CHAPTER 8

BUDGETING FOR PLANNING AND CONTROL

QUESTIONS FOR WRITING AND DISCUSSION
1. Budgets are the quantitative expressions of
plans. Budgets are used to translate the
goals and strategies of an organization into
operational terms.

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.

2. Control is the process of setting standards,

receiving feedback on actual performance,
and taking corrective action whenever actual
performance deviates from planned performance. Budgets are standards, and they are
compared with actual costs and revenues to
provide feedback.

8. For a merchandising firm, the production

budget is replaced by a merchandise purchases budget. Merchandising firms also
lack direct materials and direct labor budgets. All other budgets are essentially the
same. For a service firm (for-profit), the
sales budget doubles as the production
budget, and there is no finished goods inventory budget. The rest of the budgets
have counterparts.

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
attain 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.

9. A static budget is for a particular level of

activity. A flexible budget is one that can be
established for any level of activity. For performance reporting, it is necessary to compare the actual costs for the actual level of
activity with the budgeted costs for the actual level of activity. A flexible budget provides the means to compute the budgeted
costs for the actual level of activity, after the
fact.

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.
5. A master budget is the collection of all individual area and activity budgets. Operating
budgets are concerned with the incomegenerating activities of a firm. Financial
budgets are concerned with the inflows and
outflows of cash and with planned capital
expenditures.
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

231

10.

A flexible budget is based on a simple formula: Y = F + VX, which requires knowledge

of both fixed and variable components.

11.

Goal congruence is important because it

means that the employees of an organization are working toward the goals of that organization.

12.

Frequent feedback is important so that corrective action can be taken, increasing the
likelihood of achieving budget.

13.

Both monetary and nonmonetary incentives

are used to encourage employees of an organization to achieve the organizations
goals. Monetary incentives appeal to the
economic needs of an individual, and nonmonetary incentives appeal to the psychological needs. Since individuals are motivated by both economic and psychological
factors, both types of incentives ought to be
present in a good budgetary system.

14.

15.

16.

Participative budgeting is a system of budgeting that allows 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 budgets goals their own personal goals.
Agree. Individuals who are not challenged
tend to lose interest and maintain a lower
level of performance. A challenging, but
achievable, budget tends to extract a higher
level of performance.
Top management should provide guidelines
and statistical input (e.g., industrial forecasts) and should review the budgets to minimize the possibility of budgetary slack and
ensure that the budget is compatible with
the strategic objectives of the firm. Top
management should also provide the incentive and reward system associated with the
budgetary system.

17.

By underestimating revenues and overestimating costs, the budget is more easily

achieved.

18.

To meet budget, it is possible to take actions

that reduce costs in the short run but increase them in the long run. For example,
lower-priced, lower-quality materials can be
substituted for the usual quality of materials.

19.

Other performance measures include productivity, personnel development, market

232

share, and product quality. A manager

would have to be rewarded for improvements achieved in each area. A major difficulty is determining how much weight to assign to each performance area.
20.

Behavioral factors can make or break a

budgetary control system. It is absolutely
essential to consider the behavioral ramifications. Ignoring them can and probably will
produce dysfunctional consequences.

21.

Across-the-board cuts have the appearance

of being fair, but they unfairly penalize good
programs. In an era of scarce resources, an
organization must decide what it wishes to
emphasize and allocate resources accordingly. This may mean the complete elimination of weak programs and the strengthening
of strong programs. To cut each program
equally without considering which ones are
vital to the success of the organization is not
good planning.

22.

Activity-based budgeting requires three

steps: (1) identification of activities; (2) estimation of activity output demands; and (3)
estimation of the costs of resources needed
to provide the activity output demanded.

23.

Functional-based flexible budgeting relies on

unit-based drivers to build cost formulas for
various cost items. Activity flexible budgeting
uses activity drivers to build a cost formula
for the costs of each activity.

EXERCISES
81
1.
2.
3.
4.
5.

e
d
c
e
b

82
1.
2.
3.
4.
5.

H, I
E
I, F
G
D

6.
7.
8.
9.
10.

F
F
A
C
B

83
1.

Freshaire, Inc.
Sales Budget
For the Year 2008
Mint:

2.

Units
Price
Sales

1st Qtr.
80,000
$3.00
$240,000

2nd Qtr.
110,000
$3.00
$330,000

3rd Qtr.
124,000
$3.00
$372,000

4th Qtr.
140,000
$3.00
$420,000

Total
454,000

$3.00
$ 1,362,000

Lemon:
Units
Price
Sales

100,000
$3.50
$350,000

100,000
$3.50
$350,000

120,000
$3.50
$420,000

140,000
$3.50
$490,000

460,000

$3.50
$ 1,610,000

Total sales

$590,000

$680,000

$792,000

$910,000

$ 2,972,000

Freshaire, Inc., will use the sales budget in planning as the basis for the production budget and the succeeding budgets of the master budget. At the end
of the year, the company can compare actual sales against the budget to see
if expectations were achieved.

233

84
Freshaire, Inc.
Production Budget for Mint Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced

1st Qtr.
80,000
11,000
91,000
4,000
87,000

2nd Qtr.
110,000
12,400
122,400
11,000
111,400

3rd Qtr.
124,000
14,000
138,000
12,400
125,600

4th Qtr.
140,000
9,000
149,000
14,000
135,000

Total
454,000
9,000
463,000
4,000
459,000

4th Qtr.
140,000
22,000
162,000
28,000
134,000

Total
460,000
22,000
482,000
6,400
475,600

Freshaire, Inc.
Production Budget for Lemon Freshener
For the Year 2008
Sales
Des. ending inventory
Total needs
Less: Beginning inventory
Units produced

1st Qtr.
100,000
20,000
120,000
6,400
113,600

2nd Qtr.
100,000
24,000
124,000
20,000
104,000

3rd Qtr.
120,000
28,000
148,000
24,000
124,000

85
Pescado, Inc.
Production Budget for Tuna
For the Year 20xx
Sales
Des. ending inventory
Total needs
Less: Beg. inventory
Units produced

January
200,000
84,000
284,000
38,000
246,000

February
240,000
77,000
317,000
84,000
233,000

234

March
220,000
70,000
290,000
77,000
213,000

Total
660,000
70,000
730,000
38,000
692,000

8-6
Pescado, Inc.
Direct Materials Purchases Budget
For January and February
Cans:
January
246,000

1
246,000
46,600
292,600
49,200
243,400

February
Total
233,000
479,000

1
1
233,000
479,000
42,600
42,600
275,600
521,600
46,600
49,200
229,000
472,400

January
Production
246,000
4 ounces

4
Ounces for production
984,000
Des. ending inventory
186,400
Total needs
1,170,400
Less: Beg. Inventory
196,800
Ounces purchased
973,600
984,000 * 20% = 196,800

February
Total
233,000
479,000

4
4
932,000 1,916,000
170,400
170,400
1,102,400 2,116,400
186,400
196,800
916,000 1,889,600

Production
1 can
Cans for production
Des. ending inventory
Total needs
Less: Beg. inventory
Ounces purchased
246,000 * 20% = 49,200
Tuna:

