Professional Documents
Culture Documents
9-3 An example of using the budget to allocate resources in a university is found in the
area of research funds and grants. Universities typically have a limited amount of
research-support resources that must be allocated among the various colleges and
divisions within the university. This allocation process often takes place within the
context of the budgeting process.
9-4 The flowchart on the following page depicts the components of the master budget
for a service station.
9-5 General economic trends are important in forecasting sales in the airline industry.
The overall health of the economy is an important factor affecting the extent of
business travel. In addition, the health of the economy, inflation, and income levels
affect the extent to which the general public travels by air.
9-6 Operational budgets specify how an organization's operations will be carried out to
meet the demand for its goods and services. The operational budgets prepared in a
hospital would include a labor budget showing the number of professional personnel
of various types required to carry out the hospital's mission, an overhead budget
listing planned expenditures for such costs as utilities and maintenance, and a cash
budget showing planned cash receipts and disbursements.
Sales Budget:
Sales Gasoline, Related
Budget Products, and
Services
Cash
Budget
Budgeted
Income
Statement
Budgeted Budgeted
Financial Balance Sheet
Statements
Budgeted
Statement of
Cash Flows
9.8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this
approach the information needed to construct a budget is gathered via the Internet
from individuals and subunits located throughout the enterprise. The Internet also is
used to disseminate the resulting budget schedules and information to authorized
users throughout the enterprise.
9-9 The city of New York could use budgeting for planning purposes in many ways. For
example, the city's personnel budget would be important in planning for required
employees in the police and fire departments. The city's capital budget would be
used in planning for the replacement of the city's vehicles, computers,
administrative buildings, and traffic control equipment. The city's cash budget would
be important in planning for cash receipts and disbursements. It is important for any
organization, including a municipal government, to make sure that it has enough
cash on hand to meet its cash needs at all times.
9.10The budget director, or chief budget officer, specifies the process by which budget data
will be gathered, collects the information, and prepares the master budget. To
communicate budget procedures and deadlines to employees throughout the
organization, the budget director often develops and disseminates a budget manual.
9-11 The budget manual says who is responsible for providing various types of
information, when the information is required, and what form the information is to
take. The budget manual also states who should receive each schedule when the
master budget is complete.
9-12 A company's board of directors generally has final approval over the master budget.
By exercising its authority to make changes in the budget and grant final approval,
the board of directors can wield considerable influence on the overall direction the
organization takes. Since the budget is used as a resource-allocation mechanism,
the board of directors can emphasize some programs and curtail or eliminate others
by allocating funds through the budgeting process.
9-15 The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary
slack. Building budgetary slack into the budget is called padding the budget. A
significant problem caused by budgetary slack is that the budget ceases to be an
accurate portrayal of likely future events. Cost estimates are often inflated, and
revenue estimates are often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-16 An organization can reduce the problem of budgetary slack in several ways. First, it
can avoid relying on the budget as a negative, evaluative tool. Second, managers
can be given incentives not only to achieve budgetary projections but also to
provide accurate projections.
9-18 This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge in
their minds about running their business. They feel that they do not need to spend a
great deal of time on the budgeting process, because they can essentially run the
business by feel. This approach can result in several problems. First, if the person
who is running the business is sick or traveling, he or she is not available to make
decisions and implement plans that could have been clarified by a budget. Second,
the purposes of budgeting are important to the effective running of an organization.
Budgets facilitate communication and coordination, are useful in resource
allocation, and help in evaluating performance and providing incentives to
employees. It is difficult to achieve these benefits without a budgeting process.
(d) Production
It is important to budget these costs as early as possible in order to ensure that the
revenue a product generates over its life cycle will cover all of the costs to be
incurred. A large portion of a product's life-cycle costs will be committed well before
they are actually incurred.
(b) Holding costs: The cost incurred in keeping inventory on hand for some period
of time. (Examples include the costs of storage space such as a warehouse,
depreciation, security, insurance, forgone interest on working capital tied up in
inventory, and the costs of deterioration and theft.)
(c) Shortage costs: The cost incurred by the organization when it does not have
materials or finished goods on hand when needed. (Examples include the costs
caused by disrupted production when raw materials are unavailable, lost sales,
dissatisfied customers, and the loss of quantity discounts on purchases.)
9-23 The EOQ approach assumes that some inventory must be held. The objective of the
model is to balance the cost of ordering against the cost of holding inventory. In
contrast, the JIT philosophy is to reduce all inventories to the absolute minimum,
eliminating them completely if possible. The JIT viewpoint asserts that inventory
holding costs tend to be higher than may be apparent because of the inefficiency
and waste involved in storing inventory. This view, coupled with the JIT goal of
reducing ordering costs to very low amounts, results in the desirability of more
frequent and smaller order quantities.
