Financial Planning and Analysis: The Master Budget

CHAPTER 9
Profit Planning and Activity-Based Budgeting

ANSWERS TO REVIEW QUESTIONS
9-1
A budget facilitates communication and coordination by making each manager

throughout the organization aware of the plans made by other managers. The
budgeting process pulls together the plans of each manager in the organization.
9-2
An example of using the budget to allocate resources in a university is found in the

area of research funds and grants. Universities typically have a limited amount of
research-support resources that must be allocated among the various colleges and
divisions within the university. This allocation process often takes place within the
context of the budgeting process.
9-3
A master budget, or profit plan, is a comprehensive set of budgets covering all

phases of an organization's operations for a specified period of time. The master
budget includes the following parts: sales budget, operational budgets (including a
production budget, inventory budgets, a labor budget, an overhead budget, a selling
and administrative expense budget, and a cash budget), and budgeted financial
statements (including a budgeted income statement, budgeted balance sheet, and
budgeted statement of cash flows).
9-4
The flowchart on the following page depicts the components of the master budget
for a service station.
9-5
General economic trends are important in forecasting sales in the airline industry.
The overall health of the economy is an important factor affecting the extent of
business travel. In addition, the health of the economy, inflation, and income levels
affect the extent to which the general public travels by air.
9-6
Operational budgets specify how an organization's operations will be carried out to

meet the demand for its goods and services. The operational budgets prepared in a
hospital would include a labor budget showing the number of professional personnel
of various types required to carry out the hospital's mission, an overhead budget
listing planned expenditures for such costs as utilities and maintenance, and a cash
budget showing planned cash receipts and disbursements.
McGraw-Hill/Irwin
Inc.
Managerial Accounting, 8/e
2009 The McGraw-Hill Companies,

9- 1
Flowchart for Review Question 9-4

Sales Budget:
Gasoline, Related
Products, and
Services
Sales
Budget
Operational
Budgets
Ending
Inventory
Budget:
Gasoline
Materials Budget:
Gasoline and
Related Products
Labor
Budget
Overhead
Budget
Selling and
Administrative
Expense
Budget
Cash
Budget
Budgeted
Income
Statement
Budgeted
Financial
Statements
Budgeted
Balance Sheet
Budgeted
Statement of
Cash Flows
McGraw-Hill/Irwin
Inc.
9-2

Solutions Manual
9.7 Application of activity-based costing to the budgeting process yields activity-based

budgeting (ABB). Under ABB, the first step is to specify the products or services to
be produced and the customers to be served. Then the activities necessary to
produce these products and services are determined. Finally the resources needed
to perform the specified activities are determined. ABB differs from traditional
budgeting in the emphasis that it places on activities and its use of activity-based
costing data in the budgeting process.
9.8 E-budgeting stands for an electronic and enterprise-wide budgeting process. Under this
approach the information needed to construct a budget is gathered via the Internet
from individuals and subunits located throughout the enterprise. The Internet also is
used to disseminate the resulting budget schedules and information to authorized
users throughout the enterprise.
9-9
The city of Boston could use budgeting for planning purposes in many ways. For
example, the city's personnel budget would be important in planning for required
employees in the police and fire departments. The city's capital budget would be
used in planning for the replacement of the city's vehicles, computers,
administrative buildings, and traffic control equipment. The city's cash budget would
be important in planning for cash receipts and disbursements. It is important for any
organization, including a municipal government, to make sure that it has enough
cash on hand to meet its cash needs at all times.
9.10The budget director, or chief budget officer, specifies the process by which budget data
will be gathered, collects the information, and prepares the master budget. To
communicate budget procedures and deadlines to employees throughout the
organization, the budget director often develops and disseminates a budget manual.
9-11
The budget manual says who is responsible for providing various types of
information, when the information is required, and what form the information is to
take. The budget manual also states who should receive each schedule when the
master budget is complete.
9-12
A company's board of directors generally has final approval over the master budget.
By exercising its authority to make changes in the budget and grant final approval,
the board of directors can wield considerable influence on the overall direction the
organization takes. Since the budget is used as a resource-allocation mechanism,
the board of directors can emphasize some programs and curtail or eliminate others
by allocating funds through the budgeting process.
McGraw-Hill/Irwin
Inc.

9- 3
9-13
A master budget is based on many assumptions and predictions of unknown

parameters. For example, the sales budget is built on an assumption about the
nature of demand for goods or services. The direct-material budget requires an
estimate of the direct-material price and the quantity of material required per unit of
production. Many other assumptions are used throughout the rest of the budgeting
process.
9-14
The difference between the revenue or cost projection that a person provides in the
budgeting process and a realistic estimate of the revenue or cost is called budgetary
slack. Building budgetary slack into the budget is called padding the budget. A
significant problem caused by budgetary slack is that the budget ceases to be an
accurate portrayal of likely future events. Cost estimates are often inflated, and
revenue estimates are often understated. In this situation, the budget loses its
effectiveness as a planning tool.
9-15
An organization can reduce the problem of budgetary slack in several ways. First, it
can avoid relying on the budget as a negative, evaluative tool. Second, managers
can be given incentives not only to achieve budgetary projections but also to
provide accurate projections.
9-16
The idea of participative budgeting is to involve employees throughout an

organization in the budgetary process. Such participation can give employees the
feeling that "this is our budget," rather than the feeling that "this is the budget you
imposed on us." When employees feel that they were part of the budgeting process,
they are more likely to strive to achieve the budget.
9-17
This comment is occasionally heard from people who have started and run their own
small business for a long period of time. These individuals have great knowledge in
their minds about running their business. They feel that they do not need to spend a
great deal of time on the budgeting process, because they can essentially run the
business by feel. This approach can result in several problems. First, if the person
who is running the business is sick or traveling, he or she is not available to make
decisions and implement plans that could have been clarified by a budget. Second,
the purposes of budgeting are important to the effective running of an organization.
Budgets facilitate communication and coordination, are useful in resource
allocation, and help in evaluating performance and providing incentives to
employees. It is difficult to achieve these benefits without a budgeting process.
McGraw-Hill/Irwin
Inc.
9-4

Solutions Manual
9-18
In developing a budget to meet your college expenses, the primary steps would be to
project your cash receipts and your cash disbursements. Your cash receipts could
come from such sources as summer jobs, jobs held during the academic year,
college funds saved by relatives or friends for your benefit, scholarships, and
financial aid from your college or university. You would also need to carefully project
your college expenses. Your expenses would include tuition, room and board, books
and other academic supplies, transportation, clothing and other personal needs, and
money for entertainment and miscellaneous expenses.
9-19
Firms with international operations face a variety of additional challenges in

preparing their budgets.
A multinational firm's budget must reflect the translation of foreign currencies

into U.S. dollars. Almost all the world's currencies fluctuate in their values
relative to the dollar, and this fluctuation makes budgeting for those translations
difficult.
It is difficult to prepare budgets when inflation is high or unpredictable. Some

foreign countries have experienced hyperinflation, sometimes with annual
inflation rates well over 100 percent. Predicting such high inflation rates is
difficult and complicates a multinational's budgeting process.
The economies of all countries fluctuate in terms of consumer demand,

availability of skilled labor, laws affecting commerce, and so forth. Companies
with foreign operations face the task of anticipating such changing conditions in
their budgeting processes.
9-20
The five phases in a product's life cycle are as follows:

(a) Product planning and concept design
(b) Preliminary design
(c) Detailed design and testing
(d) Production
(e) Distribution and customer service
It is important to budget these costs as early as possible in order to ensure that the
revenue a product generates over its life cycle will cover all of the costs to be
incurred. A large portion of a product's life-cycle costs will be committed well before
they are actually incurred.
McGraw-Hill/Irwin
Inc.