87
Carson, Inc.
Production Budget
For the First Quarter, 20XX
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced

January
200,000
36,000
236,000
18,000
218,000

235

February
240,000
33,000
273,000
36,000
237,000

March
220,000
30,000
250,000
33,000
217,000

Total
660,000
30,000
690,000
18,000
672,000

88
Manning Company
Direct Materials Purchases Budget
For March, April, and May 20XX
Units to be produced
Direct materials per unit
(yards)
Production needs
Desired ending inventory
(yards)
Total needs
Less beginning inventory
Direct materials to be
purchased (yards)
Cost per yard
Total purchase cost

March
20,000

April
60,000

May
100,000

Total
180,000

25
500,000

25
1,500,000

25
2,500,000

25
4,500,000

300,000
800,000
100,000

500,000
2,000,000
300,000

60,000
2,560,000
500,000

60,000
4,560,000
100,000

700,000
$0.30
$210,000

1,700,000
$0.30
$ 510,000

2,060,000
$0.30
$ 618,000

4,460,000
$0.30
$1,338,000

89
Manning Company
Direct Labor Budget
For March, April, and May 20XX
Units to be produced
Direct labor time per
unit (hours)
Total hours needed
Cost per hour
Total direct labor cost

March
20,000
0.04
800
$12
$ 9,600

236

April
60,000

0.04
2,400

$12
$ 28,800

May
100,000

Total
180,000

0.04
4,000

$12
$ 48,000

0.04
7,200

$12
$ 86,400

810
Swasey, Inc.
Sales Budget
For the Coming Year
Model
LB-1
LB-2
WE-6
WE-7
WE-8
WE-9
Total
1
2
3
4
5

Units
33,6001
21,6002
25,2003
19,4404
9,6005
4,0006

Price
$30.00
15.00
10.40
10.00
22.00
26.00

Total Sales
$1,008,000
324,000
262,080
194,400
211,200
104,000
$2,103,680
16,800 units * 200% = 33,600; Price increased to $30
18,000 + (18,000 * 20%) = 21,600; no change in price
Quantity remains the same; price decreases by 20%; $13 * 80% = $10.40
16,200 + (16,200 * 20%) = 19,440; no change in price
Oct, Nov, and Dec represent 3 months of sales; 2,400 / 3 = 800 sales per
month for 12 months = 9,600 units; no change in price.
6 1,000 / 3 * 12 = 4,000 units; no change in price

811
1.

Raylenes Flowers and Gifts

Production Budget for Gift Baskets
For September, October, November, and December
Sales
Desired ending inventory
Total needs
Less: Beginning inventory
Units produced

Sept.
200
15
215
20
195

237

Oct.
150
18
168
15
153

Nov.
180
25
205
18
187

Dec.
250
10
260
25
235

811
2.

Continued
Raylenes Flowers and Gifts
Direct Materials Purchases Budget
For September, October, and November

Fruit:
Production
Amount/basket (lbs.)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases

Sept.
195
1
195
8
203
10
193

Small gifts:
Production
Amount/basket (items)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases

Sept.
195
5
975
383
1,358
488
870

Cellophane:
Production
Amount/basket (feet)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases

Sept.
195
3
585
230
815
293
522

238

Oct.
153
1
153
9
162
8
154
Oct.
153
5
765
468
1,233
383
850
Oct.
153
3
459
281
740
230
510

Nov.
187
1
187
12
199
9
190
Nov.
187
5
935
588
1,523
468
1,055
Nov.
187
3
561
353
914
281
633

811

Concluded

Basket:
Production
Amount/basket (item)
Needed for production
Desired ending inventory
Needed
Less: Beginning inventory
Purchases
3.

Sept.
195
1
195
77
272
98
174

Nov.
187
1
187
118
305
94
211

A direct materials purchases budget for December requires January production which cannot be computed without a February sales forecast.

812
1. Credit sales in May = $240,000 x 0.9 = $216,000
Credit sales in June = $230,000 x 0.9 = $207,000
Credit sales in July = $246,000 x 0.9 = $221,400
Credit sales in August = $250,000 x 0.9 = $225,000

2.

Oct.
153
1
153
94
247
77
170

Lawrence, Inc.
Schedule of Cash Receipts

Cash sales
Payments on account:
From May credit sales
(0.07 x $216,000)
From June credit sales
(0.60 x $207,000)
(0.07 x $207,000)
From July credit sales
(0.30 x $221,400)
(0.60 x $221,400)
From August credit sales
(0.30 x $225,000)
Cash receipts

July
24,600

August
25,000

15,120

---

124,200
14,490
66,420
132,840
--67,500
$230,340 $239,830

239

813
1.

Janzen, Inc.
Cash Receipts Budget
For July
Payments on account:
From May credit sales (0.15 $220,000) .................................
From June credit sales (0.60 $230,000) ...............................
From July credit sales (0.20 $210,000) .................................
Less: July cash discount (0.02 $42,000) ..............................
Cash receipts ............................................................................

2.

$ 33,000
138,000
42,000
(840)
$212,160

Janzen, Inc.
Cash Receipts Budget
For August
Payments on account:
From June credit sales (0.15 $230,000) ...............................
From July credit sales (0.60 $210,000) .................................
From August credit sales (0.20 $250,000) ...........................
Less: August cash discount (0.02 $50,000) .........................
Cash receipts.............................................................................

814
MarvelI agree with comment Company
Schedule of Cash Payments for August

Payments on accounts payable:

From July purchases (0.75 x $25,000)
$18,750
From August purchases (0.25 x $30,000)
7,500
Direct labor payments:
From July (0.10 x $40,000)
4,000
From August (0.90 x $50,000)
45,000
Overhead ($70,000 - $5,500)
64,500
Loan repayment [$10,000 + ($10,000 x 0.12 x 4/12)]10,400
Cash payments

$150,150

240

$ 34,500
126,000
50,000
(1,000)
$209,500

815
Cash Budget
For the Month of June 20XX

Beginning cash balance

Collections:
Cash sales
Credit sales:
Current month ($30,000 50%)
May credit sales ($25,000 30%)
April credit sales*
Total cash available
Less disbursements:
Inventory purchases:
Current month ($50,000 60% 40%)
Prior month ($40,000 60% 60%)
Salaries and wages
Rent
Taxes
Total cash needs
Excess of cash available

345

20,000
15,000
7,500
3,778
$46,623

$12,000
14,400
8,700
1,200
5,500
41,800
$ 4,823

*$25,000 15% = $3,750

$3,750/2 0.015 = $28
$3,750 + $28 = $3,778
2.

No. Without the possibility of short-term loans, the owner should consider
taking less cash salary.

241

816
1.
Units produced
Direct materials cost
Direct labor cost
Total
a.
b.

Performance Report
Actual
Budgeted Variance
1,100
1,000
100 F
a
$11,200
$10,000 $1,200 U
4,400
4,000b
400 U
$15,600
$14,400
$1,600 U

1,000 units * 2 leather straps * $5 = $10,000

1,000 units * .5 hours per unit * $8 = $4,000

2. The performance report compares costs at two different levels of activity and
so cannot be used to assess efficiency.

817
1.