In addition, under JIT inventory management, order quantities typically will vary
depending on requirements. In contrast, under the EOQ model, the order quantity
remains constant.
1.
April May June
Sales........................................................... $80,000 $60,000 $90,000a
Cash receipts:
From cash sales.................................... $ 40,000b $ 30,000c $ 45,000
From sales on account......................... 36,000d 34,000 39,000e
Total cash receipts.................................... $ 76,000 $ 64,000 $ 84,000
a
$90,000 = $45,000 2
b
$40,000 = $80,000 .5
c
$30,000 = $60,000 .5
d
$36,000 = ($40,000 .6) + ($30,000 .4)
e
$39,000 = ($45,000 .6) + ($30,000 .4)
Answers will vary widely, depending on the governmental unit selected and the budgetary
items on which the student focuses. In the past, students have expressed surprise at the
proportion of the U.S. federal budget that goes to entitlement programs (e.g., Social
Security and Medicare), interest expense, and the military.
2. Purchases of raw material (in units), assuming production of 500,000 finished units:
Notice that the amount of sales on account in June, $49,000 was not needed to solve
the exercise.
Amount Collected
Credit
Month of Sale Sales October November December
October............................................ $90,000 $ 63,000 $13,500 $ 9,000
November........................................ 100,000 70,000 15,000
December......................................... 85,0000 59,500
Total................................................. $ 63,000 $83,500 $ 83,500
Total collections in fourth quarter
from credit sales in fourth
quarter......................................... $230,000
Sales in units:
July................................................................................................................ 200,000
August........................................................................................................... 210,000
September..................................................................................................... 220,500
Total for third quarter................................................................................... 630,500
Add: Desired ending inventory, September 30.......................................... 185,220
Subtotal......................................................................................................... 815,720
Deduct: Desired ending inventory, June 30............................................... 160,000
Total required production............................................................................ 655,720
3. BINGHAMTON CORPORATION
EXPECTED CASH BALANCE
AUGUST 31
Balance, August 1.......................................................................................... $22,000
Add: Expected collections............................................................................ 67,200
Less: Expected disbursements.................................................................... 67,320
Expected balance...................................................................................... $21,880
Memorandum
Date: Today
Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
and usefulness of the budget as a planning and control tool. When a budget includes
slack, the amounts in the budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts in
20x2. Yet the new accounts manager's projection is only 700 new accounts. This
projection will make it more likely that the actual number of new accounts will exceed
the budgeted number.
1.
Total Sales in January 20x2
$100,000 $130,000 $160,000
Cash receipts in January, 20x2
From December sales on account............ $ 7,125* $7,125 $7,125
From January cash sales.......................... 75,000 97,500 120,000
From January sales on account............... 20,000** 26,000 32,000
Total cash receipts..................................... $ 102,125 $130,625 $159,125
Cost of
Goods
Month Sales Sold Amount Purchased in December
December.................... $220,000 $165,000 $165,000 20% $ 33,000
January....................... 200,000 150,000 150,000 80% 120,000
Total December
purchases................ $153,000
May June
Half-hour visits (4,000 80%)............................................... 3,200 3,200
Billing rate.............................................................................. $40 $40
Total billings for half-hour visits........................................... $128,000 $128,000
One-hour visits (4,000 20%)............................................... 800 800
Billing rate.............................................................................. $70 $70
Total billings for one-hour visits........................................... $ 56,000 $ 56,000
Total billings during month................................................... $184,000 $184,000
Percentage of month's billings collected
during June........................................................................ 10% 90%
Collections during June........................................................ $ 18,400 $165,600
Total collections in June ($18,400 + $165,600).................... $184,000
Patient registration and records (4,000 visits $2.00 per visit). . . $ 8,000
Other overhead and administrative expenses
(2,400 hours $5.00 per hour)................................................... 12,000
Total overhead and administrative expenses................................. $20,000
(2)(13,230)($250)
Case A : EOQ 1,102,500 1,050
$6
(2)(1,681)($40)
Case B : EOQ 6,724 82
$20
(2)(560)($10)
Case C : EOQ 1,600 40
$7
1. Safety stock:
The lead time is one month, so the safety stock is equal to the difference between
average monthly usage and the maximum usage in a month. Average monthly usage is
65 tons (780/12), and the maximum usage is 80 tons. Therefore, the safety stock is 15
tons (80 65).
2. Reorder point:
The reorder point is 80 tons. This is the maximum amount of the bonding agent that
would be used in a month, which is the time required to receive an order after it is
placed.
