CHAPTER 9 Profit Planning and Flexible Budgets
P 9-69 ↓ links ↓
2.
Basic diet bags 100,000 0.2 change here, please
Sp. diet bags 90,000 0.3
Actual Budgeted* Variance 190,000
Units produced………………………………………………………………………………………………………………………
190,000 190,000 0
Production unit: Fixed
Maintenance……………………………………………………………………………………………………………………
$81,300 $80,750 $550 U81,300
……………………..Maintenance……………………..
21,000 0.50
Power……………………………………………………………………………………………………………………
18,700 18,800 100 F18,700
……………………..Power……………………..
18,800 0.40
Indirect labor……………………………………………………………………………………………………………………
143,600 142,200 1,400 U143,600
……………………..Indirect labor……………………..
43,500 2.10
Rent……………………………………………………………………………………………………………………
39,000 39,000 039,000
……………………..Rent……………………..
39,000
Total costs……………………………………………………………………………………………………………………
$282,600 $280,750 $1,850 U
3. All of the variances are small (less than 1% of budgeted amounts). Most would
probably view the variances as immaterial. Reasons for variances are numerous.
For example, an unfavorable maintenance variance could be caused by more
Healthy Pet Company
Performance Report
For the Current Year
Variable
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-70
change here, please →
1. To determine accounts payable as of June 30, a schedule of purchases will be % collected
constructed. This schedule will also be used to build the cash budget. May 100,000 month of sale 20%
Let X = Cost of Sales X + 0.25 = 1.00 June 120,000 following month 50%
If X + 0.25X = Sales, then X = Sales/1.25. 1.00 – 0.25 = 0.80 July 90,000 2nd mo. after 30%
For example, for August, August 100,000 common stock 210,000
Cost of Sales = Sales/1.25 = $100,000/1.25 = $80,000 100,000 / 1.25 = 80,000 September 135,000 retained earnings 268,750
Cost of sales…………………………………………………………………………………………………………
Desired end. inventory*…………………………………………………………………………………………………………
Less: Beg. inventory…………………………………………………………………………………………………………
*0.50 × Next M onth’s Cost of Sales deprec. p&e 4,000
Since purchases are paid for in the following month, accounts payable at the end utilities 1,000
of June is $84,000. Inventory for June 30 is $36,000.
Accounts receivable for June 30 is computed as follows:
From June:
0.70 × $120,000 × 0.80…………………………………………………………………………………..…………………………
$67,200 70% × 120,000 × 80% =
From May:
0.70 × $100,000 × 0.30…………………………………………………………………………………..…………………………
21,000 70% × 100,000 × 30% =
Total A/R………………………………………………………………………………………………..………………………………………………..
$88,200
*By June 30, 20% of June credit sales and 70% of May credit sales have been collected, leaving 100% – 20% = 80%
80% and 30%, respectively, to be collected. 100% – 70% = 30%
Given accounts payable, the total liabilities plus stockholders’ equity must equal
$562,750 ($84,000 + $210,000 + $268,750). Cash is the difference between total 84,000 + 210,000 + 268,750 =
assets and all other assets except cash ($562,750 – $425,000 – $36,000 – $88,200). 562,750 – 425,000 – 36,000 – 88,200 = 13,550
This difference is $13,550.
Total liabilities plus stockholders’ equity…………………………………………………………………..………………..………………..………………..………………..………..……..
$562,750
Cash…………………………………..…………………………..……………………………………..………..………………..……………………….
13,550
Accounts receivable………………………..……………………………………………………………………………….
Inventory…………………..…………………………………………………………………………………………….
Plant and equipment, net…………………..……………………………………………………………………………………
Accounts payable…………………………………………………………………………………………………………….
Common stock……………………………….………………………………………………………………………………..
Retained earnings…………………………………………………………………………………………………………
67,200
21,000
562,750
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-70 (Continued)
2.