Pet-Care Company
Overhead Budget
For the Coming Year
Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs

Activity Level
55,000 Hours*
$0.40
0.50
1.60

$22,000
27,500
88,000
$137,500
$17,000
26,500
18,000
61,500
$199,000

*BasicDiet: (0.25 100,000)

SpecDiet: (0.30 100,000)
Total DLH

25,000
30,000
55,000

242

817
2.

Concluded

10% higher:

Pet-Care Company
Overhead Budget
For the Coming Year
Activity Level
60,500 Hours*

Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs

$0.40
0.50
1.60

$24,200
30,250
96,800
$151,250
$17,000
26,500
18,000
61,500
$212,750

*55,000 DLH 110% = 60,500

20% lower:

Pet-Care Company
Overhead Budget
For the Coming Year

Formula
Variable costs:
Maintenance
Power
Indirect labor
Total variable costs
Fixed costs:
Maintenance
Indirect labor
Rent
Total fixed costs
Total overhead costs

Activity Level
44,000 Hours*
$0.40
0.50
1.60

$17,600
22,000
70,400
$110,000
$17,000
26,500
18,000
61,500
$171,500

*55,000 DLH 80% = 44,000

243

818
1.

Pet-Care Company
Performance Report
For the Current Year
Units produced
Production costs*:
Maintenance
Power
Indirect labor
Rent
Total costs

Actual
220,000

Budget
220,000

Variance
0

$ 40,500
31,700
119,000
18,000
$209,200

$ 41,000
30,000
122,500
18,000
$211,500

$ 500
1,700
3,500
0
$2,300

F
U
F
F

*Flexible budget amounts are based on 60,000 DLH:

(0.25 120,000) + (0.30 100,000) = 60,000 DLH
Maintenance: $17,000 + $0.40(60,000) =
$41,000
Power:
$0.50(60,000) =
$30,000
Indirect labor: $26,500 + $1.60(60,000) = $122,500
Rent:
$18,000 + 0 =
$18,000
2.

All of the variances are within 5 to 10 percent of budgeted amounts. Most

would probably view the variances as immaterial. There are numerous reasons for variances. For example, a favorable maintenance variance could be
caused by less preventive maintenance or by increased efficiency by individual maintenance workers. Indirect labor could be favorable because (among
other things) lower-priced labor was used to carry out higher-skilled jobs.
Power could be more expensive than planned because of a rate increase. An
investigation would be needed to know exactly why the variances occurred.

244

819
1.

a. An imposed budgetary approach does not allow input from those who are
directly affected by the process. This can tend to make the employees feel
that they are unimportant and that management is concerned only with
meeting budgetary goals and not necessarily with the well-being of their
employees. The employees will probably feel less of a bond with the organization and will feel that they are meeting standards set by others. An
imposed budgetary approach is impersonal and can give employees the
feeling that goals are set arbitrarily or that some people benefit at the expense of others. Goals that are perceived as belonging to others are less
likely to be internalized, increasing the likelihood of dysfunctional behavior. Furthermore, imposed budgets fail to take advantage of the knowledge subordinate managers have of operations and local market conditions.
b. A participative budgetary approach allows subordinate managers considerable say in how budgets are established. This communicates a sense
of responsibility to the managers and fosters creativity. It also increases
the likelihood that the goals of the budget will become the managers personal goals, due to their participation. This results in a higher degree of
goal congruence. Many feel that there will be a higher level of performance
because it is felt that individuals who are involved in setting their own
standards will work harder to achieve them. When managers are allowed
to give input in developing the budget, they tend to feel that its success or
failure reflects personally on them.

2.

a. In an imposed budgetary setting, communication flows from the top to the

bottom and is mostly a one-way flow. Any upward flow would have to do
with understanding the budgets being communicated. For participative
budgeting, the communication flows are necessarily in both directions,
with much of the communication being initiated by subordinate managers.
b. The first communication process (imposed budgeting) leaves the impression that the opinions and thoughts of lower-level managers are unimportant. Subordinate managers may feel that no input is being solicited
because their input is not valued. The second process (participative
budgeting), however, conveys the impression that opinions and views are
important and valued. This tends to create a greater feeling of worth to the
organization and a stronger commitment to achieving its goals.

245

820
1. First, calculate the inspection hours needed: (50,000 units/1000 units
per batch) 100 testing hours per batch = 5,000 projected testing hours.
This requires the hiring of three inspectors (5,000 projected testing
hours/2,000 inspector hours per year) = 2.5 required inspectors and the
lease of one piece of testing equipment. Thus, the budget for 5,000 inspection hours is given as follows:

Resource
Salaries
Lease
Power
Total

Formula
Variable
Fixed
$150,000

10,000

-$2.00
$160,000
$2.00

5,000 inspection hours

$150,000
10,000
10,000
$170,000

2. Inspection hours needed: (60,000 units/1,000 units per batch) 100

hours per batch = 6,000 projected testing hours. Inspectors needed =
6,000/2,000 = 3; equipment needed = 6,000/5,00 = 1.2 (rounds up to 2).
Thus, the budget is as follows:
Resource
Salaries
Lease
Power
Total

Formula
Fixed
Variable
$150,000

20,000

-$2.00
$2.00
$170,000

6,000 inspection hours

$150,000
20,000
12,000
$182,000

3. First determine the capacity need to service: (80,000/1,000) 100 = 8,000

inspection hours. Inspectors required = 8,000/2,000 = 4. Equipment
needed = 8,000/5,000 = 1.6 (rounded up to 2).
Letting Y = total cost, the flexible formula is
Y = $220,000 + $2X.
Fixed expenses = Salaries of 4 * $50,000 = $200,000
2 Equipment Leases = $20,000
Total Fixed Expenses =
$220,000

246

The formula is only valid for this range because of the step-cost nature of
the fixed resources. Outside this range the number of inspectors and
equipment needed may change.
821
1.

Resource
Salaries
Lease
Crates
Fuel
Total

Formula
Variable
Fixed
$400,000

24,000

$1.00

0.06
$1.06
$424,000

60,000 Moves (activity output)

$400,000
24,000
60,000
3,600
$487,600

Note: Cycles, instead of moves, could have been used as the output measures. In this case, the variable cost per unit would double. In some ways,
cycles is a better measure because crates then become a strictly variable
cost (for moves, it is a step-variable cost treated as a variable cost). For either
moves or cycles, salaries and leases are step-fixed costs. Also, capacity is
determined by operators: 3 2,000 10 = 60,000 moves. The forklifts actually
supply more potential capacity: 3 24 280 3 = 60,480, but they cannot
move without operators.
2.

Resource
Salaries
Lease
Crates
Fuel
Total

Formula
Fixed
Variable
$400,000

24,000

$1.00

0.06
$424,000
$1.06

54,000 Moves (activity output)

$400,000
24,000
54,000
3,240
$481,240

The reduction in output reduces the demand for crates and fuel, but the number of operators and forklifts would stay the same (even if the reduction in activity output were permanent).
3.