Direct-labor costs:
Wages ($16.00 per DLH)............................. $160,000 $136,000 $108,000 $404,000
Pension contributions
($.50 per DLH)......................................... 5,000 4,250 3,375 12,625
Workers' compensation
insurance ($.20 per DLH)........................ 2,000 1,700 1,350 5,050
Employee medical insurance
($.80 per DLH)......................................... 8,000 6,800 5,400 20,200
Employer's social security
(at 7%)...................................................... 11,200 9,520 7,560 28,280
Total direct-labor cost..................................... $186,200 $158,270 $125,685 $470,155
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the sales data include the following:
Sales budget
Cost-of-goods-sold budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the production data include the following:
Direct-material budget
Manufacturing-overhead budget
Cost-of-goods-sold budget
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the direct-labor-hour data include the following:
Components of the master budget, other than the production budget and the direct-
labor budget, that would also use the direct-labor cost data include the following:
Cost-of-goods-sold budget
Cash budget
Month
4. No. While the number of faculty may be a key driver, the number of faculty is highly
dependent on the number of students. Students (and tuition revenue) are akin to
salesthe starting point in the budgeting process.
* $15,000 x 8% x 2/12
1. Income statement for the two months ended March 31, 20x1:
Assets:
Cash $114,000
Accounts receivable... 91,000
Merchandise inventory.. 14,000
Land 62,000
Plant & equipment (net). 56,000
Total assets $337,000
Supporting calculations:
3. Metroplex began February with a debit balance in Retained Earnings (i.e., a deficit),
presumably because of cumulative losses. By the end of March, the deficit had been
trimmed from $69,000 to $40,000 courtesy of profitable operations during the two-
month period.
Despite this turnaround, Metroplex may soon find itself in a cash bind. Cash
and near-cash projected for 3/31/01 total $219,000 ($114,000 + $91,000 + $14,000),
while short-term debt amounts to $237,000 ($180,000 + $57,000). The situation would
be somewhat more favorable without the land acquisition, with cash and near-cash
assets totaling $224,000 ($219,000 + $5,000) and Accounts Payable of $180,000 being
the only liability outstanding. From a liquidity perspective, the acquisition will not
help the firm.
1. Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $216,000 equal 60% of Decembers sales;
thus, December sales total $360,000 ($216,000 .6). Since the selling price is $40
per unit, Badlands sold 9,000 units ($360,000 $40).
2. Since the company expects to sell 10,000 units, sales revenue will total $400,000
(10,000 units x $40).
6. February sales will total 9,800 units ($392,000 $40), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:
1. Sales budget
3. Raw-material purchases
4. Direct-labor budget
1. Empire Chemical Companys production budget (in gallons) for the three products
for 20x2 is calculated as follows:
2. The companys conversion cost budget for 20x2 is shown in the following schedule:
3. Since the 20x1 usage of Islin is 100,000 gallons, the firms raw-material purchases
budget (in dollars) for Islin for 20x2 is as follows:
4. The company should continue using Islin, because the cost of using Philin is $76,316
greater than using Islin, calculated as follows:
Raw Material
Sheet Copper
Metal Wire Platforms
Light coils (65,000 units projected
to be produced)................................................. 260,000 130,000 __
Heavy coils (41,000 units projected
to be produced)................................................. 205,000 123,000 41,000
Production requirements........................................ 465,000 253,000 41,000
Add: Desired inventories, December 31, 20x0...... 36,000 32,000 7,000
Total requirements.................................................. 501,000 285,000 48,000
Deduct: Expected inventories,
January 1, 20x0.................................................. 32,000 29,000 6,000
Purchase requirements (units)............................... 469,000 256,000 42,000
Projected Hours
Production per Total Total
(units) Unit Hours Rate Cost
Light coils..................................... 65,000 2 130,000 $15 $1,950,000
Heavy coils................................... 41,000 3 123,000 20 2,460,000
Total.............................................. $4,410,000
Cost
Cost Driver Driver Budgeted
Quantity Rate Cost
a
725,000 = 469,000 + 256,000 (from req. 4)
b
106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
253,000 = 130,000 + 123,000 (from req. 5)
1. The benefits that can be derived from implementing a budgeting system include the
following:
2.
