To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER BUDGETING FOR PLANNING AND CONTROL QUESTIONS FOR WRITING AND DISCUSSION Budgets are the quantitative expressions of plans Budgets are used to translate the goals and strategies of an organization into operational terms manufacturing budgets, in turn, depend on the production budget The same is true for the financial budgets since sales is a critical input for budgets in that category Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates from planned performance Budgets are standards, and they are compared with actual costs and revenues to provide feedback For a merchandising firm, the production budget is replaced by a merchandise purchases budget Merchandising firms also lack direct materials and direct labor budgets All other budgets are essentially the same For a service firm (for-profit), the sales budget doubles as the production budget, and there is no finished goods inventory budget The rest of the budgets have counterparts The planning and control functions of budgeting can benefit all organizations regardless of size All organizations need to determine what their goals are and how best to attain those goals This is the planning function of budgeting In addition, organizations can compare what actually happens with what was planned to see if the plans are unfolding as anticipated This is the control function of budgeting A static budget is for a particular level of activity A flexible budget is one that can be established for any level of activity For performance reporting, it is necessary to compare the actual costs for the actual level of activity with the budgeted costs for the actual level of activity A flexible budget provides the means to compute the budgeted costs for the actual level of activity, after the fact Budgeting forces managers to plan, provides resource information for decision making, sets benchmarks for control and evaluation, and improves the functions of communication and coordination A master budget is the collection of all individual area and activity budgets Operating budgets are concerned with the incomegenerating activities of a firm Financial budgets are concerned with the inflows and outflows of cash and with planned capital expenditures The sales forecast is a critical input for building the sales budget However, it is not necessarily equivalent to the sales budget Upon receiving the sales forecast, management may decide that the firm can better than the forecast indicates Consequently, actions may be taken to increase the sales potential for the coming year (e.g., increasing advertising) This adjusted forecast then becomes the sales budget Yes All budgets are founded on the sales budget Before a production budget can be created, it must have the planned sales The 231 10 A flexible budget is based on a simple formula: Y = F + VX, which requires knowledge of both fixed and variable components 11 Goal congruence is important because it means that the employees of an organization are working toward the goals of that organization 12 Frequent feedback is important so that corrective action can be taken, increasing the likelihood of achieving budget 13 Both monetary and nonmonetary incentives are used to encourage employees of an organization to achieve the organization’s goals Monetary incentives appeal to the economic needs of an individual, and nonmonetary incentives appeal to the psychological needs Since individuals are motivated by both economic and psychological factors, both types of incentives ought to be present in a good budgetary system To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 14 15 16 Participative budgeting is a system of budgeting that allows subordinate managers a say in how the budgets are established Participative budgeting fosters creativity and communicates a sense of responsibility to subordinate managers It also creates a higher likelihood of goal congruence since managers have more of a tendency to make the budget’s goals their own personal goals Agree Individuals who are not challenged tend to lose interest and maintain a lower level of performance A challenging, but achievable, budget tends to extract a higher level of performance Top management should provide guidelines and statistical input (e.g., industrial forecasts) and should review the budgets to minimize the possibility of budgetary slack and ensure that the budget is compatible with the strategic objectives of the firm Top management should also provide the incentive and reward system associated with the budgetary system 17 By underestimating revenues and overestimating costs, the budget is more easily achieved 18 To meet budget, it is possible to take actions that reduce costs in the short run but increase them in the long run For example, lower-priced, lower-quality materials can be substituted for the usual quality of materials 19 Other performance measures include productivity, personnel development, market 232 share, and product quality A manager would have to be rewarded for improvements achieved in each area A major difficulty is determining how much weight to assign to each performance area 20 Behavioral factors can make or break a budgetary control system It is absolutely essential to consider the behavioral ramifications Ignoring them can and probably will produce dysfunctional consequences 21 Across-the-board cuts have the appearance of being fair, but they unfairly penalize good programs In an era of scarce resources, an organization must decide what it wishes to emphasize and allocate resources accordingly This may mean the complete elimination of weak programs and the strengthening of strong programs To cut each program equally without considering which ones are vital to the success of the organization is not good planning 22 Activity-based budgeting requires three steps: (1) identification of activities; (2) estimation of activity output demands; and (3) estimation of the costs of resources needed to provide the activity output demanded 23 Functional-based flexible budgeting relies on unit-based drivers to build cost formulas for various cost items Activity flexible budgeting uses activity drivers to build a cost formula for the costs of each activity To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES 8–1 e d c e b 8–2 H, I E I, F G D 10 F F A C B 8–3 Freshaire, Inc Sales Budget For the Year 2008 Mint: Units × Price Sales 1st Qtr 80,000 × $3.00 $240,000 2nd Qtr 110,000 × $3.00 $330,000 3rd Qtr 124,000 × $3.00 $372,000 4th Qtr 140,000 × $3.00 $420,000 Total 454,000 × $3.00 $ 1,362,000 Lemon: Units × Price Sales 100,000 × $3.50 $350,000 100,000 × $3.50 $350,000 120,000 × $3.50 $420,000 140,000 × $3.50 $490,000 460,000 × $3.50 $ 1,610,000 Total sales $590,000 $680,000 $792,000 $910,000 $ 2,972,000 Freshaire, Inc., will use the sales budget in planning as the basis for the production budget and the succeeding budgets of the master budget At the end of the year, the company can compare actual sales against the budget to see if expectations were achieved 233 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–4 Freshaire, Inc Production Budget for Mint Freshener For the Year 2008 Sales Des ending inventory Total needs Less: Beginning inventory Units produced 1st Qtr 80,000 11,000 91,000 4,000 87,000 2nd Qtr 110,000 12,400 122,400 11,000 111,400 3rd Qtr 124,000 14,000 138,000 12,400 125,600 4th Qtr 140,000 9,000 149,000 14,000 135,000 Total 454,000 9,000 463,000 4,000 459,000 4th Qtr 140,000 22,000 162,000 28,000 134,000 Total 460,000 22,000 482,000 6,400 475,600 Freshaire, Inc Production Budget for Lemon Freshener For the Year 2008 Sales Des ending inventory Total needs Less: Beginning inventory Units produced 1st Qtr 100,000 20,000 120,000 6,400 113,600 2nd Qtr 100,000 24,000 124,000 20,000 104,000 3rd Qtr 120,000 28,000 148,000 24,000 124,000 8–5 Pescado, Inc Production Budget for Tuna For the Year 20xx Sales Des ending inventory Total needs Less: Beg inventory Units produced January 200,000 84,000 284,000 38,000 246,000 February 240,000 77,000 317,000 84,000 233,000 234 March 220,000 70,000 290,000 77,000 213,000 Total 660,000 70,000 730,000 38,000 692,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8-6 Pescado, Inc Direct Materials Purchases Budget For January and February Cans: January 246,000 × 246,000 46,600 292,600 49,200 243,400 February Total 233,000 479,000 × × 233,000 479,000 42,600 42,600 275,600 521,600 46,600 49,200 229,000 472,400 January Production 246,000 × ounces × Ounces for production 984,000 Des ending inventory 186,400 Total