Chapter 14 Planning for Profit and Cost Control
14-1
Answers to Questions
1. Budgets are useful for large companies with complex activities as well as small
companies. Budgets act as a vehicle for communication by formalizing management’s
2. The budget represents the companywide plans stated in financial terms as to how to
coordinate operating activities to accomplish goals and objectives. Accordingly, its
the master budget.
3. The three levels of planning are as follows:
(1) Strategic planning – the long-run planning activities that address issues such as
overall company goals and objectives.
4. The span of time is the primary factor that distinguishes the three levels of planning
5. The perpetual budget has the advantage of keeping management involved in the budget
6. The primary advantages associated with budgeting are as follows:
Planning – formalizes management’s plans in a document that communicates company
objectives.
Corrective action – acts as an early warning system that promotes corrective action.
7. Budgeted amounts represent management’s expectations regarding how the firm as a
whole and individual departments within the firm should perform. By comparing
Chapter 14 Planning for Profit and Cost Control
14-2
8. Mr. Shilov’s failure with budgets seems to stem from his misunderstanding of the
human element. He states that “he made budgets.” Experience shows that, in general,
the budget and would be unmotivated to accomplish budget standards.
10. The sales forecast normally functions as the starting point for the development of the
master budget. Clearly, production and other related activities depend upon the level
of sales.
11. The cash budget is composed of three major components:
(1) Cash receipts – expected cash inflows from sales, sale of investments, and
borrowing activities, etc.
12. Determining the amount of the cash balance to include on the budgeted balance sheet is
an insignificant reason for preparing a cash budget. The real purpose of preparing a
cash budget is to enable a company to effectively manage its financing and investing
The pro forma income statement provides information about the expected profitability of the
company. The completion of this statement is dependent on the departmental operating
Chapter 14 Planning for Profit and Cost Control
14-3
13. The cash budget, like the pro forma statement of cash flows, provides information as to
Exercise 14-1
Ms. Weller appears to be a person with an attitude problem. She does not understand how to
involve her colleagues in the budgeting process. She degrades their input and uses the budget
as a tool for criticism. In so doing, Ms. Weller has failed to gain the support of upper-level
management. The attitudes of upper-level management will have a significant impact on the
change. Perhaps the most effective solution in this case is to replace Ms. Weller.
Exercise 14-2
a.
Sales Budget
January
February
March
Cash sales
$ 60,000
$ 66,000
$ 72,600
Sales on account
140,000
154,000
169,400
Total budgeted sales
$200,000
$220,000
$242,000
b. The amount of sales revenue appearing on the 1st quarter income statement is the sum of
Exercise 14-3
a.
Schedule of Cash Receipts
August
September
Current cash sales
$ 85,000
$ 90,000
Plus collections from accounts receivable
90,000
108,000
Total budgeted collections
$175,000
$198,000
b. The current month’s sales on account will be collected in the following month.
Exercise 14-4
a.
Chapter 14 Planning for Profit and Cost Control
14-4
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
East Div.
$150,000
$156,000
$162,240
$168,730*
West Div.
250,000
255,000
260,100
265,302
South Div.
200,000
210,000
220,500
231,525
Total
$600,000
$621,000
$642,840
$665,557
*Rounded
b.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Total
$600,000
$621,000
$642,840
$665,557
Exercise 14-5
a. Sales for January are expected to be $560,000 ($800,000 x 0.70)
Beginning accounts receivable balance
$120,000
January sales on account
560,000
Available for collection
680,000
Less: Ending accounts receivable balance
(82,000)
Cash collected
$598,000
b. It is reasonable to assume that sales will decline in January. Customers tend to buy
Exercise 14-6
Sales would likely be highest in late January or early February because of Valentine’s Day
sales. October may also produce higher sales due to buying for Halloween. Other holiday
seasons are also likely to boost sales. Accordingly, sales would be high in April for Easter, and
Exercise 14-7
a.
