Chapter 20
Master Budgets and Performance
Planning
QUESTIONS
1.
A budget helps managers control and monitor a business by 1) communicating
plans to employees, 2) coordinating the activities of different parts of the
organization, and 3) providing a basis for deciding whether actual performance is
acceptable (through benchmarking). Budgeting also helps 4) promote analysis, 5)
focus on the future, and 6) motivate employees.
2.
Two common benchmarks used by managers to evaluate performance are: past
performance and budgeted performance. Budgeted performance is generally more
useful because it is based on more current business conditions and information that
are presumably reflected in the numbers.
3.
Continuous budgeting provides managers a full set of updated budgets each time a
budget period goes by. In a changing environment, continuous budgeting should
provide superior information for effective planning.
4.
Three common short-term horizons for planning and budgeting purposes are:
monthly, quarterly, and annually. A semiannual planning horizon is also popular.
5.
Budgeting can be a strong positive motivating force if employees are involved or
consulted in the process. This participation promotes their commitment to reaching
the specified goals—such a process is called participatory budgeting. Alternatively,
if employees are not consulted, budgets may produce negative attitudes and
dysfunctional behavior in an organization.
6.
Budgeting helps management coordinate and plan business activities by providing
specific guidance for the individual activities of various departments and
employees.
7.
The sales budget reflects the expected sales to be made over a period of time, stated
in dollars and/or units. The sales budget is the most important of all the component
budgets of the master budget because it is used to set purchasing/production levels
and the related selling and administrative activities and expenditures.
8.
A selling expense budget is a plan of the expenses to be incurred to produce the
planned amount of sales. The capital expenditures budget lists dollar amounts of
plant assets to be disposed of and additional plant assets to be purchased during
the budget period.
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Solutions Manual, Chapter 20
1091
9.
Budgeting promotes good decision making by requiring managers to conduct
research (or analysis) and by focusing their attention on the future.
10. A cash budget shows the planned cash receipts and cash disbursements for each
budget period, including any loans to be received or repaid. Since the operating
budgets and the capital expenditures budget reflect transactions and events that
produce cash inflows and cash outflows, the cash budget can be completed only
after these companion budgets are completed.
11. A production budget shows the number of units to be produced each budget period.
Based on the number of units to be produced (taken from the production budget),
the manufacturing budget shows the budgeted costs for direct materials, direct
labor, and factory overhead.
12. A manager of an Apple store would have responsibility for and decision control over
budgeting for his/her store. A manager at the corporate offices may participate in,
but would not likely be involved in the budgeting for individual stores, but would
have responsibility and decision control over administrative budgets.
13. With the exception of the decision to operate, the manager of an Arctic Cat
distribution center is not likely to engage in a substantial amount of long-term
budgeting. Once the distribution center is up and operating, the vast majority of
decisions will focus on day-to-day operations. Most of the decisions concerning
freight carriers, pricing, and product mix are often made at the corporate level.
However, corporate level decision-making should incorporate information and
expectations provided by the operating managers of distribution centers.
14.
Budget Participant
Description
Sales manager ....................Information on estimated sales (units and dollars).
Production manager ...........Number of units to produce based on estimated sales.
Manufacturing manager .....Amount of direct materials, direct labor, and
manufacturing overhead to produce the estimated level
of production.
Sales manager ....................Cost of selling the estimated sales level.
General & administrative managers ...............Cost to support operations; most often are fixed costs.
Capital expenditures
Prepare plans to have available plant assets necessary
committee ...........................to carry on business activities.
Cash managers ...................Working with the above budgets, this team will prepare
cash flow analysis.
Accounting and finance
staff .....................................Financial budgets prepared from above information.
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1092
Financial & Managerial Accounting, 5th Edition
QUICK STUDIES
Quick Study 20-1 (5 minutes)
Correct answer is 4.
Quick Study 20-2 (10 minutes)
Three useful guidelines to help motivate employees with budgeting are
1. Employees affected by a budget should be consulted when it is prepared.
2. Goals reflected in a budget should be attainable.
3. Evaluations of performance should be made carefully with opportunities
to explain any failures and discrepancies.
Quick Study 20-3 (15 minutes)
Montel Company
Computation of Budgeted Cost of Purchases
For Month Ended July 31
Budgeted ending inventory ........................................................................
$ 40,000
Budgeted cost of goods to be sold [$600,000 x (1 – 40%)] .....................
360,000
Required available merchandise ................................................................
400,000
Less budgeted beginning inventory ..........................................................
50,000
Budgeted cost of purchases ......................................................................
$350,000
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Solutions Manual, Chapter 20
1093
Quick Study 20-4 (10 minutes)
1. The bottom-up approach to budgeting is considered more successful
because without active employee involvement in preparing budget
figures, there is a risk these employees will feel that the numbers fail to
reflect their special problems and needs. It also has the benefit of
directly involving those employees who regularly confront and deal with
day-to-day situations.
2. Examples of bottom-up budgeting include
 Involving the sales department in preparing sales estimates.
 Involving the production department in preparing its own expense
budget.
Quick Study 20-5 (15 minutes)
Computation of budgeted Accounts Receivable balance as of July 31
Sales month Total Sales
June.....................$420,000
July ...................... 398,000
Total ....................
Credit
Sales*
$168,000
159,200
Percent Still
Uncollected*
10%
80%
Amount
Uncollected
$ 16,800
127,360
$144,160
* Credit sales are 40% of total sales—of these credit sales, 20% are collected in the sale month,
70% are collected in the month after sale, and 10% are collected in the second month after sale.
Quick Study 20-6 (15 minutes)
Gado Merchandising Company
Cash Budget
For Month Ended March 31
Beginning cash balance ..........................................................
$ 72,000
Cash receipts from sales ........................................................
300,000
Total cash available .................................................................
Cash disbursements
Payments for purchases ........................................................
140,000
Salaries ....................................................................................80,000
Other expenses .......................................................................45,000
Repayment of bank loan ........................................................20,000
Total cash disbursements .....................................................
Ending cash balance ...............................................................
$372,000
285,000
$ 87,000
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1094
Financial & Managerial Accounting, 5th Edition
Quick Study 20-7 (10 minutes)
1. Activity-based budgeting requires managers to focus on the activities of
their departments, forecast the individual activity levels, identify the
resources required to carry out the activities, and estimate the costs of
those resources.
2. Traditional budgeting consists of listing the amount of resources
required for each department (such as salaries and utilities). Activitybased budgeting allows managers to better justify changes in budgeted
amounts based on changes in activity levels.
Quick Study 20-8 (15 minutes)
Forrest Company
Production Budget
For Month Ended November 30
Next month’s budgeted sales ............................................................... 350,000
Ratio of inventory to future sales ......................................................... x 10%
Budgeted ending inventory .................................................................. 35,000
Add budgeted sales for the month ...................................................... 400,000
Required units of available production ............................................... 435,000
Less beginning inventory ..................................................................... 40,000
Units to be produced ............................................................................. 395,000
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Solutions Manual, Chapter 20
1095
Quick Study 20-9 (15 minutes)
Forrest Company
Factory Overhead Budget
For Month Ended November 30
Units to be produced (from QS 20-8) ................................................... 395,000
Variable factory overhead rate per unit ...............................................
x
$1.50
Budgeted variable overhead .................................................................
$ 592,500
Budgeted fixed overhead ......................................................................4,600,000
Budgeted total overhead .......................................................................
$5,192,500
Quick Study 20-10 (10 minutes)
Grace
Sales Budget
For Month Ended June 30
Prior month’s unit sales ........................................................................
1,000
Plus 4% growth in unit sales ................................................................
40
Projected June sales (units) .................................................................
1,040
Selling price per unit ............................................................................. x
$250
Projected sales for June ....................................................................... $260,000
Quick Study 20-11 (10 minutes)
Grace
Selling Expense Budget
For Month Ended June 30
Budgeted sales (from QS 20-10) .......................................................... $260,000
Sales commission percent ................................................................... x
8%
Sales commissions ...............................................................................
20,800
Sales manager’s monthly salary ..........................................................
6,000
Projected selling expense for June ..................................................... $ 26,800
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1096
Financial & Managerial Accounting, 5th Edition
Quick Study 20-12 (10 minutes)
Grace
Budgeted Cash Receipts
For Month Ended June 30
Budgeted sales (from QS 20-10) .......................................................... $260,000
Less ending accounts receivable ($260,000 x 0.40) ........................... 104,000
Cash sales ($260,000 x 0.60)) ............................................................... 156,000
Collections of last month’s receivables* ............................................. 100,000
Total cash receipts ................................................................................ $256,000
*$250,000 x 40% = $100,000. Last month’s sales of $250,000 from QS 20-10.
Quick Study 20-13 (15 minutes)
Sales .......................................................................................................
Office salaries paid ...............................................................................
Accumulated depreciation ...................................................................
Amortization expense ...........................................................................
Interest paid on note payable ..............................................................
Cash dividends paid .............................................................................
Bank loan owed .....................................................................................
Cost of goods sold ................................................................................
BIS
BIS
BBS
BIS
BIS
NA
BBS
BIS
Quick Study 20-14 (10 minutes)
CANDLE SHOPPE
Cash Receipts Budget
For Month Ended September 30
Cash receipts from September cash sales (40% x $170,000) ............ $ 68,000
Collection of prior month’s receivables (60% x $150,000) ................
90,000
Total cash receipts ................................................................................ $158,000
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Solutions Manual, Chapter 20
1097
Quick Study 20-15 (10 minutes)
WELLS COMPANY
Budgeted Cash Receipts
For Month Ended November 30
Cash receipts from November cash sales (20% x $80,000) ............... $ 16,000
Collection of October’s sales (70% x $66,000) ....................................
46,200
Collection of September’s sales (10% x $55,000) ...............................
5,500
Total cash receipts ................................................................................ $ 67,700
Quick Study 20-16 (10 minutes)
GORDANDS
Cash Disbursements for Merchandise (Budgeted)
For Month Ended September 30
Cash disbursements for September purchases (25% x $720,000) ....$180,000
Cash disbursements for August purchases (75% x $600,000)........... 450,000
Total cash disbursements ....................................................................$630,000
Quick Study 20-17 (10 minutes)
MEYER CO.
Cash Disbursements for Merchandise (Budgeted)
For January, February, and March
January
February
March
Purchases ..................................................... $15,800
$18,600
$20,200
$ 7,440
$ 8,080
9,480
11,160
$16,920
$19,240
Cash disbursements for
Current month’s purchases (40%) ......... $ 6,320
Prior month’s purchases (60%) ...............
22,000*
Total cash disbursements for purchases ..... $28,320
* Accounts payable balance at December 31
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1098
Financial & Managerial Accounting, 5th Edition
Quick Study 20-18 (5 minutes)
RAIDER-X CORP.
Purchases Budget (in units)
For Month Ended April 30
Budgeted ending inventory (130% x 3,000) .........................................
3,900
Budgeted sales for April (units) ...........................................................
18,000
Required units of available inventory ..................................................
21,900
Less beginning inventory (units) .........................................................
(3,000)
Units to be purchased ...........................................................................
18,900
Quick Study 20-19 (15 minutes)
LEXI COMPANY
Merchandise Purchases Budget
For April, May, and June
April
May
Next month’s budgeted sales (units) ......... 1,220,000
Ratio of inventory to future sales ............... x
30%
980,000
x
30%
June
1,020,000
x
30%
366,000
294,000
306,000
Add budgeted sales (units) ......................... 1,040,000
1,220,000
980,000
Required units of available merch. ........... 1,406,000
1,514,000
1,286,000
Budgeted ending inventory (units) ............
Deduct beginning inventory (units) ........... (280,000)
Units to be purchased ................................. 1,126,000
(366,000)
1,148,000
(294,000)
992,000
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Solutions Manual, Chapter 20
1099
Quick Study 20-20 (10 minutes)
CHAMP, INC.
Production Budget
For Month Ended May 31
Next month’s budgeted sales (units) ...................................................
200
Ratio of inventory to future sales .........................................................
x 60%
Budgeted ending inventory (units) ......................................................
120
Add budgeted sales for the month (units) ..........................................
180
Required units of available production ...............................................
300
Deduct beginning inventory (units) .....................................................
(50)
Units to be produced .............................................................................
250
Quick Study 20-21 (10 minutes)
ZORTEK CORP.
Direct Materials Budget
For Month Ended January 31
Budget production (units) .....................................................................
400
Materials requirements per unit ...........................................................
x 5 lbs.
Materials needed for production (lbs.) ................................................
2,000
Add budgeted ending inventory (200* units x 5 lbs. per unit x 40%) ....
400
Total materials requirements (lbs.) ......................................................
2,400
Deduct beginning inventory (lbs.) ........................................................
(130)
Materials to be purchased (lbs.) ...........................................................
2,270
Materials price per pound .....................................................................
$
2
Total cost of direct materials purchases .............................................
$4,540
*February’s budgeted production.
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1100
Financial & Managerial Accounting, 5th Edition
Quick Study 20-22 (5 minutes)
TORA CO.
Direct Labor Budget
For Month Ended July 31
Budget production (units) .....................................................................
1,020
Labor requirements per unit (hours) ...................................................
x 2
Total labor hours needed ......................................................................
2,040
Labor rate (per hour) ............................................................................. $
20
Labor dollars .......................................................................................... $40,800
Quick Study 20-23 (10 minutes)
SCORA INC.
Sales Budget
For January, February, and March
Budgeted
Unit Sales
Budgeted Budgeted
Unit Price Total Sales
January .........................................................
1,200
$50
$ 60,000
February........................................................
2,000
50
100,000
March ............................................................
1,600
50
80,000
Totals for the quarter ...................................
4,800
$50
$240,000
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Solutions Manual, Chapter 20
1101
Quick Study 20-24 (10 minutes)
SCORA INC.
