Chap 013
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Chapter 13 - Planning and Budgeting
13
Planning and Budgeting
Solutions to Review Questions 13-1. Next period’s budget has more detail because it is closer in time than the longer-range forecasts. The budget plan is a blueprint for operations in the coming period. It must be sufficiently detailed so that it provides adequate direction to the various people responsible for operations. 13-2. Cash receipts and disbursements often take place in different time periods from when items are recognized in the income statement and balance sheet. Thus, a company needs to prepare a cash budget to ensure that cash needs will be met. 13-3. Answers will vary, but examples include: a. Econometric methods—using economic data to forecast using statistical models; b. Delphi technique—collecting and synthesizing the opinion of experts; c. Estimates from salespeople and other knowledgeable personnel; d. Trend analysis—statistical analysis of historical data; e. Market research—collecting information on the macroeconomic trends in the industry and in the local markets.
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Chapter 13 - Planning and Budgeting
13-4. The master budget links long-term objectives and short-term, tactical plans. Organization goals are broad-based statements of purpose. Strategic plans take the broad-based statements and express them in terms of detailed steps needed to attain those goals. Budgets are the short-term plans used to implement the steps included in the strategic plans. For example, a company might have a goal of "Becoming the number 1 company in the industry." The strategic plans would include such statements as: "Increase sales volume by 20% per year." The master budget would state the number of units that are needed to be produced and sold in the coming period to meet the 20% volume increase as well as the production and marketing costs necessary to attain that objective. The master budget would also include estimates of the levels of cash, accounts receivable, inventories, and fixed assets needed to support the budgeted level of activity. 13-5. Because middle management has better knowledge about operations at lower levels in the organization, and because budgets are usually used to evaluate performance or compute bonuses for middle management, middle management might have a tendency to underestimate revenues and overestimate costs. This bias arises because if the biased plans are adopted, middle management will find it easier to meet targets and to achieve bonus awards. Of course, if upper management always "tightens" the budget plans suggested by middle management, gaming might result. The disadvantage of this gaming is that the planning effectiveness might be reduced. 13-6. Budgeting aids in coordination in a number of ways. By relating sales forecasts to production activities it is possible to reduce the likelihood of over- or under-production. It coordinates production so that plants making subassemblies are making the appropriate number at the right time as needed by the plant making the final assemblies. In addition, the budget process is used to make certain that adequate cash is on hand to finance company activities for the coming period. Guidelines are set for administrative and selling departments so that their costs are commensurate with the company’s income and output goals.
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Chapter 13 - Planning and Budgeting
Solutions to Critical Analysis and Discussion Questions 13-7. The strategic plan provides broad, long-range goals for the company. The budget provides more detail for how to work toward achieving those goals on an annual (or quarterly, or monthly) basis. 13-8. Answers will vary. Two possible reasons are (1) smaller firms have less of a “cushion” and therefore require better estimates of cash and (2) smaller firms might have more difficulty (might need to pay higher rates) borrowing money. 13-9. The earlier the budgeting process is started, the earlier the company will understand some of the problems it must address. In addition, an early start allows managers to work on the budget, step back and think about it, and then revise it. A later start avoids some of the costs of developing budgets only to have them revised as more current data become available. 13-10. Because inventories would be eliminated, the timing of purchases would be closer to the time of production. This would minimize the differences between the timing of cash outflows for materials purchases, work in process and finished goods, and the time when the related costs are recognized in the production budget. 13-11. The purpose of tying spending to budgets is to ensure that the wishes of the legislature are carried out. The problem is that managers cannot take advantage of funds in one budget to use in another area, even if that means lower overall costs to the government.
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Chapter 13 - Planning and Budgeting
13-12. Planning communicates the goals of the organization and can be used to coordinate the activities of different units in the organization. The control purpose of the budget is to provide a mechanism to influence managers, either by limiting resources available or by providing a performance evaluation benchmark. Problems can arise when the manager who is most knowledgeable, and, therefore the best source of information for planning, will be evaluated at the end of the period. Knowing that the information he or she submits for planning purposes will be used to evaluate
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Chapter 13 - Planning and Budgeting
performance can affect the manager’s actions when providing information needed for preparing the budget. 13-13. It is common to start the budgeting process with a sales forecast because sales are most out of control of managers. However, if raw materials were difficult to obtain and a ready market existed for output, especially if prices were regulated, a company might start with a forecast of production. Electricity production might be an example. 13-14. In organizations where spending is literally tied to the budget, managers often spend what remains in the budget as the year ends to avoid losing the funds and potentially leading to lower budgets in the future. 13-15. A positive balance at the end of the budgeting period does not ensure that there is always cash available. An example is when all bills are due on the first of the month and receipts are collected at the end of the month. The net cash flows can be positive even though, during the month, there is a negative cash balance.
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Chapter 13 - Planning and Budgeting
Solutions to Exercises 13-16. (15 min.) Estimate Sales Revenues: SVI. .90 = market volume in the coming year (as a percent of last year) .85 = number of trades in the coming year (as a percent of last year) 1.15 = average commission per trade in the coming year (as a percent of last year) 150,000 trades x $60 per trade x .85 x .90 x 1.15 = $7,917,750. Note: This is not the same as a 25 percent reduction (15% + 10%) because the volume would not have been 10 percent of last year’s volume but 10 percent of the reduced volume of 127,500 trades (= 150,000 x 85%). 13-17. (15 min.) Estimate Sales Revenues: EZ-Credit, Inc. Portfolio Interest Income Amount Rate (thousands) Consumer loans.................................................. $84 million 12% $10,080 Home equity loans.............................................. 60 million 8 4,800 Securities............................................................. 16 million 7 1,120 Total.............................................................. $16,000 13-18. (15 min.) Estimate Sales Revenues: Starlite Company. Market size last year = 45,000 units ÷ 0.3 = 150,000 units Market size next year = 1.10 x 150,000 units = 165,000 units Company share = 25% x 165,000 units = 41,250 units Sales revenue = 41,250 units x $11 per unit = $453,750
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Chapter 13 - Planning and Budgeting
13-19. (15 min.) Estimate Production Levels: Hofmann Corporation. Hoffmann Corporation Production Budget For the Year Ended December 31 (in units) Expected Sales................................................................... 72,000 units Add: Desired ending inventory of finished goods (1 months ÷ 12 months) x 72,000................................... 6,000 Total needs.......................................................................... 78,000 Less: Beginning inventory of finished goods...................... 3,900 Units to be produced........................................................... 74,100 units
13-20. (15 min.) Estimate Sales Levels Using Production Budgets: Sanlax, Inc. Sanlax, Inc. Sales Budget For the Year Ended December 31 (in units) Expected Production........................................................... 200,000 units Subtract: Increase in inventory level............................... 20,000 units Available for sale............................................................. 180,000 units
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Chapter 13 - Planning and Budgeting
13-21. (25 min.) Estimate Production and Materials Requirements: Wyoming Machines. a. Wyoming Machines Casings Plant Production Budget For the Year Ended December 31 (in units) Expected sales................................................................................. 160,000 units Add: Desired ending inventory of finished goods............................. 5,000 Total needs....................................................................................... 165,000 Less: Beginning inventory of finished goods.................................... 20,000 Units to be produced........................................................................ 145,000 units b.
Wyoming Machines Casings Plant Direct Materials Requirements For the Year Ended December 31 (in units) Units to be produced........................................................................... 145,000 Direct materials needed per unit......................................................... x 6 ounces Total production needs (amount per unit times 145,000 units).......... 870,000 ounces Add: Desired ending inventory (2 months ÷ 12 months) x 160,000 x 6................................... 160,000 Total direct materials needs................................................................ 1,030,000 Less: Beginning inventory of materials............................................... 60,000 Direct materials to be purchased........................................................ 970,000 ounces Alternative Method Production (P)—assumes finished goods in inventory reduced to 20,000 units at the end of this year (BB = Beginning Balance; EB = Ending Balance): BB + P = Sales + EB 20,000 + P = 160,000 + 5,000 P = 145,000 units Materials Requirements: BB + P = Usage + EB 60,000 + P = (6 x 145,000) + (2 ÷ 12) x 160,000 x 6 oz. P = 970,000 oz.
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Chapter 13 - Planning and Budgeting
13-22. (25 min.) Estimate Purchases And Cash Disbursements: Westile Company. a. and b.
Westile Company Merchandise Purchases Budget For the Period Ended March 31 (in units) January
Estimated sales................................................... 24,800 Add: Estimated sales inventory........................... 90,400a Total merchandise needs................................ 115,200 Less: Beginning inventory................................... 56,000 Merchandise to be purchased............................. 59,200 Estimated cost per unit........................................ x $2 Total estimated cost of merchandise................... $118,400
February March 35,600 74,000 109,600 90,400 19,200 x $2 $38,400
26,400 62,000 88,400 74,000 14,400 x $2 $28,800
Estimated sales for following three months: 90,400 = 35,600 (February) + 26,400 (March) + 28,400 (April) a
Note: Once the process reaches equilibrium, the estimated purchases (in units) are equal to the budgeted sales three months in the future.
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Chapter 13 - Planning and Budgeting
13-23. (25 min.) Estimate Purchases And Cash Disbursements: White Products. a.
