Chapter 5 – Planning and Forecasting
Case 5-39
a. Changes from base case in 5-38: decrease price, increase advertising, increase units sold
Affected budget components
All budgets affected
Net income impact
Income increases by $5,544 ($81,326 – $75,782)
Balance sheet impact
Accounts receivable increases by $5,025 due to higher
sales. By the end of the quarter, short-term debt is $2,000
less, though more cash had to be borrowed in April.
Increased initial borrowing caused interest expense to be
higher. Taxes payable and retained earnings are higher
due to increased net income.
Recommendation
A 7% increase in net income is a good result. Before
Klandon implements this strategy, though, she needs to
conduct sensitivity analysis, reducing the number of units
sold to determine the minimum increase in sales required
to break even on the price change.
Sales Budget
April
May
June
Quarter
Budgeted units sold
22,000
55,000
33,000
110,000
Budgeted sales price
× $ 9.70
× $ 9.70
× $ 9.70
× $ 9.70
Budgeted sales revenue
$213,400
$533,500
$320,100
$1,067,000
Solutions for Davis & Davis, Managerial Accounting, 2nd ed.
5-52
5-39a, continued
Selling and Administrative Expense Budget
April
May
June
Quarter
Depreciation
$10,000
$10,000
$10,800
$30,800
Sales personnel compensation
35,670
51,675
41,005
128,350
Advertising
2,000
2,000
2,000
6,000
Management salaries
10,000
10,000
10,000
30,000
Miscellaneous
500
500
500
1,500
Bad debts
10,670
26,675
16,005
53,350
Total budgeted expenses
$68,840
$100,850
$80,310
$250,000
Less non-cash expenses
Depreciation
$10,000
$10,000
$10,800
$30,800
Bad debts
10,670
26,675
16,005
53,350
Total cash costs
$48,170
$64,175
$53,505
$165,850
Production Budget
April
May
June
Quarter
Budgeted unit sales
22,000
55,000
33,000
110,000
+
Budgeted ending inventory
11,000
6,600
5,500
5,500
=
Total units required
33,000
61,600
38,500
115,500
–
Beginning inventory
4,000
11,000
6,600
4,000
=
Budgeted production
29,000
50,600
31,900
111,500
Chapter 5 – Planning and Forecasting
5-53
5-39a, continued
Materials Purchases Budget
April
May
June
Quarter
Budgeted production
29,000
50,600
31,900
111,500
×
Standard pounds per unit
5
5
5
5
=
Production needs
145,000
253,000
159,500
557,500
+
Budgeted ending inventory (pounds)
25,300
15,950
12,650
12,650
=
Total pounds required
170,300
268,950
172,150
570,150
–
Beginning inventory
13,000
25,300
15,950
13,000
=
Budgeted purchases (pounds)
157,300
243,650
156,200
557,150
×
Standard price per pound
$0.40
$0.40
$0.40
$0.40
=
Budgeted purchases cost
$62,920
$97,460
$62,480
$222,860
Direct Labor Budget
April
May
June
Quarter
Budgeted production
29,000
50,600
31,900
111,500
×
Standard DLH per unit
0.25
0.25
0.25
0.25
=
Total direct labor hours required
7,250
12,650
7,975
27,875
×
Standard wage rate
$10
$10
$10
$10
=
Budgeted direct labor cost
$72,500
$126,500
$79,750
$278,750
5-54
5-39a, continued
Manufacturing Overhead Budget
April
May
June
Quarter
Budgeted production
29,000
50,600
31,900
111,500
×
Variable overhead per unit
0.50
0.50
0.50
0.50
=
Total variable overhead
14,500
25,300
15,950
55,750
+
Fixed overhead
50,000
50,000
50,000
150,000
Total budgeted manufacturing overhead
64,500
75,300
65,950
205,750
Less: Non-cash items
Depreciation
8,000
8,000
8,000
24,000
=
Total cash costs
$56,500
$67,300
$57,950
$181,750
Chapter 5 – Planning and Forecasting
5-55
5-39a, continued
Raw Materials
Beginning balance
$5,200
Purchases of raw materials
222,860
Less: Ending raw materials inventory (12,650 lbs. $0.40)
5,060
Raw materials used
$223,000
Finished Goods
Unit costs:
Direct materials ($0.40/lb. × 5 lbs.)
