Solutions Chapter 8

Chapter 08 - Budgetary Planning
Chapter 8
Budgetary Planning
ANSWERS TO QUESTIONS
1. Budgetary planning is crucial because companies use budgets to plan their ongoing
operations so they will be able to meet their short-term and long-term objectives.
2. Budgets are an important part of organizing because they translate the companys
objectives into financial terms and lay out the resources and expenditures required
over a limited horizon. Budgets give managers a goal to work toward as it directs
their actions, and may either motivate or demotivate them. Budgets impact the
control function because they serve as a basis against which actual results are
compared.
3. A strategic plan is the starting point of the planning process and is the vision of what
management wants the organization to achieve over the long term. A strategic plan
includes long-term goals which are typically over a 5-10 year period and also
includes short-term or intermediate steps needed to achieve the long-term goals.
4. Answers will vary, but students should clearly distinguish between the three
categories.
Long-term goal: To have $X in personal assets by the age of 55.
Short-term goals: To save $X per month from their paycheck, to generate $X in
return from specific investments, etc.
Tactics: Cut costs by eliminating unnecessary expenses, to research potential
investments thoroughly, etc.
5. Benefits of budgeting include forcing managers to look ahead, which will help them
to foresee potential problems such as running out of cash or inventory. Budgets
also promote communication by allowing managers to share their expectations and
priorities for the future. And because budgets span the entire organization, they
require managers from different functional areas to coordinate their activities.
Finally, when implemented correctly, budgets can be useful for motivating
employees to work toward the organizations objectives.
6. Answers will vary. Potential negative consequences of not developing budgets
include failure to consider a companys long-term and short-term goals, lack of
communication between managers, and absence of motivation for employees
because there isnt an identifiable goal.
8-1
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7. Unlike a top down approach to budgeting where budgets are set by upper
management and imposed on employees, participative budgeting allows employees
to provide input into their own budget. This may motivate them to work hard to
achieve the goal. It may also result in more accurate information as employees may
have more knowledge or information about the process. Disadvantages of
participative budgeting include the amount of time consumed and the fact that
employees may try to build slack into a budget.
8. Budgetary slack results from employees attempts to build a cushion or margin of
safety into their budget so that they will be more likely to meet or exceed their
budgetary goal, and thus receive a better performance evaluation. Budgetary slack
can be detrimental if other decisions are based on the budget, without adjustment for
budgetary slack. For example, a production manager may underestimate production
goals so that they will be easier to achieve. However, the raw materials purchases
manager who relies on this budget will not buy enough materials to meet actual
production needs.
9. a. Utilizing different budgets for planning and performance evaluation will minimize
the impact of budgetary slack.
b. Continuous budgeting gives managers a constant period of budgets available
and keeps them in a continuous planning mode instead of only once per period.
c. Zero-based budgeting requires managers to justify their expenditures each and
every budgeting cycle instead of simply assuming previous periods levels are
still appropriate.
10. A master budget is a comprehensive set of budgets that covers all phases of an
organizations planned activities for a specific period. It is made up of both operating
budgets (sales, production, direct materials purchases, direct labor, manufacturing
overhead, selling and administrative expenses, and income statement), and financial
budgets (cash receipts and disbursements, inventory, capital purchases, financing,
and balance sheet).
11. The sales forecast is the starting point because all of the other budgets are based on
the sales forecast. The production, direct materials purchases, direct labor,
manufacturing overhead, selling and administrative, cash receipts/disbursements,
and inventory budgets are all affected by the sales forecast.
12. The sales forecast is based on last periods sales, industry trends, information from
top management about sales objectives, input from research and development, and
planned marketing activities. An inaccuracy in any of these sources would result in
an incorrect sales forecast which would, in turn, cause many operating budgets to be
inaccurate.
13. The operating budget is made up of the sales forecast, production budget, direct
materials purchases budget, direct labor budget, manufacturing overhead budget,
selling and administrative budget, and budgeted income statement.
8-2
14. The components of the cash budget include budgeted cash receipts, budgeted cash
payments, and financing.
15. The operating budgets feed directly into the cash budget. The sales budget is used
to compute the cash receipts, while the direct materials purchases, direct labor,
manufacturing overhead, and selling administrative expense budgets are used to
compute budgeted cash payments. The ending balance of cash appears on the
budgeted balance sheet. The operating budgets also affect other elements of the
budgeted balance sheet, including budgeted accounts receivable, inventory,
accounts payable, and owners equity.
16. The cash budget receives considerable attention because a company cannot exist
without sufficient cash. Sales revenue does not always become cash or there may
be a lag and companies need to know that they have sufficient cash on hand to pay
their expenses in the interim.
17. Depreciation is a non-cash expense. While it does increase a companys total
expenses and decrease net operating income, it does not require a cash outflow
during the current period.
18. The end result of the budgeting process is a set of pro-forma financial statements
that includes a budgeted income statement, statement of cash flows, and budgeted
balance sheet. Each of these budgets provides managers with valuable information
to use for planning, managing operations, and making investing and financing
decisions.
19. Service firms do not need to prepare production budgets, inventory budgets, or
manufacturing overhead budgets. But they do need to prepare budgets to predict
sales revenue, labor costs, supplies, and other non-manufacturing expenses such
as commissions and advertising.
20. One of the primary operating budgets a merchandiser needs to prepare is the
merchandise purchases budget. Instead of considering production needs and raw
materials inventory, this budget is based on budgeted sales and the need to
maintain adequate levels of finished goods inventory. The other major difference
between merchandising and manufacturing firms budgets is that merchandising
firms do not have a raw materials, direct labor, or manufacturing overhead expense
budget.
8-3
Authors' Recommended Solution Time

