CHAPTER 23
OPERATIONAL BUDGETING
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 23.1 Budgeting philosophies 23-3 Analysis, judgment
B. Ex. 23.2 Cash flow at Body Builders 23-1, 23-5 Analysis, judgment
B. Ex. 23.3 Production budget 23-4 Analysis
B. Ex. 23.4 Estimating direct materials inventory 23-4 Analysis
B. Ex. 23.5 Benefits of budgeting 23-2
Analysis, communication,
judgment
B. Ex. 23.6 Elements of the budget 23-4, 23-5 Analysis
B. Ex. 23.7 Flexible budgets 23-6 Analysis
B. Ex. 23.8 Operating expense budget 23-4, 23-5 Analysis
B. Ex. 23.9 Cost of budgeting systems 23-2, 23-3
Analysis, communication,
judgment
B. Ex. 23.10 Evaluating managers with flexible budgets 23-6
Analysis, communication,
judgment
Learning
Exercises Topic Objectives Skills
23.1 Budgeting purchases and cash payments 23-4, 23-5 Analysis
23.2 Budgeting labor costs 23-4, 23-5 Analysis
23.3 Production budgets 23-4, 23-5 Analysis
23.4 Production and direct materials budget 23-4, 23-5 Analysis, judgment
23.5 Budgeting for prepayments 23-4, 23-5 Analysis
23.6 Budgeting for interest expense 23-4, 23-5 Analysis
23.7 Preparing a flexible overhead budget 23-6 Analysis
23.8 Budgeting cash receipts 23-4, 23-5 Analysis
23.9 Budgeting an ending cash balance 23-4, 23-5 Analysis
23.10 Preparing a flexible budget 23-6 Analysis
23.11 More on flexible budgeting 23-6 Analysis
23.12 Budget estimates 23-2, 23-3
Analysis, communication,
judgment
23.13 Budgeting manufacturing overhead 23-4, 23-5 Analysis
23.14 Establishing budget amounts 23-2, 23-3
Analysis, communication,
judgment
23.15 Real World: Home Depot’s budget goals 23-2, 23-3
Analysis, communication,
judgment, research
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Problems
Sets A, B
Topic
Learning
Objectives
Skills
23.1 A,B
Budgeting production, inventories, and cost
of sales
23-4, 23-5 Analysis
23.2 A,B Short budgeting problem 23-4, 23-5 Analysis
23.3 A,B Budgeting for cash 23-4, 23-5 Analysis
23.4 A,B Estimating borrowing requirements
23-1, 23-2,
23-4, 23-5
23.5 A,B Budgeted income statement and cash budget
23-1, 23-2,
23-4, 23-5
23.6 A,B Preparing a cash budget
23-1, 23-2,
23-4, 23-5
23.7 A,B Preparing and using a flexible budget
23-2, 23-4 –
23-6
23.8 A,B Flexible budgeting
23-2, 23-4 –
23-6
Critical Thinking Cases
23.1 Budgeting in a nutshell 23-2, 23-5
23.2 An ethical dilemma 23-1–23–3
23.3 Cash budgeting 23-1, 23-2 Analysis,
communication, judgment
23.4
Real World: Medlin Accounting
Shareware
(Internet) Budgeting shareware
23-2, 23-6
23. 5 Budgeting and internal controls 23-4 Analysis,
(Ethics, fraud, and corporate governance) communication, judgment
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
Renfrow International/Frowren Domestic 25 Easy
Budget such quantities and amounts as the planned production of
finished goods, cost of goods manufactured, finished goods
inventory, and the cost of goods sold.
Lakeland Corporation/Harlow Corporation 20 Medium
Budget such quantities and amounts as the planned production of
finished goods, cost of goods manufactured, finished goods
inventory, and the cost of goods sold.
Barnum Distributors/Barley, Inc. 50 Strong
Prepare a cash budget for one month.
Fromer Corporation/Peter Corporation 40 Strong
Analyze collection patterns for accounts receivable and accounts
payable. Assess the company’s ability to generate adequate cash flow
to service additional debt.
Rizzo’s/Snyder’s 30 Strong
Analyze a budgeted income statement and a cash budget, and
determine why income recognition differs from cash flow.
23.6 A,B Marley Wholesale/Marlow Industries 60 Strong
Prepare a monthly cash budget for three months in support of a loan
application. Determine whether a scheduled loan repayment can be
met at the end of the period.
23.7 A,B Snells/Eight Flags 50 Medium
Prepare a statement comparing actual results with a flexible budget
and comment on the company’s performance.
