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Solutions Manual, Chapter 9 455
Chapter 9
Profit Planning
Solutions to Questions
9-1 A budget is a detailed quantitative plan for the acquisition and use of financial and other resources over a given time period. Budgetary control involves the use of budgets to control theactual activities of a firm.
9-
- Budgets communicate management’s plans throughout the organization.
- Budgets force managers to think about and plan for the future.
- The budgeting process provides a means of allocating resources to those parts of the or- ganization where they can be used most effec- tively.
- The budgeting process can uncover po- tential bottlenecks before they occur.
- Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.
- Budgets define goals and objectives that can serve as benchmarks for evaluating subse- quent performance.
9-3 Responsibility accounting is a system in which a manager is held responsible for those items of revenues and costs—and only those items—that the manager can control to a signifi- cant extent. Each line item in the budget is made the responsibility of a manager who is then held responsible for differences between budgeted and actual results.
9-4 A master budget represents a summary of all of management’s plans and goals for the future, and outlines the way in which these plans are to be accomplished. The master budg- et is composed of a number of smaller, specific budgets encompassing sales, production, raw materials, direct labor, manufacturing overhead,
selling and administrative expenses, and inven- tories. The master budget generally also con- tains a budgeted income statement, budgeted balance sheet, and cash budget. 9-5 The level of sales impacts virtually every other aspect of the firm’s activities. It deter- mines the production budget, cash collections, cash disbursements, and selling and administra- tive budget that in turn determine the cash budget and budgeted income statement and balance sheet. 9-6 No. Planning and control are different, although related, concepts. Planning involves developing goals and developing budgets to achieve those goals. Control, by contrast, in- volves the means by which management at- tempts to ensure that the goals set down at the planning stage are attained. 9-7 The flow of budgeting information moves in two directions—upward and down- ward. The initial flow should be from the bottom of the organization upward. Each person having responsibility over revenues or costs should pre- pare the budget data against which his or her subsequent performance will be measured. As the budget data are communicated upward, higher-level managers should review the budg- ets for consistency with the overall goals of the organization and the plans of other units in the organization. Any issues should be resolved in discussions between the individuals who pre- pared the budgets and their managers. All levels of an organization should par- ticipate in the budgeting process—not just top management or the accounting department. Generally, the lower levels will be more familiar with detailed, day-to-day operating data, and for this reason will have primary responsibility for developing the specifics in the budget. Top lev-
456 Managerial Accounting, 12th Edition
els of management should have a better per- spective concerning the company’s strategy.
9-8 A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets. This is in contrast to a budget that is imposed from above. The major advantages of a self-imposed budget are: (1) Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued. (2) Budget estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less inti- mate knowledge of markets and day-to-day op- erations. (3) Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Self-imposed budgets create commitment. (4) A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible
to meet. With a self-imposed budget, this ex- cuse is not available. Self-imposed budgets do carry with them the risk of budgetary slack. The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack. 9-9 Budgeting can assist a company forecast its workforce staffing needs through direct labor and other budgets. By careful planning through the budget process, a company can often smooth out its activities and avoid erratic hiring and laying off employees. 9-10 No, although this is clearly one of the purposes of the cash budget. The principal pur- pose is to provide information on probable cash needsduring the budget period, so that bank loans and other sources of financing can be an- ticipated and arranged well in advance.