a. Schedule b. Subsequent Schedule
Sales Budget Production Budget
Selling Expense Budget
Budgeted Income Statement
1. The revised operating budget for Toronto Business Associates for the
fourth quarter is presented below. Supporting calculations follow:
Revenue:
Consulting fees:
Computer system consulting......................................................... $478,125
Management consulting................................................................. 468,000
Total consulting fees............................................................... $946,125
Other revenue......................................................................................... 10,000
Total revenue................................................................................... $956,125
Expenses:
Consultant salary expenses*................................................................. $510,650
Travel and related expenses.................................................................. 57,875
General and administrative expenses................................................... 93,000
Depreciation expense............................................................................. 40,000
Corporate expense allocation................................................................ 75,000
Total expenses................................................................................. $776,525
Operating income.......................................................................................... $179,600
Supporting calculations:
Computer
System Management
Consulting Consulting
Third Quarter:
Revenue............................................................................ $421,875 $315,000
Hourly billing rate............................................................. $75 $90
Billable hours.................................................................... 5,625 3,500
Number of consultants.................................................... 15 10
Hours per consultant....................................................... 375 350
Fourth-quarter planned increase.......................................... 50 50
Billable hours per consultant............................................... 425 400
Number of consultants.......................................................... 15 13
Billable hours......................................................................... 6,375 5,200
Billing rate.............................................................................. $75 $90
Projected revenue.................................................................. $478,125 $468,000
Computer
System Management
Consulting Consulting
Compensation:
Existing consultants:
Annual salary........................................................... $ 46,000 $ 50,000
Quarterly salary....................................................... $ 11,500 $ 12,500
Planned increase (10%).......................................... 1,150 1,250
Total fourth-quarter salary per consultant............ $ 12,650 $ 13,750
Number of consultants........................................... 15 10
Total................................................................................. $ 189,750 $137,500
New consultants at old salary (3 $12,500)................. -0- 37,500
Total salary...................................................................... $ 189,750 $175,000
Benefits (40%)................................................................. 75,900 70,000
Total compensation................................................. $ 265,650 $245,000
Travel expenses:
Computer system consultants (425 hr 15)................ 6,375
Management consultants (400 hr. 13)........................ 5,200
Total hours............................................................... 11,575
Rate per hour*................................................................ $5
Total travel expense................................................ $ 57,875
General and administrative ($100,000 93%)................... $ 93,000
Corporate expense allocation ($50,000 150%)............... $ 75,000
1. Sales budget:
Box C Box P
Sales...................................................................................... 500,000 500,000
Add: Desired ending inventory........................................... 5,000 15,000
Total units needed................................................................ 505,000 515,000
Deduct: Beginning Inventory.............................................. 10,000 20,000
Production requirements..................................................... 495,000 495,000
3. Raw-material budget:
PAPERBOARD
Box C Box P Total
Production requirement (number of boxes)........... 495,000 495,000
Raw material required per box (pounds)................ .3 .7
Raw material required for
production (pounds)............................................ 148,500 346,500 495,000
Add: Desired ending
raw-material inventory......................................... 5,000
Total raw-material needs......................................... 500,000
Deduct: Beginning raw-material inventory............ 15,000
Raw material to be purchased................................. 485,000
Price (per pound)..................................................... $.20
Cost of purchases (paperboard)............................. $ 97,000
CORRUGATING MEDIUM
Box C Box P Total
Production requirements (number of boxes)......... 495,000 495,000
Raw material required per box (pounds)................ .2 .3
Raw material required for
production (pounds)............................................ 99,000 148,500 247,500
Add: Desired ending
raw-material inventory......................................... 10,000
Total raw-material needs......................................... 257,500
Deduct: Beginning raw-material inventory............ 5,000
Raw material to be purchased................................. 252,500
Price (per pound)..................................................... $.10
Cost of purchases (corrugating medium).............. $ 25,250
Total cost of raw-material purchases
($97,000 + $25,250)............................................... $122,250
4. Direct-labor budget:
5. Manufacturing-overhead budget:
Box C Box P
Direct material:
Paperboard
.3 lb. $.20 per lb......................................... $.06
.7 lb. $.20 per lb......................................... $.14
Corrugating medium
.2 lb. $.10 per lb......................................... .02
.3 lb. $.10 per lb......................................... .03
Direct labor:
.0025 hr. $12 per hr.................................... .03
.005 hr. $12 per hr...................................... .06
Applied manufacturing overhead:
.0025 hr. $40 per hr.................................... .10
.005 hr. $40 per hr...................................... ___ .20
Manufacturing cost per unit..................................... $.21 $.43
2. For each of the financial objectives established by the board of directors and
president of Healthful Foods, Inc., the calculations to determine whether John
Winslows budget attains these objectives are presented in the following table.