23.8 A,B Braemar Saddlery/XL Industries 45 Medium
An excellent problem for demonstrating the importance of flexible
budgeting. Due to an increase in production, the production
department exceeds its budget by large amounts. The student is asked
to prepare a flexible budget showing that the company actually did
very well in controlling costs.
23.5 A,B
23.3 A,B
23.4 A,B
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
23.1 A,B
23.2 A,B
Critical Thinking Cases
23.1
Budgeting in a Nutshell 30 Medium
A short budgeting case that shows the interrelationships among
budgeted financial statements. but more importantly, it provides an
opportunity for students to review the relationships between cash
flows and accrual accounting. A real favorite.
23.2
An Ethical Dilemma 20 Medium
A company in need of bank financing has inflated its master
budget figures due to a large receivable with a questionable
likelihood of being collected. The company’s CPA is aware of the
problem and knows that if the company is denied credit, his
accounting firm will not be paid. Students must decide whether the
role of a CPA is to serve the client or to serve the client’s
creditors.
23.3 Cash Budgeting 20 Medium
The case describes six steps of cash budgeting for businesses and
individuals. Students are asked about strategies for managing cash
flows when inflows and outflows are mismatched. Students write a
paragraph explaining how a personal cash budget would help
them
23.4 Budgeting Shareware 30 Medium
Internet
Student is asked to explore free software available on the Internet
to help companies with budgeting.
23.5 Budgeting and Internal Controls 30 Medium
Ethics, Fraud & Corporate Governance
Students trace an error due to an internal control weakness through
multiple budgets and consider how strong internal controls can
help prevent these errors.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
a.
The process of preparing the budget forces management to consider all aspects of the
3.
4.
5.
Preparation of the sales budget is an early step in the budgeting process because many budgeted
Planning is the process of setting financial and operational goals, including cost levels, and
The most widely used budgeting “philosophy” is to set budgeted amounts at reasonable and
achievable levels. A second approach is to set these amounts at levels achievable only under
A business may expect to benefit from preparing a formal budget in several ways, including
(three required):
Responsibility budgets are subsections of the master budget showing only the business activities
6.
7.
8.
9.
10.
First, consider the Behavioral approach. The fundamental assumption under this approach is
that managers will be motivated by budgets that are set at reasonable and achievable levels .
The average collection period in days is determined by dividing the number of days per year
A flexible budget may be geared to any volume level and therefore can be based on the actual
If a budgeted expenditure can be directly influenced by the manager responsible for such an
When companies undergo periods of rapid growth, increased demand for their products can
12.
13.
14.
15.
Disadvantages highlighted by the authors include: (1) Budgets are often applied too
Fixed costs should be divided into committed costs and controllable costs because only the
A rolling budget is a budget that always covers the upcoming twelve months by adding a new
Cash budget estimates and operating budget estimates can be very different because of timing
B. Ex. 23.1
B. Ex. 23.2
B. Ex. 23.3
Q1 Q2 Q3
7,500 8,800 3,200
B. Ex. 23.4
Direct materials used during the period
B. Ex. 23.5
The controller could acknowledge the costs of budgeting discussed by the
2,900
Expected sales
Sandy’s Camping Gear
Budgeted Production
SOLUTIONS TO BRIEF EXERCISES
Q4
Renaldo’s is following the Total Quality Management approach of budgeting.
The marketing manager’s plan to allow customers to delay payment until the
1,760 640 580
1,500
Plus: Desired ending
Less: Beginning
B. Ex. 23.7
B. Ex. 23.8
B. Ex. 23.9
B. Ex. 23.10
The variable cost per gallon can be found by finding the difference in total cost
between any two levels of production and dividing that cost difference by the
Because one half of selling and administrative costs are variable, then the
The managers’ complaints are realistic. Managers do consume large amounts of
time thinking about, preparing, and reconsidering the budget. In addition, there
is evidence that managers increase budget requests to allow for increased
The budget overage may have been caused by the expansion of the Dry Goods
Ex. 23.1 a. 300,000$
Ex. 23.2
Total Smoking Packing
Smoking: 500,000 pounds × 0.08 hours/pound
Ex. 23.3 a.
Target ending inventory ………………………………………………………….
Cases budgeted to be available for sale ……………………………………….
Less: Beginning inventory ……………………………………………………..
Selling price per case …………………………………………………………..
Budgeted sales (cases) ………………………………………………………..
Variable overhead ………………………………………………………………..
Direct materials ………………………………………………………………….
Direct labor (1.5 hours/case × $8/hour) ………………………………………..