458 Managerial Accounting, 12th Edition
Exercise 9-2 (10 minutes)
July August
Septem- ber Quarter Budgeted sales in units ............ 30,000 45,000 60,000 135, Add desired ending inventory*. 4,500 6,000 5,000 5, Total needs ............................. 34,500 51,000 65,000 140, Less beginning inventory.......... 3,000 4,500 6,000 3, Required production ................ 31,500 46,500 59,000 137, *10% of the following month’s sales
Exercise 9-3 (15 minutes)
- Solutions Manual, Chapter
- Required production of calculators 60,000 90,000 150,000 100,000 80, First Second Third Fourth First
- Number of chips per calculator × 3 × 3 × 3 × 3 ×
- Total production needs—chips 180,000 270,000 450,000 300,000 240, - Year
- Production needs—chips 180,000 270,000 450,000 300,000 1,200, First Second Third Fourth Year
- Add desired ending inventory—chips 54,000 90,000 60,000 48,000 48,
- Total needs—chips 234,000 360,000 510,000 348,000 1,248,
- Less beginning inventory—chips 36,000 54,000 90,000 60,000 36,
- Required purchases—chips 198,000 306,000 420,000 288,000 1,212,
- Cost of purchases at $2 per chip $396,000 $612,000 $840,000 $576,000 $2,424,
Solutions Manual, Chapter 9 461
Exercise 9-5 (15 minutes)
- Krispin Corporation Manufacturing Overhead Budget 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter Year Budgeted direct labor-hours ......... 5,000 4,800 5,200 5,400 20, Variable overhead rate ................ × $1.75 × $1.75 × $1.75 × $1.75 × $1. Variable manufacturing overhead. $ 8,750 $ 8,400 $ 9,100 $ 9,450 $ 35, Fixed manufacturing overhead ..... 35,000 35,000 35,000 35,000 140, Total manufacturing overhead ..... 43,750 43,400 44,100 44,450 175, Less depreciation ........................ 15,000 15,000 15,000 15,000 60, Cash disbursements for manufac- turing overhead ........................ $28,750 $28,400 $29,100 $29,450 $115,
- Total budgeted manufacturing overhead for the year (a) ...................................... $175, Total budgeted direct labor-hours for the year (b) ................................................ 20, Predetermined overhead rate for the year (a) ÷ (b) ............................................. $8.
462 Managerial Accounting, 12th Edition
Exercise 9-6 (15 minutes)
Haerve Company Selling and Administrative Expense Budget 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter Year Budgeted unit sales .................................. 12,000 14,000 11,000 10,000 47, Variable selling and administrative expense per unit ................................................. × $2.75 × $2.75 × $2.75 × $2.75 × $2. Variable expense ...................................... $ 33,000 $ 38,500 $ 30 ,250 $ 27,500 $129, Fixed selling and administrative expenses: Advertising............................................. 12,000 12,000 12,000 12,000 48, Executive salaries ................................... 40,000 40,000 40,000 40,000 160, Insurance .............................................. 6,000 6,000 12, Property taxes........................................ 6,000 6, Depreciation .......................................... 16,000 16,000 16,000 16,000 64, Total fixed selling and administrative ex- penses................................................... 68,000 74,000 74,000 74,000 290, Total selling and administrative expenses ... 101,000 112,500 104,250 101,500 419, Less depreciation ...................................... 16,000 16,000 16,000 16,000 64, Cash disbursements for selling and admin- istrative expenses................................... $ 85,000 $ 96,500 $ 88,250 $ 85,500 $355,
464 Managerial Accounting, 12th Edition
Problem 9-8 (30 minutes)
- Cadence and Cross used a top-down approach to prepare the budget. That is, they prepared the budget with little or no input from the indi- viduals who would have to implement the budget. In contrast, the rec- ommended approach is a participative budget in which the individuals who have cost control responsibility initiate and fully participate in the budgeting process. Participatory budgets have a number of advantages including: 1) those who are closest to the action are likely to have better information; 2) managers are likely to be more committed to and under- stand a budget they participated in preparing than a budget that is im- posed from above; and 3) participative budgets help to foster a sense that everyone’s input is valued.
- While Cadence and Cross are undoubtedly pleased with their work, the dissatisfaction expressed by some employees with the budget process is a sign that there may be storm clouds ahead. If employees feel that the budget is unrealistic, the fact that it was imposed can lead to resent- ment, anger, and a sense of helplessness. Employees may, as a conse- quence, spend their time and energy complaining about the budget ra- ther than creatively solving problems. And if the budget is indeed unre- alistic and managers are held responsible for meeting the budget, un- productive finger-pointing is likely to result as reality fails to live up to expectations.