White Products Merchandise Purchase Budget For the Period Ended May 31 (in units) April
May
Estimated sales................................................... 8,600 Add: Estimated ending inventory........................ 7,000 Total merchandise needs.................................... 15,600 Less: Beginning inventory................................... 8,000 Merchandise to be purchased............................. 7,600
7,000 7,400 14,400 7,000 7,400
b. Payments for these purchases are made as follows: Month of Payment
Total
March
April..................................................................... $385,200 $180,000a May...................................................................... 336,600 $180,000 = 40% x $45 x 10,000 units. b $205,200 = 60% x $45 x 7,600 units. c $136,800 = 40% x $45 x 7,600 units. d $199,800 = 60% x $45 x 7,400 units. a
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Month of Delivery April $205,200b 136,800c
May –0– $199,800d
Chapter 13 - Planning and Budgeting
13-24. (15 min.) Estimate Cash Disbursements: Ashland Corporation. Ashland Corporation Schedule of Cash Disbursements For the Period Ended October 31 Payments for purchases prior to September................... Payments for September purchases................................ October purchases........................................................... Total cash disbursements................................................ a $462,000
$ 30,000 165,000 462,000a $657,000
= $660,000 70%
13-25. (15 min.) Estimate Cash Collections: Duluth Company. Duluth Company Schedule of Cash Collections For the Month Ended December 31 Collections in December for sales prior to November........ $ 24,000 November sales.................................................................. 157,500a December sales.................................................................. 75,000b Total cash collections.......................................................... $256,500 a $157,500 = $225,000 x 70% b $75,000 = $300,000 x 25%
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Chapter 13 - Planning and Budgeting
13-26. (20 min.) Estimate Cash Collections: Nassau Products. Nassau Products Schedule of Cash Collections For the Month Ended April 30 April January sales...................................................... $ 11,400a February sales..................................................... 16,800b March sales......................................................... 167,400c April sales............................................................ 75,000d Total cash collections....................................... $270,600 a$11,400
= $285,000 x 4% b$16,800 = $240,000 x 7% c$167,400 = $270,000 x 62% d$75,000 = $300,000 x 25%
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Chapter 13 - Planning and Budgeting
13-27. (30 min.) Estimate Cash Receipts: Scare-2-B-U. a. Revenues are as follows: April..................................................................... $12,000 = 75 occasions x $160 May...................................................................... $7,200 = 45 occasions x $160 June..................................................................... $4,800 = 30 occasions x $160 July...................................................................... $9,600 = 60 occasions x $160 August................................................................. $12,000 = 75 occasions x $160 September........................................................... $26,400 = 165 occasions x $160 b. Cash receipts are as follows: Scare-2-B-U Multiperiod Schedule of Cash Receipts Cash Receipts in Month of: April May June July April sales............................................................ $ 3,600a May sales............................................................ 3,600b $2,160 June sales........................................................... 960c 2,400 $ 1,440 July sales............................................................. 1,920 4,800 $ 2,880 August sales........................................................ 2,400 6,000 September sales................................................. 5,280 ________ ______ _______ Total cash collections
$8,160
______ $6,480
a $3,600
_______ $8,640
= 12,000 x 30% b $3,600 = $7,200 x 50% c $960 = $4,800 x 20% This pattern is repeated for subsequent months.
13-13
$14,160
Total Cash Receipts for Period $ 3,600 5,760 4,800 9,600 8,400 5,280 $37,440
Chapter 13 - Planning and Budgeting
13-28. (30 min.) Estimate Cash Receipts: Varmit-B-Gone. Revenues are as follows: March...... April......... May......... June........ July......... August.....
$28,800 50,400 168,000 320,000 384,000 288,000
= = = = = =
0.6 calls 0.9 calls 1.5 calls 2.5 calls 3.0 calls 2.4 calls
x x x x x x
600 subscribers 700 subscribers 1,400 subscribers 1,600 subscribers 1,600 subscribers 1,500 subscribers
x x x x x x
$80 $80 $80 $80 $80 $80
Collections of these revenues are expected according to the following schedule: Varmit-B-Gone Multiperiod Schedule of Cash Receipts Cash Receipts in Month of: May June July August March sales......................................................... $ 2,304a ($15,000) April sales............................................................ 30,240b $ 4,032 ($27,000) May sales............................................................ 50,400c 100,800 ($97,500) June sales........................................................... 96,000 ($187,500) July sales............................................................. ($225,000) August sales........................................................ _________ ________ ($168,000)
Total Cash Receipts for Period $2,304 34,272
$13,440
164,640
192,000 $ 25,600
313,600
115,200
230,400
345,600
86,400
86,400
Total cash collections....................................... $82,944 $200,832 $320,640 $342,400
$946,816
a $2,304
= 8% x $28,800 b $30,240 = 60% x $50,400 c $50,400 = 30% x $168,000 This pattern is repeated for subsequent months.
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Chapter 13 - Planning and Budgeting
13-29. (30 min.) Prepare Budgeted Financial Statements: Varmit-B-Gone. Varmit-B-Gone Budgeted Income Statement For the Month of September
Calculations Revenues............................................................ $207,360 (90% x 1,500) x (80% x 2.4) x $80 Less manufacturing costs: Variable costs.................................................. $ 17,280 (.72a x $24,000) Maintenance and repair................................... 22,220 (1.01 x $22,000) Depreciation..................................................... 42,000 (no change) Total service costs............................................... $ 81,500 Marketing and administrative: Marketing (variable) ........................................ $ 10,440 (.72a x $14,500) Administrative (fixed) ...................................... 57,750 (1.05 x $55,000) Total marketing and administrative costs............ $ 68,190 Total costs............................................................ $149,690 Operating profit.................................................... $ 57,670 a Ratio of September to August volume: September: (90% x 1,500) x (80% x 2.4) = 2,592 August: 1,500 x 2.4 = 3,600 Ratio = .72 = 2,592 ÷ 3,600 or Ratio = .80 x .90 = .72
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Chapter 13 - Planning and Budgeting
13-30. (15 min.) Prepare Budgeted Financial Statements: Rhodes, Inc. Rhodes, Inc. Budgeted Income Statement August Revenues (240 units @ $675/unit) .................... $162,000 Less Manufacturing costs: Variable........................................................ $ 26,994 Depreciation (fixed) ..................................... 22,950 Total manufacturing costs................................... $ 49,994 Gross profit margin.............................................. $112,056 Less: Marketing and Administrative Fixed costs (cash) ....................................... $61,974 Depreciation (fixed) ..................................... 19,050 Total marketing and administrative costs............ $81,024 Operating profits.................................................. $31,032
13-16
Calculations ($150,000 x 1.20 x .90)
($21,840 x 1.20 x 1.03) (unchanged)
($56,340 x 1.10) (unchanged)
Chapter 13 - Planning and Budgeting
13-31. (15 min.) Prepare Budgeted Financial Statements: Carreras Café. Carreras Café Budgeted Income Statement June Revenues (2,520 meals @ $18.75/meal) .......... $47,250 Less Service costs: Food............................................................. $ 7,623 Labor................................................................. 10,080 Other variable costs..........................................3,450 Fixed service costs .....................................9,600 Total manufacturing costs................................... $ 30,753 Gross profit margin.............................................. $16,497 Less: Marketing and Administrative Marketing (variable) .................................... $ 3,780 Administrative ..............................................5,000 Total marketing and administrative costs............ $8,780 Operating profits.................................................. $7,717
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Calculations ($15 x 4,200 x 0.60 x 1.25)
($11,550 x 0.60 x 1.10) ($16,800 x 0.60) ($5,750 x 0.60) (unchanged)
($6,300 x 0.60) (unchanged)
Chapter 13 - Planning and Budgeting
13-32. (15 min.) Incentives and Sales Forecasts—Ethical Issues: Northwest Hardware. a. One explanation is that Lloyd has better (more specific) local knowledge about conditions in the Montana District that the statistical analysis does not include. A second explanation is that Lloyd wants to “be conservative” in his estimate because he believes his performance evaluation depends on how well the district does relative to this forecast. b. The first explanation is the same as in requirement (a); Lloyd has better information. A second explanation is that Lloyd is trying to justify hiring additional employees to sell in the district and thinks it will be easier to justify if the sales forecast is higher. c. Answers will vary. Gaming the system is common and, given that firms use targets to assess performance, is expected. The answer to this question depends, in part, on what Lloyd’s motives are and how good his information is. For example, if he “knows” that the sales will be $1 million, but reports $900,000 to ensure a higher bonus, that might be considered unethical. If he thinks sales might be $1 million, but knows he will be fired if he fails to meet the target, that would not generally be considered unethical. The controller should consider both forecasts. Both forecasts represent different types of knowledge and the forecasters have different incentives (and biases). By understanding the knowledge incorporated in each forecast and the incentives that the forecasters have, the controller is in a better position to use the information from both forecasts. 13-33. (15 min.) Budget Revisions—Ethical Issues: Galaxy Electronics. a. Elizabeth is probably hoping that because the company is committed to the aircraft guidance program, it will not cut funding for that program and she can protect the other projects, including her favorite. Is this ethical? Answers will vary. It certainly depends on Elizabeth’s motives. If she believes that cutting other programs will truly harm them, more than cuts to the aircraft guidance program, then she is doing what she is paid to do, manage the department. At the other extreme, if she is simply trying to fund her personal project at the expense of the company, that might be considered unethical. b. The managers of the company probably have been promoted from positions similar to Elizabeth’s and understand her motives and incentives. They can adjust the budget after she submits the revision. The final budget will depend on many factors including negotiation skills.