Cash Receipts Budget
For January, February, and March
January
February
March
Sales (from QS 20-23) .................................. $60,000
$100,000
$80,000
Less ending accts. receivable (60%) ......... 36,000
60,000
48,000
Cash sales (40% of sales) .......................... 24,000
40,000
32,000
Collections of prior month’s receivables ...... 15,000
36,000
60,000
Total cash receipts ..................................... $39,000
$76,000
$92,000
January
February
March
Budgeted sales (from QS 20-23) ................ $60,000
$100,000
$80,000
Sales commission percent ......................... x 10%
x
10%
x 10%
Cash receipts from
Quick Study 20-25 (10 minutes)
SCORA INC.
Selling Expense Budget
For January, February, and March
Sales commissions ....................................
6,000
10,000
8,000
Sales manager monthly salary ...................
6,000
6,000
6,000
Total selling expenses ............................... $12,000
$ 16,000
$14,000
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1102
Financial & Managerial Accounting, 5th Edition
Quick Study 20-26 (5 minutes)
MESSERS COMPANY
Cash Budget
For Month Ended February 28
Beginning cash balance ........................................................................ $ 20,000
Cash receipts .........................................................................................
75,000
Total cash available ...............................................................................
95,000
Cash disbursements.............................................................................. (100,250)
Preliminary cash balance ...................................................................... $ (5,250)
Additional loan from bank ....................................................................
10,250
Ending cash balance ............................................................................. $
5,000
Based on the cash budget above, the company must borrow $10,250 during
February to maintain a $5,000 cash balance.
Quick Study 20-27 (10 minutes)
1.
Sales (current year) .................................................................
(in € millions)
€25,400
Sales growth (€25,400 x 3%) ...................................................
762
Budgeted sales (next year) .....................................................
€26,162
2.
Note: Assume sales of €26,000 for this question.
Budgeted selling expenses (€26,000 x 20%) .........................
€5,200
Budgeted general and admin. expenses (€26,000 x 4%) .....
1,040
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Solutions Manual, Chapter 20
1103
EXERCISES
Exercise 20-1 (25 minutes)
KAYAK COMPANY
Cash Budget
For January, February, and March
January
February
March
Beginning cash balance ..............................$ 30,000
$ 30 ,000
$ 69,294
Cash receipts ............................................... 525,000
400,000
450,000
Total cash available ..................................... 555,000
430,000
519,294
Cash disbursements.................................... 475,000
350,000
525,000
February ($10,600 x 1%) ............................________
106
________
Preliminary cash balance ............................ 79,400
79,894
Interest expense
January ($60,000 x 1%) ............................
600
Additional loan from bank ..........................
(5,706)
35,706
Repayment of loan to bank ......................... (49,400)
(10,600)
________
Ending cash balance ...................................$ 30,000
$ 69,294
$ 30,000
Ending loan balance*...................................$ 10,600
$
$ 35,706
0
*Loan balance is $60,000 at the beginning of January. January’s ending loan balance is
computed as $60,000 – 49,400.
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1104
Financial & Managerial Accounting, 5th Edition
Exercise 20-2 (30 minutes)
1. Merchandise Purchases Budget
Note: Shaded numbers represent known information provided in the exercise.
Walker Company
Merchandise Purchases Budget
For July, August, and September
July
August
September
Next month’s budgeted sales .............. 315,000
270,000
200,000
(10)
Ratio of inventory to next month sales . x 15% (9)
x 15%
(9)
x 15%
(9)
(6)
40,500
(3)
30,000
Budgeted ending inventory .................
47,250
Add budgeted sales for month ............ 180,000
315,000
Required units available inventory ..... 227,250 (7)
355,500
(4)
300,000
(1)
(8)
47,250
(5)
40,500
(2)
Less beginning inventory ....................
27,000
Budgeted merchandise purchases ..... 200,250
270,000
308,250
259,500
The following notes (1) through (10) provide supporting calculations and explanations.
Notes: (1) September required units
Ending inventory
Add budgeted sales
Total required in September
(2) September beginning Inventory
Total required (1 above)
Less budgeted purchases
September beginning inventory
30,000
270,000
300,000
300,000
(259,500)
40,500
(3) September Beginning Inventory = August Ending Inventory
(4) August required units
Ending inventory
Add budgeted sales
Total required in August
40,500
315,000
355,500
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Solutions Manual, Chapter 20
1105
Exercise 20-2 (concluded)
Notes: concluded
(5) August beginning inventory
Total required (4 above)
Less budgeted purchases
August beginning inventory
355,500
(308,250)
47,250
(6) August Beginning Inventory = July Ending Inventory
(7) July required units
Ending inventory
Add budgeted sales
Total required in July
47,250
180,000
227,250
(8) July Beginning Inventory
Total required (7 above)
Less budgeted purchases
July beginning inventory
227,250
(200,250)
27,000
(9) Percent of Sales to be held as Ending Inventory
Ending inventory for August
= 40,500
September Sales
270,000
This percentage is constant for the three months.
(10) October expected sales
September Ending Inventory
Required %
=
30,000
15%
= 15%
= 200,000
2. Monthly ending inventory is 15% of next month’s sales (see note #9).
3. October budgeted sales = 200,000 (see note #10 above).
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1106
Financial & Managerial Accounting, 5th Edition
Exercise 20-3 (25 minutes)
ACCO COMPANY
Cash Budget
For Month Ended July 31
Beginning cash balance ................................................
$
50,000
Cash receipts from sales (note 1) ..................................1,364,000
Total cash available .......................................................
$1,414,000
Cash disbursements
Payments for merchandise (note 2)............................. 730,000
Salaries ......................................................................... 275,000
Other expenses ............................................................ 200,000
Accrued taxes ..............................................................
80,000
Interest on bank loan ..................................................
6,600
Total cash disbursements ............................................
1,291,600
Ending cash balance .....................................................
$ 122,400
Supporting calculations
(1) Cash receipts in July from sales
From May sales ($1,720,000 x 20%) ..............
From June sales ($1,200,000 x 50%) .............
From July sales ($1,400,000 x 30%) ..............
Total .................................................................
$ 344,000
600,000
420,000
$1,364,000
(2) Cash disbursements in July for merchandise
For June purchases ($700,000 x 40%) ..........
$ 280,000
For July purchases ($750,000 x 60%) ...........
450,000
Total .................................................................
$ 730,000
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Solutions Manual, Chapter 20
1107
Exercise 20-4 (45 minutes)
ACCO COMPANY
Budgeted Income Statement
For Month Ended July 31
Sales (from Exercise 20-3) ..................................................
$1,400,000
Cost of goods sold (note 1) .............................................
770,000
Gross profit .....................................................................
630,000
Operating expenses
Salaries expense (note 2) .............................................. $285,000
Depreciation expense (from Exercise 20-3) ....................
36,000
Other cash expenses (from Exercise 20-3) ..................... 200,000
Bank loan interest expense .........................................
6,600
Total expenses ................................................................
527,600
Income before taxes .......................................................
102,400
Income tax expense (note 3) ............................................
30,720
Net income.......................................................................
$
71,680
Supporting calculations
(1) Cost of goods sold
Sales ................................................................ $1,400,000
Cost percent ....................................................
55%
Cost of goods sold ......................................... $ 770,000
(2) Salaries expense
Cash paid ......................................................... $ 275,000
Less beginning payable .................................
(50,000)
Plus ending payable .......................................
60,000
Salaries expense ............................................. $ 285,000
(3) Income tax expense
Pre-tax income ................................................ $ 102,400
Tax rate ............................................................
30%
Income tax expense ........................................ $ 30,720
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1108
Financial & Managerial Accounting, 5th Edition
Exercise 20-4 (Continued)
ACCO COMPANY
Budgeted Balance Sheet
As of July 31
ASSETS
Cash (from Exercise 20-3) ..................................................
Accounts receivable (note 1) ..........................................
Inventory (given) ..............................................................
Total current assets .......................................................
Equipment ......................................................................
$1,600,000
Less accumulated depreciation (note 2) ....................... 316,000
Total assets ....................................................................
$ 122,400
1,220,000
60,000
1,402,400
1,284,000
$2,686,400
LIABILITIES AND EQUITY
Liabilities
Accounts payable (note 3) ............................................
$ 300,000
Salaries payable .......................................................... 60,000
Income taxes payable ................................................. 30,720
Total current liabilities ................................................ 390,720
Bank loan payable ....................................................... 660,000
Stockholders’ equity
Common stock ............................................................. 600,000
Retained earnings (note 4) ...........................................1,035,680
Total liabilities and equity .............................................
1,050,720
1,635,680
$2,686,400
Supporting calculations
(1) Accounts receivable
June sales (20% x $1,200,000) ...................................
$ 240,000
July sales (70% x $1,400,000)...................................
980,000
Total ..............................................................................
$ 1,220,000
(2) Accumulated depreciation
Beginning .....................................................................
$ 280,000
Expense ........................................................................
36,000
Ending ..........................................................................
$ 316,000
(3) Accounts payable
Purchases ....................................................................
$ 750,000
Percent unpaid.............................................................
40%
Payable .........................................................................
$ 300,000
(4) Retained earnings
Beginning .....................................................................
$ 964,000
Net income ...................................................................
71,680
Ending ..........................................................................
$1,035,680
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Solutions Manual, Chapter 20
1109
Exercise 20-5 (30 minutes)
Preliminary calculations (sales, cost of sales, beginning and ending inventory)
August
September
October
November
Sales ........................................................... $325,000
$ 320,000
$250,000
$310,000
Cost to sales percent ................................. x 60%
x 60%
x 60%
x 60%
Cost of goods sold ..................................... 195,000
192,000
150,000
186,000
Beginning inventory percent ..................... x 20%
x 20%
x 20%
x 20%
Beginning inventory................................... $ 39,000
$ 38,400
$ 30,000
$ 37,200
Ending inventory (from next month) ......... $ 38,400
$ 30,000
$ 37,200
Merchandise purchases budgets (* denotes from preliminary calculations)
August
Budgeted ending inventory (*) ........................
$ 38,400
Add budgeted cost of goods sold (*) .............195,000
Cost of available merchandise.......................233,400
Less beginning inventory (*)...........................(39,000)
Budgeted purchases .......................................
$194,400
September
October
$ 30,000 $ 37,200
192,000
150,000
222,000
187,200
(38,400)
(30,000)
$183,600 $157,200
Cash payments for purchases (on accounts) in October
Dollars
Percent
For purchases from August ...........................
$194,400
For purchases from September .....................183,600
For purchases from October ..........................157,200
Total cash payments for purchases ..............
15%
35
50
Paid
$ 29,160
64,260
78,600
$172,020
Exercise 20-6 (25 minutes)
1. Budgeted merchandise purchases
June
July
Ending accounts payable .........................
$ 200,000 $ 235,000
Cash paid on accounts payable ...............
1,490,000
1,425,000
Total payable during month ......................
1,690,000
1,660,000
Less beginning accounts payable ...........
(150,000)
(200,000)
Purchases during month ..........................
$1,540,000 $1,460,000
August
$ 195,000
1,495,000
1,690,000
(235,000)
$1,455,000
2. Budgeted cost of goods sold
June
July
Beginning inventory ..................................
$ 250,000 $ 400,000
Plus purchases ..........................................
1,540,000
1,460,000
Less ending inventory ...............................(400,000)
(300,000)
Cost of goods sold ....................................
$1,390,000 $1,560,000
August
$ 300,000
1,455,000
(330,000)
$1,425,000
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1110
Financial & Managerial Accounting, 5th Edition
Exercise 20-7 (40 minutes)
1.
Preliminary calculations (sales, cost of sales, beginning inventory)
July
August
September
Budgeted sales...............................
$350,000 $290,000
$320,000
Cost to sales percent .....................
x
70% x
70%
x
70%
Budgeted cost of goods sold ........245,000
203,000
224,000
Budgeted inventory percent ..........
x
20% x
20%
x
20%
Budgeted beginning inventory .........
$ 49,000 $ 40,600
$ 44,800
October November
$275,000 $265,000
x
70% x
70%
192,500
185,500
x
20% x
20%
$ 38,500 $ 37,100
Budgeted merchandise purchases
July
Budgeted ending inventory .................
$ 40,600
Budgeted cost of goods sold ..............
245,000
Cost of available merchandise ............
285,600
Less beginning inventory ....................(49,000)
Budgeted purchases ............................
$236,600
August September
$ 44,800
$ 38,500
203,000
224,000
247,800
262,500
(40,600)
(44,800)
$207,200
$217,700
October
$ 37,100
192,500
229,600
(38,500)
$191,100
2.
Budgeted payments on accounts payable in September
For purchases from September ..........
For purchases from August .................
For purchases from July ......................
Total payments .....................................
Purchases
$217,700
207,200
236,600
Percent Paid
25%
60
15
Dollars Paid
$ 54,425
124,320
35,490
$214,235
Budgeted payments on accounts payable in October
For purchases from October ...............
For purchases from September ..........
For purchases from August .................
Total payments .....................................
Purchases
$191,100
217,700
207,200
Percent Paid
25%
60
15
Dollars Paid
$ 47,775
130,620
31,080
$209,475
3.
Budgeted balance of accounts payable at the end of September
Purchases
From purchases in September ............$217,700
From purchases in August .................. 207,200
Total .......................................................
Percent Unpaid
75%
15
Dollars Unpaid
$163,275
31,080
$194,355
Budgeted balance of accounts payable at the end of October
Purchases
From purchases in October .................$191,100
From purchases in September ............ 217,700
Total .......................................................
Percent Unpaid
75%
15
Dollars Unpaid
$143,325
32,655
$175,980
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Solutions Manual, Chapter 20
1111
Exercise 20-8 (15 minutes)
ELECTRO COMPANY
Production Budget
Second and Third Quarters
Second
Quarter
Third
Quarter
Budgeted ending inventories
Second quarter (20% x 525,000) ...........................................
105,000
Third quarter (20% x 475,000) ...............................................
95,000
Add budgeted sales .................................................................
450,000
525,000
Required units of available production .................................
