Accounting Chapter 8 Homework Hair again Marketing Expense Budget For The Year

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CHAPTER 8

BUDGETING FOR PLANNING AND CONTROL

DISCUSSION QUESTIONS

1. Budgets are the quantitative expressions of

plans. Budgets are used to translate the

goals and strategies of an organization into

operational terms.

2. Control is the process of setting standards,

receiving feedback on actual performance,

and taking corrective action whenever actual

performance deviates from planned perfor-

mance. Budgets are the standards, and they

are compared with actual costs and reve-

nues to provide feedback.

3. Budgeting forces managers to plan, provides

resource information for decision making,

sets benchmarks for control and evaluation,

and improves the functions of communication

and coordination.

4. The master budget is the collection of all

individual area and activity budgets. Operat-

ing budgets are concerned with the income–

generating activities of a firm. Financial

budgets are concerned with the inflows and

outflows of cash and with planned capital

expenditures.

5. The sales forecast is a critical input for build-

ing the sales budget. It, however, is not nec-

essarily equivalent to the sales budget. Upon

receiving the sales forecast, management

may decide that the firm can do better or

needs to do better than the forecast is indi–

cating. Consequently, actions may be taken

to increase the sales potential for the coming

year (e.g., increasing advertising). This ad-

justment then becomes the sales budget.

6. Yes. All budgets essentially are founded on

the sales budget. The production budget

depends on the level of planned sales. The

manufacturing budgets, in turn, depend on

the production budget. The same is true for

the financial budgets since sales is a critical

input for budgets in that category.

7. An accounts receivable aging schedule gives

the proportion of accounts receivable that

are, on average, collected in the months fol-

lowing sale. It is important in creating the

cash budget, since the sales on account for

past months can be multiplied by the appro–

priate percentage to yield the amount of cash

expected.

8. If the vice president of sales is a pessimistic

individual, one might expect that she or he

would underestimate sales for the coming

year. In your role as head of the budget pro-

cess, you might increase the budgeted sales

figure to take out the individual bias.

9. If the factory controller is a particularly opti-

mistic individual, it is possible that the costs

for direct materials, direct labor, and over-

head could be underestimated. For exam-

ple, an optimistic person might assume that

everything will go well (e.g., that there will be

no problems in obtaining an adequate sup-

ply of materials at the lowest possible price).

As head of the budget process, you might

allow for somewhat higher costs to more ac-

curately reflect reality.

10. The learning curve is the relationship be-

tween unit costs of production and increas-

ing number of units. As time goes on, the

number of units produced in a time period

will increase and the cost per unit will de-

crease. The budgets affected will be the

direct materials purchases budget, the direct

labor budget, and the overhead budget.

11. Small firms often do not engage in a compre-

hensive master budgeting process. (Person–

ally, we believe that is a mistake. The budget–

ing process helps management more fully

understand the business and helps them to

plan for the coming year.) Even small busi–

nesses create cash budgets, however, be-

cause cash flow is critically important. For

example, it is possible to have positive oper-

ating income, but negative cash flow (e.g., if

sales on account are high, but customers are

slow to pay). Negative cash flow could put a

company out of business in short order.

12. The master budget has been criticized for

the following reasons: it does not recognize

the interdependencies among departments,

it is static, and it is results rather than pro-

cess oriented. These criticisms are especially

apparent when companies are in a competi-

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tive, dynamic environment. When the envi-

ronment changes slowly, if at all, the master

budget would do a good job of both planning

and control.

13. A static budget is one that is not adjusted for

changes in activity. Using a static budget for

control can be a real problem. For example,

suppose that the master (static) budget is

based on the production and sale of 100,000

units, but that only 90,000 units are actually

produced and sold. Further suppose that the

budgeted variable cost of goods sold was

$2,000,000, and that the actual variable cost

of goods sold was $1,890,000. It looks as if

the company spent less than expected for

variable manufacturing costs. However, the

budgeted variable cost was $20 per unit

($2,000,000/100,000), and the actual varia-

ble cost per unit is $21 per unit

($1,890,000/90,000). Not adjusting the

budget for changes in activity level can mis-

lead managers about efficiency.