(links to prev)
July August September Total
Beginning cash balance…………………………………………………………………………………………………………
$ 13,550 $ 10,450 $ 10,405 $ 13,550 May 100,000 month of sale 20%
Cash collections*…………………………………………………………………………………………………………
102,600 100,700 113,300 316,600 June 120,000 following month 50%
Total cash available…………………………………………………………………………………………………………
$116,150 $111,150 $123,705 $330,150 July 90,000 2nd mo. after 30%
Purchases**…………………………………………………………………………………………………………
Salaries and wages…………………………………………………………………………………………………………
Utilities…………………………………………………………………………………………………………
Other…………………………………………………………………………………………………………
Property taxes…………………………………………………………………………………………………………
Advertising fees…………………………………………………………………………………………………………
6,000 6,000 credit sales 70%
Lease…………………………………………………………………………………………………………
5,000 5,000
Total disbursement…………………………………………………………………………………………………………
$111,700 $ 94,700 $111,700 $318,100
Minimum cash balance…………………………………………………………………………………………………………
10,000 10,000 10,000 10,000
Total cash needs…………………………………………………………………………………………………………
$121,700 $104,700 $121,700 $328,100
Excess (deficiency)…………………………………………………………………………………………………………
Borrowings…………………………………………………………………………………………………………
Repayments…………………………………………………………………………………………………………
Interest***…………………………………………………………………………………………………………
*Cash collections:
Cash sales…………………………………………………………………………………………………………
$ 27,000 $30,000 $40,500 $97,500 @30%
Credit sales:
Current month…………………………………………………………………………………………………………
12,600 14,000 18,900 45,500 @70% × 20%
Prior month…………………………………………………………………………………………………………
42,000 31,500 35,000 108,500 @70% × 50%
From two months ago…………………………………………………………………………………………………………
21,000 25,200 18,900 65,100 @70% × 30%
Total collections…………………………………………………………………………………………………………
$102,600 $100,700 $113,300 $316,600
Grange Retailers
Cash Budget
For the Quarter Ending September 30
% collected
CHAPTER 9 Profit Planning and Flexible Budgets
(links to prev)
P 9-70 (Concluded)
3. end. inventory 50% month of sale 20%
mark-up 25% following month 50%
cash sales 30% 2nd mo. after 30%
Assets L & OE credit sales 70%
Cash………………………………………………………………………………………………………………………………………………
$ 12,005 plant & equip. 425,000
Accounts receivable a…………………………………………………………………………………………
96,600 deprec. plant & equip. 4,000
Inventory b………………………………………………………………………………………………………………………………………
44,000
Plant and equipment c…………………………………………………………………………………………..
413,000 (links)
Accounts payable b………………………………………………………………………………………………………………….
$ 98,000 september purchases 98,000
Common stock…………………………………………………………………………………………………………………………………………….
210,000 common stock 210,000
Retained earnings d…………………………………………………………………………………………………………….
257,605
Total………………………………………………………………………………………………………………………………….……………………………
$565,605 $565,605
4. Cash budgets are important in loan decisions to help determine the company’s
ability to repay the loan. A statement of cash flows would also be helpful to see how
cash has been generated and used in the past. Another key report is the balance
% collected
Grange Retailers
Balance Sheet
September 30
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-71
When Eisenhower said “planning is everything,” he was no doubt referring to the
extensive planning process he undertook to plan the D-Day invasion of Normandy.
That plan was comprehensive and took into account the manpower needed,
probable German response, and even the weather. However, once the invasion
grew closer, Eisenhower had to respond to changes in the assumptions underlying
the plan. He had to change the plan in response to changes in important factors. It is
in that sense that “the plan is nothing.” He had no problem deviating from the
original plan if it seemed warranted.
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-72
change here, please ↓
cash sales 40% prepaid insurance 6,000
Beginning cash balance…………………………………………………………….……………………………….
$ 27,000 credit sales 60% dividends 130,000
Collections: month of sale 45% old equipment sale 25,200
Cash sales (0.40 × $1,140,000)………….……………………………………………………..……………………………………………..……..………….…...
456,000 40% × 1,140,000 = 456,000 following month 30% equip purchased 173,000
Credit sales: third month 25% minimum cash bal 20,000
Sale of old equipment……………………………………………………….……………………………………….
