1. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals
and strategies of an organization into operational terms.
3. The planning and control functions of budgeting can benefit all organizations, regardless
of size. All organizations need to determine what their goals are and how best to obtain
those goals. This is the planning function of budgeting. In addition, organizations can
compare what actually happens with what was planned to see if the plans are unfolding
as anticipated. This is the control function of budgeting.
4. 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.
6. The sales forecast is a critical input for building the sales budget. However, it is not
necessarily equivalent to the sales budget. Upon receiving the sales forecast, management
may decide that the firm can do better than the forecast indicates. Consequently, actions
may be taken to increase the sales potential for the coming year (e.g., increasing
advertising). This adjusted forecast then becomes the sales budget.
7. Yes. All budgets are founded on the sales budget. Before a production budget can be created,
it must have the 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.
Profit Plannin
g
and
Flexible Bud
g
ets
9
DISCUSSION QUESTIONS
CHAPTER 9 Profit Planning and Flexible Budgets
10. Participative budgeting is a system of budgeting that gives subordinate managers a say in how the
budgets are established. Participative budgeting fosters creativity and communicates a sense of
responsibility to subordinate managers. It also creates a higher likelihood of goal congruence since
managers have more of a tendency to make the budget’s goals their own personal goals.
13.
A
static budget is for a particular level of activity. A flexible budget is one that can be established
for any level of activity.
14.
A
flexible budget is based on a simple formula: Total Costs (Y) = F + VX, where F = Fixed Costs
and V = Variable Cost per Unit; this requires knowledge of both fixed and variable components.
A
A
A
CHAPTER 9 Profit Planning and Flexible Budgets
9-1. d
9-4. e
9-5. d
9-8. a
9-9. c
9-10. c = 100 + 30
–
10 = 120
9-11. e = 220 + 20
–
50 = 190
9-15. a
9-16. e
9-17. c
MULTIPLE-CHOICE QUESTIONS
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-21
1st Quarte
r
BE 9-22
1st Quarte
r
February March Total
Sales………………………
…
38,000 50,000 129,000
Desired ending
inventory………………
…
12,500 12,750* 12,750
…
BRIEF EXERCISES: SET A
Patrick Inc.
Sales Budget
For the Coming Quarte
r
Patrick Inc.
Production Budget
41,000
January
9,500
For the Coming Quarte
r
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-23
1. Ending Inventory for December = 0.15 × 5.50 gal. of chemicals × 43,800 units
= 36,135
Ending Inventory for January = 0.15 × 5.50 gal. of chemicals × 41,000 units
= 33,825
2. Direct materials purchases budget—chemicals in gallons:
January February
Production in units……………………………………
…
43,800 41,000
× Gallons per unit…………………………………
…
5.5 5.5
Gallons for production………………………………
…
240,900 225,500
Desired ending inventory……………………………
…
33,825 41,456
…
…
3. Ending Inventory for Decembe
r
= 0.15 × 1 drum × 43,800 units = 6,570
Ending Inventory for January = 0.15 × 1 drum × 41,000 units = 6,150
Ending Inventory for February = 0.15 × 1 drum × 50,250 units = 7,538*
* Rounded
4. Direct materials purchases budget—drums:
January February
Production in units……………………………………
…
43,800 41,000
× Drums per unit……………………………………
…
1 1
Drums for production…………………………………
…
43,800 41,000
Desired ending inventory……………………………
…
6,150 7,538
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-24
Direct Labor Budget: January February March Total
Units to be produced………………… 43,800 41,000 50,250 135,050
BE 9-25
Overhead Budget: January February March Total
Total direct labor hours ……………
…
13,140 12,300 15,075 40,515
×
V
ariable overhead rate…………
…
$0.70 $0.70 $0.70 $0.70
BE 9-26
1. Direct materials……………………………………………………………………
…
$14.00
Direct labor (1.9 hrs. × $16)…………………………….…………………………
…
30.40
V
ariable overhead (1.9 hrs. × $1.20)…………………………….………………
…
2.28
Fixed overhead (1.9 hrs. × $1.60)…………………………….…………………
…
3.04
Unit product cost…………………………………………………………………… $49.72
2. Cost of ending inventory ($49.72 × 675)………………………………………
…
$33,561
BE 9-27
Direct materials ($14 × 20,000)………………………………………………………… $280,000
Direct labor (1.9 hrs. × $16 × 20,000)………..……………………..…………………
…
608,000
V
ariable overhead (1.9 hrs. × $1.20 × 20,000)………..……………………..………
…
45,600
…
…
Cost of Goods Sold Budget
For the Coming Yea
r
Andrews Company
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-28
V
ariable selling expenses (0.03 × $19,730,000)…………
…
$ 591,900
Fixed expenses:
Salaries………………………………………………………
…
$ 960,000
BE 9-29
Sales ($10.80 × 160,000)….……………..…………….…………………………… $1,728,000
Cost of goods sold ($6.30 × 160,000)….……………..…………….……………
…
1,008,000
Gross margin……………………………….………………………………………
…
$ 720,000
Less: Variable selling and administrative
expenses ($1.10 × 160,000)….……………..…………….………………………
…
176,000
…
…
For the Coming Year
Fazel Company
Selling and Administrative Expenses Budget
For the Coming Year
Oliver Company
Budgeted Income Statement
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-30
August Septembe
r
June:
($100,800 × 0.25)………………………………….…………
…
$25,200 —
July:
($77,000 × 0.50)………………………………….…………
…
38,500
($77,000 × 0.25)………..……………………….……………
…
$19,250
BE 9-31
1. Payments for purchases from:
April ($374,400 × 0.80)……………………….……………………………
…
$299,520
May ($411,200 × 0.20)……………………….………………………………
…
82,240
Total cash needed for May……………………..…………………….
