STUDENT SOLUTIONS MANUAL

CHAPTER 8: STRATEGY AND THE MASTER BUDGET

EXERCISES

8-32 Behavioral Considerations (15 Minutes)

There are at least two issues here. One is the failure to take advantage of all the
cash discount included in the sales term. (In this regard, see Exercise 8-37.) The
other is the constant occurrence of rush orders, last-minute changes, and other
operating emergencies that require the purchasing department to do last minute
purchases.
Janet needs to ensure that the Accounting Department records all purchases
at the net price whenever a purchase is made with cash discounts included in the
sales terms. Any additional amount that the firm has to pay because of the failure
to make the payment within the payment terms should be charged to the finance
department as a loss and not treated as an adjustment to the cost of purchase.
The firm needs to be very clear in its operating procedures about the minimum
amount of time required for purchases. Any additional acquisition cost because of
rush orders, last-minute changes, or operating emergencies should be borne by
the department making the request.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-1 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-34 Budgeted Cash Disbursements (25 minutes)

1. Budgeted cash payments for merchandise purchases:

a. February:
25% x $100,000 = $25,000
75% x $120,000 = $90,000 $115,000

b. March:
25% x $120,000 = $30,000
75% x $110,000 = $82,500 $112,500

2. Budgeted cash payments for merchandise purchases:

a. February:
25% x $100,000 x 0.98 = $24,500
75% x $120,000 x 0.98 = $88,200 $112,700

b. March:
25% x $120,000 x 0.98 = $29,400
75% x $110,000 x 0.98 = $80,850 $110,250

3. The financial cost of not taking advantage of the early-payment discount can be
approximated by the following formula:

Opportunity cost (%) = [discount %/(1 - discount %)] x [365/no. of extra

days allowed if discount is not taken]

= [0.02/(1 - 0.02)] x [365/20] = 0.020408 x 18.25 = 37.25%

Basically, if you choose not to take the early-payment discount, you are giving up
a 2% discount (on the net amount) in return for an extra 20 days in which to pay.
There are 18.25 (365/20) 20-day periods in a year. Note that in the first term of
this formula we divide the 2% discount rate by 98% (1 - 2%) because, in effect,
you are paying 2% to delay for 20 days paying 98% of the total bill. So, the
percentage rate you are paying in this case is really 2.0408% of the net bill (the
bill without financing cost). Regardless of the technicalities here, students should
understand that the opportunity cost of not taking advantage of the early-
payment (cash) discount can be very significant, as is the case here. For this
reason, firms record purchases at net cost and any discounts lost as interest
expense.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-2 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-36 Production and materials purchases budgets (20 minutes)

Production Budget:
2nd Quarter 3rd Quarter
Budgeted sales 38,000 34,000
Desired ending inventory (10%) + 3,400 + 4,800
Total units needed 41,400 38,800
Beginning inventory 3,800 3,400
Total units to produce 37,600 35,400

Budgeted Purchases of Direct Materials for the Second quarter:

2nd Quarter 3rd Quarter

Budgeted production 37,600 35,400
Direct materials per unit x 3 x 3
Direct materials needed in production 112,800 106,200
Desired ending inventory of direct materials
(20% of 106,200) + 21,240
Total direct materials needed 134,040
Beginning inventory of DM (20% of 112,800) 22,560
Budgeted purchases of direct materials (lbs.) 111,480

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-3 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-38 Production and materials budgets--process costing (20 minutes)

1. Budgeted Production (XPL30):

Units
Budgeted sales 480,000
Budgeted finished goods ending inventory (June 30, 2008) + 50,000
Total number of units needed 530,000
Less: Budgeted finished goods beginning inventory 80,000
Budgeted production (units) 450,000

2. Units of XPL30 to Start into Production:

Budgeted production (from (1) above) 450,000

Budgeted WIP ending inventory (June 30, 2008) + 20,000
Total number of units needed 470,000
Less: Budgeted WIP beginning inventory (July 1, 2007) 10,000
Total units of XPL30 to start into production 460,000

3. Raw Materials Purchases Budget:

Units of XPL30 to start into production (from (2) above) 460,000

Units of raw materials needed per unit of XPL30 x 2
Total raw materials needed for production 920,000
Budgeted raw materials ending inventory (June 30, 2008) + 50,000
Total number of units of raw materials needed 970,000
Budgeted raw materials beginning inventory (July 1, 2007) 40,000
Total units of raw materials that must be purchased 930,000

4. While the timing of the addition of materials would affect the calculation for number
of equivalent units produced, number of equivalent units in the ending WIP
inventory, and the raw materials cost per equivalent unit, it will have no impact on
the budgeted purchases of materials for the period.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-4 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-40 Cash budget (10-15 minutes)

Cash Available
Cash balance, beginning $ 10,000
Cash collections from customers + 150,000
Total cash available $160,000

Cash Disbursements
Direct materials purchases $ 25,000
Operating expenses $50,000
Less: Depreciation expenses - 20,000 30,000
Payroll 75,000
Income taxes 6,000
Machinery purchase + 30,000
Total cash disbursements prior to financing $166,000

Financing:
Cash excess (shortage) before financing ($ 6,000)
Minimum cash balance desired - 20,000
Financing need $26,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-5 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-42 Cash Budgeting: Not-for-Profit Context (30 minutes)

1. Endowment fund: a gift (contribution) whose principal must be maintained but whose
income may be expended. (You might use the example of an endowed professorship
as an example.)

