CH. 9 solutions
This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge
in their minds about running their business. They feel that they do not need to
spend a great deal of time on the budgeting process, because they can essentially
run the business by feel. This approach can result in several problems. First, if
the person who is running the business is sick or traveling, he or she is not
available to make decisions and implement plans that could have been clarified
by a budget. Second, the purposes of budgeting are important to the effective
running of an organization. Budgets facilitate communication and coordination,
are useful in resource allocation, and help in evaluating performance and
providing incentives to employees. It is difficult to achieve these benefits without
a budgeting process.
9-18
In developing a budget to meet your college expenses, the primary steps would
be to project your cash receipts and your cash disbursements. Your cash receipts
could come from such sources as summer jobs, jobs held during the academic
year, college funds saved by relatives or friends for your benefit, scholarships,
and financial aid from your college or university. You would also need to carefully
project your college expenses. Your expenses would include tuition, room and
board, books and other academic supplies, transportation, clothing and other
personal needs, and money for entertainment and miscellaneous expenses.
9-19
Firms with international operations face a variety of additional challenges in
preparing their budgets.
 A multinational firm's budget must reflect the translation of foreign currencies
into U.S. dollars. Almost all the world's currencies fluctuate in their values
relative to the dollar, and this fluctuation makes budgeting for those
translations difficult.
 It is difficult to prepare budgets when inflation is high or unpredictable. Some
foreign countries have experienced hyperinflation, sometimes with annual
inflation rates well over 100 percent. Predicting such high inflation rates is
difficult and complicates a multinational's budgeting process.
 The economies of all countries fluctuate in terms of consumer demand,
availability of skilled labor, laws affecting commerce, and so forth. Companies
with foreign operations face the task of anticipating such changing conditions
in their budgeting processes.
9-20
The five phases in a product's life cycle are as follows:
(a) Product planning and concept design
(b) Preliminary design
(c) Detailed design and testing
(d) Production
(e) Distribution and customer service
It is important to budget these costs as early as possible in order to ensure that
the revenue a product generates over its life cycle will cover all of the costs to be
incurred. A large portion of a product's life-cycle costs will be committed well
before they are actually incurred.
EXERCISE 9-22 (25 MINUTES)
1.
Cash collections in October:
Month of Sale
July ..............................................................
August .........................................................
September ...................................................
Amount Collected in October
$ 6,000
$150,000  4%
17,500
175,000  10%
30,000
200,000  15%
October ........................................................
Total .............................................................
157,500
$211,000
225,000  70%
Notice that the amount of sales on account in June, $122,500 was not needed to
solve the exercise.
2.
Cash collections in fourth quarter from credit sales in fourth quarter.
Amount Collected
Month of Sale
October ............................................
November ........................................
December ........................................
Total .................................................
Total collections in fourth quarter
from credit sales in fourth
quarter .........................................
3.
Credit
Sales
$225,000
250,000
212,500
October
$157,500
–
–
$157,500
November
$ 33,750
175,000
–
208,750
December
$ 22,500
37,500
148,750
$208,750
$575,000
THE ELECTRONIC VERSION OF THE SOLUTIONS MANUAL “BUILD A SPREADSHEET
SOLUTIONS” IS AVAILABLE ON YOUR INSTRUCTORS CD AND ON THE HILTON, 8E
WEBSITE: www.mhhe.com/hilton8e.
EXERCISE 9-27 (30 MINUTES)
1.
Budgeted cash collections for December:
Month of Sale
November .............................................................
December .............................................................
Total cash collections .........................................
2.
Collections in December
$152,000
$400,000  38%
264,000
440,000  60%
$416,000
Budgeted income (loss) for December:
Sales revenue .......................................................................
Less: Cost of goods sold (75% of sales) ............................
Gross margin (25% of sales) ...............................................
Less: Operating expenses: ..................................................
Bad debts expense (2% of sales) ..............................
Depreciation ($432,000/12) ........................................
Other expenses ..........................................................
Total operating expenses ..........................................
Income before taxes .............................................................
$440,000
330,000
$110,000
$ 8,800
36,000
45,200
90,000
$ 20,000
EXERCISE 9-27 (CONTINUED)
3.
Projected balance in accounts payable on December 31:
The December 31 balance in accounts payable will be equal to December's purchases of
merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.
Month
December ...................
January ......................
Total December
purchases ................
Sales
$440,000
400,000
Cost of
Goods
Sold
$330,000
300,000
Amount Purchased in December
$ 66,000
$330,000  20%
240,000
300,000  80%
Therefore, the December 31 balance in accounts payable will be $306,000.
$306,000
EXERCISE 9-28 (20 MINUTES)
Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From:
I.M. Student and Associates
Subject: Budgetary slack
Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
and usefulness of the budget as a planning and control tool. When a budget includes
slack, the amounts in the budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts in
20x5. Yet the new accounts manager's projection is only 800 new accounts. This
projection will make it more likely that the actual number of new accounts will exceed
the budgeted number.
PROBLEM 9-32 (40 MINUTES)
1.
Production and direct-labor budgets
SHADY SHADES, INC.
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Sales (units) .....................................................
Add: Ending inventory* ...................................
Total needs.......................................................
Deduct: Beginning inventory ..........................
Units to be produced .......................................
Direct-labor hours per unit .............................
Total hours of direct labor
time needed .................................................
Direct-labor costs:
Wages ($16.00 per DLH)† ............................
Pension contributions
($.50 per DLH) .........................................
Workers' compensation
insurance ($.20 per DLH) .......................
Employee medical insurance
($.80 per DLH) .........................................
Employer's social security
(at 7%) ......................................................
Total direct-labor cost .....................................
January
20,000
32,000
52,000
32,000
20,000

