverting potential
customers to the sales representative costs the company a sales commission that would not have
otherwise been paid. If satisfaction surveys are sent to customers asking about their first contact
with the company, this may be enough to prevent the office manager from breaking the rules.
2. Each driver is responsible for controlling and keeping an accurate accounting of his or her
time. Because the drivers are paid for mileage while driving and an hourly rate while in idle,
there is an incentive to report less travel time and more idle time. The cost could be controlled by
using global positioning systems (GPS) to track the movement and location of the motor
coaches.
3. The maintenance technician is clearly responsible for completing all of the preventative
maintenance. Requiring the technician to work significant overtime will likely decrease his
efficiency. Ignoring routine maintenance will end up costing the company more money in fuel
and repair costs. If the technician cannot complete the tasks during busy months, the company
should consider outsourcing some of the more routine maintenance jobs or hiring additional help
during those months.
4. The maintenance technician is clearly responsible for completing all of the preventative
maintenance. If he cannot complete the tasks during busy months, the company should consider
outsourcing some of the more routine maintenance jobs. Requiring the technician to work
significant overtime will likely decrease his efficiency. Ignoring routine maintenance will end up
costing the company more money in fuel and repair costs.
5. Bartlett has designed the stretch target system correctly. Taking advantage of loss aversion,
Bartlett has set a stretch target of 50 contracts rewarding the representative with a 12 percent
commission (assuming paying this amount of commission is profitable). If the target is not met,
the commission decreases to 8 percent. This will motivate the representatives to achieve 50
contracts.
In establishing “stretch targets,” Bartlett should be sure that there are sufficient potential
contracts to allow all three sales representatives to achieve the higher target. Otherwise, the
stretch target may cause friction among the sales representatives. One or more of the sales
representatives may decide that the 8 percent commission is not sufficient incentive to stay with
the company, and may leave to work for a competitor, resulting in overall reduced sales.
5. The drivers are responsible for driving the motor coaches at fuel-efficient speeds on the
highway. The maintenance technician is responsible for maintaining the vehicles to improve
6-23
efficiency. An increase in fuel consumption would be difficult to pin on either employee because
either could be responsible. However, the bonus offered to drivers would have to exceed the loss
of pay due to driving slower, as they are paid by the mile, and the loss in personal comfort from
sitting in a hot or cold bus may outweigh the bonus from fuel savings while the bus is idle.
“Stretch targets” such as these are more challenging when employees from different departments
must both work in order to achieve them but this may be necessary to get better fuel efficiency.
For the reduced emissions target, Bartlett could consider rewarding just the technicians, as the
maintenance they perform has a direct impact on emissions.
6-34 Cash flow analysis, sensitivity analysis. HealthMart is a retail store selling home medical
supplies. HealthMart also services home oxygen equipment, for which the company bills
customers monthly. HealthMart has budgeted for increases in service revenue of $500 each
month due to a recent advertising campaign. The forecast of sales and service revenue for the
March–June 2018 is as follows:
Almost all of the retail sales are credit card sales; cash sales are negligible. The credit card
company deposits 92% of the revenue recorded each day into HealthMart’s account overnight.
70% of oxygen service billed each month is collected in the month of the service, and 30% is
collected in the month after the service.
Required:
1. Calculate the cash that HealthMart expects to collect in April, May, and June 2018. Show
calculations for each month.
2. HealthMart has budgeted expenditures for May of $14,100.
a. Given your answer to requirement 1, and assuming a beginning cash balance for
May of $650, will HealthMart be able to cover its payments for May?
b. Assume (independently for each situation) that May revenues might also be 10%
lower or that costs might be 5% higher. Under each of those two scenarios, show
the total net cash for May and the amount HealthMart would have to borrow if
cash receipts are less than cash payments. The company requires a minimum cash
balance of $600. (Again, assume a balance of $650 on May 1.)
3. Why do HealthMart’s managers prepare a cash budget in addition to the revenue,
expenses, and operating income budget? Has preparing the cash budget been helpful?
Explain briefly.
SOLUTION
(30 min.) Cash flow analysis, sensitivity analysis.
6-24
1.
The cash that HealthMart can expect to collect during April, May, and June is calculated
below.
Cash collection in
From sales revenue (credit cards)
April ($8,400 × 0.92)
May ($9,100 × 0.92)
April ($10,500 × 0.92)
From service revenue
March ($5,000 × 0.30)
April ($5,000 × 0.70; 0.30)
May ($5,000 × 0.70; 0.30)
June ($5,000 × 0.70; 0.30)
Total collections
2.
April
May
June
$7,728
$8,372
$9,660
$1,500
$3,850
$1,650
$4,200
$13,078
$14,222
$1,800
$4,550
$16,010
(a) Beginning balance $650 + Collections $14,222 – Expenditures $14,100 = $772. Yes,
HealthMart will be able to cover the budgeted expenditures and maintain a minimum
ending balance of more than $600.
(b)
Beginning cash
Collections
Expenditures
Total
Original
Numbers
$650.00
14,222.00
14,100.00
$772.00
May Revenues
Decrease 10%
$650.00
12,799.80
14,100.00
($650.20)
May Costs
Increase 5%
$650.00
14,222.00
14,805.00
$67.00
If May costs increase by as much as 5%, it would not be necessary to borrow money. If May
revenues decrease 10%, HealthMart would have to borrow $1,250.20 ($650.20 + $600) in order
to maintain an ending balance of $600.
3.
HealthMart’s managers prepare a cash budget in addition to the operating income budget
to plan cash flows to ensure that the company has adequate cash to make expenditures as they
come due. HealthMart’s managers may need to initiate a plan to borrow money to finance any
shortfall. Building a profitable operating plan does not guarantee that adequate cash will be
available, so HealthMart’s managers need to prepare a cash budget in addition to an operating
income budget.
6-35 Budget schedules for a manufacturer. Lame Specialties manufactures, among other
things, woollen blankets for the athletic teams of the two local high schools. The company sews
the blankets from fabric and sews on a logo patch purchased from the licensed logo store site.
The teams are as follows:
6-25
■ Knights, with red blankets and the Knights logo
■ Raiders, with black blankets and the Raider logo
Also, the black blankets are slightly larger than the red blankets. The budgeted direct-cost inputs
for each product in 2017are as follows:
Unit data pertaining to the direct materials for March 2017 are as follows:
Unit cost data for direct-cost inputs pertaining to February 2017and March 2017 are as follows:
Manufacturing overhead (both variable and fixed) is allocated to each blanket on the basis of
budgeted direct manufacturing labor-hours per blanket. The budgeted variable manufacturing
overhead rate for March 2017 is $16 per direct manufacturing labor-hour. The budgeted fixed
manufacturing overhead for March 2017 is $14,640. Both variable and fixed manufacturing
overhead costs are allocated to each unit of finished goods.
Data relating to finished goods inventory for March 2017are as follows:
6-26
Budgeted sales for March 2017 are 130 units of the Knights blankets and 190 units of the
Raiders blankets. The budgeted selling prices per unit in March 2017 are $229 for the
Knights blankets and $296 for the Raiders blankets. Assume the following in your answer:



Work-in-process inventories are negligible and ignored.
Direct materials inventory and finished goods inventory are costed using the FIFO
method.
Unit costs of direct materials purchased and finished goods are constant in March2017.
Required:
1.
Prepare the following budgets for March2017:
a. Revenues budget
b. Production budget in units
c. Direct material usage budget and direct material purchases budget
d. Direct manufacturing labor budget
e. Manufacturing overhead budget
f. Ending inventories budget (direct materials and finished goods)
g. Cost of goods sold budget
2.
Suppose Lame Specialties decides to incorporate continuous improvement into its
budgeting process. Describe two areas where it could incorporate continuous improvement into
the budget schedules in requirement 1.
SOLUTION
(40 min.) Budget schedules for a manufacturer.
1a.
Revenues Budget
Units sold
Selling price
Budgeted revenues
b.
Knights
Blankets
130
$ 229
$29,770
Raiders
Blankets
190
$ 296
$56,240
$86,010
Production Budget in Units
Budgeted unit sales
Add budgeted ending fin. goods inventory
Total requirements
Deduct beginning fin. goods inventory
Budgeted production
c.
Total
Direct Materials Usage Budget (units)
6-27
Knights
Blankets
130
22
152
12
140
Raiders
Blankets
190
27
217
17
200
Red
wool
Black
wool
Knights
Raiders
logo patches logo
patches
–
–
–
1
140
140
–
–
–
–
–
–
5
200
1,000
–
–
–
1
200
200
560
1,000
140
200
35
$ 9
15
$ 12
45
$ 7
60
$ 6
$ 315
$ 180
$315
$ 360
525
$ 10
985
$ 11
95
$ 7
140
$ 8
$5,250
$10,835
$665
$1,120
$17,870
$5,565
$11,015
$980
$1,480
$19,040
Knights blankets:
1. Budgeted input per f.g. unit 4
2. Budgeted production
140
3. Budgeted usage (1 × 2)
560
Raiders blankets:
4. Budgeted input per f.g. unit
5. Budgeted production
6. Budgeted usage (4 × 5)
7. Total direct materials
usage (3 + 6)
Direct Materials Cost Budget
8. Beginning inventory
9. Unit price (FIFO)
10. Cost of DM used from
beginning inventory (8 × 9)
11. Materials to be used from
purchases (7 – 8)
12. Cost of DM in March
13. Cost of DM purchased and
used in March (11 × 12)
14. Direct materials to be used
(10 + 13)
Direct Materials Purchases Budget
Budgeted usage
(from line 7)
Add
target
ending
inventory
Total requirements
Deduct
beginning
inventory
Total DM purchases
Purchase price (March)
Total purchases
d.
Red wool
Black
wool
Knight Raiders
s logos logos
560
1,000
140
200
25
585
25
1,025
25
165
25
225
35
550
$ 10
$5,500
15
1,010
$ 11
$11,110
45
120
$ 7
$840
60
165
$ 8
$1,320
Direct Manufacturing Labor Budget
Direct
Budgete Manuf. Labord
Units
Hours per
Total
6-28
Hourly
Total
$18,770
Total
$ 1,170
Knights
blankets
Raiders
blankets
e.