9- 5
SOLUTIONS TO EXERCISES
EXERCISE 9-21 (20 MINUTES)
1.
The total required production is 131,144 units, computed as follows:

Budgeted Sales
(in units)
June
July
August
September
October
40,000 (given)
42,000 (40,000 1.05)
44,100 (42,000 1.05)
46,305 (44,100 1.05)
Planned Ending Inventory

(in units)
32,000 (40,000 80%)
37,044 (46,305 80%)
Sales in units:
2.
July................................................................................................................
August...........................................................................................................
September.....................................................................................................
Total for third quarter...................................................................................
Add: Desired ending inventory, September 30..........................................
Subtotal.........................................................................................................
Deduct: Desired ending inventory, June 30...............................................
Total required production............................................................................
40,000
42,000
44,100
126,100
37,044
163,144
32,000
131,144
Assumed production during third quarter (in units).................................

Raw-material requirements per unit of product (in pounds)....................
Raw material required for production in third quarter (in pounds)..........
Add: Desired ending raw-material inventory, September 30
(480,000 25%)....................................................................................
Subtotal.........................................................................................................
Deduct: Ending raw-material inventory, June 30.......................................
Raw material to be purchased during third quarter (in pounds)..............
Cost per pound of raw material...................................................................
Total raw-material purchases during third quarter....................................
120,000
4
480,000
McGraw-Hill/Irwin
Inc.
9-6
120,000
600,000
140,000
460,000
$1.40
$ 644,000

Solutions Manual

1.
Cash collections in October:

Month of Sale
July...............................................................
August.........................................................
September...................................................
October........................................................
Total.............................................................
Amount Collected in October

$ 6,000
$150,000 4%
17,500
175,000 10%
30,000
200,000 15%
157,500
225,000 70%
$211,000
Notice that the amount of sales on account in June, $122,500 was not needed to
solve the exercise.
2.
Cash collections in fourth quarter from credit sales in fourth quarter.

Amount Collected
Month of Sale
October............................................
November........................................
December.........................................
Total.................................................
Total collections in fourth quarter
from credit sales in fourth
quarter.........................................
3.
Credit
Sales
$225,000
250,000
212,500
October
$157,500
$157,500
November
$ 33,750
175,000
208,750
December
$ 22,500
37,500
148,750
$208,750
$575,000
The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS

is available on your Instructors CD and on the Hilton, 8e website:
WWW.MHHE.COM/HILTON8E.
McGraw-Hill/Irwin
Inc.

9- 7

1.
Sales...........................................................
Cash receipts:
From cash sales....................................
From sales on account.........................
Total cash receipts....................................
a
$270,000
= $240,000 .5
$ 90,000
= $180,000 .5
September
$270,000a
$120,000b
108,000d
$ 228,000
$ 90,000c
102,000
$ 192,000
$135,000
117,000e
$252,000
$108,000
($120,000 .6) + ($90,000 .4)
$117,000
($135,000 .6) + ($90,000 .4)
2.
August
$180,000
= $135,000 2
$120,000
July
$240,000
Accounts payable, 12/31/x0................................................................

Purchases of goods and services on account during 20x1.............
Payments of accounts payable during 20x1.....................................
Accounts payable, 12/31/x1................................................................
600,000 euros
2,400,000 euros
(2,200,000) euros*
800,000 euros
*2,200,000 euros
= 600,000 euros + 2,400,000 euros 800,000 euros
3.
Accounts receivable, 12/31/x0............................................................

Sales on account during 20x1............................................................
Collections of accounts receivable during 20x1...............................
Accounts receivable, 12/31/x1............................................................
1,700,000y
4,500,000y
(3,900,000y)
2,300,000y
4.
Accumulated depreciation, 12/31/x0..................................................

Depreciation expense during 20x1....................................................
Accumulated depreciation, 12/31/x1..................................................
$ 405,000
75,000
$ 480,000
5.
Retained earnings, 12/31/x0...............................................................

Net income for 20x1............................................................................
Dividends paid in 20x1........................................................................
Retained earnings, 12/31/x1...............................................................
$1,537,500
300,000
0
$1,837,500
McGraw-Hill/Irwin
Inc.
9-8

Solutions Manual

1.
Production (in units) required for the year:

Sales for the year...........................................................................................
Add: Desired ending finished-goods inventory on December 31..............
Deduct: Beginning finished-goods inventory on January 1......................
Required production during the year...........................................................
2.
3,360,000
350,000
560,000
3,150,000
Purchases of raw material (in units), assuming production of 3,500,000 finished units:
Raw material required for production (3,500,000 2)................................
Add: Desired ending inventory on December 31........................................
Deduct: Beginning inventory on January 1.................................................
Required raw-material purchases during the year......................................
McGraw-Hill/Irwin
Inc.
7,000,000
315,000
245,000
7,070,000

9- 9

1.
WHITE MOUNTAIN FURNITURE COMPANY

EXPECTED CASH COLLECTIONS
NOVEMBER
Month
September.........................................
October..............................................
November..........................................
Total...............................................
2.
Sales
$150,000
195,000
165,000
Percent
9%
20%
70%
Expected
Collections
$ 13,500
39,000
115,500
$168,000

EXPECTED CASH DISBURSEMENTS
NOVEMBER
October purchases to be paid in November................................................
Less: 2% cash discount................................................................................
Net...............................................................................................................
Cash disbursements for expenses...............................................................
Total............................................................................................................
3.
$135,000
2,700
$132,300
36,000
$168,300

EXPECTED CASH BALANCE
NOVEMBER 30
Balance, November 1.....................................................................................
Add: Expected collections............................................................................
Less: Expected disbursements....................................................................
Expected balance......................................................................................
McGraw-Hill/Irwin
Inc.
9-10
$55,000
168,000
168,300
$54,700

Solutions Manual

Answers will vary widely, depending on the governmental unit selected and the budgetary
items on which the student focuses. In the past, students have expressed surprise at the
proportion of the U.S. federal budget that goes to entitlement programs (e.g., Social
Security and Medicare), interest expense, and the military.
1.
Budgeted cash collections for December:

Month of Sale
November.............................................................
December..............................................................
Total cash collections..........................................
2.
Collections in December
$152,000
$400,000 38%
264,000
440,000 60%
$416,000
Budgeted income (loss) for December:

Sales revenue.......................................................................
Less: Cost of goods sold (75% of sales)............................
Gross margin (25% of sales)...............................................
Less: Operating expenses:..................................................
Bad debts expense (2% of sales)..............................
Depreciation ($432,000/12)........................................
Other expenses..........................................................
Total operating expenses..........................................
Income before taxes.............................................................
McGraw-Hill/Irwin
Inc.
$440,000
330,000
$110,000
$8,800
36,000
45,200
90,000
$20,000

9- 11
EXERCISE 9-27 (CONTINUED)

3.
Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to December's purchases of
merchandise. Since the store's gross margin is 25 percent of sales, its cost of goods
sold must be 75 percent of sales.
Month
December....................
January.......................
Total December
purchases................
Sales
$440,000
400,000
Cost of
Goods
Sold
$330,000
300,000
Amount Purchased in December

$ 66,000
$330,000 20%
240,000
300,000 80%
$306,000
Therefore, the December 31 balance in accounts payable will be $306,000.
McGraw-Hill/Irwin
Inc.
9-12

Solutions Manual

Memorandum
Date:
Today
To:
President, East Bank of Mississippi
From:
I.M. Student and Associates
Subject: Budgetary slack

Budgetary slack is the difference between a budget estimate that a person provides
and a realistic estimate. The practice of creating budgetary slack is called padding the
budget. The primary negative consequence of slack is that it undermines the credibility
and usefulness of the budget as a planning and control tool. When a budget includes
slack, the amounts in the budget no longer portray a realistic view of future operations.
The bank's bonus system for the new accounts manager tends to encourage
budgetary slack. Since the manager's bonus is determined by the number of new
accounts generated over the budgeted number, the manager has an incentive to
understate her projection of the number of new accounts. The description of the new
accounts manager's behavior shows evidence of such understatement. A 10 percent
increase over the bank's current 10,000 accounts would mean 1,000 new accounts in
20x5. Yet the new accounts manager's projection is only 800 new accounts. This
projection will make it more likely that the actual number of new accounts will exceed
the budgeted number.
McGraw-Hill/Irwin
Inc.

