13
Planning and Budgeting
Solutions to Review Questions
13–1.
Next period’s budget has more detail because it is closer in time than the longer-range
13–2.
13–3.
Answers will vary, but examples include:
13–4.
The master budget links long-term objectives and short-term, tactical plans.
Organization goals are broad-based statements of purpose. Strategic plans take the
broad-based statements and expresses them in terms of detailed steps needed to attain
13–5.
Because middle management has better knowledge about operations at lower levels in
the organization, and because budgets are usually used to evaluate performance or
13–6.
Budgeting aids in coordination in a number of ways. By relating sales forecasts to
production activities it is possible to reduce the likelihood of over– or under-production. It
13–7.
Participative budgeting is a process that uses inputs from lower- or middle-management
13–8.
13–9.
13–10.
Solutions to Critical Analysis and Discussion Questions
13–11.
13–12.
Answers will vary. Two possible reasons are (1) smaller firms have less of a “cushion”
13–13.
The earlier the budgeting process is started, the earlier the company will understand
13–14.
Because inventories would be eliminated, the timing of purchases would be closer to
13–15.
The purpose of tying spending to budgets is to ensure that the wishes of the legislature
13–16.
Planning communicates the goals of the organization and can be used to coordinate the
activities of different units in the organization. The control purpose of the budget is to
13–17.
It is common to start the budgeting process with a sales forecast because sales are
13–18.
In organizations where spending is literally tied to the budget, managers often spend
13–19.
A positive balance at the end of the budgeting period does not ensure that there is
13–20.
Answers will vary. Many people will submit a budget in excess of their best guess. Part
13–21.
Answers will vary. Some basic factors are the nature of the product and the nature of
the market. For products that are well established (mature), there might be enough data
Solutions to Exercises
13–22. (15 min.) Estimate Sales Revenues: Stubs-R-Us.
.80
=
market volume in the coming year (as a percent of last year)
.95
=
number of sales in the coming year (as a percent of last year)
13–23. (15 min.) Estimate Sales Revenues: Friendly Financial.
Portfolio
Amount
Interest
Rate
Income
(thousands)
Home equity loans ………………………………………
Securities …………………………………………………..
13–24. (15 min.) Estimate Sales Revenues: Larson, Inc.
Market size last year
=
85,000 units ÷ 0.2
= 425,000 units
Market size next year
=
1.15 x 425,000 units
Company share
=
16% x 488,750 units
=
78,200 units
13–25. (15 min.) Estimate Production Levels: Offenbach & Son.
Offenbach & Son
Production Budget
For the Year Ended December 31
(in units)
Expected sales revenue …………………………………………….
225,000
units
Less: Beginning inventory of finished goods …………………
13–26. (15 min.) Estimate Sales Levels Using Production Budgets: Sunset
Motors, Inc.
Sunset Motors, Inc.
Sales Budget
For the Year Ended December 31
(in units)
units
13–27. (15 min.) Estimate Inventory Levels Using Production Budgets: Flex-Tite.
Flex-Tite
Sales Budget
For the Year Ended December 31
(in units)
Expected sales ………………………………………………………………
900,000
units
Plus: Desired ending inventory (1/12 x 900,000 x 130%) ……..
units
13–28. (15 min.) Estimate Production Levels: Capacity Constraints: Waterloo,
Ltd..
a.
Waterloo Ltd.
Sales Budget
For the Year Ended December 31
(in units)
Expected sales …………………………………………………………
660,000
units
units
13–29. (15 min.) Estimate Production and Materials Requirements: Wyoming
Machines.
a.
Wyoming Machines
Casings Plant
Production Budget
For the Year Ended December 31
(in units)
Expected sales ……………………………………………………………………..
160,000
units
Add: Desired ending inventory of finished goods ……………………….
Total needs ………………………………………………………………………….
Less: Beginning inventory of finished goods ……………………………..
Units to be produced ……………………………………………………………..
units
b.
Wyoming Machines
Casings Plant
Direct Materials Requirements
For the Year Ended December 31
(in units)
Units to be produced ……………………………………………………………….
