Solution Chapter 8

Solution to Chapter 8: Budgeting for Planning and Controlling
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CHAPTER 8
QUESTIONS FOR WRITING AND DISCUSSION

1. Budgets are the quantitative expressions of manufacturing budgets, in turn, depend on
plans. Budgets are used to translate the the production budget. The same is true for
goals and strategies of an organization into the financial budgets since sales is a critical
operational terms. input for budgets in that category.
2. Control is the process of setting standards, 8. For a merchandising firm, the production
receiving feedback on actual performance, budget is replaced by a merchandise pur-
and taking corrective action whenever actual chases budget. Merchandising firms also
performance deviates from planned per- lack direct materials and direct labor budg-
formance. Budgets are standards, and they ets. All other budgets are essentially the
are compared with actual costs and reve- same. For a service firm (for-profit), the
nues to provide feedback. sales budget doubles as the production
budget, and there is no finished goods in-
3. The planning and control functions of budg- ventory budget. The rest of the budgets
eting can benefit all organizations regard- have counterparts.
less of size. All organizations need to de-
termine what their goals are and how best to 9. A static budget is for a particular level of
attain those goals. This is the planning func- activity. A flexible budget is one that can be
tion of budgeting. In addition, organizations established for any level of activity. For per-
can compare what actually happens with formance reporting, it is necessary to com-
what was planned to see if the plans are un- pare the actual costs for the actual level of
folding as anticipated. This is the control activity with the budgeted costs for the ac-
function of budgeting. tual level of activity. A flexible budget pro-
vides the means to compute the budgeted
4. Budgeting forces managers to plan, pro- costs for the actual level of activity, after the
vides resource information for decision mak- fact.
ing, sets benchmarks for control and evalua-
tion, and improves the functions of 10. A flexible budget is based on a simple
communication and coordination. formula: Y = F + VX, which requires
knowledge of both fixed and variable
5. A master budget is the collection of all indi- components.
vidual area and activity budgets. Operating
budgets are concerned with the income- 11. Goal congruence is important because
generating activities of a firm. Financial it means that the employees of an
budgets are concerned with the inflows and organization are working toward the goals
outflows of cash and with planned capital of that organization.
expenditures.
12. Frequent feedback is important so that
6. The sales forecast is a critical input for build- corrective action can be taken, increasing
ing the sales budget. However, it is not nec- the likelihood of achieving budget.
essarily equivalent to the sales budget.
Upon receiving the sales forecast, man- 13. Both monetary and nonmonetary
agement may decide that the firm can do incentives are used to encourage employees
better than the forecast indicates. Conse- of an organization to achieve the
quently, actions may be taken to increase organizations goals. Monetary incentives
the sales potential for the coming year (e.g., appeal to the economic needs of an
increasing advertising). This adjusted fore- individual, and nonmonetary incentives
cast then becomes the sales budget. appeal to the psychological needs. Since
individuals are motivated by both economic
7. Yes. All budgets are founded on the sales
and psychological factors, both types of
budget. Before a production budget can be
incentives ought to be present in a good
created, it must have the planned sales. The
budgetary system.
1
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Solutions
Chapter 8
Budgeting for Planning and Controlling
83
1. Freshaire, Inc.
Sales Budget
For the Year 2008
Mint:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
Units 80,000 110,000 124,000 140,000 454,000

