To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER MASTER BUDGET AND RESPONSIBILITY ACCOUNTING 6-1 a b c d The budgeting cycle includes the following elements: Planning the performance of the company as a whole as well as planning the performance of its subunits Management agrees on what is expected Providing a frame of reference, a set of specific expectations against which actual results can be compared Investigating variations from plans If necessary, corrective action follows investigation Planning again, in light of feedback and changed conditions 6-2 The master budget expresses management’s operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements It is the initial plan of what the company intends to accomplish in the period 6-3 Strategy, plans, and budgets are interrelated and affect one another Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives Strategic 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 6-4 We agree that budgeted performance is a better criterion than past performance for judging managers, because inefficiencies included in past results can be detected and eliminated in budgeting Also, future conditions may be expected to differ from the past, and these can also be factored into budgets 6-5 Production and marketing traditionally have operated as relatively independent business functions Budgets can assist in reducing conflicts between these two functions in two ways Consider a beverage company such as Coca-Cola or Pepsi-Cola: Communication Marketing could share information about seasonal demand with production Coordination Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer 6-6 In many organizations, budgets impel managers to plan Without budgets, managers drift from crisis to crisis Research also shows that budgets can motivate managers to meet targets and improve their performance Thus, many top managers believe that budgets meet the cost-benefit test 6-7 A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended A four-quarter rolling budget for 2011 is superseded by a four-quarter rolling budget for April 2011 to March 2012, and so on 6-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-8 The steps in preparing an operating budget are as follows: Prepare the revenues budget Prepare the production budget (in units) Prepare the direct material usage budget and direct material purchases budget Prepare the direct manufacturing labor budget Prepare the manufacturing overhead budget Prepare the ending inventories budget Prepare the cost of goods sold budget Prepare the nonmanufacturing costs budget Prepare the budgeted income statement 6-9 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 6-10 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 in monitoring those assumptions that are most critical to a company in attaining its budget and allows them to make timely adjustments to plans when appropriate 6-11 Kaizen budgeting explicitly incorporates continuous improvement anticipated during the budget period into the budget numbers 6-12 Nonoutput-based cost drivers can be incorporated into budgeting by the use of activitybased budgeting (ABB) ABB focuses on the budgeted cost of activities necessary to produce and sell products and services Nonoutput-based cost drivers, such as the number of parts, number of batches, and number of new products can be used with ABB 6-13 The choice of the type of responsibility center determines what the manager is accountable for and thereby affects the manager’s behavior For example, if a revenue center is chosen, the manager will focus on revenues, not on costs or investments The choice of a responsibility center type guides the variables to be included in the budgeting exercise 6-14 Budgeting in multinational companies may involve budgeting in several different foreign currencies Further, management accountants must translate operating performance into a single currency for reporting to shareholders, by budgeting for exchange rates Managers and accountants must understand the factors that impact exchange rates, and where possible, plan financial strategies to limit the downside of unexpected unfavorable moves in currency valuations In developing budgets for operations in different countries, they must also have good understanding of political, legal and economic