1
Month
February
24,000
25,000
49,000
32,000
17,000

1
March
16,000
27,000
43,000
25,000
18,000

.75
Quarter
60,000
27,000
87,000
32,000
55,000
20,000
17,000
13,500
50,500
$320,000
$272,000
$216,000
$808,000
10,000
8,500
6,750
25,250
4,000
3,400
2,700
10,100
16,000
13,600
10,800
40,400
22,400
$372,400
19,040
$316,540
15,120
$251,370
56,560
$940,310
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
†DLH denotes direct-labor hour.
PROBLEM 9-32 (CONTINUED)
2.
Use of data throughout the master budget:
Components of the master budget, other than the production budget and the
direct-labor budget, that would also use the sales data include the following:
 Sales budget
 Cost-of-goods-sold budget
 Selling and administrative expense budget
Components of the master budget, other than the production budget and the
direct-labor budget, that would also use the production data include the
following:
PROBLEM 9-42 (120 MINUTES)
1.
Sales budget:
20x0
Total sales ........................
Cash sales* ......................
Sales on account† ............
December
$800,000
200,000
600,000
20x1
January February
$880,000 $968,000
220,000
242,000
660,000
726,000
March
$1,064,800
266,200
798,600
First
Quarter
$2,912,800
728,200
2,184,600
*25% of total sales.
†75% of total sales.
2.
Cash receipts budget:
20x1
Cash sales .............................................
Cash collections from credit
sales made during current
month* ...............................................
Cash collections from credit
sales made during preceding
month† ...............................................
Total cash receipts ...............................
*10% of current month's credit sales.
†90% of previous month's credit sales.
January
$220,000
February
$242,000
March
$266,200
First
Quarter
$ 728,200
66,000
72,600
79,860
218,460
540,000
$826,000
594,000
$908,600
653,400
$999,460
1,787,400
$2,734,060
PROBLEM 9-42 (CONTINUED)
3.
Purchases budget:
20x0
December
Budgeted cost of
goods sold .................. $560,000
Add: Desired
ending inventory ........ 308,000
Total goods
needed ........................ $868,000
Less: Expected
beginning
inventory ..................... ††280,000
Purchases ........................ $588,000
20x1
January
February
March
First
Quarter
$2,038,960
$616,000
$677,600
$745,360
338,800
372,680
372,680*
$954,800
308,000
$646,800
$1,050,280 $1,118,040
338,800
$711,480
372,680
$745,360
372,680†
$2,411,640
308,000**
$2,103,640
*Since April's expected sales and cost of goods sold are the same as the projections
for March, the desired ending inventory for March is the same as that for February.
†The
desired ending inventory for the quarter is equal to the desired ending inventory
on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
††50%
x $560,000 (where $560,000 = December cost of goods sold = December sales of
$800,000 x 70%)
PROBLEM 9-42 (CONTINUED)
4.
Cash disbursements budget:
20x1
January
February
$258,720
$284,592
$298,144
$ 841,456
352,800
388,080
426,888
1,167,768
$611,520
$672,672
$725,032
$2,009,224
Other expenses:
Sales salaries ..................................
Advertising and promotion.............
Administrative salaries ...................
Interest on bonds** .........................
Property taxes** ..............................
Sales commissions .........................
$ 42,000
32,000
42,000
30,000
-08,800
$ 42,000
32,000
42,000
-010,800
9,680
$ 42,000
32,000
42,000
-0-010,648
$ 126,000
96,000
126,000
30,000
10,800
29,128
Total cash payments for other
expenses ..........................................
Total cash disbursements ...................
$154,800
$766,320
$136,480
$809,152
$126,648
$851,680
$ 417,928
$2,427,152
Inventory purchases:
Cash payments for purchases
during the current month* ........
Cash payments for purchases
during the preceding
month† ........................................
Total cash payments for
inventory purchases .......................
March
First
Quarter
*40% of current month's purchases [see requirement (3)].
†60%
of the prior month's purchases [see requirement (3)].