1,500
SOLUTIONS TO EXERCISES
Direct materials budgeted for use during the year ……………………………
For the Month Ended March 31st
DEEP VALLEY FOODS
Budget for Direct Labor Costs
Sales forecast:
Budgeted sales (in cases) ………………………………………………………
Add: Budgeted direct materials inventory at December 31 ……………….
Total direct materials budgeted to be available ……………………………….
Total owed to suppliers during the year ………………………………………
Less: Amount owed to suppliers at December 31 …………………………….
Less: Direct materials inventory at January 1 ………………………………
Amount owed to suppliers at January 1 ………………………………………
Ex. 23.3
(continued)
c.
Ex. 23.4 a.
Less: Beginning inventory ………………………………………………..
Planned production ……………………………………………
Budgeted sales (units) …………………………………………………….
Target ending inventory ……………………………………………………..
Units budgeted to be available for sale …………………………………….
b.
Glass: (6,460 doors × 6 square feet/door) ……………………………….
129,200 lbs. 38,760 sq. ft.
80,000 lbs. 4,000 sq. ft.
209,200 lbs. 42,760 sq. ft.
(40,000) lbs. (6,000) sq. ft.
169,200 lbs. 36,760 sq. ft.
Raw materials to be purchased
Direct materials available for use ……………….
Less: Beginning inventory ………………..
× Budgeted purchase price
Budgeted direct materials
(units) …………………………………
Materials purchases budget:
Glass
Materials requirements based on planned production of 6,460 doors:
Manufacturing cost budget:
Variable manufacturing costs:
Production schedule:
Steel
Direct materials used ………………………………
Target ending inventory …………………….
d.
Target ending inventory (cases) × Manufacturing cost per unit
Ending inventory value = $82,000
Variable overhead (1,700 cases × $5/case) …………………………..
Direct materials (1,700 cases × $15/case) ………………………..
Direct labor (1,700 cases × $12/case) …………………………………..
Ending inventory value:
Total variable manufacturing costs ……………………………………..
Add: Fixed manufacturing overhead ……………………………………..
Ex. 23.4
(continued)
c.
Ex. 23.5
500,000$
Lock Tight may wish to increase its ending inventory level of steel if the price of
steel this year is expected to be much lower than the price next year. However,
First, calculate prepayments to be expired during the period:
Total costs and expenses ……………………………………………………….……
Depreciation expense ……………………………………..……………
Amount financed with current payables ………………………………………
Ex. 23.6
February March April
a.
Willmar Corporation
Debt Service Schedule
For February through April
Note Payable at the
Beginning of the month
Budgeted interest expense reported on the February income statement is
computed as follows:
Ex. 23.7
Fixed
Portion
Budgeted
Overhead at
2,800 Hours
$ 2,000 $ 16,000
Ex. 23.8
— within discount period, $880,000 × 70% × 98% ……….
— after discount period, $800,000 × 6% ……………………
— within discount period, $800,000 × 12% × 98% ……..…
— after discount period, $880,000 × 10% …………………
Ex. 23.9 a. $ 500,000
Less: Expenditures ……………………………………………………………….
Collections on January sales ($300,000 × 15%) ……………………………..
Collections on February sales ($400,000 × 30%) ……………………………..
Collections on March sales ($600,000 × 50%) ………………………………..
Total cash available ……………………………………………………………….
Cash balance on March 1 ……………………………………………………..
Estimated cash collections of accounts receivable in February are computed below.
On accounts receivable representing sales in:
Variable Cost Per Hour Formula
($17,000-$12,000) ÷ (3,000 hrs-2,000 hrs.) = $5.00/hr.
Maintenance
Ex. 23-9
(continued)
b. $ 565,000
c. $ 755,000
90,000
210,000
400,000
$ 1,455,000
400,000
Total cash available ………………………………………………………………..
Less: Expenditures …………………………………………………………..
Collections on April sales ($700,000 × 30%) …………………………………
Collections on May sales ($800,000 × 50%) …………………………………..
Ex. 23.10
$ 1,800,000
1,080,000
$ 720,000
450,000
$ 270,000
81,000
$320,000 ÷ 80,000 units = $4 variable expenses per unit.
Sales ($1,600,000 80,000 units = $20 per unit;
Cost of goods sold ($960,000 ÷ 80,000 units = $12 per unit;
Gross profit on sales
Operating expenses [($4 variable expenses per unit* ×
Income taxes ($270,000 × 30%) …………………………………….
Operating income ………………………………………………………..
Flexible budget at 90,000-unit level of activity:
Cash balance on May 1 (from b) ………………………………………………….
