24-56
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
Schedule of Cash Payments
1st Qtr.
2nd Qtr.
3rd Qtr.
4th Qtr.
Total
Total direct materials purchases
$ 5,430
$ 6,400
$ 7,400
$ 8,470
$ 27,700
Total
Cash Payments
Direct Materials:
Accounts Payable balance, 12/31/16
4,887
5,760
2nd Qtr. purchases, 10% paid in 3rd qtr.
3rd Qtr. purchases, 90% paid in 3rd qtr.
6,660
3rd Qtr. purchases, 10% paid in 4th qtr.
4th Qtr. purchases, 90% paid in 4th qtr.
7,623
Total payments for direct materials
15,887
6,303
7,300
8,363
$ 37,853
Direct Labor:
Total payments for direct labor
1,160
1,260
1,460
1,660
5,540
Manufacturing Overhead:
Variable manufacturing overhead
1,160
1,260
1,460
1,660
5,540
Utilities, insurance, property taxes
1,540
1,540
1,540
1,540
6,160
Total payments for mfg. overhead
2,700
2,800
3,000
3,200
11,700
Selling and Administrative Expenses:
Salaries Expense
8,500
8,500
8,500
8,500
34,000
Rent Expense
2,400
2,400
2,400
2,400
9,600
Insurance Expense
3,000
Supplies Expense
1,820
Total payments for S&A expenses
12,000
12,070
12,140
12,210
48,420
Income Taxes:
Total payments for income taxes
3,500
3,500
3,500
3,500
14,000
Capital Expenditures:
Total pmts. for capital expenditures
30,000
30,000
Total cash payments (before interest)
Accounts Payable balance, December 31, 2017:
4th Quarter, DM purchases, 10% paid in 1st quarter 2018
24-57
Comprehensive Problem for Chapters 22-24, cont.
Requirement 1, cont.
THOMPSON TOY COMPANY
Cash Budget
For the Year Ended December 31, 2017
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
Beginning cash balance
$ 25,053
$ 30,080
$ 48,740
$ 27,000
Cash receipts
39,060
46,060
53,060
193,480
Cash available
64,113
76,140
101,800
220,480
Cash payments:
Purchases of direct materials
6,303
7,300
37,853
Direct labor
1,260
1,460
Manufacturing overhead
2,800
3,000
11,700
Selling and administrative expenses
12,070
12,140
12,210
48,420
Income taxes
3,500
3,500
14,000
Capital expenditures
0
0
0
30,000
Interest expense
0
Total cash payments
26,033
27,400
28,933
147,613
Ending cash balance before financing
38,080
48,740
72,867
72,867
Minimum cash balance desired
Projected cash excess (deficiency)
13,080
23,740
47,867
47,867
Financing:
Borrowing
0
0
0
Principal repayments
0
Total effects of financing
0
0
Ending cash balance
$ 30,080
$ 48,740
$ 72,867
$ 72,867
24-58
Comprehensive Problem for Chapters 22-24, cont.
Requirement 2
THOMPSON TOY COMPANY
Budgeted Income Statement
For the Year Ended December 31, 2017
Sales Revenue
$ 182,000
Cost of Goods Sold
58,200
Gross Profit
Selling and Administrative Expenses
54,420
Operating Income
69,380
Interest Expense
100
Income Before Income Taxes
69,280
Income Tax Expense
14,000
Net Income
THOMPSON TOY COMPANY
Budgeted Balance Sheet
December 31, 2017
Assets
Current Assets:
Cash
Raw Materials Inventory
Finished Goods Inventory (270 sets at $22 each)
Total Current Assets
$ 103,327
Property, Plant, and Equipment:
Equipment ($177,000 + $30,000)
207,000
Less: Accumulated Depreciation ($39,000 + $16,000 + $6,000)
146,000
Total Assets
$ 249,327
Current Liabilities:
Accounts Payable
$ 847
Stockholders’ Equity
Common Stock
$ 100,000
Retained Earnings ($93,200 + $55,280 – $0)
148,480
Total Stockholders’ Equity
248,480
$ 249,327
24-59
Comprehensive Problem for Chapters 22-24, cont.
Requirement 2, cont.
