hiteh charaniya

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CHAPTER EIGHT STRATEGY AND THE MASTER BUDGET

8-1 Compel strategic planning and facilitate implementation of strategic plans. Anorganizations strategy, strategic plans, and budgets are interrelated. Preparingbudgets compel reviews of an organizations strategy and its strategic plans and

facilitate implementations of the strategic plans. Feedbacks from budgets oftenresult in improvements of an organizations strategy and its strategic plans.Provide a framework for guidance and control of operations. A budget delineatesthe roadmap the organization expects to traverse and thereby provides aframework for guiding, monitoring, and controlling operations.Serve as a basis for performance evaluation . udgeted performance measuresare better for !udging performances than using past performance for two reasons.First, budgeted amounts take into account expected changes in environment andimprovements. "econd, past performance is a result of past events and operationsand may not be suitable to serve as a benchmark. #xpected results as delineatedin budgets are better benchmarks for assessing performances.Motivate managers and employees. udgets set the goals for managers andemployees and motivate them toward achievements of the goals.Promote coordination and communication within the organization. udgetpreparation compels managers to think of interdependencies andinterrelationships among all operational units of the organization. A budget is acommunication device that helps all employees understand and accept theorganizations ob!ectives.$ther benefits include serving as a basis for resource allocation,aiding cash flowmanagement, and providing authorization documentation.

8-2 A firms strategic plan describes how the firm matches its strengths andweaknesses with the opportunities and threats in the marketplace in order to

accomplish its long%term goals. &t is the guideline for the firms short%term andlong%term operations. A strategic plan may extend over several budget periodsnormally covered by a master budget.

A master budget is a comprehensive operation plan of a business unit for afuture period, which is for one year or less in most instances. 'he strategic plan ofa firm underlies each of the firms master budgets. A master budget coordinatesoperations and delineates detailed implementation of the planned activities andincludes both financial and non%financial (operating) aspects of the plannedactivities.

8-3 A master budget is a comprehensive plan of operations for a business unit for a

future period while a capital budget is an investment plan for a ma!or pro!ect orprogram that has long%range effects on operations. *apital budgets are preparedfor the purpose of bringing an organization+s capabilities in line with the needs ofits long%range plan and long%term sales forecast. 'he capacity that anorganization has is a result of capital investments made in prior budgetingperiods. esources needed in the capital budget for the planned activities of thecurrent period are included in the master budget of the period.

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8-4 A master budget is a comprehensive plan of operations for a future period thatincludes both operating and financial budgets. An operating budget consists ofplans of resources re-uired in all aspects of operating activities during the budgetperiod, including sales and services, production, purchasing, marketing, researchand development, and general administrative activities. A financial budgetdelineates funds from operations that are available for uses during the budgetedperiod and uses of funds in operation during the budget period.

8-5 *ommon characteristics of successful budgets include

fully accepted and supported by key managers.

become personalized budgets of the people who have the responsibility forcarrying them out.

Perceived as planning and coordinating tools, not as pressure devices.

/ot viewed as a basis for seeking blame.

"erved as motivating devices, not as excuses for not doing things beneficial tothe organization.

technically correct with all the numbers in the budgets reasonably accurate.

8-6 'he budget committee of an organization is the highest authority in theorganization for all matters related to the budget. 'he committee sets or approvesthe overall budget goals for the organization and its ma!or business units, directsand coordinates budget preparation, resolves conflicts and differences that mayarise during budget preparation, approves the final budget, monitors operations asthe year unfolds, and reviews the operating results at the end of the period. 'hebudget committee also approves ma!or revisions of the budget during the period.

8-7 'hey are not synonymous. "ales forecasts estimate sales units of the firms

products and are often the starting point in preparing the sales budget for theperiod.

A sales budget describes expected sales dollars of the firms products basedon the results of sales forecasts.

"ales forecasts rely heavily on past sales levels and external factors, whilesales budgets incorporate internal factors, decisions, and activity levels in theirpreparations. An accurate sales forecast enhances the usefulness of the budgetas a planning and control tool.

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$"


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8-8 'he sales budget is often regarded as the cornerstone in budget preparationsbecause all activities in business organizations emanate from efforts to attain thedesired sales. A firm can complete the plan for other activities of a period onlyafter it knows the expected sales level of the current and the immediate futureperiods. A manufacturing firm, for example, cannot complete its productionschedule for the upcoming period without knowing the number of units it mustproduce for each of its products. 'he firm can ascertain the number of units to beproduced only after it knows the number of units to be sold during the period andthe desired ending inventories. 'he units to be produced, in turn, affect manyother activities of the firm including units and kinds of materials to be purchased,number of employees to be hired, levels of factory overhead, and selling andadministrative expenses.

8-9 0hen sales volume is seasonal in nature, the three most significant items tocoordinate are production volume, finished goods inventory, and sales volume.

8-10 Additional factors include

the beginning inventories on hand and the desired ending inventories of bothwork%in%process and finished products.

the re-uired materials for each product.

the beginning inventories of materials on hand and the desired endinginventories of materials.

the cost of materials.

8-11 'he two factors that determine the amount of factory overhead for a period aremanagement !udgment (decision) and production volume. 1anagement

!udgement determines the level of operation, which is the underlying factor thatsets the amounts of fixed factory overheads. Production volume often dictates thetotal amount of variable factory overheads.

8-12 *ash budget generally includes three ma!or components

*ash available,

*ash disbursements, and

Financing.

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8.13'he following are some of the characteristics that are similar between cashbudgets and cash flow statements

oth show sources and uses of funds.

oth are prepared for a period of time.

/either includes any non%cash revenues and expenses.

Among differences between these two statements are

A cash flow statement reports the results of past activities while a cash budgetdescribes effects of planned operations.

A firm needs to follow 2AAP in preparing cash flow statement while theguiding principle for preparing a cash budget is relevance and usefulness tomanagement.

'he ma!or categories of cash flow statements are operating, financing, andinvesting activities. #ach of these categories may include both sources anduses of cash. 'he ma!or categories of cash budgets are cash available, cashdisbursements, and financing. oth cash available and cash disbursements

may include cash from either operating or investing activities.

8-14 &n comparison with manufacturing organizations, uni-ue budget characteristics ofservice organizations include

absence of production and materials purchase budgets.

emphasis on work force planning.

8-15 &n contrast to business firms, a not%for%profit organization

has no single bottom%line amount such as operating income that often servesas the ultimate consideration in budgeting.

is more likely to use its budgets as the source of authorization for its activities.

limits the total amount in the budget to the expected total revenues (Federalbudgets are exceptions).

8-16 3ero%base budgeting is a budgeting process that re-uires managers to preparebudgets from ground zero for all operations.

A typical budgeting process starts from the budget for the current period andassumes that most, if not all, the current activities and functions will continue intothe budget period.

&n contrast, a zero%base budgeting process allows no activities or functions tobe included in the budget unless managers can !ustify their need.

8-17 /o. 4aizen budgeting is a budgeting approach that explicitly demands continuousimprovement and incorporates all the expected improvements in budgets.

&n contrast, activity%based budgeting is a budgeting process that focuses oncosts of activities or cost drivers necessary for the operations. 'he final A*budget is a budget of the costs of performing various activities and may not be akaizen budget.

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$&


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8-18 udget slack, or 5padding5 the budget, is the practice of knowingly including ahigher amount of expenditure in the budget than managers actually believe isneeded. $ne reason that it is common to find slacks in budgets is the desire ofmany managers to use budget slack as a cushion for unpredictable future events.