$2.00
Direct labor ($10/DLH × .25 DLH)
2.50
Overhead ($50,000 × 12 months
400,000 bags + $0.50/bag)
2.00
Total standard unit cost
6.50
× Ending inventory units
5,500
Ending finished goods inventory
$35,750
Cost of Goods Sold
Beginning work in process inventory
$ 0
Direct materials used
223,000
Direct labor
278,750
Manufacturing overhead
205,750
Total manufacturing costs
707,500
Less: Ending work in process inventory
0
Cost of goods manufactured
707,500
Add: Beginning finished goods inventory
26,000
Less: Ending finished goods inventory
35,750
Cost of goods sold
$697,750
5-56
5-39a, continued
Cash Receipts Budget
April
May
June
Total
Cash Receipts
Bad Debts
Accounts
Receivable
March A/R
$30,000
$30,000
April sales
149,380
$53,350
202,730
$10,670
May sales
373,450
$133,375
506,825
26,675
June sales
224,070
224,070
16,005
$80,025
Totals
$179,380
$426,800
$357,445
$963,625
$53,350
$80,025
Cash Payments for Materials Budget
April
May
June
Total Cash
Payments
Accounts
Payable
A/P from March
$12,000
$ 12,000
April purchases
31,460
31,460
62,920
May purchases
48,730
$48,730
97,460
June purchases
31,240
31,240
$31,240
Total
$43,460
$80,190
$79,970
$203,620
$31,240
Chapter 5 – Planning and Forecasting
5-57
5-39a, continued
Cash Budget
April
May
June
Quarter
Beginning cash balance
$40,000
$30,750
$30,765
$40,000
Collections from sales
179,380
426,800
357,445
963,625
Total cash available to spend
219,380
457,550
388,210
1,003,625
Less disbursements
Materials purchases
43,460
80,190
79,970
203,620
Direct labor
72,500
126,500
79,750
278,750
Manufacturing overhead
56,500
67,300
57,950
181,750
Selling & administrative expenses
48,170
64,175
53,505
165,850
Income taxes
50,000
50,000
Equipment purchase
48,000
48,000
Dividends
49,000
49,000
Total cash disbursements
319,630
338,165
319,175
976,970
Cash excess (deficiency)
(100,250)
119,385
69,035
26,655
Minimum cash balance
30,000
30,000
30,000
30,000
Cash excess (needed)
(130,250)
89,385
39,035
(3,345)
Financing:
Borrowings
131,000
131,000
Repayments
(86,000)
(38,000)
(124,000)
Interest
(2,620)a
(450)a
(3,070)
Total financing
131,000
(88,620)
(38,450)
3,930
Ending cash balance
$30,750
$30,765
$30,585
$30,585
a$131,000 × 12% × 2
12 = $2,620, ($131,000 – $86,000) × 12% × 1
12 = $2,620 = $450
5-58
5-39a, continued
Income Statement for the quarter ended June 30
Sales
$1,067,000
Cost of goods sold
697,750
Gross profit
369,250
Selling and administrative expense
250,000
Operating income
119,250
Interest expense
3,070
Income before taxes
116,180
Income tax expense (30%)
34,854
Net income
$81,326
Balance Sheet as of 6/30
Cash
$30,585
Accounts receivable
80,025
Finished goods
35,750
Raw materials inventory
5,060
Property, plant & equipment
248,000
Less: Accumulated depreciation
(104,800)
Total Assets
$294,620
Accounts payable
$31,240
Income taxes payable
34,854
Short-term note payable
7,000
Common stock
52,000
Retained earnings
169,526
Total Liabilities and Equities
$294,620
Chapter 5 – Planning and Forecasting
5-39, continued
Affected budget components
Materials purchases budget, ending inventory & COGS
budget, payments for materials budget, cash budget, pro-
forma financial statements
Net income impact
Income increases by $4,613 ($80,395 – $75,782), primarily
driven by a decrease in COGS. Interest expense increases
a slight bit, as does income tax expense.
Balance sheet impact
Total assets don’t change by much. Finished goods
inventory decreases because of reduced materials cost, but
raw materials inventory increases since more materials
needs to be held. $2,000 in additional short-term borrowing
is required in April. But with the lower cash disbursements
in May and June, the ending note payable balance is $4,000
lower.
Recommendation
This alternative could be a good idea if Klandon can be
convinced that the lower quality rocks won’t result in a lower
quality finished product. It also requires a higher investment
in inventory.
5-60
5-39b, continued
Materials Purchases Budget
April
May
June
Quarter
Budgeted production
26,000
46,000
29,000
101,000
×
Standard pounds per unit
6
6
6
6
=
Production needs
156,000
276,000
174,000
606,000
+
Budgeted ending inventory (pounds)
41,400
26,100
20,700
20,700
=
Total pounds required
197,400
302,100
194,700
626,700
–
Beginning inventory
13,000
41,400
26,100
13,000
=
Budgeted purchases (pounds)
184,400
260,700
168,600
613,700
×
Standard price per pound
$0.32
$0.32
$0.32
$0.32
=
Budgeted purchases cost
$59,008
$83,424
$53,952
$196,384