Attained/
Objective Not Attained Calculations
Increase sales by 12% Not attained ($947,750$850,000)/$850,000 = 11.5%
($850,000 1.12 = $952,000)
Increase before-tax income by 15% Attained ($120,750$105,000)/$105,000 = 15%
($105,000 1.15 = $120,750)
Maintain long-term debt at or below Attained $308,000/$2,050,000 = 15% (rounded)
16% of assets
($2,050,000 .16 = $328,000)
Maintain cost of goods sold at or below Attained $574,725/$947,750 = 60.6% (rounded)
70% of sales
($947,750 .70 = $663,425)
1. Sales budget:
20x0 20x1
First
December January February March Quarter
Total sales........................ $400,000 $440,000 $484,000 $532,400 $1,456,400
Cash sales*...................... 100,000 110,000 121,000 133,100 364,100
Sales on account............ 300,000 330,000 363,000 399,300 1,092,300
20x1
First
January February March Quarter
Cash sales............................................. $110,000 $121,000 $133,100 $ 364,100
Cash collections from credit
sales made during current
month*............................................... 33,000 36,300 39,930 109,230
Cash collections from credit
sales made during preceding
month................................................ 270,000 297,000 326,700 893,700
Total cash receipts............................... $413,000 $454,300 $499,730 $1,367,030
3. Purchases budget:
20x0 20x1
First
December January February March Quarter
Budgeted cost of
goods sold.................. $280,000 $308,000 $338,800 $372,680 $1,019,480
Add: Desired
ending inventory........ 154,000 169,400 186,340 186,340* 186,340
Total goods
needed......................... $434,000 $477,400 $525,140 $559,020 $1,205,820
Less: Expected
beginning
inventory..................... 140,000 154,000 169,400 186,340 154,000**
Purchases........................ $294,000 $323,400 $355,740 $372,680 $1,051,820
*Since April's expected sales and cost of goods sold are the same as the projections
for March, the desired ending inventory for March is the same as that for February.
The desired ending inventory for the quarter is equal to the desired ending inventory
on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
20x1
First
January February March Quarter
Inventory purchases:
Cash payments for purchases
during the current month*........ $129,360 $142,296 $149,072 $ 420,728
Cash payments for purchases
during the preceding
month........................................ 176,400 194,040 213,444 583,884
Total cash payments for
inventory purchases....................... $305,760 $336,336 $362,516 $1,004,612
Other expenses:
Sales salaries................................... $21,000 $21,000 $21,000 $ 63,000
Advertising and promotion............. 16,000 16,000 16,000 48,000
Administrative salaries................... 21,000 21,000 21,000 63,000
Interest on bonds**......................... 15,000 -0- -0- 15,000
Property taxes**............................... -0- 5,400 -0- 5,400
Sales commissions......................... 4,400 4,840 5,324 14,564
20x1
First
January February March Quarter
Cash receipts [from req. (2)]................ $ 413,000 $ 454,300 $ 499,730 $1,367,030
Cash disbursements
[from req. (4)]................................... (383,160) (404,576) (425,840) (1,213,576)
Change in cash balance
during period due to operations.... $ 29,840 $ 49,724 $ 73,890 $ 153,454
Sale of marketable securities
(1/2/x1).............................................. 15,000 15,000
Proceeds from bank loan
(1/2/x1).............................................. 100,000 100,000
Purchase of equipment........................ (125,000) (125,000)
Repayment of bank loan
(3/31/x1)............................................ (100,000) (100,000)
Interest on bank loan*.......................... (2,500) (2,500)
Payment of dividends........................... (50,000) (50,000)
Cash................................................................................................................ $ 25,954
Accounts receivable*.................................................................................... 359,370
Inventory........................................................................................................ 186,340
Buildings and equipment (net of accumulated depreciation)................... 676,000
Total assets.................................................................................................... $1,247,664
an ual an ual
1. Annual cost of ordering =
and storing XL-20
requirem nt costper orderquantiy holding
order order 2 costper
quanity unit
(2)(annual requirement)(cost per order)
2. Economic order quantity = annual holding cost per unit
(2)(4,800)($150)
= $4
= 360,000 = 600
= $2,400
Note that this cost does not include the actual cost of XL-20 purchases (i.e., the
quantity puchased multiplied by the price).
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
9-48 Solutions Manual
4. Orders per year:
(2)(4,800)($20)
= $19.20
10,000 = 100
=
PROBLEM 9-49 (CONTINUED)
annual requirement 4,800
b. Number of orders per year = order quantity 100
= 48
Order size
400 600 800
Number of orders
(4,800 order size)................................. 12 8 6
Ordering cost
($150 number of orders)..................... $1,800 $1,200 $900
Average inventory
(order size 2)........................................ 200 300 400
Holding costs
($4 average inventory)........................ $800 $1,200 $1,600
Total annual costs (ordering
costs + holding costs)............................ $2,600 $2,400 $2,500
minimum
2. The tabular method is cumbersome and does not necessarily identify the optimal
order quantity. If the optimal order quantity does not happen to be selected as one of
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
Managerial Accounting, 5/e 9- 49
the order quantities for the tabular analysis, an order quantity other than those
included in the table will be the least-cost order quantity.
$3,500
$3,000
$1000
Ordering costs
$500
Order quantity
200 400 600 800 1,000
1. Reorder point:
annual usage
Monthly usage = 12
4,800
= 400 canisters
12
Usage during
1-month = 400 canisters
lead time
Reorder point = 400 canisters
The chemical XL-20 should be ordered in the economic order quantity of 600 canisters
when the inventory level falls to 400 canisters. In the one month it takes to receive the
order, those 400 canisters will be used in production.