8-19 A highly achievable budget has a target that is achievable by most managers 67to 87 percent of the time. &n a study by 1erchant (9887), the author finds that abudget with a highly achievable target serves -uite well in the vast ma!ority oforganizational situations, especially when accompanied by extra rewards forperformance exceeding the target. Among the advantages of using a highlyachievable budget target are these9. &ncreasing managers+ commitment to achieving the budget target.:. 1aintaining managers+ confidence in the budget.;.


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EXERCISES

8-21 Among the first steps that the management accountant must do is to synchronizethe budgeting and accounting system with the organizational structure, to ensurethat budgeted data are incorporated in performance reports, and to provide timelyreports to all responsible units.

8-22 'here are at least two issues here. $ne is the failure to take advantage of all thecash discount included in the sales term. 'he other is the constant occurrence ofrush orders, last%minute changes, and other operating emergencies that re-uirethe purchasing department to do last minute purchases.

anet needs to ensure that the Accounting


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8-23 (!"#$"%&'

:. a. From the point of view of the business unit manager, budgetary slackprovides

flexibility under unexpected circumstances.

the opportunity to show consistent performance despite variations indepartmental resources and workloads.

a blending of personal and organization goals.

Dowever, the use of budgetary slack limits the ob!ective evaluation of abusiness unit and, therefore, limits the ob!ective evaluation of theperformance of the unit manager. &t also becomes more difficult for thebusiness unit manager to evaluate the performance of subordinates andto use the budget as a control mechanism over subordinate performance.

b. From the perspective of corporate management, the use of budgetary

slack increases the probability that budgets will be achieved. 'hisincreased probability facilitates the overall corporate budgetingprocess. *orporate management may also allow budgetary slack as aform of reward to managers for previous good performance.

From the point of view of corporate management, the use of budgetaryslack increases the likelihood of inefficient allocation of scarcecorporate planning process, and decreases the ability to identifypotential weaknesses or trouble spots in the budgeting process and,thus, limits corrective actions.

;. a. 3ero%based budgeting is a planning budgeting techni-ue that evaluatesall proposed operating and administrative expenditures as though theywere being initiated for the first time. #ach manager must evaluate eachexpenditure, investigate alternative means of conducting each activity,evaluate alternative budget amounts for various levels of service, !ustifyeach expenditure, and finally rank expenditures in order of importance.

b. Atlantis Eaboratories could benefit from zero%based budgeting as eachof the business unit managers would be re-uired to specificallyidentify and !ustify all proposed expenditures for the upcoming year.'his increased evaluation of expenditures would make it difficult toinclude budgetary slack in the budget for the upcoming year.

c. 'he biggest disadvantage of zero%based budgeting is the significantamount of time and cost involved in its implementation. Additionally,the concept of zero%based budgeting may be difficult for managementto learn and accept. Atlantis must be sure that the benefits of zero%based budgeting outweigh the associated costs.

Solutions Manual 8-(


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6%:= P)!'%#$!" *%'+ (5 ,$"%#&

udgeted sales 6,77777'otal units needed 8;,>77eginning inventory % :=,777'otal units to be produced ?8,>77

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$8


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8-26 P)!'%#$!" /"' ,/#&)$/ %)/& *%'+ (10 ,$"%#&

udgeted Production:nd Huarter ;rd Huarter

udgeted sales ;6,777 ;=,777,=77

udgeted Purchases of ,777 % ::,777udget purchases 9@;,777 :@:,777

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8-28 P)!'%#$!" /"' ,/#&)$/ *%'+-)!&$"+ !#$"+ (10,$"%#&

9. Jnits of Finished 2oods (KPE;7) to 1anufacture Jnit

udgeted sales =67,777udgeted finished goods ending inventory (une ;7, :77?) G >7,777

'otal number of units needed >;7,777udgeted finished goods beginning inventory % 67,777

'otal units to manufacture =>7,777

:. Jnits of KPE;7 'o "tart &nto Production'otal units to manufacture =>7,777udgeted 0&P ending inventory G :7,777'otal units needed in production =@7,777udgeted 0&P beginning inventory % 97,777

'otal units of KPE;7 to start into production =?7,777

;. aw 1aterials Purchase udgetJnits of KPE;7 to start into production

=?7,777Jnits of raw materials needed for one unit of KPE;7 x :

'otal raw materials needed in production 8:7,777udgeted raw materials ending inventory G >7,777

'otal number of units of raw materials needed 8@7,777udgeted raw materials beginning inventory % =7,777

'otal units of raw materials to purchase 8;7,777

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$1#


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8-29 P)!'%#$!" /"' ,/#&)$/ *%'+-)!&$"+ !#$"+ (10,$"%#&

9. Jnits of Finished 2oods (KPE;7) to 1anufacture Jnit

udgeted sales =67,777udgeted finished goods ending inventory (une ;7, :77?) G >7,777

'otal number of units needed >;7,777udgeted finished goods beginning inventory % 67,777

'otal units to manufacture =>7,777

:. Jnits of KPE;7 'o "tart &nto Production'otal units to manufacture =>7,777udgeted 0&P ending inventory G :7,777'otal units needed in production =@7,777udgeted 0&P beginning inventory % 97,777

'otal units of KPE;7 to start into production =?7,777

;. aw 1aterials Purchase udgetJnits of KPE;7 to start into production

=?7,777udgeted 0&P ending inventory % :7,777Jnits to start and complete during the period ==7,777udgeted 0&P beginning inventory G 97,777Jnits of KPE;7 re-uiring raw materials =>7,777Jnits of raw materials needed for one unit of KPE;7 x :

'otal raw materials needed in production 877,777udgeted raw materials ending inventory G >7,777

'otal number of units of raw materials needed 8>7,777udgeted raw materials beginning inventory % =7,777

'otal units of raw materials to purchase 897,777



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8-30 C/ *%'+ (5 ,$"%#&

*ash Available*ash balance, beginning L 97,777*ollections from customers G 9>7,777

'otal cash available L9?7,777

*ash 7,777Eess ,777&ncome taxes ?,7771achinery purchase G ;7,777'otal cash disbursements % L9??,777*ash shortage before financing (L ?,777)1inimum cash balance desired % :7,777Financing need L:?,777

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$1"


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8-31 C/ *%'+ (10 ,$"%#&

*ash Available*ash balance, beginning L 9:,777*ollections from customers G 9@>,777

'otal cash available L96@,777

*ash 7:77@ 9,>77 :,@>7

Payment for office e-uipment update G ?,777'otal cash disbursements % L9@6,@>7*ash balance L6,:>7

Mes, the cash budget shows that ill can meet the minimum cashbalance re-uirement with an excess amount of L:,:>7.

Solutions Manual 8-1%


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8-32 E#$,/#& / !$!" (5 ,$"%#&

*ollections for credit sales prior to April L 9?,777

*ollections for credit sales in April (L9>7,777 x @7) 97>,777

*ollections for credit sales in 1ay (L:77,777 x :>) G >7,777

'otal cash receipts from accounts receivablecollections in 1ay L9@9,777

8-33 ACCUNTS RECEIABE CECTINS (10 ,$"%#&

9. 1onth 'otal Percentage to be udgeted *ash of "ale *redit "ale *ollected in $ctober *ollection &n $ctober$ctober L87,777 @7 L ?;,777

"eptember 67,777 9> 9:,777

August @7,777 97 @,777

uly ?7,777 = :,=77

#stimated 'otal *ash *ollection in $ctober L6=,=77

:. udgeted collection 1onth Amount *ollected in in the =th-uarter from

of "ale of "ale $ct. /ov. 9;,>77

97 8,777

/ovember 977,777 @7 @7,777

9> 9>,777

,777 @7 >8,>77

'otal budgeted collection in the fourth -uarter L:;7,777

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$1&


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8-34 A!%"# R&&$/*& C!$!" (10 ,$"%#&