Solutions Manual, Chapter 9 465
Problem 9-9 (30 minutes)
- September cash sales .............................................. $ 7, September collections on account: July sales: $20,000 × 18% .................................... 3, August sales: $30,000 × 70% ............................... 21, September sales: $40,000 × 10% ......................... 4, Total cash collections ............................................... $36,
- Payments to suppliers: August purchases (accounts payable) .................... $16, September purchases: $25,000 × 20% .................. 5, Total cash payments ................................................ $21,
- Calgon Products Cash Budget For the Month of September Cash balance, September 1.................................. $ 9, Add cash receipts: Collections from customers................................ 36, Total cash available before current financing ......... 45, Less disbursements: Payments to suppliers for inventory ................... $21, Selling and administrative expenses ................... 9,000 * Equipment purchases ........................................ 18, Dividends paid .................................................. 3, Total disbursements ............................................ 51, Excess (deficiency) of cash available over dis- bursements ...................................................... (6,000) Financing: Borrowings ....................................................... 11, Repayments ..................................................... 0 Interest ............................................................ 0 Total financing .................................................... 11, Cash balance, September 30 ................................ $ 5, *$13,000 – $4,000 = $9,000.
Solutions Manual, Chapter 9 467
Problem 9-10 (continued)
of either. It would take tremendous courage for Keri to take the problem all the way up to Stokes himself—particularly in view of his less-than- humane treatment of subordinates. And going to the Board of Directors is unlikely to work either since Stokes and his venture capital firm ap- parently control the Board. Resigning, with a letter of memorandum to the individual who is most likely to be concerned and to be able to take action, may be the only ethical course of action that is left open to Keri in this situation. Of course, she must pay her rent, so hopefully she has good alternative employment opportunities.
Note: This problem is very loosely based on the MiniScribe scandal re- ported in the December, 1992 issue ofManagement Accounting as well as in other business publications. After going bankrupt, it was discov- ered that managers at MiniScribe had perpetrated massive fraud as a result of the unrelenting pressure to meet unrealistic targets. Q. T. Wiles, the real chairman of MiniScribe, was reported to have behaved much as described in this problem. Keri Kalani is, alas, a fabrication. Hopefully, there were people like Keri at MiniScribe who tried to do something to stop the fraud.
468 Managerial Accounting, 12th Edition
Problem 9-11 (45 minutes)
- Production budget:
July August September October Budgeted sales (units) ........... 40,000 50,000 70,000 35, Add desired ending inventory. 20,000 26,000 15,500 11, Total needs ........................... 60,000 76,000 85,500 46, Less beginning inventory ....... 17,000 20,000 26,000 15, Required production .............. 43,000 56,000 59,500 30,
- During July and August the company is building inventories in anticipa- tion of peak sales in September. Therefore, production exceeds sales during these months. In September and October inventories are being reduced in anticipation of a decrease in sales during the last months of the year. Therefore, production is less than sales during these months to cut back on inventory levels.
- Direct materials budget:
July August September
Third Quarter Required production (units) .. 43,000 56,000 59,500 158, Material A135 needed per unit .................................. × 3 lbs. × 3 lbs. × 3 lbs. × 3 lbs. Production needs (lbs.) ........ 129,000 168,000 178,500 475, Add desired ending invento- ry (lbs.) ............................ 84,000 89,250 45,750 * 45, Total Material A135 needs .... 213,000 257,250 224,250 521, Less beginning inventory (lbs.) ................................ 64,500 84,000 89,250 64, Material A135 purchases (lbs.) ................................ 148,500 173,250 135,000 456,
- 30,500 units (October production) × 3 lbs. per unit= 91,500 lbs.; 91,500 lbs. × 0.5 = 45,750 lbs. As shown in part (1), production is greatest in September. However, as shown in the raw material purchases budget, the purchases of materials is greatest a month earlier because materials must be on hand to sup- port the heavy production scheduled for September.