9- 13

1.
Total Sales in January 20x5
$200,000
$260,000
$320,000
Cash receipts in January, 20x5
From December sales on account............
From January cash sales..........................
From January sales on account...............
Total cash receipts.....................................
$ 14,250*
150,000
40,000**
$ 204,250
$14,250
195,000
52,000
$261,250
$14,250
240,000
64,000
$318,250
*$14,250 = $380,000 .25 .15
$150,000 = $200,000 .75

**$40,000 = $200,000 .25 .80
2.
Operational plans depend on various assumptions. Usually there is uncertainty about

these assumptions, such as sales demand or inflation rates. Financial planning helps
management answer "what if" questions about how the budget will look under various
sets of assumptions.

1.
Direct professional labor budget for the month of June:

Office visits per month = 48,000/12 = 4,000
Professional services in June:
One-hour visits (20% 4,000 1 hr.)...................................
Half-hour visits (80% 4,000 1/2 hr.)................................
Total direct professional labor..............................................
Hourly rate for dental associates..........................................
Total direct professional labor cost......................................
McGraw-Hill/Irwin
Inc.
9-14
800 hours
1,600 hours
2,400 hours
$ 90
$216,000

Solutions Manual
EXERCISE 9-30 (CONTINUED)

2.
Cash collections during June:

Half-hour visits (4,000 80%)...............................................
Billing rate..............................................................................
Total billings for half-hour visits...........................................
One-hour visits (4,000 20%)...............................................
Billing rate..............................................................................
Total billings for one-hour visits...........................................
Total billings during month...................................................
Percentage of month's billings collected
during June........................................................................
Collections during June........................................................
Total collections in June ($27,600 + $248,400)....................
May
3,200
$60
$192,000
800
$105
$ 84,000
$276,000
June
3,200
$60
$192,000
800
$105
$ 84,000
$276,000
10%
$ 27,600
90%
$248,400
$276,000
3. Overhead and administrative expense budget for June:

Patient registration and records (4,000 visits $3.00 per visit). . .
Other overhead and administrative expenses
(2,400 hours $7.50 per hour)...................................................
Total overhead and administrative expenses.................................
$12,000
18,000
$30,000
4. The electronic version of the Solutions Manual BUILD A SPREADSHEET

SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
McGraw-Hill/Irwin
Inc.

9- 15
SOLUTIONS TO PROBLEMS
PROBLEM 9-31 (30 MINUTES)
1.
Schedule of cash collections:

January
Collection of accounts receivable:
$165,000 x 20%
........................................................................
Collection of January sales ($450,000):
60% in January; 35% in February
........................................................................
Collection of February sales ($540,000):
60% in February; 35% in March
........................................................................
Collection of March sales ($555,000):
60% in March
........................................................................
Sale of equipment..........................................
Total cash collections
........................................................................
2.
February
March
$ 33,000
270,000
$157,500
324,000
$189,000
333,000
$303,000
$481,500
15,000
$537,000
Schedule of cash disbursements:

January
Payment of accounts payable.......................
Payment of January purchases ($270,000):
70% in January; 30% in February............
Payment of February purchases ($300,000):
70% in February; 30% in March...............
Payment of March purchases ($420,000):
70% in March............................................
Cash operating costs.....................................
Total cash disbursements.......................
McGraw-Hill/Irwin
Inc.
9-16
February
March
$ 66,000
189,000
93,000
$348,000
$ 81,000
210,000
$ 90,000
72,000
$363,000
294,000
135,000
$519,000

Solutions Manual
PROBLEM 9-31 (CONTINUED)

3.
Schedule of cash needs:

January
February
March
Beginning cash balance. $ 60,000

Total receipts.
303,000
Subtotal. $363,000
Less: Total disbursements
348,000
Cash excess (deficiency) before financing $ 15,000
Financing:
Borrowing to maintain $60,000 balance..
45,000
Loan principal repaid
Loan interest paid..
Ending cash balance $ 60,000
$ 60,000
481,500
$541,500
363,000
$178,500
$132,900
537,000
$669,900
519,000
$150,900
(45,000)
(600)*
$132,900
-0-0-0$150,900
* $45,000 x 8% x 2/12
McGraw-Hill/Irwin
Inc.

9- 17

1.
Production and direct-labor budgets

SHADY SHADES, INC.
BUDGET FOR PRODUCTION AND DIRECT LABOR
FOR THE FIRST QUARTER OF 20X1
Sales (units).....................................................
Add: Ending inventory*...................................
Total needs.......................................................
Deduct: Beginning inventory..........................
Units to be produced.......................................
Direct-labor hours per unit..............................
Total hours of direct labor
time needed.................................................
Direct-labor costs:
Wages ($16.00 per DLH).............................
Pension contributions
($.50 per DLH).........................................
Workers' compensation
insurance ($.20 per DLH)........................
Employee medical insurance
($.80 per DLH).........................................
Employer's social security
(at 7%)......................................................
Total direct-labor cost.....................................
January
20,000
32,000
52,000
32,000
20,000
1
Month
February
24,000
25,000
49,000
32,000
17,000
1
March
16,000
27,000
43,000
25,000
18,000
.75
Quarter
60,000
27,000
87,000
32,000
55,000
20,000
17,000
13,500
50,500
$320,000
$272,000
$216,000
$808,000
10,000
8,500
6,750
25,250
4,000
3,400
2,700
10,100
16,000
13,600
10,800
40,400
22,400
$372,400
19,040
$316,540
15,120
$251,370
56,560
$940,310
*100 percent of the first following month's sales plus 50 percent of the second following
month's sales.
DLH denotes direct-labor hour.
McGraw-Hill/Irwin
Inc.
9-18

Solutions Manual

2.
Use of data throughout the master budget:

Components of the master budget, other than the production budget and the directlabor budget, that would also use the sales data include the following:
Sales budget
Cost-of-goods-sold budget
Selling and administrative expense budget
Components of the master budget, other than the production budget and the directlabor budget, that would also use the production data include the following:
Direct-material budget
Manufacturing-overhead budget
Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor-hour data include the following:
Manufacturing-overhead budget (for determining the overhead application rate)

Components of the master budget, other than the production budget and the directlabor budget, that would also use the direct-labor cost data include the following:
Manufacturing-overhead budget (for determining the overhead application rate)

Cash budget
Budgeted income statement
McGraw-Hill/Irwin
Inc.

9- 19

3.
Manufacturing overhead budget:

SHADY SHADES, INC.
MANUFACTURING OVERHEAD BUDGET
Month
Shipping and handling...............

Purchasing, material handling,
and inspection............................
Other overhead...........................
Total manufacturing overhead...
January
February
March
Quarter
$ 60,000
$ 72,000
$48,000
$180,000
90,000
210,000
$360,000
76,500
178,500
$327,000
81,000
141,750
$270,750
247,500
530,250
$957,750

1.
Niagra Chemical Companys production budget (in gallons) for the three products for
20x2 is calculated as follows:
Sales for 20x2.............................................