9. *ollection from sales in 1arch L9:7,777 x 97 I L 9:,777

*ollection from sales in April L9>7,777 x ?7 I 87,777

*ollection from sales in 1ay L:77,777 x :> I >7,777

'otal *ash *ollections in 1ay L9>:,777

:. 2ross amount of accounts receivable on 1ay ;9

From credit sales in April L9>7,777 x 9>N I L ::,>77

From credit sales in 1ay L:77,777 x @>OI 9>7,777

'otal L9@:,>77

N977 % :> (collected in April) % ?7 (collected in 1ay) I 9>

O977 % :> (collected in 1ay) I @>

;. /et balance of accounts receivable on 1ay ;9

2ross amount of accounts receivable on 1ay ;9 L9@:,>77

Allowance for uncollectible accountsFrom credit sales in April L9>7,777 x > I L @,>77

From credit sales in 1ay L:77,777 x >I 97,777 9@,>77

'otal L9>>,777

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8-35 C/ D$!%"# (10 M$"%#&

*ollection'otal Amount *ash &nflow

*ash sales L@>,777 =7 L;7,777

*ollections of AC une sales L?7,777 ?7 L;?,7770ith cash discount 67 L:6,677 :6,::=

efore end of month 9: L =,;:7 =,;:7 1ay sales L>7,777 ?7 > 9,>77'otal *ash *ollection L?=,7==

8-36 C/ D$!%"# (20 M$"%#&

S/& D/#/ A,!%"# C!$!" P/##&)"

une L?7,777 *ash sales =7uly L67,777 *redit cards ?7August L87,777 ank charges ;"eptember L8?,777 *redit sales$ctober L66,777 *urrent month :7

9st month >7S/& B)&/'!" /"' T&), :nd month 9>*ash and credit cards sales :> ;rd month 9:*redit sale @> Eate charge : 'erm 9Ceom, nC=>

"ales *ash 'otal Paid *ollected eceipt

S&,*&)*ash sales L8?,777 :> =7 L 8,?77*redit cards sales L8?,777 :> ?7 8@ L9;,8?6*ollections of AC "eptember credit sales L8?,777 @> :7 88 L9=,:>?August credit sales L87,777 @> >7 L;;,@>7uly credit sales L67,777 @> 9> L 8,777

une credit sales L?7,777 @> 9: 97: L >,>76'otal *ash *ollection L6?,76:

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$1'


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8-37 C/ D$!%"# (60 M$"%#&

/ote to &nstructors Mou can show the formula by following these steps9. ight click anywhere in the worksheet.:. "elect worksheet ob!ect.Q

;. "elect $pen.Q=. ight click any cell that you wish to show the formula. 'he embedded

formula for the selected cell is shown right above the spreadsheet onthe screen.

>. &f you click FileQ and select *lose R eturn to SQ while you are in thespreadsheet mode the screen will return to the solution that shows thecompleted calculations.

Solutions Manual 8-1(

S/0&- D/#/ A,!%"# C!00$!" P/##&)"

une L?7,777 *ash sales =7

uly L67,777 *redit cards ?7 August L87,777 ank charges ;

"eptember L8?,777 *redit sales

$ctober L66,777 *urrent month :7

S/0&- T&), 9st month >7

*ash and credit cards sales :> :nd month 9>

*redit sale @> ;rd month 9:

:7 88 9=,:>?L

August credit sales L87,777 @> >7 ;;,@>7L

uly credit sales L67,777 @> 9> 8,777L

une credit sales L?7,777 @> 9: 97: >,>76L

'otal *ash *ollection 6?,76:L

2#!*&)

*ash sales L66,777 :> =7 6,677L

*redit cards sales L66,777 :> ?7 8@ 9:,67=L

*ollections of account receivables $ctober credit sales L66,777 @> :7 88 9;,7?6L

"eptember credit sales L8?,777 @> >7 ;?,777L

August credit sales L87,777 @> 9> 97,9:>L

uly credit sales L67,777 @> 9: 97: @,;==L

'otal *ash *ollection 66,9=9L


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8-38 ACTIITY-BASED BUDGETING (5 M$"%#&9.

Activity Tolume *ost ate 'otal *ost

"torage =77,777 L7.=8:> L 98@,777

e-uisition Dandling ;7,777 L9:.>7 L ;@>,777

Pick Packing 677,777 L 9.>7 L9,:77,777

,777

9,777. &f the firm uses a

single cost rate system based on the number of cartons delivered,

the firm will not be able to estimate the savings without special

efforts to gather additional information.

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$18


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8-39 A#$$#-B/&' B%'+$"+ $# :/$;&" (> 1inutes)9. Jnit%Eevel Pick packing, 7Pick Packing 88 L 9.>7 L 9.=6> L 9.=@7:77 L ;?7,9>7Pick Packing 677,777 L9,:77,777 L9,966,777 L9,9@?,9:7@=,@==

'otal L:,?99,777 L:,>@@,967 L:,>=;,6>:

;. Factors that may influence the success of a continuousimprovement program include

easonable or achievable cost reductions. Awareness of all employees on the expected (scheduled) cost

improvements over at least the immediate future periods. Accepted by both the management and employees.

*ommitment of both the firm and all the employees on theimportance on the success of the continuous improvementprogram.

*lose link between the scheduled improvements andperformance evaluations and rewards.

*ost reductions arising from small continuous incrementalimprovements, not from large discontinuous changes in factorssuch as operating processes, capital e-uipment, suppliernetworks, or customer interactions.

Solutions Manual 8-1)


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8-40 C/ *%'+ (20 ,$"%#&

9. 'otal credit sales in /ovember L:=7,777Percentage collectible x V 8>'otal amount collectible from credit sales in /ovember L::6,777

Percentage collected in the month followingthe month of sales x =7

udgeted collections in I L;=:,777Percentage to be collected in anuary x =7

*ollections from credit sales in @,?77For


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"taff re-uirements for the budgeted activities"enior

'otal Partner 1anager *onsultant *onsultantDours #ach 'otal #ach 'otal #ach 'otal #ach 'otal

usiness return =,777 7.; 9,:77 7.: 677 7.> :,777*omplex return 9:,777 7.7> ?77 7.9> 9,677 7.= =,677 7.= =,67"imple return ;:,677 7 7 7.: ?,>?7 7.6 :?,:=

'$'AE 9,677 :,?77 9;,;?7 ;9,7=

Dours per week >7 => =7 =O of weeks needed ;? >6 ;;= @@

O of wks per employee per year =7 => => =O of employees needed 7.8 9.:6 @.=:: 9?.9

'otal number of employees 6 9

'otal hours available

"enior *onsultants (6 "enior *. x =7 hrs. x => wks) 9=,=77

*onsultants(9? *onsult. x =7 hrs. x =6 wks) ;7,@:

#xcess hours (part%time hours) 9,7=7 ;:

9. /o overtime premium for senior consultants.

:. 'he firm will have to have 9? full%time and ;:7 hours of part%time

consultants.