issues in those countries 6-15 No Cash budgets and operating income budgets must be prepared simultaneously In preparing their operating income budgets, companies want to avoid unnecessary idle cash and unexpected cash deficiencies The cash budget, unlike the operating income budget, highlights periods of idle cash and periods of cash shortage, and it allows the accountant to plan cost effective ways of either using excess cash or raising cash from outside to achieve the company’s operating income goals 6-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-16 (15 min.) Sales budget, service setting 2011 Volume 12,200 16,400 Rouse & Sons Radon Tests Lead Tests At 2011 Selling Prices $290 $240 Expected 2012 Change in Volume +6% -10% Expected 2012 Volume 12,932 14,760 Rouse & Sons Sales Budget For the Year Ended December 31, 2012 Radon Tests Lead Tests Selling Price $290 $240 Units Sold 12,932 14,760 Total Revenues $3,750,280 3,542,400 $7,292,680 Rouse & Sons Radon Tests Lead Tests 2011 Volume 12,200 16,400 Planned 2012 Selling Prices $290 $230 Expected 2012 Change in Volume +6% -7% Expected 2012 Volume 12,932 15,252 Rouse & Sons Sales Budget For the Year Ended December 31, 2012 Radon Tests Lead Tests Selling Price $290 $230 Units Sold 12,932 15,252 Total Revenues $3,750,280 3,507,960 $7,258,240 Expected revenues at the new 2012 prices are $7,258,240, which is lower than the expected 2012 revenues of $7,292,680 if the prices are unchanged So, if the goal is to maximize sales revenue and if Jim Rouse’s forecasts are reliable, the company should not lower its price for a lead test in 2012 6-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-17 (5 min.) Sales and production budget Budgeted sales in units Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 6-18 (5 min.) 200,000 25,000 225,000 15,000 210,000 Direct materials purchases budget Direct materials to be used in production (bottles) Add target ending direct materials inventory (bottles) Total requirements (bottles) Deduct beginning direct materials inventory (bottles) Direct materials to be purchased (bottles) 6-19 2,500,000 80,000 2,580,000 50,000 2,530,000 (10 min.) Budgeting material purchases Production Budget: Finished Goods (units) 45,000 18,000 63,000 16,000 47,000 Budgeted sales Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct Materials Purchases Budget: Direct materials needed for production (47,000 Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased 6-4 3) Direct Materials (in gallons) 141,000 50,000 191,000 60,000 131,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-20 (30 min.) Revenues and production budget 12-ounce bottles 4-gallon units a b Selling Price $0.25 1.50 Units Sold 4,800,000a 1,200,000b Total Revenues $1,200,000 1,800,000 $3,000,000 400,000 × 12 months = 4,800,000 100,000 × 12 months = 1,200,000 Budgeted unit sales (12-ounce bottles) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced 4,800,000 600,000 5,400,000 900,000 4,500,000 Beginning = Budgeted + Target Budgeted inventory sales ending inventory production = 1,200,000 + 200,000 1,300,000 = 100,000 4-gallon units 6-21 (30 min.) Budgeting: direct material usage, manufacturing cost and gross margin Direct Material Usage Budget in Quantity and Dollars Material Wool Physical Units Budget Direct materials required for Blue Rugs (200,000 rugs × 36 skeins and 0.8 gal.) 7,200,000 skeins Cost Budget Available from beginning direct materials inventory: (a) Wool: 458,000 skeins $ 961,800 Dye: 4,000 gallons To be purchased this period: (b) Wool: (7,200,000 - 458,000) skeins × $2 per skein 13,484,000 Dye: (160,000 – 4,000) gal × $6 per gal _ Direct materials to be used this period: (a) + (b) $14,445,800 6-5 Dye Total 160,000 gal $ 23,680 936,000 $ 959,680 $15,405,480 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com $31, 620, 000 Weaving budgeted = = $2.55 per DMLH overhead rate 12, 400, 000 DMLH Dyeing budgeted = $17, 280, 000 = $12 per MH overhead rate 1, 440, 000 MH Budgeted Unit Cost of Blue Rug Cost per Unit of Input $2 13 12 2.55 Wool Dye Direct manufacturing labor Dyeing overhead Weaving overhead Total Input per Unit of Output 36 skeins 0.8 gal 62 hrs 7.21 mach-hrs 62 DMLH Total $ 72.00 4.80 806.00 86.40 158.10 $1127.30 0.2 machine hour per skein 36 skeins per rug = 7.2 machine-hrs per rug