Quantity (canisters)
of XL-20 Usage of
600 XL-20
400
200
Time
1 month Denotes
lead time Order 1 month
received
Reorder point, when
inventory equals 400
canisters. Order EOQ
of 600 canisters.
Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average
monthly usage still is 400 canisters, there is the potential for an excess range of 100
canisters in any particular month. The safety stock of XL-20 is equal to the potential
excess monthly usage of 100 canisters. With a safety stock of 100 canisters, the
reorder point is 500 canisters (400 + 100). The materials and parts manager should
order the EOQ of 600 canisters when the inventory of XL-20 falls to 500 canisters.
During the one-month lead time, another 300 to 500 canisters of XL-20 will be used in
production.
(2)(10,800)($172.80)
EOQ = $20.00
EOQ = 432 windshields per order
4. The minimum annual relevant cost at the economic order quantity is calculated as
follows:
(2)(10,800)($32.40)
a. EOQ = $60.00
= 100 orders
1. Yes, City Raquetball Club (CRC) should be better able to plan its cash receipts with
the new membership plan and fee structure. The cash flows should be more
predictable and certain because the large, prepaid membership fee becomes the only
factor affecting cash receipts. The hourly court fees, which were dependent upon a
variable that could fluctuate daily, are eliminated.
2. a. Factors that CRCs management should consider before adopting the new
membership plan and fee structure include:
The expected number of memberships by classes that can be sold for each
plan at the specified rates
The anticipated rate of return for excess cash or cost of borrowing funds in
periods of cash shortages
3. Because CRC's cash flows should be more predictable, management should be better
able to plan for and control cash disbursements. In addition, management should be
better able to plan for short-term investments when excess cash occurs or to arrange
for short-term financing when there are cash shortages.
The collection and billing function is also simplified with the new membership
plan and fee structure. There would be only a one-time cash receipt rather than
multiple transactions.
1. Some of the operational and behavioral benefits that are generally attributed to a
participatory budgeting process are as follows:
Utilization of the best knowledge of activities in a specific area, because the participants
are close to daily operations.
Goals that are more realistic and acceptable.
Improved communication and group cohesiveness.
A sense of commitment and willingness to be held accountable for the budget.
Deficiencies Recommendations
The setting of constraints on fixed Rewards should be based on meeting
expenditures includes uncontrollable fixed budget and/or organizational goals or
costs, thereby mitigating the positive effects objectives.
of participatory budgeting.
The arbitrary revision of approved budgets The contingency budget should be separate,
defeats the participatory process. over and above each departments original
submission.
The division manager holds back a Managers should be involved in the revision
percentage of each budget for discretionary of budgets. Managers could submit a
use. budget with programs at different levels of
funding.
Evaluation based on budget performance Divisional constraints could be
must be accompanied with intrinsic rewards. communicated at a budget kick-off
meeting; however, individual limits of
controllable expenses should be set by each
manager.
1. Sales budget:
20x0 20x1
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
S frame unit
sales..................... 50,000 55,000 60,000 65,000 70,000 250,000
S sales price...... $10 $10 $10 $10 x $10 $10
S frame sales
revenue................ $ 500,000 $ 550,000 $ 600,000 $ 650,000 $ 700,000 $2,500,000
L frame unit
sales..................... 40,000 45,000 50,000 55,000 60,000 210,000
L sales price...... $15 $15 $15 $15 $15 $15
L frame sales
revenue................ $ 600,000 $ 675,000 $ 750,000 $ 825,000 $ 900,000 $3,150,000
Total sales
revenue................ $1,100,000 $1,225,000 $1,350,000 $1,475,000 $1,600,000 $5,650,000
20x1
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Year
$ 490,000
Cash sales.......................................... $ 540,000 $ 590,000 $ 640,000 $2,260,000
Cash collections from credit
sales made during current
quarter*............................................588,000 648,000 708,000 768,000 2,712,000
Cash collections from credit
sales made during previous
132,000
quarter............................................ 147,000 162,000 177,000 618,000
Total cash receipts............................. $1,210,000 $1,335,000 $1,460,000 $1,585,000 $5,590,000
3. Production budget
20x0 20x1
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
S frames:
Sales (in units)................. 50,000 55,000 60,000 65,000 70,000 250,000
Add: Desired ending
inventory........................ 11,000 12,000 13,000 14,000 15,000 15,000
Total units needed............... 61,000 67,000 73,000 79,000 85,000 265,000
Less: Expected
beginning inventory......... 10,000 11,000 12,000 13,000 14,000 11,000
Units to be produced.......... 51,000 56,000 61,000 66,000 71,000 254,000
L frames:
Sales (in units)................. 40,000 45,000 50,000 55,000 60,000 210,000
Add: Desired ending
inventory........................ 9,000 10,000 11,000 12,000 13,000 13,000
Total units needed............... 49,000 55,000 61,000 67,000 73,000 223,000
Less: Expected
beginning inventory......... 8,000 9,000 10,000 11,000 12,000 9,000
Units to be produced.......... 41,000 46,000 51,000 56,000 61,000 214,000
4. Raw-material budget:*
20x0 20x1
4th 1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Quarter Year
Metal strips:
S frames to be
produced........................ 51,000 56,000 61,000 66,000 71,000 254,000
Metal quantity per
unit (ft.)........................... 2 2 2 2 2 2
Needed for S frame
production.....................102,000 112,000 122,000 132,000 142,000 508,000
L frames to be
produced........................ 41,000 46,000 51,000 56,000 61,000 214,000
Metal quantity per
unit (ft.)........................... 3 3 3 3 3 3
Needed for L frame
production.....................123,000 138,000 153,000 168,000 183,000 642,000
Total metal needed
for production; to
be purchased (ft.).......... 225,000 250,000 275,000 300,000 325,000 1,150,000
Price per foot................. $1 $1 $1 $1 $1 $1
Cost of metal strips to
be purchased:................$225,000 $250,000 $275,000 $300,000 $325,000 $1,150,000
Glass sheets:....................
