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CHAPTER 6
MASTER BUDGET AND RESPONSIBILITY ACCOUNTING
6-1 What are the four elements of the budgeting cycle?
The budgeting cycle includes the following elements:
a. Planning the performance of the company as a whole as well as planning the
6-2 Define master budget.
The master budget expresses management’s operating and financial plans for a specified period
6-3 “Strategy, plans, and budgets are unrelated to one another.” Do you agree? Explain.
Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an
6-4 “Budgeted performance is a better criterion than past performance for judging managers.”
Do you agree? Explain.
We agree that budgeted performance is a better criterion than past performance for judging
6-5 “Production managers and marketing managers are like oil and water. They just don’t
mix.” How can a budget assist in reducing conflicts between these two areas?
Production and marketing traditionally have operated as relatively independent business
6-6 “Budgets meet the cost–benefit test. They force managers to act differently.” Do you
agree? Explain.
6-1
In many organizations, budgets impel managers to plan. Without budgets, managers drift from
6-7 Define rolling budget. Give an example.
A rolling budget, also called a continuous budget, is a budget or plan that is always available for
6-8 Outline the steps in preparing an operating budget.
The steps in preparing an operating budget are as follows:
1. Prepare the revenues budget.
6-9 “The sales forecast is the cornerstone for budgeting.” Why?
The sales forecast is typically the cornerstone for budgeting because production (and, hence,
6-10 How can sensitivity analysis be used to increase the benefits of budgeting?
How can sensitivity analysis be used to increase the benefits of budgeting?
6-11 Define Kaizen budgeting.
Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget
6-12 Describe how nonoutput-based cost drivers can be incorporated into budgeting.
Nonoutput-based cost drivers can be incorporated into budgeting by the use of activity-based
6-2
6-13 Explain how the choice of the type of responsibility center (cost, revenue, profit, or
investment) affects behavior.
The choice of the type of responsibility center determines what the manager is accountable for
6-14 What are some additional considerations that arise when budgeting in multinational
companies?
Budgeting in multinational companies may involve budgeting in several different foreign
currencies. Further, management accountants must translate operating performance into a single
6-15 “Cash budgets must be prepared before the operating income budget.” Do you agree?
Explain.
No. Cash budgets and operating income budgets must be prepared simultaneously. In preparing
their operating income budgets, companies want to avoid unnecessary idle cash and unexpected
6-16 Master budget. Which of the following statements is correct regarding the components
of the master budget?
a. The cash budget is used to create the capital budget.
SOLUTION
Master budget.
Choice "b" is correct. All of the operating budgets (like the sales budget, production budget,
6-3
Choice "a" is incorrect. The capital budget is used to create the cash budget.
Choice "c" is incorrect. The factory overhead budget is derived from the production budget.
6-17 Operating and financial budgets. Which of the following statements is correct regarding
the drivers of operating and financial budgets?
a. The sales budget will drive the cost of goods sold budget.
SOLUTION
Operating and financial budgets.
Choice "a" is correct. The sales (or revenues) budget is the primary driver of most components of
Choice "b" is incorrect. The units of production budget drives the budgets for direct materials,
Choice "c" is incorrect. The selling and administrative expense budget is separate from the
6-18 Production budget. Superior Industries sales budget shows quarterly sales for the next
year as follows: Quarter 1–10,000; Quarter 2–8,000; Quarter 3–12,000; Quarter 4–14,000.
Company policy is to have a target finished-goods inventory at the end of each quarter equal to
20% of the next quarter’s sales. Budgeted production for the second quarter of next year would
be:
SOLUTION
Production budget.
Choice "2" is correct. 8,800 units are the budgeted production for the second quarter.
The calculation proceeds with first determining the beginning inventory for the second quarter
6-4
Check:
Second Quarter
Beginning inventory (20% × 8,000) 1,600 units
6-19 Responsibility centers. Elmhurst Corporation is considering changes to its responsibility
accounting system. Which of the following statements is/are correct for a responsibility
accounting system.
I. In a cost center, managers are responsible for controlling costs but not revenue.
II. The idea behind responsibility accounting is that a manager should be held responsible for
those items that the manager can control to a significant extent.
III. To be effective, a good responsibility accounting system must help managers to plan and to
control.
IV.Costs that are allocated to a responsibility center are normally controllable by the
responsibility center manager.
1. I and II only are correct.
2. II and III only are correct.
3. I, II, and III are correct.
4. I, II and IV are correct.
SOLUTION
Responsibility centers.
Choice "3" is correct.
The question asks which of a series of statements is/are correct for a responsibility accounting
6-20 Cash budget. Mary Jacobs, the controller of the Jenks Company is working on Jenks’
cash budget for year 2. She has information on each of the following items:
6-5
I. Wages due to workers accrued as of December 31, year 1.
II. Limits on a line of credit that may be used to fund Jenks’ operations in year 2.
III. The balance in accounts payable as of December 31, year 1, from credit purchases made in
year 1.
Which of the items above should Jacobs take into account when building the cash budget for
year 2?
a. I, II b. I, III
c. II, III d. I, II, III
SOLUTION
Cash budget
Choice "d" is correct. All of the elements listed should be considered when building the cash
budget. Accrued wages will be factored into the determination of cash disbursements in year 2,
which is part of the cash budget. Financing budgets, a component of the cash budget, cover how
6-21 Sales budget, service setting. In 2017, Hart & Sons, a small environmental-testing firm,
performed 11,400 radon tests for $260 each and 15,000 lead tests for $210 each. Because newer
homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 12%
next year. However, awareness of radon-related health hazards is expected to result in a 5%
increase in radon-test volume each year in the near future. Jim Hart feels that if he lowers his
price for lead testing to $200 per test, he will have to face only a 4% decline in lead-test sales in
2018.
Required:
1. Prepare a 2018 sales budget for Hart & Sons assuming that Hart holds prices at 2017 levels.
2. Prepare a 2018 sales budget for Hart & Sons assuming that Hart lowers the price of a lead test
to $200. Should Hart lower the price of a lead test in 2018 if the company’s goal is to
maximize sales revenue?
SOLUTION
(15 min.) Sales budget, service setting.
1.
Hart & Sons
2017
Volume
At 2017
Selling Prices
Expected 2018
Change in Volume
Expected 2018
Volume
Radon Tests 11,400 $260 + 5% 11,970
6-6
Hart & Sons Sales Budget
For the Year Ended December 31, 2018
Selling
Price
Units
Sold
Total
Revenues
Radon Tests $260 11,970 $3,112,200
2.
Hart & Sons
2017
Volume
Planned 2018
Selling Prices
Expected 2018
Change in Volume
Expected
2018 Volume
Hart & Sons Sales Budget
For the Year Ended December 31, 2018
Selling
Price Units Sold
Total
Revenues
Radon Tests $260 11,970 $3,112,200
Expected revenues at the new 2018 prices are $5,992,200, which is higher than the expected
6-22 Sales and production budget. The Coby Company expects sales in 2018 of 201,000
units of serving trays. Coby’s beginning inventory for 2018 is 13,000 trays, and its target ending
inventory is 29,000 trays. Compute the number of trays budgeted for production in 2018.
(5 min.) Sales and production budget.
Budgeted sales in units 201,000
Add target ending finished goods inventory 29,000
6-23 Direct material budget. Dawson Co. produces wine. The company expects to produce
2,535,000 two-liter bottles of Chablis in 2018. Dawson purchases empty glass bottles from an
outside vendor. Its target ending inventory of such bottles is 77,000; its beginning inventory is
54,000. For simplicity, ignore breakage. Compute the number of bottles to be purchased in 2018.
(5 min.) Direct materials purchases budget.
6-7
Direct materials to be used in production (bottles) 2,535,000
6-24 Material purchases budget. The McGrath Company has prepared a sales budget of
42,000 finished units for a 3-month period. The company has an inventory of 13,000 units of
finished goods on hand at December 31 and has a target finished-goods inventory of 15,000
units at the end of the succeeding quarter.
It takes 3 gallons of direct materials to make one unit of finished product. The company has
an inventory of 61,000 gallons of direct materials at December 31 and has a target ending
inventory of 53,000 gallons at the end of the succeeding quarter. How many gallons of direct
materials should McGrath Company purchase during the 3 months ending March 31?
(10 min.) Budgeting material purchases.
Production Budget:
Finished Goods
(units)
Budgeted sales 42,000
Direct Materials Purchases Budget:
Direct Materials
(in gallons)
Direct materials needed for production (44,000 3) 132,000
6-25 Revenues, production, and purchases budgets. The Yucatan Co. in Mexico has a
division that manufactures bicycles. Its budgeted sales for Model XG in 2018 are 95,000 units.
Yucatan’s target ending inventory is 7,000 units, and its beginning inventory is 11,000 units. The
company’s budgeted selling price to its distributors and dealers is 3,500 pesos per bicycle.
Yucatan buys all its wheels from an outside supplier. No defective wheels are accepted.
Yucatan’s needs for extra wheels for replacement parts are ordered by a separate division of the
company. The company’s target ending inventory is 14,000 wheels, and its beginning inventory
is 16,000 wheels. The budgeted purchase price is 400 pesos per wheel.
Required:
1. Compute the budgeted revenues in pesos.
6-8
2. Compute the number of bicycles that Yucatan should produce.
3. Compute the budgeted purchases of wheels in units and in pesos.
4. What actions can Yucatan’s managers take to reduce budgeted purchasing costs of wheels
assuming the same budgeted sales for Model XG?
SOLUTION
(15–20 min.) Revenues, production, and purchases budget.
1. 95,000 bicycles 3,500 pesos = 332,500,000 pesos
2. Budgeted sales (bicycles) 95,000
3. Direct materials to be used in production,
91,000 × 2 (wheels) 182,000
4. Nevertheless, Yucatan’s managers would want to check if the target ending inventory of
Furthermore, Yucatan could help improve quality, efficiency, and productivity of its
6-26 Revenues and production budget. Saphire, Inc., bottles and distributes mineral water
from the company’s natural springs in northern Oregon. Saphire markets two products: 12-ounce
disposable plastic bottles and 1-gallon reusable plastic containers.
Required:
1. For 2018, Saphire marketing managers project monthly sales of 500,000 12-ounce bottles
and 130,000 1-gallon containers. Average selling prices are estimated at $0.30 per
12-ounce bottle and $1.60 per 1-gallon container. Prepare a revenues budget for Saphire,
Inc., for the year ending December 31, 2018.
2. Saphire begins 2018 with 980,000 12-ounce bottles in inventory. The vice president of
operations requests that 12-ounce bottles ending inventory on December 31, 2018, be no less
than 660,000 bottles. Based on sales projections as budgeted previously, what is the
minimum number of 12-ounce bottles Saphire must produce during 2018?
6-9
3. The VP of operations requests that ending inventory of 1-gallon containers on December 31,
2018, be 300,000 units. If the production budget calls for Saphire to produce 1,200,000
1-gallon containers during 2018, what is the beginning inventory of 1-gallon containers on
January 1, 2018?
6-10