needs 1,170,400 Less: Beg Inventory 196,800 Ounces purchased 973,600 984,000 * 20% = 196,800 February Total 233,000 479,000 × × 932,000 1,916,000 170,400 170,400 1,102,400 2,116,400 186,400 196,800 916,000 1,889,600 Production × can Cans for production Des ending inventory Total needs Less: Beg inventory Ounces purchased 246,000 * 20% = 49,200 Tuna: 8–7 Carson, Inc Production Budget For the First Quarter, 20XX Sales Desired ending inventory Total needs Less: Beginning inventory Units to be produced January 200,000 36,000 236,000 18,000 218,000 235 February 240,000 33,000 273,000 36,000 237,000 March 220,000 30,000 250,000 33,000 217,000 Total 660,000 30,000 690,000 18,000 672,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–8 Manning Company Direct Materials Purchases Budget For March, April, and May 20XX Units to be produced Direct materials per unit (yards) Production needs Desired ending inventory (yards) Total needs Less beginning inventory Direct materials to be purchased (yards) Cost per yard Total purchase cost March 20,000 April 60,000 May 100,000 Total 180,000 × 25 500,000 × 25 1,500,000 × 25 2,500,000 × 25 4,500,000 300,000 800,000 100,000 500,000 2,000,000 300,000 60,000 2,560,000 500,000 60,000 4,560,000 100,000 700,000 × $0.30 $210,000 1,700,000 × $0.30 $ 510,000 2,060,000 × $0.30 $ 618,000 4,460,000 × $0.30 $1,338,000 8–9 Manning Company Direct Labor Budget For March, April, and May 20XX Units to be produced Direct labor time per unit (hours) Total hours needed Cost per hour Total direct labor cost March 20,000 × 0.04 800 × $12 $ 9,600 236 April 60,000 × 0.04 2,400 × $12 $ 28,800 May 100,000 Total 180,000 × × 0.04 4,000 × $12 $ 48,000 0.04 7,200 × $12 $ 86,400 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–10 Swasey, Inc Sales Budget For the Coming Year Model LB-1 LB-2 WE-6 WE-7 WE-8 WE-9 Total Units 33,6001 21,6002 25,2003 19,4404 9,6005 4,0006 Price $30.00 15.00 10.40 10.00 22.00 26.00 Total Sales $1,008,000 324,000 262,080 194,400 211,200 104,000 $2,103,680 16,800 units * 200% = 33,600; Price increased to $30 18,000 + (18,000 * 20%) = 21,600; no change in price Quantity remains the same; price decreases by 20%; $13 * 80% = $10.40 16,200 + (16,200 * 20%) = 19,440; no change in price Oct, Nov, and Dec represent months of sales; 2,400 / = 800 sales per month for 12 months = 9,600 units; no change in price 1,000 / * 12 = 4,000 units; no change in price 8–11 Raylene’s Flowers and Gifts Production Budget for Gift Baskets For September, October, November, and December Sales Desired ending inventory Total needs Less: Beginning inventory Units produced Sept 200 15 215 20 195 237 Oct 150 18 168 15 153 Nov 180 25 205 18 187 Dec 250 10 260 25 235 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–11 Continued Raylene’s Flowers and Gifts Direct Materials Purchases Budget For September, October, and November Fruit: Production × Amount/basket (lbs.) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases Sept 195 × 195 203 10 193 Small gifts: Production × Amount/basket (items) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases Sept 195 × 975 383 1,358 488 870 Cellophane: Production × Amount/basket (feet) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases Sept 195 × 585 230 815 293 522 238 Oct 153 × 153 162 154 Oct 153 × 765 468 1,233 383 850 Oct 153 × 459 281 740 230 510 Nov 187 × 187 12 199 190 Nov 187 × 935 588 1,523 468 1,055 Nov 187 × 561 353 914 281 633 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–11 Concluded Basket: Production × Amount/basket (item) Needed for production Desired ending inventory Needed Less: Beginning inventory Purchases Sept 195 × 195 77 272 98 174 Nov 187 × 187 118 305 94 211 A direct materials purchases budget for December requires January production which cannot be computed without a February sales forecast 8–12 Credit sales in May = $240,000 x 0.9 = $216,000 Credit sales in June = $230,000 x 0.9 = $207,000 Credit sales in July = $246,000 x 0.9 = $221,400 Credit sales in August = $250,000 x 0.9 = $225,000 Oct 153 × 153 94 247 77 170 Lawrence, Inc Schedule of Cash Receipts Cash sales Payments on account: From May credit sales (0.07 x $216,000) From June credit sales (0.60 x $207,000) (0.07 x $207,000) From July credit sales (0.30 x $221,400) (0.60 x $221,400) From