Solutions Manual 8-"1

6%=9 "ervice Firm udget (:> minutes)

9. R :.

'otal hours for the budgeted activities'otal Dourly 'otal

evenue ate ours usiness return L9,777,777 L:>7 =,777

*omplex return L9,:77,777 L977 9:,777

"imple return L9,?=7,777 L>7 ;:,677

;,6=7,777L


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NDourly wage rate L?7,777 (=7 hours x =6 weeks) I L;9.:>

0ages for part%time consultants ;:7 hours x L;9.:> I L97,777

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$""

6%=9 (*ontinued)

;

evenue ;,6=7,777L

Payroll expenses

Partner L:>7,777

1anager 87,777

"enior consultant @:7,777

*onsultant

0hole time L8?7,777

Part%timeN 97,777 8@7,777

"upporting staff :77,777 :,:;7,777

2eneral and Administrative expenses ;@;,777

$perating income before bonus to manager 9,:;@,777L

Eess manager+s bonus @;,@77

$perating income before taxes 9,9?;,;77L

"alary 87,777L

onus @;,@77

'otal 9?;,@77L

Accu'ax &nc.

udget &ncome "tatementfor the year ended August ;9, :77@

'otal compensation for the manager


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:. "taff re-uirements for the budgeted activities

'otal Dours "eniore-uired Partner 1anager *onsultant *onsultant

usiness return =,677 8?7 9,==7 :,=77 7*omplex return 9;,:77 ??7 :,?=7 @,:?7 :,?=7"imple return ;?,767 9,67= 8,7:7 :>,:>? '$'AE 9,?:7 >,66= 96,?67 :@,68?

Dours per week >7 => =7 =7/umber of weeks needed ;:.=7 9;7.@? =?@ ?8@.=7

O of weeks per employee per year =7 => => =6/umber of employees needed 7.69 :.89 97.;6 9=.>;

/umber of employees ; 97 9=

'otal hours available

"enior consultants (97 "* x =7 hours x => weeks) 96,777

*onsultants (9= *onsultants x =7 hours x =6 weeks) :?,667

$vertime or Part%time hours ?67 9,79?

9. Dourly wage rate L87,777 (=7 hours x => weeks) I L>7.77

$vertime premium ?67 hours x L>7 x 9>7 I L>9,777

:. 9= *onsultants with additional 9,79? part%time hours.

Solutions Manual 8-"%

6%=: Accu%'ax (:> minutes)

9. 'otal hours for the budgeted activities

East Mear+s #xpected Dourly 'otal Dours

evenue evenue ate e-uiredusiness return L9,777,777 9,:77,777L L:>7 =,677

*omplex return L9,:77,777 9,;:7,777L L977 9;,:77

"imple return L9,?=7,777 9,67=,777L L>7 ;?,767

;,6=7,777L =,;:=,777L


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6%=: (*ontd)

;. $perating &ncome and onus to 1anager

Accu'ax &nc.

udget &ncome "tatement

For the Mear #nded August ;9, :77@

evenue L =,;:=,777

Payroll expenses

Partner L:>7,777

1anager :@7,777

"enior consultant

egular L 877,777

$vertime >9,777 8>9,777*onsultant

Full%time L 6=7,777

Part%time ;9,@>7 6@9,@>7

"upporting staff :=7,777 :,>6:,@>7

2eneral R Administrative expenses =76,:@>

$perating income (before bonus) L 9,;;:,8@>

Eess manager+s bonus 9:=,8=?

$perating income before taxes L 9,:76,7:8

'otal compensation for the manager "alary L87,777

onus ?:,=@;

'otal L9>:,=@;

Dourly wage rate L?7,777 (=7 hours x =6 weeks) I L;9.:>

0ages for part%time consultants 9,79? hours x L;9.:> I L;9,@>7

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$"&


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PRBEMS

8-43 S,/ *%$"& *%'+ (10 ,$"%#&

9. 'he key features that need to be considered in developing a profitplan for a small business include#stimations of key factors such as revenues (sales demand, sales price)

and expenses for the plan period."ystematic evaluation of all available resources (materials, labor,

technology) and their uses.*oordination of related functions or elements, such as scheduling

production to meet sales or sufficient productive capacity to meetsales demand.

*ritical evaluations of nonoperational sources and uses of cash./onoperational items may pose a more serious threat to smallbusinesses than to large businesses.

2reater control over monthly cash flows and short%term financing thanmay be necessary in large enterprises.

2reater needs for continuous budgeting than for large organizations,because of the higher risks associated with economic, competitive,and financial factors for small businesses.

:. 'he management accountant must exercise care to ensure that the small

business managers do not suffer from information overload (strive forsimplicity). A profit management system should be established thatcaptures sufficient data on a timely basis to allow a reasonable level ofoperations control and evaluation without becoming too costly or toosophisticated for the business.

1any large enterprises may continue operations simply by inertia.0ith small businesses, a strategic plan rationally linked to the masterbudget is critical, especially in the early stage of its products life cycles.'he concepts of activity%based management, total -ualitymanagement, logistics management, life cycle and target costing, and

constraints management are essential for the long%run survival andgrowth of small businesses.

Solutions Manual 8-"$


26/82

8-43 (C!"#$"%&'

;. 'he management accountant can insist upon, and assist in thepreparation of, continuous cash budgets. 'hese cash flow reports shouldidentify the ma!or operational and nonoperational sources and uses of

cash, and point out the periods of potential cash shortages or surpluses.'his will facilitate planning for short%term lines%of%credit financing andshort%term investments.

A profit management system should be created, utilizing theprinciples of activity%based costing and cost variance reporting includingactivity%based standard costing and activity%based cost variances."egmented income statements comparing budgeted to actual resultswith profit variance summaries should be an integral component of thehigh%-uality profit management system.

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$"'


27/82

8-44 E#$ $" *%'+$"+ (10 ,$"%#&

9. a. 'he reasons that 1arge Atkins and Pete 2ranger use budgetary slackinclude the following 'hese employees are hedging against the unexpected (reducing

uncertaintyCrisk).'he use of budgetary slack allows employees to exceed expectations

andCor show consistent performance. 'his is particularly importantwhen performance is evaluated on the basis of actual resultsversus budget.

#mployees who are able to blend personal and organizationalgoals through budgetary slack and show good performancegenerally are rewarded with higher salaries, promotions, andbonuses.

b. 'he use of budgetary slack can adversely affect Atkins and 2rangerby limiting the usefulness of the budget to motivate their employees to

top performance. affecting their ability to identify trouble spots and take appropriate

corrective action. reducing their credibility in the eyes of management.

Also, the use of budgetary slack may affect management decision%making, as the budgets will show lower contribution margins (lowersales, higher expenses).


28/82

8-44 (C!"#$"%&'

:. 'he use of budgetary slack, particularly if it has a detrimental effect onthe company, may be unethical. &n assessing the situation, the specificstandards of S#/#&,&"# !" M/"/+&,&"# A!%"#$"+ N%,*&) 1C

(SMAC


29/82

8-45 M/#&) *%'+ (15 ,$"%#&

9. 'he benefits that can be derived from implementing a master budgetsystem include the following 'he preparation of budgets forces management to plan ahead and to

establish goals and ob!ectives that can be -uantified. udgeting compels departmental managers to make plans that are in

congruence with the plans of other departments as well as theob!ectives of the entire firm.

'he budgeting process promotes internal communication andcoordination.

udgets provide directions for day%to%day operations, clarify duties tobe performed, and assign responsibility for these duties.

udgets provide a framework for measuring performance.

Solutions Manual 8-")


30/82

8-45 (C!"#$"%&'

:. a R b "ubse-uent $perating

"cheduleC"tatement udget "cheduleC"tatement

"ales udget Production udget "elling #xpense udget udgeted &ncome "tatement

#nding &nventory udget (units) Production udget

Production udget (units)


31/82

6%=? (*ontd%9)

Solutions Manual 8-%1

6%=? "pring 1anufacturing *ompany (?7 minutes)

9. "ales udget

"pring 1anufacturing *ompany

"ales udget

*9: @ 'otal

"ales (in units) 9:,777 8,777 :9,777x Price Per Jnit 9>7L ::7L

'otal "ales 9,677,777L 9,867,777L ;,@67,777L

:77?