Total cash available…………………………………………………………….………………………………………
Less disbursements: operating expenses 376,000
Raw materials: depreciation 45,000
Julye…………………………………………………………….………………………
Junef…………………………………………………………….………………………
Direct labor………………………………………………………..……………………………………………..…………………….
Operating expenses………………………………………………..………………………………..………………………………….
130,000
105,000
325,000
Total disbursements…………………………………………..………………………………………..……………………..
$1,037,200
Minimum cash balance…………………………………………..…………………………………..…………………………………….
20,000
Total cash needs…………………………………………………..………………………………………………………………………..
$1,057,200
Excess of cash available over needs………………………………………………………..…………………………………………….……………….
$ 4,722
Ending cash balance…………………………………………………………………………..…………………………………..………………………
$ 24,722
a
(0.60 × $1,140,000) × 0.45 × 0.50 × 0.98 = $150,822
60% × 1,140,000 × 45% × 50% × 98% = 150,822
b(0.60 × $1,140,000) × 0.45 × 0.50 = $153,900 60% × 1,140,000 × 45% × 50% = 153,900
d(0.60 × $580,000) × 0.25 = $87,000 60% × 580,000 × 25% = 87,000
Feinberg Company
Cash Budget
For the Month of July
$ 156,000
148,200
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-73
1. Schedule 1: Sales Budget (units and budgeted sales in thousands) in thousands 1,000
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total cash balance 250,000 sales inventory
Unit price………………………………………..…………………………………………………..…………
current quarter 85% Fourth quarter 90,000 10,000
2. Schedule 2: Production Budget next month 15%
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Sales (Sch. 1)………………………………………..…………………………………………………..…………
65,000 70,000 75,000 90,000 300,000 unit of DM 3 cash 250,000 new equip 2,000,000
Desired unit of DM cost 80 DM inventory 5,256,000 purchases:
Total needs………………………………………..…………………………………………………..…………
variable selling expenses 10 total liabilities & SE 42,306,000
fixed 250,000
depreciation (per quarter) 50,000
dividends 300,000
assets:
(change here, please)
PLEASE NOTE: All schedules in P 9-51 link to this
page. For reference, selected links display on
following pages when appropriate.
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-73 (Continued) ↓ links ↓
3. Schedule 3: Direct Materials Purchases Budget (in thousands) in thousands 1,000 ↓ links ↓
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total ↓ links ↓ unit of DM 3 labor hours 5
Production………………………………………..…………………………………………………..…………
78.0 72.0 80.0 80.0 310.0 ÷ 1,000 beginning material 65,700 labor cost 10
× Materials/unit………………………………………..…………………………………………………..…………
3 3 3 3 3 % of beginning material 30% overhead rate 6
Production needs………………………………………..…………………………………………………..…………
234.0 216.0 240.0 240.0 930.0 unit of DM cost 80 fixed overhead 1,000,000
Desired ending fixed 250,000
inventory………………………………………..…………………………………………………..…………
63.0 67.5 81.0 65.7 65.7 @ 3 × 30% ÷ 1,000 sales inventory
Total needs………………………………………..…………………………………………………..…………
inventory………………………………………..…………………………………………………..…………
Purchases………………………………………..…………………………………………………..…………
× Cost per unit………………………………………..…………………………………………………..…………
Purchase cost………………………………………..…………………………………………………..…………
$18,504 $17,640 $20,280 $17,976 $74,424
4. Schedule 4: Direct Labor Budget (in thousands, except per unit/hour data)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Production………………………………………..…………………………………………………..…………
78 72 80 80 310
× Hours per unit………………………………………..…………………………………………………..…………
5 5 5 5 5 @ 5 labor hours
Hours needed………………………………………..…………………………………………………..…………
390 360 400 400 1,550
× Cost per hour………………………………………..…………………………………………………..…………
$10 $10 $10 $10 $10 @10 labor cost
Total cost………………………………………..…………………………………………………..…………
$3,900 $3,600 $4,000 $4,000 $15,500
5. Schedule 5: Overhead Budget (in thousands, except per unit/hour data)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Budgeted hours………………………………………..…………………………………………………..…………