Produce
d
Output Unit
Hours
Rate
Total
140
3
420
$27
$11,340
200
4
800
1,220
$27
21,600
$32,940
Manufacturing Overhead Budget
Variable manufacturing overhead costs (1,220 × $16)
Fixed manufacturing overhead costs
Total manufacturing overhead costs
$19,520
14,640
$34,160
Total manuf. overhead cost per hour = $34,160 ÷ 1,220 = $28 per direct manufacturing laborhour
Fixed manuf. overhead cost per hour = $ 14,640 ÷ 1,220 = $12 per direct manufacturing laborhour
f.
Computation of unit costs of ending inventory of finished goods
Knights
Raiders
Blankets
Blankets
Direct materials
Red wool ($10 × 4, 0)
$ 40
$ 0
Black wool ($11 × 0, 5)
0
55
Knights logos ($7 × 1, 0)
7
0
Raiders logos ($8 × 0, 1)
0
8
Direct manufacturing labor ($27 × 3, 4)
81
108
Manufacturing overhead
Variable ($16 × 3, 4)
48
64
Fixed ($12 × 3, 4)
36
48
Total manufacturing cost
$212
$283
Ending Inventories Budget
Direct Materials
Red wool
Black wool
Knights logo patches
Raiders logo patches
Finished Goods
Knights blankets
Raiders blankets
Cost per Unit
Units
Total
$ 10
11
7
8
25
25
25
25
$ 250
275
175
200
900
212
283
22
27
4,664
7,641
12,305
$13,205
Total
g.
Cost of goods sold budget
Beginning fin. goods inventory, March 1, 2014 ($1,440 + $2,550)
6-29
$ 3,990
Direct materials used (from Dir. materials cost budget)
$19,040
Direct manufacturing labor (Dir. manuf. labor budget)
32,940
Manufacturing overhead (Manuf. overhead budget)
34,160
Cost of goods manufactured
86,140
Cost of goods available for sale
90,130
Deduct ending fin. goods inventory, March 31, 2014 (Inventories budget) 12,305
Cost of goods sold
$77,825
2.
Areas where continuous improvement might be incorporated into the budgeting process:
a. Direct materials. Either an improvement in usage or price could be budgeted. For
example, the budgeted usage amounts for the fabric could be related to the maximum
improvement (current usage – minimum possible usage) of yards of fabric for either
blanket. It may also be feasible to decrease the price paid, particularly with quantity
discounts on things like the logo patches.
b. Direct manufacturing labor. The budgeted usage of 3 hours/4 hours could be
continuously revised on a monthly basis. Similarly, the manufacturing labor cost per
hour of $27 could be continuously revised down. The former appears more feasible
than the latter.
c. Variable manufacturing overhead. By budgeting more efficient use of the allocation
base, a signal is given for continuous improvement. A second approach is to budget
continuous improvement in the budgeted variable overhead cost per unit of the
allocation base.
d. Fixed manufacturing overhead. The approach here is to budget for reductions in the
year-to-year amounts of fixed overhead. If these costs are appropriately classified as
fixed, then they are more difficult to adjust down on a monthly basis.
6-36 Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA)
manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following:
Budgeted sales and selling price per unit are as follows:
USA has the opportunity to switch from using the dye it currently uses to using an
environmentally friendly dye that costs $1.25 per ounce. The company would still need 4 ounces
of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in
profit), but the Environmental Protection Agency has threatened to fine the company $130,000 if
it continues to use the harmful but less expensive dye.
Required:
6-30
1. Given the preceding information, would USA be better off financially by switching to the
environmentally friendly dye? (Assume all other costs would remain the same.)
2. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to
the new dye. The production manager suggests trying Kaizen costing. If USA can reduce
fabric and labor costs each by 1% per month on all the shirts it manufactures, by how much
will overall costs decrease at the end of 12 months? (Round to the nearest dollar for
calculating cost reductions.)
3. Refer to requirement 2. How could the reduction in material and labor costs be
accomplished? Are there any problems with this plan?
SOLUTION
(45 min.) Budgeted costs, Kaizen improvements.
1.
Increase in Costs for the Year
Assume US Apparel uses New Dye
Units to dye
50,000
Cost differential ($1.25 – $0.50) per ounce × 4 ounces
× $3.00
Increase in costs
$150,000
Because the fine is only $130,000, US Apparel would be financially better off by not switching.
3.
If US Apparel switches to the new dye, costs will increase by $150,000.
If US Apparel implements Kaizen costing, costs will be reduced as follows:
Original monthly costs
Input
Fabric
Labor
Total
*
Unit cost
$6.00
$4.00
Number of units
5,000*
5,000*
Total cost
$30,000
20,000
$50,000
(10,000 + 50,000)/12 months = 5,000 units
Monthly decrease in costs
(calculated at 99% of previous month’s cost)
Fabric
Labor cost
Month 1 $ 30,000
Month 1
Month 2
29,700
Month 2
Month 3
29,403
Month 3
Month 4
29,109
Month 4
Month 5
28,818
Month 5
Month 6
28,530
Month 6
Month 7
28,245
Month 7
Month 8
27,963
Month 8
Month 9
27,683
Month 9
Month 10
27,406
Month 10
6-31
$ 20,000
19,800
19,602
19,406
19,212
19,020
18,830
18,642
18,456
18,271
Annual cost
$360,000
240,000
$600,000
Month 11
Month 12
TOTAL
27,132
26,861
$340,850
Month 11
Month 12
18,088
17,907
$227,234
Difference between costs with and without Kaizen improvements
($600,000 – $568,064)
$568,064
$ 31,916
This means costs increase a net amount of $150,000 – 31,916 = $118,084. With Kaizen, the cost
of using the higher cost dye is less than the $130,000 fine for using the harmful dye. US Apparel
would be better off by switching to the new dye.
3.
Reduction in materials can be accomplished by reducing waste and scrap. Reduction in
direct labor can be accomplished by improving the efficiency of operations and decreasing down
time.
Employees who make and dye the T-shirts may have suggestions for ways to do their jobs
more efficiently. For instance, employees may recommend process changes that reduce idle time,
setup time, and scrap. To motivate workers to improve efficiency, many companies have set up
programs that share productivity gains with the workers. US Apparel must be careful that
productivity improvements and cost reductions do not in any way compromise product quality.
6-37 Revenue and production budgets. (CPA, adapted) The Sabat Corporation manufactures
and sells two products: Thingone and Thingtwo. In July 2016, Sabat’s budget department
gathered the following data to prepare budgets for 2017:
2017 Projected Sales
2017 Inventories in Units
The following direct materials are used in the two products:
Projected data for 2017 for direct materials are:
6-32
Projected direct manufacturing labor requirements and rates for 2017 are:
Manufacturing overhead is allocated at the rate of $24 per direct manufacturing labor-hour.
Required:
Based on the preceding projections and budget requirements for Thingone and Thingtwo, prepare
the following budgets for 2017:
1. Revenues budget (in dollars)
2. What questions might the CEO ask the marketing manager when reviewing the revenues
budget? Explain briefly.
3. Production budget (in units)
4. Direct material purchases budget (in quantities)
5. Direct material purchases budget (in dollars)
6. Direct manufacturing labor budget (in dollars)
7. Budgeted finished-goods inventory at December 31, 2017 (in dollars)
8. What questions might the CEO ask the production manager when reviewing the production,
direct materials, and direct manufacturing labor budgets?
9. How does preparing a budget help Sabat Corporation’s top management better manage the
company?
SOLUTION
(30–40 min.) Revenue and production budgets.
This is a routine budgeting problem. The key to its solution is to compute the correct quantities
of finished goods and direct materials. Use the following general formula:
production
ending
Budgeted sales or
Beginning
 Budgeted
 =  Target
or purchases
inventory   materials used   inventory 
+
–
1.
Sabat Corporation
Revenues Budget for 2017
Units
Thingone
Thingtwo
Budgeted revenues
Price Total
62,000
$172 $10,664,000
46,000
264
12,144,000
$22,808,000
6-33
2.
The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?
3.
Sabat Corporation
Production Budget (in units) for 2017
Budgeted sales in units
Add target finished goods inventories,
December 31, 2017
Total requirements
Deduct finished goods inventories,
January 1, 2017
Units to be produced
4.
Thingone
62,000
Thingtwo
46,000
26,000
88,000
14,000
60,000
21,000
67,000
13,000
47,000
Sabat Corporation
Direct Materials Purchases Budget (in quantities) for 2017
Direct materials to be used in production
• Thingone (budgeted production of 67,000
units times 5 lbs. of A, 3 lbs. of B)
• Thingtwo (budgeted production of 47,000
units times 6 lbs. of A, 4 lbs. of B, 2 lb. of C)
Total
Add target ending inventories, December 31,
2017
Total requirements in units
Deduct beginning inventories, January 1, 2017
Direct materials to be purchased (units)
5.
C
335,000
201,000
--
282,000
617,000
40,000
188,000
389,000
35,000
94,000
94,000
12,000
657,000
37,000
620,000
424,000
32,000
392,000
106,000
10,000
96,000
Sabat Corporation
Direct Materials Purchases Budget (in dollars) for 2017
Direct material A
Direct material B
Direct material C
Budgeted purchases
6.
Direct Materials
A
B
Budgeted
Purchases
(Units)
620,000
392,000
96,000
Expected
Purchase
Price per unit
$11
6
5
Sabat Corporation
Direct Manufacturing Labor Budget (in dollars) for 2017
Direct
6-34
Total
$6,820,000
2,352,000
480,000
$9,652,000
Thingone
Thingtwo
Total
7.