S frames to be
produced........................ 51,000 56,000 61,000 66,000 71,000 254,000
Glass quantity per
unit (sheets)................... .25 .25 .25 .25 .25 .25
Needed for S frame
production.....................12,750 14,000 15,250 16,500 17,750 63,500
L frames to be
produced........................ 41,000 46,000 51,000 56,000 61,000 214,000
Glass quantity per
unit (sheets)................... .5 .5 .5 .5 .5 .5
Needed for L frame
production.....................20,500 23,000 25,500 28,000 30,500 107,000
Total glass needed
for production
(sheets).......................... 33,250 37,000 40,750 44,500 48,250 170,500
Add: Desired ending
inventory........................ 7,400 8,150 8,900 9,650 10,400 10,400
Total glass needs............. 40,650 45,150 49,650 54,150 58,650 180,900
Less: Expected
beginning inventory......6,650 7,400 8,150 8,900 9,650 7,400
Glass to be
purchased...................... 34,000 37,750 41,500 45,250 49,000 173,500
Price per glass
sheet............................... $8 $8 $8 $8 $8 $8
Cost of glass to be
purchased......................$272,000 $302,000 $332,000 $362,000 $392,000 $1,388,000
Total raw-material
purchases (metal
and glass)......................$497,000 $552,000 $607,000 $662,000 $717,000 $2,538,000
201
1st 2nd 3rd 4th Entire
Quarter Quarter Quarter Quarter Year
Raw-material purchases:
Cash payments for
purchases during
the current quarter.......... $441,600 $ 485,600 $ 529,600 $ 573,600 $2,030,400
Cash payments for
purchases during the
preceding quarter**.......... 99,400 110,400 121,400 132,400 463,600
Total cash payments for
raw-material purchases... $541,000 $ 596,000 $ 651,000 $ 706,000 $2,494,000
Direct labor:
Frames produced
(S and L)............................ 102,000 112,000 122,000 132,000 468,000
Direct-labor hours per
frame................................. .1 .1 .1 .1 .1
Direct-labor hours to be
used.................................. 10,200 11,200 12,200 13,200 46,800
Rate per direct-labor
hour................................... $20 $20 $20 $20 $20
Total cash payments for
direct labor....................... $204,000 $ 224,000 $ 244,000 $ 264,000 $ 936,000
Manufacturing overhead:
Indirect material.................... $ 10,200 $ 11,200 $ 12,200 $ 13,200 $ 46,800
Indirect labor......................... 40,800 44,800 48,800 52,800 187,200
Other...................................... 31,000 36,000 41,000 46,000 154,000
Total cash payments for
manufacturing
overhead........................... $ 82,000 $92,000 $ 102,000 $ 112,000 $ 388,000
20x1
1st 2nd 3nd 4th Entire
Quarter Quarter Quarter Quarter Year
Cash receipts [from req. (2)].......... $1,210,000 $1,335,000 $1,460,000 $1,585,000 $5,590,000
Less: Cash disbursements
[from req. (5)].............................. 927,000 1,012,000 1,097,000 1,182,000 4,218,000
Change in cash balance due to
operations................................... $ 283,000 $ 323,000 $ 363,000 $ 403,000 $1,372,000
Payment of dividends..................... (50,000) (50,000) (50,000) (50,000) (200,000)
Proceeds from bank loan (1/2/x1). . 1,000,000 1,000,000
Purchase of equipment.................. (1,000,000) (1,000,000)
Quarterly installment on loan
principal...................................... (250,000) (250,000) (250,000) (250,000) (1,000,000)
Quarterly interest payment*........... (25,000) (18,750) (12,500) (6,250) (62,500)
Change in cash balance during
the period.................................... $ (42,000) $ 4,250 $ 50,500 $ 96,750 $ 109,500
Cash balance, beginning of period 95,000 53,000 57,250 107,750 95,000
Cash balance, end of period.......... $ 53,000 $ 57,250 $ 107,750 $ 204,500 $ 204,500
7. FRAME-IT COMPANY
BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, 1/1/x1................................................. $ 59,200
Add: Purchases of raw material [req. (4)]................................ 2,538,000
Raw material available for use................................................. $2,597,200
Deduct: Raw-material inventory, 12/31/x1
([req. (4)] 10,400 $8)........................................................... 83,200
Raw material used $2,514,000
Direct labor [req. (5)]....................................................................... 936,000
Manufacturing overhead:
Indirect material......................................................................... $ 46,800
Indirect labor............................................................................. 187,200
Other overhead.......................................................................... 154,000
Depreciation.............................................................................. 80,000
Total manufacturing overhead................................................. 468,000*
Cost of goods manufactured.......................................................... $3,918,000
Add: Finished-goods inventory, 1/1/x1.......................................... 167,000