555,000
620,000
Less actual or budgeted beginning inventories ...................
(75,000) (105,000)
Units to be produced ...............................................................
480,000
515,000
Exercise 20-9 (15 minutes)
ELECTRO COMPANY
Direct Materials Budget
Second Quarter
Units to be produced (from Exercise 20-8) .................................
Materials requirement per unit ...............................................
480,000
x
0.80
Materials needed for production (units) ................................
384,000
Add budgeted ending inventory (units)* ...............................
206,000
Total materials requirements (units) ......................................
590,000
Deduct beginning inventory (units)** ....................................
(192,000)
Materials to be purchased (units) .........................................
398,000
Material price per unit..............................................................
x
Total cost of direct materials purchases ...............................
$67,660,000
* (515,000 x 0.80) x 50%
$170
**384,000 x 50%
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1112
Financial & Managerial Accounting, 5th Edition
Exercise 20-10 (15 minutes)
ELECTRO COMPANY
Direct Labor Budget
Second Quarter
Units to be produced (from Exercise 20-8) .................................
480,000
Labor requirements per unit (hours) .....................................x
4
Total labor hours needed ........................................................ 1,920,000
Labor rate (per hour) ...............................................................x
$12
Labor dollars ............................................................................$23,040,000
Exercise 20-11 (10 minutes)
HECTOR COMPANY
Budgeted Cash Disbursements
For August and September
August
Sept.
Payments for merchandise* ...................................................
$14,400
$19,200
Selling expenses (10% of sales) ............................................. 7,200
6,600
Administrative expenses (8% of sales) ................................. 5,760
5,280
Rent expense............................................................................ 7,400
7,400
Total cash disbursements ......................................................
$34,760
$38,480
*Equals prior month’s purchases. Note that depreciation expense is excluded since it is
a non-cash expense.
*
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Solutions Manual, Chapter 20
1113
Exercise 20-12 (15 minutes)
JASPER COMPANY
Cash Receipts Budget
For April, May, and June
April
May
June
Sales..............................................................$525,000
$535,000
$560,000
Less ending accts. receivable (70%) ......... 367,500
374,500
392,000
Cash sales (30% of sales) .......................... 157,500
160,500
168,000
Collections of prior month’s receivables ...... 400,000
367,500
374,500
Total cash receipts .....................................$557,500
$528,000
$542,500
Cash receipts from
Exercise 20-13 (20 minutes)
KARIM CORP.
Cash Budget
For July, August, and September
July
August
Sept.
Beginning cash balance .............................. $ 8,400
$ 8,000
$ 8,000
Cash receipts ............................................... 20,000
26,000
40,000
Total cash available .................................... 28,400
34,000
48,000
Cash disbursements.................................... 28,000
30,000
22,000
Interest on bank loan
August ($7,600 x 1%) ................................
76
September ($11,676 x 1%)* ...................... ______
______
117
400
$ 3,924
$25,883
7,600
4,076
Repayment of loan to bank ......................... ______
_______
11,676
Ending cash balance ................................... $ 8,000
$ 8,000
$14,207
Loan balance, end of month ....................... $ 7,600
$11,676
$
Preliminary cash balance ........................... $
Additional loan from bank ..........................
0
* Rounded to nearest whole dollar.
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1114
Financial & Managerial Accounting, 5th Edition
Exercise 20-14 (20 minutes)
FOYERT CORP.
Cash Budget
For October, November, and December
Oct.
Nov.
Dec.
Beginning cash balance* ............................$ 30,000
$ 30,000
$ 30,000
Cash receipts ............................................... 110,000
80,000
100,000
Total cash available .................................... 140,000
110,000
130,000
Cash disbursements.................................... 120,000
75,000
80,000
Interest on bank loan
October ($10,000 x 1%) ............................
100
November ($20,100 x 1%) .........................
201
December ($15,300 x 1%) ......................... _______
_______
153
Preliminary cash balance ........................... $ 19,900
$ 34,799
$ 49,847
Repayment of loan to bank ......................... _______
4,799
15,301
Ending cash balance ................................... $ 30,000
$ 30,000
$ 34,546
Loan balance, end of month ....................... $ 20,100
$ 15,301
$
Additional loan from bank .......................... 10,100
0
*October’s beginning cash balance includes an outstanding loan balance of $10,000.
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Solutions Manual, Chapter 20
1115
Exercise 20-15 (25 minutes)
CASTOR, INC.
Cash Budget
For April, May, and June
April
May
June
Beginning cash balance* ............................ $12,000
$12,000
$12,279
Cash receipts**............................................. 28,000
36,000
32,000
Total cash available .................................... 40,000
48,000
44,279
16,800
17,200
Cash disbursements
Payments for merchandise ......................... 20,200
Sales commissions (10% of sales) ............
3,200
4,000
2,400
Shipping (2% of sales) ................................
640
800
480
Office salaries ..............................................
5,000
5,000
5,000
Rent ...............................................................
3,000
3,000
3,000
May ($6,060 x 1%) ..................................... ______
61
_______
Preliminary cash balance ........................... $7,940
$18,339
$16,199
Repayment of loan to bank ......................... _______
6,060
_______
Ending cash balance ................................... $12,000
$12,279
$16,199
Loan balance, end of month ....................... $ 6,060
$
$
Interest on bank loan
April ($2,000 x 1%) ....................................
Additional loan from bank ..........................
20
4,060
0
0
*April’s beginning cash balance includes an outstanding loan payable of $2,000.
**Per cash receipts budget on next page
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1116
Financial & Managerial Accounting, 5th Edition
Exercise 20-15 (continued)
CASTOR, INC.
Cash Receipts Budget
For April, May, and June
April
May
June
Sales.............................................................. $32,000
$40,000
$24,000
Less ending accts. receivable (50%) ......... 16,000
20,000
12,000
Cash sales (50% of sales) .......................... 16,000
20,000
12,000
Collections of prior month’s receivables ...... 12,000
16,000
20,000
Total cash receipts ..................................... $28,000
$36,000
$32,000
August
Sept.
Sales.............................................................. $64,000
$80,000
$48,000
Less ending accts. receivable (80%) ......... 51,200
64,000
38,400
Cash sales (20% of sales) .......................... 12,800
16,000
9,600
Collections of prior month’s receivables ...... 45,000
51,200
64,000
Total cash receipts ..................................... $57,800
$67,200
$73,600
Cash receipts from
Exercise 20-16 (30 minutes)
(1)
KELSEY
Cash Receipts Budget
For July, August, and September
July
Cash receipts from
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Solutions Manual, Chapter 20
1117
Exercise 20-16 (continued)
(2)
KELSEY
Cash Budget
For July, August, and September
July
August
Sept.
Beginning cash balance* ............................
$15,000
$15,000
$25,504
Cash receipts (from part 1) .........................
57,800
67,200
73,600
Total cash available ....................................
72,800
82,200
99,104
Payments for merchandise .........................
40,400
33,600
34,400
Sales commissions (10% of sales) ............
6,400
8,000
4,800
Office salaries ..............................................
4,000
4,000
4,000
Rent ...............................................................
6,500
6,500
6,500
August ($4,550 x 1%) ................................ _______
46
_______
$15,450
$30,054
$49,404
Repayment of loan to bank .........................
450
4,550
______
Ending cash balance ...................................
$15,000
$25,504
$49,404
Loan balance, end of month .......................
$ 4,550
$
$
Cash disbursements
Interest on bank loan**
July (5,000 x 1%) .......................................
Preliminary cash balance ...........................
50
Additional loan from bank ..........................
0
0
*July’s beginning cash balance includes a loan payable of $5,000.
** Rounded to the nearest dollar. Answers vary slightly if rounded to the nearest cent.
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1118
Financial & Managerial Accounting, 5th Edition
Exercise 20-17 (15 minutes)
ZETROV COMPANY
Budgeted Balance Sheet
As of March 31
ASSETS
Cash ................................................................................
$ 50,000
Accounts receivable ($140,000 x 70%).............................
98,000
Merchandise inventory (600 units x $35) ........................
21,000
Total current assets .......................................................
169,000
Equipment ...................................................................... $84,000
Less accumulated depreciation (note 1) ......................
47,000
Total assets ....................................................................
37,000
$206,000
LIABILITIES AND EQUITY
Liabilities
Accounts payable ....................................................... $89,000
Income taxes payable .................................................
26,000
Bank loan payable .......................................................
10,000
125,000
Stockholders’ equity
Common stock .............................................................
25,000
Retained earnings (note 2) ..........................................
56,000
Total liabilities and equity .............................................
81,000
$206,000
Supporting calculations
(1) Accumulated depreciation
Beginning .....................................................................
$46,000
Depreciation expense .................................................
1,000
Ending ..........................................................................
$47,000
(2) Retained earnings
Beginning .....................................................................
$ 8,000
Net income ...................................................................
48,000
Ending ..........................................................................
$56,000
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Solutions Manual, Chapter 20
1119
Exercise 20-18 (15 minutes)
FORTUNE, INC.
Budgeted Income Statement
For Quarter Ended March 31
Sales (note 1).....................................................................
$3,750,000
Cost of goods sold (note 2) .............................................
2,100,000
Gross profit .....................................................................
1,650,000
Operating expenses
Commissions expense (8% of sales) ............................. $300,000
Rent expense ($14,000 x 3) .............................................
42,000
Advertising expense (15% of sales) ............................... 562,500
Office salaries expense ($75,000 x 3) ............................ 225,000
Depreciation expense ($40,000 x 3) ............................... 120,000
Interest expense ($250,000 x 15% x 3/12).........................
Total operating expenses ............................................
9,375
1,258,875
Income before income taxes .........................................
391,125
Income tax expense (note 3) ............................................
117,338
Net income.......................................................................
$ 273,787
Supporting calculations
(1) Sales
Unit sales (45,000 + 55,000 + 50,000) .............
Unit price .........................................................
Sales dollars ....................................................
150,000
$25
$3,750,000
(2) Cost of goods sold
Unit sales (45,000 + 55,000 + 50,000) .............
Unit cost...........................................................
Cost of goods sold dollars .............................
150,000
$14
$2,100,000
(3) Income tax expense
Pre-tax income ................................................
Tax rate ............................................................
Income tax expense ........................................
$ 391,125
30%
$ 117,338*
* Rounded to the nearest dollar.
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1120
Financial & Managerial Accounting, 5th Edition
Exercise 20-19 (10 minutes)
MANNER COMPANY
Direct Labor Budget
For July, August, and September
July
Budgeted production (units) ......................
August
620
Labor requirements per unit (hours) ......... x
Total labor hours needed ............................
2
680
x
1,240
Labor rate per hour ...................................... $
20
Labor dollars ................................................ $24,800
Sept.
2
540
x
1,360
$
20
2
1,080
$
21
$27,200
$22,680
May
June
Exercise 20-20 (15 minutes)
HOSPITABLE CO.
Production Budget
For April, May, and June
April
Next month’s budgeted sales (units) .........
580
540
620
Ratio of inventory to future sales ...............
x 25%
x 25%
x 25%
Budgeted ending inventory (units) ...........
145
135
155
Add budgeted sales for the month ............
500
580
540
Required units of available production .....
645
715
695
Deduct beginning inventory (units) ...........
(190)
(145)
(135)
Units to be produced ...................................
455
570
560
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Solutions Manual, Chapter 20
1121
Exercise 20-21 (15 minutes)
HOSPITABLE CO.
Direct Materials Budget
For April, May, and June
April
Budgeted production (units)* .....................
May
455
June
570
Materials requirements per unit .................
x
Materials needed for production (lbs.) ......
2,275
2,850
2,800
Add budgeted ending inventory** ..............
855
840
810
Total materials requirements (lbs.) ............
3,130
3,690
3,610
Deduct beginning inventory (lbs.) ..............
Materials to be purchased (lbs.) .................
5
x
(663)
2,467
5
560
x
(855)
5
(840)
2,835
2,770
* From Exercise 20-20
** 30% of next month’s materials needed for production.
July’s materials needed for production (2,700 pounds = 540 units x 5) is given.
Exercise 20-22 (10 minutes)
(1) h
(2) d
(3) g
(4) e
(5) i
(6) b
(7) a
(8) f
(9) c
Exercise 20-23 (5 minutes)
Potential negative outcomes from participatory budgeting include the
potential for employees to (1) understate sales budgets and//or overstate
expense budgets, (2) commit unethical or fraudulent acts in order to meet
budgeted results, and (3) always spend budgeted amounts, even if on
unnecessary items.
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1122
Financial & Managerial Accounting, 5th Edition
Exercise 20-24 (15 minutes)
RENDER CO. CPA
Activity-Based Budget
For Year Ending December 31, 2013
Budgeted
Hours
Budgeted
Price/hour
Budgeted
Cost
Data-entry .....................................................
2,200
$10
$ 22,000
Auditing ........................................................
4,800
40
192,000
Tax .................................................................
4,300
50
215,000
Consulting ....................................................
750
50
37,500
Total ..............................................................
12,050
$466,500
Exercise 20-25 (15 minutes)
RIDA INC.
Direct Materials Budget
Second Quarter
Units to be produced ...............................................................
Materials requirement per unit ............................................... x
240,000
.60
Materials needed for production (units) ................................
144,000
Add budgeted ending inventory (units)* ...............................
15,750
Total materials requirements (units) ......................................
159,750
Deduct beginning inventory (units)** ....................................
(72,000)
Materials to be purchased (units) .........................................
87,750
$175
Material price per unit.............................................................. x
Total cost of direct materials purchases ...............................$15,356,250
*(52,500 x 0.60) x 50%
**144,000 x 50%
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Solutions Manual, Chapter 20
1123
Exercise 20-26 (15 minutes)
1.
RIDA INC.
Direct Labor Budget
Second Quarter
Units to be produced ...............................................................
Labor requirements per unit (hours) ..................................... x
Total labor hours needed ........................................................
