6-1
SOLUTION
1.
Revenue Budget
For the Month of April
Units
Selling Price
Total Revenues
Cat-allac
530
$205
$108,650
Dog-eriffic
225
310
69,750
Total
$178,400
2.
Production Budget
For the Month of April
Product
Cat-allac
Dog-eriffic
530
225
30
10
560
235
10
25
550
210
3.
Direct Material Usage Budget in Quantity and Dollars
For the Month of April
Material
Plastic
Metal
Total
Physical Units Budget
Direct materials required for
Cat-allac (550 units × 4 lbs. and 0.5 lb.)
2,200 lbs.
275 lbs.
Dog-eriffic (210 units × 6 lbs. and 1 lb.)
1,260 lbs.
210 lbs.
Total quantity of direct material to be used
3,460 lbs.
485 lbs.
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
Plastic: 290 lbs. × $3.80 per lb.
$ 1,102
Metal: 70 lbs. × $3.10 per lb.
$ 217
To be purchased this period
Plastic: (3,460 – 290) lbs.
$5 per lb.
15,850
Metal: (485 – 70) lbs.
$4 per lb.
_______
1,660
Direct materials to be used this period
$16,952
$1,877
$18,829
6-2
Direct Material Purchases Budget
For the Month of April
Material
Plastic
Metal
Total
Physical Units Budget
To be used in production (requirement 3)
3,460 lbs.
485 lbs.
Add target ending inventory
410 lbs.
65 lbs.
Total requirements
3,870 lbs.
550 lbs.
Deduct beginning inventory
290 lbs.
70 lbs.
Purchases to be made
3,580 lbs.
480 lbs.
Cost Budget
Plastic: 3,580 lbs.
$5
$17,900
Metal: 480 lbs.
$4
_______
$1,920
Purchases
$17,900
$1,920
$19,820
4.
Direct Manufacturing Labor Costs Budget
For the Month of April
Output Units
Produced
DMLH
Total
Hourly Wage
(requirement 2)
per Unit
Hours
Rate
Total
Cat-allac
550
3
1,650
$10
$16,500
Dog-eriffic
210
5
1,050
10
10,500
Total
$27,000
5. Machine Setup Overhead
Cat-allac
Dog-eriffic
Total
Units to be produced
550
210
Units per batch
÷ 25
÷9
Number of batches (rounded up)
22
24
Setup time per batch
×1.50 hrs.
×1.75 hrs.
Total setup time
33 hrs.
42 hrs.
75 hrs.
Budgeted machine setup costs = $105 per setup hour
75 hours
= $7,875
Processing Overhead
Budgeted machine-hours (MH) = (11 MH per unit × 550 units) + (19 MH per unit × 210 units)
= 6,050 MH + 3,990 MH = 10,040 MH
Budgeted processing costs = $10 per MH × 10,040 MH
= $100,400
Inspection Overhead
Budgeted inspection-hours = (0.5
22 batches) + (0.7
24 batches)
= 11 + 16.8 = 27.8 inspection hrs.
Budgeted inspection costs = $15 per inspection hr.
27.8 inspection hours
= $417
Manufacturing Overhead Budget
For the Month of April
Machine setup costs
$ 7,875
Processing costs
100,400
Inspection costs
417
Total costs
$108,692
6.
Unit Costs of Ending Finished Goods Inventory
April 30
Product
Cat-allac
Dog-eriffic
Cost per
Input per
Input per
Unit of
Input
Unit of
Output
Total
Unit of
Output
Total
Plastic
$ 5
4 lbs.
$ 20.00
6 lbs.
$ 30.00
Metal
4
0.5 lbs.
2.00
1 lb.
4.00
Direct manufacturing labor
10
3 hrs.
30.00
5 hrs.
50.00
Machine setup
105
0.06 hrs.1
6.30
0.2 hr1
21.00
Processing
10
11 MH
110.00
19 MH
190.00
Inspection
15
0.02 hr2
0.30
0.08 hr.2
1.20
Total
$168.60
$296.20
1 33 setup-hours ÷ 550 units = 0.06 hours per unit; 42 setup-hours ÷ 210 units = 0.2 hours per unit
2 11 inspection hours ÷ 550 units = 0.02 hours per unit; 16.8 inspection hours ÷ 210 units = 0.08 hours per unit
Ending Inventories Budget
April 30
Quantity
Cost per unit
Total
Direct Materials
Plastic
410
$ 5
$2,050
Metals
65
4
260
$ 2,310
Finished goods
Cat-allac
30
$168.60
$5,058
Dog-eriffic
10
296.20
2,962
8,020
Total ending inventory
$10,330
7.
Cost of Goods Sold Budget
For the Month of April
Beginning finished goods inventory, April, 1 ($1,000 + $4,650)
$ 5,650
Direct materials used (requirement 3)
$18,829
Direct manufacturing labor (requirement 4)
27,000
6-4
Manufacturing overhead (requirement 5)
108,692
Cost of goods manufactured
154,521
Cost of goods available for sale
160,171
Deduct: Ending finished goods inventory, April 30 (requirement 6)
8,020
Cost of goods sold
$152,151
8.
Nonmanufacturing Costs Budget
For the Month of April
Salaries ($32,000 ÷ 2
1.05)
$16,800
Other fixed costs ($32,000 ÷ 2)
16,000
Sales commissions ($178,400
1%)
1,784
Total nonmanufacturing costs
$34,584
9.
Budgeted Income Statement
For the Month of April
Revenues
$178,400
Cost of goods sold
152,151
Gross margin
26,249
Operating (nonmanufacturing) costs
34,584
Operating income
$ (8,335)
10. Preparing a budget helps Animal Gear 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 management and employees to
achieve “stretch” targets of higher revenues and lower costs.
6-36 (25 min.) Cash budget (Continuation of 6-35) (Appendix)
Refer to the information in Problem 6-35.
Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only to
the public and accepts cash and credit cards; 90% of its sales are to customers using credit cards,
for which AG gets the cash right away, less a 2% transaction fee.
Purchases of materials are on account. AG pays for half the purchases in the period of the
purchase and the other half in the following period. At the end of March, AG owes suppliers
$8,000.
AG plans to replace a machine in April at a net cash cost of $13,000.
Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month
incurred except of course depreciation, which is not a cash flow. Depreciation is $25,000 of the
manufacturing cost and $10,000 of the nonmanufacturing cost for April.
6-5
AG currently has a $2,000 loan at an annual interest rate of 24%. The interest is paid at the end
of each month. If AG has more than $10,000 cash at the end of April it will pay back the loan. AG
owes $5,000 in income taxes that need to be remitted in April. AG has cash of $5,900 on hand at
the end of March.
Required:
1. Prepare a cash budget for April for Animal Gear.
2. Why do Animal Gear’s managers prepare a cash budget in addition to the revenue, expenses,
and operating income budget?
SOLUTION
Cash Budget
April 30
Cash balance, April 1
$ 5,900
Add receipts
Cash sales ($178,400 × 10%)
17,840
Credit card sales ($178,400 × 90% × 98%)
157,349
Total cash available for needs (x)
$181,089
Deduct cash disbursements
Direct materials ($8,000 + $19,820 × 50%)
$ 17,910
Direct manufacturing labor
27,000
Manufacturing overhead ($108,692 ─ $25,000 depreciation)
83,692
Nonmanufacturing salaries
16,800
Sales commissions
1,784
Other nonmanufacturing fixed costs ($16,000 ─ $10,000 depreciation)
6,000
Machinery purchase
13,000
Income taxes
5,000
Total disbursements (y)
$171,186
Financing
Repayment of loan
$ 2,000
Interest at 24% ($2,000
24%
1
12
)
40
Total effects of financing (z)
$ 2,040
Ending cash balance, April 30 (x) ─ (y) ─ (z)
$ 7,863
Note: The solution assumes that the loan is repaid. Some students may point out that the cash
balance at the end of April is anticipated to be slightly less than $10,000 [$9,903 ($181,089 –
$171,186)], and so Animal Gear would not repay the loan. Under this assumption, the $2,000
repayment would not be shown.
2. Animal Gear’s managers prepare a cash budget in addition to the operating income budget
to plan cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and
pay operating expenses as these payments come due. Animal Gear could be very profitable on an
accrual accounting basis, but the pattern of cash receipts from revenues might be delayed and result
6-6
in insufficient cash being available to make scheduled payments for its expenses. Animal Gear’s
managers may then need to initiate a plan to borrow money to finance any shortfall. Building a
profitable operating plan does not guarantee that adequate cash will be available, so Animal Gear’s
managers need to prepare a cash budget in addition to an operating income budget.
6-37 (60 min.) Comprehensive operating budget, budgeted balance sheet.
Skulas, Inc., manufactures and sells snowboards. Skulas manufactures a single model, the Pipex.
In the summer of 2014, Skulas’ management accountant gathered the following data to prepare
budgets for 2015:
Skulas’ CEO expects to sell 2,900 snowboards during 2015 at an estimated retail price of $650 per
board. Further, the CEO expects 2015 beginning inventory of 500 snowboards and would like to
end 2015 with 200 snowboards in stock.
Variable manufacturing overhead is $7 per direct manufacturing labor-hour. There are also
$81,000 in fixed manufacturing overhead costs budgeted for 2015. Skulas combines both variable
and fixed manufacturing overhead into a single rate based on direct manufacturing labor-hours.
Variable marketing costs are allocated at the rate of $250 per sales visit. The marketing plan calls
for 38 sales visits during 2015. Finally, there are $35,000 in fixed nonmanufacturing costs
budgeted for 2015.
Other data include:
6-7
The inventoriable unit cost for ending finished goods inventory on December 31, 2014, is $374.80.
Assume Skulas uses a FIFO inventory method for both direct materials and finished goods. Ignore
work in process in your calculations.
Budgeted balances at December 31, 2014, in the selected accounts are as follows:
Required:
1. Prepare the 2015 revenues budget (in dollars).
2. Prepare the 2015 production budget (in units).
3. Prepare the direct material usage and purchases budgets for 2015.
4. Prepare a direct manufacturing labor budget for 2015.
5. Prepare a manufacturing overhead budget for 2015.
6. What is the budgeted manufacturing overhead rate for 2015?
7. What is the budgeted manufacturing overhead cost per output unit in 2015?
8. Calculate the cost of a snowboard manufactured in 2015.
9. Prepare an ending inventory budget for both direct materials and finished goods for 2015.
10. Prepare a cost of goods sold budget for 2015.
11. Prepare the budgeted income statement for Skulas, Inc., for the year ending December 31,
2015.
12. Prepare the budgeted balance sheet for Skulas, Inc., as of December 31, 2015.
13. What questions might the CEO ask the management team when reviewing the budget? Should
the CEO set stretch targets? Explain briefly.
14. How does preparing the budget help Skulas’ management team better manage the company?
SOLUTION
6-8
Note: There is a typo on page 241. The In some print version of the book, the budgeted
balances in the problem balance sheet items that appear just before the requirements are as
shown as balances for December 31, 2014. These balances are for December 31, 2015, and
not for December 31, 2014.
1. Schedule 1: Revenues Budget for the Year Ended December 31, 2015
Units Selling Price Total Revenues
Snowboards 2,900 $650 $1,885,000
2. Schedule 2: Production Budget (in Units) for the Year Ended December 31, 2015
Snowboards
Budgeted unit sales (Schedule 1) 2,900
Add target ending finished goods inventory 200
Total requirements 3,100
Deduct beginning finished goods inventory 500
Units to be produced 2,600
3. Schedule 3A: Direct Materials Usage Budget for the Year Ended December 31, 2015
Wood Fiberglass Total
Physical Units Budget
Wood: 2,600 × 9.00 b.f. 23,400
Fiberglass: 2,600 × 10.00 yards _______ 26,000
To be used in production 23,400 26,000
Cost Budget
Available from beginning inventory
Wood: 2,040 b.f. × $32.00 $ 65,280
Fiberglass: 1,040 b.f. × $8.00 $ 8,320
To be used from purchases this period
Wood: (23,400 – 2,040) × $34.00 726,240
Fiberglass: (26,000 – 1,040) × $9.00 ________ 224,640
Total cost of direct materials to be used $791,520 $232,960 $1,024,480
Schedule 3B: Direct Materials Purchases Budget for the Year Ended December 31, 2015
Wood Fiberglass Total
Physical Units Budget
Production usage (from Schedule 3A) 23,400 26,000
Add target ending inventory 1,540 2,040
Total requirements 24,940 28,040
Deduct beginning inventory 2,040 1,040
Purchases 22,900 27,000
Cost Budget
Wood: 22,900 × $34.00 $778,600
Fiberglass: 27,000 × $9.00 ________ $243,000
Purchases $778,600 $243,000 $1,021,600
4. Schedule 4: Direct Manufacturing Labor Budget for the Year Ended December 31, 2012
6-9
Labor Category
Cost Driver
Units
DML Hours per
Driver Unit
Total
Hours
Wage
Rate
Total
Manufacturing labor
2,600
5.00
13,000
$29.00
$377,000
5. Schedule 5: Manufacturing Overhead Budget for the Year Ended December 31, 2015
At Budgeted Level of 13,000
Direct Manufacturing Labor-Hours
Variable manufacturing overhead costs
($7.00 × 13,000) $ 91,000
Fixed manufacturing overhead costs 81,000
Total manufacturing overhead costs $172,000
6. Budgeted manufacturing overhead rate:
$172,000
13,000
= $13.23 per hour
7. Budgeted manufacturing overhead cost per output unit:
$172,000
2,600
= $66 per output unit
8. Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2015
Cost per
Unit of
Inputa Inputsb Total
Direct materials
Wood $34.00 9.00 $306.00
Fiberglass 9.00 10.00 90.00
Direct manufacturing labor 29.00 5.00 145.00
Total manufacturing overhead 66.00
$607.00
aCost is per board foot, yard, or per hour
bInputs is the amount of each input per board
9. Schedule 6B: Ending Inventories Budget, December 31, 2015
Cost per
Units Unit Total
Direct materials
Wood 1,540 $ 34.00 $ 52,360
Fiberglass 2,040 9.00 18,360
Finished goods
Snowboards 200 607.00 121,400
Total Ending Inventory $192,120
10. Schedule 7: Cost of Goods Sold Budget for the Year Ended December 31, 2015
From
Schedule Total
Beginning finished goods inventory
January 1, 2015, $374.80 × 500 Given $ 187,400
Direct materials used 3A $1,024,480
6-10
Direct manufacturing labor 4 377,000
Manufacturing overhead 5 172,000
Cost of goods manufactured 1,573,480
Cost of goods available for sale 1,760,880
Deduct ending finished goods
inventory, December 31, 2015 6B 121,400
Cost of goods sold $1,639,480
11. Budgeted Income Statement for Skulas for the Year Ended December 31, 2015
Revenues Schedule 1 $1,885,000
Cost of goods sold Schedule 7 1,639,480
Gross margin 245,520
Operating costs
Variable marketing costs ($250 × 38) $ 9,500
Fixed nonmanufacturing costs 35,000 44,500
Operating income $ 201,020
12. Budgeted Balance Sheet for Skulas as of December 31, 2015
Cash $ 14,000
Inventory Schedule 6B 192,120
Property, plant, and equipment (net) 854,000
Total assets $1,060,120
Current liabilities $ 21,000
Long-term liabilities 182,000
Stockholders’ equity 857,120
Total liabilities and stockholders’ equity $1,060,120
13. The CEO would want to probe if the revenue budget is sufficiently stretched. Is the
increase 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?
The CEO would want to ask the production manager if production could 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?
The CEO should set stretch targets that are challenging but achievable because creating
some performance anxiety motivates employees to exert extra effort and attain better
performance. A major rationale for stretch targets is the psychological motivation that comes
from loss aversion—people feel the pain of loss more than the joy of success. Setting challenging
targets motivates employees to reach these targets because failing to achieve a target is seen as
failing. At no point should the pressure for performance push employees to engage in illegal or
unethical practices. So, while setting stretch targets, the CEO must place great emphasis on
adhering to codes of conduct and following appropriate norms and values. The CEO should also
not set targets that are very difficult or impossible to achieve. Such targets demotivate employees
because they give up on trying to achieve them.
6-11
14. Preparing a budget helps Skulas 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 management and employees to achieve
“stretch” targets of higher revenues and lower costs.