THOMPSON TOY COMPANY
Budgeted Statement of Cash Flows
For the Year Ended December 31, 2017
Operating Activities:
Cash receipts from customers
$ 193,480
Cash payments for operating expenses*
(103,513)
Cash payments for interest expense
Cash payments for income taxes
Net cash provided by operating activities
Investing Activities:
Cash payments for equipment purchases
Net cash used for investing activities
Financing Activities:
Proceeds from issuance of notes payable
Payment of notes payable
Net cash provided by (used for) financing activities
Net increase in cash
Cash balance, January 1, 2017
27,000
Cash balance, December 31, 2017
$ 72,867
24-60
Comprehensive Problem for Chapters 22-24, cont.
Requirement 3
THOMPSON TOY COMPANY
Flexible Budget Performance Report
For the Year Ended December 31, 2017
1
2
(1) – (3)
3
4
(3) – (5)
5
Budget
Amounts
Per Unit
Actual
Results
Flexible
Budget
Variance
Flexible
Budget
Sales
Volume
Variance
Static
Budget
Units
3,000
3,000
2,600
Sales Revenue
$ 70.00
$ 210,000
$ 0
$ 210,000
$ 28,000
F
$ 182,000
Variable Costs:
Product Costs
42,720
U
U
36,040
S&A Costs
U
1,820
Contribution Margin
165,180
U
166,260
22,120
F
Fixed Costs:
Product Costs
F
22,160
S&A Costs
52,600
Operating Income
F
$ 22,120
F
Flexible Budget Variance Sales Volume Variance
24-61
Comprehensive Problem for Chapters 22-24, cont.
Requirement 6
The static budget is prepared for only one level of sales volume—the 2,600 sets expected to be sold—
and it doesn’t change after it is developed. The $23,200 favorable static budget variance is the difference
Requirement 7
Direct Materials Cost Variance
=
(AC ̶ SC)
×
AQ
=
($2.10 per pound – $2.00 per pound)
×
14,750 pounds
=
$1,475 U
Direct Materials Efficiency Variance
=
×
=
×
$2.00 per pound
=
$500 F
=
(10.50 per DLHr – $10.00 per DLHr)
×
=
$290 U
Direct Labor Efficiency Variance
=
(AQ ̶ SQ)
×
SC
=
×
$10.00 per DLHr
=
$200 F
24-62
Comprehensive Problem for Chapters 22-24, cont.
Requirement 8
VOH Cost Variance
=
(AC ̶ SC)
×
AQ
=
($9.75 per DLHr – $10.00 per DLHr)
×
580 DLHr
=
$145 F
VOH Efficiency Variance
=
(AQ ̶ SQ)
×
SC
=
×
$10.00 per DLHr
=
$200 F
=
=
$2,160 F
=
=
=
$1,840 F
24-63
Comprehensive Problem for Chapters 22-24, cont.
Requirement 9
THOMPSON TOY COMPANY
Standard Cost Income Statement
For the Year Ended December 31, 2017
Sales Revenue at standard ($70/set × 3,000 sets)
$ 210,000
Cost of Goods Sold at standard ($22 per set × 3,000 sets)
$ 66,000
Manufacturing Cost Variances (from Req. 7 and 8):
Direct Materials Cost Variance
$ 1,475
Direct Materials Efficiency Variance
Direct Labor Cost Variance
Direct Labor Efficiency Variance
Variable Overhead Cost Variance
Variable Overhead Efficiency Variance
Fixed Overhead Cost Variance
Fixed Overhead Volume Variance
Cost of Goods Sold at actual
Gross Profit
Selling and Administrative Expenses:
Variable
Fixed
Operating Income
Requirement 10
ROI
=
Operating Income
Average total assets
24-64
Comprehensive Problem for Chapters 22-24, cont.
Requirement 11
Profit margin ratio
=
Operating income
Net sales
Requirement 12
Asset turnover ratio
=
Net sales
Average total assets
$210,000
Requirement 13
Profit margin
ratio
×
Asset turnover
ratio
=
ROI
0.4083 = 40.83%
Requirement 14
RI
=
Operating income
–
(Target rate of return × Average total assets)
–
–
24-65
Critical Thinking
Decision Case 24-1
Colgate-Palmolive Company operates two product segments. Go to the company Web site
(http://www.colgatepalmolive.com), and then click on the “For Investors” link. From there, go to the
SEC filings and select “10–K reports.” Select the Annual Report filed February 20, 2014, for the year
ended December 31, 2013. The necessary information will be in Note 15 (pages 86–89).
