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 2009 is superseded by a four-quarter rolling budget for April 2009 to March 2010, 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 part numbers, 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 McGrath & Sons Radon Tests Lead Tests 2009 Volume 11,000 15,200 At 2009 Selling Prices $250 $200 Expected 2010 Change in Volume +5% -10% Expected 2010 Volume 11,550 13,680 McGrath & Sons Sales Budget For the Year Ended December 31, 2010 Radon Tests Lead Tests Selling Price $250 $200 Units Sold 11,550 13,680 Total Revenues $2,887,500 2,736,000 $5,623,500 McGrath & Sons Radon Tests Lead Tests 2009 Volume 11,000 15,200 Planned 2010 Selling Prices $250 $190 Expected 2010 Expected Change in 2010 Volume Volume +5% 11,550 -5% 14,440 McGrath & Sons Sales Budget For the Year Ended December 31, 2010 Radon Tests Lead Tests Selling Price $250 $190 Units Sold 11,550 14,440 Total Revenues $2,887,500 2,743,600 $5,631,100 Expected revenues at the new 2010 prices are $5,631,100, which are greater than the expected 2010 revenues of $5,623,500 if the prices are unchanged So, if the goal is to maximize sales revenue and if Jim McGrath’s forecasts are reliable, the company should lower its price for a lead test in 2010 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.) 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) 6-19 200,000 25,000 225,000 15,000 210,000 2,500,000 80,000 2,580,000 50,000 2,530,000 (10 min.) Budgeting material purchases Production Budget: Budgeted sales Add target ending finished goods inventory Total requirements Deduct beginning finished goods inventory Units to be produced Finished Goods (units) 45,000 18,000 63,000 16,000 47,000 Direct Materials Purchases Budget: Direct materials needed for production (47,000  3) Add target ending direct materials inventory Total requirements Deduct beginning direct materials inventory Direct materials to be purchased 6-4 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 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 margin Direct Material Usage Budget in Quantity and Dollars Material Wool Physical Units Budget Direct materials required for Blue Rugs (100,000 rugs × 30 skeins and 0.5 gal.) 3,000,0000 skeins Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) Wool: 349,000 skeins $ 715,450 Dye: 5,000 gallons To be purchased this period Wool: (3,000,000 - 349,000) skeins × $2 per skein 5,302,000 _ Dye: (50,000 – 5,000) gal × $5 per gal Direct materials to be used this period: (a) + (b) $6,017,450 6-5 Dye Total 50,000 gal $ 24,850 225,000 $ 249,850 $6,267,300 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com $18,852,000 Weaving budgeted = = $3.3664 per DMLH overhead rate 5,600,000 DMLH Dyeing budgeted = $12,809,000 = $28.4644 per MH overhead rate 450,000 MH Budgeted Unit Cost of Blue Rug Wool Dye Direct manufacturing labor Dyeing overhead Weaving overhead Total 10.15 Input per Unit of Output 30 skeins 0.5 gal 56 hrs 4.5 mach-hrs 56 DMLH Cost per Unit of Input $2 15 28.4644 3.3664 Total 60.00 2.50 840.00 128.09 188.52 $1219.11 $ machine hour per skein  30 skeins per rug = 4.5 machine-hrs per rug Revenue Budget Blue Rugs Blue Rugs Selling Units Price Total Revenues 100,000 $2,000 $200,000,000 95,000 $2,000 $190,000,000 5a Sales = 100,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($840 × 100,000) Dyeing overhead ($128.09 × 100,000) Weaving overhead ($188.52 × 100,000) Cost of goods available for sale Deduct ending finished goods inventory Cost of goods sold 6-6 Total $ $ 6,267,300 84,000,000 12,809,000 18,852,000 121,928,300 121,928,300 $121,928,300 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 5b Sales = 95,000 rugs Cost of Goods Sold Budget From Schedule Beginning finished goods inventory Direct materials used Direct manufacturing labor ($840 × 100,000) Dyeing overhead ($128.09 × 100,000) Weaving overhead ($188.52 × 100,000) Cost of goods available for sale Deduct ending finished goods inventory ($1,219.11 × 5,000) Cost of goods sold Total $ $ 6,267,300 84,000,000 12,809,000 18,852,000 121,928,300 121,928,300 6,095,550 $115,832,750 Revenue Less: Cost of goods sold Gross margin 100,000 rugs sold $200,000,000 121,928,300 $ 78,071,700 95,000 rugs sold $190,000,000 115,832,750 $ 74,167,250 6-22 (15–20 min.) Revenues, production, and purchases budget 900,000 motorcycles  400,000 yen = 360,000,000,000 yen 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 6-7 900,000 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 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 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 6-23 (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, 2010 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 a100% 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 5-23 (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 Fresh Produce Packaged Food Total Batch-level $1,260 $ 2,160 $1,260 $ 4,680 Batch-level Output-unitlevel Output-unitlevel 984 5,084 1,558 7,626 336 3,612 1,974 5,922 828 $3,408 6,156 $17,012 1,935 $6,727 8,919 $27,147 13% 63% Percentage of total indirect costs (subject to rounding) 25% 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 (63%) 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 Produce 46% 67 61 69 Packaged Food 27% 20 33 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 $89.82000 $89.64 82.00 81.83600 81.67 21.00 20.95800 20.92 0.18 0.17964 0.179 The March 2008 rates can be used to compute the total budgeted cost for each activity area in March 2008: Activity Ordering $89.64  14; 24; 14 Delivery $81.67  12; 62; 19 Shelf-stocking $20.92  16; 172; 94 Customer support $0.179  4,600; 34,200; 10,750 Total Cost Hierarchy Soft Drinks Fresh Produce Packaged Food Total Batch-level $1,255 $ 2,151 $1,255 $ 4,661 Batch-level 980 5,064 1,552 7,596 Output-unit-level 335 3,598 1,966 5,899 Output-unit-level 823 $3,393 6,122 $16,935 1,924 $6,697 8,869 $27,025 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 4,661 Delivery $7,626 7,596 ShelfStocking $5,922 5,899 Customer Support $8,919 8,869 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 10 Schedule 7: Cost of Goods Sold Budget for the Year Ended December 31, 2010 From Schedule Total Beginning finished goods inventory January 1, 2010, $374.80 × 100 Given $ 37,480 Direct materials used 3A $193,800 Direct manufacturing labor 137,500 Manufacturing overhead 104,500 Cost of goods manufactured 435,800 Cost of goods available for sale 473,280 Deduct ending finished goods inventory, December 31, 2010 6B 80,000 Cost of goods sold $393,280 11 Budgeted Income Statement for Slopes for the Year Ended December 31, 2010 Revenues Schedule $450,000 Cost of goods sold Schedule 393,280 Gross margin 56,720 Operating costs Variable marketing costs ($250 × 30) $ 7,500 Fixed nonmanufacturing costs 30,000 37,500 Operating income $ 19,220 12 Budgeted Balance Sheet for Slopes as of December 31, 2010 Cash Inventory Schedule 6B Property, plant, and equipment (net) Total assets Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity 6-29 $ 10,000 135,000 850,000 $995,000 $ 17,000 178,000 800,000 $995,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-36 (30 min.) Cash budgeting, chapter appendix Projected Sales May Sales in units Revenues (Sales in units × $450) June July August September 80 120 200 100 60 $36,000 $54,000 $90,000 $45,000 $27,000 May June July August September October 40 Collections of Receivables From sales in: May (30%  $36,000) June (50%; 30%  $54,000) July (20%; 50%; 30%  $90,000) August (20%; 50%  $45,000) September (20%  $27,000) Total $10,800 27,000 18,000 $16,200 45,000 9,000 $55,800 $70,200 $ 27,000 22,500 5,400 $54,900 July August September