Add: Inventory, 12/31/x2
(.08 20x3 sales)...................................
Total required.............................................
Deduct: Inventory, 12/31/x1
(.08 20x2 sales).................................
Required production in 20x2.....................
2.
Yarex
Darol
Norex
120,000
80,000
50,000
_10,400
130,400
_5,600
85,600
_4,800
54,800
9,600
120,800
6,400
79,200
4,000
50,800
The companys conversion cost budget for 20x2 is shown in the following schedule:
Conversion hours required:
Yarex (120,800 .07)..................................
Darol (79,200 .10)....................................
Norex (50,800 .16)...................................
Total hours.................................................
8,456
7,920
_8,128
24,504
Conversion cost budget (24,504 x $20)....
$490,080
McGraw-Hill/Irwin
Inc.
9-20

Solutions Manual

3.
4.
Since the 20x1 usage of Islin is 200,000 gallons, the firms raw-material purchases
budget (in dollars) for Islin for 20x2 is as follows:
Quantity of Islin required for production in 20x2 (in gallons):
Yarex (120,800 1)...................................................................
Darol (79,200 .7)....................................................................
Norex (50,800 .5)...................................................................
Subtotal..
Add: Required inventory, 12/31/x2 (201,640 .10)......................
Subtotal..........................................................................................
Deduct: Inventory, 1/1/x2 (200,000 .10)......................................
Required purchases (gallons).......................................................
120,800
55,440
25,400
201,640
20,164
221,804
20,000
201,804
Purchases budget (201,804 gallons $5 per gallon)..................
$1,009,020
The company should continue using Islin, because the cost of using Philin is
$152,632 greater than using Islin, calculated as follows:
Change in material cost from substituting Philin for Islin:
20x2 production requirements:
Philin (201,640 $5 1.2)........................................................
Islin (201,640 $5)...................................................................
Increase in cost of raw material....................................................
Change in conversion cost from substituting Philin for Islin:
Philin (24,504 $20 .9)..........................................................
Islin (24,504 $20)...................................................................
Decrease in conversion cost........................................................
Net increase in production cost...................................................
McGraw-Hill/Irwin
Inc.
$1,209,840
1,008,200
$ 201,640
$ 441,072
490,080
$ (49,008)
$ 152,632

9- 21

1.
2.
Tuition revenue budget:

Current student enrollment.
Add: 5% increase in student body
Total student body.
Less: Tuition-free scholarships.
Tuition-paying students
Credit hours per student per year.
Total credit hours..
Tuition rate per hour.
Forecasted tuition revenue.
12,000
600
12,600
180
12,420
x 30
372,600
x $75
$27,945,000
Faculty needed to cover classes:

Total student body.
Classes per student per year [(15 credit hours
3 credit hours) x 2 semesters].
Total student class enrollments to be covered.
Students per class.
Classes to be taught.
Classes taught per professor.
Faculty needed
12,600
x 10
126,000
25
5,040
5
1,008
3.
Possible actions might include:

Hire part-time instructors
Use graduate teaching assistants
Increase the teaching load for each professor
Increase class size and reduce the number of sections to be offered
Have students take an Internet-based course offered by another university
Shift courses to a summer session
4.
No. While the number of faculty may be a key driver, the number of faculty is highly
dependent on the number of students. Students (and tuition revenue) are akin to
salesthe starting point in the budgeting process.
McGraw-Hill/Irwin
Inc.
9-22

Solutions Manual

1.
Sales budget
Sales (in sets)..............................................
Sales price per set......................................
Sales revenue..............................................
2.
August
6,000
$60
$360,000
September
7,500
$60
$450,000
July
5,000
1,200
6,200
1,000
5,200
August
6,000
1,500
7,500
1,200
6,300
September
7,500
1,500
9,000
1,500
7,500
Production budget (in sets)

Sales............................................................
Add: Desired ending inventory..................
Total requirements......................................
Less: Projected beginning inventory........
Planned production....................................
3.
July
5,000
$60
$300,000
Raw-material purchases
Planned production (sets).............................
Raw material required per set
(board feet).................................................
Raw material required for production
(board feet).................................................
Add: Desired ending inventory of raw
material (board feet)..................................
Total requirements.........................................
Less: Projected beginning inventory of
raw material (board feet)...........................
Planned purchases of raw material
(board feet).................................................
Cost per board foot........................................
Planned purchases of raw material
(dollars)......................................................
McGraw-Hill/Irwin
Inc.
July
5,200
10
August
6,300
10
September
7,500
10
52,000
63,000
75,000
6,300
58,300
7,500
70,500
8,000
83,000
5,200
6,300
7,500
53,100
$.60
64,200
$.60
75,500
$.60
$ 31,860
$ 38,520
$ 45,300

9- 23

4.
Direct-labor budget
Planned production (sets).............................
Direct-labor hours per set.............................
Direct-labor hours required...........................
Cost per hour.................................................
Planned direct-labor cost..............................
5.
July
5,200
1.5
7,800
$21
$163,800
August
6,300
1.5
9,450
$21
$198,450
September
7,500
1.5
11,250
$21
$236,250
The electronic version of the Solutions Manual BUILD A SPREADSHEET

SOLUTIONS is available on your Instructors CD and on the Hilton, 8e website:
www.mhhe.com/hilton8e.
McGraw-Hill/Irwin
Inc.
9-24

Solutions Manual

1.
Sales are collected over a two-month period, 40% in the month of sale and 60% in the
following month. December receivables of $108,000 equal 60% of Decembers sales;
thus, December sales total $180,000 ($108,000 .6). Since the selling price is $20
per unit, Dakota Fan sold 9,000 units ($180,000 $20).
2.
Since the company expects to sell 10,000 units, sales revenue will total $200,000
(10,000 units x $20).
3.
Dakota Fan collected 40% of Februarys sales during February, or $78,400. Thus,
Februarys sales total $196,000 ($78,400 .4). Combining January sales ($76,000 +
$114,000), February sales ($196,000), and March sales ($200,000), the company will
report revenue of $586,000.
4.
Sixty percent of Marchs sales will be outstanding, or $120,000 ($200,000 x 60%).
5.
Finished-goods inventories are maintained at 20% of the following months sales.

January sales total $190,000 ($76,000 + $114,000), or 9,500 units ($190,000 $20).
Thus, the December 31 inventory is 1,900 units (9,500 x 20%).
6.
February sales will total 9,800 units ($196,000 $20), giving rise to a January 31
inventory of 1,960 units (9,800 x 20%). Letting X denote production, then:
12/31/x0 inventory + X January 20x1 sales = 1/31/x1 inventory
1,900 + X - 9,500 = 1,960
X 7,600 = 1,960
X = 9,560
7.
Financing required is $3,500 ($15,000 minimum balance less ending cash balance of
$11,500):
Cash balance, January 1 $ 22,500
Add: January receipts ($108,000 + $76,000)..
184,000
Subtotal $206,500
Less: January payments 195,000
Cash
balance
before $ 11,500
financing.
McGraw-Hill/Irwin
Inc.

9- 25

1.
The benefits that can be derived from implementing a budgeting system include the
following:
The preparation of budgets forces management to plan ahead and to establish

goals and objectives that can be quantified.
Budgeting compels departmental managers to make plans that are in congruence

with the plans of other departments as well as the objectives of the entire firm.
The budgeting process promotes internal communication and coordination.

Budgets provide directions for day-to-day control of operations, clarify duties to
be performed, and assign responsibility for these duties.
Budgets help in measuring performance and providing incentives.

Budgets provide a vehicle for resource allocation.
McGraw-Hill/Irwin
Inc.
9-26

Solutions Manual

2.
a. Schedule
Sales Budget
b. Subsequent Schedule
Production Budget
Selling Expense Budget
Budgeted Income Statement
Ending Inventory Budget (units)
Production Budget
Production Budget (units)
Direct-Material Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Direct-Material Budget
Cost-of-Goods-Manufactured Budget
Direct-Labor Budget
Manufacturing-Overhead Budget
Cost-of-Goods-Sold Budget
Cost-of-Goods-Sold Budget (includes

ending inventory in dollars)

Budgeted Balance Sheet
Selling Expense Budget
Research and Development Budget
Administrative Expense Budget

Budgeted Statement of Cash Flows
Capital Expenditures Budget
Cash Receipts and Disbursements Budget

Cash Receipts and Disbursements

Budget

McGraw-Hill/Irwin
Inc.