Cost of goods available for sale.................................................... $4,085,000
Deduct: Finished-goods inventory, 12/31/x1................................. 235,000**
Cost of goods sold.......................................................................... $3,850,000
*In the budget, budgeted and applied manufacturing overhead are equal. The applied
manufacturing overhead may be verified independently as follows:
S Frames L Frames
Frames produced................................................................... 254,000 214,000
Manufacturing cost per unit.............................................. $7 $10
Total manufacturing cost...................................................... $1,778,000 $2,140,000
Grand total............................................................................. $3,918,000
S Frames L Frames
Projected inventory on 12/31/x1........................................... 15,000 13,000
Manufacturing cost per unit.................................................. $7 $10
Cost of ending inventory....................................................... $ 105,000 $ 130,000
Total cost of ending inventory (S and L).............................. $235,000
S Frames L Frames
Frames sold........................................................................... 250,000 210,000
Manufacturing cost per unit.................................................. $7 $10
Cost of goods sold................................................................ $1,750,000 $2,100,000
Total cost of goods sold (S and L)....................................... $3,850,000
8. FRAME-IT COMPANY
BUDGETED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
9. FRAME-IT COMPANY
BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 20X1
Cash.............................................................................................................. $ 204,500
Accounts receivable*................................................................................... 192,000
Inventory:
Raw material......................................................................................... 83,200
Finished goods...................................................................................... 235,000
Plant and equipment (net of accumulated depreciation)**....................... 8,920,000
Total assets................................................................................................... $9,634,700
"U.S. AIRLINES CONSIDER IMPACT OF HIGHER FUEL BILL," THE WALL STREET JOURNAL,
OCTOBER 13, 2000. "AMERICAN'S NET SOARS, BUT HIGH OIL PRICES STING U.S.
AIRWAYS," THE WALL STREET JOURNAL, OCTOBER 19, 2000, MELANIE TRUTTMAN
AND SUSAN CAREY.
1. Higher fuel costs mean that airlines may have to raise airfares so that costs are met.
2. Higher fuel costs result in many expenses increasing throughout society. Since
airlines have to purchase many different kinds of supplies, many of which could be
affected by rising prices, increased fuel prices could affect the airlines budgets in
many places in addition to their actual fuel costs.
ISSUE 9-58
2. New technology via computer software allows employees from different levels of an
organization to provide integrated input into budget formation. This has allowed a
faster and more accurate process on a national as well as an international scale that
is updated on a continuous basis.
ISSUE 9-60
There are fewer best practices that are directly transferable from company to company
than exist with re-engineering. This article discusses re-engineering the planning
process. Planning pervades every corner of an organization and is steeped in a
tradition of negotiation. Planning is the most political of all processes. Success in this
area requires patience, communication with employees, investment in new data-
gathering tools and time. It also requires finance to evolve from being a reporter to
being a facilitator of the process. Companies that succeed in revamping this process
believe they can accurately assess strategic decisions based on metrics intrinsic to the
business. Since this is a continuous process that starts when senior management
defines business objectives and communicates them to the operating lines, benefits
begin immediately.
ISSUE 9-61
Using too much detail can bog an audience down and make them miss the overall
message. The author of the article suggests choosing the view of a picture that is best
for the message the presenter is trying to convey. Use bar graphs, pie charts, line
graphs, and/or scatter graphs for the purpose they were intended. Present high-level
assumptions that don't give more detail than is needed to make an informed decision.
The presenter can always give more detail when answering a specific question. Value
an audience's time, and respect their intelligence level.
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
9-72 Solutions Manual
ISSUE 9-62