Managerial Accounting 10

er Budget nsibility m9
ver 207" of sales of books, music, and electronicsoccur online.lf you're one of the millions customers of worldwidewho points and clicks buy your booksand CDs on Amazon.com, to then you're part of Amazon.com's strategy to "get big fast." This strategy increased Amazon.com's sales,but at a cost. Spending was out of control.There was no budget,and managers sparedno expense help the company to grow. As a result,Amazon.com lost more than $860 mil/ionin 2000. Founderand CEO Jeff Bezoshad to turn this sea of red ink into income.Bezosset up a budget for Amazon.com's plan of action.Now, ea ch divisionbudgets both s a le sa n d e x p e n s e s . n we e k ly me e t in g s , I managers compareactualresults the budget,which helpsthem corto rect problems quickly.
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salesincreased 2000and 2002,Amazon.com's Between The result? 42%.Wirh such an increasein sales,you'd exPect expensesalso to cut new budget helped managers operating But increase. Amazon.com's when saleswere exPenses How did the companydecrease expenses. reduceorderThe so increasing dramatically? budget helpedAmazon.com computersysto costsby 5"/".Switching lower-cost filling and distribution and content" operatingcostsby 20%.Theresult? tems reduced"technical reported its first-everincomefrom operationsin 20A2.By Amazon.com had to from operations risen over $588million. 2Q04, income
Fortune, December18,2000, "Beautiful Dreamer," KatrinaBrooker, Sources: 2,2002, pp. 186-187;Fred "Bezos,"Fortune, September pp.234-239;FredVogelstein, December30,2002,p. 166;Nick "What Went Right2002," Fortune, Vogelstein, on Pagefrom Wal-Martto Prosper Web," AmazonTakes Wingfield,"survivalStrategy: Wall StreetJournal,November 22, 2002,p. 41; Fred Vogelstein,"Mighty Amazon," Fortune,May 26,2003, pp. 60-74' m
LearningObjectives
Ml M use t""rn why managers budgets budget er"p"reanoperating
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in analysis budgeting Ur" sensitivity centers for reports responsibility er"p"te performance
P.rh"pr, like Amazon.com, you've prepared a budget to ensure that you have The budget forces you to plan. If your budgeted enough cash to pay your expenses. you can do one or both of the following: cash inflow falls short of expenses, o Increaseyour cash inflow (by taking on a job or a student loan). . Cut your expenses. In addition to planning, your personal budget can help you control expenses. To stay within your grocery budget, you may buy macaroni and cheeseinstead of shrimp. At the end of the month, if your bank balance is lessthan expected,you can compare your actual cash inflows and expensesto your budget to seewhy. You need to know whether cash inflows are lower than expected or expensesare higher than expected to know what corrective action to take. As Amazon.com learned, it's easyfor spending to get out of control if you don't have a budget. That's why everyone, from individuals like you to complex international organizations like Amazon.com, uses budgets. Careful budgeting helps both individuals and businessesstay out of trouble by reducing the risk that they will spend more than they earn.
The MasterBudgetand Responsibility Accounting
539
As you'll seethroughout this chapter, knowing how costs behave contrnues to be important in forming budgets. Total fixed costs will not change as volume changes within the relevant range. However, total variable costs must be adjusted when salesvolume is expected to fluctuate.
Why ManagersUse Budgets

Let's continue our study of budgets by moving from your personal budget to seehow a small servicebusinessdevelopsa simple budget. Assume that you begin an online service that provides travel itineraries for leisure travelers. You want to earn $SSOa month to help with your college expenses. You expect to sell 20 itineraries per month at a price of $30 each. Over the past six months, you paid your Internet serviceprovider an average of $18 a month and you spentan additional $20 per month on reference materials.You expect these monthly costs to remain about the same. These are your monthly fixed costs. Finally, you spend 5"/. of your salesrevenuesfor banner ads on other travel Web sites.Becauseadvertising costs fluctuate with salesrevenue,these costs are variable. Exhibit 10-1 shows how to compute budgeted revenuesand then subtract budgeted expensesto arrive at budgeted operating income. Learn why managers
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Service Company Budget
Budgeted salesrevenue (20 x $30) Less budgeted expenses: Internet accessexpense Referencematerials expense Advertising expense(5% x $600) Total expenses Budgeted operating income
If businessgoes according to plan, you will not meet your $SS0 per month operating income goal. You will have to increaserevenue (perhapsthrough word-ofmouth advertising) or cut expenses(perhaps by finding a less-expensive Internet provider). access
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Large international for-profit companies such as Amazon.com and nonprofit organizations such as Habitat for Humanity use budgetsfor the samereasonsyou do in your personal life or in your small business-to plan and control actions and the related revenuesand expenses.Exhibit 10-2 shows how managers use budgets in fulfilling their major responsibilities.First, they develop strategies-overall businessgoals like Amazon.com's goal to expand its international operations or Gateway'sgoal to be a value leader in the personal computer market while diversifying into other markets. Then, companiesplan and budget for specificactions to achievethose goals.The next step is to act. For example, Amazon.com recently planned for and then added the Marketplace auction feature to its \feb sites for the United Kingdom, Germany and Japan. And Gateway is leaning on its suppliers to cut costs, while at the same time it is pumping out new products such as plasma TVs and audio and video gear.
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Managers Budgets Planand Control Use to Activities Business

Feedback to identify corrective acIl0n
After acting, managers compare actual results to the budget. This feedback allows them to determine what, if any, corrective action to take. If Amazon.com spent more than expected to add the Marketplace to its international Web sites, managers must cut other costs or increaserevenues.These decisionsaffect the company's future strategiesand plans. Amazon.com has a number of budgets. Each manager develops a budget for his or her division. Software then "rolls up" the division budgets to create an organization-wide budget for the company as a whole. Managers also prepare long-term and short-term budgets. Boeing's long-term budget forecasts demand for planes for the next 20 years. However, most companies (including Boeing) budget their cash flows monthly, weekly, and even daily to ensure that they have enough cash. They also budget revenues and expenses-and operating income-for months, quarters, and years. This chapter focuseson short-term budgets of one year or less. Chapter 9 explained how companies budget for major capital expenditures on property, plant, and equipment.
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Exhibit 10-3 summarizes three key benefitsof budgeting.Budgetingforcesmanand providesa benchagersto plan, promotescoordinationand communication, mark for evaluating actualperformance.
Planning
Exhibit 10-1 shows that your expected income from the online travel itinerary business falls short of the target. The sooner you learn of the expected shortfall, the more time you have to plan how to increaserevenues or cut expenses.The better your plan and the more time you have to act on the plan, the more likely you will find a way to meet your target. Amazon.com's budget required that managers 'Web sites tailored for customers in GermanS France, plan the expansion of the and Japan.
TheMaster Budget Responsibility and Accounting 541
Benefits of Budgeting
Budgets forcemanagers t0 plan.
promote Budgets coordination andcommunication.
provide benchmark Budgets a thatmotivates employees andhelps managers evaluate oerformance.
Coordination and Communication

The master budget coordinates a company's activities. It forces managers to consider relations among operations across the entire value chain. For example, Amazon.com stimulates sales by offering free shipping on orders over a specified dollar amount. The budget encourages managers to ensure that the extra profits from increasedsalesoutweigh the revenue lost from not charging for shipping. Budgets also communicate a consistent set of plans throughout the company. For example, the initial Amazon.com budget communicated the messagethat all employeesshould help control costs.
Benchmarking
Budgets provide a benchmark that motivates employeesand helps managers evaluate performance. In most companies, part of the manager'sperformance evaluation dependson how actual results compare to the budget. So, for example, the budgeted expenses for international expansion encourage Amazon com's employees to increasethe efficiency of international warehousing operations and to find lessexpensivetechnology to support the \07eb sites. Let's return to your online travel business.Supposethat comparing actual results to the budget in Exhibit 10-1 leadsto the performance report in Exhibit 10-4.
This report shouldprompt you to investigate are why actualsales $50 lessthan ($SSO $600).Thereare threepossibilities: budgeted 1. The budgetwas unrealistic. 2. You did a poor sellingjob. 3. Uncontrollable factors(suchas a sluggish economy) reduced sales.
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All three may have contributed to the poor results. You also want to know why expenses are $22 higher than expected ($90 $68). Did your Internet service provider increaserates? Did you have to buy more referencematerials than planned? Did you spend more than 5o/" of your revenue on 'Web banner ads? You need to know the answers to these kinds of questions to decide how to get your businessback on track.
Preparing the Master Budget

Now that you know wby managers go to the trouble of developing budgets, let's consider the stepsthey take to prepare a budget.
Hudget Compoments the Mlasten of

is financial and Themaster budget the setof budgeted statements supporting schedules for the entire organization.Appendix 10A briefly discusses similaritiesand the companies, service differences betweenthe master budgetsfor merchandising Exhibit 10-5 showsthe order in which managers companies, manufacturers. and prepare components the master of budget a merchandiser asAmazon.com. for such the
Budgetfor a Merchandising Master Company
Financial budget
543
The exhibit shows that the master budget includes three types of budgets: 1. The operating budget 2. The capital expenditures budget 3. The financial budget Let's consider each in turn. The first component of the operating budget is the sales budget, the cornerstone of the master budget. Why? Becausesalesaffect most other components of the master budget. After prolecting salesrevenue,cost of goods sold, and operating expenses) management preparesthe end result of the operating budget: the budgeted income statement that projects operaring income for the period. The second type of budget is the capital expenditures budget. This budget presentsthe company's plan for purchasing property, plant, equipment, and other longterm assets.Chapter 9 discussedhow companies analyze and budget for capital expenditures. The third type of budget is the financial budget. The financial budget has three components: o Cash budget . Budgeted balance sheet o Budgeted statement of cash flows The cash budget, which projects cash inflows and outflows, feeds into the budgeted period-end balance sheet,which, in turn, feeds into the budgeted statement of cash flows. These budgeted financial statementslook like ordinary statements.The only difference is that they list budgeted (projected) rather than actual amounts.
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\7e'll use Whitewater Sporting Goods Store No. 18 to see how managers prepare operating and financial budgets. These budgets are normally prepared for a full 12-month period. However, to simplifg we'll present the budgets over a four-month period. \Ve'll refer to this Data Set by item number as we create the operating and financial budgets, so you may want to bookmark this page. 1. You manage Whitewater Sporting Goods Store No. 18, which carries a complete line of outdoor recreation gear.You are to prepare the store'smaster budget for April, May June, and July, the main selling season.The division manager and the head of the accounting department will arrive from headquarters next week to review the budget with you. 2. Your storeb budgetedbalance sheetat March 31,2009, appearsin Exhibit 10-6. 3. Salesin March were budgeted at $40,000. The salesforce predicts these future monthly sales:
$.50,000
,May,,,,...r',.,.r,;;,. . ; ; , i. , : . : . . , . . ; ; . , . r . r . . . . , . . - , : . ; , . . , . . . t . . . . ', . , . . , . , . , , , r . " 1 . , , . , . . ; , ..80,000 ,;...;,....
,60,000 50;000,
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Assets
Current assets:
Liabilities Current liabilities:

A ccounts payabIe........,....... 16,800 ,r $ Salary and commissions payable Total l i abi l i ri es
$ 1s,000 16,000 Accounts receivable 48,000 In ve n to r y........ 1,800 Prepaid insurance ................ 80,800 T o ta l cu r r e n t assets
Ca sh ............... Plant assets: Equipment and fixtures ......... Accu m u la te ddepreci ari on..... ..............,.... T o ta l p la n t a ss ets T o ta l a sse ts..,...
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21,050 ',
Owners'Equity 32,000 (12.800 ) 19.200

