Cost AccountingA Managerial Emphasis

14th Edition

Questions & Solutions

Charles T. HorngrenSrikant M. DatarMadhav V. Rajan

Master Budget and Responsibility Accounting

Chapter - 6

Questions

6-1 What are the four elements of the budgeting cycle?6-2 Define master budget.6-3 “Strategy, plans, and budgets are unrelated to one another.” Do you agree? Explain.6-4 “Budgeted performance is a better criterion than past performance for judging managers.” Do

you agree? Explain.6-5 “Production managers and marketing managers are like oil and water. They just don’t mix.” How

can a budget assist in reducing battles between these two areas?6-6 “Budgets meet the cost-benefit test. They force managers to act differently.” Do you agree? Explain.6-7 Define rolling budget. Give an example.6-8 Outline the steps in preparing an operating budget.6-9 “The sales forecast is the cornerstone for budgeting.” Why?

6-10 How can sensitivity analysis be used to increase the benefits of budgeting?6-11 Define kaizen budgeting.6-12 Describe how nonoutput-based cost drivers can be incorporated into budgeting.6-13 Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment)

affects behavior.6-14 What are some additional considerations that arise when budgeting in multinational companies?6-15 “Cash budgets must be prepared before the operating income budget.” Do you agree? Explain.

Exercises

6-16 Sales budget, service setting. In 2011, Rouse & Sons, a small environmental-testing firm, performed12,200 radon tests for $290 each and 16,400 lead tests for $240 each. Because newer homes are being builtwith lead-free pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness ofradon-related health hazards is expected to result in a 6% increase in radon-test volume each year in thenear future. Jim Rouse feels that if he lowers his price for lead testing to $230 per test, he will have to faceonly a 7% decline in lead-test sales in 2012.

Assignment Material

Required1. Prepare a 2012 sales budget for Rouse & Sons assuming that Rouse holds prices at 2011 levels.2. Prepare a 2012 sales budget for Rouse & Sons assuming that Rouse lowers the price of a lead test to

$230. Should Rouse lower the price of a lead test in 2012 if its goal is to maximize sales revenue?

212 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

6-17 Sales and production budget. The Mendez Company expects sales in 2012 of 200,000 units of serv-ing trays. Mendez’s beginning inventory for 2012 is 15,000 trays and its target ending inventory is25,000 trays. Compute the number of trays budgeted for production in 2012.

6-18 Direct material budget. Inglenook Co. produces wine. The company expects to produce2,500,000 two-liter bottles of Chablis in 2012. Inglenook purchases empty glass bottles from an outside ven-dor. Its target ending inventory of such bottles is 80,000; its beginning inventory is 50,000. For simplicity,ignore breakage. Compute the number of bottles to be purchased in 2012.

6-19 Budgeting material purchases. The Mahoney Company has prepared a sales budget of 45,000 finishedunits for a three-month period. The company has an inventory of 16,000 units of finished goods on hand atDecember 31 and has a target finished goods inventory of 18,000 units at the end of the succeeding quarter.

It takes three gallons of direct materials to make one unit of finished product. The company has aninventory of 60,000 gallons of direct materials at December 31 and has a target ending inventory of 50,000 gal-lons at the end of the succeeding quarter. How many gallons of direct materials should be purchased duringthe three months ending March 31?

6-20 Revenues and production budget. Purity, Inc., bottles and distributes mineral water from the com-pany’s natural springs in northern Oregon. Purity markets two products: twelve-ounce disposable plasticbottles and four-gallon reusable plastic containers.

Required 1. For 2012, Purity marketing managers project monthly sales of 400,000 twelve-ounce bottles and 100,000 four-gallon containers. Average selling prices are estimated at $0.25 per twelve-ounce bottle and $1.50 per four-gallon container. Prepare a revenues budget for Purity, Inc., for the year ending December 31, 2012.

2. Purity begins 2012 with 900,000 twelve-ounce bottles in inventory. The vice president of operationsrequests that twelve-ounce bottles ending inventory on December 31, 2012, be no less than600,000 bottles. Based on sales projections as budgeted previously, what is the minimum number oftwelve-ounce bottles Purity must produce during 2012?

3. The VP of operations requests that ending inventory of four-gallon containers on December 31, 2012,be 200,000 units. If the production budget calls for Purity to produce 1,300,000 four-gallon containersduring 2012, what is the beginning inventory of four-gallon containers on January 1, 2012?

6-21 Budgeting; direct material usage, manufacturing cost and gross margin. Xerxes ManufacturingCompany manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use36 skeins of wool at a cost of $2 per skein and 0.8 gallons of dye at a cost of $6 per gallon. All other materi-als are indirect. At the beginning of the year Xerxes has an inventory of 458,000 skeins of wool at a cost of$961,800 and 4,000 gallons of dye at a cost of $23,680. Target ending inventory of wool and dye is zero. Xerxesuses the FIFO inventory cost flow method.

Xerxes blue rugs are very popular and demand is high, but because of capacity constraints the firm willproduce only 200,000 blue rugs per year. The budgeted selling price is $2,000 each. There are no rugs inbeginning inventory. Target ending inventory of rugs is also zero.

Xerxes makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumu-lated in two cost pools—one for weaving and the other for dyeing. Weaving overhead is allocated to prod-ucts based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based onmachine-hours (MH).

There is no direct manufacturing labor cost for dyeing. Xerxes budgets 62 direct manufacturing labor-hours to weave a rug at a budgeted rate of $13 per hour. It budgets 0.2 machine-hours to dye each skein inthe dyeing process.

The following table presents the budgeted overhead costs for the dyeing and weaving cost pools:

Dyeing(based on 1,440,000 MH)

Weaving (based on 12,400,000 DMLH)

Variable costsIndirect materials $ 0 $15,400,000Maintenance 6,560,000 5,540,000Utilities 7,550,000 2,890,000

Fixed costsIndirect labor 347,000 1,700,000Depreciation 2,100,000 274,000Other ƒƒƒƒ723,000 ƒƒ5,816,000

Total budgeted costs $17,280,000 $31,620,000

Required 1. Prepare a direct material usage budget in both units and dollars.

ASSIGNMENT MATERIAL � 213

2. Calculate the budgeted overhead allocation rates for weaving and dyeing.3. Calculate the budgeted unit cost of a blue rug for the year.4. Prepare a revenue budget for blue rugs for the year, assuming Xerxes sells (a) 200,000 or

(b) 185,000 blue rugs (that is, at two different sales levels).5. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption.6. Find the budgeted gross margin for blue rugs under each sales assumption.

6-22 Revenues, production, and purchases budgets. The Suzuki Co. in Japan has a division that manu-factures two-wheel motorcycles. Its budgeted sales for Model G in 2013 is 900,000 units. Suzuki’s target end-ing inventory is 80,000 units, and its beginning inventory is 100,000 units. The company’s budgeted sellingprice to its distributors and dealers is 400,000 yen (¥) per motorcycle.

Suzuki buys all its wheels from an outside supplier. No defective wheels are accepted. (Suzuki’s needsfor extra wheels for replacement parts are ordered by a separate division of the company.) The company’starget ending inventory is 60,000 wheels, and its beginning inventory is 50,000 wheels. The budgeted pur-chase price is 16,000 yen (¥) per wheel.

Required1. Compute the budgeted revenues in yen.2. Compute the number of motorcycles to be produced.3. Compute the budgeted purchases of wheels in units and in yen.

6-23 Budgets for production and direct manufacturing labor. (CMA, adapted) Roletter Company makes andsells artistic frames for pictures of weddings, graduations, and other special events. Bob Anderson, the controller,is responsible for preparing Roletter’s master budget and has accumulated the following information for 2013:

2013January February March April May

Estimated sales in units 10,000 12,000 8,000 9,000 9,000Selling price $54.00 $51.50 $51.50 $51.50 $51.50Direct manufacturing labor-hours per unit 2.0 2.0 1.5 1.5 1.5Wage per direct manufacturing labor-hour $10.00 $10.00 $10.00 $11.00 $11.00

In addition to wages, direct manufacturing labor-related costs include pension contributions of $0.50 perhour, worker’s compensation insurance of $0.15 per hour, employee medical insurance of $0.40 per hour, andSocial Security taxes. Assume that as of January 1, 2013, the Social Security tax rates are 7.5% for employ-ers and 7.5% for employees. The cost of employee benefits paid by Roletter on its employees is treated as adirect manufacturing labor cost.

Roletter has a labor contract that calls for a wage increase to $11 per hour on April 1, 2013. New labor-saving machinery has been installed and will be fully operational by March 1, 2013. Roletter expects to have16,000 frames on hand at December 31, 2012, and it has a policy of carrying an end-of-month inventory of100% of the following month’s sales plus 50% of the second following month’s sales.

RequiredPrepare a production budget and a direct manufacturing labor budget for Roletter Company by month andfor the first quarter of 2013. Both budgets may be combined in one schedule. The direct manufacturing laborbudget should include labor-hours, and show the details for each labor cost category.

6-24 Activity-based budgeting. The Chelsea store of Family Supermarket (FS), a chain of small neighbor-hood grocery stores, is preparing its activity-based budget for January 2011. FS has three product cate-gories: soft drinks, fresh produce, and packaged food. The following table shows the four activities thatconsume indirect resources at the Chelsea store, the cost drivers and their rates, and the cost-driveramount budgeted to be consumed by each activity in January 2011.

1

2

3

4

5

6

7

FEDCBA

Activity Cost DriverSoft

DrinksFresh

ProducePackaged

FoodOrdering Number of purchase ordersDelivery Number of deliveries Shelf stocking Hours of stocking time Customer support Number of items sold

January 2011 BudgetedJanuary 2011 Budgeted Amount of Cost Driver Used

$

Cost-DriverRate

0.18

141994

10,750

2462

17234,200

141216

4,600

$90$82$21

214 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Required 1. What is the total budgeted cost for each activity and the total budgeted indirect cost for March 2011?2. What are the benefits of using a kaizen approach to budgeting? What are the limitations of this

approach, and how might FS management overcome them?

6-26 Responsibility and controllability. Consider each of the following independent situations forAnderson Forklifts. Anderson manufactures and sells forklifts. The company also contracts to service bothits own and other brands of forklifts. Anderson has a manufacturing plant, a supply warehouse that suppliesboth the manufacturing plant and the service technicians (who often need parts to repair forklifts) and10 service vans. The service technicians drive to customer sites to service the forklifts. Anderson owns thevans, pays for the gas, and supplies forklift parts, but the technicians own their own tools.

1. In the manufacturing plant the production manager is not happy with the engines that the purchasingmanager has been purchasing. In May the production manager stops requesting engines from the sup-ply warehouse, and starts purchasing them directly from a different engine manufacturer. Actual mate-rials costs in May are higher than budgeted.

2. Overhead costs in the manufacturing plant for June are much higher than budgeted. Investigationreveals a utility rate hike in effect that was not figured into the budget.

3. Gasoline costs for each van are budgeted based on the service area of the van and the amount of drivingexpected for the month. The driver of van 3 routinely has monthly gasoline costs exceeding the budget forvan 3. After investigating, the service manager finds that the driver has been driving the van for personal use.

4. At Bigstore Warehouse, one of Anderson’s forklift service customers, the service people are onlycalled in for emergencies and not for routine maintenance. Thus, the materials and labor costs forthese service calls exceeds the monthly budgeted costs for a contract customer.

5. Anderson’s service technicians are paid an hourly wage, with overtime pay if they exceed 40 hours perweek, excluding driving time. Fred Snert, one of the technicians, frequently exceeds 40 hours perweek. Service customers are happy with Fred’s work, but the service manager talks to him constantlyabout working more quickly. Fred’s overtime causes the actual costs of service to exceed the budgetalmost every month.

6. The cost of gasoline has increased by 50% this year, which caused the actual gasoline costs to greatlyexceed the budgeted costs for the service vans.

Required For each situation described, determine where (that is, with whom) (a) responsibility and (b) controllabilitylie. Suggest what might be done to solve the problem or to improve the situation.

6-27 Cash flow analysis, sensitivity analysis. Game Guys is a retail store selling video games. Sales areuniform for most of the year, but pick up in June and December, both because new releases come out andbecause games are purchased in anticipation of summer or winter holidays. Game Guys also sells andrepairs game systems. The forecast of sales and service revenue for the second quarter of 2012 is as follows:

Sales and Service Revenue BudgetSecond Quarter, 2012

Month Expected Sales Revenue Expected Service Revenue Total RevenueApril $ 5,500 $1,000 $ 6,500May 6,200 1,400 7,600June ƒƒ9,700 ƒ2,600 ƒ12,300Total $21,400 $5,000 $26,400

Almost all the service revenue is paid for by bank credit card, so Game Guys budgets this as 100% bank cardrevenue. The bank cards charge an average fee of 3% of the total. Half of the sales revenue is also paid forby bank credit card, for which the fee is also 3% on average. About 10% of the sales are paid in cash, andthe rest (the remaining 40%) are carried on a store account. Although the store tries to give store credit only

Required 1. What is the total budgeted indirect cost at the Chelsea store in January 2011? What is the total bud-geted cost of each activity at the Chelsea store for January 2011? What is the budgeted indirect cost ofeach product category for January 2011?

2. Which product category has the largest fraction of total budgeted indirect costs?3. Given your answer in requirement 2, what advantage does FS gain by using an activity-based approach

to budgeting over, say, allocating indirect costs to products based on cost of goods sold?

6-25 Kaizen approach to activity-based budgeting (continuation of 6-24). Family Supermarkets (FS) hasa kaizen (continuous improvement) approach to budgeting monthly activity costs for each month of 2011.Each successive month, the budgeted cost-driver rate decreases by 0.4% relative to the preceding month.So, for example, February’s budgeted cost-driver rate is 0.996 times January’s budgeted cost-driver rate,and March’s budgeted cost-driver rate is 0.996 times the budgeted February 2011 rate. FS assumes that thebudgeted amount of cost-driver usage remains the same each month.