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Chapter 13 - Planning and Budgeting
13-34. (15 min.) Sensitivity Analysis: Sanjana’s Sweet Shoppe. The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the specific row number. For example, to enter the formula for gross margin for unit gross margin of $2 and 15,000 customers, place the cursor in cell c6 and type everything between, not including, the following quotation marks: “=a6*b6”. Notice the range of incomes is quite large, from a loss of $5,900 to a profit of $90,500.
13-35. (15 min.) Sensitivity Analysis: Bay Area Limos. The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the specific row number. For example, to enter the formula for gross margin for unit gross margin of $20 and 2,000 customers, place the cursor in cell c6 and type everything between, not including, the following quotation marks: “=a6*b6”. Notice the range of incomes is quite large, from a loss of $29,000 to a profit of $142,000.
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Chapter 13 - Planning and Budgeting
Solutions to Problems 13-36. (30 min.) Prepare Budgeted Financial Statements: Dancer Components. Dancer Components Budgeted Income Statement For Year 2
Calculations Revenues............................................................ $6,389,700a $5,700,000 x 1.18 x .95 Manufacturing costs: Materials.......................................................... $ 364,762 $336,000 x .92 x 1.18 Other variable costs.........................................329,343 $284,800 x .98 x 1.18 Fixed cash costs..............................................687,960 $655,200 x 1.05 Depreciation (fixed) ......................................... 1,998,000 unchanged Total manufacturing costs................................... $3,380,065 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 996,864 $844,800 x 1.18 Marketing depreciation....................................299,200 unchanged Administrative (fixed, cash) ............................. 1,120,240 $1,018,400 x 1.10 Administrative depreciation..............................149,600 unchanged Total marketing and administrative costs............ $2,565,904 Total costs............................................................ $5,945,969 Operating profits.................................................. $ 443,731 a
Alternatively, $6,389,700 = (1.18 x 300,000 units) x (.95 x $19.00 per unit)
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Chapter 13 - Planning and Budgeting
13-37. (10 min.) Estimate Cash from Operations: Dancer Components. Dancer Components Cash Basis Budgeted Income Statement For Year 2 Revenues............................................................ $6,389,700 Manufacturing costs: Materials.......................................................... $ 364,762 Other variable costs......................................... 329,343 Fixed cash costs.............................................. 687,960 Total manufacturing costs................................... $ 1,382,065 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 996,864 Administrative (fixed, cash) ............................. 1,120,240 Total marketing and administrative costs............ $2,117,104 Total costs............................................................ $3,499,169 Cash operating profits......................................... $2,890,531 Cash from operations would equal revenues less cash costs, which excludes depreciation.
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Chapter 13 - Planning and Budgeting
13-38. (30 min.) Prepare Budgeted Financial Statements: Cameron Parts. Cameron Parts Budgeted Income Statement For Year 2 Calculations Revenues............................................................ $1,328,477 $1,119,000 x 1.12 x 1.06 Manufacturing costs: Materials.......................................................... $ 245,784 $199,500 x 1.12 x 1.10 Variable cash costs.......................................... 291,756 $271,350 x 1.12 x .96 Fixed cash costs.............................................. 100,440 $108,000 x .93 Depreciation (fixed) ......................................... 139,950 $133,500 – $14,550 + $21,000 Total manufacturing costs................................... $777,930 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 159,600 $142,500 x 1.12 Marketing depreciation.................................... 33,900 unchanged Administrative (fixed, cash) ............................. 145,978 $135,165 x 1.08 Administrative depreciation.............................. 12,600 unchanged Total marketing and administrative costs............ $352,078 Total costs............................................................ $1,130,008 Operating profits.................................................. $198,469
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Chapter 13 - Planning and Budgeting
13-39. (10 min.) Estimate Cash from Operations: Cameron Parts. Cameron Parts Cash Basis Budgeted Income Statement For Year 2 Revenues............................................................ $1,328,477 Manufacturing costs: Materials.......................................................... $ 245,784 Variable cash costs.......................................... 291,756 Fixed cash costs.............................................. 100,440 Total manufacturing costs................................... $637,980 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 159,600 Administrative (fixed, cash) ............................. 145,978 Total marketing and administrative costs............ $305,578 Total costs............................................................ $943,558 Cash operating profits......................................... $384,919 Cash from operations would equal revenues less cash costs, which excludes depreciation.
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Chapter 13 - Planning and Budgeting
13-40. (25 min.) Prepare A Production Budget: Chander, Inc. Chander, Inc. Production Budget Coming Year (in units) Expected Sales......................................................... 270,000 units Add: Desired ending inventory of finished goods..... 105,000 Total needs................................................................ 375,000 Less: Beginning inventory of finished goods............ 60,000 Units to be produced................................................. 315,000 units Alternative method: First, compute the estimated production: P = Sales + EB – BB P = Sales + (105,000 – 60,000) = 270,000 + 45,000 = 315,000 units Next estimate the costs: Direct materials Cotton 315,000 x 1 yard x $6.00 x 1.20..............$2,268,000 Canvas 315,000 x 0.2 yards x $20.00................ 1,260,000 Total direct materials........................................ $3,528,000 Direct labor: 315,000 x 0.5 hr. x $32.................................... $5,040,000 Overhead: Indirect labor........................................................ 315,000 x $1.00 $ 315,000 Indirect materials................................................. 315,000 x $.30 94,500 Power................................................................... 315,000 x $.60 189,000 Equipment costs.................................................. 300,000 x $2.50 750,000 Building occupancy............................................. 300,000 x $1.60 480,000 Total overhead............................................... $ 1,828,500 Total budgeted manufacturing costs...................$10,396,500
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Chapter 13 - Planning and Budgeting
13-41. (25 min.) Prepare A Production Budget: Lotus Fixtures, Inc. Lotus Fixtures, Inc. Production Budget Year 2 (in units) Expected Sales......................................................... 420,000 units Add: Desired ending inventory of finished goods..... 20,000 Total needs................................................................ 440,000 Less: Beginning inventory of finished goods............ 40,000 Units to be produced................................................. 400,000 units Alternative method: First, compute the estimated production: P = Sales + EB – BB P = Sales + (20,000 – 40,000) = 420,000 – 20,000 = 400,000 units Next estimate the costs: Direct materials Steel 400,000 x 2 pounds x $0.40 x 0.80........... Alloy 400,000 x 0.5 pounds x $3.00.................... Total direct materials........................................ Direct labor: 400,000 x 0.01 hr. x $30 x 1.10....................... Overhead: Indirect materials................................................. 400,000 x $0.50 Indirect labor........................................................ 400,000 x $0.80 Utilities................................................................. 400,000 x $0.40 Plant and equipment depreciation...................... 500,000 x $1.00 x 1.05 Miscellaneous...................................................... 500,000 x $0.70 Total overhead............................................... Total budgeted manufacturing costs...................
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$256,000 600,000 $856,000 $132,000 $ 200,000 320,000 160,000 525,000 350,000 $1,555,000 $2,543,000
Chapter 13 - Planning and Budgeting
13-42. (25 min.) Sales Expense Budget: Capstone Corporation.
Item January Adjustments Sales commissions............................................. $607,500 x 1.05 x 1.10 = Sales staff salaries.............................................. 144,000 x 1.04 = Telephone & mailing............................................ 72,900 x 1.08 x 1.10 = Building lease payment....................................... 90,000 (unchanged) = Utilities................................................................. 18,450 x 1.15 = Packaging & delivery........................................... 123,300 x 1.10 = Depreciation........................................................ 56,250 + ($85,500 ÷ 120 months) = Marketing consultants......................................... –0– + $157,500 = Total budgeted costs. .