Labor rate (per hour) ............................................................... x
240,000
4
960,000
$9
Labor dollars ............................................................................ $8,640,000
2.
RIDA INC.
Factory Overhead Budget
Second Quarter
Total labor hours needed ........................................................
Variable overhead rate per DL hour .......................................x
960,000
$11
Budgeted variable overhead ...................................................$10,560,000
Budgeted fixed overhead ........................................................
450,000
Budgeted total overhead .........................................................$11,010,000
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1124
Financial & Managerial Accounting, 5th Edition
Exercise 20-27 (20 minutes)
RAD CO.
Direct Materials Budget
For April, May, and June
April
Budget production (units) ...........................
May
442
570
x
Materials needed for production (lbs.) ......
2,210
2,850
2,720
Add budgeted ending inventory* ...............
855
816
810
Total materials requirements (lbs.) ............
3,065
3,666
3,530
Materials to be purchased (lbs.) .................
(663)
2,402
x
5
544
Materials requirements per unit .................
Deduct beginning inventory (lbs.) ..............
5
June
(855)
2,811
x
5
(816)
2,714
*30% of next month’s materials needed for production. July’s materials needed for
production equals 2,700 pounds (540 units x 5).
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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Solutions Manual, Chapter 20
1125
Exercise 20-28 (15 minutes)
1.
RAD CO.
Direct Labor Budget
For April, May, and June
April
Budget production (units) ...........................
May
June
442
570
544
Direct labor hours per unit .......................... x 0.50
x 0.50
x 0.50
221
285
272
Labor rate (per hour) ................................... x $16
x $16
x $16
Labor cost..................................................... $3,536
$4,560
$4,352
May
June
Total labor hours needed ............................
2.
RAD CO.
Factory Overhead Budget
For April, May, and June
April
Total labor hours needed ............................
221
285
272
Variable factory overhead rate ................... x $20
x $20
x $20
Budgeted variable overhead ....................... $4,420
$5,700
$5,440
Budgeted fixed overhead ............................ 8,000
8,000
8,000
Total factory overhead ................................$12,420
$13,700
$13,440
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1126
Financial & Managerial Accounting, 5th Edition
PROBLEM SET A
Problem 20-1A (60 minutes)
Part 1
KEGGLER’S SUPPLY
Merchandise Purchases Budgets
For March, April, and May
March
April
May
FOOTWEAR
Budgeted sales for next month ........................... 25,000
Ratio of ending inventory to future sales ........... 30%
Budgeted ending inventory ................................. 7,500
Add budgeted sales .............................................. 15,000
Required units of available merchandise ........... 22,500
Less actual (or budgeted) beginning inventory .......(20,000)
Budgeted purchases ............................................ 2,500
32,000
30%
9,600
25,000
34,600
(7,500)
27,100
35,000
30%
10,500
32,000
42,500
(9,600)
32,900
SPORTS EQUIPMENT
Budgeted sales for next month ........................... 90,000
Ratio of ending inventory to future sales ........... 30%
Budgeted ending inventory ................................. 27,000
Add budgeted sales .............................................. 70,000
Required units of available merchandise ........... 97,000
Less actual (or budgeted) beginning inventory .......(80,000)
Budgeted purchases ............................................ 17,000
95,000
30%
28,500
90,000
118,500
(27,000)
91,500
90,000
30%
27,000
95,000
122,000
(28,500)
93,500
APPAREL
Budgeted sales for next month ........................... 38,000
37,000
25,000
30%
30%
30%
Budgeted ending inventory ................................. 11,400
11,100
7,500
Add budgeted sales .............................................. 40,000
38,000
37,000
Required units of available merchandise ........... 51,400
49,100
44,500
Less actual (or budgeted) beginning inventory .......(50,000)
(11,400)
(11,100)
Budgeted purchases ............................................ 1,400
37,700
33,400
Ratio of ending inventory to future sales ...........
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Solutions Manual, Chapter 20
1127
Problem 20-1A (Continued)
Part 2. Analysis Component
The factor that causes the first month’s purchases to be so much smaller is
the excess inventory that accumulated just prior to the budgeting period.
For example, 20,000 units of footwear are in March’s beginning inventory;
however, March sales are budgeted at only 15,000 units. Accordingly,
budgeted purchases are smaller because it is management’s goal to
reduce the inventory to only 30% of the next month’s sales.
This overstocking factor could exist for a number of reasons, including:
 Management may have simply lost sight of inventory levels, thereby
allowing them to reach inappropriately high levels.
 There may have been some potentially disruptive factor (such as a
strike, bad weather, or political uncertainty) that would have temporarily
interrupted the smooth delivery of products from the supplier. Thus,
management would have found it prudent to accumulate an excess as a
temporary safety stock against an interrupted supply.
 The company’s suppliers may have only recently become more
dependable than they were in the past.
 A supplier may have recently located a new distribution facility nearby,
with the result that the merchandise can be delivered more promptly.
 Competition among suppliers may have caused them to become more
customer oriented, with the result that they will deliver products in
smaller lots more quickly.
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1128
Financial & Managerial Accounting, 5th Edition
Problem 20-2A (50 minutes)
ONEIDA COMPANY
Cash Budget
For September, October, and November
September
Beginning balance ..........................................$
October November
5,000
$ 99,250
$ 69,500
Collection on accounts receivable* ............ 159,250
249,250
338,100
Receipts from bank loan .............................. 100,000
_______
_______
Total cash available ........................................ 264,250
348,500
407,600
Cash disbursements
Payments on accounts payable** ............... 100,000
217,000
228,000
Cash receipts
Payroll ............................................................
20,000
22,000
24,000
Rent ................................................................
10,000
10,000
10,000
Other expenses .............................................
35,000
30,000
20,000
Repayment on bank loan .............................
100,000
Interest on bank loan*** ............................... ________
________
3,000
Total cash disbursements ........................... 165,000
279,000
385,000
Ending cash balance ......................................$ 99,250
$ 69,500
$ 22,600
*** Interest at 12% on $100,000 for 3 months is $3,000.
Supporting schedules
Collections of credit sales*
August September October November
Aug. sales ($215,000)—[25%: 45%: 20%: 9%] ................
$ 53,750
$ 96,750 $ 43,000
$ 19,350
Sept. sales ($250,000)—[25%: 45%: 20%] ....................... 62,500 112,500
50,000
Oct. sales ($375,000)—[25%: 45%] .................................. 93,750
168,750
Nov. sales ($400,000)—[25%] .......................................... 100,000
Total ..................................................................................
$ 53,750
$159,250 $249,250
$338,100
Payments on credit purchases**
August September October November
Aug. purchases ($125,000)—(0%: 80%: 20%) ........................................
$
0
$100,000 $ 25,000
$
Sept. purchases ($240,000)—(0%: 80%: 20%) .......................................
0 192,000
48,000
Oct. purchases ($225,000)—(0%: 80%) ..................................................
0
180,000
Nov. purchases ($200,000)—(0%) ..........................................................
0
Total .........................................................................................................
$
0
$100,000 $217,000
$228,000
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Solutions Manual, Chapter 20
1129
Problem 20-3A (70 minutes)
Part 1
Cash collections of credit sales (accounts receivable)
From sales in
Total
% Collected
April ..............................................$ 720,000
28%
May ............................................... 360,000
50
...............................................
28
June..............................................1,080,000
20
..............................................
50
July ............................................... 900,000
20
Total collected .............................
June
$201,600
180,000
July
$100,800
216,000
540,000
_______ 180,000
$597,600 $820,800
Part 2
Budgeted ending inventories (in units)
April
Next month’s budgeted sales ..................... 2,000
Ratio of inventory to future sales ............... 20%
Budgeted “base” ending inventory ...........
400
Plus safety stock..........................................
100
Budgeted ending inventory ........................
500
May
6,000
20%
1,200
100
1,300
June
5,000
20%
1,000
100
1,100
July
3,800
20%
760
100
860
Part 3
AZTEC COMPANY
Merchandise Purchases Budgets
For May, June, and July
May
June
July
Budgeted ending inventory (from part 2) ............
1,300
1,100
860
Add budgeted sales ..........................................
2,000
6,000
5,000
Required units of available merchandise .......
3,300
7,100
5,860
(1,300)
(1,100)
Deduct beginning inventory ............................
(500)
Budgeted purchases (units) ............................
2,800
5,800
4,760
Budgeted cost per unit .....................................
$110
$110
$110
Budgeted cost of merchandise purchases ........$308,000
$638,000
$523,600
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1130
Financial & Managerial Accounting, 5th Edition
Problem 20-3A (Continued)
Part 4
Cash payments on product purchases (for June and July)
From purchases in
Total
% Paid
June
May ................................................
$308,000
40%
$123,200
June...............................................638,000
60
382,800
..............................................
40
________
July ................................................523,600
60
Total paid ......................................
$506,000
July
$255,200
314,160
$569,360
Part 5
AZTEC COMPANY
Cash Budget
June and July
June
July
Beginning cash balance ................................................ $100,000
$100,000
Cash receipts from customers ..................................... 597,600
820,800
Total available cash ....................................................... 697,600
920,800
Cash disbursements
Payments on purchases ............................................. 506,000
569,360
Selling and administrative expenses......................... 110,000
110,000
Interest expense* .........................................................
250
437
Total disbursements ................................................... 616,250
679,797
Preliminary cash balance ..............................................
81,350
241,003
Additional loan from bank ............................................
18,650
0
Repayment of loan to bank ........................................... ________
43,650
Ending cash balance ..................................................... $100,000
$197,353
Ending loan balance** ................................................... $ 43,650
$
0
* Interest expense
** Loan balance
June = $25,000 x 12%/12 = $250
June = $25,000 + $18,650 = $43,650
July = $43,650 x 12%/12 = $437 (rounded)
July = $43,650 - $43,650 = $0
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Solutions Manual, Chapter 20
1131
Problem 20-3A (Concluded)
Part 6
Information about the need for cash in the near future would be helpful to
the management of Aztec Company because they would be able to enter
into negotiations with potential lenders well ahead of any immediate need
to obtain the cash. They would not only be able to avoid the risk of being
unable to pay their bills, they would also be able to enter into the debt
agreement on the most favorable terms available to them.
In addition, a good cash budget is likely to be helpful to management in
negotiating the terms of the loan. In this situation, the company can tell the
bank that it will need another loan in the following month. Hopefully, the
company will be able to develop additional cash budgets that will show
enough cash being accumulated to allow the loans to be paid back. If
management is armed with this kind of information, it should be able to
negotiate more favorable terms with the bank.
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1132
Financial & Managerial Accounting, 5th Edition
Problem 20-4A (50 minutes)
Part 1
MERLINE
Budgeted Income Statement
For Months of January, February, and March, 2014
January
Sales* .......................................................$2,062,500
Cost of goods sold* ................................ 1,237,500
February
March
$2,268,750 $2,495,625
1,361,250
1,497,375
825,000
907,500
998,250
Sales commissions (10%) ....................
206,250
226,875
249,563
Advertising ($250,000 x 1.15) ..............
287,500
287,500
287,500
Store rent ...............................................
30,000
30,000
30,000
Administrative salaries ........................
45,000
45,000
45,000
Depreciation ..........................................
50,000
50,000
50,000
Other expenses .....................................
10,000
10,000
10,000
Total expenses ........................................
628,750
649,375
672,063
Gross profit .............................................
Expenses
Net income...............................................$ 196,250
$ 258,125 $ 326,187
* Volume for the next three months increases by 10% per month
Sales
Cost of Goods
Units
(@ $125)
Sold (@ $75)
December ($2,250,000/$150) .....................
15,000
January ......................................................
16,500 $2,062,500
$1,237,500
February .....................................................
18,150
2,268,750
1,361,250
March..........................................................
19,965
2,495,625
1,497,375
Part 2: Analysis Component
The plan for increasing sales volume by reducing the price and increasing
advertising would cause the company to generate less net income in each of the
three months of the next quarter than was earned in December. This result is not
encouraging. However, the rate of increase in earnings over the three months is
substantial. If the growth rate for sales can be maintained without increasing
commissions or other expenses, a large payoff would be earned by making the
changes and riding out the short-run period of relatively lower profits. This is a
common problem for management when introducing a new strategy, product, or
service to the market.
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Solutions Manual, Chapter 20
1133
Problem 20-5A (130 minutes)
Part 1
DIMSDALE SPORTS CO.
Sales Budgets
January, February, and March 2014
Budgeted
Units
Budgeted
Unit Price
Budgeted
Total Dollars
$55
55
55
$ 385,000
495,000
605,000
$1,485,000
January 2014 ........................................................7,000
February 2014.......................................................9,000
March 2014 ...........................................................
11,000
Total for the first quarter .....................................
27,000
Part 2
DIMSDALE SPORTS CO.
Merchandise Purchases Budgets
January, February, and March 2014
January
February
March
Total
Next month’s budgeted sales ...............
9,000
11,000
10,000
Ratio of inventory to future sales ......... x
20% x 20% x 20%
Budgeted ending inventory ..................
1,800
2,200
2,000
Add budgeted sales...............................
7,000
9,000
11,000
Required available merchandise ..........
8,800
11,200
13,000
Deduct beginning inventory .................
(5,000)
(1,800)
(2,200)
Units to be purchased ...........................
3,800
9,400
10,800
24,000
Budgeted cost per unit.......................... $
30 $
30 $
30 $
30
Budgeted merchandise purchases ...... $114,000 $282,000 $324,000 $720,000
Part 3
DIMSDALE SPORTS CO.
Selling Expense Budgets
January, February, and March 2014
January
Budgeted sales .....................................
$385,000
Sales commission percent ..................
x
20%
Sales commissions expense............... 77,000
Sales salaries........................................ 5,000
Total selling expenses .........................
$ 82,000
February
$495,000
x
20%
99,000
5,000
$104,000
March
Total
$605,000
x
20%
121,000 $297,000
5,000
15,000
$126,000 $312,000
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1134
Financial & Managerial Accounting, 5th Edition
Problem 20-5A (Continued)
Part 4
DIMSDALE SPORTS CO.
