CASE 9-55 (35 MINUTES)

1.

Some of the operational and behavioral benefits that are generally attributed to a
participatory budgeting process are as follows:

Utilization of the best knowledge of activities in a specific area, because the participants
are close to daily operations.
Goals that are more realistic and acceptable.
Improved communication and group cohesiveness.
A sense of commitment and willingness to be held accountable for the budget.
2.

Four deficiencies in Patricia Eklunds participatory policy for planning and

performance evaluation, along with recommendations of how the deficiencies can be
corrected:
Deficiencies

Recommendations

The setting of constraints on fixed Rewards should be based on meeting

expenditures includes uncontrollable fixed budget and/or organizational goals or
costs, thereby mitigating the positive effects objectives.
of participatory budgeting.
The arbitrary revision of approved budgets The contingency budget should be separate,
defeats the participatory process.
over and above each departments original
submission.
The division manager holds back a Managers should be involved in the revision
percentage of each budget for discretionary of budgets. Managers could submit a
use.
budget with programs at different levels of
funding.
Evaluation based on budget performance Divisional
constraints
could
be
must be accompanied with intrinsic rewards. communicated at a budget kick-off
meeting; however, individual limits of
controllable expenses should be set by each
manager.

CASE 9-56 (120 MINUTES)

1.

Sales budget:
20x0
4th
Quarter

1st
Quarter

2nd
Quarter

20x1
3rd
Quarter

S frame unit
sales ....................
50,000
S sales price .....
$10

55,000

$10

60,000

$10

65,000

$10

70,000
$10

250,000

$10

S frame sales
revenue ...............

$ 500,000

$ 550,000

$ 600,000

$ 650,000

$ 700,000

$2,500,000

L frame unit
sales ....................
40,000
L sales price......
$15

45,000

$15

50,000

$15

55,000

$15

60,000

$15

210,000

$15

L frame sales
revenue ...............

$ 600,000

$ 675,000

$ 750,000

$ 825,000

$ 900,000

$3,150,000

Total sales
revenue ............... $1,100,000

$1,225,000

$1,350,000

$1,475,000

$1,600,000

$5,650,000

$ 440,000

$ 490,000

$ 540,000

$590,000

$640,000

$2,260,000

660,000

735,000

810,000

885,000

960,000

3,390,000

Cash sales*...........
Sales on
account ..............
*40% of total sales.
60% of total sales.

4th
Quarter

Entire
Year

CASE 9-56 (CONTINUED)

2.

Cash receipts budget:

1st
Quarter
Cash sales ..........................................
$ 490,000
Cash collections from credit
sales made during current
quarter* ............................................588,000
Cash collections from credit
sales made during previous
quarter ............................................132,000
Total cash receipts ............................
$1,210,000
*80% of current quarter's credit sales.
20% of previous quarter's credit sales.

2nd
Quarter
$ 540,000

20x1
3rd
Quarter
$ 590,000

4th
Quarter
$ 640,000

Entire
Year
$2,260,000

648,000

708,000

768,000

2,712,000

147,000
$1,335,000

162,000
$1,460,000

177,000
$1,585,000

618,000
$5,590,000

CASE 9-56 (CONTINUED)

3.

Production budget
20x0
4th
Quarter

S frames:
Sales (in units) .................
Add: Desired ending
inventory........................
Total units needed ..............
Less: Expected
beginning inventory.........
Units to be produced ..........
L frames:
Sales (in units) .................
Add: Desired ending
inventory........................
Total units needed ..............
Less: Expected
beginning inventory.........
Units to be produced ..........

1st
Quarter

2nd
Quarter

20x1
3rd
Quarter

4th
Quarter

Entire
Year

50,000

55,000

60,000

65,000

70,000 250,000

11,000
61,000

12,000
67,000

13,000
73,000

14,000
79,000

15,000 15,000
85,000 265,000

10,000
51,000

11,000
56,000

12,000
61,000

13,000
66,000

14,000 11,000
71,000 254,000

40,000

45,000

50,000

55,000

60,000 210,000

9,000
49,000

10,000
55,000

11,000
61,000

12,000
67,000

13,000 13,000
73,000 223,000

8,000
41,000

9,000
46,000

10,000
51,000

11,000
56,000

12,000
9,000
61,000 214,000

CASE 9-56 (CONTINUED)

4.

