ACCG200 SolutionCh 09 PDF

CHAPTER 9
BUDGETING SYSTEMS
ANSWERS TO QUESTIONS
9.1 A budget can be used to evaluate performance by comparing the actual results to the budget. This can be
used to assess the performance of individuals, departments, divisions and the overall company. Budgets
can be used to provide incentives through rewarding people who meet or exceed their budgeted goals.
9.2 A budget facilitates communication and coordination by making each manager throughout the organisation
aware of the plans made by other managers. The budgeting process pulls together plans of each manager in
the organisation.
9.3 Strategic plans are concerned with long-term planning, whereas budgeting is usually related to planning
for a short-term period. As strategic plans may relate to a ten- or even 20-year horizon, those plans may
include the acquisitions of new businesses, development of new product lines, expansion of the
business, the refinancing of new operations and restructuring of the business.
The budget must be formed by taking into account the details of the strategic plan. The budget will tend
to be formulated in greater detail than the strategic plan and may relate to one year or even a shorter
time period.
9.4 Predicting sales is one of the most important steps in the budgeting process as many of the budgets rely
on this information. For example the production budget will depend on how many units the company
expects to sell over the period.
9.5 Budgets are usually developed along responsibility lines. Managers often develop budgets for their own
areas of responsibility, and their performance against budget targets may form part of the responsibility
accounting system.
9.6 The flow chart below depicts the components of the annual budget for a bookshop.
Strategic Budget
planning assumptions
Sales budget:
Magazines, books and
tickets
Material Labour Overhead Selling and

Inventory:
budget: budget budget administrative
Magazines, budget
Magazines,
books
books
Cash
budget
Balance sheet Income statement
9.7 General economic trends and international events are important when forecasting sales in the fast food
industry, as the state of economy affects the consumption pattern of households. For example, an
increase in the level of disposable household income may lead to an increased demand for fast food, or
alternatively it could lead to a decrease in demand if we assume that households will choose to
substitute restaurant meals for fast food. In addition, increased concerns for healthy lifestyles and global
increases in childhood obesity may lead to decreases in future sales of fast food.
Chapter 9 Solutions Manual t/a Management Accounting: Information for Creating and Managing Value 5e
by Langfield-Smith, Thorne and Hilton 1
9.8 Operating budgets include the sales budget and a series of cost budgets that specify how an
organisations operations will be carried out to meet the budgeted demand for its goods and services.
The operating budgets prepared in a medical centre would include:
a budget for projected revenue, based on forecast demand for various services offered by the medical
centre and the amounts to be reimbursed by the government or private health funds paid by patients
a labour budget showing the number of professional personnel of various types required to carry out
the medical centres mission
an overhead budget listing planned expenditures for such costs as utilities and maintenance.
Financial budgets summarise the financial impact of operating budgets. For a medical centre these
would include:
a cash budget showing planned cash receipts and disbursements
a budgeted income statement
a budgeted balance sheet.
A capital expenditure, detailing projected items of building, plant and equipment over the next 510
years, would also be prepared.
9.9 A sporting club uses budgeting for planning purposes in many ways. For example, the personnel budget
would be important in planning the number of employees required for both the operating and
administration areas. The capital budget would be used to plan for the replacement of major exercise
equipment, such as treadmills and bicycles. The cash budget would be important in planning for cash
receipts, including membership fees, and disbursements. It is important for any organisation, including a
sporting club, to make sure that it has sufficient cash on hand to meet its needs, and to anticipate any
cash shortages.
9.10 The accountant often specifies the process by which budget data will be gathered, collects the information
and prepares the final budget. To communicate budget procedures and deadlines to employees throughout
the organisation, the accountant often develops and disseminates a budget manual.
9.11 The budget manual details 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 annual budget is complete.
9.12 Some managers may see budgeting as a constraint on creativity. However, in large organisations in
particular, budgeting provides an important communication and coordinating tool, and is essential for
forecasting cash position, evaluating performance and controlling excessive expenditure.
9.13 The cash budget is an important tool for managing cash receipts and disbursements. It is important for
any company to make sure that it has enough cash on hand to meet its cash needs. Where the cash
budgeting forecasts cash shortages, this can then be managed to ensure that the amount borrowed is at
the best rate and that it is borrowed to cover only that period where there is a shortage. In many large
organisations, weekly or even daily cash budgeting takes place. Not only are cash shortages managed;
cash surpluses are also anticipated and invested, sometimes overnight, to get the best return.
9.14 Under zero-base budgeting, the budget for virtually every activity in the organisation is initially set to
zero. To receive funding during the budgeting process, each activity must be justified in terms of its
continued usefulness. The zero-base budgeting approach forces management to rethink each phase of an
organisations operations before allocating resources.
9.15 Top-down budgeting describes the system where senior managers impose budget targets on more junior
managersthere is little participation or consultation in the budget setting process. Budgets may be set
at the corporate level and then cascaded down to the various responsibility centresprofit centres and
cost centresthroughout the organisation. However, bottom-up budgeting is used to describe the
participative process in which people at the lower managerial and operational levels play an active role
in setting their own budget. Budgets are collected at the lowest responsibility centres of the business
and are consolidated and fed up to senior management. Both practices can be used in the one
budgeting system, as some operational budgets may be set by local responsibility centres while other
corporate spending (such as advertising) may be set by senior management. In these situations there
may need to be some negotiation between various levels of management to ensure consistency between
the various final budgets.
9.16 Budgetary slack describes 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. 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. When this happens, the budget loses its effectiveness as a planning tool.
9.17 An organisation can reduce the problems of budgetary slack in several ways. First, it can avoid relying
on the budget as a negative, evaluative tool. Second, managers can be given incentives not only to
achieve budgetary projections but also to provide accurate projections.
9.18 Participative budgeting allows managers at all levels to develop their own initial estimates for budgeted
sales, costs and so on. The positive outcomes of participative budgeting are improvements in
coordination and communication between managers and incentives for the managers to work within the
budgets. It is generally believed that most people will perform better and try harder to achieve a budget
goal if they have been consulted in setting that budget. However, the negative outcomes of participative
budgeting are that the process of participation can be costly to administer and too time-consuming.
Also, too much participation and discussion can lead to indecisiveness and delay. In addition, when
those involved in the budgeting process disagree in significant and irreconcilable ways, the process of
participation may aggravate those differences. Finally, participative budgeting could lead to budget
padding and cause budgetary slack that undermines the accuracy and integrity of the budget.
9.19 This comment is occasionally heard from people who are experienced managers who have run their
own small business for a long period of time. These individuals may have great knowledge about
their business and may be able to manage effectively without the assistance of formal systems, such
as budgets. They may feel they do not need to spend a great deal of time on the budgeting process,
because they can essentially run the business by gut feeling. This approach can result in several
problems. First, if the person who is running the business is absent or leaves the business, there are no
formal plans or budgets which may assist new managers to run the business. Second, budgeting can
assist in the effective running of an organisation. Budgets facilitate communication and co-ordination,
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.
9.20 In order to construct a budget for the travel expenses on my next holiday trip, I will first need to develop
a detailed plan of the route that I will be taking to travel between Sydney and Hanoi, showing each day
of the trip. This plan will allow me to then estimate the specific costs of land travel, sea travel,
accommodation and meals. I will then need to calculate the total cost and consider how I will be
financing this trip. Will I use credit card, bank loan or savings? If the cost is too high I may need to
revise my planschange the route, reduce the length of the trip, look for cheaper accommodation or
travel costsuntil I am satisfied that I will be able to afford the trip.
9.21 Program budgeting involves identifying the various programs undertaken by the business, and
developing objectives and budgets for each program. Program budgeting differs from line item
budgeting as resources are no longer allocated to line items (salaries, rent, electricity etc.) or expenditure
controlled by line items. Instead, the program is the focus for control, and performance is evaluated
against both financial and non-financial objectives and performance measures for each specific program.
9.22 The managers comments indicate that he underestimates the difficulties that can be experienced in
encouraging employees to achieve their goals. For example, some employees may only be motivated to
achieve budget goals if they have been are involved in setting that budget. Also, if the targets are too
difficult employees may not feel motivated to strive hard to achieve themthey just give up!
Sometimes financial incentives may need to be provided to encourage motivation.
SOLUTIONS TO EXERCISES
EXERCISE 9.23 (20 minutes) Cash budgeting
1
Berwick Ltd
Expected cash collections
August
Month Sales Per cent Expected collections
June $150 000 8% $12 000
July 195 000 30% 58 500
August 330 000 60% 198 000
Total $268 500
2
Berwick Ltd
Expected cash disbursements
August
July purchases to be paid in August $135 000
Less 2% cash discount 2 700
Net purchases cost $132 300
Cash disbursements for expenses 72 000
Total $204 300
3
Berwick Ltd
Expected cash balance
31 August
Balance, August 1 $110 000
Add Expected collections 268 500
Cash available $378 500
Less Expected disbursements 204 300
Expected balance $174 200
EXERCISE 9.24 (25 minutes) Cash receipts: retailer
1 Calculate cash collections in October using an Excel spreadsheet:

