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CHAPTER 23
OPERATIONAL BUDGETIN
G
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 23.1 Budgeting philosophies 23-3 Analysis, judgment
B. Ex. 23.2 Cash flow at Body Builders 23-1, 23-5 Analysis, judgment
B. Ex. 23.3 Production budget 23-4 Analysis
B. Ex. 23.4 Estimating direct materials inventory 23-4 Analysis
B. Ex. 23.5 Benefits of budgeting 23-2 Analysis, communication,
judgment
B. Ex. 23.6 Elements of the budget 23-4, 23-5 Analysis
B. Ex. 23.7 Flexible budgets 23-6 Analysis
B. Ex. 23.8 Operating expense budget 23-4, 23-5 Analysis
B. Ex. 23.9 Cost of budgeting systems 23-2, 23-3 Analysis, communication,
judgment
B. Ex. 23.10 Evaluating managers with flexible budgets 23-6 Analysis, communication,
judgment
Learning
Exercises Topic Objectives Skills
23.1 Budgeting purchases and cash payments 23-4, 23-5 Analysis
23.2 Budgeting labor costs 23-4, 23-5 Analysis
23.3 Production budgets 23-4, 23-5 Analysis
23.4 Production and direct materials budget 23-4, 23-5 Analysis, judgment
23.5 Budgeting for prepayments 23-4, 23-5 Analysis
23.6 Budgeting for interest expense 23-4, 23-5 Analysis
23.7 Preparing a flexible overhead budget 23-6 Analysis
23.8 Budgeting cash receipts 23-4, 23-5 Analysis
23.9 Budgeting an ending cash balance 23-4, 23-5 Analysis
23.10 Preparing a flexible budget 23-6 Analysis
23.11 More on flexible budgeting 23-6 Analysis
23.12 Budget estimates 23-2, 23-3 Analysis, communication,
judgment
23.13 Budgeting manufacturing overhead 23-4, 23-5 Analysis
23.14 Establishing budget amounts 23-2, 23-3 Analysis, communication,
judgment
23.15 Real World: Home Depot’s budget goals 23-2, 23-3 Analysis, communication,
judgment, research
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Problems
Sets A, B Topic Learning
Objectives Skills
23.1 A,B Budgeting production, inventories, and cost
of sales 23-4, 23-5 Analysis
23.2 A,B Short budgeting problem 23-4, 23-5 Analysis
23.3 A,B Budgeting for cash 23-4, 23-5 Analysis
23.4 A,B Estimating borrowing requirements 23-1, 23-2,
23-4, 23-5 Analysis, communication,
judgment
23.5 A,B Budgeted income statement and cash budget 23-1, 23-2,
23-4, 23-5 Analysis, communication,
judgment
23.6 A,B Preparing a cash budget 23-1, 23-2,
23-4, 23-5 Analysis, communication,
judgment
23.7 A,B Preparing and using a flexible budget 23-2, 23-4 –
23-6 Analysis, communication,
judgment
23.8 A,B Flexible budgeting 23-2, 23-4 –
23-6 Analysis, communication,
judgment
Critical Thinking Cases
23.1 Budgeting in a nutshell 23-2, 23-5 Analysis, communication,
judgment
23.2 An ethical dilemma 23-1–23-3 Analysis, communication,
judgment
23.3 Cash budgeting 23-1, 23-2 Analysis,
communication, judgment
23.4 Real World: Medlin Accounting
Shareware
(Internet) Budgeting shareware
23-2, 23-6 Analysis, communication,
research, technology
23. 5 Budgeting and internal controls 23-4 Analysis,
(Ethics, fraud, and corporate governance) communication, judgment
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
Renfrow International/Frowren Domestic 25 Easy
Budget such quantities and amounts as the planned production of
finished goods, cost of goods manufactured, finished goods
inventory, and the cost of goods sold.
Lakeland Cor
p
oration/Harlow Cor
p
oration 20 Medium
Budget such quantities and amounts as the planned production of
finished goods, cost of goods manufactured, finished goods
inventory, and the cost of goods sold.
Barnum Distributors/Barle
y
, Inc. 50 Stron
g
Prepare a cash budget for one month.
Fromer Cor
p
oration/Peter Cor
p
oration 40 Stron
g
Analyze collection patterns for accounts receivable and accounts
p
ayable. Assess the company’s ability to generate adequate cash flow
to service additional debt.
Rizzo’s/Sn
y
der's 30 Stron
g
Analyze a budgeted income statement and a cash budget, and
determine why income recognition differs from cash flow.
23.6 A,B Marle
y
Wholesale/Marlow Industries 60 Stron
g
Prepare a monthly cash budget for three months in support of a loan
application. Determine whether a scheduled loan repayment can be
met at the end of the period.