× Variable rate………………………………………..…………………………………………………..…………
Budgeted VOH………………………………………..…………………………………………………..…………
Budgeted FOH………………………………………..…………………………………………………..…………
Total OH………………………………………..…………………………………………………..…………
$3,340 $3,160 $3,400 $3,400 $13,300
6. Schedule 6: Selling and Administrative Expenses Budget (in thousands, except
per unit/hour data)
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total
Planned sales………………………………………..…………………………………………………..…………
65 70 75 90 300 ÷ 1,000
× Variable rate………………………………………..…………………………………………………..…………
$10 $10 $10 $10 $10 @10
Variable expenses………………………………………..…………………………………………………..…………
$650 $700 $750 $900 $3,000
Fixed expenses………………………………………..…………………………………………………..…………
250 250 250 250 1,000 ÷ 1,000
Total expenses………………………………………..…………………………………………………..…………
$900 $950 $1,000 $1,150 $4,000
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-73 (Continued)
7. Schedule 7: Ending Finished Goods Inventory Budget ↓ links ↓
Unit cost computation: ↓ links ↓ in thousands 1,000
Direct materials (3 units @ $80)………………………………………………………………………..…………………………………………..…..……………
$ 240.00 3
@
80 = 240.00 unit of DM 3
Direct labor (5 units @ $10)………………………………………………………………………..…………………………………………..…..……………
50.00 5
@
10 = 50.00 unit of DM cost 80
Overhead: labor hours 5
Variable (5 units @ $6)………………………………………………………………………..…………………………………………..…..……………
30.00 5
@
6 = 30.00 labor cost 10
Fixed ($4,000,000/310,000)*…………………………………………………………..….……………………………………………………………………….…..
12.90 4,000 × 1,000 / 310,000 = 12.90 overhead rate 6
Total unit cost…………………………………………………………………………………………………………
$ 332.90
Finished goods (10,000 × $332.90)…………………………………………….………………………………………………………………………………….
$3,329,000 10,000 × 332.90 =
*Rounded ↓ links ↓
8. Schedule 8: Cost of Goods Sold Budget sales inventory
Direct materials used (Schedule 3)……………………………………………………..……………………………….…………
$ 74,424,000 74,424 × 1,000 First quarter 65,000 13,000
Direct labor used (Schedule 4)…………………………………..…………………….…………………..……………………………
Overhead (Schedule 5)………………………………………………………………………………………..……………….…………….
Budgeted manufacturing costs…………………………………………………..…………………………………………………………………………………….………………………………………..
Cost of goods available for sale………………………………………………………………………………………………
Budgeted cost of goods sold………………………………………………………………………………………..…………….
$ 99,895,000 DM inventory 5,256,000
9. Cash Budget (in thousands) A/R 3,300,000 fixed overhead 1,000,000
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Total plant & equip 33,500,000 deprec per quarter 350,000
Beginning cash…………………..………………………………..……………
$ 250 $1,110 $3,128 $5,568 $250 ÷ 1,000 liabilities & SE: fixed 250,000
Collections: A/P 7,248,000 deprec per quarter 50,000
Credit sales:
capital stock 27,000,000
Current quarter…………………..………………………………..………………………………..……………
22,100 23,800 25,500 30,600 102,000 @400 × 85% ÷ 1,000 retained earnings 8,058,000
Prior quarter…………………..………………………………..………………………………..……………
3,300 3,900 4,200 4,500 15,900 @400 × 15% ÷ 1,000
Cash available…………………..………………………………..………………………………..……………
$25,650 $28,810 $32,828 $40,668 $118,150 new equip 2,000,000
Current quarter…………………..………………………………..………………………………..……………
Prior quarter…………………..………………………………..………………………………..……………
Total cash needs…………………..………………………………..………………………………..……………
3,329,000
*
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-73 (Concluded)
10. ↓ links ↓ ↓ links ↓
Pro Forma Income Statement × 1,000 current quarter 85%
unit price 400 next month 15%
Sales (Schedule 1)…………………………………..…………………………………………………………………
$120,000,000 depreciation (per quarter) 350,000
Less: Cost of goods sold (Schedule 8)…………………………..………………………………..…………………..…………………………
Gross margin………………………..……………………………..………………………………..………………………………………………..