(Time in minutes)
Mini-exercises
No.
Time
1
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Exercises
No.
Time
1
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Problems
No.
Time
PA1
15
PA2
12
PA3
12
PA4
12
PA- 5
12
PA-6
15
PB1
15
PB2
12
PB3
12
PB4
12
PB5
12
PB6
15
Cases and
Projects*
No.
Time
1
45
2
45
* Due to the nature of cases, it is very difficult to estimate the amount of time students
will need to complete them. As with any open-ended project, it is possible for students
to devote a large amount of time to these assignments. While students often benefit
from the extra effort, we find that some become frustrated by the perceived difficulty of
the task. You can reduce student frustration and anxiety by making your expectations
clear, and by offering suggestions (about how to research topics or what companies to
select).
8-4
ANSWERS TO MINI-EXERCISES
M81
No, he isnt correct. Planning, directing, and control are very interrelated functions
within any organization. Managerial accounting plays a crucial role in each of these
functions.
M82
Potential consequences of CCs philosophy include a lack of vision for the companys
future development, failure to communicate goals to employees, and inability to
evaluate performance of the company or its employees.
M83
a)
b)
c)
d)
e)
f)
g)
h)
i)
Cash receipts and payments budget

Sales budget
Raw materials purchases budget
Selling and administrative expense budget
Budgeted balance sheet
Manufacturing overhead budget
Direct labor budget
Budgeted income statement
Production budget
Financial
Operating
Operating
Operating
Financial
Operating
Operating
Operating
Operating
M84
Budgeted sales (units)

Budgeted unit price
Budgeted sales revenue
October
7,200
x $27.50
$ 198,000
November
7,400
x $27.50
$ 203,500
December
7,100
x $27.50
$ 195,250
4th Quarter
21,700
x $27.50
$ 596,750
M85
July
480
x 10
4,800
300
(300)
4,800
x $ 1.50
$ 7,200
Production
Material required per unit
Material required for production
Ending raw materials inventory
Beginning raw materials inventory
Materials purchases
Average cost per foot
Budgeted raw materials purchases
August
400
x 10
4,000
300
(300)
4,000
x $ 1.50
$ 6,000
8-5
M86
July
Production
Average direct labor hours per unit
Total direct labor hours required
Average hourly labor rate
Budgeted direct labor cost
480
x 1.75
840
x $ 9.00
$ 7,560
August
400
x 1.75
700
x $ 9.00
$ 6,300
M87
1st Quarter
$ 200,000
x 19%
38,000
46,500
$ 84,500
Sales
Variable overhead rate
Variable manufacturing overhead
Fixed overhead
Budgeted manufacturing overhead
2nd Quarter
$ 236,000
x 19%
44,840
46,500
$ 91,340
M88
Sales
Variable selling and administrative rate
Variable selling and administrative expenses
Fixed selling and administrative expenses
Budgeted selling and administrative expenses
January
$ 87,000
x 8%
6,960
11,000
$ 17,960
February
$ 81,000
x 8%
6,480
11,000
$ 17,480
March
$ 92,000
x 8%
7,360
11,000
$ 18,360
February
$235,000
March
$298,000
$ 82,250
$104,300
91,650
52,000
$225,900
116,220
61,100
$281,620
M8-9
Budgeted sales revenue (given)
Cash sales
(35% of budgeted sales revenue)
Credit collections
(65% of budgeted sales revenue):
60% during month of sale
40% in month following sale
Budgeted cash receipts
8-6
M8-10

Cash sales
20% of budgeted sales revenue
Credit collections (80% of sales)
50% during month following sale
January
$450,000
February
$510,000
March
$530,000
90,000
102,000
106,000
180,000
304,000*
$574,000
204,000
180,000
$486,000
212,000
204,000
$522,000
* December sales $760,000 x 80% x 50% = $304,000

M811
Unit sales
Ending inventory (30% of April sales of 900)
Beginning inventory (30% of March sales of 1,300)
Purchases (units)
Cost per unit
Total purchases
March
1,300
270
(390)
1,180
x $ 40
$47,200
8-7
ANSWERS TO EXERCISES
E8-1
Req. 1
If Samantha knows that Leslie will automatically increase the estimate she gives her,
then she has a motivation to underestimate her budget. Additionally, the fact that
Samanthas bonus is tied to her ability to beat the budget gives her incentive to
underestimate production because this will increase her chances of receiving a bonus.
Req. 2
Budgeted production is used to make raw material purchases, inventory storage, and
labor staffing decisions. If Samanthas underestimated production numbers are used,
the Purchasing Manager and Human Resources Director will both be impacted. As a
result, they may not have enough resources on hand at the time they are needed which
could result in increased costs or a necessary reduction in production levels.
E8-2
1. Master budget
2. Operating budgets
3. Participative; Top-down
4. Budgetary slack
5. Controlling
6. Sales forecast
7. Budgeted income statement
8. Rolling budget
9. Budgeted balance sheet
10. Production budget
E83
Likely Order of
Preparation
9*
7*
5*
3*
10
1
4*
8
6*
2
Budget
Cash receipts and payments budget.
Selling and administrative expense budget.
Manufacturing overhead budget.
Raw materials purchases budget.
Budgeted balance sheet.
Sales budget.
Direct labor budget.
Budgeted income statement.
Budgeted cost of goods sold.
Production budget.
*Order shown is the order presented in the book. Some budgets are independent of
others and could be prepared in slightly different order.
8-8
All of the budgets above would be overstated if the sales forecast were overstated.
E84
Shaded answers are provided below:
Production
550
930
750
900
805
845
Ending
Inventory
125
90
120
85
225
290
Sales
500
965
710
1,200
740
795
Beginning
Inventory
75
125
80
385
160
240
E85
Req. 1
Sales (units)
Price per unit
Budgeted total sales
May
600
x $ 18
$10,800
June
800
x $ 18
$14,400
May
600
50
(75)
575
June
800
60
(50)
810
Req. 2
Sales
Ending inventory
Beginning inventory
Budgeted production (units)
E86
Req. 1
Production
x Closures required per unit
Total closures required for production
+ Ending Inventory
- Beginning Inventory
Budgeted purchases
x Cost per closure
Budgeted cost of closures purchased
May
575
x 1
575
20
(30)
565
x $1.50
$ 847.50
Req. 2
Production (units)
x Variable overhead rate
Budgeted variable overhead
+ Budgeted fixed overhead
575
x $ 1.25
718.75
1,000.00
$1,718.75
June
810
x 1
810
25
(20)
815
x $1.50
$1,222.50
810
x $ 1.25
1,012.50
1,000.00
$2,012.50
8-9
E8-7
May
575
x 0.3
172.50
x $ 9.00
$ 1,552.50
Production
Total direct labor hours required
June
810
x 0.3
243
x $ 9.00
$2,187.00
E8-8
Req. 1
Budgeted manufacturing cost per unit
Direct materials
Total direct labor (.30 hrs each X $9.00 per hour)
Variable manufacturing overhead ($1.25 per unit)
Fixed manufacturing overhead (given as $2.00 per unit)
Manufacturing cost per unit
Cost Per Unit