Ow ners' equi ty.............. Total liabilities and owners'
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$100.000,
are Sales because somesales madeon account. are follow sales 4. Cashcollections 'Whitewater collectsall credit salesthe month dfter 60"/" cashand 40o/ocredit. at accounts receivable March 3L arosefrom the sale.The $16,000of budgeted accounts immaterial. are Uncollectible in creditsales March (40% of $+O,OOO;.
5. Whitewaterwants to maintaininventoryat a levelequalto $20,000plus 80% costof goodssold for the following month. lfhitewater prices of the budgeted grossprofit on sales revenue. This means that costof its productto earna 30o/o we revenue. Therefore, computeinventoryon goodssoldaverages 70% of sales March 31 asfollows: = + sold of inventory $20,000 0'80(cost goods for nextmonth) March31. = $20,000 0.80x (0.70 Aprilsales $50,000) x of + = $20,000(0.80 $35,000) x + = $20,000 $28,000 + = $48,000 with the March 31 inventoryshownin Exhibit 10-6.The how this agrees See endinginventoryeverymonth. budgeted is sameprocedure usedto calculate (calculated datanot given). from on inventory July31 is $42,400 Budgeted ending 'Whitewater payslor inventory follows:50% duringthe monthof purchase as purpayable consists inventory of and 50% duringthe next month.Accounts accounts were $33,600,so budgeted March purchases chases only.Budgeted ($33,600 0.50). x payable theendof Marchtotals$16,800 at equalto commissions of 6. Monthly payrollhastwo parts:a salary $2,500plussales The component. is a mixedcost,with both a fixedandvariable This 1.5"/o sales. of payshalf this amountduring the month and half early the following company month. Therefore,at the end of eachmonth, \Thitewaterreports salary and payroll.The $4,250liabilityon the payable equalto half the month's commissions is sheet half the Marchpayrollof $8,500: balance March 31 budgeted = (0;15x $40,000) + commissions$6,000 of of Marchpayroll Salary $2,500 Sales = $8,500 = = payable 0.50x $8,500 $4,250 and March31. salary commissions
7. Other monthly expensesare as follows:
(fixed Rentexpense cost)............
paidasincurred $2,000,
Depreciation including expense, truck(fixed cost).................-.............. 500
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(uari"fle cortl ... Miscellaneous expenses 5Y"of sales,paid as incurred
8. Whitewater plans to purchase a used delivery truck in April for $3,000 cash. This information will be recorded on the capital expenditures budget. 9. Whitewater requires each store to maintain a minimum cash balance of $10, 000 at t h e e n d o f e a c h mo n th . T h e store can borrow money on si xm ont h not es p a y a b l e o f $ 1 ,0 0 0 e a c h a t a n annual i nterest rate of 1,2o/" . M anagem ent b o rro w s n o m o re th a n th e amount needed to mai ntai n the $10,000 minimum. Total interest expense will vary as the amount of borr owing v ar ies fro m mo n th to mo n th . N otes payabl e requi re si x equal monthly payments of principal plus monthly interest on the entire unpaid principal. Borrowing and all principal and interest payments occur at the end of the month. 10. Income taxes are the responsibility of corporate headquarters, so you can ignore tax. As you prepare the master budget, remember that you are developing the sto re' s oper at ing a n d fi n a n c i a l p l a n fo r th e next four months. N ormal l y, ma n ager s pr epar e th e b u d g e ts fo r a fu l l 1 2-month peri od. H ow ever, to si mplif y , we c ons i d e r th e n e x t fo u r mo n th s here. The steps i n thi s process may seem mechanical; but you must think carefully about pricing, product Iines, job assignments, needs for additional equipment, and negotiations with banks. Successfulmanagers use this opportunity to make decisions that affect th e fut ur e c our s e o f b u s i n e s s .
Preparing the OperatingBudget

The first three components of the operating budget, as shown in Exhibit 10-5, are: 1. Salesbudget (Exhibit 10-7). 2. Inventory,purchases, and cost of goods sold budget (Exhibit 10-8). 3. Operating expenses budget (Exhibit 10-9). The results of these three budgets feed into the fourth element of the oper'We ating budget: the budgeted income statement (Exhibit 10-10). consider each tn turn. Prepare operating an budget
The $a[esffiudget
The forecast of sales revenue is the cornerstone of the master budget becausethe level of sales affects expensesand almost all other elements of the master budget. Budgeted total sales for each product is the sales price multiplied by the expected number of units sold. The overall salesbudget in Exhibit 10-7 is the sum of the budgets for the individual products.
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SalesBudget
Cashsales, 60% 40% Creditsales, Total sales, 100%
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The total sales shown is from Data Setitem 3. The breakdownbetween cash and credit salesis based on Data Setitem 4. Tracethe April throughJuly total sales ($240,000) to the budgetedincome statement Exhibit 10-10. in
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This budget determines cost of goods sold for the budgeted income statement, ending inventory for the budgeted balance sheet, and purchases for the cash budget. The familiar cost of goods sold computation specifiesthe relations among theseitems:
Beginning Ending , " +l 'u r c h a s e s - . rnventory lnventory
Cost of gooos sold
Beginning inventory is known from last month's budgeted balance sheet, budgetedcost of goods sold is 70% of sales(from Data Set item 5), and budgeted ending inventory is computed as $20,000 + 80% of the cost of goods sold for the next month (from Data Set item 5). You must solve for the budgeted purchases figure. To do this, rearrange the previous equation to isolate purchases on the left side:
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Cost of Ending ,, + gooclssolo lnventory
Beginning lnventory
This equation makes sense.How much does \Thitewater Sporting Goods have to purchase?Enough to cover its current month's salesand desired ending inventory Iess the amount of beginning inventory aheady on hand at the start of the period. Exhibit 10-8 shows \Thitewater Sporting Goods' inventory, purchases,and cost of goods sold budget. Remember: Inventory, purchases,and cost of goods sold are all stated at'S7hitewater'scost, not at its salesprices. Trace the total budgetedcost of goods sold from Exhibit 10-8 ($168,000) to the budgeted income statement in Exhibit 10-10.'We will use the budgeted inventory
547
Inventory, Purchases, and Cost of GoodsSold Budget
btal $168
tBalanceat March 31 {Exhibit 10-5). +Givenin Data Setitem 5 on page544.
and purchases amounts later, when we create the budgeted balance sheet and the budgeted cash payments for these four months.
The OperatingExpenses Budget

Exhibit 10-9 showsthe operatingexpenses budget.The informationusedto create the budgetis from Data Setitems6 and7. Studyeachexpense makesureyou to know how it is computed. For example,sales fluctuatewith sales. commissions Other expenses, suchas rent and insurance, the sameeachmonth (fixed). are
Budget OperatingExpenses
Trace the April through July totals from the operating expenses budget in Exhibit 10-9 (salary and commissions of $46,000, rent expense of $8,000, and so forth) to the budgeted income statement in Exhibit 10-10.
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Chapter 10
The Budgeted Income Statement

'We use the salesbudget (Exhibit 10-7); the inventory, purchases,and cost of goods sold budget (Exhibit 10-8); and the operating expensesbudget (Exhibit 10-9) to prepare the budgeted income statement in Exhibit 10-10. (\Weexplain the computation ofinterest expenseas part ofthe cash budget in the next section.)
BudgetedIncomeStatement
Amount
Source
Inventory, purchases,and cost of goods sold budget (Exhibit 10-8)
Operating expenses budget(Exhibit10-9) expenses Operating budget(Exhibit10-9) Operating expenses budget(Exhibit10-9) Operating expenses budget(Exhibit 10-9) Operating expenses budget(Exhibit10-9)
*$ 9 0 + $ 7 5 + $ 5 0
Take this opportunityto solidify your understanding operatingbudgetsby of Problem1. carefullyworking out Summary
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Review the N7hitewater Sporting Goods example. Supposeyou now think July sales will be $40,000 instead of the projected $50,000 in Exhibit 10-7. You want to see how this change in salesaffects the budget. Requiremnent Revise the sales budget (Exhibit 1,0-7);the inventory, purchases,and cost of goods sold budget (Exhibit 10-8); and the operating expenses budget (Exhibit 10-9). Prepare a revisedbudgetedincome statementfor the four months endedJuly 31,2009. No/e: You need not repeat the parts of the revised schedulesthat do not change.Assume that interest does not change.
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Although not required, this solution repeats the budgeted amounts for April, May, and June. Revisedfigures appear in color for emphasis.
WHITEWATER SPORTINGGOODS STORENO. 18 Budeet Revised-Sales
Cash sales,607o Credit sales,40% T o t a l s a l e s ,1 0 0 %
WHITEWATERSPORTINGGOODS STORENO. 18
Revised-Inventory,
and Purchases, Costof GoodsSoldBudget April May June $3s,000 $56,000 $42,000 64.800
99,800
Julv
Total
Cost of goods sold (0.70 X sales,from revised salesbudget) + Desired ending inventory ( $ 2 0 , 0 0 0 + 0 .8 0 x co st o f g o o d s so ld fo r n e xt month) = Total inventory required - Beginning inventory = Purchases
53,600
1 4 8 . 0 0 0 ) * ( 6 4 . 8 0 0.
v0e,600
(53.600
42,4001 (r rlr
$s1.800 s44.800
"Balanceat March 31 (Exhrbit 10-"r. Given in Data Setitem.5 on page.544
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April
Salarn fixed alr.loLrnt Commission, 1,5'/. of salesfrom revised salesbudget Total salary and commtssrons Rent expense,fired arnount Depreciation expense,fixed amount Insutance expense,fixed amount Miscellaneous expenses.5% of salesfrom revised salesbudget Total operating ex
May
ne
Jnly
T'
ti 2,s00 $ 2,s00 7.500 12.000

10,000 2,000 500 200 2.500 $1s.200
$ 2,500 $ 2,-500
9.000 14,500 11,500 2,000 2,000 s00 500 200 200 3.000 4.000 $21.200 $17.200
2,000
s00 200
8,0 00 2,0 00 80 0
Amount
Salesrevenue Co st o f g o o d s so ld Gr o ss p r o fit Operating expenses: Sa la r ya n d co tn m issi ons Rent expense De p r e cia tlo tle xPense In su r a n cee xPe n s e s M isce llan e o r .re xPenses Operating income In te r e ste xp e n se Net income
!,;
Source
Revised sales br-rdget Reviseclinventory, purchases,and cost of goods sold budget
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budget R evi sedoperati ngexpenses
8,000 2,000 800
Revised operating expensesbudget budget expetrses Revised operzrtil.rg Revised operatitrg expensesbr"rdget (r(r"lJ00 Revised operrltir.rg budget experrses
225
| .t) 7.;
Gi ven, E xhi bi t i 0-10
10 Chapt er
Accounting The MasterBudgetand Responsibility
551
Budget the Financial Preparing

Now that we have prepared the operating budget, we're ready to move on to the financial budget. Recall from Exhibit 10-5 that the financial budget includes the cash budget, the budgeted balance sheet,and the budgeted statement of cash flows. \7e'll start with the cash budeet.
Preparea financial budget
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The cash budget, or statement of budgeted cash receipts and payments, details how the businessexpectsto go from the beginning cash balance to the desiredending balance. The cash budget has five major parts: . . . . Cash collectionsfrom customers(Exhibit 10-11) Cash payments for purchases(Exhibit 10-1,2) Cash payments for operating expenses(Exhibit 10-13) Cash payments for capital expenditures (for example, the $3,000 capital expenditure to acquire the delivery truck would be shown on the company's capital expenditures budget) less any proceedsfrom the sale of capital assets Cash financing (borrowings, repayments, and interest)
Cash collections and payments depend heavily on revenues and expenses, which appearin the operating budget. This is why you cannot prepare the cash budget until you have finished the operating budget.
Budgeted Cash Collectionsfrom Customers

'When doesWhitewater expect to The cash collections budget is all about timing: 's7hitewater will receive cash immediately receive cash from its sales?Of course, on its cash sales.Whitewater also expectsto collect cash for all of its credit sales in the monthafter the salesare made (Data Set item 4). Therefore, Exhibit 10-11 shows two componentsto each month's cash collections:(1) collectionsfrom cash salesand (2) collection of the previous month's credit sales.These componentsare found on the salesbudget shown in Exhibit 10-7.
CashCollections Budgeted
"March 31 accouf,ts receivable (Exhibit 10'6)

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Take a moment and trace each month's total cash collections in Exhibit 10-11to the cash budget shown in Exhibit 1.0-14.
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10 Chapter
Budgeted Cash Payments for Purchases

The cash payments budget is also about timing When will'Whitewatef pay for its 'Whitewater pays for half of its inventory purchases in the month of prrchasesl purchase and pays for the other half in the month after putchase (Data Set item 5). therefote, Exhibit 10-12 shows tlvo components to each month's cash payments for purchases: (1) 50% of last month's purchases and (2) 50o/r of this month's purchases.These components are calculated from the purchases shown on the inventorS purchases, and cost of goods sold budget (Exhibit 10-8). For example, May's cash payments for purchasesconsistsof (1) 50% of April's purchases(50% X $ 5 1 ,8 0 0 : $ Z S ,9OO) and (2) 50' /" of May' s purchases (507o x $44 , 800
: $22,400).
for BudgetedCashPayments Purchases
nMarch 31 accountspayable(Exhibit 10-5).
Take a moment and trace each month's total cash payments for purchases in to Exhibit 1,0-1,2 the cash budget shown in Exhibit 1'0-14.
Budgeted Cash Paymentsfor Operating Expenses

To budget cash payments for operating expenses,\Thitewater must consider the timing of when it pays for payroll expenses(Data Set item 6) and other operating expenses(Data Set itemT).
for BudgetedCashPayments OperatingExpenses
payable(Exhibit 10-5) "March 31 salaryand commissions
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553
Notice that depreciation and insurance expensesare not included in this cash payments budget (Seethe next Stop & Think). Take a moment and trace each month's total cash payments for operating expenses Exhibit 10-13 to the cash budget in Exhibit t0-L4. in
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Why are deprec iation expensefrom the operating expenseand insurance (Exhibit10-9)excluded for from the budgeted cashpayments expenses budget operating expenses Exhibit in 10-13? Anrswen: Theseexpenses not requirecashoutlaysin the currentperiod. do Depreciation the periodicwrite-off the cost of the equipmentand fixtures is of previously. is Insurance expense the that Whitewater SportingGoods acquired expiration insurance wasoreoaidat an earlier date. of that
The Cash Budget