145,000
Direct materials needed per unit …………………………..…………………..
x 6
ounces
Total production needs (amount per unit times 145,000 units) ………
870,000
ounces
(2 months ÷ 12 months)
x 160,000 x 6 …………………………….
Total direct materials needs ……………………………………………………..
Less: Beginning inventory of materials ……………………………………….
Direct materials to be purchased……………………………………………….
ounces
=
Sales + EB
=
Usage + EB
(6 x 145,000) + (2 ÷ 12) x 160,000 x 6 oz.
13–30. (25 min.) Estimate Purchases And Cash Disbursements: Midland
Company.
a. and b. Midland Company
Merchandise Purchases Budget
For the Period Ended March 31
(in units)
January
February
March
Estimated sales revenue ……………………………..
12,400
17,800
13,200
Total merchandise needs ………………………….
57,600
57,800
44,200
Less: Beginning inventory …………………………….
45,200
Estimated cost per unit ………………………………..
13–31. (25 min.) Estimate Purchases And Cash Disbursements: Lakeside
Components.
a. Lakeside Components
Merchandise Purchase Budget
For the Period Ended July 31
(in units)
June
July
Estimated sales ………………………………………….
12,900
10,500
Total merchandise needs …………………………….
23,400
21,600
Merchandise to be purchased ……………………….
11,400
11,100
b. Payments for these purchases are made as follows:
Month of Delivery
Month of Payment
Total
May
June
July
June ………………………………………………………….
13–32. (15 min.) Estimate Cash Disbursements: Cascade, Ltd.
Cascade, Ltd.
Schedule of Cash Disbursements
For the Period Ended March 31
Payments for purchases prior to February …………………
$ 67,500
Payments for February purchases …………………………...
March purchases ……………………………………………………
Total cash disbursements ……………………………………….
13–33. (15 min.) Estimate Cash Collections: Minot Corporation.
Minot Corporation
Schedule of Cash Collections
For the Month Ended August 31
Collections in August for sales prior to July …………………..
$ 14,400
July sales ………………………………………………………………..
August sales ……………………………………………………………
13–34. (20 min.) Estimate Cash Collections: Ewing Company.
Ewing Company
Schedule of Cash Collections
For the Month Ended September 30
September
June sales ………………………………………………….
$ 5,700a
July sales …………………………………………………..
9,600b
August sales ………………………………………………
September sales …………………………………………
13–35. (30 min.) Estimate Cash Receipts: Scare-2-B-U.
a. Revenues are as follows:
April ………………………………………………………….
$18,000
=
75 occasions
x
$240
May …………………………………………………………..
=
45 occasions
x
$240
July …………………………………………………………..
=
60 occasions
x
$240
August ………………………………………………………
$18,000
=
75 occasions
x
$240
b. Cash receipts are as follows:
Scare-2-B-U
Multiperiod Schedule of Cash Receipts
Cash Receipts in Month of:
Total Cash
Receipts for
April
May
June
July
Period
April sales ………………………………………………….
$ 5,400a
$ 5,400
June sales………………………………………………….
July sales …………………………………………………..
2,880
September sales …………………………………………
_______
_____
7,920
7,920
13–36. (30 min.) Estimate Cash Receipts: Varmit-B-Gone.
Revenues are as follows:
March …..
$28,800
=
0.6 calls
x
600 subscribers
x
$80
April …….
50,400
=
0.9 calls
x
700 subscribers
x
$80
June …….
=
2.5 calls
x
x
$80
July ……..
=
3.0 calls
x
x
$80
Collections of these revenues are expected according to the following schedule:
Varmit-B-Gone
Multiperiod Schedule of Cash Receipts
Cash Receipts in Month of:
Total Cash
Receipts
May
June
July
August
for Period
March sales …………………………..………………….. ($15,000)
April sales …………………………………………………. ($27,000)
June sales…………………………………………………. ($187,500)
July sales ………………………………………………….. ($225,000)
13–37. (30 min.) Prepare Budgeted Financial Statements: Varmit-B-Gone.
Varmit-B-Gone
Budgeted Income Statement
For the Month of September
Calculations
Sales revenue …………………………………………….