$
4.00
2.70
1.25
2.00
$
9.95
Req. 2
Shadee Corp.
Cost of Goods Sold Budget

Budgeted cost of goods sold
x
$
May
600
$9.95
5,970
x
$
June
800
$9.95
7,960
E8-9
May
$10,800
x 6%
648
1,200
$ 1,848
Sales
Variable selling and administrative rate
Variable selling and administrative expenses
Budgeted selling and administrative expenses
June
$14,400
x 6%
864
1,200
$ 2,064
E8-10
Shadee Corp.
Budgeted Income Statement
May
$ 10,800
5,970
$ 4,830
Budgeted Sales
Less: Cost of goods sold
Budgeted gross margin
Less: Budgeted selling and administrative
June
$ 14,400
7,960
$ 6,440
2,064
8-10
expenses
Budgeted net operating income
1,848
2,982
4,376
E811
July
625
x $ 18
$11,250
Sales (units)
x Unit sales price
Cash sales (60% of budgeted sales revenue)

Credit collections (40% of budgeted sales revenue)
(40% x 50% x current month budgeted sales)
45% in month following sales
(40% x 45% x previous month budgeted sales)
Budgeted cash collections

*Rounded
August
490
x $ 18
$ 8,820
September
450
x $ 18
$ 8,100
August
$5,292
September
$ 4,860
1,764
1,620
2,025
$ 9,081
1,588*
$ 8,068
E8-12
Req. 1
Sales
+ Ending inventory (60% of next month
sales)
- Beginning inventory
Budgeted production (units)
April
3,850
2,325
May
3,875
2,556
June
4,260
2,481
July
4,135
2,154
2,310
3,865
2,325
4,106
2,556
4,185
2,481
3,808
Req. 2
Production
x Pounds required per unit
Total pounds required for production
+ Ending Inventory (50% of next
month needs)
- Beginning Inventory
Budgeted purchases
x Cost per pound
Budgeted cost of material purchased
April
3,865
x 2
7,730
4,106
3,865
7,971
x $ 3.10
$ 24,710.10
May
4,106
x2
8,212
June
4,185
x 2
8,370
4,185
3,808
4,106
4,185
8,291
7,993
x $ 3.10
x $ 3.10
$ 25,702.10 $24,778.30
8-11
E8-13
Strike Model
Production
Total direct labor hours required for Strike
Turkey Model
Production
Total direct labor hours required for Turkey
Total direct labor hours required (for both models)

Budgeted October direct labor cost for Alleyway
Cutting
2,500
x 0.1
250
Sewing
2,500
x 0.3
750
3,250
x 0.2
650
3,250
x 0.5
1,625
900
x $ 15.00
$ 13,500
2,375
x $ 12.00
$28,500
E814
Price per unit
November
3,100
x $ 95
$294,500
December
3,600
x $ 95
$342,000
$ 32,395
$ 37,620
15,800
$ 48,195
15,800
$ 53,420
Variable selling & administrative expenses

(11% of sales revenue)

($5,000 + $2,500 + $2,500 + $3,500 + $1,500 + $800)
Total budgeted selling and administrative expenses

E8-15
Req. 1
Budgeted Manufacturing Costs
Direct materials (2 pounds x $2.00 per pound)
Direct labor (1.5 hours x $15.00 per hour)
Manufacturing overhead
Budgeted unit sales
Per Unit
$ 4.00
22.50
3.00
$ 29.50
15,000
$442,500
Req. 2
Budgeted sales revenue (15,000 x $41.00)
Less: Budgeted cost of goods sold (15,000 x $29.50)
Less: Budgeted selling and administrative expenses
$615,000
- 442,500
172,500
(135,870)
$ 36,630
8-12
E816
Cash receipts from customers
March
$ 36,450
Cash paid to suppliers

Cash paid for manufacturing overhead ($6,100 - $1,200 depreciation)
Cash paid for direct labor
Cash paid for selling and administrative expenses
Cash paid for equipment
Budgeted cash payments
$ 22,300
4,900
8,250
4,200
7,000
$ 46,650
Beginning cash balance

+ Budgeted cash receipts
- Budgeted cash payments
Preliminary cash balance
Cash borrowed ($10,000 6,120 = $3,880 needed ~ $4,000 loan)
Ending cash balance
$ 16,320
36,450
- 46,650
$ 6,120
4,000
$ 10,120
E817