470 Managerial Accounting, 12th Edition
Problem 9-12 (continued)
- Priston Company Direct Labor Budget 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter Year Units to be produced .......................... 6,000 7,000 8,000 5,000 26, Direct labor time per unit (hours) ........ × 0.50 × 0.50 × 0.50 × 0.50 × 0. Total direct labor-hours needed........... 3,000 3,500 4,000 2,500 13, Direct labor cost per hour ................... × $12.00 × $12.00 × $12.00 × $12.00 × $12. Total direct labor cost ......................... $ 36,000 $ 42,000 $ 48,000 $ 30,000 $156,
Solutions Manual, Chapter 9 471
Problem 9-13 (30 minutes)
- Harveton Corporation Direct Labor Budget 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter Year Units to be produced ................... 16,000 15,000 14,000 15,000 60, Direct labor time per unit (hours). 0.80 0.80 0.80 0.80 0. Total direct labor-hours needed.... 12,800 12,000 11,200 12,000 48, Direct labor cost per hour ............ $11.50 $11.50 $11.50 $11.50 $11. Total direct labor cost .................. $147,200 $138,000 $128,800 $138,000 $552,
- Harveton Corporation Manufacturing Overhead Budget 1st Quarter
2nd Quarter
3rd Quarter
4th Quarter Year Budgeted direct labor-hours ......... 12,800 12,000 11,200 12,000 48, Variable overhead rate ................ $2.50 $2.50 $2.50 $2.50 $2. Variable manufacturing overhead. $ 32,000 $ 30,000 $ 28,000 $ 30,000 $120, Fixed manufacturing overhead ..... 90,000 90,000 90,000 90,000 360, Total manufacturing overhead ..... 122,000 120,000 118,000 120,000 480, Less depreciation ........................ 34,000 34,000 34,000 34,000 136, Cash disbursements for manufac- turing overhead ........................ $ 88,000 $ 86,000 $ 84,000 $ 86,000 $344,
Solutions Manual, Chapter 9 473
Problem 9-14 (continued)
- Cash budget:
Month April May June Quarter Cash balance, begin- ning .......................... $ 26,000 $ 27,000 $ 20,200 $ 26, Add receipts: Collections from cus- tomers.................... 181,000 217,200 283,000 681, Total available .............. 207,000 244,200 303,200 707, Less disbursements: Merchandise purchas- es .......................... 108,000 120,000 180,000 408, Payroll....................... 9,000 9,000 8,000 26, Lease payments......... 15,000 15,000 15,000 45, Advertising ................ 70,000 80,000 60,000 210, Equipment purchases. 8,000 — — 8, Total disbursements ..... 210,000 224,000 263,000 697, Excess (deficiency) of receipts over dis- bursements ............... (3,000) 20,200 40,200 10, Financing: Borrowings ................ 30,000 — — 30, Repayments .............. — — (30,000) (30,000) Interest ..................... — — (1,200) (1,200) Total financing ............. 30,000 — (31,200) (1,200) Cash balance, ending ... $ 27,000 $ 20,200 $ 9,000 $ 9,
- If the company needs a minimum cash balance of $20,000 to start each month, the loan cannot be repaid in full by June 30. If the loan is repaid in full, the cash balance will drop to only $9,000 on June 30, as shown above. Some portion of the loan balance will have to be carried over to July, at which time the cash inflow should be sufficient to complete re- payment.
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Problem 9-15 (60 minutes)
- Schedule of cash receipts:
Cash sales—June ............................................... $ 60, Collections on accounts receivable: May 31 balance .............................................. 72, June (50% × 190,000) .................................... 95, Total cash receipts ............................................. $227,
Schedule of cash payments for purchases: May 31 accounts payable balance ....................... $ 90, June purchases (40% × 200,000) ...................... 80, Total cash payments .......................................... $170,
Phototec, Inc. Cash Budget For the Month of June Cash balance, beginning .................................... $ 8, Add receipts from customers (above) ................. 227, Total cash available............................................ 235, Less disbursements: Purchase of inventory (above) ......................... 170, Selling and administrative expenses ................. 51, Purchases of equipment .................................. 9, Total cash disbursements ................................... 230, Excess of receipts over disbursements ................ 5, Financing: Borrowings—note ........................................... 18, Repayments—note .......................................... (15,000) Interest .......................................................... (500) Total financing .................................................. 2, Cash balance, ending ......................................... $ 7,
