SOLUTION
(15 min.) Responsibility of purchasing agent.
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
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
6-40 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:
Animal Gear accounts for direct materials using a FIFO cost-flow assumption.
6-1
Animal Gear uses a FIFO cost-flow assumption for finished-goods inventory.
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:
If necessary, round up to calculate number of batches.
Nonmanufacturing fixed costs for March equal $32,000, half of which are salaries. Salaries
are expected to increase 5% in April. Other nonmanufacturing fixed costs will remain the same.
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
7Cost 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?
SOLUTION
(60 min.) Comprehensive problem with ABC costing
1.
Revenue Budget
6-2
For the Month of April
Units Selling Price Total Revenues
Cat-allac 530 $205 $108,650
2.
Production Budget
For the Month of April
Product
Cat-allac Dog-eriffic
Budgeted unit sales 530 225
Add target ending finished goods
Deduct beginning finished goods
Units of finished goods to be
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
Cost Budget
Available from beginning direct materials inventory
(under a FIFO cost-flow assumption)
To be purchased this period
Plastic: (3,496 – 290) lbs.
´
$5 per lb.
Metal: (485 – 70) lbs.
´
$4 per lb.
6-3
Direct Material Purchases Budget
For the Month of April
Material
Plastic Metal Total
Physical Units Budget
To be used in production (requirement
Cost Budget
Plastic: 3,616 lbs.
´
$5
Metal: 486 lbs.
´
$4
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
5. Machine Setup Overhead
Cat-allac Dog-eriffic Total
Units to be produced 550 216
Units per batch ÷ 25 ÷9
´
Processing Overhead
Budgeted machine-hours (MH) = (11 MH per unit × 550 units) + (19 MH per unit × 216 units)
Budgeted processing costs = $10 per MH × 10,154 MH
6-4
Inspection Overhead
Manufacturing Overhead Budget
For the Month of April
Machine setup costs $ 7,875
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
Direct manufacturing
Ending Inventories Budget
April 30
Quantity Cost per unit Total
Direct Materials
Finished goods
6-5
7.
Cost of Goods Sold Budget
For the Month of April
Beginning finished goods inventory, April, 1 ($1,000 + $4,650) $ 5,650
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%)
9.
Budgeted Income Statement
For the Month of April
Operating (nonmanufacturing)
10. Animal Gear is making a loss and will need to increase revenues and manage costs to
turn around the business. Preparing a budget helps Animal Gear manage costs based on revenues
and production needs, look for opportunities to increase efficiencies, reduce costs, particularly in
6-6
6-41 Cash budget (continuation of 6-40). Refer to the information in Problem 6-40.
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.
AG currently has a $2,000 loan at an annual interest rate of 12%. The interest is paid at the
end of each month. If AG has more than $7,000 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
(25 min.) Cash budget (Continuation of 6-40) (Appendix)
Cash Budget
April 30
Cash balance, April 1 $ 5,900
Add receipts
Deduct cash disbursements
Financing
6-7
Note: The solution assumes that the loan is repaid. Some students may point out that the cash
balance at the end of April after the loan is paid is anticipated to be $6,341, which is less than
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
6-42 Comprehensive operating budget. Skulas, Inc., manufactures and sells snowboards.
Skulas manufactures a single model, the Pipex. In late 2017, Skulas’s management accountant
gathered the following data to prepare budgets for January 2018:
6-8
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 January 2018. Finally, there are $35,000 in fixed
nonmanufacturing costs budgeted for January 2018.
Other data include:
The inventoriable unit cost for ending finished-goods inventory on December 31, 2017, is
$374.80. Assume Skulas uses a FIFO inventory method for both direct materials and finished
goods. Ignore work in process in your calculations.
Required:
1. Prepare the January 2018 revenues budget (in dollars).
2. Prepare the January 2018 production budget (in units).
3. Prepare the direct material usage and purchases budgets for January 2018.
4. Prepare a direct manufacturing labor costs budget for January 2018.
5. Prepare a manufacturing overhead costs budget for January 2018.
6. What is the budgeted manufacturing overhead rate for January 2018?
7. What is the budgeted manufacturing overhead cost per output unit in January 2018?
8. Calculate the cost of a snowboard manufactured in January 2018.
9. Prepare an ending inventory budget for both direct materials and finished goods for January
2018.
10. Prepare a cost of goods sold budget for January 2018.
11. Prepare the budgeted income statement for Skulas, Inc., for January 2018.
12. What questions might the CEO ask the management team when reviewing the budget?
Should the CEO set stretch targets? Explain briefly.
13. How does preparing the budget help Skulas’s management team better manage the company?
SOLUTION
(60 min.) Comprehensive operating budget, budgeted balance sheet.
1. Schedule 1: Revenues Budget for January 2018
Snowboards 2,900 $650 $1,885,000
2. Schedule 2: Production Budget (in Units) for January 2018
Snowboards
Budgeted unit sales (Schedule 1) 2,900
6-9
3. Schedule 3A: Direct Materials Usage Budget for January 2018
Wood Fiberglass
Total
Physical Units Budget
Cost Budget
Available from beginning inventory
To be used from purchases this period
Schedule 3B: Direct Materials Purchases Budget for January 2018
Wood Fiberglass Total
Physical Units Budget
Production usage (from Schedule 3A) 23,400 26,000
Add target ending inventory 1 ,540 2 ,040
Cost Budget
6-10