Cash sales
July
$25,000
(60% of budgeted sales revenue)
August
$23,000 Calculation
$13,800.00 (23,000 x .60)
Credit collections
(40% of budgeted sales revenue):
40% in month following sale
5,520.00 (23,000 x .40 x .60)

4,000.00 (25,000 x .40 x .40)
$23,320.00
8-13
E8-18
Req. 1
Sales revenue
Cash sales (70% of budgeted sales revenue)
Credit collections (30% of budgeted sales revenue)
(30% x 40% x current month budgeted sales)
60% in month following sales
(30% x 60% x previous month budgeted sales)
Budgeted cash collections
July
$160,000
$112,000
August
$145,000
$101,500
19,200
17,400
20,700*
$151,900
28,800
$ 147,700
July
$150,000
August
$ 80,000
82,500
44,000
42,750**
38,250
67,500
34,700
$ 163,500
$146,200
* $115,000 x 30% = $34,500; $34,500 x 60% = $20,700

Req. 2
Purchases (All on account)
Cash disbursements:
Credit purchases paid in month of purchase (55%)
Credit purchases paid in month following purchase
(45%)
Cash paid for operating expenses
Budgeted cash payments

** $95,000 x 45% = $42,750
E 8-19
Sales
(40% sales)
Add: Desired ending inventory
Total inventory required
Less: Beginning inventory
Required purchases
January
$400,000
160,000
February
March
$480,000 $640,000
192,000 256,000
48,000
$208,000
40,000
$168,000
64,000
68,000*
$256,000 $324,000
48,000
64,000
$208,000 $260,000
* $680,000 x 40% = $272,000 (April budgeted COGS) x 25% = $68,000
8-14
E8-20
Req. 1
Sales
(30% sales)
Add: Desired ending inventory
Total inventory required
Less: Beginning inventory
Required purchases
April
$220,000
66,000
11,400
$77,400
13,200
$64,200
May
June
$190,000 $310,000
57,000
93,000
18,600
$75,600
11,400
$64,200
5,400*
$98,400
18,600
$79,800
* $90,000 x 30% = $27,000 (August budgeted COGS) x 20% = $5,400
Req. 2
Budgeted sales
Less: Budgeted selling and
administrative expenses*
Citrus Girl Company

For the Month Ending
April 30
May 31
June 30
$220,000
$190,000 $310,000
66,000
57,000
93,000
$154,000
$133,000 $217,000
44,535
43,335
48,135
$109,465
$89,665 $168,865
* For each month total of salaries $30,000, delivery expense 4% of monthly sales, rent
expense on the warehouse $4,500, utilities $800, insurance $175, and other expenses
$260.
8-15
E8-21
Budgeted cash collections:
Req. 1
June
Sales
$24,000
Cash collected in month of sale
(60%)
14,400
Cash collected in month
following sale (35%)
7,700
nd
Cash collected in 2 month
following sale (5%)
800
Total cash receipts
$22,900
July
$36,000
August
$38,000
21,600
22,800
8,400
12,600
1,100
$31,100
1,200
$36,600
June
$9,000
July
$17,000
August
$12,000
4,500
8,500
6,000
2,500*
$7,000
4,500
$13,000
8,500
$14,500
Budgeted cash payments:

Purchases
Cash paid in month of purchase
(50%)
Cash paid in month following
purchase (50%)
Total cash payments
May purchases $5,000 x 50%
Req. 2
Balances for August 31 budgeted balance sheet
Cash
June 1 balance
Add: Total cash receipts
Less: Total cash payments
August 31 balance
$14,600
90,600
34,500
$70,700
Supplies Inventory
15% of August purchases
$1,800
Accounts Receivable
40% of August sales
5% of July sales
Balance at August 31
$15,200
1,800
$17,000
Accounts Payable
50% of August purchases
$6,000
8-16
GROUP A PROBLEMS
PA81
Req. 1
x Unit sales price
May
300
x $ 25
$ 7,500
June
400
x $ 25
$10,000
2nd Quarter
950
x $ 25
$23,750
April
250
May
300
June
400
2nd Quarter
950
120
160
150
150
- 100
270
- 120
340
- 160
390
- 100
1,000
April
270
x 4
1,080
May
340
x 4
1,360
June
390
x 4
1,560
408
468
474*
474
- 324
1,164
x $ 2.00
$ 2,328
- 408
1,420
x $ 2.00
$ 2,840
- 468
1,566
x $ 2.00
$ 3,132
- 324
4,150
x $ 2.00
$ 8,300
April
250
x $ 25
$ 6,250
Req. 2
+Ending finished goods inventory
(40% of next months budgeted sales)
- Beginning finished goods inventory

(40% of current months budgeted sales)
Budgeted production
Req. 3
Budgeted production
x Material requirements per unit
Total material needed for production
+ Ending raw materials inventory
(30% of next months production needs)
2nd Quarter
1,000
x 4
4,000
- Beginning raw materials inventory

(30% of current month production needs)

x Material cost per foot
Budgeted cost of raw material purchases
*July budgeted production = 375 + (.40 x 425) (.40 x 375) = 395