Resource
Salaries
Lease
Crates
Fuel
Total

Formula
Fixed
Variable
$120,000

8,000

$1.00

0.06
$128,000
$1.06

15,000 Moves (activity output)

$120,000
8,000
15,000
900
$143,900

Note: Reducing demand permanently to 15,000 moves requires three

operators (3 2,000 3 = 18,000), assuming that part-time help is not permitted, and one forklift (24 280 3 = 20,160). If part-time operators are al-

247

lowed, then the cost for salaries would be budgeted at $100,000. This illustrates the lumpy nature of resources and their role in budgeting.

248

PROBLEMS
822
First, separate fixed and variable costs for each category using the high-low method.
Maintenance:
V = ($13,100 $10,100)/(2,000 1,000) = $3.00
F = Y2 VX2 = $13,100 $3(2,000) = $7,100
Maintenance cost = $7,100 + $3X
Supplies:
V = ($4,800 $2,400)/1,000 = $2.40
F = $4,800 $2.40(2,000) = 0
Supplies cost = $2.40X
Power:
V = ($2,000 $1,000)/1,000 = $1.00
F = $2,000 $1.00(2,000) = 0
Power cost = $1.00X
Other:
V = ($14,240 $12,940)/1,000 = $1.30
F = $14,240 $1.30(2,000) = $11,640
Other costs = $11,640 + $1.30X

Maintenance
Depreciation
Supervision
Supplies
Power
Other
Total

1,800 Direct Labor Hours

$12,500
7,000
16,000
4,320
1,800
13,980
$55,600

249

823
Kendall Law Firm
Cash Receipts Budget
Cash fees .....................................................................
Received from sales in:
June:
(0.7)($255,000)(0.17)(1.02) ...............
July:
(0.7)(0.7)($204,000)...........................
(0.7)(0.17)($204,000)(1.02) ...............
August:
(0.7)(0.1)($240,000)...........................
(0.7)(0.7)($240,000)...........................
September: (0.7)(0.1)($300,000)...........................
Total .............................................................................

August
$ 72,000

September
$ 90,000

30,952

99,960

24,762

16,800

$219,712

117,600
21,000
$253,362

824
Briggs Manufacturing
For the Quarter Ended March 31, 20XX
1. Schedule 1: Sales Budget
Units
Selling price
Sales
2.

January
40,000
$215
$8,600,000

February
50,000

$215
$10,750,000

March
60,000

$215
$12,900,000

Total
150,000

$215
$32,250,000

Schedule 2: Production Budget

Sales (Schedule 1)
Desired ending inventory
Total needs
Less: Beginning inventory
Units to be produced

January
40,000
40,000
80,000
32,000
48,000

250

February
50,000
48,000
98,000
40,000
58,000

March
60,000
48,000
108,000
48,000
60,000

Total
150,000
48,000
198,000
32,000
166,000

824
3.

Continued

Schedule 3: Direct Materials Purchases Budget

Metal

January
Components

Units to be produced
(Schedule 2)
48,000
Direct materials
per unit (lbs.)

10
Production needs
480,000
Desired ending
inventory
250,000
Total needs
730,000
Less: Beginning
inventory
200,000
Direct materials to
be purchased
530,000
Cost per pound

$8
Total cost
$4,240,000

Metal

48,000

February
Components

58,000

58,000

10
580,000

6
348,000

150,000
438,000

300,000
880,000

180,000
528,000

120,000

250,000

150,000

318,000

$2
$636,000

630,000

$8
$5,040,000

378,000

$2
$756,000

6
288,000

(Schedule 3 continued)
Metal

March
Components

Units to be produced
(Schedule 2)
60,000
Direct materials
per unit (lbs.)

10
Production needs
600,000
Desired ending
inventory
300,000
Total needs
900,000
Less: Beginning
inventory
300,000
Direct materials to
be purchased
600,000
Cost per pound

$8
Total cost
$4,800,000

Metal

60,000

6
360,000

Total
Components

166,000

10
1,660,000

166,000

6
996,000

180,000
540,000

300,000
1,960,000

180,000
1,176,000

180,000

200,000

120,000

360,000

$2
$720,000

1,760,000

$8
$14,080,000

1,056,000

$2
$2,112,000

251

824
4.

Continued

Schedule 4: Direct Labor Budget

January
Units to be produced
(Schedule 2)
Direct labor time
per unit (hours)
Total hours needed
Cost per hour
Total cost

5.

February

48,000

58,000

4
192,000

$9.25
$1,776,000

4
232,000

$9.25
$2,146,000

Total

60,000

4
240,000

$9.25
$2,220,000

166,000

4
664,000

$9.25
$6,142,000

Schedule 5: Overhead Budget

January
Budgeted direct labor
hours (Schedule 4)
192,000
Variable overhead rate
$3.40
Budgeted variable overhead $652,800
Budgeted fixed overhead
338,000
Total overhead
$990,800

6.

March

February
232,000

$3.40
$ 788,800
338,000
$1,126,800

March

Total

240,000

$3.40
$ 816,000
338,000
$1,154,000

664,000

$3.40
$2,257,600
1,014,000
$3,271,600

Schedule 6: Selling and Administrative Expenses Budget

Planned sales (Schedule 1)
Variable selling and
administrative expenses
per unit
Total variable expense
Fixed selling and
administrative expenses:
Salaries
Depreciation
Other
Total fixed expenses
Total selling and
administrative expenses

January
40,000

February
50,000

March
60,000

Total
150,000

$3.60
$144,000

$3.60
$180,000

$3.60
$216,000

$3.60
$540,000

$ 50,000
40,000
20,000
$110,000

$ 50,000
40,000
20,000
$110,000

$ 50,000
40,000
20,000
$110,000

$150,000
120,000
60,000
$330,000

$254,000

$290,000

$326,000

$870,000

252

824
7.

Continued

Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation:
Direct materials:
Metal (10 @ $8) = $80
Comp.
(6 @ $2)
=
12
Direct labor (4 $9.25)
Overhead:
Variable (4 @ $3.40)
Fixed (4 $1,014,000/664,000)
Total unit cost

$ 92.00
37.00
13.60
6.11
$148.71

Finished goods inventory = Units Unit cost

= 48,000 $148.71
= $7,138,080
8.

Schedule 8: Cost of Goods Sold Budget

Direct materials used (Schedule 3)
Metal (1,660,000 $8)
$13,280,000
Components (996,000 $2)
1,992,000
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Add: Beginning finished goods (32,000 $148.71)
Goods available for sale
Less: Ending finished goods (Schedule 7)
Budgeted cost of goods sold

9.