Credit sales
Month (budgeted)
June $122 500
July $150 000
August $175 000
September $200 000
October $225 000
November $250 000
December $212 500
Month Credit sales Percentage collected Collected in October

October $225 000.00 70% $157 500.00
September $200 000.00 15% 30 000.00
August $175 000.00 10% 17 500.00
July $150 000.00 4% 6 000.00
Total $211 000.00
2 Cash collections in fourth quarter from credit sales in fourth quarter.
Collected in Collected in Collected in
Month Credit sales October November December
October $225 000.00 $157 500.00 $ 33 750.00 $22 500.00
November $250 000.00 175 000.00 37 500.00
December $212 500.00 148 750.00
Total $157 500.00 $208 750.00 $208 750.00
Total collections in fourth quarter $575 000.00
EXERCISE 9.25 (20 minutes) Professional services budget: dental practice
1 Direct professional labour budget for the month of June:

Patient visits per month = 48 000/12 = 4000
Professional services in June:
One-hour visits 20% 4000 1 hour = 800 hours
Half-hour visits 80% 4000 1/2 hour = 1600 hours
Total direct professional labour 2400 hours
Hourly wage rate for dentists $100
Total direct professional labour cost $240 000
2 Cash collections during June:

May June
Half-hour visits (4000 80%) 3 200 3 200
Billing rate $80 $80
Total billings for half-hour visits $256 000 $256 000
One-hour visits (4000 20%) 800 800
Total billings for one-hour visits $112 000 $112 000
Total billings during month $368 000 $368 000
Percentage of months billings collected during June 10% 90%
Collections during June $36 800 $331 200
Total collections in June $368 000
EXERCISE 9.26 (30 minutes) Budgeted financial statements: retailer
1 Budgeted cash receipts for December:
Month of sale Collections in December

November $400 000 38% $152 000
December 440 000 60% 264 000
Total cash collections $416 000
2 Budgeted profit (loss) before income taxes for December:
Sales revenue $440 000
Less Cost of goods sold (75% of sales) 330 000
Gross margin (25% of sales) $110 000
Less Operating expenses:
Bad debts expense (2% of sales) $ 8 800
Depreciation ($432 000/12) 36 000
Other expenses 45 200
Total operating expenses 90 000
Profit before tax $ 20 000
3 Projected balance in accounts payable on December 31:

The December 31 balance in accounts payable will be equal to Decembers purchases of merchandise.
Since the stores gross margin is 25 per cent of sales, its cost of goods sold must be 75 per cent of sales.
Cost of goods
Month Sales sold Amount purchased in December
December $440 000 $330 000 $330 000 20% = $ 66 000
January 400 000 300 000 300 000 80% = 240 000
Total December purchases $306 000
Therefore, the December 31 balance in accounts payable will be $306 000.
EXERCISE 9.27 (20 minutes) Budgetary slack: bank
Memorandum
Date: Today
To: Managing Director, Southpac Bank
From: I.M. Student and Associates
Subject: Budgetary slack
Budgetary slack is the difference between the revenue or cost that a person provides and a realistic estimate of
the revenue or cost. 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 banks bonus system for the new accounts manager may encourage budgetary slack. Since the managers
bonus is determined by the number of new accounts generated over the budgeted number, there is an incentive
for the manager to understate her projection of the number of new accounts. There is evidence of this in the
description of the new account managers behaviour. A 10 per cent increase over the banks current 10 000
accounts would mean 1000 new accounts in next year. Yet the new account managers projection is only 700
new accounts. This will make it more likely that the actual number of new accounts will exceed the budgeted
number, resulting in the manager obtaining a bonus for her apparent good performance.
The bank could consider some alternative measures for balancing the dysfunctional aspects encouraged by the
current system. A bonus could be rewarded for any increase in new accounts above the 10 per cent increase
that has occurred over the past few years. Perhaps for every 1 per cent increase over the 10 per cent target, a
bonus could be paid. New account volumes should be calculated on a net basis; i.e. accounts that are closed
during the year could be deducted from the number of new accounts opened. This could encourage the
manager to maintain customer satisfaction. Bonuses could also be based on a range of performance targets,
including the results of customer satisfaction surveys and reductions in customer complaints.
EXERCISE 9.28 (15 minutes) Budgeted balance sheet and income statement; missing
amounts: retailer
Accumulated depreciation, 1 January $ 405 000

