Problem 7-24A (45 minutes)
1. a. The reasons that Marge Atkins and Pete Granger use budgetary slack
include the following:
• These employees are hedging against the unexpected (reducing
uncertainty/risk).
• The use of budgetary slack allows employees to exceed expectations
Problem 7-24A (continued)
2. The use of budgetary slack, particularly if it has a detrimental effect on
the company, may be unethical. In assessing the situation, the specific
standards contained in “Standards of Ethical Conduct for Management
Accountants” that should be considered are listed below.
Problem 7-25A (45 minutes)
1. Schedule of expected cash collections:
Month
July
August
September
Quarter
From accounts receivable:
May sales
$250,000 × 3% ………
$ 7,500
$ 7,500
June sales
$300,000 × 70% ……..
210,000
210,000
$300,000 × 3% ………
$ 9,000
9,000
From budgeted sales:
July sales
$400,000 × 25% ……..
100,000
100,000
$400,000 × 70% ……..
280,000
280,000
$400,000 × 3% ………
$ 12,000
12,000
August sales
$600,000 × 25% ……..
150,000
150,000
$600,000 × 70% ……..
420,000
420,000
September sales
$320,000 × 25% ……..
80,000
80,000
Total cash collections …….
$317,500
$439,000
$512,000
$1,268,500
Problem 7-25A (continued)
2. Cash budget:
Month
July
August
Septem-
ber
Quarter
Beginning cash balance ….
$ 44,500
$ 28,000
$ 23,000
$ 44,500
Add receipts:
Collections from
customers ………………
317,500
439,000
512,000
1,268,500
Total cash available ……….
362,000
467,000
535,000
1,313,000
Less cash disbursements:
Merchandise purchases ..
180,000
240,000
350,000
770,000
Salaries and wages ……..
45,000
50,000
40,000
135,000
Advertising ………………..
130,000
145,000
80,000
355,000
Rent payments …………..
9,000
9,000
9,000
27,000
Equipment purchases ….
10,000
0
0
10,000
Total cash disbursements .
374,000
444,000
479,000
1,297,000
Excess (deficiency) of
cash available over
disbursements ……………
(12,000)
23,000
56,000
16,000
Financing:
Borrowings ……………….
40,000
0
0
40,000
Repayments ………………
0
0
(40,000)
(40,000)
Interest ……………………
0
0
(1,200)
(1,200)
Total financing ……………..
40,000
0
(41,200)
(1,200)
Ending cash balance ……..
$ 28,000
$ 23,000
$ 14,800
$ 14,800
3. If the company needs a $20,000 minimum cash balance to start each
month, then the loan cannot be repaid in full by September 30. If the
Problem 7-26A (60 minutes)
1. a. Schedule of expected cash collections:
Next Year’s Quarter
First
Second
Third
Fourth
Total
Current year—Fourth quarter sales:
$200,000 × 33% …………………….
$ 66,000
$ 66,000
Next year—First quarter sales:
$300,000 × 65% …………………….
195,000
195,000
$300,000 × 33% …………………….
$ 99,000
99,000
Next year—Second quarter sales:
$400,000 × 65% …………………….
260,000
260,000
$400,000 × 33% …………………….
$132,000
132,000
Next year—Third quarter sales:
$500,000 × 65% …………………….
325,000
325,000
$500,000 × 33% …………………….
$165,000
165,000
Next year—Fourth quarter sales:
$200,000 × 65% …………………….
130,000
130,000
Total cash collections ………………….
$261,000
$359,000
$457,000
$295,000
$1,372,000
Problem 7-26A (continued)
b. Schedule of expected cash disbursements for merchandise purchases for next year:
Quarter
First
Second
Third
Fourth
Total
Current year—Fourth quarter purchases:
$126,000 × 20% ………………………….
$ 25,200
$ 25,200
Next year—First quarter purchases:
$186,000 × 80% ………………………….
148,800
148,800
$186,000 × 20% ………………………….
$ 37,200
37,200
Next year—Second quarter purchases:
$246,000 × 80% ………………………….
196,800
196,800
$246,000 × 20% ………………………….
$ 49,200
49,200
Next year—Third quarter purchases:
$305,000 × 80% ………………………….
244,000
244,000
$305,000 × 20% ………………………….
$ 61,000
61,000
Next year—Fourth quarter purchases:
$126,000 × 80% ………………………….
100,800
100,800
Total cash disbursements ………………….