2.
Cash Budget for Tri-County Social Service Agency
2007
(in thousands)
Quarters
I II III IV Year
Cash Balance, beginning $11 $8 $8 $8 $11
Receipts:
Grants $80 $70 $75 $75 $300
Contracts $20 $20 $20 $20 $80
Mental Health Income $20 $25 $30 $30 $105
Charitable donations $250 $350 $200 $400 $1,200
Total Cash Available $381 $473 $333 $533 $1,696
Less: Disbursements:
Salaries and Benefits $335 $342 $342 $346 $1,365
Office expenses $70 $65 $71 $50 $256
Equipment purchases & maintenance $2 $4 $6 $5 $17
Specific assistance $20 $15 $18 $20 $73
Total disbursements $427 $426 $437 $421 $1,711
Excess (deficiency) of cash available
over disbursements ($46) $47 ($104) $112 ($15)
Financing:
Borrow from endowment fund $54 $0 $112 $0 $166
Repayments $0 ($39) $0 ($104) ($143)
Total financing effects $54 ($39) $112 ($104) $23
Cash Balance, ending $8 $8 $8 $8 $8

3. $23,000.

4. It is probable that both donations and requests for services are unevenly distributed
over the year. The agency may want to increase requests for donations and seek
additional grants.

5. No. Assuming there is careful fiscal management, borrowing only occurs when
necessary.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-6 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-44 Accounts Receivable Collections and Sensitivity Analysis (45 minutes)

Original Assumptions/Data:
Actual credit sales for March $120,000
Actual credit sales for April $150,000
Estimated credit sales for May $200,000
Estimated collections in month of sale 25%
Estimated collections in first month following month of sale 60%
Estimated collections in the second month after month of sale 10%
Estimated provision for bad debts in month of sale 5%

1. Estimated cash receipts from collections in May:

Collection from sales in March (0.10 x $120,000) $12,000
Collection from sales in April (0.60 x $150,000) $90,000
Collection from sales in May (0.25 x $200,000) $50,000
Total estimated cash collections in May $152,000

2. Gross accounts receivable, May 31st:

From credit sales made in April (0.15 x $150,000) $22,500
From credit sales made in May (0.75 x $200,000) $150,000
Estimated gross accounts receivable, May 31 st $172,500

3. Net accounts receivable, May 31 st:

Gross accounts receivable, May 31 st $172,500
Less: Allowance for uncollectible accounts:
From credit sales made in April $7,500
From credit sales made in May $10,000
Net accounts receivable, May 31st $155,000

4. Revised data/assumptions:
Actual credit sales for March $120,000
Actual credit sales for April $150,000
Estimated credit sales for May $200,000
Estimated collections in month of sale 60%
Estimated collections in first month following month of sale 25%
Estimated collections in the second month after month of sale 10%
Estimated provision for bad debts in month of sale 5%

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 STUDENT SOLUTIONS MANUAL

8-44 (Continued)

a. Estimated cash receipts from collections in May:

Collection from sales in March (0.10 x $120,000) $12,000
Collection from sales in April (0.25 x $150,000) $37,500
Collection from sales in May (0.60 x $200,000) $120,000
Total cash collections in May $169,500

b. Gross accounts receivable, May 31st:

From credit sales made in April (0.15 x $150,000) $22,500
From credit sales made in May (0.40 x $200,000) $80,000
Gross accounts receivable, May 31st $102,500

Note to Student: An Excel spreadsheet solution file is embedded in this document.

You can open the spreadsheet object that follows by doing the following:

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2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return
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Input Data

Actual credit sales for March $120,000

Actual credit sales for April $150,000
Estimated credit sales for May $200,000
Estimated collections in month of sale 25%
Estimated collections in first month following month of sale 60%
Estimated collections in the second month after month of sale 10%

5. The principal benefit is the accelerated receipt of cash, which the company can
potentially employ to pay down debt, reduce borrowing, invest, etc. Principal
costs would relate to whatever programs are needed to secure the accelerated
collection of cash. These costs could include personal, travel, mailings,
telephone, incentive programs, and costs related to customer relations.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-8 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-46 Budgeting Cash Receipts: Cash Discounts Allowed on Receivables (30

Minutes)
1. Breakdown of Cash/
Sales Data Amount Bank Credit-Card Sales
June $60,000 Cash sales 40%
July $80,000 Credit cards 60%
August $90,000
September $96,000 Bank charges 3%
October $88,000
Credit sales: Collection of Credit Sales
Current month 20%
Sales Breakdown and Terms 1st month 50%
Cash and bank credit card sales 25% 2nd month 15%
Credit sales 75% 3rd month 12%
Terms 1/eom, n/45 Late charge/mo. 2%

Sales % % Cash
September Total % Paid Collected Receipts
Cash sales $96,000 25% 40% $ 9,600
Bank credit card sales $96,000 25% 60% 97% $13,968
Collections of A/R:
September credit sales $96,000 75% 20% 99% $14,256
August credit sales $90,000 75% 50% $33,750
July credit sales $80,000 75% 15% $ 9,000
June credit sales $60,000 75% 12% 102% $ 5,508
Total Cash Receipts, September $86,082

2. Appropriate accounting treatment for:

a) Bank service (collection) fees: these can be considered an offset to gross sales
and thus can be reflected as a deduction in determining net sales (see text
Exhibit 8.15). Alternatively, these amounts can be considered selling expenses
and, as such, be treated as an operating expense, (i.e., an element of Selling
and Administrative Expenses on the Income Statement).

b) Cash discounts allowed on collection of receivables: these can be considered a

selling expense and, as such, would be included within the Selling and
Administrative expense category on the Income Statement.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-9 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-48 Activity-Based Budgeting (ABB) (20 Minutes)

1. Budgeted Cost
Activity Volume Driver Rate Total Cost
Storage 400,000 $0.4925 $ 197,000
Requisition Handling 30,000 $12.50 $ 375,000
Pick Packing 800,000 $ 1.50 $1,200,000
Data Entry 800,000 $ 0.80 $ 640,000
30,000 $ 1.20 $ 36,000
Desktop Delivery 12,000 $30.00 $ 360,000
Total Budgeted Cost for the Division $2,808,000
2. Average number of cartons/delivery
= 1,170,000 cartons 11,700 deliveries = 100 cartons/delivery
Total number of cartons budgeted for delivery in January 2007:
12,000 deliveries x 100 cartons/delivery = 1,200,000 cartons
Cost per carton delivered = $2,808,000 1,200,000 = $2.34
Therefore, the total budgeted cost for the division remains the same at
$2,808,000.
3. Expected saving in costsJanuary 2007:
Requisition Handling $ 375,000
Data Entry: number of lines 640,000
Data Entry: number of requisitions 36,000
Expected Cost Savings, January 2007 = $1,051,000