Depreciation expense during year 75 000
Accumulated depreciation, 31 December $ 480 000
Retained earnings, 1 January $1 537 500

Net profit for year 300 000
Dividends paid 0
Retained earnings, 31 December $1 837 500
Accounts receivable, 1 January $ 1 700 000

Credit sales during year 4 500 000
Collections of accounts receivable (3 900 000)
Accounts receivable, 31 December $ 2 300 000
Accounts payable, 1 January $ 600 000

Purchases of goods and services on credit 2 400 000
Payments of accounts payable (2 200 000)
Accounts payable, 31 December $ 800 000
July August September

Sales $240 000 $180 000 $270 000a
Cash receipts:
From cash sales $120 000b $90 000c $135 000
From credit sales 108 000d 102 000 117 000e
Total cash receipts $228 000 $192 000 $252 000
a
$270 000 = $135 000 2
b
$120 000 = $240 000 .5
c
$90 000 = $180 000 .5
d
$108 000 = ($120 000 .6) + ($90 000 .4)
e
$117 000 = ($135 000 .6) + ($90 000 .4)
EXERCISE 9.29 (20 minutes) Budgets in service firms: veterinary clinic
1
Paws and Claws
Budgetary data
Sales November $80 000
December $90 000
January $30 000
February $90 000
March $80 000
Purchases December $30 000
January $0
February $50 000
Salaries per month $40 000

Other costs per month $30 000
Cash budget for the quarter ending 31 March

January February March
Opening cash balance (80 000) (116 000) (142 000)
Cash received from consultations
sales 2 months ago (20%) 16 000 18 000 6 000
last month sales (20%) 18 000 6 000 18 000
current month sales (50%) 15 000 45 000 40 000
Total cash receipts 49 000 69 000 64 000
Cash payments
Supplies
previous month purchases (50%) 15 000
current month purchases (50%) 0 25 000 25 000
Salaries 40 000 40 000 40 000

Other costs 30 000 30 000 30 000
Total cash payments 85 000 95 000 95 000
Closing cash balance (116 000) (142 000) (173 000)
2 The cash budget using a spreadsheet approach shows the implications of the clinics present cash
management practices. The clinic has a serious cash flow problem with monthly cash disbursement
being greater than cash receipts. Over the three month period the cash balance has moved from
$(80 000) to $(173 000). Management needs to serious consider its pricing policy, the level of business
that it is generating, the high level of uncollectable sales (at 10%) and the generous payment terms
offered to clients.
Management can use the cash flow budget to experiment with pricing and other changes to see what the
impact would be on cash flow. An obvious problem lies in the slow payment by most customers (even though
this appears to have been improved in the current year), coupled with the high level of bad debts at 10 per
cent. Attempts could be made to ask clients to pay cash basis for consultations by offering a reasonable
discount on immediate payment. Budgeting will help evaluate the impact of various discount policies.
EXERCISE 9.30 (20 minutes) (appendix) Budgeting production and direct material
purchases: manufacturer
1 Production requirements:
Month Projected sales

July 200 000 units
August 210 000 units
September 220 500 units
Sales for the quarter 630 500 units
Total sales for quarter, July through September 630 500 units
Add Desired ending inventory on 30 September (231 525* 80%) 185 220 units
815 720 units
Less Inventory on 30 June 150 000 units
Total production requirement for quarter 665 720 units
*
Projected October sales = 220 500 x 1.05 = $231 525
2 Direct material purchases during the quarter, assuming production of 600 000 units:
Direct material for production (600 000 4 kg) 2 400 000 kg
Add Desired ending inventory on September 30 (2 400 000 25%) 600 000 kg
3 000 000 kg
Less Inventory on 30 June 800 000 kg
Purchases during the quarter 2 200 000 kg
Direct material cost per kg $12
Total cost of purchases during the quarter $26 400 000
SOLUTIONS TO PROBLEMS
PROBLEM 9.31 (25 minutes) Sales and labour budgets: university
1 Revenue budget:
Current student enrolment 12 000
Add 5% increase in student enrolments 600
Total number of students 12 600
Less: Scholarship students 180
Fee-paying students 12 420
Subjects per student per year 8
Total enrolments in subjects 99 360
Fee per subject $3 000
Forecasted academic revenue $298 080 000
2 Number of staff needed to cover classes:

Total students enrolled 12 600
Subjects per student per year (4 each semester 2 semesters) 8
Total student class enrolments to be covered 100 800
Students per class 80
Classes to be taught 1 260
Classes taught per staff member 3
Staff required 420
3 Possible actions might include:

hire sessional or part-time instructors
increase the teaching load for each academic staff
increase class sizes and reduce the number of subjects offered
encourage students to take online subjects offered by another university for credit towards their degree.
4 No. While the number of staff may be a key driver, the number of staff is highly dependent on the
number of students. Students (and tuition revenue) are similar to salesthe starting point in the
budgeting process.
PROBLEM 9.32 (60 minutes) Cash budgeting: hospital
1 Alice Springs Medical Centre

Schedule of budgeted cash receipts
for the quarter ending 30 September (000s)
Actual or estimated billings Percentages Receipts
Month Amount Type* Timing July August September
May $5 000 TP 80% 20% $800
May 5 000 DP 20% 30% 300
June 5 000 TP 80% 20% 800
June 5 000 DP 20% 40% 400
June 5 000 TP 80% 20% $800
June 5 000 DP 20% 30% 300
July 4 500 TP 80% 50% 1800
July 4 500 DP 20% 20% 180
July 4 500 TP 80% 20% 720
July 4 500 DP 20% 40% 360
July 4 500 TP 80% 20% $720
July 4 500 DP 20% 30% 270
August 5 000 TP 80% 50% 2 000
August 5 000 DP 20% 20% 200
August 5 000 TP 80% 20% 800
August 5 000 DP 20% 40% 400
September 5 500 TP 80% 50% 2 200
September 5 500 DP 20% 20% $220
Total receipts from billings $4 280 $4380 $4 610
Investment income 175 175 175
Total cash receipts $4 455 $4 555 $4 785
*
TP denotes third party billings; DP denotes direct patient billings.