Revenue Budget Blue Rugs Blue Rugs Selling Units Price Total Revenues 200,000 $2,000 $400,000,000 185,000 $2,000 $370,000,000 5a Sales = 200,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($806 × 200,000) Dyeing overhead ($86.40 × 200,000) Weaving overhead ($158.10 × 200,000) Cost of goods available for sale Deduct ending finished goods inventory Cost of goods sold 6-6 Total $ $15,405,480 161,200,000 17,280,000 31,620,000 225,505,480 225,505,480 $225,505,480 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 5b Sales = 185,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($806 × 200,000) Dyeing overhead ($86.40 × 200,000) Weaving overhead ($158.10 × 200,000) Cost of goods available for sale Deduct ending finished goods inventory ($1,127.30 × 15,000) Cost of goods sold Total $ $ 15,405,480 161,200,000 17,280,000 31,620,000 225,505,480 225,505,480 16,909,500 $208,595,980 Revenue Less: Cost of goods sold Gross margin 200,000 rugs sold $400,000,000 225,505,480 $ 174,494,520 185,000 rugs sold $370,000,000 208,595,980 $ 161,404,020 6-22 (15–20 min.) Revenues, production, and purchases budget 900,000 motorcycles Budgeted sales (motorcycles) Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Direct materials to be used in production, 880,000 × (wheels) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased (wheels) Cost per wheel in yen Direct materials purchase cost in yen 400,000 yen = 360,000,000,000 yen 900,000 80,000 980,000 100,000 880,000 1,760,000 60,000 1,820,000 50,000 1,770,000 16,000 28,320,000,000 Note the relatively small inventory of wheels In Japan, suppliers tend to be located very close to the major manufacturer Inventories are controlled by just-in-time and similar systems Indeed, some direct materials inventories are almost nonexistent 6-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-23 (15-25 min.) Budgets for production and direct manufacturing labor Roletter Company Budget for Production and Direct Manufacturing Labor for the Quarter Ended March 31, 2013 Budgeted sales (units) Add target ending finished goods inventorya (units) Total requirements (units) Deduct beginning finished goods inventory (units) Units to be produced Direct manufacturing labor-hours (DMLH) per unit Total hours of direct manufacturing labor time needed Direct manufacturing labor costs: Wages ($10.00 per DMLH) Pension contributions ($0.50 per DMLH) Workers’ compensation insurance ($0.15 per DMLH) Employee medical insurance ($0.40 per DMLH) Social Security tax (employer’s share) ($10.00 0.075 = $0.75 per DMLH) Total direct manufacturing labor costs January 10,000 February 12,000 March 8,000 Quarter 30,000 16,000 26,000 12,500 24,500 13,500 21,500 13,500 43,500 16,000 10,000 16,000 8,500 12,500 9,000 16,000 27,500 × 2.0 × 2.0 1.5 20,000 17,000 13,500 50,500 $200,000 $170,000 $135,000 $505,000 10,000 8,500 6,750 25,250 3,000 2,550 2,025 7,575 8,000 6,800 5,400 20,200 15,000 12,750 10,125 37,875 $236,000 $200,600 $159,300 $595,900 a 100% of the first following month’s sales plus 50% of the second following month’s sales Note that the employee Social Security tax of 7.5% is irrelevant Such taxes are withheld from employees’ wages and paid to the government by the employer on behalf of the employees; therefore, the 7.5% amounts are not additional costs to the employer 6-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-24 (20–30 min.) Activity-based budgeting This question links to the ABC example used in the Problem for Self-Study in Chapter and to Question 5-24 (ABC, retail product-line profitability) Cost Hierarchy Activity Ordering $90 14; 24; 14 Delivery $82 12; 62; 19 Shelf-stocking $21 16; 172; 94 Customer support $0.18 4,600; 34,200; 10,750 Total budgeted indirect costs Soft Drinks Batch-level Fresh Produce $1,260 Batch-level Output-unitlevel Output-unitlevel Total $ 2,160 $1,260 $ 4,680 984 5,084 1,558 7,626 336 3,612 1,974 5,922 6,156 $17,012 1,935 $6,727 8,919 $27,147 828 $3,408 12.5% Percentage of total indirect costs Packaged Food 62.7% 24.8% Refer to the last row of the table in requirement Fresh produce, which probably represents the smallest portion of COGS, is the product category that consumes the largest share (62.7%) of the indirect resources Fresh produce demands the highest level of ordering, delivery, shelf-stocking and customer