14. A flexible budget is (1) a budget for various

levels of activity or (2) a budget for the actual

level of activity. The first type of flexible

budget is used for planning and sensitivity

analysis. The second type of budget is used

for control, since the actual costs of the actual

level of activity can be compared with the

planned costs for the actual level of activity.

15. The activity-based budget starts with output,

determines the activities necessary to create

that output, and then determines the re-

sources necessary to support the activities.

This differs from the traditional master

budgeting process in that the master budget

leaps directly from output to resources.

Some of the resource levels are assumed to

be fixed. This makes them independent of

volume changes and hides the drivers that

actually do affect the fixed resources. As a

result, the budget format does not support

the creation of value and the thinking that

would go into determining the sources of

waste.

CORNERSTONE EXERCISES

Cornerstone Exercise 8.1

1. FlashKick Company

Sales Budget

For the First Quarter

January February March Quarter

Practice ball:

Units ……………… 50,000 58,000 80,000 188,000

Unit price ……….. × $8.75 × $8.75 × $8.75 × $8.75

2. FlashKick Company

Sales Budget

For the First Quarter

January February March Quarter

Practice ball:

Units ……………… 50,000 58,000 80,000 188,000

Unit price ……….. × $8.75 × $8.75 × $8.75 × $8.75

Sales ……………… $437,500 $507,500 $ 700,000 $1,645,000

Match ball:

Units ……………… 4,200 4,500 7,800 16,500

Cornerstone Exercise 8.2

1. Production budget for practice balls:

January February March

Unit sales ……………………………… 50,000 58,000 80,000

Desired ending inventory ………. 11,600 16,000 20,000

2. In order to construct a production budget for April, you would need May

Cornerstone Exercise 8.3

1. Direct materials purchases budget for practice balls:

Polyvinyl chloride panels: January February

Units produced ………………………………………. 58,500 62,400

Direct materials per unit …………………………. × 0.7 × 0.7

Cornerstone Exercise 8.3 (Concluded)

Bladder and valve: January February

Units produced ………………………………………. 58,500 62,400

Direct materials per unit ………………………….. × 1 × 1

Direct materials for production …………… 58,500 62,400

Glue: January February

Units produced ………………………………………. 58,500 62,400

Direct materials per unit ………………………….. × 3 × 3

Direct materials for production …………… 175,500 187,200

Desired ending inventory* ………………………. 37,440 50,400

2. If the desired ending inventory percentage decreases, then less would be or-

Cornerstone Exercise 8.4

1. Number of wrong numbers = Total calls × Percent

= 5,000 × 0.10 = 500

Number of answering machine calls = Total calls × Percent

= 5,000 × 0.15 = 750

2. Minutes for wrong numbers (500 × 1) ………………………. 500

Minutes for answering machine calls (750 × 0) ………… 0

Minutes for alumni contact calls (3,750 × 8) …………….. 30,000

Cornerstone Exercise 8.5

1. Direct labor hours = Budgeted unit × Budgeted direct labor hours per unit

= 120,000 × 1.3 = 156,000 direct labor hours

Budgeted fixed overhead:

Indirect labor ………………………………………………. $176,000

Supervision …………………………………………………. 73,500

Depreciation on equipment ………………………….. 47,000

2. Overhead Budget

For the Year

Budgeted direct labor hours……………………………… 156,000

Variable overhead rate ……………………………………… × $1.71

3. Overhead Budget

For the Year

Budgeted direct labor hours* ……………………………. 153,400

Variable overhead rate ……………………………………… × $1.71

Cornerstone Exercise 8.6

1. Unit costs:

Direct materials ………………………………. $1.67

Direct labor …………………………………….. 0.56

Overhead:

= (16,000 + 300,000) – 285,000 = 31,000

2. If the number of units sold increases to 290,000, there will be 5,000 fewer units

Cornerstone Exercise 8.7

1. Budgeted direct materials ($1.67 × 300,000) $ 501,000

Budgeted direct labor($0.56 × 300,000) 168,000

2. Direct materials ……………………………………………. $ 501,000

Direct labor ………………………………………………….. 168,000

Overhead ……………………………………………………… 756,000

3. If the cost of beginning inventory of finished goods was only $75,200, the cost

Cornerstone Exercise 8.8

1. Hair-Again

Marketing Expense Budget

For the Year Ended December 31

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total

Budgeted unit sales ……………… 5,000 15,000 40,000 35,000 95,000

Unit variable expense* …………. × $0.45 × $0.45 × $0.45 × $0.45 × $0.45

Total variable expense ………….. $ 2,250 $ 6,750 $18,000 $15,750 $ 42,750

Fixed marketing expense:

Internet ads ……………………… $ 7,600 $ 7,600 $ 7,600 $ 7,600 $ 30,400

2. If the cost of internet ads rises to $15,000 in Quarters 2, 3, and 4, the fixed

Cornerstone Exercise 8.9

1. Green Earth Landscaping Company

Administrative Expense Budget

For the Summer Months

June July August Total

Salaries …………………………………….. $ 9,600 $ 9,600 $ 9,600 $28,800

2. The increase in insurance rates at the beginning of July will increase the total

Cornerstone Exercise 8.10

1. Coral Seas Jewelry Company

Budgeted Income Statement

For the Coming Year

Sales …………………………………………………… $ 15,900,000

Less: Cost of goods sold …………………….. 8,750,000

2. If Coral Seas Jewelry Company has interest expense of $500,000, there would

be no impact on operating income. Interest expense would be subtracted from

Cornerstone Exercise 8.11

1. Cash Sales Credit Sales

Quarter Total Sales (10% of total sales) (90% of total sales)

3, current year $4,900,000 $490,000 $4,410,000

4, current year 6,850,000 685,000 6,165,000

Cornerstone Exercise 8.11 (Concluded)

2. Quarter 1 Quarter 2 Quarter 3 Quarter 4

Cash sales ………………………….. $ 460,000 $ 510,000 $ 500,000 $ 760,000

Received on account from:

Quarter 3, current yeara …….

308,700

Quarter 4, current yearb ……. 1,541,250 431,500

a$4,410,000 × 0.07 = $308,700

b$6,165,000 × 0.25 = $1,541,250; $6,165,000 × 0.07 = $431,500

3. If Shalimar’s percentage of uncollectible accounts rises to 10 percent, then no

cash would be collected in the second quarter after the sale. The 10 percent of

credit sales is bad debt expense; it never appears on the cash budget since it

is never collected in cash. The following is the cash receipts budget using the

new assumption.

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Cash sales ………………………….. $ 460,000 $ 510,000 $ 500,000 $ 760,000

Received on account from:

Quarter 4, current year …….. 1,541,250

Cornerstone Exercise 8.12

1. Khloe Company

Cash Budget

For the Month of November

Beginning balance, cash account………………………………………….. $ 53,817

Received on account from sales in:

October ($1,240,000 × 0.28) ………………………………………………. 347,200

Disbursements:

Payments for purchases made in:

October ($980,000 × 0.85) …………………………..……………….. 833,000

November ($2,000,000 × 0.15) ………………………………………. 300,000

Salaries paid for work in:

October ($48,000 × 0.10) ……………………………………………… 4,800

November ($48,000 × 0.90) …………………………………………… 43,200

2. If Khloe Company faced a customs duty and shipping percentage of 35 percent,

the cost of customs duty and shipping for November would be $100,000 higher

Cornerstone Exercise 8.13

1. Variable

Cost Range of Production in Units

per Unit 160,000 170,000 175,000

Production costs:

Variable:

Direct materials …………… $7.20 $ 1,152,000 $ 1,224,000 $ 1,260,000

Direct labor …………………. 1.54 246,400 261,800 269,500

Variable overhead:

Supplies ……………………… 0.23 36,800 39,100 40,250

2. Per-unit product cost @ 160,000 units = $1,913,400/160,000 = $11.96 (rounded)

3. If maintenance cost rose to $0.22 per unit, then the per-unit cost would in-

Cornerstone Exercise 8.14

1. Actual Cost Flexible Budget Cost Variance

Direct materials …….. $1,170,000 $1,175,040 $5,040 F

Direct labor …………… 258,000 251,328 6,672 U

Supplies ……………….. 38,100 37,536 564 U

Maintenance …………. 30,960 31,008 48 F

2. If Nashler Company’s actual direct materials cost was $1,175,040, the variance

EXERCISES

Exercise 8.15

Palmgren Company

Production Budget

For the Third Quarter

July August September Total

Unit sales ……………………………… 32,500 33,700 38,000 104,200

Desired ending inventory ………. 8,425 9,500 9,000 9,000

Exercise 8.16

1. Berring Company

Sales Budget

For the Year Ended December 31

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year

Deluxe:

Units ……….. 12,000 14,300 16,600 20,000 62,900

2. Berring Company probably asked the marketing vice president for sales

Exercise 8.16 (Concluded)

3. Production budget for deluxes:

Quarter 1 Quarter 2 Quarter 3

Unit sales ……………………………… 12,000 14,300 16,600

Desired ending inventory ………. 2,860 3,320 4,000

Production budget for standards:

Quarter 1 Quarter 2 Quarter 3

Exercise 8.17

1. Crescent Company

Direct Materials Purchases Budget for Fabric

For the Fourth Quarter

October November December Total

Units produced …………………….. 42,000 90,000 50,000 182,000

DM per unit (yd.) …………………… × 0.20 × 0.20 × 0.20 × 0.20

Production needs …………… 8,400 18,000 10,000 36,400

Exercise 8.17 (Concluded)

2. Crescent Company

Direct Materials Purchases Budget for Polyfiberfill

For the Fourth Quarter

October November December Total

Units produced ……………………… 42,000 90,000 50,000 182,000

DM per unit (oz.) ……………………. × 8 × 8 × 8 × 8

Production needs ………………….. 336,000 720,000 400,000 1,456,000

3. Crescent Company

Direct Labor Budget

For the Fourth Quarter 20XX

October November December Total

Units produced ……………………… 42,000 90,000 50,000 182,000

Direct labor time per

Exercise 8.18

Audio-2-Go, Inc.

Sales Budget

For 2013

Model Units Price Total Sales

A-2 …………………………. 33,000 75 2,475,000

A-4 …………………………. 16,500 120 1,980,000

A-6 …………………………. 15,000 180 2,700,000

Total …………………….. $12,605,000

1.

January February March April May

Unit sales ………….. 170 160 180 190 210

Desired EI …………. 16 18 19 21 20

2. Sales price = $9 (Monthly dollar sales/Unit sales)

Cost × 1.80 = Price

Unit Unit Total

Month Purchases Cost Cost

January ……….. 163 $5 $ 815

Exercise 8.20

Rosita’s Mexican Restaurant

Schedule of Cash Receipts

For the Months of May and June

May June

Cash sales:

($45,000 × 80%) ………………………… $36,000

*Check collections for: May June

(0.20 × $45,000) ………………………… $ 9,000

Less: Bad checks

(0.03 × $9,000) ………………………….. (270)

(0.03 × $11,200) ………………………… (336)

Less: Service charge

Exercise 8.21

Revised sales estimates:

Rosita’s Mexican Restaurant

Schedule of Cash Receipts

For the Months of May and June

May June

Cash sales:

($58,500 × 10%) ………………………………………. $ 5,850

($72,800 × 10%) ………………………………………. $ 7,280

VISA/MasterCard:

[(0.75 × $45,000) – $1,536*] ………………………. 42,339

American Express:

[(0.15 × $58,500) – $483**] ……………………….. 8,292

*VISA/MasterCard fee: May fee = [(0.75 × $41,600) × 0.035] = $1,092; June fee =

Exercise 8.22

1. Cash Budget

For the Month of October

Beginning cash balance……………………………………… $ 1,118

Collections:

Cash sales ………………………………………………….. 5,000

Credit sales:

October ($63,000 × 40%) ………………………… 25,200

Disbursements:

Inventory purchases:

October ($68,000 × 70% × 45%) ………………. $21,420

September ($66,500 × 70% × 55%) ………….. 25,603

Salaries and wages ……………………………………… 3,850

2. The ending cash balance does not meet the desired level of $3,000. To quick-

Exercise 8.23

1. From payments in May for credit sales in:

February ($182,000 × 0.80 × 0.05) ………………….. $ 7,280

2. April credit sales = $196,000 × 0.80 = $156,800