1. The three major objectives of budgeting are (1) to establish specific goals for future
2. If goals set by the budgets are viewed as unrealistic or unachievable, employees and
3. A budget that is set too loosely may fail to motivate managers and other employees to perform
5. A static budget is most appropriate in situations where costs are not variable to an underlying
6. Computers not only speed up the budgeting process, but they also reduce the cost of budget
7. The production requirements must be carefully coordinated with the sales budget to ensure
8. Purchases of direct materials should be closely coordinated with the production budget so
that inventory levels can be maintained within reasonable limits.
9. a. The cash budget contributes to effective cash planning. This involves advance planning
CHAPTER 21 (FIN MAN); CHAPTER 6 (MAN)
BUDGETING
DISCUSSION QUESTIONS
21-1
CHAPTER 21 Budgeting
PE 21–1A (FIN MAN); PE 6–1A (MAN)
Variable cost:
PE 21–1B (FIN MAN); PE 6–1B (MAN)
Variable cost:
PE 21–2A (FIN MAN); PE 6–2A (MAN)
Expected units to be sold 240,000
PE 21–2B (FIN MAN); PE 6–2B (MAN)
Expected units to be sold 75,000
Plus desired ending inventory, December 31, 2016 2,700
MyLife Chronicles Inc.
Production Budget
For the Year Ending December 31, 2016
Magnolia Candle Inc.
Production Budget
For the Year Ending December 31, 2016
PE 21–3A (FIN MAN); PE 6–3A (MAN)
Square yards required for production:
Diaries (238,900 × 5 sq. yd.) 1,194,500
PE 21–3B (FIN MAN); PE 6–3B (MAN)
Pounds of wax required for production:
Candles [(74,200 × 8 oz.) ÷ 16 oz.] 37,100
Plus desired ending inventory, December 31, 2016 2,100
PE 21–4A (FIN MAN); PE 6–4A (MAN)
Hours required for assembly:
Diaries (238,900 × 6 min.) 1,433,400 min.
MyLife Chronicles Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2016
MyLife Chronicles Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2016
Magnolia Candle Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2016
21-3
CHAPTER 21 Budgeting
PE 21–4B (FIN MAN); PE 6–4B (MAN)
Hours required for assembly:
Candles (74,200 × 12 min.) 890,400 min.
Convert minutes to hours 60 min.
PE 21–5A (FIN MAN); PE 6–5A (MAN)
Finished goods inventory, January 1, 2016
Work in process inventory, January 1, 2016 $ 19,000
Direct materials:
Direct materials inventory, January 1, 2016
(32,400 × $0.30) $ 9,720
Direct materials purchases
(from PE 21–3A; PE 6–3A) 357,870
$ 25,000
Magnolia Candle Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2016
MyLife Chronicles Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2016
÷
PE 21–5B (FIN MAN); PE 6–5B (MAN)
Finished goods inventory, January 1, 2016 $ 9,800
Work in process inventory, January 1, 2016 $ 3,600
Direct materials:
Direct materials inventory, January 1, 2016
(2,500 × $4.10) $ 10,250
Direct materials purchases
(from PE 21–3B; PE 6–3B) 150,470
PE 21–6A (FIN MAN); PE 6–6A (MAN)
July
PE 21–6B (FIN MAN); PE 6–6B (MAN)
April
Magnolia Candle Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2016
21-5
CHAPTER 21 Budgeting
Ex. 21–1 (FIN MAN); Ex 6–1 (MAN)
a.
September October November December
Estimated cash receipts from:
Estimated cash payments for:
Season football tickets $ 210
Additional entertainment 275 $ 275 $ 275 $ 275
Tuition 3,700
Rent 600 600 600 600
Food 235 235 235 235
b. The four-month budgets do not change with any identified activity level; thus,
they are static budgets.
c. While Malloy’s budget might first appear satisfactory, Malloy must earn
enough cash in order to pay for the spring semester tuition. Her present budget
shows that she will be $700 short of the tuition amount ($3,700 – $3,000) by the
time she needs to pay her spring tuition. Thus, Malloy will likely need to
adjust the plan before the fall term even begins. Some possibilities would be to
For the Four Months Ending December 31, 2016
KATHERINE MALLOY
Cash Budget
EXERCISES
21-6
CHAPTER 21 Budgeting
Ex. 21–2 (FIN MAN); Ex 6–2 (MAN)
Total sales $400,000 $500,000 $600,000
Variable cost:
Sales commissions (14% of sales) $ 56,000 $ 70,000 $ 84,000
Advertising expense (18% of sales) 72,000 90,000 108,000
Miscellaneous administrative
CLOUD PRODUCTIVITY INC.