October Calculation of Payables May Material and Labor Use, Units Budgeted production Direct materials Wood (board feet) Fiberglass (yards) Direct manuf labor (hours) June 200 100 60 40 1,000 1,200 1,000 500 600 500 300 360 300 200 240 200 $30,000 $15,000 $9,000 6,000 3,000 1,800 12,500 7,500 5,000 150 150 150 Disbursement of Payments Direct materials Wood (1,000; 500; 300  $30) Fiberglass (1,200; 600; 360  $5) Direct manuf labor (500; 300; 200  $25) Interest payment (6%  $30,000 ÷12) Variable Overhead Calculation Variable overhead rate Overhead driver (direct manuf labor-hours) Variable overhead expense $ 500 $ 3,500 6-30 $ 300 $ 2,100 $ 200 $1,400 October To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Cash Budget for the months of July, August, September 2007 July August Beginning cash balance $10,000 $ 5,650 September $40,100 Add receipts: Collection of receivables Total cash available 55,800 $65,800 70,200 $75,850 54,900 $95,000 Deduct disbursements: Material purchases Direct manufacturing labor Variable costs Fixed costs Interest payments Total disbursements Ending cash balance $36,000 12,500 3,500 8,000 150 60,150 $ 5,650 $18,000 7,500 2,100 8,000 150 35,750 $40,100 $10,800 5,000 1,400 8,000 150 25,350 $69,650 Yes Slopes has a budgeted cash balance of $69,650 on 10/1/2010 and so it will be in a position to pay off the $30,000 1-year note on October 1, 2010 No Slopes does not maintain a $10,000 minimum cash balance in July To maintain a $10,000 cash balance in each of the three months, it could perhaps encourage its customers to pay earlier by offering a discount Alternatively, Slopes could seek short-term credit from a bank 6-31 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-37 (40–50 min.) Cash budgeting, chapter appendix Itami Wholesale Co Statement of Budgeted Cash Receipts and Disbursements For the Months of December 2009 and January 2010 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 2009 $ 10,000 January 2010 $ 2,025 235,900 245,900 285,800 287,825 $183,875 50,000 10,000 243,875 $ 2,025 $141,750 25,000 10,000 176,750 $111,075 Enough cash should be available for repayment of the note on January 31, 2010 Schedule 1: Collections of Receivables Collections in December October $14,400a November $50,000b} 171,500c 20,000d January December $235,900 $ 60,000e} 205,800f a0.08 b0.20 c0.70 × $180,000 × $250,000 × $250,000 × 98 d0.08 × $250,000 e0.20 × $300,000 f0.70 × $300,000 × 98 6-32 Total $285,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Schedule 2: Payments for Merchandise Target ending inventory (in units) Add units sold (sales ÷ $100) Total requirements Deduct beginning inventory (in units) Purchases (in units) Purchases in dollars (units × $70) Cash disbursements: For December, accounts payable; For January, December’s purchases at 50% For current month’s purchases at 50% December 875a 3,000 3,875 1,250b 2,625 $183,750 January 800c 1,500 2,300 875 1,425 $99,750 December January $ 92,000 91,875 $183,875 $ 91,875 49,875 $141,750 a500 units + 0.25 ($150,000 ÷ $100) ÷ $70 c500 units + 0.25($120,000 ÷ $100) b$87,500 Schedule 3: Marketing, Distribution, and Customer-Service Costs Total annual fixed costs, $150,000, minus $30,000 depreciation Monthly fixed cost requiring cash outlay $400,000  $150,000 Variable cost ratio to sales = = 1/6 $1,500,000 December variable costs: 1/6 × $300,000 sales $50,000 January variable costs: 1/6 × $150,000 sales $25,000 6-33 $120,000 $ 10,000 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, 2009 Chairs Tables Total Units 172,000 45,000 Selling Price Total Revenues $ 80 $13,760,000 $900 $40,500,000 $54,260,000 2a Total budgeted marketing costs = Budgeted variable marketing costs + Budgeted fixed marketing costs = $2,011,200 + $4,500,000 = $6,511,200 $6,511, 200 Marketing allocation rate = = $0.12 per sales dollar $54, 260,000 