$207,360
(90% x 1,500) x (80% x 2.4) x $80
Less service costs:
Variable costs ………………………………………….
$ 17,280
(.72a x $24,000)
Maintenance and repair …………………………….
(1.01 x $22,000)
Depreciation ……………………………………………
(no change)
Total service costs ………………………………………
Marketing and administrative:
Marketing (variable) …………………………………
(.72a x $14,500)
Administrative (fixed) ……………………………….
(1.05 x $55,000)
Total marketing and administrative costs ………..
Total costs ………………………………………………….
$149,690
13–38. (15 min.) Prepare Budgeted Financial Statements: Cycle-1
Cycle-1
Budgeted Income Statement
November
Calculations
Sales revenue (360 units @ $540/unit) ………….
$194,400
($180,000 x 1.20 x .90)
Less
Manufacturing costs:
Variable ……………………………………………….
Depreciation (fixed) ………………………………
(unchanged)
Total manufacturing costs …………………………….
Gross profit margin ………………………………………
Less:
Marketing and Administrative
Fixed costs (cash) ………………………………..
Depreciation (fixed) ………………………………
(unchanged)
Total marketing and administrative costs ………..
13–39. (15 min.) Prepare Budgeted Financial Statements: Carreras Café.
Carreras Café
Budgeted Income Statement
June
Calculations
($15 x 4,200 x 0.60 x 1.25)
Sales revenue
Less
Service costs:
Food ……………………………………………………
($16,800 x 0.60)
($5,750 x 0.60)
Fixed service costs ………………………………
(unchanged)
Total service costs ………………………………………
Gross profit margin ………………………………………
Less:
Marketing and Administrative
Marketing (variable) ……………………………..
Administrative ……………………………………..
(unchanged)
Total marketing and administrative costs ………..
13–40. (15 min.) Budgeting in a Service Organization: Executive Solutions.
Executive Solutions
Budgeted Income Statement
May and June
May
June
Revenues:
Managers (@ $900) …………………………...
$1,080,000
$675,000
Staff (@ $450) …………………………..……….
2,880,000
2,025,000
Total revenue ………………………………..
Manager compensation (@ $225) …………
$1,740,000
SG&A ……………………………………………….
Marketing ………………………………………….
$2,865,000
13–41. (15 min.) Budgeting in a Service Organization: Jolly Cleaners.
Jolly Cleaners
Budgeted Income Statement
April
April
Revenues:
Commercial (48 @ $1,400) ……………………………….
$67,200
(a)
Residential (176 @ $300) …………………………………
52,800
(b)
Total revenue ……………………………………………..
$120,000
Expenses:
Cleaner compensation (4,160 hours @ $15) ……….
(c)
(c)
SG&A …………………………………………………………….
30,000
(d)
Other expenses ……………………………………………….
(d)
Total expenses …………………………..……………….
13–42. (15 min.) Budgeting in a Service Organization: Solving for Unknown: Jolly
Cleaners.
The contribution margin for a residential client is:
The contribution margin for a commercial client is:
To check:
Jolly Cleaners
Budgeted Income Statement
July
July
Revenues:
Commercial (50 @ $1,400) ……………………………….
$70,000
(a)
Residential (170 @ $300) …………………………………
51,000
(b)
Total revenue ……………………………………………..
Expenses:
Cleaner compensation (4,200 hours @ $15) ……….
(c)
Supplies (4,200 hours @ $5) …………………………….
21,000
(c)
SG&A …………………………………………………………….
(d)
Other expenses ……………………………………………….
(d)
Total expenses …………………………..……………….
13–43. (15 min.) Incentives and Sales Forecasts—Ethical Issues: Northwest
Hardware.
a. One explanation is that Lloyd has better (more specific) local knowledge about
b. The first explanation is the same as in requirement (a); Lloyd has better information.
13–44. (15 min.) Budget Revisions—Ethical Issues: Galaxy Electronics.
a. Elizabeth is probably hoping that because the company is committed to the aircraft
guidance program, it will not cut funding for that program and she can protect the other
projects, including her favorite.