Flexible Selling and Administrative Expenses Budget
For the Month Ending March 31, 2016
21-7
CHAPTER 21 Budgeting
Ex. 21–3 (FIN MAN); Ex 6–3 (MAN)
a.
January February March
Units of production 90,000 100,000 110,000
Supporting calculations:
Units of production 90,000 100,000 110,000
Hours per unit 0.20 0.20 0.20
Total hours of production 18,000 20,000 22,000
Wages per hour $16.00 $16.00 $16.00
Total wages $288,000 $320,000 $352,000
Depreciation is a fixed cost, so it does not “flex” with changes in production.
Because it is the only fixed cost, the variable and fixed costs are not classified in
the budget.
b.
January February March
Total flexible budget………………………………
…
$375,000 $410,000 $445,000
Actual cost……………………………………………
…
400,000 440,000 470,000
Excess of actual cost over budget………………
…
$ (25,000) $ (30,000) $ (25,000)
RODRIGUEZ COMPANY—MACHINING DEPARTMENT
Flexible Production Budget
For the Three Months Ending March 31, 2016
×××
×××
21-8
CHAPTER 21 Budgeting
Ex. 21–4 (FIN MAN); Ex 6–4 (MAN)
Units of production 18,000 20,000 22,000
Variable cost:
Fixed cost:
Supervisor salaries $150,000 $150,000 $150,000
1
18,000 × 12/60 min. × $22
Ex. 21–5 (FIN MAN); Ex 6–5 (MAN)
Small Scale Large Scale
Expected units to be sold 81,000 146,000
Plus desired inventory, July 31, 2017 1,500 2,500
For the Month Ending July 31, 2017
Units
STEELCASE INC.—ASSEMBLY DEPARTMENT
Flexible Production Budget
(assumed data)
August 2016
TRUE TAB INC.
Production Budget
21-9
CHAPTER 21 Budgeting
Ex. 21–6 (FIN MAN); Ex 6–6 (MAN)
a.
Unit Sales Unit Selling
Volume Price Total Sales
Model DL:
East Region 2,560 $190 $ 486,400
West Region 2,310 190 438,900
b.
Model DL Model XL
Expected units to be sold 4,870 2,010
For the Month Ending September 30, 2016
Units
Product and Area
SOUNDLAB INC.
Sales Budget
For the Month Ending September 30, 2016
SOUNDLAB INC.
Production Budget
21-10
CHAPTER 21 Budgeting
Ex. 21–7 (FIN MAN); Ex 6–7 (MAN)
Billable Hourly Total
Hours Rate Revenue
Staff 13,200 $150 $ 1,980,000
Partners 5,500 320 1,760,000
Total 18,700 $ 3,740,000
Small Business Accounting Department:
Staff 3,000 $150 $ 450,000
Ex. 21–8 (FIN MAN); Ex 6–8 (MAN)
Staff Partners
Audit Department hours 22,400 7,900
Tax Department hours 13,200 5,500
Professional Labor Cost Budget
For the Year Ending December 31, 2016
ROLLINS AND COHEN, CPAs
Professional Fees Earned Budget
For the Year Ending December 31, 2016
ROLLINS AND COHEN, CPAs
21-11
CHAPTER 21 Budgeting
Ex. 21–9 (FIN MAN); Ex 6–9 (MAN)
Dough Tomato Cheese Total
September 30, 2016 580 185 315
Total 17,640 8,535 15,065
Less estimated inventory,
September 1, 2016 520 200 295
ROMANO’S FROZEN PIZZA INC.
Direct Materials Purchases Budget
For the Month Ending September 30, 2016
21-12
CHAPTER 21 Budgeting
Ex. 21–10 (FIN MAN); Ex 6–10 (MAN)
Materials required for production:
Coke® 459 lbs. 153,000 btls. 306,000 ltrs.