ASSIGNMENT MATERIAL � 215

to the best customers, it still averages about 2% for uncollectible accounts; 90% of store accounts are paidin the month following the purchase, and 8% are paid two months after purchase.

Knights Blanket Raiders BlanketRed wool fabric 3 yards 0Black wool fabric 0 3.3 yardsKnight logo patches 1 0Raider logo patches 0 1Direct manufacturing labor 1.5 hours 2 hours

Unit data pertaining to the direct materials for March 2012 are as follows:

Actual Beginning Direct Materials Inventory (3/1/2012)Knights Blanket Raiders Blanket

Red wool fabric 30 yards 0Black wool fabric 0 10 yardsKnight logo patches 40 0Raider logo patches 0 55

Target Ending Direct Materials Inventory (3/31/2012)Knights Blanket Raiders Blanket

Red wool fabric 20 yards 0Black wool fabric 0 20 yardsKnight logo patches 20 0Raider logo patches 0 20

Unit cost data for direct-cost inputs pertaining to February 2012 and March 2012 are as follows:

February 2012 (actual) March 2012 (budgeted)Red wool fabric (per yard) $8 $9Black wool fabric (per yard) 10 9Knight logo patches (per patch) 6 6Raider logo patches (per patch) 5 7Manufacturing labor cost per hour 25 26

Required1. Calculate the cash that Game Guys expects to collect in May and in June of 2012. Show calculationsfor each month.

2. Game Guys has budgeted expenditures for May of $4,350 for the purchase of games and game sys-tems, $1,400 for rent and utilities and other costs, and $1,000 in wages for the two part time employees.a. Given your answer to requirement 1, will Game Guys be able to cover its payments for May?b. The projections for May are a budget. Assume (independently for each situation) that May revenues

might also be 5% less and 10% less, and that costs might be 8% higher. Under each of those threescenarios show the total net cash for May and the amount Game Guys would have to borrow if cashreceipts are less than cash payments. Assume the beginning cash balance for May is $100.

3. Suppose the costs for May are as described in requirement 2, but the expected cash receipts for May are$6,200 and beginning cash balance is $100. Game Guys has the opportunity to purchase the games andgame systems on account in May, but the supplier offers the company credit terms of 2/10 net 30, whichmeans if Game Guys pays within 10 days (in May) it will get a 2% discount on the price of the merchan-dise. Game Guys can borrow money at a rate of 24%. Should Game Guys take the purchase discount?

Problems

6-28 Budget schedules for a manufacturer. Logo Specialties manufactures, among other things, woolenblankets for the athletic teams of the two local high schools. The company sews the blankets from fabricand sews on a logo patch purchased from the licensed logo store site. The teams are as follows:

� Knights, with red blankets and the Knights logo

� Raiders, with black blankets and the Raider logo

Also, the black blankets are slightly larger than the red blankets.The budgeted direct-cost inputs for each product in 2012 are as follows:

216 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Manufacturing overhead (both variable and fixed) is allocated to each blanket on the basis of budgeted directmanufacturing labor-hours per blanket. The budgeted variable manufacturing overhead rate for March 2012is $15 per direct manufacturing labor-hour. The budgeted fixed manufacturing overhead for March 2012 is$9,200. Both variable and fixed manufacturing overhead costs are allocated to each unit of finished goods.

Data relating to finished goods inventory for March 2012 are as follows:

Knights Blankets Raiders BlanketsBeginning inventory in units 10 15Beginning inventory in dollars (cost) $1,210 $2,235Target ending inventory in units 20 25

Budgeted sales for March 2012 are 120 units of the Knights blankets and 180 units of the Raiders blankets.The budgeted selling prices per unit in March 2012 are $150 for the Knights blankets and $175 for the Raidersblankets. Assume the following in your answer:

� Work-in-process inventories are negligible and ignored.� Direct materials inventory and finished goods inventory are costed using the FIFO method.

� Unit costs of direct materials purchased and finished goods are constant in March 2012.

Required 1. Prepare the following budgets for March 2012:a. Revenues budgetb. Production budget in unitsc. Direct material usage budget and direct material purchases budgetd. Direct manufacturing labor budgete. Manufacturing overhead budgetf. Ending inventories budget (direct materials and finished goods)

g. Cost of goods sold budget

2. Suppose Logo Specialties decides to incorporate continuous improvement into its budgeting process.Describe two areas where it could incorporate continuous improvement into the budget schedules inrequirement 1.

6-29 Budgeted costs; kaizen improvements. DryPool T-Shirt Factory manufactures plain white and solidcolored T-shirts. Inputs include the following:

Price Quantity Cost per unit of outputFabric $ 6 per yard 1 yard per unit $6 per unitLabor $12 per DMLH 0.25 DMLH per unit $3 per unit

Additionally, the colored T-shirts require 3 ounces of dye per shirt at a cost of $0.20 per ounce. The shirtssell for $15 each for white and $20 each for colors. The company expects to sell 12,000 white T-shirts and60,000 colored T-shirts uniformly over the year.

DryPool has the opportunity to switch from using the dye it currently uses to using an environmentallyfriendly dye that costs $1.00 per ounce. The company would still need three ounces of dye per shirt. DryPool isreluctant to change because of the increase in costs (and decrease in profit) but the Environmental ProtectionAgency has threatened to fine them $102,000 if they continue to use the harmful but less expensive dye.

Required 1. Given the preceding information, would DryPool be better off financially by switching to the environ-mentally friendly dye? (Assume all other costs would remain the same.)

2. Assume DryPool chooses to be environmentally responsible regardless of cost, and it switchs to thenew dye. The production manager suggests trying Kaizen costing. If DryPool can reduce fabric andlabor costs each by 1% per month, how close will it be at the end of 12 months to the gross profit itwould have earned before switching to the more expensive dye? (Round to the nearest dollar for cal-culating cost reductions)

3. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Arethere any problems with this plan?

6-30 Revenue and production budgets. (CPA, adapted) The Scarborough Corporation manufactures andsells two products: Thingone and Thingtwo. In July 2011, Scarborough’s budget department gathered thefollowing data to prepare budgets for 2012:2012 Projected Sales

Product Units PriceThingone 60,000 $165Thingtwo 40,000 $250

ASSIGNMENT MATERIAL � 217

Expected TargetProduct January 1, 2012 December 31, 2012Thingone 20,000 25,000Thingtwo 8,000 9,000

2012 Inventories in Units

The following direct materials are used in the two products:

Amount Used per UnitDirect Material Unit Thingone Thingtwo

A pound 4 5B pound 2 3C each 0 1

Direct Material Anticipated Purchase PriceExpected Inventories

January 1, 2012Target InventoriesDecember 31, 2012

A $12 32,000 lb. 36,000 lb.B 5 29,000 lb. 32,000 lb.C 3 6,000 units 7,000 units

Product Hours per Unit Rate per HourThingone 2 $12Thingtwo 3 16

Projected data for 2012 with respect to direct materials are as follows:

Projected direct manufacturing labor requirements and rates for 2012 are as follows:

Manufacturing overhead is allocated at the rate of $20 per direct manufacturing labor-hour.

RequiredBased on the preceding projections and budget requirements for Thingone and Thingtwo, prepare the fol-lowing budgets for 2012:

1. Revenues budget (in dollars)2. Production budget (in units)3. Direct material purchases budget (in quantities)4. Direct material purchases budget (in dollars)5. Direct manufacturing labor budget (in dollars)6. Budgeted finished goods inventory at December 31, 2012 (in dollars)

6-31 Budgeted income statement. (CMA, adapted) Easecom Company is a manufacturer of videoconferenc-ing products. Regular units are manufactured to meet marketing projections, and specialized units are made afteran order is received. Maintaining the videoconferencing equipment is an important area of customer satisfaction.With the recent downturn in the computer industry, the videoconferencing equipment segment has suffered,leading to a decline in Easecom’s financial performance. The following income statement shows results for 2011:

Easecom CompanyIncome Statement

For the Year Ended December 31, 2011 (in thousands)Revenues:

Equipment $6,000Maintenance contracts ƒƒ1,800

Total revenues $7,800Cost of goods sold ƒƒ4,600Gross margin 3,200Operating costs

Marketing 600Distribution 150Customer maintenance 1,000Administration ƒƒƒ900

Total operating costs ƒƒ2,650Operating income $ƒƒ550

Pet Luggage accounts for direct materials using a FIFO cost flow assumption.

218 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Easecom’s management team is in the process of preparing the 2012 budget and is studying the follow-ing information:

1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins. Theselling price of each maintenance contract is expected to remain unchanged from 2011.

2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in units ofmaintenance contracts.

3. Cost of each unit sold is expected to increase by 3% to pay for the necessary technology and qualityimprovements.

4. Marketing costs are expected to increase by $250,000, but administration costs are expected to remainat 2011 levels.

5. Distribution costs vary in proportion to the number of units of equipment sold.6. Two maintenance technicians are to be hired at a total cost of $130,000, which covers wages and

related travel costs. The objective is to improve customer service and shorten response time.7. There is no beginning or ending inventory of equipment.

Required Prepare a budgeted income statement for the year ending December 31, 2012.

6-32 Responsibility in a restaurant. Barney Briggs owns a restaurant franchise that is part of a chain of“southern homestyle” restaurants. One of the chain’s popular breakfast items is biscuits and gravy. CentralWarehouse makes and freezes the biscuit dough, which is then sold to the franchise stores; there, it isthawed and baked in the individual stores by the cook. Each franchise also has a purchasing agent whoorders the biscuits (and other items) based on expected demand. In March, 2012, one of the freezers inCentral Warehouse breaks down and biscuit production is reduced by 25% for three days. During thosethree days, Barney’s franchise runs out of biscuits but demand does not slow down. Barney’s franchisecook, Janet Trible, sends one of the kitchen helpers to the local grocery store to buy refrigerated ready-to-bake biscuits. Although the customers are kept happy, the refrigerated biscuits cost Barney’s franchisethree times the cost of the Central Warehouse frozen biscuits, and the franchise loses money on this itemfor those three days. Barney is angry with the purchasing agent for not ordering enough biscuits to avoidrunning out of stock, and with Janet for spending too much money on the replacement biscuits.

Required Who is responsible for the cost of the biscuits? At what level is the cost controllable? Do you agree thatBarney should be angry with the purchasing agent? With Janet? Why or why not?

6-33 Comprehensive problem with ABC costing. Pet Luggage Company makes two pet carriers, theCat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the Cat-allac is smaller.Information for the two products for the month of April is given in the following tables:

Input PricesDirect materials

Plastic $ 4 per poundMetal $ 3 per pound

Direct manufacturing labor $14 per direct manufacturing labor-hour

Input Quantities per Unit of OutputCat-allac Dog-eriffic

Direct materialsPlastic 3 pounds 5 poundsMetal 0.5 pounds 1 pound

Direct manufacturing labor-hours (DMLH) 3 hours 5 hoursMachine-hours (MH) 13 MH 20 MH

Inventory Information, Direct MaterialsPlastic Metal

Beginning inventory 230 pounds 70 poundsTarget ending inventory 400 pounds 65 poundsCost of beginning inventory $874 $224

Sales and Inventory Information, Finished GoodsCat-allac Dog-eriffic

Expected sales in units 580 240Selling price $ 190 $ 275Target ending inventory in units 45 25Beginning inventory in units 25 40Beginning inventory in dollars $2,500 $7,440

ASSIGNMENT MATERIAL � 219

Pet Luggage uses a FIFO cost flow assumption for finished goods inventory.Pet Luggage uses an activity-based costing system and classifies overhead into three activity pools:

Setup, Processing, and Inspection. Activity rates for these activities are $130 per setup-hour, $5 permachine-hour, and $20 per inspection-hour, respectively. Other information follows:

Cost Driver InformationCat-allac Dog-eriffic

Number of units per batch 25 13Setup time per batch 1.25 hours 2.00 hoursInspection time per batch 0.5 hour 0.6 hour

Nonmanufacturing fixed costs for March equal $32,000, of which half are salaries. Salaries are expected toincrease 5% in April. The only variable nonmanufacturing cost is sales commission, equal to 1% of sales revenue.

RequiredPrepare the following for April:

1. Revenues budget2. Production budget in units3. Direct material usage budget and direct material purchases budget4. Direct manufacturing labor cost budget5. Manufacturing overhead cost budgets for each of the three activities6. Budgeted unit cost of ending finished goods inventory and ending inventories budget7. Cost of goods sold budget8. Nonmanufacturing costs budget9. Budgeted income statement (ignore income taxes)

6-34 Cash budget (continuation of 6-33). Refer to the information in Problem 6-33.Assume the following: Pet Luggage (PL) does not make any sales on credit. PL sells only to the public,

and accepts cash and credit cards; 90% of its sales are to customers using credit cards, for which PL getsthe cash right away less a 2% transaction fee.

Purchases of materials are on account. PL pays for half the purchases in the period of the purchase,and the other half in the following period. At the end of March, PL owes suppliers $8,400.

PL plans to replace a machine in April at a net cash cost of $13,800.Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month incurred

except of course, depreciation, which is not a cash flow. $22,500 of the manufacturing cost and $12,500 ofthe nonmanufacturing cost for April is depreciation.

PL currently has a $2,600 loan at an annual interest rate of 24%. The interest is paid at the end of eachmonth. If PL has more than $10,000 cash at the end of April it will pay back the loan. PL owes $5,400 inincome taxes that need to be remitted in April. PL has cash of $5,200 on hand at the end of March.

RequiredPrepare a cash budget for April for Pet Luggage.

6-35 Comprehensive operating budget, budgeted balance sheet. Slopes, Inc., manufactures and sellssnowboards. Slopes manufactures a single model, the Pipex. In the summer of 2011, Slopes’ managementaccountant gathered the following data to prepare budgets for 2012:

Materials and Labor RequirementsDirect materials

Wood 5 board feet (b.f.) per snowboardFiberglass 6 yards per snowboard

Direct manufacturing labor 5 hours per snowboard

Slopes’ CEO expects to sell 1,000 snowboards during 2012 at an estimated retail price of $450 per board.Further, the CEO expects 2012 beginning inventory of 100 snowboards and would like to end 2012 with200 snowboards in stock.