…
$381,760
2. Payments for purchases from:
…
…
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-32
1. Cash receipts in October from:
Cash sales ($157,000 × 0.85)………………………………………………
…
$133,450
2. Payments for food and supplies purchases from:
September ($130,000 × 0.75)………………………………………………
…
$ 97,500
October ($116,000 × 0.25)…………………………………………………
…
29,000
Total cash needed for October……………………………..…………
…
$126,500
3. Beginning balance……………………………………………………………… $ 2,147
Cash receipts……………………………………………………………………
…
157,558
Cash available…………………………………………………………………… $159,705
Less:
…
…
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-33
2,500 units 3,000 units 3,500 units
Direct materials…………………………………………
…
$ 4,500 $ 5,400 $ 6,300
Direct labor………………………………………………
…
20,000 24,000 28,000
V
ariable overhead………………………………………
…
2,750 3,300 3,850
BE 9-34
1.
Direct materials ($0.60 × 3 × 4,000)………………………………
…
$ 7,200
Direct labor ($16.00 × 0.5 × 4,000)………………………………
…
32,000
V
ariable overhead ($2.20 × 0.5 × 4,000)…………………………
…
4,400
Fixed overhead:
Materials handling………………………………………………
…
$6,200
Depreciation……………………………………………………… 2,600 8,800
Total…………………………………………………………………… $52,400
2.
Actual Budgeted
V
ariance*
Units produced……………………………………
…
3,800 4,000 200 U
Direct materials……………………………………
…
$ 6,800 $ 7,200 $ (400) F
V
Budgeted for 4,000 units
Performance Report
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-34 (Concluded)
3.
Actual Budgeted
V
ariance*
Units produced…………………………………
…
3,800 3,800 —
Direct materials…………………………………
…
$ 6,800 $ 6,840 $ (40) F
Direct labor………………………………………
…
30,500 30,400 100 U
V
Performance Report
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-35
1st Quarte
r
February March Total
BE 9-36
1st Quarte
r
February March Total
Sales…………………………
…
20,000 30,000 72,000
Desired ending
inventory…………………… 6,000 6,200* 6,200
Total needs…………………
…
26,000 36,200 78,200
January
BRIEF EXERCISES: SET B
Tulum Inc.
Sales Budget
For the Coming Quarte
r
January
Tulum Inc.
Production Budget
For the Coming Quarte
r
22,000
4,000
26,000
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-37
1. Ending Inventory for December = 0.10 × 4.2 lb. of chocolate mix × 24,700 unit
s
= 10,374
Ending Inventory for January = 0.10 × 4.2 lb. of chocolate mix × 22,000 units
= 9,240
2. Direct materials purchases budget—chocolate mix in pounds:
January February
Production in units……………………………………
…
24,700 22,000
× Gallons per unit…………………………………
…
4.2 4.2
Gallons for production………………………………
…
103,740 92,400
Desired ending inventory……………………………
…
9,240 12,684
Needed…………………………………………………… 112,980 105,084
…
3. Ending Inventory for Decembe
r
= 0.10 × 1 box × 24,700 units = 2,470
Ending Inventory for January = 0.10 × 1 box × 22,000 units = 2,200
4. Direct materials purchases budget—boxes:
January February
Production in units……………………………………
…
24,700 22,000
× Boxes per unit……………………………………
…
1 1
Boxes for production…………………………………
…
24,700 22,000
Desired ending inventory……………………………
…
2,200 3,020
Needed………………………………………………
…
26,900 25,020
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-38
Direct Labor Budget: January February March Total
Units to be produced………………
…
24,700 22,000 30,200 76,900
× Direct labor hours per unit…
…
0.4 0.4 0.4 0.4
BE 9-39
Overhead Budget: January February March Total
Total direct labor hours …………
…
9,880 8,800 12,080 30,760
×
V
ariable overhead rate………
…
$0.50 $0.50 $0.50 $0.50
BE 9-40
1. Direct materials………………………………………………………………………… $ 5.00
Direct labor (0.9 hr. × $18)…………………………….……………………………… 16.20
V
ariable overhead (0.9 hr. × $1.00)…………………………….…………………… 0.90
Fixed overhead (0.9 hr. × $2.00)…………………………….………………………
