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6-1
SOLUTION
1.
Increase in Costs for the Year
Assume Trendy uses New Dye
Units to dye
60,000
Cost differential ($1.25 – $0.40) per ounce × 3 ounces
× $2.55
Increase in costs
$153,000
Because the fine is only $120,000, Trendy would be financially better off by not switching.
1. If Trendy switches to the new dye, costs will increase by $153,000.
If Trendy implements Kaizen costing, costs will be reduced as follows:
Original monthly costs
Input
Unit cost
Number of units
Total cost
Annual cost
Fabric
$7.00
6,000*
$42,000
$504,000
Labor
$3.50
6,000*
21,000
252,000
Total
$63,000
$756,000
* (12,000 + 60,000)/12 months = 6,000 units
Monthly decrease in costs
Fabric
Labor cost
Month 1
$ 42,000
Month 1
$ 21,000
Month 2
41,580
Month 2
20,790
Month 3
41,164
Month 3
20,582
Month 4
40,753
Month 4
20,376
Month 5
40,345
Month 5
20,173
Month 6
39,942
Month 6
19,971
Month 7
39,542
Month 7
19,771
Month 8
39,147
Month 8
19,573
Month 9
38,755
Month 9
19,378
Month 10
38,368
Month 10
19,184
Month 11
37,984
Month 11
18,992
Month 12
37,604
Month 12
18,802
$477,184
$238,592
$715,776
TOTAL
Difference between costs with and without Kaizen improvements
($756,000 – $715,776)
$ 40,224
This means costs increase a net amount of $153,000 – 40,224 = $112,776
6-2
3. Reduction in materials can be accomplished by reducing waste and scrap. Reduction in
direct labor can be accomplished by improving the efficiency of operations and decreasing down
time. Employees who make and dye the T-shirts may have suggestions for ways to do their
jobs more efficiently. For instance, employees may recommend process changes that reduce idle
time, setup time, and scrap. To motivate workers to improve efficiency, many companies have
set up programs that share productivity gains with the workers. Trendy must be careful that
productivity improvements and cost reductions do not in any way compromise product quality.
(CPA, adapted) The Sabat Corporation manufactures and sells two products: Thingone and
Thingtwo. In July 2013, Sabat’s budget department gathered the following data to prepare budgets
for 2014:
The following direct materials are used in the two products:
Projected data for 2014 for direct materials are:
6-3
Projected direct manufacturing labor requirements and rates for 2014 are:
Manufacturing overhead is allocated at the rate of $19 per direct manufacturing labor-hour.
Based on the preceding projections and budget requirements for Thingone and Thingtwo, prepare
the following budgets for 2014:
Required:
1. Revenues budget (in dollars)
2. What questions might the CEO ask the marketing manager when reviewing the revenues
budget? Explain briefly.
3. Production budget (in units)
4. Direct material purchases budget (in quantities)
5. Direct material purchases budget (in dollars)
6. Direct manufacturing labor budget (in dollars)
7. Budgeted finished goods inventory at December 31, 2014 (in dollars)
8. What questions might the CEO ask the production manager when reviewing the production,
direct materials, and direct manufacturing labor budgets?
9. How does preparing a budget help Sabat Corporation’s top management better manage the
company?
SOLUTION
This is a routine budgeting problem. The key to its solution is to compute the correct quantities of
finished goods and direct materials. Use the following general formula:
( )
Budgeted production
or purchases
=
( )
Target ending
inventory
+
( )
Budgeted sales or
materials used
–
( )
Beginning
inventory
1. Sabat Corporation
Revenues Budget for 2014
Units Price Total
Thingone 62,000 $172 $10,664,000
Thingtwo 46,000 264 12,144,000
Budgeted revenues $22,808,000
2. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the revenue
growing faster than the market? Should the company increase marketing and advertising spending
to grow sales? Would increasing the sales force or giving salespersons stronger incentives result
in higher sales?
3. Sabat Corporation
Production Budget (in units) for 2014
Thingone
Thingtwo
Budgeted sales in units
62,000
46,000
Add target finished goods inventories,
December 31, 2014
26,000
14,000
Total requirements
88,000
60,000
Deduct finished goods inventories,
January 1, 2014
21,000
13,000
Units to be produced
67,000
47,000
4. Sabat Corporation
Direct Materials Purchases Budget (in quantities) for 2014
Direct Materials
A
B
C
Direct materials to be used in production
• Thingone (budgeted production of 67,000
units times 5 lbs. of A, 3 lbs. of B)
335,000
201,000
--
• Thingtwo (budgeted production of 47,000
units times 6 lbs. of A, 4 lbs. of B, 2 lb. of C)
282,000
188,000
94,000
Total
617,000
389,000
94,000
Add target ending inventories, December 31, 2014
40,000
35,000
12,000
Total requirements in units
657,000
424,000
106,000
Deduct beginning inventories, January 1, 2012
37,000
32,000
10,000
Direct materials to be purchased (units)
620,000
392,000
96,000
5. Sabat Corporation
Direct Materials Purchases Budget (in dollars) for 2014
Budgeted
Expected
Purchases
Purchase
(Units)
Price per unit
Total
Direct material A
620,000
$11
$6,820,000
Direct material B
392,000
6
2,352,000
6-5
Direct material C
96,000
5
480,000
Budgeted purchases
$9,652,000
6. Sabat Corporation
Direct Manufacturing Labor Budget (in dollars) for 2014
Direct
Budgeted
Manufacturing
Rate
Production
Labor-Hours
Total
per
(Units)
per Unit
Hours
Hour
Total
Thingone
67,000
3
201,000
$11
$2,211,000
Thingtwo
47,000
4
188,000
14
2,632,000
Total
$4,843,000
7. Sabat Corporation
Budgeted Finished Goods Inventory
at December 31, 2014
Thingone:
Direct materials costs:
A, 5 pounds × $11 $55
B, 3 pounds × $6 18 $ 73
Direct manufacturing labor costs,
3 hours × $11 33
Manufacturing overhead costs at $19 per direct
manufacturing labor-hour (3 hours × $19) 57
Budgeted manufacturing costs per unit $163
Finished goods inventory of Thingone
$163 × 26,000 units $4,238,000
Thingtwo:
Direct materials costs:
A, 6 pounds × $11 $66
B, 4 pounds × $6 24
C, 2 each × $5 10 $100
Direct manufacturing labor costs,
4 hours × $14 56
Manufacturing overhead costs at $19 per direct
manufacturing labor-hour (4 hours × $19) 76
Budgeted manufacturing costs per unit $232
Finished goods inventory of Thingtwo
$232 × 14,000 units 3,248,000
Budgeted finished goods inventory, December 31, 2014 $7,486,000
8. The CEO would want to ask the production manager why the target ending inventories
have increased. Could production be more closely tailored to demand? Could the efficiency and
productivity of direct materials and direct manufacturing labor be increased? Could direct
materials inventory be reduced?
6-6
9. Preparing a budget helps Saadi Corporation manage costs based on revenues and production
needs, look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs
are high, coordinate and communicate across different parts of the organization, create a
framework for judging performance and facilitating learning, and motivate managers and
employees to achieve “stretch” targets of higher revenues and lower costs.
This is a routine budgeting problem. The key to its solution is to compute the correct quantities of
finished goods and direct materials. Use the following general formula:
( )
Budgeted production
or purchases
=
( )
Target ending
inventory
+
( )
Budgeted sales or
materials used
–
( )
Beginning
inventory
6-33 (30 min.) Budgeted income statement.
(CMA, adapted) Smart Video Company is a manufacturer of videoconferencing products.
Maintaining the videoconferencing equipment is an important area of customer satisfaction. A
recent downturn in the computer industry has caused the videoconferencing equipment segment
to suffer, leading to a decline in Smart Video’s financial performance. The following income
statement shows results for 2014:
Smart Video’s management team is preparing the 2015 budget and is studying the following
information:
1. Selling prices of equipment are expected to increase by 10% as the economic recovery begins.
The selling price of each maintenance contract is expected to remain unchanged from 2014.
2. Equipment sales in units are expected to increase by 6%, with a corresponding 6% growth in
units of maintenance contracts.
3. Cost of each unit sold is expected to increase by 5% to pay for the necessary technology and
quality improvements.
4. Marketing costs are expected to increase by $290,000, but administration costs are expected to
remain at 2014 levels.
6-7
5. Distribution costs vary in proportion to the number of units of equipment sold.
6. Two maintenance technicians are to be hired at a total cost of $160,000, which covers wages
and related travel costs. The objective is to improve customer service and shorten response
time.
7. There is no beginning or ending inventory of equipment.
Required:
1. Prepare a budgeted income statement for the year ending December 31, 2015.
2. How well does the budget align with Smart Video’s strategy?
3. How does preparing the budget help Smart Video’s management team better manage the
company?
SOLUTION
1. Smart Video Company
Budgeted Income Statement for 2014
(in thousands)
Revenues
Equipment ($8,000 × 1.06 × 1.10) $9,328
Maintenance contracts ($1,900 × 1.06) 2,014
Total revenues $11,342
Cost of goods sold ($4,000 × 1.06 × 1.05) 4,452
Gross margin 6,890
Operating costs:
Marketing costs ($630 + $290) 920
Distribution costs ($100 × 1.06) 106
Customer maintenance costs ($1,100 + $160) 1,260
Administrative costs 920
Total operating costs 3,206
Operating income $3,684
2. The budget aligns with Videocom’s key strategy of customer satisfaction through
maintaining videoconferencing equipment by hiring maintenance technicians and increasing
costs of customer maintenance by 14.55% ($160,000 ÷ $1,100,000) more than the 6% forecasted
increase in sales.
3. Preparing a budget helps Videocom manage costs based on revenues and production
needs, look for opportunities to increase efficiencies, reduce costs, particularly in areas where
costs are high, coordinate and communicate across different parts of the organization, create a
framework for judging performance and facilitating learning, and motivate managers and
employees to achieve “stretch” targets of higher revenues and lower costs.
6-34 (15 min.) Responsibility of purchasing agent.
6-8
Paula Beane owns a restaurant franchise that is part of a chain of “southern homestyle” restaurants.
One of the chain’s popular breakfast items is biscuits and gravy. Central Warehouse makes and
freezes the biscuit dough, which it then sells to the franchise stores where it is thawed and baked
in the individual stores by the cook. Each franchise also has a purchasing agent who orders the
biscuits (and other items) based on expected demand. In March 2015, one of the freezers in Central
Warehouse breaks down and biscuit production is reduced by 25% for 3 days. During those 3 days,
Paula’s franchise runs out of biscuits but demand does not slow down. Paula’s franchise cook,
Betty Baker, sends one of the kitchen helpers to the local grocery store to buy refrigerated ready-
to-bake biscuits. Although the customers are kept happy, the refrigerated biscuits cost Paula’s
franchise three times the cost of the Central Warehouse frozen biscuits, and the franchise loses
money on this item for those 3 days. Paula is angry with the purchasing agent for not ordering
enough biscuits to avoid running out of stock and with Betty for spending too much money on the
replacement biscuits.
Required:
Who is responsible for the cost of the biscuits? At what level is the cost controllable? Do you
agree that Paula should be angry with the purchasing agent? With Betty? Why or why not?
SOLUTION
The cost of the biscuits is usually the responsibility of the purchasing agent, and usually
controllable by the Central Warehouse. However, in this scenario, Betty the cook has taken the
responsibility for the cost of the replacement biscuits from the purchasing agent by making a
purchasing decision. Because Paula holds the purchasing agent responsible for biscuit costs, and
presuming that Betty knew this, Betty should have discussed her decision with the purchasing
agent before sending the kitchen helper to the store.
Paula should not be angry because her employees acted to satisfy the customers on a short-term
emergency basis. Presuming the Central Warehouse does not consistently have problems with
their freezer, there is no way the purchasing agent could foresee the biscuit shortage and plan
accordingly. Also, the problem only lasted three days, which, in the course of the year (or even
the month) will not seriously harm the profits of a restaurant that sells a variety of foods.
However, had they run out of biscuits for three days, this could have long-term implications for
customer satisfaction and customer loyalty, and in the long run could harm profits as customers
find other restaurants at which to eat breakfast.
6-35 (60 min.) Comprehensive problem with ABC costing
Animal Gear Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both
made of plastic with metal doors, but the Cat-allac is smaller. Information for the two products for
the month of April is given in the following tables:
6-9
Animal Gear accounts for direct materials using a FIFO cost flow assumption.
Animal Gear uses a FIFO cost flow assumption for finished goods inventory.
6-10
Animal Gear uses an activity-based costing system and classifies overhead into three activity
pools: Setup, Processing, and Inspection. Activity rates for these activities are $105 per setup-hour,
$10 per machine-hour, and $15 per inspection-hour, respectively. Other information follows:
Nonmanufacturing fixed costs for March equal $32,000, half of which are salaries. Salaries are
expected to increase 5% in April. The only variable nonmanufacturing cost is sales commission,
equal to 1% of sales revenue.
Prepare the following for April:
Required:
1. Revenues budget
2. Production budget in units
3. Direct material usage budget and direct material purchases budget
4. Direct manufacturing labor cost budget
5. Manufacturing overhead cost budgets for each of the three activities
6. Budgeted unit cost of ending finished goods inventory and ending inventories budget
7. Cost of goods sold budget
8. Nonmanufacturing costs budget
9. Budgeted income statement (ignore income taxes)
10. How does preparing the budget help Animal Gear’s management team better manage the
company?