The top portion of the cash budget shown in Exhibit 10-14 shows all cash collections and payments. We start with the beginning cash balance, then add cash collections to determine the cash available. Next, we subtract cash payments for purchases (Exhibit 1,0-121, cash payments for operating expenses(Exhibit 10-13), and cash payments for capital expenditures (from the company's capital expenditures budget). This yields the ending cash balance before financing, shown in blue.
CashBudget
"March 31 Notes fBorrowing occurs in multiples of $1,000 and only for the amount neededto maintain a minimum cash balance of $10,000 a_Monthlyprincipal payments: $9,000 + 6 $1,500. "lnterest exDense: May: $9,000 x (0.12 x L/L2) - 590 Ju n e :($ 9 ,0 0 0 $ 1 ,5 0 0) x 101- zxL/L2) =$75 = July: ($9,000- $1,500 - $1,500) x (0.12 x 1./1.21 560
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The lower portion of the cash budget is the financing section.Recall that Whitewaterwants to maintain a minimum cashbalanceof $10,000 at eachstore (Data Setitem 9). April's cashbalancebeforefinancing($1,SSO; falls $8,450 short of this goal, so l7hitewaterwill haveto borrow cash.Since Whitewaterborrows in increments $1,000 notes,it will have to borrow a full $9,000 to bring its cash of balance abovethe minimum $10,000required. After financing,the endingcashbalancefor April is $10,550. April's endingcashbalance becomes May's beginning cashbalance($f O,SSO;. Whitewaterfollows the sameprocess May: addingcashcollections in and subtracting cash payments.In Ma5 \Thitewater'sending cash balancebefore financing ($12,000)is $2,000 greaterthan the minimum requiredcashbalance. Therefore, 'Whitewater can start repayingits notespayable. Data Setitem 9 states that Ifhitewater mustrepaythe notesin six equalinstallments.Thus,May throughJuly showsprincipalrepayments $1,500($9,000+ 6) of per month. Whitewateralsopaysinterest expense the outstanding on notespayable per year. Interest expense paid monthly. The June interest expenseis at 12o/o is principal- $1,500repayment the end of May) x 12% x %zl. at $ZS 1199,990 Interestexpense the four monthstotals $225 ($90 + $ZS + $60). This interest for expense incomestatement Exhibit 10-10. appears the budgeted on in The cashbalance the end of July ($22,525)is the cashbalance the July 31 at in budgeted balance in sheet Exhibit 10-15.
The Budgeted BalanceSheet

To preparethe budgeted projecteachasset, balance sheet, liability, and owners' equity accountbased the plansoutlinedin the previousexhibits. on Studythe budgeted balance sheetin Exhibit 10-15to makecertainyou understandthe computationof eachfigure.For example, the budgeted on balance sheet as ofJuly 31,,2009,budgeted cashequalsthe endingcashbalance from the cashbud($22,525). get in Exhibit 1.0-1,4 Accountsreceivable of July 31 equalJuly'scredit as sales $20,000,shown in the sales of budget(Exhibit 1.0-7). luLy31 inventoryof $42,400is July'sdesiredendinginventoryin the inventory,purchases, cost of and goodssold budgetin Exhibit 10-8. Detailedcomputations eachof the other for accounts in appear Exhibit 10-15.
The BudgetedStatementof CashFlsws

The final stepis preparingthe budgeted statement cashflows. Usethe informaof tion from the schedules cashcollections of and payments, cashbudget,and the the beginningbalanceof cashto project cashflows from operating,investing,and financingactivities. Take time to study Exhibit 10-L6 on page556 and make sure you understand origin of eachfigure. the
GettinE Employee$to Accept the Budget

NThat is the most important part of lThitewater Sporting Goods' budgeting system? Despite all of the numbers we have crunched, it is not the mechanics. It is getting managers and employees to accept the budget so'Whitewater Sporting Goods can reap the planning, coordination, and control benefits illustrated in Exhibit 10-3.
555
BudgetedBalanceSheet
Assets
Cuffent assets: Cash (Exhibit 10-14) Accounts receivable (Sales budget, Exhibit 10-7) Inventory (Inventory, purchases,and cost of goods sold budget, Exhibit 10-8) Prepaid insurance (beginning balance of $1,800 - $800" for four months'expiration; Operating expensesbudget, Exhibit 10-9) Total current assets Plant assets: Equipment and fixtures (beginning balance of $32,000" + $3,000 truck acquisition; Data Set item 8) Accumulated depreciation (beginning balance of $12,800" + $2,000 for four months' depreciation; Operating expensesbudget, Exhibit 10-9) Total plant assets Total assets
$ 85,925
$706,L25
Liabilities Currentliabilities: (0.50 x July purchases $29,400; Inventory, Accountpayable of purchases, costof goodssoldbudget, Exhibit 10-8) and ($9,000- $4,500paid back; note payable Short-term Exhibit10-14) (0.50 x July expenses $10,000; payable of Salaryand commissions Operating expenses budget, Exhibit 10-9) Total liabilities Owners'Equity 5 Owners'equity(beginning balance $78,950* + $2,97 net income; of Exhibit10-10)
$ 24,200
81 $106,125
..,1
jil-"-:*ll*!-illtig:3!4rvffg-*qi!v--- " *March37,2009, (Exhibit

Balance Sheet 10-6).
Few people enjoy having their work monitored and evaluated. So, if managers use the budget as a benchmark to evaluate employees'performance, managers must motivate employeesto accept the budget's goals. Here's how managers can do it: o Support the budget themselves,or no one else will. o Show employeeshow budgets can help them achieve better results. o Have employeesparticipate in developing the budget. But these principles alone are not enough. As the manager of Store No. 18, 'lJfhen you your performance is evaluated by comparing actual results to the budget. develop your store'sbudget, you may be tempted to build in slack. For example, you might want to budget fewer sales and higher purchases than you expect. This
556
Chapt er 10
increasesthe chancethat actual performance will be better than the budget and that you will receive a good evaluation. But adding slack into the budget makes it less accurate-and lessuseful for planning and control. \7hen the division manager and the head of the accounting department arrive from headquarters next week, they will scour your budget to find any slack that you may have inserted.
BudgetedStatement CashFlows of
Cash flows from operating activitres: Receipts: Collections from customers (Exhibit 10-11) Total cash receipts Payments: Purchasesof inventory (Exhibit 10-12) Operating expenses(Exhibit 10-13) Payment of interest expense(Exhibits 10-14 and 10-10) Total cash payments Net cash inflow from operaring activiries Cash flows from investing acrivirres: Acquisition of delivery truck (Data Set item 8) Net cash outflow from rnvesrrrrg actrvrrres Cash flows from financing activitres: Proceedsfrom issuanceof notes payable (Exhibit 10-14) Payment of notes payable (Exhibit 10-14) Net cash inflow from financrng actlvltres Net increasein cash Cash balance,April 1, 2009 (Exhibits 1,0-6 and t0-I4)
/f10 07(\
$236,000
6,025
Cashbalance, 31, 2009 (Exhibits 10-14and 10-15) July
UsingInformationTechnology Sensitivity for Analysis and RollingUp Unit Budgets

Exhibits 10-7 through 10-16 show that the manager must prepare many calculations to develop the master budget for just one of the retail stores in the \Thitewater Sporting Goods merchandising chain. No wonder managers embrace information technology to help prepare budgets! Let's seehow advancesin information technology make it more cost-effectivefor managers to: o Conduct sensitivity analysis on their own unit's budget. . Roll up individual unit budgets to create the company-wide budget.
557
Sensitivity Analysis
The master budget models the company's planned activities. Top management pays special attention to ensure that the results of the budgeted income statement (Exhibit 10-10), the cash budget (Exhibit 10-1,4),and the budgeted balance sheet (Exhibit 10-15) support key strategies. But actual results often differ from plans, so management wants to know how budgeted income and cash flows would change if key assumptions turned out to be incorrect. Chapter 7 defined sensitiuity analysis as a what-if technique that asks what a result will be if a predicted amount is not achieved or l/ an underlying assumption changes. V/hat if the stock market crashes?How will this affect Amazon.com's sales?\7ill it have to postpone the planned expansion in Asia and Europe? What wlll be'Whitewater Sporting Goods Store No. 18's cash balance on '$Thitewater Sporting July 31 if the period's sales arc 45o/o cash, not 60o/" cash?'lfill Goods have to borrow more cash? Most companies use computer spreadsheetprograms (or special budget software) to prepare master budget schedulesand statements. One of the earliest spreadsheetprograms was developed by graduate business students who realized that computers could take the drudgery out of hand-computed master budget sensitivity analyses. TodaS managers answer what-if questions simply by changing a number. At the press of a ke5 the computer screen flashes a revised budget that includes all of the effects of the change. Technology makes it cost effective to perform more comprehensive sensitivity analyses.Armed with a better understanding of how changesin salesand costs are likely to affect the company's bottom line, today's managers can react quickly if key assumptions underlying the master budget (such as salesprice or quantity) turn out to be wrong. Usesensitivity analysis i n budgeti ng
(1) anaConsider Sporting Goods'marketing two budget situations: Whitewater for lystsproducea near-certain salesof $4,500,000 the forecast four-month for (2) The company's stores. Much uncertainty 20 existsabout the period'ssales. any most likelyamountis $4,500,000, marketing considers amountbetween but process differin Howwillthe budgeting and to $3,900,000 $5,100,000 be possible. thesetwo circumstances? Amsvvan:WhitewaterSportingGoods will preparea masterbudget for the in expected Because the uncertainty the of sales levelof $4,500,000 eithercase. in the secondsituation, will executives want a set of budgetscovering entirerange mayprepare budgets of volumerather Whitewater's managers thana singlelevel. based on salesof, for example,$3,900,000, $4,500,000, $4,800,000, $4,200,000, planfor sales levels throughout and$5,100,000. These budgets helpmanagers will the forecasted range.
Rolling Up Individual t.f Budgets into the nit Company-WideBudget

many retail \ThitewaterSportingGoodsStoreNo. 18 is just one of the company's headquarters mustroll stores. Exhibit 10-17shows,'Whitewater As SportingGoods' for eachof the other up the budget data from StoreNo. 18, along with budgets stores, preparethe company-wide to masterbudget.This roll-up can be difficult for companies to whoseunits usedifferentspreadsheets preparethe budgets.
558
Chapter10
Rolling Up Individual Unit Budgets into the Company-WideBudget
;,i
:il
1,,
ll,
Companies such as Sunoco turn to budget management software to solve this problem. Often designedas a component of the company's Enterprise Resource Planning (ERP) system (or data warehouse), this software helps managers develop and analyze budgets. Across the globe, managerssit at their desks,log in to the company's budget system,and enter their numbers. The software allows them to conduct sensitivity 'Sfhen analyseson their unit's data. the manager is satisfiedwith the budget, he or she can enter it in the company-wide budget with the click of a mouse. The unit's budget automatically rolls up with budgets from all of the other units around the world. Before the store's budget is officially accepted,it will most likely go through a corporate review process involving division managers and corporate accountants. This review processhelps to ensure that the budget is realistic. \Whether at headquarters or on the road, top executivescan log in to the budget system and conduct their own sensitivity analyseson individual units' budgets or on the company-wide budget. Managers can spend lesstime compiling and summarizing data and more time analyzing the information to ensure that the budget leads the company to achieveits key strategic goals.
Responsi lity Accounting bi

Prepare performance reportsfor responsibil centers ity You've seen how managers set strategic goals and develop plans and budget resourcesfor activities that help reach those goals. Let's look more closely at how managers zase budgets to control operations. Each manager is responsible for planning and controlling some part of the firm's activities. A responsibility center is a part or subunit of an organizationwhose
559
manager is accountable for specific activities. Lower-level managers are often responsiblefor budgeting and controlling costs of a single value-chain function. For example, one manager is responsiblefor planning and controlling the prodwction of Pace picante sauce at the plant, while another is responsible for planning and controlling the distribution of the product to customers.Lower-level managersreport to higher-level managers, who have broader responsibilities. Managers in charge of production and distribution report to senior managers responsible for profits (revenuesminus costs) earned by an entire product line.
FourTypesof Responsibility Genters