$15,272,000
6,142,000
3,271,600
$24,685,600
4,758,720
$29,444,320
7,138,080
$22,306,240

Schedule 9: Budgeted Income Statement

Sales (Schedule 1)
Less: Cost of goods sold (Schedule 8)
Gross margin
Less: Selling and admin. expenses (Schedule 6)
Income before income taxes

253

$ 32,250,000
22,306,240
$ 9,943,760
870,000
$ 9,073,760

824

Concluded

10. Schedule 10: Cash Budget

Beg. balance
Cash receipts
Cash available
Less:
Disbursements:
Purchases
Direct labor
Overhead
Selling & admin.
Total
Tentative
ending balance
Borrowed/(repaid)
Interest paid
Ending balance

January
$ 378,000
8,600,000
$8,978,000

February
$ 1,321,200
10,750,000
$12,017,200

March
$ 2,952,400
12,900,000
$15,852,400

Total
$ 378,000
32,250,000
$32,628,000

$4,876,000
1,776,000
790,800
214,000
$7,656,800

$5,796.000
2,146,000
926,800
250,000
$9,118.800

$ 5,520,000
2,220,000
954,000
286,000
$ 8,980,000

$16,192,000
6,142,000
2,671,600
750,000
$25,755,600

$1,321,200

2,952,400

$ 6,872,400

$6,872,400

$1,321,200

$ 2,952,400

$ 6,872,400

$ 6,872,400

*(0.12 2/12 $56,800) + (0.12 1/12 $6,800)

254

825
1.

To determine accounts payable as of June 30, a schedule of purchases will be

constructed. This schedule will also be used to build the cash budget.
Let X = Cost of sales, and sales = 1.00.
If X + 0.25X = 1.00, then X = 0.80.
Cost of sales
Desired end. inventory*
Total requirements
Less: Beginning inventory
Purchases

June
$ 96,000
36,000
$132,000
48,000
$ 84,000

July
$ 72,000
40,000
$112,000
36,000
$ 76,000

August
$ 80,000
54,000
$134,000
40,000
$ 94,000

September
$108,000
44,000
$152,000
54,000
$ 98,000

*0.50 Next months cost of sales

Since purchases are paid for in the following month, accounts payable at the
end of June is $84,000. Inventory for June 30 is $36,000.
Accounts receivable for June 30 is computed as follows:
From June:
From May:
Total

0.7 $120,000 0.8* = $67,200

0.7 $100,000 0.3* = 21,000
$88,200

*By June 30, 20% of June credit sales and 70% of May credit sales have been
collected, leaving 80% and 30%, respectively, to be collected.
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 assets and all other assets except cash ($562,750 $425,000
$36,000 $88,200). This difference is $13,550.

Cash
Accounts receivable
Inventory
Plant and equipment
Accounts payable
Common stock
Retained earnings
Total

Liabilities and
Assets
$ 13,550
88,200
36,000
425,000

$562,750

255

Stockholders Equity

$ 84,000
210,000
268,750
$562,750

825
2.

Continued
Grange Retailers
Cash Budget
For the Quarter Ending September 30, 2008

Beginning cash balance

Cash collections*
Total cash available
Cash disbursements:
Purchases**
Salaries and wages
Utilities
Other
Property taxes
Advertising fees
Lease
Total disbursement
Minimum cash balance
Total cash needs
Excess (deficiency)
Financing:
Borrowings
Repayments
Interest***
Total financing
Ending cash balance
*Cash collections:
Cash sales
Credit sales:
Current month
Prior month
From two months ago
Total collections

July
$ 13,550
102,600
$ 116,150

August
$ 10,450
100,700
$ 111,150

September
$ 10,405
113,300
$ 123,705

Total
$ 13,550
316,600
$ 330,150

$ 84,000
10,000
1,000
1,700
15,000

$ 76,000
10,000
1,000
1,700

$ 94,000
10,000
1,000
1,700

$ 254,000
30,000
3,000
5,100
15,000
6,000
5,000
$ 318,100
10,000
$ 328,100
$ 2,050

6,000
$ 111,700
10,000
$ 121,700
$ (5,550)
$

$ 94,700
10,000
$ 104,700
$ 6,450

5,000
$ 111,700
10,000
$ 121,700
$ 2,005

6,000

$ 6,000
$ 10,450

(6,000)
(45)
$ (6,045)
$ 10,405

$
0
$
0
$ 12,005

6,000
(6,000)
(45)
$
(45)
$ 12,005

$ 27,000

$ 30,000

$ 40,500

$ 97,500

12,600
42,000
21,000
$ 102,600

14,000
31,500
25,200
$ 100,700

18,900
35,000
18,900
$ 113,300

45,500
108,500
65,100
$ 316,600

**Taken from the purchases schedule developed in Requirement 1.

***$6,000 0.09/12

256

825

Concluded

3.

Grange Retailers
Pro Forma Balance Sheet
September 30, 2008

Cash
Accounts receivablea
Inventoryb
Plant and equipmentc
Accounts payableb
Common stock
Retained earningsd
Total

Liabilities and
Assets
$ 12,005
96,600
44,000
413,000

$565,605

Stockholders Equity

$ 98,000
210,000
257,605
$565,605

(0.7 $135,000 0.8) + (0.7 $100,000 0.3).

From purchases schedule prepared in Requirement 1.
c
[$425,000 3($4,000)].
d
If total assets equal $565,605, then liabilities plus stockholders equity must
also equal that amount. Subtracting accounts payable and common stock
from total liabilities and stockholders equity gives retained earnings of
$257,605.
b

826
1.

Participative budgeting communicates a sense of responsibility to subordinate managers and fosters creativity. Since the subordinate manager creates
the budget, it also increases the likelihood that the goals of the budget will
become the managers personal goals, resulting in a higher degree of goal
congruence. Many believe that the increased responsibility and challenge
provide nonmonetary incentives that lead to a higher level of performance
because it is felt that individuals who are involved in setting their own standards work harder to achieve them. It also involves individuals whose knowledge of local conditions may enhance the entire planning process.

257

826

Concluded

There are also certain disadvantages or problems associated with participative budgeting. Some managers may tend to either set the budget too loosely
or too tightly. Participative budgeting also creates the opportunity for managers to build slack into the budget by underestimating revenues or overestimating costs. Another problem is that top management may assume total
control of the budgeting process and, simultaneously, seek superficial participation of lower-level managers. The participation is generally limited to an
endorsement activity, and no real input is sought. In this case, the advantages of participation are negated.
2.

Scott Weidners participative budgetary policy has certain deficiencies. They

are as follows:
a. Managers do not participate in setting the appropriation target figure.
Recommendation: Managers should have the opportunity to give some input as to what the target figure will be.
b. Setting an upper spending constraint gives indirect approval to spending
up to that level whether justified or not. Recommendation: Zero-based
budgeting could be used.
c. Setting prior constraints, such as maximum limits and inclusion of noncontrollable fixed expenditures prior to departmental input, defeats the purpose of participative management. Recommendation: Divisional constraints
should be known to management prior to budgeting, but individual limits
should be determined with the input of managers.
d. Arbitrary allocation of the approved budget defeats the purpose of a participative budget process. Recommendation: The department managers
should be involved in the reallocation of the approved budget.
e. The division manager holds back a specified percentage of each departments appropriation for discretionary use. Recommendation: Contingency funds should not be a part of a departmental budget. These funds
should be identified and provided for before the allocation process to departments.
f. Exception reporting and evaluation based on performance must be accompanied by rewards. Recommendation: Recognition should be given to
those attaining budget goals, not just exceptions. (Part 2 is adapted from
CMA unofficial answers.)