If the firm uses a single cost-rate system based on the number of cartons
delivered, the firm will not be able to estimate the savings without special
efforts to gather additional information.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-10 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-50 Cash budget (30 minutes)

1. Total credit sales in November $240,000

Percentage collectible x _ 95%
Total amount collectible from credit sales in November $228,000
Percentage collected in the month following month of sales x 40%
Budgeted collections in December from Nov. credit sales $ 91,200

2. Cash sales in January $ 60,000

Collections from credit sales in January:
Total collectible from credit sales
$180,000 x 95% = $171,000
Percentage to be collected in January x 60% $102,600
Collections from credit sales in December:
Total collectible from credit sales
$360,000 x 95% = $342,000
Percentage to be collected in January x 40% 136,800
Budgeted total cash receipts in January $299,400

3. Total inventory purchases in November:

For November sales: $320,000 x 0.3 X 0.6 = $ 57,600
For December sales: $460,000 x 0.7 X 0.6 = 193,200 $250,800
Percentage of Nov. purchases to be paid in December x 75%
Payment in December for purchases in November $188,100
Budgeted purchases in December:
For December sales: $460,000 x 0.3 X 0.6 = $ 82,800
For January sales: $240,000 x 0.7 X 0.6 = 100,800 $183,600
Percentage of Dec. purchases to be paid in December x 25%
Payment in December for purchases in December $45,900
Budgeted payment in December for inventory purchases $234,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-11 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-52 Budgetary Pressure and Ethics (20-25 minutes)

1. The use of alternative accounting methods to manipulate reported earnings is
professionally unethical because it violates the Standards contained in the IMAs
Statement of Ethical Professional Practice (see: www.imanet.org). The
Competence standard is violated because of failure to perform duties in
accordance with relevant accounting (technical) standards. It can probably be
argued that the competence standard is also violated because the accountant is
not providing information that is accurate. The Integrity standard is violated
because the underlying activity would discredit the profession. The Credibility
standard is violated because of failure to communicate information fairly and
objectively.

2. Yes, costs related to revenue should be expensed in the period in which the
revenue is recognized (matching principle). Perishable supplies are purchased
for use in the current period, will not provide benefits in future periods, and
should therefore be matched against revenue recognized in the current period. In
short, the accounting treatment for supplies was not in accordance with generally
accepted accounting principles (GAAP). Note that similar issues, but on an
extremely large basis, occurred at WorldCom and at Global Crossing. In the case
of the latter, the company was engaging simultaneously in contracts to buy and to
sell bandwidth, treating the former as capitalized expenses and the latter as
revenue for the current accounting period.

3. The actions of Gary Woods were appropriate. Upon discovering how supplies
were being accounted for, Wood brought the matter to the attention of his
immediate superior, Gonzales. Upon learning of the arrangement with P&R,
Wood told Gonzales that the action was improper; he then requested that the
accounts be corrected and the arrangement discontinued. Wood clarified the
situation with a qualified and objective peer (advisor) before disclosing
Gonzaless arrangement with P&R to Belcos division manager, Tom Lin
Gonzaless 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, however, the superior is involved. According to the
IMAs statement regarding Resolution of Ethical Conduct, Wood acted
appropriately by approaching Lin without Gonzaless knowledge and by having a
confidential discussion with an impartial advisor.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-12 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

PROBLEMS

8-54 Ethics in Budgeting/Budgetary Slack (40 minutes)

1. a. The reasons that Marge Atkins and Pete Granger use budgetary slack include
the following:

These employees are hedging against the unexpected (i.e., they use slack to
deal with or reduce uncertainty and risk).
Budgetary slack allows employees to look good, (i.e., to exceed
expectations and/or show consistent performance). This is particularly
important when performance is evaluated on the basis of actual versus
budgeted results.
Employees who are able to blend personal and organizational goals through
budgetary slack and show good performance generally are rewarded with
higher salaries, promotions, and bonuses.
By padding the budget, the manager is more likely to get what he/she
actually needs in terms of resources for the upcoming period.

b. The use of budgetary slack can adversely affect Atkins and Granger by:

limiting the usefulness of the budget to motivate their employees to top

performance
affecting their ability to identify trouble spots and take appropriate corrective
action
reducing their credibility in the eyes of management
reducing the ability of top management to effectively allocate resources to
organizational subunits on the basis of actual economic performance. For
example, the use of budgetary slack may affect management decision-
making, as the budgets will show lower contribution margins (lower sales,
higher expenses). Decisions regarding the profitability of product lines,
staffing levels, incentives, etc. could have an adverse effect on Atkins's and
Granger's departments.

2. The use of budgetary slack, particularly if it has a detrimental effect on the company,
may be unethical. In assessing the situation, the IMAs Statement of Ethical
Professional Practice can be consulted (www.imanet.org). This statement notes that
a commitment to ethical professional practice includes: overarching principles
(expressions of core values) and a set of standards intended to guide actual
conduct and practice.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-13 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-54 (Continued)

The IMAs overarching PRINCIPLES include: Honesty, Fairness, Objectivity, and

Responsibility. The list of STANDARDS includes the following: Competence,
Confidentiality, Integrity, and Credibility. The following Standards could be
referenced in conjunction with the use of budgetary slack, as described above:

Competence: Provide decision support information and recommendations that

are accurate, clear, concise, and timely.
Integrity: Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
Credibility: Communicate information fairly and objectively; disclose all relevant
information that could reasonably be expected to influence an intended users
understanding of the reports, analyses, or recommendations.