Responsibility accounting is a system for evaluating the performance of each responsibility center and its manager. Responsibility accounting performance reports compare plans (budgets) with actions (actual results) for each center. Superiors then evaluate how well each manager (1) used the budgeted resourcesto achievethe responsibility center'sgoals and thereby (2) controlled the operations for which he or she was responsible. Exhibit 10-18 illustrates four types of responsibility centers. 1. In a cost center,managers accountable costs(expenses) only. Manufacturing for are The line picantesauce production lines,are cost centers. operations, suchas the Pace The supervisor work efficiently. supervisor controlscostsby ensuringthat employees is zol responsible generating he for revenues because or sheis not involved in selling the product. The plant manager evaluatesthe supervisoron his or her ability to control costsby comparing actual coststo budgetedcosts.All elsebeing equal (for example, holding quality constant),the supervisoris likely to receivea more favorableevaluationwhen actual costsare lessthan budgetedcosts. 2. In a revenuecenter,managersare accountableprimarily for revenues.Examples include the Midwest and Southeastsalesregions of businesses such as Pace Foods. These managers of revenuecentersmay also be responsiblefor the costs of their own salesoperations. Revenuecenter performance reports compare actual with budgeted revenuesand may include the costs incurred by the revenue center itself. All else being equal, the manager is likely to receive a more favorable evaluation when actual revenuesexceedthe budeet.
Centers FourTypesof Responsibility
Pace Foods
MidwestSalesReoron
In a costcenter, suchasa production for Pace picante line sauce, managers responsible are for costs
In a revenue center, suchasthe region, managers Midwest sales for areresponsiblegenerating sales revenue.
center, suchasa In a profit managers line products, of are responsiblegenerating for lnc0me.
In an investment center, such asCamobell Souos Sauces and division, managers responsible are forincome invested and capital.
560
Chapt er 10
3. In a profit center, managers are accountable for both revenues and costs
(expenses)and, therefore, profits. The (higher-level) manager responsible for the entire Paceproduct line is accountable for increasing salesrevenueand controlling costs to achievethe profit goals. Profit center reports include both revenues and expensesto show the profit center's income. Superiors evaluate the manager'sperformance by comparing actual revenues,expenses,and profits to the budget. All else being equal, the manager is likely to receive a more favorable evaluation when actual profits exceedthe budget.
4. In an investment center, managers are accountable for investments, reyenues,

and costs (expenses). Investment centers are generally large divisions of a corporation. For example, the North American Saucesand Beverages Division (which includes Pace Foods) of Campbell Soup is considered an investment center.Managers of investment centers are responsiblefor (1) generating sales, (2) controlling expenses,and (3) managing the amount of investment (assets) required to earn the income. Investment centers are treated almost as if they were stand-alone companies. Managers have decision-making authority over how all of the division's assetsare used. As a result, managers are held responsible for generating as much income as they can with those assets. Top management often evaluates investment center managers based on performance measures such as return on investment (ROI), residual income, and economic value added (EVA). Chapter 12 explains how thesemeasuresare calculated and used. All else being equal, the manager will receive a more favorable evaluation if the division's actual ROI, residual income. or EVA exceedsthe amount budgeted.
Responsibility AcsountingPerformance Reports

Exhibit 10-19showshow an organization suchas CampbellSoupCompanyassigns responsibility. At the top level,the CEO oversees eachof the four divisions.Division managersgenerallyhave broad responsibilityincluding decidinghow to use assets to maximizeROI. Most companies consider divisionsas inuestment centers. Each division managersupervises of the product lines in that division. all Exhibit 10-19showsthat the VP of North AmericanSauces Beverages and oversees the PregoItalian sauces, PaceMexican sauces, juice, and Franco-American V8 cannedpastaproduct lines. Product lines are generallyconsidered profit centers. Thus, the managerof the PaceFoodsproduct line is responsible evaluating for lower-level managers both of the following: of o Costcenters (suchasplantsthat makePace Foodsproducts) o Reuenue (suchasmanagers centers responsible sellingPace for Foodsproducts) Exhibit 10-20 illustrates responsibility performance accounting reportsfor eachlevel of management shown in Exhibit 1,0-1"9. Exhibit 10-20 usesassumed numbers illustratereportslike those: to . The CEO may useto evaluate divisions. o The divisionalVPsmay useto evaluate individualproduct lines. o The product line managers may use to evaluatethe development, production, marketing,and distributionof their products. At eachlevel,the reportscompareactualresults with the budget. Startwith the lowestleveland moveto the top. Follow the $25 million budgeted operatingincomefrom the Mexican sauces product line report to the report of the VP-North AmericanSauces Beverages. VP'sreport summarizes budgeted and The the and actualoperating incomes eachof the four productlineshe or shesupervises. for
561
Chart PartialOrganization
incomefrom the VP'sreport to operating Now, tracethe $70 million budgeted the CEO'sreport. The CEO's report includesa summaryof eachdivision'sactual headquarters, which profits,aswell asthe costsincurredby corporate and budgeted are not assigned any of the divisions. to
Management by Exception
The variances reported in Exhibit 10-20 aid management by exception, which directs executives' attention to important differences between actual and budgeted amounts. Look at the CEO's report. The International Soups and SaucesDivision's actual operating income of $34 million is very close to the budgeted $35 million. Unless there are other signs of trouble, the CEO will not waste time investigating such a small variance. Division earned a great In contrast, the North American Saucesand Beverages deal more profit than budgeted. The CEO will want to know why. Supposethe VP of the division believesthat a national salespromotion was especiallyeffective.That promotion may be repeated or adapted by other divisions. One reason managers investigate large, favorable variances (not just large, unfavorable ones) is to identify the reason for exceptional results so that other parts of the organization may benefit. Another is to ensure that employeesare not skimping on ingredients, marketing, Also, it's possible that or R&D, which could hurt the company's long-term success. large variances are the result of unrealistic budgets. A CEO who received the report at the top of Exhibit L0-20 would likely concentrate on improving the North American SoupsDivision becauseits actual income fell $9 million below budget. The CEO would want to see which product lines
562
Chapt er 10
Responsibility Accounting Performance Reports at VariousLevels
Operating Income of Divisions and Corporate

North American Soups Biscuits and Confectionary Interr-rationaI Soups and Sauces Corporate Headquarters Expense
Actual
Variance Favorable/ (Unfavorable) $ 2 18
s209
$ (e)
87 79 34 35 (2e) 33 $38s i l s369
VP-NORTH AMERICAN SAUCESAND BEVERAGES QUARTERLY RESPONSIBILITYREPORT (in millionsof dollars)

Variance Favorable/ (Unfavorable) $ (2) .5 (2)
lli ll'i
Income of Product Lines
Actual $18
Budget
$20 10 15
lces AS
15 13
MANAGER-MEXICAN SAUCES QUARTERLY RESPONSIBILITYREPORT (in millionsof dollars)

Variance Favorable/ (Unfavorable) $4 6
Revenue and
Salesrevenue Cost of goods sold Gross profit Marketing expenses Researchand development expenses Other expenses
Actual $84
30
10 3 (1)
"l
causedthe shortfall so that he or she and the VP of the division could work together to correct any problems. Exhibit 10-20 also shows how summarized data can hide problems. Although as a whole, the North American Saucesand Beverages Division performed well, the Italian saucesand canned pasta lines did not. If the CEo received only the condensedreport at the top of the exhibit, he or she would rely on division managers ro spot and correct problems in individual product lines.
563
Not a Ouestion of Blame

Responsibility accounting assigns managers responsibility for their unit's actions anilprovides a way to evaluate both the managers and their unit's performance. But ,.rp.iiorc should not misuse responsibility accounting to find fault or place blame. The question is not who is to blame for an unfavorable variance. Instead, the question ii who can best explain why a specific variance occurred. Consider the North American Soups Division in Exhibit 10-20. Suppose a tornado devastatedthe primary production plant. The remaining plants may have operated very efficiently, and'this efficiency kept the income variance down to $9 million. If so, the North American Soups Division and its VP actually did a good job'
Other Pedormance Measures

each Top management usesresponsibility accounting performance reports to assess often assesses responsibiiity center's financial performance. Top management also .u.h,.rponsibility center's nonfinancial operating performance. Typical nonfinancial performance measuresinclude customer satisfaction ratings, delivery time' the broader view of product quality, and employee expertise. Chapter 12 discusses petfotmance evaluation, known as the "balanced scorecard." In that chapter, we will look at how managers use both financial and nonfinancial performance measuresto form a "balanced view" of each responsibility center'sperformance. The following Decision Guidelines review budgets and the way managers use them in responsibility accounting. Study these guidelines before working on Summary Problem 2.
Guidelines Decision
Accounnruc AND Txe MnsreRBuDGET REsPoNslBILlrY
Amazon.com's initial strategy was to "get big fast." But without a budget, spending got- out of control' So, founder second stiategii goal-to become the world's most cost-efficient, high-quality e-tailer. and CEO Jeff Bezos added,-a Today, Amazon.com's managersuse budgets to help reach growth and cost-efficiencygoals. Let's consider some of the decisionsAmazon.com made as it set up its budgeting process.
Decision
What benefits should Amazon.com expect to obtain from developing a budget?
Guidelines
Requires managersto plan how to increasesalesand how to cut costs. Promotescoordination dnd commwnication,such as comgoal' municating the importance of the cost-efficiency Provides a benchmark that motivates employeesand helps managers evaluate how well employeescontributed to the salesgrowth and cost-efficiencygoals.
In what order should Amazon.com's managersprepare the components of the master budget?
1. Begin with the operating budgetz . Start with the sales bwdgeL which feeds into all other budgets. continued . . .
Chapter10
Decision
Guidelines
. r r Then, determine the inventorS purchases,and cost of goods sold budget. Next, prepare the operating expensesbudget. From these three budgets, create the bwdgeted xncornestqtenlent.
2. Next, prepare the capital expenditwres bwdget. 3. Finally, prepare the financial bwdget. r Start with the cash bwdget. . The cash budget provides the ending cash balance for the bwdgetedbalance sheet and the details for the budgeted statement of cash flows. 'What extra steps should Amazon.com take given the uncertainty of Internet-basedsalesforecasts? How does Amazon.com compute budgeted purchases?
Prepare sensitiuity a analysis projectingbudgeted by resultsat differentsales levels.
What kind of a responsibility centerdoeseachmanager supervise?
Cost center: Manageris responsible costs. for Revenue center: Manageris res-ponsible revenues. for Profit center: Manageris responsible both revenues for and costsand, therefore, profits. Investment center: Manageris responsible revenues, for costs,and the amountof the investment requiredto eam the income.
How should Amazon.com evaluate manaqers?
Compare actualperformance the budget the with for manager's responsibility center. Management exception by focuses largedifferences on between budgeted and actualresults. The emphasis shouldbe on information, not blame.
ffi ffimwfuffiwm ffiwffiruffiffiffi3r

'Whitewater Continue the revised Sporting Goods illustration from Summary Problem 1. Now that you think July saleswill be $40,000 instead of $50,000, as projected in Exhibit 10-7, how will this affect the financial budget? Requirements Revise the scheduleof budgeted cash collections (Exhibit 10-11), the scheduleof budgeted cash payments for purchases(Exhibit 10-1,2),and the scheduleof bud(Exhibit 10-13). Preparea revisedcash geted cash paymentsfor operating expenses budget; a revised budgeted balance sheet at July 31, 2009; and a revised budgeted statement of cash flows for the four months ended July 31,2009. Note: You need not repeat the parts of the revised schedulethat do not change. Hint: You will need to refer to the reuised budgets created in Swmmary Problem 1.
@r
ffiffiffi&firyfr4b#?
fr
*q
Although not required, this solution repeats the budgeted amounts for April, May, and June. Revised figures appear in color for emphasis.
WHITEWATER SPORTING GOODS STORE NO. 18 from Customers Revised-Budgeted CashCollections April
Cash sales,from revised salesbudget Collections of last month's credit sales,from revised salesbudget Total collections
'' Nltrth ll nttr)t!)tts t(t.u'r[)[r (l rbil)it ll) 6)
May
June
Julv
24.000
Total
$3o,ooo $48,000 $ 36,000 * 16.000 20.000 32.000

$ 46.000 $ 68.000 $ 68.000
WHITEWATER SPORTING GOODS STORE NO. 18 for Revised-Budgeted CashPayments Purchases

ril
50% of last month's purchases,from revised inventory, purchases,and c o s t o f g o o d s so ld b u d g e t 50% of this month's purchases,from revised inventorg purchases,and cost of goods sold budget Total payments for purchases
''March 31 accotnts payable (Exhibit 1A-6)
Ma'
Tune
$22,400
lulv
Tota
$ 1 6 , 8 0 0 ', $25,900 25,900 22,400
iliil
$42,700 $48,300
565
WHITEWAIER SPORTINGGOODS STORENO. 18 Revised-Budgeted CashPayments Operating for Expenses April

Salary and commissions: 50% of last month's expenses, from revised operaung expensesbudget 50% of this month's expenses, from revised operating c expensesbudget Total salary and cornmissions Rent expense,from revised operating expensesbudget Miscellaneous expenses,frorn revised operating expensesbudget Total payments for operating expense*s
May
Iune
ul
Total
$ 4,2s0' $ s,000 $ 7,2s0 5.000 9,250 2,000 2.500

$ 13.750
$ .) ,,/ )
7.250 12,250 2,000 4.000

$1 8 . 2 5 0
;uorri t i tik,:y iii ,or:i,',i"it iFiLiu't to-.i1. ioyobi,:
5.750 13,000 2,000 .3.000 $18,000
2,000
WHITEWATER SPORTINGGOODS STORENO. 18 Revised CashBudget Four Months Endingluly 31,2009