13-26
Budgeted Typical Month $701,663 149,760 86,605 90,000 21,218 135,630 56,963 157,500 $1,399,339
Chapter 13 - Planning and Budgeting
13-43. (30 min.) Budgeted Purchases And Cash Flows: Delhi, Inc. a. $900,000 BB + P = Sales + EB (130% x 47,600) + P = 47,600 + (130% x 45,600) 61,880 + P = 47,600 + 59,280 P = 47,600 + 59,280 – 61,880 = 45,000 units 45,000 x $20 = $900,000 b. $974,400 BB + P = Sales + EB (130% x 45,600) + P = 45,600 + (130% x 48,000) 59,280 + P = 45,600 + 62,400 P = 45,600 + 62,400 – 59,280 = 48,720 units 48,720 x $20 = $974,400 c. $1,318,776 60% 25% 9%
x $1,452,000 x 97% x $1,452,000 x $1,416,000
= = =
$845,064 363,000 127,440 $1,335,504
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Chapter 13 - Planning and Budgeting
13-43. (continued) d. $1,141,516 September cash disbursement. August purchases paid in September:
$900,000* x 46% = $414,000
August selling general and administrative expenses paid in September: [($1,428,000 x 15%) – $8,000] x 46% = $94,852 September purchases paid in September: $974,400** x 54% = $526,176 September selling, general and administrative expenses paid in September: [($1,368,000 x 15%) – $8,000] x 54% = $106,488 $414,000 + $94,852 + $526,176 + $106,488 = $1,141,516 *From part a. of this problem **From part b. of this problem e. 49,040 BB + P = Sales + EB (130% x 48,000) + P = 48,000 + (130% x 48,800) P = 48,000 + 63,440 – 62,400 = 49,040 units
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Chapter 13 - Planning and Budgeting
13-44. (40 min.) Comprehensive Budget Plan: Brighton, Inc. a. (1)
Brighton, Inc. Schedule Computing Production Budget (Units) For April, May, and June
Budgeted sales—Units........................................ Inventory required at end of montha................... Total to be accounted for..................................... Less inventory on hand at beginning of month... Budgeted production—Units............................... a April:
May: June:
(2)
April 600,000 90,000 690,000 120,000 570,000
May 450,000 120,000 570,000 90,000 480,000
450,000 x .2 = 90,000 600,000 x .2 = 120,000 600,000 x .2 = 120,000 Schedule Computing Raw Materials Inventory Purchase Budget (Pounds) For April and May April
Budgeted production—Pounds (1/4 lb. per Unit) a...... 142,500 .................................................................................... Inventory required at end of monthb........................... 48,000 Total to be accounted for............................................ 190,500 Less inventory on hand at beginning of month.......... 57,000 Balance required by purchase.................................... 133,500 Budgeted purchases—Pounds (Based on Minimum Shipments of 62,500 lbs. each) a April:
570,000 x .25 = 142,500 May: 480,000 x .25 = 120,000
b April:
480,000 x .4 x .25 = 48,000 May: 600,000 x .4 x .25 = 60,000
c
June 600,000 120,000 720,000 120,000 600,000
102,000 = 57,000 + 187,500 – 142,500
13-29
187,500
May 120,000 60,000 180,000 102,000c 78,000 125,000
Chapter 13 - Planning and Budgeting
13-44. (continued) b. Brighton, Inc. Projected Income Statement For the Month of May Sales (450,000 Units at $4) ...................................................... $1,800,000 Less: Cash discounts on Sales................................................. $ 18,000 Estimated bad debts (1/2 percent of gross sales) ................... 9,000 27,000 Net Sales................................................................................... $1,773,000 Cost of Sales: $1,100,000 Variable cost per unit (= x 450,000 Units) ................................................ $990,000 500,000 Fixed Cost................................................................................ 400,000 1,390,000 Gross profit on sales................................................................... $ 383,000 Expenses: Selling (10 percent of gross sales) .........................................$180,000 Administrative ($165,000 per month) ..................................... 165,000 Interest expense (.01 x $500,000) ......................................... 5,000 350,000 Operating profit........................................................................... $ 33,000
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Chapter 13 - Planning and Budgeting
13-45. (60 min.) Comprehensive Budget Plan: Panther Corporation Panther Corporation Budgeted Income Statement (in thousands) Actual For the Year Ended December 31, (Year 1)
Revenue: Sales............................................................ $1,800,000 Other income................................................ 60,000 Total Revenue...........................................$1,860,000 Expenses: Cost of goods manufactured & sold: Materials....................................................... $ 528,000 Direct labor................................................... 540,000 Variable overhead........................................ 324,000 Fixed overhead 48,000 (Depreciation and other).......................... $1,440,000 Beginning inventory......................................... 192,000 $1,632,000 Ending inventory.............................................. 192,000 $1,440,000 Marketing: Salaries........................................................ $ 54,000 Commissions................................................ 60,000 Promotions and advertising......................... 126,000 240,000 Administrative: Salaries........................................................ $ 56,000 Travel............................................................ 8,000 Office costs.................................................. 32,000 96,000 Income taxes (credit) ...................................... 33,600 Total expenses.............................................$1,809,600 Operating profit (loss) ......................................... $ 50,400 a
Budgeted For the Year Ended December 31, (Year 2) $2,400,000 36,000
$2,436,000
$ 852,000 872,000 520,000 51,000 $2,295,000 192,000 $2,487,000 459,000a $2,028,000 $
$
64,000 80,000 180,000 64,000 10,000 36,000
324,000
110,000 (10,400)a $2,451,600 $ (15,600)
See notes to the balance sheet.
CMA adapted Note: Actual for December 31, Last Year not required but included for comparison.
13-31
Chapter 13 - Planning and Budgeting
13-45. (continued) Panther Corporation Budgeted Balance Sheet (in thousands) Budgeted December 31, Year 2
Current Assets Cash................................................................. Accounts receivable......................................... Inventory.......................................................... Income tax receivable...................................... Total current assets...................................... Plant and equipment........................................... Less: Accumulated depreciation..................... Total assets.................................................. Current liabilities Accounts payable............................................. Accrued payable.............................................. Notes payable.................................................. Total current liabilities................................... Shareholders’ equity Common stock................................................. Retained earnings............................................ Total shareholders’ equity............................ Total liabilities and shareholders’ equity...... Notes on the next page:
13-32
$ 4,800 320,000 459,000a 10,400b 520,000 164,000
$180,000 93,000 200,000
280,000 397,200c
$794,200 356,000 $1,150,200
$473,000
677,200 $1,150,200
Chapter 13 - Planning and Budgeting
13-45. (continued) a Inventory
Units:
$1,440,000 = 40,000 units 300,000 Added to inventory 450,000 – 400,000............... = 50,000 units Ending inventory.................................................. 90,000 units Cost: Manufacturing costs........................................$2,295,000 Units manufactured.......................................... 450,000 Cost per unit ($2,295,000 450,000) ............ $5.10 Ending units..................................................... x 90,000 Cost of ending inventory.................................. $459,000 Beginning inventory $192,000
b Income
tax: Sales & other income.......................................... Cost of goods sold.............................................. $2,028,000 Selling expense................................................... 324,000 General & administrative expense...................... 110,000 Total cost.......................................................... Tax loss............................................................... Tax rate................................................................ Tax receivable.....................................................
c
$2,436,000
$2,462,000 $ (26,000) 40% $ 10,400
Ending retained earnings = Expected beginning balance plus net income – Dividends = $432,800 – 15,600 – $20,000.
13-33
Chapter 13 - Planning and Budgeting
Solutions to Integrative Case 13-46. (40 min.) Prepare Cash Budget for Service Organization: Cortez Beach Yacht Club. The income statement is on a cash basis, hence we start with a budgeted income statement. a.
Cortez Beach Yacht Club Budgeted Statement of Income (Cash Basis) For the Year 10
Cash revenue Annual membership fees.................................... $710,000 x 1.1 x 1.03
$804,430 .............................................................. Lesson and class fees .................................... (468,000 ÷ 360,000) x $468,000) $608,400 Miscellaneous ................................................. (4,000 ÷ 3,000) x $4,000) 5,333 613,733 Total cash received .................................................................................................................... $1,418,163 Cash costs Manager’s salary and benefits ($72,000 x 1.15) ..................................... Regular employees’ wages and benefits ($380,000 x 1.15) ................... Lesson and class employee wages and benefits (given)......................... Supplies ($32,000 x 1.25) ........................................................................ Utilities (heat and light) ($44,000 x 1.25) ................................................. Mortgage interest ($720,000 x .06) a......................................................... Miscellaneous ($4,000 x 1.25) ................................................................. Total cash expenses.............................................................................. Cash income................................................................................................. Additional Cash Flows Cash payments: Mortgage payment.................................................................................... Accounts payable balance at 10/31/Year 9.............................................. Accounts payable on equipment at 10/31/Year 9..................................... Planned new equipment purchase........................................................... Total cash payments.............................................................................. Cash inflows from income statement............................................................ Beginning cash balance (including petty cash)............................................ Cash available for working capital and to acquire property.........................
aOn
$ 82,800 437,000 604,650 40,000 55,000 43,200 5,000 $1,267,650 $ 150,513
$ 60,000 5,000 30,000 50,000 $ 145,000 150,513 14,600 $ 20,113
November 1, Year 9, the unpaid balance after annual payment is $720,000, computed as follows: Balances after the $60,000 annual payment November 1, Year 6 = $900,000; November 1, Year 7 = $840,000; November 1, Year 8 = $780,000; November 1, Year 9 = $720,000 and as given in the problem.
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Chapter 13 - Planning and Budgeting
13-46. (continued) b. Operating problems that Cortez Beach Yacht Club could experience in Year 10 include:
The lessons and classes contribution to cash decreased because the projected wage increase for lesson and class employees is not made up by the increased volume of lessons and classes.
Operating costs are increasing faster than revenues from membership fees.
CBYC seems to have a cash management problem. Although there appears to be enough cash generated for the club to meet its obligations, there are past-due amounts on equipment and regular accounts. Perhaps the cash balance might not be large enough for day-to-day operating purposes.
c. The manager’s concern with regard to the Board’s expansion goals is justified. The Year 10 budget projections show only a minimal increase in the cash balance. The total cash available is well short of the cash needed for the land purchase over and above the club’s working capital needs. However, it appears that the new equipment purchases can be made on an annual basis. If the Board desires to purchase the adjoining property, it is going to have to consider significant increases in fees or other methods of financing such as membership bonds, or additional mortgage debt.