June raw materials ending inventory = 395 x 4 = 1,580 x 30% = 474
Req. 4
Budgeted production
x Direct labor requirements per unit
Direct labor hours required
x Direct labor rate
Req. 5
Budgeted production
x Variable manufacturing overhead rate
Budgeted variable manufacturing
+ Fixed manufacturing overhead
April
270
x .5
135
x $ 12
$ 1,620
May
340
x .5
170
x $ 12
$ 2,040
June
390
x .5
195
x $ 12
$ 2,340
2nd Quarter
1,000
x .5
500
x $ 12
$ 6,000
April
270
x $0.30
81.00
600.00
$ 681.00
May
340
x $0.30
102.00
600.00
$ 702.00
June
390
x $0.30
117.00
600.00
$ 717.00
2nd Quarter
1000
x $0.30
300.00
1,800.00
$ 2,100.00
8-17
PA81 (Continued)
Req. 6
Direct materials (4 ft x $2.00 per ft)
Direct labor (.5 hours x $12 per hour)
Fixed manufacturing overhead ($7,200 / 4,000 units)
Budgeted sales
x Budgeted manufacturing cost per unit
Per Unit
$ 8.00
6.00
0.30
1.80
$ 16.10
April
May
June
250
300
400
x $16.10
x $16.10
x $16.10
$4,025.00 $4,830.00 $6,440.00
Req. 7
x Variable selling and administrative rate
Budgeted variable selling and adm. expenses
+ Budgeted fixed selling and adm. expenses
Total budgeted selling and adm. expenses
April
250
x $.60
150
650
$ 800
May
300
x $.60
180
650
$ 830
June
400
x $.60
240
650
$ 890
2nd Quarter
950
x $16.10
$15,295.00
2nd Qtr
950
x $.60
570
1,950
$ 2,520
PA82

Less: Budgeted cost of goods sold
administrative expenses
April
$6,250.00
- 4,025.00
2,225.00
May
June
$7,500.00 $10,000.00
- 4,830.00 - 6,440.00
2,670.00
3,560.00
(800.00)
$1,425.00
(830.00)
$1,840.00
(890.00)
$2,670.00
2nd Quarter
$23,750.00
- 15,295.00
8,455.00
(2,520.00)
$ 5,935.00
8-18
PA83
Req. 1
(from Req. 1 of PA 8-1)
Cash collections
April
$ 6,250
May
$ 7,500
June
$10,000
2nd Quarter
$23,750
(80% of budgeted sales)
$ 5,000
$ 6,000
$ 8,000
$ 19,000
625
750
1,000
2,375
625
$7,375
750
$9,750
2,063
$23,438
Credit collections
(20% of budgeted sales)
50% collected in month of sale
(20% x 50% x current month sales)
50% collected in month following sale
(20% x 50% x previous month sales)
688*
$6,313
*Credit collections from March sales = 275 units x $25 = $6,875 x 20% x 50% = $687.50 (rounded to
$688)
Req. 2
(from PA 8-1 Req. 3)
Cash disbursements:
Raw material purchases
April
$ 2,328
80% paid in the month of purchase

(Current month purchases x .80)
20% paid in the following month
(Prior month purchases x .20)
$1,862.40
400.00*
June
$ 3,132
2nd Quarter
$ 8,300
$2,272.00 $2,505.60
$6,640.00
May
$ 2,840
465.60
568.00
1,433.60
1,620.00
2,040.00
2,340.00
6,000.00
681.00
- 150.00
702.00
- 150.00
717.00
- 150.00
2,100.00
- 450.00
830.00
-
890.00
-
2,520.00
3,000.00
$6,159.60 $6,870.60
$21,243.60
Direct labor
Less: Depreciation (given)

Selling and administrative expenses
800.00
3,000.00
Purchase of Equipment
Total budgeted cash payments
$8,213.40
*March purchases given at $2,000 x 20% = $400
Req. 3
Plus: Budgeted cash receipts
Less: Budgeted cash payments
Cash borrowed/Repaid
Ending cash balance
April
May
June
$ 10,800.00 $10,899.10 $10,114.50
6,312.50
7,375.00
9,750.00
- 8,213.40 - 6,159.60 - 6,870.60
$8,899.10 $12,114.50 $12,993.90
2,000.00 (2,000,00)
10,899.10
10,114.50 $12,993.90
2nd Quarter
$10,800.00
23,437.50
- 21,243.60
$12,993.90
$12,993.90
8-19
PA84
Req. 1
Sales (units)
x Unit sales price
Budgeted Sales
Req. 2
Sales (units)
+ Ending finished goods inventory
January
2,000
x $ 44
$ 88,000
February
2,200
x $ 44
$ 96,800
March
2,700
x $ 44
$ 118,800
1st Quarter
6,900
x $ 44
$ 303,600
January
2,000
February
2,200
March
2,700
1st Quarter
6,900
660
810
750
750
- 600
2,060
- 660
2,350
- 810
2,640
- 600
7,050
(30% of next months sales)

(30% of current months sales)
Budgeted production
Req. 3
Budgeted production
X Material requirements per unit

Total material required for production
+ Ending raw materials (25% of
following months production needs)
- Beginning raw materials (25% of
current months production needs)
Budgeted raw material purchases

X Material cost per housing
Budgeted cost of raw material
purchases
January
2,060
x 1
2,060
February
2,350
x 1
2,350
March
2,640
x 1
2,640
1st Quarter
7,050
x 1
7,050
588**
660
580*
580
- 515
2,133
x $7.00
- 588
2,422
x $7.00
- 660
2,560
x $7.00
- 515
7,115
x $7.00
$14,931
$ 16,954
$ 17,920
$49,805
January
February
March
2,060
2,350
2,640
x .75
x .75
x .75
1,545.00
1,762.50
1,980.00
x $18.00
x $18.00
x $18.00
$27,810.00 $31,725.00 $35,640.00
1st Quarter
7,050
x .75
5,287.50
x $18.00
$95,175.00
* April production = 2,500 + (1,900 x .30) (2,500 x .30) = 2,320

March ending raw materials inventory = 2,320 x 1 x .25 = 580
**Rounded
Req. 4
Budgeted production
x Direct labor hours per unit