Budgeted
Production
(Units)
67,000
47,000
Manufacturing
Labor-Hours
per Unit
3
4
Total
Hours
201,000
188,000
Rate
per
Hour
$11
14
Total
$2,211,000
2,632,000
$4,843,000
Sabat Corporation
Budgeted Finished Goods Inventory
at December 31, 2017
Thingone:
Direct materials costs:
A, 5 pounds × $11
$55
B, 3 pounds × $6
18
$ 73
Direct manufacturing labor costs,
3 hours × $11
33
Manufacturing overhead costs at $19 per direct
manufacturing labor-hour (3 hours × $19)
57
Budgeted manufacturing costs per unit
$163
Finished goods inventory of Thingone
$163 × 26,000 units
$4,238,000
Thingtwo:
Direct materials costs:
A, 6 pounds × $11
$66
B, 4 pounds × $6
24
C, 2 each × $5
10
$100
Direct manufacturing labor costs,
4 hours × $14
56
Manufacturing overhead costs at $19 per direct
manufacturing labor-hour (4 hours × $19)
76
Budgeted manufacturing costs per unit
$232
Finished goods inventory of Thingtwo
$232 × 14,000 units
3,248,000
Budgeted finished goods inventory, December 31,2017
$7,486,000
8. The CEO would want to ask the production manager why the target ending inventories have
increased. Could production be more closely tailored to demand? Could the efficiency and
productivity of direct materials and direct manufacturing labor be increased? Could direct
materials inventory be reduced?
9. Preparing a budget helps Saadi Corporation manage costs based on revenues and production
needs, look for opportunities to increase efficiencies, reduce costs, particularly in areas where
costs are high, coordinate and communicate across different parts of the organization, create a
framework for judging performance and facilitating learning, and motivate managers and
employees to achieve “stretch” targets of higher revenues and lower costs.
6-38 Budgeted income statement. (CMA, adapted) Smart Video Company is a manufacturer
of videoconferencing products. Maintaining the videoconferencing equipment is an important
6-35
area of customer satisfaction. A recent downturn in the computer industry has caused the
videoconferencing equipment segment to suffer, leading to a decline in Smart Video’s financial
performance. The following income statement shows results for 2017:
Smart Video Company Income Statement for the Year Ended December 31, 2017
(in thousands)
Smart Video’s management team is preparing the 2018 budget and is studying the following
information:
1. Selling prices of equipment are expected to increase by 10% as the economic recovery
begins. The selling price of each maintenance contract is expected to remain unchanged from
2017.
2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in
units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and
quality improvements.
4. Marketing costs are expected to increase by $290,000, but administration costs are expected
to remain at 2017 levels.
5. Distribution costs vary in proportion to the number of units of equipment sold.
6. Two maintenance technicians are to be hired at a total cost of $160,000, which covers wages
and related travel costs. The objective is to improve customer service and shorten response
time.
7. There is no beginning or ending inventory of equipment.
Required:
1. Prepare a budgeted income statement for the year ending December 31, 2018.
2. How well does the budget align with Smart Video’s strategy?
3. How does preparing the budget help Smart Video’s management team better manage the
company?
SOLUTION
6-36
(30 min.) Budgeted income statement.
1.
Smart Video Company
Budgeted Income Statement for 2017
(in thousands)
Revenues
Equipment ($8,000 × 1.06 × 1.10)
Maintenance contracts ($1,900 × 1.06)
Total revenues
Cost of goods sold ($4,000 × 1.06 × 1.05)
Gross margin
Operating costs:
Marketing costs ($630 + $290)
Distribution costs ($100 × 1.06)
Customer maintenance costs ($1,100 + $160)
Administrative costs
Total operating costs
Operating income
$9,328
2,014
$11,342
4,452
6,890
920
106
1,260
920
3,206
$3,684
2.
The budget aligns with Videocom’s key strategy of customer satisfaction through
maintaining videoconferencing equipment by hiring maintenance technicians and increasing
costs of customer maintenance by 14.55% ($160,000 ÷ $1,100,000) more than the 6% forecasted
increase in sales.
3.
Preparing a budget helps Videocom manage costs based on revenues and production
needs, look for opportunities to increase efficiencies, reduce costs, particularly in areas where
costs are high, coordinate and communicate across different parts of the organization, create a
framework for judging performance and facilitating learning, and motivate managers and
employees to achieve “stretch” targets of higher revenues and lower costs.
6-39 Responsibility in a restaurant. Christa Schuller owns an outlet of a popular chain of
restaurants in the southern part of Germany. One of the chain’s popular lunch items is the
cheeseburger. It is a hamburger topped with cheese. On demand, purchasing agents from each
outlet orders the cheese and meat patties from the Central Warehouse. In January 2018, one of
the freezers in Central Warehouse broke down and the production of meat patty and storing of
cheese were reduced by 20-30% for 4 days. During these 4 days, Christa’s franchise runs out of
meat patties and cheese slices while facing a high demand for cheeseburgers. Christa’s chef,
Kelly Lyn, decides to prepare cheeseburgers using ingredients from a local market, sending one
of the kitchen helpers to the market to buy the ingredients. Although the customers’ are satisfied,
Christa’s restaurant has to pay twice the cost of the Central Warehouse’s products to procure
meat and cheese from the local market, and the restaurant loses money on this item for those 4
days. Christa is angry with the purchasing agent for not ordering enough meat patty and cheese
to avoid running out of stock, and with Kelly for spending too much money on the procurement
of meat and cheese.
Required:
6-37
Who is responsible for the cost of the meat patty and cheese as ingredients of a
cheeseburger? At what level is the cost controllable? Do you agree that Christa should be angry
with the purchasing agent? With Kelly? Why or why not?
SOLUTION
(15 min.) Responsibility of purchasing agent.
The procurement of meat patties and cheese slices is usually the responsibility of the purchasing
agent, though the costs of these items are not under his control. It is usually controllable by the
Central Warehouse. However, in this scenario, Kelly, the cook, has taken the responsibility for
the cost of the meat to be used in meat patties and cheese slices from the local market by making
a purchasing decision. As Christa holds the purchasing agent responsible for the costs of meat
and cheese, and presuming that Kelly knew this, Kelly should have discussed her decision with
the purchasing agent before sending the kitchen helper to the local market.
In any case, Christa should not be angry because her employees acted to satisfy the
customers on a short-term emergency basis. Assuming that the Central Warehouse does not
consistently have problems with their freezer, there is no way the purchasing agent could foresee
the incident beforehand and plan accordingly. The problem only lasted four days, which, in the
course of the year (or even the month) will not seriously harm the profits of a restaurant that sells
a variety of foods along with the cheeseburger. However, if they had not cooked the
cheeseburger with local ingredients when they went out of meat patties and cheese slices for four
days, there could have been a long-term implications on customer satisfaction and customer
loyalty, and in the long run this could harm profits as customers could have found other
restaurants to frequent for lunch.
6-40 Comprehensive problem with ABC costing. Animal Gear Company makes two pet
carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but
the Cat-allac is smaller. Information for the two products for the month of April is given in the
following tables:
6-38
Animal Gear accounts for direct materials using a FIFO cost-flow assumption.
Animal Gear uses a FIFO cost-flow assumption for finished-goods inventory.
Animal Gear uses an activity-based costing system and classifies overhead into three activity
pools: Setup, Processing, and Inspection. Activity rates for these activities are $105 per setuphour, $10 per machine-hour, and $15 per inspection-hour, respectively. Other information
follows:
If necessary, round up to calculate number of batches.
Nonmanufacturing fixed costs for March equal $32,000, half of which are salaries. Salaries
are expected to increase 5% in April. Other nonmanufacturing fixed costs will remain the same.
The only variable nonmanufacturing cost is sales commission, equal to 1% of sales revenue.
Prepare the following for April:
Required:
1.
2.
3.
4.
5.
6.
Revenues budget
Production budget in units
Direct material usage budget and direct material purchases budget
Direct manufacturing labor cost budget
Manufacturing overhead cost budgets for each of the three activities
Budgeted unit cost of ending finished-goods inventory and ending inventories budget
6-39
7 Cost of goods sold budget
8. Nonmanufacturing costs budget
9. Budgeted income statement (ignore income taxes)
10. How does preparing the budget help Animal Gear’s management team better manage the
company?
SOLUTION
(60 min.) Comprehensive problem with ABC costing
1.
Revenue Budget
For the Month of April
Cat-allac
Dog-eriffic
Total
Units
530
225
Selling Price
$205
310
Total Revenues
$108,650
69,750
$178,400
2.
Production Budget
For the Month of April
Budgeted unit sales
Add target ending finished goods inventory
Total required units
Deduct beginning finished goods inventory
Units of finished goods to be produced
Product
Cat-allac Dog-eriffic
530
225
30
10
560
235
10
19
550
216
3.
Direct Material Usage Budget in Quantity and Dollars
For the Month of April
Material
Plastic
Metal
Physical Units Budget
Direct materials required for
Cat-allac (550 units × 4 lbs. and 0.5 lb.)
Dog-eriffic (216 units × 6 lbs. and 1 lb.)
Total quantity of direct material to be used
2,200 lbs.
1,296 lbs.
3,496 lbs.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Plastic: 290 lbs. × $3.80 per lb.
Metal: 70 lbs. × $3.10 per lb.
6-40
275 lbs.
216 lbs.
491 lbs.
$ 1,102
$ 217
Total
To be purchased this period
Plastic: (3,496 – 290) lbs.  $5 per lb.
Metal: (485 – 70) lbs.  $4 per lb.
Direct materials to be used this period
16,030
_
$17,132
1,684
$1,901
$19,033
Direct Material Purchases Budget
For the Month of April
Material
Plastic
Physical Units Budget
To be used in production (requirement 3)
Add target ending inventory
Total requirements
Deduct beginning inventory
Purchases to be made
Cost Budget
Plastic: 3,616 lbs.  $5
Metal: 486 lbs.  $4
Purchases
3,496 lbs.
410 lbs.
3,906 lbs.
290 lbs.
3,616 lbs.
$18,080
_______
$18,080
Metal
Total
491 lbs.
65 lbs.
556 lbs.
70 lbs.
486 lbs.
$1,944
$1,944
$20,024
4.
Direct Manufacturing Labor Costs Budget
For the Month of April
Cat-allac
Dog-eriffic
Total
Output Units
Produced
(requirement 2)
550
216
DMLH
per Unit
3
5
Total
Hours
1,650
1,080
Hourly Wage
Rate
$10
10
Total
$16,500
10,800
$27,300
5. Machine Setup Overhead
Units to be produced
Units per batch
Number of batches (rounded up)
Setup time per batch
Total setup time
Cat-allac
550
÷ 25
22
×1.50 hrs.
33 hrs.
Dog-eriffic
216
÷9
24
×1.75 hrs.
42 hrs.
Total
75 hrs.
