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11.
Nonmanufacturing Costs Budget
For the Year Ending December 31, 2018
Variable Fixed Total
Marketing $21,150 $90,000 $111,150
12.
Budgeted Income Statement
For the Year Ending December 31, 2018
Revenue $528,000
Cost of goods sold 396,240
13. Preparing a budget helps Hazlett manage costs based on revenues and production needs,
look for opportunities to increase efficiencies, reduce costs, particularly in areas where costs are
6-45 Cash budget. (Continuation of 6-44) (Appendix)
Refer to the information in Problem 6-44.
All purchases made in a given month are paid for in the following month, and direct material
purchases make up all of the accounts payable balance and are reflected in the accounts payable
balances at the beginning and the end of the year.
Sales are made to customers with terms net 45 days. Fifty percent of a month’s sales are
collected in the month of the sale, 25% are collected in the month following the sale, and 25% are
collected two months after the sale and are reflected in the accounts receivables balances at the
beginning and the end of the year.
Direct manufacturing labor, variable manufacturing overhead and variable marketing costs
are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, 60% of fixed
marketing costs, and 100% of fixed distribution costs are depreciation expenses. The remaining
fixed manufacturing overhead and marketing costs are paid as they are incurred.
Selected balances for December 31, 2017, follow:
Selected budget information for December 2018 follows:
6-1
Hazlett has budgeted to purchase equipment costing $145,000 for cash during 2018. Hazlett
desires a minimum cash balance of $25,000. The company has a line of credit from which it may
borrow in increments of $1,000 at an interest rate of 12% per year. By special arrangement, with
the bank, Hazlett pays interest when repaying the principal, which only needs to be repaid in
2019.
Required:
1. Prepare a cash budget for 2018. If Hazlett must borrow cash to meet its desired ending cash
balance, show the amount that must be borrowed.
2. Does the cash budget for 2018 give Hazlett’s managers all of the information necessary to
manage cash in 2018? How might that be improved?
3. What insight does the cash budget give to Hazlett’s managers that the budgeted income
statement does not?
SOLUTION
Cash budget (Continuation of 6-44)
Cash Budget for 2018
Beginning cash balance $ 29,200
Add receipts:
Collections from customersa 519 ,500
Total cash available $ 548 ,700
Deduct disbursements:
6-2
2. The cash budget for 2018 does not show when during the year the equipment will be
3. Hazlett’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. Hazlett could be very profitable on an accrual
6-46 Budgeting and ethics. Jayzee Company manufactures a variety of products in a variety
of departments and evaluates departments and departmental managers by comparing actual cost
and output relative to the budget. Departmental managers help create the budgets and usually
provide information about input quantities for materials, labor, and overhead costs.
Kurt Jackson is the manager of the department that produces product Z. Kurt has estimated
these inputs for product Z:
The department produces about 100 units of product Z each day. Kurt’s department always gets
excellent evaluations, sometimes exceeding budgeted production quantities. For each 100 units
of product Z produced, the company uses, on average, about 48 hours of direct manufacturing
labor (eight people working 6 hours each), 790 pounds of material, and 39.5 machine-hours.
Top management of Jayzee Company has decided to implement budget standards that will
challenge the workers in each department, and it has asked Kurt to design more challenging input
standards for product Z. Kurt provides top management with the following input quantities:
Required:
Discuss the following:
1. Are these budget standards challenging for the department that produces product Z?
2. Why do you suppose Kurt picked these particular standards?
3. What steps can Jayzee Company’s top management take to make sure Kurt’s standards really
meet the goals of the firm?
6-3
SOLUTION
(15 min.) Budgeting and ethics.
1. The standards proposed by Kurt are not challenging. In fact, he set the target at the level his
department currently achieves.