Raw-material budget:*
20x0
4th
Quarter

Metal strips:
S frames to be
produced ....................... 51,000
Metal quantity per
2
unit (ft.) ..........................
Needed for S frame
production ..................... 102,000
L frames to be
produced ....................... 41,000
Metal quantity per
unit (ft.) ..........................
3
Needed for L frame
production ..................... 123,000
Total metal needed
for production; to
be purchased (ft.) .......... 225,000
Price per foot ................
$1
Cost of metal strips to
be purchased: ............... $225,000

1st
Quarter

2nd
Quarter

56,000

20x1
3rd
Quarter

61,000

4th
Quarter

66,000

Entire
Year

71,000

254,000

112,000

122,000

132,000

142,000

508,000

46,000

51,000

56,000

61,000

214,000

138,000

153,000

168,000

183,000

642,000

250,000

$1

275,000

$1

300,000

$1

325,000

$1

1,150,000

$1

$250,000

$275,000

$300,000

$325,000

$1,150,000

*Raw-material budget continued on next page.

CASE 9-56 (CONTINUED)

Glass sheets: ...................
S frames to be
produced ....................... 51,000
Glass quantity per
unit (sheets) .................. .25
Needed for S frame
production ..................... 12,750
L frames to be
produced ....................... 41,000
Glass quantity per
unit (sheets) ..................
.5
Needed for L frame
production ..................... 20,500
Total glass needed
for production
(sheets) .......................... 33,250
Add: Desired ending
inventory........................ 7,400
Total glass needs ............. 40,650
Less: Expected
beginning inventory...... 6,650
Glass to be
purchased...................... 34,000
Price per glass
sheet ..............................
$8
Cost of glass to be
purchased...................... $272,000
Total raw-material
purchases (metal
and glass) ...................... $497,000

56,000

.25

66,000

.25

71,000

.25

254,000

.25

14,000

15,250

16,500

17,750

63,500

46,000

51,000

56,000

61,000

214,000

.25

61,000

.5

.5

.5

.5

.5

23,000

25,500

28,000

30,500

107,000

37,000

40,750

44,500

48,250

170,500

8,150
45,150

8,900
49,650

9,650
54,150

10,400
58,650

10,400
180,900

7,400

8,150

8,900

9,650

7,400

37,750

41,500

45,250

49,000

173,500

$8

$8

$8

$8

$8

$302,000

$332,000

$362,000

$392,000

$1,388,000

$552,000

$607,000

$662,000

$717,000

$2,538,000

CASE 9-56 (CONTINUED)

5. Cash disbursements budget:*

Raw-material purchases:
Cash payments for
purchases during
the current quarter .........
Cash payments for
purchases during the
preceding quarter**..........
Total cash payments for
raw-material purchases ...
Direct labor:
Frames produced
(S and L) ...........................
Direct-labor hours per
frame .................................
Direct-labor hours to be
used ..................................
Rate per direct-labor
hour ...................................
Total cash payments for
direct labor .......................

1st
Quarter

2nd
Quarter

201
3rd
Quarter

$441,600

$ 485,600

$ 529,600

$ 573,600

$2,030,400

99,400

110,400

121,400

132,400

463,600

$541,000

$ 596,000

$ 651,000

$ 706,000

$2,494,000

102,000

112,000

122,000

132,000

468,000

.1

10,200

$20

$204,000

.1

11,200

$20

$ 224,000

*Cash disbursements budget continued on next page.

80% of current quarters purchases
**20% of previous quarters purchases

.1

4th
Quarter

12,200

$20

$ 244,000

Entire
Year

.1

13,200

$20

$ 264,000

.1
46,800

$20

$ 936,000

CASE 9-56 (CONTINUED)

Manufacturing overhead:
Indirect material....................
Indirect labor ........................
Other......................................
Total cash payments for
manufacturing
overhead ...........................
Cash payments for selling
and administrative
expenses ..........................
Total cash disbursements ........

$ 10,200
40,800
31,000

11,200
44,800
36,000

12,200
48,800
41,000

13,200
52,800
46,000

46,800
187,200
154,000

$ 82,000

$ 92,000

$ 102,000

$ 112,000

$ 388,000

$100,000
$927,000

$ 100,000
$1,012,000

$ 100,000
$1,097,000

$ 100,000
$1,182,000

$ 400,000
$4,218,000

CASE 9-56 (CONTINUED)

6.

Summary cash budget:

Cash receipts [from req. (2)] ..........