August credit sales (0.30 x $225,000) Cash receipts July 24,600 August 25,000 15,120 - 124,200 14,490 66,420 132,840 67,500 $230,340 $239,830 239 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–13 Janzen, Inc Cash Receipts Budget For July Payments on account: From May credit sales (0.15 × $220,000) From June credit sales (0.60 × $230,000) From July credit sales (0.20 × $210,000) Less: July cash discount (0.02 × $42,000) Cash receipts $ 33,000 138,000 42,000 (840) $212,160 Janzen, Inc Cash Receipts Budget For August Payments on account: From June credit sales (0.15 × $230,000) From July credit sales (0.60 × $210,000) From August credit sales (0.20 × $250,000) Less: August cash discount (0.02 × $50,000) Cash receipts 8–14 MarvelI agree with comment Company Schedule of Cash Payments for August Payments on accounts payable: From July purchases (0.75 x $25,000) $18,750 From August purchases (0.25 x $30,000) 7,500 Direct labor payments: From July (0.10 x $40,000) 4,000 From August (0.90 x $50,000) 45,000 Overhead ($70,000 - $5,500) 64,500 Loan repayment [$10,000 + ($10,000 x 0.12 x 4/12)]10,400 Cash payments $150,150 240 $ 34,500 126,000 50,000 (1,000) $209,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–28 a The new budget system allows the managers to focus on those areas that need attention By dividing the annual budget into 12 equal parts, managers can take corrective action before the error is compounded (frequent feedback is provided) Also, the company has segregated costs into fixed and variable components, an essential step for good control A major weakness of the budget is the failure to properly define responsibility Because of this, supervisors are being held accountable for areas over which they have no control b The performance report should emphasize those items over which the manager has control The report should also compare actual costs with budgeted costs for the actual level of activity Currently, the report is attempting to compare costs at two different levels: the original budget for 3,000 units with the actual costs for production of 3,185 units A flexible budgeting system needs to be employed Berwin, Inc Machining Department Performance Report For the Month Ended May 31, 2008 Volume in units Budget* 3,185 Actual 3,185 Variance Variable manufacturing costs: Direct materials Direct labor Variable overhead Total variable costs $ 25,480 29,461 35,354 $ 90,295 $ 24,843 29,302 35,035 $ 89,180 $ 637 159 319 $1,115 Fixed manufacturing costs: Indirect labor Depreciation Taxes Insurance Other Total fixed costs $ 3,300 1,500 300 240 930 $ 6,270 $ 3,334 1,500 300 240 1,027 $ 6,401 $ 34 U 0 97 U $ 131 U Total costs $ 96,565 $ 95,581 $ 984 F F F F F *For the variable costs: 3,185 × $24,000/3,000; 3,185 × $27,750/3,000; 3,185 × $33,300/3,000 260 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–28 Concluded Berwin’s budgetary system could also be improved by offering monetary and nonmonetary incentives to reach budget goals The managers and supervisors should be allowed and encouraged to participate in the budgetary process because they will be responsible for controlling the budget The controller needs to be certain that the budget objectives are based on realistic conditions and expectations The managers should be held accountable only for costs over which they have control 8–29 Direct labor Power Setups Total Actual Costs $210,000 135,000 140,000 $485,000 Budgeted Costs $200,000 85,000 100,000 $385,000 Budget Variance $ 10,000 U 50,000 U 40,000 U $100,000 U Note: Budgeted costs use the actual direct labor hours and the labor-based cost formulas Example: Direct labor cost = $10 × 20,000 = $200,000; Power cost = $5,000 + ($4 × 20,000) = $85,000; and Setup cost = $100,000 (fixed) Direct labor Power Setups Total Actual Costs $210,000 135,000 140,000 $485,000 Budgeted Costs $200,000 149,000 142,000 $491,000 Budget Variance $10,000 U 14,000 F 2,000 F $ 6,000 F Note: Budgeted costs use the individual driver formulas: Direct labor = $10 × 20,000 = $200,000; Power = $68,000 + ($0.90 × 90,000) = $149,000; and Setups = $98,000 + ($400 × 110) = $142,000 The multiple-cost-driver approach captures the cause-and-effect cost relationships and, consequently, is more accurate than the direct-labor-based approach 261 