Price $3.00 $3.00 $3.00 $3.00 $3.00
Sales $240,000 $330,000 $372,000 $420,000 $ 1,362,000
Lemon:
Units 100,000 100,000 120,000 140,000 460,000
Price $3.50 $3.50 $3.50 $3.50 $3.50
Sales $350,000 $350,000 $420,000 $490,000 $ 1,610,000
Total sales $590,000 $680,000 $792,000 $910,000 $ 2,972,000
2. Freshaire, Inc., will use the sales budget in planning as the basis for the pro-
duction budget and the succeeding budgets of the master budget. At the end
of the year, the company can compare actual sales against the budget to see
if expectations were achieved.
2
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84
Freshaire, Inc.
Production Budget for Mint Freshener
For the Year 2008
Sales 80,000 110,000 124,000 140,000 454,000
Des. ending inventory 11,000 12,400 14,000 9,000 9,000
Total needs 91,000 122,400 138,000 149,000 463,000
Less: Beginning inventory 4,000 11,000 12,400 14,000 4,000
Units produced 87,000 111,400 125,600 135,000 459,000
Freshaire, Inc.
Production Budget for Lemon Freshener
For the Year 2008
Sales 100,000 100,000 120,000 140,000 460,000
Des. ending inventory 20,000 24,000 28,000 22,000 22,000
Total needs 120,000 124,000 148,000 162,000 482,000
Less: Beginning inventory 6,400 20,000 24,000 28,000 6,400
Units produced 113,600 104,000 124,000 134,000 475,600
3
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88
Manning Company
Direct Materials Purchases Budget
For March, April, and May 20XX
March April May Total
Units to be produced 20,000 60,000 100,000 180,000
Direct materials per unit
(yards) 25 25 25 25
Production needs 500,000 1,500,000 2,500,000 4,500,000
Desired ending inventory
(yards) 300,000 500,000 60,000 60,000
Total needs 800,000 2,000,000 2,560,000 4,560,000
Less beginning inventory 100,000 300,000 500,000 100,000
Direct materials to be
purchased (yards) 700,000 1,700,000 2,060,000 4,460,000
Cost per yard $0.30 $0.30 $0.30 $0.30
Total purchase cost $210,000 $ 510,000 $ 618,000 $1,338,000
89
Manning Company
Direct Labor Budget
For March, April, and May 20XX
March April May Total
Direct labor time per
unit (hours) 0.04 0.04 0.04 0.04
Total hours needed 800 2,400 4,000 7,200
Cost per hour $12 $12 $12 $12
Total direct labor cost $ 9,600 $ 28,800 $ 48,000 $ 86,400
4
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811
1. Raylenes Flowers and Gifts

Production Budget for Gift Baskets
For September, October, November, and December
Sept. Oct. Nov. Dec.
Sales 200 150 180 250
Desired ending inventory 15 18 25 10
Total needs 215 168 205 260
Less: Beginning inventory 20 15 18 25
Units produced 195 153 187 235
For September, October, and November
Fruit: Sept. Oct. Nov.
Production 195 153 187
Amount/basket (lbs.) 1 1 1
Needed for production 195 153 187
Desired ending inventory 8 9 12
Needed 203 162 199
Less: Beginning inventory 10 8 9
Purchases 193 154 190
Small gifts: Sept. Oct. Nov.

Amount/basket (items) 5 5 5
Needed 1,358 1,233 1,523
Purchases 870 850 1,055
Cellophane: Sept. Oct. Nov.

Amount/basket (feet) 3 3 3
Needed 815 740 914
5
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811

Production Budget for Gift Baskets
For September, October, November, and December
Sept. Oct. Nov. Dec.
Sales 200 150 180 250
Desired ending inventory 15 18 25 10
Total needs 215 168 205 260
Less: Beginning inventory 20 15 18 25
Units produced 195 153 187 235
Raylenes Flowers and Gifts
For September, October, and November
Fruit: Sept. Oct. Nov.
Amount/basket (lbs.) 1 1 1
Needed 203 162 199
Small gifts: Sept. Oct. Nov.

Amount/basket (items) 5 5 5
Needed 1,358 1,233 1,523
Purchases 870 850 1,055
Cellophane: Sept. Oct. Nov.

Amount/basket (feet) 3 3 3
Needed 815 740 914
6
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Concluded
Basket: Sept. Oct. Nov.

Amount/basket (item) 1 1 1
Needed 272 247 305
3. A direct materials purchases budget for December requires January produc-

tion which cannot be computed without a February sales forecast.
813
1. Janzen, Inc.
Cash Receipts Budget
For July
Payments on account:
From May credit sales (0.15 $220,000)................................. $ 33,000
From June credit sales (0.60 $230,000) ............................... 138,000
From July credit sales (0.20 $210,000)................................. 42,000
Less: July cash discount (0.02 $42,000) .............................. (840)
Cash receipts ........................................................................... $212,160
2. Janzen, Inc.
Cash Receipts Budget
For August
Payments on account:
From June credit sales (0.15 $230,000) ............................... $ 34,500
From July credit sales (0.60 $210,000)................................. 126,000
From August credit sales (0.20 $250,000) ........................... 50,000
Less: August cash discount (0.02 $50,000)......................... (1,000)
Cash receipts ............................................................................ $209,500
8-16
1
7
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1. Performance Report
Actual Budgeted Variance
Units produced 1,100 1,000 100 F