:. Production udget

*9: @

"ales (in units) 9:,777 8,777

G


32/82

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$%"

;. ,=77

% eginning inventory ;,777

'otal 19 to purchase (pounds) 98:,=77

x *ost per pound :.77L

udgeted purchase cost of 19 ;6=,677L

aw 1aterial :

*9: @ 'otal

Production unit 99,877 8,7>7

x Pounds per unit 7 =

1: needed in production (pounds) % ;?,:77 ;?,:77G


33/82

6%=? (*ontd%:)

Solutions Manual 8-%%

*9: @ 'otalProduction unit 99,877 8,7>7

x Pounds per unit : 9

1; needed in production (pounds) :;,677 8,7>7 ;:,6>7

G 77

'otal units of 1; needed ;=,;>7

% eginning inventory 9,777Jnits of 1; to purchase ;;,;>7

x *ost per pound L7.>7

udgeted purchase cost of 1; L9?,?@>

aw 1aterial ;

=. 7 >7,8>7

x Dourly wage rate :>.77L

udgeted direct labor costs 9,:@;,@>7L



34/82

6%=? (*ontd%;)

Factory overhead rate 'otal udgeted 7,8>7 L?.=7

Fixed factory overhead :>=,@>7 >7,8>7 L>.77

'otal L>67,6;7 L99.=7

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$%&

>. Factory $verhead udget

"pring 1anufacturing *ompany Factory $verhead udget

:77?

Tariable Factory $verhead

&ndirect materials L97,777

1iscellaneous supplies and tools >,777

&ndirect labor =7,777

Payroll taxes and fringe benefits :>7,777

1aintenance costs 97,767

Deat, light, and power 99,777'otal Tariable Factory $verhead L;:?,767

Fixed Factory $verhead

"upervision L9:7,777

1aintenance costs :7,777

Deat, light, and power =;,=:7

'otal *ash Fixed Factory $verhead L96;,=:7


35/82

6%=? (*ontd%=)


udgeted *ost of 2oods "old and Finished 2oods #nding &nventory

:77?

*9: @ 'otal

"ales volume 9:,777 8,777 :9,777

*ost per unit ("chedules 9 and :) L 8;.67 L 998.@7

*ost of goods sold L9,9:>,?77 L9,7@@,;77 L:,:7:,877

*9: @ 'otal

Finished goods ending inventory ;77 :77

*ost per unit ("chedules 9 and :) L 8;.67 L998.@7

udget finished goods ending balances L:6,9=7 L:;,8=7 L>:,767

"chedule 9 *ost *ard % Product *9:

udgeted *ost #lement udgeted

*ost #lement *ostCPound Huantity *ostCJnit

aw material 9 L :.77 97 L:7.77

aw material ; 7.>7 : 9.77

.77 : >7.77

Tariable factory $D (L;:?,767C>7,8>7) ?.=7 : 9:.67

Fixed factory $D (L:>=,@>7C>7,8>7) >.77 : 97.77

*ost Per Jnit L8;.67

"chedule : *ost *ard % Product @



aw material 9 L :.77 6 L 9?.77

aw material : :.>7 = 97.77

aw material ; 7.>7 9 7.>7.77 ; @>.77

Tariable factory $D (L;:?,767C>7,8>7) ?.=7 ; 98.:7

Fixed factory $D (L:>=,@>7C>7,8>7) >.77 ; 9>.77

*ost Per Jnit L998.@76%=? (*ontd%>)

Solutions Manual 8-%$


36/82

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$%'

@. "elling and Administrative #xpense udget

"elling #xpenses

Advertising ?7,777L

"ales salaries :77,777

'ravel and entertainment ?7,777

,777;:>,777L

Administrative expenses

$ffices salaries ?7,777L

#xecutive salaries :>7,777

"upplies =,777

,777L

'otal selling expenses

o a a m ns ra ve expenses'otal selling and administrative expenses


"elling and Administrative #xpense udget

:77?

6. udgeted &ncome "tatement

*9: @ 'otal

"ales 9,677,777L 9,867,777L ;,@67,777L

*ost of goods sold 9,9:>,?77 9,::9,;77 :,;=?,877ross pro ?@=,=77L @>6,@77L 9,=;;,977L

"elling and administrative expenses ?=>,777Pretax net operating income @66,977L

&ncome taxes (=7) ;9>,:=7After tax net operating income =@:,6?7L

"pring 1anufacturing *ompanyudgeted &ncome "tatement

For the Mear :77?


37/82

6%=@ "pring 1anufacturing *ompany U comprehensive Profit Plan Jsing"preadsheet (?7 min.)

/ote to instructor *hanges can be made by clicking on the table to bechanged, opening the spreadsheet, and entering the desired changes.

9. "ales udget


"ales udget

:77?

*9: @ 'otal

"ales (in units) 9:,777 96,777 ;7,777x Price Per Jnit L 9?7 L 967

'otal "ales L9,8:7,777 L;,:=7,777 L>,9?7,777

6%=@ (*ontd%9)

Solutions Manual 8-%(

:. Production udget

*9: @

"ales (in units) 9:,777 96,777

G


38/82

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$%8

;. 7

x Pounds per unit 7 =

1: needed in production (pounds) % @:,:77 @:,:7

G


39/82

6%=@ (*ontd%:)

Solutions Manual 8-%)

=. =,9>7 @@,8>7

x Dourly wage rate :>.77L

udgeted direct labor costs 9,8=6,@>7L


7% eginning inventory 9,777

Jnits of 1; to purchase =:,;>7

x *ost per pound 7.>7L

udgeted purchase cost of 1; :9,9@>L

aw 1aterial ;


40/82

6%=@ (*ontd%;)

Factory overhead rate 'otal udgeted 7 L?.=7

Fixed factory overhead :>=,@>7 @@,8>7 L;.:@

'otal L>67,6;7 L8.?@

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$

>. Factory $verhead udget

Tariable Factory $verheadN

&ndirect materials L9>,:88

1iscellaneous supplies and tools @,?>7

&ndirect labor ?9,98@

Payroll taxes and fringe benefits ;6:,=6;

1aintenance costs 9>,=::

Deat, light, and power 9?,6:8

'otal Tariable Factory $verhead L=86,667

Fixed Factory $verhead

"upervision L9:7,777

1aintenance costs :7,777

Deat, light, and power =;,=:7

'otal *ash Fixed Factory $verhead L96;,=:7


41/82

6%=@ (*ontd%=)6. B%'+&' C!# != G!!' S!' /"' >$"$&' G!!' E"'$"+ I"&"#!)

S)$"+ M/"%=/#%)$"+ C!,/"

B%'+&' C!# != G!!' S!' /"' >$"$&' G!!' E"'$"+ I"&"#!)

2006

C12 D57 T!#/

S/& !%,& 12


42/82

6%=@ (*ontd%>)

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$&"




"elling #xpenses

Advertising ?7,777L



,777;:>,777L




"upplies =,777

,777L

'otal selling expenses

o a a m ns ra ve expenses

o a se ng an a m n s ra ve expenses

:77?


43/82

6%=@ (*ontd%?)

6. udget &ncome "tatement



For the Mear :77?

*9: @ 'otal

"ales L9,8:7,777 L;,:=7,777 L>,9?7,777

*ost of goods sold 9,76=,7;> :,7?9,7@8 ;,9=>,99;

2ross profit L 6;>,8?> L9,9@6,8:9 L:,79=,66@

"elling and administrative expenses ?=>,777

Pretax net operating income L9,;?8,66@&ncome taxes (=7) >=@,8>>

After tax net operating income L 6:9,8;:

Answer9. &ncrease in after%tax operating income L6:9,8;: % L=@:,6?7 I L;=8,7@:

:. 0hile the changes increased the after%tax operating income, the firmshould examine the decision more closely. Although the firm increases itsoperating income by @= (L;=8,7@:CL=@:,6?7), it re-uires doubling ofunits of @. &n fact, a 977 increase in units sold of @ increased thegross profit from @ from L@>6,@77 to L9,9@6,8:9, an increase ofL=:7,=:9 while the total change in the gross profit is L>69,@6@ (fromL9,=;;,977 to L:,79=,66@). 'he 977 increase in @ accounts for only@: (L=:7,=:9 L>69,@6@) of the increase in profit. *9: contributes to:6 of the increase in profit.