**Bond interest is paid every six months, on January 31 and July 31. Property taxes also
are paid every six months, on February 28 and August 31.
PROBLEM 9-42 (CONTINUED)
5.
Summary cash budget:
20x1
January
Cash receipts [from req. (2)] ................ $ 826,000
Cash disbursements
[from req. (4)] ................................... (766,320)
Change in cash balance
during period due to operations .... $ 59,680
Sale of marketable securities
(1/2/x1) ..............................................
30,000
Proceeds from bank loan
(1/2/x1) .............................................. 200,000
Purchase of equipment ........................ (250,000)
Repayment of bank loan
(3/31/x1) ............................................
Interest on bank loan* ..........................
Payment of dividends ...........................
First
Quarter
$2,734,060
February
$ 908,600
March
$ 999,460
(809,152)
(851,680)
(2,427,152)
$ 99,448
$147,780
$ 306,908
30,000
200,000
(250,000)
(200,000)
(5,000)
(100,000)
Change in cash balance during
first quarter ......................................
Cash balance, 1/1/x1.............................
Cash balance, 3/31/x1...........................
(200,000)
(5,000)
(100,000)
$ (18,092)
70,000
$ 51,908
*$200,000  10% per year  1/4 year = $5,000
6.
Analysis of short-term financing needs:
Projected cash balance as of December 31, 20x0.......................................
Less: Minimum cash balance .......................................................................
Cash available for equipment purchases ....................................................
Projected proceeds from sale of marketable securities .............................
Cash available ................................................................................................
Less: Cost of investment in equipment .......................................................
Required short-term borrowing ....................................................................
$ 70,000
50,000
$ 20,000
30,000
$ 50,000
250,000
$(200,000)
PROBLEM 9-42 (CONTINUED)
7.
GLOBAL ELECTRONICS COMPANY
BUDGETED INCOME STATEMENT
FOR THE FIRST QUARTER OF 20X1
Sales revenue ........................................................................
Less: Cost of goods sold ......................................................
Gross margin .........................................................................
Selling and administrative expenses:
Sales salaries ...................................................................
Sales commissions ..........................................................
Advertising and promotion..............................................
Administrative salaries ....................................................
Depreciation .....................................................................
Interest on bonds .............................................................
Interest on short-term bank loan ....................................
Property taxes ..................................................................
Total selling and administrative expenses ..........................
Net income .............................................................................
8.
$2,912,800
2,038,960
$ 873,840
$126,000
29,128
96,000
126,000
150,000
15,000
5,000
5,400
552,528
$ 321,312
GLOBAL ELECTRONICS COMPANY
BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE FIRST QUARTER OF 20X1
Retained earnings, 12/31/x0 ........................................................................
Add: Net income ..........................................................................................
Deduct: Dividends .......................................................................................
Retained earnings, 3/31/x1 ..........................................................................
$ 215,000
321,312
100,000
$ 436,312
PROBLEM 9-42 (CONTINUED)
9.
GLOBAL ELECTRONICS COMPANY
BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash ................................................................................................................
Accounts receivable* ....................................................................................