Though not asked for in the original CMA exam problem, you might want to discuss
with students how, in practice, they would deal with ethical dilemmas. In its
Resolution of Ethical Conflict statement the IMA provides the following guidance:

1. Discuss the issue with your immediate supervisor except when it appears that
the supervisor is involved. In that case, present the issue to the next level. If
you cannot achieve a satisfactory resolution, submit the issue to the next
management level. If your immediate superior is the chief executive officer or
equivalent, the acceptable reviewing authority may be a group such as the
audit committee, executive committee, board of directors, board of trustees, or
owners. Contact with levels above the immediate superior should be initiated
only with your superiors knowledge, assuming he or she is not involved.
Communication of such problems to authorities or individuals not employed or
engaged by the organization is not considered appropriate, unless you
believe there is a clear violation of the law.

2.Clarify relevant ethical issues by initiating a confidential discussion with an IMA

Ethics Counselor or other impartial advisor to obtain a better understanding of
possible courses of action.

3.Consult your own attorney as to legal obligations and rights concerning the
ethical conflict.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-14 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-56 Comprehensive Profit Plan (90 minutes)

1. Sales Budget

Spring Manufacturing Company

Sales Budget
2007

C12 D57 Total

Sales (in units) 12,000 9,000 21,000
x Selling Price Per Unit $150 $220
Total Sales Revenue $1,800,000 $1,980,000 $3,780,000

2. Production Budget

Spring Manufacturing Company

Production Budget
2007
C12 D57
Budgeted Sales (in units) 12,000 9,000
+ Desired finished goods ending inventory 300 200
Total units needed 12,300 9,200
Beginning finished goods inventory 400 150
Budgeted Production (in units) 11,900 9,050

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 STUDENT SOLUTIONS MANUAL

8-56 (Continued-1)

3. Direct Materials Purchases Budget

Spring Manufacturing Company

Direct Materials Purchases Budget (units and dollars)
2007

C12 D57 Total

Raw Material (RM) 1:
Budgeted Production 11,900 9,050
Pounds per Unit x 10 x8
RM 1 needed for production 119,000 72,400 191,400
Plus: Desired Ending Inventory (lbs.) 4,000
Total RM 1 needed (lbs.) 195,400
Less: Beginning inventory (lbs.) 3,000
Required purchases of RM 1 (lbs.) 192,400
Cost per pound $2.00
Budgeted purchases, RM 1 $384,800

Raw Material (RM) 2:

Budgeted Production 11,900 9,050
Pounds per Unit x0 x4
RM 2 needed for production 0 36,200 36,200
Plus: Desired Ending Inventory (lbs.) 1,000
Total RM 2 needed (lbs.) 37,200
Less: Beginning inventory (lbs.) 1,500
Required purchases of RM 2 (lbs.) 35,700
Cost per pound $2.50
Budgeted purchases, RM 2 $89,250

Raw Material 3:
Budgeted Production 11,900 9,050
Pounds per Unit x2 x1
RM 3 needed for production 23,800 9,050 32,850
Plus: Desired Ending Inventory (lbs.) 1,500
Total RM 3 needed (lbs.) 34,350
Less: Beginning inventory (lbs.) 1,000
Required purchases of RM 3 (lbs.) 33,350
Cost per pound $0.50
Budgeted purchases, RM 3 $16,675

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-16 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-56 (Continued-2)

4. Direct Manufacturing Labor Budget

Spring Manufacturing Company

Direct Labor Budget
2007

C12 D57 Total

Budgeted production 11,900 9,050
Direct labor hours per unit x 2 x 3
Total direct labor hours needed 23,800 27,150 50,950
Hourly wage rate $25.00
Budgeted direct labor costs $1,273,750

5. Factory Overhead Budget

Spring Manufacturing Company

Factory Overhead Budget
2007

Variable Factory Overhead:

Indirect materials $10,000
Miscellaneous supplies and tools 5,000
Indirect labor 40,000
Payroll taxes and fringe benefits 250,000
Maintenance costs 10,080
Heat, light, and power 11,000 $326,080

Fixed Factory Overhead:

Supervision $120,000
Maintenance costs 20,000
Heat, light, and power 43,420
Total Cash Fixed Factory Overhead $183,420
Depreciation 71,330 $254,750

Total Budgeted Factory Overhead $580,830

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-17 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-56 (Continued-3)

6. Budgeted Cost of Goods Sold

Spring Manufacturing Company

Ending Finished Goods Inventory and Budgeted CGS
2007

C12 D57 Total

Sales volume 12,000 9,000 21,000
Cost per unit (Schedule 1 and 2) $93.80 $135.70
Cost of goods sold $1,125,600 $1,221,300 $2,346,900

Finished goods ending inventory 300 200

Cost per unit (Schedule 1 and 2) $93.80 $135.70
Budgeted ending inventories $28,140 $27,140 $55,280

Schedule 1: Cost per Unit--Product C12:

Inputs Cost
Cost Element Unit Input Cost Quantity Per Unit
RM-1 $2.00 10 $20.00
RM-3 $0.50 2 $1.00
Direct labor $25.00 2 $50.00
Variable factory OH ($326,080/50,950) $6.40 2 $12.80
Fixed factory OH ($254,750/50,950) $5.00 2 $10.00
Manufacturing cost per unit $93.80

Schedule 2: Cost per Unit--Product D57:

Inputs Cost
Cost Element Unit Input Cost Quantity Per Unit
RM-1 $2.00 8 $16.00
RM-2 $2.50 4 $10.00
RM-3 $0.50 1 $0.50
Direct labor $25.00 3 $75.00
Variable factory OH ($326,080/50,950) $6.40 3 $19.20
Fixed factory OH ($254,750/50,950) $5.00 3 $15.00
Manufacturing cost per unit $135.70

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-18 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-56 (Continued-4)

