Chapter 22 Budgeting 1039

Chapter 22 Budgeting 1039

Estimated Costs and Expenses

Fixed Variable (Total for Year) (Per Unit Sold)

Cost of goods manufactured and sold:Direct materials . . . . . . . . . . . . . . . . . . . . . . — $0.90Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.55Factory overhead:

Depreciation of plant and equipment . . . . . $48,000 —Other factory overhead . . . . . . . . . . . . . . . 8,000 0.35

Selling expenses:Sales salaries and commissions . . . . . . . . . . 42,000 0.40Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 —Miscellaneous selling expense . . . . . . . . . . . 5,000 0.20

Administrative expenses:Office and officers salaries . . . . . . . . . . . . . . 69,200 0.15Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 0.08Miscellaneous administrative expense . . . . . 3,000 0.12

Balances of accounts receivable, prepaid expenses, and accounts payable at the endof the year are not expected to differ significantly from the beginning balances. Federalincome tax of $90,000 on 2011 taxable income will be paid during 2011. Regular quar-terly cash dividends of $1.00 a share are expected to be declared and paid in March,June, September, and December on 19,000 shares of common stock outstanding. It isanticipated that fixed assets will be purchased for $75,000 cash in May.

Instructions1. Prepare a budgeted income statement for 2011.2. Prepare a budgeted balance sheet as of December 31, 2011, with supporting calculations.

Special Activities

The director of marketing for Eclipse Computer Co., Lori Keller, had the following dis-cussion with the company controller, Deon Johnson, on July 26 of the current year:Lori: Deon, it looks like I’m going to spend much less than indicated on my July budget.

Deon: I’m glad to hear it.

Lori: Well, I’m not so sure it’s good news. I’m concerned that the president will see that I’m under budgetand reduce my budget in the future. The only reason that I look good is that we’ve delayed an advertisingcampaign. Once the campaign hits in September, I’m sure my actual expenditures will go up. You see, weare also having our sales convention in September. Having the advertising campaign and the convention atthe same time is going to kill my September numbers.

Deon: I don’t think that’s anything to worry about. We all expect some variation in actual spending monthto month. What’s really important is staying within the budgeted targets for the year. Does that look as ifit’s going to be a problem?

Lori: I don’t think so, but just the same, I’d like to be on the safe side.

Deon: What do you mean?

Lori: Well, this is what I’d like to do. I want to pay the convention-related costs in advance this month. I’llpay the hotel for room and convention space and purchase the airline tickets in advance. In this way, I cancharge all these expenditures to July’s budget. This would cause my actual expenses to come close tobudget for July. Moreover, when the big advertising campaign hits in September, I won’t have to worryabout expenditures for the convention on my September budget as well. The convention costs will alreadybe paid. Thus, my September expenses should be pretty close to budget.

Deon: I can’t tell you when to make your convention purchases, but I’m not too sure that it should beexpensed on July’s budget.

Lori: What’s the problem? It looks like “no harm, no foul” to me. I can’t see that there’s anything wrongwith this—it’s just smart management.

How should Deon Johnson respond to Lori Keller’s request to expense theadvanced payments for convention-related costs against July’s budget?

SA 22-1Ethics and profes-sional conduct inbusiness

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1040 Chapter 22 Budgeting

Children’s Hospital of the King’s Daughters Health System in Norfolk, Virginia, intro-duced a new budgeting method that allowed the hospital’s annual plan to be updatedfor changes in operating plans. For example, if the budget was based on 400 patient-days (number of patients � number of days in the hospital) and the actual count roseto 450 patient-days, the variable costs of staffing, lab work, and medication costs couldbe adjusted to reflect this change. The budget manager stated, “I work with hospitaldirectors to turn data into meaningful information and effect change before the monthends.”

a. What budgeting methods are being used under the new approach?b. Why are these methods superior to the former approaches?

SA 22-2Evaluating budgetingsystems

A bank manager of First Union Bank Inc. uses the managerial accounting system totrack the costs of operating the various departments within the bank. The departmentsinclude Cash Management, Trust, Commercial Loans, Mortgage Loans, Operations,Credit Card, and Branch Services. The budget and actual results for the OperationsDepartment are as follows:

Resources Budget Actual

Salaries $200,000 $200,000Benefits 30,000 30,000Supplies 45,000 42,000Travel 20,000 30,000Training 25,000 35,000Overtime 25,000 20,000________ ________Total $345,000 $357,000________ ________________ ________Excess of actual over budget $ 12,000

a. What information is provided by the budget? Specifically, what questionscan the bank manager ask of the Operations Department manager?

b. What information does the budget fail to provide? Specifically, could thebudget information be presented differently to provide even more insight for thebank manager?