support resources of all three product categories—it has to be ordered, delivered and stocked in small, perishable batches, and supermarket customers often ask for a lot of guidance on fresh produce items An ABB approach recognizes how different products require different mixes of support activities The relative percentage of how each product area uses the cost driver at each activity area is: Activity Ordering Delivery Shelf-stocking Customer support Cost Hierarchy Batch-level Batch-level Output-unit-level Output-unit-level Soft Drinks 27% 13 Fresh Packaged Produce Food 46% 27% 67 20 61 33 69 22 Total 100% 100 100 100 By recognizing these differences, FS managers are better able to budget for different unit sales levels and different mixes of individual product-line items sold Using a single cost driver (such as COGS) assumes homogeneity in the use of indirect costs (support activities) across product lines which does not occur at FS Other benefits cited by managers include: (1) better identification of resource needs, (2) clearer linking of costs with staff responsibilities, and (3) identification of budgetary slack 6-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-25 (20–30 min.) Kaizen approach to activity-based budgeting (continuation of 6-24) Activity Ordering Delivery Shelf-stocking Customer support Cost Hierarchy Batch-level Batch-level Output-unit-level Output-unit-level Budgeted Cost-Driver Rates January February March $90.00 $89.6400 $89.2814 82.00 81.6720 81.3453 21.00 20.9160 20.8323 0.18 0.1793 0.1786 The March 2011 rates can be used to compute the total budgeted cost for each activity area in March 2011: Activity Ordering $89.2814 14; 24; 14 Delivery $81.3453 12; 62; 19 Shelf-stocking $20.8323 16; 172; 94 Customer support $0.1786 4,600; 34,200; 10,750 Total Cost Hierarchy Soft Drinks Batch-level $1,250 Batch-level Fresh Produce Packaged Food Total $ 2,143 $1,250 $ 4,643 976 5,043 1,546 7,565 Output-unit-level 333 3,583 1,958 5,874 Output-unit-level 821 $3,380 6,108 $16,877 1,920 $6,674 8,849 $26,931 A kaizen budgeting approach signals management’s commitment to systematic cost reduction Compare the budgeted costs from Question 6-24 and 6-25 Question 6-24 Question 6-25 (Kaizen) Ordering $4,680 4,643 Delivery $7,626 7,565 ShelfStocking $5,922 5,874 Customer Support $8,919 8,849 The kaizen budget number will show unfavorable variances for managers whose activities not meet the required monthly cost reductions This likely will put more pressure on managers to creatively seek out cost reductions by working ―smarter‖ within FS or by having ―better‖ interactions with suppliers or customers One limitation of kaizen budgeting, as illustrated in this question, is that it assumes small incremental improvements each month It is possible that some cost improvements arise from large discontinuous changes in operating processes, supplier networks, or customer interactions Companies need to highlight the importance of seeking these large discontinuous improvements as well as the small incremental improvements 6-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-37 (40–50 min.) Cash budgeting Itami Wholesale Co Statement of Budgeted Cash Receipts and Disbursements For the Months of December 2011 and January 2012 Cash balance, beginning Add receipts: Collections of receivables (Schedule 1) (a) Total cash available for needs Deduct disbursements: For merchandise purchases (Schedule 2) For variable costs (Schedule 3) For fixed costs (Schedule 3) (b) Total disbursements Cash balance, end of month (a – b) December 2011 January 2012 $ 88,000 $ 18,470 295,250 383,250 265,050 283,520 $291,280 66,000 7,500 364,780 $ 18,470 $223,040 50,000 7,500 280,540 $ 2,980 Under the current projections, the cash balance as of January 31, 2012, is $2,980, which is not sufficient to enable repayment of the $100,000 note Schedule 1: Collections of Receivables Collections in Oct Sales December $39,200a January a d 0.14 × $280,000 0.14 × $320,000 b e Nov Sales Dec Sales Jan Sales Total $96,000b $160,050c $295,250 $44,800d $ 99,000e $121,250f $265,050 0.30 × $320,000 c 0.50 × $330,000 × 97 0.30 × $330,000 f 0.50 × $250,000 × 97 6-33 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Schedule 2: Payments for Merchandise December 750a 3,300 4,050 815b 3,235 $258,800 Target