7. Budgeted selling and administrative expenses:

Spring Manufacturing Company

Selling and Administrative Expense Budget
2007

Selling Expenses:
Advertising $60,000
Sales salaries 200,000
Travel and entertainment 60,000
Depreciation 5,000 $325,000
Administrative expenses:
Offices salaries $60,000
Executive salaries 250,000
Supplies 4,000
Depreciation 6,000 $320,000
Total selling and administrative expenses $645,000

8. Budgeted Income Statement:

Spring Manufacturing Company

Budget Income Statement
For the Year 2007

C12 D57 Total

Sales (part 1) $1,800,000 $1,980,000 $3,780,000
Cost of goods sold (part 6) 1,125,600 1,221,300 2,346,900
Gross profit $674,400 $758,700 $1,433,100
Selling and administrative expenses (part 7) $645,000
Pre-tax operating income $788,100
Income taxes (@40%) $315,240
After-tax operating income $472,860

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-19 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-56 (Continued-5)

Note to Student: An Excel spreadsheet solution file is embedded in this document.

You can open the spreadsheet object that follows by doing the following:

1. Right click anywhere in the worksheet area below.

2. Select Worksheet Object, then Open.
3. To return to the Word document, select File and then Close and return to...
while you are in the spreadsheet mode.

8-56 Spring Manufacturing Company

1. Sales Budget
Spring Manufacturing Company
Sales Budget
2007

C12 D57 Total

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 STUDENT SOLUTIONS MANUAL

8-58 Comprehensive Profit Plan with Kaizen (90 minutes, but much less if assigned
in conjunction with 8-56 and completed with an Excel spreadsheet)

1. Sales Budget

Spring Manufacturing Company

Sales Budget
2007

C12 D57 Total

Sales (in units) 12,000 9,000 21,000
x Selling Price Per Unit $150 $220
Total revenue $1,800,000 $1,980,000 $3,780,000

2. Production Budget

Spring Manufacturing Company

Production Budget
2007

C12 D57
Budgeted Sales (in units) 12,000 9,000
Plus: Desired finished goods ending inventory 300 200
Total units needed
12,300
9,200
Less: Beginning finished goods inventory 400 150
Budgeted Production (in units) 11,900 9,050

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-21 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-58 (Continued-1)

3. Direct Materials Purchases Budget (units and dollars)

Spring Manufacturing Company

Direct Materials Purchases Budget (units and dollars)
2007

C12 D57 Total

Raw Material (RM) 1:
Budgeted Production 11,900 9,050
Pounds per Unit x9 x7
RM 1 needed for production 107,100 63,350 170,450
Plus: Desired Ending Inventory (lbs.) 4,000
Total RM 1 needed (lbs.) 174,450
Less: Beginning inventory (lbs.) 3,000
Required purchases of RM 1 (lbs.) 171,450
Cost per pound $2.00
Budgeted purchases, RM 1 $342,900

Raw Material (RM) 2:

Budgeted Production 11,900 9,050
Pounds per Unit x0 x 3.6
RM 2 needed for production 0 32,580 32,580
Plus: Desired Ending Inventory (lbs.) 1,000
Total RM 2 needed (lbs.) 33,580
Less: Beginning inventory (lbs.) 1,500
Required purchases of RM 2 (lbs.) 32,080
Cost per pound $2.50
Budgeted purchases, RM 2 $80,200

Raw Material 3:
Budgeted Production 11,900 9,050
Pounds per Unit x 1.8 x 0.8
RM 3 needed for production 21,420 7,240 28,660
Plus: Desired Ending Inventory (lbs.) 1,500
Total RM 3 needed (lbs.) 30,160
Less: Beginning inventory (lbs.) 1,000
Required purchases of RM 3 (lbs.) 29,160
Cost per pound $0.50
Budgeted purchases, RM 3 $14,580

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-22 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-58 (Continued-2)

4. Direct Manufacturing Labor Budget

Spring Manufacturing Company

Direct Labor Budget
2007

C12 D57 Total

Budgeted production 11,900 9,050
Direct labor hours per unit x 1.5 x 2
Total direct labor hours needed 17,850 18,100 35,950
Hourly wage rate $30.00
Budgeted direct labor costs $1,078,500

5. Factory Overhead Budget

Spring Manufacturing Company

Factory Overhead Budget
2007

Original Variable OH Budget:

Indirect materials $10,000
Miscellaneous supplies and tools 5,000
Indirect labor 40,000
Payroll taxes and fringe benefits 250,000
Maintenance costs 10,080
Heat, light, and power 11,000
Total Variable Factory Overhead $326,080

Reduction Rate for Variable OH Costs 10.00%

Original Fixed OH, Excluding Depreciation:

Supervision $120,000
Maintenance costs 20,000
Heat, light, and power 43,420
Total Cash Fixed Factory Overhead $183,420
Depreciation 71,330
Total Original Fixed OH $254,750

Reduction Rate for Cash Fixed OH Costs = 5.00%

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-23 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-58 (Continued-3)

Budgeted Variable OH:

($326,080 x (1 - 0.10)) = $293,472
Budgeted Fixed OH:
Cash Charges = ($183,420 x (1 - 0.05)) = $174,249
Depreciation (same as last year) = $71,330
Total Budgeted Fixed OH = $245,579

6. Budgeted CGS and Ending Finished Goods Inventory Budget

Spring Manufacturing Company

Ending Finished Goods Inventory and Budgeted CGS
2007

C12 D57 Total

Sales volume 12,000 9,000 21,000
Cost per unit (Schedule 1 and 2) $86.39170 $113.38893
Cost of goods sold $1,036,700 $1,020,500 $2,057,200

Finished goods ending inventory 300 200

Cost per unit (Schedule 1 and 2) $86.39170 $113.38893
Budgeted ending inventories $25,918 $22,678 $48,596

Schedule 1: Cost per UnitProduct C12:

Inputs Cost
Cost Element Unit Input Cost Quantity Per Unit
RM-1 $2.00 9 $18.00
RM-3 $0.50 1.8 $0.90
Direct labor $30.00 1.5 $45.00
Variable factory OH ($293,472/35,950) $8.16334 1.5 $12.24501
Fixed factory OH ($245,579/35,950) $6.83113 1.5 $10.24669
Manufacturing cost per unit $86.39170

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-24 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-58 (Continued-4)

Schedule 2: Cost per UnitProduct D57:

Inputs Cost
Cost Element Unit Input Cost Quantity Per Unit
RM-1 $2.00 7 $14.00
RM-2 $2.50 3.6 $9.00
RM-3 $0.50 0.8 $0.40
Direct labor $30.00 2 $60.00
Variable factory OH ($293,472/35,950) $8.16334 2 $16.32668
Fixed factory OH ($245,579/35,950) $6.83113 2 $13.66225
Manufacturing cost per unit $113.38893

7. Selling and Administrative Expense Budget

Spring Manufacturing Company

Selling and Administrative Expense Budget
2007
Selling Expenses:
Advertising $60,000
Sales salaries 200,000
Travel and entertainment 60,000
Depreciation 5,000 $325,000
Administrative expenses:
Offices salaries $60,000
Executive salaries 250,000
Supplies 4,000
Depreciation 6,000 $320,000

Total selling and administrative expenses $645,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-25 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-58 (Continued-5)

8. Budgeted Income Statement

Spring Manufacturing Company

Budget Income Statement
For the Year 2007

C12 D57 Total

Sales (part 1) $1,800,000 $1,980,000 $3,780,000
Cost of goods sold (part 6) 1,036,700 1,020,500 2,057,200
Gross profit $763,300 $959,500 $1,722,800
Selling and administrative expenses (part 7) $645,000
Pre-tax operating income $1,077,800
Income taxes (@40%) $431,120
After-tax operating income $646,680

Answers:

1. The budgeted after-tax operating income with Kaizen is $646,680.

2. The immediate benefit is an increase of $173,820 in operating income, or 37% from

$472,860.

The firm is also likely benefit in the long-run from the reductions in materials, labor
hours, and factory overhead required in production. Decreases in consumption of
manufacturing elements reduce wear and tear of equipment and other facilities and
lessens the need for additional capital investments/replacements.

Note to Student: An Excel spreadsheet solution file is embedded in this document.

You can open this spreadsheet object that follows by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select Worksheet Object, then Open.
3. To return to the Word document, select File and then Close and return to...
while you are in the spreadsheet mode.

8-58 Spring Manufacturing Company

1. Budgeted Sales (units):

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-26 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-60 Sales budget and pro-forma financial statements (75 minutes)

1.
Original Budget Data

Sales (units):
Beginning inventory of finished goods (9/1/2007) 9,300
Estimated production for the 2007-8 fiscal year 162,000
Units available for sale 171,300
Planned ending finished goods inventory (8/31/2008) 3,300
Projected unit sales, 2007-8 fiscal year 168,000

Selling price/unit:

Projected Dollars of Sales

Selling Price/Unit =
Projected Unit Sales
$31,248,000
= = $186
168,000

a. & b. Revised sales volume--units and dollars:

Sales in units in the original budget (see above) 168,000
Increase in units of production (170,000 - 162,000)* + 8,000
Revised total salesunits 176,000
Selling price per unit (see above) x $ 186
Revised projected dollar-volume of net sales $32,736,000

*With no change in the ending finished goods inventory (3,300 units) the increase in
production is a result of the expected increase in sales.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-27 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-60 (Continued-1)

2.
Molid Company
Pro-Forma Statement of Cost of Goods Sold (Revised)
For the Year Ending August 31, 2008

Direct materials:
Materials inventory, 9/1/07 $ 1,360,000
Materials purchases 1 15,576,000
Materials available for use $16,936,000
Materials inventory, 8/31/08 2 1,709,400
Direct Materials used $15,226,600
Direct labor3 1,215,200
Factory overhead:
Indirect material 4 $ 1,522,660
General factory overhead 5 3,320,000 4,842,660
Cost of goods manufactured $21,284,460
Plus: Finished goods inventory, 9/1/07 (given) 1,169,000
Cost of goods available for sale $22,453,460
Less: Finished goods inventory, 8/31/08 6 413,169
Cost of goods sold $ 22,040,291
1
Supporting Calculations (units represent equivalent units of output):
37,500 units @ $88.00* = $ 3,300,000
45,000 units** @ $88.00 = 3,960,000
90,000 units @ $92.40***= 8,316,000
$15,576,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-28 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-60 (Continued-2)

*$3,300,000/37,500 units = $88.00

**Desired ending inventory of materials 18,500

Materials needed for production this year + 170,000
Total materials needed 188,500
Beginning inventory 16,000
Total materials purchases for the year 172,500
Less: Materials purchased in the 1st quarter 37,500
Materials yet to be purchased during the year 135,000
Number of remaining quarters 3
Materials to be purchased in each remaining quarter 45,000

***$88.00 x 1.05 = $92.40

2
18,500 units @ $92.40 = $1,709,400
3
Direct labor cost

170,000 units
$1,134,000 x = $1,190,000
162,000 units
45,000 units
$1,190,000 x x .08 = 25,200
170,000 units
$1,215,200

4
Indirect material:$15,226,600 x 0.10 = $1,522,660
5
General factory overhead:
Variable: $1,620,000 x (170,000units/162,000units) = $1,700,000
Fixed $3,240,000 x 1/2 = 1,620,000
Total $3,320,000
6
Average manufacturing cost/unit, 2007-8:
$21,284,460 /170,000 units = $125.2027
Ending finished goods inventory (units) x 3,300
Cost of ending finished goods inventory (FIFO basis) $ 413,169

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-29 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-60 (Continued-3)

3.
a. Savings in working capital from eliminating ending inventory:

Finished goods $ 413,169

Direct materials $92.40 x (18,500 100) = 1,700,160
Total savings $2,113,329

The firm can reduce the need for working capital by $2,113,329. The final net
savings depends on the cost of capital of the firm. At 10%, the company saves
financing costs of over $200,000 per year. The firm can save more than $211,333
per year if the cost of capital exceeds 10%. Note that this estimate refers to
financing (cost-of-capital-related) costs, not operating costs.

b. Yes. Under the assumption that the companys cost of capital is 10%, the economic
savings would represent about 4% of its current pre-tax operating income figure, as
shown below. Note that these savings put the company in an improved economic
position, although the formal accounting statements might not reflect this. As such,
this gives the instructor the opportunity to discuss with students the notion of
Economic Value Added (EVA) as alternative financial performance indicator to
conventional accounting income statements.