Direct labor requirements
x Average labor rate
8-20
PA85
Req. 1
Direct materials ($7 + $4.50)
Direct labor (.75 hrs x $18.00)
Total budgeted mfg cost per unit
Sales (units)
Budgeted cost of goods sold*
*Rounded
January
2,000
x $28.87
$ 57,733
Per Unit
$11.50
13.50
1.20
2.67
$28.87
February
2,200
x $28.87
$ 63,507
March
2,700
x $28.87
$ 77,940
1st Quarter
6,900
x $28.87
$ 199,180
Req. 2
x Variable selling and administrative
rate (7% of budgeted sales revenue)
Variable selling and adm. expenses
+ Fixed selling and adm. expenses
Budgeted selling and adm. expenses
January
$ 88,000
February
$ 96,800
March
$ 118,800
1st Quarter
$ 303,600
x 7%
6,160
18,000
$24,160
x 7%
6,776
18,000
$24,776
x 7%
8,316
18,000
$26,316
x 7%
21,252
54,000
$75,252
Req. 3
Budgeted gross profit
January
$ 88,000
57,733
30,267
24,160
$ 6,107
February
$ 96,800
63,507
33,293
24,776
$ 8,517
March
$118,800
77,940
40,860
26,316
$ 14,544
1st Quarter
$ 303,600
199,180
104,420
75,252
$ 29,168
8-21
PA8-6
Budgeted unit sales
Quarter 1
40,000
Quarter 2
60,000
Quarter 3
30,000
Budgeted sales price
$ 600,000
$ 900,000
$ 450,000
Merchandise Purchases Budget

Budgeted unit sales
Plus: Planned ending inventory
(25% of next quarter sales)
Less: Planned beginning inventory
(25% of current quarter sales)
Budgeted purchases (units)
Cost of merchandise
Total cost of merchandise purchased
Quarter 1
40,000
Quarter 2
60,000
Quarter 3
30,000
15,000
7,500
15,000
(10,000)
(15,000)
(7,500)
45,000
52,500
37,500
15.00
6.00
15.00
6.00
Quarter 4
60,000
15.00
Quarter 4
60,000
6.00
$ 270,000
$ 315,000
$ 225,000

Budgeted unit sales
Quarter 1
40,000
Quarter 2
60,000
Quarter 3
30,000
Budgeted cost of merchandise
$ 240,000
$ 360,000
$ 180,000
Selling and Administrative Expense Budget

Variable Selling Expenses
Fixed Administrative Expenses
Budgeted Selling and Adm. Expenses
Quarter 1
$ 600,000
$ 60,000
$ 80,000
$ 140,000
Quarter 2
$ 900,000
$ 90,000
$ 80,000
$ 170,000
Quarter 3
$ 450,000
$ 45,000
$ 80,000
$ 125,000
Quarter 4

Quarter 1
$ 600,000
Quarter 2
$ 900,000
Quarter 3
$ 450,000
Quarter 4

240,000
$ 360,000
360,000
$ 540,000
180,000
$ 270,000
140,000
170,000
125,000
$ 220,000
$ 370,000
$ 145,000
Less: Budgeted selling and adm. expenses

6.00
6.00
Quarter 4
60,000
6.00
8-22
GROUP B PROBLEMS
PB81
Req. 1
x Unit sales price
May
650
x $ 20
$13,000
June
720
x $ 20
$14,400
2nd Quarter
2,070
x $ 20
$41,400
April
700
195
May
650
216
June
720
249
2nd Quarter
2,070
249
- 210
685
- 195
671
- 216
753
- 210
2,109
April
685
x 2
1,370.00
May
671
x 2
1,342.00
June
753
x 2
1,506.00
268.40
301.20
- 274.00
1,364.40
x $ 0.60
$ 818.64
- 268.40
1,374.80
x $ 0.60
$ 824.88
April
700
x $ 20
$14,000
Req. 2
(30% of next months budgeted sales)

(30% of current months budgeted sales)
Budgeted production
Req. 3
Budgeted Production
Total material needed for production
+ Ending raw materials inventory
(20% of next months production needs)
323.60*
2nd Quarter
2,109
x 2
4,218.00
323.60
- Beginning raw materials inventory

(20% of current month production needs)

x Material cost per yard
Budgeted cost of raw materials purchases
- 301.20
1,528.40
x $ 0.60
$ 917.04
- 274.00
4,267.60
x $ 0.60
$ 2,560.56
*July production = 830 + (.30 x 760) (.30 x 830) = 809

June ending raw materials inventory = 809 x 2 = 1,618 x 20% = 323.60
June
753
x .50
376.50
x $ 8.00
$ 3,012
2nd Quarter
2,109
x .50
1,054.50
x $ 8.00
$ 8,436
April
May
June
685
671
753
x $0.40
x $0.40
x $0.40
274.00
268.40
301.20
750.00
750.00
750.00
$1,024.00 $1,018.40 $1,051.20
2nd Quarter
2,109
x $0.40
843.60
2,250.00
$ 3,093.60
Req. 4
Budgeted production
x Direct labor requirements per unit
Direct labor hours required
x Direct labor rate
Req. 5
Budgeted production
x Variable manufacturing overhead rate
Budgeted variable manufacturing
+ Fixed manufacturing overhead
April
685
x .50
342.50
x $ 8.00
$ 2,740
May
671
x .50
335.50
x $ 8.00
$ 2,684
8-23
PB81 (Continued)
Req. 6
Direct materials (2 yards x $0.60 per yard)
Direct labor (.50 hours x $8 per hour)
Budgeted sales
Req. 7
x Variable selling and administrative rate
($.75 per unit sold)
Budgeted variable selling and
+ Budgeted fixed selling and administrative
expenses (given)
Budgeted selling and administrative
expenses
Per Unit
$ 1.20
4.00
0.40
1.00
$ 6.60
April
May
June
700
650
720
x $6.60
x $6.60
x $6.60
$4,620.00 $4,290.00 $4,752.00
2nd Quarter
2,070
x $6.60
$13,662.00
April
700
May
650
June
720
2nd Qtr
2,070
x $.75
x $.75
x $.75
x $.75
525.00
487.50
540.00
1, 552.50
820.00
820.00
820.00
2,460.00
$1,345.00 $1,307.50 $1,360.00
$4,012.50
8-24
PB82