Of $5 000 000 billed in May, 80 per cent was billed to third parties, for a total of $4 000 000. Of this amount,
20 per cent will be collected in the second month following service, which is July.
Alice Springs Medical Centre

Schedule of budgeted cash disbursements
for the quarter ending 30 September (000s)
Disbursements
July August September
Salaries:
Variable
$4500 20% $ 900
$5000 20% $1 000
$5500 20% $1 100
Total variable $ 900 $1 000 $1 100
Fixed 1 500 1 500 1 500
Total salaries $2 400 $2 500 $2 600
Purchases of previous month 1 200 1 250 1 500
Interest 450
Total cash disbursements $3 600 $3 750 $4 550
Alice Springs Medical Centre

Cash budget as at 1 October (000s)
Cash balance, 1 July $ 300
Add Cash receipts in third quarter:
July $4 455
August 4 555
September 4 785
Total cash available $13 795
Less Cash disbursements in third quarter:
July $3 600
August 3 750
September 4 550 11 900
Projected cash balance, 30 September $ 2 195
2 Calculation of required borrowings:

Projected cash balance, 30 September $ 2 195
Less Minimum end of month cash balance required ($1850 10%) 185
Cash available to acquire capital items $ 2 010
Less Capital expenditures planned for 1 October 3 800*
Cash shortfall ($1 790)
The amount of borrowing needed on 1 October to enable the purchase of the new equipment is $1 790 000.
* th
PLEASE NOTE: In the first printing of the 5 edition of the textbook, this figure is incorrectly given as
$4 000 000 instead of $3 800 000.
PROBLEM 9.33 (20 minutes) Ethics; budgetary pressure; management bonuses:
manufacturer
1 The use of alternative accounting methods to manipulate reported earnings is unethical because it
violates some of the principles of ethical conduct outlined in the Code of Ethics for Professional
Accountants (see Chapter 1). The principles of integrity, objectivity and independence, and compliance
with accounting standards, as well as the image of the profession, are violated.
2 Yes, costs related to revenue should be expensed in the period in which the revenue is recognised.
Perishable supplies purchased for use in the current period will not provide benefits in future periods
and should be recognised as revenue in the current period. The accounting treatment for the supplies
was not in accordance with standards.
3 Gary Woods actions were appropriate. Upon discovering the change in the method of accounting for
supplies, Wood brought the matter to the attention of his immediate superior, Kern. Upon learning of the
arrangement with Pristeel, Wood told Kern that the action was improper and requested that the accounts
be corrected and the arrangement discontinued. Wood clarified the situation with a qualified and
objective peer (adviser) before disclosing Kerns arrangement with Pristeel to Belcos president, Kerns
immediate superior. Contact with levels above the immediate superior should be initiated only with the
superiors knowledge, assuming the superior is not involved. In this case, the superior is involved. Thus,
Wood has acted appropriately by approaching North without Kerns knowledge.
PROBLEM 9.34 (40 minutes) Budgeting, financial objectives: manufacturing company
1 Strategic planning identifies the overall objective of an organisation 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 Healthy
Foods Ltd, the calculations to determine whether John Winslows budget attains these objectives are
presented in the following table.
Calculation of financial objectives: Healthy Foods Ltd.
Attained/
Objective Not attained Calculations
Increase sales by 12%
Not attained ($947 750 $850 000)/$850 000 = 11.5%
($850 000 1.12 = $952 000)
Increase profit before tax by 15%
Attained ($120 750 $105 000)/$105 000 = 15%
($105 000 1.15 = $120 750)
Maintain long-term debt at
maximum of 16% of assets Attained $308 000/$205 000 = 15% (rounded)
($2 050 000 .16 = $328 000)
Maintain cost of goods sold at
maximum of 70% of sales Not attained $669 500*/$947 750 = 70.6% (rounded)
($947 750 .70 = $663 425)
*
Variable cost of goods sold + fixed manufacturing cost = $574 725 + $94 775 = $669 500.
3 The accounting adjustments contemplated by John Winslow are unethical because they will result in
intentionally overstating profit by understating the cost of goods sold. John Winslow as a cost
accountant would probably be a member of professional accounting organisations (CPA Australia or
ICAA), and such conducts are clearly unethical according to the Code of Ethics for Professional
Accountants.
PROBLEM 9.35 (45 minutes) Revised operating budget: consulting firm
1 The revised operating budget for the Clark Services for the fourth quarter is presented below.
Supporting calculations follow:
Clark Services
Revised operating budget
fourth quarter
Revenue
Consulting fees:
Management consulting $1 404 000
Computer system consulting 1 434 375
Total consulting fees $2 838 375
Other revenue 100 000
Total revenue $2 938 375
Expenses
Consultant salary expenses $1 531 950
Travel and related expenses 173 625
General and administrative expenses 279 000
Depreciation expense 120 000
Corporate expense allocation 225 000
Total expenses $2 329 575
Operating profit $608 800
SUPPORTING CALCULATIONS
Schedule of projected revenues for the fourth quarter:
Management Computer system

consulting consulting
Third quarter:
Revenue $945 000 $1 265 625
Hourly billing rate $270 $225
Billable hours 3 500 5 625
Number of consultants 10 15
Hours per consultant 350 375
Fourth quarter planned increase 50 50
Billable hours per consultant 400 425
Billable hours 5 200 6 375
Projected revenue $1 404 000 $1 434 375
Schedule of projected salaries, travel, general and administrative, and allocated corporate expenses:
Management Computer system

consulting consulting
Compensation
Existing consultants:
Annual salary $ 150 000 $ 138 000
Quarterly salary 37 500 34 500
Planned increase (10%) 3 750 3 450
Total $ 41 250 $ 37 950
Total $412 500 $569 250
New consultants at old salary (3 $37,500) 112 500 0
Total salary 525 000 569 250
On-costs and benefits (40%) 210 000 227 700
Total $735 000 $796 950
Total compensation (management consulting and computer consulting) $1 531 950
Travel expenses:
Management consultants (400 hours 13) 5 200
Computer consultants (425 hours 15) 6 375
Total hours 11 575
Rate per hour* $15
Total travel expense $ 173 625
*
Third quarter travel expense hours = rate
$136,875 9,125 = $15.00
9,125 = (350 10) + (375 15)
General and administrative: ($300 000 93%) $279 000
Corporate expense allocation: ($150 000 150%) $225 000
2 An organisation 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 companys
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.
PROBLEM 9.36 Production and materials budgets
1 Production Budget (for year 2)

Yarex Darol Norex Total
Budgeted sales (litres) 60 000 40 000 25 000 125 000
Plus Required ending finished goods inventory 5 200 2 800 2 400 10 400
Finished goods required 65 200 42 800 27 400 135 400
Less Beginning finished goods inventory 4 800 3 200 2 000 10 000
Required production (litres) 60 400 39 600 25 400 125 400
2 Conversion Cost Budget (for year 2)*