Beginning cash balance Cash collections (revised budgeted cash collections) Cash available Cash payments: Purchasesof inventory (revisedbudgeted cash payments for purchases) Operating expenses(revised budgeted cash payments for operating expenses) Purchaseof delivery truck (Data Set item 8) Total cash payments (1) Ending cash balance before financing Less: Minimum cash balance desired Cash excess(deficiency) Financing of caslr deficiency (see Borrowing (at end of month) Principal paymenrs (at end of month) I n t e r e s te xp e n sela t l2 o /oa n n u a lly) (2t T o t a l e f f e c t so f f i n a ne in g
$1 0 , 5 5 0
$1 0 , 4 1 0
$42,700 $48,300 13,7 50 18,250
$ (8,4s0 )
(1,s00 $ (1,500) $ (1,s00) )

601
1,560
$ 10,550
,.,'t,,,t,,: ''March 31 cash balance (Exhibit 10-6). Notrs {:lBorrow,tng occurs_in muhtplesof '$1,000and onLyfol the amount fteeded mdintdin d miuimum cashbalanceof 510,000 to ". M o a t b l yI'n n ci l ,d Ip a yu trn ts: ,000 : n - .t/,50n. J9 'lnterest expense: May: $9,000 x. (0.12 x 1/12)= $90 J w n e :( 5 9 ,0 0 0 $ 1 ,5 0 0 ) x (0 .12 Y. 1/12)= 975 July: ($9,000 $1,s00 - $1,s00) x (0.12 x 1/12) = 9611
566
Chaptell0
Assets
Cufrent assets: Cash (revisedcash budget) Accounts receivable (revisedsales Inventory Prepaid insurance Total current assets Plant assets: Equipment and fixtures A c c u m u l a r e dd e p r e cie tio n Total plar-rtassets Total assets
$35,000 (14,800 ) 20,200
Liabilities
Current liabilities: A c c o u n t s p a ya b le ( 0 .5 0 x Ju ly p u r ch a se s f ' r ' i 'i :l ; revi sed o inventory, purchases,and cost of goods sold budget) Short-term note payable Salary and commissions payable (0.50 x July expensesof revised operating expensesbudget) Total liabilities
4,500
Owners'Equity
Owners' equity (beginning balance of $78,950. revised budgeted income statement) Total liabilities and owners'eoul
567
Cash flows from operating activities: Receipts: Co lle ctions(revi sedbudgetedc:i shcol l ecti ons) Total cash receipts Payments: Purchasesof inventory (revised budgeted cash payments for purch:rses) expenses(revised budgeted cash payrnents for O peratir-rg
ntlcrrttnq cYn cn cccl
Payment of interest expense Total cash paynrents Net cash inflow from operating activities Ca sh flo u s ir o r r rinvesti ngacri vi ti es: Acquisition of delivery truck Ne t c;lr lr o utfl ow from i nvesti ngacti vi ri es Ca sh flo ws fr o n r fi nrnci ng acti vi ti es: Proceedsfrom issuanceof notes payable Payment of notes payable Net cash inflow from financing activities Net increasein cash
22
(3,000)
500
IJ
Cashbalance, April 1, 2009 (Exhibit10-6) Cashbalance, 31,2009(revised cash July
568
Chapt er 10
The Master Budget for Serviceand Manufacturing Companies

In the chapter, we presented the master budget for a merchandising company. The components of the master budget for a merchandising company are summarized in Exhibit 10-5. The master budgets for servicecompanies and manufacturers vary somewhat from those of a merchandising company: . Seruice companies: The master budget of a servicecompany is Iesscomplex than that inventory, of a merchandising company.Sinceservicecompanieshave no merchandise they do not have an Inventory Purchases, and Cost of Goods Sold budget.As a result, either.All other they won't have to schedulecash paymentsfor inventory purchases, components of a service company master budget are the same as those for a merchandising Exhibit 10-5). company(see o Manwfacturing companies:The master budget of a manufacturing company is slightly more complex than that of a merchandising company. \fhy? Becausethey produce rather than purchasetheir finished inventory. As a result, a production budget replacesthe purchasesbudget used by merchandisingfirms. The production purchasesbudget budget follows the same general format as the merchandiser's except that it is calculated in units rather than dollars: Units neededfor curent month's sales xxx
XXX XXXX
Plus:Unitsneeded desired for inventory ........ endine = Total units needed Less: inventory Units in beginning = Number of units to oroduce
(what we need) (what we have) (what we need to make)
(xxx,
XXXX
Once the production requirements have been budgeted, the manufacturer will develop three additional budgets for the three manufacturing cost components: direct materials, direct labor, and manufacturing overhead: . The direct materials budget also follows the same general format of the production or purchasesbudget. Usually, the direct materials budget is formulated in terms of the quantity of raw materials that need to be purchased; then it is translated into the cost of buying those direct materials from suppliers. . The direct labor budget forecaststhe cost of the direct labor that will be needed to meet production requirements. . The manufacturing overhead budget estimates all manufacturing overhead costs that will be incurred during the year (indirect materials, indirect labor, and other indirect manufacturing costs). This budget is extremely dependent upon cost behavior since many manufacturing overhead costs are fixed while others are variable. All other components of the manufacturing master budget are the same as those for a merchandising company (seeExhibit 10-5). The MasterBudgetand Responsibility Accounting 569
RgVigVlf
sibility Accounting The MasterBudget andRespon
mAccounting Vocabulary
Capital Expenditures Budget. (p. 5a3) A company's plan for purchasesof property, plant,equipment,and other long-termassets. Gash Budget. (p. 551) Detailshow the businessexpectsto go from the beginningcash balanceto the desiredending Also calledthe statementof budgeted balance. cash receiptsand payments. Financial Budget. (p. 543) The cash budget (cashinflowsand outflows), the budgetedperiod-endbalancesheet,and the budgetedstatementof cash flows. Management by Exception. (p. 56f ) attentionto important Directsmanagement's differencesbetween actual and budgetedamounts. Master Budget. (p.542) The set of budgetedfinancialstatements and for supportingschedules an entireorganization. Includes operatingbudget,the capital the expenditures budget,and the financialbudget. Operating Budget. (p. 543) cost of goods sold, and Projectssalesrevenue, leadingto the budgeted operatingexpenses, incomestatementthat projectsoperating incomefor the oeriod. Responsibility Accounting. (p. 559) A system for evaluatingthe performanceof each responsibility centerand its manager. Responsibility Center. (p, 558) whose A part or subunitof an organization for manageris accountable specificactivities.
wOuick Check
1. Amazon.com expected to receive which of the following benefits when it started its budgeting process? a. b. c. d. The planning required to develop the budget helps managers foreseeand avoid potential problems before they occur. The budget helps motivate employeesto achieveAmazon.com's sales growth and cost reduction goals. The budget provides Amazon.com's managers with a benchmark against which to compare actual results for performance evaluation. All of the above.
2. I7hich of the following is the cornerstone (or most critical element) of the
master budget? a. b. c. d. the salesbudget the inventory budget the purchasesand cost of goods sold budget the operating expensesbudget
The income statement is part of which element of Amazon.com's master budget? a. b. c. d. the operating budget the capital expenditures budget the financial budget none of the above
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Use the following information to answer Questions 4 through 6. Suppose Amazon.com sells 1 million hardcover books a day at an averageprice of $30 and 1.5 million paperback books a day at an ayerageprice of $15. Assume that Amazon.com's purchase price for the books is 607" of the selling price it chargesretail customers.Amazon.com has no beginning inventory, but it wants to have a three-day supply of ending inventory. Assume that operating expenses are $0.5 million per day.
4. Compute Amazon.com's budgeted salesfor the next (seven-day)week.

a. b. c. d. $JZ.J mrlllon $210 million $220.5 million $367.5 million
5 . Determine Amazon.com's budgeted purchasesfor the next (seven-day)week.

a. b.
c.
$220.5 million $315 million

$Jbl,J mrlllon
^ -h
d.
$525 million
6. \What is Amazon.com's budgeted operating income for a (seven-day)week?

a. b. c. d.
7
$52.5 million $56 million $143.5 million $147 million
Which of the following expenses would not appear in Amazon.com's cash budget? a. b. c. d. depreciationexpense wages expense lnterest expense marketing expense
8. IT has made it easierfor Amazon.com'smanagersto perform all of the following

tasks except a. b. c. d. sensitivityanalyses rolling up individual units' budgets into the company-wide budget removing slack from the budget preparing responsibility center performance reports that identify variances between actual and budgeted revenuesand costs
9. Which of the following managers is at the highest level of the organization?

a. b. c. d. cost centef manager revenue center manager profit center manager inyestment center manager
571
10. SupposeAmazon.com budgets $5 million for customer servicecosts but actually 'Which of the following is true? spends$4 million. a. b. c. d. Becausethis $1 million variance is favorable, management does not need to investigate further. Management will investigatethis $1 million favorable variance to ensure that the cost savings do not reflect skimping on customer service. Management will investigatethis $1 million unfavorable variance to try ro identify and then correct the problem that led to the unfavorable variance. Management should investigateevery variance, especiallyunfavorable ones.
Quick Check Answers

q'0I p ' 6 )' 8 p ' L )' 9 q ' 9 p ' v o ' t . u ' z p ' I
For Internet Exercises,Exsel in Praqtice,and additional online astivities, go to this book's Web site at www.prenhall.com/bamber.
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AssessYour Progress
w Learning Objectives
ffir Learnwhy managersuse budgets