$174,000
$234,000
$293,200
$161,800
$863,000
Problem 7-26A (continued)
2. Budgeted selling and administrative expenses for next year:
Quarter
First
Second
Third
Fourth
Year
Budgeted sales in dollars …………………
$300,000
$400,000
$500,000
$200,000
$1,400,000
Variable selling and administrative
expense rate …………………………..….
× 15%
× 15%
× 15%
× 15%
× 15%
Variable selling and administrative
expense …………………………………….
$45,000
$ 60,000
$ 75,000
$30,000
$210,000
Fixed selling and administrative
expenses ……………………………………
50,000
50,000
50,000
50,000
200,000
Total selling and administrative
expenses ……………………………………
95,000
110,000
125,000
80,000
410,000
Less depreciation …………………………..
20,000
20,000
20,000
20,000
80,000
Cash disbursements for selling and
administrative expenses ………………..
$75,000
$ 90,000
$105,000
$60,000
$330,000
Problem 7-26A (continued)
3. Cash budget for next year:
Quarter
First
Second
Third
Fourth
Year
Beginning cash balance ………….
$ 10,000
$ 12,000
$ 10,000
$ 10,800
$ 10,000
Add collections from customers .
261,000
359,000
457,000
295,000
1,372,000
Total cash available ……………….
271,000
371,000
467,000
305,800
1,382,000
Less cash disbursements:
Merchandise purchases ……….
174,000
234,000
293,200
161,800
863,000
Selling and administrative
expenses (above) …………….
75,000
90,000
105,000
60,000
330,000
Dividends …………………………
10,000
10,000
10,000
10,000
40,000
Land ………………………………..
––
75,000
48,000
––
123,000
Total cash disbursements ……….
259,000
409,000
456,200
231,800
1,356,000
Excess (deficiency) of cash
available over disbursements ..
12,000
(38,000)
10,800
74,000
26,000
Financing:
Borrowings ……………………….
0
48,000
0
0
48,000
Repayments ………………………
0
0
0
(48,000)
(48,000)
Interest
($48,000 × 2.5% × 3) ……..
0
0
0
(3,600)
(3,600)
Total financing ……………………..
0
48,000
0
(51,600)
(3,600)
Ending cash balance ……………..
$ 12,000
$ 10,000
$ 10,800
$ 22,400
$ 22,400
Problem 7-27A (120 minutes)
1. Schedule of expected cash collections:
April
May
June
Quarter
Cash sales ………………..
$36,000
*
$43,200
$54,000
$133,200
Credit sales1 ……………..
20,000
*
24,000
28,800
72,800
Total collections …………
$56,000
*
$67,200
$82,800
$206,000
2. Merchandise purchases budget:
April
May
June
Quarter
Budgeted cost of goods
sold1 ……………………….
$45,000
*
$ 54,000
*
$67,500
$166,500
Add desired ending
merchandise
inventory2 ………………..
43,200
*
54,000
28,800
*
28,800
Total needs …………………
88,200
*
108,000
96,300
195,300
Less beginning
merchandise inventory ..
36,000
*
43,200
54,000
36,000
Required purchases ………
$52,200
*
$ 64,800
$42,300
$159,300
April
May
June
Quarter
March purchases ………….
$21,750
*
$ 21,750
*
April purchases ……………
26,100
*
$26,100
*
52,200
*
May purchases …………….
32,400
$32,400
64,800
June purchases ……………
21,150
21,150
Total disbursements ……..
$47,850
*
$58,500
$53,550
$159,900
Problem 7-27A (continued)
3. Cash budget:
April
May
June
Quarter
Beginning cash balance .
$ 8,000
*
$ 4,350
$ 4,590
$ 8,000
Add collections from
customers ………………
56,000
*
67,200
82,800
206,000
Total cash available …….
64,000
*
71,550
87,390
214,000
Less cash
disbursements:
For inventory …………..
47,850
*
58,500
53,550
159,900
For expenses …………..
13,300
*
15,460
18,700
47,460
For equipment …………
1,500
*
0
0
1,500
Total cash
disbursements …………
62,650
*
73,960
72,250
208,860
Excess (deficiency) of
cash available over
disbursements …………
1,350
*
(2,410)
15,140
5,140
Financing:
Borrowings ……………..
3,000
7,000
0
10,000
Repayments ……………
0
0
(10,000)
(10,000)
Interest ($3,000 ×
1% × 3 + $7,000 ×
1% × 2) ………………
0
0
(230)
(230)
Total financing …………..