Less: Cash disbursements
[from req. (5)] ..............................
Change in cash balance due to
operations ...................................
Payment of dividends .....................
Proceeds from bank loan (1/2/x1) ..
Purchase of equipment ..................
Quarterly installment on loan
principal ......................................
Quarterly interest payment* ...........
Change in cash balance during
the period ....................................
Cash balance, beginning of period
Cash balance, end of period ..........
*$1,000,000 10% = $25,000
$750,000 10% = $18,750
$500,000 10% = $12,500
$250,000 10% = $6,250

1st
Quarter
$1,210,000

2nd
Quarter
$1,335,000

20x1
3nd
Quarter
$1,460,000

927,000

1,012,000

1,097,000

1,182,000

4,218,000

$ 283,000
(50,000)
1,000,000
(1,000,000)

$ 323,000
(50,000)

$ 363,000
(50,000)

$ 403,000
(50,000)

$1,372,000
(200,000)
1,000,000
(1,000,000)

(250,000)
(25,000)

(250,000)
(18,750)

(250,000)
(12,500)

(250,000)
(6,250)

(1,000,000)
(62,500)

96,750
107,750
$ 204,500

$ 109,500
95,000
$ 204,500

$ (42,000)
95,000
$ 53,000

4,250
53,000
$ 57,250

50,500
57,250
$ 107,750

4th
Quarter
$1,585,000

Entire
Year
$5,590,000

CASE 9-56 (CONTINUED)

7.

FRAME-IT COMPANY
BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1

Direct material:
Raw-material inventory, 1/1/x1.................................................
Add: Purchases of raw material [req. (4)] ...............................
Raw material available for use .................................................
Deduct: Raw-material inventory, 12/31/x1
([req. (4)] 10,400 $8) ..........................................................
Raw material used
Direct labor [req. (5)].......................................................................
Manufacturing overhead:
Indirect material ........................................................................
Indirect labor .............................................................................
Other overhead .........................................................................
Depreciation ..............................................................................
Total manufacturing overhead .................................................
Cost of goods manufactured .........................................................
Add: Finished-goods inventory, 1/1/x1 .........................................
Cost of goods available for sale ....................................................
Deduct: Finished-goods inventory, 12/31/x1 ................................
Cost of goods sold .........................................................................

$ 59,200
2,538,000
$2,597,200
83,200
$2,514,000
936,000
$ 46,800
187,200
154,000
80,000
468,000*
$3,918,000
167,000
$4,085,000
235,000**
$3,850,000

*In the budget, budgeted and applied manufacturing overhead are equal. The applied
manufacturing overhead may be verified independently as follows:
Total number of frames produced ...........................................
Direct-labor hours per frame ................................................
Total direct-labor hours ............................................................
Predetermined overhead rate per hour ................................
Total manufacturing overhead applied ...................................
See

next page.
**See next page.
See next page.

468,000

.1
46,800
$10
$468,000

CASE 9-56 (CONTINUED)

The

cost of goods manufactured may be verified independently as follows:

Frames produced ..................................................................
Manufacturing cost per unit ..............................................
Total manufacturing cost .....................................................
Grand total .............................................................................

S Frames
L Frames
254,000
214,000

$7

$10
$1,778,000
$2,140,000
$3,918,000

**The finished-goods inventory on 12/31/x1 may be verified independently as follows:

Projected inventory on 12/31/x1 ...........................................
Manufacturing cost per unit .................................................
Cost of ending inventory ......................................................
Total cost of ending inventory (S and L) .............................
The

cost of goods sold may be verified independently as follows:

Frames sold ...........................................................................
Manufacturing cost per unit .................................................
Cost of goods sold ................................................................
Total cost of goods sold (S and L) .......................................

8.

S Frames
L Frames
15,000
13,000

$7
$10
$ 105,000
$ 130,000
$235,000

S Frames
L Frames
250,000
210,000

$7

$10
$1,750,000
$2,100,000
$3,850,000

FRAME-IT COMPANY
BUDGETED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales revenue .......................................................................
Less: Cost of goods sold ....................................................
Gross margin ........................................................................
Selling and administrative expenses ..................................
Interest expense ...................................................................
Net income ............................................................................

$5,650,000
3,850,000
$1,800,000
$400,000
62,500

462,500
$1,337,500

CASE 9-56 (CONTINUED)

9.

FRAME-IT COMPANY
BUDGETED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 20X1
Retained earnings, 12/31/x0 ........................................................................
Add: Net income ...........................................................................................
Deduct: Dividends ........................................................................................
Retained earnings, 12/31/x1 ........................................................................

10.

$3,353,800
1,337,500
200,000
$4,491,300

FRAME-IT COMPANY
BUDGETED BALANCE SHEET
DECEMBER 31, 20X1
Cash ..............................................................................................................
Accounts receivable* ...................................................................................
Inventory:
Raw material .........................................................................................
Finished goods ......................................................................................
Plant and equipment (net of accumulated depreciation)** .......................
Total assets ..................................................................................................

$ 204,500
192,000

Accounts payable ......................................................................................

Common stock .............................................................................................
Retained earnings ........................................................................................
Total liabilities and stockholders' equity....................................................