9- 27

1.
Sales budget for 20x3:
Light coils................................................................
Heavy coils..............................................................
Projected sales........................................................
2.
Units
60,000
40,000
Price
$130
$190
Total
$ 7,800,000
7,600,000
$15,400,000
Light
Coils
60,000
Heavy
Coils
40,000
25,000
85,000
20,000
65,000
9,000
49,000
8,000
41,000
Sheet
Metal
Raw Material
Copper
Wire
Platforms
260,000
130,000
__
205,000
465,000
36,000
501,000
123,000
253,000
32,000
285,000
41,000
41,000
7,000
48,000
32,000
469,000
29,000
256,000
6,000
42,000
Production budget (in units) for 20x3:
Projected sales..............................................................................
Add: Desired inventories,
December 31, 20x3....................................................................
Total requirements.........................................................................
Deduct: Expected inventories, January 1, 20x3..........................
Production required (units)...........................................................
3.
Raw-material purchases budget (in quantities) for 20x3:
Light coils (65,000 units projected

to be produced).................................................
Heavy coils (41,000 units projected
to be produced).................................................
Production requirements........................................
Add: Desired inventories, December 31, 20x3......
Total requirements..................................................
Deduct: Expected inventories,
January 1, 20x3..................................................
Purchase requirements (units)...............................
McGraw-Hill/Irwin
Inc.
9-28

Solutions Manual

4.
Raw-material purchases budget for 20x3:
Raw Material
Required
Raw Material
(units)
Sheet metal.............................................................
469,000
Copper wire............................................................
256,000
Platforms................................................................
42,000
Total.
5.
Total
$ 7,504,000
2,560,000
___252,000
$10,316,000
Direct-labor budget for 20x3:
Projected
Production
(units)
Light coils.....................................
65,000
Heavy coils...................................
41,000
Total..............................................
6.
Anticipated
Purchase
Price
$16
10
6
Hours
per
Unit
4
6
Total
Hours
260,000
246,000
Rate
$15
20
Total
Cost
$3,900,000
4,920,000
$8,820,000
Manufacturing overhead budget for 20x3:
Purchasing and material handling.......................

Depreciation, utilities, and inspection..................
Shipping.................................................................
General manufacturing overhead.........................
Cost Driver
Quantity
Cost
Driver
Rate
725,000 lb.a
106,000 coils b
100,000c
506,000 hr. d
$.50
$8.00
$2.00
$6.00
Total manufacturing overhead..............................
Budgeted
Cost
$362,500
848,000
200,000
3,036,000
$4,446,500
725,000 = 469,000 + 256,000 (from req. 3)

106,000 = 65,000 + 41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem)
d
506,000 = 260,000 + 246,000 (from req. 5)
b
McGraw-Hill/Irwin
Inc.

9- 29

1.
Sales budget:
Box C
500,000
$1.35
$675,000
Sales (in units)

Sales price per unit
Sales revenue
2.
Box P
500,000
$1.95
$975,000
$1,650,000
Production budget (in units):
Sales......................................................................................
Add: Desired ending inventory...........................................
Total units needed................................................................
Deduct: Beginning Inventory..............................................
Production requirements.....................................................
3.
Total
Box C
500,000
5,000
505,000
10,000
495,000
Box P
500,000
15,000
515,000
20,000
495,000
Raw-material budget:
CORRUGATING MEDIUM
Production requirements (number of boxes).........
Raw material required per box (pounds)................
Raw material required for
production (pounds)............................................
Add: Desired ending
raw-material inventory.........................................
Total raw-material needs.........................................
Deduct: Beginning raw-material inventory............
Raw material to be purchased.................................
Price (per pound).....................................................
Cost of purchases (corrugating medium)..............
Total cost of raw-material purchases
($145,500 + $37,875).............................................
McGraw-Hill/Irwin
Inc.
9-30
Box C
495,000
.2
Box P
495,000
.3
Total
99,000
148,500
247,500
10,000
257,500
5,000
252,500
$.15
$ 37,875
$183,375

Solutions Manual

PAPERBOARD
Production requirement (number of boxes)...........
Raw material required per box (pounds)................
Raw material required for
production (pounds)............................................
Add: Desired ending
raw-material inventory.........................................
Total raw-material needs.........................................
Deduct: Beginning raw-material inventory............
Raw material to be purchased.................................
Price (per pound).....................................................
Cost of purchases (paperboard).............................
4.
Box P
495,000
.7
Total
148,500
346,500
495,000
5,000
500,000
15,000
485,000
$.30
$145,500
Direct-labor budget:
Box C
495,000
.0025
1,237.5
Production requirements (number of boxes)

Direct labor required per box (hours).....................
Direct labor required for production (hours)
Direct-labor rate.......................................................
Total direct-labor cost..............................................
5.
Box C
495,000
.3
Box P
495,000
.005
2,475
Total
3,712.5
$18
$66,825
Manufacturing-overhead budget:
Indirect material...........................................................................................
Indirect labor................................................................................................
Utilities..........................................................................................................
Property taxes..............................................................................................
Insurance......................................................................................................
Depreciation.................................................................................................
Total overhead..............................................................................................
McGraw-Hill/Irwin
Inc.
$ 15,750
75,000
37,500
27,000
24,000
43,500
$222,750

9- 31

6.
Selling and administrative expense budget:

Salaries and fringe benefits of sales personnel........................................
Advertising...................................................................................................
Management salaries and fringe benefits..................................................
Clerical wages and fringe benefits.............................................................
Miscellaneous administrative expenses....................................................
Total selling and administrative expenses.................................................
7.
$112,500
22,500
135,000
39,000
6,000
$315,000
Budgeted income statement:

Sales revenue [from sales budget, req. (1)]...............................................
Less: Cost of goods sold:
Box C: 500,000 $.315*............................................................. $157,500
Box P: 500,000 $.645* ............................................................ 322,500
Gross margin................................................................................................
Selling and administrative expenses..........................................................
Income before taxes.....................................................................................
Income tax expense (35%)...........................................................................
Net income....................................................................................................
$1,650,000
480,000
$1,170,000
315,000
$ 855,000
299,250
$ 555,750
*Calculation of manufacturing cost per unit:

(a)
Predetermined overhead rate
budgeted manufacturing overhead

volume of direct -labor hours
$222,750
= (495,000)(.0025) (495,000)(.005)
$222,750
= 3,712.5 hours $60 per hour
McGraw-Hill/Irwin
Inc.
9-32

Solutions Manual

(b)
Calculation of manufacturing cost per unit:

Box C
Direct material:
Paperboard
.3 lb. $.30 per lb.........................................
.7 lb. $.30 per lb.........................................
Corrugating medium
.2 lb. $.15 per lb.........................................
.3 lb. $.15 per lb.........................................
Direct labor:
.0025 hr. $18 per hr....................................
.005 hr. $18 per hr......................................
Applied manufacturing overhead:
.0025 hr. $60 per hr....................................
.005 hr. $60 per hr......................................
Manufacturing cost per unit.....................................
McGraw-Hill/Irwin
Inc.
Box P
$.090
$.210
.030
.045
.045
.090
.150
___
$.315
.300
$.645

9- 33

1.
The revised operating budget for Vancouver Consulting Associates for

the fourth quarter is presented below. Supporting calculations follow:
VANCOUVER CONSULTING ASSOCIATES
REVISED OPERATING BUDGET
FOR THE FOURTH QUARTER OF 20X4
Revenue:
Consulting fees:
Computer system consulting.........................................................
Management consulting.................................................................
Total consulting fees...............................................................
Other revenue.........................................................................................
Total revenue...................................................................................
$ 956,250
936,000
$1,892,250
20,000
$1,912,250
Expenses:
Consultant salary expenses*.................................................................
Travel and related expenses..................................................................
General and administrative expenses...................................................
Depreciation expense.............................................................................
Corporate expense allocation................................................................
Total expenses.................................................................................
Operating income..........................................................................................
$1,021,300
115,750
186,000
80,000
150,000
$1,553,050
$ 359,200
*$1,021,300 = $490,000 + $531,300. (See supporting calculations.)
McGraw-Hill/Irwin
Inc.
9-34

Solutions Manual

Supporting calculations:
Schedule of projected revenues for the fourth quarter of 20x4:

Computer
System
Management
Consulting Consulting
Third Quarter:
Revenue............................................................................
Hourly billing rate.............................................................
Billable hours....................................................................
Number of consultants....................................................
Hours per consultant.......................................................
Fourth-quarter planned increase..........................................
Billable hours per consultant...............................................
Number of consultants..........................................................
Billable hours.........................................................................
Billing rate..............................................................................
Projected revenue..................................................................
McGraw-Hill/Irwin
Inc.
$843,750
$150
5,625
15
375
50
425
15
6,375
$150
$956,250
$630,000
$180
3,500
10
350
50
400
13
5,200
$180
$936,000