Direct Materials InventoriesBeginning Inventory 1/1/2012 Ending Inventory 12/31/2012

Wood 2,000 b.f. 1,500 b.f.Fiberglass 1,000 yards 2,000 yards

Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also $66,000 infixed manufacturing overhead costs budgeted for 2012. Slopes combines both variable and fixed man-ufacturing overhead into a single rate based on direct manufacturing labor-hours. Variable marketing

220 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

2011 Unit Price 2012 Unit PriceWood $28.00 per b.f. $30.00 per b.f.Fiberglass $ 4.80 per yard $ 5.00 per yardDirect manufacturing labor $24.00 per hour $25.00 per hour

The inventoriable unit cost for ending finished goods inventory on December 31, 2011, is $374.80. AssumeSlopes uses a FIFO inventory method for both direct materials and finished goods. Ignore work in process inyour calculations.

Budgeted balances at December 31, 2012, in the selected accounts are as follows:

Cash $ 10,000Property, plant, and equipment (net) 850,000Current liabilities 17,000Long-term liabilities 178,000Stockholders’ equity 800,000

Projected SalesMay 80 units August 100 units

June 120 units September 60 unitsJuly 200 units October 40 units

Direct Materials and Direct Manufacturing Labor Utilization and CostUnits per Board Price per Unit Unit

Wood 5 $30 board feetFiberglass 6 5 yardDirect manufacturing labor 5 25 hour

Required 1. Prepare the 2012 revenues budget (in dollars).2. Prepare the 2012 production budget (in units).3. Prepare the direct material usage and purchases budgets for 2012.4. Prepare a direct manufacturing labor budget for 2012.5. Prepare a manufacturing overhead budget for 2012.6. What is the budgeted manufacturing overhead rate for 2012?7. What is the budgeted manufacturing overhead cost per output unit in 2012?8. Calculate the cost of a snowboard manufactured in 2012.9. Prepare an ending inventory budget for both direct materials and finished goods for 2012.

10. Prepare a cost of goods sold budget for 2012.11. Prepare the budgeted income statement for Slopes, Inc., for the year ending December 31, 2012.12. Prepare the budgeted balance sheet for Slopes, Inc., as of December 31, 2012.

6-36 Cash budgeting. Retail outlets purchase snowboards from Slopes, Inc., throughout the year.However, in anticipation of late summer and early fall purchases, outlets ramp up inventories from Maythrough August. Outlets are billed when boards are ordered. Invoices are payable within 60 days. From pastexperience, Slopes’ accountant projects 20% of invoices will be paid in the month invoiced, 50% will be paidin the following month, and 30% of invoices will be paid two months after the month of invoice. The averageselling price per snowboard is $450.

To meet demand, Slopes increases production from April through July, because the snowboards areproduced a month prior to their projected sale. Direct materials are purchased in the month of productionand are paid for during the following month (terms are payment in full within 30 days of the invoice date).During this period there is no production for inventory, and no materials are purchased for inventory.

Direct manufacturing labor and manufacturing overhead are paid monthly. Variable manufacturingoverhead is incurred at the rate of $7 per direct manufacturing labor-hour. Variable marketing costs aredriven by the number of sales visits. However, there are no sales visits during the months studied. Slopes,Inc., also incurs fixed manufacturing overhead costs of $5,500 per month and fixed nonmanufacturing over-head costs of $2,500 per month.

costs are allocated at the rate of $250 per sales visit. The marketing plan calls for 30 sales visits during2012. Finally, there are $30,000 in fixed nonmanufacturing costs budgeted for 2012.

Other data include the following:

ASSIGNMENT MATERIAL � 221

The beginning cash balance for July 1, 2012, is $10,000. On October 1, 2011, Slopes had a cash crunch andborrowed $30,000 on a 6% one-year note with interest payable monthly. The note is due October 1, 2012.Using the information provided, you will need to determine whether Slopes will be in a position to pay off thisshort-term debt on October 1, 2012.

Required1. Prepare a cash budget for the months of July through September 2012. Show supporting schedules forthe calculation of receivables and payables.

2. Will Slopes be in a position to pay off the $30,000 one-year note that is due on October 1, 2012? If not,what actions would you recommend to Slopes’ management?

3. Suppose Slopes is interested in maintaining a minimum cash balance of $10,000. Will the company beable to maintain such a balance during all three months analyzed? If not, suggest a suitable cash man-agement strategy.

6-37 Cash budgeting. On December 1, 2011, the Itami Wholesale Co. is attempting to project cashreceipts and disbursements through January 31, 2012. On this latter date, a note will be payable in theamount of $100,000. This amount was borrowed in September to carry the company through the seasonalpeak in November and December.

Selected general ledger balances on December 1 are as follows:

Cash $ 88,000Inventory 65,200Accounts payable 136,000

Sales terms call for a 3% discount if payment is made within the first 10 days of the month after sale, with thebalance due by the end of the month after sale. Experience has shown that 50% of the billings will be col-lected within the discount period, 30% by the end of the month after purchase, and 14% in the followingmonth. The remaining 6% will be uncollectible. There are no cash sales.

The average selling price of the company’s products is $100 per unit. Actual and projected sales areas follows:

October actual $ 280,000November actual 320,000December estimated 330,000January estimated 250,000February estimated 240,000Total estimated for year ending June 30, 2012 $2,400,000

All purchases are payable within 15 days. Approximately 60% of the purchases in a month are paid thatmonth, and the rest the following month. The average unit purchase cost is $80. Target ending inventoriesare 500 units plus 10% of the next month’s unit sales.

Total budgeted marketing, distribution, and customer-service costs for the year are $600,000. Of thisamount, $120,000 are considered fixed (and include depreciation of $30,000). The remainder varies withsales. Both fixed and variable marketing, distribution, and customer-service costs are paid as incurred.

RequiredPrepare a cash budget for December 2011 and January 2012. Supply supporting schedules for collections ofreceivables; payments for merchandise; and marketing, distribution, and customer-service costs.

6-38 Comprehensive problem; ABC manufacturing, two products. Follete Inc. operates at capacity andmakes plastic combs and hairbrushes. Although the combs and brushes are a matching set, they are soldindividually and so the sales mix is not 1:1. Follette Inc. is planning its annual budget for fiscal year 2011.Information for 2011 follows:

Input PricesDirect materials

Plastic $ 0.20 per ounceBristles $ 0.50 per bunch

Direct manufacturing labor $12 per direct manufacturing labor-hour

Folette Inc. accounts for direct materials using a FIFO cost flow.

222 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Input Quantities per Unit of OutputCombs Brushes

Direct materialsPlastic 5 ounces 8 ouncesBristles — 16 bunches

Direct manufacturing labor 0.05 hours 0.2 hoursMachine-hours (MH) 0.025 MH 0.1 MH

Inventory Information, Direct MaterialsPlastic Bristles

Beginning inventory 1,600 ounces 1,820 bunchesTarget ending inventory 1,766 ounces 2,272 bunchesCost of beginning inventory $304 $946

Sales and Inventory Information, Finished GoodsCombs Brushes

Expected sales in units 12,000 14,000Selling price $ 6 $ 20Target ending inventory in units 1,200 1,400Beginning inventory in units 600 1,200Beginning inventory in dollars $ 1,800 $18,120

Folette Inc. uses a FIFO cost flow assumption for finished goods inventory.Combs are manufactured in batches of 200, and brushes are manufactured in batches of 100. It takes

20 minutes to set up for a batch of combs, and one hour to set up for a batch of brushes.Folette Inc. uses activity-based costing and has classified all overhead costs as shown in the follow-

ing table:

Cost Type Budgeted Variable Budgeted Fixed Cost Driver/Allocation BaseManufacturing:

Materials handling $11,490 $15,000 Number of ounces of plastic usedSetup 6,830 11,100 Setup-hoursProcessing 7,760 20,000 Machine-hoursInspection 7,000 1,040 Number of units produced

Nonmanufacturing:Marketing 14,100 60,000 Sales revenueDistribution 0 780 Number of deliveries

Delivery trucks transport units sold in delivery sizes of 1,000 combs or 1,000 brushes.

Required Do the following for the year 2011:

1. Prepare the revenues budget.2. Use the revenue budget to

a. find the budgeted allocation rate for marketing costs.b. find the budgeted number of deliveries and allocation rate for distribution costs.

3. Prepare the production budget in units.4. Use the production budget to

a. find the budgeted number of setups, setup-hours, and the allocation rate for setup costs.b. find the budgeted total machine-hours and the allocation rate for processing costs.c. find the budgeted total units produced and the allocation rate for inspection costs.

5. Prepare the direct material usage budget and the direct material purchases budgets in both units anddollars; round to whole dollars.

6. Use the direct material usage budget to find the budgeted allocation rate for materials handling costs.7. Prepare the direct manufacturing labor cost budget.8. Prepare the manufacturing overhead cost budget for materials handling, setup, and processing.9. Prepare the budgeted unit cost of ending finished goods inventory and ending inventories budget.

ASSIGNMENT MATERIAL � 223

10. Prepare the cost of goods sold budget.11. Prepare the nonmanufacturing overhead costs budget for marketing and distribution.12. Prepare a budgeted income statement (ignore income taxes).

6-39 Budgeting and ethics. Delma Company manufactures a variety of products in a variety of depart-ments, and evaluates departments and departmental managers by comparing actual cost and output rela-tive to the budget. Departmental managers help create the budgets, and usually provide information aboutinput quantities for materials, labor, and overhead costs.

Wert Mimble is the manager of the department that produces product Z. Wert has estimated theseinputs for product Z:

Input Budget Quantity per Unit of OutputDirect material 4 poundsDirect manufacturing labor 15 minutesMachine time 12 minutes

The department produces about 100 units of product Z each day. Wert’s department always gets excellentevaluations, sometimes exceeding budgeted production quantities. Each 100 units of product Z uses, onaverage, about 24 hours of direct manufacturing labor (four people working six hours each), 395 pounds ofmaterial, and 19.75 machine-hours.

Top management of Delma Company has decided to implement budget standards that will challengethe workers in each department, and it has asked Wert to design more challenging input standards for prod-uct Z. Wert provides top management with the following input quantities:

Input Budget Quantity per Unit of OutputDirect material 3.95 poundsDirect manufacturing labor 14.5 minutesMachine time 11.8 minutes

RequiredDiscuss the following:

1. Are these standards challenging standards for the department that produces product Z?2. Why do you suppose Wert picked these particular standards?3. What steps can Delma Company’s top management take to make sure Wert’s standards really meet the

goals of the firm?

6-40 Human Aspects of Budgeting in a Service Firm. Jag Meerkat owns three upscale hair salons: HairSuite I, II, and III. Each of the salons has a manager and 10 stylists who rent space in the salons as inde-pendent contractors and who pay a fee of 10% of each week’s revenue to the salon as rent. In exchangethey get to use the facility and utilities, but must bring their own equipment.

The manager of each salon schedules each customer appointment to last an hour, and then allows the styl-ist 10 minutes between appointments to clean up, rest, and prepare for the next appointment. The salons are openfrom 10 A.M. to 6 P.M., so each stylist can serve seven customers per day. Stylists each work five days a week on astaggered schedule, so the salon is open seven days a week. Everyone works on Saturdays, but some stylistshave Sunday and Monday off, some have Tuesday and Wednesday off, and some have Thursday and Friday off.

Jag Meerkat knows that utility costs are rising. Jag wants to increase revenues to cover at least somepart of rising utility costs, so Jag tells each of the managers to find a way to increase productivity in thesalons so that the stylists will pay more to the salons. Jag does not want to increase the rental fee above10% of revenue for fear the stylists will leave, and each salon has only 10 stations, so he feels each saloncannot hire more than 10 full-time stylists.

The manager of Hair Suite I attacks the problem by simply telling the stylists that, from now on, cus-tomers will be scheduled for 40 minute appointments and breaks will be five minutes. This will allow eachstylist to add one more customer per day.

The manager of Hair Suite II asks the stylists on a voluntary basis to work one extra hour per day, from10 A.M. to 7 P.M., to add an additional customer per stylist per day.

The manager of Hair Suite III sits down with the stylists and discusses the issue. After consideringshortening the appointment and break times, or lengthening the hours of operation, one of the stylists says,“I know we rent stations in your store, but I am willing to share my station. You could hire an eleventh stylist,who will simply work at whatever station is vacant during our days off. Since we use our own equipment,this will not be a problem for me as long as there is a secure place I can leave my equipment on my daysoff.” Most of the other stylists agree that this is a good solution.

224 � CHAPTER 6 MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

Input PricesDirect materials

Cloth $3.50 per yardWood $5.00 per board foot

Direct manufacturing labor $10 per direct manufacturing labor-hour

Required 1. Which manager’s style do you think is most effective? Why?2. How do you think the stylists will react to the managers of salons I and II? What can they do to indicate

their displeasure, assuming they are displeased?3. In Hair Suite III, if the stylists did not want to share their stations with another party, how else could

they find a way to increase revenues?4. Refer again to the action that the manager of Hair Suite I has chosen. How does this relate to the con-

cept of stretch targets?

Collaborative Learning Problem

6-41 Comprehensive budgeting problem; activity based costing, operating and financial budgets.Borkenstick makes a very popular undyed cloth sandal in one style, but in Regular and Deluxe. The Regularsandals have cloth soles and the Deluxe sandals have cloth covered wooden soles. Borkenstick is prepar-ing its budget for June 2012, and has estimated sales based on past experience.

Other information for the month of June follows:

Input Quantities per Unit of Output (per pair of sandals)Regular Deluxe

Direct materialsCloth 1.3 yards 1.5 yardsWood 0 2 b.f.

Direct manufacturing labor-hours (DMLH) 5 hours 7 hoursSetup-hours per batch 2 hours 3 hours

Inventory Information, Direct MaterialsCloth Wood

Beginning inventory 610 yards 800 b.f.Target ending inventory 386 yards 295 b.f.Cost of beginning inventory $2,146 $4,040Borkenstick accounts for direct materials using a FIFO cost flow assumption.