13-35
13
Planning and Budgeting
Solutions to Review Questions 13-1. Next period’s budget has more detail because it is closer in time than the longer-range forecasts. The budget plan is a blueprint for operations in the coming period. It must be sufficiently detailed so that it provides adequate direction to the various people responsible for operations. 13-2. Cash receipts and disbursements often take place in different time periods from when items are recognized in the income statement and balance sheet. Thus, a company needs to prepare a cash budget to ensure that cash needs will be met. 13-3. Answers will vary, but examples include: a. Econometric methods—using economic data to forecast using statistical models; b. Delphi technique—collecting and synthesizing the opinion of experts; c. Estimates from salespeople and other knowledgeable personnel; d. Trend analysis—statistical analysis of historical data; e. Market research—collecting information on the macroeconomic trends in the industry and in the local markets.
13-1
Chapter 13 - Planning and Budgeting
13-4. The master budget links long-term objectives and short-term, tactical plans. Organization goals are broad-based statements of purpose. Strategic plans take the broad-based statements and express them in terms of detailed steps needed to attain those goals. Budgets are the short-term plans used to implement the steps included in the strategic plans. For example, a company might have a goal of "Becoming the number 1 company in the industry." The strategic plans would include such statements as: "Increase sales volume by 20% per year." The master budget would state the number of units that are needed to be produced and sold in the coming period to meet the 20% volume increase as well as the production and marketing costs necessary to attain that objective. The master budget would also include estimates of the levels of cash, accounts receivable, inventories, and fixed assets needed to support the budgeted level of activity. 13-5. Because middle management has better knowledge about operations at lower levels in the organization, and because budgets are usually used to evaluate performance or compute bonuses for middle management, middle management might have a tendency to underestimate revenues and overestimate costs. This bias arises because if the biased plans are adopted, middle management will find it easier to meet targets and to achieve bonus awards. Of course, if upper management always "tightens" the budget plans suggested by middle management, gaming might result. The disadvantage of this gaming is that the planning effectiveness might be reduced. 13-6. Budgeting aids in coordination in a number of ways. By relating sales forecasts to production activities it is possible to reduce the likelihood of over- or under-production. It coordinates production so that plants making subassemblies are making the appropriate number at the right time as needed by the plant making the final assemblies. In addition, the budget process is used to make certain that adequate cash is on hand to finance company activities for the coming period. Guidelines are set for administrative and selling departments so that their costs are commensurate with the company’s income and output goals.
13-2
Chapter 13 - Planning and Budgeting
Solutions to Critical Analysis and Discussion Questions 13-7. The strategic plan provides broad, long-range goals for the company. The budget provides more detail for how to work toward achieving those goals on an annual (or quarterly, or monthly) basis. 13-8. Answers will vary. Two possible reasons are (1) smaller firms have less of a “cushion” and therefore require better estimates of cash and (2) smaller firms might have more difficulty (might need to pay higher rates) borrowing money. 13-9. The earlier the budgeting process is started, the earlier the company will understand some of the problems it must address. In addition, an early start allows managers to work on the budget, step back and think about it, and then revise it. A later start avoids some of the costs of developing budgets only to have them revised as more current data become available. 13-10. Because inventories would be eliminated, the timing of purchases would be closer to the time of production. This would minimize the differences between the timing of cash outflows for materials purchases, work in process and finished goods, and the time when the related costs are recognized in the production budget. 13-11. The purpose of tying spending to budgets is to ensure that the wishes of the legislature are carried out. The problem is that managers cannot take advantage of funds in one budget to use in another area, even if that means lower overall costs to the government.
13-3
Chapter 13 - Planning and Budgeting
13-12. Planning communicates the goals of the organization and can be used to coordinate the activities of different units in the organization. The control purpose of the budget is to provide a mechanism to influence managers, either by limiting resources available or by providing a performance evaluation benchmark. Problems can arise when the manager who is most knowledgeable, and, therefore the best source of information for planning, will be evaluated at the end of the period. Knowing that the information he or she submits for planning purposes will be used to evaluate
13-4
Chapter 13 - Planning and Budgeting
performance can affect the manager’s actions when providing information needed for preparing the budget. 13-13. It is common to start the budgeting process with a sales forecast because sales are most out of control of managers. However, if raw materials were difficult to obtain and a ready market existed for output, especially if prices were regulated, a company might start with a forecast of production. Electricity production might be an example. 13-14. In organizations where spending is literally tied to the budget, managers often spend what remains in the budget as the year ends to avoid losing the funds and potentially leading to lower budgets in the future. 13-15. A positive balance at the end of the budgeting period does not ensure that there is always cash available. An example is when all bills are due on the first of the month and receipts are collected at the end of the month. The net cash flows can be positive even though, during the month, there is a negative cash balance.
13-5
Chapter 13 - Planning and Budgeting
Solutions to Exercises 13-16. (15 min.) Estimate Sales Revenues: SVI. .90 = market volume in the coming year (as a percent of last year) .85 = number of trades in the coming year (as a percent of last year) 1.15 = average commission per trade in the coming year (as a percent of last year) 150,000 trades x $60 per trade x .85 x .90 x 1.15 = $7,917,750. Note: This is not the same as a 25 percent reduction (15% + 10%) because the volume would not have been 10 percent of last year’s volume but 10 percent of the reduced volume of 127,500 trades (= 150,000 x 85%). 13-17. (15 min.) Estimate Sales Revenues: EZ-Credit, Inc. Portfolio Interest Income Amount Rate (thousands) Consumer loans.................................................. $84 million 12% $10,080 Home equity loans.............................................. 60 million 8 4,800 Securities............................................................. 16 million 7 1,120 Total.............................................................. $16,000 13-18. (15 min.) Estimate Sales Revenues: Starlite Company. Market size last year = 45,000 units ÷ 0.3 = 150,000 units Market size next year = 1.10 x 150,000 units = 165,000 units Company share = 25% x 165,000 units = 41,250 units Sales revenue = 41,250 units x $11 per unit = $453,750
13-6
Chapter 13 - Planning and Budgeting
13-19. (15 min.) Estimate Production Levels: Hofmann Corporation. Hoffmann Corporation Production Budget For the Year Ended December 31 (in units) Expected Sales................................................................... 72,000 units Add: Desired ending inventory of finished goods (1 months ÷ 12 months) x 72,000................................... 6,000 Total needs.......................................................................... 78,000 Less: Beginning inventory of finished goods...................... 3,900 Units to be produced........................................................... 74,100 units
13-20. (15 min.) Estimate Sales Levels Using Production Budgets: Sanlax, Inc. Sanlax, Inc. Sales Budget For the Year Ended December 31 (in units) Expected Production........................................................... 200,000 units Subtract: Increase in inventory level............................... 20,000 units Available for sale............................................................. 180,000 units
13-7
Chapter 13 - Planning and Budgeting
13-21. (25 min.) Estimate Production and Materials Requirements: Wyoming Machines. a. Wyoming Machines Casings Plant Production Budget For the Year Ended December 31 (in units) Expected sales................................................................................. 160,000 units Add: Desired ending inventory of finished goods............................. 5,000 Total needs....................................................................................... 165,000 Less: Beginning inventory of finished goods.................................... 20,000 Units to be produced........................................................................ 145,000 units b.
Wyoming Machines Casings Plant Direct Materials Requirements For the Year Ended December 31 (in units) Units to be produced........................................................................... 145,000 Direct materials needed per unit......................................................... x 6 ounces Total production needs (amount per unit times 145,000 units).......... 870,000 ounces Add: Desired ending inventory (2 months ÷ 12 months) x 160,000 x 6................................... 160,000 Total direct materials needs................................................................ 1,030,000 Less: Beginning inventory of materials............................................... 60,000 Direct materials to be purchased........................................................ 970,000 ounces Alternative Method Production (P)—assumes finished goods in inventory reduced to 20,000 units at the end of this year (BB = Beginning Balance; EB = Ending Balance): BB + P = Sales + EB 20,000 + P = 160,000 + 5,000 P = 145,000 units Materials Requirements: BB + P = Usage + EB 60,000 + P = (6 x 145,000) + (2 ÷ 12) x 160,000 x 6 oz. P = 970,000 oz.
13-8
Chapter 13 - Planning and Budgeting
13-22. (25 min.) Estimate Purchases And Cash Disbursements: Westile Company. a. and b.
Westile Company Merchandise Purchases Budget For the Period Ended March 31 (in units) January
Estimated sales................................................... 24,800 Add: Estimated sales inventory........................... 90,400a Total merchandise needs................................ 115,200 Less: Beginning inventory................................... 56,000 Merchandise to be purchased............................. 59,200 Estimated cost per unit........................................ x $2 Total estimated cost of merchandise................... $118,400
February March 35,600 74,000 109,600 90,400 19,200 x $2 $38,400
26,400 62,000 88,400 74,000 14,400 x $2 $28,800
Estimated sales for following three months: 90,400 = 35,600 (February) + 26,400 (March) + 28,400 (April) a
Note: Once the process reaches equilibrium, the estimated purchases (in units) are equal to the budgeted sales three months in the future.
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Chapter 13 - Planning and Budgeting
13-23. (25 min.) Estimate Purchases And Cash Disbursements: White Products. a.