April
May
June
$14,000.00 $13,000.00 $14,400.00
4,620.00
4,290.00
4,752.00
9,380.00
8,710.00
9,648.00
2nd Quarter
$ 41,400.00
13,662.00
27,738.00
1,345.00
$ 8,035.00
4,012.50
$ 23,725.50
1,307.50
1,360.00
$ 7,402.50 $ 8,288.00
PB83
Req. 1
(from Req. 1 of PB 8-1)
April
$ 14,000
May
$13,000
June
$ 14,400
2nd Quarter
$ 41,400
$ 8,400
$ 7,800
$ 8,640
$ 24,840
2,800
2,600
2,880
8,280
2,800
$13,200
2,600
$14,120
8,800
$41,920
Cash collections (60% of budgeted sales)

Credit collections (40% of budgeted sales)
50% collected in month of sale
(40% x 50% x current month sales)
50% collected in month following sale
(40% x 50% x previous month sales)
3,400*
$14,600
*Credit collections from March sales = 850 units x $20 = $17,000 x 40% x 50% = $3,400
Req. 2
(from PB 8-1 Req. 3)
Cash disbursements:
Raw material purchases
April
$ 818.64
May
$ 824.88
June
$ 917.04
2nd Quarter
$ 2,560.56
$ 491.18
$ 494.93
$550.22
$1,536.34
320.00*
327.46
329.95
977.41
2,740.00
2,684.00
3,012.00
8,436.00
1,024.00
- 280.00
1,018.40
- 280.00
1,051.20
- 280.00
3,093.60
- 840.00
1,345.00
15,000.00
1,307.50
-
1,360.00
-
4,012.50
15,000.00
$20,640.18 $5,552.29 $6,023.37
$32,215.85
60% paid in the month of purchase

(Current month purchases x .60)
40% paid in the following month
(Prior month purchases x .40)
Direct labor
Less: Depreciation (given)

Selling and administrative expenses
Cash paid for equipment

Total budgeted cash payments
8-25
*March purchases given at $800 x 40% = $320

Req. 3
Plus: Budgeted cash receipts
Less: Budgeted cash payments
Cash borrowed (repaid)
Ending cash balance
April
$12,200.00
14,600.00
(20,640.18)
$6,159.82
$4,000.00
$10,159.82
May
June
$10,159.82 $13,807.53
13,200.00
14,120.00
(5,552.29) (6,023.37)
$17,807.53 $21,904.16
$(4,000.00)
$13,807.53 $21,904.16
2nd Quarter
$12,200.00
41,920.00
(32,215.84)
$21,904.16
$21,904.16
PB84
Req. 1
Sales (units)
x Unit sales price
Budgeted Sales
Req. 2
Sales (units)
January
8,000
x $ 30
$240,000
February
7,400
x $ 30
$222,000
March
8,700
x $ 30
$261,000
1st Quarter
24,100
x $ 30
$723,000
January
8,000
February
7,400
March
8,700
1st Quarter
24,100
1,850
2,175
2,375
2,375
- 2,000
7,850
- 1,850
7,725
- 2,175
8,900
- 2,000
24,475
March
8,900
x 1
8,900
1st Quarter
24,475
x
1
24,475
(25% of next months sales)

(25% of current months sales)
Budgeted production
Req. 3
Budgeted Production

Total material required for
production
+ Ending raw materials (30% of
following months production needs)
- Beginning raw materials (30% of
current months production needs)

x Cost per heating element
Budgeted raw material cost
January
7,850
x 1
7,850
February
7,725
x 1
7,725
2,318**
2,670
- 2,355
- 2,318
7,813
8,077
x $1.25
x $1.25
$ 9,766 $10,096.25
2,824*
- 2,670
9,054
x $1.25
$11,317.50
2,824
- 2,355
24,944
x $1.25
$ 31,180.00
* April production = 9,500 + (.25 x 9,150) (.25 x 9,500) = 9,413 (rounded)

March ending raw materials inventory = 9,413 x 1 x 30% = $2,824 (rounded)
** Rounded
8-26
Req. 4
Budgeted production
x Direct labor hours per unit

Direct labor requirements
x Average labor rate
January
February
March
7,850
7,725
8,900
x .5
x .5
X .5
3,925
3,862.50
4,450
x $18.00
x $18.00
x $18.00
$70,650.00 $69,525.00 $80,100.00
1st Quarter
24,475
x .5
12,237.50
x $18.00
$220,275.00
PB85
Req. 1
Direct materials ($3.25 + 1.25)
Direct labor (.5 hrs x $18.00)
Total budgeted mfg cost per unit
Sales (units)
January
8,000
x $15.45
$123,600
Per Unit
$ 4.50
9.00
1.00
0.95
$15.45
February
7,400
x $15.45
$114,330
March
8,700
x $15.45
$134,415
1st Quarter
24,100
x $15.45
$372,345
Req. 2
x Variable selling and administrative
rate (5% of budgeted sales revenue)
Variable selling and administrative
expenses
+ Fixed selling and administrative
expenses ($17,500)
expenses
January
$240,000
February
$222,000
March
$261,000
1st Quarter
$723,000
x 5%
x 5%
x 5%
x 5%
12,000
11,100
13,050
36,150
17,500
17,500
17,500
52,500
$ 29,500
$ 28,600
$ 30,550
$ 88,650
Req. 3
Budgeted gross profit
expenses
January
$240,000
123,600
116,400
February
$222,000
114,330
107,670
March
$261,000
134,415
126,585
1st Quarter
$723,000
372,345
350,655
29,500
$ 86,900
28,600
$ 79,070
30,550
$ 96,035
88,650
$262,005
8-27
PB8-6
Budgeted unit sales
Quarter 1
50,000
Quarter 2
70,000
Quarter 3
45,000
Budgeted sales price