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–30 Westcott, Inc Performance Report For the Year 2008 Direct materials Direct labor Depreciation Maintenance Machining Materials handling Inspections Total Actual Costs $ 440,000 355,000 100,000 425,000 142,000 232,500 160,000 $1,854,500 Budgeted Costs* $ 480,000 320,000 100,000 435,000 137,000 240,000 145,000 $1,857,000 Budget Variance $40,000 F 35,000 U 10,000 F 5,000 U 7,500 F 15,000 U $ 2,500 F *Budget formulas for each item can be computed by using the high-low method (using the appropriate cost driver for each method) Using this approach, the budgeted costs for the actual activity levels are computed as follows: Direct materials: $6 × 80,000 Direct labor: $4 × 80,000 Depreciation: $100,000 Maintenance: $60,000 + ($1.50 × 250,000) Machining: $12,000 + ($0.50 × 250,000) Materials handling: $40,000 + ($6.25 × 32,000) Inspections: $25,000 + ($1,000 × 120) 262 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–30 Concluded Pool rates: $1,100,000/100,000 $672,000/300,000 $290,000/40,000 $225,000/200 = $11 per DLH = $2.24 per MHr = $7.25 per move = $1,125 per batch Note: The first pool has material and labor costs included Unit cost: Pool 1: $11 × 10,000 Pool 2: $2.24 × 15,000 Pool 3: $7.25 × 500 Pool 4: $1,125 × Total Units Unit cost = = = = $110,000 33,600 3,625 5,625 $152,850 ÷ 10,000 $ 15.29* *Rounded Knowing the resources consumed by activities and how the resource costs change with the activity driver should provide more insight into managing the activity and its associated costs For example, if moves could be reduced to 20,000 from the expected 40,000, then costs can be reduced by not only eliminating the need for four operators, but by reducing the need to lease from four to two forklifts However, in the short run, the cost of leasing forklifts may persist even though demand for their service is reduced 20,000 moves Materials handling: Forklifts Operators Fuel Total 40,000 moves $ 40,000 120,000 5,000 $ 165,000 $ 40,000 240,000 10,000 $ 290,000 The detail assumes that forklift leases must continue in the short run but that the number of operators may be reduced (assumes each operator can 5,000 moves per year) 263 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–31 a Schedule 1: Sales Budget (units and total sales in thousands) Units Unit price Total sales Qtr 65 × $400 $26,000 Qtr 70 × $400 $28,000 Qtr 75 × $400 $30,000 Qtr 90 × $400 $36,000 Total 300 × $400 $120,000 Qtr 65,000 Qtr 70,000 Qtr 75,000 Qtr 90,000 Total 300,000 13,000 78,000 15,000 85,000 20,000 95,000 10,000 100,000 10,000 310,000 78,000 13,000 72,000 15,000 80,000 20,000 80,000 310,000 b Schedule 2: Production Budget Sales (Schedule 1) Desired ending inventory Total needs Less: Beginning inventory Production c Schedule 3: Direct Materials Purchases Budget (in thousands) Production Materials/unit Production needs Desired ending inventory Total needs Less: Beginning inventory Purchases Cost per unit Purchase cost Qtr 78.0 × 234.0 Qtr 72.0 × 216.0 Qtr 80.0 × 240.0 Qtr 80.0 × 240.0 Total 310.0 × 930.0 63.0 297.0 67.5 283.5 81.0 321.0 65.7 305.7 65.7 995.7 65.7 231.3 × $80 $18,504 63.0 220.5 × $80 $17,640 67.5 253.5 × $80 $20,280 81.0 224.7 × $80 $17,976 65.7 930.0 × $80 $74,400 264 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–31 Continued d Schedule 4: Direct Labor Budget (in thousands) Production Hours per unit Hours needed Cost per hour Total cost e Qtr 72 × 360 × $10 $3,600 Qtr 80 × 400 × $10 $4,000 Qtr 80 × 400 × $10 $4,000 Total 310 × 1,550 × $10 $15,500 Qtr 400 × $6 $2,400 1,000 $3,400 Qtr 400 × $6 $2,400 1,000 $3,400 Total 1,550 × $6 $ 9,300 4,000 $13,300 Schedule 5: Overhead Budget (in thousands) Budgeted hours Variable rate Budgeted VOH Budgeted FOH Total OH f Qtr 78 × 390 × $10 $3,900 Qtr 390 × $6 $2,340 1,000 $3,340 Qtr 360 × $6 $2,160 1,000 $3,160 Schedule 6: Selling and Administrative Expenses Budget (in thousands) Planned sales Variable rate Variable expenses Fixed expenses Total expenses Qtr 65 × $10 $ 650 250 $ 900 Qtr 70 × $10 $ 700 250 $ 950 Qtr 75 × $10 $ 750 250 $1,000 g Schedule 7: Ending Finished Goods Inventory Budget Unit cost computation: Direct materials (3 units @ $80) Direct labor (5 hours @ $10) Overhead: Variable (5 hours @ $6) Fixed ($4,000,000/310,000) Total unit cost $240.00 