White Products Merchandise Purchase Budget For the Period Ended May 31 (in units) April
May
Estimated sales................................................... 8,600 Add: Estimated ending inventory........................ 7,000 Total merchandise needs.................................... 15,600 Less: Beginning inventory................................... 8,000 Merchandise to be purchased............................. 7,600
7,000 7,400 14,400 7,000 7,400
b. Payments for these purchases are made as follows: Month of Payment
Total
March
April..................................................................... $385,200 $180,000a May...................................................................... 336,600 $180,000 = 40% x $45 x 10,000 units. b $205,200 = 60% x $45 x 7,600 units. c $136,800 = 40% x $45 x 7,600 units. d $199,800 = 60% x $45 x 7,400 units. a
13-10
Month of Delivery April $205,200b 136,800c
May –0– $199,800d
Chapter 13 - Planning and Budgeting
13-24. (15 min.) Estimate Cash Disbursements: Ashland Corporation. Ashland Corporation Schedule of Cash Disbursements For the Period Ended October 31 Payments for purchases prior to September................... Payments for September purchases................................ October purchases........................................................... Total cash disbursements................................................ a $462,000
$ 30,000 165,000 462,000a $657,000
= $660,000 70%
13-25. (15 min.) Estimate Cash Collections: Duluth Company. Duluth Company Schedule of Cash Collections For the Month Ended December 31 Collections in December for sales prior to November........ $ 24,000 November sales.................................................................. 157,500a December sales.................................................................. 75,000b Total cash collections.......................................................... $256,500 a $157,500 = $225,000 x 70% b $75,000 = $300,000 x 25%
13-11
Chapter 13 - Planning and Budgeting
13-26. (20 min.) Estimate Cash Collections: Nassau Products. Nassau Products Schedule of Cash Collections For the Month Ended April 30 April January sales...................................................... $ 11,400a February sales..................................................... 16,800b March sales......................................................... 167,400c April sales............................................................ 75,000d Total cash collections....................................... $270,600 a$11,400
= $285,000 x 4% b$16,800 = $240,000 x 7% c$167,400 = $270,000 x 62% d$75,000 = $300,000 x 25%
13-12
Chapter 13 - Planning and Budgeting
13-27. (30 min.) Estimate Cash Receipts: Scare-2-B-U. a. Revenues are as follows: April..................................................................... $12,000 = 75 occasions x $160 May...................................................................... $7,200 = 45 occasions x $160 June..................................................................... $4,800 = 30 occasions x $160 July...................................................................... $9,600 = 60 occasions x $160 August................................................................. $12,000 = 75 occasions x $160 September........................................................... $26,400 = 165 occasions x $160 b. Cash receipts are as follows: Scare-2-B-U Multiperiod Schedule of Cash Receipts Cash Receipts in Month of: April May June July April sales............................................................ $ 3,600a May sales............................................................ 3,600b $2,160 June sales........................................................... 960c 2,400 $ 1,440 July sales............................................................. 1,920 4,800 $ 2,880 August sales........................................................ 2,400 6,000 September sales................................................. 5,280 ________ ______ _______ Total cash collections
$8,160
______ $6,480
a $3,600
_______ $8,640
= 12,000 x 30% b $3,600 = $7,200 x 50% c $960 = $4,800 x 20% This pattern is repeated for subsequent months.
13-13
$14,160
Total Cash Receipts for Period $ 3,600 5,760 4,800 9,600 8,400 5,280 $37,440
Chapter 13 - Planning and Budgeting
13-28. (30 min.) Estimate Cash Receipts: Varmit-B-Gone. Revenues are as follows: March...... April......... May......... June........ July......... August.....
$28,800 50,400 168,000 320,000 384,000 288,000
= = = = = =
0.6 calls 0.9 calls 1.5 calls 2.5 calls 3.0 calls 2.4 calls
x x x x x x
600 subscribers 700 subscribers 1,400 subscribers 1,600 subscribers 1,600 subscribers 1,500 subscribers
x x x x x x
$80 $80 $80 $80 $80 $80
Collections of these revenues are expected according to the following schedule: Varmit-B-Gone Multiperiod Schedule of Cash Receipts Cash Receipts in Month of: May June July August March sales......................................................... $ 2,304a ($15,000) April sales............................................................ 30,240b $ 4,032 ($27,000) May sales............................................................ 50,400c 100,800 ($97,500) June sales........................................................... 96,000 ($187,500) July sales............................................................. ($225,000) August sales........................................................ _________ ________ ($168,000)
Total Cash Receipts for Period $2,304 34,272
$13,440
164,640
192,000 $ 25,600
313,600
115,200
230,400
345,600
86,400
86,400
Total cash collections....................................... $82,944 $200,832 $320,640 $342,400
$946,816
a $2,304
= 8% x $28,800 b $30,240 = 60% x $50,400 c $50,400 = 30% x $168,000 This pattern is repeated for subsequent months.
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Chapter 13 - Planning and Budgeting
13-29. (30 min.) Prepare Budgeted Financial Statements: Varmit-B-Gone. Varmit-B-Gone Budgeted Income Statement For the Month of September
Calculations Revenues............................................................ $207,360 (90% x 1,500) x (80% x 2.4) x $80 Less manufacturing costs: Variable costs.................................................. $ 17,280 (.72a x $24,000) Maintenance and repair................................... 22,220 (1.01 x $22,000) Depreciation..................................................... 42,000 (no change) Total service costs............................................... $ 81,500 Marketing and administrative: Marketing (variable) ........................................ $ 10,440 (.72a x $14,500) Administrative (fixed) ...................................... 57,750 (1.05 x $55,000) Total marketing and administrative costs............ $ 68,190 Total costs............................................................ $149,690 Operating profit.................................................... $ 57,670 a Ratio of September to August volume: September: (90% x 1,500) x (80% x 2.4) = 2,592 August: 1,500 x 2.4 = 3,600 Ratio = .72 = 2,592 ÷ 3,600 or Ratio = .80 x .90 = .72
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Chapter 13 - Planning and Budgeting
13-30. (15 min.) Prepare Budgeted Financial Statements: Rhodes, Inc. Rhodes, Inc. Budgeted Income Statement August Revenues (240 units @ $675/unit) .................... $162,000 Less Manufacturing costs: Variable........................................................ $ 26,994 Depreciation (fixed) ..................................... 22,950 Total manufacturing costs................................... $ 49,994 Gross profit margin.............................................. $112,056 Less: Marketing and Administrative Fixed costs (cash) ....................................... $61,974 Depreciation (fixed) ..................................... 19,050 Total marketing and administrative costs............ $81,024 Operating profits.................................................. $31,032
13-16
Calculations ($150,000 x 1.20 x .90)
($21,840 x 1.20 x 1.03) (unchanged)
($56,340 x 1.10) (unchanged)
Chapter 13 - Planning and Budgeting
13-31. (15 min.) Prepare Budgeted Financial Statements: Carreras Café. Carreras Café Budgeted Income Statement June Revenues (2,520 meals @ $18.75/meal) .......... $47,250 Less Service costs: Food............................................................. $ 7,623 Labor................................................................. 10,080 Other variable costs..........................................3,450 Fixed service costs .....................................9,600 Total manufacturing costs................................... $ 30,753 Gross profit margin.............................................. $16,497 Less: Marketing and Administrative Marketing (variable) .................................... $ 3,780 Administrative ..............................................5,000 Total marketing and administrative costs............ $8,780 Operating profits.................................................. $7,717
13-17
Calculations ($15 x 4,200 x 0.60 x 1.25)
($11,550 x 0.60 x 1.10) ($16,800 x 0.60) ($5,750 x 0.60) (unchanged)
($6,300 x 0.60) (unchanged)
Chapter 13 - Planning and Budgeting
13-32. (15 min.) Incentives and Sales Forecasts—Ethical Issues: Northwest Hardware. a. One explanation is that Lloyd has better (more specific) local knowledge about conditions in the Montana District that the statistical analysis does not include. A second explanation is that Lloyd wants to “be conservative” in his estimate because he believes his performance evaluation depends on how well the district does relative to this forecast. b. The first explanation is the same as in requirement (a); Lloyd has better information. A second explanation is that Lloyd is trying to justify hiring additional employees to sell in the district and thinks it will be easier to justify if the sales forecast is higher. c. Answers will vary. Gaming the system is common and, given that firms use targets to assess performance, is expected. The answer to this question depends, in part, on what Lloyd’s motives are and how good his information is. For example, if he “knows” that the sales will be $1 million, but reports $900,000 to ensure a higher bonus, that might be considered unethical. If he thinks sales might be $1 million, but knows he will be fired if he fails to meet the target, that would not generally be considered unethical. The controller should consider both forecasts. Both forecasts represent different types of knowledge and the forecasters have different incentives (and biases). By understanding the knowledge incorporated in each forecast and the incentives that the forecasters have, the controller is in a better position to use the information from both forecasts. 13-33. (15 min.) Budget Revisions—Ethical Issues: Galaxy Electronics. a. Elizabeth is probably hoping that because the company is committed to the aircraft guidance program, it will not cut funding for that program and she can protect the other projects, including her favorite. Is this ethical? Answers will vary. It certainly depends on Elizabeth’s motives. If she believes that cutting other programs will truly harm them, more than cuts to the aircraft guidance program, then she is doing what she is paid to do, manage the department. At the other extreme, if she is simply trying to fund her personal project at the expense of the company, that might be considered unethical. b. The managers of the company probably have been promoted from positions similar to Elizabeth’s and understand her motives and incentives. They can adjust the budget after she submits the revision. The final budget will depend on many factors including negotiation skills.