ffi
Prepare operatingbudget an
m
ffil
Prepare financial a budget MT Usesensitivity analysis budgeting in Prepareperformance reportsfor responsibility centers
wShort Exercises
S10-1 Explain benefits of budgeting (Leaming Objectiue7) (page539). Explain how you Consider budgetfor your travel itinerarybusiness the benefitfrom preparingthe budget. Order of preparation and components of master budget (Learning Obiectiues 3) 2, In what order shouldyou preparethe following components the masterbudget? of
510-2
\fhich are components the operatingbudget? of Which are components the of financialbudget?
s10-3
Sales Budgel (Learning Objectiue2) In a seriesof Short Exercises, you will prepareparts of the masterbudgetfor Grippers,which sellsits rock-climbingshoesworldwide. We will concentrate on Grippers'budgetfor Januaryand February. Grippersexpects sell 4,000 pairs of shoesfor $185 eachin Januaryand to 3,500 pairs of shoesfor $220 eachin February. sales cashonly. Prepare All are the sales budgetfor Januaryand February. Gontinuation of 510-3: inventory purchases, and cost of goods sold (Leaming Obiectiue2) In 510-3,Grippersexpects cost of goodssold to average 65'/" of sales revenue and the companyexpects sell4,300 pairs of shoes March for $240 each.Grippers' to in targetendinginventoryis $10,000plus 50% of the next month'scostof goodssold. Usethis information and the salesbudgetfrom 510-3 to prepareGrippers'inventory, purchases, cost of goodssold budgetfor January and and February.
s10-4
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s10-5
3) Continuation of 510-3: cash colleclions (Leaming Objectiue are budgetin S10-3.Now, assume that Grippers'sales Grippers'sales You prepared are historyindicates that creditsales 25o/"cashand75'/" credit.Grippers'collection collected follows: as
and sales were$398,250. Prepare totaled$391,500, December November sales for for cashcollections Januaryand February. a schedule the budgeted S10-6 3) Continuation of 510-5: cash budget (LearningObjectiue Referto 510-5.Grippershas $8,300 cashon hand on January1. The company of cashcollections $548,330 are requires minimumcashbalance $7,500. a January (asyou calculated S10-5). for are Prepare Totalcashpayments January $583,200. in Will Grippersneedto borrow cashby the endof January? a cashbudgetfor January. Revise sales budget (LearningObjectiue4) Turn to the originalWhitewaterSportingGoodsData Setitem 3. Suppose Junesales are expected be $40,000 rather than $60,000.ReviseWhitewaterSporting to 'What of SportingGoods' other components \X/hitewater Goods' salesbudget. by in budget? masterbudgetwould be affected this change the sales 4) Reviseinventory purchases,and cost of goods sold budget (LeamingObjectiue SportingGoodsData Setitem 5. Suppose cost of Referto the original's7hitewater Revise ratherthanT0o/o. WhitewaterSporting goodssold averages 75% of sales purchases, cost of goodssold budgetfor April and May. and Goods' inventory, SportingGoods' masterbudgetwould be of N7hatother components rWhitewater cost of goodssold? in affected the change the budgeted by 4) Revise cash collections budget (LearningObjectiue 70% of SportingGoodsData Set item 4. Suppose Turn to the original'$Thitewater salesbudgetand budgeted salesare cashand 30o/oarecredit. ReviseSfhitewater's for from customers April and May. cashcollections Revise cash payments for purchases (LearningObjectiue4) Sporting GoodsDataSetitem 5. Suppose Whitewater Referto the originalrWhitewater purchases themonthof thepurchase in and paysfor 60% of inventory Goods Sporting SportingGoods'budgeted cash 40Y. dwing the next month. ReviseWhitewater new that payments purchases inventoryfor April and May. (Hint: Assume these for of percentages applyto March purchases $33,600givenin Data Setitem 5.) of also
S10-7
S10-8
S10-9
510-10
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510-11
ldentify responsibility centers (Leaming Objectiue 5) Fill in the blankswith the phrase that bestcompletes sentence. the
a. b. c. d. e. f. g. h.
The maintenance department at the San Diego Zoo is The concessionstand at the San Diego Zoo is -. The menswear department at Bloomingdale's, which is responsiblefor buying and selling merchandise,is -. A production line at a PalmPilot plant rs is any segmentof the businesswhose manager is accountable for specific activities. Gatorade, a division of Quaker Oats, rs The salesmanager in charge of Nike's northwest salesterritory oversees Managers of cost and revenue centers are at Ievelsof the organization than are managers of profit and rnvestment centers.
S10-12
Corporate headquarters expenses (Learning Obiectiue 5) In Exhibit 10-20, the next to last line of the CEO's report consists entirely of expenses. Describe the kinds of expenses that would be included in this category. Management by exception (Leaming Objectiue 5) Look at the performance report in Exhibit 1,0-20.According to the management by exception principle, on which variances should the manager of the Mexican sauces product line focus his or her efforts? For these variances,compute the variance as a percent of the budgeted amount and suggestsome questions the manager may want to investigate. Interpret favorable variance (Leaming Obiectiue 5) Exhibit 10-20 shows that the Mexican sauces product line had a favorable marketing expense variance. Does this favorable variance necessarily mean that the manager of the Mexican saucesline is doing a good job? Explain.
S10-13
510-14
w Exercises
E10-15 Prepare summary performance report (Leaming Objectiue 1) Hanna White owns a chain of travel goods stores. Last year, her sales staff sold 10,000 suitcasesat an average salesprice of $150. Variable expenseswere 80% of salesrevenue, and the total fixed expensewas $100,000. This year,the chain sold more expensiveproduct lines. Saleswere 8,000 suitcasesat an averageprice of $200. The variable expense percentage and the total fixed expensewere the same both years.\fhite evaluatesthe chain manager by comparing this year's income with last year's income. Preparea performancereport for this year,similar to Exhibit 10-4. How would you improve Vhite's performance evaluation systemto better analyzethis year's results?
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El 0-16
Prepare inventory purchases, and cost of goods sold budget (Learning Objectiue2) Leno sells rims. Its sales tire budgetfor the ninemonthsendedSeptember follows: 30
In thepast,costof goods soldhasbeen 60o/o totalsales. directorof marketof The ing and the financialvicepresident agree that eachquarter's endinginventoryshould not be below$20,000plus t0% of costof goodssold for the followingquarter. The marketing of directorexpects sales $220,000 duringthe fourth quarter. JanuaryL The inventory $19,000. was purchases, cost of goodssold budgetfor eachof the Prepare inventory, an and first threequarters the year.Computecostof goodssoldfor the entirenine-month of period(use Exhibit 10-8asa model). El0-17 Prepare a cash collections budget (Learning Obiectiue 3) in Referto the sales budgetpresented E10-16.Credit sales typicallycollected are as follows: 60'/. in the quarterof the sale,30o/o the quarterafter the sale,77o the in in secondquarter after the sale,and 37o uncollectible. Preparethe cashcollections budgetfor the third quarter(thequarterendedSeptember 30). Prepare a sales budget for a not-for-profit organization (Learning Objectiue 2) GreatStartPreschool operates not-for-profitmorningpreschool. a Eachfamilypaysa nonrefundable registration of $120 per child per schoolyear.Monthly tuition for fee yearvariesdepending the numberof daysper weekthat the the nine-month school on preschool. The monthlytuition is $115 for the two-dayprogram,$130 child attends program,$145 for the four-dayprogram,and $160 for the five-day for the three-day program.The followingenrollment beenprojected the comingyear: has for
E10-18
In addition to the morning preschool, Great Start Preschool offers a Lunch Bunch program where kids have the option of staying an extra hour for lunch and playtime. Great Start charges an additional $3 per child for every Lunch Bunch attended. Historically, half the children stay for Lunch Bunch an averageof ten times a month.
Requirement
Calculate Great Start Preschool'sbudgeted revenue for the school year.
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E10-19 Gontinuation of E10-18: prepare an operating expenses budget (Learning Objectiues 7,2) Refer to Great Start Preschool's data in E10-18. Great Start'sprimary expense is payroll.The stateallowsa student-to-teacher of no morethan eightchildrento ratio eachteacher. Teachers paid a flat salaryeachmonth as follows: are
In addition to the salary expense, Great Start must pay federal payroll taxes (FICA taxes) in the amount of 7.65% of salary expense.Great Start leasesits facilities from a local church, paying $2,000 per month plus 10% of monthly tuition revenue. Fixed operating expenses(telephone, Internet access,bookkeeping services, and so forth) amount to $850 per month over the nine-month school year. Variable monthly expenses(over the nine-month school year) for art supplies and other miscellaneoussupplies are $12 per child. Requirements 1. Prepare Great Start Preschool'smonthly operating budget. Round all amounts to the nearest dollar. 2. Using your answer from E10-18 and Requirement 1, create Great Start Preschool'sbudgeted income statement for the entire nine-month school year. You may group all revenuestogether and all operating expensestogether. 3. Great Start is a not-for-profit preschool. lJ7hat might Great Start do with their projected income for the year?
E10-20 Prepare an inventory, purchases, and cost of goods sold budget (Learning
Objectiue 2) UniversityLogos buys logo-imprintedmerchandise and then sellsit to university bookstores. Salesare expected be $2,000,000in September, to $2,160,000in October,$2,376,000in November, and $2,500,000in December. UniversityLogos setsits pricesto earn an average 30% grossprofit on salesrevenue. The company doesnot want inventoryto fall below $400,000plus 15% of the next month'scost of goodssold. Prepare inventory, purchases, cost of goodssold budgetfor the months an and of Octoberand November. E10-21 Prepare budgeted income statement (Learning Objectiue2) Wheelsis an exotic car dealership. its Suppose Miami office projectsthat 2009 quarterlysales will increase 3% in Quarter 1, by another4oh in Quarter 2, by by another6%"in Quarter 3, and by another5Y" in Quarter4. Management expects operatingexpenses be 80% of revenues to during eachof the first two quarters, 79% of revenues during the third quarter,and 8LT" during the fourth quarter.The officemanager expects borrow $100,000on July 1, with quarterlyprincipalpayto mentsof $10,000beginning September and interestpaid at an annualrate of on 30 13o%. Assume that fourth-quarter 2008 sales were$4,000,000.
continwed .
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Prepare a budgeted income statement for each of the four quarters of 2009 and for the entire year. Present the 2009 budget as follows:
E1O-22
Compute cash receipts and payments (Leaming Obiectiue 3) Aqua Pure is a distributor of bottled water. For each of the items a through c, compute the amount of cash receipts or payments Aqua Pure will budget for September. The solution to one item may depend on the answer to an earlier item. a. b. Management expectsto sell equipment that costs $14,000 at a gain of $2,000. Accumulated depreciation on this equipment is $7,000. Management expectsto sell 7,500 casesof water in August and 9,200 in Each casesells for $12. Cash salesaverage 30% of total sales,and September. credit salesmake up the rest. On average,three-fourths of credit salesare colIected in the month of sale, with the balance collected the following month. The company pays rent and property taxes of $4,200 each month. Commissions and other selling expensesaverage25% of sales.Aqua Pure pays two-thirds of commissions and other selling expensesin the month incurred, with the balance paid the following month.
c.
E10-23
Prepare sales and cash collections budgets (Learning Objectiues2, 3) Rovniak Reeds, a manufacturer of saxophone, oboe, and clarinet reeds,has proj e c te d s a l e sto b e $890,000 i n October, $950,000 i n N ovember, $1,025,0 00 in December,and $920,000 in January. Rovniak's salesare 25o/o cashand75o/o credit. Rovniak's collection history indicates that credit salesare collected as follows:
Requirements for showing breakdown the between 1. Prepare sales a budget all four months,
cashand creditsales. Round all budgetfor December January. and 2. Prcpare cashcollections a dollar. answers to the nearest up
E10-24
Prepare cash budget, then revise (Learning Obiectiues3, 4) batterystore,beganOctoberwith $10,500cash. BatteryPower,a family-owned from credit customers will be $11,000in forecasts that collections Management The storeis scheduled receive to Octoberand $15,000in November. $6,000cashon in cashpaymentsincludeinventory note receivable October.Projected a business ($13,000 Octoberand $13,900 November) in and operating expenses purchases in ($3,000 eachmonth). Battery Power'sbank requiresa $10,000 minimum balancein the store's checkingaccount.At the end of any month when the accountbalancedips below $10,000, the bank automatically extendscredit to the store in multiples of $1,000. Battery Power borrows as little as possibleand pays back loans in quarterly installmentsof $2,000 plus 4"/" intereston the entire unpaid principal. The first paymentoccursthree months after the loan.
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Requirements 1. Prepare Battery Power's cash budget for October and November. 2. How much cash will Battery Power borrow in November if collections from that month total $12,000 insteadof $15,000? customers
E10-25 Finish an incomplete cash budget (Learning Objectiue 3)

You recently began a job as an accounting intern at Outdoor Adventures. Your first task was to help prepare the cash budget for February and March. UnfortunatelS the computer with the budget file crashed, and you did not have a backup or even a hard copy. You ran a program to salvage bits of data from the budget file. After entering the following data in the budget, you may have just enough information to reconstruct the budget. Outdoor Adventures eliminates any cash deficiency by borrowing the exact amount needed from State Street Bank, where the current interest rate is 8olo. Outdoor Adventures pays interest on its outstanding debt at the end of each month. The company also repays all borrowed amounts at the end of the month as cash becomesavailable. Complete the following cash budget:
79,600 1,800
5,100 20,000
? )
?
i?
E10-26 Prepare budgeted balance sheet (LeamingObiectiue3)
balance for sheet Marine.com Usethe following informationto preparea budgeted amounts. for at March 31,2009.Showcomputations the cashand owners'equity balance, a. March 31 inventory $15,000 for b. March payments inventory, $4,600 liabilities,$8,200 payableand accrued c. March payments accounts of balance, d. March 31 accountspayable $4,300
continwed . . .
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depreciation 28 e. February furniture and fixturesbalance, $34,800;accumulated balance, $29,870 f. February28 owners'equity,$26,700 g. March depreciation expense, $600 h. Costof goodssold,60% of sales includingincometax, total $5,000;paid in cash i. Other March expenses, 28 balance, $11,400 l. February cash k. March budgeted sales, $12,200 balance, one-fourthof March sales receivable l. March 31 accounts m. March cashreceipts, $14,300
E1O-27 fdentify types of responsibility centers (Learning Objectiue S) Identify each responsibility center as a cost center, a revenue center, a profit center, or an lnvestment center. a. b. c. The bakery department of a Publix supermarket reports income for the current year. PaceFoods is a subsidiary of Campbell Soup Company. The personnel department of State Farm Insurance Companies prepares its budget and subsequentperformance report on the basis of its expected expensesfor the year. The shopping section of Burpee.com reports both revenuesand expenses. Burpee.com'sinvestor relations Veb site provides operating and financial information to investors and other interested parties. The manager of a BP servicestation is evaluated basedon the station's revenues and expenses. A charter airline records revenuesand expensesfor each airplane each month. Each airplane's performance report shows its ratio of operating income to averagebook value. The manager of the southwest salesterritory is evaluated basedon a comparison of current period salesagainst budgetedsales.
d. e. f. g,
h.
El0-28
levels reportsat differentorganizational Prepareperformance (LeamingObiectiue 5)

InTouch is a Seattlecompany that sells cell phones and PDAs on the Web. InTouch has assistantmanagersfor its digital and video cell phone operations. These assistant managers report to the manager of the total cell phone product line, who, with the manager of PDAs, reports to the manager for all salesof handheld devices,Beth Beverly.Beverly receivedthe followin g data for November operations:
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Chapter10
Arrange the data in a performance report similar to Exhibit 10-20. Show November results, in thousands of dollars, for digital cell phones, for the total cell phone product line, and for all devices.Should Beverly investigate the performance of digital cell phone operations? Why or why not?
imPrOblefit5
(probtem A) set
P10-29A Prepare budgeted income statement (LearningObiectiue 2) The budgetcommitteeof Vinning Office Supplyhas assembled following data. the As the business manager, mustprepare budgeted you the incomestatements May for andJune2009. a. Sales April were $42,1,00. in You forecast that monthly sales will increase 2.07oin May and 2.4"/"in June. b. VinningOfficeSupply maintains inventoryof $9,000plus257' of sales budgeted for the followingmonth.Monthly purchases average 50% of sales revenues in that same month.Actualinventoryon April 30 is $14,000. Sales budgeted for Julyare$42,400. c. Monthly salaries amountto $4,000.Sales commissions equal4./" of sales for that month. Combinesalaries commissions a singlefigure. and into d. Other monthly expenses are:
Prepare Vinning Office Supply'sbudgeted incomestatements May and for Round all amounts the nearest to June.Show cost of goodssold computations. $100. (Roundamountsendingin $50 or more upward and amountsendingin less than $50 downward.) For example, budgeted May sales $42,900($42,100x are 1.02)andJune x sales $43,900($42,900 1.024). are
P10-30A Gontinuation of P10-29A:cash budgets