General and Administrative Expense Budgets
January, February, and March 2014
January
February
Salaries .......................................................
$12,000
$12,000
Maintenance ...............................................
2,000
2,000
2,000
6,000
Depreciation* ..............................................
6,000
7,000
7,300
20,300
Total expenses ...........................................
$20,000
$21,000
* Depreciation expense calculations
Annual
Amount
Equipment owned
on 12/31/2013 ....................
$67,500
Purchased in January ........
4,500
Purchased in February .......
12,000
Purchased in March............
3,600
Totals ...................................
January
February
$5,625
375
$5,625
375
1,000
______
$7,000
______
$6,000
March
Total
$12,000 $36,000
$21,300 $62,300
March
$5,625
375
1,000
300
$7,300
Total
$16,875
1,125
2,000
300
$20,300
Part 5
DIMSDALE SPORTS CO.
Capital Expenditures Budgets
January, February, and March 2014
January
February
March
Equipment purchases .........................................
$36,000
$96,000
$ 28,800
Land purchase .....................................................
______
______
150,000
Total ......................................................................
$36,000
$96,000
$178,800
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20
1135
Problem 20-5A (Continued)
Part 6
DIMSDALE SPORTS CO.
Cash Budgets
January, February, and March 2014
January February
Beginning cash balance ......................................
$ 36,000
Cash receipts from customers (note A)................
221,250
Total cash available .............................................
257,250
Cash disbursements
Payments for merchandise (note B) ................... 80,000
Sales commissions ........................................... 77,000
Sales salaries ..................................................... 5,000
General & administrative salaries .................... 12,000
Maintenance expense ....................................... 2,000
Interest ($15,000 x 1%) ............................................ 150
Taxes payable ....................................................
Purchases of equipment ................................... 36,000
________
Purchase of land ................................................
Total cash disbursements ..................................
212,150
March
$ 30,100
697,000
727,100
$210,300
489,500
699,800
302,800
99,000
5,000
12,000
2,000
147,600
121,000
5,000
12,000
2,000
96,000
________
516,800
90,000
28,800
150,000
556,400
Preliminary cash balance .................................... 45,100
210,300
Repayment of loan to bank .................................(15,000) _______
Ending cash balance ...........................................
$ 30,100 $210,300
$143,400
Loan balance, end of month ...............................
$
$
0
$
0
143,400
________
Supporting calculations
January
Note A: Cash receipts from customers
Total sales .........................................................$385,000
Cash sales (25%) .............................................. 96,250
Credit sales (75%) ............................................ 288,750
Cash collections
Receivables at 12/31/2013 ...............................$125,000
Month after sale (60%) .....................................
Second month (40%) ........................................ _______
Total from credit customers ............................ 125,000
Cash sales......................................................... 96,250
Total cash received ..........................................$221,250
Note B: Cash payments for merchandise
Credit purchases ..............................................$114,000
February
March
$495,000
123,750
371,250
$605,000
151,250
453,750
$1,485,000
371,250
1,113,750
$400,000
173,250
_______
573,250
123,750
$697,000
$222,750
115,500
338,250
151,250
$489,500
$525,000
396,000
115,500
1,036,500
371,250
$1,407,750
$282,000
$324,000
$720,000
Accounts payables at 12/31/2013
$ 80,000
Month after purchase (20%) ............................
Second month (80%) ........................................ _______
Total paid on purchases ..................................$ 80,000
$280,000
22,800
_______
$302,800
$ 56,400
91,200
$147,600
$360,000
79,200
91,200
$530,400
0
Total
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1136
Financial & Managerial Accounting, 5th Edition
Problem 20-5A (Continued)
Part 7
DIMSDALE SPORTS CO.
Budgeted Income Statement
For Three Months Ended March 31, 2014
Sales................................................................................
$1,485,000
Cost of goods sold (27,000 units @ $30) .....................
810,000
Gross profit ....................................................................
675,000
Operating expenses
Sales commissions ..................................................... $297,000
Sales salaries ............................................................... 15,000
General administrative salaries ................................. 36,000
Maintenance expense .................................................
6,000
Depreciation expense ................................................. 20,300
Interest expense ..........................................................
150
374,450
Income before taxes ......................................................
300,550
Income taxes (40%) .......................................................
120,220
Net income......................................................................
$180,330
Part 8
DIMSDALE SPORTS CO.
Budgeted Balance Sheet
March 31, 2014
ASSETS
Cash ............................................................
Accounts receivable ..................................
Inventory .....................................................
Total current assets ...................................
Land ............................................................
Equipment ..................................................
$700,800
Less accumulated depreciation ............... 87,800
Total assets ................................................
$ 143,400
602,250
60,000
805,650
150,000
613,000
$1,568,650
Cash budget
Note C
Note D
Capital budget
Note E
Note F
LIABILITIES AND EQUITY
Accounts payable ......................................
Bank loan payable .....................................
Taxes payable (due 4/15/2014) .................
Total liabilities ............................................
Common stock ...........................................
$472,500
Retained earnings ......................................426,330
Total stockholders’ equity ........................
Total liabilities and equity .........................
$ 549,600
0
120,220
669,820
Note G
Cash budget
Income stmt.
Unchanged
Note H
898,830
$1,568,650
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20
1137
Problem 20-5A (Concluded)
Supporting Footnotes
Note C
Beginning receivables ......................................................$ 525,000
Credit sales ........................................................................1,113,750
Less collections ................................................................(1,036,500)
Ending receivables............................................................$ 602,250
Note D
Beginning inventory..........................................................$ 150,000
Purchases .......................................................................... 720,000
Less cost of goods sold ................................................... (810,000)
Ending inventory*..............................................................$ 60,000
*Also equals 2,000 units @ $30 = $60,000
Note E
Beginning equipment ........................................................$ 540,000
Purchased in January ....................................................... 36,000
Purchased in February...................................................... 96,000
Purchased in March .......................................................... 28,800
Total ...................................................................................$ 700,800
Note F
Beginning accumulated depreciation ..............................$
Depreciation expense .......................................................
Total ...................................................................................$
67,500
20,300
87,800
Note G
Beginning accounts payable ............................................$
Purchases ..........................................................................
Payments ...........................................................................
Ending accounts payable .................................................$
360,000
720,000
(530,400)
549,600
Note H
Beginning retained earnings ............................................$ 246,000
Net income ......................................................................... 180,330
Total ...................................................................................$ 426,330
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1138
Financial & Managerial Accounting, 5th Edition
Problem 20-6A (40 minutes)
Part 1
BLACK DIAMOND COMPANY
Production Budget (in units)
Third Quarter
Budgeted ending inventory (skis) .........................................................
3,500
Add budgeted sales ................................................................................ 150,000
Required units of available production ................................................ 153,500
Deduct beginning inventory (skis) ........................................................
(5,000)
Units to be manufactured ...................................................................... 148,500
Part 2
BLACK DIAMOND COMPANY
Direct Materials Budget (in lbs, except where noted)
Third Quarter
Materials (carbon fiber) needed for production (148,500 x 2) ........
297,000
Add budgeted ending inventory (carbon fiber) ...............................
4,000
Total materials (carbon fiber) requirements ....................................
301,000
Deduct beginning inventory (carbon fiber) ......................................
(6,000)
Units of materials (carbon fiber) to be purchased...........................
295,000
Materials cost per pound ...................................................................
$15
Total cost of materials purchases (295,000 x $15) ..........................$4,425,000
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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Solutions Manual, Chapter 20
1139
Problem 20-6A (concluded)
Part 3
BLACK DIAMOND COMPANY
Direct Labor Budget
Third Quarter
Units to be produced ...............................................................
Labor requirements per unit (hours) ..................................... x
Total labor hours needed ........................................................
Labor rate (per hour) ............................................................... x
148,500
0.50
74,250
$20
Labor dollars ............................................................................ $1,485,000
Part 4
BLACK DIAMOND COMPANY
Factory Overhead Budget
Third Quarter
Total labor hours needed ........................................................
Variable overhead rate per DL hour ....................................... x
74,250
$8
Budgeted variable overhead ................................................... $ 594,000
Budgeted fixed overhead ........................................................ 1,782,000
Budgeted total overhead ......................................................... $2,376,000
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1140
Financial & Managerial Accounting, 5th Edition
Problem 20-7A (130 minutes)
Part 1
ZIGBY MANUFACTURING
Sales Budgets
April, May, and June 2013
Budgeted
Units
Budgeted
Unit Price
Budgeted
Total Dollars
April 2013 ..............................................................
20,500
$23.85
$ 488,925
May 2013 ...............................................................
19,500
23.85
465,075
June 2013..............................................................
20,000
23.85
477,000
Total for the second quarter ...............................
60,000
$1,431,000
Part 2
ZIGBY MANUFACTURING
Production Budget
April, May, and June 2013
April
Next month’s budgeted sales ...............
Ratio of inventory to future sales ......... x
May
19,500
80%
June
20,000
x
80%
Total
20,500
x
80%
Budgeted ending inventory ..................
15,600
16,000
16,400
Add budgeted sales...............................
20,500
19,500
20,000
Required units to be produced .............
36,100
35,500
36,400
Deduct beginning inventory .................
(16,400)
(15,600)
(16,000)
Units to be produced .............................
19,700
19,900
20,400
60,000
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Solutions Manual, Chapter 20
1141
Problem 20-7A (continued)
Part 3
ZIGBY MANUFACTURING
Raw Materials Budget
April, May, and June 2013
April
May
Production budget (units) .....................
19,700
Materials requirement per unit ............. x
0.50
Materials needed for production ..........
9,850
Add budgeted ending inventory ...........
4,975
Total materials requirements (units) ....
14,825
Deduct beginning inventory .................
(4,925)
Materials to be purchased ....................
9,900
June
19,900
20,400
x 0.50 x 0.50
9,950
10,200
5,100
4,000
15,050
14,200
(4,975)
(5,100)
10,075
9,100
Total
29,175
Material price per unit ........................... $
20 $
20 $
20 $
20
Total cost of direct material purchases ..... $198,000 $201,500 $182,000 $581,500
Part 4
ZIGBY MANUFACTURING
Direct Labor Budget
April, May, and June 2013
April
Budgeted production (units) ................
May
19,700
Labor requirements per unit (hours).... x 0.50
Total labor hours needed ......................
9,850
June
19,900
20,400
x 0.50 x 0.50
9,950
10,200
Total
30,000
Labor rate (per hour) ............................. $
15 $
15 $
15 $
15
Labor dollars .......................................... $147,750 $149,250 $153,000 $450,000
Part 5
ZIGBY MANUFACTURING
Factory Overhead Budget
April, May, and June 2013
April
Labor hours needed ............................. 9,850
Variable factory overhead rate ............x $2.70
Budgeted variable overhead ............... 26,595
Fixed overhead ..................................... 20,000
Budgeted total overhead .....................$46,595
May
June
Total
9,950
10,200
x $2.70
x $2.70
26,865
27,540
$ 81,000
20,000
20,000
60,000
$46,865
$47,540
$141,000
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1142
Financial & Managerial Accounting, 5th Edition
Problem 20-7A (continued)
Part 6
ZIGBY MANUFACTURING
Selling Expense Budgets
April, May, and June 2013
April
May
June
Budgeted sales .....................................
$488,925
$465,075
$477,000
Sales commission percent ..................
x
x
x
8%
8%
Sales commissions expense............... 39,114
37,206
Sales salaries........................................ 3,000
3,000
Total selling expenses .........................
$ 42,114
$ 40,206
Total
8%
38,160 $114,480
3,000
9,000
$ 41,160 $123,480
Part 7
ZIGBY MANUFACTURING
General and Administrative Expense Budgets
April, May, and June 2013
April
May
Salaries .......................................................
$12,000
$12,000
Interest on long-term note ........................
4,500
4,500
Total expenses ...........................................
$16,500
$16,500
June
Total
$12,000 $36,000
4,500
13,500
$16,500 $49,500
*$500,000 x 0.90%
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Solutions Manual, Chapter 20
1143
Problem 20-7A (Continued)
Part 8
ZIGBY MANUFACTURING
Cash Budgets
April, May, and June 2013
April
Beginning cash balance ......................................
$ 40,000
Cash receipts from customers (note A)................
488,925
Total cash available .............................................
528,925
Cash disbursements
Payments for raw materials (note B) ..................
200,500
Payments for direct labor .................................
147,750
Payments for variable overhead ...................... 26,595
Sales commissions ........................................... 39,114
Sales salaries ..................................................... 3,000
General & administrative salaries .................... 12,000
Dividends ...........................................................
Loan interest ($12,000 x 1%) .................................. 120
Long-term note interest ($500,000 x .0.9%) ............ 4,500
Purchase of equipment .....................................
_______
Total cash disbursements ..................................
433,579
May
June
$ 83,346
481,770
565,116
$124,295
468,653
592,948
198,000
149,250
26,865
37,206
3,000
12,000
10,000
201,500
153,000
27,540
38,160
3,000
12,000
4,500
_______
440,821
4,500
130,000
569,700
Preliminary cash balance .................................... 95,346
124,295
Additional loan .....................................................
Repayment of loan to bank .................................(12,000) _______
Ending cash balance ...........................................
$ 83,346 $124,295
23,248
16,752
$ 40,000
Loan balance, end of month ...............................
$
$ 16,752
Supporting calculations
April
Note A: Cash receipts from customers
Total sales .........................................................$488,925
Cash sales (30%) .............................................. 146,677
Credit sales (70%) ............................................ 342,248
Cash collections
Month after sale (100%) ...................................$342,248
Cash sales......................................................... 146,677
Total cash received ..........................................$488,925
Note B: Cash payments for raw materials
Month after purchase (100%) ..........................$200,500
0
$
0
_______
May
June
Total
$465,075
139,522
325,553
$477,000
143,100
333,900
$1,431,000
429,299
1,001,701
$342,248
139,522
$481,770
$325,553
143,100
$468,653
$1,010,049
429,299
$1,439,348
$198,000
$201,500
$ 600,000
NOTE: Cash sales are rounded down to the nearest whole dollar. All other amounts are rounded
up to the nearest whole dollar. Student answers will vary slightly if they round differently.