SA 22-3Service companystatic decision making

Domino’s Pizza L.L.C. operates pizza delivery and carryout restaurants. The annualreport describes its business as follows:

We offer a focused menu of high-quality, value-priced pizza with three types of crust (Hand-Tossed, Thin Crust, and Deep Dish), along with buffalo wings, bread sticks, cheesy bread,CinnaStix®, and Coca-Cola® products. Our hand-tossed pizza is made from fresh dough pro-duced in our regional distribution centers. We prepare every pizza using real cheese, pizza saucemade from fresh tomatoes, and a choice of high-quality meat and vegetable toppings in generousportions. Our focused menu and use of premium ingredients enable us to consistently and effi-ciently produce the highest-quality pizza.

Over the 41 years since our founding, we have developed a simple, cost-efficient model. Weoffer a limited menu, our stores are designed for delivery and carry-out, and we do not generallyoffer dine-in service. As a result, our stores require relatively small, lower-rent locations andlimited capital expenditures.

How would a master budget support planning, directing, and control forDomino’s?

SA 22-4Objectives of themaster budget

The city of Western Heights has an annual budget cycle that begins on July 1 and endson June 30. At the beginning of each budget year, an annual budget is established foreach department. The annual budget is divided by 12 months to provide a constantmonthly static budget. On June 30, all unspent budgeted monies for the budget yearfrom the various city departments must be “returned” to the General Fund. Thus, ifdepartment heads fail to use their budget by year-end, they will lose it. A budget

SA 22-5Integrity and evaluating budgetingsystems

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Chapter 22 Budgeting 1041

analyst prepared a chart of the difference between the monthly actual and budgetedamounts for the recent fiscal year. The chart was as follows:

Do

llars

Months

(15,000)

(10,000)

(5,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

$35,000

Janu

ary

Febr

uary

Mar

ch

Apr

il

May

June

Dec

embe

r

Nov

embe

r

Oct

ober

Sept

embe

r

Aug

ust

July

a. Interpret the chart.b. Suggest an improvement in the budget system.

In a group, find the home page of the state in which you presently live. The home pagewill be of the form statename.gov. At the home page site, search for annual budgetinformation.

1. What are the budgeted sources of revenue and their percentage breakdown?2. What are the major categories of budgeted expenditures (or appropriations) and

their percentage breakdown?3. Is the projected budget in balance?

SA 22-6Budget for a stategovernment

Answers to Self-Examination Questions

1. B Individuals can be discouraged with budgetsthat appear too tight or unobtainable. Flexiblebudgeting (answer C) provides a series of budg-ets for varying rates of activity and thereby buildsinto the budgeting system the effect of fluctua-tions in the level of activity. Budgetary slack(answer A) comes from a loose budget, not a tightbudget. A “spend it or lose it” mentality (answerD) is often associated with loose budgets.

2. A The first step of the budget process is to de-velop a plan. Once plans are established, manage-ment may direct actions (answer B). The results ofactions can be controlled (answer C) by compar-ing them to the plan. This feedback (answer D)can be used by management to change plans orredirect actions.

3. B Administrative departments (answer B), suchas Purchasing or Human Resources, will oftenuse static budgeting. Production departments

(answer A) frequently use flexible budgets.Responsibility centers (answer C) can use eitherstatic or flexible budgeting. Capital expendituresbudgets are used to plan capital projects (answer D).

4. B The total production indicated in the pro-duction budget is 257,500 units (answer B),which is computed as follows:

Sales 250,000 unitsPlus desired ending inventory 30,000 units_______Total 280,000 unitsLess estimated beginning inventory 22,500 units_______Total production 257,500 units______________

5. C Dixon expects to collect 70% of April sales($560,000) plus 30% of the March sales ($195,000)in April, for a total of $755,000 (answer C).Answer A is 100% of April sales. Answer B is70% of April sales. Answer D adds 70% of bothMarch and April sales.

Group Project

Internet Project

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