Sales and Inventory Information, Finished GoodsRegular Deluxe

Expected sales in units (pairs of sandals) 2,000 3,000Selling price $ 80 $ 130Target ending inventory in units 400 600Beginning inventory in units 250 650Beginning inventory in dollars $15,500 $61,750

Cost type Denominator Activity RateManufacturing:

Setup Setup-hours $12 per setup-hourProcessing Direct manufacturing labor-hours $1.20 per DMLHInspection Number of pairs of sandals $0.90 per pair

Nonmanufacturing:Marketing and general administration Sales revenue 8%Shipping Number of shipments $10 per shipment

Borkenstick uses a FIFO cost flow assumption for finished goods inventory.All the sandals are made in batches of 50 pairs of sandals. Borkenstick incurs manufacturing overhead

costs, marketing and general administration, and shipping costs. Besides materials and labor, manufactur-ing costs include setup, processing, and inspection costs. Borkenstick ships 40 pairs of sandals per ship-ment. Borkenstick uses activity-based costing and has classified all overhead costs for the month of Juneas shown in the following chart:

ASSIGNMENT MATERIAL � 225

Required1. Prepare each of the following for June:a. Revenues budgetb. Production budget in unitsc. Direct material usage budget and direct material purchases budget in both units and dollars; round

to dollarsd. Direct manufacturing labor cost budgete. Manufacturing overhead cost budgets for processing and setup activitiesf. Budgeted unit cost of ending finished goods inventory and ending inventories budget

g. Cost of goods sold budgeth. Marketing and general administration costs budget

2. Borkenstick’s balance sheet for May 31 follows. Use it and the following information to prepare a cashbudget for Borkenstick for June. Round to dollars.� All sales are on account; 60% are collected in the month of the sale, 38% are collected the follow-

ing month, and 2% are never collected and written off as bad debts.� All purchases of materials are on account. Borkenstick pays for 80% of purchases in the month of

purchase and 20% in the following month.� All other costs are paid in the month incurred, including the declaration and payment of a $10,000 cash

dividend in June.� Borkenstick is making monthly interest payments of 0.5% (6% per year) on a $100,000 long term loan.� Borkenstick plans to pay the $7,200 of taxes owed as of May 31 in the month of June. Income tax

expense for June is zero.� 30% of processing and setup costs, and 10% of marketing and general administration costs

are depreciation.

BorkenstickBalance Sheet

as of May 31AssetsCash $ 6,290Accounts receivable $216,000

Less: Allowance for bad debts ƒƒ10,800 205,200InventoriesDirect materials 6,186Finished goods 77,250Fixed assets $580,000

Less: Accumulated depreciation ƒƒ90,890 ƒ489,110Total assets $784,036

Liabilities and EquityAccounts payable $ 10,400Taxes payable 7,200Interest payable 500Long-term debt 100,000Common stock 200,000Retained earnings ƒ465,936Total liabilities and equity $784,036

3. Prepare a budgeted income statement for June and a budgeted balance sheet for Borkenstick as ofJune 30.

6-1

CHAPTER 6

MASTER BUDGET AND RESPONSIBILITY ACCOUNTING

6-1 The budgeting cycle includes the following elements:

a. Planning the performance of the company as a whole as well as planning the performance

of its subunits. Management agrees on what is expected.

b. Providing a frame of reference, a set of specific expectations against which actual results

can be compared.

c. Investigating variations from plans. If necessary, corrective action follows investigation.

d. Planning again, in light of feedback and changed conditions.

6-2 The master budget expresses management’s operating and financial plans for a specified

period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial

plan of what the company intends to accomplish in the period.

6-3 Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies

how an organization matches its own capabilities with the opportunities in the marketplace to

accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In

turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about

the likely effects of their strategic plans. Managers use this feedback to revise their strategic

plans.

6-4 We agree that budgeted performance is a better criterion than past performance for

judging managers, because inefficiencies included in past results can be detected and eliminated

in budgeting. Also, future conditions may be expected to differ from the past, and these can also

be factored into budgets.

6-5 Production and marketing traditionally have operated as relatively independent business

functions. Budgets can assist in reducing conflicts between these two functions in two ways.

Consider a beverage company such as Coca-Cola or Pepsi-Cola:

Communication. Marketing could share information about seasonal demand with

production.

Coordination. Production could ensure that output is sufficient to meet, for example,

high seasonal demand in the summer.

6-6 In many organizations, budgets impel managers to plan. Without budgets, managers drift

from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and

improve their performance. Thus, many top managers believe that budgets meet the cost-benefit

test.

6-7 A rolling budget, also called a continuous budget, is a budget or plan that is always

available for a specified future period, by continually adding a period (month, quarter, or year) to

the period that just ended. A four-quarter rolling budget for 2011 is superseded by a four-quarter

rolling budget for April 2011 to March 2012, and so on.

6-2

6-8 The steps in preparing an operating budget are as follows:

1. Prepare the revenues budget

2. Prepare the production budget (in units)

3. Prepare the direct material usage budget and direct material purchases budget

4. Prepare the direct manufacturing labor budget

5. Prepare the manufacturing overhead budget

6. Prepare the ending inventories budget

7. Prepare the cost of goods sold budget

8. Prepare the nonmanufacturing costs budget

9. Prepare the budgeted income statement

6-9 The sales forecast is typically the cornerstone for budgeting, because production (and,

hence, costs) and inventory levels generally depend on the forecasted level of sales.

6-10 Sensitivity analysis adds an extra dimension to budgeting. It enables managers to

examine how budgeted amounts change with changes in the underlying assumptions. This assists

managers in monitoring those assumptions that are most critical to a company in attaining its

budget and allows them to make timely adjustments to plans when appropriate.

6-11 Kaizen budgeting explicitly incorporates continuous improvement anticipated during the

budget period into the budget numbers.

6-12 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-

based budgeting (ABB). ABB focuses on the budgeted cost of activities necessary to produce

and sell products and services. Nonoutput-based cost drivers, such as the number of parts,

number of batches, and number of new products can be used with ABB.

6-13 The choice of the type of responsibility center determines what the manager is

accountable for and thereby affects the manager’s behavior. For example, if a revenue center is

chosen, the manager will focus on revenues, not on costs or investments. The choice of a

responsibility center type guides the variables to be included in the budgeting exercise.

6-14 Budgeting in multinational companies may involve budgeting in several different foreign

currencies. Further, management accountants must translate operating performance into a single

currency for reporting to shareholders, by budgeting for exchange rates. Managers and

accountants must understand the factors that impact exchange rates, and where possible, plan

financial strategies to limit the downside of unexpected unfavorable moves in currency

valuations. In developing budgets for operations in different countries, they must also have good

understanding of political, legal and economic issues in those countries.

6-15 No. Cash budgets and operating income budgets must be prepared simultaneously. In

preparing their operating income budgets, companies want to avoid unnecessary idle cash and

unexpected cash deficiencies. The cash budget, unlike the operating income budget, highlights

periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost

effective ways of either using excess cash or raising cash from outside to achieve the company’s

operating income goals.

6-3

6-16 (15 min.) Sales budget, service setting.

1.

Rouse & Sons

2011

Volume

At 2011

Selling Prices

Expected 2012

Change in Volume

Expected 2012

Volume

Radon Tests 12,200 $290 +6% 12,932

Lead Tests 16,400 $240 -10% 14,760

Rouse & Sons Sales Budget

For the Year Ended December 31, 2012

Selling

Price

Units

Sold

Total

Revenues

Radon Tests $290 12,932 $3,750,280

Lead Tests $240 14,760 3,542,400

$7,292,680

2.

Rouse & Sons

2011

Volume

Planned 2012

Selling Prices

Expected 2012

Change in Volume

Expected

2012 Volume

Radon Tests 12,200 $290 +6% 12,932

Lead Tests 16,400 $230 -7% 15,252

Rouse & Sons Sales Budget

For the Year Ended December 31, 2012

Selling

Price Units Sold

Total

Revenues

Radon Tests $290 12,932 $3,750,280

Lead Tests $230 15,252 3,507,960

$7,258,240

Expected revenues at the new 2012 prices are $7,258,240, which is lower than the expected 2012

revenues of $7,292,680 if the prices are unchanged. So, if the goal is to maximize sales revenue

and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead test in

2012.

6-4

6-17 (5 min.) Sales and production budget.

Budgeted sales in units 200,000

Add target ending finished goods inventory 25,000

Total requirements 225,000

Deduct beginning finished goods inventory 15,000

Units to be produced 210,000

6-18 (5 min.) Direct materials purchases budget.

Direct materials to be used in production (bottles) 2,500,000

Add target ending direct materials inventory (bottles) 80,000

Total requirements (bottles) 2,580,000

Deduct beginning direct materials inventory (bottles) 50,000

Direct materials to be purchased (bottles) 2,530,000

6-19 (10 min.) Budgeting material purchases.

Production Budget:

Finished Goods

(units)

Budgeted sales 45,000

Add target ending finished goods inventory 18,000

Total requirements 63,000

Deduct beginning finished goods inventory 16,000

Units to be produced 47,000

Direct Materials Purchases Budget:

Direct Materials

(in gallons)

Direct materials needed for production (47,000 3) 141,000

Add target ending direct materials inventory 50,000

Total requirements 191,000

Deduct beginning direct materials inventory 60,000

Direct materials to be purchased 131,000

6-5

6-20 (30 min.) Revenues and production budget.

1.

Selling

Price

Units

Sold

Total

Revenues

12-ounce bottles $0.25 4,800,000a $1,200,000

4-gallon units 1.50 1,200,000b 1,800,000

$3,000,000 a 400,000 × 12 months = 4,800,000

b 100,000 × 12 months = 1,200,000

2. Budgeted unit sales (12-ounce bottles) 4,800,000

Add target ending finished goods inventory 600,000

Total requirements 5,400,000

Deduct beginning finished goods inventory 900,000

Units to be produced 4,500,000

3. Beginning Budgeted Target Budgeted

= + inventory sales ending inventory production

= 1,200,000 + 200,000 1,300,000

= 100,000 4-gallon units

6-21 (30 min.) Budgeting: direct material usage, manufacturing cost and gross margin.

1.

Direct Material Usage Budget in Quantity and Dollars

Material

Wool Dye Total

Physical Units Budget

Direct materials required for

Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.) 7,200,000 skeins 160,000 gal.

Cost Budget

Available from beginning direct materials inventory: (a)

Wool: 458,000 skeins $ 961,800

Dye: 4,000 gallons $ 23,680

To be purchased this period: (b)

Wool: (7,200,000 - 458,000) skeins × $2 per skein 13,484,000

Dye: (160,000 – 4,000) gal. × $6 per gal. _________ 936,000

Direct materials to be used this period: (a) + (b) $14,445,800 $ 959,680 $15,405,480

6-6

2.

Weaving budgetedoverhead rate

= $31,620,000

12, 400,000 DMLH = $2.55 per DMLH

Dyeing budgetedoverhead rate

= $17, 280,000

1,440,000 MH= $12 per MH

3.

Budgeted Unit Cost of Blue Rug

Cost per

Unit of Input

Input per

Unit of

Output

Total

Wool $2 36 skeins $ 72.00

Dye 6 0.8 gal. 4.80

Direct manufacturing labor 13 62 hrs. 806.00

Dyeing overhead 12 7.21 mach-hrs. 86.40

Weaving overhead 2.55 62 DMLH 158.10

Total $1127.30

10.2 machine hour per skein 36 skeins per rug = 7.2 machine-hrs. per rug.

4.

Revenue Budget

Units

Selling

Price Total Revenues

Blue Rugs 200,000 $2,000 $400,000,000

Blue Rugs 185,000 $2,000 $370,000,000

5a.

Sales = 200,000 rugs

Cost of Goods Sold Budget

From Schedule Total

Beginning finished goods inventory $ 0

Direct materials used $15,405,480

Direct manufacturing labor ($806 × 200,000) 161,200,000

Dyeing overhead ($86.40 × 200,000) 17,280,000

Weaving overhead ($158.10 × 200,000) 31,620,000 225,505,480

Cost of goods available for sale 225,505,480

Deduct ending finished goods inventory 0

Cost of goods sold $225,505,480

6-7

5b.

Sales = 185,000 rugs

Cost of Goods Sold Budget

From Schedule Total

Beginning finished goods inventory $ 0

Direct materials used $ 15,405,480

Direct manufacturing labor ($806 × 200,000) 161,200,000

Dyeing overhead ($86.40 × 200,000) 17,280,000

Weaving overhead ($158.10 × 200,000) 31,620,000 225,505,480

Cost of goods available for sale 225,505,480

Deduct ending finished goods inventory

($1,127.30 × 15,000)

16,909,500

Cost of goods sold $208,595,980

6.

200,000 rugs sold 185,000 rugs sold

Revenue $400,000,000 $370,000,000

Less: Cost of goods sold 225,505,480 208,595,980

Gross margin $ 174,494,520 $ 161,404,020

6-22 (15–20 min.) Revenues, production, and purchases budget.

1. 900,000 motorcycles 400,000 yen = 360,000,000,000 yen

2. Budgeted sales (motorcycles) 900,000

Add target ending finished goods inventory 80,000

Total requirements 980,000

Deduct beginning finished goods inventory 100,000

Units to be produced 880,000

3. Direct materials to be used in production,

880,000 × 2 (wheels) 1,760,000

Add target ending direct materials inventory 60,000

Total requirements 1,820,000

Deduct beginning direct materials inventory 50,000

Direct materials to be purchased (wheels) 1,770,000

Cost per wheel in yen 16,000

Direct materials purchase cost in yen 28,320,000,000

Note the relatively small inventory of wheels. In Japan, suppliers tend to be located very close to

the major manufacturer. Inventories are controlled by just-in-time and similar systems. Indeed,

some direct materials inventories are almost nonexistent.