23.7 A,B Snells/Ei
g
ht Fla
g
s 50 Medium
Prepare a statement comparing actual results with a flexible budget
and comment on the company’s performance.
23.8 A,B Braemar Saddler
y
/XL Industries 45 Medium
An excellent problem for demonstrating the importance of flexible
budgeting. Due to an increase in production, the production
department exceeds its budget by large amounts. The student is asked
to prepare a flexible budget showing that the company actually did
very well in controlling costs.
23.5 A,B
23.3 A,B
23.4 A,B
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
23.1 A,B
23.2 A,B
Critical Thinking Cases
23.1 Budgeting in a Nutshell 30 Medium
A short budgeting case that shows the interrelationships among
b
udgeted financial statements. but more importantly, it provides an
opportunity for students to review the relationships between cash
flows and accrual accounting. A real favorite.
23.2 An Ethical Dilemma 20 Medium
A company in need of bank financing has inflated its master
budget figures due to a large receivable with a questionable
likelihood of being collected. The company’s CPA is aware of the
problem and knows that if the company is denied credit, his
accounting firm will not be paid. Students must decide whether the
role of a CPA is to serve the client or to serve the client’s
creditors.
23.3 Cash Budgeting 20 Medium
The case describes six steps of cash budgeting for businesses and
individuals. Students are asked about strategies for managing cash
flows when inflows and outflows are mismatched. Students write a
paragraph explaining how a personal cash budget would help
them.
23.4 Budgeting Shareware 30 Medium
Internet
Student is asked to explore free software available on the Internet
to help companies with budgeting.
23.5 Budgeting and Internal Controls 30 Medium
Ethics, Fraud & Corporate Governance
Students trace an error due to an internal control weakness through
multiple budgets and consider how strong internal controls can
help prevent these errors.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
a. The process of preparing the budget forces management to consider all aspects of the
3.
5.
Planning is the process of setting financial and operational goals, including cost levels, and
deciding upon the actions that will achieve these goals. Exercising control over costs means
The most widely used budgeting “philosophy” is to set budgeted amounts at reasonable and
achievable levels. A second approach is to set these amounts at levels achievable only under
A business may expect to benefit from preparing a formal budget in several ways, including
(three required):
Responsibility budgets are subsections of the master budget showing only the business activities
that are under the control of a particular manager. In a large retail store, responsibility sales
6.
7.
8.
A flexible budget may be geared to any volume level and therefore can be based on the actual
(as distinguished from the planned) level of volume attained during a budget period. A thorough
If a budgeted expenditure can be directly influenced by the manager responsible for such an
expenditure, it is known as a controllable expenditure. Most variable expenses, for example, are
When companies undergo periods of rapid growth, increased demand for their products can
11.
12.
Expenses related to the expiration of prepaid items and depreciation are two expenses not
requiring cash outflows during the period of the budget.
Cash budget estimates and operating budget estimates can be very different because of timing
differences. Two obvious examples are depreciation and prepayments. In both of these cases the
B. Ex. 23.1
B. Ex. 23.2
B. Ex. 23.3
Q1 Q2 Q3
7,500 8,800 3,200
1,760 640 580
B. Ex. 23.4 Direct materials used during the period 12,000 lbs.
B. Ex. 23.5
Sandy’s Camping Gear
Budgeted Production
SOLUTIONS TO BRIEF EXERCISES
Q4
Renaldo’s is following the Total Quality Management approach of budgeting.
Under this approach the entire organization is committed to completely
The marketing manager’s plan to allow customers to delay payment until the
end of the quarter will create significant cash flow problems for Body Builders
The controller could acknowledge the costs of budgeting discussed by the
2,900
580
Expected sales
Plus: Desired ending
of tents
(4,000 pounds × 3) ………………………………………
…
B. Ex. 23.6 1. b, e
B. Ex. 23.7
B. Ex. 23.8
Bud
g
eted sales ……………………………………………………… $ 900,000
Variable sellin
g
and administrative costs ………………………… × 0.20
B. Ex. 23.9
B. Ex. 23.10
The variable cost per gallon can be found by finding the difference in total cost
between any two levels of production and dividing that cost difference by the
Because one half of selling and administrative costs are variable, then the
The managers’ complaints are realistic. Managers do consume large amounts of
The budget overage may have been caused by the expansion of the Dry Goods
Ex. 23.1 a. 264,000$ 85,000
SOLUTIONS TO EXERCISES
Direct materials budgeted for use during the year …………………
…
Add: Budgeted direct materials inventory at December 31 ………
…