…
1.80
Unit product cost………………………………………………………………………
…
$23.90
2. Cost of ending inventory ($23.90 × 830)…………………………………………
…
$19,837
BE 9-41
Direct materials ($5.00 × 16,000)……………………………………………………
…
$ 80,000
Direct labor (0.9 hr. × $18.00 × 16,000)………..……………………..……………
…
259,200
V
…
…
Lazlo Company
Cost of Goods Sold Budget
For the Coming Year
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-42
V
ariable selling expenses (0.04 × $18,620,000)…………
…
$ 744,800
Fixed expenses:
Salaries………………………………………………………
…
$ 796,000
Utilities………………………………………………………
…
173,000
BE 9-43
Sales ($9.70 × 230,000)….……………..…………….……………………………
…
$2,231,000
Cost of goods sold ($5.30 × 230,000)….……………..…………….……………
…
1,219,000
Gross margin……………………………….………………………………………
…
$1,012,000
Less: Variable selling and administrative
…
Jameson Company
Budgeted Income Statement
For the Coming Year
Elwood Company
Selling and Administrative Expenses Budget
For the Coming Year
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-44
August Septembe
r
June:
($192,000 × 0.42)………………………………….…………
…
$ 80,640 —
July:
($207,000 × 0.40)………………………………….…………
…
82,800
($207,000 × 0.42)………..……………………….…………
…
$ 86,940
BE 9-45
1. Payments for purchases from:
April ($374,400 × 0.75)……………………….………………………………
…
$280,800
May ($411,200 × 0.25)……………………….………………………………
…
102,800
Total cash needed for May……………………..…………………….…
…
$383,600
2. Payments for purchases from:
…
…
…
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-46
1. Cash receipts in October from:
Cash sales ($395,000 × 0.80)………………………………………………… $316,000
2. Payments for food and supplies purchases from:
September ($275,000 × 0.65)………………………………………………… $178,750
October ($285,000 × 0.35)…………………………………………………….
.
99,750
Total cash needed for October……………………………..……………
…
$278,500
3. Beginning balance………………………………………………………………
…
$ 1,916
Cash receipts……………………………………………………………………… 393,140
Cash available……………………………………………………………………
…
$395,056
Less:
Payments for food and supplies purchases……………………………
…
$278,500
Owners’ draw…………………………………………………………………
…
18,500
Workers’ wages*………………………………………………………………
…
29,300
CHAPTER 9 Profit Planning and Flexible Budgets
BE 9-47
4,000 units 4,500 units 5,000 units
Direct materials…………………………… $15,600 $17,550 $19,500
Direct labor………………………………… 36,000 40,500 45,000
V
ariable overhead………………………… 6,800 7,650 8,500
BE 9-48
1.
Direct materials ($1.30 × 3 × 4,500)…………………
…
$17,550
Direct labor ($18.00 × 0.5 × 4,500)…………………
…
40,500
V
ariable overhead ($3.40 × 0.5 × 4,500)……………
…
7,650
Fixed overhead:
2.
Actual Budgeted
V
ariance*
Units produced………………………
…
4,700 4,500 (200) F
Direct materials……………………… $18,320 $17,550 $ 770 U
Direct labor…………………………… 42,400 40,500 1,900 U
V
Budgeted for 4,500 units
Performance Report
BE 9-48 (Concluded)
3.
Actual Budgeted
V
ariance*
Units produced………………………
…
4,700 4,700 —
Direct materials………………………
…
$18,320 $18,330 $ (10) F
Direct labor……………………………
…
42,400 42,300 100 U
V
ariable overhead……………………
…
7,900 7,990 (90) F
Performance Report
CHAPTER 9 Profit Planning and Flexible Budgets
E 9-49
1. h, i 6. f
2. e 7. f
E 9-50
1.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Y
ea
r
S12L7
Units……
…
800 2,200 5,600 4,600 13,200
Price……
…
$475 $475 $475 $475 $475
Sales……
…
$380,000 $1,045,000 $2,660,000 $2,185,000 $6,270,000
S12L5
…
…
…
2. Stillwater Designs will use the sales budget in planning as the basis for the production
budget and the succeeding budgets of the master budget. The company can also
compare actual sales against the budget to see if expectations were achieved.
EXERCISES
Stillwater Designs
Sales Budget
For the Year Ended December 31, 20X1