6-8

6-23 (15-25 min.) Budgets for production and direct manufacturing labor.

Roletter Company

Budget for Production and Direct Manufacturing Labor

for the Quarter Ended March 31, 2013

January February March Quarter

Budgeted sales (units) 10,000 12,000 8,000 30,000

Add target ending finished goods

inventorya (units) 16,000 12,500 13,500 13,500

Total requirements (units) 26,000 24,500 21,500 43,500

Deduct beginning finished goods

inventory (units) 16,000 16,000 12,500 16,000

Units to be produced 10,000 8,500 9,000 27,500

Direct manufacturing labor-hours

(DMLH) per unit × 2.0 × 2.0 1.5

Total hours of direct manufacturing

labor time needed 20,000 17,000 13,500 50,500

Direct manufacturing labor costs:

Wages ($10.00 per DMLH) $200,000 $170,000 $135,000 $505,000

Pension contributions

($0.50 per DMLH) 10,000 8,500 6,750 25,250

Workers’ compensation insurance

($0.15 per DMLH) 3,000 2,550 2,025 7,575

Employee medical insurance

($0.40 per DMLH) 8,000 6,800 5,400 20,200

Social Security tax (employer’s share)

($10.00 0.075 = $0.75 per DMLH) 15,000 12,750 10,125 37,875

Total direct manufacturing

labor costs $236,000 $200,600 $159,300 $595,900

a100% of the first following month’s sales plus 50% of the second following month’s sales.

Note that the employee Social Security tax of 7.5% is irrelevant. Such taxes are withheld from employees’

wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5% amounts are not

additional costs to the employer.

6-9

6-24 (20–30 min.) Activity-based budgeting.

1. This question links to the ABC example used in the Problem for Self-Study in Chapter 5

and to Question 5-24 (ABC, retail product-line profitability).

Activity

Cost

Hierarchy

Soft

Drinks

Fresh

Produce

Packaged

Food

Total

Ordering

$90 14; 24; 14

Delivery

$82 12; 62; 19

Shelf-stocking

$21 16; 172; 94

Customer support

$0.18 4,600; 34,200; 10,750

Total budgeted indirect costs

Percentage of total indirect costs

Batch-level

Batch-level

Output-unit-

level

Output-unit-

level

$1,260

984

336

828

$3,408

12.5%

$ 2,160

5,084

3,612

6,156

$17,012

62.7%

$1,260

1,558

1,974

1,935

$6,727

24.8%

$ 4,680

7,626

5,922

8,919

$27,147

2. Refer to the last row of the table in requirement 1. Fresh produce, which probably

represents the smallest portion of COGS, is the product category that consumes the largest share

(62.7%) of the indirect resources. Fresh produce demands the highest level of ordering, delivery,

shelf-stocking and customer support resources of all three product categories—it has to be

ordered, delivered and stocked in small, perishable batches, and supermarket customers often ask

for a lot of guidance on fresh produce items.

3. An ABB approach recognizes how different products require different mixes of support

activities. The relative percentage of how each product area uses the cost driver at each activity

area is:

Activity

Cost

Hierarchy

Soft

Drinks

Fresh

Produce

Packaged

Food

Total

Ordering

Delivery

Shelf-stocking

Customer support

Batch-level

Batch-level

Output-unit-level

Output-unit-level

27%

13

6

9

46%

67

61

69

27%

20

33

22

100%

100

100

100

By recognizing these differences, FS managers are better able to budget for different unit sales

levels and different mixes of individual product-line items sold. Using a single cost driver (such

as COGS) assumes homogeneity in the use of indirect costs (support activities) across product

lines which does not occur at FS. Other benefits cited by managers include: (1) better

identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3)

identification of budgetary slack.

6-10

6-25 (20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-24).

1.

Budgeted Cost-Driver Rates

Activity Cost Hierarchy January February March

Ordering

Delivery

Shelf-stocking

Customer support

Batch-level

Batch-level

Output-unit-level

Output-unit-level

$90.00

82.00

21.00

0.18

$89.6400

81.6720

20.9160

0.1793

$89.2814

81.3453

20.8323

0.1786

The March 2011 rates can be used to compute the total budgeted cost for each activity area in

March 2011:

Activity

Cost

Hierarchy

Soft

Drinks

Fresh

Produce

Packaged

Food

Total

Ordering

$89.2814 14; 24; 14

Delivery

$81.3453 12; 62; 19

Shelf-stocking

$20.8323 16; 172; 94

Customer support

$0.1786 4,600;

34,200; 10,750

Total

Batch-level

Batch-level

Output-unit-level

Output-unit-level

$1,250

976

333

821

$3,380

$ 2,143

5,043

3,583

6,108

$16,877

$1,250

1,546

1,958

1,920

$6,674

$ 4,643

7,565

5,874

8,849

$26,931

2. A kaizen budgeting approach signals management’s commitment to systematic cost

reduction. Compare the budgeted costs from Question 6-24 and 6-25.

Ordering

Delivery

Shelf-

Stocking

Customer

Support

Question 6-24 $4,680 $7,626 $5,922 $8,919

Question 6-25 (Kaizen) 4,643 7,565 5,874 8,849

The kaizen budget number will show unfavorable variances for managers whose activities do not

meet the required monthly cost reductions. This likely will put more pressure on managers to

creatively seek out cost reductions by working ―smarter‖ within FS or by having ―better‖

interactions with suppliers or customers.

One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small

incremental improvements each month. It is possible that some cost improvements arise from

large discontinuous changes in operating processes, supplier networks, or customer interactions.

Companies need to highlight the importance of seeking these large discontinuous improvements

as well as the small incremental improvements.

6-11

6-26 (15 min.) Responsibility and controllability.

1. (a) Production manager

(b) Purchasing Manager

The purchasing manager has control of the cost to the extent that he/she is doing the purchasing

and can seek or contract for the best price. The production manager should work with the

purchasing manager from the warehouse. They can, together, possibly find a combination of

better engine and better price for the engine than the production manager has found.

2. (a) Production Manager

(b) External Forces

In the case of the utility rate hike the production manager would be responsible for the costs, but

they are hard to control. The rates are fixed by the utility company, and there is usually no

choice in which utility company is used. The production manager can try to reduce waste (turn

off lights when not in use, turn of machines when not running, don’t leave water running, etch)

but other than conservation measures, the manager has no say in the utility rates. The manager

might consider purchasing more energy-efficient machines.

3. (a) Van 3 driver

(b) Service manager

The driver of each van has the responsibility to stay within budget for the costs of the

service vehicle. The service manager should set policies to which the drivers must adhere,

including not using the van for personal use. Although costly, the service manager could install

GPS in the vans to make sure they are where they are supposed to be, and can also fire the driver

of Van 3 for misusing company property. (Using the van for personal driving affects the tax

deductibility of the van for the firm as well).

4. (a) Anderson’s service manager

(b) Bigstore Warehouse manager

Since Bigstore Warehouse has a maintenance contract with Anderson, both the warehouse

manager and Anderson’s service manager should work together to make sure routine

maintenance is scheduled for the Bigstore Warehouse forklifts. This will decrease the number

and cost of the repair emergencies. The manager should also consider the average cost of these

service calls over the months where there were no calls.

5. (a) Service manager

(b) This depends…

The answer to this question really depends on why Fred Snert works so slowly. If it is because

Fred is chatting with the customers (which may be why they like him) then the service manage

should tell him to only bill for actual time worked. If it is because Fred works intentionally

slowly to get the overtime, then the service manager should consider disciplining him unless he

is too valuable in other ways. If it is because he does not have adequate training, then HR should

6-12

be involved, and the service manager should work with Fred to get him more training and with

HR to make sure future hires are adequately trained.

6. (a) Service manager

(b) External forces

Like the cost of utilities, the cost of gasoline is determined externally. However, unlike

the case of utilities, it is possible that the service manager can contract with a gasoline

company to buy gas at a fixed price over a period of time. The advantage for Anderson is

that the price is set, and the advantage for the gasoline company is that they are certain to

have a long term customer even if the price is lower than for a random customer.

6-13

6-27 (30 min.) Cash flow analysis, chapter appendix.

1. The cash that Game Guys can expect to collect during May and June is calculated below.

Cash collected in May June

From service revenue

May ($1,400 x .97) $1,358.00

June ($2,600 x .97) $2,522.00

From sales revenue

Cash sales

From credit card sales

May (.5 x $6,200 x .97) 3,007.00

June (.5 x $9,700 x .97) 4,704.50

From cash sales

May (0.1 x $6,200) 620.00

June (0.1 x $9,700) 970.00

Credit sale collections

From April (.4 x $5,500 x .9) 1,980.00

(.4 x $5,500 x .08) 176.00

From May (.4 x $6.200 x .9) 2,232.00

Total collections $6,965.00 $10,604.50

2. (a) Budgeted expenditures for May are as follows.

Costs

Inventory purchases $4,350

Rent, utilities, etc. 1,400

Wages 1,000

TOTAL $6,750

Yes, Game Guys will be able to cover its May costs since receipts are $6,965 and

expenditures are only $6,750.

(b)

Original

numbers

May

Revenues

decrease

10%

May

Revenues

decrease

5%

May Costs

increase

8%

Beginning cash $100.00 $100.00 $100.00 $100.00

Collections 6,965.00 6,466.50a

6,715.75b 6,965.00

Cash Costs 6,750.00 6,750.00 6,750.00 7,290.00

Total $315.00 $(183.50) $ 65.75 $(225.00)

a From requirement 1, this is 0.90 × (1,358 + 3,007 + 620) + 1,980 = $6,466.50

b From requirement 1, this is 0.95 × (1,358 + 3,007 + 620) + 1,980 = $6,715.75

6-14

3. The cost of inventory purchases without the discount is $4,350, which Game Guys would

not have to pay until June if they buy the inventory on account in May. However, if they

take the discount and pay in May, the cost will be $4,350 x (100% - 2%) = $4,263. This

means they will save $87.

This makes total expenditures for May

Costs

Inventory purchases $4,263.00

Rent, utilities, etc. 1,400.00

Wages 1,000.00

TOTAL $6,663.00

Game Guys total cash available is $100 (cash balance) + $6,200 (cash receipts) so they will have

to borrow $363 at a rate of 24% (or 2% per month.) Based on the information from #1, they will

be able to pay this back in June (assuming cash expenditures don’t increase dramatically), so

they will incur interest costs of $363 x .02 = $7.26 (rounded up). Since it will cost them less

than $8 to save $87, it makes sense to go ahead and take the short-term loan to pay the account

payable early.

6-15

6-28 (40 min.) Budget schedules for a manufacturer.

1a. Revenues Budget Knights

Blankets

Raiders

Blankets

Total

Units sold 120 180

Selling price $150 $175

Budgeted revenues $18,000 $31,500 $49,500

b. Production Budget in Units Knights

Blankets

Raiders

Blankets

Budgeted unit sales 120 180

Add budgeted ending fin. goods inventory 20 25

Total requirements 140 205

Deduct beginning fin. goods inventory 10 15

Budgeted production 130 190

c. Direct Materials Usage Budget (units) Red

wool

Black

wool

Knights logo

patches

Raiders logo

patches

Total

Knights blankets:

1. Budgeted input per f.g. unit 3 – 1 –

2. Budgeted production 130 – 130 –

3. Budgeted usage (1 × 2) 390 – 130 –

Raiders blankets:

4. Budgeted input per f.g. unit – 3.3 – 1

5. Budgeted production – 190 – 190

6. Budgeted usage (4 × 5) – 627 – 190

7. Total direct materials

usage (3 + 6) 390 627 130 190

Direct Materials Cost Budget

8. Beginning inventory 30 10 40 55

9. Unit price (FIFO) $8 $10 $6 $5

10. Cost of DM used from

beginning inventory (8 × 9) $240 $100 $240 $275 $855

11. Materials to be used from

purchases (7 – 8) 360 617 90 135

12. Cost of DM in March $9 $9 $6 $7

13. Cost of DM purchased and

used in March (11 × 12) $3,240 $5,553 $540 $945 $10,278

14. Direct materials to be used

(10 + 13) $3,480 $5,653 $780 $1,220 $11,133

6-16

Direct Materials Purchases Budget

Red wool

Black

wool

Knights

logos

Raiders

logos

Total

Budgeted usage

(from line 7) 390 627 130 190

Add target ending inventory 20 20 20 20

Total requirements 410 647 150 210

Deduct beginning inventory 30 10 40 55

Total DM purchases 380 637 110 155

Purchase price (March) $9 $9 $6 $7 ______

Total purchases $3,420 $5,733 $660 $1,085 $10,898

d. Direct Manufacturing Labor Budget

Budgeted

Direct

Manuf. Labor-

Units Hours per Total Hourly

Produced Output Unit Hours Rate Total

Knights blankets 130 1.5 195 $26 $5,070

Raiders blankets 190 2.0 380 $26 $9,880

575 $14,950

e. Manufacturing Overhead Budget

Variable manufacturing overhead costs (575 × $15) $8,625

Fixed manufacturing overhead costs 9,200

Total manufacturing overhead costs $17,825

Total manuf. overhead cost per hour = $17,825 / 575 = $31 per direct manufacturing labor-hour

Fixed manuf. overhead cost per hour = $ 9,200 / 575 = $16 per direct manufacturing labor-hour

f. Computation of unit costs of ending inventory of finished goods

Knights

Blankets

Raiders

Blankets

Direct materials

Red wool ($9 × 3, 0) $ 27.0 $ 0.0

Black wool ($9 x 0, 3.3) 0.0 29.7

Knights logos ($6 x 1, 0) 6.0 0.0

Raiders logos ($7 x 0, 1) 0.0 7.0

Direct manufacturing labor ($26 ×1.5, 2) 39.0 52.0

Manufacturing overhead

Variable ($15 ×1.5, 2) 22.5 30.0

Fixed ($16 ×1.5, 2) 24.0 32.0

Total manufacturing cost $118.5 $150.7

6-17

Ending Inventories Budget

Cost per Unit Units Total

Direct Materials

Red wool $9.0 20 $ 180.0

Black wool 9.0 20 180.0

Knight logo

patches

6.0 20 120.0

Raider logo

patches

7.0 20 140.0

620.0

Finished Goods

Knight blankets 118.5 20 2,370.0

Raider blankets 150.7 25 3,767.5

6,137.5

Total $6,757.5

g. Cost of goods sold budget

Beginning fin. goods inventory, March 1, 2012 ($1,210 + $2,235) $ 3,445.0

Direct materials used (from Dir. materials cost budget) $11,133.0

Direct manufacturing labor (Dir. manuf. labor budget) 14,950.0

Manufacturing overhead (Manuf. overhead budget) 17,825.0

Cost of goods manufactured 43,908.0

Cost of goods available for sale 47,353.0

Deduct ending fin. goods inventory, March 31, 2012 (Inventories budget) 6,137.5

Cost of goods sold $41,215.5

2. Areas where continuous improvement might be incorporated into the budgeting process:

(a) Direct materials. Either an improvement in usage or price could be budgeted. For

example, the budgeted usage amounts for the fabric could be related to the maximum

improvement (current usage – minimum possible usage) of yards of fabric for either

blanket. It may also be feasible to decrease the price paid, particularly with quantity

discounts on things like the logo patches.