Cash balance on April 1 (from a) ………………………………………………
Collections on March sales ($600,000 × 15%) ……………………………………
Ex. 23.11
Flexible
Budget Actual Favorable Unfavorable
341,000$ 320,000$ 21,000$
Ex. 23.12 a.
Manufacturing costs:
*Budgeted variable manufacturing costs are restated from the 10,000 units of production level
b.
To purposely distort budget estimates for personal gain is an unethical practice
and should be avoided. In addition to ethical implications, distorting a sales
To avoid the manipulation of sales forecasts, the company may wish to
Direct materials used*
Upload Games Company
Performance Report—Packaging Department
For the Current Month
11,000 Units
Variances
Total manufacturing costs
Direct labor*
Variable manufacturing
Fixed manufacturing overhead
WELLS ENTERPRISES
Budget for Manufacturing Overhead Costs
Total Dept. I Dept. II
Fixed manufacturing overhead:
Dept. I: 10,000 units × $25
250,000$ 250,000$
Ex. 23.14
Ex. 23.15
1.
2.
3.
4.
5.
Average ticket price
Comparable store sales increase %
Weighted average sales per square foot
Number of customer transactions
Ex. 23.13
Imposed budgets do not generate commitment to budget goals. Also imposed budgets
Home Depot could use the following categories of store data:
Students will have various suggestions for how these data points might be used in
budgeting to set goals for each store and in performance evaluations of store managers.
Average square footage per store
SOLUTIONS TO PROBLEMS SET A
25 Minutes, Easy PROBLEM 23.1A
RENFROW INTERNATIONAL
a. Planned production of finished goods (in units):
Budgeted sales
180,000
Add: Finished goods inventory, end of quarter 33,600
b. Cost of finished goods manufactured:
Planned production of finished goods (in units—part a)168,000
Multiply by: Budgeted manufacturing cost per unit 40$
Cost of finished goods manufactured 6,720,000$
c. Finished goods inventory at quarter-end (average cost):
Finished goods inventory, beginning of quarter
1,396,800$
Add: Cost of finished goods manufactured (part b)6,720,000
Divide by: Units budgeted to be available for sale (part a)213,600
d. Cost of goods sold:
Budgeted cost of goods available for sale (part c)8,116,800$
Less: Finished goods inventory, end of quarter (part c)1,276,800
Cost of goods sold 6,840,000$
Budgeted sales, 180,000 units × $38 (part c)6,840,000$
9,840,000$
Less: Budgeted cost of goods sold (part d)6,840,000
Less: Finished goods inventory, beginning of quarter 45,600
Planned production of finished goods 168,000
20 Minutes, Medium PROBLEM 23.2A
LAKELAND CORPORATION
a. Planned production of finished goods (in units):
Budgeted sales
200,000
Add: Finished goods inventory, Mar. 31 (end of quarter) 40,000
b. Cost of finished goods manufactured:
Planned production of finished goods (part a)190,000
Multiply by: Budgeted manufacturing cost per unit (given) 48$
Cost of finished goods manufactured (190,000 units x $48) 9,120,000$
Finished goods inventory, Mar. 31 (40,000 units × $48)* 1,920,000$
Add: Cost of finished goods manufactured (part b)9,120,000
Cost of goods available for sale 11,370,000$
Less: Finished goods inventory, Mar. 31 (part c)1,920,000
Cost of goods sold 9,450,000$
Units budgeted to be available for sale 240,000
50 Minutes, Strong PROBLEM 23.3A
BARNUM DISTRIBUTORS
BARNUM DISTRIBUTORS
Cash Budget
For the Month Ended November 30
Cash balance at beginning of month
29,600$
Receipts:
Collections on receivables (Schedule A)
778,800$
Sale of fully depreciated equipment 8,400 787,200
Total cash available 816,800$
Payments:
Schedule A—Collections on Receivables in November
September sales: 7% × (40,000 × $11)—actual
30,800$
October sales: 20% × (60,000 × $11)—actual 132,000
November sales: 70% × (80,000 × $11)—estimated 616,000
Total collections on receivables 778,800$
Schedule B—Payments for Purchases of Merchandise
On November purchases (see below), 50% of $539,000 269,500
Total payments for purchases of merchandise 486,500$
Purchases
Computation of Purchases Units ($7 Per Unit)
Inventory at end of September (2,000 + 10% of 60,000)
8,000
Add: Purchases in October (60,000 + 10,000* – 8,000) 62,000 434,000$
Less: Sales in October 60,000
Less: Sales in November (estimated) 80,000
486,500$
Payment on note payable 98,500 770,000
Cash balance at end of month 46,800$