2b Total budgeted distribution costs = Budgeted variable distribution costs + Budgeted fixed distribution costs = $54,000 + $380,000 = $434,000 Chairs: Tables: Total 172,000 units ÷ 500 units per delivery 45,000 units ÷ 500 units per delivery Delivery allocation rate = 344 deliveries 90 deliveries 434 deliveries $434,000 = $1,000 per delivery 434 deliveries Production Budget (in Units) For the Year Ending December 31, 2009 Product Chairs Tables Budgeted unit sales 172,000 45,000 Add target ending finished goods inventory 8,500 2,250 Total required units 180,500 47,250 Deduct beginning finished goods inventory 8,000 2,100 Units of finished goods to be produced 172,500 45,150 6-34 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 4a Machine setup overhead Units to be produced Units per batch Number of setups Hours to setup per batch Total setup hours Chairs Tables Total 172,500 ÷500 345 ×3 1,035 45,150 ÷50 903 ×2 1,806 2,841 Total budgeted setup costs = Budgeted variable setup costs + Budgeted fixed setup costs = $97,000 + $300,740 = $397,740 $397,740 Machine setup = = $140 per setup hour allocation rate 2,841 setup-hours b Chairs: Tables: Total 172,500 units × MH per unit 45,150 units × MH per unit 517,500 MH 225,750 MH 743,250 MH Total budgeted processing costs = Budgeted variable processing costs + Budgeted fixed processing costs = $789,250 + $5,900,000 = $6,689,250 $6,689, 250 Processing allocation rate =  $9 per MH 743, 250 MH Direct Material Usage Budget in Quantity and Dollars For the Year Ending December 31, 2009 Wood Physical Units Budget Direct materials required for Chairs (172,500 units × b.f and sheets) Tables (45,150 units × b.f and sheets) Total quantity of direct materials to be used Material Glass 862,500 b.f 316,050 b.f 1,178,550 b.f Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) $ 170,352 To be purchased this period Wood: (1,178,550 b.f ─ 109,200 b.f.) × $1.60 per b.f 1,710,960 Glass: (90,300 sheets ─ 8,750 sheets) × $12 per sheet _ Direct materials to be used this period $1,881,312 Direct Materials Purchases Budget 6-35 Total 90,300 sheets 90,300 sheets $ 109,375 978,600 $ 1,087,975 $2,969,287 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com For the Year Ending December 31, 2009 Material 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 Cost Budget Wood: 1,186,850 b.f  $1.60 per b.f Glass: 90,550 sheets  $12 per sheet Purchases Wood Glass 1,178,550 b.f 117,500 b.f 1,296,050 b.f 109,200 b.f 1,186,850 90,300 sheets 9,000 sheets 99,300 sheets 8,750 sheets 90,550 sheets $ 1,898,960 $ 1,898,960 $ 1,086,600 $ 1,086,600 Total $2,985,560 Total budgeted materials-handling costs = Budgeted variable materials-handling costs + Budgeted fixed materials-handling costs = $342,840 + $600,000 = $942,840 Materials handling = $942,840 = $0.80 per b.f allocation rate 1,178,550 b.f Direct Manufacturing Labor Costs Budget For the Year Ending December 31, 2009 Chairs Tables Total Output Units Produced 172,500 45,150 Direct Manufacturing Total Hourly Wage Total Labor-Hours per Unit Hours Rate 690,000 $15 $10,350,000 361,200 15 5,418,000 $15,768,000 Manufacturing Overhead Cost Budget For the Year Ending December 31, 2009 Materials handling Machine setup Processing Total Variable $ 342,840 97,000 789,250 $1,229,090 Fixed $ 600,000 300,740 5,900,000 $6,800,740 6-36 Total $ 942,840 397,740 6,689,250 $8,029,830 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, 2009 Wood Glass Direct manufacturing labor Materials handling Machine setup Processing Total Cost per Unit of Input $1.60 12 15 0.80 140 Chair Input per Unit of Output b.f ─ hrs b.f 0.006 hrs MH Table Total $ 8.00 ─ 60.00 4.00 0.84 27.00 $ 99.84 Input per Unit of Output b.f sheets hrs b.f 0.04 setup-hr1 MH Total $ 11.20 24.00 120.00 5.60 5.60 45.00 $211.40 1,035 setup-hours ÷ 172,500 units = 0.006 hours per unit; 1,806 setup