(b) Direct manufacturing labor. The budgeted usage of 1.5 hours/2 hours could be

continuously revised on a monthly basis. Similarly, the manufacturing labor cost per

hour of $26 could be continuously revised down. The former appears more feasible

than the latter.

(c) Variable manufacturing overhead. By budgeting more efficient use of the allocation

base, a signal is given for continuous improvement. A second approach is to budget

continuous improvement in the budgeted variable overhead cost per unit of the

allocation base.

(d) Fixed manufacturing overhead. The approach here is to budget for reductions in the

year-to-year amounts of fixed overhead. If these costs are appropriately classified as

fixed, then they are more difficult to adjust down on a monthly basis.

6-18

6-29 (45 min.) Activity-based budget: kaizen improvements.

1.

Increase in Costs for the Year

Assume DryPool uses New Dye

Units to dye 60,000

Cost differential ($1-$.20) per ounce x 3 ounces x $2.40

Increase in costs $144,000

Since the fine is only $102,000, they would be financially better off by not switching.

2. If DryPool switches to the new dye, costs will increase by $144,000.

If DryPool implements kaizen costing, costs will be reduced as follows:

Original monthly costs

Input Unit cost Number of units Total cost Annual cost

Fabric $6 6,000*

$36,000 $432,000 Labor $3 6,000

* $18,000 $216,000

Total

$54,000 $648,000 *

(12,000 + 60,000)/12 months = 6,000 units

Monthly decrease in costs

Fabric

Labor cost

Month 1 $36,000 Month 1 $18,000

Month 2 35,640 Month 2 17,820

Month 3 35,284 Month 3 17,642

Month 4 34,931 Month 4 17,466

Month 5 34,581 Month 5 17,291

Month 6 34,235 Month 6 17,118

Month 7 33,893 Month 7 16,947

Month 8 33,554 Month 8 16,778

Month 9 33,218 Month 9 16,610

Month 10 32,886 Month 10 16,444

Month 11 32,557 Month 11 16,280

Month 12 32,231 Month 12 16,117

$409,010

$204,513

TOTAL

$613,523

Diff between costs with and without Kaizen improvements $34,477

This means costs increase a net ($144,000 – 34,477) = $109,523

6-19

Since DryPool would otherwise have to spend $102,000 to pay the fine, their net costs would

only be $7,523 higher than if they did not switch to the new dye or implement kaizen costing.

3. Reduction in materials can be accomplished by reducing waste and scrap. Reduction in

direct labor can be accomplished by improving the efficiency of operations and decreasing down

time.

Employees who make and dye the T-shirts may have suggestions for ways to do their

jobs more efficiently. For instance, employees may recommend process changes that reduce idle

time, setup time, and scrap. To motivate workers to improve efficiency, many companies have

set up programs that share productivity gains with the workers. DryPool must be careful that

productivity improvements and cost reductions do not in any way compromise product quality.

6-20

6-30 (30–40 min.) Revenue and production budgets.

This is a routine budgeting problem. The key to its solution is to compute the correct quantities

of finished goods and direct materials. Use the following general formula:

( )Budgeted,production,or purchases = ( )Target,ending,inventory +

( )Budgeted,sales or,materials used – ( )Beginning,inventory

1. Scarborough Corporation

Revenue Budget for 2012

Units Price Total

Thingone 60,000 $165 $ 9,900,000

Thingtwo 40,000 250 10,000,000

Budgeted revenues $19,900,000

2. Scarborough Corporation

Production Budget (in units) for 2012

Thingone Thingtwo

Budgeted sales in units 60,000 40,000

Add target finished goods inventories,

December 31, 2012 25,000 9,000

Total requirements 85,000 49,000

Deduct finished goods inventories,

January 1, 2012 20,000 8,000

Units to be produced 65,000 41,000

3. Scarborough Corporation

Direct Materials Purchases Budget (in quantities) for 2012

Direct Materials

A B C

Direct materials to be used in production

• Thingone (budgeted production of 65,000

units times 4 lbs. of A, 2 lbs. of B) 260,000 130,000 --

• Thingtwo (budgeted production of 41,000

units times 5 lbs. of A, 3 lbs. of B, 1 lb. of C) 205,000 123,000 41,000

Total 465,000 253,000 41,000

Add target ending inventories, December 31, 2012 36,000 32,000 7,000

Total requirements in units 501,000 285,000 48,000

Deduct beginning inventories, January 1, 2012 32,000 29,000 6,000

Direct materials to be purchased (units) 469,000 256,000 42,000

6-21

4. Scarborough Corporation

Direct Materials Purchases Budget (in dollars) for 2012

Budgeted Expected

Purchases Purchase

(Units) Price per unit Total

Direct material A 469,000 $12 $5,628,000

Direct material B 256,000 5 1,280,000

Direct material C 42,000 3 126,000

Budgeted purchases $7,034,000

5. Scarborough Corporation

Direct Manufacturing Labor Budget (in dollars) for 2012

Direct

Budgeted Manufacturing Rate

Production Labor-Hours Total per

(Units) per Unit Hours Hour Total

Thingone 65,000 2 130,000 $12 $1,560,000

Thingtwo 41,000 3 123,000 16 1,968,000

Total $3,528,000

6. Scarborough Corporation

Budgeted Finished Goods Inventory

at December 31, 2012 Thingone:

Direct materials costs:

A, 4 pounds × $12 $48

B, 2 pounds × $5 10 $ 58

Direct manufacturing labor costs,

2 hours × $12 24

Manufacturing overhead costs at $20 per direct

manufacturing labor-hour (2 hours × $20) 40

Budgeted manufacturing costs per unit $122

Finished goods inventory of Thingone

$122 × 25,000 units $3,050,000

Thingtwo:

Direct materials costs:

A, 5 pounds × $12 $60

B, 3 pounds × $5 15

C, 1 each × $3 3 $ 78

Direct manufacturing labor costs,

3 hours × $16 48

Manufacturing overhead costs at $20 per direct

manufacturing labor-hour (3 hours × $20) 60

Budgeted manufacturing costs per unit $186

Finished goods inventory of Thingtwo

$186 × 9,000 units 1,674,000

Budgeted finished goods inventory, December 31, 2012 $4,724,000

6-22

6-31 (30 min.) Budgeted income statement.

Easecom Company

Budgeted Income Statement for 2012

(in thousands)

Revenues

Equipment ($6,000 × 1.06 × 1.10) $6,996

Maintenance contracts ($1,800 × 1.06) 1,908

Total revenues $8,904

Cost of goods sold ($4,600 × 1.03 × 1.06) 5,022

Gross margin 3,882

Operating costs:

Marketing costs ($600 + $250) 850

Distribution costs ($150 × 1.06) 159

Customer maintenance costs ($1,000 + $130) 1,130

Administrative costs 900

Total operating costs 3,039

Operating income $ 843

6-32 (15 min.) Responsibility of purchasing agent.

The cost of the biscuits is usually the responsibility of the purchasing agent, and usually

controllable by the Central Warehouse. However, in this scenario, Janet the cook has taken the

responsibility for the cost of the replacement biscuits from the purchasing agent by making a

purchasing decision. Since Barney holds the purchasing agent responsible for biscuit costs, and

presuming that Janet knew this, Janet should have discussed her decision with the purchasing

agent before sending the kitchen helper to the store.

Barney should not be angry because his employees acted to satisfy the customers on a short term

emergency basis. Presuming the Central Warehouse does not consistently have problems with

their freezer, there is no way the purchasing agent could foresee the biscuit shortage and plan

accordingly. Also, the problem only lasted three days, which, in the course of the year (or even

the month) will not seriously harm the profits of a restaurant that sells a variety of foods.

However, had they run out of biscuits for three days, this could have long term implications for

customer satisfaction and customer loyalty, and in the long run could harm profits as customers

find other restaurants in which to eat breakfast.

6-23

6-33 (60 min.) Comprehensive problem with ABC costing

1.

Revenue Budget

For the Month of April

Units Selling Price Total Revenues

Cat-allac 580 $190 $ 110,200

Dog-eriffic 240 275 66,000

Total $176,200

2.

Production Budget

For the Month of April

Product

Cat-allac Dog-eriffic

Budgeted unit sales 580 240

Add target ending finished goods inventory 45 25

Total required units 625 265

Deduct beginning finished goods inventory 25 40

Units of finished goods to be produced 600 225

3a.

Direct Material Usage Budget in Quantity and Dollars

For the Month of April

Material

Plastic Metal Total

Physical Units Budget

Direct materials required for

Cat-allac (600 units × 3 lbs. and 0.5 lb.) 1,800 lbs. 300 lbs.

Dog-errific (225 units × 5 lbs. and 1 lb.) 1,125 lbs. 225 lbs.

Total quantity of direct material to be used 2,925 lbs. 525 lbs.

Cost Budget

Available from beginning direct materials inventory

(under a FIFO cost-flow assumption)

Plastic: 230 lbs. × $3.80 per lb. $ 874

Metal: 70 lbs. × $3.20 per lb. $ 224

To be purchased this period .

Plastic: (2,925 – 230) lbs. $4 per lb. 10,780

Metal: (525 – 70) lbs. $3 per lb. __ ____ 1,365

Direct materials to be used this period $11,654 $ 1,589 $13,243

6-24

Direct Material Purchases Budget

For the Month of April

Material

Plastic Metal Total

Physical Units Budget

To be used in production (requirement 3) 2,925 lbs. 525 lbs.

Add target ending inventory 400 lbs. 65 lbs.

Total requirements 3,325 lbs. 590 lbs.

Deduct beginning inventory 230 lbs. 70 lbs.

Purchases to be made 3,095 lbs. 520 lbs.

Cost Budget

Plastic: 3,095 lbs. $4 $12,380

Metal: 520 lbs. $3 ______ $ 1,560

Purchases $12,380 $ 1,560 $ 13,940

4.

Direct Manufacturing Labor Costs Budget

For the Month of April

Output Units

Produced DMLH Total

Hourly

Wage

(requirement 2) per Unit Hours Rate Total

Cat-allac 600 3 1,800 $14 $25,200

Dog-errific 225 5 1,125 14 15,750

Total $40,950

5. Machine Setup Overhead

Cat-allac Dog-errific Total

Units to be produced 600 225

Units per batch ÷ 25 ÷13

Number of batches 24 18

Setup time per batch 1.25 hrs. 2.00 hrs.

Total setup time 30 hrs. 36 hrs. 66 hrs.

Budgeted machine setup costs = $130 per setup hour 66 hours

= $8,580

Processing Overhead

Budgeted machine-hours (MH) = (13 MH per unit × 600 units) + (20 MH per unit × 225 units)

= 7,800 MH + 4,500 MH = 12,300 MH

Budgeted processing costs = $5 per MH × 12,300 MH

= $61,500

Inspection Overhead

Budgeted inspection-hours = (0.5 24 batches) + (0.6 18 batches)

= 12 + 10.8 = 22.8 inspection hrs.

Budgeted inspection costs = $20 per inspection hr. 22.8 inspection hours

= $456

6-25

Manufacturing Overhead Budget

For the Month of April

Machine setup costs $ 8,580

Processing costs 61,500

Inspection costs 456

Total costs $70,536

6.

Unit Costs of Ending Finished Goods Inventory

April 30, 20xx

Product

Cat-allac Dog-errific

Cost per Input per Input per

Unit of

Input

Unit of

Output Total

Unit of

Output Total

Plastic $ 4 3 lbs. $ 12.00 5 lbs. $ 20.00

Metal 3 0.5 lbs. 1.50 1 lb. 3.00

Direct manufacturing labor 14 3 hrs. 42.00 5 hrs. 70.00

Machine setup 130 0.05 hrs. 1

6.50 0.16 hr1 20.80

Processing 5 13 MH 65.00 20 MH 100.00

Inspection 20 0.02 hr2 0.40 0.048 hr.

2 0.96

Total $127.40 $214.76

1 30 setup-hours ÷ 600 units = 0.05 hours per unit; 36 setup-hours ÷ 225 units = 0.16 hours per unit

2 12 inspection hours ÷ 600 units = 0.02 hours per unit; 10.8 inspection hours ÷ 225 units = 0.048 hours per unit

Ending Inventories Budget

April 30, 20xx

Quantity Cost per unit Total

Direct Materials

Plastic 400 $4 $1,600

Metals 65 3 195 $1,795

Finished goods

Cat-allac 45 $127.40 $5,733

Dog-errific 25 214.76 5,369 11,102

Total ending inventory $12,897

6-26

7.

Cost of Goods Sold Budget

For the Month of April, 20xx

Beginning finished goods inventory, April, 1 ($2,500 + $7,440) $ 9,940

Direct materials used (requirement 3) $13,243

Direct manufacturing labor (requirement 4) 40,950

Manufacturing overhead (requirement 5) 70,536

Cost of goods manufactured 124,729

Cost of goods available for sale 134,669

Deduct: Ending finished goods inventory, April 30 (reqmt. 6) 11,102

Cost of goods sold $123,567

8.