Merchandise Purchases Budget
Budgeted unit sales
Plus: Planned ending inventory
(30% of next quarter sales)
Less: Planned beginning inventory
(30% of current quarter sales)
Budgeted purchases (units)
Cost of merchandise
Total cost of merchandise purchased
20.00
20.00
20.00
$ 1,000,000
$ 1,400,000
$ 900,000
Quarter 1
50,000
Quarter 2
70,000
Quarter 3
45,000
21,000
13,500
19,500
(15,000)
(21,000)
(13,500)
56,000
62,500
51,000
8.00
8.00
Quarter 4
65,000
Quarter 4
65,000
8.00
$ 448,000
$ 500,000
$ 408,000

Budgeted unit sales
Quarter 1
50,000
Quarter 2
70,000
Quarter 3
45,000
Budgeted cost of merchandise
$ 400,000
$ 560,000
$ 360,000
Selling and Administrative Expense Budget

Variable selling expenses
Fixed administrative expenses
Quarter 1
$ 1,000,000
$ 150,000
$ 60,000
$ 210,000
Quarter 2
$ 1,400,000
$ 210,000
$ 60,000
$ 270,000
Quarter 3
$ 900,000
$ 135,000
$ 60,000
$ 195,000
Quarter 4

Quarter 1
$ 1,000,000
Quarter 2
$ 1,400,000
Quarter 3
$ 900,000
Quarter 4

400,000
$ 600,000
560,000
840,000
360,000
$ 540,000
210,000
270,000
195,000
$ 390,000
$ 570,000
$ 345,000
Less: Budgeted selling and adm. expenses

8.00
8.00
Quarter 4
65,000
8.00
8-28
ANSWERS TO SKILLS DEVELOPMENT CASES
S81
Student answers to this case will vary depending on the size and type of organization
they choose to investigate. It is important that students examine the process from
multiple perspectives and attempt to balance any dissatisfaction with the needs of other
individuals and of the organization as a whole. Also, any recommendations should be
considered from other perspectives and not just from the perspective of a single
dissatisfied party. For example, a student who recommends a participative budgeting
process be implemented should also consider any consequences that might result from
this change.
S82
This case offers a chance for considerable in-class discussion and is an opportunity for
instructors to pull a managerial accounting topic into students everyday lives. Other
tools that could be introduced during discussion include estimates of the time it takes to
pay off credit cards and calculating payment amounts in commonly-used software such
as Microsoft Excel.
8-29

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Chapter 08 - Budgetary Planning

Chapter 08 - Budgetary Planning

Chapter 08 - Budgetary Planning

Chapter 08 - Budgetary Planning

Authors' Recommended Solution Time

Chapter 08 - Budgetary Planning

Cash receipts and payments budget

Budgeted sales (units)

Chapter 08 - Budgetary Planning

Budgeted cash receipts

Chapter 08 - Budgetary Planning

Budgeted sales revenue (given)

* December sales $760,000 x 80% x 50% = $304,000

Chapter 08 - Budgetary Planning

Chapter 08 - Budgetary Planning

Chapter 08 - Budgetary Planning

Cost Per Unit

Budgeted sales (units)

Chapter 08 - Budgetary Planning

Cash sales (60% of budgeted sales revenue)

Budgeted cash collections

Chapter 08 - Budgetary Planning

Total direct labor hours required (for both models)

Variable selling & administrative expenses

Fixed selling and administrative expenses

Total budgeted selling and administrative expenses

Chapter 08 - Budgetary Planning

Cash paid to suppliers

Beginning cash balance

Budgeted sales revenue (given)

(60% of budgeted sales revenue)

5,520.00 (23,000 x .40 x .60)

Budgeted cash receipts

Chapter 08 - Budgetary Planning

Budgeted cash collections

* $115,000 x 30% = $34,500; $34,500 x 60% = $20,700

Budgeted cash payments

* $680,000 x 40% = $272,000 (April budgeted COGS) x 25% = $68,000

Chapter 08 - Budgetary Planning

* $90,000 x 30% = $27,000 (August budgeted COGS) x 20% = $5,400

Citrus Girl Company

Chapter 08 - Budgetary Planning

Budgeted cash payments:

Chapter 08 - Budgetary Planning

- Beginning finished goods inventory

- Beginning raw materials inventory

Budgeted raw materials purchases

*July budgeted production = 375 + (.40 x 425) (.40 x 375) = 395

Chapter 08 - Budgetary Planning

Budgeted sales revenue

Chapter 08 - Budgetary Planning

(80% of budgeted sales)

Budgeted cash receipts

80% paid in the month of purchase

Less: Depreciation (given)

*March purchases given at $2,000 x 20% = $400

Chapter 08 - Budgetary Planning

(30% of next months sales)

- Beginning finished goods inventory

X Material requirements per unit

Budgeted raw material purchases

* April production = 2,500 + (1,900 x .30) (2,500 x .30) = 2,320

x Direct labor hours per unit

Chapter 08 - Budgetary Planning