Budgeted machine setup costs = $105 per setup hour  75 hours
= $7,875
Processing Overhead
Budgeted machine-hours (MH) = (11 MH per unit × 550 units) + (19 MH per unit × 216 units)
= 6,050 MH + 4,104 MH = 10,154 MH
Budgeted processing costs = $10 per MH × 10,154 MH
= $101,540
Inspection Overhead
Budgeted inspection-hours = (0.5 22 batches) + (0.7 24 batches)
6-41
= 11 + 16.8 = 27.8 inspection hrs.
Budgeted inspection costs = $15 per inspection hr.  27.8 inspection hours
= $417
Manufacturing Overhead Budget
For the Month of April
Machine setup costs
$ 7,875
Processing costs
101,540
Inspection costs
417
Total costs
$109,832
6.
Unit Costs of Ending Finished Goods Inventory
April 30
Product
Cat-allac
Dog-eriffic
Cost per Input per
Input per
Unit of Unit of
Unit of
Input
Output
Total
Output
Total
Plastic
$ 5
4 lbs.
$ 20.00
6 lbs.
$ 30.00
Metal
4
0.5 lbs.
2.00
1 lb.
4.00
Direct manufacturing labor
10
3 hrs.
30.00
5 hrs.
50.00
Machine setup
105
0.06 hrs.a
6.30
0.2 hra
21.00
Processing
10
11 MH
110.00
19 MH
190.00
Inspection
15
0.02 hrb
0.30
0.08 hr.b
1.20
Total
$168.60
$296.20
a
b
33 setup-hours ÷ 550 units = 0.06 hours per unit; 42 setup-hours ÷ 210 units = 0.2 hours per unit
11 inspection hours ÷ 550 units = 0.02 hours per unit; 16.8 inspection hours ÷ 210 units = 0.08 hours per unit
Ending Inventories Budget
April 30
Quantity
Direct Materials
Plastic
Metals
Finished goods
Cat-allac
Dog-eriffic
Total ending inventory
Cost per unit
410
65
$ 5
4
30
10
$168.60
296.20
Total
$2,050
260
$5,058
2,962
$ 2,310
8,020
$10,330
7.
Cost of Goods Sold Budget
For the Month of April
Beginning finished goods inventory, April, 1 ($1,000 + $4,650)
Direct materials used (requirement 3)
6-42
$
$ 19,033
5,650
Direct manufacturing labor (requirement 4)
Manufacturing overhead (requirement 5)
Cost of goods manufactured
Cost of goods available for sale
Deduct: Ending finished goods inventory, April 30 (requirement 6)
Cost of goods sold
27,300
109,832
156,165
161,815
8,020
$153,795
8.
Nonmanufacturing Costs Budget
For the Month of April
Salaries ($32,000 ÷ 2  1.05)
$16,800
Other fixed costs ($32,000 ÷ 2)
16,000
1,784
Sales commissions ($178,400  1%)
Total nonmanufacturing costs
$34,584
9.
Budgeted Income Statement
For the Month of April
Revenues
Cost of goods sold
Gross margin
Operating (nonmanufacturing)
costs
Operating income
$178,400
153,795
24,605
34,584
$ (9,979)
10.
Animal Gear is making a loss and will need to increase revenues and manage costs to
turn around the business. Preparing a budget helps Animal Gear manage costs based on revenues
and production needs, look for opportunities to increase efficiencies, reduce costs, particularly in
areas where costs are high, coordinate and communicate across different parts of the
organization, create a framework for judging performance and facilitating learning, and motivate
management and employees to achieve “stretch” targets of higher revenues and lower costs.
6-41 Cash budget (continuation of 6-40). Refer to the information in Problem 6-40.
Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only
to the public and accepts cash and credit cards; 90% of its sales are to customers using credit
cards, for which AG gets the cash right away, less a 2% transaction fee.
Purchases of materials are on account. AG pays for half the purchases in the period of the
purchase and the other half in the following period. At the end of March, AG owes suppliers
$8,000.
AG plans to replace a machine in April at a net cash cost of $13,000.
Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month
incurred except of course depreciation, which is not a cash flow. Depreciation is $25,000 of the
manufacturing cost and $10,000 of the nonmanufacturing cost for April.
AG currently has a $2,000 loan at an annual interest rate of 12%. The interest is paid at the
6-43
end of each month. If AG has more than $7,000 cash at the end of April it will pay back the loan.
AG owes $5,000 in income taxes that need to be remitted in April. AG has cash of $5,900 on
hand at the end of March.
Required:
1. Prepare a cash budget for April for Animal Gear.
2. Why do Animal Gear’s managers prepare a cash budget in addition to the revenue, expenses,
and operating income budget?
SOLUTION
(25 min.) Cash budget (Continuation of 6-40) (Appendix)
Cash Budget
April 30
Cash balance, April 1
Add receipts
Cash sales ($178,400 × 10%)
Credit card sales ($178,400 × 90% × 98%)
Total cash available for needs (x)
Deduct cash disbursements
Direct materials ($8,000 + $20,024 × 50%)
Direct manufacturing labor
Manufacturing overhead ($109,832 ─ $25,000 depreciation)
Nonmanufacturing salaries
Sales commissions
Other nonmanufacturing fixed costs ($16,000 ─ $10,000 depreciation)
Machinery purchase
Income taxes
Total disbursements (y)
Financing
Repayment of loan
1
Interest at 12% ($2,000 12% )
12
Total effects of financing (z)
Ending cash balance, April 30 (x) ─ (y) ─ (z)
$
5,900
17,840
157,349
$181,089
$ 18,012
27,300
84,832
16,800
1,784
6,000
13,000
5,000
$172,728
$
2,000
20
$ 2,020
$ 6,341
Note: The solution assumes that the loan is repaid. Some students may point out that the cash
balance at the end of April after the loan is paid is anticipated to be $6,341, which is less than
$7,000 and so Animal Gear would not repay the loan. Under this assumption, the $2,000
repayment would not be shown. Our assumption is that Animal Gear has $8,361 ($181,089 −
$172,728) at the end of April before the loan is paid which is more than $7,000 and so the loan
will be repaid.
2.
Animal Gear’s managers prepare a cash budget in addition to the operating income
budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet
payroll, and pay operating expenses as these payments come due. Animal Gear could be very
6-44
profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be
delayed and result in insufficient cash being available to make scheduled payments for its
expenses. Animal Gear’s managers may then need to initiate a plan to borrow money to finance
any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be
available, so Animal Gear’s managers need to prepare a cash budget in addition to an operating
income budget.
6-42 Comprehensive operating budget. Skulas, Inc., manufactures and sells snowboards.
Skulas manufactures a single model, the Pipex. In late 2017, Skulas’s management accountant
gathered the following data to prepare budgets for January 2018:
Skulas’s CEO expects to sell 2,900 snowboards during January 2018 at an estimated retail price
of $650 per board. Further, the CEO expects 2018 beginning inventory of 500 snowboards and
would like to end January 2018 with 200 snowboards in stock.
Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also
$81,000 in fixed manufacturing overhead costs budgeted for January 2018. Skulas combines
both variable and fixed manufacturing overhead into a single rate based on direct manufacturing
labor-hours. Variable marketing costs are allocated at the rate of $250 per sales visit. The
marketing plan calls for 38 sales visits during January 2018. Finally, there are $35,000 in fixed
nonmanufacturing costs budgeted for January 2018.
Other data include:
The inventoriable unit cost for ending finished-goods inventory on December 31, 2017, is
$374.80. Assume Skulas uses a FIFO inventory method for both direct materials and finished
goods. Ignore work in process in your calculations.
Required:
1. Prepare the January 2018 revenues budget (in dollars).
2. Prepare the January 2018 production budget (in units).
3. Prepare the direct material usage and purchases budgets for January 2018.
4. Prepare a direct manufacturing labor costs budget for January 2018.
6-45
Prepare a manufacturing overhead costs budget for January 2018.
What is the budgeted manufacturing overhead rate for January 2018?
What is the budgeted manufacturing overhead cost per output unit in January 2018?
Calculate the cost of a snowboard manufactured in January 2018.
Prepare an ending inventory budget for both direct materials and finished goods for January
2018.
10. Prepare a cost of goods sold budget for January 2018.
11. Prepare the budgeted income statement for Skulas, Inc., for January 2018.
12. What questions might the CEO ask the management team when reviewing the budget?
Should the CEO set stretch targets? Explain briefly.
13. How does preparing the budget help Skulas’s management team better manage the company?
5.
6.
7.
8.
9.
SOLUTION
(60 min.) Comprehensive operating budget, budgeted balance sheet.
1.
Schedule 1: Revenues Budget for January 2018
Units Selling Price
Snowboards
2.
2,900
$650
$1,885,000
Schedule 2: Production Budget (in Units) for January 2018
Snowboards
2,900
200
3,100
500
2,600
Budgeted unit sales (Schedule 1)
Add target ending finished goods inventory
Total requirements
Deduct beginning finished goods inventory
Units to be produced
3.
Total Revenues
Schedule 3A: Direct Materials Usage Budget for January 2018
Wood
Total
Fiberglass
Physical Units Budget
Wood: 2,600 × 9 b.f.
Fiberglass: 2,600 × 10 yards
To be used in production
Cost Budget
Available from beginning inventory
Wood: 2,040 b.f. × $32.00
Fiberglass: 1,040 b.f. × $8.00
To be used from purchases this period
Wood: (23,400 – 2,040) × $34.00
Fiberglass: (26,000 – 1,040) × $9.00
Total cost of direct materials to be used
23,400
_______
23,400
26,000
26,000
$ 65,280
$
726,240
_______
$791,520
8,320
224,640
$232,960
$1,024,480
Schedule 3B: Direct Materials Purchases Budget for January 2018
Wood
Physical Units Budget
Production usage (from Schedule 3A)
23,400
6-46
Fiberglass
26,000
Total
Add target ending inventory
Total requirements
Deduct beginning inventory
Purchases
Cost Budget
Wood: 22,900 × $34.00
Fiberglass: 27,000 × $9.00
Purchases
1,540
24,940
2,040
22,900
2,040
28,040
1,040
27,000
$778,600
________
$778,600
$243,000
$243,000
6-47
$1,021,600
4.
Schedule 4: Direct Manufacturing Labor Budget for January 2018
Labor Category
Manufacturing labor
5.
Cost Driver
Units
2,600
DML Hours per
Driver Unit
5.00
Total
Hours
13,000
Wage
Rate
$29.00
Total
$377,000
Schedule 5: Manufacturing Overhead Budget for January 2018
At Budgeted Level of 13,000
Direct Manufacturing Labor-Hours
Variable manufacturing overhead costs
($7.00 × 13,000)
Fixed manufacturing overhead costs
Total manufacturing overhead costs
6.
7.
8.
$ 91,000
81,000
$172,000
$172,000
= $13.23 per hour
13,000
$172,000
Budgeted manufacturing overhead cost per output unit:
= $66 per output unit
2,600
Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in January 2018
Budgeted manufacturing overhead rate:
Direct materials
Wood
Fiberglass
Direct manufacturing labor
Total manufacturing overhead
Cost per
Unit of
Inputa
Inputsb
$34.00
9.00
29.00
9.00
10.00
5.00
Total
$306.00
90.00
145.00
66.00
$607.00
a
Cost is per board foot, yard, or per hour
Inputs is the amount of each input per board
b
9.
Schedule 6B: Ending Inventories Budget, January 31, 2018
Direct materials
Wood
Fiberglass
Finished goods
Snowboards
Total Ending Inventory
Units
Cost per
Unit
Total
1,540
2,040
$ 34.00
9.00
$ 52,360
18,360
200
607.00
121,400
$192,120
6-48
10. Schedule 7: Cost of Goods Sold Budget for January 2018
From
Schedule
Beginning finished goods inventory
January 1, 2018, $374.80 × 500
Given
Direct materials used
3A
$1,024,480
Direct manufacturing labor
4
377,000
Manufacturing overhead
5
172,000
Cost of goods manufactured
Cost of goods available for sale
Deduct ending finished goods
inventory, January 31, 2018
6B
Cost of goods sold
11. Budgeted Income Statement for Skulas for January 2018
Revenues
Schedule 1
Cost of goods sold
Schedule 7
Gross margin
Operating costs
Variable marketing costs ($250 × 38)
$ 9,500
Fixed nonmanufacturing costs
35,000
Operating income
Total
$
187,400
1,573,480
1,760,880
121,400
$1,639,480
$1,885,000
1,639,480
245,520
44,500
$ 201,020
13.
The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
revenue growing faster than the market? Should the company increase marketing and advertising
spending to grow sales? Would increasing the sales force or giving salespersons stronger
incentives result in higher sales?
The CEO would want to ask the production manager if production could be more closely
tailored to demand? Could the efficiency and productivity of direct materials and direct
manufacturing labor be increased? Could direct materials inventory be reduced?
The CEO should set stretch targets that are challenging but achievable because creating
some performance anxiety motivates employees to exert extra effort and attain better
performance. A major rationale for stretch targets is the psychological motivation that comes
from loss aversion—people feel the pain of loss more than the joy of success. Setting challenging
targets motivates employees to reach these targets because failing to achieve a target is seen as
failing. At no point should the pressure for performance push employees to engage in illegal or
unethical practices. So, while setting stretch targets, the CEO must place great emphasis on
adhering to codes of conduct and following appropriate norms and values. The CEO should also
not set targets that are very difficult or impossible to achieve. Such targets demotivate employees
because they give up on trying to achieve them.
14.
Preparing a budget helps Skulas manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
high, coordinate and communicate across different parts of the organization, create a framework
for judging performance and facilitating learning, and motivate management and employees to
achieve “stretch” targets of higher revenues and lower costs.
6-49
6-43 Cash budgeting, budgeted balance sheet. (Continuation of 6-42) (Appendix)
Refer to the information in Problem 6-42.
Budgeted balances at January 31, 2018 are as follows:
Selected budget information for December 2017 follows:
Customer invoices are payable within 30 days. From past experience, Skulas’s accountant
projects 40% of invoices will be collected in the month invoiced, and 60% will be collected in
the following month.
Accounts payable relates only to the purchase of direct materials. Direct materials are
purchased on credit with 50% of direct materials purchases paid during the month of the
purchase, and 50% paid in the month following purchase.
Fixed manufacturing overhead costs include $64,000 of depreciation costs and fixed
nonmanufacturing overhead costs include $10,000 of depreciation costs. Direct manufacturing
labor and the remaining manufacturing and nonmanufacturing overhead costs are paid monthly.
All property, plant, and equipment acquired during January 2018 were purchased on credit
and did not entail any outflow of cash.
There were no borrowings or repayments with respect to long-term liabilities in January
2018.
On December 15, 2017, Skulas’s board of directors voted to pay a $160,000 dividend to
stockholders on January 31, 2018.
Required:
1. Prepare a cash budget for January 2018. Show supporting schedules for the calculation of
collection of receivables and payments of accounts payable, and for disbursements for fixed
manufacturing and nonmanufacturing overhead.
2. Skulas is interested in maintaining a minimum cash balance of $120,000 at the end of each
month. Will Skulas be in a position to pay the $160,000 dividend on January 31?
3. Why do Skulas’s managers prepare a cash budget in addition to the revenue, expenses, and
operating income budget?
4. Prepare a budgeted balance sheet for January 31, 2018 by calculating the January 31, 2018
balances in (a) cash (b) accounts receivable (c) inventory (d) accounts payable and (e)
plugging in the balance for stockholders’ equity.
SOLUTION
(30 min.) Cash budgeting, chapter appendix.
6-50
1.
Cash Collections from Receivables
From sales in:
December7
(60%

$1,650,000)
January (40%  $1,885,000)
Total
$ 990,000
754,000
$1,744,000
Cash Disbursements for Material Purchases
For purchases in:
December (50% × $820,000)
January (50% × $1,021,600a)
Total
$410,000
510,800
$920,800
a
6-37, Schedule 3B
Cash Disbursements for Fixed Overhead Costs
Fixed manufacturing overhead ($81,000b – $64,000)
Fixed nonmanufacturing overhead ($35,000c – $10,000)
Total
$17,000
25,000
$42,000
b
6-42, Schedule 5
6-42, Budgeted Income Statement
c
Cash Budget for January 2018
Beginning cash balance
$ 124,000
Add receipts: Collection of receivables
Total cash available
1,744,000
$1,868,000
Deduct disbursements:
Material purchases
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable marketing costs
Fixed nonmanufacturing costs
Cash dividends
Total disbursements
Ending cash balance
$ 920,800
377,000
91,000
17,000
9,500
25,000
160,000
1,600,300
$ 267,700
2. Yes. Skulas has a budgeted cash balance of $267,700 on January 31, 2018, after paying the
dividend of $160,000 at the end of January.
6-51
3. Skulas’ managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Skulas could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Skulas’ managers
may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable
operating plan does not guarantee that adequate cash will be available, so Skulas’ managers need
to prepare a cash budget in addition to an operating income budget.
4.
Budgeted Balance Sheet for Skulas as of January 31, 2018
Cash
$ 267,700
Accounts receivable (60% × $1,885,000)
1,131,000
Inventory
Schedule 6B
192,120
Property, plant, and equipment (net)
1,175,600
Total assets
$2,766,420
Accounts Payable
Long-term liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
$ 510,800
182,000
2,073,620
$2,766,420
6-44 Comprehensive problem; ABC manufacturing, two products. Hazlett, Inc., operates
at capacity and makes plastic combs and hairbrushes. Although the combs and brushes are a
matching set, they are sold individually and so the sales mix is not 1:1. Hazlett’s management is
planning its annual budget for fiscal year 2018. Here is information for 2018:
Hazlett accounts for direct materials using a FIFO cost flow.
6-52
Hazlett uses a FIFO cost-flow assumption for finished-goods inventory.
Combs are manufactured in batches of 200, and brushes are manufactured in batches of 100.
It takes 20 minutes to set up for a batch of combs and 1 hour to set up for a batch of brushes.
Hazlett uses activity-based costing and has classified all overhead costs as shown in the
following table. Budgeted fixed overhead costs vary with capacity. Hazlett operates at capacity
so budgeted fixed overhead cost per unit equals the budgeted fixed overhead costs divided by the
budgeted quantities of the cost allocation base.
Delivery trucks transport units sold in delivery sizes of 1,000 combs or 1,000 brushes.
Do the following for the year 2018:
Required:
1. Prepare the revenues budget.
2. Use the revenues budget to:
a. Find the budgeted allocation rate for marketing costs.
b. Find the budgeted number of deliveries and allocation rate for distribution costs.
3. Prepare the production budget in units.
4. Use the production budget to:
a. Find the budgeted number of setups and setup-hours and the allocation rate for setup costs.
b. Find the budgeted total machine-hours and the allocation rate for processing costs.
c. Find the budgeted total units produced and the allocation rate for inspection costs.
5. Prepare the direct material usage budget and the direct material purchases budget in both
units and dollars; round to whole dollars.
6. Use the direct material usage budget to find the budgeted allocation rate for materialshandling costs.
7. Prepare the direct manufacturing labor cost budget.
8. Prepare the manufacturing overhead cost budget for materials handling, setup, processing,
and inspection costs.
9. Prepare the budgeted unit cost of ending finished-goods inventory and ending inventories
budget.
10. Prepare the cost of goods sold budget.
11. Prepare the nonmanufacturing overhead costs budget for marketing and distribution.
6-53
12. Prepare a budgeted income statement (ignore income taxes).
13. How does preparing the budget help Hazlett’s management team better manage the
company?
SOLUTION
(60 min.) Comprehensive problem; ABC manufacturing, two products.
1.
Revenues Budget
For the Year Ending December 31, 2018
Combs
Brushes
Total
Units
12,000
14,000
Selling
Price
$ 9
$30
Total Revenues
$108,000
420,000
$528,000
2a.
Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed marketing costs
= $21,150 + $90,000 = $111,150
Marketing allocation rate = $111,150 ÷ $528,000 = $0.2105 per sales dollar
2b.
Total budgeted distribution costs = Budgeted variable distribn. costs + Budgeted fixed distribn. costs
= $0 + $1,170 = $1,170
Combs:
Brushes:
Total
12,000 units ÷ 1,000 units per delivery
14,000 units ÷ 1,000 units per delivery
12 deliveries
14 deliveries
26 deliveries
Delivery allocation rate = $1,170 ÷ 26 deliveries = $45 per delivery
3.