Nonmanufacturing Costs Budget

For the Month of April, 20xx

Salaries ($32,000 ÷ 2 1.05) $16,800

Other fixed costs ($32,000 ÷ 2) 16,000

Sales commissions ($176,200 1%) 1,762

Total nonmanufacturing costs $34,562

9.

Budgeted Income Statement

For the Month of April, 20xx

Revenues $176,200

Cost of goods sold 123,567

Gross margin 52,633

Operating (nonmanufacturing) costs 34,562

Operating income $ 18,071

6-27

6-34 (25 min.) (Continuation of 6-33) Cash budget (Appendix)

Cash Budget

April 30, 20xx

Cash balance, April 1, 20xx $ 5,200

Add receipts

Cash sales ($176,200 × 10%) 17,620

Credit card sales ($176,200 × 90% × 98%) 155,408

Total cash available for needs (x) $178,228

Deduct cash disbursements

Direct materials ($8,400 + $13,940 × 50%) $ 15,370

Direct manufacturing labor 40,950

Manufacturing overhead ($70,536 ─ $22,500 depreciation) 48,036

Nonmanufacturing salaries 16,800

Sales commissions 1,762

Other nonmanufacturing fixed costs ($16,000 ─ $12,500 deprn) 3,500

Machinery purchase 13,800

Income taxes 5,400

Total disbursements (y) $145,618

Financing

Repayment of loan $ 2,600

Interest at 24% ($2,600 24%1

12)

52

Total effects of financing (z) $ 2,652

Ending cash balance, April 30 (x) ─ (y) ─ (z) $ 29,958

6-28

6-35 (60 min.) Comprehensive operating budget, budgeted balance sheet.

1. Schedule 1: Revenues Budget for the Year Ended December 31, 2012

Units Selling Price Total Revenues

Snowboards 1,000 $450 $450,000

2. Schedule 2: Production Budget (in Units) for the Year Ended December 31, 2012

Snowboards Budgeted unit sales (Schedule 1) 1,000

Add target ending finished goods inventory 200

Total requirements 1,200

Deduct beginning finished goods inventory 100

Units to be produced 1,100

3. Schedule 3A: Direct Materials Usage Budget for the Year Ended December 31, 2012

Wood Fiberglass Total

Physical Units Budget Wood: 1,100 × 5.00 b.f. 5,500

Fiberglass: 1,100 × 6.00 yards 6,600

To be used in production 5,500 6,600

Cost Budget

Available from beginning inventory

Wood: 2,000 b.f. × $28.00 $ 56,000

Fiberglass: 1,000 b.f. × $4.80 $ 4,800

To be used from purchases this period

Wood: (5,500 – 2,000) × $30.00 105,000

Fiberglass: (6,600 – 1,000) × $5.00 28,000

Total cost of direct materials to be used $161,000 $32,800 $193,800

Schedule 3B: Direct Materials Purchases Budget for the Year Ended December 31, 2012

Wood Fiberglass Total

Physical Units Budget

Production usage (from Schedule 3A) 5,500 6,600

Add target ending inventory 1,500 2,000

Total requirements 7,000 8,600

Deduct beginning inventory 2,000 1,000

Purchases 5,000 7,600

Cost Budget

Wood: 5,000 × $30.00 $150,000

Fiberglass: 7,600 × $5.00 $38,000

Purchases $150,000 $38,000 $188,000

6-29

4. Schedule 4: Direct Manufacturing Labor Budget for the Year Ended December 31, 2012

Labor Category

Cost Driver

Units

DML Hours per

Driver Unit

Total

Hours

Wage

Rate Total

Manufacturing labor 1,100 5.00 5,500 $25.00 $137,500

5. Schedule 5: Manufacturing Overhead Budget for the Year Ended December 31, 2012 At Budgeted Level of 5,500

Direct Manufacturing Labor-Hours

Variable manufacturing overhead costs

($7.00 × 5,500) $ 38,500

Fixed manufacturing overhead costs 66,000

Total manufacturing overhead costs $104,500

6. Budgeted manufacturing overhead rate: 5,500

$104,500 = $19.00 per hour

7. Budgeted manufacturing overhead cost per output unit: 1,100

$104,500 = $95.00 per output unit

8. Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2012

Cost per

Unit of

Inputa Inputs

b Total

Direct materials

Wood $30.00 5.00 $150.00

Fiberglass 5.00 6.00 30.00

Direct manufacturing labor 25.00 5.00 125.00

Total manufacturing overhead 95.00

$400.00 acost is per board foot, yard or per hour

binputs is the amount of each input per board

9. Schedule 6B: Ending Inventories Budget, December 31, 2012

Cost per

Units Unit Total Direct materials

Wood 1,500 $ 30.00 $ 45,000

Fiberglass 2,000 5.00 10,000

Finished goods

Snowboards 200 400.00 80,000

Total Ending Inventory $135,000

6-30

10. Schedule 7: Cost of Goods Sold Budget for the Year Ended December 31, 2012

From

Schedule Total Beginning finished goods inventory

January 1, 2010, $374.80 × 100 Given $ 37,480

Direct materials used 3A $193,800

Direct manufacturing labor 4 137,500

Manufacturing overhead 5 104,500

Cost of goods manufactured 435,800

Cost of goods available for sale 473,280

Deduct ending finished goods

inventory, December 31, 2012 6B 80,000

Cost of goods sold $393,280

11. Budgeted Income Statement for Slopes for the Year Ended December 31, 2012

Revenues Schedule 1 $450,000

Cost of goods sold Schedule 7 393,280

Gross margin 56,720

Operating costs

Variable marketing costs ($250 × 30) $ 7,500

Fixed nonmanufacturing costs 30,000 37,500

Operating income $ 19,220

12. Budgeted Balance Sheet for Slopes as of December 31, 2012

Cash $ 10,000

Inventory Schedule 6B 135,000

Property, plant, and equipment (net) 850,000

Total assets $995,000

Current liabilities $ 17,000

Long-term liabilities 178,000

Stockholders’ equity 800,000

Total liabilities and stockholders’ equity $995,000

6-31

6-36 (30 min.) Cash budgeting, chapter appendix.

1. Projected Sales May June July August September October

Sales in units 80 120 200 100 60 40

Revenues (Sales in units × $450) $36,000 $54,000 $90,000 $45,000 $27,000

Collections of Receivables

May June July August September October

From sales in:

May (30% $36,000) $10,800

June (50%; 30% $54,000) 27,000 $16,200

July (20%; 50%; 30% $90,000) 18,000 45,000 $ 27,000

August (20%; 50% $45,000) 9,000 22,500

September (20% $27,000) 5,400

Total $55,800 $70,200 $54,900

Calculation of Payables

May June July August September October

Material and Labor Use, Units

Budgeted production 200 100 60 40

Direct materials

Wood (board feet) 1,000 500 300 200

Fiberglass (yards) 1,200 600 360 240

Direct manuf. labor (hours) 1,000 500 300 200

Disbursement of Payments

Direct materials

Wood

(1,000; 500; 300 $30) $30,000 $15,000 $9,000

Fiberglass

(1,200; 600; 360 $5) 6,000 3,000 1,800

Direct manuf. labor

(500; 300; 200 $25) 12,500 7,500 5,000

Interest payment

(6% $30,000 ÷12) 150 150 150

Variable Overhead Calculation

Variable overhead rate $ 7 $ 7 $ 7

Overhead driver

(direct manuf. labor-hours) 500 300 200

Variable overhead expense $ 3,500 $ 2,100 $1,400

6-32

Cash Budget for the months of July, August, September 2012 July August September

Beginning cash balance $10,000 $ 5,650 $40,100

Add receipts: Collection of receivables 55,800 70,200 54,900

Total cash available $65,800 $75,850 $95,000

Deduct disbursements:

Material purchases $36,000 $18,000 $10,800

Direct manufacturing labor 12,500 7,500 5,000

Variable costs 3,500 2,100 1,400

Fixed costs 8,000 8,000 8,000

Interest payments 150 150 150

Total disbursements 60,150 35,750 25,350

Ending cash balance $ 5,650 $40,100 $69,650

2. Yes. Slopes has a budgeted cash balance of $69,650 on 10/1/2012 and so it will be in a

position to pay off the $30,000 1-year note on October 1, 2012.

3. No. Slopes does not maintain a $10,000 minimum cash balance in July. To maintain a

$10,000 cash balance in each of the three months, it could perhaps encourage its customers to

pay earlier by offering a discount. Alternatively, Slopes could seek short-term credit from a

bank.

6-33

6-37 (40–50 min.) Cash budgeting.

Itami Wholesale Co.

Statement of Budgeted Cash Receipts and Disbursements

For the Months of December 2011 and January 2012

December 2011 January 2012

Cash balance, beginning $ 88,000 $ 18,470

Add receipts:

Collections of receivables (Schedule 1) 295,250 265,050

(a) Total cash available for needs 383,250 283,520

Deduct disbursements:

For merchandise purchases (Schedule 2) $291,280 $223,040

For variable costs (Schedule 3) 66,000 50,000

For fixed costs (Schedule 3) 7,500 7,500

(b) Total disbursements 364,780 280,540

Cash balance, end of month (a – b) $ 18,470 $ 2,980

Under the current projections, the cash balance as of January 31, 2012, is $2,980, which is not

sufficient to enable repayment of the $100,000 note.

Schedule 1: Collections of Receivables

Collections in Oct. Sales Nov. Sales Dec. Sales Jan. Sales Total

December $39,200a $96,000

b $160,050

c ---- $295,250

January $44,800d

$ 99,000e $121,250

f $265,050

a 0.14 × $280,000

b 0.30 × $320,000

c 0.50 × $330,000 × .97

d 0.14 × $320,000

e 0.30 × $330,000

f 0.50 × $250,000 × .97

6-34

Schedule 2: Payments for Merchandise

December January

Target ending inventory (in units) 750a 740

c

Add units sold (sales ÷ $100) 3,300 2,500

Total requirements 4,050 3,240

Deduct beginning inventory (in units) 815b 750

Purchases (in units) 3,235 2,490

Purchases in dollars (units × $80) $258,800 $199,200

December January

Cash disbursements:

For December: accounts payable; $136,000

60% of current month’s purchases $155,280 $119,520

For January: 40% of December’s purchases _______ 103,520

$291,280 $223,040

a500 units + 0.10 ($250,000 ÷ $100)

b$65,200 ÷ $80

c500 units + 0.10($240,000 ÷ $100)

Schedule 3: Marketing, Distribution, and Customer-Service Costs

Total annual fixed costs, $120,000, minus $30,000 depreciation $90,000

Monthly fixed cost requiring cash outlay $ 7,500

Variable cost ratio to sales = $2,400,000

$120,000 $600,000 = 0.2

December variable costs: 0.2 × $330,000 sales $66,000

January variable costs: 0.2 × $250,000 sales $50,000

6-35

6-38 (60 min.) Comprehensive problem; ABC manufacturing, two products.

1.

Revenues Budget

For the Year Ending December 31, 2011

Units

Selling

Price Total Revenues

Combs 12,000 $ 6 $72,000

Brushes 14.000 $20 $280,000

Total $352,000

2a. Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed

marketing costs

= $14,100 + $60,000 = $74,100

Marketing allocation rate = $74,100 / $352,000 = $0.21 per sales dollar

2b. Total budgeted distribution costs = Budgeted variable distribution costs + Budgeted fixed

distribution costs

= $0 + $780 = $780

Combs: 12,000 units ÷ 1,000 units per delivery 12 deliveries

Brushes: 14,000 units ÷ 1,000 units per delivery 14 deliveries

Total 26 deliveries

Delivery allocation rate = $780 / 26 deliveries = $30 per delivery

3.

Production Budget (in Units)

For the Year Ending December 31, 2011

Product

Combs Brushes

Budgeted unit sales 12,000 14,000

Add target ending finished goods inventory 1,200 1,400

Total required units 13,200 15,400

Deduct beginning finished goods inventory 600 1,200

Units of finished goods to be produced 12,600 14,200

6-36

4a.

Combs Brushes Total

Machine setup overhead

Units to be produced 12,600 14,200

Units per batch ÷200 ÷100

Number of setups 63 142

Hours to setup per batch ×1/3 ×1

Total setup hours 21 142 163

Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs

= $6,830 + $11,100 = $17,930

Machine setupallocation rate

= $17,930 / 163 setup hours = $110 per setup hour

b.

Combs: 12,600 units × .025 MH per unit 315 MH

Brushes: 14,200 units × 0.1 MH per unit 1,420 MH

Total 1,735 MH

Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed

processing costs

= $7,760 + $20,000 = $27,760

Processing allocation rate = $27,760 / 1,735 MH = $16 per MH

c. Total budgeted inspection costs = Budgeted variable inspection costs + Budgeted fixed

inspection costs

= $7,000 + $1,040 = $8,040

Inspection allocation rate = $8,040 / 26,800 units = $0.30 per unit

5.

Direct Material Usage Budget in Quantity and Dollars

For the Year Ending December 31, 2011

Material

Plastic Bristles Total

Physical Units Budget

Direct materials required for

Combs (12,600 units × 5 oz and 0 bunches) 63,000 oz.