ending inventory (in units) Add units sold (sales ÷ $100) Total requirements Deduct beginning inventory (in units) Purchases (in units) Purchases in dollars (units × $80) Cash disbursements: For December: accounts payable; 60% of current month’s purchases For January: 40% of December’s purchases January 740c 2,500 3,240 750 2,490 $199,200 December January $136,000 $155,280 _ $291,280 $119,520 103,520 $223,040 a 500 units + 0.10 ($250,000 ÷ $100) $65,200 ÷ $80 c 500 units + 0.10($240,000 ÷ $100) b Schedule 3: Marketing, Distribution, and Customer-Service Costs Total annual fixed costs, $120,000, minus $30,000 depreciation Monthly fixed cost requiring cash outlay $600,000 $120,000 Variable cost ratio to sales = = 0.2 $2,400,000 December variable costs: 0.2 × $330,000 sales $66,000 January variable costs: 0.2 × $250,000 sales $50,000 6-34 $90,000 $ 7,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-38 (60 min.) Comprehensive problem; ABC manufacturing, two products Revenues Budget For the Year Ending December 31, 2011 Combs Brushes Total Units 12,000 14.000 Selling Price Total Revenues $ $72,000 $20 $280,000 $352,000 2a Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed marketing costs = $14,100 + $60,000 = $74,100 Marketing allocation rate = $74,100 / $352,000 = $0.21 per sales dollar 2b Total budgeted distribution costs = Budgeted variable distribution costs + Budgeted fixed distribution costs = $0 + $780 = $780 Combs: Brushes: Total 12,000 units ÷ 1,000 units per delivery 14,000 units ÷ 1,000 units per delivery 12 deliveries 14 deliveries 26 deliveries Delivery allocation rate = $780 / 26 deliveries = $30 per delivery Production Budget (in Units) For the Year Ending December 31, 2011 Product Combs Brushes Budgeted unit sales 12,000 14,000 Add target ending finished goods inventory 1,200 1,400 Total required units 13,200 15,400 Deduct beginning finished goods inventory 600 1,200 Units of finished goods to be produced 12,600 14,200 6-35 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4a Combs Brushes Total 12,600 ÷200 63 ì1/3 21 14,200 ữ100 142 ì1 142 163 Machine setup overhead Units to be produced Units per batch Number of setups Hours to setup per batch Total setup hours Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs = $6,830 + $11,100 = $17,930 Machine setup = $17,930 / 163 setup hours = $110 per setup hour allocation rate b Combs: Brushes: Total 12,600 units × 025 MH per unit 14,200 units × 0.1 MH per unit 315 MH 1,420 MH 1,735 MH Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed processing costs = $7,760 + $20,000 = $27,760 Processing allocation rate = $27,760 / 1,735 MH = $16 per MH c Total budgeted inspection costs = Budgeted variable inspection costs + Budgeted fixed inspection costs = $7,000 + $1,040 = $8,040 Inspection allocation rate = $8,040 / 26,800 units = $0.30 per unit Direct Material Usage Budget in Quantity and Dollars For the Year Ending December 31, 2011 Material Plastic Bristles Physical Units Budget Direct materials required for Combs (12,600 units × oz and bunches) Brushes (14,200 units × oz and 16 bunches) Total quantity of direct materials to be used 63,000 oz 113,600 oz 227,200 bunches 176,600 oz 227,200 bunches 6-36 Total To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) To be purchased this period Plastic: (176,600 oz ─ 1,600 oz) × $0.20 per oz Bristles: (227,200 bunches ─ 1,820) × $0.5 per bunch Direct materials to be used this period $ 304 35,000 $35,304 $ 946 112,690 $ 113,636 $148,940 Direct Materials Purchases Budget For the Year Ending December 31, 2011 Material Plastic Bristles Total Physical Units Budget To be used in production (requirement 5) Add: Target ending direct material inventory Total requirements Deduct: Beginning direct material inventory Purchases to be made 176,600 oz 1,766 178,366 oz 1,600 oz 176,766 oz 227,200 bunches 2,272 229,472 bunches 1,820 bunches 227,652 bunches Cost Budget Plastic: 176,766 oz $0.20 per oz Bristles : 227,652 bunches $0.5 per bunch Purchases $ 35,353 _ $ 35,353 $ 113,826 $ 113,826 $149,179 Total budgeted materials handling costs = Budgeted variable Materials handling costs + Budgeted fixed materials handling costs = $11,490 + $15,000 = $26,490 Materials handling = $26,490 / 176,600 oz = $0.15 per oz of plastic allocation rate Direct Manufacturing