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1144
Financial & Managerial Accounting, 5th Edition
Problem 20-7A (Continued)
Part 9
ZIGBY MANUFACTURING
Budgeted Income Statement
For Three Months Ended June 30, 2013
Sales................................................................................
$1,431,000
Cost of goods sold (60,000 units @ $19.85) ................
1,191,000
Gross profit ....................................................................
240,000
Operating expenses
Sales commissions ..................................................... $114,480
Sales salaries ...............................................................
9,000
General administrative salaries ................................. 36,000
Long-term note interest .............................................. 13,500
Interest expense ..........................................................
120
173,100
Income before taxes ......................................................
66,900
Income taxes (35%) .......................................................
23,415
Net income......................................................................
$ 43,485
Part — Budgeted Retained Earnings & Budgeted Balance Sheet
ZIGBY MANUFACTURING
Budgeted Balance Sheet
June 30, 2013
ASSETS
Cash ............................................................
Accounts receivable ..................................
Raw materials inventory ...........................
Finished goods inventory .........................
Total current assets ...................................
Equipment ..................................................
$730,000
Less accumulated depreciation ...............210,000
Total assets ................................................
$
40,000
333,900
80,000
325,540
779,440
520,000
$1,299,440
Cash budget
Note C
Note D
Note E
Note F
Note G
LIABILITIES AND EQUITY
Accounts payable ......................................
Bank loan payable .....................................
Taxes payable ............................................
Total current liabilities ..............................
Long-term note payable ............................
Common stock ...........................................
$335,000
Retained earnings ......................................242,273
Total stockholders’ equity ........................
Total liabilities and equity .........................
$ 182,000
16,752
23,415
222,167
500,000
Note H
Cash budget
Income stmt.
Unchanged
Note I
577,273
$1,299,440
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Solutions Manual, Chapter 20
1145
Problem 20-7A (Concluded)
Supporting Footnotes
Note C
Beginning receivables ...................................................... $ 342,248
Credit sales ........................................................................ 1,001,701
Less collections ................................................................ (1,010,049)
Ending receivables............................................................ $ 333,900
Note D
Beginning raw materials inventory .................................. $ 98,500
Purchases of raw materials .............................................. 581,500
Less materials used in production** ................................ (600,000)
Ending raw materials inventory* ...................................... $ 80,000
*Also equals 4,000 units @ $20 = $80,000
**30,000 units x $20 per unit
Note E
Beginning finished goods inventory................................$ 325,540
Cost of goods completed during the period ................... 1,191,000
Less cost of goods sold during the period ..................... (1,191,000)
Ending finished goods inventory*....................................$ 325,540
*Also equals 16,400 units @ $19.85 = $325,540
Note F
Beginning equipment ........................................................ $ 600,000
Purchased in June ............................................................ 130,000
Total ................................................................................... $ 730,000
Note G
Beginning accumulated depreciation .............................. $ 150,000
Depreciation expense .......................................................
60,000
Total ................................................................................... $ 210,000
Note H
Beginning accounts payable ............................................ $ 200,500
Purchases of raw materials .............................................. 581,500
Payments for raw materials .............................................. (600,000)
Ending accounts payable ................................................. $ 182,000
Note I
ZIGBY MANUFACTURING
Budgeted Statement of Retained Earnings
For Three Months Ended June 30, 2013
Retained earnings, Beginning.........................
$208,788
Add:
Net income .........................................
43,485
252,273
Less:
Dividends ...........................................
10,000
Retained earnings, Ending ..............................
$242,273
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1146
Financial & Managerial Accounting, 5th Edition
PROBLEM SET B
Problem 20-1B (60 minutes)
Part 1
H2O SPORTS CORPORATION
Merchandise Purchases Budgets
For April, May, and June
April
May
June
WATER SKIS
Budgeted sales for next month ........................... 90,000
Ratio of ending inventory to future sales ........... 10%
Budgeted ending inventory ................................. 9,000
Add budgeted sales .............................................. 70,000
Required units of available merchandise ........... 79,000
Less actual (or budgeted) beginning inventory .......(40,000)
Budgeted purchases ............................................ 39,000
130,000
10%
13,000
90,000
103,000
(9,000)
94,000
100,000
10%
10,000
130,000
140,000
(13,000)
127,000
TOW ROPES
Budgeted sales for next month ........................... 90,000
Ratio of ending inventory to future sales ........... 10%
Budgeted ending inventory ................................. 9,000
Add budgeted sales ..............................................100,000
Required units of available merchandise ...........109,000
Less actual (or budgeted) beginning inventory .......(90,000)
Budgeted purchases ............................................ 19,000
110,000
10%
11,000
90,000
101,000
(9,000)
92,000
100,000
10%
10,000
110,000
120,000
(11,000)
109,000
LIFE JACKETS
Budgeted sales for next month ...........................190,000
200,000
120,000
10%
10%
10%
Budgeted ending inventory ................................. 19,000
20,000
12,000
Add budgeted sales ..............................................160,000
190,000
200,000
Required units of available merchandise ...........179,000
210,000
212,000
Less actual (or budgeted) beginning inventory .......
(150,000)
(19,000)
191,000
(20,000)
192,000
Ratio of ending inventory to future sales ...........
Budgeted purchases ............................................ 29,000
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Solutions Manual, Chapter 20
1147
Problem 20-1B (Concluded)
Part 2. Analysis Component
The factor that causes the first month’s purchases to be so much smaller is
the excess inventory that accumulated just prior to the budgeting period.
For example, 40,000 units of water skis are in April’s beginning inventory;
however, April sales are budgeted at only 70,000 units. Accordingly,
budgeted purchases are smaller because it is management’s goal to
reduce the inventory to only 10% of the next month’s sales.
This overstocking factor could exist for a number of reasons, including:
 Management may have simply lost sight of inventory levels, thereby
allowing them to reach inappropriately high levels.
 There may have been some potentially disruptive factor (such as a
strike, bad weather, or political uncertainty) that would have temporarily
interrupted the smooth delivery of products from the supplier. Thus,
management would have found it prudent to accumulate an excess as a
temporary safety stock against an interrupted supply.
 The company’s suppliers may have only recently become more
dependable than they were in the past.
 A supplier may have recently located a new distribution facility nearby,
with the result that the merchandise can be delivered more promptly.
 Competition among suppliers may have caused them to become more
customer oriented, with the result that they will deliver products in
smaller lots more quickly.
This means H2O Sports can now get by with a much smaller safety stock.
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1148
Financial & Managerial Accounting, 5th Edition
Problem 20-2B (50 minutes)
SONY STEREO
Cash Budgets
For April, May, and June
April
May
June
$ 53,000
$ 44,000
Collection on accounts receivable* ............ 136,000
210,000
290,200
Receipts from bank loan ..............................
80,000
_______
_______
Total cash available ........................................ 219,000
263,000
334,200
Cash disbursements
Payments on accounts payable** ...............
80,000
188,000
186,000
Payroll ............................................................
16,000
17,000
18,000
Rent ................................................................
6,000
6,000
6,000
Other expenses .............................................
64,000
8,000
7,000
Beginning balance .......................................... $ 3,000
Cash receipts
Repayment on bank loan .............................
80,000
Interest on bank loan* .................................. ________
________
2,400
Total cash disbursements ........................... 166,000
219,000
299,400
Ending cash balance ......................................$ 53,000
$ 44,000
$ 34,800
* Interest at 12% on $80,000 for 90 days is $2,400.
Supporting calculations
Collections of credit sales*
March
April
May
March sales ($180,000)—[25%: 45%: 20%: 9%] ..............
$ 45,000 $ 81,000 $ 36,000
April sales ($220,000)—[25%: 45%: 20%] ....................... 55,000
99,000
May sales ($300,000)—[25%: 45%] .................................. 75,000
June sales ($380,000)—[25%] .......................................... Total ..................................................................................
$ 45,000 $136,000 $210,000
June
$ 16,200
44,000
135,000
95,000
$290,200
Payments on credit purchases**
March
April
May
March purchases ($100,000)—(0%: 80%: 20%) .....................................
$
0 $ 80,000 $ 20,000
April purchases ($210,000)—(0%: 80%: 20%)........................................
0 168,000
May purchases ($180,000)—(0%: 80%) ..................................................
0
June purchases ($220,000)—(0%) ..........................................................
Total .........................................................................................................
$
0 $ 80,000 $188,000
June
$
42,000
144,000
0
$186,000
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Solutions Manual, Chapter 20
1149
Problem 20-3B (70 minutes)
Part 1
Cash collections of credit sales (accounts receivable)
From sales in
Total % Collected
January ..................................... $396,000
23%
February.................................... 495,000
35
...................................
23
March ........................................ 418,000
40
.........................................
35
April ........................................... 412,500
40
Total collected ..........................
March
$ 91,080
173,250
April
$113,850
167,200
_______
$431,530
146,300
165,000
$425,150
Part 2
Budgeted ending inventories (in units)
January February
Next month’s budgeted sales .....................
22,500
Ratio of inventory to future sales ............... 20%
Budgeted “base” ending inventory ........... 4,500
Plus safety stock.......................................... 100
Budgeted ending inventory ........................ 4,600
19,000
20%
3,800
100
3,900
March
April
18,750
20%
3,750
100
3,850
21,000
20%
4,200
100
4,300
Part 3
CONNICK COMPANY
Merchandise Purchases Budgets
For February, March, and April
February
Budgeted ending inventory (from part 2) ............
March
April
3,900
3,850
4,300
Add budgeted sales .......................................... 22,500
19,000
18,750
Required units of available merchandise ....... 26,400
22,850
23,050
Deduct beginning inventory ............................
(3,900)
(3,850)
18,950
19,200
$12
$12
(4,600)
Budgeted purchases (units) ............................ 21,800
Budgeted cost per unit .....................................
$12
Budgeted cost of merchandise purchases ........$261,600
$227,400 $230,400
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1150
Financial & Managerial Accounting, 5th Edition
Problem 20-3B (Continued)
Part 4
Cash payments on product purchases (for March and
From purchases in
Total
% Paid
February.......................................$261,600
70%
March ........................................... 227,400
30
............................................
70
April .............................................. 230,400
30
Total paid .....................................
April)
March
$183,120
68,220
_______
$251,340
April
$159,180
69,120
$228,300
Part 5
CONNICK COMPANY
Cash Budget
March and April
March
April
Beginning cash balance ..........................................................
$ 50,000
431,530
Cash receipts from customers ...............................................
481,530
Total available cash .................................................................
Cash disbursements
Payments on purchases .......................................................
251,340
Selling and administrative expenses...................................
160,000
Interest expense* ................................................................... 120
411,460
Total disbursements .............................................................
$ 58,070
425,150
483,220
228,300
160,000
0
388,300
$ 70,070 $ 94,920
Preliminary cash balance ........................................................
Additional loan .........................................................................
Repayment of loan ...................................................................
(12,000) ________
Ending cash balance ...............................................................
$ 58,070 $ 94,920
Ending loan balance ................................................................
$
0
$
0
*Interest expense: March = $12,000 x 12% /12 = $120
Part 6
Analysis Component: Information about the supply of cash in the near future
would be helpful to the management of Connick Company. A good cash
budget would be likely to be helpful to management in negotiating the terms
of the loan. If the bank knows, for example, that the full borrowed amount is
likely to be repaid in the following month, the interest rate could be
substantially lower.
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Solutions Manual, Chapter 20
1151
Problem 20-4B (50 minutes)
Part 1
COMP-MEDIA
Budgeted Income Statement
For Months of July, August, and September, 2013
July
Sales* .........................................................
$1,265,000
August
September
$1,391,500 $1,530,650
Cost of goods sold* .................................. 660,000
726,000
798,600
Gross profit ............................................... 605,000
665,500
732,050
Expenses
Sales commissions (10%) ...................... 126,500
Advertising ($200,000 x 1.25) ................ 250,000
Store rent ................................................. 24,000
Administrative salaries .......................... 40,000
Depreciation ............................................ 50,000
Other ........................................................ 12,000
139,150
250,000
24,000
40,000
50,000
12,000
153,065
250,000
24,000
40,000
50,000
12,000
Total expenses .......................................... 502,500
515,150
529,065
Net income.................................................$ 102,500
$ 150,350 $ 202,985
* Volume for the next three months increases by 10% per month
Sales
Cost of Goods
Units
(@ $115)
Sold (@ $60)
June ($1,300,000/$130) ..............................
10,000
July .............................................................
11,000 $1,265,000
$660,000
August ........................................................
12,100
1,391,500
726,000
September ..................................................
13,310
1,530,650
798,600
Part 2: Analysis Component
The plan for increasing sales volume by reducing the price and increasing
advertising would cause the company to generate less net income in each of the
three months of the next quarter than was earned in June. The expected results
for the first three months are not encouraging. However, the September net
income is 83% of that for June, and the rate of increase in earnings over the three
months is substantial. If the growth rate for sales can be maintained without
increasing commissions or other expenses, a large payoff might be earned by
making the changes and riding out the short-run period of relatively lower profits.
This is a common problem for management when introducing a new strategy,
product, or service to the market.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1152
Financial & Managerial Accounting, 5th Edition
Problem 20-5B (130 minutes)
Part 1
ISLE CORPORATION
Sales Budgets
January, February, and March 2014
Budgeted
Units
Budgeted
Unit Price
Budgeted
Total Dollars
$45
45
45
$ 270,000
360,000
450,000
$1,080,000
January 2014 ....................................................... 6,000
February 2014...................................................... 8,000
March 2014 ..........................................................10,000
Total for the first quarter ....................................24,000
Part 2
ISLE CORPORATION
Merchandise Purchases Budgets
January, February, and March 2014
January
February
March
Total
Next month’s budgeted sales ...............