258

827
Minota Company
Cash Budget
For the Month of July 2008
Beginning cash balance .......................................................
Collections:
Cash sales (0.3 $1,140,000) .........................................
Credit sales:
July:
With discounta.......................................................
Without discountb .................................................
Junec ...........................................................................
Mayd.............................................................................
Sale of old equipment ..........................................................
Total cash available ........................................................

234,612
239,400
140,000
84,000
25,200
$1,092,212

Less disbursements:
Raw materials:
Julye.............................................................................
Junef ............................................................................
Direct labor ......................................................................
Operating expenses ........................................................
Dividends .........................................................................
Equipment ........................................................................
Total disbursements ..................................................
Minimum cash balance ........................................................
Total cash needs ...................................................................

$ 144,000
136,800
110,000
280,000
140,000
168,000
$ 978,800
20,000
$ 998,800

Excess of cash available over needs..................................

Ending cash balance ............................................................

$ 113,412

27,000
342,000

93,412

(0.7 $1,140,000) 0.6 0.5 0.98

(0.7 $1,140,000) 0.6 0.5
c
(0.7 $1,000,000) 0.2
d
(0.7 $600,000) 0.2
e
July requirements (0.24 $1,140,000) ...............................
$273,600
Desired ending inventory (0.24 $1,200,000) ...................
288,000
Total requirements ..............................................................
$561,600
Less: Beginning inventory .................................................
273,600
Purchases ............................................................................
$288,000
July payment: $288,000/2 = $144,000
f
$273,600/2 = $136,800 (June purchases are computed as shown for July.)
b

259

828
1.

a. The new budget system allows the managers to focus on those areas that
need attention. By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded (frequent
feedback is provided). Also, the company has segregated costs into fixed
and variable components, an essential step for good control. A major
weakness of the budget is the failure to properly define responsibility. Because of this, supervisors are being held accountable for areas over which
they have no control.
b. The performance report should emphasize those items over which the
manager has control. The report should also compare actual costs with
budgeted costs for the actual level of activity. Currently, the report is attempting to compare costs at two different levels: the original budget for
3,000 units with the actual costs for production of 3,185 units. A flexible
budgeting system needs to be employed.

2.

Berwin, Inc.
Machining Department Performance Report
For the Month Ended May 31, 2008
Volume in units

Budget*
3,185

Actual
3,185

Variance
0

Variable manufacturing costs:

Direct materials
Direct labor
Variable overhead
Total variable costs

$ 25,480
29,461
35,354
$ 90,295

$ 24,843
29,302
35,035
$ 89,180

$ 637
159
319
$1,115

Fixed manufacturing costs:

Indirect labor
Depreciation
Taxes
Insurance
Other
Total fixed costs

$ 3,300
1,500
300
240
930
$ 6,270

$ 3,334
1,500
300
240
1,027
$ 6,401

34 U
0
0
0
97 U
$ 131 U

Total costs

$ 96,565

$ 95,581

$ 984 F

F
F
F
F

*For the variable costs: 3,185 $24,000/3,000; 3,185 $27,750/3,000; 3,185

$33,300/3,000

260

828
3.

Concluded

Berwins budgetary system could also be improved by offering monetary and

nonmonetary incentives to reach budget goals. The managers and supervisors should be allowed and encouraged to participate in the budgetary
process because they will be responsible for controlling the budget. The controller needs to be certain that the budget objectives are based on realistic
conditions and expectations. The managers should be held accountable only
for costs over which they have control.

829
1.
Direct labor
Power
Setups
Total

Actual Costs
$210,000
135,000
140,000
$485,000

Budgeted Costs
$200,000
85,000
100,000
$385,000

Budget Variance
$ 10,000 U
50,000 U
40,000 U
$100,000 U

Note: Budgeted costs use the actual direct labor hours and the labor-based
cost formulas. Example: Direct labor cost = $10 20,000 = $200,000; Power
cost = $5,000 + ($4 20,000) = $85,000; and Setup cost = $100,000 (fixed).
2.
Direct labor
Power
Setups
Total

Actual Costs
$210,000
135,000
140,000
$485,000

Budgeted Costs
$200,000
149,000
142,000
$491,000

Budget Variance
$10,000 U
14,000 F
2,000 F
$ 6,000 F

Note: Budgeted costs use the individual driver formulas: Direct labor = $10
20,000 = $200,000; Power = $68,000 + ($0.90 90,000) = $149,000; and Setups
= $98,000 + ($400 110) = $142,000.
3.

The multiple-cost-driver approach captures the cause-and-effect cost relationships and, consequently, is more accurate than the direct-labor-based
approach.

261

830
1.

Westcott, Inc.
Performance Report
For the Year 2008
Direct materials
Direct labor
Depreciation
Maintenance
Machining
Materials handling
Inspections
Total

Actual Costs
$ 440,000
355,000
100,000
425,000
142,000
232,500
160,000
$1,854,500

Budgeted Costs*
$ 480,000
320,000
100,000
435,000
137,000
240,000
145,000
$1,857,000

Budget Variance
$40,000 F
35,000 U
0
10,000 F
5,000 U
7,500 F
15,000 U
$ 2,500 F

*Budget formulas for each item can be computed by using the high-low method (using the appropriate cost driver for each method). Using this approach, the budgeted costs for the actual activity levels are computed as follows:
Direct materials: $6 80,000
Direct labor: $4 80,000
Depreciation: $100,000
Maintenance: $60,000 + ($1.50 250,000)
Machining: $12,000 + ($0.50 250,000)
Materials handling: $40,000 + ($6.25 32,000)
Inspections: $25,000 + ($1,000 120)

262

830
2.

Concluded

Pool rates: $1,100,000/100,000

$672,000/300,000
$290,000/40,000
$225,000/200

= $11 per DLH

= $2.24 per MHr
= $7.25 per move
= $1,125 per batch

Note: The first pool has material and labor costs included.
Unit cost:
Pool 1: $11 10,000
Pool 2: $2.24 15,000
Pool 3: $7.25 500
Pool 4: $1,125 5
Total
Units
Unit cost

=
=
=
=

$110,000
33,600
3,625
5,625
$152,850
10,000
$ 15.29*

*Rounded
3.

Knowing the resources consumed by activities and how the resource costs
change with the activity driver should provide more insight into managing the
activity and its associated costs. For example, if moves could be reduced to
20,000 from the expected 40,000, then costs can be reduced by not only eliminating the need for four operators, but by reducing the need to lease from
four to two forklifts. However, in the short run, the cost of leasing forklifts
may persist even though demand for their service is reduced.
20,000 moves
Materials handling:
Forklifts
Operators
Fuel
Total

40,000 moves
$ 40,000
120,000
5,000
$ 165,000

$ 40,000
240,000
10,000
$ 290,000

The detail assumes that forklift leases must continue in the short run but that
the number of operators may be reduced (assumes each operator can do
5,000 moves per year).

263

831
a.

Schedule 1: Sales Budget (units and total sales in thousands)

Units
Unit price
Total sales

Qtr. 1
65
$400
$26,000

Qtr. 2
70
$400
$28,000

Qtr. 3
75
$400
$30,000

Qtr. 4
90
$400
$36,000

Total
300
$400
$120,000

Qtr. 1
65,000

Qtr. 2
70,000

Qtr. 3
75,000

Qtr. 4
90,000

Total
300,000

13,000
78,000

15,000
85,000

20,000
95,000

10,000
100,000

10,000
310,000

0
78,000

13,000
72,000

15,000
80,000

20,000
80,000

0
310,000

b. Schedule 2: Production Budget

Sales (Schedule 1)
Desired ending
inventory
Total needs
Less: Beginning
inventory
Production
c.