50.00 30.00 12.90* $332.90 Finished goods = 10,000 × $332.90 = $3,329,000 *Rounded 265 Qtr 90 × $10 $ 900 250 $1,150 Total 300 × $10 $3,000 1,000 $4,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–31 Continued h Schedule 8: Cost of Goods Sold Budget Direct materials used (Schedule 3) Direct labor used (Schedule 4) Overhead (Schedule 5) Budgeted manufacturing costs Add: Beginning finished goods inventory (Schedule 2) Goods available for sale Less: Ending finished goods inventory (Schedule 7) Budgeted cost of goods sold i Cash Budget (in thousands) Qtr Beginning cash bal $ 250 Collections: Credit sales: Current quarter 22,100 Prior quarter 3,3001 Cash available $25,650 Less disbursements: Direct materials: Current quarter $ 9,252 Prior quarter 7,248 Direct labor 3,900 Overhead 2,990 Selling and admin 850 Dividends 300 Equipment Total cash needs $24,540 Ending cash bal $ 1,110 55,000 * 400 * 15 = 3,300 $ 74,400,000 15,500,000 13,300,000 $103,200,000 $103,200,000 3,329,000 $ 99,871,000 Qtr $ 1,110 Qtr $ 3,128 Qtr $ 5,568 $ 23,800 3,900 $28,810 25,500 4,200 $32,828 30,600 4,500 $40,668 102,000 15,900 $118,150 $ 8,820 9,252 3,600 2,810 900 300 $10,140 8,820 4,000 3,050 950 300 $25,682 $ 3,128 $27,260 $ 5,568 $ 8,988 10,140 4,000 3,050 1,100 300 2,000 $29,578 $11,090 $ 37,200 35,460 15,500 11,900 3,800 1,200 2,000 $107,060 $ 11,090 266 Total 250 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–31 Concluded j Optima Company Pro Forma Income Statement For the Year Ending December 31, 2008 Sales (Schedule 1) Less: Cost of goods sold (Schedule 8) Gross margin Less: Selling and administrative expenses (Schedule 6) Income before income taxes k $120,000,000 99,871,000 $ 20,129,000 4,000,000 $ 16,129,000 Optima Company Pro Forma Balance Sheet December 31, 2008 Assets Cash Accounts receivable Direct materials inventory Finished goods inventory Plant and equipment Total assets $11,090,000 5,400,000 5,256,000 3,329,000 33,900,000a $58,975,000 Liabilities and Stockholders’ Equity Accounts payable Capital stock Retained earnings Total liabilities and stockholders’ equity a $33,500,000 2,000,000 (1,600,000) $33,900,000 b $ 8,058,000 16,129,000 (1,200,000) $22,987,000 Beginning plant and equipment Add: New equipment Less: Depreciation expense Ending plant and equipment Beginning retained earnings Plus: Net income* Less: Dividends paid Ending retained earnings *Ignore taxes 267 $ 8,988,000 27,000,000 22,987,000b $58,975,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–32 The flexible budgets presented are based on three different activity levels, none of which coincide with the actual level of performance for November The budget must be restated to a level of activity that matches the actual results The fixed and variable components of the mixed costs must be segregated and a budgeted cost calculated for the level of activity attained Patterson Company Selling Expenses Report For the Month of November Monthly Expenses Advertising and promotion Administrative salaries Sales salariesa Sales commissionsb Salesperson travelc Sales office expensed Shipping expensee Total a Budget $1,200,000 57,000 84,000 327,000 187,200 500,500 705,000 $3,060,700 Actual $1,350,000 57,000 84,000 327,000 185,000 497,200 730,000 $3,230,200 Variance $150,000 U 0 2,200 F 3,300 F 25,000 U $169,500 U ($75,600/72)(80) = $84,000 b ($300,000/$10,000,000)($10,900,000) = $327,000 c Change in cost: $175,000 – $170,000 = $5,000 Change in sales dollars: $10,625,000 – $10,000,000 = $625,000 Variable cost per dollar of sales = Change in cost divided by change in activity level $5,000/$625,000 = $0.008 per dollar of sales Fixed cost at 72-person level: $170,000 – ($10,000,000 × 0.008) = $90,000 Fixed cost at 80-person level: ($90,000/72) × 80 = $100,000 Total travel budget: $100,000 fixed + ($10,900,000 × 0.008) variable = $187,200 268 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–32 Concluded d Change in cost: $498,750 – $490,000 = $8,750 Change in number of orders: 4,250 – 4,000 = 250 Variable cost per order: $8,750/250 = $35 Fixed cost: $490,000 – (4,000 × $35) = $350,000 Total office expense budget: $350,000 + (4,300 × $35) = $500,500 e Change in cost: $712,500 – $675,000 = $37,500 Change in number of units: 425,000 – 400,000 = 25,000 Variable cost per unit: $37,500/25,000 = $1.50 Fixed cost: $675,000 – (400,000 × $1.50) = $75,000 Total shipping expense budget: $75,000 + (420,000 × $1.50) = $705,000 269 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com MANAGERIAL DECISION CASES 8–33 Linda’s behavior is not ethical In the budgeting process, she is deliberately misrepresenting the capabilities of her division for personal gain To ensure that she achieves budget (either this year or next), she manipulates accounting procedures This manipulation is in opposition to generally accepted accounting principles Her decisions are based on her own self-interest rather than on the interest of the company Deceptive and manipulative behavior for personal gain is clearly wrong There are few, if any, legitimate reasons for deferring the closing of sales Thus, if a marketing manager were asked to engage in this behavior, the first response must be to find out why the request is being made If there is no sound reason offered, then a simple refusal should suffice If it takes on the nature of an order and no sound reason exists, then the marketing manager should consider appealing to a higher-level manager Certainly, deferral of closings so that it increases the likelihood of meeting budget for the coming year is not a sound reason, and, in fact, is wrong It would be hard to go against a common practice that seems to have the approval of the plant managers The widespread knowledge of the practice may even suggest that higher-level management is aware of it and essentially condones the practice—or at least adjusts for it If higher-level management is aware of the practice and adjusts for it, then the ability to achieve bonus may not be enhanced as much as believed The plant manager could investigate and find out the extent to which upper-level management is aware of padding At the same time, the manager could obtain some advice on what his behavior ought to be If told that the practice is acceptable, then the manager has to decide whether to continue in an organization that accepts deceptive behavior (or go against the grain and simply report what he or she feels is really achievable by the plant) This is a clear violation of the ethical code for management accountants A management accountant is obligated to report information fairly and objectively and to disclose all information that can be expected to influence a user’s understanding of accounting reports Moreover, management accountants must perform their duties in accordance with relevant laws, regulations, and technical standards Accelerating the recognition of expenses violates generally accepted accounting principles 270 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–34 Dr Roger Jones Cash Budget Cash collections and cash available* Less cash disbursements: Salaries Benefits Building lease Dental supplies Janitorial Utilities Phone Office supplies Lab fees Loan payments Interest payments Miscellaneous Total cash needs $21,360 Deficiency of cash available over needs $ (2,904) $12,700 1,344 1,500 1,200 300 400 150 100 5,000 570 500 500 $24,264 *Total revenues for a month: Fillings ($50 × 90) Crowns ($300 × 19) Root canals ($170 × 8) Bridges ($500 × 7) Extractions ($45 × 30) Cleaning ($25 × 108) X-rays ($15 × 150) $ 4,500 5,700 1,360 3,500 1,350 2,700 2,250 $21,360 The budget shows that there is $2,904 more cash going out than coming in 271 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–34 Continued Dr Jones must either increase revenues to make up the deficiency or cut costs or a combination of the two Three possible approaches are outlined below: a Extend office hours so that a total of 40 hours are worked each week This could increase revenues by as much as $5,340 Based on a four-week month, the current revenue earned per hour is $166.88 ($21,360/128) Thus, the total revenue increase possible is $166.88 × 32 hours = $5,340 Dr Jones would need to inform his assistants and receptionist of the increased time and indicate that each will receive a 15% increase in salary for the additional time (The office is currently open 34 hours per week.) Benefits (primarily FICA and unemployment insurance benefits) would also increase Other expenses that will likely increase with an increase in sales are dental supplies, lab fees, and utilities (representing