9- 35
Schedules of projected salaries, travel, general and administrative, and allocated

corporate expenses:
Compensation:
Existing consultants:
Annual salary...........................................................
Quarterly salary.......................................................
Planned increase (10%)..........................................
Total fourth-quarter salary per consultant............
Number of consultants...........................................
Total.................................................................................
New consultants at old salary (3 $25,000).................
Total salary......................................................................
Benefits (40%).................................................................
Total compensation.................................................
Travel expenses:
Computer system consultants (425 hrs. 15).............
Management consultants (400 hrs. 13)......................
Total hours...............................................................
Rate per hour*................................................................
Total travel expense................................................
General and administrative ($200,000 93%)...................
Corporate expense allocation ($100,000 150%).............
*Third-quarter travel expense
hours
$91,250 9,125
Computer
System
Consulting
Management
Consulting
$ 92,000
$ 23,000
2,300
$ 25,300
15
$379,500
-0$379,500
151,800
$531,300
$100,000
$ 25,000
2,500
$27,500
10
$275,000
75,000
$350,000
140,000
$490,000
6,375
5,200
11,575
$10
$115,750
$186,000
$150,000
= rate
= $10.00
9,125 = (350 10) + (375 15)
2.
An organization would prepare a revised operating budget when the assumptions

underlying the original budget are no longer valid. The assumptions may involve
factors outside or inside the company. Changes in assumptions involving external
factors may include changes in demand for the company's products or services,
changes in the cost of various inputs to the company, or changes in the economic or
political environment in which the company operates. Changes in assumptions
involving internal factors may include changes in company goals or objectives.
McGraw-Hill/Irwin
Inc.
9-36

Solutions Manual

1.
Strategic planning identifies the overall objective of an organization and generally

considers the impact of external factors such as competitive forces, market demand,
and technological changes when identifying overall objectives. Budgeting is the
quantitative expression of plans evolving from strategic planning. The time horizon
for budgeting is generally a year, or an operating cycle, and greater attention is
focused on internal factors than on external factors.
2.
For each of the financial objectives established by the board of directors and
president of Fit-for-Life, Inc., the calculations to determine whether John Winslows
budget attains these objectives are presented in the following table.
CALCULATION OF FINANCIAL OBJECTIVES: FIT-FOR-LIFE, INC.
Objective
Increase sales by 12%
($1,700,000 1.12 = $1,904,000)
Attained/
Not Attained
Not attained
Calculations
($1,895,500$1,700,000)/$1,700,000 = 11.5%
Increase before-tax income by 15%

($210,000 1.15 = $241,500)
Attained
($241,500$210,000)/$210,000 = 15%
Maintain long-term debt at or below

16% of assets
($4,100,000 .16 = $656,000)
Attained
$616,000/$4,100,000 = 15% (rounded)
Maintain cost of goods sold at or

below 70% of sales
($1,895,500 .70 = $1,326,850)
Not attained
$1,339,000*/$1,895,500 = 70.6% (rounded)
*Variable cost of goods sold + fixed manufacturing cost = $1,149,450 + $189,550 = $1,339,000
3.
The accounting adjustments contemplated by John Winslow are unethical because

they will result in intentionally overstating income by understating the cost of goods
sold. The specific standards of ethical conduct for management accountants
violated by Winslow are as follows:
Integrity. Winslow violated the integrity standard by engaging in an activity that
prejudiced his ability to carry out his duties ethically, by not communicating
unfavorable as well as favorable information, and by engaging in an activity that
appears to be a conflict of interest.
McGraw-Hill/Irwin
Inc.

9- 37

Competence. By making the accounting adjustments, Winslow violated the
competency standard by not preparing financial statements in accordance with
technical standards.
Objectivity. By overstating the inventory and reclassifying certain costs, Winslow
has violated the objectivity standard. He has failed to communicate information
fairly and objectively and has failed to disclose all relevant information that would
influence the users understanding of the report.

1.
Sales budget:
20x0
Total sales........................
Cash sales*......................
Sales on account............
December
$800,000
200,000
600,000
20x1
January February
$880,000 $968,000
220,000
242,000
660,000
726,000
March
$1,064,800
266,200
798,600
First
Quarter
$2,912,800
728,200
2,184,600
*25% of total sales.
75% of total sales.

2.
Cash receipts budget:

20x1
Cash sales.............................................
Cash collections from credit
sales made during current
month*...............................................
sales made during preceding
month................................................
Total cash receipts...............................
January
$220,000
February
$242,000
March
$266,200
First
Quarter
$ 728,200
66,000
72,600
79,860
218,460
540,000
$826,000
594,000
$908,600
653,400
$999,460
1,787,400
$2,734,060
*10% of current month's credit sales.
90% of previous month's credit sales.

McGraw-Hill/Irwin
Inc.
9-38

Solutions Manual

3.
Purchases budget:
20x0
December
Budgeted cost of
goods sold.................. $560,000
Add: Desired
ending inventory........ 308,000
Total goods
needed......................... $868,000
20x1
January
February
March
First
Quarter
$616,000
$677,600
$745,360
$2,038,960
338,800
372,680
372,680*
372,680
$1,050,280 $1,118,040
$2,411,640
$954,800
Less: Expected
beginning
inventory..................... 280,000
Purchases........................ $588,000
308,000
$646,800
338,800
$711,480
372,680
$745,360
308,000**
$2,103,640
*Since April's expected sales and cost of goods sold are the same as the projections
for March, the desired ending inventory for March is the same as that for February.
The desired ending inventory for the quarter is equal to the desired ending inventory
on March 31, 20x1.
**The beginning inventory for the quarter is equal to the December ending inventory.
50% x $560,000 (where $560,000 = December cost of goods sold = December sales of
$800,000 x 70%)
McGraw-Hill/Irwin
Inc.

9- 39

4.
Cash disbursements budget:

20x1
First
Quarter
January
February
$258,720
$284,592
$298,144
$ 841,456
352,800
388,080
426,888
1,167,768
$611,520
$672,672
$725,032
$2,009,224
Other expenses:
Sales salaries...................................
Advertising and promotion.............
Administrative salaries...................
Interest on bonds**.........................
Property taxes**...............................
Sales commissions.........................
$ 42,000
32,000
42,000
30,000
-08,800
$ 42,000
32,000
42,000
-010,800
9,680
$ 42,000
32,000
42,000
-0-010,648
$ 126,000
96,000
126,000
30,000
10,800
29,128
Total cash payments for other

expenses..........................................
Total cash disbursements....................
$154,800
$766,320
$136,480
$809,152
$126,648
$851,680
$ 417,928
$2,427,152
Inventory purchases:
Cash payments for purchases
during the current month*........
Cash payments for purchases
during the preceding
month........................................
Total cash payments for
inventory purchases.......................
March
*40% of current month's purchases [see requirement (3)].
60% of the prior month's purchases [see requirement (3)].
**Bond interest is paid every six months, on January 31 and July 31. Property taxes also
are paid every six months, on February 28 and August 31.
McGraw-Hill/Irwin
Inc.
9-40

Solutions Manual

5.
Summary cash budget:

20x1
January
Cash receipts [from req. (2)]................ $ 826,000
Cash disbursements
[from req. (4)]................................... (766,320)
Change in cash balance
during period due to operations.... $ 59,680
Sale of marketable securities
(1/2/x1)..............................................
30,000
Proceeds from bank loan
(1/2/x1).............................................. 200,000
Purchase of equipment........................ (250,000)
Repayment of bank loan
(3/31/x1)............................................
Interest on bank loan*..........................
Payment of dividends...........................
First
Quarter
$2,734,060
February
$ 908,600
March
$ 999,460
(809,152)
(851,680)
(2,427,152)
$ 99,448
$147,780
$ 306,908
30,000
200,000
(250,000)
(200,000) (200,000)
(5,000)
(5,000)
(100,000) (100,000)
Change in cash balance during

first quarter......................................
Cash balance, 1/1/x1.............................
Cash balance, 3/31/x1...........................
$ (18,092)
70,000
$ 51,908
*$200,000 10% per year 1/4 year = $5,000