Conversion hours Conversion hours Conversion cost
Litres produced per unit required @ $20 per hour
Yarex 60,400 0.07 4,228 $84,560
Darol 39,600 0.10 3,960 $79,200
Norex 25,400 0.16 4,064 $81,280
Total 12,252 $245,040
*
PLEASE NOTE: In the first printing of the 5th edition of the textbook, Requirement 2 specifies year 3 when it should be
year 2 as shown here.
3 Raw Material (Islin) Purchases Budget (for year 2)

Islin
Raw material required for production (in litres) 100 820.00
Plus Ending inventory (litres) 167 771.43
Material needed (litres) 268 591.43
Less Beginning inventory (litres) 10 000.00
Material to be purchased (litres) 258 591.43
Material to be purchased (dollars) $1 292 957.14
4 Advanced Chemical Company should not replace Islin with Philin in year-2 production, as its costs
outweigh its savings.
Conversion hours calculations for year 2:
Litres produced Conversion hours per unit Conversion hours required

Yarex 60 400 0.07 4,228
Darol 39 600 0.10 3,960
Norex 25 400 0.16 4,064
Total 12,252
Incremental analysis for replacing Islin with Philin:
Incremental analysis for replacing Islin with Philin:
Savings in conversion costs (12,252 x .10 x $20) $24,504.00
Less Increment in material purchase prices
(1 292 957 .20) $258,591.43
Net effect of usage of Philin ($234,087.43)
PROBLEM 9.37 (40 minutes) Production and direct labour budgets (appendix):
manufacturer
1 Production and direct labour budgets:

Alpha Mann Ltd
Budget for production and direct labour
for the first quarter of the budget year
Month
January February March Quarter
Sales (units) 20 000 24 000 16 000 60 000
Add Ending inventory* 32 000 25 000 27 000 27 000
Total needs 52 000 49 000 43 000 87 000
Deduct Beginning inventory 16 000 32 000 25 000 16 000
Units to be produced 36 000 17 000 18 000 71 000
Direct labour hours per unit 1 1 .75
Total hours of direct labour time required 36 000 17 000 13 500 66 500
Direct labour costs:

Wages ($32.00 per DLH) $1 152 000 $544 000 $432 000 $2 128 000
Superannuation contributions (at 9% of wages) 103 680 48 960 38 880 191 520
Workers compensation insurance ($.20 per 7 200 3 400 2 700 13 300
DLH)
Payroll tax (at 7% of wages) 80 640 38 080 30 240 148 960
Total direct labour cost $1 343 520 $634 440 $503 820 $2 481 780
*
100 per cent of the first following months sales plus 50 per cent of the second following months sales.
2 Sales data would also be used by:

Sales budget
Cost of goods sold budget
Selling and administrative expense budget.
Production data would also be used by:
Direct material budget
Manufacturing overhead budget
Cost of goods sold budget.
Direct labour hour data would also be used by:
Manufacturing overhead budget (for determining the overhead application rate).
Direct labour cost data would also be used by:
Manufacturing-overhead budget (for determining the overhead application rate)
Cost of goods sold budget
Cash budget
Budgeted income statement.
3 Alpha Mann Ltd

Manufacturing overhead budget
for the first quarter of the budget year
Month
January February March Quarter
Shipping and handling $ 60 000 $ 72 000 $48 000 180 000
Purchasing, material handling and inspection 162 000 76 500 81 000 319 500
Other overhead 378 000 178 500 141 750 698 250
Total manufacturing overhead $600 000 $327 000 $270 750 $1 197 750
PROBLEM 9.38 (60 minutes) (appendix) Sales, production and purchases budgets:
manufacturer
1 Sales budget:
Units Price Total
Light coils 60 000 $130 $ 7 800 000
Heavy coils 40 000 $190 7 600 000
Projected sales $15 400 000
2 Production budget (in units):

Light coils Heavy coils
Projected sales 60 000 40 000
Add Desired inventories, 31 December 25 000 9 000
Total requirements 85 000 49 000
Deduct Expected inventories, 1 January 20 000 8 000
Production required (units) 65 000 41 000
3 Direct material purchases budget (in quantities):

Raw material
Sheet metal Copper wire Platforms
Light coils (65 000 units projected to be produced) 260 000 130 000 __
Heavy coils (41 000 units projected to be produced) 205 000 123 000 41 000
Production requirements 465 000 253 000 41 000
Add Desired inventories, 31 December 36 000 32 000 7 000
Total requirements 501 000 285 000 48 000
Deduct Expected inventories, 1 January 32 000 29 000 6 000
Purchase requirements (units) 469 000 256 000 42 000
4 Direct material purchases budget (in dollars):
Raw material Anticipated
Raw material required (units) purchase price Total
Sheet metal 469 000 $16 $ 7 504 000
Copper wire 256 000 10 2 560 000
Platform 42 000 6 252 000
Total $10 316 000
5 Direct labour budget:

Projected production
(units) Hours per unit Total hours Rate Total cos
Light coils 65 000 4 260 000 $30 $7 800 00
Heavy coils 41 000 6 246 000 40 9 840 00
Total $17 640 00
6 Budgeted finished goods inventory as at 31 December

Light coils:
Direct materials:
Metal: 4 kilograms @ $16 $64
Wire: 2 kilograms @ $10 20 $84
Direct labour: 4 hours @ $30 120
Overhead: 4 hours @ $2 per direct labour hour 8
Total cost per unit $212
Total cost $212 25 000 units $5 300 000
Heavy coils:
Direct materials:
Metal: 5 kilograms @ $16 $80
Wire: 3 kilograms @ $10 30
Platform: 1 each @ $6 6 $116
Direct labour: 6 hours @ $40 240
Overhead: 6 hours @ $2 per direct labour hour 12
Total cost per unit $368
Total cost $368 9 000 units $3 312 000
Budgeted finished goods inventory, 31 December $8 612 000
PROBLEM 9.39 (40 minutes) Participative budgeting: manufacturing
1 Participative budgeting allows employees throughout an organisation to work with managers to have
input into the setting of their budgets.
Positive aspects:
Participation can encourage employees to identify with the budget targets and increase the motivation to
achieve the budget.
It can encourage coordination and communication between managers and employees.
It can lead to employees gaining a greater understanding and appreciation of the strategy and goals of
the business.
It can lead to a more accurate budget as those who are developing the budget may have the best
knowledge of the activities of the business.
Limitations:
Participation can encourage employees to pad the budget to make it more achievable. This can result in
an inaccurate budget which is of limited use for forecasting.
Participative budgeting is also very time-consuming and costly to implement.
Conflicts and difficult relationships between managers and employees can be increased during budget
negotiations.
2 The budgetary process is described as participatory, but may not be motivational. Divisional managers
have very little discretion over the targets that are set for their divisions and while their managers are
accountable for achieving budget targets, many aspects included in divisional budgets seem to be under
the control of senior management. The budgetary process and the budgets themselves seem to be
strongly controlled by senior management.
There are several aspects included in the budgets which are not under the control of divisional managers.
Capital expenditure projects are directed by senior management, but divisional managers are
accountable.
Long-term supply contracts are fixed. It is unclear whether divisional managers were involved in
negotiating these contracts.
The increase in estimated head office charges after divisional budgets is thought to be motivational, but
this simply adds to the top-down nature of the budgetary process.
The approach to motivation is punitive. It is unclear whether there are any rewards or bonuses tied to
achieving the budgets.
The formulation of divisional budgets down to the line item level is far too detailed and simply
reinforces the top-down approach that is taken.
The company operates in three different industries and it is not clear whether industry differences are
taken into account in the formulation and approval of divisional budgets. Are the divisional targets set
by senior management realistic?
If senior management is serious about creating budget motivation through participation, then it needs to
give divisional managers more discretion in the formulation of their budgets. It should also consider
how positive performance will be rewarded.
PROBLEM 9.40 (50 minutes) (appendix) Revising a budget based on new