13–45. (15 min.) Sensitivity Analysis: Sanjana’s Sweet Shoppe.
The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown
in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the
13–46. (15 min.) Sensitivity Analysis: Classic Limo, Inc.
The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown
in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the
specific row number. For example, to enter the formula for gross margin for unit gross
Solutions to Problems
13–47. (30 min.) Prepare Budgeted Financial Statements: Pepper Products.
Pepper Products
Budgeted Income Statement
For Year 2
Calculations
Sales revenue …………………………………………….
$3,113,625a
$2,850,000 x 0.95 x 1.15
Manufacturing costs:
Materials …………………………………………………
$168,000 x 0.95 x 1.12
Other variable costs ………………………………….
$142,400 x 0.95 x 0.90
Fixed cash costs ………………………………………
$327,600 x 1.04
Depreciation (fixed) …………………………………
$999,000 (unchanged)
Total manufacturing costs …………………………….
Marketing and administrative costs:
Marketing (variable, cash) ………………………..
$422,400 x 0.95
Marketing depreciation ……………………………..
$149,600 (unchanged)
Administrative (fixed, cash) ……………………….
Administrative depreciation ……………………….
Total marketing and administrative costs ………..
Total costs ………………………………………………….
13–48. (10 min.) Estimate Cash from Operations: Pepper Products.
Pepper Products
Cash Basis Budgeted Income Statement
For Year 2
Sales revenue …………………………………………….
$3,113,625
Manufacturing costs (cash):
Materials …………………………………………………
$ 178,752
Other variable costs ………………………………….
Fixed cash costs ………………………………………
Total cash manufacturing costs……………………..
$ 641,208
Marketing and administrative costs:
Marketing (variable, cash) ………………………..
Administrative (fixed, cash) ……………………….
Total cash marketing and administrative costs ..
Total cash costs ………………………………………….
13–49. (30 min.) Prepare Budgeted Financial Statements: Gulf States
Manufacturing.
Gulf States Manufacturing
Budgeted Income Statement
For Year 2
Calculations
Sales revenue …………………………………………….
$2,781,000
$2,500,000 x 1.08 x 1.03
Manufacturing costs:
Materials …………………………………………………
$ 457,920
$400,000 x 1.08 x 1.06
Variable cash costs ………………………………….
$545,000 x 1.08 x 0.95
Fixed cash costs ………………………………………
$216,000 x 0.91
Depreciation (fixed) …………………………………
$267,000 – $29,100 + $42,000
Total manufacturing costs …………………………….
$1,493,550
Marketing and administrative costs:
Marketing (variable, cash) ………………………..
$285,000 x 1.08
Marketing depreciation ……………………………..
Administrative (fixed, cash) ……………………….
$270,300 x 1.10
Administrative depreciation ……………………….
Total marketing and administrative costs ………..
Total costs ………………………………………………….
13–50. (10 min.) Estimate Cash from Operations: Gulf States Manufacturing.
Gulf States Manufacturing
Cash Basis Budgeted Income Statement
For Year 2
Sales revenue …………………………………………….
$2,781,000
Manufacturing costs:
Materials …………………………………………………
$ 457,920
Variable cash costs ………………………………….
559,170
Fixed cash costs ………………………………………
Total manufacturing costs …………………………….
$1,213,650
Marketing and administrative costs:
Marketing (variable, cash) ………………………..
Administrative (fixed, cash) ……………………….
Total cash marketing and administrative costs ..
Total cash costs ………………………………………….
13–51. (25 min.) Prepare A Production Budget: EcoSacks.
EcoSacks
Production Budget
Coming Year
(in units)
Expected Sales ………………………………………………..
540,000
units
Add: Desired ending inventory of finished goods …..
210,000
Less: Beginning inventory of finished goods …………
120,000
Units to be produced …………………………………………
630,000
units
Alternative method:
First, compute the estimated production:
P
=
Sales + EB – BB
P
=
Sales + (210,000 – 120,000)
=
units
Next estimate the costs:
Direct materials
Cotton 630,000 x 1 yard x $4.00 x 1.20 …………..
$3,024,000
$5,670,000
Overhead:
Indirect labor ……………………………………………….