Referto P1.0-29A. Vinning Office Supply's sales 70"h cashand 30o/o are credit (use the roundedsaleson the last line of P1.0-29A). Credit salesare collected the in month after sale.Inventorypurchases paid 50% in the month of purchase are and 50% the following month. Salaries and sales commissions alsopaid half in the are month earnedand half the next month. Incometax is paid at the end of the year. The April 30,2009, balance sheet showedthe following balances:
continwed.
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Requirements (b) cashcollections, budgeted cashpayments of 1. Prepare schedules (a) budgeted cashpayments operating for expenses. Show and for purchases, (c) budgeted Roundyour computations for monthandtotalsfor May andJune. amounts each to the nearest dollar. no activitytook 2. Prepare cashbudgetsimilarto Exhibit 1,0-1,4.If financing a place, cashbalance onJune 30,2009? what is the budgeted Pl0-31A Prepare budgeted balance sheet and statement of cash flows (Leaming Obiectiue 3) for has a has AlliancePrintingof Baltimore applied a loan.Bankof America requested statement cashflows for of sheet April 30, 2009, anda budgeted at budgeted balance you the controller, haveassembled followinginformation: April. As AlliancePrinting's accumulated depreciation, balance, a. March 31 equipment $52,400; $41,300. for of of $42,800budgeted cashpurchase equipment. b. April capitalexpenditures expense, c. April depreciation $900. d. Costof goodssold,60% of sales. includingincometax, total $13,200,25% of expenses, e. Other April operating accrued April 30. at which will be paid in cashand the remainder f. March 31 owners'equitg $93,700. g. March 31 cashbalance, $40,600. sales, h. April budgeted $90,000,70%"of which is for cash.Of the remaining in 30o/o,half will be collected April and half in May. on April cashcollections March sales, $29,700. of of l. April cashpayments March 3L liabilitiesincurredfor March purchases inventory, $17,300. k. March 3L inventorybalance, 929,600. l. April purchases inventory $10,000for cashand $36,800on credit.Half of will be paid in April and half in May. of the credit purchases i. Requirements sheet AlliancePrintingat April 30, 2009. for the balance 1. Prepare budgeted for and owners'equity balances. computations cash,inventory, Showseparate of statement cashflows for April. 2. Prcpare budgeted the awareof more efficient(andmore AlliancePrintinghasbecome 3. Suppose 'Sfhat for in is the total equipment than it budgeted purchase April. expensive) purchases April, beforefinancing, in for amountof cashavailable equipment is endingcashbalance $21,000?(For this requirement, if the minimum desired purchases.) for disregard $42,800initially budgeted equipment the 4) P10-32A Continuation of P10-31A:revised sales (LearningObiectiue Referto P10-31A.Beforegrantinga loan to AlliancePrinting,Bank of Americaasks that April sales only $60,000ratherthan the assuming are for a sensitivity analysis (Whilethe costof goodssold will change, assume that $90,000originallybudgeted. expenses remainthe sameas in will purchases, and depreciation, the otheroperating P10-314.)
Chapter 10
Requirements 1,. Preparea revisedbudgetedbalancesheetfor Alliance Printing, showing separate computations for cash, inventory, and owners' equity balances. 2. SupposeAlliance Printing has a minimum desired cash balance of $23,000. Will the company need to borrow cash in April? 3. In this sensitivityanalysis,salesdeclinedby 33%% ($30,000 + $90,000). Is the decline in expensesand income more or lessthan 33%%? Explain. P10-33A ldentify responsibility centers (Learning Objectiue 5) Is each of the following most likely a cost center, a revenue center, a profit center, or an investment center? a. b. c. d. e. f. g. h. i. j. k. l. n. o. p. q. r. s. t. u. v. w. Shipping department of Amazon.com Eastern district of a salesperson's territory Child care department of a church or synagogue Catering operation of Sonny's BBQ restaurant Executive headquarters of the United \Vay Accounts payable section of the accounting department at Home Depot Proposed new office of Coldwell Banker, a real estatefirm Disneyland The Empire State Building in New York City Branch warehouse of Dalton Carpets Information systemsdepartment of Habitat for Humanity Servicedepartment of Audio Forest stereo shop Assembly-line supervisorsat Dell Computer American subsidiary of a Japanesemanufacturer Surgery unit of a privately owned hospital Researchand development department of Cisco Systems Childrenswear department at a Target store Typesetting department of Northend Press,a printing company Prescription-fillingdepartmentof Drugstore.com Order-taking department at L.L.Bean Personnel department of Goodyear Tire and Rubber Company Grounds maintenance department at Augusta National Golf CIub
m. Investments department of Citibank
P10-34A
Prepare performance reports for various organizational levels (Learning Objectiues 7,5) 'Winnie's'World operatesa chain of pet stores in the Midwest. The manager of each store reports to the region manager, who, in turn, reports to the headquarters in Milwaukee, S7isconsin. The actual income statements for the Dayton store, the Ohio region (including the Dayton store), and the company as a whole (including the Ohio region) for July 2009 are
Bwdgeted amountsfor July were as follows:
Requirements the of 1. Prepare reportfor July2009thatshows performance theDayton a

store,the Ohio region,and the companyas a whole.Follow the format of Exhibit 1,0-20. would you investigate Dayton storeon the the 2. As the Ohio regionmanager, basisof this report?\X/hyor why not? your discussion of Base on'Sfinnie's the 3. Briefly discuss benefits budgeting. 'World's performancereport.
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Hi P1OSlgfitS
Pl0-358
(probtemset B)
Prepare budgeted income statement (Learning Obiectiue 2) Representatives the various departments of Go Sports have assembledthe followof ing data. As the business manager, you must prepare the budgeted income statements for August and Septemb 2009. er a. b. Salesin July were $196,000. You forecast that monthly saleswill increase3o/o in August and 2"/" in September. Go Sports tries to maintain inventory of $50,000 plus 20% of salesbudgeted for the following month. Monthly purchasesaverage60% of salesrevenue in that same month. Actual inventory on July 31 is $90,000. Salesbudgeted for October are $220,000. Monthly salariesamount to $15,000. Sales commissionsequal 67" of salesfor that month. Combine salariesand commissions into a single figure. Other monthly exoensesare:
c. d.
Prepare Sports'budgeted Go incomestatements August and September. for Show cost of goodssold computations. Round all amounts the nearesr to $1,000. For example, budgeted ($196,000 1.03)and September August sales $202,000 are X sales $206,000 ($202,000 1.02). are x P10-368 Continuation of P10-358: cash budgets (Leaming Objectiue 3) Referto P10-358. Sports'sales 50% cashand50o/o Go are credit(usesales the on Iast two linesof P10-358).Credit sales collected the month after the sale. are in Inventorypurchases paid 60% in the month of purchase 40'/" the following are and month. Salaries and salescommissions paid three-fourths the month earned are in and one-fourththe next month. Incometax is paid at the end of the year. The July 31,2009, balance sheet showedthe following balances:
6,75,4
Requirements 1. Prepareschedules (a) budgetedcash collections from customers,(b) budgeted of cash payments for purchases,and (c) budgetedcash payments for operatrng expenses. Show amounts for each month and totals for August and September. Round your computations to the nearestdollar. 2. Prepare a cash budget similar to Exhibit 1.0-14.If no financing activity rook place, what is the budgeted cash balance on September 30,2009?
585
P10-378 Prepare budgeted balance sheet and staternent of cash flows (Leaming Objectiue 3) a The Music Box hasappliedfor a loan. First CentralBank hasrequested budgeted of statement cashflows for June.As at sheet June30, 2009, anda budgeted balance the officer)of The Music Box, you haveassembled the controller (chiefaccounting information: following depreciation, accumulated balance, $12,400. a. May 31 equipment $80,800; of for of b. Junecapitalexpenditures $16,400budgeted cashpurchase equipment. expense, c. Junedepreciation $400. goodssold,50% of sales. d. Costof includingincometax, total $34,000,75"/. of expenses, e. Other Juneoperating at accrued June30. which will be paid in cashand the remainder f. May 31 owners'equity, $137,500. g. May 31 cashbalance, $50,200. sales, h. Junebudgeted $85,000,40'/. of which is for cash.Of the remaining in collected Juneand half in July. 60oh,half will be on $15,300. i. Junecashcollections May sales, j. Junecashpayments liabilities May inventorypurchases credit,$8,300. on for of balance, $11,900. k. May 31 inventory of l. Junepurchases inventory, $11,000for cashand$37,200on credit.Half the paid in Juneand half in July. will creditpurchases be Requirements sheetfor The Music Box at June30, 2009. balance 1. Prepare budgeted the for cash,inventory and owners'equitybalances. computations Showseparate of statement cashflows for June' the 2. Preparc budgeted 3. On the basisof this data,if you were a First CentralBank loan officer,would you grant The Music Box a loan?Give your reason. 4) P10-388 Gontinuation of P10-37B:revised sales (Leaming Obiectiue Refer to Pt0-378. Beforegranting a loan to The Music Box, First Central Bank assuming that June salesare only $65,000rather analysis, asksfor a sensitivity than the $85,000 originally budgeted.(While cost of goods sold will change, will and the other operatingexpenses remain depreciation, assume that purchases, as the same in P10-37B.) Requirements for sheet The Music Box, showingseparate balance budgeted 1. Prepare revised a and owners'equitybalances. for computations cash,inventory, cashbalance $35,000.Will of The Music Box hasa minimum desired 2. Suppose the companyborrow cashin June? affectFirst Central'sloan decision? 3. How would this sensitivityanalysis 5) P10-398 ldentify responsibility centers (Leaming Obiectiue or center, profit center, a a Is eachof the following most likely a costcenter, revenue center? an investment
a.
Purchasingdepartment of Milliken, a textile manufacturer
b. Quality control department of Mayfield Dairies c. European subsidiary of Coca-Cola d. Payroll department at the University of lfisconsin
586 10 Chapt er
e. f. g. h. i. j. k. l. n. o. p. q. r. s. t. u. v.
Lighting department in a Searsstore Children's nursery in a church or synagogue Personneldepartment of E"TRADE, the online broker igourmet.com, an e-tailer of gourmet cheeses Servicedepartment of an automobile dealership Customer service department of Procter & Gamble Proposed new office of Deutsche Bank Southwest region of Pizza Inns Order-taking department at Lands'End 'Wall Editorial department of The Streetlournal A Ford Motor Company production plant Police department of Boston Century 21 Real Estate A small pet-grooming business Northeast salesterritory for Boise-Cascade Different product lines of Broyhill, a furniture manufacturer McDonald's restaurantsunder the supervisionof a regional manager
m. Delta Airlines
w. Job superintendentsof a home builder
P10-408 Prepareperformance reportsfor variousorganizational levels (Leaming Obiectiues 7,5)

Etown is a chain of home electronicsstores. Each store has a manager who answers to a city manager,who, in turn, reports to a statewide manager.The actual income statements of Store No. 23, all stores in the Dallas area (including Store No. 23), and all stores in the state of Texas (including all Dallas stores) are summarized as follows for April:
547
Bwdgetedamounts for April were as follows:
Requirements of a 1. Prepare report for April that showsthe performance StoreNo' 23, all of Follow the format in in the stores the Dallas area,andall of the stores Texas. of Exhibit 1.0-20. StoreNo' 23 on the of 2. As the city manager Dallas,would you investigate \Whyor why not? basisof this report? your discussion Etown's Base on of the 3. Briefly discuss benefits budgeting. performance report.
Chapter 10
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DecisionCases 'i,,
Case 10-41. Suggest performance improvements (Learning Objectiue 7) Donna Tse recently joined Cycle World, a bicycle store in St. Louis, as an assistanr manager. She recently finished her accounting courses. Cycle'World's manager and owner, Jeff Towry, asks Tse to prepare a budgeted income statement for 2009 based on the information he has collected. Tse'sbudset follows: CYCLE WORLD Budgeted IncomeStatement For the YearEndingJuly 31, 2009
Salesrevenue Cost of goods sold Gross profit Operating expenses: Salary and commission expense Rent expense Depreciation expense Insurance expense Miscellaneous expenses Operating loss Interest expense Net loss
$244,000 177,000
67,000 $ 46,000 8,000 2,000 800