information: manufacturer
1 (a) Based on the revised data presented, Number Cruncher Corporations projected unit sales for the
year are 166 000 units, calculated as follows:
Beginning inventory of finished goods 9 300
Planned production 160 000
Units available for sale 169 300
Ending inventory of finished goods 3 300
Units to be sold 166 000
(b) Based on the revised data presented, Number Cruncher Corporations projected dollar volume of
sales for the year is $29 050 000, calculated as follows:
original projected sales dollars
Selling price per unit =
original projected unit sales
$25 550 000
=
9300 + 140 000 3300
= $175 per unit
Projected dollar volume of sales = $175 per unit 166 000 units
= $29 050 000
2 Based on the revised data presented, Number Cruncher Corporations budgeted schedule of cost of
goods manufactured and sold for the year is as follows:
Number Cruncher Corporation

Budgeted schedule of cost of goods manufactured and sold
for the year ending 31 December
Direct material:
Raw materials inventory, 1 January $ 1 200 000
Raw material purchased a 13 360 000
Raw material available for use 14 560 000
Raw materials inventory, 31 December b 1 554 000
Direct material used $13 006 000
Direct labour c 1 145 200
Manufacturing overhead:
Indirect material d $ 1 300 600
Other overhead e 3 000 000 4 300 600
Cost of goods manufactured 18 451 800
Finished goods inventory, 1 January 930 000
Cost of goods available for sale 19 381 800
Finished goods inventory, 31 December 380 556
Cost of goods sold $19 001 244
Supporting calculations:
a
Raw material purchased:
27 500 units @ $80 per unit* $ 2 200 000
45 000 units @ $80 per unit 3 600 000
90 000 units @ $84 per unit** 7 560 000
Total $13 360 000
*
$2 200 000 27 500 units

45 000 = (160 000 - 25 000) 3
**
$80 1.05
b
Raw materials inventory, 31 December:
18 500 units $84 $ 1 554 000
c
Direct labour:
25 000 units @ $7 per unit* $ 175 000
90 000 units @ $7 per unit 630 000
45 000 units @ $7.56 per unit** 340 200
Total $ 1 145 200
*
$980 000 140 000 units

90 000 = 2 (160 000 25 000) 3
**
$7.00 1.08
d
Indirect material:
$13 006 000 .10 $ 1 300 600
e
Other manufacturing:
Fixed component: $2 800 000 2 $ 1 400 000
$1 400 000
Variable component: 160 000 units 1 600 000
140 000 units
Total other overhead $3 000 000
f
Finished goods inventory, 31 December
Average cost per unit:
$18 451 800
= $115.32 per unit (rounded)
160 000 units
Finished goods: 3300 $115.32 $ 380 556
PROBLEM 9.41 (45 minutes) (appendix) Production, materials, labour, and overhead
budgets: manufacturer
1 Production budget:
Estimated sales for third quarter 18 000 units
Less Beginning inventory (5 000)
Plus Ending inventory (80% 7000) 5 600
Production requirements for third quarter 18 600 units
2 (a) Material budget:

Direct material
#101 #211 #242
Usage* 108 000 72 000 36 000
Less Beginning inventory (35 000) (30 000) (14 000)
Plus Ending inventory** 42 000 28 000 14 000
Purchases in units 115 000 70 000 36 000
Price per unit $2.40 $3.60 $1.20
Cost of purchases $276 000 $252 000 $43 200
*
18 000 production units 6, 4, 2 units of raw material per finished unit.
**
Ending inventory is based on September sales of 7 000 6, 4, 2 units of raw material per finished unit.
(b) Labour budget:

Units produced DLH per unit Total DLH Cost per DLH Total cost
Forming 18 000 .4 7 200 $40 $288 000
Assembly 18 000 1.0 18 000 32 576 000
Finishing 18 000 .125 2 250 36 81 000
27 450 $945 000
(c) Overhead budget:

Expected annual production 60 000 units
Actual production 6 months to June 30 27 000
Expected production during last six months of 2006 33 000 units
Variable overhead rate per unit ($148 500 27 000 units) $5.50
Budgeted variable overhead $181 500
Budgeted fixed overhead* 93 000
Total budgeted overhead $274 500
*
50% of the budgeted annual cost of $186 000.
This assumes that management believes the annual budget for fixed overhead is still valid, and
fixed overhead will be incurred at the same budgeted rate (i.e. $93 000 every six months).
Two alternative amounts are also reasonable, depending on the assumptions one makes:
(1) $92 500 (original annual budget of $186 000 minus the $93 500 incurred in the first six
months), or (2) $93 500, the actual fixed overhead incurred in the first six months.
PROBLEM 9.42 (60 minutes) Preparation of the annual budget (appendix):

manufacturer
1 Sales budget:
Box C Box P Total
Sales (in units) 500 000 500 000
Sales price per unit $0.90 $1.31
Sales revenue $450 000 $655 000 $1 105 000
2 Production budget (in units):
Box C Box P
Sales 500 000 500 000
Add Desired ending inventory 5 000 15 000
Total units needed 505 000 515 000
Deduct Beginning Inventory 10 000 20 000
Production requirements 495 000 495 000
3 Direct material budget:

Corrugating medium
Box C Box P Total
Production requirements (number of boxes) 495 000 495 000
Raw material required per box (kilograms) .2 .3
Raw material required for production (kilograms) 99 000 148 500 247 500
Add Desired ending raw-material inventory 10 000
Total raw material required 257 500
Deduct Beginning raw-material inventory 5 000
Raw material to be purchased 252 500
Price (per kilogram) $.15
Cost of purchases (corrugating medium) $ 37 875
Total cost of raw-material purchases
($145 500 + $37 875) $183 375
Paperboard
Box C Box P Total
Production requirement (number of boxes) 495 000 495 000
Raw material required per box (kgs) .3 .7
Raw material required for production (kgs) 148 500 346 500 495 000
Add Desired ending raw-material inventory 5 000
Total raw-material required 500 000
Deduct Beginning raw-material inventory 15 000
Raw material to be purchased 485 000
Price (per kilogram) $.30
Cost of purchases (paperboard) $145 500
4 Direct labour budget:

Box C Box P Total
Production requirements (number of boxes) 495 000 495 000
Direct labour required per box (hours) .0025 .005
Direct labour required for production (hours) 1 237.5 2 475 3 712.5
Direct labour rate $18
Total direct labour cost $66 825
5 Manufacturing-overhead budget:
Indirect material $ 10 500
Indirect labour 50 000
Utilities 25 000
Land tax and council rates 18 000
Insurance 16 000
Depreciation 29 000
Total overhead $148 500
6 Selling and administrative expense budget:
Salaries of sales personnel $75 000
Advertising 15 000
Management salaries 90 000
Clerical wages 26 000
Miscellaneous administrative expenses 4 000
Total selling and administrative expenses $210 000
7 Budgeted income statement:

Sales revenue (from sales budget, see Requirement 1) $1 105 000
Less Cost of goods sold:
Box C: 500 000 $.265* $132 500
Box P: 500 000 $.545* 272 500 405 000
Gross margin $700 000
Selling and administrative expenses 210 000
Profit before taxes $ 490 000
Income tax expense (40%) 196 000
Net profit $ 294 000
*
Calculation of manufacturing cost per unit:
budgeted manufacturing overhead
Predetermined overhead rate =
budgeted volume of direct labour hours
$148 500
=
(495 000)(.0025) + (495 000)(.005)
$148 500
= = $40 per hour
3712.5 hours
Unit cost for Box C = direct materials + direct labour + manuf. overhead
= ($0.3x0.30 + $0.15x0.20) + (0.0025 hrs x $18) + (0.0025 x $40)
= $ 0.265
Unit cost for Box P =($0.3x0.70 + $0.15x0.30) + (0.005 hrs x $18 ) + (0.005 x $40)
= $ 0.545
SOLUTIONS TO CASES
CASE 9.43 (60 minutes) Using budgets to evaluate business decisions: sports club
1 Yes, Hawthorn Leisure Works (HLW) should be better able to plan its cash receipts with the new
membership plan and fee structure. The cash flows should be more predictable because the large,
prepaid membership fee is a significant component of the cash receipts. The hourly court fees, which
fluctuate daily, are eliminated.
2 Total annual membership fees, old membership structure:

Membership Annual fee No. members Revenue
Individual $45 500 $22 500
Student 30 500 15 000
Family 100 1000 100 000
Total 2 000 $137 500
Revenue from court fees, old membership structure:
Minimum Maximum
Peak season:
Prime time 181 days $12 4 hours 10 courts $78 192 $86 880
(90%)* (100%)
Non-prime time 181 days $8 7 hours 10 courts 50 680 60 816
(50%) (60%)
Off-peak season 181 days $6 12 hours 10 courts 26 064 52 128
(20%) (40%)
Total revenue from court fees $154 936 $199 824
* Indicates capacity.
Revenue from membership fees, new membership structure:
Current members:*
Promotional membership fee
Individual $250 450 members $112 500
Family $450 450 members 202 500
Regular memberships fee
Individual $300 250 members 75 000
Family $500 250 members 125 000
New members:**
Individual $300 300 members 1/2 year 45 000
Family $500 300 members 1/2 year 75 000
Total revenue from yearly membership $635 000
*
70% of current members will renew their membership: 2000 x 0.70 = 1400 memberships. These are equally split
between individual and family memberships
45% of current members will take up the new membership during the promotional period: 2000 0.45 = 900
memberships. These are equally split between individual and family memberships.
Thus, 500 of the current members will pay after the promotional period at the new rate
**
Assumes that new members pay the full yearly membership fee and pay for an average of 6 months membership
Comparison of old and new plans:

Maximum Minimum
Revenue from old fee structure
Court fees $154 936 $199 824
Yearly memberships fees 137 500 137 500
Total from old structure $292 436 $337 324
Fees from new structure 635 000 635 000
Additional revenue from new structure $342 564 $297 676
Under the new membership structure next year, the club will generate between $342 564 and $297 676
in additional revenue.
3 (a) Factors that Hawthorn Leisure Works should consider before adopting the new membership plan
and fee structure include:
costs associated with the plan changeover
members 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) Financial analyses conducted by Hawthorn Leisure Works could include a forecast of projected
cash inflows and outflows by month, a statement of financial performance including interest
revenue and expense, a cost volume profit analysis, and a cash management plan for excess cash
or cash shortages.
4 Because Hawthorn Leisure Works cash flows should be more predictable, the business will be better able
to plan for and control cash disbursements. In addition, Hawthorn Leisure Works should be better able to
plan for short-term investments when excess cash occurs in September and October, 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.
CASE 9.44 (75 minutes) Comprehensive budget question: wholesaler
1 Sales budget:
Current year
December January February March 1st quarter
Total sales $400 000 $440 000 $484 000 $532 400 $1 456 400
Cash sales* 100 000 110 000 121 000 133 100 364 100
Credit sales 300 000 330 000 363 000 399 300 1 092 300
*
25% of total sales.

75% of total sales.
2 Cash receipts budget:

January February March 1st quarter
Cash sales $110 000 $121 000 $133 100 $364 100
Cash collections from credit sales
made during current month* 33 000 36 300 39 930 109 230
Cash collections from sales made
during preceding month 270 000 297 000 326 700 893 700
Total cash receipts $413 000 $454 300 $499 730 $1 367 030
*
10% of current months credit sales.