Production Budget (in Units)
For the Year Ending December 31, 2018
Product
Combs
Brushes
Budgeted unit sales
12,000
14,000
Add target ending finished goods inventory
1,200
1,400
Total required units
13,200
15,400
Deduct beginning finished goods inventory
600
1,200
Units of finished goods to be produced
12,600
14,200
4a.
Machine setup overhead
Units to be produced
Combs
Brushes
12,600
14,200
6-54
Total
Units per batch
Number of setups
Hours to setup per batch
Total setup hours
÷200
63
×1/3
21
÷100
142
×1
142
163
Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs
= $10,245 + $16,650 = $26,895
Machine setup
allocation rate = $26,895 ÷ 163 setup hours = $165 per setup hour
b.
Combs:
Brushes:
Total
12,600 units × 0.025 MH per unit
14,200 units × 0.1 MH per unit
315 MH
1,420 MH
1,735 MH
Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed processing costs
= $11,640 + $30,000 = $41,640
Processing allocation rate = $41,640 ÷ 1,735 MH = $24 per MH
c.
Total budgeted inspection costs = Budgeted variable inspection costs + Budgeted fixed inspection costs
= $10,500 + $1,560 = $12,060
Inspection allocation rate = $12,060 ÷ 26,800 units = $0.45 per unit
6-55
5.
Direct Material Usage Budget in Quantity and Dollars
For the Year Ending December 31, 2018
Plastic
Physical Units Budget
Direct materials required for
Combs (12,600 units × 5 oz and 0 bunches)
Brushes (14,200 units × 8 oz and 16 bunches)
Total quantity of direct materials to be used
Material
Bristles
Total
63,000 oz.
113,600 oz. 227,200 bunches
176,600 oz. 227,200 bunches
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
$ 456
To be purchased this period
Plastic: (176,600 oz. – 1,600 oz) × $0.30 per oz.
52,500
Bristles: (227,200 bunches – 1,820) × $0.75 per bunch _______
Direct materials to be used this period
$52,956
$
1,419
169,035
$170,454
$223,410
Direct Materials Purchases Budget
For the Year Ending December 31, 2018
Plastic
Material
Bristles
Physical Units Budget
To be used in production (requirement 5)
Add: Target ending direct material inventory
Total requirements
Deduct: Beginning direct material inventory
Purchases to be made
176,600 oz. 227,200 bunches
1,766 oz.
2,272 bunches
178,366 oz. 229,472 bunches
1,600 oz.
1,820 bunches
176,766 oz. 227,652 bunches
Cost Budget
Plastic: 176,766 oz.  $0.30 per oz
Bristles : 227,652 bunches $0.75 per bunch
Purchases
$ 53,030
_______
$ 53,030
$170,739
$170,739
Total
$223,769
6. Total budgeted matls. handlg. cost = Budgeted variable matls. handlg. cost + Budgeted fixed
matls. handlg. cost
= $17,235 + $22,500 = $39,735
Materials handling
allocation rate = $39,735 ÷ 176,600 oz = $0.225 per oz. of plastic
6-56
7.
Direct Manufacturing Labor Costs Budget
For the Year Ending December 31, 2018
Output Units
Produced
12,600
14,200
Combs
Brushes
Total
Direct Manufacturing
Labor-Hours per Unit
0.05
0.2
Total Hourly Wage
Hours
Rate
630
$18
2,840
18
Total
$11,340
51,120
$62,460
8.
Manufacturing Overhead Cost Budget
For the Year Ending December 31, 2018
Materials handling
Machine setup
Processing
Inspection
Total
Variable
$17,235
10,245
11,640
10,500
$49,620
Fixed
$22,500
16,650
30,000
1,560
$70,710
Total
$ 39,735
26,895
41,640
12,060
$120,330
9.
Unit Costs of Ending Finished Goods Inventory
For the Year Ending December 31, 2018
Plastic
Bristles
Direct manufacturing labor
Materials handling
Machine setup
Processing
Inspection
Totals
Cost per
Unit of
Input
$0.30
0.75
18.00
0.225
165.00
24.00
0.45
Combs
Input per
Unit of
Output
5 oz.
─
0.05 hrs.
5 oz.
0.001667 hrs.a
0.025 MH
1 unit
Total
$1.50
─
0.90
1.125
0.275
0.60
0.45
$4.85
Brushes
Input per
Unit of
Output
Total
8 oz
$ 2.40
16 bunches
12.00
0.2 hour
3.60
8 oz
1.80
0.01 setup-hra
1.65
0.1 MH
2.40
1 unit
0.45
$24.30
a
21 setup-hours ÷ 12,600 units = 0.001667 hours per unit; 142 setup hours ÷ 14,200 units = 0.01 hours per unit
Ending Inventories Budget
December 31, 2018
Quantity
Direct Materials
Plastic
Bristles
Finished goods
Combs
Brushes
Total ending inventory
Cost per unit
1,766 oz
2,272 bunches
1,200
1,400
6-57
Total
$0.30
0.75
$
529.80
1,704.00
$4.85
24.30
$ 5,820.00
34,020.00
$ 2,233.80
39,840.00
$42,073.80
10.
Cost of Goods Sold Budget
For the Year Ending December 31, 2018
Beginning finished goods inventory, Jan. 1
($2,700 + $27,180)
Direct materials used (requirement 5)
$223,410
Direct manufacturing labor (requirement 7)
62,460
Manufacturing overhead (requirement 8)
120,330
Cost of goods manufactured
Cost of goods available for sale
Deduct: Ending finished goods inventory, December 31
(reqmt. 9)
Cost of goods sold
$ 29,880
406,200
436,080
39,840
$396,240
11.
Nonmanufacturing Costs Budget
For the Year Ending December 31, 2018
Marketing
Distribution
Total
Variable
$21,150
0
$21,150
Fixed
$90,000
1,170
$91,170
Total
$111,150
1,170
$112,320
12.
Budgeted Income Statement
For the Year Ending December 31, 2018
Revenue
$528,000
Cost of goods sold
396,240
Gross margin
131,760
Operating (nonmanufacturing) costs
112,320
Operating income
$ 19,440
13.
Preparing a budget helps Hazlett manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
high, coordinate and communicate across different parts of the organization, create a framework
for judging performance and facilitating learning, and motivate management and employees to
achieve “stretch” targets of higher revenues and lower costs.
6-45 Cash budget. (Continuation of 6-44) (Appendix)
Refer to the information in Problem 6-44.
All purchases made in a given month are paid for in the following month, and direct material
purchases make up all of the accounts payable balance and are reflected in the accounts payable
balances at the beginning and the end of the year.
Sales are made to customers with terms net 45 days. Fifty percent of a month’s sales are
collected in the month of the sale, 25% are collected in the month following the sale, and 25% are
collected two months after the sale and are reflected in the accounts receivables balances at the
beginning and the end of the year.
6-58
Direct manufacturing labor, variable manufacturing overhead and variable marketing costs
are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, 60% of fixed
marketing costs, and 100% of fixed distribution costs are depreciation expenses. The remaining
fixed manufacturing overhead and marketing costs are paid as they are incurred.
Selected balances for December 31, 2017, follow:
Selected budget information for December 2018 follows:
Hazlett has budgeted to purchase equipment costing $145,000 for cash during 2018. Hazlett
desires a minimum cash balance of $25,000. The company has a line of credit from which it may
borrow in increments of $1,000 at an interest rate of 12% per year. By special arrangement, with
the bank, Hazlett pays interest when repaying the principal, which only needs to be repaid in
2019.
Required:
1. Prepare a cash budget for 2018. If Hazlett must borrow cash to meet its desired ending cash
balance, show the amount that must be borrowed.
2. Does the cash budget for 2018 give Hazlett’s managers all of the information necessary to
manage cash in 2018? How might that be improved?
3. What insight does the cash budget give to Hazlett’s managers that the budgeted income
statement does not?
SOLUTION
Cash budget (Continuation of 6-44)
Cash Budget for 2018
Beginning cash balance
Add receipts:
Collections from customersa
Total cash available
519,500
$ 548,700
Deduct disbursements:
Material purchasesb
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overheadc
Variable marketing costs
Fixed marketing costsd
Equipment purchase
Total disbursements
Excess or (deficiency) of cash
$ 217,449
62,460
49,620
35,355
21,150
36,000
145,000
567,034
(18,334)
6-59
$
29,200
Need to borrow
Ending cash balance
$
44,000
25,666
a
$40,000 beg. accounts receivable + $528,000 sales in 2018 - $48,500 ending accounts receivable =
$519,500 disbursed
b
$21,450 beg. accounts payable + $223,769 direct material purchases - $27,770 ending accounts payable
= $217,449 disbursed
c
$70,710 fixed manufacturing overhead – (50% × $70,710) depreciation = $35,355 disbursed
d
$90,000 fixed marketing overhead – (60% × $90,000) depreciation = $36,000 disbursed
2. The cash budget for 2018 does not show when during the year the equipment will be
purchased. As a result, Hazlett’s managers do not know when to plan to borrow the $44,000 to
achieve the minimum ending cash balance at the end of the year. It could be improved by
preparing a cash budget for each month of the year. The problem did not present the data in such
a way to make that possible here, but an actual company would have sufficient information.
3. Hazlett’s managers prepare a cash budget in addition to the operating income budget to plan
cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay
operating expenses as these payments come due. Hazlett could be very profitable on an accrual
accounting basis, but the pattern of cash receipts from revenues might be delayed and result in
insufficient cash being available to make scheduled payments for its expenses. Hazlett’s
managers may then need to initiate a plan to borrow money to finance any shortfall. Building a
profitable operating plan does not guarantee that adequate cash will be available, so Hazlett’s
managers need to prepare a cash budget in addition to an operating income budget.
6-46 Budgeting and ethics. Jayzee Company manufactures a variety of products in a variety
of departments and evaluates departments and departmental managers by comparing actual cost
and output relative to the budget. Departmental managers help create the budgets and usually
provide information about input quantities for materials, labor, and overhead costs.