68,800
(1,800 ) 225 $ (2,025 )
Requirements Tse does not want to give Towry this br-rdget without luakirrg constrllctivesuggcstions for stepsTowry could take to improve expectedperforrnance. Wr:itea memo to Towry outlining your suggestions.Your memo shor-rld take the following form:
To: tr4r..feff Towry, Man:rger Cycle World From: Donna Tse Subject: Cycle World's 2009 budgeted income sratemenr
Case 10-42. Prepare cash budgets under two alternatives (Learning Obiectiues 2,3) Eachautumn, as a hobby,suzanneDe Angelo weavescotton placemats to sell at a local crafts shop.The mats sell for $20 per set of four. The shop charges 10"/" a commission and remits the net proceeds De Angelo at the end of December. to
continued . . . The MasterBudgetand Responsibility Accounting 589
De Angelo has woven and sold 25 sets each of the last two years. She has enough cotton in inventory to make another 25 sets.She paid $7 per set for the cotton. De Angelo uses a four-harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30. De Angelo is considering buying an eight-harnessloom so that she can weave more intricate patterns in linen. The new loom costs $t,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 18o/" interest, with $200 principal plus accrued interest payable each December 31. De Angelo believes she can weave 15 linen place mat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. De Angelo'ssupplierwill sell her linen on credit, payableDecember31. De Angelo plans to keep her old loom whether or not she buys the new loom. The balance sheetfor her weaving businessat August 31,2009, is as follows:
Current assets: Cash Inventory of cotton
Currentliabilities: payable Accounts
Fixed assets: Loom Accumulated depreciation
Total assets
and owner's ecuit Total liabilities
Requirements 1. Prepare a cash budget for the four months ending December 31,,2009, for two alternatives: weaving the place mats in cotton using the existing loom and weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31, 2009, and a budgeted balance sheet at December 31, 2009. 2. On the basis of financial considerations onlS what should De Angelo do? Give your reason. 'Sfhat nonfinancial factors mieht De Anselo consider in her decision? 3.
r,+, Ethical lssue

fssue 10-43. Ethical considerations for padded budgets (Leaming Obiectiues7, 5) ResidenceSuites operates a regional hotel chain. Each hotel is operated by a manager and an assistantmanager/controller.Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so turnover is high. Assistant manager/controller Terry Dunn asked the new bookkeeper to help prepare the hotel's master budget. The master budget is prepared once a year and submitted to company headquarters for approval. Once approved, the master 590 Chapter10
budget is used to evaluate the hotel's performance. These performance evaluations affect hotel managers' bonuses; they also affect company decisions about which hotels deserve extra funds for capital improvements. rifhen the budget was almost complete, Dunn asked the bookkeeper to increase amounts budgeted for labor and supplies by 15%. 'When asked wh5 Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, becausecompany headquarterstightly controls capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisionsor to pay "bonuses" to keep valued employees. Dunn initially accepted this explanation becauseshe had observed similar behavior at her previous place of employment. Put yourself in Dunn's position. In deciding how to deal with the situation, answer the following questions: 1. What is the ethical issue? 2. What are my options? 'lfhat 3. are the possible consequences? 4. What should I do?
mTeam Project
Project 10-4. Analyzing and discussing budget concerns (Learning Objectiues 7,2, 5) Xellnet provides e-commerce software for the pharmaceuticals industry. Xellnet is organized into several divisions. A company-wide planning committee sets general strategy and goals for the company and its divisions, but each division develops its own budget. Rick Watson is the new division manager of wirelesscommunications software. His division has two departments:development and sales.Carrie Pronai managesthe 20 or so programmers and systemsspecialiststypically employed in the development department to create and update the division's software applications. Liz Smith managesthe salesdepartment. Xellnet considersthe divisions to be investment centers.To earn his bonus next year,'Watson must achievea 30% return on the $3 million investedin his division. This amounts to $900,000 of income (30% x $3 million). rX/ithinthe wirelessdivision, developmentis a cost center,while salesis a revenuecenter. Budgeting is in progress. Pronai met with her staff and is now struggling with two setsof numbers. Alternative A is her best estimate of next year's costs.However, unexpectedproblems can arise in the writing of software, and finding competent programmers is an ongoing challenge.Sheknows that Watson was a programmer before he earned an MBA, so he should be sensitiveto this uncertainty. ConsequentlS she is thinking of increasing her budgeted costs (Alternative B). Her department's bonuses largely depend on whether the department meets its budgetedcosts. continued. . .
591
Alternative B ';:'
havemadetheir budget.Companies with her sales Liz Smith is also struggling it is harderto win new cussoftware,so in initial investments communications teamcanmaintainthe levelof growth her If thingsgo well, shebelieves sales tomers. budget.However, This is AlternativeA in the sales over the last few years. achieved her fall short of the budget.If this happens, team may if Smithis too optimistic,sales numbers the reducing sales Smithis considering Therefore, bonuses. will not receive and submittingAlternativeB'
before Split your team into three groups.Each group shouldmeet separately the entireteammeets' Requirements ManagerCarrie Pronai.Before 1. The first group playsthe role of Development which set of budgetnumbersyou are meeting*ittt itti entireteam,determine Use to goingto present Rick Watson.Write a memosupportingyour decision. group beforethe Givethis memoto the third ih. fot-"t shownin Case10-41,. team meeting. ManagerLiz Smith.Beforemeeting 2. The secondgroup plays the role of Sales which set of budgetnumbersyou are goingto with the entireteam,determine 'sfrite a memo supporting your decision' Use the presentto Rick !tratson. ior-"t shown in Case 10-41.Give this memo to the third group before the teammeetlng.
592
Chapter10
3. The third group plays the role of Division Manager Rick Nfatson. Before meeting with the entire team, use the memos that Pronai and Smith provided to prepare a division budget based on the sales and development budgets. Your divisional overhead costs (additional costs beyond those incurred by the development and salesdepartments) are approximately $390,000. Derermine whether the wireless division can meet its targeted 307o return on assetsgiven the budgeted alternatives submitted by your department managers. During the meeting of the entire team, the group playing \flatson presents the division budget and considersits implications. Each group should take turns discussing its concernswith the proposed budget. The team as a whole should consider whether the division budget must be revised.The team should prepare a report that includesthe division budget and a summary of the issuescoveredin the team meeting.
593
Chapter10: Demo Doc 1

w Master Budget
LearningObiectiue 2 Actual salesfor the month ended Joe University sells college sweatshirts. September were$20,000. expects 30 sales increase in Octoberand another to 8% Joe 47" in November. Cashsales exoected be 60"/' of total sales are to and credit sales about40Yoof sales. Costof goodssoldshouldbe 60% of total sales. doesn't want inventory fall to Joe below$4,000plus 10% of costof goodssoldfor the nextmonth.Sales $25,000are of expected December. for Inventory September is $6,000. on 30 Operatingexpenses includesalescommission, 107o of sales; rent expense of expense $1,200;utility expense $800; and insurance of of $1,000;depreciation expense $400. of Round all figuresto the nearest dollar. Requirement Frepare the fofilowing budgmtsfmr ffictoher and Novennher: a. Sales budget b. Inventory,purchases, costof goodssold budget and c. Operatingexpense budget d. Budgeted incomestatement
DemoDoc 1 Page1 of 6 | Chapter10
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Requirement
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a. Sales budget \7e prepare the salesbudget first becausesalesimpact most elementsof the other budgets we will be preparing for this period. To complete the sales budget, we start by calculating the total sales for each 'We then compute the split between cash salesand credit salesfor each month. month basedon Joe'sestimation that cash saleswill be 60"h of the total sales for each month and credit saleswill be 40% of total salesfor each month. Let's begin by calculating Joe'stotal salesfor October and November. 'Weknow 30 that actual salesfor the month ended September were $20,000 and that Joe salesto increase by 8% over that amount in October and another 4"/" expects over October'ssalesin November: x sales 108% Octobertotal sales = September x sales = $20,000 108% = $21,600 October total
= x Novembertotal sales Octobersales 104% = Novembertotal sales $21,600x 704% = $22,464 So, we begin to build our salesbudget with this data:
JOE UNIVERSITY Sales Budget
Cashsales, 60% Creditsales, 40% $ 2 1 , 6 0 0 ': $22,464
Now, we work backward to calculate the split between cash and credit salesfor each month. In this case,cash salesare 60% of total salesand credit salesare 40% of total salesfor the current months:
Cash sales = Total salesx 60%
= $21.600 60"/' = $12.960 x = $22,464 60"/'= 5I3,478.40 (rounded $13,478) x to November cashsales October cashsales
Credit sales
= Total salesx 40%
Octobercreditsales = $21.600x 407. = $8.640 = to Novembercreditsales 922,464x 40o/"= $8,985.60(rounded $8,986)
Chapter10 | DemoDoc 1 Solutions Paoe2 of 6
Cash sales,607o 4 Credit sales, 0% Total sales

rr rr . ,, lr : I
$13,478
This givesus a total salesbudget for October and November ol $44,064, with 60% of that (526,438) from cash and 40% ($17,626) from credit. Becausethe sales budget calculates values you will use when preparing other budgets, it's always a good idea to check your work. b. Inventory, purchases,and cost of goods sold budget The inventory, purchases,and cost of goods sold budget takes the following format:
Cost of goods sold (what we need for current month sales)
+ Desiredending inventory (what we needto have on hand at month-end) = Total inventory required (what we need) - Beginning inventory = Purchases (what we have) (what we need to buy)
'We know from the questionthat cost First, we calculatethe cost of goods sold. of goods sold is expectedtobe 607" of total salesfor the period. From the sales budget, we know that toral salesfor October are expectedto be $21,600 and total salesfor November afe expectedto be $22,464. 'We can calculatecost of goods sold as follows: budget from the sales sales of Cost of goodssold = 60o/o budgeted = x O c t ob e r $ 2 1 ,6 0 0 6 0 " h = 5 1 ,2 ,9 6 0 = x November $22.464 607o= $13,478
Page3 of 6 | Chapter10 DemoDoc 1 Solutions
Here's our budget so far:

i'r,,rlr, i ir, r,
t,,
, iili' l
October
Cost of goods sold + Desired ending inventory = Total inventory reqr-rired - Beginning inventory = Purchases
$12,960
qtl 47R
Next, we need to add the desired ending inventory for each month. The information statesthat Joe doesn't want inventory to fall below $4,000 plus 10% of cost of goods sold for the next month. To calculate the desired ending inventory for November, we need to know the cost of goods sold for December. December'ssalesare expected to be $25.000. Returnine to our calculation for cost of eoods sold: Costof goods sold= 60% of budgeted sales fiom the sales budger = D e c e m ber $25,000 x60' /" = $15,000 Desiredending inventory is calcr-rlated follows: ers = Desired endirrg inventory [$4,000 (10% of costof goodssoldfor the nexrmonth)] + = Oc t< > b = r: 4 ,0 00 (" 10% $13,478) $5,348 e$ + x = N o v e m b e= $ 4 ,000 (10" /o $15,000) $5,500 r + x \7e carrnow calculate total inventoryreqr:ired: the
$1 8 , 9 7 8
Chapter10 | Demo Doc 1 Solutions Paoe4 of 6
Beginning inventory is equal to the previous month's desired ending inventory. \7e know that the inventory on September30 is $6,000, so this becomesOctober's beginning inventory. Once we determine beginning inventory, we subtract it from the total inventory required to determine purchasesfor the period:
JOE UNIVERSITY Purchases, Cost of GoodsSoldBudget Inventory, and

October $1 2 , 9 6 0 5,348 November $1 3 , 4 7 8 5,500 $1 8 , 9 7 8 .5,348
Cost of goods sold + D e s i r e de n d i n g in ve n to r y = Total rnventory required - B e g i n n i n gi n v e n to r y = Purchases
$18,308 6,000 $12,308
3,530 $1
c. Operating expensebudget \fith the exceptionof the sales commission,which we know to be 1,0%of sales, all expenses remaln constant betweenOctober and November, as follows:
JOE UNIVERSITY Expense Budget Operating

November
Salescommission Rent expense Insurance expense Depreciation expense
Total
Utility e
1,000 400 1,200 800
2,000 800 2,400 1,600
The only calculationto perform hereis sales \7e can computesales commission. commissions October and November using the respective for sales computatrons ($21,600 and$22,464) from the salesbudget: = Sales commission Expected x sales 10% = October x sales comrnission $21,699 t0"/' = $2,160 = (rounded $2,246) November x sales commission $22,464 l0'/' = $2,246.40 to
DemoDoc 1 Solutions Page5 of 6 | Chapter10
Here's our completedoperating expensebudget for October and November:
Salescommission Rent expense Insurance expense Depreciation expellse Utility expense Total operating expenses
$4,406 2,000 800 2,400
1.600
$ 1 1 ,2 0 6
d. Budgeted income statement The results of the budgetsyou've created so far are carried over into the fourth element:the budgetedirrcomestatement. Salesrevenueis traced from the salesbudget in part a. and cost of goods sold Cost of goods sold is traced from the inventory, purchases, budget in part b. rWecompute grossprofit by subtractingthe cost of goods sold from salesrevenue:
Total Sales revenue Costof goods sold Grossprofit Operating expenses Operating income $44,064 1,7,626
budget. are Operating expenses traced from the operating expenses We compute operating income (loss) by subtracting operating expensesfrom grossprofit. Our completedbudgetedincome statementlooks like this:
October
Salesreyenue Cost of goods sold Gross pro{it
O,r e rr ti n o i- - ^- -
November $22,164 13,478 8,98 6 5.646
Total $44,064 26.438 1.7,626 11.206 $ 6,120
$21,600 12,960 8,640 .5,560
A-- . - t i- -
$ 3,080
$ 3,340
Chapter10 I DemoDoc 1 Solutions Paoe6 of 6

Managerial Accounting 10

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Managerial Accounting 10

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