90% of previous months credit sales.
3 Purchases budget:
Current year
December January February March 1st quarter
Budgeted cost of goods sold $280 000 $308 000 $338 800 $372 680 $1 019 480
Add Desired ending inventory 154 000 169 400 186 340 186 340** 186 340
Total goods needed 434 000 477 400 525 140 559 020 1 205 820
Less Expected beginning
inventory 140000* 154 000 169 400 186 340 154 000
Purchases $294 000 $323 400 $355 740 $372 680 $1 051 820
*
Equals December budgeted COGS 0.50.
**
Since Aprils 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 31 March.
4 Cash disbursements budget:

Inventory purchases:
Cash payments for purchases during the current
month* $129 360 $142 296 $149 072 $ 420 728
Cash payments for purchases during the
preceding month 176 400 194 040 213 444 583 884
Total cash payments for inventory purchases $305 760 $336 336 $362 516 $1 004 612
Other expenses:
Sales salaries 21 000 21 000 21 000 63 000
Advertising and promotion 16 000 16 000 16 000 48 000
Administrative salaries 21 000 21 000 21 000 63 000
Interest on borrowings** 15 000 0 0 15 000
Property taxes** 0 5 400 0 5 400
Sales commissions 4 400 4 840 5 324 14 564
Total cash payments for other expenses $ 77 400 $ 68 240 $ 63 324 $ 208 964
Total cash disbursements $383 160 $404 576 $425 840 $1 213 576
*
40% of the current months purchases (Schedule 3).

60% of the prior months purchases (Schedule 3).
**
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.
5 Summary cash budget:

Cash receipts (from Schedule 2) $413 000 $454 300 $499 730 $1 367 030
Less: Cash disbursements (from Schedule 4) (383 160) (404 576) (425 840) (1 213 576)
Change in cash balance during period
due to operations $ 29 840 $ 49 724 $ 73 890 $ 153 454
Sale of marketable securities (1 January) 15 000 15 000
Proceeds from bank loan (1 January) 100 000 100 000
Purchase of equipment (125 000) (125 000)
Repayment of bank loan (31 March) (100 000) (100 000)
Interest on bank loan* (2 500) (2 500)
Payment on dividends (50 000) (50 000)
Change in cash balance during 1st quarter $ (9 046)
Cash balance, 1 January 35 000
Cash balance, 31 March $ 25 954
*
Interest on the bank loan = $100 000 10% per year 1/4 year = $2 500.
6 Analysis of short-term financing needs:
Projected cash balance as of 31 December $ 35 000
Less Minimum cash balance 25 000
Cash available for equipment purchases 10 000
Projected proceeds from sale of marketable securities 15 000
Cash available 25 000
Less Cost of investment in equipment 125 000
Required short term borrowing $(100 000)
7
Universal Electronics Company
Budgeted income statement
for the first quarter
Sales revenue $1 456 400

Less Cost of goods sold 1 019 480
Gross margin 436 920
Less Other expenses
Sales salaries $63 000
Sales commissions 14 564
Advertising and promotion 48 000
Administrative salaries 63 000
Depreciation 75 000
Interest on borrowings 7 500
Interest on short-term bank loan 2 500
Property taxes 2 700
Total selling and administrative expenses 276 264
Net profit $ 160 656
8
Budgeted statement of retained earnings
for the first quarter
Retained earnings, 31 December $ 107 500

Add Net profit 160 656
Earnings available for distribution $268 156
Less Dividends 50 000
Retained earnings, 31 March $ 218 156
9
Budgeted balance sheet
31 March
Cash $ 25 954
Accounts receivable* 359 370
Inventory 186 340
Buildings and equipment (net of accumulated depreciation) 676 000
Total assets $1 247 664
Accounts payable** $ 223 608

Interest payable on borrowings 5 000
Property taxes payable 900
Long term borrowings 300 000
Share capital 500 000
Retained earnings 218 156
Total liabilities and shareholders equity $1 247 664
*
Accounts receivable, 31 December $ 270 000
Add Sales on credit (Schedule 1) 1 092 300
Less Total cash collections from credit sales ($109 230 + $893 700) (1 002 930)
Accounts receivable, 31 March $ 359 370

Buildings and equipment (net), 31 December $ 626 000
Add Cost of equipment acquired 125 000
Less Depreciation expense for 1st quarter (75 000)
Buildings and equipment (net), 31 March $ 676 000
**
Accounts payable, 31 December $ 176 400
Add Purchases (Schedule 3) 1 051 820
Less Cash payments for purchases (Schedule 4) (1 004 612)
Accounts payable, 31 March $ 223 608

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CHAPTER 9

Material Labour Overhead Selling and

Balance sheet Income statement

EXERCISE 9.24 (25 minutes) Cash receipts: retailer

1 Calculate cash collections in October using an Excel spreadsheet:

Month Credit sales Percentage collected Collected in October

EXERCISE 9.25 (20 minutes) Professional services budget: dental practice

1 Direct professional labour budget for the month of June:

2 Cash collections during June:

EXERCISE 9.26 (30 minutes) Budgeted financial statements: retailer

1 Budgeted cash receipts for December:

Month of sale Collections in December

3 Projected balance in accounts payable on December 31:

EXERCISE 9.27 (20 minutes) Budgetary slack: bank

To: Managing Director, Southpac Bank

From: I.M. Student and Associates

Subject: Budgetary slack

Accumulated depreciation, 1 January $ 405 000

Retained earnings, 1 January $1 537 500

Accounts receivable, 1 January $ 1 700 000

Accounts payable, 1 January $ 600 000

July August September

EXERCISE 9.29 (20 minutes) Budgets in service firms: veterinary clinic

Salaries per month $40 000

Cash budget for the quarter ending 31 March

Salaries 40 000 40 000 40 000

Month Projected sales

2 Number of staff needed to cover classes:

3 Possible actions might include:

PROBLEM 9.32 (60 minutes) Cash budgeting: hospital

1 Alice Springs Medical Centre

Alice Springs Medical Centre

Alice Springs Medical Centre

2 Calculation of required borrowings:

PROBLEM 9.34 (40 minutes) Budgeting, financial objectives: manufacturing company

Schedule of projected revenues for the fourth quarter:

Management Computer system

Management Computer system

PROBLEM 9.36 Production and materials budgets

1 Production Budget (for year 2)

2 Conversion Cost Budget (for year 2)*

3 Raw Material (Islin) Purchases Budget (for year 2)

Litres produced Conversion hours per unit Conversion hours required

1 Production and direct labour budgets:

Direct labour costs:

2 Sales data would also be used by:

3 Alpha Mann Ltd

2 Production budget (in units):

3 Direct material purchases budget (in quantities):

5 Direct labour budget:

6 Budgeted finished goods inventory as at 31 December

PROBLEM 9.39 (40 minutes) Participative budgeting: manufacturing

PROBLEM 9.40 (50 minutes) (appendix) Revising a budget based on new

Number Cruncher Corporation

2 (a) Material budget:

(b) Labour budget:

(c) Overhead budget:

PROBLEM 9.42 (60 minutes) Preparation of the annual budget (appendix):

3 Direct material budget:

4 Direct labour budget:

7 Budgeted income statement:

2 Total annual membership fees, old membership structure:

Comparison of old and new plans: