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SOLUTION
(40 min.) Budget schedules for a manufacturer.
1a. Revenues Budget
Broncos
Blankets
Rams
Blankets Total
b. Production Budget in Units
Broncos
Blankets
Rams
Blankets
c. Direct Materials Usage Budget (units)
Red
wool
Black
wool
Broncos logo
patches
Rams logo
patches Total
Broncos blankets:
Rams blankets:
7. Total direct materials
Direct Materials Cost Budget
10. Cost of DM used from
11. Materials to be used from
13. Cost of DM purchased and
14. Direct materials to be used
6-1
Direct Materials Purchases Budget
Red wool
Black
wool
Bronco
s logos
Rams
logos Total
Budgeted usage
Add target ending
Total requirements 780 1,260 180 235
Deduct beginning inventory 40 20 50 65
d. Direct Manufacturing Labor Budget
Budgeted
Direct
Manuf. Labor-
Units Hours per Total Hourly
Produced Output Unit Hours Rate Total
Broncos blankets 150 4 600 $28 $16,800
e. Manufacturing Overhead Budget
f. Computation of unit costs of ending inventory of finished goods
Broncos
Blankets
Rams
Blankets
Direct materials
Manufacturing overhead
Ending Inventories Budget
6-2
Cost per Unit Units Total
Direct Materials
Red wool $ 11 30 $ 330
Finished Goods
g. Cost of goods sold budget
2. Areas where continuous improvement might be incorporated into the budgeting process:
(a) Direct materials. Either an improvement in usage or price could be budgeted. For
(b) Direct manufacturing labor. The budgeted usage of 4 hours/5 hours could be
(c) Variable manufacturing overhead. By budgeting more efficient use of the allocation
(d) Fixed manufacturing overhead. The approach here is to budget for reductions in the
6-36 Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA)
manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following:
6-3
Budgeted sales and selling price per unit are as follows:
USA has the opportunity to switch from using the dye it currently uses to using an
environmentally friendly dye that costs $1.25 per ounce. The company would still need 4 ounces
of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in
profit), but the Environmental Protection Agency has threatened to fine the company $130,000 if
it continues to use the harmful but less expensive dye.
Required:
1. Given the preceding information, would USA be better off financially by switching to the
environmentally friendly dye? (Assume all other costs would remain the same.)
2. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to
the new dye. The production manager suggests trying Kaizen costing. If USA can reduce
fabric and labor costs each by 1% per month on all the shirts it manufactures, by how much
will overall costs decrease at the end of 12 months? (Round to the nearest dollar for
calculating cost reductions.)
3. Refer to requirement 2. How could the reduction in material and labor costs be
accomplished? Are there any problems with this plan?
SOLUTION
(45 min.) Budgeted costs, Kaizen improvements.
1.
Increase in Costs for the Year
Assume US Apparel uses New Dye
Units to dye 50,000
Cost differential ($1.25 – $0.50) per ounce × 4 ounces × $3.00
Increase in costs $150,000
Because the fine is only $130,000, US Apparel would be financially better off by not switching.
1. If US Apparel switches to the new dye, costs will increase by $150,000.
6-4
Input Unit cost Number of units Total cost Annual cost
Fabric $6.00 5,000* $30,000 $360,000
Monthly decrease in costs
(calculated at 99% of previous month’s cost)
Fabric Labor cost
Month 1 $ 30,000 Month 1 $ 20,000
Month 2 29,700 Month 2 19,800
Month 3 29,403 Month 3 19,602
Difference between costs with and without Kaizen improvements
This means costs increase a net amount of $150,000 – 31,916 = $118,084. With Kaizen, the cost
of using the higher cost dye is less than the $130,000 fine for using the harmful dye. US Apparel
would be better off by switching to the new dye.
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.
6-37 Revenue and production budgets. (CPA, adapted) The Chen Corporation manufactures
and sells two products: Thingone and Thingtwo. In July 2016, Chen’s budget department
gathered the following data to prepare budgets for 2017:
6-5
2017 Projected Sales
2017 Inventories in Units
Projected direct manufacturing labor requirements and rates for 2017 are:
Manufacturing overhead is allocated at the rate of $24 per direct manufacturing labor-hour.
Required:
Based on the preceding projections and budget requirements for Thingone and Thingtwo, prepare
the following budgets for 2017:
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, 2017 (in dollars)
8. What questions might the CEO ask the production manager when reviewing the production,
6-6
direct materials, and direct manufacturing labor budgets?
9. How does preparing a budget help Chen Corporation’s top management better manage the
company?
SOLUTION
(30–40 min.) Revenue and production budgets.
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. Chen Corporation
Revenues Budget for 2017
Units Price Total
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. Chen Corporation
Production Budget (in units) for 2017
Thingone Thingtwo
Budgeted sales in units 69,000 44,000
Add target finished goods inventories,
Deduct finished goods inventories,
4. Chen Corporation
Direct Materials Purchases Budget (in quantities) for 2017
Direct Materials
A B C
6-7
Direct materials to be used in production
• Thingone (budgeted production of 74,000
• Thingtwo (budgeted production of 45,000
5. Chen Corporation
Direct Materials Purchases Budget (in dollars) for 2017
Budgeted Expected
Purchases Purchase
(Units) Price per unit Total
6. Chen Corporation
Direct Manufacturing Labor Budget (in dollars) for 2017
Direct
Budgeted Manufacturing Rate
Production Labor-Hours Total per
(Units) per Unit Hours Hour Total
Thingone 74,000 4 296,000 $13 $3,848,000
7. Chen Corporation
Budgeted Finished Goods Inventory
at December 31, 2017
Thingone:
Direct materials costs:
A, 6 pounds × $13 $78
Direct manufacturing labor costs,
4 hours × $13 52
Manufacturing overhead costs at $24 per direct
manufacturing labor-hour (4 hours × $24) 96
Thingtwo:
6-8
Direct materials costs:
Direct manufacturing labor costs,
5 hours × $18 90
Manufacturing overhead costs at $24 per direct
Finished goods inventory of Thingtwo
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
9. Preparing a budget helps Chen Corporation manage costs based on revenues and
production needs, look for opportunities to increase efficiencies, reduce costs, particularly in
6-38 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 2017:
Smart Video Company Income Statement for the Year Ended December 31, 2017
(in thousands)
Smart Video’s management team is preparing the 2018 budget and is studying the following
information:
6-9
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
2017.
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 2017 levels.
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, 2018.
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
(30 min.) Budgeted income statement.
1.
Smart Video Company
Budgeted Income Statement for 2017
(in thousands)
Revenues
Equipment ($8,000 × 1.06 × 1.10) $9,328
Maintenance contracts ($1,900 × 1.06) 2 ,014
Operating costs:
6-10
2. The budget aligns with Videocom’s key strategy of customer satisfaction through
3. Preparing a budget helps Videocom manage costs based on revenues and production
6-39 Responsibility in a restaurant. 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 2018, 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?
6-11