6.
Analysis of short-term financing needs:

Projected cash balance as of December 31, 20x0.......................................
Less: Minimum cash balance.......................................................................
Cash available for equipment purchases....................................................
Projected proceeds from sale of marketable securities.............................
Cash available................................................................................................
Less: Cost of investment in equipment.......................................................
Required short-term borrowing....................................................................
McGraw-Hill/Irwin
Inc.
$ 70,000
50,000
$ 20,000
30,000
$ 50,000
250,000
$(200,000)

9- 41

7.
GLOBAL ELECTRONICS COMPANY

BUDGETED INCOME STATEMENT
Sales revenue.........................................................................
Less: Cost of goods sold......................................................
Gross margin.........................................................................
Selling and administrative expenses:
Sales salaries....................................................................
Sales commissions..........................................................
Advertising and promotion..............................................
Administrative salaries....................................................
Depreciation.....................................................................
Interest on bonds.............................................................
Interest on short-term bank loan.....................................
Property taxes..................................................................
Total selling and administrative expenses..........................
Net income.............................................................................
8.
$2,912,800
2,038,960
$ 873,840
$126,000
29,128
96,000
126,000
150,000
15,000
5,000
5,400
552,528
$ 321,312

BUDGETED STATEMENT OF RETAINED EARNINGS
Retained earnings, 12/31/x0........................................................................
Add: Net income...........................................................................................
Deduct: Dividends........................................................................................
Retained earnings, 3/31/x1..........................................................................
McGraw-Hill/Irwin
Inc.
9-42
$ 215,000
321,312
100,000
$ 436,312

Solutions Manual

9.

BUDGETED BALANCE SHEET
MARCH 31, 20X1
Cash................................................................................................................
Accounts receivable*....................................................................................
Inventory........................................................................................................
Buildings and equipment (net of accumulated depreciation)...................
Total assets....................................................................................................
$ 51,908
718,740
372,680
1,352,000
$2,495,328
Accounts payable**.......................................................................................
Bond interest payable...................................................................................
Property taxes payable..................................................................................
Bonds payable (10%; due in 20x6)...............................................................
Common Stock..............................................................................................
Retained earnings..........................................................................................
Total liabilities and stockholders' equity.....................................................
$ 447,216
10,000
1,800
600,000
1,000,000
436,312
$2,495,328
*Accounts receivable, 12/31/x0.....................................................................

Sales on account [req. (1)]............................................................................
Total cash collections from credit sales
[(req. (2)] ($218,460 + $1,787,400).............................................................
Accounts receivable, 3/31/x1........................................................................
$ 540,000
2,184,600
Buildings and equipment (net), 12/31/x0....................................................

Cost of equipment acquired.........................................................................
Depreciation expense for first quarter.........................................................
Buildings and equipment (net), 3/31/x1.......................................................
$1,252,000
250,000
(150,000)
$1,352,000
**Accounts payable, 12/31/x0.......................................................................

Purchases [req. (3)].......................................................................................
Cash payments for purchases [req. (4)]......................................................
Accounts payable, 3/31/x1............................................................................
$ 352,800
2,103,640
(2,009,224)
$ 447,216
McGraw-Hill/Irwin
Inc.
(2,005,860)
$ 718,740

9- 43
SOLUTIONS TO CASES
CASE 9-43 (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 Jack Rileys 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.
McGraw-Hill/Irwin
Inc.
9-44

Solutions Manual

1.
Yes, Triple-F Health Club should be better able to plan its cash receipts with the new
membership plan and fee structure. The cash flows should be more predictable and
certain because the large, prepaid membership fee becomes the only factor affecting
cash receipts. The hourly court fees, which were dependent upon a variable that could
fluctuate daily, are eliminated.
2.
a.
Factors that management should consider before adopting the new membership
plan and fee structure include:
Costs associated with the plan changeover

Public acceptance of the new proposal
The expected number of memberships by classes that can be sold for each
plan at the specified rates
The anticipated rate of return for excess cash or cost of borrowing funds in
periods of cash shortages
b.
3.
Financial analyses conducted by Triple Fs management could include a forecast

of projected cash inflows and outflows by months, an income statement
including interest revenue and expense, a cost-volume-profit analysis, and a
cash management plan for excess cash or cash shortages.
Because Triple-F's cash flows should be more predictable, management should be

better able to plan for and control cash disbursements. In addition, management
should be better able to plan for short-term investments when excess cash occurs or
to arrange for short-term financing when there are cash shortages.
The collection and billing function is also simplified with the new membership
plan and fee structure. There would be only a one-time cash receipt rather than
multiple transactions.
McGraw-Hill/Irwin
Inc.

9- 45

1.
Sales budget:
20x4
4th
Quarter
1st
Quarter
2nd
Quarter
20x5
3rd
Quarter
S frame unit
sales.....................
50,000
S sales price...... $10
55,000
$10
60,000
$10
65,000
$10
70,000
x $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...............
4th
Quarter
Entire
Year
*40% of total sales.
60% of total sales.
McGraw-Hill/Irwin
Inc.
9-46

Solutions Manual
CASE 9-45 (CONTINUED)

2.
Cash receipts budget:
1st
Quarter
Cash sales..........................................
$ 490,000
sales made during current
quarter*............................................588,000
sales made during previous
quarter............................................
132,000
Total cash receipts.............................
$1,210,000
2nd
Quarter
$ 540,000
20x5
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
*80% of current quarter's credit sales.
20% of previous quarter's credit sales.
McGraw-Hill/Irwin
Inc.

9- 47

3.
Production budget:
20x4
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..........
McGraw-Hill/Irwin
Inc.
9-48
1st
Quarter
2nd
Quarter
20x5
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

Solutions Manual

4.
Direct-material budget:*
20x4
4th
Quarter
Metal strips:
S frames to be
produced........................ 51,000
Metal quantity per
unit (ft.)........................... 2
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
20x5
3rd
4th
Quarter
Quarter
2nd
Quarter
Entire
Year
56,000
61,000
66,000
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
*Direct-material budget continued on next page.
McGraw-Hill/Irwin
Inc.

9- 49

20x4
4th
Quarter
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
McGraw-Hill/Irwin
Inc.
9-50
1st
Quarter
20x5
3rd
Quarter
2nd
Quarter
4th
Quarter
Entire
Year
56,000
61,000
66,000
71,000
254,000
.25
.25
.25
.25
.25
14,000
15,250
16,500
17,750
63,500
46,000
51,000
56,000
61,000
214,000
.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

Solutions Manual

5. Cash disbursements budget:*
Raw-material purchases:
Cash payments for
purchases during
the current quarter..........
Cash payments for
purchases during the
preceding quarter**..........
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...................................
direct labor.......................
1st
Quarter
2nd
Quarter
205
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
.1
.1
.1
.1
10,200
11,200
12,200
13,200
46,800
$20
$20
$20
$20
$20
$204,000
$ 224,000
$ 244,000
$ 264,000
$ 936,000
4th
Quarter
Entire
Year
*Cash disbursements budget continued on next page.
80% of current quarters purchases

**20% of previous quarters purchases
McGraw-Hill/Irwin
Inc.

9- 51

1st
Quarter
Manufacturing overhead:
Indirect material.................... $ 10,200
Indirect labor.........................
40,800
Other...................................... 31,000
manufacturing
overhead........................... $ 82,000
Cash payments for selling
and administrative
expenses...........................
Total cash disbursements........
McGraw-Hill/Irwin
Inc.
9-52
$100,000
$927,000
2nd
Quarter
3rd
Quarter
4th
Quarter
Entire
Year
$ 11,200
44,800
36,000
$ 12,200 $ 13,200
48,800
52,800
41,000 46,000
$ 46,800
187,200
154,000
$92,000
$ 102,000
$ 112,000
$ 388,000
$ 100,000
$1,012,000
$ 100,000
$1,097,000
$ 100,000
$1,182,000
$ 400,000
$4,218,000

Solutions Manual

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/x5). .
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..........
1st
Quarter
$1,210,000
2nd
Quarter
$1,335,000
20x5
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)
$ (42,000)
95,000
$ 53,000
$ 4,250
53,000
$ 57,250
$ 50,500
57,250
$ 107,750
$ 96,750
107,750
$ 204,500
$ 109,500
95,000
$ 204,500
4th
Quarter
$1,585,000
Entire
Year
$5,590,000
*$1,000,000 10% = $25,000

$750,000 10% = $18,750
$500,000 10% = $12,500
$250,000 10% = $6,250
McGraw-Hill/Irwin
2009 The McGraw-Hill Companies, Inc.