Inventory ........................................................................................................
Buildings and equipment (net of accumulated depreciation)† ...................
Total assets ....................................................................................................
$
Accounts payable** .......................................................................................
Bond interest payable ...................................................................................
Property taxes payable .................................................................................
Bonds payable (10%; due in 20x6) ...............................................................
Common Stock ..............................................................................................
Retained earnings..........................................................................................
Total liabilities and stockholders' equity .....................................................
$ 447,216
10,000
1,800
600,000
1,000,000
436,312
$2,495,328
*Accounts receivable, 12/31/x0 .....................................................................
Sales on account [req. (1)] ............................................................................
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400) .............................................................
Accounts receivable, 3/31/x1 ........................................................................
$ 540,000
2,184,600
†Buildings
and equipment (net), 12/31/x0 ....................................................
Cost of equipment acquired .........................................................................
Depreciation expense for first quarter .........................................................
Buildings and equipment (net), 3/31/x1 .......................................................
$1,252,000
250,000
(150,000)
$1,352,000
**Accounts payable, 12/31/x0 .......................................................................
Purchases [req. (3)] .......................................................................................
Cash payments for purchases [req. (4)] ......................................................
Accounts payable, 3/31/x1 ............................................................................
PROBLEM 9-34 (25 MINUTES)
$ 352,800
2,103,640
(2,009,224)
$ 447,216
1.
Tuition revenue budget:
Current student enrollment…………………….
Add: 5% increase in student body……………
Total student body……………………………….
Less: Tuition-free scholarships……………….
Tuition-paying students…………………………
Credit hours per student per year…………….
Total credit hours………………………………..
Tuition rate per hour…………………………….
12,000
600
12,600
180
12,420
x 30
372,600
x $75
51,908
718,740
372,680
1,352,000
$2,495,328
(2,005,860)
$ 718,740
Forecasted tuition revenue…………………….
2.
$27,945,000
Faculty needed to cover classes:
Total student body…………………………………….
Classes per student per year [(15 credit hours ÷
3 credit hours) x 2 semesters]………………….
Total student class enrollments to be covered….
Students per class…………………………………….
Classes to be taught………………………………….
Classes taught per professor……………………….
Faculty needed…………………………………………
12,600
x 10
126,000
÷ 25
5,040
÷ 5
1,008
3.
Possible actions might include:
 Hire part-time instructors
 Use graduate teaching assistants
 Increase the teaching load for each professor
 Increase class size and reduce the number of sections to be offered
 Have students take an Internet-based course offered by another university
 Shift courses to a summer session
4.
No. While the number of faculty may be a key driver, the number of faculty is
highly dependent on the number of students. Students (and tuition revenue) are
akin to sales—the starting point in the budgeting process.
PROBLEM 9-35 (25 MINUTES)
1.
Sales budget
Sales (in sets) ..............................................
Sales price per set ......................................
Sales revenue ..............................................
2.
August
6,000