Kurt Jackson is the manager of the department that produces product Z. Kurt has estimated
these inputs for product Z:
The department produces about 100 units of product Z each day. Kurt’s department always gets
excellent evaluations, sometimes exceeding budgeted production quantities. For each 100 units
of product Z produced, the company uses, on average, about 48 hours of direct manufacturing
labor (eight people working 6 hours each), 790 pounds of material, and 39.5 machine-hours.
Top management of Jayzee Company has decided to implement budget standards that will
challenge the workers in each department, and it has asked Kurt to design more challenging input
standards for product Z. Kurt provides top management with the following input quantities:
Required:
6-60
Discuss the following:
1. Are these budget standards challenging for the department that produces product Z?
2. Why do you suppose Kurt picked these particular standards?
3. What steps can Jayzee Company’s top management take to make sure Kurt’s standards really
meet the goals of the firm?
SOLUTION
(15 min.) Budgeting and ethics.
1. The standards proposed by Kurt are not challenging. In fact, he set the target at the level his
department currently achieves.
Direct materials: 7.9 lbs. × 100 units = 790 lbs.
Direct manufacturing labor: 29 min. × 100 units = 2,900 min ÷ 60 = 48.33 hrs.
Machine time: 23.6 min. × 100 units = 2,360 min. ÷ 60 = 39.33 hrs. approx
2. Kurt probably chose these standards so that his department would be able to make the goal and
receive any resulting reward. With a little effort, his department can likely beat these goals.
3. Top management should point out that the targets set by Kurt are targets that the department
already achieves. Top management is seeking targets that are slightly difficult to achieve, a
stretch target that would challenge workers.
As discussed in the chapter, benchmarking might also be used to highlight the easy targets set
by Kurt and to determine more challenging targets. Perhaps the organization has multiple plant
locations that could be used as comparisons. Alternatively, management could use industry
averages. Also, management should work with Kurt to better understand his department and
encourage him to set more realistic targets. Finally, the reward structure should be designed to
encourage increasing productivity, not beating the budget. Management could also set
continuous improvement standards.
6-47 Kaizen budgeting for carbon emissions. Apex Chemical Company currently operates
three manufacturing plants in Colorado, Utah, and Arizona. Annual carbon emissions for these
plants in the first quarter of 2018 are 125,000 metric tons per quarter (or 500,000 metric tons in
2018). Apex management is investigating improved manufacturing techniques that will reduce
annual carbon emissions to below 475,000 metric tons so that the company can meet
Environmental Protection Agency guidelines by 2019. Costs and benefits are as follows:
Total cost to reduce carbon emissions
$10 per metric ton reduced in 2019 below 500,000
metric tons
Fine in 2019 if EPA guidelines are not met $300,000
Apex Management has chosen to use Kaizen budgeting to achieve its goal for carbon emissions.
Required:
1. If Apex reduces emissions by 1% each quarter, beginning with the second quarter of 2018,
will the company reach its goal of 475,000 metric tons by the end of 2019?
6-61
2. What would be the net financial cost or benefit of their plan? Ignore the time value of money.
3. What factors other than cost might weigh into Apex’s decision to carry out this plan?
SOLUTION
(30 min.) Kaizen budgeting for carbon emissions.
1. Yes, the company would achieve its goal. Total carbon emissions for 2019 are calculated in
the following table. Each quarter’s emissions are 99% of the previous quarter’s emissions since
Apex reduces emissions by 1% each quarter. Total emissions in 2019 would be 120,075 +
118,874 + 117,685 + 116,508 = 473,142 metric tons, which is below the Environmental
Protection Agency (EPA) guideline of 475,000 metric tons.
Quarter
2018 Q1
2018 Q2
2018 Q3
2019 Q4
2019 Q1
2019 Q2
2019 Q3
2019 Q4
Quarterly Emissions
125,000 metric tons
123,750a metric tons
122,513b metric tons
121,287 metric tons
120,075 metric tons
118,874 metric tons
117,685 metric tons
116,508 metric tons
a
123,750 = 125,000 × 0.99; b122,513 = 123,750 × 0.99
2. Apex’s emissions are below the EPA guideline of 475,000 metric tons. Consequently the
EPA will not assess Apex a fine of $300,000.
Current annual emissions
Emissions in 2019
Reduction in emissions
500,000 metric tons
473,142 metric tons
26,858 metric tons
Fine avoided
Cost at $10 per metric ton reduction, 26,858 × $10
Net benefit of plan
$300,000
268,580
$ 31,420
3. While this plan would benefit Apex marginally by $31,420, avoidance of the EPA fine
should not be the company’s sole motivation in carrying out this plan. Reducing carbon
emissions is good for the environment, and will contribute to a smaller impact on climate
change. Research has shown that good environmental and sustainability practices has positive
effects on investors, consumers, and employees. Apex may also be able to share this plan with
the general population and gain favorable publicity. Apex may want to continue to reduce
carbon emissions if they have the technology to do so.
6-62
6-48 Comprehensive budgeting problem; activity-based costing, operating and financial
budgets. Tyva makes a very popular undyed cloth sandal in one style, but in Regular and
Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth-covered wooden
soles. Tyva is preparing its budget for June 2018 and has estimated sales based on past
experience.
Other information for the month of June follows:
Tyva accounts for direct materials using a FIFO cost-flow assumption.
Tyva uses a FIFO cost-flow assumption for finished-goods inventory.
All the sandals are made in batches of 50 pairs of sandals. Tyva incurs manufacturing
overhead costs, marketing and general administration, and shipping costs. Besides materials and
labor, manufacturing costs include setup, processing, and inspection costs. Tyva ships 40 pairs of
sandals per shipment. Tyva uses activity-based costing and has classified all overhead costs for
the month of June as shown in the following chart:
6-63
Required:
1. Prepare each of the following for June:
a. Revenues budget
b. Production budget in units
c. Direct material usage budget and direct material purchases budget in both units and
dollars; round to dollars
d. Direct manufacturing labor cost budget
e. Manufacturing overhead cost budgets for setup, processing, and inspection activities
f. Budgeted unit cost of ending finished-goods inventory and ending inventories budget
g. Cost of goods sold budget
h. Marketing and general administration and shipping costs budget
2. Tyva’s balance sheet for May 31 follows.
Use the balance sheet and the following information to prepare a cash budget for Tyva for June.
Round to dollars.
• All sales are on account; 60% are collected in the month of the sale, 38% are collected the
following month, and 2% are never collected and written off as bad debts.
• All purchases of materials are on account. Tyva pays for 80% of purchases in the month of
purchase and 20% in the following month.
• All other costs are paid in the month incurred, including the declaration and payment of a
$15,000 cash dividend in June.
• Tyva is making monthly interest payments of 0.5% (6% per year) on a $150,000 long-term
loan.
• Tyva plans to pay the $10,800 of taxes owed as of May 31 in the month of June. Income tax
expense for June is zero.
• 30% of processing, setup, and inspection costs and 10% of marketing and general
administration and shipping costs are depreciation.
6-64
3. Prepare a budgeted income statement for June and a budgeted balance sheet for Tyva as of June
30, 2018.
SOLUTION
(60 min.) Comprehensive budgeting problem; activity-based costing, operating and financial
budgets.
1a.
Revenues Budget
For the Month of June, 2018
Regular
Deluxe
Total
Units Selling Price Total Revenues
2,000
$120
$240,000
3,000
195
585,000
$825,000
b.
Production Budget
For the Month of June, 2018
Budgeted unit sales
Add: target ending finished goods inventory
Total required units
Deduct: beginning finished goods inventory
Units of finished goods to be produced
Product
Regular
Deluxe
2,000
3,000
400
600
2,400
3,600
250
650
2,150
2,950
c.
Direct Material Usage Budget in Quantity and Dollars
For the Month of June, 2018
Material
Cloth
Wood
Physical Units Budget
Direct materials required for
Regular (2,150 units × 1.3 yd.; 0 b.f.)
Deluxe (2,950 units × 1.5 yds.; 2 b.f.)
Total quantity of direct materials to be used
Total
2,795 yds.
0 b.f.
4,425 yds. 5,900 b.f.
7,220 yds. 5,900 b.f.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
To be purchased this period
Cloth: (7,220 yd. – 610 yd.) × $5.25 per yd.
Wood: (5,900 – 800) × $7.50 per b. f.
Direct materials to be used this period
6-65
$ 3,219
$ 6,060
34,703
$37,922
38,250
$44,310
$82,232
Direct Materials Purchases Budget
For the Month of June, 2018
Material
Cloth
Wood
Physical Units Budget
To be used in production
Add: Target ending direct material inventory
Total requirements
Deduct: beginning direct material inventory
Purchases to be made
Cost Budget
Cloth: (6,996 yds. × $5.25 per yd.)
Wood: (5,395 ft × $7.50 per b.f.)
Total
7,220 yds.
386 yds.
7,606 yds.
610 yds.
6,996 yds.
$36,729
______
$36,729
Total
5,900 ft
295 ft
6,195 ft
800 ft
5,395 ft
$40,463
$40,463
$77,192
d.
Direct Manufacturing Labor Costs Budget
For the Month of June, 2018
Regular
Deluxe
Total
Output Units
Produced
2,150
2,950
Direct Manufacturing
Labor-Hours per Unit
5
7
Total Hourly Wage
Hours
Rate
10,750
$15
20,650
15
31,400
Total
$161,250
309,750
$471,000
e.
Manufacturing Overhead Costs Budget
For the Month of June 2018
Total
Machine setup
(Regular, 43 batchesa × 2 hrs./batch + Deluxe, 59 batchesb × 3 hrs./batch) $18/hour
Processing (31,400 DMLH $1.80)
Inspection [(2,150 + 2,950) pairs  $1.35 per pair]
Total
a
Regular: 2,150 pairs ÷ 50 pairs per batch = 43; bDeluxe: 2,950 pairs ÷ 50 pairs per batch = 59
6-66
$ 4,734
56,520
6,885
$68,139
f.
Cloth
Wood
Direct manufacturing labor
Machine setup
Processing
Inspection
Total
a
b
Unit Costs of Ending Finished Goods Inventory
For the Month of June, 2018
Regular
Deluxe
Cost per
Input per
Input per
Unit of Input
Unit of Output
Total
Unit of Output
Total
$ 5.25
1.3 yd
$ 6.83
1.5 yd
$ 7.88
7.50
0 b.f.