Concentrate Bottles Water
COCA-COLA ENTERPRISES—WAKEFIELD PLANT
For the Month Ending May 31, 2016
(assumed data)
Direct Materials Purchases Budget
2-Liter Carbonated
*
21-13
CHAPTER 21 Budgeting
Ex. 21–11 (FIN MAN); Ex 6–11 (MAN)
Total
Plus desired inventory,
December 31, 2016 40,000 10,000
Total 2,992,000 lbs. 372,000 lbs.
Less estimated inventory,
January 1, 2016 46,000 8,000
Total units purchased 2,946,000 lbs. 364,000 lbs.
Unit price $1.20 $0.80
Ex. 21–12 (FIN MAN); Ex 6–12 (MAN)
Hours required for production:
SAFETY GRIP COMPANY
Direct Materials Purchases Budget
For the Year Ending December 31, 2016
Rubber Steel Belts
Direct Labor Cost Budget
For the Month Ending July 31, 2016
ACE RACKET COMPANY
Department
Forming Assembly
Department
××
12
21-14
CHAPTER 21 Budgeting
Ex. 21–13 (FIN MAN); Ex 6–13 (MAN)
Weekday Weekend Day
Room occupancy
Room capacity 300 300
Occupied percent (occupancy) 80% 40%
Restaurant staff
Base restaurant staff 6 6
Incremental 60 room blocks [(a) ÷ 60 rooms] 4 2
Total staff 10 8
AMBASSADOR SUITES INC.
Direct Labor Cost Budget
For a Weekday or a Weekend Day
++
××
21-15
CHAPTER 21 Budgeting
Ex. 21–14 (FIN MAN); Ex 6–14 (MAN)
a.
Expected units to be sold
Plus May 31 desired inventory
b.
Outer-
Inseam seam Pockets Zipper Total
Dockers® 42,030 46,700 14,010 28,020
1
(23,350 ÷ 10 pairs) × 18 min. = 42,030 min.
2
(23,350 ÷ 10 pairs) × 20 min. = 46,700 min.
3
(23,350 ÷ 10 pairs) × 6 min. = 14,010 min.
LEVI STRAUSS & CO.
Production Budget
(assumed data)
May 2016
LEVI STRAUSS & CO.
Direct Labor Cost Budget
501 Jeans®
53,100
Dockers®
23,600
420
(assumed data)
May 2016
1,860
1234
5678
21-16
CHAPTER 21 Budgeting
Ex. 21–15 (FIN MAN); Ex 6–15 (MAN)
Variable factory overhead costs:
Manufacturing supplies $ 14,000
Power and light 48,000
SWEET TOOTH CANDY COMPANY
Factory Overhead Cost Budget
For the Month Ending August 31, 2016
21-17
CHAPTER 21 Budgeting
Ex. 21–16 (FIN MAN); Ex 6–16 (MAN)
Finished goods inventory, June 1
1
$ 16,900
Work in process inventory, June 1 $ 12,900
Cost of direct materials placed in
production $3,149,100
Direct labor 240,000
Factory overhead 400,000
Total manufacturing costs 3,789,100
Total work in process during the period $3,802,000
Less work in process inventory, June 30 13,500
DELAWARE CHEMICAL COMPANY
Cost of Goods Sold Budget
For the Month Ending June 30, 2017
21-18
CHAPTER 21 Budgeting
Ex. 21–17 (FIN MAN); Ex 6–17 (MAN)
Finished goods inventory, September 1, 2016 $ 11,500
Work in process inventory, September 1, 2016 $ 3,400
Direct materials:
Direct materials inventory, September 1, 2016 $ 6,440
Cost of direct materials placed in
production $186,020
Direct labor 193,600
Factory overhead 105,500
Total manufacturing costs 485,120
MINGWARE CERAMICS INC.
Cost of Goods Sold Budget
For the Month Ending September 30, 2016
21-19
CHAPTER 21 Budgeting
Ex. 21–18 (FIN MAN); Ex 6–18 (MAN)
May June July
May sales on account:
Collected in May ($134,000 × 65%) 87,100
Collected in June ($134,000 × 30%) 40,200
PET PLACE SUPPLIES INC.
Schedule of Collections from Sales
For the Three Months Ending July 31, 2016
21-20