Direct materials cost $11,200 $10,000a $1,200 U
b
Direct labor cost 4,400 4,000 400 U
Total $15,600 $14,400 $1,600 U
a. 1,000 units * 2 leather straps * $5 = $10,000
b. 1,000 units * .5 hours per unit * $8 = $4,000
2. The performance report compares costs at two different

levels of activity and so cannot be used to assess efficiency.
8
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8-17
Pet-Care Company Overhead Budget For the Coming Year
Activity Level
Formula 55,000 Hours*

Variable costs:
Maintenance $0.40 $22,000
Power 0.50 27,500
Indirect labor 1.60 88,000
Total variable costs $137,500
Fixed costs:
Maintenance $17,000
Indirect labor 26,500
Rent 18,000
Total fixed costs 61,500
Total overhead costs $199,000
*BasicDiet: (0.25 100,000) 25,000
SpecDiet: (0.30 100,000) 30,000
Total DLH 55,000
9
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2. 10% higher: Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
Variable costs:
Power 0.50 30,250
Fixed costs:
Maintenance $17,000
Rent 18,000
*55,000 DLH 110% = 60,500
20% lower: Pet-Care Company Overhead Budget For

the Coming Year
Activity Level
Variable costs:
Power 0.50 22,000
Fixed costs:
Maintenance $17,000
Rent 18,000
*55,000 DLH 80% = 44,000
10
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824
Briggs Manufacturing
For the Quarter Ended March 31, 20XX
1. Schedule 1: Sales Budget
January February March Total
Units 40,000 50,000 60,000 150,000
Selling price $215 $215 $215 $215
Sales $8,600,000 $10,750,000 $12,900,000 $32,250,000
2. Schedule 2: Production Budget

Sales (Schedule 1) 40,000 50,000 60,000 150,000
Desired ending inventory 40,000 48,000 48,000 48,000
Total needs 80,000 98,000 108,000 198,000
Less: Beginning inventory 32,000 40,000 48,000 32,000
11
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3. Schedule 3: Direct Materials Purchases Budget

January February
Metal Components Metal Components
Units to be produced
(Schedule 2) 48,000 48,000 58,000 58,000
Direct materials
per unit (lbs.) 10 6 10 6
Production needs 480,000 288,000 580,000 348,000
Desired ending
inventory 250,000 150,000 300,000 180,000
Total needs 730,000 438,000 880,000 528,000
Less: Beginning
inventory 200,000 120,000 250,000 150,000
Direct materials to
be purchased 530,000 318,000 630,000 378,000
Cost per pound $8 $2 $8 $2
Total cost $4,240,000 $636,000 $5,040,000 $756,000
March Total
Units to be produced Metal Components Metal Components
60,000 60,000 166,000 166,000
Direct materials
per unit (lbs.) 10 6 10 6
Production needs 600,000 360,000 1,660,000 996,000
Desired ending
inventory 300,000 180,000 300,000 180,000
Total needs 900,000 540,000 1,960,000 1,176,000
Less: Beginning
inventory 300,000 180,000 200,000 120,000
Direct materials to
be purchased 600,000 360,000 1,760,000 1,056,000
Cost per pound $8 $2 $8 $2
Total cost $4,800,000 $720,000 $14,080,000 $2,112,000
12
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4. Schedule 4: Direct Labor Budget
Units to be produced
(Schedule 2) 48,000 58,000 60,000 166,000
Direct labor time
per unit (hours) 4 4 4 4
Total hours needed 192,000 232,000 240,000 664,000
Cost per hour $9.25 $9.25 $9.25 $9.25
Total cost $1,776,000 $2,146,000 $2,220,000 $6,142,000
5. Schedule 5: Overhead Budget

Budgeted direct labor
hours (Schedule 4) 192,000 232,000 240,000 664,000
Variable overhead rate $3.40 $3.40 $3.40 $3.40
Budgeted variable overhead $652,800 $ 788,800 $ 816,000 $2,257,600
Budgeted fixed overhead 338,000 338,000 338,000 1,014,000
Total overhead $990,800 $1,126,800 $1,154,000 $3,271,600
6. Schedule 6: Selling and Administrative Expenses Budget