Further, the price increase in *9: has no effect on the units sold. 'hismay be an indication that *9: may have a higher potential than the firmperceived.

Solutions Manual 8-&%


44/82

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$&&

:. Production udget

*9: @

"ales (in units) 9:,777 8,777

G


45/82

6%=6 (*ontd%9)

Solutions Manual 8-&$

;. 7

% eginning inventory ;,777'otal 19 to purchase (pounds) 9@9,=>7

x *ost per pound :.77L

udgeted purchase cost of 19 ;=:,877L

*9: @ 'otal

Production unit 99,877 8,7>7

x Pounds per unit 7 ;.?1: needed in production (pounds) % ;:,>67 ;:,>67

G


46/82

6%=6 (*ontd%:)

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$&'

*9: @ 'otal

Production unit 99,877 8,7>7 x Pounds per unit 9.67 7.67

1; needed in production (pounds) :9,=:7 @,:=7 :6,??7

G 77

'otal units of 1; needed ;7,9?7% eginning inventory 9,777

Jnits of 1; to purchase :8,9?7

x *ost per pound 7.>7L

udgeted purchase cost of 1; 9=,>67L

aw 1aterial ;

=. 7 96,977 ;>,8>7

x Dourly wage rate ;7.77L

udgeted direct labor costs 9,7@6,>77L



47/82


48/82


Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$&8


49/82

udgeted *ost of 2oods "old and Finished 2oods #nding &nventory

Solutions Manual 8-&)


50/82

For the Mear:77?

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$$#


51/82


52/82

*9: @ 'otal

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$$"


53/82

"ales volume 9:,777 8,777 :9,7

Solutions Manual 8-$%


54/82

*ost per unit ("chedules 9 and :) L 6?.;8 L 88.;8

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$$&


55/82

*ost of goods sold L9,7;?,@77 L68=,>77 L9,8;9,:

Solutions Manual 8-$$


56/82

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$$'


57/82

*9: @ 'otal

Solutions Manual 8-$(


58/82

Finished goods ending inventory ;77 :77

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$$8


59/82

*ost per unit ("chedules 9 and :) L 6?.;8 L 88.;8

Solutions Manual 8-$)


60/82

udget finished goods ending balances L:>,896 L98,6@6 L=>,@

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$'#


61/82

"chedule 9 *ost *ard % Product *9:udgeted *ost #lement udgeted


aw material 9 L :.77 8 L96.77aw material ; 7.>7 9.6 7.87

=>.77

Tariable factory $D 6.9? 9.> 9:.:>

Fixed factory $D ?.6; 9.> 97.:>

*ost Per Jnit L6?.;8"chedule : *ost *ard % Product @


*ost #lement *ostCPound Huantity *ostCJnitaw material 9 L:.77 @ L9=.77

aw material : :.>7 ;.? 8.77

aw material ; 7.>7 7.6 7.=7


62/82

6%=6 (*ontd%>)

6. udget &ncome "tatement



For the Mear :77?

*9: @ 'otal

"ales L9,677,777 L9,867,777 L;,@67,777

*ost of goods sold 9,7;?,@77 68=,>77 9,8;9,:79

2ross profit L @?;,;77 L9,76>,>77 L9,6=6,@88"elling and administrative expenses ?=>,777

Pretax net operating income L9,:7;,@88

&ncome taxes (=7) =69,>:7

After tax net operating income L@::,:67

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$'"




"elling #xpenses

Advertising ?7,777L



,777;:>,777L




"upplies =,777

,777L

o a se ng expenses

'otal administrative expenses

o a se ng an a m n s ra ve expenses

:77?


63/82

6%=6 (*ontd%?)

Answer9. 'he budgeted after%tax operating income with 4aizen is L@::,:67.

:. 'he immediate benefit is an increase of L:=8,=:7 in operating income, or>; from L=@:,6?7.

'he firm is also likely benefit in the long%run from the reductions inmaterials, labor hours, and factory overheads re-uired in production.


64/82

8-49 R/$&) B%'+ (40 ,$"%#&

9 ;=,=77 L>=7,777eginning inventory (9;7 ofthis month+s *$2s) % ;78,=77 % :8?,=77udget Purchases L::>,777 L:=;,?77

: *ash #xpenditures for ", 2 R A expenses 1ay une

"ales revenue L;>@,777 L;=:,777", 2 R A expenses ratio x 7.9> x 7.9>'otal ", 2 R A expenses L >;,>>7 L >9,;779,>>7 G =8,;77'otal account payables L:@?,>>7 L:8:,877Payment for the current month payables (>=) L9>6,9??$wed from last month (=?) G 9:@,:9;*ash outflow for payments of accounts payables L:6>,;@8

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$'&


65/82

8-49 (C!"#$"%&'

;.


66/82

8-50 S/& *%'+ /"' )! =!),/ =$"/"$/ #/#&,&"# (35 ,$"%#&

9.a. Original udget

eginning inventory of finished goods 8,;77

#stimated production from the :77?%@ fiscal year 9?:,777

Jnits available for sale 9@9,;77

Planned ending finished goods inventory ;,;77

Pro!ected number of units to be sold during the:77?%@ fiscal year 9?6,777

$186=168,000

0$31,248,00=

SalesofUnitsProjected

SalesofollarsProjects=UnitPerPriceSelling

b. evised total sales in unit

"ales in units in the original budget 9?6,777

&ncrease in units of production (9@7,777 % 9?:,777)N G 6,777

evised total sales (units) 9@?,777

"elling price per unit x L 96?

evised pro!ected dollar volume of net sales L;:,@;?,777

N0ith no change in the ending finished goods inventory the increase inproduction is a result of the expected increase in sales.

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$''


67/82

8.50 (C!"#$"%&'-1

:.1olid *ompany

Pro Forma "tatement of *ost of 2oods "old

For the Mear #nding August ;9, :77@

,>@?,777

1aterials available for use L9?,8;?,777

1aterials inventory, 6C;9C7@: 9,@78,=77

,::?,?77,:77

Factory overhead

&ndirect material= L 9,>::,??7

2eneral factory overhead> ;,;:7,777 =,6=:,??7

*ost of goods manufactured L:9,:6=,=?7

Finished goods inventory, 8C9C7? 9,9?8,777

*ost of goods available for sale L::,=>;,=?7

Finished goods inventory, 6C;9C7@? =9;,9?8

*ost of goods sold L ::,7=7,:89

9"upporting *alculations

;@,>77 units W L66.77N I L ;,;77,777

=>,777 unitsNN W L66.77 I ;,8?7,777

87,777 units W L8:.=7NNNI 6,;9?,777 L9>,>@?,777

N L;,;77,777C;@,>77 units I L66.77

Solutions Manual 8-'(


68/82

8.50 (C!"#$"%&'-2

NN77'otal materials needed for the year G 9@7,777'otal units of materials needed 966,>77

eginning inventory % 9?,777'otal materials purchase for the year 9@:,>771aterials purchased in the 9st-uarter % ;@,>771aterials yet to purchase before the end of the year 9;>,777

/umber of remaining -uarters * ;Jnits of materials to purchase in each -uarter =>,777