3,000
7,000
(10,230)
(230)
Ending cash balance ……
$ 4,350
$ 4,590
$ 4,910
$ 4,910
Problem 7-27A (continued)
4.
Shilow Company
Income Statement
For the Quarter Ended June 30
Sales ($60,000 + $72,000 + $90,000) …….
$222,000
Cost of goods sold:
Beginning inventory (Given) ……………….
$ 36,000
Add purchases (Part 2) ………………………
159,300
Goods available for sale ……………………..
195,300
Ending inventory (Part 2) …………………..
28,800
166,500
*
Gross margin ……………………………………..
55,500
Selling and administrative expenses:
Commissions (12% of sales) ……………….
26,640
Rent ($2,500 × 3) …………………………….
7,500
Depreciation ($900 × 3) …………………….
2,700
Other expenses (6% of sales) ……………..
13,320
50,160
Net operating income ………………………….
5,340
Interest expense (Part 3) ……………………..
230
Net income ……………………………………….
$ 5,110
* A simpler computation would be: $222,000 × 75% = $166,500.
Problem 7-27A (continued)
5.
Shilow Company
Balance Sheet
June 30
Assets
Current assets:
Cash (Part 4) …………………………..………………………….
$ 4,910
Accounts receivable ($90,000 × 40%) ………………………
36,000
Inventory (Part 2) ………………………………………………..
28,800
Total current assets ………………………………………………..
69,710
Building and equipment—net
($120,000 + $1,500 – $2,700) ………………………………..
118,800
Total assets …………………………………………………………..
$188,510
Liabilities and Stockholders’ Equity
Accounts payable (Part 2: $42,300 × 50%) ..
$ 21,150
Stockholders’ equity:
Common stock (Given) ………………………..
$150,000
Retained earnings* …………………………….
17,360
167,360
Total liabilities and stockholders’ equity ……..
$188,510
*
Beginning retained earnings ………………..
$12,250
Add net income …………………………..…….
5,110
Ending retained earnings …………………….
$17,360
Problem 7-28A (60 minutes)
1. The sales budget for the third quarter:
Month
July
August
September
Quarter
Budgeted units sales …..
30,000
70,000
50,000
150,000
Selling price per unit …..
× $12
× $12
× $12
× $12
Budgeted sales ………….
$360,000
$840,000
$600,000
$1,800,000
$195,000
$234,000
Total cash collections ..
Budgeted unit sales ……………
20,000
1,500
Total needs ………………………
53,000
Required production in units…
18,500
Problem 7-28A (continued)
3. The direct materials budget for the third quarter:
July
August
September
Quarter
Required production in units of
finished goods ………………………..
36,000
67,000
45,500
148,500
Units of raw materials needed per
unit of finished goods ……………….
× 4
× 4
× 4
× 4
Units of raw materials needed to
meet production ……………………..
144,000
268,000
182,000
594,000
Add desired units of ending raw
materials inventory ………………….
134,000
91,000
37,000
37,000
Total units of raw materials
needed ………………………………….
278,000
359,000
219,000
631,000
Less units of beginning raw
materials inventory ………………….
72,000
134,000
91,000
72,000
Units of raw materials to be
purchased ……………………………..
206,000
225,000
128,000
559,000
Unit cost of raw materials ……………
× $0.80
× $0.80
× $0.80
× $0.80
Cost of raw materials to be
purchased ……………………………..
$164,800
$180,000
$102,400
$447,200
*18,500 units (October) × 4 feet per unit = 74,000 feet
74,000 feet × ½ = 37,000 feet
Problem 7-28A (continued)
3. The schedule of expected cash disbursements for materials purchases:
July
August
September
Quarter
Accounts payable,
June 30 ……………………
$ 76,000
$ 76,000
July purchases:
$164,800 × 50%, 50% .
82,400
$ 82,400
164,800
August purchases:
$180,000 × 50%, 50% .
90,000
$ 90,000
180,000
September purchases:
$102,400 × 50% ……….
51,200
51,200
Total cash disbursements .
$158,400
$172,400
$141,200
$472,000
Problem 7-29A (120 minutes)
1. Schedule of expected cash collections:
January
February
March
Quarter
Cash sales ………………..
$ 80,000
*
$120,000
$ 60,000
$ 260,000
Credit sales ………………
224,000
*
320,000
480,000
1,024,000
Total cash collections ….
$304,000
*
$440,000
$540,000
$1,284,000
2. a. Merchandise purchases budget:
January
February
March
Quarter
Budgeted cost of goods
sold1 ……………………..