630,000 x $0.60
$ 378,000
Indirect materials …………………………………………
630,000 x $0.20
Equipment costs ………………………………………….
Building occupancy ……………………………………..
13–52. (25 min.) Prepare A Production Budget: Haggstrom, Inc.
Haggstrom, Inc.
Production Budget
Year 2
(in units)
Expected Sales ………………………………………………..
210,000
units
Add: Desired ending inventory of finished goods …..
Less: Beginning inventory of finished goods …………
Alternative method:
First, compute the estimated production:
P
=
Sales + EB – BB
P
=
Sales + (10,000 – 20,000)
=
units
Next estimate the costs:
Direct materials
Steel 200,000 x 3 pounds x $0.50 x 0.90 ………..
Alloy 200,000 x 0.5 pounds x $2.00 ……………….
Indirect materials …………………………………………
Indirect labor ……………………………………………….
Plant and equipment depreciation ………………….
Miscellaneous ……………………………………………..
©The McGraw-Hill Companies, Inc., 2017
Solutions Manual, Chapter 13 637
13–53. (25 min.) Sales Expense Budget: SPU, Ltd.
Budgeted
Item
January
Adjustments
Typical Month
Sales commissions ……………………………………..
$364,500
x
1.14 x 0.90
=
$373,977
Sales staff salaries ………………………………………
86,400
x
1.06
=
91,584
x
Building lease payment ………………………………..
=
Utilities ………………………………………………………
x
1.03
=
11,433
x
Depreciation ……………………………………………….
33,750
+
=
34,192
Marketing consultants …………………………..……..
+
$64,500
=
13–54. (30 min.) Budgeted Purchases And Cash Flows: Mast Corporation.
BB + P
=
Sales + EB
(120% x 11,900) + P
=
11,900 + (120% x 11,400)
=
11,900 + 13,680
=
11,900 + 13,680 – 14,280
=
11,300 units
BB + P
=
Sales + EB
(120% x 11,400) + P
=
11,400 + (120% x 12,000)
=
11,400 + 14,400
=
11,400 + 14,400 – 13,680
=
12,120 units
c. $691,896
x
13–54. (continued)
e. 49,040
13–55. (45 min.) Prepare Budgeted Financial Statements: HomeSuites.
It is useful to calculate some variable costs per night and property in Year 1:
Average variable labor cost per night:
For Year 2, the estimated number of nights is:
13–55. (continued)
13–56. (30 min.) Budgeted Purchases And Cash Flows: Home Suites.
a. Under the “High Price” strategy, the number of nights will be:
The estimated budget is:
13-56. (continued)
a. Under the “High Occupancy” strategy, the number of nights will be:
The estimated budget is:
13–56. (continued)
13–57. (40 min.) Comprehensive Budget Plan: Brighton, Inc.
a. (1)
Brighton, Inc.
Schedule Computing Production
Budget (Units)
For April, May, and June
April
May
June
Budgeted sales—Units ………………………………..
600,000
450,000
600,000
Total to be accounted for ……………………………..
690,000
570,000
720,000
Less inventory on hand at beginning of month ..
120,000
120,000
(2)
Schedule Computing Raw Materials Inventory
Purchase Budget (Pounds)
For April and May
April
May
Budgeted production—Pounds (1/4 lb. per Unit)a …..
142,500
120,000
Inventory required at end of monthb ……………………..
48,000
60,000
Total to be accounted for …………………………………….
13–57. (continued)
b.
Brighton, Inc.
Projected Income Statement
For the Month of May
Sales revenue (450,000 Units at $4) …………………………………
$1,800,000
Less: Cash discounts on Sales …………………………………………
$ 18,000
Estimated bad debts (1/2 percent of gross sales) ………………
9,000
27,000
Net Sales ………………………………………………………………………
$1,773,000
Fixed Cost …………………………………………………………………..
Gross profit on sales ………………………………………………………..
Expenses:
Selling (10 percent of gross sales) …………………………………
Administrative ($165,000 per month) ………………………………
Interest expense (.01 x $500,000) ………………………………….