Labor Costs Budget For the Year Ending December 31, 2011 Combs Brushes Total Output Units Produced 12,600 14,200 Direct Manufacturing Labor-Hours per Unit 0.05 0.2 6-37 Total Hourly Wage Hours Rate 630 $12 2,840 12 Total $ 7,560 34,080 $41,640 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Manufacturing Overhead Cost Budget For the Year Ending December 31, 2011 Materials handling Machine setup Processing Inspection TOTALS Variable $ 11,490 6,830 7,760 7,000 $ 33,080 Fixed $ 15,000 11,100 20,000 1,040 $ 47,140 6-38 Total $ 26,490 17,930 27,760 8,040 $ 80,220 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Unit Costs of Ending Finished Goods Inventory For the Year Ending December 31, 2011 Plastic Bristles Direct manufacturing labor Materials handling Machine setup Processing Inspection Totals Cost per Unit of Input $0.20 0.50 12 0.15 110 16 0.30 Combs Input per Unit of Output oz ─ 05 hrs oz 0.00167 hrs.1 025 MH unit Brushes Total $1.00 ─ 0.60 0.75 0.18 0.40 0.30 $3.23 Input per Unit of Output oz 16 bunches 0.2 hour oz 0.01 setup-hr1 0.1 MH unit Total $ 1.60 8.00 2.40 1.20 1.10 1.60 0.30 $16.20 21 setup-hours ÷ 12,600 units = 0.00167 hours per unit; 142 setup hours ÷ 14,200 units = 0.01 hours per unit Ending Inventories Budget December 31, 2011 Quantity Direct Materials Plastic Bristles Finished goods Combs Brushes Total ending inventory Cost per unit 1,766 oz 2,272 bunches 1,200 1,400 Total $0.20 0.50 $353.20 1,136.00 $3.23 16.20 $3,876.00 22,680.00 $1,489.20 26,556.00 $28,045.20 10 Cost of Goods Sold Budget For the Year Ending December 31, 2011 Beginning finished goods inventory, Jan ($1,800 + $18,120) Direct materials used (requirement 5) $148,940 Direct manufacturing labor (requirement 7) 41,640 Manufacturing overhead (requirement 8) 80,220 Cost of goods manufactured Cost of goods available for sale Deduct: Ending finished goods inventory, December 31 (reqmt 9) Cost of goods sold 6-39 $ 19,920 270,800 290,720 26,556 $264,164 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11 Nonmanufacturing Costs Budget For the Year Ending December 31, 2011 Marketing Distribution Total Variable $14,100 $14,100 Fixed $60,000 780 $60,780 12 Budgeted Income Statement For the Year Ending December 31, 2011 Revenue $352,000 Cost of goods sold 264,164 Gross margin 87,836 Operating (nonmanufacturing) costs 74,880 Operating income $12,956 6-40 Total $74,100 780 $74,880 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-39 (15 min.) Budgeting and ethics The standards proposed by Wert are not challenging In fact, he set the target at the level his department currently achieves DM 3.95 lbs 100 units = 395 lbs DL 14.5 100 units = 1,450 ÷ 60 = 24 hrs approx MT 11.8 100 units = 1,180 ÷ 60 = 20 hrs approx Wert probably chose these standards so that his department would be able to make the goal and receive any resulting reward With a little effort, his department can likely beat these goals As discussed in the chapter, benchmarking might be used to highlight the easy targets set by Wert Perhaps the organization has multiple plant locations that could be used as comparisons Alternatively, management could use industry averages Also, management should work with Wert to better understand his department and encourage him to set more realistic targets Finally, the reward structure should be designed to encourage increasing productivity, not beating the budget 6-40 (45 min.) Human Aspects of Budgeting in a Service Firm The manager of Hair Suite III has the best style, because this manager is involving the workers in a decision that directly affects their work The workers will most likely be upset or even angry with the manager of Hair Suite I The manager is not a stylist, and yet is changing the schedule for the stylists, assuming they can work faster and need less rest between customers, without discussing this change with them or asking for input or suggestions To indicate displeasure, the stylists at Hair Suite I could quit, or they could perform a work slowdown This means that the manager will schedule a customer for a 40 minute appointment, but the stylist will spend more than 40 minutes with each customer anyway The result is that the appointments will get backed up, some customers may not get served, and overall the customers will be unhappy Most of the workers in