2. Kurt probably chose these standards so that his department would be able to make the goal and
3. Top management should point out that the targets set by Kurt are targets that the department
6-47 Kaizen budgeting for carbon emissions. Apex Chemical Company currently operates
three manufacturing plants in Colorado, Utah, and Arizona. Annual carbon emissions for these
plants in the first quarter of 2018 are 125,000 metric tons per quarter (or 500,000 metric tons in
2018). Apex management is investigating improved manufacturing techniques that will reduce
annual carbon emissions to below 475,000 metric tons so that the company can meet
Environmental Protection Agency guidelines by 2019. Costs and benefits are as follows:
Total cost to reduce carbon emissions $10 per metric ton reduced in 2019 below 500,000
metric tons
Fine in 2019 if EPA guidelines are not met $300,000
Apex Management has chosen to use Kaizen budgeting to achieve its goal for carbon emissions.
Required:
1. If Apex reduces emissions by 1% each quarter, beginning with the second quarter of 2018,
will the company reach its goal of 475,000 metric tons by the end of 2019?
2. What would be the net financial cost or benefit of their plan? Ignore the time value of money.
3. What factors other than cost might weigh into Apex’s decision to carry out this plan?
SOLUTION
6-4
(30 min.) Kaizen budgeting for carbon emissions.
1. Yes, the company would achieve its goal. Total carbon emissions for 2019 are calculated in
the following table. Each quarter’s emissions are 99% of the previous quarter’s emissions since
Apex reduces emissions by 1% each quarter. Total emissions in 2019 would be 120,075 +
118,874 + 117,685 + 116,508 = 473,142 metric tons, which is below the Environmental
Protection Agency (EPA) guideline of 475,000 metric tons.
Quarter Quarterly Emissions
2018 Q1 125,000 metric tons
2018 Q2 123,750a metric tons
2. Apex’s emissions are below the EPA guideline of 475,000 metric tons. Consequently the
EPA will not assess Apex a fine of $300,000.
Current annual emissions 500,000 metric tons
Emissions in 2019 473,142 metric tons
Reduction in emissions 26,858 metric tons
3. While this plan would benefit Apex marginally by $31,420, avoidance of the EPA fine
should not be the company’s sole motivation in carrying out this plan. Reducing carbon
emissions is good for the environment, and will contribute to a smaller impact on climate
change. Research has shown that good environmental and sustainability practices has positive
effects on investors, consumers, and employees. Apex may also be able to share this plan with
the general population and gain favorable publicity. Apex may want to continue to reduce
carbon emissions if they have the technology to do so.
6-48 Comprehensive budgeting problem; activity-based costing, operating and financial
budgets. Tyva makes a very popular undyed cloth sandal in one style, but in Regular and
Deluxe. The Regular sandals have cloth soles and the Deluxe sandals have cloth-covered wooden
soles. Tyva is preparing its budget for June 2018 and has estimated sales based on past
experience.
Other information for the month of June follows:
6-5
Tyva accounts for direct materials using a FIFO cost-flow assumption.
Tyva uses a FIFO cost-flow assumption for finished-goods inventory.
All the sandals are made in batches of 50 pairs of sandals. Tyva incurs manufacturing
overhead costs, marketing and general administration, and shipping costs. Besides materials and
labor, manufacturing costs include setup, processing, and inspection costs. Tyva ships 40 pairs of
sandals per shipment. Tyva uses activity-based costing and has classified all overhead costs for
the month of June as shown in the following chart:
Required:
1. Prepare each of the following for June:
a. Revenues budget
b. Production budget in units
c. Direct material usage budget and direct material purchases budget in both units and
dollars; round to dollars
6-6
d. Direct manufacturing labor cost budget
e. Manufacturing overhead cost budgets for setup, processing, and inspection activities
f. Budgeted unit cost of ending finished-goods inventory and ending inventories budget
g. Cost of goods sold budget
h. Marketing and general administration and shipping costs budget
2. Tyva’s balance sheet for May 31 follows.
Use the balance sheet and the following information to prepare a cash budget for Tyva for June.
Round to dollars.
• All sales are on account; 60% are collected in the month of the sale, 38% are collected the
following month, and 2% are never collected and written off as bad debts.
• All purchases of materials are on account. Tyva pays for 80% of purchases in the month of
purchase and 20% in the following month.
3. Prepare a budgeted income statement for June and a budgeted balance sheet for Tyva as of June
30, 2018.
6-7