13–58. (60 min.) Comprehensive Budget Plan: Panther Corporation
Panther Corporation
Budgeted Income Statement
(in thousands)
Actual
For the Year Ended
December 31,
(Year 1)
Budgeted
For the Year Ended
December 31,
(Year 2)
Revenue:
Sales revenue ………………………………………
Other income ……………………………………….
Total Revenue …………………………………..
Expenses:
Cost of goods manufactured &
sold:
Materials ……………………………………………..
$ 528,000
$ 852,000
Direct labor …………………………………………..
Variable overhead …………………………………
(Depreciation and other)……………………..
Beginning inventory ………………………………….
Ending inventory ………………………………………
Marketing:
Salaries …………………………..…………………..
Commissions ……………………………………….
Promotions and advertising…………………….
Administrative:
Salaries …………………………..…………………..
$ 56,000
$ 64,000
Travel ………………………………………………….
Office costs ………………………………………….
Total expenses ……………………………………..
13–58. (continued)
Panther Corporation
Budgeted Balance Sheet
(in thousands)
Budgeted
December 31,
Year 2
Current Assets
Cash ………………………………………………………
$ 4,800
Accounts receivable …………………………………
320,000
Inventory …………………………………………………
Income tax receivable ……………………………….
Total current assets ………………………………
$794,200
Plant and equipment ……………………………………
520,000
Less: Accumulated depreciation …………………
164,000
Total assets ………………………………………….
Current liabilities
Accounts payable …………………………………….
Accrued payable ………………………………………
Notes payable ………………………………………….
200,000
Total current liabilities …………………………...
$473,000
Shareholders’ equity
Common stock …………………………………………
280,000
Retained earnings ……………………………………
Total shareholders’ equity ………………………
13–58. (continued)
a Inventory
Units:
Added to inventory 450,000 – 400,000 …………..
units
Ending inventory …………………………..…………….
units
Cost:
Manufacturing costs …………………………………
$2,295,000
Units manufactured ………………………………….
Cost per unit ($2,295,000 450,000) …………
Ending units …………………………………………….
b Income tax:
Sales & other income …………………………………..
$2,436,000
Cost of goods sold ………………………………………
$2,028,000
Selling expense ………………………………………….
General & administrative expense …………………
Total cost………………………………………………..
$2,462,000
Tax loss …………………………………………………….
Tax rate …………………………………………………….
Cash revenue
Annual membership fees ……………………………..
$804,430
Solutions to Integrative Case
13–59. (40 min.) Prepare Cash Budget for Service Organization: Cortez Beach
Yacht Club.
The income statement is on a cash basis, hence we start with a budgeted income
statement.
a. Cortez Beach Yacht Club
Budgeted Statement of Income (Cash Basis)
For the Year 10
Cash costs
Manager’s salary and benefits ($72,000 x 1.15) ……………………………….
$ 82,800
Regular employees’ wages and benefits ($380,000 x 1.15) ……………….
437,000
Lesson and class employee wages and benefits (given) …………………….
Supplies ($32,000 x 1.25) ……………………………………………………………..
Utilities (heat and light) ($44,000 x 1.25) …………………………………………
Miscellaneous ($4,000 x 1.25) ……………………………………………………….
Total cash expenses ……………………………………………………….…………
Cash income …………………………………………………………………………………..
Additional Cash Flows
Cash payments:
Mortgage payment ………………………………………………………………………..
$ 60,000
Accounts payable balance at 10/31/Year 9 ………………………………………
Accounts payable on equipment at 10/31/Year 9 ………………………………
Planned new equipment purchase ………………………………………………….
Total cash payments ………………………………………………………………….
Cash inflows from income statement ………………………………………………….
150,513
Beginning cash balance (including petty cash) …………………………..………..
13-59. (continued)
b. Operating problems that Cortez Beach Yacht Club could experience in Year 10
include:
• The lessons and classes contribution to cash decreased because the projected
c. The manager’s concern with regard to the Board’s expansion goals is justified. The
Year 10 budget projections show only a minimal increase in the cash balance. The
total cash available is well short of the cash needed for the land purchase over and