$240,000
*
$360,000
*
$180,000
$780,000
Add desired ending
merchandise
inventory2 ……………….
90,000
*
45,000
30,000
30,000
Total needs ……………..
330,000
*
405,000
210,000
810,000
Less beginning
merchandise
inventory ………………..
60,000
*
90,000
45,000
60,000
Required purchases …….
$270,000
*
$315,000
$165,000
$750,000
* Given.
February
March
$ 93,000
*
$ 93,000
*
January purchases ..
135,000
*
$135,000
*
*
February purchases .
$157,500
March purchases …..
82,500
82,500
$228,000
*
$292,500
$240,000
$760,500
Problem 7-29A (continued)
3. Cash budget:
January
February
March
Quarter
Beginning cash balance …..
$ 48,000
*
$ 30,000
$ 30,800
$ 48,000
Add collections from
customers ………………….
304,000
*
440,000
540,000
1,284,000
Total cash available ………..
352,000
*
470,000
570,800
1,332,000
Less cash disbursements:
Inventory purchases …….
228,000
*
292,500
240,000
760,500
Selling and administrative
expenses …………………
129,000
*
145,000
121,000
395,000
Equipment purchases …..
0
1,700
84,500
86,200
Cash dividends ……………
45,000
*
0
0
45,000
Total cash disbursements ..
402,000
*
439,200
445,500
1,286,700
Excess (deficiency) of cash
available over
disbursements ……………
(50,000)
*
30,800
125,300
45,300
Financing:
Borrowings ………………..
80,000
0
0
80,000
Repayments ……………….
0
0
(80,000)
(80,000)
Interest
($80,000 × 1% × 3) ….
0
0
(2,400)
(2,400)
Total financing ………………
80,000
0
(82,400)
(2,400)
Ending cash balance ………
$ 30,000
$ 30,800
$ 42,900
$ 42,900
* Given.
Problem 7-29A (continued)
4. Income statement:
Hillyard Company
Income Statement
For the Quarter Ended March 31
Sales …………………………………………………
$1,300,000
Cost of goods sold:
Beginning inventory (Given) …………………
$ 60,000
Add purchases (Part 2) ………………………..
750,000
Goods available for sale ……………………….
810,000
Ending inventory (Part 2) …………………….
30,000
780,000
*
Gross margin ……………………………………….
520,000
Selling and administrative expenses:
Salaries and wages ($27,000 × 3) ………….
81,000
Advertising ($70,000 × 3)) …………………..
210,000
Shipping (5% of sales) ………………………..
65,000
Depreciation (given) …………………………...
42,000
Other expenses (3% of sales) ……………….
39,000
437,000
Net operating income …………………………...
83,000
Interest expense (Part 3) ……………………….
2,400
Net income …………………………………………
$ 80,600
* A simpler computation would be: $1,300,000 x 60% = $780,000.
Problem 7-29A (continued)
5. Balance sheet:
Hillyard Company
Balance Sheet
March 31
Assets
Current assets:
Cash (Part 4) …………………………..………………………….
$ 42,900
Accounts receivable (80% × $300,000) …………………….
240,000
Inventory (Part 2) ………………………………………………..
30,000
Total current assets ………………………………………………..
312,900
Buildings and equipment, net
($370,000 + $86,200 – $42,000) …………………………….
414,200
Total assets …………………………………………………………..
$727,100
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable (Part 2: 50% × $165,000) ..
$ 82,500
Stockholders’ equity:
Common stock ……………………………………….
$500,000
Retained earnings* …………………………………
144,600
644,600
Total liabilities and stockholders’ equity ………….
$727,100
*
Beginning retained earnings ……………..
$109,000
Add net income ………………………………
80,600
Total…………………………………………….
189,600
Deduct cash dividends ……………………..
45,000
Ending retained earnings ………………….
$144,600
© The McGraw-Hill Companies, Inc., 2016. All rights reserved.
60 Introduction to Managerial Accounting, 7th Edition
Ethics Challenge (75 minutes)
1. Stokes is using the budget as a club to pressure employees and as a
way to find someone to blame rather than as a legitimate planning and
2. The way in which the budget is being used is likely to breed hostility,
tension, mistrust, lack of respect, and actions designed to meet targets
3. As the old saying goes, Keri Kalani is “between a rock and a hard place.”
The Statement of Ethical Professional Practice established by the
Institute of Management Accountants states that management
accountants have a responsibility to “disclose all relevant information
that could reasonably be expected to influence an intended user’s