Planned sales (Schedule 1) 40,000 50,000 60,000 150,000
Variable selling and administrative
expenses
per unit $3.60 $3.60 $3.60 $3.60
Total variable expense $144,000 $180,000 $216,000 $540,000
Fixed selling and administrative expenses:
Salaries $ 50,000 $ 50,000 $ 50,000 $150,000
Depreciation 40,000 40,000 40,000 120,000
Other 20,000 20,000 20,000 60,000
Total fixed expenses $110,000 $110,000 $110,000 $330,000
Total selling and
administrative expenses $254,000 $290,000 $326,000 $870,000
13
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7. Schedule 7: Ending Finished Goods Inventory Budget
Unit cost computation:
Direct materials: Metal (10 @ $8) = $80
Comp. (6 @ $2) = 12 $ 92.00
Direct labor (4 $9.25) 37.00
Overhead:
Variable (4 @ $3.40) 13.60
Fixed (4 $1,014,000/664,000) 6.11
Total unit cost $148.71
Finished goods inventory = Units Unit cost
= 48,000 $148.71
= $7,138,080
8. Schedule 8: Cost of Goods Sold Budget

Direct materials used (Schedule 3)
Metal (1,660,000 $8) $13,280,000
Components (996,000 $2) 1,992,000 $15,272,000
Direct labor used (Schedule 4) 6,142,000
Overhead (Schedule 5) 3,271,600
Budgeted manufacturing costs $24,685,600
Add: Beginning finished goods (32,000 $148.71) 4,758,720
Goods available for sale $29,444,320
Less: Ending finished goods (Schedule 7) 7,138,080
Budgeted cost of goods sold $22,306,240
9. Schedule 9: Budgeted Income Statement

Sales (Schedule 1) $ 32,250,000
Less: Cost of goods sold (Schedule 8) 22,306,240
Gross margin $ 9,943,760
Less: Selling and admin. expenses (Schedule 6) 870,000
Income before income taxes $ 9,073,760
14
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10. Schedule 10: Cash Budget
Beg. balance $ 378,000 $ 1,321,200 $ 2,952,400 $ 378,000
Cash receipts 8,600,000 10,750,000 12,900,000 32,250,000
Cash available $8,978,000 $12,017,200 $15,852,400 $32,628,000
Less:
Disbursements:
Purchases $4,876,000 $5,796.000 $ 5,520,000 $16,192,000
Direct labor 1,776,000 2,146,000 2,220,000 6,142,000
Overhead 790,800 926,800 954,000 2,671,600
Selling & admin. 214,000 250,000 286,000 750,000
Total $7,656,800 $9,118.800 $ 8,980,000 $25,755,600
Tentative
ending balance $1,321,200 2,952,400 $ 6,872,400 $6,872,400
Borrowed/(repaid)
Interest paid
Ending balance $1,321,200 $ 2,952,400 $ 6,872,400 $ 6,872,400
*(0.12 2/12 $56,800) + (0.12 1/12 $6,800)
15

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Solution to Chapter 8: Budgeting for Planning and Controlling

QUESTIONS FOR WRITING AND DISCUSSION

Units 80,000 110,000 124,000 140,000 454,000

1. Raylenes Flowers and Gifts

Small gifts: Sept. Oct. Nov.

Cellophane: Sept. Oct. Nov.

1. Raylenes Flowers and Gifts

Small gifts: Sept. Oct. Nov.

Cellophane: Sept. Oct. Nov.

Basket: Sept. Oct. Nov.

3. A direct materials purchases budget for December requires January produc-

Units produced 1,100 1,000 100 F

2. The performance report compares costs at two different

Formula 55,000 Hours*

20% lower: Pet-Care Company Overhead Budget For

2. Schedule 2: Production Budget

3. Schedule 3: Direct Materials Purchases Budget

5. Schedule 5: Overhead Budget

6. Schedule 6: Selling and Administrative Expenses Budget

8. Schedule 8: Cost of Goods Sold Budget

9. Schedule 9: Budgeted Income Statement

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