hours ÷ 45,150 units = 0.04 hours per unit Ending Inventories Budget December 31, 2009 Quantity Direct Materials Wood Glass Finished goods Chairs Tables Total ending inventory Cost per unit Total 117,500 b.f 9,000 sheets $1.60 12.00 $188,000 108,000 8,500 2,250 $99.84 211.40 $848,640 475,650 $ 296,000 1,324,290 $1,620,290 10 Cost of Goods Sold Budget For the Year Ending December 31, 2009 Beginning finished goods inventory, Jan ($760,000 + $477,000) Direct materials used (requirement 5) $ 2,969,287 Direct manufacturing labor (requirement 7) 15,768,000 Manufacturing overhead (requirement 8) 8,029,830 Cost of goods manufactured Cost of goods available for sale Deduct: Ending finished goods inventory, December 31 (reqmt 9) Cost of goods sold 11 Nonmanufacturing Costs Budget For the Year Ending December 31, 2009 Marketing Distribution Total Variable $2,011,200 54,000 $2,065,200 Fixed $4,500,000 380,000 $4,880,000 6-37 Total $6,511,200 434,000 $6,945,200 $ 1,237,000 26,767,117 28,004,117 1,324,290 $26,679,827 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 12 Revenue Cost of goods sold Gross margin Operating (nonmanufacturing) costs Operating income Budgeted Income Statement For the Year Ending December 31, 2009 $54,260,000 26,679,827 27,580,173 6,945,200 $20,634,973 13 The budgeted unit cost of the chair is $99.84, which is $20 more than the selling price of $80 per chair The company is willing to accept the loss on chairs because of the high markup on tables ($900 $688.60 ─ $211.40) = $688.60 (  76.5% ) Customers who purchase a table will likely want $900 matching chairs Thus the markup on tables more than recoups the loss on four chairs Dinette could, of course, reduce the price on tables and increase the price on chairs If, however, customers care less about the price of the table and more about the price of chairs and buy chairs for every table, Dinette’s pricing strategy may well be optimal 6-38 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 2.95 lbs  100 units = 295 lbs DL 19.2  100 units = 1,920 ÷ 60 = 32 hrs MT 9.9  100 units = 990 ÷ 60 = 16.5 hrs 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 (60 min.) Comprehensive budgeting problem; activity-based costing, operating and financial budgets 1a Revenues Budget For the Month of June, 20xx Large Giant Total Units Selling Price Total Revenues 3,000 $3 $ 9,000 1,800 7,200 $16,200 b Production Budget For the Month of June, 20xx Budgeted unit sales Add: target ending finished goods inventory Total required units Deduct: beginning finished goods inventory Units of finished goods to be produced 6-39 Product Large Giant 3,000 1,800 300 180 3,300 1,980 200 150 3,100 1,830 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com c Direct Material Usage Budget in Quantity and Dollars For the Month of June, 20xx Material Sugar Sticks Physical Units Budget Direct materials required for Large (3,100 units × 0.25 lb.; stick) Giant (1,830 units × 0.50 lb.; stick) Total quantity of direct materials to be used 775 lbs 915 lbs 1,690 lbs Cost Budget Available from beginning direct materials inventory (under a FIFO cost-flow assumption) $ 64 To be purchased this period Sugar: (1,690 lbs – 125 lbs.) × $0.50 per lb 783 Sticks: (4,930 – 350) × $0.30 per stick Direct materials to be used this period $847 Total 3,100 1,830 4,930 $ 105 1,374 $1,479 $2,326 Direct Materials Purchases Budget For the Month of June, 20xx Material Sugar Sticks 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 1,690 lbs 240 lbs 1,930 lbs 125 lbs 1,805 lbs Cost Budget Sugar: (1,805 lbs × $0.50 per lb.) Sticks: (5,060 × $0.30 per stick) Total $903 $903 Total 4,930 480 5,410 350 5,060 $1,518 $1,518 $2,421 d Direct Manufacturing Labor Costs Budget For the Month of June, 20xx Large Giant Total Output Units Produced 3,100 1,830 Direct Manufacturing Labor-Hours per Unit 0.20 0.25 