NNN L66.77 x 9.7> I L8:.=7:96,>77 units W L8:.=7 I L9,@78,=77

;,::?,?77 x .9 I L9,>::,??7

>2eneral factory overheadTariable L9,?:7,777 x (9@7,777unitsC9?:,777units) I L9,@77,777Fixed L;,:=7,777 x 9C: I 9,?:7,777

'otal L;,;:7,777

? Average product cost per unit for unit manufacturedin :77?%@ L:9,:6=,=?7 C9@7,777 units I L9:>.:7:@

Finished ending inventory x ;,;77 'otal cost of finished goods ending inventory L =9;,9?8

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$

$1,21!,200

2!,200="08#nits1%0,000

nits4!,000#$1,1&0,000

$1,1&0,000=nits162,000

nits1%0,000#$1,134,000

'8


69/82

8.50 (C!"#$"%&'-3

;.a. "avings in working capitals from eliminating ending inventory

Finished goods L =9;,9?8

77 % 977) I 9,@77,9?7'otal savings L:,99;,;:8

'he firm can reduce the need for working capital by L:,99;,;:8. 'he finalnet saving depends on the cost of capital of the firm. 'he firm can savemore than L:99,;;; if the cost of capital of the firm is at least 97.

b. Mes. 'he firm can increase its pro!ected net income from operationsbefore taxes by approximately = percent as shown below.

1olid *ompanyPro Forma "tatement &ncome "tatement

For the Mear #nding August ;9, :77@

/et sales L;:,@;?,777*ost of goods sold ::,7=7,:892ross profit L97,?8>,@78$perating expenses

1arketing L;,:77,7772eneral and administrative :,:77,777 >,=77,777

&ncome from operations before income taxes L >,:8>,@78

L:99,;;; )L>,:8>,@78 I =

c. &n addition to financial terms, the firm needs to consider carefully, amongother items

ade-uacy of the firm+s e-uipment to support the new systemproficiency of the firm+s accounting information system to handle thenew system

support of vendorsacceptance of factory managers and production workers

Solutions Manual 8-')


70/82

8-51 B%'+ =!) M&)/"'$& >$), (15 ,$"%#&

9. *ash collections in 2ross margin L >>,777$perating expenses

1onthly operating expenses L::,?77Jncollectible accounts L::7,777 x : I =,=77,777

/et income before taxes L97,777

=. Accounts payablePurchases in x 67 I 9:7,777

alance on ;,777

>. #nding inventory

&nventory, ;,777'otal cost of goods available for sale L:6>,777*ost of goods sold L::7,777 x @> I 9?>,777&nventory,


71/82

8-52 C/ B%'+ (60 M$"%#&

9. 'he annual cash budget is presented on the next page.

:. $perating problems that 'riple%F Dealth *lub could experience includeX 'he cash contribution from lessons and classes will decrease

because the pro!ected wage increase for lesson and class employeesis significantly greater than the pro!ected increases in revenues. Eastyear, the cash generated from these operations was L;8,777(L:;=,777 % L98>,777). 'he :776 pro!ection is only L9:,?@>(L;7=,:77 % L:89,>:>).

X $perating expenses are increasing faster than revenues frommembership fees. East year, the cash generated from regularoperations was L89,777 Y(L;>>,777 G L:,777) U (L=?9,777 %

L98>,777)Z. 'he :776 pro!ection is only L8=,86: Y(L=7:,:9> G L:,??@)U (L?79,=:> % L:89,>:>)Z. 'he increase in cash from regularoperations is pro!ected to be about =, whereas these revenues arepro!ected to increase 9;.

X 'riple%F Dealth *lub seems to have a cash management problem.'he club does not generate enough cash from operations to meet itsobligations. &t may not be able to meet expenditures for day%to%dayoperations if the trend continues. 'o avoid cash crises, the club shouldprepare monthly cash budgets to help cash management.

X /onoperational payments are pro!ected to use up virtually all of the

cash generated from operations. 2iven the recent declines inmortgage interest rates, management should consider refinancing thisdebt to reduce this cash drain.

;. ane *rowe+s concern with regard to the oard+s expansion goals is!ustified. 'he :776 budget pro!ections show an increase in the cashbalance of only L:,@>@. 'he total cash available is well short of theL?7,777 annual additional cash needed for the land purchase. &f theoard desires to purchase the ad!oining property, it is going to have toconsider increases in fees, refinancing existing debt, or other methods of

financing the ac-uisition.

Solutions Manual 8-(1


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8-52 (!"#$"%&'

'&PE#%F D#AE'D *EJ *ash udget For the Mear #nding $ctober ;9, :776

Price:77@ 2rowth &ncrease :776

PERATIN CASH IN>@1embership fee L;>>,777 97;.77 997.77 L=7:,:9>Eesson and class fees :;=,777 9;7.77 ;7=,:771iscellaneous :,777 9;;.;; :,??@

TTA PERATIN CASH IN> L>89,777 L@78,76:

PERATIN CASH UT>@1anager+s salary and benefits L ;?,777 99>.77 L =9,=77#mployee+s wages and benefits egular employees 987,777 99>.77 :96,>77 Eesson and class employees 98>,777 9;7.77 99>.77 :89,>:>'owels and supplies 9?,777 9:>.77 :7,777Jtilities (heat and lights) ::,777 9:>.77 :@,>771iscellaneous :,777 9:>.77 :,>77

TTA PERATIN CASH UT> L=?9,777 L?79,=:>CASH >RM PERATIN L9;7,777 L97@,?>@

NN-PERATIN PAYMENTS@Accounts payable given :,>77Accounts payable % e-uipment L9>,777 given 9>,7771ortgage principal ;7,777 given ;7,7771ortgage interest ;>,977 8.77 ;:,=77Planned new e-uipment purchases given :>,777

TTA NNPERATIN CASHUT> L67,977 L97=,877NET CASH IN> L=8,877 L :,@>@

CASH BAANCE< END > PERID L @,;77 L 97,7>@

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$("


73/82

8.53 E#$,/#& =!)&$+" /& )&&"%& (10 ,$"%#&

9. Eet!be the number of units sold in the domestic market

9.6!I 8,777,777

!I >,777,777

And the units of foreign sales I >,777,777 x 7.6 I =,777,777

*ondensed income statement

"ales

,777,777 x L;7 I L9>7,777,777

Foreign =,777,777 x L;7 x 7.? I @:,777,777

'otal sales L:::,777,777*osts of sales L9> x 8,777,777 I 9;>,777,777

*ontribution margin L 6@,777,777

:. L;7C7.? I L>7

;. Eet "P be the target%selling price per unit to earn the desired contributionmargin.

'otal domestic sales G 'otal foreign sales in J.". dollars- *osts of sales I ,777,777 x "P G (=,777,777 x "P x 7.?)% (L9> x 8,777,777) I L9> x 8,777,777

@,=77,777 "P I :@7,777,777

"P I L;?.=8

Solutions Manual 8-(%


74/82

8.54 S#)/#&+< )!'%# $=& &< /"' / =! (20 ,$"%#&

9. 'he development stage is generally characterized by large cash outflowsand little or no cash inflows. #xpenditures for research and development,plant and e-uipment, retooling, distribution, and promotion are re-uired.


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8-54 (C!"#$"%&'

;. 'he techni-ues that


76/82

8-55 C!"#$"%!% *%'+ (20 ,$"%#&

9.a. 'he increase in sales could have the following effects on production Production capacity may have to be reallocated to the threemodels based upon the composition of the sales increase."ome parts, in addition to the molded doors, may have to bepurchased from outside suppliers.


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8-55 (C!"#$"%&'

:.a. A continuous (rolling cycle) budget is the preparation of a new twelve%month budget as each period (e.g., month, -uarter) is completed. Atthe end of each period, the budget amounts for the period !ust

completed are deleted, the amounts for the remaining periods of theold budget are revised as necessary, and budget amounts for the newperiod are added. 'hus, a twelve%month budget is rolled forward aseach period is completed.

