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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)
13-23. (15 min.) Estimate Sales Revenues: Friendly Financial.
Portfolio
Amount
Interest
Rate
Income
(thousands)
13-24. (15 min.) Estimate Sales Revenues: Larson, Inc.
Market size last year
=
85,000 units ÷ 0.2
= 425,000 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
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)
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
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
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
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
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
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
b. Payments for these purchases are made as follows:
Month of Delivery
Month of Payment
Total
May
June
July
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
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
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
13-35. (30 min.) Estimate Cash Receipts: Scare-2-B-U.
a. Revenues are as follows:
April ...................................................................
$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
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
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
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)
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:
13-39. (15 min.) Prepare Budgeted Financial Statements: Carreras Café.
Carreras Café
Budgeted Income Statement
June
Calculations
Sales revenue
Less
Service 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
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
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)
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:
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
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
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
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
Units to be produced ................................................
630,000
units
Alternative method:
First, compute the estimated production:
P
=
Sales + EB – BB
Next estimate the costs:
Direct materials
Cotton 630,000 x 1 yard x $4.00 x 1.20 ..............
$3,024,000
Overhead:
Indirect labor .......................................................
630,000 x $0.60
$ 378,000
13-52. (25 min.) Prepare A Production Budget: Haggstrom, Inc.
Haggstrom, Inc.
Production Budget
Year 2
(in units)
Expected Sales ........................................................
210,000
units
Alternative method:
First, compute the estimated production:
P
=
Sales + EB – BB
Next estimate the costs:
Direct materials
©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
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)
BB + P
=
Sales + EB
c. $691,896
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
(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
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
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:
Expenses:
Cost of goods manufactured &
sold:
Materials .....................................................
$ 528,000
$ 852,000
Administrative:
Salaries .......................................................
$ 56,000
$ 64,000
13-58. (continued)
Panther Corporation
Budgeted Balance Sheet
(in thousands)
Budgeted
December 31,
Year 2
Current Assets
Cash ...............................................................
$ 4,800
Accounts receivable .......................................
320,000
Total current liabilities .................................
$473,000
Shareholders’ equity
Common stock ................................................
280,000
13-58. (continued)
a Inventory
Units:
Cost:
Manufacturing costs .......................................
$2,295,000
b Income tax:
Sales & other income .........................................
$2,436,000
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
Additional Cash Flows
Cash payments:
Mortgage payment ...................................................................................
$ 60,000
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