Less: Selling and administrative expenses (Schedule 6)……………………..………………………………..………………………………………
Income before taxes………………………………………………………………..………………………………..……………………………….
11. plant & equip 33,500,000
new equip 2,000,000
purchases:
Cash…………………………………………………………………………………..………………………………..
$11,090,000 current quarter 50%
Accounts receivable………………………………….……………………………..…………………………………….
5,400,000 @400 × 15% next quarter 50%
Direct materials inventory……………………………..…………………………..……………………………………
5,256,000
Finished goods inventory…………………………..……………………………..………………………………………
3,329,000
Plant and equipment, neta…………………………..……………………………..…………………………………………
33,900,000
Total assets…………………………………………………………………………..……………………………
$58,975,000
Accounts payable…………………………………………………………………………..………………………………….
Capital stock……………………………….………………………………………………..……………………………
Retained earningsb………………………………..…………………………………………..……………………………….
Total liabilities and stockholders’ equity…………………………………………………..…………………………
Optima Company
For the Year Ending December 31, 20X1
Optima Company
December 31, 20X1
Pro Forma Balance Sheet
Assets
CHAPTER 9 Profit Planning and Flexible Budgets
(change here, please)
P 9-74 units
1. October 20,000
November 40,000
December 25,000
October November December Total January 30,000
Units to be produced…………………………………..………………..……………
20,000 40,000 25,000 85,000
× DM per unit (yds.)…………………..………………………………..……………
0.2 0.2 0.2 0.2 DM per unit (yds.) 0.20
Production needs…………………..………………………………..………………………………..……………
4,000 8,000 5,000 17,000 (links) cost per yard 3.50
Desired ending inventory (yds.)…………………..………………………………..……………
Total needs…………………..………………………………..………………………………..……………
Less: Beg. inventory…………………..………………………………..………………………………..……………
DM to be purchased (yds.)…………………..………………………………..………………………………..……………
× Cost per yard…………………..………………………………..………………………………..……………
2. ending inventory (oz) 30%
October November December Total
Units to be produced…………………..………………………………..………………………………..……………
20,000 40,000 25,000 85,000
× DM per unit (oz.)…………………..………………………………..………………………………..……………
6 6 6 6
Production needs…………………..………………………………..………………………………..……………
120,000 240,000 150,000 510,000
Desired ending inventory (oz.)…………………..………………………………..………………………………..……………
Total needs…………………..………………………………..………………………………..……………
Less: Beg. inventory…………………..………………………………..………………………………..……………
DM to be purchased (oz.)…………………..………………………………..………………………………..……………
× Cost per ounce…………………..………………………………..………………………………..……………
3.
October November December Total
Units to be produced…………………..………………………………..………………………………..……………
20,000 40,000 25,000 85,000
× Direct labor time per
unit (hours)…………………..………………………………..………………………………..……………
0.10 0.10 0.10 0.10
Total hours needed…………………..………………………………..………………………………..……………
× Wages per hour…………………..………………………………..………………………………..……………
For the Fourth Quarter
Direct Materials Purchases Budget for Fabric
For the Fourth Quarter
Willison Company
Willison Company
Direct Materials Purchases Budget for Polyfiberfill
For the Fourth Quarter
Willison Company
Direct Labor Budget
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-75 (change here, please)
1.
August September checks charge 0.50 July 60,000
Cash sales: ↓ links ↓ charge per check 65 August 75,000
($75,000 × 0.75)….…………………………………..………………………………..………………………….…….……….…….…….
$56,250 75,000 × 75% = 56,250 uncollected checks 2% September 80,000
($80,000 × 0.75)….…………………………………..………………………………..………………………….…….……….…….…….