9- 53

7.
PHOTO ARTISTRY COMPANY

BUDGETED SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X5
Direct material:
Raw-material inventory, 1/1/x5.................................................
Add: Purchases of raw material [req. (4)]................................
Raw material available for use.................................................
Deduct: Raw-material inventory, 12/31/x5
([req. (4)] 10,400 $8)...........................................................
Raw material used
Direct labor [req. (5)].......................................................................
Manufacturing overhead:
Indirect material......................................................................... $ 46,800
Indirect labor............................................................................. 187,200
Other overhead.......................................................................... 154,000
Depreciation..............................................................................80,000
Total manufacturing overhead.................................................
Cost of goods manufactured..........................................................
Add: Finished-goods inventory, 1/1/x5..........................................
Cost of goods available for sale....................................................
Deduct: Finished-goods inventory, 12/31/x5.................................
Cost of goods sold..........................................................................
$ 59,200
2,538,000
$2,597,200
83,200
$2,514,000
936,000
__ 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............................................ 468,000
Direct-labor hours per frame................................................ .1
Total direct-labor hours............................................................ 46,800
Predetermined overhead rate per hour................................ $10
Total manufacturing overhead applied....................................$468,000
See next page.

**See next page.
See next page.
McGraw-Hill/Irwin
Inc.
9-54

Solutions Manual
The cost of goods manufactured may be verified independently as follows:

Frames produced...................................................................
Manufacturing cost per unit..............................................
Total manufacturing cost......................................................
Grand total (S frames and L frames)...................................
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/x5 may be verified independently as follows:

Projected inventory on 12/31/x5...........................................
Manufacturing cost per unit..................................................
Cost of ending inventory.......................................................
Total cost of ending inventory (S and L)..............................
S Frames
L Frames
15,000
13,000
$7 $10
$ 105,000
$ 130,000
$235,000
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
250,000
210,000
$7
$10
$1,750,000
$2,100,000
$3,850,000

BUDGETED INCOME STATEMENT
Sales revenue.......................................................................
Less: Cost of goods sold....................................................
Gross margin........................................................................
Selling and administrative expenses..................................
Interest expense...................................................................
Net income............................................................................
McGraw-Hill/Irwin
Inc.
$5,650,000
3,850,000
$1,800,000
$400,000
62,500
462,500
$1,337,500

9- 55

9.

BUDGETED STATEMENT OF RETAINED EARNINGS
Add: Net income...........................................................................................
Deduct: Dividends........................................................................................
10.
$3,353,800
1,337,500
200,000
$4,491,300

BUDGETED BALANCE SHEET
DECEMBER 31, 20X5
$ 204,500
192,000
Cash..............................................................................................................
Accounts receivable*...................................................................................
Inventory:
Raw material.........................................................................................
Finished goods......................................................................................
Plant and equipment (net of accumulated depreciation)**.......................
Total assets...................................................................................................
83,200
235,000
8,920,000
$9,634,700
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%
McGraw-Hill/Irwin
Inc.
9-56

Solutions Manual
FOCUS ON ETHICS (See page 376 in the text.)

Is padding the budget unethical? Some accountants argue that budget padding is a
vicious cycle: budgets are padded by lower-level managers because they believe top
management will cut the budget, and budgets are cut by top management because they
believe the submitted budget has been padded by lower-level managers. This situation
contains an unfortunate array of elements, which raise serious obstacles to effective
cost management. It is regrettable that the budget process is intermingled with the
employee incentive scheme via the bonus system in this way, since it is hindering
transparent cost management. However, given the situation, there are several possible
scenarios for the division controller to deal with.
In cutting expenses, top corporate managers may be revealing one of two things. They
may be more focused on the use of the budget data to drive incentives than as accurate
cost control tools, and thus may cut budgeted expenses specifically to provide a
stretch goal for the division. Alternatively, top management may believe that the
budget has been padded by the division, possibly based on previous budget
submissions, and thus believe they are handing back a more accurate expense budget
than was submitted to them.
No matter what the situation, the controller should make every effort to provide accurate
cost forecasts for the budgeting purpose. To do otherwise would be to compromise his
or her own integrity and authority within the organization. Further, inaccurate
information creates a poor basis for cost management. If greater stretch goals are
required by top management, then the divisional team could establish these for
themselves. If there is doubt at corporate level about the accuracy of the forecasts, then
it should be dispelled. For example, the controller could provide supporting
documentation with the budget to validate the estimates and to discourage top
corporate managers from cutting the expense budget.
McGraw-Hill/Irwin
Inc.

9- 57

Financial Planning and Analysis: The Master Budget

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Planning and Analysis: The Master Budget

Uploaded by

Copyright:

Available Formats

CHAPTER 9

Profit Planning and Activity-Based Budgeting

A budget facilitates communication and coordination by making each manager

An example of using the budget to allocate resources in a university is found in the

A master budget, or profit plan, is a comprehensive set of budgets covering all

Operational budgets specify how an organization's operations will be carried out to

2009 The McGraw-Hill Companies,

Flowchart for Review Question 9-4

2009 The McGraw-Hill Companies,

9.7 Application of activity-based costing to the budgeting process yields activity-based

2009 The McGraw-Hill Companies,

A master budget is based on many assumptions and predictions of unknown

The idea of participative budgeting is to involve employees throughout an

2009 The McGraw-Hill Companies,

Firms with international operations face a variety of additional challenges in

A multinational firm's budget must reflect the translation of foreign currencies

It is difficult to prepare budgets when inflation is high or unpredictable. Some

The economies of all countries fluctuate in terms of consumer demand,

The five phases in a product's life cycle are as follows:

2009 The McGraw-Hill Companies,

The total required production is 131,144 units, computed as follows:

Planned Ending Inventory

Assumed production during third quarter (in units).................................

2009 The McGraw-Hill Companies,

EXERCISE 9-22 (25 MINUTES)

Cash collections in October:

Amount Collected in October

Cash collections in fourth quarter from credit sales in fourth quarter.

The electronic version of the Solutions Manual BUILD A SPREADSHEET SOLUTIONS

2009 The McGraw-Hill Companies,

EXERCISE 9-23 (20 MINUTES)

($120,000 .6) + ($90,000 .4)

($135,000 .6) + ($90,000 .4)

Accounts payable, 12/31/x0................................................................

Accounts receivable, 12/31/x0............................................................

Accumulated depreciation, 12/31/x0..................................................

Retained earnings, 12/31/x0...............................................................

2009 The McGraw-Hill Companies,

EXERCISE 9-24 (15 MINUTES)

Production (in units) required for the year:

2009 The McGraw-Hill Companies,

EXERCISE 9-25 (20 MINUTES)

WHITE MOUNTAIN FURNITURE COMPANY

WHITE MOUNTAIN FURNITURE COMPANY

WHITE MOUNTAIN FURNITURE COMPANY

2009 The McGraw-Hill Companies,

EXERCISE 9-26 (30 MINUTES)

Budgeted cash collections for December:

Budgeted income (loss) for December:

2009 The McGraw-Hill Companies,

EXERCISE 9-27 (CONTINUED)

Projected balance in accounts payable on December 31:

Amount Purchased in December

Therefore, the December 31 balance in accounts payable will be $306,000.

2009 The McGraw-Hill Companies,

EXERCISE 9-28 (20 MINUTES)

President, East Bank of Mississippi

I.M. Student and Associates

Subject: Budgetary slack

2009 The McGraw-Hill Companies,

EXERCISE 9-29 (20 MINUTES)

*$14,250 = $380,000 .25 .15

$150,000 = $200,000 .75

Operational plans depend on various assumptions. Usually there is uncertainty about