about 31% of sales) The remaining expenses appear to be fixed Thus, the increase in cash flow is computed as follows: Incremental revenues Salary increases (0.15 × $3,400) Benefits ($1,344/$12,700)($510) Variable expenses (0.31 × $5,340) Cash flow increase $ 5,340 (510) (54) (1,655) $ 3,121 Approach carries with it some risk Increasing office hours may not increase business If business does not increase as expected, the cash flow problems could be aggravated rather than relieved The likelihood of increasing business would be increased if the additional hours are offered in the early evening instead of Friday afternoon Evening hours are a major convenience for patients who must work during the day and are reluctant to lose work hours 272 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–34 Continued Dr Roger Jones Revised Cash Budget Cash collections and cash avail ($21,360 + $5,340) $26,700 Less cash disbursements: Salaries ($12,700 + $510) Benefits ($1,344 + $54) Building lease Dental supplies ($1,200 + $300*) Janitorial Utilities ($400 + $100*) Phone Office supplies Lab fees ($5,000 + $1,255*) Loan payments Interest payments Miscellaneous Total cash needs $13,210 1,398 1,500 1,500 300 500 150 100 6,255 570 500 500 $26,483 Excess cash available over needs $ 217 *Variable expenses increase by 25% (8 added hours/32 original hours) b Cut one dental assistant, eliminate the salary to Mrs Jones and the activities she does, and cut Dr Jones’s salary back by $1,000 per month The savings are given below: Assistant (salary and benefits) Salaries Total $1,051* 2,000 $3,051 *($1,900/2) + [($950/$12,700) × $1,344] = $1,051 (rounded) (This provides a reasonable approximation of the benefits assigned to an assistant.) Although this achieves the savings, the solution may not be feasible The solution depends to a large extent on how well the Jones family can with a $2,000 per month cut in their income In all likelihood, this would be unacceptable to the Jones family Also, cutting an assistant would require the receptionist to become involved in assisting This may not be possible without laying off the receptionist and hiring a person that has both sets of skills Additionally, using the receptionist as an assistant would result in phone calls going unanswered and/or incoming patients being ignored 273 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 8–34 c Concluded A third possibility is to increase the fees charged for the various dental services Assuming a variable cost ratio of 31% (from Approach 1), the increase in revenues needed to cover the $2,900 deficiency can be computed as follows: 0.69R = $2,900 R = $2,900/0.69 R = $4,203 This increase would call for fees to increase an average of 19.7% Whether this increase is possible or not depends to some extent on how Dr Jones’s charges compare with other dentists in the area If some increase is possible, then the increase could be combined with elements of the other two approaches, (e.g., a 10 percent increase in fees and working an extra four hours per week, say, on Wednesday evening) I would expect Dr Jones to be more likely to accept a combination like the one just mentioned rather than accepting any of the approaches in their pure form The behavioral principles discussed in the chapter have a role in this type of setting Dr Jones’s personal goals must be in line with the goals of his professional organization, and he must have the motivation to achieve those goals There is, however, a significant difference Dr Jones owns and manages the organization To a large extent, his goals are the goals of the organization RESEARCH ASSIGNMENT 8–35 Answers will vary 274 ... 230 81 5 293 522 2 38 Oct 153 × 153 162 154 Oct 153 × 765 4 68 1,233 383 85 0 Oct 153 × 459 281 740 230 510 Nov 187 × 187 12 199 190 Nov 187 × 935 588 1,523 4 68 1,055 Nov 187 × 561 353 914 281 633... 40,000 80 ,000 32,000 48, 000 250 February 50,000 48, 000 98, 000 40,000 58, 000 March 60,000 48, 000 1 08, 000 48, 000 60,000 Total 150,000 48, 000 1 98, 000 32,000 166,000 To download more slides, ebook, solutions... materials to be purchased 530,000 Cost per pound × $8 Total cost $4,240,000 Metal 48, 000 February Components 58, 000 58, 000 10 580 ,000 × 3 48, 000 150,000 4 38, 000 300,000 88 0,000 180 ,000 5 28, 000 120,000