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Chapter 13 - Planning and Budgeting
13-34. (15 min.) Sensitivity Analysis: Sanjana’s Sweet Shoppe. The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the specific row number. For example, to enter the formula for gross margin for unit gross margin of $2 and 15,000 customers, place the cursor in cell c6 and type everything between, not including, the following quotation marks: “=a6*b6”. Notice the range of incomes is quite large, from a loss of $5,900 to a profit of $90,500.
13-35. (15 min.) Sensitivity Analysis: Bay Area Limos. The following is an Excel screenshot of the spreadsheet. In typing the formulas, shown in row 2, do not enter the opening quote (“). Replace the “#” in the formula with the specific row number. For example, to enter the formula for gross margin for unit gross margin of $20 and 2,000 customers, place the cursor in cell c6 and type everything between, not including, the following quotation marks: “=a6*b6”. Notice the range of incomes is quite large, from a loss of $29,000 to a profit of $142,000.
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Chapter 13 - Planning and Budgeting
Solutions to Problems 13-36. (30 min.) Prepare Budgeted Financial Statements: Dancer Components. Dancer Components Budgeted Income Statement For Year 2
Calculations Revenues............................................................ $6,389,700a $5,700,000 x 1.18 x .95 Manufacturing costs: Materials.......................................................... $ 364,762 $336,000 x .92 x 1.18 Other variable costs.........................................329,343 $284,800 x .98 x 1.18 Fixed cash costs..............................................687,960 $655,200 x 1.05 Depreciation (fixed) ......................................... 1,998,000 unchanged Total manufacturing costs................................... $3,380,065 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 996,864 $844,800 x 1.18 Marketing depreciation....................................299,200 unchanged Administrative (fixed, cash) ............................. 1,120,240 $1,018,400 x 1.10 Administrative depreciation..............................149,600 unchanged Total marketing and administrative costs............ $2,565,904 Total costs............................................................ $5,945,969 Operating profits.................................................. $ 443,731 a
Alternatively, $6,389,700 = (1.18 x 300,000 units) x (.95 x $19.00 per unit)
13-20
Chapter 13 - Planning and Budgeting
13-37. (10 min.) Estimate Cash from Operations: Dancer Components. Dancer Components Cash Basis Budgeted Income Statement For Year 2 Revenues............................................................ $6,389,700 Manufacturing costs: Materials.......................................................... $ 364,762 Other variable costs......................................... 329,343 Fixed cash costs.............................................. 687,960 Total manufacturing costs................................... $ 1,382,065 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 996,864 Administrative (fixed, cash) ............................. 1,120,240 Total marketing and administrative costs............ $2,117,104 Total costs............................................................ $3,499,169 Cash operating profits......................................... $2,890,531 Cash from operations would equal revenues less cash costs, which excludes depreciation.
13-21
Chapter 13 - Planning and Budgeting
13-38. (30 min.) Prepare Budgeted Financial Statements: Cameron Parts. Cameron Parts Budgeted Income Statement For Year 2 Calculations Revenues............................................................ $1,328,477 $1,119,000 x 1.12 x 1.06 Manufacturing costs: Materials.......................................................... $ 245,784 $199,500 x 1.12 x 1.10 Variable cash costs.......................................... 291,756 $271,350 x 1.12 x .96 Fixed cash costs.............................................. 100,440 $108,000 x .93 Depreciation (fixed) ......................................... 139,950 $133,500 – $14,550 + $21,000 Total manufacturing costs................................... $777,930 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 159,600 $142,500 x 1.12 Marketing depreciation.................................... 33,900 unchanged Administrative (fixed, cash) ............................. 145,978 $135,165 x 1.08 Administrative depreciation.............................. 12,600 unchanged Total marketing and administrative costs............ $352,078 Total costs............................................................ $1,130,008 Operating profits.................................................. $198,469
13-22
Chapter 13 - Planning and Budgeting
13-39. (10 min.) Estimate Cash from Operations: Cameron Parts. Cameron Parts Cash Basis Budgeted Income Statement For Year 2 Revenues............................................................ $1,328,477 Manufacturing costs: Materials.......................................................... $ 245,784 Variable cash costs.......................................... 291,756 Fixed cash costs.............................................. 100,440 Total manufacturing costs................................... $637,980 Marketing and administrative costs: Marketing (variable, cash) .............................. $ 159,600 Administrative (fixed, cash) ............................. 145,978 Total marketing and administrative costs............ $305,578 Total costs............................................................ $943,558 Cash operating profits......................................... $384,919 Cash from operations would equal revenues less cash costs, which excludes depreciation.
13-23
Chapter 13 - Planning and Budgeting
13-40. (25 min.) Prepare A Production Budget: Chander, Inc. Chander, Inc. Production Budget Coming Year (in units) Expected Sales......................................................... 270,000 units Add: Desired ending inventory of finished goods..... 105,000 Total needs................................................................ 375,000 Less: Beginning inventory of finished goods............ 60,000 Units to be produced................................................. 315,000 units Alternative method: First, compute the estimated production: P = Sales + EB – BB P = Sales + (105,000 – 60,000) = 270,000 + 45,000 = 315,000 units Next estimate the costs: Direct materials Cotton 315,000 x 1 yard x $6.00 x 1.20..............$2,268,000 Canvas 315,000 x 0.2 yards x $20.00................ 1,260,000 Total direct materials........................................ $3,528,000 Direct labor: 315,000 x 0.5 hr. x $32.................................... $5,040,000 Overhead: Indirect labor........................................................ 315,000 x $1.00 $ 315,000 Indirect materials................................................. 315,000 x $.30 94,500 Power................................................................... 315,000 x $.60 189,000 Equipment costs.................................................. 300,000 x $2.50 750,000 Building occupancy............................................. 300,000 x $1.60 480,000 Total overhead............................................... $ 1,828,500 Total budgeted manufacturing costs...................$10,396,500
13-24
Chapter 13 - Planning and Budgeting
13-41. (25 min.) Prepare A Production Budget: Lotus Fixtures, Inc. Lotus Fixtures, Inc. Production Budget Year 2 (in units) Expected Sales......................................................... 420,000 units Add: Desired ending inventory of finished goods..... 20,000 Total needs................................................................ 440,000 Less: Beginning inventory of finished goods............ 40,000 Units to be produced................................................. 400,000 units Alternative method: First, compute the estimated production: P = Sales + EB – BB P = Sales + (20,000 – 40,000) = 420,000 – 20,000 = 400,000 units Next estimate the costs: Direct materials Steel 400,000 x 2 pounds x $0.40 x 0.80........... Alloy 400,000 x 0.5 pounds x $3.00.................... Total direct materials........................................ Direct labor: 400,000 x 0.01 hr. x $30 x 1.10....................... Overhead: Indirect materials................................................. 400,000 x $0.50 Indirect labor........................................................ 400,000 x $0.80 Utilities................................................................. 400,000 x $0.40 Plant and equipment depreciation...................... 500,000 x $1.00 x 1.05 Miscellaneous...................................................... 500,000 x $0.70 Total overhead............................................... Total budgeted manufacturing costs...................
13-25
$256,000 600,000 $856,000 $132,000 $ 200,000 320,000 160,000 525,000 350,000 $1,555,000 $2,543,000
Chapter 13 - Planning and Budgeting
13-42. (25 min.) Sales Expense Budget: Capstone Corporation.
Item January Adjustments Sales commissions............................................. $607,500 x 1.05 x 1.10 = Sales staff salaries.............................................. 144,000 x 1.04 = Telephone & mailing............................................ 72,900 x 1.08 x 1.10 = Building lease payment....................................... 90,000 (unchanged) = Utilities................................................................. 18,450 x 1.15 = Packaging & delivery........................................... 123,300 x 1.10 = Depreciation........................................................ 56,250 + ($85,500 ÷ 120 months) = Marketing consultants......................................... –0– + $157,500 = Total budgeted costs. .