$60,000 80,000 × 75% = 60,000
Checks*………………………………..…………………..………………………………..……………………………………………….
18,231 19,446 % of cash sales 75% credit card fee 3.50%
Total…………………………….…………………………..………………………………..………………………………………………..
$74,481 $79,446 Check sales 25% Amex charge 5.50%
*Check collections for: ↓ links ↓
(0.25 × $75,000)….…………………………………..………………………………..………………………....……….…….…….…….
$18,750 25% × 75,000 = 18,750 Increase in sales 20% Discount fee 2%
(0.25 × $80,000)….…………………………………..………………………………..………………………....……….…….…….…….
(0.02 × $18,750)….…………………………………..………………………………..………………………....……….…….…….…….
(0.02 × $20,000)….…………………………………..………………………………..………………………....……….…….…….…….
[($18,750/$65) × $0.50]….…………………………………..………………………………..………………………….……….…….…….…….
[($20,000/$65) × $0.50]….…………………………………..………………………………..………………………….……….…….…….…….
July August September
2. a. Revised cash sales estimates: ↓ links ↓
($60,000 × 1.20 × 0.05)…………………..………………………………..………………………………..………………………………..……………
$ 3,600 60,000 × 120% × 5% = 3,600
($75,000 × 1.20 × 0.05)…………………..………………………………..………………………………..………………………………..……………
$ 4,500 75,000 × 120% × 5% = 4,500
($80,000 × 1.20 × 0.05)…………………..………………………………..………………………………..………………………………..……………
$ 4,800 80,000 × 120% × 5% = 4,800
Revised credit card sales:
($60,000 × 1.20 × 0.95)…………………..………………………………..………………………………..………………………………..……………
($75,000 × 1.20 × 0.95)…………………..………………………………..………………………………..………………………………..……………
($80,000 × 1.20 × 0.95)…………………..………………………………..………………………………..………………………………..……………
Schedule of Cash Receipts
CHAPTER 9 Profit Planning and Flexible Budgets
P 9-75 (Concluded)
3. August September (linked to previous)
Cash sales: ↓ links ↓
($90,000 × 0.05)….…………………………………..………………………………..………………………….…….……….…….…….
$ 4,500 90,000 × 5% = 4,500 checks charge 0.50 July 60,000
($96,000 × 0.05)….…………………………………..………………………………..………………………….…….……….…….…….
$ 4,800 96,000 × 5% = 4,800 charge per check 65 August 75,000
Credit card receipts net of discount: uncollected checks 2% September 80,000
From July ($68,400 × 0.98 × 0.06)…………………..………………………………..………………………………..……………
4,022 68,400 × 98% × 6% = 4,022 % of cash sales 75% credit card fee 3.50%
From August:
Check sales 25% Amex charge 5.50%
($85,500 × 0.98 × 0.94)…………………..………………………………..………………………………..……………
78,763 85,500 × 98% × 94% = 78,763
($85,500 × 0.98 × 0.06)…………………..………………………………..………………………………..……………
5,027 85,500 × 98% × 6% = 5,027 Increase in sales 20% Discount fee 2%
From September ($91,200 × 0.98 × 0.94)…………………..………………………………..………………………………..……………
Gateway and statement fee…………………..………………………………..………………………………..……………
Transaction fees:…………………..………………………………..………………………………..……………
1,710 × $0.25…………………..………………………………..………………………………..……………
1,824 × $0.25…………………..………………………………..………………………………..……………
*
*
*
*
CHAPTER 9 Profit Planning and Flexible Budgets
Case 9-76
Answers will vary.
Case 9-77
1.
change here and below, please
Cash collections and cash available*…………………………………………………………………………………………………………………..
$21,360 Salaries:
Less cash disbursements: Two dental assistants 1,900
Salaries……………………………………………………………………………………………………………………
$12,700 Receptionist/bookkeeper 1,500
Benefits……………………………………………………………………………………………………………………
1,344 Hygienist 1,800
Building lease…………………………………………………………………………………………………………….
1,200 Personal salary 6,500
Janitorial…………………………………………………………………………………………………………………..