0.00
2 b.f.
15.00
15.00
5 hr.
75.00
7 hrs.
105.00
18.00
0.04 hra
0.72
0.06 hrb
1.08
1.80
5 hrs
9.00
7 hrs
12.60
1.35
1 pair
1.35
1 pair
1.35
$92.90
$142.91
2 hours per setup ÷ 50 pairs per batch = 0.04 hr. per unit
3 hours per setup ÷ 50 pairs per batch = 0.06 hr. per unit
Ending Inventories Budget
June, 2018
Quantity
Direct Materials
Cloth
Wood
Cost per unit
386 yards
295 b.f.
Finished goods
Regular
Deluxe
Total ending inventory
400
600
Total
$5.25
7.50
$2,026.50
2,212.50
$ 92.90
142.91
$37,160
85,746
$ 4,239
122,906
$127,145
g.
Cost of Goods Sold Budget
For the Month of June, 2018
Beginning finished goods inventory, June 1 ($23,250 + $92,625)
Direct materials used (requirement c)
Direct manufacturing labor (requirement d)
Manufacturing overhead (requirement e)
Cost of goods manufactured
Cost of goods available for sale
Deduct ending finished goods inventory, June 30 (requirement f)
Cost of goods sold
$115,875
$ 82,232
471,000
68,139
621,371
737,246
122,906
$614,340
h.
Nonmanufacturing Costs Budget
For the Month of June, 2018
Total
Marketing and general administration
8% × $825,000
Shipping
(5,000 pairs ÷ 40 pairs per shipment) × $15
Total
2.
6-67
$66,000
1,875
$67,875
Cash Budget
June 30, 2018
Cash balance, June 1 (from Balance Sheet)
Add receipts
Collections from May accounts receivable
Collections from June accounts receivable
($825,000 60%)
$
9,435
307,800
495,000
Total collection from customers
Total cash available for needs (x)
Deduct cash disbursements
Direct material purchases in May
Direct material purchases in June
($77,192  80%)
Direct manufacturing labor
Manufacturing overhead
($68,139 70% because 30% is depreciation)
Nonmanufacturing costs
($67,875 90% because 10% is depreciation)
Taxes
Dividends
Total disbursements (y)
Financing
Interest at 6% ($150,0006% 1 ÷ 12) (z)
Ending cash balance, June 30 (x) – (y) – (z)
802,800
$812,235
$ 15,600
61,754
471,000
47,697
61,088
10,800
15,000
$682,939
$
750
$128,546
3.
Budgeted Income Statement
For the Month of June, 2018
Revenues
$825,000
16,500
Bad debt expense ($825,000  2%)
Net revenues
Cost of goods sold
Gross margin
Operating (nonmanufacturing) costs
$67,875
Interest expense (for June)
750
Net income
$808,500
614,340
194,160
68,625
$125,535
Budgeted Balance Sheet
June 30, 2018
Assets
Cash
Accounts receivable ($825,000 × 40%)
Less: allowance for doubtful accounts
Inventories
Direct materials
Finished goods
$ 128,546
$330,000
16,500
$
6-68
4,239
122,906
313,500
127,145
Fixed assets
Less: accumulated depreciation
($136,335 + $68,13930% + $67,875 × 10%))
Total assets
Liabilities and Equity
Accounts payable ($77,192 × 20%)
Interest payable
Long-term debt
Common stock
Retained earnings ($698,904 + $125,535 – $15,000))
Total liabilities and equity
$870,000
163,564
706,436
$1,275,627
$
15,438
750
150,000
300,000
809,439
$1,275,627
Try It 6-1 Solution
Knox
Ayer
Total
Schedule 1: Revenues Budget
for the Year Ending December 31, 2017
Units
Selling Price
Total Revenues
21,000
$25
$525,000
10,000
40
400,000
$925,000
Schedule 2: Production Budget (in Units)
for the Year Ending December 31, 2017
Product
Knox
Ayer
Budgeted sales in units (Schedule 1)
21,000
10,000
Add target ending finished goods inventory
2,000
1,000
Total required units
23,000
11,000
Deduct beginning finished goods inventory
3,000
1,000
Units of finished goods to be produced
20,000
10,000
Try It 6-2 Solution
Schedule 3A: Direct Material Usage Budget in Quantity and Dollars
for the Year Ending December 31, 2017
Material
Metal
Fabric
Physical Units Budget
Direct materials required for Knox lamps
40,000 pounds
20,000 yards
(20,000 units × 2 pounds and 1 yard)
Direct materials required for Ayer lamps
30,000 pounds
15,000 yards
(10,000 units × 3 pounds and 1.5 yards)
Total quantity of direct materials to be used
70,000 pounds
35,000 yards
Cost Budget
Available from beginning direct materials
inventory (under a FIFO cost-flow assumption)
6-69
Total
Material
(Given)
Metal: 12,000 pounds × $3 per pound
Fabric: 7,000 yards × $4 per yard
To be purchased and used this period
Metal: (70,000 – 12,000) pounds × $3 per pound
Fabric:(35,000 – 7,000) yards × $4 per yard
Direct materials to be used this period
$ 36,000
$ 28,000
174,000
$210,000
112,000
$140,000
Schedule 3B: Direct Material Purchases Budget
for the Year Ending December 31, 2017
Material
Metal
Fabric
Physical Units Budget
To be used in production (from Schedule
70,000 pounds
35,000 yards
3A)
Add target ending inventory
10,000 pounds
5,000 yards
Total requirements
80,000 pounds
40,000 yards
Deduct beginning inventory
12,000 pounds
7,000 yards
Purchases to be made
68,000 pounds
33,000 yards
Cost Budget
Metal: 68,000 pounds × $3 per pound
$204,000
Fabric: 33,000 yards × $4 per yard
$132,000
Direct materials to be purchased this period
$204,000
$132,000
Knox
Ayer
Total
Schedule 4: Direct Manufacturing Labor Costs Budget
for the Year Ending December 31, 2017
Direct
Manufacturing
Output Units
Labor-Hours
Hourly
Produced
per Unit
Total Hours Wage Rate
(Schedule 2)
20,000
0.15
3,000
$20
10,000
0.2
2,000
20
5,000
$350,000
Total
$336,000
Total
$ 60,000
40,000
$100,000
Try It 6-3 Solution
1. Quantity of lamps to be produced
2. Number of lamps to be produced per batch
3. Number of batches (1) ÷ (2)
4. Setup time per batch
5. Total setup-hours (3) × (4)
Knox
20,000 lamps
100 lamps/batch
200 batches
3 hours/batch
600 hours
6-70
Ayer
10,000 lamps
80 lamps/batch
125 batches
4 hours/batch
500 hours
Schedule 5: Manufacturing Overhead Costs Budget
for the Year Ending December 31, 2017
Machine Setup Overhead Costs
Variable costs ($60 per setup-hour × 1,100 setup-hours)
Fixed costs (to support capacity of 1,100 setup-hours)
Total machine setup overhead costs
Try It 6-4 Solution
$66,000
77,000
$143,000
Schedule 6A: Budgeted Unit Costs of Ending Finished
Goods Inventory December 31, 2017
Product
Knox
Ayer
Input per
Input per
Unit of
Unit of
Cost per Unit
Output
Output
Total
of Input
Metal
$ 3
2 pounds.
$ 6.00
3 pounds.
Fabric
4
1 yard
4.00
1.5 yards
Direct manufacturing labor
20
0.15 hrs.
3.00
0.2 hrs.
Machine setup overhead
130
0.03 hrs.
3.90
0.05 hrs.
Total
$16.90
Total
$ 9.00
6.00
4.00
6.50
$25.50
Under the FIFO method, managers use this unit cost to calculate the cost of target ending
inventories of finished goods in Schedule 6B.
Schedule 6B: Ending Inventories Budget December 31, 2017
Quantity
Cost per Unit
Direct materials
Metal
10,000
$ 3.00
$30,000
Fabric
5,000
4.00
20,000
Finished goods
Knox
2,000
$16.90
$33,800
Ayer
1,000
25.50
25,500
Total ending inventory
Total
$ 50,000
59,300
$109,300
Try It 6-5 Solution
Schedule 7: Cost of Goods Sold Budget
for the Year Ending December 31, 2017
From Schedule
Beginning finished goods inventory, January 1, 2017
Given
Direct materials used
3A
Direct manufacturing labor
4
Manufacturing overhead
5
Cost of goods manufactured
Cost of goods available for sale
Deduct ending finished goods inventory, December
6B
31, 2017
6-71
Total
$ 76,200
$350,000
100,000
143,000
593,000
669,200
59,300
From Schedule
Total
$609,900
Cost of goods sold
Schedule 8: Nonmanufacturing Costs Budget
for the Year Ending December 31, 2017
Business Function
Variable Costs Fixed Costs
Marketing (Variable cost: $925,000  0.04)
$37,000
$ 43,000
45,000
40,000
Distribution (Variable cost: $1.5030,000 cu.
ft.)
Administration costs
0
75,000
$82,000
$158,000
Budgeted Income Statement for Jimenez Corporation
for the Year Ending December 31, 2017
From Schedule
Revenues
Given*
Cost of goods sold
7
Gross margin
Operating costs
Marketing costs
8
80,000
Distribution costs
8
85,000
Administration costs
8
75,000
Operating income
Total Costs
$ 80,000
85,000
75,000
$240,000
Total
$925,000
609,900
315,100
240,000
$ 75,100
Try It 6-6 Solution
Schedule of Cash Collections
Quarters
1
Accounts receivable balance on 1-12017 (Fourth-quarter sales from
2016 collected in first quarter of
2017)
From first-quarter 2017 sales
($230,000 0.80; $230,000  0.20)
From second-quarter 2017 sales
($245,000 0.80; $245,000 0.20)
From third-quarter 2017 sales
($210,000 0.80; $210,000 0.20)
From fourth-quarter 2017 sales
($240,000  0.80)
Total collections
2
3
4
$ 46,000
184,000
$ 46,000
196,000
$230,000
6-72
$242,000
$ 49,000
168,000
$ 42,000
$217,000
192,000
$234,000