Brushes (14,200 units × 8 oz and 16 bunches) 113,600 oz. 227,200 bunches

Total quantity of direct materials to be used 176,600 oz. 227,200 bunches

6-37

Cost Budget

Available from beginning direct materials inventory

(under a FIFO cost-flow assumption) $ 304 $ 946

To be purchased this period

Plastic: (176,600 oz. ─ 1,600 oz) × $0.20 per oz. 35,000

Bristles: (227,200 bunches ─ 1,820) × $0.5 per bunch ______ 112,690

Direct materials to be used this period $35,304 $ 113,636 $148,940

Direct Materials Purchases Budget

For the Year Ending December 31, 2011

Material

Plastic Bristles Total

Physical Units Budget

To be used in production (requirement 5) 176,600 oz. 227,200 bunches

Add: Target ending direct material inventory 1,766 2,272

Total requirements 178,366 oz. 229,472 bunches

Deduct: Beginning direct material inventory 1,600 oz. 1,820 bunches

Purchases to be made 176,766 oz. 227,652 bunches

Cost Budget

Plastic: 176,766 oz. $0.20 per oz $ 35,353

Bristles : 227,652 bunches $0.5 per bunch _______ $ 113,826

Purchases $ 35,353 $ 113,826 $149,179

Total budgeted materials handling costs = Budgeted variable

Materials handling costs + Budgeted fixed materials handling

costs

= $11,490 + $15,000 = $26,490

Materials handlingallocation rate

= $26,490 / 176,600 oz = $0.15 per oz. of plastic

7.

Direct Manufacturing Labor Costs Budget

For the Year Ending December 31, 2011

Output Units Direct Manufacturing Total Hourly Wage Total

Produced Labor-Hours per Unit Hours Rate

Combs 12,600 0.05 630 $12 $ 7,560

Brushes 14,200 0.2 2,840 12 34,080

Total $41,640

6-38

8.

Manufacturing Overhead Cost Budget

For the Year Ending December 31, 2011

Variable Fixed Total

Materials handling $ 11,490 $ 15,000 $ 26,490

Machine setup 6,830 11,100 17,930

Processing 7,760 20,000 27,760

Inspection 7,000 1,040 8,040

TOTALS $ 33,080 $ 47,140 $ 80,220

6-39

9. Unit Costs of Ending Finished Goods Inventory

For the Year Ending December 31, 2011

Combs Brushes

Cost per Input per Input per

Unit of

Input

Unit of

Output Total

Unit of

Output Total

Plastic $0.20 5 oz. $1.00 8 oz $ 1.60

Bristles 0.50 ─ ─ 16 bunches 8.00

Direct manufacturing labor 12 .05 hrs. 0.60 0.2 hour 2.40

Materials handling 0.15 5 oz. 0.75 8 oz 1.20

Machine setup 110 0.00167 hrs.1 0.18 0.01 setup-hr

1 1.10

Processing 16 .025 MH 0.40 0.1 MH 1.60

Inspection 0.30 1 unit 0.30 1 unit 0.30

Totals $3.23 $16.20

1 21 setup-hours ÷ 12,600 units = 0.00167 hours per unit; 142 setup hours ÷ 14,200 units = 0.01 hours per unit

Ending Inventories Budget

December 31, 2011

Quantity Cost per unit Total

Direct Materials

Plastic 1,766 oz $0.20 $353.20

Bristles 2,272 bunches 0.50 1,136.00 $1,489.20

Finished goods

Combs 1,200 $3.23 $3,876.00

Brushes 1,400 16.20 22,680.00 26,556.00

Total ending inventory $28,045.20

10.

Cost of Goods Sold Budget

For the Year Ending December 31, 2011

Beginning finished goods inventory, Jan. 1 ($1,800 + $18,120) $ 19,920

Direct materials used (requirement 5) $148,940

Direct manufacturing labor (requirement 7) 41,640

Manufacturing overhead (requirement 8) 80,220

Cost of goods manufactured 270,800

Cost of goods available for sale 290,720

Deduct: Ending finished goods inventory, December 31 (reqmt. 9) 26,556

Cost of goods sold $264,164

6-40

11.

Nonmanufacturing Costs Budget

For the Year Ending December 31, 2011

Variable Fixed Total

Marketing $14,100 $60,000 $74,100

Distribution 0 780 780

Total $14,100 $60,780 $74,880

12.

Budgeted Income Statement

For the Year Ending December 31, 2011

Revenue $352,000

Cost of goods sold 264,164

Gross margin 87,836

Operating (nonmanufacturing) costs 74,880

Operating income $12,956

6-41

6-39 (15 min.) Budgeting and ethics.

1. The standards proposed by Wert are not challenging. In fact, he set the target at the level his

department currently achieves.

DM 3.95 lbs. 100 units = 395 lbs.

DL 14.5 min. 100 units = 1,450 min ÷ 60 = 24 hrs. approx

MT 11.8 min. 100 units = 1,180 min. ÷ 60 = 20 hrs. approx

2. Wert probably chose these standards so that his department would be able to make the goal

and receive any resulting reward. With a little effort, his department can likely beat these goals.

3. As discussed in the chapter, benchmarking might be used to highlight the easy targets set by

Wert. Perhaps the organization has multiple plant locations that could be used as comparisons.

Alternatively, management could use industry averages. Also, management should work with

Wert to better understand his department and encourage him to set more realistic targets.

Finally, the reward structure should be designed to encourage increasing productivity, not

beating the budget.

6-40 (45 min.) Human Aspects of Budgeting in a Service Firm

1. The manager of Hair Suite III has the best style, because this manager is involving the

workers in a decision that directly affects their work.

2. The workers will most likely be upset or even angry with the manager of Hair Suite I.

The manager is not a stylist, and yet is changing the schedule for the stylists, assuming

they can work faster and need less rest between customers, without discussing this

change with them or asking for input or suggestions.

To indicate displeasure, the stylists at Hair Suite I could quit, or they could perform a

work slowdown. This means that the manager will schedule a customer for a 40 minute

appointment, but the stylist will spend more than 40 minutes with each customer anyway.

The result is that the appointments will get backed up, some customers may not get

served, and overall the customers will be unhappy.

Most of the workers in Hair Suite II are not likely to volunteer to work an extra hour a

day. Although it would mean additional revenue for each stylist, it will make each work

day longer and the idea was not presented to the workers in a way that appears beneficial

to the workers.

To indicate displeasure with this plan, the stylist will simply not volunteer to work an

extra hour a day.

3. Of course the manager of Hair Suite III could implement one of the plans of the other

salons. That is, workers could shorten their appointment times per customer, or lengthen

their work days, or a combination of both. Alternately, workers could work six days per

week rather than five. However, in the case of salon III, the manager has invited the

stylists to help solve the problem rather than the manager telling them what changes to

6-42

make, so they will be more likely to agree to make changes since they are involved in the

decision.

Other things they may do:

The manager may let individual stylists set their own schedules. It is possible that

not all customers need an hour each, and the stylists can individually book

customers in a way that works in an extra customer per day.

They could agree to shorter lunch breaks

They could implement a monthly contest to see who can service the most

customers (but still have satisfied customers) and earn rewards, including

o A name on a plaque for employee of the month (virtually no cost to the

salon)

o Gift certificates to local businesses (low cost to the salon)

o Reduction in one month’s rental revenue (some cost to the salon,

depending on the amount of the reduction)

o If the salon is in an area where parking is hard to find or costly, a month of

free parking or an assigned parking space

4. A stretch target is supposed to be challenging but achievable. The manager of Hair Suite

I is asking the stylists to reduce per customer service time by 20 minutes, or a 20/60 =

33% reduction in service time. Even if this reduction is achievable, the other part of the

issue is whether the customers will believe they are still getting the same quality service.

In a hair salon this is particularly important because the customers expect to look good

when they come out, and they will not if the stylist has to rush or cut corners to meet the

40 minute deadline. Also, as mentioned before, the stretch target should motivate

employees but if the manager simply imposes the time constraint on the stylists without

their input, this will have the opposite effect.

6-43

6-41 (60 min.) Comprehensive budgeting problem; activity-based costing, operating and

financial budgets.

1a.

Revenues Budget

For the Month of June, 2012

Units Selling Price Total Revenues

Regular 2,000 $80 $160,000

Deluxe 3,000 130 390,000

Total $550,000

b.

Production Budget

For the Month of June, 2012

Product

Regular Deluxe

Budgeted unit sales 2,000 3,000

Add: target ending finished goods inventory 400 600

Total required units 2,400 3,600

Deduct: beginning finished goods inventory 250 650

Units of finished goods to be produced 2,150 2,950

c.

Direct Material Usage Budget in Quantity and Dollars

For the Month of June, 2012

Material

Cloth Wood Total

Physical Units Budget

Direct materials required for

Regular (2,150 units × 1.3 yd.; 0 bd-ft) 2,795 yds. 0

Deluxe (2,950 units × 1.5 yds.; 2 bd-ft) 4,425 yds. 5,900

Total quantity of direct materials to be used 7,720 yds. 5,900

Cost Budget

Available from beginning direct materials inventory

(under a FIFO cost-flow assumption)

$ 2,146 $ 4,040

To be purchased this period

Cloth: (7720 yd. – 610 yd.) × $3.50 per yd. 24,885

Wood: (5,900 – 800) × $5 per bd-ft _ ___ 25,500

Direct materials to be used this period $27,031 $29,540 $56,571

6-44

Direct Materials Purchases Budget

For the Month of June, 2012

Material

Cloth Wood Total

Physical Units Budget

To be used in production 7,720 yds. 5,900 ft

Add: Target ending direct material inventory 386 yds. 295 ft

Total requirements 8,106 yds. 6,195 ft

Deduct: beginning direct material inventory 610 yds. 800 ft

Purchases to be made 7,496 yds. 5,395 ft

Cost Budget

Cloth: (7,496 yds. × $3.50 per yd.) $26,236

Wood: (5,395 ft × $5 per bd-ft) ___ _ $26,975

Total $26,236 $26,975 $53,211

d.

Direct Manufacturing Labor Costs Budget

For the Month of June, 2012

Output Units Direct Manufacturing Total Hourly Wage Total

Produced Labor-Hours per Unit Hours Rate

Regular 2,150 5 10,750 $10 $107,500

Deluxe 2,950 7 20,650 10 206,500

Total 31,400 $314,000

e.

Manufacturing Overhead Costs Budget

For the Month of June 2012

Total

Machine setup

(Regular 43 batches1

2 hrs./batch + Deluxe 59 batches2

3 hrs./batch) $12/hour $ 3,156

Processing (31,400 DMLH $1.20) 37,680

Inspection (5100 pairs x $0.90 per pair) 4,590

Total $45,426

1Regular: 2,150 pairs ÷ 50 pairs per batch = 43;

2Giant: 2,950 pairs ÷ 50 pairs per batch = 59

6-45

f. Unit Costs of Ending Finished Goods Inventory

For the Month of June, 2012 Regular Deluxe

Cost per

Unit of Input

Input per

Unit of Output

Total

Input per

Unit of Output Total

Cloth $ 3.50 1.3 yd $ 4.55 1.5 yd $ 5.25

Wood 5.00 0 0 2 bd-ft 10.00

Direct manufacturing labor 10.00 5 hr. 50.00 7 hrs 70.00

Machine setup 12.00 0.04 hr. 1 0.48 0.06 hr

1 0.72

Processing 1.20 5 hrs 6.00 7 hrs 8.40

Inspection 0.90 1 pair 0.90 1 pair 0.90

Total $61.93 $95.27

1 2 hours per setup ÷ 50 pairs per batch = 0.04 hr. per unit;

3 hours per setup ÷ 50 pairs per batch = 0.06 hr. per unit.

Ending Inventories Budget

June, 2012

Quantity Cost per unit Total

Direct Materials

Cloth 386 yards $3.50 $1,351

Wood 295 bd-ft 5.00 1,475 $ 2,826

Finished goods

Regular 400 $61.93 $24,772

Deluxe 600 95.27 57,162 81,934

Total ending inventory $84,760

g.

Cost of Goods Sold Budget

For the Month of June, 2012

Beginning finished goods inventory, June 1 ($15,500 + $61,750) $ 77,250

Direct materials used (requirement c) $56,571

Direct manufacturing labor (requirement d) 314,000

Manufacturing overhead (requirement e) 45,426

Cost of goods manufactured 415,997

Cost of goods available for sale 493,247

Deduct ending finished goods inventory, June 30 (requirement f) 81,934

Cost of goods sold $411,313

6-46

h.

Nonmanufacturing Costs Budget

For the Month of June, 2012

Total

Marketing and general administration

8% 550,000 $44,000

Shipping

(5,000 pairs / 40 pairs per shipmt) x $10 1,250

Total $45,250

2.

Cash Budget

June 30, 2012

Cash balance, June 1 (from Balance Sheet) $ 6,290

Add receipts

Collections from May accounts receivable 205,200

Collections from June accounts receivable

($550,000 60%) 330,000

Total collection from customers 535,200

Total cash available for needs (x) $541,490

Deduct cash disbursements

Direct material purchases in May $ 10,400

Direct material purchases in June

( $53,211 80%) 42,569

Direct manufacturing labor 314,000

Manufacturing overhead

( $45,426 70% because 30% is

depreciation) 31,798

Nonmanufacturing costs

( $45,250 90% because 10% is

depreciation) 40,725

Taxes

Dividends

7,200

10,000

Total disbursements (y) $456,692

Financing

Interest at 6% ($100,000 6% 1 ÷ 12) (z) $ 500

Ending cash balance, June 30 (x) ─ (y) ─ (z) $ 84,298

6-47

3.

Budgeted Income Statement

For the Month of June, 2012

Revenues $550,000

Cost of goods sold 411,313

Gross margin $138,687

Operating (nonmanufacturing) costs $45,250

Bad debt expense ($550,000 2%) 11,000

Interest expense (for June) 500 56,750

Net income $ 81,937

Budgeted Balance Sheet

June 30, 2012

Assets

Cash $ 84,298

Accounts receivable ($550,000 40%) $220,000

Less: allowance for doubtful accounts 11,000 209,000

Inventories

Direct materials $ 2,826

Finished goods 81,934 84,760

Fixed assets $580,000

Less: accumulated depreciation

($90,890 + 45,426 30% + 45,250 10%)) 109,043 470,957

Total assets $849,015

Liabilities and Equity

Accounts payable ($53,211 20%) $ 10,642

Interest payable 500

Long-term debt 100,000

Common stock 200,000

Retained earnings (465,936 + 81,937-10,000)) 537,873

Total liabilities and equity $849,015