6-40 Total Hourly Wage Hours Rate 620 $8 457.5 1,077.5 Total $4,960 3,660 $8,620 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com e Manufacturing Overhead Costs Budget For the Month of June 20xx Total Machine setup (Large 310 batches1  0.08 hrs./batch + Giant 183 batches2  0.09 hrs./batch)  $20/hour Processing (1,077.5 DMLH  $1.70) Total 1Large: $ 825 1,832 $2,657 3,100 units ÷ 10 units per batch = 310; 2Giant: 1,830 units ÷ 10 units per batch = 183 f Sugar Sticks Direct manufacturing labor Machine setup Processing Total Unit Costs of Ending Finished Goods Inventory For the Month of June, 20xx Large Giant Cost per Input per Input per Unit of Output Unit of Input Unit of Output Total $ 0.50 0.25 lb $0.125 0.50 lb 0.30 0.30 8.00 0.2 hr 1.60 0.25 hr 20.00 0.008 hr 0.16 0.009 hr1 1.70 0.2 hr 0.34 0.25 hr $2.525 0.08 hour per setup ÷ 10 units per batch = 0.008 hr per unit; 0.09 hour per setup ÷ 10 units per batch = 0.009 hr per unit Ending Inventories Budget June, 20xx Direct Materials Sugar Sticks Finished goods Large Giant Total ending inventory Quantity Cost per unit 240 lbs 480 sticks $0.50 0.30 $120 144 300 180 $2.525 3.155 $757 568 6-41 Total $ 264 1,325 $1,589 Total $ 0.25 0.30 2.00 0.18 0.425 $3.155 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com g Cost of Goods Sold Budget For the Month of June, 20xx Beginning finished goods inventory, June ($500 + $474) 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 $ $2,326 8,620 2,657 13,603 14,577 1,325 $13,252 h Nonmanufacturing Costs Budget For the Month of June, 20xx Total Marketing and general administration 10%  16,200 $1,620 Cash Budget June 30, 20xx Cash balance, June 30, 20xx Add receipts Collections from May accounts receivable Collections from June accounts receivable ($16,200  80%  50%) Collections from June cash sales ($16,200  20%) Total collection from customers Total cash available for needs (x) Deduct cash disbursements Direct material purchases in May Direct material purchases in June ( $2,421  70%) Direct manufacturing labor Manufacturing overhead ( $2,657  60% because 40% is depreciation) Nonmanufacturing costs ( $1,620  70% because 30% is depreciation) Taxes Total disbursements (y) Financing Interest at 12% ($20,000  12%  ÷ 12) (z) Ending cash balance, June 30 (x) ─ (y) ─ (z) 6-42 974 $ 587 4,704 6,480 3,240 14,424 $15,011 $ 696 1,695 8,620 1,594 1,134 500 $14,239 $ $ 200 572 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Budgeted Income Statement For the Month of June, 20xx Revenues Cost of goods sold Gross margin Operating (nonmanufacturing) costs Bad debt expense ($16,200  80%  1%) Interest expense (for June) Net income $16,200 13,252 2,948 $1,620 130 200 $ 1,950 998 Budgeted Balance Sheet June 30, 20xx Assets Cash Accounts receivable ($16,200  80%  50%)) Less: allowance for doubtful accounts Inventories Direct materials Finished goods Fixed assets Less: accumulated depreciation ($55,759 + 2,657  40% + 1,620  30%) Total assets $ $ $ 6,480 130 6,350 264 1,325 1,589 $190,000 Liabilities and Equity Accounts payable ($2,421  30%) Interest payable Long-term debt Common stock Retained earnings ($109,279 + $998) Total liabilities and equity 6-43 572 57,308 132,692 $141,203 $ 726 200 20,000 10,000 110,277 $141,203 ... individual executives are given Discussions of this problem have again and again revealed a tendency among students (and among accountants and managers) to “fix the blame”––as if the variances arising... department manager must report delays more regularly and request additional capacity in a timely manner Operations manager should ask for a review of shipping capacity utilization, and consider expanding... excess cash and cash shortages may occur A company needs to know when cash shortages will occur so that prior arrangements can be made with lending institutions in order to have cash available for