Molid Company
Pro-Forma Statement Income Statement
For the Year Ending August 31, 2008

Net sales (part 1b above) $32,736,000

Cost of goods sold (part 2 above) 22,040,291
Gross profit $10,695,709
Operating expenses (givensee text):
Marketing $3,200,000
General and administrative 2,200,000 5,400,000
Income from operations before income taxes $ 5,295,709

$211,333/$5,295,709 = 4%

c. In addition to financial terms, the firm needs to consider carefully, among other
items:
adequacy of the firm's equipment to support the new system
proficiency of the firm's accounting information system to handle the new system
support of vendors
acceptance of factory managers and production workers

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-30 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-62 Budgets for a Service Firm (50 Minutes)

1. The annual cash budget is presented on the next page.

2. Operating problems that Triple-F Health Club could experience include:

The cash contribution from lessons and classes will decrease because the
projected wage increase for lesson and class employees is significantly greater
than the projected increases in revenues (i.e., in additional volume). Last year,
the cash generated from these operations was $39,000 ($234,000 $195,000).
The 2009 projection is only $12,675 ($304,200 $291,525).
Operating expenses are increasing faster than revenues from membership fees.
Last year (2008), cash generated from regular operations was $91,000
[($355,000 + $2,000) ($461,000 $195,000)]. The 2009 projection is only
$92,482 [($402,215 + $2,667) ($603,925 $291,525)]. The increase in cash
from regular operations is projected to be about 4%, whereas these revenues
are projected to increase 13%.
Triple-F Health Club seems to have a cash-management problem. The club
does not generate enough cash from operations to meet its obligations. It may
not be able to meet expenditures for day-to-day operations if the trend
continues. To avoid cash crises, the club should prepare monthly cash budgets
to help cash management.
Non-operational payments are projected to use up virtually all of the cash
generated from operations. Given the recent declines in mortgage interest rates,
management should consider refinancing this debt to reduce this cash drain.

3. Jane Crowe's concern with regard to the Board's expansion goals is justified. The
2009 budget projections show only a minimal increase in the cash balance (i.e., an
increase of only $2,757). The total cash available is well short of the $60,000
annual additional cash needed for the land purchase. If the Board desires to
purchase the adjoining property, it is going to have to consider increases in fees,
refinancing existing debt, or other methods of financing the acquisition (such as
additional mortgage debt or membership bonds).

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-31 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-62 (continued)

TRIPLE-F HEALTH CLUB

Cash Budget
For the Year Ending October 31, 2009

Price
2008 Growth Increase 2009
Operating Cash Inflows:
Annual membership fees $355,000 3.0% 10.0% $402,215
Lesson and class fees 234,000 30.0% 304,200
Miscellaneous 2,000 33.33% 2,667
Total Operating Cash Inflows $591,000 $709,082

Operating Cash Outflows:

Managers salary and benefits $36,000 15.0% $41,400
Employee wages and benefits:
Regular employees 190,000 15.0% 218,500
Lesson and class employees 195,000 30.0% 15.0% 291,525
Towels and supplies 16,000 25.0% 20,000
Utilities (heat and lights) 22,000 25.0% 27,500
Miscellaneous 2,000 25.0% 2,500
Payoff of outstanding A/P N/A given 2,500
Total Operating Cash Outflows $461,000 $603,925

Net Operating Cash Flow $130,000 $102,400

Non-Operating Cash Outflows:

Payoff of equipment payable given $15,000
Mortgage principal given 30,000
Mortgage interest 32,400
Planned equipment purchases given 25,000
Total Non-Operating Cash Outflow $104,900

Net Cash Flow $2,757

Beginning Cash Balance (given) 7,300
Budgeted Ending Cash Balance $10,057
_______________
1
$360,000 x 0.09 = $32,400

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-32 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-64 Strategy, product life-cycle, and cash flow (25-30 minutes)

1. The development stage is generally characterized by large cash outflows and little
or no cash inflows. Expenditures for research and development, plant and
equipment, retooling, distribution, and promotion are required. During this stage, a
project or company normally generates losses and may require an infusion of
outside capital.

During the growth stage, sales and revenues rise rapidly. Significant cash inflows
are generally present; however, these may be offset in part or completely by cash
outflows to build production capacity and for growing inventories and receivables.
During this stage, manufacturing efficiencies will improve contribution margins as
volume increases.

During the maturity stage, net cash inflows are generally at an optimum. Production
capacity is in place and inventories and receivables should approach a steady
state. However, by this stage, competitors generally have entered the market
resulting in higher promotional costs to maintain market share. As a consequence,
margins may begin to decline.

During the decline stage, both sales volume and profits fall. Increased price
competition and the increased availability of alternative products will reduce
margins. The declining volume will generally increase the unit cost at the
manufacturing level. Sometimes, significant cash inflows can be generated from the
liquidation of inventories and other product-related assets.

2. The maturity stage, the period of optimum net cash inflows, is missing from Burke
Company's product cycle. The company must be able to generate or raise sufficient
cash to support R & D, capital investment, and promotional costs during the
development stages and depend on the growth stage for significant cash inflows.
This will require rapid improvement in manufacturing efficiencies and careful
investment in production facilities and inventories. In addition, inventory control is
extremely important in order to minimize cash investment and reduce potential
obsolescence.