Inventory Purchases Budget
January
February
March
Budgeted cost of goods sold
$60,000
$ 64,000
$70,000
Plus: Desired ending inventory
6,400
7,000
8,000
Chapter 14 Planning for Profit and Cost Control
14-5
Total inventory needed
66,400
71,000
78,000
Less: Beginning inventory
6,000
6,400
7,000
Required purchases (on account)
$60,400
$ 64,600
$71,000
Exercise 14-7 (continued)
b. The amount of cost of goods sold appearing on the first quarter pro forma income
Exercise 14-8
a.
Schedule of Cash Payments for Inventory Purchases
April
May
June
Payment for current accounts payable
$126,000
$144,000
$171,000
Payment for previous accounts payable
8,000
14,000
16,000
Total budgeted payments for inventory
$134,000
$158,000
$187,000
b. Since 90% of the current purchases on account are paid in cash during the month of
Exercise 14-9
a. Budgeted cost goods sold for July is $420,000 ($400,000 x 1.05)
Ending inventory balance
$ 32,000
Budgeted cost of goods sold
420,000
Total inventory needed
452,000
Less: Beginning inventory balance
(30,000)
Budgeted purchases
$422,000
b.
June’s payables balance paid in July
$ 36,000
Cash paid for July purchases ($422,000 x 0.70)
295,400
Projected cash payments for July
$331,400
Exercise 14-10
a. An inventory purchases budget prepared with the sales manager’s estimate:
Chapter 14 Planning for Profit and Cost Control
14-6
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Sales
$450,000
$360,000
$320,000
$540,000
Cost of goods sold
$270,000
$216,000
$192,000
$324,000
Plus: Desired ending inventory
21,600
19,200
32,400
36,000
Total inventory needed
291,600
235,200
224,400
360,000
Less: Beginning inventory
30,000
21,600
19,200
22,440
Required purchases
$261,600
$213,600
$205,200
$337,560
b. An inventory purchases budget prepared with the marketing consultant’s estimate:
2nd Quarter
3rd Quarter
4th Quarter
Sales
$480,000
$420,000
$700,000
Cost of goods sold
$288,000
$252,000
420,000
Plus: Desired ending inventory
25,200
42,000
36,000
Total inventory needed
313,200
294,000
456,000
Less: Beginning inventory
28,800
25,200
42,000
Required purchases
$284,400
$268,800
$414,000
Exercise 14-11
a.
Schedule of Cash Payments for S&A Expenses
Oct.
Nov.
Dec.
Equipment lease expense
$7,500
$ 7,500
$ 7,500
Prior month’s salary expense, 100%
0
8,200
8,700
Cleaning supplies
2,800
2,730
3,066
Insurance premium
7,200
0
0
Rent
1,700
1,700
1,700
Miscellaneous expenses
700
700
700
Total payments for S&A expenses
$19,900
$20,830
$21,666
Depreciation is a noncash charge.
Exercise 14-11
b. Since salaries expense is paid in the month following the month it is incurred, the amount
Chapter 14 Planning for Profit and Cost Control
14-7
Exercise 14-12
a. Budgeted payments for January:
Sales commissions
$40,000
Rent
24,000
Miscellaneous
2,000
Total*
$66,000
*The amount of utilities is not included because the cash payment will be made in February.
b. The full $8,000 balance for the utilities charge will remain payable at the end of January.
a.
Cash Budget
July
August
September
Section 1: Cash receipts
Beginning cash balance
$ 50,000
$ 20,000
$ 20,000
Add cash receipts
180,000
200,000
240,600
Total cash available (a)
230,000
220,000
260,600
Sections 2: Cash Payments
For inventory purchases
165,500
140,230
174,152
For S&A expenses
54,500
60,560
61,432
For interest exp at 1% per month
0
1001
1092
Total budgeted disbursements (b)
220,000
200,890
235,693
Sections 3: Financing Activities
Cash surplus (shortage) (a – b=c)
10,000
19,110
24,907
Borrowing (repayment) (d–c)
10,000
890
(4,907)
Ending cash balance (d)
$ 20,000
$ 20,000
$ 20,000
b. Cash flow from operating activities is equal to total (i.e., sum of the monthly amounts)
Chapter 14 Planning for Profit and Cost Control
14-8
a.