8,000
10,000
9,000
Ratio of inventory to future sales ......... x 25% x 25% x 25%
Budgeted ending inventory ..................
2,000
2,500
2,250
Add budgeted sales...............................
6,000
8,000
10,000
Required available merchandise ..........
8,000
10,500
12,250
Deduct beginning inventory .................
(5,000)
(2,000)
(2,500)
Units to be purchased ...........................
3,000
8,500
9,750
21,250
Budgeted cost per unit.......................... $
30 $
30 $
30 $
30
Budgeted merchandise purchases ...... $90,000 $255,000 $292,500 $637,500
Part 3
ISLE CORPORATION
Selling Expense Budgets
January, February, and March 2014
January
Budgeted sales .....................................
$270,000
Sales commission percent ..................
x
20%
Sales commissions expense............... 54,000
Sales salaries........................................ 7,500
Total selling expenses .........................
$ 61,500
February
$360,000
x
20%
72,000
7,500
$ 79,500
March
Total
$450,000
x
20%
90,000 $216,000
7,500
22,500
$ 97,500 $238,500
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20
1153
Problem 20-5B (Continued)
Part 4
ISLE CORPORATION
General and Administrative Expense Budgets
January, February, and March 2014
January
February
March
Salaries .......................................................
$12,000
$12,000
$12,000
$36,000
Maintenance ...............................................
3,000
3,000
3,000
9,000
Depreciation* ..............................................
6,375
7,375
7,675
21,425
Total expenses ...........................................
$21,375
$22,375
$22,675
$66,425
January
February
March
$5,625
750
$5,625
750
1,000
______
$7,375
* Depreciation expense calculations
Annual
Amount
Equipment owned
on 12/31/2013 ....................
$67,500
Purchased in January ........
9,000
Purchased in February .......
12,000
Purchased in March............
3,600
Total .....................................
______
$6,375
$5,625
750
1,000
300
$7,675
Total
Total
$16,875
2,250
2,000
300
$21,425
Part 5
ISLE CORPORATION
Capital Expenditures Budgets
January, February, and March 2014
January
February
March
Equipment purchases .........................................
$72,000
$96,000
$ 28,800
_______
Land purchase .....................................................
_______
150,000
Total ......................................................................
$72,000
$96,000
$178,800
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1154
Financial & Managerial Accounting, 5th Edition
Problem 20-5B (Continued)
Part 6
ISLE CORPORATION
Cash Budgets
January, February, and March 2014
January
February
March
Beginning cash balance ......................................
$ 36,000
Cash receipts from customers (note A)................382,500
Total cash available .............................................418,500
Cash disbursements
Payments for merchandise (note B) ................... 72,000
Sales commissions ........................................... 54,000
Sales salaries ..................................................... 7,500
General & administrative salaries .................... 12,000
Maintenance expense ....................................... 3,000
Interest ($15,000 x 1%) ............................................
150
Taxes payable ....................................................
Purchases of equipment ................................... 72,000
________
Purchase of land ................................................
Total cash disbursements ..................................220,650
Preliminary cash balance ....................................
$197,850
Repayment of loan to bank ................................. (15,000)
Additional loan from bank ..................................
________
Ending cash balance ...........................................
$182,850
$182,850 $ 107,850
421,500
355,500
604,350
463,350
$107,850
76,950
$ 36,000
Loan balance, end of month ...............................
$
$
$ 76,950
Supporting calculations
Note A: Cash receipts from customers
Total sales .........................................................
Cash sales (25%) ..............................................
Credit sales (75%) ............................................
Cash collections
Receivables at 12/31/2013 (60%; 40%) ...........
January credit sales (60%; 40%) ....................
February credit sales (60%; 40%) ...................
Total from credit customers ............................
Cash sales.........................................................
Total cash received ..........................................
Note B: Cash payments for merchandise
Credit purchases ..............................................
Accounts payable at 12/31/2013 (20%; 80%) .
January purchases (20%; 80%) ......................
February purchases (20%) ..............................
Total paid on purchases ..................................
0
306,000
72,000
7,500
12,000
3,000
96,000
________
496,500
$107,850
________
0
90,000
28,800
150,000
504,300
$ (40,950)
January
February
$270,000
$ 67,500
$202,500
$360,000
$ 90,000
$270,000
$450,000 $1,080,000
$112,500 $ 270,000
$337,500 $ 810,000
$315,000
$210,000
121,500
_______
331,500
90,000
$421,500
$ 525,000
$ 81,000
202,500
162,000
162,000
243,000
889,500
112,500
270,000
$355,500 $1,159,500
$255,000
$288,000
18,000
_______
$306,000
$292,500
_______
$315,000
67,500
$382,500
$90,000
$72,000
_______
$72,000
March
123,000
90,000
7,500
12,000
3,000
$72,000
51,000
$123,000
Total
$637,500
$360,000
90,000
51,000
$501,000
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20
1155
Problem 20-5B (Continued)
Part 7
ISLE CORPORATION
Budgeted Income Statement
For Three Months Ended March 31, 2014
Sales................................................................................
$1,080,000
Cost of goods sold (24,000 units @ $30) .....................
720,000
Gross profit ....................................................................
360,000
Operating expenses
Sales commissions ..................................................... $216,000
Sales salaries ............................................................... 22,500
General administrative salaries ................................. 36,000
Maintenance expense .................................................
9,000
Depreciation expense ................................................. 21,425
Interest expense ..........................................................
150
305,075
Income before taxes ......................................................
54,925
Income taxes (40%) .......................................................
21,970
Net income......................................................................
$ 32,955
Part 8
ISLE CORPORATION
Budgeted Balance Sheet
March 31, 2014
ASSETS
Cash ............................................................
$ 36,000
Accounts receivable ..................................
445,500
Inventory .....................................................
67,500
Total current assets ...................................
549,000
Equipment ..................................................$736,800
Less accumulated depreciation ............... 88,925
647,875
Land ............................................................
150,000
Total assets ................................................
$1,346,875
Cash budget
Note C
Note D
Note E
Note F
Capital budget
LIABILITIES AND EQUITY
Accounts payable ......................................
$ 496,500
Bank loan payable .....................................
76,950
Taxes payable (due 4/15/2014) .................
21,970
Total liabilities ............................................
595,420
Common stock ...........................................$472,500
Retained earnings ...................................... 278,955
Total stockholders’ equity ........................
751,455
Total liabilities and equity .........................
$1,346,875
Note G
Cash budget
Income stmt.
Unchanged
Note H
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1156
Financial & Managerial Accounting, 5th Edition
Problem 20-5B (Concluded)
Supporting Footnotes
Note C
Beginning receivables .................................................................$ 525,000
Credit sales ................................................................................... 810,000
Less collections ........................................................................... (889,500)
Ending receivables.......................................................................$ 445,500
Note D
Beginning inventory.....................................................................$ 150,000
Purchases ..................................................................................... 637,500
Less cost of goods sold .............................................................. (720,000)
Ending inventory*.........................................................................$ 67,500
*Also equals 2,250 units @ $30 = $67,500
Note E
Beginning equipment ...................................................................$ 540,000
Purchased in January .................................................................. 72,000
Purchased in February................................................................. 96,000
Purchased in March ..................................................................... 28,800
Total ..............................................................................................$ 736,800
Note F
Beginning accumulated depreciation .........................................$ 67,500
Depreciation expense .................................................................. 21,425
Total ..............................................................................................$ 88,925
Note G
Beginning accounts payable .......................................................$ 360,000
Purchases ..................................................................................... 637,500
Payments ...................................................................................... (501,000)
Ending accounts payable ............................................................$ 496,500
Note H
Beginning retained earnings .......................................................$ 246,000
Net income .................................................................................... 32,955
Total ..............................................................................................$ 278,955
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Solutions Manual, Chapter 20
1157
Problem 20-6B (30 minutes)
Part 1
NSA COMPANY
Production Budget (in units)
Second Quarter
Budgeted ending inventory (bats) ........................................................ 6,000
Add budgeted sales ................................................................................250,000
Required units of available production ................................................256,000
Deduct beginning inventory (bats) ....................................................... (8,000)
Units to be manufactured ......................................................................248,000
Part 2
NSA COMPANY
Direct Materials Budget (in lbs, except where noted)
Second Quarter
Materials (aluminum) needed for production (248,000 x 3) ............ 744,000
Add budgeted ending inventory (aluminum) ...................................
12,000
Total materials (aluminum) requirements ........................................ 756,000
Deduct beginning inventory (aluminum) ..........................................
(15,000)
Units of materials (aluminum) to be purchased .............................. 741,000
Materials cost per pound ...................................................................
$4
Total cost of materials purchases (741,000 x $4) ............................$2,964,000
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1158
Financial & Managerial Accounting, 5th Edition
Problem 20-6B (concluded)
Part 3
NSA COMPANY
Direct Labor Budget
Second Quarter
Units to be produced ...............................................................
Labor requirements per unit (hours) ..................................... x
Total labor hours needed ........................................................
Labor rate (per hour) ............................................................... x
248,000
0.50
124,000
$18
Labor dollars ............................................................................ $2,232,000
Part 4
NSA COMPANY
Factory Overhead Budget
Second Quarter
Total labor hours needed ........................................................
Variable overhead rate per direct labor hour ........................ x
124,000
$12
Budgeted variable overhead ................................................... $1,488,000
Budgeted fixed overhead ........................................................ 1,776,000
Budgeted total overhead ......................................................... $3,264,000
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Solutions Manual, Chapter 20
1159
Problem 20-7B (130 minutes)
Part 1
NABAR MANUFACTURING
Sales Budgets
July, August, and September 2013
Budgeted
Units
Budgeted
Unit Price
Budgeted
Total Dollars
July 2013 ...............................................................
21,000
$17.00
$ 357,000
August 2013..........................................................
19,000
17.00
323,000
September 2013 ...................................................
20,000
17.00
340,000
Total for the first quarter .....................................
60,000
$1,020,000
Part 2
NABAR MANUFACTURING
Production Budget
July, August, and September 2013
July
Next month’s budgeted sales ...............
Ratio of inventory to future sales ......... x
August
19,000
70%
Sept.
20,000
x
70%
Total
24,000
x
70%
Budgeted ending inventory ..................
13,300
14,000
16,800
Add budgeted sales...............................
21,000
19,000
20,000
Required units to be produced .............
34,300
33,000
36,800
Deduct beginning inventory .................
(16,800)
(13,300)
(14,000)
Units to be produced .............................
17,500
19,700
22,800
60,000
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1160
Financial & Managerial Accounting, 5th Edition
Problem 20-7B (continued)
Part 3
NABAR MANUFACTURING
Raw Materials Budget
July, August, and September 2013
July
August
Sept.
Total
Production budget (units) .....................
17,500
Materials requirement per unit ............. x
0.50
Materials needed for production ..........
8,750
Add budgeted ending inventory ...........
1,970
Total materials requirements (units) ....
10,720
Deduct beginning inventory .................
(4,375)
Materials to be purchased ....................
6,345
19,700
x 0.50
9,850
2,280
12,130
(1,970)
10,160
22,800
x 0.50
11,400
1,980
13,380
(2,280)
11,100
27,605
Material price per unit ........................... $
$
8 $
8 $
8
$ 81,280 $ 88,800 $220,840
8
Total cost of direct material purchases ..... $ 50,760
Part 4
NABAR MANUFACTURING
Direct Labor Budget
July, August, and September 2013
July
Budgeted production (units) ................
17,500
Labor requirements per unit (hours).... x 0.50
Total labor hours needed ......................
8,750
August
Sept.
19,700
22,800
x 0.50 x 0.50
9,850
11,400
Total
30,000
Labor rate (per hour) ............................. $
16 $
16 $
16 $
16
Labor dollars .......................................... $140,000 $157,600 $182,400 $480,000
Part 5
NABAR MANUFACTURING
Factory Overhead Budget
July, August, and September 2013
July
Budgeted production (units) ............... 17,500
x $1.35
Variable factory overhead rate* ..........
Budgeted variable overhead ............... 23,625
Fixed overhead ..................................... 20,000
Budgeted total overhead .....................$ 43,625
August
Sept.
19,700
x $1.35
Total
22,800
x
$1.35
26,595
30,780
$ 81,000
20,000
20,000
60,000
$ 46,595
$ 50,780
$141,000
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Solutions Manual, Chapter 20
1161
Problem 20-7B (continued)
Part 6
NABAR MANUFACTURING
Selling Expense Budgets
July, August, and September 2013
July
August
Sept.
Budgeted sales .....................................
$357,000
$323,000
$340,000
Sales commission percent ..................
x
x
x
10%
10%
Total
10%
Sales commissions expense............... 35,700
32,300
34,000
$102,000
Sales salaries........................................ 3,500
3,500
3,500
10,500
Total selling expenses .........................
$ 39,200
$ 35,800
$ 37,500
$112,500
Part 7
NABAR MANUFACTURING
General and Administrative Expense Budgets
July, August, and September 2013
July
August
Salaries .......................................................
$ 9,000
$ 9,000
Interest on long-term note ........................
2,700
2,700
Total expenses ...........................................
$11,700
$11,700
Sept.
Total
$ 9,000 $27,000
2,700
8,100
$11,700 $35,100
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1162
Financial & Managerial Accounting, 5th Edition
Problem 20-7B (Continued)
Part 8
NABAR MANUFACTURING
Cash Budgets
July, August, and September 2013
July
Beginning cash balance ......................................
$ 40,000
Cash receipts from customers (note A)................
357,000
Total cash available .............................................
397,000
Cash disbursements
Payments for raw materials (note B) .................. 51,400
Payments for direct labor .................................
140,000
Payments for variable overhead ...................... 23,625
Sales commissions ........................................... 35,700
Sales salaries ..................................................... 3,500
General & administrative salaries .................... 9,000
Income taxes ...................................................... 10,000
Dividends ...........................................................