Schedule 3: Direct Materials Purchases Budget (in thousands)

Production
Materials/unit
Production needs
Desired ending
inventory
Total needs
Less: Beginning
inventory
Purchases
Cost per unit
Purchase cost

Qtr. 1
78.0

3
234.0

Qtr. 2
72.0

3
216.0

Qtr. 3
80.0

3
240.0

Qtr. 4
80.0

3
240.0

Total
310.0

3
930.0

63.0
297.0

67.5
283.5

81.0
321.0

65.7
305.7

65.7
995.7

65.7
231.3
$80
$18,504

63.0
220.5
$80
$17,640

67.5
253.5
$80
$20,280

81.0
224.7
$80
$17,976

65.7
930.0
$80
$74,400

264

831

Continued

d. Schedule 4: Direct Labor Budget (in thousands)

Production
Hours per unit
Hours needed
Cost per hour
Total cost
e.

Qtr. 2
72

5
360
$10
$3,600

Qtr. 3
80

5
400
$10
$4,000

Qtr. 4
80

5
400
$10
$4,000

Total
310

5
1,550
$10
$15,500

Qtr. 3
400
$6
$2,400
1,000
$3,400

Qtr. 4
400
$6
$2,400
1,000
$3,400

Total
1,550

$6
$ 9,300
4,000
$13,300

Schedule 5: Overhead Budget (in thousands)

Budgeted hours
Variable rate
Budgeted VOH
Budgeted FOH
Total OH

f.

Qtr. 1
78

5
390
$10
$3,900

Qtr. 1
390
$6
$2,340
1,000
$3,340

Qtr. 2
360
$6
$2,160
1,000
$3,160

Schedule 6: Selling and Administrative Expenses Budget (in thousands)

Planned sales
Variable rate
Variable expenses
Fixed expenses
Total expenses

Qtr. 1
65
$10
$ 650
250
$ 900

Qtr. 2
70
$10
$ 700
250
$ 950

Qtr. 3
75
$10
$ 750
250
$1,000

g. Schedule 7: Ending Finished Goods Inventory Budget

Unit cost computation:
Direct materials (3 units @ $80)
Direct labor (5 hours @ $10)
Overhead:
Variable (5 hours @ $6)
Fixed ($4,000,000/310,000)
Total unit cost

$240.00
50.00
30.00
12.90*
$332.90

Finished goods = 10,000 $332.90 = $3,329,000

*Rounded

265

Qtr. 4
90
$10
$ 900
250
$1,150

Total
300
$10
$3,000
1,000
$4,000

831

Continued

h. Schedule 8: Cost of Goods Sold Budget

Direct materials used (Schedule 3)
Direct labor used (Schedule 4)
Overhead (Schedule 5)
Budgeted manufacturing costs
Add: Beginning finished goods inventory (Schedule 2)
Goods available for sale
Less: Ending finished goods inventory (Schedule 7)
Budgeted cost of goods sold
i.

1.

Cash Budget (in thousands)

Qtr. 1
Beginning cash bal.
$ 250
Collections:
Credit sales:
Current quarter
22,100
Prior quarter
3,3001
Cash available
$25,650
Less disbursements:
Direct materials:
Current quarter
$ 9,252
Prior quarter
7,248
Direct labor
3,900
Overhead
2,990
Selling and admin.
850
Dividends
300
Equipment
Total cash needs
$24,540
Ending cash bal.
$ 1,110
55,000 * 400 * .15 = 3,300

$ 74,400,000
15,500,000
13,300,000
$103,200,000
0
$103,200,000
3,329,000
$ 99,871,000

Qtr. 2
$ 1,110

Qtr. 3
$ 3,128

Qtr. 4
$ 5,568

23,800
3,900
$28,810

25,500
4,200
$32,828

30,600
4,500
$40,668

102,000
15,900
$118,150

$ 8,820
9,252
3,600
2,810
900
300

$10,140
8,820
4,000
3,050
950
300

$25,682
$ 3,128

$27,260
$ 5,568

$ 8,988
10,140
4,000
3,050
1,100
300
2,000
$29,578
$11,090

$ 37,200
35,460
15,500
11,900
3,800
1,200
2,000
$107,060
$ 11,090

266

Total
250

831

Concluded

j.

Optima Company
Pro Forma Income Statement
For the Year Ending December 31, 2008
Sales (Schedule 1) ....................................................................
Less: Cost of goods sold (Schedule 8) ...................................
Gross margin .......................................................................
Less: Selling and administrative expenses (Schedule 6) .....
Income before income taxes ..............................................

k.

$120,000,000
99,871,000
$ 20,129,000
4,000,000
$ 16,129,000

Optima Company
Pro Forma Balance Sheet
December 31, 2008
Assets
Cash ...........................................................................................
Accounts receivable .................................................................
Direct materials inventory ........................................................
Finished goods inventory ........................................................
Plant and equipment .................................................................
Total assets ...............................................................................

$11,090,000
5,400,000
5,256,000
3,329,000
33,900,000a
$58,975,000

Liabilities and Stockholders Equity

Accounts payable .....................................................................
Capital stock ..............................................................................
Retained earnings .....................................................................
Total liabilities and stockholders equity ..........................
a

$33,500,000
2,000,000
(1,600,000)
$33,900,000

$ 8,058,000
16,129,000
(1,200,000)
$22,987,000

Beginning plant and equipment .............

Add: New equipment ...............................
Less: Depreciation expense ...................
Ending plant and equipment ..............
Beginning retained earnings ..................
Plus: Net income* ....................................
Less: Dividends paid ...............................
Ending retained earnings ...................

*Ignore taxes.

267

$ 8,988,000
27,000,000
22,987,000b
$58,975,000

832
1.

The flexible budgets presented are based on three different activity levels,
none of which coincide with the actual level of performance for November.
The budget must be restated to a level of activity that matches the actual results. The fixed and variable components of the mixed costs must be segregated and a budgeted cost calculated for the level of activity attained.

2.