Hair Suite II are not likely to volunteer to work an extra hour a day Although it would mean additional revenue for each stylist, it will make each work day longer and the idea was not presented to the workers in a way that appears beneficial to the workers To indicate displeasure with this plan, the stylist will simply not volunteer to work an extra hour a day Of course the manager of Hair Suite III could implement one of the plans of the other salons That is, workers could shorten their appointment times per customer, or lengthen their work days, or a combination of both Alternately, workers could work six days per week rather than five However, in the case of salon III, the manager has invited the stylists to help solve the problem rather than the manager telling them what changes to 6-41 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com make, so they will be more likely to agree to make changes since they are involved in the decision Other things they may do: The manager may let individual stylists set their own schedules It is possible that not all customers need an hour each, and the stylists can individually book customers in a way that works in an extra customer per day They could agree to shorter lunch breaks They could implement a monthly contest to see who can service the most customers (but still have satisfied customers) and earn rewards, including o A name on a plaque for employee of the month (virtually no cost to the salon) o Gift certificates to local businesses (low cost to the salon) o Reduction in one month’s rental revenue (some cost to the salon, depending on the amount of the reduction) o If the salon is in an area where parking is hard to find or costly, a month of free parking or an assigned parking space A stretch target is supposed to be challenging but achievable The manager of Hair Suite I is asking the stylists to reduce per customer service time by 20 minutes, or a 20/60 = 33% reduction in service time Even if this reduction is achievable, the other part of the issue is whether the customers will believe they are still getting the same quality service In a hair salon this is particularly important because the customers expect to look good when they come out, and they will not if the stylist has to rush or cut corners to meet the 40 minute deadline Also, as mentioned before, the stretch target should motivate employees but if the manager simply imposes the time constraint on the stylists without their input, this will have the opposite effect 6-42 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-41 (60 min.) Comprehensive budgeting problem; activity-based costing, operating and financial budgets 1a Revenues Budget For the Month of June, 2012 Regular Deluxe Total Units Selling Price Total Revenues 2,000 $80 $160,000 3,000 130 390,000 $550,000 b Production Budget For the Month of June, 2012 Budgeted unit sales Add: target ending finished goods inventory Total required units Deduct: beginning finished goods inventory Units of finished goods to be produced Product Regular Deluxe 2,000 3,000 400 600 2,400 3,600 250 650 2,150 2,950 c Direct Material Usage Budget in Quantity and Dollars For the Month of June, 2012 Material Cloth Wood Physical Units Budget Direct materials required for Regular (2,150 units × 1.3 yd.; bd-ft) Deluxe (2,950 units × 1.5 yds.; bd-ft) Total quantity of direct materials to be used 2,795 yds 4,425 yds 7,720 yds Total 5,900 5,900 Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) To be purchased this period Cloth: (7720 yd – 610 yd.) × $3.50 per yd Wood: (5,900 – 800) × $5 per bd-ft Direct materials to be used this period 6-43 $ 2,146 $ 4,040 24,885 _ _ $27,031 25,500 $29,540 $56,571 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Direct Materials Purchases Budget For the Month of June, 2012 Material Cloth Wood Physical Units Budget To be used in production Add: Target ending direct material inventory Total requirements Deduct: beginning direct material inventory Purchases to be made Cost Budget Cloth: (7,496 yds × $3.50 per yd.) Wood: (5,395 ft × $5 per bd-ft) Total 7,720 yds 386 yds 8,106 yds 610 yds 7,496 yds $26,236 _ _ $26,236 Total 5,900 ft 295 ft 6,195 ft 800 ft 5,395 ft $26,975 $26,975 $53,211 d Direct Manufacturing Labor Costs Budget For the Month of June, 2012 Regular Deluxe