Utilities…………………………………………………………………………………………………………………….
Phone……………………………………………………………………………………………………………………..
Office supplies……………………………………………………………………………………………………………
Lab fees…………………………………………………………………………………………………………………..
Loan payments…………………………………………………………………………………………………………..
570 Janitorial 300
Interest payments………………………………………………………………………………………………………..
500 Utilities 400
Miscellaneous……………………………………………………………………………………………………………
200 Phone 150
Total cash needs…………………………………………………………………………………………………………….
$23,964 Office supplies 100
Deficiency of cash available over needs……………………………………………………………………………………
$ (2,604) Lab fees 5,000
*Total revenues for a month: Interest payments 500
Fillings ($50 × 90)………………………………………………………………………………………………………………………………………………………..
$ 4,500 50 × 90 = 4,500 Miscellaneous 200
Crowns ($300 × 19)………………………………………………………………………………………………………………………………………………………..
5,700 300 × 19 = 5,700 Depreciation 700
Root canals ($170 × 8)………………………………………………………………………………………………………………………………………………………..
1,360 170 × 8 = 1,360 Total costs 11,964
Bridges ($500 × 7)………………………………………………………………………………………………………………………………………………………..
Extractions ($45 × 30)………………………………………………………………………………………………………………………………………………………..
Cleaning ($25 × 108)………………………………………………………………………………………………………………………………………………………..
X-rays ($15 × 150)………………………………………………………………………………………………………………………………………………………..
2,250 15 × 150 = 2,250 salary increase 25%
Dr. Roger Jones
Cash Budget
CASES
Loan payments
570
CHAPTER 9 Profit Planning and Flexible Budgets
Case 9-77 (Continued) Salaries:
2. Dr. Jones must either increase revenues to make up the deficiency or cut costs or a Two dental assistants 1,900
combination of the two. Three possible approaches are outlined as follows: Receptionist/bookkeeper 1,500
Hygienist 1,800
a. Extend office hours so that a total of 40 hours are worked each week. This could Public relations (Mrs. Jones) 1,000
increase revenues by as much as $5,340. Based on a four-week month, the current Personal salary 6,500
revenue earned per hour is $166.88 ($21,360/128). Thus, the total revenue increase 21,360 / 128 = 166.88 Total salaries 12,700
Lab fees 5,000
Incremental revenues……………………….……………………………………………………
$ 5,340 Interest payments 500
Salary increases (0.25 × $3,400)…………………………………………….……………………..…..…………………….……………………..…..……………....
(850) 25% × 3,400 = 850 Miscellaneous 200
Benefits [($1,344/$12,700) × $850]………………………………………………………………………………………………………………………………..……….…
(90) 1,344 / 12,700 × 850 = 90 Depreciation 700
Variable expenses (0.31 × $5,340)………………………………………………………………….………………………………………….……………….
(1,655) 31% × 5,340 = 1,655 Total costs 11,964
Cash flow increase……………………………………………………………………………..
$ 2,745
Approach 1 carries with it some risk. Increasing office hours may not increase cash collect. & available 21,360
CHAPTER 9 Profit Planning and Flexible Budgets
Case 9-77 (Continued)
Salaries:
Two dental assistants 1,900
Cash collections and cash available ($21,360 + $5,340)………………………………………………………………………………...………………………………………...….
$26,700 21,360 + 5,340 = 26,700 Receptionist/bookkeeper 1,500
Less cash disbursements: Hygienist 1,800
Salaries ($12,700 + $850)……………..……..…………………………..……..……………………………..……………………..………………...
$13,550 12,700 + 850 = 13,550 Public relations (Mrs. Jones) 1,000
1,434 1,344 + 90 = 1,434 Personal salary 6,500
Building lease……………………………………………………………………………………………
Dental supplies ($1,200 + $301*)……………..……..…………………………..……..……………………………..……………………..…...……………
Janitorial…………………………………………………………………………………………………….
Utilities ($400 + $100*)……………..……..…………………………..……..……………………………..……………………..…...……………
Phone………………………………………………………………………………………………………..