:.b. 'he preparation of a continuous budget would force 0est0ood+smanagement to engage in planning on an almost continuous basis."horter planning cycles increase the chances that management willanticipate and give attention to problem situations earlier than wouldotherwise have been the case. 'hus, planning would be enhanced inall of the functional areas and there would not be any periods when abudget did not exist.

Solutions Manual 8-((


78/82

6.>? Diggins 'echnologies (=> min.)

ank loan interest rate 9:ond interest rate 8

Huarters& && &&& &T Mear

*ash balance, beginning L ;7,777 $ 38,000 $ 30,520 $ 30,770 $ 30,000

Add cash receipts

*ollections from customers =:>,777 437,000 479,480 =?7,777 1,801,480

#-uipment disposal " 0 0 5,000 5,000

'otal cash available $ 455,000 L =@>,777 L >97,777 $ 495,770 $ 1,836,480

"ubtract cash disbursements

aw materials purchases L:77,777 L ::7,777 $ 250,000 L:@7,777 8=7,777

Payroll 117,000 9:7,777 99>,777 122,000 =@=,777

", 2, R A expenses ?7,777 ?:,777 >6,777 ?=,777 244,000

#-uipment purchase 20,000 30,000 30,000 - 80,000

ond interest - 11,250 - 11,250 22,500

ond sinking fund - 20,000 - - 20,000

&ncome taxes :7,777 :9,777 :>,777 96,777 84,000

'otal cash disbursement $ 417,000 $ 484,250 $ 478,000 $ 485,250 $ 1,864,500

1inimum cash balance $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000

'otal cash needed $ 447,000 $ 514,250 $ 508,000 $ 515,250 $ 1,894,500

"hort%term Financing

orrowing 7 $ 41,000 0 $ 22,000 $ 63,000

epayment 0 0 0 0 -

&nterest 0 (1,230) (1,230) (1,890) (4,350)

'otal effects of financing 7 $ 39,770 $ (1,230) $ 20,110 $ 58,650

*ash balance, ending L;6,777 $ 30,520 $ 30,770 $ 30,630 $ 30,630

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$(8


79/82

8-57 CMPREHENSIE BUDGET(30 ,$"%#&9.

Solutions Manual 8-()

I#&, %"& %08 A%+%-# S&1#.

*ash sales ?7,777L ?=,777L ?>,?77L @:,777L*redit sales 9>,777 9?,777 9?,=77 96,777

'otal sales @>,777L 67,777L 6:,777L 87,777L

eceipts

*ash sales L?=,777 L?>,?77 L@:,777

*ollections on accounts 9>,777 9?,777 9?,=77

'otal cash collections @8,777L 69,?77L 66,=77L

I#&, %08 A%+%-# S&1#. 3)' #).

Purchases L=8,:77 L>=,777 L?7,777 L9?;,:77

*ash discount =8: >=7 ?77 9,?;:

'otal =6,@76L >;,=?7L >8,=77L 9?9,>?6L

I#&, %08 A%+%-# S&1#. 3)' #).

"alaries and wages L9:,777 L9:,977 L9:,>77 L;?,?77

ent R Property 'axes 9,777 9,777 9,777 ;,777

$ther cash operating costs 9,?77 9,?=7 9,677 >,7=7

'otal 9=,?77L 9=,@=7L 9>,;77L ==,?=7L

I#&, %08 A%+%-# S&1#. 3)' #).

Purchases L=6,@76 L>;,=?7 L>8,=77 L9?9,>?6

*ash operating costs 9=,?77 9=,@=7 9>,;77 ==,?=7

&nterest payment on loan >77 >77 9,777

#-uipment % ?;,>77 % ?;,>77'otal ?;,;76L 9;:,:77L @>,:77L :@7,@76L

S&'%0& A@ B%'+&' M!"#08 C/- R&&$1#-

S&'%0& C@ B%'+&' M!"#08 C/- D$-*%)-&,&"#- =!) 21&)/#$"+ C!-#-

S&'%0& B@ B%'+&' M!"#08 C/- D$-*%)-&,&"#- =!) P%)/-&-

S&'%0& D@ B%'+&' T!#/0 M!"#08 C/- D$-*%)-&,&"#-


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8-57 (C!"#'-1

:.

Blocher, Chen, Cokins, Lin: Cost Management, 3e 8- The McGraw-Hill Companies, nc!, "##$8#

I#&, %08 A%+%-# S&1#. 3)' #).

*ash balance, beginning L:>,777 L=7,?8: L:8,>8: L:>,777

'otal cash receipts @8,777 69,?77 66,=77 :=8,777

'otal cash available L97=,777 L9::,:8: L99@,88: L:@=,777

'otal cash disbursements ?;,;76 9;:,:77 @>,:77 :@7,@76

*ash balance before financing L=7,?8: (L8,876) L=:,@8: L;,:8:

orrowing re-uired 7 =7,777 7 =7,777

&nterest payment >77 >77 9,777

orrowing repaid % % 97,777 97,777

*ash balance, ending =7,?8:L :8,>8:L ;:,:8:L ;:,:8:L

S&'%0& E@ C/- B%'+ /"' B%'+&' >$"/"$"+

"ales :>:,777L

*ost of goods sold 9=8,?66

2ross 1argin 97:,;9:L$perating expenses

"alaries and wages ;?,?77L

ent and property taxes ;,777

$ther operating expenses >,7=7


81/82

8-57 (C!"#'-2


A---

*ash ;;,:8:L

Account receivables 96,777

&nventory >8,=77

uilding and e-uipment (net) ;:=,?77

'otal Assets =;>,:8:L

4$/*$0$#$&- /"' S#!6!0'&)-F EG%$#8

Accounts payable ?;,>77L/otes payable ;7,777L

&ncome tax payable 9;,>?6

"tockholders #-uity L;:6,::=

'otal Eiabilities and "tockholders+ #-uity =;>,:8:L

udgeted alance "heet

"eptember ;7, :77@

2old "porting #-uipment


82/82

6%>@ (*ontd%;)

;. 2old needs to borrow to finance part of the payment for the newe-uipment during the third -uarter. &n addition, fluctuations in businessmay re-uire the firm to seek short%term loans. Payrolls, materials, and

supplies have to be paid before collections from customers. &nanticipation of rising sales in the coming season, 2old may experience apeak demand for cash to pay for the increased purchases of materials,payrolls, and supplies while collections from customers may be at thelowest point of the year as the firm comes out of a low activity season.

A short%termfinancing arrangement is the best way to meet seasonalcash needs. A short%term loan can be repaid as soon as activities in cashcollections increase and payrolls and purchases of materials andsupplies decrease as the firm enters into a slow season. Although thefirm may have to pay a higher cost for short%term borrowing, the totalfinancing cost likely would be lower than if the firm raised sufficient fundsthrough either issuing long%term bonds or capital stock to meet peakdemands for cash. A bond re-uires interest payments whether or not thefirm uses the funds raised from the bond in operations. Additional capitalstock is not without cost. 'he management needs to earn a desiredreturn on e-uity to satisfy investors.

Furthermore, studies have shown that management is likely to becareless in spending when abundant funds are available.

=. 'he scenarios described involved many simplified assumptions in orderto make the problem managable. Among possible complicating factorsare /o bad debts are considered.

*ustomers always make payment as prescribed in sales terms.

0ithin a given month cash inflows are in time to meet cash outflow. &tis conceivable that the bulk of cash inflows occur toward the end ofthe month while payments need to go out at the beginning of themonth.* h t t b k dit d f th h

hiteh charaniya

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