Total Output Units Produced 2,150 2,950 Direct Manufacturing Labor-Hours per Unit Total Hourly Wage Hours Rate 10,750 $10 20,650 10 31,400 Total $107,500 206,500 $314,000 e Manufacturing Overhead Costs Budget For the Month of June 2012 Total Machine setup (Regular 43 batches1 hrs./batch + Deluxe 59 batches2 hrs./batch) $12/hour Processing (31,400 DMLH $1.20) Inspection (5100 pairs x $0.90 per pair) Total Regular: 2,150 pairs ÷ 50 pairs per batch = 43; 2Giant: 2,950 pairs ÷ 50 pairs per batch = 59 6-44 $ 3,156 37,680 4,590 $45,426 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com f Cloth Wood Direct manufacturing labor Machine setup Processing Inspection Total Unit Costs of Ending Finished Goods Inventory For the Month of June, 2012 Regular Deluxe Cost per Input per Input per Unit of Input Unit of Output Total Unit of Output $ 3.50 1.3 yd $ 4.55 1.5 yd 5.00 0 bd-ft 10.00 hr 50.00 hrs 12.00 0.04 hr 0.48 0.06 hr1 1.20 hrs 6.00 hrs 0.90 pair 0.90 pair $61.93 Total $ 5.25 10.00 70.00 0.72 8.40 0.90 $95.27 hours per setup ÷ 50 pairs per batch = 0.04 hr per unit; hours per setup ÷ 50 pairs per batch = 0.06 hr per unit Ending Inventories Budget June, 2012 Direct Materials Cloth Wood Finished goods Regular Deluxe Total ending inventory Quantity Cost per unit Total 386 yards 295 bd-ft $3.50 5.00 $1,351 1,475 400 600 $61.93 95.27 $24,772 57,162 $ 2,826 81,934 $84,760 g Cost of Goods Sold Budget For the Month of June, 2012 Beginning finished goods inventory, June ($15,500 + $61,750) Direct materials used (requirement c) Direct manufacturing labor (requirement d) Manufacturing overhead (requirement e) Cost of goods manufactured Cost of goods available for sale Deduct ending finished goods inventory, June 30 (requirement f) Cost of goods sold 6-45 $ 77,250 $56,571 314,000 45,426 415,997 493,247 81,934 $411,313 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com h Nonmanufacturing Costs Budget For the Month of June, 2012 Total Marketing and general administration 8% 550,000 $44,000 Shipping (5,000 pairs / 40 pairs per shipmt) x $10 1,250 Total $45,250 Cash Budget June 30, 2012 Cash balance, June (from Balance Sheet) Add receipts Collections from May accounts receivable Collections from June accounts receivable ($550,000 60%) Total collection from customers Total cash available for needs (x) Deduct cash disbursements Direct material purchases in May Direct material purchases in June ( $53,211 80%) Direct manufacturing labor Manufacturing overhead ( $45,426 70% because 30% is depreciation) Nonmanufacturing costs ( $45,250 90% because 10% is depreciation) Taxes Dividends Total disbursements (y) Financing Interest at 6% ($100,000 6% ÷ 12) (z) Ending cash balance, June 30 (x) ─ (y) ─ (z) 6-46 $ 6,290 205,200 330,000 535,200 $541,490 $ 10,400 42,569 314,000 31,798 40,725 7,200 10,000 $456,692 $ $ 500 84,298 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Budgeted Income Statement For the Month of June, 2012 Revenues Cost of goods sold Gross margin Operating (nonmanufacturing) costs Bad debt expense ($550,000 2%) Interest expense (for June) Net income $550,000 411,313 $138,687 $45,250 11,000 500 56,750 $ 81,937 Budgeted Balance Sheet June 30, 2012 Assets Cash Accounts receivable ($550,000 40%) Less: allowance for doubtful accounts Inventories Direct materials Finished goods $ $ Fixed assets Less: accumulated depreciation ($90,890 + 45,426 30% + 45,250 10%)) Total assets Liabilities and Equity Accounts payable ($53,211 20%) Interest payable Long-term debt Common stock Retained earnings (465,936 + 81,937-10,000)) Total liabilities and equity 6-47 84,298 $220,000 11,000 209,000 2,826 81,934 84,760 $580,000 109,043 470,957 $849,015 $ 10,642 500 100,000 200,000 537,873 $849,015 ... ($6,000 × 1 .06 × 1.10) Maintenance contracts ($1,800 × 1 .06) Total revenues Cost of goods sold ($4,600 × 1.03 × 1 .06) Gross margin Operating costs: Marketing costs ($600 + $250) Distribution costs... to the new dye, costs will increase by $144,000 If DryPool implements kaizen costing, costs will be reduced as follows: Original monthly costs Input Fabric Labor Total * Unit cost $6 $3 Number... Variable manufacturing overhead costs (575 × $15) Fixed manufacturing overhead costs Total manufacturing overhead costs $8,625 9,200 $17,825 Total manuf overhead cost per hour = $17,825 / 575 =