$ 143,400
5,000,000
4,491,300
$9,634,700

*Fourth-quarter sales on account 20% = $960,000 20%

10,400 units $8
**$8,000,000 + $1,000,000 $80,000
Fourth-quarter purchases on account 20% = $717,000 20%

83,200
235,000
8,920,000
$9,634,700

CURRENT ISSUES IN MANAGERIAL ACCOUNTING

ISSUE 9-57
"U.S. AIRLINES CONSIDER IMPACT OF HIGHER FUEL BILL," THE WALL STREET
JOURNAL, OCTOBER 13, 2000. "AMERICAN'S NET SOARS, BUT HIGH OIL PRICES STING
U.S. AIRWAYS," THE WALL STREET JOURNAL, OCTOBER 19, 2000, MELANIE TRUTTMAN
AND SUSAN CAREY.
1. Higher fuel costs mean that airlines may have to raise airfares so that costs are met.
2. Higher fuel costs result in many expenses increasing throughout society. Since
airlines have to purchase many different kinds of supplies, many of which could be
affected by rising prices, increased fuel prices could affect the airlines budgets in
many places in addition to their actual fuel costs.
ISSUE 9-58
"BUDGET PLANNING: THE NEXT GENERATION," INFORMATIONWEEK.COM, SEPTEMBER
25, 2000, RICK WHITING.
1. Budgeting has moved to a combination of top-down and bottom-up processes. The
idea is that managers will be able to measure results more accurately. Strategic
planning begins with the organization's objectives and then builds a budget designed
to achieve those goals. Input from all levels is needed to make strategic planning
successful.
2. New technology via computer software allows employees from different levels of an
organization to provide integrated input into budget formation. This has allowed a
faster and more accurate process on a national as well as an international scale that
is updated on a continuous basis.
3. Amway Corporation incorporated Adaytum Software to project reducing travel
expenses by 5% for its executives. Next year Amway will use the software to
eventually link several hundred managers into the budgeting process.

ISSUE 9-59
"INEFFICIENT BUDGETING COSTS COMPANIES DEARLY," MANAGEMENT ACCOUNTING,
FEBRUARY 2000, JOHN FANNING.
The traditional budget and associated processes, such as strategic planning,
forecasting, monthly reviews and reward processes, consume an enormous amount of
management time. If these processes are linked, rather than operating in isolation, the
overall level of control over the business can be improved while eliminating, or
substantially streamlining, redundant or superfluous activities.

ISSUE 9-60
"THE REVOLUTION IN PLANNING," CFO, AUGUST 1999, RUSS BANHAM.
There are fewer best practices that are directly transferable from company to company
than exist with re-engineering. This article discusses re-engineering the planning
process. Planning pervades every corner of an organization and is steeped in a
tradition of negotiation. Planning is the most political of all processes. Success in this
area requires patience, communication with employees, investment in new datagathering tools and time. It also requires finance to evolve from being a reporter to
being a facilitator of the process. Companies that succeed in revamping this process
believe they can accurately assess strategic decisions based on metrics intrinsic to the
business. Since this is a continuous process that starts when senior management
defines business objectives and communicates them to the operating lines, benefits
begin immediately.
ISSUE 9-61
"SELLING THE BUDGET," STRATEGIC FINANCE, SEPTEMBER 1999, CATHERINE M.
STANKE.
Using too much detail can bog an audience down and make them miss the overall
message. The author of the article suggests choosing the view of a picture that is best
for the message the presenter is trying to convey. Use bar graphs, pie charts, line
graphs, and/or scatter graphs for the purpose they were intended. Present high-level
assumptions that don't give more detail than is needed to make an informed decision.
The presenter can always give more detail when answering a specific question. Value
an audience's time, and respect their intelligence level.
ISSUE 9-62

"MANAGEMENT ACCOUNTING IN CHINA CHANGES - PROBLEMS AND THE FUTURE,"

MANAGEMENT ACCOUNTING, JANUARY 1999, MIKE JONES AND JASON XIAO.
1. Economic Responsibility Contracts are designed to control and motivate enterprise
management. Internal Responsibility Contracts are used by many enterprises to
meet the ERC. While ERCs are becoming less popular, IRCs are still in operation in
many companies. The IRC has four principal components. First, responsibility
centers are established for appropriate internal departments, such as production, to
facilitate income monitoring and cost control. Second, top management uses the
company's overall financial targets to implement targets at the responsibility center
level. Third, an internal bank is established which settles transactions between
company divisions and lends funds raised from within or outside the company to
internal divisions. Finally, performance by the IRC is evaluated periodically against
pre-set targets.
2. ERCs involve management of a state-owned enterprise attaining an agreed level of
sales and profit upon which it is then taxed. In return, the enterprise has autonomy
to manage its business operations. A consequence of this system is that
enterprises develop management accounting techniques, such as budgeting and
standard costing, to help them meet targets.