Requirements
1. What are the two product segments? Gather data about each segment’s net sales, operating income,
and identifiable assets for 2013.
2. Calculate ROI for each segment for 2013.
3. Which segment has the highest ROI? Explain why.
4. If you were on the top management team and could allocate extra funds to only one division, which
division would you choose? Why?
SOLUTION
Requirement 1
The information is from the 2013 Annual Report. All dollar amounts are in millions. The two segments
are Oral, Personal and Home Care and Pet Nutrition.
Oral, Personal
and Home Care
Pet Nutrition
Net Sales
$ 15,209
$ 2,211
Operating Income
Identifiable Assets, 12/31/13
Identifiable Assets, 12/31/12
Identifiable Assets, Average
Requirement 2
ROI
=
Operating income
Average total assets
=
= 0.3268 = 32.68%
=
24-66
Decision Case 24-1, cont.
Requirement 3
The Pet Nutrition Division has a much higher ROI than the Oral, Personal and Home Care Division. By
expanding the ROI calculation, it appears they both have about the same profit margin ratio, but the Pet
Nutrition Division generates more sales from its identifiable assets. Therefore, the Pet Nutrition Division
is more efficient in using its assets and has a higher ROI.
Profit margin ratio
=
Operating income
Net sales
=
Asset turnover ratio
=
Net sales
Average total assets
=
Requirement 4
The management team would most likely choose to allocate additional funds to the Pet Nutrition
24-67
Ethical Issue 24-1
Dixie Irwin is the department manager for Religious Books, a manufacturer of religious books that are
sold through Internet companies. Irwin’s bonus is based on reducing production costs.
Irwin has identified a supplier, Cheap Paper, that can provide paper products at a 10% cost reduction.
The paper quality is not the same as that of the current paper used in production. If Irwin uses the
supplier, she will certainly achieve her personal bonus goals; however, other company goals may be in
jeopardy. What is the ethical issue? Identify the key performance issues at risk, and recommend a plan
of action for Irwin.
SOLUTION
Irwin’s ethical issue is deciding if she should do what will benefit her the most personally or do what is
best for the company as a whole. Irwin’s bonus is based on reducing production costs. The purchase of
Fraud Case 24-1
Everybody knew Ed McAlister was a brilliant businessman. He had taken a small garbage collection
company in Kentucky and built it up to be one of the largest and most profitable waste management
companies in the Midwest. But when he was convicted of a massive financial fraud, what surprised
Requirements
1. If an asset has either too long a useful life or too high an estimated salvage value, what happens,
from an accounting perspective, when that asset is worn out and has to be disposed of?
24-68
SOLUTION
Requirement 1
When an asset is disposed of, any remaining net book value must be reported as a loss, which will
decrease income. If the estimated useful life is too long, or the salvage value unrealistically high, the
Requirement 2
GAAP does not mandate specific lives for assets. Companies are expected to estimate useful lives and
salvage values that are reasonable and realistic for the assets involved. Outside auditors have a
Requirement 3
If the useful life is too long or the salvage value of an asset is too high, the book value of the assets on
the balance sheet will be overstated. Also, operating income will be overstated due to the depreciation
Team Project 24-1
Each group should identify one public company’s product to evaluate. The team should gather all the
information it can about the product.
Requirement
Develop a list of key performance indicators for the product.
SOLUTION
24-69
Communication Activity 24-1
In 150 words or fewer, list each of the four perspectives of the balanced scorecard. Give an example of
one KPI from each of the perspectives, and explain what measure the KPI provides for a retailing
business.
SOLUTION
Student answers will vary. Key items to look for are:
Perspective
Strategy
Common Key Performance Indicators (KPIs)
Financial
Increase company profits
through increasing revenue
growth and productivity
• Net income
• Sales revenue growth
• Gross margin growth
• Cash flow
• Return on investment
• Residual income
Customer
Improve customer
satisfaction for long-term
• Customer satisfaction ratings
• Percentage of market share