Patterson Company
Selling Expenses Report
For the Month of November
Monthly Expenses
Advertising and promotion
Administrative salaries
Sales salariesa
Sales commissionsb
Salesperson travelc
Sales office expensed
Shipping expensee
Total
a

Budget
$1,200,000
57,000
84,000
327,000
187,200
500,500
705,000
$3,060,700

Actual
$1,350,000
57,000
84,000
327,000
185,000
497,200
730,000
$3,230,200

Variance
$150,000 U
0
0
0
2,200 F
3,300 F
25,000 U
$169,500 U

($75,600/72)(80) = $84,000

($300,000/$10,000,000)($10,900,000) = $327,000

Change in cost: $175,000 $170,000 = $5,000

Change in sales dollars: $10,625,000 $10,000,000 = $625,000
Variable cost per dollar of sales = Change in cost divided by change in
activity level
$5,000/$625,000 = $0.008 per dollar of sales
Fixed cost at 72-person level:
$170,000 ($10,000,000 0.008) = $90,000
Fixed cost at 80-person level:
($90,000/72) 80 = $100,000
Total travel budget:
$100,000 fixed + ($10,900,000 0.008) variable = $187,200

268

832

Concluded

Change in cost: $498,750 $490,000 = $8,750

Change in number of orders: 4,250 4,000 = 250
Variable cost per order: $8,750/250 = $35
Fixed cost: $490,000 (4,000 $35) = $350,000
Total office expense budget:
$350,000 + (4,300 $35) = $500,500

Change in cost: $712,500 $675,000 = $37,500

Change in number of units: 425,000 400,000 = 25,000
Variable cost per unit: $37,500/25,000 = $1.50
Fixed cost: $675,000 (400,000 $1.50) = $75,000
Total shipping expense budget:
$75,000 + (420,000 $1.50) = $705,000

269

MANAGERIAL DECISION CASES

833
1.

Lindas 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. This manipulation is in opposition to generally accepted accounting principles. Her decisions are based on her own self-interest rather
than on the interest of the company. Deceptive and manipulative behavior for
personal gain is clearly wrong.

2.

There are few, if any, legitimate reasons for deferring the closing of sales.
Thus, if a marketing manager were 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, then a simple refusal should suffice. If it takes on the
nature of an order and no sound reason exists, then the marketing manager
should consider appealing to a higher-level manager. Certainly, deferral of
closings so that it increases the likelihood of meeting budget for the coming
year is not a sound reason, and, in fact, is wrong.

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 practiceor at least adjusts for it. If higher-level management
is aware of the practice and adjusts for it, then the ability to achieve bonus
may not be enhanced as much as believed. The plant manager could investigate and find out the extent to which upper-level management is aware of
padding. At the same time, the manager could obtain some advice on what
his behavior ought to be. If told that the practice is acceptable, then the manager has to decide whether to continue in an organization that accepts deceptive behavior (or go against the grain and simply report what he or she feels
is really achievable by the plant).

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 users 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.

270

834
1.

Dr. Roger Jones

Cash Budget
Cash collections and cash available* ..........................
Less cash disbursements:
Salaries ......................................................................
Benefits .....................................................................
Building lease ...........................................................
Dental supplies .........................................................
Janitorial ....................................................................
Utilities .......................................................................
Phone .........................................................................
Office supplies ..........................................................
Lab fees .....................................................................
Loan payments .........................................................
Interest payments .....................................................
Miscellaneous ...........................................................
Total cash needs ............................................................

$21,360

Deficiency of cash available over needs .....................

$ (2,904)

$12,700
1,344
1,500
1,200
300
400
150
100
5,000
570
500
500
$24,264

*Total revenues for a month:

Fillings ($50 90) ..................
Crowns ($300 19) ...............
Root canals ($170 8) ..........
Bridges ($500 7) .................
Extractions ($45 30) ...........
Cleaning ($25 108) .............
X-rays ($15 150) .................

$ 4,500
5,700
1,360
3,500
1,350
2,700
2,250
$21,360

The budget shows that there is $2,904 more cash going out than coming in.

271

834
2.

Continued

Dr. Jones must either increase revenues to make up the deficiency or cut
costs or a combination of the two. Three possible approaches are outlined
below:
a. Extend office hours so that a total of 40 hours are worked each week. This
could increase revenues by as much as $5,340. Based on a four-week
month, the current revenue earned per hour is $166.88 ($21,360/128). Thus,
the total revenue increase possible is $166.88 32 hours = $5,340. Dr.
Jones would need to inform his assistants and receptionist of the increased time and indicate that each will receive a 15% increase in salary
for the additional time. (The office is currently open 34 hours per week.)
Benefits (primarily FICA and unemployment insurance benefits) would also increase. Other expenses that will likely increase with an increase in
sales are dental supplies, lab fees, and utilities (representing about 31% of
sales). The remaining expenses appear to be fixed. Thus, the increase in
cash flow is computed as follows:
Incremental revenues
Salary increases (0.15 $3,400)
Benefits ($1,344/$12,700)($510)
Variable expenses (0.31 $5,340)
Cash flow increase

$ 5,340
(510)
(54)
(1,655)
$ 3,121

Approach 1 carries with it some risk. Increasing office hours may not increase business. If business does not increase as expected, the cash flow
problems could be aggravated rather than relieved. The likelihood of increasing business would be increased if the additional hours are offered in the early evening instead of Friday afternoon. Evening hours are a major convenience for patients who must work during the day and are reluctant to lose
work hours.

272

834

Continued
Dr. Roger Jones
Revised Cash Budget

Cash collections and cash avail. ($21,360 + $5,340) ........

$26,700

Less cash disbursements:

Salaries ($12,700 + $510) ....................................................
Benefits ($1,344 + $54) ........................................................
Building lease ......................................................................
Dental supplies ($1,200 + $300*) ........................................
Janitorial ...............................................................................
Utilities ($400 + $100*) .........................................................
Phone ....................................................................................
Office supplies .....................................................................
Lab fees ($5,000 + $1,255*) .................................................
Loan payments ....................................................................
Interest payments ................................................................
Miscellaneous ......................................................................
Total cash needs .................................................................

$13,210
1,398
1,500
1,500
300
500
150
100
6,255
570
500
500
$26,483

Excess cash available over needs .....................................

217

*Variable expenses increase by 25% (8 added hours/32 original hours).

b. Cut one dental assistant, eliminate the salary to Mrs. Jones and the activities she does, and cut Dr. Joness salary back by $1,000 per month. The
savings are given below:
Assistant (salary and benefits)......................
Salaries ............................................................
Total .............................................................

$1,051*
2,000
$3,051

*($1,900/2) + [($950/$12,700) $1,344] = $1,051 (rounded) (This provides a

reasonable approximation of the benefits assigned to an assistant.)
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 month cut in their income. In all likelihood, this would be
unacceptable to the Jones family. Also, cutting an assistant would require
the receptionist to become involved in assisting. This may not be possible
without laying off the receptionist and hiring a person that has both sets of
skills. Additionally, using the receptionist as an assistant would result in
phone calls going unanswered and/or incoming patients being ignored.

273

834
c.

Concluded

A third possibility is to increase the fees charged for the various dental services. Assuming a variable cost ratio of 31% (from Approach 1), the increase in revenues needed to cover the $2,900 deficiency can be computed as follows:
0.69R = $2,900
R = $2,900/0.69
R = $4,203
This increase would call for fees to increase an average of 19.7%. Whether
this increase is possible or not depends to some extent on how Dr.
Joness charges 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 percent increase in fees and working an extra four 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.
The behavioral principles discussed in the chapter do have a role in this type
of setting. Dr. Joness personal goals must be in line with the goals of his
professional organization, and he must have the motivation to achieve those
goals. There is, however, a significant difference. Dr. Jones owns and manages the organization. To a large extent, his goals are the goals of the organization.

RESEARCH ASSIGNMENT
835
Answers will vary.

274