13-26
Budgeted Typical Month $701,663 149,760 86,605 90,000 21,218 135,630 56,963 157,500 $1,399,339
Chapter 13 - Planning and Budgeting
13-43. (30 min.) Budgeted Purchases And Cash Flows: Delhi, Inc. a. $900,000 BB + P = Sales + EB (130% x 47,600) + P = 47,600 + (130% x 45,600) 61,880 + P = 47,600 + 59,280 P = 47,600 + 59,280 – 61,880 = 45,000 units 45,000 x $20 = $900,000 b. $974,400 BB + P = Sales + EB (130% x 45,600) + P = 45,600 + (130% x 48,000) 59,280 + P = 45,600 + 62,400 P = 45,600 + 62,400 – 59,280 = 48,720 units 48,720 x $20 = $974,400 c. $1,318,776 60% 25% 9%
x $1,452,000 x 97% x $1,452,000 x $1,416,000
= = =
$845,064 363,000 127,440 $1,335,504
13-27
Chapter 13 - Planning and Budgeting
13-43. (continued) d. $1,141,516 September cash disbursement. August purchases paid in September:
$900,000* x 46% = $414,000
August selling general and administrative expenses paid in September: [($1,428,000 x 15%) – $8,000] x 46% = $94,852 September purchases paid in September: $974,400** x 54% = $526,176 September selling, general and administrative expenses paid in September: [($1,368,000 x 15%) – $8,000] x 54% = $106,488 $414,000 + $94,852 + $526,176 + $106,488 = $1,141,516 *From part a. of this problem **From part b. of this problem e. 49,040 BB + P = Sales + EB (130% x 48,000) + P = 48,000 + (130% x 48,800) P = 48,000 + 63,440 – 62,400 = 49,040 units
13-28
Chapter 13 - Planning and Budgeting
13-44. (40 min.) Comprehensive Budget Plan: Brighton, Inc. a. (1)
Brighton, Inc. Schedule Computing Production Budget (Units) For April, May, and June
Budgeted sales—Units........................................ Inventory required at end of montha................... Total to be accounted for..................................... Less inventory on hand at beginning of month... Budgeted production—Units............................... a April:
May: June:
(2)
April 600,000 90,000 690,000 120,000 570,000
May 450,000 120,000 570,000 90,000 480,000
450,000 x .2 = 90,000 600,000 x .2 = 120,000 600,000 x .2 = 120,000 Schedule Computing Raw Materials Inventory Purchase Budget (Pounds) For April and May April
Budgeted production—Pounds (1/4 lb. per Unit) a...... 142,500 .................................................................................... Inventory required at end of monthb........................... 48,000 Total to be accounted for............................................ 190,500 Less inventory on hand at beginning of month.......... 57,000 Balance required by purchase.................................... 133,500 Budgeted purchases—Pounds (Based on Minimum Shipments of 62,500 lbs. each) a April:
570,000 x .25 = 142,500 May: 480,000 x .25 = 120,000
b April:
480,000 x .4 x .25 = 48,000 May: 600,000 x .4 x .25 = 60,000
c
June 600,000 120,000 720,000 120,000 600,000
102,000 = 57,000 + 187,500 – 142,500
13-29
187,500
May 120,000 60,000 180,000 102,000c 78,000 125,000
Chapter 13 - Planning and Budgeting
13-44. (continued) b. Brighton, Inc. Projected Income Statement For the Month of May Sales (450,000 Units at $4) ...................................................... $1,800,000 Less: Cash discounts on Sales................................................. $ 18,000 Estimated bad debts (1/2 percent of gross sales) ................... 9,000 27,000 Net Sales................................................................................... $1,773,000 Cost of Sales: $1,100,000 Variable cost per unit (= x 450,000 Units) ................................................ $990,000 500,000 Fixed Cost................................................................................ 400,000 1,390,000 Gross profit on sales................................................................... $ 383,000 Expenses: Selling (10 percent of gross sales) .........................................$180,000 Administrative ($165,000 per month) ..................................... 165,000 Interest expense (.01 x $500,000) ......................................... 5,000 350,000 Operating profit........................................................................... $ 33,000
13-30
Chapter 13 - Planning and Budgeting
13-45. (60 min.) Comprehensive Budget Plan: Panther Corporation Panther Corporation Budgeted Income Statement (in thousands) Actual For the Year Ended December 31, (Year 1)
Revenue: Sales............................................................ $1,800,000 Other income................................................ 60,000 Total Revenue...........................................$1,860,000 Expenses: Cost of goods manufactured & sold: Materials....................................................... $ 528,000 Direct labor................................................... 540,000 Variable overhead........................................ 324,000 Fixed overhead 48,000 (Depreciation and other).......................... $1,440,000 Beginning inventory......................................... 192,000 $1,632,000 Ending inventory.............................................. 192,000 $1,440,000 Marketing: Salaries........................................................ $ 54,000 Commissions................................................ 60,000 Promotions and advertising......................... 126,000 240,000 Administrative: Salaries........................................................ $ 56,000 Travel............................................................ 8,000 Office costs.................................................. 32,000 96,000 Income taxes (credit) ...................................... 33,600 Total expenses.............................................$1,809,600 Operating profit (loss) ......................................... $ 50,400 a
Budgeted For the Year Ended December 31, (Year 2) $2,400,000 36,000
$2,436,000
$ 852,000 872,000 520,000 51,000 $2,295,000 192,000 $2,487,000 459,000a $2,028,000 $
$
64,000 80,000 180,000 64,000 10,000 36,000
324,000
110,000 (10,400)a $2,451,600 $ (15,600)
See notes to the balance sheet.
CMA adapted Note: Actual for December 31, Last Year not required but included for comparison.
13-31
Chapter 13 - Planning and Budgeting
13-45. (continued) Panther Corporation Budgeted Balance Sheet (in thousands) Budgeted December 31, Year 2
Current Assets Cash................................................................. Accounts receivable......................................... Inventory.......................................................... Income tax receivable...................................... Total current assets...................................... Plant and equipment........................................... Less: Accumulated depreciation..................... Total assets.................................................. Current liabilities Accounts payable............................................. Accrued payable.............................................. Notes payable.................................................. Total current liabilities................................... Shareholders’ equity Common stock................................................. Retained earnings............................................ Total shareholders’ equity............................ Total liabilities and shareholders’ equity...... Notes on the next page:
13-32
$ 4,800 320,000 459,000a 10,400b 520,000 164,000
$180,000 93,000 200,000
280,000 397,200c
$794,200 356,000 $1,150,200
$473,000
677,200 $1,150,200
Chapter 13 - Planning and Budgeting
13-45. (continued) a Inventory
Units:
$1,440,000 = 40,000 units 300,000 Added to inventory 450,000 – 400,000............... = 50,000 units Ending inventory.................................................. 90,000 units Cost: Manufacturing costs........................................$2,295,000 Units manufactured.......................................... 450,000 Cost per unit ($2,295,000 450,000) ............ $5.10 Ending units..................................................... x 90,000 Cost of ending inventory.................................. $459,000 Beginning inventory $192,000
b Income
tax: Sales & other income.......................................... Cost of goods sold.............................................. $2,028,000 Selling expense................................................... 324,000 General & administrative expense...................... 110,000 Total cost.......................................................... Tax loss............................................................... Tax rate................................................................ Tax receivable.....................................................
c
$2,436,000
$2,462,000 $ (26,000) 40% $ 10,400
Ending retained earnings = Expected beginning balance plus net income – Dividends = $432,800 – 15,600 – $20,000.
13-33
Chapter 13 - Planning and Budgeting
Solutions to Integrative Case 13-46. (40 min.) Prepare Cash Budget for Service Organization: Cortez Beach Yacht Club. The income statement is on a cash basis, hence we start with a budgeted income statement. a.
Cortez Beach Yacht Club Budgeted Statement of Income (Cash Basis) For the Year 10
Cash revenue Annual membership fees.................................... $710,000 x 1.1 x 1.03
$804,430 .............................................................. Lesson and class fees .................................... (468,000 ÷ 360,000) x $468,000) $608,400 Miscellaneous ................................................. (4,000 ÷ 3,000) x $4,000) 5,333 613,733 Total cash received .................................................................................................................... $1,418,163 Cash costs Manager’s salary and benefits ($72,000 x 1.15) ..................................... Regular employees’ wages and benefits ($380,000 x 1.15) ................... Lesson and class employee wages and benefits (given)......................... Supplies ($32,000 x 1.25) ........................................................................ Utilities (heat and light) ($44,000 x 1.25) ................................................. Mortgage interest ($720,000 x .06) a......................................................... Miscellaneous ($4,000 x 1.25) ................................................................. Total cash expenses.............................................................................. Cash income................................................................................................. Additional Cash Flows Cash payments: Mortgage payment.................................................................................... Accounts payable balance at 10/31/Year 9.............................................. Accounts payable on equipment at 10/31/Year 9..................................... Planned new equipment purchase........................................................... Total cash payments.............................................................................. Cash inflows from income statement............................................................ Beginning cash balance (including petty cash)............................................ Cash available for working capital and to acquire property.........................
aOn
$ 82,800 437,000 604,650 40,000 55,000 43,200 5,000 $1,267,650 $ 150,513
$ 60,000 5,000 30,000 50,000 $ 145,000 150,513 14,600 $ 20,113
November 1, Year 9, the unpaid balance after annual payment is $720,000, computed as follows: Balances after the $60,000 annual payment November 1, Year 6 = $900,000; November 1, Year 7 = $840,000; November 1, Year 8 = $780,000; November 1, Year 9 = $720,000 and as given in the problem.
13-34
Chapter 13 - Planning and Budgeting
13-46. (continued) b. Operating problems that Cortez Beach Yacht Club could experience in Year 10 include:
The lessons and classes contribution to cash decreased because the projected wage increase for lesson and class employees is not made up by the increased volume of lessons and classes.
Operating costs are increasing faster than revenues from membership fees.
CBYC seems to have a cash management problem. Although there appears to be enough cash generated for the club to meet its obligations, there are past-due amounts on equipment and regular accounts. Perhaps the cash balance might not be large enough for day-to-day operating purposes.
c. The manager’s concern with regard to the Board’s expansion goals is justified. The Year 10 budget projections show only a minimal increase in the cash balance. The total cash available is well short of the cash needed for the land purchase over and above the club’s working capital needs. However, it appears that the new equipment purchases can be made on an annual basis. If the Board desires to purchase the adjoining property, it is going to have to consider significant increases in fees or other methods of financing such as membership bonds, or additional mortgage debt.
13-35
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