3. The techniques that Devin Ward should consider to cope with Burke Company's
cash-management problems include:
careful, timely cash-flow projections and monitoring, matching the cash receipts
from products in the growth stage with the expenditures for products in the
development stage.
establishing good banking relationships and flexible lines of credit to facilitate
short-term borrowing needs.
aggressive accounts-receivable management.
tight control of materials purchasing and inventory management.
improved cost controls.
timely decisions on inventory liquidation as product life cycles near collapse.
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-33 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-34 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-66 Cash Budget (45-50 minutes)

Quarters
I II III IV Year
Cash balance, beginning $30,000 $38,000 $30,520 $30,770 $30,000
Plus: Cash receipts:
Collections from customers 425,000 437,000 479,480 460,000 1,801,480
Equipment disposal 0 0 0 5,000 5,000
Total cash available = (A) $455,000 $475,000 $510,000 $495,770 $1,836,480

Cash disbursements:
Raw material purchases $200,000 $220,000 $250,000 $270,000 $940,000
Payroll 117,000 120,000 115,000 122,000 474,000
S, G, & A expenses 60,000 62,000 58,000 64,000 244,000
Equipment purchase 20,000 30,000 30,000 0 80,000
Bond interest (@9%) 0 11,250 0 11,250 22,500
Bond sinking fund payment 0 20,000 0 0 20,000
Income taxes 20,000 21,000 25,000 18,000 84,000
Total cash disbursements, prior to financing = (B) $417,000 $484,250 $478,000 $485,250 $1,864,500
Plus: Minimum cash balance $30,000 $30,000 $30,000 $30,000 $30,000
Total cash needed = (C) $447,000 $514,250 $508,000 $515,250 $1,894,500

Excess cash (cash deficiency), prior to financing

(D) = (A) - (C) $8,000 ($39,250) $2,000 ($19,480) $(58,020)

Financing:
Short-term borrowing $0 $41,000 $0 $22,000 $63,000
Repayment (principal) $0 $0 $0 $0 $0
Interest (@12%) $0 ($1,230) ($1,230) ($1,890) ($4,350)
Total Effects of Financing = (E) $0 $39,770 ($1,230) $20,110 $58,650

Ending cash balance = (A) - (B) + (E) $38,000 $30,520 $30,770 $30,630 $30,63
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-35 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

8-68 Cash Budgeting; Sensitivity Analysis (50 Minutes)

1. Estimated Cash Receipts, April 2007:

April Cash Receipts:
April cash sales (25.0% x $425,000) = $106,250
April credit-card sales ($425,000 x 55% x 97%) = $226,738
Collection of accounts receivable:
From April Sales (20% x $425,000 x 25%) = $21,250
From March Sales ($400,000 x 20% x 45%) = $36,000
From February Sales ($550,000 x 20% x 27%) = $29,700
Total $419,938

2. Purchase Order for Hardware, executed January 25th (to be paid April 10th):

a) Number of units to be ordered:

Estimated Unit Sales, March = 90

Plus: Desired End. Inv., March (30% x 100) = 30
Total Needs (in Units) = 120
Less: Beg. Inv., March (30% x 90) = 27
Required Purchases (in Units) = 93

b) Cost of purchases:

Selling price per unit (e.g., $300,000/100 units) = $3,000

Estimated cost per unit (@65% of selling price) = $1,950
Total cost of purchases (93 units x $1,950/unit) = $181,350

Note that the cash outflow associated with these purchases will be 4/10/2007
(75 days after executing the purchase order).

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-36 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-68 (Continued-1)

3. Sensitivity Analysis: Three Senarios for March Sales and the CGS%

Estimated
SalesMarch CGS %

Optimistic Estimate = 100 60%

Base-line Estimate = 90 65%
Pessimistic Estimate = 80 70%

March
Cash
Sales Payment

Scenario (units) CGS % April 10th

1 100 60%
2 100 65%
3 100 70%
4 90 60%
5 90 65%
6 90 70%
7 80 60%
8 80 65%
9 80 70%

Maximum = $210,000
Minimum = $154,800
Range = $55,200

4. Monthly cash budgets are prepared by companies such as CompCity, Inc., in order to
plan for their cash needs This means identifying when both excess cash and cash
shortages may occur. A company needs to know when cash shortages will occur so
that prior arrangements can be made with lending institutions in order to have cash
available for borrowing when the company needs it. At the same time, a company
should be aware of when there is excess cash available for investment or repaying
Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-37 The McGraw-Hill Companies 2008
 STUDENT SOLUTIONS MANUAL

loans so that planned usage of the excess can be made.

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-38 The McGraw-Hill Companies, 2008
 STUDENT SOLUTIONS MANUAL

8-68 (Continued-2)

Sensitivity analysis, one type of which is illustrated in part (3) above, can be used to
help managers deal with uncertainties in the budgeting process. Sensitivity analysis
enables managers to examine how a budget would change in response to changes
in one or more underlying assumptions (such as sales volume level and CGS %). As
such, the process enables managers to monitor key assumptions and to make timely
adjustments to plans. In practice, management might view the base-line outcome as
the expected value prediction. It might define, subjectively, optimistic and
pessimistic values as those having a small probability, (e.g., 10% or less).

Note to Student: An Excel spreadsheet solution file for this assignment is

embedded below. You can open the spreadsheet object that follows by doing
the following:

1. Right click anywhere in the worksheet area below.

2. Select Worksheet Object, then Open.
3. To return to the Word document, select File and then Close and return
to... while you are in the spreadsheet mode.

8-68 Cash Budgeting; Sensitivity Analysis

Inputs
Hardware Hardware Software/Support Total
Sales (Units) Revenue Services Revenue Revenue
January 120 $360,000 $140,000 $500,000
February 130 $390,000 $160,000 $550,000

Blocher, Stout, Cokins, Chen, Cost Management, 4/e 8-39 The McGraw-Hill Companies 2008