Cash Collections
Collections from May’s receivables balance
$ 80,000
Collections from June’s credit sales ($500,000 x .80)
400,000
Cash sales from June
200,000
Total cash receipts
$680,000
Desired cash balance
30,000
Cash disbursements
660,000
Total cash needs
690,000
Cash shortage (amount needed to be borrowed)
$ 10,000
b. The interest expense for June is $0 because the loan is taken at the end of June.
Exercise 14-15
a. Pro forma income statement prepared with Mr. Meier’s estimate:
2nd Quarter
3rd Quarter
Total
Sales revenue
$216,000
$226,800
$918,000
Cost of goods sold
129,600
136,080
550,800
Gross profit
86,400
90,720
367,200
S. & Adm. expenses
21,600
22,680
91,800
Net income
$ 64,800
$ 68,040
$275,400
b. Pro forma income statement prepared with Ms. Odom‘s estimate:
2nd Quarter
3rd Quarter
Total
Sales revenue
$210,000
$220,500
$892,500
Cost of goods sold
126,000
132,300
535,500
Gross Profit
84,000
88,200
357,000
S & A expenses
21,000
22,050
89,250
Net income
$ 63,000
$ 66,150
$267,750
c. Forecasting is not likely to be 100% accurate. Therefore, different executive officers
within the same company may have different estimates about the future. In addition to
Chapter 14 Planning for Profit and Cost Control
14-9
Problem 14-16
a. Pro forma income statement assuming 5% growth:
Budget
Sales revenue
$2,100,000
Cost of goods sold
1,312,500
Gross profit
787,500
Selling & administrative expenses
472,500
Net income
$ 315,000
b. Pro forma income statement with 10% growth:
Actual Result
Sales revenue
$2,200,000
Cost of goods sold
1,375,000
Gross profit
825,000
Selling & administrative expenses
495,000
Net income
$ 330,000
c. Pro forma income statement assuming 15% growth:
Budget
Sales revenue
$2,300,000
Cost of goods sold
1,437,500
Gross profit
862,500
Selling & administrative expenses
517,500
Net income
$ 345,000
Chapter 14 Planning for Profit and Cost Control
Problem 14-16 (continued)
e. The process of participative budgeting is recommended. This process requires two-way
communication between the president and divisional vice presidents. Any disagreement
about the budget assumptions should be fully discussed and pros and cons well considered.
a.
Sales Budget
January
February
March
Total
Sales on account
$240,000
$252,000
$264,600
$756,600
c.
Schedule of Cash Receipts
January
February
March
Receipts from January sales
$168,000
Receipts from January sales
$ 48,000
Receipts from January sales
$ 24,000
Receipts from February sales
176,400
Receipts from February sales
50,400
Receipts from March sales
185,220
Total
$168,000
$224,400
$259,620
d.
Schedule of Cash Receipts
January
February
March
April
May
Receipts from January sales
$168,000
Receipts from January sales
$ 48,000
Receipts from January sales
$ 24,000
Receipts from February sales
176,400
Receipts from February sales
50,400
Receipts from February sales
$25,200
Receipts from March sales
185,220
Receipts from March sales
52,920
Receipts from March sales
$26,460
Chapter 14 Planning for Profit and Cost Control
14–11
Total
$168,000
$224,400
$259,620
$78,120
$26,460
The accounts receivable as of March 31, 2015 is equal to the amount due to be collected in
April and May from the first quarter sales, $104,580 ($78,120 + $26,460).
Problem 14-18
a.
Inventory Purchases Budget
April
May
June
Budgeted cost of goods sold
$75,000
$68,000
$60,000
Plus desired ending inventory
6,800
6,000
9,000
Inventory needed
81,800
74,000
69,000
Less beginning inventory
3,600
6,800
6,000
Required purchases (on account)
$78,200
$67,200
$63,000
c.
Schedule of Cash Payments
April
May
June
Payment of current accounts payable
$46,920
$40,320
$37,800
Payment of previous accounts payable
14,800
31,280
26,880
Total budgeted payments for inventory
$61,720
$71,600
$64,680
purchase, 40% will remain payable at the end of the month (i.e., $63,000 x .40 = $25,200).
Problem 14-19