MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 22 BUSINESS PLANNING I Questions Strategy, plans, and budgets are interrelated and affect one another Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives Strategy analysis underlies both long-run and short-run planning In turn, these plans lead to the formulation of budgets Budgets provide feedback to managers about the likely effects of their strategic plans Managers use this feedback to revise their strategic plans Budgeted performance is better than past performance for judging managers Why? Mainly because the inefficiencies included in past results can be detected and eliminated in budgeting Also, new opportunities in the future, which did not exist in the past, may be ignored if past performance is used A company that shares its own internal budget information with other companies can gain multiple benefits One benefit is better coordination with suppliers, which can reduce the likelihood of supply shortages Better coordination with customers can result in increased sales as demand by customers is less likely to exceed supply Better coordination across the whole supply chain can also help a company reduce inventories and thus reduce the costs of holding inventories The sales forecast is typically the cornerstone for budgeting, because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales Sensitivity analysis adds an extra dimension to budgeting It enables managers to examine how budgeted amounts change with changes in the underlying assumptions This assists managers to monitor those assumptions that are most critical to a company attaining its budget or make timely adjustments to plans when appropriate Factors reducing the effectiveness of budgeting of companies include: Lack of a well-defined strategy, 22-1 Chapter 22 Business Planning Lack of a clear linkage of strategy to operational plans, Lack of individual accountability for results, and Lack of meaningful performance measures II Problems Problem (Budgeted Income Statement) Globalcom Company Budgeted Income Statement for 2006 (in thousands) Net sales P6,996 Equipment (P6,000 x 1.06 x 1.10) 1,908 Maintenance contracts (P1,800 x 1.06) Total net sales Cost of goods sold (P4,600 x 1.03 x 1.06) Gross margin Operating costs: Marketing costs (P600 + P250) 850 Distribution costs (P150 x 1.06) 159 Customer maintenance costs (P1,000 + P130) 1,130 Administrative costs 900 Total operating costs Operating income P8,904 5,022 3,882 3,039 P 843 Problem (Comprehensive Operating Budget) Requirement Schedule 1: Revenue Budget For the Year Ended December 31, 2006 Skateboards Total Units 1,000 Selling Price P450 Requirement Schedule 2: Production Budget (in Units) for the Year Ended December 31, 2006 22-2 Total Revenues P450,000 Business Planning Chapter 22 Skateboards 1,000 200 1,200 100 1,100 Budgeted unit sales (Schedule 1) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Requirement Schedule 3A: Direct Materials Usage Budget For the Year Ended December 31, 2006 Wood Physical Budget To be used in production (Wood: 1,100 x 5.00 b.f Fiberglass: 1,100 x 6.00 yards) Fiberglass Total 5,500 6,600 Cost Budget Available from beginning inventory (Wood: 2,000 b.f x P28.00 Fiberglass: 1,000 b.f x 4.80) To be used from purchases this period (Wood: (5,500 – 2,000) x P30.00 Fiberglass: (6,600 – 1,000) x P5.00) Total cost of direct materials to be used 5,500 6,600 56,000 4,800 105,000 P161,000 28,000 P32,800 P193,800 Schedule 3B: Direct Materials Purchases Budget For the Year Ended December 31, 2006 Wood Physical Budget Production usage (from Schedule 3A) Add target ending inventory Total requirements Deduct beginning inventory Purchases Cost Budget (Wood: 5,000 x P30.00 Fiberglass: 7,600 x P5.00) 5,500 1,500 7,000 2,000 5,000 P150,000 P150,000 Requirement Schedule 4: Direct Manufacturing Labor Budget For the Year Ended December 31, 2006 22-3 Fiberglass Total 6,600 2,000 8,600 1,000 7,600 P38,000 P38,000 P188,000 Chapter 22 Business Planning Labor Category Manufacturing labor Cost Driver Units 1,100 DML Hours per Driver Unit Total Hours Wage Rate Total 5.00 5,500 P25.00 P137,500 Requirement Schedule 5: Manufacturing Overhead Budget For the Year Ended December 31, 2006 At Budgeted Levels of 5,500 Direct Manufacturing Labor-Hours Variable manufacturing overhead costs (P7.00 x 5,500) Fixed manufacturing overhead costs Total manufacturing overhead costs P 38,500 66,000 P104,500 Requirement Budgeted manufacturing overhead rate: P104,500 5,500 = P19.00 per hour Requirement Budgeted manufacturing overhead cost per output unit: P104,500 = 1,100 = P95.00 per output unit Requirement Schedule 6A: Computation of Unit Costs of Manufacturing Finished Goods in 2006 22-4 Business Planning Chapter 22 Cost per Unit of Inputa Direct materials Wood Fiberglass Direct manufacturing labor Total manufacturing overhead a b P30.00 5.00 25.00 Inputsb 5.00 6.00 5.00 Total P150.00 30.00 125.00 95.00 P400.00 cost is per board foot, yard or per hour inputs is the amount of input per board Requirement Schedule 6B: Ending Inventory Budget December 31, 2006 Units Direct materials Wood Fiberglass Finished goods Skateboards Total Ending Inventory Cost per Unit Total 1,500 2,000 P 30.00 5.00 P 45,000 10,000 200 400.00 80,000 P135,000 Requirement 10 Schedule 7: Cost of Goods Sold Budget for the year Ended December 31, 2006 From Schedule Beginning finished goods inventory, January 1, 2006 Direct materials used Direct manufacturing labor Manufacturing overhead Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, Given 3A Total P 37,480 P193,800 137,500 104,500 435,800 473,280 22-5 Chapter 22 Business Planning December 31, 2006 Cost of goods sold 6B 80,000 P393,280 Requirement 11 Budgeted Income Statement for Pacific for the Year Ended December 31, 2006 Revenues Schedule Costs Cost of goods sold Schedule Gross margin Operating costs Marketing costs (P250 x 30) Other costs Operating income III Multiple Choice Questions A B C D D 10 A B D A C 11 12 13 14 15 22-6 D D B C A P450,000 393,280 56,720 P 7,500 30,000 37,500 P 19,220 .. .Chapter 22 Business Planning Lack of a clear linkage of strategy to operational plans, Lack of individual accountability for results, and Lack of meaningful performance... 2: Production Budget (in Units) for the Year Ended December 31, 2006 22- 2 Total Revenues P450,000 Business Planning Chapter 22 Skateboards 1,000 200 1,200 100 1,100 Budgeted unit sales (Schedule... Manufacturing Labor Budget For the Year Ended December 31, 2006 22- 3 Fiberglass Total 6,600 2,000 8,600 1,000 7,600 P38,000 P38,000 P188,000 Chapter 22 Business Planning Labor Category Manufacturing labor