150 Dental supplies 1,200
Office supplies……………………………………………………………………………………………..
100 Janitorial 300
Lab fees ($5,000 + $1,254*)……………..……..…………………………..……..……………………………..……………………..…………………
6,254 5,000 + 1,254 = 6,254 Utilities 400
Loan payments……………………………………………………………………………………………..
570 Phone 150
Interest payments………………………………………………………………………………………….
500 salary increase 850 Office supplies 100
Miscellaneous………………………………………………………………………………………………
200 benefit increase 90 Lab fees 5,000
Total cash needs……………………………………………………………………………………………….
$26,559 dental supplies increase (as % of Sales incr) 1,655 Loan payments 570
Excess cash available over needs………………………………………………………………………….
$ 141 utilities increase 0 Interest payments 500
dental supplies
utilities
lab fees
Additional expense ($5,340 × 31%, rounded) in each category (rounded to the nearest dollar):
Dental supplies ($1,655 × 18.2%) = $301 1,655 × 18.2% = 301 days 128
Utilities ($1,655 × 6.1%) = $100 1,655 × 6.1% = 100 Cash collect. & cash available 21,360
Lab fees ($1,655 × 75.8%) = $1,254 1,655 × 75.8% = 1,254 hours 32
b. Cut one dental assistant, eliminate the salary to Mrs. Jones and the variable expenses 31%
activities she does, and cut Dr. Jones’s salary back by $1,000 per month: hour increase % 25%
The savings are as follows:
Assistant (salary and benefits)*…………………………………………………………..……………………..…………………………..
$3,051 links ↓ input ↓
Dr. Roger Jones
Revised Cash Budget
expense increase
dental supplies
utilities
lab fees
CHAPTER 9 Profit Planning and Flexible Budgets
Case 9-77 (Concluded)
Although this achieves the savings, the solution may not be feasible. The solution
depends to a large extent on how well the Jones family can do with a $2,000 per
c. A third possibility is to increase the fees charged for the various dental services.
Assuming a variable cost ratio of 31% (from the first approach), the increase in 1.00 – 0.31 = 0.69
revenues needed to cover the $2,604 deficiency can be computed as follows:
0.69 R = $2,604 0.69 R = 2,604
R = $2,604/0.69 2,604 ÷ 0.69 = 3,774
R = $3,774
This increase would call for fees to increase an average of 17.7%. Whether this
increase is possible or not depends to some extent on how Dr. Jones’s charges 3,774 ÷ 21,360 = 17.7
compare with other dentists in the area. If some increase is possible, then the
increase could be combined with elements of the other two approaches (e.g., a
10% increase in fees and working an extra 4 hours per week, say, on
Wednesday evening). I would expect Dr. Jones to be more likely to accept a
combination like the one just mentioned rather than accepting any of the
approaches in their pure form.
Case 9-78
1. Linda’s behavior is not ethical. In the budgeting process, she is deliberately
misrepresenting the capabilities of her division for personal gain. To ensure that she
achieves budget (either this year or next), she manipulates accounting procedures.
CHAPTER 9 Profit Planning and Flexible Budgets
Case 9-78 (Concluded)
2. There are few, if any, legitimate reasons for deferring the closing of sales. Thus, if a
marketing manager was asked to engage in this behavior, the first response must
be to find out why the request is being made. If there is no sound reason offered,
3. It would be hard to go against a common practice that seems to have the approval
of the plant managers. The widespread knowledge of the practice may even suggest
that higher-level management is aware of it and essentially condones the practice—or
at least adjusts for it. If higher-level management is aware of the practice and adjusts
for it, then the ability to achieve a bonus may not be enhanced as much as believed.
4. This is a clear violation of the ethical code for management accountants. A management
accountant is obligated to report information fairly and objectively and to disclose all
information that can be expected to influence a user’s understanding of accounting
reports. Moreover, management accountants must perform their duties in accordance
with relevant laws, regulations, and technical standards. Accelerating the recognition
of expenses violates generally accepted accounting principles. Your first step would