Loan interest ($24,000 x 1%) .................................. 240
Long-term note interest ($300,000 x .0.9%) ............ 2,700
Purchase of equipment .....................................
_______
Total cash disbursements ..................................
276,165
August
Sept.
$ 96,835
346,800
443,635
$141,180
328,100
469,280
50,760
157,600
26,595
32,300
3,500
9,000
81,280
182,400
30,780
34,000
3,500
9,000
20,000
2,700
_______
302,455
2,700
100,000
443,660
Preliminary cash balance ....................................
120,835
141,180
Additional loan .....................................................
Repayment of loan to bank .................................(24,000) _______
Ending cash balance ...........................................
$ 96,835 $141,180
25,620
14,380
Loan balance, end of month ...............................
$
Supporting calculations
July
Note A: Cash receipts from customers
Total sales .........................................................$357,000
Cash sales (30%) .............................................. 107,100
Credit sales (70%) ............................................ 249,900
Cash collections
Month after sale (100%) ...................................$249,900
Cash sales......................................................... 107,100
Total cash received ..........................................$357,000
Note B: Cash payments for raw materials
Month after purchase (100%) ..........................$ 51,400
August
0
$
Sept.
0
________
$ 40,000
$ 14,380
Total
$323,000
96,900
226,100
$340,000
102,000
238,000
$1,020,000
306,000
714,000
$249,900
96,900
$346,800
$226,100
102,000
$328,100
$ 725,900
306,000
$1,031,900
$ 50,760
$ 81,280
$ 183,440
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Solutions Manual, Chapter 20
1163
Problem 20-7B (Continued)
Part 9
NABAR MANUFACTURING
Budgeted Income Statement
For Three Months Ended September 30, 2013
Sales................................................................................
$1,020,000
Cost of goods sold (60,000 units @ $14.35) ................
861,000
Gross profit ....................................................................
159,000
Operating expenses
Sales commissions ..................................................... $102,000
Sales salaries ............................................................... 10,500
General administrative salaries ................................. 27,000
Long-term note interest ..............................................
8,100
Interest expense ..........................................................
240
147,840
Income before taxes ......................................................
11,160
Income taxes (35%) .......................................................
3,906
Net income......................................................................
$ 7,254
Part — Budgeted Retained Earnings & Budgeted Balance Sheet
NABAR MANUFACTURING
Budgeted Balance Sheet
September 30, 2013
ASSETS
Cash ............................................................
$
40,000
Accounts receivable ..................................
238,000
Raw materials inventory ...........................
15,840
Finished goods inventory .........................
241,080
Total current assets ...................................
534,920
Equipment ..................................................
$820,000
Less accumulated depreciation ...............300,000
520,000
Total assets ................................................
$1,054,920
Cash budget
Note C
Note D
Note E
Note F
Note G
LIABILITIES AND EQUITY
Accounts payable ......................................
Bank loan payable .....................................
Taxes payable ............................................
Total current liabilities ..............................
Long-term note payable ............................
Common stock ...........................................
$600,000
Retained earnings ...................................... 47,834
Total stockholders’ equity ........................
Total liabilities and equity .........................
$ 88,800
14,380
3,906
107,086
300,000
Note H
Cash budget
Income stmt.
Unchanged
Note I
647,834
$1,054,920
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1164
Financial & Managerial Accounting, 5th Edition
Problem 20-7B (Concluded)
Supporting Footnotes
Note C
Beginning receivables ...................................................... $ 249,900
Credit sales ........................................................................ 714,000
Less collections ................................................................ (725,900)
Ending receivables............................................................ $ 238,000
Note D
Beginning raw materials inventory .................................. $ 35,000
Purchases of raw materials .............................................. 220,840
Less materials used in production** ................................ (240,000)
Ending inventory raw materials inventory* ..................... $ 15,840
*Also equals 1,980 units @ $8 = $15,840
**30,000 units x $8 per unit
Note E
Beginning finished goods inventory................................ $ 241,080
Cost of goods completed during the period ................... 861,000
Less cost of goods sold during the period ..................... (861,000)
Ending inventory raw materials inventory* ..................... $ 241,080
*Also equals 16,800 units @ $14.35 = $241,080
Note F
Beginning equipment ........................................................ $ 720,000
Purchased in September .................................................. 100,000
Total ................................................................................... $ 820,000
Note G
Beginning accumulated depreciation .............................. $ 240,000
Depreciation expense .......................................................
60,000
Total ................................................................................... $ 300,000
Note H
Beginning accounts payable ............................................ $ 51,400
Purchases of raw materials .............................................. 220,840
Payments for raw materials .............................................. (183,440)
Ending accounts payable ................................................. $ 88,800
Note I
NABAR MANUFACTURING
Budgeted Statement of Retained Earnings
For Three Months Ended September 30, 2013
Retained earnings, Beginning.........................
$60,580
Add:
Net income .........................................
7,254
67,834
Less:
Dividends ...........................................
20,000
Retained earnings, Ending ..............................
$47,834
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20
1165
Serial Problem
— SP 20
Serial Problem, Success Systems (50 minutes)
Part 1
SUCCESS SYSTEMS
Budgeted Income Statements
For Months of April, May, and June
April
Sales* ......................................................... $69,600
May
June
$75,550
$81,500
Cost of goods sold**.................................
54,000
57,750
61,500
Gross profit ...............................................
15,600
17,800
20,000
Sales commissions (10%) ......................
6,960
7,555
8,150
Advertising ($3,000 x 1.10) ....................
3,300
3,300
3,300
Other fixed expenses .............................
6,000
6,000
6,000
Total expenses ..........................................
16,260
16,855
17,450
Expenses
Net income................................................. $ (660)
$
945
$ 2,550
*Results from per month volume increases for the next 3 months
Desks
Units
Sales (@ $1,150) Variable Cost of Sales (@ $750)
April.....................................................................
48
$55,200
$36,000
May ......................................................................
52
59,800
39,000
June ..............................................................
56
64,400
113
42,000
Chairs
Units
Sales (@ $450)
April.....................................................................
32
$14,400
May ......................................................................
35
15,750
June ..............................................................
38
17,100
113
Variable Cost of Sales (@ $250)
$8,000
8,750
9,500
Total Desk & Chairs
Sales
April.....................................................................
$69,600 = $55,200 + $14,400
May ......................................................................
$75,550 = $59,800 + $15,750
June ..............................................................
$81,500 = $64,400 113
+ $17,100
**Total Cost of Sales
Variable
April.....................................................................
$44,000
May ......................................................................
47,750
June
51,500
Fixed
$10,000
10,000
10,000
Variable Cost of Sales
$44,000 = $36,000 + $8,000
$47,750 = $39,000 + $8,750
$51,500 = $42,000 + $9,500
Total Cost of Sales
$54,000
57,750
61,500
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Financial & Managerial Accounting, 5th Edition
Serial Problem, Success Systems (Concluded)
Part 2
The plan for increasing sales volume by reducing the price and increasing
advertising would cause the company to generate a loss in the first month
of the next quarter. This result is not encouraging. However, the company
would expect profits in each of the next two months of the quarter, and the
rate of increase in earnings over the three months is substantial. However,
the amount of profits in each of the next two months is low relative to the
company’s current income. If the growth rate for sales can be maintained
without increasing commissions or other expenses, a large payoff might be
earned by making the changes and riding out the short-run period of
relatively lower profits. This is a common problem for management when
introducing a new strategy, product, or service to the market.
Reporting in Action
— BTN 20-1
1. Polaris’s statement of cash flows would report cash paid for
acquisitions of property and equipment among the activities disclosed
in its cash flows from investing activities section.
2. a. Cash paid for acquisitions of property and equipment and reported
on the statement of cash flows for the year ended December 31, 2011
is $84,484 (thousands).
b. Given the assumption—that Polaris’s annual cash payments for
acquisitions of property and equipment equal 40% of the prior year’s
net income—we would budget cash payments for the year ended
2012 of $91,030 (thousands), computed as $227,575 (thousands) x
40%.
3. Answers will depend on Polaris’s results obtained.
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Solutions Manual, Chapter 20
1167
Comparative Analysis
— BTN 20-2
1. Computation of inventory reduction under new distribution system
Amount of ending inventory required at the 30% rule
[$1,000,000 x (1- 0.20) x 0.30] .................................................. $240,000
Amount of ending inventory required at the 10% rule
[$1,000,000 x (1- 0.20) x 0.10] ..................................................
80,000
Difference (inventory reduction)................................................. $160,000
This result implies that Arctic Cat can reduce its inventory level for the
Canadian market by $160,000 if it improves its distribution system.
2. An analysis such as in part 1 along with an explanation can make clear
to management the cost of funds necessary to support ending
inventory levels. Unless this type of information and analysis are
prepared, it is unlikely management will dedicate valuable time and
energy to investigate and implement a JIT inventory system.
To further illustrate, assuming a 15% interest cost of resources tied up
in inventory, a company can save money by reducing its inventory
level. In particular, by reducing its ending inventory by $160,000, Arctic
Cat would save $24,000 per year ($160,000 difference x 15% interest
cost) for just this one model and market. This means the operating
costs of a JIT inventory system can be as high as $24,000 per year and
be justified in terms of its costs being less than its benefits. Moreover,
if such a shift in inventory can benefit multiple future periods and
multiple product models, the savings are even greater. The type of
analysis here can show management the benefits of a JIT inventory
system, or any system, that reduces its inventory level. Extending this
analysis to all markets and product models, the benefits can be seen to
be substantial.
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1168
Financial & Managerial Accounting, 5th Edition
Ethics Challenge
— BTN 20-3
Report on “Use It or Lose It” Budgeting
Instructor note: There is no widely accepted solution to this problem. The key is for the student to
think about the problem and work to at least modify the negative behavioral consequences of this
practice.
Any plan offered as a solution must better align upper management’s
expectations with department managers’ behavior. For example, upper
management might only cut by one-half the amount not spent according to
budget. Another potential suggestion is to allow department managers the
option of justifying why the amount was not spent and explain why current
budget levels must be maintained.
Upper management must also keep in mind that efficient and effective
allocation of resources is necessary to provide high-quality services to
customers and the public. All spending behavior must be monitored.
Without monitoring in the budgeting system, even more money will be
wasted or used inefficiently.
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Solutions Manual, Chapter 20
1169
Communicating in Practice
— BTN 20-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
____________________
____________________
____________________
____________________
The content of this memorandum will vary among students. The student
must emphasize the need to know the compensation structure of the sales
staff to understand any potential bias in the information provided to the
budget process.
The memorandum should explain why a concern with bias in the
information does exist. Specifically, if a bonus is paid when sales go over
budget, then the sales staff is likely to under report achievable sales to
increase the likelihood of earning the bonus. However, setting the budget
below what is actually expected to occur invalidates the budget activity.
Useful budgeting depends on accurate and unbiased sales estimates.
Taking It to the Net
— BTN 20-5
1. The “e-budgets” Website lists a number of benefits such as accuracy, timeliness, ease of
sharing information, ease of updating, real-time comparison of actual performance vs.
estimates, and so on.
In the case of large, multi-divisional companies, coordination across
and within divisions is extremely important, so that plans across the
organization are consistent.
It appears that e-budgeting allows
managers to share information on a real-time basis. Therefore, any
changes made to the estimates can be seen right away by others within
the organization.
Moreover, e-budgets are spreadsheet based which
manipulation of data and sensitivity (or what-if) analysis.
allows
for
2. As a senior manager, my biggest concern would be security, particularly
when the system is easily accessible and usable. It would be important
to determine who in the organization will have access to the information,
and who will have the authority to change information. Also, it would be
important to review the security protocols of outsiders (pirates)
accessing e-budgets’ databases.
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1170
Financial & Managerial Accounting, 5th Edition
Teamwork in Action
— BTN 20-6
There is no specific solution to this assignment. The instructor should
watch for proper development and identification of all reasonable costs.
Specifically, one should review the (1) items included in the budget, (2)
assumptions used in preparing the budget, and (3) proper format. For
example, one can look for how the team projected the costs of books and
supplies for courses yet to be attended. Taking the average cost of books
per course is one reasonable approach.
Entrepreneurial Decision
— BTN 20-7
1. Budgeting allows an organization to plan its activities better by
allocating financial resources to the different activities. Consequently, it
can provide the owners with information that they can use for financing
purposes as well.
2. Sales forecasts and purchases budgets are particularly important in
businesses like Freshii that sell perishable items (food) and that try to
adapt rapidly to changing customer tastes. Failure to identify changing
sales trends could result in Matthew purchasing too much of certain
food items and too little of others. Purchasing excessive food items
could result in losses due to spoilage. Purchasing too little of certain
food items could result in missed sales.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 20
1171
Hitting the Road
— BTN 20-8
Instructor note: This problem is designed to (1) show that external factors are important
in determining price and volume and (2) develop awareness of external factors when
preparing a sales budget.
1. & 2.
The types of external factors identified by the student for consideration in
part (1), or selected as an explanatory factor for part (2), might include the
following:
 Location, such as near a convenient or busy traffic area.
 Competitors’ responses to price and quality.
 Climatic conditions.
 Shifting demographics.
 Changes to industrial base.
 Labor supply.
Global Decision
— BTN 20-9
1. The infrastructure and administration expense budget is likely to be an
important budget in the master budgeting process at KTM. In 2011,
infrastructure and administration expenses comprised about 4.0%
(€20,870,000/€526,801,000) of sales revenue.
The amount of
infrastructure and administration expenses requires that due attention is
given to the infrastructure and administration expense budget
component of the master budget each year.
2. General office expenses
Top management salaries
Depreciation expense
3. The initial responsibility usually rests with a vice president or an
equivalent-level manager. KTM is organized by divisions. Therefore,
managers in each division may have initial responsibility for the
infrastructure and administration expense budget.
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1172
Financial & Managerial Accounting, 5th Edition