$60
$360,000
September
7,500

$60
$450,000
July
5,000
1,200
6,200
1,000
5,200
August
6,000
1,500
7,500
1,200
6,300
September
7,500
1,500
9,000
1,500
7,500
Production budget (in sets)
Sales ............................................................
Add: Desired ending inventory ..................
Total requirements ......................................
Less: Projected beginning inventory ........
Planned production ....................................
3.
July
5,000

$60
$300,000
Raw-material purchases
Planned production (sets) .............................
Raw material required per set
(board feet) .................................................
Raw material required for production
(board feet) .................................................
Add: Desired ending inventory of raw
material (board feet) ..................................
Total requirements.........................................
Less: Projected beginning inventory of
raw material (board feet) ...........................
Planned purchases of raw material
(board feet) .................................................
Cost per board foot ........................................
Planned purchases of raw material
(dollars) ......................................................
July
5,200

10
August
6,300

10
September
7,500

10
52,000
63,000
75,000
6,300
58,300
7,500
70,500
8,000
83,000
5,200
6,300
7,500
53,100
 $.60
64,200
 $.60
75,500
 $.60
$ 31,860
$ 38,520
$ 45,300
PROBLEM 9-35 (CONTINUED)
4.
Direct-labor budget
Planned production (sets) .............................
Direct-labor hours per set .............................
Direct-labor hours required ...........................
Cost per hour .................................................
Planned direct-labor cost ..............................
5.
July
5,200

1.5
7,800

$21
$163,800
August
6,300

1.5
9,450

$21
$198,450
September
7,500

1.5
11,250

$21
$236,250
The electronic version of the Solutions Manual “BUILD A SPREADSHEET
SOLUTIONS” is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
PROBLEM 9-36 (30 MINUTES)
1.
Sales are collected over a two-month period, 40% in the month of sale and 60% in
the following month. December receivables of $108,000 equal 60% of December’s
sales; thus, December sales total $180,000 ($108,000 ÷ .6). Since the selling price
is $20 per unit, Dakota Fan sold 9,000 units ($180,000 ÷ $20).
2.
Since the company expects to sell 10,000 units, sales revenue will total $200,000
(10,000 units x $20).
3.
Dakota Fan collected 40% of February’s sales during February, or $78,400. Thus,
February’s sales total $196,000 ($78,400 ÷ .4). Combining January sales ($76,000
+ $114,000), February sales ($196,000), and March sales ($200,000), the company
will report revenue of $586,000.
4.
Sixty percent of March’s sales will be outstanding, or $120,000 ($200,000 x 60%).
5.
Finished-goods inventories are maintained at 20% of the following month’s sales.
January sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 ÷ $20).
Thus, the December 31 inventory is 1,900 units (9,500 x 20%).
6.
February sales will total 9,800 units ($196,000 ÷ $20), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:
12/31/x0 inventory + X – January 20x1 sales = 1/31/x1 inventory
1,900 + X - 9,500 = 1,960
X – 7,600 = 1,960
X = 9,560
7.
Financing required is $3,500 ($15,000 minimum balance less ending cash balance
of $11,500):
Cash balance, January 1………………………… $ 22,500
Add: January receipts ($108,000 + $76,000)..
184,000
Subtotal………………………………………… $206,500
Less: January payments………………………… 195,000
Cash balance before financing…………………. $ 11,500
PROBLEM 9-37 (45 MINUTES)
1.
The benefits that can be derived from implementing a budgeting system include the
following:
 The preparation of budgets forces management to plan ahead and to establish
goals and objectives that can be quantified.
 Budgeting compels departmental managers to make plans that are in congruence
with the plans of other departments as well as the objectives of the entire firm.
 The budgeting process promotes internal communication and coordination.
 Budgets provide directions for day-to-day control of operations, clarify duties to
be performed, and assign responsibility for these duties.
 Budgets help in measuring performance and providing incentives.
 Budgets provide a vehicle for resource allocation.
PROBLEM 9-37 (CONTINUED)
2.
a. Schedule
Sales Budget
b. Subsequent Schedule
Production Budget
Selling Expense Budget
Budgeted Income Statement
Ending Inventory Budget (units)
Production Budget
Production Budget (units)
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Direct-Material Budget
Cost-of-Goods-Manufactured Budget
Direct-Labor Budget
Cost-of-Goods-Manufactured Budget
Manufacturing-Overhead Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Manufactured Budget
Cost-of-Goods-Sold Budget
Cost-of-Goods-Sold Budget (includes
ending inventory in dollars)
Budgeted Income Statement
Budgeted Balance Sheet
Selling Expense Budget
Budgeted Income Statement
Research and Development Budget
Budgeted Income Statement
Administrative Expense Budget
Budgeted Income Statement
Budgeted Income Statement
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Capital Expenditures Budget
Cash Receipts and Disbursements Budget
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Cash Receipts and Disbursements
Budget
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Budgeted Balance Sheet
Budgeted Statement of Cash Flows
Budgeted Statement of Cash Flows